A-Mark Precious Metals, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good afternoon, and welcome to A-Mark Precious Metals Fiscal Third Quarter 2015 Conference Call. My name is Rob, and I will be your operator this afternoon. After the market closed today, the company issued the results of its fiscal third quarter of 2015 in a press release, a copy of which is available in the Investor Relations section of the company's website at www.amark.com. The link to the Investor Relations section is at the bottom of the A-Mark’s home page. Joining us for today's presentation is the company's CEO, Greg Roberts and COO, Thor Gjerdrum. Following their remarks we will open up the call for your questions. Then, before we conclude today's 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 will be recorded and made available for replay via a link available in the Investor Relations section of the company's website. Now I would like to turn the call over to A-Mark's CEO, Mr. Greg Roberts. Sir, please proceed.

[Gregory Roberts:]

Thank you, Rob and welcome everyone. Thank you for joining us today. We experienced another period of relatively low volatility in the precious metals market during our fiscal third quarter. Despite the light market volatility, we once again delivered profitable financial results. During the quarter, gold prices remained relatively flat, while silver prices experienced a slight increase. Gold traded between $1,150 and $1,301 per ounce, and silver traded between $15.54 and $18.32 per ounce. Of note, today gold is trading at $1,192 and silver is trading at $16.53. Given that our net income has historically been a factor of interest to industry-wide precious metal price volatility, the recent lower levels of volatility have impacted our premium spreads and the resulting gross margins. During Q3, we remained focused on pursuing business development initiatives, where we have more direct influence over our profitability. This included expanding our value-added service offerings, including the continued progress of our new Las Vegas Logistics facility. Along those lines, during the third quarter, we continued to increase our operational capacity and value-added products and services. This will allow us to accommodate increased trading volumes, as well as provide customers with more comprehensive and sticky services like logistics and financing. These value-added services will help drive increased margins in any market environment. Now, before I go further, I would like to turn the call over to our Chief Operating Officer, Thor Gjerdrum, who will take us through the financial details for the period. Afterward, I will return to talk more about our operational highlights and business outlook for the balance of the year. Thor?

[Thor Gjerdrum:]

Thank you, Greg, and welcome, everyone. Now to our financial results for the third quarter and nine months ended March 31, 2015. Turning to revenue, revenue in the third quarter totaled $1.62 billion, which represents a 6% increase from the $1.54 billion in the prior quarter and a 3% increase from $1.58 billion compared to the same year ago quarter. For the nine month period, revenue was $4.62 billion, which was up slightly from $4.57 billion in the same period last year. The sequential improvement was due primarily to an increase in gold ounces sold. Also by lower silver ounces sold, improvement in fiscal Q3 2015 as compared to Q3 2014, which is primarily from increase in the total number of silver ounces sold. Gross profit increased 22% to $5.6 million, or 0.35% of revenue, and $7.2 million or 0.47% of revenue in the prior quarter, and decreased 26% from $7.6 million or 0.48% of revenue in the same year ago quarter. For the nine months ended March 31, 2015, gross profit declined 70% to $18.5 million or 0.40% of revenue from $22.4 million or 0.49% of revenue in the same year ago period. The decreases reflect the lower premium spreads on the company’s primary products, offset by some of our higher margin value-added products. Turning to expenses, selling, general and administrative expenses for the third quarter of fiscal 2015 were $4.1 million, which is down 14% from the $4.8 million in the prior quarter and down 6% from $4.4 million in Q3 of last year. For the nine month period, SG&A expenses increased 4% to $13.1 million from $12.5 million in the same year ago period. Our total quarterly SG&A expenses decreased one sequential and year ago comparative basis primarily due to lower accrued performance-based bonuses, which were offset with costs associated with our logistics services, as well as administrative expenses related to being a public company. Additionally for the comparative nine-month period, the addition of key personnel and legal and accounting fees and expenses contributed to the SG&A increase. Our net income for the fiscal third period of 2015 totaled $1.7 million or $0.24 per diluted share, which was flat compared to the previous quarter, and down from $2.1 million or $0.28 per diluted share in the third fiscal quarter of 2014. For the nine-month period, our net income totaled $4.5 million or $0.64 per diluted share, which compares to $6.7 million or $0.87 per diluted share in the same period last year. The comparable decreases were due to lower gross margins related to lower commodity price volatility, offset by a lower estimated effective tax rate related to changes in state apportionment and a reduction in our uncertain tax positions. As you review our financial performance, it’s important to note that during the first nine months of fiscal 2014, the precious metals market experienced significant volatility. This volatility generated increased revenue and gross profit. And as Greg mentioned, this volatility was largely absent for the majority of the first nine months of this year, and as a result, the first nine months of fiscal 2015 produced lower profitability. Now, turning to the balance sheet, at March 31, we had $16.2 million in cash on our balance sheet, which is an increase of $13.2 million from June 30, 2014. The increase in our cash balance is due to product financing arrangements. Our access to capital remained strong, with a total of $132.8 million undrawn on our lines of credit at quarter-end. Our maximum trading credit is $220 million. We also have a product financing arrangement, with $48.1 million [undrawn] at the end of fiscal Q3. This arrangement provides us with approximately $100 million in additional inventory finance capability. Our current ratio remained strong at 1.2, which has increased slightly when compared to our prior quarter and is generally in line with our industry, and our tangible net worth totaled $46.4 million or $6.67 per share, which is up 5% from the prior quarter. Lastly during the fiscal third quarter we initiated a cash dividend policy [Indiscernible] quarterly cash dividend of $0.05 per common share. As we announced this week, we will be maintaining our quarterly dividend distributing $0.05 per share to stockholders of record on May 14 of this month. The dividend demonstrates our board’s confidence in our balance sheet, future cash flows, and commitment to maximizing shareholder value. While the dividend will provide income to our existing shareholders, it is also expected to attract new [Indiscernible] business model, which as Greg mentioned, has been structured to consistently produce profits – profitable quarters despite the fluctuation in precious metals. This completes the financial summary. Greg?

[Gregory Roberts:]

Thank you, Thor. Since we began trading on NASDAQ in March of 2014, we've reported six consecutive profitable quarters. This performance was achieved despite a relatively flat market environment for precious metals. As our Q3 financial results demonstrated, the overall demand for physical products increased year-over-year, reflecting higher precious metals trading volume and to some extent our ability to gain market share. This volatility has been consistent with what we’ve seen thus far in our current quarter and positions us for another profitable quarter. We believe future increases in precious metal prices and volatility are highly likely. As a result, we have built our business to capitalize upon the significant opportunity that will present itself when volatility returns. During periods of volatility, we anticipate seeing notable increases in trading volume across our trading desks in Santa Monica and Vienna, which are open 17 hours a day, increases in trading spreads and increased activity in our logistics and finance business. Each of these elements will result with increased revenue and gross profits for A-Mark. In the interim, while our markets have been calm we’re focused on pursuing business development initiatives and capacity, where we have more direct influence on our profitability. This includes expanding our value-added service offerings. In particular, our new Las Vegas Logistics facility, which will provide significant operational synergies and cost savings to A-Mark. It will also allow us to offer additional high margin services, which will provide recurring revenue and visibility into our business. Along those lines, we recently secured an anchor tenant for our Las Vegas Logistics facility, which remains on track to open this summer. We are encouraged by the unprecedented level of interest we are seeing for our logistics services from current and prospective customers. We expect to convert this interest into service contracts within the next 6 to 9 months of opening as we begin to satisfy this demand. When fully operational, we anticipate the logistics centre will allow us to reduce our operational cost by consolidating select operations into a single facility. To that end, we estimate that by month nine, after opening the Las Vegas facility, our total cost savings will be at least $500,000 annually. These savings will go straight to the bottom line. In terms of prioritizing opportunities, the logistics facility represents a great growth opportunity for A-Mark over the next 12 months. Most importantly, it will allow us to reduce our costs and expand our gross margins regardless of the volatility in the market. And when and if volatility returns we will be ideally positioned to capitalize on the expanded premium spreads of our primary products. Another opportunity for A-Mark’s growth currently is in Europe. We see an underserved market that is right for expansion, especially with the recent movement and uncertainty around the euro. The result has been an increase in demand for precious metals in Europe and we expect to see a higher level of activity during the coming year with continued macroeconomic uncertainties overseas. We plan to expand within our existing European customer base as well as with new customers looking to enter the market. Currently our European operations remain consistent at approximately 5% of sales in Q3. In step with this, we continue to [accelerate] European trade and logistics capability to take advantage of increased market activity. We believe these key initiatives will allow us to effectively capitalize on the European market and increase our market share there. Now turning to our value-added products. Our custom coin products continue to present an opportunity to enhance our gross margins and overall profitability. Our strong relationships with the top sovereign mints enabled A-Mark to create new coins and concepts and meet the growing needs of our customer base. As many of you know, our custom coin products are an important growth engine for our business. During the third quarter, we continued to expand our custom coin product pipeline. In fact we currently have 20 custom coin products that are actively being marketed, as well as an additional five products in our pipeline that we expect to launch in the next 90 days. This brings our total custom coin products developed since inception to 42, up 75% from 24 in the same year ago period. Turning to our financing subsidiary, CFC. We continue to see steady demand for our secured loan program. This was reflected by the growing number of loan dollars outstanding in Q3, which were up 43% to $45.6 million compared to a year ago. As we mentioned on our last call, we made minority investments in two fast-growing [online] companies. These investments are an integral part of our retail growth strategy and overall business diversification strategy. We are encouraged with our partners’ execution and strong performance today. We anticipate these successful investments will help drive future business initiatives as we seek to capitalize on the large yet unpenetrated internet retail markets in Europe and Asia. Looking ahead, we remain committed to our strategy that has proven successful and profitable by focusing on growing our service and finance revenues and our custom coin programs. As I mentioned earlier, we are focused on growing our geographic presence, particularly in Europe. We are also rapidly expanding our logistics and trading capacity to handle increased volatility and volume that we expect to see in the future. We also continue to evaluate and build the scope of complementary products and services that we offer to our growing customer base. Our strategy remains unchanged and we will drive growth through leveraging our existing integrated operations and the depth of our customer relationships, through our access to market makers suppliers and sovereign mints, our trading offices in the US and Europe which are open 17 hours a day, five days a week, our expansive precious metals dealer network, our depository relationships around the world, our logistical capabilities and trading expertise, our financing and secured loan programs and finally the quality and experience of our management team. Now with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Gregory Roberts:]

Thanks to everyone for joining us on our call today. I especially want to thank our investors for their continued support as we continue to build A-Mark into the global leader in precious metals trading. We look forward to updating you on our next call. Rob?

[Operator:]

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 the call. During today’s call, there were forward-looking statements made regarding future events including 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 are identified in the company’s public filings with the Securities and Exchange Commission and include the following