Churchill Downs Inc (CHDN) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Churchill Downs year end conference call. (Operator Instructions). I would now like to turn the call other to Ms. Courtney Norris, Director of Communications please go ahead.

Good morning, and welcome to this Churchill Downs, Inc. conference callto review the Company's business results for the fourth quarter and full year ended of December 31, 2013. The Company's fourth 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 will 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 in the Investor 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 and Reform Act of 1995. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or are 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 SEC or 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, Inc. expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes and expectations. I will now turn the call over to our Chairman and CEO, Mr. Bob Evans.

Thank you, Courtney. Good morning, everyone. Thank you for joining us. With me today are Allen Tse, our General Counsel, Bill Carstanjen our President and COO, and Bill Mudd, our CFO. I'm going to turn this over to Bill Mudd, he will make a few prepared remarks and then we'll come back to take your questions.

Thanks, Bob. Good morning, everyone. After I make a few comments about our fourth quarter and full year results I will be happy to answer any questions. We made a few changes to our press release to make it easier to understand the operational drivers of our financial results by segment. I hope you like the new format.

Overall, it was a good year, with record net revenues of $779 million, up 7% over 2012, and a relatively tough fourth quarter with net revenues up 3%. For the year, our gaming business revenues increased 33%, reflecting revenues generated by Oxford, which was acquired in July of 2013, and Riverwalk which was acquired in October of 2012. Our Calder casino revenues increased by 1%, during the year, on the closure of internet cafes and direct marketing efforts, partially offset by new competition. Our Louisiana operations were roughly even with 2012, as gains in the first half of the year were lost in a very soft fourth quarter. Our Fairgrounds slots business also had significant road construction disruption on Gentilly Avenue, for an extended period of time, which impacted our ability to access the facility.

Our Harlow's property revenues were down $4.2 million, or 7%, despite new amenities coming online in early January. We believe these losses are primarily from continued economic weakness in the region, product improvements at a competitor and limited incremental revenue associated with free play offers.

For the fourth quarter, our gaming business revenues increased by 25%, as incremental revenues from the Riverwalk and Oxford acquisitions were partially offset by weakness in our Louisiana operations at Harlows casino. Our fairground slots revenue declined 10%, and our video poker operations declined 5% in the quarter against a very tough prior year comparable.

Last year we reported fourth quarter revenue gains of 11% in our slots business, and 6% in our video poker business driven by state and federal stimulus, post hurricane Isaac. While we performed better as a market as a whole, our fourth quarter 2013 results gave back those gains.

Our Hawlow's property suffered the largest year over year decline in the fourth quarter with revenues down 12%, visits and spend per visit have been down, particularly with low and mid tier customers to despite aggressive pre-played marketing promotions to drive guest counts. Our Riverwalk property also suffered decline of 6% when including a full quarter of revenues in the prior year. We believe both properties results were impacted by the continued tough regional economic environment. As well as the unseasonably volatile weather.

Our Calder casino revenue growth slowed in the fourth quarter posting a 1% decrease verses the prior year. Growth from the closure of internet cafes in April, was offset by a weaker overall market. This trend continues into January, but appears we started growing again in the early part of February. We have been pleased with our new Oxford property, despite one of the highest snow falls on record in December at 26.2 inches, and with precipitation on 22 of 31 days, the property was still able to report a 1% increase over the fourth quarter of 2012.

Moving on to our online business. Our online business had a decent year, all things considered. Posting a 1% revenue improvement despite the lack of wagering by Illinois residents for 5-months, and Texas resident wagering ceasing in late September. Total year handle on TwinSpires increased 1% with an 18% increase in unique players to $869 million. Excluding wagering by Illinois and Texas residents in both years, wagering improved by 6.2%, compared to US industry handle that was flat to 2012, as players continue to shift their wagering activity to the online channel. Our fourth quarter online results were similar with revenues down 1%, on a 2.5% decline in handle, with a loss of Texas wagering.

Including Texas from both periods, handle growth was 3.7%. We made our oral arguments against the Texas law banning internet wagering on horse racing in front of a three judge panel of the UScircuit court of appeals for the fifth circuit on February 4th. We believe we have a strong argument, and hope to receive a verdict, by allowing us to resume wagering prior to this years Kentucky Derby. A bit of good news for our online business is that the Illinois legislature authorized an extension of ADW regulations through January 2017.

Finally, let's look at our racing operations. Our racing operations net revenues declined by $27.8 million for the full year. The primary driver of this decline was a $28.3 million decrease in our Calder operation from the hosting revenue dispute and live racing over Arapahoe Gulf Stream Park. That led to a 13% reduction in live race days at offer Calder facility during the year. The good news is that the Florida department of Fair Mutuel Wagering issued a notice on November 7th, that the permit holders must conduct three days of live racing per week to qualify as a host track. Consistent with the language of the statute, and has scheduled a hearing on March 6th to promulgate the rule.

During much of the 2013, Gulfstream Park and Tampa Bay Downs, the other two thoroughbred racetracks in Florida, claimed hosting revenues despite running fewer than three live race days. As mentioned on the last earnings call, we will pursue the recovery of these lost hosting revenues using all means available to us.

As far as the continuing overlap of Gulfstream Park, we have had many discussions of the [industrial] over the past few months to resolve the issue, which has led to a diminished product at both facilities. We have not been able to agree to a compromise that both parties can live with. We will continue to work on an agreement and we will do what is best for Florida racing and for our share holders. The silver lining for now is that we will conduct 39 live race days in the first quarter, qualifying as a host racetrack, where we have not traditionally ran those days.

In addition, most of the economic damage from these issues was inflicted in 2013, and thus going forward we will see some improvement to our financials as we run Gulf Stream Park's traditional dates, and if we reach a compromise, it should improve the Company's results. Arlington Park revenues declined 7% during the year on 18 fewer host days, temporary cessation of ADW wagering resulting in lower source market fees, and handle declines driven by poor weather and smaller field sizes. The good news is that there are no material changes to our racing and host day schedule in 2014. And with the passage of new ADW legislation by the Illinois legislature in January, there should be no disruption to ADW operations for the next three years.

Also, in the racing segment, inclement weather conditions affected racing and jazz fest at fairgrounds property which experienced a decline in revenues of 8% for the year. Churchill Downs was our only racing property that grew year-over-year, with revenues up 7%, on another record Kentucky Oaks and Derby week, in the introduction of a 12 day September meet.

Total company racing operations had a rough fourth quarter with revenues down 21%, primary driver of decline was an $8.8 million reduction at our Calder property. $6.8 million of this decline was from lost hosting revenues. A remaining $2 million is from running 22% fewer races on 7% fewer race days. Churchill Downs came in slightly below last year's fourth quarter with revenues down 4%, driven by a night racing event that overlapped with a University of Louisville home football game, affecting attendance and on track wagering.

Finally, our Fairgrounds property revenues declined 12% from lower wagering driven by bad weather and increased competition. Excessive rain forced us to take races off the turf, impacting starters per race, a key indicator of product quality.

Since I know you will ask how this year's Derby is shaping up, I will go ahead and make a few comments. With the caveats at our cash (inaudible) and mission revenues dependent on the day of the event, which is very much driven by weather, and then our pari-mutuel revenues are driven by the still to be determined size and competitiveness of the Oaks and Derby races, and that we are still 66 days out from the event, our premium missions revenues are very strong compared to last year. Sales of personal seat licenses are significantly ahead of last year, sponsorship sales are ontrack to out pace last year. We have a new NBC agreement going out to 2025. Our new 2,400 ft. roof top garden and liquor garden areas of the renovated grand stand are sold out. Our new 15,000 square foot video board is on track for it's debut on opening weekend. Handle and future wager pulls are 5% ahead of last year. Based on what we have seen so far, we expect this year's Oaks and Derby weeks financial performance will be very strong.

Now, let's take a look at EBITDA performance by segment. For the year, our gaining adjusted EBITDA increased $16.2 million, primarily due to the addition of Riverwalk of $13 million, and Oxford of $9.2 million. Partially offsetting these increases was a decline in Harlows of $3.6 million driven by general economic weakness and lower discretionary spending in the region. In addition, Harlow's experienced temporary disruptions for modifying it's casino floor to create a better gaming experience.

Fairground slots and video poker adjusted EBITDA decreased by $1.9 million as softness in the market more than offset the opening of the new video poker facility. Finally, the $0.8 million impact of a prior year recovery of slot referendum expenses, Calder adjusted EBITDA grew by $0.3 million due to the closure of internet cafe's and improved marketing efforts.

For the fourth quarter our gaming adjusted EBITDA increased 10% to $18.5 million, improvements driven by the Oxford acquisition were partially offset by a $1.2 million decline in our Louisiana properties, and a $0.9 million declinein our Harlow's property on lower revenues. Our total year online business adjusted EBITDA increased $4.5 million reflecting a 1% increase in our pari-mutuel handle, improvements in our velocity high volume business, and a favorable settlement of litigation, partially offset by higher pari-mutuel taxes in certain states.

For the year, the temporary loss of Illinois ADW wagering, and the exit of Texas, reduced adjusted EBITDA by approximately $2.7 million. Expenditures related to the launch of Luckity totaled $2.2 millions in the year, an improvement of $0.4 million compared to 2012. We started marketing Luckity in earnest in mid-January of 2014 as a real money gaming Bingo site. We are still very early in the process but we are starting to show that we can attract and retain customers. By early next quarter, we should be able to determine if we want to continue investing in this product. For the fourth quarter, our online business adjusted EBITDA improved $1.4 million dollars as a result of favorable litigation settlement, was partially offset by the loss of wagering by Texas residents and higher pari-mutuel taxes in certain states.

In addition, we spent $0.4 million on the development of our Luckity platform and and velocity earnings improved by $0.3 million. Our total year racing operations adjusted EBITDA decreased $4.1 million primarily due to a $9 million decline in adjusted EBITDA of which $6.3 million was associated with a loss of Florida hosting revenues and $1.8 million was associated with fewer live race days.

Arlington Park adjusted EBITDA declined by $2.3 million due to 18 fewer host days, the impact of inclement weather during the racing season, and lower fees from ADW operators. Fairgrounds adjusted EBITDA decreased $1.4 million primarily due to inclement weather. Partially offsetting declines was an increase in adjusted EBITDA of $5.8 millionfrom a record setting Kentucky Oaks and Derby week, as well as an increase related to our new September meet at Churchill Downs. In the fourth quarter, our racing operations EBITDA loss was $8.1 million, $4 million worse than the fourth quarter of 2012. The higher loss was primarily driven by Calder which was down $3 million on lower hosting revenues, as well as a 22% reduction in the number of live races.

Fairgrounds was down $0.3 million on fewer starters per race, and two fewer live race days, and Arlington was down $0.7 million on higher general liability insurance losses. As I said earlier, the head winds we experienced in Florida and Illinois, during 2013 are now behind us and we shouldn't see any additional impact going forward.

For the year, our investments and adjusted EBITDA increased by $1.1 million primarily due to incremental equipment sales, at United Tote, an $800,000 increase in our share of operating income, from our Ohio joint venture partially offset by $1.1 million in cost, associated with developing our internet gaming platform.

In the fourth quarter our share of the Miami valley gaming facility which opened December 12th approximately three months ahead of schedule, and well below budget, added half a million dollars to our other investment segment adjusted EBITDA. We are reporting our 50% share of EBIT earnings before interest and taxes, in our adjusted EBITDA metric. Note that this includes depreciation andamortization which is lower than the adjusted EBITDA amount we would report if we were a consolidating entity. A more detailed P&L can be found in the 10-K filings.

While the ramp up has been slower than we would like, we have been pleased with the performance to date considering the weather we have been experiencing. We are near capacity on the weekends and the weekdays have been improving. Weekly gross wind per unit has improved each of the last four weeks from $181 of gross win per unit to $256 last week, as we focus our mid-week data base marketing efforts. Offsetting the gains from Miami valley in the fourth quarter where $1 million in expenses to continue development of our internet gaming platform and poker site.

Overall, total year adjusted EBITDA set a record at $176.2 million,up 11% over the prior year. Fourth quarter adjusted EBITDA declined slightly to $19.3 million.

Now, let's take a look at a few items below adjusted EBITDA, that effected earnings from continuing operations for the year. Insurance recovery net of losses decreased since $6.6 million primarily due to the prior year recognition of insurance recoveries associated with the 2011 flood,and wind damage at Harlows.

Horse racing equity trust fund proceeds of $4.5 million were recognized in 2013, reflecting Arlington's final share of the Riverboat casino license surcharge. Share base compensation expenses increased $7.5 million due to expense associated with grants under the Company's new long term incentive plan that took effect March 21, 2013. As discussed in our second quarter earnings call last year, the majority of this expense will be recognized during the first 14 months of the plan. As such the amount of expense associated with the plan will be greatly reduced starting in June of this year.

Pre-opening cost of $3.6 million were incurred during the year. And $2.4 million in the fourth quarterassociated with our Ohio venture. Other charges in recoveries were $2.5 million loss in the fourth quarter and year as a result of reserving a receivable related to acquiring a New Jersey internet gaming license. We are pursuing recovery of this receivable through the legal system, we are currently unsure of the ability to pay.

Now please turn your attention to the consolidated statements of comprehensive income for the years ended December 31, 2013. Full year, total net revenues grew 7% over 2012 to $779 million. In the fourth quarter net revenues increased 3% to $162 million. For the year, net earnings from continuing operations were $55 million, down from $58.2 million in 2012. With that, I'll turn it over to Bob who will open the call for questions. Bob?

Thank you, Bill. One of those longer ones that we have done.

Yes.

We've spent some time, as Bill mentioned, on our press release and in our prepared comments trying to make better disclosure of the information that we think is of interest to you. If you have any thoughts or questions or suggestions let us know and we will try to improve it further, as we go forward. With that, we will take some questions.

(Operator Instructions). Our first question comes from the line of Cameron McKnight of Wells Fargo, your line is open.

Thank you very much. Good morning.

Good morning.

Questions for Bill or Bob. TV and radio deals are roughly 11% or so of total revenues and you have announced that you have renegotiated the NBC deal. Can you give us more color around the renegotiation, given that we have seen a lot of sports media rights being renewed at increases of anything from 30% to 200%. As a follow up, do you plan on renewing any of your sponsorship deals early?

Well, on the first point, can't really disclose the details of our arrangement with NBC, but I can share two thoughts with you. One, as you know, the market for sports media rights is extremely strong right now, and this new deal reflects those market forces. Exactly how I don't want to disclose. Secondly, the improved economics for this year's Oaks and Derby, and will then increase further in future years. That's as far as I want to go on disclosing the details of that one. In terms of sponsorships, I am not aware of any we have renewed early, but we have picked up a significant and still unnamed and unannounced sponsor for the Oaks and Derby in 2014 that we will get back to you later.

Okay, great, thanks. And then to follow up, given the recent debt raise, several investors are asking about a potential acquisition strategy, and the use of proceeds. Can you give us some general thoughts on what you are seeing out there in terms of landscape for acquisitions?

Nothing has really changed in our intent. We are still looking for attractive regional gaming properties. Our selection criteria hasn't changed. If we could do the same deals that we have previously done again over the next year or so, we'd be happy to do them. Assuming the valuations were the same. So we are still looking at everything. We see the entire deal flow and if we find an attractive property at the right valuation, we have the financial resources to act.

Great, thanks very much.

Thank you. Our next question comes from the line of Amit Kapoor of Gabelli & Company.

Can you provide us with a update on Illinois, specifically the senate bill that might see some light this session in house? And then, any updates on Kentucky would be great, thank you.

Hi, Amit, it's Bill Carstanjen. It's always a mistake to try to handicap how the legislature will behave over a session. I would say both in the case of Kentucky and Illinois, we are getting to the crunch time of the session, so I think as we try to read our cards as we head into this portion, of both of the legislative sessions we have some cause to be optimistic. But is always the case, our issues are wrapped up with other issues that are going on in the legislature that can effect us in ways that are hard to predict right now. Our team is fully engaged, heavily engaged, optimistic, and working hard in both of those jurisdictions and that's probably the best I can say about where we are right now.

Thank you. Is the coalition in Kentucky Wind, is that gaining greater traction from your vantage point? Do you think that's taking place?

This is Bob. I would say that has been a pleasant area of success. The folks leading that are doing a terrific job. It has over 31,000 followers on Facebook, and in the last couple of weeks has directed something in the order of 6,000 emails and 1,700 phone calls to Kentucky legislatures. I think that's been an effective tool for us, and one that communicates the key issue in Kentucky, at least, which is that the expanded gaming is something that is good for all of Kentucky not just the horse racing industry. I think that point has been made and has been driven home. The support we have gotten around Kentucky Winds validates that.

On a separate note, can you talk potential positive implications of the new video board, in terms of visitation, visibility and just attraction you expect on the track from this new addition? Thanks, that's all.

We're pretty excited about this addition. It will be the first racetrack anywhere that has done something similar to this. It will also be the largest 4K resolution video board anywhere in the world, as far as we know. We have been working diligently on the programming for the four initial points of use, which will be our opening night, that's the Saturday before the Kentucky Derby weekend, which is when we will introduced the new video board. We didn't actually name it this, it has just become known as the big board. It will also be used the rest of Oaks and Derby week, and obviously on Oaks and Derby days themselves and it be used in a more traditional way thereafter. We have engaged in outside company to help was the programming. We have hours of programming here to provide, and we have worked pretty diligently on the effort to attract sponsors. We've got one so far, and probably will end up with a couple of others. My guess is it will be 2015 before we see a real pick up in sponsorship. Sponsors want to see what they are buying before they buy it. At the moment, the video board consists of 3-70 foot high metal towers. The board itself won't be installed for another month, so it is hard to show it to people at this point. We can point to some construction and say that's where it will be. Once people see it, how big it is, and the impact it has on the live crowd, I think there will be a lot of interest in it going forward.

Thank you.

You're welcome.

Our next question comes from the line of Justin Sebastiano, of Brean Capital. Your line is open.

Thank you. Good morning, guys. As far as the renewal with NBC, did this happen sooner than you expected and if so, what made you pull the trigger now?

I don't know that we had a specific expectation or a goal to get it done in 2014. It's just an opportunity that presented itself. We've had a great relationship with NBC, a lot of communication that has gone on between us, and the opportunity just presented itself so we decided to go ahead and act on it. And seems like a good thing to do.

Okay. And then as far as Illinois expansion, it seems like the gating factor for the governor was pension reform, seems like that has been cleared away. Are there any other issues that are in front of him or anything else he is raising now that would perhaps be a roadblock to gaming expansion in Illinois?

With respect to the governor, we are not aware of any new significant issues that have reared their head. But that doesn't mean that there won't be some that we haven't heard about, or that just haven't surfaced yet, or that will come up later. I think one thing every body will be watching during the remainder of the legislative cycle this time is just the Chicago mayor Rom Emanuel and his pension concerns for the city of Chicago. That might effect us in ways that are good and/or bad, it remains to be seen.

Okay. And as far as Kentucky, can you give us your thoughts, or update on the instant racing. There's a recent developments there, can you maybe talk about that, and then also give us your thoughts on, are those gains you would place at Churchill Downs?

A couple of ideas on responding to that question, and if I don't quite get what you are after, just clarify further. But there's been a legal process going on with respect to instant racing machines or historical racing machines. So they are still winding their way through the court system, and there hasn't been a definitive ruling yet on legality it's been pushed back down to the lower court to take another look at and review whether these machines are a legal form of gambling in the state.

So what we said for our company is we want all of the ambiguities resolved by the courts before we would seriously look at it, but we have also said in the past, and we will remain firmly of the belief based on what we have seen in the performance of these machines where they have been deployed down in the southern portion of the state, and also at Ellis Park, to the west, these machine may do okay in a markets where there isn't a slot machine competition nearby.

But we remain concerned that in a competitive market like Louisville, where Churchill Downs racetrack is located, these machines aren't likely to fare well compared to full casino offerings including slot machines like we have seen lining our borders around near the Louisville market. So we are following the issues closely. But it's hard to imagine at this point, based on what we have seen, that these machines are of real interest to us.

Okay, that did answer the question. Is there any, as far as timing, as to when the lower court will render a decision?

Not as far as I'm aware.

Okay. Lastly, you mentioned that MVG ramp up was slower than you would like but last week it seemed like they had a good win per unit. How far off your initial expectations did it perform, and how is it performing now compared to where you thought it would be before it opened?

We were excited to get this open three months earlier than we had originally planned and to get it open below our originally expected budget. On the other hand, it didn't turn out to be a great thing to open it up in the middle of the weather cycle that we've been enduring. So that effected us. We got it open around mid to late December. Every week it's been an improving build site, some of the data every week is getting significantly better. In terms of where it is now compared to our internal projections, I'm not sure we do disclose those, but we are increasingly optimistic week to week, and this isn't an improvement cycle that has tapered off yet, every week it seems to be moving significantly better.

Okay, thank you, guys.

You're welcome. Any other questions?

We do have one more question from Steve Altebrando, of Sidoti & Company.

I think you mentioned in the script some free play promotions not being that effective, wondering if you have since dialed back at all on that?

Yes. That's correct. And that's predominately in our Mississippi property, and we have dialed those back pretty dramatically at the beginning of the year.

Okay. And then in terms of touching on the M&A environment, have you seen any change or multiples rising since the GLPI read has been out in the market?

I think there's been a lot of discussion in the M&A circles bout the re-driving of evaluations. I don't know that we have seen that yet. But there's been one transaction, maybe two, that's been done out there. There's a lot of talk to over time they may drive up the acquisition prices. We will have to see. Not sure that will be the case, but there isn't enough data yet to be worried about that, and we're not particularly worried about it at the moment.

Okay. And then, have you repurchased any shares since the authorization has been in effect?

Not yet, Steve.

Last question is, assuming Kentucky legislation is not passing for gaming, just wanted to get your thoughts on capitol deployment. Obviously, with the high yield note being in place,it seems like you have very significant and overcapitalized at the point. Just wanted your thoughts on capital allocation.

We're pushing to get gaming in both Kentucky and Illinois, and that's the primary objectives. If we don't get those obviously we are continuing to look for opportunities to grow the Company, via acquisition. But we also have the ability to buy back shares and pay dividend. So we look at all different ways to return capitol to our shareholders.

Okay, thank you.

Thank you, and I'm showing no further questions at this time, like to turn it back over to Mr. Bob Evans.

Thank you, good job. Thanks everyone for joining us. Hopefully you found the time together productive. Hopefully the weather improves dramatically over the next few weeks and months and we look forward to talking to you in another quarter. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference, this does conclude the program and you may all disconnect. Have a great day.