Churchill Downs Incorporated
Q4 2008 Earnings Call Transcript

Published: 5 Mar 2009

[Operator:]

Good day, ladies and gentlemen and welcome to the fourth quarter 2008 Churchill Downs Incorporated earnings conference call. My name is Francine and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) With us on the call today, we have Mr. Kevin Flanery, Senior Vice President, Mr. Bob Evans, President and CEO and Mr. Bill Mudd, CFO. I’d now like to turn the presentation over to your host for today’s conference, Mr. Kevin Flanery; please proceed sir.

[Kevin Flanery:]

Thank you, Francine. Good morning and welcome to this Churchill Downs Incorporated conference call to review the company’s results for the fourth quarter and full year of 2008. 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 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 company’s website titled company news located at www.churchilldownsincorporated.com. 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 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 Incorporated 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 we’ll be available to answer questions after some formal remarks. We’ll begin now with our President and Chief Executive Officer, Bob Evans. Bob.

[Bob Evans:]

Thanks, Kevin. Good morning, everyone; always the most fascinating part of these conference calls. Thanks for joining us today for this discussion of our financial performance for the fourth quarter and for the full year ending December 31, 2008. Before I get into all of that, I want to make a special mentioned of Vernon Niven. Vernon is one of our four Executive Vice Presidents of Churchill Downs Incorporated and he is also President of our online business and of TwinSpires.com. Vernon is on the call with us this morning he hates these things because he is out in Mountain View, California, 6

[Bill Mudd:]

Thank you, Bob and good morning everyone. I’ll be reviewing the information as set forth in the tables of the press release that can be found at our company website, www.churchilldownsincorporated.com. Following my comments, I will turn it back over to Bob, for some final comments before we open the call for questions. Let’s begin by first reviewing the segment information which is contained on the schedule titled supplemental information by operating unit in the press release. As a reminder from our previous calls, the discontinued operation section of our financial statements and tables contain the operations of Hoosier Park, Ellis Park and Hollywood Park. My comments will focus on our operational performance from continuing operations for the fourth quarter and the full-year. Where operational performance at the net revenues from external customers’ line, Churchill Downs Racetrack total year revenues grew $1 million or 1% over 2007. The increase was driven by attendance-based revenues related to the Kentucky Derby week and five more days of live racing in the fourth quarter. These increases were partly offset by lower pari-mutuel revenues driven by the Kentucky Horsemen withholding consent to distribute the signal to ADW companies as well as Florida simulcast outlets. Certain ADW companies were allowed to take wages on the Derby, Oaks and Woodford Reserve races through Churchill’s rights established in a pre-existing contract with Horsemen. At Arlington Park, total year net revenues from external customers decreased $3.9 million or 4%, primarily driven by lower pari-mutuel revenues. Arlington enjoyed an increased in export handle driven by online account wagering while it’s all on-track revenues more inline with the industry declines. I’ll remind you that we did not conduct live racing at Arlington in the fourth quarter. Our Calder facility saw revenues from external customers declined by $22.9 million or 25% for the total year. Unfortunately, we continue to feel the after effects of the second quarter dispute with Florida Horsemen and Breeders over purse contributions from our future slots facility. Fourth quarter revenues were also down 25% or $7.9 million. We are optimistic that our renewed spirit of cooperation and partnership with industry stakeholders will improve this performance in 2009. Our Fair Grounds Race Course net revenues from external customers decreased by $5.4 million or 9% for the year; our on track and out of state export results, were only slightly below the prior year, while the biggest reductions in volume came from the simulcast import or OTB channel within Louisiana. Our fourth quarter showed an improved decline and outperformed the fourth quarter industry with external customer revenue only down 5%. We believe this is a direct result of slots and video poker operations allowing us to offer the highest overnight purses in Fair Grounds’ history. Our online business grew revenues to $54 million during 2008, an increase of $31.7 million on handle of $234 million. While the majority of this growth is from recognizing a full year revenues from the AmericaTAB and BRIS acquisitions; we are also successful in expanding our content offerings through our ADW business TwinSpires.com, to include products such as New York Racing Association, Arlington enrollment. We also expanded our customer base by introducing new features, such as conditional wagering and Twin Spires TV. These new technology features coupled with our expanded product offering allowed us to grow fourth quarter revenues by 11% or $1.1 million on a handle increase of 19% over the prior year. Now let’s look at the EBITDA performance by segment at the bottom of the page. Our racing operations EBITDA grew 20% or $9.5 million during 2008. This includes a year-over-year increase in insurance recoveries of $16.4 million. Excluding insurance recoveries in both periods; our EBITDA for this segment would have been down $6.9 million or 15%. The reduction was primarily by loss pari-mutuel wagering at Calder related to disputes previously mentioned, but also includes reductions in pari-mutuel revenues at our other locations. Partially offsetting these declines was an increase in the Kentucky Derby week as well as prior year spending related to the successful alternative gaming referendum at our Calder Facility. In the fourth quarter, EBITDA from the segment remained flat to prior year as industry declines in pari-mutuel activity were offset by five incremental days at Churchill Downs and $2.6 million in non-recurring gaming campaign expenses incurred in the fourth quarter of 2007. Our online business segment increased EBITDA by $7.8 million versus 2007 reporting $6.3 million in EBITDA for the year. As previously mentioned, this includes a full year of AmericaTab and BRIS, as well as growth driven by new account offerings and increases in the number of customers using TwinSpires.com. This segment reported $1.9 million of EBITDA in the fourth quarter versus breakeven EBITDA in the prior year. Our gaming business for EBITDA to $18.9 million during 2008 a 70% increase over prior year. We opened our permanent slot facility in November with 606 machines replacing the temporary facility, which opened in September of 2007. While it’s still early and while we experience some seasonality in the gaming business in Louisiana; we are very encouraged by the results we have seen thus far. Through the first two months of 2009, our average daily gross win per unit is $250. Overall EBITDA increased by $25.1 million for the year to $80 .2 million. I’ll remind you that we recognized $17.2 million of insurance recoveries in 2008 versus $784,000 during 2007. Excluding insurance recoveries in both years, EBITDA grew $8.7 million or 16%. Now please turn to the condensed consolidated statement of net earnings. As Bob mentioned, we grew total net revenues from continuing operations by 5% or roughly $20 million for the full year. This growth was driven by our Louisiana slot facility as well as our online business. Unfortunately, these growth drivers were not able to offset the declines in pari-mutuel activity in the fourth quarter as we recognize the net revenue decline of 3%. Selling, general and administrative expenses decreased by 1% or $770,000 versus 2007. The incremental expense related to operating the slots facility at Louisiana along with the full year of AmericaTab and BRIS was more than offset by a reduction and non-recurring campaign cost related to the referendum at Calder for alternative gaming. We recognized insurance recoveries, net of losses of $17.2 million in 2008, versus $784,000 during 2007. Interest expense decreased primarily as a result of paying down nearly $25 million of long-term debt. We were able to do this, while spending over $40 million in new investments, a majority of which was used to construct our permanent slots facility at Fair Grounds. Equity losses and unconsolidated investments for the year improved primarily as a result of exiting Empire Racing and Racing World during 2007. The fourth quarter improvement of $694,000 is primarily related to better performance in our HRTV joint venture. Our fully diluted earnings per share from continuing operations for the year came in at $2.09 which includes the net impact of insurance recoveries. Now turning your attention to the consolidated balance sheets in the release; the increase in total assets of $12.9 million was driven primarily by higher net property and equipment, which was primarily used to build-out the permanent slot facility in Louisiana and investments made in TwinSpires.com. In addition, goodwill increased as we recorded additional purchase price for AmericaTab and BRIS of $7 million related to earn-out payments; $3.5million of this amount was paid during 2008 and we anticipate paying the remainder during 2009. Offsetting this increase was a decline in accounts receivable of 5.4 million attributable to better collections of simulcast receivables. Total liabilities decreased $13.5 million, which is primarily the result of paying down of long-term debt using cash generated from operating activities. Offsetting this decrease was a higher accounts payable of $8.3 million driven by the growth of TwinSpires.com and higher simulcast payables. In addition, deferred income tax liabilities increased $5.4 million, which is a reflection of accelerated depreciation and amortization for income tax purposes primarily generated by investments in the slots facility in Louisiana as well as the AmericaTab and BRIS acquisitions. With that, I’ll turn it back over to Bob for final comments.

[Bob Evans:]

Thanks, Bill. I don’t have anything else to add. We’ll be happy to take your questions. I’d like to ask the operator Francine to see if there is any question.

[Operator:]

(Operator Instructions) Your first question comes from Ryan Worst - Brean Murray.

[Ryan Worst:]

Bob, I was wondering if you could talk about the wagering trends in the industry and also how that might be different from any mark key events that occurred in the fourth quarter and the first quarter, because I read somewhere that first quarter wagering trends are down like 7% for the overall industry, but are the big events doing better than that, worse than that or if you could shed some light on that would be great?

[Bob Evans:]

I think your numbers are correct. I believe I saw yesterday that the first quarter, first two months of 2009 handle was down between 6% and 7% over the same two months in 2007. As far as big events doing better or worse than the rest of the industry, I haven’t seen the data haven’t done analysis. So, I just can’t comment, sorry.

[Ryan Worst:]

Okay and then could you talk about how much of the revenue for Derby weekend is related to corporate events? How those corporate bookings are doing versus last year? Then I have a follow-up question.

[Bob Evans:]

Okay, we don’t break out the Oaks and Derby week revenues by individual category and don’t want to start doing that today. I’ll just make the general comment that there’s been some weakness, what I’d call in the first go with some seating and some areas, but I don’t think it’s particularly large concern and there are a lot of people that they want to attend. So, while we may on the first half get a company who is not going to come this year for whatever reason, we can always find somebody else that wants to use those seats. We got two months to go. It’s hard to predict exactly what’s going to happen, but so far at least, we’ve been pretty comfortable with the sales performance.

[Ryan Worst:]

Then could you talk about what you see in the environment in Florida that really causes you guys to take on that type of capital spend for the slot facility, especially given the results of some of your competitors?

[Bob Evans:]

Sure. I’ve got the guy here who is responsible for this. Bill Carstanjen, our Chief Operating Officer. So, let me talk just to Bill, maybe you’ve got some more detailed comments than I’d have.

[Bill Carstanjen:]

So Ryan, we’ve analyzed that market pretty carefully and I guess one advantage of not getting the slots the first time around, since we’ve been able to watch pretty carefully the performance of the market as the other folks got started with their facilities. So, we stress tested our assumptions many, many times and we feel this is a not just an acceptable investment, but will be a very good investment for us. So we’re going to proceed forward and we’re going to manage our capital spend very, very carefully to make sure we’re right-sized for the market that’s there.

[Ryan Worst:]

Right, is there any type of location or advantage that you guys have over say, Isle of Capri, because Isle of Capri, we see the results for that operation and that’s on a capital spend of about $170 million. So, you guys are spending $85 million, I’d have to think that could affect revenues and their performance certainly has not been very good.

[Bill Carstanjen:]

There are some advantages we have to our site. We’re very close to the turnpike extension. We’re also very close to 95, because good visibility of our site. We have a very well laid out site that will allow us to put our facility on that’s convenient for parking and access; and convenient to the freeways. So, those are some of the advantages that we think we have and I think you hit on it. We’re not trying to overbuild we’re trying to build for our demographic in our area. We’re quite far south from Isle of Capri’s facilities. So, I’m sure they were looking at different numbers and different demographics, but for our market, we think we’re doing what we make sense for us. We think our facility actually isn’t going to be short-changed at all. We think it will fit for our demographic and of course, we’re keeping our eyes very closely on the tax rate discussion and that’s affecting our overall investment plans.

[Ryan Worst:]

Was there anything required in terms of capital spend due to your contracts with the horsemen?

[Bill Carstanjen:]

No.

[Operator:]

(Operator Instructions) I’m not showing any further questions in the queue.

[Bob Evans:]

Okay Francine and thank you very much for your help. Thanks everyone for joining us. Hope to see you all at the Oaks and Derby this year. Bye-bye.

[Operator:]

Thank you for your participation in today’s conference. That concludes our presentation. You may now disconnect. Have a good day.