Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2018 Third 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, Ashley. Good morning, and welcome to our 2018 Third Quarter Earnings Conference Call. After the company’s prepared remarks, we will open the call for your questions. The company’s 2018 third 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 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. As indicated in our third quarter earnings release, net revenues were up 12% and adjusted EBITDA was up 7% over prior year. We had a strong quarter. Marcia will provide details on our results while I’ll focus on several larger strategic initiatives. After we finished with our comments, we will be happy to take your questions. We issued a press release yesterday announcing our entry into a definitive agreement to acquire at least 50.1% of the Rivers Casino in Des Plaines, Illinois. Our final ownership percentage will depend on the elections made by several minority partners who may choose to remain a part of our joint venture or exit along with the Clairvest Group, who is selling to us their entire ownership stake. We are thrilled to partner with Neil Bluhm and Rush Street Gaming, and regard this as an important strategic acquisition for our company. We think, we are achieving the following. Majority ownership in a best-in-class regional Casino asset with significant future upside, opportunity for full participation in the iGaming and sports betting market in Illinois, which is the sixth most populous state, if Illinois authorizes these additional forms of gaming. Ownership of an asset we believe is well positioned to resist threats from future gaming expansion in the state, if any. An attractive return on our invested capital, which will be immediately accretive to free cash flow and earnings per share, and an excellent competitive position in a Casino gaming market we have always valued as we work with the Illinois legislature and executive branch to determine the future of our Arlington…

Thanks, Bill, and good morning, everyone. As Bill said, I will provide additional details on our third quarter earnings and a few additional thoughts on our capital management actions. Overall, we are pleased with our third quarter results. We reported net revenue from continuing operations of $221 million, up $24 million or 12% compared to the prior year quarter, primarily from the consolidation of Ocean Downs, continued strong net revenue growth at nearly all of our wholly owned Casino properties and the opening of Derby City Gaming. Adjusted EBITDA from continuing operations was $62 million, up nearly $4 million or 7% compared to the prior year quarter, primarily driven by the continued strong performance of our Casino properties. Turning to our Racing segment for the third quarter. Our Racing segment adjusted EBITDA was down $2.9 million compared to the prior year quarter due to a number of smaller items. $1.2 million of the decrease was driven by one-time maintenance and timing of other expenses, as well as $400,000 from the impact of revenue recognition under ASC 606 at Churchill Downs. Fair Grounds Race Course also was down $800,000 to the higher franchise taxes and other expenses, and Arlington was down $500,000 due to lower revenues from poor weather during the race meet in third quarter. Turning to TwinSpires. TwinSpires adjusted EBITDA was up $500,000 compared to the prior-year quarter, primarily driven by growth in handle, which was partially offset by increased content expenses. TwinSpires’ handle was up 1% for the quarter compared to the prior year, which was comparable to the industry growth rate of just under 1% for third quarter. It will be helpful to understand a couple of things that we believe are responsible for the lower handle growth for the industry and for TwinSpires. First, industry growth…

Thanks, Marcia. Okay. Everyone, I think we’re ready for your questions. So fire away.

[Operator Instructions] And our first question comes from the line of David Katz with Jefferies. Your line is now open.

Hi. Good morning. This is Erik Hellquist for David Katz. How are you guys doing today?

Great. Welcome.

Thanks. Congrats on the announcements. So, I just want to touch on a few things. So as far as the transaction goes, can you just talk about some of the strategic benefits of engaging with Rush Street, whether it be in Illinois or elsewhere. Just talk about kind of the rationale behind the partnership?

Sure. I’m happy to do that. I think you started off by hitting the nail on the head. I think, with respect to Illinois, Rush Street gaming has a history of performance and a great understanding of the state from a regulatory and legislative perspective. So I think, as we look forward to things like online wagering or sports wagering, I couldn’t imagine a better partner to shape the perspective of the state to maximize that opportunity. And of course, our arrangement with Rush Street gaming is only with respect to Illinois, but certainly their track record outside of the state is also really, really impressive, and it’s been great getting to know them and learning about their perspective on some of these other markets and what they see the opportunities for Casino gaming both in the United States and beyond. So it’s just been -- it’s been nice to learn their perspective and get to know them better, but we don’t have any arrangement with them beyond Illinois in the transaction we announced today or announced yesterday.

Right. Thank you. And as far as iGaming goes, so it seems -- I think, it’s fair to say that the company is more constructive on Internet gaming than most others. Can you talk about what do you think that competitors may be overlooking in the Internet gaming space?

Well. I’m always really careful on these calls to not delve too deeply into what competitors are doing or what they’re thinking about. Because largely I can only tell, what I know about them is what I see. So we focus on how we look at the markets. And certainly as we look at the US environment, we are pretty sure, it’s going to rollout in a vulcanized fashion state by state with the regulatory and legal environment determined by state authorities instead of a federal solution seems pretty clear at this point that, that’s the environment we’re dealing with. And then we take each market one-by-one to analyze how we feel about it. And certainly our perspective on different markets has been influenced by our performance in those markets with our TwinSpires business. But also, our perspective on different states and then they market as a whole in the US is influenced by what we’ve seen in Europe and elsewhere in the world in terms of performance of products and how the performance in markets ties to population and to wealth in those markets. So we try to take as much of -- our developers as much of a 360 degree view as we can of what to expect, but we start with a state by state analysis. And certainly, not all states are equal, they differ by population, they differ by regulatory philosophy, they differ by wealth. So it’s a bit of a complex mosaic. But it’s one we spent a lot of time on and we believe long term. Just as we’ve seen in Europe, there’s a lot of opportunity as markets open.

Great, thank you. And then just one last question for me. Can you talk a little bit more about how you see Derby City shaping up since the opening?

I’m going to start on that, but also offer the floor to my colleague, Bill Mudd. He might have something he wants to add to it. For me, one of the exciting things about a Greenfield in Louisville is, we know we’re a long way from maturity in the product we just rolled out, and yet we rolled out a product that performed very, very well to start with. So while Louisville does have competition in the market, it doesn’t happen to be in the city, it’s across the river on the Indiana side. It’s not a mature market, because there haven’t -- there hasn’t been a fully developed market. So we think there’s lots of room to grow the top line in this jurisdiction. And of course, we rolled out a product that’s never been rolled out before, and that’s our version of historical racing machines. So we have a lot to learn on that, there’s a lot of improvement and there’s a lot of explanation and development with our customer base to grow their understanding and appetite for the product. So from my perspective, what’s most exciting about it is that it opened as strongly as it did, recognizing that both the product itself, the machines we rolled out and the market itself is a long way from maturity. So super high picture, I was pretty excited about the strength of the opening because I know better things are to come. Bill, do you have anything you want to add.

Yeah. With that a whole lot, Bill, I think you hit the nail on the head. The other thing I would say is, to Bill’s point, these are 70 new titles we opened with, there’s not a familiarity in the market with what a historical horse racing product is. So we have to educate our customer base. We do have a great advantage in our location vis-à-vis the competition. We don’t have maybe the diversity of product in the floor, we’re working on more product to bring to the floor. But I think the customers that have been there and tried it, they really like it. They’re coming back. We’re building the database every day. And there’s a long way to maturity on this. Probably longer way to maturity on this product and there would be a natural Casino. We do have some disadvantages, and then we don’t have table games, we don’t have a Gulf Coast or steakhouse or hotel. But I’m very proud of the facility the team has built and the service we’re delivering our customers. And I think, at the end, we’re going to continue to grow this thing every single day. And the more we are out there and the more people try it, the more they are going to come back. So I couldn’t be happier thus far.

Thank you. And our next question comes from the line of Dan Politzer with JP Morgan. Your line is now open.

I was hoping, we could talk a little bit about the multiple for the Rivers Casino, Des Plaines. I know, it’s at a 11.25 times on a trailing basis at least it’s a little bit of a premium relative to some of your recent regional gaming acquisition. So I was hoping, you could kind of apply on that. And is there, given Rush Street’s still going to manage the property day-to-day, I guess, are there any opportunities for synergies or operational improvements, given that you’re partnering with them now?

Sure. Let me take those questions in order. First, I remarked in my comments that, we kept a careful eye on Casino multiples in general, because they’ve been going up over the last couple of years and you saw with Suntar and with the Yonkers transactions, I think both of those were north of 12 times and historically that’s pretty high. A 11.2 times or so that we’re paying here is a pretty high multiple, and it’s certainly a higher multiple than you’ve ever seen us pay for an asset before. And generally, you won’t see us do that. This was just a particularly special asset, it’s one that we really coveted since it opened. And I think we saw it coming as Rush Street gaming won the license all those years ago, we saw it coming and it’s all what it was going to be. So I laid out earlier in my comments, some of the factors that I thought made this particular asset special and we’re paying for. I would say, in general though without citing every one of those factors outside a few. But without citing every one of them, I’d say in general, this one was special for us. And because of that, we were willing to go up in price. Illinois with its, with the potential over time for iGaming and sports betting, we think it’s just a really important market to have unfettered access to six most populous state, and it’s a wealthy state. So we really, really thought, this market was important for that perspective, the location of this asset in the Chicago land region with the population dynamics. And we think, there are elements that will protect this property, if there is ever an expansion of gaming. All let us from both an offensive and defensive prospective to conclude that this was a long-term winner, one of sort of the crown jewels of regional gaming that you can find in the United States. And one of the few instances where it was worth us paying more than what you would see us typically pay for a Casino asset.

Well, I have a follow-up question -- I was going to kind of a follow-up. You mentioned Yonkers and Suntar, and I know both of those transactions included a REIT. So the multiple is obviously a bit higher. I mean as you kind of go forward and think about the M&A environment and where multiples are, is this something you would consider looking ahead or is this kind of, you guys have a hard line on, we’re not going to go to retail financing because of your balance sheet being in relatively healthy condition?

So I don’t mean to rephrase the question, but I just want to make sure I understand it, Dan. Ultimately, would we consider a REIT structure for acquiring assets. Would this [indiscernible]

Yes I mean it’s right. Because the other two transactions with this multiple you called out, utilized. That’s the only reason I am kind of wondering.

Generally, we’re not looking to partner with the REITS in the acquisition of assets, generally don’t see -- without being negative, I don’t see any positive reasons to do that. I don’t see why -- what there would be in it for us to do something like that. But I think, I would say that having been around for quite a long time at this point in my career, and having always been involved in M&A from the very beginning. Every year, every -- any period of time that you can see in the horizon, you always got to revisit all of your assumptions and make sure that the assumptions that you have continue to remain true. So I think, one thing that was a nice reminder for our shareholder base and for us when we did, when we signed up this Rivers Casino Des Plaines is, they were willing to continue to work in partnerships, they were willing to look at larger assets. When we see a strategic rationale, when we see an economic return that we’re sure is there, when we see an attractive return on our invested capital that will get our attention. When we like the free cash flow that will get our attention. And when we see a strategic reason or a series of strategic reasons that might cause us to vary from our hard and fast rules. We’ll take a look at that in most circumstances to see what’s right for our company. So, generally the retransactions have not been of interest to us, but you never know. You never know, it’s a different world out there now with iGaming potentially on the horizon in lots of state. So I never say, never, we’ll keep a clear eye and hard and fast rules are made to be broken under some circumstances, but only after very, very careful consideration. And I think that’s probably is good an answer I can give you to that general question at this point.

And just one last one, how -- is it fair to interpret this transaction as a shift in how we should be thinking or how you guys think about your ownership of Arlington, given its -- relative proximity of the property.

I think that’s a fair question, but the answer to that question is, there is no change in Arlington Park at this time. Certainly that’s a jurisdiction where we’ve watched our horse racing business decline over time in Illinois despite the presence of an absolute fantastic team and an extremely supportive local community. But the structure of Illinois racing has not been advantageous versus other states, and because of that, Illinois racing in general has suffered. So we work for the shareholders of Churchill Downs, that’s our job as a management team. We will continue to evaluate what’s best for Arlington Park and what’s best for Churchill Downs over the long term, but certainly it was important for us to have a long-term presence in Illinois where we thought we have access to new products: iGaming, sports wagering et cetera that might become available over time. And certainly, Arlington Park is not in those businesses. Arlington Park does not have slots or table games nor any kind of clear access to additional products, and it was important for us to make sure that we could continue to participate in the Illinois market over time. So we’ll keep our eyes focused on what’s best for our shareholders and what’s best for our community, but ultimately, we didn’t want to take any more risk on access to other products in that jurisdiction over time.

Thank you. There I am not showing any further questions at this time. I would now like to turn the call back over to Bill Carstanjen for any closing remarks.

Thank you. Everyone, thank you for your time today. As always, we appreciate it. We appreciate your investment in our company and your confidence in our company and our management team. We will do our very best to build our company, to grow our company and generate a return for all of you. So thank you, and we’ll talk to you soon.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone have a wonderful day.