A-Mark Precious Metals Inc (AMRK) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to A-Mark Precious Metals Conference Call for the fiscal fourth quarter and full year ended June 30, 2018.

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

Before this call, A-Mark issued its results for the fiscal fourth quarter and full year 2018 in a press release, which is available in 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 for today's call are A-Mark's CEO, Greg Roberts; President, Thor Gjerdrum; and CFO, Cary Dickson.

Following their remarks, we will open the call to your questions.

Then, before we conclude the 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 is being recorded and will be made available for replay via a link available in the Investor Relations section of A-Mark's website.

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

Sir, please proceed.

Thank you, Jeremy, and welcome, everyone.

Good afternoon, and thank you for joining us again on our quarterly conference call.

Throughout fiscal 2018, we continued to execute on our long-term strategic plan to expand our platform and products and services and increase our market share in the global precious metals trading and finance markets.

The major initiatives of this plan include introducing several new customer-facing products, including a customer repository business to monetize the assets we acquired in our Goldline purchase.

In addition, we also implemented various programs to drive growth and profitability in our Wholesale Trading & Ancillary Services segment.

While our financial results for the fourth quarter and full year did not meet our expectations, primarily due to our Direct Sales segment/Goldline and low levels of activity in the precious metals market, we did further diversify our business model to create additional and more predictable sources of income and to enhance our capabilities and profitability.

One of our most effective changes involved building our Secured Lending segment through our CFC subsidiary, which continued to generate impressive results.

In fact, this segment of our business grew meaningfully in fiscal 2008 (sic) [2018].

The number of secured loans increased 48%, which helped drive $9.6 million of interest income for CFC and contributed to the record $16.1 million of interest income for the company.

And due to CFC's impressive growth, scale and other factors, CFC will now be reported as a separate segment beginning with our fiscal 2018 10-K, which will be filed shortly.

Now before I continue, I'd like to invite our CFO, Cary Dickson, to walk us through the financial details for the fiscal fourth quarter and full year 2018.

Then our President, Thor Gjerdrum, will discuss our key operational metrics for these periods.

After that, I will return to talk more about our operational progress, initiatives and outlooks and take any questions you may have.

Thank you, Greg, and good afternoon, everybody.

Turning to our financial results for the fiscal fourth quarter and full year ended June 30, 2018.

Our revenues for fiscal Q4 '18 increased 33% to $1.77 billion from $1.33 billion in the same year-ago quarter.

For the full year, our revenues increased 9% to $7.61 billion from $6.99 billion in the same period last year.

The increase in revenues for Q4 was due to an increase in gold ounces sold, gold prices and forward sales, offset by lower silver ounces sold and lower silver prices.

For the full year, the increase in revenues was due to higher gold prices and forward sales, offset by a decrease in total amount of gold and silver ounces sold and silver prices.

Gross profit.

Gross profit for the fiscal fourth quarter of 2018 decreased 5% to $5.8 million, or 0.33% of revenue, from $6.1 million, or 0.46% of revenue, in Q4 last year.

The decrease in gross profit was primarily due to lower silver ounces sold, margins and trading profits compared to the same year-ago quarter, offset by gross profits from our Direct Sales segment, Goldline.

For fiscal year '18, the gross profit decreased 6% to $29.4 million, or 0.39% of revenue, from $31.3 million, or 0.45% of revenue, in fiscal '17.

The decrease in gross profit was primarily due to lower silver ounces sold, margins and trading profits compared to the prior fiscal year, offset by the gross profit from our Direct Sales segment.

Turning to our expenses.

Selling, general and administrative expenses increased 38% to $7.7 million from $5.6 million in the same year-ago quarter.

The increase was primarily due to SG&A related to our Direct Sales segment of $2.2 million as well as legal and consulting costs of $0.3 million, partially offset by a similar $0.3 million reduction of relocation and acquisition-related costs in the same year-ago period.

SG&A expenses related to our Direct Sales segment decreased 40% to $2.2 million from $3.6 million in the prior quarter.

The decrease was primarily due to $1.1 million decrease in compensation expense, including $0.6 million decrease in severance expense from the prior period, and a $0.2 million decrease in advertising expense.

For the full year fiscal '18, SG&A increased 43% to $33.4 million from $23.3 million in the same year-ago period.

The increase was primarily due to expenses related to our Direct Sales segment of $10.6 million, including $0.6 million of severance expense, $0.6 million of nonrecurring legal expense, $0.8 million of professional consulting fees, partially offset by $1.0 million reduction to incentive compensation expense and $0.3 million of investigatory acquisition costs.

For the fourth quarter of 2018, interest income increased 62% to $5.6 million from $3.5 million in the same year-ago quarter.

The increase was primarily due to increases in interest rates and the aggregate value of the secured loan portfolio as Greg just mentioned.

Interest income also increased due to other finance product income.

For the full year ended June 30, '18, our interest income increased 28% to $16.1 million from $12.6 million in the same year-ago period.

Interest income from our secured loan portfolio increased $1.9 million or 25% in compared -- in comparison to the same year-ago period.

The increase in interest income from secured loans was primarily due to increases in interest rates and an increase in the aggregate value of the secured loan portfolio.

The number of secured loans outstanding increased by 48% to 3,507 from 2,375 at the end of the prior year.

Interest income also increased due to other finance product income.

Interest income for the fourth quarter of 2018 increased 52% to $4.2 million from $2.7 million in the same year-ago quarter.

The increase was related primarily to a greater usage of our lines of credit, the debt financing agreement associated with the acquisition of Goldline and higher LIBOR interest rates that went into effect subsequent to the Federal Reserve rate increases.

For the full year, interest expense increased 37% to $13.9 million from $10.1 million in the same year-ago period.

The increase was related primarily to greater usage of our lines of credit, the debt financing agreement associated with acquisition of Goldline, higher LIBOR interest rates that went to into effect subsequent to the Federal Reserve rate increases as well as increased third-party loan servicing fees related to our CFC business.

In the fourth quarter of 2018, we incurred a $2.7 million goodwill and intangible asset impairment charge related to our Direct Sales segment.

Net loss for the fiscal quarter of 2018 totaled $3.0 million or a $0.43 per diluted share, as compared to net income of $1.2 million or $0.17 per diluted share in the same year-ago quarter.

Included in the net loss is a $0.2 million income tax provision for both the current quarter and the same year-ago quarter.

The $0.2 million tax provision for the current quarter included a $1 million onetime revaluation tax charge related to our net deferred tax assets as a result of the recent Tax Cuts and Jobs Act, partially offset by an income tax benefit related to the loss from operations.

For the full year period, our net loss totaled $3.4 million or $0.48 per diluted share as compared to net income of $7.1 million or $1 per diluted share in the same year-ago period.

Included in the net loss of $0 million, which is nil, and $3.7 million tax provision for the current year and prior year, respectively.

The $0.0 million income tax provision, or nil provision, for the current year included a $1.2 million onetime revaluation tax charge related to our net deferred assets as a result of the Tax Cuts and Jobs Act, offset primarily by an income tax benefit related to the loss from operations.

On a reportable segment basis, our Wholesale Trading & Ancillary Services and Secured Lending segments reported a combined pretax profit for the year of $5.2 million, while our Direct Sales segment reported a pretax loss of $5.9 million, excluding the nonrecurring write-off of intangible assets.

Shifting gears to the balance sheet.

At quarter-end, we had $6.3 million of cash compared to $13.1 million at the prior year quarter-end.

For those newer to our company, we are a net borrower and typically pay down our balances daily to minimize interest expense.

It's also worth mentioning that at the end of the quarter, we had $7.2 million of long-term debt related to the acquisition of Goldline or the Direct Sales segment.

Our tangible net worth at the end of fiscal Q4 totaled $53.4 million, which compares to $53.3 million at the end of fiscal Q3.

As you may have seen last week, our indirect subsidiary and capital funding closed a private placement offering of $100 million in aggregate.

The offering consisted of $72 million in principal amount of 4.98% secured senior notes and $28 million of 5.98% secured subordinated term notes.

Morningstar rated the secured senior notes AA and the secured subordinated term notes BBB.

The interest rates are fixed and the notes mature on December 15, 2023.

The notes are backed by precious metals and loans secured by precious metals originated and acquired by CFC.

The capital will enable CFC to expand its loan portfolio and suite of complementary products.

Additional details of the notes were provided in the 8-K that we filed yesterday.

That completes my financial summary.

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

Thor?

Thanks, Cary.

Turning to our key operational metrics for the fourth quarter and full year fiscal 2018.

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

This metric reflects the volume of physical business we are transacting without regard to changes in commodity pricing, which figure into revenue and can mask underlying business trends.

During the fourth quarter, we sold 586,000 ounces of gold, which is down 5% from the prior quarter and up 98% from fiscal Q4 of last year.

For the full year period, we sold 1.9 million ounces of gold, which is down 12% compared to last year.

Turning to silver.

During Q4, we sold 8.6 million ounces of silver, which is down 24% from the prior quarter and down 39% from Q4 of last year.

For the full year period, we sold 46.5 million ounces of silver, which is down 42% compared to last year.

The second key metric we track is wholesale trading ticket volume, which is the total number of orders processed by our trading desk in Europe and in the U.S. In periods of high volatility, there's generally increased trading in the commodity markets and increased demand for our products, which translates into higher business volumes.

During fiscal Q4, our wholesale trading ticket volume decreased 10% to 25,919 tickets from the prior quarter and decreased 8% from Q4 last year.

For the full year period, our trading ticket volume increased 2% to 114,935 tickets compared to the same period last year.

The increase in our trading ticket volume is primarily the result of increase in customer usage of our online portal, which now offers 24/7 trading.

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.

Those of you who follow 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 fourth quarter, our inventory turn ratio was 4.5, which was down 6% from 4.8 in the prior quarter and up 7% from 4.2 in Q4 of last year.

For fiscal 2018, our inventory turnover ratio was 26.8, which was up 2% from 26.3 in the same period last year.

The inventory turnover ratio was fairly consistent with the prior comparable periods.

And finally, the fourth metric is the size of our lending business, which is determined by the number of secured loans we have at the end of the quarter.

The number of loans we secured at the end of the year was up 48% to a record 3,507 loans compared to the same period last year.

The year-over-year improvement in the number of secured loans was primarily due to the acquisition of the bullion-based loan portfolios.

As of June 30, 2018, the dollar value of our CFC loan portfolio totaled $110.4 million, up 1% from prior quarter and up 21% year-over-year.

That concludes my prepared remarks.

I'll now turn it back over to Greg to talk about the progress we have been making on our key operational initiatives.

Greg?

Thanks, Thor.

Building on my earlier remarks, we continue to focus our efforts around strategic initiatives that will diversify and strengthen our platform.

As I alluded to in previous calls, the activity in the precious metals market, both in terms of demand and volatility, have remained at unprecedented low levels since the 2016 election.

These trends have affected everybody in our industry, including the U.S. Mint, where sales of both gold and silver were at multi-year lows.

In fact, mint sales of silver were down 66% sequentially and 60% year-over-year in the fourth quarter.

That being said, we have seen significant improvement in the reported mint numbers in Q1.

In fact, the last 3 weeks, the numbers reported by the mint have increased significantly.

This appears to be a reflection of increased demand due to lower gold and silver prices as well as other macroeconomic issues.

Throughout fiscal 2018, we focused our time and resources on various initiatives to drive growth and profitability in our wholesale trading unit, which is A-Mark's legacy business.

We have created a solid foundation and a stable base of institution -- institutional, industrial and wholesale customers.

This translate into unique consignment offerings, developing innovative volume products through our sovereign mint relationships and producing customer-branded products through our SilverTowne Mint, all of which continue to differentiate the A-Mark brand within the industry.

In addition, we introduced several new customer-facing tools and products, including a 24/5 online trading portal in Q3 followed by our 24/7 online trading portal in Q4.

Our team is actively marketing the portals to customers who have provided positive feedback and update.

Another key component of our Wholesale Trading & Ancillary Services segment is our minting operations through our majority ownership of SilverTowne Mint.

The mint continues to meet expectations and provides us with valuable production capabilities and timely silver supplies.

From a strategic standpoint, we continue to drive growth and profitability through new licenses, successful marketing initiatives and special product offerings.

In addition, we have invested in modern minting equipment to minimize our overages, improve production efficiency and enhance capabilities to further improve the quality of our products.

In our ancillary services unit, which includes logistics and secured storage, we continue to realize the many operational benefits from our strategic investments over the last 4 years.

In particular, our Las Vegas logistics facility, which now amounts to 17,600 square feet, is the centerpiece for our logistics operation.

This facility supports our wholesale trading business by providing a significant amount of secured storage, shipping and delivery services that have historically been outsourced to third-party depositories in various locations.

By consolidating these operations into one central location under A-Mark's control, we have been able to reduce our dependence on third-party service providers, while enhancing quality control and reducing operating costs.

Additionally, the facility provides turnkey logistic services to our customers engaged in the retail business.

We provide these customers with one-stop financing through our Secured Lending segment, hedging through our trading and finance business units, inventory handling, packaging, storage and drop shipping services.

We continue to target select new customers to drive additional revenue and margin opportunities with the goal of achieving sustainable and stand-alone profitability.

Shifting gears to our Secured Lending segment through CFC which continues to generate positive results.

As Cary and Thor mentioned, fiscal 2018 was a record year for CFC, both in terms of the number of loans we secured and resulting income the loans generated.

In the fourth quarter, we appointed Capital Markets veteran Steve Reiner to the new position of Executive Vice President, Finance, Products and Ancillary Services of CFC.

In this position, Steve will help develop a number of complementary business units, all with the goal of scaling and expanding CFC and its capabilities to new levels.

Some of you might be familiar with Steve, but for those that aren't, he joined us from B. Riley and brings more than 25 years of experience in the Capital Markets and Corporate Development.

In addition to his record at B. Riley, Steve has worked with other leading companies in various capacities, including SKECHERS, Jessica (sic) [Jessica’s] as well as investment banks, Donaldson, Lufkin & Jenrette and Oppenheimer.

We have known Steve for several years and have worked closely with him, while he was at B. Riley.

We have experienced firsthand his exceptional operational abilities and financial leadership giving us confidence that he is the right leader to grow CFC to new heights.

As you know, historically, CFC has financed its loan origination and loan acquisition activity through A-Mark's balance sheet in our long-standing relationship with our financial institutions.

As Cary mentioned, last week, we closed our first asset-based securitization of $100 million in long-term debt, providing CFC with the necessary capital to aggressively expand its loan portfolio and suite of complementary products.

This is an important step in scaling CFC to the next level as it will provide dedicated financing directly to that subsidiary while locking in long-term access to capital at attractive rates and flexible terms.

By growing our finance book and introducing complementary financing products, A-Mark will increasingly benefit from the revenue diversification and interest income that CFC provides our business.

Turning to our retail sales segment, which is comprised of Goldline and our new lead repository business, which we acquired in August of 2017.

During the fourth quarter, we finalized the integration of the Goldline assets, which expanded our distribution and marketing capabilities.

As I mentioned previously, while the integration of this business was more challenging than we originally anticipated, our efforts to optimize Goldline's structure and expand its marketing programs are proving to be fruitful.

And we look forward to benefiting from these measures in fiscal 2019.

As further evidence of our successful streamlining efforts, the fourth quarter saw us dramatically reduce the pretax operating loss of the Direct Sales segment by more than $2 million compared to the third quarter of 2018, this excluding the nonrecurring $2.7 million goodwill and intangible asset charge.

We remain optimistic about the long-term potential for Goldline.

In fact, I'm encouraged to report that we completed the first sale under our new lead repository business program in July.

Looking at our current quarter, we have seen a significant drop in silver and gold prices, which has produced volatility and generated modest incremental demand for A-Mark's physical products as well as a decrease in our loan portfolio.

We will continue to take advantage of attractive near-term trading opportunities, while scaling our business further for the long term.

Today, I believe A-Mark is in the most diversified position in our company's history with the strongest and most-robust platform, customer base and business model we have seen.

We are confident these factors will translate into more predictable growth and profitability in the coming quarters and years ahead.

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

(Operator Instructions)

No questions?

It seems there are no questions at this time.

And I'd like to turn the call back to Mr. Roberts for closing remarks.

Thank you, Jeremy.

Thank you all for joining us today.

We appreciate your continued support, and we look forward to updating you on our next call.

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.

Statements that relate 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 the current domestic and international political climate; 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 the market environment as anticipated; general risks of doing business in the commodity markets; and other business, economic, financial and government 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 dates on which they are made.

Additionally, any statements related to future improved performances 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 in the Investors section of the company's website.

Thank you for joining us today for A-Mark's Fiscal Q4 and Full Year 2018 Earnings Call.

You may now disconnect.