Churchill Downs Incorporated

Good morning, and welcome to this Churchill Downs Incorporated conference call to review the company’s results for the first quarter, ended March 31, 2012. The result 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 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 a 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 as of this date only, and Churchill Downs Incorporated expressly disclaims any obligation to release publically any updates or revisions to these forward-looking statements to reflect any changes in expectations.

I will now turn the call over to our Chairman and CEO, Bob Evans.

Thank,s Courtney. Good morning, everyone.

Glad you could join us today. Let’s start with our first quarter 2012 results.

Bill Mudd, our CFO, will take you through the details but here are the highlights.

Our net revenues were up 5% in the first quarter of 2012. EBITDA was up 55%.

Net earnings went from a $3.2 million loss last year to $1.4 million profit this year. All three metrics set records for the first quarter.

Looking at first quarter EBITDA in the last three years is instructive. In the first quarter of 2010 we lost $5 million.

Last year we made $11.2 million. This year we made $17.3 million; so a very solid quarter.

I’ll now turn it over to Bill and then I’ll be back with some comments about Oaks and Derby Week and about a couple of exciting new developments.

Thank you, Bob. Good morning, everyone, I will review the information in the table of the press release that can be found under the Investors section of the website that Courtney referred to earlier.

Following my comments, I will turn it back over to Bob for some final thoughts before we open to questions.

We will begin by reviewing the segment information contained on the schedule titled “Supplemental Information by Operating Unit” in the press release. Before we review our company’s performance, I thought it was worth discussing how the U.S.

Thoroughbred industry is doing as it effects our online and racing businesses.

According to figured published by equibase.com, betting on U.S. thoroughbred racing grew for a second consecutive quarter since it started declining in 2007.

For the first three months of 2011, the industry grew handle by 5.4% due in part to a mild winter, yielding fewer race-day cancelations. After five consecutive years of declines, it was good to see some increases.

Now let’s look at our segment performance for both revenues and EBITDA. In the first quarter our racing segment generated $30.2 million in revenues, down 5% from the previous year.

Fair Grounds is the only race track that had live racing this year and posted a 5% decline on two fewer race days. In addition to the two fewer races days, Fair Grounds’ largest race day, the Louisiana Derby, fell on April 1 this year; we’re in our second quarter as compared to first quarter during the prior year,.

So overall, we’re very pleased with these results.

Our Calder operation conducted four days of live racing in the first quarter of 2011 and now run those days in April, resulting in a 30% decline at the track for the period. From an EBITDA perspective, our racing operations improved 9% or $1.1 million over the prior year.

The improvement was primary driven by lower utility expenses associated with milder weather conditions and cost control measures implemented to offset revenue declines.

Our Gaming segment posted revenues at $59.3 million during the quarter, essentially flat to the same period of the prior year. Our Calder location continued to grow revenues up 6% year-over-year after growing revenues 24% year-over-year in the prior quarter.

We believe the slower growth rate is largely a fact of the new entry into the South Florida gaming market as customers try out the newest property.

Offsetting this increase was the 6% decline in our Harlow’s property revenues as a result of operating without a permanent dining facility or entertainment venue as a result of the flood that occurred during May of 2011.

At the EBITDA line, our Gaming business improved to $20.4 million up $2.9 million over the previous year. There were two unusual items favorably impacting this segment during the quarter.

The first is a $1.5 million net insurance gain related to the final settlement of the wind damage sustained at Harlow’s during February of 2011. The second is a $0.8 million gain from the collection of receivables related to the 2005 Miami Dane gaming referendum, which was fully reserved.

Excluding the impact of the unusual items, our Calder EBITDA improved $0.9 million and was partly offset by a $0.2 million reduction at Harlow’s; both of those are driven by revenue.

Our Online businesses revenue increased 20% to $44 million in the quarter, on handled growth at 15.2%. The improvement was primarily driven by growth in unique customers, up 14% in the period as average revenue per user was essentially flat.

With the industry up 5.4% during the period, our handled growth continued to outpace the industry growth by about 10%.

On our online business EBITDA increased 38% or $2.9 million in the quarter. The improvement, driven by revenue growth, was partly offset by one unusual item, employee separation expenses unfavorably affecting the segment by $0.8 million.

Excluding this item, EBITDA growth would’ve been even higher and shows the operating leverage of the business as revenues grow.

Our Other Investments EBITDA declined $0.2 million as we spent $0.3 million on fees associated with our Ohio Joint Venture Agreement.

Total EBITDA came in at $17.3 million, an improvement of $6.2 million over the prior year.

Now if you would, please turn to the table that is titled “Condensed Consolidated Statements of Net Earnings.”

Total net revenues from continuing operations increased 5% or $6.6 million as gains in our online segment more than offset the decline in racing operations. SG&A expenses were essentially flat as employee separation expenses of $0.9 million were mostly offset by $0.8 million gain for Miami Dade referendum receivable.

Insurance recoveries net of losses added 1.5 million to EBITDA in the period and represents the final payments related to the wind storm claim at Harlow’s. Additionally the company came to a final agreement on the claims associated with the flood that impacted Harlow’s in May of 2011.

We received $5 million in insurance proceeds during the quarter just ended, $7 million dollars in April, and $3.5 million during 2011 for a total of $15.5 million after deductibles. We will book a net gain in our second quarter results of approximately $5 million from these insurance proceeds.

In total, flood insurance recoveries will fully fund our Harlow’s renovations, including a new buffet, steakhouse, business center, spa facility, fitness center, pool, and multipurpose event center. We are working through the permitting process for the Harlow’s renovations, but at this point we are still on schedule and on budget for the opening later this year.

Our fully-diluted earnings per share from continuing operations for the quarter was $0.08 compared to a loss of $0.19 in the prior year.

Now please turn to the page titles “Consolidated Statements of Cash Flows.” Net cash provided to operating activities declined $5.4 million to $55.1 million in the quarter.

The decline is primarily driven by an $8.5 million tax refund received in the first quarter of the prior year. Partially offsetting this decrease was improved EBITDA associated with our online business.

The $17.8 million increase in cash used in investing activities is primarily driven by $13.5 million of spending related to our acquisition of Bluff Media, our investment in our Ohio joint venture and our additional equity in Kentucky Downs during the quarter. Spending for additions to property and equipment was $9.1 million in the quarter, $4.9 of this was for maintenance compared to $4.6 million in the prior year.

We still expect maintenance capital to be approximately $20 million in 2012.

The remaining $4.2 million in property and equipment is related to our corporate office move, renovation at Harlow’s, new tote customer installations, and Luckity.com, which Bob will discuss at the end of the call.

Now if you could turn your attention to the schedule titled “Condensed Consolidated Statement Balance Sheet,” I’ll briefly review some changes.

Accounts receivable decreased $25.7 million from year end primarily as a result of the collection of Derby related receivables and insurance recoveries related to the damage sustained at Harlow’s. Deferred revenue increased $22.6 million since December as a result of additional first-quarter billings of Derby related and live racing meet memberships that will be recognized as revenues in subsequent quarters.

Long-term debt decreased $19.8 million reflecting repayments from our free cash flow.

With that, I’ll turn it back over to Bob for some final comments, Bob.

Thanks Bill. Well, we had quite a Kentucky Oaks and Derby week.

By week here, I mean the period of time from our opening night event on Saturday, April 28th to the Kentucky Derby itself on Saturday, May 5th. And as always this soon after the event, these numbers are preliminary and are subject to change.

Total attendance for the week was 349,700, down 3% from 2011. Fortunately, on the Oaks and Derby days when ticket prices are at their highest, attendance increased.

Total all sources handle for the week was 253.5 million, up about 22 million or 9% from 2011.

While still preliminary and subject to change, Oaks and Derby week EBITDA will likely be about $4.5 to $5.5 million higher than in 2011 and will be a new record.

The week kicked off on the Saturday before the Derby with our opening night event. 26,527 fans braved the severe weather forecast only to find that the weatherman was right.

With the onset of an intense and frankly scary thunderstorm featuring golf-ball sized hail, we had to suspend racing for a little over an hour so that the horses and humans could seek cover. As you might guess, this did not help our attendance or handle numbers.

Attendance on opening night was down 30% from the 38,142 in 2011. This decline accounted for the entire decline in Oaks and Derby week total attendance.

All sources handle at 6.5 million was off 27%. We don’t conduct live racing on the Sunday or Monday of Oaks or Derby week.

Attendance and handle on Tuesday, Wednesday, and Thursday were essentially flat with 2011’s numbers. In total for these three midweek days, we had a little over 45,000 attendees and $20 million in all sources handle.

On Thursday night we help our third Taste of Derby event. This year we moved the event to a new venue to accommodate larger crowds.

Attendance increased 13% to 1,407, nearly double the attendance of the first Taste of Derby in 2010.

With the outstanding support of the 19 world-class chefs from around the world and from our wonderful sponsors, we used Taste of Derby as our fundraising vehicle to support hunger-related charities. This year Taste of Derby raised over $56,000 for hunger-related charities.

The all-time records started to fall on Friday, Kentucky Oaks day. Oaks attendance at 112,552 was the second highest ever.

2010’s 116,046 was the all-time high and we were up 2% over last year’s 110,112. Weather again plagued us on Oaks day as an oncoming severe thunderstorm forced us to evacuate the infield for the first time in our history that we’ve ever had to do that, and that delayed racing by nearly an hour.

Similar to opening night’s hail storm, the Oaks day storm had a pretty dramatic negative effect of handle, particularly on track handle. Nonetheless, all-sources Oaks day handle of 39.9 million was a record, up 7% over 2011’s 37.5 million, which was the previous record.

There are over 40,000 thoroughbred races conducted annually in the U.S. The Kentucky Oaks is the third biggest race in the U.S.

in terms of attendance and the sixth biggest race in terms of handle. As we’ve been saying now for several , we continue to believe that there is a growing financially viable market for high-quality thoroughbred racing combined with compelling entertainments elements.

That is what opening night, the Kentucky Oaks and the Kentucky Derby, are all about.

Oaks day, again, produced a significant results for our charitable interest generating an excess of $150,000 for our fundraising partners, Stand Up To Cancer and Kentucky First Lady Jane Beshear’s Horses and Hope Breast Cancer Program. Since we started our now famous Oaks day PINK OUT in 2009 and our Taste of Derby event in 2010, we have raised over $700,000 in support of cancer-related and hunger-related charities.

Then there was the Kentucky Derby day; pick a record and we probably set it this year. Attendance was a record 165,307 up from the previous record of 164,858 set last year.

All-sources handle for the 13 races on derby day totaled a record of $187 million, up 13% from last year’s $165.2 million, and 7% above the previous record of $175.1 million set in 2006.

Handle on the Kentucky Derby race itself was $133.1 million up 19% from last year’s $112 million and 12% higher than the previous record of $118.4 million set in 2006. We didn’t set a record for our TV ratings but it was still a terrific telecast.

I literally just got the viewership and national ratings about 15 minutes ago, and viewership was 14.8 million, up from last year’s 14.5 million. The national rating was 9.0, up from last year’s 8.5.

And at 14.8 million viewers, this year’s derby was the third most watched derby in 23 years since Sunday Silence won in 1989. We beat the final round of this year’s Master’s golf tournament, the Daytona 500, the Louisville Kentucky Final Four basketball game, and the NBA All-Star game.

Since the Super Bowl, only two sporting events this year have had higher overnight ratings than the derby, the NCAA basketball championship game and the Ohio State/Kansas Final Four game.

In our digital marketing and online areas, most of our key metrics also set new records. Derby Nation on Facebook now totals a record 209,000 people up 33% last year.

Our popular Kentucky Derby app has now been downloaded by 199,000 people. Total page views at our websites, kentuckyderby.com and kentuckyoaks.com over the weekend totaled a record 14.4 million page views, up 45% from last year.

And twinspires.com had terrific Oaks and Derby days. For the two days, total twinspires.com handle on all racing totaled a record 23.8 million, up 19% over 20 million in 2011.

Over 37,000 unique players wagered via twinspires.com on Oaks day and over 69,000 unique players wagered on Derby day, up 23% and 15% respectively over last year. And we signed up over 27,000 new twinspires.com accounts on Oaks and Derby days, 15% more than in 2011.

In closing out this discussion of Oaks and Derby week, I want to congratulate Oaks winner, Believe You Can and her connections, and the Derby winner, I’ll Have Another and his connections. And I want to thank the horsemen and the over 11,000 full and part-time employees who make these wonderful events happen.

So a great first quarter and a great Kentucky Oaks and Derby week. What’s next?

Let me update you on two other developments. With 2013, next year’s Oaks and Derby, we will introduce the Mansion at Churchill Downs, the pinnacle of live sporting events experiences.

Imagine enjoying the sumptuous surroundings of a fabulous southern mansion; the library, the sitting room, the dining room, the private bar, the veranda, the balcony, served by a private entrance and elevator and all with the most compelling view of the entire Churchill Downs Race Track. Private invitations were distributed at this year’s Oaks and Derby inviting recipients to be part of the mansion next year.

If you’re interested you can register to receive more information about the mansion at www.churchilldowns.com/themansion. That’s churchilldowns.com/themansion.

And finally, Luckity. This summer, we hope to introduce an exciting new initiative called luckity.com.

That’s l-u-c-k-i-t-y.com. Luckity.com is a mobile and online gaming platform that will offer fun, simple, exciting and easy to play games, with the opportunity to win real money.

Luckity.com plays like a social game but pays like a real money game. It will be licensed, regulated and legal for U.S.

residents. Now in a private beta, we hope to launch luckity.com this summer with initial set of games that will then grow over time.

You can go to luckity.com today and sign up to be one of the first to play and win.

With that, Sean, we’ll be happy to take any questions.

Just quickly on the Luckity that you just mentioned, can you talk a little bit about how the economics work? Is that -- are you saying its similar to like a Zynga model?

It’s too soon for us to talk about that. We obviously know but let us have a few more weeks or months here and we will be glad to answer your questions.

Okay, and then in online segment, obviously looks almost like it’s accelerating here, is it -- do you suspect it’s taking share, or is this market growth over all?

I would say that it’s market growth overall. I mean, we continue to maintain the kind of 10 point delta to the industry .And with the industry now being up 5% in the first quarter versus down 5%, that’s a 10 point swing in the industry.

So I think that’s largely what you’re seeing, Steve.

Okay, and then two quick more. Could you update us on the status of Illinois legislation and also on the subsidy?

Let me have Bill Carstanjen, our President and CEO, take that.

First on the legislation, it’s still very fluid for this session. We continue to work on it, and any predictions at this point would probably just prove us wrong.

So, we’re going to continue to work and see where it takes us.

On the subsidy, as we’ve talked about in the past on these calls, that might have to be allocated by the legislature in Illinois, and they haven’t done that. Whether they will or they won’t is something that we can’t predict.

Okay, and just to be clear, it’s not in held in escrow, that -- those funds?

Bill, do you know if they are technically held in escrow?

I don’t think legislature -- first of all, they haven’t appropriated it, but I don’t think they can put it through the general fund without taking an action from that perspective either, but it’s not technically held in escrow per se.

Okay, that’s helpful, and then just lastly, what’s your equity on the ownership of Kentucky Downs now?

I think it’s 10.4% now.

I’ve followed your company for a long, long time and I just have to say congratulations on generating a first quarter profit, and a significant one at that. It’s very encouraging to see that happen.

Bill, I could not write down your CapEx numbers fast enough, could you review what you mentioned on first quarter CapEx spending and whatever break down you gave on the year’s expectation, including any maintenance or discretionary breakdown that you might have given?

Sure, I would be happy to. Well, let’s start with -- We don’t provide forward-looking guidance, we do provide some guidance with respect to what we spend on maintenance capital, kind of at the beginning of the year -- we did that in the last call.

We said we would be hitting $20 million and we are still saying around $15 to $20 million, so we are still in that same ballpark. In terms of what we’ve spent this quarter, we’ve spent -- $9.1 million is what shows up on the face of the cash flow statement.

$4.9 million of that was for maintenance capital, and we spent $4.6 million last year, and those were actually separated in the 10Q document. The other $4.2 million is project CapEx, and that number is going to be some what bigger this year because we’re going to spend $15 million renovating Harlows, for example, and that’s not really maintenance capital.

That’s replacing what was destroyed by the flood. So, so far to date, now that $4.2 million we’ve spent is partly for the corporate office move, it’s for renovation Harlows, we have -- Anytime we pick up new customers we have to buy new Coke machines, for example, so that’s going to generate incremental revenue.

That’s also in the project, capital numbers. And then we spent a little bit of money on Luckity.com which Bob discussed.

Okay, excellent, and lastly, I just wanted to let you know that the day before the derby, I decided to take my family to the infield to take in that experience, and that is what it was, it was an experience. I’m thinking about writing a book about it.

Great. We’ve probably have met more investors at this year’s Oaks and Derby than I’ve ever met before.

I don’t know why this year, everybody decided to come, but we’re pretty certain that our increase handle numbers are a result in having a lot of our investors here. So, thanks.

I would expect that.

Yes, I was wondering if you guys could kind of break down the components of the increase in derby week 4.5 to 5 million, almost as much as last year’s gain without the benefit of the new TV and sponsorship contracts. So, I was wondering how consistent those increases could be and what the components were, or how it breaks down for this year.

We don’t provide that level of details, as you know. But there was some higher ticket prices and higher sponsorship.

Those are the two biggest components, and then [indiscernible] commissions obviously are higher too with increased handle.

Okay, and then that’s helpful, and then how much are you guys spending on the corporate move in total for CaX?

I think it’s about $3 million. Yes, it’s under 3.

It’s 2-point-something million.

Okay, is that all been completed, or…

We’re tentatively planning to move over the weekend -- I think it’s June, 1, 2, 3, 4, something like that. So about a month away.

Yes, and the bulk of the cash has been spent in CapEx.

Okay, great, and then, just unique customers increasing 14% on TwinSpires.com seems like a big number. How is that relative to where you where last quarter or last year, and what are you doing to drive that?

Thanks.

The increase that I recall -- and I’m doing this from memory, I don’t have the date in front of me -- was about the same in percentage terms as what we did last year. We get a huge influx of interest about TwinSpires.com around Oaks and Derby week, and the couple of weeks leading up to that, and we are very aggressive marketers, both at the on-track level as well as the online level.

So, we do a lot of work and drive the new customer acquisition around Oaks Derby because it’s been very successful way for us to do that.

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Okay. And that, Bill, just on the separation agreement, what line item was that a part of, that -- I think it was 800,000?

Yes, about -- well, there’s 900,000 in total; 800,000 of which was in the online segment and they have both affected SG&A.

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Okay, so, that affected the online segment EBIDTA?

800,000 online, there’s a 100,000 in racing, and if you look at the statement in consolidating earnings, in the SG&A line.

Wanted to see if you could give us an update of the joint venture with Delaware North, and kind of where that stands now, and when you anticipate funds starting to transfer and investment in that new facility to begin. Thanks.

Well, one of the things -- This is Bill Carstanjen -- one of the big events that we have our eyes on is the expected ruling of the [indiscernible] on the legal mater, the legal dispute. We expect that sometime around Memorial Day.

We probably can expect that ruling to be appealed, but really the timing for project in part is going to depend on the strength of that ruling and appeals process that come back to that. So while we’re working very hard right now on preplanning what we do and what the facility would look like in the CapEx form, we won’t sink -- we’re not planning to sink money into the ground until we have much better visibility into the timing and the results of the legal dispute.

Okay, well, listen, thanks very much for joining us. One of the good things about sort of extending the Oaks and Derby into a weeklong event is that our economics improve; the bad thing is that it exhausts us.

So, we are all kind of thrilled to get this call behind us, and I think we are all going to go to sleep for 24 consecutive hours. So, thanks very much for joining us.

For those of you that were here at Oaks and Derby, thanks for coming, and we will talk to you again in August.