US Global Investors Inc (GROW) 2010 Q3 法說會逐字稿

Welcome to the U.S. Global Investors exclusive webcast U.S. Global Investors earnings announcement for the third quarter of fiscal year 2010. Please note that the slides you see on your screen are controlled by the presenters. Also, you may print a PDF of today's slides at any time by clicking on download presentation in the Resource section in the lower left corner of your screen.

A question-and-answer session will follow today's presentation. (Operator Instructions). We would now like to begin by introducing Terry Badger, Director of Communication at U.S. Global Investors. Mr. Badger, you may now proceed.

Okay. Thank you, Operator. And welcome everyone to our webcast announcing results for the three months ended March 31, 2010. The presenters for today's program are Frank Holmes, U.S. 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 detail 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 U.S. Global Investors accepts no obligation to update them in the future.

There will be a question-and-answer session as part of today's presentation. To submit a question during the webcast, which you may do at any time, just type your question in the dialogue box at the bottom and click submit. And now I'd like to get things going by introducing Frank Holmes, CEO and Chief Investment Officer, for an overview of the quarter. Frank?

Thank you, Terry, and thank you, Susan and Catherine. I want to thank everyone for listening, because the market's been extremely volatile. I highly recommend, if you've not seen it, to go to our website at usfunds.com. And the research reports we wrote on Anticipate Before You Participate, I think it allows people to understand the volatility in the marketplace and not be frightened by it.

But, let's talk about GROW on a relative basis. We did well yesterday, in light of the volatility in the marketplace. I think some of those strengths relate to that we're debt-free, and we have a very strong balance sheet. There are no toxic derivatives in our funds, and we have a disciplined monthly dividend program.

UBS just initiated coverage of asset managers with the headline, Despite Challenges, Still a Great Business. And in that report, we're going to relate to that in this presentation to give you sort of an overview of the industry and where they see the opportunities and where we are basically positioned.

And I like to use the metaphor, a sail boater's position, and it makes it easier for the wind to hit our sail. So, let's quickly go to slide number 5, a financial snapshot, year-over-year. Revenue's up, and that's predominantly because assets are up. And what's nice to see for us is the earnings are up $0.10 a share.

And then, we take a look at sequential, it was basically the same as the previous quarter. The revenue was slightly greater in this one quarter over the next. And then, we've had just some additional costs of spending for technology beefing up our basic investment division. And some of the bonuses because we had delivered some great performance relative to our peers. But, it's nice to see this growth in the revenue on a year-over-year basis.

And now, let's hop over to slide number 8. This data is from ICI and their chart's prepared by ISI and a boutique investment group which we use. And I think it's a nice, simple visual to show you the industry that money market funds have seen redemptions over the past 12 months. This money has basically flowed into US equity and bond mutual funds. The net flow is showing an increase.

And then, we hop over to slid number 9, and you can see that there was [unintelligible] at this money flowing into the mutual fund industry, is predominantly flowing into bond funds, even though bonds are at all-time low rates, part of their ramp-up in savings rates, and the fear of the volatility in the marketplace has basically created a flow into bonds.

And we've seen a rebound in equity. But, still, nothing compared to what we've seen in the bond market, which has had positive flows. Those positive flows have had a bigger impact on our peers, the larger asset management companies and financial institutions, than we have because they have a much greater bond exposure.

Now, there's positive and negatives with that. The negative is the fee, the reimbursements, etc. for bond funds is substantially less than emerging markets and resources. There's more research that goes into what we do. But, there's also additional revenue that comes from that end. It's a higher profit margin business, which the UBS report talks about, and we're going to comment a little later in this presentation.

Hopping quickly to slide number 10. As you can see that assets under management, that they're basically the same as the peers, even though the peers have had better money flows because of their bond exposure. We've been quite competitive in the overall assets that we're managing underneath the hood. Now, the visual on Page 11 shows you that our assets are lower than the peak that took place in 2008, but we are making that climb and we're performing, and that's what's really important.

Now, what's really fascinating on Page 12 is money flows. Money flows from various platforms are predominantly in four- and five-star funds ranked by Morningstar. And we have found this, to us, most challenging and fascinating at the same time, because last year we had the number-one performing gold fund and we weren't getting the record money flows.

And even though we far, far over-performed the gold equity ETS by 50%, that we still didn't get the flows that one would expect that these other funds were getting. And there's many shifts in the marketplace of people going into these asset classes.

And it's also in the four- and five-star rankings that take place. And what we found our from Morningstar, when you try to analyze it, is that their methodology is based on the expected utility theory. It assumes investors are more concerned about a possible poor outcome than an unexpected good outcome.

And this assumes that investors are willing to give up some of their expected return in exchange for a greater certainty of return. So, Morningstar's ratings account for all variation in a fund's monthly performance. You'd probably see they're long-term investment horizon, in fact the monthly volatility has a very significant impact in the calculation.

So, when we go back and look at the resource funds, especially the mid-cap, small-cap, where we've been able to generate significant alpha in the past year, but we did get hurt after the Lehman Brothers' fiasco, because Lehman Brothers, basically, in their prime broker, took over hedge funds that were also in that space, and did forced liquidation that hurt those stocks that we also owned in our portfolio.

They've rebounded from that end of it. But, according to the Morningstar methodology, that short-term, two-month, October/November of '08 negative relative performance hurts those rankings. So, it'll burn off and then we should go back to the four- and five-star performance numbers, because the funds are beating their peers, and they're in the top half. That is not all of our funds are, but the bigger weighted funds in the complex, and where we've had the strongest reputation.

This visual's over, let's take a look at earnings. And so, our earnings are up substantially against our peers. This has to do with a rebound. This also has to do with what we've previously commented on that we keep our cost structure lean and flexible. That a lot of the G&A for bonuses are tied to performance, so that the interest of the employees is tied to the shareholders of both the funds and grow as a public Company.

The next visual is return on equity. Something that I focus on is how are we doing in our relative returns on capital model. And I'm very happy to show that U.S. Global in the past 12 months, at our returns and our capital, are higher than our peers.

And our three-year compounded annual growth rates are also, for the return on capital model, higher than our peers. And in the UBS research report, they cite 12 themes that will drive flows, profitability and growth. And we are focused on several of these themes that drive a higher return on our capital than our peers.

And I think that, as we hop through, so you can see one of the key factors that helped us during the huge market correction was leverage to financials. You can see that our peers, major banks, are basically almost 70% of their balance sheet has debt against it, and our industry peers is 27%.

And I'm happy with the rebound in all asset class managers, and our peers having more leverage, they should've had a higher return on capital relative to us, and we did, I'm very proud to share with you, exceptionally well on a relative basis.

Visual number 16, I thought, was a very interesting part of the UBS research that independent asset managers, like GROW, are growing faster. Basically, quoting them, "Consultants and investors have a general biased towards the independence, because of their focus and dedication to the business of managing assets and ability to attract, frame, and retain talent."

Large financials have many perceived conflicts, and I say they're perceived of interest, and so there's always--you have to deal with this battle between the manufacturing of a product and the distribution. And with us, what we like to stay focused on is then on driving performance and driving higher returns on our capital for all shareholders.

Page 17, in the UBS report, opportunities an in emerging markets and hedge funds, alternatives. And I think that that's where we're focused. And you're also, as you can see here, there's a higher growth opportunity, and there's a higher margin business. They're more cost associated with travel, etc. But, this is where the opportunities are, and this is where U.S. Global, GROW, is positioned.

Page 18 shows you opportunities of pools of assets and profit margins. And as you can see in this other visual, as looking at emerging markets, Latin America, and with a vast developing market, this is where the high growth is, relative to the US, the UK, Canada, Japan.

We find, though, Canada does give you an opportunity to participate in emerging markets and resources where you can buy a Company that's got 100% of their assets in a country like Columbia, but they're listed on the Toronto Stock Exchange. And that helps as a money manager. So, we find it's unique in that attribute. But, we can still be able to drive higher returns. Now, let's try and hop over to significant events, and I'd like to turn that over to Susan McGee, the President and General Counsel for U.S. Global Investors.

Thank you, Frank. On March 1st, institutional class shares became available for three of our equity funds. And those funds that now offer the institutional class are the World Precious Minerals Fund, which, as you know, primarily invest in junior- and mid-tier gold and precious metals exploration companies.

The Global Resources Fund has an institutional class, and that fund is investing in energy and natural resources equities. And lastly, the Global Megatrend Fund. That is our infrastructure fund. It's investing in equities benefitting from the dramatic increase that we have seen in infrastructure development around the world.

The World Precious Minerals Fund, by the way, was the number 1 fund in total return among all US gold-oriented funds last year, in '09. And that's the second time in four years that this fund has earned that distinction. Institutions are increasingly viewing natural resources and precious metals as an important part of a diversified portfolio. And they are a growing component of U.S. Global's asset base. So, it was important for us to recognize that they have their own business needs and our institutional shares are responsive to those needs.

Secondly, also in March, the Advisors Board of Directors approved payment of our $0.02 per share monthly dividend for the second calendar quarter of 2010. We have had our stock dividend program since June of '07. And each quarter, the dividend policy is reviewed by the Board of Directors.

And the Board determines whether to continue the policy into the succeeding quarter. A variety of factors go into that decision. And those factors include the Company's financial performance, operations, capital requirements and other factors.

On the next slide, this slide is also from UBS and it shows the major distribution channels that we face as we sell our funds. There's been a lot of talk about independent registered investment advisors presenting a real challenge to the big Wirehouses. They still do have a ways to go, but that distribution channel is on the increase.

The Wirehouses, like Merrill Lynch Bank of America, Morgan Stanley, and others are still the main avenues for mutual fund investment, along with the regional and independent broker dealers. We're actively engaged in building up our relationships in all these channels.

And in calendar of '09, our assets under management from the institutional investor grew 76% to almost $750 million. And these institutional gains are important to us, because these investors control large pools of assets. And they make their decisions based not only on performance, but also on investment process and the quality of management.

The next slide shows that institutional investors are putting more money into the alternative asset classes. And as you know, our specialized funds are classified as alternative investments. And these alternative investments are becoming more popular in asset allocation models. And now to Catherine.

Thank you, Susan. Now, I'd like to go over our results of operations for the third fiscal quarter of 2010, starting on Page 23--22, pardon me. The third fiscal quarter ended on March 31st. I'm going to be comparing it to the same quarter last year.

So, beginning with revenues, we've recorded a total of 9.4 million for the quarter. That's an 88% quarter-over-quarter increase from the 5 million in revenues we recorded last year. And I'd like to point out that this is the fifth quarter in a row in which revenues have grown.

So, to break down the main components of the quarter-over-quarter changes in revenue, starting at the top with mutual fund advisory fees, we saw an increase of 138% to 5.75 million, largely because increased assets under management, especially in the natural resource and emerging market sectors.

Next, distribution and admin fees, combined, increased by 555,000, also due to higher assets under management. And near the bottom there, investment income showed an increase of 283,000, primarily as a result of a rebound from prior declines in the market value of our trading securities. And you'll notice on the left-hand side there, showing year-to-date, total revenues increased 58.5%, compared to the same nine-month period last year, from 16.7 million to 26.4 million.

And going to the next page, Page 23, our total expenses increased, but at a much lower rate than the increase in revenues. For the quarter, expenses were approximately 7.1 million, a 53% increase over the 4.6 million in expenses we recorded in the same quarter last year.

And several line items contributed to the changes in expenses. Starting at the top there with employee compensation, which increased by 1.1 million, as a result of higher performance-based bonuses. G&A went up by 329,000, primarily due to higher donations, travel, and conference fees.

And platform fees increased by 656,000. Again, primarily due to higher assets under management. And finally, near the bottom, advertising increased by 243,000, due to increased marketing activities. As a note, on the left-hand side, year-to-date, total expenses have actually declined almost 10%, compared to the same nine-month period last year.

And that brings us to net income on the next page, Page 24. Net income was $1.47 million, or $0.10 per share, compared to net income of $328,000, or $0.02 per share in the comparable quarter last year. Year-to-date, net income is $0.29 per share. That's compared to a loss of $0.21 per share for the same period last year.

Moving onto the balance sheet, starting on Page 25, that reflects our continuing high levels of cash, relative to total assets. Year-to-date, we've had positive cash flows of over 2 million. Combined with our [unintelligible] securities, the cash and cash equivalence total over 31 million, and constitutes 77% of our total assets, with working capital of over 28 million. And in addition, our free cash flows have totaled over 4.5 million year-to-date.

And finally, as Frank mentioned earlier, UBS Investment Research came out this week with coverage of asset managers. And in the report, one of the metrics they looked at was enterprise multiple, or it's also known as EBITDA multiple. And that's defined as enterprise value, divided by EBITDA.

It noted that for the universe of asset managers, that multiple averaged 11 to 12 times. And when we looked at USGI, that multiple is about 9.5, which indicated that GROW, U.S. Global Investors, could be undervalued. And with that, I'd like to turn it back over to Frank.

Thank you, Catherine. As I'm very biased in the [unintelligible] position, so I make sure I let everyone know that. Yes, it is undervalued. Now, what's really interesting, as you're walking you through some of the comments in this presentation, is the PE ratio on a relative basis to its peers, about the same. But, we're in the sectors where the growth rates are much higher. Yes, there's volatility. That's not going to go away. But, the growth is in emerging markets. And I think it's going to continue with that.

And now, let's quickly take a look at the global inventory rebuild on Page 27 that the world has rebounded. It's the first leg of rebuilding all the inventory from the wipeout. The concern now is that there's going to be a correction. There could be.

But, I think what's important is that most of these emerging markets, as I walk you through, on the next visual, do not have the debt burden that we're seeing in countries like Greece and Portugal and Ireland and Italy, etc. In the advanced G-20 economies, which is amazing, their debt level as a percent of GDP, is over 100%.

Whereas the emerging G-20, they've learned their mistakes from the '90s. And they have much more pristine balance sheets, as a country. I've mentioned this before. It's important to note that in emerging countries, 94% of cell phones are prepaid every month.

And cars are 90%, are paid with cash. There's no mortgage or no foreign bank boring. Whereas, it's the complete opposite in Europe and North America. 90% of all car sales have some form of debt funding with it. So, when debt dried up in '08, therefore car sales had to implode. Now, that's turned. So, car sales are more robust. But, they've continued to remain strong in emerging countries.

On Page 29, you can see that emerging nations are a better credit risk. And what it's showing on the left-hand side is that you can see that developed countries are in red, that their ratings are falling. On a relative basis, emerging countries may have lower ratings overall, but they're rising. And this is an important long-term secular trend that we believe is going to sustain itself.

And if you go on Page 30, what you can see, UBS growth opportunities in emerging countries, you compare the growth rates for this year and next year. But, this is just showing you this year. US, Japan, UK, and Europe growing relative to China, India, Russia, and Latin America, emerging countries are growing at a substantial greater rate without debt, to the degree that we're experiencing in North America and Europe.

So, this is where the funds are. There's a high correlation of resources. And that's what makes us feel very, very comfortable in that world that we're living in. And the next visual's a classic of showing you that China's driving the balance in global construction. And we can see that the world has rebounded, but China's been very significant. And that visual of the construction worker, what's important is of the relationship between infrastructure spending and the demand for oil is like 80%.

The next visual is China's consuming more, which is good for global economic activity. What you're seeing is not only is China exporting to North America and Europe. They're also importing, and that's helped German sales, as the Germans' been the leader in Europe of high-quality products, and the same thing with America is high-quality machinery.

And you're seeing that the manufacturing sector is exporting. So, that's very helpful for overall global economic activity. We're also seeing tremendous economic activity within Asia. Korea, Japan, selling into China and China buying products back and forth. So, I think that that's a very positive sign.

And we can see that with car sales in our next visual that China's car sales have exploded, along with India, along with Brazil. In fact, GM has been able to repay back $8 billion to the US and Canadian government in loan guarantees. And a lot of that in the comments was that their emerging market sales also exploded for them, and that gave them the financial flexibility and muscle to pay back the TARP money.

On Page 34 is China compared to the US, where the US slowed down. Now, you see the surge coming back, but you see China just exploding in those overall car sales and production. And what you see there is a picture of the CEO of Build Your Dreams, BYD. It's like an investment that Warren Buffet has a major commitment to. And I think it's just part of their overall success. He's also known as the Battery King. Has put a lot of money into technology for battery cars, etc.

That hops over into Page 35. China's new households, these homes are not luxury condos like we see in America, but they're basic. And what you see is that the basic appliances, they use a lot of copper. They use a lot of zinc. And here's a huge boom taking place on basic appliances in China. And that relates to Page 36. As you can see, the increase of aluminum, copper, lead, nickel, zinc, crude steel, and iron ore.

And we keep hearing bubble, bubble, and it's just a lot of trouble, because we can jump over to visual 37, and what you're seeing here is that clearly China, the rebound has been great for steel. But, that's far, far from a bubble of what we witnessed back in 2008.

This is basically a classic inventory rebuild, and the consumption for the housing market. But, it's not just the housing market in China. There's lots of road construction and we've commented on this, previous presentations, that China's put a lot of money into infrastructure building, railways, in particular.

They've got these speed trains that go 400 kilometers an hour. This is talking about 250 miles an hour. And they continue to build this infrastructure throughout the country, which uses a lot of steel. And then, with that, you're seeing a luxury demand.

Not only has luxury demand picked up in North America on products, but this, to me, was a very profound, on Page 38, visual of showing you where Cartier and Gucci and Louis Vuitton, they've expanded throughout China. It's not just in Beijing and Shanghai and Shenzhen. It is growing throughout the country as their prosperity grows.

In addition to the luxury goods for watches and purses, etc. you can see on the next visual is the demand for gold has been going up. Not only has their central bank been buying their own gold from the country's mines. You're seeing that gift giving, as GDP per capita rises, so does the demand for gold rise. And this has been a significant factor in China.

Hopping over to Page 40 is a super debt cycle bubble. It makes gold an attractive monetary asset. And this is what took place, we saw yesterday, the volatility in the gold stocks are beginning with this blip in that market. But, gold took off and was up to $30.

What we believe we're seeing is basically a competitive devaluation of all currencies. Right now the dollar is strong on a relative basis to Europe. In the second half, we could easily see the dollar be weak. And you're seeing this shift to gold as an asset class. And this is what we continuously advocate that there should be a 5% to 10% weighting in portfolios for gold. And you should rebalance with that.

Well, I'll give you some positive parts. There's always a positive where there's a negative. What's happening in Greece creates a positive for our asset classes. On the other hand, we hear the negativity about a bubble in real estate in China, and I think it's really helpful to put this in context that it's not a bubble. It's one of those normal corrections. And the residential real estate is not the only component that drives commodity demand in China.

But, let's take a quick recap, on Page 41, "Do rising property prices equal a bubble?" As a percentage of overall real GDP, and no. Far from it, as a percentage. Page 42, is China real estate, no bubble in a debt low. When you take a look at China's household leverage is relative to income, compared to what Denmark is, Ireland, the Netherlands, and Norway.

Just take a look at the countries trying to dictate our policies. I always find I'd get a chuckle out of it. And you take a look at their leverage of debt to the disposable income and you compare it to China. So, China can handle the--always be volatility in the real estate prices, but what we find is that you don't get the normal five-year debt-bubble liquidation process. You can immediately rebound in those prices.

Let's take a look at inventory on Page 43. Residential property inventories, number of months to clear the inventory. As you can see, it is down at the lower end. There's not a big spike in inventory. With the government policies try to slow down some of the real estate development, we could see an inventory build.

But, we feel that the Chinese government is on top of this right away. They've been very focused on cities that heat up. They could affect the CPI number. They do everything to slow that down. They increase banking reserves to slow down the amount of number that's being lent out towards real estate. And they're very specific on it. And we believe this is a healthy, normal process.

And the next one is showing you that unabated property price surge, immediately challenging investor sentiment, and China's responding to it. It'll go through its correction. And we think, as I said just a few minutes ago, it'll be short-lived.

Let's talk about other countries besides China, is the intellectual capital of the world. What percentage the distribution of the world's researchers, the global share of researchers, and what's really significant is when you go to Eastern Europe and you take a look at Russia, basically, population-wise, they have 16% of the researchers in the world.

When you go to grad school in America and Canada, you witness 40% are Chinese and Indians. And so often they get their PhDs and they go back to China and India. And that's all part of this long-term, secular drive to improve the quality and what's taking place in China and India.

And what I think is very significant, in this past quarter in India, is legislation to force that all children get an education. Now, when you take a look at the facts that you have 300 million people, the whole population of America, speaking English now in China, and now you're going to have 300 million kids that are going to have to get an education, I think this is very significant in India, along with, in the backdrop, what's been taking place in China.

And put this in context. In 1840, China and India were 50% of the world's GDP. And they're not even 15% collectively today. They are 40% of the world's population. They have a long way to grow on the upside, and their policies are all about education, education, and infrastructure building. And that is the backdrop for a long-term secular bull market in these resources and these countries.

Hopping over to the next visual is, I'm a big believer you follow the greenback. It drives US exports. Last year, as the dollar fell, exports started to take off, strong economic activity. The dollar's routed on a [unintelligible] basis to Europe, and we think that that's helpful in many ways. But, however, we think in the second half of the year, odds favor the dollar could decline. And this would help exports of US.

And now, like to end the presentation with taking a look at what GROW's done the past 12 months. It's been volatile, but it's up substantially against its peers on a relative basis. As I mentioned earlier, that even though we've had a wonderful run in the past 12 months, on an EBITDA basis, according to the UBS, when you look at our cash, you back it out and you compared it to our EBITDA for enterprise value, that we're undervalued.

And the bulk of our asset classes are in the most exciting places on the globe. So, thank you very much, ladies and gentlemen, and thank you, Susan and Catherine and Terry for helping out with going through this presentation. I think we're going to have a few seconds here for Q&A.

Okay, thank you, Frank. It is question time. For anybody who would still like to ask a question, please type your question in the dialogue box and hit Submit. Just a single question has come in so far, so we'll take that that the audience is pretty satisfied with the information that they're getting in the main body of the presentation.

The question that came in regards our institutional strategy. Asks about to talk about the relative success of our institutional strategy, which began a few years ago. Susan touched on that and the efforts in our relationships. But, Frank, but I wanted to at least open that up to you to see if you wanted to add anything more to that.

Sure. One of the big factors that we've focused on is that the money flow's predominantly coming through the 12 platforms of four- and five-star. And consultants, they're not just going to look at the four- and five-stars. They know the flaws in that methodology. So, we've been catering and focusing on dealing with consultants and building out relationships there, because overall the funds have performed well. Even with that blip, the rebound goes to show, as in these asset classes.

So, we have hired more people in the institutional. We have been banging on those doors. We've realigned. What's really important is this complex [unintelligible] system is the capacity to realign with shifts in the marketplace. Government policies, regulations, etc. shift the distribution, shift the importance of relationships, of how you communicate, what you communicate, who you communicate with.

So, we have been focused on that, and we've been adapting to those changes. And always looking for ways to better communicate and educate our story and our thesis. And so, we will endeavor down these steps going forward, as we have for the past couple of years.

Okay, great. Thank you, Frank. And seeing no further questions, this will conclude U.S. Global Investors earnings webcast for the third quarter of fiscal year 2010. This presentation will be available for replay on our website. That's at www.usfunds.com. And thank you, again, all for your participation today. Operator?

Thank you, ladies and gentlemen. This does conclude the webcast for today. We thank you all for your participation. Have a great weekend, everyone.