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

Great. Thank you, Vicky. Good morning, and welcome to our First Quarter 2017 Earnings Conference Call. After the company's prepared remarks, we will open the call for your questions. The company's 2017 First 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 Web site titled "News" located at churchilldownsincorporated.com as well as in the Web site'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 Web site at churchilldownsincorporated.com. And now I'd 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 Brad Blackwell, our General Counsel. I'll make a few general comments and then turn this over to Marcia. After she has finished her comments, Marcia, Bill Mudd and I will be happy to take your questions. The company's adjusted EBITDA was up $10.6 million, 23% above the first quarter of 2016. Big Fish Games was the major driver of that result and I will talk about their performance in a few minutes. We also achieved adjusted EBITDA growth in the TwinSpires and Casino segments, and generally, those 2 segments performed as we expected. Consequently, our results were up nicely versus first quarter 2016 with respect to adjusted EBITDA, diluted earnings per share, free cash flow, and cash flow per diluted share. While Big Fish Games, TwinSpires and the Casino segments drove our positive results in the first quarter, our Racing segment was a headwind for us. Its adjusted EBITDA was down $2.3 million in the quarter, primarily because of 2 unusual factors that I'll describe briefly. Racing is usually a fairly quiet segment for us in the first quarter, Fair Grounds Race Course in New Orleans is our only thoroughbred track conducting live racing. This year, the economic performance of the race meet was affected by an equine illness that was detected in a number of horses stabling at our facility. The presence of the illness resulted in quarantine procedures that greatly restricted the movement of horses to and from our facility. This resulted in reduced average field sizes for our races which in turn directly correlated with wagering handle. On average, when there are fewer horses and consequently fewer…

Thanks, Bill, and good morning, everyone. First I'll provide some high-level comments on the company's results. And then, I will provide some additional highlights for each of our segments. As you can see from our press release, although our top-line revenue declined in the first quarter compared to a year ago, we had strong growth and adjusted EBITDA and therefore strong growth and net income and earnings per share compared to the prior year quarter. Our company generated net revenue of $279.5 million for the first quarter, down $8.9 million or 3% compared to the prior-year quarter. This decrease was primarily driven by a $10.1 million decline from a Big Fish Games segment. And a $2.4 million decline from our racing segment. Our TwinSpires segment revenue growth of $2.4 million and our Casino segment revenue growth of $1 million partially offset these declines. Adjusted EBITDA for the first quarter was $57.3 million reflecting a $10.6 million or 23% increase over the prior-year quarter. The high-level drivers of this increase are as follows. Big Fish adjusted EBITDA grew $11.4 million, primarily due to a significant reduction in user acquisition spending compared to the prior quarter. TwinSpires adjusted EBITDA grew $1.1 million. Our Casino segment grew $1 million dollars, reflecting the addition of our equity investment in Ocean Downs and strong performance from our MVG and Saratoga equity investments. Weakness at our Riverwalk and Fair Grounds facilities partially offset this growth in our Casino segment. We also had a $2.3 million decline in our racing segment, primarily due to a decline year-over-year in our Fair Grounds Race Course adjusted EBITDA. Our company generated net income of $7.3 million in first quarter, up $4.5 million compared to the prior year quarter. We also delivered diluted net income of $0.44 per share up from…

Thanks Marcia. Okay, everyone, if you have any questions please let us know, we're available to answer them for you.

[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. Question for you, Bill. I mean we all saw that IGT sold its double down asset, recently, so 12 to 14x EBITDA depending on how you count the numbers. We now have 2 pretty high profile sales in the social gaming space. How are you thinking about Big Fish in that context?

Well, first, good morning, Cameron. Good to talk to you again. And I would say that it's nice validation of the attractiveness of the space. And maybe we were a little ahead of that curve back in 2014 when we identified this space as a place where we thought we could grow our company, so it's nice to see that others are clearly appreciating the opportunities in this space. So it's hard to really comment, specifically, on other people's transaction and we won't, but we are obviously very cognizant that those activities are taking place and there is a lot of interest in social games' assets, particularly, social casino assets. So we're monitoring the market, making sure we understand the trends and the thought processes behind some of this activity and we'll keep doing so.

Perfect, thanks. And then, just still on the topic of Big Fish. Are we now at the point where we should be starting to think a little bit more about seasonality in either bookings or EBITDA?

There is definitely seasonality that's already evident across the calendar. Sometimes, for our business, it can be clouded by the fact that there are so many other trends that there also going on. New competition or rapid growth in the space, or maturing in another. But, certainly, it's the case that there is seasonality in this business, and I don't know that a business with this much change going on where it will make sense in the short run to focus on seasonality as the big driver in change, but, certainly, it is a relevant driver even now. It just gets clouded with some of the other things that are going on at any given time.

Got it. Thanks. And then a question for you, Bill, or for Marcia. As you sit here with leverage under 3x now and leverage likely dropping over the next year as you continue to generate cash, is there a hard or a soft leverage target that you guys have?

No, I think, we don't really set a hard or soft leverage target. I think what we focus on as a leadership team is, are there opportunities where we can successfully invest capital to grow the business and whether that be strategic investments, I mentioned, regarding growing the investment at the Derby to, as Bill mentioned, the $16 million that was invested at the Derby for this year, the $37 million that we're investing in the Starting Gate Suite additions for next year that will help us grow the business. While we're looking at things that will help us sustain and support the growth of the business in the long-term, where we're getting -- supporting an acceptable return on the cost of capital, for the long-term. That's the decision even around for the Oxford Hotel, but the business is making that investment as well. Very disciplined acquisitions as well but the business looks at whether it be the Ocean Downs equity investment that was made, the team is always looking at that and always staying thoughtful about how high or low that takes the leverage over time, but, clearly, having the leverage where it is gives us a lot of flexibility for making those strategic investments, gives us a lot of flexibility for acquisitions as they come up and it also gives us flexibility related to share repurchases in the future.

Perfect. Thank you very much.

And our next question comes from the line of David Katz with Telsey Advisory Group. Your line is now open.

Hi, good morning all.

Good morning, David.

So without asking any -- asking questions in an appropriate way that you can actually answer about whether someone's trying to buy or you've tried to sell, anything, that sort of thing, I think there's probably -- there certainly is confidence that you sort of deal with those matters in an appropriate way. But assuming that there was some demand and I think we probably agree that there is a market for social gaming companies in the M&A market at this point, the alternative is to compare Big Fish with your short, medium and long-term model for what you think you can do with it. And my question is, how is that -- what is that qualitatively speaking, because I understand we don't want to guide too much. But how does that model look today and what is it look like compared with when you bought Big Fish couple of years ago? Clearly, some things have changed and given the cost and the investment how are you thinking about getting to an appropriate return and what do you think an appropriate return on that ultimately should be?

David, I'm going to start on that question. There were a lot of levels of that to peel back. So, let me start and I'll try to give you sort of a fair and appropriate answer given in this current forum, it isn't appropriate to be too forward-looking. I think there'll be a lot of things that will come out over time with respect to some of these transactions that we are seeing occur in the social gaming space. One point that's been heartening for us is it's affirming of -- it's affirmation of the decision we have been making to focus on the social casino portion. That is a linchpin, that is a foundation of stability around which you can build a social games company. So I think from our perspective, whether fair or not, but our perspective when we see some of the activity that we have recently, it's a nice marker out there that's focusing on the social casino piece of the foundation as a smart way to grow this company and it allows you to produce consistently and in a stable manner, hopefully, growth and profitability over time. And that gives you the flexibility to use those skills that you have in that segment and the genre to explore other genres that are related where there might be more upside but also might be more volatility. So that's how we've been thinking about Big Fish. We think the foundation and the key to health in that division is performance in social casino and that is the springboard to try other things and to be aggressive about other things if we think there's an opportunity to do so. So what the future holds is always a question that is hard to talk about in this and it's…

No, understood. And I appreciate it. If I can follow it up, given -- I think it's fair to characterize the social casino business as having changed in some ways since you made the acquisition and clearly, in some ways since before you notably start looking at it in the first place. And so in that context, how would you have us think about the length of the tail or the progression of this business, not yours specifically, but the industry overall? And is it a fair concern that this kind of a business will not follow a straight path down the road and could morph into something entirely different by 2 to 5 years from now, right? And I think, I think in some respects, the question may be shouldn't we -- do we have the time? Do you feel like we have the time to ramp this business at a moderate trajectory in its current form with -- when it may change into something entirely different down the road?

I think that's a fair question. I think within the social casino genre, there is as much stickiness and consistency to the customer base as we would ever hope. It is a competitive space and I think what makes the competitive environment even more challenging to analyze and understand is many competitors that are new to this space just focus on bookings growth. So they're not driving towards profitability, they're just trying to perhaps get a quick score, show a lot of bookings growth and not focus on the more traditional fundamental metrics of good performance in the company which revolve around free cash flow and profitability. So sometimes when we're competing with new entrants into the genre, we're running into that phenomena, where we're making UA investments based on profitability and long-term returns. Others may not be making the same choices because they have a more short-term profile. If you look at the leaders in the space though, the company that have shown sustained profitability and performance over time, I think there is some consistency within that genre and I think we are pleased that we are one of those players that have demonstrated the ability to be a leader in terms of the various key metrics over an extended period of time. So when it comes to that genre, we feel pretty good. There is an innovation that happens within the genre, features and functionality, but I think there's a real advantage to have scale and predictability and you can't fake those things. Those things ultimately get translated on the bottom line performance of that segment and I think that's something we have been demonstrating and so feel good about that, feel that, that is a business with legs that now has a track record that demonstrates it's pretty -- it's a -- fairly consistent and likely to be around for an extended period of time. Some of the other games, I think there is a more volatility in some of the other games, the casual -- Free-to-Play Casual in mid-core segment. There is a great deal of competition, and a blending between genres, can create new entrants and new competition and that's a space where we've just learned a lot. So we are being thoughtful and careful so that we can be consistent and predictable in how we play in those other spaces.

Understood. And my last thing and then I'll sort of give somebody else a chance is, I believe, as a management team, you've always talked about being thoughtful and analytical about the assets that you have. And not in any way, emotionally attached to any of the business units or assets that you have. With respect to Big Fish, there is sort of the old expression; there is a number for everything. I suppose all of us would love to just be comfortable that there is an ongoing analysis about what that number is and that there is one. And that, that sort of analytical approach and lack of emotional attachment applies to Big Fish as well as it always has for your other assets.

I think we look at all of our businesses the same way. We're constantly reviewing our businesses, our strategy, our place in our competitive universes, that we find our businesses. I think for that -- for us, that is a constant and continuing process that we've always been committed to and we'll continue to be committed to. We know who we work for and we work for the shareholders of this company and I think our performance over time has demonstrated, we do understand who we work for and we haven't lost sight of that and we will continue to do the strategic and long-term work necessary to make decisions with all of our businesses, not just one you just mentioned.

I appreciate your answers and patience. Thanks very much.

Thank you, David.

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

Hey, thanks for taking my question. First, Bill, I know you said that we won't have a Japanese horse running this year in the Derby, but can you just help us frame our thinking on how this effort may show up in the P&L in the coming years? And also, are you still simulcasting from Japan or to Japan?

Hi, Adam, this is Bill Mudd. Good question. First, to understand what's going on in Japan, Japan has typically been a closed country so they didn't allow simulcasting of any horseracing outside of Japan for Japanese customer to wager on. That opened up in the late spring of last year. So it's a great opportunity for us to evaluate. We had Lani in the race in the Kentucky Derby last year. So, a lot of excitement from the Japanese last year, around our event, when that law passed, [Audio Gap] a year to go in to that market outside of the Japan to be simulcast. The first race that went in was the Arc de Triomphe out of France, and it did $40 million of handle on that race, that one race. That was more than I think the rest of the world did, certainly more than France itself did on the race. And that was a great race. So we created a Japan Road to the Derby. We had 2 horses in it. Unfortunately, we do not have a horse this year. But, I think the prospects are very good for future years and we'll probably expand the number of races this year. And the way that it would show up is one, it would be more excitement in wagering on our product. What will be also and we see hopefully, be more opportunity for them to distribute their signal which will hopefully turn into economics at some point down the road. Sponsors, obviously, there are a lot of Japanese sponsors that are potentially looking at us as part of the Derby. And then, we are also building 36 new suites as you know and we've had a number of people inquire about adding some hospitality to what we give on the Japanese side. So there's a lots of ways, and it's all the same ways we monetize the Derby today largely. This gives us another market to get into.

Okay, great. That's helpful. Thanks Bill. I guess second on Big Fish. Two things, one, how we should we think about UA spending and how it tracks for the rest of the year in light of the new game launches you spoke about? I guess -- I know the guidance was for levels kind of consistent with this quarter, but help us think, about if one of these games takes off, could we see a marked increase?

I'll take that one. This is Bill Carstanjen, again. We'll be very, very, very careful about significant changes in UA spend even in the face of a game that shows, if we are so fortunate to have this circumstance, a game that shows wildly good metrics. And the nuance to long-term value of customers, you may see hot and heavy monetization early but just because you see it early doesn't mean it sustains itself over time. So truly, theoretically, there isn't a way to know when you launch a new game, how sticky the customers will be over time, and you can't just rely on the fact they monetize quickly to assume that they'll be sticky and monetizing at a high level over a long period of time. So I think, we learned that lesson over 2016. So even in the face of launching new products and if we're so fortunate for them to show really good metrics early on, we'll still be fairly cautious because of the lack of clarity of how that customer long-term value curve holds up over time, given that there won't be any data in a new game for the long-term yet. So I think you'll see us be more thoughtful and careful about that even in the face of good metrics for new game if we're lucky enough to have it. We want to be a little more predictable and data-driven in UA and thus, have our performance be a little more predictable at the bottom line.

Okay, that makes sense. And I guess related to that, I guess, I don't want to pile on. But, Bill, you spoke about scale being important on the social casino space now increasingly. I guess, with some of these big tie-ups and some of the leaders in the space launching multiple brands, I guess, do you feel like you're at where you need to be in terms of the scale or should we see more consolidation, I guess, to a certain degree, you're putting out multiple skins and multiple games, and that's, I guess, broadening the revenue base with which you could derive the UA spending from. But, I guess, do you feel like there is a need if we see more consolidation to do something yourself?

Well, I have to be careful about answering that kind of question because it's pretty forward-looking. We're trying not to talk about consolidation or acquisition activity. But I would say, speaking more generally about it, I would say that our Big Fish model is really an organic growth model. That when we acquired the platform, one of the things that was really important to us and one of the things that we were most excited about is the capabilities within the existing team and with the network of third-party developers, many of who we work with exclusively but all of whom we have deep long-term relationships with. Really our feeling from the beginning is that this collection of people and this collection of assets called Big Fish really has the capabilities to pursue most things of interest, organically. At least that's our approach to it. Others approach their business differently and others have different needs than we have. But at least from one perspective, I would say we're really more organic growth as we think about Big Fish.

Okay. Great. Well, thank you very much. I appreciate.

And our next question comes from the line of Dan Politzer from JPMorgan. Your line is now open.

Hey, guys. Thanks for taking my question. Sorry, I've been hopping around a bit, but I was wondering, did you guys quantify the breakdown between the impact from the Louisiana Derby and the quarantined horses?

We did not actually put that out from a disclosure perspective. But I think the thing is, obviously, both of those are sort of -- the way to think about it are really sort of unique events. We'll pick up the Louisiana Derby right in the second quarter, again. The quarantine we hope is a one-time event.

Okay. On TwinSpires, your active players were up 20%. Your revenues were up 5%. I guess how do we think about retention in these players? Is this kind of like a short-term phenomena leading up to the Derby, or is this increase sustainable on part of your ongoing strategy for the business?

I think Bill's comment said that where we really focus on getting new customers, in the past it's been transitioning. We still see quite a bit of that. It's not as much as it used to be. People transitioning from going to brick-and-mortar locations like OTBs and going online. Now, what we're seeing is the majority of new customers we have signing up are really new to the sport and are realizing they can do this online. So as you bring those people online, they're not as comfortable betting as big a numbers as people that we historically got. So that's why you see that the percentage of users is going up faster than the revenue line. And the hope is, over time, you build them into more core players and you just have to train them and they learn the system and get more comfortable with betting and more familiar with the horses and the trainers and the jockeys and the stars of the show. And then you grow them into your core audience over time.

Got it. Thanks a lot.

Thank you.

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

Thank you. Well, our team is now going to put this morning behind us and go get busy on what everybody here needs to focus on which is a successful Kentucky Derby. So we hope you all enjoy that as well either in person or on television if you can't make it. And don't forget about your TwinSpires account and if you don't have one, get one. But broader than that, thank you for your interest in our company; thank you for investing our company. We appreciate it. We try to be good stewards of your investment and we'll keep doing the best we can to generate returns for you. So with that, thanks very much and Happy Derby, everybody.

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