04/24/2014 2:01PM

CDI: Fair Grounds license dispute the result of 'publicity campaign'

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Churchill Downs Inc. would “vigorously” dispute any decision by the Louisiana Racing Commission to suspend its license for Fair Grounds racetrack in New Orleans and its offtrack betting parlors, a top official of the company said Thursday during a conference call with analysts.

William Carstanjen, Churchill’s chief operating officer, said the commission’s decision to defer approval of the Fair Grounds license at a meeting Tuesday was the result of a “publicity campaign” waged by horsemen and critics of the company’s management of the track. He was not specific about what actions the company might take if the license is not ultimately approved.

The commission asked Churchill at the meeting Tuesday to provide information by Friday on how the company would increase its spending on improvements to the track, according to the commission’s executive director, Charles Gardiner, speaking Wednesday night. A meeting has been scheduled for April 28  to reconsider the license. The deadline under Louisiana statute to award licenses is May 1.

The conference call took place one day after Churchill released its first-quarter results for 2014. During the quarter, revenue from the company’s three main business segments – racing operations, casinos, and online betting – were all up compared with the first quarter last year, but the company still posted a small loss of $700,000 for the period, according to the financial documents released Wednesday.

Total revenue from its operations was up 13 percent to a record $167.3 million for the quarter. Revenue from its casinos was up 20 percent to $86.6 million, largely due to the inclusion of numbers from a casino in Maine that Churchill acquired in the middle of last year. Revenue from its online gambling operations was $46.1 million, up 7 percent, and revenue from its racing operations was $30.6 million, up 10 percent.

Still, operating expenses were up 14 percent, while interest expense jumped $3.5 million, sending the overall results into the red. In the first quarter of 2013, Churchill had net income of $1.1 million.

During the Thursday conference call, Churchill chief executive Bob Evans said the company will continue to pursue legislation in Kentucky allowing for a casino at its track. However, he said it was not realistic to expect that a bill could be passed in 2015 due to the abbreviated nature of legislative sessions in Kentucky in odd-numbered years.

“Probably our next good shot is in 2016,” Evans said.

Churchill officials did not address how a pending takeout hike at Churchill Downs will affect its business, and analysts on the call did not question the decision. The takeout increases, from 16 percent on straight wagers and 19 percent on exotic wagers to 17.5 percent and 22 percent, could result in increased revenue for the company, especially if coupled with increased rates charged to its simulcasting outlets.

However, gains could be offset by handle declines if bettors react to the higher rate by betting less or churning a lower amount of their winnings back into the track’s pools.

In response to an analyst’s question, Evans said the company’s recent installation of a giant video board on the backside rail of Churchill would mostly benefit patrons of its infield on Kentucky Oaks and Kentucky Derby Day.

“Rather than being in a place where they never saw a horse in the past, they’re going to have front-row seats, and that’s a cool thing,” Evans said.

Churchill officials said on the conference call that handle through its account-wagering company, twinspires.com, was up 8.8 percent in the quarter, at a time when the racing industry is struggling overall. In contrast to the results at twinspires.com, handle on all U.S. races in the first quarter was down 1.2 percent, according to Equibase.

Twinspires.com had handle of approximately $1 billion in 2013, according to figures kept by the Oregon Racing Commission, which regulates the company’s wagering hub. That’s almost 10 percent of all handle in the United States, making the account-wagering company the online market leader.

Though revenue from racing operations was up overall in the quarter, expenses from racing operations significantly exceeded the revenue figure, at $43.2 million and $30.6 million, respectively.

Racing-operations revenue was up due to Churchill’s decision to run 39 race dates during the quarter at its Calder Race Course in Miami, a first for the track. The decision to run the dates in head-to-head competition with Gulfstream Park also allowed Churchill to act as a broker for simulcast signals in the state, a critical source of revenue for Calder in prior years, when it had a monopoly on the business for most of the year.

Revenue at Calder was up from $2.3 million in the first quarter of last year to $8.0 million this year, according to the statements. Revenue was down 15 percent at Arlington Park near Chicago and down 11 percent at Fair Grounds.

Interest expense in the quarter rose from $1.5 million in the first quarter of 2013 to $5.0 million in the first quarter this year. Share-based compensation expense jumped from $3.4 million in the first quarter of 2013 to $5.2 million, up 56 percent.

Bill Mudd, who was paid $8.3 million in compensation in 2013, mostly in equity awards, according to the company’s proxy statement, said the brunt of the expenses related to the company’s new executive compensation plan would be charged to the company through the middle of the second quarter. Carstanjen, Churchill’s COO, was paid $9.9 million last year, mostly in equity awards as well.

“The expenses will be greatly reduced starting in June of this year,” Mudd said.