Century Casinos Inc (CNTY) 2008 Q1 法說會逐字稿

Welcome to Century Casinos first quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS)

I'll introduce Mr. Peter Hoetzinger. You may begin.

Thank you, operator. Welcome, everyone to our first quarter 2008 earnings conference call. Joining me on the call today are my co-CEO and Chairman of the Company, Erwin Haitzmann as well as Larry Hannappel, Sr. Vice President and Chief Operating Officer, North America, and Ray Sienko, our Chief Accounting Officer. Before we begin, I need to remind you that in our remarks today, 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 their appropriate GAAP measures can be found in our news release and in the 10Q filing all of which are available at our investor section of our website at www.cnty.com.

Let me now present the results of the first quarter. On a consolidated basis, net operating revenue essentially remains flat year-over-year at $21 million. EBITDA decreased by 60% to $4.4 million. When we look at the contribution by property and region, you get this interesting picture. Colorado properties generated 35% of total revenue, but only 19% of EBITDA. South Africa casinos generated 33% of revenue, but 40% of EBITDA. The Canadian operation, Edmonton, provided 27% of revenue and 32% of total EBITDA and our smaller operations in eastern Europe and on the ships provided 5% of revenue and 9% of EBITDA, whereby the results of our investment in Poland is reflected in the EBITDA portion only. So, we have 19 casinos in our portfolio and clearly all is pretty well with the exception of the two operations in Colorado. The slow economy, increased fuel prices and the newly introduced smoking ban in Colorado all had an effect.

In addition, our property in Cripple Creek lost customers due to ongoing renovation works during this reporting period. Earnings per share came in at $0.02 cents, beating first call consensus estimates. In the year-over-year comparison, the net earnings of $541,000 were negatively impacted by the following non-operational items. South African exchange rates, $156,000, decrease in foreign currency gain on exchange of cash, $465,000 and stock compensation expense of $196,000. These are all net after takes amounts totaling $817,000 of $0.03.5 cents a share. We generated a (inaudible)on $4 million of operating cash flow in the quarter. On the balance side, we reduced total long-term debt from $65 million at the end of '07 to $56 million at the end of this reporting period. Almost half of this reduction came from the net repayment of $4.2 million in our revolving credit facility in Cripple Creek, Colorado.

I'm now going to discuss the results property by property in local currency. Starting with Edmonton, Canada. Revenues increased by 17%, EBITDA increased by 72%, the EBITDA margin went up from 22%to 34% and earnings after takes more than tripled. We saw increases all across the board in Edmonton, including table (inaudible) and table win, slot coining and slot win. (inaudible) A big thanks to our operations management. They seem to hit all the right buttons. The transition to of the dinner theater into a light entertainment and catering menu continues to attract more customers to the casino. The addition of more slots and tables and the introduction of 24-hour poker also contributed to the increased performance. Over the next few months, we will upgrade certain areas such as the hotel lobby, water fall feature in the hotel rooms, as well as the exterior lighting, but nothing major in terms of CapEx. For the rest of the year, we continue to be optimistic about this property going from strength to strength.

Now turning to Colorado, starting with Womacks Casino & Hotel in Cripple Creek. Revenues declined by 29% and the EBITDA margin saw a drop from 32% down to 10%. As already mentioned earlier, this casino is suffering from many (inaudible) factors, the decline in the economy and the increased fuel prices, the smoking ban that was introduced on January 1 and the renovation works that were done in the last quarter of '07 and in this reporting period. You can see what kind of impact the economic stimulus package will have on our Colorado customers. Perhaps it can help a little. The smoking ban's impact is expected to subside after another two or three quarters as we know from other jurisdictions. The renovation work is finally completed. We have planned marketing programs to regain customer loyalty and to be competitive when the new casino in town will open next month which will bring the number of casinos in that particular market from 15 to 16. With the newly renovated facility, all slots now on a ticket in, ticket out system, and about 70% of (inaudible) play. Our local casino management will do its best to face the challenges ahead.

The Century Casino and Hotel in Central City, Colorado saw a revenue decline of 2% and an EBITDA margin decline from 23% to 19%. The economy and the smoking ban had, of course, (inaudible) effect on the Central City market. The good news; however, is while the Central City market as a whole decreased by almost 10%, it actually gained market share and decreased by 2.4% only. That's not great, but it surely shows that we are competitive and management is doing the right things. EBITDA declined, but only because of an additional property tax accrual. Other than the rearrangement of about 100 gaming machines on the floor, did not plan any major changes to the facility for the remainder of '08, in fact, CapEx will be minimal this year. As some of you may have heard or read about, in Colorado, the casino industry is assessing whether it should support the ballot initiative in 2008 to amend the constitution to authorize an increase of the betting limits, allow additional types of table games and authorize 24-hour gaming instead of the current 8-2 restriction. The Colorado casinos recently submitted an initiative package (inaudible) to the Colorado legislative counsel. By the end of May, the casinos will determine whether to support the bill's initiatives through the November general election. As you know, this presidential election is expected to generate a record voter turnout and large voter turnouts tend to produce more favorable outcomes on gaming measures. We will report back to you once more detailed information on this issue becomes available.

I am now reporting on the two South African properties starting with the Caledon casino in the western province in Capetown. Caledon properties saw revenues, EBITDA as well as EBITDA margins pretty much flat year over year and earnings after takes increased by 19%. This has been achieved even though hotel and food and beverage, as well as conference revenues were negatively impacted by the renovation of the main restaurant during the quarter. For the remainder of the year, we expect continued modest growth at this property. The planning and approval process for the Golden housing development is continuing. We were of course, delighted to see our man Trevor Immelman win the Masters golf tournament recently. Our course will be the first to sign Trevor. Trevor works with [Holfstata] a South African company we have hired to manage the development process. Holfstata as already delivered more than 30 championship courses in South Africa and their courses have won the best , the prestige FD Course Award on an unparalleled five occasions. Construction is expected to commence next year and we'll also include approximately 450 free load golf estate lots.

The Century Casino Hotel in Newcastle increased revenues by 7%, EBITDA by 10%. It improved the EBITDA margin to 33% and increased earnings after takes by 36%. We expect to see a continuation of high single digit revenue growth for the remainder of the year. In the next two months, a new online casino system will be installed which will give us better and more effective and efficient marketing and promotions capabilities. Recently I've agreed to sell a parcel of land adjacent to the casino for $200,000. The purchaser proposes to develop the region's largest shopping mall attached to the casino and they are hopeful to start construction the second half of this year. With the completion date within about 12 months thereafter. It's important to mention that due to the specific location of that parcel of land, we expect no business disruption during that development and we certainly look forward to the positive impact on the visitation to the casino next year.

The casinos in Prague and on the ships are our smallest lease, generating about 5% of our total revenue. The year-over-year comparison, we had one ship less in operation this quarter and revenues declined by 12%. Longer term, however, we will increase the number of ship board casinos with the new buildings of Oceania Cruises coming on line in 2010, 11 and 12. Each of these ships will have twice the capacity and occupancy of the (inaudible) vessels and we expect revenues to go up accordingly.

Casinos Poland. Casinos Poland increased revenues by 3%, EBITDA by 44%, mainly because we could manage to increase the EBITDA margin from 12 to 17% and Poland increased earnings (inaudible) 77%. They continue to be the market leader with 17 casinos and one slot casino in all major cities of the country. Our one third stake in that company provided close to $.5 million dollars in equity earnings for Century Casinos in this quarter. Our interest in operations of the company continues to show positive results. Service levels are improving and we are currently renewing gaming equipment and refreshing all properties. The extension of our casino in (inaudible) in Warsaw, the flagship property of Casinos Poland is the most important CapEx project this year. We will double the size of the gaming floor. The opening is expected this summer. Talks with our co-owners about us buying their stake continues, but at a slow pace and this is mostly due to the new political landscape in Poland.

Before we go into the Q & A session, it's important for you to know that we see quite a few things in the near future that could have a positive impact on Century Casinos. In the U.S. and in Colorado, we are cautiously optimistic about the impact of the economic stimulus package that will enhance our operations. As mentioned, there's a good likelihood about the question about raising the betting limit in Colorado will be put on the November ballot and we think will have a reasonable chance of success. Based on the changing environment, we will make sure that we structure and staff all businesses appropriately to existing and expected business levels. We are identifying areas where we can be more efficient and drive and improve margins compared to where we are today and we see that there has been some opportunities to do that.

In Edmonton, we expect continued strong, positive momentum. And overall, in general, we will also look at strategic alternatives to make the best use of our real estate. This could include a sale or a sale and lease back situation of one or the other property. Any cash generated by such moves could be used for debt repayment, new projects and/or stock buy back. And we are also working on several new projects in the U.S. and internationally. As you know, my own family trust has invested another $600,000 into Century Casinos just a few weeks ago. Be assured that my co-CEO Erwin Haitzmann and I together with our management team, are extremely confident about the future of Century Casinos. Thank you for your attention. This completes the presentation and we can now start the q&a session.

(OPERATOR INSTRUCTIONS) Our first question comes from Ryan Worst with Brean Murray. Please state your question.

Thanks. Hi, Peter. You said that there was some disruption at Cripple Creek. Could you talk about the impact during the quarter? And then, also, could you just provide some color on the covenants that were violated at Central City and what the flexibility there is now in terms of that debt agreement?

Okay. Erwin, can I ask you please to answer the Cripple Creek question, then Larry on the covenant?

Right. This is Erwin. The majority of the interruption was in Q4 and in Q1 there was a little bit of -- just a keen effort, so that was not really major anymore. The majority of the impact we feel came from the smoking ban from the economy or the changes in the economy, fuel prices being one of them and also from the fact that the construction at fourth quarter has shied away more customers than were anticipated and it just took and still takes more time to get them back and that impacted the first quarter.

Okay, thanks.

Larry.

This is Larry. The ratio, the covenant ratio in Central City that we did not meet in the first quarter is the six cost coverage ratio and this is a ratio that measures the EBITDA to the debt service for the property, debt service being primarily debt to -- actually it's all debt to Wells Fargo and the interest. We barely missed the ratio. The threshold was a 1.4 and what we ended up with was a 1.3. Still, it -- we didn't meet it. Our forecast going forward is that we will be able to meet it in the quarters going forward and that's because of two reasons, basically. We expect operations to get better between now and the end of the year, busier seasons and also as time goes on, the threshold goes down throughout time. So it goes down to a level of 1.15 into 3. So we feel like we should be okay going forward.

Okay. Thanks. And how much total debt do you have on that property, Larry?

Just shy of $20 million. $19.5 million, something like that.

Okay. Great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from [Justin Borris] with Lazarus Investment Management. Please state your question.

Hi. Can you give us an update on the Polish acquisition?

Yes, hi Justin. There are (inaudible) that we are making reasonable progress with the mid-level management of both [PTA and Lot], but the decision makers of both state the companies have been behind the process of being stalled due to the elections that triggered new ministers being in charge of those vacant companies and there -- as I said, he has been installed very recently and they are not yet in a position to make decisions on the sale of the non-coessence. In principal, the responsible ministries have confirmed that the non-coessence of these companies should be sold. Contractually we have the right, the first right, to buy, to buy the shares, but the process is just very slow and I don't expect any tangible results in this quarter. It will be -- it will be taking a little bit longer than we have made believe.

Maybe '08 is a good -- sometime by the end of the year is a good estimate?

Yeah. We are doing our best because that's really one of the top things on our agenda, very high up on our priority list, so that's certainly our goal.

Okay. Just one last question on the debt restructuring. Could you just give us a little update on that as well?

Yeah. We -- I think a few other companies experienced the same thing. We were pretty close with the situation in the U.S., but that fell through and we have now restarted talks with two European banks, three European banks, in fact, and I think that the next -- in this quarter or the conference call for the quarter we are in right now, we should be able to provide pretty concrete detailed information about that. So that's something that we are actively currently working on.

Okay. Thank you. Thanks, Justin.

Thank you. Our next question comes from [Steve Alabrenda] with Sidotti & Company.

I apologize. I hopped on a little late. What was the indication of violating that covenant that you mentioned?

Larry.

This is Larry. The covenant was the adjusted fixed cost coverage ratio, Steve, and that is a ratio that measures EBITDA to debt service costs. The ratio in the quarter, the threshold that we needed to exceed was 1.4 and we actually came in at 1.3. That's -- that was the reason for the extra cost and getting a waiver for the covenant ratio. It looks to us going forward that we will be meeting the ratio because operations will be improving and also the ratio itself actually declines throughout the rest of the year.

Right. I heard that. But what -- are there any implications? Is there a penalty fee or what are the --

There was a penalty fee. It was $162,000, I believe it was.

And that's basically the only ramification.

Yeah.

Okay. How about CapEx for 2008? Did you guys have a rough estimate for that?

It's mentioned through when we were going through the properties. It will not be -- it will not be a lot this year. We don't have a firm number for you, but a range of --- maximum of between 3, 4, maximum 5% or so of revenues is a rough guidance.

Okay. And can you remind me, is there any contingency payments on any of the properties that you now own going forward or are you mostly complete with that?

Larry, can you comment on that?

By -- I'm not sure what exactly you mean by contingency payments. You mean --

Any payouts, future payouts or is everything complete?

We do have an amount in Newcastle which is approximate -- it's $1.3 million ran, so let's say about $200,000.

Okay. Pretty minimal. How about future opportunities, any geography, part of the world you're looking at in -- I know you're in talks with Poland, but any other area of interest we should be keeping an eye on?

We -- we are looking specifically into the -- into America and Europe and I don't want to be more specific at this point in time. We are pretty close on two opportunities. We believe that there might also be some interesting new situations in South Africa. Some of them will be Green (inaudible) situations -- and the one or the other could well be an existing situation where we -- where we could buy into. As I mentioned on the call, we also exploring the sale or sale and lease back situation of one or the other property, which could also help in future growth, realizing future growth opportunities.

Is there a particular property that you're referring to with the sale lease back or everything is under consideration?

Everything is under consideration. Internally, we are discussing a ranking of the various properties in that respect and I believe very shortly we'll be able to start acting on that because we will be able to have summed up at least a number one and number two with all the supporting documentation available and we can go out and get a feel for what the market can do for us.

The last one, is the financing environment, has that held you back from any opportunities you felt you were perhaps close to or do you think it's going to hold you back on some of these opportunities you spoke of?

Yes. There are some good opportunities out there and the difficult markets out there have certainly not helped. I think the market has been -- we might be closer to a realization of one or the other projects if the environment would be easier out there in terms of raising debt.

Okay.

It's not -- it's not that the opportunities wouldn't be there. Quite the contrary.

The money is not. Right. Okay. Thanks. Thanks, guys.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from [Adam Kreshek] with Roth Capital Partners. Please state your question.

Hi, guys. Could you maybe talk about your Colorado operations and how that's trending so far this quarter? Has it stabilized relative to Q1, is it down, slightly up, maybe just some color there, please.

Erwin, can I turn it over to you?

It's been difficult, economics is more difficult than Central City.

So relative to Q1, Womacks is still declining, is that what you said?

We're not commenting on that, but I can only say that it's still difficult.

Okay. And Central City is improving or it's also --

less difficult.

Less difficult.

Less difficult. We have the market-- the Denver market to be easier to handle in spite of the even more competitive landscape, but it's easier to calculate and to predict.

Okay. That's all I got. Thanks.

Okay.

Thank you. Our next question comes from Nick Danna with Sterne, Agee. Go ahead, please.

Hey guys. Good morning-- good afternoon. Couple of questions. Could you share with us what the revenue EBITDA from Casinos Poland was?

Yes. The EBITDA of Casinos Poland was in Polish currency, it was $6.6 million, which is about $3.5 million U.S. And what was the other question?

Just what the revenue number was.

Yeah, the revenue number was close to $40 million in local currency, which is about 18, between 18 and $19 million U.S.

Okay. And then did you have the gaming revenue for Edmonton? You just provided the net revenue in the presentation. Did you have the casino revenue for that property?

Yeah, we do have that.

Just one second. 4.1. $4.1 million is the gaming revenue for the quarter.

Okay. And so that's the net to you, right?

Yeah.

After the --

Yeah. Yes.

Okay. And then in terms of Cripple Creek, do you have -- I mean given the revenue trends you're seeing, do you have a sense of what the margins might look like over the next couple of quarters?

It's -- the -- the smoking ban, we believe, probably will have an impact for the next probably couple of quarters still. We don't know what the economic stimulus package will do. We don't know, where the economy is going -- it's really hard to forecast. So we would rather not give out guidance.

Okay. So I mean other than perhaps some seasonal improvement in the second and third quarter, not all that much to get optimistic about at this point?

That's probably right.

Okay. And then for the corporate expense, I saw you -- you cut a little bit out of there, both on the accounting and I think on the consulting side. Is that a good run rate going forward?

Yeah. That's probably -- Larry.

Yes. I was just going to respond that it would be probably a good run rate going forward.

Okay. And the last one for me, actually two more. The property tax increase that hit Central City, when did that start? Was that the third quarter of last year?

Ray, can you-- Ray or Larry.

This is Larry. The rate increase was actually for the full year in -- of 2007. The reason you see such a variance is because we were not notified of that increase until, I believe it was, May of 2007, so that's when last year we had a catch up accrual for January through May and in 2008 it's accrued on a monthly basis going forward.

Okay. And so that catch up accrual hit the second quarter of last year?

Yes.

Okay. So the comps going forward should be more apples to apples?

Well, in Q2 you're going to see just the opposite because you're going to see a large accrual in '07 and the normal accrual in '08.

Understood. Understood. Okay. So EBITDA in the second quarter may actually look better in Central City than the prior. Okay. And then obviously the -- with the big differences in income from domestic and international, are you expecting sort of a tax benefit going forward even if you -- even if you have some income before taxes?

Larry.

I'm going to have Ray answer this.

Yeah. At this stage, because the U.S. operations are generating a loss, yes, there is a -- there is a tax benefit at this point that is being generated and could be expected to until the Colorado operations turn around.

Okay. Good. That's helpful. Thanks a lot, guys.

Thank you. (OPERATOR INSTRUCTIONS) It appears we have no further questions at this time.

Well, thank you. 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 www.cnty.com. Thank you.

This concludes today's conference call. Thank you for attending.