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DGSE Companies Inc. (NYSEMKT:DGSE)

Q2 2013 Results Earnings Call

August 13, 2013 4:30 PM ET

Executives

Brett Maas - Hayden IR

Jim Vierling - Chairman, President and CEO

Brett Burford - Chief Financial Officer

Dusty Clem - Chief Operating Officer

Analysts

Chris Doucet - Doucet Asset Management

Neal Feagans - Feagans Consulting

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the DGSE Companies' Incorporated Second Quarter 2013 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to our host, Mr. Brett Maas. Please go ahead, sir.

Brett Maas

Thank you. The call today will be hosted by Mr. Jim Vierling, Chairman and Chief Executive Officer, President of DGSE Companies. Joining Jim are Mr. Brett Burford, the company's Chief Financial Officer; Mr. Dusty Clem, Chief Financial, I’m sorry, Chief Operating Officer. Following management's discussions, there will be a formal Q&A session open to all participants on the call.

Before we get started, I'm going to review the Safe Harbor statement. Some of the information discussed in this call, particularly our revenues, store opening and operational target are forward-looking statement.

As based on information as of today, August 13, 2013 and contains forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as DGSE's SEC filings.

With that out of the way, I'd like to turn the call over to Jim Vierling, Chairman and CEO for opening comments. Jim, the floor is yours.

Jim Vierling

Thanks everybody for joining us. After our prepared remarks, we will look forward to answering your questions. To begin, let’s go over the agenda for today's call.

First, I'll start by giving a brief summary of the second quarter of 2013. Second, Brett Burford, our CFO will go over our financial results for the second quarter and year-to-date. Next, I'll give you an update of some additional initiatives we are pursing going forward, and finally, Brett, Dusty and I will be glad to take your questions.

During the second quarter of 2013, the volatile macroeconomic environment persisted as the price of gold continued to decrease. The industry experienced unprecedented decline in gold prices, in fact the price of gold decline more in the second quarter than it has in any other quarter in the history since gold began fully trading.

Even with this historically unprecedented decline in gold prices, we’ve essentially operated at a breakeven adjusted EBITDA, excluding one-time expenses for the first six months of the year. We delivered across the Board improvements in the second quarter, which is seasonally our slowest quarter of the year.

Our revenues and profit margin were up, SG&A expenses were down and we narrowed our loss compared to 2012. More specifically, revenues for the quarter are up just over 3% led by bullion and to a lesser extent jewelry.

SG&A expenses decreased almost $800,000 from a year ago period which includes one-time charges due to the restatement and related legal matters disclosed in previous documents and filings.

Even at a negative macroeconomic environment, our second quarter revenue was up, expense were down, even while adding the incremental operational expenses of five new stores.

Overall, we reduced administrative and corporate expenses by approximately $446,000 and redeployed approximately $342,000 in operating these five new stores or a net expense reduction of $104,000 excluding one-time expenses.

Again, it is important to recognize that despite the rapid and historic decline in gold prices, our performance have improved year-over-year compared with the quarter last year when gold prices were much higher.

We’ve made great progress in our efforts to transition from a gold centered company to a more diversified retail organization, and we will continue to diversify our business going forward.

Based on the current environment and reality into the commodity markets, we are taking specific steps to increase historic efficiency and control expenses. Let me discuss a few now.

First, we are being much more selective in new store openings. As such, we don’t expect to open eight to 12 new stores this year as we originally expected. However, we do expect to have measured expense in this year in strategically important markets. For example, we just announced the opening of our second Charleston Gold & Diamond Exchange in Summerville, South Carolina, part of the Greater Charleston area.

Charleston has historically been a strong market for us where we have established and well-recognized brand in the region. We have high expectations that this store will be successful quickly since our original Charleston store is one of our highest volume in most profitable locations. This store has already opened and had a fantastic first couple of weeks.

Now we’ve opened two other stores so far this year, one in Garland, Texas as part of the Dallas-Fort Worth Metro area and one in Cummings, Georgia part of the Atlanta Metro area, early indication are that all three of these new stores will be successful.

We are being selective about new store openings, we are also carefully evaluating existing stores, in particularly we are looking closely at unprofitable stores that are primarily gold buying locations, we have committed to transitioning these stores to more comprehensive stores and comprehensive offering, as part of this evaluation, those that we don’t believe we can convert in a timely fashion will be closed.

As such, we closed two Southern Bullion Coin & Jewelry stores, one in Asheville, North Carolina and one in Oxford, Alabama so far this year. We will continue to make the tough but right decisions for the long-term benefit of the company and the shareholders.

We are also being more selective when evaluating potential acquisitions. The opportunities we are seeing now is build by only stores, where owners are hurting from the declining gold prices and just want to exit their business. Many of this change have long leases and some of these leases prevent them from selling jewelry, rare coins and bullion.

We feel that we need to buy and sell all product lines to be successful in this market. As we don’t have the potential to convert the acquisition into a location that will sell at all of our product offerings, we are passing on the opportunity.

With that update, I will now turn the call over to Brett for more in-depth look at the second quarter financial results. Brett?

Brett Burford

Thanks, Jim. I'd like to add my welcome and thanks to all the listeners on the call today. I’ll review second quarter of 2013 results and then the year-to-date results for the six months ended June 30, 2013.

In the quarter ended June 30, 2013, revenues increased by $939,000 or 3.3% to $29.5 million, compared to $28.6 million in the quarter ended June, 2012. Increases in our bullion sales were offset by decreases in scrap and rare coin sales. Jewelry saw slight increase in sales near the year. In addition, revenue from discontinued operations for Superior Galleries was excluded for the quarter ended June 30, 2013 and 2012 in the amount of zero and $1.1, respectively.

Gross profit increased in the second quarter by $124,000 to $4.1 million or 14% of revenue, compared to $4 million or 14% of revenue in the prior year quarter. Lower margin bullion sales caused to the greater share upsales in the quarter offset by improvements in margins for jewelry and scrap sales.

Selling, general and administrative expenses decreased by $793,000 or 13.4% to $5.1 million, compared to $5.9 million in the prior year quarter. This was driven primarily by a reduction in non-recurring expenses from the recent restatement and related legal matters, as well as cost reduction efforts across all areas. This reduction is partially offset by opening of five new stores over the last 12 months, which have added $342,000 in the current quarter versus the same quarter last year.

The company also incurred $214,000 and $903,000 periods of three months ended June 30, 2013 and 2012, respectively in cost associated with the recent restatement and related legal matters. The 2013 amount includes $150,000 accrued by the company and expectation of the litigation settlement.

Depreciation and amortization increased by $20,000 or 14.1% in the quarter ended June 30, 2013 to $163,000, compared to $143,000 in the prior year quarter. This increase was driven primarily by new assets related to store openings and move to our new corporate offices in April of 2013.

The company reported a net loss of $1.1 million in the quarter or $0.09 per diluted share compared to a net loss of $2.4 million in the prior year quarter or $0.20 per diluted share, an improvement of $1.3 million. In year ago quarter included a $201,000 loss from discontinued operations.

Turning to the year-to-date financials, for the six months ended June 30, 2013, revenues decreased by $1.3 million or 2.2% to $60.1 million, compared to $61.4 million in the same period last year.

Revenue increases in bullion were offset by decreased sales for scrap and rare coin. In addition, revenue from discontinued operations for Superior Galleries was excluded for the periods ended June 30, 2013 and 2012 in the amount of zero and $3.2 million, respectively.

Gross profit decreased in the first half of 2013 by $1 million to $9.7 million or 16.2% of revenue, compared to $10.7 million or 17.5% of revenue in the prior year period. The decrease in gross margin as a percentage of revenue was primarily due to a higher mix bullion sales which carried significantly lower margins in other categories.

Selling, general and administrative expenses decreased by $1.3 million or 11.7% to $10.2 million, compared to $11.5 million in the prior year period. As with the quarter, this was driven primarily by a reduction in non-recurring expenses from the recent restatement and related legal matters, as well as cost reduction efforts across all areas. Given this situation is partially offset by the opening of five new stores in the last 12 months, which have added $685,000 incremental expenses during the first half of this year.

In addition, the company has incurred $315,000 and $1.1 million during the six months ended June 30, 2013 and 2012, respectively, in professional fees and costs associated with the 2012 restatement and related legal matters.

As stated earlier, this amount includes $150,000 recruit in the current quarter by the company in expectation of litigation settlement. It’s important to note that we’ve cut loan life expenses by $1.2 million in the first six months of 2013. This excludes one-time charges of litigation and restatement and the incremental operating cost from the five retail stores.

Depreciation and amortization increased by $61,000 or 11.7% in the six months ended June 30, 2013, to $357,000 compared to $296,000 in the prior-year period. Again, this increase was driven primarily by new assets related to store openings and the move to the new corporate society in April.

The company reported a net loss of $822,000 or $0.07 per diluted share in the six months ended June 30, 2013 compared to a net loss of $1.9 million or $0.16 per diluted share in the year-ago period, an improvement of $1.1 million. A year-ago period also included $601,000 loss from discontinued operations.

At June 30, 2013, we had cash and cash equivalents of $2.7 million compared to $4.9 million at December 31, 2012. During the same period, inventories increased by $1.6 million or 11.9% as we expanded our inventory levels while taking advantage of lower commodity prices. This inventory should return during the second half as we are now poised for a strong holiday season.

Stockholder’s equity decreased 6.3% to $12.3 million at June 30, 2013, compared to $13.1 million at December 31, 2012. The company’s current ratio was 2.2 to 1 compared to 2.4 to 1 at December 31, 2012. Working capital was $9.2 million at June 30, 2013 compared to $10.3 million at December 31, 2012.

I’ll now turn it back over to Jim for some additional comments.

Jim Vierling

Thanks, Brett. I have gotten some questions in recent weeks about how the wealth or the price volatility in the gold market impacts our business. I’ll spend a few moments discussing precious metal’s price volatility.

DGSE is not just a gold company. We have a diversified business model and we continue to work to increase our diversification so as -- and not rely on any single revenue stream be it scrap or jewelry or bullion or rare coin. We are able to leverage this diversity on any one of these is doing well, shipping resources and marketing focus to align with cyclical ships in our industry.

We have used the analysis that we are a company of products that have the potential to do well at different times. When there is instability in the U.S. and world economy or other uncertainty that causes gold prices to trend up, we tend to buy more scraps.

When the economy is good, our other factors starts gold prices to decline, retail prices -- retail tends to pick up, we sell more jewelry, diamonds and rare coins. In general terms, we are positioned to do well in both good times and bad. However, when gold prices fall drastically in a short period of time and the economy doesn’t improve at the same pace which is what happened in the first half of 2013, the scrap sellers tend to dramatically slow down while the jewelry buyers stay on the side lines.

We do sell more bullion in the situation but bullion is a low-margin business compared to scrap and jewelry. So we end up making less margin dollars overall. Moderate precious metal price volatility in both direction increases activity in the stores and is good for overall business. However, rapid large declines in precious metal prices significantly slows scrap purchases and are not good for overall business.

We are committed to further diversifying our model. And I believe we have the team envisioned to be nimble and opportunistic in this changing landscape. Again, it is important to note that even while gold saw a net price drop at 25% in the quarter, we grew sales, improved margins and narrowed the loss compared to the prior year second quarter. We have continued to focus on strengthening our business to both exceed in good times and bad.

Let me discuss them on our recent initiatives. First, we have launched the test of our third-party credit source. This credit source offers the variety of financing plans including 90-day no interest. It will make it easier for customers to buy our product.

Second, we have added marketing resources to help expand the visibility and we’re trying to message that DGSE is about much more than just more. Third, we are exploring opportunities to generate incremental revenue in profits and guidance. We are always looking for ways to extract value from other parts of our business.

In addition, we are re-evaluating our expenses at a corporate level as the part of this effort as we have discussed in the last call during the second quarter leased approximately 4500 square feet of space at the headquarter of our strategic partner and majority shareholder, Elemetal, who is a multi-billion dollar global leader in the precious metal industry.

Since we consolidated our corporate operations, including administrative, finance and wholesale personnel into a single national headquarters in Dallas. This has centralized management -- this has centralized management of all the DGSE retail and internet operations, which is resulting in ongoing synergies throughout the company.

Finally, we will be launching a new corporate investor relations website during the first quarter to enhance awareness of the public entity.

In summary, 2013 has been challenging but we remain confident in our business and despite the maximum level of changes, we have shown progress. The fact that our performance has improved compared to the same quarter a year ago, even though gold prices are falling sharply in the last year, clearly demonstrates the progress we have made.

It continues to strategically deal in the right market without increasing our debt while making the right but tough decisions to close unprofitable stores. We have made expense cut across the board and continue to work on becoming more diversified. Going forward, it will be more important for us to quickly shift their focus on most of our core competencies and take advantage of changing economic conditions.

While precious metal prices may fluctuate, these initiatives will position us to be more profitable -- to be profitable even in bear markets but in those markets which should be especially (inaudible).

This concludes my prepared remarks. And we’d like to open the call to take any questions you may have at this time.

Question-and-Answer Session

Brett Maas

Operator, it is time for questions.

Jim Vierling

I think we lost our Operator. Chris, are you there?

Operator

My apologies, sir. (Operator Instructions) And our first question comes from the line of Chris Doucet with Doucet Asset Management. Please go ahead, sir.

Chris Doucet - Doucet Asset Management

Hey, guys. Good afternoon. Just one quick comment and then just a couple of questions. First of all, congratulations on a breakeven EBITDA quarter in light of the financial conditions and your seasonally adjusted worst quarter, I think your performance was actually pretty abnormal.

Jim Vierling

Thank you.

Chris Doucet - Doucet Asset Management

Couple of questions. You mentioned in your comments and this is the first time I have heard you mention this a third-party consumer financing program that you are going to be testing. Can you give us a little bit more detail on that?

Brett Burford

Yeah. We’ve never done any type of financing for our customers in the past. We had laid away which helps them buy nice pieces of jewelry that are a little bit more expensive, but we never offered financing. So, we went out and did some research on several different companies.

And we found a company that offers several different ways to finance it, but one of the thing that really caught our eye is the 90-days basically seamless cash and no interest. And we feel like this could help especially in some of the smaller markets where people don’t have the liquidity to fork out a breed of $10,000 at one time and we feel like we could really help boost our sales.

Chris Doucet - Doucet Asset Management

Okay. I think probably all shareholders agree with this if the stores that you are opening on profitable, you should open them and if stores are not profitable, you should consider closing them down. So I thought changing directions in light of changing market conditions, but how many stores do you expect to transition in -- how many stores do you expect to close down in 2013?

Jim Vierling

We are just going to continue to look at how these stores are performing and try to make the right choice. We don’t have a number. We’re just continuing working at them and if they -- if we feel they don’t have the potential to transition into a -- to be able to profit on all our different product lines and we don’t try everything we can to transition some of these smaller markets.

If we can’t, we’re going to shut them down. It is just the right thing to do for the long-term benefit of the company and its shareholders. So I won’t think it’s any huge number, but we just wanted to make sure that everybody understands we are looking at that and we are not going to -- we will make the right decision and a tough decision, it might not be the most popular decision but it is the right decision.

Chris Doucet - Doucet Asset Management

Okay. Just two more questions and I’ll step back in the queue. Do you expect to make any acquisitions in 2013 now in view of the changing economic conditions of companies in your industry?

Jim Vierling

As I try to point out in our speech here that we will continue to look at it and try to make the smart move and the right move, but we are not going to do a trend or do a acquisition just because we said we were going to or we are going to try to. As I said, we looked at several different acquisitions possibilities in the last eight months. And unfortunately we felt like these owners were just trying to get out of their businesses and has lessened an opportunity for us.

They were limited in scope of what they -- of their potential. And we just felt that it was best to pass at that time. We clearly were looking at several other ones, but with gold prices coming down dramatically as they have been it is really kind of pushed us away from most of these people there. They are not diversified nearly as well as we are and they are in trouble. And they are trying to get us to buy them while there is something still there and that is just what we found so far.

But those are the opportunities that we are seeing. If we see a great opportunity that we feel like we can enhance us in the long run, we were going to jump all over. But we are going to be smarter about it.

Chris Doucet - Doucet Asset Management

And my last question, I’ll step back in the queue, you mentioned and you have mentioned before exploring new distribution acquisition opportunities for diamonds, can you expand a little bit more on that?

Dusty Clem

Hey Chris, Dusty. Yeah, we’re historically we’ve bought or purchased diamonds over the counter from our retail clients. And it’s been mostly [math dash] to get them back out of the back door in other wholesale related transactions. We’d group them up and we’d sell them to other wholesalers and there hasn’t been a lot of real strategic utilization of that purchased asset. And frankly we haven’t done a lot of business purchasing from and selling to in even large groups of [Melee Diamonds] or GIA or EGL-certified stones.

And what we’re finding here is this is a sweet spot for us. We’ve got some real talents in the organization that knows diamonds. And we have a good reputation in that space. And we’re getting better as time goes on here and just utilizing the stones that we buy over the counter and higher profit margin sales on the backend or going out in the wholesale market and purchasing and putting things, just utilizing the skill sets we have internally.

So it’s an interesting opportunity for us, especially given the fact that the scrap markets are becoming a little more difficult and allows the staff that may utilize their time doing scrap-related transactions originally not to focus on something that’s little harder, given their current gold prices.

Chris Doucet - Doucet Asset Management

All right. I’ll step back in the queue. And Dusty congratulations to you and your operations team on a great quarter. Thank you.

Dusty Clem

Thanks Chris.

Operator

(Operator Instructions) And our next question comes from the line of Neal Feagans with Feagans Consulting. Please go ahead.

Neal Feagans - Feagans Consulting

Hi Jim.

Jim Vierling

Hi Neal, how are you?

Neal Feagans - Feagans Consulting

Good. Hey, I’ve got two unrelated questions. I saw filings somewhere or something I don’t remember where but I believe that mentioned that you’ve got a court hearing set on the lawsuit on October 21st. I was just wondering is that in your opinion, is that supposed to be kind of the final hearing, if all goes according to plan or everything gets blessed by the courts and put to bed?

Jim Vierling

Yeah. That’s exactly right. We’ve been through all the preliminary hearing. All parties are on the same page. We’ve negotiated the settlements and now just need to be blessed on by the judge. We don’t foresee any issues and it should be done at that point.

Neal Feagans - Feagans Consulting

Okay. And then my other question and I know it’s a sensitive topic but since you’ve kind of brought it forward in the news release in the comment section, can you talk just a little bit in general terms about the type of synergistic opportunities that you’re exploring with Elemetal?

Jim Vierling

You know that’s always the question that everybody wants us to talk about as you know, Neal. Really, they’re in the same business, they’re in the same building, there is a lot of different things we can do. They’re helping us in a lot of different ways, even some of the skill sets of personnel but as far as can I speak specifically of a transaction or something along those lines, I really can’t.

I’ve said this many times, I’m not part of their management team. They’re very big company with several owners that have all, the stars have to align correctly for them to really be one of those companies in with us or starting other companies with us. And at this point, there is nothing imminent. They is just always that possibility that we can do something with those guys. So I’ll check the report more but that’s the realistic answer.

Neal Feagans - Feagans Consulting

Well, I think the key is that you’re willing to put it in the news release and it is something that’s kind of on the front burner every month. So I appreciate the little bit of additional color.

Jim Vierling

Okay.

Operator

(Operator Instructions) And there are no additional questions at this time. Please continue with any closing remarks.

Jim Vierling

Thank you for your time and attention today. We look forward to updating you on our next call in approximately three months. We’ll be discussing the third quarter 2013 operating and financial results. Once again thank you and have a great day.

Operator

And ladies and gentlemen, that does conclude the DGSE Companies Incorporated second quarter 2013 financial results conference call. Thank you for your participation. You may now disconnect.

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