Century Casinos Inc (CNTY) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Century Casinos second quarter 2015 earnings conference call.

This call will be recorded.

(Operator Instructions).

I would like to introduce our host for today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin.

Thank you, operator, and welcome, everyone, to our second quarter 2015 earnings conference call.

Joining me on the call today are my Co-CEO and the Chairman of the Company, Erwin Haitzmann, as well as Margaret Stapleton, our 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 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 from this morning and in the 10-Q filing, which is available in the Investors section of our website at cnty.com.

I'll now comment on the results of the second quarter. What a great first half of 2015. Already the first quarter showed excellent growth with adjusted EBIT up 72%, and now this great second quarter.

Net operating revenue up 20%, and we more than doubled our adjusted EBITDA. It is up 116% compared to the same quarter a year ago. But the true operational performance is even stronger. Excluding exchange rate swings on a constant-currency basis, net operating revenue is up 34%, and adjusted EBITDA actually is up 144%.

Net earnings came in at $6.6 million or $0.27 per share. That number was fueled, not only by increasingly profitable operations, but also by a one-time gain from the sale of some of our cruise ship casino contracts for $3.4 million, net, and by the release of a valuation allowance in the amount of $1.5 million, net.

Here are another two key indicators showing how strong the quarter really was. Earnings from operations, net of the one-time gain from the cruise ship casino sale, jumped from $300,000 last year to $4.5 million this quarter. And net cash provided by operating activities increased from $2.7 million to $4 million.

Congratulations to the entire Century Casinos team for delivering an excellent performance at pretty much all properties and at all levels.

The results generated by each region or segment, as part of our total consolidated results are as follows.

Canada is now our strongest market by all measures. It generated 35% of our total revenues, and 57% of EBITDA.

Poland remains very solid at growing, generating 34% of our revenues, and 21% of EBITDA, closely followed by our operations in the US, which contributed 19% of total revenues and 20% of EBITDA.

Our balance sheet continues to be clean, strong, and in very good shape. As of June 30, 2015, it showed net debt of $15.7 million, or only 0.9 times trailing 12-month EBITDA, and this even includes non-cash debt of exactly $15.7 million related to a long-term land lease for Century Downs in Canada. Total assets on our balance sheet reached $195 million. The book value per share increased to $5.05 as of June 30.

In the quarter, and that's excluding construction spending for Century Downs, total CapEx was $1.2 million or close to 4% of revenues, spent mostly on new gaming equipment for Colorado, Poland, and for new cruise ship casinos.

The results, on a property-by-property basis, always in local currency, looks as follows.

The Century Casino and Hotel in Edmonton showed 4% revenue growth and 11% EBITDA growth. The EBITDA margin increased from 37% last year to 39%. Most of the growth was generated at the gaming tables, specifically at baccarat, roulette, and blackjack.

This is our largest property with 762 gaming machines, and 35 gaming tables. An additional 25 gaming machines are scheduled to be added to the gaming floor during the third quarter.

The Century Casino in Calgary was the only property that had a more challenging quarter, with revenues and EBITDA down 6% and 12%, respectively. Nothing to be too concerned, however, as the main reason for this decline was the low hold on the table games. The hold percentage was 10.8% versus 14% last year. The good news is that the total drop on the gaming tables actually was up 17%.

At both properties, we continue to market and growing the players club loyalty program, and we specifically focus on growing table game revenue.

Our newest property, and our third major casino investment in Canada, the Century Downs Race Track and Casino in Calgary, is now fully operational, the casino opening on April 1st, and the race track three weeks later on April 25th.

We've been anticipating the opening with great excitement and, so far, this new property does not disappoint at all. It is holding up to our high expectations really well.

Adjusted EBITDA in Canadian dollars was CAD2.9 million, and the EBITDA margin was 43% in just its first quarter of operation.

The casino, as most new casinos do, will ramp up further over the next few quarters. The results of this quarter are very, very encouraging, and confirm our vision that Century Downs Race Track and Casino will become one of the leading operations in our entire portfolio of casinos.

We are pushing our loyalty program sign-ups, and continue to specifically target the markets of north and northwest Calgary, both of which do not have a casino.

There's been construction going on to finish the project, such as construction of the second barn, landscaping, curb and gutter work, and placement of some parking areas.

Century Downs is the only horse race track in the greater Calgary area. The racing entertainment center includes a casino with 550 slots, seven video lottery terminals, as well as food and beverage and off-track-betting facilities.

Its location offers huge potential in the years to come. Situated just north of Calgary, adjacent to the successful CrossIron Mills regional shopping mall that attracts 12 million visitors annually, it has direct off-ramp access from the major highway connecting Calgary and Edmonton, the busiest highway in western Canada.

Certain financial conditions for the operation of Century Downs are subject to the terms of an agreement between the Alberta government and Horse Racing Alberta, which expires in March of next year. Agreements to support the horse racing industry in Alberta have been in place for almost 20 years, and Horse Racing Alberta, as representative of the horse racing industry, is working diligently to get the agreement extended, but there can be no certainty that such an extension can be accomplished at the same terms as the current agreement, or can be accomplished at all.

In general, Alberta provides an excellent regulatory and economic environment for our casino investments.

Over the past 10 years Alberta's population has increased by 27% to over 4 million, the fastest growth rate of any Canadian province. The median income is 24% above Canada's national average. Alberta has one of the lowest unemployment rates in all of Canada. Albertans show an above-average propensity to gamble relative to the rest of Canada, and, most importantly, the number of casino licenses is limited.

In addition to our three casinos in Alberta, we have also entered the off-track-betting business. In May, our 75%-owned subsidiary, Century Bets!, started to operate its pari-mutuel off-tracking-betting network and already generated CAD1 million in revenues and CAD200,000 in EBITDA for the quarter.

Through Century Bets!, we have agreements with close to 100 race tracks throughout North America and worldwide for the sourcing of common pool pari-mutuel wagering content. And we have contracts with 14 off-tracking-better parlors in southern Alberta. We are providing pari-mutuel wagering content and live video to them. In return, we retain the handle from all bets placed on horse races, minus commissions, fees, and expenses. We are very pleased with the initial success of this venture.

Moving now to Colorado, where the great run of both casinos continues. Net operating revenue of the Century Casino and Hotel in Central City was up 5%. EBITDA was up 33%. In Cripple Creek, revenues were up 11% and EBITDA was up 52%. This was the fourth quarter in a row with EBITDA growing for both Colorado properties.

We continue to see improvement in every segment of our database as well as our retail customers, and we see growth in both visitation and spend per trip. The revenue increase comes from both table games and the slot floor. It's broad-based and pretty strong.

The Colorado gaming markets continue to be very competitive. We continue our marketing and promotional campaigns, with a focus on VIP player development.

Central City has street festivals planned for August and September, which will help draw people to the Central City market.

In Cripple Creek, we have been granted a 24-hour alcohol sales license on July 17, which may also help slot and table revenue a little bit.

So far, the third quarter started out strong, and both properties are continuing to gain market share.

Revenue generated by the cruise ship casinos and in Aruba was down year over year, because we have sold casino concession agreements for 8 ships to Norwegian Cruise Line during the quarter. We received a net amount of $3.4 million, and will, for the next two years, provide limited consulting services for those casinos.

At the same time, we have added three smaller ship casinos during the quarter, on the Mein Schiff 4 from TUI Cruises, and the Star Breeze and Star Legend from Windstar Cruises.

In Aruba, the Radisson Hotel was sold and rebranded as the Hilton Aruba Caribbean Resort and Casino. There was no impact or change to our agreement as a result of the sale.

And finally, turning to Poland, another great quarter for Casinos Poland, Ltd., of which we own 66.6%. In local currency, revenue was up 10%. EBITDA more than doubled. It was up 123%. The EBITDA margin for the quarter was 14%.

Everything was up -- table game revenue, food and beverage revenue, but the strongest driver was the slot floor, with slot machine revenue up 28%. At the same time, we managed to reduce operating costs and expenses by 4% through a successful cost-cutting program at all 9 locations. We added another 57 machines during the quarter, and introduced the slot player program at 3 more locations.

We plan to further increase slot capacity throughout the year, and with the additional higher-quality slots we now have on offer, coupled with the further closing of non-casino slot locations throughout the country, we anticipate continued slow growth in slot revenues in Poland.

That concludes the presentation of our second quarter results. We are very pleased with our overall progress. All operating segments are in good shape, and still show great potential for further organic growth, and we are never done looking for additional improvements, for ways to do things better and more efficiently.

Thank you for your attention, and we can now start the question-and-answer session. Operator, go ahead, please. Operator?

(Operator Instructions). Your first question comes from the line of Robert Majek from CJS Securities. Your line is open.

Good morning.

Hi, Robert.

Great margin this quarter, especially at the new racino. Could you talk a little about how sustainable margins are there, and more broadly, by geography, as well?

Yes. Erwin, would you like to comment on that, please, on the margins at Century Downs?

Sorry?

Erwin?

Your next question comes from the line of --

No, no, no. Sorry, we did not answer Robert's question. Is Erwin on the line? Apparently we've lost Erwin.

Robert, Century Downs has slots only, and slots carry a higher EBITDA margin compared to table games, and that's one of the reasons why the EBITDA margin is higher.

On the other hand, obviously, we have the racing operation, which doesn't carry higher EBITDA margins, but, overall, we believe that we should be able to hold EBITDA margins that are as high as in Edmonton, if not higher as it was in this quarter.

So, it's -- I think the -- around the 40% margin, I think, is sustainable. Next question, please?

Your next question comes from the line of Alex Fuhrman from Craig-Hallum Capital. Your line is open.

Great. Thank you for taking my questions on another very strong quarter. I wanted to ask a little bit about the strength in Poland where things continue to grow very nicely. I think you'd mentioned on the conference call that you've added some new machines to those properties. Is the strength in Poland -- I mean, how much of that has been driven by the investment you've made in those properties this year versus the shift in the regulatory landscape over there versus just perhaps strength or weakness in the overall market in Poland?

Peter, would you like me to come in? Hello?

Yes. Yes?

Peter, would you like me to respond?

Yes, in --

Yes?

Please.

Yes. This is Erwin, Erwin Haitzmann. Three things.

The first one is that when you refer to the regulatory environment and you mean the closing of the slot machine casinos, that has just been the case in a few places.

The second -- the second influence is the additional machines, and the fact that these new machines are working very well and are well accepted by the customers.

And the third effect is the cost controls that we have stringently applied around the end of the year really are taking effect now.

Okay, great. That's very helpful. Thank you. And then switching gears quickly to Canada, wondering -- that, obviously, makes sense with your Calgary property about -- what you said about the take rates. I'm wondering, though, would results there, even forgetting about take rate issue, is it possible that some of your traffic there, just in terms of overall demand, could have been pulled over, given the Century Downs opening and all of the buzz and marketing around that opening?

Just trying to wonder -- I mean, I know those are on other ends of town here, but is there, potentially, some tradeoff there as Century Downs ramps up?

Yes, a little bit, maybe 1% or 2% on the slots side. Erwin, any more color to that?

Actually, it's starting to turn around again, because the slot revenues are increasing a little bit in Calgary, in the old Calgary casino already. So, we fairly say no influence whatsoever, certainly no negative one.

Perfect.

Okay, great. That's very helpful. Thank you very much.

Your next question comes from the line of Bryan Maher. Your line is open.

Good morning. Great quarter, guys. You're really knocking the cover off the ball now. A quick question, actually two questions.

One, in Poland, are there many thoughts of license relocations or site relocations? I remember in Krakow there might be an opportunity to maybe get a better location. And then the other property in Poland that you have that's currently quasi-closed? Can you address those? And then I have a follow-up.

Erwin, please?

Here. The quasi-closed one, we don't really think that we will re-apply once this license expires. That market is just not attractive. And quasi-closed doesn't mean closed. It only means to have it open to the extent as necessary by regulations.

And the -- with regard to Krakow, yes, we do have considerations and we're looking around and trying to find a better property.

And then on the acquisition front, Peter, maybe you can address, to the extent that you can, anything that you're seeing. I know you're constantly kind of exploring around the world potential opportunities in South America with the investment you made a year ago, and out in Asia. Can you give us any update on what -- how to think about that, seeing as your kind of near-term prospects, I think, are fairly understood by the market. It's what we don't know that we'd like to know.

Yes. Thanks, Bryan.

We see a number of attractive opportunities, both in terms of new license awards, as well as on the acquisition front. On the acquisition front, it's all about finding a project that offers great future potential, but at the same time is available at low EBITDA multiples.

And I think we've identified a handful, or, say, three or four such opportunities in North America, as well as in South America. We would pay a little bit more in North America compared to South America in terms of EBITDA multiples.

Asia, nothing really new in Asia. We are discussing potential partnerships, because we wouldn't want to go into any of those Asian markets without a strong local partner. Progress is rather slow, but is more -- there's more progress in Canada, the US, and in South America (inaudible).

And can you give us an update, to the extent there is any, on your investment down in South American that you made a year ago?

Not much of an update. The casino with the Province of Mendoza is going from strength to strength. Our consulting work is -- bears fruit. We see the real potential of this agreement is the option to increase our stake to 50%. That's a three-year option. It has another two years left, and what we've said is that we wait until a few months after the election in Argentina, which is, I believe, in October.

So, probably the first part of next year you'll see us to make certain decisions that will have or could really have a material impact, but not before that.

Okay, thanks, Peter.

Thanks, Bryan.

Your next question comes from the line of Robert Majek from CJS Securities. Your line is open.

Hey, Peter. Sorry, I got disconnected there. I just wanted to follow-up on Poland. How are gaming trends there trending against your internal expectations? And, if it's possible to quantify, how much impact are you seeing from illegal street slot competition?

Erwin, can you comment on this?

Hi. I'm not sure whether I understand the question well. You're asking how much the trend in the markets is working for or against our trend? Is that what you're asking?

Yes, and then how much impact you're seeing from the illegal street slot competition?

From the legal -- from the closing of the slot casinos?

No, from the street slot vendors.

From the street what?

From the street slot arcades that are being phased out by the slot legislation.

Okay. A number of the slot arcades have been closed, and in a few months, we see a positive (inaudible).

Okay, thank you.

We have no further questions in queue.

Great. Thank you, everyone, 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. We look forward to getting together with you again for our third quarter earnings call in November.

Goodbye.

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