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.…

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…

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…

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.