Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2018 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury and Investor Relations.

Thank you, Schnael. Good morning, and welcome to our 2018 second quarter earnings conference call. After the Company's prepared remarks, we will open the call for your questions. The Company's 2018 second quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the Company's website titled News located at churchilldownsincorporated.com as well as in the website's Investors Section. Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent report 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'm going to focus on the higher-level things we see in our second quarter operating performance and provide an update on strategic initiatives we've previously disclosed. Marcia will then provide additional details on our earnings, which should further help you understand how to think about our performance and capital management, going forward. After she is finished with her comments, we will be happy to take your questions. As you may have seen in our press release, our Company grew net revenues to $379 million in the second quarter, an increase of 12% over prior year. Adjusted EBITDA was $175 million, up 13% over prior year. These comparisons to prior year exclude Big Fish Games, the sale of which closed January 9 of this year. Just to give a sense of the strength of our quarter and of the first half of the year, if you include Big Fish's contributions in 2017, adjusted EBITDA for our Company in the second quarter 2018 was still up 1%. For the first half of the year, adjusted EBITDA for the Company was down only 3% compared to prior year. Big Fish contributed nearly $39 million of adjusted EBITDA in the first half of 2017. So we're pleased we were able to grow organically to make up much of the difference. Turning to the Racing segment. Kentucky Derby week is the biggest single contributor to our company's performance in the second quarter. We had decent weather over Kentucky Derby week, except for Derby day, which is, of course the day that matters the most. This year's Kentucky Derby was the…

Thanks, Bill, and good morning, everyone. As Bill said, I will provide additional details on our second quarter earnings and capital management. Overall, we are very pleased with our results for second quarter. We reported net revenue from our continuing operations of $379 million, up $40 million or 12% compared to the prior year quarter. Adjusted EBITDA from our continuing operations was $175 million, up nearly $21 million or 13% compared to the prior year quarter. If you compare our adjusted EBITDA results in second quarter 2017, including Big Fish to our results for the second quarter 2018, our three segments have essentially replaced the adjusted EBITDA we lost with the sale of Big Fish. And we have replaced the Big Fish adjusted EBITDA we sold with less volatile and more predictable earnings. As we highlighted in our press release after the Derby in May, we had tremendous results this year despite running the Derby race in some of the wettest conditions ever. We also benefited from strong contributions from our wholly-owned Casino properties, solid performance from our equity investments in Ocean Downs and Miami Valley gaming and a 12% increase in handle for our TwinSpires business. Turning to our racing segment for second quarter. Our racing segment adjusted EBITDA was up $10.4 million or nearly 11% compared to the prior year quarter. Derby Week delivered $12.3 million of the growth. Churchill Downs racetrack, excluding Derby week, was down $1.2 million, primarily due to the adoption of the new revenue recognition standard ASC 606. And Fair Grounds in Arlington collectively decreased $700,000. Approximately half of the $12.3 million of the growth in adjusted EBITDA for Derby Week was driven by increased revenue as a result of the new Starting Gate Suites, the revenue from the new parking component of the…

Thanks, Marcia. If anybody has any questions now, we'd be happy to take them.

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

Hey, guys. Good morning. Thanks for taking my questions.

Of course, good morning.

So the first question on capital allocation, you guys mentioned your net leverage right now is around two times and that compares to your target range of around three times to four times. So can you just kind of frame or bridge that gap or how we should think about it going forward, bearing in mind that Presque – the acquisition of Presque's is still going to put you well below that target range?

Sure, Dan. It's Bill. As we said previously, we do set a target range, but more importantly than the target range is the opportunities we have to deploy our capital. So it's always been important. We've always done this over the number of years that this team has been in place to be patient and to be disciplined. So I would say that we do feel like it's a fairly target rich environment. There are lots of things that can be of interest to us that we look at closely, but a target range for leverage is really not the primary driver. Really, it's about the best opportunities that fit our long-term strategic profile of how we think we can best grow our company. So the good news is, is we have capacity and we also think we have opportunities out there that are worth looking at, but we're going to be patient and disciplined and things will sort out over time.

And just to confirm, you guys have a 10b5-1 plan in place. That's correct, right?

Dan, we actually don't comment on that.

Okay. All right, all right. So I guess kind of shifting gears. On the sports betting side, obviously, you've been active there, and you mentioned kind of where you guys stood across the market. I want to confirm for the – for Atlantic City, you guys expect to be active in the fourth quarter, you said?

Oh, we hope to be. That's an estimate. Ultimately, how we're going to be active depends on getting our license process complete. So if we get that done in time, then, yes, we will be active in the fourth quarter.

And we're also working with SBTech to get their platform approved by the commission in New Jersey.

Okay. Thanks. And then on the regulatory front, can you give us an update on what you're seeing or hearing in Illinois and Florida? And I know in Illinois, there's been some news on potential historic horseracing facilities, similar to what you guys have in Kentucky. So I guess, what are you kind of hearing or seeing there?

Yes. The racing commission in Illinois is exploring rules to regulate historical racing machines. But I think that's a process that will have to be sorted out over time because certainly, the legislative body there is also part of a process for historical racing in Illinois. So I didn't take that development as particularly a good sign or a particularly optimistic sign. I think its more noise out of that jurisdiction, more discussion and there's been lots of discussion over time. So that happens. Certainly, that's something that was reported in the media, but Illinois is a complicated jurisdiction. It's also an election year there. And I guess, it's becoming a theme in answering some of these questions. Patience and being thoughtful about how to best play our cards and how to best participate in the process, I think, is critical to long-term success. So just because the racing commission made some commentary and proposed some action doesn't mean we're jumping on that. It's a broader landscape that we want to pay attention to because ultimately at Arlington Park, what we seek there has been full casino gaming, not historical racing machines.

All right, I really appreciate the color Bill. Thanks so much and good quarter.

Thanks Dan. Appreciate it.

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

This is Erik Hellquist on for David. How do you doing, sir?

Good. Thanks for join us.

Great, so I know you guys just outlined some of the – the more state-by-state specifics on the sports betting rollout, but if you could just talk about more about the broader, cohesive strategy behind how you're viewing the opportunity, just on a more nationwide level as opposed to state-by-state?

Sure, Erik. I'll take that question. I think one of the things we've learned in TwinSpires is no individual state in and of itself is a game changer for the company. What's important is to build a capability and an infrastructure that hopefully over time will allow you to participate in a number of states. And as you participate in more and more states that's where you can leverage your cost structure and your personnel to really drive increases in your profitability. So long-term, we're very excited with the current environment that we're seeing activities so quickly with sports wagering in the face of the Supreme Court overruling past that. But ultimately, our excitement is a long-term play that hasn't happened yet that we're hopeful will develop over time where more and more states are interested in seeing a product like sports wagering offered in their market. And the realization that if they do so, and if we have access to a license in those jurisdictions, well, then we already have the personnel and platform capability that will allow us to participate in a cost-effective lucrative way. So that's a goal, and that's a strategy. That's not an event that happened yet. But we think some of the dynamics are aligning where it can be a real possibility for us over the next number of years.

Great. And just a quick follow-up on that, do you have – what would you say would be any kind of unique competitive capability that you guys have within the market that you could exploit?

Yes. This is Bill Mudd. I think the unique capability we have in the online space is we already have a team of sophisticated people that know how to acquire customers, that know how to manage those customers with good CRM capabilities, to bonus them, to take good care of the VIPs, to market and grow our brand. We do this right now in TwinSpires. We've got a lot of experience doing this as we own Big Fish Games. And we have, on our TwinSpires team, a number of folks that have real money online gaming expertise coming out of the European countries. So while other people are out searching and scrambling, putting teams together, we already have those teams, the customer service teams and the marketing and the user acquisition teams largely in place. We'll obviously augment them with new folks, but I think that puts us a step ahead of everybody else. And on top of that, we have – I think our partner on the technology space is, in my opinion, the best that there is out there. So I think between the technology and all of our human resource capabilities, I think we're well positioned.

Great, thanks guys. Appreciate the details.

Thanks, Erik. End of Q&A

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Bill Carstanjen for closing remarks.

Thank you everybody. We appreciate you joining us on our call, and we appreciate those of you who are investors for trusting us with your capital and giving us a chance to demonstrate what we can do. We'll continue to be or attempt to be good stewards of your capital and make wise decisions that can grow the size of our company and grow our returns. So thanks, everybody. We'll see you next quarter and we hope we can continue a very good run that we're on right now. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.