Good day, everyone, and welcome to today’s Century Casinos Q2 2023 Earnings Call. [Operator Instructions] Please note, this call may be recorded. It is now my pleasure to turn today’s program over to Peter Hoetzinger. Please go ahead..

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.

We would like to remind you that we will be discussing forward-looking information which involves several 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’ll 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 releases and SEC filings available in the Investors section of our website at cnty.com.

I’ll now provide an overview of the results of the second quarter 2023. And after that, there will be a Q&A session. We delivered record second quarter net revenue of $136.8 million, an increase of 23% over Q2 of last year. The increase came from the addition of the Nugget Casino Resort in Nevada, which we took over on April 3rd.

The revenue increase from the Nugget was offset to some extent by construction disruption at both Missouri properties. Excluding the Nugget, due to a like-for-like comparison, revenue was down 1%, which is not bad at all considering the Missouri disruption. Adjusted EBITDA for the second quarter was $29.3 million, down 2%.

In most of our operating segments, we faced a difficult comparison to last year. This was most pronounced in April and May, which accounted for all of the quarterly year-over-year decline. As you may recall, early last spring, we saw a temporary surge in business after mask mandates and other COVID restrictions were lifted.

June’s year-over-year variance improved sequentially, performing better than last year. During the quarter, core customer trends remained solid, but as we get lower in the database, we didn’t perform quite as well. Also unrated play continues to drag.

The decrease in EBITDA is not surprising as we are in a particularly transitional stage with lots going on at the same time, triggering extraordinary legal, compliance and consulting costs and expenses.

Our local management team is set to carry extra burdens with the two construction projects in Missouri as well as the integration of the Nugget and preparations for the takeover of Rocky Gap in Maryland.

As you know, both Nevada and Maryland, are new gaming jurisdictions for us, resulting in additional onetime setup efforts and costs for compliance structures. All that will soon be behind us, and we look forward to being able to fully focus on managing the new properties in the most efficient and profitable manner.

With these two acquisitions, we’re adding approximately $180 million in revenue and approximately $50 million in adjusted EBITDA to our company, significantly increasing our scale and customer base. On top of the operational distractions we had to deal with, we continue to see inflationary impacts on the cost side of the business.

I mean cost pressures, whether they be wage, payroll benefits, insurance cost increases or utility cost increases across the board. Increased expenses in Poland also had a notable impact on company-wide expenses. Inflation in Poland was close to 20% at certain times during the quarter. On average, it was 16%.

These increases had an even larger impact in U.S. dollars due to a 4.2% exchange rate increase during the quarter. The promotional environment across our markets is heating up a bit as well. Slowly but surely, we see some of our competitors becoming more aggressive. That’s nothing unusual, but it is noticeable.

As we have said coming out of COVID, we weren’t going to be able to maintain those high margin levels, but we’re going to stay in that neighborhood. And we think we can live up to that once we get the aforementioned distractions out of the way. Looking at segment results.

Let’s first discuss the Midwest segment with our Colorado and Missouri operations. Revenue was down 3%, and as a consequence, EBITDA was down 11%. Not a bad result at all, considering heavy construction going on at both Missouri properties and the segment was up against the very strong second quarter of last year.

Table and slot hold were also lower this quarter. We saw a lower number of trips, mainly from lower end and aged 50-plus players. The spend per trip was essentially flat. The overall EBITDA margin of the segment sits at 39%, down from a high of 43% in Q2 of last year.

In Cripple Creek, Colorado, we will complete our employee housing project this summer, providing accommodation for 30 employees. In this tight labor market, especially in Cripple Creek, the small historic gold mining town with a population of less than 2,000 and at an elevation of 9,494 feet, we are certain that gives us a competitive advantage.

In Caruthersville, Missouri, the structure of the new permanent land-based hotel and casino development is progressing according to budget and schedule. We plan to open in Q4 of next year.

The new property will have a total of 74 hotel rooms, 12 gaming tables and over 600 slot machines, which is an increase of 20% in gaming positions compared to the old riverboat. Most importantly, it will provide significant operational efficiencies, it will be much more convenient for our customers, and it will increase our catchment area.

That project is fully funded by VICI at an 8% cap rate. About an hour away from Cape Girardeau, a new development in southern Illinois is expected to open with a temporary casino later this summer. With that in mind, we’ve taken steps to create more excitement around our Cape Girardeau Casino and are developing a 69-room, 6-storey hotel building.

It’s on track for opening in the first half of next year and will transform the property into a full resort destination offering gaming, dining, conference with concerts and more. Total project cost is approximately $31 million. We fund that with cash on hand.

As of June 30, ‘23, we have spent approximately $12 million, the balance will be spent between now and the second quarter of next year. While construction disruption will continue into the third quarter, we are confident these investments will help drive long-term growth for our Missouri operations.

The East segment currently includes the Mountaineer Casino Resort in West Virginia. Going forward, it will also include the Rocky Gap Casino Resort in Maryland. Revenue was down 5%, EBITDA down 20%. Revenue in April and May was down 9% due to a decrease in the number of trips and spend across the lower end of the database, mostly during the week.

Some of it was due to a loss in crossover play from sports betting since Ohio went live on January 1st of this year. But we’re also hearing that some of it was due to the end of federal COVID subsidies. Some customers told us they had some fears because of the government defaulting on the debt ceiling, which only ended in early June.

June revenue was growing again, up 4% compared to June of last year. EBITDA was under pressure by higher expenses related to horseracing and insurance. The hotel and F&B departments are still experiencing staffing challenges, resulting in limitations to hours of operation and the availability of hotel rooms.

Continuing to the West segment, which includes the newly acquired Nugget Casino Resort in Reno, Nevada. As reported, we closed that Nugget transaction on April 3rd. We now own half of the Nugget’s real estate and 100% of the operating company. We also have an option to buy the other half of the real estate.

And let me tell you, we are more excited than ever with that acquisition. The first three months under our ownership, we increased revenue by 60% over Q2 of last year. And I’m happy to report that that grade revenue trend has continued into July as well.

The steep increase in revenue was driven by a strong conventional hotel business and improvements in slot revenue with 120 new slot machines on the gaming floor, which we added during the quarter. The number of trips to the casino was up and so was the spend per trip. The majority of the increase came from the high-end segment.

For the second half of this year, the Nugget is expecting record business from group and convention sales. Several new high spending groups have allowed us to increase our casino comp criteria, leading to better overall profitability.

Group room nights, ADR and banquet revenue are pacing ahead for the rest of the year, and we expect to generate record overall group and convention results in 2023. EBITDA for the quarter was down 2%, mostly due to transition and integration costs and expenses in April and May. June EBITDA was already better than last year.

The takeover from a private owner proved a bit more cumbersome and triggered a bit more expensive than anticipated, but they will be behind us shortly. Improvements to the facade and signage are underway as we speak, and more improvements will come on the slot floor as well.

With that, we briefly move to our international operations in Canada and Poland. In the Canadian segment, all four properties in Edmonton, Calgary saw revenue essentially flat in the quarter. EBITDA was down 8%. The comparison to last year was tough. Q2 of last year was the first full quarter without COVID restrictions.

Also, access to our property in Edmonton continues to be impacted by road construction, which will continue throughout the coming winter season. And we also have seen some impact on our revenues by the Alberta wildfires when the province declared a state of emergency in early May. In Poland, revenue was up 8%.

So far so good, but inflation in the first half of the year was 16%, triggering significant cost increases in payroll, rent, utilities and insurance. Inflation has come down since a little bit. It’s now at 11%.

As mentioned previously, the war in the Ukraine is not impacting our results negatively, and we have no significant number of employees or suppliers from the Ukraine. All right. Let’s have a quick look at our balance sheet. As of June 30, we had $109 million in cash and cash equivalents and $364 million in outstanding debt.

During the quarter, we entered into agreements for VICI to acquire the real estate assets of our Canadian real estate portfolio for approximately US$167 million in cash. Simultaneously, with the closing of that transaction, our Canadian casinos will be added to our existing Master Lease and annual rent will increase by approximately US$13 million.

The transaction is subject to customary regulatory approvals and closing conditions, and we expect it to close in the third quarter. After payment to the minority owners of Century Downs in Calgary and after fees, taxes and expenses, we will net approximately US$115 million.

We plan to use a sizable part of the cash to pay down our revolver and term loan. On a consolidated basis, our net debt-to-EBITDA ratio was 3.5 as of June 30. The lease adjusted net leverage was 4.9.

Subsequent to the end of the second quarter, we funded the Rocky Gap acquisition with $30 million borrowed from our revolver and $30 million from cash on hand.

So, if we look at it on a pro forma basis, including the Rocky Gap acquisition and the Canada real estate transactions, our net debt-to-EBITDA ratio will go down to 2.6, and the lease adjusted net leverage will be at 5.0. We closed the Rocky Gap acquisition two weeks ago on July 25.

Rocky Gap is a full-service resort less than 2 hours from the Baltimore and Washington D.C. Metro areas, and includes an 18-hole golf course designed by Jack Nicklaus, a 5,000 square feet event center, several meeting spaces, a spa and several outdoor activities.

The property has over 25,000 square feet of gaming floor, 630 slot machines, 16 tables, 198 hotel rooms and 5 food & beverage venues. We expect an easier transition compared to the Nugget. However, increasing costs for wages and payroll benefits as well as for insurance will pose quite a challenge to keep EBITDA to where it currently is.

With the Rocky Gap and Nugget acquisitions, we operate the U.S. casino portfolio that reaches from East to West, on a pro forma basis, we generate over 80% of our EBITDA in the U.S.

For the next 12 months, we will give our full attention to integrate and operate the Nugget and Rocky Gap casino resorts as best as -- profitable as possible to increase our cash flow generation and to further strengthen our balance sheet. We do not plan any major M&A activity until the second half of next year.

At that time, we will have Nugget and Rocky Gap fully integrated, and both of our Missouri construction projects will be done. Then we will be ready for more acquisitions, ideally on a larger scale. As we move further into 2023, the economic uncertainty that persists today makes it difficult to predict where consumer trends are headed.

But for the most part, our core customer continues to be resilient. Looking ahead, we have positioned our company for strong growth for years to come with the Nugget and Rocky Gap acquisitions and our two Missouri development projects, all of which we expect to drive a material increase in revenue, EBITDA and cash flow in the coming years.

Many of you have followed us over quite a long time, and you know we are not taking a quarter-by-quarter look. Our company and the way we are thinking, we aim to deliver a lot of growth over the next few years because of the pipeline we have.

That’s a very strong pipeline of great new operations and projects that just joined our portfolio or will come online next year. They all make sense in any economic environment. So, nothing about the current economy makes us want to change our plans for executing our growth strategy.

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

[Operator Instructions] We will first go to Jeff Stantial. Your line is open..

Maybe starting off here on some of the cost pressures that you called out in the release and in your prepared remarks. So just bucketing it all out, there’s the construction disruption in Missouri, there’s higher costs alongside your recent acquisitions and then, there’s a continuation of some of the inflationary pressures that you’ve been seeing.

Is there any way that you could sort of frame out for us how much each of these impacted adjusted EBITDA or margins during the quarter, I guess, on a year-on-year basis? Really, what we’re just trying to better understand is how much of this is, call it, more onetime in nature versus how much of this should we be flowing through to our model into the back half of the year and into 2024.

Thanks..

Yes.

It is about -- is it about half-half, Erwin? About half is onetime and half -- would that be your impression?.

That’s exactly what I would say it’s about 50-50..

Okay.

And sorry, just to be clear, when you say half, you said half of the year-on-year adjusted EBITDA decline?.

That’s what we mean, Erwin?.

Yes. That’s what I would say..

And sorry, just to stay on this subject for one more second. I think you called out same-store revenue growth in your prepared remarks.

What was the same-store EBITDA decline?.

We did not disclose that..

Okay. That’s not a problem. I think I could calculate that from your disclosures. Anyway, moving on here for my follow-up. Your comments on the promotional and the marketing environment, specifically competitors starting to tick back up a little bit and how much their marketing was interesting.

Can we just unpack that a little bit further? Is there any specific markets that you would really call out here and with some of this sequential change in behavior.

Is this something you saw post-COVID already from some of your competitors and then it settled back down? I’m just -- what I’m getting at, is this sort of a flare up, or is this something more structural in response to the macroeconomic environment that we’re in? Thanks..

I think the said [ph] properties suffered a bit from the South Illinois competitors and Mountaineer from Ohio.

Erwin, can you add to that?.

Yes. And then in Poland, we just found it necessary to up our marketing efforts in response to what our competitors have been doing..

We will go next to Jordan Bender. Your line is open..

I do see you called out the lower end of the database, some of the unrated play maybe causing headwinds in the quarter.

Can you just kind of remind us how much of that play makes up your revenue in the quarter, roughly? And then kind of looking at that same segment of the lower end and the unrated play, maybe how does that kind of look into the first week of August here as well? Thank you..

I would say the unrated depends on the casino, but the percentage of the unrated play would be between 30% and 40% or conversely, 60% to 70% are already at play. And we are seeing a little bit of improvement in the unrated segment and also in the lower -- in the segments with lower casino activity, we also see some rebound..

Okay, great. It’s good to hear. And then just kind of touching back on the margin question a little bit. You talked about the timeframe to get back to your post-COVID margins. This quarter seemed a little bit bumpy.

I mean, is the back half of the year kind of the right way to think about this, or is it not -- are we not going to see your post-COVID margins until all the renovation, until all of the acquisition, integration is done maybe towards the middle half of next year? Thank you..

I think it’s hard to say, but our estimate would be that within the next -- sorry, Peter, you want to go ahead?.

No..

Okay. So, our assessment is that within the next 6 to 12 months, we should be able to see the effect of synergies and certainly, these onetime things or most of them time have come already in the rate within we think the next three months or so..

We will go next to Chad Beynon. Your line is open..

Peter, I know you don’t give guidance, but you have some nice growth here. And when the projects open up, leverage should come down. So, you said currently 2.6 net debt, 5 times lease-adjusted debt. Where do you want this to get to before you start considering other inorganic opportunities? Thanks..

Net debt-to-EBITDA 2.3, below 3 is sign lease adjusted, we want to be somewhere in around 4. And that’s, I think, where we would feel the most comfortable..

Okay. And then another one, just on the margin. So, you mentioned wage pressure and a few other items there.

Generally speaking, how many months or quarters are we into these increases? Meaning, are we starting to lap some of those bigger expense item creeps, or do we have another quarter until we anniversary some of those bigger items that put pressure on margins?.

Yes, we have another quarter, if not two..

Okay.

And it’s mainly the labor piece that you saw increases, I guess, starting closer to the beginning of the year?.

And insurance and utilities..

[Operator Instructions] We will go next to Edward Engel. Your line is open..

Once the sale leaseback from Canada does close in the third quarter, any kind of commentary you can give on what you would do with that cash? Would that go mostly to delevering or debt pay-down or some of that go to some sort of capital returns? Thanks..

Yes. We will net about US$115 million out of that transaction, which we expect to close in September. And sizable part, we have not decided exactly yet, but a sizable part of that will go towards debt pay-down. We are paying currently, I think it’s around 11.5% or so, all in on our term loan. So, we will use quite a lot of that cash to pay down debt..

Helpful. Thanks.

And then of the onetime cost you kind of talked about related to the acquisitions, in the second quarter, was all of that in Nevada, or did some of that trickle into the East segment as well?.

Erwin, was the most of it in Nevada?.

I think, yes, but also in some of it to replicate -- maybe do you have -- by any chance? Corporate side, yes..

Yes. On the corporate side, we had some additional expenses related to Rocky Gap as we worked on the pre-transition and licensing and things like that..

Okay. Helpful.

And then, I guess, would it be similar -- to assume of these kind of onetime costs you saw in 2Q, you’ll see about similar in 3Q, maybe a touch less but about similar?.

Yes….

No, less..

Little bit less. Yes..

Little bit less. Okay. Helpful. All right. Well, thank you..

[Operator Instructions] And it appears we have no further questions at this time..

We appreciate everyone joining our call today, and look forward to talking to you again in early November or at G2 in October. Thank you, and goodbye..

This does conclude today’s program. Thank you for your participation. You may disconnect at any time..