Churchill Downs Inc (CHDN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated, second quarter results conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time.

If anyone should require assistance on today's conference, please press star then zero on your touch tone telephone. As a reminder, this conference is being recorded.

I would like to introduce you to your host of today's conference, Mrs. Courtney Norris.

Ma'am, you may begin.

Thank you, Teria.

Good morning, and welcome to this Churchill Downs, Incorporated conference call to review the company's business results for the second quarter, end of June 30, 2014.

The company second 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 periods to be presented in this conference call, including any information required by Regulation G, is available at the section of the company's web site titled News, located at churchilldownsincorporated.com, as well as on the web site's investor section.

Let me also note that a news release was issues advising of the accessibility of this conference call on a listen-only business 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 Security 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 facts. 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 Security and Exchange Commission for a discussion of additional information concerning factors that could cause our actual results of operation 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 visions for 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. Good morning, everyone. Thanks for joining us.

I don't have any comments other than what appear in the press release. So, I'll forego rereading those to you.

I'll turn it over to Bill Mudd, our CFO, who will take you through the numbers. And then we'll be back to try to answer any questions you've got.

Bill?

Thanks, Bob. Good morning, everyone.

Overall, our results were solid, despite a soft regional gaming market. It was a record second quarter with revenues up 7%, adjusted EBITDA of 12%, and net income from continuing operations up 14%.

Year-to-date cash provided from operating activities was $119 million, up 19% from the prior year.

Debt at the end of the second quarter was even at 2013, year end, at $369 million, despite spending $12 million maintenance capital, $26 million in project capital, funding our Miami Valley gaming development with $6.5 million, and repurchasing nearly $62 million of stock during the first half of the year.

The 100 -- 691,000 shares we repurchased at the end of June. So, the average share count for the second quarter was not affected by that repurchase.

Now, I'll make a few comments on our operations, and make some other highlights by segment.

Our racing segment revenues increased 1%, and adjusted EBITDA improved 11% for $7.6 million, despite continued headwinds at our Calder facility from racing head-to-head with Gulf Stream Park.

Our Kentucky Derby and Oak Suites had another earnings record with adjusted EBITDA of $8.8 million over the prior year. The increase in revenues and earnings were broad based.

[Assigned] Oaks and Derby Week generated record attendance, record (inaudible) of mutual revenues. Power media (inaudible) and record mission revenue on the introduction of the Grand Stand Terrace and Rooftop Garden.

We are extremely pleased with this result. The Derby continues to grow, is stronger than ever, and we've already started working on, and hope to make, 2015 an even bigger success.

Partially offsetting this record performance was a 43% decline in revenues and a $2 million decline in adjusted EBITDA at Calder Race Course. These reductions were driven by a 20% fewer live race days, the continued loss of a portion of our hosting revenues, and the impact of fewer horses per race from running head-to-head against Gulf Stream Park.

The good news is that we have come to an agreement with the Stronach Group, allowing them to lease certain assets and to operate and maintain live racing at Calder through the end of 2020. We will continue to own the racing and gaming licenses, land and billings, but have, for all intents and purposes, outsourced our racing in Florida while we continue to operate our Calder slot facility.

This agreement is a win for the customers and horsemen in South Florida, a win for the Stronach Group, and a win for Churchill Downs.

The agreement is complex. But needless to say, it will improve the results of CDI over the next 12 months.

Our gaming segment results were mixed this quarter, with revenue growth of 23% and adjusted EBITDA growth of 35%. The gains were driven by the July, 2013 acquisition of Oxford -- of the Oxford Casino and the opening of our joint venture, Miami Valley Gaming Property in mid-December of last year.

Our other properties struggled with revenue declines between 3% and 10%.

On the positive side, we believe we maintained or gained share in each of the markets we operate, as our top line results for in-line is slightly better than our competition.

The bottom and middle tier of our database continues to see fewer trips and a lower win per trip. The top tier of our database, the stable, is slightly growing in some locations. We believe the revenue growth will resume when we see employment gains and real disposal income growth in the markets we operate.

Thus far, we have been very pleased with the performance of our Miami Valley Gaming joint venture. Second quarter, a total revenue is for $36.3 million. And total adjusted EBITDA was $10.3 million.

We now have 175,000 names in our database, and it continues to grow in all customer tiers.

As a reminder, we include our share of operating income, which is after appreciation and amortization in our adjusted EBITDA metric. That amounted to $3.4 million this quarter.

Our online business continued to grow organically with second quarter revenues up 9% on a 20% increase in unique players. Handle for the quarter increased 4.7% over the prior year to approximately $266 million, outperforming total industry handle, which declined 1.4%, according to figures published by Equibase.

The reinstatement of wagering by Illinois residents in June of last year was more than offset by the continuing loss of Texas resident wagering during the period. Excluding Illinois and Texas from both periods, our handle improved 5.5%, out-pacing the industry by 6.9 percentage points.

Our online business suggests EBITDA was consistent with the prior year as organic revenue growth, [the ringing] statement of wagering by Illinois residents and a renewed focus on cost controls offset by the loss of Texas resident wagering and additional taxation of online wagering in certain states.

Our investment suggested EBITDA declined by 1.6 million during the quarter. 0.8 million of this decline is driven by the cost associated with the continuing buildout of our real money Internet gaming [platform].

United Tote adjusted EBITDA decline 0.4 million due to lower equipment and service sales.

Finally, we incurred half a million dollars in expenditures related to our bid for the Capital Region Casino license in New York. We think we have a great partner in Saratoga Casino and Raceway and believe we submitted a very competitive bid.

Yesterday, we announced that we have a binding agreement to acquire a 25% stake in Saratoga Harness Racing Inc., which includes an agreement to manage the Saratoga Springs, New York and Black Hawk, Colorado properties as the Capital View Casino in East Greenbush, New York should we awarded the license.

Saratoga Casino and Raceway, which operates 1,780 video lottery terminals, accounts for the vast majority of the acquisition value. While we have not made public the purchase price of the acquisition, we believe that the multiple is at market and based on the [performing] profitability of the property once the Capital Region Casino is open.

Additionally, while the possibility of gaining expansion in Colorado is a concern, we believe the financial downside there is limited.

Not only does this equity investment make sense economically, it is also strategically important as it provides CDI with an option on Internet gaming in two states should Internet gaming be legalized.

Additionally, this equity position would entitle us to a share of the Newburgh casino in Orange County, New York, which was proposed by Saratoga Harness Racing Incorporated and Rush Street Gaming should they be the successful bidder.

We are really excited to expand our relationship with the Saratoga Harness Team and believe it will improve our chance of being awarded a license to build and operate the Capital View Casino and Resort.

Now I'd like to cover one item below the adjusted EBITDA [line].

As a reminder, a new executive long-term incentive plan went into effect March 21st of 2013. The vast majority of the expense related to the -- was related to at-risk price [vesting] stock award and recognized over the first 14 months of the plan. That 14-month period concluded at the end of May and is the driver of the 50% reduction in share base compensation in the quarter.

The remaining unrecognized expense related to the new long-term incentive plan is $4.6 million that'll be recognized over the next 23 months.

With that, I'll turn it over to Bob who will open the talk for questions. Bob.

Thanks, Bill.

Also with us today are Alan Tse, our general counsel, and Bill Carstanjen, our president and COO.

(inaudible) if there're any questions, we'll be happy to take them down.

Certainly. Ladies and gentlemen, at this time, if you have a question, please press star then one.

If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

And once again, to ask a question, please press star then one.

One moment. And I'm showing our first question's going to come from the line of Cameron McKnight of Wells Fargo. Your line is now open.

Thanks very much. Good morning.

Good morning.

Just first of all, a question for -- for Bob or Bill. On the -- on the buyback, what was the -- what was the catalyst for -- for the change of course there in terms of -- in terms of starting to return big amounts of capital through a buyback and what was the catalyst for -- for such a big buyback in the quarter?

You know, the catalyst was -- first of all, we're -- we're always interested in -- in looking for ways to return capital to our shareholders.

It was an opportunity to do a rather large buyback in a -- private negotiations. We took the opportunity to go ahead and take some of those shares off the table without -- without, you know, affecting liquidity for existing shareholders.

Right. Got it.

And then just as a follow-up, I mean, you've got -- I mean, in terms of our view, you've got several assets that -- that no one else in regional gaming has.

Apart from the derby, you've got a balance sheet that's almost unlevered. How comfortable would you be with taking leverage up, be it through buybacks or something else and -- and is there a target you've got in mind?

Well, we don't provide [forward-looking] guidance and we don't [certainly have] a target on leverage. A lot of that, as we've discussed before, Cameron, depends greatly on the use of -- of proceeds.

Right now, I mean, we put in $300 million high-yield long-term unsecured bonds at the end of last year, provided us, you know, tremendous amount of liquidity on our $500 million [revolver], obviously.

We have lots of opportunities to spend cash and we -- we obviously continue to look for ways to invest our shareholders money to provide great returns. The share buyback at the end of last quarter is a great example of that.

And you know, in terms of leverage, it depends on the tenor of the debt and -- and the type of transaction that -- that we'd use the money. So it's kind of hard to answer that question with precise comments but that's the way we think about it.

OK, great. Thanks very much.

Thank you.

And our next question comes from the line of Amit Kapoor of Gabelli & Company. Your line is now open.

Great. Good morning. Thank you.

In terms of -- in terms of allocation of capital, Bob, is the share buyback -- I mean, stocks clearly had [an intrinsic] value, probably significantly outperformed the -- significantly outperformed the market.

So in terms of timing of buyback, how do you guys think about that, if you could walk through that thought process of what is a good point in the price [versus] performance of the stock, the buyback stock?

I understand the question. The challenge is responding to it without making forward-looking statements.

Let me just say that the -- we regularly discuss with the board capital allocation and returns to shareholders through buybacks and dividend increases. We understand that it's important to our shareholder base. We have $38 million remaining on the board authorization amount that goes through 2015, as I recall.

We're going to look for other opportunities as we go through time and we'll review this subject with the board on a regular basis.

Sorry -- sorry I can't be more specific.

OK. Great. Thank you.

And just a different question, can you walk us through a potential timeline for the New York gaming license opportunity. Licenses -- the applications were in by June 30th, licenses expected to be awarded in late this year.

But any specifics around that and [pins in the map] would be very helpful. Thank you.

Hi Amit, this is Bill Carstanjen. You just gave a pretty good summary, so we've followed their application, our definitive application June 30th. The expectation is that a decision will be rendered by the state around or before the end of the year. And it would be great if they keep to that time table. That's not really within our control. So, we'll just have to see and -- what happens after -- after that, will, I think, depend in part on -- on what the [state] says when they award the bids.

So, that -- that's as much as we know at the moment. W e certainly have hopes and expectations of how quickly the project can be developed and when it can be built and opened, but it'd be speculating to -- to so much further than given the dates we just gave.

Great, thank you.

Thank you. And once again, ladies and gentlemen, if you have a question at this time, please press star, then one.

Our next question comes from the line of [Steve Altabrandaa] of Sidoti & Company. Your line is now open.

Hi, good morning. How are you guys -- how is MBG planning to fund the -- the license sphere -- the $25 million license fee at the end of the year.

Yeah, so they're generating cash right now, Steve. Some of the cash that we're generating between, you know, the time we open, we haven't given any of that money back to ourselves or DNC. The cash is building up there and then whatever's left, you know, we're going to fund off of our balance sheet. We have 12.5 million. Part of that will come of funds sitting on the books of MBG, and part of it will come out of our debt instruments at the end of the year.

OK, that's helpful.

And then in terms of the -- the -- I don't know if there's anything you can provide, but mechanics or the economics of the management agreement with SHRI, is it based on a percentage of revenue, is there EBITDA incentives, and anything on that would be helpful.

Hi Steve. It's Bill Carstanjen again. We're not going to disclose the specifics of the management contract, but it's fairly standard and relatively consistent with which is the others due out in market.

OK.

And then you mentioned in the script, the online portion. Was that a meaningful motivation for this deal, or just something as an aside type thing?

It's always a plus. It's not the driver for any acquisition or project we've done so far on the brick and mortar side, but it's always a plus, it's always something that we factor into the mix as we look at the population demographics of -- of the different states that are out there.

OK. All right, thank you.

Thank you, and at the time we're showing no further participants in the queue. I would like to turn the call back over to management for any further remarks.

All right. Thank you. Thanks everyone for joining us. Appreciate the questions. We'll talk to you in another quarter. Thanks very much. Bye.

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