A-Mark Precious Metals Inc (AMRK) 2015 Q4 法說會逐字稿

Good afternoon and welcome to A-Mark Precious Metals fiscal fourth-quarter and full-year 2015 conference call. My name is Manny, and I will be your operator this afternoon.

After the market closed yesterday, the Company issued the results of its fiscal fourth-quarter and full-year of 2015 in a press release, a copy of which is available in the investor relations section of the Company's website at www.amark.com. The link to the investor relations section is at the bottom of A-Mark's homepage.

Joining us for today's presentation is the Company's Chief Executive Officer, Mr. Greg Roberts; and Chief Operating Officer, Mr. Thor Gjerdrum. Following their remarks we will open up the call for your questions. Then, before we conclude today's call, I will provide the necessary cautions regarding the forward-looking statements made by management during this call.

I would like to remind everyone that this call will be recorded and made available for replay via a link available in the investor relations section of the Company's website. Now I would like to turn the call over to A-Mark's Chief Executive Officer, Mr. Greg Roberts. Sir, please proceed.

Thank you, Manny. Welcome, everyone. Thank you all for joining us today. Fiscal 2015 was a transformational year for A-Mark. The year was highlighted by several operational achievements, including the development of our new Las Vegas logistics facility, which we expect to provide us with substantial operational cost savings and synergies.

From a financial perspective, fiscal 2015 was another period of relative low volatility in the precious metals markets. However, despite the light market volatility experienced, we once again delivered profitable financial results. In fact, Q4 marked our fifth consecutive quarter of profitability since we became public in March of 2014.

During the fourth quarter we continued to execute our growth plan by expanding our trading capacity along with our higher-margin services and value-added product pipeline. These key initiatives are designed to increase long-term revenues and profitability.

The success of our execution was evidenced by the 20% improvement in our gross profit during the fourth quarter compared to our gross profit the same year-ago quarter. Our financial performance also reflected the solid potential of our business model. As many of you know, our business model is strategically structured to provide consistent profitability in all market environments while offering opportunities for significantly higher revenue and gross profit when we see increased volatility and demand for our products.

Before I go further, I would like to turn the call over to our COO, Thor Gjerdrum, who will walk us through the financial details for the quarter and fiscal year. Afterwards, I will return to talk more about our operational progress and business outlook for fiscal 2016. Thor?

Thank you, Greg. Good afternoon, everyone. Now for our financial results for the fiscal fourth quarter and full-year ended June 30, 2015. Revenue in the fourth quarter totaled $1.45 billion, which is up 3% from $1.41 billion compared to the same year-ago quarter. The increase was driven primarily by higher global silver ounce volumes offset by lower commodity price.

For the fiscal year, revenue increased 2% to $6.07 billion from $5.98 billion in fiscal 2014. The increase from fiscal 2014 was also primarily due to higher sales volume of silver ounces partially offset by lower precious metals commodity prices and lower market volatility. Greg will provide more detail on our gold and silver ounces sold and trading ticket volumes shortly.

Our gross profit increased 20% to $6 million or 0.41% of revenue from $5 million or 0.35% of revenue in the same year-ago quarter. The improvement in gross profit was driven by our higher-margin value-added products.

For fiscal 2015 our gross profit was $24.5 million or 0.40% of revenue. This was down 11% from $27.4 million or 0.46% of revenue in fiscal 2014. The decrease was due to lower premium spreads on our core product, offset by higher sales volumes of our primary silver products coupled with sales of higher-margin value-added products.

To expenses, SG&A expenses for the fourth quarter of fiscal 2015 totaled $4.1 million, which was up 33% from $3.1 million in the same year-ago quarter. For the full fiscal year, SG&A expenses increased 10% to $17.1 million from $15.6 million in fiscal 2014. The increases in SG&A expenses were primarily due to costs related to the opening of our new logistics center in Las Vegas as well as a full year of administrative expenses associated with being a public company.

Our net income for the fiscal Q4 increased 66% to $2.6 million or $0.36 per diluted share from $1.5 million or $0.21 per diluted share in the same year-ago quarter. The increase was due to higher gross profit and certain one-time tax benefits, which were offset by higher SG&A expenses.

Our net income for the fiscal 2015 totaled $7.1 million or $1 per diluted share. This was down from $8.3 million or $1.09 per diluted share in the prior year. The decrease in net income was primarily due to lower gross margins and higher costs.

Now, turning to the balance sheet, at June 30 we had $20.9 million in cash on our balance sheet, which is up from $13.2 million at June 30, 2014. The increase in our cash balance is primarily due to timing of cash receipts from customers. We typically utilize excess cash to pay down our lines of credit to minimize interest expense.

Our access to capital remains strong, with $147 million drawn on our lines of credit at quarter-end. We also have a product financing arrangement with $39.4 million in draws at the end of the quarter. This arrangement provides us with approximately $100 million in additional inventory finance capability. Our current ratio remains strong at 1.16, which is flat compared to the prior year as well as in line with our industry.

Our tangible net worth totaled $48.7 million or $6.90 per share, which was up 16% from the prior year. And finally, as we announced last week, our Board of Directors maintained our quarterly dividend, distributing $0.05 per share to stockholders of record today, September 24. The dividend demonstrates our Board's confidence in our balance sheet, future cash flow, as well as commitment to maximizing shareholder value.

This completes the financial summary. Greg?

Thank you, Thor. As I mentioned on our last call, our profitability has historically been a function of industrywide precious metal price volatility and changes in supply and demand for our products. As such, the recent lower levels of volatility have impacted premium spreads and the resulting gross margins.

During the fourth quarter, the average spot price of gold was $1,208 per ounce. This was down 2% from the prior quarter and down 8% from Q4 2014. Looking at silver, the average spot price of silver in fiscal 2015 was down 1% from the prior quarter and down 16% from Q4 2014.

It's important to understand that changes in precious metal prices have no direct effect on A-Mark's business due to the hedging of our inventory. However, large price increases or decreases are typically associated with changes in volume and volatility, which do positively affect our business.

Along those lines, as trading volumes go up, we do more business and therefore earn more revenue and gross profit. In fact, our gold and silver ounces sold in the fourth quarter were up significantly from the same year-ago periods.

For Q4 2015, our physical gold ounces were up 14% to 481,130 ounces. And our physical silver ounces sold were up 4% to 22 million ounces. While our physical gold ounces sold were down 5% in fiscal 2015, our physical silver ounces sold around 30% for the year to 88.5 million ounces.

Another new metric we are introducing the quarter is trading ticket volume, which is the number of tickets processed across our trading desks in Santa Monica and Vienna, Austria. During the fourth quarter, our trading ticket volume was up 9% from the prior quarter and 17% from the same year-ago period, totaling 22,730 tickets.

For the full-year, our trading volume was up 6% to 85,094 tickets. We have seen these positive upward trends continue into our fiscal first quarter of 2016, which ends on September 30.

The economic uncertainty in Greece, China, and the US equity markets as well as the weakness in the euro have generated a strong surge in precious metals demand and volatility. These macroeconomic events greatly benefit our core trading business and allows us to expand our volumes and trade tickets along with our premium spreads on precious metals. As volatility increases, bid/ask spreads widen, and we earn more money from each transaction.

During periods of increased volatility we anticipate seeing increases in volume across our trading desk, larger trading spreads, and more activity in our logistics and financing businesses, each of which has the potential to improve our financial performance. In addition to capitalizing on the current market environment, we continue to pursue business development initiatives which can provide us with greater capacity and direct influence over our profitability. These initiatives include further expanding our value-added service offerings, which includes storage and logistics.

Along those lines, I am happy to report that our Las Vegas logistics facility is now operational. The initial customer response and feedback has been overwhelmingly positive. We are encouraged by the unprecedented level of interest we are seeing from current and prospective customers. We hope to continue satisfying this pent-up demand by converting this interest into service contracts.

Additionally, we plan to consolidate select operations into the Las Vegas facility by the end of fiscal 2016 second quarter. The consolidation will provide us with significant cost savings annually, which will further boost our bottom line. Ultimately, the expectation is that the facility will allow A-Mark to provide our customers with a full suite of ancillary services, with the goal of deepening our customer relationships and enhancing our revenues and gross margins.

The second largest growth opportunity we currently see is in Europe -- a market that is ripe for expansion, particularly in light of the recent movement in and uncertainty around the euro. The result has been a strong increase in demand for precious metals in Europe. If these demands continue, we believe the macroeconomic trends and uncertainty will generate a high level of activity for A-Mark in fiscal 2016.

As such, we are expanding our marketing efforts within Europe in fiscal 2016. In order to accomplish this, we intend to continue to expand our European trading and logistics capacity to better capitalize on the anticipated increased market activity.

Now turning to our value-added products: our custom coin products continue to present an opportunity to enhance our gross margins and overall profitability. Our strong relationships with the top sovereign mints enable us to create new coins in order to meet the growing demands of our customer base. We currently have 25 live custom products and 25 products under development, with 15 of the 25 products scheduled to launch in the next 90 days.

Turning to our financing subsidiary, Collateral Finance Corp., or CFC, we continue to see steady demand for our secured loan programs, reflected by the increase of the loan dollars outstanding at the end of fiscal 2015, which was up 20% to $49.3 million compared to last year. The improvement in the dollar value of loans outstanding, which resulted in higher interest income, was due to a greater number of borrowers. In fact, our total borrower count was up 170% to 346 from 128 in 2014, driven by our acquisition of loan portfolios.

Another growth area of our business is supplying wholesale customers who are focused on Internet retail. As we mentioned on our last call, we made investments in two fast-growing online retailers during fiscal 2015. These investments are an integral part of our online retail growth strategy and our overall business diversification strategy. We are very encouraged with our partners' continued execution and strong performance to date.

Looking ahead, we remain committed to our strategy that has proven successful and profitable by focusing on the growing our higher-margin services and finance businesses as well as our custom coin programs. Looking ahead, we have entered fiscal 2016 on a strong footing with significant operational and financial momentum. We hope to capitalize on this momentum throughout the fiscal year and believe we are seeing initial signs of increased revenues and profitability.

Now, with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions) Ian Corydon, B. Riley & Company.

Thank you. So it was nice to see the sequential increase in gross margin, and -- understanding that is driven by premium spreads -- if there is any additional color you could give on that, that would be helpful. And then maybe you could talk about the sustainability or the opportunity to improve those margins over the next few quarters.

Thank you, Ian. I think towards the end of Q4, we started to see some demand increase for our products, driven by, as we said earlier, the events in Greece; and then following on with China and some volatility in the US equities markets. It appears that all three of those events have added to the retail demand on our precious metals products, particularly in silver. And what we saw in June was the United States Mint go on allocation, which means that there was more demand, and demand for more ounces, than the US Mint was able to make. And that's something that is public; you can see that on the Mint website.

Whenever we have a situation where we go into to allocation, A-Mark benefits from the largest allocation that the Mint provides, due to our history with the US Mint. And the allocation pushes customers to other products that we also sell. These events have allowed us to increase our premium spreads over what we were seeing in the first two months of Q4, and the allocation by the US Mint has continued. They continue to be on allocation today.

And if you were to go and look at our website, you would see our premiums are much higher today than they were in April or May of Q4. So that adds a little bit of color to what we have said, and I hope it answers your question.

That's very helpful. And in terms of the recent volatility that you're seeing, it does not necessarily seem to be showing up in our spreadsheets. Is that more intraday volatility or day-to-day? Maybe you could talk about -- a little bit more about what you're seeing in terms of the volatility of gold and silver.

I think you haven't really seen it in the closing price of gold and silver. If you look at the charts, it is still traded in a fairly narrow band. But what we have seen is more inter-day volatility and more volume. And the increased volumes in ounces does allow us to make a little bit more profit on our transactions. So when you see inter-day moves of $0.20, $0.30 in silver or $5 to $10 in gold, that is very helpful for us.

I think today, in looking at the price of gold, it did have a fairly major breakout today, up to -- up past the 53 (sic - $1,153) level, and that is a new breakout. And if you look at our -- what we communicate to our customers through our newsletter, we have noted that breaking through the 50 mark was very important. So, as you said, we do see inter-day volatility up and we do see volumes up.

Okay, great. And then, Thor, maybe you could just talk about the G&A run rate. Is the Q4 number a good number to use going forward? And then, what tax rate should we use for modeling purposes?

Yes, so first, to the tax rate, there were some one-time benefits that will not be recurring. You'll see our effective tax rate go back to what you have seen historically, which is in the high 30% range from an effective rate perspective.

On the G&A side, I think you -- I don't think you are going to see a big drop in the coming quarters. However, we did have some one-time charges in there related to logistics and some additional costs related to our change in auditors. But I don't think -- as our business grows, I think that the number overall should be in the range you have seen in the Q4.

Very helpful. Thank you.

(Operator Instructions) Austin Hopper, AWH Capital.

I was hoping you could talk more about the cost savings that you expect from the Las Vegas facility and kind of the timing of that. Thank you.

Sure. So the Las Vegas facility is currently open, and we are moving that in phases. We expect that the annual savings, once our -- specifically our Los Angeles and Salt Lake wholesale operations are consolidated there, will be in the range of $0.5 million a year in bottom-line savings. We expect to begin moving one of our facilities into that facility in the next 45 days, and we expect that within 4 to 6 months, we will have the bulk of those two facilities moved in there.

So for the fiscal 2016, I don't think you will see a whole lot of the $0.5 million. But once we have both of those in there, into Q3 going forward, we would expect to experience those sales -- those savings on an annual basis.

Great, thanks.

(Operator Instructions) Louis Gesser, Private Investor.

Good morning, gentlemen. Thank you for taking my call. I have two questions. The first: on the collateralized finance side, it's good to see the borrower count go up as it has. I'd be curious to know if, in terms of absolute outstandings, do you have enough -- adequate bank capacity? I know there has been some rotation in your bank line recently; a discussion about that, if you can.

And then secondly, on the dore side of the business, I am wondering if you can dimension the size or potential of that business going forward, the forward sale, for fiscal year 2016. Thank you.

Hello, this is Greg. On the mine financing side, we probably have a book right now of between $20 million and $30 million that is outstanding for those forwards that we provide the mines. And it's an area that we are cautiously growing. Right now we are -- there has been some volatility and a little bit of uncertainty in the actual miners that are out there that are struggling a little bit right now. It's both small and large minors and commodity people.

So we are -- we are continuing to look for good customers. I think we've added one or two new customers in the last quarter. And we are happy with our pace on that, but it is slow and cautious. And when we get an opportunity where a customer may come off of a relationship they have with another lender, we are out there and ready to step in. So we still like the business, and we expect to see it continue to grow.

On the collateral lending side, as far as capacity goes, we are comfortable with the carveout that we have with our banks for CFC. CFC does use a combination of our own capital as well as borrowings from our lenders.

And we feel that looking out the next 12 months, we have plenty of capacity for that business. Obviously, as we said earlier, the numbers are quite encouraging. The book -- the overall book is up substantially, and our customer count is up dramatically. So we are comfortable with the business and very optimistic for the next 12 months.

Thank you.

Matt Schwarz, Maze Investments.

How much of the gross margin improvement that you saw in the fourth quarter was due to higher-margin products contributing to the mix versus just the overall improved spreads that you are seeing from the change in the macro environment?

I think that the premium spread on products is probably the most significant improvement we saw towards the end of Q4. I don't think that the macro market or the large institutional buyer business has really yet reflected what's going on in the macro environment.

Most of the improvement we are seeing is coming from smaller orders and mostly silver. We have started to see some improvements in the amount of ounces of gold we are selling versus the amount of silver as it relates to the difference between the two in our overall business. But thus far, in the last few months we have seen an increase mostly in small silver orders or small-denomination silver coins, particularly the 1 ounce coins. We have not seen a big increase in large silver bars or large gold bars.

Okay, got it. And if I understand some of the comments you made earlier to Ian, some of the improvement that you saw in your business in the fourth quarter -- that came -- is it right that that came pretty late in the quarter, and you have essentially seen those types of conditions continue into the first quarter?

I would agree with that statement.

Okay. Is there period in time from your past that we could turn to to try to understand what the gross margin opportunity is for your business in this type of environment that you are now experiencing?

I think the period between January -- probably the period between February, March, and June of 2013 was a past period that it felt -- that had similar characteristics of what we are seeing right now.

Okay, great. Thank you.

The only real difference in that period was you had -- if you look at the gold and silver chart, in April you had a dramatic drop in precious metals prices that was very significant. That drove some volumes. In this case, as we have said earlier, we believe that although you had a small drop in June, there appear to be some more macro economic drivers today than just by the dip concept.

Okay, all right. Excellent, thank you.

Thank you. This concludes our question-and-answer session. I would now like turn the conference back over to Mr. Roberts for any closing comments.

Thanks to everyone for joining us today. I want to thank our investors for their continued support as we continue to build A-Mark into the global leader in precious metals trading. We look forward to updating you on our next call. Operator?

Before we conclude today's call, I would like to provide A-Mark's Safe Harbor statement that includes important cautions regarding forward-looking statements made during this call. During today's call, there were forward-looking statements made regarding future events, including A-Mark's future plans, objectives, expectations, performance, events, and the like are forward-looking statements from the meaning of the Private Securities Litigation Reform Act of 1995 and of the Securities and Exchange Act of 1934.

Future events, risks, and uncertainties, individually or in the aggregate, could cause actual results to differ materially from those expressed or implied in these statements. Statements in this press release that relate to future plans, objectives, expectations, performance, events, and the like are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934. Future events, risks, and uncertainties individually or in the aggregate could cause actual results to differ materially from those expressed or implied in these statements.

Factors that could cause actual results to differ include the following: a failure to execute our growth strategy as planned; greater-than-anticipated costs incurred to execute the strategy; the favorable results that we are experiencing in the first fiscal quarter of 2016 not being indicative of activity for the full fiscal year; changes in the current international political climate, which has favorably contributed to demand and volatility in the precious metals markets; increased competition for our higher-margin services, which could depress pricing; the failure of our business model to respond to changes in the market environment as anticipated; general risks of doing business in a commodity market; and other business, economic, financial, and governmental risks as described in the Company's public filings with the Securities and Exchange Commission.

The words should, believe, estimate, expect, intend, anticipate, foresee, plan, and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the date on which they were made. Additionally, any statements related to future improved performance and estimates of revenues and earnings per share are forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

Finally, I would like to remind everyone that a recording of today's call will be available for replay via a link available on the investors section of the Company's website. Thank you for joining us today for the presentation. You may now disconnect.