Churchill Downs Inc

NASDAQ:CHDN

Earnings Call Analysis

Record Financial Performance

In the third quarter of 2024, Churchill Downs Incorporated achieved record net revenue and adjusted EBITDA, marking an impressive 10% increase in revenue and an 8% increase in adjusted EBITDA compared to the previous quarter. This growth comes despite the comparison to a strong third quarter in the prior year. The company's diversified businesses contributed significantly to this performance, with specific strength noted in both the Live and Historical Racing and Gaming segments.

Growth in Live and Historical Racing

The company's Virginia HRM properties were a key driver of adjusted EBITDA growth, with a remarkable $15 million increase, representing a 40% rise year-over-year. This surge is partly attributed to savings from the Exacta transaction, which reduced fees and allowed for better financial margins. With the addition of new HRMs, including 1,650 machines at 'The Rose' and further plans in Richmond, the company expects this segment to maintain its growth trajectory.

Continued Expansion in Gaming

Churchill Downs is focusing on strategic expansions in its gaming operations, particularly in Kentucky and Virginia. The company plans to open a new HRM venue in Owensboro by Q1 2025 and is also pursuing a new facility in Calvert City, estimated to cost between $40 million and $50 million, with an anticipated opening in early 2026. These properties are designed to tap into market demand and improve customer experiences, projecting continued growth in adjusted EBITDA.

Strengthening Financial Metrics

For 2024, the company generated a record $591 million in free cash flow, equating to $7.93 per share, up 32% from the same period last year. Maintenance capital expenditures are projected between $90 million and $105 million, while project capital spending is expected to be between $450 million and $550 million for the year. This solid financial footing facilitates ongoing investments and shareholder returns.

Increased Dividends and Healthy Balance Sheet

Demonstrating commitment to returning value to shareholders, the Board of Directors approved a 7% increase in dividends, marking the 14th consecutive year of dividend growth. At the end of the third quarter, the company’s net leverage was 4.0x, with expectations of a decline in 2025 following profitable growth from ongoing investments in Indiana, Virginia, and Kentucky.

Strategic Growth Plans Ahead

Churchill Downs is set to introduce significant Kentucky Derby qualifying races in Virginia as part of its long-term strategy to enhance racing visibility and engagement locally. Moreover, in 2025, the company aims to increase race days significantly from 27 this year to 50 by 2026, which is expected to bolster participation and revenues from racing activities.

Challenges and Opportunities in New Markets

Despite robust growth in Virginia, the company faces challenges in Louisville, specifically with its Derby City Downtown property, which has been slower to rebound post-COVID. The management team is actively adjusting the cost structure and customer outreach strategies to improve profitability. The company remains optimistic about growth trajectories, focusing on customer experiences and gradual revenue build-up.

Future Outlook and Market Potential

Overall, Churchill Downs remains optimistic about future growth opportunities across its HRM and racing segments. With a commitment to enhancing customer experiences and expanding its operations, the company is well-positioned to leverage its strong balance sheet and capitalize on emerging markets, particularly in Virginia and Kentucky, over the next several years.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2024 Third 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 third quarter 2024 earnings conference call. [Operator Instructions]

The company's 2024 third quarter business results were released yesterday afternoon. A copy of this release announcing the 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 our growth plans for the Kentucky Derby and our HRM businesses in Virginia and Kentucky, and then Marcia will provide insight into our financial results as well as an update on our capital management strategy. After she finishes, we will take your questions.

We delivered all-time record net revenue and all-time record adjusted EBITDA in the third quarter. We also delivered record third quarter revenue and adjusted EBITDA across both our Live and Historical Racing segment and our Gaming segment as well as record adjusted EBITDA for our TwinSpires segment. Our strategic choices and capital investments continue to drive best-in-class growth, and we look forward to our future with confidence and focus.

Speaking of the future, let's start with our growth plans for the Kentucky Derby. We have made significant progress on the Starting Gate Pavilion project at Churchill Downs Racetrack that we announced on our earnings call last quarter. This project will transform the seating area in front of the Starting Gate Suites from 10,000 bleacher seats to a combination of approximately 8,500 premium stadium and trackside box seats. We will also significantly improve the amenities for these guests as well as for an additional 2,800 people seated in existing surrounding sections who will be able to access the hospitality options of the newly renovated section. We are on track to complete this project on budget and on time for next year's Kentucky Derby.

We are also planning to complete over the next 3 to 4 years, a series of renovation and development projects that will provide new and extraordinary experiences in the section starting approximately 180 feet past the finish line through to the First Turn Club. The scope of this project covers approximately 500 feet of racetrack frontage, starting with the Skye Terrace structure, which we will take down and replace with a new building, and extending through the box seats adjacent to the First Turn Club. To put this further in perspective, the First Turn Club has approximately 330 feet of track frontage.

These projects will replace over 10,000 existing seats that currently consist of uncovered box seats and dated dining areas, with approximately 16,000 seats representing a variety of premium hospitality experiences. This is a considerable undertaking and will meaningfully increase the number of reserved seats and experiential options at various price points on the front side of the racetrack.

We are also designing a series of new infield experiences that will, in part, convert the current temporary infield structures, where we seat approximately 800 guests, to permanent premium structures, providing hospitality for approximately 7,000. Accomplishing this requires a new ingress and egress option for our guests to reach the infield. Hence, we are exploring a novel additional tunnel between the front side and infield that will be part of the overall experience as guests arrive to a reimagined Oaks and Derby infield.

The finish line/First Turn project on the one hand and the infield projects on the other will be worked on simultaneously in stages, with some areas ready for the Kentucky Derby in 2026 and the remaining areas opening for Derby in 2027 and 2028. There is a lot of careful planning underway as collectively these projects will, by far, be the largest expansion we have done to date and will increase our premium ceded inventory by approximately 20%. We will provide a more detailed update on these multiyear development plans at our next earnings call in February of 2025. 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 expansion. First, Virginia. We opened our new HRM property in Dumfries with 1,650 machines called The Rose on October 21 for a VIP event and then executed our official soft opening yesterday. We are planning to have the grand opening with appropriate festivities and more extensive marketing on November 7. We decided to proceed with the soft opening for a couple of weeks after the VIP event to give the team time to assimilate properly given the size of the property and the importance of establishing the right customer experience.

Given the volume of customers we saw at the VIP event and at the soft opening yesterday, we certainly have taken the right approach. We look forward to ramping the crowds and accelerating the marketing as we approach the grand opening date. We are excited to see The Rose go live and are immensely proud of our team for their efforts to get us open.

As we discussed on the July earnings call, we filed a building permit application in Northwestern Henrico County, Virginia, which is just north of Richmond, to open a new upscale HRM entertainment venue called [ The Roshire Gaming Parlor ]. We plan to convert a former furniture store into a new facility that will feature 175 games and have other gaming-related amenities. The permitting process is far along and we will begin construction when it is complete. We will update you on our next earnings call.

We are also expanding the number of HRMs that we have in our Richmond venue. During the third quarter, we added approximately 100 games, and we anticipate adding an additional 400 before the end of 2025. We will be renovating an unused section of our building to enable this expansion. Separately, we will also shift some of our existing HRMs between locations to optimize the overall performance of all of our Virginia properties. By the end of 2025, after we have completed this expansion, we will have 5,000 HRMs deployed, the maximum permitted under the law in Virginia, up from approximately 4,450 machines that we have deployed today after the opening of The Rose this week.

Virginia has been a great investment and business environment for us, and we look forward to expanding our footprint and partnership with the Commonwealth. Our HRM opportunities are inextricably tied to our Colonial Downs Racetrack and are franchised as the exclusive operator of Thoroughbred racing in the Commonwealth. In 2025, we will introduce a significant Kentucky Derby qualifying race, which will be a first in the history of racing in Virginia. The winner of this race is virtually assured a slot in the starting gate for the Kentucky Derby in 2025.

Many in the Commonwealth are very excited to see this new race and also to see the increase in the number of race days from 27 this year to 44 in 2025 and 50 in 2026. We believe we are meeting or exceeding the expectations of the Commonwealth and, in turn, Virginia has been a great place for us to grow.

In Kentucky, we are on track to open our new Owensboro HRM venue in the first quarter of 2025 on time and on budget. It is located next to Highway 60 just east of Owensboro, the fourth largest city in Kentucky. This venue will initially open with 600 HRM machines along with the center bar, sports bar and other amenities and will celebrate Kentucky's rich bourbon heritage. We also announced last evening that we will be developing a new HRM entertainment venue in Calvert City. This new facility is the extension property permitted by our Oak Grove HRM license.

Calvert City is a great location for our HRM venue in Kentucky with a population of 300,000 within a 60-minute drive, and a location near the meeting of 2 interstates that will allow easy access for customers from several surrounding cities in Southwestern Kentucky. We are confident that this will be a great addition to our portfolio of HRM assets. We anticipate spending $40 million to $50 million to build a property that will include capacity for 250 machines along with other amenities. We plan to open it in early 2026. HRMs and Exacta's 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 our shareholders' capital.

In summary, third quarter was another strong quarter for us with record financial results. We believe there are many growth opportunities for us to pursue in the coming years, whether it be further investment in our flagship asset, the Kentucky Derby; new investments utilizing our capabilities around HRMs; our growth in ancillary or adjacent business aligned with our long-term strategic plans. We have an excellent pipeline of additional opportunities that we are evaluating to position our company for future growth.

We also 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. We remain committed to delivering superior returns for our shareholders with consistent execution of our growth strategies over the long term. These are exciting times for our team.

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 third quarter financial results, as Bill shared, we delivered record net revenue and record adjusted EBITDA in the third quarter. We also delivered record third quarter revenue and adjusted EBITDA for both our Live and Historical Racing and our Gaming segments, and record third quarter adjusted EBITDA for our TwinSpires segment. Our diversified portfolio of businesses generated 10% growth in revenue and 8% growth in adjusted EBITDA on a quarter-over-quarter basis. Please keep in mind that we achieved this level of growth off of a very strong third quarter last year.

In our Live and Historical Racing segment, our Virginia HRM properties were the primary driver of adjusted EBITDA growth on a quarter-over-quarter basis. Our Virginia HRM properties increased adjusted EBITDA by $15 million or 40% compared to the prior year quarter. As a reminder, we completed the Exacta transaction on August 22 last year. As a result, our Virginia HRM properties realized $3.9 million of incremental savings from lower Exacta fees in the third quarter of this year compared to the prior year quarter.

Please keep in mind that we will continue to benefit from the Exacta transaction as we add 1,650 additional HRMs with the opening of The Rose, and as we add HRMs in the Richmond area over the next year. We also benefited in the third quarter from ongoing upgrades to the game titles and floor layouts at our existing Virginia HRM properties. These properties, excluding Racing, generated a combined margin of over 54% during the quarter, up over 6 points compared to the prior year quarter.

Our Kentucky HRM properties performed well overall in third quarter despite a strong third quarter comp last year for Derby City Gaming. Oak Grove continued to grow through market penetration with strong margins. Turfway Park and Newport also grew nicely during the third quarter with improving margins. Regarding our Derby City Gaming downtown Louisville property, we will have our 1-year anniversary for this property in December. We remain committed to growing this great entertainment venue in the heart of Downtown Louisville, and the team has worked diligently to reduce cost to improve its profitability over the next year while the top line support for this property builds.

Turning to our TwinSpires segment. our Exacta business contributed meaningful adjusted EBITDA to our TwinSpires segment again this quarter, contributing more than $10 million of adjusted EBITDA. The TwinSpires horseracing business generated lower handle primarily from less content access, while still delivering very strong margins in the third quarter. And last, regarding our gaming segment, our Terre Haute property performed extremely well since opening on April 5. As expected and communicated on our last quarter's earnings call, the margin for Terre Haute has normalized in the third quarter based on the long-term expected gaming tax rate.

Regarding the performance of the balance of our regional Gaming properties, first, it is important to note that we had 1 less weekend day in the third quarter of this year compared to the prior year quarter. Second, the regional Gaming consumer behavior remains consistent with recent quarters. We see strength at most of our regional gaming properties in rated play. In contrast, most of our regional gaming properties are showing lower unrated play.

And lastly, we did see some increased competition around a few of our properties during the quarter. Our third quarter same-store wholly owned regional gaming margins, excluding the prior year nonrecurring business interruption payments, were lower by 1.5 points compared to the same period in 2023 because of regional gaming consumer softness and increased competition.

Turning to capital management. We generated a record $591 million or $7.93 per share of free cash flow during the first 9 months of the year. This is up nearly $145 million or 32% over the first 9 months of 2023, primarily from the strong cash flow generated from our businesses. Regarding maintenance capital, we spent $50 million in the first 9 months of the year and continue to expect to spend between $90 million and $105 million in total for the year.

Regarding project capital, we spent $368 million through the first 9 months of the year and continue to expect to spend between $450 million and $550 million for the year. Based on the project capital for the Churchill Downs Starting Gate Pavilion and Courtyard and our HRM expansion projects in Virginia and Kentucky, we expect our 2025 project capital to be between $250 million and $325 million.

Regarding our dividend, our Board of Directors approved a 7% increase in our dividend, which will be paid out on January 3, 2025, to shareholders of record on December 5, 2024. This is the 14th consecutive year of increased dividends per share for our company.

At the end of third quarter, our bank covenant net leverage was 4.0x and we expect it to remain at this level through year-end 2024. We then expect our bank covenant net leverage to decline relatively quickly in 2025 and as our investments in Indiana, Virginia and Kentucky continue to deliver meaningful adjusted EBITDA and free cash flow.

Overall, we are very pleased with the record results that our team has delivered for the third quarter. We remain 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. Bill?

[William C. Carstanjen, executive]

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

[Operator]

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

[David Katz, analyst]

So I'd like to just talk about Virginia so far, right? There's sort of a lot going on in there. Bill, if you could just talk about how you feel about your progress there? Any surprises, good or not good? Any change in what you think the opportunity could be there over time. any of that around Virginia, which appears to be going quite well so far.

[William C. Carstanjen, executive]

Sure, David. So a big component of the P2E acquisition that we closed at the end of 2022 was the promise of Virginia. When we acquired P2E, there were about 300 HRMs or so deployed. We knew there was authorization to go to 5,000 and we've been executing on that. So obviously, the biggest component of that execution was the construction of a very complex property in Dumfries, which we've now completed and opened and will be ramping over the next several quarters, and it will probably ramp over the next few years.

So now, I think as good as it's been to this point, now we're going to really see we're going to see the fruits of our labor around Dumfries and the deployment of the other machines that we're allowed to deploy in the jurisdiction. So it's going very well. Obviously, you can see that in our numbers. We thought that we could make improvements to operating processes. We thought we could improve game layouts and game selection. And we also thought we could deploy the rest of the machines in a way consistent with some of the properties we've built around the country.

So that's well underway. Very optimistic. Very proud of that team. Very proud of their capabilities. Thrilled to open in the Washington, D.C., Northern Virginia metropolitan area. We've seen good success with the process by the state to curb the deployment of illegal gray games. That's something that I -- we've seen progress on. They're clearly illegal. The attorney general, other state law enforcement agencies and figures have commented on that and given direction on that, and that's a battle that will continue. There still are gray games deployed there. They keep popping up. But we're very pleased and confident that the law enforcement authorities are hard at work to enforce the law.

And that's a benefit to not only the safety of the consumer and the integrity and reliability of gaming in the jurisdiction, but it helps all the legal properties that are in the state that play by the rules and follow all the processes that are set by the state. So a big thumbs up for Virginia. Optimistic. Encouraged. And just want to get in there and get the work done on building the market around Dumfries.

[Operator]

And our next question comes from the line of Barry Jonas with Truist Securities.

[Barry Jonas, analyst]

I wanted to ask about your M&A strategy. Can you talk about the parameters you're most interested in as there are things out there for sale that checks those boxes.

[William C. Carstanjen, executive]

Good morning, Barry. So M&A has been a big part of the growth we've delivered as a company over the last number of years. I think if you look at the last couple of deals we've done, P2E, Exacta, we always want to have a plan for how we can not only improve on the operations of assets we get, but also grow into new markets. We're looking for businesses where we think we bring something to the table to improve those businesses to drive long-term growth for the company.

So in general, we look for businesses where we think there's a franchise there, where we think there's an ecosystem where our collection of skills and other assets can add to the mix and deliver growth. We're not a synergy play type shop in general, we -- while we're happy to take advantages of synergies, generally, we're more focused on true organic growth that we can drive with our collection of skills added to whatever we pursue.

So our pipeline -- so I say all that to say that I think we probably occasionally, hopefully, pleasantly surprised our investor base by doing deals that once they understood they realized made a lot of sense for us. But we're a creative, thoughtful shop. Our M&A team and our operations teams are very experienced, and we look at a lot of different things that are directly in our strike zone or immediately adjacent to our strike zone.

So I believe right now is a nice environment for M&A. I think our pipeline feels good, feels promising. It doesn't mean we'll get things done, you can never tell. That's not always in our control. But the type of things we look at, the type of things that are important to us and that we get excited about, we think there are possibilities out there. And I think if you look at our track record, we're always very patient. We're always very thoughtful. We're not on any kind of assembly line. We do deals when they make sense to do and when we're fairly confident we can improve what we buy. So in general, that's how I describe how we look at opportunities.

[Operator]

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

[Daniel Politzer, analyst]

So my question is on the project pipeline, right? You've announced Richmond, the HRM facility, Calvert City. Can you talk about maybe how you gain comfort investing in these property expansions given some of the challenges that you've experienced at Derby City Downtown? And along those lines in terms of Derby City Downtown, is there a glide path or expectation on when the profitability could start coming in there?

[William C. Carstanjen, executive]

Sure. Good questions, Dan. So we've had a lot of experience building properties. And I think it's fair to say they never go exactly as planned. Sometimes they're better and sometimes they're a little worse, but our experience with HRMs has been overwhelmingly positive. So if we talk first about -- within this realm of HRMs, if we talk first about Virginia, we know the Richmond market really well.

So we're capacity constrained right now, so expansion within our facility, which is a converted old large department store, conversion of some of the space we were using for storage into more floor space just makes sense. Not a huge amount of risk there because we can see we can see our database and we can see our level of consumer activity. So we feel pretty confident about that. And Henrico was in the general market. It's north, but it's still in the general area. So we feel pretty good about that market in general. We can see from our database where people come from and triangulate where it makes sense for us to put a facility.

So Dumfries, also, we obviously feel really good about that given the wealth profile and the sheer demographics in that MSA. So just a lot of confidence based on experience not only generally across the country, but in those specific markets and in those specific states. When it comes to Kentucky, we've had a lot of success. The one slower property has been Derby City Downtown. I feel pretty good about the trajectory that's going to be on.

But here's where we got surprised with Derby City Downtown, a lot of the thinking and planning around that occurred in the pre-COVID and COVID era, and Louisville as a city has been slow to rebound from COVID. People didn't go back to work downtown at the same level that they were there prior to COVID, and that's created a little bit of headwind for that property. But Bill Mudd and the operating team have worked hard on rightsizing the cost structure there.

And we've seen sometimes properties ramp a little slower. And we know what we're doing, we understand the market and we'll just go to work. But there was a macro change in downtown Louisville, not necessarily mobile as a whole, but there was a macro change in downtown Louisville, and that was bodies downtown post-COVID, and that's been a headwind that we've been working through. But I've seen properties start slow, and I've been with this team a long time and we have a playbook when that happens. We go after the cost structure. We manage the cost carefully, and we slowly, deliberately and consistently start work in the database and the marketing to build.

So that property will not be in the short term an A+, like we've seen with Derby City or like we've seen with Oak Grove or like we've seen with numerous of our properties, but we'll get it in line. We'll get it functioning pretty well. And I don't think that's a long-term thing. I think you'll see immediate and consistent improvement quarter-to-quarter starting next quarter.

[Operator]

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

[Chad Beynon, analyst]

Bill, last quarter, you teased us a little bit with some of the potential growth drivers down the road with Exacta beyond the internal saves and the growth in the third-party deals. I think those were ETG opportunities and also international. Anything to report or give us just a little bit more hope or clarity in terms of what growth could be beyond '24, '25 in those areas?

[William C. Carstanjen, executive]

Sure, Chad. Happy to speak to that. So those plans chug along. We're deployed in Malta in a partnership with another company. I think there are other opportunities there. But a company of our size and scale right now, that's not material. So I decided not to comment directly on that during my actual formal earnings comments. But that's underway, and that's part of the long-term growth strategy for Exacta.

And it feels good. It feels like there'll be opportunities not only internationally, but potentially in other jurisdictions within the United States. So I don't have any anything material to announce on this call, but it is something that our team works on and focuses on, and it's a part of the overall strategy for that business over the next number of years. And we are seeing success. We've already deployed overseas, and I think you'll see other examples of deployment overseas in the relative near term.

[Operator]

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

[William C. Carstanjen, executive]

Well, that was a pretty easy question. I was hoping for a tougher one. Do we want to come back to Sean? We can go down the list and return to him, if that makes sense.

[Operator]

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

[Jeffrey Stantial, analyst]

Maybe following up on Dan's question from earlier and focusing on Dumfries and really specifically more on the cadence of how you see that ramp-up progressing. Bill, you've talked about it a bit before on this call and prior calls as well, just variance and ramp timing for some of your other openings. Northern Kentucky grew a bit more gradually than, say, an opening like Terre Haute. Just curious where -- just need your thoughts on where you think Dumfries might fall in the spectrum given the project and the market characteristics here? And maybe in that, just how we should think about Q4 specifically, even the full launch or the ribbon-cutting won't be until early November?

[William C. Carstanjen, executive]

Yes. I'd break that up into a couple of components. First, our employee base there will be somewhere around 450 or so to start. And so that's -- it's a big property and that's a lot of new people in a new market for a facility of that size. So it's really important to us that the customers, when they visit that facility for the first time, for the first couple of times, they have a really great experience. Obviously, we want them to have a great experience every time they come to visit, and we will focus on that.

But when they first come, when they're sampling this for the first time, most of these folks have been the other gaming properties, they have expectations and we need to meet and exceed those expectations. So ramping carefully to ensure that we give the customers a great experience is really important. And this is a big property. There's a lot of operational procedures and processes going on here, and we want to make sure we get it right. So in general, our experience has been bigger properties ramp a little bit slower than smaller properties.

Now lots of things kind of affect that. There's not a lot of direct competition in the immediate area of these properties -- in some of the further areas of the MSA, there certainly are. So we'll have to see how that impacts how this opens up. But first and foremost, the focus is on giving these new customers a great experience, listen to their feedback, train our team up to make them as good as they can be, and then we start mining our database, building it and then mining it. So in general, compared to a real small facility, this will ramp a little bit slowly. And I think we'll be looking at growth from this for a long time to come.

So fourth quarter, I couldn't be more excited about this property than I am, but success isn't defined in the fourth quarter of 2024. Success is defined on how we build this quarter-to-quarter over the next number of years, and that depends on consistency, focus on customer service and giving the consumer the best experience that we can. So this is not a harbinger that I think we're going to start slow, that's a market with, I think, 4 million plus or 5 million people over the age of 21, this is a big market to introduce a facility like this. However, we are playing for the long term and that means delivering great experiences for these customers, all from a team member base that is real new to that market.

[Operator]

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

[Joseph Stauff, analyst]

I wanted to ask about the Virginia revenue growth that you experienced in the third quarter, obviously big growth, and realize there are a number of layers to that. But I was wondering maybe if you could disaggregate that a bit and tell us about, say, the bigger layers and contributions of that growth, largely trying to think about the sustainability of that growth rate, specifically in Virginia going forward?

[William C. Carstanjen, executive]

Sure. So it's fun to talk about Virginia. It's fun to talk about a lot of the areas of our company. But Virginia is a jurisdiction where a lot of things are going very well at the same time. And sometimes, when you find that, it's hard to run single variable experiments. So here are the things that are going very well. We believe our operating team and our processes, based on our experiences across the rest of our company, have really made a difference in Virginia.

We think we are operating the properties better than they've ever been operated before. We think our work on game titles and game mix, and our analytics around what's performing where and potentially why, have made a difference when we responded to that data that we've mined. We think that the enforcement actions with respect to gray games are a real tailwind that's driving performance. We also think the markets aren't mature yet and people are appreciating HRMs as a gaming option and becoming more familiar with it, and it's spreading deeper into potential customer segments.

So those are all things that are going well. This is a market that's not mature yet. It is not a mature gaming market in any way. And we are learning. We are operating better. We are seeing strengthening action from law enforcement agencies on working against illegal gaming. All those things are part of the tailwind that's driving the significant performance improvement of Virginia as a whole.

And I'm going to leave my answer at that because trying to break all that down into specific percentages aren't experiments -- require experiments that you can't deal in the real world. These are just all positive factors that are making a difference as a whole.

[Operator]

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

[Shaun Kelley, analyst]

We'll try this again. Can you hear me?

[William C. Carstanjen, executive]

We can hear you, Sean. We're ready for you now. Glad we found you out there.

[Shaun Kelley, analyst]

So Bill or Marcia, I just wanted to ask a little bit about the comments on the race calendar for next year. Obviously, very encouraging that you can reciprocate a bit with Virginia and the ability to kind of continue to add to that on the horse racing side. Can you just help us think through the financial implications here in terms of is the increasing race calendar going to be something we need to factor in a little bit in terms of profitability? And on the flip side, is there an opportunity down the road as you kind of continue to partner with the state of Virginia about what this might mean for the future?

[William C. Carstanjen, executive]

Well, racing in Virginia was a big component of why the legislature wanted to introduce HRMs. Virginia is a jurisdiction that has a storied history with Thoroughbred racing. That activity largely disappeared, all the racetracks had closed. And they wanted that back. They wanted that agricultural component and that industry back in the state. So building that is a part of what the Commonwealth wanted to see with the introduction of HRMs. And of course, it's a core component of our property.

And it goes back to one of our tenets of what we look for. We like the complexity of an ecosystem like this. We understand how all this fits together. We understand the racing. We believe in the racing and the racing has a couple of components. When you can introduce good content into the racing ecosystem, we have several ways to capture that. We can capture that with on track activity. So sponsorships and other things -- attendance, wagering on track. But we can also capture it through simulcasting and, in particular, online wagering on horse racing, including our own TwinSpires.

So I think as we introduce higher-quality racing and better racing and Derby prep racing, that will improve the performance of racing. But given we've also deployed 5,000 -- or will have deployed 5,000 machines relatively shortly in the jurisdiction, the impact of that in terms of materiality to the overall operations of Virginia is harder to isolate and understand. It's not a big economic driver in and of itself given it sits as a part of HRMs, but it's a positive one and it's one that we're going to focus on.

And it's critical to the overall ecosystem and relationship with the state. It's part to the promise we have with the state that we will build that industry, because not only is it of some improvement to our bottom line, it drives economic activity throughout the rural regions of the state and across the training community, the farms, the feed providers and all of the other parts of the ecosystem that drive benefit and perceive value to the state.

[Operator]

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

[Daniel Guglielmo, analyst]

I wanted to focus on the HRM consumer strength in both Kentucky and Virginia. Why do you think the demand in those states has been able to hold up so well when compared to other regional gaming states? And how is that demand compared to what you expected when building the platform in Kentucky and underwriting P2E?

[William C. Carstanjen, executive]

Yes, that's a good question, Dan. Happy to talk to that. There are several factors that contribute to what you see as clear performance across Virginia and Kentucky. Start with the fact that it's not a mature product yet. It's not mature in the markets that it's open in. And as a product itself, it's still improving. We are introducing more games, better variety, better math. We're driving product improvement, product awareness, market penetration. It's very high margin. So when you do these things well, you capture a very high percentage of it to your bottom line.

So it's different. It's a newer thing. It's a new thing. And it just doesn't track -- because of that, it has different attributes than, say, a traditional regional gaming. It just performs differently. And that's a function of all the factors I've just mentioned. They're all important, and they all provide a tailwind that gives a different financial profile than you see in other spots in gaming right now.

[Operator]

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

[Jordan Bender, analyst]

I want to touch on the balance sheet. We don't know the size of the budget for the multiyear project at the track that you just announced, Bill. But does the balance sheet reaching the targeted range open up larger growth projects or opportunities that you might not have otherwise looked out in recent years?

[William C. Carstanjen, executive]

Well, as our company has gotten bigger, we can dream bigger and we can execute on bigger projects. And that's been a thrill for those of us that have been around for a long time, myself, Bill Mudd, Marcia Dall. Those of us who have been around for a long time are really pleased to see as we get bigger that we have the capacity and capability and experience across our team to go execute on bigger projects. So as we as we finalize, work through, build out projections and costs for the Derby projects we talked about, we do so with a lot of confidence.

Over the last couple of years, we've been focused on Dumfries. We've been focused on getting Owensboro done and completing the Paddock renovation project, all of these projects. Well, now we're going to see those pay off and we're going to see the cash flow come off of those, and we expect to be able to delever relatively quickly. And that just means we've got more firepower to go out and do great things. So we're busy figuring out how best to deploy that capital.

And as we've gotten to be a bigger company, and I think a very well-run company, this capacity is important to us because we have a lot of ideas that we want to have the size to be able to go out and do. And of course, ultimately, this is a function of what return will provide to our shareholders. Total shareholder return is never far away. It's always the immediate focus for us. And as we get bigger and stronger and do bigger projects, that's not going to change. It's that return we think we can generate. But now we've got the size. As we're growing, we've got the size to go out and do bigger projects.

[Operator]

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

[Benjamin Chaiken, analyst]

In Virginia, there's a lot of positive developments which you thoughtfully walked us through, the race calendar, greenfield developments and then overall relationship with the state. I think you suggested in some of your earlier comments expanding your footprint in Virginia over time. There's obviously a goal and a limit of 5,000 machines within Virginia. Can you talk to us about the path, if any, you see to potentially expanding that number over time? And then, I guess, related with your existing footprint, is there theoretically more capacity? Or would you want or require a new property?

[William C. Carstanjen, executive]

Well, without speaking out of turn, we think the Virginia model works extremely well, and we think we are delivering for the Commonwealth as well as for our shareholders. So we do think it's a model that works. And if the state has interest and willingness, we hope to talk to them about more. We think from a racing perspective, we'd love to see more days run in Virginia over time. And consequently, we'd like to see more HRMs deployed over time in order to support that.

And so that -- we serve at the discretion of the state. Our franchise is a discretionary right given to us by the state, and we hope to talk to them about it. But right now, our focus is on delivering on the promises we've made them so far and delivering for the people of Virginia and for the state. And hopefully, if we prove the value of that model, there'll be willing listeners to talking about improving and doing more in the state.

But it's hard to talk about things we don't control, and I don't want to make promises we can't keep. But we think Virginia is a shining example of how you make Thoroughbred racing work in a jurisdiction in a way that is a win-win for the state, for us as the operator, and for all the subsegments of the Thoroughbred industry, the farms the trainers, the horse owners, the people they grow the feed, the people that take care of the horses, it's a win-win for everybody connected to the industry.

[Operator]

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

[William C. Carstanjen, executive]

Thank you. And for those of you on the call and for those of you who are investors in our company, I want to thank you for your confidence that you've shown in us, and I want you to know that we take it very, very seriously. And this is an exciting time for our team because we think we have the support of our Board and the support of the investor community and the opportunity to do great things.

So we're going to do the best we can to drive returns for you. And we're excited to talk to you in February to share more of our progress in the interim. So thanks very much, and talk to you all soon.

[Operator]

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