Q1 2021 Stonex Group Inc Earnings Call
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Ladies and gentlemen, thank you for spending by and welcome to the Stone Ex Group, Inc. Q1, FY 'twenty One earnings conference call. At this time, all participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker Bill Dunaway CFO. Thank you. Please go ahead Sir.
Good morning, My name is Bill Dunaway welcome to our earnings conference call for our first quarter ended December 31 2020.
After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2021.
This release is available on our website at Www Dot stone ex dotcom as well as a slide presentation, which we'll refer to on this call in our discussions of our quarterly results.
You'll 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 conclusion.
Before getting underway, we are required to advise you and 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 SEC.
This discussion may contain forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and section 21 E of the Securities Exchange Act of $19 34.
These forward looking statements include known and unknown risks and uncertainties, which are detailed in our filings with the SEC.
Although the company believes that its forward looking statements are based upon reasonable assumptions regarding its business and future market conditions. There can be no assurances that the company's actual results will not differ materially from any 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.
Readers are cautioned that any forward looking statements are not guarantees of future performance.
With that I will now turn the call over to Sean O'connor the company's CEO.
Thanks, Bill good morning, everyone and thanks for joining our fiscal 2021 first quarter earnings call before we start I hope all of you and your families are healthy and safe and I'm sure. All of US are looking forward to a more normal 2021 hopefully.
As you know we changed our segment presentation last year and for the call. Today. We have also changed our earnings presentation deck, which is hopefully helpful to everyone.
I'll start with some comments on the overall market environment and then take you through the presentation.
During the December quarter market volatility in the securities and FX markets abated from the elevated levels in 2020, but still remained higher than pre pandemic levels.
Bumping the onset of the pandemic, we saw volatility and energies and metals rise to historically high levels, although agricultural products didn't see much of a change until recently when they hit multiyear highs in both corn and soybeans.
If you look at how these market conditions affected our quarterly results I'll start with slide four and as you can see the positive market conditions mentioned above. The addition of the getting the retail platform and market share gains led to very strong revenues versus a year ago across all our product groups I think the key takeaway here.
The continued exceptional growth in securities that we have now seen for a number of quarters as a result of increased products and capabilities added over the last couple of years, which are now really starting to gain traction more on that later and of course. The addition of the game revenues.
Looking at the various product groups Mrs.
Mr derivative volumes increased.
And <unk>.
Modest improvements in revenue capture drove operating revenues up a healthy 32 per cent for the quarter OTC derivatives and revenues are up 7% securities volumes.
Very strong 74 per cent, while our revenue capture declined slightly resulting in a 40% increase in operating revenues.
Oh, FX and see Cfd revenues were up significantly due to the addition of the gain retail trading platforms.
Global payments growth modest increase in both volumes and revenue capture with the segment revenue I'm, sorry, the product revenue up 10% for the quarter.
Physical trading was a great.
Strong largely as precious metals, which continues to have very positive market conditions.
Our client float both on the derivative side and the security side grew very strongly up 52 per cent and 35% respectively.
Both the higher flight volumes as well as market share gains and non in aggregate stands at $4 $75 billion.
Unfortunately, the strong growth in balances was more than offset by a decline in interest rates due to the combination as a reaction to the pandemic our inter.
Interest and fee revenue on client balances were down, 71%, which has a direct impact on our bottom line results.
Turning to slide five which summarizes our Q1 earnings.
We reported net operating revenues of $380 million up 37% for the quarter aggregate cost swap 54 per cent for the quarter primarily related to the addition of gain that resulted in net earnings of $19 5 million up 20% and diluted EPS of <unk> 98.
Up 17%.
ROE was down was 10% down slightly from a year ago, largely due to a much larger capital base and a few of the items I will now walk you through.
Once again, we had some meaningful noise in our earnings primarily related to the gain acquisition.
Firstly.
<unk> primary operating entity in London is our Sterling denominated entity, while our London entity is dollar denominated.
Non closing the transaction and in order to protect the capital that we had just acquired by issuing dollar denominated debt, we elected to hedge the gain capital back to dollars, especially in the lights of the Brexit uncertainty. This.
This is what we would advise our customers to do it.
The net result of this as we incurred a hedge loss of $6 $5 million through the income statement, but we had a corresponding credit to shareholder capital of $8 $8 million.
The resulting this resulted in the accounting noise for the quarter, but we achieved our objective of protecting our capital.
The quarters results also include $2 6 million of intangible amortization relating to the valuation of the gain business on acquisition.
Additionally, we had a hedge impact on derivatives held against physical commodities, where we have to recognize the hedge losses, but have to carry the inventories at the lower of cost per market. This does happen frequently in our physical business and there's a timing issue and when the underlying inventory is sold at the higher price.
Operating gain will be recorded.
This amount was $3 $5 million four per quarter.
The impact of these three items was a reduction in EPS of approximately 45 cents per share.
Excluding these items our ROE would have been just the low 15% of stated book and a couple of percentage points higher on tangible book.
As I mentioned earlier when considering the quarters results. It is of note that the interest in fee income on client balances declined $12.7 million versus the prior year and most of that flows to the bottom line.
Game acquisition was modestly profitable for the quarter and on the Q1 target we set last year, but it did not cover the additional interest expense incurred on the high yield notes used to finance the acquisition.
The interest of which was $8 $1 million for the quarter.
We view the gain business along with other recent acquisitions as part of our long term expansion efforts and also recognize that individual businesses can be volatile quarter to quarter. As we continued to integrate gain in other acquisitions it'll become increasingly difficult to ascertain net earning contribution due to the centralized nature of our support.
Actions and segment income should be the relevant metric by which we measure our progress.
The overall quarterly results here shows the strength and resiliency of our legacy business in the face of significant headwinds on interest rates as we move through the business cycle, we expect gains to become accretive.
Including the interest expense incurred after an explosive 2020, and we continue to have significant upside on interest rates on our float.
Turning to slide six.
Which shows our quarterly performance trends.
As you can see from the graph, our quarterly EPS and ROE can be somewhat volatile due to mark to the market environment.
Suddenly we're taught to flatten out this volatility by having an increasingly diverse client base as well as the.
Diverse products that capability set however.
However, we are focused on building a franchise for the long term and I think a better way to evaluate our performances over a longer time series such as the trail trailing 12 months trailing.
Trailing 12 month Roe.
Which encompasses the last eight quarters results have steadily climbed from 14% just below our long term target to 24 per cent for the current trailing 12 months. Obviously the more recent numbers are above our targets and due to the abnormal volatility around COVID-19 for our legacy businesses as well as per gate.
The accounting treatment for the closing of gain last quarter, which resulted in a large group bargain purchase on the acquisition was driven by gains exceptional 2020 results and led to a spike in our Q4 results and again because of this the trailing 12 months representation is probably a better way to book at this metric.
It's worth noting that eight quarters ago, our shareholders' equity was $526 million and so has grown over 50% over this time series, making the Ara, we target more challenging in absolute terms.
I would anticipate that all things being equal we would see the trailing 12 month average Roe.
Trend low it towards that 15% target.
<unk> the ROE just mentioned for the current quarter, excluding the hedge accounting impact was just below 15%. Although this was largely achieved by our legacy businesses and without a contribution from gain or benefit of interest rates.
However, the potential we see with gained over the long term as well as the normalization of interest rates, we could start to see us exceeding our 15% target as we mentioned when we presented the gain transaction just prior to the pandemic a year ago.
Our trailing 12 months EPS is currently at $8.75, which obviously includes the exceptional 2020 results. Our current Q1 EPS adjusted for the hedge accounting and intangibles amortization would indicate an annual EPS run rate of around $5 and 80.
Turning to the next slide.
Which is our segment summary, just to touch on a couple of highlights before bill gets into more details I was really pleased to see that all of our client segments are up in terms of segment operating revenue as well as segment income a strong performance across the board instead.
Institutional segments had another standout quarter with a 77% increase in segment income for the quarter.
As we saw earlier this was largely driven by securities product offerings.
The highest increase was in retail due to the addition of the game business for the full quarter.
Although segment income was flat sequentially.
As I mentioned earlier the key take away. He is the growth non institutional business driven largely by securities product offering. This is now our largest segment in terms of revenue and segment income.
Global payments has seen the trajectory flatten a bit over the last year and the pandemic. So many of our partner banks in emerging markets close temporarily and M&A activity and large corporate investment slate.
We are starting to see an acceleration again in all off payment metrics and indeed Q1 was a record in almost every metric book this business rate per million average daily volume and revenue in segment income.
With that I'll hand, you over to Bill Dunaway for a more detailed discussion of the segment results Bill.
Thank you Sean.
I'll be starting with slide number eight which shows our consolidated income statement for the first quarter of fiscal 2021.
Sean covered many of the consolidated highlights for the quarter. So I will just highlight a few and then move on to our segment discussion.
<unk> expense, which is primarily related to our fixed income securities lending and physical commodity activities declined $21 2 million versus the prior year, primarily as a result of the decline in short term interest rates, which was partially offset by increased borrowings in our physical business.
Interest expense on corporate funding increased $7 8 million versus the prior year, primarily as a result of the senior secured note issuance in the third quarter of fiscal 2020 related to the gain acquisition.
Variable compensation increased $29 $7 million versus the prior year with $26 5 million of the increase being front office variable incentive compensation related to the growth in operating revenues.
Fixed compensation increased $19 9 million versus the prior year with $14 million a day increase being related to acquisitions completed subsequent to the end of the prior year quarter with the remainder related to strategic initiatives, including a build out of our product offering and geographic footprint as well as growth in support areas to support these initiatives.
Other fixed income expenses increased $29 2 million versus the prior year with $29 1 million of increase being related to acquisitions completed subsequent to the end of the prior year period.
Bad debt expense increased $1 $5 million versus the prior year with $1 million of this related to the retail FX Cfd business.
Finally, we closed out the quarter with net asset value per share at $40.78.
Which represents a 28% increase versus the prior year.
Moving on to slide number nine I will provide some more information on our operating segments. The commercial segment added $12 4 million in operating revenues versus the prior year within this segment listed derivative operating revenues increased $11 1 million.
The derivative volumes increased 11% primarily from customers in domestic grain markets.
<unk> revenues increased $1 4 million, primarily as a result of a 4% increase in the average rate per contract is OTC volumes were relatively flat.
Operating revenue from physical transactions increased $3 1 million, primarily as a result of strong customer demand for precious metals.
The increase in physical transaction revenues net of unrealized losses on derivative positions held against physical inventories carried at the lower of cost or net realizable value of $2 9 million in the current quarter and 900000 in the prior year period.
In addition, we recorded a $1 $9 million loss on the liquidation of certain energy inventories, which we are pursuing legal action to recover from a supplier from which there is no. There is substantial uncertainty of collection.
This brings the end of the liquidation of these inventories which began in the fourth quarter of fiscal 2020.
Finally interest earned on client balances declined 57 per cent or $3 3 million as a result of the significant decline in short term interest rates, which was partially offset by a 40% increase in average client equity.
The increase in operating revenues was partially offset by a $900000 increase in fixed compensation and an increase in bad debt of 500000 as compared to the prior year period.
Segment income increased 12% to $32 1 million in the current period.
Moving on to slide number 10, our institutional segment added $33 1 million in operating revenues versus the prior year, primarily driven by a $33 $7 million increase in securities revenues as the result of a 74% increase in the average daily volume of securities transactions, driven by our expanded product offering and continued market volatility.
<unk>.
In addition, operating revenues from listed derivatives increased $11 7 million as a result of a 39% increase in listed derivative volumes, primarily as a result of the gain acquisition and continued market volatility.
These increases were partially offset by a $9 $2 million decline in interest and fee income on client balances and a $5 1 million decline in securities lending revenues in this segment both of which were a result of the sharp decline in short term rates.
Interest expense related to securities lending activities declined $5 4 million versus the prior year.
Segment income increased 77% to $44 8 million in the current period.
Moving to the next slide operating revenues in our retail segment added $65 million versus the prior year, which was primarily driven by $54 8 million in FX and Cfd revenues from the gain acquisition.
In addition, the gain business added $2 7 million of fee revenue for the quarter, our retail precious metals business added 600000 in operating revenues, which is net of a $1 million negative variance from the lower of cost per market adjust.
Adjustment versus the prior year.
The increase in variable compensation and benefits and non variable direct expenses were driven by the acquisition of game.
Segment income increased 517% to $17 9 million in the current period.
Closing out the segment discussion on the next slide operating revenues and global payments added $3 million versus the prior year driven by increases in the average daily volume and the rate per million earned as compared to the prior year.
As we continue to grow our client base and there was a modest easing of the dampening effect of the pandemic on payment volumes.
Non variable expenses increased 800000 and is primarily related to the acquisition of Xerox segue.
Segment income increased 8% to $24 million in the current period.
Moving on to slide number seven.
Slide number 13, which represents a bridge between operating revenue for the first quarter of last year to the current period across our operating segments.
Overall operating revenues were $380 1 million in the current period up $103 3 million or 37% over the prior year.
I've covered the changes in operating revenues for our segments. However, the decline in revenue.
Overhead is primarily related to the capital hedge loss, Sean noted earlier.
The next slide number 14 represents a bridge from 2021st quarter pre tax income of $21 7 million to pre tax income of $26 9 million in the current period.
The negative variance in unallocated overhead of $34 2 million includes the operating revenue variance notice on the previous slide as well as a $2 $6 million increase in variable compensation, including $2 $4 million related to the game.
In addition to include the $7 million increase in fixed compensation, including $3 4 million.
Weighted to gain and finally, a $10 $8 million increase in other expenses, including $7 $6 million related to game.
With that I'd like to put put it turn it back to Sean for a strategy discussion.
Thanks, Bill hopefully you should have all received a 2020 annual reports by now in addition to re segmenting our business. We have tried to more clearly articulate our strategy and vision for building <unk> into a best in class financial franchise.
You will have also noticed for the first time, we and Cuda reported our ESG policies and initiatives our approach to ESG has always been more akin to a philosophy than a policy. We believe in playing by the rules. We think all of them are stakeholders, Fannie creating opportunities for all our employees and rewarding them on merits and always.
Doing the right thing over the easy thing even when no one is watching we.
We have now decided to codify this philosophy and approach into a clear policy framework and we'll continue to work hard to continuously improve upon this.
Turning to slide 15.
Which summarizes the high level strategic objectives that management is focused on and that will allow us to capture the opportunity we see before us.
Dealing with each of these.
Objectives in ton, especially if we want to stay relevant to our clients, both existing and new clients by adding products and services and creating the best ecosystem to connected to the global financial markets. We believe that we already have a platform that is unique outside of the bulge bracket banks, but we need to keep making sure. We stay ahead of our client needs.
Yes.
Second we are a customer centric business and we need to consistently work at growing our customer footprint into new markets and expanding market share, where we have existing customers and looking to serve new customer segments and channels gain provided us with access into the retail self directed trading market, which is significant and growth.
We have all the capabilities to service customers of all types and have a large addressable market in front of us with currently very low market penetration.
We will not achieve the necessary growth and scale unless we better in pumps technology to digitize our offer at this will not only enhance customer engagement, but increased scalability and eventually increase margins. This requires a rethink of our process is front to back which has been underway for some years now but has accelerated with the acquisition of <unk>.
Yeah.
Our business is supported by capital and we need to underpin our growth with internally generated capital resources and when appropriate to access the capital markets in a disciplined manner.
Moving onto slide 16.
Each of our products and segments has a very large number of projects in flight to address each of these strategic objectives.
In fact, one of our biggest challenges now is prioritizing the allocation of resources to the large number of projects. We have in front of US here on this slide that just some of the projects that are being worked on currently.
I will now touch on every point here, but we have a lot of exciting expansion opportunities underway. The new payments platform that we acquired with <unk> that we are rolling out in Europe, and the U S for small and medium sized enterprises electronic trading on the equity side, which is gathering momentum and we have.
Initiated a.
Cash equities.
For the game platform and all three of these initiatives could be very meaningful less meaningful to us in the medium term.
Moving on to slide 17, which lays out our key high level metric to manage to again, we think the best way to look at this is on a trailing 12 month basis.
We continue to have a very flexible cost structure, which helps protect our bottom line when we have revenue volatility.
However, it should be noted that as we continue and even accelerate the digitization of our offerings will end up with less broker payouts and more fixed costs related to the net technology spend and as a result of less flexible cost structure, although a more scalable platform with enhance margins.
Our compensation ratio was slightly higher than we would liked in RMB.
A little lower than we'd like although as mentioned after adjusting for the hedge impact on physical inventories and the additional amortization, we're pretty close to our targets and of course the assortment.
Much higher capital base than a year ago.
Moving on to slide 18.
This shows our customer growth over the last three years as mentioned earlier, our highest priority.
Assisting customers to grow our footprint.
This is what drives every aspect of our business. This slide is intended to provide some context of the data points around our progress in this regard it should be noted that not every customer client is equal in terms of revenue potential for example, a single bank customer in global payments is with perhaps thousands of REIT.
While customers in terms of revenue. This slide also does not show the benefit of gaining wallet share from existing customers, which has been a strong driver of revenue for us, particularly in global payments as we have worked to get more business from our existing bank partners.
But the important thing is that we are attracting customers and growing up for footprint, that's not any drives our revenue, but as validation of our approach strategy and the platform we have built.
The growth shown in this slide is the aggregate representation of our organic efforts as well as acquisitions you can clearly see the addition of the game clients on the retail side.
Our recent Palomar acquisition on the institutional side and the <unk> acquisition on the payment side.
Over the last three years, you can see the strong growth in every customer category with institutional clients up over full fold retail up nearly three times and commercial and global clients more than doubling.
Okay.
Moving on to slide 19.
Dealing with gain integration and synergies.
Starting with regulatory approvals. This has really been the key focus is foundational for us achieving all the other integration and synergy aspects. This will also easily this will allow us to more easily offer all of our products and capabilities seamlessly to the game clients as well as day to combine an internalized straight flow.
We have now received nearly all the major regulatory approvals we need.
We are in process of moving all adding clients into our U K entity, which should be completed by in February with the windup of the gain entity and the subsequent capital release thereafter.
Poor regulatory approvals are in hand, and the process has started to move clients into the study makes entity that should be completed by in March with a capital release soon after the gain you a swap dealer clients have been moved into the <unk> swap dealer and the entity has to be wound up and capital released in the next 60 days so over.
They're all very good progress on that front.
Integration of the support functions.
All of the support areas have been integrated into single units, serving the entire organization accounting risk compliance core it infrastructure internal audit HR and legal.
Planned rationalization of the overhauls stopping in each area has inevitably havent been slightly by Covid and potentially offset by investments to support the strong growth in the legacy <unk> entities.
We are very pleased to see that in many instances. This process has resulted in the general upgrading of our aggregate capabilities in a number of our core functional areas I'll now led by game folks.
Looking at the integration of the products capabilities and trading flow.
Initially made any projections for revenue synergies as we believe this is hard to track hot to achieve opt to measure in a portion between the business units, but this is really the exciting part of the gain transaction.
So.
Some of some notable items here the vast majority of all the gain futures clients have now been moved over to <unk> with very little attrition and are now fully inside our ecosystem and being cleared by us.
Future starts have been rationalized where needed compensation arrangements have been harmonized with phase reduction in payoffs to the flow next level.
We have seen some tangible evidence of cross selling about OTC and physical grain capability. This should lead to some modest additional revenues in coming quarters.
We have integrated our commercial and institutional precious metals pricing into the games platform, which has yielded many benefits and we believe is a good proxy for what we may see elsewhere as we continue this process.
As a result of this game clients have received tighter pricing and better liquidity in precious metals, which in turn drove adoption by getting clients. We internalized margin, we consolidated our market Counterparties, which has improved hedging costs. We estimate at this early stage. This could be a single low digit millions win for us and drive client adoption.
On the <unk> platform as well.
We have combined the starting next ethic FX flows with hundreds of gain this will require some rerouting about trading flows but should result in immediate benefits and in the single digit million range annually.
We have started the project team just to build out our cash equities offering for the city index platform, which will then pivot and do the same thing for the U S. Forex Dot com trading platform. This has required an additional investment, but we believe in the long term benefits of the retail offering significantly.
Dealing with the cost synergy updates we have achieved annualized savings of around 17 million, so far of which the gain cost savings initiatives initiated in early 2020 accounts for $11 million.
We have approximately $5 million of cost rationalization in flight some of which should start to hit in Q2, some of which might take long ago, such as rationalization of spaces leases runoff consolidation of data centers.
Consolidation of vendor contracts and the like.
As mentioned above we have revenue synergies, which we believe at this early stage could be close to $10 million per annum. Once we are fully implemented but may require some additional investment to achieve.
So we feel pretty good about the progress and what has been achieved so far clearly COVID-19 and work from home has probably delayed some of our original plans as does the reduction in the interest rate on the gain floats, but on the other hand, we have early tangible validation of the revenue opportunities. We believe we can leverage between <unk> and <unk>.
So with that moving to the final slide number 20, we believe we had a very solid quarter.
Strong results from the legacy <unk> businesses.
Spice the impact of zero interest rates.
Very strong growth in client activity as demonstrated with the volume metrics, we put up and client on boarding we've continued to expand our products and capabilities, which has driven client adoption.
We are leveraging our capabilities into the gate trading platform as I've just mentioned.
We have seen a acceleration of the digitization of our businesses.
On the <unk> side and have a large number of new platforms trading platforms now in flight.
We believe we make good progress on the integration and obviously.
Continue to be in a largely work from home environment and believe we have so far successfully navigated the epidemic.
And lastly, just to thank all of our staff customers and investors for continued efforts and support with without which none of none of this could happen. So much. Thanks from the executive team so with that I would.
We'd like to open for questions operator.
Operator.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Dan Fannon with Jefferies.
Thanks, Good morning.
The new slide deck very helpful.
So a couple of questions I was hoping Sean you could expand upon your comments about what's going on in the global payments and some of the recovery you're seeing in terms of activity and Reengagement. If you could expand upon that that would be helpful.
Sure.
So I would say a lot of it was related to the pandemic.
The flattening out do we saw.
Last year and in two ways, our core underlying payments volumes generally continued but on the margin where we saw changes was the larger payments that we get from banks.
And then the corporate finance related to capital investments and M&A activity really stopped dead in its tracks I mean, I think as the pandemic hit.
People sort of delayed plans, when making capital investments and certainly good.
Making.
Acquisition, so although those payments are relatively few in nature, they tend to be much larger and obviously the dollars we make from those payments can be significant so that we definitely noticed a.
Dramatic slowdown and I think we called that out in our prior quarters that now seems to be kind of getting back on track. So that certainly has a good impact for us.
The other thing we did noticed in some of our smaller.
Payment card doors and some of the banks really was struggling to provide service to us and that meant that some of our customers couldn't execute some of the payments. They wanted because COVID-19 right the banks closed down.
We have to go to a second or third level providers, sometimes not getting exactly the pricing we want and so on so that also seems to have worked its way out of the system. So I would say there was a bit country to other businesses, where we saw increased volatility in the pandemic.
Increased performance I think the payment cycles on the other side of that.
I think the thing be most excited about.
Going forward with payments is.
That's now starting to really leverage the <unk> acquisition and.
Providing a digital platform for small and medium sized corporate clients to make payments and hedge currency with us and that was really the logic behind the <unk> acquisition. They had done that successfully in Germany. There were small startup came to the complete.
They needed to be part of a bigger.
Institution, and one that had no payment rails too.
Large number of markets and obviously, we fit that bill. So we acquired them that deal took a long time to close was kind of caught up with Brexit.
But that is now rolling and we are now starting to really push outs.
That part of the business this will be a slow both I mean, it's a totally new segment for us, but this could be very very significant for us and along those lines and probably something I should have mentioned, we did make a very small acquisition of effectively a dormant company in the U S called uncle FX.
<unk> is now closed and what that has given us has given us the payments licenses, we need in pretty much every state in the U S. So we are now primed and ready to start rolling that back full mouth, we didn't really need those payment licenses when you're dealing with banks.
But now we do so all the pieces on place for us to open up.
A new segment for our payments business, it's not going to hit immediately this is going to be a medium term build but I'm pretty excited about that so hopefully that answer your question Dan.
Yeah. That's helpful. And then just kind of going to the retail side and some of the things that you have going on and frankly, what's happened in the market, obviously, a lot of retail participation broadly.
You mentioned the precious metals are components.
Silver has been in the headlines a lot here more recently so maybe.
Talk about how that benefits your business and how you were able to capture some of that and then I assume the cash equities build out with city index and then ultimately the U S. It's just a function of kind of again trying to get some of that retail participation. We're seeing elsewhere in the market.
So many stocked with the last part first so on the equity offering I think that someone we something we identified as strategically important when we start to sort of due diligence process with gain and I think Glenn has always wanted to do that.
So it is a priority I think the benefit for us, particularly in the U S, where it's slightly more complicated.
Because the regulatory environment right to you.
In the UK that can do this through cft's and clients can trade equities, but here in the U S to be in the cash equity business, it's a different.
A separate regulatory regime.
That requires real investment and I think as we've seen with sort of robinhood and some of these other trading platforms with commissions going to zero. The only way you can compete in equity trading as if you're a carrier I mean, Robin Hood became a theater. It for that reason because that allows you to monetize stock stock lending.
Can capture the flow you can is.
In their case, they sell that flow, obviously to citadel and others for payment for order flow. So you know unless you have that co infrastructure, it's really hard to make any money out of offering equities on new retail trading platform. So clearly with tiara, we have all of those capabilities.
Obviously, it's a bit of a technology build.
So that is a strategic priority. We are now moving on again, we started with city index. We thought that was probably the better place to stop we will then roll over and do the same in the U S with the Forex Dot com platform. So that's clearly a very big strategic initiative for us.
Think we've all seen what's happened I mean, obviously, the headlines around robinhood and Sean but I think self directed trading is here to stay I think it's a massive change to how the market operates and I think is in a lot of ways validation of what we've done with <unk> I mean, we are.
Right in the middle of that if we can build the platforms off the way we want and in fact in many ways. We have the opportunity to have even better platforms in some of these other trading.
Entities, because we can do futures and derivatives. So we can do assets and we can do equities and we could even do fixed income we have all of those products and our desire is to allow all of those products to be traded both by retail clients on retail platforms, but also by institutional clients. So that's very much the way we go in and you know it is kind of interesting.
C with the headlines how I guess the market is moving that way as well so.
I think we are well placed to take advantage I don't know if I answered all aspects of your question then if I didn't please tell me.
Just wondering.
The precious metals component.
Okay in terms of.
Silver and some of the headlines we've seen more recently and how that.
Flow through to your book.
Yeah. So.
In fact the.
Well just backing up a little bit we acquired a small retail platform.
About a year and a half ago called point invest it was a very small outfit funded by an individual.
He basically couldnt supports it any further and a little bit like the <unk> conversation.
It needed some real support they had to hold inventories in gold and that requires money in and access to two months and someone which are struggling but so we acquired that business.
Obviously, our view was it was sort of very tentative and very cheap I mean, it was single digits of millions of dollars. The acquisition price sort of attempted to step into sort of the retail side of the precious metals business.
As luck would have it dependent I think hit and we sort of.
Received back in earnings in one quarter around investments in that business. So obviously, we sort of got lucky that and then gain happened. Then obviously you know we now have sort of two retail platforms and I think we will if we can combine those capabilities and that's in flight right now.
Can offer physical gold to all of the gain customers and they have a much bigger customer base in our platform has so I think that'll be a fantastic add and it will be a differentiator from <unk> and some of the other places I think we can also sell it to people.
You buy both from US you can store it with us and we can give you good collateral on that so you're trading accounts I don't think anyone else does with that so I think now there's some really exciting things with glenn's working on.
Again, this will take time to flow through so we think that is a very exciting prospect in terms of what's happened with silver Wheaton the physical business there.
We have regular suppliers coming to us for Boulder been somebody to use medicine and others.
As you can see on our website with summer variety of coins.
When silver sort of hit the headlines over that weekend, we literally sold out.
Every piece of silver we had an inventory that doesn't cause any risk for us because once we sold out can you just have no moving with cheap to buy.
What it does allow us to do is when we see strong demand like that we can obviously charge higher premiums for the inventory we have particularly when we start to see the inventory deplete quickly, we kind of market up a little bit so that environment is good for us I mean, we don't like running out of inventory on the platform, but that's kind of the worst that happens in that environment.
Restocked and hopefully we continue to see good demand, we are looking to roll that platform out in the U S as well and make sure we have sort of a pik ship deliver capability in the U S. Because of the momentum clunky with customs so it got it.
We just think it's a great business and the more we can integrate these retail platforms together and sort of monetize the client bases that gain and us have and sell all of our products to all of our clients I think the more money we can make.
Does that answer that question Dan.
Yes, yes very helpful.
And then maybe bill.
Previously you would.
I had a chart in there to talk about kind of interest rate sensitivity and obviously balances continued to rise in rates remained low. So is there a way to kind of think about the under earning that's happening today based on the current rate backdrop versus I don't know what time period do you want to use it.
Based on where balances sit now.
Yes.
If you look at like we noted before I mean, you've got about $12 7 million decline versus the similar period.
A year ago right now.
We probably retain roughly 80% of that.
Kind of interest revenue.
Falls to the bottom line <unk> 75.
Percentage of that.
So if you look at that or about 150 basis points down from where we were a year ago.
So I think the last time, we put out that slide was the fall of last year, So about 100 basis points.
Roughly $19 $9 million worth of kind of net income effect of roughly $1 share for every 100 basis points, so you're probably talking.
That's fair.
Just shy of.
About 150% of that so about 30.
$35 million, probably shy on an annualized basis.
I would say that the way I think about it and if you go back to.
I guess slide four that we've put out which shows our product revenue.
Our revenue by product.
If you have a look at the sort of decline year on year in the interest.
It's pretty significant and I would say some of the one simple way I thought about it is if you just look at what the EPS impact of that is it's around 50.
So just the decline in the absolute interest revenue has made a 50 cent per share difference so.
I guess, if we had the same interest rate environment as a year ago in the same balances.
We would be closer to.
$2 I guess.
What's more interesting is if you said if.
If we had a year ago as interest rates on today's client balances, which are up 45% higher.
Obviously that 50 cent impact is higher it's not exactly 45% because we.
We don't keep all of that interest and just sort of a complicated math, but it's certainly significantly higher than 50, right. If we had sort of a yield of those interest rates on today's balances.
Right right makes sense.
I guess just last one for me.
You mentioned several times the expanded product offering in the securities business and that being part of the success.
Could you expand upon that in terms of what those specific products. Those are what's actually gaining traction in our you're segmenting that just obviously versus higher overall volume is just generally in the market.
Yeah, well some of this has been sort of in track for a while so let me sort of try and bucket it into maybe three separate section so.
I think people who have been with us for a longer period remember that about two years ago, We made a series of acquisitions and.
We want to do we tend to buy.
Cheap and somewhat distressed businesses, all and Additionally, we started up some activities and and all of that in I think it was two years ago all of that had a pretty big drag on our earnings which is why we called about price. We we had a couple of million dollars on the bottom line because we hired a team.
Who we liked very much.
And they started the prime brokerage business for US obviously, we had all the costs and the revenue for about a year.
We then subsequently.
Acquired an outsource trading business called syllable.
Part of that offering and in addition, we acquired a fixed income business school, GMP, which broadened our fixed income offering into new products. So all of that was a pretty big drag on our bottom line for about a year. The good news is all of those acquisitions have not only.
Broaden their capabilities, but have now started to sort of add materially to the bottom line I mean dealing with the prime brokerage business I mean, they are now expanding.
They have significant balances under management and probably the startup of shows there was really the outsourced trading business, which has gone from zero and it could be at a sort of a $20 million run rate at some point. So that's a pretty significant change in that whole offering and we think we have a good opportunity.
To further gross that up.
On the fixed income side.
The GNP business, we bought which was kind of losing a couple of million dollars a year.
Stabilized that business, we've actually added resources to that business and that business is now.
Nice to be profitable for us. So that's sort of one category of things that I think it has changed over the last two years.
The other category of things is enough fixed income businesses. In addition to GMP. They have started to really diversify the product offering and we've made some critical hires recently some from bulge bracket banks who've joined us because they see us as the up and coming.
Like what were doing and you know our revenues over a three four year period. There are probably up suite. So we are now seeing ourselves positioned in the fixed income market with a very broad product offering all the way from treasuries agencies mortgage backs, we done in high yield convertibles GMP, even had a trader trading specs.
<unk>, which was a small business now that's a good business. So that's the fixed income side has really done very well in terms of expanding there.
Now through a small acquisition, we made in Luxembourg, expanding into Europe by expanding into London. So just a lot of good things sort of happening in terms of product expansion in the fixed income on the equity side.
A little bit different I mean, obviously benefiting from getting more flow from our retail clearing business as our retail fueling business growth modest flow funds into our equity desk and the same thing on prime brokerage, but really the cornerstone of that business up until recently has been our strong positioning as a market maker in fall.
When stocks.
Net position solidified for us we are larger than citadel and virtue in that business. It's a it's a it's a fantastic place and it business for us It gives us a relationship with almost every large for them on the street, who sees us as a critical vendor and counterparty.
So we're nicely positioned there in about two years ago, we started thinking about could we stopped providing electronic offerings to our clients and eventually could we take some of that technology and apply it to basically the domestic markets.
And that started in earnest about.
I would say year ago, those electronic offerings. We have you know pretty narrow use cases that we've defined Canadian Canadian market and elsewhere.
We are really surprised at how that's ramping up and that is now starting to make a meaningful contribution and honestly our equity guys think that that could be a mainstay of business for us in the not too distant future. So.
It's still early days and we now have sort of a proof of concept and we actually have revenue that's pretty meaningful on the margin on the bottom line from those electronic offerings, but the potential and the runway for that could be pretty significant if we get it right. So it's a combination of all three of those things so sorry to ramble on but there's a lot going on in our company a lot of exciting stuff.
And some of it sort of coming together quite nicely.
Yes. Thank you. This is a I appreciate you taking home all my questions.
Yes, okay.
Thank you Ben.
Operating as anyone else.
At this time there are no further questions.
Alright, well.
Thanks, everyone and thanks for attending the call and we will speak to you in three months. Thank you.
Ladies and gentlemen that does concludes today's conference.
Thank you for participating you may now disconnect.
Yeah.
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Yes.
Sure.
Yes.
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Okay.