05/09/2011 5:35PM

Churchill Downs Inc. trims loss for first quarter


The strategy by Churchill Downs to branch out into standalone casinos and expand its account-wagering business is bearing fruit at a time when the racing industry is struggling mightily to retain its customers.

Driven by revenues from a new casino in Mississippi and a doubling in revenue from its account-wagering company, twinspires.com, Churchill lost $3.1 million in the first quarter of 2011, a sharp improvement on a loss of $8.7 million in the first quarter of last year. Churchill has historically posted a loss in the first quarter because only one of its tracks is open for live racing during the first three months of the year, but its burgeoning casino business and gains for its account-wagering operation could reverse that trend if Churchill continues to see growth.

In addition, Churchill generated $60.5 million in cash from operations during the quarter, up from $21.3 million in cash in the first-quarter of last year, and it used a significant portion of the cash to reduce its long-term debt from $265.2 million to $222.9 million. Churchill used debt to finance the $140.4 million acquisition of the Mississippi casino last December, and it also used debt to finance a portion of a merger with the large account-wagering company Youbet.com last spring. Prior to those acquisitions, the company had long-term debt of $71.1 million.

The strong first-quarter result and the commitment by Churchill to use its cash to pay down debt illustrates that Churchill remains stable at a time when racetracks without slot machines or other subsidies are struggling to survive.

By buying a standalone casino, Churchill is travelling in the well-worn path of Penn National Gaming Inc., a small racetrack operator a decade ago that has become one of the largest casino companies in the U.S. through aggressive acquisitions. But there is also a critical difference between the two companies: Unlike Penn National, which buys tracks only to capitalize on the potential for casino gambling, Churchill has little choice but to remain committed to racing at its flagship track, with or without slot machines, because of the enormous amounts of revenue provided by the Kentucky Derby and Kentucky Oaks.

Bob Evans, Churchill’s chief executive, said on a conference call on Tuesday morning that conditions in the racing industry make it difficult to justify capital expenditures on racetracks. But at the same time, Evans said that this year’s Derby and Oaks will generate an additional $5 million to $6 million in revenue over the same events last year, due to across-the-board increases in revenue sources tied to the events, such as ticket sales, sponsorships, and television rights.

“We do believe there is a demand for high-quality racing entertainment,” Evans said.

Revenues for the quarter were $131.6 million, up 54 percent compared to revenue of $85.2 million in the first-quarter of 2010, according to the financial documents released on Monday. All of the revenue gains were due to the company’s account-wagering business and its casino-gambling properties. In addition to the Mississippi property, Churchill operates casinos at Fair Grounds Race Course in New Orleans and Calder Race Course in Miami.

Revenue from account wagering in the quarter was up just over 100 percent, from $18.3 million to $36.8 million, according to the documents, solidifying Churchill’s market lead over Television Games Network, the account-wagering business owned by British-based Betfair. Revenue from the company’s casinos was up 75 percent in the quarter, from $33.7 million to $59.1 million.

As strong as those results were, the company’s racing operations had revenue of $17.3 million, down 2 percent from the first-quarter of last year, according to the documents. Net loss before interest, taxes, depreciation, and amortization from racing operations was $12.6 million in the first quarter of 2011, down $300,000 from the same figure in the first quarter of last year.

Churchill is expected to continue to lobby aggressively for slot machines or casinos in Kentucky, but legislation is not expected to be introduced until 2012, after state gubernatorial electionsin November. Over the past several years, the racing industry has thrown its financial support in the state behind the Democrats, due to the Democratic Party’s efforts to pass legislation favorable to the industry. The leading Republican candidate for governor in this year’s election, David Williams, reiterated in a televised debate last night that he is opposed to granting a monopoly on casino gambling to the racing industry.

Churchill has also lobbied for slot machines in Illinois, where casinos are already legal and the company owns Arlington Park. But efforts to obtain casino licenses for Illinois tracks have been unsuccessful, largely because of the lobbying power of the existing casinos there. Dwindling revenues at Arlington and the lack of success in getting legislation passed has introduced speculation that Churchill will soon put Arlington on the market.

Evans said on the conference call that the situation in Illinois remains uncertain.

“We’re optimistic, but we don’t have any particular reason to believe, yay or nay, that [gambling legislation] is going to move forward,” Evans said.