Century Casinos Inc (CNTY) 2009 Q2 法說會逐字稿

Thank you, operator, and welcome, everyone, to our second-quarter 2009 earnings conference call. Joining me on the call today are my co-CEO and Chairman of the Company, Erwin Haitzman, as well as Larry Hannappel, Senior VP and Chief Operating Officer North America, and Ray Sienko, 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 the appropriate GAAP measures can be found in our news release and in the 10-Q filing, all of which are available in the investor section of our website at www.CMTY.com.

I will now present the results of the second quarter 2009. As most of you know, we have closed the sale of our South African subsidiary on June 30. Out of the total net proceeds of approximately $46 million, we have received about $33 million already. The remainder of $13 million is payable as soon as the regulatory approval from the KwaZulu-Natal Gaming Board is in place which we expect before the end of the third quarter. Based on recent results of the South African operations the gross sales price equaled around 9 times EBITDA.

Because of that sale we have classified the results of our South African casinos as discontinued operations. This is in accordance with US GAAP and means that the P&L results of these operations are collapsed into one line at the bottom of the income statement. The '06 and '07 results have also been pulled out of normal operations and are reported in discontinued operations.

Our continued operations include 16 casinos in Canada, Colorado, Poland and on cruise ships with over 2,000 slot machines and about 170 gaming tables. Discontinued operations generated net operating revenues of $11.9 million in the second quarter of '09, down 14% from the same quarter a year ago and about flat compared to the first quarter of this year. The Colorado operations showed a revenue decrease of 11% year over year thanks to (inaudible) economy.

The good news is that we are seeing a double digit revenue increase since July 2, driven by the higher betting (inaudible) and during opening hours. Our largest casino sale, the Century Casino opened in Edmonton, Canada, managed to increase revenue by 3%, but significantly lower revenue on the baccarat tables (inaudible) total revenues being down 3% year over year in local currency.

Due to a weaker Canadian dollar, remember that the Canadian dollar was almost at par with the US dollar a year ago; this resulted in a decline in reported US dollar revenues of 16%. But by now the Canadian dollar has strengthened again which will be positive for our results looking forward.

The revenues of Casinos Poland Ltd. are not included in our total revenues number. We own one-third of that company, hence we are not consolidating its results, but (inaudible) using the equity methods. Revenues and EBITDA were up and our earnings in Casinos Poland more than doubled in the second quarter of '09.

Adjusted EBITDA for Q2 of Century Casinos decreased by 33% to $1.6 million. Lower US dollar revenues in Canada, lower Colorado revenues together with additional nonrecurring costs and expenses associated with the preparation for the higher betting limits, new games and longer opening hours in Colorado contributed to that decline. The bottom-line shows a loss of about $1 million or $0.05 a share; this is down from a small loss of $100,000 in the same quarter of last year, but up from a loss of $1.5 million in the first quarter of this year.

In addition to the decline in operating earnings from continued operations the loss from continuing operations increased year over year due to an increase in taxes, but more on that later. Including discontinued operations we reported net earnings of $18.9 million or $0.80 per share.

Let's now discuss the results of our continued operations property by property in more detail in local currency beginning with our Colorado casinos.

Revenue at Womacks Casino in Cripple Creek fell 15% and adjusted EBITDA fell 19% year over year. The revenue decrease is primarily due to a weak economy, but we also had a lower hold on both slots and tables compared to Q2 '08. The EBITDA decrease was also caused by additional nonrecurring costs and expenses incurred during the second quarter in preparation for the new games and extended hours that were introduced as of July 2.

At the Century Casino & Hotel in Central City revenue decreased 10% to $4.2 million for the second quarter of '09 compared to $4.6 million reported in the second quarter of '08. The Central City gaming market as a whole also declined 10%. Adjusted EBITDA decreased by 19% and, as is Womacks; this was also due to a decline in revenue and additional costs and expenses.

In general the slow economy continued to negatively impact the number of visits per customer as well as the average spend per customer during the quarter. In addition to that, bad weather impacted the second quarter with nine consecutive weekends of snow or rain.

Both our properties have prepared well for July 2 when the new rules that allow higher limits of $100 per game, 24 hours opening and additional games of roulette and craps came into effect. The first five weeks show encouraging results with revenues up by more than 10% year over year and up by about 25% compared to the second quarter.

As can be expected, slot play has benefited some, but the table action is really where the bulk of the revenue increase is coming from. We see a much younger market being attracted to the casinos which most casinos are targeting their marketing to.

The results of our property in Canada, the Century Casino & Hotel in Edmonton, decreased a little by 3%. The one reason for this was a sharp decline in both drop and hold percentage on the baccarat tables. Everything else was up -- slots up 3%; blackjack up 13%; craps up 5%; roulette up 11%; hotel revenue up 1%; and food and beverage revenue up 10%. EBITDA was down 21% or CAD470,000 which is exactly due to the decrease in operating income on the baccarat tables.

As previously reported, a massive construction project is underway in front of our property; the construction of three additional lanes for the main roads directly in front of the casino entrance has certainly not helped during the quarter. There were a lot of traffic disruptions and delays. Looking forward we can continue to be optimistic about Canada, July is looking solid again with revenues up both in Canadian and US dollars.

The ship casino segment had lower revenues, but net earnings more than doubled on cost savings and lower commission payments to the cruise lines. One ship was in dry dock in May and there were generally less passengers on the cruise lines in April and May and we had lower visitation in the casinos during those months. However, we saw revenue coming back strong in June and also July seems to be coming back -- business seems to be coming back.

Now an update on the results of Casinos Poland Ltd. of which we own one-third. The Company operates 100 gaming tables and 255 slot machines at its eight locations throughout Poland and they had a good quarter. Revenues increased by 11% and EBITDA by 43% year over year. Our net earnings increased by 167% from PLN189,000 in the second quarter of '08 to over PLN500,000 or about $160,000 this quarter.

Before starting the Q&A session let's take a look at the results of the corporate segment. Corporate G&A consists primarily of legal and accounting fees from being a public company, corporate travel expenses, corporate payroll, the amortization of stock compensation expense and other expenses not directly related to any of our individual properties. Corporate payroll expense declined by $105,000 and travel expenses declined by $109,000 compared to Q2 '08. These and some other improvements resulted in EBITDA for the corporate segment improving from minus $1.7 million to minus $1.4 million.

Better earnings of Q2 '09 were heavily impacted by an increase in tax expenses of about $700,000 compared to the same quarter a year ago. The reason for that is that in connection with the establishment of a tax valuation allowance during '08 we did not record a tax benefit on US losses during the second quarter of '09 but we did do so in Q2 '08. That tax benefit taken into Q2 '08, however, was subsequently reversed later in '08.

The total third party debt of our continued operations is as follows -- Womacks in Colorado had debt of $2.7 million at the end of the quarter, but subsequently in July we have paid down that debt to zero. The Century Casino in Central City, Colorado had $15.5 million debt at the end of the quarter, since then also in July we have paid some of it down and it now stands at $9.2 million. This debt repayment alone will result in annual interest savings of approximately $700,000.

Edmonton carries CAD17.5 million at a fixed rate of 7%, this is due in December 2012. We are in full compliance with our loan agreements. So the total sum of all our third-party debt is around $25 million. And we are also sitting on $25 million in cash plus $13 million in cash still to come from South Africa. Our balance sheet is in good shape. This concludes my presentation and we can now start the Q&A session, please.

(Operator Instructions). Todd Eilers, Roth Capital Partners.

Question regarding your Colorado operations, I think in your comment you mentioned that you've seen since expanded regulations took effect roughly a 10% increase year over, a 25% sequential increase. Can you maybe comment on have you -- has that revenue increase been fairly consistent each week or did you see maybe a larger spike at the beginning of the month and then had it tail off towards the end of the month? Can you maybe just get a feel for how that impacted across the month?

Erwin, can I ask you to jump in on that, please?

This is Erwin. Hi, Todd. Fairly consistent.

Fairly consistent, okay. And then can you also, you mentioned some pre -- I guess pre-regulation or expanded operating costs at both of your Colorado operations. Can you maybe give us the total dollar amount of that and also how much was at Cripple Creek and how much was in Central City?

Right. Larry, do you have that at hand?

Todd, for each property we started to add some payroll in the early part of Q2 and training and some CapEx, a small amount for the tables and that sort of thing. The CapEx probably in the range of $15,000 to $20,000 for each property and additional payroll costs and training costs in Q2 around the $30,000 range for each property.

Okay. All right, that's helpful. And then with respect to the use of proceeds here from the asset sale. It looks like obviously post quarter you guys reduced your debt there by about $8.7 million. Do you plan to make further debt reductions here going forward or are you comfortable where you're at right now? And then also along those lines, any plans to maybe buy back some stock at current levels and maybe what you might need for any potential M&A opportunities?

Yes, we might use a little to further reduce our debt but nothing significant, most likely. And in terms of stock buyback, it really all depends on the M&A activity because we are very closely looking at a handful of opportunities. And if we can get the one or the other at the right price then we will probably give that preference over share buyback. It's a little bit too early to say, but I think before the end of the year we should be able to make a move either in the one direction or the other.

Okay. And then along those lines, where are the opportunities geographically that you're seeing for M&A opportunities?

We like North America and there's also the very selective opportunity over in Europe, yes, those are the main areas we are looking at.

Okay. And then let's see -- lastly, Casinos Poland, the minority interest there -- looked like some pretty strong results in the quarter. Can you maybe give us a sense of what was going on there, what drove the increases in that business?

We had installed -- we changed some of the slot product which had a positive impact. A little while ago we introduced the first nationwide mega check product and that seems to be catching on well. And management is making some good decisions on the marketing front. Are there are any more specific, Erwin, that you can add to that?

Yes, in addition to what you said, we also replaced the manager of one property and that was a very good decision we found already. So and I think that expresses a change in corporate [character] vis-a-vis what was there before we came in. The first year or so we took it slowly, but I think now everybody understood that we want a clear connection between performance and, shall I say, not only promise but even job existence. We only want managers that do perform within the limits of the law, this is what our managers there are exercising and executing as well as they are.

Okay, great. And actually one final question regarding in the Edmonton casino operations. You mentioned some construction disruption there. Can you give us a sense of when the construction should be over with?

Yes, in Q4.

Okay.

And it's horrible now but it will be wonderful after that because it is a wonderful construction. It's not only a widening of the road, it's a whole project with development of shops along the roads and very nice curbside, a lot of effort from the local community has got into that and continues to go in. So, yes, disruptive now, really disruptive, but once it's all there we think it will have wonderful positive impact to our property there.

Great. Thanks, guys.

(Operator Instructions). Ryan Worst, Brean Murray.

Good afternoon, Peter and Erwin. Just a couple questions, most of them have been asked. But you didn't mention when the Central City debt matures, could you provide that?

Yes, that matures at the end of 2011.

2011, okay. And then just regarding the Colorado market, specifically Central City. What are you seeing in terms of the promotional environment following the change in the regulations on July 2?

Can I?

Yes, please.

This is Erwin. We see that our competitors are heavily pushing marketing dollars into the market, I think everyone is spending, spending and over spending, certainly as a percentage of revenues are still more than what we used to see.

Okay. And in terms of the baccarat play in Edmonton, what percent of your business is that?

Do you have that, Larry?

Ryan, off the top of my head I'm guessing it's about 10% of the table business, maybe 15%.

Okay. Okay, great. Thank you.

(Operator Instructions). Justin Borus, Lazarus Investment Partners.

Thanks for taking my question. My question is really how can you give investors confidence that the M&A opportunities they're looking at are going to be better than a potential stock buyback? I think we all had high hopes for the casino in Central City, but that's turned into a disappointment. And even Edmonton looks like it's petering off a bit.

I'm just wondering how you can give confidence or, maybe more importantly, what lessons have been learned from these past opportunities that you might give us a little bit more confidence that what you're looking at is going to actually be for the long-term benefit of the Company?

Justin, we, as you know, just sold our South African operations for $46 million at a fantastic EBITDA [market risk]; those were fantastic investments that we made since the year 2000. Edmonton we opened three years ago and it's one successful growth story and even this quarter everything was up but one segment, baccarat tables, so this is a very good investment and a very strong operation. Central City and Colorado as well as any other casino operation in the US is suffering because of the weak economy.

So your question looking forward, what we are doing is we are looking at properties that are markets we feel comfortable with in terms of their long-term potential. And we then try to -- of course we look at the historic, the past results of such a property. But more importantly, we go in with our team and we then develop a business model and make assumptions of what we can generate with that property.

And based on that, if we can acquire it at attractive multiples, then that's something then we would like to go forward with. If you look at our 20 plus or minus casino operations that we developed or acquired over the -- over the past 15 years, the vast majority of them have been extremely successful.

So it sounds like from your earlier question that more of the focus might be in Canada. It seems like the economy tends to be a little bit more resilient up there through the downturns than it is in the US. Is that a fair assumption?

That's a good possibility, yes.

Okay, well lots of good luck and thanks for taking my question.

And it appears that we have no further questions at this time. I would like to turn the call back over to Peter Hoetzinger for any closing remarks.

Thank you and thanks, everybody, for your interest in Century Casinos and for 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 and have a good day.