Century Casinos, Inc. (CNTY) Q3 2018 Earnings Report, Transcript and Summary

Welcome to Century Casinos Q3 2018 Earnings Conference Call. This call will be recorded. [Operator Instructions] I would like to introduce your host for today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin your conference.

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 Executive Vice President of Finance, Margaret Stapleton. Before we begin, we'd like to remind you that 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 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 SEC filings, available in the Investors section of our website at cnty.com. I will now provide a brief review of the company's financial results for the third quarter. Following the prepared remarks, there will be a question-and-answer session. We are happy to report a 6% increase in net operating revenue, driven by strong performances in Canada, Colorado and in Poland. Adjusted EBITDA was lower compared to last year due to extra cost and expenses related to the licensing situation in Poland and the slower than expected ramp up of the newly opened casino in the UK. The extra cost and expenses in Poland occurred in July and August. From September on, we are through with it finally. With the reopening of two more casinos in Poland in the latter half of the quarter, we already see strong adjusted EBITDA performance returning to that segment, and we look forward to a great finish to the year. Overall, Canada remains our strongest segment, generating 36% of our consolidated revenue. In local currency, the Canadian operations grew revenues by 7% and adjusted EBITDA grew by 3%. We own and operate two casinos in the Greater Edmonton market, the Century Casino & Hotel Edmonton and the Century Casino St. Albert. Results were flat year-over-year, little bit impacted by the very little hold on the tables at the St. Albert property of 13% versus 21% last year. In the Calgary market, we had a mix state of results, while the Century Casino Calgary saw slot coin in increased by 3%, but the performance on the tables dragging the overall revenue down by 5%. Our Century Downs Racetrack and Casino continued its excellent performance. Net operating revenue increased by 23%, EBITDA by 24%, EBITDA margin 39%. The revenue increase was broad-based, everything from gaming to betting and food and beverage was up. The racing side of the business showed strong growth with larger crowds on racing weekends contributing to the overall success. To further strengthen the traffic flow to our properties, we're happy to announce that Century Downs will be the host of the WPCA, World Chuckwagon Racing Finals from August 21 to 25 next year. This five-day championship event will feature the world's premier chuckwagon drivers and horses and will, for sure draw huge crowds. In the US, our two operations in Colorado contributed 22% of our consolidated revenue. Revenues for the quarter grew 4% and adjusted EBITDA by 1%, driven by a good performance of our Century Casino & Hotel in Cripple Creek, which increased its market share to over 11% and generated an EBITDA margin of 38%. We expect to finalize plans for our hotel expansion at that Cripple Creek property soon and look forward to further enhancing our position as one of the leaders in the Southern Colorado gaming market. Over in Europe, the newly opened casino in the city of Bath, in the UK is ramping up slower than anticipated. Neither the current low slot hold of 3.5% versus a more normal 7%, nor the delayed opening of a third party on site hotel detailed. But the slot hold will normalize, the hotel will open shortly and the busy Christmas season is upon us, so we look forward to slow, but steady growth, as we continue to market at the casino to locals as well as tourist groups and tour operators. In Poland, our casinos generated 38% of the company's total revenue. In local currency, revenue was up by 10% for the quarter, even though, we had two Europe casinos in operation for two out of the three months in the quarter, compared to the same quarter of last year. Poland really continues to be a strong market for us. Table drop was actually up 20%, slot coin in was up 35%, but lower hold percentages kept the revenue growth at 10%. EBITDA in July and August was still impacted by low revenue, but costs and expenses associated with two closed casinos. September was the first month with the same number of casinos in operation as last year, no closed casino with cost anymore and almost all of this quarter's EBITDA came from that one month alone. We are glad that things are back to normal in Poland and look forward to generating much higher EBITDA margins going forward. From Poland, we move to Southeast Asia, where we opened our first land-based gaming facility in Vietnam at the end of Q2. Through our 51% stake in Golden Hospitality Limited, we have an agreement to manage their hotel and gaming club in Northern Vietnam, just 300 feet from the Vietnamese-Chinese border station. Through Golden Hospitality, we also own 6% of the company that owns that property, and we have an agreement to increase that ownership stake to a controlling 51% for $3.75 million. The hotel offers a 30 low standard rooms and the gaming club currently offers 65 electronic gaming positions. Traffic is increasing day by day and the property is already EBITDA positive. We are currently finalizing plans to upgrade and expand the hotels and gaming clubs. Phase 1 include the renovation of the existing hotels, the relocation and expansion of the gaming floor as well as introduction of the restaurants. We like this opportunity to enter the Asian land-based gaming market with a relatively small initial investment, but great upside development and investment potential. This is a typical low risk, high reward situation we always look for when entering into a new market. Now a quick look at our balance sheet and liquidity. We have $48 million in cash and cash equivalents and $54 million in outstanding debt. Total debt to adjusted EBITDA ratio sits at 2.3. The net debt to adjusted EBITDA ratio is 0.3. Our debt includes $33 million related to our Bank of Montreal credit agreement, $15 million related to the Century Downs long-term land lease, $3 million at Casinos in Poland and also $3 million at the Casino in England. The book value per share climbed to $6.14. CapEx for existing operations during the quarter was $4.4 million or about 10% of revenues. That was a bit higher than usual, mainly because of leasehold improvements at two locations in Poland, new slot machines in Cripple Creek and tent barn at the Century Downs Racetrack in Calgary. We have closed on two loan agreements in the quarter, one with BMO for a $26 million increase of our existing credit facility, the other with Bank Austria for a new $8 million credit facility. Together with the freely available cash of around $50 million, that gives us $49 million available for investments. We will use approximately half of these funds to complete our most significant and largest project to date, the Century Mile Racetrack and Casino in Canada at Edmonton International Airport. So far, we have spent $28 million on the development, and we expect to be on budget and on time for an opening on April 1, 2019. It will be a multilevel building with a footprint of 48,000 square feet, initially accommodating 550 slot machines, F&B facilities and off track betting parlor and a grandstand plus convenient parking for over 1,700 cars. For comparison, that building will be about 50% larger and the footprint will be almost twice the size of our successful Century Downs facility in Calgary. The current racetrack in Edmonton, Northlands Park, has held its very last race on October 27, and we closed its casino operations for good on January 31 next year, well before we opened Century Mile. That not only means that Century Mile will not bring additional capacity to the Edmonton gaming market, it also means that our existing casino in the Northeast of the city, the Century Casino & Hotel Edmonton, will greatly benefit, because its closest competitor will fall away. Therefore, we believe that our ambition to generate an EBITDA return of 25% on the $48 million investment has a really good chance of success once the property has fully ramped. Rest assured that we are fully focused on getting this very important development done right, done successfully and done on time and on budget. Last week, for the first time, thoroughbred racehorses took to the just completed racetrack. They galloped a full test lap on the one mile over, and were full of praise for the track. Once the stable area and racetrack will open for training in the spring of next year, up to 800 thoroughbred racehorses will go through the daily training regimen. We've also signed an important long-term agreement with the Alberta horsemen's association, covering the use of their racing, training and stabling facilities at Century Downs and Century Mile. The former signing of that agreement took place before press and horse racing industry members on the second floor of the new Century Mile casino building. All right. That's the end of our presentation. I thank you for your attention, and we can now start the Q&A session. Operator, go ahead please.

[Operator Instructions] Our first question comes from the line of Brad Boyer with Stifel.

First question for you, Peter, it's just around the broader Edmonton market. The results on the quarter were a little bit softer than what we are looking for. I mean, you called out the low table hold at St. Albert. Clearly, there is I would say, some not necessarily new, but competition in that market seems to be pretty fierce. Just curious, if what you're seeing today in anyway, sort of, changes, how are you thinking about the ramp at Century Mile based on, what we've seen over the last a little bit here?

Brad, we have seen revenue growth at our largest facility, the Edmonton, Century Casino & Hotel of 1.6% in local currency. St. Albert was a little bit down and yes, a competitor completely redesigned the casino, and they opened in the West Edmonton Mall and that was the time for about, I guess four to six weeks. Also some of our players wanted to see that new facility. But that has been fully digested. Everything is back to normal and we are very confident about the mid and long-term outlook for our growth at Edmonton.

Okay, that's great. And then if you shift gears to Poland, obviously actually the volume growth was quite impressive in the quarter. Just curious, if you can give us some sense of what, sort of, the same-store metrics look like if we share about some of the noise on the revenue side? What I'm getting at is, I think, that the revenue environment in Poland it feels like it's very strong today and I think people are sort of overlooking this as sort of the margin noise around the licenses renewals have has gripped the stock. So could you just give us a sense of sort of what you're seeing in Poland on a same-store, sort of, revenue basis, excluding any noise from license renewals?

Yes. That is definitely in the double digits. As I mentioned, we saw slot coin in increased by 35%, table drop was up 20%. And that is actually better than same-store sales comparison, because that includes two-thirds of the quarter with one or two less casinos, compared to last year. So if you really compare the same number of casinos then the growth is actually even higher. We also see that filtering down to the EBITDA line at a tremendous pace. And yes, almost all of third quarter's EBITDA came from September only and October is looking even stronger.

Perfect. And then last question is just around your current thoughts on M&A. I mean, obviously, you guys have some dry powder above and beyond Century Mile. I mean, you have a nice flexibility on the balance sheet beyond the liquidity that's sitting there today. Just give us some thoughts around how you're thinking about potential M&A activity going forward? If there's any particular geographies that appeal to you more than others? And yes, I mean, that's pretty much it.

Yes, Brad. You'll probably see us doing the one or the other smaller deal in like in next six months or with little CapEx requirements for us. But more importantly, we see quite a lot of opportunity for acquisitions in North America. Not so much greenfield anymore, but acquisitions in Canada and the U.S. And we are actively uptrend in marketplace and have three or four opportunities on our table in Canada and in the US that we are currently analyzing. So that's a very high likelihood that, that we'll be coming to the market with news in the next six months.

Okay. And then just to finish on that, last question for me. To the extent that you do execute on one and/or multiple of the opportunities that you're currently looking at. Could you just remind us, sort of, how you're thinking about leverage and, kind of where you are comfortable taking leverage to the extent there is attractive accretive growth opportunities out there? That's all for me.

We have said in the past that about three times, that's the number where we are comfortable with now. It depends on the opportunity, but around that number is something that we look for on an ongoing basis. Now if there is a few quarters where it's a bit higher, that's a possibility and if the opportunity is right, but right around that number is where we feel in the long term comfortable.

Perfect. Thanks Peter.

Your next question comes from the line of David Bain with Roth Capital. Your line is open.

Most of mine were just asked, actually, but I would like to follow-up one on the M&A. When you're looking at seemingly, a lot of larger companies looking to shut smaller assets. Typically, Century, to my understanding, does about one to two deals per year, one, could that accelerate given what you're seeing out there? And then two, size range, is there a way, structure wise, so that your leverage can stay three, four times that you can get multiple properties? Or what size range would you look at a single property, perhaps? That would be helpful. And then how do you balance that with share repurchases or other CapEx investments based on what you're seeing right now?

Thanks Dave. In markets where we are not active yet and Vietnam was such an example, the size of any deal will be small, say, $5 million or less in terms of our investment. However, in Canada and in the US, we are definitely trying to move into larger unit sizes, larger properties. And if we do an acquisition or two then we would aim for those new projects to be similar in size to the largest ones that we currently have. So in other words, the EBITDA of a new project in North America, ideally, should be $10 million plus. And definitely, new project and acquisitions, that's definitely our top priority in terms of use of funds and only if we cannot find attractive targets then we would consider share buyback or dividend.

Okay. Perfect. And there is one follow-up on Poland. So pretty clear, you did the $900,000 in EBITDA just for the month of September. So to keep it simple, bigger picture, is it fair to say that Poland is generating on a per quarter basis about 2.7? And then we look at another opening early next year in the market dynamic that you spoke to that growth, is that a kind of a, I don't know, a bare bones way to look at it at this point?

There is some seasonality to it. The summer is, like June, July, August, is typically slower. But yes, but that's - I think that's broad-based, but pretty good picture, yes.

Okay, great. Thank you so much.

[Operator Instructions] Your next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital.

I was wondering if you could help drill down a bit more on the results in Century Downs Racetrack. Just add a little bit more color to that 23% revenue jump. Was the onetime? Was there some thoroughbred racing events there? And just more of this $7.5 million level, is that a sustainable level, do you guys think?

Sorry. Could not fully hear the - understand the question. The connection is very bad, but I think you were asking about Century Downs and how that - the thoroughbred racing and the weather impacted the results, right?

Yes.

Yes, okay. Much better. Definitely, that was a big plus and the on and off-track betting greatly benefited from that. We also had larger crowds on these weekends and more affluent people visiting our facility. And that all helps on the gaming floor and also in the F&B department. So it's an overall very positive development with thoroughbred racing. And that's where we also work very hard with the horse racing association to have thoroughbred racing right from the beginning at Century Mile also. And we've worked out the great schedule for both tracks with a great mixture of post briefs throughout the entire season. Weather wise, not really any impact. The races, they do run up until November and again start in, I believe, it's around March or April, so it's a pretty - it's going to be a pretty full schedule almost year round.

Okay, that's great. And is this roughly C$30 million run rate. Is that a sustainable run rate? Or was Q3, especially, seasonally strong with a number of races?

Q3 is, may be, a little bit stronger, yes. So it's may be, I don't know, 5% stronger than the other quarters, but not more than that.

Okay, great. And then on the EBITDA side, I know margins were up slightly year-over-year, but almost a 6 percentage point decrease from the 45% level in Q1. I know you guys are implementing there is some extra cost associated with implementing thoroughbred racing. I'm just wondering if this high 30s margin is the sustainable run rate going forward. Or if we should see a tick up back into the low 40s?

One of the other quarters should see the tick up into the low 40s. We had some costing expenses in there for the thoroughbred racing, but that's adjusted now going forward. There is no extra burden anymore. So we are comfortable in the high 30s, low 40s.

Okay, great. And then final question for me on the Bath, UK casino. I know the ramp has been slower than what you expected, but I'm just wondering if you could give us, sort of, what's your outlook is at scale of what you think this property could generate on a revenue and EBITDA basis?

Yes. We said before we opened that once it's fully ramped, it truly has the potential to chariot between one and two based that's on an $8 million investment. And it's just taking us longer than expected. There are some, I think, I've mentioned it before, restrictions of what we can do with - related to the pricings and promotions, also with the building for such, we are slowly working through all those issues. We see improvement. So it's probably for 2019, the goal is to have positive EBITDA and then approaching $2 million that's probably going to take a year longer than expected.

Okay, great. Thanks.

I will now turn the conference back over to our moderators for concluding remarks.

Thank you, everyone, 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 cnty.com. Goodbye.

This concludes today's conference call. You may now disconnect.