Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Charles Hills Towns Incorporated 2021 First Quarter Earnings Conference Call. At this time, all participants are on 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 Zangari, Vice President, Treasury and Investment Relations.

Thank you, Olivia. Thank you, Olivia. Good morning and welcome to our first quarter 2021 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2021 first quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled News. located at ChurchillDownsIncorporated.com, as well as in the website's investor section. Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC specifically the most recent report on Form 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 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. I will comment on our first quarter performance, our capital investment plans, and the upcoming Kentucky Derby. After my comments, Marsha will make her remarks, and then we will open the call for questions. As most of you have seen, we issued an 8 earlier this week in which we announced changes to our segments for external financial reporting purposes to reflect the evolution and growth of our company and to provide further clarity for investors to better understand our operating performance. Our continued growth and evolving plans with respect to historical racing machine developments warrant these changes. Turning our attention to the first quarter, we've completed our preparations for the 2021 Kentucky Derby, which we will conduct with fans in attendance, along with appropriate health and safety protocols. I will provide more specifics on these plans in a few minutes. We worked with industry participants and our government representatives across Kentucky to pass new legislation clarifying the legality of historical racing machines in the Commonwealth, paving the way for the further development and growth of our current venues. and the green light to move forward on potential additional projects. We repurchased 1 million shares of our stock, we placed $500 million of debt at very attractive terms, and we delivered double-digit revenue and doubled our adjusted EBITDA in the first quarter compared to the prior year. In light of the COVID-19 impact that began in March of last year, we also compared our performance in the first quarter of this year to the same period in 2019. Our businesses also delivered double-digit revenue growth and double-digit adjusted EBITDA growth for the first quarter of 2021 compared to the first quarter of 2019. Our net revenues for the quarter were up 28% compared to the same period in 2020 and up 22% compared to the same period in 2019. Adjusted EBITDA was double the same period from last year and nearly 50% higher than the same period in 2019. The keys for us to delivering these results center around our continued long-term strategic focus on growth, despite the short-term disruption of the pandemic, the careful planning around our balance sheet and access to capital, and the quality and focus of our operational leadership teams. More specifically, over the last number of quarters through the first quarter, we sought to protect the long-term value of our iconic asset, the Kentucky Derby, which remains the longest-running annual sporting event in the history of the United States. We planned aggressively but responsibly for the 2021 Kentucky Derby and will accelerate towards a 2022 event with what we expect will be significantly fewer, if any, COVID-related restrictions. We will also further invest growth capital in our facility, which I will discuss a bit later. We sought to position our core assets, our regional gaming properties, for high margin growth coming out of the pandemic by trimming operational expenses, and then adding back cost only when the analytics showed it is accretive to do so. We sought to capture significant profitable growth from the accelerated channel migration with our market leading Twin Spires horse racing business and then retain those customers online as brick and mortar restrictions were eased. We continue to make organic investments in new high growth historical racing and gaming entertainment properties. We demonstrated our stability and commitment to our investors by increasing our dividend by 7%. We repurchased a significant block of shares at a discounted price, creating value for our long-term shareholders. We launched our auction process to sell the Arlington Park land so that we can more effectively deploy this currently locked up capital into high growth projects. And finally, we reimagined our capital investment plans resulting in a new portfolio of organic growth opportunities that will provide profitable growth for the foreseeable future. In short, we didn't want to lose our long-term focus because of short-term challenges, but we also believed we could excel in the short term despite the pandemic. We believe our results demonstrate real strength in strategy and execution. Let's focus for a moment on our regional gaming properties. Our regional gaming properties delivered record adjusted EBITDA in the first quarter, which was more than half of the adjusted EBITDA growth in the first quarter for the company compared to the prior year and compared to the first quarter of 2019. All of our regional gaming properties are now open. Rivers was actually closed most of the month of January, and both Presque Isle and Neema Coleman were shut down the first week or so of January. Regulatory-related COVID restrictions have been meaningfully reduced in all of our locations over the course of the first quarter, although various levels of restrictions still exist for all of our properties, and we will continue to benefit as these restrictions are lifted. The performance of our properties, while still under serious, although steadily declining, restrictions over the quarter, while still under serious, although steadily declining, Restrictions over the quarter was an important component of our company's overall strong performance and a source of optimism as we look forward. Our equity investments in Rivers Casino and Miami Valley Gaming performed quite well in the quarter compared to the prior period, even despite Rivers' closure during most of January, reflecting the quality of these teams and their exceptional locations in large markets. As we discussed last quarter, Rivers is investing $87 million to expand the facility, which will be funded from debt at the River's entity level. 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 target completion is spring of 2022. Rivers will also pay $24 million in licensing fees for the incremental gaming positions and 10 million for its sports wagering license by the end of the second quarter. This project is an exciting one for us, and we believe a very efficient deployment of growth capital. Our wholly owned properties also performed well overall, despite COVID-related regulatory restrictions that severely impacted some of our properties. Marsha will provide more color in a few minutes. The second area of adjusted EBITDA growth in the first quarter came from our Twin Spires horse racing business. Accelerated channel migration throughout the COVID-19 crisis shifted wagering on horse racing to the online channel from brick and mortar facilities. This trend remains a surprisingly strong one. Our horse racing business grew handled by 34% over the first quarter of 2020 compared to a 10% increase in wagering on US thoroughbred races in the first quarter of 2021. Recall that some of our racing was canceled last year in the first quarter, which subsequently returns to the racing calendar this year. We continue to make careful strategic investments in building our Twin Spires sports and casino business. We launched our new GAN and Canby platform for sports betting and casino wagering in Michigan and for sports betting in Tennessee. Our focus is on establishing that our technologies will perform as we scale and then testing our marketing and acquisition strategies to see if they can be deployed efficiently at scale. Our new technology platform has performed very well to date. We transitioned Pennsylvania and Indiana to the new Gann and Camby platform earlier this week. Expect to launch a mobile product in Colorado by the end of this week and to transition New Jersey later in the second quarter. Note that our new segment reporting incorporates our retail sports betting results within our Twin Spires segment to more accurately show our sports betting activities. There are other states that have recently approved new sports betting legislation, including Maryland, where we have a brick and mortar casino. There are additional states that have either passed legislation or are considering new legislation that may be an opportunity for long-term growth in sports betting and online casino wagering. While we appreciate these new possibilities, we remain cautiously optimistic given the long timeframe that exists between legislation, when legislation is approved and when the business can become operational. as well as the ongoing industry-wide cash losses that are accumulating in all of these states that have already implemented sports betting, which has generally been driven by excessive free play, marketing, and brand spend focused on revenue growth as opposed to profitability. We remain committed to and disciplined in growing profitable businesses that create long-term shareholder value. This was our strategy in building our profitable online horse racing business and it remains our strategy in building our sports betting and online casino wagering business. As we identify clear paths to a reasonable return on marketing spend, long-term profitability, and margins sustainability, we will invest appropriately. We believe our and our investor's patience will be rewarded in time in this space. Our commitment to being disciplined in growing profitable businesses is reflected in our investment in historical racing and gaming entertainment properties. As a reminder, it has only been a little over three years since our team announced our partnership with Ainsworth to develop new state-of-the-art HRMs. In September 2018, our team opened our first HRM facility, Derby City Gaming in Louisville, which we built for $65 million. The success of Derby City reflects our ability to develop new products through industry partnerships, invest capital prudently, and build customer demand for a unique entertainment venue. The expansion of HRM game titles to include the best themes offered by Scientific Games and IGT has significantly enhanced our customer entertainment experience. Equally important, Derby City has generated significant purse money for Churchill Downs Racetrack to support the horse racing industry. The increase in purse money has attracted more and better quality horses to our premier Churchill Downs Racetrack and help strengthen the foundation of the entire horse industry in Kentucky. Despite the challenges of the global pandemic, we also completed the construction of our Oak Grove HRM facility and hotel in Oak Grove, Kentucky, that opened in September 2020, and our Turfway Park HRM annex, Newport Racing and Gaming, that opened in October 2020. These three facilities provided a combined $16 million of growth and adjusted EBITDA in the first quarter of 2021 compared to the prior year. Obviously, none of these venues have approached maturity, and they offer us high growth opportunities that we plan to continue to invest in to grow over the long term. We are making good progress in building our Turfway Park racing and HRM entertainment venue. We held the groundbreaking ceremony in March, which was celebrated with the governor of Kentucky, other state and local politicians, and members of the Kentucky Horse Racing Commission. We are on track to open the facility in the summer of 2022. Before discussing our preparation for the 147th Kentucky Derby, I will update you on our capital investment plans related to Churchill Downs Racetrack and Derby City Gaming. As I mentioned on our last earnings call, while the projects at Churchill Downs Racetrack were paused during the pandemic, we used the time to reevaluate a number of evolving factors, including consumer travel trends, especially hotel occupancy and room rates in our region, alternative capital investment opportunities at Churchill Downs Racetrack, that would create new experiences for our customers, including new or enhanced reserve seats, that would generate more immediate and higher returns with less risk, and how to optimize the distribution of HRM facilities in the Louisville market in light of the continued significant growth at Derby City Gaming and the potential for an annex permissible under Kentucky law within 60 miles of Churchill Downs Racetrack, which includes downtown Louisville. Based on this analysis, we've decided to not build a hotel on the first turn of Churchill Downs Racetrack at this time. We may decide to build a hotel at the racetrack in the future, but now is not the right time. We think we have excellent alternative projects that offer better returns on our capital over shorter periods, both at the racetrack and at Derby City Gaming. As a result of this decision, we have developed a multi-year phased set of projects that we believe will create significantly improved experiences for our guests at the Derby, and will generate consistent adjusted EBITDA growth in the coming years for this iconic asset. We are developing the final designs, completing the due diligence, and obtaining firm construction estimates for these projects. We anticipate that the first capital investment would be completed by next year's 148th Derby in 2022, the second project by the 149th Derby in 2023, and the third and most transformative project by the 150 at Derby in 2024. While we haven't gotten firm construction estimates yet, we know these projects are economically viable. We will provide a complete summary of the 148 Derby project at our next earnings call, as well as provide more information on the project to be completed by Derby 149 in 2023. We will also share some of our plans for additional amenities for Derby 150. Please stay tuned. We are excited about what is to come at Churchill Downs Racetrack over the next three years but we are not ready to share our detailed plans today. We are also evaluating options to expand Derby City Gaming. We continue to be very pleased with the growth of this entertainment venue and believe that an expansion with additional floor capacity and other amenities will enhance the long-term growth of this asset. We are in the design phase and obtaining construction estimates. We expect to share these plans at or before the next earnings call. Additionally, we are evaluating an opportunity to build the Churchill Downs HRM annex. Derby City Gaming is demonstrating the strength of our HRM product in the Louisville market, and we believe the market will support a satellite facility that does not materially cannibalize Derby City Gaming. We are excited and confident about all of these projects and view them as likely to deliver strong returns with only modest risks. This is another irony of the pandemic. We stopped our Louisville projects in light of the uncertainty but we have learned so much with the passage of the subsequent time and we will emerge with projects that we will monetize better and quicker. And now I will share some thoughts on the 147th Kentucky Derby that is just a little over a week away. Our team has worked hard in preparing to welcome spectators back to Churchill Downs for an amazing Derby week. For example, we partnered with Norton Healthcare to offer COVID-19 vaccinations at our racetrack for the community around the facility, the backside workers, and our team members. There is growing excitement amongst our team members, our community, and our fans with respect to this year's Kentucky Derby. Everyone wants to get back towards normal, and our iconic event is an important step on that road for our state and region. Derby week will begin with opening night this Saturday evening, celebrating Louisville's vibrant arts community with a variety of musicians, dancers, live performances, visual artists, and of course, horse racing. On Tuesday, April 27th, we will celebrate Champions for Change with a special day of racing commemorating black horsemen and thoroughbred racing and as a public commitment to increasing diversity and inclusivity in the sport of horse racing. On that note, we are excited to launch today the Derby Equity and Community Initiative along with our partners at Humana and the Kentucky Derby Festival. The initiative is a combined effort to incorporate more inclusive events into the Derby season with the intention of better ensuring a sense of belonging with respect to Louisville communities that have historically encountered a lack of access to opportunities. The 147th Kentucky Derby will be held on May 1st, the first Saturday in May. We expect to have sold 40 to 60% of the reserve seating in each seating area, depending on our ability in each area to comply with the Kentucky venue limitations. Guests will be asked to wear masks when they are not eating or drinking. In addition, we will have extra resources dedicated to cleaning and sanitizing high-touch services throughout the week. All of our reserved seats have been sold as all-inclusive to improve our guest experience and to minimize the need for cash handling. We are also selling a limited number of infield-only tickets at the traditional pricing levels to provide a more affordable option to attend as well. NBC Sports Network will provide coverage of the Kentucky Oaks race from 12 to 6 p.m. on Friday, April 30th. NBC Sports Network and NBC Proper will provide coverage of the Kentucky Derby from 12 to 7.30 p.m. on Saturday, May 1st. We have worked tirelessly to make this year's event very special for our guests, and we look forward to welcoming them back to our historic facility. It's going to be a great and very welcome experience for everybody. With that, I will turn the call over to Marcia, and when she is finished, we will open the call for questions. Marcia?