Q3 2021 Churchill Downs Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Churchill Downs incorporated so anytime you one third quarter earnings conference call.
At this time all participants are in a listen only mode.
<unk> will conduct a question and answer session and instructions will be given at that time.
As a reminder, this conference call is being recorded I'd now like to introduce your host for today's conference Mister Nixon, Gary Vice President of Treasury Investor Relations and risk management you May now go ahead.
Thank you Kim good morning, and welcome to our third quarter of 2021 earnings Conference call. After the company is prepared remarks, we will open the call for your questions. The company's 2021 third quarter business results released yesterday afternoon, a copy of this release announcing results and other financial and statistical information about the pier.
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 Churchill Downs incorporated Dot com.
L as in the website's Investor section.
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 and our earnings release and the risk factors included in our filings with the SEC.
Typically the most recent report on Form 10-Q.
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 for future.
During this call we will present, both gap and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.
Press release, some Form 10-Q are available on our website at Churchill Downs incorporated Dot Com and now I'll turn the call over to our Chief Executive Officer, Mister Bill Carcinogen.
Thanks, Nick Good morning, everyone with me today are several members of our team, including Bill mud, our president and Chief operating Officer.
Marcia dull, our chief financial Officer, and Brad Blackwell, Our general counsel.
I will provide brief comments on our third quarter performance and then share some updates on our capital investment plans another growth initiatives.
After my comments Marcia will provide more detail on our third quarter performance.
Then we will open up the call for questions.
Overall, we delivered the highest net revenue and highest adjusted EBITDA that we have ever generated in the third quarter and the history of our company.
Given that last year, we ran the derby in the third quarter instead of our typical first weekend in May we were especially pleased with the strength of these results.
Operationally, we were performing on an exceptional level.
And we believe we will continue to do so strategically we believe our grilled projects and potential opportunities are outstanding and bode well for the future of our company.
With respect to our H R M or historical racing facilities are Derby City gaming and Oak Grove properties in Kentucky performed very well again in the third quarter.
Derby City gaming had strong top line growth, while continuing its focus on operating efficiency to generate excellent margins.
The property delivered 65 per cent growth and adjusted EBITDA for the quarter compared to the prior year quarter.
<unk> also perform very well in the third quarter.
[noise] facility opened in September of last year. So for comparison purposes. It benefited from a full quarter of operations in the third quarter of this year.
Organs for the property or improving as a result of strong top line growth.
As we expand our reach them to Nashville, and the surrounding area.
We are on a very good and continuing to improve adjusted EBITDA run right.
Regarding our Newport racing and gaming facility, we are on track to complete the construction of the dedicated smoking expansion by the end of November.
We are adding nearly 13000 square feet of contiguous space next to the current gaming for and will be relocating 150 of the existing nature rooms into the new area.
We believe these changes will enhance the customer experience for both are smoking and Nonsmoking guess and improve the performance of the property.
Remember that this facilities the annex under our Turfway Park gaming license I will talk about the turf white construction process in a few minutes.
Turning to our Twinspries segment.
Comparisons for our online horse racing wagering business within Twinspries will greatly impacted by the running of the Derby in the third quarter of 2020, instead of the traditional second quarter as we ran it in this year.
The Kentucky Derby is our focus each year for fishing customer acquisition and monetization.
Comparing this time frame to a quarter when we do not have the derby can be misleading and confusing. So I am going to focus on comparisons to 2019 to give you a better sense of the momentum and strength of this business.
When we compare this year's third quarter to the third quarter of 2019.
Dusted EBITDA for online horse racing wagering was up 56% to $31 million as a result of strong top line growth.
The growth and adjusted EBITDA reflects the continued growth and active users driven by the customer acquisition efforts in association with the Kentucky Derby, coupled with the continuing trend of shifting wagering from brick and mortar locations to online wagering.
Industry handle grew 10% or nearly $300 million in the third quarter compared to the third quarter of 2019.
Twinspries online horse racing panel was up 31% in the third quarter driven by a 23 per cent increase in active users compared to 2019, resulting in an increase of $113 million.
Marcia will discuss in her comments the trends with respect to the margins for this business. This is a powerful story that we're very proud of and I hope it resonates with you.
Our Twinspries sports and casino business delivered top line growth as well however, given the additional marketing spend to support the growth we had a net loss and adjusted EBITDA of nearly $11 million in the quarter for this business.
We are now live with sports betting in eight states and anticipate being alive in Maryland in Louisiana early 2022.
We're also live with our I gaming casino platform in three states.
We remain disciplined and our goal of efficiently expanding our footprint and growing this business steadily over time to maximize the potential value of this investment in the long term.
We expect the loss from this business in the fourth quarter will be slightly less than our third quarter run right.
Our approaches to get access license and operational in states, where there is a mid to long term potential to generate adjusted EBITDA.
We have not attempted to match the marketing spend at some of the competitors as we focus on building our footprint first and then testing in assessing the path forward for our company.
Turning to our gaming segment.
All of our Holy own gaming properties performed well in the quarter, despite modest ongoing labor challenges and in the case of fairgrounds the impact of Hurricane Ida.
Are wholly owned properties were able to collectively expand margins by three points in the third quarter compared to the third quarter of 2020 and by nearly eight points compared to the third quarter of 2019.
Our properties in Louisiana were performing very well until the closure of the fairgrounds and are 15 O T. B's on August 27th in the face of the approaching Hurricane Ida.
We were able to reopen the fairgrounds as well as eight of R. O T. B's by September 15th and as of the end of September we reopened all but two of R. O T B's.
Our team is working hard to reopen the remaining two O T B's as soon as possible.
Turning to our equity investments.
Rivers Casino in Miami Valley Gaming performed strongly in the third quarter rivers has benefited from top line growth from slots and table games I will talk more than a minute about our expansion project that rivers and of course, we can hardly wait to get that open.
Miami Valley also continues to perform well an experienced significant growth of net revenues and adjusted EBITDA for the quarter compared to prior year.
While rivers in Miami Valley your properties that had been open for numerous numerous years, we still view them as not yet is at maturity and then the ramping up phase much as we view Derby City gaming and Oak Grove.
We have in our seeing growth and margin expansion at our existing facilities.
Some of which is attributable to our emergence as a society from Covid restrictions. However, what differentiates our company for many others. This was significant additional organic growth that we have identified and are delivering now and into the future.
There are three groups of organic wrote projects that will further transform our company over the next five years.
I'll provide an update on our progress on all of our growth projects as organized into these three buckets.
The first set of projects involve the multiyear expansion at Churchill Downs racetrack.
We are seeing extremely strong ticketing demand for the 148, Kentucky Derby set for May 2022.
This is a nice backdrop against which to pursue these projects that will provide unique experiences for our guests and further solidify the iconic nature of this amazing annual entertainment spectacle.
We believe they will also provide strong annual adjusted EBITDA growth with nominal levels of risk of our company.
Or 10 million dollar new turf course is essentially done we've installed new drainage, new irrigation and a new turf rail along with 48 acres of of Bermuda grass hybrid that represents the best of today's turf technology.
This new service will allow us to run additional races on the tour of course.
Provide for more running lanes and greatly increases the durability of the Racecourse all of this will enable us to run more races on the third of course perforations generally have larger fields, thus generating more revenue per race.
We believe it will also allow us to grow turf racing Derby week, and attract more higher level of international trainers and horses, which of course fries way drink.
With the increasing purse money generated by Derby City gaming.
And eventually are to be constructed downtown facility.
We hope to unlock the potential for additional premium turf racing throughout the year as well.
We are also on track to finished or 45 million dollar investment in the home stretch club prior to the Derby in 2022.
This is the transformation of the section with the grandstand area of that as its name would suggest is right alongside the home stretch with a track heading to the finish line.
As of yesterday, we have sales and commitments for the new area at all inclusive pricing levels for nearly all the premium seating on the rail.
Dining tables, and the private V I P lounges and for more than 50 per cent of the new stadium seats and.
And we are still more than six months away from the Derby.
Those are very strong resolve this far off from Derby day.
[noise] across Churchill Downs racetrack, all of our suites and the vast majority of premium seating are already sold out the demand for Derby tickets is stronger than we've ever seen so if you haven't requested seats yet Please act quickly.
We're also finalizing the design and preparing for construction of the 90 million dollar turned one seating expansion of Churchill Downs.
We plan on starting to site work in construction on the second phase of our multi your expansion in the fall of this year in order for this new that need to be completed by the 149th Derby and May 2023.
The combination of the Homestretch club and the <unk> and the term one project will result in a net addition of 1750 all inclusive premium seats.
And equally important will convert 8550 existing seats to all inclusive premium seating.
We're also working on the schematic design for the third multi your project, which involves a significant redesign of the paddock area, including the areas underneath and adjacent to the historic Twinspries.
The paddock and surrounding area is the heartbeat of Churchill Downs racetrack.
This project will enhance the overall experience for everyone who comes to our race track by creating an immediately visible iconic view of the paddock walking ring and the horses framed against the backdrop of the twin spires.
The redesign will also reduce congestion by significantly improving the flow of guess through the paddock and surrounding areas.
We will create a new pad a club in the area on the first floor under the twin spires that will provide never before seen window views of the paddock in the tunnel that the horses walk through as well as provide hospitality and other amenities for our guests from designated sections of our third floor clubhouse seating.
We are also exploring the addition of paris's, including a new turf club balcony overlooking the paddock to add additional premium seating inventory and a further enhance the guest experience an existing premium areas.
We were planning to have this exciting expansion completed by the 150 of anniversary the Kentucky Derby and May 2024.
Turning to the second group of capital projects. The second bucket, we have four unique H R M organic growth opportunities.
That are underway, including expanding our Derby city gaming property constructing another H R. M facility in Louisville, constructing the H O M facility of Turf way Park in Northern Kentucky, and expanding your O T V network in Louisiana to include H R. Ms <unk>.
Regarding a derby city gaming property.
As a reminder, we are investing approximately $76 million to expand the property, including the addition of a five storey 123 room hotel.
We will initially at 200, new H R M gaming positions and have the ability to add an additional 250.
We are also adding a new V I P gaming space, a new sports barn, and stage for live entertainment and an additional high end restaurant and bar all to attract new customers and enhance the experience of our existing customers to drive greater revenue per per.
For a visit.
We were obtaining zoning approval for the project and anticipate beginning construction in early 2022.
We are targeting to open the new H R. M area in the fourth grade or a quarter of 2022 and anticipate opening the hotel in time for the 149th Kentucky Derby in April of 2023.
This past quarter. We also announced are plans to invest $80 million in a new Derby city downtown facility in Louisville.
We were able to acquire a great building in the heart of downtown.
Which will be considered the official annex of our Churchill Downs Racetrack gaming license as permitted under Kentucky law.
The building is directly across the street diagonal to the Kentucky International Convention Center.
We will be redesigning the interior and exterior of the building with a Kentucky Derby thing.
New venue will provide guess, including the local tourist and convention attendees a spectacular gaming experience a sports bar that will provide music and live entertainment a premium Bourbon library and high and lounge. We believe this facility will grow the Louisville market for us and we will have minimal impact on our other Louisville gaming operation Derby City game.
We are committed to investing in the city of Louisville, It as a part of who we are as a company and a part of everyone's experience when they come from all over the country in the world to enjoy the Derby.
We were looking we are working in collaboration with local organizations to provide job opportunities at our new facility for individuals residing in Louisville, most under resource neighborhoods and to provide training and additional social support services that will focus on retention workforce development and professional advancement.
The development of this property will also enable us to increase our efforts to identify and contract with women and minority owned businesses for supply chain and other needs we.
We really appreciate all of the support that we've received from our local government and state representatives to create this opportunity for our community where.
We're planning to commence construction in the next few months and to open the venue and the first or second quarter of 2023.
Our investment and build out of the Turfway Park racing in HR M. Entertainment venue is continuing and we are on track to open the facility in early July of 2022.
We expect to open with approximately 850 to 1000 H R M with the ability to expand to up to 1200 machines.
The property will also have a sports bar VIP gaming area high and lounge and simulcast theater.
Finally regarding your H R M expansion of Louisiana.
Given hurricane items impact to the area and some supply chain disruption primarily related to I T equipment availability. We are now planning to add H a M to three O T. B's every month starting in the first quarter.
We expect to spend approximately $35 million to upgrade R. O T B's and plan to add approximately 600 H R. M. As in total and are 15 O T B's.
Now I will spend a few minutes on our third bucket of capital projects.
First the 87 million dollar two storey expansion that rivers is well underway with the direction of the steel structure and framing as well as the roofing work. When this project is complete the facility will be the first in the state to have the maximum number of 2000 physicians.
The first floor expansion with a great new gaming area and a new restaurant, we expect to be opened in the first quarter of 2022.
The second floor expansion with a new gaming area and a new poker room, we expect to be open in the second quarter of 2022.
Regarding our Miami Valley gaming joint venture the.
The property will be invest in $12 million to expand its smoking patio. This property continues to exceed our expectations and deserves more investment we were exploring what more we should do to grow this asset.
The investment at rivers in Miami Valley Gaming will be funded at the property levels from operating cash flow and that is needed.
Regarding Indiana, you may have seen that we have submitted a proposal to the Indiana gaming board to develop a 240 million dollar gaming facility in Terre Haute, Indiana.
We are one of four bidders for the license and believe our proposal very compelling.
We anticipate having 1000 slop 50 table games high limit VIP gaming area, a sports bar, several food and beverage that revenues venues and a 20 125 room luxury hotel.
We would find this project from a strong operating cash flows and revolving credit facility is needed.
We anticipate a decision by the Indiana Gaming Board on November 17th.
Collectively we believe these projects and others, we may announced in the near future will <unk> will propel strong revenue and adjusted EBITDA growth over the next five years.
Switching topics. We're also working to monetize two of our properties Arlington Park and the excess landed are called her property.
On September 28th we announced that we had reached an agreement with the Chicago bears to sell the 326 acres on which sits Arlington Park racetrack.
Although we're sad to close Arlington Park and would have loved to continue racing and investing in the region. We believe that the Chicago Bears will ultimately develop this prime real estate into a world class Stadium and development with numerous amenities for fans and residents to enjoy over the coming decades.
We expect to close the sale in late 2022 or early twenties twenty-three subject to completion of due diligence and other customary closing conditions.
In addition to the sale of Arlington Park.
We were in the final stages of a process to sell 116 acres of excess land around are called or casino noon.
Numerous bidders have participated and we're very very pleased with the process to date.
We expect to provide definitive information with respect to the terms of the sale and the fourth quarter.
Given the taxable gained that would be realized on the sale of these two properties, we would like to.
Purchase replacement property that qualifies as a 10 31 transaction under the I R. S rules to the extent possible.
As I discussed a few minutes ago, we have a number of organic capital growth projects that we believe will qualify and we will also explore potential acquisitions to fit within our strategic framework.
Finally, we recently announced a new 500 million dollar share repurchase program and also just announced the 7.2% increase to our annual dividend that will be payable in January of 2022.
We have demonstrated our ability to seamlessly execute our growth projects, while returning capital consistently to our shareholders and we remain committed to continuing to deliver growth and strong shareholder returns over the long term.
In summary, these are exciting times for our company.
The strong free cash flow of our businesses, coupled with the monetization of under utilized assets enables us to maintain low leverage invest in organic an integral inorganic growth opportunities pay increasing levels of dividends and strategically repurchase shares over the long term for our shareholders.
With that I will turn the call over to Marcia.
Yeah.
Thanks, Bill and good morning, everyone I will begin with some insights into our third quarter financial results.
I'll provide an update on capital management.
We are very pleased with our third quarter financial results and with all of the organic growth projects that our teams are executing to fuel strong growth for our company in the coming years.
Our team delivered record net revenue and record adjusted EBITDA on a consolidated basis in the third quarter.
We remain on track to deliver the highest level of net revenue and the highest level of adjusted EBITDA for the full year that our company has ever generated.
Turning to our three business segments, let's start with our live and historical racing segment.
As bill discussed quarter over quarter comparisons for Churchill Downs racetrack are not meaningful given that we ran the derby in the third quarter of 2020 and returned in 2021 to running the Derby I just normal time during the first Saturday in May.
Excluding Churchill Downs racetrack, our adjusted EBITDA for third quarter of 2021 for this segment increased $18 million compared to the prior year quarter.
Oak Grove, and Derby City gaming drove the majority of this increase.
As Bill discussed Oak Grove opened in September 2020, So we benefited from a full quarter of operations in the current year quarter.
On a sequential basis okra have continued to grow net revenue adjusted EBITDA and margin.
Derby City gaming performance continues to exceed our expectations delivering $22 million of adjusted EBITDA in the third quarter.
We look forward Derby City gaming will continue to grow as our team introduces new game titles and built on its success with the addition of a hotel and expanded gaming floor.
Turning to our twin spires segment, the timing of the Derby in 2020, and 21 also significantly impacted the quarterly comparisons for twin spires horse racing business. So today I will share comparisons of our performance for this segment versus the same quarter in 2019.
So as far as adjusted EBITDA increased $5 million in third quarter of 2021 versus the same quarter in 2019.
Our twin spires horse racing business contributed $11 million of incremental adjusted EBITDA in the third quarter of this year compared to the third quarter of 2019.
As we expected our margin rate in the third quarter for this business improved to over 33% up five points compared to the same quarter in 2019, and nearly seven points higher than in the second quarter of this year.
Our marketing spend in the third quarter returned to the typical level for quarters that we are not running the derby.
As we discussed last quarter, our margins for this business are typically lower in the second quarter due to the increase in marketing around the Derby, where we can efficiently acquire new customers at a low cost.
Regarding sports and online casino our loss from this business increased $7 million compared to the prior year quarter due to the marketing and promotional activities associated with our expansion into new states, including Michigan, Tennessee and Arizona.
Now turning to our gaming segment, we are very pleased with the performance of all of our gaming properties in third quarter net revenue increase at all of our properties for the third quarter of 2021 compared to the prior year quarter with the exception of Riverwalk and our Louisiana operations, which were impacted by hurricane either during the quarter.
<unk>.
We were pleased with the nearly eight point margin expansion in the third quarter 2021, compared to the third quarter of 2019.
For the quarter overall, we have seen continued strong demand and generally disciplined competitor behavior in our markets.
We were especially pleased with performance of rivers des Plaines, and Miami Valley gaming, which collectively contributed nearly half of the $36 million of adjusted EBITDA growth for the gaming segment compared to the prior year quarter.
These two properties combined distributed $30 million of cash to us in the third quarter, while self funding their maintenance and project capital, including the gaming floor expansion at rivers. This plane that bill discussed.
Turning to capital management regarding project capital, we spent $30 million on project capital.
First nine months of 2021, the majority of our project capital has been spent on the final build out of the Oak Grove in Newport facilities.
If I park expansion and our expansion of Churchill Downs racetrack.
Our teams have developed more detailed plans for a multi year expansion at Churchill Downs racetrack or executing the build out of Turfway Park.
Based on the timing of projected spend and we updated plans some of the 2021 expected project capital has shifted into 2022.
As a result, we have lowered our project capital estimate for the full year of 2021 to $75 million to $85 million.
Regarding maintenance capital, we have spent approximately $22 million in the first nine months of 2021, primarily related to improvements to our twin spires horse racing platform Churchill Downs racetrack and our gaming properties.
We continue to anticipate spending $45 million to $55 million for maintenance capital in 2021, the majority of our fourth quarter maintenance capital is related to finishing the new turf course, Churchill downs racetrack slot purchases and ongoing improvements to our twin spires horse racing platform.
Now regarding our debt and leverage position at the end of September 2021.
Net leverage of two nine times, our net leverage has decreased significantly over the past year, reflecting substantial improvement in our operating performance and organic growth.
We anticipate that our net leverage will decrease over the next 12 months based on our expected strong operating performance from our organic growth initiatives and potential landfills.
As Bill mentioned, we signed an agreement with the Chicago bears to sell our Arlington property for $197 million or in the process of monetizing the excess land at Calder.
Bill discussed we plan to offset some of the gains with organic capital investments and the team is exploring potential acquisitions that will enable us to permanently defer the tax on the gain on sale related to these two properties.
On September 29th our board approved a $500 million stock repurchase program.
We will continue to strategically repurchase shares in the open market and through block share repurchases.
In the past six years on a split adjusted basis, we've repurchased over 15 million shares at an average price of approximately $81 per share.
We're also pleased that our board approved a seven 2% increase.
Annual dividend that will be paid on January seven 2022 for shareholders of record as of December 31, 2021.
This is the 11th consecutive year of increased dividends for our shareholders.
Both of these actions reflect our fundamental belief in the future growth of our company and our ability to effectively redeploy excess capital to create incremental value for our shareholders.
We believe our continued long term strategic focus on growth, including investing strategically in our existing properties and executing acquisitions that are additive to our unique portfolio of assets.
Along with a thoughtful management of our balance sheet and access to capital will provide significant growth in adjusted EBITDA and free cash flow in the coming years.
All of this coupled with our ability to return excess capital to our shareholders in the form of share repurchases and dividends supports our commitment to generating strong long term shareholder returns.
With that I'll turn the call back over to Bill So that he can open the call for questions Phil. Thank.
Thank you Marcia.
For those of you out there listening we apologize.
The whole glitch, but you didn't lose any of our of our commentary we spotted the glitch.
Delayed until we came back on so you didn't miss any of our comments.
And with that I'm happy to open this up for questions firewood.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Yeah.
Yeah.
Our first question comes from the line of David Katz from Jefferies. Your line is now open.
Hi, good morning, everyone.
Thanks, Thanks for all the commentary.
Bill I wanted to add Marcia I guess I wanted to go back to one other.
The comments around <unk>.
And sales between Arlington and Calder.
Which it sounds like you're approaching under a 10 31 exchange.
Bill I Wonder if you could just elaborate more on.
The potential avenues I think you may have included.
M&A within there if you could just help us maybe set some boundaries around what would be seriously considered.
It was a reallocation of some of that capital.
Sure David and good morning.
So.
In order to qualify we have to invest in real property.
And.
And so there are.
Components of our capital reinvestment within our own.
Projects at Churchill Downs racetrack for et cetera that should qualify if we meet all the all the notification requirements and so theres. Some opportunity. There also when we look at acquisitions not the entire purchase price, but some portion of the purchase price was allocable often in the case of.
Acquiring brick and mortar casinos.
<unk> to the to the real estate assets.
So that is another avenue that we can explore so.
So we have a couple of different avenues.
To try to absorb some.
Some of these sales proceeds and we're hard at work at that and we will do our best Theres No Theres no guarantee there timing constraints or qualification constraints within the 10 31 section, but at 35000 feet. That's the Rubik's cube.
But.
That we were solving for.
Okay understood. So that it is required to be a hard asset rather than say something that were IP your digital or something like that correct. That's absolutely true it's essentially real estate.
Understood.
Just segway myself into the second part of my question around the digital strategy.
There is obviously a lot of motion in promotion going on around you.
And the industry about digital.
Just some further elaboration about what we can reasonably expect to see.
Out of Churchill Downs, six to 12 months from now.
With respect to the digital strategy would be helpful. Also.
Question two to answer it I want to make sure I answer it as accurately as I can.
The horse racing piece of our digital businesses as a great business.
As a 14 or 15 year track record of performance around and.
<unk>.
The key metrics around that continue to look stronger and stronger so we feel a great deal of.
His enthusiasm and optimism as we continue to grow that business with respect to the.
Online sports and casino.
Our focus right now is getting our footprint built doing that.
Smartly, making sure that we're efficient in how we're doing it and then and then evaluating.
What works from a marketing perspective, what the competitors are doing what really is the best long term positioning of that asset within our portfolio of business segments. So we're always thinking we're always looking we're always trying to solve for.
The equation that that's given us and that one so far I've been pleased with it I've been pleased with our team's ability to access markets to do it efficiently.
But it is a crazy chaotic space.
And we always try to run our company has responsibly.
As we can for the creation of long term shareholder value. So so we don't.
We just put one foot in front of the other and we're going to continue doing that building. The best set of digital assets that we responsibly can and so far we're on a good pathway to do that.
Understood. Thanks, so much thank.
Thank you David.
Our next question comes from the line of Dan <unk> from Wells Fargo. Your line is now open.
Hey, everyone. Good morning, Thanks for taking my questions.
So I'm wondering first on <unk> can you just remind us of what the racing calendar looks like in the upcoming quarters.
It's fourth quarter kind of similar to <unk> 19.
I wanted to hit on the margin point I think margin then Marcia made that kind of the current level run rate outside of the quarter that the Derby ground, you that kind of a fair level to assume going forward.
Yeah.
Hey, Dan This is bill I would say first of all on the fourth quarter, we're kind of entering now very stable period for inspires a lot of changes last year, where the racing calendar and the timing of the Triple Crown.
Weekend.
The Breeders' Cup occurs and it's in California.
Del Mar.
And that is consistent with where it ran last year, the only calendar real calendar difference to last year as we had the Preakness I believe in early October of last year.
Otherwise I think we're back to consistency and I think we've pretty much stabilized.
That business would be because as you know with a lot of it shifted to online some of it returned to brick and mortar, but we still have a lot of growth left to grabbing that.
That channel in the industry Marcia.
Marcia will then talk together.
Yes, I think just your question about from a margin perspective do you anticipate that were running more consistently what we've seen yes outside of the Derby quarter second quarter, you should see us have more normal sort of margin rates that are very consistent which is actually the beautiful part of the twin spires horse racing businesses.
We have great confidence in our ability to achieve the target margins that.
We're working towards.
Got it and this is obviously a pretty attractive business I guess can you just remind us of any the modes that are here and there.
The potential risks of any new entrants entering and possibly change.
Additive dynamic here.
Okay.
Sure.
Dan It's bill.
So.
With respect to horse racing.
It's conducted in the United States under a separate legal construct called the Interstate Horse Racing Act, which requires the approval of the content providers and a couple of other consent rates before anybody can take wagers on it so.
The business was allowed to start earlier, a couple of decades ago for some we started our business about 14 years ago.
But it's still the case that.
There is a whole regime of contracts and consents required to actually conduct the business.
And so the content providers that the folks actually conducting the race or a part of the equation and for our company conducting the most important.
And significant event of the industry, the Kentucky Derby has always been a.
A great building block for us as we approached approached the business. So.
We entered this business, we Werent first entered the business, but we entered when we did enter the business. We entered it in a big way with a carefully thought out strategy focused on building margins and.
Running it as efficiently as we could and we've largely executed that over the last 14 15 years and will continue to do so.
But it's not like taking wagers on football or anything like that.
And unlike those forms of of.
Sports Wagering when it comes to horse racing Youre never betting against the house, it's a form of wagering called para mutual wagering, where essentially youre always betting against other players and we as twin spires, we take a rig or we take a piece and then there's a piece that goes to taxes.
A couple of other buckets, but essentially.
Every time you take a wager we can tell you in advance what are margins going to be because the margin never changes because the house isn't really involved in the bet. We're just facilitating the bed. So when you have that kind of building block. It allows you to really carefully collab.
Monitor and determined and <unk>.
Calculate your marketing spend with a great deal of efficiency, because you always know if youre successful and you get that exactly what you what you've made on it so that's a little bit of the dynamic that's different about para mutual wagering that.
But we certainly like from a business perspective, because we can run it very efficiently with a great deal of understanding of how to measure our marketing efficiency.
Got it and then if I could just squeezing one more quick one.
On the casinos that we're closing began is there any way that you could quantify that impact.
Okay.
Dan as you know, we havent disclosed that impact us.
As Bill discussed we have insurance.
Including business interruption, and we'll be working through that with our carriers over the coming months. So we don't anticipate that to be a material impact on our company.
Got it thanks, so much everyone.
News on that is we're going to get all of this reopened we are going to get back on track. It's a hiccup it is not a fundamental change.
So so our team is.
I'm, just really proud of them down there.
They've just kept their heads down in <unk>.
Processed through every problem thrown in front of them to just get us back on track.
Understood.
Thanks, Dan.
Our next question comes from the line of Jordan Bender from Macquarie. Your line is now open.
Good morning, everyone.
Yes start here can we gave kind of the messaging around why you exited waukegan and then in the past you've talked about.
Chris and possibly entering downtown Chicago, if and when that were to open up so just any updated messaging on that.
Sure and good morning, Jordan.
With respect to Waukegan.
Sure.
The process has been out there for a long time.
And after a lot of discussion over a long period of time with rust retraining, our partner and our bid.
We decided it was really important to just focus on all of that we have going on with rivers and we are making a material investment in rivers.
Have a great deal of success there.
<unk>.
And we're expanding to maximize their number of physicians there so.
When we looked across.
Those two opportunities Waukegan and rivers, we just decided collectively we were best served.
Focusing on rivers.
With respect to.
Downtown.
First I'd say I believe Chicago is a great American city.
We've been a part of it and a part of the region for a long time so.
Our decision to sell Arlington Park really wasn't any kind of comment on Chicago or the Chicago land region or even the state of Illinois.
It was really a comment on the archaic racing laws, there really havent been changed in any material way in that state in 30, plus years and no longer worked.
While gaming was passed it wasn't really pass in a form that.
That was enough to make up for.
Oh.
The racing paradigm in the state.
I would note that the two other racetracks in that state, even though its been two and a half years since gaming was passed for race tracks. They never built anything either so we made the right decision moving forward with the sales process for Arlington, but that isn't any kind of comment on what we think of the city of Chicago or the state of Illinois.
We're always going to look for opportunities and look for.
Potential investments with.
With respect to downtown you won't see us file an application.
At the deadline, which I believe is tomorrow, we will not be filing an application or participating in a bid tomorrow, but thats not a comment on that process. That's just a comment I think the world is Chicago and I think it's going to bounce back can be stronger than ever.
That's just a comment of where we are with all of our projects and all that we have going on.
And making sure that we do the projects, we have well and that we're organized and clear minded in our strategic priorities.
Yes.
Perfect. Thank you.
Then.
You'll you'll obviously have a lot of.
Projects within Kentucky for next year ultimately once you have.
Derby City gaming in the downtown facility in Churchill Downs Guide can you just kind of talk about your strategy to leverage each of those assets with each other.
Yes.
That's a good question I think as we have some geographic density.
It will make it more important that that.
The customers can move between the facilities and take advantage of there.
Rewards and promotions and we can get a little cross facility activity. So in the history of the company. We hadn't made that a focus because we didn't really have that geographic density, where we really thought that that was an opportunity, but within Kentucky increasingly it's becoming apparent and remember we still have.
Other annex associated associated with our Oak Grove facility that potentially can come into play in the future.
But you add up the collection of facilities, we have in the region.
And even in.
Surrounding states it'll make more sense for us to two <unk>.
Deliver solutions for our customers that allows them to move seamlessly between facilities.
Perfect. Thanks, built nice quarter.
Thanks Jordan.
Our next question comes from the line of Shaun Kelley from Bank of America. Your line is now open.
Hi, everyone. Thanks for taking my questions.
Maybe just wanted to just spend a moment on a comment you made bill in the prepared remarks around some.
I think this is related to your margin performance in the gaming business.
Any segment.
I think you mentioned something about.
Ongoing in the face of ongoing labor inflation, and we're just kind of curious if you could expand on that comment a little bit obviously your over I guess without year over two year stacked margin expansion is still exceptional.
What pressures are you facing on the cost side and sequentially did that get worse in the third quarter than the second are you having some challenges finding great people, maybe just talk a little bit more about that.
Yeah.
Sure happy to do that Sean.
So I think those of us in American.
Across America and business can see that there is.
It can be some later labor shortages and some wage pressures, but although that's been discussed a lot in the media and it's something that we certainly deal with like everybody else that that's not really been.
Keeping us up at night.
What happens when the cost of anything goes up including labor when the cost goes up you want to consume less of it you want to buy less of it. So if you want to find ways to be more efficient you want to find ways to substitute processes for four people and reduce your reliance on expenses labor. So.
While labor there are some labor pressures.
Professional economists can tell you how long that's going to last and how to think about that long term, but our team as usual I'm just so proud of them. They just they just focus on what's available and how do we substitute out better ways of getting things done in order to mitigate.
And mitigate the increasing cost so whether it be supply chain disruptions or.
Labor pressures.
There is nothing that we have to go too deeply in on this particular phone call because largely largely we're managing through that and and we'll keep our eye on it we will stay focused on it but it's we're not missing a beat in our process of dealing with it.
Great very clear and then second question would also be related to something you said, which was you just as you were talking through the Derby you've mentioned several times that the demand youre seeing for Derby ticket is basically stronger than you've ever seen just wondering if you could expand on that a little bit maybe give us a little bit of color.
About the lead times for ticketing for the event. So traditionally how much might have been sold by 12 months three months six months three months out Directionally of course, but just trying to get a sense of.
How much of the book of business are you sort of able to draw conclusions from right now.
Based on what you typically have sold at this point in time.
Sure so.
Uh huh.
I don't have empirical data right in front of me at my fingertips to site, but I have been involved in this process for 16 years and so I have a very good intuitive feel that I know will be backed up empirically.
Were noticeably noticeably ahead of schedule with respect to premium areas suites.
Premium seating.
And the nature of.
Months.
So those are all things to feel good about and if I could have pulled the data to back this up and Bill Bill Mudd and I are staring at each other but neither one of us brought data that that could precisely.
We quantify how far ahead, we are.
And next time, we have this call will be ready for that will pull some of that bill do you want to add yes, I would like to thank Sean I think Bill's comments are about two things one is that.
This year, we ran the derby with around 52000 people and we're normally somewhere between $160 70 that we measure based upon our performance based on the number of people.
But.
I think the first comment is the demand is for people to come back to that event is extremely strong.
The second comment I think and really this has got more to do with the new area.
And that's where his comments were focused when we when we start new areas. For example, the starting gates suites, a couple of years ago.
First year, you brand use base out people aren't familiar with it so I don't know exactly what they're purchasing.
So it usually takes two years to really get momentum.
And for example to starting gate suites now the demand far exceeds the supply it's a great experience I think we're seeing.
The Homestretch club, that's an area, which we haven't even opened yet and in fact, it's totally you can't go look at it right now it's under construction.
And the demand for that area with all the premium spaces virtually sold out or under a commitment or have commitments on and at 50% of the grandstand seats already so that that just shows how much in demand new spaces are and how much customers have seen that we built new stuff and it's a great experience. So.
That is just an indicator of people still want to come to the event and they like the new areas that we are developing and they want to try new experiences even within the same event each year.
Great. Thank you for all the color.
Thanks, Sean.
Our next question comes from the line of Joe Stauff from Susquehanna. Your line is now open.
Thanks, Good morning, everyone.
I wanted to ask maybe a few questions about twin spires.
The online platform.
Yes, I'm curious.
Will more bill.
Kind of where where do you think.
The percentage.
Total pair mutual settles out in terms of the EDW.
C.
It was sub 40% pre COVID-19.
Last year it was over 60.
And I'm wondering if you think sort of this migration or re migration of those that debt.
Or does that stay at the window at the retail shops are we at the point now where.
That has kind of normalized and so maybe <unk> is more like.
I don't know mid fifties as a percentage of pair mutual what are your thoughts there.
First of all Joe that's a great question.
As we mentioned on the prior earnings call and to your point pre Covid was about 40% of it was 39% in the fourth quarter of last year.
19, I should say and an edge up to like 42% in the first quarter and the following year.
And <unk>.
<unk> <unk> co.
So it really was in full swing, which is the second quarter of <unk> quarter of last year, we jumped to 75%.
Where people stop going to brick and mortar facilities.
And from 75% of direct to the 63 last year in the third quarter.
And then it got down to like 56% in the second quarter of this year I think as you went through April May June.
Each month drops.
Our third quarter numbers. This year are not out yet, but we believe the stabilize somewhere around 50%. So it went from 50%, 40% to 50% of the industry and I think it's stabilized there so.
So I would say we kept about half of what.
Went from brick and mortar to online the other half went back to the brick and mortar facilities.
And then going to your question for us, whereas sales only about 10% of wagers that occur today happy to live at the racetrack with event is running.
So.
I would say that we're back to we've leveled out at 50% I think we will continue to grow from there like we did pre COVID-19, where people continue to move their wagering habit to online versus brick and mortar.
Got you.
And.
In the third quarter, obviously, you had pretty significant so user growth in the second quarter, given that you had the Kentucky Derby and how you use that strategically.
And I'm wondering.
Just in terms of the handle that you had specifically at twin spires.
Was it.
In terms of yen, the natural sort of decline and so forth was that a function of C.
Less engagement in terms of users or just less spending I know, it's always a combination but.
I'm just trying to look for kind of puzzle pieces is to think about sort of that.
What happened in the third quarter in particular was it just okay, well the Kentucky Derby.
All the races, leading in the Preakness last year and so that's a less spending per customer was it more one than the other in terms of.
That activity and what you saw in the third quarter yet another another great question Joe.
As Bill mentioned in his comments there is a whole lot of noise. When you compare this years third quarter to last year's third quarter. The Derby certainly was a huge part of that but there are also.
Changes in when Saratoga ran in del Mar ran in a number of other racetracks ran and the races, which they ran them.
Which can also shift things around.
So the best way to really analyze and understand what's happening with twin spires 2021 in the third quarter.
Normal when I say normal it's normal in terms of the racing calendar and the races. The ramp within that calendar. So if you compare that to the third quarter of 2019, which is the last.
Normal period.
Handle increased 31%.
On an apples to apples basis, and the number of unique.
<unk> players increased 23% so the vast majority of that improvement.
From the third COVID-19 to the third quarter of 'twenty, one as an increase in active users.
And there was a small so that was let's call. It two.
Two thirds of the increase the other third was an increase in spending per player in some of that I think is related to the fact that.
People have gotten a lot more engaged in the online horse racing with Covid and they've gotten used to using the app.
Playing.
Playing into pools that they can they can play from the comfort of their home or their work desk. So.
Hopefully that helps answer.
Your question, but the other thing that I would point out here is.
Each of the last over several years, we've spent more money marketing.
Twin spires during Derby week in each year.
Proven that we can continue to increase the scale. So even though this product has been out there and we've been at since 2007.
We're spending more money each year in acquiring more new unique users during derby, which are casual users and we will clearly for example engage those casual players this coming weekend on the breeder Scott will push those boats in the Breeders' Cup and hopefully over time those players become more core players and casual players and we've proven we can do that.
The beauty of this business is now that we've grown the number of casual players we have the ability to turn those into core players.
As time goes on and we've proven we can do that and that's what our focus.
Thanks, a lot that's interesting thanks.
Thanks, Joe appreciate it.
Our next question comes from the line of Zach Silverberg from Bahrenburg. Your line is now open.
Hey, good morning, Thanks for taking my question.
I guess my first one's sort of fill in twin spires. I mean can you can you provide any color on the sports and casino business.
Given the start of the NFL season, any color on bonus thing in marketing.
Throughout the full queue here.
Would you mind repeating that question I did not hear the first part of that question.
Yes, sorry about that.
Any color on the E sports and casino segment.
Twin spires business just in the beginning of NFL season, any any update on customer acquisition and marketing spend.
Yes.
I think that that's a.
Great question and potentially you would think the answer would be more complicated than the answer I'm going to give you, but but the fact is to inspire us keeps humming away. So we haven't really seen any kind of.
Negative impact on twin spires as a result of the NFL season or anything else when we compare it as bill was laying out in his answers to the previous questions. When we compare it to 2019, which is really the most accurate way to look at it everything looks good so in and of itself.
Seems like.
Our customers are getting more comfortable wagering online and that is something that's really benefited twin spires. So that's all been good with respect to.
Sports wagering itself.
We're still feeling our way through that we have a DNA of not over marketing and testing and assessing.
The result of everything we do so don't have a huge amount to report on that.
Beyond the numbers that I related my comments.
Got you. Thank you and just one more.
Sort of on the Indiana casino bidding process can.
Could you guys just sort of talk about what youre up against there what the timelines like just anything you're hearing on the ground.
The stated timeline.
By the Indiana Gaming Commission is November 17th.
So that's the timeline that we're operating under.
It's possible that they delay it but we've heard nothing on the ground that suggests that they are so we're working towards a November 17th deadlines.
We're up against.
Three other bidders.
On every level, we look to us like.
We're not only competitive but our offering a superior product so we feel pretty good about it.
But the other bidders were credible bidders.
Credible people and so we've taken very seriously and we're just putting our best foot forward with the Indiana Gaming Commission, but we worked very hard at the highest level of our company.
Put ourselves in a position to win that bid and we're going to spread through the tape, we're going to we're going to run through the finish line.
To do everything that we responsibly can to demonstrate that we're the right company to win that project.
And it will be the decision of the Indiana Gaming Board at the end of the day.
Yes.
Thank you guys.
Exactly.
I am showing no further questions at this time I would now like to turn the conference back to CEO Bill Chris Danzon you May proceed.
Thanks, everyone. Some really great questions today, Thank you for.
Your time today.
Your questions and also for your interest in our company. We will continue to try to do the right thing and invest your money wisely.
Two to grow your investment and grow this enterprise. So thanks very much look forward to the fourth quarter and we'll talk to you soon.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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