Earnings Call Transcript - GROW Q1 2021

Holly Schoenfeldt, Marketing and Public Relations Manager

Good morning and thank you for joining us today for our webcast announcing U.S. Global Investors Results for First Quarter 2021. I'm Holly Schoenfeldt. If you have any questions during the webcast, you can enter them in the questions area of the control panel sidebar, or you can email them to info@usfunds.com after the presentation. The presenters for today's program are Frank Holmes, U.S. global investors, CEO and Chief Investment Officer; Lisa Callicotte, Chief Financial Officer; and myself Polly Schoenfeldt, Marketing and Public Relations Manager. During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during the 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 and in forward-looking statements. Any such statements are made as of today and U.S. Global accepts no obligation to update them in the future. Real quick, as you're watching today, we are pleased to offer you a special giveaway. All you have to do is send an email to info@usfunds.com and we are happy to get those out to you. Just include your mailing address. On Slide 5, you'll see a quick overview of U.S. Global Investors. We are an innovative investment manager with vast experience in global markets and specialized sectors. Founded as an investment club, the company became a registered investment advisor in 1968, and has a long-standing history of global investing and launching first-of-their-kind investment products, including the first no-load gold fund. U.S. Global is well known for expertise in gold and precious metals, natural resources, and emerging markets. We strive to be the go-to stock for exposure to emerging markets, resources, gold, airlines, and digital currencies. We have a strong balance sheet with a reflexive cost structure and a monthly dividend and return on equity discipline. Now let's go to Frank Holmes for an overview of the period. Frank?

Frank Holmes, CEO and Chief Investment Officer

Thank you, Holly. And thank you, Sarah, for helping out today. We're going to have Lisa Callicotte, our CFO, who will also be speaking and addressing financial questions. I really wanted to take this opportunity to thank everyone, particularly our loyal shareholders from Parrot Capital Management and the wonderful micro-cap fund, the Royce Funds, who have been long-term, loyal shareholders. And the same goes for Bill Nasca and his team at Heartland Advisors, who have recently come in and taken a substantial position in our company. They have confidence in our vision, and I would be remiss not to mention BlackRock and Vanguard, which, while more index fund-oriented, have also been pivotal alongside other fund managers. As you see, here, the dividends are paid monthly, a practice we've maintained since 2007. The current yield is 1.13%, which is a little better than what you're going to get in a money fund. We do have a share repurchase program in motion; the board has approved purchasing up to 2.75 million shares of outstanding common stock in the open market through December of this year. During the three months ended September 30, the company repurchased 1,000 Class A shares using approximately $2,000. This may be suspended. What's important for investors is that we employ an algorithm that buys back shares whenever gold is favorable. Whenever GROW had a significant correction, the algorithm kicks in to buy back shares. It has been quite unfortunate that most of the process today reflects a secular bull market that we're now entering, particularly for many of our asset classes in which we are benefiting. As you can see here, the NASDAQ GROW reached a peak of higher than 266 as we surged yesterday. However, what is truly important for investors to recognize is the operating revenue and its correlation to our assets, particularly the ETF assets, which have continued to surge. Our operating revenues have increased 73% Q-over-Q and 300% year-over-year, and our net income increased by 32% Q-over-Q and 150% year-over-year. We currently manage $2 billion in average assets, showing a 61% Q-over-Q growth and a 209% year-over-year increase. This level of assets had not been seen since 2011/2012, and back then, we had three times the number of employees. We are now a very lean organization, with many functions outsourced. As operational efficiencies have improved, we are seeing profit margin expansion along with this growth in assets. The relative increase in assets is monumental. The visual data does not reach back to 2011/2012 when we were at similar asset levels, but during that period, we had to hire more employees and had more offshore funds generating higher fees. Today, our structure allows for easy calculations with the ETF business and other mutual funds, allowing us to focus on methods for rebuilding our balance sheet and income statement and accumulating cash. Moving forward, I consider the recent demographic studies suggesting a meaningful change for our company. We have definitely, in my eyes, turned the corner. While we still want a few more quarters of showing cash growth and rebuilding our book value, these improvements will allow us to consider our shareholders' frequent inquiries about buying back more stock or increasing dividends. We have weathered a long period of challenges in the resource sector, and those have returned. We spent five years building the brand and the ETF business before this quantum leap. Our revenue quarter has been exceptional, and comparing our performance to that of peers, especially against larger companies, has shown a robust recovery. The orange line represents GROW as compared to other mutual fund groups, such as T.Rowe Price and Franklin, with Wisdom Tree also focusing on ETFs. What surprised me was the recent sell-off during a time when our assets continued to grow. This seemed more reflective of negative market sentiment as small-cap funds began to lag leading into the election period. But seeing the surge in gold and performance from assets like the airlines ETF signals a major turn in our fortune. It’s worth noting that the JETS ETF has hit total assets, thanks to the work we’ve done. The daily volatility mirrors that of the airline industry, and with key factors like demand showing a significant increase, we are optimistic about future performance. The revenues generated from JETS have soared, illustrating a simplified model that we maintain. I've seen tremendous interest in our Twitter growth as well, reflecting a broader ecosystem engaging with our brand.

Lisa Callicotte, CFO

Thank you, Frank. Good morning. First, I want to start with our financial highlights; we had a very strong quarter. As we noted previously, we felt this quarter would demonstrate the results of inflows into our JETS ETF. This is reflected in the fact that our quarterly average assets under management and operating revenues increased approximately 300% compared to the same quarter last year, with quarterly net income rising to $1.9 million. Our quarterly operating revenues are the highest they've been in six years, and quarterly net income is the highest it's been in the last nine years. Now, reviewing more details on the financial statements for the quarter ending September 30, 2020. We recorded total operating revenues of $3.2 million for the quarter, which is an increase of $2.4 million or 304% from the $804,000 in the same quarter last year. This increase is mainly attributed to the rise in our average assets under management, particularly from our smart beta JETS ETF. Notably, operating expenses only increased 57%, primarily due to higher ETF fund expenses and increased bonuses as a result of fund performance. Our operating income for the quarter was $937,000 compared to an operating loss during the same timeframe last year. For other income, we recorded $1 million, mainly due to unrealized gains on our investments compared to unrealized losses during the quarter in September 2019. The net income attributable to U.S. Global Investors after taxes for the quarter stands at $1.9 million or $0.13 per share, which is an improvement of $5.5 million compared to the net loss of $3.6 million or a loss of $0.24 per share for the same quarter last fiscal year. Our strong balance sheet includes a high level of cash and marketable securities, which make up 73% of our total assets. Our net working capital stands at $9.3 million, reflecting a current ratio of 5.4 to one.

Holly Schoenfeldt, Marketing and Public Relations Manager

As you can see on this slide, a majority of our mutual fund assets are in emerging markets and natural resources, while 28% are in domestic equities and fixed income. Our distribution shows that more than three-quarters of our assets come from retail investors, with 18% coming from institutional investors. Our sales and marketing efforts have focused on our mutual funds centered around gold, natural resources, and emerging markets, as well as our ETFs. The company and my team continue to leverage a significant amount of viral publicity through media interviews and recommendations by influential financial newsletters. Frank Holmes frequently shares insights with major financial outlets like Fox Business Television, Bloomberg Radio, and Kitco News. We maintain a strong following throughout various platforms, including our award-winning Frank Talk blog. As of now, we’ve won 90 awards for excellence in investor education, reflecting our brand's commitment to delivering timely, well-balanced market insights. Our website receives over 770,000 visits from curious investors globally. Our subscriber base continues to grow as well, currently sitting at over 50,000 subscribers to our investment newsletters. I highly encourage interested investors to sign up on our homepage. Please remember to send your questions in via the control panel or follow up with an email to info@usfunds.com. Now, I have a few questions here. I'm going to start with you, Lisa. Can you please summarize how the increase in AUM will impact cash flow and profit margins?

Lisa Callicotte, CFO

Yes, we are very excited about the quarter, particularly regarding the improvement in our profit margin and cash flows. Our operating profit margin for the quarter was approximately 29%, and we had positive cash flow from operations, with total cash increasing by approximately $660,000 compared to the June 30 quarter. We strongly believe that the quarter ending June 30 marked a turning point for us, and we are pleased to see the more complete results of that this quarter.

Holly Schoenfeldt, Marketing and Public Relations Manager

Thank you, Lisa. Frank, I have a question for you. Are there any new products in the pipeline?

Frank Holmes, CEO and Chief Investment Officer

I think it is crucial to remember the streamlining of our financials. One impact during the bear cycle was lagging performance, especially since we have a fulcrum fee. A year ago, many funds were performing poorly, but now 90% of our funds are above average or better. It was great to see. So that’s a positive note regarding fund performance. Recently, we launched the first luxury-only dedicated fund, and although there were questions about it being launched during COVID, discretionary products have shown resilience, and companies like Costco and Netflix have thrived. Our luxury-focused mutual fund is one to watch.

Holly Schoenfeldt, Marketing and Public Relations Manager

Great. Lisa, are you planning to continue your stock buyback and dividend distribution?

Lisa Callicotte, CFO

Our board routinely reviews our stock repurchase program and dividend distributions. As Frank mentioned earlier, we're currently repurchasing shares based on an algorithm when our stock trades below a certain threshold. This program is adjustable, and while I cannot predict the future, as our financial position strengthens, it becomes more likely that we will increase our stock buyback and/or dividends.

Holly Schoenfeldt, Marketing and Public Relations Manager

Frank, can you describe how the investment team is working to improve mutual fund performance?

Frank Holmes, CEO and Chief Investment Officer

It's really our disciplined quantitative approach that incorporates dynamic rules-based thinking. A case in point is Global Resources; it was underperforming its index, but now it's outperforming, and that's called the GNR ETF. Our performance now significantly exceeds that of the GNR due to our superior top-down industry allocation and stock-picking strategies.

Holly Schoenfeldt, Marketing and Public Relations Manager

Lisa, can you give us an update on your investments in Galileo?

Lisa Callicotte, CFO

We had some great years with Galileo, but we both decided to part ways. They have been losing money lately and are now included in our discontinued operations in our financial statements.

Frank Holmes, CEO and Chief Investment Officer

While we have distanced ourselves from them, we have retained a stake in their technology fund we're major investors in, and we trust that they'll have solid performance in that focus.

Holly Schoenfeldt, Marketing and Public Relations Manager

Can you speak about your building tenants and any lease updates due to the pandemic?

Lisa Callicotte, CFO

We only have a couple of tenants whose leases will roll off in the next few years. However, we’ve noticed increased interest in leasing out some smaller areas in our office space that we’re willing to make available.

Holly Schoenfeldt, Marketing and Public Relations Manager

Frank, do you have any closing comments for shareholders tuning in today?

Frank Holmes, CEO and Chief Investment Officer

I wanted to extend my gratitude to our shareholders for their patience as we venture into the ETF business. It took a lot longer than expected; it took three years for GOAU to exceed $100 million in assets, and five years for JETS to be discovered and to set unprecedented records. The ideas we introduce require significant groundwork and time; I appreciate everyone’s patience during this. I'm continuously working on exciting new concepts for the upcoming year, advancing our product offerings while considering mechanisms for converting mutual funds more seamlessly into ETFs for our shareholders.

Holly Schoenfeldt, Marketing and Public Relations Manager

Thank you for your insights and comments, Frank. Thank you, everyone, for your questions and for tuning in. Just as a reminder, if we didn't get to your question, feel free to email us at info@usfunds.com. This concludes U.S. Global Investors' webcast for the first quarter of 2021. Thank you all for your participation.