A-Mark Precious Metals - Earnings Call - Q1 2019

Transcript

Speaker 0

Good afternoon, and welcome to A Mark Precious Metals Conference Call for the Fiscal First Quarter twenty nineteen Ended September 3038. My name is Jeremy, and I will be your operator this afternoon. Before this call, A Mark issued its results for the fiscal first quarter twenty nineteen 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 bottom of the homepage. Joining us for today's call are A Mark's CEO, Greg Roberts President, Thor Gerdrum and CFO, Carrie Dickson.

Following their remarks, we will open the call to your questions. Then before we conclude the call, I'll provide the necessary cautions regarding the forward looking statements made by management during this call. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of A Mark's website. Now I would like to turn the call over to A Mark's CEO, Mr. Greg Roberts.

Sir, please proceed.

Speaker 1

Thank you, Jeremy, and welcome, everyone. Good afternoon, and thanks for joining us. As you can see from our earnings release issued this afternoon, our results for the fiscal first quarter of twenty nineteen reflect solid improvements across our various business segments. This is most evident by our expanded gross profit margins as well as our return to profitability, a consistent track record we enjoyed prior to our acquisition of Goldline. Our financial performance for the first quarter was driven in part by more favorable market conditions.

As we alluded to on our September call, the precious metals market environment in fiscal Q1 was characterized by a decrease in silver and gold prices. This drove increased market volatility and higher demand for our products as well as wider bid ask spreads, thus improving our premiums. In fact, we were able to leverage our position as one of the largest bullion distributors for the U. S. Mint, resulting in a 32% share of the overall U.

S. Mint silver sales in the quarter, our highest share in over two years. However, before I continue, I'd like to invite our CFO, Kerry Dixon, to provide additional details on our financial results for the fiscal first quarter of twenty nineteen. Then our President, Thor Jurdram, will review our key performance metrics for the quarter. And finally, I will come back on to provide an update on the execution of our strategy in each of our business segments as well as discuss our strategic initiatives and outlook for the fiscal year and answer any questions you may have.

Carey?

Speaker 2

Thank you, Greg, and good afternoon, everyone. Turning to our financial results for the first fiscal quarter ended September 3038. Revenues decreased 28% to $1,570,000,000 from $2,160,000,000 in the same year ago quarter. The decrease was mainly due to lower forward sales and lower gold and silver prices, offset by an increase in the total amount of gold and silver ounces sold. Gross profit increased 16% to $8,500,000 or 0.5 percent of revenues from $7,300,000 or 0.3% of revenues in the same year ago quarter.

The increase is primarily due to improved market conditions offset by lower trading profits and gross profit from our direct sales segment. Turning to our expenses. Selling, general and administrative expenses increased 11% to $7,700,000 from $7,000,000 in the same year ago quarter. The increase was primarily due to SG and A related to our direct sales segment of $900,000 and higher compensation costs of $500,000 partially offset by a reduction in $500,000 of investigatory acquisition costs. Interest income increased 44% to $4,600,000 from $3,200,000 in the same year ago quarter.

The increase is driven primarily by increases in interest rates as well as an increase in the weighted average value of our secured loan portfolio and other finance product income. Interest expense increased 30% to $3,600,000 from $2,700,000 in the same year ago quarter. The increase was related primarily to greater uses of our trading credit facility, our related party debt financing agreement associated with our acquisition of Goldline and our newly issued notes payable in our lending business as well as higher LIBOR interest rates. Net income totaled $1,500,000 or 0.21 per diluted share, an improvement from net income of $478,000 or $07 per diluted share in the same year ago quarter. Shifting to our balance sheet.

At quarter end, we had $22,700,000 of cash compared to $6,300,000 at the end of fiscal twenty eighteen. Our tangible net worth at the end of Q1 totaled $55,300,000 which compares to $53,400,000 at the end of fiscal twenty eighteen. During the quarter, we closed our ABS transaction, which resulted in a significant improvement in our working capital. That completes my financial summary. Now I will turn the call over to Thor, who will update provide an update on our key performance metrics.

Thor?

Speaker 3

Thanks, Carey. Turning to our key operational metrics for the first fiscal quarter of twenty nineteen. We sold 535,000 ounces of gold during the quarter, which is down 9% from prior quarter, but up 61% from fiscal Q1 of last year. Turning to silver. We sold 18,300,000 ounces, which is up 112% from the prior quarter and up 26% from Q1 of last year.

This represents the highest volume of silver sales in the last six quarters. Looking at our key metric, wholesale trading ticket volume increased 24% to 32,013 tickets from the prior quarter and increased 7% from Q1 of last year. The key metric we evaluate is inventory turn, defined as the cost of sales during the period divided by the average inventory during the period. For the first quarter, our inventory turnover ratio was 5.5, which is up 22% from 4.5 in the prior quarter and down 24% from 7.2 in Q1 of last year. And finally, the number of secured loans at the end of the quarter totaled seventeen oh five, which was down 51% from the prior quarter and down 31% from Q1 of last year.

The decrease was due to lower gold and silver prices during fiscal Q1 of twenty nineteen, which resulted in an increase in loan payoffs. As of September 3038, the dollar value of our CFC loan portfolio totaled $81,900,000 which was down 26% from the prior quarter and down 8% year over year. We've seen the portfolio begin to rebound in Q2 of fiscal twenty nineteen as we write and acquire new loans. That concludes my prepared remarks. I will now turn it back over to Greg to talk about the progress we've been making on our key operational initiatives.

Greg?

Speaker 1

Thanks, Thor. For those of you who follow our company, understand that our business segments largely function independently of the price movement of the underlying commodities, predominantly silver, gold, platinum and palladium. However, factors such as global economics uncertainty and inflationary trends, both of which we experienced in the first quarter, affect market volatility and have the potential impact to impact demand, volumes and margins. As many of you know, the Federal Reserve hiked the Fed funds rate at their September 26 meeting, and economic data points to another rate hike at their December meeting. Higher rates tend to weigh on the prices of commodities like precious metals.

In fact, during our first quarter, all precious metals made new lows for calendar year 2018. Higher interest rates benefit certain areas of our business, especially our secured lending business segment. As interest rates increase, our net interest income grows on our secured loan portfolio, which, as Thor just mentioned, totaled $17.00 5,000,000 at quarter end. Although interest expense and interest income go up together, interest income tends to increase more, that is the net spreads widen. This was apparent by the net interest income we generated in the quarter as our Secured Lending segment continued to add steady and predictable cash flow to our overall business.

And while the total number of secured loans decreased in Q1, the $100,000,000 asset backed securitization we completed in September will allow us to be more aggressive and expand this important business to new levels. By growing our finance book and introducing complementary financing products, we will increasingly benefit from the revenue diversification and interest income that CFC and our Secured Lending segment provide. Shifting gears to our principal investments, which is probably a less familiar component of our business model to many of you. Principal investments, as we refer to it, is comprised of majority and minority investments in leading privately held entities, including retail and Internet distributors as well as mints such as SilverTowne. Not only do these investments provide us with incremental high margin revenue and gross profit, they also enhance our capabilities and reach throughout the industry.

As you might imagine, we track and monitor our return on these investments very closely. For those investments that are performing well and are aligned with our long term strategic plan, we often look to increase our principal investment. Along that line, during the first quarter, we increased our stake in SilverTowne from 55% to 69%. Our machinery and equipment investment in the SilverTowne Mint continue to improve production efficiency and enhance capabilities to expand our product offerings like our new Silver Bullet product line. We continue to focus on initiatives to drive growth and profitability through new licenses, marketing initiatives and special product offerings.

In our Direct Sales segment, we continue to work on measures to further optimize Goldline's structure. In fact, our operating expenses for this subsidiary were significantly lower than planned in the first quarter. On top of this, we are actively rolling out marketing programs for new products, such as our Canadian Silver Maple Flex, which has been well received by Goldline's clients. In summary, we are aggressively and systematically building and diversifying our platform of products and services so that it provides even more predictable sources of income regardless of the market environment. Today, A Mark has one of the largest customer bases in the industry and provides one, if not the most, comprehensive offerings in the precious metals trading industry.

We continue to pursue strategic activities to expand our platform, reach and capabilities to better capitalize on what we believe is a tremendous market opportunity. We continue to see heightened volatility and continued demand for our physical products in the current quarter, both from retail and institutional customers. We remain cautiously optimistic, especially given the backdrop of the present geopolitical environment, volatile equity markets, rising interest rates and the midterm elections. We will continue to act opportunistically in an effort to capitalize on attractive near term trading opportunities while strategically scaling our business for long term success.

Speaker 2

Now with that, we're ready to

Speaker 1

open the call for your questions. Operator, please provide the appropriate instructions.

Speaker 0

Our question comes from the line of Sarkis Sherbetchyan from B. Riley FBR. Please proceed with your question.

Speaker 4

Good afternoon. Thanks for taking my question here.

Speaker 1

Hi, Sarkis.

Speaker 4

So just want to focus on some of the heightened activity you're seeing in the markets. Can you maybe comment on the spreads, whether they're widening, what you're kind of seeing with regards to the velocity of sales, especially kind of here in the existing quarter as we kind of close the midterm elections, etcetera?

Speaker 1

Yes. I think the thing that happened this quarter was prices dropped significantly and made some new lows on silver and gold. You had a natural shift at that point from retail investors who up until that point through our fourth quarter of last year were predominantly sellers of metal. So you had retail investors who had been selling into higher prices. And I believe, I'm speculating here, shifting into other investments with the money.

When prices drop, particularly in silver in our Q1, you had a shift from selling, which causes customers not to need our new products, and you had a shift to more demand for our newer, particularly silver products. We were very fortunate in the first quarter that in connection with that, the U. S. Mint stopped selling one ounce Silver Eagles for about, I believe, three or four weeks and then went on allocation as they move into their date change at the December, they stopped making twenty eighteen dated coins. So what that did was it provided a good deal of pressure on the physical supply.

On top of that, there was a couple of other mints that experienced some logistical and product flow challenges, which exasperated the lack of product in the marketplace. A Mark, as we've talked about before, we try to be opportunistic. We were very well positioned and that we had a good deal of ounces available from the SilverTowne Mint, which was able to fill the lack of product in the marketplace. So if you look at our Q, you're going to see a tremendous increase in silver ounces sold quarter over quarter and year over year. And that was caused by, in essence, A Mark for at least a few weeks or maybe two weeks.

That was the only game in town as it related to silver one ounce coins and 10 ounce coins. So it's kind of a perfect storm for us. It allowed us to raise some premiums, which we hadn't done in over a year. And we got a couple of weeks out of it, a few weeks out of it. The market has silver has then gone back up, the demand has waned just a little bit and we've got a little bit more back to an equilibrium.

We're still at the Silvertowne Mint, we've added a shift and we've increased our production there by about 30% from where it was a month ago. So we're trying to quickly take advantage of this opportunity in the marketplace. As it relates to the elections, I think we definitely saw a bump in our customers' business in the first quarter that we believe was related to the upcoming elections. And I think October reflected some increased activity as the demographic of the precious metal buyer, some fear came back into their minds as it related to the political situation. And we think that drove some volume in October.

Once you get a day after the election or a couple of days after the election, we've seemed to have reverted back to a little bit more normalized activity. So but it was good for us. It seems that contentious elections are good for A Mark.

Speaker 4

Understood. That's really helpful commentary. If I can maybe ask a tangent on the increased stake in SilverTowne. Can you just remind us where you stand today on that stake? Perhaps how much you invested in that?

And just the strategy behind increasing your stake right now?

Speaker 1

It was just an opportunity for us that the minority partner gave us an opportunity to increase, and we decided to take advantage of it. I believe yes, our total investment percentage is up to 69. 55%. From 55%. And our strategy is to just try to be prepared.

Just to give you some perspective on the wholesale marketplace, as of today, SilverTowne one ounce rounds are selling wholesale at about $0.45 to $0.50 and that's up from $0.30 to $0.35 in our fourth quarter of last year. So you have a $0.10 to $0.15 an ounce increase in GP. It's fairly significant and it makes a big difference for us. So it's just an opportunity. It didn't it was what we thought was a reasonable transfer price and we took advantage of it.

Speaker 4

Great. That's helpful. And then one more for me and I'll hop back in the queue. For the secured loan book, you mentioned that the number of loans decreased. Can you maybe just talk about where you'd expect to take that loan book back up to given your increased capability?

And just if you have a target range of growing the average loan balance or average loan number and kind of walk us through what you'd expect to consistently generate from a spread perspective in that business? Thank you.

Speaker 1

Yes. off, why the loans dropped? The loans dropped because the price of silver dropped. And a number of the loans are tied to margin calls. And if the equity in a loan drops below a certain percentage, we make margin calls and the customer can either send us more metal, send us cash or they can choose to liquidate the loans.

We yes, so we did have liquidations in Q1 and it was directly tied to where silver hit. Hitting a new yearly low or hitting a low that triggered margin calls, it didn't last there. It came back up, but that for that three to four day period, we were very aware of the equity in those loans and we did most of them were voluntarily liquidated by the customer. We did not have any problems with the loans and there were no loan losses. So we felt like our systems really worked and it's a lot says a lot for our team on the CFC side that they're managing two to three times as many loans as they had twelve to eighteen months ago.

And they handled just because they're handling more loans, they're going to handle more situations like this with more quantities. And we were very, very impressed by what the team was able to accomplish. And to answer the question of where it is, where it was at the end of the and where it's going today and where I mean, where it is today and where it's going tomorrow. The book has come back strongly in October. And I think our overall CFC loan portfolio is back touching the $100,000,000 mark.

And I think that it's low in the last quarter was maybe around $80,000,000 maybe a little bit lower than that. So we had we've had some significant comeback there. Some of that is just related to timing and new business and customers needing to draw on credit facilities we have. But other parts of that comeback or that growth since the bottom is just related to the metals moving back up and new loans being written. And the closing of our ABS facility was it was very important to us.

It's going to free up quite a bit more liquidity for us to grow this business, hopefully, at even a little bit quicker pace. We have two or three new programs in the pipelines with new customers. Now that we have this facility, we feel very comfortable. And it just is going to allow us to put a little bit more money out in the marketplace. And then in conjunction with our regular commodity lenders that we have credit line with, those two facilities are working well together right now.

So we're very happy with that.

Speaker 4

Thanks. I'll hop back in.

Speaker 0

Our next question comes from the line of Mitch Omni from Wedbush. Please proceed with your question.

Speaker 5

Hi, Greg.

Speaker 1

Hello, Mitch. Good afternoon.

Speaker 5

I just wanted to check-in since you since I've been around the company for a while, you built your storage facility, you bought SilverTowne, you bought Goldline, you set up the asset backed credit facility. Is there anything else on the company's wish list? Or is this pretty much the suite of products that you're going

Speaker 1

to go with for a while? We would say we have a very active list we're looking at right now. So I would say without nothing is imminent, but we certainly have other opportunities that seem to be presenting themselves. This is the way it is with us. We finished one thing and we feel like it's just going to be easy to take a breather and then we and then something else pops up.

90% of the time, the deals we look at, nine out of 10, probably nothing happens. But I would say that we're very happy right now with our partners that we're partnered with that are servicing parts of the business that we're not. And we think right now is a good opportunity to make sure we're looking at the marketplace and make sure we have our eyes and ears open. And if something else pops up, we'll let you let everybody know. Nothing imminent right now, but I wouldn't say we're done.

I think there's still opportunity in the marketplace. And you just look at the last twelve months and let's maybe say the last fifteen months, if you add in this first quarter, it's been a challenging time in our marketplace. And the markets have been a little bit difficult on precious metals dealers. The stock market has been basically a can't miss no matter what you do with it. And it's pressure on some of our customers and some of our competitors and other companies in the industry that touch precious metals.

So that market is we feel like the market is shaking out shaking some things out that we're always interested in looking at if they get presented to us. So you never you get less opportunities when the market's going crazy and you're in a huge bull market. The opportunities are generally fewer and they're never as attractive in a hot market because you're generally overpaying. So in a relatively stable market we're in right now, we certainly want to be looking at anything that may come up. Was that

Speaker 5

That's all I had. That is very vague. So you're not done. You're still billable. That's all I wanted to But

Speaker 1

I would say that if we had nothing on our plate. So I mean, we're opportunistic. And we all of the partners, shareholders, lenders, everybody that supports us, we appreciate that giving us the flexibility to look at things.

Speaker 5

Super. Thank you very much.

Speaker 0

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.

Speaker 1

Thank you for joining us today. We appreciate your continued support, and we look forward to updating you on our next call.

Speaker 0

Before we conclude today's call, I would like to provide A Statements that relate A Mark's future plans, objectives, expectations, performance, events and the like are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. Future events, risks and uncertainties, individually or in the aggregate, could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ include the following: the failure to execute the company's growth strategy as planned greater than anticipated costs incurred to execute 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 business, economic, financial and governmental risks as described in the company's public filings with the Securities and Exchange Commission.

The words should, believe, estimate, expect, intend, anticipate, foresee, plan and similar expressions and variations thereof identify certain of such forward looking statements, which speak only as of the dates on which they were made. Additionally, any statements related to future improved performance and estimates of revenues and earnings per share are forward looking statements. The company undertakes no obligation to publicly update or revise any forward looking statements. Readers are cautioned not to place undue reliance on these forward looking statements. I would like to remind everyone that a recording of today's call will be available for replay via a link in the Investors section of the company's website.

Thank you for joining us today for A Mark's fiscal first quarter of twenty nineteen earnings call. You may now disconnect.