U.S. Global Investors, Inc. (GROW) Q2 2017 Earnings Report, Transcript and Summary

Good morning. Thank you for joining us today for our webcast announcing U.S. Global Investors' Results for the Second Quarter of Fiscal 2017. I'm Lisa Aston. [Operator Instructions] Also you may download a PDF of today slides by clicking on the red hand dot button. The presenters for today's program are Frank Holmes, U.S. Global Investors' CEO and Chief Investment Officer; Susan McGee, President, General Counsel, and Chief Compliance Officer; and Lisa Callicotte, Chief Financial Officer. During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don't pertain to historical facts are subject to risks and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-Q filing for more detail on factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today and U.S. Global Investors accepts no obligation to update them in the future. Now, let's go to Frank Holmes, CEO and CIO, for an overview of the period. Frank?

Good morning. Thank you, Lisa. As you can see on the slide, there is our stars on Slide 4. We have been receiving some nice stars for our gold funds, and I will comment more about that, which is so important in attracting assets and fund flows as the bulk of fund flows into mutual funds have been those with four and five stars. And that is performance coupled with risk and volatility. So U.S. Global we really look at our service being innovative investment management with a vast experience in global markets and specialized sectors. The history for those new listeners and shareholders, this company was founded in 1968 and has a long-standing history of global investing and particularly launching the first-no load gold fund. U.S. Global Investors' are well known for its expertise in precious metals and natural resources in emerging markets and they are all very tightly connected. That is the important part as China understands the drivers of emerging markets of the E7, seven most populated countries, versus the G7, has helped us in understanding gold and being a star performer in the gold funds in particular and in our other funds applying that expertise. We strive to be a go to stock, and we find that our stock particularly moves with the price of gold and the resources in emerging markets and it had a surge in our stock immediately, and in the short-term has this surge we have just seen. We are debt-free. We have a strong balance sheet and a reflexive cost structure, which Lisa, our CFO, will go into more greater detail and comment later in this presentation of how we have cut costs and then we have strived to maintain this multi-dividend return on equity discipline, and it's been very challenging for the past five years particularly September of 2011 when gold peaked at 1900, and oil is over $100 a barrel – in resources – as asset class because they were our biggest asset classes. And as also we look at Eastern Europe, which is 60% Russia, it is dominated by oil. So it is so important to recognize that these emerging markets they do have a strong correlation to the commodity cycle. On Slide 6, I want to thank our top shareholders and particularly we try to highlight FIM Group, The Royce Funds, The Newberg Family Officer, The Family Trust, Vanguard, and the new shareholder is shown up as BlackRock Institutional Trust Company from Sentry that used to be there. So we want to thank all of them for recognizing who we are and what we offer. Our dividends we pay monthly; consistently paid for 9 years. The current yield at $1.36, now the stock has rebounded since then. It is $2.21. We are paying a monthly dividend of [$0.25]. It doesn't cost much to pay monthly versus quarterly and to maintain that focus for us – the cost structure and everything we do is in that monthly cycle. The share repurchase program it is still in motion. The board has approved the purchase of the $2.75 million, and during this second fiscal quarter the company purchased 32,605 Class A shares using about $50,000. Why we haven't bought the total dollar amount is because we use an algorithm that only buys in down days and is still subject to all the regulatory rules [same thing] by sell. There is very specific rules of how much you can buy as a percentage of the daily volume, but our whole process is to buy – only the trigger is when it is on a down day and follow all the regulatory rules that we have to. A stick handle as they say in hockey within those boundaries. Our balance sheet is on the next visual. You can see that it seems to have stabilized here over the past year from June to September, December, which is important overall. Our cash is – as we showed you back in 2013, we shift a lot of our cash into higher earning investments because we went to negative interest rates and zero on money market funds, and we are trying to do everything to make sure we maximize the return on capital with our own assets. The next visual is a nice visual because it looks like the worst is behind us. We have commented before in previous presentations, you can go back and read and listen, is closing down the money funds at zero interest rate. It was costing us hundreds of thousands of dollars. Then it became millions of dollars even the process of getting rid of them. At zero interest rates, no revenue coming in to maintain the $1 NAV became very costly with escalating regulatory costs. So we got rid of them, and then we had another impact of overall the shift of the ETFs in the resource sector and just the overall cost of mutual fund industries. So we went through a process of transition to Atlantic Fund Services, which Susan McGee will comment on and it has been a quarterback in managing that process. But this type of exercise cost the advisor a lot of money, and we think we are now experiencing the fruits of that labor and those challenges. On a positive note, going through all those transitions, dealing with the adversities and headwinds of capital markets and regulatory costs, we have got some positive news and that is just really important of how you survive. They have got a grip now. It is an important part – I have always enjoyed – I think [Indiscernible] has wrote a book on it. How much grip you have as an individual, and you clearly have to have it in this mutual fund world of dealing with emerging markets and volatility of currencies. But with that, our fixed income assets were up about 20% last year, and our gold assets also were up, and I think it is also important that you can see our operating expenses were down 41% and that is to reset on the next visual – it is important. That was to reset our cost structure. Next visual, sorry, I skipped that one. The next picture I am showing you how the assets have grown. The gold asset, so we have had fund flows as positive, but it is very different. It is a very, very different cycle. Never in my life have I had to be the number one in my category when it comes to gold and not get substantial fund flows. Fund flows have predominantly gone into gold equity EPS, or they have really not existed. I am talking to other active gold fund managers. They have not experienced big fund flows on this huge rally in the price of gold, and going around and doing a lot of due diligence in the past nine months, one of the things I have noticed was that at lot of the trading is basically quant funds or macro funds in the capital markets. Even the Canadian institutions, almost 8% of their indexes is gold related, and the average weighting is only 2%. So there is not a whole lot of true conviction towards gold as an asset class in the gold equities, and the gold equities are now throwing up free cash flow and that is probably in all the quant funds, looking at those factors. If you go to usfunds.com to investor relations, we published about this explaining how the markets have changed, and we have been adapting a change of our active funds and that has helped us in being able to get. The next picture is recipients. In 2016, we are winners of the Mining Journal. They looked at the world and looked at all the gold fund managers and our funds came up as being number one, and so we received the individual awards; they call them Canada top-gun. The reason why I stay with Canada is not because I am a Canadian originally, but because 60% of all mining finance last year was in Canada. It still is the most dominant place for mining finance. Just like software is dominated in Seattle and San Francisco; biotechnology is Boston and San Diego; mining finance and mining intellectual capital is Toronto. So we are very proud of receiving this award for our fund performance, and a lot of this is also risk adjusted basis. So we had much lower bulk [probably] than our peers in addition to participating in the upside. The next visual is showing you the quarterly average assets under management, and it appears that we bottomed and have found a trough. The next visual is the asset breakdown, and it is to show you that 65% of our assets are emerging markets and natural resources. So we do move with those asset classes, and 35% are domestic equity and fixed income. And we have retail at 78%, institution is 22% of our assets. And what is important in the retail end is that we had many small accounts because we have always advocated that you have a 10% weighting in gold, the average mutual fund is $50,000, then that is only $5,000. And the overall cost, the compliance cost, the distribution platform cost, is so expensive. It really is expensive and it has got nothing but growing at a CAGR that is much stronger than the stock market over the past decade, and so therefore the cost of maintaining those accounts has only grown, and I will comment on that a little later in this presentation. But it is important to recognize where it is different from us from other fund groups is that we have a very strong relationship directly with our fund group because of our investor alert that goes out every Friday, and we have rather than just going through the [platforms], people deal directly with us. That has buffered some of the decline. The next visual Warren Buffett has always been a big anti-airlines industry because they were always destroyers of capital. But we have written a book on this. We did a lot of research. We created our first smart beta-ETF and launched it in the airlines industry, and [Indiscernible] negativity. Warren Buffett didn't like the industry, and it is the reason not to take a look at this ETF, but now the fact that he has spent billions of dollars last year when all the headwinds were so negative, but the underlying companies were buying back the stock and increasing their dividends at a far, far greater rate than the S&P 500, he became a major buyer of these stocks. And we have seen the benefits of that in our Jets ETF. The next visual is just highlighting what took place for gold last year. Gold was down. It started its rally. As you can see from its lows of just over $1000, it rallied up to $13.50 and prior to that the gold mining stocks had very high expenses. Their expenses were something like $1700 an ounce of gold. They got them down to $950. So at $950, when gold was $1050, they are only making $100 of gross margins. And as gold ran to $1350, then an explosion in gross margin growth and free cash flow and those stocks just tore it up, and after Brexit, we saw another major surge in gold. But the other thing that took place during this cycle was negative real interest rates. And those negative real interest rates is really the most important factor and for listeners who don't understand what negative interest rates are, most people just look at the rate you get at the bank, which are being paid or treasury bill, and right now Fed funds are at 50 basis points. So you take away whatever the CPI number is and you get a real rate of return. So what that means is that real interest rates reset every month. Whenever the government is going to issue a bond, take away the CPI number, it is a positive or negative. Whenever the real rate of return is positive, gold is down. Whenever the negative real rate of return is like it is growing, becoming more negative, gold is rallying. And that was the other key factor last year, we saw until September negative real interest rates and then they started going positive again because rates started rising all the way until the Fed fund rate hike, and then the inflation started to surge again, and we saw a big spike for December in inflation, and with that we had negative interest rates, which you see in the next visual. This is a classic, which is a five-year treasury bill. It is 1.8%. Take away the CPI, which came out recently in January for the December number, it was 2.1. So you have a negative rate of return. You are losing money. Why would you buy a five-year government bond, you are just going to lose lock-in money. So that is when gold starts becoming an attractive asset class. The next visual is trying to explain to people the regulatory cost. Now retail investors are being harmed by the interpretation of this fiduciary rule, even though it is being pushed back by our new elected president Trump, and so many of the firms are still adhering to it and the severe bluntness, just like the severe bluntness of the no travel for Muslim countries that are enemies of our state, it is so blunt, the interpretation of the fiduciary rule, and basically it said that you can’t buy Starbucks because their coffee is too expensive. You can only buy cheap funds. It didn't matter of their performance. It didn't matter you were five star. If you are going to be on the platform it is only the cheapest, cheapest, cheapest. And so we saw that as another factor of being pulled off of platforms and redemptions taking place, and money going into whatever is the cheapest product has nothing to do with what is the best performing. Maybe that will change with some of these new regulatory [announcing] some leadership, but the small fund family, the small funds and small shareholder accounts are all experiencing rising regulatory and distribution cost. And that has been a big impact to our overall cost structure, which is making you non-competitive not just because you look expensive, but it is now a regulatory push. And I think the other part is the next visual for investors is to appreciate GROW as a company has a much greater volatility over any one year rolling period. The daily standard deviation for GROW is plus or minus 4% 70% of the time. One sigma is what happened 70% of the time, and is a non-event for gold to jump 68% over a rolling 12 month period. This is going back over the past decade. For gold it is plus or minus 40%. For bullion it is plus or minus 19%. The S&P is 18%. Oil is very high. It is like gold stocks plus or negative 38%, and the dollar is plus or minus 9%. It is understanding volatility has helped us because for our particular gold funds, we have lower volatility versus the other gold funds and it is how we manage the cash because we understand this DNA of volatility, and we have always recommend investors, don't be afraid of volatility, understand what it is and be prepared for it to be able to benefit from it. Now I would like to turn it over to Lisa Callicotte, our hardworking CFO.

Thank you, Frank. Good morning. I would like to summarize our results of operations for the quarter ending December 31, 2016. As we see starting on Page 22, compared to the same quarter last year, our revenue is up, our expenses are down and this resulted in reporting net income in the current quarter versus a net loss in the same quarter last year. We reported total operating revenues of $1.6 million for the quarter. This was a 27% increase from the 1.3 million we reported in the same quarter last year. The increase was primarily due to an increase in average assets under management in the U.S. Global Investors Funds, USGIF, mainly due to market appreciation in the gold and natural resource funds. Our operating expenses for the quarter were $1.9 million, which is a decrease of 1.3 million or 41%. The decrease was primarily due our strategic changes including the following; employee compensation and benefits decreased $792,000, or 47% mainly as a result of fewer employees in the current period, and the severance cost paid in the prior period due to the reduction of work force; general and administrative expenses decreased $533,000 or 38% primarily due to costs incurred in the prior period related to the transition of outsourcing of certain services to other service providers. The costs included proxy costs for USGIF that was split equally between the company and USGIF. Our portion was approximately $290,000. In addition, strategic cost cutting measures have resulted in lower expenses in the current period. We have an operating loss of $234,000 for the quarter ending December 31, 2016 versus an operating loss of $1.9 million in the same quarter in the prior year. On Page 23, our other income, which is income related to our investments was $249,000 for the quarter compared to a loss of $271,000 for the quarter ending December 31, 2015. Net income attributable to USGI after taxes for the quarter is $8,000. This is an improvement over the same quarter in the previous year, which had a net loss of $2.2 million. As you can see on Page 24, this equates to $0.00 earned per share versus a loss of $0.14 per share. Moving on to Page 25, we see we still have a strong balance sheet. We own our own building, and we have cash and marketable securities of approximately $17.1 million. This combines to make up 65% of our total asset. As you can see on Page 26, we still have no long-term debt. The company has a net working capital of $16.3 million and a current ratio of 15:1. With that, I'd like to turn it over to Susan McGee.

Thank you, Lisa. Our sales and marketing efforts have continued to focus on our gold and natural resources funds and our municipal bond fund and also are the U.S. global Jets ETF. Investors can find more information about all of these funds on our Web site, which is www.usfunds.com. The company and our funds continue to receive an invaluable amount of viral publicity which is gained through media interviews, recommendations by influential financial newsletter writers and the sharing and syndication of our award-winning original content by third-party publishers. These newsletters have very loyal following and they receive millions of visitors each month. Frank Holmes CEO blog, Frank Talk also continues to grow in popularity. This commentary is often featured of our prominent publication including Forbes, SeekingAlpha, ValueWalk, and Business Insider; and these sites have millions of monthly visitors. Frank and our investment team travel around the world, they continue to share our thought leadership. We interact frequently with loyal followers through our Facebook, Twitter, LinkedIn, Instagram, and Pinterest. Kitco News, the biggest gold Web site Interviewer: he world which has an audience of about 10 million monthly visitors, features the Gold Game Film Show with Frank's weekly gold market analysis. Kitco recently partnered with The Street and it broadened the show's exposure and viewership. And since the shows beginning in 2014, we have filmed a 125 video episodes of the Gold Game Film. All this coverage helps us leverage our brand -- awarded several STAR Awards by The Mutual Fund Education Alliance which recognizes excellence in investor education. These awards have included best overall communication to retail and advisor audiences within the small funds category. Our weekly free investor alert newsletter has been named the best electronic newsletter six times. To-date we received a total of 80 STAR awards. And again investors can sign up at usfunds.com and join over 30,000 subscribers who received the award winning investor alert and advisor alert eNewsletters and also our CEO blog Frank Talk. With that, I'll open it up for questions.

Thank you, Susan. As a reminder to our audience, you can enter your questions in the control panel on your screen. So, go ahead and take a moment to do that. We do have a couple of questions that have already come in. So, and here's our first question.

What level do assets need to be for the company to breakeven?

Well, our net income was close to breakeven as of December 31st 2016 for the quarter, I mean, on a average 81 was approximately 850 million. But this was with the help of our other income due to our investment. So, for net income to be breakeven, we need assets kind of closer to what our average assets were for our September quarter which was 946 million. And this also depends on our asset mix. So, we'd probably have to be at the same ratio that it was for that September quarter. But kind of so much of the scene that we've been discussing, our strategic moves to outsource and cut cost have allowed us to be more profitable at lower asset models. Like, at this time kind of last year, when we had much higher expenses, we needed close to like 1.2 billion, I mean, average assets to breakeven. And we're kind of estimating right now with kind of all other things equal. If our U.S. JF equity funds are approximately 600 million, our operating results will be at breakeven. I mean, last year we needed more like 850 million in those equity assets. So, we're really excited about this improvement but we are aware we need a concentrated arm maintaining our and growing our AUM levels and still we need to be monitoring last Sunday.

Thank you. Another question.

What is the status of new product launches and how much work goes into the creation of new product.

Well, that's sort of big question. The launching EPS is easy. It is want to go put some name on something I launch it, but the marketing cost can just blow millions of dollars. It's just more and more expensive, your flexibility and latitude getting on platforms, many of the platforms now like Morgan Stanley, to get on their platform we have to spend a $150,000, some others it's just it becomes very expensive. So, you have to do, put a lot of thought into it and that's what we did when we created Jets, was a lot of thought going into a smart data which is a set of factors that are very resilient dynamically adapt each quarter. And you have to go and meticulously back task and look at each quarter for down cycles, up cycles and how did it do, and we're really happy just with doing exactly what we thought it would do and is capturing for me its capturing of the Alpha that most if you just had an active front manager in the space would find it very difficult to beat. For the our gold ones and our other ones we're looking at in Canada, we've put in 1000s and 1000s of hours of meticulously looking at and what we found were things like how you were looking Canada say for energy names is very different than mining. Even though the both resources, the factors are different. And it's recognizing how do you go and beat that index which the basic where most of the assets are. And so, we've done some probabilities of our new products which is in the filing process that Susan is working on that we're really considering with how many quarters it a beat over the past 40 quarters on a row in 12 month period. If it doesn't outperform high percentage of the time, then we want to take the risk because once you launch with these factors, it's very difficult to all of a sudden modify and change them. So, that means it takes 1000s of hours of testing the alloy and the strength in the flexibility of this new alloy as a metaphor when we're creating this product. And I'm very happy to share within that are gold one, we're in the final touches of it. We thought we're ready to file earlier last year and we thought we had a strategic partner, but whatever took place it became it didn’t work. And I think that some of these strategic partners think that there is so many fees they can make lots of money in the ETF space but really it's quite skinny in the scheme of things. When you take a look at this, you need big critical mass and size to get these things to breakeven. And so, that was delayed. But we've retooled, we revisitioned our strategy and we understand that the launching of the product, the importance of strategic relationship and the robustness of the product. The most important thing that I believe is my reputation is out there, our company reputation is, is this product because once it's out it's now like an active which you can turn it a dime, you have to follow these factors. And so, I feel really confident about the outcome from our great modeling and discipline. So, let's stay tuned. We're looking in the second quarter of this year to be launching products in particular where seems where fast tracking and so as to comment in Canada.

Thank you, Frank. I don’t see that we have any other questions at this time. Any other?

There's nothing. I just like to add to that we're still looking at doing acquisitions. And we spend a lot of time resources that is very expensive. We tried to drill down on getting those expenses down on what is the cost to go through the due diligence. The reality is in looking at this data, this close to 70% of all M&A work does not move past due diligence. Due diligence is the first big screening road block to we've been going further and I think that we're trying to see how can we refine that, but we've spend time and money looking at tax issues, acquiring separate account business. So, we will maintain that curiosity out there because I think strategically we have to be building out that asset base because but all true mutual funds are just a higher cash flow, slowly evaporating asset class whereas ETF and separate account business continue to grow. So, we will launch our ETFs and we will look at launching, we'll look at acquiring someone that is fit with our culture and in that separate account business.

Thank you. Well, this does conclude U.S. Global Investors webcast for the second quarter of 2017. This presentation will be available on our website at www.usfunds.com. Thank you all for your participation today.