Century Casinos Inc (CNTY) 2017 Q4 法說會逐字稿

Welcome to Century Casinos Q4 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. 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'll 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 and are also 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 fourth quarter and full year 2017. And following our prepared remarks, there will be a Q&A session.

2017 was a good year for Century Casinos as we generated all-time record revenues and all-time record adjusted EBITDA. Erwin and I are very pleased with these results. But we are even more pleased with the state, the shape and condition of our company, which is a result of a very efficient team effort of the great people we have in our offices in Colorado Springs and Vienna and at casino property level. All of them are very talented and engaged, striving for continued improvement at everything we do. Ultimately, that leads to better experiences for our guests, to better results; and to increase value for our shareholders and other stakeholders, such as our lenders and the communities we operate in.

For the year, net operating revenue came in at $154 million, up 11% over 2016. The Canadian operations increased revenues by 13% and adjusted EBITDA by 9% in local currency. Our casinos in the U.S. grew 7% on revenues and 11% on adjusted EBITDA. Poland's revenues were up 4% for the year, but adjusted EBITDA was down significantly, which has to do with the 6-year licensing cycle for Polish casinos. More color on that later when we discuss the Polish operations in more detail.

For the fourth quarter, net operating revenue was $39.3 million, up 8% over Q4 of 2016. Canada remains our strongest segment, generating 39% of our consolidated revenue and 2/3 of our consolidated adjusted EBITDA. Canada grew revenues by 26% for the quarter. Adjusted EBITDA was up 16%.

Looking at the Canadian results in more detail. Our largest property, the Century Casino & Hotel - Edmonton, which offers 822 machines and 35 gaming tables, showed flat revenues. EBITDA grew by 13%. The EBITDA margin jumped from 35% to 39% despite the minimum wage increase that took effect on October 1.

The Century Casino St. Albert, also located in the Greater Edmonton area, had a very good quarter too. Revenue was up 10%. Adjusted EBITDA up 17%. EBITDA margin increased from 29% to 31%.

In the Calgary market, our Century Downs Racetrack and Casino increased net operating revenue by 17%. EBITDA grew by 2%. The reason for the lower EBITDA growth is the additional operational and payroll expenses associated with setting up the newly introduced thoroughbred racing. As of now, because of those -- the setup costs being absorbed -- have been absorbed in Q4, the EBITDA margin at Century Downs are already back to normal, north of 40%.

The results of our other property in that market, the Century Casino Calgary, are also very encouraging. Revenue increased by 5%; adjusted EBITDA by 24%. On our last earnings call, we reported about the new changes we initiated at that property, including new top management as well as the introduction of mini golf and other family-style arcade games. And it seems we are on the right track with these changes.

The U.S. operations in Colorado contributed 20% of our revenue and 21% of our consolidated adjusted EBITDA. The Century Casino and Hotel in Central City increased revenues by 9% and adjusted EBITDA by 11%. The Cripple Creek property was up 4% and 9%, respectively. A very solid performance, driven by increases in all departments, as well as good cost controls.

We continue to see a positive regional economic outlook in Colorado. The unemployment rate is down to 3%. We anticipate continued modest growth due to strong focus on customer service, player development and consistent and fun promotions.

Over in Europe, our casinos in Poland generated 39% of the company's total revenue and 13% of our consolidated adjusted EBITDA. Between the summer of 2017 and the summer of 2018, we had a number of our casino licenses expire, for which we have already or will reapply. During that process, we see lower revenues because some casinos will close until relicensing; and higher costs because we keep the leases for the casino premises in place, and also keep most of the staff on payroll.

Having said that, business volumes at the existing casinos are strong. The drop at the gaming tables was up 3%, and the slot machine revenue was up 15% in the fourth quarter over the fourth quarter of 2016. But unusually low table hold -- it was 13.9% this quarter versus a more normal 22% last year -- as well as extra costs and lost revenue associated with relicensing, that all negatively impacted adjusted EBITDA in fourth quarter alone by approximately $2 million.

We know the situation in Poland can be complicated at times, but we are really happy with the strength and the performance of the existing operations. If you add the $2 million to EBITDA, you see really strong numbers and high growth rates being generated there.

In about September of this year, the relicensing round should be over and done with, and normal EBITDA margins should kick in again. After that, the next batch of licenses expires in 2022.

Now a quick look at our balance sheet. Total assets grew by 26% to $275 million. Our total debt of $56.7 million includes $38 million related to our Bank of Montreal credit agreement; $15.5 million related to the Century Downs long-term land lease; and $2.7 million for the new project in the city of Bath in England. Our total debt-to-adjusted EBITDA ratio sits at 2.2. Book value per share increased to $6.13. CapEx during the quarter was $1.6 million or 4% of revenues, spent mainly on building improvements at the 2 Calgary operations and on gaming equipment for the Cripple Creek Casino.

Last November, we raised $34.4 million, net, in an equity offering at the price of $7.50 per share, which was an 11% discount to the 30-day average stock price prior to the offering, or a 4.5% discount based on the 60-day stock price average prior to the offering. We will use the majority of the funds to complete our most significant and largest project to-date, the Century Mile Racetrack and Casino in Canada at Edmonton International Airport.

Let's now go over our projects under development, starting with Century Mile. 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 the horse racing and gaming entertainment facility in South Edmonton, which was named Century Mile.

So far, we have spent approximately $7 million on the development. And with 85% of all tenant packages in, we expect to be on budget, which is CAD 60 million or about USD 40 million. In addition to the equity we are putting into this project, we are in the midst of increasing our credit line with Bank of Montreal to cover the balance.

We plan to open all facilities of the project in early 2019. It will be a multilevel building with a footprint of 48,000 square feet, initially accommodating 550 slot machines, restaurants, bars, a deli, an off-track betting parlor and a grandstand, plus convenient parking for over 1,700 cars. Just for comparison, that building will be about 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 racetrack in Western Canada and we are particularly excited about its location. It couldn't be better. We're on Edmonton International Airport lane, right off of Queen Elizabeth II Highway, which is the second biggest highway in Western Canada. We're next to an Ivanhoé Cambridge regional shopping mall, a Costco retail center, a golf course and a cast of hotels and restaurants all in the south of Edmonton, which does not have any casino right now. In fact, the nearest casino will be about 20 miles to the north.

The current racetrack and casino, Northlands Park, will close when ours will open, which means that our existing casino in the northeast of the city will greatly benefit. Because Northlands Park is currently its closest competitor, and that will fall away, which also means that our new racino will not bring additional capacity to the Edmonton gaming market. Therefore, we believe that our ambition to generate an EBITDA return of over 25% on that USD 48 million investment has a really good chance of success.

Over in Europe, we have acquired a casino project 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 micro-level mixed leisure development, including a 147-room hotel and various restaurants in the center of the city directly opposite the very popular Theatre Royale.

The acquisition price was $766,000. In addition, we'll invest about $7 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. More importantly, the immediate catchment area includes close to 200,000 people and we are the only casino in that area. We plan to open at the end of May, just over 2 months from now, and expect, again, an EBITDA return on our investment of at least 25% once the property has fully ramped up.

Finally, our casino management project in Bermuda seems to gain some traction. Last year, together with the owner of the Hamilton Princess Hotel & Beach Club in Hamilton, Bermuda, we submitted an application for a casino at that hotel. The casino will feature approximately 200 slot machines, 17 table games plus electronic table games, and a high-limit area and salon privé.

The Bermudan government has now issued a provisional casino license to our group, which is subject to certain conditions and approvals, including the adoption of certain rules and regulations by the Parliament of Bermuda. Whilst they have no estimated time frame on when will this be completed, or if it will be completed at all, we've entered into a long-term management agreement with the owner of the hotel to manage the operations of the casino and to receive a management fee once the final license is awarded. We will also provide a $5 million loan for the purchase of casino equipment if the license is awarded.

All right. That's the end of our presentation. Thank you for your attention. And we can now start the Q&A session. Operator, please go ahead.

(Operator Instructions) Our first question comes from David Bain of ROTH Capital.

Just so I'm clear on Poland. The history of CPL or since you've acquired it, has there ever been a time -- or how many times have you not had a license renewed?

Erwin, can you chip in on that? Maybe let me start. The company -- Casinos Poland is the name, which we own 2/3 of -- has started operations in 1988 with the casino at the Marriott Hotel in Warsaw, which is the #1 casino in the country. And that license has been in place continuously since 1988; most of the others as well.

But maybe Erwin, for details, do you have that?

Yes. For these matters, we always said, like you indicated, a continuity. Out in the countryside, we have lost the one and the other license that we have not gotten back. But then we applied for other ones and we got those. So I think, in short, the important ones, we were always able to either keep or renew.

Okay. And so do they typically let these expire before going through a renewal process?

No. They will be...

[I've never seen this] disruption before.

No, no. That's new, and we hope it won't be forever. I mean, we obviously -- we and the union representatives spoke yesterday, diplomatically as we can be, to hopefully change that. But it's not in our hands.

Okay. And then, can you discuss what actions you took that led to that nice year-over-year, quarter-over-quarter margin increase at Casino Edmonton? And then, any other margin initiatives underway for further flow-through, either at that property or some of the others?

Specifically, we always -- I would say, (inaudible) we take the fine comb and then go through the details; and, more likely than not, we always find something. And then, that's probably really the only thing I could say here.

Okay. And, I guess, just final one. I saw the press release on the free shuttle that will take patrons from the Edmonton Airport -- International Airport to the outlet mall to Century Mile. Obviously, that creates a nice traffic flow potential. Are there any details that you would have on number of trips or expected passenger counts? Is there anything like that at this point? Or is that too freshly designed?

It's too early, yes. We haven't set up any details yet.

It's a bit too early, but what -- the airport officials, what they want to do is they want to really create a day trip destination for people in Western Canada. There's lots of smaller communities that have these small commuter planes going into Edmonton International Airport from living in like a 45 minute, 1 hour distance. And with all these amenities at the airport, they want to market this for people to fly in, in the morning, do their shopping, have fun at the racetrack, go to restaurants, maybe even play golf; and then fly out in the evening or the next day, and not even go to the city side of Edmonton. They think that there's really a market in there. And obviously, if we are successful, that's even better for us.

Your next question comes from Mike Malouf of Craig-Hallum Capital.

Your next question comes from Brad Boyer of Stifel.

First one here. I just want to make sure that I heard you correctly, Peter. On the Polish margins, were you saying that there's still going to be some noise there until you kind of get into the September time frame of this year?

Yes. Yes.

Okay. And so we should expect to see kind of some continued pressure there through kind of the first half of this year? Is that fair?

It's fair to say. Yes.

Okay. And then, second, going back to Poland, can you just give us an update on kind of how things are ramping at the Hilton Warsaw? That will be helpful.

Yes. It's continuing to ramp up as anticipated. Sometimes, the ramp is like in the -- between 20% and 30% over the previous month. Sometimes, it's between 10% and 20%, right? It's always a nice double-digit ramp.

And as I said, we had 2 issues in Q4. One is the -- for this relicensing cycle, the normal pressure on margins because of the higher costs that we have, keeping the premises in place and staff in place for those casinos that are under their relicensing review. But we also have this really, really low hold situation, and that cost us about $2 million just for the quarter. If you would add that back in, the Poland EBITDA would have increased by about 25%. So overall, we are really okay with the strength of the casinos that are up and running.

Okay. That's great. And then, the last one for me would just be around sort of your intermediate to longer term growth initiatives. I just wanted to see if you could provide some perspective there. Obviously, you guys have a decent amount on your plate here with the Mile. But just curious if you could share some perspective on kind of how you are thinking about growth initiatives, beyond Mile and the Bath project, at this point.

We expect to be able to announce at least one exciting additional growth project this year. We hope for it to be coming online this summer. And then, obviously, Bermuda is also [clocking] along, you might say. The local politicians are coming around and coming to terms with each other. And the teams that -- there's some traction on that project as well. But over in Bath, there's one more that is really close to being completed, and that should be only within a few months from now of being announced.

(Operator Instructions) Your next question comes from Mike Malouf of Craig-Hallum Capital.

This is Eric on for Mike. If I could just drill in a little bit more into Poland. I know you've kind of talked about it a bit already, but if you could go over the -- your kind of expected time frame of when you feel you might hear back on those licenses? And remind us how many licenses are kind of in limbo right now?

Erwin, please?

Yes. We have opened Bielsko-Biala already in June 15 this year; and we plan to open Katowice in April, and Wroclaw in April. And then, on the pending applications are: one for Warsaw, one for Plock, Lodz, Kraków and Poznan.

Okay. Great. And then, what kind of confidence do you guys have that you'll get those renewed? And then, what kind of revenue run rate might we be able to expect once those are back up and running?

Lodz, Kraków, Poznan and Plock, we have had already in our portfolio. And we would assume that the revenues would -- the history would be a good indication and a good basis for calculating or making assumptions about future revenues. And with regard to Warsaw, it -- you also know the Warsaw numbers, right?

I'm sorry?

You're also familiar with our Warsaw numbers that we are doing now.

Right. Okay. So, I guess, a better way to phrase this is no real expected change from historical numbers when those get back up and running, despite the sort of strength that you guys have experienced in your current operations?

No. Hopefully, we can always -- as we said earlier, we always try to grow. But it would be the -- we would operate, in essence, in the same premises. So yes, we wouldn't really expect a whole different.

Having said that, at Katowice -- you know Wroclaw was always also our second best market after Warsaw. So we expect that to have a really good impact starting in April. And also Katowice would be a contributor.

Makes sense. Great. And then, if I could ask about the impact to Century Downs and the expected impact to Century Mile of that existing racetrack closing? If you could go over the time frame of that closing? Again, I think you said when Century Mile is expected to open, so Q1, I suppose? But if you could just talk about the incremental impact to the 2 current racinos that you have?

Yes, Eric. There's 2 separate markets. One is in Calgary. This is where Century Downs is operating and has been for over 2 years. There will not be any impact on that facility from the closing of Northlands Park. Because Northlands Park is in Edmonton, which is 3.5 hours north, and it's really a completely separate market. There's almost no overlap.

Now, I have said that within the Edmonton market, the existing racetrack, Northlands Park, is very close, only a few minutes from our Century Casino Edmonton. And the Century Casino Edmonton will substantially benefit from Northlands Park closing because they operate over 500 machines very close to our casino. And that, we believe, will have an impact of approximately -- well, a double-digit revenue impact probably, between 10% and 20%; which is fantastic, because that should flow right through to the EBITDA line. And that will happen when we open Century Mile, which is in the south of Edmonton.

That's great. And then, final question for me. If I can ask about the Bath casino in U.K. I know you're trying to open that in the end of May. What kind of revenues might we be able to expect from that? I know you mentioned the 25% EBITDA return, but if I could just draw down on the top line a bit, that will be great.

Yes. All in all, we have about $8 million in, and we expect a 25% EBITDA return, so that's about between 2 and 2.5. And the EBITDA margins that we expect to generate there are also in the mid-20s, so the revenue should be around $10 million.

There are no further questions at this time.

I'll now return the call to Mr. Hoetzinger.

Thank you, everybody. Thank you 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.