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Edited Transcript of CLCT earnings conference call or presentation 8-May-18 8:30pm GMT

Q3 2018 Collectors Universe Inc Earnings Call

SANTA ANA May 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Collectors Universe Inc earnings conference call or presentation Tuesday, May 8, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph J. Orlando

Collectors Universe Inc. - CEO & Director

* Joseph J. Wallace

Collectors Universe Inc. - CFO

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Conference Call Participants

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* Alexander Macdonald

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe's financial results for the third quarter ended March 31, 2018. With us today from management are Joseph J. Orlando, Chief Executive Officer; and Joseph Wallace, Chief Financial Officer. Management will provide a brief overview of the quarter, and then open the call up to your questions.

Comments made during today's call may contain statements regarding the company's expectations about its future financial performance, including forecasts and statements concerning business trends and profitability that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company's actual results in the future may differ, possibly materially, from those forecasts in this call due to a number of risks and uncertainties. Certain of these risks and uncertainties, in addition to other risks, are more fully described in the company's filings with the Securities and Exchange Commission. The forward-looking statements are made only as of the date of today's conference call, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

With that, I would now like to turn the call over to Joseph Orlando. Joe?

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Joseph J. Orlando, Collectors Universe Inc. - CEO & Director [2]

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Thank you, and welcome to today's Third Quarter Conference Call for Fiscal 2018. I want to summarize the results for the quarter and then give you some commentary on the outlook going forward into our fourth fiscal quarter of the year.

After a slower Q2, Collectors Universe finished Q3 in stronger fashion. In fact, from a revenue perspective, it was the second best Q3 in our 32-year history. While service revenues in the third quarter were down year-over-year to $17.5 million from $18.6 million, a 6% decline from a year ago, keep in mind that the revenue figure from last year represented an all-time Q3 record.

Our primary division showed a decline of 16% in our coin business but an increase of 23% in our trading card and autograph business from the previous year.

The U.S. coin business continue to experience soft market conditions in Q3, which impacted the PCGS vintage, show and bulk services once again. That said, the general activity in prices realized at auctions started to pick up near the end of the quarter in the vintage segment of the market. The same cannot be said for the bulk market as sales for recently released products by the U.S. Mint have been relatively weak compared to past years. This major downturn in consumer demand had a material impact on our Q3 performance as bulk revenue was down roughly $2 million from last year.

On a positive note, the international coin business continued to grow in Q3. Our offices in France, Hong Kong and Shanghai combined for $2 million in revenue in Q3, which was up from $1.3 million a year ago. The majority of the growth emanated from our Shanghai office, which more than doubled its revenue with $1.2 million versus $0.5 million last year. Through 3 quarters, our Shanghai and Hong Kong offices have combined for $8 million in revenue this year versus $5.9 million through the first 3 quarters of fiscal 2017.

Our PSA and PSA/DNA division finished Q3 with another record top and bottom line performance for the quarter, finishing with $5.4 million in revenue versus approximately $4.4 million a year ago. The Q3 revenue figure represented an all-time quarterly record for the division. Several other records were set as well. This included the most units shipped for any quarter in division history at over 525,000 collectibles. The record-setting quarter helped PSA reach another major milestone as the division certified its 30 millionth collectible since opening its doors in 1991.

Through 3 quarters of fiscal 2018, this segment of our business is on track to surpass its annual revenue record set in fiscal 2017. At the close of Q3, PSA's total revenue was approximately $15.2 million for the fiscal year versus $13 million during the same period a year ago. The incoming submission pace has been brisk for PSA, so our focus has been on expanding operational capacity to handle the surge in business. We are committed to increasing output using a combination of new hires, cross-training, additional shifts and technology to improve efficiency.

Our brand is as strong as it has ever been. Just a few weeks ago, a PSA Mint 9 1952 Topps Mickey Mantle baseball card sold for an auction record $2.88 million. It became the highest price paid for any card ever made other than the T206 Honus Wagner. The fact that the last PSA Mint 9 Mantle sold for $282,000 in 2006 is an example of the tremendous gains that some high-end iconic sports collectibles have generated in the past 12 years. While the excitement about our market and brand strength is evident, we need to adjust to the new level of demand to further grow the PSA business and satisfy our customer base.

Returning to our overall business. Gross profit margins were 55% for the quarter, which was down from 60% a year ago. Our operating income for Q3 was $2 million compared to $4.7 million the previous year. This was mainly due to the decline in U.S. coin revenues. Income from continuing operations was $1.5 million for the third quarter of fiscal 2018 or $0.17 per diluted share, down from $0.35 per share in the prior year.

Now let me turn it over to Joe Wallace for a more detailed review of our financial performance in Q3. Joe?

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Joseph J. Wallace, Collectors Universe Inc. - CFO [3]

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Thank you, Joe. I'll now give a brief overview of the financial results for the third quarter of fiscal '18. For the third quarter, the company generated service revenues of $17.5 million, earned operating income of $2 million and after-tax income from continuing operations of $1.5 million or $0.17 per diluted share. This compares to revenues of $18.6 million, operating income of $4.7 million and after-tax income from continuing operations of $3 million or $0.35 per diluted share for the third quarter fiscal '17.

For the 9 months, the company generated revenues of $51.3 million, earned operating income of $6.7 million and after-tax income from continuing operations of $5.2 million or $0.58 per diluted share. This compares to revenues of $52.2 million, operating income of $12 million and after-tax income from continuing operations of $7.5 million or $0.87 per diluted share for the 9 months of fiscal '17.

Based on the above numbers, revenue declined by 6% in the third quarter and 2% in the 9 months.

Our cards and autograph revenues were up $1.0 million in the third quarter and $2.2 million for the 9 months, representing increases of 23% and 17% for the quarter and 9 months and representing also record quarterly and 9-month revenues for that business.

Total coin revenues declined by $2 million or 16% in the third quarter and $3 million or 8% in the 9 months. China coin revenues increased by $0.7 million or 136% in this year's third quarter and $1.7 million or 33% in the 9 months as we continue to see greater brand acceptance in that region. Revenues generated by our U.S. coin business declined by $2.8 million or 24% in the third quarter and by $5 million or 17% in the 9 months, reflecting the previously disclosed general slowness in the U.S. coin market in this year's third quarter.

Our overseas operations, including China, were 11% and 18% of total revenues in the third quarter and 9 months as compared to 7% and 13% in the same periods of the prior year. Despite the lower revenue, our coin business represented 62% and 64% of revenues in the third quarter and 9 months and reflects the continued importance of our coin business to our overall financial performance.

Notwithstanding our cards and autograph business generating record quarterly and 9-month revenues and our China business generating record third quarter and 9-month revenues, we are continuing to experience a challenging U.S. coin market. Past history has shown that after a period of slower revenues, the U.S. coin market typically rebounds. However, at this point, it is too early to determine when this will occur. Furthermore, our third quarter is typically our seasonally strongest quarter of the year in the U.S.

With respect to our China business. As previously disclosed, we terminated the exclusive relationship with our China customer [conservative] banking channel in China. Although we are prepared to continue to authenticate and grade coins for that customer on a nonexclusive basis, it is too early to predict the effect that this action will have on future submissions from that customer. However, we believe that, over time, it will ultimately enable us to increase our submissions from the banking channel in China. Our experience to date is that revenues from the banking channel are generated in the first or second quarters of our fiscal year.

The gross profit margins were 55% and 58% in this year's third quarter and 9 months as compared to 60% and 62% in the same periods of last year. The declines in the gross profit margins primarily reflects the decline in coin revenues in the current year periods as a significant proportion of our direct costs are relatively fixed in the short term.

Selling and marketing expenses were about 14% and 15% of revenues in the third quarter and 9 months as compared to 12% and 13% in the same periods of fiscal '17. In dollar terms, selling and marketing expenses increased by $0.3 million and $0.7 million in the current periods and primarily reflected increased costs of our growing cards and autographs and China businesses.

G&A expenses represented about 30% of revenues in the third quarter and 9 months as compared to 23% and 25% in the same periods of the prior year. In dollar terms, G&A expenses increased by $0.9 million and $1.9 million in the current periods.

We incurred higher noncash stock-based compensation costs and depreciation and amortization costs in the current year periods and moving and lease exit and recruitment costs in this year's 9 months. Partially offsetting those increases were reductions in performance-based incentives, resulting from the lower operating results in the quarter and 9 months.

Turning to our balance sheet. The company's cash position was $9.2 million at March 31, 2018, as compared to $9.8 million at June 30, 2017, and $8.7 million at December 31, 2017. Net cash used of $0.6 million in the 9 months included cash generated from continuing operations of $8.5 million and borrowings under our term loan of $3.0 million, offset by dividends paid to stockholders of $7.5 million, $4.4 million used for capital expenditures and capitalized software costs and $0.2 million used for discontinued operations. In this year's third quarter, we paid about the $0.8 million in remaining disbursements for the new facility.

In September '17, the company obtained a 5-year $3.5 million unsecured term loan to fund costs for our new business operations and headquarter facility and for general and corporate purposes. There were borrowings of $3 million outstanding under this loan as of March 31, 2018.

On May 1, we announced a quarterly dividend of $0.175 per share, which will be paid on May 25 to stockholders of record on May 16.

I will now hand the call back to Joe.

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Joseph J. Orlando, Collectors Universe Inc. - CEO & Director [4]

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Thanks, Joe. Before we conclude, I would like to make a few comments on our outlook for the remainder of Q4 and the rest of fiscal 2018. Q3 represented a better performance for Collectors Universe versus Q2, but our company still has a lot of work to do.

In Q3, 2 key actions took place that we believe will help prioritize our focus and improve our performance in the long term. In February, our management team participated in a 2-day off-site strategic planning session. This session proved to be productive in several ways, but the primary benefit was to establish and agree upon the priorities that will best serve our company, customers and shareholders.

Profitably growing a company is the goal of any organization, but the key is to zero in on the services and projects that can bear the most fruit for all interested parties. With over 3 decades of experience under our belt, we have a great understanding of what needs the most attention in our unique business. In addition, our management team instituted an action plan, which included a restructuring of the organization. This restructuring will not only help make our company a more cohesive unit from an operational perspective, but it should provide about $2 million in annual savings once complete. While our coin business still finds itself amid a softer overall market, the goal is to position ourselves for growth when and where the market is cooperative. We have opportunities both domestically and internationally.

PCGS has taken the lead in global expansion, which has helped Collectors Universe reach a new level of revenue in recent years, but there are opportunities for PSA as well. PSA has already started to establish relationships and hire local talent to further our brand recognition in Asia. There is great interest in sports and nonsports collectibles, ones that we authenticate and grade in Asia and throughout the world. This includes everything from baseball and basketball collectibles to Pokémon and Magic: The Gathering cards in various regions. Just like PCGS, we need to introduce our powerful PSA brand and value proposition to the rest of the collecting world. Collectors Universe has been very successful, but we can improve our discipline as we move forward. That discipline should help give us the best opportunity to profitably grow this company and provide better returns to shareholders. Of course, all our expectations are governed by several factors not in our control, such as the price of precious metals, the market for collectibles and the overall state of the economic climate primarily in the U.S. and the possibility of changing international trade policies worldwide.

Thank you for joining us today, and I look forward to speaking with you next quarter. Now I would like to open the call to any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Alexander MacDonald with Cowan Asset Management.

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Alexander Macdonald, [2]

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I'm wondering if you've seen any U.S. coin resubmission volume changes noticeably over the past few years.

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Joseph J. Orlando, Collectors Universe Inc. - CEO & Director [3]

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Resubmission in terms of reviews, that sort of thing, so not raw submissions.

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Alexander Macdonald, [4]

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Correct, yes.

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Joseph J. Orlando, Collectors Universe Inc. - CEO & Director [5]

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No. I don't think there's been any noticeable or material decline in that portion of the business. And certainly, that is a part of the coin business. It's also part of the card business as well. But I don't think there has been any material decline at all or any noticeable decline in the reviews or resubmissions

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Alexander Macdonald, [6]

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So then, obviously, most of it's come from the raw side then?

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Joseph J. Orlando, Collectors Universe Inc. - CEO & Director [7]

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Yes. I mean, according to our management team on the coin side, one of the things over the past year that hurt the vintage side of the coin market was the lack of fresh material. We go through cycles. This is true of the card market as well. We go through cycles, where there aren't a lot of new collections that come to auction or come to market for retail, and that kind of prevents that machine from continuing, where fresh material continually comes into the market and it spreads throughout the dealer and collector community, which gives us the opportunity to grade more coins and cards. So last year, according to the coin management team, they saw the beginnings of this and it continued into 2018.

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Alexander Macdonald, [8]

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Okay, that makes sense. And then just, I guess, a bit of a bigger picture question here. So cash is one of the bigger assets on your balance, although, I guess, on a percentage basis, it's been trending downwards the past couple of years. You guys are in a pretty low capital business, both on the working capital and CapEx side, so why do you maintain that elevated cash balance?

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Joseph J. Wallace, Collectors Universe Inc. - CFO [9]

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Yes. I think as a public company, we've sort of unofficially determined that we believe it's appropriate for us to have around $7.5 million to $10 million of cash on our balance sheet, and that's where we're sort of headed. And you'll obviously recall that back in February, we decided to cut our dividend because our cash was getting a bit lower than we felt comfortable about. There's also, the variable associated with how much cash we have in China at any point in time. And sometimes, cash can get delayed being repatriated from China. So there's a couple of variables in terms of the cash line. But in general, we believe it's appropriate as a public company to have about $10 million on our balance sheet at any point in time.

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Alexander Macdonald, [10]

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And is that for potential acquisition opportunities coming up or more organic growth or just sort of for a liquidity buffer?

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Joseph J. Wallace, Collectors Universe Inc. - CFO [11]

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Liquidity buffer. It's for any potential small acquisitions. It's for expanding internationally. It's for introducing new services, things like that.

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Alexander Macdonald, [12]

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Okay. And just one more, and then I'll hop off here. Just looking at the year-to-date number for stock-based compensation, it's up. I guess it's about 3x the year-to-date number of last year, and then last year sort of turned out to be a bigger number. So I guess, what is accounting for the increase year-over-year so far year-to-date this year over last year?

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Joseph J. Wallace, Collectors Universe Inc. - CFO [13]

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There's a couple of things. One is if you spread out your numbers and look at them in terms of a quarterly basis as a trend, you'll see that in Q4 fiscal '17, we recognized a large expense for stock-based compensation at that time because it had been determined we'd met our performance goals under our old LTIP plan. So therefore, associated with the vesting of those shares and the continued investing of those shares through June of this year, that's accounting for part of the increase. In addition, back in December, late December of '17, we introduced a new long-term incentive plan for management, and the balance of the increase, for the most part, would be accounted for by that new LTIP plan.

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Operator [14]

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(Operator Instructions) And at this time, there are no questions. Mr. Orlando, I'll turn the conference over to you for any additional or closing comments.

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Joseph J. Orlando, Collectors Universe Inc. - CEO & Director [15]

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We would like to thank everyone for joining us today and look forward to speaking with you next quarter.

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Operator [16]

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Thank you. That does conclude today's conference call. Thank you for your participation. You may now disconnect.