Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2019 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, the conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Nick Zangari, Vice President, Treasury, Risk Management and Investor Relations. You may begin.

Thank you, Katrina. Good morning and welcome to our third quarter 2019 earnings conference call. After the company’s prepared remarks, we will open the call for your questions. The company’s 2019 third quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company’s website titled News, located at 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 report 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 today’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.

Thanks, Nick. 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. We have a number of updates to share regarding key projects. So, I will begin today with relatively brief comments on our third quarter and then focus on our strategic projects. Marcia will then provide a more in-depth review of our financials for the quarter and an update on our capital plans. After she is finished, we will be happy to take your questions. First, a few comments on our third quarter. Our net revenues were up 38% and adjusted EBITDA was up 42% over prior year. Quarter-over-quarter net revenue growth benefited from among other things, the acquisition of Presque Isle in January of this year and the opening of Derby City Gaming in September of last year. Generally, the performance of our properties was encouraging and stable. The Online Wagering segment was a slight drag on our net revenue growth for the quarter, primarily due to the exit of a small number of high volume, low margin customers and our velocity business. I will talk more about that in a few minutes. Our adjusted EBITDA growth for the quarter increased as a result of the 61% equity investment that we made in Rivers Des Plaines Casino in March of this year, the contributions of Presque Isle and Derby City Gaming, as well as continued growth of Miami Valley Gaming. Now, I’m going to provide an overview organized around five organic growth initiatives: Projects at Churchill Downs Racetrack, expansion of HRMs in Kentucky, Illinois opportunities, Miami Valley Gaming and brick-and-mortar Sports Wagering and Online Wagering. Let’s start with Churchill Downs Racetrack, where our team is…

Thanks, bill and good morning everyone. As bill said, I will provide some details on our third quarter 2019 financial results and then provide an update on our capital management plans. Beginning with our third quarter results, we reported net revenue of $306 million in the third quarter, up $85 million or 38% compared to the prior year quarter. Derby City Gaming contributed $20 million of this increase. Derby City gaming celebrated its one year anniversary of its opening in September. So, the quarter reflects a full quarter of results compared to a partial month of results last year. Derby City gaming continues to demonstrate strong growth in the market as we have mentioned in the past, it will benefit from additional game titles from a new supplier in the future. The remainder of the increase was primarily driven by revenue growth from our gaming segment, including the addition of Presque Isle in January of this year to consolidation of Ocean Downs revenue as a result of acquiring 100% ownership of the property at the end of August last year and the assumption of the management agreement for Lady Luck Casino Nemacolin in March of this year. Our third quarter adjusted EBITDA was up $26 million or 42% compared to the prior year quarter, approximately $8 million of adjusted EBITDA growth for the third quarter was driven by our Churchill Downs segment with nearly $9 million coming from the continued growth of Derby city gaming with very strong margins. Churchill downs’ Racetrack had a slight decline as we expected in adjusted EBITDA related primarily to the addition of resources to support its growth over the coming year. Approximately, $27 million of adjusted EBITDA growth for the third quarter was generated by our gaming segment. The addition of Presque Isle and…

Okay. Thank you, Marsha. Everybody at this time, we’re going to open up the line for questions, fire away.

[Operator Instructions] For your first question, we have David Katz from Jefferies. Your line is open.

Hi, good morning everyone.

Good morning, David.

Good morning. So, I don’t want to get sort of bogged down on the current quarter, because I don’t – that’s not really all that consequential, but I do want to talk about investments in iGaming and Sports Betting. And I heard your commentary, should we be thinking about that as something that is investment spending so that revenues and costs are leading to something that’s neutral, meaning, not much profitability or should we be thinking about it as something where there is actual, where it can be a drag on the totality of earnings. How would you have us thinking about that?

I think with respect to online similar, my recollection when we started Twin Spires, it’s going to be in the investment stage until the market settles down until it – until there’s some clarity and until the investments have been made. So particularly in the online space where your expense with respect to recruiting a customer is recognized up front. But the value of that customer is recognized over time as they wager with you. This is a business built for showing some losses and some investment in the early stages. So, I think in any context, the nature of this space we’re going to have a period of investment. Right now, and the point I was really trying to make strongly was there are some irrational behavior I think going on, you see in a market like New Jersey, and we have to be careful to process through that because irrational behavior doesn’t seem rational over time. Doesn’t become rational over time. So we want to be careful that we don’t drift down business models and we’ve always been very careful about this in Twin Spires. We don’t drift down business models that we don’t fundamentally believe in. And by that I mean, we don’t want to spend more to acquire customers than we think those customers can be worth to us over time. So as we get data, we sharpen our view on how much customers are worth. But right now there’s a lot to learn about this space, and for us, there’s, there are a lot of lessons we can take from our experience previously in Twin Spires, but still there’s a lot that’s new here. So we have to invest to learn. We have to invest to gain experience, and we have to invest with patients that the nature of this business means you invest up front and it takes a while to get a return. But that said, we also have to balance against long-term irrational behavior if we see it, because we won’t participate in markets long-term that we don’t think we will be making money in.

Right. And I agree with you that the hotel racino project to Churchill Downs is among the most exciting for the company and I appreciate the detail that you’ve provided. I think many of us are trying to assign some value to it and trying to figure out how we might model something like this for the future. So two questions, one, how could you – what guidance, could you give us or I know that’s not – guidance is not necessarily the best way to ask the question, but how can you help us figure out how to model a payback period or ramp up or a return on that. And secondarily should we be looking at the Churchill Downs Kentucky Derby results or something that may see some construction impact between 2020 and 2021 while this is going on. I think those are the two biggest issues there.

On the first question, there are two questions there. On the first question, which is how to think about the expected return of a capital investment. I would say two points in response to that and I have to be general because of the construct that we’re in. First, I would say in general, we’ve identified to the market that we target construction projects internally with a five time multiple. So we try to, when we think about a year three EBIDTA contributions, we try not to spend more than five times that mature EBITDA run rate. So a five times multiple. I would say when it comes to the Kentucky Derby, we’re always willing to go higher than that, but not massively higher than that. So when we do our internal planning, and again, without providing projections or promises about the future. That’s how we plan for these projects. Generally for non-Derby stuff we’ve tried to be pretty disciplined about a five time return, but when it comes to the Derby, we’ve had a better experience and a more positive experience and more positive results in our previous projects. And so we feel comfortable going somewhat higher there because of the track record of our investments and the strength of our team. With respect to construction impact during the period of – while we’re doing the construction over the next two years, I think we’ll manage that. I don’t really expect there to be a change in the flow and of the trajectory of the performance of that facility while we’re doing construction. We’ll plan and that’s a function of the strength of this team and the carefulness around, which they plan. We’re not anticipating any real construction disruption that is flowing to the bottom line.

Got it. And then my last question is primarily around Illinois, where there again there is a number of exciting opportunities that we are challenged to figure out the timing of. And how can we think about rivers and the prospects that it could start to earn off some of these opportunities, say within the next 12 to 15 months, right? And similarly for Arlington Park, what should we reasonably be doing with our models around Arlington for 2020. I know it’s hard to know, but that we sort of got to do our job that way.

Well, we have the same challenges internally here the issue isn’t really our behavior. It’s the fact that we have regulated businesses, and we don’t control or even really influence the timing of regulatory change or regulatory process. So we can make it hard for us to predict to how to think about when changes occur in our business models. So, I think with Arlington, I’ve said all I should responsibly say – we can proceed with respect to this gaming bill at that facility at that time. And that’s something we think about and work on and it’s something we’re committed to figuring out because we think there could be a good result for everybody. If we are responsible and powerful and play our cards right. But, we’ll just have to see. So we’re anticipating at this point. Running racing there over the next two years, although we hope that there is news over that period that really define the long-term future. With respect to what happens at rivers. It’s the same thing, I think we have very strong views and plans around what we want to see happen there, but we can’t determine regulatory approval for our expansion plans nor can we completely predict when another casino will open in the Chicago or Illinois market, which is the triggering event for some of the changes in the tax laws that we’ve talked about previously. So, I think the state is incented to move the process along, I think the state wants to see more casinos in the market. I think the state wants to see the maximization of income from gaming. But, I think they work with all deliberate speed, but that’s the best insight I can give you at this time. But hope to give you more and to update you as we learn more ourselves.

Got it. Thank you very much.

Your next question sir is from Joe Stauff from Susquehanna. Your line is open.

Thank you. Good morning. I wanted to ask about the Kentucky HRM facilities in particular Oak Grove, are there any characteristics of that market, you’ll launch basically in the summer, as you suggested with the machines and obviously the analog is comparing them against Derby City and I was wondering if there are any characteristics of that market that make that comparison or what would make that comparison different?

Sure. I would say the way to think about it is to look at the size of the population of that region Nashville, Clarksville, et cetera. So look at the wealth profile of the population in the demographics in terms of age, but then also to factor in the driving distance. So when we think about the Derby movable market for Derby City Gaming. And then in comparison, think about Oak Grove. Those are the key drivers population, demographics in terms of age, wealth, but then also driving distance. That’s a big advantage for Derby City Gaming, it is clearly closer to the Louisville population then surrounding competition when we think about Oak Grove please also consider. That’s why we’re adding some of these additional amenities the hotel, the Steakhouse the ballroom things that drive people being willing to get in their car and travel to a destination. So it’s a combination of all those factors we of course model it carefully. I know you guys do as well. There are some that are very positive. When you do the comparison and then there are some factors about Oak Grove, they’re not as positive, namely the distance we’re about 55 miles or so from Nashville. But we are on the interstate and we are the first exit on the Kentucky side of the border as you come up by 24. So, those are the parameters that help us determine what the size of the market will be for us.

Okay, fair enough. Thank you. I wanted to ask you also a couple of questions. In terms of the online business, certainly the side that you’re ramping in startup mode Sports Betting and iCasino. But I wanted to ask you, maybe just a strategic question on how you think about using your existing scale with Twin Spires and whether or not or how much time it will take you to possibly have a dual offering, I know they’re different bidding systems. But I’m just wondering when you saying technology or overall or the amount of work necessary to be able to have – say both products all three products on a given app going forward.

Thanks, Joe; that’s a good question. This is Bill Mudd. I think going back to Bill’s comments, first of all, on New Jersey. We did enter that space we were one of the last ones in. I think the only way do we took last year on football is on the Super Bowl and then we rolled into the NBA and we didn’t have the ability to take NBA games early in the cycle. And now, we do have the ability with the exception of the Houston Rockets games, because of our relationship with the owners of that sport. The other thing about New Jersey is we don’t operate Twin Spires there. So we didn’t have a database of customers in New Jersey, that we can tap into and acquire customers at a very reasonable cost. So – and when we jumped in the market as Bill said, some of the spending that’s occurring in New Jersey is very rational. So as we enter these other states. We do have a very robust Twin Spires business we do intend to leverage that database to customers to help ramp up our online offering and hopefully provide a good base of business that would allow us to spin profits to the market and to brand sending. As we think about adding those two businesses together that’s certainly part of our long-term roadmap. But I would say right now with the every one of these states has their own kind of system because of the wire art. I do have to be, there is a lot of technology has to occur within the state right now the focus is building out that infrastructure, not adding sports horse racing to the same wagering app right now. So it’s quickly in the road map, but it’s not the priority right now. We will eventually get there, but right now it’s more important for us to focus on getting live and being in these markets that as a first mover. So with that being said, and of course, retail is completely different retail spending to acquire customers. So it’s already a very nice and very profitable business and those numbers are actually built into our casino cycling as Marcia stated so. I hope that answer your question.

Just to clarify, I mean you to inspires is offered in Pennsylvania and Indiana currently correct or at least historically that is?

There we are absolutely in Pennsylvania we’re absolutely in Indiana and we’re in Illinois.

And if I can squeeze one additional question sorry to hug the mic here, but the traffic delta is that you’re seeing at least, I know it’s early, but maybe Mississippi is the most representative example rate with respect to your Sports book, or your retail offering there that you talked about this, or at least references in some others also reference setting up initially the retail Sportsbook, and it adds traffic. And I’m wondering, basically if that amount of traffic has been consistent since your launch. Again, I guess Mississippi is the most representative market to be able to assess that have meaning like I have the traffic patterns basically kind of been sustainable.

Yes, they short answer is, absolutely. It has been sustainable. We finally have eclipsed kind of a year-over-year basis, we can see it now. The second thing I would say to that though is every sport – there is sporting seasons, obviously the NFL behaves a little differently the baseball versus NBA. So it is a little bit based on the calendar as well in terms of sporting events.

Sure.

So I would say that there’s two ways to think about that. The traffic is absolutely sustainable.

Okay. Thanks a lot.

And we’re seeing Presque Isle as well. The average bet size and what they bet on and where they’ve been parlays versus singles is a little different based on geography. And we certainly felt the impact of yeah, the Northeast teams being bet more heavily and then people in the south. So it’s very interesting to follow some of the regional dynamics as well.

Makes sense. Thanks a lot.

Thank you.

Your next question is from Dan Politzer from JPMorgan. Line is open.

Hey, good morning everyone and thanks for taking my questions.

Good morning.

To the first one, not to be dead horse here, but another one on online wagering obviously there’s a lot of competition here and there is a lot of promotion going on in New Jersey, but it’s how do you think about the balance of growing this business versus the profitability there and I know obviously in the infancy stages here, but is there also an element of seasonality that spend and I guess how do we think about the cadence here over the next 12 months or so?

Sure. So, Dan, I’ll take that one. Yes, there is seasonality in online wagering in our country football is the biggest driver. So generally, just like in horse racing. You want to look at a calendar and figure out when the best time in the best opportunities are to acquire customers so football season is an excellent opportunity to do that. In terms of how we think about New Jersey again, you want to build a model and an understanding of how much customers are worth. And as you get into a market, you don’t have perfect information to how the customers in any given jurisdiction going to behave over time. So you have to build your model as quickly as possible and change it quickly based on actual data so in New Jersey, just like in any other state. If we don’t see if our model doesn’t support spending above a certain level we’re not going to do that because it means we don’t think the customer spend per customer is justified given the value of those customers. So we’re always going to be disciplined and we’re always going to be careful and we’re not going to move off our modeling just because other people are doing different things, but the wrinkle is always our learning and what we learn in the market because we need data to populate our assumptions and our modeling. So, we’ve learned a ton of New Jersey. It will make us much better prepared for the other states that are to follow and that’s how, that’s how we’ll do this, but I do think you’ll see a dichotomy across different jurisdictions in the country where some states will be profitable and other states will not seem is profitable in the short run, or the midterm or even the long term and you’ll see us behave differently across those states.

Got it. Understood, thanks for that. And then just, as you think in terms of your projects, there is a lot going on in Kentucky certainly, and I think there were some press reports that you guys were authorized for additional HRMs above the amount. And I think you initially had said you plan to build at both Turfway Park. And I guess at the Churchill Downs Racetrack facility, how do you, how do you think about the return in the profitability of adding machines and how do you kind of gets the right number there.

We’re, we start conservatively. So we want to be very comfortable. Based on the demographic information that we have and our experience with HR MS machines, we always want to be very careful when we start that that we’re confident the market will support the number of machines. So we tend to go conservative and then have some upsizing capability within the facility and also within our off utilization from the regulatory authorities to add more machines, as the market as we proved to ourselves that the market will support that. So generally when you look at us and you look at our planning in our announcements we tend to be very conservative when we start, because it’s easy to add machines, so long as you have regulatory approval to do so. So this is sort of the approach we take. Get the approval, get the authority. So you can add more if you can prove to your team that you deserve more go ahead and get the authority in the approval to do so. But start conservatively because these machines are free. You have to go pay for them and so start conservatively, make sure the ROI is there and then add, if you have the good fortune of discovering that the market will support the additional machines.

Okay, got it. Great, thanks so much guys.

I am showing no further questions at this time, I would now like to turn the conference back to Mr. Bill Carstanjen.

Thank you. As always, we really appreciate your interest in our company and your investment in our company. We’re obviously very excited about the investments that we’re making right now, particularly around the Kentucky Derby this is a special time. We’re disciplined I hope we’ve proven that to you over time we’re disciplined we’re careful we’re long term in our outlook, we think the organic growth opportunities we’re pursuing will help make our company, even a greater company going forward. So we’re going to do the work now in the payoff will be in the mid-term in the long term. So we’ll try to be good stewards of your, of your capital and of your investment in us and I look forward to talking to you next time. Thanks very much.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.