Century Casinos Inc (CNTY) 2015 Q4 法說會逐字稿

Welcome to Century Casinos Q4 2015 earnings conference call. This call will be recorded.

(Operator Instructions)

I would like to introduce our host for today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin.

Good morning, everyone, and thank you for joining Century Casinos fourth quarter and year-end 2015 conference call. We'll get to the presentation of the results momentarily, but first I will review the Safe Harbor disclosure.

In today's call, we will be discussing forward-looking information which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. The Company undertakes no obligation to update or revise the forward-looking statements, but as a result of new information, future events, or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings, and we encourage you to review these filings.

In addition, throughout our call, we may refer to several non-GAAP financial measures, including but not limited to adjusted EBITDA. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our news release and in the 10-K filing from this morning, available in the investor section of our website at cnty.com.

I will now present our prepared remarks, followed by a Q&A session with my co-CEO and the Chairman of the Company, Erwin Haitzmann, and our Executive Vice President of Finance, Margaret Stapleton.

Here is what we said at our earnings call one year ago. We expect our 2015 results to benefit from our ongoing disciplined management of our resources, from continued growth and efficiencies being achieved at our existing properties, from nine months of operation of Century Downs, as well as our off-track betting network in [southern] Alberta, and from continuing margin improvement at all our properties in Poland.

Well, I'm happy to report that we have fulfilled all of it, 100%. Here' s what we achieved in the categories mentioned.

Our balance sheet is in great shape. Net debt decreased from $13.2 million at the end of 2014 to $7.2 million at the end of 2015, and that even includes $14.7 million related to long-term land and capital leases at Century Downs. Book value per share increased from $4.86 to $5.01.

All our existing properties increased both revenue and adjusted EBITDA year-over-year in local currency. Century Downs and Century Bets successfully opened for business in the second quarter, and contributed significantly to top and bottom lines every month since then. And Casinos Poland more than doubled EBITDA, and grew the operating margin by 85%, from 7.3% to 13.5%.

2015 was indeed an exceptional year for our company. Overall net operating revenue increased 12%, and as we managed to keep operating costs and expenses flat, adjusted EBITDA grew by 83%.

We have continued to improve and invest in our operations to build stronger relationships with our customers and strategically deploy our capital. We also continued to improve our cost structure by driving additional efficiencies throughout our business. The combination of revenue growth and cost efficiencies allowed us to produce very strong flowthrough and increase profitability.

In the fourth quarter, in constant currency, net operating revenue increased 18%, marking our fifth consecutive quarter of top-line growth. Adjusted EBITDA increased 53% in constant currency, also our fifth consecutive quarter of double-digit EBITDA growth.

Canada continues to be our strongest market. It generated 54% of our total consolidated EBITDA, followed by Poland where we got 25% of our EBITDA from, and Colorado which generated 16% of total EBITDA.

Let us know look at each segment in local currency. We start with Poland because of a significant current event. Our 66%-owned subsidiary Casinos Poland had another good quarter in Q4. Net operating revenue was up 9%, EBITDA up 14%.

We operate 500 gaming machines and 82 gaming tables at nine locations throughout Poland. Everything increased. Table game revenue just slightly, F&B revenue by 17%.

The strongest driver was once again the slots floor, with slot machine revenue up 33%. Slot [coin in] was up even more, 51%, but a series of high jackpot payouts resulted in a [indiscernible - 13%? 33%] revenue growth.

The higher slot volume is a direct result of us providing a better slot machine product in our casinos, of our successful implementation of the slot player loyalty program, and of the closing of the last non-casino slot arcades throughout the country.

As these numbers show, operationally everything is in pretty good shape. Revenues and margins are increasing nicely.

On the corporate or legal side, however, we got an unfavorable news just 48 hours ago. On Wednesday, March 9, the Supreme Administration Court of Poland ruled that Casinos Poland Limited, acting as a taxpayer must calculate, collect, and pass on to the Polish tax authorities personal income tax on all tips received by employees from our casino customers.

The verdict is final but we have not yet received written justification that will be issued by the court within about two or three weeks. That ruling, stating that tips are part of the salary of our casino employees, it also have negative consequences on certain social security charges of Casinos Poland.

Anyway, the exact financial impact, including a potential write-off of the goodwill we have on our books for Casinos Poland, is not yet known and is being analyzed with our tax advisers as we speak. So that is really bad news and could lead to a significant one time hit to our income statement in the first half of this year, but we will move on and focus even more on operating and profit margin development at all nine properties of Casinos Poland.

Moving onto much more positive news, Colorado, where the solid run of both casinos continued. The economy and consumer sentiment in the greater Denver and Colorado Springs metro areas are very strong, and we see consumers going more confident and showing a greater willingness to spend.

Coupled with our effective marketing programs, this led to continued revenue and EBITDA growth. Combined revenue was up 4%, EBITDA was up 10%, led by a strong performance of our Century Casino & Hotel in Cripple Creek.

At both properties, slot [coining] and drop at the gaming tables were up 6% and 11% respectively. But the lower table hold in Central City lowered the overall revenue growth to 4%. We continue to see double digit increases in hotel revenues, driven by the successful implementation of online bookings through Expedia, Priceline, and booking.com, and in Cripple Creek, we are still the number one rated hotel on TripAdvisor.

The Colorado gaming markets are very competitive. We continue our marketing and promotional campaigns with a focus on VIP player development.

In Canada, the Century Casino & Hotel Edmonton showed flat revenue and EBITDA. Table game revenue increased 12%, but slot revenue fell 6%.

Most of the growth was generated at the baccarat tables, and as reported last quarter, it seems that the Asian baccarat players are not affected much by the economic impact of the lower oil price, but the local slot players do feel it somewhat.

We are planning a substantial renovation of the floor space in the second and third quarters, which will expand the gaming floor, relocate the 24-hour poker room, enhance the high-limit VIP area, [trade] a new bar, and also expand the casino restaurant. The new design would be ready for the fourth quarter, which traditionally has been the busiest for Edmonton.

The Century Casino in Calgary was the only property that had a [indiscernible] quarter, with revenues and EBITDA down compared to Q4 of 2014. The actual volume in the casino was strong. The drop at the gaming tables was actually up 33%, but an unusually low hold percentage on the baccarat tables erased the gains and led to a decline in table revenue.

We continue to market and grow the players club loyalty program and to specifically focus on further growing table games volume to smooth out the swings in hold percentage the game of baccarat brings with it.

That results of our newest property, Century Downs Racetrack and Casino in Calgary, have stabilized on a high lever. We generated $4.5 million in revenues, and $1.5 million in EBITDA, with a 34% margin, in line with our expectations. We are pushing our loyalty program sign-ups, and continue to specifically target the markets of North and Northwest Calgary, both of which do not have a casino.

Century Downs is the only horse race track in the greater Calgary area. The racing season has already begun. Our racing entertainment center includes a casino with 560 slots and electronic table games, seven video lottery terminals, as well as food and beverage and off-track betting facilities.

And in connection with Century Downs, we operate the off-track betting business in southern Alberta, through a 75%-owned subsidiary called Century Bets. We are very pleased with the success of this venture. It generated $1.3 million in revenues and $350,000 EBITDA in Q4.

Finally, the revenue generated by the segment consisting of cruise ship casinos and the management and consulting fees in Aruba and Argentina was down year-over-year, because we had sold casino concession agreements for eight ships to Norwegian Cruise Lines earlier this year. But thanks to tight management, cost savings, and the monthly consulting fee we received from Norwegian Cruise Line, EBITDA for the segment doubled to around $400,000.

In summary, Erwin and I are proud of what our management teams have achieved in 2015. We delivered strong results for our shareholders, with significant revenue and EBITDA growth throughout the portfolio.

Except for that legal setback in Poland, we are very pleased with our overall progress. All operating segments are in good shape but still offer potential for further improvement. With a healthy balance sheet and our growing and well diversified lineup of midsize casino resorts, the Company is well positioned to create even more value in 2016.

That concludes the presentation. I thank you for your attention, and we can now start the question-and-answer session. Julie, go ahead please.

(Operator Instructions)

Robert Majek, CJS Securities

Good morning. In Poland I know you're early in the process, but can you quantify the size of the potential one-time charge in any way?

Maggie, would you like to come in on that one?

Robert, on the US GAAP side we do have a contingent liability up for a piece of this, and at this point in time we really can't quantify how much we will have as an expense hit the books.

Okay. And given you should now have full benefit from the closing of the non-casino slot arcades, can you perhaps quantify the magnitude of the pickup in any way, year-to-date?

May I ask you, Erwin?

I think it's a combination of both the closing of the slot arcades and also of the new product that we got in. It's been significant, we've been in some casinos [where] we doubled the slot revenue, in others we have an increase of one-third.

Thank you. And you touched on in your prepared remarks, but can you give us a little more color on what may have impacted results in each of your properties in Alberta, or are we simply starting to see the initial impact of oil prices impacting traffic across the board?

You know we have pretty solid -- if you look at the drop at the tables and the coining, we actually had pretty solid performance, because even in Calgary, the coining was, the drop at the gaming tables was up by a third, so that is really significant. Unfortunately we have pretty significant swings. February, for example, was extremely busy and extremely strong year-over-year on the revenue side. So overall we are not concerned in Alberta.

Edmonton, the same thing, the coining was solid and we also in January, February, and March to date, we are not seeing any significant, any downward movement at all, actually.

I appreciate it, I'll jump back in the queue.

Mark Rosenkranz, Craig-Hallum Capital.

Hi everyone, thanks for taking my question, congratulations on a really strong 2015 performance. I was wondering if you could, back to the one-time charge in Poland, could you give us a sense of timing? Would that be a 1Q event if that were to occur, or would that be more in the second quarter, or maybe throughout 2016?

Maggie?

Mark, at this point in time we're going to have to analyze the impact of it. I think it would be difficult for us to get it analyzed before Q1 but I can't say for sure. So it will be Q1 or Q2.

Okay, fair enough. And then going back to Poland a little bit, you had revenues down a little over 5% in the quarter. Could you just maybe talk about what in their year-over-year in the quarter?

Mark, that was really the currency translation, because in local currency revenue was up 9%, EBITDA was up 14%, but the zloty lost, really, against the US dollar. So locally [indiscernible] is strong and continues to grow.

Sure, fair enough. And then last question for me, I was wondering if you could talk about maybe some geographic expansion, you talked in the past about different opportunities. Could you maybe talk about the pipeline you're seeing in terms of perhaps new acquisitions, or maybe just organic growth you see in maybe different geographies?

In Canada we see both organic growth. As indicated in our prepared remarks, we are planning a substantial expansion of our Edmonton property. We also see M&A opportunities in Canada, and then we're looking at, again we're looking at Southeast Asia, and there's some very interesting leads that we have and we are pretty confident that in 2016 we would have a project there.

Okay, great, thanks for taking my questions, congratulations again on a good 2015.

Robert Maltbie, Singular Research.

Thank you, this Debra Fiakas in for Robert today, and I apologize if these questions have already been asked. I was disconnected for a few moments from your call.

I wanted to return to your discussion of Canada and your description of the slot and table revenues in Edmonton and Calgary. It seemed like there's a little bit of a difference in those two markets and I wondered if this is typical? You mentioned the table revenue being up in Edmonton, but the slot revenue being down. And then an even more exceptional gaming table revenue increase in Calgary. And I wondered if you could just comment on those two markets and how they're faring?

The number one, if I may start, the number one difference is that in Calgary, additional slot capacity came online by our own Century Downs Racetrack and Casino which opened in April. So in Q4 of 2015, that drove the Calgary market had to adjust 550 additional slots that were not in the market in Q4 2014, and that certainly took some small market share away from the existing casinos, including our own in Calgary.

Any other difference that you see, Erwin?

Yes, if I may add, historically, traditionally the Calgary market is hit earlier by an economic downswing, than the Edmonton market, and obviously with the archives going down, the casinos in Calgary felt that long before the Edmonton casinos.

Okay, very good. And also you mentioned that in Edmonton you plan on doing some renovations, putting in a new bar and expanding the number of gaming tables, and I was wondering if you could also tell us what you anticipate your investment will be there, and if you could give us the numbers on the tables that you're going to be putting in?

The investment will be between $1 million and $1.5 million, and it is not so much the addition of tables, but it is the addition of the private gaming room. We now have a regular gaming room and a high-limit room, but in addition to that we will add a private room. We see some demand there in the market and we think that should be helpful.

Okay, very good. And then I also was hoping that you might just give us a little more color on the great results that it appeared that you got from Casino Downs. This is really a big increase in EBITDA. Was that just a matter of just getting started and running greater revenues, or greater volumes through the facility? You mentioned improved cost structure and I just wondered if you could comment on what you did to improve the cost structures of Casino Downs?

If I may, the main area there was the food and beverage. It is always difficult to put together a good and functional team when you start up a food and beverage operation, particularly one that has weekly swings, where there is much business on the weekend and on racing days, and less business on the other days.

So initially it just took us a while until we could get the right team together, and in order to prevent a major disaster, we were rather over staffed initially, and as the weeks went by we were able to get great staff and we could streamline the operation, so now we have a great team together.

Okay, very good. And then my last question is in regard to Poland, of course it's unfortunate that you've had this ruling which appears to be not in your favor. I wondered if this change will have any impact on your personnel. Will it be more difficult to attract good personnel now than you've got to collect from their payroll for the tax allocation?

It will increase our staff cost, right?

Yes. It will be a combination of, on the one hand we have to negotiate this also with the [indiscernible] and with the top members of the staff individually. It will probably be a compromise; we pay some of that and then the employees would maybe take a little hit. But that'll be a process that will go on during the next month. I mean, at the end of the day people have to understand that this was -- the way we did it has been done from day one of the casino opening, and for 20 years it was good and suddenly it wasn't good any more. It's certainly outside of our control. We followed it to the very end, and we've just been doing it.

Okay, and do you know, do you have any knowledge of what other gaming operators in Poland do? Are they also being put to the test and being required to make this change too, or was it something that had been adopted by some of your competitors ahead of you?

In short, a little bit [indiscernible] the same situation, although every company handled it a little bit differently, and every company that we're aware of at least, had a little bit of a different case. But in short everybody's facing that problem.

Okay, very good, thank you for taking our questions.

There are no further questions at this time. I will turn the call back over to Mr. Hoetzinger.

All right. Thank you, everybody, for listening to our call. Thank you for your interest in Century Casinos. For a recording of the call please visit the financial results section of our website at cnty.com. Thanks again and good-bye.

This concludes today's conference call. You may now disconnect.