CHDN

Churchill Downs, Incorporated (CHDN)

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Industry: Consumer Services
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Churchill Downs, Inc. (CHDN)

Q1 2010 Earnings Call

May 6, 2010 9:00 am ET

Executives

Liz Harris - Vice President, Communications

Robert L. Evans – President and Chief Executive Officer

William E. Mudd – Chief Financial Officer

William C. Carstanjen – Chief Operating Officer

Analysts

Ryan Worst – Brean Murray

Steve Altebrando – Sidoti & Co.

Jeff Thomison – Hilliard Lyons

Presentation

Operator

Good day ladies and gentlemen. Welcome to the Churchill Downs, Inc. first quarter 2010 results. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. Instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Liz Harris. You may begin.

Liz Harris

Good morning and welcome to this Churchill Downs, Inc. conference call to review the company’s results for the first quarter of 2010. The results were released yesterday afternoon in a news release that has been covered by the financial media. A copy of the 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 the company’s website titled Investors located at the churchilldownsincorporated.com website. 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 as of this date only, and Churchill Downs, Inc. 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 will be available to answer questions after some formal remarks.

We will begin now with our President and Chief Executive Officer, Bob Evans.

Robert L. Evans

Thanks, Liz. Good morning everyone. Thanks for joining us. I will make a few general comments about Q1 and then turn it over to our CFO, Bill Mudd, to fill you in on the details. After that, I’ll be back with some thoughts on last weekend’s Kentucky Oaks and Kentucky Derby and will then be happy to try to answer your questions.

Overall, we are pleased but not thrilled with our Q1 results. Q1 EBITDA was down $4.5 million from 2009 primarily as the result of three developments. First we received $2.1 million in previously-escrowed source market fee revenues, net of purse expense, at Arlington Park in Q1 2009 last year. That did not reoccur in Q1 of this year. Second this year we incurred $1.1 million in pre-opening expenses related to the Calder Casino in Miami Gardens, Florida. Third, we incurred $1.1 million of legal and other fees related to the pending acquisition of youbet.com. So there is $4.3 million of the $4.5 million year-over-year change in Q1 EBITDA.

As for the core business racing operations, EBITDA declined $2.1 million from Q1 2009 equal to the non-recurrence of the Arlington Park source market fees in Q1 of last year. Cost controls across all tracks offset the decline in pari-mutuel revenue at the Fairgrounds, our only live race meet during the quarter.

EBITDA from our slot and video poker gaming operations in Louisiana was essentially flat with 2009, and our online business revenue was up 8% in Q1 on 8% growth in twinspires.com handle despite a 10% decline in U.S. industry thoroughbred handle according to Equibase. Our online EBITDA increased 7%.

Our Q1 results illustrate how important our diversification efforts over the last few years have been. Since Q1 2006, U.S. thoroughbred handle is off by a little over 22%. If we were still as dependent on the U.S. thoroughbred industry as we were in Q1 2006, our results would likely have mirrored the industry’s decline. Instead, our Q1 revenue was more than double that of Q1 2006, and its $75.1 million, a record level of revenues from continuing operations in Q1.

Q1 revenue growth is due to growth in our gaming and online businesses which contributed almost 60% of total revenue in Q1 and were the two business units that contributed positively to EBITDA in the first quarter.

On the topics of our gaming and online businesses, let’s spend just a minute on the Calder Casino and on the youbet.com acquisition. The Calder Casino opened on January 22. We have seen growth in gross gaming revenue, or GGR, each month on a daily average basis since the opening, and we continue to believe that the facility will operate between $80 million and $100 million GGR on an ongoing annualized basis.

EBITDA performance of the Calder Casino will be considerably enhanced by legislation enacted in Florida on April 28, 2010. It will reduce the tax rate on our slot operations by 15 percentage points effective this July 1. 10 percentage points of this reduction will accrue to us and the remaining 5 percentage points will go to the Calder Race Course purse account. In addition, the same legislation reduces the Calder Casino’s annual license fee by $500,000 this July 1 and by another $500,000 on July 1, 2011.

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