Churchill Downs Incorporated (CHDN) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Churchill Downs Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Courtney Norris. You may begin.

Good morning and welcome to the Churchill Downs Incorporated conference call to review the company’s results for the third quarter ended September 30, 2012. The 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 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 me express that some statements made during the 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 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 in expectations. I will now turn the call over to our Chairman and CEO, Mr. Bob Evans.

Thanks, Courtney. Thanks everyone for joining us this morning. For those of you that live in the Northeast we hope your lives haven't been too disrupted by Hurricane Sandy and to those of you who haven't yet voted today, please do so, it matters. Let me now turn this over to our CFO, Bill Mudd, to take you through our third quarter numbers. I will then have a few comments about our growth initiatives and after that we'll be happy to take your questions. Bill?

Thanks, Bob, and good morning, everyone. Overall, it was a decent quarter with total net revenues down 1% to $165 million as our online business growth of 9% was offset by declines in racing operations and our Calder Casino revenues. Our third quarter EBITDA came in at $21.3 million, down $21.7 million from the prior year’s record of $43 million, but it was still our second highest ever recorded for the third quarter. Net income from continuing operations was $6 million or earnings per diluted share from continuing operations of $0.34. There were a number of unusual or one-time items in both periods that led to the year-over-year decline which I will describe in the segment results. Year-to-date cash provided from operating activities was $102.1 million, down from a $131.4 million in the prior year. The decline in CFOA was primarily due to $19.3 million in Illinois Horse Racing Equity Trust Fund proceeds recognized during the September of 2011. Taxes on these proceeds were paid during the fourth quarter of 2011. As a result, 2012 year-to-date tax payments are $7.3 million greater than the same period of 2011, which also included tax refunds of $9.3 million. Finally, the prior year results also included $8.4 million in advanced billings for the Breeders' Cup held at Churchill Downs Racetrack in November of that year. Year-to-date capital spending was $25.5 million, $13.2 million of which was for maintenance purposes, while $12.3 million is related to new projects, including the Harlow’s renovation and spending on our new online game Luckity.com. Long-term debt end of the quarter at $70 million, down approximately $58 million from year-end, 2011. In October, we added approximately $140 million of net debt with the closing of the Riverwalk acquisition. Even with this added debt, our balance sheet remains in great shape, with less than 1.5 terms of debt-to-EBITDA. Now let’s take a look at our segment information. Racing operations revenues decreased 6% or $3.9 million, due to 3 fewer live race days at Churchill Downs Racetrack and weather related cancellations at our Calder Race Course. Arlington Park raced 55 days with period closer to 1% decline in revenue on a 3% increase in handle for the period as strong export handle was offset by weakness in our on-track betting. Racing operations’ EBITDA decreased $19.5 million due to the impact of recognizing $19.3 million from the Illinois Horse Racing Equity Trust Fund along with recognition of insurance proceeds net of losses of $0.6 million during the 3 months ended September 30, 2011. Partially offsetting these prior year items were EBITDA improvements from operating efficiencies as cost control measures more than offset fewer live race days and weather related cancellations previously mentioned. Our gaming revenues decreased $2.4 million or 5% during the quarter. This decrease was driven by a 12% decline in our Calder Casino due to heightened competition in the South Florida market. In our second quarter, we also posted a 12% decline year-over-year and while we continue to refine our advertising, marketing and customer loyalty programs, this may represent a new operating reality at this location. Our Louisiana gaming operations were roughly flat year-over-year despite the closure of our casino and various video poker operations for up to 5 days during September as a result of Hurricane Isaac. In total, we lost 47 days of operation across our properties in Louisiana; Harlow’s also posted revenues that were comparable to prior year. Gaming EBITDA declined $1.1 million during the third quarter as a result of the revenue declines at Calder Casino which was also down $1.1 million. EBITDA effect resulting from the closures in Louisiana related to the Hurricane Isaac is estimated at $0.4 million and was offset by growth in our slots business. Now let's take a look at online business; revenues increased 9% to $45.6 million, our third quarter handle was $250 million up 10.6% year-over-year. According to figures published by Equibase.com; handle on U.S. thoroughbred wagering was up 2.2% year-over-year for the third quarter, this means TwinSpires.com handle outpaced the industry by approximately 8.4% or 840 basis points for the period. The increase is primarily driven by new customers as unique players increased 9% for the period. Online business EBITDA decreased $0.8 million or 8% to $9 million for the quarter. Increases in EBITDA generated by TwinSpires.com handle and revenue growth were more than offset by $1 million in expenditures related to the launch of Luckity and spending related on the development of an exchange wagering platform; $0.4 million in increased losses at our HRTV joint venture. $0.3 million in expenditures related to a data security incident and $0.3 million, related to non-recurring employee related severance. Excluding these unusual items, our EBITDA growth rate was exceeded our revenue growth rate. It is important to note, that while our annual cash funding commitment of HRTV losses is capped in our joint venture agreement, our recognition of HRTV losses is not, as HRTV losses exceed our annual cap, our ownership interest is diluted resulting in a lower percentage recognition of gains and losses of the [indiscernible]. This should result in improved performance heading into 2013. EBITDA from other investments was $0.4 million for the third quarter, down $0.4 million versus prior year. Our newly acquired Bluff Media business is a primary driver of this decrease with an EBITDA loss of $0.8 million for the quarter. The Bluff loss included one-time severance expenses of $0.5 million. So do not assume our quarterly run rate is $800,000 loss. We also included losses related to our Lebanon, Ohio joint venture of $0.1 million. Partially offsetting these losses was $0.5 million increase in EBITDA at United Tote business, associated with higher revenues on handle based fees. Corporate EBITDA was a loss of $1.4 million, a slight improvement over the same period in the prior year. With that I will turn it back over to Bob for some final comments about our growth initiatives. Bob?

A couple of comments about our 2013 and ’14 before we take questions. We are all pretty excited about how our portfolio of growth initiatives is shaping up going into 2013 and ’14. We closed on the purchase of our new Riverwalk Casino and Hotel in Vicksburg, Mississippi on October 23. So less than 2 months from first hello to closing I wish all deals progressed at that speed. But what that means is that we will have a couple of month’s results on our fourth quarter numbers this year and a full year results in our 2013 numbers. You will recall that when we announced the deal, we stated that based on historical performance we estimated that Riverwalk’s annual impact was expected to be approximately $55 million in revenue, $19 million in EBITDA and $0.31 in terms of earnings per share. We hope to complete our $15 million renovation of Harlow's Casino Resort & Hotel in Greenville, Mississippi by the end of this year. Our 2011 was awful at Harlow’s, as the February windstorm tore the roof of the hotel forcing us to close and renovate the rooms and then we had the Mississippi river flood in May which pretty much wiped out everything else except for the gaming floor. This year 2012, the property has largely been a construction site. So in 2013, we are looking forward to not only having the entire property back on line, but also to in effect reopening what is largely a new Harlow’s. With a new event center, a new buffet, a new steakhouse restaurant, a new spa, a new business center, a new outdoor pool and a major redecorating of the property. We hope these new amenities significantly improve our competitive position in the region. Also on the gaming front, we will open another off track betting site with video poker machines in New Orleans’ Jefferson Parish in December of this year. Many of you saw that just last week we officially launched our real money gaming site Luckity.com and we will start to ramp up marketing over the next several months. Now there's really nothing else like Luckity in the legal US online real money gaming market today; so it’s pretty much impossible to predict just how it will fare. At Churchill Downs racetrack the $9 million construction of the mansion, the Paddock Plaza and the new media and simulcast center is progressing as planned. The new 300 seat mansion is 93% sold or committed under 3 to 7 year contract at this point. The new plaza will add over 200 upper price range seats to our seating inventory for the 2013 Kentucky Oaks, the Kentucky Derby, night racing and our other so called big event days, and I hope we can put to use some of this new seating inventory next September, September 13 during the additional 12 days of live racing that Churchill Downs racetrack was granted a month or so ago by the Kentucky Horse Racing Commission. As we announced in September, we are proceeding with our joint venture with Delaware North Companies Gaming & Entertainment with the licensing and construction of the video lottery terminal facility and a harness racing track, north of Cincinnati, Ohio. Since then in September, we have applied for our racing and gaming licenses and we're proceeding with the project which we hope to have open in the first half of 2014. Finally, we look forward to seeing how the Illinois gaming bill fares in the legislatures Veto session that comes up this month, and we were encouraged last week, when Kentucky’s Governor Steve Beshear announced that he will try to advance legislation in early 2013. It would put gaming on the ballot as a constitutional referendum in 2014. So with that, [Mini] if there is any questions, we would be happy to turn it over just as it is now.

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

I know, Luckity is early on in terms of the start. But is there any commentary you can provide about some early performance; and then just speak a little bit about, how developed the marketing plan is for the site, given that it’s obviously a very different demographic you are targeting versus TwinSpires?

Yes. Bill Carstanjen, our President, and COO to whom Luckity ultimately reports is sitting here with me. So let me have him address those 2 questions.

Sure, hi Steve. So we soft launched Luckity about 2 or 3 weeks ago, there was a gradual roll out to various internal databases that we have within the company. The reason for that was really to stress test the systems and make sure that we had our registration processes working correctly and that the site was functioning well. Going forward from now starting with this week, we'll begin a more fulsome [ph] marketing plan which will involve paid advertising, search affiliates, registration bonuses etcetera designed to take us to customers that aren’t currently affiliated with the company. So we'll continue to do that at a measured pace again to make sure we're stress testing the system as the volume picks up. In terms of performance to-date, it’s too early to comment and that’s by design, it was more important in these first of couple of weeks to make sure the site functions as we think it should function and that we address any bugs that materialize in the operations.

In terms of the economics of Luckity and I guess converting handle to revenue, is it a similar dynamic as TwinSpires or do you have I guess maybe a little bit more leverage since that is pretty much track agonistic?

When you convert to revenue, it will convert to revenue at a very similar pace as what we see in Twinspires.com. In terms of the economics of Luckity, the content cost because it is that agonistic, it doesn’t matter what track you're playing on, but I think the cost of content will be slightly less, but the cost of marketing will be more. So overall it would be very similar economics for the ADW business.

Okay and then the $1 million I believe in the Q of cost in the quarter for exchange wagering in Luckity, is that a one-time item or is that just part of the kind of the ongoing infrastructure for those segments?

It's pretty much the cost of the ongoing infrastructure, there wasn't much marketing cost at all in the current period. The costs were in there mainly for the time for developers that was not capitalized overhead cost associated with the management team and we released [ph] a little more space in California as well.

[Operator Instructions] We have a question from Jeffrey Thomison of Hilliard Lyons.

Bob, it was good to hear you review the company's various growth initiatives a minute ago and the related timeframes for them, that’s very helpful. It’s also good to see the company has a lot on its plate so to speak. Just a quick question on the September race dates at Churchill Downs track, will that essentially be 4 weekends of Friday, Saturday and Sunday racing, with Friday, Saturday potentially being at night and Sunday being afternoons and then secondly, will those dates go back up for review by the race commission each year or do you expect these to be more of a permanent fixture in your lab race date plans?

Yes, Jeff, let me toss that one to Bill Carstanjen as well.

So the plan is to race Friday, Saturday and Sunday although we have the option, we were given the option by the Racing Commission to also race Thursday, if we find that the market supports it. We tentatively plan to do 2 nights of night racing, those will be Saturday nights but those plans are still tentative. In terms of what happens in the subsequent years, we think September race dates should be very strong for us, we think it slots in nicely in the national calendar of racing that’s a great month for Churchill to run but it's in the discussion of the Racing Commission year-to-year to award the dates as they see fit.

Okay, so the potential for Thursday dates, that hasn't changed the sum total of 12? It's just potential reallocation of days you race, it is still 12?

No it could go to 16.

We have a question from Steve Altebrando of Sidoti & Company.

Couple of follow-ups, with Derby being about 6 months out, I wanted to see if you had any commentary about how sponsorships are shaping up, it seems like that's kind of been a stronger segment across most sports and particularly pricing?

Yes. I appreciate the question, it’s not something we've addressed prior to the event before and I prefer not to do it this time. So I don't mean to be rude but we are going to pass on that question.

Okay, the video poker OTB you mentioned in, it was Jefferson Parish, how much do you know roughly how many machines you will be opening with?

We'll start with 50 machines Steve and as the demand's there we'll increase that number.

Okay and in terms of the 2014 Breeders’ Cup, when are we expecting a selection is that, should that be this week?

I can honestly say I have no idea. The Breeders’ Cup organization would probably have to answer that one, just probably, we don't know.

And then just last one, any update on the subsidy from the Illinois Riverboat or is that the appropriation or is that just nothing going on still?

Nothing is going on. At least nothing that we are aware of is going on.

Thank you. I'm showing no further questions in the queue at this time. I'll hand the call back to management for closing remarks.

Thanks very much. That's all we've got, this is probably the last time we'll have this call prior to next year. So I hope everyone has a happy holiday season and we will talk to you again soon. Thank you.

Thank you. Ladies and gentlemen this concludes the conference for today. You may all disconnect and have a wonderful day.