Century Casinos, Inc. (NASDAQ:CNTY) Third Quarter 2022 Results Conference Call November 4, 2022 10:00 AMm. ET
Participating companies
Peter Hoetzinger – Vice Chairman of the Board, Co-CEO and Chairman
Erwin Haitzmann – Chairman of the Board, Co-CEO
Margaret Stapleton – Chief Financial Officer
Conference Call Participants
Jeff Stantial – Stifel Nicolas
Chad Beynon – Macquarie
Jordan Bender – JMP Values
Edward Engel – Capital ROTH
Operator
Hello everyone and welcome to Century Casinos’ third quarter 2022 earnings call today. At this time, all participants are in listen-only mode. Later, you will have the opportunity to make inquiries in the consultation and response session. [Operator Instructions] Please note that today’s call will be recorded.
And now I have the excitement of turning Peter Hoettzinger around. Please continue.
Pierre Hoetzinger
Hello everyone and thank you for our call for results. I am accompanied by my co-CEO and president of Century Casinos, Erwin Haitzmann; and our chief financial officer, Margaret Stapleton.
As always, before we begin, we would like to remind you that we will be discussing forward-looking data that relates to a number of threats and uncertainties that would possibly cause actual effects to differ materially from our forward-looking statements. The Company undertakes no legal responsibility to update or revise any forward-looking statements, whether as a result of new data, long-term events or otherwise. We provide a detailed description of the threat points in our SEC filings, and we invite you to review the documents.
In addition, in our call, we refer to various non-GAAP monetary measures, including, but not limited to, adjusted EBITDA. Reconciliations of our non-GAAP functionality and liquidity measures with appropriate GAAP measures can be found in our press release and SEC filing. Available in the inverter segment of our online page in cnty. com. I will now provide a review of the third quarter results, followed by a Q&A session.
Our third-quarter effects were higher than last year’s record performance, which continued through COVID restrictions and strong pent-up demand. Therefore, albeit sequentially, revenues are increasing. Compared to last year, revenue and adjusted EBITDA decreased by 4% and 15% respectively. Much of the decline is due to incredibly dry weather situations that affect the water level of the Mississippi River.
Low water problems in our Colorado, St. Missouri, began in August and resulted in additional expenses for [indistinguishable] and caused serious disruption to the slope of the bridges and the transition from the barge to the old riverboat.
In addition, the dry climate kept farmers, who constitute a giant component of our clientele, busy with issues and farmland much longer than usual. As a result, casino profits decreased by 14% compared to the third quarter of last year, and this was also to blame for a component of the company-wide decline in profits in the quarter.
In addition, we have incurred significant costs in preparing for the integration of our long-term operations in Nevada and Maryland. With headwinds in the economy, we have also noticed symptoms of slight adjustments in our consumer behavior, as the decline in the ADT [ph] segment has reduced the number of clips across all North American properties, but the major peak spend represented in our average and above ADT segments is advancing. This game of our key consumers is the foundation of our success, and this specific segment continues to grow. who also hates to offset the year-over-year decline in retail consumer spending, which to the highest grades last year due to stimulus payments.
On the corporate expense side, our groups handle the overall charge design well while dealing with today’s inflationary pressures. The promotional environment in all our markets remains stable. He is quite disciplined and rational for the most part. It hasn’t been replaced much in recent quarters. Total marketing spending remains below pre-COVID levels.
Among our U. S. operations, Colorado led with earnings growth of 8% and EBITDA growth of 6% compared to last year. We found that inflation does not affect profits. However, we are affected in the aspect of expenses with higher prices. for utilities, repair and maintenance, and operational supplies.
Cripple Creek rose in all card game analyses, with the exception of the average amount of vacation which decreased slightly. This is possibly because fuel prices increased, but expenses increased. However, thanks to our consistency in market placement and our continued focus on visitor service, we continue to gain market share. In Central City, average spending consistent with vacations has remained solid and we are not seeing any inflationary effect on guest spending.
In West Virginia, our Mountaineer Casino, Racetrack
It moved to Missouri, where volumes remained high in July and early August, but began to decline in the current part of the quarter. There, it is more common for other people over 70 and the lower ADT segment, which reduced travel. Dangerous problems at water points in Caruthersville and dry weather around farmland this year haven’t helped either. As a result, we have noticed a decline in earnings compared to last year’s record quarter.
Last month, in early October, we had to shut down the casino component that is on the riverboat and operated with a limited number of slot machines and tables only on the houseboat. The good news for Caruthersville is the fact that we won approval from the Missouri Gaming Commission a few weeks ago to move the barge casino’s operation to an existing land-based accommodation, which is unaffected by water levels and is protected by a flood wall.
We are allowed to operate the casino in this pavilion and build a new hotel on land and the progression of the casino is complete, which we expect in the current part of 2024. The pavilion makes the casino much less difficult for visitors and we anticipate that. It will also bring operational efficiencies and cost savings. We plan to move operations from the barge to the flag next month.
Last week, we also opened a small hotel with 36 rooms. We called it Farmstead Hotel, which we bought last year and completely renovated. Preferably, it is located near the pavilion and car park. In our general effects presentation, look for a description as well as a sitemap and images for further understanding, however, a new land-based hotel and casino structure in Caruthersville began two weeks ago at the new 27,000-square-foot casino and 30-room hotel. General budget greater than 10%, from $47 million to $52 million.
Once the new hotel-casino is completed, the transitional casino in the pavilion will move to the new casino and the new Century Casino Caruthersville, then we will have a total number of hotel rooms of 74 rooms in two hotels, one connected to a casino the other the independent one in front of the pavilion. The new casino will have 20% more gaming positions and will offer significant operational power to be much more convenient for our consumers and will also build our catchment area.
At Cape Girardeau of Century Casinos, one of our two casinos in Missouri, we began the structure of a six-story, 69-room hotel building. The allocation is expected to raise $31 million and be completed in the first part of 2024. The progression of assets in a complete destination, offering after individual reasons and organization multi-day tours for many other purposes, such as games, meals, conferences, concerts and others.
Moving north to Canada, the Central Casino Hotel in Edmonton saw its winnings drop by as much as 7% due to paintings of the structure on the main road in front of the casino and a reduced slot reserve. Our two racing casinos as well as the Alberta Century Mile and Century Downs saw a fake win expansion of 9% and 4% respectively. Utility prices rose as much as 17%. Increases in the cost of goods can only be partially offset through price increases. The fourth quarter got off to a good start for Century Mile and Century Downs, with both homes posting record effects for the month of October.
Our casinos in Poland continued their functionality with a 25% increase in profits and a 34% increase in EBITDA. Results in Poland remain strong, which also contributes to the same procedure and has sparked renewed interest from small European casino teams and personal equity investors.
Anyway, there is no time pressure on our part as we have a wonderful control team in position at Casinos Poland, and we don’t want capital expenditures or investments. On the contrary, we are receiving money from Poland.
A quick look at our balance sheet and liquidity shows that we have $100 million in money and cash equivalents, plus the $100 million we have in receivership for the final Nugget OpCo transaction once its license ends. Outstanding debt $367 million, totaling $348 million under Goldman Sachs’ credit agreement, adding $100 million in escrow for the Nugget and $14 million similar to a long-term floor lease for Century Downs in Canada.
During the quarter, we were also very busy on the M&A front. In August, we announced the acquisition of Rocky Gap Casino Resort’s operations in Maryland for $56 million. Concurrently, with the completion of this transaction, VICI Properties will require genuine ownership assets and modify our masterpiece with VICI to charge the Rocky Gap property. The initial contract entered for the Rocky Gap Casino will be $2. 5 million.
The acquisition value of the casino operation represents a 2021 implied EBITDA margin of 4. 9 times. This multiple excludes all potential cost synergies and operational innovations can deduct the annual range of VICI’s lease from EBITDA. This acquisition will immediately add to our earnings.
Rocky Gap is a full-service resort, less than a two-hour drive from the Washington DC metropolitan areas and includes an 18-hotel golf course designed by Jack Nicolas, a 5,000-square-foot event center, several meeting spaces at the spa, and various activities. The assets include approximately 25,000 square feet of gaming area, 630 slot machines, 16 table games, 198 hotel rooms and five food and beverage locations. The transaction is expected to close in mid-2023 subject to regulatory and government approvals and final consumer conditions.
In Nevada, we have already invested $95 million and now own some of the real equity in the casinos on the market. We will complete the acquisition of one hundred percent of the operating company as soon as the license is completed, but it will still charge $100 million. We remain very excited about the Nugget transaction and see significant benefits when we leverage it.
With Nugget’s acquisition of an existing transaction with a long operating history, we do not anticipate ordinary replacement CapEx for the first year. Parts of the slot terrain upgrade and innovations in location [ph]. The acquisition also provides a smart perspective to generate synergy effects as we integrate an asset stand into our portfolio of 17 casinos.
With the ongoing acquisitions of Rocky Gap and the market, we will oversee the east-west portfolio in North America and, on a pro forma basis, after accounting for any of the acquisitions, we expect to generate approximately 95% of our EBITDA from our North American casinos.
With those expansion opportunities next year and beyond, we are confident that our company is well placed for continued long-term success. We will continue to execute our business plan through organic development, identifying and sourcing promising assets in a strong push into U. S. markets.
Now, the M&A strategy, we will continue to be cautious with pricing and valuation, we will continue to dedicate resources to capture synergies and give time to digest acquisitions and recognize value. On behalf of the company’s control and Board of Directors, I would like to thank our team. members, visitors and shareholders for their continued loyalty and enthusiasm. Thank you for your attention, we can now begin the question and answer session. Operator, move forward.
Q&A session
Operator
[Operator Instructions] And we’re going to answer our first Jeff Stadel query. Continúe. Su line is open.
Jeff Stantial
Thanks a lot. Hello, Peter, Irwin, thank you for answering our questions. I tried to start with some of the comments in the ready comments about low-value demographics that seem to have softened a bit more recently during the quarter. They talked about having an effect on the entire North American portfolio.
Is there any difference to the extent to which you realize this asset through the asset?When did you start to notice some relaxation and something changed with the October trends?
Pierre Hoetzinger
Erwin, can you give it some color?
Erwin Haitzman
Yes, we see some difference that is not exactly the same everywhere. This relaxation in the third trimester and into the fourth trimester, we are already doing things to verify that it is mitigated. To give you an example, for example in Mountaineer, have more hotel room gifts for the weekend.
We count more. We have customers, but obviously we see that they are also value trade-offs at the high end of the lower support. And also, we’re giving away a car, something we haven’t done before, and it’s very well earned through it — which we see in the October issues.
Jeff Stantial
It is ok! Genial. Es helpful, thank you. Then we moved to Missouri, so the budgets for any of the projects were a bit decent. Can you describe where you see the maximum load pressures and if you think the revised budget in the end turns out to be the right number, and how do you see the retrospective profile now with overall budgets going up a bit?
Pierre Hoetzinger
They went up about 10% and 11% and that came from almost every side. But now we’re incredibly sure of ourselves in all of this, and we also have, we have this in writing. We have agreements with our contractors and developers that in terms of returning to the Cape Girardeau hotel between the lower groups and Girardeau around 3 p. m. M. , that’s where we are, that’s where we see it coming.
Jeff Stantial
Genial. Es helpful, thanks, Peter. So, if I can upload another one about the disturbance of low water levels in Caruthersville. Peter, you gave some context on how to think about the impact on assets. Could you provide a similar way of thinking about the effects of the charge?You talked about superior functioning, but is there any way we can quantify and reflect on its effect during the quarter and perhaps take into account the effect on which it deserves to enhance also in the last quarter? Thank you.
Pierre Hoetzinger
We don’t have a precise number on the plus side. Do we have, is it like more than half, that’s what we believe?Truth?
Erwin Haitzman
Yes, yes. In this range. Yes.
Jeff Stantial
Super. Heard. Very useful. Thank you both. I will.
Operator
And then we will continue with Chad Beynon. Continue here. Your line is open.
Chad Beynon
Hello smart tomorrow. Thank you for accepting my question. I wanted to ask, I suppose, some kind of question in the medium or long term. It has been successful in the process of structuring its current portfolio. Where do you think the portfolio can go in the coming years?
Or, I suppose, asked in some other way, are there still opportunities and given your agreements with your REIT partners, you deserve us to keep waiting, in keeping with perhaps a year-matching acquisition to build the degrees of loose money you start at to get even greater scale?Thank you.
Pierre Hoetzinger
We see a number of attractive homes that would have very good compatibility with our asset portfolio. In this diversity of $15 million to $50 million EBITDA. No there are many, not too many buyers, as it’s too small for giant teams and we think we’re a very smart niche.
Yes, we have a very smart percentage in VICI, but let me also say that other real estate or real estate investors are also knocking on our doors. So, we believe that over the next two, three, 4 years, there will be a lot of M&A activity. It is ahead of us. Whether it’s once a year or twice a year, we look at it a little bit on the basis of opportunities, but there are plenty of opportunities there.
Chad Beynon
Great. Thank you, Pierre. Related to that, how do you visualize optimal leverage or less tight leverage, especially at times like this when interest rates have risen?
Pierre Hoetzinger
At the moment, I think we are at the right leverage point. But as we said, we are in the process of promoting our assets in Poland. We can use it to refund this if you think it’s the right decision. We also own Colorado’s assets. We own Canadian assets. That doesn’t mean we want to do something with them, but we can do it if we want to.
Currently, our net debt to adjusted EBITDA is 3. 4 and the adjusted net leverage of rents if you use a multiplier of 8 is 5. 5. We’re going to be able to decrease that ratio and we feel pretty confident with that.
Chad Beynon
Super. Thank you very much, Pedro. Good luck.
Operator
Thank you. Then we will continue with Jordan Bender. Please continue.
Jordan Bender
Thanks a lot. Thank you for accepting my question. So, in Poland, in local currency, it seemed that its margin was one of the most productive and maybe in the last six years or so. I was wondering what kind of engine deserves this strength and long-term waiting. I guess, a small double-digit margin in this segment?
Pierre Hoetzinger
I think we can, we don’t see any sign that those numbers aren’t sustainable. We are sustainable and everything indicates that we can maintain those numbers, and we also see possibilities to increase them even more. It is difficult to identify the reasons for just one. There are a multitude of reasons.
I think that, in general, what we can say is that, despite everything, the very strong local control that has put all its efforts and has proven to be greater, is only a year in which we can compete even more than before with all those local competitors. So we are satisfied with the team and as we said, we believe it can go on and beyond.
Jordan Bender
So, with respect to Canada, a similar question, arising from COVID, I guess the margins were unstable, just given, COVID reopening and then ending and reopening again. Thinking about it, I guess activity in ’23, I guess, where do we think margin degrees are perhaps sustainable or what will be the trend as we think about next year?
Erwin Haitzman
A little color, I would say in very general terms, we deserve to be able to maintain the existing margins and in various homes for smart reasons, to be able to build them. For example, in Missouri, we talked about adjustments there and deserving household adjustments and increasing our margins from the 22nd to return to previous levels.
In Colorado, we will probably be sidelined, so to speak. We are already doing very well there, however, I think again, we are very sustainable again. Excellent control there. And in Mountaineer, we have a hard time progressing step by step. It’s more complicated in Mountaineer because the gambling tax is so high. Therefore, it cannot be compared to a low text environment. But again, we feel forged with a very forged foundation and we deserve to be able to build it too.
Jordan Bender
It is ok. And just to stick to that, just to confirm, it has traditionally achieved a low EBITDA margin of 30%. Do you think it’s imaginable to go back to that point in the next two years in Canada?
Pierre Hoetzinger
Yes, I think it is not unrealistic to assume it.
Jordan Bender
It is ok! Super. Thank you.
Pierre Hoetzinger
In Canada, one thing that works for us is that oil costs for energy personnel are high and with a sure lag that is reflected in this economy.
Jordan Bender
It is ok. Thank you.
Operator
[Operator Instructions] Then we will continue with Edward Engel. Your line is open.
Eduardo Engel
Hello. Thank you for accepting my question. I just sought to stick to that last point, just in terms of margins and I guess charge inflation only in the aspect of general charge inflation, whether it’s utilities or labor, I guess you’ve noticed it in the last couple of months?It looks like OpEx in their homes with one less Q-on-Q, maybe Canada just needs to ask what it’s seeing in terms of OpEx expansion.
Erwin Haitzman
OpEx has definitely increased. So far, in all areas, I think our control has been very adept at locating tactics to solve this challenge looking to locate even more tactics to save in other areas. As for the startup speed, I commented that it can be difficult, not here, for example. But again, this doesn’t last and we were able to perform well even with a higher sales rate, although we slightly decreased staffing levels.
Operator
Thank you. We will then move on to Daniel Honk [ph]. Please continue.
unidentified analyst
Hi, thank you for responding to theArray Just a quick one on the Caruthersville and Cape Girardeau projects, are they meant to be funded entirely through money or have you provided investment for those projects?
Pierre Hoetzinger
The allocation of the hotel in Cape Girardeau, we finance it with money. And for Caruthersville, we have made the final point, but there will be several, such as money and financing resources.
Operator
We will then move on to Chris [ph]. Continue. Your line is open.
unidentified analyst
Yes. Hello, could you concentrate and simplify?I’d like you to identify one, two, or three critical variables that we look at to model corporate earnings in the fourth quarter and then for next year. Thank you for answering my question.
Pierre Hoetzinger
Yes, I would say that progress in this Missouri is vital to see how it looked in the third quarter or some kind of effect it has had, so continued good fortune in Colorado is very important. And we change. Secondly, there is a long way to go, as we have said, and we would like to see that continuity. Therefore, we are watching those 3 markets with great interest as they are critical to our good fortune.
unidentified analyst
Are you offering sales guidance or one of the key metrics at the back of the company?
Pierre Hoetzinger
Oh no, historically, the company hasn’t provided advice. We have a handful of wonderful study reports that are available on CNTY [ph], and I invite you to get one or more and read them.
Operator
And it turns out we don’t have any additional questions right now. I would like to call Peter Hoetzinger again for any final comments.
Pierre Hoetzinger
Thank you all for joining our call today. For a recording of the call, enter the monetary effects segment of our online page in cnty. com. And if you have any additional questions, feel free to contact us. May it be well and goodbye.
Operator
This concludes today’s program. Thank you for your participation. You can log out at any time.