Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2016 Fourth Quarter and Year End 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. Mike Anderson, Vice President, Treasury, and Investor Relations.

Thank you, Lianne. Good morning, and welcome to our fourth quarter and year end 2016 earnings conference call. After the company’s prepared remarks, we will open the call for your questions. The company’s 2016 fourth quarter and year end 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 report on Form 10-K. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. The press release and Form 10-K are available on our website at churchilldownsincorporated.com. I would also like to point out that we issued a press release on February 16th that announced that we have updated our definition of adjusted EBITDA for external reporting purposes. After consideration of the SEC’s guidance regarding non-GAAP metrics, we have decided to exclude changes in Big Fish Games deferred revenue in our computation of Adjusted EBITDA. This is only a change in external non-GAAP financial reporting and has no effect on our business. We made this change on a prospective basis beginning with our fourth quarter 2016 and full year 2016 business results. All of the adjusted EBITDA metrics we discuss on the call today will be based on this new definition. And now, I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Thanks, Mike. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer and Marcia Dall, our Chief Financial Officer. I will make a few general comments about fiscal year 2016 and offer some additional color on the fourth quarter, and then turn this over to Marcia. After she has finished with her comments, Bill Mudd, Marcia and I will be happy to take your questions. Overall, the company produced record net revenue of $1.3 billion in 2016, up 8% over prior year and adjusted EBITDA of $334.5 million, up 11% over prior year. Net income was $108 million, a 66% increase over prior year and diluted net income per share was $6.42, up 73% over prior year. For the fourth quarter, the company produced record net revenue of $278.3 million, up 2% over prior year and adjusted EBITDA of $56.5 million, up 5% over fourth quarter prior year. Certainly, there are some things that went well for our company in 2016. There are also some things that we need and expect to do much better. I'll now focus my comments on each of our four main business segments to better shape your understanding of our quarter, our year and how we think about our results. I'll start with our TwinSpires.com business. For the full year, wagering at TwinSpires was up 14%, while the industry was up slightly less than 1%. Our adjusted EBITDA was up 13.6%, despite a $1.5 million increase in marketing and advertising spend, which helped drive a 23% increase in active players. In the fourth quarter, TwinSpires wagering was up 12% over prior year, while the industry as a whole was down 1%. Adjusted EBITDA was also up about 12%. Note that in the fourth quarter, wagering is more…

Thanks, Bill. As Mike discussed in his intro to the call, based on SEC guidance, we have made a change to our definition of adjusted EBITDA to exclude the change in deferred revenue related to Big Fish Games to this non-GAAP metric. A number of Big Fish’s competitors also make this change in 2016 based on SEC guidance regarding non-GAAP metrics. As Mike mentioned, all of the numbers in our press release, 10-K and in my comments to follow will be based on this new definition. I will provide some comments on the company's results first and then I'll provide some additional highlights for each of our segments. As Bill shared with you and as you can see from our press release, we delivered a strong performance in 2016. Our company generated record net revenue of $1.3 billion for the year, up $96 million or 8% compared to 2015. This increase is driven by three primary factors. First, Big Fish revenue grew $73 million, primarily from casual and mid-core free-to-play growth compared to 2015. Second, our TwinSpires revenue increased $20 million as we continue to outpace industry growth as a result of our marketing effort, especially around big event days, including the Derby by taking advantage of the shift in customer wagering habit. And last but certainly not least, we delivered a record setting Kentucky Derby and Oaks week in the second quarter. Total revenue for the fourth quarter was up $6 million, driven primarily from growth in TwinSpires and Big Fish games revenue. We did have a slight decline in revenue from our casino segment, which primarily reflected competitive pressures at our Riverwalk casino. Adjusted EBITDA for the 2016 year was $334.5 million, reflecting a $32 million or 11% increase over 2015. Our casino segment contributed $10.9 million of…

Thanks Marcia, I think we're ready now for questions.

[Operator Instructions] Our first question comes from David Katz with Telsey Group. Your line is open.

I have several questions, but first with respect to the M&A landscape, we've seen you over the past year get involved in some new casino or racing properties. What is your appetite and what are you seeing out there for any of those kind of opportunities or should we look at the portfolio is stable at this point?

Hi David, it’s Bill. So we’re limited on how we can answer those kind of questions publically, we don't comment generally on specific M&A activity. So I'm going to comment generally. We've always been very disciplined and careful, we never want to do deals to do deals and we do deals that makes sense to meet our hurdles and our sort of philosophy on where it makes sense to invest the shareholders capital. So generally I don't see a lot of changes in the M&A environment, there are opportunities here and there that are out there and we never try to force, we just wait for them to materialize they're going to materialize. So I don't think there's been any systemic change in the market that causes me pause one way or the other, I think it's consistent with how it's been in the last few years.

I have happened upon some news here and there about gaming machines in Kentucky and whether that's instant racing machines or any efforts to actually put slots or tracks and in the past those full casino or slots or tracks efforts have not really gone anywhere, what's your view on that landscape and as well you know with these instant racing machines and whether that's something you would get involved in.

Hi David, this is Bill Mudd. I’ll give you [indiscernible] high level detailed overview. So IRMs or instant racing machines and [indiscernible] historical racing machines you’ll hear IRMs and HRMs kind of used in interchangeably. Started operating here about five years ago at a location in the southern part of the state just north of Nashville. There are now three locations that have historical racing machines installed with varying degrees of success. There has been legal challenges about the ability to operate those in the state but that’s really down to one issue which is still being reviewed by the court which really boils down to are they pair mutual or not. We do believe that they will survive that legal challenge. So we've been watching these machines for quite some time, they are not competitive with Class 3 gaming as they exist today, there are two manufacturers out there, neither of which have had a basis or history in machine development or math modeling and games that people like to play and have fun with. So as you know and it works okay if you're insulated from competition but [indiscernible] we have a competitor across the bridge in southern Indiana, the Horseshoe which is actually a very formidable competitor that knows what they're doing. So we've been following it very closely at the same time we’ve been watching what the legislature is going to do, legislature is very unlikely to pass gaming anytime in the near future. They've been very clear about this and that makes our decision about how to proceed a little bit easier in that perspective. I would say that - that kind of leaves us with two choices one is we can do nothing and continue to push for casino gaming which we know is not going to happen any time in near future or we can build a better HRM machine that can better complete with Class 3 Gaming over in Southern Indiana. So really that's where our whole focus has been on the last few months is how do we make a better product and beyond that I can’t really say much more.

Right so in other words you're engaged in developing these machine?

We are working towards figuring out if we can make a better product and can’t say that we're there yet or not, but yeah that's the goal.

It isn't the sort of primary larger gaming machine manufacturers that are offering this, it's one or two one-off entities that are supplying what's in the market today?

That is correct on what is in the market today.

And just to be clear in understanding what the product is, it's a pair mutual racing based algorithm that is you know driving a sort of slot like experience?

Correct, you know in a class III game you have a random number generator that determines kind of the outcome of the game. In an historical racing machine you're using races that have actually been ran in the past to determine the outcome of the game. And you have the ability to handicap that race from the game itself as well.

The games that are in the field at other locations now are they currently being taxed by the state of Kentucky?

Yes, they're taxed at 1.5% of handle, so it's based on coin-in and not revenue.

My question is really and this was all stuff that was discussed in the article that I read, if the state is capturing tax revenue from them, is that not blessing them as a legal machine, right? I mean they certainly, right - or could they be capturing tax revenue for machines which are not firmly legal?

Yes, they are legal in the state, we actually went all the way to Supreme Court and said, hey is this, does the horseracing commission have the authority to regulate this activity. Supreme Court said yes, it does not contravene statutes that are on the books. So the only challenge right now of course is whether or not they are pair mutual machines or not which the Supreme Court didn't - they didn't digest and get into, they had confirmation on it, didn't even look at it. So they just said hey, you guys can go back and look at this piece of it, the rest of it were okay with. At the same time, the legislature did pass an actual bill that taxes this activity. But they did not necessarily pass the bill saying you have do it, but they it’s not required. And by the - I’m sorry, that’s Kentucky Supreme Court and not the US Supreme Court.

And our next question comes from Dan Politzer with JP Morgan. Your line is open.

Could you give just a broad update on your capital allocation strategy given the balance sheet. I know you guys repurchased some TIs in the quarter. So, I mean, how do you think about broadly investing in stock versus kind of saving the dry powder for acquisitions.

Dan, I'll start and Bill can jump in here. As Bill and I both mentioned in our script today, with a 2.6 times leverage we have a lot of capacity to take advantage of opportunities that might come up related to strategic acquisitions or investments. As Bill was just talking about potential development and investment around instant racing or to take advantage of investments around future expansions related to the Kentucky Derby. We have a lot of opportunity to make sanctions as I mentioned in my discussion around the properties that we are acquiring around Churchill Downs race track and the expansion opportunities there that will help us grow that iconic event over the long term. Having a 2.6 times leverage that gives us a lot of opportunity and along with that we’ve had a very consistent dividend strategy over time and then opportunistically we are in the market buying back shares when we find it appropriate to do that versus other opportunities that are in the hopper at that point in time.

Yeah, and maybe if I could just add to that Marcia, if you look at the growth pattern of a company over a number of years, we've grown pretty consistently and over a long period of time and the company's changed a lot and gotten a lot bigger and we've done that without ultimately ever compromising our balance sheet, but it is the case that when there are big [Technical Difficulty] ruling project use our balance sheet in order to pay for that project in order to put us in a position to grow our company. So we've proven in the past we're willing to do that, that will continue to be the case. But we also want to be disciplined about our balance sheets so that we're best positioned long term to take advantage of new opportunities and to manage through tougher times if we run into them. So I think we are trying to be clear I agree this is always of puzzle on where to devote your capital what's the best utilization of your capital and sometimes opportunities and things that do come in bunches but it's something that not only is a management team but with a board we talk a lot about increasingly we talk about it. So philosophic we don't want to leverage up unless there's really good reasons to leverage up, we want to keep our powder dry, but we look at everything organic growth, M&A growth, returns capital to our shareholders, we look at the entire puzzle and try to piece it together based on the environment that we're in.

And I just turned to Big Fish, I mean you kind of mentioned bookings, [indiscernible] bottom line but I guess how should we be thinking about EBITDA or margin for 2017 relative to the deceleration in bookings.

We try to give guidance without or give general health to understand where our heads out without giving specific guidance for the company we haven't generally been doing that. But here's the thing we care a lot about margins going forward, we are an adjusted EBITDA and EBITDA company, so we care about managing and building our business to the bottom line. And the larger point I was trying to make in some of my comments and they were echoed by Marcia, in some cases she was more specific than I was, the larger point I was trying to make is, yes there is generally and definitely a correlation long term to long term profitability time to booking, but with all the noise that's gone along with Big Fish over the last couple of years that's not really necessarily the case right now, you don't want to manage the company to bookings, you want to manage it to profitable growth. So when you focus on EBITDA, when you focus on margins, long term that’s our mindset. If there is a reason to return to rapid growth of bookings it'll be because we have a game that has demonstrated metrics to support it, but otherwise we have a very sort of keen eye on managing to the bottom line and just because there are changes in our booking that doesn't mean that there are corresponding or consistent changes to our EBITDA. And I don't really want to be and don't feel like I should be more specific than that at this point.

I mean as far as the leasing of new games, is there any change of a cadence, I mean those will be more backend of the year, evenly weighted or you know when you think you’re going to release those.

That's a really good question and it's one I've had over the time that we've been involved with social games. You can have a cadence but the bottom line is a big part of the process is the soft release portion of the process when we release the games into other English speaking markets and really to refine them and to get the economies right before we push hard inside the North American market where you don't necessarily get a chance to fix your mistakes. So the soft launch process is an interim process that can take long but it’s little bit harder to predict. So we definitely have not generally comment about when we’re going to sort of put out a worldwide releases of games because the soft last portion of the process isn't completely - possible to reduce that to a specific process in a specific timeframe. I would say generally our more promising games are a little bit back loaded this year as opposed to front loaded this year, but all of them existing in the system and being worked on, they will happen, it's just as we work through the soft launch portion of the process in the economy, we're not sure how long some of that will take each game. But these are just figured out these are games that exist that have been worked on for quite a while.

And our next question comes from Adam Trivison with Gabelli & Company. Your line is open.

First regarding Big Fish, can you provide some color on the dynamics underlying Big Fish user and bookings per user figures within the casino segment? I guess anything you'd call out in terms of retention trends or maybe the change in UA focus more towards the casino segment and also increasingly toward some of the newer casino platforms.

Adam, this is Marcia, I will take that question. When you look at and I do want to make a correction related to our press release, our average paying users for social casino for the total year were actually up 6% and the average bookings for paying user were down 11%, we had those numbers incorrect, we had them correct for the fourth quarter but incorrect for the total year. What's happening there as you remember, we launched Jackpot City slots in July timeframe of 2016. And so you saw the increase in the number average paying users, but as we launched Jackpot City slot, the average bookings for paying user for that game are lower than they are for our existing Social Casino game and so that is pulling down the average bookings per paying user for our total Social Casino segment slightly for the year in 2016. So we would anticipate that that trend will continue, but hopefully not to that level as we go forward.

The lower bookings per user with Jackpot City is that kind of intrinsic to the game or is that something you see improved as a game becomes more seasoned.

I think time will tell, but here is our operating assumption having a pretty deep experience base in the Social Casino genre or through our flagship Big Fish casino. You build good players over time, the day you acquire them in terms of your best players, they day you acquire them is not when they're at their best, they build into the game over time and their economic activity grows over time and they become attorneys sometimes here, they become whale. Whales don't start out as whales, they are grown into whales. So when you launch a new product even within the Social Casino space like Jackpot City slot, you have to expect that you're early customers in the game are not going to be performing at the same economic level as they are later on in the game when they're more comfortable with it where it’s become more of a pattern a part of their game playing and they spend more. So you wouldn't expect your average revenues per user in a new product like Jackpot City to be approaching what you see in a more mature product like Big Fish Casino.

And then I guess, the follow up just trying to get a sense for how much UA spend is necessary to get stabilized casino in the Match Three games. Would you say I guess you said at least for the free-to-play segment fourth quarter bookings were kind of at a run rate you’d expect going forward, would you say UA spend, how would you relate the fourth quarter UA spend to maybe how you plan to spend in the future.

It goes game by game, but I would say, I tried to highlight in my comments that I think we under spend on casino and I think the metrics say we should be spending more. Now that's what our metrics say, once we start doing it, sometimes it doesn’t work out that way, but based on the data and based on what we see, we think we under spend in 2016 so that we should consequently we should and are now exploring more spending and that doesn't mean that that will continue and I'm not promising that's what will be happening. I don't want to make long-term predictions because it'll depend on the data, but we think the data that we should have been spending more in the casino space because that's a better investment that's a good return for our company. When it comes to Big Fish, one of the themes I covered in my comments was that product is maturing, so our ability to efficiently reach new customers who become good customers of the Gummy Drop! product, that's declining a bit right now because Gummy Drop! has been out there, it’s a known commodity, it’s an understood game, a lot of potential customers out there have seen it or heard about it, so it gets a little more expensive to reach them, so we dial back UA spend on Gummy Drop! and that's the responsible thing to do and if we come up with new features and functionality that reverse the trends and that's fine. But it doesn't mean the customers in the game are leaving in mass, it just means the ability to economically efficiently acquire new customers is changing and it is getting to be a tougher equation to balance. So [indiscernible] don't spend as much as we had.

[Operator Instructions] And I’m showing no further questions, I’d now like to turn the call back to CEO, Bill Carstanjen for any further remarks.

Thank you I appreciate everybody's time today on the call. I appreciate your interest in our company. I appreciate your investment in the company, we’ll try to do the right thing with your capital and we'll talk to you next time and again, thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect, everyone have a great day.