Churchill Downs Incorporated (CHDN) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated First Quarter Results conference call. [Operator Instructions]. As a reminder today’s conference call is being recorded. I would now like to turn the conference over to your host, Courtney Norris, Director of Communications. Please begin.

Good morning, and welcome to this Churchill Downs Incorporated conference call to review the company’s results for the first quarter, ended March 31, 2012. The result 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 Investors 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 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 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 as of this date only, and Churchill Downs Incorporated expressly disclaims any obligation to release publically any updates or revisions to these forward-looking statements to reflect any changes in expectations. I will now turn the call over to our Chairman and CEO, Bob Evans.

Thank,s Courtney. Good morning, everyone. Glad you could join us today. Let’s start with our first quarter 2012 results. Bill Mudd, our CFO, will take you through the details but here are the highlights. Our net revenues were up 5% in the first quarter of 2012. EBITDA was up 55%. Net earnings went from a $3.2 million loss last year to $1.4 million profit this year. All three metrics set records for the first quarter. Looking at first quarter EBITDA in the last three years is instructive. In the first quarter of 2010 we lost $5 million. Last year we made $11.2 million. This year we made $17.3 million; so a very solid quarter. I’ll now turn it over to Bill and then I’ll be back with some comments about Oaks and Derby Week and about a couple of exciting new developments.

Thank you, Bob. Good morning, everyone, I will review the information in the table of the press release that can be found under the Investors section of the website that Courtney referred to earlier. Following my comments, I will turn it back over to Bob for some final thoughts before we open to questions. We will begin by reviewing the segment information contained on the schedule titled “Supplemental Information by Operating Unit” in the press release. Before we review our company’s performance, I thought it was worth discussing how the U.S. Thoroughbred industry is doing as it effects our online and racing businesses. According to figured published by equibase.com, betting on U.S. thoroughbred racing grew for a second consecutive quarter since it started declining in 2007. For the first three months of 2011, the industry grew handle by 5.4% due in part to a mild winter, yielding fewer race-day cancelations. After five consecutive years of declines, it was good to see some increases. Now let’s look at our segment performance for both revenues and EBITDA. In the first quarter our racing segment generated $30.2 million in revenues, down 5% from the previous year. Fair Grounds is the only race track that had live racing this year and posted a 5% decline on two fewer race days. In addition to the two fewer races days, Fair Grounds’ largest race day, the Louisiana Derby, fell on April 1 this year; we’re in our second quarter as compared to first quarter during the prior year,. So overall, we’re very pleased with these results. Our Calder operation conducted four days of live racing in the first quarter of 2011 and now run those days in April, resulting in a 30% decline at the track for the period. From an EBITDA perspective, our racing operations…

Thanks Bill. Well, we had quite a Kentucky Oaks and Derby week. By week here, I mean the period of time from our opening night event on Saturday, April 28th to the Kentucky Derby itself on Saturday, May 5th. And as always this soon after the event, these numbers are preliminary and are subject to change. Total attendance for the week was 349,700, down 3% from 2011. Fortunately, on the Oaks and Derby days when ticket prices are at their highest, attendance increased. Total all sources handle for the week was 253.5 million, up about 22 million or 9% from 2011. While still preliminary and subject to change, Oaks and Derby week EBITDA will likely be about $4.5 to $5.5 million higher than in 2011 and will be a new record. The week kicked off on the Saturday before the Derby with our opening night event. 26,527 fans braved the severe weather forecast only to find that the weatherman was right. With the onset of an intense and frankly scary thunderstorm featuring golf-ball sized hail, we had to suspend racing for a little over an hour so that the horses and humans could seek cover. As you might guess, this did not help our attendance or handle numbers. Attendance on opening night was down 30% from the 38,142 in 2011. This decline accounted for the entire decline in Oaks and Derby week total attendance. All sources handle at 6.5 million was off 27%. We don’t conduct live racing on the Sunday or Monday of Oaks or Derby week. Attendance and handle on Tuesday, Wednesday, and Thursday were essentially flat with 2011’s numbers. In total for these three midweek days, we had a little over 45,000 attendees and $20 million in all sources handle. On Thursday night we help our third…

[Operator Instructions] Our first question comes from Steve Altebrando with Sidoti & Company.

Just quickly on the Luckity that you just mentioned, can you talk a little bit about how the economics work? Is that -- are you saying its similar to like a Zynga model?

It’s too soon for us to talk about that. We obviously know but let us have a few more weeks or months here and we will be glad to answer your questions.

Okay, and then in online segment, obviously looks almost like it’s accelerating here, is it -- do you suspect it’s taking share, or is this market growth over all?

I would say that it’s market growth overall. I mean, we continue to maintain the kind of 10 point delta to the industry .And with the industry now being up 5% in the first quarter versus down 5%, that’s a 10 point swing in the industry. So I think that’s largely what you’re seeing, Steve.

Okay, and then two quick more. Could you update us on the status of Illinois legislation and also on the subsidy?

Let me have Bill Carstanjen, our President and CEO, take that.

First on the legislation, it’s still very fluid for this session. We continue to work on it, and any predictions at this point would probably just prove us wrong. So, we’re going to continue to work and see where it takes us. On the subsidy, as we’ve talked about in the past on these calls, that might have to be allocated by the legislature in Illinois, and they haven’t done that. Whether they will or they won’t is something that we can’t predict.

Okay, and just to be clear, it’s not in held in escrow, that -- those funds?

Bill, do you know if they are technically held in escrow?

I don’t think legislature -- first of all, they haven’t appropriated it, but I don’t think they can put it through the general fund without taking an action from that perspective either, but it’s not technically held in escrow per se.

Okay, that’s helpful, and then just lastly, what’s your equity on the ownership of Kentucky Downs now?

I think it’s 10.4% now.

Our next question comes from Jeffrey Thomison with Hilliard Lyons, please go ahead with your question.

I’ve followed your company for a long, long time and I just have to say congratulations on generating a first quarter profit, and a significant one at that. It’s very encouraging to see that happen. Bill, I could not write down your CapEx numbers fast enough, could you review what you mentioned on first quarter CapEx spending and whatever break down you gave on the year’s expectation, including any maintenance or discretionary breakdown that you might have given?

Sure, I would be happy to. Well, let’s start with -- We don’t provide forward-looking guidance, we do provide some guidance with respect to what we spend on maintenance capital, kind of at the beginning of the year -- we did that in the last call. We said we would be hitting $20 million and we are still saying around $15 to $20 million, so we are still in that same ballpark. In terms of what we’ve spent this quarter, we’ve spent -- $9.1 million is what shows up on the face of the cash flow statement. $4.9 million of that was for maintenance capital, and we spent $4.6 million last year, and those were actually separated in the 10Q document. The other $4.2 million is project CapEx, and that number is going to be some what bigger this year because we’re going to spend $15 million renovating Harlows, for example, and that’s not really maintenance capital. That’s replacing what was destroyed by the flood. So, so far to date, now that $4.2 million we’ve spent is partly for the corporate office move, it’s for renovation Harlows, we have -- Anytime we pick up new customers we have to buy new Coke machines, for example, so that’s going to generate incremental revenue. That’s also in the project, capital numbers. And then we spent a little bit of money on Luckity.com which Bob discussed.

Okay, excellent, and lastly, I just wanted to let you know that the day before the derby, I decided to take my family to the infield to take in that experience, and that is what it was, it was an experience. I’m thinking about writing a book about it.

Great. We’ve probably have met more investors at this year’s Oaks and Derby than I’ve ever met before. I don’t know why this year, everybody decided to come, but we’re pretty certain that our increase handle numbers are a result in having a lot of our investors here. So, thanks.

I would expect that.

[Operator instructions]. Our next question comes from Ryan Worst with Brean Murray.

Yes, I was wondering if you guys could kind of break down the components of the increase in derby week 4.5 to 5 million, almost as much as last year’s gain without the benefit of the new TV and sponsorship contracts. So, I was wondering how consistent those increases could be and what the components were, or how it breaks down for this year.

We don’t provide that level of details, as you know. But there was some higher ticket prices and higher sponsorship. Those are the two biggest components, and then [indiscernible] commissions obviously are higher too with increased handle.

Okay, and then that’s helpful, and then how much are you guys spending on the corporate move in total for CaX?

I think it’s about $3 million. Yes, it’s under 3. It’s 2-point-something million.

Okay, is that all been completed, or…

We’re tentatively planning to move over the weekend -- I think it’s June, 1, 2, 3, 4, something like that. So about a month away.

Yes, and the bulk of the cash has been spent in CapEx.

Okay, great, and then, just unique customers increasing 14% on TwinSpires.com seems like a big number. How is that relative to where you where last quarter or last year, and what are you doing to drive that? Thanks.

The increase that I recall -- and I’m doing this from memory, I don’t have the date in front of me -- was about the same in percentage terms as what we did last year. We get a huge influx of interest about TwinSpires.com around Oaks and Derby week, and the couple of weeks leading up to that, and we are very aggressive marketers, both at the on-track level as well as the online level. So, we do a lot of work and drive the new customer acquisition around Oaks Derby because it’s been very successful way for us to do that. _

Okay. And that, Bill, just on the separation agreement, what line item was that a part of, that -- I think it was 800,000?

Yes, about -- well, there’s 900,000 in total; 800,000 of which was in the online segment and they have both affected SG&A. _

Okay, so, that affected the online segment EBIDTA?

800,000 online, there’s a 100,000 in racing, and if you look at the statement in consolidating earnings, in the SG&A line.

Our next question comes Anil Gupta with Imperial Capital.

Wanted to see if you could give us an update of the joint venture with Delaware North, and kind of where that stands now, and when you anticipate funds starting to transfer and investment in that new facility to begin. Thanks.

Well, one of the things -- This is Bill Carstanjen -- one of the big events that we have our eyes on is the expected ruling of the [indiscernible] on the legal mater, the legal dispute. We expect that sometime around Memorial Day. We probably can expect that ruling to be appealed, but really the timing for project in part is going to depend on the strength of that ruling and appeals process that come back to that. So while we’re working very hard right now on preplanning what we do and what the facility would look like in the CapEx form, we won’t sink -- we’re not planning to sink money into the ground until we have much better visibility into the timing and the results of the legal dispute.

I’m not showing any other question in the queue at this time.

Okay, well, listen, thanks very much for joining us. One of the good things about sort of extending the Oaks and Derby into a weeklong event is that our economics improve; the bad thing is that it exhausts us. So, we are all kind of thrilled to get this call behind us, and I think we are all going to go to sleep for 24 consecutive hours. So, thanks very much for joining us. For those of you that were here at Oaks and Derby, thanks for coming, and we will talk to you again in August.

Thank you, ladies and gentleman. And thank you for your participation in today’s conference. This does conclude the conference. You may now disconnect.