Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2020 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, 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 third quarter 2020 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2020 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 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 website 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. We view our overall results for the third quarter very positively, both with respect to our expectations prior to the quarter and last year's results for the comparable period. Our third quarter results were strong, not just because the Kentucky Derby was in it, but because of the strength of all of our businesses. Our focus in the quarter was on operating all of our properties under our strict safety and social distancing protocols against the continued backdrop of the COVID-19 pandemic. Every single one of our brick and mortar facilities is impacted by regulatory and operational changes because of COVID. Our team's ongoing challenge is to protect the safety of our customers and our team members, while we operate each property as effectively and profitably as we responsibly can. We were successful in doing this in the third quarter and are confident we can build on this record of safety and efficiency going forward. Our balance sheet remains strong as we weather this difficult period in our country with a great portfolio of future growth opportunities. Today, I'll discuss three topics. First, we'll share some more specifics on our third quarter results. Second, we'll provide an update on historical racing machine projects in Kentucky. And last, I will provide some preliminary thoughts on the fourth quarter of 2020 and 2021. Then Marcia will walk through the financials for the third quarter in more detail and provide an update on our capital management and liquidity. After she finishes, we will take your questions. First, some thoughts on our third quarter results starting with our Churchill…

Thanks, Bill. And good morning, everyone. As Bill discussed, I will provide some details on our third quarter financial results and then provide an update on our capital management and liquidity. Turning to our third quarter results, we reported third quarter net revenue of $338 million, up $32 million or 10% compared to the prior-year quarter as growth in net revenue from our Churchill Downs and online wagering segments was partially offset by a decline in net revenue from our gaming segment. Third quarter adjusted EBITDA of $122 million was up $34 million or 39% compared to the prior-year quarter as a result of growth from the Churchill Downs and online wagering segments, as well as margin improvements from our gaming segment. The Churchill Downs segment generated $68 million of revenue in the third quarter, up $35 million from the prior-year quarter and $24 million of adjusted EBITDA in the third quarter, up $10 million from the prior-year quarter, driven primarily by Churchill Downs Racetrack. Churchill Downs Racetrack revenue increased $32 million as a result of Derby Week being held in the third quarter instead of second quarter, which more than offset the impact of lower revenue from the September race meet due to less wagering and no spectators. As a result of significant effort by the team, as Bill mentioned, the margin on Derby Week revenue was nearly 50% despite the shift to no spectators just a few weeks prior to the running of the derby on Labor Day weekend. Adjusted EBITDA for Churchill Downs Racetrack was up $15 million for the quarter compared to the prior-year quarter as a result of Derby Week, more than offset the $4 million of lower adjusted EBITDA from the lower net revenue from the September race meet. As Bill mentioned, we're running…

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

. First question, we have Daniel Politzer from J.P. Morgan.

The first one on gaming. I know you guys mentioned that there was drag from Calder and Oxford in quarter due to restrictions. Could you maybe quantify that, so we could maybe get a better handle on what kind of the wholly owned segment would have looked like ex those headwinds?

Help us with that question a little bit. Just refine it because you were breaking up on us for a second.

Is there any way you could break out maybe ex Calder and Oxford what the wholly owned gaming segment looked like in the quarter just given those properties? Obviously, we're facing some property specific headwinds.

I can't give you excluding those two, but I can give you what those two independently kind of have done. Dan, this is Bill Mudd. Calder was closed through August 31. So, they really only operated during the month of September. From a revenue perspective, revenue is down 75% at that location. And, actually, we didn't even generate a positive EBITDA for the quarter because of that. So, obviously, that had a big drag. And it continues to operate under constraints. If you look at Oxford, Oxford right now is operating at a capacity of 200 people, which includes employees, and we have to actually quarter that facility into four zones. It's probably the most awkward and odd restrictions with respect to COVID across the nation. But Oxford was down 55% in revenue and down 70% in EBITDA, although it was positive. It continues to operate under those constraints. And we continue to work with the regulatory officials in that state to free up some of that, but I don't see that we have the ability to do that anytime soon.

And then, just moving to TwinSpires, given the inequalities of second quarter and the third quarter with kind of the Triple Crown races all over, how should we think about a normalized TwinSpires margin going forward relative to the 27% that you guys did in 2019?

Well, I think some of the moving around of the Triple Crown events between quarters, really, across the quarters wasn't helpful because it caused a lot of our casual fans who we often have very high margins on to not be there, just caused confusion and chaos in the markets. So, in my view, things moving around were only headwinds. So, as we moved forward, I feel even better about our operating efficiency and then we just watch the other dynamics in the business, the cost of content, things like that, that can affect our margins over time. But so far, there's nothing to like – there's nothing to dislike about these headwinds. We performed through them and didn't lose margins.

And then, on the online sports betting and iGaming, it sounds like you guys are getting bruised in technology issues. And now that you're kind of seeing the light at the end of the tunnel, how do you think about this opportunity? And how do you expect to roll out as you kind of hunker down and see what everybody else is doing? Are there partnerships with media groups or leagues or teams that you're considering? I guess, within that, how do you weigh the opportunity of sports betting versus iGaming and maybe the margin structure of those industries?

Dan, you've followed us for a long time. So, you know us pretty well. We're always very, very focused on margins and focused on costs. And I think that's been part of our secret sauce for built over the last number of years, particularly in the online space. So, as we expand into sports wagering and iGaming, when you have a market that offers iGaming in addition to sports wagering, that's a lot more opportunity. And there's a lot of to look forward to in terms of better margins. So, each market will be different. I think, generally, when we look at partnerships or marketing partnerships or marketing relationships, whether they be local or national, it's really always a question of cost per customer acquisition – customer acquisition cost. So, it's always weighing that. I think some folks take a leap of faith that big mega partnerships will, over time, lower their cost of acquisition of good customers. And that's a fair bet. A lot of really smart people are taking it. We will always look at things like that. But generally, I think our DNA is to look before we leap and to have some certainty and some data and have done some testing before we do things like that because, ultimately, in gambling, in general, it's not always necessarily hard to get customers. It's hard to get profitable customers. And that's what we always focus on. And that's what we learned over the years in TwinSpires, and we'll take that into the online sports and iGaming markets as more of them open up. Generally, some markets are more exciting than other markets. The level of excitement depends on the products we can offer, the tax rate, the online sports and online casino versus just sports. So, the property – the products we can offer, the tax rates, our connection to that jurisdiction in terms of access to customers already or the ability to reach them cost effectively, all those things go into our level of excitement and how we view each market in comparison to the others.

Next question, we have Joe Stauff from Susquehanna.

I wanted to drill down a little bit more, I guess, on TwinSpires. Bill, I think you had mentioned in the third quarter in your prepared remarks that users had doubled in TwinSpires. But I was wondering if there any other kind of KPIs you can share with us, meaning year-to-date, are those all new customers? Are they all uniques? Whatever you can share with us on from a KPI perspective.

In my prepared remarks, we talked about a third quarter which I think was really important because we were trying to make the point about the growth in uniques, pulling out the impact of Derby. This year's Derby versus last year's Derby had lowered our uniques with respect to that week because in previous years, last year, in particular, there were more casual fans that we reached than we did this year. No big deal. That'll be back next year. It really just highlights, in my opinion, the strength and the impressiveness of the results because the numbers we've been generating have not come with that normal tailwind that we get of reaching a whole bunch of casual fans cost effectively that deliver high margin, low player reinvestment attributes. So, the performance of the business, whether you blend second and third quarter together or whether you just look at third quarter in and of itself is really, really impressive because we're missing a natural tailwind we get every year of low cost, high margin, low reinvestment customers. So, I didn't bring to this meeting – and I'm not sure I want to call anybody out and put them on the spot. I didn't bring to this meeting sort of really detailed year KPIs to discuss with everybody because if we did that, it's a discussion in and of itself because at every point, we have to distinguish between the difference in characteristics of Derby last year versus this year. So, in general, we decided as a team, we were going to start with a summary and just focus on third quarter, so that we can just give you accurate, easy to digest. But generally, as I said in the prepared remarks, all of our important metrics, all of them, all of our material metrics, show really surprising strength even after digesting the headwind of holding a derby where we did not get the casual fans compared to prior years. All the performance this year is facing that headwind that normally is a tailwind for this business and gives it a huge growth ramp up. All the results this year have been achieved with only a headwind from the derby. And so, for us, that's what I'm – one of the things I'm most proud of of the team because they didn't moan about it, they didn't worry about it, they just went out and executed and that's been good to see.

I guess there's certainly a big unknown out there as it relates to the level of growth you've had in TwinSpires and the number of users year-to-date or at least those, say, migrating from a more retail experience. I'm wondering – that's just before, but it certainly is an important sort of input going forward is, your thoughts on – once they migrate to online versus the retail experience, the stickiness of that. Would you expect them to circulate back to the retail experience, hopefully, when all this is over? Or would you expect them to, let's say, put most of their handle on the mobile platform kind of going for it?

Yeah, that's a really good question. So, one of the attributes of this business, over time, has been the stickiness of the customers. If we can get trial, we've always found, we do a really, really good job of retaining those customers. And in fact, this business is built not on masses and masses of small customers. What we've been good at is developing people into meaningful customers. Our attributes per paying and playing customer really are fairly extraordinary. So, we've always been good. Once we get the hook in the fish and reeling them in, we've always been very, very good at building our relationship with them. So, the history of this business is one of stickiness. When it comes to this year, clearly, some of the traditional brick and mortar outlets, they weren't available because, across the country, COVID restrictions led to the shutdowns of a lots of tracks and OTBs for at least a portion of the time. They'd been reopening for a while and we're demonstrating these results even with them reopening. But I think what you saw there is you saw a decline overall in handle for the industry. So, not our specific results, but handle for the industry as a whole. And that is there's some hardcore folks that didn't transition. Those folks didn't trial even in the face of losing a brick and mortar location that they normally go to. So, those folks, you can take off the table. They're not really a part of the picture. To the extent that some people did, I think it was a nice boost. But again, it wasn't by any means the whole story or any kind of revolutionary development. Clearly, it accelerated some of the channel shift that's been happening. But the story of the channel shift in horse racing is a well understood one. And that is as it develops, the customers tend to be very sticky to the product and they hang around and continue to bet online. So, it caused some mild acceleration. But I really think the story of TwinSpires this year is way broader than that. And we touched on that a bit a moment ago with the single greatest tailwind we usually get every year, which is the mass of casual fans that we acquire cheaply and don't have to reinvest in at a high level, those fans weren't here this year. So, you've got to watch some of those factors against each other. And so, generally, when it comes to active players, I think as a team, we feel pretty good going forward about the level of active players we have and our ability to grow those and the level of stickiness in the players that have joined.

If I can squeeze one more in. I apologize about hogging the mic here. But I was wondering if you can – of the ADW competitive landscape, obviously, you have one big competitor, call it, two smaller ones in there. And then, there are a few very small operators. I'm wondering, just from a competitive perspective, if you've seen any changes, any notable changes in that landscape year-to-date that could either create more opportunity for you going forward in some way, shape or form?

I think the ADWs in general have been doing very well, including the most significant competitor out there that's not a racetrack company, a pure play online gambling company. I think, in general, everybody's done pretty well. And we actually encourage that. The fact is, as we said on these calls and in other environments for a long time, this is a very good gambling product. It's based on paramutual wagering for us. So, the margins are always something you understand in terms of your net revenues. That's something you can always count on, you always understand what it's going to be. And it's a good product that's always available and you can build patterns and habits with your customers based on the availability of content and the predictability of content and your ability to reinvest in them sensibly because you have a good feel for what your true net revenues are going to be. So, I think you're seeing some of that beyond just our experience in the space. And I imagine that you'll continue to do that. But I think vis-à-vis each other, I don't think there's been a material change. I think it's a rising tide that's floating all boats. And I think others in the gambling space are starting to understand sort of the attractiveness of this from a business perspective of offering this kind of product.

Next question, we have David Katz from Jefferies.

I don't want to be in any way dismissive of your operating execution on the hard asset side. But we do have quite a few discussions around. And I know you've touched on this, but I wanted to go a little farther on the value that you have and the assets in TwinSpires, what you're building in iGaming and the ability to grow it competitively as iGaming and sports betting more broadly become legal. Bill, how do you – I'd like to hear you talk about how you think about value and capabilities, which I think is a word I've heard you use over the years, within TwinSpires on the back end. And obviously, it's an ability to capture and execute on customers. And do so profitably. On the front end, do you feel like you have the brand, the capabilities? Obviously, you have some market access, that should be helpful. How do you think about the value of pieces along the chain and where you would like to take that in the near term?

Well, first, I'd say that we've talked about these kinds of issues, David, over a long period of time. And so, we've paid attention to online wagering, not only in America, but as it's rolled out in Europe and other parts of the world over an extensive period of time. So, we've seen different models happen. And what we're seeing in America is we're seeing a jurisdiction that really hasn't been driven by technology advancement. It's really been driven – and is opening up because of regulatory change. So, the technology is there. The digital space is well understood outside of gambling. So, it's a catch-up thing. So, what you're seeing here is a rush to get into the business very, very quickly and an assumption that you need to acquire as many customers as you can with as big a brand as you can, as quickly as you can. And I'm not dismissive of those feelings or those thoughts at all. That's just an observation on how the US market is opening versus what we've seen other markets in the world do. So, from our perspective, we don't have – we have some advantages with TwinSpires, in that we have a longstanding online business with great customers in many jurisdictions to be opened up. And that's a big advantage for us. We also are a company that's recognized in the gambling space among the casual consumers. But there's some really powerful brands out there, and so there's some really powerful spending out there. And we have to be cognizant of that and careful of that. Just because somebody else spends the money doesn't mean that we can spend that money or that we see in our modeling a return with that kind of player investment. So, as we address…

And if I can follow that up, it's very clear, at least so far, what your relationship is with Rush Street from a land based or hard asset perspective. Is there any vision or any color you can provide around how that relationship rolls into the mobile side of things, sports and iGaming? As new states open up, the degree to which you may play a role with them, or is that confined just to Illinois?

Well, we have a really good relationship with Rush Street and they're really a mature, accomplished, talented people and a talented team. So, I think that's a question that's hard to answer. Certainly, everything in Illinois has been positive, including how we're engaged in the online space in Illinois, which is through the Rivers brand and through their RSI technology platform. Everything has been a positive and, generally, they're great to work with. And I think they are a special group of people and I wouldn't say more than that for the future, but certainly, we have a very strong partnership with them and we're doing other things in Illinois together, like we discussed, bidding on Waukegan, et cetera. So, never say never, but we don't have anything to talk about at this this stage.

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

Thank you. I'd just like to remark that we always appreciate your interest, your investment in our company, especially during these challenging times. COVID-19 has changed everything about how American business works. And it's something we think about and deal with every day. And we'll keep doing that. We'll keep being responsible shepherds of your capital and we'll try to make sure we make good, smart, long-term patient decisions that benefit your investment. So, thanks for your interest again and we'll see you next time. Good luck.

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