Collectors Universe Inc. (NASDAQ:CLCT) F4Q 2013 Results - Earnings Call Transcript August 28, 2013 4:30 PM ET
Robert Deuster - CEO
Joe Wallace - CFO
Good afternoon, everyone, and thank you for joining us to discuss Collectors Universe financial results for the fourth quarter ended June 30, 2013. With us today from management are Robert G. Deuster, Chief Executive Officer, and Joe Wallace, Chief Financial Officer. The 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 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 now like to turn the call over to Robert Deuster. Robert?
Thank you, and welcome to today's fourth quarter and year-end conference call. A lot has happened this last quarter and so I will spend a few minutes discussing our business activity, especially our entry into the Chinese Mainland coin market, and then give you some commentary on the outlook going forward into our 2014 fiscal Q1.
I am very pleased to report to you that our service revenue was very strong last quarter coming in at $13.7 million that [equals] the $11.6 million during the fourth quarter of 2012 and was only slightly lower than our record $14.5 million 2013 third quarter result.
This brought our total year’s service revenues to $48.5 million, a new company record. The strength in revenues last quarter was the result of a still active coin market driven by strong U.S. mint coin demand and collector interest in the grading of their coin that shows in expo venues.
Our service gross profit during the quarter was 63% compared to 59% last year and was aided by the improvement in our services offered to collectors and operational efficiencies realized at our facilities.
Operating income for the last quarter was $3.3 million, about $1.4 million higher than last year’s Q4; bringing operating income for the year to $9.5 million, better than the $9.2 million last year and making up for the slower first and second quarter’s we reported earlier this fiscal year.
All-in-all, this was a very satisfying finish to fiscal 2013, and we entered fiscal 2014 with a strong backlog and new international market opportunities. Continuing the trend we saw last quarter, we see a record setting pace for the sales of gold and silver coins from the U.S. mint. Since I am reporting to you in late August, I will refer to the year-to-date July results from the U.S. mint not June numbers.
Through July Gold Eagle bullion sales were up 82% from the same period last year and Silver Eagle bullion sales are up 50%. While this silver number is strong, it doesn’t reflect the real market demand out there since the U.S. mint is rationing coins and that program is still in effect. All of this bodes well for bulk coin grading activity at our PCGS business, which has remained strong since December 2012.
This overall market demand for modern coins is lifting the overall market, but it’s also supported by a very active global market in vintage and rare coins as well. This act of coin market in terms of the sales of rare and vintage coins at auction or between dealers is increasing levels of grading activity, occurring knowledge shows in expos and international venues.
This is a welcome trend for us, as we realize strong margins that showed and see a good selection of rare and valuable coins. I will speak more about the grand opening of our new grading center in Shanghai last month in a minute. But overall grading of coins by our PCGS business at our own and national shows in the U.S. is tracking at above 45% growth rate year-over-year. Service revenues at our Paris and Hong Kong submission and grading centers is also up 30% year-over-year.
As we have seen every few months, there is the sale of a notable rare or vintage coin in the news, and we have that again in the recent sale of what’s called the king of all U.S. Silver Dollars, an 1804 Liberty Dollar went for $3.7 million at auction just this month. Sales like this are exciting in this market and continue to [stalk] interest in the client collectable space.
[Twitching] markets, I would like to discuss the performance of our PSA/DNA business. This last quarter was the 12th consecutive quarter-on-quarter growth quarter for our sports cards and autograph business. With our service revenue for grading sports cards and autographs growing 10% last year. This steady performance is possible because of PSA’s strong market position and wide palette of services for its customers.
Evident in this growth is the collective preference to deal with PSA, due to the value realized at sale with the PSA certification because of the quality and the availability of the information we provide for sport collectibles in this market.
Our second half results also benefited from a good start to the baseball season and level of rookie card interest bringing many more sort after cards in for grading. Notable sales in the sports and autograph markets since our last report include a 1909 T206 Honus Wagner card which was graded PSA EX 5 MC which stands for intentionally miss-cut. So this was a bit of an [oversight] card, which sold for just over $2.1 million in April. This is the second highest price ever paid for a card and the highest auction price ever paid.
The highest price ever paid for any card was a private transaction a few years ago. Also sold was a Babe Ruth-Lou Gehrig dual-signed baseball graded PSA/DNA Near Mint condition 8.5, the finest example known for a $343,000. This was the highest price ever paid for a dual-signed baseball. As part of our strategy to enrich the collecting experience for both coin and card collectors alike, we continue to invest significant resources in expanding in our online coin and card fact data bases, as well as global price guides for these collectible items.
Recently we announced our PCGS business is teaming with one of the world's largest online marketplaces eBay, to expand the eBay U.S. and Canada coins catalog feature on it's website to benefit sellers and buyers alike. When the new catalog from PCGS goes online this fall, it will immediately grow from the current 8,500 products that they have to 41,000 products for coins revenue.
The renewed U.S. and Canada coins catalog will allow from a more detailed descriptions of specific coin attributes, as well as further differentiation for the collecting community. This expanded and structured data on coins comes from our extensive PCGS data bases.
Unlike the sports card market which is largely a U.S. market, the coin market is truly global and for Collectors Universe much of our organic growth potential lies outside of the United States, in the European market, and now more recently in China and Southeast Asia.
In previous reports I mentioned our intention to establish a full time grading center in Mainland China. During the last six months, considerable effort went into accomplishing this goal by a multi-functional PCGS team. On July 20, we opened our new office and grading center in Shanghai. It was a tremendous success. Along with our marketing and distribution partner, Shanghai Quanping Collectibles, principals from both companies celebrated the grand opening event with more than 400 collectors, dealers and guests in attendance. Coin submissions greatly exceeded expectations and we had a team of graders there to process these first-in country vintage and modern Chinese claims all throughout the following week.
More than just hosting a grading event, our center in Shanghai has designed and staffed to accept coins from this point forward for processing in-country. Perhaps more indicative of the commitment we're making to this major numismatic market, we're also introducing a complete suite of online tools for collectors there in their native Mandarin language, including a PCGS web portal, and price guidance. Very soon, we will introduce in Mandarin our CoinFacts and Set Registry online databases as well.
I am very excited about our start in China and its potential for us in the coming years. The level of collector interest there for coins, both modern and vintage is strong, and until now the PCGS brand of certification has not been available at all in-country because of the restrictions in place from moving Chinese coins of value or heritage out of country we've not been able to serve this market and develop our direct presence.
Now we have a platform to build-off of, and a very strong distribution partner with an expansive dealer network in place. I'll report on future quarters on how this startup activity is progressing, including significant shows and examples of value realized from PCGS graded coins in the market.
Now let me turn it over to Joe for a review of our financials. Joe?
Yes. Thanks, Bob, and good afternoon, everyone. I'll now give a brief overview of the financial results for the fourth quarter and the fiscal 2013. For the fourth quarter, the company reported record fourth quarter service revenues, which comprised our grading, authentication and related service revenues of $13.7 million, record fourth quarter operating income of $3.3 million and after-tax income from continuing operations of $2 million or $0.25 per diluted share.
This compares to service revenues of $11.6 million, operating income of $1.9 million and after-tax income from continuing operations of $2.5 million or $0.31 per diluted share for the fourth quarter of fiscal '12.
For the year, the company's net service revenues were a record $48.5 million, operating income was a record $9.5 million and after-tax income from continuing operations was $5.8 million or $0.71 per diluted share. This compares to net service revenues of $47.9 million, operating income of $9.2 million and after-tax income from continuing operations of $6.8 million or $0.85 per diluted share for fiscal year 2012.
The fourth quarter and the fiscal 2012 included an income tax benefit of $1.3 million related to the company’s investment and subsidiary, which highly effect of increase in the fully diluted earnings per share by $0.16 in both the fourth quarter and fiscal 2012.
For the current fourth quarter, the increase in our service revenues of $2.1 million or 18% compared to the last year's fourth quarter included increases of $1.8 million or 25% in coin service revenues and $0.3 million or 10% in our card and autograph service revenues. For the year, the increase in our service revenues of $0.6 million or 1% compared to fiscal ‘12 included a $1.1 million or 10% increase in our cards and autographs revenues partially offset by a $0.4 million or 1% decline in coin revenues.
As discussed in our Form 10-K filed with the SEC today, the results in the second half of the year reflect improved market conditions for coins and increases in the average service fees earned on coins authenticated and graded in the second half of the year [since] for the number of factors including new service offerings and favorable mix of coins authenticated and graded and price increases implemented effect at January 1, 2013. We believe that fourth quarter revenues reflects strong momentum in the coin market carried over from the third quarter as evidenced by a record sales of gold and silver eagles by the U.S. Mint in the six months ended June 30, 2013.
In addition, our trading cards and autograph business continues to show consistent growth. In the three months ended June 30, 2013 records as a 12 straight quarter-on-quarter revenue growth in that business. These favorable market conditions appear to be continuing into our first fiscal quarter of 2014. Although it remains uncertain as of what level of revenues the company can achieve in future quarters.
For fiscal year 2013, our coin business represents approximately 65% of service revenues and reflects the continued importance of our coin authentication and grading business to our overall financial performance.
Our services gross profit margin increased to 63% in the fourth quarter and 62% for the year, from 59% in last year’s fourth quarter and 61% at fiscal ‘12. The improved gross profit margin in the fourth quarter compared to the fourth quarter of fiscal ‘12 reflects the higher proportion and mix of coin service revenues in the quarter.
The increase in selling and marketing expense was $0.1 million for the quarter and $0.6 million for the year reflects increased costs in connection with our e-commerce and international initiatives and higher domestic tradeshow costs due to an increased number of shows partially offset by reductions in business development incentives in the year due to lower modern coin around in fiscal ‘13. The increased G&A expense is $0.3 million in the fourth quarter and $0.2 million for the year compared to the same periods of the prior year reflect higher management and IT compensation related incentive related costs, higher depreciation and labor costs offset by lower stock-based compensation cost.
Operating income for the fourth quarter increased 78% to $3.3 million or 24% of revenues compared to $1.9 million or 16% of revenues for fourth quarter of fiscal ‘12. For the year, operating income increased by 4% to $9.5 million from $9.2 million with operating margins at a consistent 19% of revenues in both years.
Turning to our balance sheet, the company’s cash position was $18.7 million at June 30, 2013 compared with $21.2 million of June 30, 2012. Net cash used of $2.5 million in the year comprised cash generated from continuing operations of $9.6 million, offset by dividends to stockowners of $10.7 million, $1 million for capital expenditures and $0.4million used in our discontinued operations.
Income tax payments were $2.4 million in fiscal 2013 compared to $0.4 million in fiscal ‘12, as we no longer have net operating loss available to offset federal taxable income. On June 30, 2013, the company continued to have $3.7 million remaining under its previously announced stock buyback program. The company has not made any open market repurchase under this program since the fourth quarter of fiscal 2008. On July, 31 2013, the company announced its quarterly cash dividend of $0.325 per share to be paid on August 30, 2013 to stockholders of record on August 16, 2013.
With that, I would like to thank you for your attention. Bob?
Thanks Joe. Before we conclude, I'd like to make a few comments on our outlook in this fiscal year. We have entered 2014 with a strong coin market and backlog of submitted collectibles to be graded. The trend for the first half of the year appears to be stronger than this period that was evident in 2013.
The modern coin market remains very active and if that continues into the fall, we should see continued year-over-year growth in our U.S. coin business. The addition of the Shanghai operation and stable growth that appears in Hong Kong centers will increase our exposure to service revenues from the international market and will begin the help to balance the dependency we have had only on the U.S. markets.
We also anticipate steady growth this year in our sports card and autograph business. Of course, all of our expectations are governed by a number of factors not in our control; such as the price of precious metals and the overall state of the economic climate primarily in the U.S. In spite of that, we continue to believe our investments in bringing the most extensive collectibles information network to collectors and providing superior authenticating and grading capabilities will help them realize maximum value for their collection. This is the long-term winning strategy we are committed to and it will benefit our investors as well.
Thank you for joining us today, and I look forward to speaking with you next quarter. Now, I would like to open up the call to any questions you might have.
Thank you, sir. (Operator Instructions) And our first question comes from the line of Jay (inaudible). Please go ahead.
I don't know which of you gentlemen I should address. But first of all I wanted to know, I am a customer in your sports end and I am also a very satisfied customer by the way, and also more recent stockholder in your company when I found out that you are a public company, and the thing that is my most important question and I have two questions. The most important question is the coverage of dividend.
When I look for the dividend history and I saw that you first paid a dividend back in 2006, I did notice that about every couple of years, you did raise the dividend and I am just looking at your coverage and what your net income is and then what's dividend payout is which is higher than the net income. So my question basically is how do you feel for at least the next 6 to 12 months how your coverage would be for the existing dividend and is there any plans of possibly of any dividend increased?
Okay. So maybe I can address that. First of all thank you for being a customer and be one as well. The whole dividend [after] when we introduced it a number of a year’s ago was basically using the strength of our balance sheet to either use that for what we’ll call strategic investments or acquisitions or try to find a way to return some of that value to shareholders. So the whole dividend policy was put in place to basically recognize that the best use of the cash we had on the balance sheet at the time was to return some of that to shareholders.
Clearly as you pointed out, the coverage on the dividend is not a 100% today. But that coupled with what we put in place recently as a long range plan for growth should allow us to hopefully fortify that position and gain coverage for the dividend; that’s our plan. So we talked about this at the Board level periodically and with the current dividend approach, we don’t have a plan to change it, although I think, economic conditions and other conditions in the company can alter that view. But it is our goal to continue at least for the near term.
But having said that, we are not doing this just because we want to use the current balance sheet cash is we have a plan for growth around the world and we have strong businesses that will allow us to hopefully think this [about] for the long-term.
Okay great. Because the dividend I mean it is one of reasons to buy the stock and also in an uncertain stock market environment like we have, I mean, a dividend that you pay, I mean the return on the dividend right now I think it’s still somewhere in the mid 7 is a heck of a good cushion against any type of fair market, so that’s good news to hear.
Well we hope we can continue it.
Okay great. Can I ask another question now?
Okay. This is a quickie; do you guys ever inventory any coins or cards on your own for resale ever?
No, our policy is not to really enter the market and buy and sell any of the collectibles.
Should be service end there?
Right. I mean, we basically have a warranty on our certification, so for some reason we need to honor that warranty by purchasing a coin or a card or a collectible from that collector we will put it into inventory but then we will return it through a sale back to the market. But we are not actively into the buy and sell mode. We are only a grading and certifying company.
Okay, great. That’s what I basically needed to know and you did say your Shanghai office open July 20 of this year.
And the initial activity was fairly strong?
Yes it was. We were very happy with the opening, it turns out that the Chinese coin market well it’s actually an older market than the U.S. coin market but there is very strong interest in coins it has been as always you know it’s a valuable metal to a lot of the Asian countries and there is a push to promote the buying and selling of gold coins and other items in countries like China, so there is a very strong consumer and collectible interest there, we have not been able to access this before directly and so this is really a new opportunity for us to pursue going forward.
Great, and actually there is the part for you when I’ll be done. Do you feel that the value of gold and silver which is of course quite volatile and that’s actually part of what I do, I mean as a trader and investor, I am both. Do you feel that the price of the commodity itself (inaudible) anything you guys do either positively or negatively at all?
There is an influence of course, I mean when the price of gold goes down it sometimes spurs buying which in some respect with bully on buying so it’s not necessarily coins that will flow through in a bidding activity, but the demand as I indicated in my comments before is very strong even with gold where it is now from the U.S. Mint for example and that’s of other Mints around the world.
I think as the price of gold continues to ramp up, it will always be an opportunity for us to grade the best for the clients that come out from that.
And higher value points go directly to the consumer, they don’t always go through grading initially. So we have not been affected nor do we anticipate we will be by the volatility in a big way that gold has exhibited and in fact, we are pretty pleased that the amount and quality of coins coming out of the Mints has found their way to us for grading because ---
Well, that's great. Okay. That's by the way congratulations again on your fine quarter and fine year that you just finished off.
Well, thank you very much.
(Operator Instructions) And I'm showing no further questions at this time. Please continue.
Well, thank you everyone for joining us today. It's been a pleasure to talk about our results last year and we look forward to speaking with you again after the next quarter. Good afternoon.
Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's call, please dial 303-590-3030 or 1800-406-7325 with access code 4637413. Thank you for your participation. You may now disconnect.
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