Entertainment Gaming Asia Incorporated (NYSEMKT:EGT)
Q1 2013 Earnings Call
May 10, 2013 8:30 AM
Traci Mangini – Senior Vice President, Corporate Finance
Clarence Chung – Chairman and Chief Executive Officer
Andy Tsui – Chief Accounting Officer
Paul Sonz – Sonz Partners
Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2013 Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded, Friday May 10, 2013.
I would now like to turn the conference over to Ms. Traci Mangini. Please go ahead.
Thank you, sir and good morning everyone. I’m Traci Mangini, Senior Vice President Corporate Finance for Entertainment Gaming Asia. With me today on the call are Clarence Chung, Chairman and Chief Executive Officer and Andy Tsui, Chief Accounting Officer.
Before we start, please let me review our Safe Harbor Statement. Some of the statements that the company will make on this conference call, such as statements of the company’s 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 do 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 news announcement and in the Company’s filings with the Securities and Exchange Commission, including the company’s reports on forms 8-K, 10-K and 10-Q. Entertainment Gaming Asia assumes no obligation to publicly update or revise any forward-looking statements.
Now, the agenda for today’s call will be as follows; first, Clarence will discuss the highlights of our first quarter 2013 financial performance and recent corporate developments. Following that Andy will review in more detail our financial results for the quarter. Clarence will then conclude our prepared remarks with the discussion of our future outlook. We would then be pleased to take your questions.
With that, let me turn the call over to Clarence Chung. Clarence.
Thank you, Traci and good morning everyone. It has been a productive start to the year for Entertainment Gaming Asia. We completed constructions and opened our Dreamworld Poipet property. We substantially restructures and we locate of our Dolphin operation at the last step in our plans to re-strategize our legacy businesses. This until progressing a low margin business and we positioning our gaming products divisions to better serve the glowing gaming market in Asia and become meaningful contributed to future earnings. And we have mixed progress in implementing our junket programs to enhance the level of high network, player traffic to Dreamworld Pailin and not in the final stage of signing agreements with operators.
Turning to the financial, we have a solid top line quarter. However, decreased revenues from our Cambodia broad operations combined with higher gaming expenses related to our casino operation and non-recurring high labor costs related to our chips and plaque operation negatively impacted, adjusted EBITDA and net income for continuing operations.
I would like to discuss some contributing factors to our performance for the quarter. Consolidated revenues were up 22% from the same period last year, driven principally by strong gaming chip and plaque sales and incremental revenues from our casino operations.
Gaming revenue was $5.3 million, up 6% from the first quarter of 2012. The increase was driven by incremental revenues on Dreamworld Pailin casino and slot operations at Thansur Bokor, both of which officially opened in May 2012. The increase was partially offset by decreased net win for our operations at NagaWorld and lower revenues from our Philippines slot operations.
The average consolidated net win for our slot operations was $139, down 10% from the prior year period. The decline was principally due to lower average net win in our operations in NagaWorld and the efficient of our slot operations at Thansur Bokor, which have lower net win. The increase was partially offset by include net wins performance in the Philippines.
Average net win for our operations in NagaWorld decreased for the first quarter to $217, compared to $250 in the prior year period. This is attributed to normal fluctuations as well as lower player traffic in February 2013 due to second observed week-long official mourning period for the deceased formal King of Cambodia at the beginning of the month and a strike by NagaWorld workforce for a couple of days at the end of the month.
We are focused on maintaining strong performance from our operations in NagaWorld and release that with prominent ground floor of locations, superior customer service and proactive marketing we have positions to do so. In fact in April, average net wins for these operations were up sharply to $276 per machine.
Our slot operations at Thansur Bokor, a property owned leading Cambodian hotelier, Sokha Hotels and Resorts, gross revenue improvement in the first quarter. Given our minimum operating costs at this venue, these operations make a positive contributions to consolidated EBITDA during the period. We will Thansur Bokor as a strategic project that will expand our gaming operations in Indo-China region with a prominent partner with multiple properties in Cambodia.
Further with recent changes in the property management and the completion of certain market entertainment amenities during the first quarter of 2013. We’re hopeful to achieve continued growth for these operations. We recently at another venues to our strong operations in Cambodia, Dreamworld Poipet. We developed and exclusively operated this stand-alone slot hall with approximately 300 EGM seats.
Dreamworld Poipet is prominently located in the established gaming markets of Poipet at the Cambodia, Thailand border, and third as a stand-alone extension of an existing popular casino there. Dreamworld Poipet has been operating under a soft launch since March 28, 2013 and the grand opening was yesterday. Two marketing efforts as still come in and we believe these markets over attractive potential.
In the Philippines, gaming operations delivered solid performance due to targeted marketing program and proactive machine management that mean in this market include significantly to $86 from $73 in the five year period, as we continues to enhance returns on the installed efforts.
Turing to our casino operation; Dreamworld Pailin contributed approximately $1.1 million to gaming revenue for the quarter, down slightly from the fourth quarter of 2012. We have focused on improving our financial performance of Dreamworld Pailin and continues our efforts to refine and broaden our marketing strategies to attract higher quality players and, where possible, to identify and implement cost reduction initiatives.
Our marketing programs implemented today have involved among other thing, the use of fixed fee training promoters, such as bus programs. These programs have been helpful in increasing traffic of the mass market players. In addition, we are preparing them to launch junket program and is in the final due diligence stage of signing agreements with potential operators.
By utilizing junket operators, we expects to improve high net worth player traffic for its premium and VIP facilities while minimizing the downside risk and volatility related to business as the junket operators typically share in wins and losses and assume the credit risk. Turning to the potential impact of such high end players and financial results, ensuring the right partners in terms for junket operators is important, and can be a lengthy process.
Turning to our slot operation, we continued our strategy initiatives to divide (inaudible) of business. On March 28, 2013 we sell the non-gaming manufacturing portions of this division in management player for our total considerations $350,000 subsequently we will be locate our gaming chips and plaques manufacturing facilities to Hong Kong from Australia.
These actions successfully conclude our plan for re-strategize our legacy businesses. They will not only enable us to exit a non-core legacy business, but also provides a opportunity to materially enhance the profitability of our gaming chips and plaques division execute lower cost, further automation and improved R&D capabilities as well as (inaudible) and service to growing the Asian gaming markets.
Into the significantly lower debit cost in Hong Kong compared to Australia. For example, the casual labor, hourly labor rate in Hong Kong is $5 compared to $20 in Australia. The ability to enhance production efficiencies and eliminate redundant support functions, we expect to see improvement in gross margin for our gaming chip and plaques going-forward.
In addition, we are exploring opportunities to expand our product mix to include other gaming products such as potentially gaming chip trays, playing cards and dice et cetera. And with product mix should add incremental revenue streams by further deepening our existing customer relationship and increasing our marketability to new customers.
Further given the operations proximity to low cost manufacturing countries, the production of certain non-security items could be outsourced, with attractive margin for products. Our – manufacturing facilities became operational in early May 2013.
We will be running double shifts in order to accommodate our near-term order pipeline of approximately $1.1 million. These facilities are now home to our new corporate headquarters as well if you reduce cost and increase monitoring and control over the gaming product positions. With a comprehensive product line, streamlined operating structure, solid existing customer base and relationships, and high securities production facilities improves (inaudible) to the growing Asia gaming markets. We believe that we owe – we have all the right and necessary elements to better our target markets and are poised to benefit from major casino development anticipated over the next several years in Asia.
I would like to turn the call over to Andy to discuss our first quarter financial results in greater details. Andy.
Thank you, Kevin, and good morning, everyone. Before I discuss our quarterly results, I would like to remind investors that we affect a 1:4 reverse stock split of our common shares in June 2012. Our historical share amount has been proportionally adjusted to reflect impact of this reverse stock split. Also due to the sale of proportion of our (inaudible) business related to the main sectors and sale of long gaining products, all historical revenue and expenses on this asset has been reclassified as discontinued operations. Reference of these non-gaming products and gaming chips and plaques was previously consolidated on the reporting segment of our products. After the sale we remained out of product as gaming products which presently comprised of our gaming chips and plaques operation.
Total revenue was $6.7 million for the first quarter of 2013, up 22% compared to $5.5 million in the first quarter of 2012. the increase in revenue was typically the result, increased sales of gaining chips and plaques and incremental revenue from Dreamworld Pailin, which opened in May 2012.
Gaming revenue was $5.3 million for the first quater of 2013, up 6% compared to $5 million in the first quarter of 2012. the quarterly gaming revenue includes $4.2 million from our slot operations and $1.1 million from Dreamworld Pailin. Slot revenue for the quarter declined 60%, compared to $5 million in the first quarter of 2012. The decline was primary the result of lower average net wins for machine for our operation in NagaWorld and decreased revenue from our operation in the Philippines due to a lower machine base.
Consolidated average during that win per unit for our slot operations was $139 for the first quarter of 2013, down 10% from $154 million in the prior year period. Our installed based gaming machines for our slot operations was 1,581 seats as of March 31, 2013, up slightly from $1,560 as of March 31, 2012. The increase in machine seats was typically due to the store opening of Dreamworld Poipet at the end of March, 2013, partially offset by a decision to both 300 premium venues during the second and third quarter period in 2012.
Slot revenue from Cambodia which consists primarily of our operation in NagaWorld was approximately $3.3 million for the first quarter of 2013, down 15% from $3.9 million in the first quarter of 2012. The decrease reflects lower average net wins per unit at NagaWorld during the quarter, partially offset by incremental revenue from the operation at Thansur Bokor. Average net win per unit in Cambodia was $176 for the quarter, down 26% from $239 in the first quarter of 2012. The decline was basically the return of lower average net win at NagaWorld and inclusion of the operations at Thansur Bokor.
In the Philippines, net revenue for the first quarter 2013 was approximately $937,000 down 4% from the first quarter of 2012 level of $1.1 million. The decrease in revenue was principally due to the lower installed machine base during the quarter. Average net win for the Philippines was $86 first quarter 2013 up 18% from $32 in the year ago period. The increase was driven by expertise strategically mange us machine placement and targeted marketing initiative.
As previously mentioned our casino operations Dreamworld Pailin contributed $1.1 million for the quarter. Dreamworld Pailin operation includes 26 tables and 52 slot machines, operating expenses for casino operation was $1.3 million during the quarter. Revenues from gaming proposition increased significantly to $1.4 million for the first quarter 2013 compared to $532,000 in the prior year period, the increase was due to higher gaming chips and track sales to existing customers.
However, higher volume recurring labor cost incurred resulted in gross loss for this operation for the period. These higher labor cost was primary result of the increased over time of the Australian workers due the expertise fulfillment of orders as the fast track the relocation of the factories from Australia to Hong Kong, as well as the S&P firmly as following the announcement of the relocation of the gaming business operation and their severance.
SG&A expenses excluding stock-based compensation was $1.6 million for the first quarter of 2013, roughly flat with the prior year period. Adjusted EBITDA from continued operation, which we defined as earnings before interest tax depreciation, amortization and non-cash expenses, was $1.9 million for the first quarter of 2013, which compared to $3.1 million in the first quarter of 2012.
We recall our net loss from continuing operation of $329,000, or $0.01 per share, on a weighted average diluted share account of approximately 30 million shares in the first quarter of 2013. This compared to a net income from continuing operations of $881,000, or $0.03 per share, on a weighted average diluted share count of approximately 30.2 million shares for the first quarter of 2012. The decrease was primarily the result of lower revenue from our slot operation; higher gaming division costs we then see our casino operation and higher labor costs from our gaming chips and plaques compared to the prior year period.
We reported a net loss of $2.5 million, or $0.08 per share, for the first quarter of 2013. This include a net loss from discontinued operations, net of tax, up $2.2 million or $0.07 per share, related to the sale of non-gaming products operations in March 2013. The net loss from discontinued operation included $1.3 million in cash restructuring costs, which included severance, relocation charges, contract termination fee, and approximately $962,000 in non-cash charges for the loss on disposal of assets primarily related non-gaming equipment and inventory. Net income for the first quarter of 2012 was $972,000, or $0.03 per share and include a net income from discontinued operations, net of tax, of $91,000.
Turning to the balance sheet, as of March 31, 2013 we had a total of $4.5 million in cash and cash equivalents. This compared to $10.4 million as of December 31, 2012. The decrease in cash was primarily the result of approximately $5 million in the capital expenditures in the quarter, which relates finally to the development of general protest at New Dolphin manufacturing plant in Hong Kong as well as $1.3 million one-time cash cost associated with the sale and relocation of Dolphin asset, which includes severance and new facility set-up, net of consideration for the sale of non-gaming manufacturing asset.
We are still in debt as of March 31, 2013. As of December 1, 2012, we had paid down our prior debts under promissory note issued to allow their service, EGT, Entertainment Gaming Holding Limited, a wholly-owned subsidiary of Melco international. If any capital expenditures luxury concentrated in the first quarter, our anticipated free cash from operations and no debt, we expect our balance sheet to continue to stable.
I would now turn the call back over to Clarence to discuss our future outlook. Clarence?
Thank you, Andy. I would like to conclude by sharing some thought on our future outlooks for our gaming operations which we will do as having three [pounds] slot operation, casino development and gaming products. Now I cannot provide specific details of future plans or financial expectations. I would like to discuss our visions for growth.
But first before we look into the future, I think it is important to recollect for a moment on the past and how far we have come in the last several years, the restructuring and relocations of our Dolphin operations marked. The completion of our efforts to re-strategize our legacy businesses, we have now divest all non-core legacy businesses and now can focus exclusively on our gaming businesses, [BN] gaming operations and gaming products we focused our slot operations to emphasize on those with the greatest potential.
We’ve expanded our gaming operations to include the developments and operations of high-quality regional gaming values under our old brand. We’ve established strong foothold, develop operational expertise and deepened our relationship in Frontier gaming market of Indochina and in the Philippines. And we have repositioned our gaming system slot operations with the potential to defend and expand our customer relationships and product range as well as much improved profitability potentials for this business.
All these efforts have sets to improve our ability to generate quality recurring cash flow, and have allowed us to invest in our operations and paid down all of our debt, we are a much stronger company today. We look into the future with a focus on growing our existing businesses and building our resources as we actively seek new growth opportunities. We are proficient, the company for largest project that would add meaningful gains to our operations. We believe larger projects have allowed us to better leverage operating costs and provide the opportunity for higher net returns for shareholders.
However, it will expand our market presence and increase brand activity in the Dreamworld name. We aim to make the Dreamworld brand, well, to high quality properties that are known for offering quality gaming products, professional management and appealing ambiance. We believe that our two Dreamworld development properties had already established themselves as quality leaders and that these properties have elevated the regional gaming experiences in their respected markets.
We continue to actively and directively seek new opportunities in Indochina. We believe that our target market offer attractive long-term growth opportunities for both Greenfield and acquisitions. These are relatively high growth economies and are largely under-penetrated in terms of quality gaming. We continue to explore potential opportunities in Cambodia where the regional gaming market is fragmented, gaming tax rates are low and we believe there is political stability. Furthermore, Cambodia shares borders with (inaudible) and economies of Thailand and Vietnam. We therefore view this market as expected for continuous investments.
We also look at other markets in the regions such as Laos, Vietnam and Myanmar. These countries have existing gaming operation, high economic growth and growing tourism. As for our gaming product, we are excited about the potential opportunities to come. We estimated that there is more than $16 billion committed for investments in the development of major integrated continual resource over the next four years in Macau and in the Philippines. We believe that given our established relationship quality and expanding product lines in close proximity of our production facility to this market. We have quickly enhanced our ability to benefit from this industry flow.
In summary, with the attractive growth potential for our existing operations established preference and strong relationships in our market, and the ability to generate quality recurring cash flow, we believe we are positioned to capitalize on the growth opportunities in our target markets of Asia.
Next, I’ll open up the call to your questions. Operator?
(Operator Instructions) we do have a question from the line of Paul Sonz from Sonz Partners. Your line is open, please go ahead.
Paul Sonz – Sonz Partners
Good morning. Question, are there going to be any more cash expenses from either the move or from the development of Poipet in Q2?
Hi, Paul. This is Andy. The majority of expense should be pay in the first quarter. But of course, we still have some remaining probably small amount to be paid out in the second quarter. But I think the range would be between about $500,000 to $1 million match the boat project together.
Paul Sonz – Sonz Partners
Okay, good excellent. I noticed that under the line other gaming costs, that remained, I think, fairly constant from last quarter. And I wondered if that is if – if you expect that line to go up now that Poipet is online?
Well, can you repeat that again? Sorry, I didn’t catch it.
Paul Sonz – Sonz Partners
Under the line other gaming cost in the fourth quarter of 2012, it was $1,073,000. The first quarter was a $1,760,000 and I wondered as now the Poipet is operational, would expect other gaming cost to go up as you spend money on marketing or do you expect that $1,760,000 to be a fairly good estimate of what other gaming cost would be going forward?
With the (inaudible) that we do expect that the average operating cost will go up, basically that will cover our variable staff, the marketing cost for the hotel facilitates, yes.
Paul Sonz – Sonz Partners
Do you have any estimate of what you think we could expect for what the incremental cost would be to that line?
I think you will probably take that couple of months to better understand the structures and the way to how we promote the marketing programs. So…
Paul Sonz – Sonz Partners
So I think probably we had better figures to share with you in the coming quarters.
Paul Sonz – Sonz Partners
Okay. I saw that SG&A came down quite a bit, do you expect that SG&A will maintain the level it’s at now 1,850,000?
You mean the SG&A expenses for the quarter was $1.8 million.
Paul Sonz – Sonz Partners
Yes, and that was down from the last – from fourth quarter 2012, it was down about almost $400,000. And I just wondered if you expect that SG&A to be going forward to be about the same number or did you expect the SG&A will be coming even more now that your – you have the savings by concentrating in Hong Kong?
Probably it’s current time only. Well, you are right. I think as I mentioned in the script, indeed we do expect there are, our cost savings in terms of one back office support because we now have consolidated both our headquarters, back office support and also in terms of the other expenses, operating expenses, SG&A expenses in southern while move to Hong Kong, it would be a significantly lower than what it was in northern.
Paul Sonz – Sonz Partners
Right. So the expectation is that SG&A will – we can’t expect SG&A going forward to be less than what we saw in this quarter?
Yes, I believe so.
Paul Sonz – Sonz Partners
All right. Is there any expectations that you have or you can share with us about what you think that the revenues might be out of pocket? What I’m talking about is I mean would you expect $50 WD out of pocket or $100, or do you have any expectations or do you not want to comment on that?
Well, obviously we do have expectation. But I think probably unfortunately it – we couldn’t – well, normally do not give any revenue forecast with that trial. So yes, we’re obviously from a management perspective, obviously we do have both in the expectations in the pocket.
Paul Sonz – Sonz Partners
All right. Thank you, guys. That’s all I have.
Thank you. (Operator Instructions) It appears we have no further questions at this time. I’ll turn the call back over to you.
Well, thank you operator. We would like to thank our shareholders for their ongoing support. We look forward to updating you on our progress in the near future. Thank you.
Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. And I ask you please disconnect your lines.
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