A-Mark Precious Metals - Earnings Call - Q3 2016

Transcript

Speaker 0

Good afternoon, and welcome to A Mark Precious Metals Conference Call for the Third Quarter sixteen Ended March 3136. My name is Roya and I will be your operator this afternoon. Earlier today, A Mark issued the results of its fiscal third quarter twenty sixteen 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 on today's call are A Mark's CEO, Greg Roberts COO, Thor Gertram and CFO, Carrie Dixon.

Following their remarks, we will open the call to 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 it will be 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.

Speaker 1

Thank you, Roya, and welcome, everyone. Thank you for joining us today. Similar to our results in Q2, our financial performance for the fiscal third quarter of twenty sixteen was generally in line with our expectations. Revenues experienced a modest decrease from where they were in the same year ago quarter. This was due primarily to lower precious metal prices as well as higher forward sales in the same year ago period.

The revenue decrease was offset by higher ounce volumes. Net income decreased by 29%, primarily due to a one time favorable tax provision adjustment in the year ago period. Carey will provide more detail on this shortly. It's important to reemphasize that investors should take a longer term view when evaluating the performance of our business. Taking into consideration the nine months of fiscal twenty sixteen, our revenues were up 9%, gross profit was up 45% and net income was up 83% over the same year ago period.

These results continue to illustrate our consistent profitability in all market conditions. We have been steadily executing on expanding our capacity. Our success in this area has resulted in considerable progress made on several of the key initiatives we laid out at the beginning of the year. We have increased the number of custom coin programs and are promoting our value added ancillary services provided through our new Las Vegas facility. Due to the increased traction we're experiencing, both our gross profit and gross margin showed improvement for both the quarter and nine months.

On top of this margin expansion in the third quarter, we continue to experience a record number of loans and customers in our financing subsidiary CFC, which is supported by the increasing demand for alternative financing in the marketplace. We have also strengthened our access to capital during the quarter by securing a new trading facility. Importantly, the new facility expands our credit capacity with up to $275,000,000 in available credit lines, allowing us to be more opportunistic when determining how to allocate our capital in the most profitable and beneficial way. But before I continue, I would like our CFO, Kerry Dixon to walk us through the financial details for the quarter and nine months ended March 3136. Then our COO, Thor Gerdin will discuss our market position and provide an industry update.

Afterward, I will return to talk more about our current operational progress and initiatives as well as our outlook for the rest of the fiscal year. Carey?

Speaker 2

Thank you, Greg, and good afternoon, everybody. It's a pleasure to have this opportunity to address you today. Looking at our financial results for the fiscal third quarter ended March 3136, our revenues totaled $1,510,000,000 which was down 7% from $1,620,000,000 in the same year ago quarter. This was driven primarily by a 3% decline in the average stock price for gold and an 11% decline in the average stock price for silver as well as higher forward sales in the same year ago period. The revenue decrease was partially offset by the increase in the total amount of gold ounces and silver ounces sold.

The 15% increase in gold ounces sold and 21% increase in silver ounces sold during the quarter was driven by demand for our primary products. Our gross profit increased 22% to $6,900,000 or 0.45% of revenue from $5,600,000 or 0.35 percent of revenue in the same year ago quarter. The improvement in our gross profit margin was predominantly due to higher sales volume of our primary products as well as an increase in the number of ounces sold for our higher margin custom coin products versus the same year ago period. Higher volatility and demand for our primary products drove a 5% increase in trading tickets compared to the same year ago quarter. Despite these higher volumes, product availability continued to improve during the quarter causing trading spreads to remain stable.

Our SG and A expenses for the third quarter of fiscal twenty sixteen totaled $5,400,000 This was up 31% from $4,100,000 in the same year ago quarter. The increase was due to higher performance based compensation accruals and operational costs related to our Las Vegas logistics facility. Our interest income increased 40% to $2,300,000 in the third quarter, driven primarily by an increase in the size of our loan portfolio as well as improvements in certain finance products. The continued growth of our loan portfolio, which resulted in higher interest income, was due to an increase in the number of secured loans. This was up 300% to seven seventy five loans fully secured from 194 in the same year ago quarter.

This increase is primarily due to the acquisition of collateralized bullion loan portfolios. In addition, fees earned related to our wholesale finance product increased compared to the same year ago quarter. Our net income for the fiscal third quarter decreased 29% to $1,200,000 or $0.17 per diluted share from $1,700,000 or $0.24 per diluted share in the same year ago quarter. This decrease was primarily due to various non recurring state tax provision benefits in the same year ago quarter. Our net income from the third quarter also decreased due to higher interest and SG and A expenses.

The decrease was partially offset by the increase in gross profit and interest income compared to the same year ago quarter. Now turning to the balance sheet. At March 31, we had $13,000,000 in cash on our balance sheet. As Greg mentioned, in order to expand our credit capacity and trading resources, we established a new credit line early last month that provides access up to $275,000,000 The new facility features a $225,000,000 base with a $15,000,000 accordion option. The facility has a one year maturity and replaces our previous $2.00 $5,000,000 credit facility while improving our terms, including a lower blended rate and more favorable financial covenants.

It is important to reiterate that this new credit facility enhances our credit capacity by $70,000,000 This will certainly be helpful as it allows us to be more opportunistic when deploying our capital. Specifically by increasing our access to capital, we are better positioned for rises in commodity prices and our growing capital requirements as we continue to expand our business. This arrangement also improves our ability to capitalize should the market experience volatility and supply constraints in the future. The lower blended rate, which allows us to reduce our interest expense and an improved leverage covenant, which were key improvements to our borrowing arrangements. In addition to our new lines of credit, we also have a product financing arrangement with $93,000,000 in draws at the end of the quarter.

This arrangement provides us with nearly $100,000,000 in additional inventory financing. Our current ratio also remained strong at 1.1, which was essentially flat compared to the prior fiscal year end. Our tangible net worth totaled a record $56,000,000 or $7.83 per share on a fully diluted basis, which was up 15% from June 3035. And finally, we announced last week our Board of Directors maintained our regular quarterly cash dividend distributing $07 per share to all stockholders of record as of May 13. As a reminder, we raised our quarterly cash dividend by 40% to $07 earlier in the quarter due to our Board's continued confidence in our balance sheet and our ability to maximize shareholder value.

Turning to our results for the nine months of fiscal twenty sixteen. Our revenues increased 9% to $5,050,000,000 from $4,620,000,000 in the same period last year. The improvement was primarily due to an increase in the total amount of gold ounces and silver ounces sold. A key contributor to the increase in demand was higher volatility, coupled with a decrease in commodity prices during fiscal Q1 of twenty sixteen. Gross profit for the nine months of fiscal twenty sixteen increased 45% to $27,000,000 or 0.53 percent of revenue as compared to $18,500,000 or 0.4% of revenue in the same year ago period.

The increase in gross margin was due in part to higher premium spreads than our primary products, particularly during Q1 twenty sixteen. Our SG and A expenses increased 25% to $16,300,000 from $13,100,000 in the same year ago period. This is attributable to increased performance based compensation accrual and the overall operational cost of our Las Vegas logistical center, which saw a decrease in fiscal Q2 twenty sixteen. Our interest income increased 42% to $6,400,000 from $4,500,000 in the same year ago period. The increase was primarily due to an increase in the size of the company's loan portfolio as well as improvements in certain finance products.

And finishing off with our net income for the nine months of fiscal twenty sixteen, our net income increased 83% during the period to $8,200,000 or $1.15 per diluted share from $4,500,000 or $0.64 per diluted share in the same period last year. The increase was primarily due to higher revenue and gross profits, which were offset by higher G and A and tax expenses. This completes my financial summary. Now I will turn the call over to Thor, who will provide a high level overview of where we stand in the market today. Thor?

Speaker 3

Thank you, Terry. On our fiscal Q2 call, we talked about some of the temporary and atypical macroeconomic factors that negatively affected our financial performance. Our customer base reduced their purchasing in fiscal Q2 as they worked through excess inventory acquired during fiscal Q1. At the same time, our Sovereign Mitt customers were ordered exceptionally high amounts of our industrial silver and gold products to fulfill their back orders and prepare their inventory for the new calendar year. Those industrial products typically provide high revenue, but at lower margins.

This resulted in a modest increase in demand for ounces, but was not enough to completely offset the Q2 decline caused by our customers' higher inventory positions. As a result, our gross margins in fiscal Q2 experienced some compression, while our lower trading volume created downward pressure on both our revenue and net income. As Carey mentioned, our gross margins rose in fiscal Q3 due in part to the stabilization of market supply for precious metals, stable demand for our primary products and improvement in custom coin sales. Customers appear to be resuming their normal buying activity, but premium spreads remain stable and have not expanded. Despite declining 3% compared to the same year ago quarter, the average spot price of gold during fiscal Q3 increased 6% over the prior quarter to $11.85 dollars per ounce.

Silver prices, however, with an average spot price of $15.51 were roughly flat from the previous quarter and down 11% from the same year ago quarter. While the average prices of both gold and silver were down compared to the same year ago quarter, volume sales of gold and silver ounces were up. For the fiscal third quarter, our fiscal gold ounces were up 15% to 662,000 ounces and fiscal silver ounces were up 21% to 27,300,000 ounces. Our trading ticket volume as well was up 5% to 21,807 tickets. I'll now turn it over to Greg, who will talk about some of the progress we've been making on our key operational initiatives as well as our outlook for the rest of the year.

Ray?

Speaker 1

Thank you, Thor. We've talked a lot about our custom coin programs in the past and they continue to be an increasingly important contributor to our core business. These custom coin products typically carry better margins and are consistently sought after by our customers because of their unique and highly differentiated nature. For that reason, we continue to expand this part of our business, which now has more than 51 active programs in place. This is up 24% from the 41 active programs we had in the same year ago period.

These programs continue to be well received in the marketplace as demonstrated by their strong sell through. And we continue working with our strategic partners to meet the growing demand. Along that line, our strategy has been to distribute these unique programs through diverse and more wide reaching channels with the help of our customers and strategic partners. As we've communicated before, we are very pleased with these products performance today. On a more general note, our recent strategic investments have enabled us to leverage the reach afforded to online retailers.

And as an example of this, we've been experiencing a gradual increase in demand for gold through these sales channels. This is despite the fact that historically silver has been the metal of choice for most online retail customers. Going forward, we will deepen our relationship with these partners and add to our growing number of products, putting A Mark in an even greater position to capitalize on these revenue generating and better margin opportunities. Moving on, our new Las Vegas logistics facility, although not yet profitable, will play an important role in supporting this growth and should be looked at as an investment in A Mark's future. We opened this 17,000 square foot facility in July of twenty fifteen to handle most of our precious metal logistics, including full service inventory management and fulfillment, as well as a complete suite of ancillary services.

These high margin services include a dedicated service and support center for our fully collateralized loan and storage solutions. We believe this facility positions A Mark strategically to take advantage of growth opportunities over the next few years. On prior calls, we've talked about making this facility more efficient, so that we can take on additional business without significantly raising our operating expenses. As such, we're working to consolidate our other wholesale operations into this single facility and expect this process to be completed by the end of this fiscal year. Besides consolidation, we're also working to expand our presence in this facility and extend our turnkey logistics services to more customers.

As discussed on our last call, we signed a lease for a suite adjacent to our facility to build out a service center for our storage and fully collateralized loan operations. We are near completion with this project and expect this expanded capacity in square footage to better enable us to support our financing operation, Collateral Finance Corp or CFC. CFC offers fully collateralized loans to dealers, investors and collectors and is rapidly becoming a central part of our total value added services. During the third quarter, we achieved a record number of customers and loans outstanding. In fact, the number of secured loans increased 300% to seven seventy five compared to the same year ago period, while the total number of customers increased 232% to seven ninety one from two thirty eight in the same year ago period.

These increases were driven by the addition of new loans and the acquisition of loan portfolios as well as an increase in our product offerings. This resulted in our interest income growing by 40% over the same year ago period, which gives us confidence that CFC will continue to diversify our organizational structure. Looking ahead to our outlook for the rest of fiscal twenty sixteen, we see precious metals prices gaining traction, which has the potential to benefit our bottom line. However, as I touched upon earlier, our performance should be gauged on a year over year basis, not a quarter to quarter one. This way one can see fluctuations inherent in a full yearly cycle.

We continue to believe A Mark is in a strong position to grow and we are focused on delivering this growth through the competitive advantages and versatility of our unique business model as well as continuing to look for strategic investments. Now with that, we'd like to open the call for your questions. Operator, please provide the appropriate instructions.

Speaker 0

Thank you. We will now be conducting a question and answer session. Thank you. Our question comes from the line of Juan Molta with B. Riley.

Please proceed.

Speaker 4

Hi, good afternoon guys. Thanks for the question. one is in regards to the volume sold this quarter. Were those generally in line with your expectations? And if you can comment among the industrial, the retail and the financial verticals, it'd be great.

Speaker 1

Sure. I think ounce totals were up and they were in line with our expectations. I think we had a little higher percentage of industrial sales, particularly in ounces of gold, which we talked about earlier on the call. And those are generally lower margin sales. But as we said, we had a higher percentage of those types of products.

In general, our ounces were up as we discussed in the quarter. And I think that the breakdown of the product mix between the different channels was in line with our expectations. As we highlighted, I think it is important to note that in calendar Q1 and our Q3, we did see a higher emphasis, particularly in January and February, on gold in the overall marketplace as well as in the more general financial circles. And I think that that did drive more gold sales and less silver sales. So I think it was a little bit environment driven and I think that we do look at this as a positive.

Think although we do very well from a margin perspective on silver, generally you will see a little bit stronger and healthier long term customer buying gold. So we look at the kind of switch to a higher percentage of overall gold sales as a positive.

Speaker 4

Okay. And generally, the retail channel, it's been picking up relative to fiscal Q2?

Speaker 1

I think it's important to note that when we talk about retail channels, we talk about those customers who are servicing the retail customer as an end user. A Mark does not deal with retail customers. I do think that we did see in that channel, we did see a higher percentage of gold purchases than we have seen historically, which again I think is a healthy sign. So I think that what we're seeing across all of our customer base is also been fairly consistent in the retailer's channel also.

Speaker 4

And going into the summer as gold spot prices and silver spot prices have increased, can you provide any color on what you're seeing maybe in terms of spread, if that's changing or volumes as we head into the summer months?

Speaker 1

Well, can only say that historically the summer months for us have been a little bit slower, although last year we saw one of our best quarters ever in July, August and September. I think that right now as we move towards summer, we are seeing a continued increase in ounces due to just the overall environment. And we see most all of our customers are performing about as we expect. To date, as we said earlier in the call, and you can see it from our website and other places where you can get prices on product, we haven't seen a huge increase or an increase in the premiums on our products as we saw in the first quarter. But again, as we've talked about before, I do see our business as kind of continuing to build our capacity.

I think that the increase in gold and silver in Q3 for us as well as the continued higher prices in Q4 so far are we were really building and we're building our ability to sell more ounces and back to I think an example I used last call, we see this as kind of a coiled spring for A Mark and I think that we're ready and we have the capacity through the logistics facility, through the credit line, stronger customers in all areas that when that spring kind of explodes or when that spring is released, you will see AMARC doing more ounces, significantly more ounces, and our performance will reflect those ounces when the market gives us that opportunity. So I think we're very well positioned right now. I think we could a tremendous, we could do tremendously more ounces today than we probably could do last year at this time you know, through the credit facility and through the logistics facility.

Speaker 4

Okay. Thank you for that. Then regarding your custom products, I assume we're not ready yet to provide any numbers there. But can you comment as to what products were popular, what's selling well?

Speaker 1

I don't really want to go into too many specifics as it relates to the specific product. Can just say that we continue to have a great demand for new products. Our historic products that have been in the marketplace now for the last couple years have either sold through and had a very high percentage sell through and we discontinued them or we've renewed them through a date change and taken a historically successful product from last year and then reintroduced it this year with a new date. We continue to look for opportunities out in the marketplace either through organic growth or through acquisitions that would help us to continue to expand these products because we believe that continuing to expand these products will just increase our market share and will help our customers develop and sell products that differentiate themselves from their competitors. So without getting into specific products, we're very happy.

We've had a number of products sell out. We've had tremendous sell through in the new products that we continue to offer and we continue to develop new customers that haven't previously sold these products that are working with our staff to develop products that will work for them.

Speaker 4

Perfect. Thank you. I'll hop back in the queue. Thank you, guys.

Speaker 1

Okay.

Speaker 0

Thank you. Our next question comes from the line of Rick Serum with Exadata Capital Partners. Please proceed.

Speaker 5

Good afternoon, gentlemen. Hey, Greg. How are you?

Speaker 1

Hi, Rick. How are you?

Speaker 5

I'm doing well. Thanks. Congrats on another nice quarter.

Speaker 1

Thanks for joining.

Speaker 5

Yes. Nice to be part of the call and appreciate your taking my questions. Just a couple. It's what I find really impressive is the growth in the loan volume. And I mean, that's nothing short of exceptional now to be up to, did you say, 75 loans at this

Speaker 2

point? Yeah.

Speaker 1

And I and I believe, if I'm not mistaken, we also went over a $100,000,000 in collateral for the time at at at collateral value. So that was a a pretty big hurdle for us, we continue to really focus on this area of our business. And you and I have talked before about this as a very good growth opportunity for us.

Speaker 5

Yes, would think so. It almost appears to be one of these just growing annuities. Is that more or less the way you look at it? Are these I know these are not all these loans are long term loans. I mean, it's probably fairly choppy, but I've got to believe that these relationships lead to additional loans and presumably your expectations are to continue to grow off this and take that what looks like $10,000,000 run rate of interest income and if your 300% growth is really eye popping, is that I can't imagine that being sustainable, but do you envision this being thousands of loans and does this really morph into almost a lending business?

Speaker 1

Yeah. Mean, I think all of those things are accurate. I will say that just to start from the beginning of your question, the loans are six month loans generally and we go out to three sixty four days on the loan. So do get loans dropping off. I think what we have been able to accomplish with this product is to allow our customers, particularly customers that are dealing with the retail public, to give their retail customers an opportunity to put their precious metal investment to work as it relates to creating a credit line for them to And something that also helps our customers to differentiate themselves from some of their competitors.

And you touched on a number of benefits. The other big one is that for the most part, when we can provide these loans and a customer can use them to either access a credit line for other purposes but also to purchase more metal, those extra purchases generally result in higher trading volumes at our desk because for the most part, these customers that we really provide these services to are trading with us also. So as the loan portfolio grows, you're correct, it's an annuity as it relates to the interest income. But the fact that we have all of this material stored in our Las Vegas facility, we really have the borrowers captive and that when they either add to their portfolio or that they choose to liquidate their portfolio, it's a much easier step to do those trades through A Mark's trading desk through their provider, whoever's providing them the silver that's buying it from A Mark. So we really see this as a long term, one of our, what we call ancillary services, that really makes our customers very sticky and keeps them hopefully doing all of their different businesses with A Mark.

Speaker 5

It's a wonderful, just a terrific business, Greg. And the fact that you're fully collateralized, this is just, it sounds like it really could grow into something exceptional. As you forecast out or as Carrie and Thor look forward into what this could be from their perspective, are you envisioning thousands of loans or tens of thousands and $10,000,000 of interest income as an annuity is wonderful, but that growth suggests that could be actually much larger.

Speaker 1

Yeah, I mean I think we've kind of hit a sweet spot right now. Remember that we do a combination of loans. We do collectible coins that have precious metal content as well as bullion loans. Collectible loans are somewhat capped. I wouldn't say that you're gonna see the same kind of growth in those loans as maybe you see in the precious metals loans.

Do think there's Our strategy is storage, lending, and trading. And obviously for us, the higher we can grow the collateral held at our storage facilities, we're gonna see increases in storage fees, interest income, and our trading revenues off of those accounts. As well as if precious metals were to rise, a lot of our fees are based off the gross amount of the metal, particularly in storage. So there is quite a bit of growth there. On the other hand, it's important to note that when precious metals prices drop, we tend to see some liquidation in loans.

And that the loan, that we tend to lose some loans because either through a margin call that's settled with the collateral or just clients just getting out of their positions. It's hard for us to predict exactly where this is going without, like any parts of our business, we continue to reiterate, we don't know what metals are going to do tomorrow or in the next few quarters. But I will say that we do feel that we've created a number of strategic partnerships in this area that are really, we think we've hit a sweet spot and as we acquire these loan portfolios and we aggregate them for our customers, we're quite optimistic about this part of our business.

Speaker 5

And with gold above $1,200 it's created probably some renewed interest that hopefully has some legs to it, I'm guessing.

Speaker 1

Yeah. I caution everybody on looking at rising prices and I want to be careful how we describe this. There's a difference between rapidly decreasing prices that we talk about in prices that decrease in a short number of days or weeks, which is something we saw in July of last year where we saw a sharp decline in a very short period of time. That drives customer purchasing where people are buying the dips. A number of precious metal customers have learned to buy dips.

When you see a slow increase in prices, it's generally not as good for our business and what you find is people that have been trained to buy the dips, they're kind of sitting on the sidelines or sitting on their hands as prices increase. So, you know, and particularly in gold where we don't have quite as big of a margin, you know, really need a breakout to see a significant effect on our trading. I will say that, the move where we tried to break through 1,300 last week was a We did see some increased activity and we saw some increase in volume in our trading tickets. Think you're gonna need to see a little more drastic breakout to the upside to really have the same effect that we see as we might see on a drop to the downside where you have a $50 drop in gold or a $1.1.25 dollars drop in silver in a few days or a week. You need to see a little bit bigger breakout to the upside.

I will say though that as you see the increased price on the upside, slowly but surely, we start to see more and more articles in the paper, more and more people on the financial channels talking about precious metals. That is very good for our customers and it does bring in from the sidelines a whole new customer that may have been out since 2011 or '12. As well as a good place to watch activity is the ounce volumes of purchases in the ETF GLD. That's also another good place to watch where you see breakouts in volume or breakouts in large masses of customers that are coming in back into our marketplace.

Speaker 5

Right. We are building lots of long term really sticky business and it's really exciting to watch. So congrats again Greg and thanks for the good answers. I appreciate

Speaker 1

that. Thank you Rick.

Speaker 0

Thank you. You. Our next question comes from the line of Greg Eason with Singular. Please proceed.

Speaker 6

Thanks and good afternoon. Hi, Greg. Hi. I'd like to start off by asking, I think Thor had something to say in the prepared remarks about customers, I guess, back in the second quarter were working through inventories this year. That kind of bulge in customer inventories, is that worked through entirely now?

Is that over with?

Speaker 1

It's impossible for me to know exactly what's in our customers' inventories unless we're holding the metal for them. I think that we did see a continued slow period probably in January and February where the product that was purchased in Q1 and throughout maybe the first month of Q2, we did see certain products that customers were not refreshing or renewing. I would say that throughout the of Q3, we have seen a return to a little bit more normalized, I mean, I'm sorry, the first month of Q4 and the last month of Q3, we did see customers return to a more normalized purchasing pattern, if that answers your question.

Speaker 6

Yeah, I think that does. That gets it. Regarding, you mentioned a reference earlier in the call your industrial sales and it's somewhat lower margin business than stuff that goes to retail end markets. Can you disclose what the industrial sales percentage was this quarter? Is that something you do?

Speaker 1

No, we really don't break out those numbers and we try not to get to the point where we're dissecting our ounces. Think that's not very productive. I will say that when you see an increase in the attention on gold like we have seen and you see an increase in the type of investor customer that's buying GLD or you see the ounces up in GLD, remember those ounces that are held in GLD are usually held in large bars and big sized bars and you will see an increase in our mix of that product when that type of larger investor is buying. Because that type of larger investor or let's call it an institutional investor or even a mint that might be stockpiling metal for a project they're working on. Those types of customers tend to buy larger.

They're not buying one ounce coins or half ounce coins. They're buying 400 ounce gold bars. So that mix of business, it's important for us. To be a global leader in precious metals, we need to be very good at that product and being able to source and sell that product. But it is a much, much lower margin product for us.

You're talking cents per ounce as a margin and that will tend to affect our metrics as it relates to ounces sold, top line as well as gross profit.

Speaker 6

I realize you need to be there for those customers to be the go to guy in the industry. You need to sell that whether they're gonna pay a high margin or not.

Speaker 1

Yeah, I mean there's many customers that we would sell 400 ounce gold bars to at a very, very small margin because of the overall relationship with the customer. That's a balance for us. It does challenge Thor and Carey a little bit as it relates to capital allocation because it requires more capital to deal in those larger products and the transaction sizes are much bigger. So that's just something we're constantly working on, making sure that we stay in the game regardless of the product because ultimately those bars get resold, they get sold back to us, or they get broken down into smaller products that we're also very good at buying and selling. And this has been a, as Thor said, this has been a fairly, last four or five months have been bigger in that particular product.

Speaker 6

Okay, understood, understood. Moving on, another question. You mentioned it looks like you'd like to consolidate some of your wholesale facilities into the new Las Vegas facility because I guess it's more efficient. Will there be one time expenses that you expect to incur in Q4 or Q1 of the filing fiscal year to accomplish this?

Speaker 1

I don't think there's any big expenses in Q4. We continue to try to match our expenses at the facility to our activities at the facility. It's important for us to have growth and have capacity at that facility to do We believe that if we had the opportunity a week from now, could do eight to 10,000 packages a day in that facility very quickly. And that would obviously result in significantly more volume across all of our products if we were to do that. But we also have to manage the fact that there's gonna be days that we may only do 2,000 packages in the facility, depending on some of the outside market conditions.

I think that what we are working on is moving more and more of our operations and our storage and logistics operations from a wholesale perspective to that facility. And that will lower our expenses and other parties that we might be paying for these services to, we would have them under one roof. And one of the reasons that we did expand into this new space next door was so that we could get more and more of our activities under one roof and cut our expenses in other areas. Now there's gonna be overlap in that and there's certain limitations we're under as to much value or how much product we can have in that facility. But I would say that probably after the end of our fiscal year, we believe we will be running at 90% capacity and be able to do more and more of what we wanna do out of the facility.

And at the same time, have the available capacity that if, you know, we run into a huge month or a huge few weeks where we're at record numbers, that we can still satisfy all of our customers and that nobody suffers.

Speaker 3

I just want to note, as I listened to your question, it's important to note that these facilities that we're moving out of, these are facilities with parties. So we don't have, disposal of asset issues, ongoing rent obligations, any of those issues. As we roll out of these facilities, there's disposition cost or one time charges related to exiting those facilities.

Speaker 6

That's good to know. I appreciate that. If I could ask about again, pile on the subject of the collateralized loan business. I'm just trying to understand on these loans. It sounds like it works a lot like a margin loan in securities, but the kind of the rules for margin loans are pretty cut and dry.

You're in the unique business. Can you say at what percent of loan to value you would stop out a customer on and ask them to post more essentially more collateral or else you'd sell them out? Is there a part of the past rule?

Speaker 1

And please note that every loan is different. Mean, and every mix of collateral is a little bit different. So there's a number of different ways we look at this. But in general, on a bullion loan, we're gonna loan about 80% of the then current spot price. And some loans may be 50%, some loans may be 83%.

But for the most part, if we use 80% as a normalized loan, if the precious metals prices were to drop 10%, we are then going to do a margin call that needs to be satisfied within generally twenty four to forty eight hours. Still leaving ourselves a little cushion as it relates to our LTV. The customer is required to either pay off the loan, pay the margin call in cash or deliver us more metal and that's how we satisfy those loans. But you are correct in that it's similar to an equities margin facility.

Speaker 6

Okay, so if it's an 80% loan to value of spot to start and you had a 10% drop in PM prices, when you reach 10, you would make the margin call essentially as in the postmortem collateral or pay off or

Speaker 3

Correct.

Speaker 6

Just liquidate one way or another. Got it. I understand. Thank you very much. I'll let someone else go.

Speaker 0

Okay. Thank you. Our next question comes from the line of Juan Malta with B. Riley. Please proceed.

Juan Molta, please proceed.

Speaker 4

Sorry about that. I was on mute. Could you please address the increase in inventories and also talk about the compensation component of the higher SG and A?

Speaker 3

Thor will answer that. So I'll answer the inventory and let Terry do the SG and A. So the inventories, as we talked about in Q2 customers working through inventory. In Q3, there continues to be reasonable levels of demand for industrial products. Our inventory levels through all of our product lines are continuing to run fairly high as industrial demand continues to be out there in the marketplace.

Although that number is running higher, Juan, it is still turning at about the same pace. It's just that the average order size is a little higher than your typical markets. The turns remain fairly

Speaker 1

consistent.

Speaker 3

Juan, it's very

Speaker 2

interesting regarding your SG and A question. Compensation accruals are up just to start off with in general because our performance is better. But I think we also have some, a few executives that now go into a higher graduated rate on the bonus calculation that drives a little bit more executive compensation accrual. Another piece is that year over year we've got, as Greg mentioned, the logistics operation and that the logistics operation costs are up a little higher year over year as well. And I think the component is we have some consulting costs that are up as well.

Mostly attributable to an IT consultant that is helping us in a big way right now as we try to put a whole new enterprise in place before the beginning of next year. So those are kind of the three big drivers for SG and A as far as year over year.

Speaker 1

Thanks, Kerry.

Speaker 4

Okay, thank you.

Speaker 1

Another question?

Speaker 4

That's all. Thank you, guys.

Speaker 1

All right.

Speaker 0

Thank you. 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

Thanks to everybody for joining us today. I'd like to thank our investors for their continued support as we continue to build A into the global leader in precious metals trading. We look forward to updating you on our next call. Operator?

Speaker 0

Before we conclude today's call, I would like to provide A During today's call, there were forward looking statements made regarding future events, 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 international political climate which has favorably contributed to demand and volatility in the precious metals markets 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. Finally, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website.

Thank you for joining us today for the presentation. You