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

Q4 2018 Collectors Universe Inc Earnings Call

SANTA ANA Sep 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Collectors Universe Inc earnings conference call or presentation Thursday, August 30, 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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* Adrian Vincent Day

Adrian Day Asset Management - President, CEO, Treasurer, and Chairman

* Aman Raj Gulani

B. Riley FBR, Inc., Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone. Please be advised that today's call is being recorded. Thank you for joining us to discuss Collector Universe's financial results for the fourth quarter and year ended June 30, 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 like to now turn the conference 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 fourth 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 first fiscal quarter of 2019. While service revenues in the fourth quarter were down slightly year-over-year to $17.1 million from $17.9 million, a 5% decline from a year ago, several individual revenue records were set within PCGS and PSA. Our primary division showed a decline of 15% in our coin business, but an increase of 18% in our trading card and autograph business from the previous year.

The U.S. coin business started to show improved market conditions in Q4, which helped our vintage service rebound with a stronger showing after slower performances earlier in the year. And while PCGS show revenue was down compared to last year, it is important to note that there was one fewer show scheduled during the quarter. On a per-show basis, the numbers were actually up versus last year.

The U.S. bulk coin business, however, continued to be soft. Similar to Q3, the significant downturn in consumer demand for recently minted coins had a material impact on our Q4 performance, as bulk revenue was down roughly $1.6 million from the previous year. On a positive note, the international portion of our coin business saw record Q4 revenues for our offices in France and Hong Kong. Both offices combined were approximately $1.2 million versus $0.8 million a year ago.

Q4 Shanghai revenues were down from last year in the same quarter, but the office finished the year at $7.7 million versus $6.6 million in fiscal 2017. In Q4, the base business performed at about the same level as it did in fiscal 2017. So the year-over-year quarterly submissions decline can be attributed almost entirely to the banking channel. As a whole, PCGS international was up approximately $1.7 million on an annualized basis, finishing a little over $11 million versus $9.4 million a year ago. In fact, all 3 international offices established new annual highs in service revenues.

Our PSA and PSA/DNA divisions finished Q4 with another record top and bottom line performance. The Q4 revenue figure of $5.9 million represented an all-time quarterly record for the division, surpassing last year's quarterly performance of roughly $5 million. Several other PSA records were set as well. This included the most units shipped for any quarter in division history at over 565,000 collectibles. In the last 2 quarters of fiscal 2018, PSA shipped approximately 1.1 million units in total. At the close of fiscal 2018, this segment of our business eclipsed its annual revenue record set in fiscal 2017, finishing the year at $21 million versus $17.9 million last year. The Q4 finish for PSA helped the division achieve its eighth consecutive year of top and bottom line growth.

As I noted in the previous earnings call for Q3, the incoming submission pace continues at record levels for PSA. I am happy to report that our ability to process items, from receiving to sealing, has improved during the last few months. This has been a result of new hires, additional shifts and most importantly, cross-training between our primary divisions. In the past, the PCGS and PSA divisions operated as silos. Today, we have blended our operation into a more cohesive unit in areas where we feel it is appropriate to do so. This means that we can shift resources to better cope with changes in the markets we serve. Now we can move the operational capacity to where the need is, which gives us better flexibility.

Returning to our overall business. Gross profit margins were 55% for the quarter, which was down from 62% a year ago. Our operating income for Q4 after stock-based compensation was $2.2 million compared to $1.2 million the previous year. Income from continuing operations was $1 million for the fourth quarter of fiscal 2018 or $0.11 per diluted share, down from $0.12 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 Q4. 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 fourth quarter in fiscal '18. For the fourth quarter, the company generated service revenues of $17.1 million, earned operating income of $2.2 million and after-tax income from continuing operations of $1 million or $0.11 per diluted share. This compares to revenues of $18 million, operating income of $1.2 million and after-tax income from continuing operations of $1 million or $0.12 per diluted share for the fourth quarter of fiscal '17. For the year, the company generated revenues of $68.4 million, earned operating income of $9.0 million and after-tax income from continuing operations of $6.1 million or $0.70 per diluted share. This compares to revenues of $70.2 million, operating income of $13.2 million and after-tax income from continuing operations of $8.5 million or $0.99 per diluted share for fiscal '17. Based on the above numbers, revenues declined by 5% in the fourth quarter and 2% for the year.

Our cards and autographs revenues were up $0.9 million in the fourth quarter and $3.1 million for the year, representing increases of 18% for both periods and record quarterly and annual revenues for that business. Total coin revenues declined by $1.7 million or 15% in the fourth quarter and $4.7 million or 10% for the year. The $1.7 million decline in the fourth quarter primarily reflected a decline in modern coin revenues in the U.S. and China. For fiscal '18, the net decline of $4.7 million comprised a $6.4 million or 17% decrease in U.S. coin revenues due to the previously disclosed general slowness in the domestic coin market, primarily in the second and third quarters. And that decline was partially offset by increases of $1.7 million or 18% in our overseas coin revenues, which is inclusive of an increase of $1.1 million or 16% in China.

Overall, our overseas operations, including China, were 12% and 16% of total revenues in the fourth quarter of fiscal '18 as compared to 13% in the same periods of fiscal '17. Despite the lower revenues in the fiscal '18 periods, our coin business represented 59% and 63% of revenues in the fourth quarter in fiscal '18 and reflects the continued importance of our coin business to our overall financial performance.

With respect to our U.S. coin revenues, in the fourth quarter of fiscal '18, vintage revenues were about the same level as the fourth quarter of fiscal '17 and show revenues improved on a per-show basis, which may indicate that the U.S. vintage coin business is recovering. However, we continue to see lower revenues for U.S. modern coins that accompany the third quarter fiscal '19 before we see an improvement in the overall activity in that part of the coin market. In the meantime, we will be focused on maximizing individual opportunities over the next few quarters.

With respect to our China business, as previously disclosed, in February '18, we terminated the exclusive relationship at our China customer that serviced a banking channel in China, although we are prepared to continue to authenticate and grade coins for that customer on a nonexclusive basis. At this time, it is too early to predict the effect that this action will have on future submissions from that customer or how successful we will be in attracting submissions from other competing banking channel customers. However, we believe that, over time, terminating the exclusivity will ultimately enable us to increase our submissions from the banking channel in China. Our experience to date, we've got revenues from the banking channel that are generated in the first and/or second quarters of our fiscal year.

The gross profit margins were 55% and 57% in the fourth quarter of fiscal '18 as compared to 62% in the same periods of last year. Higher warranty expense and inventory reserves in the fiscal '18 periods reduced our gross profit margin by 3% in the fourth quarter and 1% in fiscal '18. The remaining decreases in the gross profit margins in the current year periods primarily reflect the decline in the U.S. coin revenues, and the significant proportion of our direct cost of revenues are relatively fixed in the short term.

Selling and marketing expenses were about 14% and 15% of revenues in the fourth quarter in fiscal '18 as compared to 13% in the same periods of fiscal '17. In dollar terms, selling and marketing expenses increased by about $0.8 million in fiscal '18 and primarily reflected increased costs for our growing cards and autographs and China businesses.

G&A expenses, excluding noncash stock-based compensation expense in all periods, represented about 25% and 27% of revenues in the fourth quarter in fiscal '18 as compared to 21% and 24% in the same periods of fiscal '17. In dollar terms, G&A expenses before stock-based compensation increased by $0.5 million and $1.7 million in the fourth quarter in fiscal '18. The fourth quarter increase primarily related to legal expense, mainly due to recoveries and lower legal fees in the fourth quarter '17. The fiscal '18 increase included moving and lease exit costs in connection with moving to our new facility, higher depreciation and amortization costs, legal costs and recruitments -- recruitment costs. Partially offsetting those increases was a reduction in performance-based incentives resulting from the lower operating results in the fourth quarter of fiscal '18.

As discussed in more detail in our public filings, noncash stock-based compensation expense was $0.5 million and $1.4 million in the fourth quarter in fiscal '18 as compared to $3.7 million and $4 million in the same period of fiscal '17. The provisions for income taxes in the current year periods reflect federal income taxes at a blended rate of 28%, arising from the Tax Cuts and Jobs Act that was enacted into law in December '17. In the fourth quarter of fiscal '18, we incurred overseas withholding taxes and finalized the write-down of our deferred tax assets to our go-forward federal rate of 21%.

Turning to our balance sheet. The company's cash position was $10.6 million at June 30, '18, as compared to $9.8 million at June 30, '17, and $9.2 million at March 31, '18. Net cash generated of $0.8 million in fiscal '18 included cash generated from continuing operations of $11.9 million and borrowings under our term loan of $3 million, partially offset by dividends paid to stockholders of $9.1 million; $4.8 million used for capital expenditures and capitalized software projects, which are inclusive of our expenditures for our new facility; 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 facility and for general corporate expenses. There were borrowings of $3 million outstanding under this loan as of June 30, '18. On July 31, '18, we announced our cash dividend for the first quarter of fiscal '19 of $0.175 per share, which will be paid tomorrow, August 31, to stockholders of record on August 17.

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 about the close of fiscal 2018 and the beginning of 2019. In fiscal 2018, Collectors Universe dealt with some adversity at different points during the year, such as a challenging precious metals market. But there were plenty of positive takeaways. Annual revenue records were set in PCGS international and PSA once again. And while the PCGS U.S. coin business went through periods of softness, our vintage and show services ended on a good note.

Earlier in the fiscal year, our corporate headquarters moved into a new facility. Having the ability to customize the operational flow from scratch, coupled with the fact that we have taken down the walls between our 2 primary divisions, will improve our efficiency and make it easier to grow our business in the future. Looking forward, segments of the U.S. coin market are showing signs of life, as evidenced by recent market activity, such as the noteworthy sale of the PCGS-certified Eliasberg 1913 Liberty Head nickel for $4.5 million this summer. In addition, PSA has continued its brisk pace into Q1 of fiscal 2019, which included a record-setting performance at the National Sports Collectors Convention in Cleveland earlier this month.

Furthermore, PSA has now officially followed in the footsteps of PCGS by starting the process of building our business overseas. We have recently hired a Business Director for Asia, Oceania, who will be focused on building brand awareness and key relationships in the region. Collectors Universe has also established a legal entity in Japan as of July 2. Japan offers an excellent combination of interest in sports and nonsports collectibles with strong hobby bases in baseball and Pokémon. In addition, PSA has signed an agreement with Shanghai Ruika, the largest trading card distributor in China. They service a network of nearly 400 full-time sales locations throughout Mainland China and host the largest hobby show in the region. The company has become PSA's first official submission center in China. Over the past 2 months, we have already started to process some test submissions directly from our new partner. This partnership will enable PSA to better serve collectors in China since the submissions will flow through an established hobby entity, one with experience dealing with transferring product back and forth between countries and dealing with customs obstacles. It is also a great way of building the brand without incurring excessive costs. Both of these actions will help PSA's brand gain more traction in these international markets.

Collectors Universe has a terrific foundation and premium brands, brands that have been built over 4 decades. As we move forward, we will continue to invest in the future and seek better ways of profitably growing the business. 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) Our first question comes from Aman Gulani from B. Riley FBR.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [2]

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So what are your thoughts on the outlook for the U.S. coin grade market for fiscal '19? And how much visibility do you have into the year?

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

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Well, I guess it depends on which segment of the market. As we noted in the call today, the vintage and show side of our business and the market itself have seemed to come back in recent months based on the market activity and the levels of grading that we are seeing at PCGS. On the bulk side of the business, so the coins coming out of the Mint, it has been soft for several months now. And we don't see any immediate signs of that changing. However, it really depends on how consumers embrace the newly minted products that come out virtually every month throughout the year. So in terms of where we stand today, vintage and show seem to be at expected levels. Modern is depressed a bit and has been for several months. And usually, if you look at the typical seasonality of our business, the quarter that sort of sets the tone for the rest of the year is Q3. So I think we're getting much better indication of where modern bulk is when Q3 comes around and we turn the corner into January.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [4]

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Okay. And what kind of top line growth are you expecting in light of U.S. coin and collectibles market and geographic expansion?

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Joseph J. Wallace, Collectors Universe, Inc. - CFO [5]

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We don't typically give forecasts. Obviously, we're focused on all aspects of our business. If you look at the effect of what happened in fiscal '18, we actually had a fairly decent decline in -- on the U.S. side of the business, but we actually ended up only having 2% decline in overall revenue. So we're focused on our international overseas markets we're in. We're focused on PSA. The coin business, as Joe just mentioned, seems to be coming back a bit in terms of vintage. So we don't give forecasts, but believe me, we're focused on all aspects of that business to ensure that we get the best performance possible.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [6]

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Okay. And how should we think about OpEx and the company -- as the company invests to expand its footprint into Asia?

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Joseph J. Wallace, Collectors Universe, Inc. - CFO [7]

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Well, I think the Asian investment -- when you say Asia, I'm assuming you're talking about the new investment in Japan. The investments there will be relatively small. If you look at the business historically, we've typically always talked about revenue being 100%. Obviously, gross profit at 60%, operating income before stock-based compensation around 20%. Obviously, we didn't achieve that this year because, as we mentioned, the coin business in the U.S. So therefore, we're not backing away from those normal -- what we'd say, normalized margins. Obviously, we got some work to do as -- based upon fiscal '18 to get back to them. But at the same time, they are the margins we'd expect for the business.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [8]

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Got it. Okay. And then last one for me, I'll pass it on. How long until China becomes a material contributor to revenue? And how big do you think that market could be if we look out 3 to 5 years from now?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO & Director [9]

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Well, I think -- I guess it depends on how you define material. I think last year was a pretty strong year. It's the best year we've had so far in Shanghai. I think it was $7.7 million from our Shanghai office. As far as what we think it could be, for the last few years our coin management team believes it has the potential to be a virtual PCGS U.S. version 2. So the market is -- there's no question about the appetite for coin collecting in China, which is why we're there. There's definitely a built-in desire for coin collecting. Our job, of course, is to turn those existing coin collectors into graded coin collectors. So we do believe quite a bit in the potential of that market and see it as potentially having the ability to rival our U.S. business.

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Operator [10]

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Our next question comes from Adrian Day with Adrian Day Asset Management.

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Adrian Vincent Day, Adrian Day Asset Management - President, CEO, Treasurer, and Chairman [11]

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I was just wondering, with the reduction in the grade -- coin grading business, have you -- are you having ongoing reductions in staff, particularly graders? And then the sort of second part of that question, if I may, I realize grading coins and grading cards are 2 different things, but would a coin grader have the facility to become a good card grader fairly quickly or not?

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Joseph J. Orlando, Collectors Universe, Inc. - CEO & Director [12]

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Well, I'd say -- I'll answer the second one first. So it's possible. Certainly, as it relates to what I would define as modern or bulk coins versus modern and bulk sort of cards, I do think there is highly specialized expertise on the vintage side of both sides of our business that is required for the job. So I think there could potentially be -- and they -- crossover there in terms of the skill set they have and in terms of identifying subtle defects, interpreting a grading standard for modern. However, on the vintage side, it requires a pretty deep and significant level of expertise. So it's important that we staff ourselves with the appropriate expertise in the -- in those specific areas. As far as your -- the first part of your question in regards to looking at, I guess, its costs, a couple of things to note there. So number one, I think one thing that is a key for our business and I think can be dangerous is, we never want to react too strongly to temporary downturns in the market because it's so hard to replace some of that expertise. So as Joe mentioned in his portion of the call today, because of some of those fixed costs, look, when there's a decline, we're going to feel it. But on the flip side, when submissions increase, we tend to get a pretty good windfall from that because of our business model. But as it relates to experts, the last thing we want to do is react too quickly, panic and downsize there when it's so hard to retain quality experts in our field. So there's no real move or thought of reducing our experts staff in the -- for the time being. However, in Q3, we talked about this a little bit on our call. We did put together an action plan to really reevaluate the rest of our company outside of the experts staff to see where we could restructure. I talked earlier today about making other parts of our operation a more cohesive unit, for example, in receiving, sealing. Look, if someone can receive a coin, they certainly can receive a card. If someone can seal a coin with training, they can seal a card. So I think over time, that will have a nice impact on our business because now we can shift those resources to where they need to be. If cards are hot at the moment and the coin market is in a slight decline, we can move those people over. The one area where it gets tricky is on the experts, as you noted. So again, our market cycle is just like most other markets, and we don't feel the need to do anything there in the -- for the time being because it is so hard to replace that expertise.

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Operator [13]

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(Operator Instructions) And we're currently showing no questions in the queue.

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Joseph J. Orlando, Collectors Universe, Inc. - CEO & Director [14]

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Thank you for joining us today, and we look forward to speaking with you at the end of Q1.

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Joseph J. Wallace, Collectors Universe, Inc. - CFO [15]

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Thank you.

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Operator [16]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.