A-Mark Precious Metals Inc (AMRK) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to the A-Mark Precious Metals Conference Call for the fiscal first quarter ended September 30, 2020. My name is Jerry, and I will be your operator this afternoon.

Before this call, A-Mark issued its results for the fiscal first quarter 2021 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 top of the homepage.

Joining us today are -- today's call are: A-Mark's CEO, Greg Roberts; President, Thor Gjerdrum; and CFO, Kathleen Simpson-Taylor. Following their remarks, we will open the call for your questions. And 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 available for replay via a link available in the Investor Relations section of A-Mark's website.

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

Thank you, Jerry, and good afternoon to everyone. Thanks for joining us on our call today. I'd like to start my remarks by thanking our employees and shareholders for their continued support.

As you can see from our earnings release issued today, the first quarter of fiscal 2021 marked an impressive start to our new fiscal year. During Q1, we continue to build on the operating and financial momentum we established in the second half of last fiscal year to further capitalize on the unprecedented volatility in the precious metals market. The continued volatility, combined with significant demand for precious metals and supply constraints, has enabled us to generate record financial results in this quarter.

We delivered strong sequential improvements in all of our key financial metrics, including a 12% increase in revenue, a 29% increase in both gross profit and net income compared with last quarter. In fact, Q1 marked the most profitable quarter in A-Mark's history with net income of $23.1 million or $3.09 per diluted share. This resulted in a 20.2% return on equity for the quarter compared with 18%, as I reported last quarter.

The strong results reflected the continued benefits and scalability of our business model. As I mentioned previously, the strategic investments we've made over the last several years to expand our capacity and operational capabilities have ideally positioned A-Mark to capitalize on the current market conditions while increasing our market share and driving our growth over the long term.

I will now turn the call over to our CFO, Kathleen Simpson-Taylor, to discuss our financial results for the first quarter of 2021 in more detail. Kathleen, take it away.

Thank you, Gregory. Good afternoon, everyone. Our revenues for fiscal Q1 2021 increased 26% to $1.87 billion from $1.48 billion in Q1 of last year. The increase in revenues was primarily due to an increase in the total amount of gold and silver ounces sold and higher selling prices of gold and silver. Gross profit for fiscal Q1 2021 increased 333% to $36.1 million or 1.94% of revenue from $8.3 million or 0.56% of revenue in Q1 of last year. The increase in gross profit was primarily due to higher gross profits from the wholesale trading and ancillary services and the direct sales segments.

SG&A expenses for fiscal Q1 2021 increased 21% to $10 million from $8.3 million in Q1 of last year. The increase was primarily due to increases in compensation expense, including performance-based accruals of $1.8 million and computer software expense of $0.2 million, which were partially offset by decreases in operating expenses of $0.2 million associated with our direct sales segment and depreciation and amortization expense of $0.1 million.

Interest income for fiscal Q1 2021 decreased 31% to $4 million from $5.8 million in Q1 of fiscal 2020. The aggregate decrease was primarily related to lower interest income earned by our secured lending segment, partially offset by higher other finance product income. Interest expense for fiscal Q1 2021 decreased 17% to $4.3 million from $5.1 million in Q1 of last year. The decrease was primarily due to lower interest rates related to our trading credit facility and lower loan servicing fees. These were partially offset by increases in interest expense related to our liabilities on borrowed metals and product financing arrangements.

For the first quarter of fiscal 2021, our net income totaled $23.1 million, or $3.09 per diluted share, which was a significant improvement from net income of $128,000 or $0.02 per diluted share in Q1 of last year.

Now turning to our balance sheet. At quarter end, we had $24.4 million of cash compared to $52.3 million at the end of fiscal year 2020. Our tangible net worth at the end of the quarter was $104.9 million, up from $91 million at the end of the prior quarter. I'm pleased to announce that our Board of Directors approved a second nonrecurring special dividend of $1.50 per common share. This second nonrecurring special dividend will be paid on or about November 30, 2020, to stockholders of record as of November 23, 2020.

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?

Thank you, Kathleen. Looking at our key operational metrics for the first quarter of 2021, we sold 721,000 ounces of gold in Q1, which was up 25% from Q1 of last year and up 8% from the prior quarter, which resulted in a strong quarter for gold sales. We sold 24.2 million ounces of silver in Q1, which was up 16% from Q1 of last year and down 18% from last quarter. Wholesale trading ticket volume, our second key metric, which represents the total number of product orders processed by our trading days, increased 30% to 35,300 tickets from the prior quarter and decreased 3% from Q1 of last year. While the ticket volume decreased as compared to Q1 of last year, the average order size per ticket was higher in the current quarter.

The third key metric we evaluate is inventory turn, which is a measure of how quickly inventory has moved during the period. For the first quarter, our inventory turnover ratio was 5.0, which was up 11% from 4.5 in the prior quarter and up 14% from 4.4 in Q1 of last year.

Finally, the number of secured loans at the end of the quarter totaled 1,125, an increase of 57% from the prior quarter and a decrease of 68% from Q1 of last year. The dollar value of our loan portfolio at the end of the quarter totaled $84.2 million, which is up 32% from fiscal year-end and down 44% from Q1 of last year. Typically, the number of loans increases during periods of rising precious metals prices and decrease during periods of declining precious metals prices. In the past 2 quarters, as solar prices have rebounded, we have experienced growth in our CFC loan portfolio.

That concludes my prepared remarks. I'll now turn it back over to Greg to talk about the progress we've made on our key operational initiatives. Greg?

Thank you, Thor. In addition to delivering our strong financial results and key operational metrics, we continue to execute on our operational plan to enhance organizational processes, improve efficiencies and expand our capacity. While all of our business segments have generated profitable results in Q1, both our wholesale trading, services and direct sales segments continue to exceed our plans. We are encouraged by the demand we've seen from both the wholesale and retail channels and the related performance of these segments. Our efforts to manage costs and implement effective marketing strategies for Goldline, which drives our Direct Sales segment, have proved to be very successful as evidenced by the $3.6 million of net income earned by this segment in Q1.

I would also like to highlight the SilverTowne Mint, which provides us with enhanced price stability and sustained consistent supply during supply-constrained periods, like we saw in Q1. SilverTowne's weekly production rose to 500,000 ounces per week. We continue to invest in new machinery and operational efficiencies, which will increase the Mint's overall capacity and further enhance product quality over the coming months.

As noted, and as Thor mentioned, we've seen a nice rebound in the loan portfolio of our Secured Lending segment, both in terms of the number and the dollar value of the loans. Over the last quarter, we've continued to experience a steady increase in loans. The strategic investments we've made over the last several years to expand capacity and operational capabilities have yielded exceptional financial results. Looking ahead, the current economic uncertainties give us optimism for fiscal 2021 as we seek to capitalize on future opportunities. We continue to believe that our favorable competitive position, industry-leading platform, robust customer base and proven business model will help drive growth and profitability in the years ahead.

Operator, please provide the appropriate instructions for the Q&A.

(Operator Instructions) The first question is from Craig Irwin, ROTH Capital Partners.

So I wanted to ask you guys about the increase in average ticket size. Is this maybe related to some of the shift that you're seeing between gold and silver? Or is there something else maybe going on in the customer base that might be fundamental that we should look at as a bit of a longer-term shift?

I would say that it's probably not anything related to longer term. It's related a little bit more, in my opinion, to market volatility. And I think when you have very active markets where we have large swings in a given day like we had, I think it was on -- what we had just in the last 2 weeks, we've had about $100 swing in gold, and we've had almost a $2 swing in silver. Over short periods of time, I think our customers may tend to place a little bit bigger orders, and they may tend to call the desk and consolidate orders as opposed to, in our quieter times, you see people taking their time just on our portal and they may place an order and then they place another order. They may place 10 orders in a day, but in a more volatile time, I believe they may place 1 consolidated order. So I think it -- the factors vary that contribute to it, but for the most part, the live orders we take on the phone are larger than the portal trades.

Understood. Understood. So last quarter, one of the really good things in this environment was that you reached profitability on your Internet sales business. I don't think people sort of appreciated the scalability of that platform, particularly for retail buyers, retail investors. Can you update us on the profitability, sort of where we stand now? Are you seeing good velocity with that customer base?

That's a broad question, but I'll try to be specific in what I think is important. I think that, first off, in our retail segment, which is Goldline, as you can see from the profitability, the $3.6 million in the quarter, that business has been very active up to and since the election. We've seen good activity. And I will say that the Internet leads that we are generating in that business are better than ever. And when I say leads generated on the Internet, it's our marketing team that's going out with SEO or targeted marketing, and we have seen very, very good results and a good return on equity on our Internet marketing plan this quarter.

As it relates to Internet sales in general, direct Internet sales, which we'd attribute to a few of our investments that we have in Internet companies, those businesses were also very active in the quarter we're reporting. And I would say that pretty much whatever precious metals retail platform you're functioning on, whether we're operating it or it's our customers operating it, this quarter was very, very good, and the volatility that we've seen is continuing, which is good for us.

So the rebuilding of the CFC loan portfolio is actually making great progress. $82.4 million is a really nice 30%, 29% sequential increase. One of the things we see is -- the average loan size now seems to be up quite a bit over where you were a year ago. Can you maybe explain sort of what's going on there, if that's influenced by the same things that has the average ticket size going up? Or is there some other trend in there that's causing the new loans originated to skew larger?

I think as we've said before and what we had happened in March or April of 2020 when we had a flash drop in the price of silver and gold, that will almost always cause us to lose loans. And depending on how drastic the drop, we'll lose more loans. And if it's a mild drop, I think that -- since that moment, if you just look at the numbers, I think in March, we had silver dropped to $12, $12.50 an ounce for only a few hours, and then it bounced back, and now we have silver at $24. So what happens when prices move up is customers tend to buy more when they think the market is going up. And when they -- when you have significant material moves up, we tend to see our loans get bigger. I also think that when customers have equity in metals, they tend to add on and they sometimes add to their loan or add to their metal or their collateral. So I think that what we're seeing is natural, and I think it's in line with what we expected. I think we indicated on the last call that, just like we had a flash drop, we expected the book to probably come back a little bit faster than it had the last time we had a drop, and we believe that has occurred. And we feel good momentum right now in our loan book, so I -- what we've seen so far in the first 1.5 months of Q2 here is we've continued to see momentum in the loan book. So as you see prices continue to move up, we -- that generally equates to a higher loan book for CFC.

Okay. And then your inventory turnover is accelerating nicely, both sequentially and year-over-year. Can you maybe talk us through the mechanics of how this contributes to profitability and whether or not you're seeing that similar velocity as we progress through 2Q at this point?

Yes. I think that whenever you have volatility, you're going to see our inventory turn faster. And as it relates to profitability, the more inventory turns we have, it just -- it equates to more transactions and more ounces sold, and you just -- you get people with -- and it goes back to what we just talked about with a higher order size or a higher dollar volume on the trades, is that you're going to see our inventory turn faster. We're going to replenish inventory faster, you're going to see less -- inventory may not sit as long as it does in slower times, so I think that it's all tied together. And we are encouraged that this quarter, we continue, at least as from what we saw in October and what we've seen with some of the volatility in metal prices as well as some extreme volatility in the equities markets, we feel like we're exceeding our expectations so far in Q2.

Great. And then you did touch on the equities market. So one of the misperceptions we hear often out there that we have to explain away to investors is the importance of the price, the absolute price of gold or silver. Can you just remind us how A-Mark was able to deliver quality value to its customers to retail and institutional investors across all environments and how volatility is really our friend more than the absolute price of the underlying commodity? Maybe I answered the question myself, but...

Yes, you did a pretty good job. You did a good job on that. I think that this has been an unprecedented year for everybody, including us, I'm not exactly -- I can't pinpoint any one trend that I see happening that I think we can count on. I mean the last 7 days, I would say, prior to this -- yesterday and late last week, was that we had equities moving up fairly strong after the election, and we had metals moving up also at the same time. And we saw this through about Friday of last week. And then we had a situation yesterday where we opened, we had a vaccine that was published or a report on a vaccine as well as less of a contest in the election and a little more certainty in what was going to happen. Gold and silver diverged from the equities yesterday in the morning. It was a very quick drop, and it was very dramatic, and that volatility was very good for us. We had a very -- we had a big uptick in activity yesterday, whereas last week, metals were moving up slowly and equities are moving up slowly, and it was a little bit slower after the election last week for us. And then today, you see metals starting to come back and then kind of continue to march upward.

I think for us, when you see flash drops and you see buying opportunities, that's very good for A-Mark. And we tend to do very well on drops as well as if there's an overall sentiment that prices, real prices of metal are moving higher, you're going to get some sustained buying. I think that depending on the platform, whether it's a direct Internet retailer or Goldline, for example, these different factors affect their client base a little differently, that's why we like to be involved as much as we can in all platforms as it relates to retail sales. I will say that, as it relates to Goldline, we saw, as you can see from the performance in Q1, we saw their customer base really outperforming our expectations leading up to the election. And then with the results of the election, we have seen no drop-off in the 4, 5 days since the election. We've seen Goldline in particular and their customer base continue to respond to the macroeconomic issues as well as post-election questions. So I think we have a great insight based on what our wholesale customers are buying that are then that product is going to retail investors. We have good insight from our view into our investments that we have in Internet retailers.

And then our clearest picture is clearly what we see happening in Goldline. And I think what we're seeing the last 6 months, 8, 9 months in Goldline is the reason why we've made the acquisition in the first place, and it's helping us with good visibility into what retail precious metals buyers are doing. So did that come close to answering the question?

Absolutely, it does a great job. So congratulations on yet, again, another record quarter. Really impressive.

Thank you.

(Operator Instructions) We have a question from Chris Sakai, Singular Research.

I just had question on the balance sheet. What -- if you could remind me, what are these derivative -- what are the derivative assets? And why is there a jump, and then from $46 million to $114 million -- or sequentially, what's going on there?

Thor, you want to give that a shot?

So derivative assets are primarily related to our hedging book. So it's simply a factor of what is going on in terms of price movement from the time we put the hedge on to the balance sheet date. So if we're -- if the price moves up or down more, that's going to impact those derivative assets. But those are primarily related to the hedges that you made. As you know, our inventory is fully hedged at all times, so that asset or liability is going to be impacted in more volatile markets and will move more rapidly up or down due to the activity in the market. We have a larger balance sheet. We're seeing higher gold and silver prices, so you're going to see these derivative assets typically be at a higher aggregate number than they were historically in the last couple of years, but you're going to see those swing around depending on the timing of when those hedges were put on, what month those contracts are in, and the month in terms of forwards or futures and what the size of the inventory is.

And just to add on, I would say that over the last 10 months, we've seen increasing activity both in A-Mark's hedge position as well as in customers that we hedge for, and we do hedge for third parties, and we have a very good business there. So it has -- the volatility and the macro environment has caused there to be bigger positions that we're hedging, at which then leads to bigger numbers on these line items.

Okay. All right, great. And then one other question. I guess in the next -- in this current quarter -- I mean if we see similar sort of patterns to gold and silver, is it fair to say that we would see a similar gross margin with -- at the end of the quarter for you guys?

I mean I think it's too early in the quarter to really tell, and we have been pointing for quite some time at the election, and the results of the election and what happens next is going to drive a lot of our metrics. And I think that we feel that October was a good month, but there were some slow periods also within the October month. And I think that you had -- particularly the last couple of weeks up until yesterday, we did feel like there were some people that were customers and counter parties that were kind of sitting on their hands and kind of waiting to see what happens, so I don't think we have enough data at this moment to really say what's going to happen for the full quarter. I will just say that October, we met our expectations, and we believe we saw what we thought we would see, and we'll have to see what happens here in November and December. But based on the last 9 months, it seems like every day, we get an opportunity to take advantage of some volatility somewhere in the markets, and it's been good for us.

Okay. Great. And then one thing, have you seen a change in consumer, I guess, habits based upon the presidential election results?

Yes, I think that we have seen a change in investor habits, and I think you saw it yesterday. You had a huge day in equities, which had something to do with the vaccine and also had something to do with everyone just being relieved that the election was over. And I think that we were fortunate enough yesterday, we had a little flash drop in gold and silver, and it -- we saw it energize our customers. So yes, I mean, I think that you'll probably see events over the next 4 years that are going to impact us. There's a lot going on out there right now.

The next question is from Mitch Almy, Wedbush Securities.

Fantastic quarter, needless to say. I only have one question and then one comment. When will be your first chance, if there's one coming, for you to refinance your asset backed securities out there? And are banks coming to you wanting to do that right about now, given the change in your balance sheet?

Yes. The answer is yes. And yes, we have talked to people about how we will look to refinance that piece of our overall borrowings. I think it's a little bit premature right now to do too much. I think we're having some opportunity to talk to people about our entire financing and different ways for us to finance our business, whether it be leases, whether it be our normal credit facility, whether it be the ABS. I think we do have options. And as it relates to the ABS specifically, I mean, we still have about 3 years left on that, a little under 3 years, 2 years. So I think that you'll see us, over the next 12 months, start to explore: is there an opportunity to refinance it early; is there work we can be doing up to that date when it comes due to be prepared; or like I said, if there's anything we can do early. Certainly, the interest rates today are much better in our favor as opposed to where they were when we locked in to the ABS, so it's on everybody's mind here to be ready and to try to take advantage of anything we can do to lower our borrowing costs.

Got it. The second thing is just to comment as a, I guess, a stockholder that's been around since the spin-off and having been to several annual meetings and a lot of these calls in an environment that was less conducive to your business than it is now, and a guy who probably directed some pointed questions your way. I just wanted to thank you and the rest of management for your governance that got us to this point because a year ago this quarter, $3.09 is a long ways away, so just wanted to say thanks.

Well, we try to do what we say we're going to do and try to be transparent to everybody on patience and educate how our business works, and you've been one of the best students, so thank you for your time in learning our business and letting other people know about it.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Roberts for his closing remarks.

Thank you all for joining our call today. As always, we appreciate your interest and continued support, and we look forward to keeping you apprised of the next chapter in A-Mark's progress. Have a great day.

Before we conclude today's call, I'd 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 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 aggregate, could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results 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 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 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 or see, plan and similar expressions or variations thereof identify certain of the forward-looking statements, which speak only as of the date on which they're 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'd like to remind everyone that a recording of today's call will be available for replay via a link in the Investor section of the company's website.

Thank you for joining us today for A-Mark's earnings call. You may now disconnect your lines.