Q1 2020 Earnings Call

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Later, we will conduct a question and answer section.

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As a reminder, this conference call is being recorded.

I would now like turn the conference over to your host Mr. Bill Dunaway CFO. Please go ahead Sir.

Good morning, My name is Bill Dunaway.

Our earnings conference call for our fiscal first quarter ended December 31st 2019.

After the market close yesterday, we issued a press release reporting our results for our first fiscal quarter of 2020.

This release is available on our website at.

W.W.I.M.T. LFC stone Dot Com is one of the slide presentation that we will refer to on this call and our discussions of our quarterly result.

You will need to sign on to the live webcast in order to view the presentation.

The presentation and an archive of the webcast will also be available on our website after the call's conclusions.

Before getting underway, we are required to advise you at all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes there too as well as the form 10-Q filed with the FCC.

This discussion may contain forward looking statements within the meaning of night the section 27, eight or the securities.

Active 1933.

Section 21, each of the Securities Exchange Act of 1934.

These forward looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the FCC.

Although the company believes that its forward looking statements are based upon reasonable assumptions regarding its business and future.

Market conditions, there could be no assurances that the company actual results will not differ materially from many results expressed or implied by the company's forward looking statements.

The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

Its readers are cautioned that any forward looking statements are not guarantees of future performance.

With that I will now turn the call over to shown O'connor the company's CEO.

Thanks, Bill good morning, everyone and thanks for joining our fiscal Twentytwenty first names or first quarter earnings call.

The first quarter of fiscal 2020 was a solid quarter for us given the difficult market conditions, which include the lower market volatility generally and the impact of declining short term rights.

Operating revenues were up 14%, while total expenses were up 20%, which resulted in a 10% decline to net income versus a year.

The guy and the 11% decline in Es.

This resulted in our OE up 11% below our target of 15% and also below our run rate for the 2019 fiscal year.

This decrease in net income was primarily driven by two factors.

Our volumes on our focus futures clearing business.

In line with double digit declines in industry volumes on the exchange combined with lower interest income on find assets as well as the impact of a refocusing of the business following the option sellers mats a year ago.

Two.

Increased costs as a result of both acquisitions and organic expansion initiatives undertaken in 2000.

To the 19, which we have discussed in prior earnings calls these costs were around $8 million for the quarter and accounted for just over 50% or the total cost increase these initiatives in AG aggregate were just slightly below breakeven, but a significant improvement from earlier quarters as revenues have started to ramp up.

We anticipate that these activities will be accretive in aggregate to the bottom line in coming quarters and will enhance the long term earnings power of the company in the medium term.

Looking at all segment results commercial hedging recorded growth in revenues from a year ago, but was down 8% versus the immediately prior quarter.

Segment income was up 62%, but that was largely due to the mark to market on longer tend to hedge positions executed in the prior yes and not directly comparable.

Compared to Q4 segment income was down 20% largely due to the less favorable market conditions I mentioned earlier.

Global payments recorded a 2% increase in segment income from the prior year, but was up 29% from the immediately prior Q4.

Security segment income was up slightly from a year ago, but for the big change and product contributions equity capital markets segment income declined $6 million from its.

Court, all time record quarterly in the prior year.

This was more than offset by debt capital markets, which recorded a 7.3 million increase in segment income.

This demonstrates the benefits of having a diversified product portfolio something we've worked hard to achieve over the last couple of years.

Security segment income.

Fourth up an impressive 46% over the immediately preceding fourth quarter.

Physical commodities achieve strong growth in both operating revenue and segment income driven by strong performance in precious metals.

Operating revenue was up 61%.

In the precious area and an exit energy was up 17% segment income was down versus the immediately prior quarter largely due to the 10 million dollar coal recover we recorded in that period.

Okay and the execution service segment income was down primarily for the reasons mentioned earlier, but at the lower overall exchange.

Rooms, and lower interest rates as well as the impact of the refocusing of the business versus the immediately prior Q4 segment income was down 14%.

We'll be providing more details on all of these numbers and segments later in the coal.

We continue to see a good cadence of small tuck in acquisitions.

The three being announced recently and one being closed we are excited by these acquisitions, which continue to enhance our financial platform by adding both capabilities and products as well as acquiring new client segments, adding capabilities and clients are both significant objectives in continuing to grow our franchise and becoming more relevant.

Elephant in the markets.

In early October we closed the acquisition of the euro be business and Singapore, something we've mentioned on previous calls this acquisition provides us with critical mass in the region and their ability to offer.

The ability to connect Toplines recently with the global markets through our financial platform.

In addition, now has one of the tough carrying members on the Singapore Exchange, we had yet another trading venue for global client base.

This acquisition was a big lift for us as it required us to upgrade our presence in Singapore to fully regulated peering member of the Singapore exchange.

We are very pleased with the way the transition went and we are now looking forward to.

Growing the business.

In December we announced we had reached agreement to acquire the brokerage business of tell about group, formerly known as exotic.

This is a well known and respected franchise specializing in providing institutional investors with access to equity and debt markets in emerging and frontier markets.

Yeah.

This transaction provides us with an expanded product capability into these markets as well as a new and complimentary institutional client base.

In addition.

The we now have experienced professionals, both in London, and Dubai, which provide us with a critical mass on the security side in both of these areas.

In December we reached agreement to acquire applied agents in Europe, I FCM commodities, we had been our strategic partners in accessing and serving our European clients.

This in combination with our previously mentioned call team acquisitions means we now have a fully staffed and licensed your presence.

Which will enable us to offer our clients in Europe uninterrupted service post Brexit, we are now or the strong position to capitalize on the changing regulatory environment, which will undoubtedly create opportunities for us to expand our client footprint in Europe.

In early January we reached agreement to acquire German based Xerox.

This company provides an online platform for FX hedging and payments aimed primarily at you you based midsize companies.

We see a tremendous opportunity to provide the good slot clients with a more integrated and expanded payments capability using our global payments network as well as a more.

Comprehensive suite of hedging solutions, not only for foreign exchange, but also for commodities and interest rates.

This will allow us to offer at a unique digital payments and risk management platform for small and medium sized clients.

We see this ultimately as a global offering which should allow us to effectively and efficiently access.

These midsize commercial fines in other Jerre geographic locations and further leverage our financial platform.

As we mentioned on our last call. It has not strategic imperative for us to digitize, our financial platform to facilitate easier and more effective engagement from our 11 growing client base as well as to.

Provide efficient than scalable infrastructure.

It is Ken almost every business that digital platform scale exponentially compared to analog platforms.

This has been difficult and time consuming and has increased by Ti costs meaningfully over the last three years, but we believe we have not put the foundational pieces in place and we're seeing a good cadence of delivery and.

Use cases.

During the quarter, we delivered a significant upgrade of our market intelligence side. That's now delivers hundreds of daily pieces of research digitally to all our clients globally in multiple languages.

With our recent acquisitions, we continued to expand our market intelligence and resets assets, which we can now showcase at one place.

Yes, delivering it seamlessly to all our clients are tracking usage and seeking our patents and potential client needs also notable that many of our analysts on achieving industry recognition.

We also launched an upgrade to our commercial client portal my MTO, which not provides real time client trade reporting.

Across asset classes, and cross regulatory regulator entities to deliver clients a comprehensive view of the activity with.

Both on derivative exchanges and Odisi products in essence, we are able to deliver our entire financial platform seamlessly to these clients irrespective of the legal entity.

Jurisdiction or product they have traded with us.

The success we have.

Recently rolling out some of these technology solutions is the result of an early validation of our beta roadmap that was started three years ago.

Given the diverse number of product offerings, we have on our financial platform combined with a number.

Over of acquisitions, we have completed has resulted in us having a fairly high number of systems of record generally these are industry standing system solutions. It is not feasible practical a cost effective for us to implement an enterprise solution, although we are reducing and consolidating the number of systems, where we can in.

Question, we have created a central data Lake, which extracts data from each of these systems normalizes and makes it available for consumption across our platform. This allows for us to effectively and efficiently extract then combined data in multiple ways for clients as we've seen with the my eye NCL portal as well as while support.

Areas like risk compliance and accounting.

The use cases, we have launched a validation of this approach and roadmap and we're now seeing real benefits to the organization and to our clients.

Over the last two years I mean, we're working to upgrade and simplify our core technology stack, we have more efficiently rule reformats it on networks to provide.

Better redundancy and latency, we've simplified and consolidated our data centers created virtual offices, and I'll now better actively managing and reducing the enormous amounts of data we are required to keep.

All of this is now starting to yield tangible benefits in terms of better system performance as well as reducing and simplifying our.

And with attendant reduce costs.

During the quarter, we also launched algorithmic trading platforms for Canadian stocks that trade in Geo markets.

Ability to incurred integrate multiple market prices and foreign exchange rates and shows best execution for our institutional clients. We have had good adoption in this product as well as our recently.

Launched algo wheel, which.

What's the once that about six months ago.

So with that I will hand, you over to build on away for a discussion of the financial results Bill.

Thank you, Sean I'll be referring to slide in information, we have made available as part of the webcast.

Typically.

On slide number three which shows our performance over the last five fiscal quarters.

The chart depicts our net income earnings per share and are are we over the last five quarters.

As shown net income in the first quarter of 2020 was 16.3 million, which represents a $10.9 million decrease over the immediately preceding quarter.

Which as Sean noted included the $10 million recovery on the physical coal matter.

And over $1.9 million decline versus the prior year.

Earnings per share were 84 cents per share in the first quarter as compared to $1.40 and 94 cents per share in the immediately preceding and prior year quarters, respectively.

Moving on to slide number four which represents a bridge between operating revenues for the first quarter of last year to the current period.

Operating revenues were $276.8 million in the current period up 12.1 million or five present over the prior year.

Similar to last quarter. This growth was led by our security segment, which added 12.

1 million or 18% in operating revenues versus the prior year.

Within this segment debt capital markets had a strong quarter, adding 14.1 million and operating revenues versus the prior year, primarily driven by increased activity in our domestic fixed income business.

Performance in Argentina, and the acquisition of GMP Securities.

Equity capital markets, when compared to the record prior year quarter saw 1.3 million dollar decline in operating revenues.

Versus the prior year as a result of an 8% decline in volumes as well as a 13% decline in average revenue per $1000 traded.

Operating revenues increased in our commercial hedging segment by.

9.9 million versus the prior year to 69.7 million.

Experience shirted volumes increased 6% primarily in the domestic grain markets, while LTC volumes increased 19% as a result of increased activity in South American grain markets.

Prior year OGC revenues were negatively affected by the mark to market declines.

Sean mentioned earlier.

Interest income in this business declined 1.9 million to 5.8 million driven by lower short term rates as well as a 10% decline in average client equity to 904 million.

Physical commodities increased operating revenues 5.8 million or 41% versus the prior year driven.

By a 4.7 million dollar increase in precious metals operating revenues as well as a $1.1 million increase in physical AG in energy.

The increase in precious metals operating revenues was driven by 13% increase in the number of ounces traded.

In addition, the prior year quarter included a $1.6 million unrealized loss on derivatives.

Positions held against inventories carried at the lot lower of cost or net realizable value. While the current quarter included a 600000 dollar unrealized losses on derivative positions for an incremental increase of $1 million quarter over quarter.

Our global payments segment added 1.7 million and operating revenues versus the prior year to.

A record $31.4 million as the number of payments made increased 17%.

Growth was tempered by a lower average revenue per payment driven by lower number of M&A and capital transaction payments from our international banking clients.

Finally, operating revenues in our clearing and execution services segment declined $19.3 million.

20% as compared to the prior year.

Within this segment exchange traded futures and options operating revenues declined 12, and a half million as volumes decreased by 12% and the average rate per contract declined 15% versus the prior year.

In addition, interest income and the exchange traded futures and options business declined to.

And half million versus the prior year quarter as the result of lower short term rates.

In addition, FX prime brokerage operating revenues declined two and half million versus the prior year as the prior year included $2.7 million settlement received in the Barclays last look matter.

Finally derivative voice brokerage operating revenues.

Declined 4.4 million versus a very strong prior year quarter.

The next slide represents a bridge from the 2019 first quarter pretax income of 24.4 million to pretax income of 21.7 million in the current period.

Commercial hedging segment income increased 8.2 million as a result of an increase in.

Operating revenues as non variable direct expenses were flat with prior year period.

Our physical commodities segment added 1.7 million and segment income versus the prior year as the result of the increase in operating revenues. The prior year comparable period included a $2.4 million recovery on the bad debt on physical coal.

Our security segment added 700000 segment income versus the prior year. This growth in segment income was driven by 7.3 $9 increase in debt capital markets.

Which was covered by a 6 million dollar decline in equity capital markets. As the result of higher interest expenses related to our securities lending activities.

Startup costs associated.

It was several of our initiatives in this business.

Global payments segment income increased 300000 to $18.9 million driven by the operating revenue growth noted earlier, which was partially offset by an increase in fixed compensation and benefits.

See segment income declined 6.6 million versus the prior year as the result.

Although the decline in operating revenues. This was an increase in non variable expenses, most notably fixed compensation and market information as a result of the acquisition of the you will be business.

Finally, the net costs in unallocated overhead increased 7 million versus the prior year of which 800000 was related to increase in.

Well compensation and benefits.

Non variable unallocated costs increased 8.7 million versus the prior year of which 2 million was associated with our recent acquisitions that initiatives.

The remaining increase was driven by increased headcount in several administrative departments as well as higher non trading technology and support costs related to various.

The client engagement accounting and human resource systems.

Slide number six shows that the interest and fee income on our investment of client funds in our exchange traded futures and options businesses.

As well as the client balances held in our correspondent clearing and independent wealth management businesses.

As noted on the slide earnings on these balances.

Slide 4.2 million versus the prior year to 13, and a half million as their yield on these balances declined 48 basis points to 1.72% in the current period.

Due to the effect of the fed actions over the last 12 months.

Moving on to slide number seven our quarterly financial dashboard I would just highlight a couple of items.

Adams of note variable expenses represented 57.5% of our total expenses for the quarter well above our target of keeping more than 50% of our total expenses variable in nature.

Nonvariable expenses, which are made up of both fixed expenses and bad debt expense increased 17.4 million versus the prior year.

Excluding.

Bad debt and the recovery on the bad debt on physical coal Nonvariable expenses increased 15.3 million of which 7.7 million is related to acquisitions as well as nutrition business initiatives.

We reported net income of 16.3 million in the first quarter for a 10.8% return on equity which was below our stated.

Target of 15%.

Our total assets increased 16% versus the prior year, primarily due to increased activity in our domestic fixed income and securities lending activities.

Finally in closing out the review of the quarterly results our average revenue per employee declined 13% versus the prior year to $538000.

On an annualized basis, but this well above the 500000 and our book value per share increased $4 in 25 cents to close out the quarter at $31.89 per share.

With that I'll pass it back.

To Sean to wrap up.

Thanks, Bill I'll.

Our strategy is to become the best in class financial platform connecting clients to global markets across asset classes and operating vertically integrated execution that theory.

We help our diversified base access market liquidity manage risk and maximize profits. This is a unique an increasingly valuable platform, which is.

Generally only available from bulge bracket banks and create sticky client relationships.

Form creates diversified transaction based revenues as we drive traffic across across our global network and also generate stable interest earnings on client balances.

We will execute our strategy by relentless.

Endlessly pursuing the following objectives.

Increase the value of our financial platform by adding new products capabilities and market and liquidity venues for our clients. This can be done either organically or through disciplined acquisition to make us the financial franchise of choice for commercial and institutional clients looking to access.

Pockets with efficient execution, as well as well as post trade carrying settlement and custody services.

Second expand into client segments and geographies, where we are under represented by acquiring suit suitable talent through Recruitments will disciplined acquisition of teens.

This requires efficient.

Ramps to our financial platform that are both cost effective for us as well as compelling from a client engagement perspective.

Three more tightly integrated offerings platform and marketing strategy as well as customer experience in order to make their relationship more meaningful for the customer stickier for the company and more value both.

For both of Us.

Full increasing digitization of our platform by investing in client facing technology through an efficient mix of proprietary in industry standard platforms to better leverage our intellectual capital and driving revenue growth and providing customers easier and more efficient access to our products and services.

Five create a scalable execution and clearing infrastructure with cost per transaction not decreasing in absolute terms.

Next maintained a robust environment to dynamically allocate capital and resources to maximize long term value to shareholders and lastly.

A multi layered risk management program to ensure that we achieved the best risk adjusted return for our business.

We believe that we continue to make good progress on all fronts and are excited about where we stand currently.

With that I would like to turn it back to the operator and see if we have any questions.

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Alright operate it doesn't seem like we have any questions. At this time, so I would like to thank everyone for participating and we.

Ill speak to again in three months. Thank you.

This does conclude today's conference call you may now disconnect.

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