Wells-Gardner Electronics Corporation (NYSEMKT:WGA)
Q4 2013 Earnings Conference Call
February 13, 2014 11:00 AM ET
Joseph Diaz – Managing Partner-Lytham Partners, LLC
Anthony Spier – Chairman, President and Chief Executive Officer
James F. Brace – Executive Vice President, Secretary, Treasurer and Chief Financial Officer
Welcome to the Fourth Quarter and 12 Months 2013 Financial Results Conference Call. My name is Joe and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Mr. Joe Diaz. Mr. Diaz, you may begin.
Thank you, Joe and I thank all of you for joining us to review the financial results of Wells-Gardner for the fourth quarter and full-year 2013, which ended on December 31, 2013. As the conference call operator indicated, my name is Joe Diaz. I am with Lytham Partners. We are the financial relations consulting firm for Wells-Gardner.
With us on the call representing the company today are Mr. Tony Spier, Chairman and Chief Executive Officer and Mr. Jim Brace, Executive Vice President and Chief Financial Officer.
At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the release, you can retrieve it off the company’s website at wells-gardner.com.
Before we begin with the prepared remarks, we submit for the record the following statements. Statements made by the management team of Wells-Gardner during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements.
Those statements reflect the intent, belief or expectations of the company and its management. Readers are cautioned that the forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those expressed in any forward-looking statement.
Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, development of competing technologies, availability of adequate credit, interruption or loss of supply from key suppliers, increased competition, the regulatory process and legislative changes affecting the gaming industry.
Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect the management’s analysis only as of today. Wells-Gardner assumes no obligation to update this information provided in this conference call or to reflect on the occurrence of unanticipated events.
With that said, let me turn the call over to Tony Spier, Chairman and Chief Executive Officer of Wells-Gardner. Tony?
Thank you, Joe and thanks to all of you for participating on today’s call. 2013 was a solid year for Wells-Gardner. Revenue for the year of $57.9 million was in line with our prior guidance. full year 2013 VLT sales increased 230%, $21.5 million, compared to $6.5 million in 2012. fourth quarter VLT sales increased 45% to $6.4 million, compared to $4.4 million in the same quarter a year ago. VLT sales for the fourth quarter were positively impacted by delivering orders that would delayed in the previous quarter due to current update by our strategic partner that took place later in the year than expected.
The product update took place during the third quarter and customers are being rationale delayed orders until the new version of equipment became available. That set demand for VLT units continues to be strong throughout the entire year, despite delayed orders in the third quarter. Strong VLT sales covered with increased revenue and our past business generated the solid 13% increase in revenues.
We completed the year with VLT market share in Illinois were approximately 20%. Looking ahead, we expect that the margin of VLT units in 2014 will be comparable to that in the full-year 2013.
Net income for the full-year 2013 was $651,000 or $0.06 per diluted share, compared to net income of $164,000 or $0.01 per diluted share in 2012, an increase of 297%. We already pleased with the financial results of the year. By the way this is our eighth consecutive year of profitability.
Our strong sales in marketing focus on our VLT business in the stable of Illinois, driving revenue growth in our past business aggressively managing operating expenses, yielded good results in 2013 and that was a very solid year for Wells-Gardner.
With regards to our base business, 2013 was another challenging year. Our expectation going forward is that the marketplace will continue to remain highly competitive in 2014 and beyond. The sale of past to the gaming industry increased 3% for full-year 2013.
Casinos and gaming establishments throughout the U.S. typically bypass to extend the operating life of existing equipment and then turn delay the purchase of new equipment. The increase in power sales for the year is a meaningful indicator that a full scale replacement cycle has not yet commenced. The need to refresh the gaming experience throughout the industry is important to keeping us customers coming back. When the replacement cycle does pick up, Wells-Gardner is well positioned to benefit.
As we look ahead in 2014, we are pleased with our wholly-owned subsidiary, American Gaming & Electronics that known as AG&E has entered into Sales Representative and Distribution Agreement during the fourth quarter with FutureLogic, Inc. We look forward to long and mutually beneficial collaboration.
During 2013, we continue to make progress in operating more efficiently with approximately savings of $500,000 for the year related to the reconfiguration of our Engineering department. It probably offset by increased sales commissions and bonus payments related to significant increase in VLT sales during the fourth quarter and the year.
Operating expenses have a percent of sales decreased to 14.9% in full-year 2013 was a 17% in 2012. We are pleased with the improved efficiencies.
The dynamics in the Illinois VLT market remains essentially the same, for the Illinois game will continue to issue approximately 650 to 625 new licenses every quarter to thousands of the eligible establishments give or take some minor variations from month to month. We expect with the total number of new licenses issued in 2014 were approximately what we experienced in 2013, which averaged 214 new licenses a month.
At December 31, 2013 there were approximately 300 licenses issued out of the total universe of 8,000 to 10,000, when the program is fully implemented. Well, we do not expect and the game will meaningfully accelerate additions of licenses in the foreseeable future with the newly updated VLT product we are up to any level of demand should market conditions change. We believe that our market share remains approximately 20% by the way we estimate that our market share ticked up to 21%, in the fourth quarter 2013. Illinois will continue to be a very competitive market in VLTs, however our experience in the gaming industry and our reputation for high quality and exceptional customer service positions us well to maintain our position in the market.
Has the program becomes more fully implemented in Illinois, we have a great partnership with our VLT manufacturer Spielo and we expect to continue to be one of the leading VLT providers in Illinois. Shifting over to our base business market conditions continue to be challenging during 2013 we expect that same going forward in 2014, for the full year monitor sales decreased 19% compared to 2012, monitor unit sales decreased 22% with continued pricing pressure driving the average sales price down by approximately 10%.
Order flow from our major customers continue to be slow thus far, in 2014 this is from the low sales on the fourth quarter 2013 it was broadly caused by our largest customers switching from direct sales to vendor managed inventory was known as VMI whereby the inventory remains from Wells-Gardner books for approximately an additional 90 days. This is a one time hit and sales will continue as normal, starting in the middle of the first quarter of 2014. Part sales for the year increased 3% compared to 2012, which continues to indicate that the gaming industry is maintaining existing equipment and keeping it functional with replacement parts and repurchasing new equipment.
That said, 2013 was the sixth consecutive year without an equipment replacement cycle in the U.S. gaming industry. Since the economic meltdown in 2008, casino operators have dramatically reduced spending on updating their gaming floors and upgrading their existing technology until they see that the economic conditions are sustainably improved. While we have seen some measurable improvements throughout the economy at large, we are yet not seeing increased CapEx spending by the casino industry.
That continues to impact our customers and our business we expect that as the economy continues to steadily improve we will see the long overdue replacement cycle take hold. When the industry decides to forge ahead with increased capital – sorry with increased CapEx, Wells-Gardner is well positioned to benefit.
The financial foundation of Wells-Gardner continues to be strong we continue to run the company conservatively with an increase focus, with an season focus on managing expenses paying down debt and operating our business for internally generated cash flow for the full year 2013 we generated positive cash flow of approximately $1.8 million, bank debt now stands at $1.6 million down from $3.7 million at December 31, 2012.
Engineering sales and administrative expenses are $8.6 million is equivalent to the 2012, with that let me turn the call over to Jim Brace our CFO to review the financial results. At the conclusion of Jim’s review we will open the call for your questions. Jim.
James F. Brace
Thank you, Tony. Wells-Gardner reported net income of a $1,11000 or $0.01 per share in the fourth quarter ending December 31, 2013 compared to net earnings of $323,000 or $0.03 per share for the same period in 2012. Wells-Gardner revenues for the fourth quarter 2013 decreased $642,000 or 4.5%.to $13.6 million, compared to $14.2 million in the fourth quarter 2012.
Monitor sales decreased $2.85 million or 34% to $5.4 million in the fourth quarter 2013, compared to $8.3 million in the fourth quarter 2012, representing 40% of sales in the 2013 period, compared to 58% of sales in the 2012 period. This was due to the total display unit volume decreased 29%, 16,600 units in the fourth quarter 2013, compared to 23,500 units in the same period 2012 due to the VMA switch over, by our largest customer described before by Tony, plus an average selling price decrease of 10%.
Parts and VLT sales increased $2.2 million in the fourth quarter or 37%, $8.1 million, compared to $5.9 million in the same quarter last year, representing 60% of total sales in 2013 fourth quarter, compared to 42% in the same period 2012.
Gross margin for the fourth quarter 2013 decreased $250,000, $2.18 million or 16.1% of sales, compared to $2.43 million or 17.1% of sales in the fourth quarter 2012. The significant video display unit volume decline resulted in less overhead absorption, accounting for over one half of the decline in the consolidated gross margin, while a little less than half was due to lower monitor standard margin.
Parts and VLT gross margin percentages were about the same as 2012 fourth quarter. Operating expenses declined $19,000 to $2.07 million in the fourth quarter 2013, compared to $2.09 million in the fourth quarter 2012. Operating expenses decreased $101,000 for engineering and $70,000 for bad debt reserves and increased $152,000 for other operating expenses primarily compensation.
Due to sales decreasing operation expenses as a percent of sales increased to 15.3% in the fourth quarter from 14.7% of sales in the same quarter last year. Operating earnings were $113,000 in the fourth quarter, compared to $344,000 in the fourth quarter 2012 or $231,000 decrease in operating earnings due to lower sales in margins for the fourth quarter this year, compared to the same quarter last year.
Interest expense was $16,000 in the fourth quarter 2013, compared to $27,000 in the fourth quarter 2012 due to low debt balances. Other expense in income was $5,000 credit in the fourth quarter and zero in the same quarter last year. Income tax expense was a $9,000 credit in the fourth quarter 2013, compared to a $6,000 credit in the fourth quarter of 2012.
As a result, net income was $111,000 in the fourth quarter, compared to net income of $323,000 in the same quarter last year. For the fourth quarter 2013, basic and diluted earnings per share was $0.01, compared to basic and diluted earnings up $0.03 per share in the fourth quarter last year, whereas guidance revenues for the 12 months 2013 increased $6.8 million or 13% to $57.9 million compared to $51.1 million in the 12 months 2012.
Monitor sales decreased $8.4 million or 22% for the year to $30 million compared to $38.4 million in the 12 months 2012, representing 52% of total sales for the 2013 full year compared to 75% for the same for the full year 2012.
This was due to display average selling price declining by 10% and the total display unit volume declining by 16%, the 92,000 units in 2013, compared to 109,700 units in 2012.
Parts in VLT sales increased $15.2 million or 119% to $27.9 million in the 12 months 2013, compared to $12.7 million in the 12 months 2012 and represented 48% of total sales for 2013, compared to 25% in 2012.
Gross margin for the 12 months 2013 increased $366,000 to $9.33 million or 16.1% of sales, compared to $8.97 million or 17.5% sales in the 12 months 2012. Gross margin increased due to significantly higher sales from parts and VLT product lines what was offset somewhat by significant video display unit volume and average selling price declines.
Less overhead absorption by the video display product line accounted for a majority of the percentage decline in consolidated gross margin. Operating expenses decreased $53,000 to $8.6 million in the 12 months 2013, compared to $8.68 million in the 12 months 2012. Operating expenses increased $322,000 for parts and VLT sales in the 12 months 2013, $51,000 support engineering resources and $9,000 for other operating expense.
This operating expense increase is totaling $392,000 or significantly offset due to no Oracle upgrade expense in 2013, compared to $447,000 in the same period last year, which net results in the $53,000 12 months net operating expense decrease. Due to sales increasing more than operating expense increases, operating expense as a percent of sales decreased 14.9% in the 12 months 2013, compared – excuse me from 17% of sales in the 12 months last year.
The company continues to place great emphasis on operating expense control. Operating earnings were $710,000 for the 12 months 2013, compared to $291,000 in the 12 months 2012 due to the lower sales in gross margin dollars with a lower margin percentage and slightly lower operating expenses.
Interest expense was $77,000 in 12 months 2013, compared to $113,000 in the 12 months 2012 due to very low debt balances. Other expense was $10,000 credit in the 12 months 2013 and a $1000 credit in the twelve months 2012. Income tax expense was $8,000 credit in the twelve months 2013 compared to $15,000 expense in the twelve months 2012. The Company has available a net operating loss carry forward of approximately $5.7 million as of December 31, 2013. As a result, net income was $651,000 in the twelve months 2013 compared to net income of $164,000 in the twelve months 2012.
Prior year results included non-recurring charges of $447,000 for the Oracle system upgrade we had no Oracle expenses in the twelve months to 2013. For the twelve months 2013, basic and diluted earnings per share was $0.06 compared to basic and diluted loss per share of $0.01 in the twelve months to 2012.
Our balance sheet continues to remain very strong. Our debt decreased to $1.6 million in December 31, 2013 from a debt level of $3.7 million at year end 2012.
Cash at December 30, 2013 was $464,000 meaning that Wells-Gardener was cash positive. The company’s debt-to-equity ratio was less than 10% at December 31, 2013, compared to 23% at yearend 2012. It was worthy to note that we had cash provided by operations of $1.8 million for the twelve months 2013. We are easily in compliance with all our December 31, 2013 bank covenants with Wells Fargo Bank.
That concludes my financial review. I’ll now turn the call back to Tony.
Thank you, Jim. Before we open up the call for your questions, let me comment on our strategic review and guidance for 2014. On December 4, 2013 the Board of Directors of Wells-Gardner Electronics authorized management to explore strategic the alternatives.
The Company as retained Innovation Capital based on El Segundo, California as your financial advisors to conduct a thorough review of the company’s business and assets and to provide recommendations for consideration by the Wells-Gardner’s Board of Directors. There could be no assurance that this evolution process will result any transaction. Management will report the results of the strategic review at the conclusion of the process.
As it relates to our outlook the full year 2014 based on our estimates and information available this time we believe full year 2014 net sales will be in the range of $53 million to $57 million compared to $57.9 million in full year 2013 for the first quarter 2014 expect to be in the most challenging quarter of the year we expect that the demand for VLT units in 2014 will be comparable to that of full year 2013
With that let me turn the call over to the conference call operator to begin the question-and-answer session. Joe, over to you.
Thank you very much, we’ll now begin the question-and-answer session (Operator Instructions) and at this time I’m showing a question here from Mr. Robert Bacci [ph]. Please go ahead sir.
Yes, Tony, you are doing a better job. things are coming alone somewhat, a long way to go, we have a company that if we sell over to any other company. I’m wondering about the button invention or whatever it was called basically by David and is there anything on that, is there any business coming in on that or is that a done deal?
No, it’s not done deal. we continue to work with two or three customers on that and I’m cautiously optimistic that we will eventually get some sales out of that.
All right, good. And as far as you are doing anything with your company, I can only see that you can be dealing with people in the same field you are in to make a merger, or sale, or purchase, or whatever and eliminate the engineering a lot of the expenses and turning your expenses into profits. This would be a tremendous amount of money and was your tax loss carry forward. are you doing anything like that? are you talking to your competitors about…
Bob, we don’t envision to discuss, what we’re doing with Innovation Capital, once we’re in a position to go publicly well. But we are working with them very closely and I’m pleased with the progress we’re making, but there is nothing I can go publicly.
And our next question here comes from Mr. Mike Volpe. Please go ahead, sir.
Thank you. Hi gentleman. Two questions, number one, the first question a alluded to the fact that you are going to be still conducting this process of exploring or [indiscernible] is the company. You have any kind of timetable. How long it’s going to take?
I mean we do internally but nothing I can’t give publicly on that Mike I’m sorry.
Okay, although I tried to share everyone’s enthusiasm how the company is doing right now, for the past three and half years I’ve watched the stock steadily climbed that from free and change restaurant purchasing share is down from a $1.70 and in my estimation I don’t think anyone is looking at the company right now as far as outsiders, I don’t know we are doing a march to the company and putting in front of any type of small cap institutions or anything like that.
But I should have start especially go down in a market that’s made all time high and as a shareholder and also a person that represents a lot of shares in the company, It’s getting very tough to the people the fact that with the stock that’s performing and just I’ll get any other corporation when you don’t perform it, when I don’t perform it for my customers or myself I either lose a system or I get fired and it seems like now I have purchases on a company that has dwindled down to my sort of volume down and a half in a very robust market and it’s very difficult to sit here and point to where we’re going at this whole thing.
And when the stock trades if I remember by appointment it’s difficult to sit there and tell something who has a 100,000 shares or 150,000 shares or some group that control significantly more than that how do we get out of this company if we had to get out of?
I mean the whole issue is, we are obviously working within innovative capital on a strategic review. I certainly I think this would be a nutty time to be selling a stock given what you know as public information, and that is that we are looking at a strategic review and I think you can expect that, we expect that we expect some of those activity. I can’t promise you that but we are certainly we are working on that very hard and this will certainly it would seem to me to be an imprudent time to be selling our share that we got.
Thank you our next question here comes from Mr. James Hershkoff [ph]. Please go ahead.
Hi, Tony. Hi Jim. First of all, I was with my humor that I am sure you appreciate but I am glad to see you earned more money than your salary this year. So I must congratulate you on that. That’s good, okay. And, do you think you are going to continue rising out the manufacturing which is at extraordinary low margin and high cost and moving to move into more the distribution area?
Well, we certainly obviously we have done that to sort of a significant degree. And as we work on the HBD [ph] review let’s see where that ends.
And so again you say there is no update, no time limit if you go on for quite at long time?
Well obviously we have an internal, we have internal timing in mind, but nothing I can probably give.
James F. Brace
Right and basically what I am looking at, at least as the shareholder was obviously long-term. But that I am saying the most, seem to be the most obvious things to do and hopefully these people down they are very close to our live, [indiscernible] we are able to put someone together because you have a very cheap way to go public, now whether that’s in the agenda I don’t, obviously I don’t know but it seems like perhaps there might be one alternative to trying to increase the value because as the other gentlemen just mentioned. There has been no increase in five years or six years or seven years whatever it is. And as he, so as we put it, we did it, we would be off, we would be out clients would not be with us so you’ve been fortunate that you still have positions you have. And I guess that’s it I want to see something better and hopefully one day we will get it.
I think one day, I think we will.
All right thank you.
And at this time, I am showing no further questions.
Okay. And sort of that go to me Joe thanks. Joe?
Yes Mr. Spier, did you have any final remarks for the audience?
Yes, I do. Again Jim and I want to thank you for your participation on today’s call. And we look forward to talking with you again at the conclusion of the current quarter. We hope you have a great day. Thank you. Bye-bye.
And thank you ladies and gentlemen, this concludes today’s conference. Thank you for your participation and you may now disconnect.
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