Century Casinos (NASDAQ:CNTY) Q2 2020 Earnings Call

0:01 Welcome to Century Casinos Q2 2020 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 like to introduce our host for today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin.

0:19 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 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 encourage you to review these filings.

1:07 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 filing. available in the investor section of our website at cnty.com. I will now provide an overview of the company's status quo and review the financial results for the second quarter 2020. After that, there will be a question and answer session. Following the temporary closure of our properties in mid-March, we took immediate steps to reduce operating costs and to ensure that our company preserved its financial flexibility to manage through the shutdown.

2:00 We reduced expenses throughout the company, temporarily laid off and furloughed approximately 90% of our team members, except for Poland where all employees continued to be paid reduced salaries based on local employment laws. We continued to pay benefits to our US and Canadian employees, including part-time employees. and senior executive management agreed to voluntary pickups. When the first reopening scenarios emerged, our focus from day one has been the health and safety of our employees and guests. Erwin, Peggy and I thank all of our team members for their hard work to get our properties reopened in just a matter of days, dealing with many new procedures, especially regarding safety, social distancing and extra sanitation.

2:53 Their competence, enthusiasm and friendliness has created an atmosphere and feeling of safety and comfort which is very much appreciated by all our guests. We have used the time during the closures to build upon a progress we have started last year when we closed the acquisition of three properties from El Dorado. to improve on controlling expenses and realizing efficiencies in marketing, staffing and G&A. We are off to a very strong start and while the pandemic is not behind us, we make sure we stay focused on maintaining a disciplined approach throughout our business, avoiding unnecessary costs and efficient practices to creep back in. We fully intend to keep the focus on a more efficient, higher margin business in place after this crisis is over.

3:46 The first casinos we reopened were the ones in Europe, in Poland, on May 18. The casinos in the smaller cities around the country, which draw mostly from locals, are doing very well, actually a little bit better than during the same time last year. But the results of the two larger casinos in the capital city of Warsaw are softer because of a lack of tourists and business travelers. We are down about 25% compared to last year. As you know, Poland contributes about 10% of our total consolidated EBITDA. Most importantly, however, the operation already is cash flow positive.

4:33 Next in line to reopen were the two Missouri properties on June 1. Missouri is our most important market in terms of cash flow generation. and what a success the reopening was and still is. Even though we have only half of the table game positions and about 80% of the slots in operation, results were record-breaking. In June, with limited competition from Illinois, Cape Sheridan was up over 40% on revenues and more than doubled adjusted EBITDA, an absolute record for that property. Carradosville was up 8% on revenues and up 40% on adjusted EBITDA. Huge success and a tremendous achievement by our management teams.

5:20 The month of July, with competition from Illinois up and running, continues with results significantly stronger than last year. Cape G almost doubled EBITDA and Carradosville is up about 30%. So it goes without saying that also this market has very quickly turned cash flow positive for us. Then on June 5, we reopened our Mountaineer Resort in West Virginia to huge crowds forming long lines around the building. Approximately half of our gaming positions and hotel rooms are open. In June, revenue was up 7% and adjusted EBITDA was up 57% compared to June of last year.

6:06 July is a little softer and down compared to last year, mostly due to the newly introduced temporary smoking ban in West Virginia. Fortunately, last week we have been allowed to introduce slim plexiglass barriers between slot machines, which lets us increase the number of available slots from the current 500 to over 800. That should have a positive impact right away. In the middle of June, Our two Colorado properties reopened. Without table games, but almost all slots in operation in Cripple Creek and about two-thirds in Central City. Even though we had less slots in operation and for only half of the month, adjusted EBITDA in June was up a combined 51% year-over-year.

6:57 Truly remarkable. And July is even better. Revenue and adjusted EBITDA almost doubled compared to last year. In July, our Cripple Creek property recorded its highest gaming revenue in EBITDA in over 10 years. And of course, the properties are producing positive cash flow. Thurka Sports, one of our sports betting partners, has started its online offering already, producing some revenue share for us already. Also in the middle of June, We reopened our three casinos and two racetrack casinos in Canada in Edmonton and Calgary. Table games remained closed and we were only allowed to open with 28% of the slot machines.

7:46 Adjusted EBITDA for June has only been down by 31% compared to June of last year. In July, we could increase the slots available for play to 50% and Life Horse Racing resumed with up to 200 spectators in the apron. Life Racing has been particularly strong at the New Century Mile Racetrack and Casino. July produced a couple of days with record wagering handle. The result across all our Canadian properties are great. Adjusted EBITDA for July is higher than in July of last year. So I'm happy to report that also our Canada segment is cash flow positive already. Now let's look behind these strong performances and discuss what drives the revenue and how we manage the expense side of our businesses.

8:39 Our geographical diversity and our locations in hyperlocal markets certainly play a big role. All our casinos predominantly rely on a very local and very loyal customer base and as such our operations ramp up at a quicker rate than casinos at destination resorts. Our casinos have negligible meeting and convention business and very few of our customers, if any, travel by air to visit us. In addition, we offer a comparatively inexpensive gaming experience, one that is still affordable in economically difficult times. The number of visitors has not yet fully recovered to pre-COVID levels, but average length of play as well as spend per visit has been very encouraging.

9:31 As the current situation limits us from an amenities perspective, we see more of a pure gamer, high-quality customer that comes to our facilities. Since the reopenings of our casinos, we have adjusted the levels of services and staffing in line with the guidelines put forward by the health and political authorities. We have limited seating in our restaurants, and we have not reopened our poker rooms, our smaller hotels, the showrooms, banquet rooms, and spa and retail facilities. Being selective with our amenities, keeping strong controls on the promotional environment and staying focused on the high margin areas of our business results in expense reductions and new efficiencies, which means we are operating at significantly higher margins.

10:23 All this led to a record consolidated results for the month of June, the month of June alone. Revenue was 32.5 million, which is up 82% year-over-year. And the trusted EBITDA was a record 10.8 million for the month, up more than fourfold. We achieved that with most casinos not even open the entire month and by far not at full capacity. And what's even more important, the preliminary July numbers show that the strong performance continues. Revenue of 30 million should generate adjusted EBITDA of about 7.4 million, almost three times the EBITDA of July last year.

11:08 And in a true like-for-like comparison, comparing the July results to the pre-Corona month of early this year, January and February, which already included the three properties acquired from El Dorado, we are also doing better. Please understand that when we give you these year-over-year comparisons, We want to give you some color on current trends on the performance of the most recent month, but we are not providing guidance. As of June 30, we had 52 million in cash. Net debt was 152 million. Last week, we paid our 10 million revolver with Macquarie down to zero.

11:55 And as you have seen from our recent news release, We just announced the sale of the casino operation at Century Calgary, one of our smaller Canadian properties, for about US$7 million net. Last year, which was a strong year, this casino operation generated approximately US$600,000 in adjusted EBITDA. As we continue to own the real estate and we get approximately US$350,000 per year in rent income from the buyer of the casino operation, The actual annual cash flow we are selling is only around $250,000. On top of that, we get a percentage of their revenue over a certain threshold for the next three years.

12:42 We have already received 100% of the purchase price as a non-refundable deposit. We keep operating the Century Sports operation, that is a sports bar with bowling and entertainment facilities, which last year generated $600,000 in EBITDA. So as you can imagine, we are very happy with the transaction. The sales price multiply is huge and it immediately strengthens our liquidity position. As a result of the revolver pay down and the Calgary sale, as of August 5, we had approximately 48 million in cash and net debt of only 147 million. We do not foresee any substantial capex in the short and mid-term.

13:29 All our properties are in good shape and we've put all larger and non-essential capex projects on hold for now. So with that, 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 enthusiasm as we manage our businesses through these challenging times. I thank you for your attention and we can now start the question and answer session. Operator, go ahead, please. Ladies and gentlemen, at this time we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone. You will be placed in the queue in the order of two. If you find that your question has been answered, you may remove yourself from the queue by pressing the pound key. We are now ready to begin.

14:17 Our first question is from Chad Venyon with McGuire. Your line is open.

14:23 Thanks. Good morning. This is Jordan Venyon for Chad. Hope all is well. What have you seen with retail sports betting and how should we think about your opportunity with iGaming and sports betting in your markets with the legalized product?

14:41 We have three sports betting licenses for our Colorado properties. We have entered into two agreements, one with Circa Sports, which just launched their app recently, and another agreement with Bet365. They will launch later. And we have one more license available and have interest from a handful of providers and we are negotiating that third deal as we speak. In the other markets in West Virginia, we have sports betting and iGaming already legalized. We are partnering with William Hill and They've told us that before the end of this year, we go live with both sports betting and iGaming.

15:33 And in Missouri, it has not been legalized yet, but I think there's a strong indication that it will get legalized soon. And we look forward also to working with William Hill in Missouri.

15:52 Okay, and then you obviously added a few solid assets at the end of 2019, and you announced this move up in Canada earlier in the week or last week. Do you think you've right-sized your portfolio at this time, or you still have more to go on getting rid of some of your non-core assets?

16:20 No, I think we are happy with our portfolio there. We have two very strong performing resinos up there, one in Edmonton and one in Calgary, and the other casinos are in very good locations and strong spots, and I don't foresee any significant change as of today.

16:42 Okay, and if I could get one more here. Can you update us on the Colorado max bet limit that's coming up on the ballot here in November? I mean, do you guys have any thoughts around what that could possibly do for the business? Obviously, if that were the past, that would be something positive for the company here.

17:05 Yeah, but... No, it's hard to say. It's too early to say, and we don't have any official guidance that we are able to give out with regard to that. Erwin, would you like to comment further?

17:24 No, I think it's exactly what you said, yeah.

17:30 Okay. Thank you, guys. I'll pass it off. Thanks, Erwin. Again, if you'd like to ask a question, please press star, followed by the number one on your telephone keypad. Your next question is from Brad Boyer with Seafoam. Your line is open.

17:48 Hey, good morning, guys. Thanks for all the additional color on the quarter. Very helpful. My first question is just around the preliminary July metrics that you guys presented. How are you thinking about those numbers in the context of sort of a go-forward basis? Obviously, there's a lot of moving parts right now. You're obviously getting the benefit of some favorable revenue mix and some operating efficiencies, and then at the same time, on the flip side, you're operating with limited capacity. So how are you thinking about what those numbers might look like a couple months down the road. Do you think that sort of some of the margin performance that you're producing today is sustainable? Do you expect margins to compress a little as more of the business comes back online? Just any color you can provide around that?

18:47 Yeah. I think for the short term, like next one or two months, we don't see any significant change. As Assuming the situation with regard to COVID gets better, then our competitors and also us will most likely open some of the other amenities. And that will most likely mean that overall and absolute revenue will grow. But as these other amenities have lower operating margins, you will see Higher revenue on the one side, but the operating margins will probably not be as high as they currently are.

19:39 And with regard to the promotional environment, I think everybody is watching each other to see if everybody stays conservative and relatively quiet, or if somebody jumps out and starts some aggressive campaigning, which we don't see at the moment. That's my first take on it. Erwin, would you like to add to that?

20:04 Yeah, I agree with what you said and I would like to add. We have a little bit of runway with regard to measures that we can take on the floor. To give you one example, we have received approval in West Virginia to make part of our floor smoking again. So as of today, we will have 118 slot machines in a smoking area and that is something that will help. At the same time, we still are working on getting more slot machines in total open all across Canada. So hopefully get from 50% to a higher percentage of slots actually being in operation. So on the revenue side, we think there is still some room to grow also in the shorter term.

20:50 Okay, that's all very helpful. And then, you know, I guess, Obviously, with you guys being a little bit closer to Poland, and I know over the last couple of months, Peter, you've provided some good perspective on that market. Could you just give us an update sort of where things stand with respect to business getting back to quote-unquote kind of normal in Poland? I know sort of the pacing of COVID recovery and what have you may be a little bit different in Europe. Just any color around that and sort of how that plays into maybe Warsaw? sort of, you know, getting back on track here.

21:29 Most of the travel restrictions are gone now and tourism has started to come back. But obviously, as we go, as we are in the summer months, July, August, until mid-September was always a slower period of time in Poland because Many Poles go away for summer vacation and business tourism isn't in full swing yet. But it is getting better. Hotels are getting higher occupancy like week by week now. And that helps us.

22:04 Okay. And then last one, just, you know, could you give us a little bit of an update as to where your appetite stands for, you know, Thank you very much.

22:45 to possibly look at it very, very seriously towards the end of this year or the next. And as you've seen, we are trying to look at our liquidity position and see where we can get into the right position to make a move if an opportunity is good for us. So that's certainly something that we're looking at.

23:11 Perfect. Thanks, Peter.

23:23 Thank you for your interest in Central 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 have our best wishes for good health. Thanks again and goodbye.