Churchill Downs Inc

NASDAQ:CHDN

Earnings Call Transcript 2023-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2023 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. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Phil Forbis, Vice President, Financial Planning and Analysis.

[Phil Forbis, Vice President, Financial Planning and Analysis]

Thank you, Andrew. Good morning and welcome to our first quarter 2023 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2023 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 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 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 will 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.

And now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

[Bill Carstanjen, Chief Executive Officer]

Thanks, Phil. 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 high-level thoughts on several strategic topics, and then Marcia will walk through our results and provide an update on our capital management strategy. After she finishes, we will take your questions.

We delivered record first quarter net revenue of $560 million and record adjusted EBITDA of $223 million. We were pleased with the performance of all of our segments and our expectations remain high for the rest of the year. Let's start with our historical racing machines or HRM initiatives. HRMs are a key strategic focus over the next five to 10 years for our company as we seek to expand our existing footprint. We have developed high growth, high margin investments in this segment with excellent returns on capital, and we will seek to build on that track record in Kentucky, Virginia, New Hampshire, Louisiana, and perhaps beyond.

We are continuing to build on the success of our HRM operations in Kentucky, which began with our inaugural property opening in 2018, Derby City Gaming in suburban Louisville. Our most recent gaming floor expansion there is now complete and the new hotel is on track to open by the end of the second quarter. We have been very happy with how the property has been performing through the significant disruption across the site caused by the floor expansion and the construction of the hotel.

Our team is also working hard to prepare for the opening of Derby City Gaming downtown, our HRM entertainment venue in downtown Louisville set to open in the fourth quarter of 2023. In western Kentucky, we have shifted our plans for our Owensboro HRM extension and are evaluating new locations that will better meet our long-term growth profile and better enable us to create a premier entertainment destination for all of the residents of the region.

We are disciplined in our decisions regarding our long-term capital investments, and sometimes that means taking additional time to determine the final location that will best meet our long-term return expectations, and that is optimal for the communities in which we choose to invest significant time and capital to build long-term relationships. We will share more on these plans on our next earnings call and are very optimistic. We are on a better path now.

We have made numerous improvements at Ellis Park to enhance the racing experience for our customers and improve safety and environmental compliance at the property. We will kick off the Ellis Park Race meet on Friday, July 7th after the end of the Churchill Downs Spring meet. The purse money has increased approximately 50% to over $15 million, and we have added four new states races. We have more work to do to make this a great Kentucky racetrack and are committed to doing so. We will save any material investment in the HRM portion of Ellis Park until we complete and then evaluate its HRM extension in Owensboro to ensure these properties complement each other and are as efficient as possible from a customer offering and operational perspective.

The area around Owensboro is the larger and more economically attractive market, and thus our focus will be on that first from an HRM perspective. As a reminder, we also have the Oak Grove HRM extension in our portfolio of potential longer term development projects. We are focused on our other Kentucky projects for now. HRM Entertainment facilities in Kentucky will soon benefit from the passage in the first quarter of legislation allowing retail sports and online betting across the Commonwealth.

We will look to go live in our retail locations once regulators have promulgated all of the required regulations and operational standards. Currently, we expect this will happen in the second half of 2023. We will be permitted to have up to nine retail locations and up to eight online sports betting licenses that we can potentially monetize. Each of our racetracks and HRM facilities in Kentucky already have a sports bar that will be enhanced with sports betting kiosks so that our customers can easily and conveniently place their retail sports bets.

We believe our retail sports books help to drive additional traffic to our properties in other states and will further help to grow our HRM properties across Kentucky. With respect to online wagering, we have entered into contracts to provide certain online wagering platforms, including FanDuel access to the Kentucky market and connection with which we receive a revenue stream. We also expect to enter into other market access arrangements in the near future.

Moving to Virginia, our six HRM properties are performing as we expected, and in some cases are exceeding our expectations. Regarding new projects, we are constructing the Rosie's Emporia HRM venue in the southern portion of the state near the Virginia and North Carolina border right off of Interstate 95. This is a 150 unit facility that remains on track to be completed in the third quarter of 2023.

In addition, we are building a significantly larger HRM facility in Dumfries, which is located in Northern Virginia, approximately 30 miles south of Washington, D.C. also directly off of Interstate 95. This is an extremely important project because of its proximity to the significant population in Northern Virginia Interstate 95 corridor.

The construction is proceeding according to our schedule and we expect the first phase of the project with 1,150 HRMs and an approximately 100 room hotel to be open in the second quarter of 2024. We have the right under Virginia law to open up to three additional HRM facilities with the number of HRM machines permissible in each a function of the size and location of the community, subject to an overall cap of 5,000 machines across all of our facilities in the state.

We are working towards a goal of conducting HRM related referendums in two new communities this coming fall. We are excited about these projects and we'll share more details on our next earnings call. We will also discuss in more detail on the next call, our plans with respect to our 50/50 partnership with Urban One to pursue a full Class 3 casino in the city of Richmond, Virginia. This is a separate opportunity from our HRM operations in the state.

We are working through the required City of Richmond approvals to conduct a referendum this fall to obtain the authorization necessary to proceed with the construction of this project, which would include a casino, hotel, and event center. Also, we are making solid progress on Salem, New Hampshire HRM site plans, and we'll share more details on future earnings calls.

Regarding our online operations, TwinSpires had a nice first quarter, although our top line declined primarily because of our decision to exit the direct online sports and casino business in 2022, our bottom line improved significantly. We also were very encouraged to see early benefits of our decision to launch in the first quarter of our services to deliver racing content to FanDuel and DraftKings.

We expect to see our B2B business accelerate in the second quarter with the Kentucky Derby. And finally, regarding our preparations for the upcoming 149th running of the Kentucky Derby a week from this Saturday, we have made fantastic progress on our projects at Churchill Downs racetrack. Our new first turn experience is complete. This is a one-of-a-kind entertainment venue that is itself the size of a small stadium with 5,300 covered stadium seats and an additional 2,000 reserved indoor dining seats with exclusive views of the horses and the racetrack from the rail on the first turn. All of the covered stadium seats are sold, and more than three quarters of the indoor reserve seats are also sold with the remainder selling quickly each day.

Overall, we are very excited about our progress towards this year's Kentucky Derby. Based on advanced reserve ticket sales and other metrics available at this time, we expect to deliver record Derby Week results. We will issue a press release after the Derby with all of the details. While our focus is on hosting a special Kentucky Derby 149, we are also kicking off our year long celebration in preparation for the 150th Kentucky Derby in May of 2024. The 150th Run for the Roses will be a remarkable milestone for the longest continually run sporting event in the United States.

The Derby has run annually since 1875 through World Wars Recessions and even pandemics. We have announced a number of new guest experiences and ticket offerings that will be available for this very special Kentucky Derby. In fact, early ticket sales are already underway and selling nicely. One of the most exciting developments will be the completion of the Paddock Project with breathtaking and unrestricted views of the TwinSpires, along with spectacular new seating and dining experiences. This project will reinvent Churchill Downs racetrack and create unique once in a lifetime experiences that will surpass anything like it anywhere in the United States.

We remain on course to complete the Paddock reimagination in time for the 150th Derby. Our capital projects to grow the scale and profitability of the Kentucky Derby will be supported by our continued ramp up of sales efforts across the country, as well as a more focused and strategic sales process in numerous foreign markets.

We look forward to seeing you at the 149th Kentucky Derby on May 6th of this year. And if you cannot join us in person, please be sure to watch the NBC broadcast beginning at noon Eastern Time. In summary, the first quarter was another great quarter for us with record financial results.

We have positioned our company for strong growth for years to come with the ongoing investments in the Kentucky Derby, the acquisition of the P2E assets, including the existing operational properties and our Virginia Growth Projects, our Terra Haute Project in Indiana, our Salem, New Hampshire HRM Project, and other Kentucky HRM projects, and the pending acquisition of Exacta Systems, which will greatly improve our Virginia, New Hampshire and Kentucky capabilities, all of which we expect to drive a material increase in adjusted EBITDA and free cash flow in the coming years.

Our overarching objective is to pursue what we have demonstrated we are good at, growing the Kentucky Derby, developing greenfield and organic opportunities, as well as executing strategic acquisitions that fit our profile. We do this while maintaining one of the best balance sheets in the industry.

With that, I'll turn the call over to Marcia, and then we will take your questions. Marcia?

[Marcia Dall, Chief Financial Officer]

Thanks, Bill, and good morning everyone. As Bill shared, we delivered record first quarter revenue and adjusted EBITDA. I'll start this morning with a few insights on these financial results and then provide an update on capital management. First, all of our HRM properties made strong contributions to our financial results in first quarter. Our Oak Grove HRM facility continued to penetrate the southwestern Kentucky and Nashville, Tennessee markets.

We also had nice growth in our Northern Kentucky market as Turfway Park and Newport Gaming continue to improve and expand their market presence during first quarter. Our Virginia properties contributed $98 million of net revenue and $47 million of adjusted EBITDA in the first quarter. This represents a 48% margin collectively for these properties. This performance is prior to any material improvements to the gaming floors at these properties that we expect to realize in the future. Second, regarding our TwinSpires horse racing business, our overall handle was higher in the first quarter than the prior year.

We did generate lower adjusted EBIDA from our online TwinSpires horse racing business as a result of higher content-related expenses and slightly higher ADW taxes in certain jurisdictions. Despite a slight decline in adjusted EBITDA, we're pleased with the strong margins that this business delivered in first quarter. The pivot out of the online sports and casino business provided a nice uplift to our adjusted EBITDA and margins in first quarter compared to the prior year quarter.

We believe the B2B expansion related to our horse racing technology and related services will provide a further enhancement to our adjusted EBITDA and margins in the coming quarters. Regarding our gaming business, we rely significant contributions from the addition of the New York and Iowa properties acquired in the P2E transaction. Our equity investments in Rivers and Miami Valley gaming also delivered strong performances in first quarter compared to the prior year.

Our existing regional gaming properties in Maine, Maryland, Louisiana, and our Harlow’s property in Mississippi collectively delivered a small increase in adjusted EBITDA compared to the prior year quarter. That was more than offset by declines that are Pennsylvania and Florida properties and our Riverwalk property in Mississippi.

Our first quarter same-store wholly-owned casino margins were down less than one point compared to the prior same period in 2022, primarily reflecting the margin pressure from the decline in adjusted EBITDA from our Pennsylvania properties.

Overall, we are very pleased with the results that our team has delivered in the first quarter. And we believe we are very well positioned to continue to grow through the remainder of 2023.

Turning to capital management. We generated $204 million of free cash flow in the first quarter, up $79 million over the prior-year, primarily as a result of the strong cash flow generated from our businesses. Regarding maintenance capital, we spent $12 million in the first quarter and continue to expect to spend $75 million to $95 million in total for the year.

Regarding project capital, we spent $123 million in the first quarter and continue to expect to spend between $575 million and $675 million in total for the year. At the end of first quarter, our bank covenant net leverage was 3.9 times. Based on our planned acquisition of Exacta and our capital investments, we expect our bank covenant net leverage to remain in the four times range over the coming year. We then expect our bank covenant net leverages to decline in 2024 and 2025 as our ongoing investments in all of our new projects come online.

From a financing perspective, at the end of February, we completed a $500 million Term Loan A financing. We utilized the proceeds from the Term Loan A financing to fully repay the outstanding balance on our credit facility. We also completed a $600 million bond offering this past week. We used the portion of the proceeds from this bond offering to repay our Term Loan B that would’ve matured in December, 2024. The remainder of the proceeds will be used for capital projects or for the Exacta transaction.

And lastly, on Tuesday of this week, our Board approved a two for one stock split and a corresponding proportionate increase to the authorized shares of the company. The stock split reflects their belief and ours and the long-term growth potential of our company.

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

[Phil Forbis, Vice President, Financial Planning and Analysis]

Thank you, Marcia. At this point, we’d like to take any questions that you have for us.

[Operator]

[Operator Instructions] Our first question comes from the line of Barry Jonas with Truist.

[Barry Jonas, Truist]

Hey, guys, good morning. Thanks for taking my questions. Now that you’ve had some time owning the P2E assets, curious what you see as the upside case, and how that maybe compares to when you initially underwrote the deal? Thanks.

[Bill Carstanjen, Chief Executive Officer]

Thanks, Barry. So far we’ve been really, really pleased with the P2E assets. One of our thesis in investing to acquire P2E was that these properties were still on the early stages of their development and hadn’t reached maturity. And in general we see that. So we are also, of course, really excited about the growth projects that hadn’t been executed on, and that’s a big part of what a portion of our team spends our time on. But for the existing projects the existing properties that were already there and operational that’s been a breath of fresh air that in generally they’ve been quite strong and we’re quite optimistic looking forward.

[Barry Jonas, Truist]

Yes. Got it. And then just a follow up. There’s been more concern, I think, across the market on the health of the consumer. What are you guys seeing across your businesses? And maybe what options do you have to best respond if you did see things deteriorate?

[Bill Carstanjen, Chief Executive Officer]

I think in the first quarter, we were pleased with the consumer trends that we saw across our properties. So, we have to look at the results as they come in. We read everything everybody else does as well. But so far they’ve been pretty strong and I feel pretty good in general. Some markets are better than others, but across a portfolio that is as broad and as diverse as ours, I don’t have any yellow or red flags to raise with you at this time. If we do see in the future, if we do see economic headwinds, so external economic headwinds in the economy, we’ll adjust our marketing and our expense structure to deal with it appropriately. Because we’re always going to be focused on our margins. But right now, we’re not really doing that because there isn’t enough trend data to suggest that we need to.

[Barry Jonas, Truist]

That’s really helpful. Thank you so much.

[Bill Carstanjen, Chief Executive Officer]

Thanks, Barry.

[Operator]

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

[David Katz, Jefferies]

Hi. Good morning everyone. I wanted to go back to an issue and I apologize, if this sort of came out in the remarks, but respect to Kentucky sports betting, have you talked about what the opportunities are and sort of what the magnitude of that is and what your strategies are for activating that once it goes live?

[Bill Carstanjen, Chief Executive Officer]

Hi, David. Good morning. Yes. We can put these in our racetracks and also our HRM extensions. So, we will have nine opportunities over time to deploy retail sports betting. We do this in other markets. We do this in several other markets. So, we have an approach. We find that that it does drive traffic to our properties, that it does help the overall energy and flow of people through our properties. And so it’s a really good thing. So we will follow the strategies. We’ve followed in our other markets around our sports bars. We actually designed our facilities thinking that this may happen in Kentucky at some point. So we’ve already built the sports bars and we’ll put in the kiosks refine the customer offering.

And it’ll be a nice bonus. It’s not material to the scale of the company or anything like that. But it’ll help each of these HRM properties not only from the contribution of the sports wagering piece, but from the additional traffic that it drives to the rest of the facility.

[David Katz, Jefferies]

Understood. And on the subject of HRM facilities, one of the issues that comes up regularly with investors is the degree to which those HRM facilities can perform, right? Whether an HRM machine, how it compares with a traditional regular slot machine, whether there’s any noticeable difference in consumer spend or behaviors or any of those sorts of things, or is it really just the same?

[Bill Carstanjen, Chief Executive Officer]

I think if you see the margins we drive from these facilities and the locations of some of them with the competition of other types of gaming on our – in our surrounding borders, you can see it’s a very competitive project – product. So if you think about game titles, it’s a process constantly of getting more game titles from the traditional Class 3 manufacturers converted to HRMs. So it’s a constant journey to make the product better. And I would tell you that I think there are ways to further improve it most with concentrated around the variety of product, getting more games available to us.

So as a business model, we’re very, very pleased and excited about HRMs. And as a company that’s driven first and foremost by margins, I think you see the evidence of that and see why we’re excited about it. But part of reaching maturity eventually property-by-property, and I am of the view that we haven’t reached maturity at any of our HRM properties. Part of reaching maturity over time is constantly improving, working with the manufacturers to improve the quality and depth of products available using the HRM model.

So more to come, more to come. And I think that’s part of the reason I’m excited about the exact acquisition as well, when we are able to close that over the rest of the year, I think that just helps us with our toolkit to work with manufacturers to make this product as competitive as we can with Class 3, but we’re not where we’re going to be over the long term yet.

[David Katz, Jefferies]

Okay. Appreciate it. Thank you very much.

[Bill Carstanjen, Chief Executive Officer]

Thanks, David.

[Operator]

Thank you. And our next question comes from the line of Dan Politzer with Wells Fargo.

[Dan Politzer, Wells Fargo]

Hey, good morning everyone, and thanks for taking my questions. First I wanted – I’m going touch on the Kentucky the gray market, recently there was some legislation there that, that cracked down on this. Can you maybe talk about the size of what the gray market was in Kentucky, maybe the properties that you could see the most uplift or that had – you’d seen the most drag there from this? And then just any way or hint in how to think about or quantify this impact of this more restrictive regulation. Thanks.

[Bill Carstanjen, Chief Executive Officer]

Sure, Dan. Happy to do that. So for everyone else on the call, during the first quarter, the Kentucky legislature passed new legislation that was signed by the Governor banning the category of gaming machines that sort of euphemistically we refer to as gray games. These were part of – these were popping up in bars and taverns and restaurants and convenience stores across the state. There wasn’t a fully accurate count of how many of these were, but I think it’s fair to say there were several times the number of these actual, compared to actual HRM machines and licensed authorized facilities like the ones we run.

So this was a circumstance where these machines were multiplying rapidly and had gained an unfortunate foothold in the state. They were unauthorized, they were untaxed, they were unregulated, they were not fully understood, because there were no reporting on them. But it was the collective view of many, including us, including the legislature that they were really harming and multiplying across the state. So the state has taken steps through legislation to ban them.

The law takes effect in the late summer. That’s just a function of how Kentucky law works. So the law isn’t being implemented yet. It doesn’t get implemented until the late summer. And we think given the – while not precisely counted clearly huge number of these machines all around us, that it’s likely to have a positive impact when they go away on legal authorized gaming. But just as importantly, these were terrible for our industry. They were unauthorized, unregulated and unmanaged by the state, and that’s dangerous for a product like gaming. So, we’re happy to see them go. We expect that it’ll improve all facilities out there that are licensed and regulated like ours. But to precisely quantify it, it’s really hard because there was never an accurate count of the number of these things that were out there.

[Dan Politzer, Wells Fargo]

Got it. And then just to follow up on Kentucky and HRMs. The Turfway Park, I think it’s obviously a newer property, it’s still ramping. Can you talk about maybe some of the puts and takes in that Northern Kentucky market, any cannibalization between that and Newport and how you’re – you look to grow that as well as the margin profile over time. Any insights into how to think about that relative to a Derby City or an Oak Grove? Thanks.

[Bill Carstanjen, Chief Executive Officer]

Sure. That’s a really good series of questions. I’ll unpack that one at a time. So the Northern Kentucky market is the Cincinnati region. And in that region you have Ohio, Indiana, and Kentucky all coming to meet with borders. So Indiana and Ohio has had gaming in that market for many years. So it was a developed competitive market. We bring the advantage of being the only gaming on our side of the Ohio River, but it is a very competitive developed market. So it started with Newport for us followed by building out the full Turfway Park and every quarter’s better than the last. And I thought we showed great, great improvement between our opening last year and the first quarter of this year, I think we were very, very pleased with the path we’re on towards improvement, and we’re on a path, I think you’ll see improvement over the next several quarters.

And we look at Turfway and Newport as one combined product offering. So, I don’t really have anything material to say or any material concerns about the interplay between people that go to Newport versus Turfway. It’s about reaching these customers in the market and convincing them they have an alternative to driving over these bridges to Indiana and Ohio. So more to come on that, but the market dynamics are – we’re the new guy in a developed market, and we have to convince the customers to try us and give us an opportunity to compete for their consumer dollar. And that’s a process that takes time in a competitive market. But I’m very pleased with our team and very pleased with our start and very pleased with the progress we showed over first quarter.

[Dan Politzer, Wells Fargo]

Great. Thanks so much.

[Operator]

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

[Shaun Kelley, Bank of America]

Hi. Good morning everyone. Thanks for taking my questions. Just wanted to ask a specific one around TwinSpires. Maybe just to start is, are we yet seeing any, what we consider material contribution from some of the agreements reached with FanDuel and DraftKings on the partnership side there? Should we expect to see or possibly see something a little bit more material, in terms of contribution coming through with the Derby, just kind of how to think about that relationship. I know the economics are spread across a couple of different places, but just kind of help us think, strategically about maybe where those partnerships sit at this stage?

[Bill Carstanjen, Chief Executive Officer]

Sure, Shaun. That’s a really interesting question, and I think it’s one that you’ll see the answer play out over an extended period of time. In our organization, we track a lot of data and we look at it constantly. So we do see initial signs that that FanDuel’s investing in pushing horse racing and that others will as well. So, we’re very excited to see the first real milestone of that though, around the Kentucky Derby. And I think this is one of those things where I can tell you that I’ve paid a lot of attention to the TwinSpires business since the day was conceptualized and became a real thing. And so I follow that data personally very, very carefully. And I think the proof will be in the pudding though, and we’re very close to starting to see some of that proof.

So look out for Derby, look out for handle on the Derby this year. And really if you’ll show some patience, I think we’ll be able to provide you a better, more complete answer in the second quarter, after there’s a chance for the Triple Crown events around, which some of these folks can actually do comprehensive marketing because they have events to push people towards.

So, initial signs prior to those events, I found encouraging, but not the sort of thing that we should use this call to drill deeply into. I just ask that you show a little patience and wait for the Triple Crown events that are happening in the second quarter, where these folks can really do some marketing around. So far particularly FanDuel, I think they’re showing a lot of interest and appetite. And the thesis that we have here is that many of our customers will enjoy a bet on the Kentucky Derby or on horse racing, but we never managed to reach those customers with our TwinSpires offering.

But these folks that are out there now with a broader sports wagering platform like FanDuel, they’ve reached a lot more customers than we ever were able to with our very narrowly focused TwinSpires app, which we still think is the absolute best in the business for betting on horse racing. But that’s all you do on it. You don’t bet all these other sports. So an optimistic time for us, but the proof is going to be in the pudding and we’re happy to wait for that. We’ll talk about that in more detail next quarter.

[Shaun Kelley, Bank of America]

Makes sense. And something to look forward to. Second question would just be, Richmond came up just kind of on the slate of, it sounds like you got a couple referendum you’re targeting in Virginia for this fall. Just wondering if we could revisit, scope and scale there of a potential opportunity as well as just, any milestones or things that need to occur relative to I think a, competing proposal that exists up in Petersburg. I think your proposal has been around much longer. But just kind of a couple the pros cons there. Because I believe that the scope and scale there is pretty material.

[Bill Carstanjen, Chief Executive Officer]

That’s a potentially $500 million to $600 million project. We hope to get the opportunity to do it. Last year there was a one year delay in our ability to conduct a referendum in Richmond. A city referendum is required for authorization to move forward with the project. So this year we’re working towards authorization by the city to conduct the referendum. We’re on a pathway to do that. We hope to achieve that. We haven’t achieved that yet. Those are a series of steps that we’re processing through, but so far nothing to be concerned about. We’ll do our best to process through that, to put ourselves in a position to conduct the referendum this year.

There are five authorized licenses in the State of Fort Virginia. Four have been awarded. This is the fifth and final full Class 3 license. It requires a hotel, a casino, which will include table games and Class 3 machines. So this is the fifth license that that the city of Richmond has awarded the partnership. And now we have to go through the process to authorize the referendum or get the referendum authorized so that it can be conducted. So there’s still several steps here before the project could be realized. And we’re on that path.

Never a guarantee that you get to the finish line, but so far everything is going well. And we’ll proceed down this path, over the second and third quarter, hopefully achieve all the required approvals. Hopefully you then conduct the referendum and win the referendum. And then the process to construct would start the fruition of the project is still something that’s not measured in 2023 timeframe or probably even 2024. These are the initial steps to unleash a, what we think would be a really fantastic project.

[Shaun Kelley, Bank of America]

Thank you very much.

[Operator]

Thank you. And our next question comes from the line of Chad Beynon with Mcquarie.

[Chad Beynon, Mcquarie]

Hi, good morning. Thanks for taking my questions. First, I wanted to revisit just some comments around margins, I guess specifically focusing on the gaming and then the HRM facilities. So I believe you said, outside of Florida and Pennsylvania margins were very strong. Wondering if you could just dig into that a little bit more. Have we seen the labor and utility pressures kind of plateau? And I guess just going back to the hypothetical, if revenues in demand remain strong, are these margins that are sustainable at least for the year? Thank you.

[Bill Carstanjen, Chief Executive Officer]

Thanks, Chad. Appreciate the question. I would answer that by saying look at our results for the quarter. Those are trends that are in the books that we see and that we can fully understand week-to-week. We always look carefully to look at trends, but I’ve been around doing this for a long time, and I’d say comparisons are always something that you have to give time to watch them develop. There’s always weather events from prior year or other things like that can affect them.

So the short answer is we’re doing our thing. We’re not seeing material changes that we have to respond to. If we did see these things developing, in our operations, then we move to plans where we tighten up the cost structure and tighten up the operations in order to best maintain our margins. But there, there’s no cause for alarm here. Things generally look pretty solid across the whole portfolio. When you have as many property as we have, you might find an example of anything across that many properties. But generally in operations, I feel good and there’s nothing to report or dig deeper into at this time. We’re just going to execute as we have been executing. When it comes to construction, timing and cost, I don’t have an update on the timing or costs versus what we disclosed in our first quarter press release last year.

Yes, there are challenges on labor. Yes, there can be challenges on material, but we’re managing all those. So what we disclosed last quarter in terms of timing for our projects and cost for those projects we’re still on course for that. Other than as I disclosed in my prepared remarks where we decided of our own volition that we could do better in Owensboro and select a better site that would service better long term. But otherwise, yes, there can be challenges on the construction side, but we’re managing through those and there’s nothing really to report on the call.

[Chad Beynon, Mcquarie]

It’s great to hear. Thanks for that update. And then separately, just on the HRM content side of things, when we talk to the slot manufacturers, it sounds like they’re all really focused on generating good content for your business, for HRMs in general. Where are we, just in terms of the content journey? Are there still opportunities to kind of improve the floor, whether it’s diversification or overall content? Obviously understanding that the exact acquisition is pending. Thanks.

[Bill Carstanjen, Chief Executive Officer]

We are nowhere near the end of the journey. There are lots of pieces of content and some manufacturers that we haven’t reached yet that we haven’t developed. And it’ll be a constant state of catch up because the businesses, the manufacturing businesses really are run and oriented towards the Class 3 machines. So getting that product converted for ours will always be something we’re working on. But there’s still a pretty healthy product map and roadmap for what we want to see happen in terms of HRM product on our floor. And our manufacturers, I think get the attractiveness of HRMs for their business model, the ability to sell us machines and make a return on our HRM floors.

So it’s working fine. It’s working well. And I’d leave the question on that, obviously there’s a lot we could talk about and we do work on here, but it’s an, I would leave it at this. It’s an area of significant strategic focus for us to think about how to improve the floors and what product is out there of various types that would help us shape the floor. But I would also say that already we’ve achieved a quality product, but our goal is always to be as good as any of our competition has. And we always are going to have that extra step that we’re HRM, but all good. You’ll see improvement every quarter. All good.

[Chad Beynon, Mcquarie]

Great. Thanks, Bill. Really nice quarter. Appreciate it.

[Bill Carstanjen, Chief Executive Officer]

Thanks. Appreciate the questions.

[Operator]

Thank you. And our next question comes from the line of Jordan Bender with JMP.

[Jordan Bender, JMP]

Great, thanks. Good morning. I want to start in Virginia. There was the casino opening there during the quarter and your margins were flatter, really unimpacted kind of quarter-over-quarter. So when we think about the land-based product on the casino side coming online in the coming months, is that 48% margin sustainable or something we should think about kind of throughout the rest of the year? Thanks.

[Bill Carstanjen, Chief Executive Officer]

Really good question. Certainly there is competition coming online. There already is competition that’s come online in Virginia. I feel really good about our margins and our ability to sustain and improve, as we do the Exacta transaction. Our challenge in the state are across all our facilities there, we’re limited to 5,000 machines. So if one particular property feels pressure versus another because of competition essentially that’s an opportunity, to move product around the state. We don’t have enough machines ultimately right now we’ve deployed 2,700, but we will get the 5,000 relatively quickly as we expand our footprint. Ultimately, our real challenge in the state of Virginia is the number of machines we have, and we have 10 places we can move those machines around based on the competitive environment.

So it’s part of the chess match, but I don’t really view it as a margin threat, because ultimately that’s on us to be smart on where we deploy our resources and we have great locations now and we think really great locations that we’ll deploy to in the future. So it’s part of the chess game of how to maximize the utilization of these machines, so that we maximize our margins in the state. And I think our team will meet that challenge. So far they have.

[Jordan Bender, JMP]

Great, thanks, Bill. And Marcia, it looks like share repurchases were somewhat minimal or none in the quarter. We know you have the dividend in fourth quarters. We think about capital allocation going forward. Is it kind of fair to assume that share repurchases will be kind of close to nine until we get through most of these growth projects?

[Marcia Dall, Chief Financial Officer]

I think as we’ve said in the past Jordan, we are very opportunistic on a share repurchase perspective. And so based on all things considered, based on our leverage we have tremendous capacity, as you just saw with our credit facility to be in the market to buy shares back when we decide that we want to. And you’ll see us, buy shares back opportunistically in the future as well.

[Jordan Bender, JMP]

Great. Thanks. Nice quarter.

[Bill Carstanjen, Chief Executive Officer]

Thanks Jordan.

[Operator]

Thank you. I would now like to hand the call back over to Chief Executive Officer, Bill Carstanjen for any closing remarks.

[Bill Carstanjen, Chief Executive Officer]

Thank you. Everyone, we really appreciate your interest in our company and your investment in our company. We’ll try to be good stewards of your capital. We obviously have a lot going on right now with the Kentucky Derby and all of our growth projects and we’re up for it though. This is an exciting time for us an optimistic time for us, and we just want to execute and take good care of your capital investment in us. So thank you and we’ll talk to you all soon.

[Operator]

Thank you. This concludes today’s conference call. Thank you for participating and you may now disconnect.