Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated 2020 Second Quarter Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference. Mr. Nick Zangarelli, Vice President, Treasury, Waste Management and Investor Relations.

Thank you, Katrina. Good morning and welcome to our second quarter 2020 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2020 second 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'd 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 10Q are available on our website at ChurchillDownsIncorporated.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. During the second quarter, the global pandemic, COVID-19, has significantly affected everyone in our country and has inflicted harm on the economy and businesses throughout America. Against this backdrop, our team has performed with determination and creativity. We have developed and implemented best-in-class policies and protocols to keep our customers, employees, and communities as safe as we responsibly can during the recent reopenings of our properties. While our second quarter numbers were significantly affected by the closure of our brick and mortar operations and the postponement of the Kentucky Derby, our immediate actions to reduce a broad array of expenses helped to minimize the impact and provided an efficient operating platform for each property upon reopening. Our disciplined approach to leverage and careful focus on managing cash expenses have provided a strong balance sheet to weather this difficult period and will allow us to become an even more efficient and focused company and with a great portfolio of growth opportunities. We are built to sail through this storm and to return to growth. We are excited about what comes next for us. Today, I will update you on four important topics. First, the reopening of our gaming properties. Second, I will share some insights into the growth of our Twins Fires business during the second quarter and our plans for our sports betting and iGaming business within the online wagering segments. Third, an update on our HRM expansion in Kentucky at Oak Grove and Turfway Park. And last, I will discuss the preparations we are making for the 146th running of the Kentucky Derby on September 5th. Then Marcia will walk through the financials for the second quarter and review our capital management and liquidity. After she finishes, we will take your questions. Let's begin with the reopening of our gaming properties. As you can see from our press release, We reopened our two Mississippi properties in May, along with our off-track betting parlors in Louisiana, which have video lottery terminals. We reopened six more of our gaming properties and Derby City Gaming in June. Rivers Des Plaines Casino in Illinois and Oxford Casino in Maine reopened in July. After opening in June, Calder Casino was required to temporarily suspend operations a second time on July 2nd due to an order issued by the mayor of Miami-Dade County to close entertainment venues in a further effort to control the rise in COVID-19 cases in the county. We will continue to collaborate closely with all of the relevant authorities, including those in Florida, to address any health and safety concerns related to our properties, and we'll work to reopen Calder Casino as soon as it is prudent to do so. All of our properties across the country other than Calder remain open. We've also included in the press release the current regulatory limitations on guest and gaming capacity. All of our properties follow various restrictions on the number of customers we can serve at one time and or the number of games that can be operational. We've eliminated a number of amenities at our properties, including buffets and valet services, as well as some of the other restaurant and food outlets. We have also greatly reduced marketing and customer incentives like free play. It is difficult to determine at this point if and under what circumstances these amenities and incentives will return to our properties. We will monitor the competitive dynamics in each of our locations to determine what we need to do in the future, particularly to respond to our competitors. Based on these changes and amenities and staffing needs, as of the end of June, we had brought back approximately 80 to 85% of our total gaming workforce that had been furloughed at our wholly owned properties. With respect to our equity investments in the gaming segment, we reopened Miami Valley Gaming on June 19th, and we have had strong results so far. Although we are very pleased, we haven't elected as of yet to resume our previously announced gaming and hotel expansion at the property. We will continue to monitor the performance of Miami Valley and discuss plans with our partner in the facility, Delaware North Companies. Regarding Rivers Des Plaines Casino, Rivers reopened on July 1st and is performing quite well in light of the current guest capacity restrictions. Illinois passed a new gaming bill in May that provides certain relief for Illinois casinos as they start to recover from COVID-19. The bill reduced our graduated tax rate on table games on July 1st of this year instead of delaying it until the first new casino under the 2019 gaming expansion opened. The new gaming bill also includes delaying the required initial license payment for new gaming positions that Rivers is adding and the related reconciliation payment. These changes are helping us to recover from COVID, maximizing the number of gaming positions we operate, and putting more team members back on the job. Rivers has been working to finish the parking garage which is necessary to support the additional 670 new gaming positions it will add and now anticipates that the garage will be completed in August. Recall that 130 of the additional 800 gaming positions approved in the prior gaming bill were already added within the existing footprint. We do not have any updates on the timing for the additional 670 gaming positions. We will provide more information as soon as the performance of the facility post reopening is clearer and the team has updated our plans. We, of course, will be excited to move forward once the operating environment stabilizes and is well understood. This will bring jobs and revenues to the state and local community. Rivers reopened their retail sportsbook in July when the casino reopened. Rivers was approved to launch the first mobile app for sports betting in Illinois and, despite the limited sports wagering opportunities due to COVID-19, has seen an encouraging volume of new player signups. We are excited to see how the river sports wagering operation performs as sports returns to the American landscape. Some of you have recently asked how Churchill Downs benefits from Rivers Best Plains Casino sports betting in Illinois. As a reminder, we own a little over 61% of rivers and therefore receive 61% of the economics that accrue to rivers with respect to the sports wagering operation. Rivers is responsible for all of the marketing and user acquisition costs and owns the customers for its sports betting operations. Rivers is using a separate standalone company, Rush Street Interactive, or RSI, as its technology and service provider for the player account management system and other related services and pays a variable rate fee to RSI. You may have seen that RSI recently announced that it intends to go public through a merger with a special purpose acquisition company This does not change anything with respect to Rivers sports betting operations or our arrangement with RSI. I noted we utilize RSI for iGaming services for Rivers for which we pay fees, but Churchill does not own any portion of RSI nor is any portion of Rivers Des Plaines Casino owned by RSI. RSI is a service provider to Rivers. We wish them well with respect to their transaction and are excited for them given the market's enthusiastic response. Regarding the new casino authorized by the 2019 Gaming Expansion Bill in Illinois, we remain committed to our proposal to build the new Waukegan Casino in partnership with Rust Street Gaming, our partners in Rivers Dust Plains, if we are awarded the license by the Illinois Gaming Board. Given the anticipated minority ownership interest, Rust Street Gaming's ownership interest, and our local partners' interest, we would anticipate owning approximately 35% of the new casino, the same as Rust Street, with 100% of the debt financed at the Waukegan Casino entity level. This is similar to how Rivers Dust Plains is structured. Switching to our Derby City Gaming property, it reopened on June 8th and is performing very well as are most of our brick and mortar properties. The construction of the second outdoor smoking patio, this one on the south side of our existing Derby City Gaming facility, is still on schedule to open in Approximately 200 additional historical racing machines, including new game titles from Scientific Games and IGT. Next, I will share some thoughts on our online wagering segment. Despite the shift of the Kentucky Derby and the Preakness to third quarter, our Twin Spires business had very strong year over year growth and handle for the quarter, which provided significant operating leverage for the business. Wagering has remained quite strong into the third quarter, and we will additionally benefit from the Kentucky Derby on the Labor Day weekend and the Preakness that is scheduled to be run on October 3rd, both of which are traditionally very large contributors to wagering figures for the quarter in which they are run. Regarding our sports betting and iGaming business, we start with our base of profitable and prolific Twin Spires customers who have demonstrated yet again this past quarter that they will play on our site when we have content for them, even if it isn't the Kentucky Derby. We look forward to broadening our offerings to them as we enter the larger space for sports and iGaming and with our direct access to many markets and a roster of efficient indirect market access fields, we believe we have the foundation of a very special business. We anticipate launching our retail and online BetAmerica Sportsbook in Colorado and Michigan prior to year end and have other states like Tennessee on the horizon for 2021. We remain focused on and disciplined in building a profitable sports betting and iGaming business that will be integrated with our horse racing wagering platform over the long term. We will leverage our team's experience in building the most profitable online horse racing wagering platform in the industry with their extensive sports betting and iGaming knowledge coupled with efficient access to the states we want to be in. Unlike other businesses within the sports betting space today with significant market valuations based on multiples of future revenue, Twin Spires has already proven that it has a successful and growing online wagering platform with substantial revenues and profitability. We hope to improve our speed to market and operational capabilities in all the states that we have market access, which should strengthen our substantial foundation for profitable growth in sports betting and iGaming over the long term. The third subject to update you on is our historical racing machine expansion in Kentucky. With respect to our Oak Grove expansion in southwest Kentucky north of Nashville, Tennessee on Interstate 24, due to the COVID-19 related construction delays, we are now planning to have a soft launch with 1,325 HRMs in mid-September with the combination of Ainsworth Scientific Games and IGT game titles. We expect to have the grand opening of the HRM facility and the 128-room hotel in mid-October. We have restarted the work on the remaining non-core parts of the venue that require small amounts of capital investment, including the equine event center, outdoor concert venue, and RV park, and anticipate that these areas will open shortly after the HRM facility and hotel. With respect to our Turfway Park extension in Newport, Kentucky, we've made excellent progress on this project. Our team has completed all of the site work and the structural improvements needed to the building. We anticipate that the additional interior construction will be completed by the end of September in preparation for a grand opening by early October. This timing will provide two months of operations to generate much-needed purse money for TurfWay Park's December live thoroughbred race meet. The TurfWay Park extension will open with a simulcast area, a gaming floor with up to 500 HRMs, and a bar area, and will create 70 full-time equivalent jobs in the northern Kentucky area. Please note that the number of machines operating at both Oak Grove and Newport could be impacted by additional extensions of capacity restrictions by state officials with respect to COVID-19. I've provided the numbers assuming full capacity. Regarding Turfway Park racing and gaming, we finished demolishing the existing grandstand at Turfway Park in the second quarter, and the racetrack itself, with a new state-of-the-art artificial racing surface called Tapita, will be completed by the end of August. During the second quarter, we completed the architectural design and site development plans. We will begin construction of the new HRM and grandstand facility as soon as we obtain the required permits and complete the necessary site improvements. The updated design reflects a floor plan of approximately 155,000 square feet and includes a simulcast facility, a racing grandstand and event space for groups and banquets, racehorse owner and VIP player accommodations, 44,500 square feet of gaming floor that can accommodate up to 1,200 historical racing machines and three food and beverage venues, including a sports bar designed to accommodate sports wagering in the event it is approved in Kentucky. Based on the finalization of the design for the facility, total project capital for Turfway Park is projected to be approximately $200 million, which includes the Turfway Park acquisition costs and other previously approved capital. This capital investment will be completed over the next 15 to 18 months. The increase of approximately $45 million over previously provided estimates is primarily driven by increased site work requirements and a larger racing and gaming facility. Our team completed an additional analysis of the Northern Kentucky market and believes that the market demographics and competitive landscape can clearly support this level of investment and will generate a strong return on capital for our shareholders. And finally, I'll provide an update on Churchill Downs racetrack and the upcoming 146 running of the Kentucky Derby on September 5th. Over the past several months, as our country has faced both the spread of COVID-19 and the increasing social and racial unrest sparked by the deaths of George Floyd, Breonna Taylor, and Ahmaud Arbery, I've reflected constantly on the role of the Kentucky Derby and the Commonwealth of Kentucky and its importance to the social fabric of our community and the country. For me and our team members, the Kentucky Derby is the essence of what this company does and putting on this happening every year is the single most important contribution that we make as individuals and as a team to our community. It's a labor of love and we are all true believers that it brings something special and unique to our community and state of which we are all so proud. At its essence, the Kentucky Derby is a celebration and an inspiration. Not just to the fans, our community, our state, and our country, but also to those of us whose job it is to make it happen. Most years, we take it for granted that it is both a celebration and an inspiration. I don't think it's the same this year. With all that is going on, it just cannot be the same celebration that it normally is. However, we hope that when we run it for the 146th consecutive year this September, the event will serve as an inspiration and a unifying force. Sports and certainly the Kentucky Derby can do that. It can serve to unite us and inspire us and to remind us of the things and events that bring us together and that we have in common. Ultimately, the Kentucky Derby belongs to our community and our country. It provides a special and memorable reason to come together every year, almost always in the springtime on the first Saturday in May, but this year in September. As we've previously announced, to ensure the safety of our guests, team members and everyone else involved and in close collaboration with state, local authorities and medical professionals, we will have fewer guests this year at Derby. We are absolutely committed to ensuring a safe environment and significantly reducing the size of the crowd is an important step to doing so. We will implement best practices and protocols that we've observed from around the world and we'll make adjustments all the way up to Derby Day itself as we find ways to improve. There will be more announcements on our plans in the coming days and weeks. We have chosen to honor any requests from our suite holders and other guests for refunds or to apply the value of their tickets for this year's event for next year in lieu of refunding their tickets. We have also, when requested, worked with those sponsors who are facing difficult business challenges this year to move their sponsorship dollars to the 2021 Derby. We will protect the long-term relationship we have with our guests and sponsors during this challenging time. That's the way to think about it when we know the Derby will be back next year and every year after that into the foreseeable future. The financial details for this year's Kentucky Derby week will continue to change as we make decisions over the coming weeks. We will provide the metrics right after Derby as we do every year. Since we will have fewer guests and lower sponsorship participation, we will deliver lower financial results this year. This is a year of extenuating circumstances. For those who come to the Derby this year, we promise you that we will make it a wonderful experience, and most importantly, we will make it as safe and comfortable as we possibly can. We will continue to work tirelessly with state and local officials and medical professionals to develop and implement all necessary protocols to provide that safe environment for our guests to come together to celebrate this time-honored tradition. For those of you who cannot attend this year, NBC remains a fantastic partner for us and will be broadcasting the Derby for everyone to enjoy. from the comfort of their homes. It is important to note that our team at Churchill Downs Racetrack has been practicing our operational protocols as we approach the Derby. We completed a successful spring meet, spectator-free, over a period of 27 days in May and June. We were among a very limited number of businesses to open in the first round in Kentucky, and our team worked very, very constructively with the governor's office to earn that privilege. We implemented and enforced the comprehensive safety protocols that we developed in collaboration with the Governor of Kentucky, Andy Beshear, and the Kentucky Horse Racing Commission to protect the health and safety of the many, many people involved who are necessary to run a complex thoroughbred horse meat. This experience is an excellent foundation for the upcoming September Kentucky Derby, now 37 days away. With that, I'll turn the call over to Marcia, and then we'll take your questions. Marcia?