Iao Kun Group Holding's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Iao Kun Group Holding Company Limited (IKGH)
by: SA Transcripts

Iao Kun Group Holding Company Limited (NASDAQ:IKGH)

Q4 2013 Earnings Conference Call

March 25, 2014, 9:00 AM ET

Executives

Penelope Christo – IR, ICR

Garrett Edson – IR, ICR

Jim Preissler - Director

Raymond Li - Chief Financial Officer

Edward Chen - Assistant to the Chairman

Analysts

David Bain - Sterne Agee

Operator

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Iao Kun Group Holding Company Limited Fourth Quarter 2013 Earnings Conference. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for questions.

I would now like to turn the conference over to Penelope Christo of ICR.

Penelope Christo

Thank you and welcome everyone to Iao Kun Group Holding Company Limited fourth quarter 2013 earnings call. Participating on the call today will be our Chairman, Mr. Pou Lam; our COO, Mr. Ben Vong; Mr. Ken Leong, Chief Executive Officer; Mr. Raymond Li, Chief Financial Officer; and Mr. Edward Chen, Assistant to the Chairman; and Mr. James Preissler, Director of Iao Kun Group.

Earlier today, the company issued a press release reporting financial results for the three months and year ended December 31, 2013, which can be accessed at most financial websites as well as our own at www.ikghpl.com. For the purpose of this call, all figures presented will be discussed in US dollars.

This conference call may contain, in addition to historical information, forward-looking statements about IKGH within the meaning of the Federal Securities laws. Forward-looking statements include statements concerning plans, objectives, forward strategies, future events or performance and underlying assumptions and other statements other than those that are historical in nature. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from the expectations reflected in these forward-looking statements. For more information on these matters, we encourage you to view IKGH SEC filings.

I would now like to turn the call over to Garrett Edson of ICR.

Garrett Edson

Thank you, Penelope. I would like to briefly go through the fourth quarter 2013 financial results and then I will turn the call over to Mr. Jim Preissler for some further commentary and then open the call for Q&A.

Revenue for the fourth quarter of 2013 was $50.2 million, an 11% decrease from $56.4 million in the prior-year period. Net revenue as a percentage of Rolling Chip Turnover was 1.15%, down from 1.40% in the prior-year period.

IKGH's primary expenses commissions to agents, which was $46.9 million in the fourth quarter of 2013, up 22.1% from $38.4 million in the fourth quarter 2012. The commissions to agents as a percentage of Rolling Chip Turnover was 1.08% in the fourth quarter of 2013, up from 0.95% in the fourth quarter of 2012 is a result of higher percentage commissions paid to non-marker agents and a smaller percentage of direct business in relation to the Rolling Chip Turnover.

Selling, general and administrative expense as a percentage of Rolling Chip Turnover was 0.15% in the fourth quarter of 2013, up from 0.12% in the prior-year quarter. Non-GAAP operating loss before amortization and change in fair value for contingent consideration for the fourth quarter 2013 was $3.5 million or $0.06 per diluted share compared to income of $12.6 million or $0.28 per diluted share in the same period of 2012 due primarily to increased commissions, higher SG&A expenses due in part to costs related to the post-Hong Kong listing and costs associated with the acquisition of the VIP Room at Le Royal Arc Casino in downtown Macau.

Non-GAAP loss before amortization and change in fair value for contingent consideration margin as a percentage of total revenue in the fourth quarter of 2013 was negative 7%, down from non-GAAP income margin of 22.4% in the fourth quarter of 2012.

Net loss for the fourth quarter 2013, including all items, was $5.5 million compared to net income of $10.1 million in the fourth quarter 2012. GAAP basic and fully diluted EPS derived from net loss for the fourth quarter 2013 was negative $0.09 based on both a basic and fully diluted weighted average share count of approximately 61 million. Basic and fully diluted weighted average share counts were calculated in accordance with generally accepted accounting principles.

Turning to the balance sheet and cash flow statement, cash on hand at December 31, 2013, was $7.6 million; cash provided by operations were $37.9 million for the year ended December 31, 2013. As of December 31, 2013, total available cage capital was approximately $249.9 million. The total available cage capital is comprised of markers receivable of $242.4 million and cash, cash chips and non-negotiable chips of $7.6 million.

I would now like to turn the call over to Jim Preissler, Director of Iao Kun Group for his closing thoughts.

Jim Preissler

Thank you, Garrett. For the first two months of 2014, IKGH's Rolling Chip Turnover averaged $1.51 billion per month, giving us a Rolling Chip Turnover in Macau of $3.02 billion as of February 28th, an increase of 18% year-over-year. We are providing 2014 Rolling Chip Turnover guidance for our five existing VIP rooms in Macau of $17 billion to $19 billion.

As we mentioned in the press release, IKGH annual dividend payment policy equates to an amount for outstanding ordinary share equal to 15% of IKGH's non-GAAP net income for the most recently completed fiscal year, which is less the amount paid pursuant to the six-month dividend divided by the number of ordinary shares outstanding on the record date for the annual dividend.

However, because 15% of our full year 2013 non-GAAP net income equals approximately $4.65 million and IKGH already paid $4.8 million in cash pursuant to the 2013 six-month dividend, IKGH will not declare an annual dividend for 2013. However, going forward, we are maintaining our overall dividend payment policy.

For the fourth quarter of 2013, IKGH repurchased 732,900 shares at an average price per share of $3.10. At the end of 2013, the Board of Directors extended its share repurchase program for IKGH on an open-ended basis to purchase up to 4 million of its ordinary shares on the open market at prices to be determined by IKGH's management.

Purchases pursuant to the program may be made from time to time in accordance with SEC rules and regulations through open market transactions subject to market conditions, including its share price and other factors. At the end of 2013, the Board of Directors extended its share repurchase program for IKGH on an open-ended basis to purchase up to 4 million shares, as I previously stated.

So overall, this is a challenging year. However, we moved into 2014 and we're seeing an improvement in the VIP market in Macau and we usually are starting to turn the corner, as evidenced by our recent Rolling Chip Turnover results. Further we're continuing our market campaign, which we believe has already augmented our non-marker agent base.

In closing, our strategy remains unchanged. We are committed to expanding our business presence in the Macau VIP gaming market and increasing our market share, while effectively managing costs and our capital to create long-term value for our shareholders.

This completes our prepared remarks. I'd like to turn it over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from David Bain from Sterne Agee.

David Bain - Sterne Agee

With regard to guidance, I know you guys are no longer giving non-GAAP income guidance. Is that a function of whole variables or commission ones? And then can you give us any color on what you believe agent commissions as a percentage overall may look like in this year?

Garrett Edson

Well, before we turn over to the guidance, I'll talk about the agent commissions. As previously discussed, the agent commissions are dictated by a variety of factors, most importantly whether the agent is a cash or credit agent and how established that agent is. So what we've seen over the last year is we've been actively pursuing the growth in the cash business, and that's part of our acquisition strategy, some of the more recent acquisitions we've made is they start to develop that cash agent base. Now the hope over the long term at some of those cash agents can grow into credit agents as we get to know them as they start to establish larger players and so on.

So with that said, how does that translate to the commission structure? The cash agents could receive the highest tier of commissions across Macau, it’s anywhere from 1.1 to some cases it can be as high as 1.2. So that is the highest tier of commissions. And over the last year, we've seen that mix increase for our business, I anywhere from 5% to maybe 25%, 30% to where it is now. And we're continuing to actively cultivate that.

Now on the credit side, there is more a variable range of commissions whether it's a new agent or an established agent. That could be anywhere from 0.65 to 0.95 typically for credit side. So that mix is ultimately what dictates our overall commission that we're paying out.

Now the last piece is a direct business, which is also typically a credit business. Now we don't pay out a commission on that, but we've seen since that's a riskier segment of the business and historically it's been about 15% of the business, it's dropped probably to about 5% of business now. But that's also credit. So those are the components that determine that mix.

Now it appears that the credit side is remaining stable over the last year and we think it's going to remain stable going forward. So the real question is how quickly can we grow that if it does start to turn up, and at the same time, how much can we continue to grow that cash business. So with that, I think we're going to see the overall commission potentially tick up slightly if that cash mix continues to increase.

David Bain - Sterne Agee

Okay. Tick up slightly from – because it looks like sequentially you were down on commissions as a percentage of Rolling Chip Turnover in the fourth quarter, but I believe that was probably a function of holding your junkets participation program. So should we be looking more like the third quarter as a normal - I guess like when you normalize hold, what were the fourth quarter commissions to agents as a percentage of Rolling Chip Turnover, what would that have been, do you know?

Raymond Li

The commission to Rolling Chip Turnover are affected by super agents program. On average for the whole year, we get around 1.07, and that affected by the (inaudible) super agents, cash agent, credit agent, our business did contribute. And assuming approximately 3%, the mix would be around 1.07. But in case by the third quarter of the super agents - if the [win rate] [ph] go up, that might contribute to higher commission because of the [inaudible] sharing in the [inaudible] for the VIP room super agent. So that would [inaudible] up the average commission for a particular quarter.

David Bain - Sterne Agee

And Jim, can you share an updated timeline for the dual listing by introduction and maybe even some details as to which countries you may be visiting outside of Mainland China and Hong Kong on a potential road show and then any kind of recent feedback from agent base investors, especially in light of recent promoter merger acquisition activity?

Edward Chen

The thing is right now, the sponsor and the lawyer is finalizing the due diligence and the ramification. We are hoping that we can file the application sometime in May or before May. And for the road show, we are planning in addition to Mainland China, maybe we would be going to Taiwan, Singapore and also probably Europe.

David Bain - Sterne Agee

Edward, did you say kind of like a projected date for month or do you not have anything right now?

Edward Chen

It all depends on sponsor. Right now, the prospectus is almost 80% done and pertaining to other ramification whatever information we put in this prospectus, they have to verify the accuracy of all the information. And also the sponsor is finalizing the due diligence. So we are hoping that the application can be filed sometime in May or before May.

Jim Preissler

So, David, this process is much more intensive on the DD front, the sponsor, the investment bank and the law firm typically do than you see in the US. So they actually personally verify a very large amount of information that includes interviews with the casinos, with the government, with the regulators, with agents and so on. So I mean they spend significant time sitting in the cage, watching the business and transactions and recording everything. So it is a very detailed and exhaustive process.

David Bain - Sterne Agee

Jim or Edward, once you do that filing, though, and since you're not raising capital, I would assume that filing, that acceptance process would be relatively short in nature or is that not the case?

Jim Preissler

It's the same.

David Bain - Sterne Agee

So what timeline do you think that would be?

Jim Preissler

It's an IPO.

David Bain - Sterne Agee

So what timeline do you think from filing to road show, any best guesses there?

Edward Chen

From the filing to road show, that was a like within one, two months. And for the approval of the application, it all depends on how many questions the exchange has. We're expecting around three months.

Operator

(Operator Instructions) We do have a follow-up question from David Bain.

David Bain - Sterne Agee

Can I ask a question on something that was stated in the press release, some kind of comments about improvements in the VIP market? When you look at the macro factors and other indicators like DSO trends, what do you feel like in terms of credit extension to agents at this point? It obviously seems like a status quo right now and they're laser-focused on cash agents. But do you see some opportunities to loosen over the year or is it more that you increase the amount of cash agents and then convert them into credit agents? I mean can you give us any kind of market update on what you're seeing out there?

Jim Preissler

Obviously, we've not seen a large rebound in the mainland economy, which is the ultimate thing that's going to drive the ability to more safely extend credit on a larger scale and it has to do with liquidity and a whole host of other things, liquidity I mean the cash available to players. So we see it, it continues to be stable. If there is an uptick, obviously it's a materially positive impact on our business, but we continue to be cautious. I mean we've seen across Macau DSO trends increase significantly and we're trying to manage avoiding some of the major pitfalls like some of the other participants in the space may find themselves in. So we're looking to be as cautious as possible there with the shareholder capital.

So yes, we'd like to ramp up that credit business, when it seems prudent. And in the interim, though, we're putting a lot of effort into growing that cash business, where there's a very, very low risk. We still have obviously the gaming risk of the player winning and losing. But as far as on the credit side, we don’t have any risk there. So we're aggressively pushing that business as to grow the base. Now the long-term benefit of that is when the credit does turn around, hopefully we can migrate some of those cash players up to the credit side as well.

That was a roundabout way to answer your question. But the reason I did it that way, we're not actively trying to convert cash players into credit players. We think by growing that base when the credit does start to rebound, we'll have a much bigger base to go to on the credit side.

David Bain - Sterne Agee

On the acquisition front, I know a lot needs to fall in the place for additional acquisitions like we've had in the past. But any sort of momentum there? Seems like there is more and more merger activity within the market. And then second, that's more of a follow-up on the new casino openings and expansions, I guess, that are beginning sort of late next year. How do you position yourself from the rolling co-tiers that still going to appetizing and how do you position yourself ahead of that with customers?

Jim Preissler

Yeah, I mean it's always new opportunities. And I'll turn it to Edward.

Edward Chen

Right now, we're doing strong marketing campaign in Macau. We are happening to do both advertising, we are doing advertising on the taxi doors, and we have been advertising on the restaurants. So we're doing also the social media with different types of marketing right now. And so like acquisitions right now, if the real opportunity comes and if we feel that the agent network could work for us, then we'll consider.

David Bain - Sterne Agee

And then new casino openings, can I know some thoughts on keeping a balance between the (inaudible) co-tie, where the new openings will be on co-tie, any thoughts on cannibalization if that grows the market and how you potentially position yourself to get into those rooms or help manage one?

Edward Chen

I guess we're going to see the opening room happening for another maybe year-and-a-half to two years. Right now, we are concentrating on our businesses in our five existing VIP rooms, reason being we are on the revenue-sharing. The higher the chips turn over, the higher will be our revenue-sharing percentage. So if we open up a new room right now, we have to shift businesses maybe to the new room and that might lower our revenue-sharing percentage, which will affect our bottomline. So I guess maybe a year from now, two years from now, then we have a agent network and we're in our existing VIP rooms almost up to capacity, then I guess we'll consider opening up new rooms maybe like a year or so from now.

Operator

We'll take our next question from [ph] Pierce Harris from Humay.

Unidentified Analyst

I see that you wrote down the fair value of the contingent consideration for a case gaming family and the oriental VIP rooms. Can you explain what the accounting is there?

Raymond Li

For the contingent consideration, we need to pay them the target they need almost closer to the final year. And for the rest, they might get some incentive in terms of shares. So we lowered the target and it's quite stable. For (inaudible), the contingent consideration go up, because they met the target and then actually you can see through the income statement, because their performance is above target and we have almost $12 billion that hit the P&L.

Unidentified Analyst

I know that there is no guidance going forward. So how do we look at 2014? I guess the only number we have so far is Rolling Chip Turnover. Is there any way, even a wide range of guess what the earnings might be?

Edward Chen

The situation is beat up, because right now we're on the revenue-sharing. And the win/loss percentage will affect our bottomline. And also, right now we are beginning to promote the cash and the super agents business and that will also affect the commission payout. But hopefully, with the higher chips turnover, we'll get high allowances and higher revenue-sharing percentage from the casinos, so that will offset the higher commission paid to the agents. So for the time being, if we issue an income earnings guidance, that might be misleading. Maybe we'll do it like six months financial statements end of June 30th.

Unidentified Analyst

You have all of these credit customers, a lot of credit customers, so you know a lot about those people and you've extended them credit. On your other things that you can do to monetize or make additional money on those customers?

Edward Chen

What do you mean by monetize?

Unidentified Analyst

Some of the other people who are in your business do other things with the customers. I'm not saying they become banks, but they utilize their relationships with their customers, supplying it other revenue sources. Have you looked at any?

Edward Chen

You mean like a bank to give them out loan, finances in addition to the line of credit that we grant them for gaming?

Unidentified Analyst

Yeah.

Edward Chen

Because we are a public company, I don't think we are allowed to do that. You have to have a special license to be a money lender. And also if we get into that business, there are quite a lot of things for internal controls that we have to go through. I will not say that we will not do it, but for the time being, it's not in our agenda.

Operator

I'll take our next question from (inaudible), a private investor.

Unidentified Analyst

Can you give us a all-in number for current cage capital, including unused cash and LOCs?

Edward Chen

Raymond, would that be around $280 million.

Raymond Li

Yeah, closer to that, yes.

Edward Chen

Our existing capital item of the financial statement in front of me, if I could recall, I think it should be around (inaudible).

Jim Preissler

All right. It doesn't look like we have any more questions. Thank you, everyone, for attending today's earnings call and for your interest in IKGH. During the call, if we didn't get to your question, we'd be happy to follow up with you with a scheduled conference call or reach us by e-mail. Thanks a lot, everyone. Have a good day. Bye.

Operator

This concludes today's conference. Thank you for your participation.

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