A-Mark Precious Metals Inc (AMRK) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to A-Mark Precious Metals Conference Call for the Fiscal Third Quarter ended March 31, 2017.

My name is Matt, and I will be your operator this afternoon.

Earlier today, A-Mark issued the result of its fiscal third quarter and first 9 months of 2017 and a press release, which is available on the Investor Relations section of the company's website at www.amark.com.

You can find the link to the Investor Relations section at the bottom of the homepage.

Joining us on today's call are A-Mark's CEO, Mr. Greg Roberts; President, Thor Gjerdrum; and CFO, 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'd like to remind everyone that this call is being recorded and will be available for replay via link available in the Investor Relations section of the company's website.

Now I'd like to turn the call over to A-Mark's CEO, Mr. Greg Roberts.

Thank you.

You may begin.

Thank you, Matt, and welcome, everyone.

Thank you for joining us this afternoon.

Our financial results for the third quarter were in line with our expectations.

As we indicated on our last call, the subdued market conditions we experienced in Q2 persisted in the third quarter, both in terms of demand and volatility for precious metals.

This was experienced industry-wide as sales of both gold and silver bullion by the U.S. Mint were down significantly compared to the same year-ago period.

In fact, the U.S. Mint's gold ounces sold to all authorized purchasers in Q3 were down 33% from the prior quarter, reflecting the continued strength of the U.S. dollars and the equities market.

Despite these factors, A-Mark was still able to generate solid growth in key areas and gain market share.

This performance helped drive our 13th consecutive quarter of profitability since we became public in March 2014, a track record we're extremely proud of and which reflects our company's operating discipline and increasingly diversified business model.

In particular, we continue to focus on building our finance portfolio.

Our CFC lending business was up 26% from the prior quarter to a record 2,138 loans and has -- is another meaningful source of income and predictability to our business model, both of which have helped mitigate the effects of the recent subdued fabricated product conditions.

But before I continue, I'd like our CFO, Cary Dickson, to walk us through the financial details for the fiscal third quarter and 9 months ended March 31, 2017.

Then, our President, Thor Gjerdrum, will discuss our market position and key operational metrics.

Afterwards, I will return to talk more about our operational progress and initiatives as well as our outlook.

Cary?

Thank you, Greg, and good afternoon, everyone.

Turning to our financial results for the fiscal third quarter and 9 months ended March 31, 2017.

Our revenues increased 14% to $1.73 billion from $1.51 billion in Q3 of last year.

For the first 9 months of fiscal '17, our revenues increased 12% to $5.66 billion from $5.05 billion in the same period last year.

The improvements for the quarter and the first 9 months of fiscal '17 was mainly due to an increase in precious metal prices and higher forward sales, which was partially offset by a decrease in gold ounces and silver ounces sold.

Our gross profit for fiscal Q3 of '17 increased 7% to $7.3 million or 0.42% of revenue from $6.9 million or 0.45% of revenue in the same year-ago quarter.

The increase in gross margin was primarily due to improved performance of our finance portfolio, improved trading profit and cost efficiencies, offset by lower demand for our physical product.

For the 9 months of the fiscal year, our gross profits decreased 6% to $25.3 million or 0.45% of revenue from $27 million or 0.53% of revenue in the same year-ago period.

The decrease in our gross margin was primarily due to lower demand for our physical products resulting in lower premiums, offset by improved performance of our finance product portfolio, trading activities and cost efficiencies.

Now turning to our expenses.

Our selling, general and administrative expenses for fiscal Q3 of '17 increased 12% to $6 million from $5.4 million in Q3 of last year.

The increase was due to costs related to the recently acquired SilverTowne minting operations, some increased headcount and other expenses.

For the first 9 months of fiscal '17, our SG&A increased 9% to $17.8 million from $16.3 million in the same period last year.

The increase in SG&A was due to higher consulting expenses related to the development and implementation of our new ERP system, costs related to the recently acquired SilverTowne minting operations as well as other nonrecurring costs.

The increase in SG&A was partially offset by lower compensation costs, primarily due to lower performance-based compensation accrual.

Our interest income for fiscal Q3 increased 46% to $3.3 million from $2.3 million of the same year-ago quarter.

The improvement was driven primarily by an increase in the size of our loan portfolio as well as increased utilization of our inventory finance products by customer.

For the first 9 months of fiscal '17, our interest income increased 43% to $9.1 million from $6.4 million in the same year-ago period.

The improvement was primarily due to increase in the size of our loan portfolio and growth in finance products.

Our interest expense for Q3 of '17 increased 63% to $2.7 million from $1.7 million in Q3 of last year.

For the first 9 months of fiscal '17, interest expense increased 75% to $7.4 million from $4.2 million in the same year-ago quarter.

The increase for both the quarterly and 9-month period is primarily a result of greater usage of our lines of credit and other product financing arrangements arising from continued growth in the business.

The increase is also partially due to higher LIBOR cost -- interest rates, I should say, that went into effect after the Federal Reserve rate increases.

Our net income for fiscal Q3 of '17 was generally flat at $1.2 million or $0.16 per diluted share compared to $1.2 million or $0.17 per diluted share in Q3 of last year.

For the 9 months of fiscal '17, our net income decreased 29% to $5.9 million or $0.82 per diluted share from $8.2 million or $1.15 per diluted share in the same period last year.

The decrease is primarily due to lower gross profit, higher interest expense and higher selling, general and administrative expenses, offset by higher interest income.

Now turning to the balance sheet.

At quarter end, we had $6.4 million of cash on our balance sheet.

As we -- as you evaluate our balance sheet, it's important to remember that we are a net borrower, and we typically pay down our daily balances to minimize interest expense.

Our tangible net worth totaled $59.1 million or $8.30 per diluted share, which compares to $57.9 million or $8.14 per diluted share at the end of the prior quarter.

And finally, last week, our Board of Directors declared a regular quarterly cash dividend of $0.08 per share, reflecting our continued confidence in our balance sheet and commitment to maximizing shareholder value.

The cash dividend we paid on or about May 25 to all stockholders of record as of May 15.

This completes my financial summary.

Now I will turn the call over to Thor, who will provide an update on the market conditions and key performance metrics.

Thanks, Cary.

In addition to our financial results, our management team tracks and continually evaluate 4 metrics to assess the performance of our business.

These metrics include the number of gold and silver ounces sold, trading ticket volumes, inventory turnover as well as the size of our finance book.

Our first key metric, gold and silver ounces sold, represents the ounces of metal we sell and deliver to customers during the period excluding any ounces recorded on forward contracts.

This is an important metric because it reflects the volume of our business we are doing without regard to changes in commodity pricing, which figure into revenue and can mask underlying business trends.

During the third quarter, we sold 579,000 ounces of gold, which is down 25% from the prior quarter and down 13% from the fiscal Q3 of last year.

For the first 9 months of 2017, we sold 1.9 million ounces of gold, which is down 17% from 2.3 million in the same period last year.

Turning to silver.

During Q3 of this year, we sold 20.9 million ounces of silver, which is down 8% from the prior quarter and down 23% from Q3 of last year.

For the first 9 months of fiscal 2017, we sold 65.5 million ounces of silver, which was down 35% from 100.6 million ounces in the same period last year.

The second key metric we track and an equally significant measure of our business is trading ticket volume.

This metric tracks the total number of orders processed by our trading desks in Europe and in the U.S. For those newer to our company, in periods of high volatility, there was generally increased trading in the commodity markets and increased demand for our products, which translates into higher business volume.

During Q3, our trading ticket volume decreased 22% to 27,580 tickets from the prior quarter but increased 27% from Q3 of last year.

For the first 9 months of 2017, our trading ticket volume increased 26% to 84,809 tickets from 67,522 tickets for the same period last year.

The year-over-year increase is primarily due to higher utilization of our online trading portal by our customers.

It's important to point out, however, that a portion of the ticket -- the increase in tickets volume is because our online portal allows smaller minimum order sizes.

The third key metric we evaluate is inventory turnover, defined as the cost of sales during the period divided by the average inventory during the period.

As many of you know, inventory turn is a measure of how quickly inventory is moved.

For those that have followed our company -- those that have followed our company know that we typically experience a higher inventory turn ratio during periods of increased volatility when trading is more robust, reflecting a more efficient use of our capital.

For the third quarter, our inventory turn ratio was 5.4, which is down 25% from 7.2 in the prior quarter and down 9% from 5.9 in Q3 of last year.

For the first 9 months of fiscal 2017, our inventory turnover ratio was 19.1, which is down 12% from 21.6 in the same period last year.

The quarterly and 9-month decline in our inventory turn ratio is primarily due to higher volume of activity in our product financing and repurchase arrangements with customers.

In addition, the high demand and increased market activity during fiscal Q1 2016 was the primary driver in the strong inventory turn ratio we achieved in the comparable period last year.

Finally, the fourth key metric our management team tracks is the size of our lending business, which is determined using the number of secured loans we have at the end of the quarter.

The number of loans we secured at the end of the quarter was up 26% to a record 2,138 from the end of the prior quarter and up 176% from the end of Q3 last year.

This significant year-over-year improvement in the number of secured loans was primarily due to the acquisition of bullion-based loan portfolio.

At March 31, 2017, the dollar value of our loan portfolio totaled a record $91 million, up 12% from the prior quarter, 44% year-over-year.

That concludes my prepared remarks.

Now -- I'll now turn it back over to Greg to talk about the progress we've been making on our key operational initiatives as well as our outlook.

Greg?

Thanks, Thor.

As I mentioned in my opening remarks, our increasingly diversified business model is the reason for A-Mark's ability to consistently generate profits in all market conditions.

While our physical precious metals trading and distribution business can be episodic in nature as market volatility demand can significantly influence our financial performance, it continues to serve as a solid foundation to expand into complementary and synergistic businesses.

This includes a range of high-margin products and services that we have introduced over the last 2 years, including logistics, storage, financing and most recently, minting.

Taken together, these products and services have added incremental and meaningful sources of income and predictability to our business model, all of which have help mitigate the effects of the most recent subdued market condition.

So while these conditions continue to persist in the near term, our team remains focused on strategic initiatives that we can control.

We commit to further diversifying in our business and increase our capacity.

This will better position us to capitalize on trading opportunities and favorable market conditions as they arise.

One of these initiatives is our investment in SilverTowne Mint, a leading producer of fabricated silver products, which we completed in this year's Q1.

It's been 8 months since we made the investment, and the long-term opportunity with the mint has never been more clear.

Since our investment, SilverTowne has not only increased our capacity to meet unforeseen surges in silver demand during volatile markets, but it has also bolstered our capability to develop truly unique silver offerings like the innovative stackable coins that we released in Q2.

Along that line, we are continuing to expand our broader portfolio of custom coins.

This area of our business continues to experience moderate demand albeit at lower volumes but at higher gross margin.

Additionally, we are focused on several other initiatives to drive incremental growth and profitability at the mint.

This includes promoting consignment offerings and build-to-order silver products.

Another key objective in fiscal 2017 is to further expand our suite of ancillary services at our logistics facility in Las Vegas.

During the third quarter, we continue to benefit from the operational and cost efficiencies provided by the facility.

On top of this, we are also seeing demand for our turnkey logistics and storage services.

In addition to securing new logistics customers, our market -- marketing and sales efforts remain focused on securing additional customers for our new storage programs for precious metal, investment options and self-directed IRA accounts.

Looking ahead, we continue to experience slower market activity in our current quarter.

We expect the current market trends to persist in the near term, although we remain of the view that positive geopolitical issues have the potential to quickly alter the precious metals environment.

We intend to pursue strategic investments with the goal of positioning ourselves to take advantage of dynamic opportunities created by market volatility and changes in our customers' demand.

Furthermore, we remain focused on expanding our platform of high margin and turnkey solutions.

In the more immediate future, we'll rely on our diversified business model and seek to generate predictable streams of revenue and profits which ideally will enable us to capitalize on favorable trading opportunities and market conditions as they arise.

Now with that, we're ready to open the call for your questions.

Operator, please provide the appropriate instructions.

(Operator Instructions) Our first question is from Greg Eisen from Singular Research.

Could you share with us the -- your realized price on gold per ounce and silver per ounce this quarter versus a year ago?

Considering revenues were up nicely, but obviously volumes of gold and silver were down a lot.

So just kind of for my modeling purposes, what was your realized price?

It's a little bit difficult to answer the question without a specific product in mind.

If you're looking for fabricated silver products, for example, the silver eagle made at the United States mint, generally, our wholesale price today is about $2.15 over the spot price of the per ounce price, and that has ranged over the last 12 to 18 months, it's ranged as high as $3 and above and as low as maybe $2.10, around where we're at right now.

If you're talking about a private mint silver eagle, the market on those right now is in the -- for the 1 ounce coins, in the $0.30 to $0.35 range on a wholesale level.

And as it relates to gold coins, 1 ounce gold eagles were getting 2 3/4% over spot price right now or over melt, and that has stayed fairly consistent.

The variances in our top line or our gross revenue can be affected by the mix of products.

So if there's more 1 ounce coins, it's going to be a little different than if there's more kilo bars.

In the last quarter to 1.5 quarters, we have seen an increase in our, what we call, industrial, which is larger gold bar business, and that has grown or it's higher than it has been maybe 2 or 3 quarters ago.

So that -- when you're talking about low-margin, high-volume 100-ounce bars or kilo bars, you're going to have a higher gross sales line, but you're going to have a smaller gross profit number because our margins on those bars is much less than on a 1 ounce gold coin.

Okay, okay.

Turning to the custom coin programs.

It sounds from your commentary as though demand is somewhat muted, it's -- it isn't growing any faster than demand for the core products, it sounds like.

Was that a correct assumption on my part?

Yes, I think that you're exactly right.

I think that the custom products, although they're not correlated directly to the common sovereign mint bullion coins, there is a correlation in just the amount of people who are looking to purchase material.

So if you have a low quarter in, let's say, silver eagles, you're probably going to have some drop-off in our custom programs.

It's important to remember though that a lot of the custom programs that we do for people are turnkey or they're created specifically for customers' needs.

And that customer generally will agree to take a certain amount of product regardless of market conditions over a 6- to 12-month period in exchange for us creating the product for them.

So again, there's -- depending on the product and depending on exactly what product it is, you're going to see some variances.

I will say that in the last -- this last quarter, we've launched a sovereign mint silver coin that we're calling the Niue owl, and that coin is in our specialty product category.

But for the first time, we're striking a sovereign mint coin at our SilverTowne facility.

So the ability of SilverTowne to strike products quickly with very little lead time is giving us an advantage over some of our competitors.

Okay.

If I could change the subject to the loan portfolio.

Clearly, it looks like you're seeing a good uptake in loan demand.

Is there a reason you might attribute to why demand has been strong, and has there been any change in the marketplace for these loans?

I think the marketplace is probably fairly consistent as it has been in the last year or 2. I think our efforts to market and sell this product has been well received.

We do -- we have picked up a few new wholesale customers for the CFC loan product as well as some of the -- our customers who sell us loans have become more familiar with the product and have just been able to execute a little bit better than they have in the past.

So I wouldn't attribute it too much to the market environment.

I think it has a little bit more to do with what we're doing.

Although I will say on a dealer wholesale borrower, the slower market conditions may cause a wholesale dealer to want to continue to buy product at a quantity price and get a price break because of the quantity they're buying.

They may not choose to tie up their own capital for that product, but they want to be able to keep buying in quantities they have historically.

So I will say that we have seen an uptick in our wholesale dealer borrowers, and I think that may be attributed to the slower market condition

Okay, okay.

And looking at this, since the third quarter, you said that the third quarter trends and slowness in the market was similar to the second quarter but maybe a little bit worse.

How does the fourth quarter to date look relative to the third quarter?

Is it on that same trend line?

Or has it deteriorated at all from the Q3 demand level?

I mean, we're only 40 days into the quarter, and I would say it's trending so far similar to Q3.

Although I will say that we have had in the last 2 weeks, there have been some, what we would call, I guess, macro geopolitical issues, whether it be North Korea or whether it be the ObamaCare or whether it be the election in France.

We have seen some things -- some outside factors, and they have actually contributed to a little bit of volatility and what we see as an uptick in demand in the last couple of weeks.

So we're -- we feel like we're executing well this quarter.

We feel like we're well positioned, and we think there's opportunity for the market to change if some of these factors were to present themselves and give us an opportunity with some volatility.

(Operator Instructions) And if there are no further questions, I'd like to turn the floor back over to Mr. Roberts for any closing comments.

Thanks to everyone for joining us today.

I especially want to thank our investors for their continued support as well as our dedicated employees for their ongoing contributions to build A-Mark into the global leader in precious metals trading.

We look forward to updating you on our next call.

Matt?

Before we conclude today's call, I'd like to provide A-Mark's safe harbor statement that includes important caution 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 the strategy; changes in current domestic and international climate -- political climate, which has favorably contributed to demand and volatility in the precious metals market; increased competition for A-Mark's higher-margin services, which could depress pricing; the failure of the company's business model to respond to changes in a market environment as anticipated; general risks of doing business in the 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 to not place under reliance on these forward-looking statements.

Finally, I'd like to remind everyone that a recording of today's call will be available for replay via a link available in the Investor Relations section of the company's website.

Thank you for joining us today for A-Mark's fiscal third quarter earnings call.

You may now disconnect.