Churchill Downs, Incorporated

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

Thank you, Katrina. Good morning and welcome to our third quarter 2020 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2020 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. 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 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 Carstangen.

Thanks, Nick. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer, Marcia Dahl, our Chief Financial Officer, and Brad Blackwell, our General Counsel. We view our overall results for the third quarter very positively. both with respect to our expectations prior to the quarter and last year's results for the comparable period. Our third quarter results were strong, not just because the Kentucky Derby was in it, but because of the strength of all of our businesses. Our focus in the quarter was on operating all of our properties under our strict safety and social distancing protocols against the continued backdrop of the COVID-19 pandemic. Every single one of our brick and mortar facilities is impacted by regulatory and operational changes because of COVID. Our team's ongoing challenge is to protect the safety of our customers and our team members while we operate each property as effectively and profitably as we responsibly can. We were successful in doing this in the third quarter and are confident we can build on this record of safety and efficiency going forward. Our balance sheet remains strong as we weather this difficult period in our country with a great portfolio of future growth opportunities. Today I'll discuss three topics. First, we'll share more specifics on our third quarter results. Second, we'll provide an update on our historical racing machine projects in Kentucky. And last, I will provide some preliminary thoughts on the fourth quarter of 2020 and 2021. Then Marcia will walk through the financials for the third quarter in more detail and provide an update on our capital management and liquidity. After she finishes, we will take your questions. First, some thoughts on our third quarter results, starting with our Churchill Downs segment. Back in early May, when the Kentucky Derby is traditionally run each year, live horse racing had not yet resumed in Kentucky because the governor had imposed limitations regarding public gatherings due to the pandemic. We elected to move the Kentucky Derby to Labor Day weekend in September. We had hoped that we would have spectators at this year's Derby, but the pandemic has continued to significantly affect virtually every aspect of life in America even as we speak today. While running the Kentucky Derby on Labor Day weekend and spectator-free had a significant impact on our financial results this year compared to prior years, it was our best option and allowed us to run the event in a manner our customers could see was responsible and appropriate to protect the safety of fans and team members, as well as protect the long-term value of this iconic asset. So while this was a difficult decision, it was the right one, and now we look forward to 2021 and beyond. Our financial results for the Derby were significantly impacted by the loss of ticket revenue, fewer sponsorships, and lower wagering on the Derby itself and the races in general during Derby week. The wagering was approximately half that of last year as a result of several factors. One, rescheduling the event to a non-traditional date confused and lost us many of our casual fans for the year. Two, the lack of on-track wagering locations meant customers did not have available their traditional outlet for participation in Three, there were fewer horses per race because of a variety of factors connected to the change in the time of the year and because travel restrictions imposed by some states effectively hindered the racing plans for many elite horses. And four, there were unusually heavy favorites in many of the races this year, in fact, at a level I don't recall seeing in my many years of following Churchill Downs and the Kentucky Derby. We appreciate our partnership with NBC, and although viewership was lower than we always see in the first weekend in May, The Derby race was the most watched sporting event on Labor Day weekend since 2017 and had 20% more viewers than the most watched sporting event on last year's Labor Day weekend. And yet with all these challenges, our team was able to generate double digit adjusted EBITDA at nearly 50% margin for Derby week. Ironically, in many ways, the Kentucky Derby showed its strength as a unique and special asset in the face of all the extraordinary headwinds COVID-19 created this year. It's a great economic engine. Marshall will walk through the Derby results in more detail, and I will share some preliminary thoughts on the 2021 Derby in a few minutes. Regarding our Derby City Gaming property, we celebrated the two-year anniversary of the opening of the facility in September, and based on its performance to date, we've essentially realized a less than two-year payback. On September 3rd, we opened a second outdoor smoking patio, this one on the south side of our existing facility. The new 8,000 square foot patio resulted in a net addition of 225 historical racing machines. Turning to our online wagering segment, our Twin Spires business within this segment had very strong quarterly growth in handle over prior year, driven only partially by Derby Week being rescheduled from second quarter to third quarter this year. Primarily, the growth was driven by handle outside of Derby Week. I note that even without Derby in the second quarter this year, the second quarter actually grew handle 21%. In the third quarter, the most recent quarter, Twin Spires grew handle approximately 69%. When the second and third quarters are taken together, you get a sense of the strength, growth, and future that Twin Spires has. Overall, Twin Spires more than doubled the number of active players in the third quarter compared to prior year. Excluding Derby Week, we saw a 40% increase in active players and a 10% increase in handle wager per active player in the third quarter of this year compared to prior year. While wagering on the Kentucky Derby and other races at Churchill Downs Racetrack during Derby Week was roughly half the total of prior year, Mike Nygren, twin spires handle for the week across all tracks was still up approximately 3% over prior years derby week, even with the 23% decline of active players for that week. Mike Nygren, That is a testament to the true organic growth, the business is demonstrating. Mike Nygren, wagering has remained strong through the month of October and all of our important metrics continue to reflect a healthy growing platform. Our online sports and iGaming business outside of Twin Spires remains a drag on the EBITDA of the segment at this time, but it is a big part of the future. I will talk more specifically about this in a few minutes after we are done talking about the third quarter. Regarding the performance of our regional gaming properties, all of our gaming properties are currently open. We are operating at each property safely under strict operational and regulatory protocols. We have included a summary of the current restrictions by property in our press release. Calder Casino was closed approximately two-thirds of the quarter because it 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 response to a surge in COVID-19 cases in Miami-Dade County. We worked closely with all the relevant authorities to safely reopen Calder Casino on August 31st. We continue to be hampered by severe operating restrictions at Oxford Casino in Maine. I mentioned Calder because the regulatory restrictions at these two properties were so severe that the teams could not overcome them in any meaningful way through operating adjustments. Fortunately, Calder has now reopened. In general, our wholly owned casino margins continue to benefit from the reduction in marketing and customer incentives like FreePlay, as well as the elimination of a number of amenities including buffets and valet services, as well as some of the other restaurant and food outlets. We will monitor the competitive dynamics in each of our locations and currently do not see a need to modify our offerings for the foreseeable future. Overall, we were very pleased with the performance of our gaming properties through another difficult quarter. With Newport and Oak Grove now open and ramping up, we see growth in the immediate future. With respect to our Oak Grove expansion in Southwest Kentucky, north of Nashville, Tennessee on Interstate 24, We held the grand opening of the HRM facility in mid-September, and the 128-room hotel opened on October 15th. It has 1,325 HRMs, 1,000 of which are operational right now, with a combination of Ainsworth, Scientific Games, and IGT game titles. There are a few smaller capital investments remaining for the venue, including the Equine Event Center, outdoor concert venue, and RV park that we are finishing and plan to open before the end of the year. We recently purchased the remaining outstanding minority equity interest in our Oak Grove venture for approximately $3 million from the Keeneland Association, and we now own 100%. Oak Grove will create approximately 400 full-time equivalent jobs for the Southwestern Kentucky region. We held the grand opening on October 2nd of our Newport Racing and Gaming Facility in Newport, Kentucky. This is a legal extension under Kentucky law of our Turfway Park Racetrack. It opened with 500 HRMs and a simulcast area. We are pleased that this facility will create 70 full-time equivalent jobs in the northern Kentucky area and will also generate much-needed purse money for Turfway Park's live thoroughbred race meet that begins in December. Regarding the Turfway Park HRM and grandstand project, we have temporarily paused the construction of this facility. In late September, the Kentucky Supreme Court issued a decision concerning the legality of a company called Xacta's HRMs under Kentucky law. While we do not have any exact HRMs at any of our facilities and therefore are not directly impacted by the Kentucky Supreme Court ruling, we feel it is prudent to refrain from further significant capital investment until the Kentucky legislature has an opportunity to review the decision and the technicalities in the current law during the legislative session starting in early 2021. We appreciate the support of Governor Beshear, the Kentucky Horse Racing Commission, and many legislators on both sides of the aisle who are actively reviewing and discussing this decision. While the Kentucky Supreme Court decision was technically a narrow one, we anticipate that the Kentucky legislature may consider revisions to the relevant statute in the first quarter of 2021. It appears there is a broad recognition that it is important and necessary to address any ambiguity to protect the thousands of jobs created by the horse industry the purse money that is generated for the benefit of the horsemen and the downstream Kentucky breeding and related farms, and the millions of dollars in annual tax revenues that are generated by HRMs for funding various programs in our state. And last, I will provide some preliminary thoughts on fourth quarter 2020 and next year. Regarding Churchill Downs Racetrack, Our simulcast facilities at Churchill Downs opened on October 1st, and we are pleased that we are able to run the 24-day fall meet, which started last Sunday, with spectators. We have already begun preparations for the 147th Kentucky Derby, which will be run on May 1st, 2021. We do not anticipate moving off our traditional date of the first Saturday in May. We are starting with the assumption that we will limit the number of reserved seats to 40 to 50 percent of capacity, and we will delay selling any general admissions tickets which do not come with seats until we are closer to the date of the Derby. We do not sell many general admission tickets this far out from the event in any case. If and as the circumstances surrounding the pandemic improve, then we will sell more reserved seats and consider selling general admissions tickets. We remain paused on building the hotel and HRM facility at Churchill Bounds Racetrack until we are past the pandemic and can again model the future with more certainty. This is just being prudent with our shareholders' capital. We will provide an update on our next earnings call at the end of February. Our Derby City Gaming, Oak Grove, and Newport properties are all on a stage of organic growth, and obviously this is particularly true for Oak Grove and Newport, which we just opened this quarter. That's very exciting for us. We believe our other properties are well positioned in their local markets and these markets have been quite resilient so far. We will continue to monitor and adjust as we see the need for changes. We do anticipate that substantially similar patron restrictions and gaming limitations will apply to our casino and HRM properties into next year. Our team has done a very good job of optimizing our cost structure to maintain industry leading margins through these difficult times and will continue to do so in 2021. Any improvements in macro conditions will be upside. Regarding our sports betting and iGaming business, the Twin Spires business is having another strong year and is consistently delivered for a long time. Twin Spires is a very profitable high margin platform with substantial revenue and significant adjusted EBITDA growth that is enabled by its parimutuel wagering model, relationship with the Kentucky Derby and Churchill Downs Racetrack, and long-deployed, disciplined customer acquisition approach. We are well-positioned to broaden our online offerings to our customers as we enter the larger states for online sports and iGaming. We have direct access to many markets with our brick-and-mortar casinos and a roster of efficient indirect market access deals. Our BetAmerica sports betting and iGaming business will also provide the opportunity to introduce others to wagering on horse racing. Right now, 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. Long term success for us will depend on growing in a disciplined manner based on our strengths, which start with our commitment to operating efficiently with careful marketing spend and bottom line profitability. We recently announced new agreements with Gann and Camby, who will be providing the technology and managed trading services for our sports betting and iGaming platforms going forward. We believe they will improve our speed to market and operational capabilities and provide a more substantial foundation for profitable growth in sports betting and iGaming over the long term. When we have our technology where we need it to be, we are confident about what we can do in each market we enter. Our initial technology choices just did not provide us the reliability and confidence we needed to invest in this space, but it's been helpful to watch the strategies of others who have been active to better refine our own approach. Again, we will be disciplined and careful as we move forward. Finally, a few quick updates regarding the Rivers Casino Des Plaines gaming floor expansion. The Rivers parking garage expansion is now completed and the team is working on the preliminary design for a revised expansion that will allow Rivers to add 450 to 500 additional gaming positions to the existing casino floor. As we've discussed previously, Rivers has already added 130 of the 800 additional positions allowed under the 2019 gaming bill. We have not decided when to start construction, but it could start in early 2021 and be completed by the end of 2021. We will continue to monitor the market and any impact from the pandemic. As you may have seen this week, because of an increase in locally reported COVID cases, Rivers will close from 11 PM to 9 AM each day until further notice. This is a regulatory requirement. Regarding the Waukegan Casino proposal, we remain committed to our proposal to build the new Waukegan Casino in partnership with Rush Street Gaming, our partners in Rivers Des Plaines, if we are awarded the license by the Illinois Gaming Board. It is unclear when the Illinois Gaming Board will announce their decision regarding awarding the license, but it will not be this week. We will update you as we learn more. Regarding the Downtown Chicago Casino proposal, Rush Street Gaming and Related Midwest submitted a response to a request for information issued by the City of Chicago. Some of you may have seen recent press about this process. The City of Chicago has not yet put out a request for proposal. Should Rush Street Gaming and Related decide to respond to an RFP when issued, we may decide to be a minority equity partner in the proposed casino along with them with the debt finance at the casino entity level. We anticipate that this will be a lengthy proposal process and we will update you periodically when it makes sense going forward. There is no more to be said publicly at this time about this, but I felt I should mention the topic as there are press reports out there. In summary, we had a strong quarter and are demonstrating we can operate effectively in a difficult environment. We are well positioned to weather the ongoing challenges and are remaining disciplined in our capital investment to ensure that we deliver the best total shareholder returns for our investors over the long term. We remain poised to deploy growth capital and believe there will be good opportunities to do so. Our balance sheet is very strong. To that end, our board of directors approved a 7% increase in our annual dividend this past week. This is the 10th straight year of a dividend increase. With that, I'll turn the call over to Marcia, and then we'll take your questions when she's done. Marcia?