Century Casinos (CNTY) Q1 2022 Earnings Call Transcript

Century Casinos (CNTY 0.33%)
Q1 2022 Earnings Call
May 06, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Century Casinos Q1 2022 earnings conference call. This call will be recorded. [Operator instructions] I would like to introduce our host for today's call, Mr. 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 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 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 legibility measures to the appropriate GAAP measures can be found in our news release and SEC filings, available in the investors' section of our website at cnty.com. I will now provide an overview of the results of the first quarter.

After that, there will be a Q&A session. Our first quarter results continued the strength of record-breaking performances that we have shown throughout last year. It was a great start to 2022 with record first quarter revenue and record first quarter adjusted EBITDA. Revenues were up by more than 42% year over year, and EBITDA grew an impressive 62% compared to the first quarter of last year.

Earnings per share for the quarter were impacted by our loss on the sale of land and bidding in Calgary as well as by costs related to the acquisition of the Nugget in Nevada, we had a combined impact of approximately $3.3 million or $0.11 per share. In addition, our effective income tax rate increased from 22.6% last year to 34.6% this year due to the total earnings we project for this year. Our revenue growth was broad-based as each of our three operating segments posted new first quarter revenue records. The continued focus on our core customers and a streamlined cost structure contributed to these great results and margins and allowed us to continue our strong operating momentum from last year.

Sequentially, we managed to keep the high margins the same. In the first quarter, we maintained the 23% EBITDA margin that we achieved in the fourth quarter of last year. Compared to pre-COVID, meaning the first quarter of 2019, we are well ahead. We actually increased the margin by 800 basis points.

Marketing spend continues to remain significantly below pre-COVID levels and is expected to continue at its current run rate moving forward. Reductions in advertising, direct mail, and promotional expense appear to be sustainable and have not had any negative impact on gaming volumes. The promotional environment across all our markets remains relatively stable, I would call it disciplined and rational for the most part, not much has changed for the last several quarters. Other factors impacting margins include labor, food cost, and utilities.

And while labor is tight in some markets, we've been able to maintain our high standards of guest experience. Staff count is down by between 15% to 20% compared to pre-COVID levels and that appears sustainable. Higher food costs can, to a large extent, be offset by increased menu prices. Raising the utility costs or rising utility costs are hard to offset, obviously, so there are some incremental expenses, but it has no material impact to our P&L.

Also we are facing these cost increases, we are able to maintain margins due to our disciplined operating philosophy and efficient targeted marketing to our high-value customers. In spite of some macroeconomic change -- challenges, if not noticed any meaningful shift in consumer behavior as we look at April and even into May. The customer trends we experienced at the end of 2021 are continuing. Looking ahead, we had the impact from stimulus payments in April and May of last year, making second quarter year-over-year comparison challenging for the U.S.

operations. But more than offsetting that is the strong compact of our Canadian operations. That results in preliminary numbers for April, significantly beating April of last year. Our business is largely gaining centric.

Only a minority of our revenue is coming from non-gaming amenities. And we will only open more non-gaming amenities by expanding their opening hours as demand picks up further so that its growth in a profitable way. The geographic diversity of our portfolio with locations in hyperlocal drive two markets with a loyal customer base has proven extremely resilient. Resilient not only in light of the pandemic but also in light of changes to oil price or CPI.

With high confidence in the underlying trends of our consumers' behavior, it has not changed since we opened two years ago. Our U.S. operations in Colorado, Missouri, and West Virginia grew revenues by 1% on a combined basis. Market by market, we saw revenue and EBITDA growth in Colorado as well as investing.

While Missouri was a bit softer in the year-over-year comparison due to the impact of the government stimulus payments of last year. In more detail, we saw that the month of January was impacted by omicron so it was softer than the year before. In February, business got much stronger as the case counts went down and March mandates came off. March was a mixed bag in the year-over-year comparison.

Colorado and West Virginia were higher, while Missouri couldn't quite achieve last year's results, again, which were driven by the stimulants. [Inaudible] customer has remained relatively flat to prior year, which has been a positive sign. The main difference is that we saw a significant increase in ungraded play during the prior year as parents were not our typical customers came to the property, the strength of the miles checks. In Canada, we operated with the new restrictions for half of the first quarter.

All guests needed to provide proof of vaccination. Everybody was required to wear a mask and casinos are not allowed to serve liquor at 11 PM. These restrictions were lifted at the end of February, resulting in an overall reasonably strong quarter for Canada. Going forward, however, we can expect more from Canada, we look forward to the next quarter without restrictions.

Poland, surprisingly, had its highest revenue month ever in March and continued its run rate of close to $1 million in EBITDA per month. While results in Poland are consistently strong, and it is continuing into April and early May. You can imagine that it is difficult to find a buyer offering an attractive price right now. Timing is not really an issue for us, as casino's pretty much runs on its own.

It has its own corporate and operation staff in Poland and also that does not need any capex from us. Quite the opposite. Cash flowing from Poland to us. Let's now look at our balance sheet and liquidity.

On April 1st, we entered into a credit agreement with Goldman Sachs for a $350 million term loan and a $30 million revolving credit facility. We threw the $350 million under term loan to fund the $95 million market PropCo acquisition to repay approximately $167 million outstanding under the old credit agreement with Macquarie and to find a $100 million escrow fund that will be used to purchase the market PropCo. So as of April 1st, 2022, after giving effect to the Goldman credit agreement. We had $372 million in outstanding debt and approximately $88 million in cash and cash equivalents, resulting in net debt of $284 million.

But please note, net cash and cash equivalent amount does not include the $100 million we have in escrow to fund the market PropCo acquisition. Our strong cash flow generation is driven by our strong operational performance by our efficient capex spending programs at our properties and by favorable regulatory regimes in West Virginia, Alberta, and Canada, which is safe space for half or more of the slot machine investments. Our investments in long-term growth opportunities are spearheaded by exciting projects in Missouri and Nevada. In Missouri, we developed a 75-room hotel at our Cape Girardeau property that we've transformed that facility to a full resort destination with gaming, spas, and dining venues, as well as conference, concert, and event spaces.

It will cost $26 million and is slated for opening at the end of next year. And we developed a land-based casino and hotel facility in Colorado City, which will replace our existing old riverboat there. The new facility will cost $47 million and will include a newly designed casino with approximately 20% more gaining positions and also 75 hotel rooms. The new development will provide significant operational efficiencies.

The savings on insurance alone will be around $0.5 million per year. It would 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 the first visit. Planning to open that new facility in early 2024.

In Nevada, we already invested 95 million and now own half of the market casinos, real estate. We will close on the purchase of 100% of the operating company as soon as licensing is complete. That will cost another $100 million, which you have put in escrow already, as I mentioned. They're very excited about the next transaction and we see considerable upside once we operate it.

We the Nugget it purchased an existing operation with a long operating history. That means no development risk, no construction delays or risk of cost overruns. The fact that it's in a great location directly on I-80. The property gets an exposure that is unparalleled in the Reno-Sparks market.

The nearby intersection counts 206,000 cars per day with 110,000 square feet. The market has one of the largest convention facilities in the market, and with 1382 rooms, it can support large conventions. Previous owner. The unnamed companies have invested more than $90 million since 2016, upgrading all hotel rooms.

Most public areas added a top-notch steakhouse and upgraded or replaced bags of meat. But we've been through unnecessary and rightsized the operation. Therefore, we do not expect any extraordinary replacement capex in the next years. The market gaming floor provides most promising opportunity for improvement and growth.

It can renew and improve the stock mix, further improve the traffic flow. Any crease. The square footage the gaming floor. Also, the acquisition offers great potential for synergy effects as we integrate that stand-alone property into our portfolio of 17 casinos.

In terms of the broader market dynamics, there is substantial economic growth in the Reno-Sparks region. Population growth is outpacing the national average in the personal income per capita is expected to grow further with a core of about 4%. The unemployment rate is only 2.9%. the Nugget transactions with significantly increase our scale.

Our revenue is expected to grow by over 25%. With these opportunities for growth throughout next year and beyond, we are confident our company is very well-positioned for continued long-term success. In conclusion, the first quarter was another great performance of our company and the entire team. Our diversified portfolio continues to generate robust EBITDA growth, and our operating strategy and tight focus on the right customer are producing strong and sustainable margins.

Higher end of the database. At the higher end of the database, the truly gaming-centric customers continue to perform extremely well. Also, our older customers started to visit again in bigger numbers once the omicron and combatant started to drop mid-quarter. These trends seem to be really consistent.

We continue to execute on our business plan by growing organically and by identifying and acquiring undermanaged assets in stable drive-to markets in the U.S. In our M&A strategy, we will remain prudent with pricing and valuation and 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 businesses during these challenging times.

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

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] Our first question comes from David Bain with B. Riley. You may proceed with your question.

David Bain -- B. Riley Financial -- Analyst

Great. Thank you and congratulations on the execution of quarter. I guess my first one would be if you're able to provide any sort of detail or even broad-based thoughts on 1Q performance at the Nugget.

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

Erwin?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

I don't think that we can disclose it at this point in time, right? Plus, we don't have the detail to --

David Bain -- B. Riley Financial -- Analyst

OK. Fair enough. I'll move on. So I guess my next would be, obviously, the macro -- the environment has not been assuming environment has not been impacting real-time results at properties.

I'm wondering because it's impacted valuations if you're beginning to see that or hear potentially about that in the M&A environment if that can move more in your favor in the relative near term.

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

Yes, David. We are seeing some of that. First of all, the M&A environment, it's more active than it was last year. There are at least a handful of properties on the market.

We are looking at two of those. And yes, I mean it all varies depending on the market and the circumstance. But I don't want to say prices are coming down at all, but the opportunities are really exciting. And some of the opportunities that are being marketed would fit very well into our portfolio.

So you will see us be very active in the next couple of quarters.

David Bain -- B. Riley Financial -- Analyst

OK. Great. Thank you so much, guys.

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

Thank you.

Operator

Our next question comes from Edward Engel with ROTH Capital. You may proceed with your question.

Edward Engel -- ROTH Capital Partners -- Analyst

Hi. Thank you for taking my question and thanks for the April commentary. I recall a couple of years ago now, when oil prices were falling, it had a pretty negative impact on some of your Canadian properties where some of those economies were tied to oil and gas. I guess, with energy prices kind of higher again, I was just wondering if you're seeing any kind of signs of life in some of those markets to maybe reinvigorate demand.

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

Any comment there?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

Yeah. We see that, first of all, we see –before that Canada is really on a very healthy recovery track, and we are more or less back at pre-covid levels, but -- and we think that really the next and the coming quarters, we'll show the full impact of the recovery as most of those sections are only listed halfway through the quarter. Now in general terms, we can only be positive if the oil prices go up as far as eight months and months and operations are concerned. But it would be too early to say that that increase that we see is due to the oil price rate.

I think in the second quarter, we would be able to be more specific on that and have a better picture about that.

Edward Engel -- ROTH Capital Partners -- Analyst

Great. And I guess we look forward to it. And then I guess one more kind of housekeeping. After the refinancing, I was just wondering, could you kind of give some commentary on how we should expect cash interest expense over the next couple of quarters?

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

Take it, please.

Margaret Stapleton -- Chief Financial Officer

So are you looking for what the interest expense will be? It's probably around 7%.

Edward Engel -- ROTH Capital Partners -- Analyst

OK. And then -- OK. That's perfect.

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

OK.

Operator

[Operator instructions] Our next question comes from Jeff Stantial with Stifel. You may proceed with your question.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Hey. Good morning, Peter. It's great to hear from you both. For my first question, I'd like to hang on this macro theme that's been common throughout this earnings season.

It sounds like on the whole, the consumer still feels pretty healthy into April and thus far into May. But could we unpack that a little bit? You talked about sequential improvement in the older demographic. You talked about continued healthy growth at the high end. Just moving to the third category, how things are trending kind of in the lower end of the database, -- anything to call out there? Or do trends feel stable there as well?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

It's stable. Exactly. It's stable. So we watched it very closely as well.

Same for the obvious interest that we don't really see anything that would be deviant from what was said before

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. OK. Very good. Thank you for that.

And then just sequential upside still left in the older demographic. How about over in West Virginia with Mountaineer. How are things working through post omicron with respect to some of the non-gaming amenities that have been called relatively more impacted through COVID? Do you still see significant sequential upside there as we kind of roll through 2022?

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

We in the nongaming sector, it's obviously really secondary and in Western Virginia, as I said in earlier times, post-COVID, we opened with significantly less FMC capacity, and it hasn't purpose at all on the customer side, but certainly has helped us a lot on the cost side. And what we have now is just rightsized. And also, as Peter mentioned, before we would expand opening times, for example, an offer, we look very closely at whether we think it's justified. Concerning the player base, I think you could say that in very general terms, we see that the upper end of power players tend to stay a little longer tend to come more often tend to spend a little more money.

And maybe we have a few – less customers on the lower end, something that we are not unhappy about because it clearly helps us on the staffing side and on the cost side for simple terms for less customers, we need less employees, and that certainly helps for us.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. Great. That's really helpful. Thank you.

And then if I could just squeeze in one more. I saw your commentary in the deck around upgrades to your marketing app. Just curious, are you evaluating anything else on the technology front, whether it's some sort of cashless gaming wallet or anything else that you think is interesting out there as you evaluate potential technology upgrades of your properties?

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

Nothing that would be nothing other than rotten upgrades of the existing systems. -- one upgrade that we did in West Virginia was that you can now open your hotel room with the mobile phone and you can also check-in mobile and don't have to stand in line anymore, which is really helpful, like on a Friday afternoon when all the people -- or our guest data coming for the weekend in the past they had to line up.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. Great. That's really helpful, guys. Thanks for all the color.

Operator

Our next question comes from Chad Beynon with Macquarie. You may proceed with your question.

Unknown speaker

Hi. This is Aaron on for Chad. Thanks for taking my question and congrats on closing the first part of the Nugget acquisition. You noted the large convention facility at that property.

Do you have a sense for what the convention and event calendar looks like in '22 and '23? Is it expected to be at pre-pandemic levels?

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

That's the indication we have. Yes, it's come back strongly and the bookings are good, and we see and at all that, it's in the area of pre pandemic.

Unknown speaker

OK. Great. And moving on, I want to touch on Poland for a second. It looks like demand remains strong, but margins were ticked down a little bit sequentially.

Was that just seasonality? Or is there anything you would call out? And how should we think about that going forward? Thanks.

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

Important we had the best quarter ever. And so did you say that you saw that the numbers are going down?

Unknown speaker

Margins. Margins.

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

The margins. OK. OK. Yeah.

That is one simple reason namely the salaries. We had to increase salaries because we haven't done that in a long time. And it's really difficult to get started to begin with them to get a good start is even harder. But it's obviously more than in absolute numbers, it's more than compensated by the higher revenues.

Unknown speaker

Got it. OK. Understandable. Thanks for the color.

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

Next question.

Operator

We have no further phone questions at this time, sir. I will turn the call over to yourself for any closing remarks.

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

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 signoff]

Duration: 28 minutes

Call participants:

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

David Bain -- B. Riley Financial -- Analyst

Erwin Haitzmann -- Co-Chief Executive Officer and Chairman

Edward Engel -- ROTH Capital Partners -- Analyst

Margaret Stapleton -- Chief Financial Officer

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Unknown speaker

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