Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2022 First 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. Phil Forbis.

Thank you, Amanda. Good morning, and welcome to our First Quarter 2022 Earnings Conference Call. After the company's prepared remarks, we will open the call for your questions. The company's 2022 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 reports on Form 10-Q and 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-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, Phil. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer, Marcia Dahl, our Chief Financial Officer, and Brad Blackwell, our General Counsel. We have a lot to cover today. I will briefly share some high-level thoughts on our first quarter results and provide updates on a number of strategic topics, including the P2E acquisition and the upcoming Kentucky Derby. Marcia will then walk through our results in more detail and provide an update on our capital management strategy. After she finishes, we will answer your questions. First, some points on our first quarter results. We delivered record first quarter net revenue of $364 million, up 12% from the prior year quarter, and record first quarter adjusted EBITDA of nearly $129 million, up 16% from the prior year quarter. As you review our first quarter results compared to last year's first quarter, It is important to note that COVID related restrictions impacted both quarters in different markets and to different extents. And this makes comparisons across the quarters complicated. However you slice it though, our company continues to progress in a very positive direction. With respect to our live and historical racing segment and our gaming segment, we delivered record first quarter revenue and adjusted EBITDA. Our HRM facilities contributed over half of the company's growth in revenue and adjusted EBITDA for the quarter. We experienced continued strong growth from our Derby City Gaming and Oak Grove properties, as well as nice improvement at our smaller Newport Racing and Gaming facility. Our regional gaming properties also contributed significantly to our growth. Almost all of our regional properties grew revenue and adjusted EBITDA. Our equity investments in Rivers Casino and Miami Valley Gaming performed quite well despite the vaccine mandate at Rivers in January and February of this year, which slowed us down significantly in the Chicago land market. I will talk more about these two properties in a few minutes. Turning to our Twin Spires business, revenue in adjusted EBITDA for our Twin Spires horse racing business was down compared to the prior year's quarter as more people returned to wagering in person at racetracks and other brick and mortar facilities. As you may recall, there were still restrictions in place during the early part of last year that limited attendance last year. As those restrictions have lifted, we have seen a gradual shift back to wagering at brick and mortar facilities. However, it has stabilized at around 50% based on the trends we saw in the second half of 2021 and into the first quarter of this year. In 2019, the online share was nearly 40% and then jumped to 61% during 2020. Compared to first quarter of 2019, handle from our online horse racing business was still up 68% in the first quarter of 2022. Our Twinspire sports and casino business results for the first quarter reflect our decision to exit the online sports and casino business while maintaining our retail sports operations and our gaming facilities. We experienced strong adjusted EBITDA from our retail sports book, and the reduction in online marketing spend as we execute the plans to exit each state helped to minimize the losses related to our online sports and casino business. The reduction in spending costs will be more pronounced in the upcoming quarters. We are pleased with our progress to exit online sports and casino and are working to monetize where appropriate our market access rights to other participants. We have received interest from numerous other groups with respect to market access. We will provide more detailed updates and future earnings calls as our plans for each state reach fruition. Now updates on five areas of strategic focus for our team. First, our major organic investments. Second, an update on our P2E acquisition. Third, our recent announcement related to New Hampshire. Fourth, our Calder and Arlington land sales. And fifth and last, an update on the upcoming 148th running of the Kentucky Derby. First, let's talk about our major organic growth projects, starting with the multi-year projects at Churchill Mounds Racetrack. We are holding the grand opening for the Homestretch Club tonight for the media and community. This is the first completed phase of our multi-year strategy. This new entertainment venue along the home stretch of the racetrack includes 3,250 premium seats that will provide a variety of exciting high-end experiences for our guests. We've also begun work on the second phase of our strategy, which is the Turn 1 project, replacing lower price temporary seating with premium covered seating overlooking the first term of the racetrack. We plan to complete this project by Derby 2023. And as you saw from the details of the announcement we released yesterday afternoon, The third phase of our multi-year plan is the significant redevelopment of the paddock area, which we plan to complete by the 150th Kentucky Derby in May of 2024. The paddock is the heart of the racetrack. It's where the horses are paraded and saddled for everyone to see, where the jockeys mingle before they hear riders up and mount up. It's where some of our guests decide for whom they will cheer and bet. The paddock is truly where the best of the pageantry and spectacle that is the Kentucky Derby converge to create the energy that courses throughout the racetrack. Why make significant changes? Many reasons. The current layout of the paddock restricts circulation between the clubhouse and the grandstand. The paddock roof blocks the views of the Twin Spires as our customers enter Churchill Downs. And the area under the Twin Spires has limited and outdated amenities. We can also create spectacular new seating and viewing areas where none even exist today. And most importantly, we can reintroduce our historic facility, weaving the best of 21st century hospitality into the history and the pageantry of America's longest continuously held sporting and entertainment event. The press release goes into more detail that I won't repeat today. However, there are a few highlights that I hope you take away from the release. First, We estimate that we will spend approximately $185 to $200 million on this project and have assumed a payback period of less than eight years. Second, we will be adding over 3,600 new premium reserved seats and 3,250 new standing room only premium tickets. We will also upgrade over 3,700 premium reserved seats. Due to the prime location of the new seats, we also anticipate that some portion will be sold with personal seat licenses. Third, we will be removing approximately 2,200 existing seats, and thus the total number of additional seats added by this project is approximately 1,400. The seats we are replacing are priced lower than the price of the 3,600 new seats due to the lack of amenities and aging accommodations in the current seating areas. When we are done with this project, we will have transformed Churchill Downs Racetrack. The ability to undertake a project of this magnitude is a reflection of the deep experience, results, and stability demonstrated by our team over many years, coupled with the vision and support of our board. All of us at the company are thrilled to be a part of it. Let's turn to our investments in historical racing, beginning with Derby City Gaming. We remain on track to open the gaming floor expansion by the end of 2022 and the hotel in the second quarter of 2023. The expansion will add 450 additional HRMs and 123 room hotel along with additional dining and entertainment options. Regarding our HRM facility in downtown Louisville, we have begun to remodel the building we purchased on the corner of West Market Street and South 4th Street. We are finalizing the design and still anticipate opening in the second quarter of 2023. Turning to Turf Boy Park, the grand opening for our HRM facility will be on September 1st. We will start with 850 HRMs and have the ability to expand within the existing footprint to 1,200 as demand ramps up. We will also offer other upscale amenities, including a large clubhouse event center that can accommodate customers on race days, as well as large events at other times. This will be a very exciting entertainment venue for Northern Kentucky and the entire tri-state area around Cincinnati. We have also decided to invest an additional $26 million in the backstretch of Turfway Park to improve the dormitories for the track workers, add five new barns for horses, and replace or improve some of the basic infrastructure to improve the overall facility. The positive impact of HRMs on the Kentucky Thoroughbred Racing Circuit is undeniable, and this additional infrastructure is warranted to support the growing thoroughbred operations at TurfWay. Regarding the rollout of HRMs and our OTBs in Louisiana, as a reminder, we will be adding a total of approximately 600 machines across 14 of our OTBs in Louisiana. The timing of our rollout has shifted slightly between second quarter and third quarter. We now expect to have 170 HRMs operational and five OTBs by the end of the second quarter, 250 HRMs operational and five additional OTBs by the end of the third quarter, and the final 180 HRMs operational in the other four OTBs by the end of the fourth quarter. We remain on schedule for 2022, but are responsibly and effectively managing through supply chain and construction timing realities. As of today, we have recently opened HRMs in two of our OTBs, West Wigo and Metairie. Next, regarding our casino investments, beginning with our Terre Haute project in Indiana. We are on track to hold the groundbreaking for our Queen of Terre Haute Casino in Indiana in June with the Target grand opening in late 2023. Regarding Rivers Des Plaines Casino, the first phase of the expansion at Rivers opened on January 4th with the addition of 200 new slot machines, 24 table games, and a new restaurant. The second phase of the expansion opened on April 8th with 300 new slots, a new 22-table poker room, and a new large casino bar. The third and final phase, which includes a new ballroom and event space, is expected to open in early May. When the final phase is completed, Rivers will have added 725 gaming positions. The facility will be the first property in Illinois to utilize the maximum 2,000 positions permitted under state law. All of this capital is solely funded from cash flow generated by rivers and additional debt financing at the river's entity level. Regarding Miami Valley Gaming, we have two smaller growth projects at the property. The first expands the outdoor gaming patio to allow for more games and to add an outdoor bar. The second project converts our buffet space into two new food venues, along with adding incremental gaming space. The two new food venues leverage concepts that have proved successful at Derby City Gaming and Oak Grove and should provide significant cash flow savings compared to the prior buffet option. We expect the outdoor patio expansion will open in June with approximately 196 games and the new food venues will open in July. These projects have been funded at the JV entity level with cash flow generated by Miami Valley Gaming. Now I'd like to provide an update on our acquisition of Pacific Gaming Entertainment, or P2E. We have submitted all of our entity and individual applications to the Virginia Racing Commission, the New York State Gaming Commission, and the Iowa Racing and Gaming Commission. We are working closely with the staff in each of these states to expeditiously obtain our regulatory approvals. As Marsha will discuss in more detail, we've already completed the financing necessary and therefore we'll be ready to close the transaction as soon as we obtain the necessary regulatory approvals. In the interim, we are working on our integration plans, including participating in the development work for the Dumfries and Emporia expansion projects. We are very excited about the Dumfries project and view that as a potentially transformative project for our company. We are also analyzing where to deploy the remaining three HRM licenses in Virginia and working with Urban One on the Richmond Casino Initiative which we hope to see on the ballot in Richmond this November. The P2E acquisition consists of a very unique set of assets that provide significant growth through its existing and to be constructed facilities, expands our geographic footprint, and provides meaningful additional scale to our company in the coming years, all at an attractive multiple. We are on track to close this transaction before the end of 2022, subject to the necessary approvals. Turning to New Hampshire. We announced in March that we've signed a definitive agreement to acquire 100% of Chasers Poker Room in Salem, New Hampshire. Salem is approximately 30 miles from the Boston metropolitan area. We are planning to move the Chasers Poker Room to a larger facility in Salem after we close the acquisition to allow for a larger HRM footprint given the extremely attractive market demographics. We estimate that we will spend up to $150 million in total on the acquisition and build out of a new venue, including the HRM machines. We are working through all the necessary approvals for the acquisition and plans related to a new location. We anticipate closing by the end of second quarter. Now I'll provide a brief update on the status of our process to sell the excess land at Calder and our Arlington Park property. We are on track to close the sale of the 116 acres next to our Calder Casino for $291 million in mid to late June. We intend to utilize the real property we are purchasing as part of the P2E acquisition and a 1031 exchange to defer the tax on the gain from the sale of the Calder land. We are also still on track to sell the 326 acre Arlington Park property to the Chicago Bears for $197 million in the first half of 2023 pending receipt of remaining approvals. We will seek to utilize a 1031 exchange to defer the tax from the gain on this sale of the land as well, but do not have anything definitive to announce at this time. And finally, I will share some thoughts on the 148th Kentucky Derby that is just a little over a week away on Saturday, May 7th. It is really great to see the Derby festivities and energy return to its traditional frenzy. The celebrations and parties kicked off a few weeks ago with charities and community organizations holding their traditional events to raise money for their organization. The energy and excitement is back. Our team has been finishing the preparations to welcome everyone to Churchill Downs for an amazing Derby week. We will begin with opening night this Saturday evening with live music and Derby-inspired fashion displays and, of course, an exciting evening of horse racing. We will have racing and other festivities and activities throughout the week at the track. On Friday, May 6th, we will run the 148th Kentucky Oaks, the championship race for the Phillies. And on Saturday, May 7th, we will host the 148th Kentucky Derby. We're pleased to have a Japanese bred horse named Crown Pride running in the Kentucky Derby this year. Crown Pride won the UAE Derby in Dubai to qualify for the Derby. Because he is a Japanese bred horse, Japan will allow wagers on the Kentucky Derby race this year in Japan. TV coverage starts with USA Network covering the Kentucky Oaks from 1 p.m. to 6 p.m. on Friday, May 6. USA Network will also cover the Kentucky Derby on Saturday, May 7 from noon to 2.30, with NBC providing coverage from 2.30 to 7.30 p.m. as it does every year. Based on advanced reserve ticket sales, we expect to deliver record Derby results. We will issue a press release after the Derby, later that night, with all of the details. We look forward to seeing everyone next week, and if you can't be there, you can still enjoy the telecast on NBC and wager on Twin Spires. With that, I will turn the call over to Marcia, and when she is finished, we will open up the call for questions. Marcia?