Churchill Downs Incorporated Conference Call Transcript (Status of Louisiana Operations Following Hurricane Katrina)

Operator: Good day everyone, and welcome to the CDI Fair Grounds update conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to (Julie Koenig). Please go ahead.

(Julie Koenig): Thank you, and good morning, and welcome to this Churchill Downs Incorporated conference call to update you on the status of our Louisiana operations in the aftermath of Hurricane Katrina. The information we will share with you this morning was released this morning in a broadly disseminated news release. A copy of this release is available in the “news” section of the Company's Web site located at www.churchilldownsincorporated.com. As we start, let me express that some statements made in 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. Actual performance of the Company may differ materially from that projected in such 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. I will now turn the call over to Tom Meeker, president and chief executive officer.

Thomas Meeker: Good morning, and thanks for joining us this morning. The purpose of this morning's call is to update you on various events that are and have occurred in the New Orleans market. As you know we operate a racetrack and 10 OTBs in that market, and today we are going to brief you on what we know, and in particular, talk about our primary concern, and that is our people. With me today we have our vice president of human resources, as well as Mike Miller (chief financial officer), and Mike will talk following my comments, to talk to you a little bit about some of the financial matters that attend this particular instance.

We will not engage in any conjecture during the course of the meeting. We will attempt to deliver to you facts based upon reports that we received from the scene, and parenthetically I want you to know that we have, since Saturday at the Fair Grounds proper, seven of our employees, six men and one woman, who are members of the security department, and they volunteered to stay there during the course of the storm, together with 12 firemen who had co-located there as an emergency response team, and they have been doing some extraordinary things during the course of these last several days protecting our property and providing us information concerning the status of the property. We had to evacuate them yesterday around noontime due to the growing concern that we had about their safety due to the gunfire and some other matters that were attending the thing. The facility itself, the Fair grounds grandstand and clubhouse facility, is above water and has been above water since the events occurred. The barnyard and the track itself are about four feet underwater. The water has stabilized. We're not taking any additional water. In fact, the latest report that we received yesterday was that there was some subsidence in the water.

We have not been able to view any of the 10 OTBs that we operate, but prior to the events occurring we had evacuated all of the OTBs, as well as the racetrack. We did that on Saturday. We did our data recovery, and so all of that has been preserved, and we weathered the storm with the seven employees at the track.

Concerning where New Orleans is going is a matter of conjecture. There have been reports on television that I'm sure everyone has seen. We continue to be very concerned about our people and the people that remain in the city of New Orleans. We have located approximately 30 percent of our 500 employees. They are scattered around the country. We have been able to -- or we did establish a hotline on Wednesday, and I will give it to you right now. 1-877-244-5536, and that hotline is for our employees or anyone who's affected by the storm trying to locate some of our employees. And as I said, we’ve been able to make contact with about 30 percent of our employees, either through the hotline or at our Web site, which is located at FGNO.com where information is provided to employees and a means of communication with us through that mechanism.

We have established a policy immediately that we will continue to pay our employees for a minimum of four weeks, and that will be subject to review as time goes on. We're providing full medical coverage and all of the benefits that accrue normal employment during the course of the events that will unfold as time goes on.

We're working with state officials to determine benefits, trying to aggregate and consolidate various things such as claims adjustments et cetera, to assist our employees through the arduous times that we feel will be ahead, but our primary concern right now is to make sure that we locate our employees, communicate with them, and provide them some immediate funds. Our payroll is today, for the New Orleans group, and we're prepared to overnight checks or make direct deposits to their accounts, to the extent that we know where they are and we stand ready to assist them. All they need do is contact us either on the Web or over the toll-free number.

We're working with a national HR group, in an effort, together with other businesses and companies that are affected by this, to coordinate our efforts to provide the maximum assistance to our employees at their time of need, and as time goes on, additional services undoubtedly will be provided through that mechanism.

We've set up temporary offices in Houston and in Baton Rouge that we can work with our employees and I want to pay particular thanks to Bob Bork at San Houston, a racetrack there located in Houston. He is assisting us in establishing an on-site presence in the Astrodome or in the community I should say, because now they've moved beyond the Astrodome, in the community that will provide a point of contact for us and our employees. He's also offered to provide temporary work for our employees in that market, and we look forward to working with (Bob) and his group.

We're well on our way in trying to meet the financial needs of our team members throughout the country now, as they are spread all over. We had in place an employee program called the HORSE Program, specifically a program to assist employees who find themselves faced with emergencies or traumas. In addition, we have the Churchill Downs Foundation, which is a mechanism that we can accept donations from anyone to assist in the time of need for our employees, and if anyone wishes to make a contribution to the Churchill Downs Foundation, they can do so by sending a donation to Churchill Downs, 700 Central Avenue, Louisville KY 40208, and on the check just note it's for “Hurricane Relief.”

We're also working with the area's industry leaders and organizations, including the NTRA, and hopefully, some time today they will announce a plan that will provide yet additional funds to those in need, families in need, who have been affected by the tragedy that occurred down on the Gulf Coast.

Our second area of concern has been our horsemen – horsemen who race with us here at Churchill Downs, as well as our other racetracks, and in particular those Louisiana horsemen who would otherwise expect to be racing at the Fair Grounds starting in November. It is clear that we will not be operating a race meet in November at the Fair Grounds, and as such, we've made contact with the folks at (Harrah’s) Louisiana Downs, and we are underway in putting together a race meet at (Harrah’s) Louisiana Downs, and I think as time goes on perhaps as early as early next week we'll have definitive information concerning the plans that are underway to conduct a temporary meet if you would at the Fair Grounds.

I also want to thank Gary Loveman, the CEO of Harrah’s (Entertainment) who has been working with us to coordinate the establishment of a temporary meet at Louisiana Downs. It's a Harrah’s property, and co-located with a racino operation, and hopefully we can work together to not only run a race meet there, but (also) provide some additional relief, monetary relief, for employees who had been affected by the events in New Orleans.

So that's about all I know as of this moment. As we continue down the road we will continue to provide updates, not only for the general public, but more particular through the mechanism of the media to reach our employees. Our primary concern today is finding out where all of our 500 employees and their families are located so that we can meet their immediate and long-term needs.

So with that I'll turn it over to Mike Miller, our chief financial officer, and then following his comments we will be prepared to answer any questions that you might have. Mike?

Mike Miller: Thank you. First I want to reiterate that our primary concern remains the welfare of our employees, but we also felt it was necessary to update the financial community on some of the facts as we know them today. So I will make some comments both on our insurance coverage, as well as the potential impact from this loss on our P&L for the balance of 2005.

At this juncture we are not prepared to comment on the impact on operations beyond the year-end December 31st.

All of my comments regarding insurance coverage are based on the facts as we know them today, which as you can appreciate, could change as we and the adjusters are able to physically inspect the damage incurred.

With that having been said, it appears that our grandstand and OTB facility at the main track sites were not flooded, and the water damage sustained therein was as a result of the rain following the wind damage. There does appear to be water damage to the barn area at the track, as well as to the track surfaces, one of our owned OTB facilities, as well as several of our OTBs that are in facilities, which we lease.

At this time we believe that any losses incurred from either property or business interruption are covered by our $200 million policy except for the $500,000 deductible for which we will ultimately record a loss.

As for the impact on operations for the balance of the year, we were currently forecasting, prior to the hurricane, that our Louisiana operations would have realized a pre-tax loss in the neighborhood of $1.3 million. We obviously will not be operating for the balance of the year and will attempt to claim all expenses incurred with respect to the Louisiana operations under the business interruption portion of our insurance coverage.

That concludes my brief remarks and we will now turn it back over to the operator to respond to any questions you may have.

Thomas Meeker: Operator?

Operator: Thank you, the question-and-answer session will be conducted electronically. If you wish to ask a question please press star one on your telephone keypad at this time. Once again, if you'd like to ask a question, please press star one. We will go to (Frank Angst), with Thoroughbred Times.

(Frank Angst): Hi Tom.

Thomas Meeker: Hi, how are you?

(Frank Angst): Pretty good. How many employees work at Fair Grounds during the live meet for Churchill? And then if you could estimate just how many people work there overall as well.

Thomas Meeker: We have 500 (full-time) on our payroll right now. That elevates with some seasonal (employees) when we actually run the meet. I don't have that number.

(Frank Angst): OK.

Thomas Meeker: Chuck (Kenyon, vice president of human resources) just told me it's about 900 when we ramp up for the meet.

(Frank Angst): OK, and would you have any way of estimating like how many people also work there but not necessarily for Churchill Downs for the different trainers and horsemen?

Thomas Meeker: No, that would be hard to calculate, but it has a significant impact. It is the showcase meet for the Louisiana horsemen community.

(Frank Angst): What would be the biggest challenges in moving a meet to Louisiana Downs. Some horsemen expressed concerns that they weren't sure that the turf course would be available or is that just too early to predict?

Thomas Meeker: There are a myriad of different problems but I think at a time like this problems become much smaller, given the circumstances that we face. Our primary thing right now is to provide an opportunity for the horsemen to have a place to run against some substantial purses, and also we believe that by running a meet there we can also provide some additional funding for those individuals who are in need, be they horsemen nor employees of the track.

(Frank Angst): And then just one more question related to that, is there a minimum of dates that you have to run? And is there any way of getting a waiver on that because of these circumstances?

Thomas Meeker: There are, but I'm sure that the Louisiana Racing Commission -- unfortunately we have not been able to make contact with the chairman or the executive director at this point because they are out-of-pocket -- but I'm confident, I'm just confident, that we will be able to solve any problem, be it statutory, regulatory, or practical problems associated with moving the meet.

(Frank Angst): Thanks, Tom.

Operator: We will go next to (Bob Fortus), with Times-Picayune.

(Bob Fortus): Good morning, Tom.

Thomas Meeker: Hi (Bob), where are you?

(Bob Fortus): I'm in Michigan.

Thomas Meeker: Good.

(Bob Fortus): It's just so overwhelming, I can barely talk.

Thomas Meeker: And your family is safe?

(Bob Fortus): Well, my family's not alive anymore, but I have a lot of friends. I'm sorry, I'm having trouble talking.

Thomas Meeker: I know.

(Bob Fortus): Maybe you can take somebody else and I have some questions, but I've got to gather myself a little bit.

Thomas Meeker: Well, Let me -- I can anticipate some of your questions.

(Bob Fortus): I can answer the last question for you.

Thomas Meeker: Go-ahead.

(Bob Fortus): On the statutory thing, the rules are you have to run 80 days in a row to keep your license, so that's essentially the length of the meet question, but that's -- you know, that's so -- that's not really -- I wanted to ask -- I think I'm starting to get myself together a little bit. I had a question for Mike Miller too. Is that possible to ask him?

Thomas Meeker: Sure.

(Bob Fortus): OK. He mentioned the insurance policy and is it one policy in -- he said it was $200 million and the $500,000 deductible. If it one policy or is it more than one? And ...

Mike Miller: (Bob), this is Mike. I hope you're doing well, by the way. It is one policy. There are many carriers involved to get to the $200 million coverage, but it is one policy.

(Bob Fortus): OK, and the thing about the estimated loss, you said something about if the track had been running, it was an estimated loss to the end of the year of $1.3 million, is that true?

Mike Miller: Actually, if the track had been able to operate prior to the hurricane, -- I mean we routinely go through ...

(Bob Fortus): That would have been your loss for the fourth quarter, is that correct?

Mike Miller: Actually, the last four months of the year.

(Bob Fortus): OK.

Mike Miller: That's what it would have been.

(Bob Fortus): OK, OK. That's what I thought you meant. And as I understand it, just from covering the Fair Grounds, those are generally the slow months anyhow is that right? In other words, the prime time of the meet is in the following year, as far as making money.

Mike Miller: Yes, that's true. With respect to the meet, which would commence you know on or about Thanksgiving, it is really the first quarter of next year would have been the more profitable days in the meet, yes, that's true.

(Bob Fortus): OK. I had another -- I had several questions. Another one for Mr. Meeker -- actually, for both of you. And I'm sure you heard Mr. Hastert's (speaker of the U.S. House of Representatives) comment about New Orleans.

Thomas Meeker: Yes.

(Bob Fortus): Excuse me, they were associated that I'm having trouble asking this ...

Thomas Meeker: If I ...

(Bob Fortus): I'm not asking you to comment on him, but here is the gist of the question. There was an editorial in our paper today, the online, which essentially said there's no way people can give up on New Orleans, and I wanted to know what Churchill thinks about that.

Thomas Meeker: Well, No. 1, we invested in that community because we liked it. The nexus between the track and that community is a mirror image of what the nexus is here in Louisville, Kentucky. There's a great tradition down there in that community associated with the racetrack. The comments of the speaker I've heard them. I don't know the context in which he made those statements, but I can tell you we are firmly committed, with other business leaders and investors in that community, to re-establish New Orleans over the course of the next years, whatever it would take to get that city back on its feet. And if you look at the faces of those individuals who we've seen, the poorest of the poor down there, without anything, standing in the middle of highways, on top of roofs et cetera, and you see the determination that they have, not only to live, but their true and absolute abiding love for that community. I can't believe anyone at this point in time would have made a statement like that.

(Bob Fortus): Right, and like I said, I'm not really interested in getting comments about him. I mean ...

Thomas Meeker: I am.

(Bob Fortus): I understand, but what I'm interested is getting the people to know your intentions about the Fair Grounds, even though you said I'm not -- you know, this is only about what's going on now, but the people of New Orleans because of what the Fair Grounds means to them.

Thomas Meeker: We're going to stand side-by-side with members of the community, people to we can touch everyday right in our contiguous community. We're going to stand side-by-side, shoulder to shoulder with members of the business community, with members of the political community, making sure that New Orleans, the vitality and all of the tradition associated with that community, and more important I think, just for the nation at large as we see rising prices in gasoline et cetera, to re-establish that community as an integral part of the economic fabric of this country. And that's where we are. I can say more on that, but our concern right now is our employees and the people that are in that community right now who need to get out of that community and tending to their needs, and if there is one thing I would make in terms of the statement made by Speaker Hastert is let's talk about these other things down the road, but I would advise that he get on a plane and go to Washington and try to figure out how we can get help to those people who are in need of help right now.

(Bob Fortus): OK.

Thomas Meeker: I think we can leave that. Let's go to the next subject.

(Bob Fortus): OK. You know, I was -- I mean people have just been asking me like is the Fair Grounds going to be there, you know ...

Thomas Meeker: The Fair Grounds will be there. The Fair Grounds will be there and New Orleans will be there, but we've got a huge challenge facing us, not only as members of that community, but as members of the larger country.

(Bob Fortus): Right. So what you're saying is as far as you're concerned Churchill is committed to be a member of the New Orleans community, not just ...

Thomas Meeker: You've got it right, you've got it absolutely right, (Bob).

(Bob Fortus): OK, thank you.

Operator: We'll go next to (Bill Finley) with New York Times.

(Bill Finley): Tom, questions on two different subjects. I don't imagine there were any horses ...

Thomas Meeker: No there were not.

(Bill Finley): OK, I just wanted to clarify that, and if things work out with Louisiana Downs, would the meet the comparable or exactly duplicate what would have been run at Fair Grounds so far as dates, length of meet, perhaps purses et cetera, or in some form would it be an abbreviated meet?

Thomas Meeker: It will be a unique meet, and we're still working on the details, but there are several things that we have to work out obviously, but it would be a unique meet. That's about all I can say at this juncture.

(Bill Finley): Is it fair to say then that it could be shorter than the traditional Fair Grounds ...

Thomas Meeker: Sure, yes and we've got to put it in and we're concerned not only about establishing a meet there, but providing an orderly trail for our horsemen, so that if they come to that meet they would have the opportunity to move their horses some other place in an orderly fashion.

(Bill Finley): Very good. That's all I need, thank you.

Thomas Meeker: Sure.

Operator: (Jenny Rees), with Louisville Courier-Journal has our next question.

(Jenny Rees): Tom, in the meeting with horsemen this morning Andy said while it's very preliminary and there's a lot of things on the table, one thing that's being discussed is a December meet. Didn't really address it beyond that, which of course is a concern to some of the horsemen. Is that because you are with these SEC rules and things, cannot talk beyond the first of the year?

Thomas Meeker: No, no, no, no, no. We're looking at various alternatives and trying to fit this into the structure of U.S. racing at that time of the year. We're looking at it from the standpoint of purses, availability of horses, and a concern for the horsemen to make sure that we have an orderly path for them to follow throughout the course of this year as well as next year.

(Jenny Rees): Would a concern be you wouldn't want to be maybe impinging to match on Oaklawn, since the tracks are close?

Thomas Meeker: Well, that would be -- again, we're trying to fit this thing into the overall racing picture in the United States, and sure, we're going to be talking to Oaklawn and making sure that for instance if our horsemen go down there and some abbreviated meet that they would have a place to go to Oaklawn.

(Jenny Rees): The other thing that was indicated was that Churchill will make no money of this meet, that it will all go in one fashion or another to the hurricane efforts.

Thomas Meeker: That's what we're attempting to do, to meet the needs of both our employees as well as the horsemen, and we think this would be a great opportunity for the industry at large to pursue a course that would result in Churchill not making money, but horsemen and our employees, for getting the necessary funds to restart their life.

(Jenny Rees): And one final question for those of us that aren't used to doing business things, is that 1.3 million pre-tax loss, would that be the normal -- I mean that's routine for that one quarter for Fair Grounds?

Mike Miller: Well (Jenny), this is Mike Miller. I mean last year was our first experience ...

(Jenny Rees): Oh yes.

Mike Miller: ... ((inaudible)) to say whether it's normal or routine is somewhat problematic. I can just tell you, that was our best estimate of what the loss would have been prior to the hurricane.

(Jenny Rees): OK. Thank you.

Operator: And once again, if you do have a question or a comment please press star one at this time. We will go down to (Tim Rice) with (Rice Voelker).

(Tim Rice): Good morning guys. I don't usually ask any questions of a financial nature on these quarterly calls, but just as a horsemen, I really want to thank you for trying to ((inaudible)) and I really appreciate it, and I think I speak for my neighbors as well.

Thomas Meeker: Well, I think before this thing ends -- last night I got a call from (Frank Stronach), (Bob Bork), at San Houston has gone out of his way to assist us in meeting the needs of our employees. I think the industry, as is always the case with horsemen, the industry is able to respond to things like this when people are in need and I think ultimately over the next few days, working with the NTRA and other members of the industry we will be able to do something very special at Louisiana, and do some other things in and around whatever meet that we might be able to establish down there that will assist the horsemen and their families, and in particular, those horsemen to have suffered losses down in the New Orleans market.

(Tim Rice): Well again, thanks very much, Tom ((inaudible)) ...

Thomas Meeker: Well, we appreciate it.

Operator: And as a final reminder, if you do have a question or a comment please press star one. We will go to (Frank Angst), with Thoroughbred Times.

(Frank Angst): Hi (Tom), looking back through my notes I did have one more question. What was the name of the gentleman at Harrah’s that Churchill has been working with?

Thomas Meeker: The man on site is (Ray Tromba), who operates the meet. The CEO of Harrah’s is Gary Loveman.

(Frank Angst): OK, thanks.

Chuck Kenyon: And if I could just clarify the point ...

Thomas Meeker: This is Chuck Kenyon, our VP of human resources.

Chuck Kenyon: I just wanted to clarify the point -- the question was raised earlier on the head count. That number -- there was a high number. That 800 to 900 number would also include all of the OTB's, not just the racetrack (full-time and seasonal employment figure) that's -- unclear about that.

Operator: And there seems to be no further questions at this time.

Thomas Meeker: OK, in closing we will remain firm on our commitment to update you as we have additional thoughts, in particular as they relate to our employees, and more particularly as we unfold the plans for this unique meet that hopefully we will put in place at Louisiana Downs. And finally, I would like, to the extent that you can reach people who have been affected, to assure all of those people, our neighbors in New Orleans, those displaced persons in Houston, in Lafayette, Baton Rouge, and wherever else they may be going, that our prayers are with them, and that we stand firm in our commitment to provide whatever assistance we can to meet their needs short-term and long-term as the events unfold. So thank you for being with us this morning and talk to you later.

Operator: That concludes today's teleconference. Thank you all for your participation.