Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated Fourth Quarter and Year-End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I will now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury, Risk Management and Investor Relations.

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.

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 reopen safely for our team members, our guests, and our communities. And in a very challenging environment, we were able to safely run the 146th Kentucky Derby, maintaining its iconic stature as the longest continuously run annual sporting events in the United States.

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 teams' quick actions to reduce our cost structure, preserve capital and provide additional financial resources in response to the unprecedented pandemic crisis reflected 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 three significant factors that impacted 2020. First, the closure of all of our brick-and-mortar gaming in HRM properties and our horse racing 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 timeframe as a result of the temporary closure of Rivers Des Plaines, Presque Isle, and Nemacolin as well as some additional restrictions and a few of our other properties. All of our properties have been open since the middle of…

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

Your first question comes from the line of Dan Politzer from JPMorgan. Your line is open.

Good morning everyone and thanks for taking my questions. So first, I was hoping we could touch on the HRM facilities and how you think about the opportunities there within Kentucky. Obviously Oak Grove when created there has been improving in the past few months, I think it's up 220, Newport is still kind of ramping and Derby City has been absolutely impressive, I think over 450 days in January. So how do you think about opportunity and ramp across these facilities? And I guess where do you see the most upside from here as you think about that?

First good morning, Dan. 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 the natural ramp up even in our facility that we've had the longest. It hasn't been a long, but it's still our oldest facility. And when you think about Oak Grove down of Tennessee border, which is going to pull out of the Tennessee market, in particular Nashville, we're just getting started there and we've started during a period where there has been the 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 immature markets are matured 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.

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

You hit it on the head. I think the margin will be nice. It's a very efficiently built facility. 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 can - 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 test to our team and their careful approach to building an efficient property. But when you have a situation like we do on Oak Grove, where we want to drive people to visit us from the - in particular, the Nashville. Markets were asking

I apologize about that, one moment while we reconnect the backup speaker line. Hello, presenters, the backup speaker line is now connected in the main room. You may proceed.

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 national market and the desirability of having more amenities so that 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, far away.

Yes, 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 guess, 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?

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 reinvestment, 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 checked 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, designed to keep us on the game long term, and we will 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 where others are in and we'll see how it sorts out over time.

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

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?

First, welcome, Finn. Good morning. 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 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.

Yeah, I would say, Finn, there's a lot of noise going on - this is Bill Mudd - between third quarter, fourth quarter and the first quarter. Third quarter, obviously very big. There were probably some pent-up demand, coming out of the second quarter. Every this 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, again, 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 at the beginning of the vaccination process, and I think that will continue to draw people back to the sites as they become more available.

Thanks guys. That's super helpful. And then, switching gears a little bit to the online opportunity, it'd just be great to hear on the TwinSpires side of things, some of the player activity and behavior you're 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, I'd 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 your plans as you roll the TwinSpires brand into new markets. If we can expect to see kind of an essentially relaunch, for lack of better terms, in terms of marketing and customer acquisition under this new brand, or if it's more kind of a subtle stealth rollout?

Okay. And there is 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 they're sitting at home and working from home and there is a Pick 6 or a Pick 5 they want to play during the day, there are able to do that much more easily. So, the value of those cohorts are generally higher. They are somewhat younger, but we are also seeing a lot of the older group coming in there as well. So in terms of continuing, I think when people sign up for an account, they have 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 racetrack, 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 started 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 should sets a win racetracks reopened for live, folks would be there. In terms of Michigan, yeah, this is the first time we've launched in a jurisdiction where we have - want an active TwinSpires database, along with an app that works, a mobile platform that works, an onsite offering that will be in the Upper Peninsula of 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, the keeping those players is much higher and 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 the new technology stack has vastly improved from where we were in New Jersey and Pennsylvania and Indiana - excuse me, New Jersey and Pennsylvania where we currently operate, certainly have an app, keeps those conversion rates and keeps that stickiness higher. In terms of cross-selling, yes, we've converted a number of players and actually far exceeded our expectations of 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. CPAs seem to be very reasonable and so far exceeded our expectations.

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

Good morning, everyone. Thanks for taking the call. 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 re-populate 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.

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. 2020, a lot of races 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 horseracing just shifts to the racing that is available. So, you have a couple of different factors going on. Some is - one of those factors is people want to wager online and they find races that are there. Now, those races perhaps are not the same quality races. The races are typical - they typically bet on, but there still is content. 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 were actually looking for. So, if we take an economist to really unpack those factors to understand exactly how much of one factor versus another we saw until 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 of next year. So it's good to have them back, and I think that's a tailwind in general for our business in 2021.

I see. And I wanted to ask maybe - well, I can take this offline. 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?

I'll answer that at a pretty high level because it's a bit of a complicated topic, but more wagering on a product 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 two is theoretically true, but there is so much going on that I really would disconnect for purposes of this conversation, the nexus between wagering and purses. So when there's 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 mix than I think between wagering and the size of the purse.

Understood. That makes sense. And then, maybe two specific questions. Bill, you had talked about possible expansion of Derby City Gaming. With 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?

Really, there is a possibility for satellite facility. But as Bill Mudd and I talked recently over the last couple of weeks, Derby City Gaming is just becoming 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.

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, whether it be OSV.

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

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

Thanks for walking me in. I wanted to, if I may, just go back a little farther 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, right, 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.

David, good to talk to you. There is a lot on path 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's 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 had a bunch of topics. Bill, please.

Yeah. 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 operating in Indiana, Pennsylvania, New Jersey. We have been operating under out technology stack that allows us to retain customers and to convert customers as they come on board. Actually, I should that convert customers. So when we go far someone and they actually fund their accounts, that's the conversion rate. Under our new technology, the conversion rates are much higher; much, much higher than we used to have, so we're excited about that, and retain those customers. So if we don't have an app in places like Indiana, 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, 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, we would follow up down the line, so people knowing that what a transpired brand is, that's a big reason we've converted from BetAmerica to TwinSpires. TwinSpires had a lot of equity value and it lowers our user acquisition cost, kind of 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 as long as we feel that that long-term value exceeds the cost of - comfortably the cost to acquire those customers. And with the new technology stack, we're seeing much better LTVs that will build confidence in over time, and so far the CPAs in Michigan using the TwinSpires brand are lower because there's more brand equity that to start with. So short answer is where we're going to chip away and deliver great products 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. We also have Maryland as, I believe, Joe mentioned and we also have Louisiana, which is in the middle of running their legislation. There's lots of activity in the space and taking one forward, more upfront expense there will be, so can't give you a definitive answer on the profitability question.

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?

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

No, that's good.

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. Your line is open.

Thanks for squeezing me in too. Just, Bill, hoping you can give us some more insight on how you're thinking about reimagining the Churchill Downs racetrack expansion. So, is that something where you're going to allocate more dollars to HRM, maybe less to accommodation, amenities, things like that? If you can just help us with the factors that you're paying the most attention to?

First, Brett, thanks for joining us on the call and happy to squeeze you in, of course. So there's not a lot more than we can say on today's call because we're not ready to say, but some of the factors we're looking at really go to the robustness of the HRM product and we're best to deploy here a little, 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 interim. But we really - we break up the project really into those three dimensions, but that really is that fourth dimension, which has been the strong performance of Derby City Gaming. So we're still figuring out how those four pieces fit together, and I'm confident by our next earnings call, we'll be much more definitive on our plans for you.

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

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 am 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 more 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.

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