US Global Investors Inc (GROW) 2022 Q4 法說會逐字稿

Good morning, everyone. Thank you for joining us today for our webcast announcing U.S. Global Investors Results for Fiscal Year ended June 30, 2022. I'm Holly Schoenfeldt. Moving on to Slide #2.

The presenters for today's program are Frank Holmes, U.S. Global Investors CEO and Chief Investment Officer; Lisa Callicotte, Chief Financial Officer; and myself, Holly Schoenfeldt, Director of Marketing. On Slide #3, as always, we would love to offer anyone tuned in today, one of our JETS, GOAU or SEA (inaudible).

In addition, we do have JETS luggage tags available. All you have to do is send us an e-mail with your physical mailing address to info@usfunds.com. On Slide #4. 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 those 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.

Moving on to Slide #5. I will briefly review our company. U.S. Global Investors is an innovative investment manager with vast experience in global markets and specialized sectors. It was originally founded as an investment club, becoming a registered investment adviser in 1968.

The company has a long-standing history of global investing and launching first-of-their-kind investment products, including the first no-load gold fund. We are well known for expertise in gold and precious metals, natural resources, airlines, emerging markets and cryptocurrencies.

Now on Slide #6, I would like to hand the presentation over to CEO, Frank Holmes to review what we believe is one of the most helpful visuals when it comes to investing not only for grow but in any major asset class. Frank?

Thank you, Holly. And yes, I totally agree that life is all about managing expectations. And one of the biggest parts of understanding volatility and what drives it and each asset class does have its own unique DNA like each individual does.

But here's a simple way to look at volatility at the S&P, it's a nonevent to go up or down 1%, 70% of the time. When it was up or down 2%, that's 2 standard deviations, that becomes much more material and important. The 10 days, you can see is 4% but I also like to comment that gold bullion is the same as the S&P 500, even though many talking heads on CNBC, like to say, gold is volatile, when in fact, over 10 days because of the great volatility of this bear market we've been living in this year, the S&P is more volatile than gold now.

The Dow Jones U.S. Asset Managers Index is also twice as volatile as the S&P 500 and that's where U.S. Global Investors fits into the U.S. asset managers index. And over 10 days, it's a nonevent to go up 6%.

Now what makes GROW more volatile than the S&P 500 or gold bullion as an asset manager. And that's predominantly because we have investments and large sources of cash flow coming from Jets ETF and when you take a look at the New York Stock Exchange Arca Airline Index, its volatility is 3x the S&P 500.

And in over 10 days, it's 8%. So it's twice as volatile and having investments in high blockchain and having warrants gives us this tremendous exposure it impacts mark-to-market on a quarterly basis. So our investments in gold, our investments in airlines, our investments in the crypto industry does create this unique volatility that GROW has even though it has the same dividend yield as WisdomTree which I found was interesting. But what you can see here is as a nonevent for 70% of the time for grow to go up or down 3% and to go over 10 days, plus or minus 9%.

Next, please. Our investment process, we have this in all of our [practices.] We use a matrix of top-down macro models and bottom-up microstock selection models to determine weightings and country sectors and individual securities.

We believe government policies are a precursor to change. And as a result, we monitor and track the fiscal and monetary policies of the world's largest countries, both in terms of economic stature and population. We focus on historical and socioeconomic cycles, and we comment about them on a regular basis, and we apply both statistical and fundamental models, including growth at a reasonable price, effectually known as GARP, to identify companies with superior growth and value metrics.

We overlay these explicit knowledge models with a tacit knowledge obtained by domestic and global travel for first-hand observation of locals and geopolitical conditions as well as specific companies and projects. We use a matrix of statistical models to monitor market volatility and money flows. And as a result, we may at times maintain higher-than-normal cash levels in our funds or even in U.S. Global, something that we're going to comment on that we have been building cash as the recession fears have been growing and putting us in a great position for acquisitions.

Next, please. Our company values, respect for people and teamwork, those who take initiatives are extremely valuable, responsiveness to requests and demands from each other, curiosity to learn and improve, performance and results orientated because our performance is measured every day relative to our peers. A focused work ethic and recognition of achievement.

What's driving GROW? Well, it's mostly -- it's important for investors to recognize operating profits as Warren Buffet says, "[Tony] people just focus on your overall portfolio." It's also critical to look at operating profits. So the growing up JETS has a significant contribution to our performance.

Gold is an inflation hedge. Airlines and shipping industries. We've launched a new product in that space, and HIVE Blockchain technologies. At this moment, I'd like to thank our top institutional shareholders. In particular, long-term investors have been Royce Investment Partners who specialize in small cap value stocks and Perritt Capital Management. They've been wonderful shareholders and Heartland Advisors. These 3 are actively managed funds and I believe that Vanguard is an index and along with BlackRock. But the other 3, I really appreciate their advice when I chat with them and their guidance and support in our long-term vision.

I am the CEO and the Chief Investment Officer, and I own approximately 17% of the company and approximately 99% of the voting control. In the past year, we increased the dividend 200% in 2021. The company has paid a monthly dividend since June of 2007.

Our current yield at a price of $4.24 and as of August 18, is $2.12 -- sorry, 212%. The monthly dividend payments is $0.0075. and has been approved through the end of September, reviewed by the board quarterly, and we make press releases every month. Updating something that we're doing now is updating each month, the announcement of our dividend and our active program of buying back stock.

On February 25, 2022, the Board of Directors of the company approved an overall 80% increase in the limit of its annual share buyback program from $2.75 million to $5 million. This is quite material when you take a look at our revenue running around $24 million. We're talking about 20% of the revenue, and we're talking about 50% of our operating profits close to that are committed to buying back stock.

And for the quarter ended June 30, 2022, the company purchased a total of 45,696 Class A shares using cash of $219,000. We may suspend or discontinue as deemed necessary, but we use an algorithm to buy in down days. So we have at our year-end with $3.9 billion in average assets, the stock does move around because it's so easy for anyone to take a look at our total assets and our ETF. Download that information every day and assume 60 basis points management fee and this is what our revenue is going to be and assume a 30% gross margin, what our profits will be, but we're happy to share with you is that our operating margins have been substantially higher.

Next, please. GROW versus a small-cap asset managers at the end of June 30. You can see the Russell 2000 was off 23%. The Dow Jones Asset Managers Index was up 29% and we were up modestly at 1.37%. So we far outperformed small cap and the overall small-cap index for asset managers. Our high dividend yield supports underlying value stock theory. As you can see here, the increase.

So earnings. What's really important and Lisa Callicotte, our CFO, will give you more granularity in the discussion today. But it's a combination of operational earnings that is the cash flow and investment earnings, realized cash flow and unrealized. That investment earnings could have a great swing because it's a function of the volatility of investments we've made and also just the sentiment of capital markets. So this past 6 months, we've been living in a real tough bear market. In fact, now it's a bit of a bounce in the past month or so. But really, we still are in the sort of bear market cycle where interest rates are rising.

Next, please. So it's important for investors on valuation multiples. It sort of bifurcates. There's 2 types and 2 methods: equity multiples; comparable company analysis; precedent transactions, where takeovers were taken; and enterprise value multiples.

How mark-to-market of investments could impact investment income. This is an example of saying at the end of June 30, 2022, the equity securities had a fair value of $16 million approximately and a 25% rise or fall, what would that do to the hype of estimated fair value on a hypothetical price change.

And how does that then impact the derivatives to having options on a company like HIVE Blockchain. So it can have a big swing but most important, as Warren Buffett says is, focus on our operating profits.

And operating profits, operating income, as you can see from 2020, where it was a negative number of $2.4 million. As JETS grew, GOAU grew assets rebound going into 2021. We had a nice pickup of almost $10 million that swing from minus 2.4% plus 8.1% and then we still increased in 2022 half we were seeing a number of $11 million. And this has shown up as helping build our cash levels.

Earnings per share, you can see in '19, we lost $0.22. We lost in 2020, $0.31 during COVID. But then the following year, we had a big bounce. And that big bounce more than half of that came from crystallizing gains in HIVE Blockchain.

Now we just saw we made $0.37 and what's important for listeners and readers is at that $0.37 that we made was impacted because of mark-to-market. In fact, from an operating income point of view, it's more than double this number.

Next, please. So U.S. Global Investors versus competition. We like just -- besides a small-cap index of asset managers here some of the other names that have large exposure to ETFs. And Invesco's biggest ETF, the famous QQQ, which is weighted predominantly with technology. 40% of their assets are in QQQ and we take a look at WisdomTree, it's 100% ETFs, and we look at U.S. Global, about 80% of our operating revenue comes from the ETF business. So one of the metrics is price to book. And as you can see here, Invesco appears to be more attractive on a price-to-book metric, which I just discussed a few slides earlier, is one of the ways of looking and comparing whereas WisdomTree would appear overvalued on a relative basis if you are using a smart beta factors such as price to book.

Other people look at returns on assets. So as you can see, the return on our assets is more than double what Invesco is and up 8x greater than what WisdomTree is pretax margins. That allows us to, I believe, give a higher margin. You can see that we have higher pretax margins than Invesco and more than double what WisdomTree is.

And then attractive GARP analysis would be on a price to cash flow metric, trading at 4.7% versus Invesco '22 and WisdomTree at 8.2%. So as a value proposition, I would argue that U.S. Global is a very attractive company. And that's why we committed to increasing our stock buyback which is substantial as a portion of our operating profits. It is as substantial as a percentage of our revenue. Don't get caught up of how big other announcements are stock buybacks because it should be in the context of a ratio to the revenue, our ratio to their operating profits.

Next, please. So how do you value these companies on a day in, day out basis and people that seem to trade U.S. Global up and down. It's a simple math, if we have $4 billion in assets, and we have 60 basis points management fee, we're going to do $24 million in revenue.

And then you're going to subtract from there, the cost for running the business, and it's going to be $12 million or $13 million, then you're going to have operating profits of $11 million. Next, please.

So our capital strategy. Management expectations for new product launches, manage and preserve cash for future growth opportunities and market corrections, strategically buyback stock using the algorithm in down days and discussed and reviewed with the Board on a regular basis.

Next, please. Balance sheet. Our cash position has been growing. What we did deploy in this past quarter. As you can see, we took some of our cash and we put it into near-term tax-free and U.S. Global ultra-short-term bond fund, which are next-day settlement. So they're very liquid asset classes but -- as we continue to build our cash position.

Next, please. GROW stock buybacks, as you can see the number of shares, what they've increased and the dollar amount of our commitment to buying back stock. This is interesting enough, the average price we paid in 2021 is higher than what we paid in 2022. So as the market is falling, we are buying more shares and we are spending more money in buying back stock.

Next, please. So our compensation structure, it's an employee-based salaries historically has been modest. Employee bonuses tied directly to individual and team results. Myself as CEO, receive a bonus based on earnings and realized gains from investments and where there's free cash flow. If there's not, I don't get a bonus. So it's important as Chief Investment Officer that I drive performance for the funds because funds under management are key to growing the business.

Next, please. So U.S. Global Investors says 530 share takeover offer undervalues the company. And it's our opinion, it's a good accurate statement and what we've noticed on Seeking Alpha is what they call trolls, where the same person is talking back and forth with making FUD or misrepresentations such as I recommended that Yamana when I'm well known in the world of gold and I've recommended Gold royalty companies, and it's a big reason for my regressional research, et cetera, we launched GOAU, the ETF, which focuses on that. It appears that someone would like to try to use our cash and our HIVE investment and do an illiquid note for investors to basically get control of the asset management business, which does show -- which basically, like the real estate, is a hidden asset.

It's hidden because you really don't put a valuation even though everyone knows that you have a discounted cash flow from the management contracts for managing funds and the real estate building. I've had some of these, I call rogue guys that have called up and said, "you should sell your building and do -- and buy back more stock aggressively or pay a big premium in the stock price." And why would we do that? The value of the building has gone up dramatically. If we did that, we would have the same lease payments as we have a building that basically appreciates over time.

It's at the interstate highway system of Highway 10, which goes from Jacksonville through Houston, all the way to L.A. and it's on the first city loop around the city of 410. So it's, I believe, a wonderful long-term value for long-term investors, not short-term pirates trying to basically do a leverage buyout with their own cash so that they can turn around and take the opportunities from selling the rest of the contracts. But for ourselves, we'll stay the course. We'll continue to build cash and position in branding our new product called SEA, ticker SCA, Sea to Sky.

Next, please. I'm going to turn it over to Lisa Callicotte, Lisa, our CFO, will give you much more granularity on disclosures on the income statement and financial analysis. Lisa?

Thank you, Frank. First, on Slide 30, we'll start with our financial highlights. We had a very strong year. Our average assets under management were $3.9 billion for the year ending June 30, 2022, and that was an increase of approximately 18% from prior year.

Operating revenues were $24.7 million, and our operating margin was 45%. Let's move on to some of the details on the next slide. We recorded total operating revenues of $24.7 million for the fiscal year, which was an increase of $3.1 million or 14% from the $21.7 million in prior year.

The increase is primarily due to increased assets under management, especially in the Jets ETF. Operating expenses were relatively flat year-over-year, but the amount in expense category has changed. General and administrative expenses increased $1.2 million or 21%, primarily due to higher fund expenses and higher consulting and professional fees. The increase was offset by a decrease in employee compensation and benefits of $1.3 million or 18%, mainly due to decreased bonuses based on realized gains on investments.

And on the next slide, we see that our operating income for the year ending June 30, 2022, is $11.1 million or an increase of $2.9 million compared to prior year, which was $8.2 million. So this is the key area that Frank was noting that we expect investors to be looking at is our operating goal.

Next, we see that other income loss decreased in the current year. In the current year, we had operating losses of $4 million compared to other income of $29.3 million in the prior year. The decrease is mainly due to lower realized gains in the current period versus the prior period and that was related to having the large gains related to HIVE in the prior period.

And we had unrealized losses in the current period compared to unrealized gains in the prior period. So I want to remind our shareholders that the change in the GAAP fair value of the high warrants that we own and the change in the conversion feature on the HIVE debenture is included in our income statement.

Therefore, the volatility related to the fair value of these investments is recorded through income on a quarterly basis. And as you can see, our tax expense also decreased to $1.6 million, which is reasonable based on our decrease in income.

Our net income for the fiscal year was $5.5 million or $0.37 per share. Moving on the next couple of slides. We see that our balance sheet is strong and includes high levels of cash and securities on the next page.

And on the following page, we still have no long-term debt. The only long-term liabilities are deferred taxes and lease liabilities. The company has a net working capital of $33.9 million and a current ratio of 9.21% with that, I'd like to pass it over to Holly.

Thank you, Lisa. On the first slide in my section, we always like to do a breakdown of our mutual fund assets. So as you can see here, a majority of those assets are in emerging markets and natural resources, while 26% are in international equity and fixed income.

Similarly, if you look at assets by distribution channel, you can see that 83% come from retail, while 17% are institutional. Moving on to the next slide. I would like to highlight an interesting statistic, which we actually shared in our recent webcast that we hosted in collaboration with ETF trends.

This relates directly to our U.S. global Sea to Sky Cargo ETF, which we launched in January of this year. And that is, believe it or not, roughly 80% of the volume of world trade and goods is carried by sea. For developing countries, the percentage can be even higher.

And this helps make the case for the importance of the industry and why SEA is so heavily focused on the global shipping and cargo sectors. And actually, if you'd like to see the full replay of the SEA webcast just in us an e-mail at info@usfunds.com, and we can give you that replay link.

Moving on to the next slide. I also want to point out the magnitude and the performance of smart beta ETFs, just like SEA, JETS and GOAU. So Eric Balchunas, who is an ETF analyst at Bloomberg shared this chart at the beginning of August.

And what this is showing is that nearly 70% of smart beta ETFs, which is what our 3 ETFs are, are beating the S&P 500 so far this year. He attributes this, "thanks to their focus on fundamentals and tilts towards dividends, value and quality."

And I just thought this would be an interesting chart to put in perspective for our shareholders, not only GROW shareholders but those of our funds. Moving on to the next slide.

I also want to touch briefly on one last item related to our ETFs, in particular, the Jets ETF. As we've mentioned previously, we continue to work on building a moat around this product, which means we have gotten JETS list on various other exchanges besides the New York Stock Exchange, and that includes in both Mexico and in Peru.

And we also have come out with the UCITS product for JETS, which we work hand-in-hand with to sell with the HANetf group out of Europe. So Frank Holmes does numerous webinars with HANetf, virtual interviews. And in addition, he does one-on-one sales meetings whenever he flies overseas to help tell the JETS story. Moving on to the next slide. We are happy that this year celebrates the 15th year of Frank Holmes award-winning CEO blog, Frank Talk.

If you aren't already a subscriber, I highly recommend signing up. Doing so is completely free on our website. On the next slide, don't forget that our educational content does not only come in the form of the Frank Talk blog or the Investor Alert newsletter. We love educating our shareholders through video content as well. So make sure you're subscribed to our YouTube page to get video updates on everything from gold to airlines to the shipping industry.

And lastly, as we wrap up today's presentation, I just want to remind everyone that we do share a majority of our new content as well as announcements about upcoming events across all of our social media platform. So just be sure to check those out when you get a chance.

And as a final reminder to our audience, if you have any questions today, you can e-mail those to info@usfunds.com. Thank you so much. This concludes our webcast. Thank you for joining us today.