Q3 2021 Stonex Group Inc Earnings Call
[music].
Yeah.
Thank you for standby and welcome to the stone ex group third quarter fiscal year 'twenty 1 earnings call at the time, all participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
I asked the question during the session you will need to press Star and then 1 of your telephone.
Please be advised the today's conference may be recorded if you require any further assistance. Please press star and then zero.
I would now like to hand, the conference over to your Speaker today, Mr. Bill Dunaway CFO, Sir you may begin.
Good morning.
The Bill Dunaway, My apologies to all of you on the call here for starting a little late the conferencing center was having some kind of technical difficulties. So I appreciate all of you.
Hanging around here, a little bit with US welcome to our earnings conference call for our third quarter ended June 30 of 2021 after.
After the market closed yesterday, we issued a press release reporting our results for our third fiscal quarter of 2021.
This release is available on our website at Www Dot stone ex Dot Com is 1 of the 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 of 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.
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 $19.30 for these.
These forward looking statements involve 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 of the results expressed or implied by the companys 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'll now turn the call over to Sean O'connor the company's CEO.
Thanks, Bill good morning, everyone and thanks for joining for our third quarter earnings call.
In Q3, we once again reported strong results that exceeded our 15% ROE targets. Despite the near.
Zero interest rate deal done off line float.
During the June quarter market conditions remained somewhat positive for us, but perhaps less flow than in prior quarters. As we started to see a normalization of the market as opposed to the COVID-19 disruption of the year ago, Although we did see heightened volatility in commodities, particularly in the agricultural markets.
I think the turn to slide 4 in the earnings deck I'm go through that.
Operating revenues were up a strong 34 per cent for the quarter and 33 per cent for the year to date period operating.
Operating revenue significantly increased in all product areas with the exception of securities which was.
Which were up modestly and physical contracts, which the slide 5% as compared to very strong prior quarter, which benefited from increased demand for precious metals of the at the outset of the.
The pandemic.
Operating revenue growth was driven by strong volumes, which were up across the board with the exception of listed derivatives, where we saw a small decline of 5% as a result of a 10% reduction in our larger institutional segment, which more than offsets in the 18% increase in the commercial segment.
The revenue capture was up a very strong 46% for listed derivatives with increases in both of them.
Both of our commercial segment as well as with our institutional clients, where we have been actively repricing of our off price.
Revenue capture was up 64 per cent for OTC contracts off the back of the increased volatility in the commodity sector was down 42% for securities. Although this was offset by significant volume increases.
Revenue capture was down slightly for global payments, although offset by higher volumes, resulting in a record quarter in operating revenue for the global payments segment.
Our average client float, but its the listed derivatives and securities clearing experienced strong growth of 31 and 26% respectively.
Both of the higher client volumes as well as market share gains and together now stands at $5.6 billion of.
The 30% from a year ago and up 8% from the immediately preceding quarter.
Interest earnings were actually up from a year ago due to the highest line balances and we are now starting to compare with the post COVID-19 the interest rate environment.
On the year to date basis.
He's on the client balances were down 52% as strong growth in balances was more than offset by significantly lower interest rates.
As compared to the immediately preceding quarter overall operating revenues were down 8% consecutively due to a moderation in overall market conditions OTC derivatives revenues with the stand up up 42% with volume and revenue capture for the.
The reasons mentioned earlier, while securities revenues were down 13% due to lower rate when you capture as the result of less volatile markets.
Cfd revenues were down 31% consecutively with volumes down, 13% and revenue captured down 22%.
Global payments revenue was up 4% consecutively and listed the derivative revenue was relatively flat so overall against a record Q2.
A little down but still the struggles of nonetheless.
Turning now to slide 5.
Which has the summary of our earnings we recorded operating revenues of 431 of the half a million dollars of 34% versus the prior year.
Every day of costs about 43 per cent for the quarter, primarily related to the addition of gain as well as increased incentive compensation due to better performance.
Net earnings were $34.2 million down, 7% and diluted EPS of $1.67 down 11% versus a year ago, where we had very positive market conditions.
ROE was 15, 5% above our long term targets. Despite a much larger capital base of the new gear with the.
There were a number of notable items you can see the mentioned there in this quarter the.
The net impact of this was about $4.3 million pre tax of about 15 cents per share.
Looking at our business over the longer term cycle for the trailing 12 months operating revenues of 1.6 billion up 30% net.
Net income was $186.4 million of 56% and our EPS was $9.28 of 52% and our.
ROE was over 23 per cent, although it should be noted. These numbers include of the bargain purchase gain on the acquisition of the game business in Q4 of last year.
Reflecting on our year to date results through the 9 months I'm tremendously pleased that these results outpaced the exceptional results of last year, we were assisted by the market volatility and increased volumes of accompanying the onset of COVID-19.
For the year to day period on net income is $109 million up 18% and earnings per share.
$5.5.38 up 14% versus the very strong comparator period, a year ago.
Turning now to slide 6.
Our quarterly performance trend, we think the best way to evaluate our results for looking at the longer term performance, which shows how our business performed through short to the market cycles.
I'd like to point out that the attached chart includes only non-GAAP numbers, we have not adjusted Q1, EPS, which and I assume it was $1.43 on an adjusted basis and also of the Q4.2020 number includes the purchase accounting of gain which largely refreshed the accumulated 2020 earnings that accrued the slowdown.
Shareholders on the date of the acquisition.
For the trailing 12 months ROE, which encompasses the last 8 quarters of results has risen from 19% to just over 23% for the current trailing 12 months.
This trailing 12 month ROE significantly exceeds our long term target and was achieved during some pretty unusual market conditions, which include the acquisition accounting of gain as well it.
It is likely as we have seen in the most recent quarter net ROE is likely to trade the bit lower as market conditions moderate and normalize.
It's worth noting that 8 quarters ago, our shareholder equity was $570 million and now stands at just over $900 million. So it's grown nearly 60%, making the ROE target much more challenging in absolute dollar terms.
Our trailing 12 month GAAP diluted EPS is currently $9.28, and our current year to date EPS. If you adjust for Q1 would indicate that annual EPS run rate of around $7.75.
Okay.
Turning to slide 7.
Which is our segment summary, just to touch on some highlights for the full bill gets into more detail.
I was pleased to see that once again, despite challenging comparator period aggregates segment's operating revenues of 35 per cent for the quarter and segment income up 20 per cent for the quarter.
The standout here was the commercial segment, which had operating revenue is up 46% and segment income of 62%. Despite the near zero interest rates on our substantial client flipped.
This was driven by both volume and revenue capture gains in the listed and OTC derivatives as well as continued growth of the customer footprint.
We have mentioned a few times that we believe we're the best set of products and capabilities to the soft commercial clients on hedging their risk.
He was the most of the derivatives the spoke of OTC derivative contracts as well as the ability to provide physical commodities and logistics support and even per bed price protection into physical contracts. This is evidenced by the fact of the physical revenues are now of a meaningful 21% of the aggregate commercial segment operating revenues.
Okay.
The institutional segment operating revenues were essentially flat and segment income was down 14% as revenue gains on the list of derivative side were offset by a small decline in securities revenue as a result of the lower revenue capture compared to the very volatile prior quarter as well as lower FX revenues.
Retail was up for both operating revenue and segment income, but largely due to the acquisition of gain.
Which happened in the fourth quarter of last year.
In the immediately preceding quarter, a retail segment recorded segment income of $32 million versus $96 million of the current quarter of significant decrease.
This was due to the gain business, which experienced tougher market conditions with less volatility and trending markets of many of its products, which made spray the internalization of order to achieve.
Average daily volume was down 16% to $8.2 billion versus the immediately prior quarter.
The revenue capture was $90 per million down 21% versus the need of few preceding quarter.
As we discussed when we announced the transaction the day retail business has a fair amount of quarterly volatility, which should even out of the longer term.
This was caused by both market conditions as well as how we hedge and internalize the spreads from the trading flow.
This quarter was much weaker than the immediately prior quarter, but that coda was probably above trend.
We would anticipate revenue capture all things being equal to average around $100 per million over the longer term, which is of that exactly where we offer the year to date.
I think the key takeaway here is the diversity and resilience, we have within the business and even within all segments. The struggle of results from the commercial segment offset the weakness within the retail segment, allowing us the slope.
Report a solid overall result in excess of our target and of course in the need of few prior quarter. We saw a very strong result from the retail segment, which has offset some weakness elsewhere.
So with that I'll now hand, you over to Bill Dunaway for a more detailed discussion bill over to you.
Thank you Sean I'll be starting on slide number 8 which shows our consolidated income statement for the third quarter of fiscal 2021.
Sean covered many of the consolidated the highlights for the quarter. So I'll just highlight a few of them then move on to our segment discussion.
Action based clearing expenses were up 21% to $67.1 million in the current period, primarily related to the increase unlisted derivative operating revenues as well as the incremental cost of the gain business acquired.
Introducing broker commissions were up 74% to $41.8 million in the current period, primarily as a result of the incremental cost of gain as well as the increased activity and independent wealth management analyst of derivatives.
Interest expense increased $3 million versus the prior year, primarily due to higher average borrowings on short term financing facilities are subsidiaries and an increase in securities lending activities.
Interest expense on corporate funding increased $6.2 million versus the prior year, primarily as a result of the senior secured note issuance late in the third quarter of fiscal 2020 related to the of gain acquisition, partially offset by lower average borrowings on our senior secured credit facility.
Variable compensation increased $23.9 million versus the prior year and represented 34% of net operating revenues comparable to the 34 per cent of net operating revenues in the prior year period.
The increase in variable compensation was related to growth in operating revenues.
Fixed compensation increased $20.9 million versus the prior year with the growth primarily related to the gain acquisition as well as $3.2 million of severance costs as noted on slide number 5.
The prior year period included 700000 severance costs and other fixed expenses increased $32.4 million versus the prior year, primarily driven by the acquisition of gain including $2.6 million of incremental amortization of intangibles acquired.
In addition, other fixed expenses increased versus the prior year as a result of an increase in non trading technology costs professional fees travel and business development and depreciation of internally developed software.
Bad debt expenses declined 500000 versus the prior year period.
As noted by Sean on Slide number 5 third quarter results include a $3.6 million gain on acquisition and other gains.
$3.3 million of the gain related to an adjustment to the final tax liabilities assumed in the gain acquisition with the remaining 300000 other gain primarily related to the disposal of certain fixed assets.
Net income for the third quarter of fiscal 2021 was $34.2 million and represented a 7% decline over the prior year and the 38% decrease over the immediately preceding quarter for.
Finally, we closed out the quarter with the net asset value per share of $45.39 per share that's the component.
Per to $35.66 a share a year ago.
Moving on to slide number 9 upfront for more information on our operating segments.
The commercial segment added $47.9 million in operating revenues versus the prior year within the segment lifted derivative operating revenues increased $24 million versus the prior year as a result of of 35% increase in the average rate per contract and an 18% increase in contract volumes driven by increased volatility in agricultural and base metal.
Markets.
In addition, as Sean noted earlier, we had a strong quarter in OTC derivatives with $49.7 million.
Operating revenues this was up $28.4 million versus the prior year period and was also driven by increased volatility and agricultural markets.
Operating revenues for physical transactions declined $3.8 million, primarily as compared to the prior year period as a result of $10.6 million decline in precious metals revenues.
Partially offset by a $6.8 million increase in physical AG and energy commodity revenues.
Operating revenues in physical contracts for the current period included $2.1 million of unrealized loss on derivative positions held against physical inventories carried at the lower of cost of market. While the prior year period included the 2 and a half million dollar of unrealized loss of a similar nature.
Finally interest earned on client balances increased $2.3 million versus the prior year, principally due to the 59% increase in average client equity.
Total non variable expenses increased $4.5 million versus the prior year, primarily as a result of the increase in bad debt expenses and professional fees.
Segment income was $60.4 million for the period, an increase over the prior year period and preceding quarter of 62, 9% respectively.
Moving on to slide number 10.
The <unk> segment added $3.2 million in operating revenues versus the prior year, primarily driven by a $5.8 million increase in listed derivative revenues as of 20% and 28% increase in the rate per contract more than offset of 10% decline in volumes.
This growth was partially offset by a $4.9 million decrease in the securities revenues as a result of of 42% decline in the securities rate per million, which more than offset of 64% increase in the average daily volume of security transactions.
The growth in the average daily volume was primarily driven by increased volumes and fixed income markets and the decline in rate per million was primarily or primarily a result of the prior year quarter benefiting for wider spreads related to the onset of the Covid pandemic.
Interest and fee income on client balances modestly increased to 100000 versus the prior year due to the 15% increase in the average client balances versus the prior year.
Segment income declined 14% for $46.5 million of the current period and declined $5.5 million versus the immediately preceding quarter.
Yeah.
Moving to the next line operating revenues in our retail segment added $55.6 million versus the prior year, which was primarily driven by $48.1 million in FX and Cfd revenues from the gain acquisition.
Our retail physical precious metals business added $1.7 million in operating revenues versus the prior year.
The increase in variable compensation of benefits and non variable direct expenses was driven by the acquisition of gain.
Net income increased $2.2 million versus the prior year, while declining $26 million versus the preceding quarter with the decline primarily related to the decrease in FX and Cfd average daily volume and rate per million, Sean noted earlier.
Closing out the segment discussion on the next slide operating revenues and global payments added $7.6 million versus the prior year driven by a 38% increase in the average daily volume. Despite an 8% decrease in the rate per million earned as compared to the prior year. This growth was driven by increased activity for our NGL clients as well as continued growth.
Both of our client base.
Non variable expenses increased $1.2 million and is primarily related to the acquisition of <unk>.
Segment income increased 28% to $20.3 million in the current period.
Moving on to slide number 13, which represents the bridge between operating revenues for the third quarter of last year and the current period across our operating segments overall operating revenues for $431.5 million.
In the current period up $108.9 million of 35% over the prior year.
I've covered the changes in operating revenues for our segments. However, the $5.4 million decline in revenue in unallocated overhead is primarily related to negative variance in foreign currency gains and losses.
The next slide number 14 represents a bridge from 2023rd quarter pre tax income of 49 million to pre tax income of $46 million of the current period.
The negative variance in unallocated overhead of $25.5 million as a result of the operating revenue variance noted on the previous slide because the relevant increase in unallocated expenses.
Primarily related to the acquisition of gain the severance expense noted earlier as well as an increase in occupancy and equipment rental related additional leased office space net.
I'll move on to slide number 15, which covers the interest rate sensitivity on our average invested client balances as you can see the balances of continuing to increase versus the prior year. However, the yield on the funds are and continue to be muted. Following the onset of the Covid pandemic last year with the average rate of about <unk>.
19 basis points for the current quarter as.
At the bottom with the increase in the client balances we've seen our sensitivity both on a potential rate increase or decrease.
The 100 basis point annual rate change, resulting in a $1.20 for an additional incremental effect on post tax EPS.
With that I would like to turn it back to Sean for a strategy of discussions.
Okay.
Thanks Bill.
Now to slide 16, which summarizes the high level strategic objectives of management is focused on as the.
Well as the T projects, we have in the flight to address each of these objectives.
Of these projects are ongoing but some quick updates and highlights first.
The first is the first column there building out ecosystem, we want to stay relevant to our clients both existing of new clients by adding products services and capabilities and creating the best ecosystem to connect them to the global financial markets. The.
The 2 areas, we focused focusing more attention on both driven by increased client interest.
First crypto currency remains a hot topic in the growing market, we actively support our institutional and retail clients, but for some of things for summit tasting trading in the growing number of most of the derivatives as well as publicly listed entities such as the foreign exchanges and other market participants. This is a growing revenue source for us and we want the remainder.
Relevant to our clients by ensuring we provide access to the spring ecosystem as well as market intelligence around the space that said it is unlikely we will enter into the physical crypto wallet space anytime soon the.
Second area. We are spending time on is carbon trading which is another growing market propelled by the global ESG initiative.
And our oldest of provide clients with access to all carbon credit instruments. In addition, we of our role in educating our clients on how best to participate in the marketplace. Many of our agricultural clients of potential sources of carbon credits, which can be monetized for them.
In Brazil, we are now in all of the rice participants of the local carbon certification process, which allows these credits to be traded just recently, we appointed by 1 of the largest ESG funds in Brazil with nearly $2 billion in assets under management to help them manage this process.
Just last week, we closed on the small acquisition for the retail platform called chasing returns. This was the digital education product, we deployed on the trading platform to assist our clients to become more effective and profitable traders and empirically. This is head of real impact on the results of those you've used it while this is not a material.
They shouldn't it underscores our commitment to providing education and value added services to all of our clients.
Moving onto the next column.
We are a customer centric business and we need to consistently work of growing our customer footprint into new markets and expanding market share, where we have existing customers and looking to sort of new customer segments of channels.
Of all the capabilities of service customers of all types and have a large addressable market in front of us was very low market penetration.
Currently.
During the Covid, we received a regulatory for Mrs commissions to rollout of retail platform into the EU, which opens up the big new market for us on the retail side on the commercial institutional side, we have already acquired most of the missed the street post Brexit the regulatory submissions, we need although the entire process is still proving somewhat difficult.
To navigate.
We will not achieve the necessary growth and scale of Miss we'd better enhance our technology to digitize the offering.
This will not only enhance customer engagement, but increased scalability and increased margins, which requires a rethink of our processes from front to back which has been underway for some time, but it's now accelerated with the acquisition of gate. We are pleased with all of cadence of delivery are now digital.
Footprint.
Finally, our businesses supported by capital and we need to own the underpinned outgrowths of internally.
Generates of capital resources, and when appropriate access the capital markets and the disciplined manner.
During the quarter, we had the opportunity to call of 100 million of all high yield notes at 1 of the 3.
This was part of the put call feature of the original note offering.
We elected not to call the notes out of an abundance of caution given the strong growth in our business.
The uncertain economic situation given that Covid is still impacting things economically.
As a result, we remain very liquid and well positioned to handle growth and any volatility that may arise.
We have the ability to call the entire high yield issue in June 2022, the second anniversary of the issue.
As you'll notice in the 10-Q filing we extended the maturity of our Holdco of bank facilities until August 2022, which generally lines up with the high yield KOL day, as well as increasing the size of the overall facility by some $40 million the.
This will allow us to strategically reassessed our capital structure in June 2022 to take advantage of the most optimal combination of kits and bank funding.
It should be noted that the high yield notes and those of comparable companies a parakeet trading significantly inside of the.
Coupon, we have to pay with the issued these notes this of course will be subject to market conditions at the time, we refinance, but we would anticipate being able to drive down the cost of this capital fairly significantly.
You'll also notice of that he started to buy back our stock during the quarter. We continued to use our structured approach not trying to support the share price, but trying to take advantage of price price weakness weakness for all of our shareholders.
[laughter].
Moving on to slide 17 of quarterly dashboard.
The sits up the high level Kpis, we manage by all targets on the right hand side, you can see that we comfortably exceeded most of the targets. Although we had a little higher on the compensation ratio and this is likely to stay this way given the really tough and competitive environment that exists with Tyler right now as well as the lot of interest rate environment.
Slide 18.
Yeah.
Shows our customer growth of over the last 3 years, we've shortened the time period up here. So you can see.
The more recent changes.
As mentioned earlier, the highest priorities to debt to say by existing customers and to grow our footprint. This is what drives every aspect of our business the slide.
<unk> tended to provide some context of data points around the progress in this regard.
Lastly, an update on gain integration and synergies we are now almost exactly at the 1 year anniversary of the closing of this transaction.
As mentioned last the last time, we remain on track having completed most of the initial integration objectives and making good progress on the longer term challenges such as consolidation of premises as leases run of consolidation of data centers renegotiation of duplicative many of the contracts as these come up for renewal.
We continue to make steady progress integrating products capabilities of them in share and we have the central risk book for each principal tried the product to centralize all of the flow into the company maximize the spread capture minimize the hedging costs and minimize risk. This will take some time to fully realize but we've already seen some good of an easy wins.
The allowed us to internalize more margins and reduce risk and volatility of the earnings adding more capabilities of the retail platform such as cash equity trading and in the U S. Expanding from beyond just the FX shouldnt pretty scale and diversity of the earnings for my retail platform.
We feel pretty good about progress in what has been achieved so far and remain excited about the potential and opportunity for you have in front of us.
Let's move onto the final slide a closing summary.
This quarter represented another strong performance in excess of loss stated all of the we'd target, which has now been exceeded for 2 years on the trailing 12 month basis.
The current trailing 12 months ROE of 23 per se, but certainly aided by exceptional market conditions. As the result of the COVID-19 productivity and activity is likely to moderate somewhat as market conditions normalize.
That said, we believe that our business has been transformed and scale and through revenue and client diversity and is more resilient is the result.
The benefit significantly from increased interest rates and the more normalized environment, which should mitigate the impact of reduced the volatility.
We continue to make progress and invest in technology to digitize the offerings that we are better able to penetrate the massive addressable market that's available to us.
Lastly, just to touch on Covid last time in my wrap up I mentioned that it seemed like we were moving out of the pandemic towards normalization. Unfortunately.
Unfortunately, it seems like I spoke too soon and it looks like in many ways. We have taken the backward step, but it's in the U S and the internationally.
And now it seems to me that this will be a much longer process than we finished the visits and in the end we will have to book with Covid.
The process is likely to take years, rather than months and the likely would be bumps along the way.
I also think there'll be profound changes in every part of our lives all social lives the global business environment.
How we work and travel as well as in the economy as a whole and the role of government of the economy.
Many of these changes the north care at this time and will unfold slowly as we get the groups with the new normal.
1 thing we will always be constant for the stone ex team continues to dedicate ourselves to better serve outgrowing the client footprint of 1 around the world by providing them with the best ecosystem in service to access the global financial markets.
The executive team and I'm extremely proud of the talented flow next teams, who continue to propel us to new Heights.
So with that operator can we open for questions.
Thank you and as a reminder to ask the question you'll need of press Star then 1 of your telephone for Lasalle.
For your question. Please press the pound key.
And once again to ask the question. Please press Star and then 1 now.
And our first question comes from Dan Fannon of Jefferies. Your line is open.
Thanks, Good morning, Sean.
Sean I just address the question just before you start with that and I wanted to ask you how often do you get your estimates right to the Penny.
[laughter] Yeah, that's the.
It's usually not the case of late.
[laughter].
Yes.
Was the unique 1 but I guess my first question was just on the ROE targets and understanding that some of it is just math in terms of the growth of the capital base.
But you didn't seem a bit more cautious just generally on just kind of the near term and potentially longer term ability to achieve that so hoping you could just expand upon that a little bit more.
Sure.
No I think the the financial businesses generally do correlate to an ROE range right and part of that is because you need capital to support the business.
The increase revenues generally require increased capital and increased footprints and so on so.
I tend to think of most of the sort of gravity oil a day.
The existing financial businesses now clearly you know if if you look at.
At the environment now, it's a pretty unusual environment.
It's Goldman Sachs of Jefferies of loss.
Putting up numbers that all of you know well into the Twenty's I don't think that's a sustainable situation long term.
I think that is somewhat of an aberration and I think the market is reflecting that in sort of the low P. He's they've all of these companies are trading at right. So I think the question for US is always the look through the cycles saved yourself of long term ROE target of advantage around debt.
So if you go back to pre Covid we.
We were tracking at the 15.16, 17% ROE somewhere around the world.
The gain acquisition and if you look at the Investor presentation. We put out we said that we think the increased scale of games. In addition to the fact that that business was acquired.
Without the issuance of additional equity. So you know it was going to sort of keep equity constant, but we had an additional revenue source of you was that could push all of our oes are closer to the 20% range. So you know our view was all things being equal we should be sort of the 15% plus but debt assumption is.
The normalized market environment, the rollout of interest rate environment.
So the gain operating goes and visits.
Clearly, we don't have that environment for you.
Got it.
Pretty conducive market conditions, we have zero interest rates and the net result is we'd be sort of above even the top end of that expectation going forward. So so all things considered.
It's really hard to predict how things are going to track out you know I do think COVID-19 is going to be more bumpy that would probably argue for you guys.
Sort of slightly higher volatility generally of what those may be sporadic.
And I think at some point could of gonna see interest rates kick in which you know for us is going to be a big push.
I think we sort of come back to you know we should be.
The teen 15, 17% to 18% or are we sort of dependent on the environment and independent of the way interest rates all of them I think that's sort of a long term.
Kind of target we set ourselves.
Does it make sense, though.
Yeah, no no it does but the.
<unk> for that.
My next question is just on the.
The RPC in the with the derivatives, which increased a lot I think in your prepared comments you mentioned around some of the.
The pricing changes or proactive Miss you guys of Pat if you could just kind of expand upon that thinking about the stickiness of these types of levels.
Yeah. This is this has been a.
A tough.
Thing for us to do so even if you think about particularly in the institutional segment.
You know we.
We have a sort of the somewhat undifferentiated offerings I mean, we always think we better than the competition because we serve the better and all of that but you know there are a number of firms who compete with us directly in that offering.
That's the.
Business model was always price the assuming interest rates were going to give you the revenue needed to make the aro he's on the capital resources committed to the business all of us.
That changed and you know we have to sort of think about how are we going to deal with that business I mean, otherwise it would be a significant drag on our ROE and I think what you found also over the last 5 years ease of consolidation of the industry and the reduction of surplus capacity, which means you know pricing power.
The return to the little bit to the peers, whereas before you know it was the most aggressive guy on the margins at the price. So I think it's indicative of peering, becoming more valuable commodity.
You know less capacity and people maybe also valuing all increased capabilities over time that people will come to you and they can trade different asset classes and we sat down with some of these folks and we just said in this environment, we just not making the magical return on the capital resources, we are putting up to support your business.
And to be honest for the most part of clients, who got it I mean, they were like yeah, you're running the business. We understand you know, we don't want to be materially off market here, but we get the point, we like the relationship with you guys you serve us well and and honestly not all of the clients, but the significant portion of the clients' accepted some.
Some of the Reits, which we're not trying to gouge our customers I think we're just trying to rightsize that business model to make sure that we make the right return on capital the otherwise if we keep doing that.
The call justify the return of capital, we started reallocating capital out right.
And that doesn't help top line. So it's all I think it was an interesting process. We went through its never easy to call up you know.
Long relationship and say Hey, we have to push your prices up.
But I think we explained to them the right way and you know and you can see the results I think customers generally sort of accepted that argument.
So I'll kind of the lots of hard work and sort of calling customers up and having that conversation.
And just the 1 thing I would add there I guess, Dan I would say that.
Also there was a pretty significant increase in the rate per contract on the commercial side as well with when you see a lot of AG volatility like we saw in this quarter and even to some extent last quarter.
You tend to see not only are our some of our some of our commercial clients that the tend to be a little bit higher RPC than some of the others. But you also have the introducing brokers, which tend to be in the debt.
They cover individual farmers you start seeing a lot of activity from them and you start seeing it's a bit of of growth of tissue, where you start seeing.
Higher overall commissions, which drive higher overall RPC, but then you see of pretty good increase in the introducing broker commissions that come in there as well so it nets out lower but youre going to see a bigger kind of top line RPC just because.
So those individuals are paying a higher rate than the large commercial client is so hopefully that shut the little bit more of like there.
That's helpful.
And then just shifting to the global payments.
That was a portion of the business that was you know from a mixed perspective impacted by Covid the gist.
Thinking about of the outlook for that in both from a capture and just kind of volume perspective, how should we think about that business from here.
So you're correct that business was affected by Covid pretty dramatically and I think it's now sort of back.
Back on track largely I mean, depending on what happens going forward Kelly.
We are pretty optimistic about our payments business honestly, because we continue to get sort of internal traction of the banks and we always think there's a lot of room for us to grow inside of those bank relationships right. Because you would think the banks also the super organized than all the payments come through to 1 place in the automatic erupted.
They're not I mean, these banks have lots of different divisions and different entities and we have to sort of work with them to go through all of that so so I think there's a good sort of track record.
A good track in front of us debt, but additionally, I think as we've mentioned before with the general ex acquisition.
No.
The rolling out of sort of of digital offering to smaller companies.
You know that.
We haven't really done before we've really relied on the banks to pick up some of that flow.
Where we are now going to stop that and we're going to do it in Europe, the U S and Brazil.
So that's the big initiative for Us and Additionally, we sort of refocusing our efforts on trying to make sure that every 1 of our 450000 retail customers and 30000 commercial institutional customers use us to make the payments and really have an integrated that offering yet.
So that's pretty exciting for us as well and you know that's that's.
That's just mining the internal client base is pretty significant right. Now so those are sort of of the 2 things that are on the table. We've seen a lot of these payments providers come to market. So it's honestly so the fitbit shopping in the London to see some of the market perhaps the.
The company by getting right now.
I would say that the luck name names, but a lot of the use us because they don't have the back end capability that they sometimes claimed the half.
And a lot of those companies we looked at buying 3.4 years ago, and you know the which was lossmaking entity. So.
You know that's a bit frustrating, but we are looking at where they have been successful and I think of certain.
Segments out there that you could attack in in a more comprehensive way and expand them. So we're definitely doing that so I think there are a bunch of new initiatives in place of I think you'll continue to see hopefully some some decent growth out of that business. We are rolling out the first beta launch of the.
The platform I was talking about for small corporations on the on the beta basis that should happen.
Here in the next 3 to 6 months, we will start you know cross selling on all our platforms all payments capabilities that should start to be rolled out our guidance for the slowly and incrementally but that should start pretty soon so I think all of those things are going to sort of push the current growth strength of that businesses all of them.
So hard to give you sort of specific.
Don't like to give specific forecast, but you know that business has grown nicely in line.
Pretty consistent basis topline and bottom line and I don't see any reason why we cant keep that growth rate up.
Understood and just lastly for me you mentioned the the crypto.
Actual opportunity and curious if that's just an expansion of kind of gains retail offering or if that's something institutionally and then within that construct the just the M&A kind of outlook is that our debt of capability that you are just going to be launching organically or something as you look at the expanding that debt could be part of the.
Broader.
1 of our inorganic strategy.
It was actually interesting because you know we we've been.
Sort of watching like everyone sort of crypto all over the headlines right in and we actually did sort of the look internally and we were sort of surprised at.
How much revenue, we are actually getting at the moment from our clients who trading in the crypto ecosystem I mean, we make markets in the lot of the public companies right.
We tried the will the derivative contract. So it's actually a meaningful subset of our current businesses, but we've never really sort of Florida of it.
As an ecosystem to go on the offer to our clients and I think we put in some good research and market intelligence around that now we're starting to think of a little bit more holistically about you know.
1 of the other assets in that ecosystem, we should be.
Providing access to our clients and you know how do we sort of think about the ecosystem better I mean look we're not going to do this sort of wallets and becoming the exchange and so on but what do you want to do is make sure that you know as the new trading venues pop up as new instruments pop up with the ecosystem, we sort of force what do you think about how we can provide the clients access to that.
So that's sort of a permanent approach to it and the same thing with cotton.
And I think as the massively growing market then.
It's still a little bit of the wild west out there I mean, you have sort of missed the derivative contracts as you know the nukes the Zip code.
Tracts coming onto the Singapore and elsewhere, and we want to be at the forefront of providing liquidity to our clients. The most contracts and there's also a lot of OTC.
Trading that's happening and you know a lot of our commercial clients want to be of part of that so we've got to figure out how we can be proactive and facilitates.
Our customer demand and interest in these 2 areas and we're really making a lot of money in in both of them. So it's just a question of being a little bit more focused and fulfill the around it.
Uh huh.
And just to clarify so for the <unk>.
Crypto that's.
For your retail and institutional segments and correct Yep.
Yeah, Yeah exactly.
Alright, Thank you for taking all my questions Oh, you're welcome. Thank you.
Alright.
Sean.
Thank you and ask the reminder to ask the question. Please press Star and then 1 now.
Yeah.
Yeah.
And I am showing no further questions at this time I'd like to turn the conference back over to Sean O'connor for any closing remarks.
Okay, well, thanks, everyone for joining the call enjoy the end of summer and we will be speaking to you soon thank you.
Yeah.
Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.
Yes.
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