US Global Investors Inc (GROW) 2017 Q2 法說會逐字稿

Good morning. Thank you for joining us today for our webcast announcing U.S. Global Investors' results for the second quarter of fiscal 2017. I'm Lisa Aston.

If you have any questions during the webcast, you can answer them in the questioned area of the control panel sidebar, which is normally to the right of your screen. Also, you may download a PDF of today's slides by clicking on the red handout button.

The presenters for today program are Frank Holmes, U.S. Global Investors' CEO and Chief Investment Officer; Susan McGee, President, General Counsel and Chief Compliance Officer; and Lisa Callicotte, 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 filings for more detail on factors that could cause actual results to differ materially from any described today in forward-looking statement. Any such statements are made as of today and U.S. Global investors accepts no obligation to update them in the future.

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

Good morning. Thank you, Lisa. As you can see on the slide, these are our Stars in slide number 4, [we've been receiving nice] stars for gold funds and I'll comment more about that, which is so important in attracting assets in fund flows is the bulk of fund flows into mutual funds had been those with four and five stars, and that is performance coupled with risk and volatility. So, U.S. Global, we really look at our service being innovative investment management with the vast experience in global markets in specialized sectors.

The history for those who are new listeners and the shareholders, our Company was founded in 1968 and has a longstanding history of Global Investing in particular launching the first no-load gold fund. U.S. Global Investors are well known for the expertise in precious metals, natural resources in emerging markets and they're all very tightly connected, that's the important part, is trying to understand the drivers of the emerging markets of the E7, seven most populated countries versus the G7. It has helped us in understanding gold and being a star performer in the gold funds in particular and other funds applying that expertise. We strive to be a go-to stock and we find that our stock particularly moves with the price of gold and the resources in emerging markets. And it had a surge and our stock immediately -- in a short term has the surge we're just seeing. We're debt free. We have a strong balance sheet and a reflexive cost structure, which Lisa, our CFO will go into more greater detail and comment later in this presentation of how we cut costs. And then we strive to maintain this monthly dividend return on equity discipline and it's been really a challenge for the past five years since -- particularly September 2011 when gold peaked at $1,900 and oil was over $100 a barrel in resources, [that was an asset class because they were our biggest asset classes]. And as also when we look at Eastern Europe, which is 60% Russia, it's dominated by oil. So it's important to recognize that these emerging markets, they do have a strong correlation to the commodity cycle.

On slide number 6, I want to thank our top shareholders and particularly we tried to highlight FIM Group, the Royce Funds, The Newberg Family Office, the Family Trust, Vanguard and the new shareholder has shown up as BlackRock Institutional Trust Company from Century that used to be there. So, we want to thank all of them for recognizing what we -- who we are and what we offer.

Our dividends, we paid monthly consistently for nine years. Current yield is at a $1.36, now the stock has rebounded since then, is $2.21. We're paying a monthly dividend to $0.025. It doesn't cost much to pay monthly versus quarterly and has maintained that focus for us, from the cost structure and everything we do is in that monthly cycle.

The share repurchase program is still in motion. The Board has approved the purchase of the $2.75 million and during the second fiscal quarter, the Company purchased 32,605 Class A shares using about $50,000. Why we haven't bought the total dollar amounts because we use an algorithm that only buys on down days and is still subject to all the regulatory rules as the same thing with buy and sell. There are very specific rules of how much you can buy as a percentage of the daily volume, but our [whole] process is to buy only the trigger is when it's on the down day and follow all the regulatory rules that we have to; stick candles you say in hockey within those boundaries.

Our balance sheet is on the next visual. You can see that it seems to have stabilized here over the past year from June, September and December, which important. Overall, our cash is, as we showed you back into 2013, we shift a lot of our cash into higher earning investments because we went to negative interest rates and zero on money market funds and we are trying to do everything to make sure we maximize return on capital with our own assets. The next visual is a nice visual because it looks like the worse is behind us. We've commented before in previous presentations, you can go back read and listen, is closing down the money funds as a zero interest rate, it was costing us hundreds of thousands of dollars, then it became millions of dollars, even the process of getting rid of them as -- interest rates, no revenue coming in to maintain the $1 NAV became very costly with escalating regulatory costs.

So we got rid of them and then we had another impact of overall the shifted EPS in the resource sector and just the overall cost of mutual fund industry. So, we went through a process of transition to Atlantic Fund Services, which Susan may give a comment on and it's been quarterback in managing that process, but just that exercise cost the advisor a lot of money and we think we're now experiencing the fruits of that labor and those challenges.

On the positive note going through all of these transitions, dealing with the adversities and headwinds of capital markets and regulatory costs, we've got some positive news and that's really important of how you survive, they call it grip now. It's an important part (inaudible) wrote a book on it, how much grip you have as an individual and you clearly have to have in this mutual fund world of dealing an emerging markets and volatility of currencies. But with that our fixed-income assets were up about 20% last year and our gold assets also were up. And I think it's also important that you can see our operating expenses were down 41% and that's the reset. And the next visual is important, that was to reset our cost structure.

This next visual, sorry, I skipped that one. The next visual is showing you how the assets have grown. The gold assets, we've had fund flows as positive, but it's very different. It's a very, very different cycle, never in my life I've had to be the number one in my category when it comes to gold and not get substantial fund flows. Fund flows are predominant, coming to gold equity EPS or they -- not existed. I'm talking to other active gold fund managers. They have not experienced big fund flows on this huge rally in the price of gold and going around and doing a lot of due diligence in the past nine months, one of the things I noticed was that a lot of the trading is basically quant funds or macro funds in the capital markets. Even the Canadian institutions, almost 8% of their index is gold-related and the average [waiting] is only 2%. So, there's not a whole lot of true conviction towards goals and asset class in the gold equities and the gold equities are now -- free cash flow and that's brought in all the quant funds looking at those factors. If you go to usfunds.com from -- we published about this explaining how the markets have changed. And we have been adopting a change of our active funds and that's helped us and we're able to get.

The next picture is recipient. In 2016, we were winners of the Mining Journal. They looked at the world and looked at all the gold fund managers and our funds came up as being number one and so we received those -- the individual awards they call in Canada TopGun. Reason, why I say with Canada, is not because the Canadian originally, but because 60% of all mining finance last year was in Canada. It still is the most dominant place for mining finance, just like software is dominated in Seattle and San Francisco; Biotechnology is Boston and San Diego; mining -- finance and mining intellectual capital is Toronto. So, we were very proud of receiving this award for our fund performance. And a lot of this was also of risk-adjusted basis, so we would have much lower volatility than our peers in addition to participating in the upside.

The next visual is showing the quarterly average assets under management and it appears that we've bottomed and have found a trough. The next visual is the asset breakdown. And this will show you that 65% of our assets are emerging markets and natural resources. So, we do move with those asset classes and 35% are domestic equity and fixed income, and we have retail is 78%, institutional is 22% of our assets. And what's important on retail end is that we have many small accounts because we've always are advocated that you have a 10% [weighting] in gold, the average mutual fund is $50,000, then that's only $5,000.

And the overall cost, the compliance cost, the distribution platform costs is so expensive -- that really is expensive and it's got nothing but -- as a CAGR that's much stronger in the stock market over the past decade. And so therefore the cost of maintaining those accounts has only grown and I'll comment a little later in this presentation. It's quite important to recognize what's different from us from other groups-- fund groups is that we have a very strong relationship directly with our fund group because of our investor alert that goes out every Friday and we have a role and just going through the swap platforms, people deal directly with us. That has buffered some of the decline.

The next visual is, Warren Buffett, who has always been a big anti-airlines industry because they were always destroyers of the capital and we have written about this. We did a lot of research. We did create our First Smart Beta ETF and launched it and the airlines industry -- always showed us negativity. Warren Buffett didn't like the industry, as a reason not to take a look at this ETF, but now the fact that he has spent billions of dollars last year, but all the headwinds were so negative, but the underlying companies were buying back the stock and increase their dividends at a far greater rate than the S&P 500. He became a major buyer of these stocks and we've seen the benefits of that in our just ETF.

The next visuals are just highlighting what took place with gold last year. Gold was down, started its rally as you can see from its lows of just over a $1,000, it rallied up to $1,350 and during the -- prior to that, the gold mining stocks had very high expenses. Their expenses were something like $1,700 an ounce of gold, they've got them down to $950. So, at $950 when gold was $1,050 there are going to make a $100 of gross margins as gold ran to $1,350, they had an explosion in gross margin growth and free cash flow and those stocks tore -- just tore it up and after Brexit we saw another major surge in gold.

But the other thing that took place during this cycle was negative real interest rates. In those negative real interest rates is the really most important factor and for listeners who don't understand what negative interest rates are, where most people just look at the rate you get in the bank, which you're being paying or treasury bill and rate now at Fed funds was 50 basis points. So, you take away, whatever the CPI number is and you get a real rate of return. So, what that means is that real interest rates reset every month. Whatever, the government is going to issue a bond, take away the CPI number is a positive or negative.

Whenever the real rate of return is positive gold is down. Whenever then real rate of negative, real rate of return is like it's getting growing, becoming more negative, goal is rallying and that was the other key factor last year we saw until September negative real interest rates. And then it started going positive again because rate started rising all the way until the Fed fund rate hike and then rates -- the inflation starts to surge again and we saw a big spike for December in inflation and with that, we had negative interest rates, which you see in the next visual.

This is a classic. -- the five-year treasury bill as 1.8%, take away the CPI which came out recently in January for the December number, it was 2.1%. So you have a negative rate of return, you're losing money. Why would you buy a five-year Government bond. You're just going to lose -- money, so that's when gold starts to become an attractive asset class.

The next visual is trying to explain to people, the regulatory costs and retail investors are being harmed by the interpretation of this fiduciary role, even though it's being pushed back by new elected President Trump. Some of the firms are still hearing to it and the severe bluntness, just like the severe bluntness of the no-travel for Muslim countries that are enemies of our state, it's so blunt interpretation of fiduciary role and basically as said that you can't buy Starbucks, because thier coffee is too expensive. You can only buy cheap funds. It didn't matter the performance, it didn't matter your 5-star, if you're going to be on a platform, it's only the cheapest, cheapest, cheapest. And so we saw that as another factor being of pulled off of platforms and redemptions taking place and money going into - where the cheapest product has nothing to do with what is the best performing. Maybe that will change with some of these new regulatory pronouncements and leadership, but the small fund family, the small funds, and small shareholder account are all experiencing rising regulatory and distribution costs. And that's been a big impact to overall cost structure, which is making me non-competitive, not just because you look expensive, but it's now regulatory push.

And I think it's the other part as the next visual for investors, just to appreciate. GROW as a Company has a much greater volatility over any one year rolling period. The daily standard deviation for GROW is plus or minus 4%, 70% of the time. One sigma is what happens 70% of the time and is a non-event for GROW to jump 68% over a rolling 12-month period. This is going back over the past decade. For gold it's plus or minus 40%, for bullion it's plus or minus 19%, the S&P is 18%, oil is very high, it's like gold stocks is plus or negative 38%, and the dollar is plus or minus 9%. It's understanding volatility has helped us because for our particular gold funds we have lower volatility versus the other gold funds and it's how we manage the cash, because we understand this DNA of volatility and we've always comment investors, don't be afraid of volatilities, understand what it is and be prepared for it to be able to benefit from it.

Now I'd like to turn it over to Lisa Callicotte, our hardworking, CFO.

Thank you, Frank. Good morning. I'd like to summarize our results of operations for the quarter ended December 31, 2016. As we see starting on page 22, compared to the same quarter last year, our revenue is up, our expenses are down and this resulted in reporting net income in the current quarter versus a net loss in the same quarter last year. We recorded total operating revenues of $1.6 million for the quarter. This was a 27% increase from the $1.3 million, we reported in the same quarter last year. The increase is primarily due to increase in average assets under management in the U.S. global Investors Fund, USGIF, mainly due to market appreciation in the gold and natural resource fund.

Our operating expenses for the quarter were $1.9 million, which is a decrease from $1.3 million or 41%. The decrease is primarily due to our strategic changes, including the following: Employee compensation and benefits decreased $792,000 or 47%, mainly as a result of fewer employees in the current period and the severance cost paid in the prior period due to the reduction of workforce. General administrative expenses decreased $533,000 or 38%, primarily due to cost incurred in the prior period related to the transition of outsourcing certain services to other service providers. The costs included proxy costs for USGIF that was split equally between the Company and USGIF. Our portion was approximately $290,000. In addition strategic cost cutting measures have resulted in lower expenses in the current period. We have an operating loss of $234,000 for the quarter ending December 31, 2016 versus an operating loss of $1.9 million in the same quarter in the prior year.

On page 23, our other income which is income related to our investments was $249,000 for the quarter, compared to a loss of $271,000 for the quarter ending December 31, 2015. Net income attributable to USGI after taxes for the quarter is $8,000. This is an improvement over the same quarter in the previous year, which had a net loss of $2.2 million. As you can see on page 24, this equates to $0.00 earned per share versus a loss of $0.14 per share.

Moving to page 25, we see, we still had a strong balance sheet. We own our own building and we have cash and marketable securities of approximately $17.1 million. This combines to make up 65% of our total assets. As you can see on page 26, we still have no long-term debt. The Company has a net working capital of $16.3 million and a current ratio of 15:1.

With that I'd like to turn it over to Susan McGee.

Thank you Lisa. Our sales and marketing efforts have continued to focus on our gold and natural resources funds and our municipal bond fund and also the U.S. Global Jets ETF. Investors can find more information about all of these funds on our website which is www.usfund.com. The Company and our funds continue to receive an invaluable amount of viral publicity, which is gained through media interview recommendation by influential financial newsletter writers and the sharing and syndication of our award-winning original content of our third-party publishers.

These newsletters have very loyal followings and they receive millions of visitors each month. Frank Holmes CEO blog, Frank Talk also continues to grow in popularity. This commentary is often featured by prominent publications including Forbes, SeekingAlpha, ValueWalk and Business Insider; and these sites have millions of monthly visitors.

Frank and our investment team travel around the world, they continue to share our thought leadership. We interact frequently with loyal followers through our Facebook, Twitter, LinkedIn, Instagram and Pinterest. Kitco News, the biggest gold website in the world, which has an audience of about 10 million monthly visitors, features the Gold Game Film Show with Frank's weekly gold market analysis.

Kitco recently partnered with The Street and it broadened the show's exposure and viewership. And since the shows beginning in 2014, we have filmed 125 video episodes of the Gold Game Film. All of this coverage helps us leverage our brand because it reaches names of readers, viewers and potential investors. Our website usfund.com was visited over 540,000 times during 2016 and these are coming from -- these visitors are coming from all over the world. We have over 200 countries and territories represented by these visitors. U.S. Global is well known for timely and balanced market insights in our thought leadership. We've been awarded several STAR Awards by the Mutual Fund Education Alliance which recognizes excellence in investor education. These awards have included best overall communication to retail and advisor audiences within the small funds category.

Our weekly free investor alert newsletter has been named the best electronic newsletter six times. To-date we received a total of 80 STAR awards. And again, investors can sign up at usfund.com and join over 30,000 subscribers who receive the award winning investor alert and advisor alert eNewletters and also our CEO blog, FrankTalk.

With that, I'll turn it up for questions.

(Operator instructions). We do have a couple of questions that have already come in. So -- and here's our first question. What level do assets need to be at for the Company to breakeven?

Well, our net income was close to breakeven as of December 31, 2016 for the quarter. Our average AUM was approximately $850 million. But this was with the help of our other income due to our investments. So, for net income to be breakeven, we need assets kind of closer to what our average assets were for our September quarter, which was $946 million. And this also depends on our asset mix. So, we probably have to be at the same ratio as it was for that September quarter. But kind of so much of the scene that we've been discussing, our strategic moves to outsource and cut cost have allowed us to be more profitable at lower asset models. Like, at this time kind of last year, when we had much higher expenses, we needed close to like [$1.2 billion], I mean, average assets to breakeven.

And we're kind of estimating right now with kind of all other things equal. If our USGIF equity funds are approximately $600 million, our operating results will be at breakeven. Last year we needed more like $850 million in those equity assets. So, we're really excited about this improvement, but we are aware we need to concentrate on maintaining our -- and growing our AUM levels and still we need to be monitoring our spending.

Thank you. Another question. What is the status of new product launches and how much work goes into the creation of a new product?

Well, that's sort of big question, launching ETFs is easy. If you just want to go put some name on something and launch it, but the marketing cost can just blow millions of dollars. It's just more and more expensive, your flexibility and latitude to getting on platforms, many of the platforms now like Morgan Stanley, to get on their platform we have to spend a $150,000, some others it becomes very, very expensive.

So you have to do it -- put a lot of thought into it and that's what we did when we create Jets, there was a lot of thought going into a smart data which is a set of factors that are very resilient, dynamically adopt each quarter. And you have to go and meticulously back task and look at each quarter for down cycles, up cycles and how do they do and we're really happy Jets is doing exactly what we thought it would do, and it's capturing -- for me it's capturing of the Alpha that most -- if you just had an active fund manager in the space would find it very difficult to beat.

For our gold ones and our other ones we're looking at in Canada, we've put in thousands and thousands of hours of meticulously looking at and what we found were things like, how you look in Canada say for energy names is very different than mining. Even though they're both resources, the factors are different. And it's recognizing how do you go and beat that index, that's -- the basic where mostly assets are. And so, we've done some probabilities of our new products which is in the filing process that Susan is working on, that we're really considering with how many quarters as a beat over the past 40 quarters on a row in 12-month period. If it doesn't outperform high percentage of time, then we want to take the risk because once you launch with these factors, it's very difficult to all of a sudden modify and change them. So that means, it takes thousands of hours of testing the alloy and the strength and the flexibility of this new alloy as a metaphor when we're creating this product. And I'm very happy to share within that of our gold one, we're in the final touches of it. We thought we were ready to file earlier last year and we thought we had a strategic partner, but whatever took place, it became -- it didn't work. And I think that some of these strategic partners think that there are so many fees, they can make lots of money in the ETF space, but really it's quite skinny in the scheme of things. When you take a look at this, you need big critical mass and size to get these things to breakeven. And so, that was delayed. But, we've retooled, we re-positioned our strategy. We understand the launching of the product, the importance of strategic relationships and the robustness of the product. The most important thing that I believe is my reputation is out there, our Company reputation is, is this product -- because once it's out, it's not like an active, which you can turn it a dime, you have to follow these factors. And so, I feel really, really confident about the outcome from our great modeling and discipline. So, let's stay tuned. We're looking in the second quarter of this year to be launching products in particular, seems we're fast tracking and [so as to] comment in Canada.

Thank you, Frank. I don't see that we have any other questions at this time.

I just like to add to, that we're still looking at doing acquisitions and we spend a lot of time and resources that is expensive, we tried to drill down on getting those expenses down and what is the cost to go through the due diligence. The reality is, in looking at just data, just close to 70% of all M&A work does not move past due diligence. Due diligence is the first big screening roadblock to -- of even going further and I think that, we are trying to see how can we refine that, we've spent time and money looking at tax issues, acquiring separate account business. So, we will maintain that curiosity out there because I think strategically, we have to be building of that asset base because it all -- mutual funds are just a higher cash flow, slowly evaporating asset class, whereas ETFs and separate account business continue to grow.

So we will launch our ETFs and we will look at launching -- we will look at acquiring someone that is fit with our culture in that separate account business.

Thank you. Well, this does conclude US Global Investors Webcast for the second quarter of 2017. This presentation will be available on our website at www.usfund.com. Thank you all for your participation today.

Thank you.