Churchill Downs Incorporated Q3 FY2025 earnings call

Growth Plans for Kentucky Derby - Ticketing revenue driven by premium experiences during Derby Week, with investments like the Starting Gate Pavilion and Courtyard showing positive guest feedback. - Broadcast rates: NBC deal to boost adjusted EBITDA by $10M in 2026, and NBC to broadcast Kentucky Oaks in prime time. - Wagering: Attracting top horses, international expansion of the European and Middle Eastern road to the Kentucky Derby, and strong growth on TwinSpires.com. - Sponsorships and licensing: Expanding national and global footprint attracting well-respected brands. - Selective renovations and expansions: Planning to invest $280M - $300M in Victory Run for the 2028 Kentucky Derby. ### HRM Progress - Kentucky: On track to open eighth HRM venue in Calvert City in Q1 2026. - Virginia: The Rose had strong quarter with GGR growth, Richmond venue expanded gaming floor, and new Henrico County venue off to good start. - New Hampshire: Completed acquisition of 90% interest in Casino Salem project, expecting to open facility in 2027. - Exacta: Grown through HRM operations and third-party relationships, technology supporting New Hampshire facility and upcoming Wichita, Kansas property, and progress on gaining approval for electronic cable games.

The Live and Historical Racing segment achieved record net revenue and adjusted EBITDA, with revenue growing 21% and adjusted EBITDA growing 25% compared to the prior year quarter. The Wagering Services & Solutions segment delivered record third quarter adjusted EBITDA, driven by the growth of the Exacta business. The wholly-owned regional gaming properties had adjusted EBITDA increase over $3 million and margins up 1.1 points compared to the prior year quarter, with strength from rated players and improved unrated player trends.

Capital Management - Projected maintenance capital for 2025: $75M - $85M; project capital: $200M - $240M. - 2026 project capital projected between $160M - $200M. - Free cash flow in Q3 was $166M ($2.34 per share), up 13% yoy. - Dividend increased by 7%, to be paid on Jan 6, 2026. - Estimated lower cash tax payments of $50M - $60M in 2025 and 2026. - Bank covenant net leverage at end of Q3 was 4.1x, expected to be below 4x in 2026.

Regulatory Risks - In Virginia, ongoing issue with illegal machines requiring constant enforcement and vigilance as manufacturers try to introduce new games, though enforcement has been strong but is an ongoing process.

Q: Congrats on the quarter and the announcement of Victory Run. Can you talk more about your ROI targets for Victory Run, how and when you think you'll hit them? And maybe if there are any lessons learned you can apply from the Starting Gate Pavilion introduction at Derby 151?

A: Sure, happy to do that. Barry, so we target a 20% unlevered IRR. That's what we shoot for. We shoot for that, really focused on year 3. It takes time in this business to introduce the new asset, get trial and then get word of mouth. So it's a 3-year window that we focus on.

Q: I wanted to ask about ETGs -- from not putting words in anybody's mouth, from my own work, my sense is that Kentucky might be closer in than some of the other markets that you have. But generally speaking, have you done any sort of penciling, Marcia and team, around what the prospective opportunity could be, whether it's in Kentucky or in any of the other markets in terms of lift, maybe based on learnings from other markets that have gone into ETGs before and after?

A: Thanks, David. Good morning. So ETGs, electronic table games, that's an important frontier for us with HRMs, our facilities across Virginia, Kentucky, New Hampshire, they don't have the benefit of offering table games, which is something, of course, a class of customers really want. So electronic table games in states like Virginia and Kentucky represents an important opportunity for us, and it's a technology journey and it's also a regulatory journey. And it's one we have been focused on for a while. So I don't have any news to announce today, and I hinted at that in our comments, but it's a material focus. It's something we think can be really important and it levels us up in terms of having a comparable suite of offerings for customers compared to traditional Class III facilities. So I can't give you and wouldn't -- can't responsibly give you predictions on what it will do, and it also depends on the regulatory framework that's finally approved. But I can assure you that we take it extremely seriously and think it's an important opportunity for us and we're going to focus on it until we can get it done.

Q: Congrats on the announcement on Victory Run. I wanted to ask about just capital allocation. So year-to-date, and including the dividend, it looks like about $400 million will be spent on share repo and the dividend. So with the updated CapEx for the next couple of years, Marcia and team, how are you thinking about leverage and the balance between share repurchase and the money that will be spent on the projects?

A: Thanks, Chad. As you know, we're very disciplined in our capital management. We have made a commitment to have our leverage come below 4x next year, and we will execute that through that. That being said, we are very thoughtful about -- and strategic about buying shares back when it's appropriate. And we will continue to balance. We have a very good forecasting model that allows us to balance our capital investments with the dividend that we grow at 7% per year, along with other share repurchases throughout the year.

Q: The brick-and-mortar property portfolio is wholly owned across both the live and historical and gaming segments. Outside of not having to pay rent, what are some of the incremental mid- to long-term benefits of owning the properties outright? And then do you think the market is giving you enough credit for the full ownership piece right now?

A: Thanks for the question, Dan. So our philosophy for our gaming assets has been to own the real estate. Other companies have chosen other philosophies and they can explain their philosophies. For us, we've been focused on growing these businesses, stabilizing these businesses and running them as best as we can. So owning your own real estate gives you a sense of stability and a sense of predictability that's made sense for our company. But the philosophy is around why different companies do it the way they do it is up for the other companies to explain. For us, I don't think we get credit for it fully in our stock. It's been occasionally a source of discussion on these calls and a source of discussion with other investors. But fundamentally, we structured a very stable, consistently performing well-executed strategy around regional gaming, in particular, and hopefully, the market recognizes that because our track record is clear and our future is also fairly predictable and clear as well.

Q: I wanted to ask a bit more of a high-level strategic question on the Derby. Bill, just as you look at the track assets built up currently. I'm curious just to get your updated thoughts on what inning you think you're in with respect to some of these, call it, more substantial projects such as the First Turn or the Victory Run, and that's a corollary to that. Do you think the current product is diversified enough where it covers the full consumer life cycle? Or is there still some opportunity left to bridge jumps and ticket price, such as going from infield to premium seat and things like that?

A: Well, thanks for that question, Jeff. I like the baseball analogy. It's World Series time, so that's a very timely analogy. So in that theme, what inning are we in? When it comes -- the Derby is a very old event. It's been around for 151 years, but I think we're in the third inning. I think there's so much opportunity with that, it's a very dynamic evolving event as we develop it. And as the country changes and as we see things moving towards experiential customer spend, so I think the future is very bright for the Derby and there's a lot more to come. I think it's important to have a breadth of offering for the Derby. And a lot of that is still yet to come. When we look at Victory Run, that's a very, very, very attractive part of the track. It's just past the finish line. It has a great view of the stretch as the horse is sort of thunder towards the finish line. And it was a very -- it has seats there, but they're tired -- it's a tired old section that hasn't seen capital investment in a long time. So it was a perfect opportunity to really upgrade that and meet the modern expectations of our consumers, and we get that feedback from them every single year on what they're looking for. So they want more suites. They want more covered boxes. They want higher amenities. That's what they're looking for, and this is an area where we can do that. And there are other areas around the track where that also is in the cards for the future. So I think you'll see us be active on a small-to-medium scale constantly, but the next big project is the one we talked about today, which is Victory Run, and we need to get that done and get that digested before we talk about some of the other big projects that come next. I would say about Victory Run, it increases the capacity of the track, seating capacity by about 2%. It's a 20% increase in that section, and that's a really important section. But we're always very careful about layering in capacity because it's not really about the number of seats. It's about the quality of experience and the segmentation of the experiences that we offer. And so this fits in with a plan and a philosophy that you've seen us execute over time and it's the right next step.

Q: So I wanted to ask about The Rose. Obviously, a nice ramp you're seeing there. I think you're now within your long-term win per unit per day target. And so I guess the question would be how to think about the margin ramp from here and into next year. And I apologize for the near-term question, but any sort of concerns around the sort of government shutdown that's going on in the DC and the like, that would be helpful, too, as well.

A: Brandt, thanks for the question. Yes. We're thrilled with the progression of The Rose. We still think we have a long way to go. And we think as we progress and as our win per unit goes up, you should see improving margins. Right now, we're still heavily investing in marketing as we try to drive awareness in a very big, large complex MSA. And you mentioned also what's going on in that market. We don't really see or feel in a way that we can tell that the impact of some of the government shutdown discussions or whatnot. It's such a huge area. It's 6.5 million people, and we've not even been open in a year. So we're just growing through it. So I think it's such a huge market with great demographics, both from the population level and from the income level that we're just in the process of growing into our size. So some of the noise going on is just not something that we can discern as we currently grow. So yes, we're really happy with how that's progressing. We're really happy with the quarter-to-quarter growth. And as our team settles into the pace, we think there's more things -- good things to come there. And it would be our expectation that you'll continue to see improving performance on margins and things like that as we drive better awareness and better performance per machine.

Q: Just wondering if you guys have thought at all about or could give us some of your kind of emerging thoughts on the whole emerging landscape of prediction markets. This is a fairly disruptive force that's happening out there in the online sphere. And I'm thinking about the potential implications specifically for the Derby, you've obviously, through the pari-mutuel approach and then through the content control have generally had very strong sort of ability to control what's going out there in the betting sphere for the Derby. But this kind of new world seems to do particularly well when we're talking about like really large tentpole events and the Derby, in our eyes from a sporting perspective is definitely one of those. So just kind of wanted to get your thoughts. I know it's an early subject, but if you had any -- and have any of those operators potentially approached you about sponsorship or anything else?

A: Sure. Thanks, Shaun. So let me start by saying that wagering on horse racing in the United States is actually governed under an umbrella federal law called the Interstate Horseracing Act. That's very different than sports wagering that you see across all of the states, which is a state-by-state sort of balkanized state law construct. So our construct is fundamentally different than all the other sports wagering activity you see in the United States. We are governed by a specific dedicated federal law about how wagering works on horse racing. So that makes us quite different. And the requirements under that law are very clear about what it takes in order to take a wager on a horse race, you have to have a contract with the content provider. That's us. You have to have a contract with our horsemen, et cetera. So our philosophy on the prediction markets are, we will approach them, we will explain to them the legal construct under which activity on our sport happens -- wagering activity on our sport happens. We'll explain that both the civil and criminal elements of the Interstate Horse Racing Act and why compliance with it is so clear. And we'll take it from there. We do not have a deal with any prediction markets -- predictive market companies to take wagers on our product. We are not in discussions to do that at this time, but we do plan on approaching them and explaining to them the legal construct under which wagering happens on our product. This is not a question like some of these other sports between state law and federal regulations. We have federal law that governs how we operate. And certainly, to the extent people act counter to having a deal with us and act counter to the Interstate Horseracing Act will pursue all our rights and remedies under the Interstate Horseracing Act. So for us, I think we're different than the other sports. I think we're different than the other players in the online wagering game. And that's a serious subject. It's one we take very seriously and it's one that we've talked a lot. And for us, it's always a matter of communication and making sure that the players out there on the field understand how this sport works so they can contrast it and understand it compared to the others.

Q: Bill, Marcia. A question on Virginia, if I could. Sorry to repeat the question as maybe I have in the past, but I wanted to ask again really on the process of shutting down illegal machines kind of where that is, Bill, you've described it as a bit of a whack-a-mole process. Has that changed? And do you think it's affecting some of your assets within Virginia, at least in a modestly negative manner today. Just trying to understand essentially the opportunity and the tailwind of closing down those machines over time and how strong it is, et cetera?

A: Sure, Joe. Happy to take that question. And we haven't talked about that yet today. So I almost used the term gray games, but these aren't gray games. These games are illegal. The legislature has spoken, and the court has spoken, but there are constant issues of enforcement and also constant variations of games that manufacturers try to introduce to try to distinguish themselves from the very clear law of how this works. So it is a bit of a whack-a-mole. There's been a lot of progress in the state. This isn't binary. It isn't black or white in the sense that there is always going to be an element of enforcement necessary because of the shenanigans some of these manufacturers try to engage in to introduce machines. So generally, there has been pretty strong enforcement. It's very clear from the Attorney General. It's very clear from the legislature. But there's always enforcement issues that will happen, especially when manufacturers may try to muddy the water with games that are different in some way. So I think it's -- I think that's a process that goes on. It's sort of a slow burn indefinitely. And yes, there's still great games out there. We don't think they're really material at this point. The enforcement has been pretty good. But they are out there, and it's -- it requires constant vigilance and constant communication with law enforcement and constant and willingness to engage with the courts. It's just part of the environment in that state and in others. So we're going to grow through that. We are growing through that. We are building our business through that and that's just part of that process that we keep our eye on that and keep pushing on that. But我 would say over the most current quarter, it hasn't been a big driver or a big concern. We feel like we have it mostly in a good place.