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Churchill Downs (NASDAQ:CHDN)
Q3 2019 Earnings Call
Oct 31, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2019 third-quarter earnings conference call. [Operator instructions] As a reminder, the 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 -- Vice President, Treasury, Risk Management, and Investor Relations

Thank you, Katrina. Good morning, and welcome to our third-quarter 2019 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2019 third-quarter business results were released yesterday afternoon.

A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled News located at churchilldownsincorporated.com, as well as in the website's Investors section. Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent report on Form 10-Q and Form 10-K.

Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and Form 10-Q are available on our website at churchilldownsincorporated.com.

And now I'll turn the call over to our chief executive officer, Mr. Bill Carstanjen.

Bill Carstanjen -- Chief Executive Officer

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. We have a number of updates to share regarding key projects.

So I will begin today with relatively brief comments on our third quarter and then focus on our strategic projects. Marcia will then provide a more in-depth review of our financials for the quarter and an update on our capital plans. After she is finished, we will be happy to take your questions. First, a few comments on our third quarter.

Our net revenues were up 38% and adjusted EBITDA was up 42% over prior year. Quarter over quarter, net revenue growth benefited from, among other things, the acquisition of Presque Isle in January of this year and the opening of Derby City gaming in September of last year. Generally, the performance of our properties was encouraging and stable. The online wagering segment was a slight drag on our net revenue growth for the quarter, primarily due to the exit of a small number of high-volume, low-margin customers in our velocity business.

I will talk more about that in a few minutes. Our adjusted EBITDA growth for the quarter increased as a result of the 61% equity investment that we made in Rivers Des Plaines Casino in March of this year, the contributions of Presque Isle and Derby City gaming, as well as continued growth at Miami Valley Gaming. Now I'm going to provide an overview organized around five organic growth initiatives: projects at Churchill Downs Racetrack, expansion of HRMs in Kentucky, Illinois opportunities, Miami Valley Gaming and brick-and-mortar sports wagering and online wagering. Let's start with Churchill Downs Racetrack where our team is working on three major capital projects.

The first project is the construction of the equine medical center and quarantine barns that we announced earlier this year as part of our track safety initiatives. The equine medical center will enable state-of-the-art veterinarian care to be provided to our equine athletes. The quarantine barns are part of our strategy to increase international participation during Kentucky Derby week, as well as during the rest of the year at Churchill Downs, Turfway Park and other regional racetracks. The quarantine barns will enable international owners to shift their horses directly to Louisville, making it easier on the horses and less expensive for the horse owners.

The equine medical center and quarantine barns projects together are an $8 million investment and will be completed prior to the 2020 Kentucky Derby. The second capital project is one we announced yesterday and $11 million renovation to the premium seating area we currently call a Millionaire's Row Six that will be ready in early May of next year, just in time for the 146 Running of the Kentucky Derby. This area is on the sixth floor of our main building with an amazing view of the finish line and is also next to our most exclusive area, the Mansion. Interest and upscale, exclusive and unique experiences has grown significantly since the Mansion was created for the 2013 Derby, and now we have the opportunity to create another special world-class experience for 320 of our most exclusive guests.

The timing could not be better as all of the Mansion tickets are already completely sold out for 2020. The third capital project is the most significant construction project that we have undertaken at the track. We will build permanent covered stadium seating, a one-of-a-kind hotel experience and a historical racing machine facility along the outside of the race track around the first term. We anticipate that the project will cost approximately $300 million and based on its complexity and scope we expect it to be completed by the end of 2021.

Our original objective called for completion by early May 2021 in time for the 147th Kentucky Derby. However, as we worked extensively with the architect and construction firm, we realized we needed to build in more time. As you might imagine, there are also a host of prerequisite permits and approvals that we need to obtain in addition to the physical construction process. This is a very important project for our company.

It provides a strong foundation for long-term organic growth for the Kentucky Derby. The construction plans also contemplate the potential for future expansion of the hotel and HRM facility as demand for these unique experiences grow. From the ground floor to the top of the hotel, this is a seven-storey project. I will describe the key components starting from the bottom and working our way up to the top floor.

First, there will be a new outdoor covered stadium seating with improved amenities adjacent to the track with capacity for approximately 4,700 guests, which will replace the existing temporary seating that is built every year in that location for the Derby. This will be priced higher than the temporary seating, but will have a lower price point than the other new sections we are constructing. Also on the ground floor, we will build in an approximately 1000 machine HRM gaming facility and sports bar. During the Kentucky Derby, the amenities and the gaming facility and on the floor itself, will also provide a hospitality area or approximately 3,400 of our existing guests, who have seats that are not otherwise affected by this project.

On the second floor, there will be a 27,000-square-foot ballroom and a party deck with a tiered covered balcony facing the track. Collectively, these two areas can hold more than 1,700 guests. Also on the second floor, there will be additional dining for 150 guests in the hospitality room providing spectacular views of the track. On the third floor, there will be another balcony overlooking the race track for 250 guests.

On the third through sixth floors, there will be 92 track facing hotel suites with private balconies. For the Derby, each suite will come with 12 access passes that will allow the suite to serve sleeping accommodations at night and entertainment space for guests during the day if desired. On the third through sixth floors, there will also be 60 nontrack-facing suites with eight access passes per suite. In addition, there will be four presidential suites facing the track with windows on two sides and private balconies.

One suite on each floor of the floors, three through six for entertaining up to 20 guests at the Derby. And finally, on the seventh floor, there will be a penthouse experience for 320 guests with dining, a bar and panoramic views from the balcony that will stretch the entire length of the building. In total, there will be 156 hotel rooms and approximately 5,500 new reserved seats available for Derby. In addition, 6,700 of our existing customers will have access to additional amenities during the Derby.

Outside of Derby Week, the hotel rooms will be available for guests, who visit Churchill Downs, the City of Louisville, the university, the Fairgrounds Convention Center, or just passing through on I-65 the major north-south Interstate Highway in this region of the country, who want to stay at a wonderful hotel and enjoy our HRM facility and other amenities. We're really excited about this next phase of our expansion. Obviously, it is critically important. We execute carefully and correctly on all phases of this major project.

We have the experienced team to do that. Now let's turn to our second organic growth initiative, the expansion of HRM facilities elsewhere in Kentucky. Derby City Gaming continues to perform above our initial expectations generating in the third quarter $9.5 million of adjusted EBITDA from our $65 million investment. We are proud of what our team has accomplished in building Derby City Gaming, and we are applying this knowledge and learnings as we build our $200 million Oak Grove Racing and HRM facility and begin our preparations to invest an additional $100 million at Turfway Park.

As promised, under the terms of our racing license, we began harness racing at our Oak Grove facility a couple of weeks ago after the completion of the racetrack and ship in barn area. We are continuing to build the HRM facility and 128 room hotel, and are targeting a summer 2020 completion. We plan to open the HRM facility with approximately 1,400 machines and have regulatory approval for up to 1,500. Regarding our recent $46 million acquisition of Turfway Park, we are going to construct an HRM facility with up to 1,500 machines as well as other amenities including a sports bar and simulcast area.

We planned to begin demolition of the grandstand meet ends in April and we are targeting completion of this project by the summer of 2021. The addition of the HRM facility and other improvements to the property will increase the per structure and quality of Thoroughbred racing at Turfway Park and indirectly across the entire Kentucky circuit. We will add a new dirt track to complement the existing synthetic surface and upgrade the barn area. After completion, we will look at upgrading the profile of the current road to the Kentucky Derby prep race at Turfway Park, and we'll perhaps add one or more additional roads to the Derby prep races.

Across Derby City Gaming, Churchill Downs Race Track, Oak Grove, and Turfway Park, we have a great deal of opportunity. We have a lot of work to do to maximize our full potential and we look forward to that challenge. Our third organic growth initiative rolls around our three projects in Illinois as a result of the expanded gaming bill that became law in June of this year. First, we announced during the third quarter that we were not pursuing a casino license for Arlington Park due to the competitive environment and the challenging economic returns in light of the additional taxes, reconciliation payments and increased post-contributions that Arlington Park would have to pay if it obtained a casino license.

We have committed to race at Arlington in 2020 and have been awarded race dates. We've also committed to race at Arlington in 2021 if we are awarded race dates for that period. We will continue to explore all of the potential options with respect to Arlington Park and the future of Thoroughbred racing there including other potential locations for the racing license to be utilized in the Chicago land area or other areas of Illinois, where it may be more economically viable. We plan to apply for sports betting license for Arlington and are awaiting the sports betting regulations to be issued by the Illinois Gaming Board.

Second, Rivers Casino in Des Plaines, which we own 61% of through our equity investment in Midwest Gaming has applied for an additional 800 gaming positions as it is permitted to do under the expanded gaming bill. Rivers is currently planning to add approximately 250 positions in the first phase and approximately 550 positions in the second phase of its expansion. The first phase involves utilizing existing space, whereas the second phase requires the completion of an expansion of the parking garage and construction of new space for positions in related amenities. Rivers is pursuing renovation efforts and is working with the Illinois Gaming Board to obtain required approvals, including a request to commence land-based gaming as permitted by the expanded gaming bill.

By the end of the fourth quarter subject to Illinois Gaming Board approval, brewers will add approximately 115 slot machines and eight table games totaling 144 positions to its gaming floor. Rivers continues to evaluate opportunities to add incremental positions to the existing buildings footprint as part of the Phase 1 expansion. Rivers has begun the build out of its sports book, which is expected to open by the end of the fourth quarter and is planning to apply for a sports betting license also as part of Phase 1. The sports bar will be converted into a sports book as soon as Rivers obtains approval to do so from the Illinois Gaming Board though timing of that approval is unclear.

Construction or the expansion of the parking garage will commence in early November paving the way for the Phase 2 expansion of the property. Phase 2 otherwise remains in the conceptual design stages. The $24 million parking garage is expected to be completed by the end of July 2020. The Phase 1 expansion and the parking garage will be funded out of cash and existing credit facility at the joint venture.

The third project in Illinois is our joint bid with Rush Street Gaming, our partner in Rivers Des Plaines with the Casino license in Waukegan. Our joint bid was one of three bids submitted by the city of Waukegan to the Illinois Gaming Board. According to the gaming bill, the Illinois Gaming Board has 12 months from the date that the bill was signed, June 28, 2019, to award the gaming license to one of the bids forwarded by the city of Waukegan. Our fourth organic growth initiative, which we announced yesterday is the $100 million hotel parking garage and expanded gaming floor at our Miami Valley Gaming facility, our joint venture with Delaware North and Ohio between Cincinnati and Dayton.

The project involves the construction of 194-room hotel and a 1,000-car parking garage, as well as the expansion of the gaming floor to include an additional 250 VLTs. We are targeting completion in the second quarter of 2021. The Miami Valley gaming facility has been a very successful Greenfield project since we built it in 2013 and this expansion will support its continued growth in the coming years. It will be financed at the joint venture level, which currently has no debt.

And last, our fifth organic growth initiative relates to the expansion of Sports Betting and iGaming as States continue to legalize it. We are pleased with the impact that retail sports betting is having on our bricks and mortar casinos, both through the returns generated directly by sports wagering on premises and through increased slot and table game play. We currently have two retail operations in Mississippi and one at Presque Isle in Pennsylvania. In addition, we are going to launch a retail sports betting in Indiana through our partnership with Rising Star Casino in mid-November pending final regulatory approval.

Our BetAmerica Online platform went live in New Jersey earlier this year. We've used New Jersey to test our systems and refine our online strategies. It is not a market, where we are making any money. I believe there are 18 separate operators as a result of the New Jersey regulations permitting multiple skins for each brick and mortar casino.

in the saturated market, some operators are being extremely aggressive with player acquisition offers. Some States may be like this and where we see that we will be very careful. If we don't see a way to acquire customers at an amount consistently below their lifetime value, we will not do it. You cannot make up a per cap negative return with volume.

We have subsequently reduced our spending in New Jersey right now and we'll focus our online marketing spending and player rewards and less saturated, more profitable markets. We currently anticipate launching our online offerings in Pennsylvania and Indiana late in the fourth quarter pending regulatory approval. We believe it may take an extended period of time for the online markets node, not the brick and mortar markets in each state to become profitable based on the upfront marketing spend needed to acquire and retain online customers. We will be very, very judicious in our spending going forward as we work to build this business over the long term.

With all of our Greenfield activities and growth initiatives, we've been asked occasionally if we have the organizational capacity to support all of our initiatives. The answer to that question is simply yes. We've always had a strategy of pursuing both acquisitions in Greenfield investments. That being said, we did add additional resources to supplement our team over the past couple of years to increase our capacity to build Greenfield like Derby City Gaming, because we saw that we would have a fighting chance to land several Greenfield opportunities.

It is working out well for us. We also anticipated the changes to the online and brick and mortar sports environment relatively early and have expanded our team to pursue these new opportunities. Our team is fired up and we feel fortunate to have so many ways to grow the company. Now, I'd like to turn the call over to Marcia to provide some additional details on the third quarter and an update on capital management.

After that, we will answer any questions you may have. Thank you. Marcia?

Marcia Dall -- Chief Financial Officer

Thanks, Bill, and good morning everyone. As Bill said, I will provide some details on our third-quarter 2019 financial results and then provide an update on our capital management plans. Beginning with our third-quarter results, we reported net revenue of $306 million in the third quarter, up $85 million or 38% compared to the prior-year quarter. Derby City Gaming contributed $20 million of this increase.

Derby City gaming celebrated its one-year anniversary of its opening in September. So the quarter reflects a full quarter of results compared to a partial month of results last year. Derby City gaming continues to demonstrate strong growth in the market. As we have mentioned in the past, it will benefit from additional game titles from a new supplier in the future.

The remainder of the increase was primarily driven by revenue growth from our gaming segment, including the addition of Presque Isle in January of this year to consolidation of Ocean Downs revenue as a result of acquiring 100% ownership of the property at the end of August last year and the assumption of the management agreement for Lady Luck Casino Nemacolin in March of this year. Our third-quarter adjusted EBITDA was up $26 million or 42% compared to the prior-year quarter. Approximately $8 million of adjusted EBITDA growth for the third quarter was driven by our Churchill Downs segment, with nearly $9 million coming from the continued growth of Derby City gaming with very strong margins. Churchill Downs' Racetrack had a slight decline as we expected in adjusted EBITDA related primarily to the addition of resources to support its growth over the coming year.

Approximately, $27 million of adjusted EBITDA growth for the third quarter was generated by our gaming segment. The addition of Presque Isle and Nemacolin in our equity investment in Rivers Des Plaines in March of this year collectively contributed approximately $26 million of the increase. Nemacolin benefited from the elimination of the entrance fee for the casino in June. We saw growth in adjusted EBITDA from increased attendance at our two Mississippi gaming properties primarily as a result of the launch of retail sports betting in August of last year.

We also benefited in the third quarter from solid operating performance in Miami Valley gaming and Ocean Downs. These benefits were partially offset as we expected by decrease at Calder from expenses related to the jai alai operation and from a decline in Oxford driven primarily by the impact of a new market entrance in the Boston area. As you can see from the supplemental information and our press release, our same-store wholly owned casino margin was 31.9% for third-quarter 2019 down 140 basis points compared to the prior-year quarter and was solely attributable to the revenue pressure Oxford and from increased expenses related to the Calder jai alai operation. Excluding these two properties, same-store wholly owned casino margin would have been up 30 basis points.

Regarding our Online Wagering segment. Online wagering revenue decreased $1.6 million for the Twin Spires business, which includes the Velocity group and $0.1 million related to the Sports Betting and iGaming. The decrease in the Twin Spires business revenue was driven primarily by the exit of certain high volume, low margin customers in the velocity group. As Bill discussed, our Sports Betting and iGaming business was a slight drag on net revenue growth for the quarter, primarily due to the sign-up bonuses that we offered in the New Jersey market that more than offset the revenues that was generated in the state during the quarter.

Our core Twin Spires business, which excludes our Velocity group, had handled growth of 7.9% while the industry declined by 1.9% during the quarter. The industry was impacted by race cancellations due to weather and one less week of racing at Belmont. Our core Twin Spires business had a 2.6% increase in active players and a 1.1% decrease in revenue per player for the quarter compared to the prior year. From an adjusted EBITDA perspective, our online wagering business declined $5.8 million as we expected primarily due to the costs associated with the launch of our Online Sports Betting and iGaming operations and increased marketing spend in New Jersey.

We will maintain our focus on growing our more profitable Twin Spires players, and we feel good about the outlook for Twin Spires business going forward. As Bill stated, we will continue to be prudent with our marketing spend in the Online Sports Betting and iGaming space. Turning to net income. Third-quarter net income from continuing operations was $15 million, compared to $58 million in the prior-year quarter.

Our press release highlights the five items that impacted the comparability of our third-quarter net income from continuing operations with a primary item being the $42 million after tax gain on our Ocean Downs/Saratoga transaction in the third quarter of 2018. We did increase our legal reserves in the third quarter by approximately $3 million primarily due to the proposed settlement of a legacy ETA issue at Fair Grounds. Excluding these items, we had a $7.7 million after-tax increase in income from operations and equity investments that was partially offset by a $5.1 million of higher after-tax interest expense as a result of higher outstanding debt balances and $2.2 million related to a higher effective tax rate due to an increase in income attributable to States with higher tax rates. Third-quarter cash flow from operations was $46 million, up $73 million from the prior-year quarter.

We've benefited from significant growth in operating cash flow driven primarily by growth and adjusted EBITDA and an increase in distributions from our equity investments and lower cash paid taxes. And finally, regarding capital management, we spent $12 million in maintenance capital in third quarter, which was $5 million higher than the prior-year quarter, due primarily to the timing of payments for slot capital purchases and maintenance capital related to our newly acquired properties. We've sent $38 million year to date on maintenance capital and continued to expect to spend $45 million to $55 million of maintenance capital for the year. We currently anticipate 2020 maintenance capital to be in this same range.

Regarding Project Capital, we $21 million in the third quarter, primarily on construction spend at Oak Grove and the quarantine barn and equine medical facility at Churchill downs racetrack. We have paid $53 million related to Project Capital through the third quarter and expect our 2019 total Project Capital to be in the range of $100 million to $120 million based on the updated timing of cash payments related to Oak Grove build out. Looking ahead to 2020, we anticipate the Project Capital spend will be $300 million to $350 million. Our investment in the expansion of Oak Grove and Turfway Park in Kentucky is projected to drive nearly two thirds of this Project Capital with a remainder primarily spent at Churchill downs racetrack for the new six-floor premium reserve seating area and the initial phases of our hotel and historical racing machine facility.

We will have some other smaller projects at our other properties as well in 2020. As bill mentioned, the expansion at Miami Valley gaming and the expansion at Rivers Des Plaines Casino will be funded by those respective joint ventures. Regarding shareholder returns, our board has authorized a 7% increase in our annual dividend to be paid on January 3, 2020, for holders of record on December 6, 2019. We repurchased $25 million of our stock in third quarter and we have $200 million of remaining share repurchase capacity under our existing program.

Our dividend and share repurchase programs reflect our continued commitment to return in capital to our shareholders. Our net leverage on a reported basis at September 30 remains relatively low at 3.1 times. On a pro forma basis, it's 2.8 times, which includes 12 months trailing adjusted EBITDA for the three acquisitions that were completed in the first quarter. We have significant capacity based on our cash on hand, ongoing cash generated from operations, unused credit facility, and relatively, low leverage to support continued growth through acquisitions and organic investments as well as our dividends and opportunistic share repurchases.

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

Bill Carstanjen -- Chief Executive Officer

OK. Thank you, Marcia. Everybody, at this time, we're going to open up the line for questions. Fire away.

Questions & Answers:


Operator

[Operator instructions] For your first question, we have David Katz from Jefferies. Your line is open.

David Katz -- Jefferies -- Analyst

Hi, good morning, everyone.

Bill Carstanjen -- Chief Executive Officer

Good morning, David.

David Katz -- Jefferies -- Analyst

Good morning. So I don't want to get sort of bogged down on the current quarter, because I don't –- that's not really all that consequential, but I do want to talk about investments in iGaming and Sports Betting. And I heard your commentary, should we be thinking about that as something that is investment spending so that revenues and costs are leading to something that's neutral, meaning, not much profitability or should we be thinking about it as something where there is actual, where it can be a drag on the totality of earnings. How would you have us thinking about that?

Bill Carstanjen -- Chief Executive Officer

I think with respect to online similar, my recollection when we started Twin Spires, it's going to be in the investment stage until the market settles down until it –- until there's some clarity and until the investments have been made. So particularly in the online space where your expense with respect to recruiting a customer is recognized up front. But the value of that customer is recognized over time as they wager with you. This is a business built for showing some losses and some investment in the early stages.

So, I think in any context, the nature of this space we're going to have a period of investment. Right now, and the point I was really trying to make strongly was there are some irrational behavior I think going on, you see in a market like New Jersey, and we have to be careful to process through that because irrational behavior doesn't seem rational over time. Doesn't become rational over time. So we want to be careful that we don't drift down business models and we've always been very careful about this in Twin Spires.

We don't drift down business models that we don't fundamentally believe in. And by that I mean, we don't want to spend more to acquire customers than we think those customers can be worth to us over time. So as we get data, we sharpen our view on how much customers are worth. But right now there's a lot to learn about this space, and for us, there's, there are a lot of lessons we can take from our experience previously in Twin Spires, but still there's a lot that's new here.

So we have to invest to learn. We have to invest to gain experience, and we have to invest with patients that the nature of this business means you invest up front and it takes a while to get a return. But that said, we also have to balance against long-term irrational behavior if we see it, because we won't participate in markets long term that we don't think we will be making money in.

David Katz -- Jefferies -- Analyst

Right. And I agree with you that the hotel racino project to Churchill Downs is among the most exciting for the company and I appreciate the detail that you've provided. I think many of us are trying to assign some value to it and trying to figure out how we might model something like this for the future. So two questions, one, how could you –- what guidance, could you give us or I know that's not – guidance is not necessarily the best way to ask the question, but how can you help us figure out how to model a payback period or ramp up or a return on that.

And secondarily should we be looking at the Churchill Downs Kentucky Derby results or something that may see some construction impact between 2020 and 2021 while this is going on. I think those are the two biggest issues there.

Bill Carstanjen -- Chief Executive Officer

On the first question, there are two questions there. On the first question, which is how to think about the expected return of a capital investment. I would say two points in response to that and I have to be general because of the construct that we're in. First, I would say in general, we've identified to the market that we target construction projects internally with a five time multiple.

So we try to, when we think about a year three EBIDTA contributions, we try not to spend more than five times that mature EBITDA run rate. So a five times multiple. I would say when it comes to the Kentucky Derby, we're always willing to go higher than that, but not massively higher than that. So when we do our internal planning, and again, without providing projections or promises about the future.

That's how we plan for these projects. Generally for non-Derby stuff we've tried to be pretty disciplined about a five-time return, but when it comes to the Derby, we've had a better experience and a more positive experience and more positive results in our previous projects. And so we feel comfortable going somewhat higher there because of the track record of our investments and the strength of our team. With respect to construction impact during the period of –- while we're doing the construction over the next two years, I think we'll manage that.

I don't really expect there to be a change in the flow and of the trajectory of the performance of that facility while we're doing construction. We'll plan and that's a function of the strength of this team and the carefulness around, which they plan. We're not anticipating any real construction disruption that is flowing to the bottom line.

David Katz -- Jefferies -- Analyst

Got it. And then my last question is primarily around Illinois, where there again there is a number of exciting opportunities that we are challenged to figure out the timing of. And how can we think about rivers and the prospects that it could start to earn off some of these opportunities, say within the next 12 to 15 months, right? And similarly for Arlington Park, what should we reasonably be doing with our models around Arlington for 2020. I know it's hard to know, but that we sort of got to do our job that way.

Bill Carstanjen -- Chief Executive Officer

Well, we have the same challenges internally here the issue isn't really our behavior. It's the fact that we have regulated businesses, and we don't control or even really influence the timing of regulatory change or regulatory process. So we can make it hard for us to predict to how to think about when changes occur in our business models. So, I think with Arlington, I've said all I should responsibly say –- we can proceed with respect to this gaming bill at that facility at that time.

And that's something we think about and work on and it's something we're committed to figuring out because we think there could be a good result for everybody. If we are responsible and powerful and play our cards right. But, we'll just have to see. So we're anticipating at this point.

Running racing there over the next two years, although we hope that there is news over that period that really define the long-term future. With respect to what happens at rivers, it's the same thing, I think we have very strong views and plans around what we want to see happen there, but we can't determine regulatory approval for our expansion plans nor can we completely predict when another casino will open in the Chicago or Illinois market, which is the triggering event for some of the changes in the tax laws that we've talked about previously. So, I think the state is incented to move the process along, I think the state wants to see more casinos in the market. I think the state wants to see the maximization of income from gaming.

But I think they work with all deliberate speed, but that's the best insight I can give you at this time. But hope to give you more and to update you as we learn more ourselves.

David Katz -- Jefferies -- Analyst

Got it. Thank you very much.

Operator

Your next question, sir, is from Joe Stauff from Susquehanna. Your line is open.

Joe Stauff -- Susquehanna International Group -- Analyst

Thank you. Good morning. I wanted to ask about the Kentucky HRM facilities in particular Oak Grove, are there any characteristics of that market, you'll launch basically in the summer, as you suggested with the machines and obviously the analog is comparing them against Derby City and I was wondering if there are any characteristics of that market that make that comparison or what would make that comparison different?

Bill Carstanjen -- Chief Executive Officer

Sure. I would say the way to think about it is to look at the size of the population of that region Nashville, Clarksville, etc. So look at the wealth profile of the population in the demographics in terms of age, but then also to factor in the driving distance. So when we think about the Derby movable market for Derby City Gaming.

And then in comparison, think about Oak Grove. Those are the key drivers population, demographics in terms of age, wealth, but then also driving distance. That's a big advantage for Derby City Gaming, it is clearly closer to the Louisville population then surrounding competition when we think about Oak Grove please also consider. That's why we're adding some of these additional amenities the hotel, the Steakhouse the ballroom things that drive people being willing to get in their car and travel to a destination.

So it's a combination of all those factors we, of course, model it carefully. I know you guys do as well. There are some that are very positive. When you do the comparison and then there are some factors about Oak Grove, they're not as positive, namely the distance we're about 55 miles or so from Nashville.

But we are on the interstate and we are the first exit on the Kentucky side of the border as you come up by 24. So those are the parameters that help us determine what the size of the market will be for us.

Joe Stauff -- Susquehanna International Group -- Analyst

OK, fair enough. Thank you. I wanted to ask you also a couple of questions. In terms of the online business, certainly the side that you're ramping in start-up mode Sports Betting and iCasino.

But I wanted to ask you, maybe just a strategic question on how you think about using your existing scale with Twin Spires and whether or not or how much time it will take you to possibly have a dual offering, I know they're different bidding systems. But I'm just wondering when you saying technology or overall or the amount of work necessary to be able to have –- say both products all three products on a given app going forward.

Bill Mudd -- President and Chief Operating Officer

Thanks, Joe. That's a good question. This is Bill Mudd. I think going back to Bill's comments, first of all, on New Jersey.

We did enter that space we were one of the last ones in. I think the only way do we took last year on football is on the Super Bowl and then we rolled into the NBA and we didn't have the ability to take NBA games early in the cycle. And now we do have the ability with the exception of the Houston Rockets games, because of our relationship with the owners of that sport. The other thing about New Jersey is we don't operate Twin Spires there.

So we didn't have a database of customers in New Jersey, that we can tap into and acquire customers at a very reasonable cost. So –- and when we jumped in the market as Bill said, some of the spending that's occurring in New Jersey is very rational. So as we enter these other states. We do have a very robust Twin Spires business we do intend to leverage that database to customers to help ramp up our online offering and hopefully provide a good base of business that would allow us to spin profits to the market and to brand sending.

As we think about adding those two businesses together that's certainly part of our long-term road map. But I would say right now with the every one of these states has their own kind of system because of the wire art. I do have to be, there is a lot of technology has to occur within the state right now the focus is building out that infrastructure, not adding sports horse racing to the same wagering app right now. So it's quickly in the road map, but it's not the priority right now.

We will eventually get there, but right now it's more important for us to focus on getting live and being in these markets that as a first mover. So with that being said, and of course, retail is completely different retail spending to acquire customers. So it's already a very nice and very profitable business and those numbers are actually built into our casino cycling as Marcia stated so. I hope that answer your question.

Joe Stauff -- Susquehanna International Group -- Analyst

Just to clarify, I mean, you to inspires is offered in Pennsylvania and Indiana currently correct or at least historically that is?

Bill Mudd -- President and Chief Operating Officer

There we are absolutely in Pennsylvania we're absolutely in Indiana and we're in Illinois.

Joe Stauff -- Susquehanna International Group -- Analyst

And if I can squeeze one additional question sorry to hug the mic here, but the traffic delta is that you're seeing at least, I know it's early, but maybe Mississippi is the most representative example rate with respect to your Sports book, or your retail offering there that you talked about this, or at least references in some others also reference setting up initially the retail Sportsbook, and it adds traffic. And I'm wondering, basically, if that amount of traffic has been consistent since your launch. Again, I guess, Mississippi is the most representative market to be able to assess that have meaning like I have the traffic patterns basically kind of been sustainable.

Bill Carstanjen -- Chief Executive Officer

Yeah, the short answer is, absolutely. It has been sustainable. We finally have eclipsed kind of a year-over-year basis, we can see it now. The second thing I would say to that though is every sport –- there is sporting seasons, obviously the NFL behaves a little differently the baseball versus NBA.

So it is a little bit based on the calendar as well in terms of sporting events.

Joe Stauff -- Susquehanna International Group -- Analyst

Sure.

Bill Carstanjen -- Chief Executive Officer

So I would say that there's two ways to think about that. The traffic is absolutely sustainable.

Joe Stauff -- Susquehanna International Group -- Analyst

OK. Thanks a lot.

Bill Carstanjen -- Chief Executive Officer

And we're seeing Presque Isle as well. The average bet size and what they bet on and where they've been parlays versus singles is a little different based on geography. And we certainly felt the impact of yeah, the northeast teams being bet more heavily and then people in the south. So it's very interesting to follow some of the regional dynamics as well.

Joe Stauff -- Susquehanna International Group -- Analyst

Makes sense. Thanks a lot.

Bill Carstanjen -- Chief Executive Officer

Thank you.

Operator

Your next question is from Dan Politzer from J.P. Morgan. Line is open.

Dan Politzer -- J.P. Morgan -- Analyst

Hey, good morning, everyone, and thanks for taking my questions.

Bill Carstanjen -- Chief Executive Officer

Good morning.

Dan Politzer -- J.P. Morgan -- Analyst

To the first one, not to be dead horse here, but another one on online wagering obviously there's a lot of competition here and there is a lot of promotion going on in New Jersey, but it's how do you think about the balance of growing this business versus the profitability there and I know obviously in the infancy stages here, but is there also an element of seasonality that spend and I guess how do we think about the cadence here over the next 12 months or so?

Bill Carstanjen -- Chief Executive Officer

Sure. So, Dan, I'll take that one. Yeah, there is seasonality in online wagering in our country football is the biggest driver. So generally, just like in horse racing.

You want to look at a calendar and figure out when the best time in the best opportunities are to acquire customers so football season is an excellent opportunity to do that. In terms of how we think about New Jersey again, you want to build a model and an understanding of how much customers are worth. And as you get into a market, you don't have perfect information to how the customers in any given jurisdiction going to behave over time. So you have to build your model as quickly as possible and change it quickly based on actual data so in New Jersey, just like in any other state.

If we don't see if our model doesn't support spending above a certain level we're not going to do that because it means we don't think the customer spend per customer is justified given the value of those customers. So we're always going to be disciplined and we're always going to be careful and we're not going to move off our modeling just because other people are doing different things, but the wrinkle is always our learning and what we learn in the market because we need data to populate our assumptions and our modeling. So, we've learned a ton of New Jersey. It will make us much better prepared for the other states that are to follow and that's how, that's how we'll do this, but I do think you'll see a dichotomy across different jurisdictions in the country where some states will be profitable and other states will not seem is profitable in the short run or the midterm or even the long term and you'll see us behave differently across those states.

Dan Politzer -- J.P. Morgan -- Analyst

Got it. Understood, thanks for that. And then just as you think in terms of your projects, there is a lot going on in Kentucky certainly, and I think there were some press reports that you guys were authorized for additional HRMs above the amount. And I think you initially had said you plan to build at both Turfway Park.

And I guess at the Churchill Downs Racetrack facility, how do you, how do you think about the return in the profitability of adding machines and how do you kind of gets the right number there.

Bill Carstanjen -- Chief Executive Officer

We're -- we start conservatively. So we want to be very comfortable. Based on the demographic information that we have and our experience with HRMs machines, we always want to be very careful when we start that that we're confident the market will support the number of machines. So we tend to go conservative and then have some upsizing capability within the facility and also within our off utilization from the regulatory authorities to add more machines, as the market as we proved to ourselves that the market will support that.

So generally, when you look at us and you look at our planning in our announcements we tend to be very conservative when we start, because it's easy to add machines, so long as you have regulatory approval to do so. So this is sort of the approach we take. Get the approval, get the authority. So you can add more if you can prove to your team that you deserve more go ahead and get the authority in the approval to do so.

But start conservatively because these machines are free. You have to go pay for them and so start conservatively, make sure the ROI is there and then add, if you have the good fortune of discovering that the market will support the additional machines.

Dan Politzer -- J.P. Morgan -- Analyst

OK. Got it. Great. Thanks so much, guys.

Operator

I am showing no further questions. At this time, I would now like to turn the conference back to Mr. Bill Carstanjen.

Bill Carstanjen -- Chief Executive Officer

Thank you. As always, we really appreciate your interest in our company and your investment in our company. We're obviously very excited about the investments that we're making right now, particularly around the Kentucky Derby this is a special time. We're disciplined I hope we've proven that to you over time we're disciplined we're careful we're long term in our outlook, we think the organic growth opportunities we're pursuing will help make our company, even a greater company going forward.

So we're going to do the work now in the payoff will be in the mid-term in the long term. So we'll try to be good stewards of your, of your capital and of your investment in us and I look forward to talking to you next time. Thanks very much.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Nick Zangari -- Vice President, Treasury, Risk Management, and Investor Relations

Bill Carstanjen -- Chief Executive Officer

Marcia Dall -- Chief Financial Officer

David Katz -- Jefferies -- Analyst

Joe Stauff -- Susquehanna International Group -- Analyst

Bill Mudd -- President and Chief Operating Officer

Dan Politzer -- J.P. Morgan -- Analyst

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