US Global Investors Inc (GROW) 2011 Q2 法說會逐字稿

Welcome to the U.S. Global Investors exclusive webcast -- U.S. Global Investors Earnings Announcement for the Second Quarter of Fiscal Year 2011.

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 Resources section in the lower left corner of your screen.

We would like to begin by introducing Ryan George, Investor Relations of U.S. Global Investors. Mr. George, you may begin.

Thank you. Welcome, everyone, to our webcast announcing results for the three months ended December 31st, 2010. The presenters for today's programs are Frank Holmes, U.S. Global Investor's 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.

We're experiencing some unusually cold weather here in Texas, which is requiring us to keep our presentation brief. However, we do want to address your questions. You can submit a question at any time during the webcast. Simply type your question in the (inaudible) box at the bottom of the screen and click "submit." We will not be able to address your questions during the presentation, but we will follow up with you individually.

Now, let's go to Frank Holmes, CEO and CIO, for an overview of the quarter. Frank?

Hi, good morning. Thank you, everyone. I'm going to start off with it's been a spectacular quarter and it really shows -- it truly shows how leveraged we are in earnings and no debt to emerging markets. And I'm going to quickly go through some of the financial highlights, but the growth strengths are go-to stock exposure for emerging markets and resources, debt-free, strong balance sheet with a reflexive cost structure, and monthly dividend and return on capital, return equity discipline.

On the next side, you can see the financial snapshot as year-over-year revenue is up, net income is up, margins expanded. Catherine will go into more detail with that, but what's important is just the leverage and we are calculating that if we'll go $200 million away and new assets or money -- assets rising from peak levels of earnings just from the core mutual fund business. So as long as we keep performing, then we'll have the asset attraction and this is the big significant difference to what took place from 18 months ago.

On the top of the next one, you can see quarter-over-quarter numbers look great again. The $0.15 versus $0.08 is a significant leap and then -- and then as you can see, the next visual, assets under management, they're rising.

I apologize for speaking quickly. I've got to catch a flight to go to South Africa to do the keynote for Indaba, which is the largest resource conference in Africa, so we're trying to -- and plus the weather. We want to manage both issues.

Well, coming back on peer group comparisons, our assets in our peers grew. You can see a stronger growth in us which has one disappointing factor, but we start to see the big flows take place after the elections, even though we had spectacular performance which Susan McGee, our President and General Counsel, will comment on.

The next is just taking a look at earnings. Net income rose 55% which is better than the peers. For ourselves, this is stronger and stronger than the peers, which goes to show -- that are reflexive of the -- with emerging markets and resources.

Returns on equity, they are 16%. They're improved. That's what we like to see and now our job is to get the three-year number up and we're watching our costs very carefully and it's important because it shows up we've got margin expansion.

Peer group comparison, risk numbers for financials, which truly hurt the financials during the big correction, (inaudible) bank still stay at 63% of the balance sheet, our investment peers at 30% and we have no debt.

Now I'm going to turn it over to Catherine Rademacher, our CFO, to give you a quick overview of financials.

Okay. Thank you, Frank. Good morning. I'd like to summarize our results of operations for the quarter ended December 31, 2010, and as Frank mentioned, our profit margins have been expanding. They were 15% for fiscal 2010, 17% in the first quarter and now 20% profit margin in the second quarter of our fiscal 2011, which we're discussing now.

So if you turn to Page 13, beginning with revenues, we recorded a total of 11.9 million for the quarter. That's up 2.9 million or 32% from the 9 million we reported for the corresponding quarter last year, primarily as a result of appreciation in the natural resources-related holdings of the fund. The mutual fund and other advisory fees increased by 2.7 million or 50%.

And next on Page 14, our total expenses for the quarter were 8.3 million. That's up 23% from the same quarter last year and two items contributed most to the increase. First, general and administrative expenses, G&A, increased by 790,000 or 54%, and that's primarily relating to sales-related conferences and consulting fees and investment-related travel; and secondly, employee compensation which increased 21% or 670,000 related to performance-based bonuses.

Next on Page 15, net income shows a 50% increase in earnings per share of 15% -- excuse me -- $0.15 compared to $0.10 per share in the corresponding quarter last year, and sequentially, which is not shown on this page, earnings per share increased 88% from $0.08 in September compared to the $0.15 in December.

And finally on the balance sheet on Page 16, at December 31st, we had net working capital of 29.6 million and a current ratio of 6.3 to 1.

And with that, I'd like to turn it over to our President, Susan McGee.

Thank you, Catherine, and good morning. We had a number of significant items during the quarter which I'll go over quickly with you. Our global resources fund finished 2010 as the top-performing fund in Lipper's Global National Resources category for the one and 10-year periods. In addition, the fund ranked in the top 5% among the entire mutual fund universe for the one, five, and 10-year periods. We're very proud of this performance. It is our largest fund with over 900 million in assets under management and it's a key driver of our asset growth. The fund's outstanding short and long-term performance should help attract additional interest from both retail and institutional investors.

Overall, four of our emerging market and resource-oriented funds ranked among the top 45 funds or top 1% for total return among the entire mutual fund universe for the past decade, which is quite an accomplishment. Two of our funds, the Eastern European Fund and the Global Resources Fund, have been recognized by that research as top picks in their respective category.

We feel this recognition from Zacks is especially important because the firm evaluates funds based on the quality of the stock and a fund's underlying portfolio, as well as their expectations of the fund's performance relative to its peers. We've also seen a turnaround in performance for our funds, especially some of our larger emerging market and natural resources funds.

The turnaround in fund performance is important because of the performance-based fee structure for the nine equity funds that we implemented last fiscal year. We had discussed this before in our previous webcast. The fee structure is situated such that if a fund outperforms its benchmark by 5 or more percentage points over a rolling one-year period, the advisor will receive a 25-basis point performance fee, but if the fund under-performs its benchmark by 5% or more, the advisor will forego 25 basis points of its fee. As of December 31, roughly 68% of the firm's mutual fund assets were receiving a performance fee.

During the last quarter, our institutional assets under management grew 29% to approximately $870 million as of December 31. Our institutional assets coming through the [Vax] channel were up 24% and our assets coming through the Fidelity platform were up 33%.

Each of the Company's institutional class of funds experienced positive fund flows during the quarter. These new funds were launched -- or this new class of shares were launched in March of 2010 and they're getting increased attention from the advisors.

In addition, our World Precious Minerals Fund was recently added to the Schwab Select List. Schwab Investment Advisors use this list to screen for funds and this should bring additional exposure to the fund.

Once again, the advisors' Board of Directors has approved payment of a $0.02 per share monthly dividend for the first calendar quarter of 2011. We've had our stock dividend program, as you know, in place since June of 2007. Each quarter, this dividend policy is reviewed by the Board and the Board will determine whether to continue that policy for the next three-month period. A variety of factors do go into their decision, including the Company's financial performance, operations and capital requirements.

And lastly, I would like to invite each of you to visit our website at USFunds.com. There you can sign up to join approximately 40,000 people who receive our weekly Investor Alert or Advisor Alert. In addition, we have great resources and educational tools on the website, such as Frank Talk, Frank Holmes' blog, and our webcast archive.

Education plays a very big role in our communications with our stakeholders and one of our core company values is to be curious to learn and improve, and we urge both our employees and our investors to use these tools to explore the world we invest in.

And now I'll turn it back over to Frank to give an update on the global market.

Thank you, Susan. The S-curve, a number that visually, you'll see the big question is where are we on the curve? Where is the tipping point? And we're going through huge, two big S-curves, the super-debt contraction of the developed world and the expansion of the emerging markets. And so that creates basically an extra volatility, so we hear one week from the "PIGS," as they're called in Europe, as their debt restructure and debt issues and then we'll hear about the great growth they can place in one of the Latin American countries like Brazil or from Asia.

So I think it's important to recognize that there's such a propensity to get caught up on what's negative, but there's many positive aspects to emerging markets and resources. We gave a presentation a couple of weeks ago on outlook for resources globally. I highly recommend you go to U.S. Funds' website. You can get a more detailed explanation by myself, along with Brian Hicks and Evan Smith on the resource team, but the big part is this S-curve and where we are.

For some of these countries, we're only halfway through it and it's really important how we think and function. Look at the next visual, government policy is a precursor to change, and we take a look at the monetary and fiscal. We bifurcate interest rates and money supply, tax and spending, because we've done a lot of correlation analysis on how the impact is on markets

And what we -- we've taken the G-7, which everyone knows compares to the E-7, and this is just a simple visual that [provides] profound and significant -- as you can see that the E-7, the seven most popular countries are 50% of the world's population, approximately, and only 18% of GDP; whereas, the G-7 are [53]% of the GDP, but only 11% of the world's population.

What's important here is that money supply -- GDP growth rates of the E-7 countries, which is 50% of the world's population, are growing at three to four times that the G-7 are growing at, and that's what's so significant for driving resources.

So when governments have policies for peace and prosperity and what is the big difference from the '70s when commodities went up over supply restrictions, but there was basically a -- for a Cold-War Russia to the Middle East crises, it's a different set of circumstances today that we have China, India in the 70s that were isolationists are today building [up] their economies with free markets, and the same thing with Russia.

And this is very, very different from the previous cycles and so it's important to take a look at the next visual where the National Geographic (inaudible) many specials of seven billion people and in the '70s, there was three billion people. So the world's population has more than doubled and policies are, for the most populated countries, are basically embracing free markets and I think that's just most significant.

And we hear these numbers in your next visual, $6 trillion in infrastructure over the next three years could create an epic demand for commodities, and this is this estimate on the table. If only a third of that by Merrill Lynch's research is executed out on, then we'll have strong, healthy, robust demand for commodities.

And then the next visual just helps you appreciate when infrastructure spending is up, and it's not just empty buildings, as we quite often hear about China, it's subways. In the past 15 years, Shanghai has built more underground subway systems than what New York has done in 100 years or London with the Tube has done in 150 years. We're seeing subway systems and we're looking, building out infrastructure in China and there's a high correlation to the use of oil, and this oil also relates to the rise of the middle class. And we're seeing that and it's very significant.

When you get tens of millions of people making 30, $40,000 a year, it has a significant impact on growth and we can see in the next visual, rising incomes in the emerging markets, sustained demand (inaudible) faster. We found also because it's less debt per person and when you look at debts on individuals in these countries and you look at debt in countries, these emerging countries are very, very healthy and strong. All their problems were done in the last decade and we're seeing that up in the next visual, emerging market car sales up to twice (inaudible) and demand for resources.

The Buick Excel here is the most popular car in China which has been very significant for General Motors, and when you see them selling more cars now in China than they are in America. And what we've been commenting on five years ago is the total of highway systems and highway systems are being built up and they continue, and railway systems are going to put more demand on energy.

And the next visual is a really classic of drilling for oil in North Sea. It's risky business and all the big fields are deep, deep, miles under the ocean, and this creates a set of risks, as we saw last year with BP, but the world continues to have babies and the world continues to grow and the world -- and the most populated countries continue to (inaudible) free markets to build up the economies.

And this will create a back -- a strong wind for the demand for oil and also for grain, grain for China, grain -- if you take a look at GDP per capita where the US is and you take a look at the EU and South Korea, see where India is and China? So as those (inaudible) rising incomes starts to appreciate huge numbers, tipping points of $6,000 per person, it will have a significant impact on grain consumption.

What we're also seeing is a high correlation to demand for gold. Gold jewelry has been robust in China and India. And why? Because the migrant workers in the past two years have (inaudible) from China a 24% increase in salaries and they give gold -- and I've been calling it the "love trade." And it's a very important part of this equation. It's not just the fear trade that gold has been going up; this is a strong demand as -- for these different festivals [to come true].

So I think what's important in this presentation is to -- [isn't] just to skim over what we recently gave, which is much more detailed and exclusive, more informative, but the next visuals will show you the reasons for (inaudible) by management. These commodities all go through massive rotations and they basically, from the top to the bottom, and it's our job to be able to see what the supply-demand factors are that are driving that and rotate our weightings in our different funds to participate in this huge [go-go] in most of the world.

And the last visual here shows you the importance of diversification (inaudible) resources in 1971 as you put $1 into the S&P, U.S. stocks, it's worth $41 and as you put $1 into the commodity-linked securities, it's worth $34. As you put $0.50 in each and you rebalance each year, you make $58, almost 50% more, on your money. I think that that's just quite significant about the importance of diversifying and using resources and there's much more optionality and the performance in commodity-based stocks. And so that's what we think is a key factor, but they have to be (inaudible) managed, as I showed you on the previous page.

And with that, we have our guys traveling all over the world. Like I'm off to South Africa with Brian Hicks and Ralph Aldis is coming back from visiting Panama with [Jack], seeing the infrastructure below the Panama Canal, and then visiting operations in Colombia. So it's just important to have a tacit knowledge along with the explicit knowledge and understand how the explicit knowledge is the next visual. It is volatility. It's important to understand volatility. It's to anticipate before you participate. U.S. Global, over any 12-month period, can rise 114%, gold stocks, 40%, crude oil, 37%. Bullion is less in the S&P, as you can see.

So when you [touch] the corrections, it (inaudible) we believe that in the big S-curve, is [essentially, you] want to be a buyer and we think that it looks very, very attractive over the next several years for the emerging markets.

And with that, I'm going to end the presentation and please sign up for the Investor Alert and Frank Talks and you'll get a feel for what we're thinking about each week. And we're very, very excited about the Company, how lean we are and how the performance bonuses are all tied to the shareholders being happy. Especially when we beat an index that's related to each of the different funds by 5%, it's great for growth shareholders, but most important, it's great for the fund shareholders.

And with that, I'll turn it back to Ryan.

Thank you, Frank. I'd like to thank everyone for joining us today. This concludes U.S. Global Investors earnings webcast for the second quarter of fiscal year 2011. This presentation will be available for replay on our website at USFunds.com. As we mentioned before, please visit our website to investigate some of these research tools and educational tools we have available to you. Thank you.