Churchill Downs, Incorporated

fourth quarter in year-end 2020 earnings conference call. At this time, all participants are in a 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 Zangary, Vice President, Treasury, Risk Management, and Investor Relations.

Thank you, Katrina. Good morning and welcome to our fourth quarter and year-end 2020 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2020 fourth quarter and year-end 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-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-K are available on our website at churchildownsincorporated.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. As we begin this discussion about our 2020 results and our expectations for 2021, It is important to take a minute to reflect upon the unprecedented challenges that our country and the world as a whole faced in 2020, stemming from the global pandemic. COVID-19 significantly affected the health and wellbeing of so many people, as well as our economy, our businesses, our guests, and our team members. I am proud of how our leadership team and our team members reacted quickly to the pandemic's threat to our company. Our team took actions to immediately reduce expenses and capital spending, and to redesign our safety and health protocols, which enabled our properties to reopen safely for our team members, our guests, and our communities. And in a very challenging environment, we were able to safely run the 146th Kentucky Derby, maintaining its iconic stature as the longest continuously run annual sporting event in the United States. Going forward, we remain focused on protecting the health and safety of our guests and our team members while we operate each of our properties as effectively and profitably as we responsibly can. Today we will discuss four topics. First, high-level thoughts on our 2020 results. Second, an update on the legislative change related to historical racing machines in Kentucky and the restarting of the capital projects that we had previously suspended. Third, an update on our Twin Spires horse racing, sports betting, and online casino strategy. And last, some thoughts on our growth strategies going forward and our plans for the 147th running of the Kentucky Derby this May. Marshall will then walk through the financials for the fourth quarter in more detail and provide an update on our capital management strategy. After she finishes, we will take your questions. So first, some high level thoughts on our 2020 results. Obviously, we did not achieve the budgeted adjusted EBITDA targets we set for ourselves in 2020. but that was because of the many restrictions and changes resulting from the pandemic. We cannot reflect on 2020 solely using our traditional financial metrics. Through these challenging times, we were pleased on how our teams adjusted our business practices and protocols to conduct our operations. Given the environment, we believe we demonstrated significant financial strength and operational excellence. A great example of this is how our team developed and executed the plans to safely run the Kentucky Derby spectator-free on Labor Day weekend instead of our traditional date on the first Saturday in May. We generated double-digit positive EBITDA for Derby Week even without a crowd and while conducting it during a completely different time of the year when our customers were not used to seeing it. We protected the safety of our community and team members and also protected their reputation, the brand, and the long-term value of this iconic asset. I will share some preliminary thoughts on the 2021 Derby in a few minutes. Regarding our Derby City Gaming HRM property, Derby City Gaming generated more adjusted EBITDA in 2020 than in 2019, despite being closed from the middle of March until the middle of June and operating most of the year with significant COVID-related restrictions. We've added new game manufacturers with the addition of scientific games and IGT. Also, Konami will be submitting for the first time game things for approval at the next Kentucky Horse Racing Commission meeting which will further diversify our HRM offering. We also opened a second outdoor smoking patio with an additional 225 HRMs in early September that has been very well received by our customers. With respect to our other HRM properties in Kentucky, we are pleased with the performance of our Oak Grove facility in Southwest Kentucky, north of Nashville, Tennessee on Interstate 24. The HRM facility opened in mid-September and the 128-room hotel opened in October. The remaining amenities, including the equestrian center, the outdoor concert venue, and the RV park, will be operational this quarter. We opened this property in the middle of the pandemic, but it continues to perform even better than Derby City's comparable opening period. We opened our Newport Racing and Gaming facility in Newport, Kentucky, last year on October 2nd. Newport is performing well in a very competitive northern Kentucky, southern Ohio, and Indiana market, given we opened in the middle of the pandemic. It will take some time and patience to build our customer database and customer loyalty program. We are optimistic because the population demographics are solid, and we have an increasingly competitive product and an experienced team. We will continue to refine our marketing and improve this property as we move forward through the year. It is gratifying for our team that our three HRM facilities have created nearly 600 full-time equivalent jobs for the Commonwealth of Kentucky and have also generated substantial purse money for Kentucky's premier racetracks, which in turn fuels the health of Kentucky's racing circuit and the entire Kentucky horse industry. Turning to our online wagering segment, our Twin Spires horse racing business showed very strong growth in handle over prior year, up 36%. This reflected the shift from brick and mortar bedding to online wagering that began during the closures of most facilities in the March through June 2020 timeframe. There was also a very modest level of increased wagering by our existing players in 2020. These factors together more than offset the impact of slightly lower industry handle in 2020, which was caused by significant race cancellations due to the pandemic. On our third quarter earnings call, we shared some metrics that demonstrate the significant growth trend within this business, including we grew handle 21% in the second quarter compared to the prior year quarter, despite the absence of the Kentucky Derby in May. And we grew handle 69% in the third quarter compared to the prior year quarter with the Kentucky Derby held in the third quarter of 2020 versus the second quarter in 2019. And now in fourth quarter, Our Twin Spires horse racing business grew handle 45% compared to the prior year quarter, and the number of active players increased by 50%. This is the third quarter of double-digit increases in handle compared to the prior year quarter and is a testament to the organic growth potential for the business. It is a very profitable business based on pair mutual wagering that in 2020 generated nearly $127 million in adjusted EBITDA, up $48 million or 62% compared to the prior year, and with more than a 30% margin for the year. This growth in online wagering and horse racing is a trend that has continued into 2021. Wagering on horse racing on Twin Spires has remained strong through January and into February, and all of our important metrics continue to reflect a healthy growing platform. Regarding our online sports betting and casino business, We are still transitioning from our initial technology provider to Gann for player account management and Camby for managed trading services. While disruptive, we believe this change in technology providers is critical to our long-term success. We've completed all of our retail sportsbook migrations and early indications show high double-digit handle growth across our retail footprint since migration. We launched our first online Twin Spires branded sportsbook and casino offering on the new platform and Michigan, along with the first wave of operators in the state in early January. We are targeting a launch in Tennessee on our new platform within the next month and will complete the transition of our existing online sportsbook and casino operations in other states to the new platform by the end of this quarter, including rolling out the mobile app in Pennsylvania and Indiana upon receipt of regulatory approval. We intend to roll out our mobile and online sports betting platform in Colorado prior to the Kentucky Derby. While the online sports betting business operates at a loss at this time, we will continue to invest in this space. The real size of the EBITDA opportunity will play out over years and not quarters, and thus we are focused on very carefully developing our business model for the long term. I will talk more about our growth strategy in this space in a few minutes. Regarding the performance of our regional gaming properties, all of our gaming properties are open. Rich Kedzior, Rivers desk planes Presque Isle and nema colon were shut down for a second time for part of November and December 2020 and reopened in early January 2021. Rich Kedzior, While all of our properties still have some level of capacity or other operating restrictions are Oxford Presque Isle and Calder casinos are the ones most meaningfully impacted currently by state and local record regulations. Rich Kedzior, Performance will improve at those facilities substantially as restrictions are lessons. Our other properties are performing strongly despite various levels of capacity or other limitations, and we expect these properties to continue to improve as we get further into the year. We are maintaining ongoing safety and health protocols at every property to ensure the safety of our guests, our team members, and our communities, and we will do so for as long as necessary. Overall, we are pleased with our gaming segment performance in 2020, despite the lower adjusted EBITDA generated by our properties due to the impact of the pandemic. Our wholly owned casino margins, excluding the parts of the year that the casinos were closed due to the pandemic, were up significantly from the prior year. We continue to see the benefits from the systemic reduction in marketing and customer incentives, like free play, as well as the elimination of a number of amenities. Certainly, we are glad 2020 is behind us, and I'm very grateful to our leadership team, our team members, and our guests who have supported our company and helped us stabilize, improve, and even grow some of our businesses in the midst of an unprecedented global health crisis. The second topic today is an update on the legislative change related to historical racing machines in Kentucky and its impact on our capital projects in the state. On Monday of this week, Governor Beshear signed into law a bill recently passed by the General Assembly that significantly clarifies the definition of parimutuel wagering, including its application with respect to historical racing machines. A Kentucky Supreme Court decision issued this past September had created some uncertainty around the Kentucky Racing Commission's interpretation of this definition. Although the Kentucky Supreme Court ruled on the legality of a specific manufacturer's historical racing machines and did not address the games of any of the manufacturers we deploy at our facilities, the horse racing industry in Kentucky worked closely together with the General Assembly and the governor to codify clarifying language to eliminate any potential ambiguity with respect to the legality of historical horse racing machines under Kentucky law. This was a really important initiative for the Kentucky horse industry. And we are very appreciative of the leadership and hard work of the governor and the general assembly. We are also happy for all of our constituents, including the horsemen and the many other participants in and fans of the horse industry who encourage their respective elected representatives to support this important bill to protect the thousands of jobs across the Commonwealth and HRM facilities and directly and indirectly in the horse industry. We are also pleased for our guests. who vigorously voiced their opinions to their elected representatives so they could continue to enjoy the Commonwealth's HRM facilities as they had chosen to do over many years. We've already restarted the construction process for our Turfway Park Racing and HRM facility and are targeting a grand opening in the summer of 2022. We have suspended the significant capital project because of the uncertainty when COVID first hit last year and then later until the Kentucky General Assembly had an opportunity to review the Kentucky Supreme Court decision. We anticipate spending approximately $145 million in project capital to finish building this premier facility that will deliver approximately 800 construction jobs and 400 full-time permanent jobs in the Northern Kentucky area, as well as revitalize the Kentucky Winter Thoroughbred Racing Circuit. With respect to Churchill Downs Racetrack, We have used the past 12 months while we navigated the pandemic and worked to pass the HRM legislation to revisit our plans for a hotel and HRM facility at the track. Before suspending activity when the pandemic hit, we had completed all of the underground utilities and a handful of site prep projects. We spent approximately $15 million of the $300 million of capital that we had approved for this project. We are finalizing our revised plans that we believe will be just as impactful and exciting for our customers and community. We believe we can and should do the project more cost effectively as we reimagine each of the three elements of the overall project, a hotel, an HRM facility, and expanded permanent seating hospitality. There is really a fourth element to consider as well, which is the potential future expansion at Derby City Gaming. This facility has really performed well since opening and, in particular, showed its growth potential throughout last year. We're not ready to discuss our revised plans today. We need more time to reflect on all that we've learned. You can expect to hear more from us in the next couple of months as these plans are solidified. Next, an update on our Twin Spires horse racing, sports betting, and casino business strategy. As I previously said, Twin Spires is a very profitable, high-margin operation with substantial revenue and adjusted EBITDA growth that is enabled by its pair mutual wagering model, relationship with the Kentucky Derby and Churchill Downs Racetrack, and long-deployed, disciplined customer acquisition approach. It performed very well in 2020 and has started very strongly in 2021. In January, based on the strength of the Twin Spires brand, we announced our decision to rebrand our online sports and casino business from BetAmerica to Twin Spires. Changing our sports betting and online iGaming business to Twin Spires will allow us to better leverage the Kentucky Derby, our database of horse racing, wagering customers, and other cross-selling initiatives to lower customer acquisition costs and enable clear product positioning and differentiation from competitors in the online sports and casino space. The combination of our improved technology stack along with our rebranding should help provide much improved execution in the space. We are pleased with our initial results in Michigan, which reflects a much higher percentage of online casino handle that we anticipate will be more profitable over the long term than sports betting for us in this state. So far, Michigan is better than we thought it would be for us with respect to customer acquisition costs and player performance data. We will stay focused on building a profitable online sports betting and casino business that operates efficiently with a variable cost technology model and that grows based on disciplined marketing spend and bottom line profitability goals. This industry is still in the early stages with many participants pursuing maximum market share and top line revenue in every state with limited regard for short term or potentially even long term profitability. We don't want to do that and view this space as one in which the mature business model, and its related margins will not be settled for several years as opposed to a number of quarters. Our strategy is based on our experience building a successful and profitable online horse racing betting platform, keep acquisition costs low, and leverage our online horse racing database and the Kentucky Derby, retain customers over the long term with economically viable player reinvestment and exceptional service, and be willing to walk away quickly from market share when the model doesn't work. We have a lot to prove in this space and we believe we'll start doing that in 2021. Next, I will provide some thoughts on our other growth strategies going forward and our plans for the 147th running of the Kentucky Derby in May. We believe our gaming properties are well positioned in their markets. Our regional markets have been resilient during the past year. We will continue to monitor and adjust as we see the need for changes. Some of the restrictions around hours of operation and capacity limitations are being removed with the improvements in the COVID positivity rates. We believe patron restrictions and other limitations will apply to our casinos and HRM properties through the first half of 2021 and will be gradually lifted in the second half, assuming that COVID cases continue to decline based on the increasing availability of vaccines and other factors. We've optimized our cost structure at our properties for these assumptions to maintain industry-leading margins in 2021. We are anticipating some competitive pressures in 2021 to our Harlow's property from the new permanent casino in Pine Bluff, Arkansas that opened in October 2020, and to our Nima Coleman property from a new casino east of Pittsburgh that opened in November 2020. We also anticipate continued organic growth for each of our three HRM properties in 2021, and especially for Oak Grove and Newport, which are just getting started. We are maintaining a disciplined approach with respect to our maintenance and project capital and our wholly owned gaming properties in light of the current environment. Marsha will provide more detail in her comments about our 2021 capital plans. Regarding our equity investment in the Rivers Des Plaines Casino, we recently announced that the team at Rivers is moving forward with a more capital efficient construction plan to expand the gaming floor. As you will recall, Rivers has approval to increase their gaming positions from 1,200 to 2,000 based on the May 2019 Illinois gaming legislation. Rivers had previously added approximately 77 of these positions to its existing floor to the extent there was space. Rivers plans to invest $87 million, which will be funded from additional debt financing at the River's entity level. The expansion will be built between the existing casino building and the recently expanded parking garage on the north side of the property. The first floor of the new area will provide an expanded gaming floor and will include a new restaurant. The second floor will feature a 24-table poker room, a 10,000-square-foot ballroom for private events and live entertainment, and a slot machine gaming area. The expansion will accommodate approximately 725 gaming positions based on a combination of new slot games and table games, resulting in the facility utilizing its full 2,000 positions permitted under current law. The Rivers team will begin construction this spring with the target completion by spring of 2022. Rivers will also pay $24 million in licensing fees for the incremental 800 gaming positions. This project is an exciting one for us, and we believe a very efficient deployment of growth capital. Regarding the Waukegan Casino proposal, the Illinois Gaming Board announced that they are continuing to work on hiring an investment banking group to evaluate the three proposals. It's unclear whether the Illinois Gaming Board will be in a position to announce their decision regarding awarding the license in 2021. Regarding the proposed downtown Chicago casino, the City of Chicago has not yet put out a request for proposal. We anticipate that that will be a lengthy proposal process and we will update you periodically when it makes sense going forward. We announced this week that we are initiating the sales process for the Arlington Park Racetrack Land. We will conduct racing in 2021 at the track while moving forward with the transaction to sell this highly desirable land for other non horse racing, mixed use options. It is our intention to work constructively with state and local authorities to find a solution to continue thoroughbred operations in Illinois. And we, we look forward to further constructive dialogue as we explore alternatives. I'm optimistic that the state and local authorities are interested in finding a path forward with us. And last, we are working hard on the preparations for the 147th Kentucky Derby, which will be run on May 1st, 2021. We are currently planning to sell our seated areas at approximately 40 to 50% capacity and may offer some amount of general admissions tickets when we are a little closer to the date. We may adjust our ticketing plans as we see further improvement in the circumstances surrounding the pandemic. We plan to deliver an exciting Derby Week experience for all of our guests And we hope to see some of you there. We won't be all the way back this year, but we'll certainly expect to do much, much better in all categories than 2020 and plan on delivering an amazing experience that will blow our customers away. In summary, we are grateful to all of our leaders and team members, business partners, our guests, and local communities who helped us weather the challenges we faced last year. We were pleased to restart the capital and growth projects that we had put on hold. We look forward to continued significant organic growth at Derby City Gaming, Oak Grove, and Newport in Kentucky, and Rivers Casino Des Plaines in Illinois. We also look forward to the immediate construction of Turfway Park and the reimagining of our plans in Louisville around Churchill Downs Racetrack. I'm also excited about what we may accomplish in Illinois, as we just discussed. Online organic growth is our objective as well. Across all of our businesses, our teams are are determined to deliver long-term profitable growth along with the best possible total shareholder return for our investors over the long term. Our balance sheet is very strong and provides us the opportunity to make acquisitions, to fund our organic growth, to pay dividends, and to make strategic share repurchases. We have demonstrated our ability to deliver on all of these fronts. With a great portfolio of future growth opportunities, some of which we discussed today and others that we are working on and will discuss when appropriate, We have significant access to capital to support our initiatives. As we emerge from the challenges of the pandemic, 2021 is a transition year, but one where you can see we are firmly on track with good things on the immediate horizon. With that, I'll turn the call over to Marcia, and then we will take your questions. Marcia.