Courtney Norris – Director of Corporate Communications Bob Evans – Chairman & Chief Executive Officer Bill Mudd – Chief Financial Officer & Executive Vice President Bill Carstanjen – President, Chief Operating Officer.

Cameron McKnight – Wells Fargo. Jeff Thomison – Hilliard Lyons..

Good day, ladies and gentlemen and welcome to the Churchill Downs Incorporated First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to Courtney Norris, Director of Corporate Communications. Please go ahead..

Thank you, Karen, good morning and welcome to this Churchill Downs Incorporated conference call to review the company’s business results for the first quarter ended March 31, 2015. The company’s first 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 Investor 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 fact. 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 operation to differ materially from the forward-looking statements made in this call.

The information being provided today is as 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..

Thanks, Courtney. Good morning everyone happy Derby Week.

With me today are several members of our team including Bill Mudd, our President and Chief Financial Officer, Alan Tse, our General Counsel, Mike Anderson, our Vice President of Corporate Finance, Treasury and Investor Relations and Bob Evans, the Chairman of our Board of Directors, I’ll make a few general comments and then turn this over to Bill Mudd, after he has finished his comments, we’ll be happy to take your questions.

First, I will spend a few minutes on our first quarter. Second, I will touch briefly on the Kentucky Oaks and the Kentucky Derby.

The company produced record net revenues, record adjusted EBITDA and record net cash from operating activities, those are the metrics to which we pay great deal of attention as we operate our business segments as generally emerge by our improvement.

While there is still noise in our financials as a result of closing the Big Fish Games acquisition and the accounting adjustments required as a result of it. We have the clear picture, the performance and process for our company is beginning to emerge.

While our casino segment, our TwinSpires segment and our racing segment, all showed improvements at the adjusted EBITDA line. Big Fish Games was clearly the biggest contributor to the changes in the year-over-year comparison and we expect that we’ll continue to be so going forward.

Remind you we closed the transaction for Big Fish Games December 16th of last year. As Bill Mudd will explain a bit further in his comments, Big Fish is experiencing significant growth itself in addition to adding significantly to the overall adjusted EBITDA of our company.

So far Big Fish has been everything, we hoped it would be, so far casino business is a very solid, consistent and nicely growing foundation for the Big Fish segment overall. Whist also casino continues to generate growth, the team has developed a portfolio of Casual Free-to-play games which hope to find additional strong performers.

So far Gummy Drop in particular has been steadily climbing the top growth in apps chart on both iOS and Google Play. There are other games making contributions now, there are still others, we hope to see develop in the similar success stories. So we feel optimistic about our social casino efforts and our Casual Free-to-Play efforts.

The Premium business or prepaid games continues to reflect the changing taste of consumers moving away from purchasing prepaid games on PCs or to preferring Free-to-Play games on increasingly sophisticated mobile devices.

We were well aware of this trend, when we purchased Big Fish and the team has done an excellent job over the last few years harvesting the returns that are there in premium, while at the same time contributing the focus of Big Fish, to use the learning and expertise in its Premium group, private, new or social casino, that’s one financial quarter into this acquisition, we are encouraged and excited about our Big Fish team.

Totally, we are good fit for each other and we will continue to strongly support our technology and games’ teams to better grow our companies.

Some of you may have noticed the new Apple Watch was released last week, our team took a shot at for new game for that device and we have a game called Lifeline probably in the top five on the Apple Watch, top paid apps chart as of the last several days.

Actually, it’s surprisingly also number three on the iPhone top paid apps chart out of this morning, again Apple game that was built for the Apple Watch and not the iPhone, so it’s great to see on the iPhone as well.

Before you get too excited, we do not expect this game to have a financially material impact on our company, but it does highlight that Big Fish is keeping pace with technology changes and innovative new devices.

Turning to our brick-and-mortar Casino segment, we showed improvement at the adjusted EBITDA line, however net revenues for the segment were essentially even with prior year and we aren’t seeing any clear improvements in the macro trends across our markets.

Generally, our markets appear fairly stable in the first quarter and our improved performance is more or less selection of our continued effects with respect to cost controls and more efficient marketing promotions. We won’t make any predictions for where the U.S.

economy is heading, but we remain committed to continuing to improve our operations to be as efficient and nimble as we can, bond the changes in our market. Turning to our TwinSpires segment, again this segment showed good adjusted EBITDA improvement over prior year. However the metrics for U.S.

horseracing overall were real headwinds for us in the first quarter. According to the industry resource Equibase wagering on horseracing in the U.S. was down over 5% over prior year. That is a greater rate of decline than we’ve seen over recent periods.

We don’t know if this past quarter was an anomaly or if we should expect the similar rate going forward. There are many variables that may affect wagering in any given quarter weather, changes in the racing calendar et cetera.

April has looked stronger and we are optimistic based on our prior experiences around the Kentucky Oaks and Kentucky Derby in the Triple Crown season. That said, we will continue to keep a close eye on the wagering trends in the industry and adjust our business practices accordingly.

Speaking of horseracing, our racing segments fall decline in revenues, but that is largely business we now lease the racing operations I call there in Florida to a third party, we don’t have those revenues anymore, but we also don’t have the related operating losses to the same expense, that help you adjusted EBITDA of a racing segments as did and improved need at the Fair Grounds in New Orleans.

As noted above racing remains a very challenging business environment overall and we’ll keep our laser focus on running these brick and mortar operations as efficiently as we can.

As I hope all of you can appreciate the Kentucky Derby is much, much more than a horserace, so whatever the challenge is that may affect horseracing as an industry the Kentucky Derby remains something else entirely. We expect, we are going to have quite a party this weekend and all of us are very much looking forward to that.

As you may recall, we put out a press release right after each Kentucky Derby covering some of the key operating and financial metrics for the events, we will left that press release before itself only a few days away. Surprises to say, we are excited for the 141 edition of the Run of the Roses.

Finally, as we noted in the press release the performance of our operating segments drove a 73% improvement in cash provided by operating activities and consequently, we’ve reduced the company’s total debt to $700 million from approximately $770 million at year end, on some of the accounting around the Big Fish acquisition can be difficult to understand, we are generating more cash from Big Fish and our other operating segments and we took some of that lowered our leverage.

With that, I’d like to turn this over to Bill Mudd to provide some additional details on the quarter, after that we’ll be happy to take your questions, thank you, Bill..

Thank you, Bill, and good morning everyone and happy Derby Week. As Bill mentioned in his opening remarks, there is a record first quarter for revenues, adjusted EBITDA and most importantly my favorite cash from operating activities.

Our net loss increase driven by acquisition related charges which we will discuss in more detail on a couple of minutes. Let’s start with our newest acquisition and largest contributor to adjust an EBITDA growth in the quarter.

Big Fish’s first quarter bookings growth accelerated to 40% this quarter, that casino of 67% and Free-to-Play Casual more than quadrupling prior year’s first quarter to $27 million. Our casino bookings growth is driven by 50% increase in quarterly average paying users and a 12% increase in average bookings per paying user.

This means, we’re continuing to add new customers and increasing revenues from existing customers. Our Free-to-play casual growth has driven by a 153% increase in average paying users, largely driven by the success of Gummy Drop, which is continuing to show nice week-over-week growth and is currently averaging more than $250,000 on daily bookings.

Our premium business bookings declined by 28% consistent with recent trends, this decline was anticipated and expected to continue as customer shift from personal computers to mobile devices and as their preferences change to Free-To-Play game genres.

Premium business also has a majority of Big Fish’s non-US dollar functional currency exposure, primarily in Euros, which accounted from 19% or about $2.2 million of decline on a stronger US dollar.

Now let’s take a look at our casino performance, after a very strong start of the year in January and the early part of February, our casino segment net revenues end of the quarter in line with the prior year.

We believe this somewhat erratic monthly growth rates are more a function of changes in weather patterns and to some extent the timing of tax refunds and underlying trends and gaming customer behavior.

The markets in which we operate aren’t seeing meaningful improvements in employment wage inflation, so we believe any month-to-month volatility is primarily a function of other variables and all other things being equal, our performance will be in line with the local economies in which we operate.

Generally, across all our properties, we continue to see strength in the high end segment of our database, while the middle is stable and the lowing continues to struggle. We have a new headwind at our Fair Grounds slot facility.

The New Orleans City Council passed a Citywide Smoking Ban on January 22, [Indiscernible] into effect last week, this ban affects businesses located in Orleans [Indiscernible], so we’ll have competition outside of the city and we’ll still allow customers to smoke, we aren’t sure what the impact will be, but we did not expect it will be material to our total company financials, although it will have an unfavorable effect on our profitability at peer-grounds.

We are taking actions to minimize the impact including the, constructing a new smoking patio and encouraging smoking customers to visit one of our video poker facilities located in neighboring Perisher [ph] that do allow smoking.

We are also investing in auctions that will allow customers can play slot machines on a smoking patio using a tablet device, still a lot of work to do, including getting approval from the Louisiana State Police, so more to come on this one.

In total casinos adjusted EBITDA improved $1.5 million this quarter driven by better marketing promotions, better cost efficiencies and $0.5 million improvement in our share in Miami Valley Gaming, which experienced revenue growth of 4% and adjusted EBITDA growth of 9%.

Our TwinSpires revenues declined 2% [ph] in the quarter as a result of exceeding a service contract in the call center wagering for a third party, the contract was extremely low margin and didn’t really affect year-over-year earnings in period. Wagering until the U.S.

thoroughbred racing contracted by 5.2% in the quarter driven by 6.3% decline in the number of race days and a 7.6% decline in a number of races, March was the most significant contributor to the decline where paying were down 12% on 15% fewer live race days driven by weather cancellations and act with a racetrack living to a four day schedule.

As Bill mentioned in his opening remarks, April looks much stronger, so we believe the month of March wasn’t anomaly. Despite the industry headwinds TwinSpires first quarter handle grew 1.1% driven by a 4% increase in unique players.

On April 9, TwinSpires launch the new iPhone App in the Apple Store and it’s already proven to be a big hit with our existing players and it’s improved our acquisition efforts. Our TwinSpires adjusted EBITDA improved $1.2 million in the quarter, primarily due to a lower tax rate in Pennsylvania and savings from the discontinuation of Luckity.com.

Our racing segment revenues declined $6.1 million driven by the lease of quadrant racing to a third party, hardly offsetting this decline with a 12% increase in peer-grounds [ph] racing revenues driven by higher average field sizes and a 53% increase in Turf races as a result of installing new drainage system.

Racing adjusted EBITDA improved $1.1 million driven by $1.4 million improvement in quarter as a result of leasing racing operations. While we are on racing, I’ll share a couple of points on Derby Week, the weather for Friday and Saturday is forecasted to be mostly sunny and 70 plus degrees, really can’t ask for better weather forecast than that.

The Derby field, this might be the most competitive field in history, at least that to all the horseracing insiders are saying on the backside. Premium ticket sales, sponsorships and other ancillary revenue streams are very strong.

Bottom-line in this everything is falling in line for another record Derby we’ll let you know more in our press release after the events. Other investments, EBITDA improved $0.7 million due to lower expenditures associated with the development of our high gaming platform and an improvement of $0.3 million at United Tote due to higher equipment sales.

Our corporate adjusted EBITDA declined by $0.8 million primarily as a result of our stock price appreciation driving additional cost than our deferred compensation plan. The adjusted EBITDA came in at $48.3 million nearly doubling the prior year with all of the operating segments showing improvement.

Now I’d like to spend a few minutes discussing changes below adjusted EBITDA that affect earnings from continuing operations for the first quarter. The most significant adjustments related to the purchase accounting items associated with Big Fish Games acquisition. These adjustments totaled $19.3 million in the quarter.

The first line items Big Fish Games acquisition charges of $6.4 million is related to the fair valuing of the earn out payment and deferred founders consideration. As a reminder this will continue to be an item included in the adjustments until all of the deferred and earn out payments are complete, which is influenced by the discount rate.

The time remaining until the payments are made and most importantly driven by an assessment of how much will be optimally paid.

The next line item, Big Fish Games changes in deferred revenue are $12.9 million, there are two parts to this adjustment, largest part in this adjustment reflects the change in Big Fish Games deferred revenue resulting from business combination accounting rules of $9.2 million.

Another reminder in deferred revenue balances are assumed as part of an acquisition, deferred revenues are adjusted down to fair value, the accounting rules resulted in a reduction in revenues and EBITDA presented in the consolidated statements of comprehensive income, in the case of Big Fish, deferred revenues are returned down by approximately $47 million, which was directly through to EBITDA over the time period, which the revenues would have been recognized, we anticipated will take more than a year to cycle these revenues out of the balance sheet and into the income statement like the majority will occur during 2015.

The other part included in this adjustment is the change in deferred revenue excluding the impact of purchase price accounting, which reflects the actual change in deferred revenue from an operational perspective during the first quarter totaling $3.7 million.

The final adjustment we will talk about is other charges and recoveries of $6.1 million, which primarily reflects the gain from the sale of our remaining interest in HRTV. Depreciation and amortization expenses increased $12.1 million driven by Big Fish Games which added $12.8 million.

We have had a couple of questions from investors on how the accounting for research and development as expensed in our P&L related to Big Fish, research and development cost are expensed as they are incurred and are included in operating expenses and are showing as a reduction in adjusted EBITDA in the first quarter Big Fish realized $10.2 million of our R&D expenses and it is now shown as a separate line item on the phase of the statement for comprehensive income.

Net losses from continuing operations totaled $1.6 million, down $0.9 million from prior year, as accounting adjustments associated with the Big Fish acquisition offset premise adjusted EBITDA. Now, we just take a look at our consolidated statements of cash flows for the quarter.

Cash from operating activities increased about $37.8 million in the quarter due to the improvement and adjusted EBITDA but also includes $3.5 million of dividends from our Miami Valley Gaming joint venture, timing the collections for Kentucky Derby week as well as $11.8 million tax refund for Big Fish Games.

These refunds belongs to the prior owners of Big Fish, so there is an offsetting outflow of $11.8 million in the financing activity section of the cash flow statement. We’ve had a few questions from investors on how we account for third party investments in games and we’ll talk about that for a minute.

You will notice a couple of new line items on the cash flow statement. The first line item is game technology and rights amortization of $0.7 million.

The other new line item is game technology and rights of $4.8 million, these line items relates to the cash paid to the third party developers for games and the subsequent amortization once the games are launched. This amortization is part of the D&A on the income statement.

It is that operating expense that is included as a reduction in adjusted EBITDA. Cash used for investing activities declined by $21.8 million due to lower capital spending, lower funding requirements from $90 gaming and $6 million in proceeds from the sale of our remaining interest in HRTV.

Long-term debt end of the quarter just under $700 million down $71 million this year end. With that I’ll turn it over to Bill who will open the call up for questions.

Bill?.

Thanks, Will, if anybody have any questions please let us know and we’ll try to answer them..

[Operator Instructions] Our first question comes from the line of Cameron McKnight from Wells Fargo..

Great, thanks very much.

First of all in the casino segment you grew EBITDA by 6% year-on-year with revenues down 1%, can you talk to the cost management of the properties and the efficiencies you are getting in a low growth environment?.

Yeah, we each jurisdiction as a country a little bit different than others Cameron, but in the fourth quarter of last year we did take some restructuring actions predominately in our Mississippi properties where we have seen low single digit declines for a descended period of time.

We have combined a number of operational roles and took some headcount actions if you will last year to get the cost structure in place.

From a marketing promotions perspective, things are relatively stable, we are seeing some very high re-investment in Greenville, Mississippi and some really over inflated three-ply numbers competitors up 50% in Florida for example that we are being a little bit more disappointing looking at hitting the peers of customers that actually have money and there are lots to spend, so we are getting more efficient from a marketing perspective there.

And then in Maine, Maine had a great start the year in January, we ended up having, I think the most snowfall ever in the Northeast as people are well aware of the coldest February on record.

So we had a tough start to the year specifically in late January in early February, recovered in March, so we really had to be disciplined during those really cold period, we actually had to close the Casino for the first-time ever in Maine.

So, the team did a great job of managing the expenses in light of soft revenues, particularly in the early months of the quarter in Maine. So in general, I think the teams are very cost-conscious, I know that there is not a lot of topline growth. So we have to offset the inflationary [indiscernible] on the wages that we provided..

Got it, thanks, Bill. And then moving onto Big Fish, $20 million of quarterly EBITDA puts you well on track to hit the earn out levels.

Can you give us a sense of how EBITDA has been trending quarter-on-quarter, at least broadly speaking?.

Well, broadly speaking it is way up, I mean last year they did $57 million when we closed on a trailing 12-months number in September. So if you did $20 million in the first quarter, it is pretty easy to say on an apples-to-apples basis it is improved. Beyond that I really can’t say much more than that..

I would add to what Bill just said was, the fact that you have got two segments within the larger Big Fish segment that have been showing pretty consistent significant growth and you can’t ever make promises that that continues, but if you look towards the current period and prior periods, you see consistent growth in the Social Casino business and now pretty consistent strong growth in the Casual Free-to-Play segment..

And one other point I would say, Cameron in this business that investors may understand or may not understand is, if you spend user acquisition money, you pick-up new customers and it may be unfavorable for that particular customer in that month, but the next month you’ve got that customer and your new user acquisitions spend is to really pick-up new customers.

And you are getting paid for the other one, so it is a really a velocity based business from that perspective..

Got it, thanks.

And then as you look across the Big Fish numbers, when you think about mobile versus non-mobile, because it fair to say that the growth within mobile continues to get stronger or is the growth rate strong but relatively the same versus say last quarter or last year?.

Fair question, I think I’m always very, very careful about making predictions about macro market trends, I think there is information out there where other people speculate on what mobile looks like overtime, but certainly there is some good data points with the movement across the world of Smartphone and Tablets and other security mobile devices that I think speak well towards the continued adoption and utilization of these devices, hopefully in United States and to many parts of the world, so making products that take advantage of those devices that are consumed on those devices, that’s like a good place to focus, that was one of the strong interest we had when we got the acquisition of Big Fish done and it’s still seems like those trends generally look very good to us, but I would encourage you to utilize and review other folks that comments on those kind of trends, because there is some pretty good data out there that also comments very specifically on those type of issues..

Sure thing. And then finally guys, you generated $90 million of cash in the quarter and paid down $70 million of debt, your leverage is still significantly below peers.

Can you give us some updated thoughts on capital management?.

That’s a very – I mean it’s a dynamic process right, Cameron, we still have an earn out up to $350 million yet to pay and debt markets seem to be doing extremely well, something we manage and monitor very carefully and certainly think about quite a bit, so beyond that I really can’t say a lot..

Great. Thanks very much..

Thank you. [Operator Instructions]. Our next question comes from the line of Jeff Thomison from Hilliard Lyons..

Good morning, nice quarter, congratulations on that..

Thanks Jeff..

Bill, I think you just touched on this question, but I will ask it anyway and it’s a follow-up related to the earn out on Big Fish, when that is realized or paid I was curious if you covered how that payment will be funded relative to your balance sheet and then secondly I wanted to step away from the quantitative questions and ask for your interest [indiscernible] on something related to Big Fish and that is compared to your due diligence period.

I’m curious as to what has surprised you the most about this business or this company to-date that may be exceeded or fell short of your original expectations anything that just stands out to you..

Okay, thanks Jeff, I’ll take the first question and I’ll let Bill Carstanjen to take the second question.

The first question as it relates to the earn out payments, we’re going to have enough capacity on our existing debt facilities to fund those payments without taking in anymore debt that have been said, the long term debt markets looked to be very favorable and once, the picture becomes clear on things like whether we get gaming in Illinois or – and exactly how much one that openly paying in the earn out payments.

Then we’ll have a better idea of what our cash structure maybe look like and then we’ll take a look at whether we should put some more longer term [indiscernible]..

Can you remind us what the debt facility looks like right now in terms of capacity?.

Yes, there is a $300 million bond that has roughly 6 years left on it, come this December. We got $200 million 5 year term loan and we have a $500 million revolving credit facility that‘s what the effort today and then of course you can seen on the balance sheet where we are going on each one of those..

Right, got you, okay..

I’ll let Bill answer the other question with respect to what we are surprise about Big Fish, Bill?.

I would say that given the size of this deal versus the overall size of our company, this was the deal we spend a great deal of time on with respect to due in due diligence and trying to think through, how this company would fit with us and how this company and its markets would change overtime and how that change might affect us good and bad.

So we were very thoughtful and careful about this particular deal and that doesn’t mean that we get those choices or those predictions correctly overtime, but I would say that going into this deal, I’ve been involved with deals in my entire career and I saw as much works and effort and thoughts put into this one as any I’ve ever been a part of in my entire career here and elsewhere.

So thankfully coming out of this deal we give 1 full quarter of it behind us, the business should perform like we hope it would perform across the three major segments.

It’s largely been consistent overall with what we hoped and expected it to be, so all good on that front, couple of surprises, I continue to be surprised personally with the rigor and the analytics behind the choice of this company makes, I think when you – if you have to make an assumption about a business like Big Fish, I think the first assumption would be it’s very creatively focused, it’s a creative process, it’s art more than science, because that’s the nature of games and lack of predictability about over which games will be successful, which aren’t.

So while creativity is the big part of the customer basing products, fact is I think the secret sauce for Big Fish and I think that got us most by surprise is just how rigorous the testing and measuring behind that creativity really is.

Open terms of the features of the games, but then how the games are resonating with the customers, the marketing analytics, the business analytics, those are very, very powerful, those systems in processes and those people are very, very good, and I hope, we’ll see some rough [Indiscernible] from those field sets into TwinSpires and other businesses we do over time.

Well that’s series of attributes that I think is what caused – got us more surprising and most happy with..

Okay, I appreciate that color, and then lastly, I just want to express to those to whoever had the responsibility of ordering the [Indiscernible] weather this week and weekend, good job..

Bill, do you want to take credit for that?.

Yeah, I’ll take credit for that, thanks. Thanks, Jeff..

Thanks Jeff..

Thank you. And I have no further questions at this time. I would like to turn the conference back over to management for any closing comments..

Thank you very much everybody for joining. Please tune in Saturday and watch everybody on TV, if you’re not able to be here in person, we’re excited about it and we look forward to updating you on behalf of the Derby on Saturday. Happy Derby everybody..

Thank you. Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day..