Sprott Inc (SII) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc. 2017 First Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, May 10, 2017.

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 provisional security law. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions implied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. And additional information for factors that may cause actual results to differ materially from expectations about material factors and assumptions applied in forward-looking statements, please contact or consult the MD&A for the quarter and Sprott's other filings with the Canadian security regulators.

I will now turn the conference 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; and Glen Williams, our Head of Investor Relations. Our 2017 first quarter results were released this morning and are available on our website, and you can also find the financial statements and MD&A.

I'll start on Slide 3 with a quick review of our Q1 results. I'm pleased to report that we posted another quarter of improved financial performance and asset growth as our AUM increased by approximately $500 million, due largely to the market growth in our Exchange Listed Products business. Our adjusted base EBITDA was up by more than $10 million to $16 million in the quarter, due to higher management fee and commission revenues as well as the reversal of a loan loss provision that Kevin will talk about in a few minutes.

We are committed to running a lean organization, and the cost containment program we initiated in prior years is paying off by driving our operating expense ratio lower.

We continue to maintain a strong balance sheet with more than $310 million in investable capital. This figure will increase after giving effect to the sale of our Canadian diversified assets, which I will cover on Slide 5.

Turning now to Slide 4 for a look at some of our year-to-date highlights. In April, we completed the second close of our oversubscribed Private Resource Lending LP, raising more than USD 560 million, which we expect to deploy over the next 18 to 24 months.

We also recapitalized Sprott Resource Holdings through a merger and subsequent equity raises that have positioned that business well for future growth with more than $75 million in cash to invest.

Our recently launched merchant banking business, Sprott Capital Partners, has enjoyed high levels of activity in the early going, participating in more than $500 million of financing so far this year. The [good] business has begun to generate respectable commission revenue and operating earnings.

Finally, we've received approval from the TSX to launch a normal course issuer bid, once our current blackout period expires. Under the NCIB, we'll have the potential to buy back up to 5% of our shares for cancellation.

Turning now to Slide 5. In April, we announced an agreement to sell our Canadian diversified assets and contracts to a management-led group for $46 million. This sale will happen in 2 phases with the sale of the Asset Management contracts closing in Q3 and the private clients accounts closing in Q4. Once this sale is complete, our headcount will be reduced by approximately 50%, and our SG&A expenses will decline accordingly.

After giving effect to the transaction, we will have approximately $7.6 billion in assets under administration -- management, including close to $900 million in some advisory mandates for the SAM precious metal mutual funds. Proceeds of this sale will increase our balance sheet capital to more than $350 million, and we will also benefit from the repatriation of certain seed investments in working capital from the SAM funds. After this sale, we will be a streamlined organization entirely committed to delivering results to our investors by focusing on core strengths.

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 March 31, 2017, was $9.7 billion, which was up over $440 million from December 31, 2016. The increase was largely due to market value increases in our Exchange Listed Products and, to a lesser extent, market value increases in our alternative assets and private resource investments. So it doesn't appear here, as Peter noted, the $750 million in commitments to our new Resource Lending LP will be reported as AUM, as that capital is deployed into fee-generating loan investments over the next 18 to 24 months.

Moving on to Slide 7, you will see a breakdown of our Q1 2017 revenues. Net fees were $16.8 million for the quarter, reflecting an increase of $1.4 million or 9% from the prior period. The increase was largely due to an increase in the average AUM of our Exchange Listed Products and resource-focused funds. We also experienced, however, good AUM growth in our alternative credit products as a result of both higher market values and net sales inflows. Gross management fees as a percentage of average AUM were 1% on a 3 months ended basis, largely unchanged from the prior period.

Returns on proprietary investments were negative $2 million for the quarter, reflecting a decrease of $13.5 million from the prior period. This was due to market value depreciation in some of our resource-focused equity holdings compared to material gains on investment in the prior period.

Interest income was $5.9 million for the quarter, reflecting an increase of $1.9 million or 50% from the prior period. The increase was due to the recognition of cash interest on a previously impaired loan that had its provision reversed in the period. This was partially offset by lower average loan balances in the rest of our lending segment, as we continue our efforts to wind down on balance sheet lending and build scale in our Private Resource Lending funds.

Commission revenues were $8.2 million for the quarter, reflecting an increase of $7.1 million from the prior period. The increase was largely due to robust merchant banking activity in our new merchant banking business, Sprott Capital Partners, as well as good client trading and private placement activity in the U.S. broker-dealer business of our private resource investments platform. Other income was $1.3 million for the quarter, reflecting an increase of $5.6 million from the prior period. The increase was largely due to reduced foreign exchange losses in the quarter.

Turning now to Slide 8 for a look at our expenses. Compensation expense was $14.4 million for the quarter, reflecting an increase of $5.2 million or 56% from the prior period. A significant portion of the increase was due to higher incentive compensation, specifically higher commissions and discretionary bonus on robust private placement activity in our new merchant banking business as well as good client trading and private placement activity in our U.S. broker-dealer, as I previously noted.

The other contributor to increased compensation was increased salary expense relating to the year-over-year increase in headcount in the Canadian diversified fund business that, as Peter mentioned, is in the process of being sold and as previously announced on April 10 of this year.

SG&A expenses were $6.6 million for the quarter, reflecting a decrease of $700,000 or 10% from the prior period.

During the quarter, we benefited from lower fund operating expenses, lower technology costs, lower marketing and sales expenses in the Alternative Asset Management business, as the management team continued to see the benefits of the ongoing cost-containment program in that area.

Turning now to our loan loss provision. As you may recall, at the end of 2015, we instituted specific loan loss provisions on 2 loans as well as a general loan loss provision on the rest of the loan book. In 2016, the credit profile of 1 of the 2 impaired loans worsened, which required us to write off that specific loan against the provision, while the general provision on the rest of the loan book was reversed, as the credit profile of those loans improved.

At the end of this quarter, after completing our quarterly assessment of credit risk in the loan book, we made the decision to reverse the $5 million provision on the remaining impaired loan, as its credit profile improved to the point where the loan is no longer impaired.

Slide 9 shows an improved trend in our SG&A expense ratio since Q4 2015. We showed this slide to highlight our commitment to lowering our SG&A expense ratio. As you can see, it began falling at the end of 2015, which is when we launched our cost containment plan, and has continued to decline steadily.

Turning now to Slide 10. Net income was $8.8 million for the quarter, reflecting an increase of $7.5 million from the prior period. Excluding last year's impairment charges on intangible assets, higher net income was mainly due to the reversal of a specific loan loss provision I described earlier, higher net management fees and net commissions and lower SG&A. Adjusted base EBITDA was $15.9 million for the quarter, reflecting an increase of $10.7 million from the prior period. Higher adjusted base EBITDA was due to the same factors impacting our quarterly net income.

In conclusion, Slide 11 provides a snapshot of our current capital position. We continued to enjoy a strong balance sheet, no debt and over $309 million of investable capital. After giving effect to the disposition of our Canadian diversified assets, we expect to have approximately $350 million in balance sheet capital to deploy.

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

Thank you, Kevin. On Slide 12, we have focused on Sprott going forward. We're committed to building a global market leader in resource and real asset investments. Culturally, we are also committed to being an employee-owned organization in order to ensure complete alignment between our management and our shareholders. We expect that employees will be increasingly motivated to buy shares going forward. The leadership team is focused on fostering a performance-based culture to improve the performance of existing strategies, while creating best-in-class products, where our investment expertise gives us a sustainable, competitive advantage.

We have a strong presence in the U.S. through our Exchange Listed Products business, and under the leadership of Rick Rule and Whitney George, we will continue to grow our U.S. assets under management. We will accomplish this by increasing the scale of our key strategies and acquiring new capabilities in capacity-constrained areas of the asset management business and within our core expertise.

Internationally, our brand and awareness in our sector has always been a key, perhaps our greatest asset, and our task now is to capitalize on that recognition. In order to achieve this, we will benefit from building out systems, people and partnerships to help us service clients and distribute our products to global investors.

With more than $350 million in capital to drive future growth, how we allocate and compound that capital is going to be a key factor in our success going forward. We will generate returns on our balance sheet by continuing to pursue coinvestment opportunities with key clients and through the creation of products in core areas. We will also consider acquiring boutique asset managers, who would provide us with complementary investment and capital-raising capabilities.

On Slide 13, our outlook, I'll provide you with a few thoughts on that and then ask for follow-up questions. In today's highly correlated financial markets, we believe that investors' need for portfolio insurance has never been greater, and I believe that we're in the early innings of an allocation cycle to those types of alternatives. The fundamentals for precious metals are strong, and as investor demand for uncorrelated assets like gold, silver and other real assets increases, our goal is to be a go-to provider of alternative strategies in these areas.

One of the areas where we see immediate opportunity is in precious metal ETFs. As passive investment products in this area have grown in size, they've begin to cause distortions in the markets, and gold equities, particularly in the junior space, the growth of the incumbent index funds has started to cause problems both structurally and through the impact on the underlying holdings of these funds.

We've already begun to see increased inflows to our SDGJ (sic) [SGDJ] product as a result of these changes, and we now need to increasingly educate the markets to the superiority of our factor-based products.

We're also exploring opportunities in new areas that are complementary to core precious metals. Private farmland and infrastructure are 2 categories that with the right teams could round out our product line-up and provide us with additional cost-selling opportunities.

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

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

Now that you have a bit more time to consider since the transaction, Peter, I just wanted to pick your brain in terms of capital deployment. You mentioned products and, perhaps, small boutique acquisitions. I guess, just wondering if you can elaborate on maybe size, timing and where do you see the best opportunity there?

Well, we would look at everything on the basis of what's most accretive and value-generating to our shareholders in the long term, and I think you've touched on the key -- the 3 key areas there, one of them being what actual investment opportunities do we see and how compelling are they and how many clients are willing to come along with us, so what kind of returns can we generate there. The second one is niche products or managers that could really just be a hand-in-glove fit and could operate in a capacity-constrained, probably direct-to-investor approach, where margins are good and they are in an area where we can confidently forecast the returns to our shareholders. And the third would be returning capital to shareholders through buybacks and, of course, the dividend. We see both of those as being enhancements to what we're doing as opposed to the only thing that we would consider.

Okay. So it sounds like you would consider kind of all 3 of those in parallel?

Absolutely.

Got it. Okay. And then just on Sprott Capital Partners business, I guess, good quarter in Q1. Just wondering if you can elaborate on maybe visibility for the rest of the year.

There's basically no visibility in that business. It's a -- what we're pleased with in particular is that they're a very good team of originators. And what's also been pleasing is as is they've -- as they've teamed up with us to generate new investment opportunities, other institutions have come along, and it allows us to club deals there. So that part of it is suggesting that they've got a core business and franchise that is going to be healthy, is going to have a good margin and is going to grow over time. But we've got no aspirations of taking over the world there, and it'll be very dependent on the transactions that they're actually involved with. It's a high-margin business, and if we crank a really big deal where we're deploying, let's say, $100 million of our own capital and another $400 million from partners, well, that would make a huge impact on our quarter, but it's just impossible to forecast when and if the business will find those opportunities.

Okay, got it. And then maybe just lastly, numbers question for Kevin, just on the SG&A. The $6.6 million this quarter, and you itemized a couple of things that kind of helped out, just wondering if this is a good run rate to use? Or should we think about lower SG&A for the [rent] balance for the year?

Yes. I would say that, generally speaking, the direction is probably where we're going, but you're going to see a little bit of noise throughout the year, given the fact that, as you know, we're also going to be in the process of transitioning out of the Canadian diversified business, right? So you're likely going to see a little bit of noise from that. So this year is probably not the year to try to come up with a good run rate. I think, generally speaking, you should see, if anything, a good size drop, but there may be some blips along the way as we transition out of that other business. So again, apologies as always. I can't give any guidance on the SG&A side in, particularly this year, when there's going to be a little bit of noise, I think.

And our next question comes from the line of Geoff Kwan with RBC Capital Markets.

Just had one question maybe to follow up on Gary's question on capital deployment. On Slide 11, you've got the $309 million of kind of investable capital, roughly half of that is liquid. Obviously, it's going to be dependent on when you find things, but just how do you think about, based on what you know right now, how quickly can you kind of deploy that liquid part of that capital? And maybe more just bigger picture. When you kind of think about that pie, like, what would be your ideal target amount in terms of percentage that would be the liquid investable capital?

Again, we're more focused on optimizing return on capital employed and adding accretion at this stage than whether it's liquid or not. We've always had a high degree of liquidity. I expect we'll continue to have a high degree of liquidity. We need it, in fact, to support the Resource Lending business, where we made a commitment but where the draw cycle is a little less certain. So I don't think there's a right answer on that, except to say it'll -- there'll be a high proportion that's liquid and that it's been quite -- it's been quite conservative in the past, right? We've had a huge cash drag there, and we want to be a lot more mindful going forward that we need to make good returns off of that going forward or start to buy back shares, or both, so that shareholders can realize bigger performance going forward.

And our next question comes from the line of Nik Priebe with BMO Capital Markets.

I'm just wondering -- just a quick follow-up question on Sprott Capital Partners. I'm just wondering if you can give us a bit of a breakdown of the $8.2 million that was generated in commission revenue. I guess, what component of that was derived from the new merchant bank versus trading in the U.S. broker-dealer or private placement activity in the quarter?

Yes, we're not going to be able to give you an exact breakdown. The U.S. operations are separate. The Canadian operations are mostly involved with capital raising and advisory services around that. And we can't give you a breakdown, sorry.

Okay. That's all right. I guess, one more follow-on question. I can certainly appreciate that some of the activity with Sprott Capital Partners will be sort of episodic and lumpy and sort of capitalize on, periods where there's strength in the market and it'll be a little quieter in other periods. I'm just wondering, how did the first quarter sort of compare to your expectations for the new merchant bank?

Way above. We thought it would take a while to find some deal flow and to get other institutions interested in partnering, and it was quite a bit quicker, and the idea generation was quite a bit better than we expected.

And our next question comes from the line of Graham Ryding with TD Securities.

The Sprott -- the Private Lending LP, I'm just looking at your net sales slide, it doesn't look like there was any new money deployed or invested in the quarter. Can you just provide a little bit of color on why that was the case?

Yes. So you're not going to see it in sales, because we only include it in AUM when we draw it. And in terms of generations, it was a quiet quarter because we were just involved in the signing of the documents and kind of getting the legal closings all aligned. So we've got a really big pipeline right now, and I would expect to see that turn momentarily.

Okay. So, I guess, anything that you had already raised previous to this second round of fundraising? I guess, that's fully deployed or drawn? Is that the right way to think of it?

No, no. No, it's not at all. In fact, I think -- Kevin, do you want to comment on the exact proportion that's drawn of the initial LP?

Sure. So right now -- if you look at the lending segment, Graham, we've got the summary financial table, and we have a little footnote there that mentions that there is about $53 million of the $750 million that's been deployed.

Okay, and that's Canadian dollars?

Yes.

Okay. Peter, you just -- you mentioned capacity-constrained areas of the asset in industry, what are you referring to there? Anything in particular?

Yes, there's niche areas where teams operate and they have more capital than opportunities, because it's hard to invest capital in those sectors and you need a high degree of expertise. So the fees are generally higher. The relationships are generally directly with investors. And I guess, the example that I would give you as opposed to going through a list is direct ownership of farmland has a high correlation with our investor base. A lot of people that think about gold and silver think about farmland as a portfolio diversifier, and it is an absolutely humongous area compared to precious metals. It's probably, I don't know, 5x the size, 10x the size, and there's only a few niche teams out there. So that would be a good example of an area. There's lots of others. There's special areas within energy and resource infrastructure, where people are owning pipelines or infrastructure projects that are equally constrained. And they're good areas. They generate very strong value-added performance.

Okay. That's helpful. The $500 million raised to-date at Sprott Capital Partners, how much of that have you been coinvesting alongside, if any?

Well, we have, and it's been a decent proportion, but I can't be specific on that.

Okay, that's fine. Your net sales, bullion was quite strong in Q1, but you did have redemptions in your ETF products. Can you just provide a little bit of color around that dynamic?

Yes. So on the Exchange Listed Products side, the redemptions that you're seeing there are maybe in the Physical Trusts. I would probably characterize that as just somewhat normal course for the first quarter of the year. However, subsequent to that, we've seen over $100 million of inflows into the Exchange Listed Products, specifically the SGDJ that Peter noted earlier during his opening remarks. So net-net, I would say that we're actually up from December 31 as of today in that space.

Okay. That's helpful. Peter, are you surprised -- when bullion is strong, are you surprised to see redemptions from the Physical Trusts?

Well, bullion hasn't been that strong this year, and our trusts, the psychology tracks the other ETFs globally pretty well. And generally speaking, the other ETFs have been down. So I'm not that surprised. It's just have been a bit of a cooling-off period, and it does ebb and flow. If you see, our trust go to premiums, we're creating new units, and when they go to discounts, there is a risk that some come off. So generally speaking, our investor base is a lot more sticky than our competitors because of the exact service that we're offering. So they're not big flows on percentage basis compared to our ETF and listed bullion competitors. And last thing I should say is, look, there's a couple of things we have in the works to grow that area. We've talked before about the partnership with IEX that we have on a company called Tradewind that has a new physical gold token. And some of you that track bitcoin may have seen that that's hit a record. And I think, once gold gets linked into the block chain and made as -- in an easier investment product, I think that's kind of the next phase for gold investment by individuals and institutions. We're right on top of that. And then there are some other commodity physical products we're looking at now. So that's -- it's just an active area for growth for us, and it will continue to be.

Okay. I guess, my one last question would just be, the buyback, you've got an NCIB out there 5%, would you consider buying back more than that if you didn't see any of the opportunities to invest your capital otherwise?

I'll tell you this from the bottom of our hearts to shareholders, we would consider anything.

And our next question comes from the line of Scott Chan with Canaccord Genuity.

Peter, just going back to the Sprott Resource Lending Fund, do you have the sense how long it would take to deploy that $750 million of capital, just based on your previous [line]?

Well, we've said 18 to 24 months, perhaps that's being opportunistic. It really comes in big runs. So it's very hard to predict exact drawdown schedule. We've had a lot of term sheets outstanding. We could deploy $200 million to $500 million in one quarter, or it could be fairly dry like it was last quarter. Just depends whether our deal fit. It depends on the state of equity markets. There's a bit of counter cyclicality to it. If the equity markets are super strong, nobody really wants to sign debt term sheets. It's kind of a 1 to 2 quarter lag. So there's just so many different variables there.

And when you're looking at -- the term sheets are like range from like small to very large, I guess? (inaudible)

That's right. It's all over because our clients like the fact that we can do small deals. They're usually higher value-added on a percentage basis, but obviously, you need to do a lot more of them. The larger deals tend to be more competitive and a little bit harder to do. So it's a trade-off. We have both in our portfolio.

And can you remind me, has Sprott set an allocation to that fund over time?

Yes, I believe, we committed $80 million.

$80 million, okay. And when you talked about building a global market leader, top priority is securing distribution partnership. Can you expand on that? Is that consultants, or is it something different?

Well, it's a little bit of everything. We've had success with the couple of institutional people and people focused on corner office in national accounts so far. That's gone well. So to build on that a little bit just in terms of having direct client-facing people would help. And by the way, those people are in London and New York, respectively. Then in terms of consultants, they provide a meaningful impact, and I think that having relationships there, which we started a year or 1.5 ago is going to help. And then finally, in terms of distribution partners, we see what the international wire houses and distribution platforms are looking for. They're looking for best-in-class products. Alternative is a bit of a -- alternatives are a bit of a buzz word. So when we find a link with one of them that wants to make a push in gold, we will try and strike a relationship globally that would get us into a lot more channels. We don't have, obviously, the capital or the desire to build that kind of a network ourselves. I don't know if that involves white labeling. I don't know if that involves using our brand. Those discussions are fairly preliminary. We've had a distribution partner in the U.S. with our ETF products, and that has not gone as to our expectations. We think we need somebody bigger that can reach more markets that has more people on the ground to get that process moving a bit quicker.

And just lastly, just on that passive side, is there a demand? Or what's the outlook for new products on that platform? Is there anything in the works or...?

Yes, it's good. I mean, more and more so, in asset management, as I assume you've seen with others, it's more of a distribution partner to an active strategy that already exists, and we have those. So we don't -- we certainly don't need more people to generate more product ideas. It really is a question of which you can get to scale. And scale is a bigger number in that business. It's $100 million to $200 million in the U.S., at least, before you start to generate the kind of liquidity and interest and approvals that you need. And so what we're not interested in doing is having a stable of 50 funds of which only 3 or 4 are at scale. We're interested in sticking with each one of our products until it gets there. And we have to be careful about not confusing our brand and thinking about the right product at the right time.

And I am showing no further questions, and I'd like to turn the conference back over to Mr. Peter Grosskopf for any closing remarks.

Sure. Well, thank you everyone for participating in this call. We appreciate your interest in Sprott. We look forward to talking to you again after our Q2 results.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.

Thank you.