Entertainment Gaming Asia CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Entertainment Gaming (EGT)

Entertainment Gaming Asia, Inc. (NYSEMKT:EGT)

Q3 2010 Earnings Call

October 27, 2010 8:30 a.m. ET


Traci Mangini - SVP, Corporate Finance

Clarence Chung - Chairman and CEO

Andy Tsui - Chief Accounting Officer


James Crabbe - Private Investor

Paul Sonz – Sonz Partners


Welcome to the Entertainment Gaming Asia Third Quarter 2010 Earnings Conference Call. During the presentation all participants will be on a listen only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Wednesday, October 27, 2010.

It is now my pleasure to turn the conference over to Ms. Traci Mangini. Please go ahead.

Traci Mangini

Thank you, operator, and 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, 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 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 discuss the highlights of our third quarter earnings and then provide an update on our new growth plan for our gaming operations.

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 fourth quarter of 2010 and future outlook. We will then be pleased to take your questions.

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

Clarence Chung

Thank you Traci, and good morning, everyone. I am pleased to report another quarter of solid financial performance, and the achievement of positive GAAP earnings. This is an important milestone for the company following our successful positioning and streamlining of our operations and marks a new chapter in the company’s history. With solid recurring cash flows from all existing operations, we are now posed to embark on our exciting new growth strategies to expand our gaming business model, and become an owner and operator of Casinos in interactive and emerging gaming market in Asia.

I would now like to share some of the financial highlights of our third quarter performance.

Total Gaming Participation revenues for the third quarter of 2010, was a record $4.1 million, up 16% on the sequential basis, and more than doubled that of the year ago period. Its impressive growth was driven by improved consolidated average net win of $125 proceeds, and a slightly higher in-store gaming machine space.

We continue to adhere to our strict cost control, and as a results, cash SG&A was $1.3 million for the third quarter of 2010, below our party guardian’s range of 1.5 to $1.8 million, and down 10% from the prior quarter, 11% from a year-ago period.

Adjusted EBITDA, which we defined as earnings before interest, taxes, depreciation, amortization, and long-term expenses was $3 million for the third quarter of 2010, which is more than double of that of the prior quarter and represents much improved annual EBITDA run rate for the company.

Net income was $725,000 or $0.01 per share, which represented the first quarter of positive GAAP earnings since the company practice its new business model in September 2007.

Lastly, we continue to build our cash position during the quarter with the cash flow [inaudible] of $8.8 million, including 1 million housed in escrow for continue development activity, as of September 30, 2010, up from $6.4 million as of June 30, 2010 and $4.2 million as of December 31, 2009.

Our core gaming machine participation business in particular, our operations at NagaWorld has been a strong contributor to our improving performance. At NagaWorld, as of September 30, 2010, we had approximately 670 gaming machine seats in operation on fine casino floor space. This fulfills our total contracted machine placements at these venue, and represents remarkable growth in our in-store base since our first placement of approximately 200 machines in January of 2009.

Despite the growing in-store machine base during the recent quarter, average net win for units for our operations in NagaWorld has remained very strong.

Average net win for the quarter was $219 compared to $196 in the prior quarter and $187 in the prior year period. We attribute is to our targeted marketing efforts to build strong customer loyalty and the right machine mix.

The strong results at NagaWorld have resulted in attractive cash flows to us. For the first nine months of 2009 - 2010, our operations at NagaWorld have generated approximately $11 million in cash flow from operations. And as of mid-August 2010, we had recouped all commitment fees previously paid to NagaWorld.

Turning to the Philippines, we continue to focus on optimizing performance by refining and deploying our gaming machine base within these markets to focus assets on higher performing venues. As of September 30, 2010, we had 846 seats in operation across six venues.

Average net wins for our Philippines operations was $56 for the third quarter 2010, which was down 5% from the second quarter of 2010.

In addition to our call gaming participation gaming operation, we continue to focus on improving our Dolphin business. Dolphin Gaming Chips contributes to approximately $645,000 to the third quarter’s revenue and we have continued to step up our marketing efforts for our chips and clubs.

We believe we have better positioned ourselves to capitalize on the growth in the global gaming chip and parts market in the future.

Our Dolphin non-gaming operations, which principally consist of the manufacture and sells of automotive parts, posts strong gains as a result of the improving automotive industries and economy in Australia.

With our improving business operations and cost structure, we are now achieving positive cash flows from operations and have been improving our cash position. This enables us to reinvest in our existing operations and pursue a growth opportunity. Primarily, the development and operations of casinos under the DreamWorld brand, in selective emerging Asian gaming markets.

As discussed during our last earnings conference call, we have secured a gaming rights [inaudible] in the Kampong Cham providence of Cambodia at the Vietnam border upon which to build a casino hotel.

Also we have a assembled a project development team for our casino development plan and been working with architects on the conceptual details.

Further, we are actively pursuing additional casino development projects in the Indo-China Region, and are in the late stage discussion on the significant new project. Given our restrained capital resources, we are reevaluating the project timeline for the Takeo Project to diverge certain capital to these potential new projects, which we believe offer even greater short-term and medium-term returns potential.

While we are unable to provide any more details upon this potential project at this time, we look forward to updating you in the near future when the negotiations for this new project is finalized.

With that, let me turn the call over to Andy, to review the financial results in more detail, Andy.

Andy Tsui

Thank you Clarence, and good morning everyone. Total revenue for third quarter 2010 was $6.6 million compared to $5.1 million in the second quarter of 2010 and $3.6 million in the third quarter of 2009.

Gaming Machine Participation revenue was a record of $4.1 million for third quarter of 2010, compared to $3.5 million in the second quarter of 2010, and $1.8 million in the in the third quarter of 2009.

Consolidated average stating net win per unit includes $125 up $9 from $115 in the second quarter of 2010 and up 45% from $86 in the third quarter of 2009.

Our in-store base of machine seating operation, as of September 30, 2010 was 1,525 seats, an increase of 2% from 1,502 seats at June 30, 2010; an increase of 35% from 1,127 seats as of September 30, 2009.

Gaming Machine Participation revenue from Cambodia, which consist primarily of our operations in NagaWorld, increased to approximately $3.2 million for third quarter of 2010, up 23% from the second quarter of 2010 level of $2.6 million and nearly tripling from the third quarter of 2009 level of $1.1 million, reflecting consistently strong average win per unit, and high in-store machine base at NagaWorld.

Average net win per unit in Cambodia was $219 for third quarter of 2010, and up 12% from $196 in the second quarter in 2010, and up 17% from third quarter of 2009. Our in-store base of machine seat operation in Cambodia, as of September 30, 2010 was 679 seats, which includes 10 seats at Grand Golden during the soft opening period. This represents an increase of 9% from 624 seats as of June 30, 2010 and an increase of 76% from 385 seats as of September 30, 2009.

In the Philippines, Gaming Machine Participation revenue for third quarter of 2010 was approximately $877,000 down 5% from the second quarter of 2010 level of $919,000 and up 14% from the third quarter 2009 level of $770,000.

Average net win for the third quarter for the Philippines was $56 down 5% from $59 in the second quarter of 2010 and up 3% from $53 in the third quarter of 2009. Our in-store base of slot machine seats in operations in the Philippines was 846 seats as of September 30, 2010, a decrease of 4% from 878 seats as of June 30, 2010; an increase of 14% from 742 seats as of September 30, 2009.

Revenue for the quarter also include approximately $645,000 from our Dolphin Table Games product, namely gaming chips and parts which increases from $223,000 in the second quarter of 2010 period and from $572,000 in the year ago period.

In addition, our Dolphin Non-Gaming Division contributed revenue of $1.8 million during the quarter, up 45% from $1.3 million in the second quarter of 2010, and up 57% from 1.2 million in the third quarter of 2009.

Adjust EBITDA was $3 million for the third quarter of 2010 compared to 1.4 million for the second quarter of 2010 and $338,000 in the third quarter of 2009.

Cash SG&A expenses for the third quarter of 2010 was $1.3 million below our guidance range of 1.5 to $1.8 million. Cash SG&A expenses decreased 10% from the second quarter of 2010, and 11% from the prior year period due to aggressive cost reduction initiative increment during 2009.

We recorded a one-time tax benefit of approximately $320,000 in the third quarter of 2010, in respect of the granting of a tax incentive arrangement for our Cambodia operations in September 2010. The tax arrangement is effective from January 1, 2010 through December 31, 2010. Under this new tax arrangement, we are required to pay only a fixed allocation tax to the Cambodia Government instead of paying income tax based on the profit of our Cambodia operations.

Our consolidated net profits for the quarter was approximately 725,000 or $0.01 per share on a weighted-average share count of 115.9 million shares. This compared to a net loss for the second quarter of 2010, of $1.5 million or $0.01 per share on a weighted-average share count of 115.9 million shares.

The net loss for the third quarter of 2009 was $3.7 million or $0.03 per share on a weighted average count of 115 million shares.

Turning to the balance sheet, as of September 30, 2010, we have a total of 8.8 million in cash balance including 1 million held in escrow. This compared to $6.4 million as of June 30, 2009 and this increasing the balance was the result of strong cash flow of our NagaWorld operations; partly offset by capital expenditure for the gaming machine purchase for the NagaWorld expansion, and the remaining payment of $910,000 for the land purchase for our casino project in Cambodia.

I will now turn the call back to Clarence to discuss our fourth quarter 2010 guidance. Clarence?

Clarence Chung

Thank you, Andy. Before we open up the call to your questions, I would like to discuss our near-term outlook.

For the fourth quarter of 2010, we expect adjusted EBITDA consistent with third quarter 2010 level from existing operations while we execute on our strategic casino development growth trend and actively pursue additional projects.

Cash SG&A expense, at the low end of the range of 1.5 to $1.8 million. As cash balance of 7 to $8 million as of December 31, 2010, after giving effects to our anticipated payment of approximately 2 million in capital expenditure associated with our casino development project.

In summary, we have made great progress in striving continued improvement in operating financial performance. With quality recurring cash flows from all existing gaming operations, we have built a solid foundation from which to capitalize on the growth opportunities that exist in our market, and to achieve our goal of becoming the leading operators of regional casinos in interactive and emerging gaming markets in Asia.

We are actively pursuing attractive casino project in our targeted market that we believe will lead to solidifying our goal.

Let’s now open up the call to your question, operator.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Jim Crabbe, Private Investor. Please proceed with your question.

James Crabbe – Private Investor

Hi, Clarence. Good morning, everybody. Could you give us any more color on the Takeo Project in terms of when you expect to break ground there. And if that will be postponed by that new project, will you be starting construction and just taking it slower, or will you be postponing the beginning of the Takeo Project until this new project is underway?

Andy Tsui

Hi, Jim. It’s [Inaudible]. How are you?

James Crabbe – Private Investor

Very well, thank you.

Andy Tsui

Good morning to you.

James Crabbe – Private Investor

Great job in the quarter. Thank you.

Andy Tsui

Thank you. Thank you for all the support. Well, yeah, as I mentioned in the script, obviously we are doing the conceptive designs for the Takeo project, while on the other hand we are pursuing another even more exciting and in my view it’s an even better project. And with the limited resources that we have, probably if we landed on this new project in the near future, very near future, I think we’ll – the company will reassess how we can utilize and even better utilize the limited resources that we have.

So there may be a chance that if we landed on that new project in the very near future, then probably we might need to defer a little bit the kicking off of the Takeo Project. But that’s – I would say that we would – I would love to give more color to the shareholders in the next couple of weeks’ time, it should not be months. In that case, I think I will be in an even better position to inform the shareholders about the trends.

James Crabbe – Private Investor

Did you say in the next couple of weeks?

Andy Tsui

Yes. In the next couple of weeks, not months.

James Crabbe – Private Investor

Okay. Clearance, do you have any – when you go into a project like this, you obviously had some, at least minimum expectations. Can you share any of those with us? I know that you must have a wide range of – or have some kind of a range in which you expect these to operator and we can see by what happened in the Philippines versus Cambodia so far that they can be a very wide range in terms of daily wins and so on. What kind of a hurdle rate do you have as a minimum expectation to decide if it’s a good project to go ahead with?

Clarence Chung

Right. Well I think I’ve explained, or at least give some colors in the last earnings call in terms of the hurdle rate. So probably from the investment perspective, obviously we will not do anything – new investments with hurdle rates less than 20-25%.

The reason why is that we have quite a relatively wide range in terms of the WD, obviously that’s a – a lot of those are some sort of a carry forward from the previous management; so for instance, the Philippine venues.

So I would say that in the last two years we have tried very hard to set up and improve the operation. And again, I think what we have executed, in particular in the Cambodian market, that probably can give additional comfort to the various stakeholders, including our shareholders. And indeed, I think we are evaluating for our new project, and we will jump into it only if it is a good investment to the company. And in terms of our meeting, we’re obviously not, hopefully it’s not only just earning 20-25 hurdle, we generate a return.

James Crabbe – Private Investor

I don’t mean to take up all the time, here, but I do want to go on for just a couple more things. Do you expect, that if it were necessary, that you could extend the note yet further in order to – in order to get these two projects underway at the same time?

Clarence Chung

You mean the notes that we are paying, or using international or – yeah, again, I would – I must say that American International and [inaudible] International has been very supportive to us. And indeed, while they have been extended twice, the repayment of this. I can’t speak on their behalf, but obviously on the company’s perspective, from our perspective, we will try to extend it when needed.

But having said that, well given that we have a quite strong cash inflow, so indeed I think as Andy mentioned, we have a 9 million in the pockets right now and we are generating cash flows on the monthly basis.

I think, yeah, we are in a very good position in terms of considering expansion and new projects, CapEx, etcetera.

James Crabbe – Private Investor

Do you – not to change the tone of things, but do you have any kind of an update for us on where this lawsuit that is going – or where it might be, or has there been anything, any progress made on that? Can you talk about that?

Clarence Chung

Well, unfortunately, I cannot say a lot given the fact that it’s still in the preliminary stage and then while it’s nothing new to report but expect to say well obviously, we intend to vigorously defend ourselves against all the allegations.

James Crabbe – Private Investor

And last but not least, will the Chinese New Year have an impact on traffic in Cambodia and the Philippines? Or does it have that kind of an impact there?

Clarence Chung

Well, our experience is probably in the Chinese area there are increased traffic in Cambodia. And Philippines, yes or no. But definitely there is increase. We’ve been doing jointly marketing promotions over that period of time. So indeed, I would expect that would be the same in the coming Chinese New Year.

James Crabbe – Private Investor

Did you have any more – any plans or is there anything you can say in regards to any further expansion within NagaWorld? Is that – do you think we’re probably done there as far as expansion goes?

Clarence Chung

I would say that – well, we have completed our 670-machine contract there. And indeed, we have occupied basically the bulk of the prime area in their casino floor. So indeed, I think – well, the company has no plans at the moment to put more machines on the floor. But however, we are actively looking at other new-exciting projects that obviously one, well hopefully it will be another NagaWorld, but indeed obviously, one with over-attractive returns for our invested capitals and also give a little bit diversification from that perspective.

James Crabbe – Private Investor

I see. Thank you. Thank you very much.

Clarence Chung

Thank you.


(Operator Instructions) And our next question comes from the line of Paul Sonz from Sonz Partners. Please proceed with your question.

Paul Sonz – Sonz Partners

Good morning. A few question.

Clarence Chung

Hi, Paul.

Paul Sonz – Sonz Partners

Hello. A few questions. First, in Tagore. Is the change, there’s been recently I think some stand-up changes in Tagore in the Philippines, I wonder if this will have a beneficial effect on our operations there?

Clarence Chung

Yes. Paul, you’re right that there’s been changes in the senior management positions within the Tagore and obviously they are relatively new and indeed I think while we can’t speak on their behalf in terms of strategies and policies, etcerera, but indeed we will try to maintain a good relationship with the new management team.

In fact, I’ve met the new management team recently, so we would continue to maintain a good working relationship with them.

Paul Sonz – Sonz Partners

All right. Thank you. The second question is in terms of the capital constraint and opportunities to raise capital, I know in the past we’ve talked about selling the Dolphin Automotive aspect of the business. Is that still on as an option for raising capital?

Andy Tsui

Well, I would say that, well, again falling on what I just explained to Jim, indeed the company has 9 million in the bank and then we are generating part of the cash flow every month. So that gives us quite a good headwind in terms of expansion. If we find some exciting and attractive projects which we think it would be in the benefit of the company, certainly we will go for it. And then, while we accepting the cause and the benefits, if we cannot handle those with the internal sources of cash as well as the cash reserve that we have, then probably we might look out for alternative financing. I think under that condition, we will then only looking at alternative financing needs and options.

Paul Sonz – Sonz Partners

All right. Thank you. One last question. Could you explain the tax deal that you have, that I guess it saved us a little over $300,000 in this past quarter. I knew that there were – you were in discussions with the government for ongoing tax relief in the country.

But if I understood correctly, this is tax relief only for this calendar year?

Clarence Chung

Well, in fact the tax discussions, we need to get the clearance with the tax bills on an annual basis. So we’re clear for this year and that probably is at – kind of a precedent and you know, also the fact that we are – the revenues is up in the gaming nature. So probably we will try the same next year.

Paul Sonz – Sonz Partners

I see. So this is on a year-by-year basis?

Clarence Chung


Paul Sonz – Sonz Partners

I got it. All right. Thank you very much.

Clarence Chung

Thank you, Paul.


And there appear to be no further questions at this time. Please continue with your presentation or closing remarks.

Clarence Chung

Thank you all. We would like to thank your shareholders for their ongoing support. 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 as that you please disconnect your line. Have a great day everyone.

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