Entertainment Gaming CEO Discusses Q4 2010 Results - Earnings Call Transcript

Mar.11.11 | About: Entertainment Gaming (EGT)

Entertainment Gaming Asia Inc. (NASDAQ:EGT)

Q4 2010 Earnings Call

March 11, 2011 8:30 AM ET

Executives

Traci Mangini – Senior Vice President, Corporate Finance

Clarence Chung – Chairman and CEO

Andy Tsui – Chief Accounting Officer

Analysts

Mark Johnson – Private Investor

Paul Sonz – Sonz Partners

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Entertainment Gaming Asia Fourth Quarter and 2010 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, Friday, March 11, 2011. I would now like to turn the conference over to Ms. Traci Mangini. Please go ahead.

Traci Mangini

Thank you, Frank, 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 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 publically update or revise any forward-looking statements.

Now, for the agenda for todays call. First, Clarence will discuss the highlight of our 2010 fiscal year financial performance and corporate developments. Following that, Andy will review in more detail our financial results for both the fourth quarter and fiscal year. Clarence will then conclude our prepared remarks with an update on our growth plans and -- for our gaming operations. We will then be pleased to take your questions.

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

Clarence Chung

Thank you, Traci, and good morning, everyone. 2010 was a transformational year for the company -- strong financial performance and significant corporate achievements that have positioned us to execute on our growth strategy of developing and operating regional casinos in the emerging and dynamic market of Indo-China. I would like to take this opportunity to highlight some of our key achievement during the 2010 fiscal year.

We post strong improvement in our core participation operations. For the 2010 fiscal year we achieved $14.3 million more than doubled the 2009 level. This impressive growth was driven by both strong improvement in average net win per unit per day and an increase in installed machine.

Consolidated average net wins per unit per day was $117 for the fiscal year, up a 31% from the prior year. This improvement was achieved on a 19% increase in installed machine base as we ended the year with nearly 1,550 seats in operation, a primarily contributor to the strong performance was our operation at NagaWorld.

During 2010, we planned our gaming operations at NagaWorld to 670 gaming machine seats and maintained average daily net win per unit at these venues of approximately $200 for the year. This has provided us strong revenue and cash flows, and enabled us to [recoup] in August 2010 all commitment seats previously paid to NagaWorld.

After dramatic cost reduction in 2009, we reduced cash SG&A expenses an additional 23% during 2010 and this so, while improving our operating efficiency. With the strong improvement in whole gaming revenues in our aggressive costs reduction, we achieved dramatic growth in adjusted EBITDA, which we defined as earnings before interest, taxes, depreciation, amortization and non-cash expenses. Adjusted EBITDA was $8.2 million for the 2010 fiscal year, up from $33,000 in the prior year.

During the third quarter of 2010, we successfully negotiated a favorable tax structure with the Cambodian government for the 2010 year. Under which we paid only a fixed obligation tax to the Cambodian government instead of paying income tax rate on the profit of our Cambodian operations. We currently finalizing a tax arrangement similarly structured for this 2011 year.

Improvement in cash flows from operations resulted in us more than doubling our cash on hand. With cash and cash equivalents reaching $10.2 million as of December 31, 2010, compared to $4.2 million as of December 31, 2009. We’re continues to build on our cash position from cash flows from operation so far in 2011, with cash and cash equivalents reaching approximately $12 million as of February 28, 2011.

We also streamlined our balance sheet through an elective quasi-reorganization effective December 31, 2010. Utilizing this fresh start account method, we have eliminated our cumulative deficit in retained earnings against additional paid-in capital. Importantly, the quasi-reorganization adjustments had no effect on our cash flow and the resulted in a streamline balance sheet, which will further reflect the progress of our business operation.

With the improvement and accomplishment, Entertainment Gaming Asia enters 2011 a transformed company focused on the future.

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 the fourth quarter of 2010 was $6.1 million, up 35% compared to $4.5 million in the fourth quarter of 2009. Revenue growth was primarily driven by our gaming participation operations, as well as improvement in our non-gaming Dolphin operations, fully offset by decline in a gaming chip sale.

Gaming participation revenue was $3.8 million for the fourth quarter of 2010, up 55% compared to $2.5 million in the fourth quarter of 2009.

Consolidated average daily net win per unit improved to $119, up 13% from $105 in the fourth quarter of 2009. Our installed base of machine seats in the operation as of December 31, 2010 was 1,547 seats, an increase of 19% from 1,299 seats as of December 31, 2009.

Gaming participation revenue from Cambodia, which consists primarily of our operation at NagaWorld, increased to approximately $2.9 million for the fourth quarter of 2010, nearly doubled the fourth quarter 2009 level of $1.5 million, reflecting consistently strong average win per unit and higher installed machine base at NagaWorld.

Average net win per unit in Cambodia was $197 for the fourth quarter of 2010, up 1% from $196 in the fourth quarter of 2009. Our installed base of machine seats in operation in Cambodia as of December31, 2010 was 680, which includes 10 seats at one venue during the soft opening. This represents increase of 55% from 440 seats as of December 31, 2009.

In the Philippines, gaming participation revenue for the fourth quarter of 2010 was approximately $896,000, down 8% from the fourth quarter 2009 level of $952,000. Average net win for the fourth quarter for the Philippines was $58, up 2% from $57 in the fourth quarter of 2009. Our installed base and machine seats in operation in the Philippines was 867 seats as of December 31, 2010, an increase of 1% from 859 seats as of December 31, 2009

Philippines gaming participation revenue decline on year-over-year basis despite of modest increase in average net win per day and installed machine basis, due to a revenue catch up in the fourth quarter of 2009 with the change in revenue recognition from cash to an accrual basis for one venue.

Our Dolphin table game division mainly gaining chips and track, which experience since lumpy sales volumes, contribute approximately $295,000 for the fourth quarter, down from $675,000 in the year go period.

Our Dolphin non-gaming division which principally consists of manufacture and sale of automotive parts contributed revenue of $2 million during the fourth quarter, up 45% from $1.4 million in the fourth quarter of 2009, due to improving economy and auto industry in Australia.

Cash SG&A expenses for the quarter of 2010 was $1.6 million, in line with our guiding range of $1.5 to $1.8 million. Cash SG&A expenses decreased 4% from the prior year period. Adjust EBITDA was $2.5 million for the fourth quarter of 2010, compared to $808,000 in the fourth quarter of 2009.

We record a tax benefit of approximately $800,000 in the fourth quarter 2010, compared to a tax expenses approximately $119,000 in the fourth quarter of 2009. The fourth quarter 2010 benefit include a one-time tax benefit primarily due to the adjustment of deferred tax liability from the impairment of intangible assets and discharge of tax exposures asset deregistration of a foreign subsidiary.

Our consolidated net loss for the quarter was $2.7 million or $0.02 per share on a weighted average share count of 116 million shares. The net loss include a non-cash impairment charge of $3.1 million or $0.03 per share during the fourth quarter of 2010 related to the write-down of certain Dolphin intangible and fixed assets item as the current carrying value of the assets was higher than the expected value of the projected future cash flows.

This compared to a net loss for the fourth quarter of 2009 of $16.3 million or $0.14 per shares on a weighted average share count of 115 million shares, a net loss for the fourth quarter of 2009 include a non-cash impairment charge related to gaining asset of $13.7 million or $0.12 per share.

Now turning to our 2010 fiscal year performance. Total revenue was $22.2 million, up 42% from $15.6 million in the 2009 fiscal year. Revenue growth was primary driven by our gaming participation operations, as well as improvement in our non-gaming Dolphin operations. This was partly offset by decline in the gaming chip sales primarily due to a large gaming chip ordered delivered in 2009 to a new casino opening in Macau.

Gaming participation revenue was $14.3 million for the 2010 fiscal year, compared to $7 million in the 2009 fiscal year driven by a 31% increase in a consolidated average daily net win per unit to $117 and a 19% increase in installed base of machine seats during the year.

Gaming participation revenue from Cambodia which almost exclusively consist our operation in NagaWorld increased to approximately $10.8 million for 2010 fiscal year, compared to $3.9 million in 2009 fiscal year. This reflects a consistently strong average net win per unit of $202 for the year at this venue, up 16% from the prior year and higher installed base at NagaWorld compared to the prior year.

In the Philippines, gaming participation revenue for 2010 fiscal year was approximately $3.5 million, up 14% from the 2009 fiscal year level of $3.1 million. Consolidated average net win per day was $57, up 2% from the prior year and in machine installed base was 867 seats as of December 31, 2010, up 1% from December 31, 2009.

Philippine gaming participation revenue increased a disproportionary greater weighted daily average net win per day and installed machine based mainly due to the full year impact of two newly open venue in late 2009.

Our Dolphin table games product contribute $1.3 million for the year, down from $4.5 million in the year ago period where we delivered a large chip order for a new casino opening in Macau.

Our Dolphin non-gaming division contributed revenue of $6.6 million for the year, up 61% from $4.1 million in the fiscal year 2009 due to improvements in the overall Australian economy, as well as automotive industry.

Cash SG&A expenses for the 2010 fiscal year was $5.9 million, a decrease of 23% from the prior year due to aggressive cost reduction initiative.

Adjusted EBITDA for the 2010 fiscal year was $8.2 million, compared to $33,000 in the 2009 fiscal year. We record a tax benefit of approximately $665,000 in 2010 fiscal year compared to tax expenses of approximately $486,000 in 2009 fiscal year.

The benefits for the 2010 fiscal year was the resell of the one-time benefit recorded in the fourth quarter and the favorable tax incentive arrangement which we negotiated with the Cambodia government for the 2010 fiscal year.

Our consolidated net loss for the fiscal year was approximately $5.2 million or $0.05 per share on a weighted average share count of 115.7 million shares, excluding the aforementioned non-cash impairment charge of $3.1 million in the fourth quarter 2010. We reported a net loss of $0.02 per share for the 2010 fiscal year.

This compares to a net loss of $26.4 million or $0.23 per share on a weighted average count of 115 million shares for the 2009 fiscal year. Excluding the aforementioned non-cash impairment charge of $13.7 million in the fourth quarter of 2009, we recorded net loss of $12.7 million or $0.11 per shares for the 2009 fiscal year.

Turning to the balance sheet. As of December 31, 2010, we have a total of $10.2 million in cash and cash equivalents. This compared to $4.2 million as of December 31, 2009, the increase in the cash balance was the result of strong cash flow from our NagaWorld operations partly offset by capital expenditures for the gaming machine purchases timing for the NagaWorld expansion and the purchase on land for our casino project in the Takeo Province of Cambodia.

We have $9.2 million in debt as of December 31, 2010. This debt is held in the form of an unsecured promissory note issued to a largest shareholder EGT Entertainment Holding Limited, a wholly owned subsidiary of Melco International. This note has been amended under safer returns to us [three times in the past]. And unless, there is further amendments will begin making principal and interest payment in July 2011 at approximate amount of $530,000 per month for a period of 18 months.

I would now turn the call back over to Clarence to discuss our casino development plans. Clarence?

Clarence Chung

Thank you, Andy. Our improving business operations and cost structure as resulted in solid recurring positive cash flows on operations and a growing cash position. It enabled us to invest in our existing operations and pursue our growth opportunities, primarily the development and operations of casinos under the Dreamworld brand in the emerging gaming markets of Indo-China.

We’re making solid progress on [DC] casino development plan, on March 8, 2011, we announced plans to develop and operate a casino with table games, as well as economic gaming machines in the Kampot province of Cambodia, strategically located near the Vietnam border. Expected to open in the fourth quarter of 2011, Dreamworld casino Kampot is anticipated to contribute to near-term earnings and further establish our footprint in the Dreamworld brands in our target markets.

Further, capital expenditures for the initial phase for Dreamworld casino Kampot are expected to be minimal at less than $1 million, as we are sporting the gaming machines from inventory. While indeed, this is a relatively small amount of money compared to investments in more mature gaming market. It thus enabled us to build a single storey quality structure which we believe will compare [safer pay] to the local small casinos in the area and enable us to maintain well-positioned to actively pursue additional gaming projects in the Indo-China markets.

Currently, we are in discussions on several new strategic projects in the region to achieve our growth objective. This project include a strong venues within an entertainment center, a standalone strong venues and a casino resort.

The casino resort project is the same one we referenced on our third quarter earnings release and Form 10-Q filing. This is a large project in a strategic locations in Indo-China and involve multiple bodies with varying interest and concerns. As a result, the negotiation process is taking longer than seriously expenses.

Give this attractive pipeline of potential opportunities and our limited resources at present. We have desired to slow development on the previously announced casino projects in the Takeo Province of Cambodia. In order to progress our existing resources on both projects, which we believe offer the highest short-term returns potential.

In summary, over the last two years, we have successfully implemented our strategic initiatives to refocus our business model, streamline our operating structure and improving our financial flexibility, as such we enter 2011 a transformed company with a solid base for growth, with a strong local market presence, operational expertise and attractive pipelines of potential opportunities in the emerging gaming markets in Asia. We are excited about the future.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from [Mark Johnson], Private Investor. Please proceed.

Mark Johnson – Private Investor

Hi, Clarence. Given your pipeline, it seems you may need capital. Would you consider an equity raise on to your shelf and is that currently effective?

Clarence Chung

Yeah. Thank you for the question. I think when possible we intent to fund our growth strategy from our cash flow from operations and cash on hands. As you can see, we have $12 million at the end of February. However, should we commit to large projects such as the strategic casino project, I mentioned or to the concurrent development of valuable gaming project, we may require external financing.

In this situation, we would examine all financing options including the debt and equity and proceed in a manner that would maximize returns and shareholders value. I think, in order to improve our flexibilities in financing options over the next several years, in November 2010, we filed a Form F-3 registration statement or a shelf.

At present, the shelf is not effective and we have not issued any shares under that shelf as there are -- and there are still minor changes that require in amendment through the filings and this is (inaudible) practice and we will anticipate to file these amendments shortly.

I think we also realized that some investors may have concern about the dilutive impact of an equity raise. At this point, I would like to explain and say that this management team including myself, all shareholders in the company and obviously we’ll act in the most prudent manner possible in the event that we do need to secure projects which provide the returns to warrant an equity raise.

And also lastly, I think it’s also worth to repeating that we are gradually building up our cash from corporation and indeed, the last couple of months the run rate of cash building is above a $1 million in excess cash from operations. This along with the fact that we have structured our gaming development, project in phases, so as to spread out the payment of CapEx to provide us with greater financial flexibility while we pursue our growth strategy.

Mark Johnson – Private Investor

Thank you, Clarence.

Clarence Chung

Thank you.

Operator

(Operator Instructions) We have a question from Paul Sonz from Sonz Partners. Please proceed.

Paul Sonz – Sonz Partners

Good morning. I wanted to discuss the new venture that you just announced, as it is going to -- it is only the allocation of $1 million is it going to be substantial enough --indefinite to be worthwhile considering the time and management that will be involved in running it?

Clarence Chung

Hi, Paul. I think -- yeah thanks for the question, and indeed I think the answer is [strong] as this is. Yeah, definitely because -- well as I mentioned this is a strategic border immigration between Vietnam and Cambodia, and also given the fact that we are venturing into a expended -- well this is small though if you like, so indeed -- I think it would also be a good venture for us to start with more, but having said that this one has also a good potential.

So, indeed, I would say that while this is something that well we want to not need to build something more than enough or sufficient for that purpose. So, indeed, that’s why I think while the CapEx (inaudible) is smaller, but it still has the great potentials for giving the returns as well as building up also our Dreamworld brand in the strategic locations in the border areas et cetera. So, yeah, I would say definitely it is worthwhile for us to kick start it.

Paul Sonz – Sonz Partners

Do you think that going forward the investment strategy will be one of having many smaller clubs such as this as opposed to a more substantial facility or do you think this is just an introductory step?

Clarence Chung

I would say it is a combination of both because as you say it all depends on whether or not that particular area is -- well the stage of that development in that particular area warrants what kind of a property to be there. So, again, as I said I would rather be with some good enough property for that particular area, and in some of the other potential projects that we are looking at, Paul that some of those -- well the potential larger, that’s why we are committing or we are planning to build a larger facility to start with.

So, again, as I said was the economic role in that particular region is expending rapidly, which in other words well we want to grow our business with the economic growth and in the economy of that area. So, indeed some -- you might see -- could be smaller, but then, well good enough for the purpose and for the time being, but then some it will be a larger investment.

Paul Sonz – Sonz Partners

I understand this new facility will be relatively close to a much larger, very impressive resort, how does that factor into your thinking?

Clarence Chung

You mean the one in Kampot?

Paul Sonz – Sonz Partners

Yeah.

Clarence Chung

Well, it is -- I am not sure well, which resort you are referring to though --

Paul Sonz – Sonz Partners

I think that’s the [Huts Inn]?

Clarence Chung

The [Huts Inn], okay. Well, what --

Paul Sonz – Sonz Partners

I forget, I apologize, my pronunciation, I am sure is incorrect. But -- the [Huts Inn] is right. [Huts Inn] is the city of the area on the Vietnam side and their content is closed to (inaudible) which is a Cambodia side which is a quite a beautiful beaches and is kind of a destination.

Clarence Chung

Yeah. But your question is well -- for instance it’s closed to that resort area, how would that impact our element?

Paul Sonz – Sonz Partners

Yeah.

Clarence Chung

But I would say again, well I think that’s the beauty of it. We have a one hectares of land and we do not need to build, well everything in they want or Phase I. So in other words, can start smaller and then try to see the market and if the market demand was good, but then we can build -- we always have the option for us to quickly building other facilities whether or not it’s to expand the casino or whether or not we do some complementary structure like hotel et cetera. other entertainment facilities, related facilities et cetera.

So, that we can also capture the opportunity. So, I would say that well, our partner, in this case, is very confident in what we are planning to do. So in this, he would -- they are very supportive and then they know that they don’t have any complain or problem that we just feel Phase I well on a portion of the one hectare, and I think that’s also good for us because then we can do out – do not need to commit that much of a capital at day one, so that we allow certain type of facilities for us to look at other projects. So that we can then, sort of, well, build up our brand in a much quicker way.

Paul Sonz – Sonz Partners

One final question, could you give us a little bit more detail on Dolphin and then on the business, both the automotive side and the Plaques?

Clarence Chung

Yeah. Certainly. Well in this, I think, Dolphin for the last two years we have replaced the general manager, then the new general manager has gone in over about one year now, and we have also trying to streamline and trying to do a little bit of the organization restructuring.

So all in all, I think I would say the auto parts business somehow is quite complement to the gaming chips because the auto parts, they are – it’s a relatively steady order and while the Australia market and economy is picking up -- indeed that we are getting more and more orders from that area, from the non-gaming area. And also, as I explained last time we also expanded into other non-gaming products apart from auto parts.

On the other hand the gaming chip side, well given the -- we have a big City of Dreams orders two years ago, and we are still working at quite a couple of the new orders and indeed I think while we hope we can continue to build on what we have done and indeed we, are as I mentioned earlier, that we have developed that plaque also for commercial production.

So, well all in all, it’s picking up, but it’s not as good as the gaming participation business well in terms of the ramping. But they are – we are working hard in this area at work -- you can see the operations they are self contained and do not need any of our assistance in terms of financial assistance.

Paul Sonz – Sonz Partners

All right. Thank you very much.

Clarence Chung

Thank you, Paul.

Operator

There seems to be no further questions at this time.

Clarence Chung

Good. Thank you, Operator. We would like to thank our shareholders for their ongoing support. We look forward to updating you on our progress in the near future. 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. Have a great day, everybody.

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