Sprott Inc (SII) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2011 first-quarter conference call. At this time all participants are in a listen-only mode. Following the presentation we'll conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is the recorded today Thursday, June 2, 2011. On behalf of the speakers' that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provision of the Canadian Provincial Securities Law. Forward-looking statements involve risk and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward looking statements please consult the MD&A for this quarter and Sprott's other filings with Canadian Securities Regulators.

I will now turn the conference over to Peter Grosskopf, Chief Executive Officer, Sprott Inc. Please go ahead, Mr. Grosskopf.

Thank you, operator. Good morning, everyone, and thanks for joining us today. With me is Steve Rostowsky, our CFO. Our first-quarter 2011 results were released this morning and are available on the investor selection of our website and you can also find the financial statements and the MD&A.

I'll jump in with an overview of our Q1 financial performance. We've reported strong Q1 results this morning as we begin to see the earnings potential of our larger and more diversified company. On this slide we've put down a few highlights for the quarter financially. Our AUM increased to CAD9.7 billion at quarter's end. We generated CAD35 million in management fees. EBITDA was CAD17.4 million, or CAD0.11 per share. And net income was CAD10.6 million, or CAD0.07 per share. Yesterday we declared a CAD0.03 per share first-quarter dividend.

We continued to be very active during the quarter. We -- as we have our number one priority of improving performance and always adding to our performance team we've added new talent and we've extended our brand into new markets. We closed the acquisition of the Global Group of Companies and we are fully engaged in the integration process. Rick Rule has joined our senior management team and will be nominated to our Board of Directors at today's AGM. We've added Global's team of earth scientists who we believe will provide us with great intelligence and expertise in the resource sector.

On the product side we continue to build our specialty products franchise. We com -- during the quarter we completed a CAD340 million follow-on offering for Physical. We raised CAD90 million through the IPO of our-through product. And subsequent to the end of Q1 we launched a Sprott Physical Silver Fund, which is an open-ended mutual fund that give investors another way to invest in physical silver. Importantly, I think we made progress in our fixed income franchise, where our team of portfolio managers is performing extremely well. In fact, leading the market in that area and we are seeing consistent net inflows to fixed income products.

Turning now to our key initiatives for 2011, we remain committed to growing our Company, both organically and externally. Our expansion in the US, which is really focused on our retail presence in that market, is something that we're working on right now and we expect to launch new Sprott-branded products targeted to US investors within the next quarter or two. We are taking important and significant steps to institutionalize our products and we were successful in winning two new offshore mandates during Q1 totaling approximately CAD100 million. We think this is a key growth area for us and something that we will continue to invest in to staff through our selling organization and to build throughout 2011 and 2012.

The alternative asset management industry is fragmented. We have a strong balance sheet and investments, and we have invested significantly in our platform and we think that this gives us a key component and an ability to continue to look at deals. We're approached on a consistent basis by outside firms looking to hook up with ours and we're waiting for the right fit but we're very active in looking at external expansion.

I'll turn it over now to Steve, who will walk you through a performance in more detail.

Thanks, Peter. I'll start with a brief look at our fund performance. Overall it was kind of an up-and-down quarter, resulted in an overall modest market value appreciation across our managed asset complex. January was weak, February recovered most of January's losses and March added modest gains. So when we back our the appreciation of Sprott Resource Corp. and Sprott Resource Lending Corp. the change in market value was about CAD87 million, or 1% of opening AUN. Mutual fund performance was relatively flat on the quarter with Eric Noble's Energy Fund and Owen Jacob's Small Cap Fund leading the way with returns of approximately 40%. Perhaps our hedge fund performance, which is evaluated more in absolute terms, illustrates the quarter. The best performing hedge fund, small cap hedge fund, was up 4% with the worst performing hedge fund being down less than 0.5%.

Our assets under management increased to CAD9.7 billion during the quarter from CAD8.5 billion at the end of 2010. The majority of the increase came from the acquisition of the Global Group of Companies, which added CAD700 million to our AUM. Market value appreciation of funds managed accounts and manage companies added another CAD178 million. However we were pleased with our net sales for the quarter totaling CAD260 million. CAD85 million came from the IPO of the Sprott 2011 flow through IP. The remaining CAD175 million was broad-based, spread across the domestic mutual and hedge funds, as well as our offshore funds. As Peter mentioned, our suite of income funds and our tactical balanced fund have experienced regular positive inflows and as of March 31 had accumulated about CAD175 million of AUM with daily or monthly inflows since.

Turning now to AUM by product type, as you can see we continue to diversify our AUM across products classes. On a year-over-year basis all of our products classes have had strong growth, lead by our Bullion Fund, as well as our onshore mutual funds. As of March 31, 2011 the Bullion Fund represented CAD2.1 billion of our total AUM compared with CAD0.5 billion at the end of Q1 2010. Bullion Fund now account for a little over 20% of our AUM. Sprott Consulting's managed companies accounted for CAD600 million in AUM at the end of Q1 up from CAD335 million as of March 31, 2010. The net asset value of both Sprott Resource Corp. and Sprott Resource Lending Corp. increased during the quarter, adding an additional CAD91 million to our AUM. And, as noted earlier, the acquisition of the Global Group of Companies has added CAD700 million to our AUM, the majority of which appears here under fixed term limited partnerships.

I want to briefly mentioned the change over to IFRS. This, of course, is our first quarter during which we report under IFRS. For those who review our quarterly financial statements in any detail you will notice a lot more and some different disclosure due to IFRS; however, the changeover has had a negligible impact on our Q1 2011 results.

Moving to our revenue for the quarter, total revenue increased by 54% to CAD39.5 million from CAD25.7 million in Q1 2010. Average monthly AUM grew by 80% from the prior-year period while management fees increased by 33% to CAD35.5 million from CAD22.2 million in Q1 last year. This is reflective of lower average fees, primarily due to the significant growth of our Bullion Fund franchise. Commission revenue for the quarter was CAD3 million compared to CAD2.8 million last year. The majority of the commission revenue this year was generated by Global Resource investments, with the remainder coming from Sprott private wealth. Gains from propriety investments were CAD0.4 million compared with a loss of CAD0.4 million in the corresponding quarter last year.

Looking now at the summary financial information slide, total expenses for the quarter were CAD24.6 million, up CAD1.8 million, or 49% from Q1 2010. This includes the initial impact of the acquisition of the Global Group of Companies, including the amortization of intangibles and earn out shares that I'll discuss or cover briefly in the next slide. Expenses increased -- expense increases include an increase of CAD3 million in compensation and benefits. CAD2 million of this increase reflects higher contributions to the bonus pool, reflecting increased operating income. The balance related primarily to the cost of additional employees, both throughout the Sprott Companies and the addition of the Global Companies with two months of the quarter.

General and administrative cost increases were broad-based. The acquisition of the Global Companies, subadvisory fees, rent as we took additional space late last year, legal fees and several other items, none of which were individually significant, but all are reflective of the general business expansion over the past year. Base EBITDA increased to CAD16.9 million, or CAD0.10 per share, compared to CAD10.3 million, or CAD0.07 per share in Q1 2010. Net income was CAD10.6 million, or CAD0.07 per share, compared with net income of CAD6.5 million, or CAD0.04 per share in Q1 2010. And finally, the Board of Directors yesterday declared a dividend of CAD0.03 per share for the quarter ended March 31, 2010.

Global Group of Companies just want to briefly explain -- in order to better understand our numbers, both for this quarter and on a go-forward basis, I want to briefly discuss some of the impact of the Global acquisition. The Global Companies contributed CAD2.8 million to our EBITDA for the first two months, ahead of our initial estimates. We will need to invest in developing the right infrastructure to realize on some of the synergistic potential of our combined organizations. The fixed term limited partnerships have a private equity type model with respect to the generation and receipt of performance fees. These partnerships currently have significantly embedded performance fees that can be realized upon realization of gains and distribution of profits to the limited partners. However, we cannot speculate as to the timing of those distributions.

There are two components to the Global acquisition; the initial payment of 20 million shares plus the potential to earn an additional up to 8 million shares with the achievement of EBITDA targets over five years and Rick Rule's continued employment for at least three years. The purchase price equation resulted in certain intangible assets with identifiable lives being identified and recorded. These are being amortized over seven years. The potential earn-out shares has also resulted in a charge to earnings over three years. The result of these two pieces, net of related tax accounting, will be a non-cash charge to earnings of a little over CAD0.01 per quarter per share for three years.

I'll now turn the call back over to Peter.

Okay thanks, Steve. A great deal of effort has gone into building our particular platform for growth. We believe it's a unique platform because we address multiple channels, we have multiple product formats, we're serving now multiple markets, all of which share the same attributes in that we are being paid to perform for our clients and we believe that we are developing direct client relationships to our brand. We've invested heavily to build an industry-leading investment team and we're always looking for new talent. This quarter alone we hired Paul Wong, who brings excellent macro stock picking and stock shorting skills to our expertise. And we've added Ben Chim as a credit strategist and associate portfolio manager.

I can't emphasize enough how important it is that we have built a team and infrastructure which has the ability to continue to add new products to expand and to diversified. The investments that we've made in operations, systems, marketing and a compliance are investments that individual and private managers would have a very difficult time making on their own, and so I think we're extremely well positioned to continue to look at acquisition and growth opportunities.

Just before closing I'd like to highlight for you our positioning and our outlook on the markets. We've been positioning ourselves as best as we can for what we believe are going to be very difficult market conditions. We believe the fundamentals for precious metals remain compelling and we expect that the recent correction in those markets to be short lived. We remain focused on precious metals and on -- increasingly on silver as an excellent opportunity for the future. We believe that the currency markets and that economic conditions are going to become increasingly difficult and that the sovereign debt situation in Europe is unlikely to be result soon. And so we're sticking with our bets and increasing our bets in precious metals, energy and agriculture.

In terms of the fixed income markets I think our portfolio managers have called those very well, both for the corrections that occurred earlier this year and for the rallies that have occurred lately. I think we're going to remain very conservative and duration short of fixed income and, again, position our strategies to try to make money in a very volatile environment.

So that concludes the formal comments for today. I'd like to begin the question-and-answer session. Thanks, operator.

(Operator Instructions) Our first question comes from the line of Scott Chan from Canaccord Genuity. Your line is now open.

Hi, guys. I guess, Peter, I was just wondering if you can give us an update on Sprott private wealth in terms of launching customized portfolio products and potentially services like tax and estate down the road? Thanks.

Sure. Well, that division is going to continue to grow. We're finalizing our client-facing strategy, and will be rolling out a new marketing package within the next couple of months. We've been very busy just opening new accounts and staffing that operation, so we've been busy on the hiring side. The integration with Global and what we're doing there and bringing the 2 distribution platforms together has started to occur. With the hiring of new staff and more qualified staff and representatives, we believe that we're going to position ourselves to have a wider service offering for clients, including what you're talking about, estate planning and tax planning.

I think the most important change that we've already effected there is that our representatives are able to offer a more balanced product for clients. So if we have a large holder of the Canadian Equity Fund or the hedge fund that, say, would have previously moved money away from us to achieve a balanced platform, they're now able to do that in-house. So what we saw at the beginning of May when we had very tough market conditions for our strategies is, if clients wanted to get out of those particular strategies, we were able to sell them a product that was more balanced or fixed-income oriented. And so the money remained very sticky in what was a pretty tough market for us. So we've achieved that. We now need to finalize the offering and just continue to hire.

Okay, thanks. And just my second question is just on the institutional side. You mentioned ramping up your platform. Is it just going to be [alternative] investments, ie, the offshore hedge funds, or perhaps offering some of the core mutual funds down the road on the institutional platform?

I think for now it's going to be the offshore funds as we've been doing in the past, but with more dedicated sales support. And importantly for institutional investors, they look for the spoke solutions for their needs. Some of them may prefer more liquidity, some of them may prefer a slightly larger cap format. So with the addition of the portfolio management talent that we have, we're able to offer that for them in managed accounts. And as well, we do plan on launching 1 or 2 products that we think are going to be more attractive for the institutional community.

Okay. And just lastly, you commented on fixed income sales traction and the tactical balance of the fund to fund. Just with the challenging markets in May, the core retail funds, I guess specifically the equity-based ones, can you comment on net sales during the month of May or --?

Yes, I'll turn over to Steve to fill you in.

Okay.

Yes, focusing early on the mutual funds because we get the daily flows on those, we were still positive on the income funds and the balanced funds, and the equity funds were sort of mixed. But overall we are still seeing certainly decent inflows, even in some of our equity products, but there are some redemptions, as well. So net-net, we're not seeing big moves either way, Scott, in flows on our equity mutual funds. But our income and tactical balance continue to be positive.

Okay.

Just to give you a bit of tone on that, we thought it was a pretty good month for us last month to hold our own on the sales side. So it was rewarding to see the net sales in balance in fixed income, and it was rewarding for us to not have, quite frankly, outflows in a difficult month of performance on the other side. So we feel pretty good about it. We have that great record from the last 15 years and from last year, and I think if market conditions get a bit more negative, we're going to increasingly gain market share and traction.

Okay, perfect. Thanks, guys.

Operator?

Your next question comes the line of Paul Holden from CIBC. Your line is open.

Just 1 quick question for you. With the addition of Paul Wong, given his experience with macro factors and short selling, will he be working with Eric on the hedge funds?

Yes.

Okay. And is that a part of the long-term succession planning then? Is that fair to make that conclusion?

No, I don't think Eric is in any way getting less active or less instrumental in the running of those funds. It's just that Paul has, with his experience, the ability to execute on Eric's strategies faster than Eric could in some cases, and he has more metrics available to him. So for instance, if Eric wants to press the button on CAD100 million of short sales, Paul can work with them and make that happen more powerfully and quicker.

Okay. And then actually a second question is, with respect to the new silver mutual fund you launched, does that suggest that you will raise capital for that -- or AUM for that mandate through the mutual fund rather than follow-on offerings for the closed-end fund?

Paul, they're not mutually exclusive. They are different products and for potentially different markets. So I think the fact that we launched a mutual fund version doesn't preclude us from doing something at -- if we wanted to, at the appropriate time, on the silver side. If you look, for example, on the physical gold fund, we have a physical gold mutual fund that's been around for a couple of years, and that continues to sell. At the same time, we have done follow-on offerings of the physical gold trust.

Right.

The difficult thing is there -- and we have had some very significant offers to raise capital, but the physical silver does trade for a reason, we think, at a substantial premium 15%-plus, and we're obviously protective of that premium because we're investors ourselves, whereas the Canadian vehicle is a net asset value flush type of product.

Okay. And then finally, related questions. What would the management fees be like on the silver mutual fund?

It's 1. -- oh, that's a good question. 1.3%, I think. I'll confirm that for you.

Okay, that's fine.

-- on the A class with a trailer. I think it's 1.3% with a [50] trailer, but I will check that for you.

That would be great. Thanks, Steve, that's all the questions I had.

(Operator Instructions) Your next question comes from the line of Graham Riding from TD Newcrest. Your line is now open.

Hi, gentlemen. You've given some updates in the past about your performance fee territory year-to-date, either as a percentage of AUM or as an overview of your funds, is there anything you can give there?

Well, I think if you -- we are more diversified now. If you take a look at the numbers on the big funds, you'll see that the numbers year-to-date are underperformance-fee thresholds. However, other funds are kicking small performance fees into possible position for us. So it moves a round a lot day to day, and you have to track those big funds to get a sense of the bigger numbers, and you have to track the small funds to get a sense of what's in the black for us in performance fees.

Okay, so it's a bit of a mix. Just as a follow up to the first question, you were talking about how you're adding to the private wealth side with adding people and what not. Were you referring to more of your Canadian platform, or were you talking generally about what you're doing in the US and Canada combined?

Let me just come back to your prior question, sorry. The 1 thing that I forgot to mention is that for our US money management operations, we do have substantial in-the-money performance fees. They still need to be harvested, but I neglected to add that to the total, so that's around about CAD50 million. And for Sprott consulting, as well, that number's fairly significant.

But to come back to your question on the private wealth operations, the comments that I made were really equally applicable to Canada and the US. In the US, we've hired a new President for the brokerage operation, and he starts at the end of June. There are hiring plans that have been made already, and we've started to hire in the US. We've also staffed a team to go after the managed-account products for us there. So it's a little bit different in that the hiring is already underway there, but the comments I made our applicable to both.

Okay, that's helpful. And I know you've talked a lot about the Global acquisition, but is that a near-term focus is you're more working on getting the right people in place as opposed to focusing on product?

No, there's a few different focuses. Getting that managed-account product and the people in place to support it in the US is 1 of the key focuses, but so is the institutional effort, and so is, for instance, increasing our product line up and our ventures at Sprott Consulting. So each part of the organization is focused on a number of key priorities.

Okay, that's great. Thanks.

Your next question comes from the line of Phil Hardie from Scotia Capital. Your line is now open.

Hi, good morning.

Good morning.

Most of my questions have been answered, but maybe if I could just have 2 quickly. One really first on the US retail expansion, maybe you could just give some color just in the sense of the level of marketing that's going on in that area, and also the environment right now for the type of products? I understand it's all more motivated by market share, but if you could just give a sense of the marketing activity that's going on, and then the initial take up and feedback you're getting?

Okay. Well, the marketing hasn't changed at all for Global Resource investors. Rick has always spent a significant portion of his time getting out and meeting potential clients at various conferences and marketing events. What has changed is the level of in-bound calling and account applications. So we find that there's a certain amount of low hanging fruit from the deal where clients that were previously not able to access our products in the US, that know the Sprott name, are calling Global. And new clients are coming into Global because of the halo of being associated with a larger organization. So the phone's ringing, accounts are being opened. We've needed to staff up just to handle that flow, and assets under administration as a result are growing.

In terms of the business, which was previously called Tara Investment Management, the managed accounts business, we're retooling that now. We're redesigning the package of -- the account service, for instance, they never charged a performance fee on that in the past, and we have to keep that product synergistic with the rest of our products. So we have to go out, retool it as a performance product. There's time and effort and compliance that's involved in doing that. And we've staffed a team of 3 -- a portfolio manager and a back-up staff. And we're agreeing on a marketing plan now, and that marketing will start at the back end of the summer.

Okay, great. And maybe just 1 last question. You mentioned earlier on -- just in terms of positioning portfolios, care to give any color in terms of typical asset allocation for some of the larger managed funds at this point?

Well, all of our managed products, if there's a separate managed account, are more or less customized to the client's objectives. If you want to take a look at what our firm asset allocation policy is, you'd take a look at our tactical balanced fund. I don't know what the exact weightings are, but I know that the significant components are fixed income, cash, and our major Canadian Equity Fund.

Okay, great. Thank you.

There are no further questions in queue at this time.

Okay. Well, thank you, operator, and thanks for everyone on the line for joining us on this call and update. If you have any further questions, either Steve or myself are certainly available. And have a good day.

This concludes today's conference call. You may now disconnect.