Century Casinos Inc (CNTY) 2017 Q2 法說會逐字稿

Welcome to Century Casinos' Q2 2017 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. Peter Hoetzinger, you may begin.

Thank you, Phyllis. Good morning, everyone, and thank you for joining our earnings call. With me on the call are my co-CEO and the Chairman of Century Casinos, Erwin Haitzmann; as well as our Executive Vice President of Finance, Margaret Stapleton.

Before we begin, I 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, whether 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 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 their appropriate GAAP measures can be found in our news release and in the filing from this morning available in the Investors section of our website at cnty.com.

We will now provide a brief review of the company's financial results for the second quarter of 2017. And following our prepared remarks, there will be a question-and-answer session.

The second quarter reflected good revenue performances from our top 3 operating segments. In local currency, Canada was up 11%; Poland was up 4%; and Colorado was up 3%. We are happy with the underlying strength and stability of our geographically diverse portfolio of casino assets. There was a decline in earnings and margins in the quarter, but that was mainly because of onetime costs and expenses.

In Poland, we had onetime expenses associated with 2 closed casinos and with the opening of our new casino at the Hilton Hotel in Warsaw. And we incurred onetime costs because of the acquisition of Saw Close Casino Ltd. in Bath, United Kingdom. I'll provide more details about that later in the call.

Canada remains our strongest segment, generating 38% of our consolidated revenue and 54% of consolidated EBITDA. Looking at the Canadian results in more detail. Our largest property, the Century Casino & Hotel in Edmonton, offering 822 gaming machines and 35 gaming tables, had revenues decline by 2%. Table game revenue was flat, so was slot coin-in. Only the lowered hotel and F&B revenues were the reason for that small decline. The EBITDA margin decreased slightly from 37% to 36%. Overall, that property continues its solid performance.

Century Casinos St. Albert, also located in the greater Edmonton area, had a steady quarter. The EBITDA margin there sits at 32%. During the quarter, we replaced the carpet on the gaming floor and added 29 gaming machines.

In the Calgary market, our Century Downs Racetrack and Casino increased net operating revenue by 3%. Slot machine coin-in was up 4% and EBITDA grew by 11%. We added 40 new slot machines during the quarter. We also invested in the infrastructure necessary to host thoroughbred races. This coming weekend, we will host the World Driving Championship event. And from September on, we will have major live thoroughbred racing events, which typically draw larger audiences and drive more revenue.

The results of our other property in that market, the Century Casino Calgary, have been characterized by quite a lot of changes throughout the organization. As reported last quarter, we brought in a new GM, a new chief -- a new chef and certain other new department heads, and we instituted new responsibilities and processes. Looking ahead, we are excited about the new leadership and the positive changes that will come from it. Let's hope the performance in July of this year is already an indication for these positive changes, because preliminary results for July show a double-digit revenue increase and a day with an all-time record table games drop and win result.

The U.S. operations in Colorado contributed 21% of our consolidated revenue and 23% of our consolidated EBITDA. They showed a solid performance with revenues up 3% and adjusted EBITDA flat mainly because of staff cost increases. We continue to see a positive regional economic outlook and anticipate continued growth due to strong focus on customer service, clear development and consistent and fun promotions.

Our casinos in Poland generated 38% of the company's total revenue. This quarter, revenues were up 5%. But the drop at the gaming tables and the coin-in at the slot machines were up over 20% each, so business volumes continue to be very strong for us in Poland. We achieved this growth even though we had less casinos in operation compared to last year, as the licenses at 2 locations expired. We already reapplied and we already have been ranked first in these kind of procedures, but the actual licenses have not been issued yet. We anticipate these 2 casinos to be operational again before the end of the year.

The bottom line in Poland was lower this quarter because of onetime reasons, and it is important to clarify those. Firstly, we carried extraordinary costs and expenses associated with the 2 closed casinos of approximately $300,000. And secondly, we had approximately $225,000 in onetime expenses for the preparation and reopening of the new casino we opened at the Hilton Hotel in Warsaw in June. So adjusted for these onetime expenses, the bottom line of our Poland segment would have been higher now compared to Q2 of last year.

Warsaw, the capital of Poland, is the country's most important gaming market and our new casino at the Hilton has the largest gaming floor in all of Poland. Due to legal restrictions in Poland for casino marketing and advertising, any new casino there takes a bit longer than normal to reach its full potential, so we don't expect to see the real earnings power of that location before the end of this year. But from then on, it should really move the needle for our Polish segment.

Now a quick look at our balance sheet. Total assets grew to $224 million. Net debt is $16 million. Total debt, $55 million. Our total debt includes $39 million related to our Bank of Montréal credit agreement and $15 million related to Century Downs long-term land lease. The total debt to adjusted EBITDA ratio sits at 2.1. Book value per share increased to $5.72.

In the second quarter, we spent $1.8 million on CapEx. That amount includes $175,000 for gaming equipment for our new ship casino that we opened during the quarter, $225,000 for the thoroughbred infrastructure at Century Downs, $667,000 for leasehold improvements and surveillance equipment at several locations in Poland and a total of $350,000 spent on the new Century Mile and Bath, U.K. projects. I will now provide a quick update on these 2, our newest projects.

The most exciting growth opportunity is the Century Mile racetrack and casino project in Canada. We have been selected and approved by Horse Racing Alberta and by the Alberta Gaming and Liquor Commission to own, build and operate a horse racing and gaming entertainment facility in South Edmonton, which we will call Century Mile. We have already started the development. Stripping and grading is in full process with a budget of approximately USD 45 million, and we plan to open at the end of next year. It will be a multi-level building with a footprint of 48,000 square feet, initially accommodating 550 slot machines, restaurants, bars, a daily and off-track betting parlor and a grandstand, plus convenient parking for over 1,700 cars.

For comparison, that building will be 50% larger and the footprint will be almost twice the size of our Century Downs facility in Calgary. This will be the only 1 mile race track in Western Canada. It will offer a minimum of 100 race days per year. The casino will be open 364 days.

We are thrilled about this project for these 3 reasons. Firstly, its location. We are on Edmonton International Airport land right off of Queen Elizabeth II Highway, the second biggest highway in Western Canada, right next to an Ivanhoe Cambridge regional shopping mall, a golf course, and a cluster of hotels and restaurants, all in the south of Edmonton, which doesn't have any casino. In fact, the nearest casino will be about 20 miles to the north.

Secondly, this project came about due to the fact that the existing racetrack and casino, Northlands Park, will close next year because of the land lease with the City of Edmonton coming to an end. This means that our existing casino in the northeast of the city, Century Casino & Hotel Edmonton, which is the largest property in our entire portfolio, will greatly benefit because its closest competitor will fall away completely.

And thirdly, we look at the success that we are having with Century Downs in Calgary, which we opened about 2 years ago and which generates almost 30% EBITDA return on investment, even so it brought new gaming machine capacity to that market. In fact, it increased the number of machines in the Calgary market by over 500. Now this new project in Edmonton, Century Mile, will be bigger, better, in a comparatively even better location and will not bring any new capacity to the market because the existing racetrack and casino would close when we open. So for these reasons, we believe that our ambition to generate over 25% EBITDA return on that investment has a really good chance of success.

Over in Europe, we have acquired a casino under development in the U.K. in the City of Bath, 1.5 hours west of London. In June, we purchased 100% ownership of Saw Close Casino Ltd., the company that has the exclusive license for a casino in that market. It also has a 30-year lease agreement with the landlord of a multi-level mixed leisure development that includes a 147-room hotel and various restaurants, in the center of the city directly opposite the very popular Royal Theatre. The acquisition price was just USD 766,000. In addition, we will invest approximately USD 6.4 million for the design and fit out of the 15,000 square feet casino space, which will accommodate 18 gaming tables as well as around 60 gaming machines and live gaming terminals.

The entire City of Bath is a UNESCO World Heritage Site and draws about 5 million tourists every year. Even more important, the immediate Keynsham area includes close to 200,000 people, and we are the only casino in that area. We plan to open in the first half of next year and expect, again, an EBITDA return on our investment of at least 25% once the property has fully ramped up. We believe this project is another example of our successful track record of finding great opportunities in well-regulated markets worldwide for the reasonable cost and investment, but with a high earnings potential for our company.

A handful of new additional projects and opportunities are on our table right now, some greenfield development opportunities, some acquisitions, all in attractive markets with high return on investment potentials. It is too early for detailed disclosures, but looking at our track record of adding new casinos, we could expect 1 or 2 new ones in the next 12 to 18 months.

Finally, a brief outlook for the current -- the third quarter. What we can see so far is that business volumes have increased quite strongly. July highlights from the new individual properties include the following: the third highest slot machine coin-in ever as well as record revenues for live racing and betting at Century Downs in Calgary; increases in table games drop as well as slot machine coin-in at Century casino in Edmonton; a 32% increase in table games revenue at our new casino in St. Albert; an all-time record day for table games drop in revenue; and overall, a 29% increase in table games volume at Century Casino Calgary

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year record monthly EBITDA for that property. On a consolidated basis, preliminary results for July show double-digit revenue growth and also a very nice increase in operating margins. Again, the preliminary indication for July for adjusted EBITDA growth in that month is north of 20%.

All right. That's 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 the line of Robert Majek with CJS Securities.

Just looking at (inaudible) at 11% EBITDA margin, it came in a bit lower than what we were expecting, and it's been in the kind of the 14% to 16% range for a few quarters now. Can you just kind of walk me through what was behind the cost increase there? Perhaps there were some onetime items in that figure.

Yes. We had about USD 300,000 of onetime costs that are in that figure. And the reason for that amount is because we had some staff, and especially rent and other costs for the 2 casinos that are closed, but we kept the agreements and we kept the premises because, as I've mentioned, we reapplied for those licenses. And when you reapply, you need to show premises. And that's why we kept this intact and that's where that $300,000 number comes from.

And then you used to have a location in Katowice and the license was left to expire. What's changed there that makes it a better to reenter now?

Erwin, can you come on that? I think, that one, we change in location, is that right?

Yes. Right, right, right. It's not so much that the market changed, it is always the question of the license. And we got a better location there, so we applied for the better location. And as Peter said, we're just waiting now to get that license.

We have been ranked first in that process already, but between the end of the process and the actual issuance of the license, there is some -- the Polish authorities take some time and we don't know exactly know how long that could be 1 or 2 months or it could be 4, 5 months. And the other one which is even stronger is [Wroclaw] that has also been -- it's also closed now, and it's the same situation we expect to be opened before the end of the year.

And in addition to those 2 locations, there's also one more license that you're bidding on. Was it the countrywide casino cap increase? Or was that another expiring license from someone else?

No. And neither nor -- it was just a license that nobody sought or had been interested in before.

Got it. Okay. And if you win all 3 of these, what are the likely startup renovation costs that we should expect?

With regard to Wroclaw and Katowice, so that could be a matter of 1 or 2 months. And with regard to Bielsko-Biala, that would be a new one, we would -- it would take a little longer.

And costs, Erwin? Investment?

Costs in Wroclaw and Katowice, not very high. In Bielsko-Biala, a few hundred thousand.

And just lastly for me, can you just give us a table game hold percentage this quarter and last year's second quarter?

We have that by property.

That would be fine as well, if you could give us that.

Well, I have to take it -- did we, actually -- are we releasing those numbers for each property?

We have those by segment in the presentation. So for Canada, if you look at Page 13, it's got slot and table hold year-over-year.

Our next question comes from the line of Mike Malouf with Craig-Hallum Capital.

If I could just maybe look out a little bit in Poland. I know that you have some onetime costs here and you're ramping, obviously, the new Hilton location. As you look into 2018 and as you get past some of these, where do you think the adjusted EBITDA percentage numbers can check out? I mean are we still taking a look at potentially at the sort of 17 to 18 or even higher percentages?

I believe that's what we think, yes.

Yes. Yes. I think we've said that the high teens, the high teens, it's very unlikely to go into the 20s because of the gaming tax being at 55%.

Right. But sort of an 18% target next year, that's a reasonable goal to shoot for, right?

Yes, I think so.

Yes. And revenue should also grow quite strongly with these 2 casinos coming online again and ramping up.

Right. Those should be up over 10%, I would imagine?

That we have already -- yes, Erwin?

Okay. Yes. 10% relative to what? Relative to the total revenue of Poland, do you mean?

When you look at the net operating revenue for 2018 after you get all additions open, you should get a 10% growth next year, I would imagine, in Poland.

We would hope that this would be on the conservative side.

Correct. Okay. Got it. All right. That's helps a lot. And then with regards to G&A, G&A was a little bit higher than what we were looking for. Can you talk a little bit about that? Was there some onetime? Was that sort of double counting some of the onetime items you talked about?

Peggy, would you know?

If you're discussing G&A related to Poland, it's salary costs. We've had an increase in salary costs due to the tips issue that we had.

And at this time, there are no further questions. I will now turn it back to the moderator.

Great. Thank you, operator. And thanks, 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. Goodbye.

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