Magna Entertainment Corp. Q2 2008 Earnings Call Transcript

| About: Magna Entertainment (MECA)

Magna Entertainment Corp. (MECA) Q2 2008 Earnings Call August 6, 2008 3:00 PM ET

Executives

Frank Stronach – Chairman of the Board & Chief Executive Officer

Blake S. Tohana – Executive Vice President & Chief Financial Officer

Tom Hodgson – President & Chief Executive Officer

Analysts

Bill Dane – Private Investor

[Glenn Matthews – GSK Capitals]

[Unidentified Analyst]

Neil Weiner – Foxhill Capital Partners

[Oliver Corlett] – RW Press Ridge

Sandra McKee – Baltimore Sun

Operator

Welcome to the Magna Entertainment announcement of the second quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Frank Stronach, Chairman and Chief Executive Officer of Magna Entertainment.

Frank Stronach

Welcome to the Magna Entertainment Corporation second quarter 2008 investor conference call. My name is Frank Stronach and I am the Chairman and Chief Executive Officer of MEC. In a few moments, I will turn the call over to Blake Tohana, MEC’s Executive Vice President and Chief Financial Officer to discuss our operating results for the second quarter. Before I do so, let me make a few brief comments.

First, let me remind you that this call will include some forward-looking statements with the meaning of applicable security laws. Rather than read you the company’s disclaimer with respect to forward-looking statements, I would refer you to the disclosure contained in the final paragraphs of the press release issued by MEC this morning. Second, I would like to assure you that the company remains strongly committed to dramatically reducing its debt and strengthen its balance sheet to continue and focus on the sale of non-core assets and the pursuit of joint venture opportunities as previously announced.

Given the current environment for real estate markets and credit markets in the United States, we do not expect to achieve our previously announced targets of eliminating our debt by December 31, 2008. We did close the sale of Great Lakes Downs in July and we remain in serious discussion with a number of interested parties with respect to many of our other non-core assets. We look forward to making further public announcements as we enter into our binding agreements.

Thirdly, as you are all aware, a shareholder proposal has been tabled with respect to MID Developments, MEC’s controlling shareholder, which if completed would have a dramatic and positive impact on the balance sheet of MEC and could cause us to reconsider some potential asset sale opportunities. We are not able to comment on this call on anything related to this proposal and will not be able to answer any questions you raise with regard to this shareholder proposal.

As Blake will outline in a moment we made some encouraging progress in a number of our operating units in the second quarter. However, the final message that I want to leave you with is that we recognize that we need to remain very focused on substantial further improvements in the financial performance of our major operating units in order to achieve sustainable profitability in the future. Just as we have a long way to go in reducing our debt we have a long way to go in improving our operating EBITDA but we’re working strongly through achieving both those goals.

I will now turn the call over to Blake Tohana to summarize for your own second quarter operating performance, following which we will open the call up for investors’ questions.

Blake S. Tohana

Today I will be reviewing our financial results for the second quarter of 2008. Our financial results are in U.S. dollars and unless otherwise noted, my discussion of our financial results reflect continuing operations only. Discontinued operations in the second quarter of 2008 include the results of Remington Park, Thistledown, Great Lakes Downs, Portland Meadows and Magna Racino.

Our consolidated revenues were $166 million for the second quarter of 2008, a decrease of $1 million compared to the same period last year. The decrease in revenues is primarily due to the following: a $4 million decrease in our Maryland operations, primarily due to decreased handle and wagering revenues at this year’s Preakness and decreased average daily attendance and handle during the race meets at both Laurel Park and Pimlico; a $4 million decrease at our California operation due to five fewer live race days at Golden Gate Fields, with a change in the racing calendar partially offset by increased non-wagering revenues at Santa Anita Park from special events and facility rentals.

During the second half of 2008, we expect Golden Gate Fields to run three to five more live race days than the same period last year. These revenue decreases were partially offset by a $5 million increase at our Florida operations primarily due to a 19% increase in gaming revenue at Gulfstream Park from approved poker and slot operations, which produced an average daily net win per machine of $131 this quarter and increased wagering revenues from the introduction of year round simulcasting at the end of Gulfstream’s 2008 race meet and a $2 million increase in our real estate and other operations due to increased housing unit sales at our European residential housing development.

EBITDA was $5 million for the second quarter of 2008, an increase of $1 million compared to the same period last year. The increase in EBITDA is primarily due to the following: an increase of $3 million in our Florida operations due to increased revenues that were noted previously combined with reduced operating costs and improved food and beverage operations; an increase of $2 million in our real estate and other operations consistent with the increased revenues as noted previously, partially offset by a decrease of $4 million in our Maryland operations due to decreased revenue that was noted previously combined with increased severance costs and the expiry of expense contribution agreements with the local Horsemen and Breeders’ Associations. Our reconciliation of EBITDA to GAAP financial measures can be found in Note 15 to our consolidated financial statements for the three months ended June 30, 2008.

Net interest expense this quarter was $16 million, an increase of $5 million compared to the prior year period which reflected increased average debt levels. Our net income from discontinued operations was $2 million this quarter compared to a loss of $3 million last year. Remington Park was a significant contributor to this improvement with a 17% increase in slots revenue as average daily net win per machine increased to $266 on 700 machines this year, compared to $245 on 650 machines in the prior year period. Our net loss, including discontinued operations, was $21 million and diluted loss per share was $3.64 in the second quarter of 2008 compared to a net loss of $23 million and diluted loss per share of $4.35 in the prior year.

It should be noted that our share capital and loss per share have been adjusted to reflect a one for 20 reverse stock split which took effect July 22, 2008. Despite the modest improvement in EBITDA this quarter we recognized the need for further significant improvement in our operating results. We continue to remain encouraged by the results at Express Bet, our internet wagering company, which achieved a 21% increase in U.S. handle this quarter primarily due to obtaining access to racing content that it didn’t have last year.

We also need to dramatically reduce our debt. And although the weak real estate and credit markets have slowed our progress on asset sales we remain firmly committed to reducing debt and interest expense. However, as a result of the delay in completing asset sales our liquidity position remains weak. We have significant debt obligations coming due in the very near term, including our $40 million senior secured revolving bank credit facility, and our $110 million bridge loan and $100 Gulfstream project financing repayment, both of which are owed to a subsidiary of MID. While we will attempt to negotiate with our lenders to extend, restructure or refinance such facilities there is no assurance that such negotiations will be successful. Also, these negotiations will likely be impacted by the status of the MID reorganization proposal.

We would now like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bill Dane – Private Investor.

Bill Dane – Private Investor

I have a question on the DeFrancis deal in Maryland. In the deal, I know that he get’s 66% of revenues in the first year if we don’t restructure it but, in this scenario tell me what happens. If we [inaudible] people $10 to get in the door and give them a $10 promotional value, professional slot play only voucher, does the whole $10 come to MEC and the $10 will get wrote off as a net win on the slots for his percentage? Or, does he get a part of the $10 that you would get in for coming in the door? Is there some way we could work around that whole thing where MEC get’s some of the income and we could hide it in a promotional slot only voucher when they come in or something like that?

Frank Stronach

I have Tom Hodgson here which is sort of my assistant in getting stability, debt reduction and looking at various joint ventures and I think he’s very much in close contact with regards to that situation. Tom, can you explain that

Tom Hodgson

Look, this is a very complex situation. You’re well aware of the agreement that was entered in to a number of years ago that involved all of the previous owners of the Maryland Jockey Club. We’re in discussion with them right now attempting to come to a modification of that arrangement that makes economic sense for all of the parties that are involved so that in fact we are in a position to have a casino built there and have some profits to the buy up. I don’t think at the moment there’s much more that I can say about. When we have an agreement with the formation partners or with respect to the construction of a casino, we’ll be making public disclosure at that time and be happy to talk about it. But, until that is the case, I don’t really think there is anything more we can say other than it’s very high on our priority list. It’s a very big opportunity and one we’re spending a lot of time on.

Bill Dane – Private Investor

Tom, I feel like they’re starting to hold Frank and all of us hostage there as they’re conducting their negotiations. I still remind you guys, you guys are on top on this not them. Just keep on reminding them if we don’t make a deal, they get nothing so 66% of nothing is nothing, 66% of billions is billions but they better renegotiate to 30% because you’ve got the asset that they need and that Maryland wants and that increases the stakes. And, I would remind Maryland and I’d remind them that if you take that [inaudible] to somewhere else that will deal with you like going to whether it’s Gulf Stream or going to Texas, or going to Remington Park or taking it to Santa Anita, but you have the asset to control what Maryland wants the most. Use that asset and if you have to say, “The shareholders are calling for it and we have a fiduciary duty to answer to these shareholders and Maryland, you better come play ball.”

Frank Stronach

First of all, you can’t blame a businessman to make the most out of it, whatever the situation is, right? So, we want to be constructive. They do realize 66% of nothing is nothing so, we do believe we have some constructive conversation but as Tom said we think we’re relatively close to some agreement but as soon as something happens, we will put a press release. Thank you Bill. Any other credit questions by somebody else?

Operator

Our next question comes from [Glenn Matthews – GSK Capitals].

[Glenn Matthews – GSK Capitals]

Could you give me a breakdown on what’s happening at TrackNet and also what do California operations look like for next year including added racing days?

Frank Stronach

California, as we know at Golden Gate, I think they race another one or two weeks, they’re definitely closing. That means, I believe that we’ve got extra days.

Blake S. Tohana

29 days this year Glenn and we would expect to see some more days in 2009.

Frank Stronach

That’s Golden Gate so that should improve Golden Gate considerable. Last year, or earlier this year we did put in a new track service at Santa Anita and that didn’t work out too well and we are trying to recapture something from the contractors that put down the surface because they didn’t put it down to spec. But, I think with the new track surface I think that could withstand if it heavily rains we wouldn’t have to cancel any days so we do hope we can also improve Santa Anita and it also seems that The Meadow’s lamp company, it also seems they want to develop a Hollywood park and that also means that Santa Anita will get lots of extra days and thereby the financial performance could be greatly enhanced.

[Glenn Matthews – GSK Capitals]

And TrackNet, can you give me some information on that please?

Blake S. Tohana

Well, on TrackNet, and we mentioned XpressBet, part of the reason why XpressBet is up this quarter Glenn is because of the tri-hit arrangements and the additional comps that we’ve had for XpressBet including NYRA, the New Jersey track and a couple of the California tracks. So, the 21% growth in XpressBet is largely content driven and that’s been a real positive as a result of TrackNet.

Operator

Our next question comes from the line of [Unidentified Analyst].

[Unidentified Analyst]

Just on the notes there in the release, it talks about reconsidering assets sales in light of the pending reorganization at MID. I’m just wondering why you would reconsider selling assets? It just seems like something that would need to be done regardless to reduce the debt of the company.

Frank Stronach

The assets, call it the fringe tracks or the smaller tracks, that will go ahead regardless, we would be. But, we do have – look, if we have high debt and we can’t [inaudible] we might have to maybe sell 50% of Santa Anita, right or 60%. The final analysis, we want to get out of debt so that’s what we mean. We still have fallback position to get the company on a viable basis and that’s what we mean. But, we still go ahead in selling which isn’t strategic to us, as we listed, that still goes ahead.

Operator

Our next question comes from the line of Neil Weiner – Foxhill Capital Partners.

Neil Weiner – Foxhill Capital Partners

Just as a follow up Frank, just as a follow up question, at what point in time will you make that decision as a fall back that you need to sell Santa Anita or a portion? When is that time? And, when should we expect that type of decision to come?

Frank Stronach

Keep in mind, I really, and I put monies in this year in MEC and last year to back stop and I think I’m reasonably intelligent, I wouldn’t throw money in an empty hole. You have to understand, MIT is still a great key to that, I’m the controlling shareholder of MIT. MIT shareholders would love to see only one class of share and let’s say if there is a reasonable structure, I would have no problem with that. But, I can’t get in to details but we talk about that because I have some chips in my hand which the MIT shareholders would like to have and I have no problems releasing those chips or giving up those chips providing it’s a fair thing for MEC.

Operator

Your next question comes from the line of [Oliver Corlett] – RW Press Ridge.

[Oliver Corlett] – RW Press Ridge

I wonder if you could give us an update on your joint ventures at Santa Anita and Gulfstream and Golden Gate? What’s going on at those developments and whether you have any cash obligations or cash contributions to make it at any of those ventures?

Frank Stronach

I think when we talk of joint ventures there, I think you refer to the shopping malls?

[Oliver Corlett] – RW Press Ridge

Exactly.

Blake S. Tohana

The Four City Joint Venture which is the retail and mix use development at Gulfstream Park is in construction right now. The current expected completion date is fall of 2009. The joint venture has arranged for construction financing and other financing so that the equity contributions are not expected to be a significant component of that financing. The other projects, there’s no active development right now with respect to Golden Gate Fields with a JV partner and at Santa Anita, we have a joint venture arrangement with Caruso Enterprises that we’re going through the entitlement process on that property.

[Oliver Corlett] – RW Press Ridge

On the Golden Gate, I mean what is there to do at that property? Given that it’s only generating a pretty minimal amount of cash flow and it’s a pretty prime piece of real estate? How do you see getting some value out of that asset?

Frank Stronach


First of all, two race tracks couldn’t quite handle for the market right. So, with P. Meadows going out, I think we should improve our EBTIDA considerable and that doesn’t still mean that we wouldn’t do a joint venture on the shopping mall. We are having our feelers out, naturally the real estate crunch, the financial markets not of great help but maybe in a year or two years, that will emerge again and be viable. But, in the meantime at least we feel very strongly that the profit performance should go up considerable. But, on the other hand we’re still open to joint ventures on shopping malls there.

[Oliver Corlett] – RW Press Ridge

As far as the Maryland slot situation goes, would you mind just refreshing on that because I’m not quite up to speed on what’s going on there.

Tom Hodgson

Legislation was passed in Maryland to permit a number of slot facilities subject to the passage of a referendum that will take place in November of this year. Our race track at Laurel is a leading candidate for slots and the bill would contemplate that if Laurel is granted a license we would expect to have 4,750 machines there so it would be a very large facility. We believe that it is in a very superb location in terms of the Washington Baltimore Corridor and with that in mind we’re very supportive of the referendum and we’re working hard to come to arrangements that make sense with the previous owners of the Jockey Club with whom we have this contractual relationship and with the perspective gaming partner who might actually operate the facility.

[Oliver Corlett] – RW Press Ridge

Do you have any perspective competition in slots there?

Tom Hodgson

Well, there are going to be four or five locations in the state. There are obviously other existing locations today outside of Maryland that do represent competition. But, that’s all well known and pretty well defined in the legislation so I think we have a handle on the competition and have a very strong view that it will be an extremely attractive location.

Operator

The last question comes from the line of Sandra McKee – Baltimore Sun.

Sandra McKee – Baltimore Sun

This is also about Maryland. You noted that they were in the red this quarter and I’m wondering if you know when the last time that happened? And, you’re concern for it happening now?

Blake S. Tohana

Sandra, I think as we said in our release, the second quarter was a difficult quarter for Maryland. The results of the [inaudible] were soft, they also had some higher expenses with severance and the lack of having an agreement with the horsemen and the breeders. I don’t know specifically when the last time their results were like that but the second quarter was definitely soft for the Maryland Jockey Club.

Sandra McKee – Baltimore Sun

So with the reasons for this, you don’t expect that to continue in Maryland? The losses?

Blake S. Tohana

Well, I think there’s been a decline in handle at Maryland and attendance. I think part of that is due to the economy and part of that is due to the competition from neighboring states that do have Racino’s and are able to offer higher purses than the tracks in Maryland and I think that’s why it’s important that the referendum is successful in November of this year and Maryland racing can return to what we think it should be.

Sandra McKee – Baltimore Sun

Could you just repeat the number of slot machines that you foresee at the Laurel facility?

Blake S. Tohana

I think the legislation, the maximum permitted is 4,750.

Frank Stronach

Thank you very much for attending this conference call. We’ll hear from you soon. Thank you.

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