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Churchill Downs Incorporated (NASDAQ:CHDN) Q4 2023 Earnings Call Transcript

Churchill Downs Incorporated (NASDAQ:CHDN) Q4 2023 Earnings Call Transcript February 22, 2024

Churchill Downs Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. And welcome to the Churchill Downs Incorporated 2023 Fourth Quarter and Year Endings 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 and Treasury.

Phil Forbis: Thank you, Andrew. Good morning. And welcome to our fourth quarter and year end 2023 earnings conference call. After the company’s prepared remarks, we will open the call for your questions. The company’s 2023 fourth quarter and year end 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, 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 report on 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-K are available on our website at

And now, I’ll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Bill Carstanjen: Thanks, Phil. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. I’ll 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. 2023 was a very strong year for Churchill Downs. We grew our company substantially, accomplished a number of key strategic and operational objectives, and positioned the company for exceptional growth in 2024 and beyond. We delivered record net revenue of nearly $2.5 billion and record adjusted EBITDA of over $1 billion.

I’ll touch on a few highlights for 2023, but then turn quickly to 2024 to focus on why this year is going to be a pivotal year for growth and for positioning our company for the next several years. Beginning with the highlights of 2023. In May, we held a very successful Kentucky Derby, setting once again records for virtually every material metric. We expanded our HRM business in Kentucky with a new hotel, sports books and gaming floor expansion at Derby City Gaming and the opening of Derby City Gaming Downtown. We expanded our HRM business in Virginia with the opening of the Rosie’s Gaming Emporium in Southern Virginia. We completed the strategic acquisition of Exacta Systems. We launched our TwinSpires B2B business with FanDuel and DraftKings.

We completed the sale of our Arlington Heights property in Illinois to the Chicago Bears. And we have several significant strategic organic investments in process that will accelerate our future growth. And even with all of these initiatives, we still maintain one of the strongest balance sheets in the industry. With another record year behind us, let’s discuss our objectives for 2024 and beyond. While the gaming industry was impacted in January by volatile cold weather, we are not concerned about that and our financial results will accelerate in the second quarter and through the first half of next year as we open a number of new properties. In early April, we will celebrate the opening of the Terre Haute Casino Gaming Floor in Indiana, our greenfield development that will have 1,000 slots and 34 table games.

On the first Saturday in May, we will host the highly anticipated 150th Kentucky Derby. We will introduce the re-imagined world-class Paddock and renovated Jockey Club Suites. $200 million of exciting investments for our guests that we believe will drive energy and engagement for years to come. The hotel at our Terre Haute Casino Resort will open a short few weeks later in mid-May. Then towards the end of September, we will open the Rose Gaming Resort in Northern Virginia. I will share more on this in a few moments. In early 2025, we plan to open the Owensboro Racing & Gaming Facility in Western Kentucky. And finally, we plan to also open our expanded HRM Entertainment Facility in New Hampshire in 2025. Beyond these announced projects, we are focused on growing in 2025 and beyond as we execute the next level of our growth strategy.

We expect this to include expanding the Kentucky Derby, expanding HRMs in Virginia, creating an additional gaming property associated with our Oak Grove license in Kentucky. As you may recall, each racetrack license has the right to build an additional facility within 60 miles. Expanding the footprint of our Exacta business, growing our B2C and B2B TwinSpires business, and identifying disciplined acquisitions. We have a strong initial pipeline of growth opportunities beyond the ones we have announced. Now let’s discuss a few strategic updates since our last earnings call. First, we are preparing for the Kentucky Derby, which is in about 70 days. The re-imagined Paddock and related seating areas will deliver a series of unique and spectacular hospitality experiences.

The Paddock Club will offer luxurious accommodations directly next to and overlooking the Paddock, and will include the opportunity to walk through a private tunnel from the seating area into the Paddock for an up-close view of the horses, followed by the chance to walk out to the track to watch the races from the rail. The new Sports Illustrated or SI Club, offers a similarly exclusive experience with views of the Paddock in a celebrity and sports-themed hospitality environment, as well as access to watch the races from the rail. In addition to these two new entertainment options, there are numerous additional seating areas with fantastic views of the Paddock. This transformative project will reinvent Churchill Downs Racetrack in a way that will touch every one of our front-side customers, regardless of where they are seated.

We remain on budget, and we expect to be completed prior to the end of April, just in time for Derby Week. This is a testament to our team’s experience and ability to deliver highly impactful capital projects that drive increases in the profitability of the Kentucky Derby. This is the most significant undertaking at the track that I’ve seen in my nearly 20 years with the company and I’m pleased to tell you that there is much more we plan to do in the future to grow our iconic event. We remain significantly ahead of the pace of any previous year for Derby ticket sales, both with respect to the dollars earned from sales and the percentages of inventory already sold. Turning to our HRM Entertainment venues in Kentucky, we opened Derby City Gaming Downtown, our sixth Kentucky HRM venue, at the beginning of December.

This facility is focused on capturing the Downtown Louisville market driven by the adjacent convention center, downtown sporting, concerts and other events, bourbon tourism, and urban residence. We expect the performance to accelerate as we get closer to springtime when conventions, urban events and bourbon tourism traditionally increase in the downtown area. We’ve begun construction of our seventh Kentucky HRM venue on a 20-acre site just east of Owensboro. This is in a growing area of the region located directly adjacent to Route 60, a busy highway surrounding Owensboro, which has seen significant road improvements and commercial development over the last number of years. We plan to open the venue in the first quarter of 2025 with a total spend of $100 million.

Turning to our HRM venues in Virginia, we are making great progress on The Rose, which is located right off Interstate 95 in the town of Dumfries, 30 miles south of Washington, D.C. in northern Virginia. Last week, we received approval from the town to increase the number of HRMs as part of Phase 1, and we will now open the facility with 1,650 HRMs instead of 1,150. Phase 1 will have 100-room hotel, several bars and restaurants, and over 2,540 parking spaces. This has not changed. For the time being, we will keep open our existing HRM location in Dumfries with 150 machines. We are pleased to be making a $3.6 million one-time contribution to the town as an incentive for this increase in the number of Phase 1 games. We will also be making a $2 million one-time contribution to the town to support the design of a new community center.

We anticipate opening The Rose in late September, a couple of months later than previously communicated. This will provide additional time for the construction team to finish the build-out to accommodate the additional machines and to finish the extensive access roadwork to our parking structure. The roadway has taken longer than expected because of some construction challenges and a very wet winter weather environment. We now expect to invest a total of $460 million on Phase 1 of this project, of which only $160 million remains to be spent. Although, we are opening a bit later than we had originally planned, our team has done a masterful job addressing construction challenges and we are also very pleased to be in a position to maximize the number of HRMs in Phase 1.

A city skyline looking down on a busy racetrack with jockeys on horseback.
A city skyline looking down on a busy racetrack with jockeys on horseback.

Given this facility’s location in the Northern Virginia, Washington, D.C. market with nearly 6.5 million people and the limited other gaming options in the region, we wanted to maximize the number of machines available for our customers as quickly as possible. Our goal is to utilize all 10 of our potential Virginia HRM licenses and deploy all 5,000 HRM machines currently permitted under the law. With the increase in HRMs at The Rose, we will have approximately 4,440 HRMs operational across the Commonwealth of Virginia by the end of the third quarter of 2024, up from 2,790 at the end of 2023. As our performance over time has demonstrated, our disciplined approach to our HRM investments has led to an excellent return on capital and we will remain disciplined as we look to expand further in each of our key markets.

Turning to our TwinSpires segment. In August of 2023, we completed the acquisition of Exacta Systems, which has driven material efficiencies in our HRM operations. The Exacta team has continued to make strides growing the portfolio of third-party HRM operations in Kentucky, Wyoming and New Hampshire. We are extremely pleased with this acquisition and our new team. We have high expectations for this group as the HRM product improves and new jurisdictions consider offering this form of wagering. We have been working to better diversify the games at our HRM venues in Virginia, as well as in Kentucky. We believe this will improve our topline and our margins. As we mentioned during our last call, we are also pursuing the development of HRM-based electronic payments.

We have made progress with our team and partners and we intend to work with regulators within the legal and regulatory parameters in each jurisdiction to get them deployed when the games are ready and permitted. We also successfully launched our TwinSpires B2B business in 2023. Our B2B strategy is focused on integrating pari-mutuel wagering on horse racing directly into the online sports wagering platforms through our suite of technology and operational capabilities. Our deals with FanDuel and DraftKings are still in their early stages. This year’s Kentucky Derby will be a nice test of our progress and we are planning to expand our B2B business to other online sports wagering platforms in the future. As I have said previously, we believe pari-mutuel wagering offers predictable and high margins to sports wagering platforms, and our goal is to service their pari-mutuel demand as the sports platforms become more familiar with and focused on horse racing and higher, more predictable margins.

Turning to our Gaming segment, as I mentioned earlier, we are planning our grand opening for our Terre Haute Casino in Indiana in early April with the 122-room hotel opening in mid-May. Construction is progressing well and remains on budget. We’ve built our property team and are focused on executing a smooth opening and rolling out our initial marketing strategy. With the Terre Haute Casino, we will have 10 wholly-owned regional casinos and two equity investments and high-quality regional casinos across 11 states. This provides us increasing scale and the ability to leverage operational efficiencies across our properties. We also continue to own our underlying real estate, unlike many of the other gaming companies. In summary, 2023 was a tremendous year for our company with record financial results, which is particularly noteworthy given the challenging macroeconomic environment that developed starting in the second quarter of last year.

We are now well-positioned for ongoing growth in the next year and beyond, fueled by organic investments in Churchill Downs Racetrack, our HRM projects in Virginia, Kentucky, and New Hampshire, and our Terre Haute Casino in Indiana. One core skill we have demonstrated over time is our ability to build a pipeline of growth opportunities and I believe that remains as strong a core competency as ever. We have also demonstrated that we can effectively integrate transformative acquisitions such as P2E and Exacta Systems, while also executing on numerous growth initiatives across our portfolio. We believe there are many growth opportunities to pursue in the coming years, whether it be further investment in our flagship assets, the Kentucky Derby or new investments aligned with our long-term strategic plans.

I’m excited about the growth projects we have discussed today, as well as those to come in the future. We believe our growth plans will 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. We will keep delivering for our shareholders. With that, I’ll turn the call over to Marcia, and then we will take your questions after that. Marcia?

Marcia Dall: Thanks, Bill, and good morning, everyone. As Bill shared, 2023 was another record year for our company. Excluding 2020, our team has delivered seven years in a row of record revenue and record adjusted EBITDA from continuing operations. We also delivered record fourth quarter net revenue and record fourth quarter adjusted EBITDA for the overall company and across all three of our reporting segments. Today, I’ll start with a few insights on these financial results, provide some initial thoughts on 2024. I will then provide an update on capital management. First, regarding 2023 financial results, the acquisition of the P2E assets in Virginia, New York and Iowa, clearly created sub-function growth in our financials, generating nearly 27% of our $1 billion of adjusted EBITDA in 2023.

We also generated record adjusted EBITDA from our Kentucky HRM properties, driven by the strong performance of our Derby City Gaming and Oak Grove properties, and the first full year of operations at Turfway Park. Churchill Downs Racetrack also delivered record adjusted EBITDA as a result of a very successful Derby Week. The addition of the first turn experience and increases in ticketing, sponsorships and pari-mutual wagering provided a significant lift to our financial results while maintaining the consistently superior margins that Churchill Downs Racetrack has generated over the years. We expect Churchill Downs Racetrack to deliver sub-function growth and adjusted EBITDA in 2024, given the addition of the Paddock Project and other economics associated with the 150th Kentucky Derby.

In our TwinSpires segment, we grew adjusted EBITDA by $18 million compared to the prior year because of two disciplined strategies. First, we benefited from the final stages of the exit from online Sports and Casino business, and the pivot into the B2B for online wagering on horse racing. The pivot into B2B for online wagering on horse racing helped to partially offset a slight decline in retail wagering, higher content-related expenses and higher ADW taxes. And there were a significant number of race day cancellations and shifts in race schedules in 2023, which impacted retail wagering. Overall, we remain pleased with the strong margins this business generates despite facing industry headwinds in 2023. Although, January racing has been impacted by some extremely cold weather conditions, we’re hopeful that industry-wide horse racing handle will stabilize in 2024.

Second, we began to realize the benefits of our strategy to vertically integrate Exacta and its HRM Central Determinant System technology. We acquired Exacta for $250 million in August of 2023. In the fourth quarter, Exacta contributed nearly $9 million of adjusted EBITDA to the TwinSpire segment, and more than $5 million of improved economics for our Virginia HRM properties. And last, regarding our Gaming business, our regional gaming properties held up relatively well in 2023 despite the consumer softness across the industry. Our 2023 same-store wholly-owned casino margins, excluding insurance proceeds, were down 1.6 points compared to 2022. However, our margins on the same basis were up nearly 2.5 points compared to 2019. Regarding our equity investments, both Rivers Des Plaines and Miami Valley Gaming delivered record revenue and record adjusted EBITDA in 2023.

Rivers Des Plaines performed well despite competitive challenges in the Chicago market and MVG delivered high single-digit growth and adjusted EBITDA despite a challenging economic environment. As Bill mentioned, many of our regional gaming properties were impacted in January by inclement weather, which combined with a strong start to the year in 2023, will likely cause a difficult comparison for first quarter 2024 from a revenue and margin perspective. Despite the challenging start to the year, we are pleased with the results we have seen so far in February and we remain optimistic for these properties for the balance of the year. Overall, we are very pleased with the results that our team delivered in 2023. As Bill discussed, we will enjoy the iconic 150th Kentucky Derby in May and we will be layering on a series of new properties that will fuel our growth in 2024 and beyond.

Turning to capital management, we generated $528 million or $6.94 per share of free cash flow in 2023, up 16% per share over the prior year, primarily from the strong cash flow generated from our businesses. Regarding maintenance capital, we spent $78 million in 2023 and expect to spend between $90 million and $105 million in 2024. The increase in maintenance capital for 2024 is driven by incremental HRM slot capital in Kentucky and Virginia, racing related upgrades at Ellis Park, maintenance projects at Churchill Downs Racetrack in preparation for the 150th Kentucky Derby and incremental slot capital at our regional gaming facilities. Regarding project capital, we spent $599 million in 2023 and expect to spend between $450 million and $550 million in 2024.

The major components of our planned project capital in 2024 in order of largest to smallest are The Rose HRM venue in Northern Virginia, the Terre Haute Casino and Hotel, the Churchill Downs Paddock Project and the Owensboro HRM venue. Regarding share repurchases, we repurchased approximately 151,000 shares in the fourth quarter at an average share price of approximately $119 per share under our share repurchase program. We also repurchased 1 million shares in a privately negotiated transaction with the Duchossois Group for $123.75 per share. Our disciplined approach to share repurchases reflects our belief in the long-term value of our shares. At the end of December 2023, our bank covenant net leverage was 4.0 times. Based on the capital investments and the timing of our opening of our new facilities, we expect our bank covenant net leverage to remain in the 4 times range over the coming year.

We then expect our bank covenant net leverage to decline in 2025 as our investments in Kentucky, Virginia and Indiana begin to ramp. In closing, as Bill said, 2023 was a tremendous year for our company with record financial results, and we expect 2024 and beyond will be even better given our unique portfolio of assets and our new projects coming online that will generate a significant amount of adjusted EBITDA and free cash flow. We remain committed to creating long-term shareholder value. And with that, I’ll turn the call back over to Bill so that he can open the call for questions. Bill?

Bill Carstanjen: Thanks, Marcia. We’re now ready to take your questions. So fire away.

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