Iao Kun Group Holding Company's (IKGH) CEO Ken Leong on Q1 2014 Results - Earnings Call Transcript

May.30.14 | About: Iao Kun (IKGH)

Iao Kun Group Holding Company Limited (NASDAQ:IKGH)

Q1 2014 Earnings Conference Call

May 29, 2014 08:30 AM ET

Executives

Shannon Devine - IR

Garrett Edson - IR

Pou Lam - Chairman

Ben Vong - COO

Ken Leong - CEO

Raymond Li - CFO

Edward Chen - Assistant to the Chairman

James Preissler - Director

Analysts

David Bain - Sterne Agee

Brett Reiss - Janney Montgomery Scott LLC

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Iao Kun Group Holding Company Limited First Quarter 2014 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 up for questions. I would now like to turn the conference over to Shannon Devine of ICR. Please go ahead ma’am.

Shannon Devine

Yes. And welcome everyone to Iao Kun Group Holding Company Limited first quarter 2014 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 ended March 31, 2014, which can be accessed at most financial websites as well as on our own at www.ikghcl.com. For the purposes 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 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’s SEC filings.

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

Garrett Edson

Thank you, Shannon. I would like to briefly go through the first quarter 2014 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 first quarter of 2014 was $79.9 million, a 24% increase from $64.4 million in the prior-year period. Net revenue as a percentage of Rolling Chip Turnover was 1.68%, up from 1.57% in the prior-year period. IKGH's primary expenses commissions to agents which was $55.1 million in the first quarter of 2014, up 29% from $42.7 million in the first quarter 2013. Commissions to agents as a percentage of Rolling Chip Turnover was 1.15% in the first quarter of 2014, up from 1.04% in the first quarter of 2013 as a result of higher percentage of commissions paid to non-marker agent and a smaller percentage of direct business in relation to the total Rolling Chip Turnover.

Selling, general and administrative expense as a percentage of Rolling Chip Turnover was 0.14% in the first quarter of 2014 comparable with the prior year quarter. Non-GAAP operating income before amortization, change in fair value for contingent consideration for the first quarter 2014 was $17.8 million or $0.29 per diluted share compared to income of $15.3 million or $0.35 per diluted share in the same period of 2013. The increase in non-GAAP operating income was due primarily to the increase in revenue partially offset primarily by increased commissions. Non-GAAP income before amortization, change in fair value for contingent consideration margin as a percentage of total revenue in the first quarter of 2014 was 22.3%, down from non-GAAP income margin of 22.8% in the first quarter of 2013.

Net income for the first quarter 2014, including all items, was $3.2 million compared to net income of $7 million in the first quarter 2013, primarily due to a net increase to contingent consideration liability for Bao Li Gaming and the Oriental VIP Room due primarily to an increase in the forecasted Rolling Chip Turnover performance based on past performance, and higher commissions as a result of a higher commission rate offered to non-credit agents and super agents.

GAAP, basic and fully diluted EPS derived from the net income for the first quarter 2014 was $0.05 based on both a basic and fully diluted weighted average share count of approximately 60.4 million and 60.7 million respectively. The 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 as of March 31, 2014, was $10 million. Cash provided by operations was $27.4 million for the three months ended March 31, 2014. As of March 31, 2014, total available cage capital was approximately $260.7 million. The total available cage capital is comprised of markers receivable of $250.7 million and cash, cash chips and non-negotiable chips of $10 million.

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

James Preissler

Thank you, Garrett. For the first four months of 2014, IKGH's Rolling Chip Turnover averaged 1.62 billion per month, giving us a Rolling Chip Turnover in Macau of 6.49 billion as of April 30th, an increase of 17% year-over-year. We are maintaining our 2014 Rolling Chip Turnover guidance for our five existing VIP rooms in Macau of 17 billion to 19 billion. For the first quarter 2014, IKGH repurchased 1.415300 shares at an average price per share of $2.96. Under its current stock repurchase program, Iao Kun is authorized to purchase an additional 2.584700 shares of its common stock.

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 IKGH’s share price and other factors. Repurchase program may be modified to spend and discontinue anytime.

Overall the first quarter of 2014, we saw improve our Rolling Chip turnover by double digits with led us to increasing our non-GAAP income from the prior year period. Our marketing campaign which we believe is a very augment on non-marker agent base remains ongoing. In closing our strategy remains unchanged. We’re committed to expanding our business presence in the Macau VIP gaming market and increasing our market share while effectively managing cost 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 our Q&A section. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question from David Bain with Sterne Agee.

David Bain - Sterne Agee

Great, thanks. I guess my first question guys would be on margins, if we normalize the whole win rate in 1Q, can you give us a sense of what your payout agents would have been as a percentage of Rolling Chip?

Unidentified Company Representative

Okay, [indiscernible] answer the question then.

Unidentified Company Representative

Okay, so I think its base however we have a high win rate in the first quarter therefore the percentage of commission we pay to the super agents again because they participate in the profit sharing. So I cannot give you an exact number of like what the exact commercial percentage will be but it will be lower than what we paid out. According to what I discussed with our CFO it will be remain around the same over 1.07%, is it right Raymond?

Raymond Li

Yeah exactly I mean…

Unidentified Company Representative

If the win rate is normalized at around 3% our commission payout will be around it was like 1.07%.

David Bain - Sterne Agee

Okay, great. That’s very helpful. Okay. And then in regard to the dual listing are we still on track for late 3Q or can you give us any sort of sense as to the process timeline there?

Unidentified Company Representative

Yeah we have we made some very good progress with the underwriter and as you know they are very conservative detail oriented firm and they still have some agent to these last data actually went and interviewed several 100 of our agents as it’s just a handful that are left or remaining and currently we’re in the stage where we’re doing the final very-very thorough details walk through of the filing document which means we go through word-by-word and verify all the information that’s been there. So, it’s a quite laborious process but I think we’re getting very close to the end of the finish line here on it.

David Bain - Sterne Agee

Okay, so it sounds like we’re still on track from what you expected from the last call in terms of timeline.

Unidentified Company Representative

Yeah, I think so I think nothing has changed on the time horizon, we’re making very-very good progress on it.

David Bain - Sterne Agee

Okay, great. And just last one, looking at your first quarter and then the April VIP Rolling Chip results I mean better than the market obviously as a result of your efforts to acquire cash agents and Jim I know you mentioned those efforts are ongoing. But where are we in that process I mean is the focus more now in cultivating those existing agents or are we still early in that acquisition phase?

Jim Preissler

Well, I think there is a tremendous market potential for us to go out and acquire these cash agents on an ongoing basis. So I think that process has just begun and as bad debt accumulates out there in the market those agents those good agents mainly define new homes so I think this is a process that we can benefit from for quite some time going forward.

Operator

(Operator Instructions) We’ll take our next question from Brett Reiss with Janney Montgomery Scott.

Brett Reiss - Janney Montgomery Scott LLC

Good evening gentlemen. The crackdown by China on junked (ph) agents any impact on us?

Unidentified Company Representative

I mean we have [Multiple Speakers] there has been no impact on our [Indiscernible] agent to tell.

Brett Reiss - Janney Montgomery Scott LLC

I read something there was some issues with Neptune that’s just gossip?

Unidentified Company Representative

Well, it’s not an agent focused string I mean there obviously in any given market you can find somebody who is doing something that’s potentially problematic whether the recent headlines at the UnionPay wireless terminals and a few other things but those usually selective cases where individuals are violating regulations.

Brett Reiss - Janney Montgomery Scott LLC

Okay. And…

Unidentified Company Representative

And I sure it’s not broad thing that should be affecting us.

Brett Reiss - Janney Montgomery Scott LLC

Okay. The increased tensions with China and her neighbors in the South China Sea, is something like that if it escalates will that impact the traffic flow to Macau or that’s in a different part of the geography in Macau just like Goldman River rolls on?

Unidentified Company Representative

Well, [Multiple Speakers] to answer it’s obviously if there is major escalation of core sale the problematic are being to think it wouldn’t but the currency exchange that is going on has not seem to affected Macau, where we potentially are seeing an impact right now is that unless situations stabilizes in Vietnam for example and to lesser extent it may affect the Philippines as well, that could be in reluctance for Chinese visitors to travel outside of China and Macau. So I think right now it seems to be more impactful to the secondary gaming locations rather than to Macau itself.

Unidentified Company Representative

I think it will be beneficial to the Macau market, because instead of [indiscernible] they will just stay within China and then will go to Macau. What I think will affect us the most maybe the weather conditions. Like, in May, we have like heavy rains for about 10 to 12 days and that offset was like the traffic there will be situation in Macau.

Brett Reiss - Janney Montgomery Scott LLC

Right.

Unidentified Company Representative

Not political situation, the weather condition may have some effect like we have typhoon, we have like heavy rain, like wet rain or black rain also like alarm signals that was like in Macau.

Brett Reiss - Janney Montgomery Scott LLC

Right, I appreciate that. And just one final one. Are you able to prior to the Hong Kong listing reach out to the Chinese brokerage firms to acquaint them with your story, so that when we get the listing of the company, can hit the ground running in terms of reaching out to new shareholder constituencies.

Unidentified Company Representative

We are planning for different road shows for the coming months, and China is also in our timetable in our agenda.

Operator

(Operator Instructions). There are no further questions at this time; I’d like to turn it back to our speakers for any additional or closing remarks.

Unidentified Company Representative

Thank you everyone for attending today’s earnings call and for your continued interest IKGH, we’re out of questions, so if we didn’t answer anything you’re interested in learning we’d be happy to follow up with you. Please reach us via phone or email and we’ll probably get back to you. Thanks everyone, have a great day. Bye.

Operator

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

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