Century Casinos Inc (CNTY) 2017 Q3 法說會逐字稿

Welcome to the Century Casinos Q3 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 -- Mr. Hoetzinger, you may begin.

;

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, 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, 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 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 filing from this morning. All are available in the Investor section of our website at cnty.com.

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

The third quarter results reflect excellent performances from all operating segments and clearly demonstrate the earnings power of our international portfolio of casino assets. Net operating revenue was up 19% and adjusted EBITDA was up 20%.

During the quarter, we released a valuation allowance on our U.S. deferred tax assets resulting in a tax benefit of USD 5.1 million. We analyzed the likelihood of future realization of the deferred tax assets, and based on this analysis, we concluded that the operations in the U.S. had attained a sustained level of profitability sufficient to reduce that valuation allowance. As a result, net earnings and earnings per share for the quarter quadrupled to $7.6 million and $0.30, respectively.

Overall, Canada remains our strongest segment, generating 37% of our consolidated revenue and 53% of our consolidated adjusted EBITDA. All our Canadian operations posted increases in both revenue and EBITDA.

Looking at the Canadian results in more detail. Our largest property, the Century Casino & Hotel - Edmonton, offering 822 gaming machines and 35 gaming tables, showed a revenue increase of 2%. EBIT grew by 17%. The EBITDA margin jumped from 32% to 36%. Century Casino St. Albert, also located in the greater Edmonton area, had a very good quarter, too. The EBITDA margin increased to 34%. We are starting to see substantial synergy effects between these 2 properties in the greater Edmonton market, just as we had planned when we made the acquisition a year ago.

In the Calgary market, our Century Downs Racetrack and Casino increased net operating revenue by 9%. Slot coining was up 12%. EBITDA grew by 2%. The reason for the lower EBITDA growth is the additional expense caused by the setup works for thoroughbred racing during the quarter. We actually started thoroughbred racing in September and it is very successful for us. It draws large audiences. It drives more revenue on the gaming floor, in the restaurants and at the betting shops.

The results of our other property in that market, the Century Casino Calgary, are also very encouraging. Revenue increased by 22%. EBITDA almost quadrupled. As reported last quarter, we brought in a new GM, a new chef and certain other new department heads and we executed new responsibilities and processes. And these changes are now showing first very promising results.

During the quarter, we refurbished the bowling lanes to improve the entertainment venue for public bowling and the quality for league bowlers. We also relocated the Baccarat games and created a new enhanced atmosphere for the paper games and installed larger TV screens. Currently, we are finishing construction and installation of our new family entertainment center to include 18 holes of mini golf adventure, arcade games and 3 separate party rooms, all of which slated to open before the Christmas holiday.

Overall, we are excited about the gaming market and the economy in Alberta. The worst appears to be over for Calgary and Edmonton, as the Conference Board of Canada quoted in an article published on October 17. According to their research, Calgary and Edmonton are forecast to be the fastest-growing metropolitan areas in Canada this year. Alberta's economy has been getting stronger thanks to a rebound in drilling and increase in oil production. For 2018, the CBC estimates continued growth at over 2% for the economies of Calgary and Edmonton.

The operations in Colorado contributed 22% of our consolidated revenue and 28% of our consolidated EBITDA. They showed a solid performance, with revenues up 10% and adjusted EBITDA up 19% and both properties gaining share in their respective markets. In fact, the Century Casino & Hotel in Cripple Creek, serving mainly the Colorado Springs market, achieved the best EBITDA performance in 10 years. The Central City property, catering to the greater Denver area, increased revenues by 8%, primarily driven by newly acquired and newly developed high limit players, proving our marketing investment dollars have been well spent earlier in the year. We continue to see a positive regional economic outlook in Colorado and anticipate continued growth due to a strong focus on customer service, player development and consistent and fun promotions.

Over in Europe, our casinos in Poland generated 30% of the company's total revenue and 16% of the EBITDA. This quarter, the Poland revenue was up 8%. Slot machine revenue was up 33%, but the lower hold percentage on the table games, 19% this quarter versus 23% of last year, reduced the overall revenue growth to 8%.

We achieved this revenue 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 standard procedures, plus also in a third one for the city of Bielsko-Biala, but the process of the Ministry of Finance of actually making these licenses effective has not concluded yet. We anticipate these 3 additional casinos to be operational for us within 6 months from now.

The reason for the slight decline in EBITDA this quarter in Poland simply is the fact that we carried staff and other cost and expenses of the 2 closed casinos in anticipation of us winning these licenses again. So adjusted for these expenses, the EBITDA of our Poland segment would have been higher by over $0.5 million or up by around 10% compared to Q3 of last year.

Our newest casino in Poland at the Hilton Hotel in Warsaw is performing very well. Revenues climbed steadily since opening in early June. They increased from June to July by 40%, from July to August by 9% and from August to September by another 43%. Finally, the cruise ship casinos and management contracts, although a very small segment within our casino portfolio, increased revenues by 20% and EBITDA by 81%.

Now if we look at our balance sheet. Total assets grew by 11% to $241 million. We managed to reduce net debt down to $14 million. Our total debt of $58 million includes $37.9 million related to our Bank of Montreal credit agreement, $15.6 million related to the Century Downs long-term land lease and $2.7 million for the new project in Bath, United Kingdom. The total debt to adjusted EBITDA ratio sits at 2.2. Book value per share increased to $6.14. During the quarter, we spent $1 million on CapEx for the existing operations, that's about 2.4% of revenues. In addition, we spent $1.1 million on the new Century Mile project.

And let me now give you a quick update on our new projects that are under development. The most exciting one is the Century Mile Racetrack and Casino project in Edmonton, Canada. As most of you know, 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 named Century Mile. We have already started the $48 million development, and winter weather permitting, we plan to open at the end of next year. The civil design is complete, stripping and grading is in full progress and facility alteration permits for underground and surface works have already been approved. It will be a multi-level building with a footprint of 48,000 square feet, initially accommodating 550 slot machines, restaurants, bars, (inaudible), an offtrack betting parlor and a grandstand plus community 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 successful Century Downs facility in Calgary.

This will be the only one-mile race track in Western Canada. The location couldn't be better. We are on Edmonton International Airport land, right off of Queen Elizabeth II Highway, the second biggest highway in Western Canada, next to a regional shopping mall, a golf course a cluster of hotels and restaurants, all in the south of Edmonton, which does not have any casino. In fact, the nearest casino will be 20 miles to the north. The existing racetrack and casino, Northlands Park, will close when we open, which means that our existing casino in the northeast of Edmonton will greatly benefit, because its closest competitor will fall away and it also means that our new racino will not bring additional capacity to that market. Therefore, we believe that our ambition to generate an EBITDA return of over 25% on the $48 million 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. 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, including a 147-room hotel and various restaurants in the center of the city opposite the very popular Royal Theatre. The acquisition price was $766,000. In addition, we will invest approximately $6.7 million for the design and fit out of the 15,000 square foot casino space, which will accommodate 18 gaming tables as well as around 60 gaming machines and large 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 catchment area includes close to 200,000 people and we're the only casino in that area. We plan to open in the first half of next year and expect also there an EBITDA return on our investment of at least 25% once the property has fully ramped up.

And then, in August, we announced that together with the owner of the Hamilton Princess Hotel & Beach Club in Hamilton, Bermuda, we have submitted an application for a casino at that hotel. We believe ours was the only license application fulfilling all criteria. The casino will feature approximately 200 slot machines, 17 live table games plus electronic table games in the high limit area and salon privé. After a successful public hearing at the end of September, the Bermudan government will issue a provisional casino license as the next step in the application process. The conditions of that provisional casino license must be agreed upon with the Bermudan government and we have no estimated time from -- on when this will be completed or if it will be completed at all. We entered into a long-term management agreement with the owner of the hotel to manage the operations of the casino against a management fee if the license is awarded and it will provide a $5 million loan for the purchase of casino equipment if the license is awarded.

In total for the Century Mile project, the Bath U.K. project and the project in Bermuda, we had a combined investment budget of approximately $62 million. We are pursuing a number of financing options for that. And when we have our financing plans in place, we will inform the marketplace.

Finally, a brief outlook and selected highlights for the current fourth quarter. What we can see so far is that business volumes keep increasing. In Alberta, Canada, our operations seem to continue their regained strength. At Century Downs Racetrack and Casino, the [coining] at the slot machines as well as the F&B revenue for the month of October were the second highest in the history of that property. The live racing (inaudible) revenue were an all-time record in October. At Century Casino & Hotel Edmonton, the EBITDA margin in October were 39%, really impressive. And in Poland, the drop at the gaming tables in October at our new Hilton Hotel casino in Warsaw is continuing to grow. From September to October, it was up another 20%.

All right. That's the end of our presentation. I thank you for your attention and we can now start the Q&A session. Steve, go ahead, please.

(Operator Instructions) And your first question comes from Mike Malouf with Craig-Hallum Capital Group.

I'm wondering if you could just -- can you talk a little bit more about Poland? When you take a look at the new large casino that's ramping there and then when you take a look at the ones that are on sort of waiting approval and the third one that you've just won, what kind of size are we talking about with regards to those casinos?

Erwin, would you like to comment?

Yes, this is Erwin. Wroclaw, historically, was our second-best casino. That was before the Hilton came in. So Wroclaw was #2 in both revenue and EBITDA behind the Marriott casino. If and when it's open again now, we expect it to be #3 behind the 2 Warsaw properties. Katowice in our portfolio will be midsized, let's say, and Bielsko-Biala is a smaller casino in a smaller town.

Okay. And then, in the last quarter, I think you kind of highlighted a lower hold percentage in Poland. I think it was about 19 -- 17%. And then this quarter, it was 19%. Where do you expect that to bounce back? And have you seen hold percentages like this last for such a long period of time?

This is -- the hold percentage on table games are, by nature, subject to volatility. In this last quarter, for example, we had one large player who contributed significantly and that had an impact on the hold as well. So you obviously have to expect that there is a range where the hold percentage could go up and down, particularly if you look at it on a quarter-by-quarter basis. So over the year, it's clearly (inaudible) leveling out.

Okay. And not to keep harping on Poland, but when you take a look at late 2018, after we get some of these other -- after everything is ramped up and you open up some of these other -- the 2 or 3...

Properties, yes.

Casinos. Where do you expect or where could you hope to have that EBITDA margin reach? Because obviously, we've been kind of, especially in the September quarter, down at the low point. Where can that go to over the next couple of years?

I wouldn't want to project.

Mike, we had it at -- in the very high teens already before we started all the work on the Hilton casino and we had to reapply for those licenses. So I mean, that's just an indication of where it can be, the very high teens.

We've said previously that to go like mid-20s and up is not possible because of the gaming tax. Gaming tax is very high in Poland, 55% of revenue, and that's why we can't really jump into the mid-20s or higher.

But I mean, theoretically, we could get to 20% if everything is kind of humming on all cylinders, right?

Yes.

That's the goal, but we will see, yes.

(Operator Instructions) Your next question comes from David Bain with Roth Capital.

Great. Just to follow up on the Poland margins, I believe I heard you say that an extra $500,000 without the added expenses that you mentioned on the call. So it looks like you were up 200 basis points sequentially normalized. Did those expenses bleed into 4Q? And then, also on top of that is, is the Marriott up to full margin extraction? Or is there still a little bit of kind of onetime marketing going on at that facility to get it ramped up?

I think you mean the...

Right. The new one at the Hilton.

Yes, the -- as long as we don't have the effective licenses in hand that we can't open, yes, we will have some extraordinary costs and expenses because we, as we've said, we keep the staff and we have some other expenses like lease payments and so on. Now we expect those licenses any week, but until then, we have those costs.

And Erwin, in terms of additional or extra marketing or promotional expenses at the Hilton, we're -- at their run rate that we will like continue or is that an extraordinary going on right now?

No, no, no. We're at the run rate, a main reason being that we can't really do a whole lot due to the restrictions in marketing in Poland.

Okay. And then, overall, I mean, Canada came out much better than we had, but it looks like Calgary had the largest upside variance versus our estimate. You spoke a little bit about the thoroughbred racing addition. Maybe if you can give us a little bit of sense as to what type of player that's bringing in, if there's a mix shift there, the calendar for thoroughbred going forward there?

And then, when you look at the Century Mile development, is there a key takeaway from that, with the patron mix, that we should think about when we're modeling Century Mile?

Should I -- over to you, Erwin.

Yes, the customer that -- the people who come to the thoroughbred races spend more, both in betting on the horses as well as in the casinos and also in F&B. It's a kind -- it's the type of player, after the race, he hangs around and has a few drinks at the bar, which is different from the standard [criteria] of players.

Takeaway from Century Mile -- I mean, Century Mile, as you know -- as you may know, will be bigger, better, totally state-of-the-art. It will be a fantastic property. We are going through the revised plans twice a week. I think we've -- it will be really, really good and then we'd be, like Peter said, we'd be really surprised if we could not hit that 25% margin.

And there are no further questions at this time.

I now turn the call back over to the presenters.

Great. Thank you. 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.