May 9, 2016
Executives
Gregory Roberts - Chief Executive Officer Cary Dickson - Chief Financial Officer Thor Gjerdrum - Executive Vice President and Chief Operating Officer
Analysts
Juan Molta - B. Riley & Co.
Greg Eisen - Singular Research
Operator
Good afternoon and welcome to A-Mark Precious Metals Conference Call for the Fiscal Third Quarter 2016 ended March 31, 2016. My name is Roya and I will be your operator this afternoon.
Earlier today A-Mark issued the results of its fiscal third quarter 2016 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 Gjerdrum; and CFO, Cary Dickson. 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 the 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.
Gregory Roberts
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 2016 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.
Cary will provide more detail on this shortly. It’s important to reemphasize that investors should take a longer-term view in evaluating the performance of our business.
Taking into consideration the first nine months of fiscal 2016, our revenues were up 9%, gross profit was up 45% and net income was up 83% over the same year-ago period. These results continued 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 issues 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 new trading facility.
Importantly, the new facility expands our credit capacity with up to $275 million 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, Cary Dickson, to walk through the financial details for the quarter and nine months ended March 1, 2016.
Then our COO, Thor Gjerdrum, 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.
Cary?
Cary Dickson
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 31, 2016, our revenues totaled $1.51 billion, which was down 7% from $1.62 billion in the same year-ago quarter. This was driven primarily by a 3% decline in the average spot price for gold and an 11% decline in the average spot 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. A 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 $6.9 million, or 0.45% of revenue, from $5.6 million, or 0.35% of revenue, in the same year-ago quarter. The improvement in our gross profit margin was predominantly due to high sales volume of our primary product 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&A expenses for the third quarter of fiscal 2016 totaled $5.4 million. This was up 31% from $4.1 million 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 $2.3 million 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 775 loans fully secured from 194 in the same year-ago quarter. This increase was primarily due the acquisition of collateralized bullion loan portfolios.
In addition, fees earned related to our wholesale finance products increased compared to the same year-ago quarter. Our net income for the fiscal third quarter decreased 29% to $1.2 million or $0.17 per diluted share from $1.7 million 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&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 have $13 million 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 provide access up to $275 million. The new facility features $225 million base with a $15 million accordion option.
The facility has a one-year maturity and replaces our previous $205 million credit facility, while improving our terms including a lower blended rate and more favorable financial covenant. It’s important to reiterate that this new credit facility enhances our credit capacity by $70 million.
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 [shipment market experienced] [ph] volatility and supply constraints in the future. A lower blended rate, which allows us to reduce our interest expense, and an improved leverage covenant which were key improvements to our borrowing arrangement.
In addition to our new lines of credit, we also have a product financing arrangement with $93 million in draws at the end of the quarter. This arrangement provides us with nearly $100 million 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 million or $7.83 per share on a fully diluted basis, which was up 15% from June 30, 2015.
And finally, we announced last week our Board of Directors maintained our regular quarterly cash dividend, distributing $0.07 per share to all stockholders of record as of May 13. As a remainder, we raised our quarterly cash dividend by 40% to $0.07 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 2016, our revenues increased 9% to $5.05 billion from $4.62 billion 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 the decrease in commodity prices during fiscal Q1 of 2016. Gross profit for the first nine months of fiscal 2016 increased 45% to $27 million or 0.53% of revenue as compared to $18.5 million or 0.4% of revenue in the same year-ago period.
The increase in gross margin was due, in part, to higher premium spreads on our primary products, particularly during Q1 2016. Our SG&A expenses increased 25% to $16.3 million from $13.1 million in the same year-ago period.
This is attributable to increased performance-based compensation accruals and the overall operational cost of our Las Vegas logistical center, we saw a decrease in fiscal Q2 2016. Our interest income increased 42% to $6.4 million from $4.5 million 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 improvement in certain finance products. And finishing off with our net income for the first nine months of fiscal 2016.
Our net income increased 83% during the period to $8.2 million or $1.15 per diluted share from $4.5 million 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&A and tax expenses.
This completes my financial summary. Now, I’ll turn the call over to Thor, who will provide a high level overview of where we stand in the market today.
Thor?
Thor Gjerdrum
Thank you, Cary. 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 our purchasing in fiscal Q2, as they work through excess inventory acquired during fiscal Q1. At the same time, our sovereign mint customers were ordering exceptionally high amounts of our industrial silver and gold products to the silver dock [ph] orders and prepare their inventory for the new calendar year.
Those industrial products typically provide high revenue for the lower margins. This resulted in a modest increase in demand for ounces.
It was not enough to completely offset the Q2 decline caused by our customers’ higher inventory positions. As a result, our gross margin in fiscal Q2 experienced some compression, while our lower trading volume created downward pressure on both our revenue and net income.
As Cary mentioned, our gross margins rose in fiscal Q3 due in part just 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 premiums for us remained stable and 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 $1,185 per ounce, silver prices however with an average spot price of $15.61 were roughly flat from the previous quarter and then 11% in 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.
During fiscal third quarter, our fiscal gold ounces were up 15% to 662,000 ounces and fiscal silver ounces were up 21% to $27.3 million 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. Greg?
Gregory Roberts
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 carried 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 has 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 vendor 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 the 17,000 square foot facility in July of 2015 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 included 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 secured loans increased 300% to 775 compared to the same year-ago period, while the total number of customers increased 232% to 791 from 238 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 2016, 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.
Operator
Thank you. We will now be conducting a question-and-answer session.
[Operator Instructions] One moment, please, while we poll for questions. Thank you.
Our first question comes from the line of Juan Molta with B. Riley.
Please proceed.
Juan Molta
Hi, good afternoon, guys. Thanks for the question.
First 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, that’d be great.
Gregory Roberts
Sure, I think the ounce totals were up and they were in line with our expectation. 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, I 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.
Juan Molta
Okay. And generally the retail channel, it’s been picking up relative to fiscal Q2?
Gregory Roberts
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 retailers channel also.
Juan Molta
And going into the summer, as gold spot prices and silver spot prices have increased, can you provide any color in what you’re seeing maybe in terms of spread, if that’s changing or volumes as we head into the summer months?
Gregory Roberts
Well, I 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 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 logistics facility, through the credit line, through stronger customers in all areas that when that spring kind of explodes or when that spring is released you will see A-Mark doing more ounces, significantly more ounces, and our performance will reflect those ounces, when the market gives us that opportunity. So I think we are very well-positioned right now.
I think, we could do a tremendous - we could do tremendously more ounces today than we probably could do last time - last year at this time through the credit facility and through the logistics facility.
Juan Molta
Okay. Thank you for that.
Than regarding your custom products, I assume we are not ready yet to provide any numbers there, but can you comment as to what products were popular, what’s selling well?
Gregory Roberts
I don’t really want to go into too many specifics as it relates to the specific product. I 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 day-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 continued 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 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.
Juan Molta
Perfect. Thank you.
I’ll hop back in the queue. Thank you, guys.
Gregory Roberts
Okay.
Operator
Thank you. Our next question comes from the line of [Rick Ceram with Exodus Capital Partners] [ph].
Please proceed.
Unidentified Analyst
Good afternoon, gentlemen. Hey, Greg, how are you?
Gregory Roberts
Hey, Rick, how are you?
Unidentified Analyst
I’m doing well. Thanks.
Congrats on another nice quarter.
Gregory Roberts
Thanks for joining.
Unidentified Analyst
Nice to be part of the call and I appreciate you 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 sort of exceptional now to be up - did you say 775 loans at this point?
Gregory Roberts
Yes. And I believe if I’m not mistaken, we also went over a $100 million in collateral for the first time at collateral value.
So that was a pretty big hurdle for us and 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.
Unidentified Analyst
Yes. I would think so and it almost appears to be one of these growing annuities.
Is that more or less the way you look at it or these - I know these are - not all these loans are long-term loans. I mean, it’s probably fairly choppy, but I 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 million run rate of interest income.
And 300% growth is really eye-popping. Is that - I can’t imagine that being sustainable.
But do you envision as being thousands of loans in business really morph into almost a lending business?
Gregory Roberts
Yes. 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 364 days on the loans.
So we do get loans dropping off. I think, what we’ve 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 be in a credit line for them to use.
And it’s 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 our 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 as captive in 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 is providing them the silver that’s finite 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.
Unidentified Analyst
It’s a wonderful just a terrific business, Greg. And in the fact that, you are fully collateralized, this is just - it sounds like it really could grow in the something exceptional.
Do you - as you forecast out or as Cary and forwarding to what this could be from their perspective. Are you envisioning thousands of loans, or tens of thousands and $10 million of interest income as annuities, wonderful, but that that growth suggests that could be actually much larger?
Gregory Roberts
Yes. I mean, I think, we kind of get 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 volume loans.
The collectible loans are somewhat capped. I wouldn’t say that you’re going to see the same kind of growth in those loans, as maybe you see in the precious metals loans.
I do think there’s, our strategy is storage, lending and trading. And obviously, for us, the higher we can grow the collateral held out our storage facilities.
We are going to see increases in storage fees, interest income and our trading revenues off of those accounts as well as if precious metals were to raise a lot of our fees are based on 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 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 had 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.
Unidentified Analyst
And with gold above $1,200 it’s created probably some renewed interest that hopefully had some legs to it, I’m guessing?
Gregory Roberts
Yes. I cautioned everybody on looking at rising prices and I want to be careful how we describe this.
There is 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, is people would have been trained to buy the dips, they’re kind of sitting on the sidelines or sitting on their hands as prices increase. So - and particularly in gold, where we don’t have quite as big of a margin.
You really need a break out to see a significant effect on our trading. I will say that the move - where we try to breakthrough 1,300 last week was a - we did see some increase in activity and we saw the increase in volume trading tickets.
I think you’re going to need to see 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 down side where you have a $50 drop in gold or a $1.25 drop in silver in a few days or week. You need to see a little bit bigger breakout to the upside.
I will say though, as you see the increased price on the upside slowly materially. 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 2012 as well as a good place to watch activity is the ounce of volumes of purchases in the ETF GLD that’s also another good place to watch where you see breakouts in volume or breakouts in a large masses of customers that are coming in back into our marketplace.
Unidentified Analyst
Right. You’re building lots of long-term really sticky business and it’s really exciting to watch.
So congrats again, Greg, and thanks for the answers. I appreciate that.
Gregory Roberts
Great. Thank you, Rick.
Operator
Thank you. [Operator Instructions] thank you.
Our next question comes from the line of Greg Eisen with Singular. Please proceed.
Greg Eisen
Thanks and good afternoon. I’d like to start up by asking I think, Thor had something to say in the prepared remarks of the customers I guess, back in the second quarter, we were working through inventories this year.
Would that kind of bulge in customers’ inventories? Does that work through entirely now, is that over with?
Thor Gjerdrum
It’s impossible for me to know exactly what’s in our customers’ inventories unless we are 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 may be, the first month of Q2.
We did see certain products that customers who’re not refreshing or renewing. I would say that throughout the first month of Q3, we have seen a return to little bit more normalized and I’m sorry, the first month of Q4 and last month of Q3 we did see customers return to a more normalized purchasing pattern, if that answers your question.
Greg Eisen
Yes. I think that had it as I’m guessing.
Regarding - you mentioned, you referenced earlier in the call your industrial sales it’s somewhat lower margin. This is the stuff that goes to the retail and end markets.
Can you disclose what the industrial sales percentage was this quarter, is that something you do?
Thor Gjerdrum
No, we really don’t breakout those numbers and we try not to get to the point where we’re bisecting our ounces. We think that’s not very productive.
I will say that when you see an increase in the attention on goal that 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 size 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 mid that might be stockpiling metal for a project they’re working on. Those types of customers tend to buy larger than buying one ounce coins or half ounce coins, they’re buying 400 ounce gold bars.
So that mix of business is important for us, and we 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’s - that will tend to affect our metrics as it relates to 2 ounces sold top line as well as gross profit.
Greg Eisen
I realized you need to be there for those customers to be the go-to guy in the industry?
Gregory Roberts
Yes.
Greg Eisen
You need to sell that, whether is they going to pay a high margin or low or not in that case.
Gregory Roberts
Yes. I mean, there is many customers that we would sell 400 ounce gold bars to it, a very, very, very small margin, because of the overall relationship with the customer.
So that’s a balance for us, it does challenge Thor and Cary a little bit, as it relates to capital allocation, because it requires more capital to be 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 gets it 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.
So - 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.
Greg Eisen
Okay. I understood, understood.
Moving on to 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 they be one-time expenses that you expect to incur in Q4 or Q1 of the following fiscal year to accomplish this?
Gregory Roberts
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 of that facility to do - we would - we believe that if, if we had the opportunity a week from now we can do 8,000 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 going to 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 third parties that we might be paying off of these services to - we would have them under one roof. And one of the reasons that we did expand into this new space next store, so that we could get more and more of our activities under one roof and cut our expenses in other areas.
Now there is going to be overlapping that and there is - there are certain limitations were under as to how 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 want to do out of the facility.
And at the same time have the available capacity that is - we run into a huge month or a huge few weeks, where record numbers that we can still satisfy all of our customers and that nobody suffers.
Greg Eisen
Got it.
Thor Gjerdrum
Yes, I just wanted to note relative to your question, you’re supporting [ph] both of these facilities that we’re moving out of, these are facilities with third-parties. So we don’t have a disposal of asset issues, ongoing rent obligations, any of those issues.
So as we roll out of these facilities, there is no disposition cost or one-time charges related to exiting those facilities.
Greg Eisen
That’s good to know. I appreciate that.
If I can ask about, [I’ll get pile on to] [ph] quickly subject of the collateralized, the loan business. Just trying to understand on these loans, sounds like it works a lot like a margin loan than securities, but these - the kind of the rules for margin loans are pretty cut and dry, you’re in a unique business.
Can you say like what percent of loan-to-value you would stop out a customer on and asked them to post more - essentially more collateral or else you’d sell them out? Is there a hard-and-fast rule?
Gregory Roberts
Right, we’re on a - and please note that every loan is different, I mean, every mix of collateral is a little bit different. So it’s - there is a number of different ways we look at this.
But in general, on a bullion loan, we’re going to 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 would - we are then going to do a margin call that needs to be satisfied within generally 24 hours to 48 hours, still leaving ourselves a little cushion as it relates to our LTV.
The customers 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.
Greg Eisen
Okay. So if it’s a 80% loan-to-value of spot to start and you had a 10% drop in TM [ph] prices, when you reach 10% you would make the margin call essentially asking to post more collateral or pay off or…?
Gregory Roberts
Correct.
Greg Eisen
Or just liquidate it, one way or another. Got it.
I understand. Thank you very much.
I’ll let someone else go.
Gregory Roberts
Okay.
Operator
Thank you. Our next question comes from the line of Juan Molta with B.
Riley. Please proceed.
Juan Molta, you’re…
Juan Molta
Hello.
Operator
Please proceed.
Juan Molta
Sorry about that. I was on mute.
Could you please address the increase in inventories and also talk about the component, the compensation component of the higher SG&A.
Gregory Roberts
Sure, Thor will answer that.
Thor Gjerdrum
So I’ll answer - let me - I’ll answer the inventory. I’ll let Cary do the SG&A.
So the inventory here we talked about, in Q2 customers working through our inventory. In Q3 there continues to be reasonable levels of demand for industrial products.
So 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. But the turns remain fairly consistent.
Cary Dickson
Yes, Juan, this is Cary Dickson. Regarding your SG&A question, compensation accruals are up since [ph] they start off within general because our performance is better.
But I think we also have some - a few executives that now going into a higher graduated rate on the bonus calculations, that drives a little more executive compensation accrual. Another piece is that, year-over-year we got, as Greg mentioned, the logistics operation and that the logistic operation costs are up a little higher year-over-year as well.
And I think the third 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’re trying to put a whole new enterprise system in place [indiscernible] at the beginning of next year. So those are kind of the three big drivers for SG&A as far as year-over-year.
Gregory Roberts
Thanks, Cary.
Juan Molta
Okay. Thank you.
Gregory Roberts
Another question?
Juan Molta
That’s all. Thank you, guys.
Gregory Roberts
All right.
Operator
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.
Gregory Roberts
Thanks to everybody for joining us today. I’d like 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. Operator?
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 this call. 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 the 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 market; 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 date on which they are 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 made 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 may now disconnect.