Asia Entertainment & Resources Ltd's Director Discusses Q2 2013 Results - Earnings Call Transcript

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Asia Entertainment & Resources Ltd (AERL) Q2 2013 Earnings Conference Call August 22, 2013 9:00 AM ET


Garrett Edson – ICR

William Schmitt – ICR

James Preissler – Director of Asia Entertainment


David Bain – Sterne, Agee & Leach, Inc.

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC


Please stand by. We're about to begin. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Asia Entertainment & Resources Ltd. Second Quarter 2013 Earnings Conference Call.

Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to Mr. Garrett Edson. Please go ahead, Sir.

Garrett Edson

Thank you, Michelle, and welcome everyone to Asia Entertainment & Resources Ltd's second quarter 2013 earnings call. Participating on the call today will be our Chairman, Mr. Pou Lam; our COO, Mr. Ben Vong; Mr. Kenny Leong, Chief Executive Officer; Mr. Raymond Li, Chief Financial Officer; Mr. Edward Chen, Assistant to the Chairman; and Mr. James Preissler, Director of Asia Entertainment.

Earlier today, the Company issued a press release reporting financial results for the three- and six-month periods ended June 30 2013, which can be accessed at most financial websites as well as on our own at

For the purposes of this call, all figures presented will be discussed in US dollars. This conference call may contain, in addition to historical information forward-looking statements about AERL within the meaning of the federal securities laws. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements other than those that are historical in nature.

These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from the expectations reflected in these forward-looking statements. For more information on these matters, we encourage you to review AERL’s SEC filings.

I would like to turn the call over to Mr. Bill Schmitt of ICR.

William Schmitt

Thank you, Garrett. Today, we will briefly go over our financial results for the quarter and then hand the call over to Mr. Jim Preissler to give an overall view of the business and to discuss the Company's recent rights offering and developments with his VIP gaming room at Le Royal Arc Casino.

I would now like to turn the call back to Garrett Edson of ICR to review the second quarter financials, and then our director, Mr. Jim Preissler will provide an updated 2013 guidance followed by Q&A. Garrett?

Garrett Edson

Thanks, Bill, and let's go through the second quarter of 2013 financials.

Revenue for the second quarter of 2013 was $63.5 million, a 9% increase from $58.5 million in the prior year period. Net revenue, as a percentage of Rolling Chip Turnover was 1.42%, up from 1.25% in the prior-year period. AERL’s primary expense is commissions to agents, which was $47.7 million in the second quarter of 2013, up 25% from $38.1 million in the second quarter of 2012.

Commissions to agents, as a percentage of Rolling Chip Turnover, was 1.07% in the second quarter of 2013, up from 0.81% in the second quarter of 2012 as a result of higher percentage of commissions paid to non-marker agents and a smaller percentage of direct business in relation to the Total Rolling Chip Turnover.

Selling, general, and administrative expense, as a percent of Rolling Chip Turnover, was 0.14% in the second quarter of 2013, up from 0.09% in this prior-year quarter.

Non-GAAP operating income before amortization and change in fair value for contingent consideration for the second quarter of 2013 was $9.1 million or $0.20 per diluted share, a decrease of 41.5% from $15.6 million or $0.34 per diluted share in the same period of 2012, due primarily to our continued policy of conservative credit extension, higher SG&A expenses due in part to cost related to the Hong Kong listing, and costs associated with the acquisition of Le Royal – of the VIP gaming room at Le Royal Arc Casino in Downtown Macau.

Non-GAAP income before amortization and change in fair value for contingent consideration margin as a percentage of total revenue in the second quarter of 2013 was 14.4%, down from 26.7% in the second quarter of 2012. Income margin as a percentage of Rolling Chip Turnover was 0.15% for the second quarter of 2013, down from 0.31% in the prior-year period.

Net loss for the second quarter of 2013, including all items, was $3 million compared to net income of $22 million in the second quarter of 2012. GAAP, basic and fully diluted, EPS derived from net loss for the second quarter of 2013 was $0.07 based on a basic and fully diluted weighted average share count of approximately 44.6 million. Basic and fully diluted weighted average share counts were calculated in accordance with Generally Accepted Accounting Principles.

Turning to the balance sheet and cash flow statement, cash on hand, as of June 30, 2013, was $39.8 million. Cash provided in operations for the six months ended June 30, 2013 was $16.8 million, which includes reduced markers receivable balance of $15 million due to policy obtained in credit to junket agent.

As of June 30, 2013, total available cage capital was approximately $300 million. The total available cage capital is comprised of markers receivable of $260.1 million; and cash, cash chips, and non-negotiable chips of $39.8 million.

I would now like to turn the call over to Mr. Jim Preissler, Director of Asia Entertainment for his closing thoughts.

James Preissler

Thank you, Garrett. For the seven months of 2013, AERL’s Rolling Chip Turnover averaged $1.43 billion per month, giving us a Rolling Chip Turnover in Macau of $10.04 billion, as of July 31, a decrease of 12% year-over-year.

With the tightening of credit to junket agents, we are providing our Rolling Chip Turnover guidance for our five existing VIP rooms in Macau of $19 billion for the full year of 2013. We believe for the remainder of 2013, our business will remain on a revenue-sharing basis.

We are providing our non-GAAP income guidance for the year ended December 31, 2013, of $60 million to $75 million, based on the current and expected performance of our existing five VIP rooms in Macau.

Our guidance includes $2.8 million of additional expenses associated with the Hong Kong listing and acquisition of the VIP game room at Le Royal Arc Casino in Macau, and does not take into consideration any possible future expansion or additional VIP gaming rooms.

Further, on July –in July, we announced the closing of our rights offering and standby purchase of shares, not sold in the rights offering. We issued a total of $19.5 million ordinary shares and raised $53.5 million in gross proceeds from the rights offering and the standby purchases.

This included 9.8 million shares issued to holders upon exercise of the [existing] (ph) rights and 9.7 million shares issued to the standby purchasers pursuant to the terms of the standby purchase agreement.

We anticipate using the net proceeds of the rights offering, approximately $61.4 million following the deductions of any offering expenses and costs related to the transaction to repay any outstanding debt owed to our founding shareholders. These shareholders will also standby purchases in the rights offering.

We are pleased that during the second quarter of 2013, we completed the acquisition of our VIP gaming room at Le Royal Arc Casino in Downtown Macau. With the addition of this VIP gaming room, we enhanced our ability to serve our existing customers, and by combining our operations and (inaudible) agents, with that of the VIP game room at Le Royal Arc, we are further expanding our position as one of the premier VIP gaming room operators in Macau.

This completes our prepared remarks. I’d like to turn it over to the operator to begin our Q&A session.

Question-and-Answer Session


Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions).

And our first question, we'll hear from David Bain with Sterne, Agee.

David Bain – Sterne, Agee & Leach, Inc.

Good. Thank you. Hey, guys. I'm just trying to reconcile the Rolling Chip guidance relative to your EBITDA guidance. I guess you're expecting commissions to junket agents to come down pretty significant from 2Q. Is that the case?

James Preissler

Yes. Obviously, there's has been a big mix shift in the business recently, and that – you know the direct business, which was previously around 15% of the overall business is now a very, very small piece. That's obviously driven by the credit extension policies. And at the same time, our all agent credit businesses [function] (ph) significant as well.

And so the largest piece of the business right now from a growth standpoint is the cash business. The cash business has more than doubled than last couple of years, and that is the highest commission out there, because we're not really taking any credit risk on that front.

So, I think what we're seeing is significant mix shift in the business, which has obviously had a large disparity on the commissions page of those different segments.

For example, in the direct business, there's no commission. On the credit business, there's significantly reduced commission versus the cash business.

So, while that mix shift is going on, we've been trying to pursue opportunities by switching to the (inaudible), by making the acquisition of Le Royal Arc to better capture this business going forward. And we plan to continue to try to drive that segment because that seems to be the largest strength in Macau as of the moment on the VIP side. I mean, it's really cash that's driving them -- the VIP growth right now, not credit.

David Bain – Sterne, Agee & Leach, Inc.

Okay. And to be clear, are you expecting that to come in?

James Preissler

Well, if the Chinese economy continues to improve, and credit economy is more widely available as the year goes on, obviously those margin can shift very dramatically.

David Bain – Sterne, Agee & Leach, Inc.

Okay. And the cash agent...?

James Preissler

At zero commission is a fairly large shift in the business.

David Bain – Sterne, Agee & Leach, Inc.

Sure. Well, absolutely. And –the cash commission – the cash agents, is the top commission still 1.1? Or – because the mix – the entire mix was like 1.07, so I am wondering if the market has changed for cash agents, has it gone higher in terms of payments?

James Preissler

Yes. I mean you can see cash agents at anywhere from 1.1 to 1.2 to 1.25 depending on how large they are.

David Bain – Sterne, Agee & Leach, Inc.

Okay. And then just two more. One in terms of, just to finish up the commission thing. Do you have any idea on kind of how it is trending July, August in commissions as a percentage of Rolling?

James Preissler

I think the trends right now are similar to the prior months.

David Bain – Sterne, Agee & Leach, Inc.

Okay. And then idle capital from 1Q, that seems more or less unchanged. Can you give us an idea of ...?

James Preissler

$40 million in cash and $19 million of unused credits, so we're about $59 million of idle capital at the moment.

David Bain – Sterne, Agee & Leach, Inc.

Right. And so, going forward, I mean, has your view changed on kind of (inaudible) credit to junkets or your stand versus the first quarter or at the end of the second quarter?

James Preissler

Well, what we're seeing is a broad theme in Macau is that collections are generally slow across Macau in the credit side, so that's I think what we're seeing in Macau as a whole, and we're seeing similar trends in our business.

So, until we see the kind of the credit trends in the mainland start to shift a little bit, obviously you're starting to see some continued lumpy improvement in the economy, but until really the credit trends shift, I think the policies will be marginal improvement over time. It's not quite the time that you can make a major shift on the credit policies at this point until those broader trends become more stable.

David Bain – Sterne, Agee & Leach, Inc.

Okay. All right. Thank you.

James Preissler



(Operator Instructions). At this time, there are no further questions. I will turn the call back over the speakers for any additional – I'm sorry. We do have one that just came in; Mark Giambrone with Barrow, Hanley.

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC

Good morning. Sorry. I'm sure this was already asked, but can – in terms of the Hong Kong listing, can you kind of talk about where you are with that? I know you're waiting on the audit, I'm assuming that that's near completion, and then kind of what the timeline for the whole thing is?

James Preissler

Yes. Thanks, Mark. That is correct.

So, we anticipate in the next two to three weeks to be putting the application in, so –that's the – that's major critical step here, and then it's more of a review process; very typical to an SEC review process. So probably about, on average, three months of back and forth on comments.

But, yes – we are eminently close to getting an application in.

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC

Great. And then in terms of the acquisition that you made, I'm just curious as that rolls through, I recognize that initially when you make an acquisition – and correct me if I'm wrong – you would have to obviously look at the players, look at their relationships, think about whether or not you want to work with them in your rooms, et cetera. And so, I'm assuming that’s the ramp-up period, I guess, through an acquisition, it's not like you would just make an acquisition and (inaudible) a lot everyone should turn over.

So, I'm curious how that's coming along and how many months out you would say, "Well now, we're going to get to a normal run rate with this type of acquisition?”

James Preissler

Yes. I think it will take us probably the month of September, October before we get to a more normalized run rate there because there's a couple of factors.

One, obviously, it's a new – a little bit of a new business for us relative to what we've done in the past as far as agent segment and customer segment.

And the second thing is these are not the typical very large credit-worthy agents that we've seen in the past, so we have to spend a little bit more time getting to know them, to learn them, to figure out how and where we want to extend that credit. In fact, it is the overall push that we're trying to achieve to diversify the business into the faster growing segments of Macau, which is that middle tier of VIP player and the cash VIP player.

But you want to take some time to learn it to make sure we don't make any significant missteps there.

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC

Sounds good. Thank you.

James Preissler

Thank you.


And there are no further questions. At this time, I will turn the call back over to the speakers for any additional or closing remarks.

James Preissler

Great. Thank you, everyone for attending today's earnings call and your continued interest in AERL. If we didn't get to our questions, if you have any follow-up questions, please feel free to contact us through email or give us a call. Thanks everyone. Bye, bye.


And that will conclude today's call. We thank you for your participation.

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