Century Casinos, inc (CNTY) Q3 2021 Earnings Call Transcript

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Century Casinos, inc (CNTY 0.32%)
Q3 2021 Earnings Call
Nov 5, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Century Casinos Q3 2021 Earnings Conference Call. This call will be recorded. [Operator Instructions]

I would like to introduce our host for today, Mr. Peter Hoetzinger. Please begin, sir.

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.

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. Reconciliations 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 Investors 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 a new all-time revenue record for the second consecutive quarter. Very strong flow-through and a consolidated margin of 28% result 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 and 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 grade 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 continue 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 waited 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 Winters' 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 or 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 Cripple Creek and Central City, with both casinos clearly surpassing 2019 and 2020 levels. Net operating revenue was up 36% over '19 and was up 20% over last year. Adjusted EBITDA more than doubled compared to '19 and is up -- 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 tailor drops in property history, led by strong mini baccara 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, the increased wages on top of the hourly minimum in order to stay competitive in the Southeast Missouri areas 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 promotional 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 Caruthersville Casino, which is the last remaining riverboat casino and 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 Caruthersville, 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 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, Century Casino Cape Girardeau will transformed to a full resort destination, providing ample reasons for individual and group multi-day visits for gaming, dining, conferences, concerts, events and more. Total capex will run at about EUR68 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 & 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 Mountaineer resort destination character. It usually draws quite a lot of its business from hotel space, which were somehow limited -- somewhat limited due to staffing challenges and other restrictions. 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 in a maximum of 72 hours before entry. Also, everybody is required to wear a facemask. 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 Racetrack 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. With 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 build 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.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Jeffrey Stantial.

Jeffrey Stantial -- Stifel -- Analyst

Hey, good morning, and thanks for taking my questions, and congrats on a nice set of results here. For my first question, we talked a lot this earnings cycle about trends here in the US, so wanted to focus on the international ops for a second, can you talk a bit about the month-by-month cadence of performance for Canada and Poland? Has it been fairly stable since their respective reopenings? Have you witnessed any acceleration or deceleration? Just curious to hear your thoughts there.

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

Pretty stable right, Erwin?

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

Yes, pretty stable and very much in line with the various measures. So when we -- as Peter mentioned before, in Canada, we still have -- for a long time still have restrictions. People have to wear a mask or produce a test for vaccination. That, of course, limits the speed of growth and the acceleration a little bit. However, we have also seen that across -- say international, both in Poland and in Canada, people are getting used to wearing -- that were being vaccinated to wearing a mask also have to do a test. And more and more people have been vaccinated in the various jurisdictions, which also means that customers that may have been hesitant to visit us now feel safe and then visit us more frequently and stay longer.

So all-in-all, we can say that we see growth everywhere with the only exception that the one or the other COVID restriction limits that growth -- the speed of the growth a little bit.

Jeffrey Stantial -- Stifel -- Analyst

Okay. Perfect. And then for my follow-up, Peter, any update you can provide on the Poland sale? And then on the M&A environment, you've talked about in the US, how does seller expectations feel relative to kind of we're not focused by Q2 earnings? And that's all for me, thanks.

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

In Poland, the sales process continues, it runs, but it runs quite slowly. Several parties are showing interest on an on and off basis. But we are finding a way, these operations are pretty valuable. They produce nice results. And overall, they're getting like smaller and smaller relatively because they are now about 9% or less than 9% of our consolidated EBITDA. So that's the situation there.

And on the M&A front in the US, I think it's slowly starting. I mean you've heard, Tom Rigg [Phonetic] saying that they are interested to sell. It's starting always in Vegas. I mean, MGM is selling Mirage. So it's starting. And yes, in terms of valuation, you can talk about markets all day long. It always depends on -- you apply to which EBITDA do you apply. So it's a combination of finding a right multiple and agreeing on an EBITDA to apply it to. But we see slowly but surely more and more properties becoming available.

Jeffrey Stantial -- Stifel -- Analyst

Okay, correct. Very helpful. Thank you both. I'll pass it on.

Operator

Your next question is from David Bain.

David Bain -- B. Riley -- Analyst

Great. Thank you. Very nice quarter. A lot of the big questions were addressed, but maybe we can drill down a little bit on the M&A environment that, Peter, you were just speaking to. Understanding valuations tightened a little bit, and you've always been sensitive on that front. It seems like through earnings season, the larger companies, you mentioned one of them have been increasingly focused on sort of the virtual gaming world and spending larger amounts there. I mean, could that open up baskets of sellers more? Are you hearing of new product potential? It sounds like you were to that end? Could we see property baskets? I know you were looking at, I believe, $15 million up to maybe $60 million of EBITDA. But given your cash accumulation and some of the larger ones potentially looking to loosen their portfolios a little bit, could we punch through that at the right price? Or are you not seeing that type of product at this point?

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

Yes, we're starting to see that, absolutely. And yes, the online business does play a role because, surely, most of the larger companies with a large footprint throughout the US, they want to have at least one property in a state to secure an online license in that state. But should they have more than one in the state, then yes, more likely, some of those will become available. Yes. And so this is what we are seeing from pretty much all of the larger companies.

David Bain -- B. Riley -- Analyst

Okay. Great. And then I know this was somewhat addressed as well, but maybe just kind of reiterating or drilling down on Canada because that was a nice outperformance versus what we were anticipating. Maybe looking at the US reopening, is this sort of that reincarnated? And are you seeing anything that would give you the sense that we wouldn't expect those same sort of tailwinds to be sustained like they have here? And maybe just a tad on energy prices for the portfolio in general, both domestic and in Canada of that is something that's on the radar is that typically not something that historically has caused too much volatility?

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

Yes. I think I guess I tried to say earlier, further growth will be fueled by easing the COVID restrictions, which obviously is not our hands and is a function of the development of the numbers there. But that means upside potential because we would really think that these restrictions should be there forever. And so we feel very good about Canada and the growth potential that it has and that we will be able to realize as soon as restrictions are gone.

David Bain -- B. Riley -- Analyst

And anything on energy prices there or in the US?

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

That does not affect -- in Canada, that doesn't affect us significantly.

David Bain -- B. Riley -- Analyst

Okay. All right. Well, great quarter again. Thank you very much.

Operator

Your next question is from Kenneth Evanovich [Phonetic].

Kenneth Evanovich -- Analyst

Great quarter. I would like to just -- I think most of the question was answered, but I was wondering if you could put a percentage basis on the amount that social distancing still can restrict your ability to earn full amounts of money on all your casinos. Do you have a possible percentage that the business would increase if this was all gone?

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

Good one. Erwin, do you have anything to add?

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

I have numbers in mind, but I think it's problematic to speculate on that. It's really hard to say. I mean, one way to look at it is looking at our pre-COVID levels, and that's -- we look at it, the first goal is to kind of revenue-wise, to compare it to the pre-COVID levels and then creating to surpass them. And at the same time, with the cost control that is already in place, keep the EBITDA and EBITDA margins.

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

And also at some of our casinos, we do not have all table gate positions open, which on a busy weekend has a negative effect. Yes, but we do not have a detailed answer in terms of percentages here.

Kenneth Evanovich -- Analyst

Okay, thank you very much.

Operator

[Operator Instructions] Your next question is from Colin O'Donnell [Phonetic].

Colin O'Donnell -- Analyst

Hi guys. Thank you for taking my questions. A few weeks ago, one of your competitors, Boyd, provided an interesting statistic, and I don't know if you guys could do the same thing. But they said their labor force had been about 24,000 before COVID, and it was now about 14,000, and they expected that only 1,000 or 2,000 people would have to come back to run the casinos at a full pace. Do you guys have any -- could you provide any similar type of information just so we can think about the fixed cost structure of the casinos into next year?

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

No. We don't have that off-hand, we could try to get it to you later.

Colin O'Donnell -- Analyst

Yes. Okay. I think that would be very helpful. And just the other thing, just looking at -- I know you guys don't have very many sellside analysts, but the Street estimate on FactSet for this year is $66 million and for next year, it's $88 million. And I'm looking at your numbers, so you guys have done $91 million of EBITDA in the last 12 months. So what -- is there something missing on the Street or the communication? Or it seems like you guys are going to blow the numbers out of the water, and I'm just trying to figure out if I'm missing something.

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

Yes. No, I think they wanted to be conservative. I'm sure they will update their numbers after this quarter. But other than that, Colin, we don't give guidance. So it's...

Colin O'Donnell -- Analyst

Understood. But is there any significant reason that Colorado or Missouri or West Virginia would have a worse year in next year than this year?

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

No, we don't see any significant reason there.

Colin O'Donnell -- Analyst

Okay. Very helpful.

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

We think there's still upside.

Colin O'Donnell -- Analyst

Great. Okay. Well thank you for taking my question.

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

Thank you.

Operator

Your next question is from Chad Beynon.

Jordan Bender -- Macquarie -- Analyst

Good morning. This is Jordan Bender on for Chad today. As you look at M&A, would you look to use or continue to use a REIT to possibly go bigger? And I guess what would your optimal OpCo/PropCo structure look like? And where would you want to bring leverage?

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

Yes. Our goal is to grow, not only in absolute revenue and EBITDA numbers, but also in property size, yes. And with regard to PropCo/OpCo, currently, we have three in the US that we acquired from Eldorado Resorts on an OpCo, two in Colorado is PropCo, most in Canada is also owned by us. So that's a good mix. And we can -- we don't have like a clear goal that we don't go below a certain percentage. So I think we could easily add another OpCo or also a HoldCo, we're fine either way. We do not need to own the asset, but feel comfortable owning some. It's really more on an opportunistic basis. For us, it's more important how we like the asset, how we like the market, the competitive environment, the regulatory environment, the specific location asset. Those are the things that are far more important to us than whether we can buy the HoldCo or the OpCo.

Jordan Bender -- Macquarie -- Analyst

Okay. Perfect. And then obviously, Poland outperformed, I guess, at least our expectations in the quarter, revenues were actually over 2019 levels. You talked about that your consumers outside of Warsaw were the ones that kind of outperformed in the quarter. Can you kind of talk about where the casinos within Warsaw sit, just kind of thinking about how the model of this segment looking into '22?

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

Yes please, Erwin.

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

No, OK. It is totally fine.

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

There is two in Warsaw at American Hilton Hotel and the others are outside of the country. And historically, the Warsaw market is -- in absolute numbers much stronger than the six outside of Warsaw combined. So any uptick of the Warsaw properties has a meaningful impact on the overall Poland numbers. Erwin?

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

Right. And if I may -- I think and if I may add to that. We -- looking at what is happening in the first quarter, we are very optimistic in that direction. We see that the business customers coming back, the Marriott and Hilton both getting much higher occupancy and also guest that want to come to our casinos. So we're confident that in the next phase, so to speak, the Warsaw casinos will follow the same trend as the casinos on the country side.

Jordan Bender -- Macquarie -- Analyst

Awesome. Nice quarter. Thank you.

Operator

[Operator Instructions] Your next question is from Daniel Wayne.

Daniel Wayne -- Gam Investments -- Analyst

Hi, guys, nice quarter. I was just wondering if there's any update on the Poland strategic review process. Is the company sort of committing to the region at this point? Or any discussions there?

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

We have said that Poland has become a non-core operation for us. It is, as I've mentioned, about 9% or less than 9% of our consolidated EBITDA. And consists of eight small operations. So while it is generating very solid EBITDA and cash flow for us and very high returns on our investment, we strategically do not have Poland in our long-term plans, if we get a good offer. So in other words, it has great value for us. If we get that value, then yes, we decide to dispose of it, if not, we are happy keeping it.

Operator

At this time, there are no further questions.

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

Thank you, everyone, for joining our call today. For a recording of the call, please visit the Financial Results section of our website at cnty.com. Stay well, and goodbye.

Operator

[Operator Closing Remarks]

Duration: 34 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

Jeffrey Stantial -- Stifel -- Analyst

David Bain -- B. Riley -- Analyst

Kenneth Evanovich -- Analyst

Colin O'Donnell -- Analyst

Jordan Bender -- Macquarie -- Analyst

Daniel Wayne -- Gam Investments -- Analyst

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