Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2023 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, Vice President, Financial Planning and Analysis.

Thank you, Andrew. Good morning and welcome to our first quarter 2023 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2023 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 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 different materials. 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 yesterday'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, 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. I will share some high-level thoughts on several strategic topics, and then Marcia will walk through our results and provide an update on our capital management strategy. After she finishes, we will take your questions. We delivered record first quarter net revenue of $560 million and record adjusted EBITDA of $223 million. We were pleased with the performance of all of our segments and our expectations remain high for the rest of the year. Let's start with our historical racing machines or HRM initiatives. HRMs are a key strategic focus over the next five to 10 years for our company as we seek to expand our existing footprint. We have developed high growth, high margin investments in this segment with excellent returns on capital, and we will seek to build on that track record in Kentucky, Virginia, New Hampshire, Louisiana, and perhaps beyond. We are continuing to build on the success of our HRN operations in Kentucky, which began with our inaugural property opening in 2018, Derby City Gaming in suburban Louisville. Our most recent gaming floor expansion there is now complete and the new hotel is on track to open by the end of the second quarter. We have been very happy with how the property has been performing through the significant disruption across the site caused by the floor expansion and the construction of the hotel. Our team is also working hard to prepare for the opening of Derby city gaming downtown. Our HRM entertainment venue in downtown Louisville set to open in the fourth quarter of 2023. In western Kentucky, we have shifted our plans for our Owensboro HRM extension and are evaluating new locations that will better meet our long-term growth profile and better enable us to create a premier entertainment destination for all of the residents of the region. We are disappointed in our decisions regarding our long-term capital investments, and sometimes that means taking additional time to determine the final location that will best meet our long-term return expectations and that is optimal for the communities in which we choose to invest significant time and capital to build long-term relationships. We will share more on these plans on our next earnings call and are very optimistic we are on a better path now. We have made numerous improvements at Ellis Park to enhance the racing experience for our customers and improve safety and environmental compliance at the property. We will kick off the Ellis Park Race Meet on Friday, July 7th, after the end of the Churchill Downs spring meet. The purse money has increased approximately 50% to over $15 million, and we have added four new stakes races. We have more work to do to make this a great Kentucky racetrack and are committed to doing so. We will save any material investment in the HRM portion of Ellis Park until we complete and then evaluate its HRM extension in Owensboro to ensure these properties complement each other and are as efficient as possible from a customer offering an operational perspective. The area around Owensboro is the larger and more economically attractive market, and thus our focus will be on that first from an HRM perspective. As a reminder, we also have the Oak Grove HRM Extension in our portfolio of potential longer-term development projects. We are focused on our other Kentucky projects for now. HRM entertainment facilities in Kentucky will soon benefit from the passage in the first quarter of legislation allowing retail sports and online betting across the Commonwealth. We will look to go live in our retail locations once regulators have promulgated all of the required regulations and operational standards. Currently, we expect this will happen in the second half of 2023. We will be permitted to have up to nine retail locations and up to eight online sports betting licenses that we can potentially monetize. Each of our racetracks and HRM facilities in Kentucky already have a sports bar that will be enhanced with sports betting kiosks so that our customers can easily and conveniently place their retail sports bets. We believe our retail sports books help to drive additional traffic to our properties in other states and will further help to grow our HRM properties across Kentucky. With respect to online wagering, we have entered into contracts to provide certain online wagering platforms, including FanDuel, access to the Kentucky market in connection with which we receive a revenue stream. We also expect to enter into other market access arrangements in the near future. Moving to Virginia, Our six HRM properties are performing as we expected and in some cases are exceeding our expectations. Regarding new projects, we are constructing the Rosie's Emporia HRM venue in the southern portion of the state near the Virginia and North Carolina border right off of Interstate 95. This is a 150 unit facility that remains on track to be completed in the third quarter of 2023. In addition, we are building a significantly larger HRM facility in Dumfries, which is located in Northern Virginia, approximately 30 miles south of Washington, D.C., also directly off of Interstate 95. This is an extremely important project because of its proximity to the significant population in Northern Virginia, Interstate 95 corridor. The construction is proceeding according to our schedule, and we expect the first phase of the project with 1,150 HRMs and an approximately 100-room hotel to be open in the second quarter of 2024. We have the right under Virginia law to open up to three additional HRM facilities with the number of HRM machines permissible in each a function of the size and location of the community, subject to an overall cap of 5,000 machines across all of our facilities in the state. We are working towards a goal of conducting HRM-related referendums in two new communities this coming fall. We are excited about these projects and will share more details on our next earnings call. We will also discuss in more detail on the next call our plans with respect to our 50-50 partnership with Urban One to pursue a full Class III casino in the City of Richmond, Virginia. This is a separate opportunity from our HRM operations in the state. We are working through the required city of Richmond approvals to conduct a referendum this fall to obtain the authorization necessary to proceed with the construction of this project, which would include a casino, hotel, and event center. Also, we are making solid progress on a Salem, New Hampshire HRM site plans, and we'll share more details on future earnings calls. Regarding our online operations, Twin Spires had a nice first quarter. Although our top line declined primarily because of our decision to exit the direct online sports and casino business in 2022, our bottom line improved significantly. We also were very encouraged to see early benefits of our decision to launch in the first quarter of our services to deliver racing content to FanDuel and DraftKings. We expect to see our B2B business accelerate in the second quarter with the Kentucky Derby. And finally, regarding our preparations for the upcoming 149th running of the Kentucky Derby a week from this Saturday, we have made fantastic progress on our projects at Churchill Downs Racetrack. Our new first-turn experience is complete. This is a one-of-a-kind entertainment venue that is itself the size of a small stadium with 5,300 covered stadium seats and an additional 2,000 reserved indoor dining seats. with exclusive views of the horses and the racetrack from the rail on the first turn. All of the covered stadium seats are sold, and more than three-quarters of the indoor reserve seats are also sold, with the remainder selling quickly each day. Overall, we are very excited about our progress toward this year's Kentucky Derby. Based on advance reserve ticket sales and other metrics available at this time, we expect to deliver record Derby Week results. We will issue a press release after the Derby with all of the details. While our focus is on hosting a special Kentucky Derby 149, we are also kicking off our year-long celebration in preparation for the 150th Kentucky Derby in May of 2024. The 150th run for the Roses will be a remarkable milestone for the longest continually run sporting event in the United States. The Derby has run annually since 1875 through world wars, recessions, and even pandemics. We have announced a number of new guest experiences and ticket offerings that will be available for this very special Kentucky Derby. In fact, early ticket sales are already underway and selling nicely. One of the most exciting developments will be the completion of the Paddock Project with breathtaking and unrestricted views of the Twin Spires, along with spectacular new seating and dining experiences. This project will reinvent Churchill Downs racetrack and create unique once in a lifetime experiences that will surpass anything like it anywhere in the United States. We remain on course to complete the paddock reimagination in time for the 150th Derby. Our capital projects to grow the scale and profitability of the Kentucky Derby will be supported by our continued ramp up of sales efforts across the country, as well as a more focused and strategic sales process in numerous foreign markets. We look forward to seeing you at the 149th Kentucky Derby on May 6th of this year. And if you cannot join us in person, please be sure to watch the NBC broadcast beginning at noon Eastern time. In summary, the first quarter was another great quarter for us with record financial results. We have positioned our company for strong growth for years to come with the ongoing investments in the Kentucky Derby, the acquisition of the P2E assets, including the existing operational properties and our Virginia growth projects, our Terre Haute project in Indiana, our Salem, New Hampshire HRM project and other Kentucky HRM projects, and the pending acquisition of Xacta systems, which will greatly improve our Virginia, New Hampshire, and Kentucky capabilities, all of which we expect to drive a material increase in adjusted EBITDA and free cash flow in the coming years. Our overarching objective is to pursue what we have demonstrated we are good at, growing the Kentucky Derby, developing greenfield and organic opportunities, as well as executing strategic acquisitions that fit our profile. We do this while maintaining one of the best balance sheets in the industry. With that, I'll turn the call over to Marcia, and then we will take your questions. Marcia.