Churchill Downs - Earnings Call - Q1 2025

Executive Summary

• Record Q1 results despite weather, leap-year comp and macro headwinds: net revenue $642.6M (+9% Y/Y), Adjusted EBITDA $245.1M (+1% Y/Y), GAAP diluted EPS $1.02 (vs $1.08). Management flagged consumer hesitancy and paused large Derby capex given tariff-driven cost uncertainty.
• Versus S&P Global consensus: Revenue essentially in-line ($642.6M vs $642.8M*), and Primary EPS beat ($1.07 vs $1.04*, +$0.03) on resilient operations; adjusted EBITDA aligned with internal reporting (definitions differ). Values retrieved from S&P Global.*
• Strategic drivers: The Rose (Northern VA) showed sequential monthly improvement; Owensboro (KY) opened in Feb with solid early returns; Richmond HRM expansion and Henrico (Roseshire) remain on time/on budget.
• Capital allocation: New $500M repurchase authorization; Q1 repurchases $89.4M (798K shares); net bank leverage 4.0x; 2025 project capex cut to $250–$290M (from $350–$400M) and maintenance capex to $90–$100M.

What Went Well and What Went Wrong

• What Went Well
  • Record Q1 net revenue ($642.6M) and Adjusted EBITDA ($245.1M) achieved despite weather, one fewer day vs leap-year comp, and macro uncertainty. “We delivered record first quarter net revenue of $643 million and record first quarter adjusted EBITDA of $245 million” (CEO).
  • New properties/expansion performing: Owensboro (600 HRMs) opened on time, below budget and is “on track to deliver great return”; The Rose posted meaningful sequential GGR growth as the database builds (CEO).
  • Exacta (B2B HRM tech) driving optimization and third‑party growth; ahead on Richmond HRM expansion and Henrico (Roseshire) timing/budget (CEO).
• What Went Wrong
  • Virginia same‑store HRM EBITDA down (−$ ~6M across other VA properties) on lower unrated play, competition, weather and higher handle tax; overall VA same‑store margins still a solid 52% (CFO).
  • Regional gaming softness pressured wholly owned casinos; same‑store casino margins −2.1 pts Y/Y, notably NY/PA/ME; leap-year comp and weather also weighed (CFO).
  • Lower-tier Derby ticket demand softer over last 8–9 weeks amid tariff/macro headlines, while premium remains strong; capex for Skye/Conservatory/Infield paused to reassess costs (CEO).

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2025 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. We ask all question-and-answer participants to please limit themselves to one question. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Sam Ullrich, Vice President, Investor Relations.

Sam Ullrich (VP of Investor Relations)

Thank you, Andrew. Good morning and welcome to our First Quarter 2025 Earnings Conference Call. After the company's prepared remarks, we will open the call for your questions. The company's 2025 first 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 ChurchillDownsIncorporated.com, as well as in the website's investor 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 reports 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 present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday's earnings press release. The press release and Form 10-Q are available on our website at ChurchillDownsIncorporated.com. I will now turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Bill Carstanjen (CEO)

Thanks, Sam. 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. I will share an update on our growth plans for our company, including with respect to the Kentucky Derby and our HRM businesses in Virginia and Kentucky, and then Marcia will provide insight into our financial results, as well as an update on our capital management strategy. After she finishes, we will take your questions. We delivered record first quarter net revenue of $643 million and record first quarter adjusted EBITDA of $245 million.

These results reflect strong performance given, one, the first quarter last year was also a record; two, the material weather events that impacted many of our properties during this quarter; three, the increasingly uncertain economic environment driven by the tariffs and trade war disputes; and four, one less day this quarter compared to last year because 2024 was a leap year. This quarter, we successfully opened our Owensboro HRM venue on time and below budget. This is our seventh Kentucky HRM facility and is located just east of Owensboro, the fourth largest city in the state. It has 600 HRMs, a retail sports book, simulcast wagering, and several food and beverage offerings. We are pleased with the first couple of months of performance from this property, and it is on track to deliver a great return for our shareholders.

Churchill is an exceptional company that continues to deliver growth and with a pipeline to a great future. We have demonstrated we can nimbly apply our strategy in any economic environment to effectively manage our capital to create best-in-class value for our shareholders. Given this backdrop, let's talk about the strategic investments we are making in 2025 to drive long-term shareholder value. First, regarding Churchill Downs Racetrack and the Kentucky Derby, we have completed the Starting Gate Pavilion and Courtyard project on time and on budget. Our guests at the 151st Kentucky Derby next week will be treated to 8,500 new reserved premium stadium and trackside box seats near the Kentucky Derby starting gate. We have also significantly improved the amenities and hospitality options in the areas adjacent to the Starting Gate Pavilion, which enhances the experience for our guests throughout the surrounding sections.

On our last earnings call at the end of February, we announced a $900 million multi-year project at Churchill Downs Racetrack that included tearing down and rebuilding the Skye Terrace, building new permanent structures in the infield for premium ticket holders, and providing improved amenities for our general admissions guests. A lot has changed in the world in the past nine weeks since that earnings call, including increased general economic uncertainty and risk of significant inflation, driven in part by the new tariffs that the U.S. intends to charge on products from almost every country in the world. This has created unanticipated and currently unquantifiable expected cost increases in most materials.

Due to these factors, we have made the difficult decision to temporarily pause this multi-year effort in order to let things settle down so that we can better determine any permanent changes in the cost of this project and better evaluate any changes in the overall economic environment. We remain completely committed to growing the Kentucky Derby through the prudent timing of capital investments over the long term. We take very seriously our reputation for delivering long-term best-in-class returns to our shareholders, and it was only after careful evaluation of the current economic climate that we made this decision. We will use the coming months to assess the evolving economic conditions as well as to evaluate any changes that we want to make to the timing and sequencing.

This is an opportunity to revisit and to make sure we deliver products that best meet and exceed our customers' expectations as well as those of our shareholders. Over 151 years, the Kentucky Derby has become a testament to the enduring spirit of American sportsmanship, celebration, and the lasting power of our traditions. It's the definition of a long-term asset, and it is one that has always demanded discipline as well as innovation. When the macro environment concerns are better understood, we will move forward with thoughtful decisions on how best to invest material amounts of capital in this iconic asset. Last night, we announced two smaller projects at Churchill Downs Racetrack: the renovation of the Finish Line Suites and the Mansion. These two projects will cost approximately $25-$30 million in total and are expected to be completed in time for the 2026 Kentucky Derby.

We believe that these two low-risk and easy-to-measure projects will generate strong shareholder returns. We have 15 Finish Line Suites on the fifth floor directly overlooking the finish line. These are reserved for approximately 600 guests and have traditionally been considered one of the most prominent and prestigious areas for sponsors and companies to entertain large groups. We will update the finishes and other amenities while also increasing the capacity to a total of 750 guests. At the same time, we will renovate the trophy room, which sits behind the Finish Line Suites and seats over 300, many of whom are additional guests of the Finish Line Suite holders. The improvements to both these areas will create a larger, fully integrated hospitality experience with more energy, better flow, and superior amenities. Turning to the Mansion, this is one of our most exclusive areas.

It is located on the sixth floor and provides stunning views of the finish line and the racetrack as a whole. We will introduce updated finishes and amenities along with other enhancements. We believe that both projects will deliver long-term superior returns for our shareholders. Strategic investments have driven the Kentucky Derby experience and financial results to a level few would have imagined just a handful of years ago. We set records last year in all of our key financial metrics and grew the adjusted EBITDA for the event by $30 million compared to the prior year. We expect this year's Kentucky Derby to be comparable to last year's, delivering one of the best results in the history of our company across our key financial metrics. Next, regarding our HRM progress, our track record has demonstrated that we are disciplined in our approach to HRM investments.

This has led to excellent returns on capital from our HRM venues and the related technology. We will continue to explore further development in each of our key markets. In Virginia, as expected, we have seen good progress during the first quarter from the Rose. As a reminder, the potential customer base around the Rose is nearly four times larger than our other largest HRM properties in Virginia and Kentucky. HRM facilities and new markets like Northern Virginia take time to attract, develop, and retain customers. We saw meaningful sequential growth in the gross gaming revenues each month of the first quarter, as well as outstanding improvement in rated player metrics. This is the result of the ongoing marketing as we build our customer database. We are pleased with the progress to date. We hope to continue to demonstrate improvement as this new facility is miles away from approaching maturity.

We've also made significant progress in the expansion project at our Richmond HRM venue. In 2024, it was our largest contributor of adjusted EBITDA in Virginia and the second most profitable HRM property in our portfolio after Derby City Gaming. We have added approximately 100 HRMs so far and will have an additional 400 games operational before Memorial Day weekend. This project is ahead of schedule and on budget. Next, we are building the Roseshire Gaming Parlor in Henrico County with 175 HRMs and other guest amenities. We made great progress during the first quarter. We now expect to open early in the fourth quarter of this year. This project is ahead of schedule and on budget. In Kentucky, we began work on the Marshall Yards HRM venue in Calvert City in late January. This will be our eighth HRM venue in the Commonwealth.

We are on budget and on track to open during the first quarter of 2026. You will note a common theme as we discuss these brick-and-mortar construction projects. We have a firm grip on the schedules and budgets. This has been an important ingredient of our success over time in generating shareholder returns. Even in these more volatile economic conditions, we are committed and confident we will adhere to our principles of disciplined planning and meeting expectations. Turning to Exacta, the acquisition of the Exacta technology has improved the performance of our Virginia and Kentucky HRM venues by enabling us to better optimize the gaming floors and reduce the technology fees charged to our venues. On the B2B front, the Exacta team has continued to make strides, growing the portfolio of third-party HRM operations in Kentucky, Wyoming, and New Hampshire.

For example, we now provide our technology to 11 of the 12 HRM venues that are operational in New Hampshire. We look forward to growing this business as these properties expand and through growth in new jurisdictions that may adopt this form of wagering in the future. As we mentioned during our February call, we are making progress on the development of HRM-based electronic table games. We currently plan to implement electronic table games prior to the end of 2025 in certain of our existing HRM locations to support the growth of our properties. Regarding our preparation for the upcoming 151st Kentucky Derby on May 3rd, a week from this Saturday, we expect this will be another extraordinary experience for our guests. The buzz and energy seems greater every year, and this year promises to deliver once again.

As I commented a few minutes ago, we anticipate results that are comparable to last year's extraordinary Kentucky Derby 150. We have an exciting week of racing and festivities planned and look forward to hosting many of you in person. If you cannot join us at the track, please be sure to watch the NBC broadcast, which begins at noon Eastern Time on USA Network and then moves to NBC starting at 2:30. We will provide a press release with our preliminary results after the race like we do every year. In summary, the first quarter was another strong one for us with record financial results. Yes, a lot has changed in the last nine weeks since our last earnings call. What has not changed is our leadership team's demonstrated track record of managing, adopting, and pivoting during various economic cycles.

This discipline has positioned our company for strong growth for years to come with our pipeline of investments in the Kentucky Derby, HRM, and other gaming venues, the B2B and B2C expansion of our TwinSpires and Exacta businesses, and accretive acquisitions. Our strategic choices and capital investments over recent years, along with our strong balance sheet and diversified portfolio of assets, have positioned us well to navigate these evolving times. We remain committed to delivering excellent total shareholder return with consistent execution over the long term. With that, I'll turn the call over to Marcia, and then we will take your questions. Marcia.

Marcia Dall (EVP and CFO)

Thanks, Bill, and good morning, everyone. I'll start with a few insights into our financial results and then provide an update on capital management. First, regarding first quarter financial results, as Bill shared, we delivered record first quarter revenue and adjusted EBITDA.

We also delivered record first quarter net revenue across all of our reporting segments and record first quarter adjusted EBITDA for our live and historical racing segment and for our wagering services and solutions segment. We are pleased with the first quarter performance from our businesses in the live and historical racing segment. This segment delivered record first quarter revenue and adjusted EBITDA. The live and historical racing segment increased revenue by nearly $28 million, or 11% compared to the prior year quarter, primarily due to the opening of the Rose Gaming Resort in November 2024 and the Owensboro Racing and Gaming in February 2025. Our HRM properties in Kentucky performed extremely well during the first quarter.

Our Kentucky HRM properties increased adjusted EBITDA by $3.1 million, or 6%, compared to the prior year quarter, despite the weather events our HRM venues experienced and the impact of one less day in the quarter due to the 2024 leap year, as well as the impact from the ongoing economic uncertainty that escalated in the first quarter. We benefited from strong performance from our new Owensboro HRM venue and from our Oak Grove, Turfway Park, and Newport, Kentucky HRM venues. The Virginia HRM properties' contribution to adjusted EBITDA decreased by $2.2 million, or 3%, compared to the prior year quarter. Our Northern Virginia HRM venues collectively contributed nearly $10 million of adjusted EBITDA during first quarter, up nearly $4 million from the prior year quarter.

The Rose had a meaningful sequential increase in the GGR per machine per day for each month of the first quarter from our continued progress in marketing the property to educate and attract guests. All of our other HRM properties in Virginia collectively had a nearly $6 million, or 13%, decrease in adjusted EBITDA during the first quarter compared to the prior year quarter. Approximately one-third of the decrease was driven by the impact of weather and one less day in the quarter due to leap year in the prior year. Another one-third of the decrease was driven by a higher handle tax rate for the quarter compared to the prior year and a slight impact from running three days of racing in the quarter.

The higher handle tax rate was the result of the increase in the number of HRMs we have in the Commonwealth of Virginia compared to the prior year quarter due to the opening of the Rose. The final one-third of the decline was driven by consumer softness and the impact of competition near some of our HRM venues that reduced the level of our unrated play. Overall, it is important to note that despite the decline in adjusted EBITDA, we still generated a combined 52% margin during the quarter for our same store of Virginia HRM properties. In our wagering services and solutions segment, adjusted EBITDA grew by nearly $2 million, or 4%, compared to the prior year quarter. The Exacta business contributed nearly $4 million of increased adjusted EBITDA from both third-party customers and growth from our Virginia HRM properties.

Our TwinSpires horse racing business saw an increase in revenue and a modest decline in adjusted EBITDA in the first quarter, primarily due to incremental legal expenses related to our legal team's successful outcome regarding TwinSpires' right to accept horse racing wagers in the state of Michigan. Last, regarding our gaming business, our wholly owned regional gaming properties performed relatively well in the first quarter, given the regional gaming softness, increased competition, one less day in first quarter this year due to the 2024 leap year, and the impact of weather and competition at certain of our properties. Regional gaming consumer behavior in first quarter remained consistent with recent quarters. We see strength at the higher end and with rated play, and weakness at the lower end and with unrated play across our properties.

Regarding our Terre Haute Casino Resort in Indiana, this property delivered nearly $12 million of Adjusted EBITDA in first quarter. Our Terre Haute property continues to perform well with margins that are in the top quartile of performance for regional gaming properties. Overall, our first quarter same store wholly owned casino margins were down 2.1 percentage points compared to the same period in 2024, primarily driven by our New York, Pennsylvania, and Maine properties. Turning to capital management, we generated $234 million, or $3.15 per share of Free Cash Flow in the first quarter, primarily from the strong cash flow generated from our businesses. Regarding maintenance capital, we spent $13 million in the first quarter. Based on a review of our maintenance capital plans for the year, we have reduced our 2025 maintenance capital projection by $10 million to $90-$100 million.

Regarding project capital, we spent $68 million in the first quarter. Based on the pausing of the multi-year project at Churchill Downs Racetrack, we've reduced our 2025 project capital forecast by $100-$110 million. We are now anticipating that our project capital for 2025 will be between $250-$290 million. Regarding share repurchases and dividends, in March, we announced that our board approved a new common stock repurchase program of up to $500 million. We repurchased nearly 800,000 shares in the first quarter under our share repurchase programs. Combined with the annual dividend we paid in January, we have returned nearly $120 million to our shareholders so far this year. At the end of first quarter, our bank covenant net leverage was 4.0 times.

Based on our capital investments and anticipated share repurchases, we expect our bank covenant net leverage to remain in the 4x range for the remainder of the year. We then expect our bank covenant net leverage to decline in 2026 to between 3.6x and 3.8x. Overall, we are pleased with the record results that our team delivered in the first quarter. Our leadership team has a demonstrated track record of leading, managing, adapting, and pivoting during various economic cycles. We are well positioned to continue to grow through the remainder of 2025 and into 2026, fueled by the tangible pipeline of growth initiatives that Bill discussed. This is truly a special time of the year for our company, who will continue our rich and spectacular traditions at this year's 151st Derby. I look forward to sharing this remarkable experience with many of you in person next week.

With that, I'll turn the call back over to Bill so that he can open the call for questions. Bill?

Bill Carstanjen (CEO)

Thank you, Marcia. We're now ready to take your questions.

Operator (participant)

Certainly. Ladies and gentlemen, to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. As a reminder, we ask participants to limit themselves to one question. One moment, please. Our first question comes from the line of Chad Beynon with Macquarie.

Chad Beynon (US Director of Research and Head of Gaming and Leisure)

Hi, good morning. Thanks for taking my question and all the prepared remarks. Bill, Marcia, just wanted to ask about a little bit of the softness that you're seeing, I guess, for the quarter and particularly in the last few weeks, as we've heard from a lot of your peers. Have you seen that accelerate in terms of the decline or with all the certainty that's been out there? Has that been pretty consistent with that low-end player, I guess, when it started to drop? Thank you.

Bill Carstanjen (CEO)

Sure. Thanks, Chad. I think what we see across the board is some hesitancy with just the volatility in the macroeconomic environment and the uncertainty over tariffs and things like that. Certainly, it's most evident in our lower-tiered or unrated play, and that's the segment of play in our casinos over which we have the least amount of control. Of course, as you get into the upper tiers, we have a relationship with those people, and we have very much a 360-degree view of their behavior. We're able to communicate with them, and we're able to incent them to come. We have a better opportunity to manage that.

Certainly, for us, consistent. So far, it's been consistent over the last number of quarters. I think the theme that we think we see out there is just some hesitancy in the overall market. It's not that we know or have information that they have less money in their wallets. We don't know that for sure, but perhaps just some hesitancy that we're managing through. Of course, we're best able to manage that with the customers who are in our database because we can incent them and communicate with them.

Operator (participant)

Thank you. Our next question comes from the line of Barry Jonas with Truist.

Barry Jonas (Managing Director and Senior Equity Analyst)

Hey, guys. Good morning. Appreciate the commentary on Derby 151 and expectations for this year to look like last year. Can you maybe talk a little bit about how you see that compositionally? Just want to be clear, with the recent macro noise, are you seeing any impact on international visitation? Thanks.

Bill Carstanjen (CEO)

Sure. Thanks for the question, Barry. I'll take those in reverse. No, we're not seeing any material change in international visitation. It's hard to roll that up right at the moment, but I suspect it might even be better. It certainly isn't worse as far as we're aware of right now. In general, with the Derby, the Derby is a very, very strong event that continues to grow and is getting stronger year to year in general. We had a significant uptick last year with Derby 150, as I commented in my remarks. That was a big step up in all of our financial metrics. I'm pleased that this year we're going to be comparable to that. I think our growth trajectory will continue from there.

In terms of the customers this year, I don't see any real concerns or weaknesses in the upper-tier seats that we have. I think it's pretty strong throughout. I would say over the last eight or nine weeks, I think in the lowest tier, which are not inexpensive tickets, call them $1,000-plus tickets, we've seen less demand for those than we've seen historically, but still strong demand. I think when you see this Derby this year, it'll look like every other Derby. It'll be a packed house.

Operator (participant)

Thank you. Our next question comes from the line of David Katz with Jefferies.

David Katz (Managing Director and Senior Equity Analyst)

Hi, good morning. Thanks for taking my question. I wanted to just continue down that same avenue a bit. If we start looking past this year's Derby and a little longer term, and given the announcement about some of the capital plans being temporarily on hold, how can you help us think about the sort of progression of growth or earnings power for the Derby as we look out over the next few years? Obviously, not looking for a firm guide, but some qualitative input on how we think it can grow and what the drivers of that are. Some macro assumption, I assume, is required there.

Bill Carstanjen (CEO)

Sure. That's a good question, David. Let me do the best I can to help you through it. First, you'll see next year the NBC contract kick in with those economics.

As I referenced a moment ago, seeing strong demand for Derby tickets, but not as much in the lower tier, especially with the new area that we've introduced, the Starting Gate Pavilion. There, I think what we've seen over the last number of years, when we introduce a new area, we've been able to go right to the price that we target as our long-term price and then grow off that. I think when we look at this year, we weren't able to take that same kind of price that we've taken in previous years where we go right to our three-year or at-maturity type price for a new area. I think as people experience the new section, I think you'll see more pricing power there. As we develop more experiences, you'll see us be able to take more price.

Part of our plan for the Derby, as it's always been, is to develop new areas, introduce people to those areas, and be able to yield price as they appreciate the value of the experience. That chain this year in 2025, in my opinion, took a little bit of a jolt because we didn't have the endless pool of demand that we've seen in prior years. I think this year we'll prove it. We'll prove it with the new area. When you get to 2026, I think you'll be able to see us take more price there. We'll continue that model. We see growth in wagering. We see growth in sponsorships. We see smart growth in ticketing based on improving the experiences and yielding those experiences over time. Nothing's changed. You'll see international improvement. Nothing's really changed in the formula.

I think what we ran into over the last eight or nine weeks was hesitancy. And boy, oh boy, I'm proud of our team for how we've adjusted for that. As we go into the 2026 Derby, we're prepared. We understand this market and will be going into the market functioning with an understanding of there was a hit to the confidence in the American consumer, which I think a lot of businesses are seeing, most businesses are seeing, and we'll adjust and perform accordingly.

Operator (participant)

Thank you. Our next question comes from the line of Jordan Bender with Citizens.

Jordan Bender (Senior Equity Research Analyst)

Good morning, everyone. Bill, the implementation of the electronic table games isn't a surprise, but does seem fairly significant from a positive perspective with the wheels now in motion. Can you maybe just expand on the size and scope of rolling those out, as well as are those going to be subject to a different tax rate across your various jurisdictions? I do just want to do one follow-up here. On the Derby, when you say comparable, are you relating that to revenue or EBITDA? Thank you.

Bill Carstanjen (CEO)

Sure. I'll take those in order. Increasingly, the challenge around HRM table games is not a technological one. It's really a regulatory challenge and a taxation challenge. I want to be candid, but also cautious, because those are the things we're solving for as we look at what jurisdictions we can roll these out in and how we do so. From a product perspective, from a technology challenge perspective, we've done a pretty good job of working with key suppliers to handle those.

This will be a process that we take slowly and conservatively to help regulators and our teams and our customers adapt and adopt to this new product. I ask that there's patience on that. It's a real great development for us. It's part of the underlying growth that you have in HRMs, the continuous constant improvement in product and capability. With that, it takes time to gain acceptance in the marketplace, both from a regulatory perspective and from a customer perspective. With respect to issues like taxation, there are lots of reasons, as you know, for variations in tax rates between table games and traditional slot-like games. That's something we have to take one at a time with legislators to make that case. Sorry, what was the other question again? Oh, Derby comparable. Yeah, sorry.

Yeah, when I speak of comparability, I speak of primarily adjusted EBITDA, but I think pretty consistently across all the major metrics, but certainly adjusted EBITDA. I think you'll see some higher and some lower, but across all of them, comparable. The most critical one, the ultimate one, is the economic performance as a whole, which is adjusted EBITDA. That's what we're talking about.

Operator (participant)

Thank you. Our next question comes from the line of Daniel Guglielmo with Capital One Securities.

Daniel Guglielmo (Consumer Equity Research Analyst)

Hi, everyone. Thank you for taking my question. I know that you all are very tactical about the growth projects and plans. They're always presented in a very organized way, and it shows how serious you all take it. With last night's announcement pausing much of the penciled spend for 2026 through 2028, can you just talk about any of the other growth opportunities you see at existing properties that maybe you're dusting off as this macro uncertainty plays out?

Bill Carstanjen (CEO)

Would you mind repeating that question? Because for some reason, I lost a key phrase of it. Would you mind just stating that again?

Daniel Guglielmo (Consumer Equity Research Analyst)

Yep. Sorry about that. Now, you guys are very tactical about the growth projects and plans and take it very serious. With last night's announcement pausing much of the penciled spend for 2026 to 2028, can you just talk about any other growth opportunities you see at kind of other existing properties that maybe you're dusting off as you kind of wait for the macro to play out?

Bill Carstanjen (CEO)

Yeah. First, I just want to remind everybody that we're pausing the big project at Churchill Downs Racetrack. Whenever we make investments around Churchill, we are tethered to the fact that we hold this event every year on the first Saturday in May. We make these decisions for the year. You do not delay or pause it for a month. You need to delay and pause it for a year because every year you have to be ready for the next Kentucky Derby. Starting with the Derby, I just want to emphasize this is a pause.

We want the macroeconomic environment to calm down a little bit because when it comes to cost on things like construction items, a lot of those things either come from China or the price in the market for those items are influenced by the supply of those items that come from China. We need some of that to calm down before we can undertake something like a $900 million project. The project, I'm convinced, will still make great sense. Whenever we do a project, we do it from the perspective of trying to get it to a single variable equation as much as we can, with that single variable being how many tickets are we going to sell and at what price point and over what period of time. We do not like to have the additional variable of what is this thing going to cost us to build.

That we like to manage and treat that as a certainty and not a variable. Right now, we can't do that on a major project because of the macro environment. Churchill Downs, I expect, hey, we'll pause this year, wait for the macro stuff to settle down, and then it's full speed ahead with whatever relevant and smart changes make sense based on events that we can't predict. I think across the company, you're seeing organic growth in many of our Kentucky properties. It's a shame there's hesitancy with the consumer right now in general, but we're growing through that. I mean, that's being absorbed and we're still growing in many of our properties. Kentucky shows a lot of strength. The Rose has a lot of strength to come. We have the Richmond project, the Henrico project, the continued expansion of the Rose.

Plus, we think we have our 5,000-unit limit, which we're not at yet. We're at about 4,450 or so. We'll look to push to that 5,000 and then beyond if we have the support of the legislature. I think New Hampshire is still something we're looking very hard in and that we believe on. We just had a bunch of technical problems we've needed to solve. I like that. Essentially, there are lots of ways we will be growing this company. I think all three segments that we have will show growth, and we have plenty of opportunities there. It's really just managing cost and keeping a close eye on our balance sheet and keeping a close eye on the macro environment to sequence what we want to do first.

Because while we all support and want to pursue maximum growth and generally do in an environment where there's uncertainty, particularly on the cost side, we want to be smart about how we do it so that our balance sheet remains what we think it should be and what the market thinks we should be at too.

Operator (participant)

Thank you. Our next question comes from the line of Jeff Stantial with Stifel.

Jeff Stantial (Managing Director of Equity Research)

Hey, good morning, Bill, Marcia. Thanks for taking our question. I wanted to ask on trends in Virginia for your existing assets, so excluding Dumfries. Now that you anniversary the removal of the skill games and have a bit of a cleaner read on, call it normalized growth, I'm curious just how you think about the overall maturity of those assets, or in other words, what ending of the ramp cycle that you think you might be in.

Obviously, it's an iterative process, and even your more mature HRM facilities are still growing. Just curious how you think about the opportunity that's still remaining to drive awareness and trialing for those assets. Thanks.

Bill Carstanjen (CEO)

Yeah, I think it was a really how do I feel about Virginia? I feel great about it. It's still very early in our history in Virginia and in the maturity of these assets in Virginia. I feel great on Virginia. This was a noisy quarter. We had some severe weather events. We also had this tax fluctuation. We have had also some softness, which I hope you appreciate. I'm very candid about it. I see that generally across the American economy. We'll handle it better than most.

We had some noise in Virginia, also some new competition that's been ramping up in the very south that affects our Vinton facility in particular. We have had some noise in Virginia this quarter, but be patient on that. This is a great market, and this is a great product that we have and a great development opportunity for our company. I am very, very bullish on Virginia. I think our team is doing an excellent job with respect to what is within their control. What is not in our control, we plan around to the best that we can. There is lots of strength there. I am actually quite pleased with how that team performed and how those assets performed through that quarter.

Operator (participant)

Thank you. Our next question comes from the line of Joseph Robert Stauff with Susquehanna.

Joseph Stauff (Senior Equity Research Analyst)

Thanks. Good morning, Bill, Marcia. Bill, I wanted to ask, we're always trying to kind of figure out different, certainly, parts of the consumer segment. You talked about the lower end. You did say on your best customers, or not using those words, but your rated customers, it's easier to manage. Is there a way that I can ask with respect to, is the higher end, say, flourishing and growing, and say, the more mid-grade sort of rated players, is that still growing? Can you give some commentary on that?

Bill Carstanjen (CEO)

Sure. Happy to. Take a market like Northern Virginia with the Rose. We opened that in early November of 2024. We haven't had an opportunity yet to build out that market to identify those customers and get them into the database and get an extended period of time where we can evaluate their behavior.

That is true of a lot of our markets, particularly on the HRM side. We have not had them open for five or ten years. We have not had a chance to fully build out the data on each of these, on the customers in each of these facilities. The more time we have to do that, the more we know whether they are at their ceiling or not. In general, we do not know that. In general, these are not mature properties on the HRM side, and we have not had time to fully develop them. That is a great thing as a company because it is lots of growth to come. Generally, I view that more as an opportunity than a hindrance.

Certainly, the more you can talk to your customers, if there is an economic downturn or some hesitancy in the market, the better off that you are because you have tools that allow you to incent customers and keep them engaged. That's one of the values of the casino space in general, or the gaming space in general, for those that are in your player databases. You know a lot about their behavior, their spend, their frequency, etc., and you know what they respond to in terms of incentives to make extra trips or to invest more. I think in general, that's a better area for us to manage. I would say also that I reached the C-suite. I was in the President and COO role back in 2009. This business holds up well in economic tumultuous times. We're not there yet.

This does not look like 2009. This is not what it was like at that time. I went through those experiences with gaming assets. We are prepared for that, and we will respond well to that. It starts with working with and incenting the customers that we know a lot about. In our more mature properties, we have a 360-degree view of them, and we have known them for a long time. In our less mature properties, we have the data that we have. I think the Rose is a nice example of one where we have not had time to build that yet. We are in the process of doing that. The more time we have, the better we will continue to perform.

Operator (participant)

Thank you. Our next question comes from the line of Ben Chaiken with Mizuho.

Ben Chaiken (Equity Analyst)

Hey, thanks for taking my question. Apologies if I missed it. Would love to see how you're thinking about capital allocation and specifically buybacks, given you essentially just freed up $900 million on the balance sheet. I guess, does that allow you to be more aggressive on repurchases, essentially? Thanks.

Bill Carstanjen (CEO)

Sure. I mean, it can. It's always a question of where best to place our capital. Sometimes that stock buyback's always a component, is healthy. We always are deciding where best to place our capital, where we think we can get the best return for our shareholders. Certainly, one tool of that is share buyback, and we've been taking advantage of that. I wouldn't comment on whether we're going to change what we're doing on that front. We're evaluating the current market like everybody else. Maybe there's an opportunity relatively in the near future where asset values go down and we see something we like.

There's lots of theoreticals of what we can do. But it's part of my job, Marcia's job, Bill Mudd's job. It's part of our jobs to decide where best to invest our company's capital. This is an interesting time to make those decisions, and some of the dynamics have changed. But I can't say I see a sea change right now that demands significantly different behavior. We're early. We're early, and we're not sure if this is a hiccup or something more permanent with our economy. Don't think it is, but we don't know for sure. We'll keep our powder and use it as we see appropriately.

Operator (participant)

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America.

Shaun Kelley (Managing Director and Senior Research Analyst)

Hi, good morning, everyone. Thank you for taking my question. Bill, in the prepared remarks, you talked a little bit about some changes you could make at the Derby for next year as you just kind of think about understanding the customer and what's kind of going on there a little bit in terms of that. It sounded a little maybe too late to make bigger pivots or changes this year. I was just wondering if you could discuss a little bit more kind of theoretically what some of those changes might look like. Is that just a difference in how you kind of tier products or pricing? Is there some other element to that, and does it even filter into how you kind of allocate capital there? Thanks.

Bill Carstanjen (CEO)

The Derby is 151 years old. I don't ever think it makes sense to make major material changes without lots of data. The thing about the Derby is we do have lots of data. What we do every year after the Derby is we get together with Bill Mudd's team, and we really go through what we think we learned, and we adjust accordingly. We constantly survey our customers. We look at not only their behavior, but what they say about our hospitality, about our amenities, and we adjust from there. I don't know that I think I don't think for a second there's been some sort of material sea change in what our customers are going to want or expect from us going forward with the Derby. Certainly, we'll be monitoring that, and we can adjust.

One thing they told us over the last number of years is that there was a segment that wanted even a higher hospitality experience, that wanted even more stratification from other areas. That is something we have responded to and worked hard to meet. That is things like the Paddock Club and the SI Club. Now the projects we are doing, refinishing the Finish Line Suites and updating the Mansion, those are some of our highest and best customers, and they tell us they want more. They want higher end. They want an even greater high-end experience. We respond to that. With respect to the group as a whole, the customer group as a whole, there are so many segments and so much stratification within that group, and we are trying to meet and address and evaluate all of that. We have been pretty good at that.

I think what I'll counsel the team for this year is let's just make sure that we aren't hearing trends versus one-year things versus long-year trends. I think this is an interesting year because there has been turmoil in the macroeconomic environment. We will just evaluate all the data that comes in after this year's Derby, and maybe it'll lead to further stratification on different segment classes, and maybe it won't. That is our job to evaluate what we think our customers want.

Operator (participant)

Thank you. Our next question comes from the line of Brandt Montour with Barclays.

Brandt Montour (Director and Equity Research Analyst)

Good morning, everybody. Thanks for taking my question, Bill and Marcia. I'll just stay on topic here. On the Derby comparability this year versus last year, I'm just trying to kind of think about the puts and takes. You have the Starting Gate Pavilion. You said you had strong pricing there.

That's a good guy. You've got presumed momentum, you'd think, from the Netflix series that just hit. Of course, you're comping up against the big 150. How much of it is just general conservatism that you're trying to convey here due to the macro hesitancy? How much of it is there some comparability issue with the 150 we should think about, or anything else I'm missing in that equation?

Bill Carstanjen (CEO)

What I'm trying to do is just be, which is being very candid. There have been some macroeconomic uncertainties in sort of the macro environment. I don't want to get on a phone call and not tell you that those aren't there. Those are real. All businesses are looking at that and trying to evaluate how they might impact their business.

From our perspective, I didn't see it have a particular long-term impact on the Kentucky Derby. I don't suspect that it has. I'm not particularly concerned about it, but I don't want to get on the phone and not acknowledge this macro environment that's going on. I think we've seen a trend over the last eight or nine weeks, which correlates perfectly with some of these trade war disputes and tariffs. We've seen a difference in the lower-end ticket sales for Derby. That's a fact. We've seen a difference, but the demand is so strong for the event that it's not going to show up when you see the crowds or anything like that. There has been a change, and I acknowledge that, but I don't think you'll see it affect our performance in any material way for the event.

As we build through it to the 2026 Derby, I feel great. I feel great about what comes for 2026. I think it's important on calls like this and having been through 2009 and having been through COVID to just be very candid and to let you know that whatever we see out there, we adjust, we plan for, we work through, and I think our results reflect that.

Operator (participant)

Thank you. I'm showing no further questions at this time. With that, I'll now hand the call back over to CEO Bill Carstanjen for any closing remarks.

Bill Carstanjen (CEO)

Thank you. As always, we appreciate your interest in our company and your investment in our company, and we'll be good stewards of your capital. We look forward to a week from this Saturday for the 151st Derby. We hope as many of you as possible join us in person or watch on TV, and more good things to come. Thanks, everybody.

Operator (participant)

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.