Sprott Inc (SII) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2012 fourth-quarter 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 28, 2013.

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 materials or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter and Sprout'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, and good morning, everyone, and thanks for joining us today. With me today is Steve Rostowsky, our CFO. Our year-end results were released this morning and are available on our website where you can also find the financial statements and MD&A. I will begin by giving you a bit of a recap on the year.

In short it was a tough year for Sprott. It was also to some extent a tale of two cities. On the one hand precious metal equities traded at increasingly depressed valuations throughout the year while the broader equity indices rallied. These two factors hurt both the long and short positions of several of our larger funds in 2012. As a result our performance fell short of our expectations and this had a negative impact on our financial results.

It was a frustrating outcome for us as for the most part our economic forecast had been accurate. Our view remains that the economic global situation is far from fixed and we believe that we are positioned to deliver superior results to our investors over the long term. However, we've also taken immediate steps to improve our performance and I will talk about that in more detail at the end of the call.

On the other hand, despite performance challenges, we continued to grow the business during the year as our AUM increased to CAD9.9 billion from CAD9.1 billion at the end of 2011. This AUM growth was largely driven by the success of our bullion products franchise which has become an increasingly important part of our business and helped us to retain assets as performance of our actively managed fund lagged.

Investor demand for physical metals remained strong and we raised close to CAD2 billion in 2012 through follow-on offerings of physical gold and silver trusts and the launch of our newest bullion product the Sprott Physical Platinum and Palladium Trust. We strengthened our energy sector expertise adding a Calgary presence and broadening our yield product offerings with the acquisition of the Toscana companies.

We continued successfully to diversify our firm through three growing areas -- enhanced equity, fixed income and private equity. In particular our private equity and debt strategies performed well in 2012 and made a positive contribution to our results. And to highlight that, in September Sprott Resource Corp. celebrated its fifth anniversary in operation with an IRR that placed it near the top of all resource focused private equity funds globally.

Increasingly we are exploring opportunities to manage capital for international investors and I will talk about those initiatives in more detail during my closing remarks. I will now turn the call over to Steve for the financial details.

Thanks, Peter. I will start with an overall look at our assets under management. Our AUM was CAD9.9 billion as of December 31, 2012, up from the CAD9.1 billion at the end of 2011 and down a bit from CAD10.2 billion at the end of Q3. Net sales for the year were CAD1.3 billion compared with CAD1.4 billion in 2011.

The market value of our portfolios has depreciated by an aggregate CAD942 million during the year due largely to weaker performance from some of our larger equity mutual funds and alternative investment funds. The acquisition of Toscana and Flatiron added over CAD420 million to our AUM at the date of acquisition. I will comment in more detail on each of these numbers later in my remarks.

The next slide shows our AUM on a monthly basis. As you can see, we experienced a downward trend beginning in March that continued through the second quarter. In July the trend began to reverse itself and we saw steady AUM growth throughout Q3 due to largely improved performance and positive net sales as well as the two acquisitions that closed during the quarter. During the fourth-quarter our AUM declined slightly as prices for precious metals and their related equities faded into the end of the year.

As we have been reporting for several quarters, the mix of our AUM continues to change in both absolute and relative terms. Our bullion funds continue to grow while our mutual funds overall, our domestic alternative investment strategies and particularly our offshore funds have been declining.

So looking at AUM changes by product type for the year, as noted our AUM growth during the year was largely due to net sales of our bullion products as well as acquisitions. We raised nearly CAD1.9 billion from sales of our bullion funds and that was also the only category that showed market value growth for the year albeit modest.

We experienced CAD149 million in net redemptions from our mutual funds and CAD165 million of the net redemptions from our domestic alternative investment strategies. Our offshore funds experienced CAD225 million in net outflows. While these net numbers are all negative we did experience positive inflows from several of our funds, notably diversified yields, enhanced equity class, private credit and a new exploration LP. Our managed accounts experienced CAD93 million in net redemptions during the year while we raised a new US fixed term limited partnership.

We acquired over CAD400 million of AUM through the Toscana and Flatiron acquisitions during the year. While Toscana raised additional assets and added to the acquired AUM, as has been well publicized, the Flatiron acquisition did not turn out as well. Through market performance and redemptions we lost a fair amount of the acquired AUM by the end of the year with much of the balance going after year end.

Moving on to the next slide which gives you a breakdown of our revenue for the year, total revenue decreased by 2% to CAD158 million from CAD161 million in 2011. Management fees decreased by 19.3% to CAD118.5 million from CAD147 million last year. While average AUM was fairly consistent, as discussed, our asset mix has shifted to more lower fee products and lower AUM in higher fee funds.

On the year we generated CAD10 million in gross performance fees nearly all of which came from our private equity and private debt businesses as well as our private credit fund. Together global resource investments in Sprott Private Wealth generated CAD13.5 million in commission revenue during the year, down slightly from CAD14.2 million last year.

Overall gains from proprietary investments were CAD2.3 million in 2012 compared to losses of CAD8 million in the prior year. And I should note that other income in 2012 includes a CAD9.1 million item relating to the Flatiron acquisition that is a one time and is largely offset in the expense numbers.

So looking at the next slide, summary financial information. Total expenses were CAD116.4 million, down slightly from 2011. Compensation and benefits decreased from CAD48.7 million to CAD36.9 million mainly due to a significantly lower bonus pool for 2012 as compared with 2011 reflective of our overall financial performance. Although this decline was somewhat offset by higher stock-based compensation.

Stock-based compensation rose as we granted stock under our EPSP for the first time and this is expensed over three years beginning in 2012. Also certain new senior hires were granted stock under the EPSP, which is also being expensed commencing in 2012. Trailer fees decreased from CAD25.7 million two CAD19 million as trailer paying AUM decreased.

G&A expense including donations rose from CAD22.4 million CAD26.9 million. The increase was largely due to payments to our sub advisor for both a share of the management fees and the performance fees received from the Sprott private credit fund.

The more significant increases -- other more significant increases were in professional fees largely related to the acquisitions during the year, rent as we took on more space in Toronto and with the acquisitions, particularly Toscana, and fund subsidies and start-up costs also rose. Donations expense decreased by CAD400,000 as that relates directly to our pre-tax net income.

I should also note that through various expense categories in the income statement are a number of items relating to the Flatiron acquisition and subsequent unwinding. These total to about CAD5 million on a pre-tax basis, CAD3.6 million after-tax. And the cash impact of the Flatiron acquisition and unwinding was lower at about CAD4 million.

Net income was CAD32 million or CAD0.19 per share compared with net income of CAD33 million or CAD0.20 per share in the previous year. Our base EBITDA, which excludes the impact of gains and losses on proprietary investments, decreased by 24.4% to CAD52.5 million or CAD0.31 per share from CAD69.4 million or CAD0.41 per share in 2011.

Slide 11 is an EBITDA reconciliation showing the reconciliation of net income to EBITDA and base EBITDA. It is fairly self-explanatory, but the one item that I should mention is that non-cash stock-based compensation, we add back compensation expense for earn-out shares related to acquisitions and any stock options expense. However, stock acquired under our EPSP is regarded as a cash base expense and is not added back.

Some key management metrics that we would like to talk to you and I'll do so before handing back the floor to Peter. I want to highlight some key non-GAAP metrics that we use to manage our business. EBITDA and base EBITDA of absolute end per share has always been a key metric that we focus on. Going forward we will move to focusing on one EBITDA number for simplicity purposes; we will call it cash EBITDA and we will explain in more detail and define it in our Q1 reporting.

We are also always focused on fund performance, but with the introduction of the new co-CIOs at Sprott Asset Management that Peter will talk to, we are focusing more on both absolute and risk adjusted returns.

Fund performance and performance fee generation has been a foundation on which Sprott was built. Some of our funds are very far below their high water marks giving them weak performance fee visibility. However, several others are much closer to being able to earn performance fees and we are introducing new products that with growth and performance will result in better performance fee generation in 2013 and beyond.

We will continue to pay attention to prudent expense management in any event, but particularly as our revenue lines continue to be under stress. Finally, we are seeing several opportunities for managing client assets, but with those clients expect a certain level of co-investment by us to more closely align our interest with theirs. As we make more such commitments and expand our balance sheet we will focus more on monitoring our returns from and on invested capital. And with that I will turn the floor back to Peter.

Thanks, Steve. Before I start on page 13 I just wanted to underscore a few highlights from our perspective during the year. Our bullion funds, which we believe have a sustainable competitive advantage, now represent close to CAD5 billion in AUM and that is indeed a very viable franchise.

Our fixed-income product line is approaching CAD1 billion in AUM. John Wilson's enhanced equity funds have been well received in the marketplace and are performing well and increasing in scale. And as I mentioned before, private equity and lending businesses are doing very well.

As a more recent update, our brand for precious metals -- our brand in precious metals investing is known globally and we are now being approached with opportunities to manage capital for international clients, most of whom are based in Asia. Last week we announced an agreement to launch a precious metal and mining fund with Zijin Mining, China's largest gold miner.

The target size for this fund is CAD500 million and it will be seeded with a CAD100 million commitment by Zijin and CAD10 million by Sprott. The remainder of the capital will be raised from large investors primarily in China.

Zijin has great technical expertise and we think that this partnership is a good fit. With the recent declines in the sector we think tremendous opportunities exist to capture value in mining equities and we look forward to teaming with Zijin on this initiative.

We also recently signed an MOU to manage a similar resource capital fund on behalf of a large Chinese financial institution. We hope that we can bring that to fruition.

One of our key organizational priorities is to build an institutional business for which we've worked to enhance our risk management processes and develop lower volatility institutional strategies. We're in the process of launching our first institutionally focused hedge fund which we may simply call the Sprott fund.

This is a team-based fund that will draw on the combined resources of our entire investment and technical teams. As such it will be considered successful -- if it is successful it will be considered our flagship fund. We recently completed a 25 million private placement with a US investor thereby bolstering our balance sheet in support of this new fund and other initiatives.

Going forward, as Steve mentioned, we will increasingly seek to invest our capital as founding investors in substantial new funds. Similar to the private equity model, institutional funds and specialty fund investors prefer and in some cases insist that as the sponsor and manager Sprott co-invest with them.

We will also continue to focus on launching new products and I think the highlights for us and a past year were that in 2012 our US subsidiary, Resource Capital Investment Corp., raised CAD88 million through two new LPs and expects to launch additional new LPs this year. Earlier this year we reopened the Sprott Private Credit Trust and raised an additional CAD38 million into that fund. We also have other funds in development and we expect to launch them before the end of Q2.

Turning to slide 14, as I said at the beginning of the call, while we are confident in our ability to deliver returns to clients over the long-term and in our track record, we've also taken some immediate steps to improve our performance. We recently named John Wilson and Scott Colbourne as co-CIOs of Sprott Asset Management. They will focus on improving overall performance by optimizing idea sharing and risk management while reinforcing our results oriented culture.

Eric Sprott will become Chief Investment Officer of Sprott Inc., where he is responsible for guiding the overall positioning of the Sprott group of companies from an investment perspective. We will continue to prudently manage our expenses and ensure that all our compensation is aligned with performance.

And we are committed to focusing on core strengths during this year and moving forward as we work to form new partnership with new investors. We will leverage our strong private equity and debt track records, we will support the continued growth of our physical bullion franchise and we will capitalize on global brand recognition as we pursue international markets.

Before closing I would like to talk about our growth strategy for the business. As I mentioned at the very start of the call, we continue to build our core franchises. We will turn around and grow our globally recognized precious metal and resources franchise and we will continue to capitalize on that recognition.

And secondly, at the same time we will continue to diversify our product offerings and our firm in general through the introduction of new alternative equity income and private equity funds.

We have an excellent platform and we have the people and systems necessary to support more products and greater AUM. We have broad support and distribution for our products and our entrepreneurial culture and contrarian philosophy allows us to move against the herd, this has been the heart of our success in the past. And we have a strong balance sheet that we will intend to leverage to seed new funds and co-invest alongside large investors.

Finally, we will continue to selectively evaluate opportunities to grow the business through acquisition. This concludes our remarks for today's call and we'd now be pleased to answer any questions you have. With that I will turn the call back to the operator.

(Operator Instructions). Geoff Kwan, RBC Capital Markets.

I had just a question on -- I know you talked a little bit about the product suite and trying to launch new products. Just given the better flows that have been seen in the US market on the retail side, is there an opportunity to kind of to re-kick start and expand what you guys were originally trying to do more so a year ago with the Global Resources acquisition?

Well, we see Global -- the Global Group as having had a pretty good year and they have basically delivered on their -- on the promise to seed and launch new funds on the private equity side.

In terms of managed accounts, that business has -- we still think has great potential. But in the face of a declining resource market where many of our core investments were posting really negative returns it was hard to grow that business. We have managed to maintain it where it is and we are going to focus on getting it growing in the next year.

Okay. And the other question I had was just on the M&A, I know you have talked about it historically. Has your appetite for that changed versus now you have done some these partnerships with third parties? And also similar to that, are you looking more kind of North American type acquisition targets or are you still potentially looking international?

Well, I will say first of all our appetite hasn't changed but our approach has. I think what Flatiron taught us is that we need a tighter and stronger structure to question each and every entity that we are dealing with from the ground up.

In terms of how we would focus that going forward, the other thing that is worth mentioning is we really want to look at things and reserve our time now for things that move the dial. So looking at smaller tuck-ins is going to become a little smaller going forward, we are just a bigger company and we are very busy. So realistically we've got to stick with things that have a material impact for shareholders and for the franchise.

Okay, thank you.

Jeff Fenwick, Cormark Securities.

I just wanted to start off asking about redemption activity heading into the year here. Through the end of the year is actually still obviously negative, but maybe not quite as bad as I thought. And are you concerned about the outflows here accelerating after having struggled for the last couple of years with those mutual and hedge fund products?

Well, Jeff, it's Peter. I'm going to answer it just generally and then pass it over to Steve for a little more color. But, yes, we are concerned about redemptions and on the offshore side we believe that somewhat to be forecast, we have really suffered internationally with the redemptions but those are starting to trickle down now.

Nationally in Canada for the funds that we have we have noticed a fairly steady redemption activity, we are hoping that it is slowing down now. So I think with one or two positive months we will see that we are past it. Steve, do you want to comment on specifics?

Yes. I mean I think that's generally right. I mean we're still seeing redemptions offshore, but they are definitely slower than they were throughout all of 2012. And on the domestic hedge fund side we've seen some redemption activity but it is really not that dramatic.

And maybe almost surprising I think what has happened is it seems to us that most of the people who have redeemed or were going to redeem have redeemed. And those that are sticking with us are those who are supportive of our philosophy and Eric's strategies and philosophies and are with him and positioned for the rebound that he is positioned for and is expecting.

Okay. And maybe just moving on to the goal of expanding internationally and from larger co-investments that might be required. You did a private placement here recently. How do you feel? Like you've got some cash on your balance sheet, do you think you might have to come back to the market again if needed to go out and capitalize these funds if you see a good opportunity?

Well, we also have an un-levered company and we probably want to keep it that way. But we do have substantial capacity right now so we don't see that in the near term. There are other ways to strengthen the balance sheet that we could explore over time without issuing equity.

I do think you are going to see a much more professional and concise approach with how we manage our balance sheet and each and every time we put money into seeding a new fund we're going to have very tight controls and measurements around that. And I think you are going to find that we can do that very accretively.

So it's going to be a good development. We are going to have to watch it closely and for right now we are feeling like we have enough dry powder.

Okay. And maybe just one last one on Sprott Resource Corp., I mean that's been a very good one, as you mentioned, for Sprott Inc. Is there some way to take that business up in terms of assets even significantly higher from where it is and then leverage that success into something more than it is today?

I mean I noticed you started paying a dividend there on Sprott Resource Corp. and that might actually be the end of the NAV a little bit there. So what is the thinking on that sort of private equity managed company side of the business?

The dividend is an aggressive dividend and it's a good dividend and it was well thought out. I think it speaks to the fact that we are willing to draw a line in the sand in terms of the returns that we can achieve for investors in that strategy. And I do think that we are confident and we are working on ways to grow that business this year and we think that will happen.

Okay. Thanks, I will re-queue. Thank you.

(Operator Instructions). Scott Chan, Canaccord.

My first question is for Steve. I am just trying to understand the performance fees that came through in Q4. I guess first with the G&A you mentioned that there were sub advisory fees and performance fees lumped in the G&A. How much was that? And I am assuming most of that was performance fees.

Yes, so in the G&A there is performance fees that we paid out was CAD2.6 million and that is in the G&A number.

That is for private credit?

That is correct.

How much was this -- and the sub advisory fees are every quarter, how much would that have been this quarter?

Scott, I will need to get back to you on the exact number -- for the year sub advisory fees were CAD1.8 million. I don't have the exact number for the quarter. But I will get that for you. It was CAD1.8 million for the year plus CAD2.6 in performance fees to the sub advisor.

CAD2.6 million for sub advisor. And if I just try to reconcile my base EBITDA for Q4, and it looks like you guys were just over CAD15 million, it looks like it was on the performance fee side. And is it my understanding that the performance fee comp was lower because of the managed companies that don't pay out a 25% bonus fee component?

No, at the end of the year, Scott, we reversed some of our bonus pool accrual because of our performance; we did not utilize the full 25% bonus pool which we accrue through the year. But at year end when we get to actual payouts we reversed a fairly substantial amount, I think about a CAD4 million reversal.

Okay. And the performance fees again generated the year, were there any from the alternative investments or was it just Sprott Private Credit and Sprott Resource Corp.?

By and large Sprott Resource Corp., Sprott Resource Lending Corp. --

And lending.

-- and Private Credit. There was a few hundred thousand from some of our alternative investment strategies but that's sort of the limit on it. And just to answer your first question, the number of -- in the fourth-quarter advisory -- sub advisory fees were about CAD570,000.

Right. So in the fourth quarter CAD570,000?

Plus the performance fee pay out.

Plus performance fee. Okay, that is very helpful. Thanks a lot.

(Operator Instructions). We are showing no further questions at this time. I will turn the call back over to the presenters.

Okay, thank you, operator. And thank you, everyone, for joining us this morning. I'd be happy to answer your questions over time directly if you have any more. And have a good day and a good long weekend.

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