Churchill Downs, Incorporated

Ladies and gentlemen, and welcome to the Churchill Downs, Incorporated, third quarter 2026 earnings conference call. At this time, all participants are in 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 Ullrich. Vice President, Investor Relations.

Thank you, Andrew. Good morning and welcome to our third quarter 2026 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2026 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 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 Carstanjen.

Thanks, Sam. Good morning, everyone. Joining me today are Bill Mudd, our President and Chief Operating Officer, Marcia Dall, our Chief Financial Officer, and Brad Blackwell, our General Counsel. I will begin with the highlights of our third quarter performance. I will then provide an update on the status of the sale of our regional gaming properties and share some additional insights into our strategic plans going forward. Marcia will follow with more detail on our financial results and capital management strategy and then we will take your questions. First, regarding our third quarter results, we delivered record net revenue of $696 million and record adjusted EBITDA of $264 million. We also delivered record adjusted EBITDA for our wagering services and solutions segment and our gaming segment. Turning to the sale of our regional gaming assets, as I discussed on our earnings call last quarter, we've been working with Macquarie Capital to sell nine of our wholly owned regional gaming properties. The process is going very well. We expect to announce executed transactions for the properties by year end. While the broader M&A environment may be feeling the effects of increased interest rates and consumer uncertainty, Our regional gaming assets have attractive characteristics that distinguish them. They are generally newer and better maintained than comparable properties and generate strong cash flow with high free cash flow conversion. We intend to use the sales proceeds to significantly reduce leverage to repurchase shares and to selectively invest in Churchill Downs Racetrack and other high return growth opportunities. On Tuesday of this week, our board of directors authorized a new $750 million share repurchase program, reflecting our confidence in the execution of the asset sales process. As we look ahead, our company's strategy is focused on our three highly valuable platforms, Churchill Downs Racetrack and the Kentucky Derby, our HRM businesses, and our Twin Spires business. Each combines strong cash generation, durable competitive advantages, and attractive opportunities for profitable growth. These three cornerstones form the foundation of a more focused portfolio designed to compound shareholder value over the long term. Churchill Downs Racetrack and the Kentucky Derby, increasingly all of Derby Week, is the crown jewel of our portfolio. It is a unique global sporting and entertainment event combining tradition, community, competition, and celebration in a way few events can replicate. Our opportunity is to expand the relevance, reach, and earnings power of Derby Week while preserving the traditions that make it so special. We plan to accomplish this by making smart capital investments, continuing to enhance the guest experience, elevating the quality of racing, introducing innovative wagering opportunities, expanding social media and television viewership and growing our sponsorship platform. Derby Week is positioned to be a meaningful driver of adjusted EBITDA growth in the near term and for years to come. Regarding the 153rd Derby in early May of next year, demand is very strong. At the end of the third quarter, ticket sales for Derby 153 were well ahead of a comparable pace for Derby 152. demonstrating its enduring appeal and the increasing consumer demand for premier live sports and entertainment experiences. Construction is underway on Victory Run, which will be located just past the finish line between Sky Terrace and the first turn section of the racetrack. We are on schedule and on budget to complete this project in time for Derby 2028. Compared to Derby 2026, We will have an interim upgraded seating experience in this area for Derby 2027 with covered stadium seating and enhanced amenities to ensure our guests enjoy a premium experience. When completed for Derby 2028, Victory Run will introduce a spectacular spectrum of private suites, indoor and outdoor dining, and covered box seats. Regarding sponsorship growth, We were pleased to announce a multi-year partnership with Visa as the preferred payment partner of Churchill Downs and the Kentucky Derby. In addition to the sponsorship and hospitality relationship, Visa will also create opportunities for their clients and cardholders to access exclusive Derby Week offers and experiences while making their purchases simple, secure, and seamless. Visa joins a dynamic lineup of signature partners for the Kentucky Derby, including Woodford Reserve, Longines, Ford, and SAP. Sponsors are increasingly recognizing the desirable demographics of our guests, the value of our television viewership and digital audiences, and our extensive social media engagement. The heightened visibility is attracting interest from many of the most well-respected brands, and we remain focused on broadening and strengthening our sponsorship portfolio in the years ahead. The 2027 Kentucky Derby will be the kickoff for the Thoroughbred Championship Series. The TCS will consist of two divisions, the Derby Division for the Colts and the Oaks Division for the Phillies. The Derby Division will be a six-race series that begins with the Kentucky Derby, includes the Belmont Stakes, a race at Churchill Downs over the Fourth of July weekend, two races at Saratoga Racecourse over late July and late August, and finally ends with the championship at Churchill Downs Racetrack at the end of September. In partnership with the New York Racing Association, the owner of Belmont Park and Saratoga Racecourse, the derby division will connect three of the world's most iconic racetracks into a season-long competition over five months to determine the best three-year-old colt. In addition to national television broadcasts The series offers an incremental $5 million in prize money beyond the purses offered for each race, creating a compelling economic incentive for the best horses to compete throughout the championship series. Turning to the Oaks division for the Phillies, we will have four races beginning with the Kentucky Oaks on the Friday before the Kentucky Derby. As you will recall, the Kentucky Oaks was broadcast on NBC in primetime for the first time earlier this year to rave reviews and strong ratings, illustrating there is a national audience for Oaks Day and the competition of the world's best three-year-old fillies. The second race will be at Belmont Park on July 5th, the day before the Belmont Stakes, and then the final two races will be at Saratoga in June and August. The three highest-ranked horses in the Oaks division will split a $1 million prize pool in addition to the purse money that they otherwise win for each race. Then there is a twist. The winner of the Oaks Division will be invited to participate in the TCS Championship Race of the Derby Division in September to compete against the boys for an opportunity to win up to an additional $1 million bonus. We believe the winner of the Oaks Division going against the best of the boys will drive heightened excitement and national interest. The best filly deserves the chance to take on the Colts in what will be an electrifying challenge that is unique in sports. Today, horse racing captures significant attention around individual marquee events, particularly the Kentucky Derby. The TCS is designed to connect these moments into a continuous story that unfolds throughout a season. Sports fans naturally follow championships, rivalries, leaderboard standings, and athletes over time. and we believe the TCS format will create that same opportunity for horse racing, giving fans more reasons to stay engaged. By encouraging the best horses to compete against each other, we believe both dedicated enthusiasts and casual fans will develop stronger emotional connections with the stars of the sport while increasing visibility and demand for the highest level of thoroughbred racing. A season-long championship series leverages the economic flywheel we have established with the Kentucky Derby to create long-term economic value from expanded media rights, new hospitality experiences, sponsorship activation, licensing opportunities, and new wagering possibilities across the series. The TCS is a strategic and capital-efficient platform to modernize how fans engage with horse racing. We believe it has the potential to become an important catalyst for expanding horse racing's audience both domestically and internationally while further enhancing the value of Churchill Downs Racetrack and the Kentucky Derby. While we do not have any current plans to do so, we will consider adding new venues, races, and even new series over time. Turning to our HRMs, which are the second cornerstone of our strategy, we see long-term growth through introducing more leading gaming content and new products, including electronic table games, along with selective expansion. We are pleased with our HRM performance across all of our properties in Kentucky and are encouraged with the continued long-term growth potential for these venues. We are also happy with the performance of our roulette electronic table games in Kentucky. These ETGs are attracting new customers and supporting the reactivation of inactive HRM customers. We are planning to roll out crafts ETGs around the end of the year. We are also working to finalize the development of blackjack ETGs in 2027. Ultimately, the greatest contribution to our venues will be realized when we have a suite of ETG offerings. Thus, we are very focused on getting crafts and blackjack developed and deployed first in Kentucky, but then also we hope in Virginia. Speaking of Virginia, the rose in Northern Virginia continues to grow nicely as it further develops the market. It delivered strong growth in rated and unrated play, both quarter over quarter as well as sequentially. This also reflects the relative strength of the consumer in this market. We believe the Rose has significant long-term potential for further growth, and we remain very encouraged. In Central Virginia, our venues face competitive pressure from the new casino in Petersburg, which opened this past January. Importantly, we are seeing evidence that Petersburg is expanding the overall market rather than simply redistributing existing gaming revenue. As the market matures, we believe that the larger addressable market creates opportunities to both attract new customers and rebuild visitation with respect to customers who are now going to Petersburg. We will continue to adjust our marketing programs and enhance guest services to position our central Virginia properties to compete effectively in this evolving market. We received this week final county approval to relocate and expand our Collinsville HRM venue to a new location in Henry County. The new site will be closer to the North Carolina border, approximately 45 to 60 minutes from Winston-Salem and Greensboro. We expect to finalize an agreement in the coming days to acquire the land for a new 150 unit HRM venue. We believe this will be a successful investment that exceeds our return targets with real upside potential given the opportunity to capture a portion of the North Carolina market. We will know next week the results of our two referendums in the town of Pulaski and in Amherst County, both in the western part of Virginia. If these referendums pass, we will have the opportunity to further expand our HRM footprint in these underserved markets with a total of two facilities, each with 150 machines. The HRM regulatory structure in Virginia is unique. We have the right to deploy 5,000 HRMs across 10 sites and can move both the sites and machines around the state, subject to certain limitations, to optimize the overall performance. We currently have approximately 4,700 HRMs deployed across the Commonwealth and these three expansion opportunities would represent an incremental 415 HRMs. We have the flexibility to reallocate HRMs from other areas, including from Central Virginia, to optimize the value created by our right to have 5,000 HRMs. In New Hampshire, Rockingham Grand Casino is on track to open on time and on budget in mid-2027 at the mall at Rockingham Park in Salem, New Hampshire, right at the Massachusetts border. We are creating an exciting entertainment venue to serve this very attractive market that we expect will provide significant growth for us in the coming years. We are really excited about this project and very encouraged by the development of the market over the last year as other venues have opened. Regarding Twin Spires, our third cornerstone. Twin Spires is the largest online wagering platform for horse racing and a strategically important distribution platform for our broader integrated racing offering. We continue to expand its reach and engagement through product innovation and broader direct-to-consumer and business-to-business distribution. We continue to see wagering growth, EBITDA growth, and opportunities to expand distribution with our B2B partners. We have introduced new products such as Jackpot 8 where a better can win a significant payout for picking the first eight finishers of a race in exact order. Easy Bets is another new wagering product where a better can wager on either all the odd numbered horses or even numbered horses in a race. Twinspires has also successfully launched several enhancements leveraging AI such as Patek Pro AI and AI Race Preview to expand better engagement, especially among our VIP customers. Twinspires will continue to invest and innovate to build on its clear leadership position in horse racing. In summary, We are committed to growing the Kentucky Derby and Churchill Downs Racetrack through thoughtful, disciplined execution. We are also focused on growing our HRM and Twin Spires businesses while continuing to refine our portfolio around unique, high-performing assets that provide multiple catalysts for growth and free cash flow generation. At the same time, we remain committed to exiting the regional gaming business. The combination of the sales proceeds from our regional gaming process and the strong cash flow generated from our ongoing businesses will enable us to pay down debt, repurchase shares, and selectively invest in our businesses. Our strategic decisions, disciplined capital allocation, and strong balance sheet positions us to drive sustainable, long-term growth and adjusted EBITDA and free cash flow. and finally, we are pleased to welcome Michael Tucker to the board of directors. Mike has over 30 years experience successfully investing in sports, entertainment and leisure companies. Mike's deep investment experience, strong financial acumen and extensive knowledge of market dynamics and strategic capital allocation will be invaluable as we continue to evolve and grow. With that, I'll turn the call over to Marcia and then we will take your questions. Marcia?