Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2016 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 would now like to introduce your host for today’s conference, Mr. Mike Anderson, Vice President, Treasury, and Investor Relations.

Great. Thank you, Lisa. Good morning, and welcome to our third quarter 2016 earnings conference call. After the company’s prepared remarks, we will open the call for your questions. The company’s 2016 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 this 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 would like to turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Thanks Mike. 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 Alan Tse, our General Counsel. I will make a few general comments about the second quarter, and then turn this over to Marcia. After she has finished her comments, Marsha, Bill Mudd and I will be happy to take your questions. The company produced record net revenues and significant growth in net income and net income per share for the quarter. However, we reported adjusted EBITDA that is down $4.9 million or 6.8% compared to prior year. Our Casinos TwinSpires and Racing segment are firing in all cylinders and all produced strong growth in adjusted EBITDA for the quarter for their respective segments. That being said, adjusted EBITDA overall for the company was lower primarily due to a $9.8 million year-over-year decrease from Big Fish. This is not the result we wanted to see for this quarter, because we relied on Big Fish, but note that the third quarter of 2015 has been a high watermark for Big Fish adjusted EBITDA and we have steadily grown Big Fish adjusted EBITDA and adjusted EBITDA margin each quarter during 2016. We continue to refine our investment and operational methodologies across our portfolio of game and hope recent performance improvements continue. I am going to spend time talking about all of our segments this morning, but we will dig a little deeper into Big Fish in a few minutes. Turning to our business segment. With respect to our brick-and-mortar casinos business, net revenue increased slightly over prior year, while adjusted EBITDA was up $3.7 million or 14%. Marcia will explain the variances of our prior year in more detail. I would just like…

Thanks, Bill and good morning, everyone. We are pleased that we generated $8.7 million of net income and $0.52 of diluted net income per share, both more than double the prior year quarter. We delivered record net revenue of $303 million, up $24 million or 8%. However, as Bill discussed, adjusted EBITDA was $67 million, down $4.9 million or 6.8% from the prior year quarter. These results collectively reflect strong operating performance by our casinos, especially from our Oxford main casino and the contribution from our equity investments in Saratoga and Miami Valley Gaming. We also continue to benefit from the growth in our TwinSpires business. As I will discuss in more detail in a few minutes, Big Fish Games was the primary driver of our record net revenue growth. Although, our adjusted EBITDA for this segment was down $9.8 million compared to the prior year quarter. When we reflect on the financials for the quarter, there are items that I would like to highlight for each of our segment. I will begin with our Racing segment. Racing revenue and adjusted EBITDA were both relatively flat in the quarter. With a strong September live race meet at Churchill Downs racetrack, with handle for the quarter up 13% compared to the prior year quarter. Our Churchill Downs on track handle grew as a result of an additional day of night racing resulting from a calendar shift and included the closing day of our spring meet in this quarter. And our export handle grew based on the variety of our factors including an improvement in starters per race and the positive impact of our Pick 6 carryover. Overall, the strong results for Churchill Downs were offset by slight declines in pari-mutual revenue at our Arlington Fair Grounds racetracks, along with incremental expenses…

Thank you, Marcia. At this time, I think we are ready to take any questions if anybody have any.

[Operator Instructions] Our first question comes from the line of Cameron McKnight with Wells Fargo. Your line is now open.

Good morning. Thanks very much.

Good morning.

A question for -- good morning, Bill. Question on Big Fish, just sort of -- just joining the dots on your prepared comments on the top line and UA investment, it sounds as though we interpret the comments to mean that perhaps revenue growth will be a little more muted going forward that margins should improve over time?

Fair question. I always look at our lawyers as we start talking about the future. And generally there are some restrictions as you know. I would say this I think it's easy in this space and I think you can see it out there and other companies to chase bookings, but for us at the end of the day we respond to adjusted EBITDA that's how we want to run the business. So we want to focus on margins. We want to focus on smart long-term growth. So all things moving in the right direction are good, but the goal of his business is not to drive bookings. The goal of this business is to drive profitability over time. And certainly, we are increasingly thoughtful and considered with regard to how the margins look, especially since when you make UA investment, their long-term returns associated with that and you have to be careful about your margins at all times.

Okay. Got it. Make sense. And as far as the change in UA strategy is concerned, did that happen during the third quarter or is that something that happened after the third quarter?

So that's something that we started to understand much better coming out of the second quarter. So that's something that is in play in the third quarter and certainly continues to be a part of our experience now.

Okay. Sure. And then one more for me. I am the mix of game seems to be changing with casino -- casino in decline and decelerating premium in decline as expected and casual games growing. Does that change in mix over time have an impact on margins?

It certainly can, because I think the returns on games are different. Short-term -- some of the other genres in our experience have a different profile of customer participation. The customers don't stay in the games as long. But with the casino we have found that the customers that we acquired do stay in the game for an extended period of time. So focusing on that business is still within this space as a whole, the mobile and online game space. That genre we really, really like the most, because those customers are long-term customers once you acquire them. Now at any given point that you measure the first day you have acquired them, the first month you have acquired them, after you have acquired them or the first year they may or may not look as good as a comparison against some other genres -- some customers from another genre, a different type of game, but over the long-term these are great customers to acquire. So I think as we've gotten smarter -- and again I think our track record within Churchill if you looked at TwinSpires, the evolution of the TwinSpires business or the evolution of the Derby or the evolution of a brick-and-mortar casino, we do as a company get smarter at these things. We do talk a lot about these things. We focus on these things. We try to get smarter as a team. And I think what we've determined is the casino is a great genre to focus on, and we can't get trap and thrown off our game by seeing other games that start out hot and fast with steep LTV curve, but maybe don't hold those curves over time or we don't know if they'll hold those curves over time. We do know a lot about the casino space, not just our properties but the other properties we see in the market. So focusing on casino makes more sense for us now and over time, and it's not something we can never take our eye off that ball.

Okay. Thanks very much, Bill.

Thank you, Cameron.

Our next question comes from David Katz with Telsey. Your line is now open.

Hi. Good morning, everyone.

Good morning.

So, I wanted to go back to Big Fish and I do appreciate all of the commentary around it. My question is when we look at this business today, do you have a plan and, you know, not asking for specifics in terms of near-term and long-term to type timing or anything like that, but is there a plan that could lead this business to double its cash flow or some, you know, the bigger growth profile than where we are? And I asked the question for two reasons. One, I feel as though, we may have been drawn into thinking about the specific quarterly performance which, you know, is more -- is less important really then that the bigger long-term picture of, you know, what return you think you can get on this investment ultimately. And the second part of it is -- of the question is, has the return opportunity for that business, has it shifted at all in some way since you bought it? Is it better in some ways than you thought worse than some others, or is it -- has it -- is this doing what you thought it was going to do when you bought it?

Okay. So there are a couple layers of questions within there. I am going to start -- and I appreciate the questions. Very good questions. Let me start higher end and then I will dig down deeper, and if I end up leaving off a segment of the questions unintentionally, remind me and we will return to it. So this space -- starting with this space so forget about our business for one second and just start with the space. The explosion of mobile devices and the role they play in people's lives not only in North America, but around the world is one of the remarkable stories in American business and our world business in the recent past. It's amazing how these devices have exploded in popularity and warm their way into everything people do during their day and how they organize their day. So when you talk about where people spend their time, mobile device is a good place to look. They spent a lot of their time on these devices. Look at where they spend their time within the device and where they spend their money, I know everyone wants to think that when they're bosses and they're issuing cell phones and mobile devices the people that they're using those devices to do work and they, I am sure. But you can also see by the raw numbers that people are using these devices to purchase games and to play games, and they spend more time doing that than any other one particular thing. So I don't see that changing. Keep your eye on that at all times, because it might change, but I don't see that changing right now and that makes this a good place for an entertainment company to look to invest to create…

Well, you did get a lot of it and I appreciate -- I do appreciate the answer. But I think where, you know, perhaps the rubber meets the road is, you know, whether it's social gaming or a building or anything I think one of the things that we're trained to look at is you're allocating an amount of capital which all in was about 850. What is a reasonable payback period or what is a reasonable return on that 850? And how should we think about or how did you think about, you know, what those metrics could be? At the moment we're on a run rate that's, you know, $80 million, $90 million of EBITDA, is it possible and are you thinking about getting to run rate that's $200 million or $300 million or more than that over time, is that a realistic expectation of ours?

Again, I am slightly out of reach from our lawyer so you can't quite kick me under the table. David, I hope you can appreciate you are taking me. I have to be careful how I answer questions like that just to the nature of overreaching forward-looking statements. But I'm still going to answer it. We didn't buy this business because we thought -- because we approached it like, say a brick-and-mortar casino that we thought we had stable, but consistent cash flow that would potentially grow over time, but we would have efficiencies that we could rely on. We didn't approach it as a conservative investment like that where we thought we were basically going to acquire cash flow that was relatively stable and just changing based on GDP. We thought this is a space where there's opportunity for significant growth and significant change. We realize it's a space with disruptive technology possibilities and other risks over time, but we thought it was a space with a lot of opportunity. And our investment step beyond our core at the time into what we viewed as an adjacency, our investment was based on expecting to generate returns in excess of what we find within our core space.

Okay. Fair enough. I have more, but I want to give someone else chance. So I will go back in. Thanks very much. Appreciate it.

Thanks, David.

Our next question comes from the line of Dan Politzer with JP Morgan. Your line is now open.

Hey, guys. Thanks for taking the question. Sorry just another one on the shifting of the UA strategy. I mean, you guys are kind of keep moving away from the casual mid-core free-to-play it sounds like and shifted more towards Social Casino. Obviously the free-to-play area has been the fastest growing segment, while Social Casino has been kind of taking down and this is an area you talked about stuff level of competition. So I am just trying to piece together if you could opine more on your rationale there.

Sure. Yeah, I didn't mean to say that we weren’t going to focus on are that we had shifted away from free-to-play mobile and casual. I didn't mean to suggest that. I think there's a lot of opportunity in that space. I think we need to be smarter about our UA dollar particularly early in the life cycle of games. The point I was making was I think we -- fairly evaluating us I think we're a little dazzled by some of the early returns that we saw in those games. But those games over time don't match the consistent long-term curves that we see in casino. So I think it was a good reminder of it for us over this year to make sure we focus on what we know is there for sure and to be a little more conservative and careful as we explore the mobile mid-core and casual space. We know how to do gains in that space. We have a great series of studios both internal and external that we can rely on to produce games that are competitive with the games in the marketplace that are successful. So we'll keep playing there. We're just going to be really thoughtful about being better at what we need to be best at long-term to be a player in this space and that is marketing analytics.

Got it. And then I am actually going to ask a question that is not on Big Fish. Could you just give us an update on some of the greenfield options and the legislative situation in Illinois and I guess Kentucky to that end. I mean, how are you thinking about Arlington? What are the different variables that go into your thought process therefore for how you could potentially monetize that asset?

Okay. I am feeling a little bit guilty, because mostly in these calls the team Bill and Marcia get to answer bulk of these questions and then the way this call in particular is gone that hasn't been possible today. But since we're talking really sort of legislative, I am going to -- I am going to jump in on this one and then start. You guys jump in as you see fit. So Illinois is an extremely attractive greenfield opportunity and twice we've gotten through the legislature -- slot legislation that would allow us to put slot machines at Arlington Park and twice we were essentially blocked by the executive branch, the governor branch. There's a different governor now. But the environment in Illinois has also changed in the sense that there haven't been a budget in Illinois for a period of time. And there's been a sort of gridlock in the Illinois government -- state government. So they are really in my opinion hasn't been -- this hasn't been an issue of the attractiveness or our ability to get gaming through the legislature or the will of the legislative body in Illinois around alternative gaming. This has really been our issue getting trapped and caught up in some of these larger Illinois issues and Illinois political issues. So that's something that we evaluate constantly and look at constantly. And if it were an answer of there's no will for this. We don't want this. That would be something we would have to think through and respond to, but that's not been where we've been. Instead, it's been understanding and respect for our issues in the state, but they're minor issues compared to the issue that are driving politics within that state, particularly around budgets and underfunded pensions. All those things suggest over time for an additional source of funding to help on those issues. But those issues drive the agenda, not our issue. So we've been patient. We continue to be patient, and that's where we are on that right now. In Kentucky, pretty conservative state. May be getting more conservative. We will have to see. But right now I don't think for slot machine gaming there is any expectation that that is in the near-term a realistic possibility. That's just the current political environment that we're in. A number of other tracks in the state have implemented a product called historical racing machines or instant racing machines, we have not done that. We have not implemented that product. But another -- a number of the other tracks in the state have implemented that and we continue to watch the legal issues around that product, but also just performance of that product because right now that is the product that is the only one on the horizon.

Great. Thanks a lot guys.

[Operator Instructions] Our next question comes from the line out Adam Trivison with Gabelli & Company. Your line is now open.

Hi, everyone. Thanks for taking my question. Focusing on the Social Casino segment at Big Fish, if you look at the 8% paying user growth offset by the 14% decline in bookings for paying user, it would seem that part of this is due to the introduction of Jackpot City and the growth of the Vegas Party Slots games. Can you kind of separate out that the mix of those players coming into the base versus the trends at Big Fish casino? And maybe just monetization of those two games versus the legacy platform.

So, I am going to talk conceptually. I don't think we disclose that that level of detail about how these businesses function and don't have that, so I am not going to be able to disclose the specifics.

Okay.

Talk afterwards on whether we should be, but I am not sure we want to go into that level of disclosure. But generally when you acquire a player into a new game like Jackpot City or Vegas Party Slot, they become great customers over time. So, at first they come in the game. They monetize at a more modest level. And then over time as they take advantage of bonus cycles and features and functionality in the game and they get more interested and committed to the game, you grow their participation economically in the game. So when you introduce new products you're going to find that, you know, your average revenue per user is going to drop because new customers in a new game do not produce like more mature customers in a more mature product. But with any mature price product like we have with our Big Fish Social Casino, our flagship product, you're going to find that players sort of get -- there are other players that get to the end of their life cycle in the game and they bleed off. We find that in TwinSpires. We find that in Horse Racing. We find that in brick-and-mortar casino. So you're always trying to grow at a rate where you can grow your new customers -- more customers and get them to a higher average revenue per user to make up for the fact that you do see natural attrition in any mature product.

Okay. That makes sense. That's helpful. And then it looks like you had higher Big Fish developer and platform fees relative to bookings. Is that a function of game mix, or something else and will that reverse with this change in strategy?

That's mostly -- again, I am dominating the answers to these questions which is what it is this time. But most of the platform fees are really -- what Google and Apple charges us when revenue comes in through their stores. So Marcia, do you want to add to that? I think you do, so go ahead.

Yeah, so, it's basically tied to the revenue recognition. And, Adam, just as you mentioned there is some increase in that as a percentage just due to the mix. I talked about it at our last quarter earnings call related to the fact that free-to-play becoming a little bit larger part of our revenue mix, that means we are going to recognize more platform fees associated with that. So remember the revenue recognition for free-to-play is over four months.

Okay. That's helpful. Great. Thank you very much.

We have a follow-up question from line of Cameron McKnight with Wells Fargo. Your line is now open.

Thanks very much. Just circling back to Social Casino. I think maybe four quarters ago or three quarters ago, could have been longer, you mentioned that Social Casino was an area that had become much more competitive, a lot more promotional. Has that changed, or has -- or is your attitude towards Social Casino changed?

Yeah, I think -- I think it is a competitive environment and I think there are some established players and we are one of them, and then also there's still plenty of evidence the show that new games can come in and make a difference. I think the learning for us is it has been over the last number of quarters how good it is when you acquire these customers that they are more sticky than what you find in other games and that makes it worth it to cycle through some of the disadvantages of a competitive space, but these are good customers when you get them. Bill?

The other thing I would add, Cameron, is the things changed to as we get new product called Jackpot City Slots which is a Big Fish develop product, whereas the Vegas Party Slots was a third-party develop product. But the Vegas Party Slots product, very good product we found that. We've been advertising Big Fish so many times. People have seen the brand, they have seen the product. They're not -- it's tougher to find new customers they haven't heard of it. Whereas you come out with a new brand with new product, people go try that because they haven't seen that brand yet. So it's a lot more effective to put marketing dollars work on a new brand if people are not familiar with yet.

Okay. Thanks. And then one follow-up. Can you just talk about the buyback program and capital returns and the strategy?

Yean, Cameron, as I mentioned in my comments, you know, we -- every quarter, every month as we go through we think about things around, you know, using our free cash flow to really support our growth. We look at whether there are acquisitions on the horizon related to the need for cash flow. We also, as you know, are very focused on paying down our debt. The business has a great discipline over the history of the last five to 10 years of just really -- when the leverage goes up based on acquisition and focusing on paying down that debt after the acquisition which gives us greater flexibility going forward. We do also think about the amount of our dividend is part of what we'll use our cash flow for. And then opportunistically we look periodically whether it makes sense to buy back shares in the market in the open market period. So, although, we did not buy any back in third quarter as you know we bought some back in second order, and we may buy back additional shares in future quarters. So we have $135 million share repurchases authority available to us based on Board approval earlier this year, and so you may see us in that area over the coming year. Again, we're really just focused on creating long-term shareholder value.

Okay. Thank you very much.

We have a follow-up question from line of David Katz with Telsey. Your line is now open.

Hi. Thank you for allowing me back in here. I wanted to just ask about more of a big picture question about value, because if we look at where your stock is trading next year and I recognize this is more our job, it suggests that there are some regional casinos in there, there's a trophy level asset in the Kentucky Derby and the Churchill Downs track, as well as Big Fish game. My point is, do you think about strategies to establish or capture more credit for what you have? We've seen M&A deals in regional casinos at higher levels than where your stock is trading. We've seen some trophy type assets and some other deals, you know, trade and we've also obviously seen some public market deals in the online space that are compelling also. You do -- how do you think about strategies to raise awareness to the value that you?

Well, David, in some sense these are obviously good challenges to have, good problem to have, do you think that the market doesn't understand the true value of the company, that's a good problem to have. There are plenty of companies that have a reverse problem. That said speaking as a member of a management team, we need to go out and perform everyday and every quarter. And there are lots of theories and there are lots of ideas and there are lots of smart people that have great ideas about structure. But the fact is we're always just around the corner from the next call like this and we need to produce results. So the bulk of our management time, mine included, only focuses on building these businesses successfully. And then we use our time with the Board and with our advisors to listen to other ideas and theories out there and to watch the markets around us to see what other people do to prove out some of the theories of additional ways to create value. So we're all obviously incensed focused on understanding the market and the evolution of structures. We're all very incensed to do those things -- pay attention to those things I should say and to understand those things and those options and we try to put on a day-to-day basis. If we spend too much time worrying about stuff like that we're not going to get our day jobs done. And it's important that for all the businesses that we have to get our day jobs done and position those businesses to grow as best as we can get them to grow. So I know that's not a totally satisfying answer to you. But I guess if I had to summarize, I would say, yeah, we pay a lot of attention to the type of issues that you're talking about. And there are lots of theories and there are lots of ideas, but reality is we need to build this company for our shareholders that we have and we need to build it today and then we need to be at work tomorrow, building it tomorrow.

I appreciate that and I hope you appreciate that it's a discussion that comes up with investors and perspective ones and that's why it's being asked.

Absolutely. Thanks for asking.

Sure. Thanks for your answers.

I am showing no further questions in queue at this time. I would like to turn the call back to Mr. Carstanjen for closing remarks.

Thank you very much everybody. I appreciate your time on the call this morning. I appreciate your interest in our company, your investment in our company. We will work hard not to let you down, and we will talk to you next time. Thanks everyone.

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.