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Edited Transcript of CNTY earnings conference call or presentation 9-May-19 2:00pm GMT

Q1 2019 Century Casinos Inc Earnings Call

Colorado Springs May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Century Casinos Inc earnings conference call or presentation Thursday, May 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erwin Haitzmann

Century Casinos, Inc. - Chairman & Co-CEO

* Margaret Stapleton

Century Casinos, Inc. - Executive VP of Finance, Secretary, Principal Financial & Accounting Officer

* Peter Hoetzinger

Century Casinos, Inc. - Vice Chairman, Co-CEO & President

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Conference Call Participants

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* Brad J. Boyer

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* David Brian Bain

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Eric Anthony Des Lauriers

Craig-Hallum Capital Group LLC, Research Division - Associate Analyst

* John G. DeCree

Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Century Casinos Q1 2019 Earnings Conference Call. This call will be recorded. (Operator Instructions) I would like to introduce our host for today's call, Mr. Peter Hoetzinger. Mr. Hoetzinger, you may begin.

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [2]

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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 Executive Vice President of Finance, Margaret Stapleton.

Before we begin, we 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 do 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 release and the SEC filing available in the Investor section of our website at www.cnty.com.

I will now provide a brief review of the company's financial results for the first quarter 2019. Following these prepared remarks, there will be a question-and-answer session.

Well, this was another very good quarter for us. Net operating revenue was up 12% even though we were negatively impacted by exchange rates. In constant currency, revenue was up by 20%. Adjusted EBITDA increased by 2%, but that includes a full month of preopening costs and expenses at Century Mile Racetrack and Casino to the tune of $700,000. Our auditors stated we have to include the cost and expenses of the one month prior to opening any casino. Excluding that, the, what I would call, real adjusted EBITDA is $7.4 million, and that is 13% higher than last year.

Earnings per share increased by 33%. Canada remains our strongest segment generating 36% of our consolidated revenue and 56% of our EBITDA. In local currency, the Canadian operations grew revenues by 17% and adjusted EBITDA by 12%. The 2 casinos we own and operate in the Greater Edmonton market: the Century Casino & Hotel Edmonton and the Century Casino St. Albert, grew revenues by 1% and 4%, respectively, and adjusted EBITDA by 1% and 22%, respectively.

At the end of January, Northlands Park Casino, the closest competitor to our property in Edmonton closed for good. That certainly helped bringing in quite a lot of new faces. We noticed a strong increase in sign ups to our loyalty program. That positive momentum was offset by an extreme cold that settled over the area for about 2 weeks in February. The extreme temperatures combined with heavy snowfall deterred people from venturing out unnecessarily. It was one of the coldest month on record.

With that in mind, this revenue and EBITDA increases are even more remarkable. Our 2 casinos in the Calgary market, Century Downs and Century Casino, performed even better and generated revenue growth of 11% and 8%, respectively. Adjusted EBITDA increased by 25% and 62%, respectively.

As Century Downs Racetrack and Casino is doing so well, and consistently doing so well, we're expanding and planning to increase the floorspace by about 20% by the end of the year. The total CapEx for that casino expansion will be around $1.5 million, and we estimate to generate an EBITDA return on that investment of approximately 80%, possibly even 100%.

In the U.S., our 2 operations in Colorado contributed 18% of our consolidated revenue and 22% of our EBITDA. Revenues increased by 5%, adjusted EBITDA was up 12%.

Both properties in Central City and in Cripple Creek did very well. In Central City, we kept our market share steady compared to last year. In Cripple Creek, we actually gained market share.

Cripple Creek increased EBITDA by 14%, based on a strong 28% EBITDA margin. We maintained a positive outlook and project further growth due to solid regional economic conditions, a strong tourist business and the great positioning and loyal following our properties have in that market.

In Poland, our casinos generated 43% of the company's total revenue and 28% of our EBITDA. In local currency, revenue was up 27% for the quarter and EBITDA was up 30%. As most of you know, our Polish business was negatively impacted by licensing delays between Q4 '17 and Q3 '18. We're glad that things are now back to normal in Poland and look forward to generating high EBITDA margins going forward. Already, things are moving in the right direction. The EBITDA margin in Q1 was 12%, up from 9% in Q4 '18.

In U.K., the Casino in Bath is still disappointing. EBITDA was negative $700,000. What should help is the reduction of the maximum stake at machines in betting shops, down from GBP 100 to just GBP 2, effective as of April 1 of this year. And in fact, April results show some improvements already, but still not quite enough to reach profitability.

Now a quick look at our balance sheet and liquidity. We have $49 million in cash and cash equivalents, and $68 million in outstanding debt. That brings the total debt-to-adjusted-EBITDA ratio to 2.9 and the net debt-to-adjusted-EBITDA ratio to 0.8. Our debt includes $48 million related to our Bank of Montreal credit agreement, $15 million related to the Century Downs long-term land lease and $5 million over in Europe.

Our book value per share sits at $6.08. CapEx for existing operations during the quarter was $2.1 million or 4.7% of revenues, spent mainly on the new gaming floor at the Marriott Casino in Warsaw, Poland as well as on new slots in Colorado and some F&B in Canada.

Total other CapEx in the quarter was $8.5 million, spent on Century Mile Racetrack and Casino in Edmonton, Canada, which opened its stores on April 1. And just a little less than 2 weeks ago, on April 28, we celebrated the grand opening of that facility with the first Thoroughbred races on the one-mile racetrack. It was an exciting day for the entire Century Casinos family seeing the hard work over the last 3 years coming to fruition, attracting huge crowds with strong business volumes at the gaming floor, the betting stations and the F&B outlets.

Net operating revenue for the first month of operation is estimated at CAD 3 million, which equals about USD 2.2 million. Century Mile in Edmonton is about 50% larger and the footprint is almost twice the size of our successful Century Downs facility in Calgary.

We expect to create some synergies between the 2 racing operations by further broadening the reach of the Century brand in Alberta and Western Canada, by leveraging the 2 properties for reduction of costs and/or sharing any contracted services, and by creating a stronger Century racing brand for the sale of races to other racetracks, OTB networks and advance deposit wagering companies. And that becomes increasingly lucrative for us as we also have the exclusive license for pari-mutuel off-track and internet horse betting network in the entire province of Alberta. There are currently 37 off-track betting parlors in operation and over 500 locations worldwide offering wagering on horse races at Century Miles and Century Downs. All right, that pretty much sums up another very successful quarter.

I thank you for your attention, and we can now start with the Q&A session. Andrew, go ahead please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Bain with Roth Capital.

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David Brian Bain, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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Congratulations on the opening of Century Mile. It's great seeing it. And we appreciate the April net revenue. I think that's very helpful. I know that at the Analyst Day, you reiterated the 20% to 25% return of project, and there's a lot of margin catalysts and patron catalysts in forward quarters, but I think it'd be helpful to kind of get a sense as to what you see is EBITDA contribution in maybe 2Q or 3Q? Just to get a sense, again, on sort of that how we should look at the margin ramp there?

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [3]

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We believe that the margin -- or that the returns that we have indicated on 20% -- maybe up to 25% on the investment, that should kick in its first full year of operation, that being 2020, and until then we see it ramping up to that number pretty gradually between now and the end of the year.

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David Brian Bain, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. So fairly minimal for 2Q and then just ramping from there. Is that...

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [5]

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No, no, not -- ramping from the get-go actually.

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David Brian Bain, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. Okay, great. And then for the Bath Casino, do you see that as hitting breakeven in the second half?

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [7]

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Difficult. It's on its way. Whether it's in the second half or a little bit later, it's too early to say.

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Operator [8]

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Our next question comes from the line of Brad Boyer with Stifel.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [9]

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First one's just around Poland. Congrats on having Poland be a bright spot in the quarter and not a thorn in everyone's side. So if I look at those 12% margins that you achieved in Poland in the quarter and obviously appreciate that FX moves margins around for you guys. But I mean, is that your expectation that you're going to continue to see that margin in Poland ramp as you move up further into 2019?

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [10]

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Erwin?

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Erwin Haitzmann, Century Casinos, Inc. - Chairman & Co-CEO [11]

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We think that -- I mean, the first quarter was excellent. We made more EBITDA than in all of 2018, and I think it would be fair to assume that if you take that x4 then you have the number for the full year.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [12]

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Okay. That's helpful. And then I mean the results at Century Downs continue to surprise us. Obviously, the AGLC likes what they're seeing as well given their decision to continue to give you guys more product there. Could you just give us a sense of what in your estimation is kind of driving the strength of that property?

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Erwin Haitzmann, Century Casinos, Inc. - Chairman & Co-CEO [13]

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We think that we're managing very well.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [14]

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Okay. Anything more to add?

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Erwin Haitzmann, Century Casinos, Inc. - Chairman & Co-CEO [15]

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Yes. Sure. Racetrack casino provides a lot of opportunity to create extra traffic -- more traffic than compared to a so-called, probably, the regular casino. First of all, we had 100 racing days, which bring a certain amount of customers and that some days like the Kentucky Derby, like you have 2,500 people or so. And important to note is that many of those are customers that otherwise would not go to gamble. So we had the opportunity to expose our product and our gaming product to people who not necessarily see themselves as visitors of casinos, but it's a percentage game. Of a 100 that come to see the races, x percent will also come back and a certain number of those will become regular. And then in connection with the after racing, in both properties, both in Century Downs and Century Mile is where we have extra rooms that we can rent out for various opportunities like wedding parties and then birthday parties and so on. So that's another driver of traffic and ultimately driver of revenue. And to give another example on May the 5th, such as the Cinco de Mayo, we had for the third time in a row an event that we're marketing together with Virgin Radio, that's a chihuahua race and where probably almost 200 chihuahuas are racing in groups of 10, on the tracks for horses, for only 50 meters or so. And every chihuahua on that probably brings 10 or 15 friends. So suddenly we have another huge crowd of people that come for the chihuahuas and not at all for the casino, but same thing like before, a certain percentage of those will like what they see and come back. Is that helpful at all?

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [16]

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Yes, very helpful. I appreciate the color there. And then just lastly, like David indicated, I appreciate the color around Mile in April. I wanted to see if you could give us any sense of what you're seeing at Century Casinos Edmonton as we've sort of cycled through some of the weather impact that you encountered in the first quarter as a result of Northlands Park closing. And that's it for me.

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [17]

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Erwin?

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Erwin Haitzmann, Century Casinos, Inc. - Chairman & Co-CEO [18]

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Yes, all right. Okay. In Edmonton, we had a lower gross gaming revenue on table game side, mainly due to a decrease in baccarat draw, but with an increase in the slot side. And the increase in the slot size, and then increase in the slots, it was in Northlands Park and the decrease in the baccarat draw is probably due to a little bit of headwind from (inaudible) We are working hard on regaining our market share there, and we hope that we will be successful in that effort.

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Operator [19]

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Our next question comes from the line of Mike Malouf with Craig-Hallum.

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Eric Anthony Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [20]

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This is Eric Des Lauriers on for Mike. Congrats on the quarter. I was wondering if we can talk a little bit about the northern Alberta pari-mutuel network that hit Century Mile in Q1. And specifically just how you guys are looking at the revenue breakdown of that compared to the overall revenue generated at the racetrack itself or just the overall location itself and whether that $3 million guide for the month of April included any of the northern Alberta pari-mutuel network betting?

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [21]

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Peggy, can you start with that? Does the -- did the number include the pari-mutuel?

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Margaret Stapleton, Century Casinos, Inc. - Executive VP of Finance, Secretary, Principal Financial & Accounting Officer [22]

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Yes, it does include the pari-mutuel, is in the racing numbers for April.

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [23]

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Okay. And anymore in terms of what we see as a potential there, either Peggy or Erwin?

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Margaret Stapleton, Century Casinos, Inc. - Executive VP of Finance, Secretary, Principal Financial & Accounting Officer [24]

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You could probably take Q1's pari-mutuel numbers and extrapolate those out for the year.

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Eric Anthony Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [25]

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Okay. That helps. And then just kind of wondering overall top line what you guys expect -- how you expect the Century Mile revenue to ramp with the pari-mutuel betting. Obviously that's flat, but I guess what I'm looking to get is how much we should expect Century Mile's top line to sort of accumulate as we look from Q2 over out through 2020 if it's going to be relatively flat with that $3 million monthly run rate or we should expect some increase as it matures?

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [26]

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Well, we have only one month and based on that so it's early for us to say, but definitely we expect to have a very busy summer with all the racing going on, and we know from Century Downs' success that -- and as Erwin indicated just now that, the racing really helps us also on the gaming and the F&B revenue. So I think, Q3 should be particularly strong, and Q4 is a little bit down certain quarter here. On the one hand, we should be ramping up towards next year nicely, we should avoid operational headaches under control by the end of about Q4. It could be a little bit weaker than Q3. Overall, I think 2020, we should be there at those 20% to 25% EBITDA returns on the investment.

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Eric Anthony Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [27]

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Okay. Great. That's helpful. And then last one from me. Appreciate the color on the GBP 2 betting limit over in the U.K. as it relates to the Bath casino. Could you also just provide some color on the safe betting regulations that kind of require some onerous financial disclosures to -- from the casino patrons, and the overall impact of that?

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [28]

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Yes, the problem there is that, first of all, they came into -- in effect after we've opened and yes, they are pretty onerous. Whenever a player reaches GBP 20,000 in table drop or slot coin-in or winnings or losses, we have to -- we are required to ask for lot of detailed financial information from that player, including income and so on. And some players are hesitant to give -- to provide that, so it takes -- like on a one-on-one basis, a lot of talking and discussions and that really slows the ramp-up down. But on the other hand, it's a level playing field for the casinos in the U.K., and so one by one we are convincing players and players are coming back, but it's very, very slow process.

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Operator [29]

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Our next question comes from the line of John DeCree with Union Gaming.

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John G. DeCree, Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research [30]

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Just 1 or 2, maybe go big picture and maybe talk a little bit about this recently, but now that Mile is open, obviously, plenty of work to do in ramping that up and still a big focus. But I was wondering if you could kind of talk high level about the strategy from here. The balance sheet's obviously in great shape, additional M&A or projects that you're thinking of. So if you could kind of give us a little insight as to what might be next for Century, that would be helpful.

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [31]

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Sure, John. Yes, we've -- couple of months ago, so when we were very comfortable about how Century Mile is shaping up, we started to look around and what we're seeing is that there is very limited, if at all, attractive greenfield situations out there. And so we are focusing on the M&A side. And we do see in North America, especially in the U.S., quite a lot of attractive opportunities out there, some of the larger companies do not really focus on assets that produce between $10 million and up to $20 million EBITDA, it's too small for them. But, of course, it would be meaningful for us. And we are zooming in on the field, trying to get a deal that is beneficial for Century Casinos and you know our history, we've always tried to not pay too much and to keep the balance sheet on a conservative level. So the challenge is to find those opportunities that offer great potential for us at a price that conforms to our conservative approach. Now we believe that they are the ones or the others out there and I think we've said that before, we are very hopeful to have something presentable to you guys before the end of this year.

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John G. DeCree, Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research [32]

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Great. That's really helpful color. Congratulations, again, on the opening in Alberta.

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Operator [33]

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Our next question comes from the line of Brad Boyer with Stifel.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [34]

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Yes, coming back here, guys. John got me thinking about something else, but, just curious if you can provide some perspective obviously without giving away any of your deep dark secrets for competitors, but give us some perspective on sort of what you are looking for, as it relates to the next potential acquisition for Century Mile. Are you looking for something that is kind of a larger full-scale resort type amenity with a hotel. There are some of those out there in that range of EBITDA that you described. Are there certain market characteristics, tax rate, presence of triable competitors in the market, anything like that. Can you give us a flavor of sort of how you go about thinking through where that acquisition might take place?

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [35]

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Yes, Brad. We want to stay with some parameters that we have also used in the past and that includes -- that we believe that where we are best in our operating approach is to cater to local markets and we define that as within a 75-mile radius. So it's very unlikely that you see us going to a full destination type of target. Secondly, we like markets where the number of casino licenses is limited. And thirdly, and that's the only deviation from the path, is that we want to grow into units that is largest, the largest that we have today or even larger.

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Operator [36]

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And there are no further questions at this time. I'd now like to turn the call back over to Mr. Hoetzinger for closing remarks.

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Peter Hoetzinger, Century Casinos, Inc. - Vice Chairman, Co-CEO & President [37]

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

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Operator [38]

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