US Global Investors Inc (GROW) 2011 Q4 法說會逐字稿

Welcome to the U.S. Global Investors earnings announcement for the fiscal year 2011. Please note that these slides you see on your screen are controlled by the presenters. Also, you may present a PDF of today's slides at any time by clicking on the 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 at U.S. Global Investors. Mr. George?

Thank you. Welcome, everyone, to our Webcast announcing results for the 2011 fiscal year. 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-K 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.

If you have a question for us you can submit it at any time during the Webcast. Simply type your question in the dialogue box at the bottom of your screen and click submit. If we aren't able to answer your question during the live presentation we will follow-up with you individually after the call.

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

Thank you, Ryan.

Page 4. Our strengths at GROW, we're a go-to stock for exposure in emerging markets and resources, we're debt free, strong balance sheet with a reflexive cost structure. And that's a very important part of our overall structure and that is it's adaptable to market conditions. Salaries on a relative basis are lower than our peers. And performance drives incentives for total package to fund teams. So I think that that's a very significant factor in these volatile markets.

Other parts that are key is monthly dividends return on an equity discipline. On page 5 you can see the 10-year comparison. Our 1-year performance is 34.12% and our 10-year annualized is 31.5% returns on capital for shareholders.

Page 6 is our top institutional holders of growth. Royce & Associates specializing in small cap value owned 14% financial and investment management group which is Fidelity, the Financial Asset Management group is 8%. Perritt Capital Management, SunAmerica Asset Management, and BlackRock Fund Advisors.

Next page is 7. As I mentioned earlier the past year we're up 34%. Our market cap is $111 million. And on the next page, page 8, our fiscal year over year financial highlights, average assets are up 11%, revenues were up 20%, earnings per share were up 46%, and working capital, 14%.

Page 9. Dividends paid monthly, consistent for 48 months, $0.02 per share. Current yield is 3.3%, with a share price at $7.21. The next visual is page 10, is showing the dividends being paid since 2009, '10, and '11, consistent at $0.24 per share per year. Next visual is showing you quarterly average assets under management, which is important because quarterly average assets increased 52% from the lows of March 2009.

The next visual is showing you, on page 12, the earnings per share quarterly, where they are. And what I'm really happy about is how we adapt and adjust it when you compare year over year for March to June quarter to the previous year, and then how we've adapted to this year to the volatile marketplace. What it really shows you here is that we have tremendous leverage to rising market conditions, emerging markets resources. And just general overall market conditions with our cost structure.

Next visual is page 13, pretax margins. You can see that our goal is 30%. That's an industry average. And we've been hovering around 25% to 30% on a per quarter basis. On a year over year basis, the margins, when we just look at 12-month average, they were just shy of 30% and we're in the right direction.

Balance sheet, as you can see here, is no debt. And cash and cash equivalents and investments continue to rise.

Page 15. Three reasons GROW is more attractive than peers, in our opinion, is based on some key value metrics, growth in earnings per share, value of PE ratio, and income dividend yield. So we take a look at the leverage capacity to a rising market, 83%, the peers are 42%. When we look for value, a lower PE ratio than our peers. We trade at a lower PE ratio. And when you look at dividend yield, we offer investors a higher dividend yield. So that's a real key factor of 3 important significant factors that you see investors like Royce Funds who are a small cap value specialist looking at these metrics to consider investing in U.S. Global.

Now I'd like to turn it over to Catherine Rademacher, our CFO.

Thanks, Frank. Good morning. Frank's touched on some financial highlights. And I'd like to summarize our results of operations for the fiscal year ended June 30, 2011. And starting on page 17, we recorded total revenues of $41.9 million for the year, up $6.9 million or 20% from the $35 million we reported last year. And to summarize the primary components of the increase, starting with advisory fees, we saw a 25% increase in our SEC registered mutual fund advisory fees, largely due to an increase in our higher margin natural resource funds. Of the $6.9 million increase in revenues, mutual fund management fees contributed $3.2 million, and mutual fund performance fees contributed $2.2 million. Offshore fund performance fees also contributed $908,000 to the increase in revenues. Additionally, distribution fee revenue increased by $696,000 as a result of higher average assets under management upon which the distribution fees are based.

And moving on to page 18. Our total expenses for the year were $29.9 million. That's an increase of $3.4 million or 12.8%. Please note that the expenses increased at a lower rate than revenues this past year giving us some operational leverage. Of the $3.4 million increase in expenses, G&A, general and administrative expenses, increased $1.9 million or 27.7% as a result of an increase in sales related conference and consulting fees and implementation of new software. Platform fees also increased by $721,000 or 12.9%. That was primarily due to increased assets held through broker dealer platforms. Advertising increased $624,000, or 48.3%, as a result of increased marketing and sales activities. And finally, employee compensation expense increased by $555,000 or 4.7%, primarily due to higher performance-based bonuses.

Next, we can go to page 19 which shows our net income for the year of $7.8 million or $0.51 per share. A 46% increase over the $0.35 earnings per share reported in the prior year.

Starting on page 20 as the balance sheet. Frank talked about the strength of our balance sheet earlier. And to put some more numbers to that, the value of our cash and securities increased by $5.6 million or 18% over the prior year to $37.6 million. Cash and securities combined make up about 82% of our total assets compared with 78% last year. We continue to have positive cash flow while maintaining our dividend discipline.

And finally, as you can see on page 21 we still have no long term debt, as Frank mentioned. And the Company has net working capital of over $32 million and a current ratio of 7.6 to 1.

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

Thank you, Catherine. Good morning. I'd like to update you on a number of significant items during the fiscal year. Average assets under management for U.S. Global's mutual funds increased about $250 million or 10% during the fiscal year. The bulk of these assets under management fall into the gold-oriented and natural resources category. Our largest fund, the Global Resources Fund, finished the calendar year of 2010 as the top-performing fund in Lipper's global natural resources category for both the 1- and 10-year periods. And as of June 30, 2011, the Global Resources Fund remained the number 1 fund in its category for the trailing 10 years, which is quite an accomplishment.

In addition to attracting new investors, fund performance is important to us because the performance-based fee structure that was implemented in the 2009 fiscal year, if a fund outperforms its benchmark by 5 or more percentage points over a rolling 1-year period, the advisor will receive a 25 basis point performance fee. Conversely, if the fund underperforms its benchmark by 5 or more percentage points, the advisor will forgo 25 basis points of its fee.

During the past fiscal year institutional assets under management grew roughly 16% as of the end of the year at June 30. The largest source of the increase was via the Schwab platform which experienced a 16% increase during the fiscal year. In addition, assets clearing through the TD Ameritrade platform increased 10%, while assets through the Fidelity platform were relatively unchanged. The breakdown between retail and institutional assets remains relatively unchanged also during the fiscal year.

The long-term performance of several of our funds was recently recognized by major publications -- Barron's and the Wall Street Journal. 4 of our emerging markets in natural resources oriented funds ranked among the top 30 funds in the entire mutual fund and exchange traded fund universe for the 10-year period as of June 30, 2011. And this is according to the Wall Street Journal's latest Mutual Funds Quarterly Report. 2 funds ranked in the top 10, our World Precious Minerals Fund and the Gold and Precious Metals Fund, ranking fourth and ninth, respectively. The Global Resources Fund ranked 21st and the Eastern European Fund ranked 27th. The long-term performance of these funds is a testament to the shift that's taken place over the past decade as global growth has shifted to emerging markets. Frank will go into a further detailed discussion of this transition in a moment.

One of our values at U.S. Global is to be performance and results oriented. And since 2006, 6 of U.S. Global's 13 funds have received a total of 29 accolades from Lipper. This is a testament to the performance results our funds have posted over the past decade.

I'd also like to highlight some of the successful efforts we've had in extending the U.S. Global brand to new audiences. During the past fiscal year, Frank Holmes and other members of our portfolio management team have appeared on financial television 69 times. They've conducted 10 national radio interviews and were mentioned more than 6,000 times in market news stories. Our sales teams participated in around 45 retail and institutional investor conferences throughout the year, many of which featured Frank as a keynote speaker. Our funds also received 449 recommendations from assorted financial newsletter writers during the fiscal year. These efforts are essential to expanding our brand. Each of these interviews, the mentions, the recommendations, the conferences are an opportunity to reach new investors.

Lastly, I want to invite you to browse our series of mobile apps for the iPhone, the iPad, and the BlackBerry. It's important for global investors to keep current on market news, and these mobile apps allow our shareholders to bring along our award-winning research as they move around the world.

And now, Frank, I'll turn it back over to you.

Thank you, Susan. Thank you, Catherine. Let's look at the S-curve and why we think we're still in a very special market. I wrote a piece on the weekend regarding these markets and comparing the previous couple years. Of the S&P 1500 stocks, over 700 are seeing their revenue grow at 10%. Almost 300 of these stocks had dividend yields that are greater than the 10-year government note. Just the same as U.S. Global has a dividend yield greater than a 10-year note. And often in the business -- when I got started in the business, my mentor, and later on I've heard it from other people several times, sage-old investors, that when markets are extremely undervalued, quite often, it's regarding confidence in the leadership of the country. And I think that that's an issue here that shouldn't be confused, as we can see the all-time low in polls.

But not to be confused with what's taking place around the world. As you can see in this visual, this incredible bullet train. The Board and myself just took this from Shanghai to Beijing for that experience firsthand and it's traveling at 180 miles an hour. It's built on a cement platform that averages over 20 feet above the ground and it is such a smooth ride. And it's quite amazing to see what China is doing and I think that leadership will have a significant impact in other nations around the world. And this is part of the turnover, the S-curve, of looking for these big trends that are taking place. And I'd like to remind investors there are 2 big S-curves taking place, and they are in opposite directions to each other. One is debt contraction. And when you have the G7 countries going through a phase of debt contraction, it is much more profound and significant in the marketplace. And, two, you have a huge build out in emerging markets. And when we look at the '70s the population since the '70s has doubled. And China and India have a global footprint and they are embracing free economics, free markets which is very different today versus the '70s when they were reclusive, when they were isolationists. And with the population doubling, I think it's so important to appreciate this big S-curve that's taking place. And yes, they can slow down modestly because they are trying to make sure there's no big inflation in any component of their economy. But this doesn't derail the long-term infrastructure projects that we see and we track that are taking place in these countries.

Let's go over and recap government policies, a very key factor of investment thesis as a precursor for change. Government policies either monetary fiscal, monetary bifurcate to interest rates or money supply. And fiscal is tax and spend, corporately or individually. And as a corporation I'm very proud to say to you that we paid a lot of taxes last year. We paid our full rate. And there are some corporations that believe that other people should pay a lot more in taxes because they're not paying the full tax rate. We're paying the full rate at U.S. Global into this great economy and doing everything we can to help this economy.

So with that, going over to the next visual, on page 32, it's not to confuse political party with political policies. If we take a look at the federal deficit under President Clinton, we can see it went to a surplus. We also know that real interest rates were 2% over the inflationary rate. And what's very significant and different, we'll take a look under Obama, is that you have big deficits and you have negative real interest rates. But there is a big difference in psychology. And that is, during the '90s, not only did President Clinton raise taxes but he also, and more significantly, he deregulated. And when you deregulate an economy it's a non-linear equation. It unleashes much more capital and intellectual enthusiasm into the marketplace.

So the deregulation of telecommunications, the deregulation of unleashing the Internet, and the deregulation that took place in banking was very significant in creating a huge economic boom. And that deregulation has basically reversed itself where everything is on steroids and regulations in every aspect and component of our lives. And this is very costly. And the expectations are very different. And that's what's causing a lot of CEOs to be very cautious because they just aren't aware of the implications of Obama Care or healthcare, what's going to take place, in 2013. And I think these other, the Dodd-Frank has created a lot of cholesterol into the financial engine. And this is what creates the opportunities as people become concerned over jobs. But also the capacity of how can the economy function in a most highly regulated society that is growing rapidly.

So we would like to take those policies and compare them on E7 to G7 countries, which you see in the next page. And we like to compare the 7 most populated countries to the G7 countries. And what you see here is 50% of the world's population are E7 countries. And you're also seeing that 21% of GDP are in these countries. But these countries are growing significantly faster than what the G7 countries are. Even though the G7 countries are 50% of the world's GDP, they are growing at a very meager rate. And that's what's significant and important for taking a look at emerging markets.

On the next visual, we see a high correlation of money supply growth, and with economic activity. What you're seeing in the US is substantial injection of capital into the financial system but there's no loans. And there's no loans because of sentiment, an uneasiness over all the aspects, all the different dimensions of regulations in the economy. When you compare that to the E7 countries, money supply is growing at 17%, which is a slowdown. But what we have seen in our research is a high correlation between infrastructure spending, economic activity, GDP per capita, and the capacity of our money supply growth.

The next visual is something we try to articulate and educate investors, is the reasons for active money management over ETS. Because of the basically inherent volatility in commodities. What's in the attic one year is in the basement the following year. So it's important to recognize that for Global Resources to be able to deliver its performance is being able to rotate amongst these different commodities.

The next visual is anticipate before you participate. It's for investors to understand the volatility that is in all these different asset classes and each asset class has its own DNA of volatility. And U.S. Global as a company itself has tremendous volatility from gold-oriented investors to emerging market investors to value investors. So with that, what we've done is try to highlight to you our cost structure. And how we try to keep our salaries low and bonuses tied to performance in all departments. Because the underlying assets which we have our expertise in, we take a look at gold stocks, it's a non-event over any 12-month period for gold stocks to go plus or minus approximately 40%. And it's a non-event for emerging markets to go plus or minus 30%. And for the S&P it's 20%, approximately. So when you take a look at these numbers, it's important to be able to have an engine, a Company that can adapt and adjust and still prosper during these huge cycles, even though we have a major S-curve is still being able to participate.

The last visual here is just highlighting the importance of having diversification of our portfolio and the importance of commodities going back to 1971. It was August 15, 1971 when gold basically became unleashed to the marketplace. It was no longer convertible into dollars. And what we're seeing here is that by rebalancing each year in commodities, 50% stocks and 50% commodities that you far outperform only commodities or just the overall S&P, and you drop your volatility dramatically.

Please come visit us on Facebook, Twitter, FrankTalk, Investor Alert. And now I'd like to turn it over to Q&A.

Thank you, Frank. Now, we'll take some questions. (Caller Instructions) We've had 1 question come in already. Frank, you touched on this some. What are your thoughts regarding the disconnect between the earnings for S&P 500 companies and the market movement lately?

I think a lot of it has to do with sentiment and lack of confidence in leadership. And not to make it personal. But it's just so important to go back, and we've written on this, over the past 400 years there have been 47 such crises. And social groups as an entity, as overall, they function in very similar patterns. And it takes about 16 quarters. We go into a blame game and then we realize the blame game has gone too far and all of a sudden, the swing starts to take place in the opposite direction. Right now, it's still a blame game, blaming banks in Europe. There's a surtax on banks, there's a cap on what banks are allowed to make, et cetera. And at the same time they've been encouraged to make loans in other sovereign debts throughout Europe. And this has been causing tremendous difficulty and problems.

And domestically in America, the attack on banks. $30 billion last week was announced Bank of America gets an injection from Warren Buffett. And at the same time is being attacked for mortgages. All that creates a negative sentiment because you need to have a healthy banking sector to have a healthy economy. And this is what's a key factor. In all the research going back over 400 years, the most key significant factor to every bubble and every massive correction, it happens to be leverage. And government policies that allow excessive leverage have always come back to haunt the economy. And at the same time, group psychology basically comes back and tries to blame a sector or a group, or an individual gets blamed for all of this, when really it's policies about managing leverage.

Another area of disconnect that's received a lot of attention is gold stocks versus gold bullion. Could you discuss recent gold stocks performance and how that's created an opportunity possibly?

Sure. What we've seen in gold stocks, have basically been sold with the derisking of all stocks. And the fear of a global economic slowdown of a magnitude of 2008 because of the fear of contagion of banking within Europe over Greece and Italy and Portugal and Spain. We don't think that that's going to take place. You can have a modest slowdown but we think it's greatly exaggerated. And the recency phenomenon, which is well documented by behavior finance PhDs on dissertations and papers on this subject, the recency phenomenon has anchored everyone's hearts and minds of 2008. But we don't think it's going to be anything close to that in the way the markets are conducting themselves. So you're seeing gold stocks get sold down with all stocks. However, gold prices are up dramatically in August, up substantially this quarter on a year over year basis. So they will have significant growth in revenue and cash flow this quarter.

What we're seeing is rising dividends to be able to compete. These gold stocks are basically trying to compete with the bullion EPS and we think that that will continue. We think there's a sea change in strategy in many of the major corporations, gold corporations. So I think that you'll see this rebound taking place in gold stocks. We've seen it before. Just like growth stocks and value stocks become in and out of favor, bullion to gold stocks become in and out of favor.

So basically, Ryan, it sets up a great opportunity. And that's what these crises do. And if you understand volatility, you don't borrow to be able to participate in that market. You can buy 100s of stocks paying dividends greater than the 10-year government note, and with top line growth of over 10%. I think that this is very significant. And most American corporations are extremely lean, competitive machines, just like we try to function at U.S. Global having no debt and being able to participate in this global economic growth.

Thank you. That's all the questions we have for today. This concludes the U.S. Global Investors earnings Webcast for the fiscal year 2011. This presentation will be available for replay on our website at www.usfunds.com. Thank you all for your participation today.