Sprott Inc (SII) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2016 Second Quarter Results Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct the question-and-answer session and 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, August 12, 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 meaning of the safe harbor provision of the Canadian provincial securities laws. 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 MD&A for this quarter and Sprott's other filings with the Canadian securities regulators.

I will now turn the call over to Mr. Peter Grosskopf. Please go ahead, Mr. Grosskopf.

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. Our Q2 results were released this morning and are available on our website, where you can also find our financial statements and MD&A.

I'll start on slide 3 with a look at our assets under management. As you can see, after a difficult three-year period, our assets under management have returned to their previous peak levels in the CAD10 billion range. On a year-to-date basis, our AUM has increased by over 30% or CAD2.5 billion. A lot of this impressive growth is attributable to resurgence in precious metal prices, good performance in our resource equity funds, and continued net sales for our alternative income products. We have a significant pipeline of product launches scheduled for the second half of 2016, and we're confident that we'll be able to maintain this strong top line growth.

Looking now at slide 4. Our Q2 adjusted EBITDA was CAD0.02 per share, while our net income was CAD0.07 per share in the quarter. Our book of proprietary investments continued their strong performance during the quarter, generating CAD17 million in gains. On a year-to-date basis, our proprietary investments are up by close to CAD30 million, due largely to investments, seed investments in our precious metal funds and some proprietary gold and silver equity investments. We continue to maintain a strong and debt-free balance sheet with more than CAD305 million in available capital.

Turning now to slide 5 for some highlights. The big story for us in the first half of the year was the performance of precious metals and our precious metal funds. Investors are continuing to grapple with concerns over slowing economic and global growth, negative interest rates, a general loss of confidence in central bank policies. And together, these factors have created enough uncertainty such that the appeal of holding gold and silver has increased.

Our precious metal equity strategies performed extremely well this year, posting gains well in excess of 100%. And our exchange-listed products have returned to growth mode through both the takeover of the trust earlier this year, a secondary issue through our silver trust, as well as our recently launched at-the-market program.

In terms of sales, it's been a slow build for our diversified strategies due mostly to difficult fund and industry conditions. We have had a recent uptick in inflows to our gold and silver products, and our new Sprott Global Gold Fund is generating interest amongst institutional investors.

Overall, Sprott asset management has delivered positive year-to-date net sales, which is impressive accomplishment considering some of the challenges facing asset managers in Canada. Our specialty credit franchise is performing well. We recently launched the Sprott Private Credit Trust 2, and we're excited about the launch of an additional alternative income strategy in the near future.

On the lending side of the business, during Q2 we completed the first close of our Private Resource Lending LP, raising CAD200 million.

With that, I'll turn it over to Kevin for a more detailed look at our results.

Thanks, Peter, and good morning, everyone. I'll start on slide 6 with a look at our AUM roll forward. AUM, as of the end of the quarter, was CAD9.8 billion, which was up CAD1 billion from March 31, 2016, and up by CAD2.4 billion from December 31, 2015. As Peter noted and as we announced in July, shortly after the quarter end, our AUM broke through the CAD10 billion mark, returning us to levels not seen since 2012. The increase in AUM during the quarter was mainly due to the performance of our precious metal strategy as well as good sales momentum in our alternative income products franchise. Average AUM for the quarter was CAD9.3 billion, an increase of CAD1.4 billion or 18% from June of last year.

Moving on to slide 7. You will see a breakdown of our Q2 revenues. Management fees, net of trailers and sub-advisor fees, were CAD16.3 million on a three months ended basis, reflecting an increase of CAD800,000 or 5% from the prior period. The increase was largely due to an increase in the average AUM of our exchange-listed products and diversified alternative asset management funds, partially offset by a slight decrease in the average AUM of managed companies in our private resources businesses. Gross management fees as a percentage of average AUM were 1%, largely unchanged from the prior period.

As Peter noted, returns on proprietary investments were CAD17.6 million on a three months ended basis and CAD29.1 million on a six months ended basis, reflecting an increase of CAD14.2 million and CAD28.4 million respectively from the prior periods. Gains were due to significant market value appreciation in resource- and precious metals-focused seed investments of our diversified alternative asset management business, private resources business, as well as on equity holdings in the corporate segment.

Our reported interest income at CAD3.9 million was largely unchanged from Q2 of last year. However, excluding noncash interest on impaired loans, interest income in the quarter was actually CAD3.6 million, which is down CAD300,000 from the prior period, consistent with lower average loan balances in our lending business and the impact of previously-impaired loans.

Commission income was CAD4.5 million on a three months ended basis, reflecting an increase of CAD3 million from the prior period. The increase was due to improved client trading and private placement activity in our U.S. and Canadian broker dealers.

Other income was CAD1.3 million on a three months ended basis, reflecting an increase of CAD1 million from the prior period. The increase was due to lower foreign exchange losses on translation of U.S. dollar-denominated cash receivables and loan balances as well as higher income earned on certain seeded energy assets.

Turning now to slide 8 for a look at our expenses in the quarter. Compensation expense was CAD11.6 million in the quarter, reflecting an increase of CAD4 million or 52% from the prior period. Excluding quarter-over-quarter bonus true-up adjustments, the increase was primarily due to higher salaries and benefits expense in our diversified alternative asset management business as we continued our efforts in the quarter to invest in the long-term success of this important franchise, as well as higher commission expense due to improved client trading and private placement activity again in our Canadian and U.S. broker dealers.

SG&A expenses were CAD7.9 million in the quarter, reflecting an increase of CAD2 million or 33% from the prior period. The increase was primarily the result of higher marketing and fund operation expenses as part of the ongoing strategic investment in our diversified alternative asset management business as previously described. Stock-based compensation was CAD1.4 million during the quarter, reflecting an increase of CAD1.2 million from the prior period. The increase was partially due to the amortization of stock-based compensation attributable to the new long-term incentive compensation plan we adopted in the first quarter of this year. As noted last quarter, we believe the new LTIP program will better align executive compensation and incentives to that of our shareholders going forward.

Other expenses were CAD1.5 million during the quarter, reflecting a CAD600,000 increase from the prior period. The increase was primarily due to a placement fee on the start-up of our new Private Resource Lending LP, partially offset by the reversal of a transaction accrual we recorded in Q1 of this year in our private wealth business.

Turning now to Slide 9. Net income was CAD16.9 million for the quarter, reflecting an increase of CAD10.2 million from Q2 2015. The increased net income was due to a combination of higher net management and performing fees, higher commissions, and robust gains on proprietary investments, all of which more than offset increased spend in the areas of compensation and SG&A, arising largely from our diversified alternative asset management business.

Adjusted base EBITDA was CAD5.8 million during the quarter, reflecting a decline of CAD1.4 million or 19% from the prior period. Lower adjusted base EBITDA in the quarter was due to improved fee income being more than offset by higher compensation and SG&A spend as previously noted.

Despite disappointing year-over-year EBITDA results over the first two quarters of 2016, we expect a better second half of the year as well as improved annual results on a year-over-year basis compared to 2015. The main reasons for this are that last year's results, particularly in the back half of the year, were negatively impacted by material loan loss provisions in our lending segment, weaker private placement activity in our U.S. broker-dealer, and elevated compensation and SG&A spend in our diversified alternative investments business relative to its management fee levels.

This year, we continue to anticipate no new material credit events in our lending business. Our first half results in our global segment have already exceeded our full year 2015 level. And the pace of spend in our diversified alternative investments business is nearing an eventual conclusion, with potentially positive benefits to our operating expense ratio in that business going forward.

Slide 10 provides a snapshot of our current capital position. And as Peter mentioned, we do continue to enjoy a strong balance sheet, no debt, and over CAD300 million of invested capital.

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

Thanks, Kevin. On slide 11, you can see an overview of our loan book, which stands at over CAD80 million, down significantly from 2015. Gold industry conditions were strong in the quarter, and companies in the sector took advantage by refinancing primarily through equity. It is normal for our pipeline to swell and contract during the year, and we note that we have a strong pipeline for the next quarter as new projects in the sector tender for debt financing.

We are pleased with the performance of the resource lending business in general. And with the launch of our new LP, any loans originated by us will go into the LP and generate a new revenue stream for Sprott, rather than being carried exclusively on the balance sheet.

Slide 12, just in terms of our outlook for the year. We are pleased that we have returned to top line growth and are now focused on maintaining our momentum and translating this into economies of scale for our shareholders. We note that we have also been rebuilding our performance fee book and have several funds now in positive territory. We look forward to delivering gains as these funds hit their respective yearends. We have a number of new product launches scheduled for the second half, and I think fund flows will continue to improve in some of our existing products.

As Kevin noted, the majority of the investments in our platform are now complete. We expect our expense ratios to decrease in the second half of the year as cost containment efforts start to kick in.

That completes our remarks for today's call. We'll now open the line for questions. Operator?

(Operator Instructions) Our first question comes from the line of Gary Ho with Desjardins Capital.

Hi, good morning. First question, on the net flows. Just good momentum on the exchange-listed products. Can you give me more details around that and outlook post quarter end? And then on the CAD27 million net mutual fund outflow, is there a particular fund you're seeing higher redemptions? And I'm wondering how you view your mutual funds fees benchmarked against peers?

Thanks for the question. This is Kevin here. I'll try to answer that as best I can. So as far as what you saw around net sales, I think you were asking about our exchange-listed products? Is that correct?

Yes.

Right. So a good chunk of that relates to the PSLV offering, so the silver trust offering that we did, I think it was back in April. And then, the large majority of the remaining growth in sales on that line is really coming from our ETFs as far as new ETF creates in the second quarter of the year.

As far as the redemptions that you see on the mutual funds line, I would say it's somewhat concentrated in a limited few funds. And at this point in time, it's more than offset some of the growth that we were seeing in our other areas. But as Peter noted earlier, there are some new products that we have underway. And some of them that have recently launched have been showing some pretty good results as far as very early sales. It's just unfortunate that, at this time, there were a couple of our products that somewhat overshadowed it on the redemption fund.

And then comparing your mutual fund fees versus benchmark?

I mean we haven't noticed fee pressure, Gary. Our fund fees are in line with the averages. And there is general industry pressure obviously because of the move to ETFs for fund companies to reduce fees. But for our strategies, they're all non-benchmark alternative strategies, and we have not noticed the fee line as being an issue.

What is the case is that when Brexit occurred and other negative interest rate policies really started to kick in, investors started to just become unenthusiastic about new fund sales in general, in Canada. And it's true that every day we have flows, and if you don't get flows on the sales side, you start to notice some redemptions. The redemption trends that we saw were not -- as Kevin mentioned, there was no particular fund and no particular strategy and no particular performance issue. It was just a small reduction due to the difficulty of the quarter and difficult market conditions. Offsetting that a bit, our gold and silver funds started to see some inflows, and those have continued post quarter.

Perfect. Thanks for the color. And then maybe a more numbers question perhaps for Kevin. Just on the discretionary bonus, CAD3 million this quarter, I know that this can be lumpy. Can you walk me through how and when you accrue for this bonus? And then on the SG&A spend, CAD7.9 million, would you say this is more of the elevated spend level? And should we expect -- or should we expect this as the run rate going forward?

Okay, great. I'll first tackle the discretionary bonus piece. So much like all companies, we do accrue our bonus on a quarterly basis. And it can be lumpy at times as we look to a variety of factors in determining how to accrue as we approach the end of the year. This CAD2 million increase year-over-year in the quarter is largely offset or entirely offset by the fact that in the first quarter, the accrual was actually down by about CAD3 million, which is why on a year-to-date basis, we're down about CAD1 million in that bonus accrual line, Gary.

Okay.

So things can get lumpy. I wouldn't place too much emphasis as far as whether this provides indicative information on how the year's going to go. It's just that from time to time, we may do true-ups here and there. I think even on the call I heard a while ago with Goldman, they had a similar situation where it was a little noisy.

As far as the SG&A, I've mentioned a couple of quarters back that we're sort of moving away from providing any guidance anymore around run rate SG&As because we're in the midst of a couple of things. One we have mentioned is the sort of getting to the final stages of our diversified alternative investment business growth initiatives and investing in that. And then concurrent with that project, running in the background was the cost containment plan that I had launched shortly after coming in as CFO.

So what I can say is the goal is to, as Peter noted, get our operating expense ratios down over time. We believe that you'll slowly start to see that -- hopefully in the back half of this year. And I'd probably point you in that direction as opposed to any specific run rate SG&A number.

No, that's great. Appreciate that. And then maybe just lastly, just an update on the diversification strategy. Just wondering how that's progressing. I forgot if it's last quarter or the quarter before, you mentioned 50% of AUM is actively managed. And then I think 70% to 80% is non-resourced. Can you give me an update on those numbers, please?

Yes. They haven't changed that much. We have been one of the -- we do have one of the fastest-growing diversified platforms in Canada. It took a bit of a pause this quarter because of the difficult industry conditions. Our private credit funds did grow, and offsetting that, some of the other areas came back a bit with some net outflows. But on balance, it's still growing quickly. With these back half of the year private credit launches, we actually expect significant momentum back half of the year.

Okay. So those percentages are roughly in line then?

As a percentage of overall AUM?

Yes.

No. I don't think those -- that it would have gone the opposite way this quarter just because the precious metal performance was so strong. So it's a nice problem to have. I think that the number will keep going up, but depending on what happens in precious metals, it's very hard to benchmark where the actual ratio would be.

Got it. Okay, perfect. Thank you. That's it for me.

Our next question comes from the line of Marko Kais with TD Securities. Your line is open.

Hi, good morning. I was just wondering, what is a reasonable time line for deploying the CAD200 million in commitments on your Private Lending LP? And what [type] would you like to grow this to?

It's very difficult to tell, but it's lumpy. It could be -- I mean, the goalposts would be quite far apart. What I think is reasonable is a two-year deployment period. And I think it's also reasonable that we'll have a second close. So I don't think we're going to limit ourselves to CAD200 million. We're shooting for CAD400 million to CAD500 million altogether.

Okay. And could you let me know how should we think of this business relative to your on-balance sheet loan book?

How do we see it relative to that?

Because it seems like you're getting a lot more yield on -- sorry.

Sorry, I don't understand the question.

Just wondering, like, how should we think of this Private Resource Lending LP business relative to your on-balance sheet loan book, given that the on-balance sheet loans obviously have higher yield?

Well, what we're going to do is we're translating on-balance sheet loans to the new commitments that we've made to the funds. So you'll see those gradually slide down and move into the fund. I don't think our loan balances are going to decrease much during that process. We remain committed -- I think we targeted an average deployment to the strategy of about CAD100 million.

Okay. And then just lastly, I saw a decline in the managed companies of CAD45 million quarter-over-quarter. Was that related to Sprott Resource Corp.?

Sorry, Marko, you were breaking up there. Can you repeat the question?

Yes. The decline in the managed companies of CAD45 million quarter-over-quarter, was that due to Sprott Resource Corp.?

So in part, yes, that is one of our bigger managed companies.

Okay. And then just lastly if I could. What is differentiated about your global growth fund initiative that you're launching that's not currently in your present lineup of funds?

Well, it's an offshore hedge fund-type structure. And it was seeded over a year ago now, and we're just now starting to take new subscriptions into that. So that's probably why you haven't seen it historically.

Okay, that's it for me. Thank you.

Our next question comes from the line of Aram Fuchs with Fertilemind Capital.

Yes, it's Aram Fuchs. Follow-up question on that resource lending. Will the -- is the inevitable goal to get the direct loans off SII's book and then it will show as LP interest in the new resource lending book? Or was there a constant --

That's right.

That's right, okay.

That's right. The majority of that would be from an LP investment. And the LP has a co-commitment -- co-investment capability, so there may be from time-to-time where we decide that we're going to top up on a loan and hold it more directly, but the majority will be through the LP.

Okay. And then I was surprised that -- why didn't you accomplish that as of June -- as of the end of June? Are there some loans that you want to keep? Or is the strategy at all going to be different? Why weren't those loans put down into resource funding?

Oh, okay. So, to be clear, the lending fund is starting from ground zero. It's starting with fresh capital. There's no loans that will be transferred. What happens is as we run loans off of our balance sheet, we then make new commitments -- all new commitments in the LP. So we expect the balance of loans to be roughly flat, if not increasing. But we need to make new loans in order to show the transfer, and the existing loans will not be transferred.

Okay. Okay. That was the confusion. Okay, thank you for that. And then you didn't mention the Korean and Chinese businesses. How are they proceeding? Is it still just a toe in the water?

Yes. So the Chinese fund has been very profitable for us, due mostly to what I think is exceptional performance. So we've really been happy with the performance of this fund. What we've not been happy about is fund flows. We are going to consider it a learning experience, shift gears a little bit. And I think we've got new partners looking at us there, who should be able to support some growth and fund flows there for us. So we're actually kind of excited about that.

And then in Korea, the difficulty has not been that we don't have a good fund or a good client there. The difficulty has been in deploying the capital, and they have very rigid standards for deploying the capital. The fund doesn't make as much money. It's a good client relationship. We really need to change the mandate of the fund slightly in order to be able to deploy more, to make it more profitable. So we're working on both those now.

Okay. And China, is the new partner, is it a partner that's native to finance and not mining? Is that the change?

Well, we haven't selected yet, but that's our hope.

Okay, great. Thanks a lot.

Our next question comes from the line of Geoff Kwan with RBC Capital Markets. Your line is now open.

Hi, good morning. I apologize I did get on the call a bit late. But I just had a question. I know it's a small part of your business, but there's been a lot of different regulatory stuff happening within the mutual fund space. And maybe as a part of it, we have seen a number, unusually higher number of fund companies that have been making changes to their fee structure over the past 18 months. Just was wondering how you guys kind of feel about where your fees are these days, how much of -- any sort of conversations you have with your investors in those funds, if the tone of that conversation has changed at all over the past year?

Okay. I'll answer it in two parts. We did talk about it a bit earlier on the call, but two parts. For us, we don't really see the fee pressure so much. We have very differentiated fund products, and they're mission-specific, they're not always benchmarked. In fact, most of the time they're not benchmarking strategies. And the fees seem to be -- the client relationships seem to be happy about our fee structure. We're not on the very top, we're not on the very bottom, but that's -- it's a relationship that we don't see changing that much. I do hope that active management and believe that active management strategies will actually gain favor. We've seen the pendulum swing so far to low-cost strategies that for anyone that's in the benchmark, if there's a hiccup, we think the pendulum could swing the other way very quickly.

The second part to the question, mutual fund industry conditions are clearly very tough. New sales in the quarter for the entire industry were down by a substantial margin, and that's a number of factors. Fee pressure is only one of them. It was a volatile quarter. The CRM2 regulations are meaning that the kind of funds are held up doing paperwork and everybody is reassessing portfolios. So it is a difficult environment for new sales.

Okay, thank you.

I'm showing no further questions in queue at this time. I would now like to turn the call back over to Peter Grosskopf for any closing remarks.

Okay. Well, thank you, operator, and thank you for all those who attended. We look forward to reporting to you next quarter on our progress. Have a good weekend.

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.