A-Mark Precious Metals Inc (AMRK) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to A-Mark Precious Metals conference call for the fiscal first quarter 2019 ended September 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 first quarter 2019 in 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 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 I 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 thanks for joining us.

As you can see from our earnings release issued this afternoon, our results for the fiscal first quarter of 2019 reflect solid improvements across our various business segments.

This is most evident by our expanded gross profit margins as well as our return to profitability, a consistent track record we enjoyed prior to our acquisition of Goldline.

Our financial performance for the first quarter was driven in part by more favorable market conditions.

As we alluded to on our September call, the precious metals market environment in fiscal Q1 was characterized by a decrease in silver and gold prices.

This drove increased market volatility and higher demand for our products as well as wider bid-ask spreads, thus improving our premiums.

In fact, we were able to leverage our position as one of the largest bullion distributors for the U.S. Mint, resulting in a 32% share of the overall U.S. Mint silver sales in the quarter, our highest share in over 2 years.

However, before I continue, I'd like to invite our CFO, Cary Dickson, to provide additional details on our financial results for fiscal first quarter of 2019.

Then our President, Thor Gjerdrum, will review our key performance metrics for the quarter.

And finally, I will come back on to provide an update on the execution of our strategy in each of our business segments as well as discuss our strategic initiatives and outlook for the fiscal year and answer any questions you may have.

Cary?

Thank you, Greg, and good afternoon, everyone.

Turning to our financial results for the first fiscal quarter ended September 30, 2018.

Revenues decreased 28% to $1.57 million (sic) [billion] from $2.16 billion in the same year-ago quarter.

The decrease was mainly due to lower forward sales and lower gold and silver prices, offset by an increase in the total amount of gold and silver ounces sold.

Gross profit increased 16% to $8.5 million or 0.5% of revenues from $7.3 million or 0.3% of revenues in same year-ago quarter.

The increase is primarily due to improved market conditions, offset by lower trading profits and gross profit from our Direct Sales segment.

Turning to our expenses.

Selling, general and administrative expenses increased 11% to $7.7 million from $7.0 million in the same year-ago quarter.

The increase was primarily due to SG&A related to our Direct Sales segment of $0.9 million and higher compensation costs of $0.5 million, partially offset by a reduction of $0.5 million of investigatory acquisition cost.

Interest income increased 44% to $4.6 million from $3.2 million in the same year-ago quarter.

The increase is driven primarily by increases in interest rates as well as an increase in the weighted average value of our secured loan portfolio and other finance product income.

Interest expense increased 30% to $3.6 million from $2.7 million in the same year-ago quarter.

The increase is related primarily to greater usage of our trading credit facility, our related-party debt financing agreement associated with our acquisition of Goldline and our newly issued notes payable in our lending business as well as our -- as well as higher LIBOR interest rates.

Net income totaled $1.5 million or $0.21 per diluted share, an improvement from net income of $478,000 or $0.07 per diluted share in the same year-ago quarter.

Shifting to our balance sheet.

At quarter end, we had $22.7 million of cash compared to $6.3 million at the end of fiscal '18.

Our tangible net worth at the end of Q1 totaled $55.3 million, which compares to $53.4 million at the end of the fiscal '18.

During the quarter, we closed our ABS transaction, which resulted in a significant improvement in our working capital.

That concludes my financial summary.

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

Thor?

Thanks, Cary.

Turning to our key operational metrics for the first fiscal quarter of 2019.

We sold 535,000 ounces of gold during the quarter, which is down 9% from prior quarter but up 61% from fiscal Q1 of last year.

Turning to silver, we sold 18.3 million ounces, which is up 112% from the prior quarter and up 26% from Q1 of last year.

This represents the highest volume of silver sales in the last 6 quarters.

Looking at our second key metric, Wholesale Trading ticket volume increased 24% to 32,013 tickets from the prior quarter and increased 7% from Q1 of last year.

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

For the first quarter, our inventory turnover ratio was 5.5, which is up 22% from 4.5 in the prior quarter and down 24% from 7.2 in Q1 of last year.

And finally, the number of secured loans at the end of the quarter is over 1,705, which is down 51% from the prior quarter and down 31% from Q1 of last year.

The decrease is due to lower gold and silver prices during fiscal Q1 of 2019, which resulted in an increase in loan payoffs.

As of September 30, 2018, the dollar value of our CFC loan portfolio totaled $81.9 million, which is down 26% from the prior quarter and down 8% year-over-year.

We assume the portfolio will begin to rebound in Q2 of fiscal '19 as we write and acquire new loans.

That concludes my prepared remarks.

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

Greg?

Thanks, Thor.

For those of you who follow our company, you understand that our business segments largely function independently of the price movement of the underlying commodities, predominantly silver gold, platinum and palladium.

However, factors such as global economics uncertainty and inflationary trends, both of which we experienced in the first quarter, affect market volatility and have the potential impact -- to impact demand, volumes and margins.

As many of you know, the Federal Reserve hiked the fed funds rate at their September 26 meeting, and economic data points to another rate hike at their December meeting.

Higher rates tend to weigh on the prices of commodities like precious metals.

In fact, during our first quarter, all precious metals made new lows for calendar year 2018.

Higher interest rates benefit certain areas of our business, especially our secured lending business segment.

As interest rates increase, our net interest income grows on our secured loan portfolio, which as Thor just mentioned, totaled 1,705 at quarter end.

Although interest expense and interest income go up together, interest income tends to increase more, that is the net spreads widen.

This was apparent by the net interest income we generated in the quarter as our secured lending segment continued to add steady and predictable cash flow to our overall business.

And while the total number of secured loans decreased in Q1, the $100 million asset-back securitization we completed in September will allow us to be more aggressive and expand this important business to new levels.

By growing our finance book and introducing complementary financing products, we will increasingly benefit from the revenue diversification and interest income that CFC and our Secured Lending segment provide.

Shifting gears to our principal investments, which is probably a less familiar component of our business model to many of you.

Principal investments, as we refer to it, is comprised of majority and minority investments in leading privately held entities, including retail and Internet distributors as well as mint, such as SilverTowne.

Not only do these investments provide us with incremental high-margin revenue and gross profit, they also enhance our capabilities and reach throughout the industry.

As you might imagine, we track and monitor return on these investments pretty closely.

For those investments that are performing well and are aligned with our long-term strategic plan, we often look to increase our principal investment.

Along that line, during the first quarter, we increased our stake in SilverTowne from 55% to 69%.

Our machinery and equipment investments in the SilverTowne Mint continue to improve production efficiency and enhance capabilities to expand our product offerings, like our new silver bullet product line.

We continue to focus on initiatives to drive growth and profitability through new licenses, marketing initiatives and special product offerings.

In our Direct Sales segment, we continue to work on measures to further optimize Goldline structure.

In fact, our operating expenses for this subsidiary were significantly lower than planned in the first quarter.

On top of this, we are actively rolling out marketing programs for new products, such as our Canadian silver maple plugs, which has been well received by Goldline's clients .

In summary, we are aggressively and systematically building and diversifying our platform of products and services, so that it provides even more predictable sources of income, regardless of the market environment.

Today, A-Mark has one of the largest customer bases in the industry and provides one, if not the most, comprehensive offerings in the precious metals trading industry.

We continue to pursue strategic activities to expand our platform reach and capabilities to better capitalize on what we believe is a tremendous market opportunity.

We continue to see heightened volatility and continued demand for our physical products in the current quarter, both from retail and institutional customers.

We remain cautiously optimistic, especially given the backdrop of the present geopolitical environment, volatile equity markets, rising interest rates and the midterm elections.

We will continue to act opportunistically in an effort to capitalize on attractive near-term trading opportunities, while strategically scaling our business for long-term success.

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 the line of Sarkis Sherbetchyan from B. Riley FBR.

So just want to first focus on some of the high-end activity you're seeing in the markets.

Can you maybe comment on the spreads, whether they are widening?

What you're kind of seeing with regards to the velocity of sales, especially kind of here in the existing quarter as we kind of close the midterm elections, et cetera?

I think the first thing that happened this quarter was prices dropped significant and made some new lows on silver and gold.

You had a natural shift at that point from retail investors who, up until that point to our fourth quarter of last year, were predominantly sellers of metal.

So you had retail investors who had been selling into higher prices, and I believe, I'm speculating here, shifting into other investments with the money.

When prices drop, particularly in silver, in our Q1, you had a shift from selling, which causes customers not to need our new products, and you had a shift to more demand for our newer, particularly silver products.

we were very fortunate in the first quarter that in connection with that, the U.S. Mint stopped selling 1-ounce Silver Eagles for about, I believe, 3 or 4 weeks, and then went on allocation as they move into their date change at the end of December, they stop making 2018-dated coins.

So what that did was it provided a good deal of pressure on the physical supply.

On top of that, there was a couple of other mints that experienced some logistical and product flow challenges, which exacerbated the lack of product in the marketplace.

A-Mark, as we have talked about before, we try to be opportunistic.

We were very well positioned in that we had a good deal of ounces available from the SilverTowne Mint, which was able to fill the lack of product in the marketplace.

So if you look at our queue, you are going to see a tremendous increase in silver ounces sold quarter-over-quarter and year-over-year.

And that was caused by, in essence, A-Mark for at least a few weeks or maybe 2 weeks, that was the only game in town as it related to silver 1-ounce coins and 10-ounce coins.

So it's kind of a perfect storm for us.

It allowed us to raise some premiums, which we hadn't done in over a year.

And we got a couple of weeks out of it -- few weeks out of it.

The market has -- silver has then gone back up, the demand is weighing just a little bit, and we've got a little bit more back to an equilibrium.

We're still -- at the SilverTowne Mint, we've added a shift, and we have increased our production there by about 30% from where it was a month ago.

So we're trying to quickly take advantage of this opportunity in the marketplace.

As it relates to the elections, I think, we definitely saw a bump in our customers business in the first quarter that we believe was related to the upcoming elections.

And I think October reflected some increased activity as the demographic of the precious metal buyer -- some fear came back into their minds as it related to the political situation.

And we think that drove some volume in October.

Once you get a day after the election or couple of days after the election, we've seemed to have reverted back to a little bit more normalized activity.

So -- but it was good for us.

It seems that contentious elections are good for A-Mark.

Understood.

That's really helpful commentary.

If I can maybe ask a tangent on the increased stake in SilverTowne.

Can you just remind us where you stand today on that stake, perhaps how much you invested in that and just the strategy behind increasing your stake right now?

It was just an opportunity for us that the minority partner gave us an opportunity to increase, and we decided to take advantage of it.

I believe our total investment percentage is up to 69% from 55%.

And our strategy is to just try to be prepared.

Just to give you some perspective on the wholesale marketplace, as of today, SilverTowne 1-ounce rounds are selling wholesale at about $0.45 to $0.50, and that's up from $0.30 to $0.35 in our fourth quarter of last year.

So you have a $0.10 to $0.15 an ounce increase in GP.

It's fairly significant, and it makes a big difference for us.

So it's just an opportunity.

It didn't -- it was what we thought was a reasonable transfer price, and we took advantage of it.

Great.

That's helpful.

And then one more for me and I will hop back in the queue.

For the secured loan book, you mentioned that the number of loans decreased.

Can you maybe just talk about where you'd expect to take that loan book back up to given your increased capability and just if you have a target range of growing the average loan balance or average loan number?

And kind of walk us through what you'd expect to consistently generate from a spread perspective in that business.

Yes, first off, why the loans dropped.

The loans dropped because the price of silver dropped.

And a number of the loans are tied to margin calls.

And if the equity in a loan drops below a certain percentage, we make margin calls, and the customer can either send us more metals, send us cash or they can choose to liquidate the loans.

So we -- yes, so we did have liquidations in Q1, and it was directly tied to the -- where silver hit.

That hitting a new yearly low, or hitting a low that triggered margin calls.

It didn't last there, it came back up, but it -- but for that 3- to 4-day period, we were very aware of the equity in those loans, and we did -- most of them were voluntarily liquidated by the customer.

We did not have any problems with the loans, and there were no loan losses.

So we felt like our systems really worked, and it's a lot -- says a lot for our team on the CFC side that they're managing 2 to 3x as many loans as they had 12 to 18 months ago, and they're -- they handled -- just because they're handling more loans, they're going to handle more situations like this with more quantities.

And we were very, very impressed by what the team was able to accomplish.

And to answer the question of where it is -- where it was at the end of the first quarter and where it's going today -- I mean, where it is today and where it's going tomorrow, the book has come back strongly in October, and I think our overall CFC loan portfolio is back touching the $100-million mark.

And I think that its low in the last quarter was maybe around $80 million, maybe a little bit lower than that.

So we had -- we've had some significant come back there.

Some of that is just related to timing and new business and customers needing to draw on credit facilities we have.

But other parts of that comeback or that growth since the bottom is just related to the metals moving back up and new loans being written.

And the closing of our ABS facility was very important to us.

It's going to free up quite a bit more liquidity for us to grow this business, hopefully at even a little bit quicker pace.

We have 2 or 3 new programs in the pipelines with new customers.

Now that we have this facility, we feel very comfortable, and it just is going to allow us to put a little bit more money out in the marketplace.

And then, in conjunction with our regular commodity lenders that we have credit line with, those 2 facilities are working well together right now.

So we're very happy with that.

(Operator Instructions) Our next question comes from the line of Mitch Almy from Wedbush.

I just want to check in, since you -- since I've been around the company for a while, you've built your storage facility, you bought SilverTowne, you bought Goldline, you set up the asset-backed credit facility.

Is there anything else on the company's wish list?

Or is this pretty much the suite of products that you're going to go with for a while?

We would say we have a very active list we're looking at right now.

So I would say without -- nothing is imminent, but we certainly have other opportunities that seem to be presenting themselves.

This is the way it is with us.

We finish one thing, and we feel like it's just going to be easy to take a breather and then we -- and then something else pops up.

90% of the time, the deals we look at, 9 out of 10, probably nothing happens.

But I would say that we're very happy right now with our partners that we're partnered with, that are servicing parts of the business that we're not.

And we think right now is a good opportunity to make sure we're looking at the marketplace and make sure we have eyes and ears open, and if something else pops up, we would let you -- let everybody know.

Nothing imminent right now.

But I wouldn't say we're done, I think there's still opportunity in the marketplace.

And if you just look at the last 12 months or maybe say the last 15 months if you add in this first quarter, it's been a challenging time in our marketplace.

And the markets have been a little bit difficult on precious metals dealers, the stock market has been basically a can't-miss, no matter what you do with it.

And it's put pressure on some of our customers and some of our competitors and other companies in the industry that touch precious metals.

So that market is -- we feel like the market is shaking some things out that we're always interested in looking at if they get presented to us.

So you never -- you get less opportunities when the market is going crazy and you're in a huge bull market, the opportunities are generally fewer.

And they're never as attractive in a hot market, because you're generally overpaying.

So in a relatively stable market we're in right now, we certainly want to be looking at anything that may come up.

That's all I had.

That is very vague.

So you're not done, you're still doing?

That's all I want to know.

But I wouldn't say that if we had nothing on our plate.

So I mean, we're opportunistic, and we -- all of the partners, shareholders, lenders, everybody that supports us, we appreciate that, giving us the flexibility to look at things.

(Operator Instructions) At this time, this concludes our question-and-answer session.

I would now like to turn the call back over to Mr. Roberts for his closing remarks.

Thank you 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 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 dates on which they were made.

Additionally, any statements related to future improved performance and estimates of revenues and earnings per share are forward-looking statements.

The company undertakes no obligation to publicly update or revise any forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements.

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

Thank you for joining us today for A-Mark's Fiscal First Quarter of 2019 Earnings Call.

You may now disconnect.