Marex Group plc

Good morning, everyone. I'm Robert Coates, Global Head of Investor Relations for Marex. Thank you for joining us today for our results conference call. Speaking today are Ian Lowett, CEO, and Rob Irvin, CFO. After the formal remarks, we will open the call up for questions. Before we begin, I would like to highlight that certain matters discussed on today's conference call are forward-looking statements relating to future events, management's plans for the business, and the future financial performance of the group. which are all subject to risk and uncertainties. Actual results could differ materially from those anticipated in the forward-looking statements. The risk factors that may affect these results are referred to in the company's press release and our previous prospectus filed with the SEC. The forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these forward-looking statements. Finally, the speakers may refer to certain adjusted non-IFRS financial measures on this call. A reconciliation of the non-IFRS financial measures to the most directly comparable IFRS measures is available in the company's press release. A copy of today's release and the investor presentation can be found on the investor page of Marex.com. With that, I'll hand over to Ian.

Good morning and welcome to our third quarter earnings call. It's been a very busy few weeks for Marex with our successful equity offering and debt raise, and it's been a great opportunity for us to spend time with investors, both those who have been with us since the IPO and new investors who are putting their trust in us. Both offers were significantly oversubscribed, seven times for the equity and four times for the debt offering, demonstrating strong institutional interest in Marex and support for the firm. We are grateful for this enthusiastic response and for the time people took to meet with us and understand the Merrick story. It is also particularly heartening to be able to follow those conversations with yet another strong quarterly performance. We provided an indicative range for our quarterly results in our F1, so not much of this will come as a surprise, but we aim to provide helpful commentary on today's earnings call. I believe these results, as well as the deals we have announced in the past month, demonstrate that we are delivering on what we said we would, at the time of our IPO. We are finding opportunities to grow both organically and inorganically, resulting in a platform that is resilient and we believe can deliver growth across a range of market environments. Turning now to slide three. Slide three illustrates how we play a critical role in connecting clients to markets and how our four interconnected services of clearing, agency and execution, market making, and hedging and investment solutions reinforce one another. Our clients include producers and consumers of commodities, as well as asset managers and hedge funds, and we provide an essential connectivity layer between our clients and the markets they need to access. At the heart of the firm is clearing, which provides an essential infrastructure to connect clients to exchanges and clearinghouses. We also provide clients with access to liquidity, either through agency and execution or market making. And if there is no on-exchange product to meet a client's requirements, we provide bespoke hedging services through our hedging and investment solutions business. In combination, these four services reinforce one another, produce multiple entry points for clients, and increase cross-selling opportunities for merits. We are looking to become more and more relevant in this connectivity layer by adding clients and increasing the amount of business we do with them in the provision of these interconnected services. Turning to slide four, you can see our strong track record of double-digit growth over the past 10 years through a range of market conditions and our continued momentum as a growing business. We're on track for a 10th year of sequential growth, having delivered 34% CAGR in adjusted operating profit over the last nine years. Year-to-date, we have already surpassed our full year 2023 adjusted operating profit. We are delivering on our strategy, which is to ensure we have sufficient structural growth through product and geographic diversification to offset cyclical headwinds. We continue to add clients and do more business with them, with around 5,200 active clients at the end of the third quarter. Moving now to slide six, we've had another quarter of extremely strong performance with continued momentum across all business segments. These results were better than we had anticipated going into the often slower summer months and were supported by ongoing growth in exchange volumes in both commodities and financials. We have continued to strengthen our position in the market with Marex's growth, our pacing growth in overall volumes in almost all markets in which we operate. We have also been successful in expanding our client pipeline, converting that pipeline into new clients and deepening our relationships with existing clients to increase the amount of business we do with them. In the third quarter, we saw revenue growth across all of our business segments. Total revenue grew 32%. Reported ROE for the third quarter was 25%, notwithstanding the 70 million of primary issuance from our IPO that has yet to be deployed. Thanks to the continued strong performance, positive momentum in our core business, and the continued execution of our growth initiatives, We have upgraded our guidance for the full year 2024 and now anticipate adjusted operating profit to be between $300 and $305 million, up from the $280 to $290 million range that we provided last quarter. Please recognize that the fourth quarter is often our softest quarter, with more subdued activity in December. Over the past few months, we were pleased to have announced four growth investments and increase earnings resilience. These investments provide our clients with additional product capabilities in more geographies. We also successfully placed 9.7 million shares in a secondary follow-on transaction, which reduced the position of private equity shareholders and increased our public float from 38% to 52%. Due to the significant demand with seven times over subscription, we were able to upsize the deal to the maximum limit under our SEC filing. We were very happy with the outcome and want to thank all who participated. And we issued $600 million of five-year unsecured notes, further diversifying our funding sources and increasing our liquidity headroom to support future growth of our franchise and growing our client base, particularly in clearing and prime services. This deal also generated significant demand and was four times oversubscribed, leading us to upsize the issuance by $100 million. Consistent with a capital allocation policy set out at IPO, we will be paying a dividend of $0.14 per share this quarter, the same as last quarter. Slide 7 shows the key metrics we as a management team are focused on, growth, margins and ROE, and productivity and quality of earnings. In the third quarter, we delivered strong double-digit growth in all of our growth metrics, with revenue up 32%, adjusted operating profit up 52%, and a 66% increase in adjusted operating profit attributable to common equity. In terms of margin and ROE, our adjusted operating profit margin increased to 21%, and our reported ROE was 25%, up 7 percentage points year on year. and the increase in return of adjusted operating profit attributable to common equity also rose to 28% from 22%. In terms of productivity in our business, operating profit attributable to common equity holders per FTE was up to $97,000 on an annualized basis, up 37% year-on-year. With regards to the quality of earnings, our Sharpe ratio of monthly operating profit is a very healthy 3.8. On slide eight, you can see that overall, the markets in which we operate are growing at around 13%. You can see that there has been a positive skew to commodity markets, which have grown much faster than financial securities markets year on year, with commodity volumes up 22% year to date against 11% for financials. Turning to slide nine, 2022, as you see, was characterized by very elevated volatility and higher commodity prices following the Ukraine invasion. In 2023 and through 2024, volatility and commodity prices have returned to more normal levels. What is important to note is that at these normalized levels of volatility, we're able to perform strongly. Regarding interest rates, currently the Fed funds rate forward curve looks similar to how it did at the beginning of the year, Further rate cuts in Q4 and in 2025 are anticipated. On slide 10, we show how we perform using metrics that can be tracked against the market with reference to overall exchange volumes. When you look at our various businesses on that basis, it is apparent that we are gaining market share. We see increased market volume across each service segment, while Marex's own volumes are growing at a faster rate in almost all markets. Year-to-date, market volumes in clearing are up 14%, while at Marex we saw our volumes up 31%, while revenue is up 18%. Within agency and execution, in the energy market, volumes rose 24%, while our revenue was up 36% on volumes that were up 42%. In the securities markets, volumes rose 11% in the market, while our volumes rose 27%, and our revenues were up 28%. Market making saw volumes up 22% in the market, while Merrick saw revenues up 46% on volumes up by 46%. This is a consistent picture of Merrick's growing faster than the market, which itself is growing at a healthy rate. As we attract additional larger clients to grow share, we expect our volumes to grow somewhat faster than our revenues. I'll now hand over to Rob for a more detailed update on our financial position.

Thanks, Ian, and good morning, everyone. Turning to slide 12, as you can see, we've had another strong quarter. We have grown our revenues by 32% to $391 million, reflecting double-digit revenue growth in each business segment. This enabled us to grow adjusted operating profits to $80.5 million for the third quarter, up 52%. I want to highlight that 92% of this growth was organic. Our performance was supported by a positive market environment and exchange volumes. While the market dislocation we saw in metals in the second quarter did not repeat, we still saw strong volumes in this market. This, combined with the robust volumes in all businesses, led to a better than anticipated performance in the third quarter. Our adjusted operating margin reached 21% compared with 18% in Q3 2023, demonstrating our platform's ability to deliver scale benefits. The first nine months of the year were also strong, with revenues up 28% to $1.179 billion, and adjusted operating profit was up 35% to $240 million. We saw strong contributions from all business segments, as well as exceptional activity in the metals market, which benefited our market-making business in the second quarter, as discussed in the previous earnings call. Historically, we've had minimal adjustments between our adjusted operating profit and our reported profit before tax. As a reminder, our non-operating items grew to just under $22 million in the first nine months of this year. with the vast majority being in the first half for three reasons. Firstly, we incurred $8.6 million of costs associated with the IPO, predominantly legal and accounting costs to support our US listing. Secondly, we incurred $2.4 million of owner fees that we used to pay to our private equity shareholders subject to profitability. These fees ceased at the point of the IPO and will not resume. And thirdly, we incurred $2.2 million of tax expense relating to the vesting of our gross shares, which was connected with the IPO. Similar to this quarter, going forward, we expect minimal adjustments between our adjusted operating profit and our reported profit before tax. Given this, a key measure that we focus on as a management team is our return on adjusted operating profit after tax attributable to common equity holders. As a reminder, this return is calculated as follows. We tax effect our adjusted operating profit and then deduct the post-tax cost of our 81 dividends, whilst the equity is the firm's total equity excluding our 81 capital. Our return on adjusted operating profit attributed to common equity holders was 28% for the quarter. At the end of September, we had 70.3 million of ordinary shares outstanding. This excludes 1.9 million of treasury shares. Our adjusted basic earnings per share was 82 cents for the three months ended September the 30th, 2024, compared with 53 cents for the same period in the prior year, an increase of 55%. On slide 13, For the first nine months of the year, you can see that we have achieved double digit revenue and operating profit growth across all of our segments. We are very pleased with the strong momentum across the businesses this year. Now, let me dive into the third quarter in more detail. On slide 14, you can see that we continue to achieve double digit revenue growth across all of our business segments. Operating profits grew by double digits in all segments apart from hedging and investment solutions, which I will cover shortly. In clearing, revenues grew by 22% in the third quarter of 2024, reflecting growth in both commissions and net interest income. This primarily reflects higher customer balances. In agency and execution, revenues grew by 30%, to $170.4 million in the third quarter. This reflected, firstly, growth in security revenues of $25.4 million, or 34%, reflecting the impact of the Cowen acquisition, which we completed in December 2023, and growth within our rates business, reflecting higher volumes and the introduction of a new structured rates desk. Secondly, Revenues in our energy business grew by 25%, or $13.9 million, reflecting continued high levels in European energy markets, strong demand for our environmental offering as we continue to support our clients in the energy transition, as well as investments in new desks and capabilities. As you can see, we have grown our adjusted operating margin within the segment to 15%, as we've continued to optimize and integrate our acquisitions. Market-making revenues were up 102%, driven by metals trading, which continued to perform strongly and compared favorably to a more subdued performance in the three months a year earlier. Revenue from securities also grew, reflecting a stronger performance from equities, rates, and foreign exchange. In hedging and investment solutions, Revenue grew by 13% to $35.6 million for the quarter, reflecting growth in hedging solutions and financial products due to expansion of the sales team and onboarding of new clients. However, operating profits fell as we continue to invest in the business infrastructure and distribution network. So in summary, a strong performance across all four of our business segments during the third quarter of 2024. Moving to slide 15, as you can see, the average client balances in the third quarter were $13.8 billion and net interest income for the third quarter was $64 million. Year-to-date client balances were $12.9 billion and net interest income rose to $165 million. Please be aware that we have updated the balances to reflect daily average balances, which we think is a better reflection as to what drives net interest income. The growth in net interest income reflected three factors. Firstly, higher average Fed fixed rates in the first nine months of 2024 versus the prior year. Secondly, the impact of the current transaction that we completed in December 2023 And in the first nine months of 2023, we carried fixed investments, which had subsequently rolled off and have been reinvested at higher rates. Clearly, the fact that rates have remained elevated in the first nine months is beneficial to the business, but we do expect a gradual rate cut late this year and into next year. It is important to remember the net interest income does not just impact our clearing business. For example, the interest earned by the Cowan Prime Service business is included within the agency and execution business. As we continue to build this out, it will become a bigger driver of net interest income. And our market-making business and hedging and investment solutions incurs interest expense as they use funding to support their activities. We estimate that 100 basis point decreasing rates will reduce operating profits by around $20 million. This is before any management actions, including future growth of the book. As you can see on slide 16, we continue to maintain prudent levels of surplus capital and liquidity, which support our investment grade credit ratings from S&P and Fitch. Just last week, we completed a US senior unsecured notes issuance of $600 million, which comes due in 2029. This deal adds to our liquidity headroom, further diversifies our funding sources, and extends our maturity profile. These levels of surplus capital and liquidity also ensure that we're well positioned in periods of market turmoil. As Ian has already mentioned, we will be paying a dividend of 14 cents per share this quarter, consistent with our capital allocation policy. This is expected to be paid on the 10th of December 2024 to shareholders on record at close of business on the 25th of November 2024. Turning to slide 17, I will conclude with a view on risk. We have a proactive and involved risk management approach at Marex. In market making, we are a client flow driven business and do not take a directional view on prices. However, as the business is a market maker, we do carry a small level of inventory to source client demands and capture the trading spreads. The VAR value at risk has remained at around $2.5 million. During periods of volatility, we stay well within our risk parameters without increasing VAR and without increasing trading losses. During the first nine months of 2024, we wrote off seven specific historical provisions which had previously been provided for. Within our P&L for the first nine months of 2024, we had a release of $2.8 million reflecting our proactive credit risk management approach, which has resulted in partial recoveries of provisions we'd previously taken. We maintain a very prudent approach to monitoring credit risk. Now I'll hand you back to Ian for an operational update and some concluding remarks.

Thanks, Rob. I also want to provide an update on our recently announced growth investments, which are aligned with our strategy to expand our client base, build out our product capabilities and geographic footprint. At the time of the IPO, we highlighted significant growth opportunities with geographic expansion, identifying the Middle East as a key region. In October, we announced the acquisition of Arna Capital, an Abu Dhabi-based clearing firm, which will accelerate our clearing and agency and execution expansion while broadening our international client base. The acquisition brings 150 new clients onto our platform, posting around 330 million of cash balances. We anticipate significant day one synergies with savings from internalizing clearing fees and higher net interest income through our financial relationships. Also at the time of the IPO, we identified FX as a key growth opportunity for us. We recently announced the acquisition of UK-based FX specialist, Hamilton Court Group. This acquisition expands our FX offering and complements our existing solutions business. It adds around 1,000 corporate clients in the UK and Europe. Together, these two acquisitions are expected to contribute approximately 10% of total profit off the tax in 2025, including anticipated synergies. We were able to acquire these businesses at attractive valuations and expect them together to generate sufficient earnings to offset anticipated interest rate-related cyclical headwinds. We also recently announced two investments to further build upon our environmental capabilities, making an investment in Key Carbon, a carbon financing company, and also an acquisition of a small biofuels company, Dropit. We continue to see a lot of opportunities at attractive valuations, which would strengthen our competitive position and be accretive for our shareholders. In conclusion, our diversified and resilient business delivered strong performance in the third quarter. We continue to be proud of the sequential growth we have delivered over the past 10 years across a variety of market conditions. The scalable platform that we have built has also resulted in continued margin and return improvement. Our performance underpins the investment thesis we discussed with many of you when we were marketing our IPO. We also are making progress with both our organic growth initiatives and inorganic growth investments to add new clients to the platform and expand the products offered to these clients. We have a prudent approach to capital and liquidity management, and we further diversified our funding sources and increased our liquidity headroom through the issuance of $600 million of five-year senior unsecured notes. We also announced a dividend to be paid in the fourth quarter, consistent with our capital allocation policy, set out at the time of the IPO. I hope that we have provided you with a good sense of the strong performance in the third quarter and the good progress we are making with our growth initiatives. Given this performance, we have upgraded our guidance for the full year. We anticipate full year adjusted operating profit to be between $300 and $305 million, up from the prior range of $280 to $290 million. And with that, I'd like to open for questions.

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. We'll now take off this question from the line of Dan Fennant from Jefferies. Please ask your question, Dan.

Thanks. Good morning. I just wanted to talk about the current environment in terms of activity level and, you know, and also just kind of client balances. Clearly a good third quarter. The guidance for 4Q implies some slowdown, which I, as you said, is seasonal, but would just like to, I mean, the environment as we look at exchange volume still looks quite healthy as we look at October. So just a general update as you think about today and kind of going into year-end would be helpful.

Sure. Well, thanks, Dan. Well, I think sort of with regard to you know, sort of the updated guidance. I mean, really what I think we were doing is saying, you know, as you'll be familiar, you know, at the half year point, we wanted to ensure that as people were looking at the full year, they weren't regarding the second quarter as sort of the basis on which to forecast that just simply because there were so many unusual and positive sort of things in that quarter. And so we sort of provided guidance. And I think that the update that we're providing is much more a reflection of the fact that we obviously had a quarter in the third quarter, which was stronger than we had anticipated, in part for what you're describing, which is, you know, a very sort of healthy market environment in terms of exchange volumes. And so we're just sort of reflecting that and then leaving essentially the sort of consensus estimate for the fourth quarter in place. So that's how I think we think about, you know, what we were doing with regard to, you know, updating the guidance. In terms of the current environment, I think exactly to your point, it remains quite positive. As you say, exchange volumes were quite robust in October. I think when we think about the third quarter, exchange volumes were higher than the second quarter, and the second quarter was a particularly sort of good environment for our set of businesses. So the third quarter actually had, you know, sort of, you know, good exchange volumes and we've certainly seen that going into October. And then obviously, you know, with all the market activity over the last couple of days, you know, we're also seeing, you know, some record days in terms of volumes going through the platform. So, you know, it does feel at least for now that we certainly are seeing, you know, a continuation of the environment that we saw in the third quarter.

Great. That's helpful. And just in the context of the acquisitions or investments you've made, you've been quite busy. Just curious about what's kind of catch up from what was an IPO process and distractions from a management perspective versus what, as we think about, would be more of a normalized kind of level of investment. You talked about healthy backlogs still. curious just in terms of how to think about the cadence of new investments or additional investments going forward.

Yeah, I mean, I think you're absolutely right. There was definitely a completely understandable focus within the firm on the IPO for the first half of the year. Notwithstanding that, we were still in discussions and connecting with some of the you know, potential acquisitions. And certainly, you know, Hamilton Court, we've been in, you know, some level of engagement for over a year. So even though we weren't focused on the IPOs in the way that, you know, we are now, sorry, acquisitions in the way we are now, we were still, there was still some amount of activity that was going on there. And I think that the sort of flurry of activity, which all sort of landed in a relatively short period of time is unusual, although Two were actually quite small and one of those we'd been working on for a very long time. So it just happened to crystallize at that particular point in time. I do think that what we're seeing is a lot of interesting opportunities. I suspect that they will be sort of more spread out in 25 than what we saw at this most recent point in 2024. You know, and again, if we just sort of look at our historic average, you know, of different scale, you know, we do, you know, three or four a year. And I think that I don't see anything that would cause us to feel that if they were of this sort of magnitude, we would be doing fewer than that and that we would also expect them to be more evenly spaced through the year.

Great. Thanks for taking my questions. Thanks, Dan.

Thank you. Our next question comes from the line of Ben Budish from Barclays. Please ask your question, Ben.

Hi. Good morning, and thanks for taking the question. Maybe first, just thinking about 2025, you gave us some kind of helpful color on the impact from acquisitions. Just curious, how should we think about sort of normalized market activity? Q4, you indicated it's a little bit softer, so it's not quite the right run rate. We had elevated metals activity, but how do we think about sort of normalizing those impacts. You've given us the rate sensitivity as well, but just trying to think of, like, what's the right sort of launching off point as we think about next year.

I think that, you know, I think sort of the right launching off point is probably, you know, the guidance that we've provided. I think that, you know, what we've sort of indicated for the fourth quarter is a you know, a level that we have, you know, high confidence that we're going to be able to deliver. I mean, it's possible, you know, if the environment is more supportive that, you know, we're a bit ahead of that. But I think if I was suggesting a level to reflect on as the sort of jumping off point, as you put it, you know, then I think the guidance that we've given is a sensible point. You know, there's obviously to your question, you know, a lot of moving pieces with regard to 2025. There's You know, the anticipated headwinds from interest rates, which, you know, based on this last week's activity, you know, maybe a little less than we would have thought, you know, a month ago. But that's obviously going to move around, you know, some amount and people will get to have their own view of, you know, how that's likely to play out. But the sensitivity that we've provided, you know, I think it's helpful. We certainly see a lot of momentum in our underlying businesses. We see the acquisitions being in a position to contribute. We see opportunity actually for the carbon acquisition to be a bigger contributor in 2025. We have sort of confidence in many of the organic initiatives that we have in place. Offsetting that, as you point out, is that we had a particularly favorable set of market conditions in metals, and it would probably not be sensible to anticipate that recurring in exactly that form. But we think that in combination, still have, you know, a lot of confidence in our growth prospects. And, you know, we see ourselves as a growth company and likely to be able to deliver, you know, some level of growth in 2025.

Understood. Maybe just one follow-up there. Can you kind of remind us what is the degree of variability in the cost base? We've seen, you know, from a couple quarters now an outsized Q2, you know, the cost level has generally been a bit lower in Q3. How do we think about how that overall base kind of flexes up and down with market activity versus sort of your organic investments. Thank you.

Hey, Ben. It's Rob here. You're right. We have a highly flexible cost base. Just over 50% of our costs are variable, which allows us to right-size in response to changing market conditions. Of our variable costs, the vast majority are just around 80% relate to performance-related bonuses, and these flex with revenues in the front office and with profitability in the back office. The remainder is primarily volume-driven and relate to market data and platform fees.

Okay, appreciate it. Thank you very much. Thanks, Ben.

Thank you. Our next question comes from the line of Kyle Voigt from KBW. Please go ahead, Kyle.

Hey, good morning. Maybe just a question on the debt issuance in the quarter. Sounds like there is some desire to diversify your funding sources and maybe be less reliant on the structured note business. Can you just talk about where you'd like to get to from an ideal funding mix? And then does that have any implications for expected growth of the structured notes outstanding or the solution segment revenue growth rates into 2025 or 2026? Yeah, that's a great question.

I think that we indicated at the time that we were marketing the IPO and on an ongoing basis that we had a view that diversifying our funding was a sort of sensible step. It's not because we have sort of any concerns with sort of structured notes, but that just as a sort of general prudent matter, it's sensible to diversify those sources. And we were in a position to establish, you know, public offering in the US. And again, I think that that just adds a lot of sort of flexibility to the firm and resilience. So that was the purpose of that. I think that We see a lot of opportunity to continue to deploy liquidity to support our clients, particularly around clearing and prime brokerage. And so we don't feel that, at least at this point, that we're going to be crowding out sort of structured notes and that we would continue to see that as, you know a valuable business line a way to support a set of clients and it would continue to grow um you know it may grow you know a little bit less rapidly than it has over the last uh series of years but um we we don't see it as uh necessarily a sort of constraint because as the firm grows we want to ensure that we are uh you know in a very strong liquidity position and what you know this issuance and potentially additional issuances do uh you know will provide us for that so we do think that the mix will shift and that over time more of our liquidity will come from sort of public offerings but we still see given uh our growth opportunities to continue to grow the structured node business as well.

That's very helpful. For my follow-up, I just wanted to ask a clarification question on the clearing segment NII. You noted a couple of drivers of strength there last quarter, including some that maybe were more cyclical in terms of volatility and metals benefiting NII. In the third quarter, clearing NII remained very strong. I guess, is metals volatility still benefiting 3Q's clearing NII or is this a good jumping off point going forward? And also wondering if there's been any material change in the clearing balances into 4Q versus the $13.8 billion disclosed for 3Q.

So there's sort of a number of things there. I think that I think sort of metals balances did come down in the third quarter versus the second quarter by some amount, but it was you know, not a massive driver. I think that the offset to that has been just additional sort of client acquisition and increased balances with existing clients. And so that's sort of what played through there. And certainly the balances in the third quarter feel at the same level that we saw in the third quarter.

Great. Thank you.

Thank you. Our next question comes from the line of Alex Cramp from UBS. Please ask your question, Alex.

Yes, hey. Good morning, everyone. Specific question here on the agency and execution. The securities business stood out like an area of strength. I know on a year-over-year basis, obviously, Kona's helped, but even when you look sequentially versus the second quarter, it seems like market volumes for financial products are generally you know, down, maybe with the exception for European rates, but you stood out as, you know, very strong quarter-over-quarter growth. So I know you mentioned the new desk there, maybe that's it, and maybe it's just the European interest rate, but like, yeah, maybe you can flesh out where that came from in the third quarter and how much of that you think is sustainable.

Hi, Alex, it's Paolo. The, you know, I mean, I would say that it's, you know, it's very much a matter of us taking market share. You know, after the count acquisition, there was a little bit of time spent just on integration. And so, you know, the first part of the year was certainly more focused on integration than perhaps, you know, acquiring new clients. And there's also a bit of a lag with that. Across the other parts of agency and execution, I think we're taking market share in essentially all areas. Some of it, again, is just adding to the teams. It's improving some of our technological capability. We've added some automated execution platforms. So there's not one thing that has driven that. I think it's more a function of these particular desks, these particular products being serviced by more established teams. And that does take a little bit of time to bed in.

The other thing that I sort of add in, Alex, I think we sort of noted at the time of the IPO that the margins in Agency in execution and in particular, you know, on the sort of financial side, you know, we're below our target levels, but that, you know, we believe that there was a lot of opportunity through the efforts that, you know, the team had underway to integrate, you know, those acquisitions more effectively and deal with, you know, you know, just doing a series of things to broadly drive up sort of profitability that we were confident that the margins in those businesses would improve. And I think we are also seeing sort of the benefit of that. So, you know, all of the very detailed work that Paolo and the team have put in, you know, is bearing fruit. And, you know, to sort of at least the spirit of some of the earlier questions, you know, we see that, you know, sort of continuing into the fourth quarter and definitely into 2025.

Okay, great. And maybe just as a follow-up to the 2025 question from earlier, I don't think you specifically highlighted energy. I mean, obviously an important asset class for you and a lot of, I would say, structural changes. You mentioned environmental as an area of growth for yourself early on the call. So just wondering, we've seen a tremendous amount of growth in energy, but the world seems to be getting more complex there. I know it's difficult to foresee volumes, but Just wondering how you feel about the sustainability of energy growth on a basically two-year strength in that asset class. Thank you.

Yeah, I mean, I think that, interestingly, the market-making opportunity in energy for us, which is really around refined oil products, was primarily in 2022. And I think we've seen more normalized levels in 23 and 24. And I have, you know, no forecast or whether there will be sort of unusual circumstances in 2025 and beyond. But interestingly, you know, as we think about the energy opportunity, at least in market making, it was 2022. What we have seen exactly to your point is in our energy agency, you know, very extensive growth, you know, both through finance, share gains but also um just because the underlying markets are growing you know over the last two years um i don't know whether you know it continues to grow whether it sort of stays at that level um what i what i do have confidence in is that the renewables piece of that business will continue to grow a pace and that uh To the extent that there is any slowdown in the other components of the energy complex, and I'm not saying there would be, but if there were, I do have confidence that all of the activity we would see in the sort of environmental and the renewable side would at least be, you know, a partial, if not a complete offset.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Patrick Moley from Piper Sandler. Please go ahead, Patrick.

Yeah, good morning. Thanks for taking the question. Maybe just going back to the pipeline of potential transactions that you could look to do. You know, in the third quarter, you gained ground, it seems like, in the Middle East. Could you maybe just update us on what geographies and asset classes you could be looking at with respect to future M&A? Thanks.

yeah i mean i think we've sort of noted all along that you know one of the areas that we have interest in is uh you know is brazil and so that would be you know a geographic region that uh you know we would have interest in and then you know in terms of you know sort of products i think that uh you know we there really are a very large number where we would be you know sort of comfortable adding but i think that You know, we see sort of opportunities in the sort of capital markets agency side particularly, but, you know, it's not limited to that, but wouldn't be surprised if, you know, that was one of the areas where we found attractive opportunities for 2025. Okay, great.

And then a follow-up. You are a top five participant on the CME. The NFA recently approved their application to operate an FCM. I know they've said that they're committed to the FCM model, but just curious to get your thoughts on that development and how you think investors should think about that when it comes to, you know, being a potential risk to not only your business, but the FCM model in general. Thanks.

Yeah, I mean, I think that, you know, the CME's application for an FCM was, think made a you know a while there and it was this is i understood it you know a defensive measure with regard to you know potential industry structure changes uh when ftx appeared to be representing a competitive threat to cme uh you know i think unsurprisingly you know once that application was made uh you know that was sort of carried through i You know, we've had some conversations with CME, as I'm sure others have, and I think, you know, what we hear from, you know, from the CME, and it makes perfect sense to us, is that, you know, this is just sort of an option that's sort of available to them. It's not a business that they intend to get into, and that seems to me to be very sensible. I mean, if you were in exchange with an exchange multiple and the skill set that you need to be successful as an exchange, I don't see why you would look to get into the FCM business, which has a different multiple associated with it, and more particularly requires a completely different skill set. And if they were in, even if they were to sort of create an FCM that was sort of feeding into CME, it wouldn't really change the requirement that clients would have if they want access to a large number of exchanges. So my sense is it's, sensible to take CME at its word that they have no interest in changing their business model, shifting from a high PE business to a lower PE business, and one where they don't have any particular skills. It's much easier to deal with a few exchange members than to have to go and deal with a myriad of users and all the skills that we've had to build up as a sort of clearing member. So it's not a competitive threat that I'm concerned about, and I don't think it's a new business opportunity that is really of particular value to CME.

All right. That's great, Keller. Thank you. That's it for me.

Thank you. Our next question comes from the line of Alex Blossine from Goldman Sachs. Please go ahead, Alex.

Hey, guys. Thank you. Good morning. I wanted to Hey, I was hoping we could dig into Cowan a little more. I remember at the time of the deal, you guys gave us a rough sense on kind of the earnings contribution from that business, and you had some high hopes for growth there. Sounds like things are going pretty well, so maybe update where that business stands today, where are you getting traction, and where do you see that going into 25?

Well, I think that, I mean, Paolo, I think, can give additional color on this. My own sense of it is, that um it's a critical component for us as we sort of build out a strategy to be more relevant to clients not just around sort of futures and options, but increasingly around sort of securities. And the capabilities that we acquire as part of Cowen will be hugely important to the firm three, five, ten years from now in terms of ensuring that we can replicate the kind of share that we have with futures and options within the securities world. And I think that while, you know, the integration has – gone well, but maybe a little slower than we've anticipated, it does represent a critical

uh element of growth for us 25 and beyond hello yeah i mean i would say that um now the run rate now is significantly better than we saw in um q1 and q2 and in q4 i think you'll see you know even more improvement and i think there are sort of three factors that go into that the one that i already mentioned which is you know we've completed the integration The second, I think, is the success of cross-selling and cooperation across the clearing team and the prime team, introducing clients and being able to service clients that we already have for a wider range of products. And I think the third is that we've added some additional product capabilities, which are higher margin. And so, you know, additionally, one might sort of see a little bit of improvement just because, I think the levels of volatility over the last few weeks and perhaps over the next few weeks have been quite high. But I think the structural factors are the three that I would focus on. And I think you'll see that moving us to a slightly higher margin than we anticipated. In terms of the sort of revenue numbers, that's sort of very much consistent for the full year with what we anticipated when we went into this transaction, but much more sort of back-ended.

But I would say, Alex, I mean, this I think is maybe a part of your question. You know, if we sort of do our forecasted levels, call it, you know, sort of 305, you know, that's $75 million of growth relative to sort of the prior year. The component of that growth that is actually associated with, you know, the Cowan business is, relatively modest, and it would be a smaller fraction of the growth than we would have had historically sort of from acquisition. So it's performed fine, but its impact on the firm is, to my mind, mostly in the future.

Got it. Yeah, that's what I was getting at. Another maybe clarification question. You guys provide NII sensitivity in the deck. I'm wondering if that's at a firm level or is that solely based on kind of margin balances or does that include structured notes and NII contribution or not? And then as you sort of think about some of the fixed reinvestment benefits that you highlighted earlier, are most of those in the run rate, or is there any incremental benefit left? Just thinking if the yield curve steepens a little bit, you know, could there be an incremental benefit to NII? Thanks.

I mean, it is for the whole firm, not just for clearing. So it does include, you know, all the sources of NII benefits. Includes, you know, on the income side as well as all the costs. So it's a firm sensitivity to average changes. So 1% on average of the year we think is a $20 million PBT impact across the whole firm, not a component of it. And then, you know, with regard to whether there's, you know, some roll off, there is a little bit, but most of that would be in the current run rate. Got it. All right. Awesome. Thank you, guys. Thanks, Alex.

Thank you. Our next question comes from Chris Allen from CT. Please ask your question, Chris.

Morning, everyone. Thanks for taking the question. I wanted to ask about a little bit more color on the deals for Hamilton Court and ARNA. Any color on profitability, how that compares to Merrick's currently, and then any color on the valuation multiples paid for the businesses?

But I think that the guidance that we're providing with regard to the quantum is we think that in sort of combination, the two will generate about 10% of our level of profitability in sort of 2025. So that I think gives you a sense of the order of magnitude of what we think they look like in combination. And I think that including the synergies, you know, we've acquired them at around three times. And so you have a sense of that from that of, you know, what is the accretion that is a result of those acquisitions.

Thanks. And one other one. There's an article on Vitol this morning moving into the metals market. I wonder if you're seeing larger energy players or even mid-tier energy players moving away from energy into biodiesels, metals, other areas. And just from an overall perspective, you talked about attracting larger clients. What's the opportunity set from there, and what's the progress on the front?

Yeah, I mean, we're definitely seeing – And I think we noted it in the half-year earnings announcement. We are definitely seeing people who have traditionally been energy traders coming into the metals market. Some of that was we thought because of the energy transition and they would have some view on those series of things. But we have definitely seen that shift. from players who are traditionally in the energy space coming and looking to participate in metals. And I think we cited one as an example of cross-selling where a client that we would never have covered out of metals, but we did cover out of energy, being referred into the firm because of our strong relationship in energy and then creating a great metals client. And so I think we are definitely seeing that. I mean, we also saw, for what it's worth, earlier a movement from sort of U.S.-based sort of energy traders to Europe to sort of establish trading in Europe after the Ukraine invasion and the sizable profits that some of the trading houses sort of generated. So we're definitely seeing extension geographically uh you know from clients and then also this switches that you've identified, you know, of movement from energy to metals. And we see that as, you know, sort of a big opportunity for us, obviously, because of the quality of our metals franchise and the fact that, you know, we have so much connectivity into, you know, many of the top traders, you know, in energy. So it's definitely part of what's going on in the background in terms of cross-selling and attracting more clients onto the platform.

Thank you.

Our next question comes from the line of Carlos Gomez Lopez from HSBC. Please go ahead, Carlos.

Hello, good morning. Thank you for taking my question. The first thing I wanted to do was to thank you for the additional disclosure on interest income and interest expense and the composition and the sensitivity. I think it's very useful information. Related to that, the sensitivity that you mentioned, the $20 million, that is obviously on a pre-tax basis, would you still use the same 25% tax rate that applies to the rest of the firm for this interest income? And second, related to the competitive environment, we have seen an easing of potential rules for capital for banks in the U.S., maybe days even further with the new administration. Do you see that as changing perhaps the appetite for coming into your business of traditional banks that have perhaps exited the market before? Thank you.

Should I start on the tax rate? So on the tax rate, the way that I would think about it is this year we're at 26%, last year we were at 28%. And the reason that we're slightly higher than we've sort of indicated over the medium term is that we've had a number of one-off expenses related to our IPO, which are not tax deductible. Over the medium term, I would expect our tax rate to be closer to 25% given our geographical profits distribution.

And then just with regard to your question about potential changes in regulation and capital rules as it applies to banks and whether that would change banks' appetite to participate in our businesses and particularly clearing. I mean, as I've thought more about this question, where I sort of come out is that what's driving the move of opportunity to firms like Narex. It's not really about sort of regulation or capital arbitrage. It's really about sort of skill and willingness to invest in this product and these sets of products and build an organization that's capable of delivering sort of great outcomes for clients in these particular spaces. And I don't think that changes in sort of regulation and capital rules will create some kind of stampede back into clearing. I think if there's less regulation on banks, they'll pick very different kinds of things to expand into and invest which are closer to you know where their core skill is and what their strategy is so I think that they're they're de-emphasizing clearing you know for reasons that are really unrelated to the capital treatment per se and the regulatory pressure that they're under and the things that are driving clients to want to diversify their clearing to non-bank FCMs won't change as a result of some very modest changes that might be anticipated with regard to sort of bank capital. So, I mean, obviously, we'll watch that and see. But if banks weren't piling back into clearing where rates were higher, it doesn't seem to me they're going to be piling into clearing when rates are lower.

Thank you so much.

Thank you. Next is a follow-up question from the line of Alex Cramp from UBS. Please go ahead, Alex.

Yes, thanks again. Just one quick follow-up on that interest income. I think, Rob, when I heard you earlier on the fourth quarter, I think you made some comments around asset levels being similar and rates similar, etc., But obviously you did the acquisition, which brought, I think, $300 million or $330 million in cash balances. You also obviously did that offering very recently here. So maybe you can just flesh out the earlier comments and give us a little bit more color how we should be thinking about NII and the 4Q relative to what you just posted in the third quarter.

Thank you. Yeah, thanks, Alex. You're absolutely right.

As you sort of think about NI in the fourth quarter, there's probably a number of things you should take into account. As Ian said, you know, as we've gone into sort of October and the early start of November, we've seen customer balance remain quite resilient. They have come off a little bit in metals, but we've seen them being sort of replaced with other customer balances, mainly through sort of acquisition and continued build out in Asia of our Singapore and Australian clearing businesses. The other thing that you'll need to obviously take into account is that we have had, we're expecting a further interest rate cut to come through in the fourth quarter. We had one at the back end of the third quarter. And the other thing that you should take into account is clearly the $600 million debt issuance that we completed last week.

Right, but we also sort of will be deploying some of, you know, that 600, you know, to sort of support clients, some of which will also generate NII. So I think in broad outline, I think we would expect the fourth quarter net interest income to be, you know, somewhat lower than the third quarter, but not dramatically lower.

Exactly. That's what I was getting at. Thank you very much.

Thank you. We have reached the end of the question and answer session. Thank you all very much for your questions. I'll now turn the conference back to Ian for any additional closing comments.

Well, thanks, everybody. Thanks for all the questions from the analysts. Obviously, you know, very helpful. And, you know, to the extent that we have, you know, some of our investors, either sort of equity or debt, you know, on the call, did want to just take this opportunity to, you know, thank you for your support and your trust, you know, in the firm and that, you know, You know, we're obviously pleased with, you know, how the offerings went and, you know, we're committed to, you know, doing the very best job we can, you know, to create value for shareholders, you know, as well as for debt holders. So thanks, everybody, for your ongoing support of the firm. And we look forward to sharing with you our full year results, you know, sometime next year.