Churchill Downs Incorporated (CHDN) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights strong financial performance, especially in revenue growth and margins. The Q&A reveals optimism in strategic projects and M&A activity, despite some uncertainties in ETGs and illegal machines. The 7% dividend increase and tax benefits further enhance sentiment. Overall, positive elements outweigh concerns, suggesting a stock price rise.

Key Financial Performance

Net Revenue Record net revenue achieved in Q3 2025. No specific figures provided, but it was highlighted as a record-breaking quarter.

Adjusted EBITDA Record adjusted EBITDA achieved in Q3 2025. Specific growth percentages for segments were provided, such as a 25% increase in the Live and Historical Racing segment compared to the prior year.

Live and Historical Racing Segment Revenue Grew by 21% year-over-year in Q3 2025. Growth attributed to strong performance across Kentucky HRM properties and effective cost management.

Margins for Kentucky HRM Properties Increased by over 3 points compared to the prior year quarter, driven by growth and optimization of properties.

Virginia HRM Properties Margin Achieved a combined 51% margin during Q3 2025, which is considered best in class. Margins are sustainable due to scaling of Northern and Central Virginia properties.

Free Cash Flow Generated $166 million or $2.34 per share in Q3 2025, up 13% from the prior year quarter. Growth attributed to strong cash flow from businesses and share repurchases.

Dividend Board approved a 7% increase in dividend, marking the 15th consecutive year of increased dividends per share.

Federal Tax Impact New tax provisions will reduce cash taxes and increase free cash flow by $50 million to $60 million in both 2025 and 2026.

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Operating Highlights

Kentucky Derby Enhancements: Investments in premium experiences, such as the Starting Gate Pavilion and Courtyard, are expected to drive ticketing revenue growth. NBC broadcasting the Kentucky Oaks race in prime time is anticipated to increase engagement and wagering.

HRM Expansion: Opening of the eighth HRM venue in Calvert City, Kentucky, in Q1 2026. Expansion in Virginia with new venues and increased HRMs, including the Roseshire Gaming Parlor.

International Expansion: Expansion of the European and Middle Eastern road to the Kentucky Derby with new races in Dubai and Saudi Arabia.

Virginia Market Growth: Continued growth in HRM venues, including the completion of expansions and new openings, contributing to strong margins and customer engagement.

New Hampshire Market Entry: Acquisition of a 90% interest in the Casino Salem project, with plans for a permanent venue by 2027.

Record Financial Performance: Record net revenue and adjusted EBITDA in Q3 2025, driven by strong performance across segments.

Cost Management: Effective cost management contributed to margin improvements in regional gaming properties.

Capital Investments: Planned investments of $280M-$300M for the Victory Run project and $180M-$200M for the Casino Salem project.

Shareholder Returns: Increased dividend by 7% and repurchased over $50M in stock during Q3 2025.

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Risk or Challenges

Regulatory Risks: The company faces potential regulatory risks, particularly in the context of gaining necessary approvals for HRM-based electronic table games and other expansions. Delays or denials in regulatory approvals could impact growth plans.

Competition in Virginia: Increased competition in Virginia has impacted the performance of some HRM properties, such as Vinton and Hampton, which could affect revenue and margins in the region.

Construction and Capital Investment Risks: The company is undertaking significant capital investments, including the $280-$300 million Victory Run project and the $180-$200 million Casino Salem project. Delays, cost overruns, or disruptions during construction could adversely affect financial performance and timelines.

Economic Uncertainty: Economic conditions, such as inflation or changes in consumer spending, could impact visitation and spending at the company's properties, particularly in regional gaming and HRM venues.

Dependence on Key Events: The company heavily relies on the Kentucky Derby and Derby Week for significant revenue and adjusted EBITDA growth. Any disruptions to these events, such as weather or operational issues, could have a material impact on financial performance.

Supply Chain Challenges: Potential supply chain disruptions could affect the timely completion of ongoing construction projects and the availability of gaming equipment for new venues.

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Guidance & Outlook

Kentucky Derby Growth Projections: The company expects significant growth in ticketing revenue for Derby Week, driven by premium experiences and investments like the Starting Gate Pavilion and Courtyard. Adjusted EBITDA growth is anticipated from these initiatives. NBC's broadcast deal will add $10 million in adjusted EBITDA for 2026, with the Kentucky Oaks race being broadcast in prime time for the first time. Increased online sports wagering and international expansion, including new races in Dubai and Saudi Arabia, are expected to enhance engagement and wagering.

Capital Investments and Renovations: The company plans to invest $280-$300 million in the Victory Run structure, to be completed by 2028, with interim upgrades for the 2027 Derby. Renovations of the Finish Line Suites and The Mansion are on track for the 2026 Derby. These investments aim to enhance guest experiences and deliver long-term adjusted EBITDA growth.

HRM Venue Expansion: The company is on track to open its eighth HRM venue in Calvert City, Kentucky, in Q1 2026. In Virginia, expansions include the Richmond HRM venue and the new Roseshire Gaming Parlor. The company plans to develop a permanent gaming facility in Salem, New Hampshire, by 2027, with an investment of $180-$200 million. A new third-party HRM property in Wichita, Kansas, is expected to open in December 2025.

Exacta Technology Growth: The company anticipates growth in its Exacta business through HRM operations in Kentucky, Virginia, and third-party relationships in New Hampshire and Wyoming. Expansion into Kansas is expected to further support this growth.

Financial Projections and Capital Management: The company projects $75-$85 million in maintenance capital and $200-$240 million in project capital for 2025. For 2026, project capital is expected to be $160-$200 million. Free cash flow is projected to increase by $50-$60 million in both 2025 and 2026 due to favorable tax changes. Bank covenant leverage is expected to drop below 4x in 2026.

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Shareholder Return Plan

Dividend Increase: The Board of Directors approved a 7% increase in the dividend, which will be paid on January 6, 2026, to shareholders of record on December 5, 2025. This marks the 15th consecutive year of increased dividends per share for the company.

Share Repurchase Program: The company repurchased over $50 million of its stock in the third quarter under its share repurchase program.

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Key Q&A

Q:Can you talk more about your ROI targets for Victory Run, how and when you think you'll hit them? And maybe if there are any lessons learned you can apply from the Starting Gate Pavilion introduction at Derby 151?

A:The target is a 20% unlevered IRR, focused on year 3. It takes time to introduce the new asset, get trial, and generate word of mouth, so the focus is on a 3-year window.

Q:Have you done any sort of penciling around what the prospective opportunity could be for ETGs in Kentucky or other markets?

A:ETGs represent an important opportunity in states like Virginia and Kentucky, as they don't have table games. It's a technology and regulatory journey, and while it's a material focus, no specific predictions or news were provided.

Q:How are you thinking about leverage and the balance between share repurchase and the money that will be spent on the projects?

A:The company is committed to bringing leverage below 4x next year. They balance capital investments with a 7% annual dividend growth and strategic share repurchases.

Q:What are some of the incremental mid- to long-term benefits of owning the properties outright? Do you think the market is giving you enough credit for the full ownership piece right now?

A:Owning real estate provides stability and predictability. The company believes it doesn't fully get credit for this in its stock, but emphasizes its stable and well-executed strategy.

Q:How would you describe the level of activity or interest in the M&A environment?

A:There has been a recent pickup in activity, particularly in the brick-and-mortar space. The company remains a flexible participant, both as an acquirer and seller, and monitors market trends closely.

Q:Is the M&A activity in New Hampshire more of a one-off or could we see more activity in this region?

A:The company sees New Hampshire as a strong market and doubled down on it with the Salem acquisition. However, decisions are based on demographics, pricing, and technology rather than a specific regional philosophy.

Q:What inning do you think you're in with respect to substantial projects like the First Turn or the Victory Run? Is the current product diversified enough to cover the full consumer life cycle?

A:The company believes they are in the third inning for the Derby, with significant opportunities ahead. Victory Run increases seating capacity by 2% and focuses on enhancing the quality of experience. Future projects will follow after Victory Run is completed.

Q:How should we think about the margin ramp for The Rose and any concerns around the government shutdown in the DC area?

A:The Rose is progressing well, with expectations of improving margins as awareness grows. The government shutdown discussions have not had a discernible impact due to the large market size and demographics.

Q:What are your thoughts on the emerging landscape of prediction markets and their potential implications for the Derby?

A:Wagering on horse racing is governed by the Interstate Horseracing Act, which requires contracts with content providers. The company has no deals with prediction markets and plans to ensure compliance with federal law.

Q:What is the status of shutting down illegal machines in Virginia?

A:Progress has been made, but enforcement is ongoing due to manufacturers introducing variations of games. Illegal machines are not considered a material issue currently, but vigilance and communication with law enforcement are necessary.

Q:Review of Unclear Management Responses

A:Management avoided giving direct answers or lacked clarity on the following: 1. Specific predictions or news regarding ETGs, citing regulatory and technological uncertainties. 2. The exact impact of shutting down illegal machines in Virginia, describing it as a 'whack-a-mole' process without providing concrete data.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

CHDN Transcript

Churchill Downs Incorporated (CHDN) Q3 2025 Earnings Call Transcript

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The earnings call highlights strong financial performance with significant free cash flow and a robust share repurchase program. Despite some challenges, such as decreased EBITDA in certain segments, management's optimistic guidance, strategic investments, and growth potential in key markets like Kentucky and Virginia positively impact sentiment. The Q&A section reinforces this with positive expectations for pricing, market expansion, and strategic initiatives. Overall, the company's proactive strategies and shareholder-friendly actions suggest a positive stock price movement in the short term.

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The earnings call reflects strong financial performance with record EBITDA and significant shareholder returns through dividends and share repurchases. Despite some challenges, such as weather impacts and macroeconomic uncertainties, the company maintains growth in key areas and offers optimistic guidance for future events like the Derby. The Q&A reveals some hesitancy in lower-tier markets but overall strong demand and growth opportunities. The combination of strong financial metrics, optimistic future outlook, and shareholder-friendly actions suggests a positive sentiment, likely leading to a stock price increase.

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The earnings call highlights record revenue and EBITDA, strong financial performance in Virginia, and increased dividends, indicating robust financial health. The Q&A reveals optimism about Virginia's growth and successful HRM deployments, despite some vague responses. The dividend increase and strong cash flow further bolster positive sentiment. Overall, the company's achievements and strategic plans suggest a likely stock price increase in the short term.

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