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Entertainment Gaming Asia Inc. (NASDAQ:EGT)

Q4 2013 Earnings Conference Call

March 6, 2014 8:30 am ET

Executives

Clarence Chung – Chairman, Chief Executive Officer

Andy Tsui – Chief Accounting Officer

Traci Mangini – Senior Vice President, Corporate Finance

Analysts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter and 2013 Fiscal Year Earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star, zero. As a reminder, this conference is being recorded Thursday, March 6, 2014.

I would now like to turn the conference over to Traci Mangini. Please go ahead, ma’am.

Traci Mangini

Thank you. 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 Form 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 fourth quarter and 2013 fiscal year financial performance and recent corporate developments. Following that, Andy will review in more detail our financial results for the quarter and the fiscal year. Clarence will then conclude our prepared remarks and we’ll open the call up to investors for questions.

With that, let me turn the call over to Clarence Chung. Clarence?

Clarence Chung

Thank you, Traci, and good morning everyone. During 2013, we faced operating challenges that impacted our financial performance, but we continued our efforts to enhance the long-term growth potential for our businesses. Here is an overview of our performance this year: gaming operations revenues for the fourth quarter and the year was impacted by lower average net wins on NagaWorld, decreased revenue from the Philippines and lower sales volumes from the gaming products division. This was partially offset by incremental revenue contributions from Dreamworld Poipet and top line improvement from Dreamworld Pailin.

For the NagaWorld operations, our results were impacted by lower player traffic levels as a result of an observed week-long official mourning period for the former king of Cambodia and a several day strike by NagaWorld workers, both of which occurred in February, and organized political and labor protests which occurred in the second half of 2013. Despite these events, we maintained average net wins for this operation at a healthy $214 for the year. The political environment has calmed in recent months and while protests continue, they have been fairly well contained. We continue with our efforts to improve performance at NagaWorld through proactive marketing and machines mix management.

We expanded our gaming operations during the year with the opening of Dreamworld Poipet, a slot hall which will we exclusively developed and operated in an established regional gaming market in Cambodia. Dreamworld Poipet officially opened in May and made meaningful contributions to revenue for the year; however, performance was negatively impacted in the fourth quarter due to political unrest in Thailand and adverse weather earlier in the quarter. Despite this, we have seen improvement in the level of mass market play and are implementing targeted marketing strategies to expand the premium and VIP player base. We are focused on improving performance and capturing a meaningful share of this market.

In the Philippines, our quarterly and annual performance was impacted by higher jackpot payouts and increased competition on a major casino resort opening in Manila in early 2013; however, net wins in the Philippines remained solid in the mid to high-$70 range. We believe we have a solid local player base through our operations in the Philippines and we take a proactive approach to marketing to our target customers in an effort to maintain loyalty.

For Dreamworld Pailin, we narrowed operating losses during the fourth quarter due to the repositioning of these operations to a leasing model for the table games. We began to implement this new model in September and during the fourth quarter, we had 10 gaming tables leased on a short-term basis to a third party operator. Our agreement with this third party operator ended in early March as the leasing revenues from these tables combined with revenues from our 88 slot machines seats in operations if needed in order to cover the property’s current operating expenses. We’re working to secure new table lease operators. In addition, we continue to evaluate other options, including subletting the entire property or selling these operations altogether. We expect to provide an update on this shortly.

Turning to (indiscernible) businesses, during 2013 we completed the restructuring of these operations with the divestiture of a low margin, non-gaming business and relocations and repositioning on (indiscernible) gaming divisions. We believe our gaming product divisions, which now comprise the manufacturing and sale of gaming chips and plaques and distributions of selected third party table games products, provides a diversified revenue stream with attractive earnings potential. Despite the planned relocations and ramp-up periods of the new facilities, we recorded approximately $3.4 million in gaming chips and plaques revenues for 2013. This revenue was all reorders from our low-end customer base. With the anticipated growth and development of integrated casino resorts in Asia over the coming years, we are enthusiastic about our potential to obtain large initial orders for some of the new casino openings in our markets.

With this in mind, we have further expanded our facilities to enhance production capacity and response time for potential large orders. We are in final negotiations to supply our Dolphin Gaming chips and plaques to a new casino resort opening in the Philippines. The order will mark Dolphin’s second major gaming chips order in the growing Philippines gaming market. With these potential new orders, combined with our typical reorder flow, the sales pipeline for 2014 is expected to be attractive.

On the corporate side, in January 2014 we officially concluded a long-term litigation against the company with all claims dismissed, thereby removing an overhang on business resources and the stock. Lastly but certainly not least, during the year we continued our diligent efforts to deepen our presence and relationships in Indochina and other Asian growing gaming markets as we actively seek new high potential gaming projects.

I would like to turn the call over to Andy to discuss our fourth quarter and 2013 fiscal year financial results in greater detail. Andy?

Andy Tsui

Thank you Clarence, and good morning everyone. Due to the sale of a portion of our Dolphin business related to the manufacture and sale of non-gaming products, all historical revenues and expenses from this asset have been reclassified as discontinued operations. Revenues of these non-gaming products and gaming chips and plaques was previously consolidated under the reporting segment, Other Products. After the sale, we remain our Other Products as gaming products, which presently comprise our gaming chips and plaques operations.

Total revenue was $6.1 million for the fourth quarter of 2013, down 32% compared to $9 million in the fourth quarter of 2012. The decrease was a result of decreased sale of gaming chips and plaques and lower gaming operations revenues. Gaming revenue was $5.4 million for fourth quarter 2013, down 7% compared to $5.8 million for the fourth quarter of 2012. Reported gaming revenue includes $5.1 million from slot operations and $305,000 from Dreamworld Pailin. Slot operations revenue of $5.1 million for the fourth quarter of 2013 represents an increase of 13% compared to $4.5 million in the fourth quarter of 2012. The fourth quarter of 2013 slot operations revenues includes $900,000 in service revenue related to the reimbursement of net shared costs from casino operators, which was grossed up for accounting purposes. Given the related expenses have also been grossed up, this re-characterization of expenses reimbursement has no impact on the net income results.

Excluding the service revenue adjustment, total revenue for the quarter was down 7% compared with the fourth quarter of 2012. Revenue contributions from Dreamworld Poipet, which officially opened in May in 2013, and improvement in Thansur Bokor partially offset declines in NagaWorld and Philippines slot revenue during the quarter.

Consolidated average net wins per unit for the slot operations was $110 for the fourth quarter of 2013, down 24% from $145 in the prior year period. Our installed base of gaming machine seats for slot operations was 1,672 seats as of December 31, 2013, up 19% from 1,405 seats as of December 31, 2012. The increase in machine seats was principally due to the opening of Dreamworld Poipet partially offset by the decision to close three underperforming venues in 2012.

Slot revenue from Cambodia was approximately $3.4 million for the fourth quarter of 2013, down 3% from $3.5 million in the prior year period as incremental gains from Dreamworld Poipet and net win improvement at Thansur Bokor offset declines in NagaWorld net wins. Average net win per unit in Cambodia was $127 for the quarter, down 33% from $189 in the fourth quarter 2012. The decline was primarily due to the addition of machines of Dreamworld Poipet which has a lower average net win, and lower average net wins at NagaWorld. NagaWorld average net win was $185 for the quarter compared to $236 in the prior year period.

In the Philippines, slot revenues for the fourth quarter of 2013 were approximately $780,000, down 20% from fourth quarter of 2012 levels of $974,000. The decrease in revenue was primarily due to higher jackpot payouts and increased competition in the market. Average net win for the Philippines was $76 for the fourth quarter of 2013, down 8% from $83 in the year-ago period. As previously mentioned, our casino operation, Dreamworld Pailin contributed $305,000 for the quarter, down from $432,000 in the prior sequential quarter and $1.3 million in the prior year period. The decline was due to lower player traffic levels as we decreased the use of high-cost tour group promoters during the third quarter of 2013 as part of our strategic effort to increase profitability by shifting to a leasing model. Operating expenses for Dreamworld Pailin were $365,000 for the fourth quarter of 2013, down from $703,000 in the third quarter of 2013 due to cost reduction initiatives and lower player traffic.

Revenue from the gaming product division was $729,000 for the fourth quarter of 2013 compared to $3.2 million in the prior year period. The fourth quarter of 2013 was comprised solely of normal reorders from existing customers compared to prior year period, which primarily included $1.9 million (indiscernible) related to an order for rebranding of activity for existing customers and a reorder from a new customer in the Philippines. Due to the ramping up of the new production facility, efforts employed to fine-tune a new in-house production process and further efforts in enhancing production capacity and response time for larger order, the gaming product division posted a gross margin loss for the fourth quarter of 2013.

Adjusted EBITDA from continuing operations, which we define as net loss or earnings from continuing operations before interest, taxes, depreciation, amortization, and non-cash expenses, were $704,000 for the fourth quarter, which compares to $2.6 million in the fourth quarter of 2012. We recorded a net loss on continuing operations of $4.2 million of $0.14 per share on a weighted average diluted share count of approximately 30 million shares in the fourth quarter of 2013. The fourth quarter of 2013 net loss from continuing operations includes a $2.6 million non-cash impairment charge associated with the write-down of (indiscernible) infrastructure and certain gaming assets primarily related to Dreamworld Pailin operations.

Excluding non-cash charges, the net loss from continuing operations was $1.6 million or $0.05 per share for the fourth quarter of 2013. This compared to net income from continuing operations of $297,000 for the fourth quarter of 2012 or $0.01 per share on a weighted average diluted share count of approximately 31 million shares in the fourth quarter of 2012. The fourth quarter of 2012 net income from continuing operations included a $226,000 non-cash impairment charge associated with the write-down of certain gaming machines and systems related to the closure of underperforming venues during the year. Excluding the non-cash charge, net income from continuing operations was $523,000 or $0.02 per share for the fourth quarter of 2012.

The increase in the net loss from continuing operations, excluding non-cash impairment charge, was primarily the result of lower slot operations revenue, lower revenue and production inefficiencies for the gaming product division, higher SG&A expenses primarily due to a one-time accrued tax liability of approximately $480,000 related to tax duty assessed on prior inter-company loan balances for the Philippines operations, foreign currency losses compared to gain in the prior year period, and tax expenses compared to tax benefit resulting from foreign entity in the prior year period. The increase in net loss from continuing operations was partially offset by higher gross profit from our Philippine slot operations primarily due to an increase in fully depreciated gaming assets and decreased operating losses for Dreamworld Pailin.

Turning to 2013 fiscal year, total revenue was $24.3 million, down 9% compared to $26.8 million in the 2012 fiscal year. This decrease was primarily due to lower revenue from the gaming products division. Gaming revenue was $20.9 million for 2013 fiscal year, up 2% compared to $20.4 million in the prior year. Gaming revenue included $18.1 million from slot operations and $2.7 million from Dreamworld Pailin. Excluding the above mentioned service revenue adjustments, slot revenue for the year was down 8% compared with prior year as incremental revenue from Dreamworld Poipet and improvement from Thansur Bokor partially offset declines in NagaWorld and Philippines slot operations during the year.

Consolidated average net win per unit for slot operations was $121 for the year, down 17% from $145 in the 2012 fiscal year. Slot revenue from Cambodia was $13.9 million for the 2013 fiscal year, down 5% from $14.7 million in the prior year as incremental gains from Dreamworld Poipet and net win improvement in Thansur Bokor offset declines in NagaWorld net wins. Average net win per unit in Cambodia was $144 for the year, down 29% from $203 in the 2012 fiscal year. The decline was primarily due to addition of machines in Dreamworld Poipet which have a lower average net win, and lower average net wins at NagaWorld. NagaWorld average net win was $214 for 2013 fiscal year compared to $242 in the prior year.

In the Philippines, slot revenue for 2013 fiscal year was $3.3 million, down 15% from $3.9 million in the prior year. The decrease was primarily due to higher jackpot payouts and increasing competition in the market. Average net wins for the Philippines was $77 for 2013 fiscal year, up 3% from $75 in the prior year due to lower installed base. Dreamworld Pailin contributed $2.7 million for the year, up from $1.8 million in the prior year. Operating expenses at Dreamworld Pailin were $3.6 million for 2013, up from $2.9 million in the prior year. Revenue from the gaming product division was $3.4 million for 2013 fiscal year compared to $6.5 million in the prior year. The 2013 fiscal year revenue was comprised solely of normal reorders from existing customers compared to prior year, which includes $3.5 million in one large one-time order.

Operating results during the 2013 fiscal year from the gaming products division was negatively impacted by the plant relocation and sell-off which resulted in one-off start-up costs of approximately $300,000, reduction in efficiency due to certain machine and tooling issues, and the fine-tuning of certain new in-house production processes in a further effort to enhance production capacity and response time for potential large future orders. As a result, we believe that 2013 fiscal year performance was not representative of the new cost structure for the gaming products division. We expect to achieve a normalized cost structure for these operations in 2014 fiscal year.

Adjusted EBITDA from continuing operations was $6.2 million for 2013, which compares to $10.5 million in 2012 fiscal year. We recorded a net loss from continuing operations of $5.2 million or $0.17 per share on a weighted average diluted share count of approximately 13 million shares in the 2013 fiscal year. Excluding the above mentioned non-cash impairment charge of $2.6 million, the net loss from continuing operations was $2.6 million or $0.09 per share for the 2013 fiscal year. This compares to net income from continuing operations of $1.5 million or $0.05 per share on a weighted average diluted share count of approximately 13.8 million shares in the 2012 fiscal year. The 2012 fiscal year net income from continuing operations includes $339,000 in non-cash impairment charge primarily associated with the write-down of certain gaming machines and systems, as discussed above. Excluding the non-cash charges, net income from continuing operations was $1.8 million or $0.06 per share for the 2012 fiscal year.

The increase in net loss from continuing operations, excluding non-cash impairment charges, was primarily a result of lower slot operations revenue from NagaWorld, lower revenue, one-off factory and start-up costs and production inefficiency for gaming product divisions, pre-operating expenses for Dreamworld Poipet, higher SG&A expenses primarily due to the above-mentioned accrual on tax liability related to the Philippine operations, and foreign currency losses compared to gains in the prior year. The negative differential in foreign exchange was $600,000 for the 2013 fiscal year compared to prior year, which was mainly due to the strengthening of the U.S. dollar compared to foreign currencies in markets in which we operate. The increase in net loss from continuing operations was partially offset by higher gross margin for our Philippines operation primarily due to an increase in fully depreciated gaming assets, and decreased operating losses for Dreamworld Pailin.

Turning to the balance sheet, as of December 31, 2013, we had a total of $5.3 million in cash and cash equivalents. This compares to $10.4 million as of December 31, 2012. The decrease in cash was primarily the result of approximately $9 million in capital expenditures in the year which related primarily to the development of Dreamworld Poipet, gaming equipment purchases, and new Dolphin manufacturing plants in Hong Kong, as well as $1.3 million in one-time cash costs incurred in the first quarter of 2013 associated with the sale and relocation of Dolphin assets, net our consideration for the sale of the non-gaming manufacturing assets.

We had zero debt as of December 31, 2013, as at December 2012. We have paid down all prior debt under a promissory note issued to our largest shareholder, EGT Entertainment Holding Limited, a wholly owned subsidiary of Melco International.

I will now turn the call back over to Clarence. Clarence?

Clarence Chung

Thank you, Andy. We are focused on improving operating performance and positioning the company for long-term growth. Within our gaming operations, we continue to be proactive in our management and marketing efforts to minimize the volatility resulting from the political situations and protests in Cambodia and Thailand, which impacted certain of our slot properties. We believe these remain attractive markets with long-term potential, and while there can be no assurances that any new projects will be realized, we are actively pursuing new opportunities in Indo-China and other Asian growing gaming markets that we believe can add meaningful scale to our operations. In addition, we have our gaming products business which provides us a diversified and incremental revenue stream with the potential to become a meaningful contributor to earnings.

We are focused on continuing to take market share in our markets of Asia and Australia for the gaming products business. With a major expansion in the development of integrated casino resorts over the next several years, we believe we will benefit from this growth.

In closing, the focus on improving operating results and building our resources to secure new high potential gaming projects located in Indo-China and other Asian growing gaming markets with our established presence and strong relationships, we believe we are positioning ourselves to capitalize on the growth potential opportunities in these markets.

Let’s now open up the call to your questions. Operator?

Question and Answer Session

Operator

Thank you. [Operator instructions]

There are no questions at this time.

Thank you, Ms. Mangini, there are no questions at this time.

Clarence Chung

Okay, thank you, Operator. We would like to thank our shareholders for their ongoing support and we look forward to updating you on our progress in the very near future. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

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