Q4 2022 Churchill Downs Inc Earnings Call

February 23, 2023

Good day, ladies and gentlemen, and welcome to the Churchill Downs incorporated 2022 fourth quarter and year end 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. Nick Zangari, Vice President Treasury and Investor Relations.

Thank you Andrew.

Morning, and welcome to our fourth quarter and year end 2022 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2022 fourth quarter and year end business results were released yesterday afternoon.

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 report on Form 10-K.

Any forward looking statements that we make are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

Press release and Form 10-K 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 share some high level thoughts on several strategic topics and then Marcia will walk through our results and provide an update on our capital management strategy.

After she finishes we will take your questions.

Over the course of 2022, we accomplished numerous key strategic and operational objectives and position the company for growth in 2023 and beyond.

We delivered record net revenue of over $1 8 billion.

And record adjusted EBITDA of $764 million.

We have very high expectations for 2023, as well, but first I will touch on a few important highlights regarding 2022.

We held a very successful, Kentucky Derby setting records for virtually every material metric.

We completed the <unk> transaction, the largest acquisition in our company's history.

We expanded our HRS business into three New States, Virginia, New Hampshire and Louisiana.

We opened Turfway Park, our new HRS entertainment venue in Northern Kentucky.

We completed two other strategic acquisitions Ellis Park in Western Kentucky, and Chasers in New Hampshire, we.

We signed an agreement to purchase <unk> systems.

We completed the sale of the excess land at Calder, and we have several significant strategic organic investments in process to accelerate our future growth.

Through all of these initiatives, we still maintain one of the strongest balance sheets in the industry.

In summary, we had a productive 2022, but our focus is now on executing on our growth objectives for 2023 2024 and beyond.

Let's discuss our strategic update since our last earnings call first we.

We have made significant process progress on our projects at Churchill Downs racetrack in preparation for the upcoming 149th Kentucky Derby.

Our firsthand experience is almost complete.

The structure of the size of a typical soccer stadium with more than 7300 permanent seats located on the first turn of our iconic racetrack.

The scope of this complex a stunning the first time you see it at a forever changes the personality of this portion of our venue, which historically has been dominated by a series of temporary structures and back of house infrastructure.

Our guests will experience it for the first time at this year's Derby in early May.

Ticket sales have been very strong, but it is not yet sold out we expect it will be.

We have also made significant progress on the Paddock project. This is a transformative project for Churchill Downs race track. The most significant in decades and will create a variety of new and innovative guest experiences while at the same time, improving the views and ambiance for every single guest who enters our historic.

Through the front gates.

Our goal is to introduce a level of transformation and grandeur that will surpass any facility anywhere in the world.

We remain on course to complete this project for the 150 of Derby in May 2024.

This effort epitomize as a core strategic initiative of our company to invest and grow the scale and profitability of the Kentucky Derby.

The 149th Kentucky Derby run on May six this year.

And we will ensure that it is a special event as it always is for everyone. Despite some of the construction that will still be underway on the paddock area.

We have a good plan, we arent concerned about any material negative impact to this year's Derby.

If you haven't yet bought your tickets for this year, we encourage you to do so the demand is extremely strong.

Second since our last earnings call. We closed the <unk> acquisition on November one acquiring colonial downs racetrack and its fixed operating HRS venues in Virginia.

We also acquired a Lago resort and casino in New York, and hard Rock Hotel and casino in Sioux City, Iowa.

The acquisition also includes two <unk> properties under construction in Dumfries and Emporia, Virginia and up to three additional HR and venues we can pursue on the state.

In addition, we assumed <unk> joint venture relationship with urban one to potentially build a full casino in Richmond, Virginia. Upon the legislature permitting Richmond to proceed with a referendum.

The <unk> acquisition expands our company significantly and also provides us with material growth opportunities in the HR M and casino segments beyond the venues currently in operation.

<unk> are a key strategic focus over the next five to 10 years for our company as we seek to expand our existing footprint.

We have developed high growth high margin investments in this segment with excellent returns on capital and we will seek to build on that track record in Virginia, New Hampshire, Kentucky, and perhaps beyond.

In Virginia, we are constructing the Rosita Emporia HR imp venue in the southern portion of the state. This is a 150 unit facility that is on track to be completed in the third quarter of 2023.

In addition, we are building a significantly larger HR and facility in Dumfries, which is located in northern Virginia around 30 miles South of Washington D. C directly off of Interstate 95.

This is an extremely important project because of the long term potential given its proximity to the population in the Washington, DC and Northern Virginia area.

At the same time, we are identifying additional locations that are candidates for our remaining <unk> entertainment venues.

After finding suitable locations, we are required to run successful referendums in the relevant localities.

We will share more on our Virginia plant and later earnings calls.

With respect to every HRS venue under construction or that we subsequently pursue we will build upon the lessons learned from our successful developments and operations in Kentucky.

We expect to continue our positive momentum in Kentucky in 2023 with the completion of the Derby City gaming floor expansion and new hotel by the end of the second quarter and with the opening of the Derby City gaming downtown HR or entertainment venue and downtown.

In the fourth quarter of 2023.

And Western Kentucky, we are deep into the design phase of our atrium facility in Owensboro and are excited to tap into this new market.

We will also be investing modest levels of additional capital and to the FERC bred race track infrastructure and HR and facility at Ellis Park.

As you are aware, we have an additional HR im extension opportunity associated with our Oak Grove license that we will explore deploying and discuss in subsequent earnings call.

If and when we decided to pursue a location.

In New Hampshire, we are developing plans to construct a property in Salem that will create a significant number of jobs and will also provide support to many local charities serving surrounding communities.

As I've discussed before New Hampshire has a unique structure for HRS and which most of the excise taxes that we pay are contributed directly to charities that our direction.

We will provide a more fulsome update on our progress for this project on future earnings calls.

We expect this measure to be a significant contributor to our <unk> segment and the planning process is one in which we are heavily engaged even if we are not ready today to provide more specifics.

Since our last earnings call, we announced our entry into a definitive agreement to acquire exactly systems, a leading provider of <unk> central determinant system technology.

Integrating the exact business into our company will enable us to ensure that continued investment is made and the exact technology to improve its reliability and cost structure as well as the game themes available on the system all.

All attributes that are important to the ongoing success of our Virginia, and New Hampshire, <unk> operations and those of exact as other customers that we will continue to serve.

We expect that acquiring in fact.

<unk> improved our own operations in Virginia, and New Hampshire, It is worth noting that our Kentucky HR <unk> operations are serviced by another central determinant technology provider and we remain very happy with the performance and quality of that technology and vendor at this time.

Yes.

The closing of the exact transaction is dependent on satisfying various closing conditions, including state regulatory approvals and we do not have a date to announce at this time.

Turning to our online operations.

In 2022, we pivoted out of the online sports and casino business and our team did a nice job of carefully planning our exit while maintaining the retail sports operations and our gaming facilities.

We also pivoted towards a <unk> strategy of integrating para mutual wagering on horse racing directly into the online sports wagering platforms through our suite of technology and operational capabilities.

We remain fully committed to growing our twin spires horse racing <unk> business, while also pursuing our <unk> model.

We believe that wagering on horse racing will expand in the coming years as millions of sports betting customers are introduced to the support online.

Twin spires dot com will continue to be a destination for more serious horse players who want to comprehensive pair mutual centric experience.

And finally.

Last week on February 15th we completed the sale of the Arlington Park Racetrack property to the Chicago bears for $197 million.

We deferred the federal taxes related to the gain on the sale using qualifying 10 31 exchange transactions.

In summary, 2022 was a tremendous year for our company with record financial results we.

We are well positioned for ongoing growth in the coming years fueled by our acquisition of the pizza, we asset and buy the organic investments that we're making in alright.

And our iconic asset Churchill Downs racetrack or.

Our HR and projects in numerous states, our Terre Haute project in Indiana, all of which collectively will drive a material increase in adjusted EBITDA and free cash flow in 2023 2024 and beyond.

Our overreaching objective is to pursue what we have demonstrated we are good at.

The Kentucky Derby, developing greenfield and organic opportunities as well as executing acquisitions that fit our profile all of which allow us to grow our company, while maintaining one of the best balance sheets in the industry.

We have a great group of leaders and team members, who have helped to deliver these results and are building our business to create the best possible total shareholder return for our investors over the long term.

We'd like to extend a special welcome to Andrea Carter, who joined our board of directors in the fourth quarter Andrea brings a broad set of experiences to our board, including deep knowledge of public company compensation and human capital best practices.

We're grateful that she has chosen to join our company.

With that I'll turn the call over to Marcia and then we will take your questions Marshall.

Thanks, Phil and good morning, everyone as Bill shared if we delivered record revenue and record adjusted EBITDA for the year. Excluding 2020, we have delivered record revenue and record adjusted EBITDA from continuing operations every year since 2016.

I'll start with a few insights on these financial results and provide some initial thoughts on 2023.

I will then provide an update on capital management.

First as Bill discussed we completed the <unk> acquisition on November one 2022.

The acquisition of six new HR and properties and colonial Downs race track in Virginia, The del Lago Gaming property in New York and the hard rock, Iowa Gaming property contributed $109 million of net revenue and $48 million of adjusted EBITDA in the fourth quarter.

The addition of these properties will clearly create step function growth in our financials in 2023, as we realize the benefits of <unk>.

Full year of this acquisition.

In 2023, we will also expect to begin to realize the benefits of the enhancements our team will be making sure the ASRM properties in Virginia.

Over the longer term, we expect to realize additional benefits to these properties from the acquisition of exactly.

Second we also continued our <unk> expansion in Kentucky, and our existing atrium properties and at our new properties. We saw strong growth from our Oak Grove is HRM facility as we continue to penetrate the southwestern Kentucky, and Nashville, Tennessee market.

Our team at Derby City Gaming also delivered good growth in 2022, despite some disruption from a gaming floor expansion and hotel built out.

We will have continued growth in 2023 and beyond from these properties. We also expect to layer on growth from the addition of our turf Ray Park HR property that we opened in September . The addition of the Derby City gaming downtown property in the city of Louisville and longer term from a Ellis Park in Owensboro, Kentucky.

<unk> atrium properties as well as our tasters HR and table game facility in Salem, New Hampshire.

Third we celebrated Derby week on the first Saturday in May with full capacity for the first time dissipate dynamic, which drove a record level of adjusted EBITDA very desirable margins for Churchill Downs race track.

Based on the addition of the first turn experience unexpected growth in sponsorships and other Devry weak economics, we expect 2023 adjusted EBITDA Patricia Downs race track overall to grow 10% to $15 million.

Fourth in 2022, we pivoted out of the online sports and casino business and our team did a nice job of carefully working to quickly exit all of the states, we could while maintaining the retail sports operations and our gaming facilities.

Strategic decision, resulting in an improvement of $40 million year over year, and our adjusted EBITDA related to our online sports and casino business.

Said another way, we ended up with a nominal loss of $8 million.

<unk> EBITDA for a combined retail and online sports and casino business in 2022.

Looking forward to 2023, we would expect to continue to generate a reasonable return in the high single digits from a retail sports operations with nominal impact from our remaining online sports business.

Fifth regarding our twin spires horse racing business as we expected a portion of our casual patrons returned to wagering I brick and mortar facilities instead of wagering online compared to the prior year.

Therefore, our twin spires horseracing business generated lower pair mutual handle in 2022, and therefore also lower adjusted EBITDA.

Although the final numbers are not available yet for 2022, we estimate that 52% of all wagers on U S. Thoroughbred racing in 2022 were placed online which is still up significantly from 2019, when approximately 40% of all wagers were online.

Despite a slight decline in adjusted EBITDA.

Pleased with the strong margins that this business delivered in 2022, when we compare it to 2019 with adjusted EBITDA up 37% and margins growing by more than a point to 28%.

And last regarding our gaming business.

All of our regional gaming properties, except in Mississippi, and Pennsylvania properties grew adjusted EBITDA in 2022 compared to 2021.

Our same store wholly owned casinos generated an incremental $51 million or 33% growth in adjusted EBITDA compared to 2019.

Our 2022 same store wholly owned casino margins were down two points compared to 2021, however, our margins on the same basis.

Nearly seven points compared to 2019.

Regarding our equity investment with rivers des Plaines, and Miami Valley Gaming delivered record revenue and record adjusted EBITDA for 2022, reflecting the expansions at both of these properties last year.

Although the fourth quarter was softer for a regional gaming properties due to weather related challenges in December and some lingering economic concerns we have had a very strong start to the year, especially during the month of January however, it is difficult to draw any definitive conclusions from these early trends.

Overall, we are very pleased with the results that our team has delivered in 2022, and we believe we're very well positioned to continue to grow in 2023.

Turning to capital management, we generated $461 million of free cash flow in 2022 up $41 million over the prior year, primarily as a result of the strong cash flow generated from our businesses.

Regarding maintenance capital, we spent $50 million in 2022 and <unk>.

Not to spend $75 million to $95 million in 2023.

The increase in maintenance capital for 2023 is driven by the addition of our Virginia, New York, Iowa, and Ellis Park properties.

Maintenance projects anticipated at Churchill Downs racetrack in preparation for the 150 of the Kentucky Derby and incremental maintenance projects that are retail and gaming facilities.

Regarding project capital, we spent $373 million in 2022.

Spend between 575 $675 million in 2023.

Regarding share repurchases, we repurchased approximately $147000 in the fourth quarter at an average share price of approximately $204 per share, reflecting our belief in the long term value of our shares.

At the end of December 2022, our bank Covenant leverage was four two times our leverage increased as a result of the <unk> acquisition closing on November one of last year.

Based on the expected closing of our acquisition of exactly and our capital investments, we expect our bank covenant net leverage to remain in the four times range over the coming year.

We then expect our bank covenant leverage to decline in 2024, and 2025 as our ongoing investments in Dumfries Terre Haute Casino resort and our investments in the Kentucky Derby come online.

We received $500 million of total bank commitments to increase our existing term loan a that is due in 2027, we intend to close on this financing transaction within the next week.

We will use the proceeds to repay outstanding borrowings that we have under our revolving credit facility.

We appreciate the continued support from our existing Bank group and welcome four new banks to our exclusive Bank group.

We know that these can be challenging times for these financial institutions given the market uncertainty, we look forward to continuing to work with all of you to access the debt markets in the coming months to further support our continued growth and future investments and high performing assets.

In closing as Bill said 2022 was a tremendous year for our company with record financial results and we expect 2023 and beyond even better given our unique portfolio of assets that will generate a significant amount of adjusted EBITDA and free cash flow.

Ongoing commitment to our shareholders and to create long term shareholder value.

That I will turn the call back over to Bill So that he can open the call for questions Bill. Thank you Marcia.

Okay, everyone I think we're ready to take your questions now so far away.

Thank you, ladies and gentlemen to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

And our first question comes from the line of David Katz with Jefferies.

Hi, Good morning, I just wanted to.

Kind of touch on.

I think what you both kind of closed with as you you've done an awful lot of.

Building a pipeline over the past year or so that will generate earnings going forward.

Just to kind of set the table what would you consider the prospects or probabilities that there is there'll be more added to the pipeline before we get to the end of 2023 or are we going to chew on.

<unk> and swallow what we have for the moment.

Yeah.

Thanks, David It's bill.

The pipeline looks pretty good and we're not going to slow down we work constantly on on.

Managing our balance sheet to make sure that.

But we understand our capital needs and.

And we were constantly across all our teams we have excellent teams, we built and scaled the company well.

We have excellent teams in place to to digest the projects that are in the harvesting stage.

That process will be ongoing and while theres no guarantee of the future pipeline of future success.

Landing landing targets in the pipeline, we're going to we're going to keep at it we have a good formula and we're confident in what we're doing and so we'll keep doing what we're doing so I don't think that just because you've seen us be really busy that it's an indication that we should stop now and just digest, what we have we can.

We can digest, while we while we hunt for or things that will add to our future.

Okay.

Fair enough and Marcia if I could just get a perspective from you on.

Leverage right. There is theres kind of a lot of inputs do you have a lot to do but there is also.

I would say fairly limited economic visibility out there.

Okay, how about.

Where would you like to settle the leverage and what levers could you pull to sort of get inside of four times.

And the like should you choose to do that.

As we've said we strive to be in the three to four times leverage range.

But as Bill said, we I think have done a very effective job of managing our leverage over time.

Been times, where leverages dropped into the less than three times and people have challenged us to be higher in leverage.

We said that we would go higher when we had strategic opportunities that made sense.

Clearly the <unk> acquisition was one that was a great strategic opportunity for us and we took our leverage up to.

At four two times.

And we will be very diligent in managing through that we use share repurchases as a lever.

And in our managing of our leverage as well.

But we're always very opportunistic in and working very closely worked very closely with bill on managing our capital and we have great support from the banks and great support from from the debt market when we have great opportunities.

That we can deliver on.

Got you okay. Thank you very much.

Thank you.

And our next question comes from the line of Dan <unk> with Wells Fargo.

Hey, good morning, everyone and thanks for taking my questions.

First on Virginia, the HRS margins. These are pretty strong maybe around 48%, but for the couple of months you've owned these properties.

One is there any seasonality or anything you'd call out there into how do you think about this margin margin evolving over time, given the exact acquisition and the new slot products from additional Oems that you would look to probably saw over time in that market.

Good morning, Dan Thanks for the question.

So.

Obviously in doing the acquisition, we felt a lot of confidence on the sustainability of the business model, there and we thought we bring some things to the party overtime.

<unk> enhanced that business and grow it.

But beyond that were new operators to it and I don't want to provide a lot of guidance at this point into specific margins. Although you can see generally they're very strong and they are very high and.

That's always a focus for us as a company we are a margin focused company.

Got it.

And then on <unk>.

Capex I think there was a little bit of a step up both in terms of the the project stuff as well as the maintenance.

Even even versus kind of your guidance last quarter for 2023 were there any specific projects that are being pulled into 2023 or was the additional projects that you are now looking at or are you just really costs. Thanks.

Thank you.

Dan It's really just timing is always difficult given the size and we have over $1 billion of capital in flight related to the project capital and so it's just updated estimates around the timing projected timing of the spend.

So overall the total dollars between 23 and 24 has not really changed it's just the expected timing of when that.

Cash might go out to the door, obviously, we have the Dumfries project and the timing around that has moved a little bit as far as when we expect that spending to occur on the maintenance side.

We have included some additional capital related to Ellis Park for example.

We have some additional capital included related to the regional gaming properties for some refreshes and other things and I think we better estimates now related to some maintenance projects. We want to do ahead of the 150th Derby.

That that are included in our current outlook again. These are always difficult to project exactly when the cash spend will go out and that's why there's some variation.

Understood. Thanks for all the color.

Thanks, Dan.

Thank you and our next question comes from the line of Chad Beynon with Macquarie.

Hi, Good morning, Thanks for taking my question I wanted to continue on just kind of a broader question around the capex projects.

Maybe to make it easier just kind of focusing on some of the bigger dollar Capex. One has anything really changed in terms of how youre thinking about returns given maybe the stronger than expected consumer at this time or is that offset by a.

Tight employment market, where it might be tough to.

Just ask some of these facilities. Thank you.

When we when we think about these projects.

We think in terms of years not not trends, we see over a month or two months. So there hasnt been any any change at all.

Is there not been any material change there has not really been any change in how we perceive these projects and expect these projects to perform over time.

Great. Thank you and bill in your prepared remarks, you talked about.

<unk> stable.

Consumer.

Be it.

The weather impact that we saw in the fourth quarter and I'm sure we might be seeing in some of your markets. Currently but was there anything else in the database just in terms of different tiers of loyalty or the spend per trip that was.

Any change in direction versus kind of what you had been seeing in 'twenty. Two I think we're all looking for areas and nobody's finding them and it looks like things are continuing.

To be strong.

I don't think we saw anything in the Canary category and.

While we pay a lot of attention to the monthly data that we see and even the weekly data we see we're not we're not.

Generally inclined to conclude big big changes based on shorts amount of short periods of data, but in any case.

Thing remarkable to report that that that's.

Worthy of discussion on this call.

I appreciate it thanks and good luck. Thanks.

Thanks, Chad.

Okay.

Thank you and our next question comes from the line of Shaun Kelley with Bank of America.

Pardon me, Sean please check your mute button.

Hi can you hear me now.

Yeah, we can hear you Sean Okay, great sorry about that.

I apologize if I missed this in the prepared remarks, but just as we kind of go back to <unk> now now that you own everything here and sort of it is our first chance to kind of see some of the financial impacts.

What are the learnings so far just from the standpoint of anything any sort of.

Gration pieces that are taking a little bit more time than expected and sort of the opposite any opportunities that youre seeing are learning as you start to roll up your sleeves with that business that could be.

Things that you're excited about.

As we move into 2023.

We were pretty excited as we did the acquisition about about the opportunities in Virginia. So we believed in.

The <unk>.

Underlying fundamentals trade strength of the Virginia opportunity.

And I think.

The public saw that in the last two months of results.

A pretty robust picture. So we feel good about about what we purchased.

In terms of the integration planning process and execution, it's going fine nothing remarkable to report our team's really experienced at these sorts of things, it's a big acquisition, but but we have a lot of experience with acquisitions. So full speed ahead at this point and nothing remarkable to the.

To comment on it other than other than we've been very pleased to date with what we've seen.

Great. Thank you and then my follow up just can.

Marcia mentioned twin spires, a little bit.

Its performance in 2022 can you just give us your kind of thoughts about growth trajectory here in the more medium and long term.

Is that business.

Stable at this level can we continues can we return to some sort of a modicum of growth and then kind of underneath that what do you see in that online shift has that stabilized or that online next if that stabilizes.

Starting to ramp back up at all or how does that fit as we exit the year.

So going into Covid.

Back in 'twenty.

The online share greatly increased.

I think it got north of 60% or around 60% of those Covid ended we began this progression back towards.

A level or.

A new norm of the split between the online and the brick and mortar channel going into Covid. It was around 40% in COVID-19 it bounced way up to 60% or north and then over the course of 2022 it stabilize towards the second half of the year around 52% as Marcia said in her remarks, we haven't seen the final industry numbers for 2020.

Two.

Thanks.

Bank online will will show up in those numbers at around 50, 52% or so we think that's stable right now we we expect it will start to grow with just the trend that's been going on for many years.

Handle shifting between brick and mortar to online. So we don't know for sure what will happen, but but prior to Covid. There was a consistent trend of handle moving to online we've had some disruption because of COVID-19.

It's a reasonable expectation that over time youll see the trend at a new stepped up level.

50%, 52% area, it's a reasonable expectation that it might start to grow the other thing that affects all of this though is.

Our b to C model in.

Our efforts to provide the para mutual product directly to the sports pans out there that auto effect in ways that are not entirely clear the overall online picture for horse racing it should introduce.

Millions more customers out there that currently don't belong to Horseracing adwd it ought to introduce them to the product that not all to be a good thing, but how market share shifts between providers within that whole, it's something that we'll just have to.

We'll just have to watch and monitor and we have cause for optimism, but we'll see how that plays out over the next couple of years, but generally it's an optimistic picture for us.

It often is when you're when you have a plan and you're executing in <unk>.

And you feel like you have the best strategy given all the circumstances.

Thank you very much.

Thank you.

Question comes from the line of Joe Stauff with Susquehanna.

Good morning, Bill Marsha and Bill.

I wanted to go back to kind of Virginia, Bill you had mentioned.

As you find additional locations.

Do you have to run kind of local referendums I guess my question is.

Youll be youll add around 1100 units by the end of this year and what's what's the right kind of.

Outlook to think about what you can add beyond that I think you have at.

At least.

The ability to go up to five and so.

That's largely my question is how to think about sort of additional capacity in Virginia.

Yes, so the way the construct works the way the law works in Virginia.

As.

We're allowed to deploy across our various venues.

Up to 5000 machines as we acquired <unk> they had about 2600.

<unk> deployed so right now we have 2600 deployed which means we have 2400 to deploy over time across.

Dumfries and other venues that we opened so that's the ultimate.

Highest number that we have to stay within and then depending on the venue location there are <unk>.

Various categories of venue size based on often the locality where the referendum was run so if you take something like.

And the Hampton, our Richmond market, you can have 700 machine there and we've deployed the full 700, and we wish we could deploy more but we've deployed the full 700 other places like the Emporia facility that we're building you can only deploy a maximum of 150 dumped freezes. The ultimate exception, where you can go up to 1800 50, there so.

Those are some of the parameters that we're working within.

Starting with a total of 5000 machines as the law as currently written.

Hopefully that helps Joe answered your question.

Think I answered your question yes.

Yes, you did thank you and.

And my second follow up is just maybe to inquire about.

A couple of properties.

In the process of ramping obviously carefully just launched but I wanted to ask about kind of Derby City gaming.

Kind of when you expect to reopen that northern entrance I know you'll launch the hotel in the food and beverage.

I guess right around early June or so, but wondering when that northern entrance would open and then Oak Grove.

No.

<unk> continues to ramp grew nicely in the fourth quarter.

And we're Oak Grove is in terms of.

Whether it be a margin profile.

Or a revenue growth profile say in 'twenty, three how to think about that property.

Sure. So your first question about Derby City gaming.

The north entrance should open around May the hotel in the June area. So we feel pretty good about those dates being locked down.

And those are those those are in the right timeframe, it's not exactly right so right.

Right now the facility.

We're very pleased with our performance given that it's still very compromised with the construction projects, including the north entrance being closed.

They they really navigated through that extremely well bill and the team have done a really nice job with that.

With respect to Oak Grove.

Here's the here's the really interesting thing about HR and properties, we we haven't really figured out the formula for when they hit maturity our projects.

Our oldest being Derby city gaming are still showing attributes of not yet being at maturity is still growing within the existing market based on just our name recognition and developing the current.

The current knowledge of the customer base in terms of what we offer so I don't want to tell you I can't tell you exactly where we are in the Oak Grove maturation process, but it appears from all the data we look at that.

We haven't reached what you would call a level or a state of maturity yet we're still very much in the ramp up stage, but I think that can be particularly a phenomena and properties like Oak Grove, which are designed to pull people from further distance away from the property itself Oak Grove is not in a community with a huge population it's really.

Reaching into surrounding.

Hartsville in Nashville on the Tennessee site, so more good things to come as far as we can tell there is last year's number showed.

That is a property is still still.

Experiencing sort of step up functions as it.

As it tries to find maturity and it hasn't yet.

Okay.

Thanks, a lot.

Thank you.

And our next question comes from the line of Jordan Bender with JMP Securities.

Great. Thanks for taking my question.

You've done a nice job of capturing the existing nature and market in several states that offer the product can you maybe talk about what youre hearing or any state that could potentially move to legalize HRS.

Certainly the <unk> model in the states that have deployed deploy them I think they've been win wins for the companies involved in for the states.

I think other states have seen that in.

There's a there's there are always states at various levels of discussions about about introducing that product, but I don't I don't have any.

Any expectations to share with you today that you'll see in this legislative cycle that there'll be another state that that.

That authorizes with but certainly that's something we work on for the future.

And I hope in subsequent earnings calls, we have something more specific to tell you along those lines.

Great.

And then for my follow up Mark So you talked about the incremental EBITDA.

Towards Churchill Downs racetrack.

Can you maybe talk about leading up to the Derby you talked about some of the.

The.

Yes.

Did we lose Jordan Jordan, we might have lost you.

Can you hear me Hello.

Youre back now, but we did not get that question.

Lost you for a minute there yes.

Yes, sorry about that question, yes, sorry, Marcia you talked about the incremental EBITDA coming at Churchill Downs race track and you talked about Sunday ticket sales leading up to that.

You might maybe can you just talk about the pricing that youre starting to see on it.

The ticket sale is there any of that sponsorship. Thank you.

Yes, I think we don't share specifics regarding pricing.

Bill shared in his commentary is the first turn experience is selling very nicely.

That particular venue is going to be spectacular this year.

Yes.

Most of the venues that we have there the mansion for example, or filled out the Matt when Steakhouse. For example is almost sold out so the pricing is set.

<unk> will be selling the tickets for $1 50.

Pretty much right. After we finish the Derby this year, if the $1 49.

So I feel the pricing is very good remember our strategy for pricing is a much longer term pricing strategy.

We're adding capacity.

We're looking to sort of optimize the pricing for every particular area with a long term view to not shock the pricing.

For our customers in any particular year. So I'm very pleased with it when you think about the $10 million to $15 million that I talked about this year, it's really a combination of we have the the sponsorship coming in on the <unk> side related to the sandal deal that will come into the Churchill Downs Racetrack financials, and then there are other small.

So shifts that the team is working on there as well and there are other Adobe economics said the team has been working on that will pull through as well. So it's a nice combination of mix of economic set of pull through this year.

Great. Thank you.

Thank you.

And our next question comes from the line of Omer Sander with J P. Morgan.

Good morning, Thanks for taking my questions.

How do you think about the impact of new casino capacity coming online in Virginia, and the potential impact of Roses, both of the existing portfolio and your growth projects there.

The.

New capacity in Virginia outside of our HR and models so in terms of the.

Commercial casinos are all in the southern portion of the state. So we'll have to watch their impact on our Hampton.

The property and the vintage property.

In particular, so it's too early to tell obviously, when we purchased <unk>, we're very aware of of the competitive environment there.

<unk>.

And.

Factor that in and included as part of our analysis of.

The opportunity that we had in Virginia, but so far there's only one commercial casino that's open and it opened very recently and so we don't we don't have any real.

Strong data points to share we will also see that together when it comes out and publicly available numbers.

But it was all part of our planning process and like I said across the state one of our biggest concerns really is optimizing we're capacity constrained. We are only allowed to use 5000 machines across the state. So it's part of our analysis of where do we best deploy our machines.

Great. Thank you and then maybe if I could just jump to new Hampshire, how do you think about the opportunity of chasers and the ramp profile of their could it resembles the Kentucky projects like Derby City and the success you've seen there.

We're really excited about the potential there well, while new Hampshire itself has a small stake where salem as it sits on the Massachusetts border. So.

Planning and HR and facility in a dense.

Densely populated region.

As a as a careful process that requires time and thought as you try to make sure you do the right thing for the long term.

But the opportunity there is the the greater Boston market, but that's really.

Where our mindset is in terms of what we design and how we do it.

It's a new kind of project for us and we're making sure we do it carefully and do it well.

In particular, most of the models for us whether it be Virginia or Kentucky at this point do not involve table games, but that's a different model New Hampshire, New Hampshire comes with with.

Traditional table games, so the HRS or are additive to the traditional table games and that's that's another advantage for that particular HR market.

Alright, thank you.

Thanks Omar.

Thank you.

I would now like to hand, the call back over to CEO Bill <unk> for any closing remarks.

Thank you all for your time today. Thank you for your interest in our company.

We're humbled to have to have all of you as our investors and we'll try to be good stewards of your trust in us and your investment in US. So thanks very much and we'll talk to you in just about eight weeks.

We have our earnings call right before the Kentucky Derby take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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Thank you.

Good day, ladies and gentlemen, and welcome to the Churchill Downs incorporated 2022 fourth quarter and year end 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. Nick Zangari, Vice President Treasury and Investor Relations.

Thank you Andrew.

Good morning, and welcome to our fourth quarter and year end 2022 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2022 fourth quarter and year end business results were released yesterday afternoon.

A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by regulation G is available at the section of the Companys 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.

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.

Press release and Form 10-K 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 Carcinogen.

I will share some high level thoughts on several strategic topics and then Marcia will walk through our results and provide an update on our capital management strategy.

After she finishes we will take your questions.

Over the course of 2022, we accomplished numerous key strategic and operational objectives and position the company for growth in 2023 and beyond.

We delivered record net revenue of over $1 8 billion.

And record adjusted EBITDA of $764 million.

We have very high expectations for 2023, as well, but first I will touch on a few important highlights regarding 2022.

We held a very successful, Kentucky Derby setting records for virtually every material metric.

We completed the <unk> transaction, the largest acquisition in our company's history.

We expanded our HRS business into three New States, Virginia, New Hampshire and Louisiana.

We opened Turfway Park, our new HRS entertainment venue in Northern Kentucky.

We completed two other strategic acquisitions Ellis Park in Western Kentucky, and Chasers in New Hampshire, we.

We signed an agreement to purchase <unk> systems.

We completed the sale of the excess land at Calder, and we have several significant strategic organic investments in process to accelerate our future growth.

Through all of these initiatives, we still maintain one of the strongest balance sheets in the industry.

In summary, we had a productive 2022, but our focus is now on executing on our growth objectives for 2023 2024 and beyond.

Let's discuss our strategic update since our last earnings call first we have made significant process progress on our projects at Churchill Downs racetrack in preparation for the upcoming 149th Kentucky Derby.

Our firsthand experience is almost complete.

The structure of the size of a typical soccer stadium with more than 7300 permanent seats located on the first turn of our iconic racetrack.

The scope of this complex is stunning the first time you see it at a forever changes the personality of this portion of our venue, which historically has been dominated by a series of temporary structures and back of house infrastructure.

Our guests will experience it for the first time at this year's Derby in early May.

Ticket sales have been very strong, but it is not yet sold out we expect it will be.

Revenue through the front gates.

Our goal is to introduce a level of transformation and grandeur that will surpass any facility anywhere in the world.

We remain on course to complete this project for the 150 of Derby in May 2024.

The separate epitomizes, a core strategic initiative of our company to invest and grow the scale and profitability of the Kentucky Derby.

The 149th Kentucky Derby run on May six this year.

And we will ensure that it is a special event as it always is for everyone. Despite some of the construction that will still be underway on the paddock area.

We have a good plan, we arent concerned about any material negative impact to this year's Derby.

If you haven't yet bought your tickets for this year, we encourage you to do so the demand is extremely strong.

Second since our last earnings call. We closed the <unk> acquisition on November one acquiring colonial downs racetrack and its fixed operating HRS venues in Virginia.

We also acquired a Lago resort and casino in New York, and hard Rock Hotel and casino in Sioux City, Iowa.

The acquisition also includes two <unk> properties under construction in Dumfries and Emporia, Virginia and up to three additional HR and venues we can pursue on the state.

In addition, we assumed <unk> joint venture relationship with urban one to potentially build a full casino in Richmond, Virginia.

The legislature permitting Richmond to proceed with a referendum.

The <unk> acquisition expands our company significantly and also provides us with material growth opportunities in the <unk> and casino segments beyond the gun used currently in operation.

<unk> are a key strategic focus over the next five to 10 years for our company as we seek to expand our existing footprint.

We have developed high growth high margin investments in this segment with excellent returns on capital and we will seek to build on that track record in Virginia, and New Hampshire, Kentucky and perhaps beyond.

In Virginia, we are constructing the rosie's Emporia HR rent venue in the southern portion of the state. This is a 150 unit facility that is on track to be completed in the third quarter of 2023.

In addition, we are building a significantly larger HR and facility in Dumfries, which is located in northern Virginia around 30 miles South of Washington D. C directly off of Interstate 95.

This is an extremely important project because of the long term potential given its proximity to the population and the Washington D C and Northern Virginia area.

At the same time, we are identifying additional locations that are candidates for our remaining HR and entertainment venues.

After finding suitable locations, we are required to run successful referendums in the relevant localities.

We will share more on our Virginia plant and later earnings calls.

With respect to every HRS venue under construction or that we subsequently pursue we will build upon the lessons learned from our successful developments and operations in Kentucky.

In the fourth quarter of 2023.

And Western Kentucky, we are deep into the design phase of our ATM facility in Owensboro and are excited to tap into this new market.

We will also be investing modest levels of additional capital into the Thoroughbred race track infrastructure and HR and facility at Ellis Park.

As you are aware, we have an additional HR im extension opportunity associated with our Oak Grove license that we will explore deploying and discuss in subsequent earnings call.

And when we decided to pursue a location.

As I've discussed before New Hampshire has a unique structure for HRS and which most of the excise taxes that we pay are contributed directly to charities that our direction.

We will provide a more fulsome update on our progress with this project on future earnings calls.

We expect this metric to be a significant contributor to our HRS segment and the planning process is one in which we are heavily engaged even if we are not ready today to provide more specifics.

Since our last earnings call, we announced our entry into a definitive agreement to acquire exactly systems, a leading provider of <unk> central determinant system technology.

All attributes that are important to the ongoing success of our Virginia, and New Hampshire, <unk> operations and those of exact as other customers that we will continue to serve.

We expect that acquired exactly.

Greatly improve our own operations in Virginia, and New Hampshire, It is worth noting that our Kentucky ASRM operations are serviced by another central determinant technology provider and we remain very happy with the performance and quality of that technology and vendor at this time.

Okay.

The closing of the exact transaction is dependent on satisfying various closing conditions, including state regulatory approvals and we do not have a date to announce at this time.

Turning to our online operations.

In 2022, we pivoted out of the online sports and casino business and our team did a nice job of carefully planning our exit while maintaining the retail sports operations and our gaming facilities.

We remain fully committed to growing our twin spires horse racing <unk> business, while also pursuing our <unk> model.

We believe that wagering on horse racing will expand in the coming years as millions of sports betting customers are introduced to the sport online.

Who inspires dot com will continue to be a destination for more serious horse players who want to comprehensive pair mutual centric experience.

And finally.

Last week on February 15th we completed the sale of the Arlington Park Racetrack property to the Chicago bears for $197 million.

We deferred the federal taxes related to the gain on the sale using qualifying 10 31 exchange transactions.

In summary, 2022 was a tremendous year for our company with record financial results we.

We are well positioned for ongoing growth in the coming years fueled by our acquisition of the <unk> assets and by the organic investments that we're making.

And our iconic asset Churchill Downs racetrack or.

<unk> projects in numerous states at our Terre Haute project in Indiana, all of which collectively will drive a material increase in adjusted EBITDA and free cash flow in 2023 2024 and beyond.

Our overreaching objective is to pursue what we have demonstrated we are good at.

We are grateful that she has chosen to join our company.

With that I'll turn the call over to Marcia and then we will take your questions Marshall.

Thanks, Phil and good morning, everyone.

Bill shared we delivered record revenue and record adjusted EBITDA for the year. Excluding 2020, we have delivered record revenue and record adjusted EBITDA from continuing operations every year since 2016, I will start with a few insights on these financial results and provide some initial thought.

<unk> 2023.

I will then provide an update on capital management.

First as Bill discussed we completed the <unk> acquisition on November one 2022 <unk>.

The acquisition of six new HR and properties and colonial Downs race track in Virginia.

<unk> gaming property in New York, and the hard rock, Iowa gaming property contributed $109 million of net revenue and $48 million of adjusted EBITDA in the fourth quarter.

The addition of these properties will clearly create step function growth in our financials in 2023, as we realize the benefits of a full year of this acquisition.

In 2023, we will also expect to begin to realize the benefits of the enhancements our team will be making to the ASRM properties in Virginia.

Over the longer term, we expect to realize additional benefits to these properties from the acquisition of exacta.

Second we also continued our <unk> expansion in Kentucky at our existing atrium properties and at our new properties. We saw strong growth from our Oak Grove HRM facility as we continued to penetrate the southwestern Kentucky, and Nashville, Tennessee market.

Our team at Derby City Gaming also delivered good growth in 2022, despite some disruption from a gaming floor expansion and hotel build out.

We will have continued growth in 2023 and beyond from these properties. We also expect to layer on growth from the addition of our Turfway Park ASRM property that we opened in September . The addition of the Derby City gaming downtown property in the city of Louisville and longer term from a Ellis Park in Owensboro, Kentucky.

<unk> atrium properties as well as our chasers HR and table game facility in Salem, New Hampshire.

Third we celebrated Derby week on the first Saturday may with full capacity for the first time since the pandemic, which drove a record level of adjusted EBITDA very desirable margins for Churchill Downs race track.

Based on the addition of the first turn experience.

<unk> growth in sponsorships and other Debbie weak economics, we expect 2023 adjusted EBITDA for Churchill Downs race track overall to grow 10% to $15 million.

Strategic decision resulted in an improvement of $40 million year over year, and our adjusted EBITDA related to our online sports and casino business.

Another way, we ended up with a nominal loss of $8 million.

Adjusted EBITDA for a combined retail and online sports and casino business in 2022.

Fifth regarding our twin spires horse racing business as we expected a portion of our casual patrons returned to wagering, a brick and mortar facilities instead of wagering online compared to the prior year.

Therefore, our twin spires horseracing business generated lower turn mutual handle in 2022, and therefore also lower adjusted EBITDA.

Despite a slight decline in adjusted EBITDA.

With the strong margins at this business delivered in 2022, when we compare it to 2019 with adjusted EBITDA up 37% and margins growing by more than a point to 28%.

And last regarding our gaming business.

All of our regional gaming properties, except in Mississippi, and Pennsylvania properties grew adjusted EBITDA in 2022 compared to 2021.

Our same store wholly owned casinos generated an incremental $51 million or 33% growth in adjusted EBITDA compared to 2019.

Our 2022 same store wholly owned casino margin were down two points compared to 2021, however, our margins on the same basis.

Nearly seven points compared to 2019.

Although the fourth quarter was softer for a regional gaming properties.

The weather related challenges in December and some lingering economic concerns we have had a very strong start to the year, especially during the month of January however, it is difficult to draw any definitive conclusions from these early trends.

Overall, we are very pleased with the results that our team has delivered in 2022 and we believe we are very well positioned to continue to grow in 2023.

Turning to capital management, we generated $461 million of free cash flow in 2022 up $41 million over the prior year, primarily as a result of the strong cash flow generated from our businesses.

Regarding maintenance capital, we spent $50 million in 2022, and we expect to spend $75 million to $95 million in 2023.

The increase in maintenance capital for 2023 is driven by the addition of our Virginia, New York, Iowa, and Ellis Park properties.

Maintenance projects anticipated at Churchill Downs racetrack in preparation for the 150 of Kentucky Derby and incremental maintenance projects that are retail gaming facilities.

Regarding project capital, we spent $373 million in 2022.

Spend between 575 and $675 million in 2023.

At the end of December 2022, our bank Covenant leverage was four two times our leverage increased as a result of the <unk> acquisition closing on November one of last year.

Based on the expected closing of our acquisition of exactly and our capital investments, we expect our bank covenant net leverage to remain in the four times range over the coming year.

We then expect our bank covenant net leverage to decline in 2024, and 2025 as our ongoing investments in Dumfries Terre Haute Casino resort and our investments in the Kentucky Derby come online.

We received $500 million of total bank commitments to increase our existing term loan a that is due in 2027, we intend to close on this financing transaction within the next week.

We will use the proceeds to repay outstanding borrowings that we have under our revolving credit facility.

We appreciate the continued support from our existing Bank group and welcome four new banks to our exclusive Bank group. We know that these can be challenging times for these financial institutions given the market uncertainty, we look forward to continuing to work with all of you to access the debt markets in the coming months to further support our continued.

And future investments and high performing assets.

Our ongoing commitment to our shareholders and to create long term shareholder value.

With that I will turn the call back over to Bill So that he can open the call for questions Bill. Thank you Marsha Okay, everyone. I think we are ready to take your questions now so far away.

And our first question comes from the line of David Katz with Jefferies.

Hi, Good morning, I just wanted to.

Uh huh.

To touch on I think what you are both kind of closed with is you.

You've done an awful lot of.

Building a pipeline over the past year or so that will generate earnings going forward.

Just to kind of set the table what would you consider the prospects or probabilities.

There is there'll be more added to the pipeline.

Before we get to the end of 2023 or are we going to chew and chew and swallow what we have for the moment.

Yeah.

Thanks, David It's bill.

The pipeline looks pretty good and we're not going to slow down we work constantly on on.

Managing our balance sheet to make sure that.

But we understand our capital needs and.

And we were constantly across all our teams we have excellent teams, we've built and scaled the company well.

We have excellent teams in place to to digest the projects that are in the harvesting stage. So that process will be ongoing and while theres no guarantee of the future pipeline of future success.

Landing landing targets in the pipeline, we're going to we're going to keep at it we have a good formula and we're confident in what we're doing.

And so we'll keep doing what we're doing so I don't think that just because you've seen us be really busy.

It's an indication that we should stop now and just digest, what we have we can we can digest, while we while we hunt for.

Things that will add to our future.

Okay.

Fair enough and Marcia if I could just get a perspective from you on leverage right. There is kind of a lot of inputs you have a lot to do but there is also.

I would say fairly limited economic visibility out there.

How about.

Where would you like to settle the leverage and what levers could you pull to sort of get inside of four times.

Like should you choose to do that.

I think as we said.

We strive to be in the three to four times leverage range.

But as Bill said, we I think have done a very effective job of managing our leverage over time.

Been times, where leverages dropped into the less than three times and people have challenged us to be higher in leverage.

We said that we would go higher when we had strategic opportunities that made sense.

Clearly the <unk> acquisition was one that was a great strategic opportunity for us and we took our leverage up to.

Four two times.

And we will be very diligent in managing through that we use share repurchases as a lever.

And in our managing of our leverage as well.

But we're always very opportunistic in.

And I'm working very closely work very closely with bill on managing our capital and we have great support from the banks and great support from from the debt market when we have great opportunities.

That we can deliver on.

Got you okay. Thank you very much.

Thank you.

And our next question comes from the line of Dan <unk> with Wells Fargo.

Hey, good morning, everyone and thanks for taking my questions.

First on Virginia, the HRS margins they are pretty strong maybe around 48% for the couple of months you've owned these properties.

One is there any seasonality or anything you'd call out there in Q. How do you think about this margin margin evolving over time, given the exact acquisition and the new slot products from additional Oems that you would look to probably saw over time in that market.

Good morning, Dan Thanks for the question.

No.

Obviously doing the acquisition, we felt a lot of confidence on the sustainability of the business model there and we thought we bring some things to the party over time that that would enhance that business and grow it.

That's always a focus for us as a company we are a margin focused company.

Got it.

And then on Capex I think there was a little bit of a step up both in terms of the.

The project stuff as well as the maintenance.

Even even versus kind of your guidance last quarter for 2023 were there any specific projects that are being pulled into 2023 or was it additional projects that you are now looking at or are you just really costs. Thanks.

Thank you.

Dan It's really just timing is always difficult given the size and we have over $1 billion of capital in flight related to the project capital and so it was just updated estimates around the timing projected timing of the spend.

So overall the total dollars between 'twenty three 'twenty four is not really changed it's just the expected timing of when that cash might go out to the door. Obviously, we have the Dumfries project and the timing around that has moved a little bit as far as when we expect that spending to occur on the maintenance side.

We have included some additional capital related to Ellis Park for example.

That are included in our current outlook again. These are always difficult to project exactly when the cash spend will go out and Thats why there is some variation.

Understood. Thanks for the color.

Okay.

Thanks, Dan.

Thank you and our next question comes from the line of Chad Beynon with Macquarie.

Hi, Good morning, Thanks for taking my question I wanted to continue on just kind of a broader question around the capex projects.

Tight employment market, where it might be tough to.

Just ask some of these facilities. Thank you.

When we when we think about these projects.

We think in terms of years not not trends, we see over a month or two months. So there hasnt been any any change.

Is there not been any material change there has not really been any change in how we perceive these projects and expect these projects to to perform overtime.

Great. Thank you and bill in your prepared remarks, you talked about.

<unk> stable.

Consumer.

Be it.

Any change in direction versus kind of what you had been seeing in 'twenty. Two I think we're all looking for areas and nobody is finding that I mean, it looks like things are continuing.

To be strong.

I don't think we saw anything in the Canary category and.

While we pay a lot of attention to the to the monthly data that we see and even the weekly data we see we're not we're not.

Generally inclined to conclude big Big changes based on short amount of short periods of data, but in any case there wasn't.

Thing remarkable to report that that that's.

Worthy of discussion on this call.

I appreciate it thanks and good luck. Thanks.

Thanks, Chad.

Okay.

Thank you and our next question comes from the line of Shaun Kelley with Bank of America Pardon Me, Sean Please check your mute button.

Can you hear me now.

Yeah, we can hear you Sean Okay, great sorry about that.

Bill I apologize if I missed this in the prepared remarks.

Just as we kind of go back to <unk> now now that you own everything here in sort of this is our first chance to kind of see some of the financial impacts.

What are the learnings so far just from the standpoint of anything any sort of integration pieces that are taking a little bit more time than expected and sort of the opposite any opportunities that youre seeing are learning as you start to roll up your sleeves with that business that could be things that you're excited about.

As we move into 2023.

We were pretty excited as we did the acquisition about about the opportunities in Virginia. So we believed in sort of the under.

Underlying fundamentals straight strength of the Virginia opportunity.

And I think.

The public saw that in the last two months of results.

A pretty robust picture. So we feel good about about what we purchased.

A comment on it other than other than we've been very pleased to date with what we've seen.

Great. Thank you and then my follow up just can.

Marcia mentioned twin size a little bit.

Its performance in 2022 can you just give us your kind of thoughts about growth trajectory here in the more medium and long term.

That business.

Stable at this level can we continues can we return to some sort of a modicum of growth and then kind of underneath that what are you seeing in that online shift has that stabilized or that online next if that stabilizes.

Starting to ramp back up at all or how does that fit as we exit the year.

So going into Covid.

Back in 'twenty.

The online share greatly increased.

I think it got north of 60% or around 60% and as Covid ended we began this progression back towards.

A level.

Numbers for 2022.

Thanks.

Online will will show up in those numbers at around $50, 52% or so we think that stable right. Now we we expect it will start to grow with just the trend thats been going on for many years.

Handle shifting between brick and mortar to online. So we don't know for sure what will happen but.

Prior to Covid, there was a consistent trend of handle moving to online we've had some disruption because of COVID-19.

A reasonable expectation that over time youll see the trend at a new stepped up level.

50%, 52% area, it's a reasonable expectation that it might start to grow the other thing that affects all of this though is.

Our BDC model in.

Millions more customers out there that currently don't belong to Horseracing adwd it ought to introduce them to the product and that ought to be a good thing, but how market share shifts between providers within that whole is something that we'll just have to.

We'll just have to watch and monitor and we have cause for optimism, but we'll see how that plays out over the next couple of years, but generally it's an optimistic picture for us.

It often is when you're when you have a plan and you're executing in <unk>.

And you feel like you have the best strategy given all the circumstances.

Thank you very much.

Thank you.

Question comes from the line of Joe Stauff with Susquehanna.

Good morning, Bill Marsha and Bill.

I wanted to go back to kind of Virginia, Bill you had mentioned.

As you find additional locations.

Do you have to run kind of local referendums I guess my question is.

Youll be youll at around 1100 units by the end of this year and what's what's the right kind of.

Outlook to think about what you can add beyond that I think you have at.

Lease.

The ability to go up to five.

So.

That's largely my question is how to think about sort of additional capacity in Virginia.

Yes, so the way the construct works the way the law works in Virginia.

As.

We're allowed to deploy across our various venues.

Up to 5000 machines as we acquired <unk> they had about 2600.

<unk> deployed so right now we have 2600 deployed which means we have 2400 to deploy over time across.

Dumfries and other venues that we opened so that's the ultimate.

Highest number that we have to stay within and then depending on the venue location there are <unk>.

Various categories of venue size based on often the locality where the referendum was run so if you take something like.

And the Hampton, our Richmond market, you can have 700 machine there and we've deployed the full 700, and we wish we could deploy more but we've deployed the full 700 other places like the <unk> facility that we're building you can only deploy a maximum of 150 dump freezes. The ultimate exception, where you can go up to 1800 50, there so.

Those are some of the parameters that we're working within.

Starting with a total of 5000 machines as the law as currently written.

Hopefully that helps Joe to answer your question.

Think I answered your question yes.

Yes, you did thank you and my.

My second follow up is just maybe to inquire about.

A couple of properties.

In the process of ramping obviously turf, we just launched but I wanted to ask about kind of Derby City gaming.

Kind of when you expect to reopen that northern entrance I know Youll launch I guess the hotel in the food and beverage.

I guess.

Round in early June or so, but I'm wondering when that northern entrance would open and then Oak Grove.

<unk> continues to ramp grew nicely in the fourth quarter.

And we're Oak Grove is in terms of.

Whether it be a margin profile.

Or a revenue growth profile say in 'twenty, three how to think about that property.

Sure. So your first question about Derby City gaming.

North entrants should open around May the hotel in the June area. So we feel pretty good about those dates being locked down. So then those are those those are in the right timeframe, if not exactly right. So right.

Right now the facility.

We're very pleased with our performance given that it's still very compromised with the construction projects, including the north entrance being closed.

They've really navigated through that extremely well bill and the team have done a really nice job with that.

With respect to Oak Grove.

Here's the here's the really interesting thing about HR and properties, we we haven't really figured out the formula for when they hit maturity our projects.

Our oldest being Derby city gaming are still showing attributes of not yet being at maturity is still growing within the existing market based on just our name recognition and developing the current.

<unk>.

The current knowledge of the customer base in terms of what we offer so I don't want to tell you I can't tell you exactly where we are in the Oak Grove maturation process.

But it appears from all the data we look at that.

Reaching into surrounding.

Hartsville in Nashville on the Tennessee site, so more good things to come as far as we can tell there is last year's number showed.

That is a property is still still <unk>.

Experiencing sort of step up functions as it is.

It tries to find maturity and it hasn't yet.

Okay.

Thanks, a lot.

Thank you.

Next question comes from the line of Jordan Bender with JMP Securities.

Great. Thanks for taking my question.

Done a nice job of capturing the existing nature and market in several states. They offer the product can you maybe talk about what youre hearing or any state that could potentially move to legalize HRS.

Certainly the ASRM model in the states that have deployed deploy them I think they've been win wins for the companies involved in for the states. So I think other states have seen that in.

There's a there's they're always states at various levels of discussions about about introducing that product, but I don't I don't have any.

Any expectations to share with you today that you'll see in this legislative cycle that there'll be another state that that.

That authorizes with but certainly that's something we work on for the future.

And I hope in subsequent earnings calls, we have something more specific to tell you along those lines.

Great.

And then for my follow up Mark you talked about the incremental EBITDA.

Towards Churchill Downs racetrack.

Can you maybe talk about leading up to the Derby you talked about some of the.

The.

Yes.

Did we lose Jordan.

We might have lost you.

Can you hear me Hello.

Youre back now, but we did not get that question. We lost you for a minute there yes.

Yes, sorry about that question, yes, Sir Marcia you talked about the incremental EBITDA coming at Churchill Downs race track and you talked about Sunday ticket sales leading up to that.

You might maybe can you just talk about the pricing that youre starting to see on it.

The ticket sale is there any of that sponsorship. Thank you.

Yes, I think we don't share specifics regarding pricing.

Bill shared in his commentary is the first turn experience is selling very nicely.

That particular venue is going to be spectacular this year.

Yes.

Most of the venues that we have there. The mansion for example is filled out the Matt when Steakhouse. For example is almost sold out so the pricing is set.

<unk> will be selling the tickets for $1 50.

Pretty much right. After we finish the Derby this year the $1 49.

So I feel the pricing is very good remember our strategy for pricing is a much longer term pricing strategy.

We're adding capacity.

We're looking to sort of optimize the pricing for every particular area with a long term view to not shock the pricing.

For our customers in any particular year. So I'm very pleased with it when you think about the $10 million to $15 million that I talked about this year, it's really a combination of we have the the sponsorship coming in on the <unk> side related to the Fayetteville deal that will come into the Churchill Downs Racetrack financials, and then there are others.

Great. Thank you.

Thank you.

And our next question comes from the line of Omer Sander with J P. Morgan.

Good morning, Thanks for taking my questions.

How do you think about the impact of new casino capacity coming online in Virginia, and the potential impact of Roses, both of the existing portfolio and your growth projects there.

The.

New capacity in Virginia outside of our HR and models so in terms of the.

The commercial casinos are all in the southern portion of the state. So we'll have to watch their impact on our Hampton.

Property and the vintage property.

In particular, so it's too early to tell obviously, when we purchased <unk>, we're very aware of the competitive environment there.

And.

And the fact.

Factor that in and included as part of our analysis of.

The opportunity that we had in Virginia, but so far there's only one commercial casino that's open and it opened very recently and so we don't we don't have any real.

Strong data points to share we will also see that together when it comes out and publicly available numbers.

Great. Thank you and then maybe if I could just jump to new Hampshire, how do you think about the opportunity of chasers and the ramp profile of their kind of resemble some of the Kentucky projects like Derby City and the success you've seen there.

We're really excited about the potential there well, while new Hampshire itself has a small stake where salem as it sits on the Massachusetts border. So.

Planning and HR and facility in a dense.

Densely populated region.

It is a careful process that requires time and thought as you try to make sure you do the right thing for the long term.

But the opportunity there is the the greater Boston market, but that's really.

Where our mindset is in terms of what we design and how we do it.

It's a new kind of project for us and we're making sure we do it carefully and do it well.

In particular, most of the models for us whether it be Virginia or Kentucky at this point do not involve table games, but that's a different model New Hampshire, New Hampshire comes with with.

Traditional table games, so the HRS or are additive to the traditional table games and that's that's another advantage for that particular HR market.

Alright, thank you.

Thanks Omar.

Thank you.

I'd now like to hand, the call back over to CEO Bill <unk> for any closing remarks.

Thank you all for your time today. Thank you for your interest in our company.

When we have our earnings call right before the Kentucky Derby take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

Q4 2022 Churchill Downs Inc Earnings Call

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