Entertainment Gaming Asia's (EGT) CEO Clarence Chung on Q1 2014 Results - Earnings Call Transcript

May.11.14 | About: Entertainment Gaming (EGT)

Entertainment Gaming Asia Inc. (NYSEMKT:EGT)

Q1 2014 Earnings Conference Call

May 08, 2014 08:30 AM ET

Executives

Traci Mangini - SVP, Corporate Finance

Clarence Chung - CEO

Andy Tsui - CAO

Analysts

Paul Sonz - Sonz Partners

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter 2014 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, May 8, 2014.

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

Traci Mangini

Thank you, operator, and good morning everyone. I’m Traci Mangini, Senior Vice President of 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 about 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. Clarence will first discuss the key points of our first quarter 2014 fiscal year financial performance and recent corporate developments. Following that, Andy will review in more detail our financial results for the quarter. Clarence will then conclude our prepared remarks and we’ll open the call up to investors for questions.

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

Clarence Chung

Thank you, Traci and good morning everyone. We faced challenges during the quarter, and as a result our operating results did not meet our expectations. Please allow me to address some of the key factors that impacted our quarterly performance. For the NagaWorld operations, our average net win for these operations for the first quarter of 2014 was $175. Our results were impacted by lower player traffic levels, primarily as a result of political and labor protest in Phnom Penh which began after the July 2013 elections.

While protests continued, they have been fairly well contained. We continued our efforts to include performance in other world through proactive marketing and machine mix managements. In the month of April, average daily net wins at NagaWorld improved to approximately $200.

The performance of our Dreamworld Poipet, our slot club located near the Cambodia Thailand border that official opened in May 2013 was dampened in the quarter due to the political unrest in Thailand. Despite this, we have seen improvement in the level of mass market play and have been implementing targeted marketing strategies to expand the premium and VIP player base. We remain focused on improving performance and capturing shares of these markets.

In the Philippines, our first quarter performance was impacted by lower player traffic following the Chinese New Year holiday, and increased competitions from a major casino resort opening in Manila in early 2013. Net wins in the Philippines were in the low $70 range in the quarter.

For Deamworld Pailin, we have narrowed operating losses in the first quarter due to the change in operating loss (indiscernible) in September 2013. This model included is continuing the use of higher cost tour group operations and transitioning to a leading model for the table games at third party operators. Now let me (Indiscernible) of the table games leasing contract. The third party operators paid us a fixed monthly rental fee per table. The table games leasing contracts were short-term in nature and we experienced turnover with the operators. As a result, there were P-list during the first quarter of 2014 in which table games operations were suspended at Deamworld Pailin and at the end of March 2014 the contract with the table game operator was terminated. Under current markets conditions, Deamworld Pailin has been relying on the third-party rental income and saw revenues recover its cash operating costs and we have been unable to secure a long term third party table game operator.

Due to this, a low level of natural player traffic and the political unrest in Thailand, the outlook for Thailand operations remains challenging. We’re elevating options for this property which include exiting the operations and selling certain of the assets. We expect that we'll provide an update on this shortly.

Turning to our gaming products divisions, which comprise the manufacture and sell of gaming chips and plaques, we continue to work to build our sales pipelines and improve our production deficiency. With our new plant in Hong Kong, we believe we are well positioned amidst the major development of integrated casino resort in Asia, anticipated over the coming year. And we are opportunistic about our potentials to obtain large initial orders from some of the new casino openings in our markets.

We have recently announced two meaningful new gaming chips and plaque orders in the Philippines, one for the New City of Dreams Manila and another for the Phase 1A for the Solaire Resort & Casino. These two orders will descend a combined total of over $4 million in revenue, which is anticipated to be booked in the second half of 2014. With this major order combined with our typical reorder flow, the sale pipeline for 2014 is expected to be attractive. In our effort to enhance production efficiencies for these operations, we’ll further expand our facilities to increase capacity and respond time for potential large orders. We expect to achieve a normalized cost structure for this business this year.

I’d like to turn to call over to Andy and discuss our first quarter 2014 financial results in greater details. Andy?

Andy Tsui

Thank you, Clarence, and good morning everyone. Due to the sale of a portion of our Dolphin business dedicated to the manufacture and sale of non-gaming products, all historical revenues and expenses from this sole 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 renamed our Other Products as gaming products, which presently comprise our gaming chips and plaques operations.

Total revenue was $4.9 million for the first quarter of 2014, down 29% compared to $6.9 million in the first quarter of 2013. The decrease was a result of decline in both gaming operations and gaming plaque divisions. Gaming revenue was $4.1 million for the first quarter 2014, down 25% compared to $5.5 million in the first quarter of 2013. Reported gaming revenue includes $3.9 million from slot operations and $215,000 from Dreamworld Pailin. Slot operation revenue of $3.9 million for the first quarter of 2013 was increase 12% compared to $4.4 million in the first quarter of 2013.

Slot operations revenue for the first quarter period of 2014 and 2013 include 224,000 and 218,000 respectively in service revenue related to the reimbursement of net shared costs from casino operators, which was grossed up for accounting purposes. Incremental revenue from Dreamworld Poipet which officially opened in May 2013 at improvement at Thansur Bokor partially offset decline in NagaWorld and Philippines slot operations during the quarter.

Consolidated average daily net wins per unit for the slot operations was $101 in the first quarter of 2014, down 27% from $139 in the prior year period. Our installed base of gaming machine seats for slot operations was 1,652 seats as of March 31, 2014, up 5% from 1,581 seats as of March 31, 2013. The increase in machine seats was principally due to the opening of Dreamworld Poipet.

Slot revenue from Cambodia was approximately $2.9 million for the first quarter of 2014, down 10% from $3.2 million in the prior year period as incremental gains from Dreamworld Poipet and net win improvement at Thansur Bokor offset declines in NagaWorld average daily net wins. Average net win per unit in Cambodia was $117 for the quarter, down 34% from $176 in the fourth quarter 2013. The decline was primarily due to the addition of machines in Dreamworld Poipet which has a lower average daily net win and lower average daily net wins at NagaWorld. NagaWorld average net win was $125 for the first quarter, compared to $217 in the prior year period.

In the Philippines, slot revenues for the first quarter of 2014 were approximately $728,000, down 22% from the first quarter of 2013 levels of $937,000. The decrease in revenue was primarily due to lower payout traffic as a result of increased competition in the market. Average net win for the Philippines was $71 for the first quarter of 2014, down 17% from $86 in the year-ago period. As previously mentioned, our casino operation, Dreamworld Pailin contributed $216,000 for the quarter, down from $1.1 million in the prior year period. The decline was due to our deficiency of M&A to use of high cost to improve promoters and transition to a leasing model for table games during the third quarter of 2013. Cash operating expenses for Dreamworld Poipet was $315,000 for the first quarter of 2014, down from $1.3 million in the first quarter of 2013 due to cost reduction initiative and lower payout traffic.

Revenue from the gaming product divisions was $811,000 for the first quarter of 2014 compared to $1.4 million in the prior year period. The decrease was due to lower sales volumes from existing customers compared to prior year period when we had our largest sales pipeline and we had expedited orders ahead of the factory relocation from Australia to Hong Kong. Due to lower production volumes, lower absorption of fixed cost and sale production inefficiently, the gaming product division posted a gross margin loss for the first quarter of 2014.

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 $862,000 for the first quarter of 2014, which compares $1.9 million in the first quarter of 2013. We recorded a net loss of $1 million or $0.03 per share on a weighted average diluted share count of approximately 30 million in the first quarter of 2014. This compare to a net loss of $2.5 million or $0.08 per shares on a weighted average diluted share count of approximately 30 million for the first quarter of 2013.

The first quarter of 2013 net loss includes a $2.2 million net loss from discontinued operations related to the March 2013 sale of the portion of our subsidiary Dolphin Products Limited business dedicated to the manufacturing and sale of nongaming classic products. Excluding this, we reported a net loss from continuing operations for the quarter of 2013 of $329,000, or $0.01 per share.

The increase in net loss from continuing operations was primarily the result of lower slot operations revenue, lower sales volume and production inefficiency for the gaming products division as well as slight currency losses compared to gains in the prior year period. The increase in net loss from continuing operations was partially offset by a reduced operating loss for Dreamworld Pailin due to our decision to cease using high-cost tour promoters and transition these operations to a lower-cost leasing model for the table games and higher gross profit for the Philippine slot operations primarily due to an increase in fully depreciated gaming assets and lower operating expenses in the first quarter of 2014.

Turning to the balance sheet, as of March 31, 2014, we had a total of $4.3 million in cash and cash equivalents. This compares to $5.3 million as of December 31, 2013. The decrease in cash was primarily the result of approximately $856,000 in capital expenditures in the first quarter 2014, which related primarily to the equipment purchase for Dolphin manufacturing plants and certain EGM purchases as well as the increase of working capital in preparation for upcoming Dolphin chip and plaque orders. We had zero debt as of March 31, 2014,

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 a long-term growth. Within our gaming operations, we are proactive in our management and marketing efforts to minimize the volatility resulting from the political situations and protesters in Cambodia and Thailand, which impacts certain of our slot properties. We believe these remain attractive markets with long-term potential. Also there can be no assurances that any new projects will be materialized. We are actively pursuing new opportunities in more established gaming markets that we believe can add meaningful scale to our operations. In addition, we believe our gaming products business offer a diversified and incremental revenue stream with the potential to become a meaningful contributor to earnings. We are focused on continuing to take expand [indiscernible]’s presence in our markets of Asia and Australia 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, our focus is to improve operating results and build our resources. We are actively seeking new high potential gaming projects located in more established gaming markets in Indo-China and other growing gaming markets in Asia that will have the potential to drive meaningful long term growth for the Company.

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

Question and Answer Session

Operator

Thank you. (Operator Instructions) And the first question comes from the line of Paul Sonz with Sonz Partners. Please proceed with your question.

Paul Sonz - Sonz Partners

I wondered if you could go into a little bit more detail or little more color on your efforts for finding new areas that we can go into or new proposals?

Clarence Chung

Right. Well, in fact the company has been actively looking at new projects and potential projects. And although we couldn’t explain in greater details well, it's not that much sure yet. But we’re still looking at larger projects in more mature cities or more mature gaming areas for the long term benefits of company. So is this we do look at in the Indo-China regions, as well as outside of the Indo-China regions. And I do hope that I could share with the shareholders more details once we landed in more solid term with one or more of those projects in the near future.

Paul Sonz - Sonz Partners

Is the -- any project that you’re going to acquire is most likely going to take, I would say capital. And I wondered if you had any thoughts you can share about, how this might affect the equity shareholders?

Clarence Chung

Well, I would say that, well, depending on the type of the potential projects obviously, yes, the company well, can afford to -- without any capital raising one way or the other. Obviously, the company would look into lucrative and using -- utilizing the existing capitals of us, which as you know, we do have a couple of million dollars of cash, as well as we have not debt. But if we were to encounter some larger projects, but with good potentials and good return prospective for the shareholder, obviously the management will look into end the quarter as well, will look into various funding options in that circumstances.

Paul Sonz - Sonz Partners

Okay. And then one last question. Dolphin is becoming quite a jewel. Have you had any approaches from individuals about purchasing Dolphin?

Clarence Chung

Well, as you see, we are trying to build-up the factories and the efficiencies while we speak. And I probably had mentioned that couple of times is the early earning calls, whereby we consider Dolphin has very good potentials and in fact I think the current latest orders we see from the Philippines market, as well as other markets probably has shown that, has proven that Dolphin has great potentials. I think at this stage the company is not in the rush to consider the disposing of this kind of jewel [ph] . And indeed we wanted to even more build-to-fight, in fact, to at least unleash the great potentials of these particular businesses of us.

So again well, we are not in a hurry to do anything about it. And in fact, well, I think we’ll rather just focus our resources and in fact I spent quite some time lately in terms of looking at and how to improve further the efficiency as well as getting more of orders for Dolphin operations. And I guess we do have great potential for Dolphin in the long term.

Operator

(Operator Instructions) And there appears to be no further questions or comments over the phone line. So I will now turn the call back over to you.

Clarence Chung

Thank you, operator. And once again, we would like to thank our shareholders for their ongoing support. And we look forward to updating you on our progress in the near future. Thank you again. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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