Century Casinos Inc (CNTY) 2018 Q2 法說會逐字稿

Welcome to Century Casinos' Q2 2018 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'd like to remind you that we would 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 our 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 yesterday morning 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 second quarter, and following our prepared remarks, there will be a question-and-answer session.

We are happy to report a 6% increase in net operating revenue, driven by strong performances in Canada and Colorado. Adjusted EBITDA was lower compared to last year due to extra costs and expenses related to the licensing situation in Poland and the newly opened casino in the U.K. The extraordinary burden in Poland was around $1 million, and in the U.K., almost all of the preopening and opening costs of around $0.5 million are included in consolidated adjusted EBITDA because of new SEC guidelines regarding preopening expenses. Adjusted for both of these nonrecurring effects, adjusted EBITDA for the quarter would have been $6.2 million, $6.3 million instead of the $4.7 million we had to report.

It was clearly a transitional quarter, a quarter which saw our entry into the U.K., with the opening of the Century Casino in the city of Bath; a quarter which laid the foundation to a land-based presence in Asia, with our project on the Vietnam-China border; and a quarter which contributed a great deal to creating long-term stability in Poland, as we now hold 8 casino licenses compared to 7 previously. Considering these achievements, it was a good and very important quarter for the long-term success of our company.

Canada remains our strongest segment, generating 38% of our consolidated revenue. The Canadian operations grew revenues by 9% and adjusted EBITDA by 11%. In local currency, the Century Casino & Hotel Edmonton, offering 825 gaming machines and 35 gaming tables, had lower revenues by 1%, EBITDA declined by 5%. The Century Casino St. Albert, also located in the greater Edmonton area, increased revenues by 1%, adjusted EBITDA was down by 6%. The hold percentage on the tables at that property was 16% during the quarter versus a more normal 20% to 21% last year.

In the Calgary market, our Century Downs Racetrack and Casino continued its excellent performance. Revenue increased by 11%, EBITDA by 10%. The revenue increase was broad-based, everything from gaming to betting and food and beverage was up. Also, the racing side of our business shows strong growth, with larger crowds on racing weekends contributing to the overall success. The results of our second property in that market, Century Casino Calgary, also continue to be very strong. Revenue increased by 14%, adjusted EBITDA quadrupled. We reported already about the many changes we initiated at that property, including new top management as well as the introduction of Century Sports, a new brand, which we introduced for the bowling, mini golf and other family-style games we offer at that property. It's good to see that also there, the growth is broad-based, everything from tables and slots to off-track betting, bowling as well as food and beverage was up.

The 2 U.S. operations in Colorado contributed 22% of our consolidated revenue. Revenue for the quarter grew 7% and adjusted EBITDA also 7%, driven by an excellent performance of our Century Casino & Hotel in Cripple Creek. We expect to finalize plans for our bed expansion at that Cripple Creek property very soon, and look forward to further enhancing our position as one of the leaders in Southern Colorado gaming market.

Our casino in the Central City Black Hawk area has won the title of best casino in Denver again this year, ahead of much larger property such as Monarch and Ameristar Black Hawk. We will aggressively use that message in our marketing campaigns throughout Colorado, and anticipate continued growth due to our strong focus on customer service, clear development and consistent and fun promotions.

Over in Europe, the newly opened casino in the city of Bath, in the U.K., is renting up as predicted, with hundreds of casino club membership sign-ups every weekend. We are fine-tuning the F&B menu; adjusting the staff rotas; tweak the interior design here and there; hold a lot of local tourism network events, including some with the local Chinese communities, just the usual post-opening things. Revenue for the 1 month, it was opened in Q2, was $0.5 million, with the substantial preopening and opening costs and expenses, it brought EBITDA down to a negative $700,000. It's another attractive and elegant casino in a great location, and we look forward to continued growth as it fully ramps up in the coming quarters. The casino is located in the City Center in a multilevel, mixed leisure development, which includes various restaurants as well as 150 room hotel that will open at the end of this month. The entire city of Bath is a UNESCO World Heritage Site, and it draws about 5 million tourists every year. More importantly, the immediate catchment area includes close to 200,000 people, and we're the only casino in that market.

Our casinos in Poland generated 37% of the company's total revenue. In USD, revenue was up 2% for the quarter, even though we had 3 fewer casinos in operation compared to the same quarter of last year. Again, with 3 fewer casinos in operation, yet we increased revenues. Poland really continues to be a strong market for us. After the writeup, total MCE quarters, during which the official process for the award of casino licenses, came under heavy criticism, especially for its late timing, which not only resulted in several casino closings throughout Poland, but also we lost gaming tax revenue for the government and additional costs and expenses for the operators. Our subsidiary casinos in Poland has been awarded a total of 8 casino licenses compared to 7 we had previously. Six of the 8 are already in operation. The other 2 will open later this year.

We are really glad that we can finally leave this relicensing mess behind us and look forward to generating much stronger EBITDA margins going forward. Just how strong the market really is may, perhaps, be demonstrated best by a comparison of the only 2 casinos that we had in operations throughout this entire licensing -- relicensing situation. They are both in Warsaw. The first one is our flagship property at the Marriott Hotel, which we have had since the beginning of our investment in Poland and without interruption. It was an average annual revenue increase of 11% over the last 3 years. The other is the casino at the Hilton Hotel, and this one increased revenues by 15% since its opening over a year ago.

From Poland, we moved to Asia, where we opened our first land-based gaming facility in Vietnam at the end of June. Through our 51% stake in Golden Hospitality Limited, we had an agreement to manage hotel and international entertainment and gaming club in the Cao Bang province of Vietnam, just 300 feet from the Vietnamese-Chinese border station. Golden Hospitality Limited also owns 6% of the company that owns the property, and has an agreement to increase that ownership stake to a controlling 51% for just $3.75 million. The hotel offers 30 low-standard room, and the international, entertainment and gaming club currently offers just 7 electronic table games for non-Vietnamese passport holders. Traffic is increasing day by day, and we'll able to report meaningful numbers next quarter. We are currently finalizing plans to upgrade and expand the hotel and gaming entertainment facilities. First, one of the upgrades will include the renovation of the existing 30 rooms, the relocation and expansion of the gaming floor as well as the introduction of restaurants and karaoke club facilities. We are aware of 3 other hotel and gaming operations along the 800-mile long Vietnamese-Chinese border, all of which are more than 200 miles away from our location. They offer substantially better hotel rooms and gaming positions compared to our current product, which we see as a good indication for the strong demand for such gaming properties at border locations. We are excited about this opportunity. It's a small value, small investment but great upside development and investment potential. It is the typical low-risk, high-reward situation we always look for when entering into a new market.

Now a quick look at our balance sheet and liquidity. We have $54 million in cash and cash equivalents, and also $54 million in outstanding debt. That is still a net debt, greatly enhancing balance sheet, I'm sure you agree. Total debt to adjusted EBITDA ratio sits at 2.2%. Our debt includes $34 million related to our Bank of Montreal credit agreement; $15 million related to the Century Downs long-term land lease; $3 million at Casinos Poland; and also $3 million at the new casino in Bath, England.

The book value per share is $6.02. CapEx for existing operations during the quarter was $2.4 million, or about 6% of revenues. That was a bit higher than usual, mainly because of leasehold improvements at 2 locations in Poland.

We are in the closing stages of final documentation for 2 loan agreements, one with the Bank of Montreal for a $27 million increase of our existing credit facility, the other with Bank Austria for a new $8 million credit facility. Together with the freely available cash of $25 million, that gives us $60 million available for investments. We will use approximately half of these funds to complete our most significant and largest project to date, the Century Mile Racetrack and Casino in Canada at Edmonton International Airport land.

So far, we have spent approximately USD 18 million on the development, and we expect to be on budget and on time for an opening on April 1, 2019. It will be a multilevel building with a footprint of 48,000 feet, initially accommodating 550 slot machines, restaurants, bars, del, an 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 successful Century Downs facility in Calgary.

As previously reported, the current racetrack and casino Northlands Park will close when we open Century Mile, which means that Century Mile will not bring additional capacity to the Edmonton gaming market. It also means that our existing casino in the northeast of the city, Century Casino & Hotel Edmonton, will greatly benefit because its closest competitor will fall away. Therefore, we believe that our ambition to generate an EBITDA return of 25% on the USD 48 million investment has a really good chance of success once the property has full rent. Rest assured, that we are fully focused on getting this very important development done right, done successfully and done on time and on budget.

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

(Operator Instructions) Our first question comes from Brad Boyer of Stifel.

First one, Peter, is just around the margins. If I look at the Canadian segment and the U.S. segment, and look at the levels of revenue growth that you delivered in both of those segments, I would've expected to see a little bit more margin expansion there than what we saw. So just curious, was there anything going on there on the cost side, revenue mix side that may have flowed through negatively to the margins in those segments?

In Canada, we had increase in the minimum hourly wage. Erwin, maybe you can say more to that?

Yes. Yes. Well, that effect definitely had an increase in minimum hourly wage, which is by law, and it's now at CAD 13.50 per hour and then will go up to CAD 15 on October 1, and then that's it. That was introduced by the new government that came on a few years ago. And the other part is due to the fact that we decided, particularly for some in Central City, to make a marketing investment higher than usual due to the competitive situation that we find there and the same holds true for the Edmonton Casino because of the stronger competition with regards to the Grand Villa.

Okay. And then anything around the U.S. in -- out in Colorado?

In Colorado, that's what I tried to say before, as well in Colorado in Central City, we have 1 competitor that is ramping up his efforts, and we try to combat that by also increasing our marketing investment.

Okay. Okay. That's good to know. And then second, just around everyone's favorite topic here, Poland. It seems like things are normalizing here a little bit. Two questions here, first, and reading through the queue, it looks like there were not new licenses awarded for Plock and Poznan, which I assume was contemplated. I mean, was that a decision on your part to kind of reallocate resources to better locations? And then, second question on Poland would just be around, this eighth license is within the Marriott. Just curious, your thoughts, on the ability of that facility to support 2 casinos within 1 hotel?

Yes, should I, Peter?

Please.

Yes. So with regard to Plock, we decided that we really don't want to go for it anymore because it just wasn't attractive. With regard to Poznan, we applied, but it was not our decision, we didn't get it. However, we are not really unhappy about it because of all the markets we're in. Poznan, historically, has been the most difficult one, also mainly due to the fact that there is 1 competitor that just has no end in spending for marketing, and so we are not unhappy, really, the way it is. Now with regard to the eighth license in Warsaw, we think, for us, that's sensational, it was really the big, big win. And due to the complexity of the Polish gaming situation, we could have ended up getting closed instead of the third in Warsaw. So the Warsaw one is much better. The pending sales easily would carry 3 licenses. We used to have 2 in the past, and now the third one, we're just finalizing the details on how exactly we will open it. One of the possibilities would be to make it -- put a chase into the existing large casino that we have because we still or -- it's so large that we still would be worried -- it would be great if we could have more room. Now we'll see on how that's possible, but the more important thing with regard to Warsaw is that whenever we get a fresh Warsaw license, we then need to change it in such a fashion that the casino, which is most successful in the Warsaw, starts with the new 6 years, and then we move the other ones, then that gives 5 years over to the Hilton.

Okay. That's good to know...

I don't know, it's a large building, the linked building is 2 huge complex towers, and then it has a big shopping arcade underneath in the basement. Then in the basement, there is a connection across all 4 sections of an intersection. There is heavy foot traffic all day long, so it's complex. It's not a problem at all to have that number.

Okay. And then I just have 2 quick questions, follow-ups here. One, Peter, you talked a little bit about some of the plans for the Vietnam property, redoing some of the rooms, adding some F&B. What have you -- any idea what your portion of that CapEx would look like?

The plan is to do it out of cash flow, and if that's not sufficient, then we are talking about a few hundred thousand dollars in fresh CapEx. I don't think we would have to put in a lot more.

Okay. And then last one. Now this is for both of you guys, and it's a bit of a higher-level question. But with this year's trading where they are today and with some of the growth that you have in the pipeline and the capacity that you have on your balance sheet, fully appreciating that, the float is somewhat limited today. But have you guys ever considered implementing some sort of a share buyback to buy back some stock here? I mean, it seems like it would be a really good use of capital, given that your stock is trading at a significant discount to what kind of the forward outlook on growth would suggest.

Yes. We have a buyback program authorized actually, and what we have said and what still holds true is that we prefer to grow by new developments or acquisitions. However, if we do not find attractive growth opportunities within 6 or 12 months that depends on the market we are looking at. Then we are seriously considering to put capital towards, like, back to the shareholders or towards a buyback program. That is absolutely a possibility.

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

This is Eric Des Lauriers on for Mike. I think you detailed a bit more of the onetime expenses that were included in SG&A that were not broken out into adjusted EBITDA. Could you just go over those again? I think I may have missed some of those.

Now we said that on the Polish situation, it's around $1 million that were extraordinary nonrecurring in the quarter. And in -- and for the casino, its preopening and opening expenses in the U.K., it was close to $0.5 million.

Okay. That helps...

Going forward -- sorry, going forward, there will be -- in Q3, there will be a limited of debt in Poland, but not very much, and then it's all over and done with.

Okay. That helps. And then, switching to Century Mile. It's good to hear that's still on budget and on pace for the April 1 opening. I was wondering if you guys expect any significant operating expenses or just onetime opening expenses that might cause negative EBITDA similar to the Bath casino. If you guys could just talk about that and just the overall EBITDA margin ramp for Century Mile, that would be great.

Erwin, can you talk about that and, perhaps, referring to Century Downs, I think, it was very strong from the get-go, wasn't it?

It was very strong from the get-go, yes, with regard to revenues. But when it comes to EBITDA, maybe Peggy should chime in because I don't know -- there seems to have some change in accounting policies on how pre-ops are treated.

So we would expect probably Q1 of next year to have some additional expenses related to the opening of Century Mile. It's a little bit hard to quantify, but you are really -- as you get close to opening, it no longer becomes preopening expense but operating expense. So any training and new hires of employees in the month or 2 before we open the property will flow through expenses.

So in other words, the first quarter of results from Century Mile will not show the true EBITDA potential of it.

That makes sense, and...

But there won't be revenue to offset those expenses. So once it opens...

So are we talking in Q1 of 2019 before it opens or in -- or it's -- or Q2 in its first quarter of being -- of operating?

So Q1, just before it opens, we will have some expenses flowing through. And then once it opens and there is offsetting revenue, it should be just normal operating expenses.

Okay. So you guys think of pretty -- from the first quarter of operations, you'll have somewhat normal EBITDA margins and sort of a slow ramp-up to your sustained margins after that?

Yes.

What we saw at Century Downs 3 years ago is that we had a very strong first quarter because it was new, everybody wanted to see it. The first 2 months, especially, were very strong. And then the second quarter of operation, it slowed down a little bit. And then from the third quarter, after opening, it started to really ramp up to where it is now in the mid -- EBITDA margins on mid-40s.

Our next question comes from David Bain of Roth Capital.

I just wanted to follow up quickly on the Century Mile discussion you were just having. So with regard to the cadence to get to that 25% return after opening, which I assume includes some of the benefit to Hotel Edmonton, would that be 4 quarters, 5 quarters now just in your view? I'm just trying to get a sense as to when you think that run rate could begin to show itself?

We believe it's about 3 to 4 quarters out, but it does not include the benefit that we expect for Century Casino Edmonton.

There are no further questions at this time. I would now like to return the call to Mr. Hoetzinger.

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.