Sprott Inc (SII) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott, Inc.,'s 2015 Annual Results conference call. (Operator Instructions). As a reminder, this conference is being recorded today, March 11, 2016.

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 meanings 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, 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 assumption applied in making forward-looking statements, please consult the MB&A for this quarter of Sprotts' other filings with the Canadian Securities regulators. I would now like to turn the conference over to Mr. Peter Grosskopf. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thanks for joining us today. On the call with me today is our Chief Financial Officer, Kevin Hibbert. For those of you who've not met Kevin, he took over as CFO late last year, and we're pleased to have him join for his first earnings call.

Our 2015 annual results were released this morning and are available on our website, where you can also find our financial statements and MB&A. I'll start on slide three with a quick overview of our 2015 financial results.

Despite the extreme weakness in natural resource markets, our AUM increased by $400 million on the year to $7.4 billion. This figure does not include approximately $1.1 billion in AUM gained through the successful completion of the Central GoldTrust exchange offer in January 2016, which subsequently increased our AUM to $8.5 billion.

Our adjusted EBITDA was seven cents per share, and we recorded a net loss of 16 cents per share, due mostly to a $28.5 good will write down related to our acquisition of the global companies four years ago. In 2016 we recorded $9 million in mostly energy-related loan loss provisions relating to our, to our resource lending book, which I'll cover in more detail later in the call.

Our balance sheet remains strong with more than $300 million in invested capital, down from approximately $330 million at the end of 2014, which I'll also cover in more detail later in the call. Over the past four years we've invested in nearly every aspect of our business to position the firm for future growth. While we are not satisfied with our financial results, our recent financial results, we believe that the fourth quarter of 2015 marked a turning point, and we expect - particularly given the recent market events - that Sprott is on a positive trajectory going forward.

On the next slide, as you all know, over the past four years we hired new portfolio managers and business leaders, we built a more diversified fund lineup, and we expanded our exchange-listed offerings. We also put in place of more experienced sales and service team for both our retail and institutional clients.

Our active resource strategies have been completely retooled, and are now delivering better investment performance. The early results of our efforts have been positive and helped us to generate AUM growth and positive net sales in 2015. This trend has strengthened and continued into early 2016, and we're particularly enthused by our recent year-to-date sales and investment performance.

Turning now to slide five for a look at Sprott Asset Management, under John Wilson's leadership SAM has emerged as one of the fastest growing alternative asset managers in Canada. Sprott Asset Management has refocused its product lineup on highly-differentiated hard-to-replicate strategies and now offers its clients investment solutions they can't get anywhere else in core areas. We've invested more in sales, and particularly marketing, in order to rebrand the business and deepen SAM's invest adviser channel penetration.

We continue to expand our enhanced products franchise, which now has total AUM of more than $1.3 billion. In 2015, we hired Dennis Mitchell, and launched four new funds in large, addressable core markets for Dennis. He is one of Canada's best known portfolio managers, with a large retail following, and early sales of his strategies have been promising. SAM has established itself as a Canadian market leader in specialty credit products, and we will continue to build out this product line in 2016.

On slide six you can see how dramatically the composition of SAM's AUM has shifted since 2011, when more than 90% of our AUM was invested in precious metals. Since that time, we've successfully transitioned most of SAM's active AUM from legacy funds to new diversified strategies, and new precious metal strategies, which are just now beginning to achieve the scale needed to deliver meaningful profitability.

In addition to our active strategies, our exchange-listed products franchise has returned to growth. And so now on slide seven the Central GoldTrust transaction increased the scale of our physical trusts and, importantly, increased investor interest has moved both of our gold and silver trusts to premiums, to their net asset values. Our two gold miner ETFs are performing well as precious metal sentiment improves, and we expect to launch additional ETF products before the end of 2016.

One of our main priorities for this year is to attract AUM to our next generation resource strategies. Most of these funds outperformed their benchmarks in 2015, and our active resource strategies are up by an average of 30% year to date.

I'll now pass it over to Kevin for a review of our 2015 financial results.

Thanks, Peter, and good morning, everyone.

I'll start on slide nine with a look at our AUM role forward. AUM as of December 31, 2015, was $7.4 billion, which was up $400 million, or six%, compared to December 31, 2014, and was largely flat to September 30, 2015. The increase in AUM on a year-over-year basis was due to a combination of good sales momentum in our mutual funds and exchange-listed products. We also benefitted from foreign exchange gains in our bullion fund products, which were partially offset by market value depreciation across most product lines, as well as redemptions of our bullion fund.

Average AUM for the three and 12 months ended December 31, 2015, with $7.6 billion, up slightly from the prior year. As Peter mentioned, the successful closing of the Central GoldTrust transaction added another $1.1 billion to our AUM in January.

Moving on to slide 10, you will see a breakdown of our full year revenues for 2015. Management fees were $75.3 million, reflecting a decrease of $3.1 million, or four%, from last year as a result of lower AUM from our private resources businesses in both the U.S. and Canada.

Commission revenues were $7 million for 2015, down from $7.8 million last year. That decrease was largely due to reduced private placement activity in our U.S. brokerage business in the global segment. Interest income, which is driven primarily by the performance of our loan book, was $18.7 million, reflecting a decrease of $1.5 million, or seven%, from last year. The decrease was primarily due to lower average loan balances on the year.

We recorded a loss on proprietary investments of $9.8 million for the year, with the majority of the losses stemming from an impairment charge on a seeded energy asset, market value depreciation in certain seeded fund investments and certain equity holding. Other income for the year was $25.8 million, reflecting an increase of $14.4 million from the prior year.

The increase was mainly due to strong foreign exchange gains on translation of U.S. dollar denominated cash receivables and loan balances and the generation of royalty income on energy assets held in our proprietary investments.

Turning now to slide 11 for a look at our expenses for the year, total expenses for the year were $157 million, compared to $96.5 million last year. The increase was primarily due to impairment charges on good will and intangible assets, as well as loan loss provisions recorded during the year. As you can see, the recorded impairment charges of $43.8 million primarily from the write-off of good will in our global segment, which houses our U.S. businesses, and the write-off of an energy-related management contract in our consulting segment.

Loan loss provisions were $9.2 million for the year, reflecting an increase of $8.7 million from the prior period. The increase was primarily the result of higher specific loan loss provisions on resource loans and a new general loan loss provision of $1.2 million that was taken across the loan portfolio to reflect the credit risk associated with the ongoing global resources sector decline.

Other expenses were $8.6 million for the year, reflecting an increase of $8 million from 2014. Other expenses consist of two things. First, operating expenses, depletion and impairment charges incurred in certain seeded energy assets held as part of proprietary investments and, second, costs associated with the silver bullion trust exchange offer that were expensed on expiring of that offer.

SG&A expenses were $27 million, reflecting an increase of $4.3 million, or 19%, in 2015, due primarily to higher marketing, technology, and fund-related operating costs in our SAM segment. Total reported compensation and benefits were $38.1 million in 2015, reflecting a decrease of $1.5 million, or four%, from the prior year. The decrease was due to lower discretionary bonus resulting from year-end bonus adjustments and lower year-over-year cash-based earn-out obligations in Sprott Toscana, as that entity reached the end of its vesting period.

Finally, turning now to slide 12, you will see a full reconciliation of net loss to adjusted based EBITDA. Our net loss for the year ended was $39.6 million, or 16 cents per share, compared to net income of $19.4 million, or eight cents per share, in 2014. Adjusted base EBITDA was $16.6 million on a full year basis, reflecting a decline of $16.9 million, or 51%, from 2014. The decline in adjusted based EBITDA was largely due to lower management fees, interest, and commission income, coupled with the specific loan loss provisions taken during the year.

That said, I'll now pass it back to Peter for some closing remarks.

Thanks, Kevin.

So on slide 13 we've given a snapshot of our current capital position. We continue to enjoy a strong balance sheet. Invested capital stood at $309 million, reflecting approximately a $34 million, or 10%, decrease from last year. And I just wanted to walk you through the main drivers in 2015 of that capital book decrease. So the first one was the small shortfall in our operating cash flow compared to our dividend.

The second was our investment in the Central GoldTrust transaction. Third would be [prop] book losses, which I should mention have subsequently rebounded. Fourth would be loan loss provisions. And then, offsetting that, a partial offset was FX gains and interest income, and the FX gains were related to our U.S. dollar position, which for us is relatively permanent.

Turning now to slide 14, we thought it would be valuable on today's call to spend a bit of time on our loan book. The current balance sheet value of our loan book is just over $100 million. As we've noted, during 2015 we believe we were proactive and got in front of the extremely difficult resource market conditions by taking a $9 million loan loss in provisions in order to stay ahead of potential credit risk.

$4 million of these provisions were related to an energy loan, which we have a low expectation of recovery, and the remaining $5 million is related to loans where we have better recovery prospects. Fortunately, the provisions that we recorded in 2015 were largely offset by FX gains on those loan positions.

On slide 14, we've categorized the loan book in a number of different ways, including by geographic location of the security and by maturity. I would note that, despite the breakdown by industry groups, 75% of our loan book is current - is extended to mining industry borrowers. After taking these proactive measures, we're confident in the credit quality of our remaining loan book and that that credit quality is solid.

So going to a 2016 outlook on page - on slide 15, SAM has now been repositioned and is now one of Canada's fastest-growing alternative asset managers. We believe that the bottom is finally [in] for precious metals and both our actively-managed precious metal strategies and our exchange-listed products are well-positioned to benefit from a recovery in performance and investor interest.

With the GTU deal and strong investment performance year to date, our AUM has increased from $7.4 billion at the end of 2015 to close to $9 as of today's call. We're focused on adding new institutional AUM in 2015, and these efforts are supported by senior sales professionals we've added in New York and London.

We see excellent opportunities to seed new alternative funds, along with new clients, which can be run from our existing platform. After a tough 2015, we would note that the proprietary investments portion of our capital has generated year-to-date returns of approximately 30%. We will focus and will contain our costs during 2016 and streamline some of our subscale strategies in business units. That concludes our prepared remarks.

We'll now open the call up for questions. Back to you, operator.

Thank you. (Operator Instructions).

One moment for questions. Our first question comes from the line of Gary Ho with Desjardins Capital Markets. Your line is open. Please go ahead.

Thanks. Good morning. Thanks for the additional color on the loan book. I have one more question. Can you give us color how you came up with the general provision of the $1.2 million? Was that under a stress scenario or specific price [deck]? How should we think about that?

Hi, thanks for that question. It's, it's Kevin here on the line. So the, so the - just to sort of step back - the, the, there's, there's two provisions you make, the specific and the general. When you're deal with the general provision, you're, you're, you're generally doing that when there's no specific indicators of credit risk in the, in, in that particular area of the portfolio.

The numbers that we came up with were fairly low because the overall loan book is about 15 loans, as you know. And so you should have the ability to identify where the specific credit risks are. So when you step back and identify all the specific credit risks in the portfolio, you're really left with not that much risk left over to identify in a loan portfolio of our size. So the million that we have is really indicative just the general provisions who cover any risk that we may have missed at a specific level, and we think one million is about the right number.

Okay, perfect. Thanks for the color there. And then maybe, Peter, given the run in precious metals over the past few months, are you seeing corresponding uptick in terms of sales into your strategies? Can you elaborate on that as well?

Well, yes. So a few different points. First of all, our bullion trusts, as I mentioned, have gone to premium, so that, that opens up growth for them again and it's pretty significant. The volumes there are pretty significant. Second, the ETFs have certainly generated some interest in some creations in the last month.

Thirdly, precious metal active funds, [I mean], despite the great performance, investors are a little slow to return to the sector, so there's been some inflows, but they've not been massive. I just think it takes time to gain momentum and people are worried that perhaps they're going to get in at the wrong point and, and will be facing a pullback. So I actually think a pullback would be good for sales.

And then, lastly, institutionally there's absolutely no question that, with negative interest rates globally, institutions are looking at gold in a very, very different way than they did in the last five years. So we are seeing the pace of institutional presentations picking up significantly, and I would be really surprised if we weren't able to capitalize on that in the near future.

Great. And then just, maybe just touch on the other stuff. So on the products that's managed by Dennis Mitchell's team, how's the traction been since launch and kind of versus your expectations? And can you, can you size up how much those funds are currently?

Yes, I think the total of the funds I'm just aggregating here, is, is probably less than $100 million currently. But the, the fund launches, in my experience, are always, are always slower than you expect them to be. A manager of Dennis' stature you would think you would be in the multiple hundreds of millions right away, but money is difficult to, to move and these days investors are careful enough that, even if they know the portfolio manager, they don't always subscribe at the first meeting.

It takes a while to move money. So based on monthly sales, from what I've seen, I'm, I'm quite impressed in terms of the investor response. It looks like it's coming in daily now, and it would be about where I would expect it to be. And so Dennis is in very large categories. He's got a very large following. This is about exactly what I would have expected.

Great. And then maybe just a last question for Kevin. On the SG&A, is the current quarter's run rate - I think it's $7.9 million or so - is that a good number for 2016 to use?

No. I would, I would, I would say that this past year was, was very much about reinvesting in key areas of our, of our business. There was the rebranding and repositioning of SAM in particular, and also some investments we engaged in as far as creating some next generation products we feel will do pretty well for us when there's an eventual recovery in the resources space.

So, I, I probably would not rely on that number as indicative of what you'll see going forward this year. But I, but I'm not prepared to give any specifics at this time unfortunately.

We did spend, we spent significant dollars on the rebranding and we spent significantly on those precious metal strategies and launches and the, the ETF products that won't - those expenses just won't be repeated and will be borne by higher AUM on the funds themselves.

So the marketing and ITPs that was mentioned I think in the MD&A, those won't be repeated?

So the marketing spend there, we, we're still in the process of the rebrand, so you can still see a bit more spend there. On the technology side, that's really captured as part of a broader cost containment plan that I'm leading that Peter alluded to earlier. So there's just going to be a little bit of ins and outs and offsets, a little bit of noise, if you will, in that [est] unit and a line such that I can't really confirm right now how that number would look.

But certainly what you've seen in 2015 is not what we'd expect as a, as a longer-term run rate, that's for sure.

Okay, perfect. That's it for me.

Thank you. And our next question comes from the line of Graham Ryding with TD Securities. Your line is open. Please go ahead.

Good morning. Maybe I can focus on there was some talk in your presentation and the MD&A about new AFTs launches later this year and also focusing on U.S. expansion. So on the first, just maybe some detail around what you're looking at. And on the second part, your U.S. expansion should we think about that as focused around your existing products, or are you referring to launching new institutional products to, to grow in the U.S.?

Yes, thanks for your question, Graham. So on the ETFs, we do want to stay focused on our niche and we're not going to have a very broad lineup, but one or two additional launches is what we'd expect and see good prospects there. And then on the U.S. expansion, it's very much around existing products.

We have and will probably take our U.S. sales channels and focus on AUM generation and I mean, by that I mean both on the institutional side, retail broker dealer channels, and we have our own assets under administration through the global resource franchise that we will probably take more into AUM over the next year, year and a half.

Okay, great. And do you have an institutional product to sell in the U.S. right now?

Yes, we have our new precious metal strategy and, look, a few of our products are what I call institutionally qualified. So those, those will be packaged in usual LP formats for interest. In fact, we had one subscription in January for one of the enhanced funds, enhanced longshore that was - we haven't drawn down a lot of the commitments, so you won't - it's not really in that AUM number I quoted, but it's a $50 million lead off order for that strategy. So it's both in diversified and reserve strategies.

Okay, great. And then maybe jumping to the, to the long book, appreciate the color you provided. The, the impairment that you took this quarter on the specific side, just maybe a little bit of color. Was that one loan or was it a group of loans? And I believe you've got two loans that are in second, second positions. I'm just wondering what your comfort is around those loans going forward?

Yes, I don't know that we have any loans left on the books in second positions, Okay? I'd have to come back to you on that. I don't think that's the case. So our loan book is all senior secured. As Kevin mentioned, the general is kind of super stressed for credit market conditions. You haven't seen anything, you're just kind of cleaning up to make sure that, in case something happens in the future, you're covered. And generals aren't encouraged by auditors.

They we try to pressed them hard to go as high as we could. And that's, that's a subject of audit. For specifics, what we try to do is really, really stress test each loan for worst case scenarios and range of outcomes, and all the rest of it, given how, how poor credit market conditions got. So that's what we came up with and that's the best - I mean we hope to do better than that. We hope to get full recoveries on those loans, but we, we wanted to be realistic.

And, Graham, this is Kevin. I see where you're, you're, where you're asking about the two, the two second secured under the - I assume you're looking at the priority of security charges section of note six?

Yes, I can't remember where I got it from but I just saw, I saw some footnote around the, the breakdown of your loan book.

Yes, Okay, so I'll circle back with you after the call to give you a little bit more color around that.

Okay, great. And then just with your outlook for the loan book overall. Like are you comfortable with the, the recovery year to date and the resource space? Are you comfortable with sort of continuing to add new loans to the book? Or what's your, what's your outlook for the overall portfolio?

Yes, so there has never been a better time to be in the resource lending business. The deals that we're seeing now are I think I - it's just a very good time to, to be a resource lender. You're getting very senior secured packages on very good projects with very good upside. So we're committed to the strategy.

We think the book adequately provisioned, and we are in the progress, and I've said this for a number of quarters, but we're actually in a closing progress for a sidecar fund. So we, we think that business will actually grow, but that our balance sheet commitment does not need to grow.

Great. Thanks.

Thank you. And our next question comes from the line of Aram Fuchs with Fertilemind Capital. Your line is open. Please go ahead.

Yes, like you said, it looks like we've turned the corner here in the precious metal market. You've taken out one of your biggest competitors and this bullion trust business is really one of the few businesses that can be seen as perpetual.

And I was wondering if you can look at your loan book and look at great opportunities that you have at independent third parties, but isn't there - this a good time to be buying back your own shares? If seems like, if the corner is turned and the cash distributions are increasing, why don't you commit some of your balance sheet to a stock buyback?

Yes, Aram, it's a good question. And, and thanks for putting me on the spot about it. The - I mean we've [got] a lot of capital and we have options with that capital, and we have a very strong dividend rate, and the question gets debated all the time between the excellent opportunities to seed new funds and do things like the Central GoldTrust transaction which there are more of them available now than at any time that I've seen in the last five years.

So on the ground money that you can get very attractive rates of return on versus buying back our stock, which again we think we'd be buying back at below intrinsic value versus paying a dividend, which is important to some of our shareholders, it's, it's a debate. And when do we step on a buyback versus our organic growth opportunities?

I can tell you we're looking at a couple of things right now where we just wanted to keep dry powder at the company level, and we will always have that option, and we appreciate that it would be a sign of support for the shareholders and be very good for us. But we decided not, not to go ahead with it at this quarter. It's constantly reviewed. That's all I can say about it. I'm sorry.

Okay, thanks. That's, that's fair enough. And the Asian business, you had previously described it sort of as a toe in the water in Korea and China. You didn't bring it up this call. Is it, is it fair to say that's still sort of in the incubation stage? Or maybe you can give us an update there.

Yes. It, it's been slower than expected. So we did get those leadoff orders. We do have a decent chunk of AUM there. We do make some positive EBITDA contribution, as we do in almost all of our resource businesses now. But it's certainly not taken off the way we thought it would. We're sticking with it. Those client relationships are long term. Those new clients take a long time to develop.

There's no question in our mind that Chinese buyers are going to be the big swing factor in the gold market, and we wanted to be first, and we were first. And there's a price for being first, and that's that we were a bit early to get large AUM increases there. But that doesn't mean we're stopping, and those efforts are fully costed. It's kind of like an upside option. And I think it's a very important part of what we could develop on the institutional side for AUM.

Okay, great. Thanks a lot. Those are my two questions.

Thank you. I'm showing a follow up question from the line of Graham Ryding with TD Securities. Your line is open. Please go ahead.

Just one more on the - you mentioned on streamlining some, some scale strategies. Have you made any decisions in this area, or is this just something you're looking at going forward?

No, no decisions. It's tough because in some of those strategies we see potential, and one always thinks that you're just around a turning point where they can become economic. Most of what we're talking about does not cost us any money, so it's not as though we're pressured to rationalize a big cost item.

But we do want to focus and we're well aware of the fact that our size - unless a strategy can grow to $500 million, it's not worth us running for the most part. So you do have to make tough decisions, and we're going to continue to prune the lineup. And on some of our resource strategies in particular we have some inefficiencies that we'll be correcting in the next, in the next call it three to six months.

Okay, thanks. And just some color maybe that you had pre-constructed net sales this quarter. Maybe what were the, the influence on the mutual funds side and also the alternative investors' platform?

So the, the on, on both the three and 12-month ended basis, most of the net sales in the mutual funds space are coming from John Wilson's enhanced fund product. In Q4 we saw a little bit of momentum coming from Dennis Mitchell's focused fund and, on the alternative side, it was our, our bridging funds. And then there was a little bit on the ET, on the ETF side as well. Both the [SDTJ] and [STDM].

Great. Thank you.

Thank you. And our next question comes from the line of Scott Chan with Canaccord Genuity. Your line is open. Please go ahead.

Good morning, guys. Kevin, just on your comment on the - just on the retail flows, is it fair to say you guys put in that legacy asset chart? I know the legacy assets are down a lot from, from past periods, but how do you think about those products in terms of [CRM2], its high-cost fees and its, and its performance issues going forward? It just seems that those assets continue to be on the decline. I was wondering if there's any strategic review on, on, on what you're thinking on those.

Scott, it's Peter. Thanks. The - so it has to do with the streamlining comment that I just answered. It's always tough. A couple of those products are still pretty competitors. They are all very differentiated, so none of those products are benchmarked products that people can get elsewhere for lower fees.

I've maintained from the start that, based on how volatile our performance was on those products, it's kind of like talking about a brush fire after you just went through a forest fire to justify fees. But we all do have to do it. And the one answer that we have is in every case we've invested a lot bringing new portfolio managers in and with a discernable plan to add value. So it's, it's early days for us to prove our worth.

All the fund companies on the independent shelf in particular have to prove our worth, but we're not thinking it's a big factor in our business. We're not feeling a, a big push from lower fees. We know our - a couple of our competitors that are kind of have more prolific benchmarked products have had to react, and I do think in general the trend on fees is down. But it's not going to be a major thing for us.

Okay. And on the, on the resource credit side, did I miss it? Did you give an update on the status of the credit fund? On the, on [that] platform?

Yes, we, we do plan on closing the first traunch of a credit fund in this quarter.

This quarter, Okay.

Meaning, sorry, Q2.

Q2, Okay. And I saw [alert] that you cut your dividend, but you didn't cut your dividend, did you?

No.

Oh, okay. There's some alerts coming out that you guys cut your dividend three cents, but I didn't, I didn't read it anywhere. But on that note, how committed are you to that dividend? I know the last two quarter were tough. But year to date seems like it's, it's a lot better for you. Are you comfortable with your dividend right now?

Yes, well, that's, that's part of the question I answered before for Aram. We have a strong balance sheet. We do have operating cash flow even that we weren't happy with last year, but that we think will grow this year. And so for us the choice is buy back dividend or invest in our business through new funds. And at current levels our dividend is fine. The differences between that and our operating cash flow was fairly small and manageable for last year. And just in general we think our boat's going to float higher this year, so we're comfortable just maintaining as we are. And there's no stress on the dividend for us at all.

Okay. Very good. Thanks a lot, guys.

Thank you. The line is showing no further questions at this time. And I would like to turn the conference back over to Mr. Peter Grosskopf for any further remarks.

Well that concludes our remarks for today, operator. We're happy to take questions offline, and appreciate everybody's time and interest. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.