Donaco International Limited (DNA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Donaco International Limited Conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Arbuckle, CEO. Please go ahead.

Thank you, Rachel. Good morning, everybody. This is Paul Arbuckle, and I'm the Group CEO of Donaco International. I'd like to welcome you to the Donaco 2020 Half Year Results Presentation. There will be time for questions at the end of the presentation. So if you could hold your question till then, we would appreciate it. I'm joined this morning by Donaco's CFO, Mr. Gordon Lo. He will also be available to answer questions at the end of the session. Thank you. I'd like now to go to Slide 2 of the presentation. The statutory results due to a loss of $1.5 million, which is primarily due to a noncash impairment charge of $4 million, which has been taken against the value of the Star Vegas casino license. It is important to note that on the underlying basis, the business has still delivered a half year profit of $4.3 million in the transition year following significant Board and management changes post the 2019 AGM. We have continued to focus on operational improvements and tightening cost controls. This includes a range of new slot machines, which we negotiated better terms from our vendors at Star Vegas. We've also significantly reduced operating expenses, despite the higher legal costs related to the dispute with the Thai vendor. Following the 2019 AGM, the Donaco Board has been further strengthened with an appointment of nonexecutive Chairman and 2 nonexecutive directors. All of them bring a wealth of experience from business turnarounds, restructuring and performance management. During the period, as you know, I have also tendered my resignation as Donaco's CEO. I must say that I have enjoyed my time at Donaco, and do wish the company all the very best for the future. Pursuant to my employment contract, I will remain with the company to assist in the transition period. A number of quality candidates have been identified for the CEO position, and they're currently being considered by the Board. As previously announced to the market, the Board have signed an MoU, Memorandum of Agreement, or understanding with Thai vendor of the Star Vegas business to suspend all litigation matters until the end of March whilst the Board attempts to negotiate a settlement of the outstanding litigations. We will be able to update the market in due course on the outcome of these negotiations, but I must stress, they're still underway. Our financial position remains solid with both Star Vegas and Aristo, remaining cash flow positive and continued repayments of the Mega Bank loan, which we will provide more detail. If I could turn now to Slide 3. Okay. So following the AGM in November last year, there's been a number of senior management and Board changes. Our new chairman, Mel Ashton, and key nonexecutive director, Mr. Rod Sutton and Simon Vertullo, have been appointed to the Board. Mel is a listed company director and brings over 37 years' experience across hospitality, property, banking and resources industries. Previously, Mel held senior leadership roles in restructuring and insolvency at KPMG. Mr. Rod Sutton and Mr. Simon Vertullo also bring a wealth of experience in business turnarounds, restructuring and performance management. On Slide 4, the new Board have identified some priorities that it will focus on in the near term. The first of these is the settlement with the Thai vendor, which we are seeking to achieve with a fair outcome in a timely manner. The Board is aware that the liquidity of the company is tightened, especially after the closure of the border crossing between China and Vietnam in January, due to the outbreak of COVID-19. Accordingly, Donaco is seeking to access financing to support the payment obligations and working capital requirements. The third priority is to maintain and further tighten the control of operational and corporate expenses, including procurement to improve efficiencies across the business and also to bring the conditions around contracts to third-party vendors on to more commercial terms. On Slide 5, as mentioned before, I have tendered my resignation as Donaco's CEO and will remain with the company to assist in the transitional period. An executive search is currently underway for a new CEO, and I believe there will be some announcements in the near future. Now Mr. Gordon Lo has been appointed to the company as the CFO, previously having served as the CFO of publicly listed Hong Kong company. On Slide 6, beginning to talk about numbers. These figures are all shown in Australian dollars. The group revenue was $40.9 million, which was up from $39.7 million in the previous corresponding period. Star Vegas was impacted by increased competition in the Poipet area and the transitioning work is undertaken to expand our [indiscernible] contract. We did benefit from a strong win rate in relation to the VIP play, which benefited the results greatly. We've introduced new gaming machines on more favorable terms with the same providers. Those have shown an improved performance in our gaming machine revenues during January. Aristo produced strong performance in the 6-month period, having recovered from the challenges faced in the previous corresponding period. Revenue increase was underpinned by strong improvements from both VIP and main floor turnover and the improvement in non-gaming revenue. As previously reported to the market, the outbreak of COVID-19 in China resulted in a 75% decline in our daily visitation at Aristo in February. The border between Vietnam in L o Cai and China. L o Cai , it has closed, and we continue to maintain a tight cost control for the venue throughout this period. On Slide 7, which is nonrecurring items. As mentioned before, this period includes a $4 million noncash impairment in the value of Star Vegas single license, which is related directly to the cancellation of the online gaming license. So we recall the Canberra government issued [ 3 weeks ] to close down all online gaming activities in Canberra at the end of December. This reflects the [ maturities ] the license valuation adjusted by the new Board. [indiscernible] -- sorry, the nonrecurring costs included legal costs associated with the litigation of $1.1 million and a further $600,000 or $0.6 million in write-off of other assets and prepayments. Slide 8, the balance sheet. The group still holds $24.9 million in cash, and debt has decreased to $27.8 million from $35.9 million for the previous corresponding period, I think. The reduction in intangibles reflects the noncash write-down of the license. So overall, financial position remains sound. Slide 9 shows the cash flow statement. A significant improvement in operating cash flow of $7.6 million compared to the prior corresponding period. The improved visitation and turnover at Aristo was the major contributor to the uplift. The financing outflow represents debt and interest rate repayments to Mega Bank. Okay. Going on to Slide 10, and turning now to a look of the individual properties. At Star Vegas, the VIP turnover decreased by 41%, due to increased competition in the Poipet area, the transitioning work we've done with junket operators. We did benefit from strong VIP gross win rate of 3.52%, which, as I mentioned before, did grow the existing results. So overall, our net gaming revenue fell 18%, due to lower visitation and turnover, specifically in November and December. We started over 3 months profitable, despite probably level EBITDA being down by around about 19%, largely affected by a particularly weak December due to increased competition. Slide 11. So some operational metrics in greater detail. And as you can see, the results were lower across the board. So I think if we go over to Slide 12. Slot machine revenue did decrease by 36%, due to increased competition. We did see that the slot machine business improved in January due to the new initiatives deployed, the new machines and new terms and conditions with our same providers. We've continued to tighten control of operating expenses, which were down 9% overall compared to the prior period. Management is continuing to seek additional type of visitation and constantly reviewing our customer programs to improve visitation. So if we go on to Slide 13 and look at the Aristo. Aristo did produce a strong performance in the 6-month period, having recovered from the challenges that the business faced in the previous corresponding period. Net gaming revenue increased by 42%, RMB 51.1 million during the December 2019 half, with strong improvements in both VIP and Main Hall turnover. Non-gaming revenue also increased 33%, RMB 24.1 million. Slide 14 shows that in contrast to Star Vegas, Aristo has strong and improved across all its operating metrics. So if we turn now to the outlook on Slide 15. We are implementing cost control strategies at Aristo to manage the downturn related to travel restrictions caused by the COVID-19 virus while ensuring that the proper health and hygiene protocols are in place. The Board is currently in discussion with several potential strategic investors, and we will, of course, provide updates in due course. Operationally, we are been cautious towards the impact of COVID-19 on our results in the second half. Note that Star Vegas, there has not been a noticeable impact. At this point, we're also monitoring the situation very closely. Our [ current ] position remains solid. The Mega Bank debt being reduced to $24.1 million, and we are considering options to free up additional working capital for the business. The new Board actively negotiating with the Thai vendor to resolve the outstanding litigation matters. This is expected to result in an outcome over the next couple of months. So thank you very much. Together with Gordon, we will be happy to take -- or I'll be happy to take any questions that you may have. And I will now hand back to the moderator to -- for your questions. Thank you very much.

[Operator Instructions] Your first question comes from Kerem Aksoy from Glacier Pass Partners.

Thank you for the time and all the hard work in a tough operating environment. I had a couple of questions. But first, I understand that Leo and Kurkye will be on the call. I'm wondering if that was the case.

No, I'm sorry. It's only Gordon and myself this morning, Kerem. So it's good to have Kurkye, yes. I'm going to turn to any -- answer any questions that you might have to Kurkye.

Okay. I appreciate that. I guess maybe to start, I was curious why the company decides to start with the settlement process now. Previously, it would have been communicated. With that simple arbitration process, it would be concluded by the end of February, and the Cambodia lead settlement is tied up in a multiyear appeal process. And my understanding is that the company thought it would have most negotiating leverage after hearing the Singapore arbitration results. So I'm curious what changed versus prior communications?

Thanks, Kerem, yes. From my perspective, I guess the settlement negotiations are ongoing. They are crucial. We can't really divulge any information other than what we've already said publicly. I think the timing of the negotiations is relevant. I mean there is a, I guess, a wish on both sides to settle these issues and move forward. So that's pretty much all I can say at the negotiations at this point. We will, of course, release an update at the conclusion of the negotiations coming from the market about the outcomes. So I'm really not in a position to add any more than that at the moment, Kerem. So thank you for the question.

Okay. And then maybe just kind of continuing on. I have a question on your comments on liquidity needs. What kind of options is the company considering? I was wondering if you could talk about that a little bit.

Well, I think as you're aware, we've had the loan with Mega Bank over some time, and we are looking to negotiate more favorable terms along those many conditions and perhaps to access some additional financing from other sources. So again, it's negotiations, which are ongoing. They have been a little bit interrupted due to the virus, [ conditions are not amazing ] and people are not traveling as much as they were. And so communication is a little more difficult than what they have been. But the Board continues to negotiate those refinancing options, and I'm sure that there'll be a lot more favorable terms in the near future, but I'll not be able to further comment on that until things are settled.

So is it rights offering? And is the rights offering one of the options being discussed?

No. I'm sorry, I don't know at this point. But if you like, Kerem, I'm sure that we can pass those questions on to the Board to further elaborate.

Okay. But so you can confirm that it's not being discussed?

Well, no, I can't. I can't really comment either way.

Okay. And then, I guess, my understanding is that Leo and Kurkye are leading the negotiations with Somboon. And given they wear 2 hats now as company employees and also representatives of the controlling shareholder, can you discuss what controls and systems are in place, I mean, at Board level, the company level, negotiation level to protect the minority shareholder rights?

I'm sorry, I didn't quite understand that. What systems did you say?

Yes. Well, I mean, if you think about it, the controlling shareholder, ASM is essentially not negotiating with another shareholder here, Somboon, on behalf as company representatives, but they also are shareholders. So I was wondering what systems were in place to protect minority shareholder rights here to make sure they are not disadvantaged in this process?

Okay. Well, I guess, the corporate governance system around the Australian Stock Exchange will come into play. These directors are acting on behalf of all shareholders, and we do have non-executive directors, which are involved in the negotiations as well. It's not just simply the 2 executive directors, which we thought. So the directors are very conscious with their role and the fiduciary obligations around acting on behalf of all shareholders. And I believe that, that is prominent in their minds when you're talking to Thai vendors, et cetera, in regards to negotiations with the issues.

And then to the extent there is a transaction for one or either property or one or the other, would that require a shareholder vote?

I'm sorry, say again? To the extent that...

To the extent a transaction involving one or either property, would that require a shareholder vote?

You mean a sale or an investment or...

Yes.

I'm not sure it requires a shareholder vote or approval, but I can confidently say there would be information and announcements made around those issues, should be, eventually. Gordon, would you know if it requires a shareholder approval for any transaction? Take that.