Churchill Downs Media Teleconference Transcript (6.12.07)

Churchill Downs Incorporated Media Conference Call to Announce Acquisitions of AmericaTAB, BRIS and TSN Businesses

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Churchill Downs Media Teleconference.

I would now like to turn the presentation over to your host for today's call, Ms. Julie Koenig Loignon, vice president of communications. Please precede, ma'am.

Julie Koenig Loignon - Churchill Downs Incorporated - VP of Communications

Thank you. Good morning, and welcome to this Churchill Downs Incorporated conference call to discuss the company's acquisition of certain assets of AmericaTAB, Bloodstock Research Information Services, and the Thoroughbred Sports Network. Information regarding these acquisitions was released this morning in a news release.

A copy of this release, providing information about the acquisitions, is available at a section of the Company's Web site titled “Company News,” located at www.churchilldownsincorporated.com. Including in this morning's news release was information advising of the accessibility of this news conference via telephone. 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 and its operations 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.

Joining us today is Churchill Downs Incorporated President and CEO, Bob Evans, as well as our Company's Executive Vice President and Chief Development Officer, Bill Carstanjen. Bob will open the call with some initial remarks. And then Bob and Bill will be available to respond to your questions.

With that, I will turn the call over to Bob.

Bob Evans - Churchill Downs Incorporated - President and CEO

Thanks, Julie. Good morning, everyone. Thanks for joining us today. I'd like to take a couple of minutes to tell you about a major announcement that we made this morning. And then we'll be happy to respond to any questions you might have about our news. By now, I hope you've had the chance to review the news release that was issued around 8:30 Eastern Time this morning, outlining our most recent acquisitions. I'll briefly recap those for you.

In two separate transactions, we have acquired certain assets of AmericaTAB, as well as the Bloodstock Research Information Services, or what I'll refer to here as the BRIS family of companies. The aggregate purchase price for both acquisitions is $80 million. And there is an additional potential for a $7 million earn-out for the AmericaTAB sellers if certain performance levels are met going forward.

To fund this transaction, we will use about $30 million in cash and borrow about $50 million from our revolving line of credit. We anticipate that the ADW businesses that we've acquired should generate about $175 million in handle, and approximately $43.6 million in revenue in 2008. And we expect these acquisitions to be accretive to earnings in 2008.

Through AmericaTAB, which is a franchisor for various advanced-deposit wagering services, we've acquired the Winticket.com ADW business. And we will also continue to act as the franchisor to a number of regional ADWs that are supported by the AmericaTAB infrastructure. We will not own or operate these regional affiliates, but we will continue to provide them with the same franchisee services they have received from AmericaTAB.

BRIS – Bloodstock Research Information Services – includes both ADW platforms, as well as the industry leading data services company called Brisnet and another company called Thoroughbred Sports Network or TSN. You may know these businesses better by their Web names, Brisnet.com and Tsnhorse.com. These data services provide valuable handicapping and pedigree information that horseplayers, breeders, owners, and trainers use every day to make decisions on racing stock.

BRIS and TSN have affiliated ADW platforms known as BrisBET.com and TsnBET.com that are part of this acquisition. So with Winticket.com and our recently launched Twinspires.com account wagering services, Churchill Downs will now operate four account wagering platforms. Since Churchill Downs just launched TwinSpires earlier this spring, you may be wondering why we would buy additional ADW services after that fact. Let me take a minute and explain that decision and why this makes sense for us.

First and foremost, we have and we will continue to look for good business opportunities. And that is what we've done in this case. We like these deals just standing on their own. These acquisitions also give us a major presence in the ADW market, which continues to be the fastest- growing segment of the pari-mutuel industry in terms of handle on an annual basis.

By acquiring these platforms we are able to achieve critical mass and quickly grow the scale of our ADW business, much faster than we could have built Twinspires.com to the same level. As a result, we are now a major player in the account wagering business.

Acquiring these ADW platforms also gives us immediate access to tens of thousands of additional customers to whom we can market TrackNet Media racing signals, as well as our TwinSpires Club player rewards program. And new products and services that we'll be introducing down the road.

The BRIS and TSN data services will provide our ADW customers, as well as the horsemen and horseplayers who rely on them daily for information and insight, with valuable handicapping and pedigree information. This allows Churchill Downs and its collection of ADW platforms to further differentiate themselves based on a number of value-added products and services.

We are also inheriting a great team of people at BRIS, people who are the best in the business at what they do. I met with them this morning over in Lexington. The BRIS team has grown both its data services and ADW businesses into some of the most efficiently run, customer-driven organizations in the industry.

BRIS has about 90 employees. They will continue to work out of their current offices in Lexington, Kentucky. Happy Broadbent, who many customers know has served as the general manager for the BRIS family of companies, will continue to manage the day-to-day operations of BRIS and TSN data businesses and their affiliated wagering platforms. Happy will also have responsibility for managing the acquired AmericaTAB operations including Winticket.com.

While holding the title of general manager of our acquired ADW platforms and data services, Happy will also become a Churchill Downs vice president. He will report directly to Vernon Niven, who is our executive vice president of technology initiatives. And Vernon is also the president of our TwinSpires account wagering service.

Happy is a tremendous resource for us, and having him continue with us will ensure a seamless transition for our customers. We're excited to have someone with his experience in both the ADW and data services business as part of our management team.

At this time we do not anticipate any significant changes to the ADW platforms, or to the data services, or their respective Web sites. All of the acquired companies will continue to operate under their existing brands, and we'll continue to offer their current array of information, products, and services.

Down the road it could make sense for some consolidation to occur between the platforms, but our primary focus is to operate these platforms in their current form, serving their current customers in the way they have become accustomed.

So, that sums up the highlights of today's announcements. Let me turn this back over to the Operator, and we'll try to respond to your questions.

Operator

Your first question will come from the line of Matthew Hegarty of the Daily Racing Form.

Matthew Hegarty - Daily Racing Form - Reporter

Hi, Bob how are you doing?

Bob Evans - Churchill Downs Incorporated - President and CEO

Hi, Matt.

Matthew Hegarty - Daily Racing Form - Reporter

Yes, I was wondering if you could give a reason for why you wouldn't just consolidate under one company here? Why operate these separate platforms when they could easily just be consolidated under one banner?

Bob Evans - Churchill Downs Incorporated - President and CEO

I understand the question. I think the most straightforward answer to that is that the customers that are out there have a variety of choices. They could have chosen any one of a number of different ADW platforms to use.

But the customers of Winticket.com or BrisBET.com, they've made that choice. They're obviously happy and comfortable doing business with those particular platforms. And I see no reason why we should disrupt their choice or their experience.

So as we go through time, the business will change and new features and functions and technology capabilities will become available. And it might make sense at some future date to move these things together. But in the short run at least, we'll continue to operate them as separate brands.

Matthew Hegarty - Daily Racing Form - Reporter

Okay, and if I could get just one quick follow-up question. Is there a more specific number than tens of thousands of customers for these existing operations? Can we get a more detailed number on how many customers there are?

Bob Evans - Churchill Downs Incorporated - President and CEO

Well, as you might guess, there is such a number. But for competitive reasons we would prefer not to disclose it.

Matthew Hegarty - Daily Racing Form - Reporter

Okay, thank you.

Bob Evans - Churchill Downs Incorporated - President and CEO

Thanks.

Operator

And your next question will come from the line of Ryan Worst of Brean Murray.

Ryan Worst - Brean Murray - Analyst

Thank you. Good morning. Hi, Bob.

Bob Evans - Churchill Downs Incorporated - President and CEO

Hi, Ryan.

Ryan Worst - Brean Murray - Analyst

Just a couple of questions, on the Brisnet side, you mentioned $45 million in revenue. That seemed like it was just the account wagering. Is there going to be additional revenue associated with the data services part?

Bob Evans - Churchill Downs Incorporated - President and CEO

I think the number we mentioned is $43.6 million. That includes the data services business as well.

Ryan Worst - Brean Murray - Analyst

Okay, and how much is that from data services?

Bob Evans - Churchill Downs Incorporated - President and CEO

Well, again, this is kind of an awkward announcement for us to make and for me personally, but we would prefer not to disclose that information for competitive reasons.

Ryan Worst - Brean Murray - Analyst

Okay.

Bob Evans - Churchill Downs Incorporated - President and CEO

I understand that it makes things a bit more challenging for you, but I think we've got some good, well-considered reasons for not disclosing further information.

Ryan Worst - Brean Murray - Analyst

Okay. How about -- of the wagering, could you disclose how much is going through the Brisnet subsidiaries versus the others?

Bob Evans - Churchill Downs Incorporated - President and CEO

The $175 million in handle that we said we expect in 2008 all goes through the acquired ADW. So Winticket, which is from AmericaTAB, and BrisBET, which is from BRIS, and TsnBET. So it all comes through those three.

Ryan Worst - Brean Murray - Analyst

Right. Is it roughly divided equally between the three or --?

Bob Evans - Churchill Downs Incorporated - President and CEO

No.

Ryan Worst - Brean Murray - Analyst

Okay. Any color on that?

Bob Evans - Churchill Downs Incorporated - President and CEO

Winticket and BRIS are much bigger than TSN at this point in time.

Ryan Worst - Brean Murray - Analyst

Okay. Thank you.

Bob Evans - Churchill Downs Incorporated - President and CEO

Yes, thanks.

Operator

Your next question is from the line of Greg Hall of the Courier-Journal.

Greg Hall - Courier-Journal - Reporter

Hi, gang. For customers with the Twinspires.com model you all have basically been -- tried the no fees approach as much as possible. Will that carry over to the other sites or will they charge? Will they have fees?

Bob Evans - Churchill Downs Incorporated - President and CEO

No. Going forward from today, this is Greg, right?

Greg Hall - Courier-Journal - Reporter

Yes.

Bob Evans - Churchill Downs Incorporated - President and CEO

So going forward from today no change to any of the sites.

Greg Hall - Courier-Journal - Reporter

Okay. Can you all say how many AmericaTAB affiliates there are including the three that you've purchased?

Bob Evans - Churchill Downs Incorporated - President and CEO

Bill, do you know the answer? I think it's like five or six?

Bill Carstanjen - Churchill Downs Incorporated - EVP and Chief Development Officer

Yes, five or six additional, so total about nine or 10.

Greg Hall - Courier-Journal - Reporter

Okay.

Bob Evans - Churchill Downs Incorporated - President and CEO

Yes, just a couple for illustration. One is called Thoroughbets.com. That's owned by Oaklawn Park. One's called Myracebet.com. That's owned by Tampa Bay Downs.

Greg Hall - Courier-Journal - Reporter

Okay. And the handicapping products of BRIS and TSN, how will they be integrated on the TwinSpires site? And will they be sold for a fee, or be provided as part of the membership?

Bob Evans - Churchill Downs Incorporated - President and CEO

I haven't come to an absolute final conclusion on that. But I think it's reasonable to assume that what products and the way they're offered to the customers on BrisBET will be very similar to the way they're offered to customers of Twinspires.com. But we haven't absolutely nailed that one down to the last decimal place yet.

Greg Hall - Courier-Journal - Reporter

Okay. Do you know, can you say what percentage of the ADW market this gives you all?

Bob Evans - Churchill Downs Incorporated - President and CEO

The three acquired platforms account for about 18 percent of the market in 2006, which is the last period of time for which we have good data.

Greg Hall - Courier-Journal - Reporter

But, do you have an estimate or a number that includes the start-up of Twinspires.com?

Bob Evans - Churchill Downs Incorporated - President and CEO

Not really, because we take six or seven weeks of actual performance and have to extrapolate it out for a year, and then guess. So all I can tell you is the three we acquired account for about 18 percent of handle in -- ADW handle -- in 2006.

Greg Hall - Courier-Journal - Analyst

Okay. All right, thank you.

Bob Evans - Churchill Downs Incorporated - President and CEO

Yes, thanks.

Operator

And your next question is from the line of Peter Feld of Ramius.

Peter Feld - Ramius - Analyst

Hi, Bob. How are you?

Bob Evans - Churchill Downs Incorporated - President and CEO

Hi, Peter.

Peter Feld - Ramius - Analyst

Quick question for you. I know you had made the comment that you expected it to be accretive to earnings in 2008. Could you comment on the current profitability of these companies?

Bob Evans - Churchill Downs Incorporated - President and CEO

Other than to say that they're both quite profitable, no. Obviously starting here in a few weeks we'll be reporting our quarterly results with these numbers consolidated in them. And I think you'll get a better view there.

But as you know we have not and don't currently give guidance. So I'm trying to stay away from any forward-looking statements about the profitability of the business. Because it's just not comments that we've historically made.

Peter Feld - Ramius - Analyst

Okay. That's fair. Thank you.

Bob Evans - Churchill Downs Incorporated - President and CEO

Yes, sorry about it.

Operator

And your next question is from the line of Alan Caruso of Thoroughbred Daily News.

Alan Caruso - Thoroughbred Daily News - Reporter

I guess I had two questions. Number one, the relationship between Churchill, Equibase, Brisnet, is there some idea that Equibase and the services that BRIS provide will become competitors at some point?

Bob Evans - Churchill Downs Incorporated - President and CEO

Beats the heck out of me. I wouldn't expect that relationship to change based -- compared to the way it's been historically. So beyond that, I don't really have any other comment.

Alan Caruso - Thoroughbred Daily News - Reporter

What is Churchill's stake in the Equibase? Or, does Churchill have a stake in Equibase?

Bob Evans - Churchill Downs Incorporated - President and CEO

I honestly don't have the answer to that one. I think all the tracks or many tracks have some stake, what is it I don't know for sure.

Bill Carstanjen - Churchill Downs Incorporated - EVP and Chief Development Officer

Not sure the percentage, but we do have an equity stake in Equibase.

Alan Caruso - Thoroughbred Daily News - Reporter

Okay. And then does this, I guess does this acquisition have any impact negative or positive on that stake or interest?

Bob Evans - Churchill Downs Incorporated - President and CEO

I wouldn't think so. But maybe there's something we're not seeing here. But I wouldn't think so. We've thought about this pretty carefully.

Alan Caruso - Thoroughbred Daily News - Reporter

Okay. And for the casual race fan who logged onto the wagering services provided by BRIS or TSN, how confident are you that they're going to make some sort of transition into using the other products that BRIS, for example, has to offer?

Or, do you feel that that part of the business will stay static, and the people that use that information, the owners, trainers, breeders, that that's where that core business will come from?

Bob Evans - Churchill Downs Incorporated - President and CEO

I mean we're going to try to grow both dimensions of the businesses that we've acquired, the data and data services business, as well as the ADW businesses. I'm not sure I've got an answer to your specific question or not. But we'll try to expand the revenue base across all the customers that currently exist and also pursue new ones.

Alan Caruso - Thoroughbred Daily News - Reporter

Okay, thanks.

Bob Evans - Churchill Downs Incorporated - President and CEO

Thanks, Alan.

Operator

Your next question is a follow-up from Greg Hall.

Greg Hall - Courier-Journal - Reporter

Thanks. Was this deal in the works at the time that AmericaTAB chose TrackNet Media Group?

Bob Evans - Churchill Downs Incorporated - President and CEO

Well, I guess it all depends on what the definition of in the works is. As I understand it, discussions have taken place between Churchill Downs and BRIS and AmericaTAB and other ADW providers over the course of a number of years. So, I think those discussions go back a long, long time.

I don't know exactly what that date is. My guess would be we were probably talking about something at that point in time. But exactly what and what the timing is I don't remember. I could probably go back and check. But off the top of my head I don't know.

Bill may know. Bill may have some insight, Greg. Hang on a minute.

Bill Carstanjen - Churchill Downs Incorporated - EVP and Chief Development Officer

Yes, we certainly didn't have a deal with AmericaTAB and BRIS at that point. And you could talk to the prior owners of those businesses. But their decisions with respect to TrackNet Media Group were made completely independently of any transaction -- of this transaction we ended up doing. It was a long, long way from being anything real at that time.

Greg Hall - Courier-Journal - Reporter

Okay, that answers it. Thanks.

Operator

And your next question will come from the line of Ryan Worst.

Ryan Worst - Brean Murray - Analyst

Thanks. Yes, just a follow-up. Are you going to continue to provide services in all the states that these acquired platforms provide wage earnings services to? I know that TwinSpires does not take wagers from all the states that some of these other platforms do.

Bob Evans - Churchill Downs Incorporated - President and CEO

Ryan, good question. We're just about done with our legal analysis on this. It's a rather extensive amount of work one goes through. And I would say that with probably a couple of exceptions, we will be continuing to take bets in all the states that AmericaTAB and BRIS have historically done so. There may be some states where we do not.

Ryan Worst - Brean Murray - Analyst

Okay. So does that mean that you'll also expand the states that TwinSpires accepts wagering from?

Bob Evans - Churchill Downs Incorporated - President and CEO

I'm sure we will. That's been our plan all along. It's just a matter of sort of doing this in a measured way.

Ryan Worst - Brean Murray - Analyst

Okay. And then also do these platforms have agreements for TVG or are they all TrackNet Media Group rather than TVG?

Bob Evans - Churchill Downs Incorporated - President and CEO

They all have agreements with TrackNet Media.

Ryan Worst - Brean Murray - Analyst

Okay, thank you.

Bob Evans - Churchill Downs Incorporated - President and CEO

You're welcome.

Operator

And your next question is a follow-up from Matthew Hegarty.

Matthew Hegarty - Daily Racing Form - Reporter

Yes, I just wanted to go through this management structure a little bit. I'm guessing that TrackNet Media that basically does the selling and buying of signals that will be supplied to all these different platforms, now four different platforms, will be handled by Churchill Downs. There won't be independent, or will there be independent managers of each one of these companies that will be responsible for the content that they provide?

Bob Evans - Churchill Downs Incorporated - President and CEO

Bill, you want to do that one?

Bill Carstanjen - Churchill Downs Incorporated - EVP and Chief Development Officer

Sure. TrackNet Media will assume responsibility for obtaining the content for these platforms going forward.

Matthew Hegarty - Daily Racing Form - Reporter

So at this point, you would say that all four would have the exact same content?

Bob Evans - Churchill Downs Incorporated - President and CEO

Yes.

Matthew Hegarty - Daily Racing Form - Reporter

Okay. Thank you.

Bill Carstanjen - Churchill Downs Incorporated - EVP and Chief Development Officer

And that's currently largely the case as we go into the deal. So that'll continue, and going forward TrackNet Media will pick up the responsibility of negotiating new contracts.

Matthew Hegarty - Daily Racing Form - Reporter

Thank you.

Bob Evans - Churchill Downs Incorporated - President and CEO

You're welcome.

Operator

And your next question will come from the line of Steve Altebrando of Sidoti & Company.

Steve Altebrando - Sidoti & Company - Analyst

Hi, Bob.

Bob Evans - Churchill Downs Incorporated - President and CEO

Hi, Steve. How are you?

Steve Altebrando - Sidoti & Company - Analyst

Pretty good. The handle -- the guidance for the handle that you provided, is that, I assume, exclusive of any TVG arrangements going forward?

Bob Evans - Churchill Downs Incorporated - President and CEO

A very astute question. Congratulations. Yes, we've assumed in the numbers that we've given you that there is not any arrangement that is struck with TVG. Although we are still optimistic and hopeful that we'll get to that point at some time here over the next few months I hope.

Steve Altebrando - Sidoti & Company - Analyst

Okay. And can you give any sense on amortization going forward, whether these are going to be -- the assets will be -- amortized, sorry, as intangible and therefore pretty heavily? Or, will these assets be booked towards goodwill where it's a little lighter?

Bob Evans - Churchill Downs Incorporated - President and CEO

Another good question. We've got Mike Anderson, our principal financial officer here. So, I'm going to let Mike answer this one.

Mike Anderson - Churchill Downs Incorporated - Principal Financial Officer

Steve, we still haven't gone through our complete purchase price allocation, which we'll be doing over the next several weeks when we record this acquisition. So, I can't answer you completely.

There will be some obviously some amortization of intangibles that do have definite lives and some goodwill recorded on this transaction as well. But as far as the breakout, I can't tell you how much is goodwill and how much is amortizable intangibles.

Steve Altebrando - Sidoti & Company - Analyst

Okay. I'll try back on the next call; maybe I can get more detail. Thank you.

Bob Evans - Churchill Downs Incorporated - President and CEO

You're welcome.

Operator

And Greg Hall has a follow-up.

Greg Hall - Courier-Journal - Reporter

Bob, you used the word optimistic with TVG. I mean has there been any movement at all? Or, is that just you're really an optimist at heart?

Bob Evans - Churchill Downs Incorporated - President and CEO

Well, I'm a practical optimist. I still think it's in everybody's best interest from the customers through the various ADW platforms to the tracks and to the horsemen to find some resolution to the current impasse. So, I'm optimistic about that but nothing new to report.

Greg Hall - Courier-Journal - Reporter

No movement. Okay, thanks.

Bob Evans - Churchill Downs Incorporated - President and CEO

Thanks, Greg.

Operator

And there are no further questions in the queue.

Bob Evans - Churchill Downs Incorporated - President and CEO

All right. Well thanks very much for joining us today.

So, thanks very much for joining us. We're excited about this particular transaction. We had a great meeting this morning with the 90 or so BRIS employees over in Lexington, a terrific group. And I look forward to getting to know them better and working with them.

I think they have – along with the AmericaTAB folks up in Columbus, Ohio – these teams have really built a couple of world-class ADW platforms here. And we're really thrilled to have them part of the Churchill Downs family. Thanks, very much.

Operator

Ladies and gentlemen, thank you for your participation in today's call. This concludes the presentation. You may now disconnect. Have a wonderful day.