Sprott Inc (SII) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc. 2017 Annual Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, March 2, 2018.

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 provisions of the Canadian provincial securities law. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are implied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements.

For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for the quarter and the Sprott's other filings with the Canadian securities regulators.

I will now turn the conference over to Peter Grosskopf.

Good morning, everyone, and thanks for joining us today. On the call with me today is our CFO, Kevin Hibbert; John Ciampaglia, the Head of our Asset Management Business; and our Head of Investor Relations, Glen Williams. Our 2017 annual results were released this morning and are available on our website, where you can also find the financial statements and MD&A.

I'll start on Slide 3 with a recap of our progress in 2017.

Sprott accomplished much in 2017, and we enjoyed our best year in recent memory. We took the year to reposition the firm to focus on our historical strengths in precious metal and real asset investments. To complete this positioning, we sold our Canadian diversified mutual fund assets for $46 million and we significantly completed the strategic acquisition of the Central Fund of Canada in a transaction that added $4.3 billion in assets to our physical bullion franchise after year-end. We completed the $640 million capital raising for our Private Resource Lending LPs. And we successfully launched our resource-focused merchant bank, which contributed to our idea and transaction generation as well as our financial results during the year.

Turning now to Slide 4. Our AUM as of year-end was $7.3 billion compared to $9.2 billion at the end of 2016. This decline related entirely to the sale of our diversified business and was subsequently more than offset by the CFCL acquisition, which closed in January 2018 and increased our total AUM to $11.5 billion.

Our adjusted base EBITDA increased by 67% to $40.2 million or $0.16 per share. We maintained a strong balance sheet with $293 million in investable capital at the end of 2017 before giving effect to the CFCL transaction price. We generated more than $50 million in net sales during the year.

On Slide 5, you can see some of the recent highlights from each of our business units. I'm very pleased to report that all of our divisions were profitable in 2018, and each of them is focused on raising new pools of capital to deploy into our existing strategies.

With the CFCL acquisition, our physical trusts are now the third largest bullion management complex in North America. Our Exchange Listed Products business is highly scalable, and we expect to launch additional new ETFs over the course of the year.

Subsequently, we've now deployed approximately $250 million in capital from our Resource Lending LPs. And including existing loan commitments, which are undrawn, we believe this fund is on track to be close to majority deployed by Q4 of this year.

Sprott Capital Partners delivered a first -- a successful first years in operation, participating in more than $900 million of financings and generating close to $6 million in EBITDA. This team is looking to expand its operations slightly in 2018 while also taking on more advisory mandates.

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

Thanks, Peter, and good morning, everyone. Before I begin, I should quickly note that you'll notice a slightly different layout to our financial presentation this quarter. However, the information you are used to seeing can still be found in the supplemental financial information section of this deck. That said, I'll start on Slide 6 with a look at our earnings transition.

This year marked a key milestone for us as it is the first time since 2012 that we eclipsed the $40 million EBITDA mark, which is a 67% increase in EBITDA from last year, to Peter's point, and more than double our financial results from 2015.

Higher 2017 full year EBITDA was mainly attributable to higher net commissions from our merchant banking division as Sprott Capital Partners had a very good start to its first year of operations. We also benefited from the reversal of a loan loss provision and recognition of the related interest on that previously impaired loan and lower SG&A and compensation expenses on the year on the sale of our noncore Canadian diversified funds business earlier in the year and from changes to our annual and long-term incentive program.

Looking at our revenue performance, details of which can be found on Slide 13 of this deck. Total net revenues for the year were $121.8 million, a decrease of $11.4 million or 9% from 2016. Key revenue items worth noting include net fees, interest income and net commissions. Net fees for the year were $58.2 million, a decrease of $16.9 million or 23% from 2016. The decrease was due to the sale of our noncore Canadian diversified funds business earlier in the year but was partially offset by new fee generation from the deployment of committed capital in our lending LPs and higher fee generation from improved precious metals prices in our Exchange Listed Products.

Interest income for the year was $15.6 million, an increase of $1.4 million or 10% from 2016. That increase was due to the recognition of income on a previously impaired loan as well as the generation of coinvestment income being earned from our seed investment in our lending LPs, which more than offset the effects of the runoff of our on-balance sheet loan book.

Net commissions for the year were $18.2 million, an increase of $7.7 million or 73% from 2016. The increase was due to robust placement and advisory activity in Sprott Capital Partners and our U.S. broker-dealer.

A quick note on our expense profile, which can be found on Slide 14. Total expenses for the year were $78.5 million, a decrease of $16.8 million or 18% from 2016. Key expense items worth noting include compensation and SG&A. Compensation for the year, excluding commissions and performance details, which are presented net of their related revenue in our MD&A, and excluding severance accruals, which are nonrecurring and reported separately in our MD&A, was $40.5 million, a decrease of $7.1 million or 15% from 2016. The decline was due to lower headcount after the sale of our noncore Canadian diversified funds business as well as a change in our annual and long-term incentive programs.

SG&A was $23.7 million, a decrease of $5.8 million or 20% from 2016. The decrease was also due to the sale of noncore fund assets.

Finally, specific to the fourth quarter, I should note that our fourth quarter results had 2 material items impacting it: first, we experienced a positive valuation gain in our strategic long-term position in Tradewind and, to a lesser extent, other long-term investments; and second, larger equity amortization on the launch of our newly constituted LTIP program that replaces the old 2016 version. Adjusting our fourth quarter base EBITDA to normalize for these 2 events still results in our fourth quarter base EBITDA being up year-over-year by approximately $700,000 or 15%.

Moving back now to Slide 7. You'll see the evolution of our AUM over the last 3 years. Specific to the 2017 financial year, our AUM was $7.3 billion. However, as you can see from this slide, we have repositioned the company to focus on our core competencies of precious metals and other real asset investments. This refocusing of the company led to the sale of $2.1 billion of noncore AUM and the successful acquisition of CFCL, which added $4.3 billion of precious metals AUM.

After factoring in the acquisition and divestiture, we now have over $11.5 billion of AUM coming out of 2017 and an additional CAD 580 million of undeployed capital in our lending LPs that will become fee-generating AUM over the next short while.

Finally, a look at Slide 8 for our investable capital. The CFCL transaction closed subsequent to year-end and the $105 million of upfront cash required on closing was funded entirely through the balance sheet and was immediately accretive to EBITDA for 2018. Our remaining investable capital after the purchase of CFCL will continue to be deployed in a highly disciplined manner, so as to ensure maximum shareholder benefit.

I'll now pass it back to Peter for some final thoughts.

Thanks, Kevin. Like everyone else, we've watched the rise of cryptocurrency and sympathized with the desire of their users to seek alternatives to central bank-controlled currencies.

We have to admit that we are skeptical of the long-term viability of most cryptocurrencies, which have at best confusing claims to underlying value. However, we're convinced that the underlying blockchain technology is ideally suited to the digitization of the physical gold market and that this conversion will be the single, most important event happening to the gold universe in decades.

One way we've chosen to participate in this digitization is through our investment in Tradewind. Tradewinds is a fintech company, launching a new digital gold platform, which combines the exchange technology of the IEX Group with a tailored blockchain application, offering secure physical vaulting with significant advances in trading, settlement and ownership of physical gold. Tradewind is now in the process of a commercial launch.

We also expect to participate directly in the distribution of digital gold to our clients in an effort to generate a profitable activity for Sprott.

Finally, on Slide 10, you can see some of our key priorities for 2018. We remain steadfast in our conviction that gold and other resource investments will provide a valuable form of insurance from other market gyrations and corrections as investors digest a normalization of interest rates and the likely reemergence of inflation. Institutional and retail investor interest in precious metal investments continues to rise. And we think this is a great time to be in our position with more than 90% of our AUM concentrated in these investments. With the repositioning of the business now complete, we're entirely focused on execution and driving profitable growth in each of our business units.

We will continue to build on the relationships established in our first lending LP, and we expect to launch an additional PE-style fund later this year.

To the extent that our opportunities -- there are opportunities to add strategies and talent in our areas of focus, and we will continue to selectively evaluate acquisition opportunities. And our merchant bank continues to provide meaningful origination opportunities and margin contribution.

Finally, we will continue to build our client coverage team and adding -- we will be adding more new professionals in both Canada and the U.S. during this quarter.

And with that, I'll turn it back to the operator for questions.

(Operator Instructions) Our first question comes from the line of Nik Priebe of BMO Capital Markets.

With the acquisition of the CFCL assets complete in January, I was wondering if you could give us an update just on how the integration of those assets has progressed with respect to retention rates, better or worse than expected? Anything notable at all there?

Yes. we'll pass it over to John to answer that question.

So we assumed management of the fund on January 16, as you know. So our first redemption notice period was February 15. We've received 1 redemption that is totaling approximately USD 100 million. That redemption amount, I would say, is well within our expectations. As you may recall, back in 2016 when we acquired the Central GoldTrust, we did experience some redemptions for the first couple of months post-close of the transaction. The wildcard in all of this is really about how the underlying metals are trading. If the underlying metals have a good bid to them, what we find is a lot of the market participants will opt to sell their shares into the open market and close their arbitrage opportunities that way. We think with the backdrop of the markets that Peter referenced a few minutes ago, we think the market environment is quite positive for this. With all of the rhetoric coming out of the U.S., with trade wars, which inevitably could cause a lot of anxiety and inflationary pressures in the system, with central banks all trying to figure out how to unwind their balance sheets and normalize interest rates and with the return of equity market volatility as well as some of the dislocations we've seen with the VIX index and whatnot in the last few weeks, it's starting to change the narrative around precious metals and particularly gold and it's starting to change the psyche in a lot of investors' minds. So we're very positive. We think the redemptions are going to be well within reason and manageable.

And also, I wouldn't hesitate to add, and this is a personal expectation only, is that with the enhanced client base now totaling over 150,000, our sincere hope is that with additional products, we can build that AUM over time as opposed to have further impact from arbitrage.

Okay. Yes, that's helpful color. Can you talk a little bit more about -- I mean, you've spoken about the cross-selling opportunities to CFCL holders. But now that you've brought those assets into the fold, just wondering what's planned on that front this year? And how do you engage such a broad audience?

Right. Well, we're seeing the early signs of that engagement, and we see that every day in our website traffic, for example. So specifically, since January 16, when the new fund has come onboard, our website traffic has gone up 100%. And primarily, that is being driven by the new shareholder base that we've acquired through Central Fund. And so those are wonderful opportunities to engage in a digital format, to showcase all of our products, our company. What we're finding from not only the web traffic, but also all of the inbound inquiries by email and telephone that this shareholder base is obviously eager to engage with us. They're spending a lot of time on the website because we track the depths of the page use, we track the time on the website. And those are all very good metrics to measure their level of interest and engagement. We hope, over time, we're going to have more meaningful engagements through webcasts and other ways of educating them and updating them on the market that we'll be able to nurture those relationships along. So I think 6 weeks into it, we're very happy with the way we're onboarding that client base, how the funds are trading and how they're engaging with us thus far.

Okay. And then just lastly for me, I'm just wondering what's next on the agenda in terms of the new products pipeline? I know 2017 was a very busy year for you guys, but I think you had alluded in your comments to the introduction of a new PE-style strategy this year. Just interested if you could expand on that a bit.

Yes. Well, the track record, the deployment, the experience that we have with clients in the structured financing business in mining has been very positive. So I think that there's a chance to build that business significantly during the balance of the year. We also have a joint venture that we announced on farmland and agricultural investments with Ceres LP in the U.S. We're going to be out there with a $500 million raise this year. I do think there's opportunities for ETFs and active gold funds, depending on which market you're looking at or which specialty. There's a lot of now, what I would call, broad-based interest in mining commodities, everything from electric vehicle components and battery products to agricultural products. So there's no lack of opportunities. We recently inked a new joint venture in the lithium area to generate project finance opportunities with lithium. So there's no shortage of opportunity to look at new areas right now.

Our next question is from the line of Gary Ho of Desjardins Capital.

Just the first question, Peter, just on the capital deployment of the lending fund, slightly slower than expected. I think it was roughly $50 million in Q4. Is that the rate you think we should look for going forward? Or could there be a pickup in deployment? And as well, do you need to be at a certain deployment level before you start marketing the PE fund you just alluded to?

Yes. Well, it's not slower than we wanted. And there is a lag between what you see as AUM drawdowns and committed capital that we have under term sheets. So for instance, we have currently over $100 million sitting in committed term sheets, which will be drawn down. So for us, it's notionally AUM. You haven't seen it yet because it's not been funded. But the actual deployment of the fund, again, notionally, in our mind, sits at around $300 million now. And it's actually gone much quicker than we expected. So we're on a good pace there. And what was the second part of your question? Sorry to get you to repeat.

Yes. No, just wondering if there's a -- you need to hit a certain deployment level before you start your PE fund?

Yes, we do. Out of respect for the clients in that fund, we need to be, I think it's about 75% or 80% deployed. And the way that the drawdowns go, we see that happening within the next 2 quarters.

Okay. Got it. Helpful. And then next question as it relates to Tradewind, do you anticipate future investment that's needed for Tradewind to expand?

Well, they've received a lot of interest from strategic parties in the gold markets. And if those strategic parties come in, we would not want to be diluted.

Okay. Can you -- how much is invested? And what's your percentage in Tradewind? Can you remind me?

I think our percentage is about 20% and the amount invested is about $5 million to $6 million.

Okay. Yes. And then just my last question, I think in your press release you alluded to complementary acquisitions and strategic partnerships. Can you elaborate what those could look like?

Sorry, that's the comment that I made on the outlook about acquisitions?

Yes. Yes.

Okay. Well, there are other markets in the globe that have growing resource funds, and one of them would be UCITS, another one would be China, another one would be certain components of the U.S., more on the private side than the 40 Act side. And each of those have competitors that have all suffered through the same resource market downturns and the same difficulties that we have. I think the opportunity for consolidation is getting a little better right now.

Our next question is from the line of Geoff Kwan of RBC Capital Markets.

Just first question I had was in your press release, you made reference to that bylaw amendment. Just was wondering if there was -- what kind of precipitated that need to make that change?

Well, we saw it as standard protocol. As you know, this has been a shareholder -- sorry, an employee shareholder company for a long time, ever since Eric founded the company. But as we get bigger, we expect that it's going to be difficult for employee shareholders to continue to own the same percentage. So not having that kind of blocking in place, I think that it's just a prudent thing to do that we don't want to see outside action that disturbs the culture of the company without due warning. And it seems as though every large company has been doing the same thing. So it was time for us to put it in place as well.

Okay. So you haven't seen anything specific from, say, other parties, that would have...

If we had, we'd be announcing it. So no, no is the answer.

Okay. Just the other question I had is that you made -- you mentioned in some of your remarks about hiring some people. And as you think about your strategy of growth over the next 2 years, can you talk about, from an operating leverage standpoint, how to kind of think about that? You talked about obviously with the divestiture of the assets and rightsizing the expense base, but I'm just trying to get a sense here of what you're looking at, if you're able to execute on everything there, kind of what the expense growth might look like on the comp and the G&A. And then obviously, we can run it, what we think it would be on the top line on the revenue.

Okay. Well, that's a great question. So we invested a ton in the platform this year. You may not have seen that. You see it in some of the amortizations of the equity programs that we seeded the senior employees with. Those are on a high amortization level for last year and this year which, unfortunately, and I apologize for this, make the year-over-year comparisons very difficult. Kevin can give you the normalized numbers kind of after the call or even in a subsequent question. But I think the important part is that we're entirely focused on margin now. And the business is entirely scalable. And if we don't get a 50%-plus kind of EBIT contribution margin, we're not going to be doing it. And so you heard John talk about the client base and the exchange-traded business, we don't need more platform to do that. And when you hear me talking about consolidation, other than a key revenue producer or revenue-producing PM, we don't need more platform to do that. The salespeople, when I talk about adding salespeople, they pay for themselves very quickly. Basically, their additional revenues and client service revenues from those clients, generally, they're making contributions within 6 months. So I think you're going to see margins. We're committed to making margins higher going forward as we grow.

And then maybe if I can just sneak in one related question there. From the system side that you've got a lot of different products that you're offering to the market. Just wondering, from a system standpoint, is that -- do you have the technology to allow that scalability to take you through the next 3 to 5 years? Or is there a chance that you may need to kind of tweak how you're using your systems to be able to support that growth that you're expecting?

Geoff, it's Kevin here. I'll take that one. That's a very good question. The short answer is as part of the whole reorganization and strategic focus on the business, we've reset. We've got a clean start. And during that process, we looked at our, what I call, our people, our processes and our technology frameworks alongside the co-head of our shared services group. And we believe now that we've put in place the right technology. There's at least 3 or 4 different middle office, front and back office technologies we've rolled out to support the lending fund, which could probably handle double the AUM we have right now quite easily. And from a process and people standpoint, we have the right people in place now to also take on growth in several other areas that Peter touched on. So as far as the shared services world, there will be no material increase in technology spend. We've already done all of that through this current reorg and strategic shift in the business.

Our next question is from the line of Graham Ryding of TD Securities.

Maybe I could just start with the $49 million of resource loans on your balance sheet. Just as you roll out further -- or fund further your committed assets in your Resource Lending LP, does that change at all the amount of assets that you keep on your balance sheet? Or should we assume that roughly this $49 million of resource loans on your balance sheet is sort of going to hold in that range for the next year or so?

Yes. So, Graham, it's Kevin here. So no. Consistent with what we've been mentioning for probably the past maybe 8 quarters now, so it's been a while now, we've always had the view that as we build scale in the Resource Lending LPs, that we would continue to run off the on-balance sheet loan book. So what you're going to see is this continued sort of transition away from on-balance sheet lending to off-balance sheet AUM. And what would be replaced though, Graham, is as those loans roll off, what you would see is an increase in the lending LP units that we're holding as a coinvestment alongside our clients in those funds.

So that will sit in your balance sheet under that resource loans receivable line?

No, it wouldn't constitute a loan anymore because we wouldn't be the ones that would be providing the funds to the borrowers. It would be the LPs themselves doing that. So what you would see is the loans receivable line of the balance sheet would continue to drop. And then what you would see increase is the long-term investments line, which is the new line that you all would have seen in this morning's release.

Got it. Compensation, if I strip out the severance and the performance fee payouts, compensation was higher than I was expecting. Was there anything sort of year-end true-up in the number this quarter? Or just any color around the level that it was at this quarter?

Yes, sure. So you said you backed out the severance and what else?

The performance fees.

Okay. So when you get a chance, if you look at Page 12 of the MD&A, we show a breakout of the 3 components of our, for lack of a better word, our sort of normalized comp being salaries, AIP, which is our annual incentive, and the LTIP. What's causing perhaps the number to be different from what you were thinking is the fact that when we launched the new LTIP program to replace the old 2016 version because it's no longer relevant -- it was designed to drive different strategic objectives, we're now looking to be more focused, so on and so forth -- you're required to expense more of the equity upfront in the early years. And so as we launched this in the fourth quarter, early in the fourth quarter, you would see a very large equity amortization number in there. It's probably about $1.5 million that's sitting in there. So if you back that out, that might get you back to the number that you would have expected.

And that's not your share-based comp, that's separate?

That is the share-based comp. So our comps -- if you take our compensation plus our stock-based comp number and back out commissions, performance and severance, then you would get the numbers that we're showing on Page 12. We can talk offline if you need more detail on that.

One other changes that we put in place is we're paying the executive team mostly with shares.

Which is also why the cash bonus dropped so significantly if you look at Page 12 as well.

Okay, great. And then my last question, just to be clear, post the Central Fund closing, you haven't seen any material redemptions, there's only $100 million that you're expecting as of today that's going to come out?

That's correct.

Right. What I referenced, that number was for the month of February. So each month up until the 15th of that month, an investor is able to tender a redemption notice to us. So in approximately 2 weeks, we'll get a sense of any other redemptions. But as I said earlier, it's -- we have an expectation for some redemptions, and we think it's well within reason and normal experience.

And at this time, I'm showing no further questions. I'd like to turn the conference back over to Peter Grosskopf for closing remarks.

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Well, thanks, again, everyone for participating. We look forward to updating you next quarter. And we're happy to answer any questions you have in the meantime. Just call us directly. Also, have a good weekend.

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