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Century Casinos Inc (NASDAQ:CNTY)
Q4 2019 Earnings Call
Mar 13, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Century Casinos' Q4 2019 Earnings Conference Call. [Operator Instructions] 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.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

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.

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 do 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'll 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 SEC filings, all of which are available in the Investors section of our website at cnty.com.

I'll now provide a brief review of the Company's financial results for the fourth quarter 2019. Following these prepared remarks, there will be a question-and-answer session.

In Q4, the big story for us was the completion of the largest transaction in the Company's history, the acquisition of three casino operations in Missouri and West Virginia from Eldorado Resorts for $107 million, representing a 3.5 EBITDA multiple. These are three quality assets in strong and stable gaming markets, each enjoying a leading regional position and each with a long track record of producing solid revenue and growing EBITDA. More on the encouraging initial results in a couple of minutes.

With this acquisition, we have doubled the size of our Company, which truly underlines -- which underlines a truly transformational nature of this deal. We are very happy to report that local management at all three properties chose to stay and become part of the great Century Casinos' team of 3,500 cooperators. We cannot give enough credit to the senior management teams at all three properties. They have been first class during all steps of this transaction from initial due diligence, all the way through closing and integration into the Century brand, a big thank you for that.

The big story for everyone these days is the coronavirus, COVID-19. We are carefully monitoring the situation caused by COVID-19 pandemic. Although the entire situation is unpredictable, our management teams are prepared to control what they can control. Our casinos are following and promoting the recommendations from the U.S. Centers for Disease Control and Prevention, which include everyday actions to help prevent the spread of respiratory viruses, such as washing your hands often with soap and water, avoiding touching your eyes, nose, and mouth with unwashed hands, covering your cough or sneeze with a tissue, cleaning and disinfecting frequently touched objects and surfaces, and of course staying home when you are sick.

We're also putting an extra effort into straight-forward and realistic guest messaging and have stepped-up employee trainings to ensure strict compliance with our policies and procedures. We are in constant communication with our employees to reinforce our sanitation safety procedures in both guest-facing and back-of-house areas. We are sanitizing high-traffic public areas at an increased frequency. Proper procedures are posted in all back-of-house work areas.

To date, COVID-19 has not had any significant impact on our U.S. or Canadian markets, while the market in Poland has been weakening by about 10%. As most of you know, our customer base is very diversified within North America. Our casinos are local casinos in urban and suburban locations, with the vast majority of our business from customers who live within an hour from our facilities, outside of markets frequented by tourists. Our casinos have negligible meeting and convention business and very few of our customers, if any, travel by air to visit us. This tempers the impact of COVID-19 on our business, but as we all know this situation continues to change.

Okay. With that, let's move on to the results of the fourth quarter. Net operating revenue was up 49%, adjusted EBITDA was up 69%, boosted by the three new casinos, which contributed for three weeks in December. We wrote off the entire investment in Bath, U.K., which led to a net loss for the quarter and the year. Talking about past, we recently entered into an exclusivity and confidentiality agreement with a potential buyer. We should know more about the outcome in one month or two months from now.

In Canada at the Edmonton segment, showed a 58% revenue increase, mostly because of the new addition of Century Mile Racetrack and Casino. EBITDA was up 6% only, again, because of Century Mile. Simply put, it still costs too much to generate the revenue. Getting the EBITDA margin to a more normal level at Century Mile is certainly the goal for this year.

In the Calgary market, it's quite the opposite. Revenue was flat, but EBITDA was up 10%. The expansion at Century Downs opened in late November and already contributed strongly to EBITDA, just as we had planned it. Our operations in Poland had a great quarter, too. Revenue was up 14%, and EBITDA was up 48%.

The Colorado segments had flat revenue and flat EBITDA, but we are very excited about sports betting going live in about two months. We have three sports betting licenses available and have already entered into one agreement with Circa Sports out of Las Vegas. Two more agreements with sports betting companies are in the works. As many of our competitors, we simply provide the licenses, no investment and get a percentage of the revenue with annual minimum guarantee. Overall, it will be a meaningful increase to the Colorado EBITDA for sure.

In the segment of West Virginia, the newly acquired and Mountaineer Casino, Racetrack and Resort contributed $8.7 million in revenue and $1.3 million in EBITDA in the three weeks of December. And in Missouri, the casinos in Cape Girardeau and Caruthersville added $7.4 million in revenue, and $2.6 million in EBITDA during their three-week span.

We can't stress enough how excited we are with the acquisition of these three operations. Not only did they come at a very attractive 3.5 EBITDA multiple, they are also performing great, even better than expected. Revenue is up significantly at all three casinos for the first two months of this year and we are confident that we can increase EBITDA margins even over what Eldorado did. We are in the midst of rebranding the two Missouri properties to Century Casinos, and we leave the well-established Mountaineer brand in place.

Lots of things have been going on at these three properties since we took them over in December. The integration into our reporting marketing database and IT systems has gone very smoothly, and the number of operational improvements have already been implemented, such as the replacement of about 5% of the worst-performing slot machines with new product and the reconfiguration of the gaming floor layouts which have shown immediate positive effects. We will now focus on further optimizing marketing spend and planning a calendar around the promotions, which drives the most excitement for our customers at the most efficient cost.

On a pro forma basis, giving effect to the acquisition as if it had occurred at the beginning of 2019, we have five casinos in the U.S., five in Canada and eight in Europe, with a total of 7,200 gaming machines, 285 gaming tables, 430 hotel rooms and three horse racetracks. We generated pro forma net operating revenue of $423 million and $54 million in EBITDA after all rent expenses. These numbers do not include any synergy effects at all, and going forward we expect revenue and EBITDA to grow further due to the recent expansion at Century Downs, sports betting in Colorado, Century Mile ramping up and eliminating the losses in the U.K.

On a pro forma basis, our leverage on traditional net debt is 2.5, and our lease adjusted net debt leverage is 4.1. Maintenance capex in 2019 on a pro forma basis, including the new properties, was about $10 million or approximately 2.5% of revenues, down from $11 million a year ago. Our well-maintained asset base requires minimal levels of maintenance capex to sustain current levels of revenue and profitability. It certainly helps that the Alberta Gaming Commission pays for 100% of slot machine capex and the West Virginia Gaming Commission pays for 50% of slot machine capex.

All right. Before we go into the Q&A session, here are the current and very encouraging revenue trends for the first two months of this year. As already mentioned, Poland is down about 10%, Colorado is up mid-single digits, West Virginia is up mid-single digits, the Edmonton segment is up double digits so as Calgary, and Missouri is up double digits as well. The first two days of March confirmed these trends, thus everything points to a good start to the first quarter.

With that, I thank you for your attention. And we can now start the Q&A session. Chris, go ahead, please.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from David Bain with ROTH Capital. Please state your question.

David Bain -- ROTH Capital -- Analyst

Great. Thank you. I guess the first question I have is just kind of given everything that's going on, does this make the opportunities out there, time to negotiate acquisition is -- does this put things on hold or does it actually make things more lubricated for you, if you will? Are you assuming -- is that the REITs are still open with respect to deals you're looking at, is that the case? Or have you been in touch with them of late?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Hi, Dave. Yes. Yes, REITs are open. Other, like debt funding, is -- that's not so certain. And the targets out there, when -- the publicly listed companies, they don't consider them to be sellers, of course, at this point in time, with the lowest stock prices. But we are looking at other properties, have been looking for quite some time. And giving it a little bit of time, I think, come summer time, you will see us active again. We don't want to rush anything, just because of the current virus situation. That will not trigger any actions from us on the M&A front.

David Bain -- ROTH Capital -- Analyst

Okay. Got it. And then, Peter, also, just looking at the public revenue and some of the numbers that you cited through March, congratulations by the way, especially with regard to the new domestic portfolio. I'm hoping to get an idea of EBITDA flow-through. Is that kind of close to the same revenue growth? Should we look at that? Or does that expand and get refined through the year? How do we look at the kind of the flow-through as you've increased revenue at the properties?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

If the cost and expense structure stays roughly the same as it is done in January and February, in other words, if there is nothing coming because of this virus situation, then the EBITDA should grow by a little bit more than the revenue growth. That's why we are pretty confident for now that we can even improve on the other [Phonetic] margins.

David Bain -- ROTH Capital -- Analyst

Okay. And then just last one, just a follow-up on your coronavirus comments. So, outside of some movement in Poland, you haven't seen any impacts to offerings, given they're local, they don't have lot of flying. But Century Mile, that is a portion of its [Indecipherable], that comes from the Edmonton Airport correct? Or are you not seeing any sort of impact there?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Erwin?

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

At the moment, we don't see anything yet. So far, so far so good.

David Bain -- ROTH Capital -- Analyst

Okay, fantastic. Thanks, Peter. Thanks, Erwin.

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

Yeah. Thank you.

Operator

[Operator Instructions] Our next question is from Chad Beynon with Macquarie. Please go ahead.

Chad Beynon -- Macquarie -- Analyst

Hi, good morning. Thanks for taking my question. Wanted to just ask one more on the coronavirus. And all the color that you gave so far has been very helpful. But within, I guess, the closed regions where you have properties, are you aware of any other measures that the local county or city has made in terms of like school closures or any other things that could potentially scare you're patrons from coming? Or do you feel like, at this point, the regions where you operate, I guess, the hype is a little less than what we're seeing in some of the major cities? Thanks.

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

This is Erwin. I think, at this point, we don't see anything, but you know that can change.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

In Eldorado, there's some schools closed as of today, I believe.

Chad Beynon -- Macquarie -- Analyst

Okay. And then a common question that we're getting from investors. This week is just around any leverage covenants. Obviously, your debt leverage is lower than most of your peers. But are there any covenants or any provisions within your debt documents that we need to be aware of?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

We are very covenant light, but taking -- can you go into a little bit of detail?

Margaret Stapleton -- Chief Financial Officer

Agree, Peter. We're just -- we're covenant lite and we would not expect to trigger any covenant issues at this point in time.

Chad Beynon -- Macquarie -- Analyst

Okay. And then the last one, just with respect to your comment on some of the items that you've done since the closing of the Eldorado properties. You said you're replacing some of the lower-performing machines. Is this something that you started already? I mean, could we start to see the benefits as early as late in the first quarter or second quarter? Is this something that's already been put into place? Just kind of help us with the timing of maybe some of these revenue synergies.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Erwin?

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

This is Erwin. That has been partly put in place already. So a number of those slot machines that we got [Phonetic] are already on the floor and some reconfigurations have been made it's way. So, yes, we will see -- provided the situation stays the same, we will see that already in the latter part of this quarter.

Chad Beynon -- Macquarie -- Analyst

Okay. Thank you very much guys. Best of luck.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Thanks, Chand.

Operator

Our next question is from Richard Smith, a private investor. Your line is open.

Richard Smith -- Private Investor -- Analyst

Yeah, good morning. Considering the considerable drop in your share price, would the Company consider buying back shares at this time or in the future?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Hi, thanks for the question. That is always a consideration. At the same time, we look at our cash needs to improve the existing operations and we look what else is out there to improve our stock price, but this is one consideration that we have. But there's nothing that we will do like immediately, because we are still finalizing our immediate capex plans for the properties that we just acquired. So, don't expect anything immediately to happen.

Richard Smith -- Private Investor -- Analyst

Okay. But the Company does have ample cash to buy back shares, if within the next, I don't know, couple of months, if you have to, the stock drops, let's say, into the twos or something?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Yeah. I mean, we have about $51 million cash on hand and with lines of credit. So be the share buyback or other very important capex things that we have on our agenda, yes, we have the cash.

Richard Smith -- Private Investor -- Analyst

Okay. Okay, thank you very much. Thank you.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Thank you.

Operator

Our next question is from Steve Kaspel [Phonetic] with RJ & Associates. Please state your question.

Steve Kaspel -- RJ & Associates -- Analyst

Hey, guys. Thanks for taking the question. Just real quick, you kind of just addressed this, but I just think the market is not understanding the strength of your balance sheet. And just if you could reiterate that because obviously the stock at this price doesn't make a lot of sense. Just wanted you to kind of reiterate that.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Yeah. Thanks, Steve. Listen, we have, I think, yeah, one of the strongest balance sheets in the gaming industry. 2.5 net debt-to-EBITDA leverage is really pretty healthy. But at the same time, we've all been through various crisis over the last 30 years, when Erwin and I founded the Company in '92. Everything with the word casino in the name has gone through the roof in terms of stock price. And then we had over the last -- almost 30 years, we have various situations where many of our small competitors or highly leveraged competitors did not survive. We are still here with a balance sheet that's almost stronger than ever. And you will find us continuing going forward on a more conservative way compared to many others.

Steve Kaspel -- RJ & Associates -- Analyst

Okay. Thank you.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Yeah. Thanks.

Operator

Our next question is from Brad Boyer with Stifel. Please ask your question.

Brad Boyer -- Stifel -- Analyst

Yeah. Thanks for taking the questions, guys. And sorry if you've already answered these, I had trouble getting on the line. First question, Peter, for you. I noticed you called out in the release that thus far outside of Poland you hadn't seen much of an impact from the virus on the business. Could you just kind of give us a sense of does that comment relate to up until say yesterday, was that up till some other point of time? Just any context around that would be helpful.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Yes. Brad. That is up until yesterday. We don't see any real impact in Colorado, in the West Virginia and Missouri, and also in Canada. Yeah. And we also don't see any measures mentioned like closure of anything in the state, other than Colorado, I think, certain schools have closed. Poland is a bit different. Yeah. But then again, so far, it's around 10% and that has been for a couple of weeks now. And it's pretty stable at that number.

Brad Boyer -- Stifel -- Analyst

Okay. That's helpful. And then, I mean, obviously relative to the Albertan oil market, I mean, oil prices have been sort of relatively low for a while now, but obviously there's been a little bit of a shock to the system in the last couple of days. Could you remind us just what you believe to be your relative exposure to the oil patch in Alberta is at this point from sort of a customer sourcing perspective? I know, over the years, you sort of kind of helped us frame the segments of the demand pool in Alberta. Any color you could provide there?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Yeah, that's a little bit of a worry for the Canada segment. I mean, the companies during the last oil crisis about five years ago, they have downsized. They say they have right-sized, so there is no talk of any, like, huge layoffs or anything at all, but we are monitoring the situation. On the flip side of it is that, as you know, gas prices have a big correlation with regional gaming revenue. And with our new strength in the U.S. regional markets, there's, I think, a lot of tool to offset possibly weaker economy in Alberta with the low gas prices helping us in the U.S. regional gaming markets.

Brad Boyer -- Stifel -- Analyst

Okay. That's helpful. And then, I mean, if we look at your Polish operation today, I realize it's a smaller percentage of the overall business than it was prior to the Eldorado deal. But it's a nice little business, it's doing, the recent headwinds aside, somewhere in the neighborhood of 10-or-so-million dollars of EBITDA. I think it's still relatively ignored by North American investors. They just don't really have a good feel for that market. How committed are you to owning that business long term? And I mean, is that something where you could potentially look? I mean, I know there's a couple of opportunistic buyers out there potentially. Do you think that's a business that you could look to eventually unwind at some point and kind of redeploy that liquidity elsewhere?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

We're constantly considering various options. And with Poland, as you said, it's a nice little business, producing solid numbers. We only had the hiccup 1.5 years ago and that has still some kind of a negative effect, I believe, on some U.S. investors because it created some uncertainty, even so it was only a one-time event in the 30-year history of Polish gaming.

The value of that investment is the big question. Because of the six-year license -- lifetime of a license, the question is, how much can you really get if you put it on the market. So, we'll see. We have not decided yet. So far, we're very happy to own it, and it generates very good revenue and EBITDA for us and cash flow because we are giving the dividends out of the countries.

Brad Boyer -- Stifel -- Analyst

Great. Okay. And then, lastly, I don't know if you commented on this at all, but just from a housekeeping perspective, did you mentioned at all what you think capex could look like for this year?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

We've said that in 2019, on a pro forma basis, including the new properties, it was $10 million, down from $11 million in 2018. And I'll pass it over to Erwin. Erwin, do we expect it to go a little bit higher because of some things that we implemented in these new properties?

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

On the one hand, yes, but on the other hand at the moment, in this situation where we are now, we are holding off on capex for the next few weeks on things that are not [Indecipherable], things that are not in the middle of being completed. So, depending on how quickly we can go back into normal mode, that may impact -- that will impact the total capex spend. So, if we stay on the cost of side, it could be less than $10 million. If not, then it would be in the cost of, like you said Peter, due to the investment in 10 user products [Phonetic] and other things in the new properties.

Brad Boyer -- Stifel -- Analyst

Okay. Thanks guys. I appreciate the color.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Thanks, Brad.

Operator

Our next question is from Jamie Yackow with Moab. Please state your question.

Jamie Yackow -- Moab -- Analyst

Hi guys. Good morning. So, Peter, when -- I may have missed it. But did you guys provide any commentary or updated outlook in terms of when you're thinking get to full run rate on the Century Mile property?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

No, we have not given that number. It's -- as you said, it's ramping up slower than expected. The revenue is OK, but on the cost side, we are working and we are squeezing the numbers, and we are trying to get the EBITDA margin to where it should be. Anymore from you Erwin in terms of timing, when we think we'll get there?

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

Yeah. I think, to say, I mean, in non-quantified fixed terms, we will see positive new trends and we're confident that we'll get it up, but it's hard to say. I mean, we see now a regulation impact, but how quickly it regardless of the damage we have to estimate.

Jamie Yackow -- Moab -- Analyst

Yeah. I think you guys have previously said you thought by, like, second quarter, you could have -- you can be approaching that run rate. I guess, would you say, I mean, obviously, with the virus and all the uncertainties, do you think the -- I mean, first of all, do you think the run rate of $9 million or $10 million is realistic at this point in time in longer term? And would you expect, I don't know, to exit the year at the very least on that run rate, just given kind of the uncertainties?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Can you say anything to that, Erwin?

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

I would say, long term, it's realistic, but it's not realistic for 2020.

Jamie Yackow -- Moab -- Analyst

Understood. And what about -- just someone asked you about the flow-through on the upside, but what about on the downside? You said Poland was down 10%. How do we think about the flow-through to EBITDA?

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Yeah. I mean, same with the upside that -- on the EBITDA side, it's a little bit higher.

Jamie Yackow -- Moab -- Analyst

Okay. And I guess just, lastly, a comment, just given kind of where your stock price is and the cash generation and the belief that this will pass over time, the virus. I think it would be rather than -- I get it there is exciting opportunities out there, but just given where your stock is, I think we feel strongly that you guys should be looking at buying back your own stock at a normalized 25%-plus type of free cash flow yield, as opposed to making further acquisitions. And I'll leave it at that.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Okay. Thanks, Jamie.

Operator

There are no further questions at this time. I'll turn the call back to Mr. Hoetzinger for any closing remarks.

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Yes, I would like to thank everybody for your interest in Century Casinos and for your participation in the call. For a recording of the call, please visit the financial results section of our website at cnty.com. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Peter Hoetzinger -- Vice Chairman of the Board, Co-Chief Executive Officer and President

Erwin Haitzmann -- Chairman of the Board and Co-Chief Executive Officer

Margaret Stapleton -- Chief Financial Officer

David Bain -- ROTH Capital -- Analyst

Chad Beynon -- Macquarie -- Analyst

Richard Smith -- Private Investor -- Analyst

Steve Kaspel -- RJ & Associates -- Analyst

Brad Boyer -- Stifel -- Analyst

Jamie Yackow -- Moab -- Analyst

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