Century Casinos, Inc.

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.

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.