Good morning, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2017 Fourth Quarter and Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury and Investor Relations.

Thank you, Glenda. Good morning and welcome to our fourth quarter and year-end 2017 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2017 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 churchhilldownsincorporated.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-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 churchhilldownsincorporated.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 Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. Bill Mudd, our President and Chief Operating Officer is traveling and unable to join us this morning. We had a productive 2017 and I am proud of what our management team accomplished especially in the second half of the year. Here are few of the accomplishments. We had a record setting Kentucky Derby Day and Kentucky Derby week with respect virtually all of our significant financial metrics despite poor weather on both Oaks and Derby day. Our market leading TwinSpires team outpaced the industry’s growth by 15 percentage points and all of our wholly owned Casino properties grew market share and our equity investments in Miami Valley Gaming and Saratoga along with our new equity investment in Ocean Downs provided significant growth in adjusted EBITDA. With that we also accomplished three significant strategic objectives. We announced the sale of Big Fish in November, we refinanced all of our debt and in January we launched a $500 million share repurchase via a tender offer utilizing a portion of the proceeds from the sale of Big Fish.\ We accomplished all of these initiatives while returning approximately $212 million to shareholders through dividends and share repurchases in 2017 in addition to the $500 million share in early 2018. I will provide some insight into why we undertook these three strategic initiatives to reposition the company, then I will walk through some of the 2017 performance highlights and our positioning for growth for each of our core businesses. I will also comment on the transactions we announced late yesterday to acquire Presque Isle Downs & Casino and Lady Luck Vicksburg. Marcia will then provide additional details on…

Thanks Bill and good morning everyone. As Bill said, I will provide additional details on the three steps that we took to strategically reposition the company in the fourth quarter. After that, I will provide some details on our fourth quarter earnings and help you understand how to think about our core earnings and capital management going forward. I’ll start with the details on the three steps we took to strategically reposition the company. The first step was the sale of Big Fish on January 9, 2018. As you look at our financials for yearend 2017, please be sure to notice the following. Since we sold Big Fish, we have classified Big Fish in discontinued operations and have excluded its results from GAAP net revenue and operating income. Adjusted EBITDA, net income, diluted earnings per share and the statement of cash flows include the Big Fish results. Also, please note that the Big Fish results and discontinued operations and in the segment foot note for 2017 exclude the corporate allocations that we have historically made to this segment. These corporate allocations are now included in the corporate segment for current and historical periods. As Bill mentioned, we are projecting the after tax net proceeds from the Big Fish sale to be $930 million, which reflects a 24.5% tax on the $222 million estimated tax gain on sale. The after tax book gain which will be reflected in our first quarter 2018 financials will be approximately $165 million. The second step that Bill discussed was the refinancing of our debt in December. We replaced our existing credit facility and the existing Term Loan A with a new $700 million senior secured five-year revolving credit facility with a lower pricing grid than we had previously based on LIBOR, plus a spread that’s…

Thank you, Marcia. Nick, I think we are ready for questions if we want to open it up to the audience.

[Operator Instructions] And our first question comes from the line of Dan Politzer from JPMorgan. Your line is now open.

Hey guys, thanks for taking my question. So you spent a good time, a good amount of time talking about the strategic repositioning with the Big Fish, the refinancing and the tender offer. I guess as far as the opportunities from here, could you get some further color on where we go and what your priorities are for your free cash flow?

Dan, sure it’s Bill. I’m happy to do that. First, we still see a very strong future for the Kentucky Derby, so the growth projects that we have in mind for that, we will execute on and the ones we’ve done in the recent past has only reinforced our confidence and continuing to make those investments. I think TwinSpires, that’s an organic growth story for now. I think there are some very modest projects to improve the platform but not big capital expenditure projects, so that’s more than organic growth story in the near term. I think the Greenfields that we talked about within the casino space, the Louisville facility perhaps some other HRM facilities if we can make those happen in Kentucky, I think those are priorities for us. So I think to understand our company and to think about it, you ought to always break it down now into the three main segments that we have. Racing really led by the Kentucky Derby, TwinSpires and in the casino side. The casino opportunities, we have our own Greenfields, but also we continue to in a very disciplined and I think consistent way look beyond the organic opportunities at the M&A markets and if we find him, we go after him and if we don’t, we don’t, we don’t need to do those things. And then I think, we are also pretty excited about developments in the iGaming front, you know real money gaming. I think Pennsylvania has a really interesting opportunity for us with our long experience in TwinSpires. We've always been very interested in applying that experience to new markets. I think I-Gaming Pennsylvania in particular will be one where you see us act on, but I don't think those are big expenditures from a capital perspective.

Got it. So, if you had a kind of ranking file, returning capital of the shareholders, building up some dry powder for further M&A, or you know, maybe I don’t think deleveraging is really is priority. I guess how do you kind of think about the…?

Sure. We’re fortunate with the free cash flow that we generate that we haven’t had to make short-term choices that are not good for us overall long-term because of insufficient capital. We've had the capital to do what we see fit. So first and foremost, it's about reinvesting in our business where we see growth that will be accretive to our shareholders. First and foremost that’s what we look at. Given the strength of our free cash flow and the efficiency of our debt structure, we’ve proven it in the recent past, particularly 2017, but sometimes we've got plenty of capital to return to shareholders and we will do that. So we’ve been able to do both of those things. But first we look at how do we most effectively grow our company and create the greatest return for our shareholders. We do that first. And we've been fortunate enough to have the opportunity to also be able to return capital directly to our shareholders through dividends and through share repurchases. So I don't think those two things are mutually exclusive. I think we've demonstrated we can do both and we’ll see what the future holds for us.

Got it. That makes sense. And then just on the acquisition, can you talk a little bit about these assets and what kind of shape they’re in if there’s deferred CapEx or anything like that there? And I guess how should we think about free cash flow there given you called out some tax benefits from that acquisition?

Yes. I’ll start on this and then I think Marcia, you may want to jump in on some of the two. Both properties fit our – one of our filters, we have several filters and that is they are not capital starved with a great deal of deferred maintenance and deferred capital investment. Both properties at Presque Isle are in relatively good shape. So when I look at – we’ll start Vicksburg, the smaller one first. That one is directly adjacent to a property. We share our parking lots. Clearly our customers flow back and forth between the two properties. So that’s one where we think we can show some margin improvement, run it efficiently. I don't think it's a heavy capital reinvestment play at all. I don't think that's required. I think there is just some efficiencies of operations we can derive and some logic to holding that property as I said it’s directly adjacent to ours. Presque Isle, I always like that property since it opened in 2007. I had had been up there many times since then. We understand that property. That property does a lot of racing. It does 100 days of racing a year. We understand that kind of racing that it does. It's in very good shape. We’re very pleased with the state of the property. While there be improvements or changes in new machines here and there perhaps. It’s generally a property in really good shape and we feel pretty good about it. That's not a margin play. There might be things we can do here and there, but El Dorado I think is a very good operator that was operating that property very very well. For us that property is something that we’re excited about because we think we can run it just as well maybe find a little upside here and there in racing or a small opportunities. But the larger play is, it's important for our company strategically to start participating in the online gaming piece. In Pennsylvania with its 13 million people, relatively progressive, gaming infrastructure and gaming regulatory process, we think that’s a place where for now and for the long term we need to go build our I-Gaming capabilities. Marcia could you to comment on the tax piece?

Yes. And then, Dan, also as you’re aware our corporate tax rate has gone from 35% down to 21%. So when you just simply looking at a multiple of EBITDA that you really don't pick up that value that’s created also from that reduction in our tax rate. And then also just from the capital investment we also see the benefits from the Tax Reform Act coming through around the option to immediately expense any non-real property, capital investments that we make as well into our properties, since then we view that a benefit as well going forward.

Got it. And just one last one, you know obviously you had a pretty large board reshuffle, three members have been in the board and we have been 10 or 20 years coming off. And last year you had [Indiscernible]. So, how should we think about these moves in conjunction with how you’re repositioning the company? It seems like there’s obviously been a lot going on and I guess how should we think about this going forward along with that new forward?

Really good question, a really fair question, I think the three board members who are not standing for reelection are -- have been over a long period of time heavy hitters on our board, really important board members, really active, really influential board members, but they’ve been on the board for a long time and they’ve a long a long run. I think all of them share a deep commitment to the company and wanting to see what's best for the company. And as a company as we look forward you see us adding board members to with Doug Grissom and in his private equity and strategic skill set. Karole Lloyd hopefully will be voted on by the shareholders with her extensive public company expertise. So, we’re a company that I think is continuing to evolve. We've come a long way over the last number of years and we’re continuing to evolve, and I think the board process is part of that. I think people -- they have their run. They make their contribution and they feel like it's time for the next generation to keep the energy and keep the excitement and keep the momentum going. So I think generally our board is getting a little smaller than it has been historically. But I think some of this also is just timing where there is a generation of board members that the came on and as the years go by some of them are reaching their retirement age and otherwise we’re just as a company moving along with our operating businesses towards a slightly different configuration that’s only healthy, only a sign of strength and a sign of our board’s -- our current board’s commitment to making sure it hasn’t in place for the future the right types of people with the right level of energy and the right commitment to do the work going forward. And it’s hard to answer more specifically than that, but hopefully that gives you at least a philosophical perspective of how our board members and how our management team thinks about how we’re revolving.

Yes. I think that really helps to connect the dots between everything. Thanks so much, guys. Appreciate it.

Sure, Dan.

Thank you. And our next question comes from the line of David Katz from Jefferies. Your line is now open.

Hi. Good morning, everyone.

Hi, David.

Hi. I wanted to just ask about specifically TwinSpires. And I recall that some of its evolution was around the acquisition of Youbet, which at the time might -- if my memory serves was a platform that was well-suited for sports betting and other kinds of account wagering applications. Can you talk about how you -- how much you may have thought about that concept and what would need to be done to TwinSpires to apply it in a sports betting environment? And I know we have a fair amount of uncertainties around what could happens sports betting wise on a state-by-state basis. But whatever thoughts you have around the opportunity for that and how you’re thinking about that would be helpful?

Sure, David. Let me get started on that very meaty subject. Being in the ADW space for 10 plus years now through acquisitions of platforms like Youbet and through a whole bunch of organic growth, we’ve paid a lot of attention over time to the evolution of online gaming both here, the sports wagering as well both here and primarily overseas. So I think as the years have gone by our thoughts on that have changed. When I think about it now there's been so much development say in New Jersey and Overseas, I would say right now I don't really look at TwinSpires as the platform itself from which to conduct I-Gaming, I think that's partially explains some of the write-offs we did last quarter. It's time to look at the very best technology that's out there and look at the evolution both here and overseas of that space. And you see some very, very capable, credible B2B businesses that really provide the infrastructure backbone, bonus system, wallet, interface with content providers. You see some very credible third-party B2B businesses which I think are more economically efficient for company like ours as we look at a market by market sort of stutter step entry I-Gaming based on markets as they open up. So I see the team that we have incredibly capable, very sophisticated. We have a number of personnel in our shop that come out of the European markets. So in terms of understanding marketing, understanding the mindset of the customers, understanding bonus infrastructure and how to operate a platform, I like our team for doing that. But when it comes to the technology I think that is best suited to maximize your competitive positioning. I think at this point in our company not having -- have the opportunity over the last number years to directly do online real money gaming, we’re more interested at this point in looking at some of the B2B solutions which I think allow us and favor us to have a more cost-effective entry into the space. But David, that was more than you expected to hear, but I’m comfortable going ahead and covering that on this call.

No. Not at all. In fact I wanted to follow that up, because I wonder how much work or substance of work you may have done around the size of the opportunity for sports betting. It's certainly a lively debate and little more than that at this stage, right, but estimates in terms of the wagering in the U.S., that opportunity we certainly read estimates that are in the hundreds of billions of dollars, right. But can you sort of bring that home to what you think a business opportunity could be for you all?

Yes. I don’t want to use numbers, because I think the General Counsel is within range of kicking me in the shins and I don’t need to be kicked in the shins. I think we need to be sort of careful and cautious about making up numbers or repeating numbers that others have said. But I would say that we have a perspective on the value of different states impart based on our TwinSpires footprint and the differences in activities we see across different states based on that business. But also we paid a lot of attention to the size and behavior of different European markets to try to use those as proxies to what we think can be the U.S. market. I think the U.S. markets probably will always underperform some of those direct European comparisons for the following reasons; one it would be new activity for the consumer base in the country to adapt to. So they’ll take some familiarity. And I think you might think some of that New Jersey as it ramps up slowly. Secondly, you have to look at the impact of tax rate and how that affects marketing and bonus thing. And you have to look at the regulatory infrastructure and what kind of impediment that imposes on. How the market would otherwise develop on its own. So I think on it on a call like this I wouldn’t comfortable in using any numbers, but I look at states like New Jersey which we’re not in and I look at states like Pennsylvania which if everything goes according to plan we are able to close our acquisition which we expect to we will be in. I start with the population size and the wealth demographics of the population and then use to look to the European markets to serve as analogies of what we can expect and how much we should spend and invest to start taking advantage of the opportunity.

Certainly big enough for you to put some thought and resources into it. It is a fair answer. Correct?

Yes. Quite a bit, I mean, we’ve been excited about this for a while. It's been a process of watching to see how the country would develop then it looks like what we’re seeing now is a state-by-state approach, which is fine. A federal approach would open up the opportunity all at once. But that's not what's happening in the United States. Instead it's going state-by-state. And so I think that puts a finer point on making sure you really have a model and really have a plan for an individual state and a sense of what the market for that state will be. So obviously we’re interested enough to be pursuing it because we are pursuing it and it is something we spent a decent amount of time over the last few years focusing on.

Got it. Thanks very much.

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

Great. Thank you for taking my question. If we take a look at the TwinSpires segment and you take out BetAmerica, looks like handle is growing mid-single digit. How should we think about organic growth going forward? I'd given – I know there are some changes to the cost structure and maybe reallocation of spinning toward marketing post move to Louisville?

Yes. You’ve might have queued off the comment that Marcia made in her comments. How should we think about it? It's been pretty consistent over time. It bounces around. I've made the comment in other earnings calls that please don't think about the long-term growth rates of TwinSpires based on any particular quarter. It's more complicated than that. Some quarters are better than others, some quarters we don't understand exactly why rates fluctuate. Others quarters we think we do have good theories. Generally, we put the bulk of our investment around the larger events in the industry, which attract returning players and new players to the game. That's where we make our biggest push. But also I think with the BetAmerica property, we like that brand and we like that platform, so we've invested around growing that platform too. That's not a static thing. That is a dynamic growing platform itself. So we have more pieces on the chessboard to play with and I don't know that you should simply say TwinSpires core, BetAmerica core. It's one business. We flow asset or we flow investment between the two assets based on what we see as our returns. So generally I don't analyze it as TwinSpires’ core, but I think -- I understand why others would look at it and comment on it. I still feel pretty good about the growth of TwinSpires as far as that's based on historical performance of the team, they’ll keep finding ways to continue to grow it. So beyond that I'm optimistic for 2018, but I wouldn't tell you that as a manager I'm solely focused on core versus BetAmerica static. It's one thing, the resources and marketing materials, our marketing efforts flow between those platforms based on where we produce the best result. And it's the aggregate result that I care about.

Okay. That makes sense. And then on the acquisition I guess specifically Vicksburg, the 1.1 million in synergies, is that just initial cost take out overhead? How should we think about potential? You mentioned the deficiencies between the two properties. How should we think about maybe value accretion to that deal specifically as we move forward a couple years?

Yes. That was Vicksburg cost out that largely has taken place. So prior to our assumption, because we haven’t assumed operational ownership of the property yet, but that's largely personal low hanging fruit.

Okay.

We haven’t built-in a lot of synergies into the Presque Isle property like I said I think that's a very well-run property. I don't think there’ll be material synergies out there but certainly there are some things we’re going to try and some things we’re going to look at particularly around the racing side.

And Adam, just to follow-up on your TwinSpires question, when you look at handle growth for TwinSpires as a whole for last year not just for the quarter because my comments were for the quarter, and TwinSpires growth was almost 17% and the handle for the total year of which about half was related to core kind of TwinSpires and then the other half with the acquisition of BetAmerica.

Okay. That’s helpful. Thank you very much.

Thank you. And that concludes our question and answer session for today. I’d like to turn the call back over to Bill Carstanjen for closing remarks.

Great. Thank you. Everybody, thanks for being on the call. Thanks for investing in our company. Thanks for sticking with us through all that we’ve done. It’s been a busy year. We’ve given you a lot to chew on in 2017 especially recently. And I hope we give you more to chews, the chew on going forward. But again, thanks for your confidence in our management team and our company. We appreciate it. We’ll try to be good stewards of your investment. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.