Q4 2022 Stonex Group Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day, and thank you for standing by and welcome to the Stone Ex Group, Inc. Q4 fiscal year 'twenty two earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask.
A question during the session you will need to press star one one on your phone.
Today's conference is being recorded and I would now like to handle conference over to your speaker today, Mr. Bill Dunaway, Chief Financial Officer, Sir. Please go ahead.
Good morning, My name is built by the way welcome to our earnings conference call for our fourth quarter ended September 32022.
After the market closed yesterday, we issued a press release reporting our results for our fourth fiscal quarter of 2022.
This release is available on our website at Www Dot stone ex 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. 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 notes thereto as well as the Form 10-K to be filed with the SEC.
This discussion may contain forward looking statements within the meaning of section 27 eight of the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of 18 to 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 obligations to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
It is are cautioned that any forward looking statements are not guarantees of future performance.
With that I'll now turn the call over to Sean O'connor the company's CEO .
Thanks, Bill good morning, everyone and thanks for joining us on our earnings call.
During the fourth quarter of fiscal 2022, we continue to see the effects of inflationary pressures on the global markets sharp increases in short term interest rates and continued volatility in both financial and physical commodities markets.
This has been a great fourth quarter for us and a truly exceptional and record setting year for the company overall validating our strategy and demonstrating the earnings power of our franchise.
Reported operating revenues of $583 4 million up 50% versus the prior year and total expenses were up 25% from a year ago and up 6% sequentially.
This resulted in net income of $52 3 million up 616% over the last year.
EPS came in at $2 49, which is about 592%, which produced at 19, 8% or a week.
Turning to slide three in the earnings deck for the fourth quarter, we realized very strong revenue growth of over 30% in each of our products, except for listed derivatives, which was up 12%.
Interest and fee income on client balances was up 522% as we started to see the impact of increased interest rates off the back of a 50% increase in our type of client float, which now stands at $8 6 billion.
This revenue increase was driven by strong.
Double digit increases in transaction volumes across the board.
The higher market volatility caused spreads to widen resulting in improved revenue capture in the products, where we act as a principle.
The rate per contract for listed derivatives was down 4% versus the prior year largely due to a business mix, where we had a higher proportion of institutional volume versus commercial volume.
Moving on to slide four.
For the fiscal year as a whole it was a very similar picture with product volumes up across the board and revenue capture up except for a slight decline in the rate per contract on listed derivatives and Oh and on securities.
All of this data point towards increased client engagement driven by volatility as well as continuing strong growth in underlying client base.
It is notable that 65% of the annual increase in interest on our client float was received in just the fourth quarter.
Turning to slide five and a summary of our fourth quarter and full fiscal year results.
As I mentioned earlier, we recorded revenues of $593 4 million up 50% versus the prior year.
Total compensation and other expenses were up 25% for the quarter with variable compensation up 53% in line with revenue growth.
Compensation and related costs increased 3% from a year ago.
The resulting net income of $52 3 million.
616% and diluted EPS up to $2 49.
592% with 419, 8% Roe.
This would equate to a 21, 6% ROE on tangible equity.
We realized record operating revenues for our commercial and institutional segments.
In comparison with the immediately preceding quarter operating revenue was up 10% of net income was up 7% and our diluted EPS was up 5%.
Looking at the summary for the full year. This was a record year for us in almost every metric.
Our operating revenues were a record $2 1 billion up 26% over the prior year.
Net income was $207 1 million up 78%.
EPS was $10 one for the full year up 74%.
ROE was 21% despite equity increasing 39% over the last two years.
On a 10, Amit tangible equity basis.
ROE was over 23%.
Yeah.
Our financial results were boosted by higher interest and fee income on our client float as short term rates increased over the period, although the majority of our increase as I said earlier. It came in just the fourth quarter. This.
This is obviously due to the speed and scale of the interest rate increases as well as the fact that our interest earning assets generally take about 45 days to reprice to new rates.
Average yield on our client float was 84 basis points for the euro the role and 193 basis points for the fourth quarter.
We're likely to see a continued ramp up of our interest earnings on the slope as we continue to reprice our client flex at the current rates.
We ended Q4 'twenty two with a book value of $52 70.
Turning now to slide six our segment summary, just wanted to touch on a few highlights before but we'll get into more detail.
For the quarter segment operating revenue was up 51% and segment income was up 72% with a very strong performance across all our client segments.
<unk> client segment was up 82% in segment income off the back of a 40% increase in operating revenues with strong performances from our physical metals and AG and energy business as well as OTC derivatives.
And of course higher interest rates.
Institutional segment realized an 87% increase in revenues, which translated to an 84% increase in segment income.
This was largely due to a much improved performance from our security business versus a weak quarter, a year ago as well as the increase in interest and fee income.
Retail had another solid quarter with operating revenue up 18% driving segment income up 70% demonstrating the operational leverage we have with the digital platform.
Global payments revenue was up 29%.
Net income up 33% with double digit increases in both volumes and revenue capture.
Okay.
For the full fiscal year segment operating revenue was up 26% and segment income was up 33% again with strong performances across all of our client segments.
Operating revenues were up more than 20% at each of our segments segment income showed similar increases with the exception of institutional which was up 4%.
These are strong quarterly results across all product groups and across all segments.
But as we have said repeatedly we'd like to take a long term view on 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 results.
Other than specific quarters taken in isolation.
Turning to slide seven.
It sets up our trailing 12 month financial performance.
Just to note. These numbers have been adjusted for the accounting treatment related to the gain acquisition as disclosed in our prior filings, which appears on the reconciliation provided on the last page of the earnings.
On the left hand side, the bars represent our trailing 12 months operating revenue over the last nine quarters as.
As you can see this has been a smooth and strongly upward trend as we have steadily expanded our footprint and capabilities.
Our revenues are up 61% over this period for a compound annual growth rate of 27%.
Our adjusted pre tax income likewise has gotten significantly with a 42% CAGR.
On the right hand side, you can see our adjusted net income and the Baas, which is up 116% over the two years 44 or 47% CAGR.
The dotted line represents our ROE, which has remained above our 15% target even though our capital that is growing by 39% over this period.
Lastly, you may have noticed in the performance of the presentation has changed as we rollout the brand refresh that's willing to the cleaner logo and an updated and more contemporary reflection of the organization that started excess become.
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 on slide number eight which shows our consolidated income statement for the fourth quarter of fiscal 2022.
Jon covered many of the consolidated highlights for the quarter. So I will just highlight a few and then move onto our segment discussion.
Transaction based clearing expenses were up 7% to $69 1 million in the current period, primarily due to the increase in securities Adv enlisted derivative contract volumes.
Introducing broker commissions declined 6% to $37 4 million in the current period as an increase in IV commissions from listed derivatives were more than offset by decreases independent wealth management and retail FX and Cfd business.
Interest expense increased $63 5 million versus the prior year, primarily as a result of $44 $5 million increase in interest expense related to our institutional fixed income and securities lending activities as well as a $13 $7 million increase in interest paid the clients on the deposits as a result of the increase in short term interest rates.
Interest expense on corporate funding increased $1 4 million versus the prior year also result of the increase in short term rates.
Variable compensation increased $44 7 million versus the prior year due to the increase in net operating revenues and represent 33% of net operating revenues in the current period compared to 32% of net operating revenues in the prior year period.
Fixed compensation increased $2 6 million versus the prior year with the growth principally related to salary and benefit cost of increased head count, which increased 12% as compared to the prior year, which was partially offset by an increase in deferred compensation.
Other fixed expenses increased $19 7 million as compared to the prior year to $106 4 million and were $4 7 million versus the immediately preceding quarter.
As compared to the prior year, selling and marketing expenses increased $4 1 million in professional fees increased $2 3 million the increase in selling and marketing primarily relates to an increase in digital marketing in our retail Forex business.
We are starting to see increases in travel and business development, increasing $4 4 million as compared to the prior year.
In addition, trading trade systems and market information increased $1 3 million non trading technology and support increased to half a million and depreciation and amortization increased $2 5 million as compared to the prior year with these increases part of our initiative to expand our digital offerings.
We had bad debt expense net of recoveries of $4 4 million for the quarter versus $6 7 million in the prior year period.
Net income for the fourth quarter of 2000 fiscal 2022 was $52 3 million and represented a 616% increase over the prior year and a 7% increase versus the immediately preceding quarter.
Moving on to slide number nine I will provide some information on our operating segments.
Sean noted earlier it was a record quarter in our commercial segment, adding $52 5 million in operating revenues versus the prior year and $15 million when compared to the immediately preceding quarter.
Within this segment listed derivative operating revenues.
800000 versus the prior year, despite a 5% increase in contract volumes as a result of a 7% decline in the average rate per contract due to product mix.
OTC derivative operating revenues were $49 million for the quarter, which was up $14 5 million versus the prior year quarter, primarily as a result of a 31% increase in the average rate per contract as well as a 10% increase in OTC derivative contract volumes.
Both of which were driven by continued volatility in agricultural energy in soft commodities.
Operating revenues from physical transactions increased $25 2 million compared to the prior year.
As a result of a $13 3 million increase in precious metals operating revenues as well as an $11 9 million increase in physical AG and energy operating revenues.
Finally interest earned on client balances increased $13 3 million versus the prior year as a result of a 28% increase in average client equity as well as an increase in short term interest rates. Following recent fed actions.
Segment income was $80 2 million for the period, an increase over the prior year period preceding quarter of 82% and 11% respectively.
Moving on to slide number 10 operating revenues in our institutional segment increased $123 million versus the prior year.
Primarily driven by $73 $5 million increase in securities operating revenues compared to the prior year period, resulting from a 60% increase in securities rate per million as well as an 18% increase in the average daily volume of securities transactions.
Increase in Securities Adv was primarily driven by increases in both equity and fixed income markets as a result of heightened volatility and increased market share.
The increase in Securities RPM was primarily driven by an increase in RPM and fixed income products, which is influenced by changes in interest rates.
While the rise in interest rates positively impacted RPM for the quarter. It also resulted in an increase in interest expense for the period, which I will touch on momentarily.
In addition, operating revenues increased $11 9 million and $2 4 million enlisted derivative and FX products respectively.
Continued volatility in global markets.
Yes.
Finally interest and fee income earned on client balances increased $27 4 million versus the prior year as a result of the increase in short term interest rates. Following recent fed actions as well as increases in average client equity and average money market and FDIC sweep balances of 86% and 22% respectively.
As I mentioned earlier the rise in short term interest rates drove an increase in interest expense for the period with interest expense, increasing $59 million versus the prior year.
Interest expense related to trading and securities lending activities increased $44 5 million as compared to the prior year, while interest paid to clients increased $12 5 million.
Segment income increased 84% to $45 million in the current period as the result of a $52 $2 million increase in net operating revenues.
Variable compensation increased 66% or $20 1 million in line with the growth in net operating revenues.
Fixed compensation and benefits increased $22 2 million versus the prior year as we build out our product offering while other fixed expenses increased $9 2 million, primarily as a result of a $2 $7 million increase in professional fees of $1 $7 million increase in trade systems and market information a $600000.
Increase in depreciation and amortization a half a million dollar increase in travel and business development and a $400000 increase in selling and marketing.
Segment income declined $2 7 million versus the immediately preceding quarter.
Moving to the next slide operating revenues in our retail segment added $15 4 million versus the prior year, which was primarily driven by a $23 $3 million increase in FX and Cfd revenues as a result of a 57% increase in RPM, which was partially offset by a 7% decline in FX cfd.
Average daily volume as compared to the prior year.
Operating revenues from securities transactions, and physical contracts declined $3 8 million and $5 4 million, respectively as compared to the prior year period.
Operating revenues in the retail segment declined $6 7 million versus the immediately preceding quarter.
Segment income increased $8 $3 million versus the prior year, primarily as a result of the increase in net operating revenues. This was partially offset by a $1 $8 million increase in fixed compensation and benefits and an $8 $6 million increase in fixed expenses as compared to the prior year.
The increase in other fixed expenses was primarily driven by a $2 $9 million increase in selling and marketing of $2 $5 million increase in depreciation and amortization and a $700000 increase in travel and business development.
Segment income declined $6 1 million versus the immediately preceding quarter.
Closing out the segment discussion on the next slide operating revenues and global payments added $9 $9 million versus the prior year driven by a 19% increase in the average daily volume and a 12% increase in the rate per million as compared to the prior year.
Non variable expenses increased $2 2 million was primarily related to the expenses of our payment offerings.
Segment income increased 33% to $24 4 million in the current period, however, represent a 1% decline versus the immediately preceding record third quarter of fiscal 2022.
Moving on to slide number 13, which represents a bridge between operating revenues for the fourth quarter of last year to the current period across our operating segments. Overall operating revenues were $583 4 million in the current period up $193 3 million or 50% over the prior year.
I've covered the changes in operating revenues for our segments. How are the $4 8 million negative variance in revenues and unallocated overhead is primarily related to a negative variance in foreign currency revaluation and.
FX hedge related unrealized loss.
The next slide number 14 represents a bridge from 2021 fourth quarter pretax income of $4 9 million to pre tax income of $66 4 million in the current period.
The negative variance in unallocated overhead of $9 5 million was driven by the $4 8 million negative variance in revenues I noted on the previous slide and a $10 million increase in variable compensation. As a result of improved performance, which was partially offset by $2 $5 million decrease in fixed compensation and benefits and a $5 million decline in other fixed 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 interest rates. The interest rate earned on these client balance increased 124 basis points to 193 basis points for the current period.
As noted in the table, we estimate 100 basis point increase in short term interest rates would increase net income by $28 4 million or $1 40 per share on an annualized basis.
With that I would like to turn it back to Sean for a strategy discussion.
Thanks, Bill before we get onto the next slide I would just like to briefly touch on the gain transaction, we completed almost exactly two years ago right in the middle of Covid, which was our largest acquisition to date.
The logic at the outset was the retail clients obtain would bring flowing products, we already trade that we could internalize with our existing trade flows as well as provide clearing services and additional products that they did not have access to especially in the U S.
<unk> made excellent progress on all of this as I will touch on later.
We also saw the opportunity for some easy cost synergies most of which are being realized as well as acquiring quality incremental talent, especially on the digital marketing side.
As Youll remember the Covid volatility you had about an unexpected windfall prior to the closing of the transaction, we significantly de risked the acquisition.
Over the last two years. This business has exceeded the expectations, we laid out for it at the time of the acquisition being buoyed by good market conditions.
In addition, we executed well on all the integration objectives, we laid out and we now see retail trading flows a key part of our franchise.
Turning now to slide 16, which sets up a high level strategic objective that we are all focused on we've included the slide before and it went through it in some detail at the end of fiscal 2021, So an annual review and update is probably appropriate.
As we have mentioned before we have seen an increase in the cadence and delivery of a lot of our key projects and many of these are now through beta testing and have either been launched or on the launch pad.
Our approach is always to introduce and market on new capabilities on our steady incremental basis.
None of these projects in isolation will result in a significant change to our current growth trajectory and certain of these initiatives may not be viable in the long run.
In aggregate and over time, we believe that these initiatives will bend the growth curve upwards and because many of them are digital in nature, we should see operational leverage and scalability start to kick in and steady improvement in our margins.
So looking at slide 16, starting on the left hand side building, our ecosystem, we want to stay relevant to our clients existing and new by adding products and services and creating the best financial ecosystem to connect them to the global financial markets.
On the equity side, we have now launched electronic market, making platform to internalize in capture rate on domestic NMS equity, 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 outlets for execution of these trades, we are leveraging our longstanding.
Ending institutional relationships with over 20 years on the international equity side.
We continued to successfully ramp up our number of clients as well as the number of names that we execute on and are seeing increasing crossing rates and incremental revenue.
We are very pleased with the results and performance of our platform and this is already accretive to the costs incurred.
As we stopped approached critical mass that will start to add meaningful incremental revenues and we continue to believe that this is a significant long term opportunity for us as mentioned in previous quarters. The addition of the higher volume lower margin NMS stops will affect our operational metrics for the security side of our business.
On the fixed income side, we have steadily been diversifying into different fixed income asset classes. This strategy paid paid off for us very well in recent quarters and provided resiliency to our revenues as the interest rate environment has changed.
We have noticed a distinct change in perception from institutional investors as well as talent.
Now that's a growing and successful fixed income franchise that can compete with the tier one players. We have made some crucial hires from larger players and seen increased client adoption.
The crypto market has gone through some ranching, if predictable changes recently with consolidation and some of the excesses being exposed and perhaps we will see a smaller but more regulated market starting to emerge where clients are looking for trusted partners.
No matter, what our individual thoughts are about this it is likely to remain an asset class that some of our clients will want to access both on the institutional and the retail side. We will continue to support these clients by facilitating trading in a growing number of listed derivatives as well as public listed Etfs and <unk>.
Other crypto industry participants this.
This is an incremental source of revenue for us and we want to remain relevant to our clients by ensuring that we provide safe access to this asset class.
Carbon trading is another growing market propelled by global ESG initiatives.
And our primary role to date has been to provide our clients with access to all carbon trading instruments.
In addition, we have a role in educating our bonds on how best to participate in this marketplace.
The other agricultural clients up potential sources of carbon credits, which can be monetized. We have made good incremental progress and have a small but growing revenue stream and client base in carbon.
Our next recently became a member of the nodal exchange, which offers renewable fuse and gluten contracts to support an increasing focus on corporate sustainability and carbon neutrality.
Users of these products encourage energy refiners distributors and producers to the energy traders and environmental social and governance fund managers.
Our payments business has made some key hires to develop the local currency pay in business in Brazil and will soon thereafter begin to expand into other jurisdictions.
This will allow us to provide an end to end payment services for our large existing clients that have had.
It has large in country client basis, we can provide them an efficient way to get the dollars into the country as well as to collect the local payments from these clients to revert back to the head office and this will be an attractive offering for these large corporate clients.
On the retail side International City Index platform will introduce cash trading and equities for all clients in Q1 2023.
This platform already offers over 15000 OTC products designed for active traders and these same clients will now have access to investment products directly on our platform.
This not only expands our product offering to these clients, but allows us to target a much larger universe of potential clients.
In the U S. The different regulatory framework at significant complexities offering a multi asset class trading platform with different regulators legal entities and related protocols and challenges.
Our next one is our U S based self directed platform, allowing trading equity equity options as well as listed derivatives and will also be launched in Q1 2023. This will be available as a mobile version as well as the desktop probation with advanced functionality will soon at crypto FX and physical go.
<unk> to both international and domestic slow next one platforms, making us a very unique cross asset class execution capability.
Longer term, we can leverage our wealth management capability by adding Robo advisory portfolio management, and even the state planning options for our larger retail clients.
We continue to ensure that we offer broad access to products and marketplaces and exchanges that our clients want to access.
We continue to offer new OTC products to address client needs and have invested in our technology stack to do this faster and more effectively.
Now introducing dozens of new products every month, some of which are new and industry, leading such as the capital swaps contracted introduced into Australia. In addition.
Incremental revenue this positions <unk> as a leading innovator focused on adding value to our clients.
Moving on to our second strategic objective, we are client centric business that we need to consistently work at growing our client footprint into new markets and expanding market share where we have existing clients.
We also seek to serve new client segments and channels, we have all the capability to service clients of all types and have a large addressable market in front of us with very low market penetration currently obviously as we enhance our financial ecosystem, we are able to offer a more compelling value proposition towards us.
Potential clients.
We continue to invest and grow our EU presence post Brexit with an expanding office in Frankfurt to service, our existing European based clients and allowing us to more effectively market new clients in Europe , which may not be adequately covered post Brexit.
Our payments business has also launched its digital platform focused on small and medium sized Brazilian enterprises looking for a more efficient way to make international payments in both <unk> 20, plus non D. 20 countries will soon be launching this in Europe and the U S.
We are also adding international payments capability to all of our existing internal platforms on the commercial side further embedding ourselves with our existing commercial clients.
During the coming year, we will start to apply digital marketing resources to ramp up adoption of this new digital payments platform.
We will begin to offer these small and medium size corporations, our entire suite of hedging products, which will be an additional client channel for these products and services.
The addition of cash equities to the city index platform as I mentioned earlier as well as the multi asset platform in the U S. It's one will not only allow us to gain wallet share from existing clients, but allow us to more broadly market. These platforms dramatically increasing our addressable market.
The pro version of this platform to drive our business to our clearing custody and prime brokerage offerings as well.
On the security side, we have looked very little client penetration outside of the U S. Despite our global product offering in both equities and fixed income.
We have now added a small team in Asia and bolstered our presence in London. In addition, we are bolstering our capabilities in London to enable a more fully fledged offering back.
We will not achieve the necessary growth and scale unless we continue to embrace technology and digitize our business. This will not only enhance client engagements, but increased scalability and margin.
This initiative for quite a rethink about processes from front to back which has been underway for some years now but has accelerated with the acquisition of game.
Many of our product initiative.
As mentioned above are digital in nature, not mentioned them again, the advantage of digital offerings that they dramatically expand your addressable market every client anywhere is a potential clients and at office scalability and operational leverage to enhance margins.
Now increasingly using technology on the trading side.
All of our trading platforms are designed to aggregate trading flow and internalized spreads. So we can maximize the client revenue opportunity and minimize hedging costs.
As we gain critical mass and trading volumes the impact on revenue capture can be significant and should drive our margins.
Is the methodology behind that NMS electronic market, making initiative.
He is now also being applied more generically throughout all of our principal trading activity.
We also spend considerable effort, providing technology to help our clients be more effective.
Become more valuable and stickier to us during the year, we launched don't hedge for our grain merchandising clients. This platform is deployed throughout the clients' enterprise, allowing them to price and also hedge grain purchases in real time from mobile devices.
This platform is integrated into the enterprise accounting system, allowing all data to be shared instantly driving efficiencies for our clients.
This new platform provides trading efficiencies on the outside and Embeds us as a critical partner with our clients.
Some time ago, we launched a digital platform OTC and structured products. So a lot of commercial hedging clients around intricate scenario is to determine the best product for their needs and instantly get quotes.
Planning to upgrade this platform to allow clients to instantly execute trades, which should further drive product adoption and increased efficiency on the trade desk.
I'll start mixed technology team provides technology support our payments clients and bank counterparties by hosting Swift.
Hosting the Swift connectivity and in addition, we provide API connectivity to Swift.
We also work to integrate our payments platform, so that client enterprise systems, giving us the same stickiness.
We are building out a full API storefront to allow more sophisticated clients to link directly into our systems and access the information they need in real time.
A lot of these projects are underpinned by the success of our data Lake, which allows any use it to come to one place to get normalized data from many systems of records instead of multiple point to point connections to the systems information can be accessed for one place in near real time in an easily consumable form.
This was a massive undertaking given how fast how diverse our businesses with over 20 systems of record.
We continue to see validation of this approach as many of our internal departments as well as our client facing platforms can easily standup applications.
We continue to build and enhance the data lake as we expand our business.
Over the last year or so.
Our risk management team has made significant strides and is able to more easily aggregate and analyze data with real time monitoring to enhance the monitoring of risk across the entire organization.
We have now also virtually completed the multiyear conversion to our new Oracle based system for accounting and HR and are seeing meaningful efficiency, you've been quicker and better access to granular information.
Excuse me we.
We haven't done a large number of other projects underway throughout many of our support areas to better use technology to create efficiency and scalability of our infrastructure to drive operational leverage. These include a contract management system for our legal team technology to better track and monitor internal audits and operational risk issues and incremental technology improvements still to come.
Clients and <unk> monitoring.
Moving onto the last part.
Hello, there which is.
Compounding our capital our.
Our business is supported by capital and we need to underpin our growth is internally generated capital resources and when appropriate access to capital markets and approach acquisitions in a disciplined manner.
The most important thing we can do is to continue to create to capital runway for continued growth that is why we are focused on Roe.
It is interesting to note that 10 years ago, we had little over $300 million in shareholder equity and only a slightly lower number of shares outstanding as we do now.
Over this 10 year period with more tripled shareholder funds organically acquired over 15 businesses and significantly expanded offline footprint.
All financed organically from retained earnings and the unbelievable power of compounding.
During this growth that we have largely achieved a 15% ROE target certainly not every year, but on average over the period, it's pretty close.
As happened despite all the investments made in technology and infrastructure the cost of developing new capabilities. The integration of a large number of acquisitions and also despite low interest rates for extended periods of time.
Moving our ROE targets will continue to be our north star and we believe as we digitize the platform and gain scale that our margins and ROE you should start to increase.
Our strong earnings have resulted in a deleveraging our balance sheet such that we are now paying a lowest spread on our bank borrowings are ratchet that was built into our new facility.
You also I probably saw the recent announcement of our acquisition of PDI physical carbon business based in Brazil, and Switzerland. This is a well known and established business, which buys cotton from producers in Brazil, and West Africa, and solves a generally on a back to back basis to buy it in Asia.
The hedge their own price exposure and also provide hedging services to their produce the clients and in this activity that with both our clients and a credible competitor to our commercial hedging business in Brazil.
One of our senior Brazilian brokers, who headed up our carbon business in Brazil, less some years ago to take up a senior leadership position in CVI and when they found a wanted to retire an exit.
The business we were approached.
Combining our knowledge of hedging with our understanding of physical market, but supply chain is a compelling and differentiated offering which we have leveraged and certain other commodity verticals in the U S and elsewhere, including renewable fuels and grains.
This acquisition will allow us to make significant inroads into the cotton industry, especially in Brazil, which is growing fast.
Transaction will be immediately accretive to earnings and does not require a significant balance sheet usage.
Turning now to slide 17 at the client driven organization. Our long term revenue growth is critically dependent on broadening and deepening all of them.
And all of our strategy objectives are focused on this singular objective to broaden and deepen our client base.
This slide you can see our client numbers.
These clients may not all be active at every point in time. It does show that we are getting active and meaningful engagement from new clients and we are expanding our market share.
Each of our segments in China, better than 50% increase in.
<unk> client acquisition over the last two years. This number is also reflected in our client float which is up over 92% over the same period.
Let's move to the final slide slide 18.
Yeah.
This was another strong quarter for us with good market condition and excellent results across all products and client segments.
We achieved earnings of $52 3 million diluted EPS of $2 49, and then row stated book of 19, 8%.
The quarter capped the best fiscal year in <unk> history with earnings of $207 1 million diluted EPS of $10 110.
And ROE of 21% and 23, 2% on a tangible equity basis.
When our performance is this viewed through a slightly longer term land such as trailing 12 months.
Over the last two years, which evens out quarterly anomalies. Our results continued to show a strong upward trajectory growing our revenues at a 27% CAGR and adjusted earnings at a 42% CAGR.
We continue to see strong growth in client trading volumes and client assets across all products in all client segments, which speaks to growth in underlying client base and client engagement. We believe that this growth combined with the outlook for heightened general market volatility and increasing interest rates puts a real tailwind behind our business for the next erosion.
In fiscal 2023, we will see a number of our digital platform is being launched which will more tightly integrate our offerings by client type and make it more engaging for clients interact with our financial ecosystem.
While we have seen the increased cost associated with developing and launching these platforms as we actively start to market them.
Should further accelerate our growth and scalability that technology provides to increase margins and overall profitability.
We continue to invest in our financial ecosystem, expanding our products capabilities and talent.
We have a unique and comprehensive financial ecosystem with a very large addressable market in front of us while we have good market share in certain niche segments of the market lots of white space remains in areas, where we already have client relationships and demonstrated capabilities and now need to monetize these opportunities.
One thing we will always make remain constant for the next team will continue to dedicate ourselves to better serve our growing client footprint around the world by providing them with the best financial ecosystem and client service to access the global financial markets. The.
The executive team and I are very proud of the talented <unk> team will continue to propel us to new Heights.
On a final note I would just like to wish all of those in the U S. A happy Thanksgiving and to everyone else that break holiday season, so with that operator, let's see if we have any questions.
As a reminder to ask a question you will need to press star one one on your phone. Please standby as we compile the Q&A roster.
One moment for our first question.
Okay.
Our first question will come from Dan Fannon of Jefferies. Your line is open.
Thanks, Good morning.
I wanted.
I wanted to just follow up on the comments that were just around the interest rate sensitivity.
Clearly seeing it flow through the income statement I think the comment Sean you made is that 60% of the.
The benefit is I think in the fiscal fourth quarter was realized so I just wanted to think about from here prospectively.
Just kind of the flow through of the 45 day average thinking about incremental upside from what rates have done and then I guess as you think about the sensitivity charts, we see that but.
At what point.
I guess, that's where where you think we are in terms of the realization of based on current balances and in current rates.
So I would say if you look at that interest rate slide that we provided you a number it was.
If you look at that chart.
Slide 15, you can actually see on that.
The actually extra leave the average yield per quarter.
And you can see it was 193 basis points for the last quarter.
Q3 was 69 basis points. So a massive increase that Linda was sort of 28 basis points. So.
I think we all forget how quickly and steeply interest rates kind of jacked up and it was all sort of in the summer right.
So it has happened fairly recently and because we sort of lag by about 45 days because normally most of our investments on 90 day T bills and we roll them, we still have a lot of them up but it takes a little while for that to roll out and we sort of always a little bit behind the current interest rate curve. So I guess, if you looked at.
I don't have the number to hand, but if you looked at what the average sort of three month T. Bill rate was in the last quarter that was probably closer to 4% frankly, so we still a long way behind where current interest rates are now.
We will start catching up, particularly if the interest rate.
Increase of slow down a little bit will start catching up but we still got a bit of a bow wave behind us.
Which will start to show up in upcoming quarters. So I don't know if that explains that then I'm sure we'll have more granular detail. The other thing I would just also throw out there is.
It's a little bit of an unknown for us So we're making our best guess, yet, but as we start to get to these levels of interest rates climb.
Clients, obviously want to start participating in interest so.
Every interest rate increases incremental but it's sort of less incremental to the prior one was because we have to pay some portion of that way. So those are sort of the dynamics, we're dealing with we got sort of a bow wave.
Still catching up to current market.
Market rates.
We've also got to recognize we're going to start putting some of that incremental interest away so anything else to add bill.
No I think that's I think that's right John I mean, I think the average bill rate was probably something.
The.
Two in a quarter or two and a half range for the.
For the.
For the fourth quarter, and so I would anticipate.
For the fourth quarter as being somewhere.
And the 3%.
Plus range for the fourth quarter as we kind of as Sean said catch up with where T bills rates are going.
Overnight rates are going.
I mean given.
No.
No other market events occur that change anything, but Sean touched on there have been rapidly.
Rapidly increasing.
Great and then just to clarify because I look at the institutional segment of $30, one and interest and fees earned on client balances.
That was reported.
There's also in that in the institutional segment. There was some consulting and management account fees that also jumped a lots of $14. Four so I just want to make sure the $30 one as a good jumping off point to what you just said in terms of incremental.
The rate upside.
So respect.
Yes, so I mean.
Interest and fee income we earn on client balances is split between those two lines, Dan So that all of the T bells and overnight balances that we hold.
Primarily going through the interest line, but the FDIC sweep right, which is based on that billion.
Roughly 1 billion nine that we have that all mostly flows through the fee income line for consulting and fee revenues you touched on so that is that's the reason the primary reason for the big jump you saw in consulting fee income just because that comes through as a fee as opposed to interest.
Alright, Thanks, Paul Agri, that's all aggregated down below where we kind of break out and give you the aggregated.
Interest and fee income on client balances figure.
But we think about that as a run ratable number from here or does.
Consulting fees or line item is that a one time component no no no I'd anticipate both the interest line in the fee income line to both go up as interest rates go up here in the fourth quarter.
Eric when you bundled into it is generically bundled into consulting and fee income, but its really the interest split we get on the FDIC sweep was paid to us not as interest. So we have to put it in that line got it makes sense and then just on.
In the securities business, you've been showing that you talked about kind of the expansion into fixed income, which is going to take to even be higher than the <unk>. The <unk>.
$4 million lower but this quarter. It was kind of a dynamic the opposite right where the fee familiar went up a lot.
The IDB went down can you talk to that and obviously the longer term trend.
Well I think the first thing to recognize is.
We still have saved us a year ago I guess, if you wanted to go back and listen, but the fourth quarter last year was a pretty crappy quarter for us on the security side. So we are comping to a weak quarter.
All of our staff.
So I think you should look at it sort of just setting up the quarters I think the triangle.
The trend will look a little bit different than just the quarterly comparison.
Yes.
So say since.
But.
I mean, yes, the Adv trended down kind of in the securities just with getting into some of those other products as Sean touched on but I tried to point out in my portion of the script that.
As interest rates go up when you're trading in fixed income securities.
The revenue side goes up because theres just an interest component in the revenues, but you also saw the interest expense for that business going up quite a bit in the quarter as well.
So we don't show a net RPM, because it's kind of hard to do that across all of our businesses. So we're showing you gross but the.
Some of that RPM expansion you saw in the fourth quarters, just because of interest rates going up.
If that makes sense.
Okay.
Obviously, you didn't see that last quarter. So just.
Yes, I think it's because of that you saw.
The fourth quarter, you saw the rates going up quite precipitously in the fourth quarter more so than you saw in the third quarter.
And also you'll note we put a note in the slide deck, you could take a look at that.
The <unk>.
Adv for the third quarter.
Higher than it should be we had some double counting of transactions. So we gave you an adjusted figure here.
And that obviously affects RPM had no effect on revenues itself, but kind of adjusted that figure to wear.
Three.
<unk> should have been 512.
For the third quarter with that adjusted.
Sure.
Okay that makes more sense.
The fourth quarter is up precipitously because of the interest.
Okay. Okay.
And then just in the context of <unk>.
You guys have been talking about in terms of the new investment digitizing the platform and then margin expansion potential operating leverage as a result so.
As you've budgeted and think about next year fixed expenses.
And.
Is there a <unk>.
Inflation plus growth investment number we should be thinking about for fixed rate expenses and obviously the revenues will be what they are but in the hopes of driving.
Margin expansion I get the longer term goals of this but just trying to get a sense from a dollar perspective or how the budget looks as you think about.
<unk> expenses for next year.
But bill can give you the exact.
Number that we're thinking about I guess, but I would say the good and the bad news.
We've spent that money and have been spending the better part of two years. So these platforms doesn't just get stood up overnight. There's a long lead time. So a lot of that cost is already in our cost structure.
So you Shouldnt see a big ramp up just for that right.
And as I said, we haven't stopped running these out and have started rolling out some of these initiatives slowly and incrementally and obviously that will show some incremental revenue, obviously will be positive against that cost base.
I think you've got to assume.
Kind of pleased to see that our fixed costs that sort of flattened out I mean, a year ago, we're talking about pretty big fixed compensation cost increases and it was largely because of the gain acquisition, but you always worry that when you get to that HEICO, what we really see these tablets plateau.
And they did I mean, we were up 3% or something sort of quarter on quarter in fixed.
Fixed compensation expense.
I expect that to stay in a pretty modest range, but we obviously have to take account of sort of higher inflation. So we're just going through our annual increase.
<unk> now and then.
Going to be larger than the ones you've ever done right. So that.
It's something to be taken into account, but I don't know what your overall sort of view on that could be but I would say, it's going to be inflationary largely right. Yeah. Yeah, No I would agree with you Sean I think so.
A lot of that has come through so far but I think inflationary rate, we have to be realists here with the environment that we're seeing.
That 7% to 8% growth.
It's probably likely given just the inflationary pressures that we're seeing that kind of go forward basis Dan.
Okay that makes sense and then I don't know if you picked up I think we've chatted about it in the last quarter Didnt chat about it now but.
The strong dollar has been a net benefit for us on our cost base right.
Yes.
Almost all of our revenues are in dollars. So we don't have any.
Impact on the revenue side with the strong dollar.
But.
And all our bonuses are linked to the dollar, but our fixed cost in places like London, and Europe component and so on.
Have all got cheap, but right. So so we've seen some some benefit on the cost structure through that.
Indeed.
Put on FX hedges to try and lock that in.
Type of erosion.
So the <unk> in place to try and hold onto that benefit first and I'll, let him kind of it's about 20% of those costs are.
Alright.
The movement in Sterling sloppy and in Europe .
So.
Something to bear in mind, we've had on that.
A little bit of help on the upcycle.
Okay.
It makes sense and then.
As you think I mean, obviously, we're I know you are focused more longer term, but we're halfway through the quarter you have environment as you look past over the last 12 months has been.
Very strong in terms of client engagement activity levels. All the things you guys highlighted in terms of your results.
As you look forward and what we've seen thus far is there anything from a customer market perspective, geography, anything really changing or is it.
Relatively constructive.
Based on kind of how you exited the quarter and where things sit now.
Honestly.
I don't want to cut us here, but if you just look at a set of results I mean, I think it's just a fantastic result across the board I mean every one of our products is up double digits every one of our segments.
We really firing on all cylinders here so.
Nothing stays the same way forever, but.
I can't really see anything sort of in the immediate future.
That is going to materially change what we're seeing now so.
So we just wanted to continue.
Possible, I guess, which we know it won't but.
So no.
There's nothing really I can speak to I think Q4 was a pretty straightforward sort of vanilla quarter, there wasn't any sort of exceptional items.
Exceptionally crazy market condition, because just sort of a.
Business as usual I think.
Okay.
Yes, no I'd agree I'd agree.
Yes.
Alright, and then just in terms of the current backdrop for M&A you announced this kind of a recent smaller acquisitions as you said, but it would be immediately accretive and then.
The context of the backdrop given valuations have come in markets there may be a.
Good for some businesses, maybe not for others is there more opportunity today for you to deploy capital.
Inorganically or similar to or no real change.
Well firstly, we are pretty excited about the organic trajectory that we are I mean, if you just look at that graph up sort of.
New clients and changes I mean, our planning basis, plus the 100% over the last two years.
Run rate seems to be continuing and that'll take capital right. So.
Our base case is we sort of pretty happy with the organic track in.
In terms of acquisition opportunities I think we now starting to see sort of early days of of opportunities starting to come to the table.
A couple of things we've had to look at a couple.
Couple of things we're looking at.
Nothing that I think is close to dependent at this point, but it's definitely a change from what happened in the last two years this small change, but a change nonetheless.
Okay, well I think Thats, all my questions happy Thanksgiving and I appreciate the time.
Yes, Thank you Dan.
Thank you.
One moment.
Okay.
Okay.
And I see no further questions in the queue I would now like to turn the conference back to the CEO Shawn O'connor for closing remarks.
Okay, well thanks, everyone.
We'll speak to you again pretty soon here in the year and once again happy Thanksgiving to all the U S colleagues and friends and also for everyone else enjoy the holidays.
We'll speak to you soon thank you.
This concludes today's conference call. Thank you all for participating you may now disconnect have a pleasant day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Sure.
Yes.
Yes.
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Mhm.
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