Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated 2019 First Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I'd now like to introduce your host for this conference call, Mr. Nick Zingari, Vice President, Treasury, Risk Management, and Investor Relations.

Thank you, Kevin. Good morning, and welcome to our First Quarter 2019 Earnings Conference Call. After the company's prepared remarks, we will open the call for your questions. The company's 2019 first quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled News, located at churchildownsincorporated.com, as well as in the website's investor section. Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent report on Form 10-Q and Form 10-K. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and Form 10-Q are available on our website at churchildownsincorporated.com. and now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Thanks, Nick. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer, Marcia Dall, our Chief Financial Officer, and Brad Blackwell, our General Counsel. As most of you have seen, we issued an 8 earlier this week redefining our segments for external financial reporting purposes to reflect the evolution and growth of our company. Marcia will provide more color on this decision. I will share some thoughts on our first quarter performance and the upcoming Kentucky Derby. Marcia will then provide additional details on the quarter and on our capital management. After she is finished, we will be happy to take your questions. First quarter has been very busy. We closed three acquisitions, completed the preparation for the 2019 Kentucky Derby, including the new starting gate suites, rooftop lounge, broke ground on our Oak Grove, Kentucky historical racing machine facility, refinanced $600 million of our variable rate debt into an eight-year bond, and completed a three-for-one stock split. We did this while delivering double-digit revenue and adjusted EBITDA growth for first quarter compared to prior year. Our net revenues for the quarter were up 40%, and adjusted EBITDA was up 52% over prior year. Those are meaningful increases, and there are a few key developments that drive that year-over-year change. In January, we completed the acquisition of Presque Isle Downs and Casino, an excellent brick-and-mortar facility, which also provides us an opportunity to launch our retail BetAmerica sportsbook at the casino and launch our BetAmerica online sportsbook and iGaming platform across the entire Pennsylvania market later this year. Next, in early March, we completed our acquisition of approximately 61% of Rivers Casino in Death Plains, Illinois, which proceeded to deliver its strongest march ever with respect to adjusted EBITDA. Derby City Gaming, our historical racing machine facility in Louisville, also contributed to our company's net revenue and adjusted EBITDA growth with a strong 41% margin. Our Bet America sportsbooks at our two Mississippi casinos added incremental adjusted EBITDA and drove overall increased customer visitation. We believe brick-and-mortar sportsbooks, when efficiently run, directly contribute to adjusted EBITDA and also deliver additional slot and table game activity. and last, our gaming segment contributed growth from two new off-track betting parlors with Video Poker in Louisiana and from our now 100% ownership of Ocean Downs. I will provide some additional color on our performance and growth plan for each of our operating segments, then I'll provide some insights into the upcoming Kentucky Derby. First, let's talk about the new Churchill Downs segment. This segment includes the results of Churchill Downs Racetrack and Derby City Gaming. First quarter is a quiet quarter for Churchill Downs Racetrack, given that we do not start racing until this Saturday, one week before the Derby. Derby City Gaming contributed $18.7 million of net revenue growth and $7.6 million of adjusted EBITDA growth in first quarter. We opened the facility in September of last year and are very pleased with the ramp-up, growth in customer database, and key operational metrics. As a reminder, our capital investment in this facility was $62 million. We plan to add an additional 100 machines to the floor in May. We believe the property is a long way from maturity. We are also pleased with the incremental purse contributions that Derby City Gaming is making to Churchill Downs Racetrack, which will help support the long-term sustainability of the horse racing industry in Kentucky. Turning to our online wagering segment, which includes Twin Spires and our online sports betting and iGaming operations in New Jersey. First, our Twin Spires business grew handle slightly less than 1%, and outpaced the industry by 3.6%. The handle for the industry was negatively impacted by Oaklawn Park and Santa Anita. Oaklawn Park moved two weeks of premium racing from January into the second quarter, and Santa Anita, in response to the tragic rash of horse breakdowns on its racetrack, canceled 13 days of racing in the first quarter. Santa Anita provides the elite West Coast racing content during the first quarter and into the second quarter, Even as racing resumed, Santa Anita's field sizes and handle have not returned to the previous year's level, and consequently, Twin Spires is seeing declines in wagering on this specific track. Our customers during the first quarter tend to be relatively sophisticated horse players who have a heightened interest and appreciation for the traditional top-level racing content. Despite the industry challenges, Twin Spires net revenues dropped only very modestly in the first quarter, less than 1%. There are a few trends to explain this. First, total active players were up 2.4% in the first quarter. We continue to reach new customers and to re-engage with previous ones through our marketing programs, even though the first quarter is not one where we are aggressively marketing. We focus a significant portion of our marketing dollars on the Kentucky Derby and other Triple Crown races in the second quarter because we believe we can acquire large blocks of customers cost-effectively during this window of time. We also believe these customers can provide superior returns over the long term. While the number of active players rose in the first quarter, the revenues per player declined slightly by 3.3%, reflecting the growth in newer players who are higher margin, however, are on average less experienced and wager less. The Twin Spires team will be working to add many new customers during the upcoming Derby week and this year's Triple Crown season. Our team believes there is real organic growth that Twin Spires can continue to harvest in the ADW space. This is a very good business and we remain very optimistic about its long-term growth. Adjusted EBITDA for the online segment as a whole was down approximately $900,000 in the first quarter because of the ramp-up and launch of our BetAmerica online sports betting and iGaming business in New Jersey. In New Jersey, we have entered into what is known as a Skins Agreement with the Golden Nugget Atlantic City Casino to gain access to the New Jersey online market. We do not have a casino in New Jersey to enter the market directly, but have an arrangement with Golden Nugget which allows us full management and control of our own site. We have launched our BetAmerica online platform and have recently received approval from Apple to put our iOS app in the Apple Store. We are also still completing the implementation of our full list of payment and casino game vendors which we think will give us an extremely competitive, compelling iGaming product. Turning to the gaming segment, in the first quarter we experienced encouraging operating environments across our markets and we grew net revenue and adjusted EBITDA at each of our existing properties with the exceptions of Oxford and Calder. Even though Oxford was impacted by severe winter weather over two holiday weekends in the quarter, we were pleased with the performance of our new hotel and expanded gaming floor. Regarding Calder, we incurred additional expenses in connection with opening our new Hi-Li operation as well as related legal expenses. We are planning to hold our first Hi-Li event in May of this year. Our casino properties are well positioned in their respective markets and we have incremental growth already locked in for the segment with the addition of Rivers, Des Plaines, Presque Isle, and Nima Colon. We now have over 11,000 slot machines and VLTs and approximately 200 table games in eight states. We have a long-held strategy of pursuing both acquisitions and greenfield investments in gaming properties we believe will offer stable, predictable cash flows in diverse markets. We also like states that we believe may grant access to sports and online casino gaming to their brick-and-mortar casino's license holders. Turning to our other investments, we broke ground on our Oak Grove, Kentucky, historical racing machine facility on April 9th. Based on the results of Derby City Gaming, we have updated our revenue projections and have finalized the designs and bids for all of the various aspects of this project. We are increasing the projected cost by $50 million to $200 million to accommodate for a higher than expected cost of construction and some modifications to support the expected consumer demand for this property. We are thrilled about the opportunity to build this facility about an hour north of Nashville, which was ranked by Forbes as the seventh fastest growing city in America in 2018. Based on our research of the Nashville area along with the very encouraging results from our Derby City project, we feel that this increase in investment will exceed our return requirements. We expect to conduct 12 harness racing days in October 2019 and plan to open the historical racing facility and hotel during the first half of 2020. We will update you further in the coming quarters. Now a few additional comments on Churchill Downs Racetrack and the Kentucky Derby. As many of you saw last week, we announced a series of safety initiatives with respect to Churchill Downs Racetrack and our other racing operations. We want to protect the history and tradition of the Kentucky Derby, and that means we will also always pursue best-in-class practices to protect our athletes, both human and equine. The owners and trainers of the very best horses in the world elect to bring their horses to Churchill Downs and they have done so for well more than 100 years. There is a reason for that and we will continue to meet the highest standards of safety and integrity. We have an obligation to follow and implement best practices in equine care as well as an obligation to educate and encourage others in the industry to do the same. That is what is behind the commitments we announced last week. Regarding the Kentucky Derby, We have good visibility into our admissions, sponsorships, and a number of other categories of revenue in advance of the event, and all of these areas look very promising at this time. We are optimistic for a great Kentucky Derby. We set records last year for virtually all of our significant financial benchmarks, despite suffering the wettest Kentucky Derby in history. We are aiming high again this year. We will be unveiling our $5 million rooftop lounge and entertainment area on top of the starting gate suites at this year's Derby. The new area consists of approximately 250 new seats and an additional 250 access tickets. We are pleased to report it is sold out. Last year at the Derby, we debuted the first stage of our $32 million project to significantly improve the parking and transportation ingress and egress to our facility, as well as the external aesthetic. We completed the second stage of the project prior to the 2018 Breeders' Cup, which we hosted at the track last November. We added further improvements and enhancements over this past off-season. As our customers arrive for the Derby this year, we hope they are wowed not only from an aesthetic perspective, but also with respect to ease of entry and exit. I am also pleased to report that the Japanese horse, Master Fencer, is entered in this year's Derby. This is the first time we have had a starter from our Japanese Road to the Kentucky Derby series. Also, for the first time ever, we will simulcast the Kentucky Derby into Japan for wagering, and we look forward to seeing how the Japanese bettors react to this opportunity. Due to the time zone difference between the US and Japan, the Kentucky Derby will be simulcast around 7.50 a.m. on Sunday morning in Japan. Japanese bettors who have online wagering on horse racing as we do in the US will be able to place their bet on the day before the race right up to the moment the race starts. As you may recall, we issue a press release immediately after each Kentucky Derby detailing the financial and other metrics for the week. Please watch for this press release. There are many avenues to grow our signature event over the coming years, from additional pricing segmentation, additional seating capacity for portions of the roughly 110,000 guests who come to the Derby and do not have a seat, Additional sponsorships and harvesting international customer interest to name a few of our paths forward. Our team is engaged in numerous growth initiatives and we expect to provide an update on some of these on our next earnings call. Beyond the metrics, our mission is to improve everything we do surrounding the Kentucky Derby. We have consistently invested to deliver a world-class experience for our customers. Our strategy for the long term is to invest in projects that help more of our guests feel a strong connection to the event. and to experience as a participant, not just as a spectator, the unique magic that is the Kentucky Derby. We hope to see many of you at this upcoming Derby Weeks event starting with opening night this Saturday night. On Tuesday with our Champions Day event, on Thursday for Derby and on Friday and Saturday for Oaks and Derby. Now I'd like to turn the call over to Marcia to provide some additional details on the first quarter. After that, we will answer any questions that you may have. Thank you, Marcia.