Q1 2023 Stonex Group Inc Earnings Call
[music].
Good morning, ladies and gentlemen, thank you for standing by and welcome to the Sonics Group, Inc. First quarter fiscal year 2023 conference call. At this time all participants are in a list.
Only mode. After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference maybe recorded I would now like gender conference over to your speaker.
Today.
On a way Chief Financial Officer. Please go ahead Sir.
Good morning, My name is Bill Dunaway welcome to our earnings conference call for our first quarter ended December 31 2022.
After the market close yesterday, we issued a press release reporting our resorts results for the first fiscal quarter of 2023.
This release is available on our website at Www Dot <unk> dot com as well as a slide presentation, which we'll refer to on this call in our discussions of our quarterly results.
I'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 are 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 there too as well as the Form 10-Q filed with the SEC. This.
This discussion may contain forward looking statements within the meaning of section 27, a of the Securities Act of 1933 as amended and section 20 <unk> of the Securities Exchange Act of 1934 as amended.
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 that 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 2023 first quarter earnings call.
The first quarter of fiscal 2023 was marked with the continuing effects of inflationary pressures on global markets and significant increases in short term interest rates.
Volatility continued in both financial and physical markets have had a more diminished level than we experienced for much of fiscal 2022.
Especially towards the end of the quarter.
Turning to slide three in the earnings deck, which compares quarterly operating revenues by product versus a year ago.
A list of derivative revenues were essentially flat as higher volumes were offset by lower revenue capture.
Hey, good news from over the counter derivatives were down 9% off the back of lower volumes and slightly tighter spreads.
Physical revenues were up a strong 46% due to the addition of CDI as well as good results from the precious metals activities.
This was despite a $4 2 million mark to market loss on derivatives held against inventories, which should reverse next quarter.
Security's operating revenues were up 19, 1% as a result of significantly higher volumes and also interest rates.
While the higher interest rates helped drive the increase in securities operating revenue, we experienced significant increase in interest expense related to our fixed income trading as well.
This happens is when we trade bonds, we earn the carried interest on acquisitions, but also incurred related interest expense on financing the securities which results in a bit of a gross up on the income statement.
We have changed our method of calculating securities rate per million revenue capture for this quarter and the prior year to address this and I'm not deducting the related interest expense associated with our fixed income trading.
Factoring this in the securities rate per million declined 20% to $422 in the first quarter as compared to 529 in the prior year.
Securities net operating revenues, which deducts the interest expense in aggregate as well as the peering cost of IP commissions increased 29% versus the prior year driven by increased volumes.
Global payments recorded their best ever quarter, with revenues up 31% and volumes up 23% and revenue capture up 7%.
Our FX and Cfd revenue was down 32% largely due to tougher market conditions, which resulted in lower revenue capture down 27% versus a year ago.
Interest and fee income our client balances what was $86 2 million.
Over 900% as we realize the impact of the cumulative interest rate increases off the back of a 56% increase in our total client flows which now stands at $9 8 billion.
Moving on to slide four which.
Which shows the same data for the trailing 12 months over this longer period, we realized strong double digit revenue growth across all products, except listed derivatives, which was up 9%.
We are generally seeing increases in both volumes and revenue capture over this period with the exception of securities and listed derivatives showing declines in revenue capture.
Turning now to slide five and a summary of our first quarter and trailing 12 month results.
We recorded operating revenues of $654 8 million up 45% versus the prior year.
Our operating revenues were boosted by interest both on our client float and also the interest that is embedded in our fixed income trading as I mentioned earlier.
Net operating revenues, which net of the interest expense as well as introducing broker commissions and clearing costs was up 22%.
Total compensation and other expenses were up 19% versus the quarter for the quarter with variable compensation up 18% slightly below the knee.
Operating revenue growth rate.
Fixed compensation and related costs increased 8% versus a year ago and were in line with the immediately prior quarter.
During the quarter, we acquired CVI at global Cotton merchant business based in Switzerland, with clients and produces in Brazil, and West Africa as well as buyers in the APAC region.
This acquisition resulted in a gain on acquisition of $23 $5 million, both before and after tax.
Excluding the acquisition gain of $23 5 million and the intangible amortization we recorded.
Adjusted net income of $55 3 million up 27% over the last year and up 2% on the immediately prior quarter.
On this same basis, we achieved an adjusted ROE of 19, 7%.
Including the gain on acquisition and as reported earnings were $76 6 million, resulting in an ROE of 27, 3%.
We realized record operating revenues for both our institutional and global payments segments.
Looking at the summary for the trailing 12 months.
Operating revenues were a record $2 3 billion up 33% over the prior year.
Net income was a record $242 million up 75% and excluding the acquisition gain and the related intangible amortization was $226 6 million up 60%.
Diluted EPS was $11 59 for the trailing 12 months up 70%.
ROE was 23% despite equity increasing 47% over the last two years.
Our financial results were boosted by higher interest and fee income on our client flows as we started to realize the full benefit of the accumulated interest rate increases as.
As mentioned last quarter, our interest, earning assets generally take about 45 days to reprice to new rates.
Our average gross yield on our client float was 303 basis points for the quarter versus 193 basis points for the fourth quarter.
Net interest and fee income after deducting what is paid to clients increased $36 3 million versus the prior year quarter.
We ended.
For the quarter with a book value of 57.7 cents.
<unk> up 21% versus a year ago.
Turning now to slide six which is our segment summary.
Just to touch on some highlights of Hopewell gets into more detail.
For the quarter segment operating revenue was up 44% and segment net income was up 19% with very strong performances across all but one of our client segments.
Our commercial client segment was up 26% and segment income off the back of a 20% increase in operating revenues with strong performances from our physical business. Following the acquisition of CDI as well as the effect of higher interest rates.
Our institutional segment realized 113% increase in revenues, which translated into a 94% increase in segment income.
This was largely due to a much improved performance from our securities business in particularly equity market, making versus a softer quarter a year ago as well as the increase in interest and fee income.
Retail had a tough quarter with more challenging market conditions without resulting in a lower revenue capture compared to a much more favorable environment last year.
Operating revenue was down 27%, which resulted in a segment loss of $4 2 million demonstrating that the high operational leverage we have with the digital platform works both ways.
Global payments revenue was up 31% and segment income was up 32% with solid increases in both volume and revenue capture.
For the trailing 12 months, we have segment operating revenue and segment income up double digits across the board.
These strong quarterly results, but as we've said repeatedly we take a long term view and how we manage the company and grow our franchise as such we believe that the best way to gauge our results and progress is to look at longer term performance such as the trailing 12 months rather than specific quarters, taking in isolation.
Turning to slide seven which sets out our trailing 12 month financial performance over the last nine quarters.
These numbers are all being adjusted for the accounting treatment related to the gain in CDI acquisitions as disclosed in our prior filings and which appeared in the reconciliations provided in the appendix at the end of the sale leaseback.
On the left hand side, the bars represent our trailing 12 months operating revenue over the last nine quarters.
As you can see this has been a smooth and strongly upward trend as we have steadily expanded our footprint and capabilities.
Our operating revenues up 64% over this period for a 28% compound average annual growth rates.
Our adjusted pre tax income likewise as grown significantly at a 40% CAGR.
On the right side, you can see our adjusted net income in the boss, which is up 107% over two years for a 44% CAGR.
The dotted line represents our ROE, which has remained above our 15% target even though our capital has grown by 47% over this period.
With that I'll hand, you over to bolt on a way for a discussion of the financial results Bill.
Thank you Sean I'll be starting with slide number eight which shows our consolidated income statement for the first quarter of fiscal 2023.
Sean covered many of the consolidated highlights for the quarter. So I'll highlight a few more and then move onto our segment discussions.
Transaction based clearing expenses declined 5% to $67 3 million in the current period, primarily due to lower fees and equity products and the decline in FX Cfd contracts average daily volume.
Introducing broker commissions declined 4% to $36 $8 million in the current period, principally due to declines that are independent wealth management and retail FX Cfd business, which was partially offset by incremental expense from the CBI acquisition.
Interest expense increased $138 6 million versus the prior year, primarily as a result of the $93 $3 million increase in interest expense related to our institutional fixed income business with Sean noted earlier as well as the $36 1 million increase in interest paid to clients on their deposits as a result of the significant increase in short term intra.
Rates.
<unk> expense in corporate funding increased $2 6 million versus the prior year also as a result of the increase in short term interest rates as well as an increase in average borrowings.
Variable compensation increased $18 $1 million versus the prior year due to the increase in net operating revenues and represented 31% of net operating revenues in the current period compared to 32% of net operating revenues in the prior year period.
Fixed compensation increased $5 9 million versus the prior year with the growth principally related to salary and benefit cost of increased head count, which increased 13% as compared to the prior year, which was partially offset by an increase in deferred compensation.
Other fixed expenses increased $23 7 million as compared to the prior year to $110 2 million, which also represented a $3 $8 million increase over the immediately preceding quarter.
As compared to the prior year trading systems and market information increased $1 6 million, primarily in our securities businesses.
In addition, professional fees increased $4 million versus the prior year, principally due to higher legal accounting and other consulting fees.
Non trading technology and support increased $1 8 million due to non trading software implementations and selling and marketing expenses increased $1 9 million.
Principally due to increased campaigns and our retail FX cfd business as well as additional hosted conferences and marketing expenses across our businesses.
We continue to see an uptick in travel and business development, increasing $2 8 million as compared to the prior year.
Finally, depreciation and amortization increased $3 6 million as compared to the prior year due to incremental depreciation related to internally developed software as well as higher amortization of leasehold improvements and intangibles acquired.
We had bad debt expense net of recoveries of 700000 for the quarter versus a $200000 or $200000 rich.
Covered in the prior year period.
Net income for the first quarter of fiscal 2023 was $76 6 million represented 84% increase over the prior year and a 46% increase versus the immediately preceding quarter as Sean noted net income include the non taxable gain on the acquisition of CDI in the current period.
Moving on to slide number nine I'll provide some more information on our operating segments. Our commercial segment added $29 8 million in operating revenues versus the prior year, However declined $2 8 million when compared to the immediately preceding quarters.
The increase was driven by a $20 7 million increase in interest earned on client balances versus the prior year as a result of a 25% increase in average client equity as well as the significant increase in short term interest rates and.
In addition, operating revenues from physical transactions increased $16 3 million compared to the prior year, principally due to the acquisition of CD CDI as well as an increase in precious metals activities.
These increases were partially offset by $3 9 million and $4 2 million declines in operating revenues from listed and OTC derivatives, respectively.
Segment income was $82 8 million for the period, an increase over the prior year and preceding quarter of 26% and 3% respectively.
Moving on to slide number 10 operating revenues in our institutional segment increased $182 2 million versus the prior year, primarily driven by a $115 $5 million increase in securities operating revenues compared to the prior year as a result of a 56%.
The 6% increase in the average daily volume of Securities transactions as.
As well as the increase in interest rates.
The increase in Securities Adv was primarily driven by an increase in volumes in both equity and fixed income markets. As a result of continued volatility and increased market share.
As Sean mentioned earlier the increase in interest rates also led to a significant increase in securities related interest expense for the period, which I will touch on momentarily.
Operating revenues increased $3 1 million and $3 9 million in the listed derivatives and FX products, respectively, driven by growth in both lifted derivative and FX contract volumes.
Finally interest and fee income earned on client balances increased $56 7 million versus the prior year as a result of the increase in short term rates as well as well as a 106% increase in average client equity.
The rise in short term interest rates drove an increase in interest expense for the period with interest expense, increasing $132 9 million versus the prior year interest expense related to fixed income trading and securities lending activities increased $93 3 million and $2 2 million, respectively as compared to the prior year, while interest paid to clients increased 30.
$3 1 million.
Segment income increased 94% to $62 million in the current period as a result of the $53 million increase in net operating revenues.
Variable compensation increased 37% or $13 1 million as a result of the growth in net operating revenues.
Compensation and benefits increased $1 7 million versus the prior year as we build out our product offering while other fixed expenses increased $5 6 million, including a $1 $7 million increase in professional fees of one and a half million dollar increase in trading systems and market information.
Segment income increased $17 million versus the immediately preceding quarter.
Moving to the next slide operating revenues in our retail segment declined $25 9 million versus the prior year, which was primarily driven by a $27 $3 million decrease in FX and Cfd revenues as a result of the 29% decline in RPM as well as a 10% decline in FX Cfd average daily volume.
As compared to the prior year.
Operating revenues from Securities transaction declined $4 1 million, while operating revenues from physical contracts added $2 5 million as compared to the prior year period.
Operating revenues in the retail segment declined $31 3 million versus the immediately preceding quarter.
We recorded a $4 $2 million segment loss in the current period versus segment income of $23 4 million in the prior year, primarily as a result of the decline in operating revenues other fixed expenses increased $6 5 million compared to the prior year, driven by a $1 $1 million increase in selling and marketing of $1 $8 million increase in depreciation.
<unk> and amortization $600000 increase in non technology.
Non technology and support costs, and a $300000 increase in travel and business development.
Closing out the segment discussion on the next slide operating revenues and global payments increased $13 million versus the prior year driven by a 23% increase in the average daily volume and a 7% increase in the rate per million as compared to the prior year non variable expenses increased $2 $4 million is primarily related to the expansion of our payment offerings.
Segment income was $32 3 million in the current period and represents a 32% increase over both the prior year and 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 $654 8 million in the current period up $204 3 million or 45% over the prior year.
I've covered the changes in operating revenues for our segments. However, the $5 2 million positive variance in revenues and allocated overhead primarily related to an increase in unallocated interest income net of an FX hedge related losses compared to the prior year period.
The next slide number 14 represents a bridge from 2022 first quarter pretax income of $52 5 million to pretax income of $95 6 million in the current period.
The positive variance and allocated overhead of $15 5 million was driven by the $5 $2 million positive variance in revenues I, just mentioned as well as a $23 $5 million gain on acquisition.
Which was partially offset by a $4 $1 million increase in variable compensation as a result of improved performance of $2 $3 million increase in professional fees of $700000 increase in depreciation and amortization of $900000 increase in trading systems and market information and a $1 million increase in travel and business development.
Finally, moving on to slide 15, which depicts our interest and fees earned on client balances by quarter as well as a table, which shows the annualized interest rate sensitivity for a change in short term rates.
And fee income net of interest paid to clients and the effect of interest rate swaps increased $36 3 million to $44 $3 million in the current period as compared to $8 million in the prior year.
As noted in the table, we estimate 100% 100 basis point change in short term interest rates either up or down would result in a change to net income by $28 8 million or $1 40 per share on an annualized basis.
With that I would like to turn it back to Sean.
Thanks, Bill, let's move onto the final slide 16.
We achieved very strong results in the fiscal first quarter 2023, delivering double digit increases in operating revenues and net income, which resulted in diluted EPS of $3.62 and an ROE of over 27% for the quarter.
These results included a $23 $5 million non taxable gain on the acquisition of CVI, which contributed $1 11 of earnings per diluted share and a significant increase in interest income, reflecting the growth in our client assets and higher interest rates environment.
While trading conditions moderated towards the end of the first quarter, the multiple drivers of our business including office.
<unk> approached acquisitions, the strong growth in client assets in our core operating performance exemplify the diversity in our operating model. We believe that these multiple drivers and ongoing investments position us to continue to empower our clients and drive our growth and deliver shareholder value.
I mean, our performance is viewed through a slightly longer term lens 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 28% CAGR in our adjusted earnings at a 44% CAGR, we continued to see strong growth in client trading volume.
And client assets across all products in all client segments, which speaks to the growth in our underlying client base client engagements.
We continue to invest in our financial ecosystem, expanding our products capabilities and talents, we have a unique and a comprehensive financial ecosystem with a very large addressable market in front of us.
I would just like to note that this week represents the 20th anniversary of the investment into what would become so next <unk>.
Eight years ago, the stock price was 64.
And the market value of the company was $1 5 million.
The annual operating revenues were well less than $10 million.
Over the past 20 years, we've compounded operating revenues 32% per annum.
Shareholder equity at 29% per annum and by harnessing the phenomenon of the power of compounding we have increased the market value of the company over 150 times.
Our commitment to our clients are disciplined around risk and acquisitions and our long term owner based approach to investing into and growing our business have all been key underpinnings of the success.
While we are proud of our track record and believe that it is largely unmatched by our peers. We also believe that we're still in the early stages of the opportunity that is available and in front of US I have no doubt that the next 10 years are likely to be much more exciting for <unk> in the last 21.
Operator, let's open for questions.
Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question Westar. One again, please standby, while we compile the Q&A roster.
Yes.
I'm showing we have a question coming from the line of Daniel Fannon with Jefferies. Your line is now open.
Hi, Thanks for taking my question. This is actually June on behalf of Dan.
So maybe you can just start off with a quick discussion on the current environment and maybe just.
2023, how has SaaS startup versus what was the backdrop of 2022.
Sure.
Sure.
Obviously things can change fast and our business.
These general comments can change by the minute.
If you go back to our discussion at year end.
My view was we were going to continue to see.
Somewhat elevated volatility, which is obviously a key driver for our business and that volatility would be higher than it was pre pandemic, but may be slightly lower than it has been for the last two years and I think that's what we still see.
You know things, obviously quieted down last quarter over the Christmas period, and maybe it was just the way the days fell over Christmas.
It might also be that it was such a rough last quarter that I think a lot of people sort of closed down in the beginning of December window.
We've seen things pick up to a more normal cadence here in January .
I think we are going to see an environment that is moderately good for us.
Volatility side Mark.
Not quite as good as it was in Covid, but better than it was pre COVID-19.
That will continue for some time yet.
On the other side, we obviously now starting to feel the full impact of interest rate increases, we always forget how quick and how fast. These interest increases came about and we really only started to see them showing up in our financial results by.
By any magnitude in the fourth quarter and obviously now we're starting to get to the point, where we see that interest really kick in.
I think we're going to be in an environment where.
Interest rates are sort of.
Either side of 4% full.
I mean I'm not sure they will stay at 5%, which is it looks like they go but I don't see sort of a 2% environment out there anytime soon that's obviously very attractive for us and Thats a much better environment than we've had at any point in time over the last four years and certainly better than last year, I mean last year as I said.
We only saw a very small.
Benefit from the interest rates. So I would say if you put those two things together I think it's a pretty good environment for us obviously the interest rate impact is material and I think we still have a decent environment for volatility. So that's that would be my view.
As I said things can change dramatically quickly in our business.
We see volatility changes faster than interest rates do but.
I think this is going to be a good environment for us for that.
At least 12 to 18 months I mean beyond that hard to know.
How far interest rates might go down, but I still don't see them gain to below 2%. So.
Anything above two 5% for us is a very attractive environment to that business does that answer your question.
Yeah, Yeah, absolutely that was super helpful. And then since you mentioned interest rates and just seems like market pricing interest rates going down maybe at some point this year or next so just on the way down.
Earnings sensitivity to rates sort of similar would be somewhat similar on the way up versus way down.
There is some kind of dynamic here, yes, it won't be the same I mean, the asset so that might take a little quicker to reprice on the way down but.
But the dynamic will be the same I mean, obviously.
Incremental take of interest as it goes up reduces because we pay more way to clients and on the way down same thing happens, we take more of the interest rate on the way down so it's a little bit needs at each way as you get sort of above 3%.
But it should be it should it be symmetrical.
And then maybe just in terms of margin balance margin requirements and client balances do you see any dynamics between Dod related to interest rates and interest rate changes.
Again, we have seen some small changes here and there I mean, I think they largely immaterial, but certainly in equity clearing business, we've seen some retail clients take money off of deposits.
I don't know if thats, because they could find high interest rates elsewhere or people were starting to buy.
Into the market rather than having money on the sidelines, but we've seen that they're down 1% or something.
And then on the other side of our business obviously it depends on the volatility in the markets because that's somewhat drives how much margin people have to live with us. So.
If volatility moderates a little bit we may see.
A little bit of a pullback on our aggregate client balances.
The top sort of.
10, or 15% of our client balances tends to be more volatile, but theres a core level of client balances, there, which sort of just underpins our client footprint right and as long as markets are reasonably active thats, probably going to be reasonably stable, but it could move around on the margin just a little bit for those reasons.
Got it got it and just specifically on the retail business.
Mentioned.
Capture rate decline was mostly due to diminishing market volatility so going forward what would you describe as a normalized rate and maybe you can go a little bit more in depth on the dynamics of just market volatility and the rate that we're seeing here.
Yes, so we have data around sort of revenue capture in that business over a long period of time and.
It's pretty damn stable.
Over a period of time.
What we do see is in the short term.
Weekly monthly even quarterly there can be quite a lot of volatility.
In that revenue capture.
So I would say something.
1995.
$95 in terms of revenue capture on the Cfd eases sort of a.
About where we think the long term averages I mean that obviously also differs with product mix, because we make a lot less on the effects that we do say on indices.
So something in that region is probably where wed like to see it now we were at 82.
This quarter. So we were significantly below the sort of 9500 type level that we see as the long term average, but if you look at that.
Higher quarter.
A year ago, we're at 115.
In the immediately preceding quarter, we had 140, so I would say, we sort of massively over achieved in those quarters and you tend back you trend back to the mean at some point.
You're going to see a couple of quarters, where are we going to underperform to bring that average back in line with the sort of 9500 type level that we think is sort of the long term average. So we certainly saw exceptional market conditions over the last 12 months to 18 months in that business. Our revenue capture was above trend and now we've seen.
A bit of a tougher environment and now we are below trend. So we shouldnt be evening out somewhere in the middle here.
Good time.
Understood. Thank you and maybe bill just a quick one for you I understand that that business is doing well, but how are you thinking about fixed expenses for 2023.
Well certainly.
Something that we look to try to continue to control right and the increase was.
Was relatively modest from Q4 into Q1 here.
<unk> that.
We're riding the tailwind a bit of higher interest rates.
And slightly elevated volatility so I think that.
The growth that we kind of saw over Q4 to Q1 is probably more indicative of what we would expect.
Forward versus when you looked at Q1 versus last year Q1, with a relatively sizable increase in fixed expenses.
Kind of do to what John's talked about on previous calls us trying to digitize the business and expand our offerings, but our expectation is that would moderate here on a go forward basis like it did from Q4 to Q1.
Got it got it and then just lastly on M&A.
Do you think youre still sort of digesting the CDI acquisition or.
Looking for more opportunities at this point.
I'll take that policy like so.
So <unk> is a relatively small deal for us I mean, it had a disproportionate impact on our financial statements through sort of how you have to account for these things.
That deal is going to be digested, I think pretty easily and quickly by us. So it is not a gating factor for us looking at anything else at this point.
And we always in the market, we are always looking at opportunities.
I would say and I've said this on previous calls you know up until now.
We've seen financial businesses hit peak earnings and we've seen owners want to put sort of spec multiples on peak earnings, which obviously is of no interest to us and.
And I think we were well served law getting it post acquisitions on that basis.
What we're now seeing is obviously as you read in the press and see everywhere is a totally different environment right.
Some of these businesses are now not performing so well and they've realized that.
It was maybe a little bit of a COVID-19 sort of bump that got in there and.
And Additionally, funding has dried up for a lot of the sort of startup businesses a lot of them are sort of halfway down the road of building out the capabilities. So we're seeing a lot of those kind of opportunities.
We not a.
We don't like to take.
I guess, we stock businesses, all the time ourselves, but we don't think of us felt as venture capitalists.
So we will look at those businesses and if we think there is real capability, there and real opportunity and with a modest amount of additional investment by US we can bring those two accounts.
Ecosystem, that's sort of interesting.
But I think we're getting into a more interesting and more rational environment for M&A. So.
I think it's still going to take another six to 12 months for that to sort of settle down and for people can become.
Totally rational around prices, but that could happen I'm not saying that will mean, we go buy anything because I think.
We've expanded our footprint, we filled in a lot of our gaps and so.
So our GAAP saw fewer and our needs are less.
Default has always focused on organic growth that's the way we can add.
Shareholder value the best right when we buy something we have to make it significantly better than it was when we bought it otherwise we've added no value. So our default is broad ecosystem I think we have a tremendous run at the moment.
We seem to be culminating market share all over the place.
And the story is exciting at the moment and I think in our clients and talent and so on.
Taking notice of our so our default is just to continue doing what we think we could ask which is growing our business organically.
If we see an opportunity to do it fast it through.
A good accretive acquisition that is well priced we will always think about that.
Yeah.
Okay Super helpful. Thanks, Thanks, again for taking all my questions of course, thank you.
Operator, do we have any other questions.
Yes, so and as a reminder, ladies and gentlemen to ask a question. Please press Star 111 moment. Please for our next question.
Okay.
And our next question coming from the line of Paul <unk> with <unk>.
On churn associated investment your line is open.
Hi, good morning, guys.
As far as Youre doing taking my questions. Good morning good.
Maybe just two.
Follow up on CDI can you can you spend.
I think it's only like a $40 million deal can you talk about.
What drove this gain.
On the acquisition.
Yes.
I don't want to get too much in the weeds on this but.
This was a sole proprietorship.
And I think we sort of said some of this when we announced we were doing the deal a quarter ago.
Wonderful.
Our top employees in Brazil joined the company I think it was five six years ago.
So it becomes sort of the Arab parents.
Sad to see him go and he was a tough competitor in the cotton business for us.
And when the principal wants to sell his business.
He immediately thought about this as write ups that makes us Ali let's call them in and there was no process. We just did a deal I think the one that took the view that if I can just get that capital out of the business and there was a big tax advantage for him. He has led the profits.
Remain inside the company because as I understand it.
Treatment with <unk> would be taxed on anything you took out of the company, but if he sold the company that could be a tax free receipt for him. So there was a significant tax advantage for him to sell a business that accumulated capital over the years.
So the purchase process.
In the $30 million.
Which was tangible book value that was the deal we did.
And they.
They were a few sort of add on payments based on the results of the company on a cash basis up until December . So we made some small additional payments. So that's the deal we did I think that's the deal he wanted.
There wasn't huge amounts of negotiation I think thats the deal he was looking for.
The difference is.
Him he always accounted for this space.
Company on a cash basis, which is outsourced GAAP desert.
We have to account for the business on a mark to market basis and their business. They have a significant portion of their next year's revenue contracted it. So we obviously had to mark that to market, which led to some of the gain. So we've now brought forward some portion of next year's revenue.
And because we sort of have that came as part of the acquisition that goes is sort of part of the gain we realized. Additionally, we have to go through an independent valuation process. When we acquire businesses and we use a third party to do that they do it for all acquisitions and they have to value the business independently.
I do look at things like the value of our relationships with suppliers and so on so there is an intangible write up.
<unk>.
The value of the contracts and the suppliers I mean, if it went up to me I would prefer and I think the liquidity, we prefer never to write up those intangibles, because we just have to write it back down and for me intangibles out with anything really.
It's not hard cash and that's how we think so so part of that is just sort of an accounting anomaly that happens that we will have to write some of that down, but that's really the gist of it so.
It was sort of a bizarre outcome.
How much of a gain which show a relatively small acquisition, but that's the reason.
Yes, okay. It sounds like a nice deal.
And on.
In global payments.
It seems like it's continuing to.
Accelerate in its growth.
Could you just spend a little more time talking about what the drivers have been to get the acceleration and just the general landscape for that segment.
Yes, I mean definitely we sort of feel that that business has got.
Sort of renewed energy.
We're starting to invest in the business and sort of new angles, which I think.
Maybe 345 years ago, we weren't doing so much because our core business for sort of an attack.
And Thats always frustrating to me is when businesses do well people stop investing because they sort of busy making money right and I think we've always got to do both.
Take advantage and make hay, while the Sunshine, but you've also got a sort of.
You've got to think about investing in your business, because we want to grow the franchise and sometimes those market conditions that make your business profitable on sustainable long term unless you invest so so I think with.
With the payments business, we pushed them really hard.
About two or three years ago to really think about how to sort of reinvest and grow the business.
We're making big investments in that business right now and not a lot of that is showing up yet in the P&L, but I think it's sort of energized. The team. We've got a lot more sort of younger people and the team. We've recruited people. All these new initiatives. So very much a technology base. So we've recruited sort of younger technology based people. So.
Feel good about that.
The general sort of tone of the business and where it's taking us.
Co payments capability, when we launched that I think could be very significant potentially for us.
In terms of why the business is doing better now I think this diversely was one of the businesses that didn't experience a COVID-19 kind of tailwind.
People stopped investing overseas.
The payments, where we really make a lot of money.
When corporations are investing in making larger sized payments into their subsidiaries a lot of that slow down during COVID-19 and has not picking up so I think on.
On the margin I would say that's sort of high level takeaway as.
Covid for sort of a tough environment for this business and we're getting back to a more normalized environment, which is a little bit the opposite of some of our other businesses right. So.
Okay, Great. That's what I would have described generally yeah, okay. That's perfect.
And then.
Okay.
Really nice operating leverage again this quarter.
Okay.
Just big picture, how do you think about it.
<unk> to be able to drive.
Segment income relative to unallocated costs.
Particularly if.
The interest rate benefits are now starting to be more.
Accurately reflected in the business.
Well.
When you say, we've got better operating leverage my response to that would be finally.
Yeah.
We always seem to be investing so much in <unk>.
To make our infrastructure more efficient more scalable, but short term. It's just delayed at added costs and you sort of hope that at some point you start to see those benefits of scalability and that operational leverage sort of come to the floor. So it's been a long time in coming and I hope for.
We are now getting to the point, where we will see.
Aggregate.
Sort of an advocate.
Located cost base.
Level outs and if we can continue to keep the volumes as the revenue is going up I mean, we should have very significant operating leverage going forward. It is hard to do because not only are you trying to eat.
Digitize your business and leverage technology, better, but there is always a continuous push on costs from.
The regulators in the environment right the regulators always imposing more and more cost on a small and more processing. Some of thats. Good some of that maybe is more than more than is required but do you have to continuously sort of.
Work with that environment and then as.
As we all digitizing so you have to deal with things like cyber security and.
And all the costs that are related to that and those costs are going up fast.
And then even the high inflation, we have seen at the moment. So so theres funds, even though we're starting to flatten out at some point. They also real pushes to posture that we manage to work with.
And it's going to be a challenge going forward, but.
We definitely feel we.
Should be tapping off we've made some major investments over the last 10 years I think we're starting to see a little bit of the payoff for that so hopefully hopefully that will continue obviously it always looks better when you have interest coming in and a positive environment because your revenue spring.
Faster than your costs at that point and always remember that with our interests. We have zero cost against that price is no operational costs no systems cost.
Operational leverage our interest is 100% right.
So that also skews the numbers a little bit so anyway.
Rambled on that debt.
Onto your patient pool.
Yes, no that's great.
Perfect.
And then just last for me in terms of.
Who's being able to continue to grow the core business.
It sounds like you're having no issues with market share gains, but any any.
Color you can add.
Current competitive landscape and our ability to keep keep taking market share.
Yes.
We seem to be.
Organically sort of growing our market share in line with whats happened over the last five to 10 years, which is 10% to 15%.
Incremental growth in customers and activity.
We're giving you guys. Some of the data now in revenue capture I mean, there was always the argument that you're going to face revenue capture pressure, but if you look at it over sort of five or 10 years, we haven't seen any material decline in our margins on the revenue capture side.
That may happen at some point and Thats happened in some of our activities, but generally speaking we managed to maintain our pricing.
And we've managed to increase our market share in our client base.
I don't see any reason why that won't continue I mean, I do think maybe.
The environment has given us a boost because of volatility was high in revenue capture was higher.
It looked a bit better than it was but underlying that trend has been a pretty steady carnival organic growth in customers and that's the key.
Core long term driver for us.
I think we feel good that that's intact and in some ways.
Relative to the comments I made at the end I think the next 10 years is going to be much more exciting than the last 20.
And the reason I say that is I think we're getting to sort of a tipping point to scale in acceptability from Counterparties people know, who we are people want to come and work.
Clients see the value in our offering I mean, five to 10 years ago, we were a tiny little business that no one had heard of and.
If I think back 10 years ago, where we were sitting and how we've managed to grow at sort of like early <unk>.
We managed to pull that off.
This does become a little bit easier as as as you get a little bit of scale and as you probably know ecosystem. So.
Not that I'm, saying, it's easy, but I think there's an opportunity for us to continue that trend.
We're confident about it so anyway, we'll see but that would be my view.
Okay great.
That's it for me thank you for the time.
Yeah of course operate as anyone else.
I'm not showing any further questions at this time.
Okay, well thanks, everyone for attending I appreciate your support and we'll be speaking to you in three months' time, thanks very much bye bye.
Okay.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.