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spk00: Interest expense related to trading activities increased 13.6 million versus the prior year, primarily due to increases in short-term interest rates as well as higher average borrowings in our physical commodity business. Interest expense on corporate funding was relatively flat with the prior year period. Variable compensation increased 21.5 million versus the prior year due to the increase in net operating revenues and represented 33% of net operating revenues in the current period. compared to 34% of net operating revenues in the prior year period. Fixed compensation increased 3.4 million versus the prior year with the growth principally related to salary and benefit costs of increased headcount, which increased 11% as compared to the prior year period, which is partially offset by an increase in deferred compensation. Our fixed expenses increased 24.7 million as compared to the prior year to 101.7 million, and we're up 1.8 million versus the immediately preceding quarter. As compared to the prior year, selling and marketing expenses increased $7.9 million and professional fees increased $3.7 million. The increase in selling and marketing primarily relates to increase in digital marketing in our retail Forex business. We have started to see increases in travel and business development, increasing $3.6 million as compared to the prior year. In addition, trading systems and market information increased $1.6 and non-trading technology and support increased $1.6 million as part of their initiative to expand additional offerings. Depreciation and amortization increased 2 million and primarily relates to an increase in internally developed software. We had net recoveries of bad debt expense of 700,000 for the quarter versus 1.3 million and 12.3 million in expense in the prior year and immediately preceding quarters respectively. In the prior year, we recorded a $3.6 million in gain on acquisition and other gains, which primarily related to an adjustment to the liabilities assumed in the acquisition of gain capital While in the immediately preceding quarter, we received a $6.4 million foreign exchange antitrust class action lawsuit settlement. We recorded no gain on acquisition or other gains in the current period. Net income for the third quarter of fiscal 2022 was 49.1 million and represented a 44% increase over the prior year. This represents a 23% decline versus our all-time best quarterly performance recorded in the immediately preceding quarter. Moving on to slide number nine, I'll provide some more information on our operating segments. The commercial segment had another strong quarter, adding $18 million in operating revenues versus the prior year. However, this represents a $13.9 million decline versus the immediately preceding record second quarter. Within the segment, lifted derivative operating revenues declined $3.7 million versus the prior year as a result of a 5% decline in contract volumes as well as a 2% decline in average rate for contracts. OTC derivative operating revenues were $50.2 million for the quarter, which was up $500,000 versus the prior year quarter, primarily as a result of an 8% increase in the average rate per contract, which was partially offset by a 5% decline in OTC derivative contract volumes. Operating revenues from physical transactions increased $13.6 million compared to the prior year period, primarily as a result of a $13.1 million increase in precious metals operating revenues. Finally, interest earned on client balances increased $7.2 million versus the prior year as a result of a 45% increase in average client equity, as well as an increase in short-term interest rates following Fed actions. Segment income was $72.5 million for the period, an increase over the prior year and preceding quarter of 20% and 3%, respectively. Moving on to slide number 10, operating revenues in our institutional segment increased $36.1 million versus the prior year. primarily driven by an $18.6 million increase in securities operating revenues compared to the prior year period as the result of 128% increase in the average daily volume of security transactions, which was partially offset by a 48% decline in securities rate per million. The increase in securities ADV was primarily driven by significant increase in volumes in debt capital markets, most notably in U.S. treasuries as a result of new hires in this business combined with rapidly changing rate environment related to the recent actual and anticipated Fed actions to curb inflation, and to a lesser extent in volatility in equity markets driven by increased market share and volatility. The decline in rate per million was primarily a result of product mix traded, most notably the increase in U.S. Treasury volumes. In addition, operating revenues increased $8 million and $4.2 million in listed derivative and FX products, respectively, driven by continued volatility in global markets. Finally, interest earned on client balances increased 6.9 million versus the prior year as a result of a 63% increase in average client equity, as well as an increase in short-term interest rates following recent Fed actions. Segment income increased 3% to 47.7 million in the current period as a result of the 15.3 million increase in net operating revenues, which were partially offset by a $10.5 million increase in variable compensation. and a $3.6 million increase in non-variable direct expenses versus the prior year. The increase in non-variable expenses is primarily due to a $2.5 million increase in fixed compensation and benefits, a $1.2 million increase in trading system market information, and a $900,000 increase in travel and business development, which is partially offset by a million dollar favorable variance in bad debt. Segment income declined $2.3 million versus immediately preceding second quarter. Moving on to the next slide, operating revenues in our retail segment added $30.8 million versus the prior year, which was primarily driven by a $30.8 million increase in FX and CFD revenues as a result of a 12% and 47% increase in ADV and RPM as compared to the prior year as a result of heightened volatility in FX markets. Operating revenues for security transactions declined $1.1 million, while operating revenues from retail physical precious metals were flat with the prior year period. Operating revenues in the retail segment declined 11.5 million versus the immediately preceding quarter. Segment income increased 20.3 million versus the prior year, primarily as a result of the increase in operating revenues. The increase was partially offset by a $9.5 million increase in non-variable direct expenses as compared to the prior year, primarily driven by a $5 million increase in selling and marketing, a $1.3 million increase in depreciation and amortization, a $700,000 increase in professional fees, and a $600,000 increase in travel and business development. Segment income declined 19.2 million versus the immediately preceding record second quarter of fiscal 2022, which included the receipt of the 6.4 million from the class action settlement I mentioned earlier. Closing out the segment discussion on the next slide, operating revenues and global payments added 9.3 million versus the prior year, driven by a 20% increase in average daily volume and 9% increase in the rate per million as compared to the prior year. Non-variable expenses increased $2.8 million, and it's primarily related to the expansion of our payment offerings. Segment income increased 21% to $24.6 million in the current period, and also represented a 3% increase versus the immediately preceding quarter. Moving on to slide number 13, which represents a bridge between operating revenues for the first quarter of last year to the current period across our operating segments. Overall operating revenues were $528.8 million in the current period, up $97.3 million, or 23% over the prior year. I've covered the changes in operating revenues for our segments. However, the $3.1 million increase in revenues in unallocated overhead is primarily related to positive variance in foreign currency revaluation versus the prior year period, which was partially offset by a mark-to-market loss on exchange shares held for clearing purposes in the current period. The next slide, number 14, represents a bridge from 2021 third quarter pre-tax income of 46 million to pre-tax income of 70.9 million in the current period. The negative variance in unallocated over of 13 million is primarily driven by the increase in unallocated expenses, including a $5.1 million increase in variable compensation as a result of improved performance, a $3 million increase in non-trading technology and support, a $1.8 million increase in professional fees, $1.6 million increase in selling and marketing expenses, and a million-dollar increase in depreciation and amortization. These increases were partially offset by a $1.4 million decrease in fixed compensation and benefits. Finally, moving on to slide number 15, which depicts our average invested client balances and associated earnings by quarter, as well as a table which shows the annualized interest rate sensitivity for changes in short-term interest rates. Their interest rate earned on these client balances increased 41 basis points to 69 basis points for the current period, as the full effect of recent Fed rate hikes during the period will start to be more fully reflected during the fourth quarter of fiscal 2022. As noted in the table, with an increase in client balances noted earlier, we estimate a 100 basis point increase in short-term interest rates would increase net income by $31 million or $1.53 per share on an annualized basis. With that, I'd like to turn it back to Sean for a strategy discussion.
spk01: Thanks, Bill. Turning now to slide 16, which sets out the high-level strategic objectives that we are focused on. We have included the slide before, and I've gone through it in detail on the last call, so I won't repeat it all again. Over the last six quarters or so, I've given a fairly granular view of the various projects we are undertaking in our segments, and I'm not going to go through them all again this time. However, we continue to make excellent progress and hit our milestones in delivering many of these capabilities, some of which will be launched in the next three to six months. However, some highlights. As mentioned above, our securities business is expanding and changing its product mix as we leverage our long-standing institutional relationships into broader product offerings. On the equity side, we have now launched our electronic market-making platform to internalize and spread onto domestic NMS equities while providing best execution. This is an area dominated by a limited number of large players, and our broker-dealer clients are interested in having alternative outlets for execution of these trades. We have already enabled a limited number of clients in a limited number of names, and all of these clients have been using us to execute foreign and unlisted stocks for a long time. We are very pleased with the results and the performance of our platform, and this is already accretive to the cost incurred. We'll be ramping this up steadily over time, increasing the number of clients and the number of stocks we make market things. We believe that this is a very large opportunity for us. On the fixed income side, we have steadily been diversifying into different fixed income asset classes, many of which are higher volume and lower margins, such as T-bills and treasuries, but also high-yield emerging market and structured products. This strategy has really paid off for us and provided resiliency to our revenues as the interest rate environment has changed. We have noticed a change in perception of institutional investments as well as talents. in that we are now seen as a growing and successful fixed income franchise that can compete with Tier 1 players. We've made some crucial hires from larger players, and we've seen increased client adoption. On the payment side, we've made some key hires to develop the local currency pay-in business in Brazil, and will thereafter do this in Colombia. This will allow us to provide an end-to-end payment service for our large existing corporate clients that have large in-country client bases. We can provide them an efficient way to get dollars into the country, as well as collect local payments from local clients to remit back to head office. This will be a unique offering for these large corporate clients. StoneX One, our U.S.-based self-directed platform for individuals, is live and being used by employees. This is a multi-asset platform aligned trading in equities and equity options, as well as listed derivatives. We'll be launching this platform in the upcoming quarter to a limited number of clients, and Ryan Park from there, utilizing our digital marketing team. We'll also soon add crypto, FX, and physical gold, making this a unique cross-asset class, self-directed execution capability. All of the trading flow will be directed to our electronic market-making platform, and where appropriate, we'll be able to internalize spreads. As you can probably tell, we have a number of very exciting projects close to being launched. Let's move on to slide 17. This was a nonetheless strong quarter with good market conditions and excellent results across all products and all client segments. We achieved earnings of $49.1 million, diluted EPS of $2.37, and ROE on stated book of just over 19%. This was also the best nine-month period we've ever had, with earnings for the nine-month period being $154.8 million, a diluted EPS of $7.52 for an ROE of 21.92%. Now, we're performing to view through a slightly longer lens, pressures from the 12 years, which opens up with these. Our results continue to show steady and strong upward trajectory, growing our revenues at a 24% TAGA, and growing our adjusted earnings at a 23% CAGR. We continue to see strong growth in client trading volumes and client assets, which speaks to growth in our underlying client base and client engagement. This, combined with heightened market volatility and increasing interest rates, put the real tailwind behind our business for the next year or so. This year, we will see a number of digital platforms being launched, which will more tightly integrate our offerings by client side, make it more engaging for clients to interact with our financial ecosystem. We are initially seeing increased costs associated with bringing and standing up these platforms. As we actively start to market these platforms to clients, we should further accelerate our growth with the scalability that technology provides to increase margins and overall profitability. We continue to invest in the ecosystem, expanding our products, our capacities, and our talent. have a unique and comprehensive financial ecosystem with a very large addressable market in front of us. While we have good market share in certain niche segments of the market, lots of white space remains in areas where we already have client relationships and demonstrable capabilities and now need to monetize these opportunities. One thing is always constant for the Stonex team, we continue to dedicate ourselves to better serving our growing client footprint around the world by providing them with the best financial ecosystem and the best service to access global financial markets. So with that, operator, let's open the line and see if we have any questions.
spk04: Great. Thank you. At this time, we will conduct the question and answer portion of our session. And as a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced.
spk03: Our first question...
spk04: Our first question comes from Daniel Fannin with Jefferies LLC. Daniel, please go ahead.
spk02: Thanks. Good morning. Hey, Dan, how are you? I'm doing well, thank you. I guess my first question, Sean, would be on the securities business. Clearly, ADVs going higher, as you mentioned, and the RPM or the capture rate going lower. And obviously you have a lot of new initiatives within that complex, but can you talk about where you are? Because this quarter saw a pretty massive step up in both higher on volume and lower on capture. And just thinking about going forward, maybe just a little more color on what the asset classes are in particular and where you think you are in this normalization of going into these new markets and how we should think about these two dynamics going forward.
spk01: Yeah, sure. so dan probably before uh you guys were covering us a long time ago when we started our global payments business we went through this exact kind of process where we were exclusively dealing with those vm charities and the profile of that business was you know large payments and as a result reasonably high revenue capture and we started to transition to working with our bank partners where the payments got a lot smaller not more of them and that took about two years uh before those metrics kind of leveled off. In aggregate, it was still a net plus for the business. I think we're now seeing the exact same thing on the security side. On the equity side, for example, the bulk of revenue up until now has been our market making in foreign unlisted stocks, which has a pretty high revenue capture associated with it. We're now moving into the NMS market, And the revenue capture is orders of magnitude lower. So I'm not sure if I'm exactly correct, but I think the number of shares we trade on the NMS is now a significant proportion of the number of shares we trade foreign, even though we've only just opened this big share. So it will take a while for those numbers on the equity side to sort of achieve equilibrium. And I think it's probably going to take I would say conservatively, probably two years, just like it did on the payment side. We want to approach this very cautiously. It's an automated electronic platform. We want to make sure that we do it responsibly and carefully. We want our clients in the technology. So I don't think it would be prudent to just sort of, you know, rip it out there and let everyone have a say at it. So, you know, we are doing that, unfortunately, and I think what you've seen, the same trend as you've seen in the last two quarters probably perpetuate on, you know, probably for another four or five quarters would be my guess. Obviously, the incremental rate of change should slow because, you know, if we are really sort of you know, if we 80, 20, you know, when you get to 80, 40, it gets slower. So, I mean, at some point you do start to, the law of averages apply, I guess. So that's on the fixed income side, you know, in theory, the exact same process has happened. Our fixed income business was very focused on the mortgage market. You know, that's a high margin product. That's where we made, you know, 75% of our revenue three years ago. And, you know, we have diversifying that business into T-bills, into treasuries, into a whole range of other products. And then there's some products where we actually, you know, are more commission-based like high yield and others. So what's happened in this interest rate environment is as the mortgage market has sort of slowed down, we see a pickup in some of the other products, which again, the revenue capture there is, you know, fractions of what it is, say, in the mortgage market, but the volume of that. So I think, you know, that was a really good time because it gave us some resilience. But again, it's affecting those metrics. On the income side, we're probably closer to seeing more of an equilibrium just because I think the move there has been faster. But anyway, those are my comments on that. It would be hard to give you precise data on when I see these metrics flattening out, but I think you should continue to see, you know, over a period of time, I mean, it may vary quarter to quarter, but over a period of time, these metrics will continue to trend in the same way, I think, if that makes sense.
spk02: Yep. No, that's helpful. And then just want to understand your comment about FX and the benefit that it provided to fixed costs. I think you said 20 million per annum. So is that something that was kind of in the fixed, I mean, your fixed number, fixed costs came in lower in your fiscal third quarter. Is that a decent exit kind of run rate for this quarter? Or is that, you know, based on spot rates now, prospectively, just thinking about how much was already in your numbers versus potentially benefiting still going forward?
spk01: Yeah. So the $20 million number is really the benefit we've had kind of from the dollar low to the dollar high. So probably all experienced over the last 12 months. And we kind of looked at it and said, wow, the currency is sort of coming our way here because we have a fixed So the current exit rate is, you know, basically use the average rate, I think, over the quarter. But that's the exit rate we have now. I think what we're signaling to people is we would like to try and lock that in because what we don't want to have happen is if the dollar goes the other way, we're going to see a $20 million ramp up from where we are now. And in a sort of, we just got a $20 million discount on all the people we've hired and the offices we spun up, right? So we want to try to preserve that lower cost base for as long as we can. So we're going to try and hedge that risk out. But to answer your question, the exit rate we have now is a good approximation. And from here on in, you know, it would be sort of net ads and, you know, we are sort of, review cycle at the end of the year, we're obviously going to have to make some adjustments that are probably going to be larger than they have been previously just because of inflation. So, you know, there will be some impact of all of that coming into that run rate.
spk03: Do you agree with that, Phil? Yes, Sean. That's well said. It's perfect.
spk02: And then just another one on FX, clearly the retail side of the business benefiting from some volatility. Can you talk about, is that, you know, existing customers just trading more? Can you talk about account growth or, um, you know, kind of just trying to understand maybe going forward, um, you know, what that business might, uh, might look like. Yeah.
spk01: So, uh, you know, Dan, you, you're probably familiar with the gain business previously and, you know, certainly that business can be very volatile quarter to quarter, you know, dependent on market conditions. Um, So, you know, we obviously had a good time of it this last quarter because the volatility was good. I would say the main driver for our increased performance was market conditions and not account growth. I think our account growth has been kind of okay, but not fantastic. And I think all of our peers are seeing the same thing. I mean, just go look at Robinhood and so on. I mean, those guys, you know, their account bases have plummeted. Ours haven't, but we haven't sort of grown them significantly. But market conditions have been better. And I think, you know, we're starting to see some of the benefits that I mentioned at the time of the transaction where, you know, if we can do this right, we're going to see better revenue capture because we can start offsetting, you know, internal trades in the same products coming from different areas. So I do think we're starting to see better revenue capture, which should help us. But, you know, market conditions are still the key there. And, you know, heart Hard to predict market conditions going forward for that business, but it's done very, very well for us, exceeded our expectations at the time of the acquisition, and I think the business has got some exciting things that's going to be launched. We're going to be launching, I haven't mentioned it in my section, but we're going to be launching pretty soon cash equities in the UK, which sort of moves us from speculative products to investment products. We're going to launch, you know, crypto access. So things like that I think are going to sort of drive client growth going forward. But if we can, you know, have good market conditions, better trading and revenue capture, I think all bodes well for that business. But volatility is also the key thing, right?
spk02: Yep, understood. And then I guess just lastly for me, just thinking about the current backdrop and, you know, valuations coming in for, you know, businesses and broadly how you're thinking about M&A here. And is there, I know you've got a lot of organic initiatives that you're focused on, but is there, you know, a subset of the market or an area where, you know, maybe M&A makes more sense at this point?
spk01: I think it's starting to get more interesting just because as you say, there's sort of been a bit of a fallout and I think it's going to get interesting when, you know, some of these startups sort of find that they can't raise more money and need to go to some strategic buyers to, to help them out. I mean, certainly that would be an interesting development for us. But honestly, at this point, I think it's still early in that cycle. I think the next sort of, six to 18 months will be interesting to see if some interesting opportunities come up, but we certainly haven't seen opportunities that have been exciting to us, you know, in the last six months.
spk02: Got it. I actually do have one more question just on interest rate sensitivity and the charts that you, you guys provide. So that's incremental from here. So like the 75 basis points we've got a few, you know, weeks ago, or certainly wasn't in your run rate or is prospective, So just thinking about exiting, you know, kind of your fiscal third quarter and the rate benefit you've got versus that chart that you provide in terms of incremental hikes, how we should kind of blend those together.
spk01: Yeah. So, I mean, let Bill chime in here. Go ahead, Bill.
spk00: No, I was going to say, I think you're right, Dan. I mean, certainly the 75 wasn't fully baked in and even the 50 kind of came in, you know, a month into the, into the quarter. So I think you should be seeing the effect of those two kind of coming in, you know, in Q4 and an onward basis for us.
spk01: I think the way you should think about it is, you know, we invest in two things. Normally it's T-bills and sort of three month treasuries and then bank deposits on the other side. There's sort of a delay for us in catching those interest rates, particularly with banks. They don't all kind of put their rates up immediately. So there's a bit of a lag impact there. So we sort of, I guess, a little bit of maybe a three-month moving average of the interest rates rather than the sort of exact interest rate at the time. So, you know, we sort of catch it on the back end. So, you know, I was actually pretty shocked to see that, you know, we only know six basis points or whatever it was. You know, at the moment, we invest in three-month treasury bills at 250 basis points or 230 basis points. So, you know, there's a long baked-in kind of increase that we should start showing up in the next quarter or two for us.
spk02: Okay. Understood. All right. Thank you.
spk01: Thanks, Dan. Any other questions, Operator? Okay.
spk04: At this point, we do not have any more questions. So I'd like to turn it back over to you, Sean, CEO, for closing remarks. Okay.
spk01: Well, thanks very much. Thanks, everyone, for joining us on the call. Enjoy the rest of your summer, and we will be speaking to you in early December again. Thanks again. Bye-bye.
spk04: Thank you all for your participation in today's conference. This concludes the program. Everyone may now disconnect.
spk03: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
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