Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated 2016 First Quarter 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'd now like to introduce your host for today's conference Mr. Mike Anderson, Vice President, Treasury and Investor Relations.

Thank you, Vitoria. Good morning, and welcome to our first quarter 2016 earnings conference call. After the Company's prepared remarks we will open the call for your questions. The Company's 2016 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 investor 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 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'd like to turn the call over to our Chief Executive Officer, Bill Carstanjen.

Thanks Mike. Good morning everyone. Even though we are still 8 days from this year's Kentucky Derby, I'll go ahead and say it, Happy Derby Week. 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 Alan Tse, our General Counsel. I’ll make a few general comments and then turn this over to Marcia. After she is finished her comments, Marcia, Bill Mudd and I will be happy to take your questions. Let's spend a few minutes on our first quarter and then I will touch briefly on the Kentucky Oaks and the Kentucky Derby. The company produced record net revenues and record adjusted EBITDA for the quarter. Both of these metrics speak to the strength of the company and we are pleased with the trend. It’s worth noting that Big Fish was a significant driver of the increase and net revenues, but actually negatively impacted the growth and adjusted EBITDA by delivering approximately $5 million less than prior year. We know many of you have questions about this, we will explain in a minute why Big Fish was up so significantly on the net revenue line but down on adjusted EBITDA. First things first though, we did see a decline of $23 million in our free cash flow for the quarter compared to the first quarter of last year but this was entirely driven by unusual items that more than offset the growth in cash flow from our co-operations that we otherwise experienced. Marcia will provide more detail on the unusual items in her comments. Turning to our business divisions. There were things to point out about each. With respect to our Casinos segment, net revenue increased a modest $0.5 million over prior year…

Thanks Bill, and good morning everyone. I'm so excited to experience the 142nd Kentucky Derby next week. As Bill mentioned in his opening remarks, we delivered a strong performance for the first quarter with record levels of revenue and adjusted EBITDA. Free cash flow was down $23 million compared to the prior year quarter. I will go into more detail on the drivers of this decline in a few minutes. We are pleased that we generated $2.8 million of net income or $0.16 of diluted earnings per share which is up $4.4 million from the prior year quarter. Now I will go into more detail on the drivers of each of these key financial measures beginning with total revenue. So the revenue for the first quarter was up $37.5 million as we were able to increase net revenue in each of our segments. Big Fish Games was the largest driver of our revenue growth reflecting a strong growth in our casual and mid core free to play games during the quarter. Big Fish Games had a 22% growth in bookings, our social casino bookings were down 4% due to a 9% decline in average paying users that was partially offset by 6% increase in average bookings per paying user. Our bookings from our casual and mid core free to play games more than doubled compared to the prior year quarter, and as Bill mentioned we did see a 9% decline in bookings related to our premium paid games. Turning to our other segments, our TwinSpires revenue increased $4 million compared to the prior year. Handle increased 10.6% which was 7.5 points higher than the industry growth in the quarter. Through strong retention and activation efforts, our team was able to increase unique players with 7% and generated a 30% increase…

Thanks Marcia. Okay everybody, if anybody has any questions we are happy to take them.

[Operator Instructions] Our question comes from Cameron McKnight of Wells Fargo. Your line is now open.

Good morning, thanks very much. So first of all on Big Fish, just looking at the difference between revenue and EBITDA, looks as though expenses at Big Fish have gone from about $70 million to $75 million to $105 million over the past two or three quarters. Can you walk us through the decision process to increase spending in Q4 and increase spending again q-o-q in the first quarter of this year?

Hi Cameron, this is Will Mudd. If you refer back to Bill's comment and that’s obviously a lot information in his comments and you have to listen very carefully because this is a business that you really have to think through and understand. So if you go back to last year we really were investing in two products, Gummy Drop and Casino. And those were the two products as you remember they had - Big Fish had just kind of entered the free to play space. And the free to play space is a space where when you acquire customers the returns on those customers as you get more data, you feel more comfortable and invest more money in UA. Let's take the $14 million as an example that we increased in the first quarter of this year versus the first quarter of last year and I will also remind you there was a $12 million increase versus what we had done in the fourth quarter of last year. So we have ramped up UA over the last couple of quarters because we have seen good investments put that money into. Let's take that $14 million, so typically when you have a free to play game, the returns on those games vary anywhere from, let's just say 6 months that's kind of average shortest, because if you can do it 3 to 4 months, you keep pushing more UA into it until you get to a number that you feel comfortable with. 6 months on short answer 18 months you really get comfortable with the product like the casino business okay. So if you spend money it’s going to take anywhere from 6 months to 18 months to earn that money back. Let's take the $14 million as an example…

Okay. Got it. Thanks. If we dial back the clock to I think around the second quarter of last year, you guys posted great results, sequential growth in revenue, sequential growth in EBITDA. At that time you cautioned, hey guys look there is going to come a quarter where we are going to have to invest heavily in the product. Quarter-on-quarter results are going to be lumpy. Is this basically the quarter that you were alluding to back then, where the marketing spend does increase significantly?

I think, who knows, we get into the second quarter and we find out that the metrics fall apart because some third party event happens, maybe it drops but I don't see us pulling back on investing in these games if we keep getting good returns. And if you look at kind of what we did last year we really had 2 games we were investing in through the third quarter and in the fourth quarter where you saw that we increased investment by over $9 million in UA compared to the second quarter of last year or the third quarter of last year. So we increased UA spending from third quarter fourth quarter about 9 million, these things go and you have got to think about the momentum of the game. So if there is ever a point where the margin get crazy good then we probably don't have enough games to invest in then I start to worry we better be working on R&D. But right now these games show great metrics, we have done Sunken Secrets is a great example of a game that we pull backed on in the first quarter, we just did a release and we’ve had a great few days and we got to get more data, but that's a game that I can see us push in the accelerator more on in the second quarter. So it's really hard to tell any forward looking guidance, because this is a day were we look at stuff on a daily basis to see what our returns are.

I got it - I’m sorry.

Cameron let me add something that. I think if there's been optimism in the past expressed on call it's not really been foreshadowing it's just that we see in soft-launch that we have games. Usually in soft-launch we don't see the monetization characteristics that we're looking for long term, but we take a lot of optimism from whether we're seeing our retention of customers and time on device, time in the game. So usually the last thing we need to work on is monetization period to get that thing to work right, but one thing we were seeing last year like we're seeing now, we were seeing more games in our portfolio that we had some optimism we may be able to develop into monetizable games. So as we've said from the beginning when we enter the space, we wanted to pursue a portfolio effect where we were taking sharper or swing in the bat at many different types of pitches because we thought there was some commonality in the teams in the skill set that would allow us to try different zones of the games. So it doesn't mean though that when we see something in soft-launch it means 6 months later we're going to be investing heavily in that game because Bill was just highlighting at any different time our assumptions can no longer -can turn out to no longer be true. Sometimes we can't get the game to monetize, sometimes it doesn't monetize of the level that we'd like and sometimes there's another game that comes out that's better. All of things can change our perceptions, so we don't go into this thinking that we've got a game one year from now and it's going to be a mega hit. Everyday it’s the analytics, everyday it's careful analysis to see what we've learned from the day before. So this is a business where you can be anything other than humble. Every day you have to look at your analytics. And every day you have to invest in the products that are worth investing in and you have to be working on developing new games based on what you see other people doing out there that are successful.

Got it. Thanks. One last question from us. You guys have constantly been investing in the Derby, and really haven't stood still there. Can you summarize for us this year what new offerings and amenities are on offer at the Derby?

Yes, we'd be happy too, so this year it's been $18 million really renovating two key areas. One is our third floor Turf Club area. We've taken another area was which was the math and dining room for people who are there. And we completely redone that, we've added a much broader area we've closed the balconies with some roofs and added new tables out there. On the fourth floor in our stakes aristocrats and directors room, we've taken all those walls out and created a much bigger space with more - with more opportunities for guests, for tables and whatnot and there's also balconies and clothes there as well. So we've done a lot of things that really improves from the existing spaces on the interior side. And really when you think about our segmentation from our customer base, we've got a mansion which was the all try and then we had kind of other areas, so this takes that area and kind of shrubs it in between the mansion and millionaire's row, which is another segment of our customer database. So what the initial people have gone through, there is some articles out there where Kevin Flannery and the race track team which did a great job for us out there, they went out and did a bunch of reviews there's the articles of line when people got out and see pictures and these are the things we've when the articles were written.

Okay, great. Thanks very much guys.

Thank you. And our next question comes from David Katz of Telsey Group. Your line is now open. Q – David Katz: Hi, good morning. I heard everything that Bill Mudd went through in terms of Big Fish and the business. If I can just go back to that issue, and we could talk about, obviously our plight is to put together a forecast, and based on how you describe what you describe, that seems challenging, which I am sure you can appreciate. So should we be looking at this business in a last 12 month, or next 12 months basis in total? And overlook the quarters, so to speak? And if that's correct, help us think about what the next 12 months could look like? Again understanding that it's not easy to give guidance, and that may not be your policy, but our charge, obviously is to put together a forecast and decide how to value it?

David I think it's going to take a couple of - have that question because there's some specificity and also there is some generality and we're getting into all that so. So as Bill see I'll start. I would say that one view into the health or the expectation of our company, and again we don't give forward looking guidance is to look at the games that we have released and look at the profile of those games. I think that gives you a sense of what's going on currently and that can change compared to say 12 months ago. As we talked earlier today 12 months ago we really had two games that we had any real sort of upside to investing in on a significant scale that was Gummy in the Social Casino space. Now we have more games of different sizes that you see some patterns of investing. So that's really I think a key driver to look at in terms of what we’re doing, as how many games do you see us without there and what sort of size do you see in those games for in terms of the publicly available data. That gives you a general feeling for what's going on. And I would say that one thing that helpful to understand is, we're not - you don’t see these games under our trajectory that we've shown, you don't see these games go from zero to a thousand miles an hour, you will see them build individually. So it's really a question of how many new games that we put out there and what level of activity do you see in some of the public data on those games. And I'm sorry for the feedback we're having out there, but I don't think that's on our end.

David this Bill Mudd. I'm trying to come up with a fair analogy, but I would say that it's like looking at very high growth companies and no one obviously that would come to mind would be Amazon where they just implant a lot of money into growing that business early on or maybe a Netflix. But we have a very big challenge here and it's a challenge that is, we could have delivered a very high EBITDA margin business in the first quarter and blew everybody out of water. And Bill and I and the team out in Seattle had a very long discussion about whether we want to do that. In fact, we could have spent a lot more on UA if we really wanted to this quarter. So we thought where we ended up was a good balance of investing in growth for the future and presenting a P&L that our investors would be happy with. So let me say that it is a very difficult job to balance the expectations of all your constituents well at the same time ensuring that you continue to grow the company and do what's right long term. So the way I would think about this is, first of all it, it can be very difficult and I think what Bill said was a very salient point, it’s good news we have a lot of products that we can invest, so if you go in the fourth quarter and I know if I want to give any forward looking guidance this is a great example I can. Fourth quarter we're very excited about Dungeon Boss. We paid a lot of money and was the single biggest contributor to our UA spend increases versus the second quarter, excuse me - versus third…

I think our growth and bookings or change in bookings is a real indicator of the health of our business in the long term growth prospects of our Big Fish business. And I think the one important challenge for us with our investor community is to demonstrate over time that we make smart investment decisions when it comes to UA to profitably drive bookings as opposed to just artificially inflate bookings or make bad decisions on marketing spend to acquire bookings. One thing we think we've already proven and I think it's a long term challenge and focus for us is to always demonstrate that we are making smart choices on UA investment to drive responsible, sensible and profitable bookings growth.

I’m going to add on that point one more time that Bill just said. When you think about UA spend that we spent this quarter, you really have to believe that and know that the Big Fish team is very good at what they do and we're going to return on investment. So it's not like they're spinning this bookings with the hope of something to come. They spin it based on data very, very data and analytically driven company and we don't invest in things that are jump balls, we invest in things that we know we are going to get return on. And that's the way I think about it. So we're really allocating the maximum amount of UA spend we can still make and still deliver P&L that we feel good about in the current period. So that's the balancing act that goes on. We're very happy, actually very happy with the results we’ve achieved this quarter. And we're very happy that we're setting ourselves up for growth over the long term. Q – David Katz: So if you don't mind if I follow that up, I just want to be clear about sort of the nature of my question. I think that you have earned the confidence of a lot of us and myself included. And so I mean not to question the decision to invest or not to invest in a business like this because I would say that I think most of us understand how I think that the term I use and I know this morning was that - it can be circuitous right it's not necessarily a straight line up or forward. And so the decision to invest you have our trust. I think more along the lines of how do we sort of gauge our expectations over the short medium term as we sort of maintain that confidence going forward because for better or worse, we're sort of in this public arena that there is some attributes that we can't there's no getting around it, I think you see what I'm getting at right.

I think so and I'm going to take a stab, I believe I do understand the question. And I would say that Big Fish is an evolving growing business and it's different than it was a year ago. And I think as you look to the future of it, there are a couple things to keep in mind and that is as the business has grown, as you see in our first quarter we are demonstrating our propensity to have more games that are investable. So I think, before you think about what's that particular margin rate per quarter, you have to look at the performance of the games that we have in the portfolio now. You have to look at and a lot of the data you can track publicly to help you figure out now especially since you have a little path performance data on us in these games, you can look at that data to help you figure out what we're doing. We don't provide the forward looking guidance and it wouldn't be sensible to march down that path of trying to do that. So I would ask that you use as a proxy and understanding of how many games we have out there on the relative size of those games. Doesn't mean those games will continue on a trajectory or is that some won't get smaller that some won't grow faster than others. But I think you have to - and I would ask that our investor community, be cognizant of the fact that the company was built to offer more than one game, to offer more than one product line and it is a good thing as demonstrated in the bookings that we are now demonstrating that we can offer, half a dozen plus games at once. So I think, right now that's again without offering forward looking guidance that's the universe that we find ourselves and we have more than two games, we have half a dozen or more. I think now perhaps going forward people will be more on the look-out as they see us introduce new games that move up the App Annie charts et cetera. But right now hopefully our current portfolio of products is give the investor community a bit of a sense of how we're growing on the bookings line and what sort of investments we're making to grow half a dozen plus games instead of one or two. Q – David Katz: Okay. Thank you.

Thank you. Our next question comes from Adam Trivison of Gabelli & Company. Your line is now open.

Hi guys. Thanks for taking my question. I hate to harp on the issue, can you talk about the cost structure of Big Fish X UA, and how that has tracked since you guys have owned it? I know there wasn't much integration off the bat, how much has been done, how much will be done in the back office, at least?

Sure Adam, it's Carstanjen again here. There are different theories behind every acquisition and we’ve had different theories as we've done acquisitions, as we rolled up a couple account wagering platforms in the past, synergies were a big part of that. However when it comes to Big Fish this is a growth company. So you've got to pick your poison, you’ve got to pick what you're most focused on and what's most important. For us with Big Fish we were acquiring a new platform and new vehicle in which to grow the company. So trying to find or core synergies in core functions or common functions have not been a focus. I think overtime you might see us grab low hanging fruit, of course, we'll do that when there's low hanging fruit. But it is not a primary thesis or a primary objective to try to squeeze cost out of this business because this business has a lot, a good runway ahead of it and a lot of great people in a very strong culture in Seattle and we're more focused on being able to grow it than we are squeezing cost efficiencies out by merging functions.

Okay.

And I would also say that, the heaviest cost piece of that business really the user acquisition spending. And that's going to be dictated by the products that we have that we feel comfortable investing in. And then of course we have the platform fees from Apple and Amazon store, the Google stores - Android stores I should say. So those obviously are very variable with the amount of bookings that we get. And then the rest of it is, we'll get some customer service as we grow the company, we had some that cost but there isn't been leverage on that but the rest of it is very leverageable. Probably analytics and the marketing side of it and so on so.

That makes sense. When did you guys do the platform upgrade on Big Fish Casino, and did I hear you right, there is now user-acquisition growth, you are seeing user acquisition growth post that launch? And then do you have any color on spend per user post launch?

The upgrade is really been ongoing. So over the end of the fourth quarter and into the first quarter and currently, we've been focused on improving a bunch of attributes of that product both in terms of what the customer sees and then what's behind the scenes that they don't see to improve the operation of the site. So it's been an ongoing process. I think the brand itself is very well understood in the social casino space among the larger customers. So there comes a point where most of the better bigger customers are familiar with us and have tried us. And that's why you'll see us. And we have focused on some infrastructure improvements that will allow us to better offer new or different product besides the ones that the market is most familiar with. You'll see that over time. But also within our core brand, our core Big Fish social casino offering after treading some water as we made some of these improvements, we are starting to see some improvements in some of our basic metrics like climbing, seeing the paying users climb.

Okay. That helps. And then one last one. What's the process to gets TwinSpires onto the Android platform, and what can do you, or how much of it is just up to Google?

It's completely up to Google, so they do not allow any kind of gambling apps in the Android stores much to my chagrin. But even our new venue next at for Churchill Downs, we - the area where you'll have lot to bet online in that app. On the Android store we had to make it a much softer path to TwinSpires than we were able to do on the iTunes store, otherwise we wouldn't get it approved. So unfortunately that's completely outside of our control.

Okay, great. Thank you for answering my questions.

Thank you. And at this time I’m showing there are no further participants in the queue. I'd like to turn the call back to management for any further remarks.

Thanks very much. And again we appreciate all of the questions that you ask us. We appreciate you investing in our company. We're striving for clarity and explaining better how our company works now and how Big Fish works. So again thanks for joining us on the call. We look forward to talking to you next time.

Ladies and gentlemen, thank for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.