Courtney Norris - Director, Corporate Communications Bill Carstanjen - Chief Executive Officer Bill Mudd - President and CFO Alan Tse - General Counsel Mike Anderson - Vice President, Corporate Finance, Treasury and IR Bob Evans - Chairman.

Cameron McKnight - Wells Fargo.

Good day, ladies and gentlemen. And welcome to Churchill Downs Incorporated Fourth Quarter and Full Year 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 follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

And I would now like to introduce your host of today’s conference, Ms. Courtney Norris, Director of Corporate Communications. Please go ahead..

Thank you, Sam. Good morning. And welcome to this Churchill Downs Incorporated conference call to review the company’s business results for the fourth quarter and year ended December 31, 2014. The company’s fourth quarter business results were released yesterday afternoon in a news release that has been covered by the financial media.

A copy of this release announcing results and any other financial and statistical information about the period to be presented in this conference call, including any 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.

Let me also note that a news release was issued advising of the accessibility of this conference call on a listen-only basis via phone and over the Internet. As we begin, let me express that some statements made during this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical facts. The actual performance of the company may differ materially from what is projected in such forward-looking statements.

Investors should refer to statements included in reports filed by the company with the Securities and Exchange Commission for discussion of additional information concerning factors that could cause our actual results of operations to differ materially from the forward-looking statements made in this call.

The information being provided today is of this date only and Churchill Downs Incorporated expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations. I will now turn the call over to our CEO, Mr. Bill Carstanjen..

Fairway Solitaire, the top five grossing games in the non-casino genre. Finally, a quick comment on the paid premium games segment. That is declining segment for Big Fish and we knew that when we bought the company. Consumer tastes are moving away from the traditional prepaid games towards a free-to-play model.

In addition, consumers are moving rapidly towards mobile devices at the expense of playing games on their PCs. The prepaid segment focused on genres like Hidden Objects [technical difficulty] games, [technical difficulty] better to the PC environment.

We anticipate we will continue to see declines in the prepaid segment, but we will continue to operate in that space for the foreseeable future as there is still very good cash flow in that business, lesson learned in this segment really help improve our free-to-play segment and in any case, the growth of free-to-play mobile far exceed these declines.

We expect to go into greater detail with regard to Big Fish after the first quarter results. As you can see, closing Big Fish at the very tail end of 2014 event, that it didn’t have much time to deliver results for us last year. What it did deliver, we are very-very pleased with.

Now, I would like to turn this over to Bill Mudd to provide some details on the quarter and the full year. After that, we will answer your questions. Thank you.

Bill?.

Thank you, Bill. Good morning, everyone. I'll keep my comments brief and focused on important drivers of operations and items affecting our income statement and balance sheet, as a result of the Big Fish acquisition. After I make a few comments, we will be happy to address any questions. Please note that we have renamed our segments.

Gaming is now called Casinos and Online is now called TwinSpires. This was done to avoid any confusion with Big Fish Games, which are games conducted through online and mobile devices. Overall, it was another good year and an excellent fourth quarter with record net revenues and record adjusted EBITDA in both periods.

The net income line, however, was pressured in the fourth quarter by items below adjusted EBITDA, which we will describe in great detail later.

For the year, our Casino revenues increased to $31.5 million or 11%, as revenues from Oxford acquisition were offset by slight declines in our other Casino properties on industry weakness during the majority of year and the closure of poker operations on July 1, 2014 at Calder Casino.

For the fourth quarter, our Casino business revenues remained flat to prior year as at growth Oxford Casino, driven by the gaming floor expansion we completed last December was coupled with better weather and offset softness at our other properties. On a comparable year-over-year basis, our fourth quarter was the strongest to the year.

Part of this was driven by easier comps, as we enter the second half of the year but we are seeing more trips and higher win per trip, particularly in the middle and top tiers of the database which is encouraging.

The lower end of the database has stabilized, when considering some of the promotional changes we made to our direct mail marketing programs. Our Casino adjusted EBITDA grew 25% for the year and 21% in the fourth quarter, driven by the July 2013 acquisition of Oxford Casino and December 2013 opening of Miami Valley Gaming.

The first full year of operations at our Miami Valley Gaming joint venture has proven successful with total property adjusted EBITDA of $35 million. For the year, Miami Valley’s net slot win was $119.6 million, 5% behind Horseshoe Cincinnati, which enjoys the advantage of other amenities such as table games.

We believe our joint venture built the right asset in the right location and at the right level of investment for that market.

Our TwinSpires business had a decent year all things considered, posting a 3% revenue improvement, despite the lack of wagering by Texas residents with ceased wagering in late September of 2013, coupled with an industry that contracted about 2.8% for the year.

Those losses were offset by the restatement of Illinois resident wagering in June of 2013 and organic handle growth of 5%, driven by a 19% increase in unique players, including Texas and Illinois resident wagering. Our fourth quarter TwinSpires results -- revenues were similar with revenue of 1% on a 4% increase in handle.

We finally have all of the Texas and Illinois noise behind us, so we now on a comparable basis year-over-year with respect to handle and revenues. Unfortunately, wagering on thoroughbreds was down 4% across the industry in the fourth quarter, including our handle and revenue for the periods.

The good news is that TwinSpires’ growth rate continued to outpace the industry by 8 percentage points. We hope that sets us up for stronger organic growth in 2015. TwinSpires adjusted EBITDA for the year was $45.3 million, down $3.8 million compared to 2013.

The profitability decrease was driven primarily by the loss of Texas resident wagering of $5.4 million and newly imposed taxes on New York resident online wagering of $3.9 million. These losses were offset by strong organic growth, restatement of wagering in Illinois and stricter cost controls.

TwinSpires’ adjusted EBITDA was down 5% or $600,000 in the fourth quarter on new taxes imposed in New York. Those taxes went into affect on January 1, 2014, but that headwind is now behind us as well.

Our racing business net revenues decreased $12.8 million for the prior year, primarily as a result of the ceasing pari-mutuel operations at Calder in July. This decline will continue through the middle of 2015, as the only revenue our Calder Racing operation will receive is related to rental payments from the lease of the property to a third-party.

Total year revenues at our Fairgrounds and Arlington properties also declined year-over-year due to inclement weather and enhanced competition in the simulcast market. Partially offsetting these declines were record revenues generated by Kentucky Oaks & Derby Week.

Our fourth quarter revenue declines are also a result of ceasing pari-mutuel operations at Calder. Total year racing adjusted EBITDA increased by $10.9 million, driven by an $8.8 million increase in Kentucky Derby Week profitability and a $3.3 million improvement driven by ceasing pari-mutuel operations at Calder.

Our fourth quarter racing business adjusted EBITDA improvement is primarily the result of ceasing pari-mutuel operations at Calder. As you are all well aware, we close the new acquisition of Big Fish Games on December 16th.

The revenues recognized subsequent to the acquisition and included in our consolidated results were $13.9 million in revenue, with adjusted EBITDA for the two week period of $3.8 million.

We provided annual bookings and bookings growth rates by quarter and segment of the business, that is Premium, Casino, and Free-to-Play Casual games as part of our acquisition announcements and investor communications. We used bookings as the leading indicator of revenue trends and a barometer on the health of the business.

We currently do not plan to report the number of daily active users, monthly active users, and other metrics some of our competitors utilize when describing their business. These metrics are not indicative of revenue or earnings growth for our business.

Instead, we will discuss changes in bookings, average paying users, and average bookings per paying user which we feel are much more relevant to the underlying business. For the fourth quarter, total Big Fish bookings increased 33%, with Casino up 94% and Free-to-Play Casual bookings up 200% to the prior year.

The fourth quarter Casino increase was driven by a 77% increase in quarterly average paying users and a 9% increase in average booking per paying user. The Free-to-Play Casual growth is driven by the success of Gummy Drop!, as Bill mentioned in this opening remarks.

Premium Paid bookings declined 23%, which was expected and consistent with the prior period of 2014.

This decline was anticipated and expected to continue as customers shift from personal computers to mobile devices and as their preferences change to free-to-play game genres, but will continue to be a key driver of revenues and profitability for this foreseeable future. The Premium business also has a majority of Big Fish’s non-U.S.

dollar functional currency exposure, primarily in euros and British pounds, which accounted for 18% or about $1.7 million of that bookings decline on a stronger U.S. dollar.

For the year, our other investments adjusted EBITDA decreased by $4.7 million, primarily due to incremental costs associated with the development of our real-money i-gaming platform along with lower tote service revenues and equipment sales.

Now I would like to spend a few minutes discussing changes below adjusted EBITDA that affected earnings from continuing operations for the fourth quarter and total year, as well as laid the groundwork for what to expect from these items in 2015. The most significant additions to this list relate to the acquisition of Big Fish Games.

These adjustments totaled $14.7 million in the fourth quarter. The purchase price accounting implications of the acquisitions are complex and I expect analysts will have numerous questions, so I hope this brings some clarity to help their modeling.

The first line item, Big Fish Games acquisition charges of $3.8 million is related to the fair valuing of the earn-out payment and deferred founders payment consideration.

This will continue to be an item, included in the adjustments until all the deferred and earn-out payments are complete, which is influenced by the discount rate, the time remaining until payments are made, and most importantly, driven by an assessment of how much will ultimately be paid.

To use the earn-out payment as an example, at year end we have $327.8 million accrued on our balance sheet as the fair value today of the earn-out liability. If we end up paying $350 million, we will incur an additional $22.2 million in fair value expenses in our income statement until the earn-out is fully paid.

Conversely, if the earn-out consideration ends up being $300 million, we will have a favorable impact to our income statement, $27.8 million. Regardless, both of these events are non-cash charges and non-cash income will create non-cash volatility in our income statement over the next few quarters.

That non-cash volatility will present itself an earnings and EPS numbers as well and will settle down to the most part by the end of the first quarter of 2016. The actual cash impact will only be the amount we ultimately make in earn-out payment. The second item is related to transaction expenses for the Big Fish acquisition of $6.4 million.

These are for legal, accounting and advisor fees. These charges are not tax deductible for IRS regulation and is the biggest driver of our fourth quarter tax rate. We do not expect any material charges in this line item going forward. The final item is Big Fish Games changes in deferred revenue of $4.5 million. There are two parts to this adjustment.

The largest part in this adjustment reflects the change in Big Fish Games deferred revenue resulting from business combination accounting rules. The deferred revenue balances are assumed as part of an acquisition, deferred revenues are adjusted down to fair value.

The accounting rules result in reduction in revenues and EBITDA presented in the consolidated statements of comprehensive income. In the case of Big Fish, deferred revenues were written down by approximately $47 million, which flows directly through to EBITDA over the time period which the revenues would have been recognized.

We anticipate it will take more than year to cycles these revenues out of the balance sheet and into the income statement, but the vast majority will occur in 2015.

The smaller part included in this adjustment is the change in deferred revenue, excluding the impact of the purchase price accounting, which reflects the actual cash change in deferred revenue from December 16th to December 31st.

The asset impairment charges of $4.8 million for the fourth quarter reflect the write-off for our investment in Luckity of $3.2 million and charges of $1.6 million related to our unsuccessful attempt to obtain a gaming license in New York.

Other charges of $3.3 million is comprised of our third quarter severance costs incurred for the enclosure of Calder racing and our share of equity losses associated with the Capital Region casino bid. Depreciation and amortization increased $6.5 million during 2014, driven primarily by the Big Fish Games and Oxford acquisition.

Please note that our 10-K lays out the fair value and weighted average useful life by intangible asset class along with the expected annual amortization. The intangibles amortization portion for the Big Fish transaction into ‘15 is approximately $46 million.

Now please turn your attention to the consolidated statements of comprehensive income for the years ended December 31st and for the fourth quarter. For the full year, total net revenues grew 4% over 2013 to $813 million. In the fourth quarter, net revenues also increased 4% to $168 million.

SG&A expenses increased $1.7 million in the year, primarily due to a $6.4 million deal costs, a $2.5 million increase due to the Oxford and Big Fish acquisition and $2.3 million from non-recurring expenses due to the conclusion of Calder pari-mutuel operations, mostly offset by $9.6 million reduction in equity compensation.

Equity losses of unconsolidated affiliates improved by $10.5 million for the year, due to a $12 million increase at Miami Valley Gaming, with a grand opening of the casino in December of 2013, partially offsetting this game was a $2.2 million loss as a result of other -- our unsuccessful Capital Region casino bid in New York.

For the year, net earnings from continuing operations were $46.4 million, down from $55 million in 2013. With that, I'll turn it over to Bill to open the call for questions.

Bill?.

Thanks, Bill. At this point, I think we’re ready to take any questions if there any that are out there..

Thank you. [Operator Instructions] Our first question comes from Cameron McKnight with Wells Fargo. Your line is open..

Thanks very much. Good morning..

Good morning..

Bill, with respect to the casino segment, you mentioned in your prepared remarks, you’re seeing encouraging topline indicators? I’m wondering if you could elaborate a little bit there given most of the regional gaming peers of reported results given commentary just that things at the low-end are starting to get better and getting better over and above the effect of easy comparisons from weather?.

Yeah. I think, as I mentioned in my comment, Cameron, as we look at each of the quarters over the last year, I think the first quarter was our softest, second quarters were better, third quarter were better and the fourth quarter was the best, at least on a year-over-year perspective.

And I think part of that was driven by the fact that the comparables in the prior year were a little bit easier. But we’re certainly seeing more life in basically all tiers of our business and actually we’re seeing a little bit more life in the top and middle tiers than we are in the bottom tier.

The bottom tier is stabilized, but it’s not really the predominant driver of our growth. And if you look across the regions of the U.S., we’re seeing a lot of strength right now in Louisiana. Mississippi has improved dramatically from where we were. We’re not seeing the reductions that we had seen earlier last year.

And in the North East, particularly in our main facility, we had a terrific January but that was unfortunately -- last year was a terrible winter weather period for us but this year, I think, we’ve got four times more snow as people know that live in that area.

So, unfortunately, it was offset by a very brutal few weeks here in the last few weeks of weather, so all signs are pretty encouraging. We believe that’s really directly related to the fact that fuel prices have dropped and consumer discretionary income has improved..

Okay. Great. Thanks for your answers. That’s very helpful. And then moving on to Big Fish, you closed a deal about 10 weeks ago.

Can you comment on whether anything has surprised you either to the upside or to the downside, since you guys took over there?.

Sure. I would say that we’ve been very, very pleased. And it’s largely been in line with what we expected and I think that’s a good thing. Big Fish was a very large transaction for us. We did a tremendous amount of work before we did it. So, I’m happy to say that we haven't really been surprised. We knew the team very well.

We knew the business very well when we decided to do the deal, so largely everything has been performing as we hope that it would.

I guess if I -- on a more qualitative side as opposed to a quantitative side, continue to just be incredibly impressed by the dedication of this team, the commitment of this team through the business and the focus around business intelligence and analytics. The strength of that work within the company is something that continues to really impress us.

Cameron, I hope I answered that question, but just let me know if there is any other specifics you wanted..

Sure. Thanks. Thanks, Bill. And then just moving on, I mean, the earn-out to Big Fish is premised on a pretty significant amount of growth over the course of this year.

Can you give us a bit of commentary on the product pipeline and the profile of marketing spend this year, given that we expect this paramount that’s coming down the pipe?.

Sure. I would say in general, the approach of this business, one of the things we like about this business that it’s a portfolio approach. So it doesn’t make giant bets on individual games. Instead it uses a low-cost development network, consisting of not only U.S.

resources but development shops that they have partnership arrangements with, from around the world to put out a portfolio of content and then content soft launched, marching began slowly and is carefully measured to track which new games are likely to have some upside.

So, I don’t think -- this is not a business that ever gets in too deep or bets too much on any individual gamer or any individual content. And I would say because of that fact, we always want to be careful about the forward-looking statements we make about the content that will come out during the course of the year.

We are going to put out a lot of content, up to a 20 plus games, which some of them are very big bets in and of themselves and we prefer not to get into any kind of real details on them until we actually soft launch them and can measure some of the initial returns and some of the initial evaluations of the marketing spend before we go into too much detail publicly on our true expectations for any piece of content.

So that’s probably not the answer you’d like to hear, but that’s how we are going to talk about this going forward. We are going to be -- we are going to prove it before we get into too much expectations setting with the public..

And, Cameron, just to kind of reiterate what Bill said without providing forward-looking guidance, I think to the extent that you see bookings continue to grow and you can expect that our user acquisition cost, all our marketing costs as you said is also growing.

So, we are expecting to spend considerably more marketing cost this year than we did last year. I think you are going to see the EBITDA growth was driven by cost and marketing and it is absolutely, is not..

Got it. That’s great. And then just one final question, this is a little more general. I mean. when we speak to investors, we sense that -- we sense the social gaming is still a category, that’s not terribly well understood.

Could you give us some commentary on just the size and the growth in social gaming, I mean the industrial overall as a new category of entertainment, just to frame the market size and opportunity for investors?.

Yes. I think there’s a few analysts out there that cover only social gaming. Eilers is probably one of the bigger ones. And correct me, Bill and team here, if I say anything it’s kind of -- look I am talking of the memory, so I’d encourage anyone listening to actually go look at the research they have.

The global market right now is expected to be about $3 billion market, about $1.5 million of that is in the U.S.

Is that fair, Bill?.

That’s fair, right. Correct..

And they have it growing at 20% roughly clip a year as an industry. So it’s a very strong industry, but it has a lot of growth potential. So -- and if you look at where revenues are produced on the Big Fish, considerable amount of that is outside of the U.S. I don’t have the exact numbers, pardon me, but it is a global business..

Yes. I’d add a couple remarks to that. The social casino space, relatively new space it’s growing pretty rapidly a $2.7 billion business growing at a 20% clip or thereabout is a pretty impressive standing start.

And some of the trends we see for our business, we don’t want to speak to other people’s social casino business, but we a see a fairly sticky customer base, a fairly consisting customer base.

So the lifetime value of these customers within the space so far is very, very appealing to us, and perhaps different than trends you might see on other forms of social games.

So that’s one element of the social casino space, that for us remains very attractive, characteristics of the customers that are already customers in the space, or generally the mobile game market, which is a big focus of Big Fish beyond just the social casino piece.

That’s the space that’s been growing very rapidly and we don’t keep our own numbers for how big that industry is expected to grow, but you can look at Eilers and other publications out there that provide estimates.

But I've seen estimates in Eilers saying that space -- the mobile game space not gaming, not gambling but mobile game space will be a $30 billion space over calendar year '15 growing to $40 billion by '17.

So the gaming space -- mobile game space just in and of itself is considered by many to be a large rapidly growing space, of which the social casino piece is just one part..

And just to add on to that, Cameron, about a quarter of our casino revenues are outside the U.S. And to Bill’s point on the casual free-to-play space, that $30 billion market, about 40% of that business is outside the U.S. So, it’s truly a global platform..

Got it. Thanks. Those are some big numbers. Thanks a lot, guys..

Thank you. [Operator Instructions].

Well, I guess we don’t have any other questions, so thanks everybody for joining us today and we look forward to talking to you next time..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect..