Yahoo Finance Churchill Downs Incorporated (NASDAQ:CHDN) Q1 2024 Earnings Call Transcript
Churchill Downs Incorporated (NASDAQ:CHDN) Q1 2024 Earnings Call Transcript April 25, 2024
Churchill Downs Incorporated isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen and welcome to the Churchill Downs Incorporated 2024 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Phil Forbis, Vice President, Financial Planning and Analysis and Treasury.
Phil Forbis: Thank you, Andrew. Good morning and welcome to our first quarter 2024 earnings conference call. After the company’s prepared remarks, we will open the call for your questions. The company’s 2024 first quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company’s website titled News, located at churchilldownsincorporated.com as well as in the website’s Investors section. Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements.
These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent reports on Form 10-Q and Form 10-K. Any forward-looking statements that we make are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday’s earnings press release. The press release and Form 10-Q are available on our website at churchilldownsincorporated.com.
And now I’ll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.
Bill Carstanjen: Thanks, Phil. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. I’ll 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. We delivered record first quarter net revenues of $591 million and record adjusted EBITDA of $243 million. We were pleased with the performance of all of our segments, and our expectations remain high for the rest of the year. We hope our performance resonates with our shareholders.
As a reminder that our long-term and consistent strategies have resulted in an extremely strong company that is delivering best-in-class growth with the pipeline to a great future. Let me update you on the strategic investments we are making in 2024 to drive long-term shareholder value. First, we have completed 1 of the most significant construction developments ever at Churchill Downs Racetrack, the new Paddock project. Every guest who enters through our front gates will be treated to breathtaking views of the TwinSpires Paddock area. Those who have tickets in the newly created sections will enjoy spectacular seating and dining that will deliver a once-in-a-lifetime experience. I am proud in particular of what our team has accomplished over the past 3 years in delivering three significant projects: the Homestretch Club, the First Turn Club and now the Paddock project.
These investments illustrate what our team can dream, design and execute to enhance the special experience expected at the Kentucky Derby by each of our guests. Every year, we seek to surprise and delight our guests with something new and tangible as they explore Churchill Downs Racetrack. Paddock project has been a multiyear massive undertaking that fundamentally improves the entire venue. As we unveil it for its first Derby, we will undoubtedly find both operational opportunities to improve upon and new ancillary investments to give the customer more of what they tell us they value. We believe our $200 million investment in this transformative project will provide a foundation around which to further innovate for years to come. We are also evaluating an intriguing smaller project for the 2025 Derby that will enhance the guest experience in another portion of our venue.
We anticipate that this will be a capital investment in the range of $60 million to $80 million and a payback of 6 to 8 years, which is our target range for Churchill Racetrack. We will provide a more detailed update on our 2025 plans at our next earnings call in late July. Next, regarding our HRM progress. Our disciplined approach to HRM investments demonstrated over the last number of years has led to excellent returns on capital from both our HRM properties and our acquisitions of related technology. We remain focused on expanding further in each of our key markets. In Kentucky, the construction of our Owensboro HRM venue, remains on track with a planned opening in the first quarter of 2025. This will be our seventh Kentucky HRM venue, and it will be located just east of Owensboro, the fourth largest city in Kentucky.
We are permitted under Kentucky law to develop 1 more HRM venue. This one tied to and required to be located within 60 miles of our Oak Grove license. This opportunity is one in which we are very interested and devoting time and resources to exploring. In Virginia, our goal is to utilize all 10 of our potential Virginia HRM licenses and deploy all 5,000 HRM machines currently permitted under the law. As I discussed on our February earnings call, we have received approval to open our new HRM venue in Dumfries, called the Rose with 1,650 machines instead of the previous limit of 1,150 machines. We anticipate opening in September. The team has made great progress on the gaming floor and hotel construction and has kept us on schedule despite an extremely wet spring that affected outdoor road and utilities work.
Dumfries is a great location, located right off Interstate 95 and just 30 miles south of Washington, D.C. in Northern Virginia. I am very excited about this opportunity. A $465 million greenfield project in the Washington, D.C., Northern Virginia region will mark a meaningful step forward in growth for Churchill Downs. With the completion of the Rose by the end of the third quarter of 2024, we will have approximately 4,450 HRMs operational across the Commonwealth of Virginia. We have a number of additional Virginia HRM development opportunities we are exploring, and we anticipate that we will have deployed in 2025, the remaining 500-plus machines we are permitted under law. We are analyzing the best options for the remaining HRMs and as well as deciding if we should shift any of the existing HRM to other locations to optimize the performance overall of our Virginia HRM business.
As the first quarter financials reflect our Kentucky and Virginia operations are performing very well. There are a number of factors contributing to our results, including the continued integration and product improvement opportunities resulting from our Exacta acquisition; the improvement of our marketing and operational processes, particularly with respect to the Virginia properties, which we have only owned since late 2022; the continued trend towards familiarity and acceptance by gaming customers of the HRM product. And with respect to Virginia, the enforcement of the ban on so-called skill games, all of these factors are helping our results, although it is hard to firmly distinguish the effect of each factor from the others. Turning to Exacta.
The acquisition of the Exacta central determinant system technology 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 venues. Because of this vertical integration, we have improved both our top line and our overall margins. We are also in the process of converting approximately 10% of our gaming floors in Kentucky to the Exacta technology to improve our top line over the long term. The Exacta team has continued to make strides growing the portfolio of third-party HRM operations in Kentucky, Wyoming and New Hampshire. For example, we are now one of the central determinant system providers in 9 of the 10 HRM venues that are operational in New Hampshire, and we look forward to growing this business as those properties expand.
There are a number of new jurisdictions that are considering this form of wagering, and our team is looking forward to participating in these growth opportunities if they materialize. As we mentioned during our February call, we are making progress on the development of HRM-based electronic table games. This development work will only further enhance the performance of our HRM venues over the long term. Our Exacta team is demonstrating it can be effective as both a B2C and a B2B business. That is a key cultural and operational challenge we wanted to meet to potentially participate in the range of market opportunities, and we are pleased the team is proving they can do so. Next, regarding our investment in gaming properties. We held the grand opening for our Terre Haute casino in Indiana on April 5, on time and on budget.
We had over 12,000 people visit the property on opening day. As a point of reference for how strong the initial demand is at the property, the total coin-in on opening day surpassed the largest day that we have ever had at Derby City Gaming, a great start. While the daily volumes have since come down, we have been extremely pleased with the performance, and we are well ahead of our projections. Since we will be a destination for people from Indianapolis, our 122-room hotel opening in mid-May should propel our performance even more, again, a great start and congratulations to our Terre Haute team. And finally, regarding our preparations for the upcoming Kentucky Derby, a week from this Saturday, the 150th Run for the Roses will be an extraordinary milestone for the longest continually run sporting event in the United States.
Personally, this will be my 19th Kentucky Derby and 10th as CEO. The buzz and energy is greater every year, and this year feels particularly heightened. Ticket sales, including throughout our new seating areas, have exceeded our expectations, and all of the metrics we track appear exceptional. We look forward to seeing many of you at the Kentucky Derby on May 4 and if you cannot join us in person, please be sure to watch the NBC Telecast beginning at noon Eastern Time. We will provide a press release with our preliminary results after the race like we do every year. In summary, the first quarter was another great quarter for us with record financial results. We were particularly pleased to overcome the challenging January weather, which was significantly worse compared to prior year.
We have positioned our company for strong growth for years to come with our pipeline of investments in the Kentucky Derby, HRM and other gaming venues, the B2B and B2C expansion of our TwinSpires and Exacta businesses and disciplined acquisitions. We are delivering for our shareholders and we have been consistent in our strategies and execution over an extended period of time. We also have a strong pipeline of growth opportunities we are developing beyond the ones we’ve announced. We continue to expect to drive a material increase in adjusted EBITDA and free cash flow in the coming years, while we maintain one of the best balance sheets in the industry. With that, I’ll turn the call over to Marcia, and then we will take your questions. Marcia?
Marcia Dall: Thanks, Bill, and good morning, everyone. I’ll start with a few insights on our financial results and then provide an update on capital management. First, regarding first quarter financial results. As Bill shared, we delivered record first quarter revenue and adjusted EBITDA and our Live and Historical Racing segment, our HRM properties in Virginia and Kentucky performed extremely well during the first quarter. In Virginia, our HRM properties increased adjusted EBITDA by nearly $13 million or more than 27% compared to the prior year quarter. Savings related to the Exacta transaction provided nearly $6 million of improved economics to our Virginia HRM properties. We also benefited from the opening of the Rosie’s Emporia in September 2023 and as well as strong growth in our other Virginia properties.
Our Virginia HRM properties, excluding racing, generated a combined 54% margin during the quarter, up 5.9 points compared to the prior year quarter and up 4.4 points on a sequential basis. Our Kentucky HRM properties increased adjusted EBITDA by $8.5 million or nearly 20% compared to the prior year quarter. Nearly half of this growth was driven by our Northern Kentucky HRM properties. We did have a $2.7 million decrease at Churchill Downs Racetrack compared to the prior year quarter related to increased maintenance and other expenses in preparation for the 150th Kentucky Derby. In our TwinSpires segment, adjusted EBITDA grew by more than $10 million compared to the prior year quarter. The Exacta business contributed more than $9 million of adjusted EBITDA to the TwinSpires segment from third-party customers and growth in our Virginia HRM properties.
Our TwinSpire Horse Racing business saw a modest decline in adjusted EBITDA in the first quarter, primarily as a result of lower retail volume from extremely cold weather conditions in January. Weather-related cancellations resulted in an 8% reduction in U.S. Thoroughbred races in the quarter compared to the prior year period. And last, regarding our gaming business, our regional gaming properties performed relatively well in the first quarter despite being impacted by inclement weather in January. We did see the majority of our properties top line as well as adjusted EBITDA improve in March. As we anticipated, our first quarter same-store wholly owned casino margins were down 2.4 points compared to the same period in 2023, primarily as a result of the challenging January weather.
Turning to capital management. We generated $242 million or $3.24 per share of free cash flow in the quarter, up 21% per share over the prior year, primarily from the strong cash flow generated from our businesses. And regarding maintenance capital, we spent $12 million in the first quarter and continue to expect to spend between $90 million and $105 million in total for the year. Regarding project capital, we spent $143 million in the first quarter and continue to expect to spend between $450 million and $550 million in total for the year. Regarding share repurchases, we repurchased $22 million of CDI shares in the first quarter. At the end of the first quarter, our bank covenant net leverage was 4.1x. Based on our capital investments and the timing of the opening of our new facilities, we expect bank covenant net leverage to remain in the 4x range for the remainder of the year.
We then expect our bank covenant net leverage to decline in 2025 as our investments in Kentucky, Virginia and Indiana began to deliver significant adjusted EBITDA growth. Overall, we are very pleased with the record results that our team has delivered in the first quarter, and we are well positioned to continue to grow through the remainder of 2024 and to 2025, fueled by the tangible pipeline of growth initiatives that Bill discussed. This is my 9th year as CFO and will be my ninth Kentucky Derby next week. This is truly a special time of the year for our company, and this year’s Derby is going to be even more spectacular than ever. I’m looking forward to sharing the experience with many of you in person next week. With that, I’ll turn the call back over to Bill so that he can open the call for questions.
Bill?
Bill Carstanjen: Thank you, Marcia. We’re now ready to take your questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of David Katz with Jefferies.
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