Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Churchill Downs Inc. (NASDAQ:CHDN)

Q1 2014 Results Earnings Conference Call

April 24, 2014 9:00 AM ET

Executives

John Asher - Vice President, Communications, Churchill Downs Racetrack

Bob Evans - Chairman and CEO

Bill Mudd - Chief Financial Officer

Bill Carstanjen - President and COO

Analysts

Amit Kappor - Gabelli & Company

Justin Sebastiano - Brean Capital

Cameron McKnight - Wells Fargo

Steve Altebrando - Sidoti & Company

Operator

Good day, ladies and gentlemen. And welcome to the Churchill Downs Incorporated First Quarter Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be follow that time. (Operator Instructions)

As a reminder, this conference is being recorded. Now I would like to turn the call over to John Asher, Vice President of Communications, Churchill Downs Racetrack. Mr. Asher, you may begin.

John Asher

Thank you, Kevin. Good morning. And welcome to this Churchill Downs Incorporated conference call to review the company’s business results for the first quarter ended March 31, 2014. The company’s first 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 Inventors 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 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 Securities and Exchange Commission for a 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 and expectations.

I will now turn the call over to our Chairman and CEO, Bob Evans. Bob?

Bob Evans

Thanks, John. We are sitting here smiling because nobody wants to follow John with that voice. So unfortunately I don’t have any prepared remarks today. I am going to turn it over to Bill Mudd, our CFO, who will take you through the numbers then we will back and try to address any questions you might have. Bill?

Bill Mudd

Thank you, Bob, and good morning, everyone. Overall, it was a solid quarter, setting records for both revenues and adjusted EBITDA. Revenues increased 13% to $167 million, while adjusted EBITDA improved 16% to $24.5 million.

In the fourth quarter, we made few changes to our press release make it easier to understand our results. The feedback has been positive. So I’ll shorten my comments to highlight the most important and interesting elements of our earnings.

In our Gaming segment, excuse me, revenues increased 20% over the prior year to $86.6 million, increase was entirely driven by the July 2013 acquisition of the Oxford, Maine Casino. Our other properties had mixed results largely [technical difficulty] of the markets where they operate.

Our Calder Casino revenues were consistent with the prior year. We saw gains in the number of players and the number of trips in every customer tier, which is partly due to the closure of Internet cafes in 2013. These improvements were offset by a lower win per customer and the loss of a large VIP customer in April of last years.

Our Louisiana and Mississippi operations experienced decline in trips and win per trips in nearly every customer segment. We believe both state continued to be hindered by regional economic weakness as our competitors are experiencing similar results.

Now our Oxford propriety posted revenues that were flat to the prior year, despite terrible weather, games from an 8% increase in February revenues were offset by 10% decline in March, which experienced 9 days of bad weather compared to only four days in prior year.

Before we get into the Gaming adjusted EBITDA, I want to highlight that we’ve reclassified our equity investment in Miami Valley Gaming from our Other Investment segment to our Gaming segment this quarter, coincide with first full quarter of operations.

In total, Gaming adjusted EBITDA improved $5.3 million, driven by the additions of Oxford Casino which added $4.2 million and our Miami Valley Gaming joint venture which added $2.7 million.

Both properties met or exceeded our expectations in the first quarter. I would like to highlight that our adjusted EBITDA metric, which includes our share of Miami Valley Gaming earnings before interest and taxes, which includes depreciation and amortization cost. You could find more details on the MVG financials in both the 10-Q and the press release.

The first quarter adjusted EBITDA per property, including our partner share was $8.6 million. Partly offsetting the adjusted EBITDA gains from our new properties were declines in our Mississippi operations of $0.7 million and Louisiana operations of $0.8 million, driven by the revenue declines discussed earlier.

Our Online Business revenues improved 7% during the quarter, driven by an 8.8% increase in wagering. The reinstatement of wagering by Illinois residence was mostly offset by the late September 2013 legislations by wagering by Texas residents. When excluding wagering from Illinois and Texas residents from both periods, handle grew 8.6% in the quarter, driven by a 13% increase in unique players.

Betting on U.S. thoroughbred racing declined by 2.1% in the period, gaining the handle growth on TwinSpires outpaced the industry by nearly 11%. Our Online Business adjusted EBITDA declined by $1.4 million, as organic revenue growth was offset by the disruption in Texas resident wagering and additional taxation of online wagering to certain states.

Our Racing segment posted revenues of $30.6 million, up 10% from the prior year, driven by the addition of 39 live race days at Calder. Partially offsetting this increase was the decline in revenues at Fair Grounds, driven by inclement weather causing races to be removed from the turf and lower on-track attendance.

Racing Operations adjusted EBITDA improved by $1 million versus the prior year, driven by a $1.3 million increase at Calder from the addition of live racing. Partially offsetting this increase was a $0.2 million decrease at Churchill Downs Racetrack as unusual winter weather patterns negatively impacted revenues and expenses.

Other Investments EBITDA decreased $1.7 million, primarily driven by expenditures of $1.1 million on the development of our iGaming platform. We also spend $0.6 million on legislative efforts, gaming efforts in Kentucky during the quarter. Total adjusted EBITDA came in at $24.5 million, an improvement of 16% over the prior year.

Net losses from operations totaled $0.7 million, down $1.8 million from the prior year as improvements and adjusted EBITDA were offset by higher equity compensation expenses associated with the new long-term incentive plans and higher interest expenses on higher debt balances and higher interest rates associated with our new senior secured notes.

As a reminder, the vast majority of expense related to the new long-term incentive plan is recognized over the first 14 months of the plan. The plan started at the end of March 2013 where the expenses will be greatly reduced starting in June of this year.

With that, I will turn it back over to Bob who will open the call up to questions. Bob?

Bob Evans

Thanks, Bill. Also with me today are Alan Tse, our General Counsel and Bill Carstanjen, our President and COO. So if there is any questions, Kevin, if you could check, we’ll have to address those now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Amit Kapoor of Gabelli & Company. Your line is now open.

Amit Kapoor - Gabelli & Company

Thank you. Thanks for taking my question. Good morning. Bob, can you provide us an update now that the legislative session has ended in Kentucky on the potentially the roadmap and prospects of the house bill, the two house bills that were introduced in the Senate bill and how that might look in the narrow separate question please? Thank you.

Bob Evans

Sure Amit. Thanks for joining us this morning. The legislative session is ended. We didn’t give any of those bills passed. We will have another shot in 2015 that the short year, short session and it’s probably unlikely that anything material happens then. It could but historically not lot gets done in this short session.

If matter proceeds via constitutional referendum which is what the intent was this year. Our next shot would be 2016 and sort of too far away at this point given that there are elections in between. You know, it is how that will play out but our realistically hope that our next best shot is in 2016.

Amit Kappor - Gabelli & Company

Thank you. And on a separate note, can you highlight some of the potential positive implications and users of the new board, the big board at the track. And correct me, if I’m wrong, you’d be unveiling this Saturday but the Board’s always been in use and I guess tested and how quickly can you -- can it be used going forward for events and other programs? Thank you.

Bob Evans

The board is -- construction’s been completed. It’s been in testing for the last week and half or so. I was over there yesterday and saw some video demonstrated pretty cool stuff. I think people would be really excited about it. Let just do a couple of things that we never been able to do before. In fact, no race tracks even been -- thoroughbred race tracks never been able to do before.

We’ll start that just everyone will be able to see the race which is kind of -- if you think that would have been true historically but unfortunately wasn’t but everybody will see the race this year from beginning then. The horses themselves are about 70 feet tall on the screen. I don’t think it will be too hard to find your favorite in there -- in the field.

Two other things we have planned. There will be some advertising, some sponsorship this year but that will probably be taken in the more significant way in 2015. We’re gong to do some fun stuff with the fans, let the fans post pictures to the big board.

Probably we’d view it of course and probably my favorite part of that whole thing is that it makes the folks in the infield with tens of thousands of people that turn out to watch the Oaks and Derby in the infield, it puts them in the front row seat to rather than being in a place where they probably never saw horse in years passed. They are getting the front row seats with big board. And I think that’s a pretty cool thing.

Amit Kappor - Gabelli & Company

Thanks. Thank you for the detail.

Bob Evans

Sure.

Operator

And the next question comes from Justin Sebastiano of Brean Capital. Your line is now open.

Justin Sebastiano - Brean Capital

Thanks. Good morning guys. Can you give us a little bit of update on the Fair Grounds licensing renewal processes going on right now?

Bob Evans

Sure. Bill Carstanjen will take that one.

Bill Carstanjen

Sure. So the summary of that is that there has been a fairway active publicity campaign down there requesting that essentially we invest more on the racing side at the Fair Grounds. And coincident with that, there was a bill that passed with the house, chamber of the legislature that would require more investments -- more investment in the Fair Grounds Racing fees. If we were to get all the way to the legislature and casted it due signed by the governor. So in that context, we’ve also had a series of racing commission meetings where they wanted to understand more our plans on the racing side in conjunction with the licensing process.

There is a -- in our view, we are licensed for 10 years. The racing commission will hold the yearly hearing to re-award our license. So if they were ever to withdraw racing license, we would certainly dispute that very vigorously and very strongly in our positions. But the larger point is, ensuring that we can continue to run that business in an economically sensible way and that’s we’re working forward both in the legislature and with the racing commissions to explain our side of the story and what the economics are for racing at Louisiana.

Justin Sebastiano - Brean Capital

Okay. And as far as on the gaming side, can you give us a little bit more color on the Mississippi that your two assets there? I mean, I’ve seen the properties, I assume it’s more of the macro view in Mississippi as opposed to something specific to your properties. Can you give us maybe a little bit of color on what’s actually impacting those properties this quarter?

Bill Mudd

This is Bill. I’ll take that one. Let’s start with the markets in both. If you look at the Mississippi market, those numbers are relatively well-publicized in what our competitors are doing. We do only have slots. We have to strip out the table games. But if you look at market share, we might have eroded 0.2 points of market share over the last quarter. I think there is probably some stimulus money still left in the market last year after some of the hurricane money is commenced. So maybe we were affected slightly more, but largely in line with what our competitors are doing in Louisiana.

Mississippi market though, both of our properties have gained market share. They are slightly ahead of last year. When you look at the customer database, we are getting hit across the database from high tier customers, low tier customer, medium tier, both in trips and win per trip. But our properties in Mississippi, we have done a nice job of trimming expenses. So we will offset a good portion of that at least in our Vicksburg property. We didn’t have quite as much luck in our Greenville property, but still nonetheless we were able to offset a good portion of it. So yes, the whole market in that region we believe is just economic weak.

Justin Sebastiano - Brean Capital

And you haven’t seen trends improve over the past few as we got into April here versus Q1?

Bill Mudd

No, I think it bounces around, and some of it has to do with what your table hold rate was in the prior year, but it was pretty constant. And a lot of it -- if there was any change, there is also maybe a little bit easier comparison to the prior year.

Justin Sebastiano - Brean Capital

Okay.

Bill Mudd

This year we should start to hit comparison points, that’s I guess the bright spot in it.

Justin Sebastiano - Brean Capital

Okay. And then just lastly, you spent another $1 million plus on your Internet gaming platform, is this something that you’re going to continue to invest in? Is there an ROI on this fashion? I mean, where can we think this is going and when will we maybe start to see some good returns on this?

Bob Evans

That’s a good and fair question. Okay, a short and sweet answer which is that we believe that over time the Internet gaming market in the U.S. will develop into a significant opportunity for us and for others as well of course. We plan to be a significant player in that. We will continue to make the investments at about the current rate at least through the rest of this year building the technology platform which I think we’ve got some real advantages in and the kind of long-term view on this. We can’t make states legalize Internet gaming any faster than they would otherwise. But as that occurs, we want to be a player. We will make the appropriate investment to do that. Bill, anything else you want to add?

Bill Mudd

No, Bob just highlighted, we did have $1.1 million as expense in our fourth quarter of last year. We said that will continue, so we’ve got about $1.1 million in this quarter also. I think it’s fair to assume that will continue, as Bob just mentioned.

Bob Evans

As least through this year.

Justin Sebastiano - Brean Capital

Okay. All right. Great. Thanks, guys.

Bob Evans

You are welcome. Thanks, Justin.

Operator

We have a next question from Cameron McKnight with Wells Fargo. Your line is now open.

Cameron McKnight - Wells Fargo

Good morning. Thanks. Just one question for me. On Ohio, it looks like the properties are doing well and things are off to a good start. Could you give some broad thoughts on perhaps now where you think the market is, whether you think the property will help grow the market? And if you are taking some share, who do you think you might be taking some share from? Thanks.

Bill Carstanjen

Cameron, hi. It’s Bill Carstanjen. I will take the first stab at that one. Yes, we think we can grow the market and we think that because of where we are located within the market. We like how we are situated between Dayton and Cincinnati where we can draw pretty well from the southern portion of the Dayton suburbs and from the northern Cincinnati suburbs. And we’re tuck right in there on Route 75. So I think we feel very good about the start so far. We think, we feel a niche in the market, geographical niche where there is some good population basis at the fore front.

So overtime, there will be two other properties that opened in that market. One fairly far away from us, the Belterra property. We feel pretty good that we’re pretty distant from that and then the Penn property which will open north of Dayton. We’ll have to watch and see how they do when they do open. Our niches really that quarter are between southern portion of Dayton and northern portion of Cincinnati.

Cameron McKnight - Wells Fargo

Great, thanks very much. And then just as a follow-up on the -- as far as the gaming segments concerned outside of Maine, just broadly and generally, what are you seeing with the consumer to the extent that you can comment. Is it just a low end consumer that’s challenged or is it more broad based store or more geographically specific?

Bill Carstanjen

I would say it’s more geographically specific, Cameron. In Mississippi and Louisiana, we’re seeing all the segments of the customer data base being affected. And I think our competitors are doing the same thing. In Florida, all parts of our -- all segments of our customer database is doing very well. And then I discussed Maine, we’ve done a nice job of growing that upper end about kind of making some changes to our player rewards program though.

Bob Evans

There is no blinding inside here but we need job growth and we need growth in personal disposable income. And until that occurs, I think, same story of sales across all of gaming are going to be pretty soft.

Cameron McKnight - Wells Fargo

Great. Thanks. That’s very helpful.

Operator

The next question comes from Steve Altebrando of Sidoti & Company. Your line is now open.

Steve Altebrando - Sidoti & Company

Hi. Good morning. Going back to online costs that we’re seeing around through the P&L, how much of that is headcount, is it substantially headcount?

Bill Mudd

No, I think, Steve, the loss of Texas is a big margin driver. That was a nice margin state for us. And then there were some new taxes that were imposed in Pennsylvania, starting in October last year.

Bob Evans

It’s the online gaming question?

Steve Altebrando - Sidoti & Company

Yes, non racing.

Bill Mudd

I’m sorry. Yeah, it’s mainly headcount.

Steve Altebrando - Sidoti & Company

Okay. And then in terms of short term, its look like short-term deferred revenue was up 10%. How much of that is timing, how much does that reflect strengthening it into the Derby?

Bill Carstanjen

I think, we get this question every year.

Steve Altebrando - Sidoti & Company

Usually from me.

Bill Carstanjen

It could be.

Bill Mudd

Well, I mean, Steve, maybe some of its timing and some of its early business volumes. I don’t want to make any forward looking statements but I think all the metrics that we discussed on the last earnings call, which I think is only a month and a half ago. They are all training very positive and I think we’re going to have a great Derby this year.

Steve Altebrando - Sidoti & Company

Okay. And then just last one, I guess, you funded $6 million of the JV. Does that complete the cash contribution and assuming all proceeds going forward will be paid back to you in dividends, is that correct?

Bill Mudd

Yeah. Right now obviously, we are generating cash and reasons for that cash to continue to pay for the development cost and the sellers note. So I think, right today we’re about $97 million or so. There was going to be a $25 million licensee payment at the end of this year. So when you’re actively open, we owe the second half of the licensee. There obviously be another cash contribution that help covers that, otherwise, yes we should -- we should start seeing cash coming in fact to us.

Steve Altebrando - Sidoti & Company

Okay. Thank you.

Operator

And I’m not showing any further question at this time.

Bob Evans

All right, cool. Thanks everyone for joining us. Appreciate your time and attention. And we’re looking forward to great Oaks and Derby weeks starting this Saturday night, with opening night. And we’ll issue press release at the end of that week with some of the details of how we planned. So look forward to that and if you are in town, please join us. Thanks.

Operator

Ladies and gentlemen, thanks for participating in today’s conference. This does conclude the program. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Churchill Downs' CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts