Churchill Downs Incorporated (CHDN) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2020 Second 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. Nick Zangari, Vice President, Treasury, Risk Management and Investor Relations.

Thank you, Katrina. Good morning, and welcome to our second quarter 2020 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2020 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 Web site titled News, located at churchhilldownsincorporated.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 Web site at churchhilldownsincorporated.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. During the second quarter, the global pandemic, COVID-19, has significantly affected everyone in our country and has inflicted harm on the economy and businesses throughout America. Against this backdrop, our team has performed with determination and creativity. We have developed and implemented best-in-class policies and protocols to keep our customers, employees and communities as safe as we responsibly can during the recent reopening of our properties. While our second quarter numbers were significantly affected by the closure of our brick-and-mortar operations and the postponement of the Kentucky Derby, our immediate actions to reduce a broad array of expenses helped to minimize the impact and provided at an efficient operating platform for each property upon reopening. Our disciplined approach to leverage and careful focus on managing cash expenses have provided a strong balance sheet to weather this difficult period and will allow us to become an even more efficient and focused company and with a great portfolio of growth opportunities. We are built to sail through the storm and to return to growth. We are excited about what comes next for us. Today, I will update you on four important topics: first, the reopening of our Gaming properties; second, I will share some insights into the growth of our TwinSpires business during the second quarter and our plans for our sports betting and iGaming business within the online wagering segment; third, an update on our HRM expansion in Kentucky at Oak Grove and Turfway Park; and last, I will discuss the preparations we are making for the 146th running of the Kentucky Derby on September 5. Then Marcia will walk through the financials for the second quarter and review our capital management and liquidity. After she finishes, we will take your questions. Let's begin with the reopening of our Gaming properties. As you can see from our press release, we reopened our two Mississippi properties in May, along with our off-track betting parlors in Louisiana, which have video lottery terminals. We reopened six more of our Gaming properties and Derby City Gaming in June. Rivers Des Plaines Casino in Illinois and Oxford Casino in Maine reopened in July. After opening in June Calder Casino was required to temporarily suspend operations the second time on July 2 due to an order issued by the mayor of Miami Day County to close entertainment venues in a further effort to control the rise in COVID-19 cases in the county. We will continue to collaborate closely with all of the relevant authorities, including those in Florida, to address any health and safety concerns related to our properties, and we'll work to reopen Calder Casino as soon as it's prudent to do so. All of our properties across the country other than Calder, remain open. We have also included in the press release the current regulatory limitations on guest and gaming capacity. All of our properties follow various restrictions on the number of customers we can serve at one-time and/or the number of games that can be operational. We've eliminated a number of amenities at our properties, including buffets and valet services as well as some of the other restaurant and food outlets. We have also greatly reduced marketing and customer incentives like free play. It is difficult to determine at this point if and under what circumstances, these amenities and incentives will return to our properties. We will monitor the competitive dynamics in each of our locations to determine what we need to do in the future, particularly to respond to our competitors. Based on these changes and amenities and staffing needs, as of the end of June, we had brought back approximately 80% to 85% of our total Gaming workforce that had been furloughed at our wholly owned properties. With respect to our equity investments in the Gaming segment, we reopened Miami Valley gaming on June 19, and we've had strong results so far. Although we are very pleased, we haven't elected as of yet to resume our previously announced gaming and hotel expansion at the property, we will continue to monitor the performance of Miami Valley and discuss plans with our partner in the facility, Delaware North companies. Regarding Rivers Des Plaines Casino, Rivers reopened on July 1 and is performing quite well in light of the current guest capacity restrictions. Illinois passed a new gaming bill in May that provides certain relief for Illinois casinos as they start to recover from COVID-19. The bill reduced our graduated tax rate on table games on July 1 of this year instead of delaying until the first new casino under the 2019 gaming expansion opened. The new Gaming Bill also includes delaying the required initial license payment for new gaming positions that Rivers is adding and the related reconciliation payment. These changes are helping us to recover from COVID, maximizing the number of gaming positions we operate and putting more team members back on the job. Rivers has been working to finish the parking garage, which is necessary to support the additional 670 new gaming positions it will add, and now anticipates that the garage will be completed in August. Recall that 130 of the additional 800 gaming positions approved in the prior Gaming Bill were already added within the existing footprint. We do not have any updates on the timing for the additional 670 gaming positions. We will provide more information as soon as the performance of the facility post reopening is clear, and the team has updated our plans. We, of course, will be excited to move forward once the operating environment stabilizes and is well understood. This will bring jobs and revenues to the state and local community. Rivers reopened their retail sports book in July when the Casino reopened. Rivers was approved to launch the first mobile app for sports betting in Illinois, and despite the limited sports wagering opportunities due to COVID-19, has seen an encouraging volume of new player sign-ups. We are excited to see how River sports wagering operation performs as sports returns to the American landscape. Some of you have recently asked how Churchill Downs benefits from Rivers Des Plaines Casino, sports betting in Illinois. As a reminder, we own a little over 61% of Rivers and therefore, received 61% of the economics that accrue to Rivers with respect to the sports wagering operation. Rivers is responsible for all of the marketing and user acquisition costs and owns the customers for its sports betting operations. Rivers is using a separate stand-alone company, Rush Street Interactive or RSI, as its technology and service provider for the player account management system and other related services and pays a variable rate fee to RSI. You may have seen that RSI recently announced that it intends to go public through a merger with a special purpose acquisition company. This does not change anything with respect to River sports betting operations or our arrangement with RSI. I noted, we utilize RSI for iGaming services for Rivers for which we pay fees, but the Churchill does not own any portion of RSI nor is any portion of Rivers Des Plaines Casino owned by RSI. RSI is a service provider to Rivers. We wish them well with respect to their transaction and are excited for them given the market's enthusiastic response. Regarding the new casino authorized by the 2019 gaming expansion bill in Illinois, we remain committed to our proposal to build the new Waukegan Casino in partnership with Rush Street Gaming, our partners in Rivers Des Plaines, if we are awarded the license by the Illinois Gaming Board. Given the anticipated minority ownership interest, Rush Street Gaming's ownership interest and our local partner's interest, we would anticipate owning approximately 35% of the new casino, the same as Rush Street, with the 100% of the debt-financed at the Waukegan Casino entity level. This is similar to how Rivers Des Plaines is structured. Switching to our Derby City Gaming property. It reopened on June 8 and is performing very well as are most of our brick-and-mortar properties. The construction of the second outdoor smoking patio, this went on South side of our existing Derby City Gaming facility, it's still on schedule to open in [indiscernible] approximately 200 additional historical racing machines including new game titles from scientific games in IGT. Next, I will share some thoughts on our online wagering segment. Despite the shift of the Kentucky Derby and the Preakness, the third quarter, our TwinSpires business had very strong year-over-year growth and handle for the quarter, which provided significant operating leverage for the business. Wagering has remained quite strong into the third quarter, and we will additionally benefit from the Kentucky Derby on the Labor Day weekend and the Preakness that is scheduled to be run on October 3. Both of which are traditionally very large contributors to wagering figures for the quarter in which they are run. Regarding our sports betting and iGaming business, we start with our base of profitable and prolific to inspires customers. We have demonstrated yet again this past quarter that they will play on our site when we have content for them even if it isn't the Kentucky Derby. We look forward to broadening our offerings to them as we enter the larger states of sports and iGaming and with our direct access to many markets and a roster of efficient indirect market access deals, we believe we have the foundation of a very special business. We anticipate launching our retail and online BetAmerica Sportsbook in Colorado and Michigan prior to year-end and have other states like Tennessee on the horizon for 2021. We remain focused on and disciplined in building a profitable sports betting and iGaming business that will be integrated with our horse racing wagering platform over the long term. We will leverage our team's experience in building the most profitable online horse racing wagering platform in the industry with their extensive sports betting and iGaming knowledge, coupled with efficient access to the states we want to be in. Unlike other businesses within the sports betting space today with significant market valuations based on multiples of future revenue, TwinSpires has already proven that it has a successful and growing online wagering platform with substantial revenues and profitability. We hope to improve our speed to market and operational capabilities in all the states that we have market access, which should strengthen our substantial foundation for profitable growth in sports betting and iGaming over the long term. The third subject to update you on is our historical racing machine expansion in Kentucky. With respect to our Oak Grove expansion in South Kentucky, North of Nashville, Tennessee on Interstate 24, due to the COVID-19 related construction delays, we are now planning to have a soft launch with 1,325 HRMs in mid-September with the combination of Ainsworth Scientific Games and IGT Game titles. We expect to have the grand opening of the HRM facility and the 128 room hotel in mid-October. We have restarted the work on the remaining noncore parts of the venue that require small amounts of capital investment including the equine event center, outdoor concert venue and RV Park and anticipate that these areas will open shortly after the HRM facility and hotel. With respect to our Turfway Park extension in Newport, Kentucky, we've made excellent progress on this project. Our team has completed all of the site work and the structural improvements needed to the building. We anticipate that the additional interior construction will be completed by the end of September in preparation for a grand opening by early October. This timing will provide 2 months of operations to generate much needed purse money for Turfway Park's December live thoroughbred race meat. The Turfway Park extension will open with simulcast area, a gaming floor with up to 500 HRMs and a bar area and will create 70 full-time equivalent jobs in the Northern Kentucky area. Please note that the number of machines operating at both Oak Grove and Newport could be impacted by additional extensions of capacity restrictions by state officials with respect to COVID-19, I provided the numbers assuming full capacity. Regarding Turfway Park race and gaming, we finished demolishing the existing grandstand at Turfway Park in the second quarter, and the racetrack itself with a new state-of-the-art artificial racing surface called Tapeta will be completed by the end of August. During the second quarter, we completed the architectural design and site development plans. We will begin construction of the new HRM and grandstand facility as soon as we obtain the required permits and complete the necessary site improvements. The updated design reflects a floor plan of approximately 155,000 square feet and includes a simulcast facility, a racing grandstand and event space for groups and banquets, race horse owner and VIP player accommodations, 44,500 square feet of gaming floor that can accommodate up to 1,200 historical racing machines and 3 food and beverage venues, including a sports bar designed to accommodate sports wagering in the event it is approved in Kentucky. Based on the finalization of the design for the facility, total project capital for Turfway Park is projected to be approximately $200 million, which includes the Turfway Park acquisition costs and other previously approved capital. This capital investment will be completed over the next 15 to 18 months. The increase of approximately $45 million over previously provided estimates is primarily driven by increased site work requirements and a larger racing and gaming facility. Our team completed an additional analysis of the Northern Kentucky market and believes that the market demographics and competitive landscape can clearly support this level of investment and will generate a strong return on capital for our shareholders. And finally, I'll provide an update on Churchill Down's Racetrack and the upcoming 146 running of the Kentucky Derby on September 5. Over the past several months, as our country has faced both the spread of COVID-19 and the increasing social and racial unrest sparked by the death of George Floyd, Breonna Taylor and Ahmaud Arbery, I've reflected constantly on the role of the Kentucky Derby and the commonwealth of Kentucky and it's importance to the social fabric of our community and the country. For me and our team members, the Kentucky Derby is the essence of what this company does and putting on this happening every year is the single most important contribution that we make as individuals and as a team to our community. It's a labor of love, and we are all true believers that it brings something special and unique to our community and state of which we are also proud. At its essence, the Kentucky Derby is a celebration and an inspiration, not just to the fans, our community, our state and our country, but also for those of us whose job it is to make it happen. Most years, we take it for granted that it is both, a celebration and an inspiration. I don't think it's the same this year. With all that is going on, it just cannot be the same celebration that it normally is. However, we hope that when we run it for the 146th consecutive year this September, the event will serve as an inspiration and a unifying force. Sports and certainly, the Kentucky Derby can do that. It can serve to unite us and inspire us and to remind us of the things and events that bring us together and that we have in common. Ultimately, the Kentucky Derby belongs to our community and our country. It provides a special and memorable reason to come together every year, almost always in the springtime on the first Saturday in May but this year in September. As we've previously announced to ensure the safety of our guests, team members and everyone else involved and in close collaboration with state, local authorities and medical professionals, we will have fewer guests this year at Derby. We are absolutely committed to ensuring a safe environment and significantly reducing the size of crowd is an important step to doing so. We will implement best practices and protocols that we've observed from around the world, and we'll make adjustments all the way up to Derby day itself as we find ways to improve. There will be more announcements on our plans in the coming days and weeks. We have chosen to honor any requests from our suite holders and other guests for refunds or to apply the value of their tickets for this year's event to next year in lieu of refunding their tickets. We have also, when requested, work with those sponsors who are facing difficult business challenges this year to move their sponsorship dollars to the 2021 Derby. We will protect the long-term relationship we have with our guests and sponsors during this challenging time. That's the way to think about it and when we know the Derby will be back next year and every year after that into the foreseeable future. The financial details for this year's Kentucky Derby week will continue to change as we make decisions over the coming weeks. We will provide the metrics right after Derby as we do every year. Since we will have fewer guests and lower sponsorship participation, we will deliver lower financial results this year. This is a year of extenuating circumstances. For those who come to the Derby this year, we promise you that we will make it a wonderful experience. And most importantly, we will make it as safe and comfortable as we possibly can. We will continue to work tirelessly with state and local officials and medical professionals to develop and implement all necessary protocols to provide that safe environment for our guests to come together to celebrate this time on our tradition. For those of you who cannot attend this year, NBC remains a fantastic partner for us, and we'll be broadcasting the Derby for everyone to enjoy from the comfort of their homes. It is important to note that our team at Churchill Downs racetrack has been practicing our operational protocols as we approach the Derby. We complete a successful spring meet, spectator free over a period of 27 days in May and June. We were among a very limited number of businesses to open in the first round in Kentucky, and our team worked very, very constructively with the Governor's office to earn that privilege. We implemented and enforced the comprehensive safety protocols that we developed in collaboration with the Governor of Kentucky, Andy Beshear, and the Kentucky Horse Racing Commissioner to protect the health and safety of the many, many people involved who are necessary to run a complex thoroughbred horse meat. This experience is an excellent foundation for the upcoming September, Kentucky Derby, now 37 days away. With that, I'll turn the call over to Marcia, and then we'll take your questions. Marcia?

Thanks, Bill, and good morning, everyone. As Bill discussed at the beginning of his comments, our results in the second quarter reflect the quick decisions, swift actions and hard work of our team during these difficult times. The diversity of our portfolio provided strong earnings growth from our TwinSpires business and our gaming properties in DCG since reopening, as well as the cost reductions that were taken to reduce the impact of the gaming property closures and helped to partially offset the material reduction in adjusted EBITDA from the prior year quarter due to the rescheduling of Derby week from second quarter to third quarter this year, along with the impact of the property closures in the early part of the quarter. As Bill discussed, we began reopening our gaming properties in May with a more efficient operating model. We were pleased with the results we saw during the May and June time frame that our wholly owned casino properties were open. During their respective reopening periods, the properties collectively generated a 9% growth in net revenue, a 38% growth in adjusted EBITDA and a 9% point increase in our industry-leading margins compared to the prior year period. Our elimination of amenities, including buffets, valet services and some of the other hotel and food and beverage services provided the foundation for this increase in operating efficiency. We have also significantly reduced our free play and other customer incentives. Sustainability of these margins depends upon the competitive landscape in each market. Though rest assured, we will only add back amenities or additional free play and other incentives, if necessary. Our equity investment MVG also has performed well since its reopening on June 19. And although the time period is more limited, and therefore, not necessarily a conclusive trend, MVG has realized strong growth rates in net revenue and adjusted EBITDA and has realized improved margins during this reopening period as well. Derby City Gaming also had strong results after reopening during the 22 days that we were opened in June, as you can see from the public data on the Kentucky Horse Racing Commission Web site. Even though we had a little over 50% of our machines available for our guests during this period, we averaged $646 of gross gaming commission per day per machine, more than double the average of the trailing 12-month period ending in March 2020 for Derby City Gaming. Our Derby City Gaming margin was significantly higher during June after we opened. We do anticipate lower required levels of marketing and free play, as well as more limited amenities and will adjust if necessary, based on the competitive environment. Turning to our online wagering results for the quarter. Despite the shift of the Derby REIT to the third quarter of 2020, our TwinSpires business grew handle in the second quarter over $100 million or 22% compared to the prior year quarter as many brick-and-mortar betting outlets remained closed and customers migrated to online wagering as racetracks began to reopen. Excluding the 2019 Derby week handle from Churchill Down's Racetrack content, TwinSpires grew handle 43% compared to the prior year quarter. We also experienced an increase in the amount wagered and an increase in the average number of wagering days by our existing customers in the quarter compared to the prior year that we believe reflects the lack of alternatives sports betting options available for wagering. The significant growth in handle on a quarter-over-quarter basis provided significant operating leverage which generated an $18 million or 78% increase in adjusted EBITDA for our TwinSpires business. Handle growth in the third and fourth quarter for TwinSpires should benefit from the shift of Derby week to the third quarter, and the Preakness has moved to the fourth quarter and will be run on October 3. Turning to capital. We spent $4 million on maintenance capital in the second quarter, which primarily related to mandatory items and capitalized labor-related to improvements to our TwinSpires technology platform. For the first 6 months of 2020, we have spent $13 million. We do anticipate that maintenance capital spending will increase slightly in the second half of the year based on the reopening of the gaming properties and the preparation for the Derby in the third quarter and Churchill Downs Racetrack. Therefore, we anticipate $30 million to $40 million on maintenance capital for the full year 2020. We spent $79 million on project capital in the second quarter, of which $58 million was spent on the Oak Grove facility, $15 million on the Churchill Downs Racetrack related projects and $5 million on the Turfway Park extension. During the second half of 2020, we anticipate spending $120 million to $130 million on project capital that will be focused primarily on the 4 major capital projects that Bill discussed; Oak Grove, the Derby City Gaming smoking patio edition, the Turfway Park extension and the Turfway Park racing and gaming facility. We remain committed to building the hotel and HRM facility in Churchill Downs Racetrack. However, we will continue to pause on this project until we have better clarity on the longer-term impact of this crisis on the U.S. and global economy. Regarding our leverage and cash liquidity at the end of June, our leverage net of cash at June 30 was 6.1x, reflecting the impact of the shift of Derby week from second to third quarter and the impact of our property closures in first and second quarter. We had $649 million of unrestricted cash with no long-term debt maturities until the second half of 2024, except for $4 million of annual amortization of our Term Loan B. We have cash liquidity well beyond the next 12 months with the flexibility to adjust the capital spending as needed. Even though we have proactively obtained a waiver of our two maintenance financial covenants through the reporting period ending June 30, 2021, primarily due to the shift of Derby REIT from second to third quarter. We were in compliance with both financial covenants on the revolver at the end of June. And finally, as I approach my five-year anniversary with Churchill Downs this year, and reflect on what I appreciate most about our company and our leadership team, I can assure you, we will always do the right thing for the long-term for our customers, for our employees, our communities and our shareholders. As we've shared on this call, there are a number of near-term opportunities that we are investing in that will provide growth and solid return on our investment. And there are also a number of other longer-term opportunities that we will be able to invest in over time to drive organic growth for our company. Our team has developed a core capability in doing this successfully within our businesses. We also may have the opportunity to capitalize on the market momentum around sports betting related companies as investors more clearly understand the tremendous asset that our team has developed, our TwinSpires business that at its core is a very profitable sports betting platform. And as markets liberalize over time, we can capitalize on the opportunity to expand into other sports as well as iGaming. TwinSpires already has market access and is operational in nearly 4x the number of states, the traditional online sports wagering providers are operational in today. And our online sports wagering business has market access either directly or more efficiently through market access deals that provides a strong foundation for developing a very special business when combined with our TwinSpires business. And then most important of all, we have this tremendous iconic asset, the Kentucky Derby, that through its magic, has created a time every year for us to come together, generations after generations for 146 consecutive years to unite and inspire. We look forward to seeing you at the Derby in a few weeks, if you are able to come. And if you can't, we hope that you will enjoy watching it on NBC. A special thanks to our team. We're all working hard to ensure that we create a safe and special experience for our guests. With that, I'll turn the call back over to Bill so that he can open the call for questions. Bill?

Yes, thank you, Marcia. At this point, we're ready to take your questions. So please, fire away.

[Operator Instructions] First question, we have David Katz from Jefferies.

I wanted to just start in Illinois, if that's okay. We still have a deadline of hearing about the Waukegan license, I believe it's in October. But the terms have changed or the prospective terms have changed around the downtown casino license. How have you thought about that change and whether that's a license you would pursue as well. And its potential to impact what you have there in Rivers as well as prospectively in Waukegan.

I'm going to answer it the best I can within the context of this sort of process. So first, we remain excited about Waukegan. We haven't heard any updates with respect to the timing. And you're correct when you say that the date that they're supposed to respond with the awarding of the bid is in late October. So we remain optimistic about that and still believe that's the time frame that the state is on, the Gaming commission is on. With respect to the Downtown Chicago side, yes, there have been some developments in the new gaming bill that was passed in May, it changed some of the parameters of the Chicago license, change the tax rate, et cetera. So I imagine that the city is working on an RFP. And when they put out an RFP, certainly, that's something that we and others would take a look at to evaluate it. We do have an investment in the state. It's a challenged state in many ways, but it's a state we believe in, and we've invested heavily in that state as a company. So anything Chicago is going to do or put out, we're going to want to take a look at and explore but that's all we know as of right now. We'll have to wait till the city acts to be in a position to really evaluate whether there'd be an opportunity for a company like ours. But certainly, we have some advantages of knowing the market and being familiar with the jurisdiction.

With respect to Arlington Park, right, which in some respect, is contingent on your kind of broad Illinois strategy and what path it will pursue is contingent on a number of these other variables. How are you dealing with that property in the interim? At one point, I think you had indicated the prospect of a sports wagering facility. What should we be doing with respect to Arlington?

We decided to play on an Arlington Park for now, and we reached an agreement with the horseman, a two-year agreement with the horseman. So we're running the race meet right now. We'll run a 2020 race meeting. We have an agreement to run a 2021 race meet if we elect to do so. That's not a long-term viable solution for the Arlington Park license. So on the other hand, we want to give the state and ourselves an opportunity to figure out if there's a location we can move that to or a better solution in the state for us. But currently, we're not planning on doing sports wagering there through the Arlington license. We're happy to play heavily in Illinois and sports wagering through our Rivers license, which I discussed in my earnings comments. So that will be our play for sports wagering in Illinois. And long-term for Arlington Park, as we've explained on these calls, and we've explained to the state, it doesn't work. The economics don't work. It's not a viable solution. We'd like to give the state, given everything that's going on, an opportunity to help us find a better long-term solution. But the long-term solution is not Arlington Park. That land will have a higher and better purpose for something else at some point. But we want to work constructively with all of the constituencies in the market to see if there's an opportunity to move the license or otherwise change the circumstances so that racing can continue in Illinois. But for us, we've been patient and thoughtful and constructive with the parties up in that jurisdiction. But long term, that land gets sold, and that license will need to move if it's going to continue. And the time frame for doing that is not something I'm going to comment on this call today, and it's not definitive. But certainly, certainly, it's something that's on our mind on a week-to-week basis, if not a day-to-day basis.

Fair. I wanted to ask about the Derby, because under normal circumstances, an important earnings driver, right, in our models. And to be very candid about it, I've spoken to investors who are sort of putting a placeholder of zero and others who are putting in numbers that are much higher than that. The challenge, obviously, is that those earnings are driven from a number of different avenues. And I know that you don't guide or disclose specifics around those. But perhaps, you or Marcia can just give us a little bit of qualitative input so that we can make our own assumptions around the degree to which fans are present or not. You've sort of given a fair amount of refunds and maybe you can sort of help us with that. And as you indicated in your remarks that you've deferred some sponsorships, which won't be in this year. So any qualitative commentary that can help us revisit the model would really be helpful.

David, you always ask very thoughtful questions, but sometimes they're tough to answer in a satisfactory way to you. And I appreciate that. I offer that in advance. Here's the thing. The Derby long-term has not been damaged in any way. And as folks have asked for refunds, it's been humbling to go through that process with them. And as many have rolled the money forward to the next year. So, here's the thing. We are going to do what's right by our customers and our sponsors. So, we are going to work with them. Largely, I think we have a lot of the data points that are within our control. I think we largely understand and are still processing what our customers want to do. We do get new information every day. But it starts with what they want to do, and it starts with then making sure that we can stay within the restrictions that have been provided to us by the Governor, that we worked out with the Governor in our safety plan. So, as we think about where to move people, as we think about how many people in a section, how to keep them safe, what are we learning about COVID-19 that might change our assumptions on social distancing, all of those things we are factoring in, in a very dynamic process. So qualitatively, I feel really good about what we're experiencing, and I've been humbled by, as I always am, by the quality of the team and by the fervor that our customers feel for this event. But we need to make sure we keep them safe. We need to make sure that we comply with all regulations now and any changes that might come from the governor. I can tell you, the data points I can give you, we are not selling any GA tickets right now. We had sold a bunch, but we've stopped selling GA. We're still well under the capacity that we've discussed with the Governor. But we've stopped anyway because we want to make sure that, first and foremost, when our customers come to this event, they feel safe, and they feel like we've taken all possible steps to give them an excellent, wonderful experience, that is a safe experience. So we've also greatly reduced the temporary structures and expenses, part of this process. And part of, I guess, the confidence we have around this process is as we reduce what the event's going to be, we rightsize our cost structure. So all in all, it's a dynamic process, but it's not one of weakness or one of fear. Our team has this well under control but we are responding real-time as our community and as our state responds to COVID-19. And at all points, we're going to do the right thing to protect the long-term of this brand even if that means we stay under what the governor authorized to do, it's all about safety and how our guests feel when they come. So I'm sorry that that's not everything you want to hear and an answer like this, but that's the best I can give you right now. We haven't made every decision. There's a possibility that we'll restore GA, for example. But I would tell you right now, we've turned it off. Until we really understand and are comfortable with what will happen if we turn it back on, for example.

I understand. I appreciate. I have more, but I'll give somebody else a chance to circle back.

Next question, we have Dan Politzer from JPMorgan.

So TwinSpires had a fairly strong quarter and the 2Q margins were up significantly. Can you talk about how sustainable the margin expansion is given the elevated volumes? And is there more operating leverage in this business than maybe previously thought? Or I guess, how sustainable are these elevated margins going forward? And how do you think about the current playing volumes of -- and the current level handle?

I would say -- well, first of all, there's overhead cost that you have to cover. And if the volumes stay where they are, I think the margins are very sustainable generally. So I think it boils down to have customers – two things, have customers shifted from wagering on properties to online and then they become more comfortable with online, and I believe they have. And then the second thing is, will volumes stay where they are? And I think that's a good question that I don't completely know the answer to. I think it will. I think the lack of other sports have shifted people to playing more horse racing and certainly playing online horse racing since they're working from home and have more time to do that sort of thing. So I think it kind of comes down to those two. But I think as long as the volumes stay where they are, then yes, margins will stay high.

And then just a higher-level question on sports betting, iGaming from TwinSpires in there. A lot of the market share leaders in the field have stated that their near-term goal is to gain market share and grow revenues, just given they're trading out revenue multiples right now. And a lot of companies in this space have been raising capital. They've been going public, to your point, through [indiscernible] and other structures. So given the evolving nature of this market and Marcia's commentary on Twinspires, I think she made a remark about this stand-alone business. I mean, is there -- have you given any thoughts on maybe changing the capital structure? Could this be a stand-alone company, publicly traded in some form? And along with that, how do you think about allocating capital to this business, given there has been significant capital increases for many of these as they embark on a growth strategy?

I'll take the second one -- the second question you asked first. And the second question was on how much capital you deploy to the business. We talk about that all the time. We're aware there are different models being followed out there in the market and that investors have rewarded aggressive outlays of capital to drive market share numbers even if it doesn't drive profitability. So we pay attention to all of that and see what people are doing. And the good news is we have the capital. We're very well capitalized, and we have access to substantial balance sheet. So stay flexible, be willing to learn from others, and that's within our motto, and we continue to study that market and think about it. But we built TwinSpires in a certain way, and we like what we've built, and we're very proud of what we've built, and it is a very strong business with very good customers that we believe we own for other forms of online wagering as those become available in the jurisdictions where our customers are located. So we're always thoughtful and careful about it and will continue to be so. But following the model that some have followed, that's everybody's prerogative. But here, we're hardwired to generate profitability and that's our default always. In terms of capital structure, yes, we work for the shareholders at Churchill Downs. So we have to always consider what is the appropriate capital structure for any of our three main business divisions: online wagering, including TwinSpires is one; the Kentucky Derby and, our Kentucky operations is another; and of course, our brick-and-mortar gaming. Absolutely, over time, I've been in business for quite a while now. Over time, preferred capital structures change, opportunities arise, and we always think about that. We always studied of those developments. And of course, we're studying the developments that are happening in the marketplace now with respect to online wagering. So that's our job, and our job is to stay abreast of those things and understand and interpret whether they offer our shareholders a better return on their investment than the current structure. So we'll keep looking at all of those things and that's a core requirement of our jobs and one we welcome.

And last one on just M&A and also capital allocation. Where does M&A fall in terms of your capital allocation preferences here, just given there's, obviously, properties that are coming on to the market. One of your competitors in Louisville across the River is coming on the market specifically. I guess how do you think about M&A in the competitive landscape within Louisville? And how you think it evolves?

I think M&A is an avenue to responsibly and efficiently grow our company that has been a part of our story over the term of this management team. So that's not changed. You always look at, and I'd say, of the 520 to 550 commercial casinos that exist in the United States, probably myself or our business development leader, or Bill Mudd or Marcia, probably we could talk fairly fluently about most of any of those. So we have views on commercial casinos that are out there. We have views on markets that are attractive. We have views on assets that are attractive. And we always manage our capital utilization to hold back to have the ability to go after acquisition targets that are on our list. So nothing's changed. We'll have to watch what multiples do now with all of the disruption that's happened in the American economy. But certainly, we are an active and vigilant participant in the M&A markets going forward just as we've been in the past. It doesn't mean we like the prices. It doesn't mean we pull the trigger, but we certainly show up at the table to evaluate what's out there.

And then just a quick follow-up on Caesars Southern Indiana, which Caesars has mentioned, it has to divest. I mean would that be of any interest? How do you think about the competitive landscape evolving over time there?

Dan, I appreciate the question, but I just feel like I should not comment on any particular asset or opportunity that's out there or maybe out there in the marketplace. I just feel like I should reserve comment on that. So I wish I could delve into it, but all things considered, I shouldn't comment on other people's property or other people sales processes.

Next question, we have Joe Stauff from Susquehanna.

Bill, I wanted to ask you about a comment that you made just earlier in the call. With respect to BetAmerica, I think you're referring to BetAmerica, certainly, because you're talking in the online segment. But BetAmerica integrating with TwinSpires over time. And I wanted to see what timing is reasonable to assume that would occur?

That's a real strategic initiative of ours. We really want to see that happen because it will link our great customers seamlessly to other products. But I can't give you a time frame right now. All I can tell you is it's something we're very interested in seeing done, and we'll pursue it in our list of other priorities as appropriate. But I can't give you a time frame right now. But I would tell you, we view that as an important strategic initiative of ours over time.

And could you just update us for BetAmerica on your B2B or your tech stack approach for BetAmerica?

I don't really have any comment on that today. I think at a higher level, while we believe we have the capability of building our own tech stack, we'd rather stay at a variable cost model during these early years for sure and maybe beyond. And I wouldn't really want to comment more specifically about our B2B providers, our tech stack providers, our third-party providers at this point. I don't have anything to really announce on that. But certainly, we want to see improvements in our operating capabilities, in our timing to market, in our performance in different markets, and that's something we'll continue to work on. But no real commentary or announcements on this call.

And finally, just to revisit TwinSpires, obviously, huge growth. You had mentioned that it continued in July. And certainly, it will be there for September, especially given the Kentucky Derby. But I was wondering if you thought the demand for TwinSpires and online horse racing, in general, do you think it will be affected because, obviously, other sports mutually based on BA Hockey is restarting now such that it could be affected or that growth, call it, 25% in the second quarter could be a little bit lower in August. Just wondering what your thoughts are.

I mean it could be. I've been involved with online wagering on horse racing since we started the business in 2007. And some of Bill's comments were directed to a variant of this question as well. And just referencing back to my long history being involved in this, I do that only to say that I've seen lots of things and been surprised lots of times. Here's what I know for sure. Wagering on horse racing online is a very competitive good gambling product that customers gravitate towards as they understand it. So I think, certainly, it's the case that our customers like to bet on other things beyond horse racing, and they like to bet on more horse racing when we can offer it to them. So our customers are gamblers, and they like to gamble and they like lots of products. So certainly, as more sports become available for them, again, they're all throughout the country in different jurisdictions, they're all over the place. Certainly, they'll want to participate in that. But I think what's important for us is we've built a relationship with them. We understand their preferences, we understand their patterns, and it's up to us to continue to offer them products that they find attractive. And that's our challenge to make sure and in all the jurisdictions we care about that we do so. But I do think, though, just because they'll want to split their wallet on other sports doesn't necessarily mean that's not a bad thing for Churchill Downs. But also there's a big share of wallet out there that isn't captured in their online activity side I'm not sure there's no crystal ball to say exactly how much additional sports wagering impacts their current volumes on TwinSpires. There's plenty of wallet out there to get as we -- as they develop their skill set and they get access and opportunity. So I'm excited about TwinSpires. I think the bottom line is we'll see what happens to that business, but we've been growing it a long time. And I don't really see any change in that fundamental formula. I'm excited to have more products to offer these people.

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 confidence in us as a company and as a management team. Thank you for investing with us. For those of you who haven't, thank you for your interest in our company. We'll continue to do right by your investment, and we appreciate your patience and support during what's been an exogenous series of challenges to the economy and to our company that we're processing through. So we'll talk to you soon. And in the meantime, we'll go run a Great Derby, and best of luck to everybody out there. Thank you.

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