Executives
Traci Mangini – Senior Vice President-Corporate Finance
Clarence Chung – Chairman and Chief Executive Officer
Andy Tsui – Chief Accounting Officer
Analysts
Grant Govertsen – Union Gaming Group
Entertainment Gaming Asia Inc. (EGT) Q2 2012 Earnings Call August 7, 2012 8:30 AM ET
Operator
Ladies and gentlemen thank you for standing by, and welcome to the Second Quarter 2012 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 recoded today, Tuesday, August 7, 2012. It is now my pleasure to turn the conference over to Traci Mangini. Please go ahead, ma’am.
Traci Mangini
Thank you, operator 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 the 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 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 Form 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 second quarter 2012 financial performance and recent corporate developments. Following that, Andy will review in more detail of the financial results for the fourth quarter. Clarence will then conclude our prepared remarks with an update on our plans for our gaming operations. We would then be very 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. It has been an eventful quarter for the company with strong improvement in the financial performance for our established businesses and the beginning of our new casino operations. Let me share with you some of the highlights. We posted record quarterly gaming revenue. We achieved strong improvement in gaming chips and plague sales and secured a sizable new order. We opened our first Dreamworld development property in May. We began active development of our second Dreamworld projects and we achieved all these while maintaining a healthy cash positions and paying down tax.
Total revenues was $7.6 million, up 13% from the second quarter of 2011 driven both of our gaming and other products business divisions. Gaming revenue was $5.2 million up 14% from the second quarter of 2011. Gaming revenue was driven by strong performance for our total operations, formally refers to as our participation business, as well as incremental revenues from our newly opened Casino, Dreamworld Pailin.
The average net win for our strong operations was $147 with strong performance in Cambodia and the Philippines. In Cambodia our operations in NagaWorld post impressive net wins of $258 for the quarter. As we benefit from our proactive machine management and target marketing initiatives.
Cambodia slot revenues also benefit from our new operations at Thansur Bokor which officially opened May 3, 2012. This flagship property of leading Cambodian Hotelia Sokha Hotel and resort is located in a tourist area of Southern Cambodia.
Sokha is still completing certain aspect of the resort such as the VIP gaming areas and the entertainment complex. We believe that these slot operations will be a meaningful contributor to earnings. Once the facility is fully operational and Sokha has implemented it’s broader marketing programs.
In the Philippines, our strategic efforts to maximize performance in these markets continue to play off. These efforts which includes strategic management of machine placements, targeted marketing and extended hours at our most promising venues in these markets have resulted solid FA steady net wins of $72 for the quarter.
Dreamworld Pailin, our first casino development property opened on May 9 contributed approximately $213,000 to gaming revenue, for it’s seven week in operations during the quarter.
Dreamworld Pailin is located at an important border crossing in growing trade routes between Cambodia and China. The $2.5 million dollar first phase of the property comprises over 16,000 square feet of gaming space including both Poipet floor and special VIP facilities.
We expertized the opening within the second quarter initially open to demand market floor of the casino which offers the most expensive range of games in Pialin with 26 tables between popular games such as baccarat, variations of poker, and dice game and an attractive suite of 50 slot machines on the top-tier manufacturers. Dreamworld Pialin operations are in their infancy and we do not believe this results are representative of our future potential.
In addition to the solid performance of our gaming operations our other products divisions contributed $2.4 million to revenue, the other product divisions consist of the manufacturer and sale of gaming chips and plaques as well as plastic components brought by nearly for all the automotive industry.
Over the last several year, we have made a strategic shift in focus of these divisions towards the higher margin gaming chips and plaque size of the operations. With our comprehensive product lines with state of the art security features, efficient patents for the production capabilities and strong relationships in our target markets in Asia and Australia. We believe we have the potential to meaningfully increase our shares in these niche markets.
To this end, we implement target of marketing programs in our key markets where we have a strong presence in relationships. Making ongoing investments in product development and are in the process of expanding including our manufacturing plants in Melbourne. We believe these efforts position us to increase revenues and improve operation efficiency for this business in the future.
In fact we are already seeing the initial benefits of these initiatives. Gaming chips and plaque sales reached nearly $1 million for the quarter, representing approximately half of the 2011 annual revenues for these products division.
We are expanding our customer base and sales volume and the pipeline for the second half of this year’s most promising was the new gaming chips and plague order valued over $2 million. We expect to deliver this order in the third quarter of 2012.
The solid top line growth combined with high expenses primarily related to the startup and generally operating causes associated with our new casino operations resulted in adjusted EBITDA of $2.8 million and net income of $484,000 for the second quarter of 2012.
We maintained a healthy cash balance of $11.8 million as of June 30, 2012, while continuing to paying down debt and investing in our gaming operation. We’re steady recurring cash flows on our slot operations and meaningful improvement in our casino chips and plagues business, we are focused in the future and we are too cautious of our new casino development strategies.
We will talk more about these future plans in a moment. But first I’d like to turn the call over to Andy to discuss the details of our second quarter financial results. Andy?
Andy Tsui
Thank you, Kevin. And good morning everyone. Total revenue was $7.6 million for the second quarter of 2012, up 13% compared to $6.7 million in the second quarter of 2011. The increase in revenue was the result of the improvement in both our gaming and other product business divisions. Gaming revenue was $5.2 million for the second quarter of 2012, up 40% compared to $4.5 million in the second quarter of 2011.
This quarters’ gaming revenue includes $5 million for our slot operations, formally refers to as a participation business and $213,000 for Dreamworld Pialin, which was opened late night 2012.
The strong performance from our slot operations was principally driven by a strong average net win per machine at NagaWorld and growth in the average net wins in the Philippines.
Consolidated average daily net win per unit for our slot operations was $147 flat with the prior year period.
Our install base of gaming machine seats for our slot operations as of June 30, 2011 was 1,441 seats down 4% from June 30, 2011. The decline in the machine seats was principally due to the closure of one venue in the Philippine in June 2012 as we’ve not renewed the contract and largely offset by the opening of Thansur Boko early this year.
Slot revenue from Cambodia, which consists primarily of our operations at NagaWorld increased to approximately $4 million for the second quarter of 2012, up 7% from $3.7 million in the second quarter of 2011. The increases reflect strong average net wins per unit at NagaWorld and incremental revenue from our new slot operations at Thansur Boko.
Average net win per unit in Cambodia was $215 for the quarter, down 14% from $250 in the second quarter of 2011. The decline was principally the result of new operations at Thansur Boko, which create a direct (inaudible) on average net win at this operation are still ramping up.
In the Philippine, slot revenue for the second quarter of 2012 was approximately $1 million, up 20% from the second quarter of 2011 level of $836,000. The increase in revenue was primarily due to improved average net wins and our acquisition of higher revenue sharing interest at one venue in October 2011.
Average net win for the Philippine was $72 for the second quarter of 2012, up 18% from $61 in the year ago period. The increase was driven in part by our effort to strategically mange our machine placements, our targeted marketing initiative and extended hours at our most promising venue.
Our other products division, mainly the manufacture and sale of gaming chips and plaques and other non-gaming products such as automotive components, contributed approximately $2.4 million in revenue to the second quarter of 2012, up 11% from the year ago period. This was driven primarily by significant higher gaming chip and plaques sales due to higher level of customer reorders. The gain in the gaming chips and plaques was partly offset by reduced sale of non-gaming product due to a weakness in the Australian auto industry.
SG&A expenses for the second quarter of 2012 was $1.6 million, up from $1.2 million in the prior year period, largely due to start-up and general operating costs associated with Dreamworld Pailin.
Adjusted EBITDA, which we define as earning before interest, taxes, depreciation, amortization, and non-cash expenses, was $3.8 million for the second quarter of 2012, which compares to a $3.3 million in the second quarter of 2011. Our net income for the second quarter of 2012 was approximately $484,000 compared to $307,000 for the second quarter of 2011.
Turning to the balance sheet, as of June 30, 2012, we have a total of $11.8 million in cash and cash equivalent. This compares to $12.8 million as of December 31, 2011. The decrease in cash balance was the result of the capital expenditures for our casino development projects, gaming machine purchased for Thansur Boko, and to enhance our excising slot operations and principal interest debt repayment. This decrease was partly offset by strong cash flow from our slot operations.
We have $3.1 million in debt as of June 30, 2012. This compares to $6.2 million as of December 31, 2011. This debt which is held in a form of an unsecured promissory note issued to our largest shareholder ETT Entertainment Holding Limited, a wholly-owned subsidiary of Nelco International will be repaid in full as of December 1, 2012.
I will now turn the call back over to Clarence to discuss our casino development plans. Clarence?
Clarence Chung
Thank you, Andy. With refined slot operation that provide meaningful recurring cash flows on operations, continued improvement in our cash chip and plaque operations and strengthening balance sheet. we believe we have established a solid base on which to invest in our gaming operations. we focused on the executions of our plans to develop and operate of our own regional style casinos, and gaming venues operated under our Dreamworld brand. and I’m pleased we were able to quickly open our first development project, Dreamworld Pailin during the quarter.
Dreamworld Pailin’s operations are still in that infancy, but with quality gaming offerings, professional management and an inviting atmosphere. we aimed to set a new standard for regional gaming in the market. We are establishing our presence in the Pailin market and working on a number of marketing initiatives to build quality mass market play of traffic and engaged to the right partners to open our VIP rooms.
Dreamworld Pailin also provides us with the development of strong systems and controls for the benefit of our future, expanded casino extensions. In addition to our focus, operating up Dreamworld Pailin, we’re actively developing our next project, Dreamworld Poipet. Dreamworld Poipet will be a stand-alone slot hall, which will be developed and operated as an extension of an existing popular casino in the attractive Poipet market.
Poipet is one of Cambodia’s most significant border crossings with Thailand and it’s approximately 3 hours from Bangkok by car. It is a separate growing and gaming market with existing casinos, setting mass markets and premium players from major nearby cities in the area. And those limitedly are stayed for future gaming development. We are pleased to have securer, permanent locations within the market to build our projects.
We’ll fund, develop, and operate this $7.5 million project. and we’ll receive 40% of the daily net being generated by the gaming machines and incur 40% of the certain operating costs in our slot hall. once complete, Dreamworld Poipet is intended to measure approximately 16,000 square feet and how is the comprehensive suite of 300 high-quality gaming machines. these machines will include multiple electronic tables and live dealers to provide players the full casino experience. We are finishing the foundation well enough and expect to begin full construction shortly.
based on this current timetable, we expect to open Dreamworld Poipet in the first quarter of 2013. We also have a casino development project, Dreamworld Kampot in the Kampot Province of Cambodia near the Vietnam border. This project is in the pre-construction development phase. as discussed on our last quarter call, we have decided to focus our available resources on Dreamworld Poipet and this is a more established market and we have higher near-term return expectations for this project. As a result, we expect to complete development of Dreamworld Kampot in 2013.
In summary, with solid recurring cash flows and improved financial flexibility, we believe we have established a solid foundation for growth. We are focused on executing on our casino development strategies and achieving our long-term goal of becoming a leading developer and operator of regional style casinos and gaming venues in the emerging gaming market of Indochina.
Let’s now open up the call to your questions. Operator, operator?
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Grant Govertsen with Union Gaming. Please proceed with your question.
Grant Govertsen – Union Gaming Group
Hi guys. Congrats on the quarter, and thanks for taking my questions. First one just with respect to Dreamworld Pailin and understanding that obviously in its infancy and VIP has its start of the operating at. could you give us some color on just like food traffic with respect to the mass market segment? when we visited the project, things seemed quite well, a lot of food traffic? But could you give us some trends over the past, call it two to three months? How that’s been developing?
Clarence Chung
Well, thanks Grant. Well, indeed we are continue developing the mass market, and indeed we are gradually introducing more and more bus programs and vans programs that leading customers are from the various nearby cities. And indeed to put traffic ramps up, it’s good. In fact we do well, more than about 20 buses and vans today coming in throughout the date and we are also continues to increase that traffic. So, indeed yeah, I would say that’s the ramp up is satisfactory.
Grant Govertsen – Union Gaming Group
Okay, great. Great and again early days being the context…
Clarence Chung
Yeah.
Grant Govertsen – Union Gaming Group
Have you learned anything over the past several months of operations that that perhaps reflecting the change as the way you think about either put Pailin and Kampot, bringing them on like quicker or changes to marketing or changing the scope anything like that?
Clarence Chung
Again well, yeah, while we manage to open Casino earlier that we expect at where original we expect to opening the second quarter, but that we manage to open a month or two earlier. So yeah, when the (inaudible) use the road and obviously, it’s a new market to us and that definitely there are certain learning that we experience. Indeed we are gradually learning the experience and indeed well, also get our hands dirty in terms of running the operation.
Again, well, there are quite certain are good and lessons for us in that particular market also that definitely would help us where we continues to plan our Poipet project and indeed given the market are relatively similar. I would say that whatever that we are, we have learned here then definitely will have adding to the benefits and the initial ramps up would be even that’s for our Poipet project which is to me is even important project in the short-term.
Then again where the markets – to capture market is pretty similar though, yes a little bit distinguish among the two and indeed to us I think we with the ramps up and learnings in Pailin then definitely it would help us and again well for us and we are giving a lot effort in the various initiatives as to get more and more good quality throughout into the property. But obviously it would be relatively easy to bring non-quality. But I guess what our aim would be while we bring quantity as far as quality players into our Poipet. Indeed we also see there are quality players walking into our properties from other casinos in the Pailin area given the fact and obviously the infrastructure, the hardware of that is much better.
Grant Govertsen – Union Gaming Group
That’s great. Thanks for the color. And just a couple real quick one, the VIP segment at Pailin, what’s the timing on that?
Clarence Chung
I would say that probably we don’t want to be a non-selective. So in deed that’s why we have carefully select, while DVRP (inaudible) and in deed we have identified couples and we are in discussions with them. Hopefully in the next quarter, in the next quarter that we will again engage them and then start rolling the VIP programs, and indeed we have everything in place in just a matter of we got the rights upon us for these particular market because indeed initially we do not expect ourselves to provide any practice that’s why we also would be a little bit more careful and yet in selection programs as we wanted to find the best partners for these segment of the business.
Grant Govertsen – Union Gaming Group
Okay, great. And last one real quickly just on your Naga operations, win per day was more or less flat 1Q and 2Q. How is that trending so far as we go into July and August?
Traci Mangini
Well, I’d say the second quarter is quite outstanding quarter, over $250 million, in fact it's $258 million. I would say that we did, and myself congrats the [ground] team having done that fantastic job. And the fourth, – third quarter so far is okay obviously we're looking at a day-to-day basis there are fluctuations, but then overall the third quarter so far is also showing a quite some good results.
Grant Govertsen – Union Gaming Group
Okay, great. Thanks again, and congrats on the quarter.
Traci Mangini
Thank you.
Operator
Our next question is coming from the line of [Paul Weitz] a Private Investor. Please visit with your question.
Unidentified Analyst
Thank you. Thanks for delivering such a solid quarter, steady progress. Did the quarter bring any new customers or any new significant customers in the chip and plaque business?
Clarence Chung
For the second quarter it would – we got additional orders from our existing customers. So that's why you can see that even only in second quarter is a $1 million of revenues for us, so indeed is probably one of the best quarter that for this particular line of business that we have.
And during the quarter also we have one major customers in Cambodia area. But then as I report just now regarding all that of over $2 million from a major casinos, which unfortunate, I cannot share with you the name given the fact that is the kind of a confidential for the time being, but then the quantum of the orders over $2 million and it would be deliver in the third quarter of this year. So again, which means third quarter would be another record-breaking quarter in the recent months for this business lines.
So we're gradually building up our capabilities and marketing initiative and again where we are – we have developed our goodwills and our qualities, standard and the confidence to our existing and new customers that's why we're working hard to provide to new customers and to market to new customers, because also we have a full range of product that we can also including gaming chips and plaques as well.
Unidentified Analyst
Thank you.
Clarence Chung
Thank you.
Operator
(Operator Instructions) Our next question is comes from the line of Paul (inaudible). Please proceed with your questions.
Unidentified Analyst
Good morning good evening is it maybe.
Clarence Chung
Good morning, Paul.
Unidentified Analyst
I have a question, the increase in cost for the quarter, I would believe directly attributable to Pailin in Bokor. Could you tell me how you would – how that those increase cost would be split between the two?
Andy Tsui
Paul this Andy. Thanks for the question. Because if you ramping up the operations, so these numbers are not being normalized yet, so I would not be able to really provide details at the moment. I think when we ran up in the next coming quarter we have more information to share to make (inaudible) coming months.
Unidentified Analyst
Is there any estimates you can give us what you’ve figured normalized operating expenses would be for each or do you want to just wait until next quarter to see?
Andy Tsui
Yeah, I think we can really – definitely have more information or better information to share in the coming quarters because the cost structure really not being normalized yet. And some of these are also a one-off costs, so we'll see a better pictures in a coming quarter.
Unidentified Analyst
Okay. In terms of the – I think you mentioned that the operating income from Pailin was 213,000 for the first seven weeks. Where you in operation all of those seven weeks with the facility open that seven days a week?
Traci Mangini
Paul, I just want to pointed out the $213,000 which looks in the operating revenue or net income. So this is basically the income we are starting from seems to be opening on May time. So it’s about seven weeks of operation.
Unidentified Analyst
Right. So there is been the firm – the difference once it open was in continuous operation. Wasn’t that you did an opening and then you had to close down again to do more work on the facility?
Clarence Chung
Yeah, it is continuous operation, but then as Andy mentioned, the revenue is not the (inaudible). The revenue is the net revenue due to certain accounting adjustments as we discuss and agree with the auditors.
Unidentified Analyst
Okay. All right. I’m confused, is it $213,000 your net revenue after expenses or is that your gross revenue.
Clarence Chung
Gross revenue before expenses.
Unidentified Analyst
It’s gross revenue. In terms of the type of people that are coming in, can you give us an idea of what the average bet was?
Clarence Chung
I think it will obviously vary and you see that I said indeed we just opened (inaudible) and in fact it’s not responsive in normal line as we speak. So indeed we are still open to VIP and programs, and again we are like in other jurisdictions and the average spend would be very different. So it was rather when the operations become more normal and probably these numbers and figures would be more meaningful.
Unidentified Analyst
Okay. One last question. Of that revenue was there a pronounced split amongst the table games versus these electronic gaming machines or was preference by your customers for one versus the other.
Clarence Chung
It is a total for the tables.
Unidentified Analyst
I know, but I am just saying, was the debt revenue pipe predominantly come from the table games or do you predominantly come from the electronic gaming machines.
Clarence Chung
Again, it’s ramping up but the amount was primarily for the tables and house starts is also ramping up to.
Unidentified Analyst
Good. Thank you very much.
Clarence Chung
Thank you.
Operator
We don’t have any further questions at this time.
Clarence Chung
Okay, thank you, operator. We will 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.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect the lines.
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