Century Casinos Inc (CNTY) 2022 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Century Casinos Third Quarter 2022 Earnings Call. (Operator Instructions). Please note, today's call will be recorded.

It is now my pleasure to turn the call over to Peter Hoetzinger. Please go ahead.

Good morning, everyone, and thank you for joining our earnings call. With me on the call are my co-CEO and the Chairman of Century Casinos, Erwin Haitzmann; as well as our Chief Financial Officer, Margaret Stapleton.

As always, before we begin, we would like to remind you that we will be discussing forward-looking information which involves several risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. 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 encourage you to review these items.

In addition, throughout our call, we refer to several non-GAAP financial measures including, but not limited to, adjusted EBITDA. The considerations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our news release and SEC filings available in the Investor section of our website at cnty.com.

I will now provide an overview of the results of the third quarter, and after that, there will be a Q&A session.

Our third quarter results were up against a record performance of last year, which was (inaudible) by lifted COVID restrictions and lots of pent-up demand. Thus, while on a sequential basis, revenue is up compared to last year, revenue and adjusted EBITDA were down 4% to 15%, respectively. A large part of the decline is due to an extremely dry weather conditions affecting the water level of the Mississippi River. The water level issues at our Caruthersville, Missouri operation started in August, can trigger additional expenses for (inaudible) and caused issues for access -- the steepness of the access bridges and the transition from the barge to the old riverboat.

In addition, the dry weather kept farmers, which are a large part of our customer base, busy on the field from farmlands for much longer than usual. As a result, the Caruthersville Casino saw revenues decline 14% compared to Q3 of last year, and (inaudible) half of the company-wide revenue decline during the quarter. In addition, we made considerable costs in connection with preparing to integrate the soon to be our Nevada and Maryland operations.

With the headwinds in the economy, we also saw some evidence of slight changes in our customers' behavior as the lower ADT segment has cut down on the number of trips across all our North American properties. But importantly, (inaudible) from our mid and higher ADT segment held steady. That play from our core customers is the foundation of our success in this segment, in particular, continues to grow. It also helps to offset year-over-year declines in spend for retail customers, which also has elevated levels last year due to stimulus payments.

On the expense side of the business, our teams are effectively managing the overall cost structure while dealing with the inflationary pressures that exist today. The promotional environment across all our markets remains relatively stable. It's pretty disciplined and rational for the most part. Not much has changed in the last several quarters. Total marketing spend continues to remain below pre-COVID levels.

Of our U.S. operations, Colorado was leading the way with revenue growth of 8% and EBITDA growth of 6% compared to last year. We've not seen any effect on revenues due to inflation. However, we are affected on the expense side with higher costs for utilities, repair maintenance, as well as operating supplies.

Cripple Creek increased in all carded play analytics, with the exception of average number of trips decreasing slightly. It's maybe due to higher gas prices. However, spend per trip has increased. Cripple Creek market continues to remain flat year-over-year, but due to our consistency in marketing and continued emphasis on customer service, we continue to gain market share. In Central City, average spend per trip remained flat, and we are not seeing any inflationary effects on patron spending.

In West Virginia, our Mountaineer Casino, Racetrack and Resort saw a slight revenue decline compared to Q3 of last year. The number of trips to the casino was down, especially from the younger customers in the lower ADT segment. Eventually, however, looking at the last 2 quarters, the trend is up. We grew from Q2 over Q1, and again, Q3 over Q2, in both revenue and EBITDA. We experienced some staffing challenges at Mountaineer, resulting in some limitations to hours of operation and ability to clear (inaudible).

Moving to Missouri, where coining volumes remained strong during July and early August, but began dropping off during the second half of the quarter. There, it was especially the older demographics, 70 plus, and the lower ADT segment which cut down on trips. Economic inflationary factors may play a role here. Dangerous water level issues at the Caruthersville boat and the dry weather around the farmlands this year didn't (inaudible), so we saw revenue decline compared to the record quarter we had last year. Last month, in early October, we actually had to close the part of the casino that sits on the riverboat, and we operate with a limited number of slots and tables on the barge (inaudible).

The good news for Caruthersville is the fact that we did receive approval from the Missouri Gaming Commission a couple of weeks ago to relocate the casino operation from the barge to an existing land-based pavilion, which is not affected by the water levels and is protected by flood water. We are allowed to operate the casino in that pavilion until the new land-based hotel and casino development is complete, which we expect in the second half of 2024. The pavilion provides much easier access to the casino for customers, and we anticipate it will also bring operating efficiencies across service. We expect to move the operations from the barge to the pavilion next month.

Last week, we also opened a small 36-room hotel. We call it the Farmstead Hotel, which we bought last year and completely refurbished. It is conveniently located close to the pavilion and the parking. In our quarterly presentation of the results, you find a description as well as a site plan and pictures for better understanding.

For the new land-based hotel and casino development in Caruthersville, construction began 2 weeks ago on the new 27,000 square feet casino and 30 room hotel. The total budget increased by 10% from USD 47 million to USD 52 million. Once the new casino and hotel completed, temporary casino in the pavilion will be moved to the new casino. And the new Century Casino Caruthersville, we then have a total hotel room count of 74 rooms in 2 hotels, one directly connected to a casino, and the other, the stand-alone, opposite the pavilion. The new casino has 20% more gaming positions and provide significant operational efficiencies to be much more convenient for our customers and it will also increase our catchment area.

At Century Casinos Cape Girardeau, the larger of our 2 Missouri casinos, we have started construction of a 69-room, 6-storey hotel building. The project is expected to cost USD 31 million and be completed in the first half of 2024. This development will transform the property to a full resort destination, providing operations for individual and group (inaudible) for many different purposes such as gaming, dining, conferences, concerts and more.

Moving north to Canada, the Century Casinos Hotel in Edmonton had revenues declined by 7% due to construction works on the main road fronting the casino and due to lower slot hold. Most of our racetrack casinos in Alberta, Century Mile and Century Downs, saw solid revenue growth of 9% and 4%, respectively. Utility costs are up 17%, the cost of goods increases could only be partially mitigated by price increases. Q4 has started really strong for Century Mile and Century Downs, with both properties posting all-time record results for the month of October.

Our casinos in Poland continued their great performance with revenue up 25% and EBITDA up 34%. Results in Poland are consistently strong, which also helps the same process and has led to renewed interest from smaller European casino groups and private equity investors. Anyway, there is no time pressure on our side, as we have an excellent management team based in Casinos Poland. And there's no need for any CapEx or investment from us, quite the opposite. Cash is flowing from Poland to us.

Quick look at our balance sheet and liquidity shows that we have USD 100 million in cash and cash equivalents plus the USD 100 million which we keep in escrow for the closing of the Nugget OpCo transaction once the Nevada licensing is complete. Outstanding debt totals USD 367 million, which includes USD 348 million under the Goldman Sachs credit agreement, of which USD 100 million is in escrow for Nugget, and USD 14 million related to a long-term land lease for Century Downs in Canada.

During the quarter, we were also very busy on the M&A front. In August, we announced the acquisition of the operations of Rocky Gap Casino Resort in Maryland for USD 56 million. Simultaneously, with the closing of that transaction, VICI Properties will acquire the real estate assets and we will amend on our master lease with VICI to add the Rocky Gap property. The initial annual rent for the Rocky Gap Casino will be USD 15.5 million. The purchase price for the casino operation represents an implied 2021 EBITDA margin of 4.9x. This margin would excludes any potential cost synergies and operational improvements, can deduct annual rent for the VICI leads from EBITDA. This acquisition is expected to be immediately accretive to our earnings.

Rocky Gap is a full-service resort less than 2 hours drive from (inaudible) Washington DC metro areas, includes an 18-hole golf course designed by (inaudible) 5,000 square foot event center, several meeting spaces, a spa and several outdoor activities. The property consists of over 25,000 square feet of gaming floor, 630 slot machines, 16 table games, 198 hotel rooms and 5 food and beverage venues. The transaction is expected to close mid-2023, subject to regulatory and governmental approvals and customary closing conditions.

In Nevada, we already invested USD 95 million and now own half of the Nugget Casino's real estate. We will close on the purchase of 100% of the operating company as soon as licensing is complete. That will cost about USD 100 million. We continue to be very excited about the Nugget transaction, and we see considerable upside once we operate it. With the Nugget, we purchased an existing operation with a long operating history. We do not expect any extraordinary replacement CapEx for the first year, some upgrading parts of the slot floor and equipment to this hotel. The acquisition also offers good potential to generate synergy effects as we integrate that standalone property into our portfolio of 17 casinos.

With the pending Rocky Gap and Nugget acquisitions, we'll oversee the portfolio that reaches from East to West in North America on a pro forma basis, after giving effect to the 2 acquisitions, we expect to generate approximately between 95% of our EBITDA from our North American casinos. With these opportunities for growth throughout next year and beyond, we are confident our company is very well positioned for continued, long-term success.

We will continue to execute on our business plan by growing organically, by identifying and acquiring promising assets and stable price to market in the U.S. In our M&A strategy, we will remain prudent with pricing and valuation. We will continue to dedicate resources to capture synergies and provide time to digest the acquisitions and recognize value.

On behalf of the company's management and Board, I'd like to thank our team members, our guests and our stockholders for their continued loyalty and their enthusiasm. I thank you for your attention, and we can now start the Q&A session.

Operator, go ahead, please.

(Operator Instructions) And we will take our first question from Jeff Stantial.

I wanted to start with some of the commentary in the prepared remarks on the lower worth demographic, that it sounds like softened a bit more recently in the quarter. You talked about the impact across the broader North American portfolio. Is there differences in terms of how much you're noticing that asset by asset? And then can you just talk about the timing there? When did you start to notice some softening there, and has anything changed with the October trends?

Erwin, can you give some color?

Yes. We do see some difference, it's not exactly the same everywhere. That softening started in the third quarter. And in the meantime, for the fourth quarter, we are doing things to trying to mitigate. To give you an example in , for example, in Mountaineer, we increased the number of hotel room giveaways for the weekend. We comp more. We have customers who probably clearly see that they are worth being comped also in that range of the lower bracket. And also, we are doing a category, something that we haven't done before. And indications are that this is very, very received from the -- what we see from the October numbers.

Okay, great. That's helpful.

Then moving to Missouri. So the budget for both projects came up a decent deck. Can you just frame where you're seeing the most cost pressures? And if you think the revised budget should prove ultimately to be the right number? And then just how are you thinking about the return profile now with the total budgets picking up a bit?

They went up about 10% and 11%, and it came from pretty much all sites. But we are extremely confident now this holds. And we have also -- we have that in writing. We have agreements with our contractors and developers that have opted in. In terms of return, Cape Girardeau Hotel return between the low teens and Caruthersville, around 15%, that's where we are, where you see it coming. .

Great, that's helpful.

And then if I could just squeeze in one more on the disruption with the low water levels in Caruthersville. Peter, you gave some context for how to think about the impact to revenues at the property. Can you provide similar -- similar way to think about the cost impacts? You talked about some higher operating expenses, just any way for us to quantify and think about how impactful that was during the quarter? And maybe any thoughts on how impacts improve it should prove in Q4 as well?

We don't have the exact number on the EBITDA side there. We did have -- it's like more than half, is that what we believe, right?

Yes, in that range.

We will move next with Chad Beynon.

Just wanted to ask, I guess, kind of a medium or long-term question. You guys have been successful and you're currently in the process of building the portfolio. Where do you think the portfolio can get to in the next couple of years? Or I guess asked another way, are there still opportunities out there? And given your arrangements with your REIT partners, should we continue to expect maybe one acquisition per year to kind of build the free cash flow levels where you start to get even greater scale?

We can see quite a number of interesting properties out there that would fit very well into our portfolio of assets in that range of, say, [USD 15 million to 250 million] In EBITDA. Not too many buyers out there, because it's way too small for the larger groups, and we believe we have a very good niche. Yes, we do have a very good property in VICI, but let me also say that other property or real estate investors are also knocking on our doors. So there is, we believe for the next 2, 3, 4 years, a great years of M&A activity ahead of us. Whether it be once a year or two, every other year, that's -- we look at this a little bit on an opportunistic basis, but there's plenty of opportunity out there.

And related to that, how are you thinking about the optimal debt leverage or lease adjusted leverage, particularly during times like this is when interest rates have risen.

Yes. At the moment, I think we are at a leverage level that is okay. But as we said, we are in the process of selling our Poland assets, we can use that to pay down debt. We believe that that's the right move. We also do own Colorado assets, we own the Canadian assets. Not to say that there's any need to do anything with those, but we could, if we wanted to. Currently, our net debt to adjusted EBITDA ratio is 3.4% and lease adjusted net leverage, if you use an 8 multiplier, it's 5.5%. And we believe with the projects that we have on hand in Missouri and also Nugget and Rocky Gap, we will be able to bring that ratio down, and I think we can be quite comfortable with that.

Best of luck.

We will move next with Jordan Bender.

So in Poland in local currency, it actually looks like your margin was one of the best in maybe the last 6 or so years. I was just kind of wondering what's kind of driving that strength? And looking forward, should we expect, I guess, a low double-digit margin within that segment?

I think we see no signs that these numbers would not be sustainable. We think they are sustainable, and everything points to us being able to keep those numbers and we also see potential to increase them further. It's hard to pinpoint the reasons down to one. It's multitude of reasons. I think overall, what can be said is finally the very strong local management that you have the all the efforts came into fruition. And just show better then -- it's just the year where we could compete even better than before with our local competitors. So we're really happy with the team, and as we said, we think this can continue and go further up.

Great. And then turning to Canada, kind of the similar question. Coming out of COVID, I guess, margins were choppy, just kind of given COVID reopening and then reclosing and reopening again. As we think about, I guess, the business in '23, I guess, where should we think about margin levels maybe being sustainable? Or where should they be trending as we think out into next year?

Give some color, Erwin?

I would say in general terms, we should be able to sustain the client margins and in various properties for good reason be able to increase them. For example, in Missouri, as we talked about the changes there and the improvements to the properties that should improve and increase our margins relative to '22, back to old levels. In Colorado, probably, it's -- so to speak, margined out. We are doing very well already there, and -- but I think again we consider this to be very sustainable. Again, excellent management there.

And then Mountaineer's working hard on rolling up step by step. It's harder in Mountaineer because the game impact is very high, so this cannot be compared to a low-tax environment. But again, we feel solid. We have a very solid base, and we should be able to increase there as well.

Okay. And just a follow-up on that. Just to confirm, I mean, you historically have done below 30% EBITDA margin. You think getting back to that level is achievable over the next couple of years in Canada?

Yes, I think that's not unrealistic question. In Canada, one thing that works for us is that the energy and oil prices high, and with a certain time delay, that always is then reflected in -- for this economy.

(Operator Instructions) We will move next with Edward Engel.

Just wanted to follow up on the last one, just regarding margins, and I guess, cost inflation. Just -- on the overall cost inflation side, whether it's utilities or labor, I guess, what have you kind of seen over the past couple of months? It looks like generally, OpEx across your properties was flattish Q-on-Q, minus maybe Canada. I just kind of want to wonder what you're seeing in terms of increases in OpEx?

OpEx does -- did increase definitely. So far, also across the board, I think our management has been very skillful in finding ways through this by trying -- to find even further ways to save in other areas.

With regard to starting (inaudible), I mentioned it can be challenging. Like, get Mountaineer, for example. But again, I mean, this won't go on forever, and we were able to operate well even on higher sell rate, but slightly lower staffing levels.

We will move next with [Daniel Hong].

Just a quick one on the Caruthersville and Cape Girardeau projects. Is that intended to be funded entirely out of cash on hand or do you have financing lined up for those projects?

The hotel project in Cape Girardeau, we financed with cash at hand. And for the one in Caruthersville, we have not made the final decision, but it will be several cash on hand and financing sources.

We will move next, please, Chris [Dull].

Yes. Could you please focus and simplify, and I'd like you to identify the 1, 2, 3 critical variables that we should monitor for corporate earnings model in the fourth quarter and then going into next year.

I would say that the progress in Missouri is an important one to watch as we have seen in Q3 or kind of an impact that has. Then continued success in Colorado is very important. And West Virginia is sequentially on a great path, as we said, and we would like to see that continue.

So we're watching those 2 markets with high interest because they are very critical to us.

Are you providing any guidance with regard to sales or really have any other key parameters on the corporate results?

No. Historically, the company has not provided guidance. We have a handful of excellent research products that are out there on CNTY, and I would encourage you to get a hold of one or more and then read through.

It appears 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, everyone, for joining our call today. For a recording of the call, please visit the financial results section of our website at cnty.com. And if you have any follow-up questions, please feel free to reach out to us. Stay well, and goodbye.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.