U.S. Global Investors, Inc. (GROW) Earnings Call Transcript & Summary

[Audio Gap] Financial Officer; and myself, Holly Schoenfeldt, Director of Marketing. If we move onto Slide #3. 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 accepts no obligation to update them in the future. Moving on to the next slide. As always, we would love to offer anyone tuned in today, one of our JETS, GOAU or SEA hats. All you need to do is send us an e-mail with your physical mailing address to [email protected]. And now on to the next slide, I will briefly review our company. U.S. Global Investors is an innovative investment manager with vast experience in global markets and specialized sectors. It was originally founded as an investment club, becoming a registered investment adviser in 1968. The company has a long-standing history of global investing and launching first-of-their-kind investment products, including the first no-load gold fund. We're also well known for our expertise in gold and precious metals, natural resources, airlines and luxury goods. Now when we move to the next slide, Slide #6, this is where I want to hand the presentation over to CEO, Frank Holmes. Frank?

Thank you, Holly, and thank you, all the shareholders who are listening. This is one of the most important disclaimers I always like because it's colorful, but it's factual in a quant world, is the DNA of volatility. And what's important here is that every asset class has its own DNA of volatility and it changes over time. They know well today that the DNA of the human body can change, and external forces imbalances between macro forces of monetary fiscal policies can all of a sudden impact capital markets, and it can change the DNA of the volatility of an asset class. So let's take a look at the S&P 500. It basically says it's a nonevent to go up or down 1%, almost 70% of the time. Over 10 days, it's 3%. And you can see that gold bullion is the same as the S&P 500. And if we go back 10 years ago, bullion was more volatile, 2:1 to what the S&P was. On the Dow Jones U.S. Asset Manager Index, it's got a daily volatility, close to the S&P, but over 10 days, it doubles basically the 5%. GROW definitely doubles over 10 days. It's a nonevent, they go up or down 6% on a weekly basis. Some of our funds are known, especially for gold and GOAU. You can see that it's plus or minus 7% over a 10-day period. Those changes in the assets of the airlines or gold, they do have an impact in our funds. And this is how we earn fees, we earn fees on basis points on the total assets that we manage and they can change over a monthly basis, a quarterly basis, and that's what changes basically. It's very simple business to calculate what our revenue is going to be. Next, well, the ETF world continues to beat down on the mutual fund world. As you can see, the ETF world continues to enjoy more product access and the fund flows going out of the mutual fund world. It's interesting that the younger investors, the millennials and generations X, Y and Z are much more keen to go and trade and invest but predominantly trade an ETF to get exposure to a theme. Next please. I want to thank our institutional shareholders, Vanguard, Royce Investment Partners, Perritt Capital, KWM and BlackRock. A couple of these other lineups are into index funds, but still, we thank them all for -- that we qualify and show up in their product lineup. Next, please. So as you know, I'm the CEO and Chief Investment Officer, and I've been in this saddle for about 35 years -- and it's interesting to watch how U.S. Global has been through different cycles of global booms and busts, but during this period, I've owned approximately 18% of the company and 99% of the voting control. That's a technical part of having 40 Act rules. But what's important is I am the largest shareholder. Next. So bond yields are important to look at, and we track what happens with a 2-year, 5-year and the 10-year. And to share with you is that most -- the currency movement is off a 2-year yield, and that impacts gold. So that's one reason why I follow the 50-day moving average on the yields. And the 5-year is predominantly on dividend paying stocks and the 10-year is for the infrastructure spending, if you're going to build a new pipeline, the financing is usually off a 10-year government bond, a new gold mine, an expansion of a gold mine, it's off a 10-year government bond. So it's important to be able to track what is happening over 10 weeks which is 50 -- 10 weeks of trading, which is a 50-day moving average to get a feel for these swings in the short-term trades. And what you see here is the 5-year yield when it crosses above the 50-day, that is usually bearish. And you can see last year when the 5-year yield went above in May that we started seeing small cap stocks fall; microcap even more so, and we would be characterized in fact, more of a microcap. Until October that when rates seem to have peaked and the yields started declining and as that was taking place, small-cap stocks started that rally. So this is trying to highlight that there's a very strong inverse relationship with the 5-year yield and the dividends that you're paying on your stock. And next, please, is to try to -- this sets into the motion here that shows you that the Russell 2000 looked like it had a breakout while rates were falling until this year, that all of a sudden the fear of the rates rising, that the small-cap stocks started selling off. So it's sort of an important part. And I think that we're pretty close to this cycle where rates are in a presidential election cycle in the fourth year -- going back almost 100 years of data in the fourth year of a presidential election cycle when you have a democratic president and a Republican Congress, the market is usually up 8%. But when you have falling interest rates, not rising interest rates going into this fourth year, odds are that it's 11%, 12%. So even with all the negative news, the math suggests that the markets will be up this year. This time last year, I forecasted that based on the presidential election cycle, the markets would be up historically double digit in the third year when you have the sort of balance of power, and it was. And how it was volatile, but it ended up closing up on the year. So I do like looking at data. And I do from a macro point of view and a micro point of view, from stock picking to macro, and that is called quantamental approach to investing. And that has led us down the journey to create smart beta 2.0 ETFs. And so it doesn't matter if it's a macro factor or it's a micro, we do look at these factors. And I thought I'd highlight that when rates do start to tick down, be they in April or May that I think that we will see money flows into this category, which does impact companies like U.S. Global. Next, please. Our capital strategy, the allocation strategy. Well, one is the shareholder yield. And the shareholder yield is a model that looks like the cash dividends paid plus the net share repurchases and net reduction divided by the market cap. That's another way of looking at it, and as a fund manager, Meb Faber that wrote a book on it and he's picked stocks and they seem to -- has a deep value approach of picking the stocks and they've outperformed. So we do follow that and we do ask questions on a regular basis of where we're allocating capital. 2 is we manage expectations for new product launches, what's necessary, how do we brand this asset class. And 3, we managed to preserve cash for future growth opportunities and market corrections. We have been stockpiling cash. We have been buying back our stock. And fourth is strategically buy back the stock, but we're using an algorithm on flat and down days. And 5, we discuss and review with the Board on a regular basis and keep in touch with our Board so they know what we're doing and why. Next. So this is Mebane Faber. And he came up with a famous book and it really pounded the table across America on the Shareholder Yield: A Better Approach to Yield Investing. And it's a bit of looking at Warren Buffett's model of looking at companies that if they're not paying dividends, but they're decreasing their yield and they're increasing their cash flow, they're going to be bought. If they're buying back stock, Warren Buffett has always believed that it's been better than paying out dividends, but he has this unique model, which we look at and respect. Next, please. This is the model. Shareholder yield is 3 parts, cash dividends plus net purchase of your shares back and net debt reduction divided by the market cap. Next, please. So GROW's dividends, the company has paid monthly dividends since June 2007, and it's interesting because that was the peak in gold and all the emerging markets really peaked. And we started that strategy of paying out dividends, but we've been able to do it through down cycles and 2008 crisis, still be able to maintain paying dividends of how we manage our capital. But the yield right now is 3.17%. I'm going to show you that it's below the 5-year, but that's okay because the buying back stock just takes the yield higher. The Board approves of this, but they can -- at any time, they can always cut a dividend. They have that right if something comes up. Next, please. Share -- GROW's total shareholder yield is approximately 7.9%. Next please. And that is adding back the dollars we've spent buying back the stock plus paying out dividends, so you can see here that the GROW dividend is below the 5-year treasury yield. Now why do I show that? It's because lots of institutions make a decision that they will rather buy risk-free a 5-year government bond than buy a stock with a dividend yield that's less than 5% unless the -- sorry, 5-year yield, unless that dividend is increasing faster. So therefore, it will catch up and surpass the 5-year treasury yield over the next 5 years. So as my first time as a money manager research analyst actually was in 1978, I'm aging myself. But it was on a dividend growth monitor, and you looked at stocks that had yields that were higher than the 5-year government and it's interesting that they did outperform. So you have to look at that model in the context of how much is being spent on buying back the stock along with the dividend yield. Next, please. So you saw earlier that our total shareholder yield is twice what the -- our dividend yield is more than twice, and it's higher than the 5-year government bond. So it is of great value. And it's another rational reason for buying the stock on down days. This is an important comparative analysis. We quite often get calls from institutions and comparing us to a WisdomTree and to Invesco. The reason why I bring these 2 names up is WisdomTree is 100% ETFs, 85% of our operating revenue is ETFs; and Invesco is 40% because they have the biggest beast to them, the QQQ ETF. What you can see is that the price to book value for WisdomTree is substantially higher, almost 4x higher -- or 3x higher than what ours is. And so it says that on a price to book relative valuation, we're undervalued relative to a WisdomTree. Invesco looks a lot cheaper, but then there's other factors in that financial model. There's never one singular factor. The return on assets, as you can see, the return on assets by WisdomTree was greater than ours, but we're greater both of us than Invesco. And that's one reason why Invesco trades at lower price to book. And then pretax margins for WisdomTree, they're higher. That would afford a higher P/E ratio. We are much higher than, say, Invesco. And then we look at dividend yield and compare. And as you can see that the lowest dividend yield is WisdomTree and then we're in the middle between Invesco. And our price to cash flow is about the same of WisdomTree, is higher than Invesco, but it appears that Invesco has other losses that they're wrestling with. And this is sort of the gambit. These companies are bigger. We'd be a microcap, WisdomTree be a mid-cap and Invesco will be a big cap of -- probably a mid-cap going into a big cap range. And I think it's just a helpful comparative analysis and some basic quantamental approach that analysts would take a look at it, picking one stock versus another. Next, please. So why we buy back our shares. So one of our large institutional investors I have a tremendous respect for, Bruce as always wants to know, are now articulating it, and I wanted to point out that the company believes that the stock is undervalued and therefore, buys back shares of GROW's stock when the price is flat or down from the previous trading day. And as Warren Buffett highlights the value proposition of buying back one stock at value-accretive prices, doing so Buffett says, benefits all shareholders, not just the biggest holders, and we agree. Next, please. So the current shareholder repurchase program for the quarter ended December 31, 2023. The company repurchased a total of 196,295 shares, Class A shares using cash of approximately $560,000. We bought back about 1% of the outstanding shares since September 2023. And this may be suspended or discontinue as deemed necessary by the Board. I think what's important is that you could only buy back a certain amount of the volume. So if the volume picks up, then we can pick up more. There's always sort of regulatory borders in sports, they call them and hockey blueline or redline. So you have to sort of manage within the boundaries. I've been asked, why don't you buy back more? Because it's relative to this model what the volume is. Next, please. This is another illustration to show that we have increased our stock buying back. You can see in the year of 2023, substantially from 2021 and from 2022. From '21 just as COVID was ending, you can see that it's quite a big number. It's more like 12x increase. Next, please. So let's look at our fiscal year 2024 of the strengths. The company remains profitable despite challenging macro market conditions. I'm going to highlight that unless you were in the Magnificent 7, a few stocks were champions of the overall market. The company continues to buy back stock on flat and down days and pays a monthly dividend. The company has a strong balance sheet, which includes both cash and other investments. Next, please. We're listed in NASDAQ. We have about $2 billion in assets, $2.8 million at quarterly operating revenue. Next, please. Earnings per share, we saw a nice bump from the summer year-end -- sorry -- quarter end of September -- from September to December. The markets rallied as rates were coming off and the assets and also certain write-downs in that past quarter because we do have investments that go through a mark-to-market process of write-downs and write-ups. And so you can see that the increase in investment income was $1.9 million. Next, please. By the way, on more granularity, Lisa can always answer any questions and go into greater detail. Operating income, as you can see, it went from $215,000 to $192,000. The decrease in operating revenue is due to a decrease in assets under management, partially offset by a decrease in operating expenses. Next, please. Smart beta 2.0. Well, this whole idea of smart beta came to the realization that I love math at quant and we're quant focused on how we look at stocks and quantamentals is new word that comes out and Investopedia covers it. But it's an investment strategy that combines both fundamental tools along with quant approach to picking stocks and building a diversified portfolio. So our quantamental investment strategy combines both cutting-edge technology and robust data analysis to help optimize returns and manage risk effectively for our shareholders. And we believe use of smart beta 2.0 factors in our thematic fund lineup, sets us apart from the competition. It's really important that there are some factors that are great for picking stocks. Other factors are not, but they're good for screening stocks. And then there's a magic about what portion of the portfolio is going to have mean reversion and what portion of the portfolio is going to have momentum of growth in revenue or operating income and they're both laws of physics. So the portfolio construction is -- this is critical as the factors for picking the stocks. Next, please. So the thematic lineup of smart beta 2.0 ETFs. JETS was the first. It's done its thing. It's done what the [ goal ] that we went out to beat the index and a quant approach has done a phenomenal job. It is deeply undervalued on a relative basis to trains and trucks. The Dow Jones Transport Index includes a much bigger weighting in trains and trucks. But if you just had it pure trains and trucks, the P/E ratios, the cash flow ratios, et cetera, for the airlines are a much more attractive value proposition. But the concerns of a recession, the negative news that's out there has impacted the sentiment in particular, institutional investors out of -- that are of Europe that we have been able to witness as insurance companies. But overall, the retail and the family offices and big RIAs in the U.S. are still actively involved in JETS. GOAU, it's done its -- I'm so proud of it because it's outperformed the GDXJ. It's done what the model suggested it would do, both portfolio construction of 30% focused on gold royalties, and then stock factors for bottom-up stock picking and rebalancing each quarter. Our newest addition to the lineup is SEA, S-E-A. It has to do with cargo shipping and heavily weighted towards shipping with a small portion of the portfolio into airline cargo only shipping. And I think what's interesting is that last year, due to all the drama that's taken place in Russia, it impacted our Eastern European fund, even though we sold all of our Russian stocks before the war and before they became basically insolvent holdings, we were very fortunate for our shareholders that we went liquid very early, but it didn't matter. People, the sentiment -- people would rather speculate in technology stocks in America than be in the growth of Eastern Europe. And further, same thing with the great concerns out of China and its bullion tactics, it's impacted the China fund. And so we shut down those two funds -- mutual funds in the summer. And I think it's been a wise decision for the shareholders and for us, and -- but how do we play this emerging market thesis, which has been so important relative to the world of gold and luxury goods, et cetera? So one of the things in this journey of building JETS and what we witness is that cargo is one of the best arteries to understand the whole economy, the global economy. And it has a strong correlation to PMI and they trade at deep value. Relative cargo ships trade like JETS do, to trains and trucks on P/E ratios and cash flow and the dividend yields on the cargoes are much higher. So I said, okay, how do we have a footprint for the global economy? What's the best trade-off between any emerging country exporting products to a manufacturing hub and then [ sending ] them back? It was cargo shipping and that's why we created SEA. Next, please. So the shipping industry is a leading indicator to the health of the global economy and one way to play emerging markets. Next, please. And it is highly correlated to a great leading indicator, which is called PMI, Purchasing Manufacturers' (sic) [ Managers' ] Index. And what did we see this last year as rates were rising, the dollar is getting strong, a great contraction in PMI that was a foreteller warning of the slowdown in the global economy. And I think that every time this happens, governments panic and they start printing money. And this year, 40% of the world's population in over 70 countries are going to go through election in addition to America, which is the biggest GDP in the world. It's going through its fourth year of our presidential election cycle. It's important to recognize that over 70 other countries are going through an election cycle, and that usually is spur the economy to get the votes and drop interest rates. So I think an uptick in the PMI, it appears that it has bottomed. A sustaining run would be explosive to this category [ bearish ] for the emerging markets. So again, another thing to recognize that war or bottlenecks, whatever takes place in Panama Canal or the Red Sea, it gives tremendous pricing power to the cargo shipping companies and they put on a great spot here, a run in the past 7 -- no, probably about 14 weeks a run with all the drama that's taken place in the Red Sea. So I think it's interesting to show you that choke points on supply the world still continues, has to move blood through the arteries of the global economy, and these guys all they do is have pricing power. Next, please. So this is an outline that JETS, the overall as ETF, we saw assets decline, redeem. And the bulk of those seem to be institutions from out of the country that use JETS as a proxy. Next, please. Chinese stocks significantly underperformed Asian peers. As you can see here, Taiwan because the semiconductor business has done well. Japan, South Korea, but not Hong Kong and China. It's had a very rough year as China's policies have been very much more war-like rather than trade and economics, the policies against the technology sector. Now they're resting with excessive JETS -- debt as a percentage of GDP and real estate imploding around the leadership. So I think that shutting down the China fund last -- early summer was a wise decision from a macro theme point of view. Next, please. Tech stocks distort performance of the S&P. The S&P is market cap weighted, but there's another S&P index that's equally weighted. 500 names equally weighted, and you can see it far underperformed the market cap weighted. Next, please. And then, this is the Magnificent 7. They're up 5.4x as much as the equal weighted NASDAQ Index since January of 2020. I mean it's quite incredible to see what -- especially growth of NVIDIA, what it's done and everyone else jumping into AI. Next, please. So GROW's investment in HIVE Digital. HIVE also has infrastructure build-out in the AI business. It's been a very attractive investment, paying monthly principal down payments every quarter. The yield on this has been much higher than you would earn on a 5-year or a 10-year government bond. So we've been very happy with that. And next, please. I'm going to turn it over to Lisa Callicotte, our CFO, to give you more granularity on the numbers.

Thank you, Frank. Good morning. First, I'll start with our financial highlights on the next slide. Average assets under management were $2 billion for the quarter ending December 31, 2023. Operating revenues were $2.8 million, and our quarterly net income was $1.2 million, which was an increase of 45% over the prior year same quarter, and our earnings were $0.09 per share. The next slides will provide more detail on the results of operations for December 31, 2023. So on Slide 37, we see our total operating revenues of $2.8 million for the quarter, which was a decrease of $910,000 or 24% from the $3.7 million from the same quarter last year. The decrease is primarily due to decreases in assets under management, especially in our JETS ETF, as Frank discussed. Operating expenses for the current quarter were $2.6 million, a decrease of $194,000 or 7%, primarily due to decreases in employee compensation and benefits of $168,000 or 15%, mainly due to decreases in bonuses. On the next slide, we see our operating income for the quarter ending December 31, 2023, is $192,000 or a decrease of $716,000 compared to the same quarter for fiscal year 2023. And you can also see that our other income increased $1.3 million compared to the prior year, and that was mainly due to unrealized gains on equity securities in the current quarter for $279,000 compared to unrealized losses in the prior year of $937,000. Net income after taxes for the quarter was $1.2 million or the $0.09 per share, which was an increase of $382,000 compared to the net income of $847,000 or $0.06 per share the same quarter last year. On the next slide, we see that we still have a strong balance sheet. It includes high levels of cash and securities. And on the following page, we see that we still have no long-term debt. We have a net working capital of $38.3 million, which is an increase of $840,000 or 2% since June 30, 2023, and our current ratio is 18.8:1. With that, I'll turn it over to Holly to discuss marketing and distribution initiatives.

Thank you, Lisa. All right. On the next slide, I want to briefly point out some of the upcoming events that U.S. Global will be attending or speaking at. The first is ETF Exchange, where our head trader will be headed to next week in Miami. And then following that the week after, Frank Holmes will be attending and speaking at the Oxford Club's Investment U Conference. There, he will be sharing his thought leadership on the various industries that we invest in and how to gain exposure to these industries via our funds. And then in March, Frank will head over to Zurich for the Swiss Mining Institute, where he will be speaking alongside other industry leaders in the gold and precious metal space. Then on the next slide, I want to point out a quick stat about our website traffic during the quarter ended December 31. We've had over 0.5 million visitors from around the world visit usfunds.com. Many repeat visitors, but even more new visitors, many of whom came to read the award-winning Frank Talk blog or sign up for the Investor Alert newsletter, which we've seen tremendous growth in subscribers on for the last several months. Then moving on to the next slide. Don't forget that our educational content does not only come in the form of the Frank Talk blog or the Investor Alert newsletter. We love educating our shareholders through video content as well. So make sure you're subscribed to our YouTube page to get video updates on everything from gold to airlines to luxury goods. Then lastly, as we wrap up today's presentation, I just want to remind everyone that we do share a majority of our new content as well as announcements about upcoming events across all of our social media platforms, which continue to grow across the board. Then on the next slide, I just encourage you to follow us on all of these platforms, so you stay up to date with what's going on with GROW, our funds and our broader market insights. And then just as a friendly reminder to our audience as we wrap up today, if you do have any questions, please e-mail those to [email protected] and we will gladly follow up with you to get anything clarified that you may need more information on. Thank you so much for tuning in today.