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spk10: 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.
spk01: 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.
spk03: 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.
spk02: Thanks, Bill, and good morning, everyone. This morning, I will share some thoughts on our 2020 performance, including some additional detail on fourth quarter. Then I will provide an update on our capital management strategy and our 2021 plans. As I premiered my remarks for today, I looked back at my quarterly earnings comments from last year. On our first quarter earnings call last year, I began my comments by stating that our leadership team has always had a commitment to maintaining a strong balance sheet with relatively low leverage in relation to others in the gaming industry. and a capital structure that provides flexibility to support organic growth and enable our business to be nimble through different economic cycles. Our strong balance sheet, relatively low leverage, and flexible capital structure proved to be a critical fortress that enabled our company to navigate the challenges that were thrown at us in 2020. Our leadership team's quick actions to reduce our cost structure, preserve capital, and provide additional financial resources in response to the unprecedented pandemic crisis reflected the resilience necessary to weather these difficult times. I want to personally thank our leadership team and team members for their commitment and dedication in the face of such incredible adversity. Turning to our financial results, there were three significant factors that impacted 2020. First, the closure of all of our brick and mortar gaming and HRM properties in our horse racing operations for certain periods of time in the year as a result of the COVID-19 pandemic. We were impacted in the November and December timeframe as a result of the temporary closure of Rivers, Displains, Prescott Isle, and Mimicolon, as well as some additional restrictions at a few of our other properties. All of our properties have been open since the middle of January, and we have seen some restrictions being lifted at our properties. Our team aggressively reduced expenses and was able to generate significant margin improvements year over year when the properties reopened. For 2020, excluding quarterly results for properties that were closed during a quarter, the margin for our wholly owned casino properties was up 690 basis points. Second, we ran the 146th Kentucky Oaks and Derby without any spectators on Labor Day weekend instead of the first weekend in May. And as Bill highlighted, the team was still able to deliver double-digit positive EBITDA for Derby Week while protecting the long-term iconic value of this incredible asset. And last, our Twin Spires business benefited from a significant increase in the level of online wagering on horse racing. As Bill discussed, the closure of most brick-and-mortar betting locations caused wagering on horse racing to shift from these brick-and-mortar locations to online in second quarter. In prior periods, online wagering on horse racing represented 35 to 40% of all wagering on horse racing. In second quarter of 2020, we saw this increase to approximately 75%. And then as various betting locations reopened in the third quarter, we saw online penetration of 64%. The diversity of our portfolio of businesses enabled us to still generate over a billion dollars of revenue and $286.5 million of adjusted EBITDA, despite the unprecedented challenges that we faced in 2020. Regarding our fourth quarter results, adjusted EBITDA of $79 million was up over $5 million, or 7% compared to the prior year quarter, as a result of the strong growth from our Twin Spires horse racing business, our new Oak Grove HRM facility, and from Derby City Gaming. This strong growth was partially offset but the impact of lower adjusted EBITDA for our gaming properties and the Churchill Downs racetrack due to the ongoing patron capacity restrictions, as well as the closure of River Sus Plains in November and Prescott Isle in New McClellan in mid-December for the remainder of the year. Regarding our Twin Spires horse racing business, the fourth quarter of 2020 was the third year in a row we grew handle by over $100 million compared to the prior year quarter. the business grew quarter-over-quarter handle by $100 million in the second quarter, $254 million in the third quarter, and $141 million in the fourth quarter. This growth in handle has translated directly and reliably into record levels of adjusted EBITDA for this business. And last, regarding fourth quarter, excluding our Presque Isle and Nima Colon properties that were closed for a portion of December, our wholly-owned casino margin increased 570 basis points compared to the prior year period, despite lower net revenue. We remain disciplined regarding our competitive offerings at each property. Turning to capital management, in 2020, we spent $23 million on maintenance capital, primarily related to capitalized labor-related improvements to our Twin Spires horse racing technology platform and mandatory items at our gaming properties. For 2021, we anticipate spending $50 to $60 million on maintenance capital, of which about half is targeted for our gaming properties, primarily driven by our deferral of spending in 2020. We also anticipate spending the majority of the remainder on replacing the turf course at Churchill Islands Racetrack and on continued improvements to our Twin Spires horse racing technology platform. Regarding project capital, in 2020, we spent $211 million on Project Capital, of which more than half was spent on the Oak Grove facility. The balance of the Project Capital was spent on the Matt Wynn Steakhouse project and the Quarantine Barn at Churchill Downs Racetrack, the build-out of the Newport Racing and Gaming facility, the grandstand demolition and site preparation at Turfway Park, and the additional smoking patio at Derby City Gaming. For 2021, we anticipate spending $150 to $160 million on project capital, of which approximately half is planned for the build-out of the Turfway Park atrium facility that Bill discussed, and the final completion of a few caregiver projects related to Oak Grove and Newport, as well as some smaller capital projects that are gaming facilities. The balance of the 2021 project capital is a placeholder for the potential capital expansion plans at Churchill Downs Racetrack that Bill also mentioned. We will provide more detail on this project in the future, when the revised plans are more fully developed. At the end of December 2020, we had net leverage of 5.5 times, reflecting primarily the lower level of 2020 adjusted EBITDA as a result of the pandemic. We were compliant with both of our revolver covenants for each quarter in 2020, even though we have a waiver of these covenants through the reporting period for second quarter of 2021. A few weeks ago, we repurchased 1 million shares of our stock for $193.9 million from an affiliate of the Dutchess Law Group that we funded with our revolving credit facility. We're also planning to pay $124 million related to the Cater and Thiemegaardic settlement near the end of March. Therefore, we anticipate raising a combination of secured and unsecured debt in the first half of this year, primarily to repay the outstanding balance on our revolving credit facility. This will provide flexibility to use our revolving credit facility for opportunistic growth over the coming year. We appreciate the support of our bank group and debt holders who recognize our proven track record of disciplined growth. Their support enabled us to continue to invest in strategic organic growth projects and to pay a 7% higher annual dividend to our shareholders and to strategically repurchase a large block of our shares in early 2021. We anticipate that our net leverage will decrease over the balance of 2021 and in 2022 as our businesses return to full throttle and we accelerate the growth from our newer properties over the coming years. In closing, we are in a unique position of having many opportunities support our long-term growth. As Bill mentioned, 2021 is a transition year for our company as we anticipate the gradual lifting of the restrictions on our properties throughout the year as we begin to return to a more normal and magical Kentucky Derby. As we look beyond 2021, our outlook reflects the acceleration of organic growth at Derby City Gaming, Oak Grove, Newport, as well as the expansion at Rivers Des Plaines. We're also expecting to begin to see the benefits of growing our online wagering segment through the expansion of sports betting and iGaming, leveraging our Twin Spires brand and customer base on a state-by-state basis. We will also see additional growth in our adjusted EBITDA from the opening of TurfWay Park and additional expansion projects at Churchill Downs Racetrack. With that, I'll turn the call back over to Bill so that he can open the call for questions. Bill?
spk03: Thanks, Marcia. If any of you have any questions, and I expect you do, fire away. We're here to take them.
spk10: Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Dan Pollitzer from J.P. Morgan. Your line is open.
spk08: Hey, good morning, everyone, and thanks for taking my questions. So, first, I was hoping we could touch on the HRM facilities and how you think about the opportunities set within Kentucky. Obviously, Oak Grove wind per unit there has been improving the past few months. I think it's up to 220. Newport is still kind of ramping, and Derby City has been absolutely impressive in, I think, over 450 days in January. So, you know, how do you think about the opportunity and the ramp across these facilities? And I guess where do you see the most upside from here as you think about that?
spk03: First, good morning, Dan. So the product's getting better and better. And that's one of the most exciting things about this opportunity. The product's getting better. More manufacturers are interested and are participating. And that's giving us a more competitive offering. So I'm excited about that. I think our team's excited about that. And of course, when you look at taking them one at a time, In no sense was the Louisville market or Derby City Gaming mature when the pandemic hit. So we have the natural ramp up, even in our facility that we've had the longest. It hasn't been that long, but it's still our oldest facility. And when you think about Oak Grove down on the Tennessee border, which is going to pull out of the Tennessee market, in particular Nashville, we're just getting started there. And we've started during a period – where there's been the pandemic, and that's clearly hindered the start path, but even with that hindrance, it started so well for us. So we have a couple factors that are really good to have. One is we have an improving product and a pathway to see improvements in the product. We have a new product, and also our facilities are new and in no sense immature. markets or mature facilities. So we feel pretty good about those, and we have some of our best and brightest in the company focused on those properties to drive them forward.
spk08: Great. And how do you think about the margin opportunity at Oak Grove relative to Derby City, given it's a little bit more of a full offering down in Oak Grove?
spk03: Great. You hit it on the head. I think the margins will be nice. It's a very efficiently built facility, and I think that's something we're good at when we get the opportunity to do greenfields. We're very focused on efficiency and margins. But that one has a hotel and some other amenities, and while those are good things to have and they drive a bigger business, they can also lower your margin because the business they drive doesn't have quite the same margins. So the margins on HRMs in Kentucky have been solid. how we've built and operated our facilities as opposed to any natural other advantage at play. That's a testament to our team and their careful approach to building an efficient property. But when you have a situation like we do in Oak Grove where we want to drive people to visit us from, in particular, the Nashville market. So we're asking them to go.
spk10: Apologies about that. One moment while we reconnect the backup speaker line. All right, presenters, the backup speaker line is now connected in the main room. You may proceed.
spk03: Thanks. I'm sorry, everybody, if we dropped you for a second, but when I heard that beep I was just wrapping up my comment on on the Nashville market and the desirability of having more amenities so we can get people to get in their cars and drive a little bit further distance to visit us than they do in our other markets. So I don't think you missed anything. And, Dan, if you have any follow-ups, fire away. Yeah, just one more.
spk08: No worries. Just one more kind of switching gears into the sports betting and iGaming stuff. Obviously, valuations have continued to rise. There's been a lot of robust growth. I mean, I guess as we think about your footprint here, it does seem like being a first mover does have some advantages. And while certainly you're being measured in your approach, how do you kind of weigh the pros and cons of being a little bit more conservative on the marketing side at this stage Um, you know, as you think about the longer term opportunity and, you know, with the goal of obviously this being a material contributor to your, to your business.
spk03: Well, we, we have to weigh those things very, very carefully because obviously there are a lot of smart people out there that talk constantly and put their money where their mouth is, who believe that first mover advantage is the be all end all and a must have. So we have to respect the views of those folks. And, um, I think in our case, uh, We don't want to play it that way. We have a balance sheet that we treasure, that's been important to us, that we think about all the time. And we don't want to compromise it in a universe where the ultimate business model at play here, in terms of margins and player reinvestments, is something that's going to be determined over years and not quarters. So there's a lot of risk of being wrong. So we took all those inputs and said, well, what we need to do for our company is demonstrate a very quick pathway to profitability and don't chase share and don't chase size, chase profitability. So everything we do in this company is built on a short time frame and a conservative time frame on when we think we can demonstrate profitability and that'll be our model designed to keep us in the game long term and we'll be more aggressive when we're more sure about about the returns we can drive. And if we're not sure about the returns we can drive for our shareholders, then we sit on the sidelines and we wait until we are sure. And the risk on that is you lose first mover advantage, and not everybody out there can follow the same strategy, and first mover advantage is not the strategy that can be an advantage for us. Although now that we have our technology platform, I don't think we're disadvantaged in terms of our offering, but we're just not going to chase player acquisition costs the way others are and, and we'll see how it sorts out over time.
spk08: Got it. Understood. I appreciate all the thoughtfulness and the color there. Thanks.
spk03: Thanks.
spk10: Your next question comes from the line of Finn Barrett from back of America. Your line is open.
spk07: Thanks guys. And good morning. Congrats on the great quarter. Just wanted to, uh, touch quickly on some of the trends you're seeing so far in 2021 across both the regional gaming portfolio and the HRM facilities in Kentucky, just how those are going compared to maybe third quarter when we saw some of the better demand in 2020 and any expectations for returns, especially around the older demographic in your database.
spk03: First, welcome, Finn. Good morning. So the pandemic really obviously still really affects American commerce and it affects everybody, including the older demographic in terms of their willingness to take trips. So I think a real driver for all our properties, whether they be mature properties or newly opened properties, is going to be when are people vaccinated and comfortable and otherwise willing to return to their normal patterns of behavior. And I think that's something that we'll see develop over 2021. And that's That's why I use the year that this is a transition year. We can't go full throttle and won't go full throttle at all our properties because we're still in a bridge time period where things are getting better, it appears, with respect to the pandemic. But we're not out of it, and it is something that affected all avenues of American commerce, including our brick-and-mortar facilities. And that's the big driver. And I think that's the most important driver. And it's so important, it sort of overwhelms other things. But I guess if I had to do another one, I'd say, you know, clearly the last few weeks have been weather impacted.
spk04: Yeah, I would say, Ben, it's a lot of noise going on. This is Bill Mudd. Between third quarter, fourth quarter, and the first quarter. Third quarter, obviously very big. There was probably some pent-up demand. Coming out of the second quarter, everything was shut down. fourth quarter fell off a little bit, and that's really driven by new constraints put on casinos by certain states. January came back to be very strong again, and then February hits and we hit ice and snow and a few other things. So in terms of people coming back, it's very gradual. I think we're at the beginning of the vaccination, really it's still at the beginning of the vaccination process, and I think that will continue to to drop people back to the sites as they become more available.
spk07: Thanks guys. That's super helpful. And then switching gears a little bit to the online opportunity, it would just be great to hear on the Twin Spires side of things, some of the player activity and behavior you are seeing in the quarter and what you think that means in terms of durability of that demand in this opportunity. And then as well, when we think about Michigan, Be curious if you guys saw any uplift from the Twin Spires database with the rebranding of the app compared to some of your markets where you're still BetAmerica. And your plans as you roll the Twin Spires brand into new markets, if we can expect to see kind of a essentially relaunch, for lack of better terms, in terms of marketing and customer acquisition under this new brand, or if it's more kind of a subtle stealth rollout.
spk04: Okay, Tim, there's a lot of questions there, so let me try to take them kind of one at a time. I'll tell you, first of all, on the value of the new cohorts that are coming into Twin Spires, the value of those cohorts are higher than what we've traditionally seen. And I think some of that's driven by the fact that, you know, they're sitting at home and working from home, and, you know, if there's a, you know, pick six or a pick five they want to play during the day, they're able to do that much more easily. So the value of those cohorts are generally higher. They're somewhat younger, but we're also seeing a lot of the older group coming in there as well. So in terms of continuing, I think once people sign up for an account and they have the access to that account, they're going to continue to play. But I do think that there are certain people that when they're at the racetrack, they don't put money through the window. So I think we'll keep a good chunk, a huge chunk, I think, of the folks that have decided to go online. But I think some of that will continue. A small portion of that will go back to the windows if and when, or should I say when, racetracks reopen for live folks to be there. In terms of Michigan, this is the first time we've launched in a jurisdiction where we have, one, an active Twin Spires database along with an app that works, a mobile platform that works, an onsite offering, albeit in the Upper Peninsula in Michigan. But, you know, on the new technology platform. And what I can say is our conversion rates under our new platform are much higher. The retention and stickiness of keeping those players is much higher. And the value of the player is much higher. So we've been very happy with that. I think that gives us a lot more confidence around what the long-term value of these players will be versus what we had seen before. Our casino offering on the new technology stack is vastly improved from where we were. New Jersey and Pennsylvania and Indiana, excuse me, New Jersey and Pennsylvania, where we currently operate, certainly have an app that keeps those conversion rates and keeps that stickiness higher. In terms of cross-selling, yes, we've converted a number of players and actually aren't seeing our expectations of Twin Spires customers in Michigan, so we're very happy and excited about that. So far, we're very positive on Michigan. We can see a path to profitability. CPA seemed to be very reasonable, and so far succeeded our expectations.
spk07: Really appreciate it. No problem.
spk10: Your next question comes from the line of Joe Stoff from Susquehanna. Your line is open.
spk09: Good morning, everyone. Thanks for taking the call. I wanted to ask about... the canceled races, you know, in 2020, I guess roughly about 25% of the races, I guess, were canceled or that was about, I guess, 7,500. What is, you know, if you can help educate me on the right way to think about how some of those races kind of repopulate above and beyond just sort of the normal kind of, vaccination rate sort of sequence or expectation. How do you think about maybe when a chunk of those could reoccur this year? Just wondering about that.
spk03: Sure. So I think generally you'll see in 2021 return to the racing calendars that you saw in 2019 and the years prior to that. 2020, a lot of races were lost, as you just described, because many jurisdictions, including Kentucky, weren't allowed to conduct racing for a portion of the year because of the pandemic. Now, when that happens, some of the demand for wagering on horse racing just shifts to the racing that is available. So you have a couple different factors going on. One of those factors is people want to... want to wager online, and they find races that are there. Now, those races perhaps are not the same quality of races, or the races are typical. They typically bet on, but there still is content. So some of the demand shifts to whatever product is available, and then some of the demand goes away because people can't find what they were actually looking for. So it would take an economist to really unpack those factors to understand exactly how much of one factor versus another we saw in 2020 and what we'll see in 2021. But certainly it is not helpful to handle and not helpful to the game when we lost the extent and the quality of races that we lost in the second quarter next year. So it's good to have them back. And I think that's a tailwind in general for our business in 2021.
spk09: I see. I see. And I wanted to ask maybe, well, I could take this offline. This might be a little specific, but like, Given the extent, given the growth and online in particular, does that drive purses up high enough such that the demand can be created for additional races, or is it just primarily just a function of, like you said, a jurisdiction that prohibited racing given COVID?
spk03: I'll answer that at a pretty high level because it's a bit of a complicated topic, but You know, more wagering out of profit is an indication of interest in a particular race, and the more wagering you have creates additional interest in the race because the pools are bigger and the opportunities, particularly around the exotic wagering, are better. But I think the nexus or the connection between the size of the purses and the wagering is really has been fundamentally altered in many jurisdictions across the country because of alternative funding mechanisms. Basically, casino gaming has impacted a lot of the purses. So access between the two is theoretically true, but there's so much going on that I really would disconnect... I would disconnect them for purposes of this conversation, the nexus between wagering and purses. So when you see a lot of wagering, so slightly different twist I'm taking you towards on this. When you see in wagering, there's more interest in the wagering product because it creates more opportunity for sophisticated bettors and others to come in and find opportunity for value. So that's a more important point. than I think between majoring in the cyber force.
spk09: Understood. That makes sense. And then maybe two specific questions. You know, Bill, you had talked about possible expansion of Derby City Gaming. Were you referencing maybe the satellite facility that I think you have flexibility to create, maybe something like Newport, or would that be on the existing, you know, sort of building?
spk03: Really, really, there is a possibility for a satellite facility, but as Bill and I have talked recently over the last couple weeks, Derby City Gaming has just become this juggernaut, and we have to make sure that we maximize that and make it everything that it can be. So watching its performance over the last year has really been fairly stunning. And we want to make sure that that property is everything in and of itself that it's supposed to be before we rush forward with an idea of what else we should do at the racetrack. And that's even before we get to the idea of the satellite, which is clearly additional opportunities in Kentucky attached to each of our licenses.
spk09: I see. One last question and just kind of thinking about your digital business. You talked about sort of the launch sequence that you have largely in the first half. Looking at your portfolio, you're likely to have a skin in Maryland when let's say they issue the rigs and so forth. So I guess theoretically you could launch in Maryland at some point later this year. Are there any other say, market access agreements that you'd be interested in to get yourself into states that you don't have a skin in, whether it be gaming, whether it be OSB?
spk03: We generally have followed a policy of not publicly disclosing our market access deals until they're ripe. So we have a fairly robust operation to explore and obtain market access deals where we don't have direct access. The state you just mentioned, Maryland, we actually have a facility there. We have our Ocean Downs facility. So that's not one where we need market access through a third party. But in states like Michigan, where we're launched and we were talking about a few moments ago, that's an example of where we obtain market access through a third party. And we work on that, too. It's just we follow the policy of not of not disclosing each and every one of those until they're ripe for disclosure.
spk09: Okay. Thanks very much.
spk03: Okay. Thank you.
spk10: Your last question comes from the line of David Katz from Jefferies. Your line is open.
spk06: Hi. Good morning, everyone. Thanks for working me in. I wanted to, if I may, just go back a little farther on the digital strategy. Taking in all of your commentary as well as some of your answers, I'd love to just have a clearer definition of how you're looking at success in this. Should we ultimately expect that you will be in most states that are meaningful one way or another? Is it something that we should be thinking about actual profits and This year, right, presuming there is some investment, moderate investment acquired and entering new states, is next year the year where we start to see some, you know, meaningful EBITDA. You know, if you could just paint us a little broader picture, not asking for guidance, of course. I appreciate it.
spk03: David, good to talk to you. There's a lot to unpack there, so I'm going to make a broad comment, and then Bill's going to talk about some of the specifics, because there are a number of specifics that you took us towards there. First, our metrics around this business are totally profitability-driven. That's how our company is valued. That's how we're driven. That's how our company's been built, and that's the best way for us to look at this space. So the overarching commentary is profitability is the only thing we're interested in, and pathway to profitability is the only thing that matters when we talk about this opportunity. Now, as we dig down through that, you hit a bunch of topics. Bill, please.
spk04: Yeah. So, David, I think a lot of the topics you hit was relative to when do we become profitable, and I think that's a really, really tough – question to answer and for a number of reasons. One, you know, we really, while we've been operating in Indiana, Pennsylvania, New Jersey, we haven't been operating under a technology stack that allows us to retain customers and to convert customers as they come on board. Actually, I should have said that backwards, convert customers. So when we go acquire someone and they actually fund their accounts, that's the conversion rate. Under our new technology, the conversion rates are much higher, much, much higher than we used to have. So we're excited about that. And then retain those customers. So if we don't have an app in places like Indiana and Pennsylvania, it's hard to keep those customers on your platform if the only place they can wager is on your PC. So those factors play a very, very large role in the long-term value of that customer. So we've got a lot of experience with Twin Spires and even our days in Big Fish. Bill and myself and our team, understanding the value of the long-term value of a customer versus the cost to acquire that customer. So as long as we can continue to acquire customers where we know the value, the long-term value of that customer exceeds what we're paying to acquire that customer, we're going to continue to spend marketing dollars. And then the marketing dollars obviously come in the form of both branding, which is the which is kind of what we call above the line. So people knowing that what the Twin Spires brand is, that's a big reason we converted from Vet America to Twin Spires, because Twin Spires has a lot of that equity value, and it lowers our user acquisition cost, kind of that cost per click acquisition. So in terms of when do you become profitable, we'll continue to spend marketing dollars in places like Michigan and Colorado and Tennessee and New Jersey, Pennsylvania, and Indiana, as long as we feel that that long-term value exceeds the cost to acquire, comfortably, the cost to acquire those customers. And with the new technology stack, we're seeing much better LTVs that we'll build confidence in over time. And so far, the CPAs in Michigan using the Twin Spires brand are lower because there's more brand equity there to start with. So short answer is we're going to continue to chip away and deliver a great product and grab customers as long as that CPA remains low. Then the timing of states, obviously. We talked about Tennessee, New Jersey, Pennsylvania, Indiana, Colorado. We also have Maryland, as I believe Joe mentioned, and we also have Louisiana, which is in the middle of writing their legislation. There's lots of of activity in this space and the more upfront expense there will be. So I can't give you a definitive answer on the profitability question.
spk06: Should we expect you to at least endeavor to get into the larger states that seem to be moving somewhere in New York, Texas, right? Are those on the board?
spk04: Of course, as long as it's a reasonable cost to get into it. Yes, Bill, do you want to add to that? No, that's good.
spk06: Okay, thank you very much.
spk03: Thanks, David.
spk10: I am showing no further questions at this time. I would now like to turn the conference back to Mr. Bill Garstangian. Thank you. I apologize about that. We just had another question from Mr. Brett Andrus from KeyBank. Your line is open.
spk05: Hey, thanks for squeezing me in, too. Just, Bill, hoping you can give us some more insight about on how you're thinking about reimagining the Churchill Jones racetrack expansion. So, I mean, is that something where you're going to allocate more dollars to HRM, maybe less to accommodation, amenities, things like that? If you could just help us with the factors that you're paying the most attention to.
spk03: First, Brett, thanks for joining us on the call and happy to squeeze you in, of course. So there's not a lot more that we can say today. today's call because we're not ready to say it but some of the factors we're looking at really go to the robustness of the HRM product and we're best to deploy here in Louisville what the best hospitality offering is at the racetrack itself how to think about the hotel was some of the disruption that we've seen in the hotel industry across the United States in the last 12 months Those are all things we're looking at, and we have a really good handle around those things. We're just not ready right now on this call to get into them. But we really break up the project really into those three dimensions, but there really is that fourth dimension, which has been the strong performance at Derby City Gaming. So we're still figuring out how those four pieces fit together, and I'm confident by our next earnings call we'll be much – more definitive in our plans for you.
spk05: I appreciate the color. Thank you.
spk10: All right. I'm showing no further questions at this time, sir. I turn it back to you, Mr. Bill Kirsten.
spk03: Thanks, everyone. As always, we appreciate your interest in our company and your support. and we'll try to make sure we always do the right thing. I feel great about the company. I'm very excited, and I'm very pumped up about the upcoming Derby. Things are getting better out there, and I'm excited for our team as they finalize their plans for that event. It'll be much, much stronger than it was last year as we go through this transition back to normalcy, which isn't quite there yet in 2021, but hopefully on the horizon. So thanks very much for your support. We'll talk to you next time, and be safe. Thank you.
spk10: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.
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