Entertainment Gaming Asia, Inc. (NYSEMKT:EGT)
Q3 2011 Earnings Call
November 10, 2011, 08:30 a.m. ET
Traci Mangini - SVP, Corporate Finance
Clarence Chung - Chairman and CEO
Andy Tsui - CAO
Welcome to the Third 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 today Thursday, November 10, 2011.
It is now my pleasure to turn the conference over to Traci Mangini. Please go ahead.
Thank you, operator and good morning everyone. My name is Traci Mangini and I’m the 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, 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 third quarter 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 with an update on our growth plans for our gaming operations including the status of our existing casino project. We would then be pleased to take your questions.
With that, let me turn the call over to Clarence Chung. Clarence?
Thank you, Traci, and good morning everyone. I’m pleased to report that Entertainment Gaming Asia has reported another solid quarter of operating results with strong EGM participation revenues and consolidated average net win in our gaming participation operation and another quarter of positive GAAP earning.
With the healthy EBITDA run rate, we have maintained a solid cash positions while investing in our strategic growth plan and strengthening our balance sheet. Further, we remain focused in enhancing overall returns of our core existing operation and executing our casino development growth strategies within emerging gaming market in the Indo-China region.
Before we discuss an update of our casino growth trend, I’d like to take this opportunity to highlight some of our key financial results during the third quarter of 2011 and recent corporate development.
Total gaming participation revenues for the third quarter of 2011 was $4.4 million, this represent 7% growth from the same period last year. This growth was driven by consolidated average net win of $145 proceeds due primarily by our operations at NagaWorld, which achieved average net wins of $233 for the quarter. As a result of positive marketing to customers as well as machine mix improvement.
Adjusted EBITDA was $2.8 million for the third quarter, essentially in line with our current run rate of approximately $1 million for the month. We achieved another quarter of positive GAAP earnings with net income of $647,000. We have stronger flow from operations. We have maintained a cash possessions of approximately 14 million as of September 30, 2011, up from $10.2 million as of December 31, 2010, while we are using our debt and investing in our growth trend. While we are focused on our casino development plan, we also maintained committed to and hunting our key existing operation.
As recently announced, we entered into an agreement pertaining to one of our best performing venues under participation in the Philippines, to help improve performance of our gaming participation operation in this market. This agreement enables us to work directly with the government operator PAGCOR, and serves to increase the company’s revenue sharing rights to 35% from 17% of net win and its control over marketing strategies in this venue.
With regard to gaming chips and plaques, we are pleased to report that we have added several new customers which should provide incremental benefit in future quarters. This includes one new customers in Indo-China which is expected to provide revenues of approximately $350,000 in the first quarter of 2012. Further, we continue to pursue additional new customers in our current and new market as well as a deeper penetration of our existing customer base.
We will discuss our casino development plans in a moment. But first I’d like to turn the call over to Andy, to review the financial results in more detail. Andy?
Thank you, Clarence, and good morning everyone. Before we discuss the detail of the third quarter 2011 financial results, I’d like to remind investors that effective in the beginning of 2011, we reclassify our reported operating segment into two divisions. Gaming operations which include our gaming participation business and future casino development operations and other products which consist of our Dolphin operating division, formerly called table game and non-gaming products. These changes do not reflect any change in focus of the company. And new reporting segment information have been applied retroactively to all periods discussed.
Total revenue for a third quarter of 2011 was $6.5 million down 2% compared to $6.6 million in the third quarter of 2010. The decline in revenue was the result of decrease in sales in our other products operations offset by strong contribution from our gaming participation operations.
Gaming participation revenues was $4.4 million for a third quarter of 2011, up 7% compared to $4.1 million in the third quarter of 2010 driven by strong improvement in average win per machine. Consolidated average net win per unit for the quarter improved to $145 up 16% from $125 in the third quarter of 2010.
Average net win per day figures exclude EGMs operating under a new venue start open or when a venues revenue is collected on a cash rather than accrual basis.
For a third quarter of 2011, 146 seats were excluded from the net win calculation. Were these seats included in the calculation, average consolidated net win per day for this period would have been $137.
Our install base of electronic gaming machine seats operation as of September 30, 2011, was 1,495 seats down slightly from 1,525 seats as of September 30, 2010. The decline was principally the result of venue closure and machine movement within the Philippines market as well as the company’s on-going assets to improve returns in this market.
Gaming participation revenue from Cambodia which consist primarily of our operations in NagaWorld increased to approximately $3.5 million for its third quarter of 2011, up 9% from $3.2 million in the third quarter of 2010 reflecting strong average win per unit.
Average win per unit in Cambodia was $233 for a third quarter of 2011, up 6% from $219 in the third quarter of 2010. Our install base machines seating operation in Cambodia as of September 30, 2011 was 715, this includes 60 seats at one venue doing a soft open period, while the venue owner completes construction which is now expected to open in December of this year. The install base as of September 30, 2011 represents increase of 5% from 679 seats as of September 30, 2010.
We have recently experienced some temporary fluctuation in the operating base of machines at NagaWorld due to a change in the machine mix and machine upgrade as part of our efforts to drive continuous improvement in operating performance at this venue.
In the Philippines, gaming participation revenue for the third quarter of 2011 was approximately 848,000 down 3% from a third quarter of 2010 level of 877,000. The decline in the third quarter of 2011, revenue was (inaudible) due to the April closure of one venue by the (inaudible) proponent with approximately 120 EGM seats as well as the deferred revenue recognition for one venue with 86 seats in the Philippines, as the collection from this venue is not yet reasonably assure.
We continue to explore its opportunity to deploy the machines from the venue that was closed. In addition, we remain actively engaged in a discussion with a venue owner for which we recognize revenue on a cash basis in order to reach an amicable solutions that allow us to resume revenue recognition on accrual basis.
Average net win for the Philippine was $68 for the third quarter of 2011 up 21% from $56 in the third quarter of 2010. The increase was driven in part by our efforts to strategically manage our machine placement and our targeted marketing initiative. Our install base of machine seating operation in the Philippines was 780 seats as of September 30, 2011, a decrease of 8% from 846 seats as of September 30, 2010. The decrease was primarily the results of the closure of the mentioned venue closed during the second quarter of 2011.
Our other product divisions mainly the manufacturer and sale of gaming chips and plaques; and other non-gaming products such as automotive components contribute approximately $2.1 million in revenue in the third quarter of 2011 down from 2.5 million in the year ago period driven primarily by lower gaming chips sales.
Cash based SG&A expenses for the third quarter of 2011 was $1.5 million up 12% for the prior period due to higher legal expenses related to our casino development project and higher salary and wages expenses.
Adjusted EBITDA which we define as earnings before interest, taxes, depreciations, amortization and non-cash expenses was $2.8 million for the third quarter of 2011 which compared to $3.2 million in the third quarter of 2010. The decline was primarily due to slightly higher cash based SG&A expenses and lower gross profit from other product divisions, which experienced reduced production and efficiency on lower gaming chips and plaques sales volume.
Our consolidated net income for the third quarter of 2011 was 647,000, a $0.01 per share. This compared to a net income for the third quarter of 2010 of 725,000 or $0.01 per share. The third quarter of 2010 net income include a one-time tax benefit of 320,000.
Turning to the balance sheet. As of September 30, 2011, we have a total of $14.3 million in cash and cash equivalent, this compares to $10.2 million as of December 31, 2010. The increase in cash balance was the result of strong cash flow from gaming participation operations, partly offset by cap expenditure for our casino development projects, gaming machine purchases to enhance our participation business operations and principal and interest debt repayments.
We have $7.7 million in debt as of September 30, 2011. This debt is (inaudible) issued to a largest shareholder ETT Entertainment Holding Company, a wholly owned subsidiary of Nelco International. According to the terms of renewals, we began making principal interest payments in the third quarter. Monthly payments are approximately $530,000 and will continue through December 2012 at which time the note will be repaid in full.
I’ll now turn the call back over to Clarence, to discuss our casino development plans. Clarence?
Thank you, Andy. With meaningful recurring cash flows from operations, a strengthening balance sheet and efficient operating structure, we believe we have that favors a solid base from which to invest in our existing operations and pursue our growth objectives, primarily the development and operations of regional casinos under the Dreamworld brand in the emerging gaming markets of Indo-China.
Currently, we have two projects in the pre-constructions phase, the Pailin project and the Kampot project. These casino projects are statistically located in Indo-China and provide us the ability to expand and grow markets demand.
As you may recall, our Pailin project is located on a growing trade route and border crossing with Thailand. The initial phase of the Pailin projects will consist of a casino within an estimated 23 tables games and 40 gaming machine seats. We will own the project with which we develop on property leased from a local land owner, we will have exclusive management rights and controlled over the development and operations of the casino, and we and the land owner will share in the profit before depreciations and land lease expense on a 80%-20% basis, respectively.
The gaming license and construction equipments for the Pailin project has been obtained. We are finalizing the detailed design and preparing to begin construction before year-end. Based on our current construction time line for these project, we now expect the initial phase of the Pailin casinos to open in the second quarter of 2012, before the opening of the Kampot project.
Please see our press release for some renderings of the project and we look forward to updating you soon on the ground breaking.
Our Kampot project is located in the Kampot province of Cambodia and near the Vietnam border. The initial phase of the casino is expected to include up to 14 table games and 25 EGM seats. The Kampot project will be developed under a joint venture company owned by us in a local land owner, which owns the property upon which the casino will be built. The local partner will contribute the land and we will have exclusive management advice and controlled over the development and operations of the casino, as well as management [imposing] controlled over the joint venture company.
We and the local partner will share the net revenues of the joint venture, which is the total growth revenues of the casino less any payouts to customers, operating expenses and taxes on the 60-40 basis, respectively.
We have secured the casino license for these projects with the improved soil conditions after the heavier than typical rainfall during the monsoon season, we are working to complete the land-fill process. We expect the initial phase of the casino to open in the second quarter of 2012, softly following the opening of Pailin. In addition to this project, we continue to pursue additional strategic projects to build and an attractive pipeline of casino and gaming projects in the region. We look forward to providing more detail on this project as such plans materialize.
In summary, we have (inaudible) solid operating base with enhanced financial flexibility. We are focused on improving returns on our existing operations and executing on our strategic growth initiatives to develop and operate regional casinos under our Dreamworld brand in the Indo-China regions.
We are making progress in the development of these projects and continue our efforts to selectively build a solid pipeline of additional projects to become a leading owner and operator of regional casinos in the Indo-China region. We believe this effort will drive near-term returns and long-term growth for the company and enhance long-term shareholder value.
Let’s now open up the call to your questions. Operator?
Thank you. (Operator Instructions) Our first question coming from the line of (inaudible), Private Investor. Please proceed with your question.
Do you have any an update on any legal issue that are going on.
What’s the question?
Legal issues, has there been any update, or can you give us any update on that?
Okay, the legal issues. You mean the lift.
Okay. The obviously the (inaudible) the gains of companies as you may know on June 2nd, 2011, the district court has ruled on our motions to dismiss and have dismiss all the claims of one plaintiff and dismiss all the others plaintiffs claims example to breach of contract claims against the company. All claims against the current and former officers and directors were dismissed, however, on November 7, 2011, the plaintiffs filed a motion to sick leaves to amend, there dismiss securities law claims and filed an amend a complaint. In other words, if the courts does not allow the plaintiffs motions to amend the complain, then the only surviving claims by the plaintiffs are the breach of contract claims. So, in this we have yet to study, but haven’t said in any of the event we intend to continue to rigorously defend against this litigations and conduct business as usual.
Jim, on top of what Clarence is saying, basically now we have no timetable for the hearing for such motion. So, we have nothing more to add at the moment.
Okay. All right. Do you have any update, about a year ago you mentioned rather large project and it's all (inaudible). I know there has been talks about it every quarter on the call sometime. And I was just wondering do you have any update on that, is that still a viable or still a potential new project for us?
Yes, we remain active in our potential pipeline, but I think more importantly we continue to pursue other casinos and gaming development projects of varying sizes in the region that in line with our long-term strategic growth plans and growth plans are not depended on any one of these potential projects. So, in other words while there are many projects in the pipeline that we are current actively looking at right now.
Clarence, what do you think the size is in the area in which you are looking as far as not necessarily the number of site so much is. The number of each SGMs and tables that you think we can effectively manage. And do you think that there is a market for in a region in which you are lucky?
Well, we did look at project large and small to be honest. And well we do not particularly limiting ourselves to only locate at small projects or a large projects. So, in other words we are relatively open. So, the reason why I say that is, if it's a good project, I’d look at it regardless whether it's large or small, because obviously if it's small project like Pailin or the Kampot which we do think is good project and that we can take it all by ourselves, but it is a good project and is yet larger size project. And we can always partner with others and/or doing other search and financing activities if we after DFS assessment think that this is of the best interest of the company. So, indeed we do not, specifically we limit ourselves in terms of looking at specific type of size of projects.
Clarence I guess what I was saying is that, in the overall size of the region in which you are looking. Has the company done any, do you have any thoughts about, do you have the potential to put up 5,000 machines and a 1000 tables or 10,000 tables. Have you looked at the overall project. Is there anything you can talk about in terms of the potential of the market that we are in?
Well, I’d say in the market that we are actively looking on, it is expanding. The market is expanding. Indeed, well with the economic growth and with the level (inaudible) and the market is expanding. And for instance, well we first put 120 machines in NagaWorld (inaudible) I’d say that the market is only capable of paying that, but after we do put in that and we found out that market is growing and expanding. And indeed, well there are tour groups and there are arbitragers from Vietnam and from Thailand and even China etcetera, Singapore, Malaysia, they come to this particular property. Then indeed, we expand our install base and up to now its 670 and indeed, we still enjoy very good WUD. So, indeed, I’d say that this area is got lot of potentials and indeed for the [slots clubs] that’s already in this region, obviously, this market is underserved and with the growing and expanding of the economy. And more importantly or is equally important that where we believe that as a professional managed casino operators than we can these two as good as the others if not better.
Are you still just, I mean, will remain trust of the business Cambodia and perhaps Vietnam and we talked about Laos also. Are there any other countries in the area that you are looking at right now or expecting?
Yes, I’d say that, well [long-term focus] at least for now is putting in the Mekong delta area which in other words it includes countries Thailand, Vietnam, Cambodia, Laos, that part of the world and also were Philippines. In fact, we have about half of our install base in the Philippines and [yet] we are actively growing the existing venues, the net wins etcetera. And indeed also well, if you look at the Philippines market they are relatively stable market, but having said that I think the (inaudible) is working towards to grow this market as well. Similarly, like in Singapore, it didn’t have been markets before the opening of the two casinos but then now it's become a $1 trillion market. And we will cap that market potential of this.
When you are building Kampot and Pailin, were you building to accommodate will be initial phase of building accommodate more than the number of machines that you are suggesting. So, that there is room for second phase without going into the second construction phase. So, if you open Thailand, for example, and everything is full, right after that, will you have the footprint or the building built to be able to increase the size of that facility in Kampot as well?
Yes, for Pailin we do build in the initial phase 1 up to the including envelope that we could build for the phase 1. But having said that we do have the options in 3 to 5 years to acquire or to take up a much bigger land next to it. So, indeed well there we do have expansion capabilities for Pailin. So, indeed well the current were built to the envelope for the phase1 so as to cater the business and if business is good we do believe it, and we have the ability to expand in the next couple of years. And in Kampot in fact, we only built up to a third of the land area that we have. So, in other words well we can easily expand and expand towards the existing casino flow area into new phases.
So, the initial building phase is, when the buildings are completed it will accommodate no more than a machines you have already suggested, or that you already said you are going to go in?
Initially, yes, but indeed that the building structure is relatively not too complicated and then that well if you sort of build on attaching and then knock down a wall, then you immediately expand, because floor area.
I see. But that additional space will not be built on the initial phase and so separate it with a wall you have to build the building in the second phase in order to increase the number of machines. Where will you get employees that are trained as for the tables in particular? And where do those people come from, I mean it's such an infant industry in that area?
Yes, I know, in fact in Cambodia in certain of those there has been not too sophisticated casinos operations in the region. So, indeed, we can take certain of the experience staff if you like, and for the table games dealers, we would train it out though. We have high a well experienced casino managers so that indeed, we will bring and hire the people about two months before the operations and then we will train them. Because we do believe that where we wanted to train it our way in a more professional way to treat and service our customers.
We currently don’t have any questions registered at this time.
Okay. And 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.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask as please disconnect your lines.
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