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

Explicit Guidance:

• Capital Expenditure (Maintenance): Full-year 2026 spend expected to be $90 million–$100 million (up from $57 million YTD Q1–Q3 2026).
• Capital Expenditure (Project): Full-year 2026 spend expected to be $160 million–$180 million (up from $119 million YTD Q1–Q3 2026).
• Capital Expenditure (Project): Full-year 2027 project spend expected to be $200 million–$250 million.
• Share Repurchases: New $750 million board-authorized buyback program announced; reflects confidence in asset sales and cash flow outlook.
• Dividends: 7% dividend increase approved, payable January 5, 2027; marks 16th consecutive year of dividend growth.
• Leverage: Bank leverage expected to remain 3.80–3.90x through FY2026, declining below 3.0x upon completion of regional gaming asset sales.
• Revenue/EBITDA: No specific numerical guidance provided for FY2026 or FY2027; management targets "meaningful driver of adjusted EBITDA growth" for Derby Week in near term and long term.

Business-Segment Outlook:

• Churchill Downs Racetrack & Kentucky Derby:
  • 2027 Derby: Ticket sales pacing well ahead of 2026 levels; demand remains "very strong."
  • Derby 2028: "Victory Run" construction on schedule and on budget to open; introduces private suites, indoor/outdoor dining, and covered box seats.
  • Derby 2027: Interim upgraded seating with covered stadium seating and enhanced amenities in Victory Run area.
  • Strategic Initiatives: Launch of Thoroughbred Championship Series (TCS) kicking off at 2027 Kentucky Derby; connects Derby, Belmont, Saratoga, and Churchill Downs over five months.
  • Sponsorship: Multi-year partnership with Visa as preferred payment partner; aim to expand portfolio using TCS content to offer 5 months of assets vs. current 1 week.
• HRM (Live Racing & Gaming):
  • Kentucky: Plan to roll out craps Electronic Table Games (ETGs) by end of 2026; develop blackjack ETGs in 2027.
  • Virginia:
    • Collinsville: Relocating and expanding to Henry County (150 machines) in 2026; land acquisition agreement expected within days; target ROI exceeds targets with upside from NC market capture.
    • Pulaski/Amherst: Awaiting results of two referendums in next week; potential to add two 150-machine facilities (totaling 415 incremental machines) to reach 5,000 machine state-wide cap.
    • Competitive Landscape: Central Virginia venues impacted by new Petersburg casino; management views this as market expansion rather than diversion; adjusting marketing and machine allocation to optimize state-wide performance.
    • Northern Virginia: "The Rose" continues sequential growth in rated and unrated play; significant long-term potential remains.
  • New Hampshire: Rockingham Grand Casino on track to open mid-2027; 800–850 HRMs/slots and 32 table games; expected to provide significant growth serving MA/NH border market.
• Twin Spires:
  • Continued investment in product innovation (Jackpot 8, Easy Bets) and AI enhancements (Paddock Pro AI, AI Race Preview) to drive VIP engagement and B2B distribution.
  • Focus on maintaining market leadership and expanding wagering/EBITDA growth.

Market and Competitive Outlook:

• Consumer Trends: Notable improvement in consumer demand compared to prior year; higher-value rated play drove growth; lower-value unrated segments remain resilient.
• Market Dynamics: Regional gaming assets cited as having "attractive characteristics" (newer, better maintained, strong cash flow) distinguishing them in a potentially soft M&A environment.
• Competition: New supply in Virginia and NH viewed as expanding total market addressability; competition in Central VA expected to drive need for market maturation and optimized machine allocation rather than revenue cannibalization.
• Derby Week: Increasing consumer demand for premium live sports/entertainment; social media and TV viewership metrics (avg 19–20M viewers) growing sequentially.

Macro / Industry Outlook:

• M&A Environment: Acknowledges increased interest rates and consumer uncertainty in broader M&A, but notes confidence in selling regional assets due to their cash flow profile.
• Regulatory: Unique HRM regulatory structure in Virginia (5,000 machines across 10 sites) allows flexibility to reallocate machines to optimize value; pending referendums could expand footprint in underserved markets.
• Taxes: Central Virginia impacted by $5 million in new tax on live racing days effective July 1, 2026.
• Gaming Trends: Industry focus shifting toward adding new content (ETGs, craps, blackjack) to HRMs; transition from single-product offerings to suites of games to match Class III facilities.

Strategic Initiatives:

• Portfolio Refocus: Active sale of nine regional gaming properties; proceeds intended to reduce leverage, repurchase shares, and selectively invest in Churchill Downs Racetrack and high-return growth opportunities.
• Thoroughbred Championship Series (TCS):
  • Derby Division: 6-race series (Derby, Belmont, Churchill 4th of July, Saratoga late July/August, Churchill late Sept) with $5 million in incremental prize money.
  • Oaks Division: 4-race series (Oaks, Belmont July 5, Saratoga June/August) with $1 million prize pool; winner competes against Derby Division winner for $1 million bonus.
  • Goal: Modernize fan engagement, create season-long storytelling, and expand media rights/licensing/sponsorship opportunities.
• Asset Sales Timeline: Expect executed transactions for regional properties by end of 2026; sales process described as going "very well."

Risks and Headwinds to Outlook:

• Asset Sales Timing: Completion of regional property sales contingent on market conditions; delays could impact leverage reduction targets.
• Regulatory Uncertainty: HRM expansion in Virginia dependent on success of upcoming referendums in Pulaski and Amherst counties.
• Competitive Pressure: New casino in Petersburg (Central Virginia) and potential new supply in New England markets could impact local performance metrics.
• Development Risks: Construction timelines and budgets for Victory Run (2028) and Rockingham Grand (2027) must be maintained; delays could impact growth trajectories.
• TCS Adoption: Success of Thoroughbred Championship Series relies on owner/trainer buy-in, horse availability, and ability to convert casual fans to season-long engagement; monetization of TV/social metrics is a work in progress.

Management Tone on the Future:

• Confidence Level: High. Descriptions include "very strong" demand, "on track," "excited," "very encouraged," and "full speed ahead."
• Strategic Focus: Clear shift toward a "more focused portfolio" centered on Churchill Downs, HRMs, and Twin Spires; confident in the ability to compound shareholder value via the "Derby Flywheel."
• Hedges: No specific downside scenarios quantified; general caution regarding M&A market conditions and the need to "prove" the TCS format to consumers over time.
• Capital Allocation: Strong belief in the value of the balance sheet to drive debt reduction and shareholder returns post-asset sales.

Miscellaneous:

• Board of Directors: Michael Tucker added; 30+ years experience in sports/entertainment investing.
• Derby Ticket Sales Clarification: Management clarified ticket sales are up ~25% year-over-year, with ~40% of the total allocated inventory sold at this point in the cycle; premium ticket inventory sold is roughly 25%.
• Earnings Release: 2026 Q3 results (Record $696M revenue, $264M adj EBITDA) released the previous afternoon.