Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated 2020 First 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, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Nick Zangieri, Vice President, Treasury, Risk Management, and Investor Relations.

Thank you, Stephanie. Good morning and welcome to our first quarter 2020 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2020 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 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 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. 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 in 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. Just nine weeks ago, We shared our 2019 year-end results and our growth plans for 2020 and beyond. We talked about the exceptional year we had and we were just as excited as we looked forward. As we've all seen, however, the global pandemic, COVID-19, has changed lives throughout the world and inflicted harm on our citizens, our economy, and companies throughout America. If there's one point I'd like you to understand today, it's this. When the relevant government authorities permit the reopening of our businesses, Churchill Downs will be prepared to do so following all the best in class policies and protocols to keep our customers, employees, and communities as safe as we responsibly can. Our team is determined to attack the challenges imposed by COVID-19 and manage through them with determination and creativity. As the daily routines of Americans changed over the last month, so did the business landscape for our company. Over a period of several days, we closed all of our gaming properties. We also discontinued racing at Turfway Park and Fairgrounds Racetrack, our only two tracks conducting live racing at the time. We elected to keep the backstretch of these facilities open in order for the horses and the people who take care of them to have a place to stay. It was the right thing to do. Prior to closing our properties in March, our company had experienced very strong results. While our final first quarter numbers were significantly affected by the closures of our brick and mortar operations, as will be our second quarter, we immediately took the necessary actions to reduce a broad array of expenses and ensure significant liquidity. With our exceptional balance sheet and careful focus on managing cash expenses, we are strongly positioned to weather this period and will emerge a more efficient and focused company with a strong roster of growth opportunities. Today I'll update you on several important topics and then Marcia will walk you through the financials for the first quarter and provide an update on our capital management and liquidity. Then we will be happy to take your questions. I'll begin with an update on the spring meet at Churchill Downs Racetrack. After careful collaboration with the Governor of Kentucky, Andy Beshear, and the Kentucky Horse Racing Commission, we've developed a series of comprehensive safety protocols under which we will open the backside of Churchill Downs Racetrack on Monday, May 11th, and begin live racing on a spectator-free basis soon thereafter on a date we expect to announce shortly. We are among a very limited number of businesses to open in the first round in Kentucky, and our team has worked very, very constructively with the governor's office to earn that privilege. Racing with spectators and, of course, opening Derby City Gaming will follow as soon as the relevant authorities conclude it is safe to do so. We support their careful and deliberate process and will continue to be active and constructive participants in the development of the appropriate protocols. As a result of the closure of our gaming properties, we have significantly reduced our maintenance and growth project capital expenditures for 2020. We have eliminated nearly all maintenance expenditures except for mandatory items until our properties are reopened. Regarding growth project capital, We have elected to continue investing where it makes sense and stop where the timelines to completion are far out. The bulk of the expense has largely not yet been incurred, or in the case of hotel developments, we need to revisit assumptions regarding the occupancy rates and travel patterns going forward. I will talk about the larger projects one at a time. Oak Grove HRM Facility and Hotel. We are going to finish the historical racing machine and hotel facility at Oak Grove with a planned opening of September 1st, or as soon thereafter as permitted under state and local protocols. We have put the equine event center, outdoor concert venue, and other non-core, still unfinished elements of the build-out on hold for now. We will be incorporating a combination of Ainsworth, Scientific Games, and IGT historical racing machines into this facility when it opens. Turfway Park and the Newport Extension. As you saw in our recent press release, we have received the required approvals to build a simulcast and historical racing machine facility in Newport, Kentucky under what is referred to as an extension of the racing license associated with our Turfway Park facility nearby in Florence, Kentucky. This is analogous to our Derby City Gaming property located close to and associated with Churchill Downs Racetrack. We will build the Newport Extension in an existing shopping center and we hope to open in the fourth quarter of 2020. The revenue generated from this facility will support the purses for future live race meets at Turfway Park. It will open with a simulcast area, a gaming floor with approximately 500 historical racing machines, and a bar area. This creates 70 full-time equivalent jobs in the Northern Kentucky area. As a reminder, The Kentucky Horse Racing Commission had recently voted to amend state regulations to allow for Kentucky licensed racetracks to have a second location to conduct simulcasting and historical racing under certain conditions subject to their approval. Ultimately, the addition of the historical racing machines at Derby City Gaming, Churchill Downs Racetrack, Turfway Park, its Newport extension, and Oak Grove will significantly increase jobs and tax revenues in the Commonwealth increase the purse money for the horses that race at our racetracks, attract more money to be wagered on our races because of the increase in the quality of our racing product, and increase the value of thoroughbreds for breeding purposes, which is all good for the Kentucky horse industry as well as for the Commonwealth of Kentucky. While we are proceeding with the Newport Extension, we will continue with the initial stages of our main Turfway Park historical racing machine facility. Right now, we are demolishing the existing grandstand and will replace the current artificial racing surface with a new state-of-the-art artificial surface called Topedo. We have placed a temporary hold on the continued architectural design phase of the new grandstand and historical racing machine facility while we complete this initial work. We are not surrendering much time from the completion date and certainly it makes sense to balance conserving cash with ordinary course growth capital efforts. We can pause on the design work without losing much time so that we have. As the state opens up and we complete the teardown of the existing grandstand and the installation of the new racing surface, we expect we are likely to pursue the next phase with all delivered speed. Derby City Gaming smoking patio. We also announced that we will be adding a second outdoor smoking patio on the south side of our existing Derby City Gaming facility. that will provide for approximately 200 additional historical racing machines by early fourth quarter of 2020. Our existing smoking patio outperforms the gaming floor, and it is clear we will substantially benefit from more smoking positions. We will be able to incorporate more of the new titles from our two new suppliers of machines, Scientific Games and IGT, through this expansion. We introduced 24 machines from Scientific Games on the Derby City gaming floor in late February and we're very pleased with their performance. Rivers Des Plaines Casino in Illinois. The Rivers Casino is in the process of building a parking garage in connection with the recent authorized gaming expansion allowing for an additional 800 positions. It's already 90% complete. As you might remember, 130 additional positions were added in the fourth quarter of last year to the existing facility. We have now paused on the planning and execution of the expansion necessary to accommodate the additional 670 additional positions. We have also paused on the parking garage, but that is a decision we will continue to think about given it is fairly far along and is a prerequisite to the expansion to absorb the other 670 positions. Miami Valley Gaming. We had previously announced that MVG would be expanding their gaming floor, adding a garage, and adding a hotel. We've put this on hold for now. Churchill Downs Racetrack. We have completed the quarantine barn and medical equine facility. We have also completed the high-end renovation of the sixth floor area, which is next to and comparable to our exclusive mansion area. This new space is called the Matt Wynn Steakhouse and seats approximately 350 people. We've decided to delay further build out of the hotel and historical racing machine facility at Churchill Downs Racetrack until we have better visibility into the full impact of the COVID-19 pandemic on the regional economy and until after we have completed these next two derbies, which will now be run in fairly rapid succession this September and then next May. We remain extremely committed to investing in the build out of Churchill Downs Racetrack. However, we feel it is prudent at this time to pause this investment until we have greater clarity on timing for a return to economic stability. As this is a project where a lot of cash would be going out the door for construction with the revenue from opening still 18 months or more away, it really makes sense from a cash perspective to hold on to the funds for now. Churchill Downs Racetrack Virtual Derby Party and the 146th Kentucky Derby. We announced last week that we have partnered with NBC to develop and host a day-long at-home Kentucky Derby party on May 2nd, the original date for the 146th Kentucky Derby, with the goal of raising $2 million for COVID-19 emergency relief efforts. Viewers of NBC's broadcast from 3 to 6 p.m. Eastern Standard Time will experience the magic of the Derby while revisiting the 2015 Kentucky Derby that began American Pharaoh's historic Triple Crown run. There will also be lots of other updates and surprises during the telecast. The NBC broadcast will highlight Churchill Downs' first-ever virtual horse race, the Kentucky Derby Triple Crown Showdown, a computer-simulated version of the Derby under the Twin Spires, featuring the 13 Triple Crown winners throughout history, with the outcome of the simulated race determined by a random number generator factoring in odds based upon the relative past performances of each horse. Fans can vote on their favorite horse to win at KentuckyDerby.com, enter to win a deluxe Derby hospitality experience, and can make a charitable donation to COVID-19 emergency efforts. The Churchill Downs Foundation will match up to $1 million of charitable donations made by fans related to this event on KentuckyDerby.com. Please watch NBC this Saturday and enjoy what I think will be great fun for everyone. Our team continues to plan and prepare for the 146th running of the Kentucky Oaks and the Kentucky Derby on Labor Day weekend, September 4th and 5th, as we've previously announced. This will mark only the second time in the 145-year history of the event that it has not been held on the first Saturday in May. The other time was at the end of World War II in 1945. NBC has been a great partner throughout the process that led to this change and will be broadcasting the Derby as they normally do every year. Our team relishes the challenge of the September Derby and is deeply committed to holding the very best Kentucky Derby ever and certainly the most unique in any of our lifetimes. September 5th is still four months away. A lot can happen in our country and I expect that it will. We will adjust and respond to whatever the circumstances and will work tirelessly with state and local officials to develop any and all necessary protocols and procedures to make our event a safe and responsible spectator event. The Derby has been held every single year since 1875. Most years it's easy. This year we have to work hard with our state and local leaders to make it everything it can be, and we will do that. The impact of the Kentucky Derby extends well beyond the Twin Spires of Churchill Downs. It is an incredibly important time for the city of Louisville and the Commonwealth of Kentucky, culturally, economically, and with respect to our time-honored traditions. As I said, we are working extremely closely with federal, state, and local authorities as well as leading experts to take all necessary steps to protect the health and safety of all who attend and participate in the Derby. The reopening of our gaming properties. In every state where we have a gaming facility, there are ongoing discussions that will impact when and under what conditions gaming facilities will reopen. We are active participants in those discussions. It is likely that no two states will be exactly the same with respect to timing and operational protocols, but certainly all or most states are studying what others are doing, and thus we are likely to see some commonalities between jurisdictions. We remain optimistic that reopenings are on the horizon, but we do not control this. We only control our participation, preparation, and commitment to the reopening process. When the state and local authorities in our various jurisdictions are ready, we will be ready as well. Before I turn the call over to Marcia, I'd like to share a few brief additional thoughts on our first quarter earnings. One of the things that makes us unique in the gaming space is the diversification of our businesses. Our Twin Spires business within the online wagering segment has grown significantly as more individuals bet online, particularly with so many brick and mortar betting outlets closed and perhaps with fewer entertainment options in general. Even as the number of racetracks that are actively running races has declined, Twin Spires really capitalized. This has been even more true as we've progressed through the second quarter. We have been very pleased, especially since the quality and quantity of racing content has declined. We are excited for Churchill Downs Racetrack to open sometime in May, which will provide a further boost to TwinSpires.com. We have always been thoughtful stewards of our shareholders' investment in our company. We have maintained a capital structure with modest leverage that has provided flexibility to invest in our existing businesses and also to pursue strategic investments to create long-term shareholder value. We are well positioned to navigate these difficult times we now face as a result of the decisions we've made over the past number of years. We have enhanced the diversification of our earnings in our three core segments and created a pipeline of organic investments and greenfield opportunities that will still exist for our company when cities and states begin to reopen for business. We are built to get through this and succeed over the long term. We appreciate all of our team members, customers, partners, and community and government leaders who are working with us through these challenging times. Together, we will reopen our properties again over the coming months and gratefully welcome back our employees and guests. Marcia.