Q1 2022 Churchill Downs Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the Churchill Downs incorporated 2022 first quarter earnings Conference call.
At this time all participants are in a listen only mode.
Later, we 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 would now like to introduce your host for today's conference Mr. Philip Morris.
Thank you Amanda good morning, and welcome to our first quarter 2022 earnings conference call. After the company's prepared remarks, we will open the call for your questions.
The company's 2022 first quarter business results were released yesterday afternoon.
A copy of this release announcing results and other financial in 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 Churchill Downs incorporated Dot com as well as in the website's investors 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 today's earnings press release.
The press release and 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, Mr. Bill course Amgen.
Thanks, Phil Good morning, everyone.
With me today are several members of our team, including Bill Mudd, our President and Chief operating Officer.
<unk>, our Chief Financial Officer, and Brad Blackwell, Our general counsel.
We have a lot to cover today I will briefly share some high level thoughts on our first quarter results and provide updates on a number of strategic topics, including the <unk> acquisition and the upcoming Kentucky Derby.
Marcia will then walk through our results in more detail and provide an update on our capital management strategy. After.
After she finishes we will answer your questions.
First some points on our first quarter results.
We delivered record first quarter net revenue of $364 million up 12% from the prior year quarter and record first quarter adjusted EBITDA of nearly $129 million up 16% from the prior year quarter.
As you review, our first quarter results compared to last year's first quarter. It is important to note that COVID-19 related restrictions impacted both quarters in different markets and to different extents and this makes comparisons across the quarters complicated.
However, you slice it though our company continues to progress in a very positive direction.
With respect to our live and historical racing segment in our gaming segment, we delivered record first quarter revenue and adjusted EBITDA, Our HR and facilities contributed over half of the company's growth in revenue and adjusted EBITDA for the quarter.
We experienced continued strong growth from our Derby City gaming and Oak Grove properties as well as nice improvement at our smaller Newport racing and gaming facility.
Our regional gaming properties also contributed significantly to our growth almost all of our regional properties grew revenue and adjusted EBITDA.
Our equity investments and rivers Casino in Miami Valley gaming performed quite well despite the vaccine mandate at rivers in January and February of this year, which slowed us down significantly in the Chicago land market.
I will talk more about these two properties in a few minutes.
Turning to our twin spires business.
Revenue and adjusted EBITDA for twin Spires horse racing business was down compared to the prior year's quarter as more people returned to wagering in person at racetracks and other brick and mortar facilities. As you may recall, there were still restrictions in place during the early part of last year that limited attendance last year.
As those restrictions have lifted we have seen a gradual shift back to wagering at brick and mortar facilities. However, it has stabilized at around 50% based on the trends we saw in the second half of 2021 and into the first quarter of this year.
In 2019, the online share was nearly 40% and then jumped to 61% during 2020.
Compared to first quarter of 2019 handle from our online Horseracing business was still up 68% in the first quarter of 2022.
Our twin spires sports and casino business results for the first quarter reflect our decision to exit the online sports and casino business, while maintaining our retail sports operations and our gaming facilities.
We experienced strong adjusted EBITDA from our retail sports books.
And the reduction in online marketing spend as we execute the plans to exit each state helped to minimize the losses related to our online sports and casino business the.
The reduction in spend and costs will be more pronounced in the upcoming quarters.
Yeah.
We are pleased with our progress to exit online sports and casino and are working to monetize where appropriate our market access rights to other participants we have received interest from numerous other groups with respect to market access we will provide more detailed updates in future earnings calls as our plans for each state reach fruition.
Now updates on five areas of strategic focus for our team first our major organic investments second an update on our <unk> acquisition.
Third our recent announcement related to New Hampshire fourth our Calder at Arlington land sales and fifth and last an update on the upcoming 148 running of the Kentucky Derby.
First let's talk about our major organic growth projects, starting with our multi year projects at Churchill Downs racetrack.
We were holding the Grand opening for the Homestretch Club Tonight for the media and community.
This is the first completed phase of our multiyear strategy.
This new entertainment venue, along the home stretch of the race track includes 3250 premium seats that will provide a variety of exciting high and experiences for our guests.
We've also begun work on the second phase of our strategy, which has returned one project, replacing lower priced temporary seating premium covered seating overlooking the first term of the racetrack. We plan to complete this project by Derby 2023.
And as you saw from the details and the announcement, we released yesterday afternoon.
Third phase of our multiyear plan as the significant redevelopment of the paddock area, which we plan to complete by the 150 of Kentucky Derby in May of 2024.
The <unk> is the heart of the racetrack, it's where the horses are prorated and saddled for everyone to see where the jockeys mingle before they hear riders up amount up it's.
Where some of our guests to five for whom they will cheer a bet.
<unk> is truly where in the past with the pageantry and spectacle that is with Kentucky Derby converge to create the energy the courses throughout the racetrack.
Why make significant changes many reasons.
Currently out of the paddock restrict circulation between the clubhouse in the grandstand.
<unk> roof blocks the views of the twin spires as our customers enter Churchill Downs.
And the area under the twin Spires has limited now painted amenities.
We can also create spectacular new seating and viewing areas, where known even exists today and most importantly, we can reintroduce our historic facility.
Leaving the best of 21st century hospitality into the history and the pageantry of America's longest continuously held sporting and entertainment events.
The press release goes into more detail. So I won't repeat today. However, there are a few highlights that I hope you take away from that.
Our release.
First we estimate that we will spend approximately $185 million to $200 million on this project and have assumed a payback period of less than eight years.
Second we will be adding over 3600, new premium reserve seats, and 3250, new standing room only premium tickets.
We will also upgrade over 3700 premiums reserve seats.
Due to the prime location of the new seats. We also anticipate that some portion will be sold with personal seat licenses.
<unk>.
We will be removing approximately 2200 existing seats and thus the total number of additional seats added by this project is approximately 1400.
The seats, we are replacing are priced lower.
The price of the 303600, new seats due to the lack of amenities and aging accommodations in the current seating areas.
When we are done with this project, we will have transformed Churchill Downs racetrack.
The ability to undertake a project of this magnitude is a reflection of the deep experience results and stability demonstrated by our team over many years, coupled with the vision in support of our board all of US at the company, we're thrilled to be a part of it.
Let's turn to our investments in historical racing beginning with Derby City gaming.
We remain on track to open the gaming floor expansion by the end of 2022 and the hotel in the second quarter of 2023.
The expansion will add 450, additional HRS <unk> and 123 room hotel, along with additional dining and entertainment options.
Regarding your <unk> facility in downtown Louisville, we've begun to remodel the building we purchased on the corner of West market Street in South Fourth Street, we are finalizing the design and still anticipate opening in the second quarter of 2023.
Turning the Turfway Park.
The Grand opening for our HR and facilities will be on September one we will start with 850, <unk> and have the ability to expand within the existing footprint to 1200 as demand ramps up.
We will also offer other upscale amenities, including a large clubhouse event center that can accommodate customers on res space as well as large events at other times.
This will be a very exciting entertainment venue for northern Kentucky, and the entire Tri state area around Cincinnati.
We have also decided to invest an additional $26 million and the backstretch of Turfway park to improve the dormitories for the track workers at five new barns for horses, and replace or improve some of the basic infrastructure to improve the overall facility.
The positive impact of HR ramps on the Kentucky Thoroughbred racing circuit is undeniable and this additional infrastructure is warranted to support the growing Thoroughbred operations of turf way.
Regarding the rollout of HRS and our Otb's in Louisiana.
As a reminder, we.
We will be adding a total of approximately 600 machines across 14 of our Otv's, Louisiana.
The timing of our rollout has shifted slightly between second quarter and third quarter. We now expect to have 170, <unk> operational and five O Tvs by the end of the second quarter.
250, <unk> operational in five additional otv's by the end of the third quarter and.
And the final 180, <unk> operational in the fourth and the other four otv's by the end of the fourth quarter.
We remain on schedule for 2022, but our responsibly and effectively managing through supply chain and construction timing realities.
As of today, we recently opened an HR engine two of our Otv's Westwego and battery.
Next regarding our casino investments beginning with our Terre Haute project in Indiana.
We are on track to hold the groundbreaking for our Queen apparel casino in Indiana in June with the target Grand opening in late 2023.
Regarding rivers des Plaines Casino first phase of the expansion at rivers opened on January four with the addition of 200, new slot machines 2000 for table games and a new restaurant.
The second phase of the expansion opened on April 8th with 300, new slots in <unk> 'twenty, two table poker room, and a new large casino bar.
The third and final phase, which includes a new ballroom and event space is expected to open in early may.
When the final phases completed rivers will have added 725 gaming positions.
The facility will be the first property in Illinois to utilize the maximum 2000 positions permitted under state law.
All of this capital solely funded from cash flow generated by our rivers and additional debt financing at the rivers entity level.
Regarding Miami Valley Gaming, we have two smaller growth projects at the property. The first expands the outdoor gaming patio to allow for more games and to add an outdoor bar. The second project converts our buffet space into two new food venues, along with it adding incremental gaming space.
The two new food venues leverage concepts that have proved successful Derby city gaming and Oak Grove, and should provide significant cash flow savings compared to the prior buffet options.
We expect the outdoor patio expansion will open in June with approximately 196 games and the new food venues will open in July these.
These projects have been funded at the JV entity level with cash flow generated by Miami Valley gaming.
Now I'd like to provide an update on our acquisition of Pacific Gaming Entertainment or <unk>.
We have submitted all of our entity in individual applications from Virginia Racing Commission, The New York State Gaming Commission, and the Iowa Racing and Gaming Commission.
We are working closely with the staff in each of these states to expeditiously obtain our regulatory approvals.
Marcia will discuss in more detail, we've already completed the financing necessary and therefore, we will be ready to close the transaction as soon as we obtain the necessary regulatory approvals.
In the interim we are working on our integration plans, including participating in the development work for the Dumfries an important expansion projects.
We're very excited about the country's project and view that as a potentially transformative project for our company.
We are also analyzing where to deploy the remaining three HRS licenses in Virginia, and working with urban one on the original Casino initiative, which we hope to see on the ballot in Richmond. This November .
The <unk> acquisition consists of a very unique set of assets that provide significant growth through its existing and to be constructed facilities expands our geographic footprint and provides meaningful additional scale to our company in the coming years, all at an attractive multiple.
We are on track to close this transaction before the end of 2022 subject to the necessary approvals.
Turning to New Hampshire.
We announced in March that we have signed a definitive agreement to acquire 100% of chasers Poker room in Salem, New Hampshire, San Juan was approximately 30 miles from the Boston Metropolitan area.
We are planning to move to Chase was poker room to a larger facility in Salem. After we close the acquisition to allow for a larger HR HR and footprint given the extremely attractive market demographics.
We estimate that we will spend up to $150 million in total on the acquisition and build out of our new venue, including the <unk> machines. We are working through all the necessary approvals for the acquisition and plans related to any location, we anticipate closing by the end of second quarter.
Now I will provide a brief update on the status of our process to sell the excess land at Calder and our Arlington Park properties.
We are on track to close the sale of a 116 acres next to our Calder casino $291 million in mid to late June .
We intend to utilize the real property, we are purchasing as part of the <unk> acquisition and a 10 31 exchange to defer the tax on the gain from the sale of the Calder land.
We are also still on track to sell for 326 acre Arlington Park property to the Chicago Bears for $197 million in the first half of 2023 pending receipt of remaining approvals.
We will seek to utilize a 10 31 exchange to defer the tax from the gain on the sale of the land as well, but do not have anything definitive to announce at this time.
And finally, I will share some thoughts on the 148, Kentucky Derby that is just a little over a week away on Saturday may seven.
It is really great to see the Derby festivities and energy return to its traditional frenzy the.
The celebrations and parties kicked off a few weeks ago for charities and community organizations holding their traditional events to raise money for their organization.
The energy and excitement is back.
Our team has been finishing the preparations to welcome everyone to Churchill Downs for an amazing Derby week, we will begin with opening night Saturday evening with live music and Derby inspired fashion displays and of course, an exciting evening of horse racing.
We will have racing and other festivities and activities throughout the week at the track.
On Friday May six we will run the 148, Kentucky Oaks the championship race with facilities and on Saturday May 7th we will host a 148, Kentucky Derby.
We're pleased to have a Japanese bred horse and Crown pride running of the Kentucky Derby. This year Brown private one the UAE Derby in Dubai to qualify for the Derby.
Because he is a Japanese bred horse, Japan will allow wagers on the Kentucky Derby races. This year in Japan.
Television coverage starts with USA network, covering the Kentucky Oaks from one P M to six PM on Friday may six.
Say network will also cover the Kentucky Derby on Saturday May seven from noon to $2 30, with NBC, providing coverage from $230 to 730 P. M. As it does every year.
Based on advanced reserve ticket sales, we expect to deliver record Derby results.
We will issue a press release after the Derby later that night with all of the details.
We look forward to seeing everyone next week and if you can't be there you can still enjoy the telecast on NBC and wager on twin spires.
With that I will turn the call over to Marcia and when she is finished we will open up the calls the call for questions Marshall.
Thanks, Bill and good morning, everyone. It has been a very busy start to the year.
I'll begin with a few thoughts on our first quarter 2022 results and then provide an update on our capital management.
Bill shared we just finished a record setting first quarter with record revenue and record adjusted EBITDA.
As you review our first quarter results. There are few takeaways that I want to share with you.
First as Bill discussed our HR and facilities in Kentucky contributed over half of our growth in first quarter compared to the first quarter of the prior year.
Three HR and properties delivered a combined 120 basis point increase in margins in first quarter compared to the prior year quarter.
As I've shared in the past these atrium properties are unique assets and the early growth stage of their lifecycle has been built to be operated very efficiently as you ramp up the business.
For example, Derby City gaming operates at a margin that is more than 10 points higher than margins for typical regional casino.
Despite significant construction during the quarter related to the gaming floor expansion and the building of the New Hotel Derby City gaming delivered 30% growth in revenue for the quarter compared to the prior year quarter and nearly the same level of growth in adjusted EBITDA with four of its top five handled days ever.
In March.
<unk> and Newport gaming It has similar stories during the first quarter of.
Growth had net revenue up over 50% and nearly double the adjusted EBITDA for the quarter compared to the prior year quarter.
Newport Gaming continues to benefit from the expansion and realignment of the gaming floor delivering over a 40% increase in net revenue and more than doubling its adjusted EBITDA for the quarter compared to the prior year quarter.
We're looking forward to explaining our ATM footprint in Virginia, with the <unk> acquisition and in New Hampshire with the Chase just poker room acquisition that we announced during the quarter.
Second our twin spires sports and casino results began to show the improvement that you will see from our exit of the online sports casino business. During the first six months of this year.
As we indicated on our year end earnings call, we expect to eliminate more than a $30 million loss from a run rate adjusted EBITDA in 2022 compared to 2021, and we're still on track to do so.
Third regarding margins for our wholly owned gaming properties, our margins were down one seven points in the first quarter compared to the prior year quarter, driven by the decrease in revenue and adjusted EBITDA from our Mississippi properties.
Excluding our Mississippi properties, our margins were up 50 basis points compared to the prior year quarter.
Our Mississippi properties have faced significant market pressure from the new competitor in Arkansas and seeing some early softness due to the elimination of government stimulus.
All of our other gaming properties had good topline growth.
Most of which was due to the elimination of Covid restrictions and curfews that were in place during the first quarter of last year.
And last regarding our first quarter results, we generated $125 million of free cash flow.
Nearly $26 million over the prior year quarter and up nearly $69 million over the first quarter of 2019.
As we add new properties in 2022 and beyond we expect to see very significant growth in free cash flow from our business.
We continue to expect to spend $60 million to $70 million on maintenance capital and $300 million to $350 million on project capital in 2022.
Given our belief in returning capital to our shareholders over time in the form of dividends and share repurchases, we repurchased approximately 117000 shares in the first quarter and an average share price of approximately $214 per share.
At the end of March 2022, our net leverage was two seven times.
Internal net leverage was two six times.
Our leverage has continued to decline because of our strong operating results in the first quarter 2022.
On April 13th we completed an $800 million delayed draw term loan a transaction and funded a $1 $2 billion high yield bond offering into escrow both of which will be used for the financing of the <unk> acquisition.
We also increased our revolver for our credit facility from $700 million to $1 $2 billion.
We are grateful to our bank partners to help them successfully execute this issuance of debt.
Certain times.
Institutional debt holders for their support and unwavering commitment.
We were pleased to execute the largest high yield transit transaction and nearly two months and a great long term rate in anticipation of the closing of the <unk> acquisition before the end of the year.
In closing we are truly looking forward to seeing everyone. This coming week and all of the Derby week event and as the week filled with music fashion celebrations and embracing a beautiful car sits around the most iconic race track and the world hopefully have already downloaded the <unk> app.
You can easily bet on your favorite horses was that I will turn the call back over to Bill. So that he can open the call for questions Bill.
Marcia.
At this time, we're ready to take any questions that you have out there so far away.
Thank you.
To ask a question you will need to press Star and then the number one on your telephone keypad.
Our first question comes from the line of David Katz with Jefferies. Your line is now open.
Good morning, David go ahead.
Sorry, good morning.
Thanks, very much for taking my question.
Morris.
Look I think.
What what wed love to just get into here is if you could.
Maybe bridge us a little bit.
Not guidance, but just talk to us about how youre thinking about what the earnings power of the company could be a little longer term are we.
Correct.
Sort of building this out.
It looks like something in the neighborhood of $1 billion to in terms of the total company with all of the projects that you have out there.
Is that a fair way for us to think about it.
I can imagine when you when you look at our company right now it looks fairly complex because we have so much.
Growth coming so much Greenfield in addition to organic growth in our existing properties purely the HRS. So you have to look at property by property and and you have to look at Virginia, too because within Virginia, we have Dumfries.
The other three HRS licenses that have not been assigned to a location in Virginia, and then potentially even the urban one Richmond casino.
If that goes according to plan.
So when you add those projects to the existing other projects that we have.
New Hampshire Terre Haute.
Kentucky.
You have to be used you have to do it as a series of building blocks in.
I'm not going to give you guidance on what the number is but I can tell you I've been here for 17 years and I've never been more excited about our firepower with respect to development and our opportunities with respect to development.
It's a tribute to the team if you look at how in particular HR EMS have performed for us in our existing location.
But we have a winner there so we have a.
A very strong team with a lot of knowledge of how to deploy <unk> and the ASRM projects themselves are products themselves are very very good machines. So so this is a very optimistic time, even if the macro environment may not be the most optimistic of times for the country.
This is a very optimistic time for our company and we're just going to put our heads down and execute like we've been doing for a number of years and we will prove it will prove it over the upcoming quarters.
Sure.
<unk>.
Make this sound like a negative follow up because it's not with all of the positive opportunities that you have and positioning that you have.
Just thinking through the gating factors are the risks to actualizing all of it.
One investors ask about supply chain and making sure you have the materials to do you have in front of you to that.
Human capital to execute in third.
The financial resources.
Whether you feel like you have all the all of those in place to execute or if any of that is on the come.
Yeah.
Those are the right questions. Those are what we focus on all the time and we've been in a high growth environment as a company for an extended period of time, we really have grown.
Consistently and significantly over an extended period of time. So we are constantly revisiting how to structure ourselves how our training is working for our team.
So high degree of confidence on the human capital because we've been building our pipeline of human capital talent in order to address our opportunities. We're a company that believes very very strongly and promotion from within.
That is something that creates a culture, where people learn better and try harder because they see opportunity for their own careers to advance so feel really good on the human capital the.
The financial resources I think we.
We've demonstrated we're among best in class at that we're very thoughtful about our balance sheet.
We have the confidence to go ahead and go on out and raise the money now for the <unk> acquisition. So we don't have high leverage now and we'll have it managed as.
As we get into our new projects and we have a good revolver in place $1 2 billion capacity in order to flex up as necessary to fund our projects so feel pretty good about our financing feel like we're best in class at that the supply chain is a little bit more out of our control, it's something that people talk about constantly in the country and it's real.
It's real there is some disruption, but so far our team has really managed it well and it is just a function of.
The team that we built here Bill Mudd runs that team we.
We built a pretty good team that.
That understands the challenges predicted.
And works around it so yes supply chain disruptions are something that we've experienced it's something that everybody in the country is going to experience and you just have to attack that with good people and careful planning and so far I believe I have been very comfortable with how how we've how we've dealt with it and I don't feel that it's cost us any particular meaningful.
<unk>.
Opportunity or timing, so I think David you were asking the right questions. The right thing to focus on as a company.
Are we going to scale to handle the opportunities that are in front of us. It's a great problem to have but I think it's a problem that we have a track record for dealing with because we've actually been in an environment like this for an extended period of time.
Understood. Thanks, so much.
Thanks, David.
Thank you. Our next question comes from Dan <unk> with Wells Fargo. Your line is now open.
Hey, good morning, everyone and thanks for taking my questions.
So first I wanted to touch a bit on the <unk>.
<unk> trends that you're seeing across your portfolio I know you guys called out Mississippi things some competition, there and some impact of the government stimulus rolling off.
As far as you look across your portfolio I mean are there any kind of nuances are one offs that you kind of look through the different properties and dynamics that could be affecting demand here.
Hi, Dan This is bill Mudd, something we look at very closely a good question.
Every every day.
<unk>.
More frequently than that even.
I'd say first of all not only 11 properties.
So everything outside of our two Mississippi properties show growth in the first quarter and it was it was good growth across each of the.
Of the months in the way that we analyze it really is taking a look at.
Our net revenues compared to 2019, because there is noise both in 2020 , one and so far the only properties, we've really seen show a little bit of.
Our struggle is the Mississippi properties and they probably are more susceptible to.
Fuel and <unk>.
Food prices, but even those two properties haven't fell off as much as we would.
As it could have been so otherwise all of the properties continue to show growth.
Got you and then.
For Q2.
I know you're set to close I think by the end of this year and Theres a handful of opportunities for <unk> to be constructed facilities. How should we think about layering in the additional development over the course of 2023.
And then if that is the case in 2024 should we think about this as kind of our fully ramped run rate EBITDA year for pizza.
So.
You talk about Dumfries, let's take don't freeze, which is the biggest unbuilt.
Projects project, there were shooting for that to be operational by the end of 2023, but I would caveat that that date a bit I feel very good about it but we're not and they are actually operating.
This business at this point, so sort of reserve the right.
To tweak that timing on the margins as as we get in there and take control of the <unk> assets, but really truly an excellent team on the ground doing great work and.
And that's sort of the timing for that property the other unbuilt.
Licenses.
Are predicated on winning a local referendum. So we are working hard now to analyze where we think in the state we should be.
Best devote our time and effort to passing local referendums then we need to go do that and then we need to build the facilities. So I think thats, a 2023 2024 target date for not only passing referendums, but building out building out those projects and then as we become more familiar with the state I'm not saying we're done there because I don't think we actually are.
As we become more familiar with the state we actually you may take.
One or more of our 10 licenses that are currently our to be built and actually move them to new jurisdictions. If we think we can get a better return. So I think Virginia is a really interesting chess board and I don't want anyone to ever think that.
One of the pieces on the board. It can never be moved we will look to see where we can maximize.
Of the 5000 <unk> that were allowed in the jurisdiction and.
And you may see us move licenses around if it makes sense over time, but I think youll see a lot of activity over 2022, I think all of these properties are are in a stage building towards maturity I'm talking about the ones that are existing that are currently existing in operational so I think youll have organic growth in the existing.
Properties, you have the new licenses to be deployed and then you have the ability to reassign machines across different facilities.
And you have the ability to move the licenses within the state. If you think there are better markets. So I think theres going to be some.
An element of of of chain.
Change and it's going to be a dynamic set of circumstances for a while but I think youll see this play out over 'twenty three 'twenty four with some cleanup work and some improvement as we even go beyond 2024.
Got it thanks.
Just quick one.
On the paddock projects of $185 to $200 million I think you mentioned there was an eight year payback return.
Which I think was a little bit longer than the typical kind of five to six years is that reflective of maybe a higher cost for the project given given material cost and supply chain as you alluded to or is this just yes. It is a more expensive project because it's at the race track its expenses to kind of modify Churchill downs.
Well.
With respect to Churchill Downs racetrack.
We've pretty frequently followed.
Our model of a little bit longer payback.
The reason I think that there's sometimes confusion on that as we've often beaten that we tend to beat that so our projects at the track tend to turn out to be better than we thought we tended to be more conservative.
In our planning. So this one is fairly typical yes. There are there are challenges to.
Supply chain and cost of raw materials.
But there's always the ability to do value engineering, and we also really understand our facility. After all these years, we understand it extremely well so although it is a constant theme both in our company and broader in.
The American business community.
To talk about and obsess about supply chain and construction restrictions in there those are all valid topics let's.
Let's say, we've generally been dealing with them and it's a function of the team that's been built and the quality of the resources. We have to address these problems. So I would say that when we put together the paddock project and something we've been working on for a while yes those themes around costs are there.
Targeted payback period is pretty consistent with what we've asked our team to drive towards over the last number of projects.
We will beat the return estimates on this one like we have in some of the others.
Regardless, there isn't anything unusual about this planning compared to these other projects, except the projects bigger than and in this case.
We're operating on the heart of the facility, we're operating on the absolute centerpiece of the racetrack, which is the paddock. So that's something that affects everybody's experience when they come to our track and I think that that raises the.
The attention that raises the pressure.
And the required commitment to make sure we do a good job of meeting everybody's expectations and Thats, why we needed something really bold.
Something spectacular that that marks us as a as a world class facility not just now but as we look out over the next.
A couple of decades as far into the horizon as we can as we can see we've got to be world class. We can have customers that come from Japan or other parts of the world.
And have a mediocre experience they have to come here and have a unique experience and this is what it takes and it'll.
It will pay for itself.
It's an economically.
Significant.
And worthy project in addition to being an artistic won its first and foremost an economic one.
Got it that makes sense. Thanks, thanks, guys for all the detail.
Sure Dan.
Our next question comes from Shaun Kelly with Bank of America.
Your line is now open.
Hi, good morning, everyone.
Bill maybe just to stick with the development projects for a moment.
Could we get a little bit more color on just the timing of how that capex will be let out between both the paddock project and.
New Hampshire I think these are sort of two of the more recent announcements. So just kind of over what time period do you expect to spend the capital and how should that trend media across 2023, and maybe into 'twenty 'twenty four okay.
Okay, well I'm going to start by answering this question Marcia I invite you to jump in if you want to give more specifics than how I answer. This question so with respect to the paddock project.
We are obviously going to have a completely spent and all the capital spent in the project opened.
For May 2024, because thats the 150 of Derby. So two years from now this project will be completely done so over the next year. We're focusing we have the homestretch club done that was I think a $45 million project over this next year 2022 to 2023, we will be doing the first term project, which is the 90 million.
Spend so the rest of the spend on that to complete that project and at the same time, we will be working around our live race meets in order to do the paddock project. So the breakdown between.
2022, and 2023 with this money largely being spent over that time, so that we're ready to open in 2024.
<unk>.
We can give you that detail, but off the top of my head, it's fairly level loaded between between the two projects.
With respect to new Hampshire.
First we'll close that transaction and then there's a fairly significant spend as we as we build a broader <unk> footprint.
At a new location, we have a great market and sell them a great license location, but we're going to look to move that license. So that is something that we'll work hard on in 2022 and look to have completed by 2023, but contrast thing that with our plans for the paddock our plans for the paddock are locked.
Down we know exactly what we do what we're doing we know to the month, we are our expectations on price and it's completely planned out with respect to new Hampshire, we have to complete the regulatory process and get our license and then we have to decide on our definitive location of where we want to move to and then run through all of that planning.
<unk>.
That planning process, so theres a little more.
Flex in the system for that one but that is something that we expect to get done over and over.
22, and by the completion of 2023.
Great and then maybe for my follow up it's a little bit more of an academic one but I'm interested because it keeps me enough to be worth calling out but you mentioned.
The Japanese horse it could have an impact it sounds like a little bit on the ability to bet.
On the Kentucky Derby do you have it sure historical experienced a precedent of a similar time that's occurred and how does some of that opportunity flow back I think for those of US who know the market a little bit I know I think we know that.
Horse racing is very very popular in Japan, So just any sense of what some of that impact or financial outcomes could be for Churchill downs as a result of that.
Yeah. So.
We've worked hard to build a Japanese and an international road to the Derby or.
Future growth.
For our company will be bringing in international guests America of the Kentucky Derby in terms of what it is today has great International appeal and our great International brand, but that's never really been connected with our efforts at the track to develop a sales strategy to bring in lots of <unk>.
Our national guests and that is something that we're focused on changing so if you think about what's happening in the middle East with <unk>.
With.
Dubai in.
And the path from there and if you think it's about Japan.
Part of the focus is to get horses to come how we will monetize this.
We hope through sponsorships, we hope through attendance ultimately and of course in the case in some cases, we hope to do so through handle a wagering Japan is what you call a closed market. So if you go to Japan horse racing is a very very large business in Japan.
You're only allowed to bet on Japanese races in Japan, except for a handful of exceptions.
Call it somewhere around 20, or so races, a year, perhaps its 30 now that are brought in from overseas into Japan for Japanese betters to Tibet and in order to do that you need to have a Japanese horse in the in the international race before the Japanese authorities, we'll let the race to come into the jurisdiction. So.
So getting a Japanese horse in the Derby has been something that we've been focused on as we've learned that market and giving them opportunities.
Now that we are emerging from Covid, we feel like we're back on track and so prior to Covid Master fencer, a Japanese horse.
Came to the United States, a ran in the Kentucky Derby and now we will have another Japanese horse and.
Our experiences last time, where theres, a big time difference I believe it was something around $4 $5 million of handle so it's.
It's in.
How much was it might've been as much as eight didnt bring that information into the room with us, but but it was a number compared to the overall significance of the of the day.
Card.
That does $250 million on that day $200 million to $250 million. It wasn't an overwhelming contribution but it's it's a good start so.
All of these things we do.
Start and we build on them, but I would expect that this horse running in the Derby would have an economic impact to handle of somewhere around 4% to 10 million Bucks and if we can do it consistently year to year that will that will increase significantly over time.
But as the.
The larger point I wanted to make about it Sean was it's one piece of this puzzle.
We wanted we want wagering from Japan, but ultimately this is about building a connection to that customer base, which will allow us to drive sponsorships and allow us to drive.
Attendance in future years, it can be a bit premature to talk about that on a call like this but it's part of an international strategy that we over overtime. We hope reached reaches fruition because we have the brand we just have to build that the processes and the connections to.
Harvest the economics associated with it and some of these jurisdictions.
Really interesting thank you very much.
Sure.
Yeah.
Our next question comes from Brett Andress from Keybanc Capital. Your line is now open.
Hi, good morning.
On chasers in New Hampshire, I think that was a market that.
Up until now <unk> pretty low on the radar for most investors, but bill if you could maybe help frame up for us a little more of the longer term opportunity of that market, what you like about it.
And maybe the size of.
The total HR and build out there as you see it even beyond chasers.
So.
First we like New Hampshire is the new Hampshire, because it's HRS its historical racing machines, and that's something that we've built.
We believe a real expertise that can a series of processes that allow us to do it successfully so we liked that about the new Hampshire market.
The second thing that.
We really like.
And it may be economically the most important thing.
As.
The fact that new Hampshire sits.
On the border.
Massachusetts pretty close to Boston, So the Massachusetts population the population on the Massachusetts side.
Of the border is really pretty significant so the economic opportunity really is to try to offer a product that is attractive enough for for those residents to move back and forth across the border. So I think.
There are other opportunities across the state and other population bases, but for US we wanted to start with the one that we thought was most.
Most important or most lucrative for us and that's what we did and we got our absolute first choice. So we think over time there'll be some others that look at that but.
But for our company, we're particularly well situated for it because we've been building facilities that our HR and facilities and we have an extensive team that focuses on HRS everyday so for us it's a product that that's very familiar.
That we have a lot of confidence for but I think ultimately.
Those states are fairly dense and they are relatively small so when you when you try to analyze the market you have to look beyond state borders and just look at populations of metropolitan areas to build your modeling on how good an opportunity it will be but I don't expect that.
That it will be competition free.
I think others might have opportunities and perhaps we will too over time, but we want to focus on what's most important first and and Thats. How we approach any market. So we got the opportunity. We wanted now we just need to focus on where we where we put it within sale them and then we just need to run our programs in.
Deploy our team the way we have it at Derby City gaming and Oak Grove, and our other HR and facilities.
Got it and you already have.
So many shovels in the ground at Sao.
A little Crazy for me to ask this but but after the paddock and closing that chapter.
The investment I mean, what does the next stage of Churchill Downs look like and maybe asked a different way what is.
Maybe still on your wish list.
With respect to Churchill Downs racetrack.
<unk>.
You have to take it in stages and you remember you always have the next derby never more than 12 months away, but absolutely. We're not done when we get the Patrick project, we need to demonstrate that we can do that successfully but if you.
If you had a drone flying over the track and you look down at the track you would see that Theres still a fair amount of real estate around the first turn connecting what we call. Our we'll call. The first term project.
To sky terrorists and Millionaire's row. So you still see there is a fair amount of real estate, but one step at a time, we need to go demonstrate that we can successfully do the most important project.
That we've done during during my time here at the company with respect to Churchill Downs Racetrack, we need to go nail that project, we need to nail our projects every year.
But it's as simple as looking at the real estate of Churchill Downs Racetrack Theres still opportunity even on the front side of the racetrack not even talking about what you might do in the infield. So it's a fun sandbox.
To be in.
We're not at the end of our historical you know we're not at the end of history here, we're somewhere in the beginning or the middle there's still lots to do with that track, but we can't get distracted we have three big projects, we're executing on and we're just going to execute those first and leave the future out there a little bit before we talk about that.
<unk>.
Understood. Thank you.
Our next question comes from Joe Stack with <unk>. Your line is now open.
Thanks, Good morning, Bill Marcia.
I wanted to ask a couple of questions kind of zooming out a bit on the HRS category for you guys.
I guess, one if you can maybe just give us a sense of any other states that may or may not be contemplating HRS legalization <unk> expansion plans.
I know there are a handful, but I didn't know exactly like where the status of those were in.
And then secondarily to that.
Can you talk about Bill maybe just the competitive advantage you have with your horse racing experience.
And what that gives you in terms of positioning yourselves to win more HR and licenses.
Maybe another jurisdiction so.
Oh sure.
So Joe I'm going to do the best I can on this but.
With respect to identifying other state I really don't want to identify other states. There are other states that are considering this and during during our time here in the company.
Governmental affairs has really become an important function as we worked with legislature's as we work with other.
A relevant political bodies, often horsemen groups and tracks in different jurisdictions. So.
I would say that as.
As much as I want to say about this is.
Certainly there are other states that we're focused on certainly we think there are other <unk> opportunities in the United States, where we're laws can be passed in this product can be deployed.
But I don't think I'd be responsible to our processes that were running in those states to talk about them. Further so our objective Joe is to develop other states, where we can deploy HRS.
Youre aware currently are the ones, where we're allowed to do that.
But certainly.
Certainly the process to get an opportunity like <unk>.
Is a process, it's not something you're gifted you have to work to earn it somebody has to work to earn it and across a handful of states. There are people, sometimes us directly who are working to get that kind of product.
Pass through the legislature, so that its an opportunity. So that's as much as I'd want to say on that the competitive advantage with respect to HR Rems really is twofold not every state.
<unk>.
Connect historical racing machines to actual live racing New Hampshire is an example of a state where there is not live thoroughbred or harness racing in the state anymore and yet they still past.
Our paradigm, allowing historical racing machines largely to support charitable initiatives in the state so with respect to those kind of states and I don't think this will be the last one I think with respect to those kind of states, we bring our operational expertise and our knowledge of these machines, having worked with ainsworth to actually develop the machines as they exist.
<unk>.
We bring a lot to that process because of our deep deep knowledge from a technical and operational standpoint.
On how these machines work how the laws.
Maybe are structured how they're regulated we have a lot of advice and understanding.
That that we can bring to the table that that helps us and helps the state with respect to those states were H rems are very firmly connected to live horse racing while that is.
The ultimate sweet spot for our company because <unk>.
<unk> bred racing is at our core it's where our company comes from.
We have a.
Deep history in understanding at this point on how all this works together, how the <unk> fuel the racing Howard fuels capital investment.
It fuels pursuit, how it fuels the breeding industry.
We have a very good paradigm and template for.
How all the pieces fit together and it is a complex mosaic because.
Horse racing is a complex business, it's breeders itself sales.
Its farms that support the horses and all of those share in <unk>.
At one level and other or another.
And harnessing all of that energy and all of that political support that's something we've done now in a few places and Thats probably are.
Our strongest competitive advantage when we find a circumstance like that so we think for example, Virginia is a very good place optimal place for our company with our current skill sets.
To invest.
I appreciate that thank you and if I can ask one follow up please.
And this is really I guess kind of dovetails into just understanding.
Where margins May go the rest of the year for your.
Your gaming portfolio.
But just wondering bill.
If you see a change maybe in the promotional <unk> marketing environment, especially in larger markets that you compete in that.
That may or may not influence say the direction of the margins that you might put up this year.
Hi, This is bill not I'll I'll take that one.
If you look at the promotional market I think we ran at about a 15% free play rate, which was above last year, which is around 12 in the first quarter, but well below kind of the 19% in Q1 of <unk> 19.
<unk> kind of where we are today in a promotional environment I don't see a big move from where we are we are seeing customers that fell off during COVID-19 returns of facility. So that's good news and we are seeing some of the younger demographic lower end players not come quite as frequently as they have other options open.
For entertainment.
Purposes.
No.
And those players don't bring a large wallet so the more valuable players aren't coming back so I don't see a whole lot changing with respect to where we are today on the margin side as long as volume.
Base roughly consistent.
Understood. Thanks, Thanks, a lot.
Our next question is from Zach Silverberg with Bahrenburg. Your line is now open.
Hi, Thanks for taking my question good morning.
You guys mentioned that.
The twin Spires result that there was a greater increase of patrons returning too.
Retail a horse race wagering could you.
The impact of that.
On the cadence of the remainder of the year for the twin Spires digital horse racing segment.
Yes, Hi, this is bill I'll take that one.
And I think some of this was in Bill's comments during COVID-19 the percentage of folks the wagering online jumped from like 40% over 60.
And roughly in the middle of last year sometime during early to mid third quarter.
That kind of fell back to close to 50% and it stayed pretty consistent so I would say in terms of the return back to brick and mortar we're largely through that we'll see one more quarter and then I think we'll be kind of back to a consistent year over year basis in terms of what we would say so I think we got maybe one more quarter.
Of of kind of year over year comparison constraints now that we're back to back to where we think we will be on a consistent run rate basis.
Gotcha, Thanks for taking my question.
Yeah.
The next question is from the line of Chad Beynon with Macquarie. Your line is now open.
Good morning, Thanks for taking my question and all the details thus far.
Did you ask about share repurchases and just kind of general capital allocation decision tree here given the Capex that you noted and obviously the pending Petri acquisition, how should we think about how opportunistic you can be kind of along the way with share repurchases.
As you did execute in the in the first quarter. Thanks.
That's a really excellent question I appreciate you asking it.
I know this is a time, where if you look at our company you see a lot of projects and you see a lot of investment.
And building our company.
That being said, we've always been very very careful of how we manage our balance sheet I think I think marsh is an absolute master at it.
We always build in capacity.
With respect to more than one strategy for share buybacks. So we believe very very strongly in our company. During my entire 17 years here at Churchill I've always felt this way we believe very very strongly in the future of our company and so we are very opportunistic when it can.
To share repurchases and we work hard to make sure we're never in a position where we can't take advantage of an opportunity. If one presents itself. So we run more than one strategy, we constantly have more than one strategy that we're looking at.
Ordinary course repurchases, but also capacity for.
Outside of the ordinary course repurchases.
And we don't take steps and left unless we thought those things through in advance and we know what our limits are and we know what we're capable of.
So that we can address any foreseeable opportunities that we see so.
You will see that.
That the projects, we've announced and the efforts we're making.
Sensitive as they are they have all been designed to allow us to continue to participate in share buybacks.
If it is warranted.
Thank you very much I appreciate it.
Thank you at this time I would like to turn the call back to Mr. Bill <unk> for any closing remarks.
Thank you.
As always we're very grateful for all of all of you on the phone call. Thank you for your questions. Thank you for your interest in our company. Thank you for your investment will try to be worthy of that.
As I said, a really exciting time for for those of US on the management team here, we really feel we have a lot of growth in a lot of runway. So it's an exciting time and it's not just because it's the derby in a week.
It is a reflection of all the.
All the work that's been done to get US here. So we will talk to you.
Next quarter beyond the lookout for our Derby press release that we put out after the Derby, where we'll give you some feedback on how we did during the derby, but otherwise we're going to just put our heads down and go execute and we'll talk to you next quarter and hope to share with you.
Good results and good progress when we talk to you next thanks very much.
This does conclude today's conference call. Thank you for participating and you may now disconnect.
Okay.
Okay.
Okay.
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Yes.
Thank you.
Yes.
Okay.
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