Entertainment Gaming Asia's (EGT) CEO Clarence Chung on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Entertainment Gaming (EGT)

Entertainment Gaming Asia Inc. (NASDAQ:EGT)

Q2 2014 Earnings Conference Call

August 7, 2014 8:30 AM ET

Executives

Traci Mangini - SVP, Corporate Finance

Clarence Chung - Chairman and CEO

Andy Tsui - Chief Accounting Officer

Analysts

Operator

Welcome to the Entertainment Gaming Asia Incorporated Second 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, August 7, 2014.

I would to turn the conference over to Traci Mangini. Please go ahead, ma'am.

Traci Mangini

Thank you, Gabriel. Good morning everyone. I'm Traci Mangini, Senior Vice President, 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 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 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; Clarence will first discuss the key points of our second quarter 2014 financial performance and our 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, please let me turn the call over to Clarence Chung. Clarence?

Clarence Chung

Thank you, Traci, and good morning everyone. For the second quarter of 2014, we posted quarterly sequential improvements in gaming operation revenue, adjusted EBITDA and net income from continuing operations.

Please allow me to address some of the key operations, and how they impacted the second quarter results. For gaming operations, revenues were $4.4 million, which was down from $5 million in the five year period, but up from $4.1 million in the prior sequential quarter. Our primary driver was our operations in NagaWorld. In the second quarter of 2014, NagaWorld average daily net wins per unit was $203, which compares to a particularly strong $256 in the prior year period. The decline was primarily due to the tough five year comparison and higher jackpot in the second quarter of 2014.

However, we posted marked improvements on $175 in average net wins in the first quarter of 2014, which was due to higher player traffic levels, as the protest in Phnom Penh area have been fairly contained.

Dreamworld Poipet, our slot club located near the Cambodia Thailand border that officially opened in May 2013, posted improvement in the second quarter of 2014, compared to the prior year and in sequential quarters. While volatilities in these markets continued during the second quarter, due to political unrest in Thailand, we have seen improvement in the level of VIP traffic. We continue to implement targeted marketing strategies to expand the premium and VIP player base, and remain focused on capturing a greater share of these markets.

In the Philippines, our performance was essentially unchanged with the same periods of last year, but improved materially from the first quarter of 2014. Due to our active marketing and machine management, we achieved a healthy $76 in the average daily net wins from these operations, despite increased competition in the market.

Turning to our gaming products division, which principally comprised the manufacture and sales of gaming, chips and plaques, we experienced some challenges in the same quarter, due to the equipment malfunctions as well as delay in the implementation of certain new automatic production equipments. We have resolved these specific issues and continued towards to build our sales pipeline, and improved the production efficiencies.

With our new branch in Hong Kong, we believe we believe we have better positioned ourselves amidst the major development of integrated casino resort in Asia, anticipated over the coming years; and we are optimistic about our potential to obtain large initial orders from some of the new casino openings in our markets.

As you may recall, we previously announced two meaningful new gaming chips and plaque orders in the Philippines, one for the New City of Dreams Manila and another for Phase 1A for Solaire Resort & Casino. These two orders represent a combined total of $4 million in revenue, which we intend to book in the second half of 2014. In addition, we have two distribution contracts with third party gaming suppliers, and are working to expand this business line to become a meaningful contributors to the gaming product's divisions earning.

Lastly, as previously announced, we ceased operations of Dreamworld Pailin in June 2014, and shortly after, entered into an agreement to sell 100% of the issued share capital of our wholly-owned Cambodian subsidiary that serves for the purpose of developing and operating the property.

In connection with the sale, we also entered into an agreement to terminate previous agreements with our partners in the operations. This transaction is expected to close within the next few months, pending certain government approvals.

I'd like to turn the call over to Andy, to discuss our second quarter of 2014 financial results in greater detail. Andy?

Andy Tsui

Thank you, Clarence, and good morning everyone. Due to the termination of Dreamworld Pailin operation, and the sale of the portion of our Dolphin business, dedicated to the manufacture, and sale of non-gaming products. All historical revenues and expenses from these assets, has been classified as discontinued operations.

We anticipate gains from the disposition of Dreamworld Pailin, is expected to be recognized when the transaction closes, which is anticipated [indiscernible] in the next few months.

Total revenue was approximately $4.9 million for the second quarter of 2014, a decrease of 5% compared to $5.2 million in the second quarter of 2013, as the decline in the gaming operation revenue was partially offset by an increase in gaming cross-sales.

Gaming operations revenue was approximately $4.4 million for the second quarter of 2014, down 12% compared to approximately $5 million for the second quarter of 2013. Gaming operation revenue for the second quarter period of 2014 and 2013, includes approximately $283,000 and $256,000 respectively in the service revenue related to the reimbursement of net share costs from the casino operation, which was grossed up for accounting purposes.

The decline in gaming operation revenue, was primarily due to lower average daily net wins from NagaWorld, partially offset by increased revenue contribution from Dreamworld Poipet, slot opened in March 2013, and had grand opening in May 2013.

Consolidated average net win per unit was $112 in the second quarter of 2014, down 17% from $135 in the prior year period. Our install base of gaming machine seats was 1,694 seats as of June 30th, 2014, up 4% from 1,632 seats as of June 30, 2013.

Gaming revenue from Cambodia was approximately $3.4 million for the second quarter 2014, down 16% from approximately $4 million in the prior year period, primarily due to a decline in NagaWorld average daily net win and improvements on Dreamworld Poipet.

Average daily net win per win in Cambodia was $130 for the quarter, down 23% from $169 in the second quarter 2013. The decline was primarily due to lower average daily net win at NagaWorld. NagaWorld gaming average net win was $203 for the second quarter, compared to $256 in the prior year period.

Gaming operation performance in the Philippines were relatively stable. Revenue was approximately $787,000 for the second quarter of 2014, down 2% from the second quarter of 2013 level of approximately $803,000. Average daily net win was $76 for the second quarter of 2014, up 3% from the $74 in a year ago period.

Revenue from the gaming products division was approximately $524,000 for the second quarter of 2014, compared to approximately $162,000 in the prior year period. The increase was due to higher sales volumes from existing customers compared to the prior year period, when experienced a shortened production period due to the time spent on the relocation of our production facility from Australia to Hong Kong.

Due to some production and efficiency related delay in the installation of certain automation equipment and expected machine issues, as gaming production division posted a gross margin loss of approximately $401,000 for the second quarter of 2014.

Adjusted EBITDA from continued operation, which we define as net loss or earnings from continued operations before interest, taxes, depreciation, amortization and non-cash expenses was approximately $2.1 million for the second quarter of 2014, which compared to approximately $2.3 million in the second quarter of 2013.

We reported net loss of $22,000 or breakeven per shares on a weighted average diluted share count of approximately $31.1 million in the second quarter of 2014. The second quarter 2014 net loss of $239,000 from discontinued Dreamworld Pailin operations. Excluding this, we report net income from continued operation of $217,000 or $0.01 per share for the second quarter of 2014. This compared to a net loss of $286,000 or $0.01 per share on a weighted average diluted share count of approximately $30.7 million for the second quarter of 2013. The second quarter 2013 net loss, includes a net loss of $378,000 from discontinued operation related to Dreamworld Pailin and the Dolphin product non-gaming product business sold in March 2013. Excluding this discontinued operations, we report net income from continued operations of $92,000 or breakeven per shares for the second quarter of 2013.

The increase in the net income from continued operation, was primarily the result of higher gross profit from the Philippine gaming operation, mainly due to increase in fully depreciated gaming assets, lower operating expenses largely due to a benefit of approximately $448,000 related to the reversal in the second quarter 2014 of a previously accrued one-time other tax liability for the Philippine operations. As well as a slight foreign currency gain in the second quarter of 2014, compared to a significant loss in the prior year period. This favorable differential of $263,000 was primarily due to strengthening of the U.S. dollar compared to certain foreign currency in the markets in which we operate in the prior year period. These factors was partially offset by lower revenue from NagaWorld.

Turning to the balance sheet as of June 30, 2014, we have a total of $4.7 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 $2.4 million in capital expenditure in the first half of 2014, which relates primarily to the equipment purchase for the Dolphin manufacturing plant, and slot machine purchases. As well as an increase in the use of working capital, in preparation for the upcoming Dolphin and chip plaque quarters. We have zero debt as of June 30, 2014.

I will now turn the call back over to Clarence. Clarence?

Clarence Chung

Thank you, Andy. We are focused on improving our operating performance and positioning the company for long term growth. An important aspect of this, is securing new projects in attractive markets. While there can be no assurance, that any new projects will be realized, we are actively seeking new opportunities in the service gaming markets that we believe could add meaningful scale to our operations.

We intend to pursue gaming projects for both, slot participations and casino and gaming slot developments.

For slot participation, we seek additional opportunities in certain markets in China and to place our slot machines in prime locations on the gaming floors of major casinos and/or hotels in our target markets. For casino developments, we seek projects in Indochina and other growing gaming markets in Asia, that will enable us to expand our market presence, and increase brand equity for our Dreamworld name.

We intend to resume projects that are relatively larger in size and investments than our previous Dreamworld projects, and in more established markets with stronger levels of existing metro player traffic.

Identifying and securing new projects takes time, and there is competition in quality projects. However, we are focused on expanding our gaming operations, and believe that our local market relationships and presence provide us advantages in this regard.

In addition, we believe our gaming products business offer a diversified revenue stream, with the potential to become a meaningful contributor to earnings. We are focused on continuing to expand our presence in our markets of Asia and Australia, but the major expansions in the development on the integrated casino resort 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, to better position us to capitalize on the growth opportunities in our markets.

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

Traci Mangini

Gabriel, are you there?

Question-and-Answer Session

Operator

(Operator Instructions). We do not have any questions at this time.

Clarence Chung

Okay. Well, thank you, operator. 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 very much.

Operator

Ladies and gentlemen, this 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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Entertainment Gaming (NASDAQ:EGT): Q2 EPS of $0.01. Revenue of $4.9M (-5.8% Y/Y)