Churchill Downs Inc

NASDAQ:CHDN

Earnings Call Analysis

Churchill Downs Reports Record Q2 Revenue and Focuses on Expansion

Churchill Downs achieved all-time record net revenue of $891 million and adjusted EBITDA of $445 million in Q2. The 150th Kentucky Derby contributed significantly with strong growth in ticketing and sponsorship revenue, alongside record wagering. The new Paddock Project debuted on time and within budget, enhancing guest experiences and offering future monetization opportunities. The company projects $26-$28 million of incremental EBITDA from Derby Week this year. The new Terre Haute Casino performed well, contributing $19 million of adjusted EBITDA. With a strong pipeline of projects and strategic expansions in Kentucky, Virginia, and other locations, Churchill Downs continues to focus on long-term growth.

Introduction

Churchill Downs Incorporated (CDI) announced its second-quarter 2024 results, showcasing record-breaking numbers across various financial metrics. The company holds a diverse portfolio, including racetracks, casinos, and online gaming platforms, leading to a broad and resilient revenue base.

Record Financial Performance

For Q2 2024, CDI reported all-time high net revenue of $891 million, marking a 16% increase compared to the same period last year. The adjusted EBITDA also reached an all-time record of $445 million, with a notable 22% year-over-year growth. The gains were driven by diversified operations, including an outstanding performance during the Kentucky Derby week, which added $26 to $28 million in incremental adjusted EBITDA for the entire year.

Kentucky Derby Highlights

The 150th Kentucky Derby was a pivotal event contributing to the robust financials. The introduction of the new Paddock Project enhanced guest experiences, significantly boosting ticket sales, sponsorships, and wagering activities. This construction project was completed on time and within budget, setting a new benchmark for future developments at Churchill Downs.

Gaming Operations Expansion

CDI's Virginia Historical Racing Machine (HRM) properties notably increased their adjusted EBITDA by $16 million, a 37% jump from last year. This growth was partially driven by improved economics from the Exacta transaction and the opening of new facilities like Rosie’s Emporia. The combined margins for these properties climbed to nearly 55%, signifying a 7.3 percentage point improvement from the previous year.

Terre Haute Casino Performance

The Terre Haute Casino, which opened in April 2023, performed exceptionally well. Contributing $19 million to adjusted EBITDA for Q2, this casino achieved a 57% margin, benefiting from a favorable initial gaming tax rate due to Indiana’s fiscal year-end structure. Margins are expected to stabilize at slightly lower rates in subsequent quarters.

Long-Term Capital Management

CDI generated a record $437 million in free cash flow during the first half of 2024, up by nearly $65 million from the previous year. This strong cash flow supports ongoing and future capital investments. The capital spend for 2024 is projected at $450 to $550 million, with significant projects like The Rose HRM venue in Virginia and the Grandstand Club and Pavilion at Churchill Downs Racetrack expected to continue driving growth.

Future Growth Initiatives

Looking forward, CDI is committed to expanding its HRM operations in Virginia and Kentucky. The company plans to fully deploy all 5,000 HRM machines allowed under Virginia law by the end of 2025. New gaming facilities and expansions, such as the Henrico County venue and the Owensboro HRM property, are on track to open on time and within budget, promising further revenue growth and margin improvements.

Exacta Integration and B2B Opportunities

The integration of Exacta's central determinant system technology has been a crucial factor in enhancing CDI’s gaming operations' performance, particularly in Virginia. As CDI continues to convert approximately 10% of its Kentucky gaming floors to Exacta technology, the future looks promising for expanding their B2B services both domestically and internationally, with potential new markets on the horizon.

Acknowledgment and Closing Remarks

CEO Bill Carstanjen acknowledged the hard work of the CDI team and reiterated the company’s long-term commitment to delivering superior returns for shareholders. With substantial investments and a solid pipeline of growth initiatives, CDI is well-positioned to sustain its momentum and build on its track record of success.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2024 Second Quarter 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. Sam Ullrich, Vice President, Investor Relations.

[Sam Ullrich, executive]

Thank you, Andrew. Good morning, and welcome to our second quarter 2024 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2024 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 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.

[William C. Carstanjen, executive]

Thanks, Sam. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. .

I will share some high-level thoughts on several strategic topics, and then Marcia will provide insight into our financial results as well as an update on our capital management strategy. After she finishes, we will take your questions.

First, regarding our second quarter results. We delivered all-time record net revenue of $891 million, an all-time record adjusted EBITDA of $445 million in the second quarter of this year. These are excellent results across all our segments. We are demonstrating quarter after quarter that we can deliver strong returns on the strategic choices and capital investments we make. And we remain focused on executing our long-term strategies to deliver best-in-class growth for years to come.

Second, regarding the 150th Kentucky Derby and our plans for future developments at Churchill Downs Racetrack. We were very pleased with the results for this year's Derby. Strong growth in ticketing and sponsorship revenue, coupled with record wagering generated a significant increase in adjusted EBITDA, setting a new all-time record for Derby Week.

We were thrilled to debut on time and on budget the new Paddock Project. This was one of the most significant construction developments ever undertaken at Churchill Downs Racetrack. Every guest this year who entered through our front gates was treated to new and breathtaking views of the TwinSpires and Paddock area. Ticketed guests in the newly created areas enjoyed unique seating and dining experiences and spectacular views of the horses and races. This project provides a foundation for further innovation and monetization opportunities into the future.

Every year, we seek to surprise and delight our guests with something new as they explore Churchill Downs Racetrack. As we look to 2025, we still have much to learn and improve on to maximize our new Paddock area before we execute on any new large capital projects that would significantly expand our seating inventory.

For Derby 151, we will focus on an exciting renovation project. As we announced yesterday, the Grandstand Club and Pavilion project will transform a seating area in front of the starting gate suites from 10,000 bleacher seats to a combination of 8,300 premium stadium seats and trackside box seats on the rail of the racetrack. We will significantly improve the amenities for these guests as well as for an additional 2,800 patrons seated in surrounding sections who can seamlessly access the hospitality options in this area. These new hospitality experiences will be similar to the Homestretch Club that we unveiled in 2022.

This Grandstand Club and Pavilion will increase ticket renew, personal seat license, or PSL, inventory and sponsorships. The capital investment is expected to be $85 million with a payback of less than 8 years, which is our target range for projects at Churchill Downs Racetrack. This is a meaningful redesign that will require diligent planning and execution by our team to complete in time for next year's Kentucky Derby.

Beyond this project, we are developing plans that will provide new experiences for our guests, both on the front side of Churchill Downs Racetrack as well as in the infield. We will provide a more detailed update on our multiyear development plans, which target delivering new experiences starting in 2026 at our next earnings call in late October.

Our commitment to investing in our flagship asset reflects our belief in our ability to generate consistent adjusted EBITDA growth with nominal levels of risk for years to come.

Next, regarding our HRM plan. HRMs and HRM technology are a key strategic focus over the next 5 to 10 years for our company. These high-growth, high-margin investments provide an excellent return on capital. We have 2 HRM venues that we will be opening within the next several months and we are working on further expansion opportunities in Kentucky, Virginia and New Hampshire. Our acquisition of Exacta also provides additional expansion opportunities from an HRM technology B2B perspective. I will provide a brief update on each of these strategic growth avenues.

In Kentucky, we remain on track to open our new Owensboro HRM venue in the first quarter of 2025 on time and on budget. It will be located just the east of Owensboro, the fourth largest city in Kentucky. Our facility design is inspired by Kentucky's rich horse racing and Bourbon history and will initially open with 600 HRM machines along with a center bar, sports bar and simulcast wagering area. This property will be our seventh HRM venue in the state.

We are permitted under Kentucky Law to develop one additional HRM venue, this one associated with our Oak Grove license. We have made excellent progress on evaluating and developing the plans related to this opportunity. We anticipate a modest capital investment in 2025. We will provide a more definitive update for you with respect to location, cost and timing on our third quarter earnings call.

In Virginia, we remain on track to open our new HRM property in Dumfries called The Rose in late September. We are on time and on budget to what we told you on the last earnings call as we increased the size of the facility to 1,650 HRM. It's a massive site, and it's exciting to see the exterior and interior pieces come together as we approach completion.

We filed a construction application in Henrico County, Virginia, which is just north of Richmond, to open a new HRM entertainment venue. Our application included details of our plans to convert a former furniture store into a new facility that will feature 175 HRMs and have other gaming-related amenities for our customers to enjoy. This project will boost tax revenue for the Commonwealth and provide additional purse money for the horse racing industry in Virginia. The cost is projected to be $30 million to $40 million and have a payback of less than 5 years. We will update you with further details on our next earnings call.

We are planning to expand the number of HRMs that we have in certain locations to meet the strong demand that we are seeing across our footprint in Virginia. We anticipate that we will deploy the remaining HRMs permitted under the law in Virginia by the end of 2025 at the very latest, taking us to the full 5,000 from the approximately 2,750 machines that we have deployed today. We may also shift some of our existing HRMs between locations to optimize the overall performance. Virginia has been a great investment and business environment for us, and we look forward to expanding our footprint and partnership with the Commonwealth.

Turning to Exacta. The acquisition of the Exacta central determinant system technology has provided many benefits for our company, some of which we have already begun to realize and some of which we are still developing. Exacta has improved the performance of our Virginia HRM venues by enabling us to better optimize the gaming floors and reduce the technology fees charged to our properties. With this vertical integration, we have improved both our top line and our overall margins. We are also in the process of converting approximately 10% of our gaming floors in Kentucky to Exacta technology to improve our top line and product offering over the long term.

Exacta has also enabled us to provide technology to third-party HRM operations in Kentucky, Wyoming, New Hampshire and most recently, internationally. Our B2B business earns a recurring fee on every machine that third-party HRM operators deploy, utilizing our technology. We recently announced our first international deal, working with IGT in Malta, to provide our central determinant system with IGT's games. There are a number of other jurisdictions, both in the U.S. and internationally that are considering this form of wagering, and our team is looking forward to these potential growth opportunities.

We continue to make progress on the development of HRM-based electronic table games. These products would further enhance the performance of our HRM venues over the long term, and we believe is an important part of Exacta's future.

Regarding TwinSpires' B2B expansion. This was the second year that our B2B strategy was in place for the Kentucky Derby, and we are pleased with the results. Our TwinSpires and United Tote businesses provide technology and other para-mutual services to FanDuel, DraftKings and other sports wagering platforms facilitating their participation in wagering on horse racing. The distribution of horseracing content is a growth opportunity that we believe is important for the industry and for us over the longer term.

While we continue to invest in our B2B capabilities and relationships, our core B2C TwinSpires business continues to perform quite well as it focuses on committed horseplayers seeking a more immersive horseracing wagering experience.

Next, regarding our investment in gaming properties. We held the grand opening for our Terre Haute Casino in Indiana on April 5, followed by its hotel on May 15, both on time and on budget. We've been happy with the performance since the opening. The property is located right off Interstate 70 on the east side of Terre Haute, approximately 70 miles from downtown Indianapolis.

Similar to our Oak Grove HRM property in Southwestern Kentucky, our Terre Haute Casino provides an appealing entertainment venue with limited competition in the surrounding market area. It is also a destination for people from Indianapolis, particularly from the northern and western portion of the metropolitan statistical area.

In summary, the second quarter was great for us with all-time record financial results. We have a strong pipeline of growth opportunities in both brick-and-mortar and technology-related businesses that we are actively executing. We also have an excellent pipeline of additional investments and potential acquisitions that we are evaluating to position our company for growth further into the future.

We have one of the best balance sheets in the industry, with great assets that we believe will continue to drive adjusted EBITDA and free cash flow in the coming years. We remain committed to delivering superior returns for our shareholders with consistent execution of our growth strategy over the long term. We think our track record shows we can deliver.

Finally, I want to acknowledge and congratulate Bob Fealy, one of our long-standing directors on his retirement from our Board of Directors. Bob has been an active member of our Board for more than 20 years. I want to personally thank him for his friendship and wisdom over the many years that we've worked closely together. Bob, if you're listening, enjoy retirement, and we will miss you.

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

[Marcia Dall, executive]

Thanks, Bill, and good morning, everyone. I'll start with a few insights on our financial results and then provide an update on capital management.

First, regarding second quarter financial results. As Bill shared, we delivered all-time record net revenue, an all-time record adjusted EBITDA in the second quarter. Our diversified portfolio of businesses, highlighted by a record Kentucky Derby week, generated a 16% growth in revenue and a 22% growth in adjusted EBITDA on a quarter-over-quarter basis. We hope that you were able to join us in person or were able to watch the 150th running at the Kentucky Derby on NBC on May 4.

We project that Derby Week will generate $26 million to $28 million of incremental adjusted EBITDA for the total year. As a reminder, we recognized nearly all of the revenue and costs associated with Derby Week during the second quarter of the year. However, there are some Derby Week-related costs that are recognized during the other quarters as well.

Increases related to ticket sales, primarily as a result of the addition of the new Paddock project, new sponsorships and strong para-mutual wagering provided a significant lift to our financial results while maintaining the consistently superior margins that Derby Week has generated over the years.

Our Virginia HRM properties were the primary driver of adjusted EBITDA growth related to HRMs on a quarter-over-quarter basis. Our Virginia HRM properties increased adjusted EBITDA by $16 million or nearly 37% compared to the prior year quarter. Savings related to the Exacta transaction provided nearly $6 million of improved economics to our Virginia HRM properties during the quarter compared to the prior year quarter. We also benefited from the opening of Rosie's Emporia in September 2023 as well as the strong growth at our other Virginia properties from the continued upgrades to our gaming floors and increased foot traffic at our properties. These properties, excluding racing generated a combined margin of nearly 55% during the quarter, up 7.3 points compared to the prior year quarter.

Our Exacta business contributed meaningful adjusted EBITDA to the TwinSpires segment again this quarter. The Exacta business generated more than $10 million of adjusted EBITDA, in addition to the nearly $6 million of benefit that our Virginia properties in the Live and Historical segment realized in the second quarter from lower central determinant system-related fees.

Our Terre Haute Casino performed extremely well since opening on April 5, contributing more than $19 million of adjusted EBITDA during the quarter and a 57% margin. It is important to note that we benefited from a lower initial gaming tax rate in the second quarter because of the tiered structure of Indiana's gaming tax rates and the state's fiscal year ending June 30. The gaming tax rate will normalize at the expected long-term tax rate beginning in the third quarter. Terre Haute margins will remain at the highest levels of all of our regional gaming properties, albeit lower than the second quarter level.

Our second quarter same-store, wholly-owned casino margins, excluding the prior year nonrecurring union payment in New York, were down 1.3 points compared to the same period in 2023, primarily driven by our properties in Maine, Mississippi and Louisiana.

Turning to capital management. We generated a record $437 million or $5.85 per share of free cash flow during the first half of the year. This is up nearly $65 million or $0.96 per share over the first half of 2023, primarily from the strong cash flow generated from our businesses. We spent $35 million on maintenance capital in the first half of the year and continue to expect to spend between $90 million and $105 million in total for the year.

We spent $257 million on Project Capital in the first half of the year and continuing to expect to spend between $450 million and $550 million in total for the year. Based on the remaining Project Capital for our new HRM venue called The Rose in Northern Virginia and the Owensboro HRM venue in Kentucky, along with the recently announced CDR -- CDRT Grandstand Club project and the new Henrico County, HRM venue in Virginia, our 2025 Project Capital is expected to be approximately 1/3 of our projected capital spend in 2024.

At the end of second quarter, our bank covenant net leverage was 4.0x. Based on our capital investments and the timing of the opening of our new facilities, we expect our bank covenant net leverage at year-end to be at or slightly below 4x. We expect our bank covenant net leverage to decline relatively quickly in 2025 as our investments in Indiana, Virginia and Kentucky to continue to deliver meaningful adjusted EBITDA and free cash flow.

Overall, we are very pleased with the all-time record results our team has delivered for the second quarter. We remain very well positioned to grow over the long term, fueled by our tangible pipeline of growth initiatives and supported by our strong balance sheet.

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

[William C. Carstanjen, executive]

Thank you, Marcia. Okay, everyone, we're ready to take your questions.

[Operator]

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

[Barry Jonas, analyst]

Another very strong derby. Can you talk a little bit more maybe about the different components that drove the growth this year. It seems visibility goes up and variability goes down each year. So how does that mix -- how has that mix evolved and where do you think it goes from here?

[William C. Carstanjen, executive]

Sure, Barry. So first, ticketing revenue is the big driver or experience revenue. We tend to think about it. So with the Paddock Project, we introduced more capacity, more high-end experiences. And that was a meaningful contributor to the results that we saw. Also, as we reported at the time, the wagering results were fantastic. We continue to set virtually every wagering record each year, and that's been a real tailwind for us. And then sponsorships has also been firing on all cylinders. So across the board, all of the key revenue drivers have been showing improvement, but it's led with our ticketing segment.

[Operator]

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

[David Katz, analyst]

Congrats on the quarter. I wanted to just sort of get a little more clarity around Kentucky, right, where there's -- where -- I'll call it in sort of a middle stage of progression where we're looking at -- for the Louisville Downtown Turfway, in particular, and sort of how those properties and Oak Grove in particular, how are those properties progressing? How are they accelerating? What's left for them, and what kinds of dials are you adjusting to try and actualize what you aspire to get there?

[William C. Carstanjen, executive]

Yes. Thanks, David. Appreciate the question. So a lot of optimism for Kentucky and for the growth to come that we think will show over time. I think none of our properties have reached maturity at this point, all of them we continue to add and change the mix of the games on the floor. Our teams get better at operating them. Our database get deeper. So I -- also I'm optimistic for the future with respect to additional products like electronic table games. So over the long term, I still think there's a lot of growth there. I think there's still a lot of learning there. And I don't think you should think about those projects or those properties as anything other than it's still in their ramp-up stage.

[David Katz, analyst]

Got it. And just as my follow-up, can we just talk about Exacta a bit? I know you touched on some of the outside opportunities. But with what you have on your plate for it now, we've seen a little bit of a run rate for how that has earned. But is that going to ramp in the near term, excluding any sort of new opportunities that aren't yet sort of plugged in?

[William C. Carstanjen, executive]

Yes. So I think there are a couple of different categories for evaluating Exacta. I'd start with Virginia. We've deployed about 2,750 games, and we're on our way to 5,000. So Exacta rides that wave too, and that's part of that story. So that' s one place to start. I think whether you talk in the United States or beyond, there are lots of potential markets that will look at this product. I can't make any promises or commit to any expectations when additional markets will open or how many will open, but that generally has been trending in the right area. So in the right direction.

So I think -- whether you think about our own footprint, our own expansion, whether it be in Virginia or New Hampshire or Kentucky, that business has a lot of runway to service Churchill's needs. Also as a provider to third parties, you see the activities of other operators in different states, both the ones I've mentioned and others like Wyoming. And then you have potentially new markets, which is something we work on with our government relations teams as do other companies.

And then the international, the international opportunity and our beginning of exploring that was an inbound. That was an inbound thing. We were contacted and that's when we first started to realize there might be some appetite. So I can't make promises about future markets, you always have to be thoughtful and careful about that. But it's a great technology. It's a great product that we've done a lot of work on with our various partners that produce games to produce a really quality product. And when you produce a quality product, you often get opportunities to deploy it. So those are just some of the avenues that we're looking towards.

[Operator]

Our next question comes from the line of Dan Politzer with Wells Fargo.

[Daniel Politzer, analyst]

I wanted to just follow up on the Kentucky HRM landscape and what you're seeing specifically as it relates to Derby City Downtown and the ramp there. And how to think about cannibalization? And then similarly, if you could talk about where we are in terms of like Newport and Turfway, I acknowledge Ellis Park was probably a drag in the quarter, but Newport, Turfway and Derby City Downtown, if we can kind of zoom in on the ramps there and kind of puts and takes to those properties and potential cannibalization.

[William C. Carstanjen, executive]

Yes. So Derby City Downtown I'll start there. The good news is we didn't see any cannibalization from our Derby City gaming property. And so that was the good news. I would say though that, that property has ramped slower than we started. I don't find that particularly problematic at this point, having watched our team opened numerous properties. They all ramp a little bit differently. I'm very confident that our team built the right customer offering. And I'm very confident we have the right team on the ground. So we'll make incremental progress and continue to push that. And I never react to the first or second quarter although it's always great when they go extremely well like we've seen in Terre Haute.

So Derby City Gaming more to come on that. I'm encouraged, but I would say the downtown Louisville environment has not been the quickest market to rebound from COVID as some other comparably sized cities. And so that maybe has been a bit of a headwind there. But otherwise, our team is doing everything right, both in terms of what we've built there and how we staffed it. And we have a lot of expertise in the area that we can devote to driving improvement. So we'll get there.

When you talk about Newport and Turfway, those are also properties that started a little bit on the slower side. But as you've seen over the subsequent quarters, they continue to build. So they continue to get stronger. And I think that's a hallmark of our team. There's a lot of experience, and there's a lot of confidence. And every quarter, we just focus on incremental improvement. So both of those properties stand for the proposition that we're still in the ramp-up stage that we haven't reached maturity and that's what you see from our team across Kentucky.

[Daniel Politzer, analyst]

Congrats on the quarter.

[William C. Carstanjen, executive]

Thanks, Dan.

[Operator]

Our next question comes from the line of Joe Stauff with SIG.

[Joseph Stauff, analyst]

Yes. Can you hear me okay, Bill?

[William C. Carstanjen, executive]

We can hear you, Joe. Go ahead. We can hear you just fine.

[Joseph Stauff, analyst]

Bill, can you hear me?

[William C. Carstanjen, executive]

Yes, we can hear you now.

[Joseph Stauff, analyst]

I wanted to ask about, say, the Grandstand -- yes, sorry about that. I wanted to ask about the Grandstand project. I guess how many tickets within that area, are -- exist today? And how many do you expect to exist after the renovation? And maybe comment about other, say, areas or white spaces within Churchill Downs that you're looking at for reinvestment?

[William C. Carstanjen, executive]

Sure. So currently, in the Grandstand Club and Pavilion project scope, there are 10,000 bleacher seats, and we're going to take those 10,000 bleacher seats out, and we're going to replace them with 8,300 new seats in a couple of different categories of seats. Some of them are going to be boxes -- box seat, hospitality on the rail of the racetrack. Some of them are going to be stadium seats and some of them are going to be covered stadium seats. So we are taking a section of lower-end hospitality and we are moving it towards premium hospitality. And that's a combination of both the seating options, but also the amenities that we associate with those seating options. So we are significantly upgrading not only the seats, but the hospitality associated with those seats.

In this case, there are an additional 2,800 seats in the Grandstand who traditionally access the same hospitality areas that we are fixing and substantially upgrading as part of this project. So those 2,800 Grandstand seat holders will also benefit from this renovation project because their amenities will be substantially better. So that's the scope, 10,000 going to 8,300 plus an additional 2,800 seats aren't changing, but they have access to all the new amenities. That's the scope of this project. And of course, consistent with what you've seen us do over the last number of years with the substantial upgrade in the seating and hospitality experience, there will be an associated increase in premium pricing for those experiences.

Oh, and your other part of that question, if you look at our facility as a whole, I know, Joe, you had one other follow-up, and I'm not going to let you forget it. Let me -- I'll hit on that quickly. That was what else are we looking at, at the track. We don't have anything else that we wanted to announce on this call, but as many of you are aware, these projects that we do are often more than one year project. So we will be working on things well before we announce and we have a very good working approach to our facility as a whole.

So if you think about our property, you have the infield, which is all temporary hospitality. That's an area where we're looking at various ideas, including what we've seen in other places around the country and around the world, for concepts we think might work there. But also, if you think about the area of our track, really around the first turn, you have the first term project, and then you have a gap area between that first term project and the sky terraces. We have a gap in the [ smile ] as we sometimes call it. So that's an area that we look at. And then you also have the area at the top of the stretch of our track as you come down Central Avenue and approach our facility.

So we have some significant real estate in our 200-acre property that is largely untouched. But when you touch that kind of real estate and approach that kind of project, you really have to do so carefully and it takes some time to figure out how it all -- how the puzzle will fit together. And so those are things we're currently exploring, but not ready at this point to be real specific on what we intend to do.

[Operator]

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

[Jeffrey Stantial, analyst]

Just one from us. I wanted to focus on the competitive environment in Kentucky and Virginia. And more specifically, there's been some articles recently suggesting that new types of skill games are starting to emerge, which try to skirt the recently enacted ban with different reveal mechanisms. Bill, I'm just curious to get your perspective on how you see overall enforcement of the 2 bans across the 2 markets? Are you still seeing a number of these machines operating around your properties? Is it de minimis, the amount that are willing to risk, legal action? Just any thoughts you can provide there would be great.

[William C. Carstanjen, executive]

Yes. So I think there is a theme in certain states and in certain parts of the country of sort of bald-faced attempts to try to skirt gaming laws to introduce gaming products. So I don't -- I wouldn't go so far as to say it's whack-a-mole because it's not that significant. But I think we're in a stretch of time where it takes a lot of vigilance by the state authorities, legal authorities and by our internal team to watch for sort of egregious violations of state law with the introduction of machines that various nefarious operators will try to claim are not forms of gaming, but some form of skill game or some other kind of nonsensical theory for why they should be legal under state law.

So we've seen some of that in Kentucky. You see it in different states. It is now part of the rhythm of a gaming company like ours to be vigilant with respect to those. And so there is some activity around that, but I wouldn't describe it as something we need to call out on this earnings call as a massive additional threat or close to legalization or something like that. It's just part of the landscape and it just takes lots of work and communication with local authorities to point it out and to ensure that it's getting the proper focus it deserves from law enforcement.

[Operator]

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

[Jordan Bender, analyst]

Maybe kind of a follow-on to the last question. Now that we're kind of a year following that Kentucky gray market machine ban, are there any kind of definite conclusions on spend or visitation to those properties? And maybe the follow-on to that is, taking the trailing 12-month results in Kentucky, are there any conclusions to draw in Virginia and maybe how we should view the growth in the back half of the year based off of that?

[William C. Carstanjen, executive]

Yes. So Jordan, I'd say that life often doesn't allow you to reduce an experiment to a single variable. So both in Virginia and in Kentucky, there's a lot going on at the same time. We're getting better at operating our businesses. We found efficiencies. We've been good at game mix. We've been good at moving machines around between our different facilities based on performing -- performance differences between the different facilities. Our team has gotten more experienced. Our database has gotten deeper.

So in both Virginia and Kentucky, you're in a circumstance where you're not at maturity. So there's a lot of things that are going on that make our business better. And because of that, it's hard to precisely define how much improvement might be because of reduction of competitive products from the illegal gaming products that have been in the market. But certainly, it's important and a positive to get illegal gaming products removed from the market, that definitely helps our facility, that definitely is a positive thing. But I can't give you a percentage, although my suspicion is it's different between Kentucky and Virginia. But I can't give you specific percentages because it's a multivariable equation and all the variables are in flux right now because these are still relatively undeveloped markets that haven't approached maturity. But certainly, it's positive, certainly, it's important. And certainly, it's something our company focuses on to make sure that we're not facing illegal competition in the markets that we're in.

[Operator]

And next question comes from the line of Chad Beynon with Macquarie.

[Chad Beynon, analyst]

Bill, Marcia, I wanted to ask about consumer trends within the database, particularly on the HRM and gaming pieces, kind of what you've seen in terms of different tiers in the programs, if that low end is remaining stable or if you've seen some weakening in the past couple of months?

[William C. Carstanjen, executive]

So you're covering a lot of ground with a broad question like that because it can depend on individual markets, and we have a pretty broad geographic footprint. But in general, we're finding more trips and we're finding spend per trip flat to modestly declining but relatively flat. So a fair amount of stability in general across the properties.

[Operator]

And our next question comes from the line of Ben Chaiken with Mizuho.

[Benjamin Chaiken, analyst]

Terre Haute had a particularly strong start. I guess given your history of opening other projects and the dynamics of this opening. How do you think about the projected ramp for maturing of this property? In other words, clearly, you had a great start. Do you anticipate some of them [ are a lull before finding its footing ] or do you think it continues to build an understanding that is impacting dynamic, impacting EBITDA more so referring to top line. And I guess I asked the question in the context of limited competition and some unique demand sources nearby, universities, et cetera?

[William C. Carstanjen, executive]

Well, thanks for the question. I think, generally with Terre Haute, we really thought about it as a property that was similar to our Oak Grove property on the border of Kentucky and Tennessee, which had -- has market activity and population around it but also is similarly close to Nashville as Terre Haute is close to Indianapolis.

So when we thought about how this property would ramp, we looked at our project there. And the way we approached it is we thought we'd do pretty well, introducing -- with the local market, we're introducing a high-end entertainment option in a market without that sort of product. So we thought we do pretty well initially with the locals, but that it would take quite a while to build into the market that's 60, 70 miles away. It's an easy trip on the freeway, but there is some distance and you have to -- it takes a while to develop your database and the customer experience level and comfort with your product when they have to drive an hour or so or an hour plus.

So to be frank, we were really thrilled with how Terre Haute opened. It's -- I would tell you that it was -- it opened quite a bit stronger than we expected, and that's a great thing. It seems to immediately been a hit with the local population. And we'll keep working on building that database locally. And we'll keep working and expect to see improvement over time, reaching further afield into those suburbs of Indianapolis that are 60, 70, 80 miles away down I-70.

So more to come, but it's not a simple market or a simple model like some of our properties, which are just designed to attract the locals. We built Terre Haute hoping to drive traffic and visitation out of Indianapolis 70 miles down the road, and we wouldn't be anywhere near at this point, maturity with respect to that strategy.

[Operator]

And our next question comes from the line of Daniel Guglielmo with Capital One Securities.

[Daniel Guglielmo, analyst]

So on adjusted EBITDA margin expansion in all the segments this quarter versus last year. Has there been any concerted efforts around expenses that have been paying off, and can you just talk a little bit about the labor environment you're seeing at the properties as of late?

[William C. Carstanjen, executive]

Yes. Our team, led by Bill Mudd, is constantly focused on efficient cost structures. So their countless initiatives that roll up to the aggregate of trying to make sure we optimize our cost structure. So that's a part of our culture. And it isn't one thing, and it isn't one initiative. It's just a constant focus on our best to provide the cost infrastructure we need to successfully run our properties as efficiently as we can do so.

In terms of the labor market, all of us out there see some level of wage inflation. But I don't find our experience with it to be something that is particularly remarkable versus other companies are particularly concerning in terms of managing our business long term. It's just there's always something going on. And there's always something to keep your eye on and to manage carefully. So yes, we're subject to some of the same trends you see in America. There has been wage inflation. And we try to manage that by being really careful and thoughtful about hiring great people and designing jobs to maximize their contribution.

So it's not something that I would say is a top concern for our senior team, and that's a tribute to the work they've done, both our HR team and in particular, Bill Mudd and his team, in getting ahead of these kind of issues to make sure we don't find ourselves with an untenable situation. We're in good shape on this.

[Operator]

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

[Shaun Kelley, analyst]

Bill, I just want to go back to some of the comments you made in the prepared remarks about Virginia. I think you talked about full deployment of your 5,000 machine opportunity there by the end of 2025. Could you just elaborate a little bit on that? What locations are you seeing or you may have the biggest opportunity to kind of reshuffle to? And are there any constraints to be that physical i.e., a bit more CapEx required to hit some of those targets or legislative meaning you need local approvals to go back and move around some of those machines in order to hit that target?

[William C. Carstanjen, executive]

Sure, Shaun. Good question. Thanks for the question. So yes, the construct in Virginia, just to remind everybody, is we're allowed 10 facilities over which we can deploy 5,000 machines and the amount of machines we can deploy in any particular facility is also subject to a relatively complex scenario and paradigm. So it's not level loaded across to 10 different licenses. For example, as you know, Dumfries has allowed a total of 1,800 machines in that market.

So we have to strategize carefully how to deploy the limited number of machines we have. And I would say our biggest restraint is not the 10 licenses right now. We haven't deployed the 10 licenses. We have a couple more to go. Our biggest constraint is the fact that we already want to deploy across the licenses that we have, the full contingent of 5,000 machines. So we haven't fully deployed the maximum amount across all our facilities. And yet we're seeing such strong results over some, we want to add more.

So in general, yes, there can be some modest additional capital expenditure in order to purchase the machine and expand the spaces to make sure that we can house those machines. And all of those, we'll reveal to the shareholder community and the investor community as we're ready, as we finalized our plans and are executing on them. But in general, our restraint right now is not the number of licenses, it's the fact that we've got really great properties that we've already opened, and we want to get more machines into those properties. So we're working on that right now.

I think over the next couple of earnings calls, as we finalize plans and are executing them, we'll get real precise in explaining exactly where they're going and what quantity and what modest capital expenditures are necessary to accomplish that. But it's all underway. It's all being carefully planned. And as I said in my prepared remarks, we expect all of this to have been communicated and completely executed on before the end of 2025. Right now, we're at 2,750.

[Shaun Kelley, analyst]

Great. And then my follow-up would just be similar, but around the margin commentary you gave about -- I think this is in Marcia's section around combined margin across the HRM properties at 55%, up 730 basis points from the prior year quarter. Can you just help us give us a sense, I mean, obviously, like you continue to do incredibly well here and Exacta has been a tailwind, too. Can you help us think about either the fact that just that absolute number -- is that number sustainable? Or is there anything that would impact that, including, I guess, across the segment race calendar timing, double think about the 55%. And then the same question is the magnitude of increase when we start to lap that or more difficult comps? Like, how should we think about the cadence of that increase this quarter versus the balance of the year?

[William C. Carstanjen, executive]

Sure. So a lot of the improvement that we've shown and as I recall on Marcia's remarks, she was talking about Virginia most specifically or most in detail. Some of that's been driven by Exacta. As we acquired Exacta and we restructured, rethought that business, rethought the contractual relationship between Exacta and the gaming floors, some of that margin goes to the gaming property and Exacta still is a very important growing business. So Exacta has a big impact, both from the vertical integration of us owning it from the gaming floor improvements.

Remember, when we acquired P2E, Exacta had an exclusivity contract with the previous owners. With us owning Exacta, we could remove that exclusivity to bring in Ainsworth product to improve the quality of floor, to improve the performance and attractiveness of the gaming operation. That's been a big driver. Our floor is a lot better. Our floor is more interesting and more competitive compared to traditional Class III gaming floors. And our team has gotten in there and we're operating well. We're figuring out our structure how to best operate these properties, how to utilize the database, the way we do in other territories.

So there have been lots of incremental things that are going on that have driven the improvement. And I think consistent with Marcia's comments, Exacta was a big key to unlocking our ability to giving us a full toolkit to improve how the business performs in a big part in Virginia, but also you're seeing it in Kentucky too as the properties exist for a longer period of time. They're still on the ramp-up towards maturity. They're not mature. But during that process, everything is getting better, we're getting smarter. We're getting better at our database, et cetera.

So I don't think you've seen the end of improvement, but I'm not on this call today here to promise you how margins will improve in each of these facilities over time. That's something that we'll try to prove and demonstrate, but generally, where we are in the life cycle of our operations, there's lots of cause for optimism, and it's an exciting time for our team as we use -- learn and use our new toolkit to improve these businesses.

[Operator]

Thank you. I'll now hand it back to CEO, Bill Carstanjen for any closing remarks.

[William C. Carstanjen, executive]

Thank you, everyone, and we appreciate your time today. We appreciate your interest in our company. For those of you who have invested, we appreciate your investment. We'll try to do right by that investment. And our team is very motivated, they're very driven, and this is a time of real optimism for our team because we think we have the skills and the opportunities to shine. So we'll keep doing what we do. And thanks again for your confidence, and we'll talk to you soon. Thank you.

[Operator]

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