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Penn National Gaming, Inc. (PENN -0.05%)
Q3 2017 Earnings Conference Call
Oct. 26, 2017, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming Third-Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we conduct a question and answer session. At that time, if you have a question please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star, zero. I would now like to turn the conference over to Mr. Joe Gafoni, please go ahead, sir.
Joe Jaffoni
Thank you, Frank. Good morning everyone. 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 of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involves risks and uncertainties. These statements can be identified by the use of forward-looking terminology 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, risks or uncertainties, including future plans, strategies, performance development, acquisitions, capital ventures, and operating results. These forward-looking statements reflect the company's current expectations and beliefs but are not guaranteed 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 10k and 10q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.
Today's call and webcast may include non-GAPP financial measures within the meaning of SEC Regulation J. 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?
Timothy J. Wilmott -- Chief Executive Officer
Thank you, Joe, and good morning to everyone.
We're all here together in Wyomissing, Pennsylvania. I'd like to just introduce who's in the room with me. Our general counsel, Carl Sottosanti, our Senior Vice President of Public Affairs, Eric Shippers, 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 wanna, 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. We had hundreds and hundreds of concert-goers come into our facility seeking shelter. Our team there, you can never train 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 over-night in our ballrooms and provided, and executed on what we could never expect to train for, as I said and were the real heroes of our company that night. I wanted 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's gonna 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, 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 were able to reduce net debt by $60 million and also return capital to shareholders by repurchasing approximately 19 million Penn shares. B.J.'s gonna 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 three regional operating segments when you exclude cash-settled stock-based comp. Jay's gonna get into more specifics on a key initiative 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 Hamul Facility. Negotiations continue with the tribe and the other lender there. We don't have resolution yet, but we are making progress. B.J.'s gonna give you more color on that.
Finally, I do wanna 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, I wanted to make that clear that we cannot provide any further commentary on any of that. 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.
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
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 ½% overall. When you exclude Charlestown that number goes up to 4 ½% which would represent our strongest same-store sales growth quarter in the last 10 years. Profitability EBITDA margins increased year-over-year in all three of our geographic regions as Tim mentioned, this is despite one-time 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 Charlestown 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, other than June, has been down in the same range of 8 to 11% in net revenue year-over-year. In San Diego, we continue to improve the overall performance of Hollywood Casino, Hamul and we were encouraged 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 performance in Q3 with revenues up over 14% and EBITDA more than doubled. The quarter benefited from the reopening of the MGM connector bridge and our new Robert Irvine Public House Restaurant. Not surprisingly, however, fourth quarter's off to a more challenging start given the heinous events that Tim covered and occurred next to us at the Route 91 Harvest Festival on October 1st. In the first two 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. 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 per share 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 five 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 five of these businesses by either high single digits or, in many cases, double digits year-over-year. The positive momentum of these businesses has continued into October.
Moving to Enterprisewide database results, there are plenty of positive trends worth highlighting. Spend per visit across the entire database was up over 5% year-over-year, an increase 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 showed improvement across the majority of the portfolio from prior quarters.
We remain confident that these trends will continue as the consumer discretionary environment remains buoyant due to low unemployment, growing consumer confidence and increasing home values. With that, I'll turn it over to B.J. to walk through Guidance.
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
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 3.1 through 5 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 release payments of 413.5 million, 91.7 million in Q4.
The guidance figures above carry the $2.8 million property level [inaudible] [00:10:00] we achieved in Q3, offset by the additional corporate expenses. Our Q4 guidance remains unchanged from the last quarter. Items already impacted in the fourth quarter guidance estimates include impacts at 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 remaining in Q4. As we previously 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 of the year is anticipated to be 310 million in net-free cashflow after mandatory payments and project Capex is expected to be 169 million. As always, all of our debt covenants will be comfortably met.
In addition to the highlights, the third-quarter had some accounting adjustments at specific 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 account adjustment and does not have the current or future cash or EBITDA impact. By way of background, at the time of the Opco Property spin-off of the company, a significant deferred tax asset was created which primarily reflected the tax-affected difference between the book value of our real property assets and our GLPI financing obligation. Significant impairment in transaction costs incurred with the spin-off subsequently place the company in a 36-month cumulative pre-tax loss position. As a result, a valuation allowance was recorded against the deferred tax asset.
As of the end of this quarter, we have significant levels of cumulative pre-tax income and anticipate this amount will grow significantly by year-end and are confident in our future prospects. Subsequently, we determine that Q3 was the proper period to record this non-cash adjustment. The second item that was mentioned is the earn-out adjustment for Rocket Speed. Our acquisition of Rocket Speed included an earn-out 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 earn-out 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 [inaudible] [00:13:29].
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.
Finally, on Hamul. As Jay said earlier, we continue to be encouraged by the improvements in operations at the property as evidenced by the strong September results. Negotiations are on-going between the tribe and its lenders and we have reached an agreement, in concept, among 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 non-cash incurment 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 our property.
With that, I turn it back to Tim.
Timothy J. Wilmott -- Chief Executive Officer
Thanks, B.J.
About a 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. 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 years. 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 continue to advance this effort. We've 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 are today, but more importantly where we're going.
Jay Snowden -- President, Chief Operating Officer, and Executive Vice President.
Thanks, Tim.
I'm gonna 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 Earning Release. I've referenced on the last couple of calls, as Tim noted, that we believe, as good as we've been through the years, that there are still quite a bit of work to do on improving our EBITDA margins at Penn National Gaming.
If you move to slide three, you'll see a comparison of our property level gaming tax adjusted margins versus our regional gaming peer group average. 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 one or arguably two, operate in highly competitive marketplaces. 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 in size and the number of new initiatives that we had identified as opportunities to enhance our margins. Without getting into too much detail for obvious competitive reasons, we've provided a brief description of the five 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 gonna 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 six years, but we really haven't done a good enough job 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 our restaurant is gonna save the company $250,000 a year. It gives you a sense as to the size of the opportunity that's out there with regards to strategic sourcing.
When it comes to labor we think we manage our labor margins than anyone else in the industry. 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 enterprisewide and continue to drive our labor costs down by more effective scheduling.
There will be some one-time capital investments to make, as you can imagine. In 2018 associated with these initiatives we're still quantifying that amount. We believe it's gonna be in the range of $20 million, no doubt that 20 million's gonna 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 in a stable revenue environment. Implementation commenced here in the fourth-quarter and will continue through much of 18 and in some cases with some initiatives even in early 19. The playbooks finalized, and the third-parties 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 months.
With that, I will turn it back over to Tim Wilmott.
Timothy J. Wilmott -- Chief Executive Officer
Thanks, Jay.
We will continue 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.
...
Questions and Answers:
Operator
Thank you. Ladies and gentlemen if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request.
One moment please for the first question.
Our first question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed.
Carlo Santarelli -- Deutsche Bank -- Analyst
Hey guys. Thanks, and good morning.
Tim, wanting to respect your commentary earlier on M&A, if I could maybe ask the question a little bit differently around the buy-back 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 an extended blackout period in the quarter itself. 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?
Timothy J. Wilmott -- Chief Executive Officer
B.J. why don't you go ahead?
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
Carlo, I'll take that.
I think that as we took a look and the difference of the quarters, we looked at the M&A activity that we were looking at, and I don't think that there's really much to glean from quarter to quarter. It was really a determination of the set of circumstances as the window was open. There's really not much difference between how we were looking at keeping our powder dry, and how many activities between the two quarters.
Carlo Santarelli -- Deutsche Bank -- Analyst
Great. Thank you.
Then guys, if you could provide, maybe, an update or the status of the Canadian bundle and what you're thinking about timing around that?
Timothy J. Wilmott -- Chief Executive Officer
Just so that everyone knows, we have mentioned in the past of our interest in the bundle in the western Toronto suburbs. B.J.'s probably closest to it than any of us. I'll let him answer the question, where we are with regard to that decision.
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
Yeah, Carlo, a decision has not been made yet on the western bundle. We have heard that the OLG is working through some legal issues it had had based upon a claim of one of the First Nations tribes. As a result, we had expected that there had been a decision made by this time, there has not been. The applications for the remaining bundle of the central has not been... The timeframe for that has not been completed yet. We're still in a wait-and-see mode with respect to Canada. We'd like to hear relatively soon but no information is forthcoming at this point.
Carlo Santarelli -- Deutsche Bank -- Analyst
Great. Thanks.
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?
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
That was specific to Tropicana, Carlo. We had a very strong quarter at M as well, but the numbers I quoted at 14% net revenue growth and our EBITDA more than doubling was Tropicana specific.
Carlo Santarelli -- Deutsche Bank -- Analyst
Great. Thanks a lot, guys.
Operator
Our next question comes from the line of Steve Wisinski from Stifel. Please proceed.
Steve Wisinski -- Stifel -- Analyst
Hey guys. Good morning.
Jay, some good color around the Tropicana and the impact that you've seen so far post-October 1st. 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, 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'm just trying to get a sense of what guidance would have looked like if you didn't have those two impacts?
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
Sure, Steve. This is Jay.
Look, it's difficult because there's so many puts and takes with portfolio of 25, 26 properties. As I mentioned, Ohio and Massachusetts, continue to ramp nicely in October. The rest of the portfolio is performing largely consistent with what we saw last quarter. October had a rough start in Las Vegas in Tropicana. A little bit at M Resort but more so at Tropicana. 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. It's just too early in the quarter to really make any change to what we had put out there for fourth-quarter guidance. It's likely to be somewhere in that range, but it's hard to say after only one month.
Timothy J. Wilmott -- Chief Executive Officer
Thanks, Jay. Steve.
We see stabilization of things at Tropicana, Las Vegas, but we wanna 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 would ever quantify the total impact.
Steve Wisinski -- Stifel -- Analyst
Okay. Got you. Understood.
Second question would be around your margin targets. I guess it's a pretty simple question. Do you guys view those targets as conservative, aggressive, middle of the road? Then, maybe, how much of achieving those margin assumptions is tied to the continuation of where we are right now in terms of revenue trends?
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
Sure. We've provided ranges, Steve. I would just kind of leave it there. They're ranges 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 gonna work out great. We're gonna come up with new ideas, we're gonna modify things. We provided a range. We're comfortable with the range that we provided in those out-years. Sorry, the second part of your question Steve?
Steve Wisinski -- Stifel -- Analyst
It was around, how did they hinge on current revenue trends?
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
Yeah, sorry. It assumes a stable revenue environment. Just assume low single-digit organic revenue growth across the portfolio.
Steve Wisinski -- Stifel -- Analyst
Okay. Got you. Great. Thanks, guys. Appreciate it.
Operator
Our next question comes from the line of Felicia Hendrix with Barclays. Please proceed
Felicia Hendrix -- Barclays Bank-Analyst
Hi. Thank you. And good morning.
I was wondering if you could just talk about the flow-through in the quarter. You guys had some very strong revenue results. Even if we adjust for the variances in the quarter, the flow-through was a bit lower than expected. I was just wondering if there were any headwinds you wanted to call out there?
Timothy J. Wilmott -- Chief Executive Officer
The only thing that I would mention, Felicia, if you look at that property level, the flow-through was about 33%. That's inclusive of these third-party costs that I referenced earlier. The third-party costs were in the millions. When you make that adjustment for the third-party costs in the third-quarter the flow-through was 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. There are some factors there, but when you take out the noise, it's more like 40% flow-through and we're happy with that.
Felicia Hendrix -- Barclays Bank-Analyst
Okay.
Actually, your answer is a great segue into my next question. I'm just trying to wrap my arms around the announcement that you made this morning with your margin improvement initiatives. 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. What I'm not understanding is 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?
Timothy J. Wilmott -- Chief Executive Officer
Sure.
The cost 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. It's mainly more of a project management role. The third-party also brought some ideas from industries they've worked with outside of gaming that I thought were helpful. 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 1st. We 're just winding them down, those costs are reflected in our fourth-quarter guidance.
Felicia Hendrix -- Barclays Bank -- Analyst
Okay.
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
Another reason why, Felicia, we wanted to bring in the third-party more than anything else in my mind is 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 margins. That was the primary reason in my mind that we needed to bring in outside help.
Felicia Hendrix -- Barclays Bank -- Analyst
Okay.
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 going through impairment charges that you took at the Trop. I just wanna understand, was that related to the NOLs or is that related to some other, because the Trop... It seems like the Tropicana is actually ahead of plan, just trying to understand that.
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
Again, the impairment at the Trop was another unfortunate result of the reversal of the deferred tax valuation allowance. As a result, when the allowance was reversed, we ended up having to push that down on individual properties and so, at the time of the acquisition of the Tropicana, we had NOLs we had acquired as part of the acquisition which ultimately ended up getting booked as good will. Again, it's a major accounting treatment but the impact to the Tropicana is strictly the result of the deferred tax allowance reversal.
Felicia Hendrix -- Barclays Bank -- Analyst
Okay.
So, even though the deferred tax allowance reversal had to do with the Upco Propco structure in the Trop, so it was a holistic kind of view.
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
That gets distributed out to the properties as well and that increased the book value.
Felicia Hendrix -- Barclays Bank -- Analyst
Okay.
Will we see anything coming from this in other quarters or is this it?
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
This is it.
Felicia Hendrix -- Barclays Bank -- Analyst
Okay. Great. Thank you.
Timothy J. Wilmott -- Chief Executive Officer
Thanks, Felicia.
Operator
Our next question comes from the line of Thomas Allen from Morgan Stanley. Please proceed.
Thomas Allen -- Morgan Stanley -- Analyst
Hey.
Can we talk about Pennsylvania a little bit? I'm just getting an email right now saying that you're opposed to the expansion. Can you just give a little bit more granularity around that? Thanks.
Timothy J. Wilmott -- Chief Executive Officer
We will, Thomas, I'd like to turn it over to Eric Shippers who's been living and breathing Harrisburg the last couple months.
Eric Shippers -- Managing Director -- Penn Interactive
Hi, Thomas.
Yes. Suffice it to say, this 970-page bill that passed the Senate last night had some significant flaws in it. Namely, there's a 54% tax rate on I-gaming, which is completely unprecedented. It lacks sufficient protective zones for the existing casinos, ours in particular from the additional expansion of gaming. Most of the rank-and-file legislators, honestly, didn't even know what they were voting on. They got it in their hands late last night and the House is debating the issue this morning. We're gonna 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.
Timothy J. Wilmott -- Chief Executive Officer
Needless to say, Thomas, this is legislation that is moving quickly through Harrisburg right now. It's in real-time. We haven't had a chance, ourselves, to fully digest what was approved last night. There's a lot of different points of interest for us on that. We'll see what happens today in the House and then provide more commentary as we better understand this legislation. Unfortunately, it has not had a lot of time to be vetted through the law-making process.
Thomas Allen -- Morgan Stanley -- Analyst
I guess my follow-up to this is, Eric I mean the 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?
Eric Shippers -- Managing Director -- Penn Interactive
There's been a ton of back and forth on this, as you know. It's been a very fluid situation over the last many months. Frankly, the House and Senate didn't wanna to continue cede the authority to the governor to solve the budget crisis on his own, so there was this sense of let's just pass something quickly. Like I said, many of the members didn't get a chance to review the 970-page bill, we're hoping that cooler heads will prevail in the House and 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 gonna have to weigh all of our options, we're gonna have to dissect the 970-pages and figure out where we go from here. We remain hopeful. I can't really handicap it for you given the fluidity of the situation on the floor right now.
Thomas Allen -- Morgan Stanley -- Analyst
And just finally, are there any deadlines that we should be paying attention to?
Timothy J. Wilmott -- Chief Executive Officer
If the bill passes in its current form, the local municipalities, the local host communities, the prospective host communities for these satellite casinos would have the option of opting out. That's part of the gray area right now, or the uncertainty around this. If the bill passes, we're gonna 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.
Thomas Allen -- Morgan Stanley -- Analyst
Helpful. Thank you.
Operator
Our next question comes from the line of Shaun Kelly from Bank of America Merrill Lynch. Please proceed.
Shaun Kelly -- Bank of America Merrill Lynch -- Analyst
Hey, good morning, guys.
I just wanted to go back to the whole margin presentation that you guys gave. 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. 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 pulling back promotion and marketing? How exactly would that impact margins? Some of that's gonna show up on contra revenue line?
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
Again, Shawn, trying to avoid getting into too much detail. It's a playbook that we feel is proprietary in nature. We believe there is opportunities for us to drive more efficient marketing spends and takes costs out of the business and drive a higher return with the dollars we do spend. It's specific to each market, it's specific to different categories. I really need to leave it there. 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 two, you really see a stable promotional environment and that certainly allows for initiatives like this to take hold.
Shaun Kelly -- Bank of America Merrill Lynch -- Analyst
Got it. Okay, Jay.
Maybe just going in a slightly different direction, you did mention some of the procurement and centralization. Let's call it the procurement initiatives. Is a lot of that, or a lot of the expenditures that you have done at the property level, is there a lot of room for centralization opportunities at Penn or is it a little bit more mixed? We know some operators, including, obviously, Caesars who's sort of coming back to the market more aggressively recently, do do a lot of centralization. Where do you think you're out on that spectrum and is that part of the driver here?
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
Sure. In the area of procurement, we're an outlier, we largely, and this is of the five 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 have not done a lot of rolling up and consolidating to the corporate level. We just hired a new VP of Procurement here at corporate, Drew Mischer, with a great background of doing exactly what we need to do in the company. We're adding a few other resources. 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 it's time to do that. As I mentioned, that's a big opportunity for us.
Shaun Kelly -- Bank of America Merrill Lynch -- Analyst
Thanks a lot.
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
Thanks, Shawn.
Operator
Our next question comes from the line of Chad Beynon with Macquarie. Please proceed.
Chad Beynon -- Macquarie -- Analyst
Hi. Good morning. Thanks for taking my questions.
I wanted to focus on revenues. In the quarter you exceeded your guidance by about 15 million on the revenue line, and that's what you increased the annual guidance by. You talked about 4 ½% same-store growth excluding West Virginia, which I think was significantly better than what we were all thinking. Your guidance for the fourth-quarter on revenue, does that assume 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. No, carry forward in the guidance in 4Q. Thanks.
Timothy J. Wilmott -- Chief Executive Officer
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 wanna change the numbers. 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. We just wanted to play it safe at this point given the uncertainty.
Chad Beynon -- Macquarie -- Analyst
Okay. Great. That's helpful.
Just a broad one on M&A as kind of a different way than asked earlier. If these market improvements and margin improvements continue to hit your goals, that kind of implies that the synergies are maybe greater on M&A. If that's the case, would you potentially shift your focus a little bit more toward M&A versus the share repo and debt paydown with respect to overall capital allocation?
Timothy J. Wilmott -- Chief Executive Officer
Chad, 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. 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. I would say as we look at states that don't have gaming that may or may not enable legislation in the next couple years, I think it's limited. With that, you have to look at all these opportunities to continue to increase your platform and enhance shareholder value.
Chad Beynon -- Macquarie -- Analyst
Okay. Thank you very much.
Operator
Our next question comes from the line of Patrick Scholes from SunTrust. Please proceed.
Patrick Scholes -- SunTrust -- Analyst
Hi. Good morning.
Wondering if you can give just a little bit more color on the cancellations for Vegas that you've seen. Were these, I assume, mostly I would say for the fourth-quarter, but did you see... How significant were cancellations for stays in 2018, and how has booking pace been trending the past couple weeks specifically for 2018?
Timothy J. Wilmott -- Chief Executive Officer
Sure, Patrick. I had mentioned in my prepared comments that of the 35% increase in cancellations year-over-year, 80% of those, eight, zero, were isolated to October, November, if you add in December it goes to 90%. At this point, it appears as though there will be very little impact going into 2018 but it's still the first month post-event. It's hard to say exactly for sure 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. 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.
Patrick Scholes -- SunTrust -- Analyst
Okay. I thank you.
Operator
Our next question comes from the line of Joe Greff from JP Morgan. Please proceed.
Joe Greff -- JP Morgan -- Analyst
Good morning everybody.
With regard to today's new margin iterative program, Jay, I think earlier you mentioned there's $20 million of one-time costs or investment. Where will that hit your P&L and how much of that is Opex related versus system, or Capex related?
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
Good morning, Joe.
The majority of that is Capex. Probably 80, 90% of that is Capex. Any of the Opex that hits will roll through likely in either fourth-quarter or in the first half of 2018. Most of that is gonna be spread from a capital perspective throughout the year of 2018. There might be some that trickles in to early 19 as well, initiatives that are a little bit harder to get at.
Joe Greff -- JP Morgan -- Analyst
Got it.
Based on your presentation, the way I think you're thinking about what the incremental EBITDA contribution from this is somewhere in the neighborhood of $15 to $20 million of incremental annual EBITDA just based on the incremental margin targets that you have on the slide here.
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
We provided the ranges, Joe. So, whatever assumption you're making for revenue growth, I think you can get to the number that way.
Joe Greff -- JP Morgan -- Analyst
Got it. Good enough. Thanks.
Operator
Our next question comes from the line of Brian Egger from Bloomberg. Please proceed.
Brian Egger -- Bloomberg -- Analyst
Good morning.
Just to go back to your margin expansion plan of 200 basis point margin increase you're targeting. Is it fair to assume that the various sources you talked about that the marketing reinvestment spend, reassessment is gonna be the biggest part of that?
Timothy J. Wilmott -- Chief Executive Officer
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 six, seven years opening a couple properties per year on average, that we were still largely handling procurement at the local level. When you take a step back and you consolidate that and leverage your scale and your purchasing power, there's tremendous opportunity there. Marketing, probably second in line, but procurement, no doubt the biggest opportunity for us.
Brian Egger -- Bloomberg -- Analyst
Just a quick follow-up. I know Caesars 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 decidedly more rational stance in a formal way, makes it that much easier for you to implement whatever's left in terms of reinvestment spending duplication, so to speak?
Timothy J. Wilmott -- Chief Executive Officer
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 in enhancing our margins because we've been living in a high gaming packed environment for as long as Penn's been around due to West Virginia, Pennsylvania and number of other states where you're over 50% on your slot business. Yeah. I think it's certainly helpful that all the primary competitors appear to be focused on enhancing their margins. The consumer environment's healthy so you've got some organic growth on the top line. It makes enhancing your margins and reducing costs that much more effective.
Brian Egger -- Bloomberg -- Analyst
Okay. Great. Thanks very much.
Operator
Ladies and gentlemen as a reminder, to register your question, please press the one, followed by the four on your telephone.
Our next question comes from the line of David Katz from Telsey Group. Please proceed.
David Katz -- Telsey Group -- Analyst
Hi. Good morning.
I do wanna 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? That was just the thought process around it.
Timothy J. Wilmott -- Chief Executive Officer
It certainly wasn't the thought process around it going in, David. But, yes, it's only helpful. That's 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.
David Katz -- Kelsey Group -- Analyst
If I can just ask you to elaborate a bit on the notion of how you're being more efficient with the promotional spending. Is it more a function on data analytics around the customers and their notional values, or is it manner in which you're connecting with customers. Is there some technological 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.
Timothy J. Wilmott -- Chief Executive Officer
All of the above, David. 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. It's a little here, a little there, and it all adds up to a significant opportunity.
David Katz -- Kelsey Group -- Analyst
Great. Thanks for taking my questions.
Operator
Mr. Wilmott, there are no further questions at this time. Please continue with your presentation or closing remarks.
Timothy J. Wilmott -- Chief Executive Officer
Thank you, sir. Again, thanks everyone for listening in to our third-quarter 2017 Earnings Call. We'll certainly be following up with investors that have questions with either with Justin or B.J., specifically. 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.
...
Operator
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.
Duration: 50 minutes
Call participants:
Joe Jaffoni -- Penn National Gaming, Inc.
Timothy J. Wilmott -- Chief Executive Officer
Jay A. Snowden -- President, Chief Operating Officer, and Executive Vice President
William J. Fair -- Chief Financial Officer, Treasurer, and Executive Vice President
Carlo Santarelli -- Deutsche Bank -- Analyst
Steve Wisinski -- Stifel -- Analyst
Felicia Hendrix -- Barclays Bank-Analyst
Thomas Allen -- Morgan Stanley -- Analyst
Shaun Kelly -- Bank of America Merrill Lynch -- Analyst
Chad Beynon -- Macquarie -- Analyst
Patrick Scholes -- SunTrust -- Analyst
Joe Greff -- JP Morgan -- Analyst
Brian Egger -- Bloomberg -- Analyst
David Katz -- Telsey Group -- Analyst
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