Churchill Downs, Inc. Q1 2010 Earnings Call Transcript

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 |  About: Churchill Downs, Incorporated (CHDN)
by: SA Transcripts

Churchill Downs, Inc. (NASDAQ:CHDN)

Q1 2010 Earnings Call

May 6, 2010 9:00 am ET

Executives

Liz Harris - Vice President, Communications

Robert L. Evans – President and Chief Executive Officer

William E. Mudd – Chief Financial Officer

William C. Carstanjen – Chief Operating Officer

Analysts

Ryan Worst – Brean Murray

Steve Altebrando – Sidoti & Co.

Jeff Thomison – Hilliard Lyons

Operator

Good day ladies and gentlemen. Welcome to the Churchill Downs, Inc. first quarter 2010 results. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. Instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Liz Harris. You may begin.

Liz Harris

Good morning and welcome to this Churchill Downs, Inc. conference call to review the company’s results for the first quarter of 2010. The results were released yesterday afternoon in a news release that has been covered by the financial media. A copy of the release announcing results, as well as 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 Investors located at the churchilldownsincorporated.com website. 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 operation to differ materially from the forward-looking statements made in this call.

The information being provided today is as 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 in expectations. Members of our executive team are here and will be available to answer questions after some formal remarks.

We will begin now with our President and Chief Executive Officer, Bob Evans.

Robert L. Evans

Thanks, Liz. Good morning everyone. Thanks for joining us. I will make a few general comments about Q1 and then turn it over to our CFO, Bill Mudd, to fill you in on the details. After that, I’ll be back with some thoughts on last weekend’s Kentucky Oaks and Kentucky Derby and will then be happy to try to answer your questions.

Overall, we are pleased but not thrilled with our Q1 results. Q1 EBITDA was down $4.5 million from 2009 primarily as the result of three developments. First we received $2.1 million in previously-escrowed source market fee revenues, net of purse expense, at Arlington Park in Q1 2009 last year. That did not reoccur in Q1 of this year. Second this year we incurred $1.1 million in pre-opening expenses related to the Calder Casino in Miami Gardens, Florida. Third, we incurred $1.1 million of legal and other fees related to the pending acquisition of youbet.com. So there is $4.3 million of the $4.5 million year-over-year change in Q1 EBITDA.

As for the core business racing operations, EBITDA declined $2.1 million from Q1 2009 equal to the non-recurrence of the Arlington Park source market fees in Q1 of last year. Cost controls across all tracks offset the decline in pari-mutuel revenue at the Fairgrounds, our only live race meet during the quarter.

EBITDA from our slot and video poker gaming operations in Louisiana was essentially flat with 2009, and our online business revenue was up 8% in Q1 on 8% growth in twinspires.com handle despite a 10% decline in U.S. industry thoroughbred handle according to Equibase. Our online EBITDA increased 7%.

Our Q1 results illustrate how important our diversification efforts over the last few years have been. Since Q1 2006, U.S. thoroughbred handle is off by a little over 22%. If we were still as dependent on the U.S. thoroughbred industry as we were in Q1 2006, our results would likely have mirrored the industry’s decline. Instead, our Q1 revenue was more than double that of Q1 2006, and its $75.1 million, a record level of revenues from continuing operations in Q1.

Q1 revenue growth is due to growth in our gaming and online businesses which contributed almost 60% of total revenue in Q1 and were the two business units that contributed positively to EBITDA in the first quarter.

On the topics of our gaming and online businesses, let’s spend just a minute on the Calder Casino and on the youbet.com acquisition. The Calder Casino opened on January 22. We have seen growth in gross gaming revenue, or GGR, each month on a daily average basis since the opening, and we continue to believe that the facility will operate between $80 million and $100 million GGR on an ongoing annualized basis.

EBITDA performance of the Calder Casino will be considerably enhanced by legislation enacted in Florida on April 28, 2010. It will reduce the tax rate on our slot operations by 15 percentage points effective this July 1. 10 percentage points of this reduction will accrue to us and the remaining 5 percentage points will go to the Calder Race Course purse account. In addition, the same legislation reduces the Calder Casino’s annual license fee by $500,000 this July 1 and by another $500,000 on July 1, 2011.

Finally, a word on the youbet.com acquisition. On January 25, the U.S. Department of Justice issued a formal request to both CDI and YouBet for additional information, a so-called second request. It took us several months to comply with this request and we submitted the requested materials on April 19. The DOJ is now in the process of reviewing that information. We continue to believe that we will be able to close this transaction in the second quarter.

Let me now turn this over to Bill.

William E. Mudd

Thank you, Bob, and good morning everyone. I will review the information as set forth in the tables of the press release that can be found under the Investor section that Liz referred to earlier, which is on our website www.churchilldownsincorporated.com. Following my comments, I will turn it back over to Bob for some final thoughts on the Kentucky Oaks and Kentucky Derby before we open the call to questions.

The discontinued operations section of our financial statements and tables contain adjustments related to Hollywood Park and Ellis Park. My comments will focus only on our performance from continuing operations.

Let’s begin by first reviewing the segment information which is contained on a schedule titled Supplemental Information by Operating Units in the release. Total racing operations’ net revenues from external customers declined 21% or $8.3 million in the first quarter of 2010. Our Arlington Park property saw external customer revenues decline $7 million for the quarter. The majority of this reduction is driven by the receipt of $4.3 million of source market fees recognized in the first quarter of 2009.

In addition, the Illinois Racing Board designates a host track when there is no live racing in the state. Arlington received 11 fewer host days during the quarter, which was a major contributor to the remaining $2.7 million revenue decline. As a reminder, they do not conduct live racing during the first quarter.

Our Fairgrounds racing operation revenues from external customers declined 12% to $16.5 million. A big driver of this decline is driven by a 10% reduction in the number of race days conducted. According to Equibase, wages on total U.S. thoroughbred racing declined 10% in the first quarter, so we did slightly worse than the industry as abnormal weather conditions during the live meet resulted in 53 turf cancellations compared to 23 in the prior year.

Our online business increased net revenues from external customers by 8% to $18 million during the quarter. We realized increased wagering in approximately two-thirds of the states in which we operate. This channel continues to grow despite the contracting industry.

Our gaming business grew net revenues from external customers by $8.5 million or 47% on the introduction of our new Calder Casino in Miami Gardens, Florida. This new facility had a soft opening on January 22 with 1,245 machines and generated $9 million in net revenues from external customers during the quarter. This was the primary driver of revenue growth in the segment.

After a very difficult start in January for our Fairgrounds slots and video poker facilities in Louisiana, they recovered nicely during the months of February and March. Our Fairgrounds slot facility registered a 2% decline in net external customer revenues while our video poker business realized a 5% decline in the period.

Now let’s look at the EBITDA performance by segment at the bottom of the page. Our racing operations EBITDA performance was $2.1 million unfavorable to the same period of the prior year. This is primarily attributable to the recognition of $2.1 million in source market fees net of purses recognized at Arlington Park during the first quarter of 2009. Declines in profitability of our Fairgrounds meet driven by lower pari-mutuel wagering were offset by better cost performance in our other racing locations.

Our online business EBITDA improved by $0.3 million or 7% year-over-year driven by an increase in handle. Our gaming business EBITDA decreased by $1.8 million. This includes a negative EBITDA for the quarter at our Calder Casino of $1.5 million driven by $1.1 million of pre-opening expenses and $0.7 million of allocated corporate overhead. Otherwise, EBITDA was slightly positive for the quarter. Our Fairgrounds slot facility was able to manage a $0.2 million increase in EBITDA despite the slight revenue decline, while our video poker operations were down $0.4 million.

Other investments’ EBITDA decreased primarily due to expenses associated with the launch of Churchill Downs Entertainment, which will present the Hullabaloo Music Festival in the third quarter of this year. Total EBITDA was a loss of $5.5 million for the quarter, a reduction of $4.5 million versus the prior year. The decline is primarily the result of $2.1 million of non-recurring source market fees net of purses, $1.1 million recognized in the prior year, $1.1 million of pre-opening expenses for our Calder Casino, and $1.1 million of expenses related to our pending acquisition of youbet.com.

Now if you would, please turn to the table that is titled Condensed Consolidated Statements of Net Loss.

Total net revenues from continuing operations increased by 2% or $1.3 million as gains from our gaming and online businesses more than offset declines in racing operations and the source market fees we received in 2009. Operating expenses grew faster than revenues primarily due to the opening of the Calder Casino and also include a $2.6 million increase in depreciation and amortization related to that property.

Selling general and administrative expenses increased by $0.9 million versus the same quarter of the prior year. While we continue to be vigilant in controlling costs across the company, we were not able to offset the $1.1 million in legal expenses associated with our pending merger with youbet.com. Interest expense increased primarily as a result of spending related to the build-out of our Calder Casino.

The income tax benefit increased year-over-year as a result of the reversal of previously-accrued expenses related to the recognition of personal seat license revenue for tax purposes. Discussions with the IRS during the quarter, as well as our participation in the fast track mediation process, resulted in a position that was $1.6 million better than what we had expected from a continuing operations standpoint.

Our fully diluted loss per share from continuing operations for the quarter was a loss of $0.62 compared to a loss of $0.37 in the prior year. In the last schedule, if you turn your attention to the schedule titled Condensed Consolidated Balance Sheets, I will briefly review some changes.

Accounts receivable decreased $16.8 million from year end as a result of the collection of Derby-related receivables. The increase in income taxes receivable of $7.8 million reflects the benefit of net losses generated during the first quarter. Other current assets increased $9 million due to pre-payments related to the Kentucky Derby and Hullabaloo, as well as those related to our annual insurance premiums.

Net property and equipment increased $5.3 million as we completed the build-out of the Calder Casino and installed permanent lighting at Churchill Downs Racetrack. Deferred revenue increased $19.2 million since December as a result of additional first quarter billings of Derby-related and live racing meet memberships that will be recognized as revenues in subsequent quarters. Long-term debt increased $9.2 million as we incurred borrowings for purposes of completing the build-out of the Calder Casino and the installation of permanent lights at Churchill Downs.

Before closing, I thought I would add a few comments on the status of the Illinois Horseracing Equity Trust Fund and related lawsuits generally referred to as the Molaro bill. With respect to the ongoing lawsuit filed by the casinos to challenge a 2008 Molaro bill, the state court in the lawsuit recently ruled that the funds associated with that bill can be disbursed to the Illinois racetracks, including Arlington Park. We anticipate that Arlington Park will receive $11.6 million of which $6.8 million will be added to purses and $4.8 million will be used by Arlington Park.

The appellate court in the related federal lawsuits also filed by the casinos has issued an order that racetracks must escrow these funds pending the outcome of the federal lawsuit. We expect to receive these funds over the next couple of weeks. The appellate court should make a decision on the escrowed funds when it rules on the merits of the case. Oral arguments were held in late February and we are waiting on the court’s decision.

With that, I will turn it back over to Bob for some final thoughts on the Kentucky Derby and Kentucky Oaks.

Robert L. Evans

Last weekend was the 136th running of the Kentucky Oaks and the Kentucky Derby. Despite continuing high unemployment and the continuing decline in U.S. thoroughbred handle, which through April was down 8.4% according to Equibase, we had a terrific weekend. The Oaks and Derby week party now gets started on Thursday night with a new event, the Taste of Derby. Taste featured the culinary specialties of 14 world class chefs from around the United States, representing the cities that are the homes of the Kentucky Derby prep races.

The inaugural sold-out event produced 860 attendees at ticket prices ranging from $250 to $350. Benefitting the Dare to Care Food Bank and the World Food Program, Taste raised over $82,000 for hunger relief. We think Taste is something we can grow in the years ahead. Just by point of reference, the 2010 Taste of the NFL event, which we modeled Taste of Derby after, had 2,400 attendees at ticket prices roughly double the ticket prices we charged this year.

The party continued on Friday with the Kentucky Oaks. Now positioned as an event that puts, as its tagline says, ladies first, the Oaks benefits breast cancer awareness and research with its tie-in with the Susan G. Komen For the Cure Foundation and with Kentucky’s first lady Jane Beshear’s Horses and Hope initiative. Oaks attendance set an all-time record of 116,046, up 11% over 2009. Oaks day full card all sources handle increased 20% to $36 million, also an all-time record. The Oaks generated a $116,046 contribution, that is $1 per Oaks attendee, to the Susan G. Komen Foundation and $30,000 to the Horses and Hope program, bringing our two-year total contributions to both programs to over $275,000.

The party concluded on Saturday with the Kentucky Derby. Saturday’s weather forecast had, for several days, been for severe weather and the forecasters were unfortunately right. Nobody at Churchill Downs can remember such a period of sustained rainfall on Derby Day, and our expectations for the day were becoming as dreary as the weather.

But the fans turned out. They came later than normal, but they came. And in the end, attendance was 155,804, the sixth highest attendance ever. All sources handle was $163 million on the Kentucky Derby Day card, up 4% over 2009. Sponsorship and merchandise sales were also up and viewership of the NBC broadcast of the race, $16.5 million people, was the highest in 21 years. It boiled down to a single still-preliminary number. We expect Kentucky Derby week EBITDA to increase $3 million or more this year over the comparable 2009 number.

We will now be happy to try to answer your questions. Latoya, if you could please check to see if we have any questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We have a question from Ryan Worst – Brean Murray.

William E. Mudd

Thank you. Good morning, guys. Just a few questions. One, Bob, do you have any estimate on the impact of the weather during the Kentucky Derby in terms of wagering per customer or at the track or average spent per visitor at the track?

Robert L. Evans

No, not really. We have a hard time separating out what’s weather-related versus other factors, so I can’t help you there.

Ryan Worst – Brean Murray

Nothing with fans coming later so spending less at the track? I noticed that you had a lot of scratched races during the day. Does that impact wagering negatively?

Robert L. Evans

That does. On Derby Day, early in the day, we had a couple of races that came off the turf course which resulted in a few scratches. That hurts us. To do this analysis, you have to argue that the money that would have been bet on those races is not bet on later races. We have no way of knowing that. So, you know, bad weather doesn’t help but it’s hard to quantify exactly how much it hurts us.

Ryan Worst – Brean Murray

Okay. Moving to Calder, would you anticipate becoming profitable before the change in the tax rate?

Robert L. Evans

We are profitable now in EBITDA line. Have been since I believe March.

Ryan Worst – Brean Murray

Okay. That’s good. Could you talk about the status of any legislation in Illinois? And then I have one final question.

Robert L. Evans

Bill Carstanjen is here. Bill, do you want to comment on the politics of Illinois? Having lived there, it’s indecipherable to me, so I’m just going to pass to somebody else.

William C. Carstanjen

Sure. There’s a lot of activity in Illinois right now and, of course, we’re hopeful but it’s really difficult to make any prediction. There are some positive things we’re seeing. There is some positive activity we’re seeing. But we’ll just have to wait and see how things turn out. It’s too hard to read the tealeaves.

Ryan Worst – Brean Murray

Yeah. I’m not really asking for a prediction, but any color on some of the proposals that are out there or that the legislators are considering, for people who are not as close to the situation?

William C. Carstanjen

Premature. Things change in committees and it’s really premature. We certainly have been working along the lines of a couple different proposals, but it really would be inappropriate right now to call those out and discuss those on this conference call because it’s up to the legislature to modify those as they see fit.

Robert L. Evans

Ryan, I think the one issue that we do have some influence over is the level of cooperation between the different breeds, harness and thoroughbred, the different tracks and the horsemen that represent those breeds. I think at this juncture there is a much higher level of cooperation and common interest among all those different parties on the horse side of the issue then there has been in the past. So I’m optimistic, but politics is politics. I have no idea how this will actually turn out.

Ryan Worst – Brean Murray

Right. Can you talk about the cost of the infrastructure that you have put in place for the entertainment segment and kind of what your expectations there are?

Robert L. Evans

No. We haven’t released any of that information and won’t until we get to the Hullabaloo event on July 23, July 24 and July 25.

Operator

Our next question is from Steve Altebrando – Sidoti & Co.

Steve Altebrando – Sidoti & Co.

Can you break down Calder EBITDA for the quarter?

William E. Mudd

Yes. In my comments, I had mentioned that EBITDA for the gaming segment was down $1.8 million. The Calder EBITDA for the quarter was down $1.5 million. That negative $1.5 million consisted of $1.1 million in pre-opening costs. Remember, the facility didn’t open until late January, so we really ramped up the head count adds so we could get all the people trained and know what their job functions are and make sure you have all the controls and processes in place to obviously run the facility efficiently.

We had about $1.1 million of pre-opening costs and then there was $700,000 of corporate overhead that was allocated. The way that we do our overhead allocations for the corporate functions, which basically is all the HR, all the legal, all the IT support, a big chunk of the finance support, it gets allocated to each of the segments based on the revenues. So with the revenue that they received, they picked up $700,000 worth of allocated corporate overhead.

Steve Altebrando – Sidoti & Co.

Thank you. The tax reduction, that goes into effect July 1, is that correct?

William E. Mudd

That’s correct.

Steve Altebrando – Sidoti & Co.

Okay. Can you just give a little bit of color? I mean, last time you had mentioned when you opened it you hadn’t really ramped up marketing. How are you attacking that currently?

William C. Carstanjen

Sure. This is Bill Carstanjen. Critical to our marketing plan is to fill the database, so our team is focused heavily on that, to add players to our database so that we can direct market. So that’s taken a couple months to really ramp up. So at this point, Bill, can we disclose a number?

William E. Mudd

Yeah, that would be fine.

William C. Carstanjen

At this point, we are approaching about 90,000 players in our database and have begun targeting in earnest to them. So each month since we’ve been open, we’ve seen nice improvement and we’re hopeful we can continue that going forward.

Steve Altebrando – Sidoti & Co.

Okay. Any color on the competitive environment down there since you guys opened?

William E. Mudd

Yeah, Steve, let me take that one. In the press release we put out accompanying the first quarter results, we said there that of the five pari-mutuel slot operators, so those are the ones that we consider our competition. We are now the second largest in the market in terms of net gaming revenue. We have about 20% of that market and we have about 22% of the machine inventory. So we feel like we have been able to gain share pretty quickly here since we opened in late January, and bottom line is I think we have got a better mousetrap there with the facility we built and I think if we just stay patient and do a good job of marketing, we will continue to build the revenue base.

Steve Altebrando – Sidoti & Co.

Okay, thank you. The ADW segment’s growth was pretty notably slower. I know the base is getting larger so it’s not sustainable what you did last year. But is there any competitive issue to that? Are you seeing anyone maybe being more aggressive with promotions?

William E. Mudd

Not really. I think it’s been pretty much as competitive as it’s been. In the first quarter, total thoroughbred handle is down 10%. We were up 8% on twinspires.com. I haven’t seen the numbers yet from the Oregon hub, but I’m reasonably confident that we will likely gain share of the ADW channel in Q1. I feel pretty good about the business. If you look at the results so far in April and early May, we feel pretty good about those two months as well.

Robert L. Evans

One other thing I would highlight which we are glad about, Steve, is that everyone has all content now. In the first quarter of last year, TVG did not have the track net content and they have it this year, so that is a platform that we weren’t competing against last year. But that’s all flushed out now at the Kentucky Derby. That’s when everything picked up.

Steve Altebrando – Sidoti & Co.

Okay. And then just the last two. The depreciation, is that a good run rate excluding the YouBet acquisition?

William E. Mudd

That will actually drop a little bit come July 1. It will be a good run rate for the second quarter and then it will drop off a little bit in the second half of this year. But otherwise, yeah, it’s not too far off.

Steve Altebrado – Sidoti & Co.

Was there something that caused the one-time spike?

William E. Mudd

Yeah, the annual license in Florida, because we didn’t open the casino until late January, it gets amortized over the period from January to July 1 rather than over a full year. So there’s an acceleration, if you will, of a full year’s worth of that license fee. And obviously that license fee, as Bob commented, will also come down starting July 1.

Steve Altebrando – Sidoti & Co.

Okay. And then the last one is the one-time legal fees from YouBet. In the EBITDA breakdown, is that allocated to corporate?

William E. Mudd

It’s in corporate, but then it gets allocated out in the way of management fees.

Steve Altebrando – Sidoti & Co.

Okay, but in terms of the ADW EBITDA you’re generating, is $4 million kind of a good number to use that excludes the one-time fees for the quarter?

William E. Mudd

One-time fees, there’s about $200,000 of that $1.1 million that’s sitting in the online segment. So of that $1.1 million we spent on legal fees for the YouBet acquisition, about $200,000 of that is in the online segment.

Operator

Our next question is from Jeff Thomison – Hilliard Lyons.

Jeff Thomison – Hilliard Lyons

Thank you and good morning. Bill, just a clarification, please. The long-term debt figure of $80.3 million, can you just kind of go over what has been added, what that includes and what might be to come? I’m trying to look at either a period-end or a year-end debt number for you guys when you’re done with your CapEx projects.

William E. Mudd

Let me try to rephrase the question for you. So your question is, where do we expect the debt to be toward year end, is that correct?

Jeff Thomison – Hilliard Lyons

That’d be great.

William E. Mudd

Okay. So we don’t provide forward-looking guidance on that type of number. Here’s what I can tell you. Through the end of March, we spent in the first quarter about $12 million in the Calder Casino. In the previous call, we said we had about $20 million left to go. So we got somewhere between $7 million and $8 million left to work its way out on the Calder Casino. We do have the $24 million which we will pay for the Arlington land May 15, and then beyond that, we have some smaller projects to spend capital on throughout the year.

So you take that, and take the amount of money that we’ll spend on the YouBet acquisition which will be somewhere in the cash side around $45 million depending on what the ultimate stock price is at the time, and then you can kind of figure out what our free cash flows with the Derby and other operations where you think we’ll come in.

Jeff Thomison – Hilliard Lyons

So your lighting is all reflected in the $80.3 million? Any money you borrowed for that?

William E. Mudd

Yes. All the lighting is completed in the third quarter.

Jeff Thomison – Hilliard Lyons

Okay. That’s exactly what I needed. Thanks.

Operator

Thank you. I’m not showing any further questions at this time.

Robert L. Evans

Thanks, Latoya. Thanks everyone for joining us. Talk to you again after Q2. Have a great week.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Good day.

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