Executives
Traci Mangini – Senior Vice President Corporate Finance
Clarence Chung – Chairman, Chief Executive Officer
Andy Tsui – Vice President of Finance
Tony Lam – Senior Vice President of Operations
Analysts
[Paul Stones – Paul D. Stones Partners]
Elixir Gaming Technologies, Inc. (EGT) Q4 2008 Earnings Call March 19, 2009 8:30 AM ET
Operator
Welcome to the Elixir Gaming Technologies fourth quarter earnings conference call. (Operator Instructions) I would like now to turn the conference over to Traci Mangini, Senior Vice President of Corporate Finance.
Traci Mangini
Good morning everyone. I'm Traci Mangini, Senior Vice President of Corporate Finance for Elixir Gaming Technologies. With me today on the call are Clarence Chung, Chairman and Chief Executive Officer and Andy Sewe, Vice President of Finance, Tony Lamb, Senior Vice President and Head of Operations and Walt Stowe, General Council.
Before we start, let me review the Safe Harbor Statement. Some of the statements the company will make on this conference call such as statements about the plans and expectations are forward-looking. While forward-looking statements reflect the company's good faith beliefs, they are not guarantees of future performance and involve risks and uncertainties. The company's actual results could differ materially from those discussed on this phone call.
Some of these risks and uncertainties are described in today's new announcement and in the company's filings with the Securities and Exchange Commission including the company's reports on 8-K, 10-K and 1-Q. Elixir Gaming assumes no obligation to publicly update or revise any forward-looking statements.
Now on this morning's call we will review our fourth quarter and fiscal 2008 results as well as recent market developments. The agenda for today's call will be as follows: first, Clarence will review the company's progress and outlook including updates on additional perspective on our recently announced agreements with NagaWorld, Shuffle Master and the regulatory landscape in Cambodia.
Following that, Andy will provide a brief review of our financial results and the ongoing process we're making with our cost cutting initiatives, and then Tony will discuss key operating metrics and provide an update on our 2009 roll out plan. We will then conclude by taking questions from analysts and institutional investors.
With that, let me turn the call over the Clarence Chung.
Clarence Chung
Good morning everyone. Elixir Gaming has begun in 2009 a new company, a thinner, more focused entity with the single mind purpose of dominating the slot participation industry within emerging Asian markets. We've evolved and matured and we have emerged a materially different company from the organization that began operations in September 2007.
Our operating structure has been rationalized to maximize efficiency and we have implemented dramatic improvements to our cost structure, all of which leave us positioned with great flexibility to pursue growth opportunities within our sphere of operations. Now I would like to discuss in more detail some of the steps we have taken in order to achieve this transformation which lays the foundation for future growth.
These efforts include the streamlining of our operations, the realignment of resources to our core business through the divestiture of our legacy business and the settlement of a long standing law suit as well as the addition of a strong new partner. I'd like to provide more detail on each of these items.
To reduce corporate overhead expenses we have closed our Macao office and are in the process of closing our U.S. office. We have closed our factories in China to realign resources with our core participation business and we are down sizing our Hong Kong and Cambodia operation.
As Andy will discuss in greater detail, these ongoing initiatives will result in quarterly SG&A of $2.5 million by the third quarter of 2009 representing annualized savings of approximately 30% compared to 2008.
We have divested our Legacy table game business and simultaneously resolved a long term litigation. As we reported earlier this week, we reached agreements to sell Shuffle Master, our portfolio of table games, peripheral equipment and its actual property while settling all outstanding patent infringement litigation.
The base consideration was $2.4 million in cash with upward adjustment potential to $2.8 million subject to final inventory. These agreements are clearly positive for the company, serving to further strengthen our balance sheet and free up important management resources to focus on our core business.
I would like to add that while we have prevailed on our motion for some adjustments on the issue of infringement and had a reasonable level of confidence in our eventual victory in the damage phase of the litigation, it was not a certainty. Rather than incurring significant time and legal expenditure that would have been required to pursue the matter in the courts, we believe it was advantageous to have this certainty of at least $2.4 million cash payment and to divest an unprofitable legacy business.
In Cambodia, we have aligned with a strong partner, NagaWorld, a Hong Kong company and have taken on an operator role. In January, we quickly delivered on our agreement with NagaWorld to provide approximately145 games to the Premier Club brand portion of their floor. These initial machine placements have been in operation since January 24, 2009 and the early net win results have been very strong.
For the month of February, we have a daily average net win per machine of $54.00. In March, we expanded our install base to 200 machines and for the first 15 days of the month, daily net wins per machine increased substantially to $171.00, notably on a higher per machine base.
Despite economic challenges that persist throughout Asia, we believe the result of Premier Club at NagaWorld clearly demonstrates our expertise in the floor management area and also highlights the potential growth achievable in Cambodia as well as many other Asian gaming markets where the price remains relatively limited when compared to that of the more mature gaming markets such as the U.S. and Australia.
We are pleased with our progress but we have encountered certain external events that have impacted our near term growth. As Asian gaming markets continue to develop, so to do their regulatory framework. Cambodia recently issued directives requiring all slot machine operators with the exception of those with a casino license to suspend operations.
As you may know, our partner NagaWorld has an exclusive casino license within a 200 kilometers radius of the capital city of Phnom Penh. As a result of these directives, all of our operating venues in Cambodia except its Premier Club at NagaWorld have been closed.
Despite the resulting negative impact on our machine placement and near term participation of revenues, the venue closures in the Phnom Penh area have provided a benefit to our operations at NagaWorld.
Building on a solid foundation, Elixir Gaming is laser focused on growth and improving performance in our Philippines operations and expanding our install base in strong venues. In the Philippines we have established a solid installation base and achieved steady improvement in our operations in these markets as fourth quarter average net win per machine is improving 28% from first quarter 2008 levels.
However, we believe we can accelerate revenue and net win growth in our venues by leveraging our expertise from our successful marketing and promotion efforts and Premier Club at NagaWorld. We also have the commitment of our venue owners to be more aggressive in these marketing efforts and such programs are underway.
We anticipate opening three to four new venues during 2009 two of which are expected to open during the second quarter of 2009 in the Philippines. We believe these venues have strong potential as they are located in superb locations.
In addition, we are actively pursuing several other projects in the Philippines as well as opportunities in other high potential Asian countries such as Viet Nam and Laos which are experiencing some major casino developments.
In summary, I think it is evident that despite economic headwinds we have a clear strategies to improve performance and are making deliberate progress as a company in our operating market. With a much leaner operating structure now in place, Elixir Gaming is even better positioned to capitalize on the growth of gaming markets which will then generate improvement to the company's top and bottom line results.
Based on this and consistent with our previous guidance, we expect to turn adjusted EBITDA positive during the second half of 2009. With that, let me turn the call over to Andy Tsui to review the financial results in more detail.
Andy Tsui
Good morning everyone. The total revenues for the quarter was $2.1 million of which $1 million was from slot participation business. Slot participation revenue declined 7% sequentially reflecting the impact of the regulatory change in Cambodia partially offset by continuing net win improvements in the Philippines.
Adjusted EBITDA which we define as earnings before interest, taxes, depreciation, amortization and non cash expenses for the quarter improved to a loss of $4.4 million compared to a loss of $5.9 million in the fourth quarter of 2007.
Cash SG&A expenses for the quarter of 2008 were $3.3 million a decrease of $1 million from the year ago period a decrease of $0.05 million from 2008 third quarter period. Of note, the company benefited from a $3.2 million adjustment to non cash stock compensation expenses in the quarter related to the adjustment for actual forfeitures due to significant employee turnover in late 2008 and the revaluation of options granted to non employees based on their fair market value.
As Clarence discussed, we continue to make progress on our cost cutting initiatives and are identifying additional cost saving opportunities targeted to reduce costs to under $3 million in quarter cash and SG&A expenses by the second quarter of 2009 and we now expect to achieve a quarterly cash SG&A run rate of $2.5 million by the third quarter of 2009. This represents annualized cost savings of approximately 30% reduction from the year ago period.
As our recent agreement with Elixir International and Shuffle Masters, we have materially strengthened our balance sheet in the last six months. We ended the fourth quarter with $14.5 million in cash as compared to $17.8 million at the end of the third quarter 2008.
We believe that our current cash on hand and machine inventory levels are sufficient to fund the vast majority of our new vending openings and expansion through the end of this year which we can see particularly developing given the current state of the global capital markets.
I will now turn the call over to Tony Lam to discuss the key operating metrics and our roll out plan.
Tony Lam
Good morning. We ended 2008 with 977 machines in operation at nine venues as compared to 1,283 machines in 12 venues at the end of the third quarter. The 977 unit install base was comprised of five venues in the Philippines with a total of 801 units installed and four venues in Cambodia with a total of 176 units installed.
The quarterly sequential decline was due to the closure in December of three Cambodian venues to comply with the Prime Minister's directive. Since that time, all of our clubs in Cambodia have been permanently closed with the exception of Premier Club at NagaWorld.
Importantly, Premier Club at NagaWorld is one of the few facilities that possesses casino license and that is currently in operation in Cambodia. Since December 31, we have installed 200 machines at Premier Club which includes some machines redeployed from our closed Cambodia venues and some additional machines from existing venues in the Philippines. s a result, our total current installed base of machines in operation is now 1,029.
As a result of optimization initiatives we have implemented over the last several quarters aimed at generating improvement in net revenues and net wins, net slot participation revenues for Elixir Gaming in the Philippines market during the quarter rose to $791,000, up 22% from the third quarter levels of $650,000.
Operations per win machines today for the quarter in the Philippines improved to $51.00 up from $47.00 in the third quarter and increased 8%. Net slot participation revenue in Cambodia during the quarter declined to $286,000 from third quarter levels of $460,000 reflecting the closure of three venues to pursue compliance with new directives.
However, we have seen strong improvement in Cambodia participation revenues in the first quarter of 2009 due to the performance at the Premier Club at NagaWorld. We are extremely encouraged by the initial performance of our units at the Premier Club. For the month of February, net wins per day from machine operation was $54.00 on the 146 machines in operation.
In March we increased the number of units in operation to 200 and the facility has continued to ramp up based on our aggressive marketing efforts and given the percentage of the closure of all but the two clubs previously operating in the Phnom Penh region. As a result for the first two weeks of March, average net win per day has improved to $171.00 on an average machine base of 182 machines.
We will continue to work closely with our partners at NagaWorld on marketing initiatives to further ramp up wins per day at this venue.
With regard to other businesses, I would like to provide an update on our Dolphin division and specifically the City of Dreams. In November we announced that our Dolphin division executed a $2.7 million order to supply RFID gaming chips for the much anticipated City of Dreams Casino Resort in Macau. City of Dreams is expected to open this June and Elixir Gaming's RFID order is on schedule. We expect to report the revenue from this sale in the second quarter of 2009.
Before turning the call back to Clarence, I would like to discuss our 2009 roll out plan. Given the effects of the venue closures in Cambodia and taking a conservative approach in view of the current global economic condition, we now anticipate adding three to four new venues during 2009 increasing our installation base by at least 400 machines. Two of these new venues are expected to open during the second quarter in prime locations in the Philippines.
Based on this roll out plan and our current healthy inventory of over 1,100 gaming machines we anticipate continued managed growth for 2009 and 2010 with minimal capital expenditures. In 2009 we project capital expenditures of approximately $3 million, down dramatically from $35.3 million in 2008.
Let's now open the call to your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from [Paul Stones – Paul D. Stones Partners]
[Paul Stones – Paul D. Stones Partners]
I noticed there was not mention of scientific gaming and your relationship with them. Could you give us an update on how that's proceeding?
Clarence Chung
Back in last December we entered into a strategic alliance with Global Draw to place several gaming machines at venues sourced by us in exchange for a shared portion of the net win per day of these devices. However, given the recent regulatory events in Cambodia, our more immediate target placement for the Global Draw network gaming machines will be in the Philippines at the bingo halls, the e-game venues, TV as well as the slot clubs.
I think we are aligning closely and we are also doing the show of the Silver Board machines in the coming Manila April gaming shows. So we are working on that and hopefully we can place several of those machines in the Philippines in the second half of the year and if successful, we'll ramp up placement relatively quickly and we believe that the placement of these games will deliver incremental net revenues to Elixir.
[Paul Stones – Paul D. Stones Partners]
With the revenues from the chip order coming in the second quarter is there any estimation of whether you will be cash flow positive in the second quarter?
Clarence Chung
The cash flow from the chip order from City of Dreams will be recorded in the second quarter, you're right, and if fact coupled with the apparent results from the cost monetization during the first quarter and then probably leading to the second quarter, we expect that we might be still marginally cash negative but in the second half of the year we are still targeted to turn EBITDA positive.
[Paul Stones – Paul D. Stones Partners]
Any estimate of how much positive cash you believe you'll have on hand at the end of the second quarter? I'm trying to get a sense of the margin of error that the company is operating with.
Andy Tsui
We don't disclose this information in such detail but again, the goal is to turn EBITDA positive in the second half. We are taking significant steps to reduce our overhead while building our revenue in the Philippines and Cambodia because with the additional cash profits from Shuffle Master we expect to have sufficient cash for working capital for the next 12 months.
[Paul Stones – Paul D. Stones Partners]
Is there any update that you can give us on the efforts to sell the automobile parts operation out of Australia?
Clarence Chung
I think as you know, those are considered our legacy business and indeed while our business successfully, the table games related products to several [inaudible] and I think we are very, very active, but I think when opportunities come we won't turn the opportunities away, but as you know, the global industry is on a downturn and indeed obviously while we may not be able to get the fast valuation so it all depends on the opportunity, but yet we're not in a hurry to liquidate all of these legacy business if we do not think it's in the best interest of the company.
[Paul Stones – Paul D. Stones Partners]
Is it still cash flow positive as a separate entity? Is it costing you anything to hold it or is it holding its own?
Clarence Chung
Not for the past six months and we don't expect that for this year.
[Paul Stones – Paul D. Stones Partners]
So it hasn't been cash flow positive in the last six months.
Clarence Chung
Yes it has been.
[Paul Stones – Paul D. Stones Partners]
And you expect it to continue to be cash flow positive over the rest of the year?
Clarence Chung
For the full year 2009, the answer is yes.
[Paul Stones – Paul D. Stones Partners]
Obviously the change or my perceived strategy in change from smaller clubs to more established operations or higher end in the Naga group, do you see other opportunities similar to the Naga opportunity? I know you mentioned something in Viet Nam or Laos and I wondered if you're seeing opportunities of the same quality and stature of the Naga opportunity.
Clarence Chung
Yes we are continuously talking to and looking for good partners and reliable partners and credible partners. And as I mentioned in the call earlier on, we are expanding into the Philippines markets, and in fact the Philippine market has been steadily growing. We are talking to a bunch of those new joint venture partners who are also credible to expand in the Philippine operations.
Also the NagaWorld has proven our sales to be an expert in the slot machine operation management. It has brought us to different levels of the playing field versus our competitors. We do encounter more and more inquiries to us from other operators or partners who do not have those expertise and ask us to talk in terms of forming partnerships etc. in either other parts of Asian countries such as Laos and Viet Nam.
But I think where our focus is given that we are in the three pronged approach of cash preservation and management growth as well as trying to utilize our machines in the warehouse on hand for growth as far as possible, and also given the overall world economy at this stage, so we are relatively conservative in terms of expansion and we do have the ability and also have the chance to be more selective in our partners.
[Paul Stones – Paul D. Stones Partners]
Is there, I'm taking from you said earlier about adding three to four venues and 400 machines. My guess is that at the end of the calendar year, you would have approximately 1,500 machines in operation. Would that be sort of the new estimate for this year?
Clarence Chung
Yes, you're right. That's our current target and estimate.
[Paul Stones – Paul D. Stones Partners]
Do you have an estimate that you'd like to give us as to what you expect the average per day would be on those 1,500 machines?
Clarence Chung
I think it is difficult to be honest because given the fact that like NagaWorld we ramped up from almost $10.00, $20.00 at the end of January to February $54.00 and $271.00 in March, so it's quite difficult. But I think our history has shown that for those with good partners and good strategies in marketing and promo etc. that we can ramp up pretty fast.
But it would depend on the different market and the different venue, so it's very difficult. But in the Philippines as we discussed or as Tony pointed out earlier on that we should not be happy or we should not be pleased at the current level of $51.00 net wins per machine of our 900 machines at our install base.
That's why we are putting more focus and more resources to hopefully through marketing and promotion and trying to ramp us that towards the end of the year. And we believe that we have the capability and the expertise to do so.
[Paul Stones – Paul D. Stones Partners]
What would be a realistic range of possibilities for the Philippines? $75.00 to $80.00 a machine or $60.00 to $70.00 a machine, just to get a sense of what is possible in the Philippines.
Clarence Chung
I think it ranges to be honest. We do have venues which earn over $100.00 win per day and with some of the unsubstantiated information, some of the others, our competitor's venues can have a $150.00 per machine per day net wins.
And that's why I say given the diversities of geographicals etc. and the different demographics of the different cities in the Philippines they might be quite different. But that's why we are a lot more picky in terms of getting the right venues and in that case we want to ramp that up in terms of on an average basis. So yes, that's still our goal.
[Paul Stones – Paul D. Stones Partners]
Is there any chance then that you would remove some of the machines if it's $50.00 some a day and you have some that are doing over $100.00 there are some that are obviously not doing particularly well. Any plans to remove those or close some of the venues?
Clarence Chung
We did that in 2008. In fact we have closed of the Cambodian venues which are non performing and I think for the venues that are remaining in our portfolio, we are quite happy with them. I think given also the fact that we have inventory on hand, I think it would be better if we are comfortable with those venues we put in operation rather than get them back and then put in the warehouse.
Operator
There are no further questions at this time.
Clarence Chung
Elixir Gaming has evolved and matured into a more focused and efficient entity. We entered 2009 with an improved operating structure and financial stability that positions the company to further capitalize on gaming opportunities in the Asian markets. Our optimization initiative has delivered results in the Philippines as evidenced by the sequential improvement in net wins per day experienced during 2008 and we are focused on accelerating the growth.
Despite the experience in Cambodia, we believe that Elixir Gaming and its shareholders will ultimately benefit from a more defined and controlled Cambodian regulatory environment. Furthermore, we are encouraged by the initial results we have generated at NagaWorld which is benefiting in the Phnom Penh area.
We would like to thank our shareholders for their ongoing support and we look forward to updating you on our progress when we report our first quarter results in May. Thank you very much.
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