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…

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…

[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.