Century Casinos (NASDAQ:CNTY) Q3 2021 Earnings Call

0:00 Welcome to Century Casino's Q3 2021 Earnings Conference Call. This call will be recorded. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. I would like to introduce our host for today, Mr. Peter Hoetzinger. Please begin, sir.

0:22 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. We undertake 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. In addition, throughout our call, we refer to several non-GAAP financial measures, including but not limited to adjusted EBITDA.

1:14 The continuations 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 third quarter results. After that, there will be a question and answer session. Our results for the third quarter have been truly outstanding. Revenues exceeded the third quarter of last year by 22%, and they doubled compared to 2019. At $117 million, we set the new all-time revenue record for the second consecutive quarter. Very strong flow-through and a consolidated margin of 28% resulting in adjusted EBITDA of $33.1 million for the quarter, also a new all-time record for our company.

2:12 That is 49% higher than the EBITDA of Q3 of last year. Sequentially, it is 31% higher than the EBITDA of the second quarter of this year. Considering yesterday's reaction in the stock market, let me point out that our sequential revenue in EBITDA growth of 27% and 31%, respectively, are some of the largest, if not the largest, improvements of Q3 over Q2 numbers of any listed gaming company. And on top of that, we also generated sequential margin improvement. Our EBITDA margin in Q3 was 95 points higher than our margin was in Q2.

2:57 And one more thing. Sports betting and iGaming is profitable for us, and it has been profitable for us since day one. All right, now let's move on. Our great Q3 performance is the result of a disciplined, cost-focused operating philosophy and effective targeted marketing to our high-value customers. The quarter showed continued strength and momentum across all our local and regional properties and businesses. We saw impressive growth with increased visitation, more time on device, and higher spend per visit across our database and across our markets. We continued to benefit from strong regional demand and the preference for close to home entertainment.

3:46 All of that has improved visitation as well as spending levels in our casinos and together with our disciplined and efficient operating strategy contributed to these great results across our portfolio. Our cost structure is more streamlined and our marketing and promotional investments are more targeted which translates into increased spend per visit, especially from our most valuable players. We achieved the record operating results and margins despite some pressure from a challenging labor market and other cost inflation resulting from supply chain disruptions. Our local management teams are doing a great job dealing with inflationary pressures, whether it be on cost of goods or wage inflation, and we are not seeing it having a meaningful impact on margins.

4:38 On our busy weekends, we have been able to manage the labor shortages and operate the hotels and F&B outlets at full capacity. During the week, however, due to labor shortages, we had to operate some of our hotels below the available room capacity. And as a result, we have not always been able to accommodate all rated customers. But as the labor market normalizes, We will be able to bring more hotel rooms online, driving even more gaming revenue growth from these customer segments. Our business is largely gaming-centric. Only a minority of our revenue is coming from non-gaming amenities, resulting in an overall lower-cost structure.

5:25 We will only open more non-gaming amenities or expand their opening hours as demand picks up further, so that should grow in a profitable way. with regard to the sustainability of our high operating margins. At this point, we haven't seen any significant impact of more aggressive marketing from our competitors, even as other entertainment options, Las Vegas, for example, have started to come back quite strongly. That environment hasn't really changed over the last quarter or two. Most of our competitors are being disciplined and maintain their attention to cost control. We will continue focusing on the right customer, enhancing customer convenience, building loyalty, streamlining processes, and reinforcing our operating efficiency through new initiatives and technology.

6:21 A great example of that is our mobile application, the Winner's Zone app. With that app, we can send exclusive offers that are targeted by tier, location, date of the last visit, etc., etc., to our customers. It displays direct messages, up-to-date promotional information, current tier level and benefits, current point balance, as well as the value of those points, the amenities at the property, the number of entries for drawings, and current offers. The app is already live in Missouri and West Virginia with great success, and will be rolled out in Colorado shortly. It provides great convenience for our customers, and for us it brings lots of opportunities to further increase customer loyalty, and it also saves significantly on direct mail and related expenses.

7:15 Revenue from iGaming and sports betting and pari-mutuel betting continues at a strong pace. As you know, we have partnered with experienced companies to run these operations without any significant investment from our side whatsoever. That may limit the upside potential in a very optimistic scenario, but we believe this approach is the prudent one for us, at least currently, proving an efficient use of our capital. Beyond these digital initiatives, we are also excited about additional growth opportunities available throughout our operations, most notably in Missouri. More about that in the Missouri segment shortly. Let's now cover our balance sheet and liquidity. Today, we are financially a much stronger company than at any point in our history.

8:06 Net leverage at the end of the quarter was 1.4 times, and it's expected to further decline by year end. The strength of our operating performance increased our current cash position to over $100 million. With outstanding debt of just $182 million, our net debt sits at $81 million as of September 30. We have a well-maintained asset base that requires minimal levels of maintenance capex to sustain the current levels of profitability. And we have no substantial debt maturities before 2026. Next, a brief summary of the performance of each operating segment, starting with Colorado.

8:53 It was an excellent quarter for our properties in Crystal Creek and Central City, with both casinos clearly surpassing 2019 and 2020 levels. Net operating revenue was up 36% over 2019, and it was up 20% over last year. Adjusted EBITDA more than doubled compared to 2019, and it was up 4% over last year. The EBITDA margin remained very strong at 40%. The combined market share of our Central City and Cripple Creek properties increased by 350 points. To further solidify and strengthen our competitive position in Cripple Creek, we have decided to provide high-quality employee housing.

9:41 We will build housing for up to 30 of our current and future employees and expect to have the apartments ready by September of next year. Moving on to Missouri, our most important market in terms of EBITDA and cash flow generation. Again, great results for the quarter. July had one of the highest monthly table drops in property history, led by strong mini Baccarat volumes. and July and September set monthly coin-in records for those months. Net operating revenue was up 24% over Q3 of last year, and adjusted EBITDA increased by 38%. The EBITDA margin was 45%, even though we increased wages on top of the hourly minimum in order to stay competitive in the southeast Missouri area and help attract and retain high-quality team members.

10:40 Marketing spend continues to remain significantly below pre-COVID levels and is expected to continue at its current run rate. Reductions in advertising, direct mail, and promotion expenses appear to be sustainable and have not had any negative impact on gaming volumes. We've announced two important developments at our Missouri properties. We plan to bring the Carradosville Casino, which is the last remaining riverboat casino in open water in Missouri, on land to a non-floating facility. And we plan to build a hotel at our property in Cape Girardeau. In Carradosville, the new facility will include a newly designed casino with approximately 20% more gaming positions and 75 hotel rooms in total.

11:30 The new development will provide significant operational efficiencies as well as significantly more convenience for our customers. It will increase the catchment area and also give us a chance to win back customers who didn't like the old riverboat style when they paid us the first visit. In Cape Girardeau, we will develop a nine-story, 75-room hotel building that will be single-loaded so that all hotel rooms will have scenic views of beautiful Cape Girardeau and the Mississippi River including the iconic Bill Emerson Memorial Bridge. With that hotel development, Central Casino Cap Girardeau will transform to a full resort destination, providing ample reasons for individual and group multi-day visits for gaming, dining, conferences, concerts, events and more.

12:23 Total cat bags will run at about 68 million for both projects. In terms of timing, we don't have clear visibility yet, but we aim for openings in late 2023 or early 2024. Next is West Virginia, where we operate the Mountaineer Casino, Racetrack, and Resort. Net operating revenue was up 12% and adjusted EBITDA was up 23% over the third quarter of last year. These are really great results, especially because of the new resort destination character. It usually draws quite a lot of its business from hotel stays, which were somehow limited, somewhat limited due to staffing challenges and other restrictions.

13:09 The same with F&B outlets. They are open but with limited hours of operation. The convention space remains closed. And on top of all that, we increased wages in July. So considering all these factors, a 23% uptick in EBITDA is really exciting and we have high hopes for a strong finish to the year. Internationally, our operations in Poland generated solid numbers. Adjusted EBITDA was just under 3 million for the quarter, fueled by a strong performance of the casinos outside the capital city of Warsaw. We do, however, expect the Warsaw casinos to come back quite strongly in Q4 with international tourist business and convention business just starting.

13:59 And in Canada, we operate with restrictions. All guests need to provide proof of vaccination or a negative COVID test taken a maximum of 72 hours before entry. Also, everybody is required to wear a face mask. Despite those challenges, net operating revenue almost reached 2019 levels, and adjusted EBITDA surpassed 2019 results by 56%. All properties contributed to that EBITDA growth, and I'm happy to report that the increase was highest at Century Mile, Race Track, and Casino. That finishes the roundup of operations. We are very optimistic going forward, as the recent trends have continued relatively consistently into the fourth quarter and we expect a significant portion of the cost savings to prove permanent.

14:54 We have multiple avenues for continued growth as well as confidence that this level of performance is sustainable and that we will maintain much of the margin improvements we have achieved over the last 12 to 18 months. As the pandemic continues to fade, Additional visitors will return to our properties, and as the labor market normalizes, we will be able to bring more hotel rooms and other amenities online, increasing our capacity to host profitable customers, thus increasing our revenue opportunities. In conclusion, the third quarter was another remarkable performance of our company and our entire team. Our entire portfolio continues to generate robust EBITDA growth, and our operating strategy and tight focus on the right customer are producing the highest margins in our history.

15:47 On the M&A front, we are looking at a handful of possible acquisition opportunities, all in the US, to further broaden our footprint and leverage our successful operating model. We've always been strategic and value-oriented when pursuing acquisitions, and that will not change. With that discipline and our strong balance sheet, we are confident to find opportunities to deploy capital in a manner that consistently builds shareholder 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 enthusiasm as we manage our businesses during these challenging times. Thank you for your attention, and we can now start the Q&A session.

16:35 Operator, go ahead, please. If you have a question, press star 1 on your telephone keypad. Again, star 1 for a question. Your first question is from Jeff Stanchel.

16:55 Hey, good morning, Peter, Erwin. Thanks for taking our questions, and congrats on a nice set of results here. For my first question, you know, we've talked a lot this earnings cycle about trends here in the U.S., so I wanted to focus on the international ops for a second. Can you talk a bit about the month-by-month cadence of performance for Canada and Poland? Has it been fairly stable since their respective reopening? Have you witnessed any acceleration or deceleration? Just curious to hear your thoughts there.

17:23 Pretty stable, right, Erwin?

17:26 Yes, pretty stable and very much in line with the various measures. So when we, as Peter mentioned before, in Canada, we still have restrictions. People have to wear masks or produce a test for vaccination. That, of course, limits the speed of growth and the acceleration a little bit. However, we have also seen that across, when say internationally, both in Poland and in Canada, people are getting used to being vaccinated, to wearing a mask, or to have to do a test. And more and more people have been vaccinated in the various jurisdictions, which also means that customers that may have been hesitant to visit us now feel safe and then visit us more frequently. and stay longer.

18:17 So all in all, we can say that we see growth everywhere, with the only exception that the one or the other COVID restriction limits that growth, the speed of the growth a little bit.

18:32 Okay, perfect. And then for my follow up, Peter, any update you can provide on the Poland sale? and then on the M&A environment you talked about in the U.S., you know, how does seller expectations feel relative to the kind of one last, okay, Q2 earnings and that's all for me, thanks.

18:51 In Poland, the sales process continues. It runs, but it runs quite slowly. Several parties are showing interest on an on and off basis. But we are finding the way these operations are pretty valuable. They produce nice results. And overall they're getting smaller and smaller relatively because they are now about 9 or less than 9% of our consolidated data. So that's the situation there. And on the M&A front in the U.S., I think it's slowly starting. I mean, you've heard Tom Rigg saying that they are interested to sell. It's starting always in Vegas. I mean, MGM is selling the Mirage.

19:36 So it's starting.

19:40 And yeah, in terms of valuation, you can talk about multiples all day long. You know, it always depends on Do you apply to which EBITDA do you apply to? So it's a combination of finding the right marketer and agreeing on an EBITDA to apply to. But we see slowly but surely more and more properties becoming available.

20:17 Okay, perfect. Very helpful. Thank you both. I'll pass it on. The next question is from David Bain. David Bain Great.

20:31 Thank you. Very nice quarter. A lot of the big questions were addressed, but maybe we can drill down a little bit on the M&A environment that, Peter, you were just speaking to. You know, understanding valuations kind of a little bit, and you've always been It seems like, you know, through earnings season, the larger companies, you mentioned one of them, have been increasingly focused on sort of the virtual gaming world and spending larger amounts there. I mean, could that open up baskets of sellers more? Are you hearing of new product potential? It sounds like you were to that end. Could we see property baskets? I know you were looking at, I believe, 15 up to maybe 60 million of EBITDA.

21:16 Given your cash accumulation and some of the larger ones potentially looking to loosen their portfolios a little bit, can we punch through that at the right price, or are you not seeing that type of product at this point? That would fit.

21:31 Yeah, we're starting to see that, absolutely. Yeah, the online business does play a role because surely most of the larger companies with a large footprint throughout the U.S., they want to have at least one property in a state to secure an online license in that state. But should they have more than one in the state, then yeah, more likely some of those will become available. And so this is what we are seeing from pretty much all of the larger companies.

22:16 Okay, great. And then I know this was somewhat addressed as well, but maybe just kind of reiterating or drilling down on Canada because that was a nice outperformance versus what we were anticipating. Maybe, you know, looking at the U.S. reopening, is this sort of that reincarnated? And, you know, are you seeing anything that would give you the sense that we wouldn't expect those same sort of tailwinds to be sustained like they have here? And maybe just a tad on energy prices for the portfolio in general, both domestic and in Canada, if that is something that's on the radars that typically not something that historically has caused too much volatility.

23:06 Erwin? Yeah, I think I guess I tried to say earlier, further growth will be fueled by easing the COVID restrictions, which obviously is not on hand and is in the function of the development of the numbers there. But that means upside potentially because we would really think that these restrictions should be there And so we feel very good about Canada and the growth potential that it has and that we will be able to realize as soon as restrictions are gone.

23:45 And anything on energy prices there or in the U.S.?

23:50 In Canada, that doesn't affect us significantly.

23:55 Okay. All right. Well, great quarter again. Thank you very much. Your next question is from Kenneth Ivanovic.

24:11 Great quarter. I would like to just, I think most of the question was answered, but I was wondering if you could put a percentage basis on the amount that social distancing still can restrict your ability to earn full amounts of money on all your casinos. Do you have a I have numbers in mind, but I think it's problematic to speculate on that. It's really hard to

24:47 say. I mean, one way to look at it is looking at our pre-COVID levels and we look at it, the first goal is revenue-wise to come back to the pre-COVID levels and then gradually surpass them and at the same time with the cost control that is already in place keep EBITDA and EBITDA margins.

25:20 And also at some of our casinos we do not have all table game positions open which on a busy weekend has a negative effect. But we do not have a detailed answer in terms of percentages yet.

25:42 Okay. Thank you very much, sir. Again, if you have a question, press star 1 on your telephone keypad. Your next question is from Colin O'Donnell.

26:02 Hi, guys. Thank you for taking my questions. A few weeks ago, one of your competitors, Boyd, provided an interesting statistic, and I don't know if you guys could do the same thing, but they said their labor force had been about 24,000 before COVID, and it was now about 14,000. And they expected that only 1,000 or 2,000 people would have to come back to run the casinos at a full pace. Do you guys have any Could you provide any similar type of information just so we can think about the fixed cost structure of the casinos in the next year?

26:46 No, if we don't have that offhand, we could try to get that to you later.

26:52 Yeah, okay. I think that would be very helpful. And just, you know, the other thing, just looking at, I know you guys don't have very many cell site analysts, but You know, the street estimate on FactSet for this year is $66 million and for next year it's $88 million. I'm looking at your numbers here. You guys have done $91 million of EBITDA in the last 12 months. So is there something missing on the street or the communication? It seems like you guys are going to blow the numbers out of the water and I'm just trying to figure out if I'm missing something.

27:32 Yeah, no, I think they wanted to be conservative. I'm sure they will update their numbers after this quarter. But other than that, Colin, we don't give guidance, so it's... Yeah, understood.

27:51 But is there any significant reason that Colorado or Missouri or West Virginia would have a worse year next year than this year?

28:01 No, we don't see any significant reason, no.

28:05 Okay, that's very helpful.

28:07 We would rather think that it's still upside.

28:11 Yeah, yeah, great. Okay, well, thank you for taking my question. Thank you. The next question is from Chad Baynon.

28:27 Good morning, this is Jordan Bender on for chat today. As you look at M&A, would you look to use or continue to use a REIT to possibly go bigger? And I guess, what would your optimal op-go prop-go structure look like and where would you want to bring leverage?

28:48 Our goal is to grow not only in Absolute revenue and EBITDA numbers, but also in property size, yes. And Sokratu, PropCo, OpCo, currently we have three in the in the U.S. that you acquired from Eldorado Caesars on an op-co. Two in Colorado is prop-co. Most in Canada is also owned by us. So that's a good mix. And we don't have a clear goal that we don't go below a certain percentage.

29:36 So I think we could easily add another op-co or also a whole-co We are fine either way. We do not need to own the asset, but feel comfortable owning some. It's really more on an opportunistic basis. For us it's more important how we like the asset, how we like the market, the competitive environment, the regulatory environment. The specific location asset, those are the things that are far more important to us than whether we can buy the holdco or the upco.

30:15 Okay, perfect. And then obviously polling outperformed, I guess, at least our expectations in the quarter. Revenues were actually over 2019 levels. You talked about that your casinos outside of Warsaw were the ones that kind of outperform in the quarter. Can you kind of talk about where the casinos within Warsaw sit, just kind of thinking about how to model the segment looking into 22? No, no, go ahead.

30:56 We have two in Warsaw at the Marathon Hinton Hotel and the others are outside of the country. Historically, the Warsaw market is in absolute numbers much stronger than the six outside of Warsaw combined. So any uptick of the Warsaw properties has a meaningful impact on the overall Poland numbers.

31:28 Right, and if I may add to that, looking at what is happening in the first quarter, we are very optimistic in that direction. We see that the business customers coming back, Merritt and Hilton, are both getting much higher occupancy and also guests that want to come to our casinos. So we're confident that in the next wave, so to speak, the Warsaw casinos will follow the same trend as the casinos on the countryside.

32:05 Awesome. Next quarter. Thank you. If you have a question, press star 1 on the telephone keypad. The next question is from Daniel Lane.

32:23 Hi guys, nice quarter. I was just wondering if there's any update on the Poland strategic review process. Is the company sort of committing to the region at this point or any discussions there?

32:42 We have said that Poland has become a non-core operation for us. It is, as I've mentioned, about 9% or less than 9% of our consolidated EBITDA and consists of eight small operations. So while it is generating very solid EBITDA and cash flow for us and very high returns on our investment, We strategically do not have Poland in our long-term plans if we get a good offer. In other words, it has great value for us. If we get that value, then yes, we decide to dispose of it. If not, then we are happy keeping it.

33:52 At this time, there are no further questions.

33:57 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. Stay well and goodbye. That concludes today's conference, and we now disconnect.