CHURCHILL
DOWNS INCORPORATED
2006
First-Quarter Results Conference Call
May
10, 2006
9
a.m. EDT
Operator:
Hello
everyone. Thanks for holding, and welcome to the Churchill Downs Incorporated
first-quarter conference call. Today’s call is being recorded.
At
this
time for opening remarks and introductions, I’d like to turn the call over to
the Director of Communications and Investor Relations Julie Koenig. Please
go
ahead.
Julie
Koenig Loignon:
Good
morning, and welcome to this Churchill Downs Incorporated conference call
to
review the Company’s results for the first quarter of 2006. 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 Web site entitled, “Company News,” located at
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 the 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 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 Tom Meeker, president and chief executive
officer.
Tom
Meeker:
Thanks
for joining us this morning to discuss our first quarter results.
During
this morning’s call, I’ll make a few comments concerning the financial
performance of the Company during the quarter. I’ll also make some preliminary
statements about the results of this year’s Derby Week and end by making a few
comments about where we expect to take the Company in the future.
Following
my comments, Mike Miller, our chief financial officer, will give you all
the
details.
As
reflected in the release, the Company performed well during the quarter.
As you
know, the first quarter is always a loss for the Company since there’s little
racing during the quarter other than the Fair Grounds. This quarter’s results
were also significantly impacted by the events in Louisiana that required
the
relocation of the abbreviated winter meet to Harrah’s Louisiana Downs.
As
reflected in the release, the impact was most apparent at the Churchill Downs
Simulcast Network (CDSN) number, which, due to fewer racing days, was down
over
last year. Notwithstanding, the Company was able to post improvements in
continuing operations where we saw an 11-percent improvement year-over-year
at
the EBITDA line.
On
balance, we were right where we expected to be with the exception of the
impact
of the Fair Grounds, and Mike will give you all the details concerning that
when
he takes the call.
Let
me
give you a status report on the Louisiana operations. At the Fair Grounds,
we
have re-roofed the facility, done all the mold mitigation, and substantially
repaired the barn facilities. Two floors of the clubhouse are operational.
In
the coming months, we hope to have most of the other floors renovated to
be
ready to host the live racing this fall.
While
our
live racing and simulcast operation suffered as a result of Katrina, the
Louisiana off-track betting (OTB) and video poker business performed
exceptionally well. Prior to Katrina, we had 11 OTB facilities operating
in the
New Orleans area. This included the operation at the track.
Currently
we have eight OTBs operating. Our Metairie operation just reopened on April
20.
As of April 30, the eight OTBs are 78 percent ahead of last year in total
net
win, and the pari-mutuel handle is up 36 percent over last year.
If
you
look at the same-store growth, not the total business, the video poker business
is 145 percent above last year. Three factors contributed to this growth:
population displacement, the construction workers coming into the communities
that we serve, and the deployment of new video poker machines in the market.
While it’s too soon to say that this trend will continue, we are certainly
encouraged at this point.
I’m
also
pleased to report that the Louisiana State Senate has passed a bill that
allows
the Fair Grounds to deploy up to 700 slot machines as part of a gaming facility
at the track. We expect it to pass the House shortly.
Previously,
our ability to install more than 500 slot machines was dependent upon the
business levels at the Harrah’s Casino in downtown New Orleans.
Several
other bills are being considered by the legislature, which if passed, could
assist the Fair Grounds and the horsemen. These include clarifying the manner
in
which taxes are calculated on video poker and player-tracking
legislation.
On
April
14, we announced our intention to conduct the Winter Meet at the Fair Grounds
in
2006. This was done after a careful analysis of several factors, including
housing, workforce, facilities, needs of the horsemen, and desires of the
community.
While
the
whole facility will not be open during the meet, we believe that the meet
will
be a success, due in part to the pent-up demand for entertainment in the
community. This demand was manifested over the past two weeks when the Fair
Grounds hosted the annual Jazz Fest in New Orleans
Backed
by
such acts as Bruce Springsteen, Dave Matthews, Jimmy Buffet, Usher, Paul
Simon,
and Bob Dylan, this year’s Jazz Fest was a phenomenal success. While operating
one less day than it did in 2005, the Jazz Fest early numbers indicate that
attendance will be at or about the total for last year.
Last
week
there was also some positive news coming out of Illinois where the legislature
passed a bill aimed at improving racing. The bill provides racing will receive
three percent of adjusted gross revenues of riverboat casinos, which produced
more than $200 million of annual AGR in 2005.
While
the
bill has a two-year sunset provision, it does provide the racing industry
some
assistance while we attempt to find the permanent solution to the competitive
disadvantage facing racing. The bill attempts to reconcile the economic
imbalance that has occurred as a result of the riverboat casinos being
statutorily permitted to operate dockside gaming while the racing industry
has
yet to receive an estimated $70 million to $90 million annually from the
yet-to-be-awarded 10th riverboat casino, all of which was approved by the
legislature in 1999.
As
a
result of this new legislation, Arlington Park will receive an estimated
$10
million in supplemental revenues over the next two years. Of that amount,
60
percent will go to purses and 40 percent will go to capital improvements,
marketing of the live racing product, and other programs operated by the
track.
The governor has not signed the bill, but he has publicly indicated his support
for it.
Now,
let
me make a few comments about the Kentucky Derby Week, which, by any measurement,
was a great success. As we’ve indicated in prior calls, our focus has been on
creating three great days of racing centered around the Kentucky
Derby.
The
results this week clearly indicate that we are well on our way to achieving
that
objective. Attendance for the three days was 290,987. Wagering records were
set
each day with $175 million being wagered on the entire Derby card, a
12.3-percent increase over the record set last year.
Wagering
on the Oaks race alone increased 43 percent over last year. Despite the sale
of
79 permanent suites and the implementation of the Personal Seat License (PSL)
program, sales of temporary hospitality facilities continued to increase.
These
sales related to the Marquee Village units and located on the first turn
and the
temporary suites located in the infield.
This
year
we sold 95 units compared to 80 units in 2005, a 19-percent increase, and
over
the past five years, we’ve increased the total units sold by 31, for a
49-percent increase. Revenues from these sales now stand at $5.5
million.
National
ratings for the race portion of the Kentucky Derby program were down
approximately six percent. We are in the process of evaluating several factors,
including good weather and the “live,” non-measured viewers in attendance at
facilities accepting wagers on the Derby. All of these may have impacted
this
year’s television ratings.
On
another subject, and to allay any questions, I can report that the Succession
Planning Committee continues its work to select a new CEO. At this moment,
that’s all I can say.
Now,
let’s look to the future. While I’m not able to comment on any specific
transaction, I will provide you some brief comments about where the Company
is
directionally headed.
Over
the
coming months, there are a number of initiatives and objectives that we will
be
targeting. As previously reported, we will continue our efforts to improve
the
tote system. I’m very pleased with the response of the major tote companies to
the RFP, and I remain confident that a more nimble, secure, and customer-centric
tote platform will be developed.
In
all
candor, I am disappointed in the pace this effort is undertaking, but on
the
other hand, I’m encouraged by the efforts of the tote companies to deploy new
technologies in the marketplace, not necessarily in response to the
RFP.
More
is
to be done in this area. And we, together with other racing companies, will
continue our efforts to find the best possible solution.
Our
contracts with Television Games Network (TVG) begin to expire in 2007. And
with
that, we have an opportunity to redefine our relationships with all of the
account-wagering providers. As we move down the road, our objective is to
establish business relationships that afford our customers easy access to
racing
products, a centralized account-management system, and, most important, a
fair
and equitable business model that motivates all parties to grow the business
both domestically and internationally.
Concomitantly,
we must, and we will, redefine our business relationship so that the non-racing
operations contribute their fair share to purses and to the tracks that produce
the products.
U.S.
racing is, without a doubt, the best in the world. CDI will continue to focus
its effort on expanding the market for U.S. racing around the globe.
Recently,
CDI and Magna Entertainment Corp. invested in Racing
World,
along
with a well-established U.K. partner. This joint venture is the first step
in
taking a major bundle of U.S. racing product into the global market. While
this
effort is targeted at the U.K. and Ireland, it does serve as a blueprint
for
future deployment in other foreign markets.
We
will
not lose focus on our core racing operations as we move to explore new growth
channels for the Company. To the contrary, as mentioned last call, we are
in the
process of evaluating each of our properties, particularly the under-performing
properties, to ensure that each fits our strategic plan and each as good
growth
potential.
Finally,
as we have done in the past, we will continue to evaluate various programs
we
operate within the Company against where the Company is going in the future.
Aligning our human and fiscal resources with our core strategy strategic
objectives will require change, and we are prepared to make those changes
as
required.
With
that, let me now turn the call over to Mike Miller, who will give you all
the
financial details.
Mike
Miller:
Good
morning, everyone. As Tom stated, we are very pleased with our first-quarter
results, particularly given the condition of our facilities in New Orleans
as we
continue to rebuild from Hurricane Katrina.
First,
please turn your attention to the segment data, and I will comment both on
revenues and our EBITDA performance.
Overall,
the revenues from continuing operations decreased from 2005 to 2006 by $6.9
million, or 13 percent. Actually, this is a remarkable performance given
that
there were 61 live race days in New Orleans in 2005 and only 12 in 2006,
which
resulted in a decrease in simulcast revenues alone of $6.2 million.
As
you
are probably aware, New Orleans is the only facility where we would typically
have any significant racing in the first quarter.
In
the
first quarter, we were operating only seven OTBs in New Orleans compared
to 11
last year, but those seven are significantly outpacing the prior-year’s
performance in both pari-mutuel and video poker operations, as Tom
stated.
This
performance was a significant contributor in our recent decision to reopen
for
live racing this fall at the Fair Grounds. The overall success of the Jazz
Fest
further supports this decision. We have since opened one more OTB and will
be
considering other locations as we look ahead.
Arlington
Park and Calder Race Course also enjoyed revenue increases. Arlington benefited
from being awarded eight additional “dark days” by the Illinois Horse Racing
Board. And, for the first time, Calder was able to simulcast for 20 days
while
Gulfstream Park was racing -- until stopped by court injunction.
We
are
hopeful that the Supreme Court of Florida will soon hear the appeal and rule
that this simulcasting can be allowed in the future. Aside from these items,
our
overall import
simulcasting
business at all locations was generally soft.
Turning
to EBITDA, our negative performance actually improved by $1.7 million, or
13
percent. In large measure, this is a result of the $2.8 million spent in
Florida
last year to support the March 2005 referendum as well as our strong results
in
New Orleans. And this savings was partially offset by increased expenses,
primarily payroll, development activities and expenses resulting from changes
made in the fourth quarter to the CEO’s contract arrangement as a result of his
impending retirement.
Once
again, it’s important to note that this improvement is in the face of an EBITDA
reduction for CDSN of $1.6 million attributable to the impact of Katrina.
Back
to
the statement of net loss, at the pre-tax level, our performance from continuing
operations improved by nearly $600,000 following the EBITDA improvement that
was
then slightly diluted by higher depreciation and interest costs.
Our
depreciation charges now fully include the impact of the Master Plan project
at
Churchill Downs racetrack. And our continuing operations now support all
of our
interest costs, whereas most of our interest expense in 2005 was included
in the
discontinued operations line.
Improvement
in performance at the pre-tax level actually reverses positions at the net
loss
from continuing operations level where our results were worse in 2006 by
400,000. This is somewhat of an anomaly attributable to the non-deductibility
of
Florida referendum costs in 2005, which resulted in an effective tax rate
of 44
percent compared to 39 percent in 2006.
Normally
a decrease in tax rate is positive, but certainly not in a case where rates
are
applied to a pre-tax loss. These after-tax results then produced a two-cent
greater loss in 2006 from $0.77 $0.79 cents on approximately the same number
of
outstanding shares. The nominal increase in outstanding shares is due to
option
exercises during the quarter.
With
respect to fluctuations in the balance sheet, movements in cash, accounts
receivable, and current payables are either the impact of the timing of live
race meet receivables and payables or the collection of Derby receivables
that
were billed in 2005.
The
income tax receivable is a function of our loss for the quarter, and the
$10
million increase in other current assets is largely the recording of pre-paid
insurance items in connection with the renewal of our more significant coverages
as of March 1.
Our
property premiums alone increased approximately $3 million year over year.
The
$4 million increase in fixed assets net of depreciation is due to the spends,
primarily in Florida, for the repairs from the hurricane that hit Calder
last
year.
Until
our
insurance picture takes on a little more clarity, I’m not able to give you
guidance on capital expenditures for the year, as we would normally do. As
that
becomes more in focus, I’ll report more on that in later calls.
The
$14
million increase in deferred revenues is due to billing for Derby-related
events
as well as for future wagers taken on the Derby and Oaks races. Virtually
all of
these amounts will be reflected in our second quarter revenues.
At
March
31, there was approximately $13 million of our $200 million credit line drawn
and outstanding. These amounts will be repaid shortly from Derby Week cash
receipts, and we expect to continue at a net cash position, barring the impact
of any development activities. We are working hard to put our available debt
capital to use.
The
decrease in common stock outstanding came about as the result of the adoption
of
FASB-123R, which caused us to reclassify stock options in compensation, which
was shown separately Dec. 31, now treated as a component of common
stock.
Overall,
our balance sheet reflects our continued attention to the management of our
resources as well as our ready access to capital for growth.
With
respect to our ongoing insurance negotiations, we do currently anticipate
that
they should be largely finalized this year. We expect that we will be
recognizing gains on both the casualty piece as well as on that part of the
settlement associated with business interruption. But at this juncture, I
am
unable to predict with any level of accuracy the magnitude of these amounts.
To
date,
we have offset approximately $3 million of expenses incurred in Louisiana
with
insurance proceeds.
That
concludes my remarks, and I will now turn it back to the operator for your
questions.
Operator:
If you
have any questions at this time, please signal us by pressing *1 on your
telephone keypad. Again, *1 for your questions at this time.
We’ll
take just a moment to assemble the roster.
First
up
from Brean Murray, this is Ryan Worst.
Ryan
Worst:
Hi. Good
morning.
Tom
Meeker:
Good
morning, Ryan.
Mike
Miller:
Good
morning.
Ryan
Worst: Tom
or
Mike, could you guys - do you have any idea on the timing of slots being
implemented at the Fair Grounds yet?
Tom
Meeker:
No. It’s
going to be a step-by-step process. Clearly it won’t be this year. We’re at
least a year behind where we thought we would be when we acquired that
asset.
Ryan
Worst:
Right.
Tom
Meeker:
And
that’s all as a result of Katrina. What we’re going to do is go through this
meet down there. There’s still a number of questions that are endemic to that
community down there, basic infrastructure, workforce issues, etc., housing,
a
myriad of other things.
And
I
would say the earliest that we would, the earliest we would start construction
down there would be mid-year of next year. For implementation, it’s about a
nine-month build-out, I think. So it’s probably 2008 before you would see
anything.
Ryan
Worst: OK.
And
then just on this Illinois legislation, that looks like it’s going to pass or
get signed by the governor?
Tom
Meeker:
Right.
Ryan
Worst:
What do
you see as far as any objections, legal objections to that? Is that going
to be
fought in court or does that look like any kind of opposition wouldn’t have much
of a chance?
Tom
Meeker:
Well…
I’d have to put my lawyer hat on.
Ryan
Worst:
Unless
you have your legal team there.
Tom
Meeker:
Yes,
we’ve got our legal team. There have been a couple of comments made about some
potential challenge. But I don’t think at this point - until we see the type and
the nature of the challenge - we have really any opinion.
Ryan
Worst:
OK. And
then on the 40-percent piece that tracks get to keep, is that going to be
mostly
spent on capital expenditures or marketing expenditures? Or did you have
a
breakdown on percentage that…
Tom
Meeker:
No, we
don’t have that plotted out. It’s a 60/40 split. That’s all we know at this
juncture. We don’t have any specific plans.
Ryan
Worst:
Right.
OK. And then, Tom, for the Marquee Village, you gave a $5.5 million revenue
number…
Tom
Meeker:
Right.
Ryan
Worst:
…for
this year. Do you have a comparable number for last year?
Tom
Meeker:
No,
unless Andy does.
Tom
Meeker:
Yes, 16
percent. I think, I think you can…
Andy
Skehan (Chief Operating Officer):
It was
$5.5million in 2006. It was about $4.2 million in 2005.
Tom
Meeker:
$4.2
million is what Andy’s got.
Ryan
Worst:
OK. And
any other further comment on pricing during the Derby and Oaks weekend versus
last year? Tickets: were they about the same prices or what kind of increase
did
you establish?
Tom
Meeker:
We had a
little elevation in certain tickets but, on balance, they were essentially
the
same as last year. There were certain areas that we elevated a little bit
but
nothing substantial.
Ryan
Worst:
OK. And
then just one last question, on the federal legislation that’s out there now
attempting to curb Internet gambling, does that pertain to, you know, could
that
pertain to account wagering and simulcasting even in OTBs between
states?
Tom
Meeker:
Well, if
you listen to the Justice Department, yes, that’s the position they’ve taken.
But there are significant attempts being made to clarify that position in
the
legislation that is being proposed, either the Goodlatte bill or the bill
that’s
over in the House.
And
I’m
hopeful that as we move down the road there’ll be some statutory clarification
of the inconsistency that exists between the Wire Act and the Interstate
Horse
Racing Act.
Ryan
Worst:
So the
current bills, how do they clarify that?
Tom
Meeker:
Well,
right now in their current form they don’t. But there’s discussion with some of
the sponsors to make sure that that clarification occurs.
Ryan
Worst:
So if
the Goodlatte bill passes in its current form, that could affect the horse
racing industry?
Tom
Meeker:
Well, it
could provide a clarification for the inconsistency that appears - or excuse
me,
it could clarify the legality that we believe exists under the Interstate
Horse
Racing Act, albeit that there’s an existing Wire Act issue.
Ryan
Worst:
Right.
So is there an exemption in the Goodlatte bill for horse racing?
Tom
Meeker: Yes.
Ryan
Worst: OK.
And
then just one last question, as far as account wagering goes, in the past
conference calls it sounded like you guys were looking at options such as
buying
or building, and now you’re talking more about just redefining your
relationships with current account-wagering providers.
Is
the
buy or build option off the table? I mean, have you narrowed that
down?
Tom
Meeker:
I
don’t…
Ryan
Worst:
And then
what’s your comment on centralized account-wagering system? Could you provide
a
little more detail as to what you mean by that?
Tom
Meeker:
Well,
back up. Number one, I don’t think you should take our position any differently
than we’ve stated before and that is we’ll look at all options. The redefinition
may include acquisitions. It may include other arrangements with
account-wagering providers.
The
reference to a centralized account-management system is a response that our
customers are demanding. And that is, “Why can’t I have a centralized account
where I can bet on any platform? I want on a centralized account instead
of
having four or five different accounts, depending upon the product that you
want
to bet, having to access different accounts.”
That’s
what we’re talking about.
Ryan
Worst:
OK.
Thanks.
Tom
Meeker:
Yes.
Operator:
Next up
we have a question from Tim Rice at Rice Voelker.
Tim
Rice:
Good
morning.
Tom
Meeker: Good
morning, Tim.
Tim
Rice: My
first
question is to possibly get you to expand on your comment about the TVG
contract. I kind of detected an implication that maybe sort of along the
lines
of the betting platform universality that you’re possibly considering continuing
with TVG but in a non-exclusive manner. Is that a fair assumption?
Tom
Meeker: I
don’t
think we can make any comment about that at this juncture.
Tim
Rice:
OK.
Second question, could you go into a little more detail about the U.K. and
Ireland distribution as far as whether its met, exceeded, or not reached
expectations?
Tom
Meeker: Not
at
this time. It just started, and I would hope by the next call we’ll be able to
give you some detail on that to show you where we’re going. But it’s an
interesting concept.
We’ve
got
an existing content provider of U.K. racing on the ground. We’ve got two major
U.S. racing operations with huge amounts of content being delivered into
the
U.K. and Ireland. And that is a model that we’re really looking at because that
model, I think, has great application beyond U.K. and Ireland in that you
join
together the local tracks together with the foreign tracks in developing
a
business relationship that would be mutually beneficial.
So
that’s
really the focus of that. And I think, as I mentioned before, by next call
we
should be in a position to kind of give some clarity as to how well that
thing
is doing.
Tim
Rice: Great.
One last quick one, I’ve seen press reports here in New Orleans that the purse
structure Fair Grounds was going to approximately $300,000 a day. Is that
a
number that you guys have blessed?
Tom
Meeker: No.
Not
really. We’re going to be working - I can tell you given the OTB, pari-mutuel as
well as the poker, video poker business, the purse structure down there should
be pretty good.
Now,
you
know, last year we didn’t run as many days and so we have more days to run our
purse structure across. But I would suggest that it will be fairly good down
there, I mean, better than what it used to be.
But
we
still have to wait. This trend that we see going on down there with our OTBs
and
video poker, where we’re making the purse money right now, hopefully that will
continue. If it doesn’t continue then we might have a different
look.
Tim
Rice: Right.
Great. Thanks very much.
Tom
Meeker: Sure
enough.
Operator:
There
are no additional questions holding at this time.
Tom
Meeker:
OK. This
is Tom again. Thank you all so much for joining us. As I mentioned, I think
by
the next call the results from the Derby as well as some of the other things
that we’re doing right now will have more clarity.
I’m
very
optimistic about this year and where we’re going and how we’re going to execute
on various strategies. And hopefully by next call we’ll be able to give you more
clarity.
Thanks
again for joining us. See you next time.
Operator:
Again,
that concludes today’s conference call. Thank you for joining us, everyone. Have
a good day.
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