Century Casinos Inc (CNTY) 2007 Q3 法說會逐字稿

Welcome to Century Casinos' Q3 2007 earnings conference call. This call will be recorded. (Operator Instructions). I would like to introduce our host for today's call, Ms. Ulrike Pichler. Ms. Pichler, please begin.

Thank you. Good morning to all U.S. participants and good afternoon to our European listeners. In this call we would like to discuss Century Casino's third quarter 2007 earnings. On the call with us today are the company's co-CEOs, Erwin Haitzmann and Peter Hoetzinger, as well as Larry Hannappel, SVP and COO North America, and Ray Sienko, CAO.

I want to point out that in our remarks today we will be discussing forward-looking information which involves a number of risks and uncertainties that may cause results to differ materially from our forward-looking statements. We provide a detailed discussion of the various risk factors in our SEC filings and of course strongly encourage you to thoroughly review our filings. In addition, throughout our call we may refer to several non-GAAP metrics including but not limited to adjusted EBITDA, earnings before interest, taxes, depreciation, amortization, and minority interests. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the third quarter can be found on our most recent 10Q filing which is stored on our website at cnty.com.

With that, I turn over the call to Peter Hoetzinger, co-CEO of Century Casinos.

Thank you. For the third quarter of 2007, net operating revenues were a record $24.7 million and consolidated adjusted EBITDA was $5.9 million which represents an increase over the same quarter of last year of 46% in net operating revenues and an increase of 40% in consolidated adjusted EBITDA.

Our new casinos in Central City, Colorado, New Castle, South Africa, Edmonton, Canada also contributed (inaudible) total increase in net operating revenue and $2.3 million of additional adjusted EBITDA. On a U.S. GAAP basis, we recorded net earnings of $1.949 million or $0.08 per basic share. The quarter reflects increased depreciation charges and net interest charges primarily related to the opening and financing of the two new casino operations that we opened in late '06. In addition, stock based comp expense increased $354,000.

I will now give an overview of the individual properties results in local currency. Womacks Casino, located in Cripple Creek, Colorado. The Cripple Creek market grew 2.6% in the third quarter of '07 versus the third quarter of '06. Our Womacks Casino continued to outperform the market growth by increasing gaming revenue by over 6% versus the third quarter '06. This growth in gaming revenue, greater than the markets, was the result of a successful marketing plan, continuous (inaudible) and an aggressive summer promotion we called the (inaudible) of the Century.

EBITDA and EBITDA margin increased as a result of the additional expenses associated with the marketing promotion. It was about $150,000. We initiated that promotion to counteract the potential loss of business because of our ongoing remodeling program which we started in August. The slot update amount to about $170,000 that also complicated the declining EBITDA. These updates were related to keeping the slot flow current through leasing games that are unavailable for purchase which caused of course an increase in royalty participation expense..

In addition, game conversions and slot payouts were up (inaudible). We now have 90% of all slots on the Ticket In/Ticket Out system. EBITDA margin last quarter was 38% and this quarter was 37%. It's a competitive market but we are confident that we will be able to stay in that high 30s, low 40s margin range.

The casino remodeling has continued through 2007 with an estimated completion date before Christmas. As of September we approximately spent $0.5 million and another 1.1, 1.2 million left to be spent for the remainder of the remodeling period.

The Century Casino and Hotel in Central City Colorado, revenues increased by 27% over Q3 '06 mostly driven by successful promotions, good customer service, driving a good business. Revenue has been increasing steadily and in September '07 the casino recorded its highest level of revenue since opening. Central City revenues grew by 3%, (inaudible) revenues grew by 5% over the same period, indicating that we solidly outperformed market growth.

EBITDA increased by 86% to just under $1.8 million. The EBITDA margin increased to 30%. Last year in the same quarter, the EBITDA margin was 20%. In the second quarter of '07 it was in the low 20s, so we are on the right track with the margins. And our 30% EBITDA margin compares okay with the 35% EBITDA margin of the Isle of Capri and the 32% EBITDA margin of Ameristar, two casinos in neighboring Blackhawk with substantially higher revenues.

For the first quarter of '08, we are considering to relocate the deli to the so-called (inaudible) expanding slots into the current gaming location and the current office area so the budget for that would be $1.7 million and that would also include 65 new slots. The new Players Club signups reached a record number for the quarter, exceeding past quarters and we now stand at 71,000 members of our Players Club in Central City.

The Century Casino and Hotel in Edmonton, Canada. We compare the results of this quarter to the results of the second quarter of '07 as this property was not open in Q3 of last year. It was opened in November of '06. Slot revenue in the third quarter was up about 7% over the second quarter while table revenue was slightly decreased to a slight decrease in whole percentage.

Hotel occupancy was at around 50% in the second quarter but now improved to 70%. EBITDA increased from the third quarter over the second quarter by 16% mainly due to gaming revenue increases combined with payroll decreases as a result of ongoing improving efficient scheduling.

EBITDA margin improved to 31% again continuing to trend to higher margins similar to Central City, Colorado. In Edmonton we recently expanded the poker room to a 24 hour operation and since September we have now 654 slots on the floor, an increase of almost 10% and we expect that to have positive impact on revenues and EBITDA. Over 16,000 members joined our player's club as of September. Outlook for the fourth quarter is good. Traditionally that is a strong, good quarter for our casinos and we expect that the fourth quarter will drive climbing table tops, F&P sales, and resulting higher total revenue during the holiday season.

The Caledon Casino, Hotel and Spa near Cape Town, South Africa. Net operating revenue increased by 4% at that property. EBITDA increased by 8% compared to last year. EBITDA margin increased to 43% and that compares to sort of 1% in the same quarter of last year or to 40% in the second quarter of '07. The strong focus on cost control and effective marketing programs helped us achieve that excellent margin. Substantial traffic strain is scheduled for the fourth quarter with the implementation of the new gaming management system that is due for installation in mid November. Budget for this is approximately $800,000 and we expect to achieve better and more effective data management capabilities which should ultimately lead to improved and more cognitive promotions and direct marketing campaigns.

The Century Casino Hotel in Newcastle, South Africa. In the third quarter we saw more than 50% increase in revenues compared to last year and earnings after tax grew 30%. EBITDA increased by 28% to 5.5 million Rand but the EBITDA margin came down to about 27%. This is partly or mostly because there were a number of accounting corrections in the quarter totaling almost a million Rand. And this action leads to (inaudible) EBITDA margin of 31% for this quarter, but as you can imagine, this also leads to us looking for a new financial manager for that property.

The Newcastle radio station has opened a broadcasting studio yesterday which we think will have a positive impact on the popularity and marketing capabilities of that casino.

The Century Casino Millennium in Prague, Czech Republic. On the conference call for the second quarter results, we informed you about the renovation we did at this casino with new slots, carpeting, wallpaper, signage, and the remodeling of the bar area. That has been completed and we were fortunate enough that it showed a positive impact right away. We grew revenues by 18% and EBITDA more than doubled. Also Prague remains a difficult and very competitive market.

Our five ship casinos. Ship casino revenue fell by 13% mainly because we reported five ships in this quarter compared to six ships in the third quarter of '06. EBITDA turned positive again after it was negative in Q2. In this quarter, we completed the rollout of new slots on the three Oceania Cruises vessels and in connection with that (inaudible) we also had some one time expenses in connection with the ship casino project that never took off. The ship revenues had a good start into Q4 with total revenues 40% higher than last year's.

Casinos Poland. Revenues for the seven table casinos and one slot casino increased in Poland by 8% in the fourth quarter of '07 over the third quarter of '06. As most customers are local residents, the summer seasons and holiday seasons are always lower while the fourth quarter is traditionally a strong period in Poland and we look forward to seeing stronger revenues going into the end of the year.

We also saw some revenue shift from tables to slots increasing slot revenue by about 42% comparing to the third quarter of last year. EBITDA margin is at 11%, the same as in the second quarter even though the revenues were a little lower than in the second quarter. Presently we are enlarging the game floor in the casino at the Marriott in Warsaw which should have a positive long term impact on revenues knowing that the Marriott Casino generates about 40% of total revenues of Casinos Poland.

It's also good to know that our nominee has been selected as the Chairman of the Board and we have begun to implement operational changes. The casino market in Poland has continued to grow and Casinos Poland Limited is covering around 50% of it.

Thank you. This concludes the presentation. We can start the question and answer session.

(Operator Instructions). Our first question comes from the site of Steve Altebrando from Sidoti & Company.

Larry, I just had a couple questions. The options expense. Was that previously -- was it previously broken down by properties in the EBITDA line?

Peter, I'll go ahead and answer that. The option expense was not reported in the property lines before if I understand your question correctly, it's just that it has increased in Q3 versus prior quarters as a result of options and restricted stock issued in Q3.

Okay. I see the depreciation was down pretty substantially on a percentage basis sequentially. Is this a good run rate to use or should we expect it to move back to where it was in the second quarter?

Yes. I would -- for a run rate going forward, I would say that the depreciation on a quarterly basis is going to go up about $200,000.

From this quarter?

From this quarter, yes.

Okay. And just the last one, the minority interest below the line, is that more related to the reversal of the losses from Central City? Or is that Casinos Poland mostly?

No, it is not Casinos Poland. It is the toll gate casino, or Central City, sorry.

Central City. Where is Casinos Poland on the EBITDA breakdown?

Casinos Poland is reported as a one line equity income and you see that on the income statement going -- it's right after -- I'm looking for it myself here --

Sure, mostly I'm looking for the --

It's right after total operating costs and expenses, $37,000.

Where would it be on the amendment -- from the consolidated EBITDA breakdown? Where would that fall?

Do you mean which segment does it fall?

Yeah.

It's in the corporate segment.

Corporate, okay. Thank you very much. That's all I have.

We'll take our next question from the site of Todd Aylers from Roth Capital Partners. Please state your question.

Hi, Peter. Hi, Larry. How are you guys? Question is, I guess let's start off with the Cripple Creek market. Can you -- at one time I thought there was a new competitor who was planning to build a new casino there. Can you maybe update us on that? Is that still in the pipeline or have they scrapped their plans?

This is Erwin. No, they are building and everybody's estimate is that they will target to open on July 4 of next year, but everybody also thinks they won't make it. So it's more likely that it would an Q3 or Q4 of 2008 event that they open.

Okay, thank you. And then with respect to Newcastle, I think, Peter, I think I heard you indicate that there were some accounting adjustments there in the quarter. Can you maybe go over those again? And is there any impact I guess to prior quarters? Should we expect any impact or restatement to prior quarters?

Larry or Ray, can you please answer that?

This is Ray. The most significant impact came from a correction to their depreciation as we were taking them live onto a new accounting system, to the corporate accounting system. That is the impact that Peter or Larry referred to earlier where depreciation going forward will probably be about $200,000 higher because that was the impact on the current quarter. Yes, it did have an impact on the previous quarters, but the net impact of that was deemed to be immaterial, so we're not restating the prior quarters for that purpose. We also came across, through some additional audit work, certain receivable that they had sitting on their books that we had to adjust off. That makes up the majority of the one million Rand that Peter referred to earlier.

Okay, thanks, Ray. That helps. And then let's see, with regards to your minority partner, the potential buyout in Central City, can you update us on that? Do you still anticipate exercising that buyout option? And maybe what the timing on that might be?

Yes, that is still our plan and timing is difficult to say, probably Q1 is fair.

Okay, and then how about with respect to consolidating your various pieces of debt? Can you maybe update us on that progress?

Yes, same thing, that is still our plan. I mean the stock concentration delayed the whole thing unfortunately a little bit, but negotiations are on and discussions are back on track. That's again not sure -- it's probably not very likely that we can get it done before the end of the year so it's early '08. (Inaudible) make sure that we don't just take the first one that offers us an improvement but really try to pick the optimum.

And then let's see, how about in Celadon, maybe an update on the land development there, when your expectations are to maybe start monetizing some of that I believe 600 acres of excess land that you have.

Okay, this is Erwin. We are in the middle of the approval process and our estimate as of today is that we will be done with that process by the end of 2008 so say 13, 14 months from now. And from then on we could start building and marketing, we'll probably start a little bit either before or just after all the approvals have been received. We have not yet finally decided on how exactly we will market it, whether we will only sell the pieces of land or sell pieces of land plus houses, or a combination thereof.

Okay. And then let's see, lastly, just Larry, maybe your expectation for corporate expense going forward still kind of in the 2 million run rate on a quarterly basis?

Yes, that's correct.

Okay. Thanks, guys.

We'll take our next question from the site of Ryan Worst from Brean Murray. Please state your question.

Thanks. Good morning, guys. Most of my questions have been answered. I just want to actually thank you for the improvements to the press release. Those were very handy. And then could you guys just talk a little bit more about the Newcastle operations in the third quarter? It looks like you're down a lot from the second quarter. Could you just go over what that was about and what exactly was that $1 million Rand item that -- I kind of missed that.

Ray, why don't you summarize that one million Rand item again and in terms of the EBITDA margin, if you (inaudible) was about the same as last quarter, 31, 32% range, and if you also take that into account, then we have increased earnings after tax by about 40% year over year. So it's okay. I mean we are working on it to get better, but it's okay and Ray, why don't you summarize the million Rand again?

Okay, sure, Peter. Ryan, this is Ray. The vast majority of the one million actually came out of some additional audit work we performed on the property. And the majority of it were receivables that we discovered sitting on their books that were actually deemed to be uncollectible or that the collection efforts were going to take us a while. So they have either been written off or reserved in this quarter.

Okay, thanks.

Once again, if you'd like to ask a question, please press the star and one. We'll take our next question from the site of Adam Steinberg from Morgan Joseph. Please state your question.

Yeah, sure, hi, guys. Just want to see without [Berta] and the royalty rates that they're going to start charging on the producers there, have any of the other energy companies said they are going to pull back on development there? And what sort of impact do you think that could have on Edmonton?

I have not noticed any pullback, but Larry maybe you know of anything? You have been up there just now?

No, I'm not aware of any of the energy companies pulling back at all and I was just up there a week ago and there was some discussion on this, but it's really unclear at this point what direction things will take.

Okay. What would be a worst case scenario in terms of an impact to Edmonton based on that? How many of your customers are coming from that far away or are working in the oil sands?

We don't anticipate any significant impact at all because we are drawing almost no customers from that area yet. The hotel occupancy has increased to 70% but that's again mostly locals who stay overnight after a long evening at the casino and Larry if you want to add, but we don't see any significant impact if anything at all for us right now.

I would say if there is an impact, and I think it's too early to really determine this, but it could be a favorable impact on the payroll on the labor side because that's what drives the labor rates in Alberta.

All right. And then in South Africa, I think they caught the guys who were committing the casino robberies?

Sorry, come again?

In South Africa, they've captured the guys who were committing the robberies in the casinos, right?

As far as we know, they caught five of (inaudible).

Has there been any others since they caught those guys, or is that pretty much stopped now?

We really cannot discuss that. We haven't heard anything whether they catch more, we don't know.

As near as you can tell, have any of your customers stopped visiting the casinos because of concerns about safety or no?

No, there was a short term effect a few days after that, but it has rebounded at the latest indicator.

Okay, thank you.

We increased security measures, also the recent security measures on property prior significantly and I think that has given comfort quickly.

How much does that cost you for the security measures in terms of increased labor? Will that have an impact on margins at those properties?

No. No, no. I think some of the people just have to put a few of our cops into different uniforms.

Okay. Thank you.

Our next question from the site of Nick Danna of Sterne, Agee. Your line is open.

Good morning, guys. Congratulations on the nice results in Central City and Edmonton. A couple of questions. First, what would be the target long term margins in Newcastle and Edmonton?

Well I mean Newcastle we think that that property should approach mid to high 30s and in Edmonton there is also some room. And I think after the next two quarters should be very strong in Edmonton. In Colorado the Q4 and Q1 are not really the strongest, but in Edmonton, that's what the market takes us, those two are the strongest. So I think after the first quarter, we should have a good guess of what the true potential in terms of EBITDA margin of that property is.

Okay. And then you made some comments on Poland in terms of their revenue increase and the EBITDA margin. Could you give us the actual revenue in EBITDA numbers?

The revenue of Casinos Poland was 31.3 million total zloty and maybe while I start saying that, Ray or Larry, can you translate into dollars? So 31.3 million zloty. And EBITDA was 3.3 million zloty.

This is Ray. Their net operating revenue for the three months that we reported in dollars was $11.3 million.

Okay, and EBITDA?

And EBITDA in dollars -- hold on for one moment --

It's somewhere around $1.1 million, maybe 1.1, 1.2 --

Yeah, we would have -- I'm only hesitating because I don't have the exact number in front of me. But we would be somewhere in the neighborhood of about 1.1, 1 million to 1.1 million in USD.

Okay. Interest looked like it was up a little bit from the second quarter. I thought you had paid down the Central City debt. So is there any reason that interest picked up?

Larry?

There was no additional borrowings in the third quarter. The increase is going to be only the result of interest rate increases which is largely in South Africa.

Okay. And then lastly, on the last conference call, you made a couple -- you made some comments about trends into the next quarter. Do you have any comments on current fourth quarter trends at any of the properties?

Yes, we just talked about that we expect a strong fourth quarter in Edmonton. We are also going into the summer and holiday season in our two South African properties which is traditionally very strong. In Colorado as you know, it largely depends in the winter whether it snows during the week or on the weekends. The ships had a very good start to the fourth quarter, with a 40% increase in revenues in October. So overall, the two Colorado properties, they account for about 40%, 41% of our total revenues and those two properties could be affected by the winter negatively. But the others generating more around 60% should have very strong fourth quarter.

Okay, great. Thanks. That's helpful.

We take our next question from the site of Justin Sebastiano from Nollenberger. Please state your question.

Thanks. Hey, guys, on the previous call you had eluded to possibly changing out the management at Edmonton. Has -- the improvement there, is that still kind of on the agenda for you guys or are you happy with where it's heading?

Yeah, see it's going well. When we talked improving the management, it was in one of the other areas strengthening the team up there. And it's continuously looking to improve and make possibly changes, but there's' no immediate action plan necessary.

Okay. And as far as on the acquisitions, you're still pursuing possibly something down in the southeastern part of the U.S., maybe Mississippi or something down there?

We have not indicated any geographic areas, but yes, we do look at one or the other projects in North America. We also would like to hopefully in early '08 start to make good progress with our plan to increase our shareholding in Poland. So yes, we -- it's three properties we have now under our belts now for more than a year leverage and I think now is a good time to not only focus on the operations and increasing the margins, but again, on new projects, and that's what we are doing now for quite some time and I believe '08 will be the year where we can add to one or the other new properties.

Okay, so as far as early '08 though, it's really going to probably be just increasing your stake in Poland as opposed to going out an buying an existing property elsewhere. Is that fair?

That's something similar to that could also happen in the first half of '08.

Okay, so you're closer along than you were last quarter or something?

Yes.

Okay. All right, thanks, guys.

And we have no further questions at this time. I'll turn the call back to our speakers.

Thank you for your interest in Century Casinos and your participation on the call. For a recording of the call, please visit the financial results section of our website at www.cnty.com. Thank you.