Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2022 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'd now like to introduce your host for today's conference, Mr. Nick Vangary, Vice President, Treasury, Risk Management, and Investor Relations. Please go ahead.

Thank you, Bonjay. Good morning and welcome to our second quarter 2022 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2022 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 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 can 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 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 provide some high-level thoughts on our second quarter results and then share some updates on a number of strategic topics, including the P2E acquisition and our major capital investment projects. Marsha will then walk through our results in more detail and provide an update on our capital management strategy. After she finishes, we will open up the call for questions. First, some thoughts on our second quarter results. Overall, we deliver the highest net revenue and highest adjusted EBITDA that we have generated in any quarter in the history of our company. We generated record net revenue of nearly $583 million, up 13% from the prior year quarter, and record adjusted EBITDA of $291 million, up 25% from the prior year quarter. While I will talk in a few minutes about the significant growth opportunities that we are currently executing on, it's worth pointing out the strength of our current portfolio. We were very pleased with the results for this year's Kentucky Derby. A crowd of nearly 150,000 fans watched Rich strike an 80 to 1 long shot, pull off an incredible victory, As you saw in the press release that we issued immediately following the Derby, we set all-time records for wagering on the Kentucky Derby Race, the Kentucky Derby Day program, and the Kentucky Derby Week. Twin Spires also generated record handle on the Derby Day program and on the Derby Race. It was also wonderful to see the many community and charity events occur again this year during the month-long celebration in Kentucky and all the themed parties and festivities that take place throughout the country leading up to Derby Week. The Derby truly was back in full force. We, along with our broadcast partner, NBC, were extremely pleased with this year's 16 million average viewers with peak viewership of 19 million, our largest since 2017. The Kentucky Derby was NBC's most watched program since the Super Bowl in early February, ahead of every single primetime program, special event programming, and all other sports programming. Virtually all metrics point to the Derby's relative and growing appeal. Just as an example, the 16 million average viewership for the Derby was the same as the total for the Daytona 500, Indy 500, and Miami Formula One race combined. Our Derby guests were thrilled with the new home stretch club, which opened in time for Derby week. We anticipate that our final investment in this project will be approximately $38 million. which is about $7 million under our original projections. This investment added 3,250 premium seats and provided a variety of new high-end experiences. We plan to continue our strong run of capital projects with the completion of the new first term project for next year's Derby. I will talk more about that in a few minutes. As we look towards the Kentucky Derby in 2023, we expect to see continued strong ticketing demand and feel a great deal of optimism for the future growth of our iconic event. Our Kentucky HRM venues also performed very well in the second quarter with all three properties, Derby City Gaming, Oak Grove, and Newport Gaming, delivering record revenue and record adjusted EBITDA. The success of our HRM facilities reflects our ability to find and develop great opportunities, build unique entertainment offerings with innovative new products, invest capital wisely, and successfully build customer demand. Turning to our Twin Spires business, revenue in adjusted EBITDA for our Twin Spires horse racing business was down compared to the prior year quarter as more people continued to return to wagering in person at racetracks and other brick and mortar facilities. As we said previously, We believe that online wagering has stabilized at around 50% of the US market based on the trends we've seen in the latter half of last year through the first half of this year. This represents a 12 point increase in online wagering penetration since 2019, but a decline from the pandemic period of 2020 and 2021. We believe online wagering will likely continue to grow its share of wagering and horse racing after we clear the tough comps from the pandemic quarters. The second quarter of 2022 handle for our online horse racing business was up 30% compared to the second quarter of 2019 and adjusted EBITDA was up 32%. I will share more about our strategy for this business in a few minutes. Our Twin Spires online sports and casino business was almost break even in the second quarter, reflecting the actions we have taken to quickly exit this business while maintaining the retail sports operations and our gaming facilities. We are still working to monetize our market access rights to other participants, and we'll provide an update when our plans reach fruition in the coming months. Turning to our gaming business, adjusted EBITDA from our wholly owned casino properties was down for the quarter compared to the prior year. Our Oxford and Calder casinos delivered growth in the quarter. However, we saw the impact from weaker economic conditions at our two Mississippi properties our Fairgrounds property in Louisiana, and our Presque Isle Casino in Erie, Pennsylvania. Our Harlow's property in Mississippi also experienced increased competitive pressure in the quarter from the Pine Bluff, Arkansas property. In addition, one of our most profitable OTBs, which is the Houma, Louisiana OTB, is still closed as a result of Hurricane Ida damage from 2021. We are planning to reopen Houma in October. We also saw modest increased labor cost pressure across all of our regional gaming facilities. Regarding our equity investments in Rivers Des Plaines Casino, in May we completed the final phase of the property's expansion project with the opening of a new ballroom and event space. Rivers Des Plaines has added a total of 725 gaming positions in 2022 and is the first casino in Illinois to reach the maximum 2,000 positions permitted under state law. These new gaming positions are made up of 500 slot machines, 24 table games, and a 22-table poker room. We also added a new restaurant and a large casino bar. The property generated record revenue in the second quarter, and adjusted EBITDA was up nearly 60% compared to the first quarter. While adjusted EBITDA was down slightly the second quarter of last year, that was a very tough comp. We expect to see continued strong growth at Riversteppes Plains in the second half of this year. Regarding Miami Valley Gaming, we completed the expansion of our outdoor gaming patio in June and the conversion of our buffet in July. The outdoor gaming patio has been expanded to allow for 196 additional games and an outdoor bar. We have also converted the buffet space into two new food venues while also adding an incremental gaming space. This will help the property's performance in the second half of the year. Marcia will share more details on our gaming segment performance in a few minutes. My larger point to you is that we understand our properties very well and have excellent teams in place. We are managing through the current environment, and even though we have significant growth coming as a result of our deep development pipeline, we remain laser-focused operators. We are watching our revenue trends carefully at all of our regional gaming properties, and we'll be focused on taking actions to reduce our costs where appropriate in the coming months. Now I will provide updates on the five areas of strategic focus for our team that will transform our company over the next five years. First, our major organic investments. Second, the P2E acquisition. Third, our New Hampshire acquisition. Fourth, our Calder and Arlington land sales. And finally, our Twin Spires business-to-business strategy. Let's talk about our major organic growth projects, starting with our projects at Churchill Downs Racetrack. We have been working on the first turn project, which as a reminder involves replacing 3,400 lower price temporary seats with 7,100 new covered premium seats overlooking the first turn of the racetrack. We will have two distinct ticket offerings. The first area will add 2,000 premium dining seats inside a new 50,000 square foot first floor hospitality venue. The second area will add 5,100 new covered stadium-style cushioned seats with all-inclusive food and beverage on two new elevated concourses built behind the new seating sections. Our projected $90 million investment in this project remains on track to be completed by Derby 2023. The work on the paddock project is also well underway. Our projected $185 to $200 million investment and the transformation of the areas underneath and adjacent to the historic Twin Spires remains on track for completion by the 150th Kentucky Derby in May of 2024. This project will enhance the overall experience for nearly every guest at our facility as we weave the best of 21st century hospitality programming into the history and pageantry of Churchill Downs Racetrack. This project will reduce congestion by significantly improving the flow of guests through the paddock and surrounding plaza areas, and will add over 3,600 new premium reserve seats and 3,250 new standing room only premium tickets, while also materially and directly upgrading the amenities for over 3,700 existing premium reserve seats. When we are done with these two projects, we will still have only transformed a portion of Churchill Downs Racetrack. There are many more opportunities in the years ahead to build out a facility to provide innovative and spectacular once-in-a-lifetime experiences for all segments of our guests, including those who today do not even have a reserved seat and attend simply with a general admissions pass. We believe these investments will afford the opportunity to generate consistent adjusted EBITDA growth with nominal levels of risk for years to come. Let's turn to our organic investments in new high-growth historic racing and gaming properties, beginning with Derby City Gaming. We are investing approximately $76 million to expand the gaming floor and to build a new five-story hotel. The gaming floor expansion is on track to be completed by the end of 2022. We plan to open with 200 machines and will have the capacity to add an additional 250. We will also add new dining and entertainment options. The construction of the 123-room hotel remains on track to be completed late in the second quarter of 2023. Regarding our planned $80 million investment in Derby City Gaming Downtown in Louisville, we've completed the necessary demolition work at the site and are in the process of renovating the building that we purchased on the corner of West Market Street and South 4th Street. We anticipate opening Derby City Gaming Downtown in the second half of 2023. Turning to Turfway Park, we are nearing the finish line regarding our $148 million investment in this new HRM facility. We plan to open on September 1st. What an exciting entertainment venue for northern Kentucky and the entire tri-state area around Cincinnati. We will open with 850 HRMs and have the ability to expand within the existing footprint to 1,200 as demand ramps up. Other upscale amenities, including a sports bar and a large event center, will attract customers on race days as well as provide a great venue for large events at other times. Regarding the rollout of HRMs and our OTBs in Louisiana, as of today, we have installed 171 HRMs and five OTBs, and we are pleased with their performance to date. The timing of our HRM rollout has been impacted by supply chain challenges and contractor shortages as the state continues to recover from Hurricane Ida, which occurred in the third quarter of 2021. We plan on rolling out a total of approximately 600 machines across 14 of our OTBs in Louisiana by the end of the first quarter of 2023. Next, our Terre Haute project in Indiana. We purchased the property for our Queen of Terre Haute Casino Resort in early June and held the groundbreaking for the facility on June 21st. We have finalized the site plan and are now completing the final design of the casino and 125 room luxury hotel. The casino will have up to 1000 slots, 50 table games, a high limit gaming lounge and a sports bar, along with several food and beverage venues. We anticipate completing our $260 million investment in this facility in late 2023. Now I'd like to provide an update on our acquisition of Pacific Peninsula Gaming Entertainment, or P2E. As a reminder, we are acquiring a very unique set of assets that will provide significant growth through both existing and to be constructed facilities. The P2E acquisition also expands our geographic footprint and provides meaningful additional scale to our company at a very attractive multiple. We have obtained approval from the Virginia Racing Commission to acquire the Virginia properties. We expect to be on the Iowa Racing and Gaming Commission agenda for approval on August 25th. And we have submitted all of the entity and individual licensing applications to the New York State Gaming Commission although they have not yet provided guidance on when they will approve our application. We are working closely with the regulatory staff in each state. As Marcia discussed on our last earnings call, we have already completed the financing needed for the acquisition, and therefore we will be ready to close the transaction as soon as we obtain the remaining regulatory approvals. We are working very diligently on our integration plans, including participating in the development work for the Dumfries and Emporia projects. The Dumfries project consists of a $400 million investment in a 175,000 square foot state-of-the-art gaming facility that can accommodate 1,150 HRMs and is scheduled to open in the fourth quarter of 2023. It also includes a 102-room hotel that is planned to open in the first quarter of 2024. This is an extremely exciting project given its location in the densely populated Northern Virginia market. After completing the first phase, we will evaluate a further expansion of this facility up to 1,800 HRMs. The Rosie's Emporia development project is also underway. Emporia will add 150 HRMs and is currently planned to open in the third quarter of 2023. We are also working on plans to enhance the racing at Colonial Downs in support of the horse racing and agricultural industries in Virginia. Based on Virginia law, we will be required to run one race date for every 100 HRMs that are operational in the state up to the 5,000 HRMs we are currently authorized. Colonial Downs will hold 27 race days this year in conjunction with the approximately 2,700 HRM machines now deployed. Over the next two to four years, we expect to grow to 50 race dates as we reach 5,000 HRMs. We continue to analyze where to deploy additional HRMs in Virginia. We are prioritizing locations based on population, disposable income, and likelihood of being able to pass a local referendum allowing for HRMs in the specified locations. We will provide updates on future earnings calls. We are on track to close the P2E transaction before the end of 2022, subject to receiving the necessary approvals. Turning to New Hampshire. We anticipate closing on our acquisition of 100% of Chasers Poker Room in Salem, New Hampshire in the third quarter. Salem is approximately 30 miles from downtown Boston. We anticipate that we will finalize plans for our new HRM facility in the third quarter as well. Our current plans contemplate opening a new facility with up to 800 gaming positions, including HRMs and table games, with the potential to add more after we open. We aren't ready to announce a schedule yet. We will provide an update on our next earnings call. Now I'll provide a brief update on the status of our process to sell the excess land at our Calder and Arlington Park properties. We closed in June the sale of the 116 acres next to our Calder Casino for $291 million. We intend to utilize the real property we have already purchased for Derby City Gaming downtown and the Queen of Terre Haute Casino, as well as real property we will be purchasing as part of the P2E acquisition and various 1031 exchange transactions to defer the tax on the gate 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 quarter of 2023, pending completion of remaining conditions. We plan to utilize 1031 exchange transactions to defer the tax and the gain on this sale as well. And last, I will share some thoughts on our Twin Spires B2B strategy relating to wagering on horse racing. As we've stated in previous calls, we are exiting the online sports and casino business, but remain very focused on our profitable online Twin Spires horse racing business. It's a sophisticated, data-intense offering that strongly appeals to committed horse players. We believe fundamentally that horse racing content should and will become available over time on sports wagering platforms to reach every wagering customer across the U.S. We intend to be a leading distributor of horse racing content, either directly to customers of Twin Spires or under a B2B model that enables the online distribution of horse racing content to millions of new customers who have opened online sports wagering accounts. Given our expertise and extensive knowledge of parimutuel wagering on horse racing, We have the technical expertise, access to racing content and technology to seamlessly integrate parimutuel wagering into existing third party online sports wagering platforms. We will also provide user interfaces and ancillary services that may be necessary or desired by online sports wagering platforms. The strategy will also enable us to offer sports weight and sponsorships for the Kentucky Derby and to generate incremental content fees for Churchill Downs Racetrack as well as our other racetracks. Our Twin Spires strategy going forward will be to maintain and grow our existing Twin Spires platform while growing the distribution of online horse racing content to the millions of U.S. sports betting customers who have been acquired by sports betting platforms over the past couple of years. We anticipate that we will announce some key partnerships before the end of the year and will provide an update on our progress on our next earnings call. In sum, our existing portfolio of assets is performing quite well, and we remain focused on operational excellence while also executing on our substantial growth pipeline. To reiterate, we grew adjusted EBITDA 25% last quarter over prior year quarter, and we're proud of that. We are also deeply focused and optimistic about our growth projects. With that, I will turn the call over to Marcia, and when she is finished, we will open up the call for questions. Marcia?