Churchill Downs Incorporated Third Quarter 2026 Results Conference Call - CHURCHILL DOWNS INC

Financial Performance:

• Recorded third-quarter 2026 net revenue of $696 million and adjusted EBITDA of $264 million.
• Delivered record adjusted EBITDA for both the wagering services (Twin Spires) and gaming segments.
• Live and historical racing segment in Kentucky posted record revenue with adjusted EBITDA up 10% YoY.
• Gaming segment adjusted EBITDA increased 4% YoY; same-store margins for wholly-owned casinos remained consistent.
• Virginia adjusted EBITDA declined $6 million YoY excluding a one-time insurance recovery and a new $5 million tax on live racing days in Central Virginia.
• Generated $603 million in free cash flow (or $8.59/share) through the first nine months of 2026.
• Ended the quarter with a bank leverage ratio of 3.8x, expected to remain between 3.8x–3.9x through year-end and drop below 3.0x post-asset sales.
• Paid $119 million in project capital and $57 million in maintenance capital in the first nine months of 2026.

Guidance and Future Outlook:

• Expects full-year 2026 maintenance capital spend of $90–$100 million and project capital spend of $160–$180 million.
• Projects 2027 project capital spend between $200 million and $250 million.
• Expects bank leverage to decline below 3.0x following the completion of regional gaming asset sales by year-end.
• Revenue and EBITDA growth anticipated to be driven by the Thoroughbred Championship Series (TCS), expanded Derby Week, and HRM expansion in Virginia and New Hampshire.
• Revenue trends show resilient consumer demand with improvement in higher-value rated play.

Business Segments and Product Lines:

• Churchill Downs Racetrack & Kentucky Derby: Ticket sales for the 153rd Derby are pacing 25% ahead of last year's pace (approximately 40% of allocated inventory sold). Construction on "Victory Run" is underway for a 2028 opening, with interim upgrades for 2027.
• Thoroughbred Championship Series (TCS): Launching in 2027 featuring a 6-race Colt division and 4-race Filly division across Churchill Downs, Belmont Park, and Saratoga, with a $5 million bonus structure for series performance.
• HRM (Retail Gaming): Expanded partnerships with electronic table game (ETG) providers; craps and roulette ETGs rolling out late 2026, with blackjack ETGs targeted for 2027.
• Virginia Operations: The Rose (Northern Virginia) shows sequential and YoY growth; Central Virginia facing competition from the Petersburg casino but viewed as market-expanding. Received final approval to relocate Collinsville venue to Henry County, NC border (150-unit capacity).
• New Hampshire: Rockingham Grand Casino on track to open mid-2027 with 800–850 HRMs and 32 table games.
• Twin Spires: Launched AI-driven products (Paddock Pro AI, AI Race Preview) and new wagering products (Jackpot 8, Easy Bets); B2B distribution expanding.

Market and Competitive Landscape:

• Virginia market characterized as immature with significant upside; company utilizes regulatory flexibility to shift 5,000 machines across 10 sites to optimize performance.
• Competition from the new Petersburg casino in Virginia seen as expanding the total market addressable rather than simply redistributing revenue.
• The TCS aims to create a "league" structure for horse racing, linking marquee events to drive sustained engagement beyond single-day derbies.
• Sponsorship portfolio strengthened with a multi-year partnership with Visa; brands increasingly targeting the Derby's demographics and digital viewership.

Risks and Challenges:

• Potential macroeconomic headwinds and increased interest rates affecting the broader M&A environment for asset sales.
• Competitive pressure in Central Virginia from the new Petersburg casino impacting short-term performance metrics.
• Regulatory uncertainty regarding the passage of two referendums in Pulaski and Amherst County, Virginia.
• Complexity and regulatory hurdles associated with developing and deploying new electronic table games (craps, blackjack) in HRM venues.
• Execution risks regarding the timeline and valuation of the sale of nine regional gaming properties.

Management Commentary and Tone:

• Management expressed high confidence in the asset sales process, targeting executed transactions by year-end.
• Tone is optimistic and growth-oriented, emphasizing the "Derby flywheel" and the strategic value of the TCS.
• CEO Bill Carstangen highlighted the unique competitive advantage of the Churchill Downs Racetrack and the cultural significance of the Kentucky Derby.
• CFO Marcia Dahl emphasized strong free cash flow generation and disciplined capital allocation.
• Board added Michael Tucker, a sports and entertainment investor, to leverage strategic capital allocation expertise.

Analyst Questions and Answers:

• TCS Economics: Management expects immediate wagering contributions and admission revenue growth, with sponsorship and licensing ramping as the series proves success; timeline for full maturity is a multi-month ramp.
• Derby 157 Outlook: Ticket sales and sponsorship are pacing ahead of 2026; strategy involves doubling down on unique, themed daily programming (Oaks, Derby Day, etc.) with national television partnerships (NBC).
• Virginia Strategy: Viewed as a state-wide optimization puzzle; will adjust machine counts and marketing spend based on real-time demand signals across Northern, Central, and Western regions.
• Asset Sales Process: Transactions will be executed as a series of individual property sales rather than a single bulk deal; management expects to close by year-end.
• HRM Content: Focus remains on expanding the suite of Class III-to-HRM game titles and deploying a full suite of electronic table games (roulette, craps, blackjack) to drive win-per-day.
• Ticket Inventory: Approximately 25% of premium ticket inventory sold by this point in the cycle; management is throttling sales volume to preserve inventory for late-season demand.

Other Key Points:

• Board authorized a new $750 million share repurchase program.
• Approved a 7% dividend increase, marking the 16th consecutive year of increases.
• The Rose in Northern Virginia continues to outperform with strong sequential growth in GGR per machine.
• Management clarified ticket sales figures during Q&A: 25% of premium inventory sold, representing 40% of the total allocated inventory for sale at this stage.
• The TCS includes a unique twist where the Oaks division winner competes in the Derby Division championship for a chance to win an additional $1 million.