Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2017 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury and Investor Relations.

Thank you, Michelle. Good morning, and welcome to our second quarter 2017 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2017 second quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period 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 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, Nick. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. I'll make a few general comments and then turn this over to Marcia. After she is finished with her comments, Marcia, Bill Mudd and I will be happy to take your questions. The company produced record net revenues, adjusted EBITDA and net income for the quarter. While the increases in adjusted EBITDA and these other metrics were significantly driven by another strong Kentucky Derby and by the performance of our Casino segment, all of our segments including Big Fish and TwinSpires were up. I am encouraged by the signs of operational strength across all of our businesses. Let's start the discussion with the Racing segment, given that Kentucky Derby week is the biggest single driver of our company's performance in the second quarter. Despite the truly miserable weather on Oak day and Derby day we had a fantastic Kentucky Derby week. Adjusted EBITDA for the Racing segment increased $7.4 million from the prior year, driven by a $6.5 million increase at Churchill Down's racetrack, $4.8 million of which was a result of Kentucky Derby week. This year's Kentucky Derby set records for among other things net revenues, adjusted EBITDA and all sources wagering for the race, the entire Derby day as well as for the full week. In addition, the 2017 Kentucky Derby delivered the largest medium audience since 1989, peeking it over 19 million viewers and making it the most watched Saturday afternoon television program since the NFC divisional playoffs in the second week of January. We did not however, set any attendance marks on Oaks day or Derby day this year given the…

Thanks, Bill, and good morning, everyone. First, I will provide some high-level comments on our overall results and then I will provide some additional highlights for each of our segments. I'll close with some additional insight on our cash flow for the quarter and our share repurchases. Starting with our overall results, net revenue was $451.9 million for the second quarter, up $13.4 million or 3.1% compared to the prior year quarter. Adjusted EBITDA for the second quarter was $173 million, reflecting a $12.8 million or 8% increase over the prior year quarter. Net income was $78.3 million in the second quarter, up $8.5 million compared to the prior year quarter. We also delivered diluted net income of $4.81 per share, up from $4.11 per share in second quarter 2016. Turning to our segments; our Racing segment has $7.4 million or 8.1% increase in adjusted EBITDA compared to the prior year quarter. As Bill discussed, we had a successful Kentucky Derby week, that despite rainy weather conditions, contributed $4.8 million of this increase. We also had a strong Spring meet at Churchill Downs outside of Derby week with attendance up 10% and handle up 6.9% compared to the prior year. Arlington racetrack also had solid growth in the second quarter compared to the prior year. Adjusted EBITDA for the Casino segment was up $4.2 million, or 12.6% compared to the prior year quarter. We benefited from the addition of our Ocean Downs equity investments and our Saratoga and Miami Valley Gaming equity investments delivered strong growth in the quarter compared to last year. Our Oxford and Calder casinos also delivered strong top line growth in the quarter as a result of increased marketing and promotional efforts, that along with the growth from our equity investments, helped to more than offset…

Thank you, Marcia. Okay, everyone, we're ready to take some questions if you have any for us. Fire away.

[Operator Instructions] Our first question comes from Dan Politzer of JPMorgan. Your line is open.

Hey guys, thanks for taking my question. I guess let's start with TwinSpires, can you -- as far as the margin, could you guys just walk us through the cost and kind of the long-term viability for margin expansion here?

Dan, why don't I start? This is Marcia and then Bill may want to join in as well. I think when you look at second quarter what you need to think about is you need to back out the impact on the margins in the Pennsylvania tax that did not reoccur, that occurred in 2016. That did not reoccur in 2017. You need to factor that in from a comparison perspective. And then really, as you think about second quarter this year, there was a more significant amount of marketing spend related to marketing around the Derby to attract new players, new unique players to TwinSpires, that we anticipate we will recoup this marketing dollars over the coming months. And so you do see, in our financials an uptick in the marketing dollars for the quarter and that obviously impacted the margin but that should come back in future quarters.

Got it. Okay, and then for the historical horseracing. I guess, you're planning the one facility. But do you think that there is potential for additional facilities? And what would be necessary in order to achieve that? Is there a regulatory, something granted on the regulatory side or what?

I think that -- it's Bill Carstanjen. I think that's a really interesting and fair question, but at this point we don't really have anything else, we can add to our discussion on historical racing machine. And certainly, we put a lot of energy, time, creative thinking in to how to develop a product and how to develop a facility, and we'd love to apply that more than one time. But other than an aspiration -- other than confirming that we would have that inspiration, there isn't anything else specifically we can offer at this point.

Okay, and just one final, kind of, high-level question, I'm sure you guys are seeing across the interactive landscape, the social casino landscape, what some other stocks have been doing. And what transactions have gone for, so it seems like you guy are pivoting back to just focusing on social casino and obviously the metrics are encouraging for Cooking Craze, but I guess what's your long-term strategy envisioned for the Big Fish business?

That's a broad question. So I'm going to start talking and if you want more specificity just jump in and steer me in the right direction. I would say that, starting with the social casino segment the online space game space, it's an evergreen. It has some stability and yet at the same time continues as a segment across that industry to show growth. So we have refined our strategy over that -- with respect to that over the last three years because we realized we needed to continue to focus heavily on it because it's a market or a segment of the market where there is opportunity, long term for stability and continued growth. So that's really a foundation for us. That's an important foundation and we hope we continue to see it as a profitable and sustainable foundation. We think the Big Fish business in that respect is special. When it comes to some of the other segments, there is some really attractive markets in there and we played in those. We've demonstrated that we can create casual games in the mastery and other genres that are sustainable and profitable and we have a mechanism to take lots of swings and can do so on a cost-effective and low cost basis. And so we'll continue to play in that space, which is a series of different sub-segments of types of games and we leverage our third-party developer network in order to take shots across a variety of genres within the casual segment. So you'll see us continue to do that. We've already demonstrated we can do that successfully and it looks like with Cooking Craze we may be off to a very good start on doing it again. The mid-core segment is one that's very, very large, as demonstrated if you look at the top grossing charts. That's one where we think our team has developed capabilities and expertise and so we'll continue to rely on the strength of our foundation and some of the areas where we have already demonstrated success to give us the flexibility and some of the expertise to take shots here and there at the mid-core but we will always do that sort of wisely and at a sensible pace because it's not a segment that we have deep, deep experience in yet. So generally, backing up or pulling back the 35,000 feet, we rely on the foundation of our social casino business to give us the flexibility to take smart bets across other genres within the social game space.

Got it. Thanks so much, Bill.

Our next question comes from David Katz of Telsey Group. Your line is open.

Hi, good morning everyone.

Good morning, David.

Good morning. And if I will apologize at the outset, as I'm sort of going back and forth between two calls at one, and I'll admit that I didn't hear every word you said so far. But if I can just follow up that previous question, I suppose the specific question is, based on the investment on the acquisition so far, irrespective of the ongoing operating expenses to ramp it up, are you all comfortable that it can get to what you would consider to be a reasonable return on that investment, within your operating grasp and control? Whether the trajectory is longer or shorter is, I suppose, an issue we can discuss, but are you still comfortable right if all in, you paid what you paid, that you can get to a level that is an appropriate return?

Well, the short answer to that is yes. This business already throws off really good cash flow. We continue to monetize this business, and we've got a good strategy for continuing to grow it and our team is very strong. Our business processes are very strong. We keep making corrections and improvements in how we run the business and our team keeps getting better and better. So in my opinion we have a very high degree of confidence that we're on the right path and we will demonstrate a very effective return for our investors over time with that asset.

Right. My second question, and again if you addressed this, I'll apologize. But since we last had an earnings call, there is some change within your ownership and Board base, and as of last night in addition to the Board, which is I think we have to admit is directionally different from what we have seen, I think, on your Board before. How should we take this information of these two events, given the Duchossois family has been involved for very long time and been committed for very long time and that appears to be moving in a direction. What are your thoughts around all that?

I'm going to start with the Duchossois family comment that you just made. It seems like that's where we ended up. You may want me to also taking in a different direction and I'll do so. But help me on the first part of your last question. With respect to the Duchossois Group, they have sold down twice over last number of years. They are a fantastic shareholder, a fantastic long-term stable shareholder. They've commented in the past about estate planning and family planning issues and they are still a very material shareholder in our company at around 8%, and a very committed and I'd say supportive and informed shareholders. So they have been a pleasure to deal with, an important part of our journey, over the last 20 years, which certainly perceived my time in the company. I have been in the company for 12 or 13 years. So tremendous shareholders, large family investments considerations on their part. They have to make choices that make sense across their portfolio of investments and assets. So we'll continue to work them as a large shareholder in our company and it's been a pleasure to do so. Did you want to ask something about Board as well, Dave? And I -- maybe

Well, yes.

Maybe something with their company and I'm happy to comment on it. Help me with that question I'm happy to comment on it.

Sure, you've added and incremental board member. How did you think about what your-- what kind of sort of needs, experiences or perspectives you wanted to bring and I don't mean you specifically but the company wanted to bring to the Board in making that selection?

That's a really fair question and it's a good question. I can offer one perspective, but of course, we have a nominating and governance committee of our Board as well as the input of the full board in making a determination of who comes on the board and what skillsets we look for. But I think in the case of Doug, his broad, broad experience over more than a couple of decades in strategy work, in technology, in software, in transactions, his finger on the pulse of the modern M&A environment. That's all extremely helpful to our company, an important skillset for us to have on our board as well as in our management team because if you look at our company over the last decade or so. We've relied in part on acquisitions and careful strategy work in order to build the company that we've built over the last decade plus, because you've seen us make a lot of changes. You've seen us go from solely a brick-and-mortar horseracing company to a company that's has got a large brick-and-mortar casino business, that has a large online business with TwinSpires, that's reduced its exposure to brick-and-mortar horseracing and also it has this large social games business with the number of components within it called Big Fish. So our company has been fairly dynamic over the last decade plus, we hope to continue to be dynamic, we know we need to be -- continue to be dynamic and thoughtful and aware of our environment. So with a dynamic company, with a growing company, you need to make sure that you understand a lot about your markets in addition to your own participation in those. So Doug helps us, gives us a frame of reference and an experience base, that's a nice add to our team.

Got it, and if I can just one more detail about Big Fish. What have you said about strategic spending or kind of investment spending for future periods in terms of recent game launches. Is there some in that 18 point -- sorry that was my estimate -- your $18 million or so of EBITDA for the quarter. Is there some embedded acquisition spending that we're going to see the fruits of in the future.

David, what we said is that when you look at our trends from a UA spend from first quarter to second quarter, you can see Bill and I both talked about the fact that we invested $3.5 million more in UA spending casino in second quarter than we did in first quarter. And obviously, that supports continued growth in our social casino various games. We also said, from first quarter to second quarter Free-to-Play Casual, UA investment was relatively flat and so the only caveat there is that Cooking Craze launched at the end of June, we got a lot of the free featuring in the App Store and Google and Amazon that really helped the initial growth. We are spending some money on Cooking Craze, but in my comments I included a discussion about the fact that we're being very careful and thoughtful to make sure that we keep the metrics and we're watching the long-term metrics around the Cooking Craze game to make sure that it's achieving our long-term retention targets and our long-term return targets but that game is forming very well. We have almost a million daily average users playing that game and it's performing very well. Bill, talked about the bookings being almost $140,000 a day already on that game in less than 30 days. So that game is performing actually better than Gummy Drop! did during the same timeframe. And I also talked about the fact that in second quarter, social casino actually hit its highest level of bookings ever in its history. So we do -- we remain committed to continuing to support the growth in the social casino segment, continuing to invest in our Jackpot Magic Slots, game in particular, as well as our Big Fish Casino app. And then selectively investing in the Free-to-Play Casual games that we're committed to. We talked about Solitaire, Gummy Drop! and then obviously, Cooking Craze coming here. And then Bill also talked a little bit about the fact that we have a game in the mid-core space that is targeted to come out later this year, but that would have very limited UA spend associated with towards the end of the year. So overall we're pretty excited about where Big Fish is positioned at this point.

Got it, and just last one if I may, I think, we have lively debate and discussion with investors about -- and with you frankly, about the sort of portfolio of assets that the company owns and whether or not there are bids for them at high multiples, and sort of the highest and best use of the assets within your portfolio. And whether those bids are appropriate to consider or not. Since we last spoke a quarter ago, do you have any updated views about the M&A market and any inbound interest on any of the assets within the portfolio and their current highest and best use within Churchill Downs?

David, that's an impossible question to really answer in a public company context. But I'm -- nevertheless, I am going to try to answer it the best that I can. On a daily basis, we work with our teams across our businesses to run these businesses in the best manner that we possibly can. We try to learn from everybody else out there in terms of what they are doing so that we can borrow from them best practices that we think they might be doing better than us and we try to improve on what we think we might be doing better than them. So on a day-to-day basis that's what we spend our time mostly focused on. We also have a responsibility to our Board and to our shareholder base at large, to always have our businesses placed in the context of a larger market and we work for the shareholders of this company. So we always have our eyes opened, we are always thoughtful about whether we're growing through acquisitions or not and what the competitive market and the long-term strategies for each of our businesses are. So that's an obligation that we have. We know who we work for. We always remember that. So we never lose sight of those obligations and we always try to be thoughtful about what's best for our shareholders, what's best for our businesses and our employees long term. So that's what we -- in essence having answers to the questions that you just asked really I think is what our job is and the C suite in particular and for our Board. So yes, we do focus on it, we do care about it a great deal. And on the other hand, paradoxically it's not something that we can discuss at great length in a public environment.

I understand. I appreciate the answer and your stock with certainly provide support for being a good answer. Thank you for taking my questions.

Our next question comes from Adam Trivison of Gabelli & Company.

Hi, thanks for taking my questions. First up on the TwinSpires margin, are the cost savings from move to Louisville fully reflected in the results and if not, how should we think about that going forward?

I would take that call. When you think about our numbers for TwinSpires, the transition has really occurred, the people have come back. So the -- some of the severance costs that would have been incurred that -- has already been sort of flushed through the system below adjusted EBITDA prior to this quarter. We are spending some money on recruiting additional people to support the growth of the company and obviously, they build-out of the additional space here in Louisville that's really leasehold improvement. So there's no real additional cost here that you're not seeing already in the P&L.

Okay, what about...

We do have about 15 positions. They were still -- that were good portion of those positions are under development team which that cost to be capitalized. And the way to think about it is, it's really to expand the team, to accelerate our growth and accelerate the number of features and appearances and our ability to compete within that space. And that's really what we're doing, is taking some of that savings and plowing it back into accelerating our ability to grow that product.

Okay that makes sense. And then on Big Fish, can you just help us think about how the Premium vertical maybe dragging on the full segment EBITDA? I guess said another way, give us a sense for detrimental margins there and I know you are kind of going back to and renegotiating some contracts, but just, how should we think about that?

Yeah, I'll take that one and Bill may want to jump back in. The Premium segment is actually a relatively higher-margin segment for the Big Fish team. When you think about it -- I've discussed in the past that there's a very little UA spend regarding that particular business, but we're really pleased with the Big Fish team. What they've done is -- with the challenges around, the transition of premium PC to mobile and the declining sort of top line pressure that they've had, and they worked and went out and renegotiated all of their contracts and have effectively got that taken care so that they can get additional savings that are going to kick in later this year, as well that will incrementally hit next year, that will help them hold their margin as that business continues to sort of decline. But what's also exciting is, as Bill mentioned in his conversation and discussion is that they have also worked with Apple to build out this mobile subscription business, where they're able to use some of the titles that they currently have and be able to -- and are working to port this over and offer a subscription service in a mobile capacity that they believe will be very interesting for people -- who similar to like a Netflix to other type of subscription services, there are who people will be interested in obtaining games in a mobile environment through a subscription service and that should come out later this year towards the end of this year.

Okay, and then I guess one last little detail, have you guys quantified the effect of weather on the Derby or were they significant or...?

Yes, this is Bill. I think when you look at the performance this year, our handle I think was a record, was over $200 million this year on Derby day, 8% above our prior record. In terms of the effect there is probably -- you can look at the attendance was down about 5%. That's largely going to be for the general admission patron, which is $75 a ticket on that day. So if you figure 10,000 people will up you can figure out what the impact of that was and I wouldn't say, it was real big from an economic perspective.

Okay, great. Well thank you very much.

There are no further questions. I'd like to turn the call back over to Bill Carstanjen for any closing remarks.

Thank you. Everybody thank you for your time. We appreciate your time this morning. Thank you for our interest -- your interest in our company. We'll do our best to be good stewards of your investments and we'll talk to you soon. Thank you.

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.