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Edited Transcript of CLCT earnings conference call or presentation 7-Feb-18 9:30pm GMT

Thomson Reuters StreetEvents

Q2 2018 Collectors Universe Inc Earnings Call

SANTA ANA Feb 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Collectors Universe Inc earnings conference call or presentation Wednesday, February 7, 2018 at 9:30:00pm 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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Presentation

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Operator [1]

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

With us from today's 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 up the call 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 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 like to turn the call over to Joseph Orlando. Please go ahead, sir.

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

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Thank you, and welcome to today's second 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 third fiscal quarter of the year. As is usually the case for our company, due to the seasonality of the business, the second quarter proved to be a slower one overall. Service revenues in the second quarter were down year-over-year to $14.1 million from $17.8 million, a 21% decline from a year ago.

Our primary division showed a decline of 34% in our coin business, but an increase of 14% in our trading card and autograph business from the previous year. Our U.S. coin business experienced a slowdown in each major segment. Those 3 key areas are bulk, shows and vintage, with the latter 2 services closely related. In calendar 2017, the United States men had their slowest year in sales since 2007 and Collector interest or the lack thereof had a direct impact on our bulk service. American Eagle Silver bullion sales, which make up the lion share of bulk submissions, dropped a reported 52% from 2016 totals. The year-over-year decline in gold sales was even more dramatic. The poor sales numbers at the Mint did not have an immediate impact on our company last year, but the lack of consumer demand, eventually, took its toll as dealers had to shelf higher amounts of inventory.

Coupled with the general drop in Collector interest with the additional issue of coin quality. Some of the 2017 releases, such as the limited-edition Silver Proof Set and American Liberty Silver Medals were manufactured with conditioned flaws that prevented a good portion of them from achieving desirable grades. And this further complicated the bulk business in the quarter. Q2 also saw a decline in our vintage and show coin services, which usually follow the same track. This was primarily due to an overall softening in the market. The good news is that the vintage market has shown signs of improving, as evidenced by stronger auction sales recorded in the first few weeks of 2018.

In Q2, service revenues from all international coin operations was 16% of total company service revenues. Once again, most of the international revenue was generated by the combination of our Shanghai and Hong Kong offices, which finished the second quarter with approximately $1.87 million in revenue versus $3.94 million in the second quarter a year ago. While the year-over-year comparison is certainly challenging, it is important to put the recent international performance into the proper perspective.

During fiscal 2017, our Shanghai offices received their first significant submission of coins in Q2, which was also the first quarter our overseas office was staffed with the capacity needed to handle this level of volume. This year, that volume arrived a quarter earlier in Q1. So through 2 quarters, it is important to note that this part of the business is up from $5.1 million in fiscal 2017 to $6.3 million in fiscal 2018, an increase of 24% despite the year-over-year Q2 decline.

Our growth has been positive in China, but this business has also proved to be, somewhat, lumpy as we try to gain more and more traction overseas. Our PSA and PSA/DNA divisions finished Q2 with another record top and bottom line performance for the quarter, finishing with $4.6 million in revenue versus approximately $4.1 million a year ago. Through 2 quarters of fiscal 2018, this segment of our business is once again on track for another record year.

Returning to our overall business. Gross profit margins were 54% for the quarter, which was down from 64% a year ago.

Our operating income for Q2 was $0.2 million compared to $4.5 million in the previous year. Income from continuing operations was $70,000 for the second quarter of fiscal 2018 or $0.01 per diluted share, down from $0.34 per share in the prior year. As many of you know, Collectors Universe moved into a new facility during the month of November. While a move of this magnitude created some disruption during Q2, the move went well and we are now completely settled into a facility that provides the proper layout and space for long-term growth.

Now let me turn it over to Joe Wallace for a more detailed review of our financial performance in Q2. 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 second quarter of fiscal '18.

For the second quarter, the company generated service revenues of $14.1 million, earned operating income of $240,000 and after-tax income from continuing operations of $70,000 or $0.01 per diluted share. This compares to revenues of $17.9 million, operating income of $4.5 million and after-tax income from continuing operations of $2.9 million or $0.34 per diluted share for the second quarter fiscal '17.

For the first half of the year, the company generated revenues of $33.8 million, earned first half operating income of $4.8 million and after-tax income from continuing operations of $3.7 million or $0.42 per diluted share. This compares to revenues of $33.6 million, operating income of $7.3 million and after-tax income from continuing operations of $4.5 million or $0.53 per diluted share in the first half of fiscal '17.

Based on the above numbers, revenue declined by 21% in the second quarter, but was substantially unchanged for the first half of the year. Our cards and autograph revenues were up $0.6 million end of second quarter, a $1.2 million for the 6 months, representing increases of 14% and record second quarter and first half revenues for that business.

Coin revenues declined by $4.4 million or 34% in the second quarter and $0.9 million or 4% in the first 6 months.

China coin revenues decreased by $2.2 million or 59% in this year's second quarter, which was due to seasonality in that business. Whereas for the 6 months, China revenues increased by $1.0 million or 21%. Revenues generated by our U.S. coin business declined by $2.3 million or 27% in the second quarter and $2.2 million or 13% in the 6 months, reflecting a general slowness in the coin market in this year's second quarter.

Our overseas operations, including China, were 16% and 21% of total revenues in the second quarter in 6 months, as compared to 24% and 17% in the same periods of the prior year.

Despite the lower revenue, our coin business represented 61% and 65% of revenues in the second quarter and first half of fiscal '18 and reflects the continued importance of our coin business for our overall financial performance.

As previously disclosed, our second fiscal quarter is typically our seasonally slowest quarter of the year in the U.S. due to the winter holidays that occur in that quarter and the decline in our U.S. coin revenues in this year's second quarter reflected generally lower submissions.

The lower world revenues and, in particular, China, reflected our previously discussed expectation, that our China revenues in this year's second quarter would be lower than this year's first quarter due to the seasonal nature of that business that we've experienced over the last 6 quarters.

Our third quarter is typically our seasonally strongest quarter of the year in the U.S. Although coin submissions have started more slowly than in the third quarter of fiscal '17.

Due to the seasonality of the China business and the significant impact that business had on our first quarter revenues, we don't expect total consolidated revenues in the third quarter of fiscal '18 to exceed the level of revenues generated in this year's first quarter.

The gross profit margin was 54% and 59% in this year's second quarter and 6 months as compared to 64% and 62% in the same periods of last year. The declines in gross profit margin primarily reflects the decline in coin revenues in the second quarter as a significant proportion of our direct costs are relatively fixed in the short term. Selling and marketing expenses were about 17% and 15% of revenues in the second quarter and 6 months, as compared to 13% and 14% in the same periods of fiscal '17.

In dollar terms, selling and marketing expense increased by $0.1 million and $0.4 million in the current periods and reflected increased costs incurred for payroll, travel and show cost and business development costs, primarily in support of our growing cards and autographs and China businesses.

G&A expenses represented about 35% and 29% of revenues in the second quarter and 6 months, as compared to 25% and 27% in the same periods of the prior year.

In dollar terms, G&A expenses increased by $0.4 million and $1 million in the current periods. We incurred about $0.6 million in moving and lease exit costs in this year's second quarter, in connection with the relocation of our operations and headquarters facility in November '17. In addition, we incurred higher non-cash stock-based compensation costs and higher recruitment costs in the current periods. Partially offsetting the increases in the second quarter was a reduction in performance-based incentives resulting from the lower operating results in the quarter.

Turning to our balance sheet. The company's cash position was $8.7 million at December 31, 2017, as compared to $9.8 million at June 30, '17, and $10.2 million at September 30.

Net cash used of $1.1 million in the 6 months included cash generated from continuing operations of $5.4 million and borrowings under our term loan of $3 million, offset by dividends paid to stockholders of $6 million, $3.3 million used for capital expenditures and capitalized software development costs and $0.2 million used for discontinued operations.

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 corporate purposes.

Total borrowings of $3 million outstanding under this loan as of December 31, '17. Today, we announced a quarterly cash dividend of $0.175 per share, which will be paid on February 23, 2018, to stockholders of record on February 13. 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. The Q2 summary leads us into the subject of our quarterly dividend. Several years ago, the Board of Directors made a decision to return what they believed to be excess cash to our shareholders, as the company worked hard to grow into the dividend. Our current cash position has simply entered a range that required a thoughtful review of our dividend policy.

During the last several years, investments were made in overseas infrastructure, but big -- but progress was clearly shown as international expansion has started to have a positive, material effect on our overall performance.

To ensure that our company has the requisite capital needed to continue our progress overseas and fund domestic initiatives, our Board of Directors has decided to reduce the dividend from $1.40 per share on an annual basis to $0.70 per share. We realized how important the dividend is to our shareholders, but we also need to take what we believe is the most responsible fiscal action and do what is in the best long-term interest of the company. This approach, in turn, is what's best for our shareholders.

Our cash reserves have simply come down to a level that the Board of Directors is not comfortable with, considering our global expansion goals, which extends beyond the markets we have penetrated so far. This is our greatest growth opportunity and we need the ability to comfortably fund those initiatives as they arise. Using the information available to us, both management and the Board of Directors feel the dividend reduction was placed at a sustainable level as we enter another growth phase at Collectors Universe.

Before we conclude, I would like to make a few comments on our outlook for the remainder of Q3 and the rest of fiscal 2018. Q2 was a challenging one for Collectors Universe, but much of the year-over-year decline was due to market factors in our coin business.

Through 2 quarters, Collectors Universe revenue is still slightly ahead of last year's record-setting pace. The PCGS business has started relatively slowly in Q3, but one of the hobby's greatest finds has been processed and graded by PCGS as we speak. The story of the SS Central America, or as Collectors refer to it, the ship of gold, has received global media attention in recent weeks. PCGS is currently in the process of certifying over 3,000 gold coins from this incredible find. Beyond the revenue generated from this historic submission, the value to our brand is priceless as these relics will all be offered in PCGS folders.

In addition, our focus on long-term goals have not changed. Our management team continues to build upon the foundation we have started to lay overseas. It is no secret that international expansion is a big part of our growth strategy. As we learn more about the diverse cultures and the markets outside of the U.S., we will continue to make the necessary adjustments to keep our momentum moving in the right direction. Our corporate move is now behind us and this new building has already enabled our PSA business, for example, to expand in a way that our prior facility did not allow. Sometimes, markets do not cooperate with the business, which causes temporary downturns in revenue. Our job is to hone in on the aspects of our business that we can control. This includes how we spend our time and our money. As we move forward, it is imperative that we stay hyper-focused on the projects and efforts that can bear the most fruit for the company and its shareholders. A prudent and responsible long-term approach is crucial to the success of Collectors Universe.

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) We have no questions in the queue. I'll turn it back over to you for any closing remarks.

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

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We want to thank everyone for joining us today and listening in and look forward to speaking with you at the end of Q3.

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Operator [3]

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And that concludes our call for today. Thank you for your participation. You may now disconnect.