Churchill Downs Inc Q3 FY2024 earnings call

• Kentucky Derby Growth: Significant progress on the Starting Gate Pavilion project at Churchill Downs Racetrack, transforming seating and amenities, on track to complete on budget and time for next year's Kentucky Derby. Also designing new infield experiences.
• HRM Expansion: In Virginia, opened The Rose HRM property, filed for Roshire Gaming Parlor, expanding HRMs in Richmond, and shifting HRMs for optimization. In Kentucky, on-track to open Owensboro HRM venue in Q1 2025 and developing Calvert City HRM venue. HRMs and Exacta's HRM technology are key strategic focuses.
• Financial Results: Delivered record net revenue, adjusted EBITDA, and segment-specific records for Live and Historical Racing, Gaming, and TwinSpires segments. Diversified portfolio had 10% revenue growth and 8% adjusted EBITDA growth quarter-over-quarter.

In the third quarter, Churchill Downs Incorporated delivered record net revenue and adjusted EBITDA. The Live and Historical Racing segment saw Virginia HRM properties as the primary driver of adjusted EBITDA growth, with a $15 million or 40% quarter-over-quarter increase. Virginia HRM properties excluding racing had a combined margin over 54% during the quarter, up over 6 points from the prior year. Kentucky HRM properties performed well overall. The Gaming segment had the Terre Haute property perform extremely well, but regional gaming properties faced softness due to consumer behavior and increased competition. The TwinSpires segment had the Exacta business contribute over $10 million in adjusted EBITDA, with the horseracing business having lower handle but strong margins.

• Project capital for 2025 expected to be between $250 million and $325 million. - Board approved a 7% dividend increase, paid on January 3, 2025. - Bank covenant net leverage expected to decline in 2025 as investments deliver meaningful adjusted EBITDA and free cash flow.

• Illegal grey games in Virginia continuing to be a risk, despite law enforcement efforts. - Macro changes in downtown Louisville affecting the profitability of the Derby City Gaming Downtown property post-COVID.

Q: David Katz with Jefferies asked about progress in Virginia, any surprises and opportunity outlook.

A: William Carstanjen said Virginia progress is good, big component of P2E acquisition, optimistic about deployment of remaining HRMs, law enforcement working on curbing grey games.

Q: Barry Jonas with Truist Securities asked about M&A strategy.

A: William Carstanjen said M&A looks for businesses where they can improve operations and grow into new markets, focused on organic growth with their skills, pipeline feels promising.

Q: Dan Politzer with Wells Fargo asked about project pipeline and Derby City downtown profitability.

A: William Carstanjen said HRM experience positive, Richmond expansion makes sense, Derby City downtown had headwinds from post-COVID downtown Louisville, but team working on cost structure and improvement.

Q: Chad Beynon with Macquarie asked about Exacta growth beyond 2024-2025.

A: William Carstanjen said Exacta has international deployments and opportunities, pipeline chugging along.

Q: Jeff Stantial with Stifel asked about Dumfries ramp up cadence.

A: William Carstanjen said Dumfries is a big property, ramping carefully for great customer experience, bigger properties ramp slower, focusing on long-term.

Q: Joseph Stauff with SIG asked about Virginia revenue growth sustainability.

A: William Carstanjen said Virginia has multiple positive factors like better operations, game mix, law enforcement action, and maturing market.

Q: Shaun Kelley with Bank of America asked about race calendar financial implications.

A: William Carstanjen said racing is part of Virginia's ecosystem, improves performance and economic activity, but hard to isolate materiality to overall operations.

Q: Daniel Guglielmo with Capital One Securities asked about HRM consumer strength.

A: William Carstanjen said HRM is newer, high margin, not maturing yet, driving different financial profile than traditional gaming.

Q: Jordan Bender with Citizens JMP asked about balance sheet and larger growth projects.

A: William Carstanjen said bigger company can do bigger projects, capacity and capability to execute, looking to deploy capital for returns.

Q: Benjamin Chaiken with Mizuho asked about Virginia HRM machine expansion.

A: William Carstanjen said Virginia model works well, hopes to talk to state about expanding, focus on delivering promises to state.