Q4 2021 Churchill Downs Inc Earnings Call

February 24, 2022

Good morning, ladies and gentlemen, and welcome to the Churchill Downs incorporated so what that was.

Some went to one fourth quarter and year end earnings conference call.

At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time.

As a reminder, this conference call is being recorded.

Now like to introduce your host for today's conference Mr. Nick Zangari, Vice President Treasury, Investor Relations and risk management.

Thank you friendly good morning, and welcome to our fourth quarter and year end 2021 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2021 and fourth quarter and year end business results were released yesterday afternoon.

Copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by regulation G is available at the section of the company's website titled News located at Churchill Downs incorporated Dot com as well as in the website's investors section before.

We get started I would like to remind you that some of the statements that we make today may include forward looking statements.

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 Churchill Downs incorporated Dot Com and now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carcinogen.

Thanks, Nick Good morning, everyone with me today are several members of our team, including Bill Mudd, Our President and Chief operating Officer, Marcia Dall, Our Chief Financial Officer, and Brad Blackwell, Our General counsel.

We have a lot to cover today I will briefly share some high level thoughts on our 2021 results and then provide updates on a number of strategic topics. Marcia will then walk through our results in more detail and provide an update on our capital management strategy.

Which is especially important in light of the announcement on Tuesday, or our acquisition of substantially all of the assets of Peninsula Pacific Entertainment, which is also known as P. Two week.

After she finishes we will take your questions.

So first some high level thoughts on our 2021 results.

We delivered record net revenue of nearly $1.6 billion and record adjusted EBITDA of $627 million in 2021, despite running the 147th Kentucky Derby was significant limitations on attendance and despite continued COVID-19 related restrictions at our AGM in gaming properties during the year.

Our net revenue increased by over half a billion dollars and adjusted EBITDA increased by $340 million compared to 2020.

This growth was driven by Derby week, our HR am expansion in Kentucky, and a regional gaming businesses.

The return of Derby week towards normal first Saturday in May along with limited spectators provided a nice increase over 2020, when we conducted the event without fans.

We also saw continued growth from Derby City gaming and the benefit of the first full year of operations for our Oak Grove atrium facility in Kentucky.

We expect to build on the positive momentum of our Kentucky operations in 2022, particularly with respect to the Derby, which will return to full force as I will discuss in more detail in a few minutes.

Adjusted EBITDA from our twin Spires horse racing business was down slightly compared to the prior year as people return to race tracks and other brick and mortar facilities to wager in person.

It is important to note that nearly 54% of all wagers on U S. Thoroughbred racing in 2021 were placed online which is still up significantly from 2019, when approximately 40% of all wagers were online we expect to see online wagering on horse racing level out and stabilize at around 50% in 2022 based on the trends that we saw in.

The second half of 2021 still.

Still a nice growth story compared to 2019 and this business continues to show organic growth after adjusting for the disruption caused by the Covid pandemic.

We believe we will continue to pick up share in 2022 in the online segment and an industry that will be flat to modestly up.

Yeah.

Our sports and casino business performed largely in line with what we expected in 2021, and a very challenging market conditions as we developed and launched online and retail sports books and online casino operations in various states.

I will share more regarding our go forward strategy in this space in a few minutes, we're going to make some changes and drive bottom line improvements across the segment in 2022.

All of our regional gaming properties grew adjusted EBITDA in 2021, compared to 2020 and compared to 2019 with our wholly owned casino margins up nearly 11 points compared to 2020 and up nearly eight points compared to 2019.

As we look to 2022, we do see modest pressure on margins from inflation with respect to labor and other direct costs. We will work to offset these where we can again it appears to be modest impact right now and we believe there is quite a bit of growth in this segment in 2022.

Overall, we are very pleased with the results that our team has delivered in 2021 and we believe we are very well positioned to continue to grow in 2022.

Now update from five areas of strategic focus for our team.

First our major organic investments.

Second our go forward to inspire sports and online casino strategy third our Calder in Arlington land sales.

Fourth our recent announcement related to the <unk> acquisition and fifth and last our plans for the 148th running of the Kentucky Derby dismay.

First an update on our major organic growth projects, starting with the multiyear projects at Churchill Downs Racetrack.

As a reminder, the first project is the Homestretch club, which is on schedule to be operational for the Kentucky Derby.

The Homestretch club includes 3250 premium seats that will provide a variety of high end experiences.

As of today, all of the lounges and dining tables have been sold as high as two thirds of the stadium seats.

We anticipate that the home stretch club will be completely sold out by early April which is a great accomplishment by our team.

We've also begun to work on the term one project, which will add a significant amount of premium covered seating overlooking the first turn as well as an indoor dining space.

This new area will replace a lower in large temporary seating area.

Work on this project will accelerate after Derby week, and we'll be ready for Derby next year in 2023.

The designs for the Paddock project are also well underway and this project will be completed for the 150 of Derby in 2024, we will provide a more fulsome update on our July earnings call and expect that this project will be a spectacular addition to our facility.

Switching to our historical racing operations in Kentucky over.

Over the past three years, we've made significant progress in building out our venues across the Commonwealth, Let's begin with Derby City gaming.

As we previously announced we were expanding the facility to hold up to 450, additional HR amps and to add 123 room hotel.

We are also adding some additional dining and entertainment options for our guests.

We anticipate opening the gaming floor expansion by the end of 2022 and the hotel in the second quarter of 2023, most likely not quite in time for the Kentucky Derby.

Regarding our prior announcement to build a new HR and facility in downtown Louisville.

We have executed an agreement to buy a great building on the corner of West market Street in South <unk> Street in the heart of downtown that is an ideal location for this facility given its proximity to the convention center and other downtown Louisville attractions.

We have designed a new facility to build upon our Derby theme and Protract locals as well as tourists, we anticipate opening in the second quarter of 2023.

Turning to Turfway Park.

We continue to make great progress building, a new HR and facility.

As a reminder, we plan to open with 850, <unk> and the ability to expand within the existing footprint to 1200 as soon as demand ramps up.

We are building a sports bar VIP gaming area.

Lounge simulcast room.

And a clubhouse that will double as an event center if that can accommodate large events.

We've had some supply chain delays related to roofing installation elect and electrical materials and are now targeting a September 1st Grand opening for the facility.

The team has managed inflation and supply chain issues, very well, but we had to accept some delays with respect to the materials I just mentioned.

We were close to the finish line on this one on budget.

And we are thrilled to offer this exciting entertainment venue for northern Kentucky, and the Tri state area around Cincinnati.

Let's spend a minute on our <unk> and our <unk> in Louisiana.

Our team has been aggressively working to expand our otv's in order to offer H R. M.

We will be adding a total of approximately 600 machines across 14 of Aro Tvs.

We plan to have approximately 220, <unk> operational and six otb's by the end of second quarter.

200, <unk> operational in four additional otv's by the end of third quarter.

And the final 180, <unk> operational and the remaining four otv's by the end of the fourth quarter.

We will have a mix of game titles from all of our HR and manufacturers, including aristocrat and economics as well as the popular IGT wheel of Fortune game.

Next regarding our Terre Haute project in Indiana.

We were successful in winning the casino license license for Vigo County, and plan to build a destination casino resort called the Queen of Terre Haute.

Our team competed in a head to head public competition against three other bidders and an all day event in November .

We were officially awarded the license on January six of this year.

We have purchased a 50 acre parcel of land off Interstate 70 at the State Road 46 exit on the far east side of Terre Haute to get us as close to.

So the western portion of the Indianapolis Metropolitan area as possible.

We are in the process of obtaining all of the permits and approvals required and finalizing the designs for the property.

We are planning to start construction in late May with a target Grand opening in late 2023, this will be a $240 million to $260 million project.

Okay.

Regarding rivers des Plaines casino.

As a reminder, rivers is expanding its facility between the existing casino building and the parking garage on the north side of the property.

The expansion will accommodate approximately 725 additional gaming positions based on a combination of new slot games and table games, resulting in the facility utilizing its full 2000 positions permitted under current law.

The first phase of our gaming expansion opened on January 24th of this year. We added approximately 200 slot machines in 2000 for table games.

The second phase of the expansion is on track to open on April seven it will add approximately 300 slot machines.

A new 22 table poker room, and a new casino bar.

We expect the third and final phase will open in early May. It will include a new 10000 square foot ballroom and an additional new space to private events and live entertainment.

This is an exciting project for rivers and we believe a very efficient deployment of growth capital that is solely funded from cash flow and additional debt financing at the rivers entity level.

Now, let's talk about our sports and online casino business.

We are always committed to building long term value for our shareholders.

And consistent with this commitment when we see that in investment is not progressing as we had planned.

We'll redeploy the resources and capital to other growth projects or return the capital to our shareholders.

We have proven with our past decisions.

So we are willing to walk away from businesses, where we do not see a secure enough path to consistent profitable growth with an acceptable return for our shareholders.

When the U S Supreme Court overturned the federal ban on sports betting in May of 2018, we had high hopes for the potential to build a profitable business in this space. Our initial strategy was to leverage our variable cost technology model and be disciplined in our marketing spend with a focus on bottom line profitability as states legalized.

Online sports wagering in high gaming.

We have profitable retail sports books in four of our casinos. However, the online sports betting and online casino space is highly competitive with an ever increasing number of participants that the states have licensed.

Many are pursuing maximum market share in every state with limited regard for short term or potentially even long term profitability.

Because we do not see for us a path in which this business model delivers predictable and acceptable margins for at least several years if ever we have decided to exit the b to C online sports betting and I gaming space over the next six months.

We will focus on our retail sports betting operations, where we are profitable and we will seek to monetize where appropriate our market access rights to other participants.

We consistently receive interest from other industry parties with respect to market access in states, where we conduct operations or have the rights to do so.

We do expect to still have a slight drag.

In the high single digit range for the year on our adjusted EBITDA from the combined retail and online sports and casino businesses as we wind down the online business, we will work to minimize as much of this drag as we can.

This isn't the result, we wanted when we started this business back in late 2018.

But it is the prudent next step forward for our company.

We remain absolutely committed and excited about twin spires horse racing as its topline bottomline and margins continued to demonstrate that this is a special online business with a sustainable scalable and unique business model that delivers profitable growth today, just as it has since we started this business well over a decade ago.

Next I'll discuss our process to sell the excess land at Calder.

And our Arlington Park property.

We previously announced our agreement to sell 116 acres next to our Calder casino for $291 million to link logistics.

We are progressing through all of the closing conditions and obtaining the rezoning requirements needed by the purchaser of the property.

We anticipate closing the sale in the second quarter of this year, we intend to minimize the tax consequences related to the gain on the sale through the use of a 10 31 exchange.

We have retained approximately 38 acres of land that the Calder casino utilizing sports facility and parking for its guests.

We have also retained an additional 17 acres of land that is along northwest 27th Avenue that is not necessary for the Calder casino long term and that may be redeveloped or sold in the future.

We also previously announced we had entered into an agreement to sell the Arlington Park property to the Chicago bears for $197 million.

The Arlington Park facilities of 326 acre property in Arlington Heights, Illinois.

Pending receipt of remaining approvals the transaction is anticipated to close in the first half of 2023.

Similar to the Calder landfill process, we intend to minimize the tax consequences related to the gain on the sale through the use of a 10 31 exchange.

Now I'd like to discuss the announcement that we made Tuesday regarding our agreement to acquire substantially all of the assets of <unk>.

As you saw on the press release, we've agreed to pay close to $2 5 billion.

For colonial Downs racetrack and its existing six historical racing entertainment venues in Virginia, The del Lago resort and casino in water or in New York and the operations of the hard rock Hotel and casino in Sioux City, Iowa.

With our acquisition of colonial Downs comes to development rights to build up to five additional historical racing entertainment venues in Virginia with collectively up to approximately 2300 additional HRS and.

In total this transaction includes up to 11, HR and venues and up to 5000 HRA machines. We are acquiring the rights to several active development projects, including the construction of a large gaming resort with up to 2800, <unk> in Northern Virginia, which we call the Dumfries project as well as a new HR and venue and employee of Virginia.

Carolina border.

In addition to an entirely separate from these HR and projects. We are also very excited to acquire the rights to <unk> ongoing efforts in partnership with urban one to win the right to develop one casino and resort a proposed class III casino in Richmond, Virginia.

We believe in the potential of this project and look forward to jumping in.

We included the details for each of these properties in our press release earlier. This week, so I won't repeat it all today.

We are particularly excited about the opportunity to significantly expand the ASRM footprint in Virginia.

<unk> has a unique set of <unk> assets that they have developed and managed that is tied to the ownership and operation of colonial Downs racetrack, all very much in our wheelhouse.

We plan to strategically grow and expand their existing properties.

And also complete the development of the <unk> project and the gaming venue in employer as well as other projects yet to be far enough along to warrant discussion today.

We will work to build upon and and improve the strong HR and foundation that the <unk> team has built using lessons learned from our successful <unk> development in Kentucky, including opportunities to improve the quality of HR entitled Some features available to patrons.

We are also very excited about hard rock Sioux City, and del Lago resort and casino.

We believe the Iowa, and New York properties are excellent facilities with strong teams and states, we really want it to be and.

We think we can show stable incremental improvements in operating performance and look forward to being a good partner in these communities.

Both of these are outstanding properties and opportunities for our company.

Overall, we believe this is a very unique set of assets that expands our geographic footprint and provide significant additional scale to our company in the coming years at a very attractive multiple.

We're also thrilled to have the operating teams in all three jurisdictions joined the Churchill team.

We expect to close the transaction by the end of 2022 subject to necessary approvals.

And it is a reasonable expectation that we will be able to defer the tax on the gain from the sale of the Calder land in connection with the closing of the <unk> transaction.

Our final topic is the preparations for the 148, Kentucky Derby, which will be run on may 7th we.

We are returning to full capacity and will deliver an amazing experience for everyone.

Our traditional Derby week events will be back for the first time since 2019, including our opening night celebration and.

In addition, most if not all the various celebrations and parties that raise money for numerous charities and community organizations in the month long lead up to the Kentucky Derby will return this year.

If you haven't bought your tickets yet you better do so assume the demand is incredibly strong with very few options remaining for tickets.

This year's Derby week shaping up to be truly special with all the magic and mystique that may have been missing a bit in the last couple of years.

In summary, 2021 was a tremendous year for our company with record financial results both for net revenue as well as for adjusted EBITDA.

We are positioned for ongoing growth in the coming years from the organic investments that we're making in our iconic asset the Kentucky Derby.

<unk> assets in Kentucky, our HR and expansion in Louisiana, and our Terre Haute project in Indiana.

And now we will look forward to adding the assets of <unk> to our growing portfolio of entertainment and gaming facilities.

We are grateful to all of our leaders and team members, who have helped to deliver our results to date and are helping to build our business to create the best possible total shareholder return for our investors over the long term.

And finally, I would like to recognize the passing of Richard Dutch a swap we affectionately called Mr. D. On January 28 of this year. Mr. <unk> was a long term shareholder and prior longtime board member who is also a tireless champion of our company and Thoroughbred racing.

You had an extraordinary life.

And it was a mentor and a friend so many of us at Churchill now.

We will miss his grace wisdom and tumor.

With that I'll turn the call over to Marcia and then we will take your questions Marcia.

Thanks, Phil and good morning, everyone. It has been an exciting and very busy week for everyone else.

Start with a few thoughts on our 2021 results and provide an update on our capital management, then I'll provide some additional insights regarding the <unk> acquisition.

As Bill shared we just finished a record setting year with record revenue and record adjusted EBITDA.

As I reflect on 2021, there are a few takeaways that I want to share with you.

First it was great to return to running the Kentucky Derby and its normal time on the first Saturday in May and with spectators, albeit more limited than we typically would have.

Our team at Churchill Downs Racetrack use this past year to test a new all inclusive concept that is ultimately very well received by our guests and significantly enhance the experience for everyone who attended the event.

We're all looking forward to having everyone back to celebrate this year is running at 148, Kentucky Derby in early May.

I mean, just intend to sell all of our reserve seating with the all inclusive concept and expect sponsorships and wagering to return to historical levels.

We expect to see significant growth in adjusted EBITDA from the Derby compared to 2021, when we had more limited attendance.

Second organic growth from our ATM facilities in Kentucky contributed $83 million of adjusted EBITDA growth in 2021 compared to the prior year.

Our HR and properties are unique assets that our team has been able to efficiently build and designed to collectively generate margins that are more than 10 points higher than margins for regional casinos.

As important the success of these ATM facilities generated more than $31 million of personal money in 2021 for our Kentucky race tracks and provided nearly 700, new permanent jobs for our stake in.

In aggregate, our adjusted EBITDA from HR and facilities accelerated every quarter in 2021, as we continued to build our customer databases and expand market awareness.

Third although our 2021 adjusted EBITDA was down slightly for twin spires horse racing business compared to the prior year. It was still the second highest level adjusted EBITDA ever for this business.

'cause it caused the technology paradigm shift in 2020, as the closure of brick and mortar setting facilities shifted wagering on horse racing to online.

There's been some erosion as brick and mortar facilities reopen there has been a fundamental material increase in the percent of wagering on horse racing that occurs online compared to a few years ago. This will continue to benefit our twin spires horse racing business going forward.

And last we generated a significant amount of free cash flow in 2021, nearly $420 million, which was up $300 million over 2020.

$76 million over 2019.

As our new properties opened in 2022 and beyond we expect to continue to see a very significant growth in free cash flow for MAU from all of our businesses.

Turning to capital management in 2021, we spent approximately $40 million on maintenance capital for capitalized labor related improvements to our Twinsburg horse racing technology platform the <unk>.

<unk> of course at Churchill Downs race track and maintenance at our gaming properties.

2022, we expect to spend $60 million to $70 million on maintenance capital, we plan to allocate more maintenance capital towards refreshing our slot capital and hotel facilities at a regional casino properties.

We also have some hurricane related projects planned in Louisiana that we expect to eventually recover through insurance.

Regarding project capital in 2021, we spent $52 million and project capital of which the majority was spent at Turfway Park and Churchill Downs racetrack as well as on completing the outgrowth facility.

For 2022, we anticipate spending $300 million to $350 million on project capital, we will be completing Turfway park as well as the home such as club at Churchill Downs Racetrack. We will also begin to make significant investments in the other projects that bill discussed.

As you know we believe in returning capital to our shareholders in the form of dividends and share repurchases.

We announced our 11th consecutive year of dividend increases with a 7% increase in our annual dividend that we paid in January of this year.

In aggregate, we also repurchased $1 million 471000 shares in 2021.

An average share price of $202 per share.

And the engine of December 2021, net leverage was three two times and our external net leverage was two seven times.

Our leverage has continued to decline because of our strong operating results across all of our segments in 2021.

Regarding the <unk> acquisition, there are a couple of items that I would like to clarify further.

First regarding the purchase price multiple.

We will be acquiring substantially all of the assets of <unk> as well as certain development rights for a multiple of less than nine times adjusted EBITDA.

As we thought about how to best communicate the multiple for this transaction. We started with the 2021 adjusted EBITDA of the existing assets that we were acquiring.

We increased our 2021 adjusted EBITDA for the reduction in corporate overhead that upon closing, we will no longer be needed.

And we also made run rate adjustments to the adjusted EBITDA for two of the <unk> properties in Virginia.

Vincent expansion Dumfries facility that opened in 2021.

We're both still ramping to full operating capacity.

The effective purchase price multiple would be 10, two times based on these adjustments.

We then reflected $600 million to $800 million of additional investment.

And the related projected EBITDA for the other development rights that we acquired to determine the ultimate transaction multiple of less than nine times.

These development rights include the rights to expand the Dumfries facility until large gaming resort with an incremental 1650, <unk> and northern Virginia.

<unk> also includes the development Rosie's gaming Emporium in Emporia with an additional 150 <unk> as well as the right to add a little over 500, <unk> and other locations in Virginia.

It is important to note that the economics of the transaction, we will be further enhanced as a result of the acquisition being treated as an asset purchase for tax purposes. This allows us to step up the asset value and deduct the goodwill for tax purposes, thereby enabling us to realize incremental tax benefits.

Over the next 15 years, which will provide additional cash flow to the company and enhance the overall economics of the transaction.

We are also structuring aspects of this acquisition to qualify as a 10 31 transactions. So that we can defer the tax on the gain on sale of a land near Calder Casino.

This will further enhance the overall economics of the transaction.

This acquisition is immediately accretive to free cash flow and diluted earnings per share.

Second we are often asked how we will find strategic assets that we want to acquire and how we will win those assets given the competitive environment.

This transaction is a true testament to the benefits of long term relationships that exist at many levels between our team and leaders in the industry to get this deal done.

Our willingness to be flexible to accommodate the seller's desire to do an opco propco transaction related to the Iowa asset as well as to accommodate facilitating the <unk> redemption of their debt, resulting in financial savings that will ultimately accrue to the seller truly differentiated our company as we work through them.

<unk> of this transaction.

Third do you plan on using a combination of cash on hand cash from the sales of land you Calder casino and issuing new debt to finance this transaction.

We are projecting that our pro forma bank covenant leverage will be less than $4. Two times upon completion of this transaction.

Bank Covenant leverage is projected to quickly decline below four times in the quarters. Following the closing of the transaction.

And last 2022 is shaping up to be a great year. Prior to the addition of the <unk> assets, we are expecting double digit adjusted EBITDA growth and double digit free cash flow growth in 2022.

The growth in 2022 is expected to be driven by the Derby as I discussed a few minutes ago.

The continued expansion of our <unk> assets, including the opening of Turfway Park.

The exiting of the online sports and casino business, which will eliminate more than a $30 million loss from a run rate adjusted EBITDA.

And the growth in our regional casino assets.

The addition of the <unk> assets significantly expands our geographic footprint for HR ends and increases the scale of our business substantially.

We believe the <unk> assets and the <unk>.

Right that we will acquire as part of the acquisition coupled with the balance of the organic growth projects that Bill discussed we will continue to accelerate the growth trajectory of our company for many years to come.

Upon completion of this acquisition and the development projects that we've announced we will own or manage one of the most desired collections of entertainment assets in the market.

These assets will include the iconic Churchill Downs racetrack.

Along with 12 Asia Im properties, and 13 regional gaming properties as well as one of the industry, leading horseracing wagering platforms and twin spires.

These assets will generate significant free cash flow with one of the strongest balance sheets in the industry.

Our diversification across our three segments will enable us to create long term shareholder value in the years to come.

With that I'll turn the call back over to Bill So that he can open the call for questions.

Thank you Marcia.

If anybody has any questions out there we're happy to take them at this point.

Thank you and as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound.

We have a question coming from the line of David Katz from Jefferies. Your line is now open.

Hi, good morning, everyone.

Thanks for all the information.

Could you talk to.

Bill I wanted to ask about.

The digital commentary.

We've obviously all debated.

Even discuss it with you over the past couple of years.

Given marcia laying out just the scale and scope of what you have is a land base operator, I just wonder how you see the value.

And that too.

<unk> the digital marketplace.

It is happening it is granted expansion.

But is there some some value in there to capture if you're just selling off market access rights.

Or is there something larger in there for you to capture value from.

Overtime.

Sure. Thanks, David it's good that's good to chat with you again so.

When it comes to the digital space.

I think it's hard to write the future at this time, we will have to watch what what states do what tax rates are.

What competition is but ultimately we're here to make money. That's the task that were assigned to buy our shareholders. So.

So right now it doesn't look good in the future we will have to see how it develops but where we see the opportunity for our company right now is.

Twin spires horse racing.

I'm not a person that likes the state theoretical for very long ultimately you put your team on the field and you see what your results are and you adjust to that and what we've found over time and it's been well over a decade is that our twin spires horse racing business, our online business for horse racing is an excellent business and even in this current environment is holding up extreme.

Really well.

And as just as promising as it's been over the more than a decade. Since we first started it. So we will focus on what we see is working well watch everything else, we'll monetize our market access.

<unk>.

And we will keep our eyes open and our and our ears peeled. So.

I feel really good about this decision, although I wish it could have been different but gambling ultimately as a margin driven business and you have to set up your teams and you have to set up your processes to guarantee that you can you can drive margins, we can do that with twin spires horse racing, but we just don't see that for us.

And the broader online segment, so we'll keep watching that business overtime will wash the the others that are in it.

And.

And we will see where the future takes takes that space.

Okay, I appreciate that and if I may follow up quickly.

Marcia on.

Details that you've laid out.

Irrespective of how the bank will calculate it.

Where is.

Actual leverage where do you actually expect that to be.

Is that somewhere in the mid fours.

David What I said is that for bank leverage we expect it to be which is how we think about it is that it will be less than four two times and so that's really what we're looking at.

As we think about how does.

And what really matters as we look at going to market to raise that 10, and what we think is the metric that we should be concerned with and then it will very quickly drop below four times.

Got it.

Thank you very much thanks.

Thanks, David.

Your next question comes from the line of Paul <unk> from Wells Fargo. Your line is now open.

Hey, good morning, everyone and thanks for taking my question.

So I wanted to follow up on the capital allocation.

You guys had talked about target leverage in a three to four times range here I think youre going to be at the upper end of that.

I guess, how are you thinking about that relative to buying back stock and along with that certainly with the passing of Mr. D and maybe some changes into the state planning.

And you've historically been a buyer of his shares like how should we think about all of these kind of moving factors as it relates to your capital allocation.

Dan I believe we still have tremendous capacity.

To be able to.

Either acquire things that are strategic for our company or to buy back stock should those opportunities arise in the future. So.

Clearly we have repurchased shares.

Throughout 2021.

And we.

We depending on stock price are very strategic in our repurchasing of our shares in the marketplace and obviously have made various strategic locked repurchases as in the past and we will continue to be able to do that going forward as I just mentioned.

With the answer to David's question, our leverage from a bank covenant perspective will drop very quickly.

Below four times.

As you know we have the Arlington land sale.

That will be completed in the first half of 2023 as well so our businesses collectively generated.

The amount of free cash flow.

We can use.

And when you think about free cash flow to the equity we can use that for either dividends or share repurchases and so on.

We have a lot of opportunity for four different options.

Got it thanks, and then just turning to twin Spires Bill I know you mentioned you guys are here to make money for shareholders and certainly have been opportunistic in the past can you talk a little bit a little bit about the rationale maybe for exploring a sale there.

Is it.

Was this a function that maybe some evolving changes in the competitive environment was it just being opportunistic can you just maybe touch on that topic. Thanks.

Well for us, it's really our own journey. So it wasn't it wasn't.

The function of what other people are doing it in the market or.

Uh huh.

Other People's stories, our views of how the future would be so.

It was really important to us to make sure that we.

Maintain the skill sets that we need to maximize twin spires.

And there's always a number of different ways you can look at any circumstance.

But for US we really wanted to make sure we kept the folks that and the team that we have.

Has it worked so well together and there has been built so carefully over time to perform.

We do see twin spires horse racing is a continuing growth story for our company so well.

The best path for us.

As the path, we've chosen and we do have these assets the market access that that might be attractive appear to be attractive to other people and we'll see where that takes us but ultimately this wasn't a circumstance, where we want to be out of the digital business.

We needed to step away from sports and I casino, but theres a piece of this of this segment that we think we're really good at and we want to make sure that we can continue to compete in.

Understood. Thanks, so much for the color.

We have a question coming from the line.

Line of Shaun Kelley from Churchill Downs. Your line is now open.

Hi, everyone I'm pretty sure I work at Bank of America still.

But bill.

I wanted to go back to the to the online piece and maybe just continue on twin spires for a moment.

Does it exiting the BDC or the D to C everyone to call it.

Online piece at least for a period of time here does that open you up to any sort of broader partnerships with other brands that are continuing the journey on let's call. It sports betting and online casino side. The reason I'm asking is because you seem to have like a unique customer acquisition tool I think you yourself have highlighted through twin spires.

Is this a channel that you can now open up to another partner that would probably have some value there that you could unlock some other way.

It's not through direct operation of those.

Of those platforms yourself.

Thanks for the question Sean for everybody I, just wanted to clarify Shawn does not work for Churchill Downs, who works for bank of America. So we're not planting questions to be asked.

So.

That's a really forward looking question Shaun.

I think it's an interesting one and I think it's a logical one and an obvious one but.

I can't I can't really explored in any kind of detail in this forum.

Because because it's.

It's very future focus so certainly.

Certainly there was probably some possibilities there.

I want to acknowledge that it's an interesting topic and it's an interesting thing to talk about but it's not one that we can comfortably do so at this time.

Given given the restrictions around these sorts of phone calls.

I'm happy to take another question, where I hope I can give you a more satisfying answer but but on that one.

Probably just go with the simple answer of yes, potentially but I can't I couldn't go any further than that.

Understood, maybe a little bit premature there. So second one then would be.

Yes.

Thank you and Marcia both referenced.

Our strong outlook for the Derby and just hoping you could help us bridge.

A little bit of that outlook as we think about.

What levels of cash flow or EBITDA, you were able to generate back in 2019 are there any components of it.

The Derby that you look back at that and say, we're not going to have these pieces online do you think that is a good baseline or do you think thats something we could even improve upon given those capital invested yield management and frankly.

Some of the pricing environment that we've seen in other areas of leisure and entertainment.

Good question, we're looking to improve on 2019.

And I would answer as simple as that 2019 is a nice metric a nice baseline to look at but our team is motivated and focused on improving on that.

Great. Thank you very much.

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

Hi.

Good morning, Bill Marcia Bill.

So maybe two questions.

On the existing business and then one on <unk> if it could so first question really is on your regional gaming margin outlook.

You referred to Bill in your commentary there will be some natural margin contraction from all the inflationary factors I'm wondering if you can.

Maybe provide an update on kind of where the promotional environment is in your respective markets.

How that might evolve here over the next year and possibly affecting margins.

The second question.

Is on twin spires.

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