Good day, everyone, and welcome to the Century Casinos Q3 2023 earnings call and webcast. [Operator Instructions]. Please note today's call will be 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..

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 release and SEC filings available in the investor section of our website at cnty.com.

I will now provide an overview of the results of the third quarter of 2023. After that, Co-CEO, Erwin Haitzmann; and CFO, Margaret Stapleton, will join me for a Q&A session. We delivered a record third-quarter net revenue of $161 million, an increase of 43% over Q3 of last year.

The increase came from the additions of the Nugget in Nevada and Rocky Gap in Maryland and offset to some extent by weaker retail customer and a bit of construction disruption at both Missouri properties. We also delivered a record third-quarter adjusted EBITDA of $33 million, up 19% over last year.

These results reflect the value of our strategic focus on our core customers and the benefits of our recent M&A activities. In addition, our multichannel business model with revenue streams from casinos, hotels, groups and conventions, racetracks on and offline sports betting as well as iGaming provides great diversity and stability.

With the Rocky Gap and Nugget acquisitions, we operate a US casino portfolio that reaches from east to west. 82% of our EBITDA this quarter was generated in the US, 13% in Canada, and less than 5% in Europe. Overall, customer trends remained stable during the quarter. No dramatic moves whatsoever.

We continued to see growth in core customer volumes offset by weaker retail play. Business from retail customers and from the low end of our database has remained at lower but consistent levels since the beginning of the year.

We also saw the continued return of the 60-plus demographic and moderate growth in spend per visit trends, which helped to offset softness in the lower EDT segments. Similar to what you have heard from other operators, cost pressures impacted the margin performance in all regions during the quarter.

This effect, this will continue into next year at similar levels. Consistent with what we experienced last quarter, major expense categories that increased year-over-year wages, utilities, and insurance.

On top of that, 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 teams carry burdens with the two construction projects in Missouri as well as the integration of Nugget and Rocky Gap.

Overall, while we see no signs of softening in underlying consumer demand, it's a mixed picture in terms of property margins. Relative to the second quarter margins decelerated in Missouri and Nevada but improved in Colorado and West Virginia. Looking at segment results, we first discussed the Midwest segment with our Colorado and Missouri operations.

Revenue was flat year over year, EBITDA was down 4%. Not a bad result at all considering construction going on at both Missouri properties as well as construction on both roads, that's US-6 and I-70 from Denver to Central City, Colorado. The EBITDA margin of the segment was 38%, comparing to 39% in Q3 of last year.

The number of trips as well as the spend per trip of our top tier segments increased meaningfully during the quarter, offset by weakness in the lower segments. In Caruthersville, Missouri construction 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 topping out ceremony was held two weeks ago on October 25, when the final theme of the steep portion of the project was put in place. The new property will have a total of 74 hotel rooms, 12 gaming tables, and over 600 slot machines, which is 20% decrease in gaming positions compared to the older.

Most importantly, it will provide significant operational efficiencies to be much more convenient for our customers, and it will increase our catchment area. We are more excited than ever about this permanent move to land based. What we see now as we operate in a small temporary land, this pavilion is very encouraging.

Table drop in Q3 was up 26%, slot coin-in up 6%, S&P revenue up 31%. We can't wait until we opened a new facility in less than 12 months now. Project is fully funded by VICI at an 8% cap rate. Staying in Missouri, but moving on to Century Casino Cape Girardeau, about 1 hour and 15 minutes away, a new casino opened in southern Illinois in August.

We saw a small decline in revenue the first two weeks, but volumes have bounced back and leveled out throughout the end of the quarter. Our hotel project in Cape Girardeau is on budget and on track for opening in April and will transform the property into full resort destination offering gaming, dining, conferences, concerts, events, and more.

Total project cost of $31 million, which will fund with cash on hand. As of September 30, we spent approximately $17 million. The balance will be spent between now and the second quarter of next year. Our East segment includes the Mountaineer Casino Resort in West Virginia and the newly acquired Rocky Gap Casino Resort in Maryland.

Because of that new acquisition, revenue of the segment was up 45%, EBITDA was up 60%. The EBITDA margin increased by 2 percentage points. Mountaineer is still battling with staffing challenges leading to limitations in hours of hotel and S&P operations during the week. Table games continued to be impacted by Ohio sports betting.

The majority of that decline was experienced from guests in the lowest ST segment. And we have started to work with our sports betting partners on joint promotions to increase retail sportsbook traffic with the goal of attracting back some of the lost table crossover play.

On the positive side, slot volumes were up year over year, driven by more visits and higher spend per visit from the top tiers.

Rocky Gap, which we started operating at the end of July was affected in the lower tiers of the database as well, but the substantial non-gaming revenue generators showed resilience and maintained similar volumes to prior year. Just yesterday, we successfully completed the conversion of the gaming system and player's club to aristocrat systems.

That puts us in a better position and provides much more granularity to offer flexible and higher-yielding promotions throughout the database.

With a strong focus on player development and focused efforts in major feeder markets like Baltimore, Pittsburgh and Washington, DC, we'll be able to migrate players to higher tiers and grow the overall database in 2024.

We are also planning several growth CapEx initiatives at Rocky Gap from upgrades to restaurants, various interior renovations, two more slot machine purchases. Continuing to the West segment, which includes the Nugget Casino Resort in Nevada, our focus has been and still is on driving revenue, increasing the database and gaining market share.

Since we took over on April 3 of this year, revenue has grown by 9% compared to the same period of last year and that growth is broad-based. Gaming, S&P, and ticket revenue all increased substantially. The number of rated players increased. Trips were up and spend per trip increased as well.

From an EBIT standpoint, all segments are either flat year over year or also increasing. Looking at the age demographic, the under-thirty group showed the largest increase in the number of players and trips. Innovations of the facade and sign into [Technical Difficulty] and it really looks great.

More improvements are coming, including further gaming for upgrades as well as the addition of spa and an upscale restaurant and upgrades of two existing restaurants. In the Canada segment, our four properties in Edmonton and Calgary saw revenue grow by 4% in the quarter, EBITDA was down 8%.

Access to our property in Edmonton continues to be impacted by road construction, which will continue throughout the winter season. It just has opened a sports bar there and believe it will do great, especially during holiday season. Century Mile at the airport also continues to grow business volumes with slot revenue up by 7%.

Same as in the US, the customer continues to be strong and stable, but inflationary pressures, higher operating costs and expenses led to an EBITDA decline.

As reported during the quarter, we closed on real estate transaction with VICI and our Canadian casinos have now been added to our existing master lease with annual rent of approximately $13 million. With that, let's have a quick look at our balance sheet.

As of September 30, we had $189 million in cash and cash equivalents and $348 million in outstanding debt. Net debt is down $259 million. With funds received from VICI for the Canadian sale leaseback transaction, we paid back $30 million of debt, which we had borrowed under our revolver to close the Rocky Gap acquisition.

As a result, traditional net leverage is 2.2 times. I'm pleased that adjusted net leverage is now down to 4.2 times. Our lease obligations to VICI totaled approximately $14 million per quarter. That amount already includes Rocky Gap in Canada.

Once you open the new land-based facility in Colorado Springs towards the end of next year, it'll go up by approximately $1 million per quarter. So as a rough run rate for 2025, total lease payments to VICI will be around $15 million per quarter.

As you know, we report these legal obligations to VICI as a financial lease, and it's included in the same line item as the interest payments on our debt and the line item called interest expense. Interest payments on our term loan B currently run at around $11 million per quarter.

Also, please note that we have no near-term debt maturities until 2029, and we have additional borrowing capacity of $30 million under our revolver.

In the next 18 to 24 months, we are planning to invest a total of approximately $35 million into our properties, and that's over and above the normal maintenance and replacement CapEx of around $25 million per year. These are attractive value-creation CapEx projects. We've projected EBITDA returns of 20% or higher.

On the other hand, we do not plan any M&A activity for the remainder of for next year. We remain fully focused on our existing operations on the integration of Nugget and Rocky Gap and the delivery of the two Missouri construction projects.

All of those will significantly improve customer experience and cash flow generation to further strengthen our balance sheet. Going into the fourth quarter, we expect the trends among both core customers and retail players will remain consistent with the last several quarters.

We also expected overall expenses should be sequentially consistent with the levels we saw in the third quarter. In other words, while some inflationary pressure appears to be moderating, we don't expect our overall expense structure to be increasing disproportionately going forward.

Overall, we are pleased with the strength and resilience of our properties. The stability of our operations and the performance this quarter highlights the benefits of our geographically diverse portfolio.

Looking ahead, we have positioned our company for strong growth for years to come with the new acquisitions and our two Missouri development projects, all of which we expect to drive material increases in revenue, EBITDA. and cash flow.

That is a very strong pipeline of great new operations and projects that just joined our portfolio always come online next year. And we can't wait for 2025, which be the first full year showing the full earnings potential of everything we are working on today.

So 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 for your attention, and operator, we can now start Q&A session..

[Operator Instructions]. We will now take our first question from Chad Beynon..

Good morning. Nice results, Peter, thanks for the prepared remarks. Wanted [Technical Difficulty] going really well now that you've had your hands on that property for a couple of quarters.

Could you just talk about anything else in terms of market trends, maybe bookings at the conference center? I believe you said that the high end continues to do well everywhere. But at Nugget, I think you said all segments were up or flat.

So are you taking market share? Are you growing the property? I'm just trying to get a sense of how this continues to grow. Thanks..

Thanks Chad. This is Erwin. Thanks for your questions. Concerning the market trends, I think it has to be said that Reno is very competitive and continues to be but we can hold our ground from everything we can see. And we certainly see potential to increase our market share. Bookings for '24 are solid and stable and so are for the hotel service.

And also it is for the conference center as well. With regard to shows in our outdoor venue for that hotel, now thousands of visitors where we have booked about half of the shows that we plan to do with the other half are probably coming on during the next months. These bookings are not dependent on us alone.

They are much depend on the team areas of various artists and how well they can fit Reno into their traveling schedule..

Great. Appreciate it. Thanks, Erwin. And then just going back to your comments on the retail or the low-end customer, I think you said it hasn't changed.

It has been a little bit of a drag across the portfolio, but wanted to ask what percentage of your business is made up of this group of customers? And do you expect for it to flatten out? Is anything changing in terms of promotions towards that lower end? And do you believe at some point this can start to be flat from a year-over-year perspective based on what you're seeing in the trends? Thank you..

I think in a simplified version, we are taking a two-pronged approach. The first one is that we focus on the higher end of the market, and then that's really where the majority of our focus lies. And I think for good reason.

And the second part of that would be to keep incentivizing the lower end of the market and testing which things we can do there what makes sense and what doesn't make sense. So it's obviously much more sensitive on the lower end because the headcount is much higher. And if you have spent too much too quickly, you could quickly burn your sales.

So once again, the number one focuses on the high end. And we're trying to maintain as much as possible on the low end. And probably with the lower end will only change when the economy trends like inflation go the other way..

Okay. And what's rated as a percentage of the database roughly..

It depends very much on where you draw the line. And that's a little bit subjective.

But then you mean number of customers or in revenue?.

Either or. I guess in customer base..

In customer, I would say it's probably anywhere between 30% and 50% in revenue --.

I think the question was how much of our place is rated?.

Yeah, that's a different question. In the Nugget, we have 69% rated, and that compares to pre-COVID of 67%. Okay, so rated play has actually gone up during COVID in Q3 of 2020 when the Nugget was only 59%..

Appreciate it. Thank you, guys..

We'll take our next question from Jordan Bender. Jordan, your line is now open..

Great. Thanks for taking my question. Just looking at the balance sheet, as we sit here today, you have plenty of cash sitting here. You've gone through what might be the best uses of cash for the business.

But with your debt now over about 11% and it seems like you have the cash on hand to get through most of these projects that you've talked about in the call, wondering is it make sense to start paying down debt more rapidly here to generate that free cash flow..

Certainly, as we said in the call, we have about $25 million maintenance CapEx on an annual basis. And on top of that, we intend to spend about $35 million for home for projects throughout our properties, including Nugget between $10 million and $15 million. So that's already $60 million there.

And then we'll see how it goes in the next couple of quarters. Like until the first quarter, I don't expect any major debt repayments. We'll be reinvesting in our properties first..

Understood. And then switching to Poland, it looks like you have maybe two licenses that have expired. Just thinking back a couple of years when that happened. The machines get turned off, but you continue to pay your employees.

So was there any impact at least during the third quarter from that? And maybe just any update around the process of getting those licenses back online and any timeline there? Thank you..

And I was about to say that there was no impact out of that in Q3 because the closes only came in in Q4. And with regard to the process, the only answer we can give is we really don't know. All those licenses should have been awarded already. There hasn't been yet. It could happen any day in week now, but we really don't know..

As you know, they have had elections in Poland and no new government has been formed that's holding the process up. Unfortunate, but it has to do with a little bit of those effect into politics..

And just to confirm what those assets are closed, you still continue to have to pay those employees? Correct?.

Yeah. The labor laws in Poland differed significantly from the labor laws in the United States or in North America for that matter. And it's basically the only option to just keep paying them..

Okay. Thank you very much..

We will take our next question from C.K. Dell.

Yeah. I have a strategic question. I missed the first part of your presentation.

But the strategic question in my mind is have you taken on a lot of this new capacity and acquisition of during a period when interest rates were very low and now, you're faced with a seemingly prolong period of operating losses based on the very high level of debt that you've taken on that.

Could you possibly address that so that I could understand it better?.

We have acquired three properties at the end of 2019, and we have taken on debt at that time. And then we made another major acquisition which we signed in February '22.

And at that time, when we entered into that transaction -- we closed that a year later, but when we entered into the transaction in February '22, we entered into a new loan facility with Goldman Sachs. And that is what we are faced with.

Now on the one hand, in a way we were fortunate to get it done at the end of February '22 because a few weeks later if you recall in March, end of March, the debt markets pretty much closed for some time because of the Russians invading the Ukraine. But we could and so we could close the transaction after licensing a year later.

But now we are pleased with those terms. We are free to repay the term loan anytime soon as we find something better out there. But for now, we are faced with that rate we are paying. So for 6-plus and it is what it is..

We'll take our next question from Jeffrey Stantial..

Anyway starting off here, I just wanted to drill on the margins a bit more specifically focusing on the US segment.

Peter or Erwin, can you disclose for us what same store margins were year on year for the US region in aggregate? And then unpacking that decline? I was hoping you could just frame out in your mind whether qualitatively or putting some numbers behind it, how much is some of the structural inflationary pressures you called out labor and utilities versus how much is more that one-time headwinds with the new assets and the construction?.

So in the United States, in Q3 of 2022, we had a EBITDA margin of 30%, and in Q3 of '23, our margin was 26.1%. And the margins differ from casino to casino.

With regard to separation the cost side, which really hit the integration costs for the two new properties, now within the Rocky Gap, we still have some construction disruption, which also leads to some either lower revenues and costs.

And if you know, Cape Girardeau hotel, we will be opening in Q2 of next year and Colorado Springs in Q4 of next year. And that will be [indiscernible] and all of that will be digested and then hopefully the synergies start to kick in step-by-step on. And with regard to labor costs, utilities, insurance, so the most structured ones.

As Peter said earlier, we don't think that there will be any further increase in those..

Okay, great. That's helpful. Thank you, Erwin. And then corelated to that, Peter, I wanted to follow up on one of your comments towards the end of the prepared remarks. I think you noted that you think OpEx or margins will be roughly stable from Q3 moving forward. Inflationary pressures are moderating, though, still impactful.

So I guess is the net-net of that of your inflationary pressures continue to develop pressure margins, but conversely, some of the one-time headwinds are going to roll off those dynamics roughly offset each other.

Am I thinking about things the right way or can you just expand on that a bit further?.

I would say, I think you're on the right track thinking that. We think the same way..

Okay. Perfect. That's helpful. Thank you. And then if I could just squeeze in one more. I want to follow up on one of Chad's questions earlier. We did here one of your peers that operates in Reno talk to some elevated promotional activity from a couple of competitors in that market, some higher free play, more aggressive room comps, things of that nature.

Are you seeing similar to that factor in your results during the quarter? Just any thoughts on that dynamic?.

Yeah, we see some of that in particular from one or two of the so-called smaller operators that don't have a hotel attached. Some of them go quite proactive if not to say they're shifting to the market. And we would just have to observing that. We are not going that aggressive..

Okay. Understood. That's helpful. Thank you very much. I'll pass it on..

It appears we have no further questions. I will now turn the call back over to your presenters for any additional or closing remarks..

All right. Thanks, everybody. We appreciate you joining our call today. We will talk again after the first quarter, but I'm sure we'll see each other at some conferences between now and day. Thank you. Goodbye..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..