Churchill Downs Inc (CHDN) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Churchill Downs Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions). As a reminder, this conference is being recorded. Now I'll turn the conference over to your host, Courtney Norris, Director of Corporate Communications. Please begin.

Thank you, Tyrone. Good morning, and welcome to Churchill Downs Incorporated conference call to review the Company's business results for the third quarter ended September 30, 2013. The Company's third quarter business results were released yesterday afternoon in a news release that has been covered by the financial media. A copy of this release announcing results and any other financial and statistical information about the period to be presented in this conference call, including any information required by Regulation G, is available at the section of the Company's website titled News, located at ChurchillDownsIncorporated.com, as well as in the website's Investors section.

Let me also note that a news release was issued advising of the accessibility of this conference call on a listen-only basis via phone and over the Internet.

As we begin, let me express that some statements made during this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results, or otherwise are not statements of historical fact. The actual performance of the Company may differ materially from what is projected in such forward-looking statements. Investors should refer to statements included in reports filed by the Company with the Securities and Exchange Commission for discussion of additional information concerning factors that could cause our actual results of operations to differ materially from the forward-looking statements made in this call.

The information being provided today is of this date only, and Churchill Downs, Incorporated expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations. I will now turn the call over to our Chairman and CEO, Bob Evans.

Thanks, Courtney. As I was putting together a few comments for today, I realized I was repeating the things that were already in our press release. So rather than do that to you, I thought we'd just get comments from me, turn this over to Bill Mudd to talk you through the numbers, then we'll come back and answer whatever questions you might have. Bill.

Thanks, Bob. Good morning, everyone, and Happy Halloween. Overall it was a solid quarter setting new third quarter records for both revenues and adjusted EBITDA. Our third quarter total revenues were up 13% to $185.6 million, and adjusted EBITDA was up 31% to $31.8 million. Net earnings from continuing operations for the quarter was up 53% to $9.2 million.

Year-to-date cash provided from operating activities was $114.4 million, up 12% over the prior year to $102.1 million. Year-to-date capital spending was $29.9 million, $13.8 million of which was for maintenance purposes, while $16.1 million was related to new projects including the Churchill Downs Mansion, and the renovations at Harlow's which were completed in the first half of the year.

Long-term debt ended the quarter at $325 million, up approximately $115 million from year-end 2012. In July we added approximately $169 million of debt with the closing of the Oxford acquisition. Even with this added debt, our balance sheet remains in great shape.

Now let's take a look at the performance of our segments during the third quarter. Our racing operations results were not surprising, with revenues down 19% or $12.2 million resulting in a $3 million decrease in adjusted EBITDA. The revenue decline was driven by a $14 million decline at our Calder property. $9.3 million of this decline was driven by the loss of hosting revenues that Calder has traditionally collected during its five-racing meet. As mentioned in the second quarter earnings call, we believe that Florida law requires a racetrack to run no less than 3 days of live racing per week during consecutive weeks to qualify as a host track to redistribute out-of-state simulcast signals within Florida, and to collect commission revenues on wagers on those tracks. Under this rule, Calder is the only thoroughbred track that is qualified to be host since May.

On October 14, the Florida Legislature's Joint Administrative Procedures Committee, which is comprised of five state senators and six state representatives, issued a letter to the Division of Pari-Mutuel Wagering agreeing with our position that the track must operate no less than 3 days a week to be considered a host track, and citing the relevant Florida. The Division has scheduled a public hearing on November 7 to address this. We will pursue the recovery of the lost hosting revenues since the dispute started on May 7 using all means available to us.

In addition to the lost hosting revenues, Calder conducted 17 fewer race days resulting in a revenue decline of $4.4 million. We expect to make up these lost race days and associated revenues in the first quarter of 2014 when we will race 39 days. We have not traditionally conducted live racing during the first three months of the year.

We continue to be disappointed that we have not reached an agreement with the [strident] group's Gulfstream Park in South Florida. But the impact of them running on top of our traditional live meet dates is now largely behind us, and the period from December to April should provide upside as we will conduct live racing and qualify for our share of the hosting revenues.

Churchill Downs' racetrack revenues increased $4.1 million on the successful introduction of a new 12-day September Homecoming Meeting. The Kentucky Horse Racing Commission awarded us the September dates again in 2014, and we look forward to growing the awareness, attendance, and economics of this event.

Arlington Park revenues declined 7% year-over-year on a 4% decline in race days due to calendar timing. Overall, racing operations adjusted EBITDA declined by $3 million. That is due to a $4 million decrease at Calder, again, approximately $2.7 million of the decline is associated with the loss of hosting revenues, and approximately $1.3 million is driven by 17 fewer live race days. Arlington Park profitability dropped $1 million on fewer live race days, a negative impact from bad weather and smaller field sizes. Churchill Downs partially offset these headwinds with a $2.3 million improvement generated by its new September live racing meet.

Gaming revenues improved $30.3 million or 61%, driven by the acquisitions of Riverwalk and Oxford Casinos. Excluding these acquisitions, our total gaming revenues would have been even with last year. Despite the opening of a new South Florida casino in early July, Calder revenues increased 7% for the second consecutive quarter as a result of focused marketing efforts, and more importantly, the closure of Florida Internet Cafes in early April. Calder's adjusted EBITDA improved $0.6 million from the increased revenues.

Our Louisiana gaming operations were flat year-over-year as revenues from new off track betting and video poker facility offset mild softness as our fairground slots business due to a road construction on Gentilly Boulevard. Adjusted EBITDA from these operations dropped $500,000 on higher promotional spending during the period.

Both of our Mississippi operations experienced revenue declines primarily on the back of continued regional economic weakness, and persistently high unemployment. Adding to the pressure is a streak of bad luck as Riverwalk's hold rate on table games dropped 21%, and Harlow's table hold rate dropped 31% compared to the third quarter of 2012. Harlow's revenues were also impacted by an ongoing gaming floor redesign which disrupted midweek operations in August and September. Harlow's adjusted EBITDA declined $0.8 million on the revenue loss.

We added our newest gaming property with the acquisition of Oxford Casino on July 17. It's running slightly ahead of our proforma projections, with third quarter revenues up 26% on a comparable basis to the prior year. During 10 weeks of operations post-closing, Oxford added $5.4 million to our adjusted EBITDA [of a] quarter.

Our online business performed well posting organic revenue growth of 6.4%. Wagering handle increased by 7.3%, driven by a 6% increase in unique players, and a 7% increase in wagering by existing customers. According to Equibase.com, handle on US thoroughbred racing was up 1.3% in the third quarter, meaning twinspires.com handle outpaced the industry growth rate by approximately 6% for the period.

We re-launched Luckity.com earlier this month as a real money bingo site, with game outcomes dependent on the results of live racing. We believe this is a much improved product, and plan to market it in earnest later this quarter. I encourage you to sign up and give it a try.

Online business adjusted EBITDA improved $3.1 million or 31% in the third quarter, primarily reflecting the increased revenues generated by twinspires.com, and a $0.6 million reduction in expenditures related to the development of Luckity. Additionally, the prior year included expenses related to an announced data security incident, and an employee-related severance totaling $0.6 million.

On September 23, the US District Court of the Western Division of Texas ruled against our suit challenging the constitutionality of Texas law requiring residents to wager in person at a Texas racetrack. As a result of the ruling, we stopped taking wagers from Texas residents on September 25. We have taken $42.2 million of wagers from Texas residents in the first 9 months of 2013, which is approximately 6.2% of total twinspires.com handle. We believe the law is unconstitutional and filed for an expedited hearing with the US Court of Appeals which was granted on October 17. We hope to get a ruling allowing us to resume wagering as early as possible next year, but there is no certainty how this will turn out.

Now I'll cover a few of the items below adjusted EBITDA. Illinois Horse Racing Equity Trust Fund proceeds added $4.2 million reflecting the final disbursement related to the tenth Illinois riverboat license.

Share-based compensation increased $3 million as a result of the new executive long-term incentive plan that went into effect March 21, 2013. As a reminder from our second quarter earnings call, the vast majority of these expenses related to the new four-year plan will occur in the first 14 months of the plan.

Finally, pre-opening costs associated with our Miami Valley Gaming investment totaled $500,000 in the quarter. This will increase substantially in the fourth quarter as we enter the final weeks prior to our December 12 opening.

With that, I'll turn it over to Bob who will take any questions you may have. Bob?

Tyrone, do we have any questions?

(Operator Instructions).

Cameron McKnight of Wells Fargo. Your line is open.

Good morning. How are you?

Good morning, Cameron. How are you?

Good. Just a quick question on the regional properties. This is the second quarter where we're seeing slightly weak results due to a soft macro environment. What's the ability that you have to manage costs at those properties over, let's say, the medium term?

Cameron, this is Bob. Did you say of the gaming properties? We didn't hear the first part of the question.

The regional gaming properties. And what's your ability to manage costs in a soft macro environment?

Bill Carstanjen, do you want to take that one?

Sure. We do have some leverage to do that. And that's something that we've taken a very serious look at over the last few weeks as we start our budgeting planning for next year. So with consistent pressures like we're seeing right now, we'll be looking hard at the cost structure. And also free play, comps -- a combination of those things as well.

Great. Thanks very much. And then as a follow up, can you outline some just general thoughts on Penn's conversion into a REIT and operating company, and how that impacts the landscape for acquisitions and how you fit in?

I think I'd rather pass on commenting on what other companies are doing. We're certainly aware of what they're doing and have looked into that in detail. I guess in theory, all other things being equal, it might increase the value of existing regional gaming properties, but so far at least I haven't seen any specific evidence of that in any overwhelming manner. So I prefer not to comment on it and I sort of agree with your perspective, philosophically, but I don't know that I've seen the facts to back it up yet.

Great. Thanks very much, guys.

You're welcome.

Thank you.

Amit Kapoor of Gabelli and Company. Your line is open.

Thanks for taking my question. Can you guys comment on, I mean, in the press release you announced or reiterated the support for the coalition in Kentucky. So can you talk -- give us more color around that, and potentially talk about the goings on in Illinois as well on the gaming legalization front? Thank you.

This is Bob. I'll take Kentucky and Bill Carstanjen will take Illinois.

Thank you.

Amit, there's a new coalition of business and civic leaders that has been created in Kentucky called Kentucky Wins. You can go to KentuckyWins.com if you want some more information. There's also a Facebook page. And that group of leaders is focused on trying to get an expanded gaming bill passed in order to address some, not all, but some of the state's significant budget shortfall problems. And the important thing about that approach is that while the principle goal is to solve the budget shortfall problems of the state, we want to do that in a way that doesn't negatively impact the racing business. So that's what Kentucky Wins is. It's been out, active at the local grassroots level. It's trying to build support around this idea of passing an expanded gaming bill in 2014 to address the Kentucky budget shortfall. In short, that's what it is. If you have more questions, I'll try to go deeper. Let me pass it to Bill for a second to cover Illinois, and then if we haven't addressed your question fully, let me know.

This is Bill talking. Expanded gaming in Illinois has been tied over the most recent couple of sessions to pension reform. So the Governor has made it clear that he wants progress on pension reform in the state before he will address alternative gaming. That's in an environment where prior to the focus on the pension reform, legislation was passed twice by the legislature, but the Governor didn't sign either of those pieces of legislation.

So generally, we like the environment in Illinois, and we think the Governor has expressed publicly an evolution of his views on expanded gaming. But right now the state, I think, in most people's minds is facing a bigger problem, and that's addressing the pension issues. So we're always hopeful and optimistic, but I think in the short veto session that's occurring right now, expanded gaming is really not the focus.

Thank you. Just a follow-up. So the Illinois bill that passed the Senate, is it live now or, I guess, active now? And when is it active through, if you guys have that?

Yes. The bill that was passed in the spring session is active through the end of this legislative session. So I think it goes to the end of next year, Amit.

Thank you.

I think it was passed by the Senate. It still needs to be taken up in the House.

Thank you, and Bill, and Bill.

Steve Altebrando of Sidoti. Your line is open.

Good morning. A couple of questions. Can you comment a little bit on the M&A pipeline, whether there are deals out there right now to look at?

We don't comment specifically on any deals. But there is always deals out there, Steve. It's just a question of whether they're deals that we'd want to do, and at prices we'd do them at.

Okay. And then if you can remind me, the small expansion in Oxford, is that adding gaming machines?

Yes. We're adding 4 table games and 58 machines. It should open before -- around mid-December.

Okay. And then getting back to the Illinois question that was previously asked, the bill that's passed right now in the House, is that -- you're saying it's alive through the end of 2014 or is it through this session which I thought ends the first week of 2014?

It's through the session. I might be mistaken that it's the end of next year. That's what I thought it was but it's been a while since I've looked at it, Steve. So it's theoretical it could be in January. I'll have to follow up on that one.

Okay. Thank you.

(Operator Instructions). Justin Sebastiano of Brean Capital. Your line is open.

Thanks. Morning, guys. You mentioned low table hold at Harlow's and Riverwalk as part of the reason for the weakness there. Can you maybe quantify what you think the impact of that low table hold was on the EBITDA of both properties?

Yes, give me one second. It will take me a minute.

Sure. And I guess in the meantime, Mississippi seems to be more impacted by the soft macro environment. Do you guys agree with that compared to your other regional properties and just what we've heard from your peers so far?

Yes. It is definitely more impacted than others. Much higher unemployment. I think the higher payroll taxes had a disproportionate impact on discretionary income in that region.

Okay. While you're digging for that then, just overall promotional environment across all of your properties, the casinos, how is that? Is any one market more or less rational than some others?

We've got ebbs and flows. I think -- I don't know if I can answer that quantitatively across all the markets off the top of my head, but I would tell you that for us, Mississippi right now is an area where we're looking closely at that in terms of what the competitors are doing. What we're doing is we see sort of a consistent decline in the environment.

And that's more to just manage it and be more targeted to just try to maybe get rid of the unprofitable comps and just kind of try to drive EBTIDA there. Or is it more we're not quite there yet where's it gotten irrational but it might go towards that?

Yes. Well, when you see shifts in your environment, you have to look at all your segments to see, generally, if the way you're approaching the customers within those target segments still makes sense. So I don't think you ever adopt -- at least in our company, we haven't adopted a philosophy that we stick to all the time no matter what. As we see changes in the macro environment and in our micro environment, we revisit all of our assumptions on comps and free play and reinvestment. And we're doing that pretty significantly right now in Mississippi.

Okay. And -- go ahead. I'm sorry.

At Harlow's the effect on EBITDA is around $300,000, and at Riverwalk it's around $200,000.

Okay. And then forgive me, I missed the very beginning when you guys were talking about the Florida host. What's the public hearing date?

November 7.

Okay. And do you expect to make up what you lost this quarter on the 39 race days you're going to have in Q1? Is that what you guys said?

No. I said that there are two pieces to it. One is the host revenues which is about $9.3 million of revenues in the current period, and $2.7 million of our share of that after taxes and purses. So that piece hopefully will get resolved in the November 7 hearing. I don't know how that will turn out but that's the intent. We did race 17 fewer days in the third quarter. We raced fewer days -- we raced fewer days in second quarter as well. We're going to make up those by racing 39 days in the first quarter of next year. So they're two independent things, and the timing of which -- the only thing I can tell you is we will race 39 days in the first quarter.

Okay. Okay.

(Inaudible).

And I'm sorry, what was the revenue impact then for those lost racing days?

Let me see here. Was it $4.3 million? It was $14 million total counting -- $9.3 million was on host revenues, and $4.4 is related to fewer race days.

Got you. Okay. Thank you for that. And then just lastly, as far as Steve mentioned the M&A pipeline, I won't try to pin you down for specifics, but have you just in (inaudible) view, have you seen multiples increase from the sellers? Have they asked for higher multiples over the past 12 months since Penn has done this reconversion and as they've gotten closer and now basically converted to the REIT? Have you seen those multiples expand for what sellers are expecting?

As Bob said, we haven't seen it yet. We just closed on Oxford on a 7.5 multiple is what we thought -- ends up being a little less than that. So beyond that, I can't really comment.

Okay. Thanks, guys.

Tyrone, any other questions?

There are no further questions at this time, sir.

Okay. Well, unless anybody's got anything else, I think we're finished. Thanks for joining us today. Have a happy holiday season. We'll talk to you after the first of the year. Bye bye.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Have a wonderful day.