US Global Investors Inc (GROW) 2009 Q2 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the US Global Investors exclusive webcast US Global Investor earnings announcement for the second quarter of fiscal year 2009. Please note that the slides that you see on your screen are controlled by the presenters. Also, you may print a copy of today's slides at any time by clicking on the "print slides" button on your screen. A question-and-answer session will follow today's presentation. If you would like to submit a question during the webcast, simply quick the "question" button on the upper right of your screen. It is now my pleasure to introduce your host, Terry Badger, Director of Communications with US Global Investors. Sir, you may begin.

Yes. Thank you, operator, and welcome, everyone, to our webcast announcing results for the second quarter of fiscal year 2009. The presenters for today's program are Frank Holmes, US Global Investors CEO and Chief Investment Officer, Susan McGee, President and General Counsel, and Catherine Rademacher, Chief Financial Officer.

During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don't pertain to historical facts are subject to risks and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-Q filing for more information on factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today, and US Global Investors accepts no obligation to update them in the future.

As mentioned earlier, there will be a question-and-answer session following today's presentation. If you'd like to submit a question during the webcast, feel free to do so at any point by clicking the "questions" button on the upper right of your screen. I'd now like to turn the presentation over to Susan McGee, US Global Investors President and General Counsel. Susan?

Thank you. Good afternoon.

There are four key factors that we will be highlighting in today's webcast. Number one, we want to stress that US Global Investors is debt free and has a strong balance sheet. Number two, we do not have any hot stick derivatives in our fund that we manage. Thirdly, we will be discussing several significant corporate events that were implemented during the December quarter, which we believe will position our company for better markets ahead. Lastly, we were impacted, both the company's stock and our funds under management in a negative manner during the quarter by massive global deleveraging.

Now I will pass it on to Frank Holmes for more details. Frank?

Thank you, Susan. This massive global deleveraging is a factor that drives down assets. And I think it's important, before I start going through our financial snapshots, is just to recognize that there is a high correlation of our assets and our stock price to emerging markets and resources, and there is a strong inverse correlation to the dollar, and the dollar had basically a parabolic move up this quarter, which drove down asset values of emerging markets, so we'll talk more about those factors and why we believe the worst is behind us.

Lets go to slide number five, and let's talk about the financial snapshots. What you see here is on a quarter basis, year-over-year basis, the revenue declined substantially. Catherine is going to go into more details, but a lot had to do with special events taking place, but what's important here is that net income fell from $2.5 million to $1.7 million, and earnings per share swung from $0.16 to minus $0.11.

I'd like to go to page number six, and this deleveraging Susan mentioned, as you can see, the assets declined as the dollar rose, and there was liquidations of resource equities in emerging markets. Next page, assets under management, as you can see here, our assets fell 65% on a comparing quarter year over year, peers fell 29%. This is quite simple. Most of our peers have very small exposure of their total assets to emerging markets and resources. And I think that's a key factor. But the next ones are interesting for us, because on page eight, you can see that our earnings declined less. The industry as a whole had a substantial decline in earnings.

And next page is return on equity. Our returns on equity for the quarter were below our peers, but still, over three years, we are close to double our peers. What's important is that our discipline, we run basically a low-cost model, and performance drives the bonuses, if we don't have performance, then we're not going to have bonuses, so that means our expense items we can manage better. Because you can see, from the next one is slide 10 is leverage for financials, what we're looking here to compare is the long term debt to total cap. GROW is zero. Our industry peers averaged 30% debt. The major banks are 70%. The reason why I bring this to your attention is that we declined the same percentage as major banks, but we do not have 70% leverage. In fact, we have no long term debt or short term debt, and we have lots of liquid cash in our balance sheet. The analytics of the marketplace, looking at balance sheets as a concern, we feel that we are very healthy.

Significant events that took place, I'd like to turn it over to Susan McGee.

During the December quarter, we implemented several things here at the company. We combined our two mutual fund trusts into one trust for better efficiency in operations here. We also implemented new management advisory contracts on several of our funds that were updated and approved by our fund shareholders. We also implemented the performance fee on our equity fund, and those performance fees will begin to be paying out in October of '09, and lastly, we have new distribution plans of 25 basis points, also on our equity fund. On page 12, we want to highlight that in November, we took over the day to day management of the Eastern European Fund and the Global Emerging Market Fund, and also in November, we did end our advisory relationship with Endeavor Financial Corporation.

And now to Catherine.

Thank you, Susan, and good morning, everyone. I'd like to briefly summarize our results of operations for the second quarter of fiscal year 2009, which ended on December 31st. Starting with revenues on page 13, we reported total revenues of $2.8 million, as Frank mentioned earlier, for the quarter, down $8.2 million, or 80% from $13.9 million for the same quarter last year. The largest decline in our revenues came from a decrease in our investment advisory fees of $8.3 million or 73% to $3.1 million. This decline was a result of decreased assets under management, primarily in the Natural Resource and Emerging Markets Fund, as Frank touched on earlier.

Secondly, corporate investment losses also decreased by approximately $3.4 million compared to the same quarter last year for a loss of almost $3 million. Pardon me, I should have said corporate investment losses increased. This amount includes approximately $2.5 million in writedowns of available for sale securities, and all of $600,000 in unrealized losses in our corporate trading investment, as a result of declines of the market values in securities.

Going to page 14, looking at expenses, our total expenses for the quarter were approximately $5.3 million. This is a 48% decrease compared to the same quarter last year. The largest reductions in our expenses was in subadvisory fees. Those decreased $2.1 million to $483,000, resulting from a decline in assets under management in the Eastern European Fund as well as the change in the subadvisory contract with Charlemagne that Susan mentioned. Secondly, platform fees decreased by $1.5 million, or 65%, as a result of lower assets under management, and also, employee compensation declined by $1.1 million, or 32%, to $2.3 million in the current quarter, due to lower bonuses resulting from decreased assets under management, as well as lower relative performance of certain funds during the quarter.

Next, we can go to page 15, as you can see on a pretax basis this quarter, we had a net loss of approximately $2.5 million, or $0.16 for the quarter. I'd like to point out that included in that net loss were the realized and unrealized losses on investment I mentioned earlier of $3 million or $0.20 per share pretax. So excluding these losses on a pretax basis, the company would have earned $0.04. After tax, still on page 15, we show a net loss for the quarter of $1.68 million, or $0.11 per diluted share, compared to $0.16 earnings per diluted share in the same quarter last year. Finally, I'd like to emphasize the strength of our balance sheet, starting on page 16. As you can see, our cash, cash equivalents, and marketable securities combined make up about 73% of our total assets. And on the next page, page 17, you can see that we still have no long term debt, as Frank mentioned again, and the company has strong liquidity, with net working capital of $27.7 million and a current ratio of 13 to 1.

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

Thank you, Catherine.

What you saw in the past quarter was an aggressive writedown of assets we have in our funds, and as I will share with you, we make investments in our funds and we make investments in some of those liquid securities, but there are these new accounting rules, and following those accounting rules, if they're not up over 12 months, you have to take what's called an impairment. So we've taken a decline. When you look at that balance sheet, it's sparkling clean, to me, as Chief Investment Officer and CEO. And I think what's important, I want to come back before I go into the future, is to compare how much the revenue drop you saw on page 13, and what we'd expect, basically mutual fund advisory fees declining by almost 70%, that the earnings would decline even substantially more than our peers who had less of an asset decline, and this is just to point out that we do run a very lean machine, and offer tremendous leverage for these resources when they turn, and we feel that some of these -- some of our funds are showing very very positive price action, in particular, gold, and I'm going to comment on gold in this presentation, key sectors for 2009.

So I'd like to jump over to page 19, our strategy for enduring a credit crisis, is to stabilize the volatility of our funds, reasons massive headwinds from billions of dollars of hedge fund redemptions, governments' responses yet to generate sustain confidence in the plan, and credit contraction has gone global. The tactics during this quarter were to raise cash levels, utilize covered writing until our proprietary macroindicators turn positive. We are starting to get traction in the past 30 trading day, in the past 60 trading days, we're seeing it in gold, so I think it's important, there is some opportunities in this marketplace.

Navigating on page 20 through the turmoil, frequent communication with the shareholders in both markets and factors affecting the funds, and loyal shareholders voted for a new contract during the volatile market, and a higher cash position helps to manage this extreme volatility. Page 21. We've gone back and analyzed as many different perspectives on how long do these bear markets last, what is a credit crisis, we've commented on this and how often you get a credit crisis and a currency crisis. So only 2% of the time in the past 100 years do you get both, so 98% of the time, it's not as severe as this. So when it's as severe as this, how long do you expect it will be before you get a turn? It's interesting that it shows in many models, that it takes about 9 months for massive money supply to have an impact, and it takes about 2 years for credit lending to get back to where it was a year ago. So the stock market, the average bear recession is about 13 months, and this seems to be much more like 1973 and '74 was more difficult and challenging, so the concern is what will '09 be? But we feel that governments responded globally, not just in the US, but around the world, to huge monetary and fiscal stimulus packages that will basically make next year or this year not like '74, where two back to back years were down. We'll probably have to wait to the second half of this year before we start getting this traction.

Page 22, we track government policies, we mentioned this many times. We like to compare the emergent 7 most populated countries to the G7. The fiscal stimulus around the world is substantial, and infrastructure spending, the leadership is coming from China, both in how quick they've committed to it, and basically true infrastructure spending by dollars, but coming back to what's important is all the other countries are increasing their fiscal stimulus. Next, important, is commodities. There's a high correlation to money supply printing and commodity traction, and if it takes 9 months, we're starting to see some support. We're seeing the Baltic shipping rates are finally turned up, we've had a couple times here we've had 10% moves. This is important for the basic material shipping around the world. It fell 94% in six months, basically reflecting the crisis, that is banks will now longer offer letters of credit to be able to ship toys, books, commodities anywhere. Now it appears that we're starting to get some type of a movement, which is very important.

Let's look at 24, the biggest GDP in the world, money supply is increasing rapidly, today we had a senior person for the Federal Reserve speaking at our research meeting, and what was most interesting to us, what shocked us, that since the early '90s, the Federal Reserve has not been including money supply in their econometric models, and money supply is very significant, and what they were focused on was just credit spreads and currency spreads, so there's much more, it's so important to follow money supply to get an appreciate for inflation, and it takes several years before you're going to get this expected inflation, but gold is basically moving because of expected inflation and the sheer size that money supply is growing at 20% compounded.

Let's take a look at 25, which is a the largest, most populated country in the world. Money supply turned positive. Next is a composition, 26, of China's fiscal stimulus. As you can see, it's railways, highways. It's over $500 billion, committed, almost $600 billion committed to infrastructure spending. And we feel that the leadership by China will show up in demand picking up and now we're seeing the Baltic shipping rates, so we feel it's being validated, that they've made the stimulus package and you can see a more detailed breakdown of China's infrastructure spending by Morgan Stanley compared to rest of Asia. They dominate 72% of the infrastructure spending.

What makes us long-term bullish is demographics is the key. Emerging markets will account for nearly three-quarters of the world's urban population by 2015. Half of the global population, 3 billion people, are estimated to live in urban areas. Projected urban population is larger than the entire world population in 1965. The next visual on 29 is rapid urbanization in China and India. It's not going away. It's been delayed, but it's not been stopped. Next is a some commentary that basically China has redefined the urbanization scale from 2005 to 2025, Chinese cities will add more than 350 million people. They continue with skyscrapers, and what's important, is that as they redefined urbanization scales, we're seeing in this past month, a huge spike in lending in China. It just takes a while before you start seeing the demand pick up for the commodities.

Why is infrastructure spending important in America? Well, let's take a look at this ABC step model. For every $1 billion that we commit to infrastructure spending, we'll create almost 35,000 jobs, and the multiplying effect of economic activity is six-fold. Next page is 32. New emphasis on US infrastructure. We will build the roads and bridges, the electric grids and disto lines that feed our commerce and bind us together is what President Obama said in his inaugural speech.

Page 33, Obama's administration begins with a fiscal stimulus as top priorities. It's gone back and forth in a debate. If it came back and basically the comments were there is not enough money in hard core, bridges, et cetera and I think that you will get a stimulus package that will be much more infrastructure focused, long-term infrastructure spending. Page 34 breaks down the American Recovery and Reinvestment Bill of 2009. This will evolve and change, I'm sure over the next couple of weeks, but what's important is that the politicians are focused on infrastructure spending. And for us, in products, our Mega Trends basically is our great fund. It's focused on this global and domestic infrastructure spending.

Page 35 is oil consumption, an infrastructure driver. What's important here is the share of global US consumption of the G7 and non G7 countries has swapped places from 1975 to 2008. And G7 barrels of oil consumed per year actually peaked years ago while the non G7, which we like to call our E7 countries continues to rise from a very low base. Page 36, the emerging markets are still growing, even though we're going to see a decline. Overall, as a slow economy, you're still seeing strong, healthy demand from non-OECD countries or the emerging markets. Page 37 is a supply issue. This supply issue is just not oil. And what we've witnessed in this past quarter, with the price of oil falling so rapidly, is significant contraction in spending, looking for exploring and developing oil fields around the world. This will have a big impact because the world continues to have a million babies a day and this isn't going away.

Next, page 38. Shows you that OPEC spare capacity is on the rise in the near term but still it's very, very tight. And any turn in economic activity can be quite significant. We've highlighted before is that money supply is highly correlated to oil demand, and it takes about nine months, so it's by June of this year that we expect you're going to start seeing traction, based on this model of high correlation with money supply and demand for commodities. Particularly, oil.

Next is gold. Gold and silver have been acting exceptionally well this past month, and what is very, very different, in my 20 years of being the CEO of US Global, it is the first time we have seen gatekeepers go out and advocate a position in gold, from 5 to 8%, holding in gold, and it's reflecting itself in the gold ETF, the bullion ETF is seeing some days eight tons of gold being purchased. So what we're seeing is the SEIs and Morgan Stanleys of the world are knocking on pension fund doors and recommending and exposure to gold as an asset class and I think that we've seen the traction in juniors, and this past month, world's had an excellent move on a relative basis because of exposure to small cap and junior money companies, they started to outperform the seniors. And I think that this is a sentiment shift that's taking place and gold by many historians, financial historians are commenting that the money supply is great and it's forecasted to have many years of trillion dollar budgets in America and gold is the asset class of money at this stage and I think that we're well positioned for that opportunity.

The next is page 40, that gold is money. It's a safe haven during inflation and deflationary times and new buyers are generalists. There have been many gold equity financings in the past couple of weeks. And much of that has not been by gold funds as much as generalists, because these gate keepers, asset allocators for the first time are recommending exposure to gold. Next is page 41, is the rising -- as I mentioned the rising interest in gold, historic value. It's basically the amount of tons being purchased by the gold trusts.

What's important is on 42 is just the world of volatility we live in, and I mentioned to you earlier that all these commodities have a very strong inverse relationship to the dollar. It's expected that the dollar will decline by this time next year, and many of these commodities will rebound just based on that inverse correlation and right now with a strong dollar for the first time we're actually having strong gold prices. And that's because these gatekeepers are recommending gold as an asset class. This visual is to reflect to you, it's not just the relationship inverse to the dollar, but each of these commodities have their own volatility. And seldom will you see what's on the bottom, stays at the bottom. It rises the following year, and it's important to recognize the extreme volatility that can take place with each of these individual commodities.

So this is the end of the presentation. What I feel good about is how we're positioned, that we're a lean machine, a turn in these asset classes give us huge upside, and it's now just positioning ourselves and focus on fund performance to drive this, as we believe things will turn. I'd like to turn it over to Terry Badger to address and try to answer any questions you may have.

Okay. Thanks very much, Frank. We do have a few questions that have come in this afternoon, this Friday afternoon. I did want to address one here to Catherine. Catherine, could you please provide some more detail regarding the write-downs in corporate investments and how that may impact the bottom line in the future?

Sure. We think the impact if any will be minimal going forward. What we took this quarter was $2.5 million in investment losses labeled as other than temporary impairment, as Frank touched on earlier. That's an accounting term. When you have these available for sale securities, they're in a loss position for a long period of time, you're required to take an other than temporary impairment, which we did in December. We took a significant amount of impairment. We don't have really that much more to impair, so we don't have much more that we could have in the way of a loss on our current investment. The other portion was on what's called trading shares, that was about $600,000, and that's just a quarterly mark-to-market loss on the value of those shares. And I hope that helps.

Okay. When you make an investment, you have two columns to put them in. One column will reflect and show up in your balance sheet and another column for your investments will show up in your income statement. If the balance sheet investments after 12 months, show that a decline, then you have to take this impairment and even if they're liquid, even if they're one day settlement liquid, you have to take this write-down. Now, as the market starts to rise, it is my understanding is that you will not write up those assets until you sell them. So they will not show up in the income statement of the bulk of these write-downs, until we sell these investments, and we believe that they're very important, long-term investments, investments are in our own funds and investments in relationship that we have with our funds, so from that end, we've taken the most conservative approach to our balance sheet.

What is important is that we're not like brokers and banks that are so leveraged and some of these players were 10 to 40 times leveraged, which has a big impact to them to have to raise capital. We don't have any debt and we want to make sure that we're spic and span, scrubbed clean. Even with these write-downs and even with the lower assets, from our operations, it's skinny, but we're still making money and we're tremendously leveraged and positioned for assets rising.

Thank you, Frank. Frank, to you a question here. Given the significant reduction in AUM and loss of advisory fees from Endeavor, what measures are being taken to drive AUM growth and also to better align expenses with cash flow to protect the dividend and the balance sheet?

Well, it's several questions but I think the big simple part is that we're very lean. Our basic salaries are lower than our peers. The incentives here are based on performance. So the -- as you see, as the assets drop, the revenue dropped, so did a lot of our expenses drop. Otherwise, one would have expected a much greater loss, and in fact when you compare us to the peers, we outperformed them. But we're very conscientious about protecting the balance sheet and the cash flow. I think is that we monitor this stuff by the day. And we have a fiscal policy that every dollar's a prisoner and I've been known to say that we squeeze pennies until Lincoln screams.

Okay. Thank you. And finally, Frank, another question for you. As an individual investor in my mid-30s I recently bought shares in World Precious Minerals Fund. Does this fund provide exposure to gold and other precious metals -- adequate exposure, excuse me, to weather through economic downturns and show potential for long-term growth and earnings?

There's two gold funds. One is -- which is World, which you invested in, has a much greater exposure to small cap emerging -- they call emergent gold producers, where without getting too complex, there's so much more leverage on the upside in those mining companies, however, at the same time, there's much more risk. And what we have seen is that that junior mining space has been highly correlated with the deleveraging that's taken place in the market with hedge funds blowing out their positions. We believe that a lot of these hedge funds are gone and we're seeing that these junior stocks are starting to rise. And there's been some takeover activity. So I think in a rising gold market historically, World does extremely strong.

Now, Gold Shares, Gold Shares is only gold producers and so it has in a down cycle with gold it usually outperforms World. It's a more conservative way to invest and I believe that in looking at financial historians, the comments are quite strong for Bob Boyd who has presented in our web casts that this cycle we will see Gold take off and there are many forecasts I was told that Goldman Sachs this week is calling $1200 an ounce for gold in a short period of time. The number one strategists in Asia who is not a gold investor, does not run a gold fund but is a broad-based investor has been calling $3,000 an ounce. So I think that these funds are well positioned for a flow into gold.

Okay. Thank you, Frank. And just to clarify on that, the reference to gold shares is our Gold and Precious Metals Fund. That concludes the questions for today and with that, it also concludes US Global Investors earnings webcast for the second quarter of fiscal year 2009. This presentation will be available for replay in the coming days on our website at www.USFunds.com. And I'd like to thank you all for your participation today. Operator?

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.