Q3 2022 Stonex Group Inc Earnings Call
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As Johan doing.
Good day and thank you for standing by welcome to the FY 'twenty, two third quarters, Joe Nex Group earnings Conference call.
At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
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You'll need to press star one one on your telephone you will then hear an automated message advising that your hand is raised please be advised that today's conference call is being recorded I would now like to hand, the conference over to your Speaker today Bill Dunaway. Please go ahead bill.
Good morning, My name is Bill Dunaway.
I'll come to our earnings conference call for our third quarter ended June 32022.
After the market closed yesterday, we issued a press release reporting our results for our third fiscal quarter of 2022.
This release is available on our website at Www Dot <unk> dot com as well as the 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 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're 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 <unk>.
There too as well as the Form 10-Q filed with the SEC.
This discussion may contain forward looking statements within the meaning of section 27, a of the Securities Act of $19 33, as amended and section 21 E 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 will now turn the call over to Sean O'connor the company's CEO .
Thanks, Bill good morning, everyone and thanks for joining our fiscal 2022 third quarter earnings call.
During the third quarter of fiscal 2022, we continue to see the effects of an inflationary prices on the global market shock.
Sharp increases in short term rates and continued volatility in both financial and physical market.
We recorded operating revenues of $528 8 million up 23% versus the prior year, while expenses were up 19%.
This resulted in net earnings of $49 1 million up 44% and diluted EPS of $2 37 up 42%, which produced a 19, 1% Roe.
Slide eight.
The earnings deck.
<unk> revenue for the robot.
And I'll stop being FX and Cfd is up 68%.
So being up 37% and then of course interest on client balances was up 207% off the back of a 44% increase.
Client flows, which now stands at a record $8 billion.
This revenue was driven by strong double digit increases in transaction volume except for OTC contracts.
<unk> being FX Cfd is as well as securities.
In terms of revenue capture we saw a large decrease in securities of 48%, which significantly offset the 128% volume increase.
As we have mentioned previously our securities business is growing and expanding its product and capabilities, which has impacted these transactional metrics over the last couple of quarters.
Both our fixed income and equities business they've expanded their product capabilities to now include more vanilla offerings that are higher volume and lower margin, but where we have limited market share in a larger addressable market in front of us and thus presents lots of opportunities.
Obviously as the impact of increasing volumes, while revenue capture has declined.
Additionally, these new areas that require upfront investments in personnel, which has increased phosphide costs slightly faster than revenue, which is also a.
Effectively become.
As expected revenue from these new initiatives pick up we should see a boost to the bottom line and the transactional metrics should start to level out as the product mix really stabilizes.
We have always invested in our businesses and our core pillar of our strategy is to continue to enhance our financial ecosystem by expanding our product and capability. This in turn drives increased wallet share from existing clients and enhances client adoption and market share increases.
Turning now to slide four and looking at revenue and product metrics for the trailing 12 months.
Operating revenues were up 18% versus the prior comparative periods revenue increased by double digits across the board for all of our products.
For Securities, which was up 4% the.
The standouts here Cfd.
Cft's protective for Purcell, OTC contracts up 47% and again interest balances up 110.
The close rates.
Okay.
Robust increase in transaction volume across the board with standouts being securities and FX Cfd.
Revenue capture was down 37% in securities.
And down slightly for the FX cfd, but up for all the other products.
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 two years ago.
We recorded operating revenues of $5.
$8 6 million I appreciate it's fair to say.
Hi.
Hi.
Thanks Shannon.
Other expenses were up 19% for the quarter with various variable compensation of 21% in line with revenue fixed.
Fixed compensation costs increased 5%.
Okay.
This resulted in net earnings of $49 1 million up 44% and diluted EPS of $2 37 up 42% for a $19 one row.
The adjusted ROE numbers were slightly higher and slightly higher still if tangible equity gets used.
In comparison with the immediately prior quarter.
Just remember the immediately prior quarter was our best ever from an operational point of view.
Boosted by the market volatility.
Creating situations however.
However, comparing with this immediately prior quarter operating revenues were down 3% and earnings were down 23% against this exceptional quarter.
Looking at the summary for the trailing 12 months operating revenues were $1 9 billion up 18% over the comparable periods net income was $162 1 million and 172 on an adjusted basis.
Diluted EPS was $7 88 for the trailing 12 months for a 16, 6% Roe.
Or 17, 5% on an adjusted basis.
We ended Q3 2022 with a book value per share of <unk>.
The $1 77.
Turning now to slide six our segment summary, just to touch on the highlights before bill goes into more detail.
For the quarter operating revenue and segment income was up across the board.
Largest segment commercial clients was up a solid 20% segment income off the back of a 12% revenue increase driven in large part by the physical side of our business.
Institutional segment realized a 21% increase in revenues, a new record, which translated into a 3%.
Segment income for the reasons mentioned earlier.
Retail had a very strong performance with operating revenues up 40% driving segment income.
Remember that the case.
Demonstrating the leverage we have with the digital platform.
Global payments also realized a record quarter with revenue up 27%.
<unk> equate to 1%.
This segment has also been investing in its new local pay and capability.
As well as its digital platform for mid sized commercial clients.
For the trailing 12 months, we see much of the say with strong double digit growth across the board except for our institutional segment, where operating revenue was up 7% and segment income was down 7% for the reasons I discussed earlier.
Our strong quarterly results, but as we've said repeatedly we take a long term view and how we manage the company and how we grow our franchise as such we believe that the best way to gauge our results and progress is to look at the longer term performance such as trailing 12 months rather than specific quarters taken in isolation.
Turning to slide seven with.
Which sets out our 12 months trailing financial performance.
These numbers have been adjusted for the treatment related to the gain acquisition as disclosed in our prior filings and Mr. Ken. The reconciliation provided on the last page of this earnings deck.
On the left.
For the trailing 12 months operating revenue over the last nine quarters.
As you can see this has been remarkably smooth with a strong upward trend as we have steadily expanded our footprint and capabilities.
Our revenues are up 57% over this period of a 25% compound annual growth rates.
Our adjusted pre tax income likewise has grown significantly.
92% compound average growth rate.
On the right hand graph you can see our adjusted earnings in the yellow bars, which are up 4% over the last two years for a 23% CAGR.
The dotted line represents our ROE, which has remained above 50.
Even though our capital has grown by 55% over this period.
We are seeing significant strength of the dollar over the last couple of quarters as interest rates globally have diverged I would just like to briefly touch on the impact of this on our earnings the majority of our earnings are denominated in dollars and as such we do not see much direct impact on Friday July .
Additionally, I'd also note that the vast majority of our variable compensation is also calculated in.
However, we have a significant amount of locally denominated fixed expenses.
Current run rate. These costs have now been reduced in dollar terms as a result of the strength in the dollar by some $20 million per annum from a year ago.
This is a material benefit in essence at discounts on our fixed cost base, we intend to lock in currency rates to ensure that we have some <unk> to the benefit of our oldest licensee duration with that.
For a more detailed discussion of the financials.
Thank you Sean.
I'll be starting on slide number eight which shows our consolidated income statement for the third quarter of fiscal 2022.
Sean covered many of the consolidated highlights for the quarter. So I'll just highlight a few and then move on to our segment discussion.
On the expense side transaction based clearing expenses were up 11% to $74 $7 million in the current period, primarily due to the increase in securities Adv and increase in listed derivative contract volumes as well as higher costs in our global payments business.
Introducing broker commissions declined 1% to $41 $2 million in the current period as increases in our institutional lifted derivative and global PE businesses were more than offset by a decline in IV commissions in our commercial listed derivatives business.
Interest expense related to trading activities increased $13 6 million versus the prior year, primarily due to increases in short term interest rates as high as well as higher average borrowings in our physical commodity business interest expense on corporate funding was relatively flat with the prior year period.
Variable compensation increased $21 5 million versus the prior year due to the increase in net operating revenues and represented 33% of net operating revenues in the current period compared to 34% of net operating revenues in the prior year period.
Fixed compensation increased $3 4 million versus the prior year with the growth principally related to salary and benefit cost of increased head count, which increased 11% as compared to the prior year period, which was partially offset by an increase in deferred compensation.
Our fixed expenses increased $24 7 million as compared to the prior year to $101 7 million and were up $1 8 million versus the immediately preceding quarter.
As compared to the prior year, selling and marketing expenses increased $7 9 million and professional fees increased $3 7 million the increase in selling and marketing primarily relates to increase in digital marketing in our retail Forex business.
We are starting to see increases in travel and business development, increasing $3 6 million as compared to the prior year. In addition, trading systems and market information increased one six and non trading technology and support increased $1 6 million as part of their initiative to expand our additional offerings.
Depreciation and amortization increased $2 million and primary relates to an increase in internally developed software.
We had net recoveries of bad debt expense of 700000 for the quarter versus $1 3 million and $12 3 million in expense in the prior year and immediately preceding quarters, respectively.
In the prior year, we recorded a $3 $6 million and gain on acquisition and other gains, which primarily related to an adjustment to the liabilities assumed in the acquisition of gain capital.
In the immediately preceding quarter, we received a $6 $4 million foreign exchange antitrust class action lawsuit settlement.
We recorded no gain on acquisition or other gains in the current period.
Net income for the third quarter of fiscal 2022 was $49 1 million and represented a 44% increase over the prior year.
This represents a 23% decline versus our all time best quarterly performance recorded in the immediately preceding quarter.
Moving on to slide number nine I'll provide some more information on our operating segments.
The commercial segment had another strong quarter, adding $18 million in operating revenues versus the prior year. However, this represents a $13 $9 million declined versus the immediately preceding record second quarter.
Within this segment listed derivative operating revenues declined $3 $7 million versus the prior year as a result of a 5% decline in contract volumes as well as a 2% decline in average rate per contract.
OTC derivative operating revenues were $50 2 million for the quarter, which was up 500000 versus the prior year quarter, primarily as a result of an 8% increase in the average rate per contract, which was partially offset by a 5% decline in OTC derivative contract volumes.
Operating revenues from physical transactions increased $13 6 million compared to the prior year period, primarily as a result of a $13 1 million increase in precious metals operating revenues.
Finally in our interest earned on client balances increased $7 2 million versus the prior year as a result of a 45% increase in average client equity as well as an increase in short term interest rates following fed actions.
Segment income was $72 5 million for the period, an increase over the prior year and preceding quarter of 20% and 3% respectively.
Moving on to slide number 10 operating revenues in our institutional segment increased $36 1 million versus the prior year, primarily driven by an $18 $6 million increase in securities operating revenues compared to the prior year period as the result of a 128% increase in the average daily volume of security transactions, which was partially offset by a 48.
Decline in securities rate per million.
The increase in Securities Adv was primarily driven by significant increase in volumes in debt capital markets, most notably in U S. Treasuries as a result of new hires in this business combined with rapidly changing rate environment related to the recent act actual and anticipated fed actions to curb inflation.
And to a lesser extent.
Equity market volatility in equity markets, driven by increased market share.
And volatility.
The decline in rate per million was primarily a result of product mix traded most notably the increase in U S. Treasury volumes. In addition, operating revenues increased $8 million and $4 $2 million and lifted derivative and FX products, respectively, driven by continued volatility in global markets.
Finally interest earned on client balances increased $6 9 million versus the prior year as a result of a 63% increase in average client equity as well as an increase in short term interest rates. Following recent fed actions.
Segment income increased 3% to $47 7 million in the current period as a result of the $15 3 million increase in net operating revenues, which were partially offset by a $10 $5 million increase in variable compensation and a $3 $6 million increase in non variable direct expenses versus the prior year.
The increase in non variable expenses is primarily due to a $2 $5 million increase in fixed compensation and benefits.
$1 $2 million increase in trading systems market information and a $900000 increase in travel and business development, which was partially offset by a $1 million favorable variance in bad debt.
Segment income declined $2 $3 million versus the immediately preceding second quarter.
Moving on to the next slide operating revenues in our retail segment added $38 million versus the prior year, which was primarily driven by a $38 million increase in FX and Cfd revenues as a result of a 12% to 47% increase in Adv and RPM as compared to the prior year as a result of heightened volatility and FX markets.
Operating revenues for security transactions declined $1 1 million, while operating revenues from retail physical precious metals were flat with the prior year period.
Operating revenues in the retail segment declined $11 $5 million versus the immediately preceding quarter.
Segment income increased $23 million versus the prior year, primarily as a result of the increase in operating revenues the <unk>.
Increase was partially offset by $9 $5 million increase in non variable direct expenses as compared to the prior year, primarily driven by a $5 million increase in selling and marketing of $1 3 million increase in depreciation and amortization of $700000 increase in professional fees and a $600000 increase in travel and business development.
Segment income declined $19 2 million versus the immediately preceding record second quarter of fiscal 2022, which included the receipt of the $6 4 million from the class action settlement I mentioned earlier.
Closing out the segment discussion on the next slide operating revenues and global payments added $9 3 million versus the prior year driven by a 20% increase in average daily volume, 9% increase in the rate per million as compared to the prior year non.
Non variable expenses increased $2 $8 million is primarily related to the expansion of our payment offerings.
Segment income increased 21% to $24 6 million in the current period and also represented a 3% increase 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 $528 8 million in the current period up $97 3 million or 23% over the prior year.
I'll cover the changes in operating revenues for our segments, our $3 $1 million increase in revenues and unallocated overhead is primarily related to the positive variance in foreign currency revaluation versus the prior year period, which was partially offset by a mark to market loss on exchange shares held for clearing purposes in the current period.
The next slide number 14 represents a bridge from 2021 third quarter pre tax income of $46 million pre tax income of $70 9 million in the current period.
The negative variance in unallocated over a $13 million is primarily driven by the increase in unallocated expenses, including a $5 $1 million increase in variable compensation as a result of improved performance.
$3 million increase in non trading technology in support of $1 $8 million increase in professional fees $1 6 million increase in selling and marketing expenses and $1 million increase in depreciation and amortization.
These increases were partially offset by a $1 $4 million decrease in fixed compensation and benefits.
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 changes in short term interest rates their interest rate earned on these client balances increased 41 basis points to 69 basis points for the current period as the full effect of recent fed rate hike.
During the period, we will start to be more fully reflected during the fourth quarter of fiscal 2022.
As noted in the table with an increase in client balances noted earlier, we estimate a 100 basis point increase in short term interest rates would increase net income by $31 million or $1 53 per share on an annualized basis with that I'd like to turn it back to Sean for a strategy discussion.
Thanks, Bill turning now to slide 16, which sets up the high level strategic objective that we are focused on we have included the slide before and I've gone through it in detail on the last call. So I won't repeat it all together.
Over the last six quarters, or so I've, given a fairly granular view of the various projects. We are undertaking in our segments and I'm not going to go through them. All again. This time. However, we continued to make excellent progress and hit our milestones and delivering many of these capabilities some of which will be launched in the next three to six months.
However, some some highlights as mentioned above our securities business is expanding and changing its product mix as we leverage our long standing institutional relationships into broader product offerings.
On the equity side, we have now launched our electronic market maker platforms.
And to spread out the domestic NMS equities, while providing best execution. This is an area dominated by a limited number of large players and our broker dealer clients are interested in having alternative uplift execution of each trades. We have already enabled a limited number of clients in a limited number of names and.
All of these clients have been using us to execute foreigners unlisted stocks for a long time.
We are very pleased with the results and the performance of our platform and this is already accretive to the cost incurred.
We will be ramping this up steadily over time and increasing the number of clients and the number of stocks we make marketplace.
We believe this is a very large opportunity for us.
On the fixed income side, we have steadily been diversifying into different fixed income asset classes.
Sure So Dan probably before you guys recovering us a long time ago. When we started our global payments business. We went through this exact kind of process, where we will exclusively be linked to those of you have charities and the profile of that business was large payments and as a result reasonably high.
Revenue capture and we started to transition to working with our bank partners, where the payments quite a lot smaller but more of them and that took about two years.
Before those metrics kind of level goals in.
In aggregate, it's still a net plus for the business I think we are now seeing the exact same thing on the security side.
On the equity side for example, the bulk of operating revenue up until now has been a market, making in foreign unlisted stocks.
Which has a pretty high revenue capture associated with it we now moving into the <unk> market and the revenue capture is orders of magnitude lower.
So I'm not sure if I am.
Exactly correct, but I think the number of shares we trade on the NMS is now a significant proportion of the industrial shareholder.
Okay.
Okay.
So while.
While for those numbers on the equity side.
Just sort of achieve equilibrium and I think it's probably going to take.
I would say conservatively, probably two years just like it did.
On the payment side.
We want to approach this very cautiously it's a automated electronic platform, we want to make sure that we do it responsibly and carefully roughly once our clients in the technology. So I don't think it would be prudent to just sort of.
Rip it out there and let everyone have status.
Okay.
<unk> you.
We continue to see the same trend as we've seen in the last two quarters, probably perpetuate on.
For the full five quarters with you might get.
Obviously, the incremental rate of change should slow because if we are really sort of.
If we <unk> see when you get to 840 it gets slower so I mean at some point you do start to the law of averages apply Ikea.
On the fixed income slide in theory. The exact same process has happened our fixed income business is very focused on the mortgage market.
That's a high margin products, that's where we made.
75% of our.
Revenue three years ago, and we have diversifying that business into T bills into treasuries into a whole range of other products and then there are some products where we actually.
More commission based like high yield and other so.
What's happened in this interest rate environment is as the mortgage market is so slow.
We spent I think up in some of the other products, which again.
The revenue capture there is frac.
Fractions of what it is salable mortgage market volume.
So I think.
Alright fine.
Because it gave us some resilience.
But again is affecting those metric.
Those properties income side, we are probably closer to seeing more of an equilibrium.
Just because I think the move there has been faster.
But anyway.
Okay.
<unk> data on when I see these metrics selecting us, but I think you should continue to see.
Over a period of time.
Very quarter to quarter, but over a period of time these metrics.
<unk> will continue to trend in the same way I think.
That makes sense.
Yes, no that's helpful and then.
Just want to understand your comment about FX and the benefit that it provided the fixed cost I think you said $20 million per annum. So is that.
Something that was kind of in the fixed fixed number at fixed cost came in lower than that.
Third quarter is that.
I think a decent exit kind of run rate for this quarter or is that based on spot rates now prospectively just thinking about.
How much was already in your numbers versus potentially.
Potentially.
Benefiting still going forward.
Yes, so the $20 billion number is really the benefit we've had kind of from the dollar load to the dollar high so probably all experienced over the last 12 months and we kind of looked at that and said Wow.
Currency sort of coming our way here because we have.
Could.
Aggregate impact of that in Australia.
All gene.
As you know.
So the current exit rate is.
Basically we use the average rates I think over the quarter, but that.
Thats the exit rate, we have now I think what we signaling to people as we'd like to try to lock that in because what we don't want to have happen is if the dollar goes the other way we are going to see a $20 million ramp up from where we are now.
Sort of.
Mike about it so can you just put a $20 million discount on all the people we hired in the offices, we spun up right. So we want to try it.
That lower cost base for as long as we can so we're going to try and hedge that risk out but to answer your question.
<unk>, we have now is a good approximation.
And from here on in it will be sort of net adds.
We also.
Review cycle at the end of the year, we obviously going to have to make some adjustments.
The adjustments are probably going to be larger than they have been previously just because of inflation. So there'll be some impact of all of that coming into that run rate.
So.
Okay.
Yes sure.
<unk>.
Perfect.
And then just another one on FX clearly the retail side of the business benefiting from some volatility can you talk about is that existing customers is trading more can you talk about account growth or kind of just trying to understand maybe going forward.
What that business might might look like.
Yes.
Then youre probably familiar with the gaming business previously.
Certainly that business can be very volatile quarter to quarter dependent on market conditions.
So we obviously had a good time of it this last quarter because the volatility was good.
I would say the main driver for our increased performance was market conditions and not account growth I think our account growth has been kind of okay, but not fantastic and I think all of our peers are seeing the same thing I mean, just go look at robinhood and somewhat I mean, those guys. They account basis have plummeted I'll have them, but we.
Sort of grows significantly.
Market conditions have been better and I think we're starting to see some of the benefits that I mentioned at the time of the transaction where if.
If we can do this right we're going to see better revenue capture because we can.
Offsetting internal true.
<unk> in the same products coming from different areas. So I do think we starting to see better revenue capture.
Help us but market conditions are still the key there.
Hard to predict sort of market conditions going forward for that business, but.
It's done very very well for us.
Seeded our expectations at the time of the acquisition.
I think the business is up some exciting thing thats going to be seeing ownership.
We're going to be.
Adam mentioned it in my section, but we're going to be launching pretty soon cash equities in the UK, we sort of moves us from speculative products to investment products.
We cannot launch crypto access so things like that I think are going to sort of drive client growth going forward, but if we can have good market conditions better trading in revenue capture I think all bodes well for that business, but.
Volatility is also the key thing.
Yeah.
Yes, understood and then.
I guess, just lastly for me just thinking about the current backdrop and valuations coming in for businesses.
Broadly.
How you're thinking about M&A here and there.
<unk> got a lot of organic initiatives that you're focused on but is there.
Subset of the market or an area, where maybe M&A makes more sense at this point.
I think it's starting to get more interesting just because as you say this sort of been a bit of a fallout.
Try that.
I think it's going to get interesting when some of these startups sort of find that they cant raise more money and need to go to some strategic buyers to to help them out I mean, certainly that could be an interesting development for us.
But honestly at this point I think it's still early in that cycle I think over the next sort of six months to 18 months will be interesting to see some interesting opportunities come up but we certainly haven't seen opportunities that have been exciting to us.
Last six months.
Got it I actually I do have one more question just on the interest rate sensitivity in the chart that you you guys.
<unk> so.
That's incremental from here so like the 75 basis points, we've got a few.
Weeks ago.
Certainly wasn't in your run rate or his perspective, so just thinking about exiting.
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