DGSE Companies' (DGSE) CEO Matthew Peakes on Q4 2015 Results - Earnings Call Transcript

| About: DGSE Companies, (DGSE)

DGSE Companies, Inc. (NYSEMKT:DGSE)

Q4 2015 Earnings Conference Call

March 30, 2016 4:30 PM ET

Executives

Matthew Peakes – Chairman and Chief Executive Officer

Nabil Lopez – Chief Financial Officer

Analysts

Operator

Greetings and welcome to the DGSE Companies’ Fourth Quarter and Year End 2015 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Matthew Peakes, Chairman, Chief Executive Officer for DGSE. Thank you. Mr. Peakes, you may begin.

Matthew Peakes

Thank you and good afternoon. The call today will be hosted by myself and Mr. Nabil Lopez, the Company’s Chief Financial Officer. Before we get started, I’m going to review the Safe Harbor statement. Some of the information discussed in this call, particularly our revenue, operational targets and our forward-looking business plans is based on information as of today, March 30, 2016, and contains forward-looking statements that involve risk 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.

To begin, let’s go over the agenda for today’s call. First, I’ll give a brief summary of the fourth quarter and full-year 2015. Second, Nabil Lopez, our CFO, will go over our financial results for the fourth quarter and the full-year, and finally closing remarks.

The precious metals markets continue to be challenging and have had significant negative impact on our business. The price of gold remains significantly lower than prices seen between 2010 and 2012. The World Gold Council reported in 2015 that annual demand of gold decreased slightly compared to 2014 while the price per ounce declined 11.5% as compared to 2014.

The market for buying and selling of pre-owned or scrap precious metals remains extremely negative. According to the WGC, the supply of recycled gold was down an additional 12% in 2015 and is now at its lowest point since 2007. However, during the last half of 2015, the demand for gold increased by 6% and 7% as compared to the same period in 2014 and 2013 respectively. While DGSE doesn’t report specific product line information, I can say that our scrap activity has been in line with the industry trends.

And overall bright spot in the market was the demand for physical gold in the form of bullion, bars and coins, which jumped 53% compared to 2014 with demand concentrated in the second half of the year. DGSE saw many changes in 2015. Due to the market headwinds and poor store performance, we closed three stores in the DFW area and one in South Carolina. Additionally, we signed a lease for a new store in Euless, Texas replacing the existing Euless store.

Around the time of the resignation of the prior CEO and all of the independent board members, I was elected Chairman and Chief Executive Officer in September 2015. Shortly thereafter, we elected two new independent directors to the board each bringing tremendous business experience, direction and guidance to DGSE. Their election combined with the internal board members met the requirements for the NYSE market’s continued listing standards. Nabil Lopez was appointed to the board and named CFO on October 2015 following the resignation of his predecessor.

We launched the new marketing campaign in the fourth quarter of 2015 and while we would have liked to have been able to begin marketing for the shortened holiday buying season earlier and nothing have yet been planned. We were able to initiate plan, produce and place new commercials on both television and radio and in mid November we will release the new commercials highlighting our high-end jewelry, watch and bullion businesses. It was a substantial change in the message from the We Buy Gold campaign used previously. In December 2015 we signed a lease for a new store in the east side of the DFW area. And in this new location, we will consolidate up to three stores including our flagship store. We expect to open the store this summer.

With that, I will now turn the call over to Nabil for a more detailed look at fourth quarter and 2015 full-year financial results. Nabil?

Nabil Lopez

Thanks, Matthew. For the quarter ended December 31, 2015, revenues from continued operations were $16.6 million, an 8.5% decrease, compared to $18.1 million in the quarter ended December 31, 2014. As jewelry and scrap sales trended downward while DGSE’s bullion sales saw an increase as compared to the prior year quarter. The decrease in the scrap sales is consistent with the industry-wide trends. In addition, the decrease in revenues as compared to the prior quarter is due to the closing of four stores.

Gross profit from continuing operations for the quarter was $2.4 million, or 14.7% of revenue, compared to $3.3 million, or 18.2% of revenue, in the prior year quarter. The overall gross profit decrease was driven by lower sales in jewelry and scrap categories. Bullion sales were up compared to the prior year quarter.

Selling, general and administrative expenses were flat at $3 million compared to the prior year quarter. The loss from continuing operations for the fourth quarter was $915,000, or $0.07 per share, compared to an income from continuing operations of $175,000, or $0.01 per share, in the year ago quarter.

Discontinued operations related to the closure of the Southern Bullion Coin & Jewelry, in early 2014, generated income of $20,000 in the quarter due to positive adjustments in the accrued shutdown expenses, compared to income of $97,000 in the fourth quarter of 2014. The company reported a net loss in the fourth quarter of approximately $895,000, or $0.07 per share, compared to net income of approximately $272,000, or $0.02 per share, in the prior year quarter.

Turning to the full year results for the year ended December 31, 2015, revenues from continuing operations were $60.9 million compared to $70.7 million in the prior year, a decrease of 13.9%. This decrease is again primarily due to the continued industry-wide weakness in jewelry and scrap metal transactions. Our scrap business has historically been one of our largest revenue and profit drivers and in 2015 that business continued to contract in line with the industry. Bullion sales have increased slightly as compared to the prior year. In addition, the decrease in revenues as compared to the prior year is due to the closing of four stores.

Gross profit for the year was $9.7 million, or 16% of revenue, which was down approximately $3 million from $12.7 million, or 17.9% of revenue, in the prior year. The decrease in gross profit dollars is directly related to lower year-over-year sales. As a percentage of revenue, gross profit decreased due to the shift in sales mix towards lower margin bullion products.

SG&A expenses decreased $1.5 million, or 12%, to $11.1 million, compared to $12.7 million in the prior year. The decrease was achieved despite recognizing $173,000 in expenses related to the closure of three DFW area stores and one store in South Carolina, and $360,000 accrual related to the potential Texas sales tax assessment. The overall decrease in SG&A was achieved primarily through continued efforts to reduce expenses at all levels including store level operating expenses, corporate overhead and advertising expense.

Depreciation and amortization increased by $153,000, or 40.2%, to $535,000 compared to $382,000 in the prior year. The increase is due to one-time write off of assets formally utilized in four stores closed during 2015. Loss from continuing operations in 2015 was $2.3 million, or $0.19 per share, compared to a loss from continuing operations of $636,000, or $0.05 per share in 2014.

Income from discontinued operations for the year ended December 31, 2015 was $78,000 related to the closed Southern Bullion locations, compared to a loss of $3.9 million for these locations in 2014. The income from discontinued operations in the current year is due to positive adjustments in accrued shutdown expenses related to the wind down of all Southern Bullion operations. For fiscal 2014, discontinued operations also includes the write off of the $2.9 million intangible assets attributed to the Southern Bullion Coin & Jewelry trade name as well as the write off of approximately $296,000 related to the net book value of fixed assets previously utilized in Southern Bullion operations.

The company reported a net loss for the year of $2.3 million, or $0.18 per share, compared to a net loss of $4.5 million, or $0.37 per share, in the prior year. At December 31, 2015, DGSE had cash and cash equivalents of $1.8 million compared to $2.2 million at December 31, 2014. Stockholders’ equity decreased 36.4% to $3.9 million at December 31, 2015 compared to $6.1 million at December 31, 2014. At December 31, 2015 and December 31, 2014, the outstanding balance on the company’s credit facility with NTR Metals LLC was $2.3 million.

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

Matthew Peakes

Thanks, Nabil. In January of this year, we elected our third independent director, who like our other independent board members, has been a tremendous addition. With his appointment to the board, we fulfilled the requirements of the SEC’s corporate governance reforms. That same month we opened our new store in U.S., which provides a more complete offering of our services including on site jewelry repair. This new full service storefront creates the upgraded retail experience expected from a high-end jewelry.

In February, we have received proposals from Elemetal and NTR Metals to convert both long-term debt and trade payables to equity. The board is currently reviewing the proposals. And at this point, we have received no other proposals from Elemetal or NTR Metals. Throughout the fourth quarter of 2015 and continuing onto 2016, personnel changes were made to ensure we have the right team in the right position. This revamped team has extensive experience in both high-end jewelry and retail operations.

Our merchandising strategy has shifted from having cases overstocked with whatever old jewelry was purchased over-the-counter to a more thoughtful combination of vintage jeweler and new items. By refocusing on the importance of vendor relationships, we are now able to supplement existing vendors with new popular merchandise. We’ve placed additional emphasis on our supplemental lines of business such as custom jewelry manufacturing, watch repair and customization.

In these fields, we have a tremendous amount of talent on which we believe we can capitalize the continual upgrading of our advertising website and social media presence. We believe that the changes made in late 2015 and early 2016 have added to the renewed excitement among employees and customers will help to move us towards consistent profitability.

That concludes our prepared remarks and we’d like to now open the call to take your questions.

Question-and-Answer Session

Operator

Operator

I’m showing that there are no questions at this time. I would like to turn the floor back over to Matthew Peakes for closing comments.

Matthew Peakes

Thanks everybody for joining us today. We look forward to giving you an update during our next call in mid-May when we’ll be discussing our first quarter results. This concludes our fourth quarter and full-year 2015 conference call.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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