Churchill Downs, Incorporated

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2024 Third 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. We ask all question and answer participants to please limit themselves to one question. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Sam Ulrich. Vice President, Investor Relations.

Thank you, Andrew. Good morning, and welcome to our third quarter 2024 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2024 third quarter business results were released yesterday afternoon. A copy of this release announcing the 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 yesterday'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, Sam. 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 our growth plans for the Kentucky Derby and our HRM businesses in Virginia and Kentucky, And then Marsha will provide insight into 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 revenue and all-time record adjusted EBITDA in the third quarter. We also delivered record third quarter revenue and adjusted EBITDA across both our live and historical racing segment and our gaming segment, as well as record adjusted EBITDA for our Twin Spires segment. Our strategic choices and capital investments continue to drive best-in-class growth, and we look forward to our future with confidence and focus. Speaking of the future, let's start with our growth plans for the Kentucky Derby. We have made significant progress on the Starting Gate Pavilion project at Churchill Downs Racetrack that we announced on our earnings call last quarter. This project will transform the seating area in front of the Starting Gate Suites from 10,000 bleacher seats to a combination of approximately 8,500 premium stadium and trackside box seats. We will also significantly improve the amenities for these guests, as well as for an additional 2,800 people seated in existing surrounding sections who will be able to access the hospitality options of the newly renovated section. We are on track to complete this project on budget and on time for next year's Kentucky Derby. We are also planning to complete over the next three to four years a series of renovation and development projects that will provide new and extraordinary experiences in the sections starting approximately 180 feet past the finish line through to the first turn club. The scope of this project covers approximately 500 feet of racetrack frontage, starting with the sky terrace structure, which we will take down and replace with a new building, and extending through the box seats adjacent to the first turn club. To put this further in perspective, the first turn club has approximately 330 feet of track frontage. These projects will replace over 10,000 existing seats that currently consist of uncovered box seats and dated dining areas, with approximately 16,000 seats representing a variety of premium hospitality experiences. This is a considerable undertaking and will meaningfully increase the number of reserved seats and experiential options at various price points on the front side of the racetrack. We are also designing a series of new infield experiences that will in part convert the current temporary infield structures where we seat approximately 800 guests to permanent premium structures providing hospitality for approximately 7,000. Accomplishing this requires a new ingress and egress option for our guests to reach the infield. Hence, we are exploring a novel additional tunnel between the front side and infield that will be part of the overall experience as guests arrive to a reimagined Oaks and Derby infield. The finish line slash first term projects, on the one hand, and the infield projects on the other will be worked on simultaneously in stages with some areas ready for the Kentucky Derby in 2026 and the remaining areas opening for Derby in 2027 and 2028. There's a lot of careful planning underway as collectively these projects will by far be the largest expansion we have done to date and will increase our premium seeded inventory by approximately 20%. We will provide a more detailed update on these multi-year development plans at our next earnings call in February of 2025. 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. Next, regarding our HRM expansion, First Virginia. We opened our new HRM property in Dumfries with 1,650 machines called The Rose on October 21st for a VIP event and then executed our official soft opening yesterday. We were planning to have the grand opening with appropriate festivities and more extensive marketing on November 7th. We decided to proceed with a soft opening for a couple of weeks after the VIP event to give the team time to assimilate properly given the size of the property and the importance of establishing the right customer experience. Given the volume of customers we saw at the VIP event and at the soft opening yesterday, we certainly have taken the right approach. We look forward to ramping the crowds and accelerating the marketing as we approach the grand opening date. We are excited to see the rows go live and are immensely proud of our team for their efforts to get us open. As we discussed on the July earnings call, we filed a building permit application in northwestern Henrico County, Virginia, which is just north of Richmond, to open a new upscale HRM entertainment venue called the Rowshire Gaming Parlor. We plan to convert a former furniture store into a new facility that will feature 175 games and have other gaming-related amenities. The permitting process is far along, and we will begin construction when it is complete. We will update you on our next earnings call. We are also expanding the number of HRMs that we have in our Richmond venue. During the third quarter, we added approximately 100 games, and we anticipate adding an additional 400 before the end of 2025. We will be renovating an unused section of our building to enable this expansion. Separately, we will also shift some of our existing HRMs between locations to optimize the overall performance of all of our Virginia properties. By the end of 2025, After we have completed this expansion, we will have 5,000 HRMs deployed, the maximum permitted under the law in Virginia, up from approximately 4,450 machines that we have deployed today after the opening of the rows this week. Virginia has been a great investment and business environment for us, and we look forward to expanding our footprint and partnership with the Commonwealth. Our HRM opportunities are inextricably tied to our colonial downs racetrack and our franchise as the exclusive operator of thoroughbred racing in the Commonwealth. In 2025, we will introduce a significant Kentucky Derby qualifying race, which will be a first in the history of racing in Virginia. The winner of this race is virtually assured a slot in the starting gate for the Kentucky Derby in 2025. Many in the Commonwealth are very excited to see this new race. and also to see the increase in the number of race days from 27 this year to 44 in 2025 and 50 in 2026. We believe we are meeting or exceeding the expectations of the Commonwealth, and in turn, Virginia has been a great place for us to grow. In Kentucky, we are on track to open our new Owensboro HRM venue in the first quarter of 2025 on time and on budget. It is located next to Highway 60, just east of Owensboro, the fourth largest city in Kentucky. This venue will initially open with 600 HRM machines, along with a center bar, sports bar, and other amenities, and will celebrate Kentucky's rich bourbon heritage. We also announced last evening that we will be developing a new HRM entertainment venue in Calvert City. This new facility is the extension property permitted by our Oak Grove HRM license. Calvert City is a great location for our eighth HRM venue in Kentucky, with a population of 300,000 within a 60-minute drive and a location near the meeting of two interstates that will allow easy access for customers from several surrounding cities in southwestern Kentucky. We are confident that this will be a great addition to our portfolio of HRM assets. We anticipate spending $40 to $50 million to build a property that will include capacity for 250 machines along with other amenities. We plan to open it in early 2026. HRMs and Xacta's HRM technology are a key strategic focus over the next five to 10 years for our company. These high growth, high margin investments provide an excellent return on our shareholders' capital. In summary, third quarter was another strong quarter for us with record financial results. We believe there are many growth opportunities for us to pursue in the coming years, whether it be further investment in our flagship asset, the Kentucky Derby, new investments utilizing our capabilities around HRMs, or growth in ancillary or adjacent businesses aligned with our long-term strategic plans. We have an excellent pipeline of additional opportunities that we are evaluating to position our company for future growth. We also have one of the best balance sheets in the industry with great assets that we believe will continue to drive adjusted EBITDA and free cash flow. We remain committed to delivering superior returns for our shareholders with consistent execution of our growth strategies over the long term. These are exciting times for our team. With that, I'll turn the call over to Marcia, and then we will take your questions. Marcia?