Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2019 Second Quarter's Earnings Conference Call. [Operator Instructions]As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury, Risk Management and Investor Relations.

You may begin..

Thank you. Good morning, and welcome to our second quarter 2019 earnings conference call. After the company's prepared remarks, we will open the call for your questions.The company's 2019 second 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 Investors 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 report 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 will present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and Form 10-Q are available on our website at churchilldownsincorporated.com.And now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen..

Thanks, Nick. 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 some thoughts on our second quarter performance and provide an update on some of our future plans.

Marcia will then provide additional details on the quarter and our capital plans. After she is finished, we will be happy to take your questions.First, big picture. The highlight of our second quarter is always the Kentucky Derby.

This year, despite unpleasant rainy weather, we delivered a record-setting Kentucky Derby week with respect to virtually every material metric we measure. I will talk more about Churchill Downs Racetrack in a minute.Also in the second quarter, Illinois passed an Expanded Gaming Bill that presents us with a number of strategic choices.

I will discuss what I can today.Our net revenues for the quarter were up 26% and adjusted EBITDA was up 23% over prior year. Those are meaningful increases, and there are a handful of key developments that drive the year-over-year change.

In January, we completed the acquisition of Presque Isle Downs & Casino, an excellent brick-and-mortar facility, which also provides us an opportunity to launch our retail BetAmerica Sportsbook at the Casino. Last week, we soft launched in the anticipation of our August 8 Grand Opening.

We will also launch our BetAmerica Online Sportsbook and iGaming platform across the entire Pennsylvania market later this year.Next, in early March, we completed our acquisition of approximately 61% of Rivers Casino in Des Plaines, Illinois, which is contributing strongly to our adjusted EBITDA.

Derby City Gaming, our historical racing machine facility in Louisville, also contributed to our company's net revenues and adjusted EBITDA growth, with a strong 42% margin.And finally, the Kentucky Derby continues to grow every year with respect to net revenues and adjusted EBITDA.

Let me provide some additional color on each of our operating segments.First, the Churchill Downs segment. Kentucky Derby week is the biggest single contributor to our company's adjusted EBITDA performance in the second quarter. Despite the weather, adjusted EBITDA was up over $5 million from the previous year's record.

We set records for net revenues, adjusted EBITDA and all sources wagering for the race itself as well as the entire Derby Day and for the full week.The average television viewership was up 10% over 2018, and our 25% share of active televisions was our best overnight number in nearly 30 years.

All of the important metrics we measure continue to trend nicely for our flagship event.

Looking forward, we remain focused on and committed to improving everything we do surrounding the Kentucky Derby.We think there are many avenues to grow, and our team is developing several growth initiatives that we will speak about publicly when our plans warrant disclosure.

We expect to have a couple of smaller projects to announce later this year that we think will contribute to our growth in 2020.In addition, we anticipate announcing, later this year, a significant construction project to build a hotel with suites facing the track, more permanent premium seating and a historical racing machine facility as well as other complementary amenities.

This project would be located around the first turn of the racetrack.The historical racing machine facility will be in addition to Derby City gaming. The machines that will be at Churchill Downs Racetrack are permitted under the current license issued by the Kentucky Horse Racing Commission.

Our objective is to have these new amenities opened by the 2021 Kentucky Derby.We have selected the architect for the project and are in the process of finalizing the design, cost estimates and selecting a construction company.

We will provide specifics, including design and cost estimates, on our third quarter earnings call.Derby City Gaming contributed $21.2 million of net revenues growth and $8.8 million of adjusted EBITDA growth in the second quarter.

We opened the facility in September of last year and are very pleased with the ramp-up, growth in the customer database and other key operational metrics.As a reminder, our capital investment in this facility was $65 million. We believe the property is a long way from maturity at this point.

As a result of the mandatory first contributions made by Derby City Gaming, Churchill Downs Racetrack paid a record $32 million of purses to winning horsemen during the Spring meet, an increase of $10 million over the prior year, which helped drive nearly a 9% increase in the number of horses per race and more than a $50 million increase in wagering handle over prior year.

Derby City Gaming is making a big difference, not only to Churchill Downs Racetrack, but to the health of Thoroughbred racing across Kentucky.Turning to our Online Wagering segment, which includes TwinSpires and our online Sports Betting and iGaming operations in New Jersey.

First, our TwinSpires business grew handle 3.7%, while outpacing the industry, overall, by 7%. TwinSpires had a great Derby recording over $30 million of handle on the Derby race itself, an increase of 23%.

For the entire Derby Day, TwinSpires handled $48.5 million, an increase of 20% over the prior year.The industry was impacted by several factors this quarter. First, there was no Triple Crown contender this year, and in fact, none of the first 3 finishers in the Kentucky Derby even raced in the Preakness.

This was the first time since 1996 that the Derby winner did not run in the Preakness, and it is unprecedented that none of the top finishers entered.

There were simply no riveting rivalry or anticipation heading into the Preakness, and consequently, the Belmont Stakes, which followed, also had little to build on.Finally, Santa Anita Park in California continued to experience, throughout its meet, a decline in field sizes, handle and wagering customers.

The meet simply never recovered from its safety controversy and field sizes and handle did not return to the previous year's level. Consequently, TwinSpires saw some decline in wagering on the specific track.TwinSpires performed quite well despite these headwinds.

In the third quarter, I'm pleased to note that the challenging trends that we noticed around the Triple Crown faded, and we have seen a strong TwinSpires performance to date and a healthier industry backdrop, although California racing still appears to be challenged.For the second quarter, total active players were up 18.8%.

The second quarter, and more specifically, the Triple Crown season, is always an excellent opportunity to cost-effectively reach new customers and to reengage with previous ones.

While the number of active players rose in the second quarter, the revenue per player declined by nearly 13%, reflecting the growth in newer players where higher margin, however, are, on average, less experienced and wager considerably less.Just as importantly, the cohorts of players we acquired around the Kentucky Derby this year did not wager over the rest of the Triple Crown season, consistent with the past, most likely as a result of the factors I just cited.Our team continues to believe there is real organic growth that TwinSpires can continue to harvest in the ADW space.

This is a very good business, and we remain very optimistic about its long-term growth.Adjusted EBITDA for the Online segment, as a whole, was down approximately $2.2 million in the second quarter, primarily because of the ramp-up of our BetAmerica Online Sports Betting and iGaming business in New Jersey.

Our BetAmerica Online platform is operational in New Jersey. We are focused on testing and improving our customer offerings and processes ahead of football season.

These learnings and improvements will make us better in the fall when we start to compete in earnest.There's also an economy of scale with respect to utilizing our iGaming team, processes and technology across different states as sports and online casino wagering is legalized in different markets.

All of these efficiencies and learnings will make our current and future operations, like in Pennsylvania, smarter and more competitive.Turning to the Gaming segment. In the second quarter, we generally experienced stable operating environments across our markets.

The growth in our Gaming segment was driven largely by our new acquisitions of Presque Isle and a 61% interest in the Rivers Des Plaines Casino. We're happy with both acquisitions.In particular, this is an important time for Rivers Casino and our company, as a whole, in Illinois.

Governor Pritzker signed the Illinois Gaming Expansion Bill in late June, which among other things, gives Rivers the right to expand from 1,200 gaming positions to 2,000, and gives Arlington Park the right to install up to 1,200 gaming positions.Rivers notified the Illinois Gaming Board last week that it intends to implement all 800 additional positions that are permitted.

This will require an upfront licensing fee of $24 million payable in 2020 as well as an additional reconciliation licensing fee after three years of operations.

To install the full 800 positions, Rivers will need to expand the existing building footprint, construct an extension of the parking garage and invest additional capital to support the expansion.However, Rivers can install approximately 200 to 250 additional positions quickly within its existing space if Rivers were to receive approval to do so from the Illinois Gaming Board.

Rivers will be working with the Illinois Gaming Board to ascertain what is permissible and to scope out the timing and full capital plan.Rivers expects to finance any expansion utilizing the available debt capacity at the Rivers level or through additional debt raised at the Rivers level.

Rivers will also pay the $10 million licensing fee in early 2020 to obtain an Illinois sports wagering license and will construct the sportsbook within its existing footprint.

All of this is very, very exciting.I know that some of you have questions with respect to any plans we have to install gaming positions at Arlington Park and Quad City Downs, in connection with the rights granted to those facilities under the new Illinois Gaming Expansion Bill.

We have until the end of August to submit to the state any request to add the gaming positions. We will certainly provide our full answer within that time frame, but will not do so today.I also know you have some questions regarding the sports wagering piece of the Illinois Gaming Expansion Bill.

We're very excited about the potential of the Illinois sports wagering market, which includes both online and mobile and the brick-and-mortar opportunity. We will participate in this new market through our 61% ownership of Rivers, and certainly, we have the option to do so separately through our horse racing licenses.

We will announce our plans soon.Finally, the Gaming Expansion Bill authorizes the creation of 6 new casinos in the state. We expect to participate in a bid for one of these casinos, and we'll reveal the details in good time.

Our company sees opportunities for growth in Illinois, and we look forward to sharing specific plans with you when we can responsibly do so.

Please stay tuned.In general, our casino properties are well positioned in their respective markets, and we have incremental growth already locked in for the segment, with the addition of Rivers Des Plaines, Presque Isle and Nemacolin.We now have over 11,000 slot machines and VLTs and approximately 200 table games in 8 states.

We have a long-held strategy of pursuing both acquisition and greenfield investments and gaming properties we believe will offer stable, predictable cash flows in diverse markets. We also like states that we believe may grant access to sports and online casino gaming to their brick-and-mortar casino license holders.Turning to our other investments.

We broke ground on our Oak Grove Kentucky historical racing machine facility, a $200 million project on April 9. The [indiscernible] track is taking shape, the horse ponds are being built and the underground utilities for the project are being installed.

We will conduct 12 harness racing days in October 2019 and plan to open the historical racing facility and hotel during the summer of 2020.Now I'd like to turn the call over to Marcia to provide some additional details on the first quarter. After that, we will answer any questions that you have. Thank you.

Marcia?.

Thanks, Bill, and good morning, everyone. As Bill said, I will provide some details on our second quarter 2019 financial results and then provide an update on our capital management plans.So turning to our second quarter 2019 results. We reported second quarter net revenue of $477 million, up $98 million or 26% compared to the prior year quarter.

Nearly 1/3 of this increase was driven by the $21 million of revenue added by Derby City Gaming, which opened in September 2018, as well as $8 million added primarily from the growth in ticket sales for reserve seating, sponsorship growth and record handle for the Kentucky Derby week.The remaining 2/3 of the increase was driven by revenue growth from our Gaming segment, including the addition of Presque Isle Downs & Casino in Erie, Pennsylvania in January of this year; the consolidation of Ocean Downs revenue as a result of acquiring 100% ownership of the property at the end of August last year; the assumption of the management agreement for Lady Luck Casino in Nemacolin in Farmington, Pennsylvania in March of this year; the strong performance of our Mississippi properties from the crossover traffic from a retail BetAmerica Sportsbook at these 2 locations; and the addition of 2 new Louisiana off-track betting and the video poker facilities as well as growth at our other properties in Louisiana.Our second quarter adjusted EBITDA was up $41 million or 23% compared to the prior year quarter.

Approximately $14 million of adjusted EBITDA growth for the second quarter was driven by our Churchill Downs segment, with nearly $9 million of the growth generated by Derby City Gaming with a nearly 42% margin.

The remaining $5 million of growth comes from Churchill Downs Racetrack, reflecting the strong performance of the Kentucky Derby Week.Approximately $30 million of adjusted EBITDA growth for the second quarter was generated by our Gaming segment.

Our equity investment in Rivers Des Plaines, the acquisition of Presque Isle and the addition of media management agreement for Nemacolin collectively contributed approximately $28 million of the increase.Our other gaming properties contributed a combined $2 million of growth in adjusted EBITDA, primarily from retail sports betting crossover traffic at our 2 Mississippi gaming properties and from solid operating performance in Miami Valley Gaming, Oxford and Ocean Downs, that was partially offset by a decrease at Calder from expenses related to the running of the first highlight events in May.We benefited from the acquisition of the remaining 37.5% ownership in Ocean Downs that was partially offset by the liquidation of Saratoga as part of the Ocean Downs/Saratoga Transaction in August 2018.Regarding our Online Wagering segment, as Bill discussed, we did have an increase in expenses related to the build-out of our BetAmerica Sportsbook and iGaming operations and the launch in New Jersey as well as an increase in marketing spend for our TwinSpires business that led to a slight decrease in adjusted EBITDA for the second quarter compared to the prior-year quarter.As you can see from the supplemental information in our press release, our same-store wholly owned casino margin was 34% for second quarter 2019, up 40 basis points from the prior year quarter.

Our same-store wholly owned casino margin excludes Ocean Downs, which we acquired 100% of in August 2018, as well as Presque Isle and Nemacolin management agreement that we acquired in the first quarter.

We believe this is an industry-leading regional casino margin.Our overall wholly owned casino margins, including Ocean Downs, Presque Isle and Nemacolin acquisitions, decreased by 4.5% in the second quarter 2019 compared to the prior year period due to the addition of Pennsylvania properties, which have lower margins as we anticipated when we purchased these properties due to the higher Pennsylvania gaming tax rates.Turning to net income.

Second quarter net income from continuing operations was $108 million compared to $103 million in the prior year quarter. There were 4 items that impacted the comparability of our second quarter net income from continuing operations. The first 2 relate to Midwest Gaming, the parent company of Rivers Casino Des Plaines.

Midwest Gaming recorded a noncash change in the fair value of their interest rate swaps that was reflected as a reduction in their net income.

Our 61% portion of this noncash change on an after-tax basis resulted in a $5.8 million reduction in our net income.Midwest Gaming also incurred incremental recapitalization and transaction costs, which resulted in a $600,000 reduction in our net income. Two additional items partially offset these amounts.

We incurred $1.1 million after-tax less in expenses related to transaction, pre-opening and other expenses in the second quarter compared to the prior year quarter, and we have $600,000 noncash tax benefit related to the remeasurement of our deferred tax liabilities as a result of some recently enacted lower state tax rates.Excluding these items, our second quarter net income from continuing operations grew $9.8 million or 9.3% compared to the prior year quarter.

This growth reflects a $16.7 million after-tax increase in income from operations and equity investments, which was partially offset by a $6.9 million of higher after-tax interest expense as a result of higher outstanding debt.Second quarter cash flow from operations was $144 million, up $38 million from the prior year quarter.

We benefited from significant growth in operating cash flow from our core operations and lower cash rate taxes in this quarter, compared to a year ago when we realized the gain on the Big Fish Games sale.Our effective tax rate from continuing operations for the first half of 2019 is approximately 27%, reflecting an increase in income attributable to higher tax rate states.

And therefore, we expect our full year effective income tax rate to trend closer to this rate through the balance of the year.And finally, regarding capital management.

We spent $12 million in maintenance capital in the second quarter, which was $6 million higher than the prior year quarter, primarily due to the timing of payments for slot capital purchases and one-time maintenance projects at Churchill Downs Racetrack.

Our estimated range for maintenance capital spending in 2019 is $45 million to $55 million.Regarding Project Capital, we spent $18 million in the second quarter, primarily on projects at 4 locations, finishing the Starting Gate Suites Rooftop, wall expansion and the infield gate at Churchill Downs Racetrack, building out the highlights facility at Calder, construction spend at Oak Grove and the purchase of additional machines at Derby City Gaming.Subject to finalization of our strategic plans regarding our expansion in Illinois, our project capital projections for 2019 have not changed from our estimated range of $110 million to $130 million.

As Bill discussed, the gaming expansion at Rivers will be financed fully by the Midwest Gaming entity.In second quarter, we repurchased $18 million of our stock, and we have $225 million of remaining capacity under our existing share repurchase program. Our net leverage on a reported basis at June 30 remains relatively low at 3.2x.

On a pro forma basis, it's 2.9x, which includes 12 months trailing adjusted EBITDA for the 3 acquisitions that were completed in the first quarter.We have significant capacity based on our cash on hand, unused credit facility and relatively low leverage to support continued growth through acquisitions and organic investments as well as our dividends and opportunistic share repurchases.With that, I will turn the call back over to Bill so that he can open the call for questions.

Bill?.

Thank you, Marcia. I think at this point, we're ready to take any questions that you may have, so fire away..

[Operator Instructions] Your first question comes from the line of David Katz with Jefferies..

I'm going to apologize just a bit because we have competing calls going on this morning. And Bill, I got on just as you were talking about the Rivers, and caught the very tail end of your comments.

So I'll apologize for that.But what are your immediate plans to expand that property? And is there any capital associated with that? Or is there ample room to do that? And any timing associated with that would be helpful also..

Absolutely, David. Let me recap that discussion. So Rivers has applied for the 800 additional positions that are permitted under the law.

I think we were the only casino in Illinois to actually apply at this time, but there are a handful of others that ask for an extension as they looked into their plans.So others may apply for additional positions as well. So we're going to have to pay the upfront licensing fee associated with those positions.

That will be $24 million that's payable in 2020. As we install the 800 positions, we're going to -- we're going to have to expand the facility.

Although 200 to 250 additional positions, we can fit within our existing footprint, subject to approval from the Illinois Gaming Board.So finalization of our plans is going to depend in part on discussions with the Illinois Gaming Board and what they permit, under what time frame. And there are full approval of our plans.

All of this will be financed at the JV level, at the Rivers level, and not on the Churchill Downs balance sheet.

It will involve an expansion, eventually, of the parking garage to support the additional customers that will be in the facility, and there will be an expansion of the gaming floor space to support the additional positions that we can't fit in just our existing footprint.So finalization of the capital plans isn't something we're prepared to announce right now because we're still sorting it out, and we'll still be discussing some of this with the Gaming Board.

So timing and full scope of the plan are still being sorted out, but more to come in the short term..

And you did indicate that you expect to bid for 1 of the 6 new licenses.

Is that something you expect to do independently as Churchill? Or could that involve a partner, or Rivers as a partner potentially?.

It's a fair question, and I never begrudge you asking questions or anyone else asking questions on the call. But I can't answer that question today..

Okay.

Is it fair to ask whether that's an open matter or a decided matter at this point?.

Well, I think we've proven as a company that we are willing to consider different structures, including structures involving partners. That's been good for us, and that's something we're always willing to consider, and we're also -- we've pursued projects under a variety of structures.

So anything's on the table, but we have very certain ideas on what we're going to do, but it's not something we can responsibly comment on today..

Understood. You also indicated that there may be some smaller projects that you'll discuss in time later this year.

Are those -- should we be potentially thinking about those as included in the Illinois discussion? Or are those outside of the Illinois, which is on the table, but it's a fairly big and active table at this point?.

Yes, the projects, the smaller projects I was referring to in my comments, relate to Churchill Downs Racetrack, and particularly around driving Derby performance. So when I made that comment, I wasn't referring to anything in Illinois.

The other subject that I did discuss in Illinois -- about Illinois was application for sports wagering license, which Rivers is going to do.

But when it comes to Arlington Park, that's something we're not announcing today because we're not prepared to announce our full scope of plans there, and we still have another 30 days or so under the language of the law before we need to make our announcements with respect to those issues..

And just one more on Illinois, if I may. The question comes up in our minds and investors' minds regularly about the prospects for opportunities in Illinois sliding out and things sort of hitting the timing benchmarks.

What's your perception of that based on what you've seen so far? We always want to reflect the potential for these kinds of opportunities taking longer than expected, particularly in Illinois..

Well, let me just make sure I understood the question. Do you mean the regulators extending dates under the bill or....

Yes..

I want to make sure I answer the question correctly.

Yes, I think Illinois is really a puzzle because for anybody involved in the jurisdiction, trying to figure out their plans, there are things you don't know like what your competitors are going to do, how many physicians they might apply for and precisely where some of these new casinos are going to go, particularly in the Chicago land market.

For example, the Downtown Chicago casino.So all of those are variables that impact any analysis that you want to do with respect to your own assets and your own opportunities. So I think, in fairness, as we've seen already, some people will ask for more time.

There were some casinos that asked for an extension of their 30-day window, under which to notify the Gaming Board of whether they wanted additional positions. There were some people that have already asked for additional time to complete their analysis.

So I think, in general, you might see some of that, you might see the legislature have a follow-up bill.There's all kinds of moving pieces that are hard to predict. And as a participant in a market you don't control.

So as you make plans in the market and as you try to think about capital and timing and the full scope of your plans, you have to make some assumptions on the market and timing as a whole.And so that's -- it's an interesting position to be in, and I relish it.

I welcome it, of course, when you're in circumstances like this, you want as much information as you possibly can have before you make a choice.

And when you're confident that you have as much as you're going to get before you make your choice, then you can go ahead and make your choice.But we, as a company, will be prepared to meet all deadlines as they're established under the law, and as they're set by the regulators.

Because those are the deadlines, we know for certain, and we can't count on them being moved. So all of our planning is built around a notification and the explanation as of the current deadlines..

Perfect. And if I can ask one detail, and then I'll step aside. The Derby City is ramping up really, really well. And I think in your commentary, you said that it's not mature yet. But we would consider the margin that you reported relatively high.

Were you referring in that comment to the revenue levels having more runway? Or are we just thinking about that, the profitability levels in the wrong context? And there's more headroom there..

Well, all of the above, and I would never count out Bill Mudd and Tim Bryant and the team from finding more efficiencies. Certainly, they can do that. But -- and I expect they will over time.

But I was primarily most excited about the opportunity to add new games, to add new suppliers and to just better develop the customer database as the product becomes more familiar and builds a good reputation in the current market..

Your next question comes from the line of Brian McGill with Telsey Advisory Group..

Good quarter and a helpful commentary there. So I just wanted to follow-up on David's question on Rivers. You had -- you said, obviously, 200 to 250 positions.

I guess my question is, with the change in tax rate on tables, do you consider the 200 to 250 to go put in more tables and try to drive more revenue on that piece of the business there?.

Well, Brian, that's a very fair question. But in the world I live in, where we're a member of a -- we're part of the JV, but even more importantly with that, we haven't discussed or finalized our plans with regulators.

I'm always very, very hesitant to offer too detailed a commentary on a call like this, absent the protocols, both formal and informal, they really govern how you behave in the industry.

So those aren't things that we have sorted out with the Illinois Gaming Board.So I don't want to comment further on exactly what we're going to do or what the mix is going to be between table games and slot machines.

But certainly, we're very aware of the mathematical reality of the different tax rates and how to factor that in and how to best maximize our profitability when we're limited by the number of positions we can add at any one time..

I guess then, one quick follow-up on that. As you kind of think about a master plan there and the location, obviously, near the airport.

Do you think about a longer-term plans for a hotel, possibly, at the property?.

Sure. I mean, it's -- we think about that and other things. To date, it's always been a property that's been capacity constrained in terms of number of positions. So adding amenities like hotels or whatnot, when you're already running, I think most people would agree at full capacity in terms of utilization of machinery.

But machines, it doesn't make a lot of sense.But as you get to add more machines and as the market matures and as there's more competition, some of those other amenities can help drive your bottom line, and you might have capacity in terms of utilization that can be soaked up by other amenities, bringing guests to the site and keeping them longer.

So in a new world, those type of amenities are something the JV will look at more seriously than they have in the past..

Just a couple quick ones. But I guess, in general, there's going to be a lot of -- a number of properties potentially for sale going forward with some of the consolidation in gaming. You've always been interested in the past in acquisitions, but you do have a lot on your plate in Illinois, and obviously, Kentucky.

Would you still be interested in that? Or are you all set at this point?.

You always -- it's always important to have a strategy and it's always important to be opportunistic. So Marcia and the team spends a lot of time thinking through all of the -- all the potential pathways in terms of our leverage and our capital availability, so we're not generally capital constrained.

And having been around for a while, like I've been, I've always -- always have a plan and always have enough dry powder to do and take advantage of opportunities that come up.So you don't have to worry about capacity constraint.

We're built to take advantage of opportunities as they come up, and we're not one to leave them unaddressed because we feel like we're working too hard or we don't have enough capacity to pick up a project.

Our eyes and ears are always open, and if there are opportunities that surface, we're going to take a serious look at them even though we're really busy doing other things at the same time..

Okay, good. I just wanted to turn to sports betting here. It seems like the early results are showing that the database for sports betting is proving to be pretty important and ramping the business.

From your perspective, I mean, how much do you think you're going to benefit from your database on the horse player side, given the crossover as you kind of launch in Pennsylvania than additional markets, longer term?.

I think something like our horse racing database is a nice tailwind. But it in and of itself doesn't define success. I also think -- I don't view it as a 100-yard dash. I think sports wagering is a marathon, and I think the market, as a whole, will learn a lot about cost per acquisition and lifetime value of customers.

And as we sort out the economics of sports wagering, which I think will work differently in different states because of tax rates and the demographics of different states and the wealth of different states.I think as we sort those things out, you'll see us refining our strategy and making changes. So we'll be very thoughtful and patient and careful.

But certainly, the fact that we have a healthy database from horse racing, that helps. But our ambitions are to be successful well beyond just trying to take advantage of current customers that we have in our databases..

Would you look at -- for acquisitions in that space, potentially?.

Sure, over time, if you look at how we've built our company, we try to do things really, really well, ourselves and we also look at what other people do. So certainly, we want to be successful as a company. We want to be a B2C operator in terms of online sports wagering and brick-and-mortar space sports wagering, and we want to be a B2C company.

We want to be a B2C operator.And we're committed to being successful at that, and that always involves, first and foremost, an appetite and capability of building the business organically. But it also involves keeping your eyes and ears open and using our balance sheet to acquire DNA and talent and EBITDA, if it makes sense to do so..

And last one for me.

Any update on where we stand with the Supreme Court case on historical racing?.

I don't have an update at this time. That's the case that continues to work its way through. And again, that case does not involve our particular machines. It involves, not even the question of the legality of pari-mutuel or historical racing as a former pari-mutuel wagering.

It involves whether those existing machines meet the definition of pari-mutuel wagering in the state..

Right. I think that's the important point, right.

The Supreme Court in Kentucky has already ruled that these games are legal, basically?.

Brian, they have. And this case is a subsequent case, examining whether another manufacturer's games meet the definition of pari-mutuel wagering under Kentucky law. So certainly, we pay attention to that case.

It's something we follow closely and watch as it's prudent to do, but it isn't directly applicable to what we were doing -- what we are doing at our facility with our games..

Your next question comes from the line of Dan Politzer with JPMorgan..

So Bill, I know you mentioned plans or preliminary plans for a hotel at Churchill Downs.

Can you just talk broadly how you're thinking about positioning the hotel, especially during Derby Week, as well as the remaining 51 weeks of the year?.

Sure, Dan. So first, we obviously have a tremendous opportunity to utilize a hotel and that infrastructure around the Derby, but really, our meet is a whole. Any time the Churchill Downs Racetrack is running is an opportunity to help fill the hotel. A big driver of the hotel will also be the attached historical racing machine facility.

As you're familiar, when you have an amenity like a hotel, you can keep guests longer and you can attract additional guests to the facility.So I think there are some confidence beyond just Derby. We have the confidence in the historical racing machine facility. We also are relatively close to the airport, just a couple of miles away.

We're close to the local university. But we're 3 or 4 miles from Downtown. So I do think there are some attributes of our location and of what we will construct that's going to give us a steady business.

But of course, the monetization around the Derby is a whole different scale because of the nature of that particular event.So it's an interesting model.

It's a little bit different model and a little bit more complicated to think through than, say, somebody that opens up a hotel next to the airport or somebody that opens up a hotel downtown without any particular singular event.

We have a couple of things that we view as opportunities in terms of driving a hotel that, not only contributes to what's around it in terms of the economics of the Derby and to the economics of the historical racing machine facility, but also, in and of itself, stands alone as an economically viable property the rest of the year..

Got it.

And the 1,000 additional HRMs that are associated with that license, is there flexibility there to maybe push that higher?.

There is. It's funny that, in some jurisdictions like Illinois, things are set. You can't have more than a certain position, but that's not -- other jurisdictions have different constructs.

In Kentucky, there isn't a limitation under law to the number of machines you deploy, but you do need to go to the Racing Commission and get permission to deploy those machines.We have not asked to deploy more than 2,000 machines. So not having asked the question, we can't responsibly tell you that we've been approved for more if we need them.

But we have a degree of confidence that, in Kentucky, the construct is a little bit different, and that's not a real limitation.

If there is a market for that machine, if we can demonstrate, we need more machines, it is our belief based on the discussions to date and how the law works in Kentucky that we can approach the regulator and request and receive more..

Understood. And on Derby City, margin came in pretty strong, and I think around 41%, 42%.

Where are you with the ramp of that property? And can you talk about some of the additional opportunities you see there?.

Well, our -- our biggest driver that we're excited about is the introduction of more gains with a different manufacturer. Derby City Gaming has been a real thrill for us and something we're really proud of our team for accomplishing. But right now, the entire floor is consumed by a single manufacturer.

So over time, we'd like to add some variety, and we think there'll be growth because with variety, we'll have a more interesting floor and a diverse floor, which should help us compete because there is competition across the river in the form of some of the casinos that are in Indiana.So I think a next step for us, an interesting step for us is when we can introduce more diversity to our floor.

But also, I think this is a time where we're still new to the market. We opened last September, so there's still plenty of customers that we haven't built a strong relationship with, that we don't know that are in this market that might have sampled us or might never have sampled us.

But we're still -- as we've seen in our other properties, it takes a few years before you start to feel confident that you've really reached the bulk of your potential market in your jurisdiction.So those two things, I think, are big drivers that we have to look forward to. And also, I mean, you can't argue with the 42% margin. It's great.

But it is a new team that's just started. So they'll get better at everything they do, from marketing to operations. They'll get better at everything they do over time as well..

And just one last one on Rivers. I know you talked a bit about the tax changes there.

So the lower table game tax rate, is there a sense of when this comes into effect? Or anything that needs to happen for that to take effect?.

Well, the lower tax rate takes effect when the first new casino, and I don't mean a racino, I don't mean one of the race tracks adding positions. But one of the -- when the first of the new 6 casinos in the market are in the jurisdiction opens, that's when the new tax rate takes effect..

Do you know if that -- and not trying to get to know [indiscernible], but it's like a temporary [indiscernible] that opens.

Is your understanding that you would still qualify for the lower dividends tax rate?.

Yes, that's my understanding. Having looked at these provisions in the law, that they don't draw a distinction between a temporary and a permanent. They just kind of tie it to the opening of one of these casinos. So I think there's a very credible argument that the law says this gets triggered with the temporary..

Your next question comes from the line of Joe Spak [ph] with Susquehanna..

I wanted to ask you a little bit about just kind of gross handle and the impact generally about -- obviously, Santa Anita and how it affects, basically, just gross handle, and then in particular, how it affects TwinSpires?.

Well, sure. Joe, First, welcome. We haven't spoken to you before, so it's, I guess, nice to chat with you and I appreciate your interest in our company. So TwinSpires takes other people's content. And what we bring to the equation are the customers. So generally, our model as -- from the perspective of operating TwinSpires, is we love content.

We want as much content as we can get our hands on, and we want that content to be as robust and as interesting and as healthy as possible. So how does it affect us from the perspective of TwinSpires?Well, if you see a track that is struggling with field sizes or with customer acceptance, well, our customers can feel that too.

It can make it less attractive. Now certainly, our customers also can play lots of different content.

So their wallet can shift to different tracks based on the competitive attractiveness of those tracks, and how much fun they are to wager on, or what they think the opportunities to win are.So it's not really linear because our customers will move their wallet around based on what track is most attractive to them.

But certainly, we want every track to be as healthy as possible. And certainly, Santa Anita is historically a very important track. The California tracks are important.

And West Coast customers have a previous position to the tracks that are closest to them.So when we see attractive significance like Santa Anita suffering, certainly, that's not a good thing, and it tangentially affects TwinSpires in the manner I just suggested because our customers are customers of that content, and that's how it can impact us.

It can -- as an industry, it can impact the industry in that sense.

It's a national industry where customers across the country can bet on anything within the country.So believe it or not, even though we have Churchill Downs Racetrack and Arlington Park and other race tracks, where we produce content, when we put on our TwinSpires hat, we don't think about it that way.

We don't think about our content competing against somebody else's content. What we think about is how much great content can we find out there so that we can offer that content to our customers because the more we offer to our customers that they like, the more they wager on TwinSpires, and consequently, the more money we make on TwinSpires..

It makes sense.

And as it relates to the West Coast and the normal season where all the races are out there, is it conceivable, basically, if -- again, the track remains softer just in terms of participation, number of races, et cetera, that maybe some of your southern based warmer weather tracks would benefit from increased participation? Or is that a less realistic assumption?.

I wish I were smarter than I am because, then I'd be able to factor logic through experience. What you said makes sense, but it's never been a linear industry. So I think customers do move their wallet based on what they see, but they're not completely unbiased.Some -- imagine a person that lives across the street from a California track.

That may be their touch point to the industry. So all I can -- would really say is the way we think about the world is we want major tracks to be as healthy as possible, and we don't want to rely on handle, just switching. As our customers move their handle and their wallet to different tracks as alternatives.

We want everybody to be as healthy as possible.So that's what we wish for.

But whatever happens, we're committed to offering our customers a great product, all the content that exists in the United States and worldwide that we can get our hands on, and we'll let them make the choice, and we'll keep going out and finding new customers and developing existing customers and the better customers, and we'll just roll with whatever the world brings us.

So I don't lose sleep over things like this, but I also don't say that it's completely predictable. It's just something we keep our eye on very closely, and we respond based on the data we see to run our business as best we can..

I understand. And then if I could, basically, just kind of one follow-up on your iSports and iCasino offering as well as physical books. It looks like your Mississippi properties, in particular, in the quarter, grew around about 5.5% just in terms of revenue year-over-year.

And if you can kind of discuss the availability of sports betting?And if that weren't available, how you thought the market for those properties would perform? And then any update on kind of timing for your Pennsylvania launch? I know -- I think, historically, you indicated second half of this year, and if you had refined that at all? I appreciate the -- taking the questions..

Sure.

So our experience with brick-and-mortar sports wagering, which we've been doing for a while in Mississippi, is that not only in and of itself is it at a very good thing, especially, if you run it efficiently, which we do primarily with self-service machines or exclusively with self-service machines in Pennsylvania, not only it's a good thing as a stand-alone business, we think our data demonstrates pretty clearly that it is also bringing people to our facility who then participate in our other products.So we think it is driving people that it improves table games, it improves slots, it improves the energy of the facility.

So it has an impact beyond the direct economics of the sports wagering itself.

So generally, when we get an opportunity going forward to deploy a sports book, like we have in Pennsylvania and in Mississippi, when we have the opportunity to deploy a sports book in our existing casino, we are 100% in on doing that.And now with respect to your question about the timing of Pennsylvania, I've been talking for a while, so I'm going to ask my colleague, Bill Mudd, to help walk us through that as I take a drink of water here for a second..

With respect to Pennsylvania, I can tell you, some of this is outside of our control, like GLI Certifications and approvals of both the technology and the licensing of our technology partner by the State of Pennsylvania. But I think right now, I think the kind of the best case time line is, we're looking at mid-October.

But certainly, sometime in the fourth quarter is when we expect to go live with our online offering in the State of Pennsylvania.And a lot of it also has to do with where you are in the queue, with getting approved by the regulators. So that's what our current plan is.

And of course, we did soft launch last week, and we're live right now in Pennsylvania for the retail piece of the business..

I'm showing no further question at this time. I would now like to turn the conference back to Bill Carstanjen..

Thank you. Great questions today. Thank you all for listening in on the call, and thanks for the questions. We appreciate your interest and support of our company, and we'll do our best to give you a good return on your invested capital with us. So thanks, everybody. Enjoy the rest of your summer..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect..