Churchill Downs Inc

NASDAQ:CHDN

Earnings Call Transcript 2020-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated Fourth Quarter and Year-end 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury, Risk Management and Investor Relations.

[Nick Zangari, executive]

Thank you, Katrina. Good morning, and welcome to our Fourth Quarter and Year-End 2020 Earnings Conference Call. After the company's prepared remarks, we will open the call for your questions.

The company's 2020 fourth quarter and year-end business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled News, located at churchilldownsincorporated.com as well as in the website's Investors section.

Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent report on Form 10-K.

Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and Form 10-K 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, Nick. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel.

As we begin this discussion about our 2020 results and our expectations for 2021, it is important to take a minute to reflect upon the unprecedented challenges that our country and the world as a whole faced in 2020, stemming from the global pandemic.

COVID-19 significantly affected the health and well-being of so many people as well as our economy, our businesses, our guests and our team members. I am proud of how our leadership team and our team members reacted quickly to the pandemic's threat to our company. Our team took actions to immediately reduce expenses and capital spending and to redesign our safety and health protocols, which enabled our properties to reopen safely for our team members, our guests and our communities.

And in a very challenging environment, we were able to safely run the 146 Kentucky Derby, maintaining its iconic stature as the longest continuously run annual sporting event in the United States.

Going forward, we remain focused on protecting the health and safety of our guests and our team members while we operate each of our properties as effectively and profitably as we responsibly can.

Today, we will discuss 4 topics. First, high-level thoughts on our 2020 results; second, an update on the legislative change related to Historical Racing Machines in Kentucky and the restarting of the capital projects that we had previously suspended; third, an update on our TwinSpires Horse Racing, sports betting and online casino strategy; and last, some thoughts on our growth strategies going forward and our plans for the 147th running of the Kentucky Derby this May.

Marcia will then walk through the financials for the fourth quarter in more detail and provide an update on our capital management strategy. After she finishes, we will take your questions.

So first, some high-level thoughts on our 2020 results. Obviously, we did not achieve the budgeted adjusted EBITDA targets we set for ourselves in 2020, but that was because of the many restrictions and changes resulting from the pandemic. We cannot reflect on 2020 solely using our traditional financial metrics. Through these challenging times, we were pleased on how our teams adjusted our business practices and protocols to conduct our operations.

Given the environment, we believe we demonstrated significant financial strength and operational excellence. A great example of this is how our team developed and executed the plans to safely run the Kentucky Derby spectator free on Labor Day weekend instead of our traditional date on the first Saturday in May. We generated double-digit positive EBITDA for Derby week even without a crowd and while conducting it during a completely different time of the year when our customers were not used to seeing it. We protected the safety of our community and team members and also protected the reputation, the brand and the long-term value of this iconic asset.

I will share some preliminary thoughts on the 2021 Derby in a few minutes. Regarding our Derby City Gaming HRM property, Derby City Gaming generated more adjusted EBITDA in 2020 than in 2019, despite close -- being closed from the middle of March until the middle of June, and operating most of the year with significant COVID-related restrictions.

We have added new game manufacturers with the addition of Scientific Games and IGT. Also, Konami will be submitting, for the first time, game themes for approval at the next Kentucky Horse Racing Commission meeting, which will further diversify our HRM offering. We also opened a second outdoor smoking patio with an additional 225 HRMs in early September that has been very well received by our customers.

With respect to our other HRM properties in Kentucky, we are pleased with the performance of our Oak Grove facility in Southwest Kentucky, north of Nashville, Tennessee on Interstate 24. The HRM facility opened in mid-September and the 128 room hotel opened in October. The remaining amenities, including the Equestrian center, the outdoor concert venue and the RV Park will be operational this quarter. We opened this property in the middle of the pandemic, but it continues to perform even better than Derby City's comparable opening period.

We opened our Newport Racing and Gaming facility in Newport, Kentucky last year on October 2. Newport is performing well in a very competitive Northern Kentucky, Southern Ohio and Indiana market given we opened in the middle of the pandemic.

It will take some time and patience to build our customer database and customer loyalty program. We are optimistic because the population demographics are solid, and we have an increasingly competitive product and an experienced team. We will continue to refine our marketing and improve this property as we move forward through the year.

It is gratifying for our team that our 3 HRM facilities have created nearly 600 full-time equivalent jobs with the Commonwealth of Kentucky and have also generated substantial purse money for Kentucky's premier racetracks, which in turn fuels the health of Kentucky's racing circuit and the entire Kentucky horse industry.

Turning to our Online Wagering segment. Our TwinSpires Horse Racing business showed very strong growth in handle over prior year, up 36%. This reflected the shift from brick-and-mortar betting to online wagering that began during the closures of most facilities in the March through June 2020 time frame. There was also a very modest level of increased wagering by our existing players in 2020. These factors together more than offset the impact of slightly lower industry handle in 2020, which was caused by significant race cancellations due to the pandemic.

On our third quarter earnings call, we shared some metrics that demonstrate the significant growth trend within this business, including: we grew handle 21% in the second quarter compared to the prior year quarter, despite the absence of the Kentucky Derby in May; and we grew handle 69% in the third quarter compared to the prior year quarter, with the Kentucky Derby held in the third quarter of 2020 versus the second quarter in 2019. And now in the fourth quarter, our TwinSpires Horse Racing business grew handle 45% compared to the prior year quarter, and the number of active players increased by 50%. This is the third quarter of double-digit increases in handle compared to the prior year quarter and is a testament to the organic growth potential for the business. It is a very profitable business based on pari-mutuel wagering, that in 2020 generated nearly $127 million in adjusted EBITDA, up $48 million or 62% compared to the prior year and with more than a 30% margin for the year.

This growth in online wagering and horse racing is a trend that has continued into 2021. Wagering on horse racing on TwinSpires has remained strong through January and into February, and all of our important metrics continue to reflect a healthy growing platform.

Regarding our online sports betting and casino business, we are still transitioning from our initial technology provider to GAN for player account management and Kambi for managed trading services. While disruptive, we believe this change in technology providers is critical to our long-term success. We have completed all of our retail sportsbook migrations, and early indications show high double-digit handle growth across our retail footprint since migration.

We launched our first online TwinSpires-branded sportsbook and casino offering on the new platform in Michigan, along with the first wave of operators in the state in early January. We are targeting a launch in Tennessee on our new platform within the next month and we'll complete the transition of our existing online sportsbook and casino operations in other states to the new platform by the end of this quarter, including rolling out the mobile app in Pennsylvania and Indiana upon receipt of regulatory approval.

We intend to roll out our mobile and online sports betting platform in Colorado prior to the Kentucky Derby. While the online sports betting business operates at a loss at this time, we will continue to invest in this space. The real size of the EBITDA opportunity will play out over years and not quarters, and thus, we are focused on very carefully developing our business model for the long term.

I will talk more about our growth strategy in this space in a few minutes.

Regarding the performance of our regional gaming properties. All of our gaming properties are open. Rivers Des Plaines, Presque Isle and Nemacolin were shut down for a second time for part of November and December 2020, and reopened in early January 2021. While all of our properties still have some level of capacity or other operating restrictions, our Oxford, Presque Isle and Calder casinos are the ones most meaningfully impacted currently by state and local regulations.

Performance will improve at those facilities substantially as restrictions are lessened. Our other properties are performing strongly despite various levels of capacity or other limitations, and we expect these properties to continue to improve as we get further into the year. We are maintaining ongoing safety and health protocols at every property to ensure the safety of our guests, our team members and our communities, and we will do so for as long as necessary.

Overall, we are pleased with our gaming segment performance in 2020 despite the lower adjusted EBITDA generated by our properties due to the impact of the pandemic. Our wholly-owned casino margins, excluding the parts of the year that the casinos were closed due to the pandemic, were up significantly from the prior year. We continue to see the benefits from the systemic reduction in marketing and customer incentives like free play as well as the elimination of a number of amenities.

Certainly, we are glad 2020 is behind us, and I'm very grateful to our leadership team, our team members and our guests who have supported our company and helped us stabilize, improve and even grow some of our businesses in the midst of an unprecedented global health crisis.

The second topic today is an update on the legislative change related to Historical Racing Machines in Kentucky and its impact on our capital projects in the state. On Monday of this week, Governor Beshear signed into law a bill recently passed by the general assembly that significantly clarifies the definition of pari-mutuel wagering including its application with respect to Historical Racing Machines.

The Kentucky Supreme Court decision issued this past September had created some uncertainty around the Kentucky Racing Commission's interpretation of this definition. Although the Kentucky Supreme Court ruled on the legality of a specific manufacturer's Historical Racing Machines and did not address the games of any of the manufacturers we deploy at our facilities, the horse racing industry in Kentucky worked closely together with the general assembly and the governor to codify clarifying language to eliminate any potential ambiguity with respect to the legality of Historical Horse Racing machines under Kentucky law.

This was a really important initiative for the Kentucky horse industry, and we are very appreciative of the leadership and hard work of the governor and the general assembly.

We are also happy for all of our constituents, including the horsemen and the many other participants in and fans of the horse industry, who encourage their respective elective representatives to support this important bill to protect the thousands of jobs across the Commonwealth and HRM facilities and, directly and indirectly, in the horse industry. We are also pleased for our guests who vigorously voice their opinions to their elective representatives so they could continue to enjoy the Commonwealth's HRM facilities as they had chosen to do over many years.

We've already restarted the construction process for our Turfway Park Racing and HRM facility and are targeting a grand opening in the summer of 2022. We have suspended the significant capital project because of the uncertainty when COVID first hit last year and then later until the Kentucky General Assembly had an opportunity to review the Kentucky Supreme Court decision.

We anticipate spending approximately $145 million in project capital to finish building this premier facility and -- that will deliver approximately 800 construction jobs and 400 full-time permanent jobs in the Northern Kentucky area as well as revitalize the Kentucky winter thoroughbred racing circuit.

With respect to Churchill Downs Racetrack, we have used the past 12 months, while we navigated the pandemic and worked to pass the HRM legislation, to revisit our plans for a hotel and HRM facility at the track. Before suspending activity when the pandemic hit, we had completed all of the underground utilities and a handful of site prep projects. We spent approximately $15 million of the $300 million of capital that we had approved for this project.

We are finalizing our revised plans that we believe will be just as impactful and exciting for our customers and community. We believe that we can and should do the project more cost effectively as we reimagine each of the 3 elements of the overall project: a hotel, an HRM facility and expanded permanent seating hospitality. There is really a fourth element to consider as well, which is the potential future expansion at Derby City Gaming. This facility has really performed well since opening and, in particular, showed its growth potential throughout last year.

We're not ready to discuss our revised plans today. We need more time to reflect on all that we have learned. You can expect to hear more from us in the next couple of months as these plans are solidified.

Next, an update on our TwinSpires Horse Racing, Sports Betting and Casino business strategy. As I previously said, TwinSpires is a very profitable, high-margin operation with substantial revenue and adjusted EBITDA growth that is enabled by its pari-mutuel wagering model, relationship with the Kentucky Derby and Churchill Downs Racetrack and long-deployed, disciplined customer acquisition approach. It performed very well in 2020 and has started very strongly in 2021.

In January, based on the strength of the TwinSpires brand, we announced our decision to rebrand our online sports and casino business from BetAmerica to TwinSpires. Changing our sports betting and online iGaming business to TwinSpires will allow us to better leverage the Kentucky Derby, our database of horse racing, wagering customers and other cross-selling initiatives to lower customer acquisition costs and enable clear product positioning and differentiation from competitors in the online sports and casino space. The combination of our improved technology stack along with our rebranding should help provide much improved execution in the space.

We are pleased with our initial results in Michigan, which reflects a much higher percentage of online casino handle that we anticipate -- that we will anticipate will be more profitable over the long-term than sports betting for us in this state. So far, Michigan is better than we thought it would be for us with respect to customer acquisition costs and player performance data. We will stay focused on building a profitable online sports betting and casino business that operates efficiently with the variable cost technology model and that grows based on disciplined marketing spend and bottom line profitability goals.

This industry is still in the early stages with many participants pursuing maximum market share and top line revenue in every state, with limited regard for short-term, or potentially even long-term, profitability. We don't want to do that and view this space as one in which the mature business model and its related margins will not be settled for several years as opposed to a number of quarters.

Our strategy is based on our experience building a successful and profitable online horseracing betting platform. Keep acquisition costs low and leverage our online horse racing database and the Kentucky Derby; retain customers over the long-term with economically viable player reinvestment and exceptional service; and be willing to walk away quickly from market share when the model doesn't work. We have a lot to prove in this space, and we believe we'll start doing that in 2021.

Next, I will provide some thoughts on our other growth strategies going forward and our plans for the 147th running of the Kentucky Derby in May. We believe our gaming properties are well positioned in their markets. Our regional markets have been resilient during the past year. We will continue to monitor and adjust as we see the need for changes.

Some of the restrictions around hours of operation and capacity limitations are being removed with the improvements in the COVID positivity rates. We believe patron restrictions and other limitations will apply to our casinos and HRM properties through the first half of 2021 and will be gradually lifted in the second half, assuming that COVID cases continue to decline based on the increasing availability of vaccines and other factors.

We've optimized our cost structure at our properties for these assumptions to maintain industry-leading margins in 2021. We are anticipating some competitive pressures in 2021 to our Harlow's property from the new permanent casino in Pine Bluff, Arkansas that opened in October 2020 and to our Nemacolin property from a new casino east of Pittsburgh that opened in November 2020. We also anticipate continued organic growth for each of our 3 HRM properties in 2021, but especially for Oak Grove and Newport, which are just getting started.

We are maintaining a disciplined approach with respect to our maintenance and project capital at our wholly owned gaming properties in light of the current environment. Marcia will provide more detail in her comments about our 2021 capital plans.

Regarding our equity investment in the Rivers Des Plaines Casino, we recently announced that the team at Rivers is moving forward with a more capital-efficient construction plan to expand the gaming floor. As you will recall, Rivers has approval to increase their gaming positions from 1,200 to 2,000 based on the May 2019 Illinois gaming legislation. Rivers had previously added approximately 77 of these positions to its existing floor to the extent there was space.

Rivers plans to invest $87 million, which will be funded from additional debt financing at the Rivers' entity level. The expansion will be built between the existing casino building and the recently expanded parking garage on the north side of the property. The first floor of the new area will provide an expanded gaming floor and will include a new restaurant. The second floor will feature a 24-table poker room, a 10,000-square foot ballroom for private events and live entertainment and a slot machine gaming area. The expansion will accommodate approximately 725 gaming positions based on a combination of new slot games and table games, resulting in the facility utilizing its full 2,000 positions permitted under current law.

The Rivers team will begin construction this spring with a target completion by spring of 2022. Rivers will also pay $24 million in licensing fees for the incremental 800 gaming positions. This project is an exciting one for us, and we believe a very efficient deployment of growth capital.

Regarding the Waukegan Casino proposal, the Illinois Gaming Board announced that they are continuing to work on hiring an investment banking group to evaluate the 3 proposals. It's unclear whether the Illinois Gaming Board will be in a position to announce their decision regarding awarding the license in 2021.

Regarding the proposed Downtown Chicago Casino, the City of Chicago has not yet put out a request for proposal. We anticipate that, that will be a lengthy proposal process, and we will update you periodically when it makes sense going forward.

We announced this week that we are initiating the sales process for the Arlington Park Racetrack land. We will conduct racing in 2021 at the track while moving forward with the transaction to sell this highly desirable land for other non-horseracing mixed-use options. It is our intention to work constructively with state and local authorities to find a solution to continue thoroughbred operations in Illinois, and we look forward to further constructive dialogue as we explore alternatives. I am optimistic that the state and local authorities are interested in finding a path forward with us.

And last, we are working hard on the preparations for the 147th Kentucky Derby, which will be run on May 1, 2021. We are currently planning to sell our seated areas at approximately 40% to 50% capacity and may offer some amount of general admissions tickets when we are a little closer to the date. We may adjust our ticketing plans as we see further improvement in the circumstances surrounding the pandemic.

We plan to deliver an exciting Derby week experience for all of our guests, and we hope to see some of you there. We won't be all the way back this year, but we'll certainly expect to do much, much better in all categories than 2020 and plan on delivering an amazing experience that will blow our customers away.

In summary, we are grateful to all of our leaders and team members, business partners, our guests and local communities who helped us weather the challenges we faced last year. We were pleased to restart the capital and growth projects that we had put on hold. We look forward to continued significant organic growth at Derby City Gaming, Oak Grove and Newport in Kentucky and Rivers Casino Des Plaines in Illinois. We also look forward to the immediate construction of Turfway Park and the reimagining of our plans in Louisville around Churchill Downs Racetrack.

I'm also excited about what we may accomplish in Illinois, as we just discussed. Online organic growth is our objective as well. Across all of our businesses, our teams are determined to deliver long-term profitable growth, along with the best possible total shareholder return for our investors over the long term.

Our balance sheet is very strong and provides us the opportunity to make acquisitions to fund our organic growth, to pay dividends and to make strategic share repurchases. We've demonstrated our ability to deliver on all of these fronts. With a great portfolio of future growth opportunities, some of which we discussed today and others that we are working on and we'll discuss when appropriate, we have significant access to capital to support our initiatives.

As we emerge from the challenges of the pandemic, 2021 is a transition year, but one where you can see we are firmly on track with good things on the immediate horizon.

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. This morning, I will share some thoughts on our 2020 performance, including some additional detail on fourth quarter. Then I will provide an update on our capital management strategy and our 2021 plans.

As I prepared my remarks for today, I looked back at my quarterly earnings comments from last year. On our first quarter earnings call last year, I began my comments by stating that our leadership team has always had a commitment to maintaining a strong balance sheet with relatively low leverage in relation to others in the gaming industry and a capital structure that provides flexibility to support organic growth and enable our business to be nimble through different economic cycles. Our strong balance sheet, relatively low leverage and flexible capital structure proved to be a critical fortress that enabled our company to navigate the challenges that were thrown at us in 2020.

Our leadership team's quick actions to reduce our cost structure, preserve capital and provide additional financial resources in response to the unprecedented pandemic crisis, reflected the resilience necessary to weather these difficult times. I want to personally thank our leadership team and team members for their commitment and dedication in the face of such incredible adversity.

Turning to our financial results. There were 3 significant factors that impacted 2020. First, the closure of all of our brick-and-mortar gaming and HRM properties and our horseracing operations for certain periods of time in the year as a result of the COVID-19 pandemic. We were impacted in the November and December time frame as a result of the temporary closure of Rivers Des Plaines, Presque Isle and Nemacolin as well as some additional restrictions at a few of our other properties. All of our properties have been open since the middle of January, and we have seen some restrictions being lifted at our properties.

Our team aggressively reduced expenses and was able to generate significant margin improvements year-over-year when the properties reopened. For 2020, excluding quarterly results for properties that were closed during a quarter, the margin for our wholly owned casino properties was up 690 basis points.

Second, we ran the 146th Kentucky Oaks and Derby without any spectators on Labor Day weekend instead of the first weekend in May. And as Bill highlighted, the team was still able to deliver double-digit positive EBITDA for Derby week while protecting the long-term iconic value of this incredible asset.

And last, our TwinSpires business benefited from a significant increase in the level of online wagering on horse racing. As Bill discussed, the closure of most brick-and-mortar betting locations caused wagering on horse racing to shift from these brick-and-mortar locations to online in second quarter.

In prior periods, online wagering on horse racing represented 35% to 40% of all wagering on horse racing. In second quarter of 2020, we saw this increase to approximately 75%. And then as various betting locations reopened in the third quarter, we saw online penetration of 54%.

The diversity of our portfolio of businesses enabled us to still generate over $1 billion of revenue and $286.5 million of adjusted EBITDA despite the unprecedented challenges that we faced in 2020.

Regarding our fourth quarter results, adjusted EBITDA of $79 million was up over $5 million or 7% compared to the prior year quarter as a result of the strong growth from our TwinSpires horse racing business, our new Oak Grove HRM facility and from Derby City Gaming. This strong growth was partially offset by the impact of lower adjusted EBITDA for our gaming properties in the Churchill Downs Racetrack due to the ongoing patron capacity restrictions as well as the closure of Rivers Des Plaines in November and Presque Isle and Nemacolin in mid-December for the remainder of the year.

Regarding our TwinSpires Horse Racing business, the fourth quarter 2020 was the third year in a row we grew handle by over $100 million compared to the prior year quarter. The business grew quarter-over-quarter handle by $100 million in the second quarter, $254 million in the third quarter and $141 million in the fourth quarter. This growth in handle has translated directly and reliably into record levels of adjusted EBITDA for this business.

And last, regarding fourth quarter, excluding our Presque Isle and Nemacolin properties that were closed for a portion of December, our wholly owned casino margin increased 570 basis points compared to the prior year period despite lower net revenue. We remain disciplined regarding our competitive offerings at each property.

Turning to capital management. In 2020, we spent $23 million on maintenance capital, primarily related to capitalized labor-related improvements to our TwinSpires Horse Racing technology platform and mandatory items at our gaming properties. For 2021, we anticipate spending $50 million to $60 million on maintenance capital, of which about half is targeted for our gaming properties, primarily driven by our deferral of spending in 2020. We also anticipate spending the majority of the remainder on replacing the turf course at Churchill Downs Racetrack and on continued improvements to our TwinSpires Horse Racing technology platform.

Regarding project capital. In 2020, we spent $211 million on project capital, of which more than half was spent on the Oak Grove facility. The balance of the project capital was spent on the Matt Winn's Steakhouse project and the quarantine barn at Churchill Downs Racetrack, the build-out of the Newport Racing & Gaming facility, the grandstand demolition and site preparation at Turfway Park and the additional smoking patio at Derby City Gaming.

For 2021, we anticipate spending $150 million to $160 million on project capital, of which approximately half is planned for the build-out of the Turfway Park HRM facility that Bill discussed, and the final completion of a few carryover projects related to Oak Grove and Newport as well as some smaller capital projects at our gaming facilities. The balance of the 2021 profit capital is a placeholder for the potential capital expansion plans at Churchill Downs Racetrack that Bill also mentioned. We will provide more detail on this project in the future when the revised plans are more fully developed.

At the end of December 2020, we had net leverage of 5.5x, reflecting primarily the lower level of 2020 adjusted EBITDA as a result of the pandemic. We were compliant with both of our revolver covenants for each quarter in 2020, even though we have a waiver of these covenants through the reporting period for second quarter of 2021.

A few weeks ago, we repurchased 1 million shares of our stock for $193.9 million from an affiliate of The Duchossois Group that we funded with our revolving credit facility. We're also planning to pay $124 million related to the Kater and Thimmegowda settlement near the end of March.

Therefore, we anticipate raising a combination of secured and unsecured debt in the first half of this year, primarily to repay the outstanding balance on our revolving credit facility. This will provide flexibility to use our revolving credit facility for opportunistic growth over the coming year.

We appreciate the support of our bank group and debt holders who recognize our proven track record of disciplined growth. Their support enabled us to continue to invest in strategic organic growth projects and to pay a 7% higher annual dividend to our shareholders and to strategically repurchase a large block of our shares in early 2021.

We anticipate that our net leverage will decrease over the balance of 2021 and in 2022 as our businesses return to full throttle, and we accelerate the growth from our newer properties over the coming years.

In closing, we are in a unique position of having many opportunities to support our long-term growth. As Bill mentioned, 2021 is a transition year for our company as we anticipate the gradual lifting of the restrictions on our properties throughout the year and as we begin to return to a more normal and magical Kentucky Derby.

As we look beyond 2021, our outlook reflects the acceleration of organic growth at Derby City Gaming, Oak Grove, Newport as well as the expansion at Rivers Des Plaines. We're also expecting to begin to see the benefits of growing our online wagering segment through the expansion of sports betting and iGaming, leveraging our TwinSpires brand and customer base on a state-by-state basis. We will also see additional growth in our adjusted EBITDA from the opening of Turfway Park and additional expansion projects at Churchill Downs Racetrack.

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]

Thanks, Marcia. If any of you have any questions, and I expect you do, fire away. We're here to take them.

[Operator]

[Operator Instructions] Your first question comes from the line of Dan Politzer from JPMorgan.

[Daniel Politzer, analyst]

So first, I was hoping we could touch on the HRM facilities and how you think about the opportunity set within Kentucky. Obviously, Oak Grove, win per unit there has been improving in the past few months. I think it's up to 220. Newport is still kind of ramping and Derby City has been absolutely impressive at, I think, over 450 days in January.

So how do you think about the opportunity and the ramp across these facilities? And I guess, where do you see the most upside from here as you think about that?

[William C. Carstanjen, executive]

So the product is getting better and better. And that's one of the most exciting things about this opportunity. The product is getting better, more manufacturers are interested and are participating and that's giving us a more competitive offering.

So I'm excited about that. I think our team is excited about that. And of course, when you look at taking them one at a time, in no sense was the Louisville market or Derby City Gaming mature when the pandemic hit. So we have a natural ramp up even in our facility that we've had the longest. It hasn't been that long, but it's still our oldest facility.

And when you think about Oak Grove down on the Tennessee border, which is going to pull out of the Tennessee market, in particular, Nashville, we're just getting started there. And we started during a period where there's been a pandemic, and that's clearly hindered the start path. But even with that hindrance, it started so well for us. So we have a couple of factors that are really good to have.

One is we have an improving product and a pathway to see improvements in the product. We have a new product. And also our facilities are new and in no sense in mature markets or mature facilities. So we feel pretty good about those. And we have some of our best and brightest in the company focused on those properties to drive them forward.

[Daniel Politzer, analyst]

Great. And do you think -- how do you think about the margin opportunity, Oak Grove relative to Derby City, given it's a little bit more of a full offering down in Oak Grove?

[William C. Carstanjen, executive]

You hit it on the head. I think the margins will be nice. It's a very efficiently built facility. And I think that's something we're good at when we get the opportunity to do greenfields. We're very focused on efficiency and margins. But that one has a hotel and some other amenities. And while those are good things to have and they drive a bigger business, they also -- they can also lower your margin because the business they drive doesn't have quite the same margins.

So the margins on HRMs in Kentucky have been solid. That's really been a testament to how we've built and operated our facilities as opposed to any natural -- other advantage at play. That's a testament to our team and their careful approach to building an efficient property.

But when you have a situation like we do in Oak Grove, where we want to drive people to visit us from the -- in particular, the Nashville market.

[Technical Difficulty]

[Operator]

Apologies about that. One moment while will we reconnect the backup speaker line. All right. Presenters, the backup speaker line is now connected in the main room. You may proceed.

[William C. Carstanjen, executive]

Thanks. I'm sorry, everybody, if we dropped you for a second. But when I heard that beep, I was just wrapping up my comment on the Nashville market and the desirability of having more amenities, so we can get people to get in their cars and drive a little bit further distance to visit us than they do in our other markets.

So I don't think you missed anything. And Dan, if you have any follow-ups, fire away.

[Daniel Politzer, analyst]

No worries. Just one more, kind of switching gears into the sports betting and iGaming stuff. Obviously, valuations have continued to rise. There's been a lot of robust growth. I mean, I guess we should -- as we think about your footprint here, it does seem like being a first mover does have some advantages. And while certainly, you're being measured in your approach, how do you kind of weigh the pros and cons of being a little bit more conservative on the marketing side at this stage as you think about the longer-term opportunity and with the goal of, obviously, this being a material contributor to your business?

[William C. Carstanjen, executive]

Well, we have to weigh those things very, very carefully because, obviously, there are a lot of smart people out there that talk constantly and put their money where their mouth is, who believe that first-mover advantage is the be-all end-all and a must-have. So we have to respect the views of those folks.

And I think in our case, we don't want to play it that way. We have a balance sheet that we treasure that's been important to us that we think about all the time. And we don't want to compromise it in a universe where the ultimate business model at play here in terms of margins and player reinvestments is something that's going to be determined over years and not quarters. So there's a lot of risk to being wrong.

So we took all those inputs and said, well, what we need to do for our company is demonstrate a very quick pathway to profitability and don't chase share and don't chase size, chase profitability. So everything we do in this company is built on a short time frame and a conservative time frame on when we think we can demonstrate profitability. And that will be our model design to keep us in the game long term. And we'll be more aggressive when we're more sure about the returns we can drive.

And if we're not sure about the returns we can drive for our shareholders, then we sit on the sidelines and we wait until we are sure. And the risk on that is you lose first-mover advantage and not everybody out there can follow the same strategy, and first-mover advantage is not the strategy that can be an advantage for us.

Although now that we have our technology platform, I don't think we're disadvantaged in terms of our offering, but we're just not going to chase player acquisition costs the way others are, and we'll see how it sorts out over time.

[Operator]

Your next question comes from the line of Finn Barrett from Bank of America.

[Finn Barrett, analyst]

Congrats on the great quarter. Just wanted to touch quickly on some of the trends you're seeing so far in 2021 across both the regional gaming portfolio and the HRM facilities in Kentucky. Just how those are going compared to maybe third quarter when we saw some of the better demand in 2020? And any expectations for returns, especially around the older demographic in your database.

[William C. Carstanjen, executive]

First, welcome, Finn. So the pandemic really -- obviously still really affects American commerce, and it affects everybody, including the older demographic in terms of their willingness to take trips. So I think a real driver for all our properties, whether they be mature properties or newly opened properties, is going to be when are people vaccinated and comfortable and otherwise willing to return to their normal patterns of behavior. And I think that's something that we'll see develop over 2021.

And that's why I used the year that this is a transition year. We can't go full throttle and won't go full throttle at all our properties because we're still in a bridge time period where things are getting better, it appears, with respect to the pandemic, but we're not out of it. And it is something that affected all avenues of American commerce including our brick-and-mortar facilities. And that's the big driver.

But -- and I think that's the most important driver, and it's so important it sort of overwhelms other things. But I guess if I had to do another one, I'd say, clearly, the last few weeks have been weather impacted.

[William Mudd, executive]

Yes. I would say, Dan, there's a lot of noise going on. This is Bill Mudd. Between third quarter, fourth quarter and the first quarter, the third quarter, obviously, very big. There was probably some pent-up demand coming out of the second quarter, everything was shut down. Fourth quarter fell off a little bit, and that's really driven by new constraints put on casinos by certain states. January came back to be very strong again. And then February hit, and we had ice and snow and a few other things.

So in terms of people coming back, it's very gradual. I think we're at the beginning of the vaccination. Really, it's still the beginning of the estimation process, and I think that will continue to draw people back to the sites as they become more available.

[Finn Barrett, analyst]

That's super helpful. And then switching gears a little bit to the online opportunity. It would just be great to hear on the TwinSpires side of things some of the player activity and behavior you were seeing in the quarter. And what you think that means in terms of durability of that demand in this opportunity? And then as well when we think about Michigan, be curious if you guys saw any uplift from the TwinSpires database with the rebranding of the app compared to some of your markets where you're still BetAmerica and kind of your plans as you rolled the TwinSpires brand into new markets, just if we can expect to see kind of a -- essentially relaunch, for lack of a better term, in terms of marketing and customer acquisition under this new brand? Or if it's more kind of a subtle stealth rollout?

[William Mudd, executive]

Okay. And there's a lot of questions there. So let me try and take them kind of one at a time. I'd say, first of all, on the value of the new cohorts that are coming into TwinSpires, the value of those cohorts are higher than what we've traditionally seen. And I think some of that's driven by the fact that they're sitting at home and working from home. And there's a pick 6 or a pick 5, they want to play during the day, they're able to do that much more easily.

So the value of those cohorts are generally higher. They're somewhat younger, but we are also seeing a lot of elder group coming in there as well. So in terms of continuing, I think when people sign up for an account and they have the access to that account, they're going to continue to play. But I do think that there are certain people that when they're at the race track, they don't want to put money through the window.

So I think we'll keep a good chunk of them. A huge chunk, I think, of the folks that have decided to go online. But I think some of that will, a small portion of that will go back to the windows, if and when, or I should say when, racetracks reopen for live folks to be there.

In terms of Michigan, yes, this is the first time we've launched in a jurisdiction where we have won an active TwinSpires database, along with an app that works, a mobile platform that works, an on-site offering, albeit the Upper Peninsula in Michigan.

But on the new technology platform -- and what I can say is our conversion rates under our new platform are much higher. The retention and stickiness of keeping those players is much higher and the value of the player is much higher. So we've been very happy with that. And I think that gives us a lot more confidence around what the long-term value of these players will be versus what we had seen before.

Our casino offering on a new technology stack is vastly improved from where we were in New Jersey and Pennsylvania and Indiana -- or excuse me, in Jersey and Pennsylvania where we currently operate, certainly having [ hacked path ], keeps those conversion rates and keeps that stickiness higher.

In terms of cross-selling, yes, we've converted a number of players, actually far exceeded our expectations at TwinSpires customers in Michigan. So we're very happy and excited about that. So far, we're very positive on Michigan. We can see a path to profitability. CPA seemed to be very reasonable. And so far, it's exceeding our expectations.

[Operator]

Your next question comes from the line of Joe Stauff from Susquehanna.

[Joseph Stauff, analyst]

I wanted to ask about the canceled races in 2020. I guess, roughly about 25% of the races, I guess, were canceled or that was about, I guess, 7,500. What is -- if you can help educate me on the right way to think about how some of those races kind of repopulate above and beyond just sort of the normal kind of vaccination rate sort of sequence or expectation.

Like how do you think about maybe when a chunk of those could reoccur this year, just wondering about that.

[William C. Carstanjen, executive]

Sure. So I think generally, you'll see in 2021, return to the racing calendars that you saw in 2019 and the years prior to that. In 2020, a lot of rates were lost, as you just described, because many jurisdictions, including Kentucky, weren't allowed to conduct racing for a portion of the year because of the pandemic.

Now when that happens, some of the demand for wagering on horse racing just shifts to the racing that is available. So you have a couple of different factors going on. Some -- one of those factors is people want to want to wager online and they find races that are there. Now those races perhaps are not the same quality of races or the races are typical. They typically bet on, but there's still discontent.

So some of the demand shifts to whatever product is available, and then some of the demand goes away because people can't find what they are actually looking for. So it would take an economist to really unpack those factors to understand exactly how much of one factor versus another we saw in 2020 and what we'll see in 2021.

But certainly, it is not helpful to handle and not helpful to the game when we lost the extent and the quality of races that we lost in the second quarter next year. So it's good to have them back, and I think that's a tailwind in general for our business in 2021.

[Joseph Stauff, analyst]

I see. I see. And I wanted to ask maybe -- well, I could take this off line, this might be a little specific. But like given the extent, given the growth in online, in particular, does that drive purses up high enough such that the demand can be created for additional races? Or is it just primarily just a function of, like you said, a jurisdiction that prohibited racing given COVID?

[William C. Carstanjen, executive]

I'll answer that at a pretty high level because it's a bit of a complicated topic. But more wagering out of [ purse ] is an indication of interest in a particular race. And the more wagering you have creates additional interest in the race because the pools are bigger and the opportunities, particularly around the exotic wagering, are better.

But I think the nexus or the connection between the size of the purses and the wagering really has been fundamentally altered in many jurisdictions across the country because of alternative funding mechanism, basically, casino gaming has impacted a lot of the purses.

So nexus in the 2 is theoretically true, but there's so much going on that I really would disconnect. I would disconnect them for purposes of this conversation, the nexus between wagering and purses. So when you see a lot of wagering -- so slightly different twist I'm taking you towards on this. When you see wagering -- there's more interest in the wagering product because it creates more opportunity for sophisticated betters and others to come in and find opportunity for value.

So that's a more important dynamic than, I think, between wagering and the size of a purse.

[Joseph Stauff, analyst]

Understood. That makes sense. And then maybe 2 specific questions. Bill, you had talked about possible expansion of Derby City Gaming. Was that -- were you referencing maybe the satellite facility that I think you have flexibility to create maybe something like Newport? Or would that be on the existing sort of building?

[William C. Carstanjen, executive]

Really, really, there is a possibility for a satellite facility, but as Bill Mudd and I have talked recently over the last couple of weeks, Derby City Gaming has just become this juggernaut. And we have to make sure that we maximize that and make it everything that it can be. So watching its performance over the last year has really been fairly stunning. And we want to make sure that, that property is everything in and of itself that it's supposed to be before we rush forward with an idea on what else we should do at the racetrack.

And that's even before we get to the idea of the satellite, which is clearly additional opportunities in Kentucky attached to each of our licenses.

[Joseph Stauff, analyst]

I see. One last question, and just kind of thinking about your digital business. You talked about sort of the launch sequence that you have largely in the first half. Looking at your portfolio, you're likely to have a skin in Maryland when, let's say, they issue the rigs and so forth. So I guess, theoretically, you could launch in Maryland at some point later this year. Are there any other, say, market access agreements that you'd be interested in to get yourself into states that you don't have a skin in, whether it be iGaming or whether it be OSB?

[William C. Carstanjen, executive]

We generally have followed a policy of not publicly disclosing our market access deals until they're ripe. So we have a fairly robust operation to explore and obtain market access deals where we don't have direct access. The state you just mentioned, Maryland, we actually have a facility there. We have our Ocean Downs facility. So that's not one where we need market access through a third party.

But in states like Michigan, where we're launched and we were talking about a few moments ago, that's an example of where we obtain market access through a third party. And we work on that, too. It's just we follow a policy of not disclosing each and every one of those until they're ripe for disclosure.

[Operator]

Your last question comes from the line of David Katz from Jefferies.

[David Katz, analyst]

I wanted to, if I may, just go back a little further on the digital strategy. Taking in all of your commentary as well as some of your answers, I'd love to just have a clearer definition of how you're looking at success in this? And is that -- should we ultimately expect that you will sort of be in most states that are meaningful one way or another?

Is it something that we should be thinking about actual profits this year prior to presuming there is some investment, moderate investment inquired and entering new states?

Is next year the year where we start to see some meaningful EBITDA? If you could just paint us a little broader picture, not asking for guidance, of course. I appreciate it.

[William C. Carstanjen, executive]

David, good to talk to you. There's a lot to unpack there. So I'm going to make a broad comment, and then I'm going to -- Bill is going to talk about some of the specifics because there are a number of specifics that you took us towards there.

So first, our metrics around this business are totally profitability driven. We -- that's how our company is valued, that's how we're driven, that's how our company has been built, and that's the best way for us to look at this space.

So the overarching commentary is profitability is the only thing we're interested in, and pathway to profitability is the only thing that matters when we talk about this opportunity.

Now, as we dig down through that, you hit a bunch of topics. Bill, please.

[William Mudd, executive]

Yes. So David, I think a lot of the topics you hit was relative to when do we become profitable. And I think that's a really, really tough question to answer. And for a number of reasons.

One, we really -- we've been -- while we've been operating in Indiana, Pennsylvania, New Jersey, we haven't been operating under a technology stack that allows us to retain customers and to convert customers as they come on board. Actually, I should have that, that was convert customers so when we go acquire someone and they actually fund their accounts, that's the conversion rate. Under our new technologies, conversion rates are much higher, much, much higher than we used to have. So we're excited about that.

And then retaining those customers. So if we don't have an app in places like Indiana and Pennsylvania, it's hard to keep those customers on your platform if the only place they can wager is on your PC.

So those factors play a very, very large role in the long-term value of that customer. So we've got a lot of experience with TwinSpires and even our days in Big Fish, Bill and myself and our team, understanding the value of -- the long-term value of a customer versus the cost to acquire that customer.

So as long as we can continue to acquire customers, where we know the value, the long-term value of that customer exceeds what we're paying to acquire that customer, we're going to continue to spend marketing dollars. And then the marketing dollars, obviously, come in the form of both branding, which is kind of what we call above the line. So people knowing that what the TwinSpires brand is, that's a big reason we have converted from BetAmerica to TwinSpires, as TwinSpires has a lot of equity value and it lowers our user acquisition cost on that cost-per-click acquisition.

So in terms of when do you become profitable, we'll continue to spend marketing dollars in places like Michigan and Colorado and Tennessee and New Jersey, Pennsylvania and Indiana as long as we feel that, that long-term value exceeds the cost to acquire -- comfortably, the cost to acquire those customers.

And with the new technology stack, we're seeing much better LTVs that we'll build confidence in over time. And so far, the CPAs in Michigan, using the TwinSpires brand, are lower because there's more brand equity there to start with.

So short answer is, we're going to continue to chip away and deliver a great product and great customers as long as that CPA remains low.

And the timing of states, obviously. We talked about Tennessee, New Jersey, Pennsylvania, Indiana, Colorado but we also have Maryland, as I believe Joe mentioned. And we also have Louisiana, which is in the middle of writing their legislation. There's lots of activity in this space and I think [ going forward ], more upfront expenses will be.

So I can't give you a definitive answer on the profitability question.

[David Katz, analyst]

All right. Should we expect you to at least endeavor to get into the larger states that seem to be moving somewhere, New York, Texas, right? Are those on the Board?

[William Mudd, executive]

Of course, as long as it's a reasonable cost to get into it. Yes. Bill, do you want to add to that?

[William C. Carstanjen, executive]

No, that's good.

[Operator]

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Bill Carstanjen. Thank you. I apologize about that. We just had another question from Mr. Brett Andress from KeyBanc.

[Brett Andress, analyst]

Just Bill, hoping you can give us some more insight on how you're thinking about reimagining the Churchill Downs Racetrack expansion. So I mean, is that something where you're going to allocate more dollars to HRM, maybe less to a combination, and things like that. If you could just help us with the factors that you're paying the most attention to?

[William C. Carstanjen, executive]

First, Brett, thanks for joining us on the call and happy to squeeze you in, of course. So there's not a lot more that we can say on today's call because we're not ready to say it.

But some of the factors we're looking at really go to the robustness of the HRM product, and where best to deploy here in Louisville, what the best hospitality offering is at the racetrack itself, how to think about the hotel with some of the disruption that we've seen in the hotel industry across the United States in the last 12 months. Those are all things we're looking at.

And we have a really good handle around those things. We're just not ready right now on this call to get into them. But we really -- we break up the project really into those 3 dimensions but there really is that fourth dimension, which has been the strong performance of Derby City Gaming. So we're still figuring out how those 4 pieces fit together.

And I'm confident by our next earnings call, we'll will be much more definitive in our plans for you.

[Operator]

All right. I'm showing no further questions at this time, sir. I turn it back to you, Mr. Bill Carstanjen.

[William C. Carstanjen, executive]

Thanks. Thanks, everyone. As always, we appreciate your interest in our company and your support. And we'll try to make sure we always do the right thing. I feel great about the company. I'm very excited and I'm very pumped up about the upcoming Derby. Things are getting better out there, and I'm excited for our team as they finalize their plans for that event. It will be much, much stronger than it was last year as we go through this transition back to normality, which isn't quite there yet in 2021, but hopefully on the horizon.

So thanks very much for your support. We'll talk to you next time, and be safe. Thank you.

[Operator]

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