US Global Investors Inc (GROW) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the U.S. Global Investors exclusive Webcast, U.S. Global Investors' fiscal year 2006 earnings announcement. As a reminder, this conference is being recorded. After the formal presentation, there will be a question-and-answer session for questions submitted through the Web. We would like to begin by introducing Frank Holmes, Chief Executive Officer and Chief Investment Officer at U.S. Global Investors.

Thank you very much. We'd like to welcome everyone to our Webcast announcing the 2006 earnings for U.S. Global Investors. Here with me to present today's program are Susan McGee, President and General Counsel, and Catherine Rademacher, Chief Financial Officer.

Some process issues to deal with at the beginning -- there is a slide presentation on your screen that accompanies today's Webcast. There are viewer-controlled slides, which means that you control the advancing and reversing of the slides for this presentation. We will cue you when to advance each slide. For those of you who have questions during the Webcast, please click "To Ask A Question", linked to the left-hand side of your screen. Now I want to get onto the presentation.

Record revenue, record net income, and record assets. The key drivers to our success have been the performance leadership in the resource sector and emerging markets. In particular in the emerging markets is our Eastern European Fund.

We have three main streams of revenue -- new assets, new accounts for the transfer agency, and our own proprietary assets. Our focus going forward will be to strengthen and expand our expertise in emerging markets and resource investments.

We continue to build our brand awareness with our weekly investor alert, which is approaching 30,000 subscribers. This investment service is our game film macroeconomic analysis, in which we review the past and look forward to the next week with our SWOT model.

Further, we believe in the concept of spontaneous order and complex adaptive systems. And by ranking countries and sectors on a best to worst over different time periods, we are able to see rotations in this simple system we share with our investors every week.

We are in a [sector of] bull market for commodities and emerging markets. However, investors in those sectors must realize that the volatility is higher because of two drivers. First is commodities and emerging markets are priced in U.S. dollars, and then there is economic activity with each of those different countries.

So, we can have experience where the dollar is weak and emerging markets or commodities are strong, and the amplitude and the upside expands dramatically. And, vice versa, we can have a country which is going through a correction, and at the same time we can have a strong dollar, and this will expand the amplitude on the downside. So, the big factor when looking at U.S. Global's funds and the Company is to understand the volatility drivers. Also, in order to generate competitive returns on capital for all of our shareholders, we will focus on the higher-margin products.

Now I would like to move forward to the next slide.

The massive increase in compliance and regulatory and distribution costs for mutual funds have created substantial profit margin compression, which in turn makes it challenging to be competitive -- competitive in hiring the intellectual capital which we deem critical in order to drive a return on capital disciplines.

We have enjoyed many number one rankings; however, our investment culture is team-based and bonuses are not for being number one, but rather our goal is to be in the top half on a regular and consistent basis.

We continue to publish research and white papers to build our brand name. We don't buy ads promoting our performance. This is not our strategy.

I'd like you to turn to the next slide.

As you can see, a high percentage of our assets have four and five-star rankings. This is critical, because through platforms like Fidelity and Schwab, over 70% of money flows are related to the four and five-star fund status.

Now I'm going to turn to the next slide.

As I mentioned earlier, regarding how we publish our white papers and build our brand name, we do not buy ads to promote our performance. This is not our strategy and it's important to recognize that. We strive on a regular basis to educate investors about the opportunities and the risks and the key drivers of emerging markets and resources. We are independent thinkers and active money managers, not index huggers. The experience when visiting our Website is unique and research-driven.

We do not forecast earnings or performance fees; we simply have a focused work ethic. And this is one of our key company values -- a focused work ethic -- to drive our investment and marketing models, and believe over the long term, consistent top-half performance will build and maintain our success. Markets move in cycles and so do asset flows, and our ambition is to be in the top half of whatever we do.

Now I would like to move forward on some of the slides. As you can see, the next one shows you our brand awareness in the print, and I do recommend if you wish to really -- if you wish to really understand our investment philosophy, the interview "Forces of Nature", which is on our Website, is probably the best detailed interview of how we think and function.

The next visual is the investor alert, which has, as I mentioned earlier, approximately 30,000 subscribers. I think it's important to, if you are an investor in our funds, or you are an investor in GROW, and you wish to develop a better feeling of what we are doing and thinking from a macro point of view -- it's not about picking stocks; we don't talk about stocks. But it's much more of a macro view, and this discipline of every week is like looking at game film. So, every week the investment team reviews the past drivers for the past week, and they look forward to the following week, and this is our SWOT model.

Now I would like to turn this presentation over to Catherine Rademacher to go through detail on the financials.

Good morning. Before we discuss the financials, I want to mention that the Audit Committee of the Board of Directors met last night with the auditor. Since this is our first time both as an accelerated filer and our first time complying with Sarbanes-Oxley 404C, management and auditors are carefully reviewing all necessary disclosures to ensure compliance with all regulatory requirements. We anticipate that we will file the 10-K on or before Wednesday, September 13th.

I would now like to summarize our results of operations for the fiscal year ended June 30th, 2006. If you've seen our press release this morning, you know that today we are reporting record net income of 10.4 million, or diluted earnings per share of $1.38, which is a little over seven times last year's net income of 1.4 million, or $0.19 diluted EPS.

Starting at the top, for the year we recorded total revenues of 44.8 million, which is a 164% increase over prior-year revenues of 16.9 million.

This increase in revenues was primarily attributable to three factors. The first component is advisory fees, which increased 165%, from 14 million to 37 million this year, based on increased assets under management due to outstanding performance in our SEC registered funds, as well as the offshore funds we advise.

Related to the offshore funds, we recorded 6.6 million in the fourth quarter in an annual performance fee related to the Endeavour portfolio. Just a reminder that the Endeavour performance fees, if any, are recorded only once a year in our fourth quarter, per the advisory agreement.

A second factor contributing to increased revenue was investment income, which increased by 727%, from a loss of 351,000 last year to income of 2.2 million this year. This increase was primarily due to realized and unrealized gains on our corporate investment.

The third main factor in the increase over prior-year revenues was transfer agency fees. These increased by 67% to 5.3 million, compared to 3.2 million last year, primarily as a result of an increase in the number of shareholder accounts.

Next I'd like to discuss the expense side. Total expenses increased by 97%, from $14.7 million last year to 28.9 million this year.

The four largest contributors to our expenses were the following. First, employee compensation expense increased 76%, from 5.9 million last year to 10.4 million this year. This increase was driven by strong mutual fund and offshore fund performance, which generated higher incentive bonuses. In addition, we increased our total number of employees from 64 to 77 over the last year.

Another factor in increased expense was subadvisory fees, which increased 180%, to $7.6 million from 2.7 last year, driven by the continued growth in the Eastern European Fund that Frank mentioned earlier.

Another component of additional expenses were Omnibus fees. These increased by 166%, from 1.8 million to $4.9 million this year, due to increased asset flows through various broker-dealer platforms.

Finally, our general and administrative expenses increased 43%, or 1.6 million, to 5.4 million. A large portion of that increase, about 863,000, was attributable to increased compliance costs, including consulting, auditing and accounting fees that go along with our first year of complying with Sarbanes-Oxley.

On the balance sheet side, our total assets have increased almost $17 million in the past year, from 12 million to 29 million. In addition, working capital increased 11.2 million, or 158%, from $7.1 million last year to 18.3 million this year.

And with that I'd like to turn it back over to Frank.

Thank you, Catherine. At this point, let's go ahead and take some questions from our listeners.

(OPERATOR INSTRUCTIONS). I see that we have one question that has just come in now. The question has to do with stock splits. So, I'd like to turn this over to Susan McGee, who is the President and General Counsel of U.S. Global.

We have received quite a few questions with respect to whether or not the Company is considering a stock split. And if the Board of Directors of the Company does make a determination that a stock split would be in the best interest of shareholders, then the Company would be required to file a Form 8-K with that announcement. That is a legal requirement that we will have to follow if we go down that path.

This type of corporate activity would require shareholder approval, because the terms of the Company's governing documents, which were dictated by the original underwriters who took the Company public back in the mid-1980s -- therefore, a proxy solicitation of all Company shareholders would be needed to authorize additional shares for a stock split.

Thank you very much, Susan. Other questions -- are you -- the question is -- what if anything are you planning to increase your performance fee assets under management? And are you planning on launching any new hedge fund products, or could you potentially do a secondary offering of Endeavour to increase the size of the asset pool?

I think the asset pool of Endeavour is -- the determination on that will come from their board, and it's difficult if the stock trades below its book value to go ahead and be dilutive. They're very disciplined, the return on capital model, and Endeavour is probably one of the most undervalued investments out there at this stage if you're looking at resources. So, I would be surprised if the board said go ahead and do something below its NAD.

The next question is regarding the hedge fund model. We are looking at alternative estimates, consulting, just like on Endeavour. Last October I went on the board. In February we started to mention the assets, and we participate [in] that because our reputation and our intellectual capital allowed us to participate in that particular fee.

Going forward, the fee for Endeavour is a flat 1%, and above an 8% hurdle rate there is a performance incentive fee. Now, we do not know when that will be achieved; that's a function of markets, and also it's a function of great stock-picking.

Next question? The question is regarding fund flows and trends. I think the biggest thing for investors to recognize is that our analysis has shown that fund flows seem to go off the 50-day moving average more than anything else, and then the 200-day moving average. The only rational thing we've been able to determine what drives that is that the Yahoo!, and a lot of these Internet Websites and Bloomberg, default to a 50-day and 200-day moving average.

So, we do see fund flows coming into the funds and leaving the funds. With gold bouncing from the June lows, we've had positive fund flows. And we continue to be recommended by many (indiscernible) writers. So, from that end, I think that that's the best way we've been able to determine. It's not 100%, but it is probably the most sensitive indicator.

Next question? It's a great question. Oil and gold ETFs are relatively new; do these new listings represent a threat?

I think that they are not a threat because we look upon them as a bogey to beat. And we analyze what stocks are in those ETFs, and we may use them at times for liquidity. We have found them useful for moving in and out when we have high volatility, so we've found them useful in that context. I do think for the industry as a whole, for the sort of more passive or sort of quasi-style box index huggers, money manager, they are a threat to the mutual fund industry. There is no doubt that is our thought process. And that's one reason why our way of looking at the world and how we manage money is very fundamentally different for picking stocks, globally going all over the world, and then using a lot of quantitative models to trade -- and not to be a hyperactive trade, but an opportunistic, risk-adjusted trading using mathematical models. And that's much more like the hedge fund world.

Next question? How large of a base of asset center management do you feel you can manage with your current staff?

I think that going forward, it might be another one or two quant analysts. We are looking, exploring some unique joint ventures with regard to quant analysts. I think that in the marketing end, in the higher-end distribution for the alternative investment class, that sort of much more sophisticated sales and marketing, this is where we are exploring right now today to manage it.

Now, how many assets can we manage? The gold assets are more challenging as the funds grow. But at the resource assets, I think we could go up tenfold in global resources and still be able to get significant alpha, mainly because the energy space and some of these other spaces are so much bigger and there's so many opportunities. And we just feel that -- mentioned this many times on our Website -- the cyclical market is on. The synchronicity of economies, as the market slows down, we go through a soft landing -- it does have an impact on the rest of the world.

But another factor to consider is that we are going into the third year of a presidential election term in America. And based on historical and probability models over the past 70 years, markets will be favorable next year and the following year. And we document this and we have this on our Website. So, that will be robust for the overall emerging economy and emerging countries that are doing everything to emulate the American model.

I don't think there's any other questions with that. So, all those who are listening, as I said earlier, I do recommend that you sign up for the investor alert if you have not, so you can keep a pulse of how we're thinking and working as an investment group. If you have any ideas, please feel free to send them into us, to whatever it takes to make us a better company. However, we do know that we cannot make all the people happy all the time and we can never make one person happy all the time. But we do strive -- it's very important, our company values teamwork -- very significant. And we've had this audited, this sort of culture of how we function, and we feel very comfortable that markets will be volatile, and we have the tools and systems to be able to manage those windstorms. I want to thank everyone, and the 10-K should be out next --

On or before Wednesday, September 13th.

And you commented at the beginning.

Yes.

So, to just make sure for all those listeners, the 10-K will be out next week. Thank you very much, ladies and gentlemen.

This concludes today's teleconference. Thank you for your participation.