Century Casinos (CNTY) Q4 2021 Earnings Call Transcript

Century Casinos (CNTY 0.33%)
Q4 2021 Earnings Call
Mar 08, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Century Casinos Q4 2021 Earnings Conference Call. This call is being recorded [Operator instructions] I would now like to introduce our host for today's call, Peter Hoetzinger. Mr. Hoetzinger, you may begin.

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

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 material -- from -- materially from our forward-looking statements. The company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

We provide a detailed discussion of the various risk factors in our SEC filings, and we encourage you to review this 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 results of the fourth quarter and after that there will be a question-and-answer session.

Our fourth quarter results continued the streak of record breaking performances that we have shown throughout the year. Revenues exceeded the same period of last year by 27%. Adjusted EBITDA was 36% higher. Most of the EBITDA growth came from our casinos in the U.S., but also from Poland.

Despite our record performance, it could have been even better. Canada had a difficult quarter, because proof of vaccination was required to enter the casinos. And we were not allowed to serve liquor after 11pm, which slow traffic down significantly. Thankfully, these restrictions have now been lifted and we are already seeing a nice rebound.

Our [Inaudible] operations are also impacted by the Omicron variant, a COVID related restrictions, as well as some supply and labor shortages. But our team successfully navigated through all of that, and delivered great results. Our strong performance is the result of a disciplined operating philosophy and effective targeted marketing to our high value customers. Our cost structure is more streamlined, and our marketing and promotional investments are more targeted, which translates into increased spent per visit, especially from our most valuable players.

The promotional environment in all our markets remains disciplined and rational, and while labor is tight in some markets, it's been able to maintain our high standards of guest experience. Obviously, this is largely a gaming centric only a minority of our revenue is coming from non-gaming amenities, and it will only open more non-gaming amenities or expand their opening hours as demand picks up further so that it grows in a profitable way. The geographic diversity of our portfolio with locations in hyperlocal drive to markets with a loyal customer base has proven extremely resilient in light of the pandemic. 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.

Sports betting and iGaming, both are profitable for us and has been profitable for us since day one. Early on, we decided not to participate in the costly [Inaudible] for customers at market share. We took a similar investment in zero-risk approach, meaning we simply provide our license to specialized sports betting companies. They pay us a revenue share with a minimum annual guarantee.

And what we get from them goes straight to our bottom line, we have no cost against it. Our two properties in Colorado, Cripple Creek and Central City, increased EBITDA by 14%. The EBITDA margin was 35%. Two out of the three sports betting licenses we have in Colorado are in operation already.

The third one with bet365 as a partner, is anticipated to go live next quarter. In Missouri, which is our most important pocket in terms of EBITDA and cash flow generation, we grew EBITDA by 23%. The EBITDA margin increased from 42% to 45%, even though we increase in wages, on top of the hourly minimum wage to stay competitive in the Southeast Missouri area and help attract and retain high quality team members. Marketing spend continues to remain significantly below pre-COVID levels, and is expected to continue -- to continue at its current run rate moving forward.

Reductions in advertising, direct mail and promotional expenses, it appeared to be sustained and have not had any negative impact on gaming volumes. We have announced two important developments with our Missouri properties. We plan to bring the Caruthersville Casino, which is the last remaining riverboat casino and open road 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. The savings on the insurance alone will be around $0.5 million per year.

It would also be significantly more convenient for our customers. It will increase our catchment area and also give us the chance to win back customers who didn't like the old riverboat style when they paid us a first visit. We plan to open that new facility in early 2024. In Cape Girardeau, we're developing a 75 room hotel that will transfer the property to a full resort destination with gaming, various bars, and dining menus, as well as conference concerts and event spaces.

That hotel is ready for opening at the end of next year. And now, opportunity for growth in Missouri sports betting. It has not been legalized yet, but there is a good chance it will this year, which obviously will be very beneficial for us. In West Virginia, our Mountaineer Casino, Racetrack & Resort had a great quarter, EBITDA was up 34%, over Q3 of last year.

We continue to make incremental investments into property, such as refurbishing some of the S&P outlets and upgrading the grand entrance experience. We also reconfigured separate areas of the slot floor and introduced new and additional slot product, as well as a new VIP gaming area. Hotel enhancements include new windows, new bathrooms, new and bigger TVs for the hotel suites to attract higher with players, and also that total rebuild of the outside pool. Internationally, our operations in Poland generated excellent results.

Revenue was up 67%, and EBITDA turned positive $3.2 million for the quarter. All our casinos over there are doing well, even without any meaningful business tourism. In fact, revenue over the last couple of weeks was at an all time high. In Canada, we operate with severe restrictions during the quarter, as already mentioned, all guest needed to provide proof of vaccination.

Everybody was required to wear a face mask and casinos were not allowed to serve liquor after 11pm. As a result, adjusted EBITDA was down 15%. But as mentioned, these restrictions have been lifted last week, actually. And as a direct consequence, results are on the up again.

Actually, they are up by more than 20%, in just the first -- first couple of days. Let's now cover our balance sheet and liquidity. As of the end of December 2021, we had $108 million in cash and cash equivalents, and $189 million in outstanding debt balance sheet, resulting in net debt of $81 million. A year earlier, our net debt was $130 million, meaning we generated $49 million in free cash the last 12 months.

Our strong free cash flow generation is driven by efficient and prudent capex spending programs at our properties, and for favorable regulatory regimes in West Virginia and Alberta, Canada. But if the state are respectively [Inaudible] pays for half or even all of their slot machine investments. Overall, we have a well-maintained asset base that requires minimum levels of maintenance capex to sustain the current levels of profitability. And we've always had a conservative leverage profile, and we anticipate remaining conservative in the future.

And now to the most recent news, the most exciting news, our announcement to acquire the Nugget Casino Resort in Reno Sparks Nevada. Two weeks ago, we entered into a definitive agreement to acquire 50% of the Nugget property company and 100% of the Nugget's operating company, for a combined total purchase price of $195 million. In addition, we have a five-year option to purchase the remaining 50% of practical, $405 million plus 2% per year. In connection with that transaction, we have received a firm commitment from Goldman Sachs for a $350 million senior secured term loan and a $30 million senior secured revolving credit facility.

We expect to close the purchase of 50% of the property company next month in April. And from that time on, we will receive $7.5 million in rent, which is our half of the annual rent payments that flows from the operating company to the property company. We will close that operating company purchase as soon as we get the Nevada gaming license, which is expected to take 9 to 12 month. And from then on, we will get all the EBITDA and we will pay as the operating company rent to the property company, half of which you obviously pay to ourselves.

In 2021, the Nugget is $33 million in EBITDA on revenues of revenues of $100 million. We see upside to these numbers, mainly for three reasons; First, during the first half of the year, 2021 there were no conventions or concerts, which normally are a very profitable part of Nugget's business; Secondly, we anticipate to create synergy effects when we integrate the Nugget into our portfolio of North American operations; And thirdly, we already have identified various opportunities to improve the operations, mainly on the slope for the most profitable area of ours. Now, some key data of the Nugget Resort. 60,200 square feet of casino floor, 859 slots and 29 tables, 1300 82 eighty rooms and suites in two hotel towers, a variety of casual and fine dining restaurants, 110,000 square feet convention space, and the very popular amphitheater with 8,565 seats.

With the Nuggets being directly adjacent to I-8, and with direct highway on and off ramps, ample parking, both surfacing and parking garage, it is perfectly located for customers coming by car. The traffic count at the nearby intersection is an amazing 260,000 cars per day. Here are the top 10 reasons why we love the Nuggets; First of all, we purchase an existing operation with the long operating history. That means we have no development risk, no risk of construction delays and no risk of cost overruns; Secondly, the market is in a great location.

Located directly on I-80, the property gets an exposure that is unparalleled in the Reno Sparks market; Then, the combination of hotel rooms and convention space with 110,000 square feet, the Nugget has the largest convention facilities of any hotel casino resort in the market, and it has sufficient rooms to support large conventions; Fourth, the previous owner the Munnel companies, have invested more than $90 million since 2016, upgrading all hotel rooms, most public areas added a top notch steak house, upgraded or replaced back of house equipment where necessary and the right size the operation. Therefore, we do not expect any extra ordinary or meaningful or replacement capex in the next years. And there's a brand new 8,555 plus seat amphitheater that provides us with excellent marketing opportunities. The Nugget gaming floor provides opportunities for improvement and growth, control and improve the slot mix, further improve the traffic flow, increase the square footage.

And the Nugget has a database of 80,000 active players that we will be able to market in a highly efficient manner. The acquisition offers great potential for synergy effects, as we integrate the stand-alone property into our portfolio of 17 casinos. The transition support of the settler, Anthony Munnell III and his team is perfect. We are grateful for that partnership; And last but not least, potential reason why we love the Nugget is management.

Management of the Nugget is excellent. We wanted to stay and continue that growth ahead with us. We have communicated this to management in person of the day we signed the deal. In terms of the broader market dynamics, that substantial economic growth the Reno stocks regions, companies like Tesla, Google, Switch Data, Amazon or Apple are coming to the area with the capacity to hire tens of thousands of employees. Consequently, the population growth is outpacing the national average and the personal income per capita already at over $72,000 in 2021, is expected to grow further with a key or a 4%.

And not surprisingly, the unemployment rate is only 2.9%. What we also loved about the Nugget transaction is that it significantly increases our scale. Our revenue is expected to grow by over 25%. But not only that, we also increases our geographic diversity, which substantially reduce our reliance on any one market or property.

Proforma for the Nugget transaction, we generate our cash flows from 18 properties in silver -- in seven different markets across in regions across North American, Europe, and no single property contributes more than 25% of our total EBITDA. That is something we always aim for, and that is part of our overall strategy. No reliance on any one market or property. Our team has an excellent track record of improving the performance of properties we have acquired.

In fact, we've improved the results of each and every property we have purchased within the first 6 to 12 months of acquisition. When we acquired the three casinos from Eldorado Caesars, a company with the reputation of being very disciplined and efficient operators, the increased revenue on EBITDA almost immediately. And that was before COVID-19, that had nothing to do with stimulus payments or any other COVID-19 related effects. We did that by listening to local management and focusing the operations on the more profitable revenue centers and drive additional value.

And after that very successful acquisition and integration of these three acquired properties over the last couple of years, all of us are very excited about doing the same all over again, if not better with the Nugget transaction. In conclusion, the first one 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 that focus on the right customer producing strong and sustainable margins. We will continue to execute on our business plan by growing organically, and by identifying and acquiring on the managed assets and stable price to 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 acquisition and recognize value. With that discipline and our strong balance sheet, we are confident to find further opportunities to deploy capital in a manner that consistently builds shareholder value. On behalf of the company's management and board, I'd like to thank our team members, our guests and our stockholders for their continued loyalty and enthusiasm, as we manage our business during these challenging times.

I thank you for your attention, and we can now start the Q&A session. Operator, go ahead, please.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of David Bain with B. Riley. Please state your question.

David Bain -- B. Riley -- Analyst

Great. Thank you, and congratulations on the latest acquisition. I think it's a great market. Very exciting milestone for Century.

Peter, you did a good job of outlining the structure, but if we can just take a second to review. So, you take over 50% PropCo next month and you'll begin to receive about $109 million per quarter and rent, like directly to EBITDA really flowing all the way through. And then upon Nevada approval, beginning of next year, let's call it, you get the whole EBITDA trailing $12 million, $33 million less $7.5 million in rent. But that doesn't include certain shows of hands that you outlined that weren't in there.

Probably, some benefits from structural upgrades and certain cost synergies and other performance enhancers that you've executed on previous mergers is that summarize things? Just so I can get it right.

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

Yes, absolutely, David. That's the right picture.

David Bain -- B. Riley -- Analyst

OK. Perfect. And then it looks like there's a lot of growth and synergies that identified revenue and cost wise. And I know you're not quantifying it today, per se, but are you saying material potential increases versus that $33 million at this point? Or is there anything more that you can give us there?

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

Erwin, can you come in on that? --

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

Yeah. The short answer would be yes, we see material possibilities and upsides to give you just two examples. As Peter mentioned already, the slot floor, we think, provides a significant upside potential. The average age of machines is rather old [Inaudible], and we know that bringing a new product will just help the revenues immensely.

And the second thing that we want to do is, when you look in the evening of the five large properties, the five last resorts in -- we know there is only one which is not literally well at night and that's the market. And we think that with the number of cars that Peter mentioned before 260,000 cars a day, it just makes a lot of sense to invest into a [Inaudible] with good signage and good light -- two examples, and of course, we could go on, but just to give you a first scene.

David Bain -- B. Riley -- Analyst

Very interesting -- Right. And then my second follow up, if I could. And I know you've addressed this Erwin in the past, and Peter. But just given the macro or geopolitical environment, are you still not seeing any pockets or rising oil costs could have a material impact and really either direction throughout the portfolio?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

If I may take that? No. Oil prices have been going up and down over the over the years, and we have never -- when they start, when the prices went up, we haven't really seen a negative impact on the business. And conversely, when they went down again, it wasn't the other way around either. The one thing that could be said is with regard to our our facilities in Alberta, Canada, in that area, higher oil prices obviously, a boost for the economy.

So that would even be good.

David Bain -- B. Riley -- Analyst

OK. Very good. Thanks, guys. Appreciate it.

Operator

Your next question comes from the line of Chad Beynon with Macquarie. Please state your question.

Chad Beynon -- Macquarie Group -- Analyst

Hi, good morning. Thanks for taking my question. Peter, wanted to to start with Poland. You said that the fourth quarter, obviously was very strong and you even said the past couple of weeks, revenues have continued without any international inbound.

Just wondering how we should think about this, given the current situation in Ukraine and Russia? Obviously, that could affect the international inbound, but just wanted to get a better sense of what you're seeing on the ground and what your consumers are thinking from day to day standpoint Thanks.

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

We -- it's in a way unfortunate, but we we see on positive impact so far. There's more people in Poland than before, and if that has something to do with it, but the impact is positive. Erwin, do we know exactly what's behind the uptick in revenues?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

I think, it's mainly just the pent up demand. We had so many restrictions for such a long time and people are just so happy that they can indicate going unrestricted again, and that's wonderful. And then, maybe I would like to mention all of our Casinos of [Inaudible] and West Warsaw, so we are quite far away from the border to the Ukraine.

Chad Beynon -- Macquarie Group -- Analyst

OK. Thanks. Also in Poland, is there any additional thought in terms of how we're thinking about the Warsaw license, which I believe is up for renegotiation or rebidding in 2022? Is that something given the Nugget acquisition and some of the other cash needs in the United States? How are you thinking about rebidding in that market, 

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

Chad, when we apply for new licenses in Poland, there's absolutely no investment necessary. It's all done on qualitative criteria. We would simply continue paying rent at the properties at the hotel where we have our casinos, Erwin, do you want to add something?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

No, no. Absolutely. I was about to say the same.

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

Yeah. So there's no investment associated with getting a new license.

Chad Beynon -- Macquarie Group -- Analyst

OK. Great. And then lastly, just a follow up to David's question on the PropCo Nugget calculus. Can you just explain why the 50% made sense? And how we should think about the likelihood of you taking everything in-house? Or if the opportunity would be more for I guess, taking that rent off of your balance sheet? And that's all for me.

Thank you very much.

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

Yeah. Thanks, Chad. Ultimately the outcome of a negotiation and -- be very much like that, that structure, because it gives us a lot of flexibility. We control the entire resort, we can close on that option to require the remaining 50% at any time at the fixed price.

But we don't have to. So what that means for us is like in terms of capex, we continue to look for interesting M&A opportunities. And if you find one, we can then evaluate our cash position, differentiator available at this time, and then decide whether we want to use the funds for that new acquisition or offer for acquiring the other 50%. Or theoretically, we could also sell our 50% in the Nugget and just keep the opco.

But as of today, we like the Nugget very much, and as of today, our intention is to also acquire the remaining 50%.

Chad Beynon -- Macquarie Group -- Analyst

OK. Great. Thanks, and congrats on the acquisition.

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

Thank you.

Operator

Your next question comes from the line of Jeff Stantial with Stifel. Please state your question.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Hey, good morning, Peter, Erwin, it's great to hear from you guys. Thanks for taking our questions. I just want to start -- the two projects in Missouri it did look like the total project cost ticked up a bit since the last time we spoke. You just talked to your degree of comfort that this should be where things shake out ultimately? Or should we expect that target to potentially continue to drift off a bit from here on out?

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

Erwin, do you have something on that?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

We do. What's the question of whether we think it's going to be more expensive?

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

Yeah. We -- the last time we gave the numbers, they were about 5% lower. I think we added some facilities, we changed a little bit the design of the Missouri hotel tower. So those numbers that we provided now are the most recent ones and we have high confidence in those numbers, right?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

Yeah, right.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. So just to be clear, this is more just a function of design plan as opposed to inflationary pressures?

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

Yes, we changed the -- [Inaudible]

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. Perfect. That's really helpful. And then switching gears, on the margins front looked encouragingly stable here in the U.S.

quarter-on-quarter. Aside from just some seasonality in Colorado, can you just frame the puts and takes here into 2022? Sounds like you highlighted some potential for lower margin, but EBITDA that accretive non-gaming revenues to take back up, and it does sound like the labor market remains tight in some of these markets. I think you called out Missouri, but just curious to get your thoughts there on some -- how we should think about the margin profile entering this year?

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

Erwin?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

All in all, we think we can keep it like it was in 2021, and we can also say that while the rest it's not been easy with the labor market, but we think the worst is over. We we're fine with in most departments, except maybe in food and beverage and housekeeping. But in essence, that is not such a -- such an urgent question anymore.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. Great. Perfect. Very helpful and encouraging.

Thanks.

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

Thank you, Jeff. 

Operator

Your next question comes from the line of Edward Engel with ROTH Capital. Please state your question.

Edward Engel -- ROTH Capital Partners -- Analyst

Hi, thank you for taking my question. Just back to Poland. Do you think the geopolitical issues in that part of world could impact your timing or the ability to maybe divest some of those assets?

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

We don't -- we don't know yet. We have two companies that are looking at that. They are seeing that the results are very strong, its actually getting stronger day by day. So as of now, we don't see that picture changing.

Edward Engel -- ROTH Capital Partners -- Analyst

Great. And then then onto St. Louis. Are there any benchmarks or hearing that we should think about our [Audio gap] radar maybe track the progress of that lawsuit?

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

I do not know that, except I can come back to you on that. What I do know is that we -- that there's two avenues that our people are going. One, is that we are opposing what the city of St. Louis wants to do.

And separately from that, we are also introduced with the help of the broad support of political parties. A separate bill that would only deal with our project like bringing the riverboat on land because it's much safer for everybody, and that bill has a lot of support from all political sides and it's moving now through the committees. So we will see by the end of the session in May what kind of progress we are making.

Edward Engel -- ROTH Capital Partners -- Analyst

Great, and thanks again, congrats on the transaction.

Operator

At this time, there are no further questions I would now like to turn the floor back to Mr. Hoetzinger for any additional or closing remarks.

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

Thank you, and 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, everyone and goodbye.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

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

David Bain -- B. Riley -- Analyst

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

Chad Beynon -- Macquarie Group -- Analyst

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Edward Engel -- ROTH Capital Partners -- Analyst

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