StoneX Group Inc. Q2 2023 Earnings Call

May 4, 2023

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Good day, and thank you for standing by and welcome to the Stone ex group Q2 financial earnings call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to answer a question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is right to withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today CFO Bill Dunaway. Please go ahead.

Good morning, My name is Bill Dunaway welcome to our earnings conference call for our second quarter ended March 31 2023.

After the market closed yesterday, we issued a press release reporting our results for the second 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 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-Q filed with the SEC.

This discussion may contain forward looking statements within the meaning of section 27, a of the Securities Act of $19 33, as amended and section 21 E of the Securities Exchange Act of $19 34 as amendment.

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

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 .

While volatility.

Do you need to be moderately elevated in both financial and physical markets. It was significantly diminished compared to the three months ended March 31st 2022.

The prior year period reflected the effects of the Russian invasion of Ukraine, which resulted in significant wide widening of spreads in many key markets in which our clients, making us a tough comparable quarter for us.

Turning first to slide three of the earnings deck, which compares quarterly operating revenues by product versus a year ago.

Product volumes were up except for FX, and Cfd, which were down 10% and listed derivatives down marginally.

The outlier here with securities, which was up 65% as we continue to pushing further into lower margin higher volume products.

Revenue capture was down except for global payments due largely to the exceptional conditions in the prior quarter as a result of the Ukraine situation right.

Revenue capture was up in all products except securities.

Versus the immediately preceding quarter.

Physical revenues were up a strong 33% due to good results from the AG biofuels business as well as precious metals activities.

<unk> operating revenues were up 65%.

As mentioned last time, our operating revenues and fixed income trading get boosted by higher carried interest on our positions, but we also incurred related interest expense on financing. These same securities which resulted in a gross up on the income statement. We now net of the interest in the rate per million metrics.

On this basis Securities Adv increased 65%, while the rate per million declined 49% to $282.

Versus the immediately prior quarter Adv was up 36% and the rate per million was down 33% the.

The decline in rate per million versus the prior year was.

On the security side that was definitely a tough quarter for equities, but on the other hand, the fixed income group did exceptionally well, having one of the best quarters.

Global payments had another strong quarter recording revenues up 21% with volumes up 16% in revenue capture up 2%.

Versus the immediately prior quarter Adv was up 5% and rate per million was up 14%. So an improvement over our Q1.

Interest and fee income on client balances was $103 4 million up 894% as we realize the impact of the Cumulus interest rate increases off the back of a 22% increase in total client float, which now stands at around eight 6 billion.

Interest and fee income was up 20% over Q1, even though our client float reduced 12% as clients on the FDIC sweep started buying interest rates products to maximize yield. We also started to see some pressure to pay off higher rates to our clients on their on their phones.

Moving to slide four which shows the same data for the trailing 12 months.

Over this longer period, and despite more challenging comparisons about coming to bear we realized strong revenue growth across all products, except listed and OTC derivatives, which were up only single digits.

Securities was up 57% due somewhat to the accounting impact of the interest mentioned earlier and physical contracts were up 41%.

We have generally seen increases in volumes across the board while revenue capture is starting to become more challenging generally.

And just to remind everyone. We are comparing against our best one of our best ever quarters, a year ago.

We recorded operating revenues of $704 4 million up 29% versus the prior year and up 8% from the preceding quarter.

Operating revenues are boosted by interest both on the client flows and also interest embedded in our fixed income trading mentioned earlier.

Net operating revenue, which nets off interest expense as well as introducing broker commissions and carrying class was flat versus a year ago.

Fixed compensation, which includes the retirement and reorganization charges was up $13 1 million or 16% versus the prior year with non variable salaries, increasing $10 7 million compared to the prior year as a result of a 15% increase in head count related to our ongoing initiatives to digitize and expand.

In the current period return to more normalized levels in.

Excluding all of these items fixed compensation was up 7% on the preceding quarter, reflecting annual merit increases and some incremental new hires.

Our diluted EPS was $10 43 for the trailing 12 months up 45%.

These numbers have been adjusted for the accounting treatment related to the gain in the CDI acquisition as disclosed in our prior filings and which appear in the reconciliations provided in the appendix of this earnings deck.

Net income for the second quarter of fiscal 2023 was $41 7 million, which represents a 35% decline versus a very strong $64 million in the prior year and is a 46% decline versus the immediately preceding quarter, which included included the gain on the acquisition of CDI are just noted.

Operating revenues from Securities transactions declined $3 6 million.

In addition, we saw a $900000 increase in depreciation and amortization of $600000 increase in non track technology and support and a $5 million increase in travel and business development.

Closing out the segment on the next slide operating revenues and global payments increased $8 8 million versus the prior year driven by a 16% increase in the average daily volume and a 2% increase in the rate per million as compared to the prior year.

Fixed compensation increased $12 7 million as compared to the prior year, primarily driven by the reorganization costs, Sean noted earlier as well as the incremental hires related to the buildout of our payment offerings.

Segment income was $15 9 million in the current period and represents a 33% and 51% decline versus the prior year and immediately preceding quarters respectively.

Moving on to slide number 13, which represents a bridge between operating revenues for the first quarter second quarter of last year to the current period across our operating segments. Overall operating revenues were $704 4 million in the current period up 159, seven or 29% over the prior year.

Cover the changes in the operating segments for our segment operating revenues for our segments. However, at $3 $4 million negative variance in revenues and unallocated overhead primarily related to the outcome of the elimination of central treasury activities between business segments and corporate.

The next slide number 14 represents a bridge from 2022 second quarter pre tax income of $87 4 million to pre tax income of $57 5 million in the current period.

The negative variance in overhead of 19, $19 8 million was partially driven by the $3 $4 million negative variance in revenues I, just noted as well as a $2 $5 million increase in variable compensation and a $12 $4 million increase in fixed compensation and benefits, which was partially due to the movement in the retail marketing team and Central Department as I touched on Earth.

Earlier.

In addition, we saw $4 $3 million increase in interest expense on corporate funding of $1 $7 million increase in occupancy and equipment rental.

And a $1 $8 million increase in non trading technology and support.

These increases were partially offset by $2 $6 million decline in professional fees.

An increase in central as well as an increase in central allocations, the operating segments, particularly retail.

Finally, moving on to slide number 15, which depicts our interest and fee 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 interest rates.

The interest and fee income net of interest paid the clients and the effective interest rate swaps increased $43 2 million to $54 6 million in the current period as compared to $11 4 million in the prior year.

As noted in the table, we estimate 100 basis point change in short term interest rates either up or down would result in a change to net income of $21 million or $1 two per share on an annualized basis.

With that I would like to turn it back over to Sean.

Thanks, Paul let's move to the final slide slide number 16.

We achieved another set of very good cooperating results with moderating market conditions offset by higher interest earnings on our client float.

This quarter, we are comparing against the very strong quarter, a year ago, and also had significant reorganization charges, which should be recovered with lower variable compensation over time.

For the quarter, we recorded EPS of $1 95, and an ROE of 13, 8% at.

Adjusting for the reorganization charges results would have been in line with the first quarter results, excluding the gain on the CDI acquisition.

For the trailing 12 months, we recorded net income of $219 $7 million or $10 43 in EPS equating to 19, 5% ROE on stated book.

Hello.

Value is now $60 52 per share up 21% versus a year ago.

When our performances are used to a slightly longer term lens such as trailing 12 months over the last two years, which even south quarterly anomalies. Our results continued to show a strong upward trajectory growing revenues at a 28% CAGR and adjusted earnings at a 27% CAGR.

While trading conditions moderated towards the end of the quarter, we believe that our growing and diverse business in multiple earning drivers will continue to drive growth and deliver shareholder value.

Turning to see strong growth in client trading volumes across asset classes and products as well as segments, which speaks to growth in the underlying client base and client engagement.

Continue to invest in our financial ecosystem, expanding our products capabilities and talent.

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

Operator, let's see if we have any questions I'm sure Dan.

Onto the line.

Perfect. Thank you and at this time, we will conduct a question and answer session.

A quick 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. Please press star one one again and please standby while we compile the Q&A roster.

Okay.

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

Thanks, Good morning, guys.

Hey, Dan.

Doing well thanks.

Wanted to just follow up on just the environment.

At a high level, you talked about higher volumes and lower spreads was kind of something that just kind of a takeaway for the quarter.

But maybe as you think about.

The end markets are healthier customer base kind of activity levels is.

Obviously, a tough comps from how great things have been but as you look underneath does it feel the sustainability of activity levels is kind of.

I was hoping to get a little more color Robin knowing that you can't predict volumes, but generally the trends seem like they are holding up at least reasonably well.

Okay.

Yes, you sort of have to pass that question into two things I mean in terms of revenue capture we obviously, we're comparing against a phenomenal quarter given code. So.

Revenue capture was was down versus that.

I would say excluding that if you look maybe over the last three quarters I would say our funds generally whether you look at the VIX. So whether you look at volatility in the metals markets and elsewhere that volatility has declined generally over the last two three quarters.

I think it's probably still somewhat elevated in general terms versus say 2019.

But it's certainly nowhere near where it was a year ago. So it seems to be flattening off.

Now we could be entering volatility can change fast described I mean, as we've seen with sort of the bank drama.

What's going on with all the California Bank, so I'd like to note but.

Anyway.

I think we sort of may be flattening out there and we could see periods of higher volatility.

So thats on the volatility side.

On the volume side, we certainly seeing continued strong volumes.

I think we might depending on the kind of economics situation. We think may transpire. We may also see that start to moderate slightly I mean, if we go into a highly credit constrained environment in a recession.

I think you've probably got to say volumes.

<unk> to increase at the same pace and all things being equal would probably moderate a little bit so thats my anticipation.

I would say.

The other factor to take into account that just the competitive environment.

I think we're making market share gains right. So.

I think banks are struggling I think.

They are starting to again consider whether they should be and some of these businesses we continue to see.

As on boarding clients for banks, so even in a more of a moderated environment. We may still see some decent growth through market share gains. So I think that's a pretty good environment for us and obviously you got interest rates at a high level. So I think all in all this is a pretty good environment for us over the next call.

On a three to six quarters.

It obviously depends on sort of the overall economic conditions and how those get.

Absent something really bad I think it's going to be a decent run for us yet.

Taking all those factors into account.

Okay. That's helpful. Thank you and then I guess just upon one of the areas, where you are taking share in fixed income.

Can you talk about.

You are offering is what youre doing there you've hired from people who've built this business organically.

Thinking about prospectively are you allocating more dollars resources to this to continue this trajectory.

I don't think we allocating more dollars in terms of sort of limit so inventory or whatever I mean, this business are driving talked pretty fast over the last five years.

Seems to have sort of.

Stabilize what we are seeing is just a lot more volume.

And we certainly are taking up a lot of market share in this business.

I was just travelling for two weeks and not simply the fixed income guys off.

And I came in and they like 10, new people here.

Come from.

Firms that were competitors of biology, but doing so well I mean, we've got some people from credit Suisse. We've got some people from other places so we certainly seem to be attracting talent.

We certainly seem to be outperforming our competitors and Carlos normally follows that right. So so I think the fixed income guys have done a phenomenal job.

I do think as we.

We've said now for a couple of quarters, there's a lot of activity in the more.

Commoditize products right, we've seen just a lot of activity in T bills and in treasuries.

As all of this turmoil is going on with the banking sector.

That is giving us a lot of volume now, making money out of it but in terms of rate per million revenue capture somewhat lower revenue capture than some of other products, but certainly we're seeing very good results from our fixed income guys doing a great job and I think.

We are becoming I definitely think in that area. We are showing market share gains I think it's showing up with our clients perceive us.

I think we sort of stepping into the void created by some of these other banks withdrawing so I definitely think there we're seeing lots of market share gains.

And then Huntsman took that franchise for us for us.

Okay. That's helpful. And then just following up on the re org and some of the expense items in the quarter and then I think you said were mostly kind of global payments related but why now kind of what do we see this kind of flowing through other portions or segments of the business as you kind of go through this or just a little more.

<unk> would be helpful.

Yes, I was just trying to sell the stuff always seems to hit in one quarter and kind of no matter. How you sort of think it's going to be different.

We've had a lot of people who have been with us for a long period of time, who have helped grow our businesses.

They were.

Very high highly paid people a lot of them have taken a lot of their compensation in stock.

A lot of them are sort of getting to the <unk> and I think sort of post.

Sort of a three tough.

Year periods during Covid, it's sort of it.

In time I think for some of these people to think about.

<unk>.

To start thinking about transitions.

And so that's really what happened so I think we feel very comfortable about it I think we've got a good bench.

But these people have done a fantastic job for us helped us both the brake business have both a great bench by then but at some point people want to go do other things and when that happens, particularly when people have a lot of stock.

Typically if someone retires we bear.

Asked all of their stock immediately.

The deal with us and build a great business.

And that his comes immediately right. So that's really what happened.

<unk> metals business.

Our senior Ziram brought in fact, youre, starting the whole metals business, we got a great person following up they'd be working on a transition for the better part of two years.

The Guy who headed up our precious metals activities in Asia, and then the head of our global payments business or sort of at the same time decided this was a good time for them to sort of move on so.

We've got young talented people in this space I feel very comfortable about it but there is just the cost of all of that rock.

That costs will be recovered because we have modified the variable comp structures I mean, all of our senior people.

Great.

Big draws out of the variable comp pool, given that they started and then we had originally and we manage the skinny that up a little bit. So I think we've got a leaner cost structure going forward and we certainly will recover these costs pretty quickly.

And then there'll be an enduring benefit from their own right. So so anyway, that's the story there.

Okay.

That's helpful. And then just in terms of all the disruption that's happening.

Do you view M&A and kind of moving up the priority list as you're seeing potential businesses or carve outs of other firms that maybe aren't doing as well.

Are more attractive today.

I would say, we haven't really seen that yet.

But definitely what we are seeing is a pickup in talent coming over which for US is a little bit the same thing right in some ways. If you can pick up a team and we just picked up a team of five fixed income traders.

A very competent team well known in the market.

They come across and generally speaking can bring their clients with them.

That's almost better than us, making an acquisition at some level because we don't have to pay for it.

We get a bunch of guys, who come over bring their business with them and sort of fits in seamlessly throughout our culture. So we're seeing a lot of that happening at the moment, which in some ways I think is a better and lower risk way to grow our business and I think we're going to see more of that.

Obviously, a lot of people.

Out of credit Suisse and other people looking so I think it's a good environment for us to pick up talent.

I think clients are also looking.

Wait to move two so there's a good opportunity to pick up clients.

Have you seen that kind of.

I guess.

Opportunity rather than acquisitions, but I think you're right at some point, they're going to be some acquisitions I think.

This is a tough environment for some people in the financial markets I mean, it's great for us, but some people are struggling.

There should be some opportunities, but nothing I can say.

We are looking at seriously at the moment.

Okay.

Great. Thanks for taking all my questions of course.

Yeah.

Okay.

Are there any other questions.

Operator.

Okay.

Please standby will be compile the Q&A roster.

Okay.

Again as a reminder, you will need to press star one on your telephone if you have a question.

Okay. It looks like we don't have any questions I would like to thank everyone for joining us on the call I'd like to thanks.

The great team members of <unk> for another great performance this quarter and we look forward to speaking to all of you in three months' time. Thanks.

Thanks, so much.

Yeah.

This does conclude the program you may now disconnect. Thank you.

Okay.

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Good day, and thank you for standing by and welcome to the throne Ex group Q2 financial earnings call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to answer a question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Good morning, My name is Bill Dunaway welcome to our earnings conference call for our second quarter ended March 31 2023.

After the market closed yesterday, we issued a press release reporting our results for the second 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 and year to date results.

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

The presentation and an archive of the webcast will also be available on our website after the call's conclusion.

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

There can be no assurance the company's actual results will not differ materially from any results expressed or implied by the companys forward looking statements.

You are cautioned that any forward looking statements are not guarantees of future performance.

Thanks, Paul Good morning, everyone and thanks for joining our fiscal 2023 second quarter earnings call.

In the second quarter of fiscal 2023, we continue to experience strong volume growth across all of our product offerings.

You need to be moderately elevated in both financial and physical markets. It was significantly diminished compared to the three months ended March 31st 2022.

The prior year period reflected the effects of the Russian invasion of Ukraine.

The outlier here with securities, which was up 65% as we continue to pushing further into lower margin higher volume products.

Revenue capture was up in all products except securities.

First is the immediately preceding quarter.

Physical revenues were up a strong 33% due to good results from the AG biofuels business as well as precious metals activities.

<unk> operating revenues were up 65%.

On this basis Securities Adv increased 65%, while the rate per million declined 49% to $282.

Versus the immediately prior quarter Adv was up 36% and the rate per million was down 33% the.

The decline in rate per million versus the prior year was due to the continued push by equity and fixed income groups into lower margin, but higher volume products as well as tougher trading conditions on the equity side, which made it hard for us to internalize spreads.

On the security side is definitely a tough quarter for equities, but on the other hand, the fixed income group did exceptionally well, having one of the best quarters.

Global payments had another strong quarter.

Recording revenues up 21% with volumes up 16% in revenue capture up 2%.

Our FX Cfd revenue was down 38% largely due to tougher market conditions versus the exceptionally positive conditions in the prior quarter, which resulted in volumes being down 10% and revenue capture being down 31% versus a year ago.

Versus the immediately prior quarter Adv was up 5% and rate per million was up 14%. So an improvement over Q1.

Interest and fee income on client balances was $103 4 million up 894% as we realized the impact of the Cumulus interest rate increases off the back of a 22% increase in total client float, which now stands at around eight 6 billion.

Moving to slide four which shows the same data for the trailing 12 months.

Over this longer period, and despite more challenging comparisons not coming to bear we realized strong revenue growth across all products, except listed and OTC derivatives, which were up only single digits securities was up 57% due somewhat to the accounting impact of the interest mentioned earlier and physical contracts were up 41%.

We have generally seen increases in volumes across the board while revenue capture is starting to become more challenging generally.

Turning to slide five and a summary of our second quarter and trailing 12 months results again, just to remind everyone. We are comparing against our best one of our best ever quarters, a year ago.

No.

We recorded operating revenues of $704 4 million up 29% versus the prior year and up 8% from the preceding quarter.

Operating revenues are boosted by interest both on the client float and also interest embedded in our fixed income trading mentioned earlier.

Net operating revenue, which nets off interest expense as well as introducing broker commissions and carrying clubs was flat versus a year ago.

During the quarter, we incurred $14 $6 million of retirement and reorganization charges, the bulk of which relates to the global payments segment.

These costs will be recovered over the next 18 to 24 months to lower variable compensation.

Total compensation and other expenses was up 7% for the quarter with variable compensation down, 2% and fixed compensation up 33% substantially due to the restructuring charges mentioned earlier.

Our product offering as well as annual merit increases.

As the immediately preceding quarter fixed compensation again, excluding the retirement and reorganization charges was up $15 5 million or 19%.

This was driven by increased payroll taxes, and 401K related expenses of around $4 million related to the start of the new calendar year accrual.

Accruals for paid time off increased $2 2 million as employees increased their remaining accruals in the prior period, sorry utilize the remaining accruals in the prior period and the current period return to more normalized levels in.

In addition, we experienced a decline in deferred compensation of $4 million versus the preceding quarter.

Excluding all of these items fixed compensation was up 7% on the preceding quarter, reflecting annual merit increases and some incremental new hires.

We recorded a $1 95 in EPS for the quarter and the charges mentioned earlier had an impact of around 50.

On EPS.

Without these charges our EPS would have been roughly similar to Q1, when excluding the acquisition gain on CDI.

Our ROE was 13, 8% and the charges noted earlier impacted us by roughly three 4%.

Looking at the summary for the trailing 12 months.

Operating revenues were a record $2 5 billion up 36% over the.

<unk> 12 month period, our net income was a record $219 7 million up 49%.

Diluted EPS was $10 43 for the trailing 12 months up 45%.

ROE was 19, 5% despite equity increasing 45% over the last two years.

Our average yield on our client float was 379 basis points for the quarter versus 303 basis points.

For the for the prior quarter and a net interest and fee income increased $93 million versus the prior year quarter.

Okay.

Our book value per share increased $3.15 during the quarter significantly larger than our reported EPS due to positive changes in other comprehensive income to close at $60 32.

Up 21% versus a year ago.

Okay.

Turning now to slide six our segment summary, and just to touch on some of the highlights of the full bill gets into more detail.

For the quarter segment operating revenue was up 30% and segment income was down 5% due to the exceptional results a year ago and also due to the restructuring charges mentioned earlier.

Our commercial client segment was up 47% and segment income off the back of a 20% increase in operating revenues with strong performances in precious metals and also the effect of higher interest rates.

Versus the immediately preceding quarter segment revenues were up 21% and segment income was up 24%.

Our institutional segment realized a 79% increase in revenues, which translated into a 12% increase in segment income the.

The disparity in those two growth numbers is due to revenue being increased by the interest carry on fixed income.

The fixed income business as mentioned earlier, one of the best quarters in the equity business experienced a much more challenging one while the listed derivatives business and securities clearing were boosted by interest and fee income.

Versus the preceding quarter segment revenue was up 6% and segment income was down 10%.

Retail had another difficult quarter with continued challenging market conditions, especially when compared to the exceptional results a year ago.

Operating revenue was down, 35%, but up 11% versus the preceding quarter.

Segment income swung to a profit of $4 8 million versus a loss of $4 $2 million in the preceding quarter.

Hold down 89% from a year ago.

Global payments revenue was up 21% and segment income was down 33% due largely to the bulk of the reorganization charges being charged year segment income would've exceeded last year's without these charges.

For the trailing 12 months, we have segment operating revenue and segment income up double digits, except for retail which was down.

We have said repeatedly we take a long term view and how we manage the company and grow our franchise and as such we believe that the best way to gauge our results and progress is to look at longer term performance such as trailing 12 month results rather than specific quarters taken in isolation.

Turning to slide seven which sets out our trailing 12 month financial performance over the last nine quarters.

On the left hand side, the baas represent 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 63% over this period for a 28% CAGR.

Our adjusted pre tax income likewise has grown significantly at a 25% CAGR.

Our pretax earnings dip this quarter due to the reorganization charges mentioned earlier.

On the right hand side, you can see the adjusted net income with the bonds, which is up 62% over the last two years for 27% CAGR.

The dotted line represents our ROE, which has remained above our 50% target even though our capital has grown by 45% over this period.

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

Financial results in more detail bill over to you.

Thank you Sean I'll be starting on slide number eight which shows our consolidated income statement for the second quarter of fiscal 2023, Sean.

Sean covered many of the consolidated highlights for the quarter fall heightened a few and then move onto our segment discussion.

Transaction based clearing expenses declined 10% to $69 2 million in the current period, principally due to lower fees and equity ADR as well as the decline in FX Cfd contracts average daily volume and lifted derivative contract volumes.

Leasing broker commissions declined 2% to $42 $2 million in the current period, principally due to declines that are independent wealth management and retail FX CFT businesses.

Interest expense increased $164 6 million versus the prior year, primarily as a result of the $117 million increase in interest expense related to our institutional fixed income business and a $36 $6 million increase in interest paid the client.

Hey, <expletive> client balances on deposits as a result of a significant increase in short term interest rates.

Interest expense on corporate funding increased $4 $3 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 declined $2 3 million versus the prior year due to the decline in net operating revenues as well as a change in product mix and represented 30% of net operating revenues in the current period compared to 31% of net operating revenues in the prior year period.

Sean covered earlier on this call the fluctuations in fixed compensation, so I'll move onto other fixed expenses, which increased $6 5 million as compared to the prior year to $106 4 million. However, this was a $3 $8 million declined versus the immediately preceding quarter.

As compared to the prior year non trading technology and support increased $3 4 million due to software implementations and ongoing support travel and business development increased $2 8 million depreciation and amortization increased $1 8 million due to incremental depreciation related to internally developed software as well as higher amortization of lease hold improvement.

And intangibles acquired and finally occupancy.

In equipment rental increased $1 8 million as compared to the prior year.

Setting these increases professional fees declined $2 5 million as compared to the prior year, principally due to lower legal fees.

Bad debt expense net of recoveries declined $9 3 million to $3 million in the current period versus $12 three in the prior year period.

The prior year comparable period included a $6 $4 million other gain related to a foreign exchange anti club antitrust class action settlement received while the immediately preceding quarter includes a $23 $5 million gain on the acquisition of CDI.

Moving on to slide number nine I'll provide some more information on our operating segments. Our commercial segment added $36 million in operating revenues versus the prior year and $37 7 million when compared to the immediately preceding quarter.

This increase was driven by a $37 $1 million increase in interest earned on client balances as a result of the significant increase in short term rates.

Average client equity declined a modest 2% versus the prior year.

In addition, operating revenues from physical transactions increased $14 7 million compared to the prior year as a result of growth in both physical AG and energy and precious metals activities.

These increases were partially offset by $12 million and $4 $5 million declines in operating revenues derived from listed and OTC derivatives, respectively with the prior year being a very strong performance as Sean noted earlier.

Versus the immediately preceding quarter listed and OTC derivative revenues increased $7, two and $15 $4 million respectively.

Fixed compensation and benefits increased $3 3 million versus the prior year and other fixed expenses increased $2 $6 million, including increases in selling and marketing travel and business development and depreciation and amortization.

Bad debt expense declined seven 4 million as compared to the prior year.

Net income was $102 9 million for the period, an increase over the prior year period in preceding quarters of 47% and 24% respectively.

Moving on to slide number 10 operating revenues, our institutional segment increased $159 $7 million versus the prior year, primarily driven by $101 $5 million increase in securities operating revenues compared to the prior year as a result of the 65% increase in average daily volume of security transactions as well as the increase in interest rates.

The increase in Securities Adv was driven by an increase in volumes in both equity and fixed income markets.

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.

Interest and fee income earned on client balances increased $55 2 million versus the prior year as a result of the increase in short term interest rates as well as a 61% increase in average client equity.

The rise in short term rates drove $156 million increase in interest expense versus the prior year interest expense related to fixed income trading and securities lending activities increased $117 5 million and $3 4 million, respectively as compared to the prior year.

In the immediately preceding quarter, while interest paid the clients increased $32 6 million.

Segment income increased 12% to $55 8 million in the current period as a result of the $5 $1 million increase in net operating revenues.

Fixed compensation and benefits increased $2 2 million versus the prior year as we build out our product offering while other <unk> expenses increased $1 million.

Bad debt expense declined $2 million.

As.

Compared to the prior year period segment income declined $6 2 million versus the immediately preceding quarter.

Moving on to the next slide operating revenues in our retail segment declined $41 4 million versus the prior year, which was primarily driven by a $37 $5 million decrease in FX and Cfd revenues as a result of a 26% decline in rate per million as well as a 22% decline in FX cfd ABB as compared to the prior year.

Operating revenues from Securities transactions declined $3 6 million.

Operating revenues in the retail segment increased $8 1 million versus the immediately preceding quarter.

Segment income declined eight 9% to $4 8 million in the curve.

Primarily as a result of the decline in operating revenues.

We moved retail marketing employees to our central marketing Department, which drove the $3 $2 million decline in fixed compensation and benefits. These costs were then allocated back to the retail segment through an allocation process, which partially drove the $5 1 million increase in other fixed expenses as compared to the prior year.

In addition, we saw a $900000 increase in depreciation and amortization of $600000 increase in non trek technology, and support and a $5 million increase in travel and business development.

Segment income was $15 9 million in the current period and represents a 33% and 51% decline versus the prior year and immediately preceding quarters respectively.

Moving on to slide number 13, which represents a bridge between operating revenues for the first quarter of second quarter of last year to the current period across our operating segments. Overall operating revenues were $704 4 million in the current period up $159 seven or 29% over the prior year.

I've covered the changes in the operating segment for our segment operating revenues for our segments. However, at $3 $4 million negative variance in revenues and unallocated overhead, it's primarily related to the outcome of the elimination of central treasury activities between business segments and corporate.

So next slide number 14 represents a bridge from 2022 second quarter pretax income of $87 4 million to pre tax income of $57 5 million in the current period.

The negative variance in <unk> overhead of 19, $19 8 million was partially driven by the $3 $4 million negative variance in revenue as I, just noted as well as the $2 $5 million increase in variable compensation and a $12 $4 million increase in fixed compensation and benefits, which was partially due to the movement in the retail marketing team in such a apartment as I touched on.

Earlier.

In addition, we saw $4 3 million increase in interest expense on corporate funding of $1 7 million, an increase in occupancy and equipment runoff.

And a $1 $8 million increase in non trading technology and support.

These increases were partially offset by a $2 $6 million decline in professional fees.

An increase in central as well as an increase in central allocation to the operating segments, particularly retail.

Interest and fee income net of interest paid the clients and the effect of interest rate swaps increased $43 2 million to $54 6 million in the current period as compared to 11 4 million in the prior year.

With that I would like to turn it back over to Sean.

Thanks, Paul let's move to the final slide slide number 16.

We achieved another set of very good cooperating results with moderating market conditions offset by higher interest earnings on our client float.

This quarter, we are comparing against the very strong quarter, a year ago, and also had significant reorganization charges, which should be recovered with lower variable compensation overtime.

For the quarter, we recorded EPS of $1 95, and an ROE of 13, 8%.

Adjusting for the reorganization charges results would've been in line with the first quarter results.

StoneX Group Inc. Q2 2023 Earnings Call

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