Ladies and gentlemen, thank you for standing by, and welcome to the Penn National Gaming fourth quarter conference call. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, February 8, 2018. I would now like to turn the conference over to Mr. Joe Jaffoni. Please, go ahead

Thank you, Frank. Good morning, everyone, and thank you for joining Penn National Gaming's 2017 Fourth Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first I'll review the safe harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminologies, such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words or by discussions of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results. Such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. With that, it's now my pleasure to turn the call over to company's CEO, Tim Wilmott. Tim?

Thank you, Joe, and good morning, and welcome to Penn National's Fourth Quarter 2017 Conference Call. I'm going to start off the call with my comments. I will be followed by our Chief Operating Officer, Jay Snowden, who is going to speak to what we saw with the consumer in the fourth quarter, talk a bit about Las Vegas, operational trends and also give some color into what we saw in the first month of the year from the states that reported in January of 2018. Jay will be followed by our Chief Financial Officer, B.J. Fair, who is going to speak to our '18 guidance, the traditional financial metrics, talk a little bit about the impact of the new federal tax code and speak also on where we are with our Jamul loan with the Tribe in San Diego County, California. Also with me online we see is our Treasurer, Justin Sebastiano; our Senior Vice President of Public Affairs, Eric Schippers; and our General Counsel, Carl Sottosanti. Let me begin by saying, we had another solid quarter that exceeded net revenue and EBITDA guidance after you net out largely nonoperational items, the most significant one being the impact of higher-than-anticipated cash settled stock-based compensation due to the increase of our share price in the fourth quarter, yes it was a noisy quarter, and as you can recognize with the work done on the Pinnacle transaction. But that said, we still saw consumer revenue trends remaining solid and consistent with what we saw in the earlier quarters of 2017, and Jay is going to get into more detail on that, and our margins remain strong. I wanted to give the audience an update on where we are with our recently announced transaction with Pinnacle, which we announced on December 18. And just to remind everyone, we have a deal with the Pinnacle shareholders to provide them consideration of $20 in cash and $0.42 of Penn shares. Since that announcement on December 18, I'm pleased to report that we had initial meetings and/or conversations with all the states that require regulatory approval as well as the FTC in Washington, and that we're confident that we're going to close in the second half of '18. You should expect to see our S-4 proxy filing in the next couple of days, and we anticipate a shareholder vote, both on the Pinnacle side and the Penn side, to occur this spring. We've also initiated the integration planning work to bring the 2 companies together, and we spent most of the month of January with Anthony and his leadership team visiting all of the soon-to-be acquired properties on the Penn side and also visited and worked with and began discussions with their Las Vegas corporate service center. And I must mention how impressed we continue to be with the quality of the properties that will be part of our new company and also with the quality of the talented people that we've come in contact with over the past 60 days. We continue to be very confident with the $100 million in cost synergies. We expect more than 50% of that will come from the corporate centers as we combine the Penn Wyomissing, Pennsylvania operations with the Pinnacle Las Vegas, Nevada operations, over 50% of the $100 million will come from the combination of corporate centers. There is also significant revenue synergies that are still to be sized. We have a lot of work to do to continue to bring together the mychoice program on the Pinnacle side with a Marquee Rewards program on the Penn side. In aggregate, it represents about 5 million active gamers who have been with our 2 companies playing in the last 12 months. So there is still much work to be done, but there is certainly revenue synergies that we are still working to quantify that are meaningful. B.J. will provide additional information in his update on the financing -- where we are with the financing for this transaction. I also wanted to cover something that occurred in January. We won the first Category 4 license in the state of Pennsylvania with a $50.1 million bid and placed our flag in York County, Pennsylvania. We believe this is the best location, underserved location in the state of Pennsylvania with access into the Northern Maryland market right along Interstate 83. We want to see where all the other flags are placed as these Category 4 licenses get distributed before me make our final determination of our location and the level of investment. There are 8 more of these licenses to be awarded, we think, over the next 4 months. In fact, after our call here, we're going to have round 3 to take place in Harrisburg, Pennsylvania for the next Category 4 license and location. But I want to assure our investors that we will get solid returns from this new license, inclusive of the impact of what will happen at Penn National up in Grantville, Pennsylvania. So more to come, but we are very confident about our ability to get very good returns on this investment going forward. But we want to see where the additional competitive landscape may be before we make any final determinations. With that, I'd like to turn over the call to Jay Snowden.

Thanks, Tim. Good morning, everyone. While the fourth quarter concluded really what was a terrific year for us at Penn in 2017. Similar to the third quarter, we, again, experienced solid same-store sales growth on the back of a healthy and confident consumer. Same-store sales were 2%, when including Charles Town, and 3.5% when excluded. We did have significant onetime and largely nonoperational costs that impacted us in the fourth quarter that we've outlined in the earnings release that were not baked into our guidance. But when you cut through the noise, our year-over-year EBITDA margins grew nearly 50 basis points and our flow through on the incremental revenues was approximately 50%, even when including the remainder of the consulting third-party costs associated with the margin improvement initiative that we covered in the third quarter. That 50% flow through the figure that we have always and will continue to aim to target and is also reflected in our 2018 guidance that you'll hear from B.J. shortly. Some specific fourth quarter highlights. Our year-over-year net revenues at our Charles Town facility showed sequential improvement over Q3 and Q2. Our property and management team continue to perform very well in the face of significant new supply over the last several years, and we anticipate momentum carrying over into 2018 as well. Performance at our Jamul property in San Diego continues to improve, both sequentially and year-over-year. December, which really was the first true clean year-over-year comp since our opening in the fourth quarter of '16, showed revenue growth of 14%, EBITDA growth of over 40% and a 1,000 basis points improvement in our operating margins. Tropicana Las Vegas conversely was very challenged in the fourth quarter, largely due to the aftermath of the October 1 tragedy. The south end of the strip with fewer exceptions has been and remained relatively promotional since that time. We've had the back-fill cancellations with some lower rate leisure and transient travelers and are less severe as similar trend has continued into the first quarter. The convention and group business has been largely unaffected, but it has been certainly more unpredictable and volatile in the other hotel segments over the 4 -- last 4-plus months. We closed out a truly fantastic year in Ohio, Massachusetts and our Kansas City properties, where all of our properties in those markets experienced market-leading revenue growth, coupled with meaningfully improved EBITDA margins. Now from a database perspective, the fourth quarter trends were similar to Q3. Spend per visit continues to be a very healthy story across the board, particularly at the high-end and the mid-worth segments and our unrated business grew year-over-year at nearly 2/3 of our properties and was a very good story in 2018 (sic) [ 2017 ]. Low unemployment coupled with rising wages, home values, consumer and business spending and record gains in the U.S. stock market have us feeling good heading into 2018 as well. Certainly it goes without saying that the weather in January and early February has been extremely harsh and frigid across the Midwest and the Northeast year-over-year. But given our experiences over the last several quarters and last couple of years, we're confident that once the weather eases up, we'll see some pent-up demand here in the first quarter in March -- later in February and March. So with that, I will turn it over to B.J. to walk you through Q1 and 2018 guidance.

Thanks, Jay. Excuse me. I'd like to provide a few highlights of our 2018 financial guidance as well as discuss a few other note -- financial items for the quarter. Our revised guidance and underlying assumptions are found on Page 5 of the press release. I'd like to remind everyone that this is a Penn stand-alone guidance. No assumptions have been made for the timing of the closing of the Pinnacle transaction, nor do they include any guidance for the combined company. For the full 2018, our revenue is anticipated to be $3.226 billion, adjusted EBITDA of $916 million and adjusted EBITDA after Master Lease payments of $455 million. Specifically, in Q1, revenue of $817 million, adjusted EBITDA of $234 million and adjusted EBITDA after Master Lease payments of $118 million. As Jay mentioned before, the adjusted EBITDA figures above reflect the performance with what that achieves the higher end of our 2018 margin target associated with our margin improvement plan that we disclosed on our last earnings call. Maintenance CapEx is expected to be $104 million for the year. This amount includes $20 million previously disclosed to implement our margin improvement initiatives. Some of this amount may be impacted by our integration efforts for the Pinnacle transaction. It also includes $4 million for capital projects continuing from 2017. Approximately $28 million of the maintenance cap is expected in Q1. Master Lease rent payments are forecasted to be $461 million, $116 million is incurred in Q1. As of 12/31/17, our Master Lease rent coverage was 1.69. We forecast rent coverage of 1.85 at the end of our lease year, which is 10/31/18. I'd also like to remind everyone that the rent reset will take effect at the end of this year -- the lease year. Cash taxes are forecasted to be $41 million for the year, $12 million expected in the first quarter. Cash interest on traditional debt is estimated at $56 million, $22 million in Q1. Free cash flow generation for the year is anticipated at $254 million and net free cash flow after mandatory payments is anticipated at $215 million. The primary difference in our free cash flow between this year and last year is due to the payment -- is due to cash payment of taxes versus tax rebates in the prior year. And as Tim mentioned earlier, the project capital cost for our Pennsylvania Category 4 satellite casino have yet to be determined. Cash on hand at the end of the year was $278 million, and this guidance does not assume any adjusted EBITDA contribution from our agreements with the Jamul Indian Village, and as always our debt covenants are -- will be easily met. Next, I wanted to highlight a few of the projected impacts of the Tax Cut and Job Act -- the Tax Cuts and Job Act (sic) [ Tax Cuts and Jobs Act ] will have on the company. First, we made a decision to repatriate approximately $36 million previously held in our Canadian subsidiary. We will have a minor tax on the repatriated amount, but that -- we will incur that over the next 8 years. We anticipate our tax rate to be 21% for the upcoming year, which will result in an annual benefit of over $30 million for Penn alone. We've not estimated the annual impact of the combined company post transaction. The rate decrease will also result in a reduction of approximately $20 million in tax slippage on the sales of divested assets and sale leaseback proceeds associated with the Pinnacle transaction. The impact of a legislation will result in a write-down to our deferred tax asset of $257 million. Importantly though, this is an accounting adjustment and does not have an impact on our current or future adjusted EBITDA or cash. And finally, the Master Lease rental payments will continue to be fully deductible against income for tax purposes. With respect to the Pinnacle transaction, I want to provide a brief update on the status of our financing efforts. We've met with our bank group and we -- to review the objectives and financing for the transaction. We've received strong support for both the transaction and our proposed financing structure, and we hope to finalize the proposed structure within the next week, and be prepared to close the funding of the transaction in the second half of 2018. And then finally, on Jamul. As Jay said earlier, we continue to be encouraged by the improvements in the operations of the property as evidenced by the strong year-over-year results. On our last call, we reported an agreement in concept had been reached between us and the Tribe and the other lenders. Unfortunately, the approvals have not been obtained and the amendment and the loan agreement has not been signed. The Term Loan B is in default and the amendment is signed although -- the Term Loan B is in default until an amendment is signed, although the loan is being fully serviced. Term loan C has been fully subordinated. We are extremely disappointed that the amendment has not been signed. We remain committed to work with the Tribe for an amicable solution, but can provide no assurances that one will be achieved. The uncertainty of the resolution has caused us to record an impairment charge against the loan of $48.5 million in the fourth quarter. And I'd like to reiterate that our guidance does not assume any EBITDA contribution from our management agreement or license agreement in the coming year. With that, I'll turn it back to Tim.

Thank you, B.J. Operator, we are now ready to take any questions from the audience that may be out there.

[Operator Instructions] Our first question comes from the line of Carlo Santarelli with Deutsche Bank.

I just had a couple and they are somewhat housekeeping items. But could you guys -- in the release, obviously, you talk about the Casino Rama. The Casino Rama is guided for the first half of this year. Could you guys kind of provide an update as to what the status of that will be? And how we should think about that process for the back half and future periods?

Carlo, this is B.J. The OLG is continuing with their modernization process. We know that the -- that bundle, which Casino Rama is included in, the applications have been submitted. We do anticipate that they will continue on with the schedule that they have outlined previously for that bundle, which means that by the middle to the end of the second quarter that they will be selecting a new operator for that. And that's why we've identified that the end of the second quarter is the time frame that we would be removed.

And Carlo, we have elected not to bid on that central bundle. That's why we have that expectation in our guidance.

Understood. And then I don't know if Eric is around or whoever wants to handle this. But obviously, in West Virginia, Senate Bill 357 seems to be making some progress. Could you guys kind of give us status update on what your expectations are for the impact there on Charles Town?

Carlo, it's Eric. Yes, the bill cleared 2 important first hurdles, namely the House Judiciary Committee and the Senate Judiciary Committee. It still has to go through additional committees and then ultimately be voted on by both chambers. But we like where we are right now, and more importantly, we like the structure of the bill, which provides us a 10% tax rate and a $100,000 license fee payable over 5 years.

And Carlo, one of the things that -- I'm sorry, Carlo, one of the things I did want to comment on with regard to the potential of legalized sports betting in the United States is, everyone knows we're expecting the spring ruling from the U.S. Supreme Court. And many states are -- including West Virginia, are contemplating legislation as we speak and how they're going to possibly take advantage of the repeal or significant amendment of PASPA. Given our footprint and soon to be expanded footprint with the Pinnacle transaction, we have been approached by a number of different potential strategic partners to take full advantage of the legalization of sports betting by state level. Us being in 20 states, this is something that we're watching very closely at the federal level and at the state level to make sure that, as Eric suggested, we're very pleased with what's happening in West Virginia with the economics that are currently present in the legislation. And we're trying to make sure that the West Virginia model gets followed by other states.

Understood. And then if I could, just one final one. Jay, you mentioned, obviously, that the south end of the strip remains very promotional, and I thought you might have said 1Q was more of the same of what you were looking at in the fourth quarter from Tropicana? And correct me, if I'm wrong on that point. But when you think about the property, 2018 relative to 2017, obviously acknowledging there are some tough comparisons for the market in total for the 1Q. Could you just talk a little bit about what your expectations are from Tropicana, now that you have a full year with some of the additional amenities you've added there?

Sure, Carlo. So yes, I did mention that what we experienced in the fourth quarter was more severe than what we're seeing in the first quarter, though there is somewhat of a continuation on the promotional side of things, very low prices for the transient leisure customer. January actually held up fine, but we're seeing some more softness on February. Then obviously, March is a tough comp with the CON/AGG conference year-over-year. So we're -- what we're seeing in Q1 is better than Q4, and what we can see at this point for the remainder of the year looks better than Q1. So Q4, we come up to an easy comp, but it's still to be determined what Q2 and Q3 will look like. But I'm encouraged from what I see today for Q2 and Q3 versus the trends we're currently experiencing in Q1, if that answers your question.

And if you remember, Carlo, on the first half of -- in the first half of '17, we were also disrupted by the pedestrian construction of the bridge between MGM and Tropicana. And fortunately, that work was completed in December '17. So we should see favorable pedestrian traffic flow that we didn't see because of the bridge being closed last year.

And if you go back, Carlo, to where we were in Q3, we were coming off of a really strong quarter at Tropicana. After we opened Irvine's in late July, we had a really solid August and September, and obviously, just came off the track, so on October 1 they were still dealing with that. So there's a lot of noise at Tropicana, because we're happy with the performance on a stand-alone basis of some of the new assets, but everything in the building has been impacted by the softness on the rate side and the visitation side.

Our next question comes from the line of Steve Wieczynski with Stifel.

So Jay, if I could ask Carlo's question a little bit differently. I guess, if you look at your -- if you look at the Trop for 2018, what's embedded in your guidance? I assume, if I kind of understand you correctly is, net-net, you still think that property will be up a good bit year-over-year. Is that a fair way to think about it?

It is, Steve. Again, I don't have complete visibility onto the remainder of the year, but I think that the softness that we're seeing continue through Q1 is going to be offset by what is an easy comp in Q4. And I think it'll be largely determined by what happens in Q2 and Q3. The visibility that I have into Q2 and Q3 look fine today, but I don't -- I won't go on cancellations and ultimately what the rates are for leisure and transient customers until we get closer to those dates. But at this point, your assumptions are correct that we're seeing -- we're looking at growth at Tropicana in 2018.

Okay, got you. And then just in terms of your -- Jay, again, another question for you, just in terms of your guidance in general for the year, can you maybe help us think about how you are thinking about just the overall consumer for the year? Is it kind of a status quo from what you saw in '17? Do you have them getting stronger? Do you have them getting a little bit weaker? Can you help us think about that a little bit more?

Sure. If you look at our assumptions on the revenue growth side, I think you'll see that we're assuming a continuation of what we've experienced in the second half of 2017. We've been very pleased with the health of the consumer, very pleased with the same-store growth. And as I mentioned earlier, at the high-end and the mid-worth segments of the database and the unrated at most of our properties, the trends continue. We've obviously been impacted significantly. When the weather is mild in the winter, we tend to have a great Q1, and it can be challenged because we have such a high concentration today pre-close of the transaction in the Midwest and Northeast. So to be determined as to how Q1 shakes out, it's a bit of a soft start, but we do anticipate for the year that the consumer is going to remain strong.

Our next question comes from the line of Felicia Hendrix with Barclays.

I'll start with Las Vegas, one in there too. Just of the $3 million impact that you guys highlighted in the release relative to guidance and hurting operations. Of that $3 million, you said was Las Vegas and hurricane impacts. I was just wondering, if you could kind of break out how much of that was coming directly from Las Vegas?

Yes. It's the majority of that, so sort of think of it as a 2/3, 1/3 is the way that I would answer that question Felicia. Certainly more impact at Trop than there was in the Gulf Coast from Hurricane Nate, though the impact to our properties in Gulf Coast was not insignificant, which is why we added it in the table.

Okay, great. And then just moving to Pennsylvania, you all are pretty clear that to kind of say you need more information before you can give us more information. But if you were going to take a first stab at how you were thinking about the net impact of the expansion and then your kind of mitigation of that expansion in Pennsylvania, how would you think about that?

Well, Felicia, we certainly have looked at a number of different locations in and around the city of York all the way down to the Maryland border off of Interstate 83. We have to have a minimum of 300 slot machines in the Cat 4 location, I think a maximum of 750 and 40 table games. So we still -- those are the ranges of what we're looking at today, and it all is going to depend on whether there's going to be competition to the east and west of our 15-mile circle that we have as protected based on our winning the first bid. So that's where we are right now, and I think probably by late spring, we should have our thoughts fully collected on the location and the impact on Penn National. We certainly know that the Pennsylvania had provided a 25-mile protection zone over the Category 1, Category 2 and Category 3 licenses. And as we look at our customers at Penn National, we know that most of those customers come from outside that 25-mile radius. So we're very mindful of where the business is coming from in terms of Lancaster County and York County, and that's all going to go into our final determination on location and level and scope of investment.

Okay. And then just moving to the Pinnacle transaction and the $100 million synergy expectation. I was just wondering, you guys gave us some color there, but if you could just talk about something specifically that gave you confidence in that number? And then also, I'm just wondering, are there things that you're seeing at the Pinnacle properties that you can take to the Penn legacy properties, like things that they did operationally that maybe you weren't taking advantage of? And so can you bring that to Penn and generate some incremental benefits from that?

Felicia, this is Jay. Look, yes is the answer to the second part of the question. We've been very impressed, as Tim mentioned in the opening comments, with the quality of the assets, the quality of the people, and in many cases, the quality of the practices. They are 2 great companies, but we just do things differently. In some areas, we think we maybe do things a little bit more efficiently or better on the Penn side, and we've seen a lot of areas where we think Pinnacle just makes better decisions than we do. So no doubt this is a -- we're in the discovery process. We're in -- taking a tremendous amount of information from the trips that we've made to the properties as well as our corporate offices, and we're very encouraged by what we see on all fronts. So yes is the answer to the second part. On the first part, really nothing has changed with regard to the composition of the $100 million of cost synergies we've laid out previously. We think a little over half of that will come from just -- there's a lot of overlap and redundancy, as you well know, between 2 large publically traded gaming companies, so that's where the majority of that's coming from. And then there is also best practices we think on the Penn side and the Pinnacle side at the property level that gets you to the remainder of the cost synergies. It's going to be -- there's tremendous opportunities in the area of strategic sourcing and procurement. Penn had not made as much progress as Pinnacle had, but combined, there's progress to be made on both sides. We think that we can do a much better job of managing or scheduling in our labor more effectively in the combined company than either company does today. And there's lots of things we can do on the marketing side just to be smarter with regards to how we spend our marketing dollars. So those are the 3 big buckets, those haven't changed, and the composition of the $100 million on the cost side hasn't changed. I think what you heard from Tim earlier, and you'll hear from many of us on the Penn side that have been on these visits, we just feel better than ever that there's real positive revenue synergies beyond what we initially thought, because cross-market visitation is going to be a real opportunity for the customers and the database for both companies. And we also believe that there's a tremendous amount of opportunity to continue to do business and port business from the Pinnacle database to Las Vegas. So those are some real revenue opportunities and there'll be more to come. We're 2 months into the process, but we're very encouraged so far.

And are you seeing anything on the jurisdictional front, like in terms of the state-by-state approvals that could push your expectation for -- what could put risk to the second half closing?

Felicia, this is Tim. Myself, with our legal and compliance team have been working with the states and the FTC on these jurisdictional approvals, and we see nothing at this stage that gives us any indication that we're not going to close this deal in the second half of '18. All of our conversations and meetings have been encouraging. They certainly appreciate upfront that we had a solution for the divesting of the 4 assets that are going over to Boyd, and that has really facilitated very productive conversations with the states and the FTC as well. So to -- the answer to your question is, no, there are no concerns that we're seeing as we're having these conversations and meetings.

Our next question comes from the line of Thomas Allen with Morgan Stanley.

Just in terms of the tax savings that you're going to reap over in the future now. How are you thinking about redeploying that cash?

Yes, I think that the addition to the cash flow that we've got -- Thomas, this is B.J., is really no different than how we've viewed it on the entirety of all of our capital allocation decisions. Clearly, in a post-transaction, we'll be looking to get back down to the leverage levels that we like. And then post that, we'll be taking a look at where the potential opportunities are out there, whether it would be from an M&A perspective or to the extent it's not there, we always have the ability to return cash to shareholders. So we will not -- on the incremental cash as we've always continued to generate substantial amounts of free cash flow, our determination of how we allocate that capital really hasn't changed.

One of the - Thomas, this is Tim. One of the outcomes of how we structured the consideration for Pinnacle with the use of the Penn currency, it gives us at close pre-synergies a very moderate level of leverage that will be worked down very quickly as we start generating cash flows. And it gives us a balance sheet that is -- has the ammunition to continue to grow with tuck-in acquisitions or ground-up developments like we're talking about in Pennsylvania. And as we've said in the past, we can assure our investors that we're going to continue to be very prudent allocators of capital. And if we can't find the appropriate returns for the excess cash, we have shown in the past, like we did in 2017, our willingness to return capital to shareholders that that's the best use of the excess cash.

Helpful. And that -- and now that we're -- you're removed from the opening of MGM National Harbor, how are you thinking about Charles Town trends on a go-forward basis?

Sure, Thomas. Look, we're assuming going into 2018 that we start to see year-over-year comps that are a lot closer to flat year-over-year. So I think we weathered the storm quite well in 2017. We saw our net revenues down high single digits, and we would anticipate 2018, obviously, the trends to improve significantly from what we saw in '17 now that we're in the second full year of MGM National Harbor's operation. So think about it as a sort of flattish to down very low single-digit is what we would anticipate for this year.

Our next question comes from the line of David Katz with Jefferies.

I wanted to ask, I know we've -- you've given us quite a bit of commentary about the consumer. And just looking forward and what we've seen from the different segments of the consumer economy that may be beneficiaries of the new tax bill and may be in positions where they're receiving one-time bonuses. Have you seen or do you have any reason to expect that you'll see any improvement in volume levels as a result of that specifically?

David, I'll turn this over to Jay, but I just want to have some commentary as a resident of the State of New Jersey, this new tax code is not favorable to certain consumers in California, New York, New Jersey, Massachusetts and a couple of other states. But that said, I'll let Jay answer the question.

Look David, I would love to know the answer to your question. I just don't know. You can make the strong argument that there should be some benefit to our core consumer in the majority of states where we operate. Certainly, as well another contributing factor is, interest rate is slowly on the rise, for fixed income that's a positive impact. So it's just so early in the year. There has been a lot of frigid weather. It's so hard to extrapolate anything from the first 1.5 months that we've seen in 2018, but time will tell. I think I'll have more color to your question that I can respond to on our second -- on our first quarter call in late April.

Got it. And if I can, Jay, just sort of a follow-up. I know you gave, again, some detail around what you expect to gain from Pinnacle on the marketing side. But in terms of the database that you will accumulate by combining the 2, have you given any thought to an enhanced loyalty program? And what that -- what the possibilities of that might be? And whether there might be any investments on the company's part to that end in building something like that?

David, this is Tim. I'll start, and I'll turn it over to Jay. The integration of the mychoice and Marquee Rewards programs and taking the best of both programs and moving forward with even an improvement over the current too is probably one of the most critical elements of our integration planning and that's something that our marketing leadership teams of both companies are working on today. So the details of how that's going to come together are TBD, but I can assure you that there's going to be a lot of energy and a lot of resources with making sure that when we come out of this and close the transaction and move forward with this integration that there are going to be changes on both sides of the program to take advantage of the best of both.

Yes. The only thing that I would add, and Tim summarized it very well, and that's where we are right now. We're getting groups of marketers together on both sides to talk about the programs, and the more we learn the greater we feel. It goes back to how I responded to Felicia's question, which was more general about best practices on both sides. Their mychoice program is terrific, and there's many things, aspects of that program that we've always thought were terrific. And the more we understand, the more we like it. We think there is things on the Marquee Rewards side that are very unique and compelling to our consumers as well. So what's going to come out of this, if we do it right and that's certainly our mission, is that we're going to have a new rewards program that is viewed as better than either of the stand-alone programs today when we're ready to communicate exactly what that is closer towards Q3.

David, I'll add one other thing.

Sorry, go ahead.

Let me just add one another thing. This is Tim, again. One of the things that we're working through right now as we get into the details of the Pinnacle database is that we have to work through the FTC to extract the Boyd-specific customers in their database, so that we don't have visibility towards that. That work is being done. Once we clear that information out, then we'll be -- we'll start to do some of the real heavy lifting and looking at the metrics and information in their database and our database. So that's one of the things we knew going into this we'd have to work through, but more to come after we get through the determination of that information over to Boyd.

All right. And my -- just a quick follow-up was, do you have any indication yet as to how much overlap there is between those in your database and those in theirs? Are we able to tell that yet?

We're not, David. For the reasons that Tim described, we really have not had a single view into their database, and we can't, quite frankly, at this stage. So we will have more information in the months to come, but we have to get through the FTC and the scrubbing of the database first given the divested properties.

As you can imagine, we expect there'll be some overlap in St. Louis, some overlap in the Kansas City market and some overlap in the Cincinnati market. That's a general statement. I think for the rest of their properties, we'll probably have mostly new customers combining with the Marquee Rewards Penn database. But again, that's the work we have to do with Boyd, and that Pinnacle has to coordinate not us, in order for us to answer that question.

And I'm sorry, can I ask one more quick one, which is, I've asked in the past about SG Universe, and I am actually a signed up member for hollywoodcasino.com, and receive virtual chips on a regular basis. And I typically ask the degree to which that is a business driver or an earnings driver? And a point at which I can actually adjust something in my model as a result of it? And it does make a ton of strategic sense. Can you just give a quick comment as to how we should think about that, say in the coming year and its ability to really drive business?

Yes, David. Look, I -- here is how I would answer that, when we launched SG Universe on our social gaming platform and offered that hollywoodcasino.com product to our database, it was accretive to earnings. And so, is it something that would be material in your model overall? I'm not sure I would say, it is. But I would say that when we talk about revenue synergies as part of this acquisition, that's certainly one of the categories on the revenue synergy side. But we'll have more information as time comes, and we get some visibility into how many customers in our database are unique versus crossover. As Tim was referencing earlier, you play for value, and we'll be able to answer that question better once we have more visibility into the database.

Our next question comes from the line of Shaun Kelley with Bank of America Merrill Lynch.

It's Barry Jonas. I was hoping to get maybe a little more color on sports betting legalization? Namely, like how meaningful do you think this could be for Penn depending upon how it plays out? And maybe just thoughts on the direct sports book revenue impact versus say indirect upside from more visitation to your properties?

Barry, this is Tim. And I know you are aware of the Nevada experiences, the actual revenues and EBITDA coming from sports book operations are certainly de minimis relative to the other areas of gaming, and in Las Vegas case, nongaming. But we think the big advantage for us is the increased visitation that we'll see by having sports book operations at our regional properties where we can take advantage of that visitation with higher room rates, higher volumes of food and beverage revenues. I think we certainly see higher volumes in Nevada of table game business when we have large sporting events in the Las Vegas market. So I think the bigger benefit will be from the indirect areas that sports betting brings in, just due to increased visitation. We're very encouraged by it and we're very supportive of it, but we also recognize that it is a low-margin business and that's our message back to the states as well who don't understand the business as well as we do, that you have to have a tax rate that is more like we're seeing in West Virginia, New Jersey or Nevada and not think of it as a traditional slot revenue or table games revenue operation.

Yes, there are -- just to add on real quick. There are 15 states, approximately, that are currently considering sports betting. And as Tim said, I mean, our main focus right now is on tamping down the irrational exuberance that some of them have in terms of what the revenue potential might be. You saw Pennsylvania pass that 36% tax rate on sports betting, which is ridiculous, and we've said so. So we're trying to hold firm to the Nevada model, try to keep it around 7%. West Virginia is a little higher, but we at least like that they recognize that there are some pretty thin margins. And at the same time, they're trying to fend off colleagues who are also trying to get something out of it. So as Tim said, it's nice to have. It's not a cash cow, and we've just got to continue to impress upon the states. Let's not get greedy on this subject.

Great. And then just another question on another part of tax reform. Given the new CapEx deductibility rules, I'm curious how that plays into your thoughts about gross CapEx? Whether it's the Tropicana expansion? Or the sizing of Pennsylvania? Or maybe just general maintenance slot CapEx?

Barry, it's B.J. Obviously, it's a benefit to us. We've included it, but we're not going to allow to have tax policy override what the right decision is for the right time on the capital allocation decisions we're making. We've been clear that this upcoming year is really focused on the Pinnacle integration. We -- Pinnacle has a number of capital projects that they're looking that we're viewing with them. We had the Tropicana that we've pushed off into early '19 as we go through the integration as well. And so, while it's definitely a benefit and we look at it and we appreciate the improvements that we've got through our maintenance CapEx as well, it's -- we really want to make sure that the capital allocation decisions are made based upon the ROI of the individual projects that we're looking at.

And -- but anything -- as you know, Barry, anything that improves the discounted cash flow analysis, it improves the NPV and IRR of our projects that we're considering will make it easier to say yes to.

Yes, clearly.

Great. Then just real quick, the cash settled stock options, does that tail off at any point? Or is that continually either a tailwind or headwind depending on the stock movement going forward?

Barry, it -- the number of units out there has gone down dramatically over the course of 2017. We had an unusual spike in our share price in the fourth quarter that really caused that amount to be where it was. I wouldn't -- on one hand, I'd love to see large variances in -- occur in 2018 due to what we have with the doubling of our share price in 2017. However, we don't expect that to be the case, but the denominator, the base of these units out there in the hands of management has been dramatically reduced as we've gone through 2017.

Our next question comes from the line of Chad Beynon with Macquarie.

First one regarding the $104 million of maintenance CapEx for the year. You noted that $20 million of that will go to the margin improvement plan. I just wanted to ask if the margin, I guess, goals that you had laid out last quarter or the quarter before, included this? Or was this $20 million potentially upside to your margin goals? And then just kind of a follow-up to that, is this more of a one-timer for 2018 on the CapEx side?

The -- Chad, this is B.J. The $20 million was really intended to be capital investment to be able to achieve some of the operational programs that we had -- we put in place for our margin improvement plan. So it was not included in the actual margins since it was a capital -- one-time capital cost. As we had said, based upon some of the learnings that we've had as we get into the Pinnacle integration, some of that we may put a pause on and try to understand what's out there. And so it's a little bit of a TBD. But as we described the margin improvement plan last time, we did indicate that we would have $20 million of potential capital that we would have to do from systems and other items to be able to achieve some of the objectives that we had. Again, that will may and will likely be impacted as we really start to understand the integration with Pinnacle. Jay, do you have anything to fill.

No.

My follow-up is back on the interactive side. Jay, you talked a little bit about 2018, how you think about the business. You think you'll get over the $4 million variance in the quarter? I know you noted in the press release that, that was -- increased the property-level reserves and unfavorable Penn interactive. Could you go into any more details around that just because it was a pretty big variance to, I think, everyone's model?

I think what we can say is the property-level reserves are more the majority of that variance, Chad. And they were -- the property -- and the property-level reserves were all in the Midwest region, as I saw a couple of notes that question flow through in Midwest, those legal reserves impacted just the Midwest properties.

Our next question comes from the line of Patrick Scholes with SunTrust.

Just a follow-up from a comment that you had last October, concerning reaching the 200 basis points of long-term margin growth. You had assumed low single-digit organic revenue growth. Is that still -- the low single-digit part, is that still a fair assumption to use here?

It is, Patrick. Nothing has changed there.

Okay, good. And also a little bit of color clarity on Jamul. Is the issue with any other lenders? Or is the issue with the Tribe?

Right now, the approval has -- the amendment has been to the Tribe for approval, and they have not approved the amendment.

Okay. So...

The amendment has been agreed upon between the lenders, yes.

Okay. So ball in the court of the Tribe. Okay.

That's correct.

Mr. Wilmott, there are no further questions at this time. Please continue with your presentation or closing remarks.

Thank you, moderator. Thanks for your attention on our call this morning. We look forward to getting back with you in about 3 months. Certainly, we'll give you more color on how the integration work is going on with the Pinnacle combination and certainly give you some more additional information on our thoughts about the flag -- the new flag in the State of Pennsylvania as well, but thanks for your attention this morning and take care.

Ladies and gentleman that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.