Century Casinos, Inc.

Welcome to Century Casino's Q1 2022 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.

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. 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 eligibility 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 results of the first quarter. After that, there will be a Q&A session. Our first quarter results continued the streak of record-breaking performances that we have shown throughout last year. It was a great start to 2022 with record first quarter revenue and record first quarter adjusted EBITDA. Revenues were up by more than 42% year-over-year, and EBITDA grew an impressive 62% compared to the first quarter of last year. Earnings per share for the quarter were impacted by our loss on the sale of land and building in Calgary, as well as by costs related to the acquisition of the Nugget in Nevada, which had a combined impact of approximately 3.3 million or 11 cents per share. In addition, our effective income tax rate increased from 22.6% last year to 34.6% this year due to the total earnings we project for this year. Our revenue growth was broad-based as each of our three operating segments posted new first quarter revenue records. The continued focus on our core customer and a streamlined cost structure contributed to these great results and margins and allowed us to continue our strong operating momentum from last year. Sequentially, we managed to keep the high margins the same. In the first quarter, we maintained the 23% EBITDA margin that we achieved in the fourth quarter of last year. Compared to pre-COVID times, meaning the first quarter of 2019, we are well ahead. We actually increased the margin by 800 basis points. Marketing spend continues to remain significantly below pre-COVID levels and is expected to continue at its current run rate moving forward. Reductions in advertising, direct mail, and promotional expense appear to be sustainable and have not had any negative impact on gaming volumes. The promotional environment across all our markets remains relatively stable. I would call it disciplined and rational for the most part. Not much has changed for the last several quarters. Other factors impacting margins include labor, food costs, and utilities. And while labor is tight in some markets, we've been able to maintain our high standards of guest experience. Staff count is down by between 15% to 20% compared to pre-COVID levels, and that appears sustainable. Higher food costs can, to a large extent, be offset by increased menu prices, raising Rising utility costs are hard to offset, obviously, so there are some incremental expenses, but it has no material impact to our P&L. So we are facing these cost increases. We are able to maintain margins due to our disciplined operating philosophy and an efficient, targeted marketing to our high-value customers. In spite of some macroeconomic challenges, We have not noticed any meaningful shift in consumer behavior as we look at April and even into May. The customer trends we experienced at the end of 2021 are continuing. Looking ahead, we had the impact from stimulus payments in April and May of last year, making second quarter year-over-year comparison challenging for the U.S. operations. But more than offsetting that is the strong comeback of our Canadian operations. That results in preliminary numbers for April significantly beating April of last year. Our business is largely gaming-centric. Only a minority of our revenue is coming from non-gaming amenities. We will only open more non-gaming amenities or expand their opening hours as demand picks up further so that it grows in a profitable way. The geographic diversity of our portfolio with locations in hyperlocal drive-to markets with a loyal customer base has proven extremely resilient. Resilient not only in light of the pandemic, but also in light of changes to oil price or CPI. We have high confidence in the underlying trends of our consumers' behavior, which has not changed since we reopened two years ago. Our U.S. operations in Colorado, Missouri, and West Virginia grew revenues by 1% on a combined basis. Market by market, we saw revenue and EBITDA growth in Colorado as well as in West Virginia, while Missouri was a bit softer in the year-over-year comparison due to the impact of the government stimulus payments of last year. In more detail, we saw that the month of January was impacted by Omicron, so it was softer than the year before. In February, business got much stronger as the case counts went down and mask mandates came off. March was a mixed bag in the year-over-year comparison. Colorado and West Virginia were higher, while Missouri couldn't quite achieve last year's results, again, which were driven by the stimulus payments. Win per customer has remained relatively flat to prior year, which has been a positive sign. The main difference is that we saw a significant increase in ungraded play during the prior year as patrons who are not our typical customers came to the property to spend their stimulus checks. In Canada, we operated with severe restrictions for half of the first quarter. All guests needed to provide proof of vaccination, everybody was required to wear a mask, and casinos were not allowed to serve liquor after 11 p.m. These restrictions were lifted at the end of February, resulting in an overall reasonably strong quarter for Canada. Going forward, however, we can expect more from Canada. We look forward to the next quarter without restrictions. Poland, surprisingly, had its highest revenue month ever in March and continued its run rate of close to $1 million in EBITDA per month. While results in Poland are consistently strong and that is continuing into April and early May, you can imagine that it is difficult to find a buyer offering an attractive price right now. But timing is not really an issue for us as Casinos Poland pretty much runs on its own. It has its own corporate and operations staff in Poland and also does not need any capex from us. Quite the opposite, cash is flowing from Poland to us. Let's now look at our balance sheet and liquidity. On April 1st, we entered into a credit agreement with Goldman Sachs for a $350 million term loan and a $30 million revolving credit facility. We drew the $350 million under the term loan to fund the $95 million Nugget PropCo acquisition to repay approximately $167 million outstanding under the old credit agreement with Macquarie. and to fund the $100 million escrow fund that will be used to purchase the NACED OpCo. So as of April 1st, 2022, after giving effect to the Goldman Credit Agreement, we had $372 million in outstanding debt and approximately $88 million in cash and cash equivalents, resulting in net debt of $284 million. But please note that cash and cash equivalent amount does not include the 100 million we have in escrow to fund the Nugget OpCo acquisition. Our strong cash flow generation is driven by our strong operational performance, by our efficient cap expanding programs at our properties, and by favorable regulatory regimes in West Virginia and Alberta, Canada, whether states or province pays for us in West Virginia or all in Alberta of the slot machine investments. Our investments in long-term growth opportunities are spearheaded by exciting projects in Missouri and Nevada. In Missouri, we developed a 75-room hotel at our great Cape Girardeau property that will transform that facility to a full resort destination with gaming, various bars and dining venues, as well as conference, concert, and event spaces. It will cost $26 million and is slated for opening at the end of next year. and we developed a land-based casino and hotel facility at Carradosville, which will replace our existing old riverboat there. The new facility will cost 47 million and will include a newly designed casino with approximately 20% more gaming positions and also 75 hotel rooms. The new development will provide significant operational efficiencies. The savings on insurance alone will be around half a million dollars per year. did also be significantly more convenient for our customers. It would increase our catchment area and also give us the chance to win back customers who didn't like the old riverboat style when they paid us a first visit. We plan to open that new facility in early 2024. In Nevada, we already invested $95 million and now own half of the market casino's real estate. We will close on the purchase of 100% of the operating company as soon as licensing is complete. That will cost another 100 million, which we have put in escrow already, as mentioned. We are very excited about the Nugget transaction, and we see considerable upside once we operate it. With the Nugget, we purchased an existing operation with a long operating history. That means no development risk, no construction delays, or risk of cost overruns. The Nugget is in a great location. Directly on I-80, the property gets an exposure that is unparalleled in the Reno-Sparks market. The nearby intersection counts 206,000 cars per day. With 110,000 square feet, the Nugget has one of the largest convention facilities in the market. And with 1,382 rooms, it can support large conventions. The previous owner, the Marnell Companies, have invested more than $90 million since 2016, upgrading all hotel rooms, most public areas, added a top-notch steakhouse, upgraded or replaced back-of-house equipment where necessary, and right-sized the operation. Therefore, we do not expect any extraordinary replacement cat-backs in the next years. The Nugget gaming floor provides the most promising opportunity for improvement and growth. We can renew and improve the slot mix, further improve the traffic flow and increase the square footage of the gaming floor. Also, the acquisition offers great potential for synergy effects as we integrate that standalone property into our portfolio of 17 casinos. In terms of the broader market dynamics, there is substantial economic growth in the Reno-Sparks region. Population growth is outpacing the national average and the personal income per capita is expected to grow further with a CAGR of about 4%. The unemployment rate is only 2.9%. The market transaction will significantly increase our scale. Our revenue is expected to grow by over 25%. With these opportunities for growth throughout next year and beyond, we are confident our company is very well positioned for continued long-term success. In conclusion, the first quarter was another great performance of our company and the entire team. Our diversified portfolio continues to generate robust EBITDA growth, and our operating strategy and tight focus on the right customer are producing strong and sustainable margins. The higher end of the database, the truly gaming-centric customers, continue to perform extremely well. also our older customers started to visit again in bigger numbers once the Omicron and COVID counts started to drop mid-quarter. These trends seem to be really consistent. We'll continue to execute on our business plan by growing organically and by identifying and acquiring under-managed assets in stable drive-to markets in the US. In our M&A strategy, we will remain prudent with pricing and valuation will continue to dedicate resources to capture synergies and provide time to digest the acquisition and recognize value. With that discipline and our strong balance sheet, we are confident to find further 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. Kelly, go ahead, please.

Thank you, sir. Ladies and gentlemen, at this time, we will conduct the question and answer session. If you would like to ask a question, please press the 1-4 on your phone now, and you will be placed in the queue in the order received. If you find that your question has been answered, you may remove yourself from the queue by pressing 1-3 on your phone. We are now ready to begin. And our first question comes from David Bain with B. Riley. You may proceed with your question.