Churchill Downs, Incorporated

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

Thank you, Andrew. Good morning and welcome to our second quarter 2023 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2023 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 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 yesterday'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. I will share some high-level thoughts on several strategic topics, and then Marcia will provide insight on our financial results, as well as an update on our capital management strategy. After she finishes, we will take your questions. We delivered all-time record net revenues of $769 million and all-time record adjusted EBITDA of $364 million in the second quarter of this year. We were very pleased with the results for this year's 149th Kentucky Derby. A crowd of over 150,000 fans watched Mage at 15 to 1 odds pull off an incredible victory. Strong growth in ticketing and sponsorship revenue coupled with record wagering generated a sizable increase in adjusted EBITDA, setting a new all-time record for Derby Week. We were thrilled to debut on time and on budget our new first turn experience, which provided one-of-a-kind premium accommodations with exclusive views of the horses and the racetrack from the rail of the historic first turn. Our carefully planned and executed capital projects at Churchill Downs Racetrack over the last several years have delivered a solid foundation for ongoing growth in the coming years. We've kicked off our year long preparation for the 150th Kentucky Derby next year. We launched ticket sales in several areas in late May and as of June 30th have already executed contracts for approximately 37% of our planned ticket revenue for next year's Derby, which is significantly ahead of the pace for any previous year. We continue to make excellent progress on the paddock project, which is a transformative undertaking for our facility. This project has many facets to it. We are adding additional reserve premium seating that will provide a wide variety of new seating and dining experiences for our guests. When this project is done, everyone who enters our racetrack will be treated to spectacular views of the Twin Spires and the paddock, which we believe will provide a central for a venue that unites everyone who will visit. We announced yesterday that we will be investing approximately $15 million to significantly improve the guest experience in our Jockey Club Suites area overlooking the home stretch of Churchill Downs Racetrack. We have 61 suites in our Jockey Club Tower and host approximately 2,500 ticketed customers across the suites, dining areas, and terraces. We expect to have the improvements to this area completed in time for the 150th Derby. We are already planning our next series of development projects for Churchill Downs Racetrack. There are many more opportunities to build out our facility to provide innovative and extraordinary once in a lifetime experiences for new and existing guests. We hope to launch the next phase of our multi-year development plan immediately after the 150th Derby. Our commitment to investing in our flagship asset reflects our belief in our ability to generate consistent adjusted EBITDA growth with nominal levels of risk for years to come. Finally, we will also be adding a new sports bar in our existing simulcast area at Churchill Downs Racetrack in time for the launch of retail sports betting in Kentucky on September 7th of this year. Turning to our HRM entertainment venues, We were pleased to open the new hotel and steakhouse at Derby City Gaming in Louisville in early June. This, coupled with the gaming floor expansion and the addition of the new sports bar earlier in the year, provides a suite of additional amenities for our guests to enjoy. While it is still early, we are exceeding revenue and profitability projections in the first month since opening. We are on track to open Derby City Gaming downtown, our sixth Kentucky HRM entertainment venue, in the fourth quarter of 2023. This venue is located in the heart of downtown Louisville, across the street from the Convention Center. We announced that our seventh HRM facility will be just outside and to the east of Owensboro, Kentucky. We have identified a Greenfield site and believe that this location will enable us to create a premier entertainment destination for all residents of the region. We are now focused on completing the permitting and site planning process. we will provide an update on the project timing and budget on our next earnings call. HRM entertainment venues across Kentucky will benefit from the passage of legislation banning gray games, which became effective on June 30th. Gray games are essentially slot machines. However, they are unregulated and do not pay state or local taxes and do not follow responsible gaming protocols, including restrictions regarding minors, anti-money laundering policies and procedures, and a host of other federal and state laws designed to protect consumers and the community. With the ban only taking effect at the very end of last month, it is still unclear how much of an impact it will have on our HRM venues in Kentucky. We certainly believe that it will have a positive effect and will be a benefit to the Commonwealth of Kentucky, its citizens, and the horse industry as well. Our Kentucky HRM venues will also benefit from the legalization of retail and online sports betting. We plan to have live retail sports books in our HRM venues on September 7th in time for the football season. We will also have a sports bar with sports betting in our Derby City Gaming downtown facility when the property opens in the fourth quarter. Retail sports betting in our HRM venues will provide another incentive for new and existing customers to come to our properties. We also monetize a couple of the online sports betting licenses we have in Kentucky with B2B partners, including one with FanDuel. Regarding our expansion in Virginia, our Rosie's Emporia HRM venue will open later this quarter with 150 HRMs in the southern portion of the state near the North Carolina border, right off Interstate 95. Our Dumfries HRM venue and hotel is being built in Northern Virginia, approximately 30 miles south of Washington, D.C., also directly off Interstate 95. This venue will open with 1,150 HRM machines in Phase 1 and we can go up to 1,800 total machines in phase two. The construction is ongoing, and we expect the first phase of the project, including the gaming facility, to be open in the second quarter of 2024. In June, we announced plans to run a pari-mutuel referendum this November in Manassas Park, which is in Northern Virginia, where we hope to open a venue with 150 to 250 HRMs. The city has really welcomed us, and we are excited to pursue this opportunity. Currently, we have six of our allotted 10 HRM facilities open. Emporia will be the seventh. Our large scale Dumfries project will replace our current temporary 150 unit facility and thus will not be additive to our total number of deployed licenses. Manassas Park would be our eighth license, giving us two more to deploy in addition to our ability to relocate any existing facility to another location. We also recently announced that the Richmond City Council approved our partnership with Urban One as the city's preferred casino operator. Over the last week, we obtained the required certificate of approval from the Virginia Lottery, and the Circuit Court has granted our petition allowing the referendum. As a reminder, we have a 50-50 partnership with Urban One to build a class three casino, hotel, and event center in the city of Richmond upon approval via citywide referendum. If and when we obtain the right to proceed, we plan to build it in phases. The first phase consists of the casino and parking facilities and the second phase will include the hotel and the event center. This phased approach will enable us to expedite opening the casino portion of the project and generate cash flow to offset the construction costs of the second phase. This is the most financially prudent approach and provides near-term tax revenues for the City of Richmond to fund a variety of their priorities. We've also made significant progress on our Salem, New Hampshire HRM site plans and we'll be able to share more details on those plans by the end of the third quarter. Although this has taken longer than we would have liked, we remain excited and committed to creating a unique HRM entertainment offering for the Salem area that will also draw guests from the suburbs of Boston. We anticipate closing the Exacta transaction no later than the end of the year and potentially sooner if the remaining closing conditions are more quickly achieved. Through our ownership of Exacta, our facilities in Virginia will be able to have a broader variety of games on their gaming floors and we will be able to reduce the cost of providing and operating the machines. This will improve our top line and our margins for Virginia. We will also continue to improve the technology platform and to offer the exact assistance of third-party HRM operators. HRMs and HRM venues are key strategic focus over the next five to 10 years for our company. These high growth, high margin investments provide an excellent return on capital, and we will remain disciplined as we expand our existing footprint and product offerings. Regarding our Twin Spires segment, We were pleased this quarter to see the beginning of the benefits from our B2B expansion strategy. Our Twin Spires and United Tote businesses are now receiving B2B fees related to providing and settling wagers on horse races for FanDuel and DraftKings. Although we cannot comment on our B2B partners' horse racing results, the Kentucky Derby was a great boost for both our Twin Spires horse racing platform, which saw record handle and new registrants, and for our B2B partners. We expect to add additional B2B partners over the next 12 months. We are very optimistic that horse racing and our Twin Spires services can be expanded meaningfully to online sports wagering platforms to reach millions of customers, and that we will continue to benefit from the growth and incremental fees related to our B2B services over the longer term. Our Twin Spires handle was impacted in the second quarter by the loss of 88 race days, as well as over 600 races, many from top tracks, primarily related to the extensive wildfires in Canada. Twin Spires was also impacted by the move of the Churchill Downs Race Meet to Ellis Park in June. To many of our players, Churchill Downs Racetrack is the single most important track that draws them to our site on any given day. We expect some Canadian wildfire impact on our Twin Spires handle in the third quarter. However, we will return to racing at Churchill Downs Racetrack for our September Race Meet. Regarding our gaming segment, We delivered record second quarter revenue and adjusted EBITDA with the addition of the Iowa and New York properties from the P2E acquisition. We did see mild softness across some of our regional gaming properties, particularly in the first half of the quarter. Each regional market has different economic and competitive drivers that on a quarter to quarter basis can impact the performance of a property. Overall, despite the inflationary and economic pressures and increased interest rates over the past year, we remain highly confident in the performance of our regional gaming properties, which generates significant free cash flow. With respect to our Terre Haute casino and resort, construction is progressing well with the planned grand opening for the casino and hotel in the second quarter of 2024. In summary, second quarter was another great quarter for us with all-time record financial results, and the best is still to come. We've delivered strong growth from our investments in the Kentucky Derby, our acquisition of the P2E assets, and our organic investments in HRM and other gaming entertainment venues. And we still have a lot more growth to come from the projects we've discussed today and others yet to be far enough along to share with you. We expect our growth plans to drive a material increase in adjusted EBITDA and free cash flow in the coming years while we maintain 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?