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spk02: The conference will begin shortly.
spk01: To raise your hand during Q&A, you can dial star 1 1.
spk02: Good day, and thank you for standing by.
spk01: Welcome to the StoneX Group, Inc. Q4 Fiscal Year 22 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1-1 on your phone. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Bill Dunaway, Chief Financial Officer. Sir, please go ahead.
spk04: Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fourth quarter ended September 30th, 2022. After the market closed yesterday, we issued a press release reporting our results for our fourth fiscal quarter of 2022. This release is available on our website at www.stonex.com, as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly and year-to-date results. You will need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we 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-K to be filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, There 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 statements. The company undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Raters are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll now turn the call over to Sean O'Connor, the company's CEO.
spk05: Thanks, Bill. Good morning, everyone, and thanks for joining us on our earnings call. During the fourth quarter of fiscal 2022, we continue to see the effects of inflationary pressures on the global markets, sharp increases in short-term interest rates, and continued volatility in both financial and physical commodities markets. This has been a great fourth quarter for us and a truly exceptional and record-setting year for the company overall, validating our strategy and demonstrating the earnings power of our franchise. Recorded operating revenues are $583.4 million, up 50% versus the prior year, and total expenses were up 25% from a year ago and up 6% sequentially. This resulted in net income of $52.3 million, up 616% over the last year. Diluted EPS came in at $249, which is up 592%, which produced a 19.8% ROE. Turning to slide three in the earnings deck, For the fourth quarter, we realized very strong revenue growth of over 30% in each of our products, except for listed derivatives, which was up 12%. Interest and fee income on client balances was up 522%, as we started to see the impact of increased interest rates off the back of a 50% increase in our total client float, which now stands at $8.6 billion. This revenue increase was driven by... strong double-digit increases in transaction volumes across the board. The higher market volatility caused spreads to widen, resulting in improved revenue capture in the products where we act as a principal. The rate per contract for listed derivatives was down 4% versus the prior year, largely due to a business mix where we had a higher proportion of institutional volume versus commercial volume. Moving on to slide four, For the fiscal year as a whole, it was a very similar picture with product volumes up across the board and revenue capture up except for a slight decline in the rate per contract on listed derivatives and on securities. All of this data point towards increased client engagement driven by volatility as well as continuing strong growth in our underlying client base. It is notable that 65% of the annual increase in interest on our client float was received in just the fourth quarter. Turning to slide five and a summary of our fourth quarter and full fiscal year results. As I mentioned earlier, we recorded revenues of $583.4 million, up 50% versus the prior year. Total compensation and other expenses were up 25% for the quarter, with variable compensation of 53% in line with revenue growth. Fixed compensation and related costs increased 3% from a year ago. The resulting net income of 52.3 million is up 616% and diluted EPS of $2.49 is up 592% for a 19.8% ROE. This would accrue to a 21.6% ROE on tangible equity. we realized record operating revenues for our commercial and institutional segments. In comparison with the immediately preceding quarter, our operating revenue was up 10%, our net income was up 7%, and our diluted EPS was up 5%. Looking at the summary for the full year, this was a record year for us in almost every metric. Our operating revenues were a record $2.1 billion, up 26% over the prior year. Our net income was $207.1 million, up 78%. Our diluted EPS was $10.01 for the full year, up 74%. And ROE was 21%, despite equity increasing 39% over the last two years. On a tangible equity basis, our ROE was over 23%. Our financial results were boosted by a higher interest and fee income on our client float as short-term rates increased over the period, although the majority of our increases, as I said earlier, came in just the fourth quarter. This is obviously due to the speed and scale of the interest rate increases, as well as the fact that our interest-earning assets generally take about 45 days to reprice to new rates. Our average yield on our client float was 84 basis points for the year overall and 193 basis points for the fourth quarter. We are likely to see a continued ramp up of our interest earnings on this float as we continue to reprice our client floats at the current rates. We ended Q4 22 with a book value of $52.70. Turning now to slide six, our segment summary. I just want to touch on a few highlights before Bill gets into more detail. For the quarter, segment operating revenue was up 51% and segment income was up 72%. with a very strong performance across all our client segments. Our commercial client segment was up 82% in segment income off the back of a 40% increase in operating revenues, with strong performances from our physical metals and ads and energy business, as well as OTC derivatives, and of course, higher interest rates. Our institutional segment realized an 87% increase in revenues, which translated to an 84% increase in segment income. This was largely due to a much improved performance from our security business versus a week quarter a year ago, as well as the increase in interest and fee income. Retail had another solid quarter with operating revenue up 18%, driving segment income up 70%, demonstrating the operational leverage we have with a digital platform. Global payments revenue was up 29% and segment income up 33%, with double-digit increases in both volumes and revenue structure. For the full fiscal year, segment operating revenue was up 26% and segment income was up 33%, a gain with strong performances across all of our client segments. Operating revenues were up more than 20% in each of our segments. Segment income showed similar increases with the exception of institutional, which was up 4%. These are strong quarterly results across all product groups and across all segments. But as we have said repeatedly, we like to take a long-term view in how we manage the company and grow our franchise. As such, we believe that the best way to gauge our results and progress is to look at longer-term performance, such as the trailing 12-month results, rather than specific quarters taken in isolation. Turning to slide 7, which sets out our trailing 12-month financial performance, Just to note, these numbers have been adjusted for the accounting treatment related to the gain acquisition as disclosed in our prior filings, which appear in the reconciliation provided on the last page of this earnings deck. On the left-hand side, the bars represent our trailing 12 months operating revenue over the last nine quarters. As you can see, this has been a smooth and strongly upward trend as we have steadily expanded our footprint and capabilities. Our revenues are up 61% over this period, for a compound annual growth rate of 27%. Our adjusted pre-tax income likewise has grown significantly with a 42% CAGR. On the right-hand side, you can see our adjusted net income in the bars, which is up 116% over the two years for a 47% CAGR. The dotted line represents our ROE, which has remained above our 15% target, even though our capital has grown by 39% over this period. Lastly, you may have noticed that the format of the presentation has changed as we roll out a brand refresh. This will include a cleaner logo and an updated and more contemporary reflection of the organization that StoneX has become. With that, I'll hand you over to Bill Dunaway for a discussion of the financial results. Bill?
spk04: Thank you, Sean. I'll be starting on slide number eight, which shows our consolidated income statement for the fourth quarter of fiscal 2022. Sean covered many of the consolidated highlights for the quarter, so I will just highlight a few and then move on to a segment discussion. Transaction-based clearing expenses were up 7% to $69.1 million in the current period, primarily due to the increase in securities ADV and listed derivative contract volumes. Introducing broker commissions declined 6% to $37.4 million in the current period as an increase in IB commissions from listed derivatives were more than offset by decreases in independent wealth management and retail FX and CFD business. Interest expense increased $63.5 million versus the prior year, primarily as a result of a $44.5 million increase in interest expense related to our institutional fixed income and securities lending activities as well as a $13.7 million increase in interest paid to clients on their deposits as a result of the increase in short-term interest rates. Interest expense on corporate funding increased $1.4 million versus the prior year, also a result of the increase in short-term rates. Variable compensation increased $44.7 million versus the prior year due to the increase in net operating revenues and represent 33% of net operating revenues in the current period compared to 32% in net operating revenues in the prior year period. Fixed compensation increased $2.6 million versus the prior year, with the growth principally related to salary and benefit costs of increased headcount, which increased 12% as compared to the prior year, which is partially offset by an increase in deferred compensation. Other fixed expenses increased $19.7 million as compared to the prior year to $106.4 million, and were $4.7 million versus the immediately preceding quarter. As compared to the prior year, selling and marketing expenses increased 4.1 million and professional fees increased 2.3 million. The increase in selling and marketing primarily relates to an increase in digital marketing in our retail Forex business. We have started to see increases in travel and business development, increasing 4.4 million as compared to the prior year. In addition, trading and trade systems and market information increased 1.3 million. Non-trading technology and support increased to half a million. and depreciated amortization increased 2.5 million as compared to the prior year with these increases part of our initiative to expand our digital offerings. We had bad debt expense, net of recoveries of 4.4 million for the quarter versus 6.7 million in the prior year period. Net income for the fourth quarter of fiscal 2022 was 52.3 million and represented a 616% increase over the prior year and a 7% increase versus the immediately preceding quarter. Moving on to slide number nine, I will provide some information on our operating segments. As Sean noted earlier, it was a record quarter in our commercial segment, adding $52.5 million in operating revenues versus the prior year, and $15 million when compared to the immediately preceding quarter. Within this segment, listed derivative operating revenues declined $800,000 versus the prior year, despite a 5% increase in contract volumes as a result of a 7% decline in the average rate per contract due to product mix. OTC derivative operating revenues were $49 million for the quarter, which was up $14.5 million versus the prior year quarter, primarily as a result of a 31% increase in the average rate per contract, as well as a 10% increase in OTC derivative contract volumes, both of which were driven by continued volatility in agricultural energy and soft commodities. Operating revenues from physical transactions increased $25.2 million compared to the prior year. as a result of a $13.3 million increase in precious metals operating revenues, as well as an $11.9 million increase in physical ag and energy operating revenues. Finally, interest earned on client balances increased $13.3 million versus the prior year as a result of a 28% increase in average client equity, as well as an increase in short-term interest rates following recent Fed actions. Segment income was $80.2 million for the period, an increase over the prior year period preceding quarter of 82% and 11% respectively. Moving on to slide number 10, operating revenues in our institutional segment increased $120.3 million versus the prior year, primarily driven by a $73.5 million increase in securities operating revenues compared to the prior year period, resulting from a 60% increase in securities rate per million, as well as an 18% increase in the average daily volume of securities transactions. The increase in securities ADV was primarily driven by increase in both equity and fixed income markets as a result of heightened volatility and increased market share. The increase in securities RPM was primarily driven by an increase in RPM in fixed income products, which is influenced by changes in interest rates. While the rise in interest rates positively impacted RPM for the quarter, it also resulted in an increase in interest expense for the period, which I will touch on momentarily. In addition, operating revenues increased $11.9 million and $2.4 million in listed derivative and FX products, respectively, driven by continued volatility in global markets. Finally, interest and fee income earned on client balances increased $27.4 million versus the prior year as a result of the increase in short-term interest rates following recent Fed actions. as well as increases in average client equity and average money market and FDI suite balances of 86% and 22% respectively. As I mentioned earlier, the rise in short-term interest rates drove an increase in interest expense for the period, with interest expense increasing $59 million versus the prior year. Interest expense related to trading and securities lending activities increased $44.5 million as compared to the prior year, while interest paid to clients increased $12.5 million. Segment income increased 84% to $45 million in the current period as the result of a $52.2 million increase in net operating revenues. Variable compensation increased 66% or $20.1 million in line with the growth in net operating revenues. Fixed compensation and benefits increased $22.2 million versus the prior year as we built out our product offering, while other fixed expenses increased $9.2 million, primarily as a result of a $2.7 million increase in professional fees, a $1.7 million increase in trade systems and market information, a $600,000 increase in depreciation and amortization, a half a million dollar increase in travel and business development, and a $400,000 increase in selling and marketing. Segment income declined 2.7 million versus the immediately preceding quarter. Moving to the next slide, operating revenues in our retail segment added 15.4 million versus the prior year, which was primarily driven by a $23.3 million increase in FX and CFD revenues as a result of a 57% increase in RPM, which was partially offset by a 7% decline in FX CFD average daily volume as compared to the prior year. Operating revenues from securities transactions and physical contracts declined 3.8 million and 5.4 million, respectively, as compared to the prior year period. Operating revenues in the retail segment declined 6.7 million versus the immediately preceding quarter. Segment income increased 8.3 million versus the prior year, primarily as a result of the increase in net operating revenues. This was partially offset by a $1.8 million increase in fixed compensation and benefits, and an $8.6 million increase in fixed expenses as compared to the prior year. The increase in other fixed expenses was primarily driven by a $2.9 million increase in selling and marketing, a $2.5 million increase in depreciation and amortization, and a $700,000 increase in travel and business development. Segment income declined $6.1 million versus the immediately preceding quarter. Closing out the segment discussion, on the next slide, operating revenues and global payments added 9.9 million versus the prior year, driven by a 19% increase in the average daily volume and a 12% increase in the rate per million as compared to the prior year. Non-variable expenses increased 2.2 million, and this primarily related to the expansion of our payment offerings. Segment income increased 33% to 24.4 million in the current period. However, represent a 1% decline versus the immediately preceding record third quarter of fiscal 2022. Moving on to slide number 13, which represents a bridge between operating revenues for the fourth quarter of last year to the current period across our operating segments. Overall operating revenues were $583.4 million in the current period, up $193.3 million or 50% over the prior year. I've covered the changes in operating revenues for our segments. However, the $4.8 million negative variance in revenues in unallocated overhead is primarily related to a negative variance in foreign currency revaluation and an FX hedge-related unrealized loss. The next slide, number 14, represents a bridge from 2021 fourth quarter pre-tax income of $4.9 million to pre-tax income of $66.4 million in the current period. The negative variance in unallocated overhead of $9.5 million was driven by the $4.8 million negative variance in revenues I noted on the previous slide and a $10 million increase in variable compensation as a result of improved performance, which was partially offset by a $2.5 million decrease in fixed compensation and benefits and a $5 million decline in other fixed expenses. 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 a change in short-term interest rates, The interest rate earned on these client balance increased 124 basis points to 193 basis points for the current period. As noted in the table, we estimate 100 basis point increase in short-term interest rates would increase net income by $28.4 million or $1.40 per share on an annualized basis. With that, I would like to turn it back to Sean for a strategy discussion.
spk05: Thanks, Bill. Before we get on to the next slide, I would just like to briefly touch on the GAIN transaction we concluded almost exactly two years ago, right in the middle of COVID, which was our largest acquisition to date. The logic at the outset was the retail clients of GAIN would bring flow in products we already trade that we could internalize with our existing trade flow, as well as provide clearing services and additional products that they did not have access to, especially in the U.S. We have made excellent progress on all of this, as I'll touch on later. We also saw the opportunity for some easy cost synergies, most of which have been realized, as well as acquiring quality incremental talent, especially on the digital marketing side. As you will remember, the COVID volatility handed us an unexpected windfall prior to the closing of the transaction, which significantly de-risked the acquisition. Over the last two years, this business has exceeded the expectations we laid out for it at the time of the acquisition, being buoyed by good market conditions. In addition, we executed well on all the integration objectives we laid out, and we now see retail trading flow as a key part of our franchise. Turning now to slide 16, which sets out our high-level strategic objectives that we are all focused on. We have included the slide before and went through it in some detail at the end of fiscal 2021, so an annual review and update is probably appropriate. As we have mentioned before, we have seen an increase in the cadence and delivery of a lot of our key projects, and many of these are now through beta testing and have either been launched or on the launch pad. Our approach is always to introduce and market our new capabilities on a steady, incremental basis. None of these projects in isolation will result in a significant change to our current growth trajectory, and certain of these initiatives may not be viable in the long run. But in aggregate and over time, we believe that these initiatives will bend the growth curve upwards. And because many of them are digital in nature, we should see operational leverage and scalability start to kick in and a steady improvement in our margins. So looking at slide 16, starting on the left-hand side, building our ecosystem, we want to stay relevant to our clients, existing and new, by adding products and services and creating the best financial ecosystem to connect them to the global financial markets. On the equity side, we have now launched our electronic market-making platform to internalize and capture spread on 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 are leveraging our longstanding institutional relationships of over 20 years on the international equity side. We continue to successfully ramp up our number of clients as well as the number of names we execute on, and are seeing increasing crossing rates and incremental revenue. We are very pleased with the results and performance of our platform, and this is already accreted to the costs incurred. As we start to approach critical mass, this will start to add meaningful incremental revenues, and we continue to believe that this is a significant long-term opportunity for us. As mentioned in previous quarters, the addition of the higher volume, lower margin NMS stops will affect our operational metrics for the security side of our business. On the fixed income side, we have steadily been diversifying into different fixed income asset classes. This strategy paid off for us very well in recent quarters and provided resiliency to our revenues as the interest rate environment has changed. We have noticed a distinct change in perception from institutional investors as well as talent. We are now seen as a growing and successful fixed income franchise that can compete with the tier one players. We have made some crucial hires from larger players and seen increased client adoption. The crypto market has gone through some wrenching, if predictable, changes recently with consolidation and some of the excesses being exposed. And perhaps we will see a smaller but more regulated market start to emerge where clients are looking for trusted partners. No matter what our individual thoughts are about this, it is likely to remain an asset class that some of our clients will want to access. both on the institutional and the retail side. We'll continue to support these clients by facilitating trading in a glowing number of listed derivatives, as well as publicly listed ETFs and other crypto industry participants. This is an incremental source of revenue for us, and we want to remain relevant to our clients by ensuring that we provide safe access to this asset class. Carbon trading is another growing market propelled by global ESG initiatives. Again, our primary role to date has been to provide our clients with access to all carbon trading instruments. In addition, we have a role in educating our clients on how best to participate in this marketplace. Many of our agricultural clients are potential sources of carbon credits which can be monetized. We have made good incremental progress and have a small but growing revenue stream and client base in carbon. StoneX recently became a member of the Nodal Exchange. which offers renewable fuse and pollutant contracts to support an increasing focus on corporate sustainability and carbon neutrality. The users of these products include energy refiners, distributors and producers to the energy traders, and environmental, social and governance fund managers. Our payments business has made some key hikes to develop the local currency pay-in business in Brazil and will soon thereafter begin to expand into other jurisdictions. This will allow us to provide an end-to-end payment services for our large existing clients that have large in-country client bases. We can provide them an efficient way to get the dollars into the country, as well as to collect the local payments from these clients to remit back to head office. This will be an attractive offering for these large corporate clients. On the retail side, our international city index platform will introduce cash trading and equities for all clients in Q1 2023. This platform already offers over 15,000 OTC products designed for active traders, and these same clients will now have access to investment products directly on our platform. This not only expands our product offering to these clients, but allows it to target a much larger universe of potential clients. In the U.S., the different regulatory framework adds significant complexity to offering a multi-asset class trading platform with different regulators, legal entities, and related protocols and challenges. Stonex One is our US-based self-directed platform, allowing trading in equity, equity options, as well as listed derivatives, and will also be launched in Q1 2023. This will be available as a mobile version, as well as a desktop pro version with enhanced functionality. We'll soon add crypto, FX, and physical gold to both international and domestic Stonex One platforms, making this a very unique cross-asset class execution capability. Longer term, we can leverage our wealth management capability by adding robo-advisory, portfolio management, and even estate planning options for our larger retail clients. We continue to ensure that we offer broad access to products and marketplaces and exchanges that our clients want to access. We continue to offer new OTC products to address client needs and have invested in our technology stack to do this faster and more effectively. We are now introducing dozens of new products every month. some of which are new and industry-leading, such as the cattle swaps contract we introduced into Australia. In addition to incremental revenue, this positions Phonics as a leading innovator focused on adding value to our clients. Moving on to our second strategic objective, we are a client-centric business, and we need to consistently work at growing our client footprint into new markets and expanding market share where we have existing clients. We'll also seek to serve new client segments and channels. We have all the capabilities to service clients of all types and have a large addressable market in front of us with very low market penetration currently. Obviously, as we enhance our financial ecosystem, we are able to offer a more compelling value proposition to our existing potential clients. We continue to invest and grow our EU presence post-Brexit with an expanding office in Frankfurt to service our existing European-based clients and allowing us to more effectively market new clients in Europe, which may not be adequately covered post-Brexit. Our payments business has also launched its digital platform focused on small and medium-sized Brazilian enterprises, looking for a more efficient way to make international payments in both G20 plus non-G20 countries. We'll soon be launching this in Europe and the US. We are also adding our international payments capability to all of our existing internal platforms on the commercial side, further embedding ourselves with our existing commercial clients during the coming year we'll start to apply digital marketing resources to ramp up adoption of this new digital payments platform over time we'll begin to offer these small and medium-sized corporations our entire suite of hedging products which will be an additional client channel for these products and services the addition of cash equities to the city index platform as i mentioned earlier as well as the multi-asset platform in the US, StoneX One, will not only allow us to gain wallet share from existing clients, but allow us to more broadly market these platforms, dramatically increasing our addressable market. The pro version of these platforms should drive our business to our clearing, custody, and prime brokerage offerings as well. On the security side, we have very little client penetration outside of the US, despite our global product offering in both equities and fixed income. We have now added a small team in Asia and bolstered our presence in London. In addition, we are bolstering our capabilities in London to enable a more fully-fledged offering of that. We will not achieve the necessary growth and scale unless we continue to embrace technology and digitize our business. This will not only enhance client engagement, but increase scalability and margins. This initiative requires a rethink of our processes from front to back, which has been underway for some years now, but has accelerated with the acquisition of games. Many of our product initiatives initiatives mentioned above are digital initiatives. I'll not mention them again. The advantage of digital offerings is that they dramatically expand your addressable market. Every client anywhere is a potential client, and it offers scalability and operational leverage to enhance margins. We are increasingly using technology on the trading side. All of our trading platforms are designed to aggregate trading flow and internalize spread so we can maximize the client revenue opportunity and minimize hedging costs. As we gain critical mass in trading volumes, the impact on revenue capture can be significant and should drive our margins. This is the methodology behind our NMS electronic market-making initiative, but it's now also being applied more generically throughout all of our principal trading activities. We also spend considerable effort providing technology to help our clients be more effective and in turn become more valuable and stickier to us. During the year, we launched StoneHedge for our grain merchandising clients. This platform is deployed throughout the client's enterprise, allowing them to price and auto hedge grain purchases in real time from mobile devices. This platform is integrated into the enterprise accounting system, allowing all data to be shared instantly, driving efficiencies for our clients. This new platform provides trading efficiencies on our side and embeds us as a critical partner with our clients. Some time ago, we launched a digital platform for our OTC and structured products to allow commercial hedging clients to run intricate scenarios to determine the best product for their needs and instantly get quotes. We are now planning to upgrade this platform to allow clients to instantly execute trades, which should further drive product adoption and increase efficiency on the trader. Our SoNex technology team provides technology support to our payments clients and bank counterparties by hosting their SWIFT connectivity And in addition, we provide API connectivity to Swift. We also work to integrate our payments platforms with our client enterprise systems, giving us the same stickiness. We are building out a full API storefront to allow more sophisticated clients to link directly into our systems and access the information they need in real time. A lot of these projects are underpinned by the success of our data lake. which allows any user to come to one place to get normalized data from our many systems of records. Instead of multiple point-to-point connections to these systems, information can be accessed from one place in near real time in an easily consumable form. This was a massive undertaking given how diverse our business is with over 20 systems of record. We continue to see validation of this approach as many of our internal departments, as well as our client-facing platforms, get an easily stand-up application. we continue to build and enhance the data lake as we expand our business. Over the last year or so, our risk management team has made significant strides and is able to more easily aggregate and analyze data with real-time monitoring to enhance the monitoring of risk across the entire organization. We have now also virtually completed a multi-year conversion to our new Oracle-based system for accounting and HR and are seeing meaningful efficiencies and quicker and better access to granular information. Excuse me. We have a large number of other projects underway throughout many of our support areas to better use technology to create efficiency and scalability in our infrastructure to drive operational leverage. These include a contract management system for our legal team, technology to better track and monitor internal orders and operational risk issues, and incremental technology improvements for the compliance and KYC monitoring. Moving on to the last pillar there, which is our compounding our capital. Our business is supported by capital, and we need to underpin our growth as internally generated capital resources, and when appropriate, access the capital markets and approach acquisition in a disciplined manner. The most important thing we can do is to continue to create a capital runway for our continued growth. That is why we are focused on ROE. It is interesting to note that 10 years ago, we had a little over $300 million in shareholder equity, and only a slightly lower number of shares outstanding as we do now. Over this 10-year period, we have more tripled our shareholder funds organically, acquired over 15 businesses, and significantly expanded our fine footprint, all financed organically from retained earnings and the unbelievable power of compounding. During this growth, we have largely achieved our 15% ROE target, certainly not every year, but on average over the period, it's pretty close. This has happened despite the investments made in technology and infrastructure, the cost of developing new capabilities, the integration of a large number of acquisitions, and also despite low interest rates for extended periods of time. Achieving our ROE targets will continue to be our North Star, and we believe as we digitize the platform and gain scale that our margins and ROE should start to increase. Our strong earnings have resulted in us deleveraging our balance sheet such that we are now paying a lower spread on our bank borrowing, a rapture that was built into our new facilities. You also probably saw the recent announcement of our acquisition of TDI, a physical cotton business based in Brazil and Switzerland. This is a well-known and established business which buys cotton from producers in Brazil and West Africa and sells it generally on a back-to-back basis to buyers in Asia. They hedge their own price exposure and also provide hedging services to their producer clients. And in this activity, they are both a client and a credible competitor to our commercial hedging business in Brazil. One of our senior Brazilian brokers who headed up our cotton business in Brazil left some years ago to take up a senior leadership position at CDI. And when the founder wanted to retire and exit the business, we were approached. Combining our knowledge of hedging with our understanding of physical markets and supply chains is a compelling and differentiated offering, which we have leveraged in certain other commodity verticals in the U.S. and elsewhere, including renewable fuels and grains. This acquisition will allow us to make significant inroads into the cotton industry, especially in Brazil, which is growing fast. The transaction will be immediately accreted to earnings and does not require significant balance sheet usage. Turning now to slide 17, as a client-driven organization, our long-term revenue growth is critically dependent on broadening and deepening, and all of our strategy objectives are focused on this single objective to broaden and deepen our client base. In this slide, you can see our client numbers. While these clients may not all be active at every point in time, it does show that we are getting active and meaningful engagement from new clients and we are expanding our market share. Each of our segments has shown a better than 50% increase in client acquisition over the last two years. This number is also reflected in our client float, which is up over 92% over the same period. Let's move to the final slide, slide 18. This was another strong quarter for us with good market condition and excellent results across all products and client segments. We achieved earnings of $52.3 million, diluted EPS of $2.49, and an ROE on stated book of 19.8%. The quarter capped the best fiscal year in StoneX history with earnings of $207.1 million, a diluted EPS of $10.01, and an ROE of 21% and 23.2% on a tangible equity basis. When our performance is viewed through a slightly longer-term lens, such as trailing 12 months over the last two years, which evens out quarterly anomalies, our results continue to show a strong upward trajectory, growing our revenues at a 27% CAGR and our adjusted earnings at a 42% CAGR. We continue to see strong growth in client trading volumes and client assets across all products and all client segments, which speaks to growth in our underlying client base and client engagements. We believe that this growth, combined with the outlook for heightened general market volatility and increasing interest rates, puts a real tailwind behind our business for the next year or two. In fiscal 2023, we'll see a number of our digital platforms being launched. which will more tightly integrate our offerings by client type and make it more engaging for clients to interact with our financial ecosystem. While we have seen the increased costs associated with developing and launching these platforms, as we actively start to market them, we should further accelerate our growth and scalability that technology provides to increase margins and overall profitability. We continue to invest in our financial ecosystem, expanding our products, capabilities, and talents. We 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 demonstrated capabilities and now need to monetize these opportunities. One thing will always remain constant for the Sponex team. We'll continue to dedicate ourselves to better serve our growing client footprint around the world. by providing them with the best financial ecosystem and client service to access the global financial markets. The executive team and I are very proud of the talented Sonex team who continue to propel us to new heights. On a final note, I would just like to wish all of those in the U.S. a happy Thanksgiving and to everyone else a great holiday season. So with that, Operator, let's see if we have any questions.
spk01: Thank you. As a reminder, to ask a question, you will need to press star one one on your phone. Please stand by as we compile the Q&A roster. One moment for our first question. Our first question will come from Dan Fannin of Jefferies. Your line is open.
spk03: Thanks. Good morning. Hi. wanted to just follow up on the comments that were just around the interest rate sensitivity and clearly seeing it flow through the income statement i think the comment sean you made is that 60 percent of the uh benefit is i think in the in the fiscal fourth quarter was realized so just want to think about from here prospectively um just kind of the the flow through the 45 day average thinking about so incremental upside from what rates have done and then I guess as you think about the sensitivity charts, we see that. But at what point, I guess, is where you think we are in terms of the realization of based on current balances and current rates?
spk05: So, I would say if you look at that interest rate slide that we provided, you have to guess what number it was. If you look at that chart, you can see. slide 15 you can actually see on there the actually actually the average yield per quarter and you can see it was 193 basis points for the last quarter q3 was 69 basis points so you know a massive increase and then there was sort of 28 basis points so you know I think we all forget how quickly and steeply interest rates kind of jacked up and it was all sort of in the summer right so It's happened fairly recently, and because we lag by about 45 days, because normally most of our investments are 90-day T-bills, and we roll them, we ladder them up, but it takes a little while for that to roll out. We're always a little bit behind the current interest rate curve. I don't have the number to hand, but if you looked at what the average three-month T-bill rate was in the last quarter, it was probably closer to 4%, frankly. You know, we're still a long way behind where current interest rates are. Now, we'll start catching up, particularly if the interest rate increases, slow down a little bit, we'll start catching up. But we've still got a bit of a bow wave behind us, which will start to show up in upcoming quarters. So I don't know if that explains it, Dan. I'm sure Bill has more granular detail. The other thing I would just also throw out there is, you know, it's a little bit of an unknown for us, so we're making our best guess here. But as we start to get to these levels of interest rates, you know, clients obviously want to start participating in interest. So, you know, every interest rate increases incremental, but it's sort of less incremental than the prior one was because we have to pay some portion of that away. So, you know, those are sort of the dynamics, you know, we're dealing with. We've got sort of a bow wave where we're still catching up to current, you know, market rates. And we've also got to recognize we're going to start paying some of that incremental interest away. So, Anything else to add, Bill?
spk04: No, I think that's right, Sean. I mean, I think the average C bill rate was probably something, you know, in the two and a quarter, two and a half range for the fourth quarter and thought, you know, I would anticipate, you know, for the fourth quarter, us being somewhere, you know, in the 3% plus range, you know, for the fourth quarter as we kind of, as Sean said, catch up. with where T-bills rates are going and overnight rates are going. I mean, given no other market events occur that change anything, but as Sean touched on, they've been rapidly, rapidly increasing.
spk03: Right. And just to clarify, because I look at the institutional segments of 30.1 in interest and fees or client balances that was reported, There's also in the institutional segment, there was some consulting and management counties that also jumped a lot to 14.4. So I just want to make sure the 30.1 is a good jumping off point to what you just said in terms of incremental, the rate upside.
spk04: Yeah. So I mean, the interest in fee income we earn on client balances is split between those two lines, Dan. So all the T-bills and overnight balances that we hold, you know, probably going through the interest line, but the FDIC sweep, right, which is based on that, you know, billion, you know, roughly billion nine that we have, that all mostly flows through the fee income line. So consulting and fee revenue, as you touched on. So that is, that's the reason, the primary reason for the big jump you saw in consulting and fee income, just because that comes through as a fee as opposed to interest. But that's all aggregated down below where we kind of break out and give you the aggregated, you know, interest and fee income on client balances figure.
spk03: We think about that as a run rateable number from here or just like that consultant fee thing or line item isn't a one-time component.
spk04: No, no, no. I'd anticipate both the interest line and the fee income line to both go up as interest rates go up here in the fourth quarter.
spk05: It's generically bundled into it. It's generically funded into consulting and fee income, but it's really that the interest split we get on the FDIC suite is paid to us as a fee, not as interest. So we have to put it in that line.
spk03: Got it. Makes sense. And then just in the securities business, you've been showing that you talked about kind of the the expansion into fixed income, which is going to take the ADV higher and the fee-for-million lower. But this quarter, it was kind of a dynamic the opposite, right, where the fee-for-million went up a lot and the ADV went down. Can you talk to that and obviously the longer-term trend?
spk05: Well, I think the first thing to recognize is – and, you know, we sort of said this a year ago, I guess, if you want to go back and listen – The fourth quarter last year was a pretty crappy quarter for us on the security side, so we are comping to a weak quarter in all of those stats. So I think you should look at it sort of, you know, just stacking up the quarters. I think the trend will look a little bit different than just the quarterly comparison you're looking at.
spk04: Yeah, and I would also say since, you know, that, I mean, yes, the ADV had trended down kind of in the securities just with, you know, getting into some of those other products that Sean touched on, but I try to point out in my portion of the script that, you know, as interest rates go up, you know, when you're trading in fixed income securities, you know, that the revenue side goes up because, you know, there's just an interest component in the revenues. But you also saw, you know, the interest expense, you know, for that business going up quite a bit in the quarter as well. So we don't show a net RPM because it's kind of hard to do that across all of our businesses. So we're showing you gross. but some of that RPM expansion you saw in the fourth quarter is just because the interest rate's going up, if that makes sense.
spk03: Okay. But we obviously didn't see that last quarter.
spk04: Yeah, I think it's because you saw the fourth quarter, you saw the rates going up quite precipitously in the fourth quarter more so than you saw in the third quarter. And also, you'll note, we put a note in The slide deck, you could take a look at, Dan. There was the ADV for the third quarter was higher than it should be. We had some double counting of transactions, so we gave you an adjusted figure here. And that obviously affects RPM. It had no effect on revenues itself, but kind of adjusted that figure to where three RPM should have been 512. for the third quarter with that adjusted buying figure. But still, the fourth quarter is up precipitously because of the interest.
spk03: Okay. Okay. And then just in the context of what you guys have been talking about in terms of the new investments, digitizing the platform and then margin expansion potential and operating leverage as a result. So I guess as you budgeted and think about next year, fixed expenses, And, you know, kind of is there a inflation plus growth investment number we should be thinking about for fixed rate expenses? And obviously the revenues will be what they are. But in the hopes of driving, you know, margin expansion, I get the longer term goals of this, but just trying to get a sense from a dollar perspective or how the budget looks, you know, as you think about the expenses for next year.
spk05: Well, Bill can give you the exact numbers. that we're thinking about, I guess. But I would say the good and the bad news, you know, we've spent that money and have been spending it for the better part of two years. So, you know, these platforms don't just get stood up overnight, right? There's a long lead time. So a lot of that cost is already in our cost structure. So you shouldn't see a big ramp up just for that, right? And as I said, we're going to start rolling these out and have started rolling out some of these initiatives slowly and incrementally. And, you know, obviously that'll show some incremental revenue and obviously will be positive against that cost base. You know, I think you've got to assume, you know, I was kind of pleased to see that our fixed costs have sort of flattened out. I mean, a year ago, we were talking about pretty big fixed compensation cost increases, and it was largely because of the gain acquisition. But you always worry that when you get through that cycle, will we really see these numbers plateau? And they did. I mean, we're up, you know, 3% or something, sort of quarter on quarter in fixed compensation expense. I expect that to stay in a pretty modest range, but, you know, we obviously have to take account of sort of higher inflation. So, you know, we're just going through our annual increase process now, and it's going to be larger than it was a year ago, right? So that is something to be taken into account. So, well, I don't know what your overall sort of view on that would be, but I would say it's sort of going to be inflationary, you know, largely, right?
spk04: Yeah, yeah, no, I would agree with you, Sean. I think, you know, a lot of that has come through so far, but I think inflationary, right, we have to be realist here with the environment that we're seeing. So, you know, I think that, you know, 7%, 8% growth, you know, is probably likely given just the inflationary pressures that we're seeing on a go-forward basis, Dan.
spk03: Okay, that makes sense.
spk05: Yeah, Dan, I don't know if you picked up, I think we chatted about it in the last course, and I didn't chat about it now, but... You know, the strong dollar has been a net benefit for us on our cost base, right? You know, almost all of our revenues are in dollars, so we don't have any impact on the revenue side with the strong dollar. And all our bonuses are linked to the dollar. But our fixed costs in places like London and Europe and Poland and so on have all got cheaper, right? So we've seen some benefit on the cost structure through that. And And indeed, we've put on FX hedges to try and lock that in. And we sort of have a rolling T sort of hedge in place to try and hold on to that benefit for as long as we can. And it's about 20% of those costs are, you know, are down. I mean, that's been the movement in sterling and, you know, in blocky and in euros. So also something to bear in mind. We've had a little bit of help on the top side, though.
spk03: Makes sense. And then... As you think of, I mean, obviously we're, I know you are focused more longer term, but we're halfway through the quarter. Your environment as you look past over the last 12 months has been, you know, very strong in terms of client engagement, activity levels, all the things you guys highlighted in terms of your results. As you look forward and what you've seen thus far, is there any, from a customer market perspective, geography, anything really changing or is it still relatively constructive based on, you know, kind of how you exit the quarter and where things sit now?
spk05: You know, honestly, I don't want to curse us here, but, you know, if you just look at our set of results, I mean, I think it's just a fantastic result across the board. I mean, every one of our products is up double digits, every one of our segments. I mean, we're really firing on all cylinders here. So, you know, nothing stays the same way forever, but, you know, I can't really see anything sort of in the immediate future that is going to materially change what we see now. So, So we just wanted to continue as long as possible, I guess, which we know it won't. So, no, there's nothing really I can speak to. I think Q4 was a pretty straightforward sort of vanilla quarter. There wasn't any sort of exceptional items or, you know, exceptionally crazy market conditions. It was just sort of a business as usual, I think. Okay. Phil, do you agree?
spk04: No. Yeah, no, I'd agree. I'd agree.
spk03: All right. And then just in terms of the current backdrop for M&A, you announced kind of a recent smaller acquisition, as you said, but would be immediately accretive. And then the context of the backdrop, given valuations have come in, markets are maybe good for some businesses, maybe not for others. Is there more opportunity today for you to deploy capital inorganically or similar to or no real change?
spk05: Well, firstly, we're pretty excited about the organic trajectory that we're on. I mean, if you just look at that graph of sort of new clients and changes, I mean, our client base is up 50%, 100% over the last two years, and that run rate seems to be continuing, and that'll take capital, right? So our base case is we're sort of pretty happy with the organic track we're on. In terms of acquisition opportunities, I think we're now starting to see sort of early days of, of opportunities starting to come to the table. You know, there are a couple things we've had a look at, a couple things we're looking at, you know, nothing that I think is close to the pinnacle point, but it's definitely a change from what's happened in the last two years. A small change, but a change nonetheless.
spk03: Okay. Well, I think that's all my questions. Happy Thanksgiving and appreciate the time.
spk01: Yeah. Thank you, Dan. Thank you. One moment. And I see no further questions in the queue. I would now like to turn the conference back to the CEO, Sean O'Connor, for closing remarks.
spk05: Okay. Well, thanks, everyone. We will speak to you again pretty soon here in the new year. And once again, happy Thanksgiving to all the U.S. colleagues and friends and also for everyone else. Enjoy the holidays. And we'll speak to you soon. Thank you.
spk01: This concludes today's conference call. Thank you all for participating.
spk02: You may now disconnect. Have a pleasant day.
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