Welcome to Century Casinos Q1 2022 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 now like to introduce our host for today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin.

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 liquidity measures to the appropriate GAAP measures can be found in our news release and SEC filing 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 streak 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 building in Calgary, as well as costs related to the acquisition of the market in Nevada returned 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 customer and a streamlined cost structure contributed to these great results and margins and allowed us to maintain our strong operating momentum from last year. Sequentially, we managed to keep the high margins the same in the first quarter. It maintains the 23% EBITDA margin that we achieved in the fourth quarter of last year. Compared to pre-COVID times, 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 costs, and utilities. 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 largely be offset by increased menu prices. Rising utility costs are hard to offset, obviously. So there are some incremental expenses, but they have no material impact on our P&L. In spite of some macroeconomic challenges, we have not noticed any meaningful shift in consumer behavior as we look at April and even in May. The customer trends we experienced at the end of 2021 are continuing. Looking ahead, we had impact from stimulus payments in April and May of last year making the second quarter year-over-year comparison challenging for the U.S. operations. However, more than offsetting that is the strong comeback of our Canadian operations. Net results in preliminary numbers for April significantly beat April of last year. Our business is largely gaming-centric; only a minority of our revenue is coming from non-gaming amenities, and we'll only open more non-gaming amenities by expanding the opening hours as demand picks up further so that it grows in a profitable way. The geographic diversity of our portfolio, with locations in hyperlocal drive-to markets with a loyal customer base, has proven extremely resilient, not only in light of the pandemic but also in light of changes in oil prices or CPI. We have high confidence in the underlying trends of our consumer behavior, which have not changed since we reopened 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 in West Virginia, while Missouri was a bit softer in the year-over-year comparison due to the impact of government stimulus payments last year. In more detail, we saw that the month of January was impacted by Omicron, so it was softer than the year before. February saw much stronger business as case counts went down and mask mandates came off. March was a mixed bag in the year-over-year comparison. Colorado and Virginia were higher, while Missouri couldn't quite achieve last year's results, again, which were driven by stimulus payments. Win per customer has remained relatively flat compared to the prior year, which has been a positive sign. The main difference is that we saw a significant increase in upgraded play during the prior year, as patrons who were typically not our typical customers came to the property to spend stimulus checks. In Canada, we operated with the new restrictions for half of the first quarter. Our guests needed to provide proof of vaccination, everybody was required to wear a mask, and casinos were not allowed to serve liquor after 11:00 PM. These restrictions were lifted at the end of February, resulting in an overall reasonably strong quarter for Canada. Going forward, however, we can't 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. Our results in Poland are consistently strong, and that is continuing into April and early May. You can imagine that it is difficult to find a buyer offering an attractive price right now. Our timing is not really an issue for us as Casinos Poland pretty much runs on its own. It has its own corporate and operations staff in Poland and also does not need any CapEx from us. Quite the opposite, cash is flowing from Poland to us. Let's now look at our balance sheet and liquidity. On April 1, we entered into a credit agreement with Goldman Sachs for a $350 million term loan and a $30 million revolving credit facility. We withdrew $350 million in a term loan to fund the $95 million Nugget PropCo acquisition, to repay approximately $167 million outstanding under the old credit agreement with Macquarie, and to fund a $100 million escrow fund that will be used to purchase the Nugget OpCo. As of April 1, 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, the net cash and cash equivalent amount does not include the $100 million we have in escrow to fund the Nugget OpCo acquisition. Our strong cash flow generation is driven by our strong operational performance, our efficient CapEx spending programs at our properties, and favorable regulatory regimes in West Virginia and Alberta, Canada, where the state or province pays for our slot machine investments. Our investments in long-term growth opportunities are spearheaded by exciting projects in Missouri and Nevada. In Missouri, we are developing a 75-room hotel at our Great Cape Girardeau property that will transform that facility into a full resort destination with gaming, beverage, bars 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. We also developed a land-based casino and hotel facility at Caruthersville 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 gaming positions and also 75 hotel rooms. The new development will provide significant operational efficiencies. The savings on insurance alone will be around $0.5 billion per year. It will also be significantly more convenient for our customers. It will increase our catchment area and also give us the chance to win back customers who did not like the old riverboat style when they visited us for the first time. We plan to open that new facility in early 2024. In Nevada, we have already invested $95 million and now own half of the Nugget casino's 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 we've already put in escrow. We're very excited about the Nugget transaction and we see considerable upside once we operate it. With the Nugget, we purchased an existing operation with a long operating history. That means no development risk, no construction delays, or the risk of cost overruns. The Nugget is in a great location directly on I-80, the property gets unparalleled exposure in the Reno Sparks market. The nearby intersection counts 206,000 cars per day. With 110,000 square feet, the Nugget has one of the largest convention facilities in the market and with 1,382 rooms, it can support large conventions. The previous owner, the Marnell companies, have invested more than $90 million since 2016, upgrading all hotel rooms, most public areas, aiding a top-notch steakhouse, upgrading or replacing items as necessary, and right-sizing the operation. Therefore, we do not expect any extraordinary replacement CapEx in the next few years. The Nugget gaming floor provides the most promising opportunity for improvement and growth. We can renew and improve the slot mix, further improve the traffic flow, and increase the square footage of the gaming floor. Additionally, the acquisition offers great potential for synergies as we integrate that standalone property into our portfolio of 17 casinos. In terms of broader market dynamics, there is substantial economic growth in the Reno Sparks region. The population growth is outpacing the national average, and personal income per capita is expected to grow further, with a CAGR of about 4%. The unemployment rate is only 2.9%. The Nugget transaction will significantly increase our scale, and our revenue is expected to grow by over 25%. With these opportunities for growth throughout next year and beyond, we're confident our company is very well positioned for continued long-term success. In conclusion, the first quarter was another great performance for 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. 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 COVID counts started to drop mid-quarter. These trends seem to be really consistent. We'll continue to execute on our business plan by growing organically and by identifying and acquiring under-managed assets in stable drive-to markets in the U.S. In our M&A strategy, we will remain prudent with pricing and valuation. We 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're 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. Kelly, go ahead, please.

Thank you, everyone. We will now begin the question-and-answer session. Our first question comes from David Bain with B. Riley. Please go ahead.

Great, thank you. And congratulations on the execution of the quarter. I guess my first one would be, if you're able to provide any sort of detail or even broad-based thoughts on one key performance at the Nugget?

Erwin?

I don't think that we can discuss it at this point in time, right? Because we don't have the detail.

Okay, fair enough. I'll move on. So I guess my next would be, obviously the macro environment has not been impacting real-time results at your property? 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 that can move more in your favor in the relative near-term?

Yes, David. We're seeing some of that. First of all, the M&A environment is more active than it was last year. There are just 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 circumstances, but I don't want to say prices are coming down at all. But the opportunities are really exciting. Some of the opportunities that are being marketed would fit very well into our portfolio. So we will be very active in the next couple of quarters.

Okay, all right. Great. Thanks so much, guys.

Thank you.

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

Hi, thank you for taking my question. And thanks for the April commentary. I recall a couple of years ago when oil prices were falling; it had a pretty negative impact on some of your Canadian properties. Were some of those economies 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?

Erwin, can you just comment on that?

We see that. First of all, we see that Canada is really on a very healthy recovery track and we're more or less back at pre-COVID levels. But we think that in the coming quarters, we will show the full impact of the recovery, as most of the restrictions were only lifted halfway through the quarter. Now, in terms of can only be positive if the oil prices go up as far as Edmonton and Canadian oil operations are concerned. But it would be too early to say that with that increase we see is due to the oil price raise. I think in the second quarter, we would be able to be more specific on that and have a better picture about that.

Great, thank you. And I 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 into cash interest expense over the next couple of quarters?

Can you please?

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

7% okay. And that's perfect.

Okay.

Our next question comes from Jeff Stantial with Stifel. You may proceed with your question.

Hey, good morning, Peter, Erwin. 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 can 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's things trending kind of in that lower end of the database? Anything to call out there? Or do trends feel stable there as well?

It is stable.

It's stable, exactly. It's stable. So we've watched it very closely as well, same for the opposite interest, but we don't really see anything that would be deviant from what was said before.

Okay, okay. Very good, thank you for that. And then just so the question was, 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 outside as we kind of roll through 2022?

In the non-gaming sector, it is obviously really secondary. And in West Virginia, as said in earlier times, post-COVID, we opened with significantly less SMP capacity. And it hasn't hurt us at all on the customer side; that certainly has helped us a lot on the cost side. What we have now is just right-sized, and also, as Peter mentioned before, we would expand the opening times, for example, at the offer; we look very closely to see 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 our players tend to stay a little longer, tend to come often, and tend to spend a little more money. Maybe we have a few less customers on the lower end, something that we're not unhappy about because it really helps us on the staffing side and on the cost side. For simple terms, with fewer customers, we need fewer employees, and that's certainly helpful.

Okay, great. That's really helpful. Thank you. Then if I can 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 on your properties?

Nothing that would be, nothing other than routine upgrades of the existing systems. One upgrade that we did in West Virginia was that you can now open your hotel room with a mobile phone, and you can also check in mobile and don't have to stand in line anymore, which is really helpful, especially on a Friday afternoon when all our guests are coming for the weekend.

Okay, great. That's super helpful, guys. Thanks for all the color.

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

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 Reno convention and event calendar looks like in '22 and '23? Is it expected to be at pre-pandemic levels?

That syndication we have, yes, it's come back strongly, and the bookings are good. We see and we're told that it's in the area of pre-pandemic levels.

Okay, great. And moving on, I want to touch on Poland for a second. It looks like demand remains strong, but margins 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.

In Poland, we had the best quarter ever. Did you say that you saw that the numbers are going down?

Margins, margins, he said.

The margins, okay, okay. Yes, that is for one simple reason, namely the salaries. We had to increase salaries because we hadn't done so in a long time. It's really difficult to get staff to begin with, and to get good staff is even harder. But it's obviously more than compensated in absolute numbers by the higher revenues.

Got it. Okay, understandable. Thanks for the color.

Okay.

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

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.

This concludes today's conference call. Thank you for attending.