U.S. Markets closed

Edited Transcript of CLCT earnings conference call or presentation 5-Feb-19 9:30pm GMT

Q2 2019 Collectors Universe Inc Earnings Call

SANTA ANA Feb 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Collectors Universe Inc earnings conference call or presentation Tuesday, February 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Joseph J. Orlando

Collectors Universe, Inc. - CEO, President & Director

* Joseph J. Wallace

Collectors Universe, Inc. - CFO & SVP

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe's Financial Results for the Second Quarter ended December 31, 2018. Today's conference is being recorded.

With us today from management are Joseph J. Orlando, President and Chief Executive Officer; and Joseph Wallace, Senior Vice President and 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 forecast in the 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 conference over to Mr. Joseph Orlando. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and welcome to today's second quarter conference call for fiscal 2019. I want to summarize the results for the quarter and then give you some commentary on the outlook going forward into our third fiscal quarter of the year.

Collectors Universe finished Q2 with a marked improvement over Q2 in fiscal 2018. Service revenues in the second quarter were up year-over-year to $15.7 million from $14 million, a 12% increase from a year ago. In fact, every major area of the business showed some level of improvement versus last year from modest to substantial apart from the Shanghai office in China. Our primary division showed an increase of 3% in our overall coin business and 29% in our trading card and autograph business from the previous year.

The PCGS U.S. vintage show and bulk services all produced improved revenue figures versus last year's Q2. While the year-over-year improvement in bulk was insignificant, the vintage service showed an increase of $0.3 million or 11%, and the PCGS show service was up approximately $0.4 million or 36%. This is an area of our coin business that generates our highest ASP.

Overall, PCGS U.S. was up 14% versus last year in Q2. In addition, our coin grading division reached a major career milestone by certifying its 40 millionth coin during the quarter.

PCGS international, on the other hand, produced mixed results. Our Hong Kong and Paris offices finished with record Q2 revenues. Hong Kong was up $0.1 million or 31%, while our Paris office showed an increase of $0.2 million or 43% compared to last year. The Shanghai office was down about $0.8 million year-over-year. But it is important to note that most of that decline was a product of the banking channel effect in fiscal 2018. In Q1 of fiscal 2018, the Shanghai office enjoyed a record quarter due to the high volume of submissions from the banking channel. Because of that volume, the nonbanking channel submissions were pushed into Q2. This year, since Q1 was absent any banking channel submissions, the nonbanking channel revenue was more evenly spread between Q1 and Q2. In fact, year-to-date, the nonbanking channel revenue is up 5% versus fiscal 2018. The Q2 decline in Shanghai revenues did not in any way change our long-term expansion goals, but it does mean that a reevaluation of our structure in China is warranted as we want to maximize our short-term prospects.

Turning to our PSA and PSA/DNA division. This part of our business finished the quarter with another record top and bottom line performance for Q2. The revenue figure of $6 million surpassed last year's record Q2 of $4.6 million, a year-over-year increase of $1.4 million. PSA's record-setting quarter included a new all-time quarterly high for units shipped at roughly 590,000 collectibles. Through the first 2 quarters of fiscal 2019, this part of our company is well on its way to its ninth consecutive year of top and bottom line growth. Despite continued improvements to our operational capacity, the submission backlog remains robust as we enter the second half of the fiscal year.

Returning to our overall business, gross profit margins were 56% for the quarter, which was up from 54% a year ago. Our operating income for Q2 after noncash stock-based compensation was $2.2 million compared to $0.2 million the previous year. Income from continuing operations was $1.5 million for the second quarter of fiscal 2019 or $0.17 per diluted share, which was up from $70,000 and $0.01 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 Q2. Joe?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Joe. I'll now give a brief overview of the financial results for the second quarter of fiscal '19.

For the second quarter, which is typically the seasonally slowest quarter of the year, the company generated revenues of $15.7 million, earned operating income of $2.2 million and after-tax income from continuing operations of $1.5 million or $0.17 per diluted share. This compares to the quarterly revenues of $14.1 million, operating income of $240,000 and after-tax income from continuing operations of $70,000 or $0.01 per diluted share for the second quarter of fiscal '18.

For the 6 months, the company generated revenues of $33.2 million, earned operating income of $5.0 million and after-tax income from continuing operations of $3.6 million or $0.40 per diluted share. This compares to the revenues of $33.8 million, operating income of $4.8 million and after-tax income from continuing operations of $3.7 million or $0.42 per diluted share for the first 6 months of fiscal '18.

The second quarter revenue increase of $1.6 million or 12% included increases of $1.3 million or 29% in cards and autograph revenues and a $0.9 million increase or 14% in U.S. coin revenues. The cards and autographs increase represented record second quarter revenues for that business. The U.S. coin increased represented improved revenue from trade shows of vintage coins. Total coin revenues increased by $0.3 million or 3% in the quarter despite continued softness in China revenues.

Revenues in the 6 months included $2.4 million or 24% increase in cards and autographs and a $0.7 million or 5% increase in U.S. coin revenues. The cards and autograph revenue increase represented record first half revenues for that business. Total coin revenues for the 6 months were down $3.0 million or 14% due to the lower revenues in China.

In China, the nonbanking channel revenues were up 6% in the first half of the year as we continued to build brand awareness for the long term. Total China revenues were down $0.8 million in the second quarter and $3.8 million in the 6 months due to the previously disclosed absence of banking channel revenues this year, whereas in the second quarter of first 6 months of fiscal '18 banking channel revenues were $250,000 and $3.9 million, respectively.

Our coin business represented 57% of revenues in the first half of the year and reflects the continued importance of our coin business to our overall financial performance.

As discussed on prior calls, our third fiscal quarter is typically our seasonally strongest quarter of the year in the U.S. for coins due to the release of Gold and Silver Eagles by the U.S. Mint in that quarter, we expect that trend to continue this year. In addition, we expect our cards and autograph revenues will continue to grow in a stable manner.

With respect to China, our current expectation is that we will continue to see stability in our nonbanking channel revenues in China in the second half of the year. However, we do not expect to generate revenues for the banking channel during the remainder of fiscal 2019.

The gross profit margins were 56% and 57% in the second quarter and 6 months as compared to 54% and 59% in last year's second quarter and 6 months. The higher gross profit margin in the second quarter reflects the 12% second quarter revenue increase, whereas the lower gross profit margin for the 6 months reflects the lower China revenues. As previously disclosed, there can be variability in the gross profit margin due to the mix of revenues and the seasonality of our business. On a quarterly basis, in fiscal '18, our gross profit margins vary between 54% and 62%.

Selling and marketing expenses were 16% of revenue in the second quarter and 6 months as compared to 17% and 15% in the second quarter and first 6 months of fiscal '18. The dollar increases included higher costs in our growing cards and autographs business, including business development costs incurred for a new Japanese subsidiary, partially offset by selling and marketing cost savings in other parts of the business.

G&A expenses represented about 26% of revenues in the second quarter and 6 months as compared to about 35% and 29% in the second quarter and first 6 months of fiscal '18. The dollar decreases of $0.9 million in the quarter and $1.2 million for the 6 months primarily reflected, one, the nonrecurrence in the current year periods of moving lease exit costs of about $0.6 million incurred in the 3 and 6 months ended December 31, '17 for the company's then new operations and headquarter facility; two, lower payroll-related costs of $0.3 million in the quarter and $0.8 million in the 6 months arising from staff reductions in the fourth quarter of fiscal '18 and management changes in the company's coin business that occurred in the first half of the year; and three, lower recruitment cost in the 6 months. Those cost reductions were partially offset by increased depreciation expense related to assets capitalized as far as the company's new facility and higher amortization costs for capitalized software projects.

The tax rate issue reflects an ongoing federal rate of 21%, as compared to a blended rate of 28% in the first half of last year. All periods were adjusted for excess tax benefits or deficiencies and legacy divesting of restricted stock, which are recognized in the period in which they arise.

Turning to our balance sheet. The company's cash position was $12.4 million at December 31, '18, as compared to $10.6 million in June '18 and $12.2 million in September '18. Net cash generated of $1.8 million in the 6 months included cash generated from continuing operations of $6.4 million, partially offset by cash dividends paid to stockholders of $3.4 million, $1 million used for capital expenditures and capitalized software costs and $0.2 million used to pay down the company's term loan.

On January 23, we announced our quarterly cash dividend of $0.175 per share, which will be paid on March 1, '19, to stockholders of record on February 15.

With that, I'd like to thank you for your attention. Joe?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Joe. Before we conclude, I would like to make a few comments about the close of Q2 and the outlook moving forward.

In Q2, Collectors Universe improved in several areas from a year-over-year perspective. PCGS U.S. was up $0.9 million versus last Q2, while PSA continues its record pace as this division approaches nearly a decade of consistent sustained growth.

At the very beginning of Q3, PCGS attended the annual FUN show in Florida, where the power of the PCGS brand was on full display. An 1885 Proof Trade Dollar, an extremely rare coin valued at roughly $4 million, was submitted to PCGS on-site. The coin, which was previous graded 66 by one of our competitors, received a grade of 65-plus from PCGS. The customer paid a premium on-site grading fee to have the coin crossed into our holder, knowing the coin would receive a lower grade. This is an excellent example of how desirable PCGS's seal of approval is even in the case when the grade went down on a 7-figure coin.

We are now entering our busy bulk season at PCGS when the new coins are issued in large quantities from the U.S. Mint. In addition to the traditional annual releases like Silver Eagles, the Mint has also released several different Apollo 11 coins to commemorate the 50th anniversary of this groundbreaking event, when the first 2 people landed on the moon on July 20, 1969. The new Apollo collectibles come in the form of gold, silver dollar, clad half-dollar and 5-ounce proof silver dollar coins. PCGS is partnered with the Astronauts Memorial Foundation, AMF, to provide a special label for these beautiful commemorative coins. PCGS is proud to be donating 50% of the label fee to the Astronauts Memorial Foundation. AMF, which is based at the John F. Kennedy Space Center in Florida, was founded in the wake of the space shuttle Challenger accident in 1986 to honor and memorialize those astronauts who have sacrificed their lives for the nation and the space program. This newly designed coin is one of many releases the U.S. Mint has on the schedule for calendar 2019.

Turning to our international coin business. While the Chinese market continues to be volatile from a quarter-to-quarter perspective, the long-term goals set by our coin management team remain unchanged. PCGS will continue to build its brand in that market. In the short term, our coin management team will be reviewing our existing investment overseas to determine what the appropriate cost structure should be under the current market conditions. At PSA, operational capacity continues to be the focus. Even during what has traditionally been our seasonally slowest quarter, PSA set an all-time record for units shipped in Q2. That said, there is more work to be done. An unshipped order not only represents revenue left on the shelf, it also reminds us that there is a customer behind that submission who eagerly awaits the return of their collectibles.

On the international front, PSA launched its Japanese website in November and began taking in submissions from Japan under what we call our Tokyo Express Service. This new service now joins a similar one in China, where submissions are pooled together and shipped each month back to our facility. While we don't anticipate a material contribution to PSA's overall revenue in the near term, both initiatives are low-cost ways of expanding our reach as we establish our brand in these new markets. Greater recognition of our brand along with providing education about the benefits of our services are the prime objectives as we build the business.

Since our last earnings call, we launched our new Set Registry achievement program for both PSA and PCGS. Commonly referred to as gamification, the program's purpose is to increase user engagement. Participants on the Set Registry can earn points, digital awards and be recognized for their accomplishments as they build and improve their collections. As a reminder to our listeners, the Set Registry is arguably the single most powerful tool our company uses to stimulate core submission activity and build brand loyalty.

This website venue is home to well over 230,000 registered sets of coins, trading cards, autographs and more. Here hobbyists from all over the world share and compete with one another to see how their prized collections stack up against the best in the business. Each collection is ranked in its specific category by attributes like completion percentage and GPA, amongst other things.

While joining the registry is free to the users, the only way one can place to have their collectibles certified by our company. As I explained on our previous earnings call, it's a very simple formula. The more engaged the collector is on the registry, the more likely they are to be active. The more active a collector is, the more likely they are to buy. The more they buy, the more dealers will submit to us to satisfy that demand. We are excited to add another layer of fun to this critical element of our submission and branding machine. So far, the response to our new program has been overwhelmingly positive since the launch. Furthermore, it's also important to note that this is merely Phase 1. As we observe user activity and receive more feedback from our loyal customer base, our intent is to further enhance this key driver of our business.

Finally, after our corporate move took place a little over 1 year ago, our staff has worked hard to knock down the walls between our 2 main divisions in hopes of creating a more efficient and cohesive unit. The cross-training and blending of certain departments in our operation took place over the past year, which gives us the flexibility to move resources to where the greatest need is, from receiving to ceiling.

The plan to eliminate the silo effect continues and has now reached other support departments such as customer service. The better Collectors Universe works as a unified team, the better each business can perform. Our management team is very excited about the new year as we continue to unveil new programs in addition to improving our operation and services. 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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we currently have no questioners in the queue.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. We want to thank everyone for joining us today and look forward to speaking with everyone next quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's presentation. You may now disconnect.