Churchill Downs, Incorporated

These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent report on Form 10-K. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and Form 10-K are available on our website at ChurchillDownsIncorporated.com. And now, I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstangen.

Thanks, Nick. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer, Marcia Dahl, our Chief Financial Officer, and Brad Blackwell, our general counsel. I will share some high-level thoughts on several strategic topics, and then Marcia will walk through our results and provide an update on our capital management strategy. After she finishes, we will take your questions. Over the course of 2022, we accomplished numerous key strategic and operational objectives and positioned the company for growth in 2023 and beyond. We delivered record net revenue of over $1.8 billion and record adjusted EBITDA of $764 million. We have very high expectations for 2023 as well, but first I will touch on a few important highlights regarding 2022. We held a very successful Kentucky Derby, setting records for virtually every material metric. We completed the P2E transaction, the largest acquisition in our company's history. We expanded our HRM business into three new states, Virginia, New Hampshire, and Louisiana. We opened Turfway Park, our new HRM entertainment venue in Northern Kentucky. We completed two other strategic acquisitions, Ellis Park in Western Kentucky and Chasers in New Hampshire. We signed an agreement to purchase Exacta Systems. We completed the sale of the excess land at Calder. And we have several significant strategic organic investments in process to accelerate our future growth. Through all of these initiatives, we still maintain one of the strongest balance sheets in the industry. In summary, we had a productive 2022, but our focus is now on executing on our growth objectives for 2023, 2024, and beyond. Let's discuss the strategic update since our last earnings call. First, we have made significant progress on our projects at Churchill Downs Racetrack in preparation for the upcoming 149th Kentucky Derby. Our first-turn experience is almost complete. The structure is the size of a typical soccer stadium with more than 7,300 permanent seats located on the first turn of our iconic racetrack. The scope of this complex is stunning the first time you see it, and it forever changes the personality of this portion of our venue, which historically had been dominated by a series of temporary structures and back of house infrastructure. Our guests will experience it for the first time at this year's Derby in early May. Ticket sales have been very strong, but it is not yet sold out. We expect it will be. We have also made significant progress on the Patek project. This is a transformative project for Turtledown's racetrack, the most significant in decades, and will create a variety of new and innovative guest experiences while at the same time improving the views and ambiance for every single guest who enters our historic venue through the front gates. Our goal is to introduce a level of transformation and grandeur that will surpass any facility anywhere in the world. We remain on course to complete this project for the 150th Derby in May 2024. This effort epitomizes a core strategic initiative of our company to invest and grow the scale and profitability of the Kentucky Derby. The 149th Kentucky Derby will be run on May 6th this year. and we will ensure that it is a special event as it always is for everyone, despite some of the construction that will still be underway on the paddock area. We have a good plan. We aren't concerned about any materially negative impact to this year's Derby. If you haven't yet bought your tickets for this year, we encourage you to do so. The demand is extremely strong. Second, since our last earnings call, We closed the P2E acquisition on November 1st, acquiring Colonial Downs Racetrack and its six operating HRM venues in Virginia. We also acquired Del Lago Resort and Casino in New York and Hard Rock Hotel and Casino in Sioux City, Iowa. The acquisition also includes two HRM properties under construction in Dumfries and Emporia, Virginia, and up to three additional HRM venues we can pursue in the state. In addition, we assumed P2E's joint venture relationship with Urban One to potentially build a full casino in Richmond, Virginia upon the legislature permitting Richmond to proceed with a referendum. The P2E acquisition expands our company significantly and also provides us with material growth opportunities in the HRM and casino segments beyond the venues currently in operation. HRMs are a key strategic focus over the next five to 10 years for our company. as we seek to expand our existing footprint. We have developed high growth, high margin investments in this segment with excellent returns on capital, and we will seek to build on that track record in Virginia, New Hampshire, Kentucky, and perhaps beyond. In Virginia, we are constructing the Rosie's Emporia HRM venue in the southern portion of the state. This is a 150-unit facility that is on track to be completed in the third quarter of 2023. In addition, we are building a significantly larger HRM facility in Dumfries, which is located in Northern Virginia, around 30 miles south of Washington, D.C., directly off of Interstate 95. This is an extremely important project because of the long-term potential given its proximity to the population in the Washington, D.C., and Northern Virginia area. At the same time, we are identifying additional locations that are candidates for our remaining HRM entertainment venues. After finding suitable locations, we are required to run successful referendums in the relevant localities. We will share more on our Virginia plans and later earnings calls. With respect to every HRM venue under construction or that we subsequently pursue, we will build upon the lessons learned from our successful developments and operations in Kentucky. We expect to continue our positive momentum in Kentucky in 2023 with the completion of the Derby City gaming floor expansion and new hotel by the end of the second quarter and with the opening of the Derby City Gaming downtown HRM Entertainment venue in downtown Louisville in the fourth quarter of 2023. In western Kentucky, we are deep into the design phase of our HRM facility in Owensboro and are excited to tap into this new market. We will also be investing modest levels of additional capital into the Thoroughbred Racetrack infrastructure and HRM facility at Ellis Park. As you are aware, we have an additional HRM extension opportunity associated with our Oak Grove license that we will explore deploying and discuss in subsequent earnings call if and when we decide to pursue a location. In New Hampshire, we are developing plans to construct a property in Salem that will create a significant number of jobs and will also provide support to many local charities serving the surrounding communities. As I've discussed before, New Hampshire has a unique structure for HRMs in which most of the excise taxes that we pay are contributed directly to charities at our direction. We will provide a more fulsome update on our progress for this project on future earnings calls. We expect this venture to be a significant contributor to our HRM segment, and the planning process is one in which we are heavily engaged, even if we are not ready today to provide more specifics. Since our last earnings call, we announced our entry into a definitive agreement to acquire Exacta Systems, a leading provider of HRM central determinant system technology. Integrating the Exacta business into our company will enable us to ensure that continued investment is made in the Exacta technology to improve its reliability and cost structure, as well as the game themes available on the system. All attributes that are important to the ongoing success of our Virginia and New Hampshire HRM operations and those of Xacta's other customers that we will continue to serve. We expect that acquiring Xacta will greatly improve our own operations in Virginia and New Hampshire. It is worth noting that our Kentucky HRM operations are serviced by another central determinant technology provider, and we remain very happy with the performance and quality of that technology and vendor at this time. The closing of the exactor transaction is dependent on satisfying various closing conditions, including state regulatory approvals, and we do not have a date to announce at this time. Turning to our online operations, in 2022, we pivoted out of the online sports and casino business, and our team did a nice job of carefully planning our exit while maintaining the retail sports operations in our gaming facilities. We also pivoted towards a B2B strategy of integrating parimutuel wagering on horse racing directly into the online sports wagering platforms through our suite of technology and operational capabilities. We remain fully committed to growing our Twin Spires horse racing B2C business while also pursuing our B2B model. We believe that wagering on horse racing will expand in the coming years as millions of sports betting customers are introduced to the sport online. Twinspires.com will continue to be a destination for more serious horse players who want a comprehensive parimutuel-centric experience. And finally, last week on February 15th, we completed the sale of the Arlington Park Racetrack property to the Chicago Bears for $197 million. We deferred the federal taxes related to the gain on the sale using qualifying 1031 exchange transactions. In summary, 2022 was a tremendous year for our company with record financial results. We are well positioned for ongoing growth in the coming years, fueled by our acquisition of the P2E assets and by the organic investments that we are making in our iconic asset, Churchill Downs Racetrack, our HRM projects in numerous states, and our Terre Haute project in Indiana, all of which collectively will drive a material increase in adjusted EBITDA and free cash flow in 2023, 2024, and beyond. Our overreaching objective is to pursue what we have demonstrated we are good at, growing the Kentucky Derby, developing Greenfield and organic opportunities, as well as executing acquisitions that fit our profile, all of which allow us to grow our company while maintaining one of the best balance sheets in the industry. We have a great group of leaders and team members who have helped to deliver these results and are building our business to create the best possible total shareholder return for our investors over the long term. We would like to extend a special welcome to Andrea Carter, who joined our board of directors in the fourth quarter. Andrea brings a broad set of experiences to our board, including deep knowledge of public company compensation and human capital best practices. We are grateful that she has chosen to join our company. With that, I'll turn the call over to Marcia, and then we will take your questions. Marcia?

Thanks, Bill, and good morning, everyone. As Bill shared, we delivered record revenue and record adjusted EBITDA for the year. Excluding 2020, we have delivered record revenue and record adjusted EBITDA from continuing operations every year since 2016. I'll start with a few insights on these financial results and provide some initial thoughts on 2023. I will then provide an update on capital management. First, as Bill discussed, we completed the P2E acquisition on November 1, 2022. The acquisition of six new HRM properties in Colonial Downs Racetrack in Virginia, the Del Lago Gaming Property in New York, and the Hard Rock Iowa Gaming Property contributed $109 million of net revenue and $48 million of adjusted EBITDA in the fourth quarter. The addition of these properties will clearly create step function growth in our financials in 2023 as we realize the benefits of a full year of this acquisition. In 2023, we will also expect to begin to realize the benefits of the enhancements our team will be making to the HRM properties in Virginia. Over the longer term, we expect to realize additional benefits to these properties from the acquisition of Exacta. Second, we also continued our HRM expansion in Kentucky at our existing HRM properties and at our new properties. We saw strong growth from our Oak Grove HRM facility as we continued to penetrate the southwestern Kentucky and Nashville, Tennessee market. Our team at Derby City Gaming also delivered good growth in 2022 despite some disruption from our gaming floor expansion and hotel build-outs. We will have continued growth in 2023 and beyond from these properties. We also expect to layer on growth from the addition of our Turfway Park HRM property that we opened in September, the addition of the Derby City Gaming Downtown property in the city of Louisville, and longer term from our Ellis Park and Owensboro, Kentucky HRM properties, as well as our Tasters HRM and Table Game facility in Salem, New Hampshire. Third, we celebrated Derby Week on the first Saturday in May with full capacity for the first time since the pandemic, which drove a record level of adjusted EBITDA at very desirable margins for Churchill Downs Racetrack. Based on the addition of the first turn experience and expected growth in sponsorships and other Derby Week economics, we expect 2023 adjusted EBITDA for Churchill Downs Racetrack overall to grow $10 to $15 million. Fourth, in 2022, we pivoted out of the online sports and casino business, and our team did a nice job of carefully working to quickly exit all of the states we could while maintaining the retail sports operations in our gaming facilities. This strategic decision resulted in an improvement of $40 million year over year in our adjusted EBITDA related to our online sports and casino business. Said another way, we ended up with a nominal loss of a million dollars of adjusted EBITDA for our combined retail and online sports and casino business in 2022. Looking forward to 2023, we would expect to continue to generate a reasonable return in the high single digits from our retail sports operations with nominal impact from our remaining online sports business. Fifth, regarding our Twin Spires horse racing business, as we expected, a portion of our casual patrons returned to wagering at brick-and-mortar facilities instead of wagering online compared to the prior year. Therefore, our Twin Spires horse racing business generated lower parimutuel handle in 2022 and therefore also lower adjusted EBITDA. Although the final numbers are not available yet for 2022, we estimate that 52% of all wagers on U.S. thoroughbred racing in 2022 were placed online, which is still up significantly from 2019 when approximately 40% of all wagers were online. Despite a slight decline in adjusted EBITDA, we're pleased with the strong margins that this business delivered in 2022 when we compare it to 2019, with adjusted EBITDA up 37% and margins growing by more than a point to 28%. And last, regarding our gaming business, all of our regional gaming properties except our Mississippi and Pennsylvania properties grew adjusted EBITDA in 2022 compared to 2021. Our same-store wholly-owned casinos generated an incremental $51 million, a 33% growth in adjusted EBITDA compared to 2019. Our 2022 same-store wholly-owned casino margins were down two points compared to 2021. However, our margins on the same basis were up nearly seven points compared to 2019. Regarding our equity investments, both River Sus Plains and Miami Valley Gaming delivered record revenue and record adjusted EBITDA for 2022, reflecting the expansions at both of these properties last year. Although the fourth quarter was softer for our regional gaming properties, Due to weather-related challenges in December and some lingering economic concerns, we have had a very strong start to the year, especially during the month of January. However, it is difficult to draw any definitive conclusions from these early trends. Overall, we are very pleased with the results that our team has delivered in 2022, and we believe we are very well positioned to continue to grow in 2023. Turning to capital management, We generated $461 million of free cash flow in 2022, up $41 million over the prior year, primarily as a result of the strong cash flow generated from our businesses. Regarding maintenance capital, we spent $50 million in 2022 and expect to spend $75 to $95 million in 2023. The increase in maintenance capital for 2023 is driven by the addition of our Virginia, New York, Iowa, and Ellis Park properties, maintenance projects anticipated at Churchill Downs Racetrack in preparation for the 150th Kentucky Derby, and incremental maintenance projects at our regional gaming facilities. Regarding project capital, we spent $373 million in 2022 and expect to spend between $575 and $675 million in 2023. Regarding share repurchases, we repurchased approximately $147,000 in the fourth quarter at an average share price of approximately $204 per share, reflecting our belief in the long-term value of our shares. At the end of December 2022, our bank covenant leverage was 4.2 times. Our leverage increased as a result of the P2E acquisition closing on November 1st of last year. Based on the expected closing of our acquisition of Exacta and our capital investments, we expect our bank covenant net leverage to remain in the four times range over the coming year. We then expect our bank covenant net leverage to decline in 2024 and 2025 as our ongoing investments in Dumfries, Terre Haute Casino Resort, and our investments in the Kentucky Derby come online. We received $500 million of total bank commitments to increase our existing term loan A that is due in 2027. We intend to close on this financing transaction within the next week. We will use the proceeds to repay outstanding borrowings that we have under our revolving credit facility. We appreciate the continued support from our existing bank group and welcome four new banks to our exclusive bank group. We know that these can be challenging times for these financial institutions given the market uncertainty. We look forward to continuing to work with all of you to access the debt markets in the coming months to further support our continued growth and future investments in high-performing assets. In closing, as Bill said, 2022 was a tremendous year for our company with record financial results, and we expect 2023 and beyond will be even better given our unique portfolio of assets, that will generate a significant amount of adjusted EBITDA and free cash flow. Our ongoing commitment to our shareholders is to create long-term shareholder value. With that, I'll turn the call back over to Bill so that he can open the call for questions. Bill?