Ladies and gentlemen, thank you for standing by, and welcome to the Penn National Gaming Third Quarter Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Joe Jaffoni, please go ahead, sir. .

Thank you, Frank. Good morning, everyone and thank you for joining Penn National Gaming's 2017 Third 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 or 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, beliefs, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words or by discussion 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 may 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 measures 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 my pleasure to turn the call over to the company's CEO, Tim Wilmott.

Tim?.

Thank you, Joe, and good morning to everyone. We're all here together in Wyomissing, Pennsylvania.

I'd like to just introduce who is in the room with me, our General Counsel, Carl Sottosanti; our Senior Vice President of Public Affairs, Eric Schippers; our Managing Director of Penn Interactive Ventures, Chris Sheffield; our Treasurer, Justin Sebastiano; B.J. Fair, our CFO; and our Chief Operating Officer, Jay Snowden..

Before I begin my remarks on our third quarter results, I just want to again acknowledge the efforts of our Tropicana Las Vegas employees. At the beginning of the month, as we all know, we had that horrific incident in Las Vegas occur right next to the Tropicana and we had hundreds and hundreds of concert goers come into our facility seeking shelter.

Our team there, who never trained for this, but our team there reacted heroically and were able to provide comfort, compassion, shelter, help the wounded get to healthcare facilities, provide blankets, sheets, pillows to a large number of people who stayed overnight in our ballrooms and provided what we -- and executed on what we could never expect to train for, as I said, and were the real heroes of our company that night.

And I want to say again, thank you, and job very well done. .

Now turning to the third quarter. I'd like to first highlight continued solid consumer trends that we're seeing in our business, Jay is going to highlight more specifically, but we had a lot of very solid results, especially from our newer assets.

As we look at Ohio, Massachusetts, Nevada, Penn Interactive Ventures and Prairie State Gaming in the third quarter, all of those businesses in those areas produced EBITDA results that were greater than 10% year-over-year.

We actually saw a 21% growth in EBITDA from non-Master Lease assets year-over-year as well and now we're almost 15% of our total EBITDA coming from non-Master Lease assets for the end of the third quarter. I also think the third quarter showed again the power of our generation of free cash flow.

We're able to reduce net debt by $60 million and also retain -- returned capital to shareholders by repurchasing approximately $19 million of Penn shares. B.J. is going to go into a little bit more detail on that as well. We saw margin improvement continue.

We showed EBITDA margin of 27.5%, an improvement in all 3 regional operating segments when you exclude cash settled stock-based comp. Jay is going to get into more specifics on key initiatives we're working on to continue to drive margins up further over the course of the next couple of years. .

We also continue to show improvement in the performance of our Jamul facility. Negotiations continue with the Tribe and the other lender there. We don't have a resolution yet, but we are making progress and B.J. is going to give you more color on that.

And finally, I do want to comment regarding the speculation on M&A activity and only if something material occurs, will we offer any commentary. You all know that we cannot and will not comment on rumors and speculation at this point. So I wanted to make that clear that we cannot provide any further commentary on any of that. .

And with that, I'd like to turn it over to Jay to give you more color on what we saw in the third quarter regarding operations. .

Thanks, Tim. We're very pleased with the third quarter results across the portfolio. We were able to achieve same-store sales growth of 2.5% overall and when you exclude Charles Town, that number goes up to 4.5%, which would represent our strongest same-store sales growth quarter in the last 10 years.

Property level EBITDA margins increased year-over-year in all 3 of our geographic regions, as Tim mentioned, and this is despite onetime third-party expenses running through the property P&Ls in the third quarter that were not insignificant. I'll cover this topic in more detail later in the presentation. .

Moving to some of our key markets, some specific details. At Charles Town, revenues in the third quarter were again down year-over-year in the same range as the first quarter and second quarter. In fact, since February, every month this year -- excuse me, other than June has been down in the same range of 8% to 11% in net revenue year-over-year.

In San Diego, we continued to improve the overall performance of Hollywood Casino Jamul, and we're encouraged that in September, we posted the highest adjusted EBITDA month since our opening in October of last year. .

At Tropicana Las Vegas, we had a strong relative month -- excuse me, a strong relative performance in Q3 with revenues up over 14% and EBITDA more than doubled. The quarter benefited from reopening of the MGM connector bridge and our new Robert Irvine Public House Restaurant.

Not surprisingly however, fourth quarter is off to a more challenging start given the heinous events that Tim covered and occurred next door to us at the Route 91 Harvest festival on October 1. In the first 2 weeks following the event, hotel cancellations increased year-over-year, 35%.

80% of those cancellations, however, were isolated to October and November of this year.

At this point, we have not experienced any group business cancellations or disruptions and while our overall business volumes appear to be slowly recovering as we track toward the latter part of the month, we really won't know or understand the true impact for sure at Tropicana Las Vegas for several more weeks or at least until the end of the year. .

In Ohio and Massachusetts, we really had a fantastic quarter. All 5 of those businesses continue to ramp as we work to strengthen the relationships with our core database customers and refine our overall marketing strategies.

We grew both the top and the bottom line results at all 5 of these businesses by either high single digits or in many cases, double digits year-over-year. And the positive momentum in these businesses has continued into October. .

Moving to enterprise wide database results. There are plenty of positive trends worth highlighting. Spend per visit across the entire database was up over 5% year-over-year and increased in every work segment. Our unrated business also grew year-over-year by low single digits in the third quarter.

And visitation, while showing healthy growth at roughly half our properties, was not as consistent from market to market though still showed improvement across the majority of the portfolio from prior quarters.

So we remain confident that these trends will continue as the consumer discretionary environment remains bland due to low unemployment, growing consumer confidence and increasing home values. .

So with that, I'll turn it over to B.J., to walk you through guidance. .

Thanks, Jay. I'd like to provide a few highlights to our updated 2017 financial guidance as well as discuss a few notable financial items for the quarter. As a reminder, our revised guidance and underlying assumptions are found on Page 4 of the press release.

For the full year, our revenue is anticipated to be $3.135 billion, $756.6 million will be in Q4, adjusted EBITDA of $868.7 million for the year, $206.1 million in Q4. Adjusted EBITDA after Master Lease payments of $413.5 million, $91.7 million in Q4.

The guidance figures above carry the $2.8 million property level beat we achieved in Q3, offset by the additional corporate expenses. .

impacts of Tropicana performance as a result of the Las Vegas tragedy, as Jay just mentioned; impact to our Gulf Coast properties as a result of Hurricane Nate, where we were required to close the casinos on a major event weekend; and $1.7 million of merger-related costs for certain repairs and expenses related to the second quarter acquisition of the new Tunica assets.

.

Maintenance Capex guidance remains at $78 million for the year, approximately $31.5 million expected in Q4. Cash on hand as of the end of the quarter was $264.9 million. Project Capex is expected to be $27 million for the year, $3.7 million remaining for the -- remaining in Q4.

And as we've 0previously stated, a decision on the timing of the Tropicana expansion is shifted to the second half of 2018 at the earliest. Cash taxes are forecast to be a net refund of $30.9 million for the full year 2017. Our Master Lease rent coverage ratio was 1.83, as of the end of the quarter.

As we stated last quarter, we expect to incur rent escalation of approximately $4 million at the conclusion of our lease year due to higher-than-forecasted performance in the inclusion of the new Tunica assets. $700,000 of that increase will be reflected in Q4.

Free cash flow generation at the year is anticipated to be $310 million, and net free cash flow after mandatory payments and project Capex is expected to be $169 million. And as always, all of our debt covenants will be comfortably met. .

In addition to the highlights, the third quarter had some accounting adjustments that had significant non-EBITDA impacts to our financial statements. The first item I'd like to mention is the $766.2 million benefit related to the reversal of our deferred tax valuation allowance.

Most importantly, this is an accounting adjustment and does not have a current or future cash or EBITDA impact.

By way of background, at the time of the OpCo, PropCo spin-off of the company, a significant deferred tax asset was created, which primarily reflected the tax effective difference between the book value of our real property assets and our GLPI financing obligation.

Significant impairment and transaction costs incurred in connection with the spin-off subsequently placed the company in a 36-month cumulative pretax loss position. As a result, a valuation allowance was recorded against the deferred tax asset.

As of the end of this quarter, we had significant levels of cumulative pretax income and anticipate this amount will grow significantly by year-end and are confident in our future prospects. Subsequently, we determined that Q3 was the proper period to record this noncash adjustment.

The second item of mention is the earnout adjustment for Rocket Speed. Our acquisition of Rocket Speed included an earnout provision that was payable at the conclusion of the first and second years.

For a number of reasons, the foremost of which was to accelerate the integration of Penn Interactive Ventures and Rocket Speed, we elected to negotiate a buyout of the earnout provision. This resulted in a favorable P&L benefit of $22.2 million, which is excluded from adjusted EBITDA which is consistent with our historical [indiscernible].

In Tim's opening remarks, he indicated we repurchased shares of our common stock. During the third quarter, the company repurchased 847,263 shares of common stock at an average price of $22.41 per share. Year-to-date, the company has repurchased over 1.26 million shares at a combined average price of $19.59 per share.

Under the February 2017 board authorization, the company has authority to repurchase up to an additional $75.2 million worth of shares by February of 2019. .

And finally on Jamul, as Jay said earlier, we continue to be encouraged by the improvements in operations of the property as evidenced by the strong September results. Negotiations are ongoing between the Tribe and its lenders, and we have reached an agreement in concept amongst all the parties.

The agreement is being documented and is subject to additional approvals. We will not provide any detail on the agreement until all approvals have been obtained. While negotiations are ongoing, all the loans are current and being fully serviced. We do anticipate the entirety of the Term Loan C to be subordinated as of the test date.

In Q3, we took an additional $6.3 million noncash impairment charge against the loan. I would like to reiterate that our guidance does not assume any EBITDA received in 2017 from license or management fees from the management of property. .

So with that, I'll turn it back to Tim. .

Thanks, B.J. About little less than a year ago, we started working on initiatives to figure out how we can continue to reduce our cost structure from a very strong starting point.

We have industry-leading EBITDA margins today, and as we looked at how we run our business, we felt there were opportunities to further improve both revenue and expenses that can enhance margins going forward over the next couple of years. And we've highlighted in our previous calls, our efforts to do that.

We wanted to provide a little bit more detail and color today on that as we've continued to advance this effort. We brought in outside resources to help us. And I wanted to now turn it over to Jay Snowden to give a little more detail to our investors on where we're today, but more importantly where we're going. .

Thanks, Tim. I'm going to cover a few slides that you can access either through our Investor Relations page of our website or there is an embedded link in the earnings release.

And I've referenced on the last couple of calls, as Tim noted, that we believe as good as we've been through the year that there is still quite a bit of work to do on improving our EBITDA margins at Penn National Gaming.

If you move to Slide 3, you'll see a comparison of our property level gaming tax adjusted margins versus our regional gaming peer group average.

And while we don't typically show it this way or perhaps highlight it enough This is something that we take a great deal of pride in, particularly when you consider that all of our properties with the exception of 1 or arguably 2 operate in highly competitive market places.

One of the primary reasons behind this operating discipline over the years is that we have the highest effective gaming tax rate of the group, and we've been forced to constantly challenge the status quo in order to continue to grow our business and our earnings. .

If you move to the next page and as Tim referenced and we referenced in the release, we've been working with a third party for much of 2017 in order to assist us in validating and sizing a number of new initiatives that we had identified as opportunities to enhance our margins.

So without getting into too much detail for obvious competitive reasons, we provide a brief description of the 5 areas of focus that we believe will help us improve our margins by over 200 basis points over the coming years.

Highlighting just a few, we continue to make refinements to our marketing reinvestment across our portfolio, which we believe is going to help us deliver a higher return on our marketing spend overall.

With regard to strategic sourcing, we've nearly doubled the number of properties in the portfolio over the last 6 years, but we really haven't done a good enough job of leveraging our consolidated purchasing power with our key vendors.

One small example that we discovered over the course of the last couple of weeks just by going to a single to-go bag in a restaurant that's going to save the company $250,000 a year. So it gives you a sense as to the size of the opportunity that's out there with regard to strategic sourcing.

When it comes to labor, we think we manage our labor margins better than anyone else in the industry, but there's a lot of new technology and scheduling software that can help us improve our results.

We've deployed this at a number of our properties and are looking to take it enterprise-wide and continue to drive our labor costs down by more effective scheduling. There will be some onetime capital investments to make, as you can imagine, in 2018 associated with these initiatives. We're still quantifying that amount.

We believe it's in the range of $20 million. And no doubt that $20 million is going to deliver very nice returns for us. .

If you move to the next slide, you'll see an illustration of where we believe our EBITDA margins are headed in the coming years and a stable revenue environment. Implementation commences here in the fourth quarter and will continue through much of '18, and in some cases with some initiatives, even in early '19.

The playbook is largely finalized and the third party's work is winding down and will be completed by the end of this year, as we continue to transition to full internal ownership over the next couple of months. .

So with that, I will turn it back over to Tim Wilmot. .

Thanks, Jay. We will continue, as we -- quarter-to-quarter continue to provide updates on our margin improvement initiative and let you know how we're progressing against these activities and obviously, the results around these activities will be highlighted, as you would expect. .

With that, operator, I'd like to turn it over to any questions out there in the audience. .

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

Tim, one in respect to your commentary earlier on M&A. If I can maybe ask the question a little bit differently around the buyback that you did in this quarter, $19 million relative to last quarter where you guys had noted you were largely out of the market.

I believe some of that might have had to do with a shorter -- an extended blackout period in the quarter itself.

But how much could we read into your ability to buy back stock in this quarter whereas last quarter it seemed as though M&A might have prevented you from doing so?.

B.J., why don't you go ahead?.

Carlo, I'll take that. I think that as we took a look in the difference to the quarters, we looked at the M&A activity that we were looking at and I don't think there's really much to glean from quarter-to-quarter.

It was really a determination of a certain set of circumstances, as the window was open and there is really not much difference between how we're looking at keeping our powder dry in M&A activity between the 2 quarters. .

Great.

And then guys, if you could provide maybe an update or kind of the status of the Canadian bundle and what you're kind of thinking about timing around that?.

Just so everyone knows, we've mentioned in the past of our interest in the bundle in the Western Toronto suburbs, and B.J. is probably closest to it than any of us. So I'll let him answer the question where we are with regard to that decision. .

Yes, Carlo. A decision has not been made yet on the Western bundle. We have heard that the OLG is working through some legal issues that they have had based upon a claim of one of the First Nations' Tribe and as a result, we had expected that there would have been a decision made by this time. There has not been.

The applications for the remaining bundles of the central has not been -- the time frame for that has not been completed yet. And so we're still in a wait-and-see mode with respect to Canada. We'd would like to hear relatively soon, but nothing is -- no information is forthcoming at this point. .

Great. And then just one quick follow-up. Jay, in your remarks, I thought you said Tropicana or Las Vegas net revenue was up 14% in the 3Q.

Could you just confirm if that was overall including M?.

That was specific to Tropicana, Carlo. We had a very strong quarter at M as well, but the numbers I quoted of 14% net revenue growth and our EBITDA more than doubling was Tropicana specific. .

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

So Jay, you gave some good color around the Tropicana and the impact that you've seen so far post October 1.

I guess when we look at your guidance for the fourth quarter and B.J., I know you called out the Trop and the Gulf Coast properties, but is there any way you can give us some color as to what those impacts are, I guess, or what you're embedding for those in your guidance.

I guess just trying to get a sense of what guidance would have looked like if you didn't have those 2 impacts?.

Sure, Steve. This is Jay. Look, it's difficult because there's so many puts and takes with a portfolio of 25, 26 properties. So as I mentioned, Ohio and Massachusetts continue to ramp nicely in October. The rest of portfolio is performing largely consistent with what you saw last quarter.

October had a rough start in Las Vegas at Tropicana, little bit at M Resort, but more so at Tropicana and then as B.J. referenced, we lost an entire weekend due to Hurricane Nate at our Biloxi and Bay St. Louis properties in early October, I think it was the 8th and 9th.

So it's just too early in the quarter to really make any change to what we have put out there for fourth quarter guidance. It's likely to be somewhere in that range, but it's hard to say after only 1 month. .

And as Jay said, Steve, we see stabilization of things at Tropicana Las Vegas, but we want to have a little bit more time to really assess and probably by end of November into December, we'll know whether it's fully back to business as usual or not.

But we wanted to give that more time before we finally -- before we would ever quantify the total impact. .

Okay. Got you. Understood. Second question would be around your margin targets. I guess it's a pretty simple question.

I mean, do you guys view those targets as conservative, aggressive, kind of middle-of-the-road and then maybe how much of achieving those margins assumptions is tied to kind of the continuation of where we are right now in terms of revenue trends?.

Sure. I mean, we provided ranges, Steve. So I would just kind of leave it there. The range is for a reason. We still have a lot to figure out as we get into implementation. Most of what we have in our work plan right now, I think, is going to work out great. And then some are going to come up with new ideas. We're going to modify things.

So we provided a range. We're comfortable with the range that we provided in those out years.

And sorry, your second part of your question, Steve?.

It was around just kind of how do they hinge on kind of current revenue trends?.

Yes. Sorry. So it assumes a stable revenue environment, just assume low single-digit organic revenue growth across the portfolio. .

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

I was wondering if you could just talk about the flow-through in the quarter. You guys had some very strong revenue results. And even if we adjust for the variances in the quarter, the flow-through was a bit lower than expected.

So I was just wondering if there were any headwinds you wanted to call out there?.

The only thing I would mention, Felicia, if you look at the property level flow-through was about 33% and that's inclusive of these third-party costs that I referenced earlier. The third party costs were in the millions.

So when you make that adjustment for the third-party cost in the third quarter, the flow-through is more like 40% at the property level, which is pretty consistent with what we've seen given that our effective gaming tax rate is low 30s. We have higher bonus accruals of the properties given performance this year.

So there's some factors there but when you take out the noise, it's more like 40% flow-through and we're happy with that. .

Okay. And then actually your answer is a great segue into my next question because I'm just trying to wrap my arms around the announcement that you made this morning with your margin improvement initiatives.

So I think the initiative is great, and it seems like everyone in the gaming industry is now getting very serious around examining their cost base and you guys have always been the leaders.

But what I'm not understanding is, why you feel the need to or why you felt the need to outsource this? And how much is it going to add to expenses in the near term? I definitely understand that there's a cost benefit.

But until you realize the upside, what kind of impact or cost can we see or how should we think about that?.

Sure. Well, the costs that I referenced, they conclude at the end of the year. We brought a third party in at the beginning of the year. We had a number of ideas that we came up with as a leadership group, both property and corporate alike. But we wanted some help just to administrate. We don't have extra resources to help us project manage.

So it's mainly more of a project management role. The third party also brought some ideas from industries they work with outside of gaming that I thought were helpful. So it's not as though we're relying on that third party in those out years. We're taking this project on 100% internally here at Penn, starting January 1.

So we're just winding them down, and those costs are reflected in our fourth quarter guidance. .

Another reason why, Felicia, we wanted to bring in the third party probably more than anything else in my mind was it really helped in speed of execution.

We wanted to get these resources in here in 2017 so that we could, as we turn the calendar year, begin implementation and if we didn't bring in the third party, we would not have had the time period that Jay highlighted to see these improvements in our margin. So that was the primary reason in my mind that we needed to bring in an outside help. .

Okay, that's helpful. And B.J., just for you. Thank you for walking us through some of the accounting changes.

But you also had a footnote in your release, kind of going through impairment charges that you took at the Trop, and I just want to understand, was that related to the NOLs or is that related to some other like -- because the Trop is in -- I mean, it seems like Tropicana is actually ahead of plan. So just trying to understand that ... .

Again, the impairment of the Trop was another unfortunate result of the reversal of deferred tax valuation allowance.

And as a result, when that got -- when the allowance was reversed, we ended up having to push one of the -- that element down into individual properties and so, at the time of the acquisition of the Tropicana, we had an NOL that we had acquired as the part of the acquisition, which ultimately ended up getting booked as goodwill.

So again, it's a major accounting treatment, but the impact to Tropicana is strictly a result of the deferred tax allowance reversal. .

Okay. But -- so even though the deferred tax allowance reversal had to do with kind of the OpCo, PropCo structure and the Trop doesn't it just was a holistic kind of view. Okay. .

Yes. It gets -- that gets distributed out to the properties as well and that increased the book value. .

Okay.

And will we see anything coming from this in other quarters? Or is this it?.

This is it. .

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

Can we talk about Pennsylvania a little bit? I'm just getting an e-mail right now saying that you're opposed to the expansion.

Can you just talk -- give a little bit more granularity around that?.

We will, Tom. I'd like to turn it over to Eric Schippers, who has been living and breathing Harrisburg the last couple of months. .

Hi, Thomas. Yes, suffice it to say this 970-page bill that passed the Senate last night had some significant flaws in it. And mainly, there's a 54% tax rate on iGaming, which is completely unprecedented and it lacks sufficient protective zones for the existing casinos, ours in particular, from the additional expansion of gaming.

So most of the rank-and-file legislators honestly didn't know what they were voting on. They got it in their hands late last night and the house is debating the issue this morning. So we're going to have to see how this plays out. But it's on the house floor in real-time right now. So more to come on that subject. .

Needless to say, Thomas, this is a legislation that's moving quickly through Harrisburg right now. And it's in real-time and we haven't had a chance ourself to fully digest what was approved last night.

There's a lot of different points of interest for us on that, and we'll see what happens today in the house and then provide more commentary, as we better understand this legislation. But unfortunately, it has not had a lot of time to be vetted through the lawmaking process. .

And I guess my follow-up to this is, I mean, Eric, I mean, this has been -- discussion of this has been going on for a long time.

Does it feel like rational minds will prevail and if they do, what do you think the real scenario will be?.

So there has been a ton of back and forth on this. As you know, it's been a very fluid situation over the last many months. And frankly, the house and senate didn't want to continue to cede the authority to the governor to solve the budget crisis on its own. So there was this sense of let's just pass something quickly.

So like I said, many of the members didn't get a chance to even review the 970-page bill. So we're hoping that cooler heads will prevail in the house in that they'll urge some additional time to digest what is contained in this bill. If they don't, and they end up passing this, as Tim said, we're going to have to weigh all of our options.

We're going to have the dissect the 970 pages and figure out where we go from here. But we remain hopeful. I can't really handicap it for you given the fluidity of the situation on the floor right now. .

And just finally, are there any deadlines that we should be paying attention to?.

So by the -- if the bill passes in its current form, the local municipalities, the local host communities, the prospective host communities for the satellite casinos would have the option of opting out and so that's part of the gray area right now or the uncertainty around this.

If the bill passes, we're going to have to wait till the end of the year to see who's in and who's out in terms of hosting these types of facilities. .

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

Maybe, I just wanted to go back to the whole margin presentation that you guys gave and I'm curious because, again, some of these types of initiatives are being talked about a lot more aggressively in the industry and specifically, around the marketing optimization side.

So kind of curious with what you -- like when you start to look at the different opportunities, how much of the opportunity that you're seeing do you think you can do from sort of pulling back promotion and marketing and how exactly would that impact margin since some of that's going to show up on kind of contra revenue line?.

Yes, again, Shaun, trying to avoid getting into much detail. It's a playbook that we feel is proprietary in nature. We believe there's opportunities for us to drive more efficient marketing spends and take cost out of business and drive a higher return with the dollars we do spend. So it's specific to each market. It's specific to different categories.

So I really need to leave it there. Just rest assured, this is something that we've been doing for a long time here at Penn and we think there's more meat on the bone. It's nice that we're finally at a point where we hear from everyone to focus on improving EBITDA margins. Revenues are stable.

It's a good time to continue to work on improving your margins because outside of maybe a market or 2, you really see a stable promotional environment and that certainly allows for initiatives like this to take hold. .

Got it. Okay, Jay. And then like maybe just sort of going in a slightly different direction, you did mention some of the procurement and centralization or let's call it the procurement initiatives.

Is a lot of that or a lot of the kind of expenditures that you have done at the property level meaning like is there's a lot of room for centralization opportunity at Penn? Or is it a little bit more mixed? I mean, we know some operators, including, obviously, Caesars who is sort of coming back to the market more aggressively recently to do a lot of centralizations to kind of where -- like where do you think you're out on that spectrum and is that part of the driver here?.

Sure. In the area of procurement, we're an outlier. We largely, and this is, I think, of the 5 that I laid out, this is the biggest opportunity. We've largely allowed our properties to handle procurement at a local level or at least a regional level. We've not done a lot of rolling up and consolidating to the corporate level.

And we just hired a new VP of procurement here at corporate, Drew Misher, with a great background of doing exactly what we need to do in the company riding a few other resources. And so we really -- there's an enormous opportunity for us. I gave you one example.

There's a list of 100 or more that we can take advantage of that even though we've driven price out of our business, I think in a very smart way at the property level, we haven't leveraged our scale. And so it's time to do that and again, as I mentioned, that's -- it's a big opportunity for us. .

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

Wanted to focus on revenues in the quarter. You exceeded your guidance by about $15 million on the revenue line, and that's where you increased the annual guidance by. You talked about 4.5% same-store growth excluding West Virginia, which I think was significantly better than what we were all thinking.

So your guidance for the fourth quarter on revenue, does that assume just a bigger impact from Tropicana? Increased impact versus the 8% to 10% at West Virginia? Just trying to think about the outperformance in the third quarter, yet no kind of carryforward in the guidance in 4Q. .

Sure, Chad. Look, it really is -- it's just the uncertainty at Tropicana and the fact that we lost a very important weekend down the Gulf Coast, we didn't want to change the number. So not as much science has gone into it other than let's just keep it where it is and where it was going into the quarter and see how things play out.

If Tropicana and the Gulf Coast properties recover and make up some lost ground in October then the number we have out there is likely conservative. But we just wanted to play it safe at this point given the uncertainty. .

Okay. Great. That's helpful. And then just a broad one on M&A, asked kind of a different way than asked earlier. If these market improvements, and margin improvements continue to kind of hit your goals, that kind of implies that the synergies are maybe greater on M&A.

So if that's the case, would you potentially kind of shift your focus a little bit more towards M&A versus the share repo and debt paydown with respect to overall capital allocation?.

Chad, it's -- I don't think our level of interest in M&A is heightened or lessened with this margin improvement program. We have this in front of us for the current enterprise here at Penn, and we continue to look at a lot of different things out there.

There's things going on as we mentioned in Canada, there's assets -- individual assets, a collection of assets that are out there. So I would not say that this margin improvement program lessens or enhances our appetite for M&A activity. It's something we needed to do and we can take advantage of.

But it still is the same level of appetite that we've always had here to try to grow our business. And I would say, as we look at states that don't have gaming that may or may not enable legislation next couple of years, I think it's limited.

And so with that, you have to look at all these opportunities to continue to increase your platform and enhance shareholder value. .

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

Wonder if you can give just a little bit more color on the cancellations for Vegas that you've seen.

Were these, I assume, mostly, obviously, for the fourth quarter, but have you -- did you see how significant were cancellations for stays in 2018, and how has booking pace been trending past couple of weeks, specifically for 2018?.

Sure, Patrick. I had mentioned in my prepared comments that of the 35% increase in cancellations year-over-year, 80% of those, 8-0, were isolated to October, November. If we add in December, it goes to 90%. So at this point, it appears as though there'll be very little impact going into 2018, but it's still the first month post event.

So it's hard to say exactly for sure what's going to -- how it's going to play out. Will there be an impact in 2018 or not? I would also mention that the cancellations were largely in the leisure online travel agency segment. So our group business, we didn't have any cancellations. Our casino block has held up very well.

It's really that leisure business that decided to cancel in the fourth quarter. We'll see how it plays out in Q1. .

Our next question comes from the line of Joe Greff with JPMorgan. .

With regard to today's new margin initiative program, Jay, I think earlier you mentioned there is $20 million of onetime cost or investment.

Where will that hit your P&L and how much of that is OpEx-related versus systems or CapEx related?.

Yes. Sure. Good morning, Joe. The majority of that is CapEx, probably 80%, 90% of that is CapEx. So any of the OpEx that hits will roll through likely in either fourth quarter or in the first half of 2018. But most of that is going to be spread from a capital perspective throughout the year of 2018.

There might be some that trickles in to early '19 as well on initiatives that are little bit harder to get at. .

Got it.

And based on your presentation, the way that I think you are thinking about what the incremental EBITDA contribution from this is, it's somewhere in the neighborhood of $15 million to $20 million of incremental annual EBITDA, just based on the incremental margin targets that you have on the slide here?.

Yes. We provided the ranges, Joe. So you can -- whatever assumption you're making for revenue growth, I think, you can get to the number that way. .

Our next question comes from the line of Brian Egger with Bloomberg. .

So just to go back to your margin expansion plan of the 200 basis points margin increase you are targeting, is it fair to assume that -- of the various sources you talked about, that the marketing reinvestment spend reassessment is going to be the biggest part of that?.

I think, for us, given that we've been at the marketing optimization work for so long, it's a real opportunity, but procurement is probably on top of the list for us because we haven't spent as much time there.

We've grown so much from a portfolio perspective over the last 6, 7 years, opening a couple of properties per year on average that we were still largely handling procurement at the local level and so when you take a step back and you consolidate that and leverage your scale and your purchasing power, there's tremendous opportunity there.

So marketing probably second in line, but procurement no doubt the biggest opportunity for us. .

Okay. And just a quick follow up. I mean, I know Caesar has made a big point about this recently in terms of their efforts to cut back on duplicative marketing and promotional efforts in a number of their markets.

I'm assuming from an operational and implementation perspective that having one of your large competitors take this more decidedly more rational stance in a formal way makes it that much easier for you to implement whatever is left in terms of reinvestment spending duplication so to speak?.

That's right, Brian. I mentioned that just a few minutes ago that we've been at it forever.

We've always been very disciplined on our cost structure and enhancing our margin because we've been living in a high gaming tax environment for as long as Penn has been around due to West Virginia, Pennsylvania and a number of other states where you're over 50% on your slot business.

So yes, I think it's certainly helpful that all the primary competitors appear to be focused on enhancing their margins. The consumer environment is healthy, so you've got some organic growth on the top line. It makes enhancing your margins and reducing costs that much more effective. .

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

I do want to follow up the prior question a little bit and excuse me if this sounds a bit cynical, but it's not what I intend.

The notion that other operators have been pursuing and talking more about promotional spending and focusing on that as a margin opportunity, does that in and of itself enable you to pursue this more aggressively from the perspective that if neighbors are promoting less, it makes it easier for you to promote less? And that was just the thought process around it.

.

It certainly wasn't the thought process around it going in, David. But yes, it's only helpful.

I mean, that's sort of common sense that if the competitors are also focused on improving their margins and being more disciplined around their marketing reinvestment and promotional spend, then it's helpful for everyone in that marketplace and that does appear to be the focus with the regional gaming group right now. .

And if I can ask you to just elaborate a bit on the notion of how you're being more efficient with the promotional spending.

Is it more a function of data analytics around the customers and their notional values? Or is it the manner in which you're connecting with customers? Is there is some technical advancement that's available to you that may not have been some years ago? I just was curious what you can share in that regard. .

All the above, David. I mean, yes, the technology is more advanced. There's third-party platforms we use today that we haven't in the past. I'd like to believe that we're smarter than we were in the past. And yes, it's a little here and a little there, and it all adds up to a significant opportunity. .

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

Thank you, sir. Again, thanks to everyone for listening into our third quarter 2017 earnings call. We'll certainly be following up with investors that have questions either with Justin or B.J. specifically, but we look forward to finishing 2017 on a very strong note in the fourth quarter.

And we'll be back together probably in early February to talk about our prospects for 2018. Thank you,. .

Ladies and gentlemen, 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..