Century Casinos, Inc. (NASDAQ:CNTY) Q1 2024 Earnings Call Transcript

Century Casinos, Inc. (NASDAQ:CNTY) Q1 2024 Earnings Call Transcript May 11, 2024

Century Casinos, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to today's Century Casino's Q1 2024 Earnings Call. [Operator Instructions] Please note this call is being recorded. And I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Peter Hoetzinger. Please go ahead.

Peter Hoetzinger: Good morning, everyone, and thank you for joining our earnings call. We would like to remind you that we will be discussing forward-looking information, which involves risks and uncertainties that may cause actual results to differ 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 discussion of the risk factors in our SEC filings and encourage you to review these filings. Throughout our call, we'll refer to several non-GAAP financial measures, including, but not limited to, adjusted EBITDA. Reconciliations of our non-GAAP measures to the appropriate GAAP measures can be found in our news releases and SEC filings available in the Investors section of our website at cnty.com.

I'll now provide an overview of the first quarter 2024 results as well as our outlook for this and next year. After that, my co-CEO, Erwin Haitzmann, and our CFO, Margaret Stapleton, will join me for a Q&A session. For the quarter, we delivered net revenue of $136 million, an increase of 25% over Q1 of last year. The increase came from the additions of the Nugget in Nevada and Rocky Gap in Maryland, as well as good performances of our Canadian operations, offset by extremely bad weather, a weaker retail customer, construction disruption at a few properties and the temporary closures of 3 casinos in Poland. Adjusted EBITDA was $21 million, down 18% from last year. The U.S. operations were flat and Canada was up, but Poland and the Corporate segment were down.

So it was a rather challenging start to the New Year. While we knew our performance was comping to a strong first quarter of '23, the results were also impacted by severe winter weather. As you've heard from others in regional casinos, January was essentially wiped out because of weather. And because most of our casinos are located outside of major cities in destination areas such as Rocky Gap, Mountaineer, Century City or Cripple Creek and [indiscernible] Caruthersville, our customers need to drive half an hour, an hour, or more outside of city lights and urban streets. You can imagine the dramatic impact winter storms with unsafe driving conditions have on this situation. In addition to the January weather, we faced several other transitory issues as well.

Three of our casinos in Poland were closed for some or all of the quarter, 2 reopened towards the end of the quarter. And the third one, the largest of the 3, will reopen in Q3. So from about August on, we will have all 8 casinos in full operation again. Also, our increased spend on capital projects throughout our properties caused construction disruption at most of our casinos. And finally, remember, we acquired Nugget and Rocky Gap just about 12 months ago, meaning we are still early in the process of managing everything as one cohesive portfolio. But to really get a good picture about what was going on in the quarter, we need to take the weather impact in January out of the equation and look at February and March. And what we see is that, beyond January, gaming volumes from our core customers actually grew.

In addition, operating margins in February and March were better than in Q4 of last year, and they were very close to the margin of Q3 of last year, which is typically a very good quarter. So there's no working trend or anything like that. I mean, all of the substantial declines happened in January. February and March were quite normal. In fact, March showed signs of real strength at our properties. Take Nevada, the slot revenue in the Reno-Sparks Nugget was down 3%, but slot revenue at our Nugget grew 9%. In Colorado, same-casino backlog were up 3%. Our casino was up 7%. In Cripple Creek, the market was up 2%. We were up 6%. And while Missouri slot revenue was down 1% in March, we were up 2%. Very encouraging signs as we move into the second quarter.

Looking at the segment results for Q1, we start with the Midwest, which includes our Colorado-Missouri operations. Revenue for the segment was flat year-over-year. EBITDA was down 9%. That's not bad at all considering the January weather as well as construction disruption at both Missouri properties and also considering that Cripple Creek was totally closed for 2 full days in March because of a heavy snowstorm. In Cripple Creek, a competing property opened directly across the street from us with 300 hotel rooms, which certainly increases the market. And as anticipated, we continue to benefit from our proximity to their location. As mentioned in March, we outgrew the market. And April is up double digits as well. In Missouri, revenue from retail play was up 6%.

Both the number of trips as well as the spend per trip increased. Retail play was softer, mostly because of the weather in general and disruption from construction at both properties. But in March, Cape Girardeau bounced back and set the new all-time record for table game revenue, the highest since inception. And I'm happy to report that the strong performance continued into April, which posted the third highest table games revenue in that property's history. Last month, on April 4, we opened our new hotel, The Riverview, at Century Casino Cape Girardeau [indiscernible] transforms the property into a full resort destination, offering gaming, dining, conferences, concerts, events at more. And it's off to a great start, better than we expected.

Total project costs was $ 31 million. We funded that with cash on hand. In Caruthersville, construction of the new permanent land-based casino hotel is progressing according to budget and schedule. We plan to open at the end of this year. That new property will have a total of 74 hotel rooms, 12 gaming tables and over 600 slot machines, which is a 20% increase in gaming positions compared to the old Riverwalk and a 50% increase in gaming positions compared to our current interim casino. The way we think about it is this, it's a significantly enhanced facility moving from an on-river boat and a small temporary location to the dry side of the levy, a brand-new land-based casino with a hotel, convenient parking and convenient food and beverage amenities and a much better environment overall.

The new property will provide significant operational efficiencies. It will be much more convenient for our customers, and it will certainly increase our catchment area. We expect a good uplift on the overall performance from that property, both revenue and EBITDA. The project is fully funded by VICI at an 8% cap rate. Our East segment includes the Mountaineer Resort in West Virginia and the newly acquired Rocky Gap Casino Resort in Maryland. Because of that new acquisition, revenue for the segment was up 44%, EBITDA was up 23%. In January, both properties suffered a lot under the bad weather and unsafe driving conditions as they are both destination resorts with many customers having to drive 2 or 3 hours to get to our casinos. So, not surprisingly, the number of trips declined significantly, but the spend per trip was up a bit.

At Mountaineer, available hotel rooms, hours of operation for casino and food outlets are still limited as a result of continued staffing challenges. However, it will get much better next month in June with many [indiscernible] visa-holders returning and allowing us to improve and expand our offerings. We will enhance our entertainment offerings throughout the year to further diversify our portfolio, giving our guests more reasons to choose us for their entertainment. Rocky Gap enters its busy season now in early May. We anticipate rebounding travel and capture of pent-up travel demand throughout the summer. Great amenities, such as our newly constructed swimming breach, in addition to continued enhancements of menus in S&P will allow the property to maximize wallet share.

Within renewed marketing efforts in the major feeder markets, Pittsburgh, Baltimore and the DC Metro area, we expect to attract more affluent customers and grow the overall database. Continuing to the West segment, which includes the Nugget Casino Resort in Reno-Sparks Nevada, the Nugget saw mixed results during the quarter compared to prior year. Average spend per trip increased by 4%, but trips during the quarter decreased by 8%. Performance from the high-end segment was strong, increasing by 18%, but the low- to mid-tier segment decreased 6%. Our management team is working on refreshing restaurants and bars and upgrading the sports book. And in 3 weeks, the high-limit VLT slots area will open. We are optimistic that the second half of this year will be strong and most of the transitional extraordinary expenses, as well as most project CapEx and the disruption that comes with it, will be behind us.

Our properties, entertainment and special events calendar looks great. We see strong bookings. And all of that points to a very busy summer season for the Nugget. In the Canadian segment, our 4 properties in Edmonton and Calgary continued their great performance of last year also into this quarter. Revenue grew by 11% and EBITDA was up 13%. All of our properties were up in revenue as well as EBITDA. So it's overall a very promising start into 2024 for Canada. In Poland, as mentioned, 3 casinos were closed for some or all of the quarter, which resulted in a significant drop in revenues. But Casinos Poland was able to renew their licenses for all 3 cities, and we have reopened 2 of the 3 casinos a few weeks ago. The third and largest one will open at a new location in Wroclaw in Q3.

After the final reopening, results are expected to get back to normal levels quite quickly, and normal levels are around $11 million, $12 million in EBITDA. Let's discuss our balance sheet and liquidity position. As of March 31, we had $137 million in cash and cash equivalents and $342 million in outstanding debt. Net debt is $205 million. The main reasons for the decrease in our cash position are cash payments of approximately $12 million for taxes on our Canadian real estate sale, a $4 million onetime principal pay-down of debt as well as approximately $18 million in property and equipment purchases. Traditional net leverage is 3.5x and the adjusted net leverage is 4.3x. We are okay with our leverage as we don't charge our leverage just based on a onetime snapshot, but rather look at its development over time.

The leverage is elevated because of our recent significant acquisitions and investments. It will play above the long-term range until we have fully integrated the acquisitions and until we have completed our CapEx project later this summer, around Q3. From then on, it should lower down to closer to 2x traditional and 4x as adjusted for next year. Our lease obligations to VICI currently total approximately $15 million per quarter. Once opened, the permanent land-based facility in Caruthersville towards the end of the year will go up by $1 million per quarter. So as a rough run rate for next year, for '25, total lease payment to VICI will be around $16 million per quarter. Interest payments are on our Term loan B currently amount to $10 million per quarter.

Please note that we have no debt maturities until '29, and we have additional borrowing capacity of $30 million under our revolver, and we can reprice or refinance the entire term loan at any time without penalty. So as soon as the window opens, we want to act on it and improve our terms. Turning to CapEx, we are nearing the end of our $40 million CapEx program as we are finishing several construction projects that we expect to generate a 25%-plus EBITDA return and will complete an elevated CapEx cycle for the company. The newly opened Cape Girardeau resort open a month ago and so far exceeds our initial expectations with higher cash ADR than budgeted. Further, we are upgrading many of our S&P outlets throughout our portfolio in the U.S. and Canada.

We're also refreshing and updating our hotel product. Currently, we are renovating rooms at Mountaineer in West Virginia as well as our Colorado properties. And at the Nugget, we are upgrading restaurants and bars as well as the sports book. We are putting in a new high-limit VIP [indiscernible] area, and we are improving our VIP hotel suites. Beyond upgrading our property amenities, we are also getting closer to completing our permanent land-based project in Caruthersville. All of these projects will enhance the competitiveness and appeal of our properties. We position them for higher-value customers and will deliver attractive returns on capital to drive growth in their segments. So, as we report this quarter, we are moving closer to the step-down in CapEx spend and a substantial increase in free cash flow.

We are about 4 to 5 months away from that. By late summer, we'll see significant reduction in CapEx as we move forward. Free cash flow will be improving substantially both from revenue growth due to the built facilities and a better customer experience and from a reduction in CapEx, and our casinos in Poland will be up and running by then as well. That will lead to a significant positive change in terms of cash generation. Whilst you can expect to burn $30 million this year, we should generate about that amount in positive cash next year. Our presentation posted on our website shows you the bridge from the negative to the positive cash generation from this year to next. Again, we are in a transitory period right now, but we have a clear plan to fully focus on generating cash to deleverage and opportunistically also buy back stock later this year and next.

We are fully focused on the projects that we have underway and are looking forward to the end of the current intense CapEx cycle. Having said all that, we continue to see a softer retail customer. That trend is not worsening, but it's still soft. The retail customer is more economically sensitive to inflation and other changes in the economy. It's those customers that still seem to be more cautious about how they are spending their discretionary dollars. Looking ahead, we remain encouraged by the continued strength in play from our core customers and the strong initial performance of our new hotel at Century Casino Cape Girardeau, as well as the impact our current CapEx program will have on our operations. Our positive outlook for the second half of this year and into '25 remains unchanged.

With all properties being in great shape in '25, we see us approaching $700 million in revenue with a 24% EBITDA margin. Our CapEx in '25 should come in at approximately $20 million to $25 million, almost all of which will be regular maintenance CapEx. In closing, I'd like to reiterate our enthusiasm for the second half of this year and for next. From the third quarter on and certainly next year, results and free cash flow should improve significantly for these reasons: we will be at the end of our elevated CapEx cycle; Nugget and Rocky Gap will be fully integratedl all casinos in Poland will be up and running; we have the new permanent land-based facility in Caruthersville; and there will be no more construction disruption. And the only other point I'm going to make is that, from a guidance perspective, last year, we had softness in the second half.

So we think that's an opportunity in the second half of this year, since that comp is going to be a little easier to meet. All right. That includes -- that concludes our prepared remarks. We'll now open up the call for Q&A. Operator, go ahead, please.

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