Envela Corp (ELA) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the DGSE Companies third-quarter financial results conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for your questions. (Operator Instructions). This conference is being recorded today, November 13, 2014.

I would now like to turn the call over to Dusty Clem, Chairman and Chief Executive Officer of DGSE Companies, Inc. Please go ahead, sir.

Thank you and good day. The call today will be hosted by myself and Mr. Brett Burford, the Company's Chief Financial Officer. Following management's discussion, there will be a formal Q&A session open to the participants of the call.

Before we get started, I'm going to review the Safe Harbor statement. Some of the information discussed on this call, particularly our revenue, operational targets and our forward-looking business plans, is based on information as of today, November 13, 2014, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today as well as DGSE's SEC filings.

I'd like to begin by thanking everyone for joining us on our earnings call today. With all the legacy issues behind us, we were able to be very focused on improving our business during the quarter, and we are pleased to see some early signs of improvement.

During today's call, I'll speak briefly about the third quarter and talk about our progress on various initiatives. Brett will then give you a recap of our financial performance in the third quarter. And finally, I'll share some closing comments.

We are gratified to show a return to positive earnings for the first time in several quarters. While we're certainly not satisfied with essentially breaking even in our continuing operations, this represents a significant improvement versus recent results. I believe this improvement is an indication that our increased focus on jewelry, watch and diamond sales is the best path to driving consistent revenue and profitability in the current market.

As we've mentioned before, our increased success in the jewelry business has been driven by multiple factors, including improving our product mix, selection in merchandising, the development of new vendor relationships, the recruitment of more experienced jewelry sales professionals, implementation of new staff development and training programs, and shifting our advertising focus to focus on jewelry, diamonds and watches rather than scrap buying as it was in our recent past.

Our scrap and bullion businesses continue to lag substantially behind last year and were both down over 25% this quarter compared to 2013. A portion of this is directly attributable to the 11% decline in average gold prices this year, but we've also seen a significant industry wide slowdown in demand. While the market dictates that we're not as focused on scrap and bullion today, we're still fully engaged in these lines and will take advantage of every opportunity to participate in these segments. While growth in bullion and scrap returns, we believe our leaner retail infrastructure can easily be leveraged to allow incremental margin dollars to fall straight to the bottom line.

While the decrease in our bullion and scrap businesses has ultimately led to a decline in overall revenue of $2 million or 10% compared to the third quarter of last year, gross profit only saw a decrease of $178,000, or 5%. While bullion is still our largest revenue stream, I'd remind everyone that our jewelry business creates significantly more gross margin dollars than bullion and we believe that jewelry, diamonds and watches provide a much more consistent, sustainable profit stream.

We also reported income in discontinued operations this quarter. We worked hard and we were ultimately able to successfully negotiate several favorable terminations to the remaining leases in our discontinued Southern Bullion business. Additionally, we recorded tax benefits in the current quarter related to a reduction in the final tax calculation for states in which we no longer conduct business.

I'm now going to turn the call over to Brett for a more detailed look at the third-quarter 2014 financial results. Brett?

Thanks, Dusty. In the quarter ended September 30, 2014, revenues from continuing operations were $17 million compared to $19 million in the quarter ended September 30, 2013. The decrease was the result of continuing declines in the value of precious metals and the related decreased demand which negatively impacted our bullion and scrap businesses.

Gross profit from continuing operations was $3.1 million, or 18.4% of revenue, compared to $3.3 million, or 17.4% of revenue, in the prior-year quarter. While lower revenue for the quarter lead to lower gross margin dollars, gross margins as a percent of revenue increased by 1% for the third quarter of 2014 due to a favorable sales mix shift as high-margin jewelry sales continued to grow while lower margin bullion sales decreased.

Selling, general, and administrative expenses were $2.9 million, down $873,000 compared to $3.8 million in the prior-year quarter. Last year in the third quarter, we accrued $650,000 towards the eventual settlement of our Texas sales tax issue. With that issue behind us, we saw a significant decrease in expenses in the third quarter of 2014 combined with $223,000 in other savings generated from our continued efforts to cut costs across the Company, including both reductions at the store level and in our corporate overhead.

Income from continuing operations for the third quarter was approximately $13,000, or breakeven on a per share basis, an improvement of $876,000 compared to a loss from continuing operations of approximately $863,000, or $0.07 a share last year.

Income from discontinued operations for the three months ended September 30, 2014 was $167,000 related to the Southern Bullion locations closed in February and April of 2014 compared to a net loss of $569,000 for these locations in the same quarter of 2013. Income from discontinued operations includes the reversal of certain previously established expense accruals as the Company has been able to successfully negotiate releases from various long-term contracts and leases related to Southern Bullion. Income from discontinued operations also includes state and local tax benefits estimated as the Company exits certain geographies. The Company believes it's now recognized all material expenses related to the closure of Southern Bullion.

The Company reported net income for the third quarter of $180,000, or $0.01 per share, compared to a net loss of $1.4 million, or $0.12 per share, in the third quarter of 2013.

Turning to the year-to-date financials, in the nine months ended September 30, 2014, revenues were $52.6 million, down $13.7 million, or 21%, compared to $66.3 million in the same period last year. This decrease is again primarily due to the drop in gold prices which were down an average of 11% as measured by London PM Fix compared to the prior year. This decrease in gold prices affected our scrap and bullion sales significantly.

Gross profit in the first nine months of 2014 was $9.4 million, or 17.8% of revenue, which was down $417,000 compared to $9.8 million, or 14.7% of revenue, in the prior-year period. The overall increase in gross margin as a percentage of sales was due to favorable sales mix shift as we continue to see strong growth in jewelry sales which again carry high margins versus lower bullion sales which carry lower margins.

SG&A expenses decreased $722,000, or 7%, to $9.6 million compared to $10.4 million in the prior-year period.

In addition to the year-over-year savings related to the 2013 sales tax accrual of $650,000, the Company has been able to completely offset incremental operating expenses related to two additional retail locations that were opened in mid-2013 through continued cost reduction efforts across all areas.

The loss from continuing operations for the nine months ended September 30, 2013 was $810,000, or $0.06 per share, compared to a loss from continuing operations of $1.2 million or $0.10 per share last year. The loss from discontinued operations for the nine months ended September 30, 2014 was $4 million related to the closed Southern Bullion locations compared to a net loss of $1.1 million for these locations in the same period of 2013. Discontinued operations for the current year includes the non-cash write-off of $3.2 million in Southern Bullion assets, including the intangible asset attributed to the trade name as well as fixed assets previously utilized in operations.

The Company reported a net loss in the nine months ended September 30, 2014 of $4.8 million, or $0.39 per share, compared to a net loss of $2.3 million, or $0.19 per share, last year.

As of September 30, 2014, we had cash and cash equivalents of $1.9 million compared to $2.6 million at December 31, 2013. Inventories for continuing operations increased $1.2 million to $11.2 million at September 30, 2014 compared to $10 million at December 31, 2013 due primarily to transfers of inventory from discontinued operations.

Stockholders equity decreased $5.7 million at December 31, 2014 compared to $10.4 million at December 31, 2013 largely due to the Southern Bullion write-offs discussed previously. As of September 30, 2014, the outstanding balance of the Company's credit facility with NTR Metals was approximately $2.3 million compared to $2.4 million at year end 2013.

In February of 2014, we entered into a one-year extension of the loan agreement which extended the term to August 1, 2015. Given this timing, as of the third quarter of 2014, the NTR credit facility has been reclassed as a current liability. Management expects to renew or replace this credit facility well in advance of its expiration.

With that, I'm going to turn it back over to Dusty for some final comments.

Thank you, Brett. While we're not satisfied with our current results, we are starting to see the impact of the strategic decisions we've made over the last several months. In addition to successfully growing our jewelry business, we've worked hard to reduce costs at both the store level and at our corporate office. While we've been successful at achieving significant cost savings, we continue to look at any and all options that will allow us to run a more efficient and profitable business. This includes continuing to critically evaluate our store count, market configuration, vendor relationships, product mix, and advertising efficiency. I'm confident that these improvements, paired with our ongoing efforts to grow our jewelry, diamond, and watch businesses, will move the Company toward consistent profitability and value creation.

That concludes our prepared remarks, and we would now like to open the call to take your questions.

(Operator Instructions). Chris [Dusey], Dusey Asset Management.

Congratulations on the turning the corner in the business. I had a few questions. You answered a couple of them in your prepared remarks but, Dusty, you had spoken about a consignment program that you had started in I believe the beginning of the third quarter, end of the second quarter. Do you have an update on that?

Yes, that's actually running pretty well. The way that program works, it allows people who come into the store and may want more than we are willing to offer on a cash basis an option to consign the items or item to us for a period of six months. We take 25% of the gross proceeds and generally get a repair fee or a diamond replacement fee or a watch repair fee as well. So that program is going pretty well for us. We are excited about it as we see what this holiday is going to bring for us. It typically brings in different and more unique merchandise than we otherwise would have been able to purchase just as a straight -- or cash basis. So I'm happy with the progress of that so far.

Okay. And shifting gears a little bit, Brett, would there be a revenue number that you'd be willing to provide and a net income number, for, say Q4 of 2013 adjusted for the disposition of SBT?

I'm sorry, Chris, say that again. So Q4 2013 --

2013, I think the Company did $25 million or so in revenue. I can't remember (multiple speakers)

Yes. Basically that's the way that the -- if I understand you correctly, Chris, that's the way it's presented in the financials, we present it, so all of discontinued ops have been reclassified and so what you see and so for the comp is -- and again hopefully this is what you're asking. g If it's not, please stop me. But the comp would have been $18.9 million or actually $19 million in the third quarter of last year versus $17 million in the third quarter of this year. Those are apples-to-apples numbers.

No, I'm asking for what was the number in the fourth quarter of 2013 so I can do an apples-to-apples comparison when you guys report the fourth quarter this year and work on my model.

You know what, Chris, I apologize. I don't have that handy in front of me. I'd be happy to look at it and shoot you an email.

That'd be great. I'd appreciate it.

And one last question. Actually I have two more questions. Is there an SG&A run rate number that I can use in my model going forward? Is $3 million a good number, or is that a little bit too low?

No, I think that's a good number. We are, right now we are right around $1 million a month. We feel like we have squeezed out -- there's always a few incremental wins but I think we've squeezed out most of what we can squeeze out. I think most of the incremental expenses related to all the restatements and the various lawsuits, that's all really out of that number at this point. So the $1 million a month during the quarter is a pretty good run rate for now. Again, I'd say we make -- we're constantly looking at that number but for today that's a reasonable run rate.

And I would just add to that, Chris, we are coming up on the fourth quarter, so you can expect to see another several hundred thousand dollars below $0.5 million but about $250,000 in additional advertising expenses this quarter.

Okay. And Dusty, the last question and I'll step back in the queue. I saw that you guys added a couple of new board members who had some retail experience. As a result of that, I mean are you going to change anything you plan on doing on the retail side or the jewelry side in the fourth quarter?

Well, I think we already started to make some changes in our retail model, and I'm very happy with what the new board members are bringing. As you mentioned, they have a fairly extensive retail background and have provided a really nice insight for us to sometimes make small tweaks and others maybe not quite so small inside the store in terms of the way that we communicate with our customers, the way we are structuring some incentive plans and hiring practices. And I think we're making changes on a quite regular basis as we just make the place better, and they certainly have a large impact on that.

Okay, great progress on the business, and I'll step back in the queue. Thank you.

Larry Katz, private investor.

I have actually two questions. Listening to the earnings reports today, it seems more and more businesses are concentrating on expanding on the Internet. I know you do a lot of watch business, especially branded jewelry. You seem to do very good on the Internet. Is there anything you're doing to increase your presence throughout the US or even the world that people would know that DGSE is a place that they could get the branded jewelry?

Hi, Larry. Yes, a couple of things. We've mentioned in a previous call that we're working on redoing our websites. We have two primary websites. One is for DGSE, Dallas Gold & Silver Exchange. The other is for CGDE, which is Charleston Gold & Diamond. We also have a store in Highland Park, Illinois that we will be rebranding into Chicago Gold & Diamond. It's currently called Bullion Express but it will be rebranded Chicago Gold & Diamond here in the next couple of weeks. As leading into the holidays, and honestly we're a little late, Larry, in getting this launched, but our website, our new website, is coming along and we expect that to launch that site in the coming weeks. And then paired with that will be a new advertising push to get to those customers who may not know or may not be in the geographic areas of South Carolina or Illinois or Texas and getting in front of them. So yes, and I would expect that to be hopefully a sizable portion of our revenue as we go into 2015.

Okay. And my other question is even as gold has come down and your bullion business has come down, it's good that you're going into a higher margin of jewelry sales. Your sales are in excess of $60 million. Basically if you want to say -- I'm not even going to say you're earning money because your loss you could say breakeven and the stock price is basically only $1.05. Is there anything being done to increase the price of the stock?

Well, I think we're having calls like this and, Larry, what you're -- unfortunately where not done for a long, long time in the stock. I think that the best thing we can do for the price of the stock is right the ship and start making some money. Fundamentally, that's what you should care about and I think everybody else on the call cares about, and it's not something that we've done in our more recent past. So I'm focusing every day to make sure that we are not overspending in terms of the expense side and we are growing our jewelry business as well as we can.

I think, as you mentioned, gold prices are down. It has substantially hurt our scrap business. And our goal is to get ourselves in a place where we can be profitable in whatever gold market we're in whether it's a ripping and roaring one or a modest one like it is today. But in those times that it does, gold does move up and there is more excitement in the bullion and scrap businesses that all that is just incremental profit that like I said in my remarks falls straight to the bottom line. We can be astoundingly profitable in a really good precious metal market.

Thank you.

Aram Fuchs, Fertilemind Capital.

I'm curious. The World Gold Council came out with their quarterly report today, and they didn't show much of a drop in recycling demand. And the price hasn't changed that much from last year, certainly compared to the other years. Are you sure you're not losing market share to other shops? Are you concerned about that?

Yes, good question. The World Gold Council did produce the report yesterday and I think if you look at the numbers closely -- I've actually got it sitting here in front of me. It's on Table 4 of that report, Aram.

The recycled gold column as you'll see is down about 25% quarter-over-quarter. Gold is down 11% so just even if everybody's buying the exact amount -- this is presented in tons, but in ounces, from our standpoint, you would be down 11%. That decrease in price has quelled demand quite significantly by, like I said, 25% quarter-over-quarter. We don't report by segment, but that's a pretty comparable number to what we're seeing.

Okay. And then on your jewelry business, what can you give us sort of more details on how you'll be changing the merchandise in the coming 12 months? You seem to have gotten off to a good start. What else is there to do?

Yes, we have historically focused on mostly what we bought over-the-counter, repairing those goods and then flipping them back out to the public. As I've gotten in here and taken charge, we've gotten a better relationship with several new vendors and hope to continue that. We are having higher-end merchandise at still really competitive prices come through the door. And the theory here is we want to pair really good strong estate jewelry, which we've always made a name for ourselves, designer pieces as well as privately labeled pieces that we've bought over-the-counter at our shops with new pieces that are very competitively priced.

Part of that is also an advertising push. For example, here in DFW this year, we're sponsoring the New Year's Eve party downtown or at American Airlines Center downtown. We are cobranding with companies like GMC and Texas Motor Speedway. They'll be probably in excess of 100,000 people at the event. And then it is broadcast in most of the southern, central time zone. We're giving away a ring and sponsoring a couple of minutes in the middle of that segment for a gentleman to propose to his girlfriend, and we are supplying the ring, that kind of branding. And we are doing that, cobranding that with a company, one of our new vendors. Really that kind of thing is something that would've been impossible given our product mix in years past. We are able to pair that with getting the entries to that contest and then remarketing to them with a discount at a later date.

So, all sorts of advertising and promotions that we are doing as an example, but there are several more that I think are starting to push some sales inside the store and things that we hope will continue to do so as we move into next year.

Okay, good. And on the upgrade to the website, will that be out for Black Friday or Cyber Monday, or what is the latest on the schedule of that?

That is how -- frankly, the website has taken longer than expected. We've had some problems with getting it up and running, to be as frank as possible, but my expectation is it will be up by Thanksgiving.

Great, thanks a lot.

(Operator Instructions). Ladies and gentlemen, there are no more questions at this time. I'd like to turn it back over to management for any closing remarks.

Thank you for your time and attention today. We look forward to updating you during our next call when we will discuss the year-end fourth-quarter operating and financial results. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.