Traci Mangini - SVP, Corporate Finance
Clarence Chung - Chairman and CEO
Andy Tsui - Chief Accounting Officer
James Crabbe - Private Investor
Entertainment Gaming Asia Inc. (EGT) Q2 2010 Earnings Call August 5, 2010 8:30 AM ET
Welcome to the Entertainment Gaming Asia second quarter 2010 earnings call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, August 5, 2010.
I would now like to turn the conference over to Ms. Traci Mangini.
Good morning, everyone. I am Traci Mangini, Senior Vice President, Corporate Finance for Entertainment Gaming Asia, formerly known as Elixir Gaming Technologies. With me today on the call are Clarence Chung, our Chairman and Chief Executive Officer; and Andy Tsui, our 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 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 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 provide an overview of our new growth strategy for our gaming operations and then will discuss highlights of our second quarter earnings 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 our guidance for the second half of 2010 and future outlook. We will then take questions from investors and analysts.
With that, let me turn the call over to Clarence Chung.
Thank you, Traci, and good morning, everyone. I'm pleased to welcome you to our first conference call under our new name, Entertainment Gaming Asia. As you may know, on July 26, we changed our name to reflect not only the dramatic changes at the company over the past several years, but also our resizing new strategies to expand our gaming business model.
In addition to being a leading provider of gaming machines on the participation basis to emerging gaming markets in Pan Asia, our plans are underway to also serve these markets as an owner and operator of regional casinos to capitalize on an attractive growth potential in these underpenetrated and growing markets. We believe this incremental leg to our growth strategies allows us to leverage our existing market presence and relationships and offer us attractive long-term returns and greater operational controls.
In furtherance of these strategies, in Cambodia, we obtained a casino license from the Cambodian government and acquired the title of over seven acres of land in the Takeo Province near one of major Vietnam border crossings. We have already assembled a project development team and have been working with architects on the conceptual design.
In addition to being very excited about our casino development plan, we're also pleased with the strong performance of our existing operations, particularly our core gaming participation business. I would like to take this opportunity to discuss some of the highlights of our second quarter and more recent performance.
Total gaming participation revenues for the second quarter of 2010 was a record $3.5 million, up 24% on a sequential basis and double that of the year-ago period. This impressive growth was driven by improved consolidated average net win of $115 per unit and a higher installed gaming machine base.
We continue to adhere to our strict cost controls. And as a result, cash SG&A was $1.5 million for the second quarter of 2010, at the low end of our prior guidance range of $1.5 million to $1.8 million and down 24% from the prior-year period.
Adjusted EBITDA, which we define as earnings before interest, tax, depreciation, amortization and non-cash expenses, was $1.4 million for the second quarter of 2010, which represents our fifth consecutive quarter of positive adjusted EBITDA since our new business was enacted in September 2007. We continue to build our cash position. Our cash balance improved to $6.4 million as of June 30, 2010, up from $4.2 million as of December 31, 2009.
Clearly, our core gaming machine participation business, and in particular our operations at NagaWorld has been a strong contributor to our improved performance. At NagaWorld, as of August 1, we had a total of 656 gaming machine seats in operation and expect it to reach 670 seats within the next several weeks. This will fulfill our total contracted machine placements at this venue and represents remarkable growth in our installed base since our first placement of approximately 200 machine seats at NagaWorld in January 2009.
Despite the growing installed machine space during the recent quarter, average net win per unit for our operations in NagaWorld had remained very strong. We attribute this to our targeted marketing efforts to build strong customer loyalty, the right machine mix and the benefits of the closures of all slot clubs previously operating in the non-Pan regions earlier in 2009.
Average net win per unit for our operations at NagaWorld has continued to post improvement in recent month with average net win reaching $214 for the month of June and $227 for the month of July.
The strong result of NagaWorld has resulted in attractive cash flows to us. For the first six months of 2010, we have booked $6.6 million in cash flow from operations from NagaWorld as of August 1, 2010. We have the remaining balance of approximately $1 million in commitment fees paid to NagaWorld which we expected to recoup by September of this year.
Turning to the Philippines, as part of our initiative to optimize performance, we continue to refine and re-deport our gaming machine space within these markets to focus assets on higher performing values. As of August 1, we have 888 units in operations across six venues. Average net win for our Philippines operations was $59 for the second quarter of 2010, which was up 5% or $56 in the first quarter of 2010.
In addition to our core gaming participation operations, we continue to focus on improving our Dolphin business. For our Dolphin gaming chips, a newly developed class, we have significantly increased our marketing efforts, and we are pleased with the initial interest from our existing and potential new customers.
Quarter-to-quarter comparisons are difficult, given the lumpy nature of gaming chips and plaques order. However, we believe we are better positioned to first, capitalize on the growth in the global gaming chip and throughout the market in the future.
Lastly, we continue to explore means to strengthen our balance sheet and financial flexibilities. Through the refinement of our business operations and the streamlining of our cost structure over the last seven quarters, we are now achieving positive cash flows from operations and have been building our cash position. This enables us to invest in our existing operations and pursue or growth opportunities.
We've made other improvements to the balance sheet as well, as you may know, that is unsecured promissory notes due to EGT Entertainment Holding Limited, formerly known as Elixir Group Limited. EGT Entertainment is our principal shareholder and a wholly-owned subsidiary of Melco International. The notes originally issued in April 2008 has been amended several times, most recently in May 2010.
Under the new terms, which became effective July 1, 2010, we will defer the repayment of principal on the outstanding principal balance on the note of $9.2 million until July 1, 2011. During the deferment period, we will make monthly fewer interest payments at the previous rate of 5% per annum.
Monthly interest payments began in August 2010, and are made in arrears on the outstanding principal balance for the preceding months. In addition, we agreed to pay all the accrued interest for the period of July 1, 2009 to June 30, 2010, which has accrued at a rate of 5% per annum on the principal amount of $9.2 million in a total amount of approximately $416,000 on July 1, 2010.
On July 1, 2011, we will resume equal monthly payments of principal and interest to EGT Entertainment over an 18-month period. We would like to thank EGT Entertainment for their continued support.
With that, let me turn the call over to Andy to review the financial results in more detail. Andy.
Thank you, Clarence, and good morning everyone. Before I discuss our financial figure for the quarter, I would like to note that historical revenue and expenses from our portfolio of automated card verification machines and electronic card shuffling systems, which were sold to Shuffle Master in April 2009 has been reclassified as discontinued operations.
Full revenue for the second quarter of 2010 was $5.1 million compared to $4.4 million in the first quarter of 2010 and $5.8 million in the second quarter of 2009. Slot participation revenue was a record $3.5 million for the second quarter of 2010.
Average daily net win per unit increased to $115, up 7% from $107 in the first quarter of 2010, and up 21% from $95 in the second quarter of 2009. Our installed base on machines in operation during second quarter of 2010 increased 9% from 1,384 units as of March 31, 2010 to 1,502 units as of June 30, 2010.
Slot participation revenue from Cambodia, which primarily consists solely of our operation at NagaWorld, increased to approximately $2.6 million during the second quarter of 2010, up 31% from the first quarter 2010 level of $2 million and up 160% from the second quarter 2009 level of $1 million reflecting consistently strong average net win per unit and a higher installed machine base at NagaWorld.
Average net win per unit in Cambodia was $196 for the second quarter of 2010, and increase of 1% from $194 in the first quarter of 2010. Our installed base on machines in operation in Cambodia increased 13% from 551 units as of March 31, 2010 to 624 units as of June 30, 2010.
In the Philippines, slot participation revenue for the second quarter of 2010 was approximately $919,000 up 10% from the first quarter 2010 level of $833,000 and up 25% from the second quarter 2009 level of $737,000. Average net win for the second quarter for the Philippines was $59, up 5% from $56 in the prior quarter and up 2% from $58 in the same period last year. Our in-store base of machines in operation in the Philippines increased in the second quarter of 2010 by 5% fro 833 units as of March 2010 through 878 units as of June 30, 2010.
Revenues for the quarter also include $232,000 from our Dolphin table game product subsidiary, which increased from $121,000 in the first quarter 2010 period and declined from $3.2 million in the year-ago period. Notably, in the second quarter of 2009 we report a large RFID chip order for the City of Dreams resort in Macau.
In addition, our Dolphin non-gaming division which primarily comprises manufacture and sale of automotive components contributed of $1.3 million during the quarter, that 8% from $1.4 million in the first quarter of 2010 and up 54% from $839,000 in the second quarter of 2009. Adjusted EBITDA was $1.4 million for the second quarter of 2010 compared to $1.3 million in the first quarter of 2010 and $1.5 million in the second quarter of 2009.
Cash SG&A expenses for the second quarter 2010 was $1.5 million at the low end of our guidance range of $1.5 million to $1.8 million. Cash SG&A expenses increased 5% from $1.4 million in the first quarter of 2010 principally due to a higher legal and consultant fee cost. Cash SG&A expenses decreased 24% from $2 million in the prior year period due to aggressive cost reduction initiative implemented during 2009.
We incurred tax expenses of approximately $220,000 in the second quarter. This was primarily due to taxable income during the quarter from our operation in Cambodia partly offset by losses in our other business entity. The profit tax in Cambodia is approximately 20%; however, we are currently working on an initiative which should minimize our future tax expenses for our Cambodia operations. We expect to finalize the increment our proposed new tax structure during third quarter in this event. The benefit will be retroactively at the beginning of the year.
Our consolidated net loss for the quarter was $1.5 million or $0.01 per share on a weighted average share count of 150.9 million shares. This compares to a net loss for the first quarter of 2010 of $1.7 million for $0.01 per share on a weighted average share count of 115 million shares.
The net loss for the second quarter 2009 was about $133,000 or $0.00 per share on a weighted average share count of 115 million shares and includes several non-recurring items including net income from discontinued operations of approximately $1.8 million or $0.02 per share related to the sale of the Shuffle business and a one-time gain of $0.7 million related to the settlement of legal suits.
Turning to the balance sheet, as of June 31, 2010 we have $6.4 million in cash as compared to $5.1 million as of March 31, 2010 and $4.2 million as of December 31, 2009. The increase in cash balance was the result of strong cash flow from our NagaWorld operations, partly offset by the capital expenditures for the gaming machine purchases for the NagaWorld expansions. The payment of $1 million for the commitment fee for the expansion of gaming machine under the May 2010 contract and the payment of $850,000 for the deposit on the rent for our Casino project in Cambodia.
I will now turn the call back to Clarence and to discuss our second half guidance and future outlook. Clarence?
Thank you, Andy. Before we open up the call to your questions, I would like to discuss our future outlook. As you can see, we are continuing to improve our financial performance and flexibility, this has resulted in quality recurring cash flows and adjusted EBITDA, providing us a solid base from which to grow earnings and expand our business.
Now, I would like to provide you some of our expectation for the second half of 2010. We expect quarterly sequential improvement in both total gaming machines participation revenues and consolidated adjusted EBITDA for third and the fourth quarter of 2010 driven by the continued swing of our Naga operations and increasing gaming machines installed base and strict cost controls; based on our cost containment initiatives and current scale of operations, quarterly SG&A cash expense at the low end of the range of $1.5 million to $1.8 million; achieve breakeven GAAP earnings by the fourth quarter of 2010; positive cash flows from operations, plus the remaining amount of approximately $1 million in commitment fees paid to NagaWorld as of August 1, 2010 to be recouped by September 2010.
We continue to selectively pursue additional growth opportunities for our gaming operations, particularly casino development projects. Such opportunities exist at both the greenfield level and through the acquisitions of existing properties.
However, given our currently constrained financial resources, in the events we were to commit to additional and concurrent projects, it could require us to reallocate resources and adjust projects timelines in order to give priority to the highest potential return projects.
Our growth is targeted to the Indo-China regions which we can leverage our expertise and relationships and capitalize on the strong desire for gaming and the favorable demographic and economic trends that exist in these emerging gaming markets.
Given our current and projected cash flows generation capabilities from our operations at NagaWorld and our existing inventory of approximately 300 machines as of June 30, 2010, we anticipate funding our existing targeted 2010 expansion plan from cash on hand and expected net cash flows from operations.
In summary, I'm pleased with our progress in driving continued improvement in operating and financial performance. With solid recurring cash flows from our existing gaming operations, a leaner cost structure and improved financial flexibility, we're even better prepared to capitalize on the growth opportunities that exist in the emerging Pan Asia gaming markets. Building on this solid foundation, we believe we are positioned to achieve our goal of becoming the leading operator of regional casinos in emerging gaming markets in Pan Asia.
Let's now open up the call to your questions.
(Operator Instructions) Our first question is from the line of James Crabbe, a private investor.
James Crabbe - Private Investor
I have a couple of questions. I'm assuming that perhaps we can continue to keep things improving at NagaWorld, that we're going to be generating about $16million to $18 million of revenues here. Now if you have $6 million of SG&A expenses, I believe you have one of the classification, and maybe this is a question for Andy, what are the other expenses other than the SG&A? I think you classified them as cost of goods sold. Is that correct? How much of those are running per quarter now?
Well, basically in the P&L, you can see our depreciation. We have about $2 million in depreciation. And then we have about $300,000 on the product development cost related mainly to our Dolphin operations and certain non-gaming depreciation related to our general office and other planned expenses.
James Crabbe - Private Investor
Okay. I'm looking at it more than anything from an EBITDA standpoint. Maybe I'm to aggressive on this, but looks like about $13.5 million in NagaWorld depending on where revenues go after the last machines are in, and about $4.2 million in the Philippines. And I've kind of looked at the new project coming up and saying that with a $125 a day on a 30% participation will be generating about $1 million a year of revenues from the Grand Golden project and I guess with 60 machines. So we should exit the year doing somewhere $18 million to $20 million of revenue.
It seems to me that that's going to fund not only all the requirements that we have for the new casino with the cash that we have in hand, but make it reasonably easy to finance other projects as well. I'm just a little bit puzzled. It looks to me like we're in pretty good shape money-wise, even if there are more projects that come about. Clarence, is it?
Indeed I think the company's financial position is much stronger and growing even stronger every day. Well, you are right that we have seen quite solid cash inflows from our operations in Cambodia and in the Philippines. So indeed, I think that's what we highlighted in the script just now that we are building up our cash position, and indeed that is quite strong cash flows coming in, so that we can think of taking the company to the next level, which, including the expansion that we have announced, and obviously with the better financial position, the cash position, et cetera, and we are also actively looking at other good potentials.
Well, we are not in a rush to sort of invest our cash. But having said that, what we are looking at are quality investment opportunities, which I do admit that there are good quality investment opportunities come to us, given the fact that I think we did build our goodwill in the region that we are one of the better operators and indeed we can execute and we can perform.
So indeed, they are quite good quality opportunities come through. And again, we are looking for quality, not quantity now, and with even better financial positions and cash positions, yes, we can be a lot more selective.
James Crabbe - Private Investor
Clarence, can you tell us what kind of assumptions are you using for the new project? It's hard to imagine its right up the road, I think what is it 100-some kilometers to NagaWorld. What kind of assumptions are you using? They are doing right now on our slot machines $227 a day, and something like what $1,200 on the gaming tables? Is that $1,200 correct? Or about?
Well, I think different opportunities where you would attach to different assumptions. But having said that I think well, in our estimations obviously we have taken into account the current operations results that we can achieve, and again, also we can take into account the various other special circumstances.
But having said that, I think we're evaluating or investing the new potential opportunities where we would not be entertained or interested to look at things or to invest in things that are below 20% to 25% return on our investment. Again, that's a basic criteria to us.
And obviously, we do believe that we can execute and then we can do even better than our going over the hurdle race. But having said that I think indeed, again we are looking for quality deals, and there are quite some good quality deals we're following through with.
James Crabbe - Private Investor
Just one other quick thing. You've said before that you can expand through game participation and through your greenfielding your project and through buying existing projects and through partnering in projects and so on. Are there a lot of opportunities to buy casinos that are up and running today? And if so, are they good casinos, or are there quality projects available?
Well, as I said, obviously I would like to share more information if I may, but at this stage given certain of those projects are not mature enough, but indeed I think I can confirm that we are looking at some good quality projects, which I hope I can elaborate more. But I would certainly do that to all shareholders, once the information I can share. And I would share that with the Board or the shareholders.
But indeed, yes, where they are, well I would say that there a lot of quite some good opportunities coming through. Hopefully, I can share more with you and the other shareholders in due course.
(Operator Instructions) And our next question comes from the line of (Paul Sonz) with Entertainment Gaming Asia.
I wanted to know about how much was the cost per seat to machines you bought for the placement in NagaWorld?
Well in fact, we purchased obviously some of the teller machines and indeed also some of those machines that are more liked by the customers. So in general, I think it's a mixture of different brands. And we recently bought some of the top notch or the latest machines from Aristocrat, and they do perform extremely good. And it is obviously, in fact some of the new machines that we purchased from Aristocrat they can perform north of $300 per day.
So indeed it all depends, but our philosophy is we do provide a combination of attractions and machines that is well liked by the customers there. So that's why we are constantly reviewing the mix. As well as they can see from the performance we are improving on a quarter-to-quarter basis. So I think the last quarter is 200 plus, but then now on the latest July figures it shows 227. So indeed we are constantly improving ourselves.
I'm trying to estimate the cash flow and how much cash you will have at the end of September. Could you give us some kind of ball park or a range of estimates of what you expect the cash might be, assuming that you don't have any other projects that you announce between now and then?
You mean by this September?
By 9/30, by the September; by the end of the current quarter.
By the end of the third quarter.
A range of what you expect cash might be?
I can say is, just like simple mathematic of what we have announced, we have $6.4 million by end of June, and then well, as Andy said, we did recoup certain of those are for entertainment or commitment fee from Naga within this July, and by August that we only have about $1 million. So without doing very complicated mathematics, well for 6.4, but plus the $1 million to $2 million debt outstanding as of June 30 that would bring sales up to over $8 million.
And that does not include the net wins that we accumulate for our 25% shares in NagaWorld for this third quarter, plus the share in the Philippines operation. Obviously, we need to minus the OpEx, which is in the low end of $1.5 million to $1.8 million, which let's assume $1.5 million for the third quarter.
Yes, that's basically both our numbers.
And then also in July you paid I think $1 million for the land.
Yes, you're right. That's about a big hundred something dollars that we paid in July.
One last thing, you'd announced the up placement of 60 machines in another venue in Cambodia.
That was Grand Golden.
And when do you expect those to go in?
In fact, probably closer to November, because our partners are still renovating the area, so the grand opening is expected in November. So I would assume it would be closer to November, maybe sometimes October.
And would you expect to fill that out of inventory?
I would say, partially would be from our inventory and then we are looking at some other machines to fill the mix.
One last question, the auto parts manufacturing in Australia, any color that you can give us on how that's going or where that stands.
Well, in fact the Australian economy is getting better. We just had some workshop with the Dolphin team down in Melbourne saying in fact, the auto part as well as the "non-gaming", the non-gaming part is doing okay. And we're picking up in terms of the auto part and indeed we are venturing into some other new industry, like the defense industry that's giving us on and on gaming side some good prospects.
Again, well, the non-gaming part would be relatively stable and steady order that helps, because the on the gaming side, which is chip and the plaques, they are relatively volatile in terms of the orders. But having said that, I would say that the two gaming and non-gaming is complement to each other.
And in fact, for the gaming side, we are doing, of course, some good traction, given also the fact that we recently have the plant being developed and then we showed it our customers and potential customers, and they all liked it. And in fact, we're supplying sudden small orders. That's what we intended, trying to start a little bit doing smaller orders to Crown in Melbourne and Burswood in Australia in Perth. So the feedbacks are very good.
So indeed, that adds to our confidence in terms of expanding into a fuller products range in i.e., the plaques and the chips, which is traditional and the RFID.
(Operator Instructions) And we have a follow-up question from the line of James Crabbe, private investor.
James Crabbe - Private Investor
Do you expect further consolidation in the Philippines in terms of the number of establishments? Number two, in Grand Golden, do you except to install eventually more machines in that property? And last, can you give us any kind of update on anything that's happened as far as the lawsuit goes that was filed by the people in New York.
Just to answer first question, Jim, in the Philippines, obviously internally we are doing some sort of consolidation, as we discussed in the previous calls. But I would say that it would take a couple of quarters, and that's what we are doing ongoing improvements and trying to help the net win in there as well as the cost side and the revenue side, et cetera. So hopefully, we will report to the shareholders and yourself in the next quarters or so.
And then the second, the Grand Golden, I think it's similar to Naga. Obviously, we do not want to be too aggressive in terms of placement. So in that case, we will be relatively careful and conservative in terms of putting 60 machines in the first play, and then we'll see the responses. And if the responses are as good as Naga, obviously we would increase. Well, obviously, Naga, we're growing from less than 200 to almost 700 in a year's time. So I think that'd probably be the way that we would like to do.
James Crabbe - Private Investor
If you had any kind of an update on this lawsuit.
Unfortunately, I can't tell a lot of those, given the fact that it's been in legal process. But all I can say is obviously the company will defend vigorously on the litigations. And indeed I think we have engaged a law firm to help us to do so.
There are no further questions at this time. I will now turn the conference back over to our presenters today to continue with the presentation or closing remarks.
We'd like to thank our shareholders again for their ongoing support, and 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 we ask that you disconnect your lines. Thank you.