Q2 2024 Churchill Downs Inc Earnings Call

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Operator: Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2024 second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. We ask all question and answer participants to please limit themselves to one question. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Sam Ulrich, Vice President, Investor Relations.

Speaker Change: Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated 2024 second quarter earnings conference call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time.

Speaker Change: We ask all question and answer participants to please limit themselves to one question. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Sam Ulrich, Vice President, Investor Relations.

Sam Ulrich: Thank you, Andrew. Good morning, and welcome to our second quarter 2024 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2024 second quarter business results were released yesterday afternoon.

Sam Ulrich: Thank you, Andrew. Good morning, and welcome to our second quarter 2024 earnings conference call. After the company's prepared remarks, we will open the call for your questions.

Sam Ulrich: 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 on the section of the company's website titled News, located at ChurchillDownsInc.com, as well as in the website's investor 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.

Speaker Change: The company's 2024 second 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.

Sam Ulrich: 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.

Speaker Change: located at www.churchilldownsinc.com as well as in the website's investor section.

Speaker Change: Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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.

Sam Ulrich: A reconciliation of GAAP to non-GAAP measures is included in yesterday's earnings press release. The press release and Form 10-Q are available on our website at www.churchilldownsinc.com. Now, I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Speaker Change: The press release and Form 10-Q are available on our website at churchildownsincorporated.com. And now, I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

William C. Carstanjen: Thanks Sam. Good morning everyone.

William C. Carstanjen: With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer, Marcia Dall, our Chief Financial Officer, and Brad Blackwell, our General Counsel. I will share some high-level thoughts on several strategic topics, and then Marcia will provide insight into our financial results, as well as an update on our capital management strategy. After she finishes, we will take your questions.

William C. Carstanjen: Thanks Sam. 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.

William C. Carstanjen: I will share some high-level thoughts on several strategic topics, and then Marcia will provide insight into our financial results, as well as an update on our capital management strategy.

William C. Carstanjen: First, regarding our second quarter results. We delivered all-time record net revenue of $891 million and all-time record adjusted EBITDA of $445 million in the second quarter of this year. These are excellent results across all our segments.

Speaker Change: After she finishes, we will take your questions.

Speaker Change: First, regarding our second quarter results.

Marcia Ann Dall: We delivered all-time record net revenue of $891 million and all-time record adjusted EBITDA of $445 million in the second quarter of this year.

William C. Carstanjen: We are demonstrating quarter after quarter that we can deliver strong returns on the strategic choices and capital investments we make, and we remain focused on executing our long-term strategies to deliver best-in-class growth for years to come. Second, regarding the 150th Kentucky Derby and our plans for future developments at Churchill Downs Racetrack. We were very pleased with the results for this year's Derby. Strong growth in ticketing and sponsorship revenue, coupled with record wagering, generated a significant increase in adjusted EBITDA, setting a new all-time record for Derby Week.

Speaker Change: These are excellent results across all our segments.

Speaker Change: We are demonstrating quarter after quarter that we can deliver strong returns on the strategic choices and capital investments we make. And we remain focused on executing our long-term strategies to deliver best-in-class growth for years to come.

Speaker Change: Second, regarding the 150th Kentucky Derby and our plans for future developments at Churchill Downs Racetrack.

Speaker Change: We were very pleased with the results for this year's Derby.

Speaker Change: Strong growth in ticketing and sponsorship revenue, coupled with record wagering, generated a significant increase in adjusted EBITDA, setting a new all-time record for Derby Week.

William C. Carstanjen: We were thrilled to debut, on time and on budget, the new Patek project. This was one of the most significant construction developments ever undertaken at Churchill Downs racetrack. Every guest this year who entered through our front gates was treated to new and breathtaking views of the Twin Spires and Paddock area.

Speaker Change: We were thrilled to debut, on time and on budget, the new Patek project.

Speaker Change: This was one of the most significant construction developments ever undertaken at Churchill Downs racetrack.

Speaker Change: Every guest this year who entered through our front gates was treated to new and breathtaking views of the Twin Spires and Paddock area. Ticketed guests in the newly created areas enjoyed unique seating and dining experiences and spectacular views of the horses and races.

William C. Carstanjen: Ticketed guests in the newly created areas enjoyed unique seating and dining experiences and spectacular views of the horses and races. This project provides a foundation for further innovation and monetization opportunities into the future. Every year, we seek to surprise and delight our guests with something new as they explore Churchill Downs racetrack.

Speaker Change: This project provides a foundation for further innovation and monetization opportunities into the future.

Speaker Change: Every year we seek to surprise and delight our guests with something new as they explore Churchill Downs racetrack.

William C. Carstanjen: As we look to 2025, we still have much to learn and improve on to maximize our new paddock area before we execute on any new large capital projects that would significantly expand our seeding inventory. For Derby 151, we will focus on an exciting renovation project. As we announced yesterday, the Grandstand Club and Pavilion Project will transform a seating area in front of the starting gate suites from 10,000 bleacher seats to a combination of 8,300 premium stadium seats and trackside box seats on the rail of the racetrack.

Speaker Change: As we look to 2025, we still have much to learn and improve on to maximize our new paddock area before we execute on any new large capital projects that would significantly expand our seeding inventory.

Speaker Change: For Derby 151, we will focus on an exciting renovation project. As we announced yesterday, the Grandstand Club and Pavilion project will transform a seating area in front of the starting gate suites from 10,000 bleacher seats

Speaker Change: to a combination of 8,300 premium stadium seats and trackside box seats on the rail of the racetrack.

William C. Carstanjen: We will significantly improve the amenities for these guests as well as for an additional 2,800 patrons seated in surrounding sections who can seamlessly access the hospitality options in this area. These new hospitality experiences will be similar to the Homestretch Club that we unveiled in 2022. This grandstand, club, and pavilion will increase ticket revenue, personal seat license or PSL inventory, and sponsorship.

Speaker Change: We will significantly improve the amenities for these guests, as well as for an additional 2,800 patrons seated in surrounding sections who can seamlessly access the hospitality options in this area.

Speaker Change: These new hospitality experiences will be similar to the Homestretch Club that we unveiled in 2022.

Speaker Change: This grandstand, club, and pavilion will increase ticket revenue, personal seat license or PSL inventory, and sponsorships.

William C. Carstanjen: The capital investment is expected to be $85 million with a payback of less than 8 years, which is our target range for projects at Churchill Downs Racetrack. This is a meaningful redesign that will require diligent planning and execution by our team to complete in time for next year's Kentucky Derby. Beyond this project, we are developing plans that will provide new experiences for our guests, both on the front side of Churchill Downs Racetrack as well as in the infield.

Speaker Change: The capital investment is expected to be $85 million with a payback of less than 8 years, which is our target range for projects at Churchill Downs Racetrack.

Speaker Change: Beyond this project, we are developing plans that will provide new experiences for our guests both on the front side of Churchill Downs racetrack as well as in the infield.

William C. Carstanjen: We will provide a more detailed update on our multi-year development plans, which target delivering new experiences starting in 2026, at our next earnings call in late October. Our commitment to investing in our flagship asset reflects our belief in our ability to generate consistent, adjusted EBITDA growth with nominal levels of risk for years to come. Next, regarding our HRM plan. HRMs and HRM technology are a key strategic focus over the next five to 10 years for our company. These high-growth, high-margin investments provide an excellent return on capital.

Speaker Change: Our commitment to investing in our flagship asset reflects our belief in our ability to generate consistent adjusted EBITDA growth with nominal levels of risk for years to come.

Speaker Change: Next, regarding our HRM plans.

Speaker Change: HRM's and HRM technology are a key strategic focus over the next 5 to 10 years for our company.

William C. Carstanjen: We have two HRM venues that we will be opening within the next several months, and we are working on further expansion opportunities in Kentucky, Virginia, and New Hampshire. Our acquisition of Xacto also provides additional expansion opportunities from an HRM technology B2B perspective. I will provide a brief update on each of these strategic growth avenues. In Kentucky, we remain on track to open our new Owensboro HRM venue in the first quarter of 2025 on time and on budget.

Speaker Change: These high-growth, high-margin investments provide an excellent return on capital.

Speaker Change: We have two HRM venues that we will be opening within the next several months, and we are working on further expansion opportunities in Kentucky, Virginia, and New Hampshire.

Speaker Change: Our acquisition of Xacta also provides additional expansion opportunities from an HRM technology B2B perspective.

Speaker Change: I will provide a brief update on each of these strategic growth avenues.

Speaker Change: In Kentucky, we remain on track to open our new Owensboro HRM venue in the first quarter of 2025, on time and on budget.

William C. Carstanjen: It will be located just east of Owensboro, the fourth largest city in Kentucky. Our facility design is inspired by Kentucky's rich horse racing and bourbon history and will initially open with 600 HRM machines, along with a center bar, sports bar, and simulcast wagering area. This property will be our 7th HRM venue in the state. We are permitted under Kentucky law to develop one additional HRM venue, this one associated with our Oak Grove license. We have made excellent progress in evaluating and developing the plans related to this opportunity. We anticipate a modest capital investment in 2025.

Speaker Change: It will be located just east of Owensboro, the fourth largest city in Kentucky.

Speaker Change: Our facility design is inspired by Kentucky's rich horse racing and bourbon history and will initially open with 600 HRM machines along with a center bar, sports bar, and simulcast wagering area.

Speaker Change: This property will be our seventh HRM venue in the state. We are permitted under Kentucky law to develop one additional HRM venue, this one associated with our Oak Grove license.

Speaker Change: We have made excellent progress on evaluating and developing the plans related to this opportunity. We anticipate a modest capital investment in 2025. We will provide a more definitive update for you with respect to location, cost, and timing on our third quarter earnings call.

William C. Carstanjen: We will provide a more definitive update for you with respect to location, cost, and timing on our third quarter earnings call in Virginia. We remain on track to open our new HRM property in Dumfries, called The Rose, in late September. We are on time and on budget as we increase the size of the facility to 1,650 HRM. It's a massive site, and it's exciting to see the exterior and interior pieces come together as we approach completion. We filed a construction application in Henrico County, Virginia, which is just north of Richmond, to open a new HRM entertainment venue.

Speaker Change: in Virginia.

Speaker Change: We remain on track to open our new HRM property in Dumfries, called The Rose, in late September .

Speaker Change: We are on time and on budget to what we told you on the last earnings call as we increase the size of the facility to 1,650 HRMs.

Speaker Change: It's a massive site, and it's exciting to see the exterior and interior pieces come together as we approach completion.

Speaker Change: We filed a construction application in Henrico County, Virginia, which is just north of Richmond, to open a new HRM entertainment venue.

William C. Carstanjen: Our application included details of our plans to convert a former furniture store into a new facility that will feature 175 HRMs and have other gaming-related amenities for our customers to enjoy. This project will boost tax revenue for the Commonwealth and provide additional purse money for the horse racing industry in Virginia. The cost is projected to be $30 to $40 million and have a payback of less than five years.

Speaker Change: Our application included details of our plans to convert a former furniture store into a new facility that will feature 175 HRMs and have other gaming related amenities for our customers to enjoy.

Speaker Change: This project will boost tax revenue for the Commonwealth.

Speaker Change: and provide additional purse money for the horse racing industry in Virginia.

Speaker Change: The cost is projected to be $30 to $40 million and have a payback of less than five years.

William C. Carstanjen: We will update you with further details on our next earnings call. Meanwhile, we are planning to expand the number of HRMs that we have in certain locations to meet the strong demand that we are seeing across our footprint in Virginia. We anticipate that we will deploy the remaining HRMs permitted under the law in Virginia by the end of 2025, at the very latest, taking us to the full 5,000 from the approximately 2,750 machines that we have deployed today.

Speaker Change: We will update you with further details on our next earnings call.

Speaker Change: We are planning to expand the number of HRMs that we have in certain locations to meet the strong demand that we are seeing across our footprint in Virginia.

Speaker Change: We anticipate that we will deploy the remaining HRMs permitted under the law in Virginia by the end of 2025 at the very latest, taking us to the full 5,000 from the approximately 2,750 machines that we have deployed today.

William C. Carstanjen: We may also shift some of our existing HRMs between locations to optimize overall performance. Virginia has been a great investment and business environment for us, and we look forward to expanding our footprint in partnership with the Commonwealth. Turning to Exacto,

Speaker Change: We may also shift some of our existing HRMs between locations to optimize the overall performance.

Speaker Change: Virginia has been a great investment and business environment for us and we look forward to expanding our footprint and partnership with the Commonwealth.

William C. Carstanjen: The acquisition of the Exacta Central Determinant System technology has provided many benefits for our company, some of which we have already begun to realize, and some of which we are still developing. Xacta has improved the performance of our Virginia HRM venues by enabling us to better optimize the gaming floors and reduce the technology fees charged to our property. With this vertical integration, we have improved both our top line and our overall margin.

Speaker Change: Turning to X-ACTA.

Speaker Change: The acquisition of the Xacta Central Determinant System technology has provided many benefits for our company, some of which we have already begun to realize and some of which we are still developing.

Speaker Change: Xacta has improved the performance of our Virginia HRM venues by enabling us to better optimize the gaming floors and reduce the technology fees charged to our properties.

Speaker Change: With this vertical integration, we have improved both our top line and our overall margins.

William C. Carstanjen: We are also in the process of converting approximately 10% of our gaming floors in Kentucky to Xacti technology to improve our top line and product offering over the long term. Xacta has also enabled us to provide technology to third-party HRM operations in Kentucky, Wyoming, New Hampshire, and most recently, internationally. Our B2B business earns a recurring fee on every machine that third-party HRM operators deploy utilizing our technology. We recently announced our first international deal working with IGT in Malta to provide our central determinant system to IGT's advantage

Speaker Change: We are also in the process of converting approximately 10% of our gaming floors in Kentucky to Xacti technology to improve our top line and product offering over the long term.

Speaker Change: Xacta has also enabled us to provide technology to third-party HRM operations in Kentucky, Wyoming, New Hampshire, and most recently internationally.

Speaker Change: Our B2B business earns a recurring fee on every machine that third-party HRM operators deploy utilizing our technology.

Speaker Change: We recently announced our first international deal working with IGT in Malta to provide our central determinant system with IGT's gains.

William C. Carstanjen: There are a number of other jurisdictions, both in the U.S. and internationally, that are considering this form of wagering, and our team is looking forward to these potential growth opportunities. We continue to make progress on the development of HRM-based electronic table games.

Speaker Change: There are a number of other jurisdictions, both in the U.S. and internationally, that are considering this form of wagering, and our team is looking forward to these potential growth opportunities.

William C. Carstanjen: These products would further enhance the performance of our HRM venues over the long term and we believe is an important part of Xactus' future, as regards Twin Spires B2B expansion. This was the second year that our B2B strategy was in place for the Kentucky Derby, and we were pleased with the results. Our Twin Spires and United Tote businesses provide technology and other parimutuel services to FanDuel, Giraffe Kings, and other sports wagering platforms, facilitating their participation in wagering on horse racing.

Speaker Change: We continue to make progress on the development of HRM-based electronic table games. These products would further enhance the performance of our HRM venues over the long term, and we believe is an important part of Xactus' future.

Speaker Change: regarding Twin Spires B2B expansion.

Speaker Change: This was the second year that our B2B strategy was in place for the Kentucky Derby, and we were pleased with the results.

Speaker Change: Our Twin Spires and United Tote businesses provide technology and other parimutuel services to FanDuel, Giraffe Kings, and other sports wagering platforms, facilitating their participation in wagering on horse racing.

William C. Carstanjen: The distribution of horse racing content is a growth opportunity that we believe is important for the industry and for us over the longer term, while we continue to invest in our B2B capabilities and relationships. Our core B2C Twins Fires business continues to perform quite well as it focuses on committed horseplayers seeking a more immersive horse racing wagering experience. Next, regarding our investment in gaming properties, we held the grand opening for our Terre Haute Casino in Indiana on April 5th, followed by its hotel on May 15th, both on time and on budget.

Speaker Change: The distribution of horse racing content is a growth opportunity that we believe is important for the industry and for us over the longer term.

Speaker Change: While we continue to invest in our B2B capabilities and relationships,

Speaker Change: Our core B2C Twins Fires business continues to perform quite well as it focuses on committed horse players seeking a more immersive horse racing wagering experience.

William C. Carstanjen: We've been happy with the performance since the opening. The property is located right off Interstate 70 on the east side of Terre Haute, approximately 70 miles from downtown Indianapolis. Similar to our Oak Grove HRM property in southwestern Kentucky, our Terre Haute Casino provides an appealing entertainment venue with limited competition in the surrounding market area. It is also a destination for people from Indianapolis, particularly from the northern and western portions of the metropolitan statistical area.

Speaker Change: Next, regarding our investment in gaming properties, we held the grand opening for our Terre Haute Casino in Indiana on April 5th, followed by its hotel on May 15th, both on time and on budget.

Speaker Change: We've been happy with the performance since the opening.

Speaker Change: The property is located right off Interstate 70 on the east side of Terre Haute, approximately 70 miles from downtown Indianapolis.

Speaker Change: Similar to our Oak Grove HRM property in southwestern Kentucky, our Terre Haute Casino provides an appealing entertainment venue with limited competition in the surrounding market area.

Speaker Change: It is also a destination for people from Indianapolis, particularly from the northern and western portion of the Metropolitan Statistical Area.

William C. Carstanjen: In summary, the second quarter was great for us, with all-time record financial results. We have a strong pipeline of growth opportunities in both brick-and-mortar and technology-related businesses that we are actively executing. We also have an excellent pipeline of additional investments and potential acquisitions that we are evaluating to position our company for growth further into the future. We have one of the best balance sheets in the industry with great assets that we believe will continue to drive adjusted EBITDA and free cash flow in the coming years. We remain committed to delivering superior returns for our shareholders with consistent execution of our growth strategy over the long term. We think our track record shows we can do that.

Speaker Change: In summary, the second quarter was great for us, with all-time record financial results. We have a strong pipeline of growth opportunities in both brick-and-mortar and technology-related businesses.

Speaker Change: We also have an excellent pipeline of additional investments and potential acquisitions that we are evaluating to position our company for growth further into the future.

Speaker Change: We have one of the best balance sheets in the industry with great assets that we believe will continue to drive adjusted EBITDA and free cash flow in the coming years. We remain committed to delivering superior returns for our shareholders with consistent execution of our growth strategy over the long term.

William C. Carstanjen: Finally, I want to acknowledge and congratulate Bob Faley, one of our long-standing directors, on his retirement from our board of directors. Bob has been an active member of our board for more than 20 years. I want to personally thank him for his friendship and wisdom over the many years that we've worked closely together. Bob, if you're listening, enjoy your retirement, and we will miss you. With that, I'll turn the call over to Marcia, and then we will take your questions. Thank you, Marcia. Thanks, Phil.

Speaker Change: We think our track record shows we can deliver.

Bob Faley: Finally, I want to acknowledge and congratulate Bob Faley, one of our long-standing directors, on his retirement from our Board of Directors.

Speaker Change: Bob has been an active member of our board for more than 20 years. I want to personally thank him for his friendship and wisdom over the many years that we've worked closely together.

Speaker Change: Bob, if you're listening, enjoy retirement and we will miss you.

Marcia Ann Dall: Thanks, Bill. And good morning, everyone.

Speaker Change: With that, I'll turn the call over to Marcia and then we will take your questions. Marcia?

Marcia Ann Dall: Thanks, Phil. And good morning, everyone. I'll start with a few insights on our financial results and then provide an update on capital management.

Marcia Ann Dall: I'll start with a few insights on our financial results and then provide an update on capital management. First, on the second quarter financial results. As Bill shared, we delivered all-time record net revenue and all-time record adjusted EBITDA in the second quarter. Our diversified portfolio of businesses, highlighted by a record Kentucky Derby Week, generated a 16% growth in revenue and a 22% growth in adjusted EBITDA on a quarter-over-quarter basis. We hope that you were able to join us in person or were able to watch the 150th running of the Kentucky Derby on NBC on May 4th.

Marcia Ann Dall: First, regarding second quarter financial results.

Marcia Ann Dall: As Bill shared, we delivered all-time record net revenue and all-time record adjusted EBITDA in the second quarter.

Marcia Ann Dall: Our diversified portfolio of businesses, highlighted by a record Kentucky Derby week, generated a 16% growth in revenue and a 22% growth in adjusted EBITDA on a quarter-over-quarter basis.

Marcia Ann Dall: We hope that you were able to join us in person or were able to watch the 150th running of the Kentucky Derby on NBC on May 4th.

Marcia Ann Dall: We project that Derby Week will generate $26 to $28 million of incremental adjusted EBITDA for the total year. As a reminder, we recognize nearly all of the revenue and costs associated with Derby Week during the second quarter of the year. However, there are some Derby Week-related costs that are recognized during the other quarters as well.

Marcia Ann Dall: We project that Derby Week will generate $26 to $28 million of incremental adjusted EBITDA for the total year.

Marcia Ann Dall: As a reminder, we recognize nearly all of the revenue and costs associated with Derby Week during the second quarter of the year. However, there are some Derby Week related costs that are recognized during the other quarters as well.

Marcia Ann Dall: Increases related to ticket sales, primarily as a result of the addition of the new Patek project, new sponsorships, and strong parimutuel wagering provided a significant lift to our financial results while maintaining the consistently superior margins that Derby Week has generated over the years. Our Virginia HRM properties were the primary driver of adjusted EBITDA growth related to HRMs on a quarter-over-quarter basis. Our Virginia HRM properties increased adjusted EBITDA by $16 million, or nearly 37 percent, compared to the prior year quarter.

Marcia Ann Dall: Increases related to ticket sales, primarily as a result of the addition of the new Patek project, new sponsorships, and strong parimutuel wagering provided a significant lift to our financial results while maintaining the consistently superior margins that Derby Week has generated over the years.

Speaker Change: Our Virginia HRM properties for the primary driver of adjusted EBITDA growth related to HRMs on a quarter-over-quarter basis. Our Virginia HRM properties increased adjusted EBITDA by $16 million, or nearly 37 percent compared to the prior year quarter.

Marcia Ann Dall: Savings related to the XACTA transaction provided nearly $6 million of improved economics to our Virginia HRM properties during the quarter compared to the prior year quarter. We also benefited from the opening of Rosie's Emporia in September 2023, as well as the strong growth at our other Virginia properties, from the continued upgrades to our gaming floors and increased foot traffic at our properties.

Speaker Change: Savings related to the Xacta transaction provided nearly $6 million of improved economics to our Virginia HRM properties during the quarter compared to the prior year quarter.

Speaker Change: We also benefited from the opening of Rosie's Emporia in September 2023, as well as the strong growth at our other Virginia properties, from the continued upgrades to our gaming floors and increased foot traffic at our properties.

Marcia Ann Dall: These properties, excluding rates, generated a combined margin of nearly 55% during the quarter, up 7.3 points compared to the prior year quarter. Additionally, our Exact-A-Business contributed meaningful adjusted EBITDA to the Twin Spire segment again this quarter. The Exact-A-Business generated more than $10 million of adjusted EBITDA in addition to the nearly $6 million of benefit that our Virginia properties in the live and historical segment realized in the second quarter from lower Central Determinant system-related fees.

Speaker Change: These properties, excluding rates, generated a combined margin of nearly 55% during the quarter, up 7.3 points compared to the prior year quarter.

Speaker Change: Our Executive Business contributed meaningful adjusted EBITDA to the Twin Spires segment again this quarter.

Speaker Change: The exacted business generated more than $10 million of adjusted EBITDA in addition to the nearly $6 million of benefit that our Virginia properties in the live and historical segment realized in the second quarter from lower Central Determinant System-related fees.

Marcia Ann Dall: Our Tarahoke Casino performed extremely well since opening on April 5th, contributing more than $19 million of adjusted EBITDA during the quarter and a 57% margin. It is important to note that we benefited from a lower initial gaming tax rate in the second quarter because of the tiered structure of Indiana's gaming tax rates and the state's fiscal year ending June 30th. The gaming tax rate will normalize at the expected long-term tax rate beginning in the third quarter.

Speaker Change: Our Terre Haute Casino performed extremely well since opening on April 5th, contributing more than $19 million of adjusted EBITDA during the quarter and a 57% margin.

Speaker Change: It is important to note that we benefited from a lower initial gaming tax rate in the second quarter because of the tiered structure of Indiana's gaming tax rates and the state's fiscal year ending June 30th.

Speaker Change: The gaming tax rate will normalize at the expected long-term tax rate beginning in the third quarter.

Marcia Ann Dall: Terre Haute margins will remain at the highest levels of all of our regional gaming properties, albeit lower than the second quarter level. Our second quarter, same store, wholly owned casino margins, excluding the prior year non-recurring union payment in New York, were down 1.3 points compared to the same period in 2023, primarily driven by our properties in Maine, Mississippi, and Louisiana. Turning to capital management, we generated a record $437 million, or $5.85 per share, of free cash flow during the first half of the year.

Speaker Change: Terre Haute margins will remain at the highest levels of all of our regional gaming properties, albeit lower than the second quarter level.

Speaker Change: Our second quarter, same store, wholly owned casino margins, excluding the prior year non-recurring union payment in New York, were down 1.3 points compared to the same period in 2023, primarily driven by our properties in Maine, Mississippi, and Louisiana.

Speaker Change: Turning to capital management, we generated a record $437 million, or $5.85 per share, of free cash flow during the first half of the year.

Marcia Ann Dall: This is up nearly $65 million, or $0.96 per share, over the first half of 2023, primarily due to the strong cash flow generated from our business. We spent $35 million on maintenance capital in the first half of the year and continue to expect to spend between $90 and $105 million in total for the year. We spent $257 million on project capital in the first half of the year and continue to expect to spend between $450 and $550 million in total for the year.

Speaker Change: This is up nearly $65 million, or 96 cents per share, over the first half of 2023, primarily from the strong cash flow generated from our businesses.

Speaker Change: We spent $35 million on maintenance capital in the first half of the year and continue to expect to spend between $90 and $105 million in total for the year.

Speaker Change: We spent $257 million on project capital in the first half of the year and continue to expect to spend between $450 and $550 million in total for the year.

Marcia Ann Dall: Based on the remaining project capital for our new HRM venue called The Rose in Northern Virginia and the Owensboro HRM venue in Kentucky, along with the recently announced CDRT Grandstand Club project and the new Henrico County HRM venue in Virginia, our 2025 project capital is expected to be approximately one-third of our projected capital spend in 2024.

Speaker Change: Based on the remaining project capital for our new HRM venue called The Rose in Northern Virginia and the Owensboro HRM venue in Kentucky.

Speaker Change: along with the recently announced CDRT Grandstand Club project and the new Henrico County HRM venue in Virginia.

Speaker Change: Our 2025 project capital is expected to be approximately one-third of our projected capital spend in 2024.

Speaker Change: At the end of second quarter, our bank covenant leverage was 4.0 times.

Marcia Ann Dall: At the end of the second quarter, our bank covenant leverage was 4.0 times. Based on our capital investments and the timing of the opening of our new facilities, we expect our Bank Covenant net leverage at year-end to be at, or slightly below, four times. We expect our Bank Covenant net leverage to decline relatively quickly in 2025 as our investments in Indiana, Virginia, and Kentucky continue to deliver meaningful adjusted EBITDA and free cash flow.

Speaker Change: Based on our capital investments and the timing of the opening of our new facilities, we expect our Bank Covenant net leverage at year-end to be at, or slightly below, four times.

Speaker Change: We expect our Bank Covenant net leverage to decline relatively quickly in 2025 as our investments in Indiana, Virginia, and Kentucky continue to deliver meaningful adjusted EBITDA and free cash flow.

Marcia Ann Dall: Overall, we are very pleased with the all-time record results our team delivered for the second quarter. We remain very well positioned to grow over the long term, fueled by our tangible pipeline of growth initiatives and supported by our strong balance sheet. With that, I'll turn the call back over to Bill so that he can open the call to questions.

Speaker Change: Overall, we are very pleased with the all-time record results our team has delivered for the second quarter.

Speaker Change: We remain very well positioned to grow over the long term, fueled by our tangible pipeline of growth initiatives and supported by our strong balance sheet.

Speaker Change: With that, I'll turn the call back over to Bill so that he can open the call for questions.

William C. Carstanjen: Okay, everyone, we're ready to take your questions. Ladies and gentlemen, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 0.

William C. Carstanjen: Thank you, Marcia.

Operator: Ladies and gentlemen, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. And our first question comes from the line of Barry Jonas with Truist Security. Thank God, it's a good morning.

William C. Carstanjen: Okay, everyone, we're ready to take your questions.

Speaker Change: Ladies and gentlemen, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.

Speaker Change: And our first question comes from the line of Barry Jonas with Truist Securities.

Barry Jonathan Jonas: Thank God, it's good morning.

Barry Jonathan Jonas: Another very strong derby. Can you talk a little bit more maybe about the different components that drove the growth this year? It seems like visibility goes up and variability goes down each year. So how has that mix evolved and where do you think it goes from here? Thanks.

William C. Carstanjen: Sure, Barry. So first,

William C. Carstanjen: Ticketing revenue is the big driver, or experience revenue, as we tend to think of it. So with the Patek project, we introduced more capacity and more high-end experiences. And that was a meaningful contributor to the results that we saw. Also, as we reported at the time, the wagering results were fantastic and continued to set virtually every wagering record each year. And that's been a real tailwind for us. And then sponsorship has also been firing on all cylinders. So across the board, all of the key revenue drivers have been showing improvement, but it's led to our ticketing segment.

Barry Jonathan Jonas: Sure, Barry. So, first...

Barry Jonathan Jonas: Ticketing revenue is the big driver, or experience revenue as we tend to think about it.

Speaker Change: So, with the Patek project...

Speaker Change: We introduced more capacity, more high-end experiences, and that was a meaningful contributor to the results that we saw. Also, as we reported at the time, the wagering results were fantastic.

Speaker Change: We continue to set virtually every wagering record each year, and that's been a real tailwind for us. And then sponsorships have also been firing in all cylinders. So across the board,

Speaker Change: All of the key revenue drivers have been showing improvement, but it's led with our ticketing segments.

Speaker Change: Great, thank you.

Speaker Change: Thank you. One moment, please, for our next question.

Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of David Katz with Jeffreys.

Speaker Change: Our next question comes from the line of David Katz with Jeffreys.

David Brian Katz: Hi, everyone. Good morning. Congratulations on the quarter.

William C. Carstanjen: I wanted to just get a little more clarity on Kentucky, where I'll call it in the middle stage of progression, where we're looking at Louisville downtown, Turf Way in particular, and how those properties, and Oak Grove in particular, are progressing? How are they accelerating? What's left for them? What kinds of dials are you adjusting to try and actualize what you aspire to get there?

David Brian Katz: Hi, everyone. Good morning. Congrats on the quarter.

David Brian Katz: I wanted to just sort of get a little more clarity around Kentucky.

Speaker Change: you know, in particular, and sort of how those properties and Oak Grove

David Brian Katz: you know, in particular. How are those properties progressing? How are they accelerating? What's left for them? And, you know, what kinds of, you know, dials are you, you know, adjusting to try and actualize what you aspire to get there?

William C. Carstanjen: Yeah, thanks, David. I appreciate the question. So a lot of optimism for Kentucky and for the growth to come that we think will show over time. But I think none of our properties have reached maturity at this point. All of them. We continue to add and change the mix of the games on the floor. Our teams get better at operating them. Our databases are getting deeper, so I am also optimistic about the future with respect to additional products like electronic table games.

Speaker Change: Yeah, thanks David. Appreciate the question. So, a lot of optimism for Kentucky and for the growth to come.

Speaker Change: that we think will show over time. I think none of our properties have reached maturity at this point. All of them, all of them we continue to add.

Speaker Change: and change the mix of the games on the floor. Our teams get better at operating them. Our databases get deeper.

Speaker Change: So, I also am optimistic for the future with respect to additional products like electronic table games.

William C. Carstanjen: So, over the long term, I still think there's a lot of growth there. I think there's still a lot of learning there. And I don't think you should think about those projects or those properties as anything other than still in their ramp-up stage.

Speaker Change: So, over the long term, I still think there's a lot of growth there, I think there's still a lot of learning there, and I don't think you should think about those properties as anything other than still in their ramp-up stage.

William C. Carstanjen: Got it. And as a follow-up, can we just talk about Exacta a bit?

Speaker Change: Got it. And just as my follow-up, can we just talk about Xacta a bit? I know you touched on some of the, you know, outside opportunities.

William C. Carstanjen: I know you touched on some of the, you know, outside opportunities. But, you know, with what you have on your plate for it now, you know, we've seen a little bit of a run rate for how that has performed. But, you know, is that going to ramp up in the near term, excluding, you know, any sort of new opportunities that aren't yet?

Speaker Change: But, you know, with what you have on your plate for it now, you know, we've seen a little bit of a run rate for how that has earned.

Speaker Change: But, you know, is that going to ramp in the near term, excluding, you know, any sort of new opportunities that aren't yet sort of plugged in?

William C. Carstanjen: Yeah, so I think there are a couple of different categories for evaluating Xacta. I'd start with Virginia. We've deployed about 2,750 games, and we're on our way to 5,000.

Speaker Change: Yeah, so I think there are a couple of different categories for evaluating X-ACTA. I'd start with Virginia.

William C. Carstanjen: So Xacta rides that wave, too, and it's part of that story. So that's one place to start. I think whether you talk in the United States or beyond, there are lots of potential markets that will look at this product, can't make any promises, or...uh, commit to any expectations when additional markets will open or how many will open, but that generally has been trending in the right direction. So I think whether you think about our own footprint, our own expansion, whether it be in Virginia or New Hampshire or Kentucky, that business has a lot of runway to service The activities of other operators in different states, both the ones I've mentioned and others like Wyoming.

Speaker Change: We've deployed about 2,750 games, and we're on our way to 5,000. So X-ACTA rides that wave, too, and that's part of that story.

Speaker Change: So that's one place to start. I think whether you talk in the United States or beyond, there are lots of potential markets that will look at this product, can't make any promises or

Speaker Change: commit to any expectations when additional markets will open or how many will open. But that generally has been trending in the right area, so in the right direction.

Speaker Change: So I think whether you think about our own footprint, our own expansion, whether it be in Virginia or

Speaker Change: New Hampshire or Kentucky. That business has a lot of runway to service Churchill's needs. Also as a provider to third parties, you see

Speaker Change: the activities of other operators in different states, both the ones I've mentioned and others like Wyoming. And then you have potentially new markets, which is something we work on with our government relations teams, as do other companies.

William C. Carstanjen: And then you have potentially new markets, which is something we work on with our government relations teams, as do other companies, and then the international... The international opportunity and our beginning of exploring that were inbound. You know, that was an inbound thing. We were contacted, and that's when we first started to realize there might be some appetite. So I can't make promises about future markets. You always have to be thoughtful and careful about that.

Speaker Change: And then the international...

Speaker Change: The International Opportunity and...

Speaker Change: Our beginning of exploring that was an inbound, you know, that was an inbound thing. We were contacted and that's when we first started to...

Speaker Change: to realize there might be some appetite.

Speaker Change: So...

Speaker Change: Can't make promises about future markets. You always have to be thoughtful and careful about that. But it's a great technology. It's a great product that we've done a lot of work on with our various partners that produce games to produce a really quality product. And when you produce a quality product, you often get opportunities to deploy it.

William C. Carstanjen: But it's a great technology. It's a great product that we've done a lot of work on with our various partners that produce games to produce a really quality product. And when you produce a quality product, you often get opportunities to deploy it, so those are just some of the avenues that we're looking toward.

William C. Carstanjen: That's helpful. Thank you very much.

Speaker Change: So, those are just some of the avenues that we're looking towards. That's helpful. Thank you very much.

Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Dan Politzer with Wells Fargo.

Speaker Change: Thank you. One moment please for our next question.

Speaker Change: And our next question comes from the line of Dan Politzer.

Daniel Brian Politzer: Hey, good morning everyone, and thanks for taking my question. I wanted to just follow up on the Kentucky HRM landscape and what you're seeing specifically as it relates to Derby City downtown and the ramp there, and, you know, how to think about cannibalization. And then similarly, if you could talk about where we are in terms of like Newport and Turf Way. I acknowledge Ellis Park was probably a drag in the quarter but, you know, Newport, Turf Way, and Derby City downtown, if we can kind of zoom in on the ramps there and kind of put the takes on those properties and potential cannibalization. Thanks.

Speaker Change: with Wells Fargo.

Daniel Brian Politzer: Hey, good morning, everyone, and thanks for taking my question.

Daniel Brian Politzer: I wanted to just follow up on the Kentucky HRM landscape and what you're seeing, specifically as it relates to Derby City downtown and the ramp there, and how to think about cannibalization. And then similarly, if you could talk about where we are in terms of like Newport and Turfway. I acknowledge Ellis Park was probably a drag in the quarter, but Newport, Turfway, and Derby City downtown, if we can kind of zoom in on the ramps there and kind of puts the takes to those properties and potential cannibalization.

William C. Carstanjen: Yeah, so Derby City downtown. The good news is we didn't see any cannibalization from our Derby City gaming property. And so that was the good news. I would say, though, that that property has ramped slower than we started. But I don't find that particularly problematic at this point.

Daniel Brian Politzer: Thanks.

Speaker Change: Yeah, so Derby City downtown, I'll start there. The good news is we didn't see any cannibalization from our Derby City gaming property.

Speaker Change: And so that was the good news. I would say, though, that that property has ramped slower than we started. I don't find that particularly problematic at this point, having watched our team open numerous properties.

William C. Carstanjen: Having watched our team open numerous properties, they all ramp up a little bit differently. I'm very confident that our team built the right customer offering. And I'm very confident we have the right team on the ground. So we'll make incremental progress and continue to push that. And I never react to the first or second quarter, although it's always great when they go extremely well, like we've seen in Terre Haute. So Derby City Gaming, more to come on that. I'm encouraged.

Speaker Change: They all ramp a little bit differently. I'm very confident that our team built the right.

Daniel Brian Politzer: Customer Offering.

Daniel Brian Politzer: and I'm very confident we have the right team on the ground.

Daniel Brian Politzer: So, we'll make incremental progress and continue to push that, and I never react to the first or second quarter, although it's always great when they go extremely well, like we've seen in Tara Haute. So, Derby City Gaming, more to come on that.

William C. Carstanjen: But I would say the downtown Louisville environment has not been the quickest market to rebound from COVID as some other comparably sized cities, and so that maybe has been a bit of a headwind there. But otherwise, our team is doing everything right, both in terms of what we've built there and how we've staffed it. And we have a lot of expertise in the area that we can devote to driving improvement. So we'll get there.

Daniel Brian Politzer: I'm encouraged.

Daniel Brian Politzer: But I would say...

Daniel Brian Politzer: The downtown Louisville environment has not been...

Daniel Brian Politzer: The quickest market to rebound from COVID is some other comparably-sized cities. And so that maybe has been a bit of a headwind there. But otherwise, our team is doing everything right, both in terms of what we've built there and how we've staffed it.

Daniel Brian Politzer: And we have a lot of expertise in the area that we can devote to driving improvement. So we'll get there.

William C. Carstanjen: When you talk about Newport and Turfway, those are also properties that started a little bit on the slower side, but as you've seen over the subsequent quarters, they continue to build. So they continue to get stronger, and I think that's a hallmark of our team. There's a lot of experience, and there's a lot of confidence. And every quarter, we just focus on incremental improvement. So both of those properties stand for the proposition that we're still in the ramp-up stage, that we haven't reached maturity. And that's what you see from our team across Kentucky.

Daniel Brian Politzer: When you talk about Newport and Turf Way...

Daniel Brian Politzer: Those are also properties that started a little bit on the slower side, but as you've seen over the subsequent quarters, they continue to build, so they continue to get stronger, and I think that's a hallmark of our team.

Daniel Brian Politzer: There's a lot of experience and there's a lot of confidence.

Daniel Brian Politzer: And every quarter we just focus on incremental improvement.

Daniel Brian Politzer: So both of those properties...

Daniel Brian Politzer: stand for the proposition that we're still in the ramp-up stage, that we haven't reached maturity, and that's what you see from our team across Kentucky.

Operator: Got it. Thanks so much and congrats on the quarter.

Operator: Thank you. One moment, please, for our next question. Our next question comes from the line of Joe Stauff with SIG. And our next question comes from the line of Joe Stauff. Good morning, Bill. Good morning.

Speaker Change: Got it. Thanks so much and congrats on the quarter.

Dan: Thanks, Dan.

Speaker Change: Thank you. One moment, please, for our next question.

Speaker Change: Our next question comes from the line of Joe Stauff with SIG.

Joseph Robert Stauff: Good morning, Bill. Good morning, Marcia.

William C. Carstanjen: I wanted to ask, you know... Yes, can you hear me okay, Bill? We can hear you, Joe. Go ahead.

Joseph Robert Stauff: Good morning, Bill. Good morning, Marcia. I wanted to ask, you know,

William C. Carstanjen: We can hear you, Joe. Go ahead.

Joseph Robert Stauff: Yes, can you can you hear me okay, Bill? We can hear you, Joe. Go ahead. We can hear you just fine.

Joseph Robert Stauff: We can hear you just fine. Hey Bill, can you hear me? Yes, we can hear you now. Yes. I wanted to ask about, say, the Grandstand...

Speaker Change: Hey Bill, can you hear me?

Joseph Robert Stauff: Yes, we can hear you now. Yes, I wanted to ask about, say, the grandstand.

William C. Carstanjen: Yes, sorry about that. I wanted to ask about the Grandstand project. Um, I guess how many tickets there are within that area today and how many do you expect there to be after the renovation, and maybe comment about other areas or white spaces within Churchill Downs that you're looking at for reinvestment.

William C. Carstanjen: Yes, sorry about that. I wanted to ask about the Grandstand project.

Speaker Change: I guess, how many tickets...

Speaker Change: You know within that area are there

Speaker Change: exist today and how many do you expect to exist after the renovation?

Speaker Change: and maybe comment about other, say, areas or white spaces.

Speaker Change: within Churchill Downs that you're looking at for reinvestment.

William C. Carstanjen: Sure. So currently, I... In the Grandstand Club and Pavilion Project scope, there are 10,000 bleachers. And we're going to take those 10,000 bleacher seats out, and we're going to replace them with 8,300 new seats in a couple of different categories of seats. Some of them are going to be boxes, box seat hospitality on the rail of the racetrack. Some of them are going to be stadium seats, and some of them are going to be covered stadium seats.

Speaker Change: Sure, so currently in the Grandstand Club and Pavilion Project scope, there are 10,000 bleacher seats.

Speaker Change: and we're going to take those 10,000 bleacher seats out and we're going to replace them with 8,300 new seats in a couple of different categories of seats.

Speaker Change: Some of them are going to be...

Speaker Change: of boxes, you know, box seat, hospitality on the rail of the racetrack. Some of them are going to be

William C. Carstanjen: So we are taking a section of lower-end hospitality and moving it towards premium hospitality. And that's a combination of both the seating options and also the amenities that we associate with those seating options. So we are significantly upgrading not only the seats but the hospitality associated with those seats. In this case, there are an additional 2,800 seats in the grandstand who traditionally access the same hospitality areas that we are fixing and substantially upgrading as part of this project.

Speaker Change: Stadium seats, and some of them are going to be covered stadium seats.

Speaker Change: So we are taking...

Speaker Change: William Carstanjen

Speaker Change: a section of lower-end hospitality and we are moving it towards premium hospitality and that's a combination of both.

Speaker Change: The seating options, but also the amenities that we associate with those seating options. So we are significantly upgrading not only the seats, but the hospitality associated with those seats.

Speaker Change: In this case, there are an additional 2,800 seats.

Speaker Change: in the grandstand.

Speaker Change: who traditionally access...

Speaker Change: the same hospitality areas that we are fixing and substantially upgrading as part of this project.

Speaker Change: So, those 2,800 grandstand seat holders will also benefit from this renovation project.

William C. Carstanjen: So those 2,800 grandstand seat holders will also benefit from this renovation project because their amenities will be substantially better. So that's the scope, 10,000 going to 8,300 plus an additional 2,800 seats aren't changing, but they have access to all the new amenities. That's the scope of this project, and, of course, consistent with what you've seen us do over the last number of years with the substantial upgrade in the seating and hospitality experience, there'll be an associated increase in premium pricing for those.

Speaker Change: because their amenities will be substantially better.

Speaker Change: So that's the scope. 10,000 going to 8,300, plus an additional 2,800 seats aren't changing, but they have access to all the new amenities. That's the scope of this.

Speaker Change: And of course, consistent with what you've seen us do over the last number of years, with the substantial upgrade in the seating and hospitality experience, there'll be an associated increase in premium pricing for those experiences.

William C. Carstanjen: Oh, and your other part of that question. If you look at our facility as a whole, yeah, Joe, you had one other follow-up, and I'm not going to let you forget it. I'll hit on that quickly.

Speaker Change: Oh, and your other part of that question...

Speaker Change: If you look at our facility as a whole...

William C. Carstanjen: That was what else we were looking at at the track. We don't have anything else that we wanted to announce on this call, but, as many of you are aware, these projects that we do are often more than one-year projects, so we will be working on things well before we announce, and we have a very good working approach to our facility as a whole. So if you think about our property, you have the infield, which is all temporary hospitality.

Speaker Change: Yeah, Joe, you had one other follow-up, but I'm not going to let you forget it. Let me, I'll hit on that quickly. That was, what else are we looking at at the track? We don't have anything else that we wanted to announce on this call. But

Speaker Change: As many of you are aware...

Speaker Change: These projects that we do are often more than one-year projects, so we will be working on things well before we announce, and we have a very good working...

Speaker Change: [inaudible]

William C. Carstanjen: That's an area where we're looking at various ideas, including what we've seen in other places around the country and around the world for concepts we think might work there. But also, if you think about the area of our track, really around the first turn, you have the first turn project, and then you have a gap area between that first turn project and the sky terraces. We have a gap in the smile, as we sometimes call it.

Speaker Change: various ideas including what we've seen in other places around the country and around the world for concepts we think might work there but also if you think about the area of our track really around the first turn

Speaker Change: You have the first term project, and then you have a gap area between that first term project and...

William C. Carstanjen: So that's an area that we look at. And then you also have the area at the top of the stretch of our track as you come down Central Avenue and approach our facility. So we have some significant real estate on our 200-acre property that is largely untouched. That kind of real estate and approach that kind of project, you really have to do so carefully, and it takes some time to figure out how it all, how the puzzle will fit together. And so those are things we're currently exploring, but not ready at this point to be really specific on what we intend to do.

Speaker Change: the sky terraces, we have a gap in the smile as we sometimes call it. So that's an area that we look at. And then you also have the area at the top of the stretch of our track as you come down Central Avenue and approach our facility. So we have some significant real estate in our 200 acre property.

Speaker Change: that is largely untouched, but when you touch...

Speaker Change: That kind of real estate and approach that kind of project, you really have to do so carefully and it takes some time to figure out how it all, how the puzzle will fit together. And so those are things we're currently exploring but not ready at this point to be real specific on what we intend to do.

Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Jeff Stantial with Stiefel.

Speaker Change: Thank you. One moment please for our next question.

Jeffrey Austin Stantial: Hey, good morning, Bill, and Marcia. Thanks for taking our question. Just one from us. I wanted to focus on the competitive environment in Kentucky and Virginia. And more specifically, there have been some articles recently suggesting that new types of skill games are starting to emerge, which try to skirt the recently enacted bans with different reveal mechanisms. Bill, I'm just curious to get your perspective on how you see overall enforcement of the two bans across the two markets. Are you still seeing a number of these machines operating around your properties? Is it de minimis the amount that are willing to risk legal action? Just any thoughts you can provide there would be great.

Speaker Change: And our next question comes from the line of Jeff Stantial with Stiefel.

Jeffrey Austin Stantial: Hey, good morning, Bill, Marcia. Thanks for taking our question. Just one from us. I wanted to focus on the competitive environment in Kentucky and Virginia, and more specifically, there's been some articles recently suggesting that new types of skill games are starting to merge, which...

Speaker Change: try to skirt the recently enacted bans with different reveal mechanisms. Bill, I'm just curious to get your perspective on on how you see overall enforcement.

Speaker Change: of the two bands across the two markets. Are you still seeing a number of these machines operating around your properties? Is it de minimis the amount that are willing to risk legal action? Just any thoughts you can provide there would be great. Thanks.

William C. Carstanjen: Thanks. Yeah.

William C. Carstanjen: Yeah, so I think there is a theme in certain states and in certain parts of the country of sort of, sort of... bald-faced attempts to try to skirt violations of state law with the introduction of machines that various nefarious operators will try to claim are not forms of gaming but some form of skill game or some other kind of nonsensical theory for why they should be legal under state law. So we've seen some of that in Kentucky; you see it in different states.

William C. Carstanjen: Yeah, so I think there is a theme in certain states and in certain parts of the country of sort of...

Speaker Change: Sodom

Speaker Change: bald-faced attempts to try to skirt

Speaker Change: gaming laws to introduce gaming products.

Speaker Change: So, I don't, I wouldn't go so far as to say it's whack-a-mole because it's not that significant. But I think we're in a, I think we're in a stretch of time where it takes a lot of vigilance by the state authorities, legal authorities, and by our internal team to watch for.

Speaker Change: . . . egregious violations of state law with the introduction of machines that . . .

Speaker Change: various nefarious operators will try to claim are not forms of gaming but some form of skill game or some other kind of

Speaker Change: nonsensical theory for why they should be legal under state law. So, we've seen some of that in Kentucky, you see it in different states.

William C. Carstanjen: It is now part of the rhythm of a gaming company like ours to be vigilant with respect to those, and so there is some activity around that, but I wouldn't describe it as something we need to call out on this earnings call as a massive additional threat or close to legalization or something like that. It's just part of the landscape, and it just takes lots of work and communication with local authorities to point it out and to ensure that it's getting the proper focus it deserves from law enforcement.

Speaker Change: It is now part of the rhythm of a gaming company like ours to be vigilant with respect to those.

Speaker Change: And so there is some activity around that, but I wouldn't describe it as something we need to call out on this earnings call as...

William C. Carstanjen: William Carstanjen

William C. Carstanjen: a massive additional threat or close to legalization or something like that. It's just part of the landscape.

William C. Carstanjen: And it just takes lots of work and communication with local authorities to point it out and to ensure that it's getting the proper focus it deserves from law enforcement.

Operator: Great. Thanks very much. A nice quarter. I'll pass it on.

Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Jordan Bender with JMP Securities.

Speaker Change: Great. Thanks very much. A nice quarter. I'll pass it on. Thank you.

Speaker Change: Thank you. One moment please for our next question.

Speaker Change: And our next question comes from the line of Jordan Bender.

Jordan Maxwell Bender: Greg, good morning. Thanks for taking my question. Maybe kind of a follow-on to the last question. Now that we're kind of a year following that Kentucky gray market machine ban, are there any kind of definite conclusions on spend or visitation to those properties? And, you know, maybe the follow-on to that is, you know, taking the trailing 12 month results in Kentucky, are there any conclusions to draw in Virginia? And maybe, you know, how we should view the growth in the back half of the year based on that? Thank you.

Jordan Maxwell Bender: with JMP Securities.

Jordan Maxwell Bender: Greg, good morning. Thanks for taking my question. Maybe kind of a follow-on to the last question, you know, now that we're kind of a year following that Kentucky gray market machine ban, you know, are there any kind of definite conclusions on spend or visitation to those properties? And, you know, maybe the follow-on to that is

Speaker Change: taking the trailing 12-month results in Kentucky. Are there any conclusions to draw in Virginia and maybe how we should view the growth in the back half of the year based off of that? Thank you.

William C. Carstanjen: Yes, so Jordan, I'd say that, um... Life often doesn't allow you to... reduce an experiment to a single variable.

Greg: Yes, so...

Speaker Change: Jordan, I'd say that, um...

Speaker Change: Life often doesn't allow you to...

William C. Carstanjen: So both in Virginia and in Kentucky, there's a lot going on at the same time. We're getting better at operating our businesses. We found the market, we found efficiencies. We've been good at game mix. We've been good at moving machines around between our different facilities based on performance differences between the different facilities. Our team has gotten more experienced, and our database has gotten deeper. So in both Virginia and Kentucky, you're in a circumstance where you're not at maturity.

Greg: Reduce an experiment to a single variable. So both in Virginia and in Kentucky, there's a lot going on at the same time.

Speaker Change: We've been good at game mix, we've been good at moving machines around between our different facilities based on performance differences between the different facilities.

Speaker Change: Our team's gotten more experience, our database has gotten deeper.

William C. Carstanjen: So there's a lot of things that are going on that make our business better. And because of that, it's hard to precisely define how much improvement might be because of the reduction of competitive products from the illegal gaming products that have been in the market. But certainly, it's important and positive to get illegal gaming products removed from the market. That definitely helps our facility. That definitely is a positive thing. But I can't give you a percentage, although my suspicion is it's different between Kentucky and Virginia, but I can't give you specific percentages because it's a multivariable equation, and all the variables are in flux right now because these are still relatively undeveloped markets that haven't approached maturity. But certainly it's positive, and certainly it's important. And certainly, it's something our company focuses on to make sure that we're not facing illegal competition in the markets that we're in.

Speaker Change: to get illegal gaming products removed from the market. That definitely helps our facility. That definitely is a positive thing. But I can't give you a percentage, although my suspicion is it's different between Kentucky and Virginia, but I can't give you specific percentages.

Speaker Change: because it's a multivariable equation and all the variables are in flux right now because these are still relatively undeveloped markets that haven't approached maturity.

Speaker Change: But certainly it's positive, certainly it's important, and certainly it's something our company focuses on to make sure that we're not facing illegal competition in the markets that we're in.

William C. Carstanjen: Great. Thanks, Bill.

Chad C. Beynon: And our next question comes from the line of Chad Beynon with Macquarie.

William C. Carstanjen: And our next question comes from the line of Chad Beynon with Macquarie.

Chad C. Beynon: All right, good morning. Thanks for taking my question.

Chad C. Beynon: Bill, Marcia, I wanted to ask about consumer trends within the database, particularly on the HRM.

Chad C. Beynon: and gaming pieces, kind of what you've seen in terms of, you know, different tiers in the programs, if that low end is remaining stable, or if you've seen some weakening in the past couple months. Thank you.

William C. Carstanjen: So you're covering a lot of ground with a broad question like that because it can depend on individual markets, and we have a pretty broad geographic footprint. But in general, in general, we're finding more trips.

Speaker Change: So, you're covering a lot of ground with a broad question like that because it can depend on individual markets and we have a pretty broad geographic footprint. But in general, we're finding more trips.

Speaker Change: And we're finding spend per trip flat to modestly declining, but relatively flat. So, fair amount of stability in general across the properties.

William C. Carstanjen: in general across the property.

Speaker Change: It's great to hear. Thank you very much.

Speaker Change: Thank you.

Speaker Change: And our next question comes from the line of Ben Chaiken with Mizzouho.

Benjamin Nicolas Chaiken: Hey, good morning. Thanks for taking my question.

Speaker Change: Tara Haute had a particularly strong start, I guess, you know, given your history opening other projects.

Speaker Change: and the dynamics of this.

Speaker Change: opening. How do you think about the projected ramp or maturing of this property? In other words, clearly it had a great start. Do you anticipate some of the wall before finding its footing?

Speaker Change: What do you think it continues to build? And, you know, understanding there's a tax dynamic impacting EBITDA more so.

Speaker Change: referring to top line. And I guess I asked the question in the context of limited competition and some unique demand sources nearby, universities, etc. Thanks. Well, thanks for the question. I think generally with Tara Haute,

Speaker Change: We really thought about it as a property that was similar to our Oak Grove property on the border of Kentucky and Tennessee which which

William C. Carstanjen: has market activity and population around it, but it also is similarly close to Nashville as Terre Haute is close to Indianapolis. So when we thought about how this property would do, we looked at our project there, and the way we approached it was we thought we'd do pretty well introducing, to the local market, we're introducing a high-end entertainment option in a market without that sort of product. So we thought we'd do pretty well initially with the locals but that it would take quite a while to build up a market that's 60, 70 miles away.

William C. Carstanjen: had

William C. Carstanjen: has market activity and population around it, but also is similarly close to Nashville as Terre Haute is close to Indianapolis.

William C. Carstanjen: So, when we thought about how this property would ramp, we looked at our project there.

William C. Carstanjen: And the way we approached it is we thought we'd do pretty well introducing with the local market, we're introducing a high end entertainment option in a market without that sort of product. So we thought we'd do pretty well.

William C. Carstanjen: Initially, with the locals, but that it would take quite a while to build.

William C. Carstanjen: It's an easy trip on the freeway, but there is some distance, and it takes a while to develop your database and the customer experience level and comfort with your product when they have to drive an hour or so, or an hour plus. So, to be frank, we were really thrilled with how Terre Haute opened. And our next question comes from the line of Daniel...

William C. Carstanjen: you know, 60, 70 miles away.

William C. Carstanjen: It's an easy trip on the freeway, but there is some distance and it takes a while to develop your database and the customer experience level and comfort with your product when they have to drive an hour or so, or an hour plus. So to be frank, we were really thrilled with how Terre Haute opened.

William C. Carstanjen: I would tell you that it opened quite a bit stronger than we expected, and that's a great thing. It seems to have immediately been a hit with the local population.

William C. Carstanjen: And we'll keep working on building that database locally, and we'll keep working.

William C. Carstanjen: and expect to see improvement over time, reaching further afield into those suburbs of Indianapolis that are...

William C. Carstanjen: 60, 70, 80 miles away down I-70.

William C. Carstanjen: So, more to come, but it's not a simple market or a simple model like some of our properties, which are just designed to attract the locals. We built Terre Haute hoping to drive traffic and visitation out of Indianapolis, 70 miles down the road, and we wouldn't be anywhere near, at this point, maturity with respect to that strategy.

Speaker Change: Thanks, appreciate it.

Operator: And our next question comes from the line of Daniel Guglielmo with Capital One Security.

Speaker Change: Thank you. And our next question comes from the line of Daniel Guglielmo with Capital One Securities.

Daniel Edward Guglielmo: Hello, everyone. Thanks for taking my question. Bill had addressed the EBITDA margin expansion in all the segments this quarter versus last year. Have there been any concerted efforts around expenses that have been paying off? And can you just talk a little bit about the labor environment you're seeing at the properties as of late?

Speaker Change: Our team, you know, led by Bill Mudd, is constantly focused on efficient cost structures. So there are countless...

William C. Carstanjen: initiatives that roll up to the aggregate of trying to make sure we optimize our cost structure.

Speaker Change: So, that's a part of our culture and it isn't one thing and it isn't one initiative, it's just a constant focus on how best to provide the cost infrastructure we need to successfully run our properties as efficiently as we can do so. In terms of the labor market, all of us out there see some level of wage inflation, but I don't find our experience with it to be something that is particularly remarkable versus other companies or particularly concerning in terms of managing our business long term.

William C. Carstanjen: There's always something going on, and there's always something to keep your eye on and to manage carefully. So, yes, we're subject to some of the same trends you see in America. There has been wage inflation.

William C. Carstanjen: And we try to manage that by being really careful and thoughtful about hiring great people and designing jobs to maximize their contribution. So it's not...

William C. Carstanjen: something that I would say is a top concern for our senior team. And that's a tribute to the work they've done, both our HR team and in particular, Bill Mudd and his team, in getting ahead of these kind of issues to make sure to make sure we don't.

William C. Carstanjen: We don't find ourselves with an untenable situation. We're in good shape on this.

William C. Carstanjen: Great, thank you.

Speaker Change: Thank you. One moment, please, for our next question.

Speaker Change: Our next question comes from the line of Shaun Kelley with Bank of America.

Shaun Clisby Kelley: Hi, good morning, everyone. Thanks for taking my questions.

Shaun Clisby Kelley: Phil, I just wanted to go back to some of the comments you made in the prepared remarks about Virginia. I think you talked about full deployment of your 5,000 machine opportunity there by the end of 2025.

Shaun Clisby Kelley: Could you just elaborate a little bit on that? What locations are you seeing or you may have the biggest opportunity to kind of reshuffle to? And are there any constraints, be that physical, i.e. a bit more capex required to hit some of those targets, or legislative, meaning you need local approvals to go back and move around some of those machines in order to hit that target?

Daniel Edward Guglielmo: Sure, Shaun, good question. Thanks for the question. So, yes, the construct in Virginia... just to remind everybody, we're allowed 10 facilities over which we can deploy 5,000 machines, and the amount of machines we can deploy in any particular facility is also subject to a relatively complex scenario and, and, uh...

William C. Carstanjen: Great, thank you for the incremental color there.

Shaun Clisby Kelley: Sure, Shaun, good question. Thanks for the question. So yes, the construct in Virginia.

Shaun Clisby Kelley: Just to remind everybody, is we're allowed 10 facilities over which we can deploy 5,000 machines. And the amount of machines we can deploy in any particular facility is also subject to a relatively complex

William C. Carstanjen: William Carstanjen

William C. Carstanjen: scenario and

William C. Carstanjen: paradigm. So it's not level loaded across the 10 different licenses. For example, as you know, Dumfries has allowed a total of 1,800 machines in that market. So we have to strategize carefully.

William C. Carstanjen: how to deploy the limited number of machines we have. And I would say our biggest restraint is not the 10 licenses right now. We haven't deployed the 10 licenses. We have a couple more to go. Our biggest constraint is

William C. Carstanjen: The fact that we already want to deploy across the licenses that we have the full contingent of 5,000 machines.

William C. Carstanjen: So, we haven't fully deployed the maximum amount across all our facilities.

William C. Carstanjen: and yet we're seeing such strong results over some, we want to add more.

Speaker Change: In general, yes, there can be some modest additional capital expenditure in order to purchase the machines and expand the spaces to make sure that we can house those machines. And all of those will reveal to the...

Speaker Change: Shareholder community and the investor community as we're ready as we finalized our plans and are executing on them but in general our restraint

William C. Carstanjen: Right now is not the number of licenses. It's the fact that we've got really great properties that we've already opened and we want to get more machines into those properties.

William C. Carstanjen: So, we're working on that right now.

William C. Carstanjen: I think over the next couple earnings calls, as we finalize plans and are executing them, we'll get real precise in explaining exactly where they're going and what quantity.

William C. Carstanjen: and what modest capital expenditures are necessary to accomplish that.

William C. Carstanjen: But it's all underway. It's all being carefully planned. And as I said in my prepared remarks, we expect all of this to have been communicated and completely executed on before the end of 2025. Right now we're at 2750.

Speaker Change: Great, thank you for the incremental color there. And then my follow-up would just be, you know, similar but around the margin commentary you gave about, I think this was in Marcia's section, around...

Marcia Ann Dall: Combined margin across the HRM properties of 55%, up 730 basis points from the prior year quarter.

Speaker Change: Can you just help us give us a sense? I mean, obviously, you know, like you continue to do incredibly well here, and Xacta has been a tailwind too. You know, can you help us think about either the, just that absolute number, is that number sustainable, or is there anything that would, you know, impact that, including, I guess, across the segment, race?

Speaker Change: calendar, timing, double think about the 55%, and then same question, is the magnitude of increase, when we start to lap that or more difficult comps, like how should we think about the cadence of that increase this quarter versus the balance of the year?

Marcia Dall: Sure, so a lot of the improvement that we've shown, and as I recall on Marcia's remarks, she was talking about Virginia most specifically or most in detail. Some of that's been driven by Exacta, you know, as we acquired Exacta and we restructured, we thought that business, we thought the contractual relationship between Exacta and the gaming floors. Some of that margin goes to the gaming property, and Exacta still is a very important growing business. So Exacta has a big impact both from the vertical integration of us owning it. From the gaming floor improvements, remember when we acquired P2E? Exacta had an exclusivity contract with the previous owners.

William C. Carstanjen: Sure, so a lot of the improvement that we've shown and as I recall Marcia's remarks, the vertical integration of us owning it, from the gaming floor improvements. Remember when we acquired P2E. Exacta had an exclusivity contract with the previous owners. With us owning Exacta, we could remove that exclusivity to bring in Ainsworth products to improve the quality of the floor, to improve the performance and attractiveness of the gaming operation. That's been a big driver. Our floor's a lot better. Our floor is more interesting and more competitive compared to... (inaudible)

Speaker Change: Sure, so a lot of the improvement that we've shown, and as I recall on Marcia's remarks,

Speaker Change: She was talking about Virginia most specifically, or most in detail. Some of that's been driven by Xacta. You know, as we acquired Xacta and...

Speaker Change: We restructured, rethought that business, rethought the contractual relationship between Xacta and the gaming floors.

Speaker Change: Some of that margin goes to the gaming property and Xacta still is a very important growing business. So, Xacta has a big impact both from

Speaker Change: The vertical integration of us owning it, from the gaming floor improvements, remember when we acquired P2E.

Marcia Dall: With us owning Exacta, we could remove that exclusivity to bring in aims worth product to improve the quality of floor, to improve the performance and attractiveness of the gaming operation. That's been a big driver; our floors are a lot better, our floors are more interesting and more competitive compared to traditional classroom gaming floors. And our team has gotten in there and we're operating well. We're figuring out our structure, how to best operate these properties, how to utilize the database the way we do and other territories.

Speaker Change: Xacta had an exclusivity contract with the previous owners. With us owning Xacta, we could remove that exclusivity to bring in Ainsworth product to improve the quality of floor.

Speaker Change: [inaudible]

Speaker Change: traditional class 3 gaming floors.

Speaker Change: And our team has gotten in there, and we're operating well. We're figuring out our structure.

Marcia Dall: So there have been lots of incremental things that are going on that have driven the improvement, and I think, as I think consistent with Marcia's comments, Exacta was a big key to unlocking our ability to give us a full tool kit to improve how the business performs. In a big part in Virginia, but also you're seeing it in Kentucky too, as the properties exist for a longer period of time, they're still on their ramp up towards maturity; they're not mature. But during that process, everything's getting better; we're getting smarter; we're getting better at our database, etc.

Speaker Change: How to Best Operate These Properties, How to Utilize the Database the Way We Do in Other Territories. So, there have been lots of incremental things that are going on that have driven the improvement, and I think...

Speaker Change: is, I think, consistent with Marcia's comment. Exactly, it was a big key to unlocking our ability to giving us a full toolkit to improve how the business performs.

Speaker Change: In a big part in Virginia, but also you're seeing it in Kentucky too.

Speaker Change: as the properties...

Speaker Change: exist for a longer period of time. They're still on the ramp up towards maturity, they're not mature, but

Speaker Change: During that process, everything's getting better. We're getting smarter. We're getting better at our database.

Marcia Dall: So I don't think you've seen the end of improvement, but I'm not on this call today here to promise you how margins will improve and each of these facilities over time.

Speaker Change: etc. So I don't think you've seen the end of improvement, but I'm not on this call today here to promise you how margins will improve in each of these facilities over time. That's something that we'll try to prove and demonstrate.

Marcia Dall: That's something that will try to prove and demonstrate, but generally where we are in the life cycle of our operations, there's lots of cause for optimism and it's an exciting time for our team as we use, learn, and use our new tool kit to improve these businesses.

Speaker Change: But generally, where we are in the life cycle of our operations, there's lots of cause for optimism and it's an exciting time for our team as we use, learn and use our new toolkit to improve these businesses.

William C. Carstanjen: Thank you. I'll now hand it back to CEO Bill Carstanjen for any closing remarks.

William Carstanjen: I'll now hand it back to CEO Bill Car Stange in for any close remarks. Thank you, everyone. We appreciate your time today; we appreciate your interest in our company. For those of you who have invested, we appreciate your investment.

Speaker Change: Thank you. I'll now hand it back to CEO Bill Carstanjen for any closing remarks.

William C. Carstanjen: Thank you, everyone. We appreciate your time today. We appreciate your interest in our company. For those of you who have invested, we appreciate your investment. We'll try to do right by that investment, and our team is very motivated. They're very driven, and this is a time of real optimism for our team because we think we have...

William Carstanjen: We'll try to do right by that investment, and our team's very motivated; they're very driven, and this is a time of real optimism for our team. Because we think we have the skills and the opportunities to shine. So we'll keep doing what we do, and thanks again for your confidence, and we'll talk to you soon.

Speaker Change: We have the skills and the opportunities to shine, so we'll keep doing what we do. Thanks again for your confidence, and we'll talk to you soon. Thank you.

Operator: Ladies and gentlemen, thank you for participating. This concludes today's program, and you may now disconnect.

Operator: Ladies and gentlemen, thank you for participating. This concludes today's program, and you may now disconnect the two of us.

Speaker Change: Ladies and gentlemen, thank you for participating. This concludes today's program and you may now disconnect.