Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2017 Third Quarter 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'd now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury and Investor Relations.

Thank you, David. Good morning and welcome to our third quarter 2017 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2017 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 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 FCC, 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 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. I'll make a few general comments about the third quarter and then turn this over to Marcia. After she has finished her comments, we will be happy to take your questions. The company produced strong year-over-year growth for the third quarter in all of our key metrics. We saw nice gains in net revenues, adjusted EBITDA, net income, and net income per diluted share. Our Casino, TwinSpires, and Racing segments all produced strong growth in adjusted EBITDA for the quarter. Generally, there are a number of good factors influencing the performance of these segments, and I will touch on those in my comments. Big Fish adjusted EBITDA was lower than last year, primarily because we ramped up marketing spend on our social casino and our new Cooking Craze game. We saw solid sequential growth in social casino bookings again this quarter and from Fairway Solitaire as well, and strong initial results from the worldwide launch of Cooking Craze. The segment performed better than we expected. Turning to each of our businesses, with respect to our brick-and-mortar casinos, adjusted EBITDA was up $9.1 million or 30%. All of our properties produced improved results at the adjusted EBITDA line for the quarter. That's a hard feat to achieve and we're taking a brief moment to acknowledge. Our strategy within our Casino segment is to take numerous small bets on building or acquiring properties with the expectation that it is difficult to perform well all of the time across all markets. Thus a diversified portfolio of properties with small…

Thanks Bill and good morning everyone. I will provide some high level comments on our overall results and some highlights for each of our segments, and then I will provide an update on our capital investment plan. Starting with our overall results, net revenue was $314.8 million for the third quarter, up $11.4 million or 3.8% compared to the prior year quarter. Adjusted EBITDA for the third quarter was $76 million, reflecting a $4.9 million, a 6.9% increase over the prior year quarter. Net income was $16.7 million in the third quarter, up $8 million, compared to the prior year quarter. We also delivered diluted net income of $1.08 per share, up from $0.52 per share in third quarter 2016. Turning to our segments, adjusted EBITDA for our Racing segment was $1.7 million, compared to $400,000 in the prior year quarter. The $1.3 million increase reflected a favorable insurance reserve [Indiscernible], strong performance at Arlington from increased handle and admission revenue and a slight decrease in revenue at Churchill Downs due to one less live racing day in the quarter compared to a year ago. Adjusted EBITDA for the Casino segment was $39.5 million, compared to $30.4 million in the prior year quarter, up $9.1 million or nearly 30%. Our equity investments contributed $5.5 million to the growth and our owned casinos contributed $3.6 million to the growth in adjusted EBITDA for the quarter, compared to the prior year. Once again, we benefitted from the addition of our Ocean Downs equity investment in January of this year and our Saratoga equity investment delivered strong growth compared to the prior year quarter. As Bill mentioned, our Riverwalk, Harlow's and Fair Grounds team have effectively executed enhancements to their marketing programs over the past three months to help grow revenue and also…

Yes. Thank you, Marcia. We're prepared now to take your questions. We hope you have some for us. So, with that, we'd like to open this up.

Thank you. [Operator Instructions] Our first question comes from Dan Politzer with JP Morgan. Your line is now open.

Hey guys. Thanks for taking my question. On TwinSpires, could you guys kind of break out or the difference that BetAmerica contributed and maybe over the last two -- over 2Q and 3Q, the extent of the organic growth versus the impact from that?

Sure Dan. This is Bill. So, I don't think we have that information right here to break out in front of us, but let me give you some perspective on it. When I think about that acquisition, certainly it contributes some to the topline, but the underlying TwinSpires business is very, very healthy and growing very, very well organically. So, I don't pay personally much attention to the topline. Longer term for that business, I really like the brand and it's really important that we harness the technology advantages we have in our core TwinSpires business and apply them to BetAmerica and also capture any other synergies that we can to integrate it successfully. So, we haven't been disclosing just the company as we get larger as we have been getting. It just doesn't make sense to get into that level of minutia of disclosing the organic contribution of BetAmerica, nor do we run the business now or think about it that way, because, again long-term, that's really not what its importance to us is.

Got it. Okay. And then turning to casinos, you guys touched a little bit on the marketing spend and kind of how you're deploying that across Fair Grounds, Harlow's, Riverwalk. I guess, more generally across the portfolio, are you -- is marketing a real focus in opportunity to reduce costs from where we sit today? And I guess are there any other areas where -- within your casino portfolio, you would look to reduce costs?

That's a really good question. Something that we think about a lot. Fundamentally, it's about understanding the math. It's about understanding the results you are actually getting from different campaigns and while it seems very easy to analyze and simplistic, there's just always lots and lots of factors that impact the true performance of your programs. So, I think as a focus for the company, what we've tried to do is be consistent and get smarter about how we use our data, because there is growth, but, ultimately, what you're interested in is bottom-line growth, not topline growth at the expense of bottom-line growth. So, I think as we get confidence -- more confidence within our organization that we understand the true implications of our marketing plans and we can nimbly modify them based on results, we'll get better at marketing. But to me, ultimately, that is the power of marketing, and that is the importance. It's not just trying to grow topline. It's being very, very smart about what kind of return you're actually getting from your marketing spend. So, as a company, we are getting better across everything we do. I think Big Fish taught us a lot. The TwinSpires team has learned and taught us a lot. And trying to share some of those lessons across the entire company, I think, makes us better at efficient marketing.

Got it. One last quick one. On the Mississippi properties, was there anything in the quarter you would call out that kind of pointed to this or can better explain the strength that you're seeing or was this more just kind of a one-off?

I don't know that it's necessarily just one-off. I think we focused and need to give credit to our team in Mississippi. We focused very, very intensely on how do we run our business better, how do we serve our customers better, how do we understand the impact of our marketing programs. We have had to -- as you often find in challenging market environments, we've had to focus very, very intensely on what we do to provide service to our customers and think about every place we can improve our performance. And so sometimes that's not starting and stopping on a dime. Sometimes, the results of that kind of effort takes a little bit of time to get recognized and to be understood and to get built upon. So, I don't think these were necessary one-off factors in Mississippi at all. I think it's a reflection of a commitment by the overall teams, including corporate to run those properties as well as we can run them assuming that we're looking at environments like we've seen over the last couple of years.

Got it. Great job. Thanks. Thanks so much.

Well, thank you.

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

Hi. Thanks for taking my question. First, on Big Fish, can you quantify the non-cash and non-recurring portions of the SG&A increase in the quarter?

Yes. So, the way I would think about it is that the head count piece was directionally -- and that is a recurring piece, so that's directionally about a $1.2 million of it. The FX and the bonus accrual and the increased legal fees, which, again, are the -- in a way non-recurring because we've spent that money to successfully defend that patent litigation, the balance of that announced for the quarter was the non-recurring.

Okay. That's helpful. Thank you. And then on TwinSpires, in your Q you noted that the IRS has made some changes to reporting withholding requirements. Can you maybe help us think about the magnitude of the impact on specifically the TwinSpires business?

Sure Adam, it's Bill again. So, what happened was both with respect to the rules around reporting of gambling winnings and of withholding, the IRS made some changes. So, quantifying the impact of that, it's all upside. It's potentially pretty important to our larger customers, but we'll have to see exactly how it gets reflected. But, essentially, there'll be, in our view -- we'll see if the data bears this out going forward -- in our view, there will be significantly less occurrences of withholding and less occurrences of reporting, particularly on the withholding that means there's more money in your customers' pockets, which they can turn around and reinvest in placing more bets. On reporting -- similarly, it makes for a more efficient day at the racetrack or a more efficient day on TwinSpires, when you're not sitting there trying to parse through reporting obligations or looking to see what they are. So, generally it makes for a more efficient game and certainly the larger customers, who are the ones generally in a situation where they're dealing with withholding and reporting, it makes for a better experience and an easier experience. So, there ought to be some benefit from that efficiency, but that's not something that we can directly quantify. Although, someone that's been around gambling businesses for a number of years and certainly understands horse racing, I think it was a really nice thing for our game and I think our customers are really going to appreciate it.

Okay. That makes a lot of sense. Thank you very much.

Thank you. And our next question comes from Jeffrey Thomison with Hilliard Lyons. Your line is now open.

Thanks. Good morning. I had two questions. First, I was wondering if you could comment on the transportation infrastructure project as it relates to the capital spend. I'm curious how you will measure the benefits or success of that project, such as ROI and how you determined the optimum spend there? And then the second question is hoping you could just comment on the plans for the racing facilities in Kentucky in a similar -- in a way similar to the previous question, how you arrive at the proper capital commitment there, relative to the expected returns for those markets? And then is it a bit different of an approach for you to announce the projects without having the legislative or industry approvals? Thanks so much.

Okay. So, there's a whole lot there. I'm going to take it one step at a time and you may need to jump back in and direct me to make sure that I cover everything that you want to cover. If I'm not covering something, it's because I forgot, not that I don't want to cover it.

I have confidence in you. Okay.

So, first, the parking lot in the external capital project, one of our challenges for any of you -- and one of our challenges for the Kentucky Derby and for any of you have been there, you will understand this challenge -- one of our challenges is the size of our footprint and the fact that we don't have sufficient parking. There is only so much we can do about that. Our property sits in a residential neighborhood and people live in the homes in our neighborhood. So, there's a limit to how much property we can acquire to expand our parking and we've already done that. We've maximized our footprint. So, what we decided to do is create an extremely efficient bus depot and transportation infrastructure, so that we can go leverage other parking nearby, because if any of you know, within a couple of miles of our facility, there is a Fair Grounds Complex with lots and lots of parking, for example, and there is other parking facilities across the city that maybe, over time, we'll look to those as well. But really what we wanted to do was package more parking with our tickets and since we could not place those people at our facility, we needed an infrastructure and an arrangement with others to park those people at other places and then bus them into our facility to try to create a better ingress and egress process for them. So, fundamentally, while we would love our customers' experience to start once they're inside the gate, fundamentally, that's not when their experience starts. Their experience starts when they leave their home and when they sit in traffic and all of that. We can't help all the way back to that point, but certainly, we want to get better and work closer to improving their experience from the time they park their car. So, ultimately, we were faced with the challenge of limitation of space and that's how we decided to solve it. We decided to solve it with an efficient transportation infrastructure and leveraging another large parking facility close by. In terms of ROI, you'll see that over time here. What's important is that we give them an excellent parking experience, so that we can consistently package parking with tickets. Historically, we have not been able to do that. That is something that we want to do. We haven't had the parking to do that, but we are going to work forward now to include parking with ticketing, so long as we can acquire parking and so long as we can deliver a worthy experience for the consumer in terms of the efficiency of them from the time they park their car to the time they get to our facility.

Bill, before you go to the second question --

Or we move onto any other -- before we move on to other questions, though, let's make sure we finish talking about this one, if you have more questions about it. I have more to say about it, but I want to pause to make sure I'm covering what you want to cover.

Just a clarification, though. So, the spending that you will do relates to the physical construction of new assets or new infrastructure and not using existing infrastructure down the street from you?

Well, at our facility, we have to put in infrastructure because we do not efficiently move buses in and out.

Got you.

And also we have people wandering across the streets, which slow down the ability of buses to get in and out quickly. So, we needed to significantly change the parking design, so that we could have a very large multi-bus drop-off, pickup concurrent operation, and then get those buses to the street, up and down the street, away from our facility without blocking. So you will see -- again, this is not the most exciting part. I'll talk about some of the esthetics in a minute, but you'll see a -- what I hope will be a very, very well-designed bus ingress and egress infrastructure, so that we can move large buses in and out very, very quickly and get them out of our facility to Fair Grounds as quickly as possible. We will also have temporary pedestrian bridges placed over Central Avenue, so that those people that are trying to wander across the street will now be directed to the bridges, so they will not be interrupting traffic as we move people away from the facility or towards the facility depending on the time of day. There are also some aesthetic improvements that are more than aesthetics. They're part of efficiently getting people in and out of our facility. So, you will see a redesigned front portion of the facility, a new gate -- a new entrance gate. Instead of the two traditional gates that you come in -- of Central Avenue, there'll be a large, well-designed central gate that will allow us to bring people into our facility very quickly and also exit them very quickly. And again with a project like this, there is some portion of it devoted to the idea that you have to overall improve your experience to keep up with the best experiences that other people have in the country. So, we've looked at ingress and egress at Super Bowl, at NASCAR events, which also have large crowds coming in and leaving very quickly. Yes, there is some ROI associated with this, but some of this is just necessary to maintain an economic event. So, we plan on monetizing this by charging people for parking and acquiring parking spaces that are not our own and not on our facility, but servicing those parking spaces and thus packaging them with our tickets. So, there will be ROI associated with that, but this is broader than that. I don't want to characterize this as a straight-up ROI project that you might see when we decide to deploy a new slot machine versus keeping an old one. Some of this goes to the aesthetics of the event and improving the things that our customers tell us are the most frustrating and unpleasant parts of their experience. To maintain what we have, to maintain sort of the iconic extravaganza that we are, we have to do better at consistently getting people in and out of our facility efficiently.

I think you covered that very well. I appreciate that, Bill. Then just secondly, a comment on the approval process that's hopefully forthcoming, but we'll see on the racing facilities in Kentucky.

Yes. They're not on the same timeframe. Remember, we're talking about three of them. We have the Louisville facility, which is, of course, right here five miles away from Churchill Downs Racetrack. We have the Corbin, Kentucky facility, which is out in the southeast portion of the state, and we have the Oak Grove facility, which is down in the southern portion of the state up I-24. With respect to the Louisville facility, we have the conditional approval of the Kentucky Horseracing Commission and we also have the Zoning Board approvals. So, we are beginning to move dirt. We are going to very shortly start moving dirt and constructing our facility. With respect to the Corbin and Oak Grove facilities, we don't have licenses yet but of course, in a process like this, this is a public process. So, we have to declare our intentions and publicly present our work and our plans to the Racing Commission in order to obtain a license. So, we have started that process. We have applied -- and it's a fairly extensive application process. We have applied for the two additional licenses, the Corbin license and the Oak Grove license. We've applied for those licenses, but the Racing Commission has only had a single meeting since our application was submitted and they elected at that time to not hear those applications. So, that is something that we are working on with the Racing Commission and also the Bevin administration to try to find some process and some parameters on how that licensing application process will proceed because it isn't something that happens frequently in the state, so there is some ambiguity on the timing and the scope of the work necessary for new licenses. But that's a cooperative respectful process. It's just one that's different than the Louisville timeframe and the timeline, so we'll take it one step at a time.

Okay. I appreciate it.

Thank you. And I'm showing no further questions in queue. I would now like to turn the call back over to Bill Carstanjen for any closing remarks.

I don't have any closing remarks other than to say thank you for your interest in our company. Thank you for being on the call today. We're available for further discussions offline for those of you who are interested in that. But I appreciate your time today and we'll see you next time. Thank you everyone.

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