So I think now I’ve been doing this, I’ve been in this industry for almost 20 years. So I’ve seen other periods where you see a couple of years of lumpy behavior and I don’t think it’s the new norm per se, I just sometimes these things happen in bunches. So, I think, Marcia and her comments and definitely the way that Bill Mudd and I think about it is we’ve had some noise going on here. We need that to settle out a little bit to see how the business is doing. But generally it is the little engine that could. It’s been incredibly robust. I know there were a lot of theories in previous earnings calls where you’d asked about how is sports wagering impacting it? How is the business holding up in the face of that? What I’d say is, the biggest thing I look at and the biggest thing I’m worried about is just consistency of content.
It’s just the availability of the racing product to our core customers on TwinSpires. Our backstop to all this and over time it may become incredibly significant. We’ll just have to see over time. I don’t have the crystal ball. But our ability to service with our suite of technology services, pari-mutuel wagering for other providers of sports wagering. So the sports wagering platforms, we’d like to give them the ability to bet on horse racing. Their technology stacks work differently and they have to integrate with ours or others in order for theirs to work seamlessly on pari-mutuel and we’d like to see that happen. We’d like to see the distribution of the product more broadly. We think that’s the way to think about the TwinSpires business long-term, not just B2C, but B2C plus B2B, just like we’re demonstrating with Exacta.
Jordan Bender: Thanks, Bill.
Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Jeff Stantial with Stifel.
Jeff Stantial: Hi. Great morning, Bill, Marcia. Thanks for taking my questions. Maybe starting off here on the TwinSpires business, can you just talk a little bit more on what you’re seeing from your sports betting partners as it relates to, we’ll say, product investment and marketing spend? Are you seeing kind of investment going towards cross-selling users and bringing more people into the horse racing platform? Can you just talk about that as it relates to the trajectory of your B2B component? Thanks.
Bill Carstanjen: I think — happy to do that, Jeff, and I always appreciate the question. I think last year was — last Derby was really proof-of-concept, just trying to get deals in place and the technology to work seamlessly. I think we’ll see around this Triple Crown event the level of interest and investment they want to devote to it at this time. The advantage of pari-mutuel wagering on horse racing over time is the consistency of the margins and the relatively high nature of the margins versus other products. So I think over time, that will become more of an interest just from a business perspective for sports wagering platforms. But right now, they have a lot of priorities. They can speak for themselves on the different ones that they have, and we’re just a piece of that.
So I think last year was more proof-of-concept. This year we’ll see the level of focus and interest they put into the Kentucky Derby. It is a big Kentucky Derby. It’s the 150th of it. So I think like a lot of what you see in the sports arena, they market around big events that are there and the next big one for horse racing, it’s the biggest of the big, is the Kentucky Derby and that will be a good point to measure progress. But I was very pleased with the level of engagement last year and the interest, and also respectful and understanding that they have multiple priorities right now, of which we’re just one. I personally believe that over time we’ll become, and when I say we, I mean, the horse industry and this particular product as a wagering product will become more of a focus, but that’ll have to be proven out.
That theory will have to be proven over time.
Jeff Stantial: Great. Thanks, Bill. And turning to the Gaming segment, could you just talk a little bit more on what you’re seeing for the various customer cohorts, kind of low-end, high-end, unrated, if there’s any sort of discrepancies region by region? Thanks.
Bill Carstanjen: No. What I would say is, that’s always a good question and the right question to ask. I don’t think there’s a change in the, I think, as Marcia indicated in her notes, last year, I think, the customer base was a little stronger, the economy was a little stronger in the first quarter than it is now, but second quarter, third quarter, fourth quarter, going through today, our team’s not really seeing material change in the quality and capability of our customers. It’s been relatively sequentially consistent. So when we think about our business, we’re not particularly obsessed or worried about material changes in the quality of customer and the capabilities and the wallet of the customer sequentially.
It’s been pretty consistent over the last number of months. It’s other things that’s driving variations in the business. Marcia talked about there was some rough weather this winter in January versus last year, December wasn’t as bad, February’s pretty good. The HRMs, they’re growing anyway. They’re growing anyway, they’re not at maturity yet, so we’re seeing growth there and those products look good. So there are other variables that are really driving the outlook for the business right now, as opposed to variability in the customer’s capabilities.
Jeff Stantial: Great. Very helpful. Thanks, Bill. I’ll pass it on.
Bill Carstanjen: Thanks Jeff.
Operator: Thank you. One moment, please, for our next question. Our next question comes from the line of Joe Stauff with SIG.
Joe Stauff: Thank you. Good morning, Bill, Marcia. Just a couple follow-ups. Bill, you had mentioned kind of the benefits of Exacta. I was wondering if you expect to use that system within your various Kentucky properties. I think it’s downtown, but I was just wondering more about the expectation to use that in your other Kentucky properties?
Bill Carstanjen: Yeah. There are products that, without getting too detailed into some of the oddities and some of the nuances and availability of products, there are some differences in terms of offerings between Exacta and other providers and we do expect to have to deploy and have deployed Exacta in some of our facilities. So I think there’s nothing wrong with having more than one central determinant system on your floor. That can make sense. It’s whatever maximizes the return on your invested capital and you’re going to see examples in Virginia and Kentucky, everywhere where there’s going to be more than one central determinant system on the floor, and certainly Exacta is a major one of those.
Joe Stauff: Makes sense. And then, in Virginia, on the existing portfolio, call it, roughly 2,000 — 2,800 units, I’m wondering how long, like, I know you want to say optimize that game offering. It takes some time. And so I’m wondering how long it might take you to kind of optimize that game offering within Virginia for say the existing, so call it, 2,800 units?
Bill Carstanjen: Well, we’re going to be at 4,440 in the third quarter and we have a team that works pretty hard on where else we can deploy licenses and how many machines we should deploy. And then we work with, that team works with Bill Mudd’s team constantly to figure out what the optimal allocation will be between facilities. So I don’t know that it’ll ever be, will ever be done. We’ll always be analyzing as we get the 5,000 machines where it’s best to have those 5,000 machines. But of course, we’d also, Joe, really love to change the equation at some point and have more machines, because this is a different environment than say Kentucky, where there isn’t a limit on the number of machines. But Virginia’s construct under their law is the machines are capped.
So yield on machines is a very important concept in Virginia, not quite as important in Kentucky because we can have as many machines as we want, but ultimately we’ll work constantly as we get the 5,000 to deploy all the machines in Virginia and then to deploy them to the right, highest utilization license. But then ultimately it’d be nice to have more machines. And that’s not something I’m foreshadowing. That would just be nice to have and that’s one thing we’d like to see. It would help the state and help the horse industry because the market would support them.
Joe Stauff: Gotcha. And if I could just one quick one, you talked about just the pattern, you described as say lumpy enforcement of the gray-market machines in Virginia. Can you give us maybe the right description about the enforcement pattern in Kentucky for the gray-market, for now the illegal gray-market machines?
Bill Carstanjen: Yeah. They’re clearly illegal in Kentucky. So they’re — and same in Virginia. There’s not a question of their legality. It’s a question of the boots on the ground to have them turned off and removed. That’s a justice moves in the right direction, but it doesn’t move uniformly in every jurisdiction and it can take time. So it’s just the reality of, in both the State of Virginia and the State of Kentucky, these things have become ubiquitous. They were pretty widely dispersed and it’s just a manpower and will process to get them removed, and they have been — that’s been happening, that clearly has been happening. It’s just, it’s taken time and it’s been lumpy. Some areas have moved faster than others.
And also there really isn’t a mechanism where somebody’s out there counting to make sure they’re all off in every single place everywhere. That’s just something that is moving in the right direction and we’ve been happy, but take Virginia, this all happened in the mid to late fall. That’s when the court case came down. So these are the months after that happened.
Joe Stauff: Thanks a lot, Bill.
Bill Carstanjen: My pleasure.
Operator: Thank you. One moment, please, for our next question. Our next question comes from the line of Daniel Guglielmo with Capital One Securities.
Daniel Guglielmo: Hello, everyone. Thank you for taking my questions. So you all have obviously been developing and are continuing to develop. With that framework in mind, how has the development environment changed, if any, this year versus last? So anything of note around labor availability, supply chain consideration, underwriting versus actuals?
Bill Carstanjen: Yeah. I think, at this point, we’ve seen the volatility in the environment and we build it into our plans. So I think if you talk about the Owensboro project and The Rose, at this point, we have a high degree of confidence, just like we did pre-COVID on timing generally and cost. We’re in this environment where there has been inflation, there has been increased costs, but we’re able to predict that now and plan around it. So we’re back to feeling comfortable about this. There was a little bit of a, the period we’re emerging from COVID where there were significant restrictions on supply, the supply chains were working differently and then we hit the heavy inflation environment. And so those environments were different than when we started the project and our team, I think, just did a masterful job.
That’s the word I’d use, getting our projects done as cost effectively and as close to budget, mostly within budget as possible. So our team’s done a great job in a volatile environment, but at this point, I don’t describe this as a volatile environment. This is now a predictable environment where we understand how the supply chain’s different than it was pre-COVID and we just plan around that. So while others may look at inflation or supply chain disruptions, we’ve now had a window where we can see how it works and we just plan around that. So when we do our projects now, the Owensboro thing that we talked about, mentioned in our prepared remarks, I feel very, very good about that. The rows — completing the rows, I feel very, very good about that.
We’re in a predictable volatile environment now and that’s all we need. We just need predictability. So I feel very good about our plans and about timing and budgets.
Daniel Guglielmo: Great. I really appreciate all that color. And then just around, so the Super Bowl in Vegas brought out some really big spenders and we think the ultra-luxury consumer strength has been clear. For this year’s Derby, have you all seen an increase in interest from those types of spenders? And then outside of the ticket prices, how would that financial impact be seen on race day?
Bill Carstanjen: So what we’ve seen is extraordinary interest in the Kentucky Derby at all price points. I think we’ve been doing this for so long. I think sometimes we ourselves take it for granted. But we’re building our facility and we’re selling product every year that we never had previously. And it’s a testament to the team that we are doing this so successfully and it’s a testament to the quality and the place of the Kentucky Derby in the American entertainment landscape. So we couldn’t be happier about where we are with respect to customer interest at all price points, whether you’re talking about the infield or our most expensive tickets, we are in very, very good shape. We wish we had more to sell than we have. So we feel very, very positive about that. And was there another part of your question that I missed or did I capture that? Was there anything else to your question?
Daniel Guglielmo: No. You got it. That was it. Thank you. Appreciate it.
Bill Carstanjen: Oh! Yeah. My pleasure, Daniel.
Operator: Thank you. One moment, please, for our next question. And our next question comes from Shaun Kelley with Bank of America.
Shaun Kelley: Hi. Good morning, everyone. Thanks for taking my question. Bill, you alluded a little bit ago to the productivity in Virginia, just given the limits on the machine counts there and I was hoping you could help us bridge that a little bit to your expectations for the ramp up at The Rose Resort in Northern Virginia. Could you just talk a little bit about, right now, I mean, we see some extreme productivity coming out of that, a very limited, I think, account of machines up there. Can you give us a sense of kind of how you expect that to ramp up either relative to the Virginia average or just relative to your other experiences in that market? And how extraordinary can the returns of some of those machines be once you meaningfully increase the footprint there? Just give us some bounds of your expectations, I think that’d be helpful.
Bill Carstanjen: I appreciate that, Shaun. So we start with just the size of the market. It’s a 6.5-million-person metropolitan area and that’s very large. We’re not used to operating in markets with that many people. You take Louisville, for example, where we have Derby City Gaming, et cetera. This is a 1-million-person market. So the Washington DC, Northern Virginia market is a very, very large market. And we, of course, would love and we’re located right on one of the major arteries, I-95, that runs directly north-south in that Northern Virginia Corridor. So the market’s there, the people are there and we would have liked to have deployed and are deploying as many machines as we can. And our experience so far with our 150-unit facility has been pretty remarkable.
It’s been pretty remarkable, the level of activity running through 150 machines. So we’re really thrilled to open up The Rose with the 1,650 machines. And it’ll be a question of learning the customer base, yielding the machines, as well as we can in terms of how we incent our different levels of customers to maximize our return there. But I would say academically, we haven’t opened yet, but I’d say academically, this is a case where I wish we had more machines in a larger facility. So this will be about running efficiently and yielding the machines as smartly as we can, because we have a limited number of them. So we’re optimistic about the market. I feel very good about our team that’s going to be on the field there and it’ll just be a ramp-up period where we get to know the different customers.
Remember, when we open the door, we have to learn all our customers. We have to learn one from another and the different levels of play amongst them and that’ll take some time and we’ll get, I hope we open very successfully. I have every reason to think we will. But we’ll also get better after we open as we start to learn who our customers are and how best to work with those different customer cohorts.
Shaun Kelley: Thanks. And could you address a little bit, I mean, you talked about a lot of your different facilities, but I don’t think for Owensboro, you talked yet a little bit about, I think, the machine count there was, in terms of what your new plan is for that facility is basically 2x what you had had originally. Could you just talk a little bit about that? Maybe same question a little bit, the densities in that area, the ability to support 600 machines relative to some of your experiences, elsewhere in Kentucky, you obviously know the market, the demographics probably better than anybody?
Bill Carstanjen: Yeah. Owensboro is the fourth largest city in Kentucky and there’s a lot of development on the Kentucky side of the Ohio River. Owensboro is on the river separating the Ohio River separating Kentucky from Indiana. And there’s a fair amount of development on the Kentucky side, including Owensboro and the surrounding region. So we’re going to open up with 600 machines. There are properties on the Indiana side that help us measure and size the market and we have our expectations on how big the market should be for us, given the Kentucky side of the population there. So we built our model, not just based on having Ellis Park in the area with a modest amount of machines, but looking what we see on the other side of the river across that region and then measuring how much of the population and density is on the Kentucky side. So plenty of inputs into our model to help us figure out how to size that project correctly.
Shaun Kelley: Thank you very much.
Bill Carstanjen: My pleasure, Shaun.
Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Dan Politzer with Wells Fargo.
Dan Politzer: Hey. Good morning. I was wondering if we could drill a little bit more into the Derby, Bill, I think you mentioned a step function change in growth for the 150. Maybe you could kind of quantify that. I think around last year you gave us kind of an EBITDA range we should expect there. Maybe bridge us to the kind of key pieces that are going to be driving that growth?
Bill Carstanjen: Sure, Dan. Good to talk to you. So we’re not putting out a number. We’re not providing guidance on the increase. But I would point out the size of the change in the facility. We created a great deal of additional high-end seats. There’s a great deal of also interest in the Derby. Generally, it’s building, and this is the 150th. So I would say, whether you look at sponsorships, you look at attendance, we don’t know yet on the wagering, but that’s been trending in the right direction. But we look at our key components to how you build the economics for the Derby and they all look really, really good. But for purposes of the modeling you do and the thinking you do, I would look at trends from the last number of years on where those components are heading and then review with the team and through the press releases that the infrastructure that’s being implemented for this year, the additional seats, the type of seat, the level of hospitality.
And that will give a sense of why we’re so optimistic that we’re going to be looking at a really special version of the Derby. And you used the term step function increase. That was actually something Marcia said. I know what she means by it and I share that optimism and we’ll go out and execute and make it happen.
Dan Politzer: Thank you. Got it. Thanks. And then just for my follow-up, Exacta, I think, that you called out within the live and historical racing segment of 5 million EBITDA uplift there. I think for the Virginia properties margins were more or less the same relative to the prior year periods. So how should we think about those cost synergies flowing through in 2024, the extent that there should be more margin uplift and maybe if there’s any offsets to that that you guys are managing through?
Bill Carstanjen: Well, it’s never a single variable and that’s — and we all like to reduce everything to a single variable and it’s hard to do that. But this coming year, we have a full year of the Exacta efficiencies coming in. We have new machines coming online in the rows in what we hope is a high-yield market. So there’s going to be pros and cons to the margins, but Exacta is very much a real good guy. I think how we yield the machines, I think, you’ll start to see that we’re good at that and we’re thoughtful about that and we’ll get better at that. So those will be some of the good guys and there might be other things that impact it as well. But I do think we drove margin improvement and we’re going to keep working as hard as we can on the things that we control to keep doing that and hopefully we can.
