Sprott Inc (SII) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Sprott Inc 2011 fourth quarter and year-end conference call.

At this time all participants are in listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) As a reminder this conference is being recorded today, Thursday, March 29, 2012.

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 risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are implied 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 year-end MD&A and Sprott's other filings with the Canadian Securities regulators. I will now turn the conference over to Mr. 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 at today is Steven Rostowsky, our CFO. Our 2011 year-end results were released this morning and are available on the Investor Section of our website where you can also find our financial statements and MD&A.

I'll begin on slide 4 with an overview of our 2011 performance. 2011 was a year of contrasts for us at Sprott. While our investment performance did not meet our expectations, we made progress in strengthening our investment team and building and diversifying our business. For some time now we have been vocal on our views on economic weakness and the dangers inherent in the financial system and as a result, our portfolios were positioned defensively throughout 2011. For the first eight- or nine-months of the year, this positioning served us well and we were able to deliver relatively strong results through the volatility related to the European debt crisis. However, beginning in August, with the broad market sell off, our performance suffered due to the declines in gold, silver and energy equities which accelerated into year-end.

As a result, most of our funds finished the year in negative territory and our performance fee revenue declined substantially. While we were disappointed with this result, we continue to see the benefits of the investments that we made in our platform as our core business continued to grow despite challenging markets. At the end of 2011 our AUM was CAD9.1 billion, which was up about CAD600 million on the year. Our net sales were CAD1.4 billion, and we generated approximately CAD150 million in management fees. Our base EBITDA was CAD69.4 million, or CAD0.41 per share. This is a highlight number for us as it shows where our bottom line business is trending. Net income was CAD33 million and we declared - - dividends of CAD0.12 a share for the year.

Turning now to some of our accomplishments in 2011, we continue to expand our range of investment products to provide our clients with more diversified options. Including launching the Sprott Strategic Fixed-Income Fund which completed a CAD220 million IPO and we are very pleased with the advances that we are making in our fixed-income franchise. And launching additional products in the silver bullion area, the flow through area, and adding a Corporate Class of funds. We added experienced professionals to our investment and sales teams. Paul Wong joined us as Portfolio Manager and now is playing a key role in managing our short book. And J.D. Rothstein joined us as SVP in National Sales Manager with a mandate for growing our wholesaling efforts with a view to supporting a broader funds line up.

Earlier in the year we completed our acquisition of the Global Group of companies. And we are pleased with the progress we made there with our US operations launching our US Managed Account platform and bringing on Paul Meehl as the CEO of our US broker-dealer. Our physical franchise continued to grow rapidly during the year as we completed two following offerings of PHYS units for total proceeds of approximately CAD650 million. Moving to our progress in the early months of 2012, we continued to strengthen our investment team and recently brought on John Wilson as Senior Portfolio Manager. John is named Manager of the Sprott Opportunities Funds and we expect to launch new, Enhanced Equity and Balanced Funds in the next week.

Neil Adshead also joined our team as Investment Strategist. Neil is a highly-qualified and specialized resource expert who adds to our technical depth and will support Rick Rule in the management and launch of New Exploration Partnerships. We continue to build on the success of the physical franchise and have raised CAD700 million through new follow-on offerings of both our PHYS and our PSLV. And, finally, we announced an LOI to acquire the Toscana Companies. Toscana is a Calgary-based manager who specializes in high-yield energy investments. We expect this transaction to close fairly soon and we believe that Toscana will bring to us a leading team of energy specialists and lenders as well as a Calgary presence that will help us accelerate other products across the energy sector.

I'll now turn it over to Steve to walk you through our 2011 performance in more detail.

Thanks, Peter. Hello, everyone. I will start with a look at our Assets Under Management. Our AUM was CAD9.1 billion as of December 31, 2011, an increase of approximately CAD600 million from the start of the year. But average AUM was CAD9.8 billion for 2011 compared with an average of CAD5.9 billion in 2010. Net sales for the year were CAD1.4 billion, coincidentally that number is very similar to net sales that we experienced in 2010. Nearly CAD1.2 billion of the net sales came from [Full] Funds, the following offerings of Sprott Physical Gold Trust, the launch of the Sprott Silver Bullion Fund and the Sprott Strategic Fixed-Income Fund as well as the Sprott 2011 flow-through and from the addition of a new Managed Account.

However, every AUM category had positive net sales for the year. Turning now to AUM and AUA by category, as Peter mentioned, we continue to diversify our AUM across asset classes and asset types including mutual funds, hedge funds, specialty funds and direct investments. Our AUA is concentrated in our Private Client business, that's Sprott Private Wealth, and at Global Resource Investments Ltd., our US broker-dealer. On a year over year basis, most of our AUM growth has come from our Bullion Funds and Fixed-Income products. As of December 31, 2011 the Bullion Funds represented CAD3 billion of our total AUM compared with CAD1.3 billion at the end of the previous year.

With the completion of the follow-on offerings by both PHYS and PSLV, so far in 2012 that figure has increased to CAD3.5 billion. Our Fixed Income Funds, the initial funds of which were launched in 2010, now account for nearly CAD0.5 billion in AUM. Sprott Consulting Managed Companies contributed CAD700 million in AUM at the end of 2011, up from about CAD500 million at the end of 2010. The next slide, AUM changes by product type. As I noted earlier, while the majority of these AUM categories saw positive net sales, most of our net sales during the year came from our Physical Bullion Funds and the launch of the Sprott Strategic Fixed-Income Fund, as well as 2011 flow through LP.

The remaining net sales was spread across our Domestic Mutual and Hedge Funds, as well as our Offshore Funds. The difficult markets, however, took a toll leading to a CAD994 million decline in the market value of the Mutual Fund portfolios, almost CAD400 million for Domestic Hedge Fund, CAD160 million for Offshore Funds and the Exploration Partnerships managed by our RCIC fell by nearly CAD150 million. Bullion Funds overall held their own, and we got strong AUM growth from the Sprott Consulting Managed Companies. We continue to see the benefits of our broader product shelf in helping us retain assets. However, as investors seek shelter in less volatile asset classes we tend to see inflows into lower fee products which leads to some degree of erosion in our fee margin. Despite the defensive positioning of our funds during the year, the majority finished 2011 out of performance in territory and obviously, this was a key to our 2011 results as compared to 2010.

Moving onto our revenue for the year, total revenue decreased by 50% to CAD161.3 million from CAD323.5 million in the prior-year. Management fees increased by 41% to CAD146.8 million from CAD103.7 million in 2010, but performance fees fell to CAD5.3 million on a gross basis, or CAD4 million net of sub advisory fees from CAD200 million in 2010. Just to clarify that, we have a sub advisory relationship for our Private Credit Fund. The Private Credit Fund generated the majority of our Q4 performance fees, but we pay a portion to the sub advisor, so the CAD4 million that we pre-announced in January is net of the sub advisor fees. The overall performance fee change for the year had a dramatic impact on our revenues, expenses and net income. Commission revenue for the year was CAD14.2 million, compared to CAD6.2 million in the prior-year. The majority of commission revenue was generated by Global Resource Investments which was new in 2011 with the remainder coming from Sprott Private Wealth. Losses from Proprietary Investment were CAD8 million for the year compared with gains of CAD9 million in 2010.

Looking now at slide number 11, summary financial information. Total expenses for the year were CAD117.3 million, down from CAD148.9 million in the prior-year largely due to lower bonus pool contributions and stock-based compensation expense. But, obviously, we had the addition of the Global companies as well. Net income was CAD33 million, or CAD0.20 per share compared with a net income up CAD132.7 million, or CAD0.88 a share in 2010. Base EBITDA, which excludes the impact of gains and losses on Proprietary Investment in performance fees, increased by 60% to CAD69.4 million, or CAD0.41 per share from CAD43.4 million, or CAD0.29 per share in 2010, reflecting, as Peter mentioned, the significant growth in our base business over the year including the acquisition of the Global Companies.

On the next slide, I'll walk through the EBITDA reconciliation in more detail. Because, as Peter suggested, and we have often suggested and continue to maintain that EBITDA and base EBITDA are better measures of our performance than net income. In early 2011 we completed the Global acquisition and as a result we allocated the purchase price between tangible assets acquired, intangible assets, being finite Life Management contracts and carried interest and goodwill. The intangible assets and goodwill are reviewed periodically for impairment and any impairment charge maybe taken as necessary and appropriate under IFRS. As fully explained in the financial statements and the MD&A as of December 31, 2011, we took an impairment charge totaling CAD7.7 million pretax or CAD4.6 million after-tax, or nearly CAD0.3 per share. This charge is included in the amortization in intangibles caption on this slide and in our financial statements.

We will review intangibles periodically and may adjust the carrying value up or down. We can adjust upwards to a maximum of the originally allocated amount, less amortization taken to the measurement date. The treatment of goodwill and other intangibles, stock-based compensation and other non-cash items that impact net income reflect significant assumptions and choices that we make with respect to financing of acquisitions, financing of our mutual fund sales, et cetera, and do not necessarily reflect our fundamental business activities. For this reason we prefer to focus on EBITDA, base EBITDA and cash flow from operations.

I'll now turn the call back over to, Peter, for some closing remarks.

All right, thanks, Steve. I'd like to take a minute now to talk about the initiatives that we'll be focused on in 2012. Our number one commitment is to continue to improve our performance through investment manager additions, through a team-based approach to management and through new investments that we have made and are making in technology and systems.

I think it's important to highlight the two major initiatives that we believe will be extremely important to our Company in the long run. First of all, that we have developed a team-based institutional fund to tap into demand from international institutional investors. We systemized our investment process to do this and added a new layer of risk management systems and we believe it's going to be attractive to the international institutional community. We have added a Global Sales Representative to our team to support this effort. Most recently, we hired [Brian Talory] from AGF to help build their institutional franchise and has focused on the US market. So this is going to be a major initiative for us.

And the second one is, that we are launching Equity Balanced and Hedge products in the core Canadian and North American Equity and Balanced Fund categories which is an effort that is being led by John Wilson. And we've increased our retail and our wholesale sales teams to support that initiative. So that would be a second, major push for the Company. We also continue to pursue additions of new Specialty Investment product areas, so we have Toscana, which is going to be coming into the fold and there will be other additions this year. And we will be growing our US business, our Private Client business and our Consulting business. I will also touch on another important factor for this year and that is that the Consulting, or Direct Investing business, continues to generate significant value within its portfolio of managed companies and in particular, that Sprott Resource Corp is currently well-positioned to generate performance fees in 2012 upon the disposition and closing of certain assets - - programs that they have in place.

Turning now to slide 14, I think it's important to note that we are well-positioned to continue to grow our business and that we are now confident that we have built a platform with the capacity to manage CAD20 billion, or more. That may take some time to happen, or it may happen fairly quickly, depending on developments in the markets. But I think it's an important thing for shareholders and clients to realize that we've built a team and a platform that has the capacity to manage a significantly greater asset base. Over the last two years, we've made necessary investments to build this unique global platform. I think we have a very unique offering, both for clients and for portfolio managers, that are managing high value-added products and we are going to continue to build our team. We expect that the current market volatility and the changes in the Asset Management business are going to continue to give us M&A opportunities. So not to be lost, we expect to be an active acquirer.

Before closing, just to address the last slide, I would like to provide you some thoughts on our Outlook for the markets. We put out a Market At A Glance yesterday highlighting this fact, but we remain skeptical of the economic recovery, absent money printing. We believe the opportunity has never been greater for precious metal shares to outperform. We also believe that there are strong opportunities in select specialty fixed-income products and we'll be pursuing those. And we are seeking to build our exposure to select investments in energy, in agriculture and in selectively well-valued and defensive equities.

That concludes our remarks for today's call. We'd now be pleased to answer any questions. And we'll turn the call back to the operator.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Geoff Kwan with RBC Capital Markets. Your line is open.

Hi. Good morning. Just had a question in terms of the products you've got in place right now and the personnel. Wanted to see, do you feel that you've got largely the product portfolio you have as well as the people? Or can we expect that there's going to be more additions beyond what you already announced?

We've got a lot of what we think it will take to produce good returns and to attract new clients to the firm. But there will be additions.

And will this be in the context of adding a new product capability, or enhancing kind of current products that you've got in the market place?

Both.

Okay. Second question was just on that Global Institutional Offshore Fund. I know you've talked about it -- I think it was at least in the last quarter or two. Do you have any sense on what that potential pipeline could be? Is it something that would take some time to get those sales coming in? Or, is it money that is already at the door and just waiting for the product to be launched?

Well, it's a difficult question to answer. I would have said a couple of months ago the money was kind of waiting at the door. With the volatility and our performance, it's going to take some time to launch it. We are starting the launch in May, so I know we've got a lot of interest. There is multiple channels that we are using to raise this funding. But I don't want to make any promises in terms of timing. We know that these institutional investors sometimes take a bit longer to get their approvals and make the decisions. We're hopeful that we'll have a significant amount under management by the end of the year.

And are you able to say, generally speaking, are these types of institutional players sovereign wealth funds or other types of institutional?

Well it will be a broad cross-section.

Okay, thank you.

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

All right, thank you. Going back to the new hedge fund you plan on launching. How is the investment and mandate going to be different than existing funds other than it's team-based?

You're talking about the institutional product now?

Yes. Yes.

Well, when I talk about systemizing the Sprott philosophy and system of investing, it really is to break it down into components to have a macro committee which makes waiting and allocation and timing calls, to have a tactical committee that allocates to sectors, to have a very sophisticated system of both risk management and investment attribution tracking, that type of thing, to turn the money into the highest return areas. We've never had that here before. So, I describe it more as -- it will be a go-anywhere type of fund, but the system around it is going to be a whole new level for us.

Okay. So it will take a more systematic approach? Will it use sort of the same macro views as your current funds?

Yes.

Okay.

Yes.

So consistent macro views, just different in terms of the approach to getting to the individual investments?

Yes, and it will be very different in terms of what its designed volatility is. And it will be very different in terms of how we allocate to individual managers, It will be very different in terms of the liquidity of the fund.

Got it. Okay. That's helpful. And then with respect to the Toscana pending acquisition, you mentioned you might launch some new funds around there. Can you give us any flavor of what type of products you are thinking of? Would it be more mutual funds, closed funds, limited partnerships?

Well, we're looking at a wide variety of options. I think many of those can be helped by Toscana. Some of them are actually being kind of -- the impetus behind them is coming from, for instance, the US managed accounts or the global system and also from the traditional mutual or hedge fund area.

But, I'd say ideas that are being talked about include infrastructure investments, include private investment partnerships for different types of energy investments and include go-anywhere type of hedge funds in energy. It's pretty early days though to be talking about launching those products. Toscana is still going to take another month or so to close, so we've got to get that done first. And they have three products that are growing fairly rapidly right now.

Okay, that's helpful. With respect to the existing offshore funds, AUM declined from CAD690 million to CAD566 million quarter-over-quarter. That's sort of a bigger decrease than we saw in some of the other fund categories. Were there some outflows there?

Yes. It's the quickest and most volatile type of client that we have. They're intensely focused on monthly volatility and performance. And if I had to say that it's one tide that we are fighting against right now, that would be it.

Okay. So potential for additional outflows early this year based on current performance then as well?

Yes. Yes, there is. That's the tide we are fighting now. We have offsetting factors which more than offset. And with the launch of the new institutional fund you might see that start -- we're very hopeful you'll see that start to back into the significantly positive range by the back half of the year.

Got it. Okay. And then with respect to Managed Accounts, I guess similar question, saw a big drop in assets quarter-over-quarter. Can you explain what happened there?

It's much the same thing. I mean, basically the Managed Accounts are being managed for offshore institutional investors.

Okay, got it. And finally, one last question. Point of clarification on the net performance fees in Q4. So, expenses were higher than we would have expected otherwise. And that's related to sub-advisory fees, is that correct?

There is a fairly significant sub-advisory fee charge in G&A, Paul.

Sorry, that's in G&A? So why were the net performance fees lower than we would have expected, I.e., the expenses looked higher related to performance fees in Q4?

Because of the expenses. The way that we -- so on the financial statements you're seeing a gross performance fee of 5.3%. But against that we net the sub-advisory fees, brings it down to about 4.0%, and then we take off 25% for bonuses, so we get to 3.1%, which you will see on the EBITDA reconciliation.

Got it. So it is related to sub-advised mandates then?

Absolutely.

It's not a mix that we would expect to see going forward, it just happened to be that private credit contributed a much larger than normal percentage.

Okay, got it. That's helpful. Thanks for your time. That's all the questions I had.

(Operator Instructions) Your next question comes from Doug Young with TD Securities. Your line is open.

Hi. I think I just basically got two quick ones here. I guess the first one, Peter, on the offshore product you mention you hope to have substantial assets by the end of the year. Do you care to give us a range of that you think you could take the assets to? And the other thing was in Sprott Resource Corp., you talked about it seems like a decent amount of unrealized performance fees that still have -- that still can flow through. Can you give us a sense of what that stands at right now?

Okay. Well, to answer your first question, I don't think an institutional fund -- a global fund could be seen to be successful unless it was at least CAD500 million in size. So that's kind of the immediate target. If you take a look at similar efforts by similarly-sized alternative asset management firms, I mean, they're running, their flagship funds at CAD2 billion, CAD3 billion, CAD5 billion. So, the long-term target is way up there. It's difficult to say from the first point that I gave you to an ultimate target what the timing or sequencing would be.

And on your second question, Doug, I mean, Sprott Resource Corp. just released their year-end results this morning and their call I think is later. So I don't want to preempt any of that. But their net income for the year was over CAD100 million, but most of that related to non-cash adjustments both on marking-to-market their investments as well as changes in the underlying companies. And so when they monetize those gains we will realize a performance fee. But the timing and the total amount depends on exactly how much they realize and what the timing is. But it's not insignificant and if you look at the details of when they talk about their results later you may get more details from them. But I don't want to preempt that discussion.

Is it substantially higher than it would've been at the end of the last few quarters? Because I know you've given ranges before but --?

Yes.

Yes, okay. And then lastly, I know you took some charges which you talked about. Obviously, there's a change, or there was some noise that came from the tax rate as well. I think it was CAD3.1 million, or something. What's the normalized tax rate that we should be using for this quarter?

The US -- the differences in the US, their tax rate is 40%, so on the CAD7.7 million charge there was a CAD4.6 million tax impact. Sorry, CAD3.1 million, so CAD4.6 million after-tax. Our tax rate in Canada is about 26% or so and it's higher in the US. But on a blended basis, I would use sort of 27%-ish.

And just -- there was a release of the tax liability in the quarter, was there not, as well?

Yes. But a lot of that related to the CAD3.1 billion claw back, CAD3.1 million claw back on that expense.

And that's included in the CAD4.6 million -- is that?

That is how you get to the CAD4.6 million --

That's right, sorry. I had a mental breakdown here. So thank you very much, that's great. Thanks.

There are no further questions at this time, I turn the call back over to the presenters.

Okay. Thanks, everyone, for participating in this call. We appreciate your interest in Sprott and we look forward to speaking to you again after our Q1 results.

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