Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2022 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Phil Forbis.

Thank you, Amanda. Good morning, and welcome to our first quarter 2022 earnings conference call. After the Company's prepared remarks, we will open the call for your questions. The Company's 2022 first quarter business results were released yesterday afternoon. A 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 churchilldownsincorporated.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 reports on Form 10-Q and 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-Q are available on our website at churchilldownsincorporated.com. And now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Thanks, Phil. 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 first quarter results and provide updates on a number of strategic topics, including the P2E acquisition and the upcoming Kentucky Derby. Marcia will then walk through our results in more detail and provide an update on our capital management strategy. After she finishes, we will answer your questions. First, some points on our first quarter results. We delivered record first quarter net revenue of $364 million, up 12% from the prior year quarter and record first quarter adjusted EBITDA of nearly $129 million, up 16% from the prior year quarter. As you review our first quarter results compared to last year's first quarter, it is important to note that COVID-related restrictions impacted both quarters in different markets and to different extents. And this makes comparisons across the quarters complicated. However, however you slice it though, our company continues to progress in a very positive direction. With respect to our Live and Historical Racing segment and our Gaming segment, we delivered record first quarter revenue and adjusted EBITDA. Our HRM facility contributed over half of the company's growth in revenue and adjusted EBITDA for the quarter. We experienced continued strong growth from our Derby City Gaming and Oak Grove properties as well as nice improvement at our smaller Newport Racing & Gaming facility. Our regional gaming properties also contributed significantly to our growth. Almost all of our regional properties grew revenue and adjusted EBITDA. Our equity investments in Rivers Casino and Miami Valley Gaming performed quite well despite the vaccine mandate at Rivers in January and February of this year, which slowed us down significantly in the Chicagoland market. I will talk more about these two properties in a few minutes. Turning to our TwinSpires business, revenue and adjusted EBITDA for our TwinSpires Horse Racing business was down compared to the prior year's quarter as more people returned to wagering in person at racetracks and other brick-and-mortar facilities. As you may recall, there were still restrictions in place during the early part of last year that limited attendance. As those restrictions have lifted, we have seen a gradual shift back to wagering at brick-and-mortar facilities. However, it has stabilized at around 50% based on the trends we saw in the second half of 2021 and into the first quarter of this year. In 2019, the online share was nearly 40% and then jumped to 61% during 2020. Compared to the first quarter of 2019, handle from our online horse racing business was still up 68%. Our TwinSpires Sports and Casino business results for the first quarter reflect our decision to exit the online Sports and Casino business while maintaining our retail sports operations and our gaming facilities. We experienced strong adjusted EBITDA from our retail sportsbooks and the reduction in online marketing spend as we execute the plans to exit each state help minimize the losses related to our online Sports and Casino business. The reduction in spend and costs will be more pronounced in the upcoming quarters. We are pleased with our progress to exit online sports and casino and are working to monetize, where appropriate, our market access rights to other participants. We have received interest from numerous other groups with respect to market access. We will provide more detailed updates in future earnings calls as our plans for each state reach fruition. Now updates on five areas of strategic focus for our team. First, our major organic investments; second, an update on our P2E acquisition; third, our recent announcement related to New Hampshire; fourth, our Calder and Arlington land sales; and fifth and last, an update on the upcoming 148th running of the Kentucky Derby. First, let's talk about our major organic growth projects starting with the multi-year projects at Churchill Downs Racetrack. We are holding the grand opening for the Homestretch Club tonight for the media and community. This is the first completed phase of our multi-year strategy. This new entertainment venue along the Homestretch of the racetrack includes 3,250 premium seats that will provide a variety of exciting high-end experiences for our guests. We have also begun to work on the second phase of our strategy, which is the Turn 1 project, replacing lower price temporary seating with premium covered seating overlooking the first turn in racetrack. We plan to complete this project by Derby 2023. And as you saw from the details in the announcement we released yesterday afternoon, the third phase of our multi-year plan is the significant redevelopment of the Paddock area, which we plan to complete by the 150th Kentucky Derby in May of 2024. The Paddock is the heart of the racetrack. It's where the horses are paraded and saddled for everyone to see, where the jockeys mingle before they hear riders up and mount up. It's where some of our guests decide for whom they will cheer and bet. The Paddock is truly where the best of the pageantry and spectacle that is the Kentucky Derby converge to create the energy that courses throughout the racetrack. Why make significant changes? Many reasons. The current layout of the Paddock restricts circulation between the Clubhouse and the Grandstand. The Paddock roof blocks the views of the TwinSpires as our customers enter Churchill Downs, and the area under the TwinSpires has limited and outdated amenities. We can also create spectacular new seating and viewing areas where none even exists today. And most importantly, we can reintroduce our historic facility by leaving the best of 21st-century hospitality into the history and pageantry of America's longest continuously held sporting and entertainment event. The press release goes into more detail that I won't repeat today. However, there are a few highlights that I hope you take away from the release. First, we estimate that we will spend approximately $185 million to $200 million on this project and have assumed a payback period of less than eight years. Second, we will be adding over 3,600 new premium reserved seats and 3,250 new standing room-only premium tickets. We will also upgrade over 3,700 premium reserved seats. Due to the prime location of the new seats, we also anticipate that some portion will be sold with personal seat licenses. Third, we will be removing approximately 2,200 existing seats and thus the total number of additional seats added by this project is approximately 1,400. The seats we are replacing are priced lower than the prices of 3,600 new seats due to the lack of amenities and aging accommodations in the current seating areas. When we are done with this project, we will have transformed Churchill Downs Racetrack. The ability to undertake a project of this magnitude is a reflection of the deep experience, results, and stability demonstrated by our team over many years, coupled with the vision and support of our Board. All of us at the company are thrilled to be a part of it. Let's turn to our investments in historical racing, beginning with Derby City Gaming. We remain on track to open the gaming floor expansion by the end of 2022 and the hotel in the second quarter of 2023. The expansion will add 450 additional HRMs and 123-room hotel along with additional dining and entertainment options. Regarding our HRM facility in downtown Louisville, we have begun to remodel the building we purchased on the corner of West Market Street and South 4th Street. We are finalizing the design and still anticipate opening in the second quarter of 2023. Turning to Turfway Park, the grand opening for our HRM facility will be on September 1. We will start with 850 HRMs and have the ability to expand within the existing footprint to 1,200 as demand ramps up. We will also offer other upscale amenities, including a large clubhouse event center that can accommodate customers on race days as well as large events and other times. This will be a very exciting entertainment venue for Northern Kentucky and the entire Tri-State area around Cincinnati. We have also decided to invest an additional $26 million in the backstretch of Turfway Park to improve the dormitories for the track workers, add five new barns for horses and replace or improve some of the basic infrastructure to improve the overall facility. The positive impact of HRMs on the Kentucky thoroughbred racing circuit is undeniable and this additional infrastructure is warranted to support the growing thoroughbred operations at Turfway. Regarding the rollout of HRMs and our OTBs in Louisiana, as a reminder, we will be adding a total of approximately 600 machines across 14 of our OTBs in Louisiana. The timing of our rollout has shifted slightly between the second quarter and third quarter. We now expect to have 170 HRMs operational and five OTBs by the end of the second quarter, 250 HRMs operational and five additional OTBs by the end of the third quarter, and the final 180 HRMs operational and four other OTBs by the end of the fourth quarter. We remain on schedule for 2022, but are responsibly and effectively managing through supply chain and construction timing realities. As of today, we have recently opened HRMs in two of our OTBs, Westwego and Metairie. Next regarding our casino investments, beginning with our Terre Haute project in Indiana. We are on track to hold the groundbreaking for our Queen of Terre Haute casino in Indiana in June with the target grand opening in late 2023. Regarding Rivers Des Plaines casino, the first phase of the expansion at Rivers opened on January 4 with the addition of 200 new slot machines, 24 table games, and a new restaurant. The second phase of the expansion opened on April 8, with 300 new slots, a new 22 table poker room, and a new large casino bar. The third and final phase, which includes a new ballroom and event space, is expected to open in early May. When the final phase is completed, Rivers will have added 725 gaming positions. The facility will be the first property in Illinois to utilize the maximum 2,000 positions permitted under state law. All of this capital is solely funded from cash flow generated by Rivers and additional debt financing at the Rivers entity level. Regarding Miami Valley Gaming, we have two smaller growth projects at the property. The first expands the outdoor gaming patio to allow for more games and to add an outdoor bar. The second project converts our buffet space into two new food venues along with adding incremental gaming space. The two new food venues leverage concepts that have proved successful at Derby City Gaming and Oak Grove, and should provide significant cash flow savings compared to the prime buffet option. We expect the outdoor patio expansion will open in June with approximately 196 games and the new food venues will open in July. These projects have been funded at the JV entity level with cash flow generated by Miami Valley Gaming. Now I'd like to provide an update on our acquisition of Pacific Gaming Entertainment or P2E. We have submitted all of our entity and individual applications through the Virginia Racing Commission, the New York State Gaming Commission, and the Iowa Racing and Gaming Commission. We are working closely with the staff in each of these states to expediently obtain our regulatory approvals. As Marcia will discuss in more detail, we have already completed the financing necessary, and therefore, we will be ready to close the transaction as soon as we obtain the necessary regulatory approvals. In the interim, we are working on our integration plans, including participating in the development work for the Dumfries and Emporia expansion projects. We are very excited about the Dumfries project and view that as a potentially transformative project for our company. We are also analyzing where to deploy the remaining three HRM licenses in Virginia and working with Urban One on the Richmond casino initiative, which we hope to see on the ballot in Richmond this November. The P2E acquisition consists of a very unique set of assets that provides significant growth through its existing and to-be-constructed facilities, expands our geographic footprint and provides meaningful additional scale to our company in the coming years, all at attractive multiples. We are on track to close this transaction before the end of 2022, subject to the necessary approvals. Turning to New Hampshire, we announced in March that we have signed a definitive agreement to acquire 100% of Chasers Poker Room in Salem, New Hampshire. Salem is approximately 30 miles from the Boston metropolitan area. We are planning to move Chasers Poker Room to a larger facility in Salem after we close the acquisition to allow for a larger HRM footprint, given the extremely attractive market demographics. We estimate that we will spend up to $150 million in total on the acquisition and build-out of a new venue, including the HRM machines. We are working through all the necessary approvals for the acquisition and plans related to a new location, and we anticipate closing by the end of the second quarter. Now I will provide a brief update on the status of our process to sell the excess land at Calder and our Arlington Park property. We are on track to close the sale of the 116 acres next to our Calder casino for $291 million in mid-to-late June. We intend to utilize the real property we are purchasing as part of the P2E acquisition and a 1031 exchange to defer the tax on the gain from the sale of the Calder land. We are also still on track to sell the 326-acre Arlington Park property to the Chicago Bears for $197 million in the first half of 2023, pending receipt of remaining approvals. We will seek to utilize a 1031 exchange to defer the tax from the gain on this sale of the land as well, but do not have anything definitive to announce at this time. And finally, I will share some thoughts on the 148th Kentucky Derby that is just a little over a week away on Saturday, May 7. It is really great to see the Derby festivities and energy return to its traditional frenzy. The celebrations and parties kicked off a few weeks ago with charities and community organizations holding their traditional events to raise money for their organization. The energy and excitement is back. Our team has been finishing the preparations to welcome everyone to Churchill Downs for an amazing Derby week. We will begin with opening night this Saturday evening with live music and Derby-inspired fashion displays, and of course, an exciting evening of horse racing. We will have racing and other festivities and activities throughout the week at the track. On Friday, May 6, we will run the 148th Kentucky Oaks, the championship race for the fillies. And on Saturday, May 7, we will host the 148th Kentucky Derby. We are pleased to have a Japanese-bred horse named Crown Pride running in the Kentucky Derby this year. Crown Pride won the UAE Derby in Dubai to qualify for the Derby because he is a Japanese-bred horse. Japan will allow wagers on the Kentucky Derby race this year in Japan. TV coverage starts with USA Network covering the Kentucky Oaks from 1:00 PM to 6:00 PM on Friday, May 6. USA Network will also cover the Kentucky Derby on Saturday, May 7, from noon to 2:30 PM with NBC providing coverage from 2:30 PM to 7:30 PM as it does every year. Based on advanced reserved ticket sales, we expect to deliver record Derby results. We will issue a press release after the Derby later that night with all of the details. We look forward to seeing everyone next week, and if you can't be there, you can still enjoy the telecast on NBC and wager on TwinSpires. With that, I will turn the call over to Marcia, and when she is finished, we will open up the call for questions.

Thanks, Bill, and good morning, everyone. It has been a very busy start to the year. I'll begin with a few thoughts on our first quarter 2022 results and then provide an update on our capital management. As Bill shared, we just finished a record-setting first quarter with record revenue and record adjusted EBITDA. As you review our first quarter results, there are a few takeaways that I want to share with you. First, as Bill discussed, our HRM facilities in Kentucky contributed over half of our growth in the first quarter compared to the first quarter of the prior year. Our three HRM properties delivered a combined 120 basis point increase in margins in the first quarter compared to the prior year quarter. As I have shared in the past, these HRM properties are unique assets in the early growth stage of their life cycle and have been built to be operated very efficiently as we ramp up the business. For example, Derby City Gaming operates at a margin that is more than 10 points higher than margins for a typical regional casino. Despite significant construction during the quarter related to the gaming floor expansion and the building of the new hotel, Derby City Gaming delivered a 30% growth in revenue for the quarter compared to the prior year quarter and nearly the same level of growth in adjusted EBITDA with four of its top five handle days ever in March. Oak Grove and Newport Gaming had similar stories during the first quarter. Oak Grove had net revenue up over 50% and nearly doubled adjusted EBITDA for the quarter compared to the prior year quarter. Newport Gaming continues to benefit from the expansion and realignment of the gaming floor, delivering over a 40% increase in net revenue and more than doubling its adjusted EBITDA for the quarter compared to the prior year quarter. We are looking forward to explaining our HRM footprint in Virginia with the P2E acquisition and in New Hampshire with the Chasers Poker Room acquisition that we announced during the quarter. Second, our TwinSpires sports and casino results began to show the improvement that you will see from our exit of the online Sports and Casino business during the first six months of this year. As we indicated on our year-end earnings call, we expect to eliminate more than a $30 million loss from our online adjusted EBITDA in 2022 compared to 2021, and we are still on track to do so. Third, regarding margins for our wholly-owned gaming properties, our margins were down 1.7 points in the first quarter compared to the prior year quarter driven by the decrease in revenue and adjusted EBITDA from our Mississippi properties. Excluding our Mississippi properties, our margins were up 50 basis points compared to the prior year quarter. Our Mississippi properties have faced significant market pressure from a new competitor in Arkansas and have seen some early softness due to the elimination of government stimulus. All of our other gaming properties had good topline growth, some of which was due to the elimination of COVID restrictions and curfews that were in place during the first quarter of last year. And last, regarding our first quarter results, we generated $125 million of free cash flow, up nearly $26 million over the prior year quarter and up nearly $69 million over the first quarter of 2019. As we add new properties in 2022 and beyond, we expect to see very significant growth in free cash flow from our business. We continue to expect to spend $60 million to $70 million on maintenance capital and $300 million to $350 million on project capital in 2022. Given our belief in returning capital to our shareholders every time in the form of dividends and share repurchases, we repurchased approximately 117,000 shares in the first quarter at an average share price of approximately $214 per share. At the end of March 2022, our bank net leverage was 2.7x and our external net leverage was 2.6x. Our leverage has continued to decline because of our strong operating results in the first quarter of 2022. On April 13, we completed an $800 million delayed draw term loan A transaction and funded a $1.2 billion high yield bond offering into escrow, both of which will be used for the financing of the P2E acquisition. We also increased our revolver for our credit facility from $700 million to $1.2 billion. We are grateful to our bank partners who helped us successfully execute decisions of debt in uncertain times and our institutional debt holders for their support and unwavering commitment. We are pleased to execute the largest high yield transaction in nearly two months at a great long-term rate in anticipation of the closing of the P2E acquisition before the end of the year. In closing, we are truly looking forward to seeing everyone this coming week and all of the Derby week events. It is a week filled with music, fashion, celebrations, and the racing of beautiful horses around the most iconic racetrack in the world. Hopefully, you have already downloaded the TwinSpires app, so that you can easily bet on your favorite horses. With that, I'll turn the call back over to Bill, so that he can open the call for questions.

Thank you, Marcia. At this time, we are ready to take any questions that you have out there, so fire away.

Thank you. Our first question comes from the line of David Katz with Jefferies. Your line is now open.

Sorry. Good morning. Thanks very much for taking my question.

Of course.

Look, I think what we'd love to just get into here is, if you could maybe bridge us a little bit not guidance, but just talk to us about how you're thinking about what the earnings power of the company could be a little longer term? Are we correct in sort of building this out to what looks like something in the neighborhood of a $1.2 billion in terms of the total company with all of the projects that you have out there? Is that a fair way for us to think about it?

I can imagine when you look at our company right now, it looks fairly complex because we have so much growth coming, so much greenfield in addition to organic growth in our existing properties purely the HRMs. So you have to look at property-by-property, and you have to look at Virginia too because within Virginia we have Dumfries, the other three HRM licenses that have not been assigned to a location in Virginia and then potentially even the Urban One Richmond casino, if that goes according to plan. So when you add those projects to the existing other projects that we have, New Hampshire, Terre Haute, Kentucky, you have to do it as a series of building blocks. And I'm not going to give you guidance on what the number is, but I can tell you I've been here for 17 years, and I've never been more excited about our firepower with respect to development and our opportunities for respect to development. I think it's a tribute to our team. If you look at how in particular HRMs have performed for us in our existing location, that we have a winner there, that we have a very strong team with a lot of knowledge of how to deploy HRMs. And the HRM projects themselves – our products themselves are very, very good machines. So this is a very optimistic time, even if the macro environment may not be the most optimistic of times for the country. This is a very optimistic time for our company, and we're just going to put our heads down and execute like we've been doing for a number of years and we'll prove it over the upcoming quarters.

Sure. And not to make this sound like a negative follow-up because it's not, with all of the positive opportunities that you have and positioning that you have, just thinking through the gating factors or the risks to actualizing all of it. One, investors ask about supply chain and making sure you have the materials to do you have in front of you. Two, the human capital to execute. And third, the financial resources and whether you feel like you have all of those in place to execute or if any of it is on to come?

Yes. Those are the right questions. Those are what we focus on all the time. And we've been in a high growth environment as a company for an extended period of time. We really have grown consistently and significantly over an extended period of time. So we are constantly revisiting how to structure ourselves, how our training is working for our team, so high degree of confidence on human capital because we've been building our pipeline of human capital talent in order to address our opportunities. We're a company that believes very, very strongly in promotion from within. I view that as something that creates a culture where people learn better and try harder because they see opportunity for their own careers to advance. So feel really good on the human capital. The financial resources, I think we've demonstrated we're among best-in-class at that. We're very thoughtful about our balance sheet. We have the confidence to go ahead and raise the money now for the P2E acquisition. So we don't have high leverage now, and we'll have it managed as we get into our new projects and we have a good revolver in place with a $1.2 billion capacity in order to flex up as necessary to fund our projects. So feel pretty good about our financing. Feel like we're best-in-class at that. The supply chain is a little bit more out of our control. It's something that people talk about constantly in the country, and it's real. It's real; there is some disruption, but so far our team has really managed it well. And it's just a function of the team that we've built here. Bill Mudd runs that team. We built a pretty good team that understands the challenges, predicts it, and works around it. So yes, supply chain disruptions are something that we've experienced. It's something that everybody in the country is going to experience, and you just have to attack that with good people and careful planning. And so far, I believe, I've been very comfortable with how we've dealt with it. And I don't feel that it's cost us any particular meaningful opportunity or timing. So I think David, you were asking the right questions; the right thing to focus on as a company. Are we going to scale to handle the opportunities that are in front of us? It's a great problem to have, but I think it's a problem that we have a track record for dealing with because we've actually been in an environment like this for an extended period of time.

Understood. Thanks so much.

Thanks, David.

Thank you. Our next question comes from Dan Politzer with Wells Fargo. Your line is now open.

Hey. Good morning, everyone. Thanks for taking my questions. So first, I want to touch a bit on the trends that you're seeing across your portfolio. I know you guys called out Mississippi seeing some competition there and some impact from the government stimulus rolling off. But as far as you look across your portfolio, I mean, are there any kind of nuances or one-offs as you kind of look through the different properties and dynamics that could be affecting demands here?

Hi, Dan. This is Bill Mudd. Something we look at very closely. Good question. Every day, if not, more frequently than that even. I'd say, first of all, not the 11 properties, so everything outside of our two Mississippi properties showed growth in the first quarter, and it was good growth across each of the months. And the way that we analyze it really is taking a look at our net revenues compared to 2019 because there's noise both in 2020 and 2021. And so far the only properties we've really seen show a little bit of struggle are the Mississippi properties. And they probably are more susceptible to fuel and food prices. But even those two properties haven't fallen off as much as we would as it could have been so otherwise all the properties continue to show growth.

Got it. And then for P2E, I know you're set to close, I think, by the end of this year, and there's a handful of opportunities for to-be-constructed facilities. How should we think about, I guess, layering in the additional developments? Is it over the course of 2023? And then, if that is the case in 2024, should we think about this as kind of a fully ramped run-rate EBITDA year for P2E?

So if you talk about Dumfries, let's take Dumfries, which is the biggest unbuilt project there. We're shooting for that to be operational by the end of 2023. But I would caveat that date a bit; I feel very good about it, but we're not in there actually operating this business at this point. So reserve the right to tweak that timing on the margins as we get in there and take control of the P2E assets, but really, truly an excellent team on the ground doing great work. And that's sort of the timing for that property. The other unbuilt licenses are predicated on winning a local referendum. So we are working hard now to analyze where we think in the state we should best devote our time and effort to passing local referendums. Then we need to go do that, and then we need to build the facilities. So I think that's a 2023, 2024 target date for not only passing referendum but building out those projects. And then as we become more familiar with the state, I'm not saying we are done there because I don't think we actually are. As we become more familiar with the state, we actually may take one or more of our 10 licenses that are currently or to-be-built and actually move them to new jurisdictions if we think we can get a better return. So I think Virginia is a really interesting chessboard and I don't want anyone to ever think that when a piece is on the board, it can never be moved. We will look to see where we can maximize the 5,000 HRMs that were allowed in the jurisdiction. And you may see us move licenses around if it makes sense over time. But I think you'll see a lot of activity over 2022. I think all of these properties are in a stage building towards maturity. I'm talking about the ones that are currently existing – that are currently existing in operational. So I think you'll have organic growth in the existing properties. You have new licenses to be deployed, and then you have the ability to reassign machines across different facilities and you have the ability to move the licenses within the state if you think they're better markets. So I think there's going to be an element of change and it's going to be a dynamic set of circumstances for a while, but I think you'll see this play out over 2023 and 2024 with some cleanup work and some improvement as we even go beyond 2024.

Got it. Thanks. And one last just quick one on the Paddock project, the $185 million to $200 million. I think you mentioned there was an eight-year payback return, which I think was a little bit longer than the typical kind of five to six years. Is that reflective of maybe a higher cost for the project given material cost and supply chain as you alluded to, or it's a more expensive project because it's at the racetrack; it's expensive to kind of modify Churchill Downs?

Well, with respect to Churchill Downs Racetrack, we've pretty frequently followed a model of a little bit longer payback. What's – the reason I think that there's sometimes confusion on that is we've often beaten that; we tend to beat that. So our projects at the track tend to turn out to be better than we thought; we tended to be more conservative in our planning. So this one is fairly typical. Yes, there are challenges to supply chain and cost of raw materials. But there's always the ability to do value engineering. And we also really understand our facility after all these years. We understand it extremely well. So although it is a constant theme both in our company and broader in the American business community to talk about and obsess about supply chain and construction restrictions, and those are all valid topics. I want to say we've generally been dealing with them, and it's a function of a team that's been built and the quality of the resources we have to address these problems. So I would say that when we put together the Paddock project, something we've been working on for a while, yes, those themes around costs are there. But the targeted payback period is pretty consistent with what we've asked our team to drive towards over the last number of projects. Hopefully, we'll beat the return estimates on this one like we have on some of the others. But regardless, there isn't anything unusual about this planning compared to these other projects, except the project's bigger. And in this case, we're operating on the heart of the facility. We're operating on the absolute centerpiece of the racetrack, which is the Paddock. So that's something that affects everybody's experience when they come to our track. And I think that raises the attention, that raises the pressure and the required commitment to make sure we do a good job of meeting everybody's expectations. And that's why we needed something really bold, something spectacular that marks us as a world-class facility, not just now, but as we look out over the next couple of decades as far into the horizon as we can see. We got to be world-class; we can't have customers that come from Japan or other parts of the world and have a mediocre experience. They have to come here and have a unique experience. And this is what it takes, and it'll pay for itself. It's an economically significant and worthy project in addition to being an artistic one. It's first and foremost an economic one.

Got it. That makes sense. Thanks, guys, for all the detail.

Sure, Dan.

Our next question comes from Shaun Kelley with Bank of America. Your line is now open.

Hi. Good morning, everyone. Bill, maybe just to stick with the development projects for a moment. Could we get a little bit more color on just the timing of how that CapEx will be let out between both the Paddock project and New Hampshire? I think these are sort of two of the more recent announcements. So just kind of over what time period do you expect to spend the capital and how should that trend maybe across 2023 and maybe into 2024?

Okay. Well, I'm going to start by answering this question. Marcia, I invite you to jump in if you want to give more specific than how I answered this question. So with respect to the Paddock project, we are obviously going to have it completely spent and all the capital spent and the project opened for May 2024, because that's the 150th Derby. So two years from now, this project will be completely done. So over the next year, we're focusing; we have the Home Stretch Club done. That was, I think, a $45 million project. Over this next year, 2022 to 2023, we'll be doing the first turn project, which is a $90 million spend, so the rest of the spend on that to complete that project. And at the same time, we will be working around our live race meets in order to do the Paddock project. So the breakdown between 2022 and 2023 with this money largely being spent over that time, so that we're ready to open in 2024. We can give you that detail, but off the top of my head, it's fairly level-loaded between the two projects. And with respect to New Hampshire, first, we'll close that transaction, and then there's a fairly significant spend as we build a broader HRM footprint at a new location. We have a great market in Salem, a great license location, but we're going to look to move that license. So that is something that we'll work hard on in 2022 and look to have completed by 2023. But contrasting that with our plans for the Paddock, our plans for the Paddock are locked down. We know exactly what we do, what we're doing. We know to the month, we have our expectations on price, and it's completely planned out. With respect to New Hampshire, we have to complete the regulatory process and get our license. And then we have to decide on our definitive location of where we want to move to, and then run through all of that planning process. So there's a little more flex in the system for that one, but that is something that we expect to get done over 2022 and by the completion of 2023.

Great. And then, maybe for my follow-up, it's a little bit more of an academic one, but I'm interested because it seemed to be enough to be worth calling out. But you mentioned the Japanese horse that could have an impact. It sounds like a little bit on the ability to bet on the Kentucky Derby. Do you have historical experience or precedent of a similar time that's occurred and how does some of that opportunity flow back? I think for those of us who know the market a little bit, I know, I think we know that horse racing is very, very popular in Japan, so just any sense of what some of the impact or financial outcomes could be for Churchill Downs as a result of that.

Yes. We've worked hard to build a Japanese and an international road to the Derby, a future growth for our company will be bringing in international guests. I mean, America, the Kentucky Derby in terms of what it is today has a great international appeal and a great international brand, but that's never really been connected with our efforts at the track to develop a sales strategy to bring in lots of international guests. And that is something that we're focused on changing. So if you think about what's happening in the Middle East with Dubai and the path from there, and if you think about Japan, part of the focus is to get horses to come. How we will monetize this? We hope through sponsorships; we hope through attendance ultimately. And of course in some cases, we hope to do so through handle or wagering. Japan is what you call a closed market. So if you go to Japan, horse racing is a very, very large business in Japan. But you're only allowed to bet on Japanese races in Japan, except for a handful of exceptions. Call it somewhere around 20 or so races a year, perhaps it's 30 now that are brought in from overseas into Japan for Japanese veterans to bet. And in order to do that, you need to have a Japanese horse in the international race before the Japanese authorities will let the race come into the jurisdiction. So getting a Japanese horse in the Derby has been something that we've been focused on as we've learned that market and given them opportunities. Now that we are emerging from COVID, we feel like we're back on track. And so prior to COVID, Master Fencer, a Japanese horse came to the United States and ran in the Kentucky Derby. And now we will have another Japanese horse. And our experiences last time were there's a big time difference; I believe it was something around $4 million or $5 million in handle. So it's – in how much was it, Bill? It might have been as much as $8 million. I didn't bring that information into the room with us, but it was a number compared to the overall significance of the day, a card that does $250 million on that day, $200 million to $250 million. It wasn't an overwhelming contribution, but it's a good start. So all these things we do start and we build on them. But I would expect that this horse running in the Derby would have an economic impact to handle of somewhere around $4 million to $10 million. And if we can do it consistently year-to-year, that'll increase significantly over time. But as I – the larger point I wanted to make about it, Shaun, was it's one piece of this puzzle. We want wagering from Japan, but ultimately this is about building a connection to that customer base, which will allow us to drive sponsorships and allow us to drive attendance in future years. It can be a bit premature to talk about that on a call like this, but it's part of an international strategy that we over time, we hope reaches fruition because we have the brand. We just have to build the processes and the connections to harvest the economics associated with it in some of these jurisdictions.

Really interesting. Thank you very much.

Sure.

Our next question comes from Brett Andress from KeyBanc Capital. Your line is now open.

Good morning. On Chasers in New Hampshire, I think that was a market that up until now flies pretty low on the radar for most investors. But Bill, if you could maybe help frame up for us a little more the longer-term opportunity of that market, what you like about it. And maybe the size of the total HRM build-out there is as you see it even beyond Chasers?

So first, we like New Hampshire because it's HRM, its historical racing machines, and that's something that we've built. We believe in a real expertise in a series of processes that allow us to do it successfully. So we like that about the New Hampshire market. The second thing that we really like, and it may be economically the most important thing, is the fact that New Hampshire sits on the border of Massachusetts; it's pretty close to Boston. So the Massachusetts population, the population on the Massachusetts side of the border is really pretty significant. So the economic opportunity really is to try to offer a product that is attractive enough for those residents to move back and forth across the border. So I think there are other opportunities across the state and other population bases. But for us, we wanted to start with the one that we thought was most important or most lucrative for us. And that's what we did. And we got our absolute first choice. So we think over time there'll be some others that look at that. But for our company, we're particularly well situated for it because we've been building facilities that are HRM facilities, and we have an extensive team that focuses on HRMs every day. So for us, it’s a product that’s very familiar and that we have a lot of confidence in. But I think ultimately those states are fairly dense and they're relatively small. So when you try to analyze the market, you have to look beyond state borders and just look at populations in metropolitan areas to build your modeling on how good an opportunity it will be. But I don't expect that it'll be competition-free. I think others might have opportunities and perhaps we will too over time, but we want to focus on what's most important first, and that's how we approach any market. So we got the opportunity we wanted. Now we just need to focus on where we put it within Salem. And then we just need to run our programs and deploy our team the way we have at Derby City Gaming and Oak Grove and our other HRM facilities.

Got it. And you already have so many shovels in the ground. That sounds a little crazy for me to ask this. But after the Paddock and closing that chapter of investment, I mean, what does the next stage of Churchill Downs look like? And maybe asked it a different way, what is maybe still on your wish list?

With respect to Churchill Downs Racetrack, you have to take it in stages and you remember, you always have the next Derby never more than 12 months away. But absolutely we're not done when we get the Paddock project done. We need to demonstrate that we can do that successfully. But if you had a drone flying over the track and you looked down at the track, you would see that there's still a fair amount of real estate around the First Turn connecting what we call or will call the First Turn project to Sky Terrace and Millionaire’s Row. So you still see there's a fair amount of real estate, but one step at a time we need to go demonstrate that we can successfully do the most important project that we've done during my time here in the company with respect to Churchill Downs Racetrack. We need to go and nail that project; we need to nail our projects every year. But it's as simple as looking at the real estate of Churchill Downs Racetrack; there's still opportunity even on the front side of the racetrack, not even talking about what you might do in the infield. So it's a fun sandbox to be in. We're not at the end of our historical, we're not at the end of history here, we're somewhere in the beginning or the middle. There's still lots to do at that track, but we can't get distracted. We have three big projects we're executing on, and we're just going to execute those first and leave the future out there a little bit before we talk about that.

Our next question comes from Joe Stauff with SIG. Your line is now open.

Thanks. Good morning, Bill, Marcia. I wanted to ask a couple questions, kind of zooming out a bit on the HRM category for you guys. I guess, one, if you can maybe just give us a sense of any other states that may or may not be contemplating HRM legalization and/or expansion plans? I know there are a handful, but I didn't know exactly like where the status of those were. And then secondarily to that, can you talk about Bill, like maybe just the competitive advantage you have with your horse racing experience, and what that gives you in terms of positioning yourselves to win more HRM licenses maybe in another jurisdiction?

Sure. So Joe, I'm going to do the best I can on this. But with respect to identifying other states, I really don't want to identify other states. There are other states that are considering this, and during our time here in the company, governmental affairs is really becoming an important function as we work with legislatures, as we work with other relevant political bodies, often horseman groups and tracks and different jurisdictions. So I would say that as much as I want to say about this is certainly there are other states that we're focused on. Certainly, we think there are other HRM opportunities in the United States where laws can be passed and this product can be deployed. But I don't think I'd be responsible to our processes that were running in those states to talk about them further. So our objective Joe is to develop other states where we can deploy HRMs. You're aware currently of the ones where we're allowed to do that. But certainly, the process to get an opportunity like HRM is a process. It's not something you're gifted; you have to work to earn it. Somebody has to work to earn it. And across a handful of states, there are people sometimes ask directly who are working to get that kind of product passed through the legislature so that it's an opportunity. So that's as much as I'd want to say on that. The competitive advantage with respect to HRMs really is twofold. Not every state connects historical racing machines to actual live racing. New Hampshire is an example of a state where there is not live thoroughbred or harness racing in the state anymore. And yet they still passed a paradigm allowing historical racing machines, largely to support charitable initiatives in the state. So with respect to those kinds of states, and I don't think this will be the last one. I think with respect to those kinds of states, we bring our operational expertise and our knowledge of these machines having worked with Ainsworth to actually develop the machines as they exist. We bring a lot to that process because of our deep-deep knowledge from a technical and operational standpoint on how these machines work, how the laws may be structured, how they're regulated. We have a lot of advice and understanding that we can bring to the table that helps us and helps the state. With respect to those states where HRMs are very firmly connected to live horse racing, well, that is the ultimate sweet spot for our company because thoroughbred racing is at our core; it's where our company comes from. And we have a deep history and understanding at this point on how all this works together, how the HRMs fuel the racing, how it fuels capital investment, how it fuels purchases, how it fuels the breeding industry. We have a very good paradigm and template for how all the pieces fit together. And it is a complex mosaic because horse racing is a complex business. It's breeding, it's sales, it's farms that support the horses, and all of those share in HRM at one level or another, and harnessing all that energy and all that political support. That's something we've done now in a few places. And that's probably our strongest competitive advantage when we find a circumstance like that. So we think for example, Virginia is a very good place and optimal place for our company with our current skill sets to invest.

I appreciate that. Thank you. And if I can have one follow-up, please. This really, I guess, kind of dovetails into just understanding where margins may go the rest of the year for your gaming portfolio. Just wondering Bill, if you see a change maybe in the promotional and/or the marketing environment, especially in larger markets that you compete in, that may or may not influence say the direction of the margins that you might put up this year.

Hi. This is Bill Mudd. I'll take that one. If you look at the promotional market, I think we ran in about a 15% free play rate, which was above last year, which is around 12% in the first quarter, well below kind of the 19% in Q1 of 2019. I think kind of where we are today in the promotional environment. I don't see a big move from where we are. We are seeing customers that fell off during COVID return to the facility. So that's good news. And we are seeing some of the younger demographic, lower-end players not come quite as frequently as they have other options open for entertainment purposes. And those players don't bring a large wallet. So the more valuable players are coming back. So I don't see a whole lot changing with respect to where we are today on the margin side as long as volume stays roughly consistent.

Understood. Thanks a lot.

Our next question is from Zach Silverberg with Berenberg. Your line is now open.

Hi. Thanks for taking my question. Good morning. You guys mentioned that in the TwinSpires results, that there was a greater increase of patrons returning to retail horserace wagering. Could you discuss the impact of that on the cadence of the remainder of the year for the TwinSpires digital horse racing segment?

Yes. Hi. This is Bill Mudd, again. I'll take that one. And I think this was in Bill's comments. During COVID, the percentage of folks that wager online jumped from like 40% to over 60%. And roughly in the middle of last year, sometime during early-to-mid third quarter, that kind of fell back to close to 50% and it stayed pretty consistent. So I would say in terms of the return back to brick-and-mortar, we’re largely through that; we'll see one more quarter. And then I think we'll be kind of back to a consistent year-over-year basis in terms of what we'd see. So I think we got maybe one more quarter of kind of year-over-year comparison constraints and after that we're back to where we think we will be on a consistent run rate basis.

Got it. Thanks for taking my question.

Next question is from the line of Chad Beynon with Macquarie. Your line is now open.

Hi. Good morning. Thanks for taking my question and all the details thus far. I wanted to ask about share purchases and just kind of general capital allocation decision tree here given the CapEx that you noted and obviously the pending P2E acquisition. How should we think about how opportunistic you can be kind of along the way with share repurchases, as you did execute in the first quarter? Thanks.

That's a really excellent question. I appreciate you asking it. I know this is a time where if you look at our company, you see a lot of projects and you see a lot of investment in building our company. That being said, we've always been very, very careful of how we manage our balance sheet. I think Marcia is an absolute master at it. And we always build in capacity with respect to more than one strategy for share buybacks. So we believe very, very strongly in our company during my entire 17 years here at Churchill. I've always felt this way. We believe very, very strongly in the future of our company. And so we are very opportunistic when it comes to share repurchases, and we work hard to make sure we're never in a position where we can't take advantage of an opportunity if one presents itself. So we run more than one strategy. We constantly have more than one strategy that we're looking at, ordinary course repurchases, but also capacity for outside of the ordinary course repurchases. And we don't take steps unless we thought those things through in advance and we know what our limits are and we know what we're capable of, so that we can address any foreseeable opportunities that we see. So you will see that the projects we've announced and the efforts we're making, as expensive as they are, they've all been designed to allow us to continue to participate in share buybacks if and as warranted.

Thank you very much. Appreciate it.

Thank you. At this time, I would like to turn the call back to Mr. Bill Carstanjen for any closing remarks.

Thank you. As always, we're very grateful for all of you on the phone call. Thank you for your questions. Thank you for your interest in our company. Thank you for your investment. We'll try to be worthy of that. As I said, a really exciting time for those of us on the management team here; we really feel we have a lot of growth and a lot of runway. So it's an exciting time, and it's not just because it's the Derby in a week. It's a reflection of all the work that's been done to get us here. So we'll talk to you next quarter, be on the lookout for our Derby press release that we put out after the Derby, where we'll give you some feedback on how we did during the Derby. But otherwise, we're going to just put our heads down and go execute, and we'll talk to you next quarter and hope to share with you good results and good progress when we talk to you next. Thanks very much.

This does conclude today's conference call. Thank you for participating. And you may now disconnect.