Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2022 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 Zangieri, Vice President, Treasury and Investor Relations.

Thank you, Andrew. Good morning and welcome to our third quarter 2022 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2022 third 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 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 provide some high-level thoughts on our third quarter results and then share some updates on a number of strategic topics, including the P2E acquisition and our major capital 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 third quarter results. We delivered record third quarter adjusted EBITDA. We also opened a new gaming property and completed a couple of strategic acquisitions. Finally, we positioned ourselves to close the P2E acquisition in the fourth quarter. Let's talk about each of our segments, starting with live and historical racing. This segment delivered strong double-digit growth and adjusted EBITDA for the third quarter. All of our HRM properties performed well. We were especially pleased with the double-digit adjusted EBITDA growth from our Oak Grove and Newport properties. Derby City Gaming performed solidly, despite disruptions from the ongoing gaming floor expansion and build-out of the new hotel. We opened our fourth HRM facility at Turfway Park on September 1st. This entertainment venue serves Northern Kentucky and the entire tri-state area around Cincinnati. It has 850 HRMs and the ability to expand to 1200 as demand ramps up. It's a competitive market and we expect a steady ramp up over the coming quarters. We completed on September 2nd, the acquisition of Chasers Poker Room in Salem, New Hampshire, just off of Interstate 93. Over recent years, the property has generated the highest level of revenue of all of the charitable gaming licenses in New Hampshire. That's a great backdrop from which to now expand into HRMs. More on that later. We also completed on September 26th the acquisition of Ellis Park Racing and Gaming in Henderson, Kentucky. This property currently features a thoroughbred racetrack with 300 HRMs in the grandstand. With this acquisition, we have the opportunity to construct another HRM venue in Owensboro, the fourth largest city in Kentucky. We expect to invest approximately $75 million into the existing Ellis Park facility and the new Owensboro HRM project over the next year. We will talk more about this in a few minutes. Turning to our Twin Spires business, While Handel was up almost 8% over 2021, adjusted EBITDA for the Twin Spires horse racing business was down slightly for the third quarter compared to the prior year quarter. This doesn't concern or surprise us. Despite a slight decline in adjusted EBITDA, we are pleased with the strong margins that this business delivered when we compare it to 2019. With third quarter adjusted EBITDA up nearly 50% and margins up nearly three points over the third quarter of 2019. Our Twinspire sports and casino business generated positive adjusted EBITDA in the third quarter. Our team has done a nice job of carefully yet quickly exiting the online sports and casino business while maintaining the retail sports operations in our gaming facilities. While we continue to like retail sports wagering, our interest in online sports has shifted to the B2B model focused on providing technology and horse racing content to facilitate parimutuel wagering on third-party sports wagering platforms. More on this in a few moments. Turning to our gaming business, we have a diversified portfolio of regional gaming properties that continue to perform well during the third quarter. Our consumers behave differently in each of our markets, so it is difficult to generalize across all of our properties with respect to clear trends by customer segment. Our Florida, Maryland, and Louisiana facilities delivered adjusted EBITDA growth in the quarter. As I will discuss in a moment, Illinois and Ohio were also strong. In contrast, we continue to see softness in our Mississippi and Pennsylvania gaming properties, although not as significantly as we saw in the second quarter. Most likely, this relates in part to the stimulus money that was burning off in 2021 as we progress through the year. Regarding our equity investments, Rivers Des Plaines delivered record revenue and record adjusted EBITDA in the third quarter, reflecting the benefit of the property's gaming floor expansion during the first half of this year. We are optimistic about this facility's future performance with the new amenities and improvements. Miami Valley Gaming also delivered record third quarter revenue and adjusted EBITDA. This property benefited from the expansion of its outdoor gaming patio in June, and the expansion of the indoor gaming space into a portion of the area that was previously a buffet. Across the company over the third quarter, our segments performed well, and we expect the trends in each of our segments to continue into the fourth quarter. Marsha will provide more color on our financials in a few minutes. Now I will provide updates on the five areas of strategic focus for our team that will transform our company over the coming years. First are major organic investments, Second, the P2E acquisition. Third, our next steps regarding New Hampshire and Ellis Park. Fourth, our Arlington land sale. And finally, our Twin Spires business to business strategy. First, let's talk about our major organic growth projects. We have a very experienced team leading the execution of our capital projects. Our team has done a good job in responding to materials and labor cost pressure, as well as delays in equipment delivery over the past couple of years. We plan for contingencies in our projects and value engineer to further help mitigate cost pressures. Our team works proactively with our vendors to anticipate any delays in critical equipment and develops alternatives if a critical item is delayed. The majority of our capital projects are delivered on time and on budget. Some projects, such as the Home Stretch Club, which was completed in May of this year at Churchill Downs Racetrack, and the Turfway Park HRM facility, were delivered under budget. That said, there are a couple of projects in our pipeline that we anticipate spending modestly more on than we originally projected. I will identify these as we discuss all of our projects over the next few minutes. Again, most remain on time and on budget. Beyond this, I want to give you a sense of the strength of our growth pipeline and our excitement to execute on it. Let's start with Churchill Downs Racetrack. We held the topping off ceremony for the first turn project on October 21st when we placed the final steel beam on the top of the new structure. Our $90 million investment will be ready for the 149th Derby in May of 2023 when we will introduce more than 7,300 permanent seats in this new and unique location. We are currently projecting that this project will be delivered on time and on budget. We've also made significant progress on the paddock project. Our $185 to $200 million investment in the reimagination of the area surrounding the twin spires remains on time and on budget for completion by the 150th Kentucky Derby in May of 2024. While the first term project will be transformational in its own right, the paddock project will enhance the experience of everyone who enters the front gate or views the facility on television. It's a once in a century project for our iconic flagship. Next, our investments in new high growth historical racing and gaming properties, beginning with Derby City Gaming. The expansion of the gaming floor with an additional 200 machines and new dining and entertainment options remains on track to be completed by the end of 2022. The construction of the hotel also remains on time to be completed in the second quarter of 2023. but after the Derby, as we previously explained. The budget is still approximately $76 million. Regarding our Derby City Gaming downtown project in Louisville, we are now making excellent progress renovating the building that we purchased on the corner of West Market Street and South 4th Street. This construction has been more challenging than expected as we encountered a number of issues related to the age and condition of the building. resulting in incremental costs and delays. We still anticipate opening this project in the second half of 2023. However, we are now projecting around $10 million more than the original budgeted cost of $80 million. We believe that even with this additional investment, the economic return on this project is well within our target and is a good use of our capital. Regarding the rollout of HRMs and our OTBs in Louisiana, As of today, we have installed 295 HRMs and 11 OTBs, and they have performed well to date. We are on track to have 600 machines across 14 of our OTBs by the end of the first quarter of 2023. The final organic project is our Terre Haute Casino in Indiana. We are building an entertainment venue with approximately 1,000 slots, 34 table games, and a sports book, along with several food and beverage offerings and a 122-room hotel. Our 50-acre site is immediately adjacent to Interstate 70 in Terre Haute, less than an hour from the western suburbs of Indianapolis. We have begun the construction of the foundation walls for the casino and hotel. The completion date has been affected by delays in the initial permitting and approval process and long lead times for equipment. We originally projected that this project would be opened in late 2023, would cost 260 million dollars we are now projecting it will be completed in the first quarter of 2024 and will cost up to 290 million dollars we remain confident that this is a very good use of our capital based on the expected returns now i'd like to provide an update on our acquisition of peninsula pacific gaming or p2e This acquisition of a very unique set of assets will provide our company significant growth through both existing and to be constructed facilities. After we close the transaction, we will have added meaningful scale and organic growth opportunities to our company at a very attractive multiple. We've obtained approval from the Virginia Racing Commission to acquire the Virginia properties and the Iowa Racing and Gaming Commission to acquire the Hard Rock Hotel and Casino in Sioux City. The New York State Gaming Commission is meeting this morning to consider for approval our application to acquire Del Lago Resort Casino in upstate New York. Assuming all goes according to a plan this morning in New York, we anticipate closing the P2E transaction next Tuesday, November 1st. As you likely saw, we announced in early September that we will be purchasing all of the Iowa assets as part of the acquisition instead of purchasing just the operating company in connection with the underlying real estate being sold to a REIT. As a result of this change, the purchase prices increased $265 million to $2.75 billion. The P2E acquisition includes the opportunity to construct a large HRM facility in Dumfries. This is an approximately $400 million investment in Northern Virginia around 30 miles south of Washington, D.C., directly off of Interstate 95. Phase one of the project will include 1,150 HRMs and is scheduled to open in fourth quarter of 2023. It also includes a 102-room hotel that is expected to open in the first quarter of 2024. This is an extremely exciting project. We have worked very closely with the seller to ensure a smooth transition to us at closing of the P2E acquisition. The project has been fully bid out and construction is well underway. It remains on time and on budget. We are also acquiring the Rosie's Emporia project in southern Virginia near Norfolk and Virginia Beach, immediately adjacent to an Interstate 95 interchange. This project will offer 150 HRMs. This is a $30 million effort that is currently planned to be completed in the third quarter of 2023. As part of the P2E acquisition, we also acquired the rights to partner with Urban One on the potential to build a casino in Richmond, Virginia if a referendum is held and passed there in 2023. We believe that the City of Richmond and the Commonwealth of Virginia will benefit significantly from having a state-of-the-art casino in Richmond. We will work hard with Urban One in the coming year to build support for the referendum next year. Turning to our expansion in New Hampshire. As I mentioned earlier, we completed our acquisition of Chasers Poker Room in Salem on September 2nd. We are excited about the opportunity to build an HRM venue with table games just 30 miles from Boston. New Hampshire has a unique structure for HRMs where a significant portion of the excise taxes are contributed directly to charities. We look forward to developing a successful property in Salem that will create great jobs and will also provide critical support to many local charities serving the surrounding communities. We've leased a location that is near the current Chasers Poker Room and are working with the various local stakeholders to obtain building permits and other approvals necessary for our proposed facility. We will provide more details on our development plans on future calls. With respect to our acquisition of Ellis Park, our initial focus is on our development plans for an HRM facility in Owensboro because that is the larger unrealized economic opportunity. We will have approximately 600 HRMs with room to expand as demand grows. We are also determining our capital plans for the thoroughbred racetrack and gaming facility at Ellis Park. In addition to a gaming refresh, Ellis Park itself will need capital improvements to the racing infrastructure and customer facility, and that is something we anticipated and planned for in our modeling supporting our purchase price. Across Ellis Park and the new Owensboro HRM facility, we expect to spend approximately an additional $75 million We will have much more to share on our next call, including more specific budget and timing estimates. Let's spend a moment on our process to sell the Arlington Park property. We are still on track to sell the 326 acre parcel to the Chicago Bears for $197 million in the first quarter of 2023, pending completion of remaining conditions. We expect to then execute on our plans to defer the tax from the gain on the sale by utilizing qualifying 1031 exchange transactions. And last, I will share some thoughts on our Twin Spires B2B strategy related to wagering on horse racing. First, we are still very committed to our B2C Twin Spires horse racing online wagering business. Our online offering has delivered very high customer retention metrics over a long period of time, and our connection to the Kentucky Derby should continue to help attract new and casual players. As we exited the online sports and casino business, we sought to build relationships with some of the major online sports betting companies who want to introduce their significant customer base to horse racing. which is actually an important part of the content offering in many European markets like those in the United Kingdom. We were thrilled to announce our partnership with FanDuel in early September. We expect FanDuel will go live with us in January 2023. With our support, FanDuel is creating a fully integrated and seamless wagering experience for their customers to bet on horse racing while on the FanDuel sports wagering platform where they can bet on a variety of other sports. Our partnership with FanDuel demonstrates our strategic commitment to a B2B offering. As we discussed on our last earnings call, we believe that horse racing content should be available on sports wagering platforms across the U.S., and we intend to use the expertise and technology of our Twin Spires and United Tote teams to deliver it. Our Twin Spires team is in the process of negotiating other sports betting partnerships. If successfully completed, each of these partnerships will enable sports wagering platform to distribute online horse racing content to their US sports betting customers. As we look towards the end of the year and into 2023, we are very excited about the many growth opportunities in front of us. With the imminent closing of the P2E acquisition, we will see a material increase in adjusted EBITDA and free cash flow. In 2023 and 2024, we will deliver on the other investments I discussed today. And we will keep pursuing what we are good at, developing greenfield and organic opportunities, as well as pursuing acquisitions to grow our company significantly while not overtaxing our balance sheet. With that, I will turn the call over to Marcia, and when she is finished, we will take your questions. Marcia?