Century Casinos Inc (CNTY) 2008 Q3 法說會逐字稿

Welcome to the Century Casinos third-quarter 2008 earnings conference call. This call will be recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

I would now like to introduce our host for today's call, Mr. Peter Hoetzinger. Go ahead, sir.

Thank you, operator, and welcome everyone to our third-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, Senior VP and COO North America; and Ray Sienko, Chief Accounting Officer.

Before we begin, I need to remind you that 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 statement. 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 the appropriate GAAP measures can be found in our news release and in the 10-Q filings, all of which are available in the investor section of our website at www.CenturyCasinos.com.

Let me now present the results of the third quarter. The net results of the third quarter were obviously dominated by the write-down of the goodwill on the books of the two Colorado properties, as well as the fact that we established a valuation allowance for our deferred US tax assets. In light of the deterioration of the US and Colorado economies, we decided to take a conservative approach and have written off the entire goodwill of our property in Cripple Creek in the amount of $7.2 million and of our property in Central City in the amount of $2.1 million.

Also because of the deteriorating economic environment in the US and Colorado, we considered it prudent to put all our deferred US tax assets in the amount of $6 million into a reserve so-called valuation allowance. If we conclude at a later date that the realization of these deferred taxes is more likely than not, we will reduce the valuation allowance as appropriate, which will then show as income.

Excluding these extraordinary write-offs, net earnings for the quarter would have been $1.2 million or $0.05 per share, exactly in line with consensus estimates. Net operating revenue came in at $21.9 million, down 12% year-over-year but up 2% from the second quarter.

Adjusted EBITDA was $4.9 million, which is 16% lower year-over-year but 7% higher compared to the second quarter. The group's consolidated EBITDA margin is 22%. The effective management of our cost structure helped to reduce corporate and property specific general and administrative expenses by 13%.

Looking at the long-term debt of our company, we have restructured the non-facilities for our Colorado operations and are in full compliance with all financial covenants of all our loan agreements. In the first nine months of this year, we have paid our total debt down by $11.7 million. Currently, our net debt position is $41 million.

I will now discuss the situation property by property in local currency, beginning with Colorado. Revenue at the Womacks Casino in Cripple Creek fell 38% year-over-year. Still it produced positive EBITDA of $620,000, which (inaudible) an EBITDA margin of 20%. The newly-introduced smoking ban in Colorado and the slow economy all had an effect.

In addition, that casino lost customers due to the opening of a new competitor in the second quarter, and that also hurt in the year-over-year comparison.

The Century Casino in Central City generated revenues of $4.7 million, which was down 22% from the third quarter of last year. As small as this may be, but table revenue actually increased a little over 1% quarter-over-quarter. The EBITDA margin of that property is currently at 25%.

Recent cost savings initiatives undertaken include the reduction of staff in Cripple Creek by 29% and in Central City by 18% compared to last year. In general, the Colorado casino market will continue to be very competitive for the players' dollars. Promotions in the market are being geared to weekend play when players are more likely to come to the gaming towns. However, now that Amendment 50 has been approved statewide, the Colorado casino market is poised to evolve into a much larger gaming scale with the anticipated passage of this amendment in the three casino towns of Cripple Creek, Central City and Black Hawk.

The city of Cripple Creek will most likely vote in January. The city of Central City has not set a date yet. As most of you know, Amendment 50 allows increased betting limits of $100 per game, additional gaming hours of up to 24 hours a day, and the addition of craps and related games to the casinos. The earliest that these new rules can take effect is in July of next year.

Amendment 50 also freezes the gaming tax at current levels, and the gaming tax could only be increased by a future statewide vote. The gaming towns of Central City and Cripple Creek are close enough to Denver and Colorado Springs that they should capture an increased market of higher-level players that are currently going to larger gaming destinations such as Las Vegas. We believe this will increase the Colorado casino market and will have a positive effect on our two casinos.

Our property in Canada, the Century Casino and Hotel in Edmonton, Alberta, was once again the high level of the quarter. Year-over-year revenues increased by 15%, EBITDA by 42%, and net earnings by a strong 88%. It achieved an EBITDA margin of 36%, up from 31% a year ago.

We saw increases in all aspects of the casino operation, such as win per slot per day and win per table per day, as well as revenue from poker which tripled year-over-year. These growth rates are impressive considering that a massive construction project, the city's $25 million Fort Road redevelopment project, is currently underway in front of and in the area around our property.

Mid-and long-term, the casino is expected to benefit substantially from this master planned program, which involves the widening of Fort Road from four to six lanes and the development of the new urban village with a revitalized commercial sector and residential community of up to 1000 units adjacent to the existing light rail transit station, which in turn is adjacent to our casino.

We operate there in a market of only seven gaming competitors within the greater area of greater Edmonton. The municipal area of Edmonton is over one million residents, and our casino is the only one located in the northeast section of the city. Our casino also benefits from its competitive edge over the local competition by offering a live entertainment showroom, a hotel, catering facilities, a strong monthly direct mail program, and last but not least a heated underground parking that can accommodate 300 cars.

In South Africa, our Caledon Casino resort near Cape Town saw a decrease in revenues by a little under 5%. The current EBITDA margin of that property is 31%. We believe that the addition of 500 slots to a competing casino in Cape Town earlier this year, as well as rising fuel prices during the second and third quarters of '08, have led some customers from Cape Town to gamble in Cape Town as opposed to traveling to our casino.

But the gaming market in South Africa remains quite strong, and we are optimistic as we are heading into the strong summer season and the busiest times of the year between Christmas and Easter.

Century Casino Caledon is situated in the overgrowth area of the Western Cape province of South Africa, which has over 230,000 residents and is about 60 miles from Cape Town. It is also located in close proximity to very popular holiday destinations like [Hamanos] in Somerset West, all approximately 30 minutes either way.

All five casino licenses for the Western Cape province have been issued. No other casino is within 50 miles of ours, and no new casino establishment will be entering the market. The Century Casino Caledon is expected to continue to benefit from offering a four-star hotel, restaurants, catering facilities, conference venues, a spa, free parking areas and thermal hot springs.

Our Century Casino and Hotel in Newcastle reported a revenue increase of 15% and an even stronger EBITDA increase of 59%. The EBITDA margin improved 25% in the third quarter of last year to 34% in this quarter.

Similar to the developments in Edmonton, we saw improvements across the board from win per slot per day and win per table per day to hotel and food and beverage revenues. Everything was up nicely. The city of Newcastle has over 420,000 residents and is situated halfway between Johannesburg and Durban. It is also a popular holiday destination for tourists to the Kwazulu-Natal midlands and [Drakansped] mountain area and a stopover for traveling businessmen.

All casino licenses for the Kwazulu-Natal province have been issued. No new casino establishment will therefore be entering the market, and the closest casino is more than a two-hour drive away from ours.

Century Casinos Newcastle is offering a four-star hotel, restaurants, catering facilities, conference venues and free parking areas. We expect further growth for that property in revenues, EBITDA, and net earnings for 2008 over 2007.

As most of you know, we have announced our intent to sell the South African properties. We have received a good number of expressions of interest from serious, mostly South African companies. A number of interested parties have been invited to conduct a detailed legal, financial and operational due diligence, including various site visits to both locations.

The coming weeks will bring the next round of offers from the bidders and further negotiations with them. Interest in the properties is strong, but timing of a deal is difficult to predict. The amount of the purchase price will be the predominant factor in our decision to sell.

Finally, I am moving to Europe for a brief update on Poland. Revenues of Casinos Poland Limited, of which we own one-third, increased by 13% year-over-year. EBITDA jumped 48% and net earnings grew to five times the earnings of last year. We booked $181,000 in equity earnings in this quarter from our investment in Casinos Poland.

These results have been achieved in spite of expansion and renovation works at the flagship operation of Casinos Poland, the Casino at the Marriott Hotel in the capital city, Warsaw. These works have now been concluded and the casino expansion progress successfully opened in early October to a capacity crowd.

Also in October, Casinos Poland successfully launched the first nationwide mega-jackpot. The jackpot amount, the highest in the country, is currently at the equivalent of approximately $250,000 and is a big hit with players.

The gaming market in Poland is well regulated and monitored by the authorities. At the moment, 27 casinos and 195 slot arcades have received licenses from the Minister of Finance. The Minister is authorized to issue one casino license for every 250,000 inhabitants of the city and one licensed operator slot arcade for each 100,000 inhabitants.

The outlook for the gaming market in Poland is quite positive if the legislation stays the same. Rumors about the new gaming law and different taxation models are coming up on a regular basis. Our goal is to acquire the majority of Casinos Poland. These [cautions] are continuing, but an outcome if and when is still difficult to predict.

This concludes my presentation, and we can now start the question-and-answer session. Operator?

(OPERATOR INSTRUCTIONS) Todd Eilers, Roth Capital Management.

Peter, I am wondering, assuming that both Cripple Creek and Central City also pass or approve Amendment 50, what will your plans be at that point? Will you look to expand either of those facilities? Can you just help us out with what your thoughts are there?

Yes, Todd. I turn this question over to Erwin.

Yes, our plans are to expand the gaming floor and add additional tables so that we are able to take advantage of the increased limit.

Okay. Would you be ready to go July 1st, assuming --?

Yes, absolutely.

Peter, how about with regards to the potential sale of one or both of the South African casinos; can you rank order what your priority would be in terms of use of proceeds? Would it be to reduce debt, repurchase stock or are their potential M&A opportunities or new development projects? Can you just maybe talk us through your thoughts there?

Yes. I will talk certainly around these uses of funds, depending on where the stock price will be at that point in time. A stock repurchase program is definitely in the cards. We would also reduce some of our debt, in all likelihood some of the Colorado debt.

At that point, we wouldn't have any debt in South Africa anymore, and the debt that we have on our Edmonton property is on terms that are very reasonable so that the Colorado debt would be on the front burner to be reduced.

As you can imagine, there are quite a number of attractive M&A opportunities out there. Prices have come down somewhat, so yes, we want to be a player.

Okay. Then let's see, maybe, Larry, if you could help us out on this one. With the change in the valuation allowance in the quarter, what can we expect for a tax rate going forward? What should we be looking for?

Todd, this is Larry. The tax rate going forward is still going to be largely dependent on what kind of taxable income is generated in the US. We are working with a tax firm at the moment to implement a plan to utilize the tax losses going forward. This is assuming that there would still be tax losses on the Colorado properties.

Again, it is a tough question to answer, Todd, because we have such disparity in the tax rates ranging from 3% in Mauritius to the highest in the US of 36%. So our goal is just to reduce the tax exposure as much as we can, but I can't give you a forecasted rate based on forecasted earnings right now.

Okay, that is fair. That does it for me. Thanks, guys.

Evan Greenberg, Meadowbrook Capital. Mr. Greenberg, your line is open. (Operator Instructions)

Ryan Worst, Brean Murray.

Peter, just a follow-up on the information on the progress of the sale of the South African casinos. Where are you exactly? What are the next steps to take place and as far as the official bids coming in?

A group of interested bidders has almost concluded really detailed legal, financial and operational due diligence. They have all been at our sites a couple of times, and some time this week and next week, and/or next week we will be sitting down with them to start the final round of negotiations, so we are depending on the outcome.

We could see a result, but it already depends on the price and whether we are happy with what they are offering. But it is an active process that we are actively managing, and there is a strong number of interested parties who in most cases are strong enough to handle such a transaction without a great deal of outside funding help.

So do you think an agreement if you guys choose to pursue that could be completed by the end of the year?

It is not impossible, but it is also at the same time not possible for me to say because we haven't reviewed -- we haven't seen the final term offers yet. You know, these days with the markets, it is just impossible to predict.

Okay, that is understandable. Thanks, Peter.

(OPERATOR INSTRUCTIONS) Evan Greenberg, Meadowbrook Capital.

I had a question about the goodwill write-down and why you decided to take it in Cripple Creek and in Colorado in general. Did you come up -- was there some sort of evaluation that was given to you? What was the reason for the write-down on the goodwill, especially in light of --?

(multiple speakers) scenarios that we are constantly running, and with the changes in the US and the Colorado economy and the midterm outlook for the economy, we just thought it is prudent to take the conservative scenario that was on our table amongst the many scenarios that we looked at. I mean, you have known us -- I know that you have followed us for many, many years, so you know that we, when having the choice, most of the time we are choosing the conservative approach in such similar situations because that is in the long-term best interest of our shareholders.

I respect and appreciate that. I just thought it was a bit extreme, but I appreciate that. Do you still have the financial flexibility right now to acquire Casinos Poland and make other acquisitions and grow the business due to the dislocations in the market? You are generating plenty of EBITDA. You really have never been -- you are not really that leveraged compare to your competitors at all.

As I have said before, our net debt is now down to $41 million. We paid $11 million something back just in the last nine months alone this year. So we are really working on keeping and improving our balance sheet. Yes, for the Casinos Poland acquisition, that can be financed. And other than that, of course, we are also trying to take a conservative approach with the investment policy right now, but on the Casinos Poland situation we should be in good shape.

Because Casinos Iceland may pop up, so -- but then again, that is their whole banking system. Anyway, sorry about the joke. It was a little analyst humor. Thank you very much. Keep us the good work.

Todd Eilers, Roth Capital Partners.

Just had another follow-up. Peter, I know you guys don't typically give guidance, but in light of what has happened in terms of the economy and the market in October, can you maybe talk a little bit directionally about trends in each market that you have seen that started fourth quarter; that might be helpful?

Yes. Edmonton still going strong; South Africa, Newcastle still going strong. Caledon improving. Colorado not that much of a change. Erwin, would you like to add to that?

No.

That is pretty much the picture, yes.

All right, thanks.

(OPERATOR INSTRUCTIONS) Nick Danna, Sterne, Agee.

Good morning, guys. A question regarding the South African sale, two things. One, can you give us some sort of range as to what you think those two assets might be worth? And then second, if you do in fact sell them, kind of the process of taking I guess what would be rand proceeds and bringing them back to the US and any tax implications there?

Yes, the approximate EBITDA that we would be selling which is 100% of Caledon and 60% of Newcastle is in the $8 million range. And the (inaudible) that are being applied to the EBITDA, you know, as well as I do, they are varying a bit from place to place. They have come down a bit from last year, but the fact that there are no more casino licenses available in those areas where we operate and the expansion opportunities of those two properties I think gives us a good position to achieve an attractive result.

Yes, we would get rands that would go into our Mauritian holding company, Century Resorts Limited. The tax rate there, as Larry indicated, is an effective 3%. And then we will decide on the use of funds, and that will to a certain extent also have an implication on whether or not further taxes would have to be paid. For example, if we could bring money back to the US, there might be a different situation as compared to using that money outside the US for our acquisitions.

So if you were to bring the money back to the US in order to pay down the Colorado debt, do you have a sense for how much of a hit you would take there?

Would you like to comment on that, Larry?

Nick, it is not necessarily that we would take a hit if we send a certain amount of cash from Mauritius to the US. It is likely that we would send at least $4 million to the US to pay off the [will match] revolver. But that isn't necessarily taxable because we have got some intercompany debt between Europe and the US.

Then in terms of the multiple, you said a price that would be acceptable to you. Obviously, there is a range of multiples out there and you also have some excess land at Caledon. So can you give at least a range of what sort of multiple might be in your range of reasonableness?

I can't comment, Nick. I am sure that the parties interested are also listening today, so I don't really want to give any guidance yet.

Okay, fair enough. Thanks.

(OPERATOR INSTRUCTIONS) It appears we have no further questions at this time. We will now turn the program back to Mr. Hoetzinger. Go ahead, sir.

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

This does conclude today's conference call. Thank you for attending and have a good day.