Exhibit 99.2
SUPERIOR GALLERIES
MODERATOR: SEAN COLLINS
JANUARY 24, 2005
12:00 PM CT
Operator: Good morning. My name is (Marianne). And I will be
your conference facilitator today.
At this time I would like to welcome everyone to the
Superior Galleries Quarterly Results and Strategic
Overview conference call.
All lines have been placed on mute to prevent any
background noise.
After the speakers' remarks there will be a question
and answer period. If you would like to ask a
question during this time simply press star then the
number 1 on your telephone keypad. If you would like
to withdraw your question press the pound key.
Thank you. I would now like to turn the conference
over to Sean Collins, Partner with CCG Investor
Relations.
Mr. Collins, you may begin.
Sean Collins: Thank you Operator. Good morning everyone or good
afternoon depending on where you're located in the
country.
Welcome to Superior Galleries' conference call on
Growth Strategies and Second Quarter Fiscal 2005
Financial Results.
The Operator said my name is Sean Collins, a Partner
with CCG, the company's Investor Relations counsel.
In a moment you will hear and have the chance to ask
questions of the company's CEO, Silvano DiGenova, and
its Executive Vice President and Chief Financial
Officer, Paul Biberkraut.
But before we begin I'd like to read the following
statement in connection with this conference call.
The company wishes to take advantage of the Safe
Harbor Provision of the Private Securities Litigation
Reform Act of 1995 with respect to statements that
maybe deemed to be forward-looking statements under
the Act. Such forward-looking statements could
include general or specific comments by company
officials about future performance as well as certain
responses to questions posed to the company's
officials about future operating matters.
The company wishes to caution participants in this
call that numerous factors could cause actual results
to differ materially from any forward-looking
statements made by the company.
These factors include Risk Factors set forth in the
company's SEC filings. Any forward-looking statements
made in this call speaks only as of the date of this
call and the company undertakes no obligation to
revise or update any forward-looking statements
whether a result of new information, future results
or otherwise.
So without further ado, it's my pleasure to introduce
the CEO of Superior Galleries, Sil DiGenova.
Silvano DiGenova: Thanks for joining us today. I'm Silvano DiGenova,
CEO of Superior Galleries, Inc.
We'd like to cover two major topics today, our
financial results for the second quarter and six
months of our Fiscal Year 2005, which ended December
31, 2004, and also some exciting strategic plans that
we have for our upcoming quarters.
Superior Galleries is a long established leader in
the very interesting and dynamic investing arena of
rare coins. We feel that the overall marketplace
positions our company very well for the growth
initiatives that we're pursuing. We've got the
experience, specialized knowledge, and vision
necessary to take our company to a higher level of
revenues and profitability.
New sales channels, new partnerships, and other
growth initiatives are underway. And we're more
excited about our company's potential than ever
before.
In a few moments I'll provide you some contacts for
our growth plans and then walk you through some of
the details.
But first let me introduce our Executive VP and CFO,
Paul Biberkraut, who'll update you on the financial
results we made public this morning.
Paul.
Paul Biberkraut: Good morning everyone. Let's start off by reviewing
the results of operations for the Second Quarter and
six month of our 2005 Fiscal Year and follow on with
key balance sheet components as of December 31, 2004.
It is worth pointing out that there is seasonality in
our business and our second quarter ending in
December is typically our slowest. So we are quite
pleased to have achieved record results for our
Fiscal 2005 Second Quarter and six months.
We are also pleased by some of the underlying
improvements that I'll be covering, including a
reduction in our cost of sales year-over-year and an
improvement in our gross profit percentage as a
percentage of revenue.
In the second quarter ended December 31, 2004,
Superior Galleries reported record revenue of $8.4
million, an increase of $3.2 million or 63% from $5.2
million for the three months ended December 31, 2003.
Our revenue increase was primarily due to continued
strength of the rare coin market coupled with our
ability to maintain a higher inventory levels.
Our net loss for the three months ended December 31,
2004, was $130,000 or 3 cents per share as compared
to a loss of $479,000 or 11 cents per share for the
three months ended December 31, 2003.
Our cost of sales for the three months ended
December, 2004, increased in dollar terms by $2.5
million to $6.8 million or (81.1%) of total revenue.
This compares to a cost of sales of $4.2 million or
82.3% of total revenue for the prior year second
quarter.
We'd like to note here that commission income has
minimal cost of sales associated with it. And
although the cost of sales percentage remains even
year-over-year, the cost of sales as a percentage of
revenue will typically vary from period to period
based on our success in purchasing rare coins at
advantageous prices.
Gross profit for the three months ended December 31,
2004, increased $704,000 to $1.6 million or 19.2% of
total revenue. This compares to a gross profit of
$912,000 for the prior year period, which was 17.7%
of total revenue. Again our gross profit as a
percentage of revenue will vary from period to period
based on our success in purchasing rare coins at
advantageous prices and the proportion of a
commission income of our total revenue.
Selling, general, and administrative expenses for the
three months ended December 31, 2004, increased in
dollar terms to $1.6 million from $1.4 million a year
ago but decreased year-over-year as a percentage of
revenue.
Specifically selling, general, and administrative
expenses represented 19.5% of total revenue for the
three months ended December, 2004 as compared to
26.9% in the prior year's quarter. The increase in
these expenses was primarily due to the hiring of new
employees to enhance our operational infrastructure
and in support of our growth plans.
Additionally we incurred higher commission and travel
costs that resulted from higher wholesale sales.
Next I'll summarize the comparisons for the six month
period ending December 31, 2004, and December 31,
2003.
Looking at the comparative six month periods of
Fiscal 2005 versus Fiscal 2004, revenues grew $6.6
million or 60% year-over-year to $17.7 million. Cost
of sales grew $5.1 million or 58% to $14 million. As
a percentage of total revenues our cost of sales for
the six months of Fiscal 2005 was 79.2% as compared
to 80.1% in the prior year period.
Selling, general, and administrative expenses grew
$800,000 or 30% year-over-year to $3.5 million. As a
percentage of total revenues, selling, general, and
administrative expenses ran 19.8% in the six months
of Fiscal 2005 as compared with 24.4% in the prior
year period.
Our six month net loss improved from $544,000 for the
six months of Fiscal 2004, which was 14 cents per
share, to a nominal $5,000 net loss or break-even for
the six month of Fiscal 2005.
Turning to our cash flow and the impact on our
balance sheet, our cash decreased $160,000 to
$286,000 for the six months ended December 31, 2004
from 447 as of June 30, 2004. This decrease in cash
was primarily due to the net cash used in our
operating activities in the six months ended December
31, 2004, totaling $305,000. This use of cash
reflects increases in our inventory of $654,000 and
decreases in our accounts payable of $3.4 million.
However, these items were offset by repayments of
auction and customer advances of $1.9 million and
decreases in accounts receivables of $1.7 million.
Other factors affecting our cash were the acquisition
of $60,000 in fixed assets and net short term
borrowing of $250,000.
We have implemented several initiatives that we
believe will enable us to continue to grow and
sustain profitability. We are in the process of
significant upgrades to our website, with a
particular emphasis on our e-commerce capabilities.
And we are developing exciting new sales distribution
channels.
To outline these and other growth initiatives, I will
turn the call back to our Chairman and CEO, Silvano
DiGenova.
Sil.
Silvano DiGenova: Hi again. I'd like to present the strategic direction
of Superior Galleries.
So first I'm going to provide some context for this,
a brief description of Superior Galleries.
Superior Galleries is an auctioneer, dealer, and
wholesaler of rare U.S. coins. The company was
originally founded in 1930 and has been an
institution in Beverly Hills serving the America's
rich and famous since then.
We primarily deal in the higher end of the rare coin
spectrum. However, we do handle items of all price
ranges.
Our core business breaks down into five arenas,
auctions, retail, wholesale, internet, and lending.
Let me talk first about the auction business, which
is probably the most well-known and most well
understood of these categories.
In the auction field what we do is source rare coins
through our own inventory through consignments from
dealers, the public, estates, really a wide range of
sources. We bring these items in, we catalog them, we
describe them, we promote them, and then they're sold
at public auction to the highest bidder. We receive a
commission for these consignments.
When we sell our own inventory we obviously realize
the gains or the profit on that particular inventory.
As most people know, the auction business has been
around for many, many years, and Superior is one of
the leading players in that arena.
The second aspect of our business is the retail
business. This piece of business involves buying of
coins for our own account and then selling them to
the retail public.
Sometimes we're a middle man or broker. And we make
money each side of the transaction. And sometimes we
are principals where we own the actual merchandise.
The third aspect of our business is the wholesale
business. As in retail we purchase coins for our own
account and market them to other wholesalers or
retailers of coins.
And as in the previous case sometimes we're also just
a broker where we hold the merchandise and make
spread in between.
The fourth aspect and one of the most interesting is
the internet. Our internet operations are just
beginning to ramp up. This distribution channel
ultimately includes our e-commerce activities on our
website which we're greatly increasing, weekly
auctions in partnership with E-Bay, strategic
partnerships with Amazon.Com, Overstock.Com, and
potentially other internet retailers.
All of our Live Auctions are currently featured on
the website and on E-Bay as well.
The final aspect of our business is the lending
business. We currently provide advances to our
customers against auction consignments and to other
dealers for their inventory that we also market
through the various distribution channels that we
have on our behalf.
Because the coin business is not quite as well
recognized as some of the others we do - we are able
to loan money at rather advantageous rates anywhere
from 8% to 12%.
Now I'm going to discuss some of the financial
benchmarks.
In Fiscal 2004 we did about $30 million in auction
sales. We also did an additional $27 million in
combined wholesale and retail sales. Of that portion
$19 million was wholesale and $8 million was retail.
And during that period our inventory ranged from
about $5 to $7 million.
I'm going to talk a little bit about the marketplace
because it's very significant within our business.
The universe of individuals who have coins is very
large and varied. We get coins from all over the
world from private parties, collection estates,
divorce settlements, and other auctions as previously
stated.
It's estimated that over 10 million Americans collect
coins - seriously collect coins -- and that there's
hundreds of millions of collectors worldwide. In fact
in the most recently published U.S. Mint Report they
stated that 130 million Americans have collected the
new state quarters. This suggests that there's a very
large potential market for future serious collectors.
We estimate the size of the marketplace in dollar
terms to be in excess of $10 billion and growing. And
here are some of the reasons for that growth and some
of the advantages for rare coin ownership and
collecting.
Number 1, there's no reporting requirements on rare
coin transactions.
Number 2, coins have favorable tax treatment in a
like-for-like exchange. For instance if you buy a
portfolio of coins for $100,000 and it appreciates
100% to $200,000, you can trade that $200,000
portfolio for a different $200,000 portfolio and have
no taxable event, unlike the stock market.
Number 3, liquidity, there's tens of thousands of
coin dealers throughout the country, hundreds of
conventions, and dozens of auctions annually. In
addition, there are several electronic coin
exchanges, the largest being the Certified Coin
Exchange, -- by the way we were cofounders of this
exchange.
All this culminates in the creation of a very liquid
market place. In fact, coins are the most liquid
collectible. Accordingly, many Europeans and Asians
also believe rare coins are the only truly liquid US
dollar denominated hard money investment. And this
whole aspect of hard money has been very popular in
recent years.
We have a very loyal following throughout the country
and many high-ticket foreign customers as well. The
grading standards, the structure and standards for
grading in a coin business make it very transparent
and also a very reliable collectible. Very few other
collectible areas have the equivalent. The closest
thing would be the grading of diamonds at the GIA.
Let's talk about a few company highlights. We have a
truly remarkable staff with over 250 years' combined
experience in coins. In fact, our people have
literally handled billions of dollars in transactions
in rare coins, precious metals, and other fine
collectibles. Superior has handled collections of
many notable celebrities, sports figures, and CEOs,
as well as some great institutions.
Some of our client entertainers and celebrities are
Jack Black, Karim Abdul-Jabbar, Wayne Gretzky. We've
dealt with a Smithsonian Institute, UCLA, and
actually had an auction for the NFL. Let's not forget
some of the famous wealthy families like the Hunts
that we've also handled.
A little bit about my background. As I spoke earlier,
coin grading or the certification of coins is one of
the big key aspects why coins are liquid. There are
two major companies that provide this service, the
Professional Coin Grading Service and the Numistmatic
Guaranty Corp. The Professional Coin Grading Service
is the largest of such and is owned by Collectors
Universe (CLCT).
Also worth mentioning is that I was one of the
cofounders of this particular company -- sold my
interest quite a while ago -- and also instrumental
in the grading set or the standard by which all coins
are graded. Also I was fundamentally involved in the
certified coin exchange which is the electronic
exchange very much modeled after the NASDAQ.
Superior is the largest player exclusively in rare
coins and one of the largest players in high-end
collectibles. We have over 4,000 clients on our
mailing list living in zip codes where their homes
are worth $1 million or more and who are within
driving distance of our gallery. As a matter of fact,
more clients who are multi-millionaires live within
driving distance of our Beverly Hills headquarters
and showroom than any other dealer out there.
And now Southern California has really become the
center of the rare coin business. It's taken this
leadership position away from New York quite a while
ago.
Let's talk about the market outlook. There's been a
good bull market in rare coin since 1994. Of course
with, you know, some blips here and there, and the
last three years have been particularly strong.
Uncertainty in the stock market has led a lot of
money to move into the coin business and people
worldwide want to have the tangible, portable wealth
that coins represent. Rare coins also are a great
inflation hedge. In fact, in 1980 when we had the
double digit inflation, coins went up three- to
ten-fold.
Many look at coins as sort of an insurance policy
against instability. With a falling dollar, coins
tend to appreciate. And when there's appreciation in
gold - when there's appreciation in gold such as now,
coins have become very desirable.
In comparing the rare coin market to the Dow in the
past 35 years, the coin market has actually performed
the Dow nearly 5 to 1. So for the long term, coins
have been a stable appreciating asset. This leads me
to our growth initiatives.
From a solid basis in terms of our company, our staff
and market place, here are some of the initiatives
that we are taking on at Superior Galleries. As we
indicated, there's a huge grass-roots interest in
coins. So one of the areas we intend to expand is the
retail business. There are better margins than the
wholesale business.
We have expertise and have performed very nicely in
this segment. Our new COO, Michael Wolfe, has
significant expertise in this arena. He previously
was CEO of an $80 million profitable public company
and has managed millions of direct marketing dollars.
And has been very successful in the direct marketing
business.
We intend to go full force in this arena. We are
going to expand our wholesale business and the areas
that we intend to do this in is we intend to become a
supplier to the gift and catalog companies. We
already have very positive response from these types
of organizations through Michael Wolfe's contacts.
We will acquire other small dealers. Since the coin
business is fragmented, there's lots of opportunities
to acquire small dealerships. We'll also acquire more
traders. With additional capital we can fund more
trading activities of experts out there. We also
intend to open branch offices in key cities like Las
Vegas, New York, and Miami.
Okay, next. We're going to increase online auctions.
We've done some testing in online auctions and coins
are a great commodity to sell online. Not only are
they transportable but also due to their visual
appeal you can show them attractively using Internet
images. We feel this is a huge untapped market.
We're already partners with eBay. As a matter of
fact, every one of our major auctions is held jointly
with eBay. Our plan is to run weekly Internet
auctions with eBay and we would be the only company
doing this. In terms of the highest - it turns out
that coins are the highest sell-through rate on eBay
auctions.
So we're very confident that this is a large arena to
pursue. We're now moving aggressively on to the
Internet and planning significant enhancements to our
online presence at www.sgbh.com. We'll be the first
rare coin auctioneer to work with Amazon and we're
negotiating with Overstock.com. Both of these firms
have enormous active customer bases.
One of the key projects going forward is to launch a
purely online Internet auction [un]accompanied by an
in-person event. We are planning to hold weekly
weeklong Internet-only auctions where participants
receive email notification of being outbid.
Next, we're continuing to pursue TV shopping. We have
launched some testing in the TV shopping arena. We
know that two major shopping channels,
HomeShoppingNetwork and ShopAtHome, both sell a
tremendous volume of coins. ShopAtHome is doing well
in excess of $100 million annually by our estimates
on TV, just in coins.
We're far more competitive on price and far more
knowledgeable in coins than these shopping channels.
And we believe that we can either produce our own
shopping channel or create supplier arrangements in
this arena.
Next key point in our potential expansion is our
financing. Our biggest partner is Stanford Financial
Group, who owns 49% of the Company and has over $27
billion in management. We currently have a line of
credit of $7.5 million. As a matter of fact, Stanford
is recommending rare coins to their client base
because of their tangible assets.
With this line of credit that we got from Stanford,
it fueled a 60% growth in sales in the first six
months of our fiscal year over that same period of
last year. For the year ending June 30, 2004 compared
to 2003, sales were up almost 50% from approximately
$20 million to $30 million. And we went from a $3.5
million loss to $500,000.
Obviously the key issue here was the financing. We
have begun discussions with Stanford to obtain
additional infusion of business working capital and
we believe that there is a very positive response to
this. As our results show, the more capital we have
to our command, the greater the sales growth
potential.
Our new initiatives in expanded retail, upgrading our
online ecommerce capabilities, TV marketing can only
enhance our growth potential. So at this point I'd
like to take any questions. Operator, please.
Operator: At this time, I would like to remind everyone, if you
would like to ask a question please press star then
the number 1 on your telephone keypad. We'll pause
for just a moment to compile the Q&A roster.
Your first question comes from Kenneth Cook, a
Private Investor.
Kenneth Cook: Yes, thank you Paul and Silvano. You actually did
answer most of the questions that I had on my little
sheet here. It was very interesting. But I wanted to
again ask, what do you feel will be Superior
Galleries' top two or three distribution channels and
why?
Silvano DiGenova: Well, there's no doubt that the wholesale rare coin
business and retail rare coin business will be the
two largest distribution channels. We have the
longest history in those particular areas. Also it
depends on how you define distribution channel.
I mean, the auction sales are actually our largest
portion with $30 million. So those three arenas we
find are going to be the largest. Now, of those three
I believe that the retail business has the largest
potential for overall expansion primarily because it
is a direct correlation to marketing dollars. And
last year we actually spent a relatively moderate
amount of marketing dollars, a few hundred, $200,000
to $300,000 in this arena.
We obviously have budgeted - or could budget quite a
bit more and we intend to. So we feel that there's a
very positive correlation of marketing dollars to
retail sales and think that that's the area that's
going to expand. And between the Internet and our
more traditional direct marketing, catalog marketing,
there's a lot of potential in that arena.
Kenneth Cook: Thank you so much. That was my only question.
Operator: Again, if you would like to ask a question please
press star then the number 1 on your telephone
keypad.
Your next question comes from Ben Ligtenberg with Nobel.
Ben Ligtenberg: Good afternoon, gentlemen, how are you? Good morning
there. Whichever may be the case. Are you there?
Silvano DiGenova: Yes, thank you Ben.
Ben Ligtenberg: This industry is not regulated as yet. Correct?
Silvano DiGenova: Yes, there are no, you know, reporting requirements
as far as transactions and so on.
Ben Ligtenberg: It really called my attention when you said Stanford
might be out there recommending it to clients. Is
there anything you're hearing that might be in the
mix for future regulations. particularly as the
industry as a whole continues to grow? As you say
you're leaning more and more towards retail. There's
obviously a lack of sophistication out there. Not
everybody has 10-20 years of investing background.
Where do you think the industry is going in terms of
retail and having lots of little investors on coins
in the future?
Silvano DiGenova: Well, there's been various periods where, you know,
investors have come in the market and obviously that
keeps continuing to grow. I don't see any government
interference, because the industry has done a
remarkable job of self-regulation.
Between the grading services, the information
exchanges, and the published third-party pricing
guides, most people can get a very accurate read of
the market and transparency in the market place. You
know, the government has stepped in from time to time
when there were bad apples and, you know, the Federal
Trade Commission, which shut down those types of
organizations.
And most of the key players belong to the
professional Numistmatic Guild, which is a very
strict governing body, kind of similar to the NASD.
So there's been a fair amount of effort. Now, the
gold bullion markets are much, much larger than the
coin markets in the hundreds of billions of dollars a
year.
And the government has not interfered in that market
place I believe again because it's been a very
liquid, two-way, self-regulated market. And I think
that that's going to continue in the coin business. I
believe that as people started to put together
institutional selling of coins either in mutual funds
or some sort of funds like that, these type of
enterprises would have to be registered.
And, you know, additional regulations will be there.
But I think that for the most part I do not see the
government stepping into this arena.
Paul Biberkraut: So- this is Paul Biberkraut speaking. I'd just like
to add to Sil's comments. One of the features that we
have on the retail side is that when a retail
customer purchases a coin, they have an unconditional
return policy of seven days. So if they purchase a
coin and they receive it and if they for whatever
reason do not want to keep it, we will take the coin
back as long as we receive it in the same condition.
And generally what we are selling to our retail
customers are graded, encapsulated coins. So as long
as we receive the coin back within the guarantee
period, we take it back unconditionally. So there is
that element of safety for our retail customers.
In addition like other companies that are involved in
telemarketing which we - is part of our retail
operation, we of course are governed by the various
state and federal telemarketing laws, and we abide by
all those regulations.
Operator: Your next question comes from (Rommel Dionisio) with
Roth Capital.
(Rommel Dionisio): Hi. Good morning. I wonder if you could just talk
about online auctions for - how do the margins on
those auctions, kind of the corporate average, as
lowest price point, do you see somewhat lower price
points on those auctions relative to
(unintelligible)?
Silvano DiGenova: Well we've run some tests on online auctions. And
actually in our tests we generally average higher
margins on the online auctions. And let me cover a
couple key reasons why.
Preliminarily our online auctions have only been
company inventory as opposed to consign inventory.
And you mostly have retail buyers as opposed to
wholesale buyers. In our major actions you have
pretty good mix of both wholesale and retail. But on
the online auctions, the intent is mostly to get the
retail players involved.
My thinking is we're going to try and get between 15%
and 20% which is about the same margin as our retail
margin is.
Now the one advantage in the online auction as
opposed to regular selling, in our regular retail
selling, generally there's a salesperson involved in
which case we have to pay a commission that could be
anywhere from 20%, 30%, some cases less and some
cases a little bit more of the margin.
So in the auction business we do not have that. There
are some fees paid to eBay, which is certainly going
to lower the margin. But we believe that this is an
arena that's actually going to have more favorable
margins than the rest of the market.
Now as far as price points, the online weekly or
monthly auctions are going to have much lower price
points. You can't at least right this minute
routinely sell very expensive items on the Internet.
We do feel however that by mass marketing lesser
expensive coins on the Internet we will develop some
bigger players. And we know this for a fact because
we've done this over the years.
We had run lots of items on regular e-Bay. And from
that we have been able to pull out key players who
have quickly become knowledgeable and moved way `up
the food chain,' so to speak.
In fact, one of our biggest European clients started
off as a small player on eBay, buying 500, 2000 coins
and became a player who would by six figure coins and
who ended up spending many millions with us.
(Ronald Di Amicio): Okay great. Thanks very much.
Operator: At this time there are no further questions.
Gentlemen, I'll turn it back to you for any closing
remarks.
Silvano DiGenova: Again, Paul and I would like to thank
everyone on behalf of Superior Galleries for taking
the time to participate in this conference call.
We'll provide an audio replay of the call and a
written transcript on our Web site, www.sgbh.com.
We hope that you'll spread the word on behalf of - to
anyone who might be interested in our business and
our company. And we also hope you will join us in the
future updates on our growth plans to go forward.
Thank you very much for participating.
Operator: Thank you. This concludes today's Superior Galleries
Quarterly Results and Strategic Overview conference
call. You may now disconnect.
END