A-Mark Precious Metals Inc (AMRK) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to the A-Mark Precious Metals conference call for the fiscal fourth quarter and year ending June 30, 2016. My name is Matt, and I will be your operator this afternoon. Earlier today, A-Mark issued the results of its fiscal fourth quarter and full-year 2016 in a press release which is available in the Investor Relations section of the Company's website at www.amark.com. You can find a link to the Investor Relations section on the bottom of the homepage.

Joining us on today's call are A-Mark's CEO, Greg Roberts; President, Thor Gjerdrum; and CFO, Mr. Cary Dickson. Following the remarks, we'll open the call to your questions. Then, before we conclude today's call, I'll 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 it will be 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 CEO, Mr. Greg Roberts. Sir, please begin.

Thank you and welcome, everyone. Thank you for joining us today. The fourth quarter marked a strong finish to a pivotal year in A-Mark's development. Our performance in Q4 was reflected by the year-over-year improvement of several key metrics including revenue, which was up nearly 20% as well as gross profit, which was up 27%. These double-digit growth rates were driven by the continued demand for our primary bullion products and higher-margin custom products.

In fact, during the fourth quarter, we doubled the number of custom gold products sold, resulting in more than a doubling of gross profit for this product. On top of this margin expansion, we continued to experience a record number of loans and customers from our financing subsidiary, CFC, which is supported by the increasing demand for alternative financing in the marketplace. We have been able to take advantage of this by generating increasing interest income from secured loans and other finance products. In just the fourth quarter alone, we generated $2.4 million in interest income, which was up 53% from Q4 of last year.

From a profitability standpoint, despite higher SG&A related to investments we made in our business, as well as a higher provision for taxes in Q4 as compared to the same year-ago period, we generated more than $1 million in net income. This speaks to the attractiveness of our business model, which is structured to provide profitability in all market conditions. On top of that, we were able to raise our quarterly dividend by 40% last February due to our increasingly strong financial and balance sheet strength.

While our financial results for Q4 and most notably, Q1 were encouraging, we have reiterated that it's best to evaluate the performance of our business on a longer-term basis. Along that line, our financial results for the entire fiscal year were extremely strong across the board, highlighted by double-digit revenue growth and record gross profit, which produced a two-year high in net income. A key driver of these milestones was renewed investment interest in precious metals. This is demonstrated by the fact that we sold more than 140% of the gold and silver ounces that we sold in FY15.

From an operational perspective during FY16, we continued to execute on our plan to expand capacity and gain market share. Our success in this area resulted in the achievement of several key initiatives that we identified at the beginning of the year. This included significantly increasing the number of custom coin products and programs, opening our Las Vegas logistics facility which completed its first full year of operations in July, as well as expanding our value-added ancillary services like storage and product fulfillment.

In regards to our fiscal first quarter of 2017 which will end September 30, 2016, we have seen normal market conditions in precious metals compared to the high demand and volatility we experience in the same period a year ago. As a point of reference, as everybody knows, we point to the US Mint website to gain data in the demand and products that are being sold by the US Mint. Their one-ounce Silver Eagle sales in July and August 2015 totaled 5.5 million and 4.9 million ounces, respectively, as compared to July and August of this year 2016, where they sold 1.3 million and 1.2 million, respectively. Given the current market conditions, we do not anticipate the financial performance this year to be commensurate with the same year-ago period; however, we remain optimistic about our business and all of our opportunities.

Before I continue, I would like our CFO, Cary Dickson, to walk us through the financial details for the quarter and year ended June 30, 2016. Then our newly appointed President, Thor Gjerdrum, will discuss our market position and some key operational metrics. Afterward, I will return to talk more about operational progress and those initiatives as well as our outlook for FY17. Cary?

Thank you, Greg, and good afternoon, everyone. Turning to our financial results for the fiscal fourth quarter and year ended June 30, 2016. Our revenues increased 19% to $1.74 billion from $1.45 billion in Q4 of last year. The increase in revenue was primarily due to a 48% increase in gold ounces sold and a 17% interest in silver ounces sold. This was driven by demand for our primary product as well as a 5% increase in the average spot price for gold.

For the full year, our revenues increased 12% to $6.78 billion from $6.07 billion in FY15. The increase was driven primarily by a 45% increase in gold ounces sold and a 43% increase in silver ounces sold. Contributing the increase in demand was the volatility and decrease in commodity prices during fiscal Q1 of this year, which resulted in renewed investment interest in precious metal.

Our gross profits for fiscal Q4 increased 27% to $7.6 million, or [0.44]% of revenue from $6.0 million, or 0.41% of revenue in the same year-ago quarter. The improvement in gross profit margin was primarily due to better performance of our higher-margin custom coin products. For FY16, our gross profit increased 41% to $34.5 million, or 0.51% of revenue from $24.5 million, or 0.40% of revenue in the prior year. The increase in gross margin was primarily due to higher premium spreads on higher primary product, particularly during Q1.

Our selling, general, and administrative expenses increased 46% to $5.9 million from $4.1 million in Q1 of last year. For the full year, our SG&A expenses increased 30% to $22.2 million from $17.1 million in the FY15. The increase for both Q4 and FY16 was primarily due to strategic investments in our business, specifically, the development of our IT infrastructure and related IT consulting costs as well as the operational costs and investment in our logistics facility. SG&A was also higher due to investments in key personnel and bonus compensation because of improved performance.

Interest income for the fourth quarter increased 53% to $2.4 million from $1.6 million in Q4 of last year. For FY16, interest income was up 45% to $8.8 million from $6.1 million for FY15. The quarterly and full-year increase is primarily due to an increase in the size of our loan portfolio, as well as improvement in certain finance products.

Interest expense for the fourth quarter increased 88% to $2.1 million from $1.1 million in the same year-ago quarter. For the full-year, interest expense increased 47% to $6.3 million from $4.3 million in the FY16. The quarterly and the full-year increase was primarily due to greater usages of our line of credit and other prior financing arrangements, increased interest rates, and amortization of loan syndication fees.

Net income for the fourth quarter of 2016 decreased 58% to $1.1 million, or [$0.15] per diluted share. This compares to net income of $2.6 million, or $0.36 per diluted share in the same year-ago quarter. The year-over-year decrease is primarily due to a higher provision for income taxes, as well as higher interest expense, and selling, general and administrative expenses.

The decrease in net income was partially offset by higher gross profit and interest income compared to the same year-ago quarter. For FY16, our net income increased 31% to $9.3 million, or $1.30 per diluted share from $7.1 million, or $1 per diluted share in the same period last year. The increase was primarily due to higher revenue, gross profits and interest income, partially offset by higher SG&A, interest expense, and income tax.

Now, turning to the balance sheet. At year end, we had $17.1 million of cash on our balance sheet. It's important to remember that we are a net borrower, and we typically pay down our balances daily to minimize interest expense. As we mentioned on our last call during the fourth quarter, we secured a new credit facility that provides us with access of up to $275 million, including a $225 million base with a $50 million accordion option.

The facility has a one-year maturity and replaces our previous $205 million credit facility, while improving our terms which includes a lower blended rate and more favorable financial covenant. It's important to reiterate that this new facility enhances our credit capacity by $70 million, allowing us to be more opportunistic when deploying our capital. By increasing our access to capital, we are better positioned for the rise in commodity prices, as well as our growing capital requirements as we continue to expand our business. The facility also includes our ability to capitalize should the market experience volatility and supply constraints in the future. The lower blended rate, which allows us to reduce our interest expense, and an improved leverage cost covenant, were key improvements to our borrowing arrangements.

In addition to our new facility, we also have product financing arrangements of $50 million -- $59 million in draws at the end of the quarter. This arrangements provides us with nearly $100 million of additional inventory financing. Our tangible net worth totaled a record $56.7 million, which was up 16% from June 30, 2015 and totalled [$8.01] per share on a fully diluted basis.

Finally, as we announced two weeks ago, our Board of Directors maintained our regular quarterly cash dividend, distributing $0.07 per share to all stockholders of record as of September 19. This completes my financial summary. Now, I will turn the call over to Thor, who will provide an update on market conditions and key performance metrics.

Thanks, Cary. In addition to our improving financial results, our management team utilizes four key metrics to assess the performance of our business. These include the number of gold or silver ounces sold, trading ticket volume, inventory turnover, and the size of our finance book.

The first key metric that we look at is the number of ounces of gold and silver sold. This metric is important because it reflects the volume of business that we are enjoying without regard to changes in commodity pricing, which figure into revenue and can mask actual business performance trends. In Q4, the number of gold ounces we sold was up 48% to 711,000 ounces while the number of silver ounces we sold was up 17 % to 25.8 million ounces. For the full year, we sold 3 million ounces of gold, which was up 45% and a record 126.3 million ounces of silver, which was up 43% compared to last year.

Another measure of our business volume that is unaffected by changes in the commodity price is trading ticket volume, which is the total number of orders processed at our trading desks in Santa Monica and Vienna, Austria. In periods of higher volatility, there is generally increased trading in the commodity market and increased demand for our product, which translates into higher business volume. During Q4, our trading ticket volume was down 8% to 20,964 tickets. However, for the entire fiscal year, our trading ticket volume was up 4% to 88,396 tickets.

The third key metric we evaluate is inventory churn, which we define as the cost of sales during the period divided by the average inventory during the period. As many of you know, inventory churns are measured by how quickly inventory is moved. We typically experience a higher inventory churn during periods of higher volatility, where trading is more robust, reflecting an efficient use of our capital. Our inventory churn in Q4 was 6.7 times, which was down from 7.7 times in Q4 of last year. For FY16, our inventory churn ratio was down 6% to 30.9 compared to last year.

Finally, the fourth metric that we measure is the size of our [legend] business, which is determined using the number of secured loans we have at the end of the quarter. As Greg mentioned earlier, our subsidiaries -- our financing subsidiary, CFC, had a record number of loan to customers in Q4. At quarter end, we had 1,195 secured loans, which was up 239% over the same year-ago period.

The significant improvement was primarily due to the acquisition of bullion-based loan portfolios during the quarter. With that, I will now turn it back to Greg, who will talk about some of the progress we've made -- we've have been making on our key operational initiatives, as well as the outlook for the rest of the fiscal year.

Thank you, Thor. A key driver in the improvement of our performance metrics Thor discussed has been our ability to consistently expand capacity and diversify our business, both organically and through strategic investments. This is demonstrated in FY16 by several major accomplishments, including the expansion of our custom products, the opening of our Las Vegas logistics facility, and the increase in our outside investments.

Our platform of custom coin programs continues to be an increasingly meaningful contributor to our core business. As many of you know, these products typically carry higher margins and are consistently sought after by many customers because of their unique and highly differentiated nature. For that reason, we continue to expand and invest in this part of our business, which now has more than 40 active programs currently in place.

This is up 66% from the 24 active programs we had in the same year-ago period. These programs continue to be well received in the marketplace, as demonstrated by their strong sell-through. We're working hard with our strategic partners to meet the growing demands.

Our strategy has been to push these unique programs through diverse and more wide-reaching channels with the help of our strategic partners and a broadened market strategy. Along that line, we recently appointed David Madge to the new position of Chief Marketing Officer. For those newer to A-Mark, David established our value products business line a few years ago. In his new role, David will be responsible for expanding our marketing platform across our various business units, as well as proactively marketing our portfolio of value-added products. We believe David's industry knowledge and leadership will help expand the A-Mark brand, not only domestically, but also internationally. We continue to look for new talent to add to David's team that will help him with this project.

Supporting this growth and expansion will be our Las Vegas logistics facility. FY16 was the first full year of operation where we shipped nearly 600,000 parcels from our facility. This 17,000 square-foot facility handles the majority of our precious metals logistics, including full-service inventory management and fulfillment, as well as a complete suite of ancillary services.

These higher-margin services include a dedicated service and support center for our fully collateralized loans and storage solutions. To support our wholesale trading business, the facility will ultimately provide a significant amount of secured storage, shipping and delivery services that have historically been outsourced to third-party depositories in various locations.

We have consolidated a portion of these third-party locations into the Las Vegas facility and expect to complete the consolidation phase by the end of this month. By consolidating those operations into one central location under our control, we will reduce dependence on third-party service providers while enhancing quality control, efficiency, and reducing operating costs.

Our facility also provides turnkey logistics services to our customers engaged in the retail business. We provide these customers a one-stop shop for financing, hedging, inventory handling, storage, and seamless drop shipping directly to their own retail customers. A key objective in 2017 is to accelerate the expansion of our turnkey logistics services. In addition to organic growth and expansion in FY16, we increased our strategic investment in one online retailer. In connection with these investments, A-Mark serves as the exclusive supplier for each retailer and also provides fulfillment services to both customers. Importantly, these investments have enabled us to leverage the reach afforded to online retailers. Both retailers performed well in FY16 and we look forward to helping them expand their business in FY17.

Moving on, another recent strategic investment we have completed was acquiring a 55% ownership stake in Indiana-based SilverTowne Mint, a leading producer of fabricated silver products. In connection with this investment, we also entered into an exclusive supplier agreement with Asahi Refining USA, a subsidiary of Asahi Holdings, through our global refinery and producer of precious metals to provide SilverTowne Mint with the raw silver products they need to manufacture their fabricated products.

The aggregate amount of our investment in SilverTowne Mint was $4.221 million, consisting of $3.671 million for the acquired assets, $250,000 for the real estate where the mint facility is located, and $300,000 in working capital. We paid $3.721 million at closing, with the remaining $500,000 represented by a promissory note due and payable on August 31, 2017.

The SilverTowne transaction also included a three-year earnout, with up to $1 million payable annually based on the achievement of specified performance and production thresholds. These production goals include increasing annual silver ounces produced to over 20 million ounces per year within three years. To help put this in perspective, over the last 12 months, SilverTowne Mint produced approximately 12.5 millions ounces of silver with the current capacity to produce up to 20 million ounces annually.

Many of our customers are familiar with the SilverTowne brand; historically, SilverTowne has not been a major supplier to A-Mark. Under our new supplier agreement, A-Mark will now sell 100% of SilverTowne's production, which will significantly increase one of our key metrics, which is the total ounces of silver sold. It is also important to note we have acquired an additional list of customers from SilverTowne to whom we can market A-Mark's other full range of products and services.

Our strategic supplier agreement with Asahi is another key component to the SilverTowne acquisition. Under the terms of the agreement, Asahi Holdings, which refines more than 75 million ounces of silver annually, will act as the exclusive supplier of LBMA-approved silver feedstock to SilverTowne Mint. The arrangement will provide SilverTowne Mint with a consistent supply of silver feedstock, enabling the mint to produce significantly more fabricated bullion annually, which A-Mark will then distribute exclusively throughout Asia, Europe and North America.

SilverTowne Mint currently designs and produces more than 25 different fabricated silver bullion products and 300 different seasonal and topical specialty products. They intend to leverage the Mint's long-standing fabrication capabilities and customers, as well as their extensive coin die portfolio to expand our custom coin programs, improve their quality, as well as introduce new custom products for individual customers.

Clearly, this transaction is unparalleled in the mint fabrication industry. SilverTowne Mint will now be one of the most efficient vertically integrated mints in North America, benefiting from Asahi 's global refining capabilities and A-Mark's industry-leading distribution network. SilverTowne's current management team will continue to be involved in the newly acquired SilverTowne Mint under our new ownership structure.

A-Mark also has employed two world-class traders from SilverTowne, Rita Graft and Patty Roberts, who have 47 years of combined experience and will now join our international trading team. In addition, the numerous operating synergies between A-Mark and SilverTowne will significantly expand our capacity to meet unforeseen surges in demand during market -- volatile market environments, such as the one we experienced in August and September of 2015.

Most importantly, our exclusive distributorship with SilverTowne will enable us to sell a greater amount of silver per year to fulfill the increasing demand of our existing customers and future customers and service a broader range of potential customers. This helps us further establish our reputation for being not only one of the leading bullion trading companies, but also a full-service precious metals provider with a complete array of value-added services. We are excited about this opportunity and look forward to updating you on our progress in the quarters ahead.

Along that line, our strategy going forward continues to focus on growth, investing in our Company, including the volume of our business, geographic presence, and the scope of our complementary products and services that we offer to our customers. We expect that FY17 will be a year of continued execution on our plan, focused on growing our platform of turnkey solutions. We plan to build on this platform throughout the year in order to meet the current and changing demands of our customers. We also continue to look for strategic investments like the SilverTowne Mint that are highly synergistic and complementary to our expanding platform.

So, in summary, FY16 was a transformational year in the development of our business. We continue to believe A-Mark is in a strong position to grow and we are focused on delivering this growth through the competitive advantages and versatility of our business model. We had a great year and good strides in -- on investing in the growth of our Company. Now, with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions)

Our first question comes from Ian Corydon from B. Riley. Please go ahead.

Thank you. Regarding your custom coin products, will you produce all of those silver products at SilverTowne?

Our goal is to produce as many new products as we can at SilverTowne. We currently have agreements with other parties and other manufacturers to produce the products that we're currently producing, but we do believe that over the next 12 months, our goal is to produce, hopefully five to 10 new products at the SilverTowne Mint.

Part of that will be working with David Madge, as well as some of his past contacts and folks that he knows to improve SilverTowne and bring their quality up, bring their efficiency of production up and position SilverTowne to start making those products. So, the answer is, yes, it won't be all of the products, but there are certain products that just need to be manufactured in certain locations. But the goal is to expand our capacity to make those products and have control over the production of those products as we move forward.

Okay. Just to make sure I understand. The existing custom products will stay being manufactured where they are manufactured, but you will add five to 10 new products to SilverTowne, or you will potentially -- some of those five to 10 would be moved from other manufacturing locations?

Depending on the product and what our arrangement is with the current producers and what the product -- the quality of the product is and what they are producing, we will look at each product and decide where it is best manufactured. Remember that a number of our sovereign mint products that are specialty products that are actually sovereign mint with a face value, need to be struck in specific locations and we may not be able to move those products to the SilverTowne Mint.

But, for example, A-Mark produces A-Mark silver rounds, we produced them over the last 30 years, that A-Mark branded products. We're already in the process of developing a new A-Mark type of 1-ounce product that will be struck at SilverTowne in the next few months. So, we -- this is -- we will -- we have already, over the last few months, as we've been preparing for this acquisition, we've been looking at our pipeline.

We've been looking at products that we have not been able to produce because of supply constraints at some of our other mints and manufacturers. And we have started to build a calendar of new products that we can move to SilverTowne, with the goal being to obviously fill the unused capacity that's currently at SilverTowne. Because the more ounces we can produce at the facility, the greater efficiencies we're going to get, the lower our cost per unit is and ultimately, the more profitable the mint can be.

Okay. And then a follow-up on the custom program. So over 40 today; a year out, could you have 60 products? Or do you reach some kind of level where you just start replacing poorer-performing products with new products and try to raise the volumes of the -- each of the products in the portfolio?

Well, I think that -- it's a good question. To answer, we would hope to have 50 to 60 new products a year from now. Remember that some of the products have a finite shelf life in that they may drop off. We may finish the program. We may -- they may run out of steam with our customers. So, we're constantly updating and coming up with new products. There's a number of new products that we're working on right now that will be new to 2017, just from the standpoint of the date will change.

But we would like to have, as a target, 50 to 60 products available to customers at all times. So, that's a good range. One of the things that we're also investing in is we are growing the sales team and the sales force that is out there selling these products. David Madge has done a great job to this point of developing this and finding the customers and developing the customers and working with specific customers to create products that they want to sell, that are topical and that have a theme that works for their customer base.

There is a whole world out there, though, of companies that are selling silver and gold products retail that we hope to tap in the future. We plan on investing and adding to David's team and looking for talent and people that we can bring on board that have connections or have relationships with customers out there that we don't currently have that we can not only sell specialty product to, but as an add-on to that, sell all of A-Mark's other products.

We find the custom products to be a great entry into new customers, and then once we have the customers selling custom products, it is natural for them to buy other products from us. So a little bit twofold; it's not just making the product and putting it on the shelf. The process is a little bit more finding the customer, finding what the customer needs, and then creating the product specifically for that customer.

Great. And just the last one for me, on the mint, in terms of getting to that 20 million ounces per goal a year, how much of that is driven by A-Mark's known custom programs versus just growing the business of the mint, excluding the A-Mark custom products?

Right. Again, a good question. The mint facility and the infrastructure of the mint has the capability, we believe today to do up to 25 million ounces a year of fabricated product. That would be varying product; that could be 1 ounce silver rounds. It could be 5 ounce bars. It could be 5-ounce coins. It could be specialty coins. It could be 10 ounce bars.

One of the challenges for small private mints that they face when they're trying to grow their business is that they can't get enough of the raw product, that their balance sheet or their ability to source the raw metal, whether it be in grains, shot or in 1,000 ounce bars, there are some limitations, from a capital perspective, that most mints face. So a lot of times it's not necessarily what they can produce or what they can sell, they are constrained by their ability to source metal at a favorable price in a very competitive market.

The beauty of this transaction, which we've tried to explain a little bit is, we have developed a strategic alliance with Asahi, one of the largest silver refineries in North America, to supply what we call LBMA-certified silver. That's a very high-quality of silver that is recognized around the world as a -- that the Rolls-Royce of silver products in the raw form.

And by having the study supply of product, we're going to naturally be able to increase what SilverTowne was doing previously and prepare ourselves for market conditions that are volatile that we already have the pipeline of the product. Because when silver becomes scarce or the demand exceeds the supply, it creates somewhat of a logjam, not only on the minting, but also on the supply of the raw silver to actually manufacture the product.

We've answered that with our partnership with Asahi and SilverTowne, which really creates a really unprecedented pipeline of product that will allow us on very, very short notice to increase or decrease what's coming out of the mint. Obviously, a big part of what -- of the success of this will be A-Mark's ability to, in real time, dictate to the mint what we want made.

The beauty of this is that on certain products that we make at SilverTowne, we will be able to decide what the product mix will be as late as Wednesday, let's say, Wednesday today for what we want SilverTowne to manufacture next week. This efficient ability to address where -- what products are in demand in the marketplace is going to give A-Mark a huge advantage, both in slow markets and fast markets, to really be nimble and to be able to service our clients and be first to market with what the market is looking to buy in that particular week or month.

So there's a lot that goes into increasing the capacity, but I will say that we see a clear path as long as market conditions allow it, to increase what is coming out of the mints by 7 million, 8, million 10 million ounces a year.

Very helpful. Thank you.

The next question comes from Mitch Almy from Wedbush.

Good afternoon, Greg.

Hi Mitch. How are you?

Not bad, thanks. With revenue and gross margin and net interest income all growing, but with different components of the SG&A growing a little bit faster, could you dial down into some of those specifically so we might know which are, maybe reached the point where they are not so bearable and maybe they're fixed? For example Las Vegas, which might be one time and therefore likely to go down in the future? And which are -- we might know we're going to grow as fast, if not faster than revenue?

Yes. That -- good question. Obviously, from a management perspective, we're not looking to grow expenses more than we're growing income, so that -- we're well aware of that. I think that throughout the last six months, we have consciously invested in areas that we think will grow our capacity, increase our credit lines and make sure that when -- the next time the market allows us to, that we can make more than we did the last time the market allowed us to. And I think that everybody here is very comfortable that the investments we've made are going in that direction.

We did have a few charges in Q4 that we believe are one-time charges or charges that we don't anticipate recurring. We had a change in our tax provision. We had some M&A expenses in Q4 that we're probably not likely to continue, unless we have more acquisitions that we're working on. We had a fairly significant investment in IT in consulting. We are in the process of launching an entirely new ERP platform that's going to allow us to track acquisitions like SilverTowne, track inventory better, a lot of things that we believe this system is going to allow us to do better. We're actually in the home stretch on that, so as we get closer to the finish line or the goal line, the expenses for that product, that program have increased a little bit. So we -- our timing was a little off there.

I also feel that from an accounting standpoint and from an internal controls and from a -- just making the Company better and able to grow and to potentially double our -- double some of our products and double some of the things we're doing, I think that we've invested in some internal things on the accounting side that we feel very good about. Las Vegas is probably one -- as we've said for a year now, one of our biggest projects and a project that we believe will benefit all parts of our business. It's going to benefit the SilverTowne acquisition. It's going to benefit our wholesale. But we definitely, in the last six months, have had some duplicating costs relating to Vegas and logistics, as we have tried to move certain parts of our storage and logistics business into Las Vegas. The good news is that, that is really pretty finished now.

We found ourselves a little bit short on space based on what we thought we were going to need because the business has grown a little faster than we thought. So throughout the last six months, we've invested in additional space. There, fortunately, we had an option to expand space directly next door to our original facility, but we did have to build out that space and we did have to create a little bit more space so that we could move more of our products into the Vegas facility.

There are -- we now feel that we could very easily store up to $1 billion of silver and gold at our facility. Maybe six, eight months ago, I would have said up to $500 million. We believe that ultimately the Vegas facility will continue to grow, and we would like to grow that facility so that we are more sophisticated and have more opportunities of things to store there. I will say that we are very focused right now on IRA storage at the facility, and I can say that we have received our first IRA storage business, and that's come from some other traditional storage places that do IRA business. We're working on looking into whether or not the Las Vegas facility could become a Comex-approved vault, which would be another big opportunity at the facility. But a lot of these things we're looking into and a lot of these things we're working on cost us money the last six months.

So I will say that I'm probably more excited than ever at all of the things we've put together and all that we have integrated in the last six months, and the platform has given us a really long runway to grow our business. So in a roundabout way I'm telling you we're conscious. We understand that those numbers are not going in the direction that we want from a purely optical standpoint, but I'm very confident that the $1 million or $2 million that we've probably invested in the last six months in the business are going to reap good rewards going forward.

Super. Thanks for the answer.

(Operator Instructions)

The next question is from Don Johnson From Wells Fargo Advisors. Please go ahead.

Greg, congratulations on a great year.

Thank you very much, Don.

You've explained a lot of the SilverTowne already that I was going to ask, but how would that help in a volatile market?

I'm sorry. Can you ask that again?

The SilverTowne acquisition, if (inaudible) we have a volatile market like we had last year at one time, how would that -- would that help out much or a little bit?

My guess is that with the capacity that SilverTowne has, we think that we can ramp up probably an extra 500,000 ounces to -- 500,000 ounces to 600,000 ounces a month of product. So I think that in the first quarter of last year, which we've talked about a little bit before, we had an issue where we didn't really have any product to sell pretty much from the first week of September through the first week of October.

My guess is in the first quarter of last year, if we would have had the SilverTowne acquisition finished 16 months ago, we probably would have sold, in Q1, I think we easily could have sold an extra 3 million ounces of silver that we didn't sell. The market would have been happy to take.

Just to -- as a --to put that in perspective, if SilverTowne was able to do 3 million more ounces in that quarter than they did and make money on that, but with the better silver flow and A-Mark's ability to take the silver and pay for it quicker once it's fabricated; and if A-Mark would have been able to sell that 3 million ounces in that quarter, we easily could have improved our numbers $1 million to $2 million in Q1.

So you can just do the math, with 3 million ounces in a quarter and depending on whether you're making $0.20, or $0.80, or $1 per ounce, that's huge. The other benefit to that, we know that in Q1 of last year, the fact that we did as much as we did and we sold as many ounces as we did, we still left money on the table due to capacity and due to financing and everything else that we have improved the last 12 months.

But we also picked up a great number of new customers that our competitors couldn't service in that period, and those customers are still doing business with us today. So, we really -- the one number that we can't really pinpoint exactly what it is, but we know that over the last 12 months, we have gained a number of new customers that have stuck with us, that are very sticky, and that we've -- that they will be there for us throughout the future, so --

So does any other competitors have a mint like this or -- that you know of?

I would say no other competitor has exactly what we have created here. I think that you -- we do have refineries out there that have mints, but they don't have A-Mark's distribution necessarily. We have other competitors that may have relationships with mints or have purchased capacity from mints so that they have products. But I will re-emphasize again, I don't really -- we can't identify any one that will now have real-time ability to create products and switch products and switch the mix of products as quickly as A-Mark will, which is a -- in the world of bullion logistics and moving 100 million ounces of silver around the world every 12 months, you're talking about a huge undertaking and to make sure it's on-time.

And that if we commit products to customers on a certain date, that we actually get that product on a certain date and that it actually shows up, these are things that our competitors struggle with. That we will have a much greater control of our destiny going forward which will, just from a customer service standpoint, cause customers to continue to want to do business and more business with A-Mark.

It sounds like a big deal.

Thanks.

My -- (technical difficulty)

The next question comes from Rick Fearon from Accretive Capital Partners. Please go ahead.

Greg, congrats on the SilverTowne acquisition.

Thank you, Rick. Thank you very much.

It's exciting and it sounds like we're really well-positioned for the next period of volatility and really good to see the improved gross margins continue. Back to this question about the SG&A which is, at this point, has basically eaten up any of the improvement in gross margin but hopefully, at some point, levels out and becomes fixed.

You mentioned that there's these investments in the Company, some of them, like the IT investments, like the build-out, some of the M&A costs are one time, and those presumably are all in the SG&A figure versus a tax provision, which I'm guessing is not. Are -- you talked about the investments being roughly $1 million to $2 million. Is that what you would -- is that more or less how you'd quantify those one-time costs that might not continue in the future?

So for the fourth quarter, SG&A was $5.9 million, up from $4.1 million last year, so $1.8 million increase. And the increase in year-over-year was $5.1 million. Of that $5.1 million year over year, do you think some portion of that $1 million to $2 million won't be recurring, or are those just going to flatline at this point?

Go ahead, Cary. Cary, why don't you answer that?

Referring to the fourth quarter, we're kind of back to what Greg said. I think one item in particular is that, as I said we mentioned in the call, we had some increases in there related to some of our performance bonuses. And I think due to some contractual changes, those are something that's going to be more one time and they are going to go down going forward. So that was up about $500,000-plus.

We also had, as Greg was just mentioning, the IT consulting costs are, in the quarter, were up about $400,000. And I think as we get into this next year, we're going to continue to incur some of those, but then we're do it on a maintenance mode. And when we move into maintenance mode, we're going to see some of these costs dropping off. I think, again, those are more one time in nature.

I'm going to add on another one-time costs that -- we made some executive adjustments in our Austrian office due to incurred one-time charges to make the business model where we wanted to be going forward. That won't be recurring either. So we're -- trying to tie it back to the $1 million to $2 million you're talking about, I think that's roughly quarterly.

I think even as -- when you look at the full year, it's the same type of dynamic that's going on there. And we will see some savings there. I think the more permanent type of costs is going to be the logistics facility as things settle out. That will probably be more of a recurring site cost, but as -- I think generally, the $1 million to $2 million sounds like -- sounds roughly correct as borrows the kind of one-time costs that Greg was referring to.

Thanks. That's helpful. And how much of that, those one-time costs, were the M&A costs? You mentioned the IT being roughly $400,000 bonus $500,000; and those both fell in the fourth quarter. It sounds like the M&A fee, was that fourth quarter or was that --

It was $200,000 in the fourth quarter.

Okay, so you get to about $1.1 million of what sounds like some of that IT will be continuing and then there's a maintenance mode, I guess, which you will continue with an outside consultant on IT at some lower level than $400,000 a quarter?

Yes, like we said, we're 60% to 70% through this ERM program and trying to get it in place. I think we're trying to carry it out over the next few quarters, and then I think then the cost will come back in a more of a maintenance cost mode, which will bring it down to a -- to a more run rate level.

What would you expect that to be closer to, less than $100,000 a quarter?

We would -- sorry. Yes. That's probably in line, and then I would note just that we would -- we're still looking at whether that would be outsourced or whether it would be more cost-effective to bring that in-house. So we don't have the exact figure yet, because we're still looking at what the different costs would be, third-party versus bringing some one on staff. We'll look at that as we get towards the closure of the project.

Yes, that makes good sense, and if you're growing, there's always some growing pain. So I know those are tough numbers to pinpoint. With respect to performance bonuses, it -- you qualify that as one time, but presumably, is it one time because it's related to the M&A transaction? Or can we see those based on volume and things like that come back?

I think that what Thor was referring to -- this is Greg again, is that a lot of our -- historically, a number of our performance-based arrangements with employees have been tied to our pre-tax profit at year-end. We obviously had a much higher pre-tax and after-tax performance in 2016 than we had in 2015. So the performance bonuses for certain employees, myself included, were going to be higher this year than they were last year.

I think on an ongoing basis, if you look at -- I will just take -- speak for myself, myself and Thor, we have set the example that our compensation is no longer tied to a pre-tax number. And as we looked at that, we weren't sure that, that was a great way to compensate Thor and I. If you look in our new agreements versus the old agreements, there is a percentage of pre-tax. And that has now changed to a little bit more -- it's not quite tied to the actual dollar performance; it's tied to some other things. So I think that -- and then Companywide, we're -- we've gone away a little bit from this type of bonus structure. So I think what Thor is saying is that, from a pure standpoint, if you just look at his old contract and my old contract and then our new contracts going forward, we anticipate our bonuses are going to be smaller in a similar year.

The amount that we accrued at June 30, we were still functioning under those old agreements. The new agreements started on July 1. So -- but overall we want to make sure that we pay everybody the right price and we want to make sure that we are known as a place for talent to come to. We want to pay employees what they are worth and we would like to pay them even a little bit more than they could make someplace else.

But, I think that we have been working on this and I think just as it relates to the fiscal year and the quarter, there were some bigger compensation numbers in there that I-- I'm not going to say we're not going to make twice as much money next year and that we're not going to have higher bonuses and high numbers, but I think on an apples-to-apples comparison, I think that we're looking to improve those numbers a little bit.

Greg, that is a very honorable approach and example that you and Thor have set, and it sounds like all of the right things are coming together. Let's hope for some volatility. The SilverTowne acquisition is wonderful news and congrats on a great year.

And I think just to close, if you look at -- if you -- you're probably going to see it in the next few weeks, you're going to see my bonus and it's going to be out there for everybody to look at, but I think that consciously, if you look at my new deal, I traded cash for what I think are some really good options. I got a -- if you look at my new deal, and Thor did the same thing, we want to make money with the shareholders. We want to be aligned and we think that to grow this Company and to make it a large cap company, not a small cap company, these are things we have to think about.

So, in particular, you will see -- addressing this issue of SG&A, you're going to see a pretty big number from my performance this year. But in the new deal, I took options at $19, $20, $21 and I feel really good about that. I hope we all make more off of the stock than maybe I made this year off of the bonus. So just -- that's just how we think (multiple speakers) --

That would be a great outcome, Greg, and that makes perfect sense. Thanks for the update and again, congrats on a great year.

The next question comes from Robert Maltbie from Singular.

Hello, guys. How are you doing?

Hi Robert. How are you today?

Good, thanks. Not sure what happened. I fell off the call a couple of times. I think -- (multiple speakers).

Well, I can see that you got back on.

Well, persistence is everything, as you may know. But anyway, some of these may be -- you may have answered while I was trying to get back into the queue. So, regarding some of the cost components here, what's the -- on a move ahead basis, in terms of -- are you going to continue with a performance compensation structure? And if so, what can we look at in terms of some parameters?

I don't want to get into too many specifics just because I don't want to let my competitors and everyone else know what I'm -- exactly what we do here. I will say that as we have grown from a very small Company five, 10 years ago to a bigger Company and a more successful Company, we have had to adjust and alter the way we look at some of the performance-based compensation. And not every employee is going to be compensated or motivated exactly the same way. I think what we have done as we've drilled down this year and we've taken a look at what worked for us historically.

We want to keep what has been working and we want to make sure that we don't -- we keep our great talent, which we have many great employees here, many great people that are making this Company go. We want to try to address, really, a bigger Company and maybe a little bit different look so that everybody is treated fairly, but that is compensated in a way that aligns them with shareholders and motivates them to participate alongside shareholders and make sure that nobody is participating off the shareholders.

I think that this is an ongoing project for us. I think the first steps were, as I said, maybe you were off the call, that Thor and I have restructured our deals as of July 1 going forward, to alter a little bit the way we've been compensated. And I think that's a -- from a leadership perspective, that's what we wanted to do. We're going to continue to work to make sure that everybody is paid and has a chance to have a great career here and make good money, but at the same time, we have a changing business, and our business is changing very quickly. Five years ago, if you would have said that there be -- that A-Mark would ultimately sell $1 billion worth of product that got sold on the Internet, we would have laughed at you. There was different ways to sell bullion five years ago and there were different talents and different customers and everything.

So I think management's job is to be conscientious of changing market conditions, make sure that today's -- today, the employees that were -- that are here are all going in the same direction but that we have to make sure that we are looking at everybody's contribution. And if there's new people that are contributing to the Company a little bit differently than in the past or even people that have been here a long time that are doing something different now, we just want to make sure that we're aligning everyone properly.

So I think it's -- we're working on it, and it's on our to-do list, and we feel like we're -- we've got a great handle on it. We feel -- we actually don't feel bad about anything we're doing and I don't think that -- we feel that our SG&A right now is in line with what we expect to see over the next few years. We're conscious of it and we want to make sure than on an apples-to-apples comparison that we're paying the right price for people or for services.

But at the same time, I'm -- we're growing this business organically as well as growing it with acquisitions. And as we grow it organically, we're looking to grow employees. We're looking to grow systems. We're looking to grow credit lines. We're looking to grow the business in the most efficient manner possible, and we feel like we're doing a good job on it.

Terrific. So I think I heard a little bit about your growth initiatives as per the custom coin program and silver, et cetera. The question relates to other components to that initiative, and maybe you spoke to this. But could I get a little bit of color on the strategic partners in Europe? And also, part B, regarding the Las Vegas facility, it's actually a separate question, in terms of ramping that up, putting that in place and having that at capacity, where would you put that in terms of, shall we say, percent of completion on that type of a scale?

Well, I -- let's talk about Las Vegas facility first and then we can go back to maybe the custom coin products that I talked about earlier. The Las Vegas facility is currently, has the capacity to probably do two to three times as much business as it's doing right now. We have made sure that we are able to take new business and that we're able to move our existing business that was with third parties to Las Vegas. And as you can imagine, with the numbers that we're talking about and the security and the fact that we're moving high value stuff, we are very, very careful with that.

We can't sacrifice any customer service for growth or for getting something done quicker than it should be done. So we've -- we are probably, I would say, six months away from feeling like we're -- we could utilize all of the capacity we have and that everything there is -- we could bring any new business into the facility that presents itself. There are some hurdles that we have jumped through -- or jumped over in the last six months, as it relates to making the facility, the security, the insurance capabilities, the ability to finance product there, to utilize our credit lines there, to use some of our third-party inventory financing. A lot of things that we have worked on, just from a paperwork standpoint or from an approval standpoint or from just growing capacity that we can do more business there. And we can have more value in the facility. Those are all things we were very careful and cautious about. But I will say that we are, from a capacity standpoint, I would say we're 90% of the way to being able to do almost any type of business in the facility.

I think that the job now, over the next six months, is to focus on making sure that we go out there and we get customers that want to do business in our facility. And whether it be financing their product at our facility; whether it be buying SilverTowne product and having A-Mark finance it for it and they store at the Vegas facility, whether it be CFC being moved there, collateral being moved there, or whether it be IRA storage or whether ultimately it might be Comex storage, these are all things that we believe now it's a function of us executing. There's not really anything at the facility that is holding us up. We've got our efficiencies there in the last 30 to 60 days, as good as they have ever been. Employees, fewer employees are shipping more packages than we've ever had before. We are operating very lean and very mean, and I think that if you asked our customers that are operating in the facility, I think they would say that the customer service is better than ever.

So, it's been, for us, it's been making sure that we're not cutting staff or cutting expenses too quickly at the -- and then -- at the expense of customer service. But I believe that right now, we're very, very comfortable where we're at and we're very excited and enthusiastic about growing the P&L at this facility. We haven't really, to this point, seen really any P&L benefit from the facility. And we still believe, like we did when we went into it, that this is a facility that when it's running at full capacity, can have a significant contribution to our earnings per share.

Terrific. Thank you.

Our next question comes from Don Johnson from Wells Fargo Advisors

Sorry about that. I was disconnected there on my next question. This question, maybe you can give me a little light on the Collateral Finance Corporation, on how it is performing in your overall loan book, and maybe you can give us some color going out 12 to 24 months?

That's a great question. I think that it is very clear, if you look at the last three quarters, what we're doing in our income, interest income, as well as how our loan portfolio is performing. I'll be -- I'm happy to say that, knock on wood, we have not suffered a loan loss at CFC. We believe that our underwriting parameters and our underwriting abilities are as good as they have ever been.

So we're -- as we move forward, we've been able to spread our margins out a little bit in this business. We've been able to provide better customer service. We've actually hired three or four new people at CFC that are -- they are specifically tasked with handling the new loans and the new customer service. So when you look at SG&A, there is -- CFC is definitely growing, and we are adding talent to that business.

But, on a rough scale, I would say that today, we're over 1,200 secured loans, and that is 1,200 individual customers. We have recently been either side of $80 million in loans at CFC and we've been, for the last four to five months, we've been able to add $3 million a month to that book. And we feel very good right now that through our credit facility, through some work we've done with our lenders, we have the capacity to go higher at CFC. We have grown very quickly, so we have had to keep up with that as it relates to making sure we have the capital to continue to grow this business.

But we feel very good looking out over the next 12 months, that CFC is going to perform, really, really perform well as it relates to our different profit centers. I would be -- I think it would be very realistic for us to be at $110 million to $120 million in this facility 12 months from now. And if you do the math on that, based on what we've said before, that could easily add -- we could be adding an extra $1 million in adjusted gross profit per year just on that alone.

So I think everybody should take from this call that CFC has gone from $25 million in loans two, three years ago, up to $80 million, incredible growth in two years, no loan losses. The Company has invested in this business. We have many more employees that are servicing these loans, and that we have the capacity right now that we believe we could write another $30 million in loans and manage them with very little further cost increase, other than the cost of funds.

So this is an area, like I've said, we're very enthusiastic about and to be honest, it just fuels all of our other business. We -- you have this metal stored, you have it captive. When someone -- people want to sell or trade, they do it with A-Mark. We have a great program going now with some people that are actually originating the loans and that are continuing to service the loans. But as part of this growth, they buy all of the metal for the loans from A-Mark. So it's just is very integrated. It's very efficient, and it's an area that we have very high hopes for in the next 12 months.

Okay. Well, that's a great answer and congratulations, again, on a great year.

Thanks, Don.

Thank you. I would now like to turn the floor back over to Mr. Roberts for any closing comments.

Thank you for joining us today. I especially 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 your next call -- 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 are forward-looking statements made regarding future events. Statements that relate to A-Mark's 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 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: the failure to execute the Company's growth strategy as planned; greater than anticipated costs incurred to execute this strategy; changes in the current international political climate, which has favorably contributed to a demand in volatility in the precious metals market, increased competition for A-Mark's higher-margin services, which could depress pricing; and the failure of the Company's business model to respond to changes in the market environment, as anticipated. Also, general risks of doing business in the commodities market and other businesses; 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 to these forward-looking statements.

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