Century Casinos Inc (CNTY) 2012 Q2 法說會逐字稿

Welcome to Century Casinos' Q2 2012 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, please.

Thank you, Todd. I am happy to have all of you join us for this call, following the release of our second quarter 2012 earnings a few hours ago. With me on the call today are Erwin Haitzmann, Co-CEO and Chairman of the Company, and Margaret Stapleton, Executive Vice President of Finance. 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 risks 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 10-K and 10-Q filings, all of which are available in the Investor Section of our website at CNTY.com.

To start with, I am happy to report that this quarter is the 10th consecutive quarter with year-over-year net earnings growth for Century Casinos. That is quite an achievement, and Erwin and I would like to thank all of our [corporate] for their support and enthusiasm. We managed to increase adjusted EBITDA by 5% year-over-year, with earnings from operations by 74%, and net earnings by 78% year-over-year. Earnings per share jumped from $0.03 to $0.05 for the quarter. And without an extra payment in deferred financing costs associated with the new credit facility, EPS would have even been $0.06.

These are very solid results, and came despite the Waldo Canyon wildfires which had a significant negative impact on our operations in Cripple Creek, Colorado. During the more than 15 days it took to contain the wildfires, more than 35,000 people in Colorado Springs, the metropolitan population which the casino primarily serves had to be evacuated and the main highway to the casino was closed for a total of 8 days, in what is the casino's high season. That was also the main reason why total revenue declined by slightly 1%. Our balance sheet, which we believe is one of the healthiest in the US casino industry, shows $19.7 million in cash and cash equivalents, and only $3.6 million in third-party debt, resulting in a net cash position of $16.1 million, or approximately $0.67 per share.

In May, we entered into a $27.5 million credit agreement with Bank of Montreal. $3.6 million from the credit agreement were used to pay the mortgage debt related to the Edmonton property, and the balance of $23.9 million can be used to pursue the development through acquisition of gaming opportunities. The interest rate on that first draw down of $3.6 million was 3.75% all-in. The BMO credit agreement has a term of five years, and it's guaranteed by the Company. Excluding the cruise ship operations which we don't consolidate, 47% of our revenue has been generated in Canada, and the remaining 53% by Colorado and the cruise ship casinos. On the EBITDA level, 51% came from Canada, and the balance of 49% of total EBITDA from Colorado and the cruise ship casinos.

I will now highlight the quarter results of each individual property in local currency. Our largest casino, with 720 slot machines and 34 gaming tables, the Century Casino located in Edmonton, Canada showed only modest revenue growth because of lower hold percentages on both slots and tables. Slot coin-in actually increased 4%. The coin-in and [our wheel] increased by 37%. Food and beverage revenue was up 4%, and hotel revenue was up 12%.

These are very good indicators about the continued strength of this operation, even though business has been interrupted by heavy road construction immediately in front of our casino, as well as by the installation of a new carpet on the entire gaming floor. 52 slot machine conversions have been done during the quarter. And but even more importantly, we managed to get a commitment from the Alberta Gaming Commission to install an additional 30 slots in our property in the current, the third quarter, bringing our total slot count to 750, just in time for the strong fall and winter season.

In Calgary, we only managed to grow revenues by 2%, and both EBITDA and net earnings declined on a year-over-year comparison. On the positive side, we can reported 32% increase in table drop, which is really significant, as both slot and table hold was lower than last year. Business was also interrupted by a renovation of parts of the gaming floor, which can be completed next month. The renovations include the removal of washrooms, modifications of the cashier's cages, and the combination of most table games into one area. We have also decided to close the poker room, and utilize that space for functions and tournaments.

In Calgary, we continue to market and grow the player's club loyalty program, and market the showroom with live entertainment, events, and concerts and various catering functions to drive traffic to the casino. A new gaming floor layout has also been designed, with the goal in mind to better and more efficiently capture aftershow traffic in the casino.

In Colorado, our Century Casinos located in Central City had a good quarter. EBITDA was up 4%, and net earnings more than doubled. We managed to lower the cost of goods sold by 10%, and also depreciation and interest expense were lower as well. In the second half of this year, we plan to install a Starbucks coffee stand and upgrade the hotel rooms in the property. The casino started [well] into the third quarter, mainly focusing on weekends, cash and car promotions, and improved VIP player development.

In Cripple Creek, Colorado, net revenues decreased slightly by 2%, but EBITDA increased by 7%, and net earnings by 12%. Slot revenue was down slightly, offset almost entirely by increases in table revenue and hotel [S&P] revenue. As mentioned earlier, the Waldo Canyon wildfires severely impacted business at the end of the quarter. The casino's current marketing and promotions strategy focuses strongly on casino weekend promotions, when customer volumes are highest, as well as on food and hotel offerings.

The 13 casinos we operate and manage on cruise ships, and in Aruba, saw revenues increase by 2%. EBITDA declined due to set up costs and expansions for two shipboard casinos. This small segment of our operations also had a good start into the third quarter, with higher revenue increases, and better operating margins than in the Q2.

Our equity investment in Casinos Poland Limited, of which we own one-third, performed okay in the quarter. EBITDA was just down a modest 1%, And with some of the new casinos and relocated casinos hitting the start up phase, this does not come unexpected at all. Overall, the Polish casino market remains very robust, and we continue to maintain a big market share lead over our competitors.

About a year ago, our co-shareholders in Casinos Poland informed us of their intent to sell their shares, that's [two-thirds] of the total shares to the state-owned Polish National Lottery firm. They requested our consent to their respective conditional sale agreement, which under the shareholders agreement was required as a condition to effect the share transfer. But there was no consensus about the future strategy and operational matters regarding Casinos Poland was received from the lottery group, we were not in a position to provide our consent. And as a result, we have been informed by our co-shareholders that the proposed [day] transaction has been terminated.

Turning to the Corporate section, I am very pleased with the new Bank of Montreal credit agreement that we could finalize during the quarter. The confidence of BMO in Century Casinos, and the attractive terms we finally agreed to. Remember, the interest rates in the first tranche is less than 4%, a great endorsement of our prudent and successful fiscal operations management. Corporate expenses decreased again, driven by cost savings in payroll and stock compensation and professional services, partially offset by an increase in foreign currency translations.

Total cash CapEx in the quarter was about $1 million, approximately 5.5% of revenues. Canadian projects such as the gaming floor renovations and new bowling equipment in Calgary, gaming equipment for Cripple Creek and the new ship casinos, as well as hotel room upgrades in Central City. Book value per share as of June 30 was $4.78.

With our internationally experienced Management team, we remain location flexible to undertake projects in many well-regulated customer markets worldwide. We continuously evaluate market opportunities on a global basis, and are currently looking at these in North America, Europe, and Southeast Asia. This includes both greenfield development, as well as possible acquisitions of existing properties. That concludes our summary of the second quarter 2012. And I now open the floor to questions. Operator, go ahead, please.

Thank you.

(Operator Instructions)

And our first question comes from Todd Eilers with ROTH Capital Partners. Go ahead, please.

Good morning. Just a few questions. Let's see, I wanted to start off on Calgary. EBITDA came in a bit below our expectations there. You mentioned two items that I think had a negative impact, low -- lower-than-expected hold, and also the casino floor renovation. Can you give us a sense for how much each of those contributed to the -- I guess, the decline in EBITDA? It looked like you were kind of tracking at about $250,000, $300,000 kind of in EBITDA the last couple of quarters. Just wanted to kind of get a sense for how much of an impact each of those had on that number.

Erwin, can you come in here?

Yes. About half of it was a lower-than-expected hold, which is primarily due to a game called EZ Baccarat. That game is our most important live game, and we hold significant market share there. But it is very volatile. And, the other half of the composition, a combination of many small things -- some expenses we had, which couldn't be capitalized.

And I guess as a follow-up question, how do we, I guess, improve margins going forward? Is the strategy still to try to grow the top line, or is the strategy now to try to drive cost out of the model? What is the latest strategy at this point?

I think cost-wise, we have reached the point where we should not go lower, otherwise there is a danger to impact business negatively. The strategy is still to grow the top line. With the new layout, which people really like and we also think that it is very successful now, we think we have an excellent chance to further grow, particularly our table games and -- but also our slot machines. And again, we -- the numbers are a little bit tainted, because of the swings we had in the table games. But, over time, we are confident that this will level out, and we get the results that we need.

Okay. And then wanted to ask, about the Cripple Creek. Obviously, the wildfires had negative impact on the quarter, and I think you mentioned about $200,000 impact to the top line. Can you give us a sense for how much of the -- how much EBITDA impact there was likely for the quarter, I guess? And then also, just kind of how is that property performing in July?

We estimate the EBITDA impact at around $70,000. And what we can say about July is that it all looks good and [friendly].

Okay. And then, in Edmonton, you mentioned some road construction, there. Did that have a negative impact on the current quarter, or is that an expectation for Q3? And if so, if you could maybe give us a sense for what sort of impact that is having, through the month of July, if any at all?

The impact, really, is time just for the second quarter, and there will be a little bit of impact with [Fino's] on the third quarter. The road, after it is all said and done, finally is done, will be very beautiful. This (inaudible) road development is beautiful, with the only exception that it impacts us now. But we hope that after the third quarter it will all be over, and only be positive.

Okay. And, let's see, you mentioned with respect to the Poland operations that the proposed transaction to buy a third of that business was terminated. So, I guess, what happens now, if anything? A little color there would be helpful.

I am actually in Warsaw, Poland, right now, Todd, and -- for a series of meetings with all the participants, to get some clarity and to harmonize the way forward. We probably need another few weeks to be able to say anything to that. At the moment, everything remains, at least for now (inaudible).

Okay. And then, last question on the tax rates. It looks like the effective tax rate has been tracking a little bit lower than what we were modeling in. What's the expectation, I guess, for the second half of this year? What should we be modeling in for the effective tax rate?

Peggy, please?

I think the effective tax rates will -- you can probably model them in. We had one tax true-up this quarter that impacted them.

So -- was that a benefit or --

It was a -- it actually got written off to devaluation allowance. It was a deferred tax asset. However, since we are in a valuation allowance situation, it -- we took a hit on the P&L for it.

Okay. All right. That does it for me. Thanks.

(Operator Instructions)

Our next question comes from Russ Silvestri with Skiritai Capital. Go ahead, please. Hello, Mr. Silvestri, your line is open. Are you muted?

No, no, here I am. Hello? Peter?

Yes, hi, Russ, can hear you.

Good. I guess, I want to say Aruba, Bahama, come on pretty mama. But, Peter, I have been in this stock now, I think for almost two years. And you are running the thing at $4.35 tangible book value. Your stock is $2.60. It's a 60% discount to the book. I can't understand why you don't -- this is -- I don't know what -- I will get to the question here in the second. I just don't understand why you don't invest in your own stock at this point in time, as opposed to these other things that aren't getting nearly the return that you are getting here. You are buying your book value at a 40% discount. None of your other investments are yielding 40%. And I am just curious why you are hesitant. And, you told us back in the first quarter that you would be doing something. And, nothing's been done, whether it's an acquisition or a dividend or -- we have been wading in the stock for two years, the same place. You are getting paid healthfully, and me as a shareholder, I am sitting here in the same exact place that I was last year. And it's pretty disappointing. I'm just wondering why you are allowing that to happen.

Yes, thanks, Russ. We are working on a couple of exciting things. Sometimes they take a little bit longer than planned, and we are in this to build a Company that is on a solid foundation, on a great basis, and we have plans over time. The Company has never been in better shape, balance sheet-wise. We are building a good Company in the -- call it, mid and long term. This is best done by developing and by investing into growth projects, and into projects and properties that, over the long run, in the long term, can deliver a good return on investment on us. And that is what we're doing. We have been in similar situations where the stock hasn't done a lot before, and ultimately, we have always come through. Also with the stock price, look at our history, and you will see that. The things that we are doing right now, we are very convinced about. We'll (inaudible) us in the long run, and we are in this for the long run.

But I mean, Calgary, as an example, I mean you had -- you bought, it's been more than a year now that you had the property, and sales are down year over year. And I think last year at this time, you had, I think it was the coffee shop was closed, and you had -- I don't know what percentage of the rooms were un-occupiable. And you took it over from an owner that had invested no money, and now you have invested money, and the sales are still down. And so, why is that?

We also have seen it with other properties. Things don't immediately catch on, they take a while. It is competitive markets we are in. And also Edmonton didn't produce fireworks from day one. It also took some time until we captured our market share.

Yes.

And once we are there, and we are very good at keeping it, and extending our position.

How do you assess your -- I mean I look at the monthly statistics out of Colorado, and it looks like the overall market is growing. I mean, how do you assess your market share gains or losses in Colorado?

How we assess those?

Yes, how do you -- do you think you're gaining share?

We are gaining share, and -- but it, again, it's very competitive market. We have some months and quarters where we are gaining share. And then, sometimes, it's two steps forward, one step back. That -- it happens.

Yes.

It just naturally happens to our competitors in the same way. But, with the stock price development, Russ, look at the broader casino stock indices.

Well, I look at one -- you got the best analyst on Wall Street right now, Todd Eilers, following you. He follows multimedia games. He has been following you for a long time. He got it at 4 and the stock is 15, 16. He got right on values. You got the best analyst on the street following you right now, and he can't even get the numbers right. And that's just disappointing. And --

Well, he gets the numbers right.

No. (Multiple Speakers).

It's his opinion, then he's talking the same thing I'm talking. Because one of the best analysts also believes this is a good stock and a good -- (Multiple Speakers).

I would like to keep it to question and answers, and I guess those are my primary questions. I congratulate you on the new debt structure, obviously that is saving some earnings there, with the lower cost structure. So I laud that good move. So, thank you.

Thanks, Russ.

Bye.

Thanks, Russ.

(Operator Instructions)

Our next question comes from [Steve Kospo] with RJ & Associates.

Hello, Peter. Thanks for taking the question. I don't want to belabor his point about the stock buyback, but I kind of feel of the same way at the level it's at. Not to not invest in other projects, but just because the stock is so cheap. I understand you got liquidity constraints. You probably couldn't buy back a lot because of that problem. But it is awfully cheap, and it would look good from a shareholder's standpoint if we saw more of that, so.

Yes.

My question is on the new projects. Are you primarily going to want to look at markets where the licenses are limited? Because that seems to be where you can obviously get the best return. Can you talk a little bit about that?

That's absolutely our focus, yes. And that's, at the same time also, the reason why sometimes it's a little bit harder, and more difficult to get into such markets. But once you are in it, it really pays off. With respect to liquidity and stock buyback, I would also like to let you know that, other than the credit facility, we have net cash, as you all know. But, I would like to point out that approximately half of that net cash is used by our day-to-day operations. And it is necessary to keep in the Company, and in the casinos. So we cannot use that really for any acquisitions, stock buybacks or what have you. So we need to consider that, too.

Yes. And also, I was speaking more of the liquidity of the stock. It doesn't trade a lot of shares. And, of course, you are limited to how much of the percentage you can buy back.

Yes.

So, it's probably hard to make a big dent, because of that issue.

Certainly.

Okay. Appreciate you taking the question. Thank you.

Thanks, Steve.

And we have no more questions in queue at this time.

Great. Well, 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 CNTY.com. Thank you.

This does conclude today's teleconference. You may disconnect at any time.