Q2 2022 Stonex Group Inc Earnings Call

May 5, 2022

Welcome to <unk> group's second quarter earnings call.

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I would now like to turn the conference over to Bill Dunaway, Chief Financial Officer. Please go ahead.

Good morning, My name is Bill Dunaway welcome to our earnings conference call for our second quarter ended March 31 2022.

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

This report is available on our website at Www Dot <unk> dot com as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly and year to date results.

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

Presentation, and an archive webcast will also be available on our website after the call's conclusion.

Before getting underway, we're required to advise you and all participants should note. 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 1933 as amended and section 20 <unk> of the Securities Exchange Act of 1934 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 second quarter earnings call.

As I mentioned last time during our Q1 call market conditions generally turn more favorable for our business.

Natural market contemplated inflation and the fed response that too.

What we had not anticipated is the geopolitical shock, which came from the Russian invasion of Ukraine, which added significant uncertainty and volatility, especially in the commodity markets.

As we have mentioned a number of times previously ideal market conditions for us are moderate market volatility and a decent level of short term interest rates.

Extreme volatility certainly provides good revenue opportunities. However, also potentially leads to liquidity stress on our clients, which generally leads to a higher bad debt charge.

Our risk management approach is to ensure that when we see these extreme market events. The net result is still a positive for all shareholders and our bottom line.

Our team has not experienced many such situations and we have implemented a robust risk management process, which over time has become embedded into the slow next eni.

I was exceptionally pleased with our team reacted we have front office risk and operational people standing shoulder to shoulder and running towards potential problems, our risk management process starts well before any crisis occurs as we sit positions in tandem limits on clients with now on boarded and we continually stress test all of our client portfolio and adjust accordingly.

Loading meet with changing market conditions.

Our job is to make sure our clients understand the risk they are taking and have a mitigation plan and sufficient liquidity to navigate these market events.

Not only do these extreme market conditions provide immediate revenue opportunities and of course the associated risks, but then also of course clients to rethink who they deal with it where the assets reside and larger banks once again recalibrate the type of clients they want to deal with.

As we experienced following previous such situations, we are seeing a number of clients looking to transition that business to us.

The result, we achieved a record quarter.

For core operational earnings besting the record we set in the prior year period, So we actually comparing against our previous record.

ROE stated.

As stated book value was 26, 1% for the quarter and 29% on a tangible book basis.

Quarterly earnings were $64 million or $3 11 per share.

On a year to date basis, we achieved an ROE of 22, 1% translated book and earnings of $105 7 million or $5 15 per share.

We continue to believe that the market environment will provide some positive tailwind for us over the next year or so with sporadic volatility as the fed with tools that support for the market and interest rates increase both direct and positive drivers for our business.

Turning now to the slide deck and starting with slide number three comparing operating revenues the key operate operating metrics against the prior year period, which you remember was in fact, a record result up until now.

Operating revenues were up 16% for the quarter.

With increases in all product areas, except for securities and physical contracts.

On a year to date basis, all products were up strong double digits, except for securities, which was down 4%.

Transaction volumes increased both for the quarter as well as on a year to date basis. In fact, we had three of our five busiest days ever in terms of transactional accounts. During this period of volatility the other two days being the initial onset of the Covid pandemic.

Revenue capture increased significantly in most products for the quarter and year to date, except for securities, which was down 21% and 20% to 23% respectively.

The FX cfd contracts, which declined marginally 2% for both periods.

Our average client flows.

Both on the listed derivatives and as well on the securities carried at <unk> experienced strong growth up 38% and 29% respectively. Due both to higher margin rates imposed by the exchanges due to volatility as well as market share gains and in aggregate now stands at over $7 billion.

Up 36% from a year ago.

Interest earnings on client balances were up 17, 9% versus a year ago due to higher client balances and we are now starting to see interest rate increases interest, earning should start accelerating strongly as the new rate hike starts to work their way through the system.

Versus the immediately prior quarter operating revenues were up 21% versus the three months ended December 31.

With double digit increases in product revenues across the board, except for global payments and physical contracts, which were both down marginally.

Prior periods being reckless for them.

Strong volume increases across the board, except for OTC and global payments, which were marginally down revenue capture was up across the board.

The prior quarter and our average client flow was up 12%.

Moving to slide four and looking at the same metrics on a trailing 12 month basis, our operating revenues were up 20% versus the trailing 12 months ended March 31 2021.

Double digit increases in product revenues across the board except from physical contracts.

Which were up 6%.

With record performance in the prior period and securities which was unchanged.

Strong volume increases across the board, except for listed derivatives, which was up only modestly.

Revenue capture was up in listed and OTC derivatives, However declined in securities and FX fees.

However, our average client float was up 30% and interested on client balances was up 64%.

Turning to slide five and a summary of.

As reported but also on an adjusted basis, which includes the ongoing accounting impact of the gain transaction.

We recorded operating revenues of $544 7 million up 16% versus the prior period, which is a record.

We achieved record quarterly revenues for three of our four segments commercial institutional and retail.

Global payments was slightly behind the immediately prior quarter, which was its record quarter.

Total compensation and other expenses were up 24% for the quarter, most notably most notably variable compensation due to higher incentive compensation fixed compensation costs increased 5%.

Other costs, including trading system market information non trading technology costs and other fixed expenses increased over the prior year as a result of the strategic initiatives I've touched on over the last several calls and we'll discuss again later on this call.

Our selling and marketing costs were up 120% over the prior year, while not technically variable reflects our digital marketing spend during times of heightened market activity when it is more effective.

Bad debts were $12 3 million due to the market stress.

Mentioned earlier this is slightly above the 1% of operating revenue be targets or better when they're trailing 12 months basis. It represents one 1%.

Operating revenues, so very much in line with that target.

Our net earnings were $64 million or $3 11.

Diluted per share representing a 26, 1% Roe.

Yeah.

Looking at the summary for the trailing 12 months, our revenues were $1 8 billion up 20% on the prior comparable period net income was 147, two and $152 million on an adjusted basis.

Reported EPS was $7 18 for the trailing 12 months for 58% ROE or 16, 3% on an adjusted basis.

Our quarterly earnings were up 53% or $22 $3 million higher than the immediately prior quarter with EPS, starting some of the increase.

We ended the quarter with book value per share of $49.86 and shareholder equity Eclipse the billion dollars benchmark for the first time.

Turning to slide six which is our segment summary, just to touch on the highlights of the full bill gets into more detail aggregate segment operating revenues were up 16% for the quarter and segment income was up 19% versus the record results.

Last year.

On a sequential basis operating revenues were up 21% and segment income was up 30%.

Standouts for the quarter, while our commercial segment, which increased operating revenues, 28% and segment income 26% both new records.

Retail showed good growth in operating revenue up 17% and segment income up 42% also both new records.

Global payments operating revenue was up 22% and segment income 23%.

Institutional segment increased revenues, 6%, However segment income was down 4% due to lower revenue capture.

Versus the comparable period.

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

These strong quarterly results, but as we've said repeatedly we take a long term view and how we manage the company in bra franchise as such we believe 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.

Turning to slide seven which sets out our trailing 12 month financial performance. These numbers have been adjusted for the accounting treatment related to the Gideon acquisition as disclosed in our prior filings and appear in the reconciliation provided on the last page of the savings back.

If you look at the graph on the left hand side, the blue bars represent our trailing 12 months operating revenues over the last nine quarters.

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

Our revenues are up 50% over this period or 22%.

Annual compound growth.

Our adjusted pre tax income likewise has grown significantly up 58% or 825% CAGR.

On the right hand side, you can see adjusted net income in the yellow box, which is up 69% over this period for a 30% annual compound growth rate.

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

Yeah.

Okay.

Thank you Sean.

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

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

Transaction based clearing expenses were up 2% to $76 5 million in the current period, primarily related to increases in OTC and listed derivatives volumes as well as higher costs in our retail FX business due to increases in client funding transactions.

Introducing broker commissions were up 6%.

To $43 2 million in the current period due to increased activity in our listed derivatives and wealth management businesses.

Interest expense increased $3 million versus the prior year, primarily due to an increase in securities lending activities as well as higher average borrowing on short term financing facilities of our subsidiaries.

Variable compensation increased $18 1 million versus the prior year due to an increase in net operating revenues and representing 31% of net operating revenues in the current period compared to 32% of net operating revenues in the prior year period.

Fixed compensation increased $4 million versus the prior year with a gross principally related to salary and benefit costs have increased head count, which increased 10% as compared to the prior year.

Other fixed expenses increased $27 9 million as compared to the prior year to $99 9 million and were up $13 4 million versus the immediately preceding quarter.

As compared to the prior year, selling and marketing expenses increased $7 8 million.

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<unk> increased $4 8 million.

The increase in selling and marketing primarily relates to an increase in digital marketing in our retail forex business and to a lesser extent costs related to our biannual global sales and strategy meeting.

In addition, trading systems and market information increased $2 1 million and non trading technology and support increased $2 2 million as part of our initiative to expand our digital offerings.

Depreciation and amortization increased $2 7 million and primarily relates to an increase in internally developed software.

Finally, we are starting to see increases in travel and business development, increasing $2 5 million as compared to the prior year.

As Shawn mentioned earlier, we recorded bad debt expense of $12 3 million for the quarter versus 900000 in the prior year period.

During the current period, we received a $6 $4 million foreign exchange antitrust class action settlement, which is reflected as an other gain on the consolidated income statement.

Net income for the second quarter of fiscal 2022 was $64 million and represented a 16% increase over the prior year and a 53% increase over the immediately preceding quarter.

Finally, as we closed out the quarter with a net asset value per share of $49 86 per share as compared to $43 48 per share a year ago.

Moving on to slide number nine I'll provide some information on our operating segments.

The commercial segment had a record quarter, adding $39 8 million in operating revenues versus the prior year and $31 5 million versus the immediately preceding quarter.

Within this segment listed derivative operating revenues increased $15 5 million versus the prior year as a result of a 30% increase in the average rate per contract as a result of strong strong performance in <unk> metals.

OTC derivative operating revenues were $62 4 million for the quarter, which was up $27 3 million versus the prior year quarter, primarily as a result of 18% and 15, 52% increase in OTC derivative volumes and average rate per contract respectively, driven by strong performance in agricultural and energy commodities.

As a result of heightened volatility in global commodity markets.

Operating revenues from physical transactions declined $5 9 million compared to the prior year as a result of a $1 $6 million decrease in physical agricultural and energy commodity revenues as well as a $4 $1 million decline in precious metals revenues with the prior year comparable period, being a particularly strong quarter for precious metals.

Finally interest earned on client balances increased $3 3 million versus the prior year, principally due to the 15% increase in average client equity as well as an increase in interest charges to customers uncertain margin balances.

Segment income was $70 1 million for the period, an increase over the prior year in preceding quarters, 26% and 7% respectively.

Moving on to slide number 10 operating revenues in our institutional segment increased $11 2 million versus the prior year, primarily driven by $6 4 million and $5 $4 million increases and listed derivatives and FX operating revenues, respectively, which were driven by widespread volatility in global markets.

Securities related operating revenues declined $7 8 million compared to the prior year period as a 16% increase in the average daily volume of Securities transactions was more than offset by 21% 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.

Interest earned on client balances increased $1 5 million, primarily as a result of the 58% increase in the average client equity as compared to the prior year as well as a modest increase in short term rates.

Institutional segment revenues increased 41 5 million versus the immediately preceding quarter, primarily as a result of the $27 8 million and $7 $1 million increases in securities Unlisted derivative operating revenues, respectively, as well as the $3 $6 million increase in FX related revenues.

Segment income declined 4% to $50 million in the current period the increase in operating revenues was more than offset by $1 8 million.

2 million increases in variable compensation and interest expense respectively.

As well as a $9 million increase in non variable direct expenses versus the prior year.

The increase in non variable expenses was primarily related to $2 million increase in bad debt expense of $1 $7 million increase in professional fees as well as increases in trading systems and market information depreciation and amortization and fixed compensation related to our digital initiatives.

Todd has mentioned on prior calls Sigma.

Segment income increased $18 $1 million versus the immediately preceding first quarter.

Moving on to the next slide operating revenues in our retail segment added $17 8 million versus the prior year, which is primarily driven by 18 F $18 $8 million increase in FX and Cfd revenues as a result of 10% and 15% increases in Adv and RPM as compared to the prior year as a result of heightened volatility and global.

Financial markets.

Operating revenues from Securities transactions increased $1 3 million. However, operating revenues in retail physical precious metals declined $2 9 million versus a particularly strong prior year period.

Operating revenues in the retail segment increased $23 6 million versus the immediately preceding quarter.

Segment income increased $13 5 million versus the prior year, primarily as a result of the increase in operating revenues and a $6 4 million class action settlement I mentioned earlier.

This was partially offset by $8 $1 million increase in non variable direct expenses, primarily driven by a $5 $2 million increase in selling and marketing.

$700000 increase in trading systems and market information as well as a $400000 increase in depreciation and amortization versus the prior year period.

Segment income increased $22 1 million versus the immediately preceding quarter, primarily as a result of the increase in operating revenues and the previously mentioned settlement.

Closing out the segment discussion on the next slide operating revenues and global payments added $7 5 million versus the prior year driven by an 8% increase in average daily volume and a 12% increase in rate per million as compared to the prior year.

Non variable expenses increased $1 9 million and is primarily related to the expansion of our payment offerings.

Segment income increased 23% to $23 9 million in the current period, however declined 2% versus 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 revenues were $544 7 million in the current period of $73 3 million or 16% over the prior year.

I have covered the change in operating revenues for our segments. However, the $3 million decline in revenues and unallocated overhead, it's primarily related to the $1 9 million FX related net gain on the internal merger of operations of gain capital to UK subsidiaries in the prior year period.

Next slide number 14 represents a bridge from 2021 second quarter pre tax income of $76 3 million to pre tax income of $87 4 million in the current period.

The negative variance in unallocated overhead of $19 4 million is related to the decline in revenues I just mentioned as well as an increase in unallocated expenses, including $4 4 million increase in variable compensation as a result of improved performance.

One $4 million increase in fixed compensation and benefits of $1 $9 million increase in trading technology in support of $2 $1 million increase in professional fees of $1 $5 million increase in depreciation and amortization and a $2 million increase in selling and marketing expenses.

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 rates and interest rate earned on these craft client balances increased nine basis points to 20 basis points for the current period the.

The 25 basis points that increase in fed increase in short term rates occurred late in the quarter.

<unk> of that hike as well as yesterday 50 basis point increase will start to be seen in subsequent quarters.

As noted in the table with the increase in client balances noted earlier, we estimate 100 basis point increase in short term interest rates would increase net income by $32 million or $1 59 per share on an annualized basis.

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

Okay.

Thanks, Phil turning now to slide 16, which they thought the high level strategic objectives that we as management are focused on we havent shifted the slides before but I think it's worth repeating for those that are new to this call.

Our primary objective is to keep expanding our financial ecosystem to make us more relevant to clients, we want to continually access more markets more sources of market liquidity, while offering more products and capabilities to outgrowing blackface. This forms the cornerstone of our next objective, which is to grow and diversify our client base and generate.

More traffic across our platform.

If we are relevant to clients and we have attractive ecosystem, that's obviously becomes easier.

We want to ensure that we are diversifying our client base by pipe.

So just by segment commercial retail and institutional as well as by geography, which of course will be enhanced as we continue to digitize we.

We need to digitize, our business to increase internal efficiencies and scalability, which will drive operational revenue as well as increased client engagement.

As we offer more digital ways for clients to access all ecosystem, we massively expand our total addressable market in a digital environment every client anywhere is an opportunity for us.

Our business needs to be supported with regulatory capital and we need to deliver consistent earnings to create the internal capital runway to support our growing business. This allows us to be disciplined in approaching the capital markets. When we put these capital is appropriately priced as well as when considering potential acquisitions.

This is a simple strategy, we have been focused on for over 15 years and has proven successful and effective.

Over the last six quarters, or so I've given a more granular view of the various projects. We are undertaking at all segments I'm not going to go through them. All again, however, we continue to make excellent progress and hit our milestones and delivering many of these new capabilities some of which will be launched in the next three to six months.

I will focus on our clients I think I would summarize our client focused initiatives are as follows.

Lastly, digitizing our offerings to access a broader base of typically smaller clients that cannot support the high touch approach and in so doing leverage some of the expertise we acquired with a bank transaction. This is happening with payments will be looking to access small commercial clients.

<unk> advantaged platform, we're looking to serve a smaller agricultural producers globally amongst other initiatives.

Secondly, expanding our retail platform to include more of our products and capabilities, which is something we laid out when we acquired <unk> a week.

Our platform is currently being rebranded and will soon be significantly enhanced internationally to offer cash equities and domestically to offer securities feature in FX trading as well as crypto assets. This will be a significant enhancement offering more traditional investment products together with leverage speculative products on one.

That pool.

Third.

We continue to rollout narrowly focused customized technology solutions to targeted client groups to make them more embedded and stickier.

Stone hedge is a good example of this with our launch commercial grade customers.

We want to keep expanding our products and capabilities, we have dramatically expanded our securities capabilities of the U S. Over the last five years and continue to do so on the equity and fixed income side, where we now cover all of them.

Almost all asset classes.

You can see with the increase in fixed costs in the institutional segment, we continue to make investments and believe that these investments will in due course.

Additional revenue.

This includes also our equity team rolling out electronic market, making capabilities put domestic U S stocks and we now looking to leverage all of our securities capabilities into a more global business.

Largely U S based at the moment.

We have made good progress building the core capabilities for this in the U K and recently made some key hires on the security side in Singapore.

Global payments team is expanding the local currency pay and capabilities and our precious metals team has made excellent inroads.

U S physical precious metals market.

So as you can see we have a large number of projects in flight all of which are being worked on for some time. The good news is many of these have started to be released some in beta form in Sumpter limited groups of clients, but most of these initiatives should be fully launched and rolled out two outdoor client base in the next three to nine months, which is pretty exciting.

As we mentioned in our last call in late December the interest rate Mark wanted to move higher that's signaling the probability that the fed would start to raise interest rates in the coming months the market expectation.

Three months ago, when we had this call what's perhaps for fed funds rates of about 100 basis points by year end.

As we know we'll know that view has changed dramatically with expectations now around 250 basis points.

There's still a lot of uncertainty around.

This will circle with data showed very high inflation, while at the same.

<unk>, we're still growing.

While there is no certainty as to the what the final outcome might look like it is fairly certain that rates will be going up faster than we thought three months ago.

We anticipate that starting in Q3, we should start to see a steady rise in the average yield earned on our growing client flows were also continued to play close attention to the yield curve and where possible market and attractive longer term yields an uplift.

Finally, we have started the process to refinance and restructure our holding company debt we have.

Hold on a parent level bank facility for three more years, while also expanding the capacity under the facility from $400 million to $475 million with additional support from existing lenders as well as several new banks joining up syndicates.

I'll turn our attention to the remaining term of debt in our capital structure.

Let's move to the final slide 17.

This was our strongest operational quarter to date with good market conditions and excellent results across all products in all client segments.

We achieved earnings of 64 million diluted EPS of $3 11, and then row stated book of 24, 1%. This.

This is also the best six month period, we've ever had with earnings for the six month period of $105 7 billion.

Diluted EPS.

The <unk> and ROE of 22, 1%.

When our performance is viewed through the through the slightly longer term lens, such as trailing 12 months, which evens out quarterly anomalies. Our results continue to show a steady and strong upward trajectory growing.

Our revenues at a 22% compound annual growth rate and adjusted earnings at 30%.

Continue to see strong growth in client trading volumes and client assets, which speaks to the growth in the underlying client base and client engagement. This combined with heightened market volatility and increasing interest rates, but it's a real tailwind behind our business for the next year or so.

This year as we just discussed we will see a number of our digital platform is being launched which are more tightly integrate our offerings by client type make it more engaging for clients to interact with a financial ecosystem.

While we are initially seeing some increased costs associated with bringing up these platforms and standing them up as we start to actively market. These platforms. We should we should further accelerate.

Accelerate our growth 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. We certainly have good market share in certain niche segments of our market, but lots of white space remains in areas, where we already have client relationships and demonstrate the capabilities and now need to monetize these opportunities.

As we said last time, one thing, we'll always be constant for the next team we continue to get dedicate ourselves to better serving our growing client footprint around the world by providing them with the best financial ecosystem and service to access the global financial markets.

Operator, we are ready if there are any questions. Thank you.

Yeah.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your headset before pressing the keys.

Cause withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Daniel Fannon with Jefferies. Please go ahead.

Thanks, Good morning, gentlemen.

Hey, Dan how are you.

I'm good thank you.

<unk>.

I was hoping you could just talk about the health of your customer base.

Obviously predicting volumes and sustainability is something that is hard to do but given some of the extreme moves in the first quarter.

And some of the levels of volatility that was that occurred wondering.

Just the after if theres any kind of flow through rate or negative impact to the customer base and thinking about future activity engagement all of those metrics.

Yeah. So.

As I mentioned in my prepared remarks, when we see extreme volatility.

Obviously that translates into.

Liquidity stress on our clients.

And we will call it to make sure our clients are prepared for that.

But obviously, you do see bad debts and clients not being able to.

Fully handled the stresses that come with them so to certain extent you see a wash out of some of our clients you can see that in our numbers, we had a $12 million.

Bad debt write offs. So that's clear evidence that there was some damage that always comes from these elevated volatility type situations, but honestly I think in large part we.

As I said I think we have a very good risk management system that I think over time, we've really synced ourselves up with our clients and make sure they understand the risk they take.

Because we obviously want to mitigate any of our client falloff right. Because we hope these clients will be clients for a long period of time, So I would say given the extreme volatility we saw I think our client base in general came through really well.

I don't anticipate a huge falloff in activity, obviously, that's dependent on ongoing market conditions, largely but I think most clients were able to weather. The storm many of them have done very very well on the commodity side because of the elevated prices of commodities.

So I don't think Thats, a significant factor I think sort of the market conditions going forward.

Our most significant I think in dictating what kind of revenues will get out of those clients. The second point I'd like to make which I did make in my prepared comments every time, we seamless we end up picking up market share.

Just kind of Raffles every wasn't a little bit.

What we see is a lot of clients want to sort of go up market, sometimes they start to worry about the financial health of the broker or the cleared or are they using.

We are one of the few in the sort of second tier space that's public.

And you typically have more capital than most of our competitors. So.

So we become a bit of an easy choice. We also have the biggest financial ecosystems.

We do find a lot of customers.

Come to us and wanted to restate business across to what they perceive to be a more critical counterparty.

And that's always very helpful. Right. So so that's been happening as we've seen before and then secondly, you know the banks often times get a little bit of rattled when they see this kind of volatility and start to sort of reassess their approach to the business, which typically means they focused sort of on the highest end your clients from that perspective.

And the smaller clients get pushed out and we're seeing that as well. So this is a good opportunity for us for customer acquisition I think if you went back and looked at what happened.

In the Covid sort of onset of Covid, which was the March quarter. In 2020, if you look at what happened post that we definitely picked up a lot of market share and that showed up in increased volumes that showed up in our client float going up significantly and I think we'll see some of the site maybe not quite to the same extent, but.

I definitely think we will see increased market share. So I would say on balance I think this is a net positive for us on the client side I think we'll end up with more clients and more clients potential.

That potential gets unlocked depends on market conditions going forward. So I'll stop there and see if that answers your question or if there was any further comments.

Okay.

Yes.

Super helpful.

I guess just on the bad debt and if I think back when W. Ti went negative repercussions to your income statement was a lagged effect associated with something like that so.

Is the if you think about what occurred in the quarter.

Across a handful of clients.

Widespread is there the potential for insurance recovery just wanted to think about just the breadth of that yes.

Yeah. So.

The one thing which becomes hard to predict is the sort of second and third derivatives of the of the show you bet right. So.

Clients that before but if their clients become stressed they have defaults you know that kind of goes up the chain.

We certainly anticipated in COVID-19 that there wouldn't be a delayed effect I think if you listen to my comments.

On the call just post that March quarter, I think we sort of highlighted the people that there was so much dislocation.

In the supply chain, but it was very hard to know how this would roll off and that they would potentially be.

Nag effect on our bad debt.

Don't see the same thing today, so I think the.

Probability of.

It's sort of a tale of bad debts relating to this volatility we've just seen is lower.

Zero I mean, I think it is very hard to predict sort of the second or third derivative assumption of these things, but I think we feel good about that being less of a risk of that now obviously it depends what happens going forward and do we see a number of extreme volatility or not.

But I think generally speaking we feel pretty good about where we are.

Some of the we typically win win.

When we.

View for bad debts.

<unk> tried to take a very conservative view, obviously, we have to go to an accounting or GAAP analysis of how we decide to take bad debts, but if anything we try around the side of conservatism.

We typically discount recoveries or potential recoveries from clients that we believe are weak or tenuous.

Sometimes those clients come through and they pay us back. So I think there is some potential for some amount of recovery.

The amounts that we have with north.

But I think they sort of fall below the threshold of being sort of comfortable in certain that that could happen. So I think it's possible, but I wouldn't rely on them. So does that answer your question Doug.

Yes, it does.

And.

Shifting to the cost side.

Yes.

And the fixed cost and obviously, a very good revenue environment, so margins to row, all of that kind of the flow through it's quite good but if we think about.

The second half of this year fiscal year.

The kind of exit run rates for some of these expense levels are you.

Should we anticipate kind of continued growth in some of these fixed costs. You mentioned, we know that all the investments in growth initiatives that you're focused on but.

Curious about the trajectory where the pace of spend as we think about your income statement or your expense budget for the second half of the year.

Yes, well Bill maybe you can give more specific comments, but as a general comment what I would say is you know.

Some of the staffing up of some of the initiatives, we envisage to happen during this year.

Been impacted just by the inability to hire people. So we are behind and have lots of positions that we thought could be still available so to that extent I think.

Is a potential for some increased spend coming at us over the next two quarters, but I think on a on a sort of overall incremental basis.

It's small amounts of percentages versus kind of our current installed expense space.

I think by and large we have.

Bested in most of the capabilities, we want I mean, certainly.

It's been a big investment in upgrading.

All digital platforms.

We starting to see the payoff of that but that's largely been embedded.

And as you can see on the security side, we can see there's been a big increase in fixed costs and that maybe hasn't really shown up with revenue as I think we mentioned last time, we brought on a lot of new teams expanded into a lot of new areas and as we know that takes a couple of quarters before those people become productive some of it back.

Just sit out on the market restrictions and so on and so am I.

Think those two things will start to work for us, but still I don't know if you've any more specific comments with them on that.

Sure sure Thanks, Sean.

Yes, so we're looking at the non variable expenses is shown touched on several non variable comp is up if youre looking versus the most recent quarter. It's up about $8 3 million underlying that is really a $3 million $3 $1 million of that is true salary increase.

I do think we'll see some incremental growth in that as Sean touched on but the hiring market is certainly difficult. So whether we're successful in actually hiring them I guess.

But I would note and I think we touched on this last call.

Cute our Q2 is the first quarter of the calendar year, and we do see a spike in payroll taxes and retirement contributions et cetera is kind of everybody's cycles reset Brexit the employer contributions to both of those are higher at the beginning of the year. So those were both.

Two and a half and $2 1 million, respectively kind of sequentially versus the first quarter. So I would see some of that trailing down Dan here as people reach their maximum.

And then looking at the other big spikes as.

As we've mentioned insurance come in selling and marketing of <unk>.

Quite a bit.

Versus both last year and sequentially.

Some of that flexes right, especially in the retail floor space in periods of good volatility will be spending more in order to try to get our name out there and more customer acquisition.

That was up about three $4 million over the first quarter and also some of that as we touched on was related to the large conference. We had that happens every couple of years ago and strategy conference.

So I wouldn't see that repeated and that was probably the two of them.

$2 3 million.

<unk>.

But other than that I do think we'll see some incremental growth, but I think you did see some of those things.

A bit higher.

Just because of the timing of Q2, and then also touch on there is somewhat non income taxes and trade areas that were somewhat elevated in the current quarter, just because of the volume of transactions that we have that.

That are not technically variable, but kind of do can flow.

Business that makes sense.

Yes, it does okay.

And then.

In terms of initiatives and showing the ones that you've been talking about several of them for more.

Multiple quarters I guess in terms of the.

Immediate contribution or the way that you.

Any.

And in <unk>.

Specifics to the order for what you talked about is whether size of the contribution.

Immediacy to rollout and seeing in the income statement or longer term kind of larger.

Opportunity.

I think this is a medium to longer term incremental opportunity I don't think any of these initiatives are going to sort of liked up into Mexico, which had a notably I think this is a steady.

Kind of Digitization of our platform, which will allow us to incrementally speed up our growth and if we do that right that should show up in sort of better margins and better growth over time, but I don't think it's something you can model into sort of the next couple of quarters or something I. Just don't think it's going to show up that way.

Right Okay.

<unk>.

And in terms of just the as you are building new businesses hiring.

Additional teams and other is there at the top of the house any discussion around you know kind of a variable pay per performance kind of payout structure that occurs in most of your businesses do we.

As you get more scale and as the platform gets more cloud and there's natural benefits of the brand do payouts ultimately come down to the benefits of.

To accrue back to shareholders and ultimately returns over time should we think about kind of more operating leverage in the business as you adjust.

The variable compensation.

Kind of commission payout.

Legacy practices.

So I would.

I would have a couple of comments on that I think.

We've proven over time that having a very transparent.

Cash compensation plan.

For our people, where they can work out what the compensation is on the back of a napkin has been a very powerful positive force for US. It's allowed us when we were very small company to attract talented people. We now pulling people out of the bulge bracket banks, who want to come work for us because the big banks don't do it that way anymore.

And you know and we allow people, who do well to make a lot of money with us so.

Don't think we want to move away from that which has been very successful for us I do get your point that when you're small you really need the people because it's my franchise value.

But I do think we've got to be really careful with sort of meddling with that because I think that could be problematic.

<unk> will happen potentially and what has happened is as these businesses have digitized we have forced and I think the teams have been willing to do this the cost of that Digitization and the IP costs have been pushed into the business units, because obviously that you're going to see the benefits of this technology.

Spend over time so.

The compensation plans have been adjusted from not really picking up central cost to picking up the cost. So that's been a major change and I think as we digitize our business more particularly on the low end.

You end up with.

Mis sales and trading people, who are commission and bonus compensated then you end up with more technology people, who are just sort of salary and bonus kind of compensated. So I think as we digitize, we should see some real operational leverage coming from that so if you look at on the game side of it.

The business for example.

A very very significant proportion like 80%, 90% of the people in that business basically also the salary and fixed bonus they coders.

The people who.

Build and maintain a black hole.

So the.

The scalability and the operational leverage we get from that business is significantly greater than what we get her by such institutional business and I think what will happen is all our businesses, we will slowly microwave for a little bit that way, but so I think that's what's going to happen.

I don't think we have a problem on the compensation side I mean, we measure compensation very carefully we've set a target of.

40% as all our cost ratio, which is way below any of our competitors and the investment banks.

I think our current plan has shown that can generate the right Roe for our investors.

So I don't think we've got a problem, but I think it will over time.

Change and become and generate more operational leverage as we digitize more I think that's what's going to happen.

That makes sense.

Yep Yep.

And then just lastly for me in terms of the current landscape.

The quick acquisition potential opportunities you mentioned.

Some of the fallout from and share gains that Youre seeing organically does that is it also presenting you know kind of.

And in M&A fashion in terms of some of the the disruption thats occurring or is there just should we think about it just more as customer ads and share gains versus any kind of bolt on.

Type of business business ads.

Yes, what I would say our default situation is always to grow organically and we work hard to do that I think we would be coming out in the market.

So we're seeing a lot of inbounds and a lot of sort of organic increases in our business as I said in my prepared remarks that always seems to increase when you go through a period of volatility everyone starts to wonder is that the right place and.

Once these movements in our client base it becomes easier to grab some of that so so I think it's a pretty positive environment towards sort of organic growth and I think that will show up without numbers.

In terms of acquisitions.

I think someone asked me might've been you've been last quarter or even the quarter before.

Sort of the landscape for acquisitions and I think my response was the market's overvalued and that's over valued mindset scripted everywhere and people are taking sort of historic record earnings.

Historically high multiples on it and that's just not an environment where.

We are going to be enticed to buy something right. I mean, we want to be disciplined and deep value buyers are businesses that we can add a lot of value to.

Having said that I think thats changed a little bit right. I mean, we've seen a lot of the excesses of the market have sort of rolled over many of them have round trips I mean, just look at Netflix removal.

So none of the specs, where we were competing in.

In M&A against spec alternatives, I mean always havent ended up very well for people. So some of the excesses all being run out of the market I mean, it will take time before that reflects itself in sort of more reasonable.

Price expectations and then on the other side when you go through the sort of traumatic event. They are people who could end up.

With business models that either suffered.

Some trauma or shareholders, who maybe not so interested in holding those businesses. So I think the landscape has changed I think it's becoming a little bit more conducive potentially two acquisitions, but just to be clear. There's nothing we see at the moment that's of any material interest at this point. So we will continue to open.

Organically grow our business and the.

The right opportunity comes with the right price.

We are always available to look at it.

Makes sense, thanks for answering all my questions.

Okay no problem. Thank you.

Okay.

Operator is there anyone else.

At this time there are no further questions.

This concludes our question and answer session I would like to turn the conference back over to management for closing remarks.

Alright, well thanks, everyone. Appreciate your attendance today and look forward to speaking to you in three months' time, thanks very much.

Yeah.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Welcome to <unk> group's second quarter earnings.

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I would now like to turn the conference over to Bill Dunaway, Chief Financial Officer. Please go ahead.

Good morning, My name is Bill Dunaway.

Welcome to our earnings conference call for our second quarter ended March 31 2022.

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

This report is available on our website at Www Dot Stella <unk> dot com as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly and year to date results.

You'll need to sign on to the LIFO cost in order to view the presentation.

Presentation, and an archived webcast will also be available on our website after the call's conclusion.

This discussion may contain forward looking statements within the meaning of section 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of $19 34 as amendment.

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.