Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2021 Second Quarter 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 Zangheri. Vice President, Treasury, and Investor Relations.

Thank you, Katrina. Good morning and welcome to our second quarter 2021 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2021 second quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call including information required by Regulation G, is available at the section of the company's website titled News, located at churchildownsincorporated.com, as well as in the website's investor section. Before we get started, I 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 10-Q are available on our website at ChurchillDownsIncorporated.com. And now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstangen.

Thanks, Nick. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer, Marcia Dahl, our Chief Financial Officer, and Brad Blackwell, our General Counsel. I will provide brief comments on our second quarter performance, and then I will share some updates on our capital investment plans for Churchill Downs, Derby City Gaming, and our other growth initiatives. After my comments, Marsha will provide more detail on our second quarter performance. Then we will open up the call for questions. Regarding our second quarter results, overall we delivered the highest net revenue and highest adjusted EBITDA for the second quarter that we have ever generated in any quarter in the history of our company. despite running the 147th Kentucky Derby and operating our gaming properties with a variety of COVID-related restrictions. We were very pleased with the overall results of the Kentucky Derby, which we ran under significant state mandated capacity restrictions. Instead of our typical 150,000 to 170,000 fans, we welcomed approximately 52,000 back to Churchill Downs Racetrack. At the time of its running on the first Saturday in May, our event represented the largest number of fans to attend a sporting event in the United States in 2021. As you saw in the press release that we issued after the Derby, wagering from all sources on the Derby Day program was up 85% to $233 million, and on the Derby race itself was up 96% to $155 million compared to 2020. This was not quite back to the previous record set in 2019, but was very close and still represents the second best all sources wagering numbers of all time. Given the capacity restrictions at Churchill Downs Racetrack and at brick and mortar facilities across the country, we were very, very pleased with that. Twin Spires generated record handle of nearly $63 million on the Derby Day program, up 66% over 2020, and record handle of nearly $41 million on the Derby race alone, up 75%. To put this in further perspective, Twin Spires handle on the Derby Day program was up 29% and handle on the Derby Race itself was up 35% compared to the previous records set in 2019. We are grateful to our sponsors of the Derby who remain so committed to the event throughout the pandemic, as well as our NBC partners. We, along with NBC, were extremely pleased with this year's nearly 16 million average viewers marking a 54% increase over the 2020 Kentucky Derby. Up through the date of the Derby, the television audience topped all entertainment award shows for the first time ever and marked NBC's most watched broadcast since the NFL Divisional Playoffs in January. As we look towards the 148th Kentucky Derby in 2022, we see extremely strong ticketing demand and with the projects we will touch on shortly, feel a great deal of optimism for the future of this iconic event. Our HRM facilities in Kentucky performed very well in the second quarter, with Derby City Gaming delivering record net revenue, record adjusted EBITDA, and record margin. Our Oak Grove HRM facility also performed very well in the second quarter. The team opened the amphitheater and equestrian center, delivered strong double-digit sequential growth in net revenue and adjusted EBITDA, and expanded margins, all records for the quarter. Regarding our Newport Racing and Gaming Facility, we decided to create two distinct areas within the facility. The new area will be designated smoking, and the existing area will remain smoke-free. We plan to build the Newport Gaming Facility for approximately $38 million and came in under budget. We are utilizing the remaining capital we had not previously spent to lease and finish out nearly 13,000 square feet next to the existing gaming floor. We are relocating 150 of the existing HRMs into the new smoking area to create a more spacious environment, and we are also adding a new bar area. This lease expansion also provides additional parking and improves our outdoor signage. We expect to have the project completed in late November of this year. The success of our HRM facilities in Kentucky reflects our ability to develop innovative new products through industry partnerships, invest capital wisely, and build customer demand for a unique entertainment offering. The addition of HRM game titles and cabinets from Aristocrat, IGT, Scientific Games, and Konami will enhance our customers' entertainment experience beyond our strong original offering of Ainsworth titles. Equally importantly, we have generated a significant increase in purse money to attract more and better quality horses to Churchill Downs Racetrack, as well as to our other racetracks, which helps strengthen the foundation of the entire horse industry in Kentucky. Regarding our Twin Spires horse racing business, as I mentioned earlier, we benefited from the return of the Kentucky Derby to the first Saturday in May, in contrast to last year when the Kentucky Derby was delayed until September. As a reminder, the majority of our annual marketing budget for Twin Spires is always spent around the Derby. Derby Week enables us to inexpensively acquire a significant number of new customers, driving down our cost per install, which is a key metric for us. This year, Derby Week set many all-time records for Twin Spires horse racing, with a record number of unique players and a record number of first-time depositors compared to last year's pandemic year, when there was little opportunity to access the Derby other than online. However, user acquisition and CRM spending is a drag on our second quarter EBITDA because we cannot recapture all of the spend in the same quarter. We should recover the spending over the next three quarters, which is less than a one-year payback on the investment. It is actually very encouraging that we are able to deploy more user acquisition and CRM dollars than ever before during this year's Derby Week. We spent $7 million more than last year and $3 million more than second quarter of 2019. This spend grew our customer base, which we believe will fuel our growth in the future. Given the second quarter of last year was in the heart of the pandemic and the Derby had to be moved to September, comparisons to the second quarter this year can get confusing. It's clear when we compare this year's second quarter to 2019. Revenues for Twin Spires horse racing were up 33% and adjusted EBITDA was up 42% over 2019. Regarding our Twin Spires sports and casino business, we launched our app under the Twin Spires brand in Colorado, Pennsylvania, and Indiana during the second quarter, following a launch in Michigan and Tennessee in the first quarter. Given the additional marketing spend to support the launch of our apps in these states, we had a net loss of adjusted EBITDA of $11 million in the quarter for this business. We remain careful and patient in our ongoing build-out, and we hope you recognize as long-term investors that the disciplined approach we are taking today will pay off. We will efficiently expand our footprint and grow the business slowly over time with disciplined acquisition and marketing spend, which will enable us to maximize the potential value of this business in the long term. Even though football season is approaching and depending on the pace of final regulations, we may see launches in a couple of new jurisdictions like Louisiana and Maryland. We believe the loss from this business in the second half of the year will be similar to the first half. Turning to our gaming segment, our gaming segment delivered all time record levels of net revenue and adjusted EBITDA. Our wholly owned gaming properties continue to generate high margins coming out of the pandemic, including nearly four percentage points of sequential margin expansion and over 10 percentage points of margin expansion compared to the same quarter of 2019. We are pleased with our regional gaming properties performance and we believe we can maintain these higher levels of margins for the foreseeable future. Our equity investments in River Casino and Miami Valley Gaming also performed quite well in the quarter compared to the prior periods and reflected the exceptional locations of these facilities in large markets. Both properties delivered all time records for net revenue, adjusted EBITDA and margins. Across our segments, The key to delivering these results center around our continued long term strategic focus on growth, our focus on building and acquiring high quality properties, making smart capital investments in our existing properties, careful planning regarding our balance sheet, and the quality and focus of our operational leadership teams. Our company has a track record of delivering long term total shareholder return and exceptional organic growth opportunities. We have a unique set of assets in each of our segments that we believe will continue to fuel strong growth in the coming years. There are three groups of capital investment projects that will further transform our company over the next five years. The first set of projects involves the multi-year expansion at Churchill Downs Racetrack to provide once in a lifetime experiences for our guests as we approach the 150th running of the Kentucky Derby in 2024. We are excited to announce three new multi-year projects that we believe will generate consistent adjusted EBITDA growth with nominal levels of risk. The first project is the home stretch club. We plan to invest approximately $45 million to transform the section of the grandstand area that is adjacent to the winter circle suites and below the jockey club suites. This area includes the bleacher seating that is adjacent to the track rail. Guests who are in these dated first and second floor bleachers previously had access to very old first floor concourse area under the jockey club suites that is not air conditioned and has limited amenities. Based on feedback from our customers, we have reimagined this section to create several new reserve seating products. This area offers a wonderful view of the starting gate for the derby, a superior view of the track's big board, and of course, a bird's eye view of the home stretch as the horses thunder to the finish line. We will also transform the former first floor conic horse into a special hospitality club that will create an air conditioned space for guests to gather in between races to place a bet, enjoy the all-inclusive food and beverage offerings, or enjoy other high-end amenities and activities. The outdoor portion of this project, replacing the bleachers, will include several new premium seating offerings for approximately 3,500 guests. These will consist of trackside lounges that are adjacent to the track rail and will provide a courtside seat experience, terrace dining tables that will offer covered outdoor dining positioned close to the racetrack, stadium-style cushioned seating, and private hospitality rooms that are available as an upgrade for guests seated in any of these new areas. While the total number of seated patrons will decrease from 5,200 in the current configuration to 3,500, in this case, less is more. The significant improvement in amenities will drive commensurate increases in ticket prices. Displaced customers who do not wish to upgrade will have other options, including what I will outline in a moment. We anticipate that the Homestretch Club will be completed in time for the May 2022 Derby. The second multi-year capital project is the Turn 1 seating expansion. In past years, we have built a temporary structure on the first turn at the track that accommodated 3,400 guests. This area has historically been a customer favorite as it offered an introductory price point and includes great views of the first turn and the big board. Our Turn 1 seating expansion project will replace these 3,400 seats with 7,100 new permanent seats for a total investment of approximately $90 million. This new area will create two distinct ticket offerings for our guests. The first area will add 2,000 new premium dining seats inside a new 50,000 square foot first floor hospitality venue. This area will provide a slew of upgraded amenities for these guests who will also have access to a reserved trackside terrace on the track rail to view the races and other signature moments throughout the day, including watching the horses walk over to the starting gate for the Derby. This project will also add covered stadium seating for 5,100 guests who will have access to all-inclusive food and beverage offerings on two new elevated concourses built behind the new stadium seating sections. This project will take longer to complete than the Homestretch Club, and we are therefore planning to have this open by the May 2023 Derby. Both the Home Stretch Club and the Turn 1 project will offer personal seat licenses. There will also be opportunities for sponsor naming rights, partner activation footprints, and special event sales to generate additional revenue over the long term. The combination of these two capital projects will result in a net addition of 1,750 high-end reserve seats And more importantly, due to the conversion to all-inclusive premium seating, we believe that net revenue for these two areas combined will be substantially higher than it has been in recent years. The third multi-year project involves an expansive redesign of the paddock area, including the areas underneath and adjacent to the historic twin spires. In addition to introducing new and innovative seating experiences, This project will reduce congestion by significantly improving the flow of guests through the paddock and plaza areas. We are so excited about this project because it will enhance the overall experience for nearly every guest who comes to our racetrack. We are still in the early design phase of this project, which we are tentatively planning to debut for the 150th anniversary of the Kentucky Derby in May 2024. We will provide updates on this project on our earnings calls going forward. One last note on Churchill Downs Racetrack. Our new turf course is on target for completion later this year. The new turf course will have a wider running surface, greatly increase the durability of the race course, and improve the safety for our equine athletes and jockeys. In general, turf racing generates more wagering per race, and we should get more races and a better quality, more predictable surface with our new additions. Our $10 million investment is a further indication of our confidence in our racing and wagering product and an investment in the growth of the Kentucky Derby. Second group of capital projects are the organic investments we are making in new high growth historical racing and gaming entertainment properties. Our commitment to being disciplined and growing profitable businesses is reflected in our organic investment in these entertainment venues. We have five unique HRM growth opportunities that are underway, including expanding our Derby City Gaming property, developing another HRM facility in Louisville, executing the growth plans at our Oak Grove property, building out the HRM facility at Turfway Park, and expanding our OTP network in Louisiana to include HRMs. Regarding our Derby City Gaming property, We continue to be very pleased with the growth of this venue and believe that additional expansion and other amenities will further enhance its long-term growth potential. We will be investing approximately $76 million to expand the property, including the addition of a five-story, 123-room hotel. The project will add 41,000 square feet of new gaming floor space and will initially accommodate 200 new HRM game positions. a new VIP gaming space, and a new sports bar and stage for live entertainment. This area will also include a new restaurant and bar that will provide a variety of food and beverage options for gaming and hotel guests throughout the entire day in order to better serve and attract guests. It's clear that Derby City is working, and we will invest where things are going well. Our Oak Grove HRM and hotel venue is still in the very early stages of maturity, and should provide ongoing growth as we expand our marketing to draw more customers. We estimate that we are less than 15% penetrated in the Nashville market, and our win per unit per day is already exceeding our expectations for this early in its maturation cycle. We believe there is significantly more opportunity for growth from this property. We are also working on an HRM annex facility in connection with our Churchill Downs racetrack license that will add additional HRM gaming positions in the Louisville market. We are not yet ready to announce the specific location of this facility, but we confirm that it will not be at the racetrack itself and will be designed to capture more of the downtown and tourist market. We will share more details over the coming weeks as our plans are finalized. We think now is a great time to invest in our hometown and that it will be a win-win for our community and Churchill Downs. Our investment and build out of our Turf Way Park racing and HRM entertainment venue is continuing, and we are on track to open the facility in the summer of 2022. Finally, we are very pleased that the Louisiana State Legislature passed a bill in the second quarter that has been signed by the governor providing for the introduction of HRMs in Louisiana. The bill specifically allows fairgrounds to have up to 50 HRMs in each of our off-track bedding locations. We are currently operating 15 off-track bedding locations in Louisiana, most with video poker machines, and are developing plans to incorporate up to 50 HRMs in each of these facilities. We expect to spend approximately $35 million upgrading our OTBs and expect to have HRMs operational starting next year. The regulators are working on the necessary regulations. We will provide an update on our progress on our next earnings call. Third group of capital projects relates to our gaming properties. The most significant project in this group is the rivers expansion, as we discussed last quarter rivers $87 million expansion plan is on track for a phased opening starting in the first quarter of 2022. The rivers expansion will accommodate approximately 725 gaming positions, based on a combination of new slots and table games and the facility will be the first in the state to have the maximum number of 2000 positions. The first floor expansion will host a great new gaming area, a new restaurant, and a new event center. The second floor expansion will include a new gaming area and a new poker area. Collectively, these capital investment projects are the building blocks that we believe will propel strong revenue and adjusted EBITDA growth over the next five years. These building blocks are real and they're tangible. We continue to have a very strong balance sheet available with significant cash and liquidity. And with the near-term opportunity to monetize two significant properties, Arlington Park and the excess land at our Calder property, we are very excited. Regarding Arlington Park, we have received numerous bids from interested parties for the land and are working through the process to select the final winning bid. We will provide an update when we have selected the winning bidder. Regarding Calder, we have launched the process to sell the excess land around our Calder Casino. received multiple unsolicited bids, but expect it will take some time to run the formal process. We will provide an update when appropriate, but are moving with all deliberate speed. In summary, the strong free cash flow of our businesses with the potential to monetize underutilized assets enables us to maintain low leverage, invest in organic and inorganic growth opportunities, pay increasing levels of dividends, and strategically repurchase shares over the long term for our shareholders. As we discussed, we have a lot of opportunities that are in the execution phase, and we have the capacity to land more projects as they develop. We think the horizon has never looked brighter for us. With that, I will turn the call over to Marcia, and when she is finished, we will open up the call for questions. Marcia?