Century Casinos, Inc. (CNTY) Q4 2013 Earnings Report, Transcript and Summary

Welcome to Century Casinos' Q4 2013 Earnings Conference Call. This call will be recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would like to introduce our host for today’s call, Mr. Peter Hoetzinger. Mr. Hoetzinger you may begin.

Thank you, Orlando. Good morning everyone in North America and good afternoon to all our European listeners. I am happy to have all of you join us for this call following the release of our fourth quarter and year-end 2013 earnings. With me on the call today are Erwin Haitzmann, Co-CEO and Chairman of the Company and Margaret Stapleton, Executive Vice President of Finance. Before we begin, I need to remind you that in our remarks today 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 may 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 in the 10-K and 10-Q filings, all of which are available in the Investors section of our website at cnty.com. In the fourth quarter of 2013 and effectively true for the entire second half of the year our business performed behind expectations, mostly because of unusual external challenges. The period-over-period increases of 66% in net operating revenue and 3% in adjusted EBITDA in the fourth quarter related primarily to the inclusion of operating results from Casinos Poland Limited, offset by softer business levels in Colorado in the later part of the year. As you probably heard from others in the recent weeks, the period was quite challenging for casino operators in…

Thank you. Ladies and gentlemen at this time, we will conduct the question-and-answer session. (Operator Instructions) Our first question comes from Bryan Maher from Craig-Hallum Capital Group. Please state your question.

A question on Poland. Do you think as you work through the operational and management location challenges that you are working on, that you can maintain flat to increasing margins throughout 2014 and what is your outlook with respect to margins and where do you think margins can ultimately go in ‘15 and ‘16 once you've accomplished what you want to in that market?

Currently, the EBITDA margins, if I take the entire year of 2013, is below 10%, in the 8% range actually. And ultimately after we are at, like few quarters down the road, we believe that we able to approximately double-dip and then grow from there. Until then it will be fluctuating as I mentioned mostly on the cost side because of the number of non-recurring measures that we have to implement.

What does it roughly cost when you go and you move a location, like you’re doing Portland [ph], which I think the grand opening is not this weekend but next weekend. What does it cost to do that?

Firstly the cost of accelerated depreciation of an old location -- for example if we count -- use some of the investment that we have made into the old location and/or lease agreement is still continuing, so there's some cost with the closure of that location, and then with the new location. But we are talking a few hundred thousand dollars, half of million or so in that neighborhood.

And do you find that there are a good number of locations for you to move underperforming Portland [ph] assets to and do you typically keep it within the city that the existing property is already located?

Within the city, yes.

Would there be an instance whereby the new host hotel, in anticipation of you bringing them more traffic would give you favorable terms to relocate one of the casinos in a market to that property?

Not really, no. That’s not a significant area now.

And then lastly the Calgary Casino, do you have a targeted opening date for that yet?

Not a firm date. It’s either -- probably first quarter. There is a chance for December this year but if you’re modeling the first quarter it’s probably [indiscernible].

(Operator Instructions) And it appears there are no further questions at this time. We just got another follow up question from Bryan Maher.

I have a couple of quick follow ups. In Colorado could you walk through that again, that potential threat to that market that you were talking about that has been previously shot down?

Can you repeat the question please?

In Colorado casinos...

Yes? I'm trying to figure out what your question is?

Peter discussed some potential threats in the Colorado market. Can you elaborate on that a little bit?

There is a group that owns the only interesting existing rate hike in Colorado and Arapahoe County and they are putting -- this is the one that is the real threat. They are putting a ballot measure -- to commit large casinos actually in three locations. And it seems that they are committed to put lot of money at that effort and so the industry -- the existing casino industry is working on fighting against that and we’ll in all likelihood also put up a significant amount of money. As you know in the past all these efforts has been soundly defeated often times with margins of 80% against. We should hope that the same is the case this time but it will ask for money from the operators to contribute to the effort to fight it off.

And would that be for the ballot for this year, 2014?

Yes, for this year.

And would the money they’d be asking for be kind of pro rata to the size and gross gaming revenues that each of the properties probably makes?

It doesn’t look like this. It’s -- a maturity of the money will come from the large casinos in Black Hawk and it’s not an obligation. It’s more what is each casino willing to put in. So we will not be obliged to put in a certain amount and which, particularly figuring out what we think is the correct contribution for us both from the Colorado side and for Central City. To give you a dimension, the industry talks about anywhere between $18 million and $20 million for the campaign to fight it off. We hear that proponents of that Arapahoe County rates are kind of putting $30 million in. It is expected that all casino operators as a whole will contribute 0.5 million with regard to the central city operators. It’s still open but not too much is expected and as I said the majority is expected to come from the Black Hawk operators.

Thanks for that. And Peter, you talked a little bit in your comments about acquisition opportunities, not only in North American but internationally. Can you kind of prioritize what’s more important to Century and where you’re seeing more opportunities and may be give us a little bit of color as it relates to -- Caesars announced that they’re closing down the Harrah's and Tunica last week and I’m surprised that they would not have even tried to have sold that for some amount of money and then also it seems like there is an increasing amount of activity in New York State. Can you elaborate on what you are thinking about some of those markets and in particular international?

I was surprised a little bit to this announcement of Australia. We think that for exhibitions in the U.S., the prices are a little bit high for our taste. It’s a little bit better in Canada. So we will lookout for some project there. But we really do love new Greenfield developments. And if we can find some of those, that would be our preference. International, we look at we look at South America and we look at Southeast Asia. In Europe, we’ve already announced that the project we’re working on in Vienna, Austria. So yes, we’re not ruling out any market as long as it’s well regulated and the demographics are right. There's lot of potential out there, new companies legalizing casinos, countries issuing more licenses. Vietnam is very interesting. They are in the process of allowing locals into casinos. So there is lots of stuffs out there to be analyzed and looked at.

And lastly that seems to be a bit of affinity for you, your stock, your management, the opportunities that you are pursuing. Assuming the market continues to look favorably on Century Casinos as a stock and the potential to maybe utilize that as some currency for an acquisition, what would be the sweet spot currently of an acquisition that you would be looking at in millions?

If the target has a solid performance record and if you can find the right debt-equity mix, then the total size of the acquisition could be around $100 million, up to around $100 million.

And our next question comes from John McGrath with [indiscernible]. Please state your question.

I was just hoping to get an update on where we are in terms of getting a license in Vienna?

For this particular license, there's a total of four applicants. We have one of the four. The Minister of Finance responsible for the decision has indicated that they want to make a decision towards the end of the second quarter. So we are talking June and maximum July of this year. And we believe that is a range month June, July will be holding even though they have already postponed it once. But we believe that towards end of June, we should be hearing from them.

(Operator Instructions) Our next question comes from Justin Ruissi with Sidoti. Please state your question.

I just have a concern. If there are four other applicants or four total, I believe for this Vienna license, the worst case scenario, if they were to partner or if they were to disseminate this license to another operator, I don’t expect you to enhance any kind of other plans but are there other options or back up plans in the mix that you could possibly aim for attack?

No, that is -- each applicant has look forward its own location. Its own ownership and management structure is all very different and separate project and applications, and there is no way to materially change any of the applications between the time you have submitted your application and the time of decision.

Okay, the application that you’re putting and you feel pretty confident that -- if the Ministry of Finance will do move forward with it, they would go with Century?

The other three are also strong applications and I think the best really we can say is that we have a 25% chance.

(Operator Instructions) And it appears there are no further questions. I will turn the call back over to Mr. Hoetzinger for any additional or closing -- we just had a follow-up question from Bryan Maher with Craig-Hallum.

Can you give us a little bit more color on the land lease agreement with United Horsemen that we’re seeing in the 10-K. You’ve touched upon it briefly, but how should we be looking at that with respect to the obligation and who owns the land, who will ultimately own the land et cetera?

The land is owned by a local real estate company. United Horseman has a long-term lease. That’s a 30-year lease, and after 10 years we have an option to purchase the land at that market value.

But you are required to show the lease obligation of $18 million on your balance sheet, correct?

Yes.

Yes. Sorry, can you come in here, and how is that exactly structured, and for how many years do we show that lease agreement on the balance sheet?

Okay. So what this turned out to be under U.S. GAAP was a failed sale leaseback due to the option to purchase the land. So due to valuation process, we actually have the land on the books and the financing arrangement -- both them at $19 million. And those sit on the books until we determine whether we purchase the land or not. If we don’t then we unwind both of those. So basically the lease will run through the financials as interest expense.

Okay, should we consider that when we value the Company then as kind of a non-EBITDA generating asset as kind of a direct offset to the financing obligation that’s been shown?

Exactly.

Okay, I just don’t want to see it degrade the price target analysis section because of this accounting maneuver.

Right.

And it appears there are no further questions. Mr. Hoetzinger, I will turn the conference back over to you for any additional or closing remarks.

Thank you and thanks everybody for your interest in Century Casinos and your participation in the call. For a recording of the call please visit the Financial Results section of our website at cnty.com. Thank you.

This does conclude today’s conference call. Thank you for attending.