Century Casinos, Inc. (CNTY) Q2 2012 Earnings Report, Transcript and Summary

Welcome to Century Casinos Q2 2012 earnings conference call. This call will be recorded. [Operator Instructions] I would now like to introduce our host for today’s call, Mr. Peter Hoetzinger. Go ahead, please.

Thank you, Ty. I’m 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 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 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’s quite an achievement, and Erwin and I would like to thank all our cooperators for their support and enthusiasm. We managed to increase adjusted EBITDA by 5% year-over-year, 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 and the deferred financing costs associated with the new credit facility, EPS even [ph] has been $0.06. These are very solid results, and came despite the…

[Operator instructions] And our first question comes from Todd Eilers with Roth Capital Partners.

Just a few questions. Let’s see, I wanted to start off on Calgary. You know, EBITDA came in a bit below our expectations there. You mentioned two items that I think had a negative impact 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 guys were kind of tracking at about 250,000, 300,000 kind of in EBITDA the last couple of quarters. I just wanted to kind of get a sense for how much of an impact each of those had on that number.

About 1/2 of it was lower than expected hold, which is primarily due to a game called EZ Baccarat. That game is our most important night game and we hold significant market share there, but it is very volatile. The other 1/2 was a composition of -- a combination of many small things, some expenses we had which couldn’t be capitalized.

And I guess the follow-up question is 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 costs out of the model? What’s the latest strategy at this point?

I think cost-wise we have reached a point where we should not go lower otherwise there is a danger to impact business negatively. The strategy has been to grow the top line with a new layout, which people really like and we also think that -- 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, 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 can [indiscernible] that we need [ph].

And then I wanted to ask about the Cripple Creek, obviously, the wildfires had negative impact on the quarter. I think you guys 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’d estimate that the EBITDA impacted around 70,000 and what we can say about July is that it all looks good, frankly.

And then in Edmonton, you mentioned some road construction there. Did that -- 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 as sense for what sort of impact that is having through the month of July, if any at all?

The impact we at this time feel [ph] is for the second quarter and there will be a little bit of impact we feel also from the third quarter. The road, after it’s all said and done, finally is done, will be very beautiful, this front road development is beautiful with the only exception that it impacts us now. But we hope that after the third quarter, it won’t be - it will only be positive.

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'm actually in Warsaw, Poland right now, Todd, and – going through a series of meetings with our [ph]participants to get some clarity on the harmonized way [ph] forward. We probably need another few weeks to be able to say anything to that. At the moment, everything remains as is for now. [Indiscernible]

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?

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

Was that a benefit or…

It was -- it actually got written off to the evaluation allowance. It was a deferred tax asset, however, since we’re in an evaluation allowance situation, it - we took a hit on the P&L for it.

[Operator Instructions] Our next question comes from Russ Silvestri with SKIRITAI Capital. Russell Silvestri: Peter, I’ve been in the stock now I think for almost 2 years and you guys are running the thing at a $4.35 tangible book value, your stock’s $2.60, it’s a 60% discount to the book. I can’t understand why you don’t -- this is -- I’ll get to the question here in a 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’re getting here. You’re buying your book value at a 40% discount. None of your other investments are yielding 40% and I’m just curious why you’re hesitant and you told us back in the first quarter that you would be doing something and nothing’s been done, so whether it was an acquisition or dividend or you know, we’ve been waiting in the stock for 2 years at the same place and you guys are getting paid healthfully and me and the shareholders are sitting here, in the same exact place we was last year and it’s pretty disappointing. And I’m just wondering why you’re allowing that to happen?

Yes, thanks, Russ. We - 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’s on a solid foundation, on a great basis and we’ve done so over time, the company has never been in better shape balance sheet wise and we are -- we’re building a good company in the -- call it mid and long term. And this is based on by developing and 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’s what we are - that’s what we are doing. We have been in similar situations where the stock has done a lot before and ultimately, we’ve 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 will pay off in the long run and we’re in this for the long run. Russell Silvestri: But I mean, Calgary is an example. I mean, you had the -- it’s been more than 1 year now that you had the property and you know, sales are down year over year. And you know, I think last year at this time, you know, you had, I think it was - I think the coffee shop was closed and you had I don’t know what percentage of the rooms were unoccupiable and you know, you took over from an owner that had invested no money and you know, you’ve invested money and the sales are still down. So why is that?

We also have seen that with other properties, things don’t immediately catch on, they take a while. It’s competitive markets we are in and also Edmonton didn’t produce fireworks from day one. It also took some time to get to the market share. And once we - once we are there, we are very good at keeping it and defending our position [ph]. Russell Silvestri: How do you assess your -- I mean, I look at the monthly statistics out of Colorado and you know, it looks like the overall market is growing. I mean, how do you assess your market share gains or losses in Colorado?

How do we assess those? Russell Silvestri: Yeah, do you - how - do you think you’re gaining share?

We are gaining share and - but again, it’s a very competitive market. We have months into [ph] orders where we’re gaining share and then sometimes you know, it’s two steps forward and one step back. That happens. It’s just naturally happens to our competitors in the same way. With the stock price development, Russ, look at the - look at the broader casino stock indices. Russell Silvestri: I look at 1 of them -- you’ve got the best analyst on Wall Street right now, Todd Eilers is following you and he follows -- multi-media games, he’s been following it for a long time, he got it at 4 and the stock is 15, 16, he got right on values [ph]. You’ve got the best analyst on the Street following you right now and you know, he can’t even get the numbers right and that’s just - it’s disappointing.

He gets the numbers right. [indiscernible] his opinion, I mean, then he’s talking the same thing I’m talking because one of the best analysts also believes it’s a good stock and… Russell Silvestri: I’d like to keep it to question and answers. I guess those are my primary questions. I congratulate you on the new debt structure, obviously that’s saving some earnings there with the lower cost structure, so I log that good move.

[Operator Instructions] Our next question comes from Steve Cospo [ph] with RJN Associates.

I don’t want to belabor his point about the stock buyback, but I kind of feel the same way at the level of that. Not to not invest in other projects but just because the stock is so cheap. I understand you’ve got liquidity constraints, you probably couldn’t buy back a lot because of that problem, but it is awfully cheap and it would, it would look good from a shareholder’s standpoint if we saw more of that. So -- my question is on the -- 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 sometimes it’s a little bit harder and more difficult to get into such markets, but once you’re in, 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’d like to point out that approximately 1/2 of that net cash is used by our day-to-day operations and it’s necessary to keep in the company in the casinos so we cannot use it really for planning acquisitions and stock buybacks. So we need to consider that.

And also on the -- I was speaking more on the liquidity of the stock. It doesn’t trade a lot of shares and of course, you’re limited to how much of the percentage you can buy back, so it’s probably hard to make a big dent because of that issue.

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

Great. Thank you for your interest in Century Casinos and your participation in the call. For a recording 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.