Q3 2023 Churchill Downs Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the Churchill Downs incorporated 2023 third quarter earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time as a reminder, this conference call is being <unk>.
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I would now like to introduce your host for today's conference Mr. Phil Forbis, Vice President financial planning and analysis and Treasury.
Thank you Andrew Good morning, and welcome to our third quarter 2023 earnings Conference call. After the company's prepared remarks, we will open the call for your questions.
The company's 2023 third quarter business results were released yesterday afternoon.
You have 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.
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 yesterday's earnings press release.
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, Phil Good morning, everyone with me today are several members of our team, including Bill Mudd, Our President and Chief operating Officer, Marcia Dall, Our Chief Financial Officer, and Brad Blackwell, Our General counsel.
I will share some high level thoughts on several strategic topics and then Marshall will provide insight on our financial results as well as an update on our capital management strategy.
After she finishes we will take your questions.
We delivered record third quarter net revenue and record third quarter. Adjusted EBITDA. We also delivered record third quarter adjusted EBITDA across all three of our reporting segments.
In addition, we opened a new HR am entertainment venue in Virginia, and completed the strategic acquisition of exact the systems.
These are strong results, particularly in a macro environment that compares favorably to prior year.
Looking forward, let's start with an overview of our preparation for the 150 of Kentucky Derby next year and the projects we have underway at Churchill Downs racetrack.
We have made significant progress on our transformative paddock project as well as our jockey club suites renovation project.
Both are on budget and will be completed prior to the end of April just in time for Derby week in Kentucky Derby 150.
This is a testament to the experience and dedication of our team members with carefully planned and are executing these highly impactful capital projects.
There are other compelling opportunities to grow the Kentucky Derby at Churchill Downs racetrack to provide extraordinary once in a lifetime experiences.
Our commitment to investing in our historic asset reflects our proven ability to generate consistent adjusted EBITDA growth with nominal levels of risk through various economic cycles over the long term.
Our focus right now is delivering these two major projects.
Unique and spectacular, Kentucky Derby, 150, which went down as we anticipate we will then lead to the projects of the future.
It's worth noting that on December six the same day as the Grand opening of Derby City gaming downtown we will celebrate 150 days until the 150 of running of the Kentucky Derby Derby.
Stay tuned as we unveil exciting details in the coming months as we count down to the first Saturday in May 2024.
We are significantly ahead of the sales pace for any previous year.
We have only a few suites left and almost all of our existing premium seating are sold.
Our team has also done a great job selling that new pad sections.
New areas are always the hardest to sell in the first year, because its sight unseen and without the advantage of previous customer testimonials.
In this case, the new areas are moving briskly, and the excitement and anticipation of Derby $1 50.
On that note. If you were planning to attend next year's milestone Derby I encourage you to purchase your tickets right away, while there is still some inventory.
Turning to our HRS entertainment venues first in Kentucky.
Derby City gaming delivered all time record adjusted EBITDA in the third quarter.
Spanned a gaming floor, new hotel and Steakhouse propelled this state of the art venue to new Heights.
Oclaro was also also delivered record third quarter adjusted EBITDA as we continue to further penetrate the expansive and growing Nashville market, we still see lots of growth before we approached this property ceiling.
Turfway Park in Northern Kentucky, Cincinnati region marked its one year anniversary at the beginning of September and continues to improve at a highly competitive market. This property is not yet where we expect it to be but we are encouraged by the steady improvement.
Our two smaller Kentucky ASRM properties Newport at Atlas Park are both performing strongly and contributing nicely as we had expected to our Kentucky EHR M operations.
<unk> entertainment venues across Kentucky have begun to benefit from the passage of legislation banning great games, which became effective on June 30 of this year.
Ban essentially makes operating a great game or skill games slot machine and a bar restaurant Truckstop tavern or other facility a criminal offense.
Hard to quantify the impact because there are other variables at play, but the American Gaming Association estimated that there were over 12000 illegal games in the Kentucky market. We believe most of those have now been turned off and are no longer operating.
Our Kentucky, EHR and you should also benefit from additional foot traffic related to the opening of the retail sports books at each of our properties on September seven the <unk>.
Direct EBITDA contribution from sports betting on site is relatively modest, but certainly positive and is included in our twin spires segments.
Derby City gaming downtown our sixth Kentucky, HRA or entertainment venue is nearing completion as I mentioned the Grand opening is in early December.
This facility will focus on capturing the downtown Louisville market driven by the adjacent Convention center downtown Sporting and other events Bourbon tourism and urban residents.
We will have approximately 500 HRS machines, along with a sports bar for retail sports betting and of course, several derby themed entertainment areas, including a cigar and Bourbon speakeasy and a spectacular wine bar.
Yeah.
We are finalizing design and construction plans for our seventh Kentucky HR M Entertainment venue on a 20 acre site just east of Owensboro, Kentucky.
This will be the primary HR and facility associated with the <unk> Park license.
As a reminder, owensboro as the fourth largest city in Kentucky, and the economic and commercial hub in the region.
Greenfield site sits right off highway 60, and an area that is growing with new residential and commercial developments, resulting from road work and infrastructure improvements over the last 10 years and great access to Indiana because of the bridge over the Ohio River, just a few short miles away.
We are targeting to open in the first quarter of 2025 with a total spend of $100 million to $110 million, we will provide more definitive timing and cost estimate estimates on our yearend earnings call in February at which point, we will have already begun construction.
Turning to our HRS entertainment venues in Virginia.
We opened our seventh Rosie's HRS site on September 26, and Emporia near the North Carolina border right off Interstate 95, we are quite pleased with the early results from this new 150, HR around $30 million property.
Our goal is to utilize all 10 of our potential Virginia, ASRM licenses and deploy all 5000 HR machines permitted under the law as quickly as practicable.
<unk> takes us to approximately 2750 machines.
We are making great progress on our Dumfries HRS venue, which represents a significant expansion for us in the state.
As a reminder, Dumfries is in northern Virginia, approximately 30 miles south of Washington D. C. Our site is right off Interstate 95, with fantastic access and visibility from the highway.
We will be transitioning from our existing Dumfries HR and location with 150 machines to a much larger facility.
We plan to open phase one with at least 1150 HRS over 2500 parking spaces, a 102 room hotel several bars and restaurants and an event center, we expect to be opened in the second quarter of 2024.
During the third quarter, we launched a referendum campaign in Manassas Park to win approval to open our eighth HRS Entertainment site with approximately 250 <unk>.
Manassas Park is also in northern Virginia, approximately 30 miles west of Washington, D. C and 20, plus miles northwest of Dumfries, we are working hard with the city and assuming successful passage of the referendum by the voters on November seven we will be in a position to immediately pursue execution of this project and an existing <unk>.
Marshall Center.
There are about 9000 registered powders in Manassas Park, making this a significantly smaller exercise than the Richmond referendum, which I will talk about in a few minutes.
This community is well situated and proximity to a large population, making it an exciting opportunity for us.
As many of you may have seen in the last week, the Virginia Supreme Court just overturned the injunction that had allowed great games to continue to temporarily operate and the state. Despite existing law recently further strengthened by the legislature, stating clearly got great games are illegal gaming activity.
We think the band will benefit the Commonwealth of Virginia at citizens and all of those who play by the rules pay their taxes submit to regulatory oversight and invest to create jobs and significant capital projects. We.
Think that the elimination of great games in Virginia will have a meaningful impact on the performance.
Our Virginia HSM properties over time as the games are removed a process that we believe will begin in earnest sometime snack sometime next month.
Switching to new Hampshire, we are not yet ready to provide details related to our second home HR implants. We are confident that we will create a unique ASRM entertainment offering from the same area in the Boston suburbs that also will be an attractive long term investment for our shareholders.
We remain very excited about Salem and committed to doing it right.
That commitment has required us to show a lot of patients with regard to planning, but we're getting close to being able to share a substantive update I look forward to doing so soon and I'm very optimistic about the contribution this project can make to our company.
As our performance over time, it's demonstrated our disciplined approach to our <unk> investments has led to an excellent return on capital and we will.
We will remain disciplined as we expand further in each of our key markets.
Regarding our twin spires segment.
We closed the exact transaction in late August.
As a reminder, exact is a major provider of social determinant systems and other related technologies to historical horse racing operations across the country.
Our executive team will continue to service its growing portfolio of third party HHR operators in Kentucky, Wyoming, and New Hampshire.
Also by acquiring <unk>, we were able to reduce cost for our Virginia ASRM operations and further diversify the games that are legacy exact HR and facilities in Virginia as well as at Ellis Park in Kentucky.
We believe this will improve our top line and our margins.
The exact acquisition further supports our strategic focus on being the industry leader in the development management and services for high growth high margin HRS entertainment venues.
We will continue to improve the exact technology platform and pursue the development of HRS based electronic table games. Once develops we intend to work with regulators within the legal and regulatory parameters in each jurisdiction to get them deployed.
Our strategy with respect to our core twin spires business starts with continuing to offer a best in class wagering experience for horse racing players, particularly particularly committed VIP players.
We remain very pleased with our ability to grow and retain our cohorts are strong players.
And variations in their handle that we have seen in the third quarter and over the course of 2023 had been driven substantially by reductions in the rates and calendars and removal of races off the grass or mostly as a result of unusually severe weather, including both extreme heat in some cases and heavy rains in others.
Our third quarter saw total active players increasing 8% over the prior year's third quarter, while twin spires retail handle was down 3%.
Total handle on U S racing.
Was down 7% driven by a 7% decline in U S race days.
We are pleased with how our business has performed through the disruptions of 2023, we will continue to invest in distinguishing our customer offering from competitors to retain and grow our online players. This is a strong business.
In addition, we are focused on the <unk> opportunities around providing horseracing wagering technology and access to horse racing content to online sports wagering companies. We're proud of our initial partnerships with <unk> and draft Kings.
We believe we've only begun to scratch the surface of this important area for growth.
We believe introducing horse racing to a broader audience of online sports wagering customers. We've already been acquired by the various sports platforms is great for twin spires and great for the game of horse racing you will see this growth opportunity unfold over the coming quarters in the meantime, you see now the continuing strength of our current results.
Turning to our gaming segment first.
First our Terre Haute casino resorts in Indiana.
We can see the finish line construction is progressing well with the plant Grand opening for the casino and hotel in early second quarter of 2024.
With regard to our pursuit of the last of the five full class III Casino gaming and hotel resort licenses available in Virginia, We are conducting our campaign to win a citywide referendum in Richmond, Virginia on November seven.
We have a 50 50 joint venture partnership with urban one public company focused on radio and digital media to <unk>.
Finally pursue this project.
This is a wonderful opportunity to bring jobs capital investment and entertainment to the city of Richmond.
If and when this referendum passes on a couple of weeks our joint venture has committed to invest over $560 million.
In addition to the thousands of construction jobs, we will create approximately 1300 permanent paying careers and generate an estimated $30 million of annual tax revenue for the city, while creating a world class dining gaming and entertainment venue with a 55 acre park.
We have selected a great site location on the south side of Richmond, just off of Interstate 95. This.
This is an impactful project for the community and we hope to convince the people of Richmond to vote for it we will let you know the outcome of this referendum and wanted to ask is park after the November 7th.
With regard to the rest of our gaming segment the modest economic headwinds. We first identified in late March and early April such as inflationary pressures on our customers continued to affect the segment generally as I believe you will agree though our team continues to manage through this very effectively.
The EBITDA decline in our equity investments was driven entirely by a reverse property half of this decline resulted from an unusually low table games hold rate for the quarter.
Our table game drop actually increased over the period, which we find encouraging.
While we are seeing the impact of new competition entering the market. It has only been on the slot side and thus it has been less than we expected.
We are encouraged and we will keep you posted.
In summary third.
Third quarter was another strong quarter for us with record financial results. Our team continues to deliver across all of our segments.
We've demonstrated that we can effectively integrate a transformative acquisition, while also executing on numerous organic growth opportunities across our expansive footprint.
And we have much more to do with share with you in the future.
We believe there are many growth opportunities remaining for us to pursue in the coming years, whether it would be further investment in our flagship asset the Kentucky Derby, our new investments aligned with our long term strategic plans. We believe these growth plans will drive a material increase in adjusted EBITDA and free cash flow, while we maintain one of the best balance.
Sheets in the industry over the long term.
With that I'll turn the call over to Marcia and then we will take your questions Marcia.
Thanks, Bill and good morning, everyone as Bill shared we delivered record third quarter net revenue and record third quarter adjusted EBITDA, our businesses collectively generated a 49% growth in revenue and a 34% growth in adjusted EBITDA on a quarter over quarter basis.
I'll start by sharing a few insights on these financial results and then provide an update on capital management.
First regarding Churchill Downs Racetrack racing.
<unk> returned to our September race me and our team with the support of the horse racing industry quite a successful and most importantly, a safe race meet.
During the third quarter, we did have a small impact from the shift in racing operations to Alice Park for the first few days of July. We also moved the Arlington million race day Char Colonial Downs Racetrack in Virginia in August outside of these two items the property performed as expected for non Derby quarter.
We will hold one final race date for the year at Churchill Downs Racetrack, beginning this Sunday and running through Thanksgiving week.
Second in five short years, our team is still a unique and diverse portfolio of brick and mortar and technology related HR and assets that expand across five states.
These HR related assets generated nearly $277 million of adjusted EBITDA in the first nine months of the year.
Our HR Im properties and alive and historical racing segment contributed nearly $49 million of growth in adjusted EBITDA for the third quarter compared to the prior year quarter.
Our Kentucky atrium properties collectively grew adjusted EBITDA, 26% compared to the prior year quarter.
Every city gaming and Oak Grove, once again delivered strong growth with record results.
<unk> recently passed its one year milestone and is beginning to see benefits from live entertainment, bringing new customers to the property.
Our Virginia properties performed well in the third quarter with margins collectively at 47%, excluding the impact of horse racing at colonial Downs race track during the quarter.
This does reflect a small benefit from the lower exaggerate that we've put in place on September one for HR machines that utilize their technology.
We expect to improve the top line and margins over the long term for our Virginia properties as we enhance the gaming floors.
We also believe we will see top line and margin improvement in all of our Virginia ASRM properties over the long term from the ban of great games.
Third turning to our Twinsburg segment, <unk> revenue and adjusted EBITDA increased in the third quarter compared to the prior year quarter.
Benefits from the <unk>.
The exact business along with the continued growth of our PDP Horseracing business and improved sports and casino economics more than offset this.
Slight decline in Thoroughbred horse racing handle.
Handled declined primarily because of fewer thoroughbred races from the cancellation of race days at certain race tracks are.
<unk> expansion related to our <unk> technology.
<unk> services and our continued pivot out of the direct online sports and casino business helped to generate positive growth in adjusted EBITDA compared to the prior year quarter.
Our margin for the Twinsburg segment did return to more historical levels in the third quarter as we expected.
Operator: Good day, ladies and gentlemen, and welcome to the Churchill Downs Inc. 2023 Third Quarter earnings conference call. At this time, all participants are in a listen only mode.
And fourth regarding our gaming business, we once again realized significant contributions in the third quarter from the addition of the New York and Iowa properties acquired in the <unk> transaction.
Operator: Later, we'll conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.
Our Pennsylvania gaming revenues were impacted in third quarter, but the exited the Pneumocolon management agreement at the end of June and the continued competitive impact on Presque Isle property from Greg games and gaming.
Phil Forbis: I would now like to introduce your host for today's conference, Mr. Phil Forbis, Vice President, Financial Planning and Analysis and Treasury. Thank you, Andrew. Good morning, and welcome to our third quarter, 2023 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2023 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 Inc, and corporate.com, as well as on the website's investor section.
All of our properties are performing relatively well despite the impact of the inflationary trends and higher interest rates. Our operating teams continue to demonstrate their ability to maximize operating results in a challenging market environment.
Our third quarter same store wholly owned casino margins were down slightly more than one point compared to the same period in 2022, excluding the impact of business interruption insurance claim recoveries.
Phil Forbis: 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 10Q and Form 10K.
Our margins on a comparable basis were up 4.0 points for the third quarter compared to the same quarter in 2019, reflecting our retention of approximately half of the margin expansion benefit in the post Covid peak in 2021.
Turning to capital management, we generated $446 million or $5 82 per share of free cash flow during the first nine months of the year.
Phil Forbis: 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 GAP and non-GAP financial measures. A reconciliation of GAP to non-GAP measures is included in yesterday's earnings press release. The press release in Form 10Q are available on our website at Churchill Downs Inc. .com.
This is up $59 million or.
<unk> <unk> per share over the same period in 2022.
This increase over the prior year reflects the strong cash flow generated from our diversified businesses that was partially offset by higher interest rates and higher cash paid taxes due to a $33 million nonrecurring tax refund in 2022.
William Carstanjen: And now I'll turn the call over to our chief executive officer, Mr. Bill Carstanger. Thanks, Phil. Good morning, everyone. With me today are several members of our team, including Bill Mud, our president and chief operating officer, Marsha Dahl, our chief financial officer, and Brad Blackwell, our general counsel. I will share some high-level thoughts on several strategic topics, and then Marsha will provide insight on our financial results as well as an update on our capital management strategy.
Regarding maintenance capital, we spent $52 million in the first nine months of the year and now expect to spend $75 million to $85 million in total for the year.
Regarding project capital, we spent $446 million in the first nine months of the year.
We expect to spend between 575 and $675 million in total for the year.
William Carstanjen: After she finishes, we will take your questions. We delivered record third quarter net revenue and record third quarter adjusted EBITDA. We also delivered record third quarter adjusted EBITDA across all three of our reporting segments. In addition, we opened a new HRM entertainment venue in Virginia and completed the strategic acquisition of executive systems. These are strong results, particularly in a macro environment that compares unfavorably to prior year.
The capital investments that we've made in the past few years continued to collectively deliver strong cash flow returns and we expect the investments we are making in 2023 and beyond we will also provide strong cash flow returns for our investors.
Our bank Covenant leverage at the end of third quarter was four one times.
Assistant with our expectations.
William Carstanjen: Looking forward, let's start with an overview of our preparation for the 150th Kentucky Derby next year and the projects we have underway at Churchill Downs Race Track. We have made significant progress on our transformative paddock project as well as our Jockey Club Suites renovation project, both are on budget and will be completed prior to the end of April, just in time for Derby Week and Kentucky Derby 150. This is a testament to the experience and dedication of our team members with carefully planned and are executing these highly impactful capital projects.
This reflects the acquisition of exacta organic investments and $37 million of share repurchases during the third quarter.
We expect our bank covenant net leverage to remain in this range through the end of this year. We then expect our bank covenant leverage to begin to decline in 2024 and 2025.
Regarding our dividend our board of directors approved a dividend of $38 <unk> per share.
Is 7% higher than last year's dividend.
William Carstanjen: Six. There are other compelling opportunities to grow the Kentucky Derby and Churchill Downs Race Track to provide extraordinary, once-in-a-lifetime experiences. Our commitment to investing in our historic asset reflects our proven ability to generate consistent adjusted EBITDA growth with nominal levels of risk through various economic cycles over the long term. Our focus right now is delivering these two major projects and a unique and spectacular Kentucky Derby 150, which, when done as we anticipate, will then lead to the projects of the future.
This dividend represents the 13th consecutive year of increased dividends per share our company.
Overall, we are very pleased with the performance and overall results that our team has once again delivered.
Our diversified portfolio of unique assets.
Organic investments along with our strong balance sheet provides a solid foundation for growth for years to come.
We remain committed to creating long term shareholder value with increasing dividends 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. Thanks Marcia.
William Carstanjen: It's worth noting that on December 6th, the same day as the grand opening of Derby City Gaming Downtown, we will celebrate 150 days until the 150th running of the Kentucky Derby. Stay tuned as we unveil exciting details in the coming months as we count down to the Saturday and May 2024. We are significantly ahead of the sales pace for any previous year. We have only a few suites left and almost all of our existing premium seating is sold.
Okay, everybody, we're ready to take your questions fire away.
Ladies and gentlemen to ask a question. Please press star one one on your telephone.
You wish to remove yourself from the queue. Please press star one again.
And our first question comes from the line of David Katz with Jefferies.
Hi, good morning, everyone.
Marcia I wanted to just just start off with.
William Carstanjen: Our team has also done a great job selling the new paddock sections. New areas are always the hardest to sell in the first year because it's sight unseen and without the advantage of previous customer testimonials. In this case, the new areas are moving briskly in the excitement and anticipation of Derby 150. On that note, if you are planning to attend next year's milestone Derby, I encourage you to purchase your tickets right away while there is still some inventory.
What youre seeing in the landscape with respect to the cost side of the equation.
The revenues, obviously, we see public numbers, but we have started to hear this earning season some mixed commentary.
Some talking about the cost side and others a bit less show and I just wanted to get your perspective on it. Please.
Good morning, David It's Bill I'll go ahead, and take that one Marcia or bill free to jump in after after I answer it.
William Carstanjen: Turning to our HRM entertainment venues, first in Kentucky, Derby City Gaming delivered all-time record adjusted EBITDA in the third quarter. The expanded gaming floor, new hotel, and stay-couse propelled the state-of-the-art venue to new heights. Oak Grove has also delivered record third quarter adjusted EBITDA as we continue to further penetrate the expansive and growing Nashville market. We still see lots of growth before we approach this property ceiling. Turfway Park in Northern Kentucky, Cincinnati region marked its one-year anniversary at the beginning of September and continues to improve at a highly competitive market.
Sure, we're in an economy, where where youre seeing.
Inflation, but having been around for 18 years working in this company and been a part of the gaming experience from the very beginning its all very manageable right now so I feel very confident in our team and their abilities to so.
Watch.
Watch all of the details watch all watch all the corners ahead, and just manage effectively so I don't think.
There is much cause for concern in our margins.
We demonstrated that in this past quarter I think some of these pressures that others are hinting at or that you are referring to are things, we've been dealing with for more than a quarter at this point.
William Carstanjen: This property is not yet where we expect it to be but we are encouraged by the study improvement. Our two smaller Kentucky HRM properties, Newport and Ellis Park, are both performing strongly and contributing nicely as we had expected to our Kentucky HRM operations. HRM entertainment venues across Kentucky have begun to benefit from the passage of legislation banning gray games which became effective on June 30th of this year. This ban essentially makes operating a gray game or skilled game slot machine and a bar, restaurant, truck stop, haven, or other facility a criminal offense.
And I think.
It's not a big part of our of our story were built to process through that and manage through that and I don't think it I don't see it as being a materially important to us.
In the current environment.
Okay.
And as my follow up if I may.
Im just thinking about kind of the path forward for leverage.
Where we are have we.
William Carstanjen: It's hard to quantify the impact because there are other variables at play but the American Gaming Association estimated that there were over 12,000 illegal games in the Kentucky market. We believe most of those have now been turned off and are no longer operating. Our Kentucky HRM venue should also benefit from additional foot traffic related to the opening of the retail sports books at each of our properties on September 7th. The direct EBITDA contribution from sports betting on site is relatively modest but certainly positive and is included in our Twin Spires section.
Fair to say that we are sort of peaking now.
And we should think about ratcheting down going forward or how does that roll.
While we generate a lot of free cash flow. So right now we're in the midst of a great deal of construction.
Construction debt.
Youll see operational next year are turned into operational projects next year. So we generate a lot of cash flow and that cash flow how do we use that we use it to.
Invest in growth projects, we use it to pay down debt, we use it to reinvest in our shareholders. We use it for a variety of things, but the cash flow picture has never looked better and it gets better as we move forward because some of some of where our cash flow is going right now some of what's caused us to have.
William Carstanjen: Derby City Gaming Downtown, our sixth Kentucky HRM entertainment venue is Nearing Completion. As I mentioned, the grand opening is in early December. This facility will focus on capturing the downtown Louisville Market, driven by the adjacent convention center, downtown sporting and other events, bourbon tourism and urban residents. We will have approximately 500 HRM machines along with a sports bar for retail sports betting. And of course, several derby things including entertainment areas including a cigar and bourbon speak easy and a spectacular wine bar.
The four times of four one times leverage.
That starts to generate cash flow next year as these projects come online.
Okay. Thank you thanks.
Thanks, David.
Thank you one moment.
Please.
Question.
And our next question comes from the line of Daniel pilots, there with Wells Fargo.
Hey, good morning, everybody and thanks for taking my questions. So I wanted to follow up on the Gray market commentary that you guys gave in the prepared remarks can you maybe talk about the enforceability of this in Virginia versus Kentucky.
William Carstanjen: We are finalizing design and construction plans for our seventh Kentucky HRM entertainment venue on a 20 acre site just the east of Owensboro, Kentucky. This will be the primary HRM facility associated with the Ellis Park license. As a reminder, Owensboro is the fourth largest city in Kentucky and the economic and commercial hub in the region. This Greenfield site sits right off Highway 60 in an area that is growing with new residential and commercial developments resulting from road work and infrastructure improvements over the last 10 years and great access to Indiana because of the bridge over the Ohio River, just a few short miles away.
And maybe maybe can you put some parameters around how big you think the gray market is in Virginia.
How confident that you are that this ruling basically.
It becomes permanent.
First is more of a temporary type measure.
First good morning, Dan good to hear from you.
I'll talk about each market individually and then compare and contrast them directly so.
William Carstanjen: We are targeting to open in the first quarter of 2025 with a total spend of $100 to $110 million. We will provide more definitive timing and cost estimates on our year end earnings call in February at which point we will have already begun construction.
In Kentucky, the machines have largely been turned off we havent done a survey where we've gone to every state and every site in the state to confirm every machine is turned off.
To say with absolute certainty, but certainly it's the law of the land and.
Our understanding of the landscape out there is there is substantial and material compliance with that so they are turned off now there is a court case, where the manufacturers are challenging the law.
William Carstanjen: Turning to our HRM entertainment venues in Virginia, we opened our seventh Rosie's HRM site on September 26 in Emporia near the North Carolina border right off Interstate 95. We are quite pleased with the early results from this new 150 HRM $30 million property. Our goal is to utilize all 10 of our potential Virginia HRM licenses and deploy all 5,000 HRM machines permitted under the law is quickly as practicable. Emporia takes us to approximately 2,750 machines.
But the machines have been turned off.
In the near term.
<unk> had been reported had reported there were about 12000 machines in the jurisdiction.
Over the last couple of months those have been turned off.
Great games were relatively new thing in Kentucky compared to Virginia.
Just a newer newly developed market that was expanding rapidly compared to Virginia, where we've seen a great deal of expansion, but we've also seen entrenched great games.
William Carstanjen: We are making great progress on our Dumfries HRM venue which represents a significant expansion for us in the state. As a reminder, Dumfries is in Northern Virginia approximately 30 miles south of Washington, DC. Our site is right off Interstate 95 with fantastic access and visibility from the highway. We will be transitioning from our existing Dumfries HRM location with 150 machines to our much larger facility. We plan to open phase 1 with at least 1,150 HRMs over 2,500 parking spaces, a 102 room hotel, several bars and restaurants and an event center. We expect to be open in the second quarter of 2024.
For a period of time, so there in Virginia.
An injunction had been granted by a lower state court that have allowed the machines to remain operational while the court case worked its way through the court system recently during the quarter the Supreme Court reversed the lower court.
Thus requiring that the law be in effect now in that great games.
In accordance with the law are thus illegal so.
The attorney General.
Provided guidance.
William Carstanjen: During the third quarter, we launched a referendum campaign in Manassas Park to win approval to open our 8 HRM entertainment site with approximately 250 HRMs. Manassas Park is also in Northern Virginia approximately 30 miles west of Washington, DC and 20 plus miles northwest of Dumfries. We are working hard with the city and assuming successful passage of the referendum by the voters on November 7, we will be in a position.., to immediately pursue execution of this project in an existing commercial center.
Some time was necessary for for the local.
Outlets to have these machines to come into compliance and thus starting sometime in mid mid November.
We expect enforcement to start to happen. So it is the law of the land. It is clearly the law Supreme Court has spoken on it.
And we expect Youll see enforcement, but it's a big state there are a whole.
A lot of great games in Virginia, I think it's fair to say that we don't have an accurate count because they were they were continuing to expand so rapidly. So it'll take a bit of time to get them turned off but so but to be clear and to answer. Your question very directly there is no legal authority.
William Carstanjen: There are about 9,000 registered voters in the NASA's park making this a significantly smaller exercise than the Richmond referendum, which I will talk about in a few minutes. This community is well situated in proximity to a large population making it an exciting opportunity for us.
At this point permitting these machines to be turned on and we expect we expect enforcement to catch up with the reality of how the law works.
William Carstanjen: As many of you may have seen in the last week, the Virginia Supreme Court just overturned the injunction that had allowed gray games to continue to temporarily operate in the state despite existing law recently further strengthened by the legislature stating clearly that gray games are illegal at gaming activity. We think the ban will benefit the Commonwealth of Virginia, its citizens, and all of those who play by the rules, pay their taxes, submit to regulatory oversight, and invest to create jobs and significant capital projects.
So comparing the two jurisdictions are much more entrenched market in Virginia versus Kentucky.
Kentucky is a little bit ahead.
The Odyssey of Great games, Ironically, though in that they have already been substantially turned off but Virginia, we expect to catch up.
Over the next month or two.
Got it and maybe as it related follow up.
In Virginia, I mean, we get the kind of state reported data.
William Carstanjen: We think that the elimination of gray games in Virginia will have a meaningful impact on the performance of our Virginia HRM properties over time as the games are removed, a process that we believe will begin in earnest sometime next month.
The ASRM growth turn negative in the past few months I mean, how much of this would you attribute to maybe the gray market versus.
Softening consumer or competition or something else altogether.
Oh sure Yeah. So there was some decline.
William Carstanjen: Switching to New Hampshire, we are not yet ready to provide details related to our Salem HRM plans. We are confident that we will create a unique HRM entertainment offering for the Salem area and the Boston suburbs that also will be an attractive long-term investment for our shareholders. We remain very excited about Salem and committed to doing it right. That commitment has required us to show a lot of patience with regard to planning, but we are getting close to being able to share a substantive update.
And the state wide reported numbers.
In September in particular.
About 90% of that is our Hampton site, which.
Was always anticipated and expected by us it's been impacted by the opening of the Portsmith casino.
In the area so.
Virginia remains a very strong.
Strong jurisdiction, we saw some impact.
William Carstanjen: I look forward to doing so and I'm very optimistic about the contribution this project can make to our company. As our performance over time has demonstrated, our disciplined approach to our HRM investments has led to an excellent return on capital and we will remain disappointed as we expand further in each of our key markets.
Our collinsville site, which is very small that was impacted by by the new seasons product project.
But the bulk of the impact really was seen at.
At Hampton, which is a large site for us because of the Portsmouth casino in the area, but also as we've made clear.
And a couple of forms and certainly with with authorities in Virginia. There was a pretty rapid expansion of great games in the quality and quantity of great games in Virginia over the course of 2023 and <unk>.
William Carstanjen: Regarding our twin-spire segment, we close the exact transaction in late August. As a reminder, the exacta is a major provider of central determinant systems and other related technologies to historical horse racing operations across the country. Our exacta team will continue to service its growing portfolio of third-party HR operators and Kentucky Wyoming and New Hampshire. Also by acquiring the exacta, we are able to reduce costs for our Virginia HRM operations and further diversify the gains that our legacy exacta HRM facilities in Virginia as well as at Ellis Park in Kentucky. We believe this will improve our top line and our margins.
So that that that's that's something that we think is going to be reversed now.
As we move into the next quarter, but ultimately don't lump all the sites in the state together because there was one site that was hit in particular by a change in that market.
Market.
That was Hampton.
Got it helpful. Thanks for all the commentary.
Sure.
Thank you one moment please for our next question.
And our next question comes from the line of Barry Jonas with <unk> Securities.
William Carstanjen: The exacta acquisition further supports our strategic focus on being the industry leader in the development management and services for high growth, high margin HRM entertainment venues. We will continue to improve the exacta technology platform and pursue the development of HRM based electronic table games. Once developed, we intend to work with regulators within the legal and regulatory parameters in each jurisdiction to get them deployed. Our strategy with respect to our core twin-spires business starts with continuing to offer a best in-class wadering experience for horse racing players, particularly committed VIP.
Hey, guys good morning Bill.
Bill maybe I just wanted to explicitly ask you about the macro impact you are seeing in the portfolio more focused on any segment of the database or geography, it's more spend per visit or are impacting visitation.
Generally when I think about the future of our company I don't think the macro environment is a big part of our story I think we're managing through it really well, but if I had to draw.
Sure.
Any any any specific commentary and again I don't claim I don't believe it to be.
Really significant to our story and our growth trajectory.
William Carstanjen: We remain very pleased with our ability to grow and retain our cohorts of strong players and variations in their handle that we have seen in the third quarter and over the course of 2023 have been driven substantially by reductions in the racing calendars and removal of races off the grass that are mostly as a result of unusually severe weather, including both extreme heat in some cases and heavy rains and others. Our third quarter saw total active players increasing 8% and over the prior years, third quarter, while Twin Spires retail handle was down 3%.
More weakness in the unrated play than there is on the rated play the rated play still looks pretty good but maybe maybe.
Modest decline in trips but.
But the impact if it's worth mentioning at all it's really been more on on some weakness in the.
Unrated play.
Got it that's really helpful. Just as a follow up I wanted to ask about exact you talked about a six five multiple on the deal before synergies now that the deal is closed I guess do you have any do you have a better sense about what the synergies could be and is there sort of an upside case for what the ultimate transact.
William Carstanjen: Total handle on U.S, racing was down 7% driven by a 7% decline in U.S, race days. We are pleased with how our business has performed through the disruptions of 2023. We will continue to invest in distinguishing our customer offering from competitors to retain and grow our online players. This is a strong business. In addition, we are focused on the B2B opportunities around providing horse racing, wadering technology, and access to horse racing content to online sports wadering companies.
Multiple <unk>.
It may wind up to be.
I really love the exact the deal I think it was a really smart deal for our company to do it's working according to our expectations right now.
Recall that exact I had an exclusivity and exclusive.
In Virginia, and we bought it when there were 2600 machines deployed in Virginia, we're going to be going to 5000 now.
William Carstanjen: We are proud of our initial partnerships with Fandoo and DraftKings. We believe we have only begun to scratch the surface of this important area for growth. We believe introducing horse racing to a broader audience of online sports wadering customers, we have already been acquired by the various sports platforms, is great for Twin Spires and great for the game of horse racing. You will see this growth opportunity unfold over the coming quarters.
We've elected to waive the exclusivity to have some ainsworth product in there too.
But ultimately.
We're going to see a lot of impact from exact that not only based on the current environment, but based on the growth of the application of the exact the system not only in Virginia as we increase the number of machines, but also as as we rollout exact.
William Carstanjen: In the meantime, you see now the continuing strike of our current results.
And the performance of our third party customers.
William Carstanjen: Turning to our gaming segment, first, our TerraHoke Casino and Resorts in Indiana. We can see the finish line. Construction is progressing well with the planned grant opening for the Casino and Hotel in early 2nd quarter of 2024.
Increases both the number of customers and in the quantity of exact a product that they use so I think it's a real growth really strong growth business in and of itself, but strategically.
William Carstanjen: With regard to our pursuit of the last of the five full Class III Casino gaming and hotel resort licenses available in Virginia, we are conducting our campaign to win a citywide referendum in Richmond, Virginia on November 7th. We have a 50-50 joint venture partnership with Urban One, a public company focused on radio and digital media to jointly pursue this project. This is a wonderful opportunity to bring jobs, capital investment and entertainment to the city of Richmond.
It's really a hugely important for us.
Not only because of the.
The impact on our own cross structure, but our ability to work with and control and direct the development of that technology to improve it.
Always driven towards an eye on our margins.
As we invest in HRS.
Facilities.
Across the country.
Great. Thanks Bill.
William Carstanjen: If and when this referendum passes in a couple of weeks, our joint venture is committed to invest over $560 million. In addition to the thousands of construction jobs, we will create approximately 1,300 permanent good paying careers and generate an estimated $30 million of annual tax revenue for the city, while creating a world-class dining, gaming and entertainment venue with a 55-acre park. We have selected a great site location on the south side of Richmond just off the Interstate 95.
Thanks Barry.
Thank you.
Please for our next question.
And our next question comes from the line of Chad Beynon with look Larry.
Hi, good morning, Thanks for taking my question.
Bill I know, there's probably not a ton you can expand on beyond what you've said regarding <unk>.
<unk> hundred 50.
But given the strong advanced commitment that you talked about with paddock with premium.
William Carstanjen: This is an impactful project for the community, and we hope to convince the people of Richmond to vote for it. We will let you know the outcome of this referendum and the one in the NASA's Park after the November 7th vote.
You've talked about your experience and kind of what people are paying for what is this what does this kind of indicate for future years, meaning we are all laser focused on kind of weekly and monthly consumer trends and different cohorts and clearly given the commitment that you've seen for 150, it kind of shows that that cohort.
William Carstanjen: With regard to the rest of our gaming segment, the modest economic headwinds we first identified in late March and early April, such as inflationary pressures on our customers, continued to affect the segment generally, as I believe you will agree though, our team continues to manage through this very effectively. The Yvita Declan and our equity investments was driven entirely by our river's property. Half of this decline resulted from an unusually low table game hold rate for the quarter.
It feels pretty good so one on the fundamental growth and then secondly, kind of how that feeds into potential expansion.
At the property.
Sure. Thanks, Thanks, Chad Thanks for the question so.
I've been so encouraged by the early sales of tickets it's been.
William Carstanjen: Our table game drop actually increased over the period which we find encouraging. While we are seeing the impact of new competition entering the market, it has only been on the slot side and thus it has been less than we expected. We are encouraged and will keep you posted.
Certainly in excess of my expectations and that allows us to focus on execution execution execution get the project built on time meet and exceed the customers' expectations and deliver a spectacular derby $1 50.
William Carstanjen: In summary, third quarter was another strong quarter for us with record financial results. Our team continues to deliver across all of our segments. We have demonstrated that we can effectively integrate a transformative acquisition while also executing on numerous organic growth opportunities across our expansive footprint. And we have much more to do and share with you in the future. We believe there are many growth opportunities remaining for us to pursue in the coming years.
I think it's the case that we're going to be very happy with the economics of $1 50, but the team is focused not just on the economics, but on delivering a great experience because that experience.
As part of the foundation for future projects.
We've had great momentum over the last decade, plus of delivering successful projects and every time, we do that that's a foundation for us to pursue additional projects that gives us the confidence that our board the confidence that we should continue investing in the Kentucky Derby, So for Derby $1 50.
William Carstanjen: Whether it be further investment and our flagship asset, the Kentucky Derby, our new investments aligned with our long-term strategic plans. We believe these growth plans will drive a material increase in adjusted EBITDA and free cash flow while we maintain one of the best balance sheets in the industry over the long term.
We have two significant projects we have of course, the paddock project that will impact the experience of all guests that come to the property. It really will absolutely transform the physical.
Marcia Dall: With that, I will turn the call over to Marsha and then we will take your questions.
Marcia Dall: Marsha. Thanks, Bill. Good morning, everyone. As Bill shared, we delivered record third quarter net revenue and record third quarter adjusted EBITDA. Our businesses collectively generated a 49 percent growth in revenue and a 34 percent growth in adjusted EBITDA on a quarter of a quarter basis. I'll start by sharing a few insights on these financial results and then provide an update on capital management.
So the front side of the Racetrack and then we have the renovation of the jockey club suites, which will impact directly the customer experience of a large group of customers that sit in those suites. So I feel very confident that we're going to deliver the economics associated with that but I don't want to take anything for granted around X.
<unk> Bill Mudd and his team they are laser focused on making sure we hit our timelines and that we think through all the wrinkles and intricacies of the experiences. These customers are going to have because if we do that well if we do that as we intend to do it that is the foundation to keep our momentum going with.
Marcia Dall: First regarding Church of Downs race track. Racing returned for our September race meet and our team with the support of the horse racing industry were in a successful and most importantly, a safe race meet. During the third quarter, we did have a small impact from the shift in racing operations to Alice Park for the first few days of July. We also moved the Arlington Million race day to our Colonial Downs race track in Virginia in August. Outside of these two items, the property performed as expected for a non-dirty quarter.
Additional significant capital projects.
That's great. Thank you and then just on HR RM medium term Marci you talked about the healthy growth. There obviously, you're your position with respect to <unk>.
Marcia Dall: We will hold one final race meet for the year at Church of Downs race track beginning this Sunday and running through Thanksgiving week.
States or licenses within states that you don't currently own and operate or they're still up opportunities to expand.
Marcia Dall: Second, in five short years, our team has built a unique and diverse portfolio of brick and mortar and technology related HRM assets that expand across five states. These HRM related assets generated nearly $277 million of adjusted EBITDA in the first nine months of the year. Our HRM properties in the live and historical racing segments contributed nearly $49 million of growth in adjusted EBITDA for the third quarter compared to the prior year quarter.
<unk> beyond kind of what you've laid out in the near term is this something that can be part of.
The back half of the decade in terms of growth in that arena. Thank you.
Well Marshall if you don't mind I could I could take that one.
So so yes. There are there are states that are considering <unk>.
<unk>.
It's part of.
The expanded gaming discussion in a number of states and previously we didn't always focus on all of those states because we didn't see a brick and mortar operator opportunity for ourselves now we look at states for more than one perspective, not just us being a direct brick and mortar operator, but also as being a <unk>.
Marcia Dall: Our Kentucky HRM properties collectively grew adjusted EBITDA 26% compared to the prior year quarter in this dirty city gaming and oak grove once again delivered strong growth with record results. Turfway recently passed its one year milestone and is beginning to see benefits from live entertainment bringing new customers to the property. Our Virginia properties performed well in the third quarter with margins collectively at 47% excluding the impact of horse racing at Colonial Downs race track during the quarter.
Technology and services provider, so I think it's.
It is not in dispute that Youll see a number of states continued to discuss potentially passing HRS.
There are there are also current opportunities in states that have passed it for us too.
Further expand the footprint of exact.
Marcia Dall: This does reflect a small benefit from the lower exact rate that we put in place on September 1st for HRM machines that utilize their technology. We expect to improve the top line and margins over the long term for our Virginia H.R, properties as we enhance the gaming floors. We also believe we will see top line and margin improvement and all of our Virginia H.R, properties over the long term from the ban of gray games.
So.
That's a that's a new tool that's.
A new part of our tool kit that we are really happy to have because we follow the development of HRS everywhere in the United States. They were considered but this gives us.
Incentive.
To invest in focused politically on states, where we might have more than one type of way of participating in successful legislation, but even even.
Marcia Dall: Third turning to our Twin Smires segment, Twin Smires revenue and adjusted EBITDA increase in the third quarter compared to the prior year quarter as a benefit from the addition of the executive business along with the continued growth of our B2B horse racing business and improved sports and casino economics more than offset in the slight decline in thoroughbred horse racing handle. Handled decline primarily because of fewer thoroughbred races from the cancellation of race days at certain racetracks.
Before we get too successful legislation in additional states there are pockets of growth opportunities in states for us that have already passed <unk> and we'll be focused on that too.
Great. Thank you very much.
Thank you one moment please for our next question.
And our next question comes from the line of Jordan vendor with JMP Securities.
Marcia Dall: Our B2B expansion related to our horse racing technology and settlement services and our continued pivot out of the direct online sports and casino business helped to generate positive growth and adjusted EBITDA compared to the prior year quarter. Our margins for the Twin Smires segment did return to more historical levels in the third quarter as we expected.
Great. Thanks for taking my question I'm going to stick with kind of last question as well on the HRS side. So it seems like tables that can be a pretty big opportunity for the company and as we sit here today do the regulations or the way that the laws are written across the states you guys operate essentially allow you guys to go live with <unk>.
<unk> as they said and then I guess off the back of that where these facilities are the gaming floor is across all these HRS facilities Bill.
Marcia Dall: And fourth regarding our gaming business, we once again realize significant contributions in the third quarter from the addition of the New York and Iowa properties acquired in the P2E transaction. Our Pennsylvania gaming revenues were impacted at third quarter by the excess of the neemical and management agreement at the end of June and the continued competitive impact on our Prescott aisle property from gray games and eye gaming. All of our properties are performing relatively well despite the impact of the inflationary trends and higher interest rates.
For cable is or would you anticipate maybe incremental investment across these gaming for us to really build out to put in these tables. Thank you.
Thanks for the question Jordan really two predicates.
Sure.
Before we get the individual site expansion plans. One is we have to develop the technology and we're in a partnership with a company that between the two companies where a lot of capabilities to do that so we have to.
Marcia Dall: Our operating teams continued to demonstrate their ability to maximize operating results in a challenging market environment. Our third quarter same store holion casino margins were down slightly more than one point compared to the same theory in 2022 excluding the impact of business interruption insurance claim recoveries. Our margins on a comparable basis were up 4.0 points for the third quarter compared to the same quarter in 2019 reflecting our retention of approximately half of the margin expansion benefit from the post-COVID peak in 2021.
Develop and perfect. The technology and then we have to work within the parameters of the states where <unk> are are permitted I don't want to.
Shortchange that piece of the puzzle, we would need to work with the regulators in those jurisdictions and make sure everything falls within the framework and parameters of what Theyre comfortable with so those are two those are those are two significant predicates that need to be addressed before we can really talk expansion plans.
But I'm confident that we're going to face both of those challenges and I'm confident that.
While things probably won't always go exactly the way we hope on exactly the timeframe we hope.
Marcia Dall: Turning to capital management which generated $446 million are $5.82 per share a free cash flow during the first nine months of the year. This is about $59 million or 80 cents per share over the same period in 2022. This increase over the prior year reflects the strong cash flow generated from our diversified businesses that was partially offset by higher interest rates and higher cash paid taxes due to a $33 million non-recurring tax refund in 2022.
Do you think we will see success.
Cochran those those are meeting those challenges when it gets to that deployment.
It will depend on the site and and if.
As I know you have as you follow our company over time, we will do a lot of testing, we'll see we'll see what works different markets will probably show different appetites and so we'll take it on a facility by facility.
Approach based on data generated from from that region, and so it'll be a different answer for for each of our properties and a different answer between jurisdictions.
Marcia Dall: Regarding maintenance capital we spent $52 million in the first nine months of the year and now expect to spend 75 to $85 million in total for the year. We're regarding Project Capital. We spent $446 million in the first nine months of the year and continue to expect to spend between $575 and $675 million in total for the year. We expect our bank covenant net leverage to the end of 3rd quarter with 4.1 times consistent with our expectations.
Great and then for my follow up I know, it's kind of early days for both retail sports betting and the gray market machines coming offline, Kentucky, but.
Your win per day in Kentucky off of those machines have been ticking up in the last couple of months are you guys seeing a different age or demographic kind of walking through that door that you can kind of point to either of those catalysts pushing more people into the facility.
I think what Youre seeing in Kentucky is the fact that our facilities haven't reached maturity yet it was a product that was introduced to the state that they didn't have a great deal of familiarity with and.
We're reaching the consumer we are still getting trial, so it's still a growing.
Business and.
Marcia Dall: This reflects the acquisition of EXACTA, our organic investments and $37 million of share purchases during the 3rd quarter. We expect our bank covenant net leverage to remain in this range through the end of this year. We then expect our bank covenant net leverage to begin to decline in 2024 and 2025.
We've continued to invest in our properties that make them those properties more attractive for visitors when they when they do come.
We're seeing some impact from from turning off grade games too I'm sure.
There are a lot of variables at play there and in the state of Kentucky in general, they're all positive variables. So I wouldn't put it to one thing I think.
Marcia Dall: Regarding our dividend, our Board of Directors approved a dividend of $38.2 per share, which is 7% higher than last year's dividend. Missed dividend represents the 13th consecutive year of increased dividends per share for our company.
There can be assumptions around how long it takes a facility to reach maturity before before.
Before it takes significant capital investment to grow it.
Further and we haven't gotten to that we haven't gotten to that point at any of our facilities in Kentucky and Thats more of the story then.
Marcia Dall: Overall, we are very pleased with the performance and overall results that our team has once again delivered. Our diversified portfolio of unique assets and our organic investments, along with our strong balance sheet, provides a solid foundation for growth for years to come. We remain committed to creating long-term shareholder value with increasing dividends by strategically repurchasing shares of our stock.
Changes in the customer dynamics or demographics.
Understood. Thanks Bill.
Thank you one moment please for our next question.
Our next question comes from the line of Daniel Guglielmo with capital one Securities.
Hi, everyone. Thanks for taking my question.
William Carstanjen: With that, I'll turn the call back over to Bill so that he can open the call for questions. Bill? Thanks, Martian.
When thinking about the size and scale of the gaming portfolio and the experience that the team has gained over the last few years from now organic and same store unit perspective do you think there is continued room for win per unit expansion from current levels and what are some of the things you are doing on that front to push that forward.
Operator: Okay, everybody, we're ready to take your questions far away. You, ladies and gentlemen, to ask a question, please press star-1-1 on your telephone. If you wish to remove yourself from the queue, please press star-1-1 again.
Okay.
Okay.
David Katz: And our first question comes from the line of David Katz with Jeffries.
Sure I think.
If you're contracting gaming versus HRS.
William Carstanjen: Hi, morning, everyone. Mark, I wanted to just start off with what you're seeing in the landscape with respect to the cost side of the equation. The revenues, obviously, we see public numbers, but we have started to hear this earning season some mixed commentary with some talking about cost side and others a bit less so. And I just wanted to get your perspective on it, please.
Our <unk> have an approach maturity at that is that is an area of a lot of investment and a lot of growth in a lot of high margin if youre comparing it to some of our non HRS gaming facilities.
Those are closer to maturity than others. Some of those have reached maturity.
And and.
In our minds, we look at this.
Two different growth trajectories.
So for more traditional brick and mortar gaming non HRS gaming sure I mean, we're seeing we're seeing some of the impact of the economy.
William Carstanjen: Good morning, David. It's Bill. I'll go ahead and take that one, Marsha or Bill. Sure. Are you free to jump in after I answer it? Sure. We're in an economy where you're seeing inflation. But having been around for 18 years working in this company and been a part of the gaming experience from the very beginning, it's all very manageable right now. So I feel very confident in our team and their abilities to watch all the details, watch all the corners ahead and just manage effectively.
<unk>.
And that's a question of managing our margins well, making sure that we're watching our costs and otherwise focusing on all of the attributes of running that business. Both those sites as well as we possibly can and then our team at those sites.
Sure.
They are aggressive growth minded.
People, that's our mindset, that's our culture, so theyre constantly pitching new ideas, new capital investment, which they think will drive it.
William Carstanjen: So I don't think there's much cause for concern in our margins. I think we demonstrated that in this past quarter. I think some of these pressures that others are hinting at or that you're referring to. Are things we've been dealing with for more than a quarter at this point. And I think it's not a big part of our of our story. We're built to process through that and manage through that. And I don't think I don't see it as being materially important to us in the current environment.
An improvement in the topline and bottom line of those facilities and we look at that very seriously just like we look at investment in twin spires, and Churchill Downs racetrack and in our HR and facilities and so those teams compete for capital as well.
And they have to demonstrate that they can grow their topline and their margins when we when we give it to the facilities so site by site.
Those those those team members.
Those team members are going to go forth in there, they're going to make their presentation and theyre going to make their plans and we will see what the best choices for us to invest our capital will be but youll see us do things on.
William Carstanjen: And as my follow-up, if I may, just thinking about kind of the path forward for leverage and where we are, have we, fair to say that we're sort of peaking now and we should think about, you know, ratcheting down going forward or how does that roll? Well, we generate a lot of free cash flow. So right now we're in the midst of a great deal of concern. The construction that you'll see operational next year or turn in operational projects next year.
Brick and mortar gaming just like Youll see us do things with HRS and if you look at the trajectory of our company you can see we're making a large investment close to $300 million in Terre Haute.
William Carstanjen: So we generate a lot of cash flow and that cash flow, how do we use that? We use it to invest in growth projects, we use it to pay down debt, we use it to reinvest in our shareholders, we use it for a variety of things. But the cash flow picture is never looked better and it gets better as we move forward because some of some of where our cash flow is going right now, some of what's caused us to have the four times or 4.1 times leverage, that starts to generate cash flow next year as these projects come online.
Traditional class III casino environment, and we've put a lot of time effort blood sweat and tears to winning the Richmond referendum, because we believe that's a huge market for brick and mortar gaming traditional brick and mortar class III gaming so.
David Katz: Okay, thank you. Thanks, David. Thank you.
Operator: Please for our next question.
I'd answered the question.
At that level, that's the way to think about how we approach where to invest our capital and how we compare and contrast.
Whether it be traditional class III gaming, our HR and gaming, our twin spires business or or investment in Churchill Downs racetrack.
Thank you. Thank you that was great.
And then just quickly you mentioned some table game weakness that rivers, it's a trend I noticed in the first SaaS theres some peers that report drop and win in a quarterly basis. When you dig into that further is there anything there of note.
Change in kind of play style the games segment a player.
That's not showing up thank you.
Daniel Politzer: Our next question comes from the line of Daniel Pollitzer with Wells Fargo. Hey, good morning everybody. Thanks for taking my questions. So I wanted to follow up on the gray market commentary that you guys gave in the prepared remarks. Can you maybe talk about the enforceability of this in Virginia versus Kentucky? And maybe can you put some parameters around how big you think the gray market is in Virginia and how confident that you are that that this ruling basically is, you know, becomes permanent versus more of a temporary type measure. First good morning, Dan. Good to hear from you.
No I think.
I'll reiterate what I've said and I think that is.
That's the story there.
The story for rivers for US was really the drop in the hold rate for table games and that happens sometimes quarter to quarter and that was a big explanation for the story certainly the fact that there is competition in the <unk>.
And the market from the Waukegan asset and from now the downtown Chicago asset, that's having less impact than we thought and it's really been on the slot side, but that is a fantastic property one of our favorite investments of.
Our experience together as a team has been the investment in rivers. It's a fantastic property, we believe in it strongly and I see cause for real optimism. When you look at how it's performing compared to the assets that are now open and the market sure. That's new competition. So it's having some level of impact, but it's not a material level of <unk>.
William Carstanjen: I'll talk about each market individually and then compare and contrast them directly. So in Kentucky, the machines have largely been turned off. We haven't done a survey where we've gone to every state in every site in the state to confirm every machine has turned off to say with absolute certainty. But certainly it's the law of the land and our understanding of the landscape out there is there's substantial and material compliance with that.
William Carstanjen: So they're turned off now. There is a court case where the manufacturers are challenging the law. But the machines have been turned off in the near term. The AGA had been reported had reported there were about 12,000 machines in the jurisdiction. And over the last couple months, those those have been turned off. Gray games were relatively new thing in Kentucky compared to Virginia. It was just a newer, newly developed market that was expanding rapidly compared to Virginia where we've seen a great deal of expansion, but we've also seen entrenched gray games for a period of time.
Impact and if you look at our performance for the quarter.
That's a that's a story about hold on table games more than then decline in the base business level.
Okay. Thank you.
Thank you.
Now I'll turn the call back over to CEO Bill <unk> for any closing remarks.
Thank you everybody as always thank you for your time today. Thank you for your interest and investment in our company, we will do our very very best to.
To meet your expectations and to maximize your return. So thank you again and we'll talk to you next time.
Ladies and gentlemen, thank you for participating this concludes today's program and you may now disconnect.
William Carstanjen: So there in Virginia, an injunction had been granted by a lower state court that have allowed the machines to remain operational while the court case worked its way through the court. System, recently during the quarter, the Supreme Court reversed the lower court, thus requiring that the law be in effect now and that gray games in accordance with the law are thus illegal. So the Attorney General provided guidance that some time was necessary for the local outlets to have these machines to come into compliance, and thus starting sometime in mid-November, we expect enforcement to start to happen.
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William Carstanjen: So it is the law of the land, it is clearly the law, the Supreme Court is spoken on it, and we expect you'll see enforcement, but it's a big state, there are a whole lot of gray games in Virginia, I think it's fair to say that we don't have an accurate count because they were continuing to expand so rapidly, so it'll take a bit of time to get them turned off, but to be clear, to answer your question very directly, there is no legal authority at this point permitting these machines to be turned on, and we expect enforcement to catch up with the reality of how the law works. So comparing the two jurisdictions, a much more entrenched market in Virginia versus Kentucky's a little bit ahead on the odyssey of gray games, ironically though, and that they've already been substantially turned off, but Virginia we expect to catch up over the next month or two.
William Carstanjen: Got it, and maybe as a related follow-up on Virginia, I mean we get the kind of state-reported data, the HRM growth has turned negative in the past few months, I mean how much of this would you attribute to maybe the gray market versus a self-ning consumer or competition or something else altogether? Oh sure, yeah, so there was some decline in the statewide reported numbers in September in particular, about 90% of that is our Hampton site, which was always anticipated and expected by us, it's been impacted by the opening of the Portsmouth casino in the area, so Virginia remains a very strong jurisdiction, we saw some impact at our Collinsville site, which is very small, that was impacted by the new Caesar's project, but the bulk of the impact really was seen at Hampton, which is a large site for us because of the Portsmouth casino in the area, but also as we'd made clear in a couple of forms and certainly with authorities in Virginia, there was a pretty rapid expansion of gray games and the quality and quantity of gray games in Virginia over the course of 2023, and so that's something that we think is going to be reversed now as we move into the next quarter, but ultimately don't lump all the sites and the state together because there was one site that was hit in particular by a change in its market and that was Hampton. Thanks for all the commentary. Thank you.
Operator: One moment please for our next question.
Barry Jonas: Our next question comes from the line of Barry Gellness with truly securities. Hey guys, good morning. Bella, maybe I just wanted to explicitly ask you about the macro impact you're seeing in the portfolio. More focused on any segment of the database or geography is it's more spend per visit or impacting the visitation. Thanks.
William Carstanjen: Generally, when I think about the future of our company, I don't think the macro environment is a big part of our story. I think we're managing through it really well. But if I had to draw any specific commentary, and again, I don't believe it to be really significant into our story and our growth projectory, there's more weakness in the unrated play than there is in the rated play. The rated play still looks pretty good, but maybe a modest decline in trips. But the impact, if it's worth mentioning at all, has really been more on some weakness in the unrated play.
William Carstanjen: That's really helpful. Just as a follow-up, I wanted to ask about you know, you talked about a fixed and a half multiple on the deal before synergies. Now that the deal is closed, I guess you have a better sense about what the synergies could be, and is there sort of an upside case for what the ultimate transaction multiple may wind up to be? I really love the exact deal. I think it was a really smart deal for our company to do.
William Carstanjen: It's working according to our expectations right now. Recall that EXACTA had an exclusivity and exclusive in Virginia, and we bought it when there were 2600 machines deployed in Virginia, we're going to be going to 5,000. Now we've elected to waive the exclusivity to have some main's worth product in there too, but ultimately we're going to see a lot of impact from EXACTA, not only based on the current environment, but based on the growth of the application of the EXACTA system, not only in Virginia, as we increase the number of machines, but also as we roll out EXACTA and the performance of our third-party customers, increases both the number of customers and in the quantity of EXACTA product that they use.
William Carstanjen: So I think it's a really strong growth business in and of itself, but strategically it's really hugely important for us, not only because of the impact on our own cross-structure, but our ability to work with and control and direct the development of that technology to improve it, always driven towards an eye on our margins as we invest in HRM facilities across the country.
Barry Jonas: Great, thanks Bill. Thanks Barry. Thank you.
Chad Beynon: One moment please for our next question. And our next question comes from the line of Chad Beynon with McCuary. All right, good morning. Thanks for taking my question. Bill, I know there's probably not a ton you can expand on beyond what you've said regarding 150. But given the strong advanced commitment that you talked about with Patek, with Premium, you've talked about the experience and kind of what people are paying for. What is this kind of indicate for future years, meaning we're all laser focused on kind of weekly and monthly consumer trends in different cohorts and clearly given the commitment that you've seen for 150. It kind of shows that that cohort, you know, feels pretty good. So one on the fundamental growth and then secondly, kind of how that feeds into potential expansion at the property. Thanks.
William Carstanjen: Sure. Thanks, Chad. Thanks for the question. So I've been so encouraged by the early sales of tickets. It's been certainly in excess of my expectations. And that allows us to focus on execution, execution, execution, get the project built on time, meet and exceed the customer's expectation and deliver a spectacular Derby 150. I think it's the case that we're going to be very happy with the economics of 150, but the team is focused not just on the economics, but on delivering the great experience because that experience is part of the foundation for future projects.
William Carstanjen: We've had great momentum over the last decade plus of delivering successful projects. And every time we do that, that's a foundation for us to pursue additional projects that that gives us the confidence and our board, the confidence that we should continue investing in the Kentucky Derby. So for Derby 150, we have two significant projects. We have of course the paddock project that will impact the experience of all guests that come to the property.
William Carstanjen: It really will absolutely transform the physical appearance of the front side of the racetrack. And then we have the renovation of the jockey club suites, which will impact directly the customer experience of a large group of customers that sit in those suites. So I feel very confident that we're going to deliver the economics associated with that, but I don't want to take that anything for granted around execution bill mud and his team.
William Carstanjen: They are laser focused on making sure we hit our timelines and that we think through all the wrinkles and intricacies of the experiences. These customers are going to have because if we do that well, if we do that, as we intend to do it, that is the foundation to keep our momentum going with additional significant capital projects.
Marcia Dall: That's great. Thank you.
William Carstanjen: And then just on HRM medium term, Marsha, you talked about the healthy growth there, obviously, your position with respect to states or licenses within states that you don't currently own and operate, are there still opportunities to expand in HRM beyond kind of what you've laid out in the near term. And is this something that could be part of, you know, the back half of the decade in terms of growth in that arena.
William Carstanjen: Thank you. Well, Marcia, if you don't mind, I could take that one. So, yeah, there are states that are considering HRMs. It's part of the expanded gaming discussion in a number of states. And previously, we didn't always focus on all those states because we didn't see a brick and mortar operator or opportunity for ourselves. Now, we look at states from more than one perspective, not just as being a direct brick and mortar operator, but also as being a technology and services provider.
William Carstanjen: So, I think it's not in dispute that you will see a number of states continue to discuss potentially passing HRMs. There are also current opportunities in states that have pasted for us to further expand the footprint of the exacta. So, that's a new tool, that's a new part of our toolkit that we're really happy to have because we follow the development of HRMs everywhere in the United States. They were considered, but this gives us incentive to invest and focus politically on states where we might have more than one type of way of participating in successful legislation. But even before we get to successful legislation in additional states, there are pockets of growth opportunities in states for us that have already passed HRMs and will be focused on that too.
Operator: Great. Thank you very much. Thank you. One moment, please. For our next question.
Jordan Bender: And our next question comes from the line of Jordan Vendor with JMP Securities. Great. Thanks for taking my question.
William Carstanjen: I want to stick with kind of the last question as well on the HRMs site. So, it seems like tables that could be a pretty big opportunity for the company. And as we see here today, do the regulations, they're the way that the laws are written across the state you guys operate, essentially allow you guys to go live with tables as they sit. And then I get off the back of that where these facilities are the gaming floors across all these HRM facilities built for tables or would you anticipate maybe incremental investment across these gaming floors to really build out to put in these tables. Thank you. Thanks for the question, Jordan.
William Carstanjen: Really two predicates before we get the individual site expansion plans. One is we have to develop the technology and we're in a partnership with a company that between the two companies, we have a lot of capabilities to do that. So, we have to develop and perfect the technology. And then we have to work within the parameters of the states where HRMs are permitted. I don't want to shortchange that piece of the puzzle.
William Carstanjen: We would need to work with the regulators and those jurisdictions and make sure everything falls within the framework and parameters of what they're comfortable with. So, those are two significant predicates that need to be addressed before we can really talk expansion plans. But I'm confident that we're going to face both of those challenges and I'm confident that while things probably won't always go exactly the way we hope and exactly the time frame we hope, I do think we'll see success conquering those or meeting those challenges.
William Carstanjen: When it gets to then deployment, it'll depend on the site and if you, as I know you have, if you follow our company over time, we'll do a lot of testing, we'll see what works, different markets will probably show different appetites, and so we'll take it on a facility by facility approach based on data generated from that region, and so it'll be a different answer for each of our properties and a different answer between jurisdiction.
William Carstanjen: Great, and then for my follow-up, I know it's kind of early days for both retail sports betting and the gray market machines coming offline in Kentucky, but, you know, your win per day in Kentucky off of those machines have been taking up in the last couple of months, are you guys seeing a different age or demographic kind of walking through that door that you kind of point to either of those catalysts pushing more people into the facility? I think what you're seeing in Kentucky is the fact that our facilities haven't reached maturity yet, it was a product that was introduced to the state that they didn't have a great deal of familiarity with, and we're reaching the consumer, we're still getting trial, so it's still a growing business, and we've continued to invest in our properties that make those properties more attractive for visitors when they do come.
William Carstanjen: We've seen some impact from turning off gray games, too, I'm sure there are a lot of variables that play there, and in the state of Kentucky, in general, they're all positive variables, so I wouldn't put it to one thing. I think there can be assumptions around how long it takes a facility to reach maturity before it takes significant capital investment to grow it further, and we haven't gotten to that point at any of our facilities in Kentucky, and that's more the story than changes in the customer dynamics or demographics. Understood, thanks Bill. Thank you.
Operator: One moment, please, for our next question.
Daniel Guglielmo: Our next question comes from the line of Daniel Guglio-Mo with Capital One Securities. Hi everyone, thanks for taking my questions. When thinking about the size and scale of the gaming portfolio and the experience that the team has gained over the last few years, from an organic and same story unit perspective, do you think there's continued room for when for unit expansion from current levels, and what are some of the things you all are doing on that front to push that forward?
William Carstanjen: Sure, I think if you're contrasting gaming versus HRM, obviously our HRM have an approach maturity, that is an area of a lot of investment and a lot of growth and a lot of high margin. If you're comparing it to some of our non-HRM gaming facilities, some of those are closer to maturity than others, some of those have reached maturity. And in our minds, we look at this as two different growth trajectories.
William Carstanjen: So for more traditional brick and mortar gaming, non-HRM gaming, sure. I mean, we're seeing some of the impact of the economy, and that's a question of managing our margins well, making sure that we're watching our costs and otherwise focusing on all the attributes of running that business both those sites as well as we possibly can. And then our team at those sites, they're of They're aggressive growth-minded people. That's our mindset. That's our culture.
William Carstanjen: So they're constantly pitching new ideas, new capital investment, which they think will drive an improvement in the top line and bottom line of those facilities. And we look at that very seriously, just like we look at investment in twin spires and Churchill Downs racetrack and in our HRM facilities. And so those teams compete for capital as well. And they have to demonstrate that they can grow their top line. And they're margins when we give it to the facilities.
William Carstanjen: So site by site, those team members, those team members are going to go for it. And they're going to make their presentations and they're going to make their plans. And we'll see what the best choices for us to invest our capital will be. But you'll see us do things on brick and mortar gaming, just like you'll see us do things with HRM. And if you look at the trajectory of our company, you can see we're making a large investment, close to $300 million in Tara Hoat.
William Carstanjen: That's a traditional Class III casino environment. And we've put a lot of time effort, blood, sweat, and tears to winning the Richmond referendum, because we believe that's a huge market for brick and mortar gaming, traditional brick and mortar, Class III gaming.
William Carstanjen: So I'd answer the question at that level. That's the way to think about how we approach where to invest our capital and how we compare and contrast whether it be traditional Class III gaming or HRM gaming or Twin Spires business or investment in triple bounce racetrack. Thank you. That was great. And then just quick, you mentioned some table game weakness that rivers. It's a trend I noticed in the first half or some peers that report drop and win on a quarterly basis.
William Carstanjen: When you dig into that further, is there anything there of note change in kind of play style, the games segment of players. That's that's not showing up. Thank you. No, I think I'll reiterate what I said and I think that is that's the story there. The story for rivers for us was really the drop in the hold rate for table games. And that happened sometimes quarter to quarter. And that that was a big explanation for the story.
William Carstanjen: Certainly the fact that there's competition in the in the market from the walkiegan asset. And from now the downtown Chicago asset that's having less impact than we thought and it's really been on the slot side, but that that is a fantastic property. One of our favorite investments of of of our experience together as a team has been the investment in rivers is a fantastic property. We believe in it strongly. And I see cause for real optimism when you look at how it's performing compared to the assets that are now open in the market. Sure, that's new competition. So it's having some level of impact, but it's not a material level of impact.
William Carstanjen: And if you look at our performance for the quarter, that's a that's a story about hold on table games more than then decline in the in the in the base business level. Thank you.
William Carstanjen: I'll now turn the call back over to CEO Bill Carst engine for any closing remarks. Thank you, everybody, as always, thank you for your time today. Thank you for your interest and investment in our company. We'll do our very, very best to meet your expectations and to maximize your return.
Operator: So thank you again, and we'll talk to you next time. Ladies and gentlemen, thank you for participating.
Operator: This concludes today's program, and you may now disconnect.
Operator: Thank you.