Sprott Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprouts Inc. 2023 Second Quarter Results Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Instructions will be provided at that time for you to queue up for questions. As a reminder, this conference is being recorded today, August 9, 2023. On behalf of the speakers that follow, Listeners are cautioned that today's presentation and the responses to the questions may contain forward looking statements within the meaning of the Safe Harbor provision of the Canadian Provisional Security Laws. 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.

Operator

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 and A for the quarter and Sprouts' other filings with the Canadian and U. S. Security Regulators. I will now turn the conference over to Mr. Whitney George.

Operator

Please go ahead, Mr. George.

Speaker 1

Good morning, everyone, and thanks for joining us today. On the call with me today is our CFO, Kevin Hibbert and John Ciappaglia, CEO of Sprott Asset Management. Our 2023 second quarter results were released this morning and are available on our website where you can also find the financial statements and MD and A. I'll start on Slide 4. Our assets under management declined slightly during the 2nd quarter due largely to weaker precious metal prices.

Speaker 1

However, on a 6 month basis, our AUM has increased by $1,700,000,000 and currently stands at $25,100,000,000 We continue to deliver net sales during the quarter despite the headwinds While on the surface, it was a relatively quiet quarter, much hard work was occurring beneath the surface. Our marketing team continues its high level of output, producing upwards of 30 thought leadership pieces during the quarter. We also recently welcomed Judith O'Connell to the Board of Directors. Judy is a founding partner and CEO of Champlain Investment Partners, a significant Vermont based employee owned asset. We look forward to adding her expertise to the Board, particularly in areas like operations, compliance and technology.

Speaker 1

And with that, I'll pass it over to Kevin for a look at our financial results. Kevin?

Speaker 2

Thanks, Whitney, and good morning, everyone. I'll start on Slide 5, which provides the usual summary of our historical AUM. As Whitney alluded to earlier, AUM finished the quarter at $25,100,000,000 down $235,000,000 or 1% from March 31 This year, it is actually up $1,700,000,000 or 7% since the end of last year. On a 3 months ended basis, Our AUM was negatively impacted by market value depreciation across majority of our fund products That was only partially offset by new capital raises and inflows to our private strategies and exchange listed products. However, on a 6 month ended basis, we did benefit from the full effects of this year's capital raise and inflows to our private strategies funds As well as good at the market activity levels in our exchange listed products and a strong Q1 of market value appreciation across the majority of our funds.

Speaker 2

Slide 6 provides a brief look at our 3 6 month earnings. Adjusted base EBITDA was $18,000,000 in the quarter, up slightly from the same 3 month period ended last year. The increase in the quarter was due to higher average AUM in our exchange listed products and private strategies funds, more than offsetting lower commission income in the quarter due to the sale of our former Canadian broker dealer. Adjusted base EBITDA was $35,300,000 on a year to date basis, down $808,000 or 2% from the same 6 month period ended last year. That decrease was due to lower commission income on the sale of the Canadian dealer, as I mentioned earlier, as well as lower at the market activity in our uranium trust.

Speaker 2

The lower commission income on a year to date basis was nearly offset by growth in net fees on improved AUM and we expect net fee levels to increase even further in the second half of the year, leading to the eventual replacement of low margin commission income from our broker dealer, with higher margin fees from our Exchange Visits Products and Private Strategy segments. So all told, we have grown annual adjusted base EBITDA consistently over the last 5 years and we anticipate more of the same for 2023, although at a much lower trajectory than previous years given the challenging 2023 operating environment. Lastly, as you can see on Slide 7, as part of our ongoing treasury and balance sheet management program, During the quarter, we paid down $20,000,000 or 37 percent of our outstanding debt facility. We expect the total debt outstanding down by another 13 in the second half of the year such that our total outstanding debt coming out of 2022 will be Lower sorry, 2023 will be lower than where it was coming out of 2022. Subsequent to quarter end, we completed a review of our current and near term funding and borrowing needs and determined that we no longer Acquire a $120,000,000 credit facility.

Speaker 2

Consequently, management decided to lower the maximum borrowing capacity under the credit by $45,000,000 to $75,000,000 Offsetting the reduction in borrowing capacity is the release of capital restrictions on the sale of our Canadian broker dealer that closed earlier this quarter as well as the eventual monetization of shares that we received on the realization of a previously unrecorded contingent asset from a historical acquisition. For more information on our revenues, expenses, EBITDA and balance sheet metrics, you can refer to the supplemental information section of this presentation as well as our Q2 MD and A that we filed earlier this morning. With that said, I'll pass things over to John.

Speaker 3

Thanks, Kevin, and good morning, everybody. Everyone is enjoying their summer. Q2, we had very solid results across our Physical Trust business, and it was obviously a very challenging market environment. $149,000,000 in net sales that was predominantly our gold and silver trusts. I think this is a good outcome given industry flows into precious Metals ETFs have been quite soft despite the fact that metal prices have been grinding higher.

Speaker 3

This is kind of an odd decoupling. We've looked at The trend over several years and usually flows are tightly track Performance. The recent environment where investors are moving to the sidelines and then putting money into cash, I think is Unusual phenomena that we think will dissipate over time. On the uranium side, our uranium trust Achieved its 2 year anniversary on July 19. The fund has experienced tremendous growth over that time and has approximately $3,500,000,000 of assets right now.

Speaker 3

And I think it really highlights the fact that it is very countercyclical. It is very recession proof and is Kind of marching to its own drum right now relative to other commodities that have had softer experiences in the last few months as People have been disappointed with the China reopening. Price of uranium has gone from about $48 to about $56.50 per pound this year, And the forward curve is clearly signaling higher prices, which is being driven by a utility contracting cycle, which is clearly Accelerating in 2023 after last year's 10 year high, and we see a number of very positive fundamentals in the uranium market over the coming years. For example, some of the largest producers in the world are essentially sold out for the next 2 years and we're starting to see the reshoring of the uranium fuel supply chain Back to Western providers such as the Converdine conversion facility, which finally restarted In June of this year, after being closed for a number of years, that's obviously going to lead to higher demand for U-three zero eight and we think that's helping prices. On the next slide, while uranium is obviously a critical role that's been getting a lot of attention in the markets Related to energy transition, there are obviously a number of other metals that we think have very bright futures as the world realizes we need to more aggressively decarbonize our And focus on greenhouse gas reductions.

Speaker 3

Last year, we saw the highest amount of Electric vehicles sold globally around 10,000,000 units. We're currently tracking for about 14,000,000 units this year. So 40% growth, which is pretty amazing because last year Many market participants would acknowledge that it was a tipping point in terms of EV adoption globally. That is obviously helping things like lithium and cobalt and nickel. While the prices have corrected this year, The equity markets related to these producers have been quite robust.

Speaker 3

There's a lot of M and A activity happening in the lithium space in particular. On the solar front, we saw record amounts of solar capacity being added globally last year and this year will well exceed that That's obviously benefiting things like silver and copper. Green Energy policy through the U. S. Inflation Reduction The EU Green Deal is really acting as a key catalyst here in terms of crowding in private investment capital.

Speaker 3

We're seeing investors around the world that are Coming increasingly interested in this thematic and we think it has a multi decade timeline to play out. The assets in the new ETFs that we launched in February March Steadily growing despite many of the competitor funds being in net outflows over the same period. Next slide. On managed equities front, fairly quiet quarter. Unfortunately, the gold strategies gave back a lot of the gains that they had delivered in the Q1, so Around flat for the year to date period.

Speaker 3

Performance was largely in line with our benchmarks. We recently hit the 1 year mark of our energy our actively managed energy transition Materials strategy, which our team has been incubating and hoping to sell that to high net worth investors and institutions. And I think it's fair to say that we're placing bets in our passive Product suite, our commodity product suite and our active product suite. We really want to cover the whole landscape in terms of meeting investors' needs as They've tried to figure out how to position themselves in this schematic. And with that, I'll pass it back to Whitney.

Speaker 1

Thanks, John. Turning now to Slide 11 for a look at our private strategies. Combined lending and streaming strategies AUM increased to $2,600,000,000 as June 30, 2023. As I mentioned earlier, we recently closed our fundraising efforts on the new lending fund And the streaming fund in our Private Strategies segment. As with our public funds, the energy transition theme is playing a larger role in our private strategies, With the team seeing more opportunities to deploy capital into energy transition materials such as copper.

Speaker 1

And now on Slide 12, I'd like to summarize. Q2 was a steady quarter despite some headwinds. Our net sales trends remain intact. We are benefiting from a continued sales in our Exchange Listed Products segment as well as Strategy expansion in our Private Strategies segment. During the quarter, we continued to return capital to our shareholders through The normal quarterly dividend and share buybacks.

Speaker 1

In the quarter, we returned a total of $8,500,000 and year to date $16,000,000 through that combination. We also reduced our overall debt by $20,000,000 in the quarter against our outstanding line of credit. We are well positioned with core holdings in precious metals and energy transition investments. We expect a weaker dollar, which has been occurring for the last 9 months or so. And we are excited about the Central Bank buying in precious metals, Expect more in the second half and beyond.

Speaker 1

In 2022, Central Banks bought 1.1 1,000,000,000 tons of gold, a record that continued in Q1, 228,000,000 tons, which beat a record by 40% that was set in 2013. And then recently for the Quarter, there's not much data out yet, but China announced in July, they bought 23,000,000 tons, that's 126 1,000,000 times year to date, increasing their holdings by 6%. I think it's interesting that China is being very visible about What it is that they're doing, and I'd like to point out that typically central bank buying of gold is not price sensitive, it's policy driven. So I think this bodes very well for continuing advancement over the reasonably near term in gold prices. Demand for energy transition investments continues to grow as what we once knew as base metals are now considered critical materials.

Speaker 1

That concludes our remarks for today's call. I'll now turn it over to the operator for some Q and A. Operator?

Operator

Thank you. Our first question comes from the line of Geoff Kwan with RBC Capital Markets. Your line is open.

Speaker 4

Hi there. Good morning. Just have one question. It was just the comment around The precious metal prices and the flows you're seeing into the physical trust, I think, you mentioned the debt decoupling maybe just Presumably retail investors moving into cash like alternatives with given where interest rates are, just wondering if there's any other factors you might attribute That too. And given where rates are today and maybe at least the near term outlook, does that suggest from your perspective like you think The flows may be kind of more subdued versus the real strength you've seen in recent years and that like I said, maybe a bit more subdued in the next, say, couple of quarters?

Speaker 3

Yes. I mean, as I mentioned, we've looked at the historical correlation between Flows into gold ETFs and the gold price. And there's a very strong relationship. Over the last few months, That is decoupled and we think it's largely on the back of investors migrating to 5% essentially risk free Money market investments, which stand at record levels as well as a number of different longer duration fixed income instruments That are yielding kind of 7%, 8%, 9% depending on credit. That's attracted the bulk of the capital for the first half of the year.

Speaker 3

Equity investments have lagged even though the equity markets keep rallying and it's only been more recently that we've seen a rotation, almost a fear of missing out Kind of response from investors that are finally putting money back into equity funds. But, I think longer term, we expect As interest rates normalize, which we expect them to do at some point next year, that their relationship We'll return in terms of stronger gold prices and stronger investor interest. As Whitney mentioned, what's been driving a lot of the gold market has been central bank buying. They've been buying record amounts of gold, whereas institutional and retail investors Have been a lot more quieter, whereas in the previous 3 years, they were the predominant buyers of physical gold. So a little bit of rotation amongst buyers and clearly interest rates are having some impact on that and we expect it to dissipate in the coming quarters.

Speaker 5

Okay. Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Razeep Banjee with TD Securities. Your line is open.

Speaker 5

Good morning. Thank you. If I could start on your Energy Transition Funds, Would you be able to share any feedback from clients as to the uptake of those funds? And if appropriate, would you be able to share why your funds are performing better than your competitors who I think you mentioned are seeing outflows whereas Sprouts is seeing inflow for those funds?

Speaker 3

Yes, sure. The feedback we get from our clients, I think, has been really positive. When we walk them through what we built and why we built it, it makes a lot of sense to them. It's very intuitive. And what I mean specifically by that is that when we look at a lot of the competitor ETFs that are available globally, typically they're generalist ETF sponsors that We'll go to a generalist index provider and say, hey, we'd like to build an index with you in an ETF around this thematic.

Speaker 3

And I think it's fair to say that in most cases the ETF sponsor as well as the index providers have little to no experience Our expertise in anything to do with mining or metals. And so the output that you usually see with these indexes are not great expressions of the thematic. And what I mean by that is that they tend not to be very pure play. You end up getting a lot of Unintended exposures across different metals that you in many cases have no idea that you're even gaining to. So for example, you might invest In a competitor, let's say, a copper mining ETF and find out that only 50% or so of the holdings even have exposure to Copper Mining and that you are getting exposure to iron ore mining or coal mining, which is obviously very different in this whole narrative and thematic.

Speaker 3

So I think investors appreciate the fact that we've built these indexes using a lot of our knowledge in partnership with NASDAQ. So they appreciate the pure play exposure. It's a they're dynamic, Meaning every 6 months, we're looking at all the companies and we're basically reevaluating them in terms of their intensity, to the thematic And we're scoring them and readjusting their weights. And this is a very dynamic market right now. There are obviously a lot of companies coming public.

Speaker 3

There are a lot of companies spinning off assets because investors are clearly willing to pay a higher multiple for Things like nickel and copper versus, let's say, traditional iron ore assets. So there's been a lot of spinouts and M and A And IPOs that is constantly all of these things are constantly changing the investment universe of eligible Companies that we're tracking and incorporating into the indexing methodology. So I think when we explain that to people, they appreciate the fact that these are, Let's say, more intelligently built by investment management people who have a lot of experience. So I think that's resonating with people. The uranium franchise, I think, has obviously grown significantly, but one of the ways we've been growing is through new funds that we've Created as extension strategy, so we basically cloned our uranium mining fund in Europe.

Speaker 3

I think that's about $70,000,000 already. We spoke off the junior uranium mining ETF, which is quickly approaching $40,000,000 And obviously, we're not in great environments for uranium mining stocks right now, but the funds have been able to steadily grow assets of challenging market environment. So I think people appreciate what we put forward into the market as being differentiated and more well thought through.

Speaker 5

Okay. Appreciate the color over there. And just my last question, if I could shift to the Private Strategies side. Well, actually maybe two questions here. The Annex Fund, is that different from your existing streaming and royalty fund?

Speaker 5

Does the name suggest it might be an extension to the fund or am I reading this incorrectly?

Speaker 1

No, you've got it Precisely correct. It's an extension to the original streaming and royalty fund.

Speaker 5

Okay. Are you would you be able

Speaker 4

to share an

Speaker 5

AUM Target for that one?

Speaker 1

Well, the capital has been raised currently It's what we disclosed. And then obviously, we can't predict market appreciation.

Speaker 2

Okay. Yes, just to build on that, as you know, Risif, we don't provide specific forecast or target information for any of the individual funds.

Speaker 5

Yes, the company is fair. Just my last question on the private strategies. You had a comment that you are benefiting from a strategy expansion in the private strategy side. Could you maybe expand on that a bit? Is it more On the energy transition side or more on the royalty side?

Speaker 1

Well, so the royalty and streaming fund is an extension in a slightly Direction from our traditional lending products, where we've just closed the 3rd lending fund. So that And we're always thinking of new kind of adjacent structures. Possibly, we're working on a More open ended version. The and then the second part is the opportunities for Other materials besides precious metals are obviously going to be tremendous. Obviously, things need To basically fund themselves to build more mines, more capacity to meet the needs that we all know are going to be out there.

Speaker 1

So The amount of capital that's going to need to be raised is enormous and that will create a more Opportunity set in a broader market for both private strategies.

Speaker 5

Okay, understood. Those were all my questions. Thank you.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back to Whitney George for closing remarks.

Speaker 1

Well, thank you everybody for joining us today and look forward to talking to you next in early November at the end after our Q3. So enjoy the rest of the summer and thank you very much for your attention. Good morning.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Sprott Q2 2023
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