Churchill Downs, Incorporated

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

Thank you, Katrina. Good morning and welcome to our third quarter 2019 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2019 third 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. at ChurchillDownsIncorporated.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 10Q and Form 10K. 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. We have a number of updates to share regarding key projects, so I will begin today with relatively brief comments on our third quarter and then focus on our strategic projects. Marcia will then provide a more in-depth review of our financials for the quarter and an update on our capital plans. After she is finished, we will be happy to take your questions. First, a few comments on our third quarter. Our net revenues were up 38% and adjusted EBITDA was up 42% over prior year. Quarter over quarter, net revenue growth benefited from, among other things, the acquisition of Presque Isle in January of this year and the opening of Derby City Gaming in September of last year. Generally, the performance of our properties was encouraging and stable. The online wagering segment was a slight drag on our net revenue growth for the quarter, primarily due to the exit of a small number of high volume, low margin customers in our velocity business. I will talk more about that in a few minutes. Our adjusted EBITDA growth for the quarter increased as a result of the 61% equity investment that we made in Rivers Des Plaines Casino in March of this year, the contributions of Presque Isle and Derby City Gaming, as well as continued growth at Miami Valley Gaming. Now I'm going to provide an overview organized around five organic growth initiatives. Projects at Churchill Downs Racetrack, expansion of HRMs in Kentucky, Illinois opportunities, Miami Valley gaming, and brick and mortar sports wagering and online wagering. Let's start with Churchill Downs Racetrack, where our team is working on three major capital projects. The first project is the construction of the equine medical center and quarantine barns that we announced earlier this year as part of our track safety initiatives. The equine medical center will enable state-of-the-art veterinarian care to be provided to our equine athletes. The quarantine barns are part of our strategy to increase international participation during Kentucky Derby Week, as well as during the rest of the year at Churchill Downs, Turfway Park, and other regional racetracks. The Quarantine Barns will enable international owners to ship their horses directly to Louisville, making it easier on the horses and less expensive for the horse owners. The Equine Medical Center and Quarantine Barns projects together are an $8 million investment and will be completed prior to the 2020 Kentucky Derby. The second capital project is one we announced yesterday, an $11 million renovation to the premium seating area We currently call Millionaires Row 6 that will be ready in early May of next year, just in time for the 146th running of the Kentucky Derby. This area is on the sixth floor of our main building with an amazing view of the finish line and is also next to our most exclusive area, the Mansion. Interest in upscale, exclusive, and unique experiences has grown significantly since the Mansion was created for the 2013 Derby and now we have the opportunity to create another special world-class experience for 320 of our most exclusive guests. The timing could not be better as all of the mansion tickets are already completely sold out for 2020. The third capital project is the most significant construction project that we have undertaken at the track. We will build permanent covered stadium seating, a one-of-a-kind hotel experience and a historical racing machine facility along the outside of the racetrack around the first turn. We anticipate that the project will cost approximately $300 million, and based on its complexity and scope, we expect it to be completed by the end of 2021. Our original objective called for completion by early May 2021, in time for the 147th Kentucky Derby. However, as we worked extensively with the architect and construction firm, we realized we needed to build in more time. As you might imagine, there are also a host of prerequisite permits and approvals that we need to obtain in addition to the physical construction process. This is a very important project for our company. It provides a strong foundation for long-term organic growth for the Kentucky Derby. The construction plans also contemplate the potential for future expansion of the hotel and HRM facility as demand for these unique experiences grow. From the ground floor to the top of the hotel, this is a seven-story project. I will describe the key components starting from the bottom and working our way up to the top floor. First, there will be a new outdoor covered stadium seating with improved amenities adjacent to the track with capacity for approximately 4,700 guests, which will replace the existing temporary seating that is built every year in that location for the Derby. This will be priced higher than the temporary seating, but will have a lower price point than the other new sections we are constructing. Also on the ground floor, we will build in an approximately 1,000 machine HRM gaming facility and sports bar. During the Kentucky Derby, the amenities in the gaming facility and on the floor itself will also provide a hospitality area for approximately 3,400 of our existing guests who have seats that are not otherwise affected by this project. On the second floor, there will be a 27,000 square foot ballroom and a party deck with a tiered covered balcony facing the track. Collectively, these two areas can hold more than 1,700 guests. Also on the second floor, there will be additional dining for 150 guests and a hospitality room providing spectacular views of the track. On the third floor, there will be another balcony overlooking the racetrack for 250 guests. On the third through sixth floors, there will be 92 track-facing hotel suites with private balconies. For the Derby, each suite will come with 12 access passes that will allow the suite to serve as sleeping accommodations at night and entertainment space for guests during the day, if desired. On the third through sixth floors, there will also be 60 non-track-facing suites with eight access passes per suite. In addition, there will be four presidential suites facing the track with windows on two sides and private balconies. One suite on each floor of the floors three through six for entertaining up to 20 guests at the Derby. And finally, on the seventh floor, there will be a penthouse experience for 320 guests with dining, a bar, and panoramic views from the balcony that will stretch the entire length of the building. In total, there will be 156 hotel rooms and approximately 5,500 new reserved seats available for Derby. In addition, 6,700 of our existing customers will have access to additional amenities during the Derby. Outside of Derby week, the hotel rooms will be available for guests who visit Churchill Downs, the City of Louisville, the University, the Fairgrounds Convention Center, or are just passing through on I-65, the major north-south interstate highway in this region of the country, who want to stay at a wonderful hotel and enjoy our HRM facility and other amenities. We are really excited about this next phase of our expansion. Obviously, it is critically important we execute carefully and correctly on all phases of this major project. We have the experienced team to do that. Now let's turn to our second organic growth initiative, the expansion of HRM facilities elsewhere in Kentucky. Derby City Gaming continues to perform above our initial expectations, generating in the third quarter $9.5 million of adjusted EBITDA from our $65 million investment. We are proud of what our team has accomplished in building Derby City Gaming, and we are applying this knowledge and learnings as we build our $200 million Oak Grove Racing and HRM facility and begin our preparations to invest an additional $100 million at Turfway Park. As promised, under the terms of our racing license, we began harness racing at our Oak Grove facility a couple of weeks ago after the completion of the racetrack and ship in barn area. We are continuing to build the HRM facility and 128 room hotel and are targeting a summer 2020 completion. We plan to open the HRM facility with approximately 1,400 machines and have regulatory approval for up to 1,500. Regarding our recent $46 million acquisition of Turfway Park, we are going to construct an HRM facility with up to 1,500 machines as well as other amenities, including a sports bar and simulcast area. We plan to begin demolition of the grandstand after the meet ends in April, and we are targeting completion of this project by the summer of 2021. The addition of the HRM facility and other improvements to the property will increase the per structure and quality of thoroughbred racing at Turfway Park and indirectly across the entire Kentucky circuit. We will add a new dirt track to complement the existing synthetic surface and upgrade the barn area. After completion, we will look at upgrading the profile of the current road to the Kentucky Derby Prep Race at Turfway Park and will perhaps add one or more additional roads to the Derby Prep Races. Across Derby City Gaming, Churchill Downs Racetrack, Oak Grove, and Turfway Park, we have a great deal of opportunity. We have a lot of work to do to maximize our full potential, and we look forward to that challenge. Our third organic growth initiative revolves around our three projects in Illinois as a result of the expanded gaming bill that became law in June of this year. First, we announced during the third quarter that we were not pursuing a casino license for Arlington Park due to the competitive environment and the challenging economic returns in light of the additional taxes, reconciliation payments, and increased purse contributions that Arlington Park would have to pay if it obtained a casino license. We have committed to race at Arlington in 2020 and have been awarded race dates. We've also committed to race at Arlington in 2021 if we are awarded race dates for that period. We will continue to explore all of the potential options with respect to Arlington Park and the future of thoroughbred racing there, including other potential locations for the racing license to be utilized in the Chicagoland area or other areas of Illinois where it may be more economically viable. We plan to apply for a sports betting license for Arlington and are awaiting the sports betting regulations to be issued by the Illinois Gaming Board. Second, Rivers Casino and Des Plaines. which we own 61% of through our equity investment in Midwest Gaming has applied for an additional 800 gaming positions as it is permitted to do under the expanded gaming bill. Rivers is currently planning to add approximately 250 positions in the first phase and approximately 550 positions in the second phase of its expansion. The first phase involves utilizing existing space whereas the second phase requires the completion of an expansion of the parking garage and construction of new space for positions and related amenities. Rivers is pursuing renovation efforts and is working with the Illinois Gaming Board to obtain required approvals including a request to commence land-based gaming as permitted by the expanded gaming bill. By the end of the fourth quarter, subject Illinois Gaming Board approval Rivers will add approximately 115 slot machines and eight table games, totaling 144 positions to its gaming floor. Rivers continues to evaluate opportunities to add incremental positions to the existing building's footprint as part of the phase one expansion. Rivers has begun the build out of its sports book, which is expected to open by the end of the fourth quarter, and is planning to apply for a sports betting license also as part of phase one. The sports bar will be converted into a sports book as soon as Rivers obtains approval to do so from the Illinois Gaming Board, though timing of that approval is unclear. Construction of the expansion of the parking garage will commence in early November, paving the way for the Phase 2 expansion of the property. Phase 2 otherwise remains in the conceptual design stages. The $24 million parking garage is expected to be completed by the end of July 2020. The Phase 1 expansion and the parking garage will be funded out of cash and existing credit facility at the joint venture. The third project in Illinois is our joint bid with Rush Street Gaming, our partner in Rivers Des Plaines, for the casino license in Waukegan. Our joint bid was one of three bids submitted by the City of Waukegan to the Illinois Gaming Board. According to the Gaming Bill, the Illinois Gaming Board has 12 months from the date that the bill was signed, June 28, 2019, to award the gaming license to one of the bids forwarded by the city of Waukegan. Our fourth organic growth initiative, which we announced yesterday, is the $100 million hotel, parking garage, and expanded gaming floor at our Miami Valley gaming facility, our joint venture with Delaware North and Ohio between Cincinnati and Dayton. The project involves the construction of a 194-room hotel and a 1,000-car parking garage as well as the expansion of the gaming floor to include an additional 250 VLTs. We are targeting completion in the second quarter of 2021. The Miami Valley Gaming Facility has been a very successful greenfield project since we built it in 2013 and this expansion will support its continued growth in the coming years. It will be financed at the joint venture level which currently has no debt. And last, Our fifth organic growth initiative relates to the expansion of sports betting and iGaming as states continue to legalize it. We are pleased with the impact that retail sports betting is having on our bricks and mortar casinos, both through the returns generated directly by sports wagering on premises and through increased slot and table game play. We currently have two retail operations in Mississippi and one at Presque Isle in Pennsylvania. In addition, we are going to launch retail sports betting in Indiana through our partnership with Rising Star Casino in mid-November pending final regulatory approval. Our BetAmerica online platform went live in New Jersey earlier this year. We have used New Jersey to test our systems and refine our online strategies. It is not a market where we are making any money. I believe there are 18 separate operators as a result of the New Jersey regulations permitting multiple skins for each brick and mortar casino. In this saturated market, some operators are being extremely aggressive with player acquisition offers. Some states may be like this, and where we see that, we will be very careful. If we don't see a way to acquire customers at an amount consistently below their lifetime value, we will not do it. You cannot make up a per cap negative return with volume. We have subsequently reduced our spending in New Jersey right now and will focus our online marketing spending and player rewards in less saturated, more profitable markets. We currently anticipate launching our online offerings in Pennsylvania and Indiana late in the fourth quarter pending regulatory approval. We believe it may take an extended period of time for the online markets, note, not the brick and mortar markets, in each state to become profitable based on the upfront marketing spend needed to acquire and retain online customers. We will be very, very judicious in our spending going forward as we work to build this business over the long term. With all of our greenfield activities and growth initiatives, we've been asked occasionally if we have the organizational capacity to support all of our initiatives. The answer to that question is simply yes. We've always had a strategy of pursuing both acquisitions and greenfield investments, That being said, we did add additional resources to supplement our team over the past couple of years to increase our capacity to build greenfields like Derby City Gaming because we saw that we would have a fighting chance to land several greenfield opportunities. It is working out well for us. We also anticipated the changes to the online and brick and mortar sports environment relatively early and have expanded our team to pursue these new opportunities. Our team is fired up and we feel fortunate to have so many ways to grow the company. Now I'd like to turn the call over to Marcia to provide some additional details on the third quarter and an update on capital management. After that, we will answer any questions you may have. Thank you, Marcia.