May 9, 2017
Executives
Gregory Roberts - Chief Executive Officer Cary Dickson - Chief Financial Officer Thor Gjerdrum - President
Analysts
Greg Eisen - Singular Research, LLC
Operator
Good afternoon and welcome to the A-Mark Precious Metals’ conference call for the fiscal third quarter ended March 31, 2017. My name is Matt, and I will be your operator this afternoon.
Earlier today, A-Mark issued its results for the fiscal third quarter and first nine-months of 2017 in a press release, which is available on the Investor Relations section of the Company’s Web site, at www.amark.com. You can find a link to the Investor Relations section at the bottom of the homepage.
Joining us on today’s call are A-Mark’s CEO, Mr. Greg Roberts; President, 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 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. Thank you.
You may begin.
Gregory Roberts
Thank you, Matt, and welcome, everyone. Thank you for joining us this afternoon.
Our financial results for the third quarter were in line with our expectations. As we indicated on our last call the subdued market conditions we experienced in Q2 persisted in the third quarter both in terms of demand and volatility for Precious Metals.
This is experienced industry wide as sales of both gold and silver, bullion by the U.S. Mints were down significantly compared to the same year ago period.
In fact the U.S. Mint’s gold ounces sold to all authorized purchasers in Q3 were down 33% from the prior quarter, reflecting the continued strength of the U.S.
dollars and the equities market. Despite these factors A-Mark was still able to generate solid growth in key areas and gain market share.
This performance help drive our 13th consecutive quarter of profitability since we became public in March 2014. A track record we are extremely proud of and which reflects our companies operating discipline and increasingly diversify business model.
In particular, we continue to focused on building our finance portfolio, our CFC lending business was up 26% from the prior quarter to a record 2138 loans. And is another meaningful source of income and predictability to our business model.
Both of which have helped mitigate the effects of the recent subdued fabricated product conditions. But before I continue, I would like our CFO Cary Dickson to walk us through the financial details for that fiscal third quarter and nine-months ended March 31, 2107 then our President Thor Gjerdrum will discuss our market position and key operational metrics.
Afterwards I'll return to talk more about our operational progress and initiatives as well as our outlook. Cary.
Cary Dickson
Thank you, Greg, and good afternoon to everyone. Turning to our financial results for the fiscal third quarter and nine-months ended March 31, 2017.
Our revenues increased 14% to $1.73 billion from $1.51 billion in Q3 of last year. For the first nine-months of fiscal 2017, our revenues increased 12% to $5.66 billion from $5.05 billion in the same period last year.
The improvement for the quarter in the first nine-months of fiscal 2017 was mainly due to an increase in precious metal prices and higher forward sales, which is partially offset by a decrease in gold ounces and silver ounces sold. Our gross profit for fiscal Q3 of 2017 increased 7% to $7.3 million or 0.42% of revenue from $6.9 million or 0.45% of revenue in the same year ago quarter.
The increase in gross margin was primarily due to an improved performance of our finance portfolio, improved trading profits and cost efficiencies offset by lower demand for our physical product. For the nine-months of the fiscal year, our gross profit decreased 6% to 25.3 million, 4.45% of revenue from 27 million or 0.53% of revenue in the same year ago period.
The decrease in net gross margin was primarily due to lower demand for our physical products resulting in lower premium offset by improved performance of our finance, product portfolio, trading activities and cost efficiencies. Now turning to our expenses.
Our selling, general and administrative expenses for fiscal Q3 of 2017 increased 12% to $6 million from $5.4 million in Q3 of last year. The increase was due to cost related to the recently acquired SilverTowne minting operations some increased headcount and other expenses.
For the first nine-months of fiscal 2017 our SG&A increased 9% to $17.8 million from $16.3 million in the same period last year. The increase in SG&A was due to higher consulting expenses related to the development and implementation of our new ERP system, costs related to the recently acquired SilverTowne minting operations as well as other non-recurring costs.
The increase in SG&A was partially offset by lower compensation costs, primarily due to lower performance-based compensation accruals. Our interest income for fiscal Q3 increased 46% to $3.3 million from 2.3% in the same year ago quarter.
The improvement was driven primarily by an increase in the size of our loan portfolio as increased utilization of our inventory finance products by customers. For the first nine-months of fiscal 2017 our interest income increased 43% to $9.1 million from $6.4 million in the same year ago period.
The improvement was primarily due to an increase in size of our loan portfolio, and growth in finance products. Our interest expense for fiscal Q3 of 2017 increased 63% to $2.7 million from $1.7 million in Q3 of last year.
For the first nine-months of fiscal 2017 interest expense increased 75% to 7.4 million from 4.2 million in the same year ago quarter. The increase in both the quarterly and nine-month period was primarily result of greater usage of our lines of credit and other product financing arrangements, arising from continued growth in the business.
The increase is also partially due to higher LIBOR cost - interest rates I should say that went into effect after the Federal Reserve rate increases. Our net income for fiscal Q3 of 2017 was generally flat at $1.2 million or $0.16 per diluted share as compared to $1.2 million or $0.17 per diluted share in Q3 of last year.
For the nine-months of fiscal 2017, our net income decreased 29% to $5.9 million or $0.82 per diluted share from $8.2 million or $1.15 per diluted share in the same period last year. The decrease is primarily due to lower gross profit, higher interest expense and higher selling, general and administrative expenses offset by higher interest income.
Now turning to the balance sheet, at quarter end we had $6.4 million of cash on our balance sheet. As you evaluate our balance sheet is important to remember that we are a net borrower and we typically pay down our daily balances to minimize interest expense.
Our tangible net worth totaled $59.1 million or $8.30 per diluted share which compares to $57.9 million or $8.14 per diluted share at the end of the prior quarter. And finally, last week our board of directors declared a regular quarterly cash dividend of $0.08 per share reflecting our continued confidence in our balance sheet and commitment to maximizing these shareholder value.
The cash dividend will be paid on or about May 25th to all stockholders on record as of May 15th. This completes my financial summary.
Now I will turn the call over to Thor who will provide an update on Market conditions and key performance metrics.
Thor Gjerdrum
Thanks Cary. In addition to our financial results our management team tracks and continually evaluate four metric to assess the performance of our business.
These metrics includes the number of gold and silver ounces sold, trading ticket volumes, inventory turnover, as well as the size of our finance book. Our first key metric gold and silver ounces sold, represents the ounces of metal we sold and deliver to customers during the period excluding any ounces recorded on forward contract.
This is an important metric because it reflects the volume of our business that we are doing without regard to changes in commodity pricing, which figure into revenue and can map underlying actual business trends. During the third quarter, we sold 507,000 ounces of gold, which was down 25% from the prior quarter and down 13% from the fiscal Q3 of last year.
For the first nine-months of 2017 we sold 1.9 million ounces of gold, which was down 17% from 2.3 million in the same period last year. Turning to sliver, during Q3 of this year, we sold 20.9 million ounces of silver, which was down 8% from the prior quarter, and down 23% from Q3 of last year.
For the first nine-months of fiscal 2017 we sold 65.5 million ounces of silver which was down 35% from 100.6 million ounces in the same period last year. The second key metric we tracked and equally significant measure of our business is trading ticket volume.
This metric tracks the total number of orders processed by our trading desks in Europe and the U.S. For those newer to our company, periods of high volatility there is generally increased trading in commodity markets and increased demand for our products which translates into higher business volume.
During Q3, our trading ticket volume decreased 22% to 27,580 tickets from the prior quarter, but increased 27% from Q3 of last year. For the first nine-months of 2017, our trading ticket volume increased 26% to 84,809 tickets from 67,522 tickets for the same period of last year.
The year-over-year increase was primarily due to higher utilization of our online trading portal by our customers. It is important point out however, the portion of the tickets increased in tickets volume is because the online portal allows smaller minimum order sizes.
The third key metric we evaluate is inventory turnover, defines the cost of sales during the period divided by the average inventory during the period. As many of you know, inventory turnover is a measure of how quickly inventory is moved.
For those who have followed our company knows that have typically experienced a higher inventory turn ratio during periods of increased volatility and trading is more robust, reflecting a more efficient use of our capital. For the third quarter, our inventory turnover ratio was 5.4, which was down 25% from 7.2 in the prior quarter and down 9% from 5.9 in Q3 of last year.
For the first nine-months of fiscal 2017, our inventory turnover ratio was 19.1, which is down 12% from 21.6 in the same period last year. The quarterly and nine-months declines our inventory turnover ratio was primarily due to a higher volume of activity in our product financing and repurchase arrangement with customers, and in addition higher demand and increased market activity during fiscal Q1 2016 was a primary driver in the strong inventory turn ratio we achieved in the comparable period last year.
And finally, the fourth key metric or management team track is the size of our lending business, which is determined using the number of secured loans we have at the end of the quarter. The number of loans we secured at the end of the quarter was up 26% to a record 2,138 from the end of the prior quarter and was up 176% from the end of Q2 last year.
This significant year-over-year improvement in the number of secured loans was primarily due to the acquisition of bullion-based loan portfolio. At March 31, 2017 the dollar value of our loan portfolio totaled a record 91 million a 12% in the prior quarter, 44% year-over-year.
That concludes my prepared remarks. I will now turn it back over to Greg to talk about the progress we have been making on our key operational initiatives as well as our outlook.
Greg.
Gregory Roberts
Thanks, Thor. As I mentioned in my opening remarks, our increasingly diversified business model is the reason for A-Mark's ability consistently generate profits in all market conditions.
While our physical precious metals trading and distribution business can be episodic in nature as market volatility and demand can significantly influence our financial performance, it continues to serve as solid foundation to expand in the complimentary and synergistic businesses. This includes the range of higher margin products and services that we have introduced over the last two years, including logistics, storage, financing and most recently minting.
Taking together these products and services have added incremental and meaningful sources of income and predictability to our business model. All of which have help mitigate the effects of the most recent subdued market condition.
So while these conditions continue persist in the near-term our term remains focused on strategic initiatives that we can control. We commit to further diversifying our business and increase our capacity.
This will better position us to capitalize on trading opportunities and favorable market conditions as they arise. One of these initiatives is our investment in the SilverTowne Mint.
A leading producer of fabricator silver products, which we completed in this year Q1, it’s the eight-months since we made the investments and the long-term opportunity with the mint has never been more clear. Since our investment SilverTowne has not only increased our capacity to meet unforeseen surges in silver demand during voluble markets, but has also bolstered our capability to develop truly unique silver offerings like the innovative stackable points that we released in Q2.
Along that line, we are continuing to expand our broader portfolio of custom points. This area of our business continues to experience moderate demand albeit at lower volumes, but at higher gross margins.
Additionally, we are focused on several other initiatives to drive incremental growth and profitability at the mint. This includes promoting consignment offerings and built-to-order sliver products.
Another key objective in fiscal 2017 is to further expand our suite of ancillary services at our logistics facility in Las Vegas. During the third quarter we continue to benefit from the operational and cost efficiencies provided by the facility.
On top of this we are also seeing demand for our turnkey logistics and storage services. In addition to securing new logistics customer, our market, marketing and sales efforts remains focused on securing additional customers for our new storage programs, for precious metals, investment options and self-directed IRA accounts.
Looking ahead we have continue to experience slower market activity in our current quarter. We expect the current market trends to persist in the near-term although we remain of the view the positive geopolitical issues have the potential to quickly alter the precious metals environment.
We intend to pursue strategic investments with the goal of positioning ourselves to take advantage of dynamic opportunities created by market volatility and changes in our customers’ demand. Furthermore, we remained focused on expanding our platform with high margin and turnkey solutions.
In the more immediate future we will rely on our diversified business model and seek to generate predictable streams of revenue and profits, which ideally will enable us to capitalize on favorable trading opportunities and market conditions as they arise. Now with that, we are ready to open call for your questions.
Operator, please provide the appropriate instructions.
Operator
Thank you. At this time, we will be conducting a Question-and-Answer Session.
[Operator Instructions]. Our first question is from Greg Eisen from Singular Research.
Please go ahead.
Greg Eisen
Tanks and good afternoon. Could you share with us your realized price on gold per ounce and silver per ounce this quarter versus a year ago.
Considering revenues were up nicely, but obviously volumes of gold and silver were down a lot, so just kind for my modeling purposes what was your realized price?
Gregory Roberts
It's a little bit difficult to answer the question without a specific product in mind. If you are looking for fabricated sliver products for example the Silver Eagle made at the United States Mint, generally our wholesale price today is about $2.15 over the spot price of the per ounce priced, and over the last 12 to 18 months it's range is high as $3 and above and as well as maybe $2.10 around where we are at right now.
if you are talking about a private mint Silver Eagle the market on those right now is for the one ounce coins in the $0.30 to $0.35 range on a whole sale level and as it relates to gold coins, one ounce gold eagles were getting two and three quarters percent over spot price right now or over melt and that has stayed fairly consistent. The variances in our top line or our gross revenue can be effected by the mix of products, so if there is more one ounce coins it's going to be a little different than if there is more kilo bars.
In last quarter to quarter and a half we have seen an increase in our what we call our industrial, which is larger gold bar business and that has grown or its higher than it has been may be two or three quarters ago. So that, when you are talking about low margin, high volume 100 ounce bars or kilo bars, you are going to have a higher gross sales line, which are going to have a smaller gross profit number, because our margins on those bars is much less then on a one ounce gold coin.
Greg Eisen
Okay, turning to the custom coin programs, it sounds from your commentary as though demand is somewhat muted, it isn’t growing any faster than the demand for the core products, it sounds like, is that a correct assumption to my part.
Gregory Roberts
Yes. I think the you are exactly right, I think that the custom products although, they are not contemplated directly to the common sovereign mint volume coins, there is a coloration in just the amount of people who are looking to purchase material, so if you have a low quarter in let's say silver Eagles, you are probably going to have some drop of in our custom program.
It's important to remember though that the lot of the custom programs that we do for people are turnkey or they are created specifically for customer needs and that customer generally will agree to take a certain amount of product regardless of market conditions over a six to 12 month period in exchange for us creating the product for them. So again depending on the product and depending on exactly what product it is, you are going to see some variances, I will say that this last quarter we have launched sovereign mint silver coin that we are calling the new way Owl and that coin is in our specialty product category, but for the first time, we are striking a sovereign mint coin at our SilverTowne facility.
So the ability of SilverTowne to strike products quickly with very little lead time is giving us an advantage over some of our competitors.
Greg Eisen
Okay that could the change the topic to the loan portfolio. Clearly it looks like you are seeing a good uptake in loan demand, is there a reason you might attribute to why demand has been strong and has there been a change in the market place for these loans.
Gregory Roberts
I think the market place is probably fairly consistent as it has been in the last year or two. I think our efforts to market and sell this product has been well received.
We have picked up a few new wholesale customers for the CFC loan product as well as some of the our customers who sell us loans have become more familiar with the product and have just been able to execute a little bit better than they have in the past. So I wouldn’t attribute it too much to the market environment, I think it has a little bit more to do with what we are doing.
Although I wills say on a dealer wholesale borrower, the slower market conditions may cause a wholesale dealer who want to continue to buy product at a quantity price and get a price break, because of the quantity of buying. They may not will choose to tie up their own capital for that product if they want to be able to keep buying in quantities they have historically.
So I will say that we have seen an uptick in our wholesale dealers borrowers and I think that made the attributed to the slower market condition.
Greg Eisen
Okay, and looking at just since the third quarter, you said that the third quarter trends and slowness of the market was similar to the second quarter but maybe a little bit worse and how does the fourth quarter to-date look relative to the third quarter, is it on that same trend line or as it deteriorated at all from the Q3 demand level?
Gregory Roberts
I mean we are only-40 days into the quarter and I would say it's trending so far similar to Q3. Although I will say that in the last two weeks there have been somewhat we would call I guess macro geopolitical issues whether it be North Korea, or whether it be the Obama Care, or whether it be the election in France.
We have seen some things, some outside factors and they have actually contributed to a little bit of volatility and what we see as a uptick in demand in the last couple of weeks. So we feel like we are executing well this quarter, we feel like we are well positioned and we think there is opportunity for the market to change if some of these factors were to present themselves and give us an opportunity with some volatility.
Greg Eisen
Okay, thanks. I will let someone else go.
Operator
[Operator Instructions] And if there are no further questions, I would like to turn the floor back over to Mr. Roberts for any closing comments.
Gregory Roberts
Thanks to everyone for joining us today. I especially want to thank our investors for their continued support as well as our dedicated employees for their ongoing contributions to build A-Mark into the global leader in precious metals trading.
We look forward to updating you on our next call. Matt.
Operator
Before we conclude today's call, I would like 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 to A-Mark's future plans objectives and exceptions, performance, events and alike 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 on 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 domestic and international political climate, which has favorably contributing to the demand and volatility in the precious metals market, 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 identifies certain of such forward-looking statements, which speak only as of the dates on which they are made.
Additionally, any statements related to the 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 to not 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 the link available in the Investor Relations section of the Company’s website.
Thank you for joining us today for A-Mark’s fiscal third quarter earnings call. You may now disconnect.