Century Casinos, Inc.

Greetings and welcome to Century Casino's Q2 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 now 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 several 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, but as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors in our SSE 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 liquidity measures to the appropriate GAAP measures can be found in our news release and SSE filing Very little in the investor section is our website at cnty.com. I'll now provide an overview of the results of the second quarter. After that, there will be a Q&A session. Our second quarter results continued the streak of record-breaking performances that we have shown throughout last year. We generated record second quarter revenue and record second quarter adjusted EBITDA. Revenue was up 21% and adjusted EBITDA grew 18% compared to the second quarter of last year. Basic earnings per share for the quarter were $0.30. We recognized two items that impacted our net earnings attributable to shareholders this quarter. First, due to the prepayment of the Macquarie Credit Agreement, we wrote off $7.3 million in deferred financing costs to interest expense. And secondly, We released a 10.2 million US valuation allowance, resulting in an income tax benefit. Even though last year's second quarter performance was heavily fueled by government stimulus payments, and even though we are now facing higher costs compared to last year, we still managed to maintain the same 27% EBITDA margin. On a sequential basis, comparing to Q1 of this year, revenue was up 8%, and adjusted EBITDA was up 25%. The continued focus on our core customer and the streamlined cost structure contributed to these strong results and margins and allowed us to continue our operating momentum from previous quarters. The promotional environment across all our markets remains relatively stable. I'd call it disciplined and rational for the most part. Not much has changed in the last several quarters. Marketing spend continues to remain below pre-COVID levels and is expected to continue at its current run rate moving forward. Reductions in advertising, direct mail, and promotional expenses appear to be sustainable and have not had any negative impact on gaming volumes. In spite of some macroeconomic challenges, we have not noticed any meaningful shift in customer behavior as we look at July and into August. The customer trends we experienced in the first half of the year seem to be continuing. 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 considering the pandemic, but also considering changes in oil price and the CPI. We have high confidence in the underlying trends of our customers' behavior It has not changed since we reopened two years ago. Our U.S. operations in Colorado, West Virginia and Missouri saw an 8% revenue decline over Q2 of last year. The main reason for this is the stimulus payments our customers received last year, which greatly supported last year's results, particularly in Missouri. While other Missouri casinos fared better when comparing with last year, A closer look at the Missouri results reveals that our properties have done better than most if we compare current results to pre-COVID times. Our Missouri locations were less impacted by COVID restrictions in 2021 because the restrictions ended or were limited in late 2020 or early 2021. And with the government stimulus money released also at that time, our casinos saw extraordinary growth last year. Therefore, and as stimulus money was exhausted, our casinos did not carry that record breaking volumes of last year into this year. Most of the other casinos in Missouri and Illinois continued significant COVID restrictions throughout the entire 2021. Those casinos were unable to generate the maximum benefit from the stimulus payments and continued with little revenue growth last year. For these properties, operations normalized this year and therefore revenues numbers increased over 2021. So all in all, regional casinos performed differently last year. While we experienced a decline this year from last year and some others experienced an increase, we see that the overall growth from 2019 is still larger with our casinos compared to most others in Missouri. What's also very interesting is that win per visit from our regulars has actually increased by 1% compared to last year. But we were not able to keep all the new patrons who came to the properties last year to spend their stimulus checks. We did retain about 20% of the headcount and about half of the revenue they generated last year. So it seems that there is some upside in these numbers. Other than gaming revenue, Everything else was up, including revenue from sports betting, pari-mutuel and iGaming, as well as hotel and F&B revenue. The outlook for the second half of the year is quite positive. Coin-in continues to normalize to prior year, as the stimulus impact tapered off during Q3 of last year. And revenue per patron continues to remain strong so far in July and the beginning of August. So we do project it higher for the third quarter compared to last year. In Canada, all four operations had a good quarter and came back strongly after the heavy COVID restrictions had been lifted. Adjusted EBITDA almost reached 2019 levels. But we still have not seen the full potential yet, because after a couple of years of staying home, many people are keen to travel out of Alberta by attending outdoor festivals and events, which were shut down the last couple of years. Our casinos in Poland continued its great performance with revenue up 24% and EBITDA up 57% over 2019. While the results in Poland are consistently strong, it is difficult to find a buyer right now offering an attractive price because of the war in the Ukraine. Anyway, timing of a sale is not really the most important issue for us as we have an excellent management team in place at Casinos Poland. and further, there is no need for any capex or investment from us. Quite the opposite, cash is flowing from Poland to us. Let's now look at our balance sheet and liquidity. We have 96 million in cash and cash equivalents, plus 100 million, which we keep in escrow for the closing of the Nugget OpCo transaction once Nevada licensing is complete. Outstanding debt totals 370 million, which includes $349 million under the Goldman Sachs Credit Agreement of which $100 million is in escrow for the Nugget and $15 million related to a long-term land lease for Century Downs Racetrack and Casino in Canada. And now some commentary on our growth projects. We are working on expanding both our Missouri operations as already reported. During the quarter on June 8, Missouri Governor Parsons signed Senate Bill 987 into law, effectively allowing us to bring the Caruthersville Riverboat Casino on land utilizing a non-floating structure. Caruthersville is the last remaining riverboat casino on open water in Missouri. The new development will include a newly designed casino with 20% more gaming positions as well as a hotel. It will provide significant operational efficiencies It will be much more convenient for our customers and it will increase our catchment area. While preparations for the project are substantially complete with a budget of 47 million, we are considering optimizing the construction timeline in order to minimize supply chain challenges. Our key intent is to deliver this project based on a high return on investment. It is the same with the hotel project at our casino in Cape Girardeau. Planning, design, and preparations are substantially finished, but budget discipline and a high return on investment are the guiding principles of the final decision when to actually commence construction. In Nevada, we already invested $95 million and now own half of the Nugget Casino's real estate. We will close on the purchase of 100% of the operating company as soon as licensing is complete, That'll be another 100 million, which we have in Eskom already. We are very excited about the Nugget transaction, and we see considerable upside once we can operate it. With the Nugget, we purchase an existing operation with a long operating history. That means there's no development risk, no risk of construction delays or anything like that, and no risk of cost overruns. We do not expect any extraordinary replacement capital in the next years. other than upgrading parts of the slot floor and some improvements to the facade. The acquisition also offers good potential to generate synergy effects as we integrate that standalone property into our portfolio of 17 casinos. With these opportunities for growth throughout next year and beyond, we are confident our company is very well positioned for continued long-term success. The second 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. We recognize we are in a period of economic uncertainty with some headwinds facing our business, but there are positive signals as well. Unemployment is near record lows across the country, and our customers continue to benefit from strong wage growth. Consumers are showing a continued willingness to spend on entertainment. Our customer trends in the second quarter and so far in July and into August remain consistent with what we have seen over the last three quarters. Especially the higher end of the database, the truly gaming-centric customer continues to perform very well. However, while these signs are encouraging, there's a flip side to it. A strong job market and growing wages are good for our customers, but they also mean increased labor expenses. Supply chain issues, higher gas prices and utility costs, and increases in the cost of goods and services are all impacting both us and our customers. Having said that, our local management teams have done an excellent job managing through these challenges. They continue to deliver strong results. Our company-wide margins during the second quarter stayed the same as last year. It even increased from Q1 of this year, despite the higher costs we are experiencing across the business. We will continue to execute on our business plan by growing organically and by identifying and acquiring promising assets in stable drive-thru markets in the U.S. In our M&A strategy, we will remain prudent with pricing and valuation, We will continue to dedicate resources to capture synergies and provide time to digest the acquisitions 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. Thank you for your attention and we can now start the Q&A session. Operator, go ahead please.

Thank you. 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 followed by the 4 on your telephone 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 the 1-3 on your phone. We are now ready to begin. Once again, that is 1-4 on your telephone. Our first question is from Jeff Stanchel with Stifle. Please go ahead. Your line is now open.