A-Mark Precious Metals, Inc. (NASDAQ:AMRK) Q3 2024 Earnings Call Transcript

A-Mark Precious Metals, Inc. (NASDAQ:AMRK) Q3 2024 Earnings Call Transcript May 7, 2024

A-Mark Precious Metals, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the A-Mark Precious Metals Conference Call for the Fiscal Third Quarter ended March 31st, 2024. My name is Matthew, and I will be your operator this afternoon. Before this call, A-Mark issued its results for the fiscal third quarter 2024 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 home page. Joining us for today’s call are A-Mark’s CEO, Greg Roberts; President, Thor Gjerdrum; and CFO, Kathleen Simpson-Taylor. Following their remarks, we will open the call to your questions. Then before we conclude the call, I’ll provide the necessary cautions regarding the forward-looking statements made by management during this call.

I’d like to remind everyone that this call is being recorded, and we will be made available for replay via a link available in the Investor Relations’ section of A-Mark’s website. Now, I’d like to turn the call over to A-Mark’s CEO, Mr. Greg Roberts. Sir, please proceed.

Greg Roberts: Thank you, Matthew, and good afternoon, everyone. Thanks for joining our call today. Our third quarter results continue to demonstrate the ability of our fully-integrated platform to generate profitable results even in a difficult market environment. During the quarter, we faced a combination of softened demand, premium compression, and elevated gold and silver prices, which led our traditional buyers to become sellers and provided us with an opportunity to purchase more inventory. Despite the challenging environment, we delivered $0.21 per diluted share and generated $12.6 million in non-GAAP EBITDA, including one-time acquisition costs of $2.2 million. We also increased the direct-to-consumer number of new customers by an impressive 8% compared to last quarter.

Consistent with our commitment to generate shareholder value, the company also repurchased a total of 204,396 shares of our common stock for $5 million during the quarter. As previously announced, we completed the acquisition of LPM Group Limited in February 2024 and have substantially completed the integration of LPM’s business and operations with A-Mark. LPM now has enhanced access to supplementary products and capital through A-Mark to broaden their offerings and to promote future growth. Key technology upgrades have also been added to enhance LPM’s logistics capabilities and to fully integrate LPM into AMGL’s fulfillment and shipping system. JMB has also collaborated closely with LPM to develop processes aimed at enhancing expanding LPM’s e-commerce footprint.

I’m happy to report that a month and a half or so into this, we are very pleased with the results we have seen. We also continue to advance our logistics automation initiatives at our A-Mark Global Logistics, or AMGL facility in Las Vegas. These initiatives are designed to enhance our operational efficiency, enabling us to effectively manage a larger number of SKUs as well as increased volume, taking in and shipping out more packages all the while minimizing operational costs. Now, I will turn the call over to our CFO, Kathleen Simpson Taylor, who will provide a more detailed overview of our financial performance. Then our President, Thor Gjerdrum will discuss our key operating metrics. Finally, I will provide further insight into our business and growth strategy and happily take all of your questions.

Kathleen?

Kathleen Simpson Taylor: Thank you, Greg, and good afternoon everyone. Our revenues for fiscal Q3 2024 increased 13% to $2.611 billion from $2.317 billion in Q3 of last year. Excluding an increase of $622.1 million of forward sales, our revenues decreased $328.6 million or 20%, which was due to a decrease in gold and silver ounces sold, partially offset by higher average selling prices of gold and silver. The DTC segment contributed 13% and 23% of the consolidated revenue in the fiscal third quarter of 2024 and 2023, respectively. Revenue contributed by JMB represented 12% of the consolidated revenues for Q3 of 2024 compared to 20% in Q3 of last year. For the nine-month period, our revenues increased 16% to $7.174 billion from $6.167 billion in the same year ago period.

Excluding an increase of $1.514 billion of forward sales, revenues decreased $506.9 million or 11%, which was due to a decrease in gold and silver ounces sold, partially offset by higher average selling prices of gold and silver. The DTC segment contributed 14% and 23% of the consolidated revenue for the nine months ended March 31st, 2024 and 2023, respectively. Revenue contributed by JMB represented 13% of the consolidated revenues for the nine months ended March 31st, 2024 compared with 21% in the same year ago period. Gross profit for fiscal Q3 2024 decreased 54% to $34.8 million or 1.33% of revenue from $75.5 million or 3.26% of revenue in Q3 of last year. The decrease in gross profit was due to lower gross profits earned from both the wholesale sales and ancillary services and DTC segment.

Gross profit contributed by the DTC segment represented 52% of the consolidated gross profit in fiscal Q3 2024 compared to 57% in the same year ago period. Gross profit contributed by JMB represented 45% of the consolidated gross profit in Q3 2024 compared to 47% in Q3 of last year. For the nine-month period, gross profit decreased 40% to $130.3 million or 1.82% of revenue from $216.1 million or 3.5% of revenue in the same year ago period. The decrease in gross profit was due to lower gross profits earned from both the wholesale sales and ancillary services and DTC segment. Gross profit contributed by the DTC segment represented 47% of the consolidated gross profit for the nine months ended March 31st, 2024 compared to 56% in the same year ago period.

Gross profit contributed by JMB represented 40% and 48% of the consolidated gross profit for the nine months ended March 31st, 2024 and 2023, respectively. SG&A expenses for fiscal Q3 2024 decreased 4% to $22.9 million from $23.8 million in Q3 of last year. The change was primarily due to a decrease in compensation expense, including performance-based accruals of $2.2 million, a decrease in insurance costs of $0.9 million, and lower advertising costs of $0.4 million, which was partially offset by higher consulting and professional fees of $2.2 million related to M&A activities and an increase in information technology costs of $0.2 million. For the nine-month period, SG&A expenses increased 8% to $67.1 million from $62.4 million in the same year ago period.

The change was primarily due to an increase in consulting and professional fees of $4.8 million, including $2.8 million related to M&A activities, an increase in information technology costs of $0.8 million, and an increase in compensation expense, including performance-based accruals of $0.4 million. This was partially offset by a decrease in insurance costs of $1.4 million. Depreciation and amortization expense for fiscal Q3 2024 decreased 12% to $2.9 million from $3.3 million in Q3 of last year. The change was primarily due to a $0.6 million decrease in amortization of acquired intangibles related to JMB. For the nine-month period, depreciation and amortization expense decreased 13% to $8.6 million from $9.8 million in the same year ago period.

The change was primarily due to a $1.7 million decrease in amortization of acquired intangibles related to JMB. Interest income for fiscal Q3 2024 increased 10% to $6.7 million from $6.1 million in Q3 of last year. The aggregate increase in interest income was primarily due to an increase in other finance product income of $0.1 million and an increase in interest income earned by our secured lending segment of $0.5 million. For the nine-month period, interest income increased 18% to $19.1 million from $16.2 million in the same year ago period. The aggregate increase in interest income was primarily due to an increase in other finance product income of $1.6 million and an increase in interest income earned by our secured lending segment of $1.4 million.

Interest expense for fiscal Q3 2024 increased 7% to $9.9 million from $9.2 million in Q3 of last year. The increase in interest expense was primarily due to an increase of $1.3 million associated with our trading credit facility, due to an increase in interest rates as well as increased borrowings and an increase of $0.9 million related to product financing arrangements, partially offset by a decrease of $1.4 million related to the AMCS notes, including amortization of debt issuance costs due to the notes repayment in December 2023. For the nine-month period, interest expense increased 32% to $29.9 million from $22.6 million in the same year ago period. The increase was primarily driven by an increase of $6.9 million associated with our trading credit facility due to an increase in interest rates as well as increased borrowings; an increase of $2.5 million related to product financing arrangements, partially offset by a decrease of $1.8 million related to the AMCS notes, including amortization of debt issuance costs due to their repayment in December 2023; as well as $0.3 million decrease in loan servicing fees.

Losses from equity method investments in Q3 2024 increased 194% to $0.2 million from $0.1 million in the same year ago quarter. For the nine-month period, earnings from equity method investments decreased 55% to $3.3 million from $7.3 million in the same year ago period. The decrease in both periods was due to decreased earnings of our equity method investees. Net income attributable to the company for the third quarter of fiscal 2024 totaled $5 million or $0.21 per diluted share. This compares to net income attributable to the company of $35.9 million or $1.46 per diluted share in Q3 of last year. For the nine-month period, net income attributable to the company totaled $37.6 million or $1.56 per diluted share, which compares to net income attributable to the company of $114.5 million or $4.64 per diluted share in the same year ago period.

Adjusted net income before provision for income taxes, a non-GAAP financial performance measure, which excludes acquisition expenses, amortization, and depreciation for Q3 fiscal 2024 totaled $11.6 million, a decrease of 76% compared to $49.2 million in the same year ago quarter. Adjusted net income before provision for income taxes for the nine-month period totaled $60.1 million, a 62% decrease from $156.9 million in the same year ago period. EBITDA, a non-GAAP liquidity measure for Q3 fiscal 2024, totaled $12.6 million, a 76% decrease compared to $52.3 million in Q3 fiscal 2023. The EBITDA for the nine-month period totaled $68.2 million, a 58% decrease compared to $163.2 million in the same year ago period. Turning to our balance sheet. At quarter end, we had $35.2 million of cash compared to $39.3 million at the end of fiscal 2023.

Our non-restricted inventories totaled $579.4 million, down $66.4 million from $645.8 million at the end of fiscal 2023. And this was despite rising commodity prices, which drove an overall increase in our inventory value of over 10%, holding ounces constant from the fiscal year-end. Our tangible net worth at the end of the quarter was $391.1 million, down from $436.8 million at the end of the prior fiscal year. The reduction is due to share repurchase activity and dividends paid, combined with higher intangible assets from the LTM acquisition. A-Mark’s Board of Directors has continued to maintain the company’s regular quarterly cash dividend program of $0.20 per common share. The most recent quarterly cash dividend was paid in April. It is expected that the next quarterly dividend will be paid in July of 2024.

That completes my financial summary. Now, I will turn the call over to Thor, who will provide an update on our key operating metrics. Thor?

Thor Gjerdrum: Thank you, Kathleen. Looking at our key operating metrics for the third quarter of fiscal 2024. We sold 446,000 ounces of gold in Q3 fiscal 2024, which was down 32% from Q3 of last year and down 1% from the prior quarter. For the nine-month period, we sold 1.4 million ounces of gold, which is down 25% from the same year ago period. We sold 25.7 million ounces of silver in Q3 fiscal 2024, which was down 30% from Q3 of last year and down 3% from last quarter. For the nine-month period, we sold 82.7 million ounces of silver, which is down 26% from the same year ago period. The number of new customers in the DTC segment, which is defined as the number of customers that have registered to set up a new account or made a purchase for the first time during the period was 56,600 in Q3 fiscal 2024, which was down 13% from Q3 of last year, but increased 8% from last quarter.

For the nine-month period, the number of new customers in the DTC segment was 148,200, which is down 40% from 244,900 new customers in the same year ago period. The number of total customers in the DTC segment at the end of the third quarter was approximately 2.5 million, which was an 11% increase from the prior year. The year-over-year increase in total customers was due to organic growth of our JMB customer base as well as from acquired customer list. The DTC segment average order value, which represents the average dollar value of products ordered excluding accumulation program orders delivered to DTC segment customers during Q3 fiscal 2024 was $2,133, which was down 13% from Q3 fiscal 2023 and down 4% from the prior quarter. For the nine-month period, our DTC average order value was $2,253 which was down 6% from the same year ago period.

For the fiscal third quarter, our inventory turn ratio was 2.3, which is a 4% decrease from 2.4% in Q3 of last year and a 21% increase from 1.9% in the prior quarter. For the nine-month period, our inventory turnover ratio was 6.8%, a 3% decrease from 7.0% in the same year ago period. Finally, the number of secured loans at the end of March totaled $675 million, a decrease of 30% from March 31st, 2023, and a decrease of 6% from the end of December. While the number of secured loans decreased, our secured loan receivable balance increased over the same period, bringing the value of our loan portfolio as of March 31st, 2024, to $115.6 million, a 19% increase from March 31, 2023, and a 9% increase from December 31, 2023. That concludes my prepared remarks.

I’ll now turn it over to Greg for his closing remarks. Greg?

Greg Roberts: Thank you, Thor and Kathleen. We’ve made significant strides in our M&A growth strategy with our expansion into Asia through our acquisition of LPM. We are enthusiastic about the opportunities in the Asian market and continue to explore prospects to further expand our geographic presence and market reach that will create synergies with A-Mark’s fully integrated platform, including our reliable access to supply, successful logistics footprint, and strong customer relationships. Our commitment to generating stockholder value remains firm, and we are confident in A-Mark’s diversified and proven business model. That concludes my prepared remarks. Matthew?

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Q&A Session

Operator: Thank you. Everyone at this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Mike Baker from D.A. Davidson. Your line is live.

Mike Baker: Hey thanks guys. Just wondering if you could talk about what do you think — what in this environment caused the compression in the spreads to happen so much in the calendar first quarter? And can you talk about maybe what you saw throughout the quarter by month? Did it get worse as the month as the quarter went on? Did it get better? Any early thoughts on the fourth quarter, the calendar second quarter in terms of the spreads?

Greg Roberts: Sure. Yes. I mean I would start with just saying that probably the single biggest headwind for this particular quarter was a record number of days in the quarter that we saw all-time record prices in gold in particular. And I think it’s important to note in our press release, we described a little bit that a lot of our customers that buy new product from us turned into sellers to A-Mark. And I think it’s important to note that A-Mark is really the terminal physical metals destination for wholesale products seeking liquidity. And I think we have done a very good job in the quarter of balancing what we’re buying back from the wholesale marketplace versus what we’re selling. And I think our management of our inventory has been a key component of what we worked on in the quarter and we balanced our inventory.

We balanced our purchases and sales. And we also rotated out of inventory, which I mentioned last call, when we rotated out of inventory that we didn’t feel gave us enough upside if the market was to turn around, and we liquidated that and we’ve held on to inventory on products that we think give us more opportunity. I can say that since probably January and February and most of March, we have started to see a shift and a reduction from what we’re buying off of the wholesale market or buying back from customers versus what we’re selling. So, we have seen a bit of a shift there. And I think it’s important to remember that there are generations of people whose grandparents or parents or even further back than that held gold for their family and that you’ve gone through a period where many of the long-term holders of physical metals have been given the opportunity to monetize and create liquidity and sell material where everybody is in a profit position as it relates to your most generic lowest premium gold products.

So, I think that’s something that we worked through. I think those — and these sustained higher prices as we go through these periods, you’re going to have waves of supply/demand imbalance. I think that as it relates to the — where — what we see today and where we are today versus where we were at March 31st and your question related to what we saw in the January, February, March period by month. I would say that December — going back to December, which we talked a little bit about on our last call, and January and February, we’re probably three of the slowest months we’ve seen in a long time. I think the company performed very well. I think that as you look at how we worked through it, we — I’ve been doing this for almost 45 years or more.

And there’s not a whole lot that surprises me in the macro environment. And for the first time ever, when you have two months of really every day or every week, you have sustained new highs in spot prices, that’s just something that we haven’t seen before. I give a tremendous amount of credit to Thor and the treasury team and Kathleen in managing our liquidity and making sure that we continue to be the dominant player, if there’s metal seeking liquidity, A-Mark wants to be the one to buy it. So, I think we went through a number of — a couple of months there where we were adjusting to the new dynamic. I can say that as we turn the calendar from March to April, some significant improvements that we saw, both in demand as well as a slowdown in buybacks that we were buying back from wholesale customers.

And we did see some expanding premiums in products that have continued throughout most of April and into May. I would say the most dramatic increase in premiums that we saw over the last five or six weeks from today has been the premium on U.S. Silver Eagles and if anybody keeps track of premiums and looking at websites and checking that, you’ll see a fairly noticeable increase. And as one of our more profitable products, any increase in premiums with Silver Eagles is welcome and is going to result in higher GP for us. And what we have seen in the last three or four weeks, as we have seen before when Silver Eagle premiums tend to rise, we’ve seen other silver products, whether it be Maple Leafs or [Indiscernible] or even some of our SilverTowne products that we make at our Mint in Indiana.

We’ve seen some less dramatic, but still increases in some of those products. I would say that we’re still looking to see some premiums in gold products. Although in the last week or 10 days, we’ve seen Gold Eagles in particular, have a fairly material move in their premium. So, we are seeing the supply/demand imbalance get back in place to what we’re used to. Very optimistic, very, very much looking forward to this quarter. I feel like April was — we performed very well, and we were able to monetize a number of the positions that we were able to take over the last six months. And I think you can look at Q3 as probably one of the worst quarters we’re going to throw out there. We had our acquisition going on. We had some acquisition costs and we had what I’ve just described in the marketplace.

But we’re looking for improvement going forward from here and feel pretty good about what we were able to accomplish in our Q3.

Mike Baker: Well, thanks. Yes, that’s consistent with some of the data that we track. If I could follow-up on one thing, and you sort of answered it there at the end where you said you were able to monetize positions that you’ve taken in the last six months. But can you just highlight or remind us all the products you were able to buy in the March quarter, how — when — how long does it take for that to usually flow through and ultimately presumably benefit you because of the inventory that you guys were able to take in?

Greg Roberts: Yes, it’s not an exact science. I mean — and it doesn’t happen overnight. We balance opportunistic inventory purchases all the time. In very good markets, we pay a lot more and we pay higher premiums because we have confidence we’re going to sell them and those opportunities that we take, they monetize over three to six months after we take the physicians. I think that we view a lot of times as inventory purchase opportunities as what I would call options or call options, which is more familiar to the financial sector, where we pay a price and a premium to take a position. Most of the time are opportunistic purchases that our trading teams make, they turn out to be profitable. Depending on how fast we sell them and how long we carry the product and how the carry builds up determines how profitable those trades are going to be.

And like options, occasionally, we’ll buy inventory, we’ll pay a premium, and we will pay the carry and the trade doesn’t work out. It happens all the time, not frequently, but it does happen. And I view that a little bit as an expiring option that people buy all the time, and they believe in something, they believe in a trade and sometimes the option expires and it’s not worth anything. In our case, it’s always worth the metal content, but we do sometimes lose on the premium, and that’s just the nature of our business. We’re doing that hundreds of times a month, and we’re taking those positions, trying to use our history, use our DTC segment to be the — to have the ability to take these positions and to move them is one of the great parts of our integrated business.

And I can say that we are really — we have a great deal of momentum and volume right now in picking up new customers in our DTC segment and the inventory opportunities that we’ve been able to buy has given us an opportunity to go out and acquire new customers. And I think when you look at 8% quarter-over-quarter as it relates to new customers that we put in the release, that’s a very important number. And those customers that we’re able to bring into our funnel right now are most likely coming from new buyers, new to the market, but we’re also — we also believe we’re taking market share right now and our inventory is allowing us to do that. 56,000 new customers in the quarter at the DTC segment is a very important number for us, and we’ve tried and we’ve made sure that we’re getting as many new customers as we can and the ability to move through some inventory with these customers, I’m just very optimistic about that, and we’re seeing that pay off.

And we’ve also had a surprising increase in — towards the end of — towards the end of March and through all of April where we’re using some of our opportune inventory opportunities to reactivate customers that haven’t bought in over a year, and we track those metrics. And we’ve seen in what I consider a fairly strong headwind in the macro environment, we have been very pleased with the new customers as well as the older customers, we’ve been able to reactivate with some of our product offerings. So, I think that’s positive. And we continue to find purchase opportunities, and we’re very, very happy with our inventory at the moment.

Mike Baker: Yes. Great. Makes sense. I appreciate all the color and time.

Greg Roberts: Sure.

Operator: Thank you. Your next question is coming from Lucas Pipes from B. Riley. Your line is live.

Lucas Pipes: Thank you very much, operator. Good afternoon everyone. I’d like to understand the kind of lower gross margin during the quarter a little bit better. Is it primarily related to the premium? Or is there kind of operational leverage coming through from the lower volume side to, Greg, if you could help me understand that a bit bet and where you think those gross margins could revert to in the last fiscal quarter of the year and maybe next year? Would really appreciate any insights you could share. Thank you.

Greg Roberts: Yes, I think the gross margin percentage is a reflection of what it is in any business. It has to do with our cost of goods as well as our — what we’re able to sell material for. I think that my rather long explanation of what happened in the quarter really answers that question in that we have a fixed carry cost on our inventory that we book every month. And that carry is going to affect what the gross profit margin is. And we have to — obviously, we have to achieve a profit over and above our carry cost. If premiums compress, and we’re selling something at $1 premium that we’ve historically sold at $1.50 premium, the gross profit margin — the gross profit in pure dollars is not only going to go down, but the gross profit percentage is going to be materially affected by that.

I also think it’s important to note that when we buy back product, we oftentimes have to sell that product, both at a wholesale level or at a retail level. So, when you look at our business and you look at the DTC contribution, it’s difficult for an outsider to really see what percentage of our product is being sold wholesale and what percentage is being sold retail. As we all know, if we’re selling a Silver Eagle on JM Bullion at $4.50 a premium over spot price, but we’re selling that at a wholesale level at $3.50. The more points we can sell at JM Bullion, the better our overall gross profit is going to be any coins we don’t have to wholesale, we’re going to make more money on. And that’s a balancing act for us when we manage our inventory all the time is what percentage of product do we sell wholesale and what percentage do we hold and pay carry on so that we can achieve the ultimate DTC price for the product.

I think that in a very, very good market. If you look back a year ago and you compare what happened a year ago versus what’s happening in this quarter — this year, I would say last year, 90% of our product that we sold was being sold through the DTC segment. I would say that, that number today, a much, much higher percentage is being sold wholesale and/or monetized outside of our retailers, and that’s going to affect the gross profit negatively. As it relates to what we can do in the future, I think there’s enough data on the company to really go back and you can see what we can achieve. We just talked about what we achieved last quarter a year ago, what we achieved last quarter just two months ago. I made comments that I thought the January, February, March period of calendar 2024 was what we would view as a kind of a low watermark.

I feel like we are very optimistic and enthusiastic about what we’ve seen in the last four or five weeks. We’ll see if that plays out in May and June. But we know how much the company can generate. The company can generate huge amounts of money in a good market. The company continues to grow and grow through M&A and grow new customers and grow our credit facilities and our liquidity so that the company — if given the opportunity, the company could do 50% more in top line sales if we were given the opportunities. So, I’ve been doing this a long time and I can say that January and February were probably a little bit worse than I would have expected them to be if I was sitting in November, December, but we still performed and we still had a good return, and I feel like we’re optimistic about how this quarter is going.

Lucas Pipes: Thank you. And just a follow-up, can you expand on kind of those last four to five weeks, what do you think changed? Is it stronger demand, less supply? Just — I know you commented earlier on it, too, but if you could maybe zero in on this, I would appreciate your insights?

Greg Roberts: I will say that there are probably 100 factors that go into answering the question. I’ll try to hit on the most basic ones. If you see a high percentage of product being sold into the marketplace from retail investors who have stopped buying and have decided they’re going to take their profits at these all-time record spot prices. There’s a whole period of reckoning for that retail customer. And I think that we went through a period in January and February where a high percentage of retail customers felt like it had the last 10 years where gold tried to make a new high and then it didn’t do it, and it fell back. I think you had a high percentage of retail customers selling back into the marketplace and monetizing, putting their money to work someplace else or just taking a profit, and you had a little bit of a herd mentality there.

As gold continued to make new highs, what we’ve seen in the last five weeks is a reversal of that where you have not an increased demand, but you’ve had a similar demand, which had been going on in the last couple of months. But what you’ve seen is a drop in the buybacks or the wholesale purchases. And as the premiums have dropped over the last four months, — it’s just become less profitable for people to make product for sovereign mints to make product for private mints to make product. And so you’re slowly seeing a little bit of a decrease in the supply side of the equation, and that’s causing us to see some premium increases. And as I pointed to, the mint has been making the same amount of Silver Eagles and the allocation has been the same for the last five to six months.

And what we’ve seen is premiums go up. So, you can’t attribute that to much anything other than, as I said, buyers increasing their demand for Silver Eagles and sellers stop may be slowing down or not selling as many Silver Eagles goes into the marketplace. So, I think it’s a number of things, but I think that’s what we’ve really seen is we’ve seen a slight uptick in demand, particularly in the last few weeks of April, and we’ve seen less product that we’re buying back from a wholesale standpoint.

Lucas Pipes: That is very helpful. I appreciate that. Thank you, and best of luck.