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Entertainment Gaming Asia Inc. (NASDAQ:EGT)

Q2 2011 Earnings Call

August 9, 2011; 08:30 am ET


Clarence Chung - Chairman & Chief Executive Officer

Andy Tsui - Chief Accounting Officer

Traci Mangini - Senior Vice President of Corporate Finance


Jim Crab (ph) - Private Investor


Ladies and gentlemen, thank you for standing by and welcome to the Entertainment Gaming Asia Incorporated, second quarter 2011 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, Tuesday, August 9, 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, our Chairman and Chief Executive Officer; and Andy Tsui, our 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 involve risk 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 statement.

Now, the agenda for today’s call will be as follows: First, Clarence will discuss the highlights of our second quarter of 2011 financial performance and corporate developments. Following that, Andy will review in more detail our financial results for the quarter. Clarence will then conclude our prepared remarks and then update on our growth plans for our gaming operations. We would 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. I’m please to report that Entertainment Gaming Asia has reported another solid quarter of operating results and record gaming participation performance, while we remain focused on the growth strategies to develop and operate the regional casinos in the emerging and growing markets of Indo-China.

Before we discuss the details of our growth plans, I would like to take this opportunity to highlight some of our key financial results during the second quarter of 2011 and recent corporate development.

Total gaming participation revenues for the second quarter of 2011 was $4.6 million, a new record for the company. This represents 29% from the same period last year. This strong growth was driven by record high, consolidated average net win of $147 per seat, driven primarily by our operations at NagaWorld, which achieved average net win of $21.50 per seat for the quarter, as a result of targeted marketing to customers, as well as machine mix improvements.

Cash SG&A was $1.2 million for the quarter, down 20% from the same period last year, reflecting our strict cost control efforts. Adjusted EBITDA was $3.3 million for the second quarter, which was well more than double the $1.4 million achieved in the same period last year and represents a solid annualized EBITDA run rate for the company.

We achieved positive GAAP earnings with net income of $307,000, which notably includes approximately $520,000 of one-time non-cash expenses for Director and key employee performance during the period.

We have significantly improved our cash flow from operations, which has enabled us to continue to build our cash position with cash and cash equivalents reaching $14 million as of June 30, 2011 compared to $10.2 million as of December 31, 2010. Our healthy cash position and improved cash flows from operations enable us to repay our outstanding notes payable, thereby strengthening (inaudible) through the redemption in debt, while maintaining the ability to execute our existing growth trends.

As you can see, we continue to post improvement in our financial performance and have accomplished this while processing on our casino development trend, which we believe will drive near term returns and long term growth for the company.

We will discuss our casino development trends in a moment, but first, I would like to turn the call over to Andy, to review the financial results in more detail. Andy.

Andy (Kin Ming) Tsui

Thank you Clarence and good morning everyone. Before we discuss the details of the second quarter of 2011 financial results, I would like to remind investors that effective at the beginning of 2011 we reclassified our reported operating segments into two divisions; gaming operations, which include our gaming participation business and future casino development operations and other products, which consist of the total operating divisions, formerly called table games and non-gaming products. These changes do not reflect any change in focus of the company and all new reporting segment information has been applied retroactively to other periods discussed.

Total revenue for the second quarter of 2011 was $6.7 million up 33% compared to $5.1 million in the second quarter of 2010. Revenue growth was primary driven by our gaming participation operation, as well as improvement in our other product operations.

Gaming participation revenue was a record $4.56 million for the second quarter of 2011, up 29% compared to $3.5 million in the second quarter of 2010, driven by strong improvement in average win per machine.

Consolidated average daily net win per unit for the quarter improved to a record high of $147, up 28% from $115 in the second quarter of 2010. Average net win per day figures exclude EGMs operating under a new venue soft launch or when the venue’s revenue is collected on a cash rather than accrual basis.

For the second quarter of 2011, 156 seats was excluded from the net win calculation. Where these seats included in the calculations, average consolidated net win per day for this period would have been $139. Our installed base of electronic gaming machine seating operations as of June 30, 2011, was 1,502 seats, packed with the installed basis as of June 30, 2010.

Gaming participation revenue from Cambodia, which consists primarily of our operations at NagaWorld, increased to approximately $3.4 million for the second quarter of 2011, up 42% from $2.6 million in the second quarter of 2010, reflecting strong average win per unit.

Average net win per unit in Cambodia was $250 for the second quarter of 2011, up 28% from $196 in the second quarter of 2010. Our installed base of machine seating operation in Cambodia as of June 30, 2011 was 718 seats, which included 60 seats at one venue during it’s soft open period. This represents an increase of 15% from 624 seats as of June 30, 2010.

We have recently experiences some temporary fluctuation in the operating data machine at Nagaworld to change the machine mix and the machines upgrades as part of our effort to drive consumer improvement in operating performance at this venue.

In the Philippines, gaming participation revenue for the second quarter of 2011 was approximately $836,000, down 9% from the second quarter of 2010 level of $919,000. The decline in the second quarter of 2011 revenue was primarily due to the April closure of one venue, while the component was approximately 121 EGM seats as well as the deferred revenue recognition from one venue was 96 EGM seats in the Philippines as collection from this venue is not yet reasonably assured.

We continue to explore opportunity to deploy the machines from the venue that was closed during the quarter and we made active engagement discussions with the venue owner for which we recognize revenue on a cash basis, another rich and amicable solutions that will allow us to resume revenue recognitions on an accrual basis.

Average net wins for the Philippines was $61 for the second quarter of 2011, up 3% from $59 in the second quarter of 2010. Our installed base of machine seats in operation in the Philippines was 784 seats as of June 30, 2011, a decrease of 11% from 878 seats as of June 30, 2010. This decrease was primarily the result of the closure of the governmental (ph) venue during the second quarter of 2011.

Our other product divisions, mainly the manufacture and sale of gaming chips and plaques and non-gaming products such as automotive components, contribute approximately $2.2 million revenue to the second quarter of 2011, up from $1.5 million in the year ago period, primarily driven by the improving economy in Australia and rebound in it’s automotive industry.

Cash based SG&A expenses for the second quarter of 2011 was $1.2 million, down 20% from the prior year period. The strong revenue and strict cost control we saw in adjusted EBITDA, which we defined as Earnings Before Interest, Taxes, Depreciation, Amortization and Non-Cash Expenses are $3.3 million during the second quarter of 2011, which compared to $1.4 million in the second quarter of 2010.

Our consolidated net income for the second quarter of 2011 was $307,000. This includes approximately $520,000 in one-time non-cash stock compensation expenses during the quarter, paid to Director and key employees. This compared to a net loss of $1.5 million for the second quarter of 2010.

Turning to the balance sheet, as of June 30, 2011, we have a total of $14 million in cash and cash equivalents. This compares to $10.2 million as of December 31, 2010. The increase in cash balance was a result of strong cash flow from gaming participation operation, partially offset by capital expenditures for the gaming machine purchased to enhance our participation business and payment related to our casino development projects.

We had $9.2 million in debt as of June 30, 2011. This debt is held in form of an unsecured promissory note issued to a larger shareholder, EGT Entertainment Holding Limited, a wholly owned subsidiary of Melco International. According to the terms of the note, we began making principal and interest payments in the third quarters. Monthly payments are approximately $530,000 and will continue through December 2012, at which time the notes will be repaid in full.

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

Clarence (Yuk Man) Chung

Thank you, Andy. With meaningful recurring cash flows from operations and improved and healthy cash position and efficient operating structure, we’ve established a solid base that allows us to continue to invest in our existing operations and pursue our growth objective, primarily the development and operations of casinos under the Dreamworld brand in the emerging gaming markets of Indo-China.

We believe the Indo-China region presents attractive growth opportunities for our casino development plans. Certain of these markets, which we likened (ph) to China not too long ago, by experiencing rapid economic growth and our growth is to position ourselves to grow with these markets.

Thirdly, we have two projects in the early development stages. They are our Kampot project and Pailin project. These regional style casino projects are strategically located in the region and provided us the ability to expand and grow with markets demand. Our Kampot project is located in the Kampot province of Cambodia near the Vietnam boarder. The initial phase of the casino is expected to include up to 14 table games and 25 gaming machine seats.

The Kampot project will be developed under a joint venture company owned by us and local landowner who owns the property upon which the casino will be built. The local partner will contribute the land and we will have exclusive management rights and controls over the development in operation of the casino, as well as management and bolting (ph) right and controls over the joint venture company. We and the local partner will share the net revenue of the joint venture, which is the total growth revenues of the casino (inaudible) any payouts to customers, operating expenses and taxes on a 60/40 basis respectively.

We have secured the casino license for this project and necessary permits to begin the rental (ph) process. However, due to an early monsoon season with heavier and typical rainfall in the region. We are currently schedules to break ground in the fall of this year. Based on this timeline, we expect construction to be complete by the end of the first quarter 2012, but we will employ all the necessary means to accelerate the pace where possible.

For our Pailin projects, which is located on a growth trade root and border crossings with Thailand, we recently announced amended terms, which affords us the (inaudible) to achieve higher potential returns from this exciting project.

The initial phase of the Pailin project will consist of a casino with an estimated 23 table games and 40 gaming machine fees. Under the (inaudible) amended terms, they will own the project in which they will be developed on property leases from a local landowner. We will have exclusive management rights and control over the development and operations of the casino and we and the landowner will share in the profits before depreciation and then lease expense on a 80%, 20% basis respectively.

We have received the gaming license for these projects and have also completed the land survey and are in the process of doing the detailed design. We look forward to sharing more details of this project with you in the near future. We are currently in the application process for all our then necessary government construction related permits and expect to being construction in Q4, 2011. Based on this timeline, we expect the initial phase of the casinos to be operational in the summer of 2012.

In addition to these projects, we continue to actively peruse additional strategic projects to build an attractive pipeline of casino and gaming projects in the region. This includes a large casino project previously discussed on higher costs. We look forward to providing more detail on these projects as such plans materialize.

In summary, we remain focused on continuing to drive recurring meaningful cash flow from our existing operations and executing on our strategic growth initiated to develop and operate regional casinos under Dreamworld brand in the Indo-China region. We believe our Kampot and Pailin projects a specific steps in achieving this objective and should provide the potential for near-term earnings and long-term growth, while further establishing our footprint and the Dreamworld brand in our target markets.

With a much-improved financial base, we believe we have positions to capitalize of the opportunities in our target markets. With two projects in the early development stage and our active discussions with potential new projects in the region, we are working to selectively build a solid project pipeline, to achieve our goals of becoming a leading regional casino operator in the growing market of Indo-China.

Lets now open up the call to your questions. Operator.

Question-and-Answer Session


Thank you. (Operator Instructions) We have a question from the line of Jim Crab (ph), a Private Investor. Please proceed.

Jim Crab (ph) – Private Investor

Good morning. Clarence, have the repayments started? So have you made one of two payments back to Melco now during the quarter?

Clarence Chung

No, the first payment stars in July, Jim.

Jim Crab (ph) – Private Investor

So you made one payment in July and one in August.

Clarence Chung

And one in August.

Jim Crab (ph) – Private Investor

Okay, so the cash actually was reduced by $1 million because of the payments to Melco?

Clarence Chung

Well, that’s correct, but on the other hand we have $1 million cash inflow every month. Not what net-net is the…

Jim Crab (ph) – Private Investor

I understand that. I’ve been looking at the cash flow and I was assuming we would have wound up with somewhere around $15 million and I wasn’t sure if it went out in the form of CapEx or debt repayment. But we’ve paid $1 million in debt repayment this quarter. So the cash would have been -- if we were not repaying the debt, would have been approximately $15 million.

Andy Tsui

No Jim, there is some additional CapEx for our current Naga operation, as well as other costs associated with our casino project plan. That’s when we end up with $14 million. But that $1 million mix payment was actually made in July and August of third quarter.

Jim Crab (ph) – Private Investor

And that reduced the cash by that amount, is that correct.

Clarence Chung

Correct, correct.

Jim Crab (ph) – Private Investor

Okay and lets see, I noticed – I mean, you mentioned that you have changed the way your reporting now between the gaming and non-gaming. I don’t want to cause anybody alarm at Dolphin, but is that because there is something going on in terms of getting -- breaking the two out so that you Dolphin is sold. You will have kind of a road map of where things have been and where they are now.

Andy Tsui

I think they (inaudible) answers, because we try to make it more simple for readers. The gaming set, my primary focus on our participation gaming business, as well as the future casino develop and the other product basically consist of default and product into the gaming chip as well as the automotive components. So we try to simplify as much as we can and then make it clear for the readers for the financial statements.

Jim Crab (ph) – Private Investor

Okay, all right. And the stock comp, about $500,000 for the quarter, is that a continuing expense or is that…

Andy Tsui

No, as I mentioned in my notice, one time on cash expenses to Director as well as the key employees. It’s a one time on cash expense.

Jim Crab (ph) – Private Investor

Okay and did we have that in the first quarter as well.

Andy Tsui

No, not in that first quarter. We reported it in the second quarter based on the accounting standards.

Jim Crab (ph) – Private Investor

All right. Just when was the last time we took a charge for that. It seemed to me that – I though that was in the first quarter, but was it in the fourth quarter of last year that the bonuses were paid and all and there was some catch-up pay and some catch-up bonus and so on that had not been recognized before.

Clarence Chung

Well Jim, this is for the 2010 performance bonus. So indeed we did not pay anything in year 2010 and also the first quarter of 2011 and then the Board and the revision committee, they decided and that was paid in April 2011.

Jim Crab (ph) – Private Investor

I see, all right. Well then that explains – that’s great. Thank you.

Andy Tsui

Thank you.


(Operator Instructions) Mr. Chung, there seems to be no further questions at this time. Please continue with your presentation or closing remarks.

Yuk Man Chung

Thank you. 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.


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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