Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Welcome to the Magna Entertainment third-quarter results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Friday, October 31, 2003. I would now like to turn the conference over to Jim McAlpine, Chief Executive Officer. Please go ahead, sir.
JIM MCALPINE, PRESIDENT, CEO, MAGNA ENTERTAINMENT: Good morning and welcome to our conference call. During today's call, Blake Tohana, our Chief Financial Officer, will be reviewing our financial results. Following our prepared remarks we will open the phones for questions. Our Board of Directors met yesterday and approved our financial statements for the third-quarter and nine months ended September 30, 2003. Last evening, we issued a press release with the quarter's results. Hopefully, you have all had an opportunity to review that press release. If not, you will find a copy posted on our website at www.magnaentertainment.com.
At this time, rather than reading our disclaimer related to forward-looking statements, I would like to refer you to yesterday's press release which includes the disclaimer at the end of the text. The press release also contains a reconciliation of EBITDA to GAAP financial measures.
As a result of our recent acquisitions, revenues for the third-quarter and first nine months of 2003, increased 60 percent and 27 percent respectively compared to the same periods last year. The positive impact of these acquisitions was partially offset by declines in revenues at most of our other facilities due to lower average daily attendance and decreased on track wagering activity. EBITDA for the third quarter was worse than a year ago despite the positive impact of the other mentioned acquisitions.
Our profits continue to suffer from the need to invest in capital assets and incur certain expenses ahead of revenues. This is particularly true with undertakings like account wagering where the cost of technology and in-house distribution of XpressBet and HRTV are significant relative to current revenue flow. Similarly we have incurred and will continue to incur significant costs pursuing alternative gaming opportunities and regulatory reforms aimed at leveling the playing field with our competitors. Investments such as our Palm Meadows training center are vital to the long term success of our racing operations. But the full benefit of an investment like Palm Meadows will not be realized until all phases of construction are complete and the facility has been in operation through several Gulf Stream meets.
Our new racetrack and simulcast operation under development in Europe is another example of a strategic investment that is expected to produce significant returns for MEC in the years ahead. Further, we must invest time and resources to develop new and more attractive ways to present horse racing and pari-mutuel rate during to larger audiences in each jurisdiction in which we operate. Each of these initiatives represents an important piece of our strategic plan, but in the short-term each gives rise to operating and capital costs which must be incurred in advance of revenues.
In addition, as we position the company to execute our strategic plan, we incur corporate and financing costs with no immediate dramatic impact on revenue. However, we cannot continue our path of allowing expenses to grow at a faster pace than revenues. While we have achieved some success with our continuous improvement program during 2003, we are not satisfied with our third-quarter results. We had expected to make greater progress with respect to increasing revenues and reducing costs by this point in time.
In view of these results, we have developed an aggressive multipart action plan aimed at improving our future financial results. In the past few weeks we have taken specific actions to reduce operating costs by $5 million on an annualized basis. Accordingly, we expect to realize at least this amount of savings in 2004. And we will continue to seek ways to further reduce costs while growing revenues. In addition, we will accelerate our efforts to monetize or improve the returns from our real estate holdings. We will explore establishing joint ventures and strategic alliances in order to capitalize on existing and future business opportunities.
One time costs or write-offs associated with some of these actions will be incurred during the fourth quarter. The amount of these costs and write-offs cannot be determined at this time. However, we believe that these onetime items will be more than offset in 2004 by the annual profit improvement arising from our multi part action plan.
As mentioned in our press release, Roman Doroniuk has stepped down as Chief Operating Officer yesterday. I want to thank Roman for his contributions to MEC. Don Amos, one of our Executive Vice Presidents and a seasoned horseman, has agreed to take on additional operating responsibilities in several important areas. In addition to his role as Head of Human Resources and the leader of our continuous improvement team, Don will play a key role in implementing our multi part action plan.
There is no question in my mind that we are building a great company. In less than five years we have acquired some of the greatest brands in the sports entertainment business. Our strategy of selectively acquiring horse racetracks and related businesses and expanding distribution of live racing across North America and internationally remains sound and intact. Last weekend's successful running of the 20th Breeders' Cup at Santa Anita, and the public's response to the movie Sea Biscuit, are evidence that horse racing has a great future. We at MEC are committed to playing a major role in the revitalization of horse racing and wagering entertainment and to delivering greater value to our shareholders. I would now like to turn this conference call over to Blake Tohana to review our third-quarter results in more detail.
BLAKE TOHANA, CFO, MAGNA ENTERTAINMENT: Thanks, Jim, and good morning, everyone. This morning I'm going to review our financial results for the third-quarter and nine months ended September 30, 2003. Our financial results for the third-quarter of 2003 reflect the full quarter operations for all of MEC's racetracks and related paramutual wagering operations. The comparative results for the third-quarter of 2002 do not reflect the operations of Lone Star Park at Grand Prairie, the Maryland Jockey Club, Flamboro Downs, HorseRacing TV, and Palm Meadows because they were not owned or operating at that time.
Our racetracks operate for prescribed period each year. As a result, our racing revenues and operating results for any quarter will not be indicative of our racing revenues and operating results for the year. The third-quarter is traditionally our weakest quarter and 2003 is expected to be no exception as three of our largest racetracks, Santa Anita Park, Gulfstream Park, and Golden Gate Fields, did not offer live racing during the period. We expect the seasonality of our business to continue to gradually diminish as our recent acquisitions, on track betting network, and account wagering initiatives evolve.
Some time ago we set out to reduce our reliance on winter racing by acquiring properties that operate at different times throughout the year. The acquisitions of Lone Star Park at Grand Prairie and the Maryland Jockey Club in 2002 give us significant new content in the second and fourth quarters. In the third-quarter of 2003 these acquisitions, together with Flamboro Downs, contributed approximately $2 million to EBITDA. Now let's turn to the specific results of are third-quarter and nine months ended September 30, 2003. Our financial results are in U.S. dollars.
Consolidated revenues increased 60 percent to 104 million for the third-quarter of 2003 compared to the same period in 2002. Revenues from our core racing business increased 68 percent to 98 million for the third-quarter of 2003 and real estate and other operations generated revenues of $6 million. The higher racing revenues in the third-quarter of 2003 primarily reflect the acquisitions of Lone Star Park, the Maryland Jockey CLub and Flamboro Downs which, in the aggregate, generated revenues of $41 million partially offset by reduced revenues as a result of lower average daily attendance which decreased on track wagering activity at most of our other racetracks.
The continued soft economic environment in certain regions in which we operate combined with Hurricane Isabel which disrupted a week of live racing operations at Pimlico had a negative impact on attendance at most of our racetracks. Our consolidated revenues increased 27 percent to $563 million for the nine months ended September 30, 2003 compared to the same period in 2002. Revenues from our core racing business increased 30 percent to $547 million for the nine months ended September 30, 2003, and our real estate and other operations generated revenues of $16 million. The higher racing revenues for the nine months ended September 30, 2003, primarily reflect the acquisitions of Lone Star Park at Grand Prairie, the Maryland Jockey CLub, and Flamboro Downs, which in the aggregate generated revenues of $148 million partially offset by reduced revenues as a result of lower average daily attendance which decreased on track wagering activity at most of our other racetracks.
The EBITDA loss for the quarter the third-quarter of 2003 was $13 million representing a loss of $14 million from our racing business and income of $1 million from real estate and operations compared to a loss of $11 million in the same period of 2002 generated solely in our racing business. EBITDA for the nine months ended September 30, 2003 was $30 million representing $27 million from our racing business and $3 million from real estate and other operations compared to EBITDA of $33 million in the same period of 2002.
The decrease in the EBITDA in the third-quarter of 2003 and the nine months ended September 30, 2003 resulted from a number of factors including various costs incurred ahead of revenues as we position the company to achieve our strategic objectives. These factors include -- lower average daily attendance at most of our racetracks, attributable largely to the factors previously discussed, which resulted in decreased wagering on imported simulcast signals and lower contribution margins; higher comps in our corporate head office; continued startup and operating costs at HorseRacing TV; higher predevelopment costs primarily related to pursuing alternative gaming opportunities; continued startup and operating costs of our new world-class Palm Meadows training facility in South Florida; and lastly, increased rent at our Bay Meadows facility effective January 1, 2003.
There were no sales of noncore real estate in the third-quarter of 2003. One sale in the third-quarter of 2002 generated revenues of $2 million and a marginal loss. For the nine months ended September 30, 2003 we also had no sales of noncore real estate as compared to three property sales in the same period in 2002 which generated revenues of $8 million and had comps of $6 million generating a gain before income taxes of $2 million.
The net loss for the third-quarter of 2003 was $15 million compared to a net loss of $10 million in the same period in 2002. The net loss for the nine months ended September 30, 2003, was $2 million compared to net income of $10 million in the same period of 2002. Significant factors adversely affecting income in both the third-quarter and nine months ended September 30, 2003 were higher depreciation and increased interest expense which in the aggregate increased $7 million and $16 million in their respective periods. The diluted loss per share for the third-quarter of 2003 was 14 cents as compared to 9 cents in the same period of 2002. For the nine months ended September 30, 2003, we had a diluted loss per share of 2 cents as compared to diluted earnings per share of 10 cents in the same period of 2002.
From a cash-flow perspective, in the third-quarter of 2003, cash used for operation before changes in non-cash working capital was $9 million. Total cash used in investment activities during the quarter was $30 million including $26 million of real estate property and fixed asset additions and $5 million of other asset additions, partially offset by $1 million of proceeds from disposal of real estate and fixed assets. Total cash used in financing activities during the quarter was $2 million including the repayment of long-term debt of $6 million, partially offset by $5 million borrowed by one of our subsidiaries under its revolving credit facility to fund capital expenditures.
During the nine months ended September 30, 2003, cash provided from operations before changes in non-cash working capital was $20 million. Total cash used in investment activities for the first nine months of 2003, was $69 million including $54 million of real estate property and fixed asset additions and $17 million of other asset additions, partially offset by $2 million of proceeds from disposable fixed -- real estate and fixed assets.
Total cash provided from financing activities for the first nine months of 2003, was $101 million including proceeds of $145 million from the issuance of convertible subordinated notes and $16 million from new long-term debt, offset partially by the net reduction of bank indebtedness at $45 million in the repayment of long-term debt of $16 million. Overall, cash generated in …