Good afternoon, welcome to A-Mark Precious Metals conference call for the fiscal first quarter ended September 30, 2016. My name is Stacey, and I will be your operator this afternoon. Earlier today, A-Mark issued the results of its fiscal first quarter 2017 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, President Thor Gjerdrum, and CFO Cary Dickson. Following their remarks, we will open the call to your questions. 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 is being recorded, and it will be made available for replay via a link available in the investor relations section of the company's website. I would like to turn the call over to A-Mark's CEO, Mr. Greg Roberts. Sir, please proceed.
Thank you, Stacey, and welcome everyone. Thank you for joining us today. Fiscal Q1 was gratifying in many ways because it validated our business model in what was a relatively subdued precious metals market. As many of you know, our exceptionally strong results in fiscal Q1 of last year were spurred by above-average demand and volatility in the precious metals market. This, in turn, drove an unprecedented level of activity in both our core trading and online retail support services business. Further, we are proud of our financial performance in Q1 of last year because it illustrated the earnings power of our business model. It's important to keep in mind that these market conditions were atypical and our business is non-seasonal.
As we communicated in our earnings call in September 2016, we anticipated that normal market conditions we experienced in Q4 to carry over into Q1, and surely they did. Looking at our results on a sequential basis, nearly every financial metric was up, including revenue, gross profit, and net income. This growth was achieved despite lower physical metal ounces sold. The sequential improvement in our numbers was driven by strong demand for our higher-margin custom coin and finance products. As I alluded to earlier, this solid performance illustrates the advantages of our diversified business model, which provides multiple revenue streams and offers opportunity for significantly higher gross profit in market environments with increased volatility and demand, similar to what we experienced in fiscal Q1 of last year.
Before I continue, I would like our CFO, Cary Dickson, to walk us through the financial details for the quarter ended September 30th, 2016. Our President, Thor Gjerdrum, will discuss our market position and key operational metrics. Afterward, I will return to talk more about our operational progress and initiatives, as well as our outlook for the remainder of fiscal 2017. Cary?
Thank you, Greg, and good afternoon to everybody. Turning to our financial results for the fiscal first quarter ended September 30th, 2016. Our revenues increased 4% to $1.81 billion from $1.74 billion in the prior quarter and decreased 10% from $2.01 billion in the same year-ago quarter. The year-over-year decrease in revenue is partially due to lower gold and silver ounces sold, partially offset by an increase in precious metal prices. Our gross profit for fiscal one increased 7% to $8.1 million, or 4.45% of revenue, from $7.6 million or 0.44% of revenue in the prior quarter. On a year-over-year basis, gross profit decreased 44% from $14.4 million or 0.72% of revenue compared to fiscal Q1 of last year.
The decline in our gross profit margin was primarily due to lower premium spreads on our primary product, as well as lower ounces and lower total tickets compared to the same year-ago quarter. The tighter premium spreads and lower volumes as compared to the same year-ago quarter were due primarily to the unusual market conditions in Q1 of last year, in which commodities experienced unusually high volatility, resulting in widening of trading spreads and higher demand. Turning to our expenses. Our selling, general, and administrative expenses decreased 5% to $5.7 million from $5.9 million in the prior quarter. On a year-over-year basis, SG&A decreased 12% from $6.4 million in Q1 of last year. The decrease in SG&A was primarily due to performance-based compensation accrual, partially offset by $250,000 of consulting expenses related to the development and implementation of a new enterprise resource planning system and $600,000 non-recurring expenses.
Our interest income increased 19% to $2.9 million from $2.4 million in the prior quarter and increased 49% to $1.9 million in the same year-ago quarter. The year-over-year increase is driven primarily by an increase in the size of our loan portfolio, as well as increased utilization of our inventory finance product by our wholesale customers, including improved contango earnings. Our interest expense for Q1 of 2017 increased 6% to $2.2 million from $2.1 million in the prior quarter, and increased 82% from $1.2 million in the same quarter last year. The year-over-year increase is primarily due to greater usage of our lines of credit and other product financing arrangements, as well as an increase in the LIBOR rate experienced as a result of the Federal Reserve rate increase in December of 2015.
Our net income for Q1 of 2017 increased 83% to $2.0 million, or $0.27 per diluted share, from $1.1 million or $0.15 per diluted share in the prior quarter. On a year-over-year basis, our net income decreased 65% from $5.6 million or $0.80 per diluted share in the fiscal Q1 of last year. The year-over-year decrease in net income was primarily due to lower revenue and gross profit. Turning to the balance sheet. At quarter end, we had $16.8 million of cash on our balance sheet. As I mentioned in our last call, it is important to remember that we are a net borrower and we typically pay down our balances daily to minimize interest expense. And finally, our tangible net worth totaled $55.3 million or $7.7 per diluted share. This completes my financial summary.
I will turn the call over to Thor, who will provide an update on market conditions and key performance metrics. Thor?
Thanks, Cary. On our last call, we talked about the four key metrics we use to assess the performance of our business. These key performance indicators include the number of gold and silver ounces sold, trading ticket volume, inventory turnover, as well as the size of our finance book. The first key metric we evaluate is the number of gold and silver ounces sold. As you may recall, this metric is important because it reflects the volume of business that we are doing without regard to changes in commodity pricing, which figure into revenue and can mask actual business trends. In the first quarter, we sold 530,000 ounces of gold, which was down 25% from the prior quarter and 41% from Q1 of last year. The number of silver ounces we sold during the quarter was also down, both sequentially and year-over-year.
For Q1, we sold 21.8 million ounces of silver, which was down 16% from the prior quarter and down 46% from the same year-ago period. The year-over-year decreases in ounces sold for both gold and silver were primarily due to higher volatility and decreases in commodity prices in Q1 of last year. These factors led our customers to increase their precious metals purchases to take advantage of lower prices. As you might remember, the increase in volatility was due to macroeconomic factors that created an increase in demand at lower commodity prices. When the average spot prices began to increase during the quarter from the two-year low in average spot prices, demand for our bullion products began to reflect more typical levels of sales activity as market supply levels normalized. This resulted in lower ounce volumes compared to Q1 of last year.
Another measure of our business volume is trading ticket volume, which is the total number of orders processed by our trading desk in Santa Monica and Vienna, Austria. As a reminder, in periods of high volatility, there is generally increased trading in the commodity market and increased demand for our products, which translates into higher business volume. During Q1, our trading ticket volume was up 5% to 22,031 from the prior quarter, which decreased 24% from Q1 of last year. The decrease from the year-ago period was primarily the result of unusually strong market conditions and demand in the year-ago period. The third key metric we evaluate is inventory turnover, which we define as the cost of sales during the period divided by the average inventory during the period.
As you know, inventory turnover is a measure of how quickly inventory has moved, and we typically experience a higher inventory turnover ratio during periods of higher volatility when trading is more robust, reflecting a more efficient use of our capital. For Q1, our inventory turnover rate was 6.6, which was down slightly from 6.7 in the prior quarter and down from 8.9 in Q1 of last year. The year-over-year decrease in our inventory turnover ratio was due to higher volume of activity in our product financing arrangements, a higher portion of our materials purchased from foreign sources, and longer carrying periods associated with our higher-margin custom products. Finally, the fourth key metric we measure 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 42% to a record 1,667 from 1,173 loans at the end of the prior quarter, and up 255% from 470 secured loans at the end of Q1 last year. This significant improvement in the number of secured loans was primarily due to the acquisition of Bullion-Based Loan portfolio. That concludes my prepared remarks. I will now turn it back over to Greg to talk about some of the progress we've been making on our key operational initiatives, as well as our outlook for 2017. Greg?
Thank you, Thor. Our strategic initiatives to expand our capacity and product offerings continues to gain traction. This is demonstrated by several recent accomplishments, especially the strategic investment we made in the SilverTowne Mint, a leading producer of fabricated silver products. In the 12 months prior to our investment, SilverTowne produced approximately 12.5 million ounces of silver. We have already made great strides in expanding that production and are well on track to achieve our first-year production targets of 15 million ounces
Ultimately, 20 million ounces by year three. Concurrent with our investment in SilverTowne, we also entered into an exclusive supplier agreement with Asahi Refining USA, a subsidiary of Asahi Holdings, a global refiner and producer of precious metals. Asahi is acting as the exclusive supplier of LBMA-approved silver feedstock to SilverTowne, providing the mint with a consistent supply of silver feedstock. This enables SilverTowne to produce significantly more fabricated bullion annually, which A-Mark then distributes exclusively through Asia, Europe, and North America. This unique arrangement creates the opportunity to sell a greater amount of silver per year to fulfill the increasing demand of our existing and future customers and service a broader range of potential customers. This vertically integrated model that combines Asahi's global refining capabilities and A-Mark's industry-leading marketing and distribution network is truly unprecedented in the industry.
In addition to increasing our capacity and distribution, we are leveraging the mint's long-standing fabrication capability. Over the years, SilverTowne has developed an extensive coin die portfolio that is helping us expand our higher-margin custom coin programs, including introducing new custom products for individual customers. Along that line, our platform of custom coin programs continues to be an increasingly meaningful contributor to our core business and margin enhancement. These products typically carry higher margins and are being sought after by many customers because of their unique and highly differentiated nature. In fact, during the first quarter, we sold more ounces of custom gold products than we ever have before. The success of our custom coin programs is the reason we continue to expand this growing part of our business, which now has a record 62 active programs currently in place.
This number is up 55% from the 40 active programs we had at the end of Q1 last year. These programs continue to be well-received in the market, as demonstrated by their strong sell-through. We are working hard with our strategic partners and SilverTowne Mint to meet the growing demand. In addition to our expanding custom coin programs, during the first quarter, we completed the consolidation of our wholesale operations into the 17,000 sq ft logistics facility in Las Vegas. By consolidating those operations into one primary location under our control, we have reduced dependence on third-party service providers while enhancing our quality control, reducing operating expenses, and ensuring a more vertically integrated business model. This model provides for a range of products and services, including turnkey logistics to our customers engaged in the retail business.
We provide these customers a one-stop shop for financing, hedging, inventory handling, storage, and seamless drop shipping directly to their own retail customers. A key objective in fiscal 2017 is to accelerate the expansion of our turnkey logistics services. Another focus this year is on expanding long-term secured storage at the facility. In particular, IRA custody is a growing area within the precious metal storage. One reason this is an attractive business for us is it involves high-margin storage fees and low turnover or product movement. The initial response from the market has been encouraging, and I'm happy to report that we recently secured our first customer in Las Vegas using this plan. We will continue to secure additional customers during fiscal 2017. Overall, the foundation of our strategy this year is on growth.
This includes growing the volume of our business, our geographic presence, and the scope of complementary products and services that we offer our expanding customer base. While similar market conditions to Q1 continue in our current fiscal quarter ending December 31st, both in terms of demand and volatility, we remain focused on executing our plan to grow our platform of high margin and turnkey solutions. In summary, we entered fiscal 2017 with encouraging momentum and now aim to leverage that product as well as our diversified business model to expand our margins and capitalize on market conditions as they arise. Now with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Ian Corydon with B. Riley & Co. Please proceed.
Thank you. I might have gotten this wrong, but I thought I heard in the prepared remarks that there was several hundred thousand dollars of one-time expenses in SG&A in the quarter. Was that right? If so, what was that for?
I believe the number was $600,000. Is it seven?
$600,000.
$600,000, Ian, in this quarter. To answer the question, we explored a business combination which would have provided geographic expansion, which we ultimately decided not to pursue at this time. The related costs in our due diligence of that combination were all incurred in this quarter.
Got it. In terms of SilverTowne, you did say you're well on your way to hitting your 15 million ounce target for this year. Can you get to 20 million ounces in 2018, or is there some reason why that would probably not occur until 2019?
I don't want to overpromise and underdeliver, but we think there's a good shot we could hit that number in 2018. I hope we don't have to wait till 2019, but like a lot of things, we're a little bit reliant upon market conditions and what the price of silver actually is. If you told me silver was going to be $28 or $14, the chances of us hitting 20 million ounces in a year would be affected by either of those numbers. Remember that there's an overall amount of dollars spent on these products, and if the price of silver is lower, we have to make a corresponding higher number of ounces to absorb that demand. There's a number of factors that go into it.
I think the most important thing to note is that if the market demanded 20 million ounces next month, we believe that with our supplier agreement from Asahi, as well as our distribution and logistics capabilities out of Las Vegas, that we would be able to produce and ship 20 million ounces next quarter if the market allowed us to. There are a number of things we're trying to do outside of market conditions, which is growing the number of products that we can produce there and bring the quality of the production up so that we can produce some higher quality products out of there that, absent of market conditions, will allow us to grow the ounces we produce. There's a couple of ways to get to 20 million ounces. It's just a function of whether those ways come together at the same time.
That'll depend on how fast we get there. Ultimately, we're going to get there.
Okay. You mentioned that market conditions are continuing to be similar into the December quarter. Should we read that to imply that your run rate of ounces sold so far this quarter is kind of similar to how it looked in the September quarter?
Yeah, I think you could read it that way. I think the last few weeks, we've had a couple of opportunities in the last, what's it been now? It's been about four weeks. Four or five weeks. We had a pretty good drop in price the first week in October, where we had gold and silver make a fairly significant retreat. A lot of that had to do with some of the election news. We saw a very immediate response from a demand side when we had that drop in early October, the first week of October. Then kind of vice versa, the last week to 10 days, you've had a little hiccup in the stock market leading up to the election, and you had gold and silver prices run up a little bit more from those early October lows.
Again, and in this case, I think the risk-off mentality out there the last seven to 10 days has actually affected our business and our ounces a little bit to the upside. We'll see what happens here following tomorrow's election, but we feel like from what we know now, 30 days into the quarter, that the conditions are fairly similar to what we saw in Q1 from a macro perspective.
Okay. Last question is just on the tax rate. Should we be looking for about 40% for this year, or could it be a lower number?
We're forecasting a lower number. This is Cary speaking. I think we've been around 40%. Our income's down a little bit, we're getting some benefit from a little bit lower federal rate. We also are not getting hit with any permanent differences like we have in the past, too. I think we're looking at between a 35%-36% rate for the year. That's what we're forecasting right now.
Got it. Thank you.
Once again, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Greg Eisen with Singular Research. Please proceed.
Thanks, and good afternoon.
Hello.
Hi. Could you first repeat the number of custom programs that you have going on now versus the prior quarter? I missed that. Had some noise on that.
We have 62 going on right now, and we had 40 a year ago.
62 now versus 40 a year ago.
Yeah.
You had said that demand looks good for those custom programs. You said that, I guess this is the highest volume quarter for custom program demand products? Did I hear you correctly?
In gold, yeah. Not in silver, but in gold. We have some gold products that have done quite well. We make a little less money on gold, but the fact that we have gold products out there in the marketplace, we're optimistic that that will continue.
Okay. It was a record quarter for gold, but not necessarily for the silver products.
Correct.
Got it.
A record number for different types of silver products, just not a record for ounces.
Got it. Can you talk about the % of sales that's coming from custom products now versus just pure bullion? Is that something you can disclose?
We don't generally discuss it. We're trying to get more information out there on these products. For right now, we're not breaking it out, or we're not using it as a metric that we're looking at.
Understood. I just thought I should ask. Could you talk about what was the average spot price of gold and silver that you saw, that you realized in the quarter compared to last quarter?
Yeah. Let me get that up. We have it right here. In the September-ended quarter, the average price of gold was $1,352, and in the June 2016 ending quarter, it was $1,274. It was up in September. It's important to note that, as I said earlier, in the first week of October, we had a retreat down to about $1,260, $1,250, and then now two days ago, it was back up to $1,300 and is now back today down to about $1,275. On the silver side, in the September 2016 ending quarter, we averaged $20. That was up from $17.31 in the June 2016 quarter. If you go back a year ago, you had silver, September 2016, again at $20, and back in September of 2015, you had it at $15.82. On gold, $1,352 this September, back to $1,148 in September of 2015.
$1,148.
A year ago.
Okay, got it.
We're up. Most of the increase occurred in the January, February, March of calendar year 2016. You had a fairly big move up in gold and then same in silver.
Got it. In the remarks, your program for storage for customers, specifically storing IRA investments in precious metals for customers.
Sure.
In doing that storage for customers, is that really a retail sale or a wholesale sale? Would you be selling that service to me as an individual or to, say, TD Ameritrade as my broker of record for my IRA when I go through them and say, "Buy me 100 ounces of gold, park it with A-Mark.
Right. You would not direct it. There's a trustee that directs it. There's a number of trustees in the U.S. that manage IRA storage for precious metals, and there's a number of different secured storage facilities around the country where IRA accounts can be stored. In your scenario or your example, you would have a trustee that manages it, and TD, your broker, would contract with a trustee to manage it. That trustee would then bring a number of individual accounts that would be segregated as they arrived in Las Vegas, and we would store them under your name, with the custodian managing the overall movement of those metals. Whether you decide to add to them or you decided to liquidate them, the trustee would send us instructions to do that.
Okay.
For us, having that business also does open up the possibility that an individual that might have an IRA account stored with us, they may also have metal owned individually, and they may choose to come to us and open a retail storage account with A-Mark in Las Vegas. That would be housed in a different area of the facility, and it would be managed directly if you were, let's say, to open an account with A-Mark for storage through our TDS-
My name.
Right.
With my own, say, taxable investment as opposed to an IRA investment. Essentially, I would be contracting with TD as my IRA company. They're hiring a manager who's the trustee.
The trustee is contracting with you, A-Mark, to actually be physical custodian.
Correct. The trustees that are out there that you would have an option with or that TD would have an option with, none of them are currently in the storage business. They contract with other storage facilities.
Okay, they're not in the storage business.
Well, yeah. They're not a trustee and own their own storage business. They contract with somebody like us or one of the other storage providers. There is a, like I said, there is like three people in the chain between TD, the IRA trustee, and the actual storage facility.
Good. When you say you made a sale this past quarter, that was in the September quarter, was that selling to one of these trustees to do business with them for essentially their clients?
Well, that's a good question. I will say that what I outlined earlier in the prepared script was that an IRA trustee did move metal to our facility this quarter. Yes, we did do that. The other way that we touch an IRA customer is that there are companies out there that are customers of A-Mark's that will buy the metal from A-Mark. It will go into an individual IRA account. The trustee, at that point, isn't involved in the actual procurement or sale of the metal. Again, they're just the trustee once the metal is in an individual's account. We do make sales with customers that sell into IRAs. In this case, you used TD as an example. It may be another retail bullion dealer who is providing metal to individuals to put into their IRAs, but the trustee would still be the same.
That trustee that we sell the metal to the customer, that metal may or may not go to the Vegas facility. It may go to one of the competing storage facilities. There's a few different aspects and routes that A-Mark metal can flow into IRAs.
Okay.
What we were referring to was specifically that we have been able to work with a trustee to move some individual IRA storage accounts to Las Vegas. That is a first this quarter, whereas we have been selling physical metal into IRA accounts through our customers for many years.
Got it. I think I understand what you're driving at here. Okay. I'll let someone else go right now. Thanks.
Thank you. I would now like to turn the floor over to Greg Roberts for closing comments.
Are we sure there's no other questions?
There are no further questions.
Okay. Thank you for joining us today. I especially want 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, and thank you again for joining us.
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 markets, and other business, economic, financial, and governmental risks as described in the company's public filings with the Securities and Exchange Commission. The words should, believe, estimate, expect, intend, anticipate, foresee, plan, and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they are made.
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. I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us today for A-Mark's fiscal Q1 earnings call. You may now disconnect.