A-Mark Precious Metals, Inc. (AMRK) on Q2 2022 Results - Earnings Call Transcript
Operator: Good afternoon. Welcome to A-Mark Precious Metals conference call for the Fiscal Second Quarter ended December 31st, 2021. My name is Sherry, and I will be your Operator this afternoon. Before this call, A-Mark issued its results for the fiscal second quarter 2022 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 top of the homepage. Joining us for today's call are A-Mark's CEO, Greg Roberts, President Thor Gjerdrum, and CFO Kathleen Simpson Taylor. Following the remarks, we will open up the call for your questions. Then before we conclude the call, I'll provide the necessary questions regarding the forward-looking statements made by management during this call. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of the A-Mark website. Now I would like to turn the call over to A-Mark's CEO, Mr. Greg Roberts. Please proceed, sir.
Greg Roberts: Thank you, Sherry. And good afternoon to everyone. Thank you for joining our call today. As you can see from our earnings release, Q2 marked another solid quarter as A-Mark delivered $31.8 million of net income and diluted EPS of $2.61 a share. We also generated $49 million of adjusted net income before provision for income taxes, or $4.02 per diluted share. Our Q2 results reflect the strength of our fully integrated precious metals platform combined with the continuation of the favorable macro conditions that we have benefited -- have benefited our business over the past several quarters. We continue to experience robust demand from both our retail and wholesale customers along with ongoing supply constraints, which has resulted in continued higher premium spreads. Our fully integrated business model continues to provide us with steady access to product, enabling us to take advantage of favorable market conditions through our wholly-owned and equity interest in private mints and our 30-plus-year relationship with other supply sources. The unique strength of our model is evident in our Q2 performance, which included an 18% sequential increase in gross profit to 65.9 million with our gross profit margin expanding by 61 basis points and an 8% return on equity. Now, I want to turn the call over to our CFO, Kathleen Simpson-Taylor, and she will walk you through our financials in more detail. Then our President, Thor Gjerdrum, will come on to discuss our KPIs and operational metrics. Afterwards, I will provide a further update on our business and growth strategy. Kathleen, take it away.
Kathleen Simpson Taylor: Thank you, Greg, and good afternoon, everyone. Our revenues for fiscal Q2 2022 increased 28% to $1.95 billion from $1.52 billion in Q2 of last year. The increase in revenues was due to an increase in gold and silver ounces sold, offset by lower average selling prices of gold and silver. JM Bullion, JMB, contributed $489.3 million of revenue to the quarter. For the six-month period, our revenues increased 17% to $3.96 billion from $3.38 billion in the same year ago period. The increase in revenues was due to an increase in gold and silver ounces sold combined with higher average selling prices for silver, offset by lower average selling prices for gold. JMB contributed $961.6 million of revenue to the six-month period. Gross profit for fiscal Q2, 2022 increased 252% to $65.9 million or 3.39% of revenue from $18.8 million or 1.23% of revenue in Q2 of last year. The gross profit increase was due to higher gross profits earned from the wholesale sales and ancillary services and direct-to-consumer segments, including $29.7 million contributed by JMB. For the six-month period, gross profit increased 122% to $121.9 million or 3.08% of revenue, from $54.9 million, or 1.62% of revenue, in the same year-ago period. The gross profit increase was due to higher gross profits earned from the wholesale sales and ancillary services, and direct-to-consumer segments, including $54.4 million contributed by JMB. SG&A expenses for fiscal Q2 2022 increased 119% to $18.7 million from $8.5 million in Q2 of last year. The increase was primarily due to $6.9 million in expenses incurred by JMB $2.3 million of legal consulting and professional fees, increased compensation expense, including performance-based accruals of $0.9 million and higher insurance costs of $0.1 million. For the six months’ period, selling, general and administrative expenses increased 96% to 35.4 million from 18 million in the same year-ago period. The increase was primarily due to $12.9 million of expenses incurred by JMB, $2.8 million of legal consulting and professional fees, increased compensation expense, including performance-based accruals of $1.1 million and higher insurance costs of $0.6 million. Depreciation and amortization expense for fiscal Q2, 2022 increased 1,535% to $8.3 million from $0.5 million in Q2 of last year. For the six-month period, depreciation and amortization expense increased 1,543% to $16.5 million from $1 million in the same year-ago period. The increase was primarily due to amortization of the acquired intangibles related to JMB. Interest income for fiscal Q2 2022 increased 16% to $5.3 million from $4.5 million in Q2 of last year. For the six-month period interest income increased 27% to $10.8million from $8.5 million in the same year-ago period. The aggregate increase was primarily due to higher interest income earned by our Secured Lending segment and higher other finance product income. Interest expense for fiscal Q2, 2022 increased 7% to $5.4 million from $5 million in Q2 of last fiscal year. The increase was primarily driven by $0.3 million associated with our trading credit facility and notes payable including amortization of debt issuance cost, $0.2 million of loan servicing fees offset by a decrease of $0.1 million in interest associated with liabilities on borrowed metals. For the six-month period, interest expense increased 16% to $10.9 million from $9.3 million in the same year-ago period. The increase was primarily driven by $0.8 million associated with our trading credit facility and notes payable, including amortization of debt issuance costs $0.7 million related to product financing arrangement, $0.4 million of loan servicing fees offset by a decrease of $0.3 million and interest associated with liabilities on borrowed metals. Earnings from equity method investments in fiscal Q2, 2022 decreased 48% to $1.2 million for $2.4 million in the same year ago quarter. The change includes an increase in earnings of $0.7 million from our current equity method investments offset by a decrease of $1.9 million related to JMB, a former equity method investment which is now reported by the company as a wholly owned subsidiary. For the six-month period, earnings from equity method investments decreased 58% to $2.7 million from $6.5 million in the same year-ago period. The change includes an increase in earnings of $1.8 million from our current equity method investments, offset by a decrease of $5.6 million related to JMB, a former equity method investment which is now reported by the company as a wholly-owned subsidiary. Net income attributable to the company for the second fiscal quarter of 2022 totaled $31.8 million or $2.61 per diluted share. This compares to net income attributable to the company of $8.9 million or $1.16 per diluted share in Q2 of last year. Our diluted EPS for the fiscal second quarter of 2022 is based on the weighted average shares outstanding of $12.2 million compared with $7.7 million weighted average shares outstanding during the second quarter of last year. Adjusted net income before provision for income taxes, a non-GAAP financial measure which excludes acquisition expenses, amortization, and depreciation for Q2 fiscal 2022 totaled $49 million or $4.02 per diluted share. An improvement of $36.3 million compared to $12.7 million or $1.64 million per diluted share for Q2 fiscal 2021. The weighted average shares outstanding for the current fiscal quarter were 4.5 million higher than those outstanding in the prior year fiscal quarter. For the six months period, net income attributable to the company totaled $57.8 million or $4.78 per diluted share. This compares to net income attributable to the company up $32 million, or $4.21 per diluted share, in the same year ago period. Our diluted EPS for the six-month period is based on weighted average shares outstanding of $12.1 million, compared with $7.6 million weighted average shares outstanding during the same year-ago period. Adjusted net income before provision for income taxes, a non-GAAP financial measure which excludes acquisition expenses, amortization, and depreciation for the six-month period, totaled $90.1 million, or $7.44 per diluted share, an improvement compared to $43.4 million or $5.70 per diluted share in the same year-ago period. The weighted average shares outstanding for the 6-month period were $4.5 million higher than those outstanding in the prior year 6-month period. Now, turning to our balance sheet, at quarter-end we had $19.4 million of cash compared to $101.4 million at the end of fiscal year 2021. Our fiscal year 2021 cash balances were high due to our significant planned Precious Metals purchases in the first few days of July 2021, specifically due in part to the U.S. men's release of a new bullion coin design on July 1st. Our tangible net worth at the end of the quarter was $226 million, up from $184.9 million at the end of the prior quarter. Finally, as we announced in December, we closed our new three year committed $350 million trading credit facility during the quarter, replacing our previous $280 million trading credit facility. The new credit facility is the largest in the company's history as we added a number of new lenders to expand our lender base, which provides additional lending capacity, should we need it in the future. We believe that reflects the strong performance of our business and our Capital Partner's confidence in our vertically integrated model. That completes my financial summary. Now, I will turn the call over to Thor, who will provide an update on our key performance metrics. Thor.
Thor Gjerdrum: Thanks you, Kathleen. Looking at our operational metrics for the fiscal second quarter and first six months of 2022. We sold 631,000 ounces of gold in fiscal Q2, which was up 32% from Q2 of last year, but down 6% from last quarter. For the six-month period, we sold 1.3 million ounces of gold, which was up 8% from the same year ago period. We sold 32 million ounces of silver in fiscal Q2 2022, which is up 51% from Q2 of last year and up 14% from last quarter. For the 6-month period, we sold $60.1 million ounces of silver, which is up 32% from the same year-ago period. Wholesale trading ticket volume, which represents the total number of product orders processed by our trading desk decreased 10% to 26,809 from Q2 of last year, but increased 3% from the first quarter of fiscal 2022. For the six-month period, wholesale ticket volume decreased 19% to 52,887 from the same year-ago period. For the second fiscal quarter, our inventory turnover ratio was 3.3, which is a 3% increase from 3.2% in Q2 of last year, and a 13% decrease from 3.8 in the prior quarter. For the 6-month period, our inventory turnover ratio was 7.6, which was down 4% from the year-ago period. I'd like to also share some of the key metrics from our direct-to-consumer segment this quarter. The total number of active customers in the quarter increased by 87,100 compared with the prior year second quarter, and increased by 201,700 for the six-month period. The number of total -- the number of customers totaled 1.9 million at the end of December, 2021 compared with 160,300 at the end of December, '20. The increase in these metrics is mainly attributable to the addition of the JMB customer base. Finally, the number of secured loans at the end of December totaled 2,393, an increase of 15% from the prior quarter and an increase of 81% from December, 2020. The dollar value of the total loan portfolio at the end of December totaled $126.3 million, which is up 14% from prior quarter, and up 32% from Q2 of last year. Typically the number of loans increased during periods of rising precious metals prices and decreased during periods of declining metals prices. That concludes my prepared remarks. I will now turn it over to Greg for closing remarks.
Greg Roberts: Thank you, Thor. As we approach the one-year anniversary of our acquisition of JM Bullion, I am thrilled and encouraged by the continued strength and momentum of our combined companies. JMB continues to execute well and grow its customer base, contributing approximately 25% of our revenue and 45% of our gross profit during the quarter. We are optimistic about our DTC prospects, including the forthcoming rollout of JMB's Cyber Metals, our innovative online platform that digitalizes large gold, silver, and platinum bars and allows consumers to buy and sell fractional shares in a range of denominations with the option to convert these holdings into physical coin and bar in the future. The Cyber Metals product remains on track for commercial release later this month, and we are eager to begin marketing this innovative offering to our many JM Bullion customers and to the broader Precious Metals community. Our DTC performance remains strong with 21% growth in gross profit and almost a full percentage point increase in our gross profit margin compared to the prior quarter. Favorable business trends have continued into the third quarter, keeping us optimistic about our outlook. Our DTC and wholesale segments continue to benefit from their access to A-Mark's supply chain, including our wholly-owned subsidiary, SilverTowne Mint. The performance of the mint remains strong which is critically important in periods such as these where we see sovereign mint struggle to meet demand due to supply chain constraints. During the second quarter the mint produced on average 625,000 ounces of silver per week, which is up an amazing 58% from the same year-ago period. We continue to evaluate and invest in capital to expand our mint capacity, and expect our February production to be in excess of 750,000 ounces of silver per week. Finally, we continue to evaluate strategic opportunities that can further augment our capabilities and drive strong results for our shareholders over the long run. Operator.
Operator: Thank you. . Our first question is from Tom Forte with D.A. Davidson. Please proceed.
Tom Forte: Great. So Greg and team, congrats on a great quarter. I have a couple of questions. I'll go one that a time. So Greg, we talked a lot about things that impact interest in precious metals. I want to talk about market volatility. We had two days in a row there where I thing the Dow was up or down more than 1,000 points. How should we think about market volatility and how that may or may not be impacting interest in Precious Metals? That's my first question.
Greg Roberts: Okay. Thank you, Tom. We clearly started to see some more volatility in the equity markets in the last few weeks and I will say that any uncertainty or fear or changing of the way assets are deployed for people, certainly affect the precious metals market and we're a direct recipient of that obviously. Different conditions create different circumstances. Some conditions create institutional buying at an ETF level or at a big bar level. Certain things affect individuals in our DTC segment, and how they're going to view that information and whether that's going to cause them to buy or sell or hold. And we did as we expected over the couple of weeks that you've described recently, we did see an increased level of activity and we saw a burst of interest from our customer base, particularly in the last two weeks when you had a significant drop in gold and silver in a two to three-day period, that was positive for our demand from our customer base and it was good to see the expanding customer base react as we would expect. Slow rising prices of gold and silver don't create the exact same result or the exact same change in behavior from the customers, but it's still good for us because it is a more affirmation that precious metals are in-demand at all levels. So I think -- we see that our business model is performing as expected and the volatility is good for us, and as we've always said before, a drop in price really motivates our customers to buy the dip and then we get great action for a couple of days, and then we get what I call aftershocks after the earthquake. We get some continued interest, and we did see that in the last couple of weeks, which is what we would have expected on the volatility that we saw. And I think from a macro perspective, they're just personally I see what seems to be a lot of repositioning and a lot of change in attitude towards all different asset classes and then you shift or any any behavioral change at a macro level is generally going to create interest at our level.
Tom Forte: Great. And then second question, and then I'll try to limit myself to three is, a lot of investors I talked to, we debate inflation, and in 2022, if precious metals have a different role as far as hedging cryptocurrency, if that's taking some of the shine off gold from a hedging standpoint. So I guess my question for you is do you feel like today, the use of -- or perception of precious metals as a hedge for inflation feels materially different from you -- or different to you versus times in the past? And I'd love to get your perspective if you feel like crypto has in any way, shape, or form, replaced gold as a hedge.
Greg Roberts: I mean, based on crypto's performance when the Dow and the NASDAQ dropped the last two weeks ago and I would say that they are uncorrelated to Precious Metals, which was the first time, I really I ever remember seeing crypto follow what the equities were doing. So I think every situation is different, but certainly for us, we saw decline get down to 36,000 and almost tracked the NASDAQ very closely, which would indicate to me that you had a risk off situation going on. And I thought that after the initial drop of $50 in gold from 1850 to 1800 I really felt that gold and silver held up really well. And in the last week or so since then, they seem to be very strong related to maybe a situation where in the past we might see them drop a little further. So I do believe the underlying inflation fear and the underlying risk-off strategy is good for gold. And I think gold's holding up very well. We're seeing that pretty predominantly.
Tom Forte: Great. Last question. The next quarter I look forward to asking you about Cyber Metals. The JM Bullion acquisition has been amazing. What are your current thoughts today on potential additional strategic M&A both U.S. e-commerce international and any other vertically integrated type assets that maybe of interest, at high level, of course?
Greg Roberts: Yeah. I mean, I think that the amazing thing that I see over the last 3 to 4 months in -- back into the quarter we're reporting right now is the continued pace of our new client on-boarding at the DTC level and the first purchase by some of those clients; the size of those first purchases. If you are looking for things that are different and then I see different from where we were a year ago or two years ago. The new clients onboarding, specifically, at the DTC level and more specifically at the JMB level, continues to really outperform my expectations from a year ago when we did the JM Bullion acquisition. I think we're way ahead of what are projections were on new clients and I think Thor talked a little bit about this. Just the pace of new clients. Now, obviously we -- in the year-ago quarter, we didn't have a DTC JM Bullion that was bringing in new clients, but we continue to average 3,000 to 4,000 new clients at JM Bullion every week, and the -- there's always a few new buyers that are making 6-figure and up purchases as a first-time purchase that -- we're getting that first purchase from them at a much higher level. So I think as it relates to M&A and where we're looking right now, I think that what we're seeing from the JM Bullion metrics is giving us confidence that there are other potential acquisitions out there that will have a slightly different demographic and that will bring new customers to the platform, and we -- we're looking at that very closely, and I think we're encouraged by some of the opportunities that we're looking at. But I think that more than anything, we really feel that we have a really good handle right now on new client acquisition, and that the pace of new clients is continuing, which gives us confidence and gives us -- encourages us to continue to seek opportunities for us on the M&A side.
Tom Forte: Great. Thank you, Greg. Thank you too, Kathleen and Michael. Great quarter.
Greg Roberts: Thank you.
Operator: Our next question is from Andrew -- Andrew Scutt with ROTH Capital Partners, please proceed.
Andrew Scutt: Hey guys. Congrats on another strong quarter and thanks for taking my questions. My first question here is, so with the sovereign mints ramping up production compared to last year, can you down that , impact your inventory management and pricing strategies and all the supply continues to come back online?
Greg Roberts: Yeah. I mean, we still are dealing with supply constraints from the sovereign mint. I don't know of any Mint that's operating at anywhere close to what they were pre -COVID. So I think that we're -- as you can see from some of my commentary, we're continuing not only at the SilverTowne Mint level, but at the Sunshine Mint level to increase our capacity to fill the demand. And we aren't seeing huge numbers out of the U.S. Mint. I mean, the U.S. Mint, I think, made about 5 million ounces of silver in January for the date change. I mean, I've seen production there in January as high as 8 million in years past. So I think as much as they tried, there's still is a lack of Silver Eagle supply. And secondly, -- probably our second biggest supplier, The Royal Canadian Mint, continues to struggle with meeting the demand that we could use. And where we're seeing it very pronounced is particularly in the fractional coins on the gold side that you're just -- all they can do is make one ounce gold coins. And the concept of making quarter ounce or 10 pounds coins is just -- they're not even trying. So I think that our Cyber Metals platform when it comes online, giving people the ability to buy a quarter ounce of gold or a 10 pounds of gold on Cyber Metals, and then down the road converting into physical, I think is setting up very well for us. And the premiums on some of the fractional gold coins are just very high. What we do get, we sell it at very high premium, so I don't see any indications right now that the sovereign mints are -- are on a path to get back to where they were before. So I think that it can be frustrating at times because sometimes we have customers that only want to buy those products and they don't want to buy private mint products. On the other hand, we have a number of clients that just want whatever we can get them. So we're just trying to prepare for all outcomes.
Andrew Scutt: Great, thanks for the additional color there. Bouncing out that question, you did bring up Cyber Metals, you guys had about two months of beta testing. Can you provide any color on anything you may have learned? The next steps to get it launched over the next month, and maybe any expectations you have given how the prior two months went?
Greg Roberts: Yeah. I mean, we have about 40 people in the beta right now testing the platform. I've been on there myself, I've done a number of trades. I think it is a fantastic product. I think that the guys at JM Bullion and the tech people, Andrea and Al did just a great job, and we're very pleased with the results and from the people that have been testing to this point, we're very happy with what we're hearing from them, and getting a lot of good comments and a lot of good input. And we're very excited to to launch this to our first set of chosen JM Bullion customers on a commercial level, probably around the first week of March. So we're very close to rolling this out, and right now, I think it's exceeded my expectations.
Andrew Scutt: Streak here you guys have had, there's been feed back. And then last one from me. Just great to see sequential margin increase in direct-to-consumer. Can you just maybe provide some puts and takes there and then also on that, you guys launched, it looks like the 2022 coins in early January and just has there been strong appetite from JM Bullion consumers for the new coins? That's all from me, thanks.
Greg Roberts: Yes, we have seen good demand on the 2022 points from the U.S. Mint, which is we expect that every January. Clearly, this year, the demand has exceeded the supply. We've been out in the marketplace buying from other authorized purchasers and buying extra coins in the secondary market. So we need more coins for our customers at the DTC level, and we've been doing that. As it relates to the sequential increase in margin at the DTC level, I think that's -- that's a reflection of the premiums we're getting and we're -- obviously we're very pleased with that right now and you can see the results. So we'll -- we're going to continue to try to outsell the supply if we can. As long as we do that, margins are going to be good.
Operator: . We will pause for a brief moment to pull for any final questions. At this time, this concludes our question-and-answer session. I would now like to turn the call over to Mr. Roberts for his closing remarks.
Greg Roberts: Thank you very much. I'd like to thank our many shareholders for joining the call today, continued. Thank you for your interest and continued support and many thanks to our employees for their dedication and commitment to A-Mark's success. And we look forward to keeping you apprised of A-Mark's progress in the future.
Operator: Before we conclude today's call, I would like to provide A-Mark's Safe Harbor statement that includes important questions regarding forward-looking statements made during this call. During today's call, there were forward-looking statements made regarding future events, statements that relay A-Mark's future plans, objectives, expectations, performance events, and the like of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities and Exchange Act of 1934. Future events, risks, and uncertainties individually or in aggregate could cause actual results to differ materially from those expressed or implied in these statements. Factors that can cause actual results to differ, 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 or international political climate, increased competition for A-Mark's higher margin services, which could depress pricing, the failure of the company's business model to respond to changes in the market environment as anticipated, general risk of doing business in the commodity markets and other business, economic, financial, and governmental risks as described in the public's -- 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 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 not to place undue reliance on these forward-looking statements. Finally, I would like to remind everyone that the recording of today's call will be available for replay via a link in the Investors section of the company's website. Thank you for joining us for A-Mark's Earnings Call. You may now disconnect.
