Century Casinos Inc (CNTY) 2016 Q2 法說會逐字稿

Welcome to Century Casinos Q2 2016 earnings conference call. This call will be recorded. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). I would like to introduce our host to today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin.

Good morning everyone. Thank you for joining Century Casinos second quarter 2016 conference call. With me on the call, are my co-CEO and the Chairman of Century Casinos, Erwin Haitzmann, and Executive Vice President of Finance, Margaret Stapleton. Before we begin, we would like to remind you that 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, either as a result of new information, future events, or otherwise. We provide a detailed discussion of various risk factors in our SEC filings, and 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-Q filing from this morning, available in the Investor section of our website at CNTY.com. We will now review the Company's financial results, and following our prepared remarks there will be an opportunity to ask questions.

In a true like for like comparison, which means eliminating the one-time payments we got from Norwegian Cruise Line last year, and looking at constant currency numbers, net operating revenue grew 6%, and adjusted EBITDA increased by 5% over the period of last year. This marks the seventh consecutive quarter of both revenue and adjusted EBITDA growth for our Company. Our strongest segment, Canada, which provides 62% of our consolidated EBITDA, saw a revenue increase of 4%, but due to higher marketing costs and property taxes, it resulted in a small 3% decline in adjusted EBITDA. Our US operations performed even stronger, revenue up 7%, and adjusted EBITDA up 15%. Overall, our US casinos generated 22% of the Company's consolidated adjusted EBITDA. Also Poland had a very good quarter. Revenue up 10%, adjusted EBITDA up 16% in local currency. Poland was responsible for 23% of our total adjusted EBITDA in the quarter. These solid results reflect the underlying strength and stability of our geographically diverse portfolio of casino assets. Our balance sheet is in great shape and improved again. Net debt decreased from our $15 million a year ago to just $5.6 million now, and that even includes $15.6 million related to long-term land and capital leases at Century Downs and Canada. Capital expenditures during the quarter were $2 million, or 5.7% of revenue. That is a little higher than normal because of renovations at the Edmonton casino, and gaming equipment for new ship casinos. Book value per share increased by 5%, from $5.05 to $5.30. We will now have a closer look into each operating segment, starting with Canada. The Century Casino & Hotel at Edmonton had a very good quarter on the gaming tables, with revenues up 5%. [Flock] revenue however was down 3%. We are very happy with these numbers in light of the extensive renovation works on the slot floor and in the table VIP area. We are expanding the gaming floor, substantially enhancing the high limit VIP area, creating a new bar, and also expanding the casino restaurant. The new design will be ready for the fourth quarter, which traditionally has been the busiest for Edmonton. The new relocated 24-hour poker room has already opened, and is performing very well. The EBITDA margin in Q2 in Edmonton was 37%.

The performance of our Century Casino in Calgary was even better, revenue was up 13%, and adjusted EBITDA increased by 48%. All of the growth came from the gaming tables. The EBITDA margin at that casino was 23% for the quarter. The great success of our newest property, the Century Downs Racetrack and Casino north of Calgary continues. Revenue in April and May almost reached a level of the great opening month last year. June was even better than last year. The whole percentage on the gaming machines was slightly lower compared to last. All of it resulted in a small revenue increase of 2% for the quarter. The EBITDA margin was 42%. This year they began live horse racing in February and it has experienced increasing customer volumes every weekend since then. We have continued to push our loyalty program sign-ups, and specifically target the markets of North and Northwest Calgary, both of which do not have a casino. Our OTP network Century Bets performed very well and generated 68% more in revenues compared to last year's second quarter. As of June 30, Century Bets provided parimutuel wagering content, live video, to 16 offtrack betting parlors throughout southern Alberta. In Colorado, the solid run of both casinos continued. The economy and the consumer sentiment in the greater Denver and Colorado Springs metro areas continue to be strong. Coupled with our effective markets programs this led to continued revenue and EBITDA growth of 7% and 15% respectively. Both properties gained market share year-over-year. Slot play was the main growth driver but S&P and hotel revenues were up nicely as well. In Cripple Creek we plan to convert one of the non-casino buildings that we own, the 30-room boutique hotel, a $5 million project that we start construction next quarter. Our small existing 21-room hotel has an occupancy rate of about 90%, and has won the 2015 Best of Cripple Creek Award. And also the only hotel in town offering direct online bookings, on Expedia, Travelocity, Hotels.com, Bookings.com, TripAdvisor, et cetera. Our property in Central City has been named the Best Casino in Denver for the fifth time in a row, and we are featuring the Best Casino title in our marketing activities and promotions. Over to Europe, to our 66%-owned subsidiary Casinos Poland Limited. As reported previously, the Supreme Court ruled in early March that Casinos Poland must calculate, collect, and pass on to the Polish Tax authorities the personal income tax on all tips received by employees from casino customers. Since then, we have received the written ruling from the courts allowing us to analyze the issues raised in more detail. We are also in negotiations with the Polish unions about sharing the impact. To address these issues, we expect changes to the payroll and holding processes for Casinos Poland will be implemented in the third quarter of 2016. We anticipate payroll costs to increase by approximately 1.2 million to 1.3 million polish zloty per quarter, which currently equals between $300,000 to $340,000 US dollars. To put that into perspective, in Q2 without the tips, Casinos Poland generated 7.6 million polish zloty EBITDA. Our Poland business is fundamentally very strong. In Q2, Casinos Poland had another good quarter, slot play showed continued strong growth with coin in up 49%, and slot revenue up 38%. On the gaming tables, there was growth in money wagers. The drop was up 5%. But the much slower whole percentage compared to last year, we started with a 10% decline in table game revenue. Overall, Casinos Poland revenue was up 10%, adjusted EBITDA was up 16%, and the EBITDA margin decreased to 15%. That concludes the presentation of the operating results of the second quarter. Overall, we are quite pleased with our progress. All operating segments are in good shape. All have posted solid revenue growth, and still offer potential for further improvement.

Let me also mention that the third quarter started out really well for us. The month of July generated strong double-digit growth over July of last year, and that is in US dollars. Besides posting good results, we've always been very active on the project development front during the quarter. We have secured contracts and started to operate three more cruise ship casinos. One on the Mein Schiff V with three cruises, one of the cruise ships Discovery with Thompson Cruises, and one on the ship Glory Sea of Diamond Cruises. Diamond Cruises is a subsidiary of theChinese traveling tourism company, Tai Hu International, and we are excited to enter the Asian gaming market with them in a very cost effective way. This casino caters almost exclusively to Chinese customers, and certainly has the potential to grow our ship-based casino segment to a more meaningful size. And finally, we are very excited about the significant agreements we have entered into to acquire the Apex Casino in St. Albert, greater Edmonton. We will acquire this casino including land and buildings for a net purchase price of CAD27.9 million, which is about $21.5 million in US dollars. Based on the casino's most current results, this equates to an acquisition multiple of 5.8 times adjusted EBITDA. The purchase is subject to, among other things, regulatory approvals and our final due diligence. We expect closing in the fourth quarter. The casino operates 382 slot machines and event gaming tables. It also has a restaurant, a bar, a lounge with live entertainment, a stage, and a banquet facility, that can accommodate up to 175 guests. St. Albert is the second largest city in the Edmonton capital region, and Edmonton is northwest of the city limits and directly adjacent to St. Albert. The Apex Casino is located off of Edmonton's main ring road, and is approximately 11 miles from our own Century Casino in Edmonton. We do expect that the addition of the Apex Casino will create operational synergies for our Company, and we can't wait to integrate it into our portfolio of successful Canadian operations. All right, that is the end of our presentation. I thank you for your attention. And we can now start the question and answer session. Operator, go ahead, please.

(Operator Instructions). Our first question comes from Robert Majek from CJS Securities. Please state your question.

Good morning. As you are aware, last week Poland passed an amendment to the Gambling Act that introduced a number of changes. What is the potential impact on your business in that country from that?

Erwin, would you like to come in?

Sure. This is Erwin. We, first of all, fortunately there are no changes to the gaming tax, so that is staying the same. And the two main things that we see there is online casinos will be not only explicitly forbidden, but it is expected that it will also be execution of that new law. Therefore, for a short time there will be no legal online gaming in Poland. However, this state will take over to one of its subsidiaries, online casinos itself, and will operate them on their own. The second change will be that slot arcades may be allowed again, but also to be operated exclusively through a state-owned subsidiary. We don't know about the timing of that, we don't think it'll happen immediately, but we will see. I think that would be the main things that may potentially affect us.

Thank you. And I was hoping you could update us on the specific table game hold percentage this quarter, and the prior year period in both of your geographies?

Erwin, do you have those numbers ready, or should I go?

If you have it ready. The question was were there changes in the whole percentage?

Yes. Correct. The change this quarter and last year?

Okay. Erwin, in Edmonton, actually, we don't, Robert, disclose it on a property by property basis. We can get you the number. Can you take it by segment?

We can calculate it by segment and put it into the presentation, sure.

I can get you those numbers, but we don't do it on a property which property basis

Yes. That would be helpful

Sure.

And lastly for me. In acquiring the Apex Casino, can you talk about your acquisition strategy in Alberta, and if there are any other major opportunities there for you on the horizon?

This presented a great opportunity because we're obviously very familiar with the market, and the regulatory environment in that province of Canada. And the location is we believe very beneficial for us, because we already operate one casino in the north. This one is also in the north. A little bit to the northwest. And as you've heard, the acquisition market is really, really, it's great. We see with potential synergy effects that in the long run this would even come down. There is another, an existing race track and casino called Northlands, also out of the greater Edmonton region, between the St. and the north. They announced that they would go out of business, out of casino business probably next year. And that means with the position of Apex Casino, and our existing Edmonton, we pretty much have the northwest, north and northeast of the greater Edmonton area pretty much under our control, which is fantastic.

In terms of the broader acquisition strategy, any well regulated market is of interest to us. We would like to move into operations that are of a size of the one that we just did, Apex or larger. And I see a number of opportunities out there in North America, as well as internationally.

Okay. Thank you.

Our next question comes from the line of Mark Rosenkranz from Craig-Hallum. Go ahead and ask your question.

Hey, good morning everyone. Thanks for taking my question.

Hi.

Touching on the Apex acquisition a little more. I was wondering if you could discuss how that deal came about, I mean you obviously know the Edmonton area very well through your casino. Is that something that was presented in terms of the M&A strategy you guys are pursing, or just discuss a little more how that deal came to be?

We had expressed interest to the owner quite some time ago, probably two years ago, and then talks intensified when we opened our Calgary Racetrack and Casino in April of last year. Yes, it was just, yes, it was a long-term goal of us to try and get a position in that casino, and over the last two years it developed into a full out purchase.

Okay. Great. That's helpful. And then switching gears, you previously talked about entering the Asia, is that announcement of the cruise ship line, or are there any other properties on the mainland that you would be looking at there?

Yes, we're also looking at a lot of properties. And then this cruise ship casino appeared on the radar screen. We are very happy for this opportunity because, first of all, we are the leader in cruise ship casino operations internationally. So that really is a business where we are very good at, and that we know inside out, and have done for a very long time. And to move with such a setup into a completely new market like China is for us, is a very good thing, because it eliminates certain, certain unknowns and certain risks. And it's also very cost effective, because we don't have to build any infrastructure or any buildings. Having said that, yes, we are still looking at other mid-sized properties, land space. It's taking a while, but we will, because we will only move ahead if we find the right local partner. If we have total confidence, and as long as that's not the case, we will not make a move.

Okay. Great. Thanks for taking my questions. And congratulations on a great quarter.

Thanks, Mark.

Our next question comes from the line of Robert Maltbie from Singular Research. Please state your question.

Hello, Peter and Erwin. Thank you for taking my questions. The question, number one, that I have, it looks like year over year for the quarter you experienced a 7% revenue decline. How would you ascribe that performance as a causation?Was it a tough comp combination, some difficulties in some of the specific operations, say Poland or Canada, what would be your best description of that?

It is the strong dollar, because you if take out the currency, and that one-time payment that we received last year from the cruise line, then our revenue actually grew 6%. That's a true like for like comparison.

Okay. Thank you. Regarding the food, hotel --

I'm losing you, Robert. Operator, I can't hear Robert anymore.

I have disconnected him from the queue. His line had some issues. Robert, if you would like to queue up one more time for your question, you can do so now by pressing star 1. And there are no other questions.

All right. Then I thank everybody for your interest in Century Casinos, and your participation in the call. For a recording of the call, please visit the financial results section of our website at CNTY.com. Good-bye.

This concludes today's conference call. Thank you for attending.