It’s the time of the year when Churchill Downs is rife with excitement about the impending Kentucky Derby.
However, while analysts expressed interest in the 150th Run for the Roses May 4 and its financial impact during Thursday’s 2024 1Q results conference call, Churchill Downs CEO Bill Carstanjen emphasized a more holistic outlook.
“We were pleased with the performance of all of our segments and our expectations remain high for the rest of the year,” Carstanjen said. “We hope our performance resonates with our shareholders as a reminder that our long-term and consistent strategies have resulted in an extremely strong company that is delivering best-in-class growth with the pipeline to a great future.”
Churchill Downs’ 1Q24 results set a record for quarterly revenue, the $590.9 million generating a 6% year-over-year increase. The adjusted EBITDA OF $242.5 million, a 9% increase compared to 1Q23, also was a quarterly record.
Net income, however, decreased 48% to $80.4 million year-over-year.
Wall Street analysts viewed the results favorably, notably due to Churchill Downs’ historical racing machine venues in Kentucky and Virginia, and its 2023 acquisition of Exacta Systems, a provider of technology that supports historical horse racing operations.
“The quarter came in well ahead of expectations, driven by HRM operations and Twin Spires, which should be positive for the shares,” wrote Jefferies analyst David Katz Wednesday after the results were first published. “The timeline and budget expectations for planned capital expectations remain on track and the forthcoming 150th Kentucky Derby should provide a near-term catalyst given the considerable capex coming online.”
Truist Securities analyst Barry Jonas Wednesday wrote in a note that the results beat expectations, “with the beat-driven across all segments and stronger than expected Exacta contribution. Virginia’s top-line performance was particularly strong in the quarter, with Exacta supporting margin expansion as well.”
Carstanjen’s expectations for this year’s Kentucky Derby are buoyed by the $200 million renovation of the track’s paddock area. The renovation includes an expansion from 5,000 to 12,000 square feet, increasing capacity from 1,000 to 2,400 patrons.
Carstanjen called the paddock renovation “one of the most significant construction developments ever at Churchill Downs.”
“The paddock project has been a multi-year massive undertaking that fundamentally improves the entire venue,” he said. “As we unveil it for its first Derby, we will undoubtedly find both operational opportunities to improve upon, and new ancillary investments to give the customer more of what they tell us they value. We believe our $200 million investment in this transformative project will provide a foundation around which to further innovate for years to come.”
Carstanjen added that Churchill Downs is currently evaluating “an intriguing smaller project” for the 2025 Kentucky Derby that will enhance the guest experience at another area of the venue. He estimated the unnamed project will require a capital investment between $60-80 million.
Churchill Downs’ investment in HRM venues is ongoing. The success of HRM venues in Kentucky and Virginia is attributable to the continued integration and product improvement opportunities resulting from the Exacta acquisition and better marketing and operational processes, “particularly with respect to the Virginia properties which we have only owned since late 2022,” Carstanjen said.
“The continued trend towards familiarity and acceptance by gaming customers of the HRM product and with respect to Virginia the enforcement of the ban on so-called skill games, all these factors help our results,” Carstanjen added, “although it is hard to firmly distinguish the effect of each factor from the others.”
Carstanjen stated that construction on an HRM site in Owensboro, Kentucky, should be finished in time to open in the 1Q25.
Under Kentucky law, Churchill Downs is permitted to develop one more HRM venue in the state that is required to be within 60 miles of the company’s Oak Grove, Kentucky license. “This opportunity is one in which we are very interested and devoting time and resources to exploring,” Carstanjen said.
In Virginia, Carstanjen expects to use all 10 of the potential HRM licenses it has available. The Rose, a new HRM venue in Dumfries, Virginia (30 miles south of Washington, D.C.) with 1,650 machines, is scheduled to open in September 2024. Completion of The Rose venue will give Churchill Downs approximately 4,450 operational HRM machines in the state.
“We have a number of additional HRM development opportunities we are exploring,” Carstanjen said, “and we anticipate that we will have deployed in 2025 the remaining 500+ machines we are permitted under law. We are analyzing the best options for the remining HRM, as well as deciding if we should shift any of the existing HRMs to other locations in order to optimize the performance overall of our Virginia HRM business.”
