Q1 2022 Stonex Group Inc Earnings Call

February 8, 2022

Good day and thank you for standing by welcome to the Stone Ex Group, Inc. Q1 fiscal year 2022 earnings call.

This time, all participants 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 today Bill Dunaway CFO . Please go ahead.

Good morning, My name is Bill Dunaway.

Welcome to our earnings conference call for our fiscal first quarter ended December 31 2021.

After the market closed yesterday, we issued a press release reporting our results for our first fiscal quarter of 2022.

This release is available on our website at Www Dot <unk> dot com as well as a slide presentation, which we'll refer to on this call and our discussion of our quarterly results.

You will need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's 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 thereto 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 $19 33, as amended and section 20 <unk> of the Securities Exchange Act of $19 34 as amended.

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 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, Paul Good morning, everyone and thanks for joining our fiscal 2022 first quarter earnings call.

Q2 was a strong start to the fiscal year for us with an ROE stated book value of 18% and 20% on tangible book basis.

Market conditions generally turned more favorable for our business during the quarter as the financial markets contemplated inflation.

Good response, there too.

These quarterly results saw a significant improvement from the immediately prior quarter.

But as we have said repeatedly we take a long term view and how we manage the company and grow our franchise.

As such we believe that the best way to gauge our results and progress is to look at longer term performance such as the trailing 12 months rather than specific quarters taken in isolation.

As I mentioned on the last call. We believe that the market environment is likely to be positive for us for the next year or so with <unk>.

Erratic volatility as the fit with doors that support for the market and also from interest rate increases both direct and positive drivers for our business.

Starting with slide three of the earnings deck, comparing operating revenues and key operating metrics against the prior year quarter.

Operating revenues were up 19% for the quarter versus a year ago with increases in all product areas versus a year ago, except for securities, which was down 3%.

OTC and physical commodities with the standouts up 93% and 72% respectively.

Transaction volumes were up double digits in all product areas, except listed derivatives, which was down 1%.

Revenue capture increase in all products, except for securities and FX Cfd.

Securities revenue capture was down 26% and offset the volume increases.

Although we did see an increase of 29% and revenue captured securities versus the immediately prior quarter.

Our securities activities have expanded significantly over the last five years and we believe there is still considerable room for growth.

We continue to make investments and expand into new related products, some of which have lower revenue capture and will change as metric over time, and additionally resulted in higher costs until these new activities reached critical mass.

Our average client float both enlisted derivatives and securities clearing.

<unk> experienced strong growth up 36% and 19% respectively.

You both to higher client volumes as well as market share gains and now in aggregate stands at $6 2 billion up 52% from a year ago.

Interest earnings on client balances were up 57% versus a year ago due to the higher client balances and we are now starting to see interest rate increases more on this later.

Versus the immediately prior quarter operating revenues were up 15% for the quarter versus Q4 2021.

Volumes increased in all products, except for securities, which was down 11%, although offset with a 29% increase in revenue capture.

Physical commodities operating revenues were essentially flat with the fourth quarter.

We also see saw revenue capture increase across all products.

Average client float was up 9% and interest earnings on client balances were up 5%.

Turning to slide four.

Looking at the revenue and product metrics for the trailing 12 months.

Operating revenues were up 24% versus the trailing 12 months ended December 31 2020.

There were double digit increases in product revenues across the board, except for securities, which was up 7%.

This is a really good result, given that the comparator trailing 12 month period includes an exceptional 2020 results, where we experienced heightened volatility as a result of the onset of COVID-19 as a tailwind.

There was strong volume increases across the board, except for listed derivatives, which was down slightly which again speaks to enhance client engagement versus the comparative period.

Revenue capture was up for listed derivatives, and OTC and down slightly for global payments and FX Cfd.

Securities revenue capture was down 30% for the reasons mentioned earlier regarding.

The very strong comparison period.

Our average client float both enlisted derivatives and securities clearing.

<unk> strong growth up, 36% and 26% respectively with interest earnings down slightly as the comparative period incorporates it.

At period prior to the fed action to reduce interest rates.

Okay.

Turning now to slide five and a summary of our earnings as reported and also on an adjusted basis, which excludes the accounting impact of the gain transaction.

We recorded operating revenues of $455 million up 19% versus the prior year.

Compensation and other expenses were up 14% for the quarter.

Notably fixed compensation costs were up only 8% and this is flattening out after the impact of the gain acquisition.

Variable compensation was up 19%, which was in line with the operating revenue growth.

Net earnings were $41 7 million or $2 <unk> per diluted share.

Presenting an 18% ROE on stated book value.

On an adjusted basis net earnings were $43 $7 million, representing an ROE of 18, 8%.

Looking at the summary for the trailing 12 months operating revenues were $1 7 billion up 24% over the prior comparable period net income was $158 5 million and $141 9 million on an adjusted basis.

Our reported diluted EPS was $6 80 for the trailing 12 month period for 15, 8% ROE or 16, 2% on an adjusted basis.

Okay.

Our quarterly earnings were up.

471% or $34 4 million higher than the immediately prior quarter with EPS showing a similar increase.

We ended Q1 'twenty two.

With a book value per share of $47 44.

It was up 16% versus a year ago.

Turning now to slide six our segment summary.

Touch on the highlights before but we'll get into more detail.

Aggregates segment operating revenues were up 17% for the quarter.

And segment income was up 26% for the quarter.

That said on a sequential basis operating revenues were up 16% and segment income was up 47%.

Standouts for the quarter were our commercial segment.

Which increased operating revenues 45%.

Segment income of 104% both new records.

Global payments operating revenue was up 23% and segment income up 20%.

Which was also a record quarter for global payments.

Retail showed strong growth in operating revenue up 18% and segment income was up 31%.

Security's operating revenue was down 3% and segment income down 29% for the reasons I discussed earlier.

For the trailing 12 months, we see much of the same with double digit growth across the board except for the Securities segment income, which was down 10%.

We have added in your slides for this earnings deck, which sets out our trailing 12 month financial performance over time.

As I said upfront I think this is a better way to value outperformance on our progress as it eliminates quarterly anomalies. These numbers have been adjusted for the accounting treatment related to the gain acquisition as disclosed in our prior filings at which appeared in the reconciliation provided on the last page of the earnings deck.

Turning to that new slide number seven.

On the left hand side, the blue bars represent our trailing 12 months operating revenue over the last nine quarters.

As you can see this has been a remarkably smooth and strongly upward trend as we have steadily expanded our footprint and capabilities.

Our revenues are up 56% over this period or 25% CAGR.

Our adjusted pre tax income likewise has grown significantly up 92% over this period for a 31% CAGR.

On the right hand side, you can see our adjusted net income and the yellow bars, which shows us nearly doubling net income over the last two years for a 44% CAGR.

The dotted line represents our ROE, which other than in the first couple of periods has been relatively stable between 14, and 16%, even though our capital has grown by some 60% over those periods.

With that I'll hand, you over to Bill Dunaway for a discussion of the financial results Bill.

Thank you Sean there'll.

I'll be starting with slide number eight which shows our consolidated income statement for the first quarter of fiscal 2022.

Sean covered many of the consolidated highlights for the quarter. So I would just highlight a few and then move onto our segment discussion.

Transaction based clearing expenses were up 8% to $70 $9 million in the current period, primarily due to higher clearing and ADR conversion fees within the equity capital markets, resulting from the increase in average daily volumes in that business.

Introducing broker commissions were relatively flat with the prior year at $38 3 million in the current period.

Interest expense increased $5 8 million versus the prior year, primarily due to an increase in activity and our institutional fixed income dealer higher average borrowings on short term financing facilities of our subsidiaries and an increase in securities lending activities.

Variable compensation increased $16 1 million versus the prior year and represented 32% of net operating revenues comparable to 33% of net operating revenues in the prior year period.

Fixed compensation increased $5 3 million versus the prior year with the growth of principally related to salary and benefit costs have increased head count along with a $900000 increase in share based compensation.

Other fixed expenses increased $12 4 million to $86 5 million.

Relatively flat with the $86 7 million in the immediately preceding quarter.

As compared to the prior year trading system and market information increased $2 4 million and non trading technology and support increased $2 1 million as part of our initiative to expand our digital offerings.

In addition, professional fees and selling and marketing expenses increased $2 6 million and $2 2 million respectively.

Finally, we are starting to see increases in travel and business development, increasing $1 9 million as compared to the prior year.

We had a net recapture of bad debt expense of 200000 for the quarter versus a $1 million and $5 in bad debt expense in the prior year.

Net income for the first quarter of fiscal 2022 was $41 7 million and represented 114% increase over the prior year and a 471% increase over the immediately preceding quarter.

Finally, we closed out the quarter with a net asset value per share of <unk> $47 44 per share.

To $40 78 per share a year ago.

Moving on to slide number nine I'll provide some more information on our operating revenues. The commercial segment added $47 million in operating revenues versus the prior year and $19 9 million versus the immediately preceding quarter.

Within this segment lifted derivative operating revenues increased $6 million versus the prior year as a result of a 17% increase in average rate per contract as a result of improved performance in <unk> metals.

This was partially offset by a 5% decline in contract volumes.

OTC derivative operating revenues were $46 7 million for the quarter, which was up $22 6 million versus the prior year, primarily as a result of a 54% increase in OTC derivative volumes and a 27% increase in the average rate per contract driven by strong performance in energy and renewable fuel market.

Operating revenues from physical transactions increased $15 3 million compared to the prior year as a result of a $14 $1 million increase in physical agricultural and energy commodity revenues and to a lesser extent, a $1 million increase in precious metals revenues.

Operating revenues in physical contracts for the current period were favorably impacted by realized gains of 800000 on the sale of physical inventories carried at the lower of cost or net realizable value. While the prior year period included a $2 $9 million unrealized loss of a similar nature.

Finally interest earned on client balances increased $2 9 million versus the prior year, principally due to a 36% increase in the average client equity as well as an increase in interest charged customers uncertain margin balances.

Segment income was $65 5 million for the period, an increase over the prior year period and preceding quarter of 104% and 49% respectively.

Moving on to slide number 10 operating revenues in our institutional segment declined $4 2 million.

Versus the prior year, primarily driven by a $6 $9 million increase in securities revenues as a 25% increase in the average daily volume of Securities transaction was more than offset by 26% decline in securities RPM.

The decline in RPM was primarily a result of the prior year quarter benefiting from wider spreads due to heightened volatility driven in part by the Covid pandemic.

Listed derivative operating revenues declined 400000, primarily as a result of a 1% decline in the rate per contract. This contract volumes were relatively flat with the prior year.

Institutional segment operating revenues increased $23 million versus the immediately preceding quarter, primarily as a result of $11 5 million and $6 $9 million increases in securities enlisted derivative operating revenues respectively.

Segment income declined 29% to $31 9 million in the current period as a result of a decline in operating revenues an increase in volume related transaction based clearing fees I mentioned earlier as well as an increase in interest expense.

In addition, non variable direct expenses increased $3 2 million versus the prior year, primarily due to an increase in professional fees travel and business development and depreciation of internally developed software.

Segment income increased $7 $5 million versus the immediately preceding fourth quarter as a result of improved performance in securities and listed derivatives.

Moving on to the next slide operating revenues in our retail segment added $14 7 million versus the prior year, which was primarily driven by a $12 $1 million increase in FX and Cfd revenues as a result of a 17% increase in the rate per million.

Our retail physical precious metal and wealth management businesses added $1 8 million and $3 million in operating revenues, respectively versus the prior year.

Segment income increased $5 $5 million versus the prior year, primarily as a result of the increase in operating revenues, which was partially offset by a $5 $9 million increase in non variable direct expenses, primarily driven by a $2 $7 million increase in non variable compensation $1 $1 million increase in professional fees and other.

$1 $7 million increase in selling and marketing.

Segment income increased $11 5 million versus the immediately preceding quarter, primarily as a result of the increase in operating revenues.

Closing out the segment discussion on the next slide operating revenues and global payments added $8 million versus the prior year driven by a 15% increase in the average daily volume and a 7% increase in the rate per million as compared to the prior year.

Non variable expenses increased $1 7 million and is primarily related to the expansion of our payment offering.

Segment income increased 20% to $24 $5 million in the current period and represented 33% increase over the immediately preceding quarter.

Moving on to slide number 13, which represents a bridge between operating revenues for the first quarter of last year to the current period across our operating segments.

Overall operating segment revenues were $455 million in the current period up $70 4 million or 19% over the prior year.

I've covered the changes in the operating revenues for our segments. How are the $4 $9 million increase in revenues and unallocated overhead is primarily related to the $6 $4 million FX related net loss on the internal merger the operations of gain capital UK subsidiaries in the prior year period.

The next slide number 14 represents a bridge from 2021 first quarter pretax income of $26 9 million to pre tax income of $52 5 million in the current period.

The negative variance in unallocated overhead of $4 5 million is primarily related to an increase in unallocated expenses, including a $2 $4 million increase in variable compensation as a result of improved performance.

$2 $6 million increase in fixed compensation benefits and a $1 $4 million increase in non trading technology and support.

Finally, moving on to slide number 15, which depicts our average invested.

Client balances and associated earnings by quarter, as well as a table, which shows the annualized interest rate sensitivity for a change in short term interest rates.

Sean will touch on this more in detail next during the strategy session of this call, but in late December and early January similar to an interest rate strategy. We utilized in fiscal 2015, and 2016, we entered into $1 billion of interest rate swaps with a two year duration to lock in interest earnings on a portion of our client float.

As noted in the table the annualized incremental earnings on these swaps of $5 2 million after tax on an annualized basis.

In addition, we retain the incremental sensitivity as noted in this table on the remaining $5 2 billion of total investable balances for which we estimate a 100 basis point increase in short term rates would increase net income by $23 5 million or $1 17 per share.

With that I would like to turn it back to Sean for a strategy discussion.

Thanks, Bill turning now to progress on the high level strategic objectives that management is focused on and that we discussed in detail last quarter.

Starting with global payments.

Thus far we are focused on building, a leading franchise to efficiently and seamlessly make payments into over 175 local countries.

Banks, Ngls and large corporations.

We announced last year that we are expanding this capability into a digital offering for midsized corporations, including all of the 50000 stone ex corporate and institutional clients. This platform has to be due to be rolled out during 2022.

During the current quarter, we announced that we have launched a new digital capabilities global payments franchise.

Will allow us to leverage our regulated capability in certain markets, such as Brazil, and others too.

Accept local payments on behalf of existing clients, many of whom have significant client bases in these countries.

Yeah.

In this way, we will be able to handle local pay ins as well as the cross border requirements are more complete and integrated payments capability for these clients.

On the commercial side of our business, we just launched Boneheads digital merchandising system for the grain industry, which automates and streamlines the activities of our large grain merchandising clients.

Providing value added assistance to our clients to our client. So it's always been part about Eni and helps grow market share and increased client engagement and loyalty.

We also completed the soft launch of our new farm is advantage for now.

<unk> provides a full suite of products aimed at the individual commodity producers we.

We have previously accessed this client segment through introducing brokers.

Now able to facilitate and service these retail clients directly which opens a new and potentially large client segment for us. This was a great example of collaboration between the client relationship focus with technology teams and gains digital marketing team.

During the quarter, we rolled out electric electronic trading platform for domestic U S stocks, which initially focused on executing our internally generate to flow from our securities clearing activities and in so doing capturing and internalizing a new will.

Albeit modest profit stream for the company.

We will now start rolling out this trading platform to existing U S clients, who previously used us only for the execution of foreign stocks. We believe that we can leverage our existing client relationships together with this new electronic trading capability into an expanded relationship with these clients and a new and potentially large revenue source for us.

Yesterday, we announced that we have become a member of the <unk> platinum auction.

<unk> is now the first non bank member of the gold silver platinum auctions, putting us at the center of the global precious metals business to better serve a broad and diverse client base.

In late December the interest rate market has started to move higher that signaling the probability that the fed would start to raise interest rates in coming months. The exact timing and extent of these increases is still data dependent and of course not guaranteed however.

However, the move in interest rates allowed us to lock into swaps on a portion of our client funds that is immediately ensuring and guaranteeing higher interest earnings on a portion of our client funds.

We will continue to look at the swap rates versus the probability of rate increases and in a disciplined manner determine whether it makes sense to lock in now versus waiting for the fed action over time.

It should also be noted that the three months Tebow also moved up by about 20 basis points in the loss.

Four five weeks.

We anticipate that starting in Q2, we should start to see a steady rise in the average yield earned on outgrowing slide float.

Dependent in the medium term on the exact actions it takes.

Finally, we have started the process to refinance and restructure our debt structure. This will allow us to strategically reassessed our capital structure to take advantage of the most optimal combination of bits and bank funding as well as hopefully drive down the cost of those capitals fairly significantly when visitors to be completed by the end of the third.

Fiscal quarter.

Moving onto slide 16.

And to wrap up.

This was one of our strongest starts to a fiscal year with good market conditions and excellent results across all products and client segments. We achieved a diluted EPS of $2 <unk> and ROE on stated book up 18% or 20% on tangible book value.

We're not performance is viewed through a slightly longer term lens, such as trailing 12 months, which evens out quarterly anomalies.

Our results show, a steady and strong upward trajectory.

We continue to see strong growth in client trading volumes and client assets, which speaks to the growth in our underlying client base and to the engagement of that client base.

This combined with heightened general market volatility and increasing interest rates puts a real tailwind behind our business for the next year or so.

This year, we will see a number of our digital platform is being launched which will more tightly integrate to offenbach line side and make it more engaging for clients to interact with a financial ecosystem.

While we are initially seeing increased costs associated with bringing up these platforms as we start to actively market that we should further accelerate outgrowth with the scalability that technology provides to increase margins and overall profitability.

We have a unique and comprehensive financial ecosystem with a very large addressable market in front of us while we might have good market share in certain niche segments of the markets large areas of white space remaining.

Where we have already.

We already have client relationships and demonstrable capabilities and now need to monetize these opportunities in aggregate. We believe that we may may have single basis points market share of our total Tam.

One thing we will always be constant for the next team will continue to dedicate ourselves to better serve our growing client footprints around the world by providing them with the best ecosystem to service them to access the global financial markets. So with that operator for any questions, we'll take them now.

Thank you as a reminder to ask a question will need to press star one on your telephone to withdraw.

Your question press the pound key.

Standby, while we compile the Q&A roster.

Our first question comes from the line of Dan Fannon from Jefferies. Your line is now open.

Hey, Thanks, good morning.

Good morning, Don I guess.

Yes, maybe just starting with rates in the swap that you talked about maybe get.

Some context around the rationale for doing that I guess the cost associated with it.

I think you mentioned retaining the upside as rates go higher but.

Just wanted to make sure I understand the mechanics of this versus just.

The normal course of reinvesting the <unk>.

Ounces.

Yes.

So.

A couple of points here so we.

We did this very successfully about four or five years ago, where we landed into the two year rates, which gave us.

And then Hans but the short term rates when rates were low.

At that time.

We do it in a very disciplined way, we sort of look at it every quarter.

And with the current setup here and with interest rates having moved.

So aggressively in late December we decided we had sort of implement that same process and the methodology. We look at is we basically look at a portion.

All of our total balance and then we say.

What rates can we locked in now and what earnings would we get over a two year period versus if the fed did what it says it's going to do that if that calculus shows us.

That with certainty we can achieve a better result at that point in time.

We think it's prudent to do that because we immediately start hitting that higher rates instead of waiting.

345 quarters, we started getting that right now.

If the fed is more aggressive with its rate increases obviously on the back end you might have an opportunity cost, but you certainly lock into.

<unk>.

Fixed rate over that two year period, so when we did that calculus it was positive.

We will do that again in March.

We'll look at sort of the fed plucks look at sort of a tds swap versus.

What's the fifth plus shows us in the aggregate and interest earnings over that two year period.

That calculus is positive and.

Positive and certain versus uncertain, we will consider doing more swaps.

At this point I think it's probably not going to be positive given where we stand right. Now if we have to do that calculus that wouldn't be positive and in that instance, we would probably then just wait wait it out and see what happens with the fed increases the one thing I would say, though we obviously in uncharted territory, but if you go back and look at.

Any of these fit predictions in the past the fit almost never did what it first predict predicted right I mean things change. So these seven brake increases that people are talking about now are by no means certain so.

There is some variability to that.

In terms of what it costs us in how we can execute that.

We broadly have two options right, we can actually just go by.

Two year rate.

Rate instruments, whether it'd be treasuries or similar high quality assets.

If we do that.

STM broker dealer, we have additional capital haircuts on that so we've got to make that helped them as well.

Because it does tie up capital.

If we use the derivative swap market.

Don't type any capital we might have to play some margin to support those trades.

This incident actually we had a client book that was the other way.

So when we put these trades on that actually released capital back to the firm so.

We sort of had a capital when and sort of a zero cost if you like so so I'll stop there I hope that all makes sense, then, but that's sort of how are we going to look at it and Thats why we are constantly looking at it because even once the rate increases have finished.

If you're in a positive yield curve you can still swap from the overnight rates at the two year rates and see what kind of a constant if you can get the reason we choose two years he's going beyond two years. When you think it's probably too aggressive for us and also the haircuts on instruments beyond two years becomes quite a collegiate so we'd like to stay in that zero to two year kind of category.

That's very helpful. Okay, So that does make sense and I guess.

As you think about the incremental benefit of not only that but just higher rates in general and the sensitivity that you've put forth on slide 15, and it's been there for some time.

The incremental margin that we should think about at the corporate level in terms of compensation or there's obviously not a lot of expense tied to this but.

We should think about this as very high incremental margin revenue coming through to your returns and overall profitability correct.

Yes, absolutely we have no payouts to our teams on that so that goes straight to the pretax line, obviously to the extent that impacts Roe.

There will be at a compensation to the executive team, but if our ROE because we ROE base, but it's a very small drag on comp that compensation provide some of that so it's a very high margin revenue source and I think people don't really understand if you look at the context of.

One $7 billion in.

Top line revenue.

Just doing the math over the top of my head, if you get 1% and $6 billion of $60 million $60 million doesn't sound that important in the context of $1 7 billion, but it's 60 million to the pretax line pretty much right. So.

Very important to lots of leverage on that.

Right right.

Makes sense.

If we think about.

The context of the business in the quarter and just.

Start the year global payments continues to or certainly had a very good.

Kind of quarter, I think you mentioned right initiatives in place.

Yes.

Just a little bit more context on the momentum in that business. So we think about whats I don't want to say normal, but the kind of if there is any seasonal components or things that maybe this is a good <unk>.

Think about the health of that business is this.

Is it building from here.

Or are there maybe.

Excuse me this past quarter was a bit elevated versus what you might consider normal.

No I think this quarter was what I would consider to be normal I mean, there is definitely seasonality in our global payments business.

If you look back on it.

The third quarter, so sorry.

Sorry in the fourth quarter for Us the September quarter is typically a weak quarter for us.

Summer holidays in Europe .

Just a lot of people just go away.

Anything so we always find that the September quarters, probably the weakest of the four and then we find that the Q1, which is the quarter. We just reported on the December quarter is normally the strongest because it's a little bit of a catch up after the weak Q3. So we seem to see that catch up happened almost every year. So so there is seasonality in that.

Largely from the NGL part of our business less so from banks.

So I would say that's to answer your seasonality question.

The global payments business is an incredible franchise I mean, we we.

We make payments around the world for 15 of the largest banks in the world and probably another 200 midsize banks around the world.

We almost systemic to some of these these countries in terms of how much money, we are pushing into those local markets.

And who we do it full and that business is continuing to grow.

Also the borrowing deeper into these banks getting more of that flow. So that's a steady business that is growing at a nice pace we've got.

Tremendous franchise value there.

Great relationships with our clients I think what you're starting to see now starting probably three quarters ago is we now starting to sort of.

I think look at some new avenues to re energize the business a little bit so.

We started with the sort of digital offering to go after smaller co.

Corporations with.

Hi, touch just isn't going to work. So we're trying to see whether we can gather up some of the smaller companies that do payments.

Also use that platform for earning terminal clients, that's a whole new Avenue for us right and the stages.

This digital.

Hey, Ian business in some of the key countries, where we have licenses is also new business, what I would say is.

You may see some additional costs and indeed, I think there have been some additional costs to to fund the build out of those businesses, which is going to put a probably a little bit of a drag on the segment income we would have otherwise seen from some of the banks in the NGL business.

But our hope is over sort of a two to three year period.

Those initiatives become very sizable businesses in their own right. So so I think you should expect that from the payments business, a little bit of a growth push and we've seen that over the last three four quarters.

I don't think its going to be materially different from where it is now but as those businesses start sort of tuning themselves to accounts, we stopped getting to breakeven we start getting beyond breakeven.

Thank you could see the global payments business accelerate in terms of its of its growth.

It makes sense.

Yes. It does thank you.

I guess bill as a follow up on in terms of expenses and other kind of notable items in the quarter I think you talked about.

There wasn't anything that stood out materially at the bad debt was obviously quite smaller or actually a positive but anything as we think about the remainder of this year, we just walk through kind of global payments and some of the investments there, but other sub segments or.

Either at the corporate level or at the segment level that we should think about that Mike.

You'll have different run rates than what we saw here in the December period.

Bill why don't you take that.

Sure.

Nothing material.

You think that will probably could you see non variable comp.

Creep up a little bit from where it is now as we continue to kind of expand that digital offering but.

Not substantially and the only other thing I would notice is Sean touch is going to be more on the interest expense line as we've talked about quite a bit we are going to be looking to refinance that.

Yes.

The debt we put on when we did this.

The gain capital acquisition, so there'll be some.

Hope some significant changes there to the interest expense line on a go forward basis, but.

Outside of that.

The last thing of note here is that I would say.

We have seen kind of sequentially and even quarter over quarter, some increases in travel and business development as we've had kind of ebbs and flows in COVID-19 .

Offices, opening and clients being more willing to see us.

Kevin.

<unk> gone.

Several times, but I think we're starting to see that go up.

We do have some big conferences planned coming up here, so we'd expect to see some of those traveling business.

Development costs go up.

We've put out some press releases on our global global market outlook here at the beginning of March which is.

Something we do.

By annually.

And so it's something that.

There is a relatively big event for us So I would expect to see some travel and business development increases, but outside of that and interest.

Nothing else of note I would say Dan that jumped out at me.

I would probably say one other thing that we did.

Speak to this but we would see also the fixed cost component.

Climb over sort of two years of quite strong growth. Some of that was gain some of that was sort of a spinning up.

So the uptake.

Our technology teams and so on.

We did plan for an increase this year and a more modest increase.

It's challenging filling those spots. So what we may see is something some of that cost sort of being back ended a little bit into the year, just because of the challenges around hiring people. So in aggregate I don't think its going to be anything different than we planned. It's just probably not going to happen sort of evenly over the quarter as we had planned.

So it's challenging.

Okay, and then just Sean as you think about the environment today.

The firm being acquisitive over time, but.

Listening to your prepared remarks lots of organic and opportunities and you just mentioned the tans and where you are so the inorganic versus organic kind of kind.

Kind of focus in this type of backdrop.

Is it do you see M&A.

As attractive.

In the current backdrop versus some of the internal.

You kind of opportunities you have ahead of you.

Yes, I think we've always we've always prided ourselves on having.

A good and profitable business that has strong organic growth and that's always been our number one criteria as many acquisitions as we've done we've never sort of set out to go acquire businesses.

It's been much more opportunistic in our number one goal is to leverage the capabilities, we have and I don't think you've ever seen.

And environment and the situation, we have so much opportunity to capitalize on internally.

The good news with that is it.

Lousy to be very disciplined around acquisitions right.

Does.

We've got lots to keep us busy in lots of ways, we can grow our business.

Therefore, we are only going to do something on the acquisition side, if it really fits it's priced right and so on so I think it's allowed us to be very disciplined.

And we don't like to overpay, we like to buy businesses, we can add value to.

I think we've done that pretty successfully so in this environment, we have a situation where I think we've got some enormous opportunities on the on the <unk>.

Organic growth side that you don't want to necessarily take the eye off the ball and this surprises big and then on the acquisition side. It feels to me that everything is overpriced.

So I think in that environment, it's probably unlikely we're going to do anything meaningful but as soon as I say that something kind of happen potentially but.

Honestly think it's probably a lower probability than it has been in the past that we will.

See something on the acquisition side, just because I think prices are way high it's probably not the right time to buy the kind of business as we looked at and at the same time, we've just got lots of really.

Really good stuff to do internally.

Great well, thanks for taking all my questions.

Yes of course.

Yes.

Thanks, operator.

At this time I'm showing no further questions I would like to turn the call back over to Sean O'connor CEO for closing remarks.

Well, thanks again, everyone for joining us.

Look forward to speak.

Speaking to you in three months or so so thanks for your interest and goodbye.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day and thank you for standing by welcome to the Stone Ex Group, Inc. Q1 fiscal year 2022 earnings call.

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 today Bill Dunaway CFO . Please go ahead.

Good morning, My name is Bill Dunaway.

Welcome to our earnings conference call for our fiscal first quarter ended December 31 2021 after.

After the market closed yesterday, we issued a press release reporting our results for our first fiscal quarter of 2022.

This release is available on our website at Www Dot <unk> dot com as well as a slide presentation, which we'll refer to on this call and our discussion of our quarterly results.

You will need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's conclusion.

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

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, Paul Good morning, everyone and thanks for joining our fiscal 2022 first quarter earnings call.

Q2 was a strong start to the fiscal year for us with an ROE on stated book value of 18% and 20% on tangible book basis.

Market conditions, generally turn more favorable for our business during the quarter as the financial markets contemplated inflation.

I would respond to that.

These quarterly results are significant improvement from the immediately prior quarter.

But as we have said repeatedly we take a long term view and how we manage the company and grow our franchise.

As such we believe that the best way to gauge our results and progress is to look at longer term performance such as the trailing 12 months rather than specific quarters taken in isolation.

As I mentioned on the last call. We believe that the market environment is likely to be positive for us for the next year or so with sporadic volatility as the fit with doors that support for the market and also from interest rate increases.

Both direct and positive drivers for our business.

Starting with slide three of the earnings deck, comparing operating revenues and key operating metrics against the prior year quarter.

Operating revenues were up 19% for the quarter versus a year ago with increases in all product areas versus a year ago, except for securities, which was down 3%.

OTC and physical commodities with the standouts up 93% and 72% respectively.

Transaction volumes were up double digits in all product areas, except listed derivatives, which was down 1%.

Revenue capture increase in all products, except for securities and FX Cfd.

Securities revenue capture was down 26% and offset the volume increases.

Although we did see an increase of 29% and revenue captured securities versus the immediately prior quarter.

Securities activities have expanded significantly over the last five years and we believe there is still considerable room for growth.

We continue to make investments and expand into new related products, some of which have lower revenue capture and will change. This metric over time and additionally resulted in higher costs until these new activities reached critical mass.

Our average client float both enlisted derivatives and securities clearing.

Experienced strong growth up 36% and 19% respectively.

Both to higher client volumes as well as market share gains and now in aggregate stands at $6 2 billion up 32% from a year ago.

Interest earnings on client balances were up 57% versus a year ago due to the higher client balances and we are now starting to see interest rate increases more on this later.

Versus the immediately prior quarter operating revenues were up 15% for the quarter versus Q4 2021.

Volumes increased in all products, except for securities, which was down 11%, although offset with a 29% increase in revenue capture.

Is it core commodities operating revenues were essentially flat with the fourth quarter.

We also see saw revenue capture increase across all products.

Average client float was up 9% and interest earnings on client balances were up 5%.

Turning to slide four and.

Looking at the revenue and product metrics for the trailing 12 months upper.

Operating revenues were up 24% versus the trailing 12 months ended December 31 2020.

There were double digit increases in product revenues across the board, except for securities, which was up 7%.

This is a really good result, given that the comparative trailing 12 month period includes an exceptional 2020 results, where we experienced heightened volatility as a result of the onset of COVID-19 as a tailwind.

There was strong volume increases across the board, except for listed derivatives, which was down slightly which again speaks to enhance client engagement versus the comparative period.

Revenue capture was up for listed derivatives, and OTC and down slightly for global payments and FX <unk>.

Securities revenue capture was down 30% for the reasons mentioned earlier regarding.

The very strong comparison period.

Average client float both enlisted derivatives and securities clearing experienced strong growth up 36% and 26% respectively with interest earnings down slightly as the comparative period incorporates it.

At period prior to the fed action to reduce interest rates.

Turning now to slide five and a summary of our earnings as reported and also on an adjusted basis, which excludes the accounting impact of the gain transaction.

We recorded operating revenues of $455 million up 19% versus the prior year.

Total compensation and other expenses were up 14% for the quarter.

Notably fixed compensation costs were up 98% and this is flattening out after the impact of the gain acquisition.

Variable compensation was up 19%, which was in line with the operating revenue growth.

Net earnings were $41 7 million or $2 <unk> per diluted share.

Presenting an 18% ROE on stated book value.

On an adjusted basis net earnings were $43 7 million, representing an ROE of 18, 8%.

Looking at the summary for the trailing 12 months operating revenues were $1 7 billion up 24% over the prior comparable period net income was $138 5 million and $141 9 million on an adjusted basis.

Our reported diluted EPS was $6 80 for the trailing 12 month period for 15, 8% ROE or 16, 2% on an adjusted basis.

Okay.

Our quarterly earnings were up.

471% or $34 4 million higher than the immediately prior quarter with EPS showing a similar increase.

We ended Q1 'twenty two.

With a book value per share of $47 44.

Which was up 16% versus a year ago.

Turning now to slide six our segment summary.

Touch on the highlights before bill gets into more detail.

Aggregates segment operating revenues were up 17% for the quarter.

And segment income was up 26% for the quarter.

That said on a sequential basis operating revenues were up 16% and segment income was up 47%.

Standouts for the quarter were our commercial segment.

Which increased operating revenues, 45% and six <unk>.

Segment income of 104% both new records.

Global payments operating revenue was up 23% and segment income up 20%.

Which was also a record quarter for global payments.

Retail showed strong growth in operating revenue up 18% and segment income was up 31%.

Security's operating revenue was down 3% and segment income down 29% for the reasons I discussed earlier.

Yeah.

For the trailing 12 months, we see much of the same with double digit growth across the board except for the Securities segment income, which was down 10%.

We have added a new slide to this earnings deck, which sets out our trailing 12 month financial performance over time.

As I said upfront I think this is a better way to value outperformance on our progress as it eliminates quarterly anomalies. These numbers have been adjusted for the accounting treatment related to the gain acquisition as disclosed in our prior filings at which appears on the reconciliation provided on the last page of this earnings deck.

Turning to that new slide number seven.

On the left hand side the <unk>.

Blue bars represent our trailing 12 months operating revenue over the last nine quarters.

As you can see this has been a remarkably smooth and strongly upward trend as we have steadily expanded our footprint and capabilities.

Our revenues are up 56% over this period or 25% CAGR.

Our adjusted pre tax income likewise has grown significantly up 92% over this period for a 31% CAGR.

On the right hand side, you can see our adjusted net income in the yellow box, which shows us nearly doubling net income over the last two years for a 44% CAGR.

The dotted line represents our ROE, which other than in the first couple of periods has been relatively stable between 14 and 16%, even though our capital is growing by some 60% over those periods.

With that I'll hand, you over to Bill Dunaway for a discussion of the financial 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 2020 to.

Sean covered many of the consolidated highlights for the quarter. So I would just highlight a few and then move on to our segment discussion.

Transaction based clearing expenses were up 8% to $70 9 million in the current period, primarily due to higher clearing and ADR conversion fees within the equity capital markets, resulting from the increase in average daily volumes in that business.

Introducing broker commissions were relatively flat with the prior year at $38 3 million in the current period.

Interest expense increased $5 $8 million versus the prior year, primarily due to an increase in activity and our institutional fixed income dealer higher average borrowings on short term financing facilities of our subsidiaries and an increase in securities lending activities.

Variable compensation increased $16 1 million versus the prior year and represented 32% of net operating revenues comparable to 33% of net operating revenues in the prior year period.

Fixed compensation increased $5 $3 million versus the prior year with the growth of principally related to salary and benefit costs have increased head count along with a $900000 increase in share based compensation.

Other fixed expenses increased $12 4 million to $86 5 million, however were relatively flat with the $86 7 million in the immediately preceding quarter.

In addition, professional fees and selling and marketing expenses increased $2 6 million and $2 2 million respectively.

Finally, we are starting to see increases in travel and business development, increasing $1 9 million as compared to the prior year.

We had a net recapture of bad debt expense of 200000 for the quarter versus $1 million and $5 in bad debt expense in the prior year.

Net income for the first quarter of fiscal 2022 was $41 7 million and represented 114% increase over the prior year and a 471% increase over the immediately preceding quarter.

Finally, we closed out the quarter with a net asset value per share of <unk> $47 44 per share.

Fair to $40 78 per share a year ago.

Within this segment listed derivative operating revenues increased $6 million versus the prior year as a result of a 17% increase in average rate per contract as a result of improved performance in <unk> metals.

This was partially offset by a 5% decline in contract volumes.

OTC derivative operating revenues were $46 7 million for the quarter, which was up $22 $6 million versus the prior year, primarily as a result of a 54% increase in OTC derivative volumes and a 27% increase in the average rate per contract driven by strong performance in energy and renewable fuel market.

Segment income was $65 5 million for the period, an increase over the prior year period and preceding quarter of 104% and 49% respectively.

Moving on to slide number 10 operating revenues in our institutional segment declined $4 2 million.

The decline in RPM was primarily a result of the prior year quarter benefiting from wider spreads due to heightened volatility driven in part by the Covid pandemic.

Listed derivative operating revenues declined 400000, primarily as a result of a 1% decline in the rate per contract. This contract volumes are relatively flat with the prior year.

Segment income increased $7 $5 million versus the immediately preceding fourth quarter as a result of improved performance in securities and listed derivatives.

Moving on to the next slide operating revenues in our retail segment added $14 $7 million versus the prior year, which was primarily driven by a $12 $1 million increase in FX and Cfd revenues as a result of a 17% increase in the rate per million.

Our retail physical precious metal and wealth management businesses added $1 $8 million and $3 million in operating revenues, respectively versus the prior year.

$1 $7 million increase in selling and marketing.

Segment income increased $11 $5 million versus the immediately preceding quarter, primarily as a result of the increase in operating revenues.

Non variable expenses increased $1 7 million and is primarily related to the expansion of our payment offering.

Segment income increased 20% to $24 5 million in the current period and represented 33% increase over the immediately preceding quarter.

Moving on to slide number 13, which represents a bridge between operating revenues for the first quarter of last year to the current period across our operating segments.

Overall operating segment revenues were $455 million in the current period up $70 4 million or 19% over the prior year.

The next slide number 14 represents a bridge from a 2021 first quarter pre tax income of $26 9 million to pre tax income of $52 $5 million in the current period the.

$2 $6 million increase in fixed compensation benefits and a $1 $4 million increase in non trading technology and support.

Finally, moving on to slide number 15, which depicts our average invested.

Client balances and associated earnings by quarter, as well as a table, which shows the annualized interest rate sensitivity for a change in short term interest rates.

As noted in the table the annualized incremental earnings on these swaps of $5 2 million after tax on an annualized basis.

With that I would like to turn it back to Sean for a strategy discussion.

Thanks, Bill turning now to progress on the high level strategic objectives that management is focused on and that we discussed in detail last quarter.

Starting with global payments.

Thus far we are focused on building, a leading franchise to efficiently and seamlessly make payments into over 175 local countries.

Banks, Ngls and large corporations.

We announced last year that we're expanding this capability into a digital offering for midsized corporations, including all of the 50000, Hispanics corporate and institutional clients. This platform has to be due to be rolled out during 2022.

During the current quarter, we announced that we have launched a new digital capability youre not global payments franchise.

Will allow us to leverage our regulated capability in certain markets, such as Brazil, and others too.

Except to local payments on behalf of existing clients, many of whom have significant client bases in these countries.

In this way, we will be able to handle local pay ins as well as the cross border requirements are more complete and integrated payments capability for these clients.

Providing value added assistance to our clients to our clients has always been part about Eni and helps grow market share and increase those clients engagement and loyalty.

We also completed the soft launch of our new farm is advantage phone App, which provides a full suite of products aimed at the individual commodity producer.

We have previously accessed this client segment through introducing brokers. We are now able to facilitate and service. These retail clients directly which opens a new and potentially large client segment for us. This was a great example of collaboration between the client relationship focus with technology teams and gains digital marketing team.

During the quarter, we rolled out our electric electronic trading platform for domestic use stocks, which initially focused on executing our internally generate to flow from our securities clearing activities and in so doing capturing and internalizing a new.

Albeit modest profit stream for the company.

We will now start rolling out this trading platform to our existing U S clients, who previously used us only for the execution of foreign stocks. We believe that we can leverage our existing client relationships together with this new electronic trading capability into an expanded relationship with these clients and a new and potentially large revenue source for us.

Yesterday, we announced that we have become a member of the <unk> platinum auction.

<unk> is now the first non bank member of the gold and platinum auctions.

US at the center of the global precious metals business to better serve a broad and diverse client base.

In late December the interest rate market has started to move higher that signaling the probability that the fed would start to raise interest rates in coming months.

Timing and extent of these increases is still data dependent and of course not guaranteed.

It should also be noted that the three months Tebow also moved up by about 20 basis points in the loss.

Four five weeks.

We anticipate that starting in Q2, we should start to see a steady rise in the average yield earned on outgrowing slide float.

Dependent in the medium term on the exact action with it takes.

Finally, we have started the process to refinance and restructure our debt structure. This will allow us to strategically reassessed our capital structure to take advantage of the most optimal combination of debt and bank funding as well as hopefully drive down the cost of this capital fairly significantly we envisage this to be completed by the end of the third.

Fiscal quarter.

Moving onto slide 16.

And to wrap up.

This was one of our strongest starts to a fiscal year with good market conditions and excellent results across all products and client segments, we achieved diluted EPS of $2 <unk> and ROE on stated book up 18% or 20% on tangible book value.

When our performance is viewed through a slightly longer term lens, such as trailing 12 months, which evens out quarterly anomalies.

Our results show, a steady and strong upward trajectory.

We continue to see strong growth in client trading volumes and client assets, which speaks to the growth in our underlying client base and to the engagement of that client base.

This combined with heightened general market volatility and increasing interest rates puts a real tailwind behind our business for the next year or so.

This year, we will see a number of our digital platform is being launched which will more tightly integrate to offering by client side and make it more engaging for clients to interact with a financial ecosystem.

While we are initially seeing increased costs associated with bringing up these platforms as we start to actively market. Then we should further accelerate outgrowth with the scalability that technology provides to increase margins and overall profitability.

We have a unique and comprehensive financial ecosystem with a very large addressable market in front of us.

While we might have good market share in certain niche segments of the markets large areas of white space remaining.

Where we have already.

We already have client relationships and demonstrable capabilities and now need to monetize these opportunities.

In aggregate, we believe that we may may have single basis points market share of our total Tam.

Yeah.

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.

Our first question comes from the line of Dan Fannon from Jefferies. Your line is now open.

Hey, Thanks, good morning.

Good morning, Dan I guess.

Yes, maybe just starting with rates in the swap that you talked about maybe get some context around the rationale for doing that I guess the cost associated with it.

I think you mentioned retaining the upside as rates go higher but.

Just wanted to make sure I understand the mechanics of this versus just.

Kind of the normal course of reinvesting your balances.

Yes so.

A couple of points here. So we we did this very successfully about four or five years ago, where we landed into the two year rates, which gave us.

And then Hans went over the short term rates when rates were low.

At that time.

We do it in a very disciplined way, we sort of look at it every quarter.

And with the current setup here and with interest rates having moved.

So aggressively in late.

December we decided we had sort of implement that same process and the methodology. We look at is we basically look at a portion.

All of our total balance and then we say.

What rates can be locked in now and what earnings would we get over a two year period versus if the fed did what it says it's going to do and if that calculus shows us that with certainty. We can achieve a better result at that point in time.

We think it's prudent to do that because we immediately start earning that higher rates instead of waiting.

345 quarters, we started getting that right now.

If the fed is more aggressive with its rate increases obviously on the back end you might have an opportunity cost, but you certainly lock into.

<unk>.

Fixed rate over that two year period, so when we did that calculus it was positive.

We will do that again in March.

We'll look at sort of the fed plops looked at sort of a tds swap versus.

What's the fifth plus shows us in the aggregate and interest earnings over that two year period.

That calculus is positive and.

Positives and certain versus uncertain, we will consider doing more swaps.

At this point I think it's probably not going to be positive given where we stand right. Now if we have to do that calculus. It wouldn't be positive and in that instance, we would probably been just wait wait it out and see what happens with the fed increases the one thing I would say, though we obviously in uncharted territory, but if you go back and look at.

Any of these fit predictions in the past the fit almost never did what it first predict projected right I mean things change. So these seven brake increases that people are talking about now are by no means certain so.

There is some variability to that.

In terms of what it costs us in how we can execute that.

We broadly have two options right, we can actually just go by.

Two year rate instruments, whether it'd be treasuries or similar high quality assets.

If we do that.

Broker dealer, we have additional capital haircuts on that so we've got to make that helped them as well.

Because it does tie up capital.

If we use the derivative swap market, we don't tie up any capital we might have to play some margin to support those trades.

In this instance, actually we had a client book that was the other way. So when we put these trades on it actually released capital back to the firm. So we sort of had a capital when and sort of a zero cost. If you like so so I'll stop there I hope that all makes sense, then, but that's sort of how are we going to look at it and Thats why we are constantly looking at it because even once.

The rate increases have finished.

If you're in a positive yield curve you can still swap from the overnight rates at the two year rates and see what kind of a constant if you can get the reason we choose two years he's going beyond <unk>, you think it's probably too aggressive for us and also the haircuts on instruments beyond two years becomes quite a bj's. So we'd like to stay in that zero to two year kind of category.

Yeah.

That's very helpful. Okay.

That does make sense and I guess.

As you think about the incremental benefit of not only that but just higher rates in general and the sensitivity that you've put forth in slide 15, and it's been there for some time.

The incremental margin that we should think about at the corporate level in terms of compensation or there's obviously not a lot of expense tied to this but.

Should think about this is <unk>.

Very high incremental margin revenue coming through to your returns and overall profitability correct yes.

Yes, absolutely we have no payouts to our teams on that so that goes straight to the pretax line, obviously to the extent that impacts Roe.

There will be at a compensation to the executive team if <unk> goes up because we row based but it's a very small drag on from that compensation provide something that sets a very high margin.

Revenue source and I think people don't really understand if you look at the context of.

Yeah.

One $7 billion in.

Top line revenue.

<unk>.

Just doing the math over the top of my head, if you get 1% and $60 billion $60 million $60 million doesn't sound that important in the context of one 7 billion, but at $60 million to the pretax line pretty much right. So.

It's very important to lots of leverage on that.

Right right.

Makes sense.

If we think about.

The context of the business in the quarter in.

To start the year global payments continues to or certainly had a very good.

Kind of quarter I think you mentioned rental initiative place.

Yes.

Just a little bit more context on the momentum in that business. So we think about whats I don't want to say normal but.

Kind of if there is any seasonal components or things that maybe this is a good as you.

You think about the health of that business is this.

Is it building from here or.

Or are there maybe.

Excuse me this past quarter was a bit elevated versus what you might consider normal.

No I think this quarter was what I would consider to be normal I mean, there is definitely seasonality in our global payments business.

If you look back on it.

The third quarter, sorry in the fourth quarter for US the September quarter is typically a weak quarter for us that's sort of summer holidays in Europe .

A lot of people just go away.

So we always thought that the September quarters, probably the weakest of the four and then we find that the Q1, which is the quarter. We just reported on the December quarter is normally the strongest because it's a little bit of a catch up after the weak Q3. So we seem to see that catch up happened almost every year. So so there is seasonality in that comes in.

Largely from the NGL part of our business less so from our banks.

So I would say that that's to answer your seasonality question.

The global payments business is an incredible franchise I mean, we we.

We make payments around the world for 15 of the largest banks in the world and probably another 200 midsize banks around the world.

We are almost systemic to some of these these countries in terms of how much money, we are pushing into those local markets.

Until we do it for and that business is continuing to grow.

Also the borrowing deeper into these banks getting more of that flow. So that's a steady business that is growing at a nice pace we've got.

Tremendous franchise value there.

Great relationships with our clients I think what you're starting to see now starting probably three quarters ago is we now starting to sort of.

I think look at some new avenues to re energize the business a little bit so.

We started with the sort of digital offering to go after smaller co.

Corporations, where.

Hi, touch just isn't going to work. So we're trying to see whether we can gather up some of the smaller companies that do payments.

Also use that platform for our own internal clients, that's a whole new Avenue for us right and this digital.

This digital.

Hey in business in some of the key countries, where we have licenses is also a new business what I would say is.

You may see some additional costs and indeed, I think there have been some additional costs to to fund the build out of those businesses, which is going to put up probably a little bit of a drag on the segment income we would have otherwise seen from some of the banks in the NGL business.

But our hope is over sort of a two to three year period.

Those initiatives become very sizable businesses in their own right. So so I think you should expect that from a payments business a little bit of a growth push and we've seen that over the last three four quarters.

I don't think its going to be materially different from where it is now but as those businesses start sort of turning themselves to account as we start getting to breakeven we start getting beyond breakeven.

Thank you could see the global payments business accelerate in terms of its of its growth.

It makes sense.

Yes. It does thank you.

I guess bill as a follow up on in terms of expenses and other kind of notable items in the quarter I think you talked about.

Either at the corporate level or at the segment level that we should think about that Mike.

You'll have different run rates than what we saw here in the December period.

Bill why don't you take that.

Sure.

Nothing material.

You think that probably could you do you see non variable comp.

Creep up a little bit from where it is now as we continue to kind of expand that digital offering but.

Yes.

The debt we put on when we did the.

The gain capital acquisition, so there'll be some.

Hope some significant changes there to the interest expense line on a go forward basis, but.

Outside of that.

The last thing of note here is that I would say.

We have seen kind of sequentially and even quarter over quarter, some increases in travel and business development as we've had kind of ebbs and flows in COVID-19 .

Offices, opening and clients being more willing to see us.

Kevin.

<unk> gone.

Several times, but I think we're starting to see that go up.

We do have some big conferences planned coming up here, so we'd expect to see some of those traveling business.

Development costs go up.

We've put out some press releases on our global global market outlook here at the beginning of March which as you know.

Something we do.

By annually.

And so it's something that.

It is a relatively big event for us So I would expect to see some travel and business development increases, but outside of that and interest.

Nothing else of note I would say Dan that jumped out at me.

I would probably say one other thing that we did.

Speak to that we would see also the fixed cost component.

Climb over sort of two years of quite strong growth. Some of that was gain some of that was sort of a spinning up.

What about technology.

Technology teams and so on.

We did plan for an increase this year and a more modest increase.

It's challenging filling those spots so.

What we may see is something some of that cost sort of being back ended a little bit into the year, just because of the challenges around hiring people. So in aggregate I don't think its going to be anything different than we planned. It's just probably not going to happen sort of evenly over the quarter as we had planned.

It was challenging.

Okay, and then just Sean as you think about the environment today.

The firm being acquisitive over time, but.

Listening to your prepared remarks lots of organic and opportunities and you just mentioned the Tam is and where you are so the inorganic versus organic kind of.

You kind of focus in this type of backdrop.

Is it do you see M&A.

It is attractive in the current backdrop versus some of the internal.

Youre kind of opportunities you have ahead of you.

Yes, I think we've always we've always prided ourselves on having.

A good and profitable business that has strong organic growth and that's always been our number one criteria as many acquisitions that we've done we've never sort of set out to acquire businesses.

It's been much more opportunistic in our number one goal is to leverage the capabilities, we have and I don't think we've ever seen.

<unk>.

And environment and the situation, we have so much opportunity to capitalize on the incentives.

The good news with that is it allows us to be very disciplined around acquisitions right. Because we've got lots to keep us busy in lots of ways, we can grow our business.

Therefore, we are only going to do something on the acquisition side, if it really fits it's priced right and so on so I think it's allowed us to be very disciplined.

And we don't like to overpay, we like to buy businesses, we can add value to.

And I think we've done that pretty successfully so in this environment, we have a situation where I think we've got some enormous opportunities on the on the sort of organic growth side that you don't want to necessarily take our eye off the ball and missed surprises big and then on the acquisition side. It feels to me that everything is overpriced.

So I think in that environment, it's probably unlikely we're going to do anything meaningful but as soon as I say, that's something that kind of happen potentially but.

I honestly think it's probably lower probability than it has been in the past that we.

We will see something on the acquisition side, just because I think prices are way high.

Probably not the right time to buy the kind of businesses, we looked at and at the same time, we just got lots of really good stuff to do internally.

Great well, thanks for taking all my questions.

Yes of course.

Thanks, operator.

Sure.

At this time I'm showing no further questions I would like to turn the call back over to Sean O'connor CEO for closing remarks.

Well, thanks again, everyone for joining us and we look forward to.

Speaking to you in three months or so so thanks for your interest and goodbye.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Stonex Group Inc Earnings Call

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