Century Casinos Inc (CNTY) 2021 Q1 法說會逐字稿

And pardon, ladies and gentlemen, we apologize for the technical delay. We're now ready to begin, and welcome to the Century Casinos Q1 2021 Earnings Conference Call. This call is being recorded. (Operator Instructions)

I would like to introduce our host for today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin.

Hello. 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 Chief Financial Officer, Margaret Stapleton.

As always, 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. 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 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 the SEC filing available in the Investor section of our website at cnty.com.

I will now provide an overview of the first quarter results. And after that, there will be a Q&A session.

Adjusted EBITDA for the quarter was $14.7 million, an increase of 53% over the first quarter of last year, double the EBITDA of Q1 2019. Our results were driven almost exclusively by our properties in the U.S. because our casinos in Canada were closed for the entire quarter, and in Poland, they were closed for most of the quarter. Without these closures, we estimate our adjusted EBITDA would have been around $22 million.

So yes, it was a great quarter. January and February were good. March was exceptional. And it is great to see that strength continuing into April and early May. As most other local and regional casinos, we are benefiting from pent-up demand. And actually, I'm not sure if we can call it that, because that strong demand has been around since June for almost a year now. But anyway, we are benefiting from strong demand, from easing restrictions, from the vaccine rollout, which is driving the older demographic back to the casinos, from strengthening consumer confidence, from the preference for close-to-home entertainment and from the fiscal stimulus. All of that has improved the situation as well as spending levels of our casinos and, together with our disciplined and efficient operating strategy, contributed to these great results across our portfolio.

We are confident we can keep delivering strong performances throughout the rest of the year, especially when looking at the very important 60-plus demographic segment. That lucrative 60-plus year old customer only started to return very recently, indicating more upside ahead. We have seen some growth from this demographic in March, but many were still cautious and remained on the sidelines. That is changing. And as COVID vaccinations continue to roll out and restrictions lift, we expect visitation to improve further as the year progresses.

We've also benefited from new player sign-ups, especially in our 3 new properties in West Virginia and Missouri, where new sign-ups was 30% higher than in Q4 of 2020, and the worth of these new players was even more impressive. It was 41% higher compared to the first quarter of 2019. This influx of new players is providing us the great opportunity to grow our database. I think these are high-value players and convert them to loyal regular visitors.

The strong revenue trajectory, coupled with a substantially reduced fixed cost base, could translate to continued meaningful EBITDA levels well ahead of 2019 benchmarks. Other than the positive revenue trend, the big question is whether the high operating margins are sustainable. For the third quarter in a row, we have been able to achieve high operating margins. And yes, we do believe it will continue to be attainable. High operating margins depend on high revenues and a disciplined approach to operating costs and expenses.

We believe we will see sustained margin improvement relative to 2019 levers through more efficient marketing practices, reduced labor costs and the elimination of certain margin-dilutive amenities. Savings come from many areas, including, but not limited to, promotions, direct mail, advertising, outside hotel comps and cost of goods sold, especially in F&B. Should competing operators get more aggressive with promotional activity or even start bringing back margin dilutive, non-gaming amenities that have been scrapped during COVID, that could have an impact on our margins. This is something we have to watch out for. But at this point, we haven't seen any significant impact in any of our markets, even as other entertainment options, Las Vegas, for example, have started to come back quite strongly. This is encouraging and has continued into April and early May.

But clearly, revenue trends have the biggest impact on whether those margins will be up or go down a little bit. And that makes us (inaudible) as we expect a significant amount of true pent-up demand from the 60-plus year old demographic, as mentioned. The play levels of that demographic are kicking in as we speak and support and boost regional gaming revenue. And most importantly, the EBITDA flow-through should continue to be strong as the marketing spend behind this player base is pretty limited.

Let's now look at the first quarter performance of each reporting segment, starting with Colorado. It was a fantastic quarter for our properties in Cripple Creek and Central City, with both casinos clearly outpacing even pre-COVID levels. Net operating revenue was up 40% over 2020, and it was up 17% over 2019 in spite of capacity restrictions throughout the quarter. Adjusted EBITDA was up 4 fold over 2020, and it was up 62% over 2019. The EBITDA margin jumped to a first quarter record of 33%. In Colorado, each county has different gaming flow restrictions. In Cripple Creek, the full slot floor and about half of the table game positions were opened during the quarter. In Central City, the casino was operating approximately 2/3 of the slot machines and half of the table game positions.

Our market share went up in both markets, in Cripple Creek from 10.6% to 12.3%; and in Central City, from 27.4% to 30.8%. We anticipate continued strong performances in the summer months and see further upside from 2 more sports betting launches, and we see growth in table game revenue from new games and higher limits. So only 1 out of 3 sports betting partnerships is up and running. The other 2 plan to launch later this year. All 3 partnerships pay as a percentage of revenue with a minimum guaranteed amount per year, and that's without any investment or cost participation from our side. So it flows straight to the bottom line.

Moving on to Missouri, which is our most important market in terms of EBITDA and cash flow generation. And there are 2 properties in Cape Girardeau and Caruthersville. Also, machines are in operation, but only 54% of our table game positions are available for play. And the results for the quarter were, again, fantastic. Net operating revenue was up 44% over 2020. It was up 27% over 2019. Adjusted EBITDA was up 2.5x over 2020, and it was up 77% over 2019. The EBITDA margin jumped to a first quarter record of, listen to this, 49.7%, truly remarkable.

At Cape Girardeau, slot revenue in the quarter was the highest quarterly slot revenue in that property's history. The month of March was a record-setting month for the property in several areas, slot revenue and total revenue were both monthly records. March also hit the highest monthly guest count seen at the property since reopening in June. F&B cash revenue was at its highest monthly total since reopening, where we're seeing only minimal increases in comps. EBITDA and revenue has a lot of upside spree as we were operating at reduced capacity and with restrictions such as no eating, drinking or smoking at gaming tables.

We continue to get very customer feedback for the new mobile app. The app focuses on increasing customer engagement and provides guests access to all amenities and promotions with full account visibility and the ability to take advantage of rewards and offers. And for us, that means lots of opportunities to further increase customer loyalty and also save significantly on direct-meal expenses. In the not-too-distant future, Missouri could legalize online sports gaming and betting and iGaming, which could bring additional revenue and EBITDA upside for us in that market.

Next is West Virginia, where we operate the Mountaineer Casino, Racetrack and Resort. Adjusted EBITDA doubled compared to Q1 2020 but was down 25% compared to 2019. That is not surprising because of a temporary smoking ban and a curfew in Ohio, where the majority of Mountaineer's business comes strong. Currently, the gaming floor offers about 94% of the slot machines and 47% of table game positions for play. Some of the F&B outlets are open with limited hours of operation. The convention space remains closed, and the hotel is operating with limited capacity. Because of its resort destination character, Mountaineer usually draws quite a lot of its business from customers staying for a night or 2, which was difficult in the last 12 months. But now, especially since March, we see a strong uptick in business, which we believe is directly linked to more people getting their vaccinations and feeling comfortable getting out of the house for short trips or overnight space. So we started to see first indications that the regional destination business is returning. Hotel reservations have increased to the highest level in more than a year. In fact, preliminary numbers for April show EBITDA exceeding 2019 numbers. It is early days still, but we may see a great comeback of that property as the year progresses. And our online casino gaming has gone live in April in partnership with Rush Street Interactive and William Hill.

Internationally, our operations in Poland were close for most of the quarter. We operated for a couple of weeks in March only. And the very latest news we got this morning point to an opening in early June. Market cash burn is about $1 million. As already reported, we are in talks with several parties about the sale of the Polish casinos but as of today, we can't predict the outcome of these negotiations. It takes time, but we are pretty certain that we will have a more precise update for you in our next earnings call.

And in Canada, we were closed for the entire quarter. We currently anticipate reopening sometime next month, early mid-June, but that's speculation at this point in time. Hospitalizations and vaccination rollouts as a percentage of the population are the key factors for reopening. Vaccination distribution is gaining ground. It's about a 30% had at least the first dose. The market cash burn there is about $1.4 million, while we are closed. Once we are allowed to reopen, we expect to realize labor efficiencies with limiting amenities to actual customer demand, which should result in increased EBITDA margin. Additionally, the potential licensing for online sports betting in Canada could provide significant upside for us in the province of Alberta, where we have 4 out of 28 licenses.

That concludes the roundup of operations. Now a few words about our balance sheet, liquidity and outlook. As of the end of March, we had $66 million in cash and cash equivalents and $184.4 million in outstanding debt on our balance sheet, resulting in net debt of $118.4 million. The outstanding debt included $167.9 million related to the Macquarie credit agreement, $9.9 million of bank debt in Europe, $15.5 million related to long-term bank lease for Century Downs in Canada, and that's a net of $8.9 million in deferred financing costs. We are going ahead with select CapEx projects, mostly new slot product. Other than that, all our properties are in good shape and do not need any substantial investment.

Overall, our business has been remarkably strong, with almost all of our revenue coming from customers who live within a 1.5-hours drive from our properties. We have successfully executed a strategy built on our premium local customers. Going forward, we will stay strongly committed to our operating strategy, drive increased EBITDA as a result of continued operating discipline and a tight focus on the right customer. Even as other gaming entertainment options, in particular Las Vegas, are starting to come back, we believe high margins will be sustainable in the regional and local casino markets, and our performances in April and early May seem to indicate that.

In terms of our online business, we continue to be excited by the opportunity presented by sports betting and iGaming. This is a highly promotional and competitive landscape. Sports betting and iGaming are already generating positive cash flows for us. We believe our partnerships with Circa Sports, William Hill, bet365, Rush Street and Tipico are the right approach right now. It gives us guaranteed income without investment and also lets us learn a lot about the online business. Long term, however, we may well consider entering the online space under our own brand, thereby enhancing the market-channel relationship with our customers.

With revenue streams from land-based casinos, racetrack and rasinos, on- and off-track betting as well as sports betting and iGaming, we are developing into a truly multichannel North American gaming company. And we are, as we speak, seriously looking at a handful of possible acquisition opportunities, all in the U.S., to further broaden our footprint and leverage our successful operating model.

With that, we look forward to our casinos and racetracks reopening in Poland and Canada and to a busy summer season in North America as the pandemic hopefully subsides. On behalf of the company's management and Board, I'd like to thank our team members, our guests and our stockholders for their continued loyalty and enthusiasm as we manage our business during these challenging times.

Thank you for your attention, and we can now start the Q&A session. Operator, go ahead, please.

(Operator Instructions) And our first question comes from David Bain from B. Riley.

Great. Congratulations on the reopening performance to date and clearly, forward trends there. First, I was hoping you could help us understand the current M&A environment, specifically have -- given the strong reopening here, have you seen prices tightening? Or are they in line with what you've been reviewing previously, product or supply tightened? Or is it the same number of acquirers? Any kind of overall view as to what's going on out there would be really helpful.

Yes. Thanks, Dave. We -- compared to about a year ago, there are certainly fewer properties on the market. But surely, at least between half a dozen and a dozen are out there that are of interest to us. And it could well fit into our portfolio. In terms of valuation and price levels, it is very difficult, if not unlikely, that we get a deal done on the same terms that we've done in over a year ago, where we actually paid, was it around 4x or so (inaudible).

But we look -- we go in with our people, with our teams when we do due diligence, and we come up with an EBITDA number, EBITDA that we think we can do with that property. And based on that, we apply a market that works for us. Because looking at current numbers or last year's numbers, especially these days, it's just extremely difficult, so we try to stay away from that and come up with our own estimates in the (inaudible). So the landscape is a little bit smaller than it was a year ago, but still very attractive targets out there.

Okay. Awesome. And this one is going to be short. So I'm hoping I can ask a brief third as well. But I think it will be short anyway. I know it's early days. Any antidotes on the table max that left and [resuming] from Colorado under Amendment 77?

Yes, David, this is Erwin. We have -- we take a cautious approach. So we have set our maximum bets at $500 and on the first day of opening, we saw action going up to $500. Overall, we have the feeling that it will take a little while until that market of the higher-end bet is developed not only at our base, but in general, in Colorado. With the exception of a few buckets just here and there, no other new games have been added anywhere or at least not yet. So like I say, it's early days. And I think amounting to the exercise, we'll be able to say something more definitive.

Okay, great. And just final one, I promise. As Canada reopens, are there any different dynamics to think about versus your strong U.S. reopening? I assume we don't know capacity restrictions out of the gate, things like that. But our drivers generally align from both the structural margin and overall reopening, similar to the U.S.? Or is there anything else that we should think about in Canada if that reopens?

I think we'll see the U.S. openings kind of near us. We'll again be cautious with the side offerings, everything other than the non-gaming offerings and very cost and EBITDA conscious. We think that will be really pent-up demand, and we would hope that we -- if and when we're permitted to open that we can produce interesting numbers right from the get-go. Just as I mentioned as much of a hindrance is if we can, if we have a limitation of slot machines. It may -- we have seen in some markets that even if we have a few restrictions here or there, we could still produce fantastic numbers simply because the people are playing longer and more.

Our next question comes from Chad Beynon from Macquarie.

Congrats on the net quarterly results. I know you mentioned that Poland is kind of in influx here. The talks are still ongoing. You mentioned that the properties do open actually this week. After we start this -- well, I guess, first question, should we expect that the demand comes back quickly? Can you remind us in terms of what restrictions would be when that opens up? And then once it's open and kind of running normally, should that propel the discussions that you're having in terms of divesting the property?

When we issued the new release, Chad, that was up until last night or mid-night or so, they told us that we will most likely be allowed to open tomorrow. But then this morning, they changed that and postponed it for another 4 weeks. SO it is early June now. Once we are allowed to reopen, we do expect that, especially in the casinos outside of Warsaw, which are truly local and regional casinos, that there will be a lot of pent-up demand, and that will translate into revenue and EBITDA right away from the get-go. The casinos in Warsaw have traditionally also drawn from international business travelers. And that's about between 20% and 30% of the business there in the Warsaw casinos and that may not come back as quickly as the locals business. Erwin, would you like to add?

Yes. Yes, I agree with what you say. And with regard to the question, which restrictions we expect, it's hard to say. We really don't know. Maybe there will still be an obligation to wear a mask, but we don't -- if we had to guess, then we would say nothing other than that. But it's speculations, we don't know.

Great. And then just on a potential change in your online strategy, is this something that would come with a lot of additional costs, whether it's technology or if you decide to pivot to this strategy, would you use third-party companies to kind of help with the sales, the marketing, the technology, all of that, limiting your expenses but just connecting from a B2C standpoint and getting those revenues?

This is Erwin. Going in, we will definitely start with the third-party partners and all the model in such a session that will keep us as flexible and possibly as we become more comfortable and get wiser in that space that we might replace step-by-step our services and take them in house, but that would be -- that would clearly be revenue and EBITDA driven.

And our next question comes from Jeffrey Stantial from Stifel.

Congrats, really nice quarter. I wanted to start on your Missouri properties, results coming out of the market just continue to be truly incredible. Those 2 assets are run rating about $60 million of EBITDA, which, if my math is right here, is over double what they were generating before you acquired them. Margins, quite a big role, you said close to 50%, but top line has also been impressive. So I guess my question is this. If you think about some of the short-term tailwinds versus the long-term structural changes that you've made to the business, both in reaction to COVID-19 as well as, as you took those assets over from prior ownerships, how do you see those assets sort of, I guess, "normalizing out" over the course of the year and into 2021, sorry 2022, apologies?

This is Erwin. We think they are pretty normal now, and we don't think that there is much more normalization going on with regard to the numbers. We are very optimistic that we can keep the numbers that we have now.

Okay. Wow, that's incredible. Great. And then for my follow-up, you talked to a number of player sign-ups during the quarter. I think it was up 30% versus in 2019, if memory serves. I was hoping to unpack that a bit and see if there are any overarching characteristics for these new players coming into the database? Do they tend to skew much younger? What part of the gaming floor and the broader casino do they gravitate to? Just anything to help understand that new player base would be great.

I would say the upper 50% of the processing power of our visitors, so the more affluent customers. Demographic is pretty much the same as we have had it before as we have it. (inaudible) something that indication.

Okay. Good. And then along those lines, just how have those fared? I think that was during the quarter. Just how does that -- how did that progress as the quarter played out? And how is that kind of pieced into April and early March, just in terms of new sign ups? Still seeing similar levels of drag versus 2019?

You mean a (inaudible), right? We are seeing strength.

And that concludes our questions at this time. I'll now turn the call back over for closing remarks from Peter Hoetzinger.

Excellent. 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. We have our best wishes for good health. Thanks again, and goodbye.

And this concludes today's conference call. Thank you for attending.