Q2 2019 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Great Canadian Gaming Corporation.

Second quarter 2019 results conference call at this time all lines are in listen only mode.

Following the presentation, we will conduct a question and answer session.

If at any time during this call you require immediate assistance. Please press star Zero 40, operator.

This call is being recorded on Tuesday August 13 2019.

I would now like to turn the conference over to Mr. Terrence Doyle. Please go ahead.

Luckily only good afternoon, everyone welcome to breed Canadian given Corporation's conference call to review the company's financial results for the second quarter ending June Thirtyth 2019.

Joining me on the call. This afternoon as well I think are the company's Chief Executive Officer, and Jon Rousseau, The company's General Counsel and Chief Privacy Officer. We also have several members of our executive finance team with us not news from RVP.

Our financial reporting the Abramson, our VP for the G. bundle and down was a VP of operations finance.

For like Canadian gaming.

I would like to remind listeners.

I want to remind listeners that the latter portion of this call is reserved for institutional investors and analysts I mean, maybe it will be identified by words, such as anticipate believe except or similar expressions are based on information currently available to the company.

Investors should not place undue reliance upon these statements, which involve significant risks uncertainties and assumptions. These statements are made as with the date of this call and the company assumes no obligation to update or revise them to reflect the new events or circumstances.

Unless otherwise indicated all financial information in this call is presented in Canadian dollars in accordance with international financial reporting standards for our RF.

Except for adjusted EBITDA, which is a non IRS time defining the company's mdna.

Unless otherwise noted all financial information for the current comparative periods exclude the financial results of the U.S. region I think I've been presented as discontinued operations. After great. Canadian Gaming Corporation was sold on June 27 2019.

I will now pass the call to Rod forward, Great Canadian financial results for this quarter. He will then provide commentary on the company's overall operation and strategic outlook Rob.

Thank you Karen good afternoon, everyone and thank you for joining us today.

Today I'd like to go over the key highlights a great Canadian this quarter, followed by an overview of the company's second quarter financial results and future outlook.

As previously mentioned the company sold all its shares of Great American for proceeds of $73.4 million in Canadian dollars, resulting in a gain of 47 million.

Net of associated income taxes, which represents 80 cents per common share in the second quarter.

Successful completion of the sale of Great American now allows the company to focus on the short and medium term development plans within its core growth markets, particularly in Ontario.

This includes the upcoming launch of the new World Class Casino.

So work in Pickering, Ontario, which will be called Green Casino resort.

The casino portion of the property and the related food and beverage amenities are expected to be complete by the end of the first quarter of 2012.

During the second quarter. We also successfully completed the gaming expansion at elements Casino ballpark, which now features approximately 1500 slot machines at 60 table games.

We continue to work on the creation of additional non gaming amenities, which we expect to complete by the end of the third quarter of 2019 and will assist in growing visitation and revenues.

On April 24, 2019, we announced that the company completed agreements with the.

Oh, TRID lottery and gaming Corporation, and the owners to be checked down to extend operations at casino Ajax beyond the opening of the company's new Pickering Casino resort to March 31 2026.

Plus an extension at the company's option for an additional 12 year term.

Im not going to comment on the financial highlights for the second quarter of 2019.

Great Canadians revenues have increased by 20% or $59.2 million from 295.2 million to 354.4 million during the second quarter of 2019, when compared to the same quarter in 2018.

The increase in revenues was attributable to one additional month of operations from the west gaining pondel when compared to the same prior year period as well as new revenues from the introduction of table games, Woodbine and expanded gaming capacity elements casino Mohawk.

Revenues also increased from E gaming bundled due to the additional revenues from shore lights Casino, Peterborough, which opened on October 15, 2018, and short on spots of course, the down which reopened under agreed terms on December 19 2018.

During the second quarter of 2019, we recognized $23.6 million in revenues related she permitted capital expenditures or PC for the Ontario gaming bundles compared to 12.7 million of PC. He received in the same quarter in the prior year.

Revenues increased in the PC regions for the quarter ended June 32019, when compared to the same prior year period, primarily from hard rock Casino, Vancouver, which experienced a labor disruption in the prior year that resulted in limited gaming and hospitality offerings for a portion of 2018.

Adjusted EBITDA was 153.7 million for the second quarter of 2000, or 19, which included a 20.5 million positive impact from I F 16, the new lease accounting standard adopted on January 1st 2019.

Adjusted EBITDA was 122.7 million in the same prior year period.

The increase in adjusted EBITDA was also attributable to the above mentioned increase in revenues in the Ontario region.

Partially offset by increased operating costs relate to expanded gaming in Ontario.

Readers are cautioned that the financial results for the comparative period 2018, I've not been adjusted for I. FRS 16.

Shareholders net earnings from continuing operations was $48 million or 81 cents per common share for the second quarter of 2019, which increased by 7.4 million or 15 cents per common share when compared to the same period in the prior year due to an increased adjusted EBIT da and decreases in share based compensation and business acquisition restructuring and other costs, partially offset by increased income taxes, and a 2.2 million or four cents per common share negative impact from it for 16 adoption.

[noise] shareholders net earnings from continuing operations was $40.6 million or 66 cents per common share the same period of 2018.

2019 is a year of significant capital expenditures as we build our infrastructure in Ontario to execute our strategic plan, we have already accomplished several major milestones in the first half of the year, including the New building addition to the great Blue Heron Casino and gaming expansion Adelman its casino Mohawk.

For the remainder of 2019, we continue to work towards completing several developments in Ontario, particularly elements Casino Flam borough and elements Casino Grand River, which will include expanded gaming and new food and beverage offerings that we expect to complete by the end of 2019.

Pickering Casino resort is projected to open in two phases. The first phase will feature a number of gaming dining options and is expected to complete by the end of the first quarter of 2012.

The second phase will include other premium non gaming amenities, such as the hotel retail offerings restaurant and a multi purpose entertainment venue.

Great Canadian continues to apply a disciplined approach to use of capital and to explore opportunities that will improve our business and increased value to our shareholders.

As of June Thirtyth 2019, the company remains in a strong financial position with cash of $407.6 million of available capacity of 397 million.

On the senior secured credit facilities.

Available capacity of $859.8 million on Ontario, gaming bundles, sorry gaming panels revolving and capital expenditures credit facility and 137.5 million on the revolving credit facility of the wet.

Gaming West GTR, gaining pondel subject to compliance with the.

Related financial covenants.

Parents, we can now take questions. Thank you. Thanks Rod before we begin today's question and answer session I would like to remind everyone, but questions will be preserved for institutional investors and analysts I would also like to reiterate the company's investor Relations philosophy, which encourages investors and analysts to utilize this public conference call as our principal medium for speaking to great Canadian Senior management, we only we can now go to the Q and eight thank you.

Thank you.

Ladies and gentlemen, I have a question. Please press star followed by one on your Touchtone phone if using a speaker phone. Please lift your handset before pressing any key one moment. Please for your first question.

Your first question is from George <unk> from Scotia Bank George Please go ahead.

[noise] gyro I'd, just like to focus on ancillary revenues.

It's literally that accounted for 15% of revenues today, there's a lot of initiatives that you spoken about in your prepared remarks.

The point to that looking after Pickering, maybe after opens in 2020 and maybe after would buying a year later, where do you kind of see that mix, where would you like to see that mix can you maybe tell us what you're thinking in terms of margin profile for that category of revenues.

So George I don't think I'm organized enough were prepared at this point in time to talk to you, but the mix I would say.

And I was trying to be very clear even in terms of our Pickering Casino resort, which we're very excited about.

And you know the end of Q1 2020 opening up the casino portion and related SMB offering that's going to be very heavily skewed to gaming revenues.

Frankly through that year, it will be a ramp up phase and it'll be a relatively modest amount of ancillary or non gaming revenues and then only once we open up the remainder of the resort toward the end of 2020, what we see a much healthier and broader mix and frankly, one that we believe will also give us a extra catalyst to continue to grow.

Gaming revenues on a go forward basis. So I think at this stage, we need to do more work that I'm not prepared to throw any sort of metrics out at this point in time, but we're we're we're clearly looking quite a ways down the road. So I'm not going to be helpful. With your modeling I think Woodbine is it is even further down the road at this point in time and we have a very extensive program and obviously went away there, but we are even internally a long way away from scoping out the non gaming amenities and the strategies that were going to employ.

Once those opened in order to drive revenues as you can appreciate in an underserved market.

This is going to be somewhat of an intergroup pros to process as well I think we have expectations in terms of that that we would like to accomplish that being said depending on the continuum of build it may will calm verses rounding out in growing chichi are incrementally true a much different manage basket of opportunities both gaming and non gaming and how they're going to work together I think it's difficult today right now to understand how that's all going to come together and you know I think a couple great. Examples that we have.

In hand in our early years of learning a if you look at opening tables. It would buying we did that and we had tremendous traction yes on the on the gaming revenue side with literally opening no non gaming and celery amenities and opportunities that point in time, and we've seen a little bit at the outset. The reverse frankly at our table offering openings out it places like Mohawk and Flamborough whereby.

In order to assist the growth and traction on the GE our side.

A much healthier mouth at an intertwined you know food and beverage and entertainment offering something that's gonna assistant driving that so I think it's even for management not to scare you too much I think it's something that we're not going to get out there and throw very confident numbers down we have a lot more work to do internally to figure out the mix the starting mix and then the evolutionary mixed over time, so I wouldn't want to commit to anything at this point in time, and frankly internally, we're not prepared to commit to it even if I, even if I was prepared to do that externally right now and the fair enough I think in your answer you had alluded that phase two is supposed to open end of 2020.

Correct.

Okay, and just switching gears to Woodbine last call you mentioned that we're not really there in terms of the VIP business at this point.

Do we do we can we get there with the initiatives are underway or or is this something that we can only got two ones. So I guess, we're buying got this full expansion.

So I mean, what buying does have very healthy amount of business right now and you know when you talk about VIP in the true sense, you really do have to offer up the totality of the experience and you're kidding yourself. If you talk about a VIP experience when you're offering up tables and frankly, just very recently introduced noodle bar in a column and space like that is that really isn't a VIP experience and so I think we do get some high value play, but we really don't have the opportunity to create a VIP experience in in what we would look at a traditional sense I do think we will have that opportunity in Pickering, what do we open up there and we're very excited and encouraged about that how much business and how far the catchment area will be I think will be interesting.

To determine and realize over time, we do believe with a highway system and with the with what that facility is going to represent and bring to the marketplace that we will have an opportunity to reach a fairly far west into the g. eight to offer up.

A different product than that that we have currently of Woodbine and we believe will be attractive to VIP all over the GTS. So I mean, when I looked at the VIP experience, we're not too far off of offering up a you know a suite of amenities and a product that will resonate with that with that marketplace.

But today it really is difficult to truly talk about delivering that kind of experience Woodbine. Okay. No. That's helpful and just one last one if I may a ride on the beat on the B C properties the table hold percentage is.

Quite a high I mean philosophy, if you look at you know watch.

Eight quarters I'm, just went as high as number one I'm just wondering if there is the same deliberate or anything happening from a table mix perspective, but you'd like to call it out for that.

So look I think you know there's a few things happening and we've lived an evolution there over many years, where by some of our higher value play has been reduced down I think one of the implications of that when you have folks that are playing at more modest levels. They spend more time, they show up with less money and.

Thankfully for us with house advantage wouldn't be.

If you spend more time, you usually leave with less money as well, which means you need more money behind so I think you'll find that if you go and you create gaming revenues over a more people playing smaller dollars for incrementally longer amount of time that hold will change to the the positive for the house I think that's one of the things that its probably borne out and maybe is one of the positives out of some of the other changes that weve had to address out in that marketplace.

Yeah. That's helpful. Those are my questions. Thank you.

Okay. Thank you George Thank you.

Your next question is from sub <unk> Khan from RBC capital markets. Please go ahead.

Okay. Thanks.

Just one on the the Woodbine facility.

In terms of the table pick up there or just the activity on the tables. This was I guess the first quarter of like I guess Q2 with the additional tables can you talk about how the trends were during the quarter, how does it compare to your expectations and.

No.

It is the overall I guess the productivity along the lines what youre expecting.

So I would say I mean, depending on if you're talking about this quarter going back over time to productivity out of the shoot was much better than we were expecting.

And it continues to perform well on the table side and I think there is still.

Incremental not exponential growth on the table side, it's available. So I think things are well from that perspective.

The slots that has flattened out and that's a little bit more of a challenge there, but I also think there's another piece as you talk about table performance that would buy and then you mentioned you know late August of last year. So Q3 is now an opportunity where we are lapping.

The introduction of tables at Woodbine, which as I mentioned it was a build it and they will come type scenario with the step function increase in revenues and so when you're looking at Q1 and Q2 of this year, we had an apples to orange comparison, where whereby in the GTT bundle, we did not have.

The benefit of the tables in 2018, whereas we had them in 2019 and now we're obviously faced starting in Q Martin Partway through Q3, 2019 and fully in Q2 thousand 19, Q4, we've got a lapping of the Woodbine table production from last year. So that's obviously going to have an implication on our math going forward. So the tables continue to do well, but they haven't done so well, but when we lap they're going to more than make up for the increase in threshold for instance that we have in 2019 versus 2018, I think thats an important takeaways you look at your numbers.

Okay, and then when you talk about the ramp up of the facilities at the West GTN. You indicated that you are a bit slower to get going on the build out I guess, how is that coming along and based on your expectations.

Hi, guys. When do you expect those facilities to be performing at I guess peak productivity or when will they catch up to our expectations.

Well of course makes decisions around so high I think none of our assets will ever catch up to them, but that's a separate issue altogether, but but seriously for a moment.

Those markets I think the team from a development perspective has been doing a very excellent job in improving the facilities and building them out. Despite the challenges that we've had and also from a from an operating perspective now that being said, it's a microcosm of what I just mentioned in terms of VIP and the expectations. It's such as VIP people expect to come to see now they have an impression of what a casino means feels looks like and the things that they'd like to do when they come to our properties and so we've been quite limited by a gaming centric experience exclusively and the introduction of additional non gaming amenities are a very exciting future and not too far months not years down the road that going to help us move those businesses forward and grow with them is that being said it realistically the growth is going to be a percentage based versus exponential.

I don't think we're going to see in most of these markets all of a sudden.

You know I see I see change when we open restaurants in buffets that you know gross gaming revenues are going to go up by 2030 40, 50% I don't think that that's the environment that we're in I think we need to be looking at our operating agreements as multi year.

And we're very focused on growing our business over a multiyear period that being said every day. It's important to continue to move forward. So I think you need to look at them like being in business.

And growing with with good growth rates, but not crazy growth rates eaten a month and years ahead. So that being you know that being said the west GTH as we were we're clear last quarter. We have had some delays and things are behind and our math is not where we'd like it to be and I think our math is going to continue to not be what we would like it to be up for an extended period of time and I would also remind you last year 2018, when we had an early day basically you know may 1st launch and we Didnt turn on some small incremental slot revenues than we had a different threshold profile in 2018 at the west GCA from a financial perspective in those early quarters.

Produced a fairly well for us as well. So you know the business continues to move forward, which is great. But we do have this extra hurdle. This year that we're dealing with that we didnt have last year, which compounds the problem from a financial perspective, obviously from an operating perspective, we continue to move the business forward and we're more pleased with that part of it.

Okay, and then on the BC segment, you know as you lap the the regulatory headwind from last year is a business there at both your larger facilities progressing this year. The way you thought it would versus those comps or do you still see theres. Some runway for improvement in terms of traffic or table drop and so forth. So look you know just because I don't have a filter I'm not at all happy with RBC operations and to be honest, they're down this quarter and there frankly down even more than you see and Weve been clear last year. We had you know our hard rock labor disruption that was partly in this Q2 period.

Which was difficult for our team members there certainly our guests and our math.

You know the good news is when you come out about a year later it added to our results and so but what it also does is camouflage even poor results throughout the rest of our system. There. So we have some real you could call them, you know opportunities, but there are challenges as well both on the revenue side as well as to the cost side out NBC that needs some significant focus and attention, which believe me. It's getting now so what you see there things Youve North Anna.

I'll mention.

Par drop is a different beast, because you had the labor disruption and as you know we talked about the re ramping up after that dislocation in the business.

The slot side has done better ramping back up the people side was much much slower as these message each quarter going forward, so thats a bit too bigger facilities. That's the one I would say to give you some transparency on river rock it actually was doing pretty well up until this quarter. The slot business had not massive but it had fairly good growth. This quarter. It actually gave a bunch of that back which is very disappointing a need.

Some extra focus and attention there. So those are the two big facilities the other.

Implication in our math here evolve from a couple of marketing initiatives at elements Victorian elements, Siri, where he and the team tried to create some new marketing programs and drive GG R. Unfortunately, the math will show you here.

Despite a relatively modest lift in Gigi are there was a significant incremental cost in non HR cost line and therefore, those businesses didnt contribute as much EBITDA as the same quarter last year. So we have some more work to do to figure out are the appropriate marketing approach there to make sure that we're not overspend or the incremental GTR that we feel we can grow to those properties. So.

You know a lot of work to do there, there's obviously been a big focus.

From management perspective, but also all of you on Ontario, what we're doing there B C continues to be a core important regions that were focused on and we're equally focused on improving our financial results there in the quarter quarters and years ahead.

Okay, and then just one last one for me.

More of a clarification item I guess are called the Pickering facility I think you're indicating today it will be called Pickering Casino resort and I believe the larger complexes Durham life is a is this a name change for the facility or is this your facility with them that larger complex. It's running so I understand. So this is a name that weve chosen you know the the larger quote complex. We you know we're a tenant in a proposal by the landlord to do a whole bunch of other things and I think it's important that there's clarity that you know.

That is our postal code, but none of those other activity have had anything to do with our partnership or great. Canadian So we've we've put a name down that.

It's very simplistic, we're very proud of being in Pickering, and frankly, we think theres a bunch of value not only in simplicity, but to reinforce where it's located so people can find it as opposed to doing something where.

They need to they need to go through extra steps to zone in on where it actually is because we want to drive traffic from everywhere. So that's what we came up with and I believe the landlord has other initiatives to do other things on other lands that are proximate to ours, but that's his own business and initiatives and we certainly hope that it works well and its symbiotic in terms of what we're doing but we're just focused on our own activity.

Okay, great. Thank you.

Okay. Thank you so Uh huh.

Thank you.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.

Your next question is from David Mcfadgen from Cormark Securities. David. Please go ahead.

Hi, Great Hum and I do in my House decline.

I have a number of questions. So I'll just start off with.

The PC revenue first so in Q2 19, you said it was 23.6 in Q2 18. It was 12.7 is that correct.

Yeah. So there's an incremental 10.9 million this year over last year in the quarter. Okay and is there any reason why you don't just disclose not named in I'm just curious.

I can answer that I don't think Theres any particular answer, but we wanted to make sure that we disclose it and we've disclosed that every quarter. So.

And the other thing that we've disclosed every quarter is now that we've lapped then all of the partnerships, where this is not going to no longer be an issue for the foreseeable future. This is a Q2 recognition of the 22.6 million plus tiki I going forward. So.

Okay can you can you tell us what it was in Q1 19, if there was any.

Q1, 19, I don't remember how much there was I don't believe there was very much I think the thing that you you use if you don't remember I'll give it to you now Q3 at 18 is what you'll want to dig out of your files.

And if you.

I wanted to ask a question, but if you don't give you the answer in any event. So Q3, 2018 was 4.4 million or we disclosed that I believe.

Last year, so that's obviously gone away as an opportunity and in Q3, because we've got the full benefit recognized in Q2. This year and we mentioned I think Q4 was de Minimis in Q4 2000, and then it was a relatively was immaterial.

Amount the small mouth, so because it was a small amount I believe.

That that that by Q4.

Our Q1 2019 was zero.

Okay I'm getting.

Finance heads nodding out here, so I think I got it right.

Okay.

And the margin on that the two towards EBITDA of 100% ranks is no cost right.

Yes, there is no operating cost or differences due to the recognition that that that's correct. Okay.

Just wanted to clarify that so I'll just go on to the Ontario business. So I was just looking at the table drop just comparing Q2 19 with Q1 19 and it was up about 5% I thought it would have been up a little stronger given Q1.

It was negatively impacted by some severe weather I was just wondering can you comment on why it wasn't done up stronger than 5% sequentially.

No I have no comments on that.

Oh, okay.

And I think you just goes on the last conference call that the G.T.A. Remy. It's rational went up as of April one it appears as though it didn't go up by much and I was just wondering if you could confirm on or provide any comments.

So any changes that there would be in fresh a whole happened on April 1st of every year.

Okay.

And it and that's the only time that changes.

Correct.

Okay and it appears as though there wasn't a big change at least for April one 2019, I was just wondering if you could confirm that.

Well I don't know what a big changes I know there was a change, but I'm not going to confirm.

What the change was and you have to remember that they're also there's three partnerships with thresholds and they're all grouped as well right. So yeah. You mentioned just the GE So I think.

You know you have to look at all of them I do all the thing I would say, which I think we sort of talked about and evolutionary it you know it it should be understood. The east by though where we've now basically gone through our step function changes in our asset base.

That the the threshold increases obviously should be much more modest in nature, because they're not event driven in terms of changing materially the profile of the asset base, where in in the G.A. and the west GTH there earlier in their lifecycle. So building out their assets. So you know when you look at the overall threat implied threshold change that you're backing out.

Ah you might look at the East fund a little bit differently than the other two bundles.

Right.

So it's my impression that.

The DTA, maybe the West you did one was a concern.

It's under my it's my impression that the G.T. unless teachey Remy thresholds.

Should step up fairly materially in 2020, and 2021 and I was wondering if you could provide any commentary on that.

Well I don't know where your impression comes from but I did mention that we expect to continue to grow these asset bases and we're changing them the west Chichi, a significant changes, but they are there incremental in nature, obviously, the GE GE with opening a brand new massive full service resort destination Casino out you know, we think changes will be more than incremental out of that and I think it's not an unfair assumption.

To believe that the government is going to get their fair share of it through a threshold arrangement and participating above this threshold as well so I think I think it's.

You said, it's your impression.

Yeah, I mean, that's your impression I think it could be maybe right, maybe wrong, maybe right and wrong.

And it depends what what you mean by material too right. So it's difficult.

Yeah, Okay, well, when I say material I'm talking 20% plus and I don't know if you can from Miami.

And Uh huh.

Like any do you have another question.

No I was just wondering did.

When I was thinking materials thinking over 20% increase any any any comment on that on that I'm not going to start commenting on percentage increases at this point yeah. Okay.

Alright, okay. Thanks, a lot guys.

Okay. Thank you David.

Thank you.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.

There are no further questions at this time. Please proceed.

Thank you, we only and thanks, everyone for participating this afternoon.

Before we conclude I would like to remind listeners that forward looking statements were made during this call.

Well those are joint Midway I encourage you to listen to the replay of this call to hear my earlier comments regarding these forward looking statements.

This replay will be available through the Investor relations sections of our website at Www Dot GC gaming Dot Com. This now concludes our call. Thank you Lily.

Thank you.

Ladies and gentlemen, we thank you for participating and ask that you. Please disconnect your lines.