StoneX Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the StoneX Group, Inc. Q1FY21 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Bill Dunaway, CFO. Thank you. Please go ahead, sir.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our first quarter ended December 31st, 2020. After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2021. This release is available on our website at www.stonex.com, as well as a slide presentation, which we'll refer to on this call, and our discussions of our quarterly 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 are 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statement. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I will now turn the call over to Sean O'Connor, the company's CEO.

Thanks, Bill. Good morning, everyone. And thanks for joining our fiscal 2021 first quarter earnings call. Before we start, I hope all of you and your families are healthy and safe. And I'm sure all of us are looking forward to a more normal 2021, hopefully. As you know, we changed our segment presentation last year. And for the call today, we have also changed our earnings presentation deck, which is hopefully helpful to everyone. I'll start with some comments on the overall market environment and then take you through the presentation. During the December quarter, market volatility in the securities and FX markets abated from the elevated levels early in 2020, but still remained higher than the pre-pandemic levels. Following the onset of the pandemic, we saw volatility in energies and metals rise to historically high levels, although agricultural products didn't see much of a change until recently when they hit multi-year highs in both corn and soybeans. To look at how these market conditions affected our quarterly results, I'll start with slide four. And as you can see, the positive market conditions mentioned above, the addition of the GAIN retail platform and market share gains led to very strong revenues versus a year ago across all our product groups. I think the key takeaway here is the continued exceptional growth in securities, that we have now seen for a number of quarters as a result of increased products and capabilities added over the last couple of years, which are now really starting to gain traction. More on that later. And, of course, the addition of the gain revenues. Looking at the various product groups, listed derivative volumes increased, and modest improvements in revenue capture drove operating revenues up a healthy 32% for the quarter. OTC derivatives and revenues were up 7%. Securities volumes were up a very strong 74%, while our revenue capture declined slightly, resulting in a 40% increase in operating revenues. Our FX and CFD revenues were up significantly due to the addition of the GAIN retail trading platforms. Global payments showed modest increase in both volumes and revenue capture. with the product revenue up 10% for the quarter. Physical trading was very strong, largely in precious metals, which continues to have very positive market conditions. Our client float, both on the derivative side and the security side, grew very strongly, up 52% and 35% respectively. due both to higher client volumes as well as market share gains, and now in aggregate stands at $4.75 billion. Unfortunately, the strong growth in balances was more than offset by a decline in interest rates due to the Fed accommodation as a reaction to the pandemic. Our interest in fee revenue on client balances were down 71%, which has a direct impact on our bottom line results. Turning to slide five, which summarizes our Q1 earnings, we recorded net operating revenues of $380 million, up 37% for the quarter. Aggregate costs were up 54% for the quarter, primarily related to the addition of gain. That resulted in net earnings of $19.5 million, up 20%, and diluted EPS of $0.98, up 17%. ROE was 10% down slightly from a year ago, but largely due to a much larger capital base, and a few of the items I'll now walk you through. Once again, we have some meaningful noise in our earnings, primarily related to the GAIN acquisition. Firstly, GAIN's primary operating entity in London is a sterling-denominated entity, while our London entity is dollar-denominated. Upon closing the transaction, and in order to protect the capital we had just acquired by issuing dollar denominated debt, we elected to hedge the gain capital back to dollars, especially in the light of the Brexit uncertainty. This is what we would advise our customers to do. The net result of this is we incurred a hedge loss of $6.5 million through the income statement, but we had a corresponding credit to shareholder capital of $8.8 million. This resulted in accounting noise for the quarter, but we achieved our objective of protecting our dollar capital. The quarter's results also include 2.6 million of intangible amortizations relating to the valuation of the game business on acquisition. Additionally, we had a hedge impact on derivatives held against physical commodities, where we have to recognize the hedge losses, but have to carry the inventories at the lower of cost of market. This does happen frequently in our physical business and is a timing issue, and when the underlying inventory is sold at the higher price, an offsetting gain will be recorded. This amount was $3.5 million for the quarter. The impact of these three items was a reduction in EPS of approximately 45 cents per share. Excluding these items, our ROE would have been just below 15% on stated book and a couple of percentage points higher on tangible book. As I mentioned earlier, when considering the quarter's results, it is of note that the interest and fee income on client balances declined $12.7 million versus the prior year, and most of that flows to the bottom line. The gain in acquisition was modestly profitable for the quarter and on the Q1 target we set last year, but it did not cover the additional interest expense incurred on the high yield notes used to finance the acquisition. the interest of which was $8.1 million for the quarter. We view the GAIN business, along with other recent acquisitions, as part of our long-term expansion efforts and also recognize that individual businesses can be volatile quarter to quarter. As we continue to integrate GAIN and our other acquisitions, it will become increasingly difficult to ascertain net earning contributions due to the centralized nature of our support functions, and segment income should be the relevant metric by which we measure our progress. The overall quarterly results here shows the strength and resiliency of our legacy business in the face of significant headwinds on interest rates. As we move through the business cycle, we expect gain to become accretive, including the interest expense incurred after an explosive 2020, and we continue to have significant upside on interest rates on our float. Turning to slide six, which shows our quarterly performance trend. As you can see from the graph, our quarterly EPS and ROE can be somewhat volatile due to the market environment. We have certainly worked hard to flatten out this volatility by having an increasingly diverse client base as well as a diverse product and capability set. However, we are focused on building a franchise for the long term, and I think a better way to evaluate our performance is over a longer time series, such as the trailing 12 months. Our trailing 12-month ROE, which encompasses the last eight quarters results, has steadily climbed from 14% just below our long-term target to 24% for the current trailing 12 months. Obviously, the more recent numbers are above our targets and due to the abnormal volatility around COVID for our legacy businesses as well as for GAIN. The accounting treatment for the closing of GAIN last quarter, which resulted in a large bargain purchase on the acquisition, was driven by GAINS' exceptional 2020 results and led to a spike in our Q4 results. And again, because of this, the trailing 12-month representation is probably a better way to look at this metric. It's worth noting that eight quarters ago, our shareholders' equity was $526 million and so has grown over 50% over this time series, making the ROE target more challenging in absolute terms. I would anticipate that all things being equal, we would see the trailing 12-month average ROE trend lower towards our 15% target. Indeed, the ROE I just mentioned for the current quarter, excluding the hedge accounting impact, was just below 15%, although this was largely achieved by our legacy businesses and without a contribution from gain or benefit of interest rates. However, the potential we see with gain over the long term, as well as the normalization in interest rates, we could start to see us exceeding our 15% target, as we mentioned when we presented the GAIN transaction just prior to the pandemic a year ago. Our trailing 12-month EPS is currently at $8.75, which obviously includes the exceptional 2020 results. Our current Q1 EPS adjusted for the hedge accounting and intangibles amortization would indicate an annual EPS run rate of around $5.80. Turning to the next slide, which is our segment summary, just to touch on a couple highlights before Bill gets into more details. I was really pleased to see that all of our client segments are up in terms of segment operating revenue as well as segment income, a strong performance across the board. Institutional segment had another standout quarter with a 77% increase in segment income for the quarter. As we saw earlier, this was largely driven by our securities product offerings. The highest increase was in retail due to the addition of the game business for the full quarter, although segment income was flat sequentially. As I mentioned earlier, the key takeaway here is the growth in our institutional business, driven largely by our securities product offering. This is now our largest segment in terms of revenue and segment income. Global payments have seen its trajectory flatten a bit over the last year, and the pandemic saw many of our partner banks in emerging markets close temporarily, and M&A activity and large corporate investment slowing. We are starting to see an acceleration again in all our payment metrics, and indeed Q1 was a record in almost every metric for this business. Rate per million, average daily volume, and revenue and segment income. With that, I'll hand you over to Bill Dunaway for a more detailed discussion of the segment results. Bill?