Envela Corp (ELA) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the DGSE Companies, Inc. fourth-quarter 2014 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, March 26, 2015.

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

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 in this call, particularly our revenue, operational targets and our forward-looking business plan, is based on information as of today, March 26, 2015, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. And for a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release we issued today, as well as DGSE's SEC filings.

To begin, let's go over the agenda for today's call. First, I'll start by giving you a brief summary of the fourth-quarter and full-year 2014. This will include a discussion of market conditions and an update on our key initiatives.

Second, Brett Burford, our CFO, will go over our financial results for the fourth quarter and for the full year, and I'll then give a few closing remarks, focusing on what to expect in the remainder of 2015. Finally, Brett and I will be glad to take your questions.

2014 was an eventful year for DGSE in which the Company made substantial changes in its operations. In April of 2014, I was named to the position of Chief Executive Officer and Chairman, and Brett Burford joined the Board of Directors for the Company. One Of the first decisions that I made, along with Brett and the rest of the Board, was to completely discontinue the operations of our Southern Bullion Coin & Jewelry stores, which were mainly located in smaller markets across the southeast.

The Southern Bullion stores had been primarily set up to purchase unwanted or unused precious metal items, or scrap, as we refer to it in the industry. As many of you know, there was a significant drop in gold prices in 2013. And since that time, the scrap market has shrunk substantially, which has had a -- which had a disproportionately negative impact on Southern Bullion. As a consequence, Southern Bullion lost approximately $1.9 million in 2013, and we did not believe that profitability could be reached in the foreseeable future.

With the close of Southern Bullion, it was necessary to write off $2.9 million in intangible assets related to the Southern Bullion Coin & Jewelry trade name, which the Company had been amortizing over 15 years since the acquisition of Southern Bullion in 2011. This $2.9 million non-cash expense, along with the operating losses from the first four months of 2014, wind-down costs, and the write-off of roughly $300,000 of fixed assets, led the losses from discontinued operations of roughly $3.9 million in 2014. As of the end of 2014, the Southern Bullion shutdown is complete and we believe that all material expenses have been recognized.

In 2014, we were also able to put to rest all legal and sales tax issues that were related to prior management. We have spoken extensively in the past few years about the accounting irregularities that were first discovered by the Company after the departure of previous management, and our self-reporting of these irregularities to the SEC and the shareholders in April of 2012.

In June of 2014, DGSE consented to an agreed final judgment and a civil action brought by the SEC in the wake of those irregularities. In connection with this settlement, the Company was not required to pay any civil damages, but the Company has agreed to undertake certain corporate governance reforms, which include the appointment of two new independent Directors; the establishing of a position of a lead independent Director; establishing reasonable term limits for members of the Board, along with various other reforms, all of which we believe to be practical additions to our corporate governance policies.

In June of 2014, the Company also reached an agreement with the State of Texas Comptroller's Office in connection with the Comptroller's 2010 sales tax audit of the Company. While the Company has initially been -- had initially been assessed $4.4 million in 2010, we ultimately settled for approximately $1.1 million. This settlement represented the culmination of several years worth of efforts on the part of this management team, during which we worked closely with the Comptroller to provide additional documentation and support for items coming out of the audit after prior management neglected to do so.

The Company agreed to pay the settlement over an 18-month period, which began with an initial payment of $325,000, followed by monthly payments of $47,000, until all agreed tax amounts, penalty and accrued interest are paid. While all expenses related to the Comptroller settlement have been accrued, the Company still owes approximately $570,000 as of year-end 2014.

As we've noted, the precious metals market continues to be challenging, and we've had a significant negative impact on our bullion and scrap businesses. While 2014 produced much more stability in gold pricing, it remains significantly lower than prices seen between 2010 and 2012. Despite this generally stable pricing, overall demand for gold in 2014 dropped 4% by weight, according to the World Gold Council, and the US demand for physical gold in the form of bullion, bars and coins, was down by 31% by weight, and 39% by dollar value.

The market for buying and selling of preowned or scrap precious metals remains extremely negative. According to the World Gold Council, the supply of recycled gold was down an additional 11% in 2014, and is now at its lowest point in seven years. While DGSE doesn't report specific product line information, I can say that our bullion and scrap activity has been in line with these industry trends.

Subsequent to the resolution of the legacy issues and the shutdown of Southern Bullion, we were pleased to see modest profitability in the most recent two quarters for the first time since the first quarter of 2013. Brett will go through in more detail in his financial recap, but in the fourth quarter of 2014, the Company generated $272,000 in net income, which represents an improvement of $677,000 compared to the fourth quarter of 2013. This is a direct result of our actions to exit the unprofitable Southern Bullion business, reduce extraneous costs, and focus on growing our jewelry, watch and diamond businesses.

In 2015, we will continue to adapt our operating model in order to best serve our clients and to meet the challenges of the current markets. One of the ways in which we plan to improve the business is to move towards fewer but larger stores in our most important market, Dallas-Fort Worth.

Our goal is to provide a greater breadth of inventory, more specialized services, a more vibrant atmosphere, and a greater concentration of experienced staff in order to provide a more robust customer experience. We firmly believe this will lead to greater and more profitable transactional activity for DGSE.

We've also relaunched our website to provide a substantially improved online customer experience. This exciting change will allow us to shift a greater share of our marketing focus to eCommerce and to broaden our potential reach beyond our physical locations.

With that initial update, I will now turn the call over to Brett for a more detailed look at the fourth-quarter and 2014 full-year financial results. Brett?

Thanks, Dusty. Let me first start by reviewing the fourth-quarter 2014 financial results, and then the full-year ended December 31, 2014. For the quarter ended December 31, 2014, revenues from continuing operations were $18.1 million, a 13% decrease compared to $20.8 million in the quarter ended December 31, 2013, due primarily to continued weakness in the Company's bullion and scrap businesses, which, as Dusty noted, are consistent with industrywide trends.

Gross profit from continuing operations for the quarter was $3.3 million or 18.2% of revenue compared to $4.4 million or 21.3% of revenue in the prior-year quarter. The overall gross profit decrease was driven by lower sales of bullion and scrap compared to the prior-year quarter.

Selling, general and administrative expenses for continuing operations decreased by $1 million or 25% in the quarter ended December 31, 2014 to $3 million compared to approximately $4 million in the prior-year quarter. The resolution of all outstanding legal and sales tax issues in 2014 helped drive significantly lower legal and special expenses in the quarter, combined with continued companywide expense reductions.

Net income from continuing operations for the fourth quarter was $175,000 or $0.01 per share compared to net income of continuing operations of $476,000 or $0.04 per share in the year-ago quarter. Discontinued operations related to the closure of Southern Bullion in early 2014 generated income of $97,000 in the quarter, due to positive adjustments in anticipated final state tax expenses, compared to a loss of $881,000 in the fourth quarter of 2013.

The Company reported net income in the fourth quarter of approximately $272,000 or $0.02 per diluted share compared to a net loss of approximately $405,000 or $0.03 per share in the prior-year quarter. As Dusty noted, this represents an improvement of $677,000 or $0.05 per share compared to the fourth quarter of 2013.

Turning to the full-year results for the 12 months ended December 31, 2014, revenues from continuing operations were $70.7 million compared to $87.1 million in the prior year, a decrease of 19%. This decrease was primarily the result of continuing weakness in the bullion and scrap markets, as we have discussed. Our scrap business has historically been one of our largest revenue and profit drivers. And in 2014, that business continued to contract in line with the industry.

Gross profit for the year was $12.7 million or 17.9% of revenue compared to gross profit of $14.2 million or 16.3% of revenue in the prior year. While gross profit decreased in line with overall sales, gross profit as a percent of revenue increased as high-margin jewelry sales became a greater share of our sales mix, and low-margin bullion sales became a lower share.

SG&A expenses decreased $1.7 million or 12% in the year ended December 31, 2014 to $12.7 million compared to $14.4 million in the prior year. This decrease was driven by a reduction in legal and professional costs, and broad cost reduction efforts across all areas. With the resolution of several outstanding legal matters, we experienced significantly lower legal expenses compared to the prior year.

We also accrued $775,000 in 2013 toward the resolution of our 2010 Texas sales tax audit, which created a positive variance in 2014. In addition, we were able to reduce operating expenses in a wide variety of areas, including freight, insurance benefits, investor relations, accounting and other professional fees, travel and supplies. In 2014, we used some of these savings to increase advertising spend in core markets by roughly 10% or $205,000.

Depreciation and amortization increased by $30,000 or 8% to $383,000 compared to $353,000 in the prior year. This increase was due primarily to new assets put into place to support our jewelry repair business. The loss from continuing operations in 2014 was $635,000 or $0.05 per share compared to a loss of $721,000 or $0.06 per share in 2013. Again, it's worth noting that the Company generated income from continuing operations of $189,000 in the second half of 2014, and that's compared to a loss of $824,000 in the first half of the year.

Discontinued operations in the year ended December 31, 2014 generated a loss of $3.9 million related to the Southern Bullion locations closed down in early 2014. That's compared to a loss of $1.9 million for these locations in 2013. For fiscal 2014, discontinued operations also includes the write-off of the $2.9 million intangible asset attributed to the Southern Bullion Coin & Jewelry trade name, as well as the write-off of approximately $296,000 related to the net book value of fixed assets previously used in the Southern Bullion operations.

The Company reported net loss for the year of $4.5 million or $0.37 per share, inclusive of discontinued operations, compared to net loss of $2.7 million or $0.22 per share in the prior year. And again, the great majority of that 2014 loss, or $3.9 million related to the discontinued operations of Southern Bullion, including $2.9 million of a non-cash write-off for the intangible asset.

At December 31, 2014, we had cash and cash equivalents of $2.2 million compared to $2.6 million at December 31, 2013. Accounts Payable increased 5% to $5.8 million at December 31, 2014 compared to $5.6 million at December 31, 2013. Stockholders equity decreased by $4.3 million or 42% to $6.1 million at December 31, 2014 compared to $10.4 million at December 31, 2013.

As of year-end, the outstanding balance in the Company's credit facility with NTR Metals was $2.3 million compared to $2.4 million at December 31, 2013. On February 4, 2015, the Company and NTR entered into a two-year extension of the credit facility, extending the termination date to August 1, 2017. All other terms of the agreement remain the same.

At this point, I'll turn it back over to Dusty for some additional comments.

Thank you, Brett. Our business looked very different at the end of 2014 than at the end of the prior year. In addition to changes at the CEO and Board levels, we exited a significant but highly unprofitable segment of our business, and successfully resolved outstanding legal and tax issues that were creating uncertainty for the Company and its shareholders.

While the precious metals markets were more stable in 2014, profits remain significantly below levels reached in 2011 and 2012. And the bullion and scrap markets remained highly depressed versus just a few years ago. Against this backdrop, we continue to focus on developing our jewelry, diamond and watch businesses at both the retail and the wholesale levels, and ensuring that our stores contain a full and robust inventory across all of our categories, and can provide essential services and industry-leading expertise that will drive customer traffic.

Towards this end, we've signed a lease on a new 4,400 square foot retail space in Euless, Texas, and have begun work on building out this space. This new space is not only bigger, but in a significantly higher profile location than our current Euless store, and it meets my vision of what our stores will be going into the future. We plan to consolidate two of our smaller nearby stores on the west side of the DFW market into this larger location when we open this summer.

We are also looking for a similar high-profile location on the east side of the DFW market in which to consolidate several smaller stores that exist in that area of DFW. We've already begun to execute our plan of moving into fewer but larger retail locations by closing down two of our most outlined and least profitable stores in DFW in the first quarter of 2015. While we were able to negotiate favorable payouts on these lease terminations, we will be recognizing approximately $190,000 in accelerated lease expenses in the first quarter of 2015.

Clearly, this will have a negative impact on our near-term financials, but we strongly believe these moves will further support our efforts to move to consistent, long-term profitability for our shareholders. As I noted earlier, we are excited to be relaunching our website. And I am pleased to announce that as of this week, the new site is live at DGSE.com.

The site provides a significantly improved user experience with a much cleaner, more contemporary interface, and improved product visuals, search, filter and checkout functionality. This site has been longer in development than we had hoped, but we are proud of the results, and hope that you will spend some time visiting it in the coming days and weeks. And by the way, while you're there, I do hope that you buy something, please.

With this relaunch, we plan to shift more of our marketing activities to the Web in order to capture a greater share of the online jeweler shoppers from across the country, and to provide better information to local brick-and-mortar shoppers looking for jewelry, diamond and watch retailers.

That concludes my prepared remarks. And we would now like to open the call to take your questions.

(Operator Instructions). Aram Fuchs, Fertilemind Capital.

I was wondering, first off, if you could address your working capital situation? It seems like a pretty big business to be running on $5.5 million worth of capital. Where do you feel comfortable there? Where do you think working capital should be at? Are you content or do you agree with me?

Aram, this is Brett Burford. But thanks for your call and for joining us. I think -- I would say that is a place that we are comfortable, but we wouldn't be comfortable going much below that. I think that we, right now, have the cash to run the business, but what we don't have, quite honestly, just speaking frankly, is a lot of excess cash, a lot of excess working capital right now.

So, I think it's a fair question. We are not into an emergency situation of any type, but we are at a point we wouldn't want to go a lot lower.

Right. And then more on a merchandising marketing front. The online site finally got launched. Congratulations. Is it your intention just to stay away from the bullion, the online bullion business because it's pretty much a commodity and the margins aren't there? Is that true?

No, that's not the intention. I think -- this is Dusty, Aram. Thanks for your question. But it's not our intention to stay completely away from it. Frankly, I think as even a passive observer would've noted, the launch of this website has taken substantially longer than I think we originally expected.

There's a number of factors I can probably -- not the forum to go into this call, but I would say the website launched without as much robust functionality as what we wanted it to have, and there will be a Version 2 and probably a Version 3.5 of it. Obviously, bullion transactional activity is one of the things that we want to add to that; although, to your point, I would say it's slightly farther down the list than some of the more jewelry-oriented items that do provide higher margin and higher profitability. But still on the wish list.

And is this omnichannel IT upgrade? -- i.e., is this what the salespeople are using in the store as well as what the consumer sees online?

No, it's not. This is just an online portal, although we will use functions of this increasingly in the stores as well. And ultimately, the goal, obviously, is to have -- or maybe not obviously, but the goal is to ultimately have one omnibus system that allows for everything from in-store sales to customer management to online transactional activity. Frankly, we're just not there yet.

Right. And then you mentioned that you started to do a little more marketing with some of the savings you had in the other areas. Can you talk about what you thought worked, and what were some learning experiences as well?

Yes. You know, we hit a lot of TV during the holiday period, and that's where a lot of that extra marketing expense went. I would say we were met with muted success. It wasn't quite as great as what I thought it would be or what I hoped it would be.

I think the message was good. I think the holidays were disappointing for a lot of people in our business, and especially stores that look and feel like us. While there's other people in our industry -- like Tiffany, for example -- that had a fairly good Christmas season, I would say a lot of retailers in our -- in DGSE's space struggled a little bit. And I would say we outperformed, based on talking to others in the industry and others at trade shows that I attend.

But I would say the marketing, and the additional spend in particular in TV, fell a little short. What print we did, did really, really well. And I think we're going to move a little more to that, as well as certainly re-looking at the marketing mix in terms of online advertising. With our past website, it did not convert very well, and there was a lot of challenges in terms of getting inventory up and having it displayed, and the customer experience, and-and-and.

So we did not spend a lot on pay-per-click advertising, contextual advertising, link partnerships, that kind of thing. And we are going to start moving more that way as we get into the meat of 2015 here.

Okay. Then on the consolidation of the westside and eastside stores, is there going to be an increase in labor, and therefore an increase in SG&A? Or is it really just moving payroll from a couple of different stores into one bigger store?

No, I think if anything, there will be a slight decrease in labor, although I would emphasize slight. We've done several analysis kind of slicing the pie different ways and looking at what's best for the Company. And I really firmly believe the way we have our stores built out inside DFW now was at scrap collection points. They were 1,500 to 2,200 square foot locations with no services available -- in other words, you couldn't come in and get a watch repaired on the spot or a ring resized on the spot.

And as the industry changes from a scrap perspective, as we change in terms of being more full-serviced, jewelers and watchmakers and rare coin experts, it is not numismatic, that kind of thing. I need my experts, my product line experts, to be in a consolidated set of locations in all of our markets, with a more full-service player.

But we have all of those people now. They are just all in one or two locations inside DFW. And I think I can get -- with some work and with some time, those people spread out in the right manner without a great increasing SG&A really at all. In fact, I think it will be a decrease year-over-year once we get into 2016.

Okay, great. Great. Those are my questions. Thanks a lot.

Thank you.

Chris Doucet, Doucet Asset Management.

Hey, Dusty; hey, Brett. Thanks for taking my call. A couple of quick questions. First of all, congratulations, Dusty and Brett, I guess, on cleaning up SBT, the sales tax issue, the legal issues, that sort of thing. And I do applaud the Company on the changes you've made in the business, including the new website. I think those were desperately needed. So, congratulations on that also.

My first question is, just out of curiosity, are there going to be any kind of clawbacks from past management as far as stock is concerned and options? And any kind of disciplinary action that maybe has already been taken by the regulatory -- from a regulatory perspective, as far as the old management is concerned, and perhaps in the future?

There -- so you've got two main actors. One was our former CEO and one was the former CFO, Chris. And the -- both have faced some sort of legal sanction already from the SEC, inclusive of the CEO having to make a small cash payment back to the Company. And that was about four months ago, five months ago at this point.

So, going forward, I would say you should not expect -- or I do not expect any further action against prior management, although that's clearly completely out of my control and ability to effectuate a difference on, so.

Okay. Switching gears a little bit, can you at least tell us if the cash balances in the Company improved in Q1 over Q4, and how the cash flow has looked in Q1 so far, since the quarter is almost over with?

Yes. I would say again, keeping in mind that our business is somewhat seasonal and it is -- Q1 is a low seasonal period, the flipside of that, though, is that we had significant receivables at year-end related to the holiday season, both from a merchant services and from a wholesale perspective.

I mean, again, we don't have receivables related to our retail business, as that's over-the-counter, but we did have some -- we had higher than normal receivables for us, just because we did some wholesale sales. And we had merchant services receivables at year-end. So we did have some cash in the door related to Q4 more than Q1, if that makes sense to you.

Overall, though, businesswise, again, we are in a kind of a more negative cash period of the year. We tend to buy inventory and build inventory over the course of the year, and sell stuff more in the fourth quarter. And that's exaggerated, because we don't have extreme seasonality; but, generally speaking, that's kind of our seasonal flux.

Okay. And Dusty, going back to the strategic plan that you kind of laid out earlier in the conversation, you talked about higher-end stores and larger stores, and larger diamonds and bricks-and-mortar's as well as website presence. Are there any other strategic initiatives that the Company is contemplating at this point that we should be aware of?

Well, I think we are always looking for things that will be an add-on to our current product offering, Chris. It's -- we do a wide variety of things. The breadth of what we do I don't think is going to get any larger in terms of being jewelry and diamonds, and watches, and rare coins, and currency and bullion, and all the things that we currently offer.

But the way in which we offer those to our clients, I think is a constantly evolving process, especially with the Web. I read constantly on trade magazines and that kind of thing. And the younger generations, especially millennials, are -- seem to be buying substantially lower-ticket items but more often and quite frequently on the Web. They are much more apt to do price comparison shopping. And that's one of the areas where I think we compete very strongly on.

But we still need to be able to provide that kind of in-store service aspect that an older crowd or just a more service-oriented crowd would expect. And I do think with this new website, that we can now finally provide both.

I think, like I said earlier, anybody that's even a passive observer would say that our website was more of a hindrance to us than it was a benefit. And I think finally being able to go over that hurdle and solve that as -- will open us up to a lot -- I hope, a lot more avenues for success than we've ever been able to have in the past, or at least in the recent past.

Okay, guys. Thank you. I'll step back in the queue.

Thanks, Chris.

(Operator Instructions). Jack Kent, private investor.

I was just curious, are there any plans of how to drive people to the website? It's all nice and fuzzy to have a website, but how are we going to attract people to the website?

Hi, Jack. Yes, we'll do -- we did a soft launch this week, so you will see in the coming -- or I hope you will see, if you're signed up for our newsletters and have registered with the site, the past one or the current one -- in the coming weeks and months, you'll see a series of newsletters and email inducements for customers that have done past transactional activity, either on the website or in our stores.

In addition to that, as I said, we're going to be shifting a fair amount of our marketing budget towards things like pay-per-click campaigns, contextual advertising, partnership activities with other websites, and hopefully driving a substantial amount of activity that way, along with leveraging things like our other online stores. We've always done a fair amount of business in things like eBay, and capturing that transactional activity has been difficult in the past.

They've gone on, bought something from us on our eBay account. And obviously, we have to pay fees on that and have less control of the transaction than we would like. But now being able to re-market to that group, get them back into our website, and find the same types of product offering I think is going to be key and is going to be substantially better than it has been historically.

Okay. I was also curious, how many -- what's the exact count of stores now? And what is your eventual goal of having these superstores? How many?

Yes, we have 10 stores now. I would say, as we progress into the next couple of months, I would probably be able to answer the question of ultimate. Because, frankly, it depends on what I'm able to find on the east side of town.

We've got our eye on, and offers out, on a couple of different locations on the east side of the Metroplex, but they are slightly geographically dispersed. So, depending on -- the right location induces a few less -- or maybe one less location. But I think, ultimately, in DFW, you can expect somewhere between four and five -- four or five locations. And we currently have eight.

The one thing you might want to consider, if you could have these bigger stores, I've noticed in my neighborhood, the bigger stores seem to carry designers, and there seems to be a big attraction as opposed to just regular jewelry. Is there any plans to carry designer jewelry?

Yes. I think to the extent that we can provide a more attractive physical appearance to the store, that would certainly be something that we are interested in. There are obviously certain designers that would not engage a company like Dallas Gold & Silver or Charleston Gold & Diamond or DGSE holistically, but we do carry certain new product lines now, and will continue to try to expand that going forward.

Okay. And just also, do you think the sale of jewelry was affected by the decrease of the price in oil, since Dallas is fairly reliant on oil?

Yes, you know, I've had a number of shareholders ask me that question over the last four, five, six months. And I do think it's a valid point. We like to think that we have a fairly diversified economy inside DFW, but it is -- we are in Texas, and I think there are some components of our population that are historically big-money guys that didn't have all that great of a year or don't feel that confident about their particular checkbook.

So I don't think it helped. And we did see clients that we were used to seeing come in and spend big-dollar amounts with us that simply never showed up in this holiday season. So, we are probably one of the few areas in the country that we may root for a little higher prices at the pump, just because it makes our particular clientele base feel a little better about themselves.

Okay. And I also got on the call late, so I don't know if this question was asked. But I noticed in the last two weeks, when the stock used to trade 1,000 shares a day, it's trading 100,000 shares a day for almost two weeks straight. Do you have any reason why this stock [float of like] 5 million shares? And the stock really not trading, all of a sudden why it's been trading?

I don't, Jack. We actually have been discussing that internally here. Obviously, to the extent that we can run novo lists and try to get a feel of what's happening, we will do that. But at this point, I don't have an answer for that. It's -- I think it's a valid question, and one that we are wondering ourselves in terms of who's doing the trading and what may be inducing it. But I don't have an answer for you right now.

Okay. Like they say, I hope the person buying it knows more than the person selling it.

I appreciate your time, Jack. Thanks for joining the call.

Thank you. We have no further questions in the queue at this time. I'd like to turn the floor back over to Mr. Clem for closing remarks.

Thanks for your time and attention today. We do look forward to giving you an update during our next call, and that will be in mid-May, where we will be discussing our first-quarter results. Thank you and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.