Q3 2022 Churchill Downs Inc Earnings Call
[music].
Yeah.
Good day, ladies and gentlemen, and welcome to the Churchill Downs incorporated 2022 third quarter earnings Conference call.
At this time all participants are.
We are in a listen 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.
I'd like to introduce your host for today's conference Mr. Nick Zangari, Vice President Treasury and Investor Relations.
Thank you Andrew.
Morning, and welcome to our third quarter 2022 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2022 third quarter business results were released yesterday afternoon, a copy of this release announcing results and other financial and statistical information about the period to be presented in this.
Conference call, including information required by regulation G is available at the section of the company's website titled News located at 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 <unk>.
Thanks, Nick Good morning, everyone with me today are several members of our team, including Bill Mudd, Our President and Chief operating Officer.
Marcia Dall, our Chief Financial Officer, and Brad Blackwell, Our general counsel.
I will provide some high level thoughts on our third quarter results and then share some updates on a number of strategic topics, including the <unk> acquisition.
Our major capital projects.
Marcia will then walk through our results in more detail and provide an update on our capital management strategy.
After she finishes we will open up the call for questions.
First some thoughts on our third quarter results, we delivered record third quarter adjusted EBITDA.
We also opened a new gaming property and completed a couple of strategic acquisitions.
Finally, we positioned ourselves to close the <unk> acquisition in the fourth quarter.
Let's talk about each of our segments, starting with live and historical racing.
The segment delivered strong double digit growth in adjusted EBITDA for the third quarter.
All of our HR and properties performed well, we were especially pleased with the double digit adjusted EBITDA growth from our Oak Grove in Newport properties.
Derby City gaming performed solidly despite disruptions from the ongoing gaming floor expansion and build out of the new hotel.
We opened our fourth HR and facility at Turfway Park on September one.
This entertainment venue serves northern Kentucky, and the entire Tri state area around Cincinnati.
It has 850 <unk> and the ability to expand to 1200 as demand ramps up.
It's a competitive market and we expect a steady ramp up over the coming quarters.
We completed on September 2nd the acquisition of Chasers Poker room in Salem, New Hampshire, just off of Interstate 93.
Over recent years the property has generated the highest level of revenue of all of the charitable gaming licenses in New Hampshire.
That's a great backdrop from which to now expand into HR apps more on that later.
We also completed on September 26 the.
<unk> of Ellis Park racing and gaming and Henderson, Kentucky.
This property currently features a thoroughbred racetrack with 300 <unk> in the grandstand.
With this acquisition, we have the opportunity to construct another HR and venue and Owensboro fourth largest city in Kentucky.
We expect to invest approximately $75 million into the existing Ellis Park facility and the new Owensboro HR and project over the next year.
We will talk more about this in a few minutes.
Turning to our twin spires business.
While handle was up almost 8% over 2021 adjusted EBITDA for the twin Spires horse racing business was down slightly for the third quarter compared to the prior year quarter.
This doesn't concern our surprise us.
A slight decline in adjusted EBITDA, we are pleased with the strong margins that this business delivered when we compare it to 2019.
With third quarter, adjusted EBITDA up nearly 50% and margins up nearly three points over the third quarter of 2019.
Our twin spires sports and casino business generated positive adjusted EBITDA in the third quarter.
Our team has done a nice job of carefully yet quickly exiting the online sports and casino business, while maintaining the retail sports operations and our gaming facilities.
We continue to like retail sports wagering, our interest and online sports has shifted to the <unk> model focused on providing technology and horse racing content to facilitate pair mutual wagering on third party sports wagering platforms more on this in a few moments.
Turning to our gaming business, we have a diversified portfolio of regional gaming properties that continue to perform well during the third quarter.
Our consumers behave differently in each of our markets. So it is difficult to generalize across all of our properties with respect to clear trends by customer segment.
Our Florida, Maryland, and Louisiana facilities delivered adjusted EBITDA growth in the quarter.
As I will discuss in a moment, Illinois, and Ohio were also strong in contrast, we continue to see softness in our Mississippian, Pennsylvania gaming properties, although not as significantly as we saw in the second quarter.
Likely this relates in part to the stimulus money that was burning off in 2021, as we progress through the year.
Regarding our equity investments rivers des Plaines delivered record revenue and record adjusted EBITDA in the third quarter, reflecting the benefit of the property's gaming floor expansion during the first half of this year.
We are optimistic about this facility's future performance with the new amenities and improvements.
Miami Valley Gaming also delivered record third quarter revenue and adjusted EBITDA.
This property benefited from the expansion of its outdoor gaming patio in June and the expansion of the indoor gaming space into a portion of the area that was previously a buffet.
Across the company over the third quarter, our segments performed well and we expect the trends in each of our segments to continue into the fourth quarter.
Marcia will provide more color on our financials in a few minutes.
Now I will provide updates on the five areas of strategic focus for our team that will transform our company over the coming years.
Second the <unk> acquisition.
Third our next steps regarding New Hampshire, and Ellis Park for our Arlington land sale and finally, our twin spires business to business strategy.
First let's talk about our major organic growth projects.
We have a very experienced team leading the execution of our capital projects. Our team has done a good job in responding to materials and labor cost pressure as well as delays in equipment delivery over the past couple of years.
We plan for contingencies in our projects and value engineered to further help mitigate cost pressures.
Our team worked proactively with other with our vendors to anticipate any delays in critical equipment and develops alternatives. If a critical item is delayed.
The majority of our capital projects are delivered on time and on budget.
Some projects such as the home stretch club, which was completed in May of this year at Churchill Downs Racetrack.
And the Turfway Park, HR and facility were delivered under budget.
That said there are a couple of projects in our pipeline that we anticipate spending modestly more on than we originally projected.
I will identify visas, we discuss all of our projects over the next few minutes.
Again, most remain on time and on budget.
Beyond this I want to give you a sense of the strength of our growth pipeline and our excitement to execute on it.
Let's start with Churchill Downs racetrack.
We held the topping off ceremony for the first turn project on October 21, when we place the final steel beam on the top of the new structure.
$90 million of investment will be ready for the 149th Derby in May of 2023, when we will introduce more than 7300 permanent seats in this new and unique location.
We are currently projecting that this project will be delivered on time and on budget.
Okay.
While the first term project will be transformational in its own right. The paddock project will enhance the experience of everyone who enters the front gate or views the facility on TV. It's a once in a century project for our iconic flagship.
Next our investments in new high growth historical racing and gaming properties.
Beginning with Derby City gaming.
The expansion of the gaming floor with an additional 200 machines and new dining and entertainment options remains on track to be completed by the end of 2022.
The construction of the hotel also remains on time to be completed in the second quarter of 2023.
But after the Derby as we previously explained.
The budget is still approximately $76 million.
Regarding our Derby City gaming downtown project in Louisville, We are now making excellent progress renovating the building that we purchased on the corner of West market Street in South Fort St.
This construction has been more challenging than expected as we encountered a number of issues related to the age and condition of the building, resulting in incremental costs and delays.
We still anticipate opening the opening this project in the second half of 2023.
However, we are now projecting around $10 million more than the original budgeted cost of $80 million.
We believe that even with this additional investment the economic return on this project is well within our target and is a good use of our capital.
Regarding the rollout of <unk> and our Otp is in Louisiana.
As of today, we have installed 295, HRS and 11 Otv's and they have performed well to date. We are on track to have 600 machines across 14 of our otv's by the end of the first quarter of 2023.
The final organic project is our Terre Haute casino in Indiana.
We are building an entertainment venue with approximately 1000 slot 34 table games and sports book, along with several food and beverage offerings and a 122 room hotel.
Our 50 acre site is immediately adjacent to Interstate 70 in Terre Haute less than an hour from the western suburbs Indianapolis.
We have begun the construction of the foundation walls for the casino and hotel the.
The completion date has been affected by delays in the initial permitting an approval process and long lead times for equipment. We originally projected that this project would be opened in late 2023 and would cost $260 million. We are now projecting it will be completed in the first quarter of 2024 and will cost up to 290 <unk>.
We remain confident that this is a very good use of our capital based on the expected returns.
Now I'd like to provide an update on our acquisition of Peninsula Pacific gaming or P. Two weeks.
This acquisition of a very unique set of assets will provide our company significant growth through both existing and to be constructed facilities.
After we close the transaction, we will have added meaningful scale and organic growth opportunities to our company at a very attractive multiple.
We've obtained approval from the Virginia Racing Commission to acquire the Virginia properties and the Iowa Racing and Gaming Commission to acquire the hard rock hotel and casino in Sioux City.
The New York State Gaming Commission is meeting this morning to consider for approval our application to acquire del Lago resort Casino in upstate New York.
Assuming all goes according to plan. This morning in New York, We anticipate closing the <unk> transaction next Tuesday November one.
As you likely saw we announced in early September .
With that we will be purchasing all of the Iowa assets as part of the acquisition instead of purchasing just the operating company in connection with the underlying real estate being sold to a REIT.
As a result of this change the purchase prices increased $265 million to $2 $7 5 billion.
The <unk> acquisition includes the opportunity to construct a large HR and facility in Dumfries.
This isn't an approximately $400 million investment in northern Virginia around 30 miles South of Washington D C.
<unk> off of Interstate 95.
Phase one of the project will include 1150, <unk> and is scheduled to open in fourth quarter of 2023.
It also includes a 102 room hotel that is expected to open in the first quarter of 2024.
This is an extremely exciting projects. We have worked very closely with the seller to ensure a smooth transition to us at closing of the Pizza Retrans acquisition.
Project has been fully bid out and construction is well underway. It remains on time and on budget.
We are also acquiring the rosy Emporia project in Southern Virginia, Norfolk, and Virginia Beach immediately adjacent to and Interstate 95 interchange.
This project will offer 150 <unk> this.
This was a $30 million effort that is currently planned to be completed in the third quarter of 2023.
As part of the <unk> acquisition, we also acquired the rights to partner with urban one on the potential to build a casino in Richmond, Virginia.
<unk> has held in past there in 2023.
We believe that the city of Richmond, and the Commonwealth of Virginia will benefit significantly from having a state of the art casino enrichment.
We will work hard with urban one in the coming year to build support for the referendum next year.
Turning to our expansion to new Hampshire.
As I mentioned earlier, we completed our acquisition of Chasers Poker room in Salem on September 2nd.
We are excited about the opportunity to build at HRS venue with table games, just 30 miles from Boston.
New Hampshire has a unique structure for <unk>, where a significant portion of the excise taxes are contributed directly to charities.
We look forward to developing a successful property in Salem that will create great jobs and will also provide critical support to many local charities serving the surrounding communities.
We've leased a location that is near the current chasers poker room and are working with the various local stakeholders to obtain building permits and other approvals necessary for our proposed facility.
We will provide more details on our development plans on future calls.
With respect to our acquisition of Ellis Park. Our initial focus is on our development plans for an HR and facility in Owensboro, because that is the larger unrealized economic opportunity.
We will have approximately 600 HRS with room to expand as demand grows.
We're also determining our capital plans for the Thoroughbred racetrack in gaming facility at Ellis Park.
In addition to our gaming refresh Ellis Park itself will need capital improvements the racing infrastructure and customer facility and that is something we anticipated and planned for in our modeling supporting our purchase price.
The cross sell with park, and the new Owensboro, HR and facility, we expect to spend approximately an additional $75 million.
We will have much more to share on our next call, including more specific budget and timing estimates.
Let's spend a moment on our process to sell the Arlington Park property.
We are still on track to sell the 326 acre parcel to the Chicago bears for $197 million in the first quarter of 2023 pending completion of remaining conditions.
We expect to then execute on our plans to defer the tax from the gain on the sale by utilizing qualifying 10 31 exchange transactions.
And last I will share some thoughts on our twin spires <unk> strategy related to wagering on horse racing.
First we are still very committed to our b to C twin spires horse racing online wagering business.
Our online offering has delivered very high customer retention metrics over a long period of time.
And our connection to the Kentucky Derby should continue to help attract new and casual players.
As we exited the online sports and casino business we.
We sought to build related build relationships with some of the major online sports betting companies, who want to introduce their significant customer base to horse racing.
Which is actually an important part of the content offering in many European markets like those in the United Kingdom.
We were thrilled to announce our partnership with <unk> in early September .
We expect <unk> will go live with Us in January 2023.
With our support <unk> is creating a fully integrated and seamless wagering experience for their customers to bet on horse racing while on the <unk> sports Wagering platform, where they can bet on a variety of other sports.
Our partnership with <unk> demonstrates our strategic commitment to our <unk> offering.
As we discussed on our last earnings call. We believe that horse racing content should be available in sports wagering platforms across the U S and we intend to use the expertise and technology of our twin spires and United Tote teams to deliver it.
Our twin spires team is in the process of negotiating other sports betting partnerships.
If successfully completed each of these partnerships will enable the sports wagering platform to distribute online horse racing content to their U S sports betting customers.
As we look towards the end of the year and into 2023, we are very excited about the many growth opportunities in front of us with.
With the imminent closing of the <unk> acquisition, we will see a material increase in adjusted EBITDA and free cash flow.
In 2023, and 2024, we will deliver on the other investments I discussed today.
And we will keep pursuing what we're good at developing greenfield inorganic opportunities as well as pursuing acquisitions to grow our company significantly while not over taxing our balance sheet.
With that I will turn the call over to Marcia and when she is finished we will take your questions Marcia.
Thanks, Phil and good morning, everyone I'll start with a few thoughts on our third quarter results and then provide an update on capital management.
First if you exclude the two businesses that we've exited in Arlington and online sports and casino business. Our net revenue would have been up $15 million, 4% higher for third quarter compared to the prior year quarter.
We had strong growth in net revenue in third quarter from our Oak Grove, and Newport, HR and facilities at Churchill Downs Racetrack, and our color Fairgrounds and Ocean Downs gaming properties as well as from our twin Spires horse racing business, we did have softness in Mississippi, and Pennsylvania properties in the third quarter compared to the prior year quarter.
Second as you look at our adjusted EBITDA for the third quarter. We are very pleased with the performance of Churchill Downs Racetrack and there is so much growth yet to be realized from this iconic asset in the coming years.
Team is very focused on the preparations for the 149th and 150 of the Kentucky Derby.
Generate step function growth in adjusted EBITDA as a result of the increased number of reserve seats. Once we complete the first turn and the panic projects and as we grow our sponsorships and wagering in the coming years.
Third we were also very pleased with the continued strong performance of our atrium properties in the third quarter and we expect strong growth from this segment of our business going forward.
Our three existing atrium properties in Kentucky, Excluding Turfway Park delivered another strong quarter with combined revenue up 14% and adjusted EBITDA up 15% compared to the prior year quarter.
<unk> had net revenue up 23% and adjusted EBITDA up 31% compared to the prior year quarter.
Our team enjoyed celebrating the second anniversary in September and it's been great to see the growth from this property and there is still much more to come in the years ahead, as we build our customer base with the surrounding area and draw customers from Nashville, Tennessee.
Newport Gaming continues to benefit from the expansion and redesign of the gaming floor delivering over 60% increase in net revenue and more than doubling its adjusted EBITDA for the quarter compared to the prior year quarter.
Our existing HII and properties, along with a new ATM properties at Turfway Park Chasers in New Hampshire, and Ellis Park in the annex in Owensboro, Kentucky, coupled with the acquisition of Peninsula specific gaming assets will fuel the growth of our high margin and uniquely attractive assets.
Fourth our team continued to make good progress in exiting the twin spires online sports and casino business and we now expect to have a combined net loss for retail and online of less than $5 million for the total year.
And last regarding our third quarter results for our wholly owned gaming properties.
Gaming margin of 36%.
Wholly owned properties, excluding our racetracks was up 30 basis points compared to the prior year quarter and up seven eight points compared to the third quarter of 2019.
Third quarter of 2021 is relevant but still a challenging comparison, given the lingering impact from stimulus payments last year and the inflationary impact on consumers this year.
Our teams that are wholly owned gaming properties of managed to execute very efficiently when compare to pre pandemic levels. Despite these challenges.
Turning to our capital management update we have generated $387 million of free cash flow on a year to date basis at $19 million over the prior year.
Regarding maintenance capital, we have spent $37 million through September and we now expect to spend $50 million to $60 million in maintenance capital for the total year.
This is $10 million lower than our previous range for the year.
Would expect our maintenance capital to grow approximately $10 million to $15 million in 2023 based on the assumption of the <unk> assets and with the growth of our existing businesses.
Regarding project capital, we spent $227 million through September and we now expect to spend $325 million to $350 million on project capital in 2022.
Many of you have asked I've also asked how to think about our project capital projections for 2023.
Currently we would anticipate our project capital spend growing by $200 million to $250 million. In 2023. This reflects the anticipated cash spend for all of the projects listed on our capital projects exhibit in our press release as well as for the remaining portion of phase one of <unk>.
<unk> project and the Pizza, we employ a project.
Regarding share repurchases, we repurchased approximately 289000 shares in the third quarter and an average share price of approximately $204 per share, reflecting our belief in the long term value of our shares.
Regarding our dividend our board of directors did approve a dividend of <unk> 71, four per share, which is 7% higher than last year's dividend.
Dividend has a record date of December 2022.
And payment date of January 2023.
This dividend represents the 12th consecutive year of increased dividends for our company.
At the end of September 2022, our bank Covenant net leverage was two five times.
External net leverage was two six times.
Our leverage has remained low because of our strong operating results again in the third quarter.
We look forward to closing the <unk> acquisition as soon as we can after we obtain the approval of the New York State Gaming Commission.
We've discussed in the past, but unfortunately raised all of the funds that we need for this acquisition earlier this year.
Do you expect our bank covenant leverage to increase to four four times at the end of this year as a result of the <unk> acquisition.
We then expect to see our bank covenant leverage to begin to decline as we benefit from the sale of the Arlington land in the first quarter of 2023.
And as our businesses generate strong cash flow from both our existing and new operations.
In closing, we have a very strong balance sheet with extended and will allow the maturities on our debt with a relatively low average cost of capital.
We have a unique portfolio of assets that is unparalleled in the gaming and entertainment space and will generate a significant amount of revenue adjusted EBITDA and free cash flow in the coming years based on the disciplined capital investments that her team has made and we will be making over the next few years.
We remain committed to creating long term shareholder value with increasing dividends and by strategically repurchasing shares of our stock.
With that I'll turn the call back over to Bill So that he can open the call for questions Bill.
Okay. Thank you very much Marcia.
We're now ready to take your questions. So please fire away.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Yes.
And our first question comes from the line of Dan <unk> with Wells Fargo.
Hey, good morning, everyone and thanks for taking my questions.
So I wanted to touch on the <unk> racing content strategy.
That seems to be unfolding real time, as we think about the <unk> deal and the four pieces Theyre broadcast rights Derby sponsorship, United Tote, and the technology component and then I guess the variable piece related to content fees.
Can you walk us through the.
The Ala Carte.
The Ala carte offering as it relates to the future conversations that youre, having what are the biggest pieces as we kind of try to estimate what the opportunity here could be.
Sure happy to do that Dan and good morning.
So first <unk>.
<unk> is a company that debt.
Whose roots are borne out of Europe , and they have a strong appreciation and interest in horse racing because of their activities, there and add the 80 W that they own.
Here in the United States TPG. So they were very very focused even militant on an integrated product from the beginning into their sports Pam So the first from a.
The first distinction I want to draw between them and others in the immediate term I don't think there'll be a distinction on this point in the long term, but in the immediate term is fine to have wanted an immediate integration. So.
They want to have pair mutual wagering on horse racing sort of as a tab or an option on their broad sports wagering platform, where you can put all sorts of other sports others will not be ready.
Quite as quickly with that middleware and that integration. So that so that the wagering can happen immediately on their sports plan Pam there'll be an interim step where they are essentially.
Being provided by us with.
A white label accounts deposit wagering platform from there. They will then transition their customers ultimately to a fully integrated product on their sports Pam. So we're prepared to move as fast or as slow as people are wanting us to move but I do think youll see it in the immediate term one one.
Differentiating differentiating point.
What that piece others will want.
Most of all what content they want.
Want to us the source of the content from them, that's something that we're good at others may want us to do settlements for them some will be interested in sponsorships.
There is a variety of commercial and operational tools and options that we will offer and I bet no too.
Sports Wagering companies has a deal that looks exactly the same with us.
Got it thanks, and then I think on the variable component that relates to the content fees for wages wages on rates to date your tracks.
What are I guess, the key variables that we should look at as we try to do.
The size of this opportunity is is it the planned race days across.
You are half a dozen or so tracks is it the estimated handle from these tracks and maybe the additive component from additional deals or what are the data points that we should be looking out there to try to size. This.
I could take that in a couple of differentially direction. So if you don't mind just clarify if you could just a little more precisely what's you're asking.
Of those four buckets for that for the <unk> deal for example, the big variable piece is there I guess, we think about it and understand it is it is the fees for wages running at your track. So a bet place on wagers placed on the <unk> App that runs through the Derby or Turfway Park for race, there. So as we try to size that opportunity.
<unk>.
I guess kind of the parameters or.
Data points that you could point us to kind of give us some clues there Scott.
Got it.
I understand and thank you so first.
We of course have our own tracks and we have our own.
We own the Kentucky Derby, So we own the most important piece of content and.
And the streams of payment.
With that are more than one so this business.
Of creating content running a race track the way it works in the United States is that track always gets paid pursuant to the Interstate Horse Racing Act you need to have contracts with tracks in order to take wagers on their track and thats different than other sports. So the first revenue stream.
For US always is the fact that if you want to bet on the Derby or Churchill Downs Racetrack. The most famous race track in America, you have to have a contractual relationship directly with our track and you have to pay our track.
On a per drink basis for every wager that is taken through your platform. So that will continue here that will continue.
Everywhere anywhere anyone in the United States takes a bet on the Kentucky Derby.
Separately.
We will be paid.
On all of the content that is provided to our sports wagering platforms that is how our deals are structured generally with respect to content. So we will get a piece.
A marginal piece of every every single track that goes through the platform.
Regardless of whether we own that track or not when we don't when we do own that track of course, another additional piece flows through.
Flows through to the track. So the margins of course are really good we are providing a technology solution and we're also delivering content for those that need us to and and the economic structure for that as always.
A piece of the of the wagering transaction, so I'm going to stop there Dan I think that answers your question.
The larger point is yes, we get paid more when it's our content.
But we get paid on all concepts.
Got it thanks, so much for the color.
My pleasure.
Yes.
Thank you and our next question comes from the line of Shaun Kelley with Bank of America.
Okay.
Hi, good morning, everyone.
Bill maybe just sticking with the <unk> deal with the <unk> strategy.
Can you can you help us think about how you.
Thought about or analyzed cannibalization. So is it just the risk Q wagers placed on twin spires as a sort of direct channel that you are relative to obviously a huge opportunity to grow the Tam you mentioned Europe , a couple of times. So I assume that's a big piece of it but sort of growing the derbys presence relative to the risk around around channels. It's just how you thought about that dimensionally.
Yes, happy to do that Sean.
So first this is a great opportunity for our company there are millions of customers out there on the sports wagering platforms and a chance to reach those customers who sign up for an online account.
Because of their interest in any variety of sports.
As a really attractive market right now we can only reach online those customers who have demonstrated such a strong interest in horse racing, they're willing to download an app and go through the registration process specifically for the Horseracing product. We know there are a lot more casual fans out there than there are more serious fans. So the chance to reach those more.
Casual fans is a much much bigger sandbox. The plan. Then then the world we've been used to where it's just those that care enough to actually sign up for an account that being said.
Our best margin would always be on on.
A player that plays through twin spires.
However.
The fact is twin spires is now and will probably continue to morph over time. It is a product that is primarily driven by more serious customers. So it is more driven by more serious players who are involved and focused and spending a lot of time building data models utilizing.
<unk> data utilizing information for for their handicapping activities. So we still think that that product.
That we offer with twin spires.
Really really really attractive for serious players and will remain so.
For the more casual players, we're pretty good at finding them in recruiting them because of our connection to the Kentucky Derby, our utilization of the NBC telecast. So I suspect we will always find new customers who are enthused.
Enough to download the product and and that provides us with newer customers, but increasingly I hope. We also find customers that become more serious horse players over time, and maybe one a more immersive experience and thats what twin spires is and will continue to morph to a lot of internet businesses I think are driven by a small.
Paul piece of economic activity from a huge group of people, that's really never been the twin spires model twin spires is driven by.
A relatively modest number of people who are significantly engaged in the product and participating in participating in a significant way both monetarily and in terms of time on device. So.
I think cannibalization will absolutely happen it'll happen at the margins. However, I do think this also is a much bigger opportunity and better overall for the company and I also think and don't want to lose track of the idea that creating serious horse players is always creating both casual horse players in creating serious.
Horse players is always in the best interest of Churchill Downs.
So any time through any way that a serious players has created that's a chance for twin spires in the long run so I.
I think cannibalization can have happen I expect it to happen in some level I think overall this is still way better for our company than to worry about that risk.
How exactly it will happen quarter to quarter I don't have an economic or I don't have a mathematical formula that can show you that we will just have to see how it plays out.
Im entirely sort of.
I am entirely optimistic on it and not.
Looking behind my shoulder.
That's really clear. Thank you for that and then maybe to switch gears on you but.
Martin I think it was in your prepared remarks, where you mentioned that the wholly owned margin if I caught it correctly were actually up 30 basis points year over year in the gaming segment could you just elaborate on that a little bit first of all tell me. If I was correct and then second of all if you could elaborate.
Right that in a little bit.
It's a pretty stunning or excellent performance you talked about efficiency. What are the team is doing and just in your mind as you look at it some of the inflationary pressures labor cost et cetera into 'twenty three.
How sustainable is the range of outcomes that you see kind of right now as we increasingly lap stimulus and some of the onetime effects from last year.
So I think the more important thing yes. It was up slightly 30 basis points on a quarter over quarter basis part of that was driven by the insurance recovery that we had.
Fairgrounds.
Regarding business interruption insurance related to Hurricane Ida I think the more important point that I was trying to make there is that we were up seven eight points compared to the third quarter of 2019 really compared to the pre pandemic levels. The team has really been able to offset you know really the the facts.
<unk>.
Given all of the inflationary pressures that we've had.
Some of the labor challenges over the last 12 months. The team has really continued to just keep their head down and even with increased competition that we've seen at the Mississippi properties. The team has really done a great job of addressing all of the challenges that they can and.
Continue to attract customers to come into the properties and growing the properties as well as they can through these challenging times.
Thank you very much.
Okay.
Thank you.
And our next question comes from the line of David Katz with Jefferies.
Hi, good morning, everyone and thanks for taking my questions I appreciate it.
Bill we've talked about this a bunch of times offline.
And I just think it would be.
To go back to it.
Since it's come up this morning, just talking about the budgets that are out there for the many compelling projects that you have.
And how comfortable you are and how comfortable you can get us that the budgets will stay.
Arent going to move a whole lot right.
First good morning, David good to talk to you.
Well some of the budgets are now being built in the current environment. So that makes it easier because we're in the middle of the environments, where there's been a disruption in the inflation and the time delay, but I have to say that even for the budgets that have been compiled previously.
Bill Mudd and his team they've done a really fantastic job where on these issues every single day, it's not like these things should surprise anybody we know we're in an environment like this so we have to be working on these things.
Things.
Every single day, and the communication with with vendors and suppliers has to be excellent. So I think the first place to look is just look at look at the projects. We are delivering look at Turfway Park look at the home stretch club look at the projects we have been doing in this environment.
We have been on time, we and we have been on budget. There have been a couple where we're slipping a little as a percentage of the project theyre not big but I called those out very specifically and talked about those very specifically in my in my comments.
We're on it.
Sometimes.
There can be different reasons for different ones I would I would say.
The Derby city downtown it's an old building.
When we got behind the covers on that building and saw what we have that's cost us a little bit more and so that's part of it is not just the inflationary environment and the cost of materials that building was in worse shape than we realized and when we when we peel back the layers and could really look at it we saw that so again, not particularly material, but there is another reason for it.
Besides just inflationary pressures so project by project. That's how we do this it's not some kind of philosophy, it's project by project and its elbow Grease, we have built a team over the last few years led by Bill Mudd and this is what they do for US every day. This is their job so.
I think the first place to look at is our performance in this environment, which is there and then hopefully we can in part some comfort as you hear us talk about these projects that.
We're focused on these sorts of risks and we have our hands around them pretty well.
Understood.
And for Marcia I know this has been disc.
<unk> discussed.
In the past as well, but I think it's instructive because it's got so much with investors of late can you just talk about the.
The debt stack that you have.
<unk> that you may need to go out and raise more capital if there is any.
And the degree to which you are.
Your interest rates are fixed versus variable today, and I, just think that would be sort of helpful. In a broad context.
Thanks, David.
I think if you look at our our debt maturity. If you will see that we have a very as I mentioned in my comments very well ladder maturity of our debt structure. We have no debt due until 2024, which is a very small piece, which is the term loan b, that's less than $400 million after that theres really no debt due in.
Until 2027, if you look at our debt once we're done with PTC, we estimate that we'll have about 45% that's floating.
65% that that will be fixed after we're done.
We really I think have a very low.
Average cost of capital.
When we're done with us so our interest rate exposure is I think very well managed at this point in time and as I mentioned, we I think we're very fortunate.
Some might call it lucky, but I think it's just a discipline of our team is that we went out and raised money for the <unk> deal earlier. This year, we did not do committed financing.
We raised some money and so we're able to execute.
The <unk> acquisition now we have a large enough revolver of $1. Two that we can handle execution of things like the Alice Park acquisition very seamlessly within three weeks.
Being able to close that and even once we're done with the <unk> acquisition and everything that we've done we will still have a very.
A significant amount of capacity remaining on our revolver.
For things that May come up.
In the coming months, we're always looking for strategic things that we might do to reposition things off of the revolver and finding those open windows.
That even free up more capacity because as bill said, we'd like to acquire things that you'd like to continue to fuel the growth of our company and.
Nick and I will always be looking for those opportunities to continue to make sure we refine those windows of opportunity.
To tap into the debt markets, where it makes sense.
Okay. Thank you very much.
Yes.
Thank you.
Our next question comes from the line of Joe Stauff with Susquehanna.
Thanks, Good morning, Good morning, Bill Marcia.
Wanted to ask about Derby City gaming Bill you had mentioned that.
Some of the construction disruption on the expansion.
Obviously very likely affected sort of the core facility, what's the right way to think about maybe when there is a more notable step down in terms of the construction disruption is will be when you kind of launched the 200 new units I guess later this quarter.
Or will it be more towards like the first quarter of 'twenty three.
The second.
The second dining options.
And then.
As we think about.
Again within PJM, so as we think about sort of Oak Grove.
The right margin profile for that property.
What's what's the right way to think about it naturally.
Derby City gaming is so high and the low to mid <unk> currently.
Just wondering.
How to think about sort of the oak Grove margin profile going forward.
Hey, Joe This is bill Mudd, so I'm going to take this one for the team.
Great questions. So first of all there has definitely been.
Construction disruption because we had two entrances to Derby city gaming, we have one at each end of the building.
One end of the building, which is where.
Over half the parking is.
Customers can't go there. So we then busing customers from that into the building over to the other entrants we've been providing.
Nominal amount of free play for the aggravation for the customers to keep them coming back. So the team has done a very good job of keeping those customers engage and keeping them coming.
So theres definitely been to be able to quantify and tell you what percentage or is this really.
Impossible to be able to tell you, but clearly been disruption we've handled it very well in terms of when that disruption goes away.
It will.
We'll have disruption until the hotel has done just because you have construction workers there and you can have people going in and out of the building.
But most of the construction will be happening on the inside as we build out the hotel rooms.
After the end of this quarter. So at the end of this quarter a good portion of the disruption will go away. We will continue to have that until the hotel is completely done a.
Towards the end of May of next year. So overall been happy with it hard to quantify exactly how much there is but there is definitely disruption.
Makes sense. Thank you.
Okay I'm going to your other question about Oak Grove, and the margin profile of low growth, Yes, I mean, if you compare outgrow the Derby city gaming, you're kind of comparing apples and oranges right. Now if you think about Oak Grove. It as a hotel it has more food and beverage offerings. So you do have a hotel, which tend to be low margin, but it also has a racing product, which obviously is <unk>.
Low margin Derby City gaming <unk> product is excluded in setting over with Churchill Downs net profile, so you're kind of comparing apples and oranges. So it would be a better more fair comparison once we.
Finished the capital expansion projects, we're working at it D C G.
But I would also say Derby city gaming, it's a bigger facility and as you have bigger facility. You you can cover overhead cost in the nominal revenue dollar falling through those those assets come through at a higher rate. So what I would say is outgrowth has lots of capacity to continue to grow we love that.
Greater Nashville market, we're continuing to see that property ramp.
And as that property ramps, even with a hotel you should see the margin rate within that facility continue to grow so all things being equal all of the assets in Kentucky or at the same tax rate, but obviously each one we're going to have different volumes and and that's clearly what's going to be the primary driver of any margin differentials between say a down to downtown new.
Port versus a.
Derby City gaming.
Okay. Thanks Bill.
Thank you.
And our next question comes from the line of Chad Beynon with Macquarie.
Hi, good morning, Thanks for taking my question.
Continuing on some detailed questions around HRS facilities at.
It sounds like things are humming along pretty well.
Growth of Newport, with respect to turf way and Louisiana HR MN Otb's can you just kind of help us think about how long. It takes for these properties to ramp up I know, it's pretty new to the customers and where obviously the customer is going through a lot right now but.
It sounds like the returns on the other assets.
Very strong after let's call it 18 to 24 months.
How long should it should it take for some of those numbers for turf way in Louisiana to start picking up thanks.
Okay.
Thanks, Chad so.
First with respect to turf way, that's a competitive market there are properties on the Ohio side of the Ohio River.
And on the Indiana side of the Ohio River in the Tri State area. So we have some experience there we have recent experience with our Newport asset that.
That we have there.
Marcia went through some of the ramping we're seeing there in her comments also a number of years ago, We opened up Miami Valley, which is not.
It's still largely part of the same markets little more distant but we saw a similar experience there so.
When it comes to turf way.
This is what youre going to find in a competitive market you just get in there you start building your database.
You try to recruit customers the right way you try to get them into your database.
And you take your time and it takes some time and in the meantime competitors will run their models to try to keep competitors or keep customers from from visiting so I think youll see a ramp up over an extended period of time Newport is a no sense done with its ramping process and we're a couple of years in and I think you'll find something similar for Turfway Park.
So we opened at September <unk>.
We immediately had some technical problems with a particular manufacturer. So some of the games were down so.
We've sorted out those those Kinks, and we're really just getting started now with building.
With building our program.
Bob.
You also asked about New Orleans, and HRS and whether they cannibalize the.
The product and our Otv's there'll probably be a little of that but anytime you have a chance to introduce a great product a better product a competitive product you do it and it'll be a rising tide it'll it will improve the overall performance. So I'm not going to give you a formula for four.
The percentage of cannibalization that you might find it an OTB in Louisiana, we're not actually sure, but we know and we're confident the more <unk>, we can add to the mix the more attractive broader.
Product offering we have and that will attract more customers who stay longer so we'll see it sort out over the near term, but we wouldn't have put these things in if we thought we were just going to spell.
<unk> capital to cannibalize, our existing product, we're very confident that this product brings us more customers who stay longer.
Great. Thank you very much I appreciate that.
And then separately on the capital allocation strategy nice to see.
How balanced it is for you guys with the share repo.
The increase in the dividend and obviously all of the projects that Youre working on as we get deeper into the the projects in 2023, how should we think about what you guys will be able to do on the share repurchase side.
Given how consistent and strong that's been in your.
And your company approach for years. Thanks.
We still have the.
The authorization in place I think I think it's $300 million or so.
Authorization, we have so it's one of the tools in our Arsenal.
<unk> it's <unk>.
Something we thought all things considered it was attractive to do and we have the ability to keep doing it can't tell you today exactly what we're going to do in the future except you do have the benefit of our.
A long history with this management team to see how we've behaved and you also understand the broader parameters of our leverage even with all the projects that we're currently executing on we pop up around 4445 times, Levered, which isn't excessively levered. So we continue to have this tool in our.
In our Arsenal in.
It's something we'll continue to consider based on market conditions and other forces, but it's certainly not off the table just because we have a lot of.
Good capital projects going on at the same time.
Great I appreciate the help thanks.
Thank you.
I'll now turn the call back over to CEO Bill <unk> for any closing remarks.
Thank you and thanks, thanks to all of our investors.
Investors out there who join these calls to the analysts we always appreciate your interest in our company and your feedback to US we're always looking to get better and to improve so we appreciate the feedback we appreciate the support.
And we appreciate the interest I would just remind you that even though it's only late October .
You start thinking about getting your Derby purchases in Derby $1 49 comes on in a hurry and we're starting to sell the tickets and theyre moving pretty well so.
You want a sample that first term for yourself I encourage you to do it.
I encourage you not to wait too long or Youll find that you may not just have the opportunity to do it so.
So don't yell at us as we as we get towards the next Derby.
And you can't find tickets were warning you know that.
<unk>.
So again, thanks very much.
Have a nice holiday season, we'll talk to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for.
Participant disconnect.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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