Churchill Prospering from Diversification

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The ability of Churchill Downs Inc. to expand into online wagering, casino-type gaming, and entertainment offerings at its four racetracks has enabled the company to continue to grow at the same time that other racetrack-operating companies have struggled.

That was the assessment of CDI president and chief executive officer Bob Evans during his annual address to shareholders June 17 at the Louisville flagship racetrack that is home of the Kentucky Derby Presented by Yum! Brands (gr. I) and Kentucky Oaks (gr. I).

While his overall report was positive, Evans told the audience of approximately 300 that CDI will undertake an internal review of all four of its racetracks this year.

CDI operates Churchill Downs, Arlington Park, Calder Casino & Race Course, and Fair Grounds Race Course & Slots. In addition, CDI has expanded into online wagering with TwinSpires.com, the purchase of Brisnet, and the recent acquisition of Youbet.com, and it has alternative gaming at Calder and Fair Grounds. All of them have helped the company weather the industry and economic downturns, Evans said.

CDI also is a partner in HRTV and, more recently, a new entertainment division has begun staging non-racing events at Churchill Downs.

For the year that ended Dec. 31, 2009, CDI reported net revenue of $439.7 million, compared with $430.6 million for the previous year. Net earnings were down to $16.8 million in 2009 from $28.5 million in 2008.

Evans said that since 2006, the benchmark year for the company to begin its strategic planning for future diversification, revenue has grown 17%. The revenue stream has transitioned during the period so that racing now accounts for 63% of revenue, compared with 93% in 2006, and online wagering (which was zero in 2006) made up 16% of the total in 2009, with $64 million. The gaming sector's $61.2 million in 2009 accounted for 14% of revenue.

Overall, Evans said that today 49% of the profits CDI generates are generated by online and gaming businesses.

"They were pretty close to nothing in 2006," he said. "So the company has changed dramatically. The reason we have been able to prosper over the past several years is because we have diversified from being solely a racing business."

By comparison, both Magna Entertainment Corp. and the New York Racing Association, two other major U.S. track operators, have been forced to file for bankruptcy protection during the period, Evans said. MEC no longer operates, with its parent, MID, taking over much of its assets, and NYRA eventually emerged from bankruptcy.

Evans said those two entities, like all racetrack operators, are being impacted by an overall retrenchment within the industry that includes cutbacks in the number of races offered, cutbacks in the amount being wagering on North American racing, and a decline in disposable income among Americans.

"Day-to-day racing—not the Oaks and the Derby—but day-to-day racing is very difficult," Evans said. "We don’t expect it to improve significantly, and we don’t expect it to improve soon."

Citing a recent report showing that 29% of all purses in North American racing comes from non-racing sources, Evans said the industry is growing more reliant upon alternative gaming and the future of tracks without slots or casino-type gaming will be at risk.

"If you are a track without slot machines, it is just going to be a tough hurdle to overcome," he said.

With two tracks—Arlington Park and Churchill Downs—that do not have alternative gaming, CDI will be looking at all options as part of its internal review, Evans said after his presentation to shareholders.

"Change is in the wind, and it is time to make assessment of our four racing operations and make decisions with that in mind going forward," Evans said, adding that the review is similar to one conducted two years ago by the company.

Evans said neither  he nor any other executive at a North American track could rule out closure as an eventual possibility, he said, but "that is not where we are starting and hope that is not where we end up" with the internal review. "But every option is on the table."

He said CDI will continue to push for legalized alternative gaming in Illinois and Kentucky. He said the internal review will also explore whether to follow the lead of Monmouth Park, which has reduced racing dates in favor of larger purses, field sizes, and wagering for the races that are offered during the current meet. Also, CDI could consider follow the lead of Churchill Downs and begin offering night racing at some of its other tracks.

In 2009, pari-mutuel revenues fell 6% at Churchill Downs, declined by 15% at Fair Grounds and 5% at Calder. At Arlington Park, pari-mutuel revenues dipped by 1% last year.

"Despite these challenges that racing faces, we are continuing to invest in our racing business and those areas where we think we can grow revenues and profits," Evans said. "Our diversification strategy is working. Despite all the turmoil in the racing industry, despite the serious economic recession of the last two years, we have been able to consistently grow the business. We believe your company is well-positioned for growth in the future."

He said the estimated $220 million spent by CDI for its online wagering platforms will generate an estimated $39 million in purses each year for the company’s tracks. Likewise, the approximately $110 million spent on the casino operations at Calder and Fair Grounds will result in about $20 million to purses each year.

While the growth at CDI is with its alternative revenue streams, horse racing is still the catalyst for the rest of the company’s ventures, Evans said.

"If we didn’t have a racing license at Calder and Fair Grounds, we would not have casinos in those two locations," Evans said of the relationship between the core product of racing and the new ventures. "Racing enables gaming; gaming turns around and returns the favor by driving racing. The same is true with entertainment and television."

"We are trying to diversify our revenue and profit streams all around our core business of racing."

As part of its continuing expansion of its online gaming operations, TwinSpires.com and Youbet.com will soon open a customer service center in Lexington that will employ about 100 people. The center will located in the Corporate Center offices occupied by Brisnet.

CDI chairman Carl Pollard opened the meeting by saying that while the company remained committed to, and continued to invest in, horse racing, it was diversification that put CDI in a position to prosper despite the downturns in the U.S. economy and horse racing overall.

"Despite the downturn in racing and despite the worst recession in my lifetime, Churchill Downs Inc. continues to prosper, is financially secure, and is in a far better position for the future than just a few years ago," Pollard said.

He said much of the credit for the strength of the company goes to the management team that put together CDI’s strategic plan that was launched in 2006.

During the business portion of the meeting, Richard Duchossois, James McDonald, Alex Rankin, and Susan Packard were elected as Class II directors, to serve until 2013, though Packard recently announced she would retire effective June 30.