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spk08: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.
spk00: Good morning, ladies and gentlemen. Thank you for standing by.
spk01: And welcome to the Sonics Group Inc. first quarter fiscal year 2023 conference call. At this time, all participants are in 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 1-1 on your telephone. Please be advised that today's conference may be recorded. I would now like to end the conference with the new speaker host today, Bill Dunaway, Chief Financial Officer. Please go ahead, sir.
spk14: Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our first quarter ended December 31st, 2022. After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2023. 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'll need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you And all participants should note the following discussion should be taken in conjunction with the most recent financial statements and notes thereto, as well as the Form 10Q 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 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'll now turn the call over to Sean O'Connor, the company's CEO.
spk05: Thanks, Phil. Good morning, everyone, and thanks for joining our fiscal 2023 first quarter earnings call. The first quarter of fiscal 2023 was marked with the continuing effects of inflationary pressures on global markets and significant increases in short-term interest rates. Volatility continued in both financial and physical markets. However, at a more diminished level than we experienced for much of fiscal 2022, especially towards the end of the quarter. Turning to slide three in the earnings deck, which compares quarterly operating revenues by product versus a year ago. Listed derivative revenues were essentially flat as higher volumes were offset by lower revenue capture. Revenues from over-the-counter derivatives were down 9% off the back of lower volumes and slightly tighter spreads. Physical revenues were up a strong 46% due to the addition of CDI, as well as good results from the precious metals activity. This was despite a $4.2 million mark-to-market loss on derivatives held against inventories, which should reverse next quarter. Securities operating revenues were up 91% as a result of significantly higher volumes and also interest rates. While the high interest rates help drive the increase in securities operating revenue, we experience significant increase in interest expense related to our fixed income trading as well. This happens as when we trade bonds, we earn the carried interest on our positions, but also incur related interest expense on financing the securities, which results in a bit of a gross up on the income statement. We have changed our method of calculating securities rate per million revenue capture for this quarter and the prior year to address this, and are now deducting the related interest expense associated with fixed income trading. Factoring this in, the securities rate per million declined 20% to $422 in the first quarter, as compared to $529 in the prior year. Securities net operating revenues, which deducts the interest expense in aggregate, as well as the clearing costs and IB commissions, increased 29% versus the prior year. driven by increased volumes. Global payments recorded their best ever quarter, with revenues up 31%, and volumes up 23%, and revenue capture up 7%. Our FX and CFD revenue was down 32%, largely due to tougher market conditions, which resulted in lower revenue capture, down 27% versus a year ago. Interest and fee income on client balances was 86.2 million, up over 900% as we realized the impact of the cumulative interest rate increases off the back of a 56% increase in our total client float, which now stands at $9.8 billion. Moving on to slide four, which shows the same data for the trailing 12 months. Over this longer period, we realized strong double-digit revenue growth across all products except listed derivatives, which was up 9%. We have generally seen increases in both volumes and revenue capture over this period, with the exception of securities and listed derivatives showing declines in revenue capture. Turning now to slide five and a summary of our first quarter and trailing 12-month results, we recorded operating revenues of $654.8 million, up 45% versus the prior year. Our operating revenues were boosted by interest both on our client float and also the interest that is embedded in our fixed income trading, as I mentioned earlier. Net operating revenues, which nets off the interest expense as well as introducing broker commissions and clearing costs, was up 22%. Total compensation and other expenses were up 19% for the quarter, with variable compensation up 18%, slightly below the net operating revenue growth rate. Fixed compensation and related costs increased 8% versus a year ago and were in line with the immediately prior quarter. During the quarter, we acquired CDI, a global cotton merchant business based in Switzerland with clients and producers in Brazil and West Africa, as well as buyers in the APAC region. This acquisition resulted in a gain on acquisition of $23.5 million, both before and after tax. Excluding the acquisition gain of 23.5 million and the intangible amortizations we recorded, adjusted net income of 55.3 million, up 27% over the last year, and up 2% on the immediately prior quarter. On this same basis, we achieved adjusted ROE of 19.7%. Including the gain on acquisition, and as reported, our earnings were 76.6 million, resulting in an ROE of 27.3%. We realized record operating revenues for both our institutional and global payment segments. Looking at the summary for the trailing 12 months, operating revenues were a record $2.3 billion, up 33% over the prior year. Net income was a record $242 million, up 75%. And excluding the acquisition gain and the related intangible amortization was $226.6 million, up 60%. Our diluted EPS was $11.59 for the trailing 12 months, up 70%. Our ROE was 23% despite equity increasing 47% over the last two years. Our financial results were boosted by a higher interest and fee income on our client float as we started to realize the full benefit of the accumulated interest rate increases. As mentioned last quarter, our interest earning assets generally take about 45 days to reprice to new rates. Our average gross yield on our client float was 303 basis points for the quarter versus 193 basis points for the fourth quarter. And our net interest and fee income after deducting what is paid to clients increased 36.3 million versus the prior year quarter. We ended the quarter with a book value of 57.7, 17 cents up 21% versus a year ago. Turning now to slide six, which is our segment summary, just to touch on some highlights before Bill gets into more detail. For the quarter, segment operating revenue was up 44% and segment net income was up 19%, with very strong performances across all but one of our client segments. Our commercial client segment was up 26% in segment income, off the back of a 20% increase in operating revenues. with strong performances from our physical business following the acquisition of CDI, as well as the effect of higher interest rates. Our institutional segment realized a 113% increase in revenues, which translated into a 94% increase in segment income. This was largely due to a much improved performance from our securities business, in particularly equity market making versus a softer quarter a year ago, as well as the increase in interest and fee incomes. Retail had a tough quarter with more challenging market conditions, resulting in a lower revenue capture compared to a much more favorable environment last year. Operating revenue was down 27%, which resulted in a segment loss of $4.2 million, demonstrating that the high operational leverage we have with the digital platform works both ways. Global payments revenue was up 31%, and segment income was up 32%, with solid increases in both volumes and revenue capture. For the trailing 12 months, we had segment operating revenue and segment income up double digits across the board. These were strong quarterly results, but as we've said repeatedly, we 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 months, rather than specific quarters taken in isolation. Turning to slide 7, which sets out our trailing 12-month financial performance over the last nine quarters. These numbers have all been adjusted for the accounting treatment related to the gain and CDI acquisitions as disclosed in our prior filings, and which appear in the reconciliation provided in the appendix at the end of this earnings deck. On the left-hand side, the bars represent our trailing 12-month operating revenue over the last nine quarters. As you can see, this has been a smooth and strongly upward trend as we have steadily expanded our footprint and capabilities. Our operating revenues are up 64% over this period for a 28% compound average annual growth rate. Our adjusted pre-tax income likewise has grown significantly at a 40% CAGR. On the right side, you can see our adjusted net income in the bars, which is up 107% over two years for a 44% CAGR. The dotted line represents our ROE, which has remained above our 15% target, even though our capital has grown by 47% over this period. With that, I'll hand you over to Bill Dunaway for a discussion of the financial results. Bill.
spk14: Thank you, Sean. I'll be starting with slide number eight, which shows our consolidated income statement for the first quarter of fiscal 2023. Sean covered many of the consolidated highlights for the quarter, so I'll highlight a few more and then move on to a segment discussion. Transaction-based clearing expenses declined 5% to $67.3 million in the current period, primarily due to lower fees and equity products and the decline in FX CFD contracts' average daily volume. Introducing broker commissions declined 4% to $36.8 million in the current period, principally due to declines in our independent wealth management and retail FX CFD business, which was partially offset by incremental expense from the CDI acquisition. Interest expense increased $138.6 million versus the prior year, primarily as a result of a $93.3 million increase in interest expense related to our institutional fixed income business, which Sean noted earlier, as well as a $36.1 million increase in interest paid to clients on their deposits, as a result of the significant increase in short-term interest rates. Interest expense on corporate funding increased 2.6 million versus the prior year, also as a result of the increase in short-term interest rates, as well as an increase in average borrowings. Variable compensation increased 18.1 million versus the prior year due to the increase in net operating revenues and represented 31% of net operating revenues in the current period compared to 32% of net operating revenues in the prior year period. Fixed compensation increased $5.9 million versus the prior year, with the growth principally related to salary and benefit costs of increased headcount, which increased 13% as compared to the prior year, which was partially offset by an increase in deferred compensation. Other fixed expenses increased $23.7 million as compared to the prior year to $110.2 million, which also represented a $3.8 million increase over the immediately preceding quarter. As compared to the prior year, trading systems and market information increased 1.6 million, primarily in our securities businesses. In addition, professional fees increased 4 million versus the prior year, principally due to higher legal, accounting, and other consulting fees. Non-trading technology and support increased 1.8 million due to non-trading software implementations, and selling and marketing expenses increased 1.9 million, principally due to increased campaigns in our retail FX CFD business as well as additional hosted conferences and marketing expenses across our businesses. We continue to see an uptick in travel and business development, increasing 2.8 million as compared to the prior year. Finally, depreciation and amortization increased 3.6 million as compared to the prior year due to incremental depreciation related to internally developed software, as well as higher amortization of leasehold improvements and intangibles acquired. We had bad debt expense, net of recoveries of $700,000 for the quarter versus a $200,000 recovery in the prior year period. Net income for the first quarter of fiscal 2023 was $76.6 million and represented an 84% increase over the prior year and a 46% increase versus the immediately preceding quarter. As Sean noted, net income includes a non-taxable gain on the acquisition of CDI in the current period. Moving on to slide number nine, I'll provide some more information on our operating segments. Our commercial segment added $29.8 million in operating revenues versus the prior year, however, declined $2.8 million when compared to the immediately preceding quarter. This increase was driven by a $20.7 million increase in interest earned on client balances versus the prior year as a result of a 25% increase in average client equity, as well as a significant increase in short-term interest rates. In addition, operating revenues from physical transaction increased $16.3 million compared to the prior year, principally due to the acquisition of CDI, as well as an increase in precious metals activities. These increases were partially offset by $3.9 million and $4.2 million declines in operating revenues from listed and OTC derivatives, respectively. Segment income was $82.8 million for the period, an increase over the prior year and preceding quarter of 26% and 3%, respectively. Moving on to slide number 10, operating revenues in our institutional segment increased 182.2 million versus the prior year, primarily driven by $115.5 million increase in securities operating revenues compared to the prior year as a result of a 56% increase in the average daily volume of securities transactions, as well as the increase in interest rates. The increase in securities ADV was primarily driven by an increase in volumes in both equity and fixed income markets, as a result of continued volatility and increased market share. As Shawn mentioned earlier, the increase in interest rates also led to a significant increase in securities related interest expense of the period, which I will touch on momentarily. Operating revenues increased 3.1 million and 3.9 million in the listed derivative and FX products, respectively driven by growth in both listed derivative and FX contract volumes. Finally, interest and fee income earned on client balances increased 56.7 million versus the prior year as a result of the increase in short-term rates as well as 106% increase in average client equity. The rise in short-term interest rates drove an increase in interest expense for the period with interest expense increasing 132.9 million versus the prior year. Interest expense related to fixed income trading and securities lending activities increased 93.3 million and 2.2 million respectively as compared to the prior year, while interest paid to clients increased 33.1 million. Segment income increased 94% to 62 million in the current period as a result of the $50.3 million increase in net operating revenues. Variable compensation increased 37% or 13.1 million as a result of the growth in net operating revenues. Fixed compensation and benefits increased 1.7 million versus the prior year as we build out our product offering. while other fixed expenses increased $5.6 million, including a $1.7 million increase in professional fees, a $1.5 million increase in trading systems and market information. Segment income increased $17 million versus the immediately preceding quarter. Moving to the next slide, operating revenues in our retail segment declined $25.9 million versus the prior year. which was primarily driven by a $27.3 million decrease in FX and CFD revenues as a result of the 29% decline in RPM, as well as a 10% decline in FX CFD average daily volume as compared to the prior year. Operating revenues from securities transaction declined 4.1 million, while operating revenues from physical contracts added 2.5 million as compared to the prior year period. Operating revenues in the retail segment declined 31.3 million versus the immediately preceding quarter. We recorded a $4.2 million segment loss in the current period versus segment income of 23.4 million in the prior year, primarily as a result of the decline in operating revenues. Other fixed expenses increased 6.5 million compared to the prior year, driven by a $1.1 million increase in selling and marketing, a $1.8 million increase in depreciation and amortization, $600,000 increase in non-technology and support costs, and a $300,000 increase in travel and business development. Closing out the segment discussion on the next slide, operating revenues and global payments increased $13 million versus the prior year, driven by a 23% increase in the average daily volume and a 7% increase in the rate per million as compared to the prior year. Non-variable expenses increased $2.4 million, and it's primarily related to the expansion of our payment offerings. Segment income was $32.3 million in the current period and represents a 32% increase over both the prior year and 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 $654.8 million in the current period, up $204.3 million or 45% over the prior year. I have covered the changes in operating revenues for our segments. However, the $5.2 million positive variance in revenues in unallocated overhead is primarily related to an increase in unallocated interest income, net of an FX hedge-related loss as compared to the prior year period. The next slide, number 14, represents a bridge from 2022 first quarter pre-tax income of $52.5 million to pre-tax income of $95.6 million in the current period. The positive variance in unallocated overhead of $15.5 million was driven by the $5.2 million positive variance in revenues I just mentioned, as well as a $23.5 million gain on acquisition, which was partially offset by a $4.1 million increase in variable compensation as a result of improved performance, a $2.3 million increase in professional fees, a $700,000 increase in depreciation and amortization, a $900,000 increase in trade systems and market information, and a $1 million increase in travel and business development. Finally, moving on to slide 15, which depicts our interest and fees earned on client balances by quarter, as well as a table which shows the annualized interest rate sensitivity for a change in short-term rates. Interest and fee income net of interest paid to clients and the effect of interest rate swaps increased 36.3 million to 44.3 million in the current period, as compared to 8 million in the prior year. As noted in the table, we estimate 100 basis point change in short-term interest rates, either up or down, would result in a change to net income by $28.8 million or $1.40 per share on an annualized basis. With that, I would like to turn it back to Sean.
spk09: Thanks, Bill. Let's move on to the final slide, 16.
spk05: We achieved very strong results in the fiscal first quarter 2023, delivering double digits increases in operating revenues and net income, which resulted in diluted EPS of $3.62 and an ROE of over 27% for the quarter. These results included a $23.5 million non-taxable gain on the acquisition of CDI, which contributed $1.11 of earnings per diluted share, and a significant increase in interest income reflecting the growth in our client assets and higher interest rate environment. While trading conditions moderated towards the end of the first quarter, the multiple drivers of our business, including our disciplined approach to acquisitions, the strong growth in client assets, and our core operating performance exemplify the diversity in our operating models. We believe that these multiple drivers and our ongoing investments position us to continue to empower our clients and drive our growth and deliver shareholder value. 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 28% CAGR and our adjusted earnings at a 44% 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 engagement. We continue to invest in our financial ecosystem, expanding our products, capabilities, and talents. We have a unique and a comprehensive financial ecosystem with a very large addressable market in front of us. I would just like to note that this week represents the 20th anniversary of the investment into what would become StoneX. 20 years ago, the stock price was $0.64, and the market value of the company was $1.5 million, and the annual operating revenues were well less than $10 million. Over the past 20 years, we have compounded operating revenues at 32% per annum, shareholder equity at 29% per annum, and by harnessing the phenomenal power of compounding, we have increased the market value of the company over 130 times. Our commitment to our clients, our discipline around risk and acquisitions, and our long-term owner-based approach to investing into and growing our business have all been key underpinnings of the success. While we are proud of our track record and believe that it is largely unmatched by our peers, we also believe that we are still in the early stages of the opportunity that is available and in front of us. I have no doubt that the next 10 years are likely to be much more exciting for Stonex than the last 20 were. Operator, let's open for questions.
spk01: Thank you. Ladies and gentlemen, as a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster.
spk00: I'm sure we have a question coming from the line of Daniel Fennel with Jeffery.
spk01: Your line is open.
spk11: Hi, thanks for taking my question. This is actually June on behalf of Dan. So maybe we can just start off with a quick discussion on the current environment and maybe just, you know, on 2023, how has that started versus what was the backdrop of 2022? Sure.
spk05: You know, obviously things can change fast in our business. You know, these general comments can change, you know, by the minute. I think if you go back to our discussion at year end, my view was we were going to continue to see somewhat elevated volatility, which is obviously a key driver for our business. And that volatility would be higher than it was pre-pandemic, but maybe slightly lower than it had been for the last two years. And I think that's what we still see. Things obviously quieted down last quarter over the Christmas period. Maybe it was just the way the days fell over Christmas. It might also be that it was such a rough last quarter that I think a lot of people sort of closed down, you know, in the beginning of December and went home. We've seen things pick up to a more normal cadence here in January. So I think we're going to see an environment that is moderately good for us on the volatility side. Not quite as good as it was in COVID, but better than it was pre-COVID. i think that'll continue for some time yet um on the other side we obviously now starting to feel the full impact of interest rate increases you know we always forget how quick and how fast these interest increases came about and we really only started to see them showing up in our financial results uh by any magnitude in the fourth quarter and obviously now we're starting to get to the point where we where we've seen that interest really kick in and know i think we're going to be in an environment where you know interest rates are sort of you know either side or four percent for you know a while i mean i'm not sure they'll stay at five percent which is where it looks like they're going but i don't see a sort of a two percent environment out there anytime soon that's obviously very attractive for us and that's a much better environment than we've had at any point in time over the last four years i mean and certainly better than last year i mean last year as i said you know, we only saw a very small benefit from the interest rates. So I would say if you put those two things together, I think it's a pretty good environment for us, honestly. You know, the interest rate impact is material, and I think we're still in a decent environment for volatility. So, you know, that would be my view. So, you know, as I said, things can change dramatically quickly in our business. You know, obviously volatility changes faster than interest rates do, but I think this is going to be a good environment for us for at least 12 to 18 months. I mean, beyond that, it's hard to know how far interest rates might go down, but I still don't see them going below 2%. So anything above 2.5% for us is a very attractive environment in our business. Does that answer your question, Jun?
spk11: Yeah, yeah, absolutely. That was super helpful. And then since you mentioned interest rates and just things like markets, pricing, interest rates going down, maybe at some point this year or next. So just on the way down, is your earning sensitivity to rates sort of similar or be somewhere similar on the way up versus way down, or is there some kind of dynamic there?
spk05: Yeah, it'll be the same. I mean, you know, the assets sort of might take a little quicker to reprice from the way down, but the dynamic will be the same. I mean, obviously our incremental take of interest as it goes up reduces because we pay more weight to clients. And on the way down, same thing happens. We take more of the interest rate on the way down. So it's a little bit muted each way as you get sort of above 3%. But it should be symmetrical.
spk11: And maybe just in terms of margin requirements and client balances, do you see any dynamics between that related to interest rate changes?
spk05: Yeah, we have seen some small changes here and there. I mean, I think they largely immaterial, but certainly in our equity clearing business, we've seen some retail clients take money off of deposits. I don't know if that's because they could find higher interest rates elsewhere or people were starting to buy into the market rather than having money on the sidelines. But, you know, we've seen that go down, you know, 1% or something. um and then on the other side of our business you know it obviously depends on the volatility in the markets because that somewhat drives how much margin people have to leave with us so if you know if volatility moderates a little bit we may see you know a little bit of a pullback on our aggregate client balances um you know the top sort of i guess 10 or 15 percent of our client balances tends to be more volatile um but there's a core level of client balances there which sort of just underpins our client footprint, right? And as long as markets are reasonably active, that's probably going to be reasonably stable. But it could move around on the margin just a little bit for those reasons.
spk11: Got it, got it. And just specifically on the retail business, you mentioned capture rate decline was mostly due to diminishing market volatility. So going forward, what would you describe as a normalized rate And maybe you can go a little bit more in depth on the dynamics of just market volatility and the rate that we're seeing here.
spk05: Yeah, so we have data around sort of revenue capture in that business over a long period of time. And it's pretty damn stable over a period of time. What we do see is in the short term, weekly, monthly, even quarterly, there can be quite a lot of volatility in that revenue capture. So I would say something around $95 in terms of revenue capture on the CFDs is sort of about where we think the long-term average is. I mean, that obviously also differs with product mix, because we make a lot less on the FX than we do, say, on indices. So, you know, something in that region is probably, you know, where we'd like to see it. Now we're at 82 this quarter. So we were significantly below the sort of 9,500 type level that, you know, we see as the long-term average. But if you look at, you know, the prior quarter a year ago, we're at 115 and, you know, in the immediately preceding quarter, we're at 140. So I would say we sort of massively overachieved in those quarters. And, you know, you tend back, you trend back to the mean at some point, you know, we're probably going to see a couple of quarters where we're going to underperform to bring that, you know, average back in line with a sort of 95, 100 type level that we think is sort of the long-term average. So we certainly saw exceptional market conditions over the last 12 to 18 months in that business. Our revenue capture was above trend. And, you know, now we've seen, a bit of a tougher environment, and now we're below trade. So we should be evening out somewhere in the middle here over time.
spk11: Understood. Thank you. And maybe, Bill, just a quick one for you. I understand that the business is doing well, but how are you thinking about fixed expenses for 2023?
spk14: Well, certainly, you know, it's something that we look to try to continue to control, right? And the increase was relatively modest from Q4 into Q1 here. You know, we're cognizant that obviously we're riding the tailwind a bit of higher interest rates and slightly elevated volatility. So, you know, I think that, you know, the growth that we kind of saw over Q4 to Q1 is probably more indicative of what we would expect going forward versus, you know, when you looked at Q1 versus last year Q1 with a relatively sizable increase in fixed expenses. You know, kind of due to what Sean's talked about on previous calls, you know, us trying to digitize the business and expand our offerings. But, you know, our expectation is that would moderate here on a go-forward basis like it did from Q4 to Q1.
spk11: Got it. Got it. And then just lastly on M&A, do you think you're still sort of digesting the CDI acquisition or kind of looking for more opportunities at this point?
spk05: I'll take that, Bill, if you like. So CDI is a relatively small deal for us. I mean, it had a disproportionate impact on our financial statements through sort of how you have to account for these things. That deal is going to be digested, I think, pretty easily and quickly by us. So it is not a gating factor for us looking at anything else at this point. And, you know, we're always in the market. We're always looking at opportunities. I would say, and I've said this on previous calls, you know, up until now, we've seen financial businesses hit peak earnings and we've seen owners want to put sort of SPAC multiples on peak earnings, which obviously is of no interest to us. And I think we were well served not getting involved in any acquisitions on that basis. what we're now seeing is obviously as you read in the press and see everywhere is a totally different environment, right? You know, some of these businesses are now not performing so well, and they've realized that, you know, it was maybe a little bit of a COVID sort of bump that got them there. And additionally, you know, funding has dried up for a lot of these sort of startup businesses. And a lot of them are sort of halfway down the road of building out their capabilities. So we're seeing a lot of those kinds of opportunities, You know, we're not a, you know, we don't like to take sort of, you know, I guess we start businesses all the time ourselves, but we don't think of ourselves as venture capitalists. So, you know, we will look at those businesses and if we think there is real capability there and real opportunity and with a modest amount of additional investment bias, we can bring those to account and grow our ecosystem. That's sort of interesting. But I think we're getting into a more interesting and more rational environment now for M&A. So I think it's still going to take another six to 12 months for that to sort of settle down and for people to become, you know, totally rational around prices. But, you know, that could happen. I'm not saying that'll mean we go buy anything because I think, you know, we've expanded our footprint. We filled in a lot of our gaps. And, you know, so our gaps are fewer and our needs are less. And Our default is always focus on organic growth. That's the way we can add to shareholder value the best. When we buy something, we have to make it significantly better than it was when we bought it. Otherwise, we've added no value. So our default is we grow our ecosystem. I think we're on a tremendous run at the moment. We seem to be garnering market share all over the place. um and the story is exciting at the moment and i think you know clients and talent and so on are taking notice of us so our default is you know just to continue doing what we think we're good at which is growing our business organically and if we see an opportunity to do it faster through you know a good accretive acquisition that is well priced we'll always think about that okay that was super helpful thanks thanks again for taking all my questions of course thank you
spk01: Thank you.
spk04: Operator, do we have any other questions?
spk01: Yes, sir. And as a reminder, ladies and gentlemen, to ask a question, please press star 1-1. 1-1, please, for our next question. And our next question coming from the line of Paul Dyer with Punch and Associates Invest in Yelena Selvin.
spk13: Hi. Good morning, guys. Hey, Paul.
spk09: How are you doing?
spk13: Thanks for taking my questions. Good morning. Good. Of course. Maybe just to... follow-up on CDI. Can you spend, I think it's only like a $40 million deal. Can you talk about what drove this gain on the acquisition?
spk05: Yeah, I mean, I don't want to get too much in the weeds on this, but this was a sole proprietorship, and I think we sort of said some of this when we announced we were doing the deal a quarter ago. You know, one of our top employees in Brazil joined the company, I think it was five, six years ago, to become sort of the heir apparent. We were sad to see him go and he was a tough competitor in the cotton business for us. And when the principal wanted to sell his business, he immediately thought of us and said, this is right up Sponex's alley, let's call them. And there was no process, we just did a deal. I think the owner took the view that, you know, if I can just get my capital out of the business and there was a big tax advantage for him, he had let the profits remain inside the company because, as I understand it, his tax treatment would be he would be taxed on anything he took out of the company. But if he sold the company, that would be a tax-free receipt for him. So there was a significant tax advantage for him to sell a business that accumulated capital over the years. So the purchase price is sort of, you know, in the 30 millions, which was tangible book value. That was the deal we did. And, you know, there were a few sort of add on payments based on the results of the company on a cash basis up until December. So we made some small additional payments. So that's the deal we did. I think that's the deal he wanted. You know, there wasn't huge amounts of negotiation. I think that's the deal he was looking for. The difference is, you know, for him, he always accounts for his basis, his company on a cash basis, which is how Swissgap does it. We have to account for the business on a mark-to-market basis and their business, they have a significant portion of their next year's revenue contracted in. So we obviously had to mark that to market, which led to some of the gains. So, you know, we've now brought forward some portion of their next year's revenue And because we sort of, that came as part of the acquisition, that was a sort of part of the gain we realized. Additionally, you know, we have to go through an independent valuation process when we acquire businesses. And, you know, we use a third party to do that. They do it for all our acquisitions and they have to value the business independently. And they do look at things like the value of the relationships, the suppliers and so on. So there's an intangible write-up of, you know, the value of the contracts and the suppliers. I mean, if it were up to me, I would prefer, and I think Bill agrees, we prefer never to write up those intangibles because we just have to write them back down. And, you know, for me, intangibles aren't worth anything really. You know, it's not hard cash and that's how we think. So part of that is just sort of an accounting anomaly that happens. So we will have to write some of that down.
spk13: that's really the gist of it so you know i i it was sort of a bizarre outcome when we saw how much of a game would show on a relatively small acquisition but that's the reason yeah okay well sounds like a nice deal um on uh on global payments it um you know it seems like it's continuing to uh accelerate in its in its growth um Could you just spend a little more time talking about what the drivers have been to get the acceleration and just the general landscape for that segment?
spk05: Yeah, I mean, definitely we sort of feel that that business has got sort of renewed energy and we're starting to invest in the business in sort of new angles, which I think maybe three, four, five years ago we weren't doing so much because our core business was sort of on a tear. And that's always frustrating to me is when businesses do well people stop investing because they're sort of busy making money, right? And I think we've always got to do both. You know, you've got to, you know, take advantage and make hay while the sun shines, but you've also got to sort of, you know, you've got to think about investing in your business, you know, because we want to grow the franchise and sometimes those market conditions that make your business profitable and sustainable in the long term unless you invest. So I think with, you know, with the payments business, we've pushed them really hard. you know, about two, three years ago to really think about how to sort of reinvest and grow the business. And, you know, we're making big investments in that business right now. And not a lot of that is showing up yet in the P&L, but I think it's sort of energized the team. We've got a lot more sort of younger people in the team. We've recruited people, you know, all these new initiatives are very much technology-based. So we've recruited sort of younger technology-based people. So sort of feel good about the general sort of, you know, tone of the business and where it's taking us and, you know, our local payments capability when we launched that, I think would be very significant potentially for us. In terms of why the business is doing better now, I think this perversely was one of the businesses that didn't experience a COVID kind of tailwind. You know, people stopped investing overseas. I mean, we, you know, the payments where we really make a lot of money are, you know, when corporations are investing and making larger size payments into their subsidiaries, a lot of that slowed down during COVID and is now picking up. So I think on the margin, I would say the sort of high level takeaway is COVID was sort of a tough environment for this business. And we're getting back to a more normalized environment, which is a little bit the opposite of some of our other businesses. Right.
spk03: So that's okay. Right. That's what I would describe it generally.
spk13: Yeah. Okay.
spk03: Yeah.
spk13: That's perfect. And then, you know, really nice operating leverage again this quarter. You know, just big picture, how do you think about continuing to be able to drive, you know, I guess segment income relative to unallocated costs, you know, particularly if the interest rate benefits are now starting to be more accurately reflected in the business?
spk05: Well, When you say we've got better operating leverage, my response to that would be finally. We always seem to be investing so much in trying to make our infrastructure more efficient, more scalable. But in the short term, it's just a net add in costs. And we sort of hope that at some point, you start to see those benefits of scalability and that operational leverage sort of come to the fore. So it's been a long time, you know, in coming. And, you know, hopefully we're now getting to the point where we will see our aggregate sort of unallocated cost base sort of level out. And, you know, if we can continue to keep the volumes and the revenues going up, I mean, we should have very significant operating leverage going forward. It's hard to do because not only are you trying to digitize your business and leverage technology better, but there's always a continual push on costs from the regulators and the environment. The regulators are always imposing more and more costs on us, more and more processes. Some of that's good, some of that maybe is more than is required. But you have to continuously sort of, you know, work with that environment. And then, you know, as we're all digitizing, so you have to deal with things like cybersecurity and all the costs that are related to that. And those costs are going up faster than, you know, even the high inflation we've seen at the moment. So even though we're starting to flatten out at some point, there are some real pushes to cost here that, you know, we've managed to work with. um and and it's going to be a challenge going forward but um you know we definitely feel we should be tapping out we've made some major investments over the last 10 years i think we're starting to see a little bit of the payoff for that so you know hopefully hopefully that will continue obviously it always looks better when you have you know interest coming in and a positive environment because your revenue is growing you know kind of faster than your cost at that point And always remember that with our interest, we have zero cost against that, right? There's no operational cost, no systems cost. So the operational leverage on interest is 100%, right? So that also skews the numbers a little bit. So anyway, I sort of rambled on. Did I answer your question, Paul?
spk13: Yeah, no, that's great. That's perfect. And then just last for me in terms of just being able to continue to grow the core business. Sounds like you're having no issues with market share gains, but any color you can add just to the current competitive landscape and the ability to keep taking market share?
spk05: Yeah. I mean, we seem to be organically sort of growing our market share in line with what's happened over the last five to 10 years, which is 10 to 15% incremental growth in customers and activity. you know, we're giving you guys some of the data now on revenue capture. I mean, you know, there was always the argument that, you know, you're going to face revenue capture pressure. But if you look at it over sort of five or ten years, we haven't seen any material decline in our margins on the revenue capture side. You know, that may happen at some point, and it's happened in some of our activities. But generally speaking, we've managed to maintain our pricing, and we've managed to increase our market share and our client base and I don't see any reason why that won't continue I mean I do think maybe you know the environment has given us a boost because volatility was high and revenue capture was higher so it sort of looked a bit better than it was but underlying that trend has been a pretty steady kind of organic growth in customers and you know that's the core long-term driver for us and I think we feel good that that's in fact and in some ways you know, relative to the comments I made at the end, you know, I think the next 10 years is going to be much more exciting than the last 20. And the reason I say that is I think we're getting to sort of a tipping point in scale, in, you know, acceptability from counterparties. People know who we are. People want to come and work here. Clients see the value in our offering. I mean, you know, five or 10 years ago, we were a tiny little business that no one had heard of. And, you know, if I think back, 10 years ago where we were sitting and how we managed to grow, I was sort of like, holy crap, how did we manage to pull that off, right? And I think this does become a little bit easier as you get a little bit of scale and as you grow your ecosystem. So not that I'm saying it's easy, but I think there's an opportunity for us to continue that trend and feel confident about it. So anyway, we'll see, but that would be my view.
spk13: Okay, great. That's it for me. Thank you for the time.
spk05: Yeah, of course. Operators, anyone else?
spk01: I'm not showing any further questions at this time.
spk05: Okay, well, thanks, everyone, for attending. I appreciate your support, and we'll be speaking to you in three months' time. Thanks very much. Bye-bye.
spk01: Ladies and gentlemen, that's our conference for today.
spk00: Thank you for your participation. You may now disconnect.
spk08: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. you you Thank you. Thank you.
spk01: Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the Sonics Group Inc. first quarter fiscal year 2023 conference call. At this time, all participants are in 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 1-1 on your telephone. Please be advised that today's conference may be recorded. I would now like to end the conference with two speaker hosts today, Bill Dunaway, Chief Financial Officer. Please go ahead, sir.
spk14: Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our first quarter ended December 31st, 2022. After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2023. 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'll need to sign on to the live webcast in order to view the presentations. 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, the following discussion should be taken in conjunction with the most recent financial statements and notes thereto, as well as the Form 10Q 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 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'll now turn the call over to Sean O'Connor, the company's CEO.
spk05: Thanks, Bill. Good morning, everyone, and thanks for joining our fiscal 2023 first quarter earnings call. The first quarter of fiscal 2023 was marked with the continuing effects of inflationary pressures on global markets and significant increases in short-term interest rates. Volatility continued in both financial and physical markets, however, at a more diminished level than we experienced for much of fiscal 2022, especially towards the end of the quarter. Turning to slide three in the earnings deck, which compares quarterly operating revenues by product versus a year ago. Listed derivative revenues were essentially flat as higher volumes were offset by lower revenue capture. Revenues from over-the-counter derivatives were down 9% off the back of lower volumes and slightly tighter spreads. Physical revenues were up a strong 46% due to the addition of CDI, as well as good results from the precious metals activity. This was despite a $4.2 million mark-to-market loss on derivatives held against inventories, which should reverse next quarter. Securities operating revenues were up 91% as a result of significantly higher volumes and also interest rates. While the high interest rates help drive the increase in securities operating revenue, we experience significant increase in interest expense related to our fixed income trading as well. This happens as when we trade bonds, we earn the carried interest on our positions, but also incur related interest expense on financing the securities, which results in a bit of a gross up on the income statement. We have changed our method of calculating securities rate per million revenue capture for this quarter and the prior year to address this and are now deducting the related interest expense associated with our fixed income trading. Factoring this in, the securities rate per million declined 20% to $422 in the first quarter as compared to $529 in the prior year. Securities net operating revenues, which deducts the interest expense in aggregate, as well as the clearing costs and IB commissions, increased 29% versus the prior year. driven by increased volumes. Global payments recorded their best-ever quarter, with revenues up 31%, and volumes up 23%, and revenue capture up 7%. Our FX and CFD revenue was down 32%, largely due to tougher market conditions, which resulted in lower revenue capture, down 27% versus a year ago. Interest and fee income on client balances was $86.2 million, up over 900% as we realized the impact of the cumulative interest rate increases off the back of a 56% increase in our total client float, which now stands at $9.8 billion. Moving on to slide four, which shows the same data for the trailing 12 months. Over this longer period, we realized strong double-digit revenue growth across all products except listed derivatives, which was up 9%. We have generally seen increases in both volumes and revenue capture over this period, with the exception of securities and listed derivatives showing declines in revenue capture. Turning now to slide five and a summary of our first quarter and trailing 12-month results, we recorded operating revenues of $654.8 million, up 45% versus the prior year. Our operating revenues were boosted by interest both on our client float and also the interest that is embedded in our fixed income trading, as I mentioned earlier. Net operating revenues, which nets off the interest expense as well as introducing broker commissions and clearing costs, was up 22%. Total compensation and other expenses were up 19% for the quarter, with variable compensation up 18%, slightly below the net operating revenue growth rate. Fixed compensation and related costs increased 8% versus a year ago and were in line with the immediately prior quarter. During the quarter, we acquired CDI, a global cotton merchant business based in Switzerland with clients and producers in Brazil and West Africa, as well as buyers in the APAC region. This acquisition resulted in a gain on acquisition of $23.5 million, both before and after tax. Excluding the acquisition gain of 23.5 million and the intangible amortizations we recorded, adjusted net income of 55.3 million, up 27% over the last year, and up 2% on the immediately prior quarter. On this same basis, we achieved adjusted ROE of 19.7%. Including the gain on acquisition, and as reported, our earnings were 76.6 million, resulting in an ROE of 27.3%. We realized record operating revenues for both our institutional and global payment segments. Looking at the summary for the trailing 12 months, operating revenues were a record $2.3 billion, up 33% over the prior year. Net income was a record $242 million, up 75%. And excluding the acquisition gain and the related intangible amortization was $226.6 million, up 60%. Our diluted EPS was $11.59 for the trailing 12 months, up 70%. Our ROE was 23% despite equity increasing 47% over the last two years. Our financial results were boosted by a higher interest and fee income on our client float as we started to realize the full benefit of the accumulated interest rate increases. As mentioned last quarter, our interest earning assets generally take about 45 days to reprice to new rates. Our average gross yield on our client float was 303 basis points for the quarter versus 193 basis points for the fourth quarter. And our net interest and fee income after deducting what is paid to clients increased 36.3 million versus the prior year quarter. We ended the quarter with a book value of 57.7, 17 cents up 21% versus a year ago. Turning now to slide six, which is our segment summary, just to touch on some highlights before Bill gets into more detail. For the quarter, segment operating revenue was up 44% and segment net income was up 19%, with very strong performances across all but one of our client segments. Our commercial client segment was up 26% in segment income, off the back of a 20% increase in operating revenues. with strong performances from our physical business following the acquisition of CDI, as well as the effect of higher interest rates. Our institutional segment realized a 113% increase in revenues, which translated into a 94% increase in segment income. This was largely due to a much improved performance from our securities business, in particularly equity market making versus a softer quarter a year ago, as well as the increase in interest and fee incomes. Retail had a tough quarter with more challenging market conditions, resulting in a lower revenue capture compared to a much more favorable environment last year. Operating revenue was down 27%, which resulted in a segment loss of $4.2 million, demonstrating that the high operational leverage we have with the digital platform works both ways. Global payments revenue was up 31%, and segment income was up 32%, with solid increases in both volumes and revenue capture. For the trailing 12 months, we had segment operating revenue and segment income up double digits across the board. These were strong quarterly results, but as we've said repeatedly, we 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 months, rather than specific quarters taken in isolation. Turning to slide 7, which sets out our trailing 12-month financial performance over the last nine quarters. These numbers have all been adjusted for the accounting treatment related to the gain and CDI acquisitions as disclosed in our prior filings, and which appear in the reconciliation provided in the appendix at the end of this earnings deck. On the left-hand side, the bars represent our trailing 12-month operating revenue over the last nine quarters. As you can see, this has been a smooth and strongly upward trend as we have steadily expanded our footprint and capabilities. Our operating revenues are up 64% over this period for a 28% compound average annual growth rate. Our adjusted pre-tax income likewise has grown significantly at a 40% CAGR. On the right side, you can see our adjusted net income in the bars, which is up 107% over two years for a 44% CAGR. The dotted line represents our ROE, which has remained above our 15% target, even though our capital has grown by 47% over this period. With that, I'll hand you over to Bill Dunaway for a discussion of the financial results. Bill.
spk14: Thank you, Sean. I'll be starting with slide number eight, which shows our consolidated income statement for the first quarter of fiscal 2023. Sean covered many of the consolidated highlights for the quarter, so I'll highlight a few more and then move on to a segment discussion. Transaction-based clearing expenses declined 5% to $67.3 million in the current period, primarily due to lower fees and equity products and the decline in FX CFD contracts' average daily volume. Introducing broker commissions declined 4% to $36.8 million in the current period, principally due to declines in our independent wealth management and retail FX CFD business, which was partially offset by incremental expense from the CDI acquisition. Interest expense increased $138.6 million versus the prior year, primarily as a result of a $93.3 million increase in interest expense related to our institutional fixed income business, which Sean noted earlier, as well as a $36.1 million increase in interest paid to clients on their deposits, as a result of the significant increase in short-term interest rates. Interest expense on corporate funding increased 2.6 million versus the prior year, also as a result of the increase in short-term interest rates, as well as an increase in average borrowings. Variable compensation increased 18.1 million versus the prior year, due to the increase in net operating revenues, and represented 31% of net operating revenues in the current period, compared to 32% of net operating revenues in the prior year period. Fixed compensation increased $5.9 million versus the prior year, with the growth principally related to salary and benefit costs of increased headcount, which increased 13% as compared to the prior year, which was partially offset by an increase in deferred compensation. Other fixed expenses increased $23.7 million as compared to the prior year to $110.2 million, which also represented a $3.8 million increase over the immediately preceding quarter. As compared to the prior year, trading systems and market information increased 1.6 million, primarily in our securities businesses. In addition, professional fees increased 4 million versus the prior year, principally due to higher legal, accounting, and other consulting fees. Non-trading technology and support increased 1.8 million due to non-trading software implementations, and selling and marketing expenses increased 1.9 million, principally due to increased campaigns in our retail FX CFD business as well as additional hosted conferences and marketing expenses across our businesses. We continue to see an uptick in travel and business development, increasing 2.8 million as compared to the prior year. Finally, depreciation and amortization increased 3.6 million as compared to the prior year due to incremental depreciation related to internally developed software, as well as higher amortization of leasehold improvements and intangibles acquired. We had bad debt expense, net of recoveries of $700,000 for the quarter versus a $200,000 recovery in the prior year period. Net income for the first quarter of fiscal 2023 was $76.6 million and represented an 84% increase over the prior year and a 46% increase versus the immediately preceding quarter. As Sean noted, net income includes a non-taxable gain on the acquisition of CDI in the current period. Moving on to slide number nine, I'll provide some more information on our operating segments. Our commercial segment added $29.8 million in operating revenues versus the prior year, however, declined $2.8 million when compared to the immediately preceding quarter. This increase was driven by a $20.7 million increase in interest earned on client balances versus the prior year as a result of a 25% increase in average client equity, as well as a significant increase in short-term interest rates. In addition, operating revenues from physical transaction increased $16.3 million compared to the prior year, principally due to the acquisition of CDI, as well as an increase in precious metals activities. These increases were partially offset by $3.9 million and $4.2 million declines in operating revenues from listed and OTC derivatives, respectively. Segment income was $82.8 million for the period, an increase over the prior year and preceding quarter of 26% and 3%, respectively. Moving on to slide number 10, operating revenues in our institutional segment increased 182.2 million versus the prior year, primarily driven by $115.5 million increase in securities operating revenues compared to the prior year as a result of a 56% increase in the average daily volume of securities transactions, as well as the increase in interest rates. The increase in securities ADV was primarily driven by an increase in volumes in both equity and fixed income markets, as a result of continued volatility and increased market share. As Shawn mentioned earlier, the increase in interest rates also led to a significant increase in securities related interest expense of the period, which I will touch on momentarily. Operating revenues increased 3.1 million and 3.9 million in the listed derivative and FX products, respectively driven by growth in both listed derivative and FX contract volumes. Finally, interest and fee income earned on client balances increased 56.7 million versus the prior year as a result of the increase in short-term rates, as well as 106% increase in average client equity. The rise in short-term interest rates drove an increase in interest expense for the period, with interest expense increasing 132.9 million versus the prior year. Interest expense related to fixed income trading and securities lending activities increased 93.3 million and 2.2 million, respectively, as compared to the prior year, while interest paid to clients increased 33.1 million. Segment income increased 94% to 62 million in the current period as a result of the $50.3 million increase in net operating revenues. Variable compensation increased 37% or 13.1 million as a result of the growth in net operating revenues. Fixed compensation and benefits increased 1.7 million versus the prior year as we build out our product offering. while other fixed expenses increased $5.6 million, including a $1.7 million increase in professional fees, a $1.5 million increase in trading systems and market information. Segment income increased $17 million versus the immediately preceding quarter. Moving to the next slide, operating revenues in our retail segment declined $25.9 million versus the prior year. which was primarily driven by a $27.3 million decrease in FX and CFD revenues as a result of the 29% decline in RPM, as well as a 10% decline in FX CFD average daily volume as compared to the prior year. Operating revenues from securities transaction declined 4.1 million, while operating revenues from physical contracts added 2.5 million as compared to the prior year period. Operating revenues in the retail segment declined 31.3 million versus the immediately preceding quarter. We recorded a $4.2 million segment loss in the current period versus segment income of 23.4 million in the prior year, primarily as a result of the decline in operating revenues. Other fixed expenses increased 6.5 million compared to the prior year, driven by a $1.1 million increase in selling and marketing, a $1.8 million increase in depreciation and amortization, $600,000 increase in non-technology and support costs, and a $300,000 increase in travel and business development. Closing out the segment discussion on the next slide, operating revenues and global payments increased $13 million versus the prior year, driven by a 23% increase in the average daily volume and a 7% increase in the rate per million as compared to the prior year. Non-variable expenses increased $2.4 million, and it's primarily related to the expansion of our payment offerings. Segment income was $32.3 million in the current period and represents a 32% increase over both the prior year and 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 $654.8 million in the current period, up $204.3 million or 45% over the prior year. I have covered the changes in operating revenues for our segments. However, the $5.2 million positive variance in revenues in unallocated overhead is primarily related to an increase in unallocated interest income, net of an FX hedge-related loss as compared to the prior year period. The next slide, number 14, represents a bridge from 2022 first quarter pre-tax income of $52.5 million to pre-tax income of $95.6 million in the current period. The positive variance in unallocated overhead of $15.5 million was driven by the $5.2 million positive variance in revenues I just mentioned, as well as a $23.5 million gain on acquisition, which was partially offset by a $4.1 million increase in variable compensation as a result of improved performance, a $2.3 million increase in professional fees, a $700,000 increase in depreciation and amortization, a $900,000 increase in trade systems and market information, and a $1 million increase in travel and business development. Finally, moving on to slide 15, which depicts our interest and fees earned on client balances by quarter, as well as a table which shows the annualized interest rate sensitivity for a change in short-term rates. Interest and fee income net of interest paid to clients and the effect of interest rate swaps increased 36.3 million to 44.3 million in the current period, as compared to 8 million in the prior year. As noted in the table, we estimate 100 basis point change in short-term interest rates, either up or down, would result in a change to net income by $28.8 million or $1.40 per share on an annualized basis. With that, I would like to turn it back to Sean.
spk09: Thanks, Bill. Let's move on to the final slide, 16.
spk05: We achieved very strong results in the fiscal first quarter 2023, delivering double digits increases in operating revenues and net income, which resulted in diluted EPS of $3.62 and an ROE of over 27% for the quarter. These results included a $23.5 million non-taxable gain on the acquisition of CDI, which contributed $1.11 of earnings per diluted share, and a significant increase in interest income, reflecting the growth in our client assets and higher interest rate environment. While trading conditions moderated towards the end of the first quarter, the multiple drivers of our business, including our disciplined approach to acquisitions, the strong growth in client assets, and our core operating performance exemplify the diversity in our operating models. We believe that these multiple drivers and our ongoing investments position us to continue to empower our clients and drive our growth and deliver shareholder value. 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 28% CAGR and our adjusted earnings at a 44% 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 continue to invest in our financial ecosystem, expanding our products, capabilities, and talents. We have a unique and a comprehensive financial ecosystem with a very large addressable market in front of us. I would just like to note that this week represents the 20th anniversary of the investment into what would become Stonex. 20 years ago, the stock price was $0.64, and the market value of the company was $1.5 million, and the annual operating revenues were well less than $10 million. Over the past 20 years, we have compounded operating revenues at 32% per annum, shareholder equity at 29% per annum, and by harnessing the phenomenal power of compounding, we have increased the market value of the company over 130 times. Our commitment to our clients, our discipline around risk and acquisitions, and our long-term owner-based approach to investing into and growing our business have all been key underpinnings of the success. While we are proud of our track record and believe that it is largely unmatched by our peers, we also believe that we are still in the early stages of the opportunity that is available and in front of us. I have no doubt that the next 10 years are likely to be much more tightening for Stonex than the last 20 were. Operator, let's open for questions.
spk01: Thank you. Ladies and gentlemen, as a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again.
spk00: Please stand by while we compile the Q&A roster. I'm sure we have a question coming from the line of Daniel Fennel with Jeffery.
spk01: Your line is open.
spk11: Hi, thanks for taking my question. This is actually June on behalf of Dan. So maybe we can just start off with a quick discussion on the current environment and maybe just, you know, on 2023, how has that started versus what was the backdrop of 2022? Sure.
spk05: You know, obviously things can change fast in our business. You know, these general comments can change, you know, by the minute. I think if you go back to our discussion at year end, my view was we were going to continue to see somewhat elevated volatility, which is obviously a key driver for our business. And that volatility would be higher than it was pre-pandemic, but maybe slightly lower than it had been for the last two years. And I think that's what we still see. Things obviously quieted down last quarter over the Christmas period. Maybe it was just the way the days fell over Christmas. It might also be that it was such a rough last quarter that I think a lot of people sort of closed down, you know, in the beginning of December and went home. We've seen things pick up to a more normal cadence here in January. So I think we're going to see an environment that is moderately good for us on the volatility side. Not quite as good as it was in COVID, but better than it was pre-COVID. I think that'll continue for some time yet. On the other side, we obviously now started to feel the full impact of interest rate increases. You know, we always forget how quick and how fast these interest increases came about. And we really only started to see them showing up in our financial results by any magnitude in the fourth quarter. And obviously now we're starting to get to the point where we're seeing that interest really kick in. you know, I think we're going to be in an environment where, you know, interest rates are sort of, you know, either side of 4% for, you know, a while. I mean, I'm not sure they'll stay at 5%, which is where it looks like they're going, but I don't see a sort of a 2% environment out there anytime soon. That's obviously very attractive for us. And that's a much better environment than we've had at any point in time over the last four years. I mean, and certainly better than last year. I mean, last year, as I said, you know, we only saw a very small benefit from the interest rates. So I would say if you put those two things together, I think it's a pretty good environment for us, honestly. You know, the interest rate impact is material, and I think we're still in a decent environment for volatility. So, you know, that would be my view. So, you know, as I said, things can change dramatically quickly in our business. You know, obviously volatility changes faster than interest rates do, but I think this is going to be a good environment for us for at least 12 to 18 months. I mean, beyond that, it's hard to know how far interest rates might go down, but I still don't see them going to below 2%. So anything above 2.5% for us is a very attractive environment in our business. Does that answer your question, Jim?
spk11: Yeah, yeah, absolutely. That was super helpful. And then since you mentioned interest rates and just things like markets, pricing, interest rates going down, maybe at some point this year or next. So just on the way down, is your earning sensitivity to rates sort of similar or be somewhat similar on the way up versus way down, or is there some kind of dynamic there?
spk05: Yeah, it'll be the same. I mean, you know, the assets sort of might take a little quicker to reprice from the way down, but the dynamic will be the same. I mean, obviously our incremental take of interest as it goes up, reduces because we pay more weight to clients and on the way down same thing happens we take more of the interest rate on the way down so it's a little bit muted each way as you get sort of above three percent um but it should be it should be symmetrical and maybe just in terms of margin balance uh margin requirements and client balances do you see any dynamics between that related to interest rates interest rate changes um Yeah, we have seen some small changes here and there. I mean, I think they largely immaterial, but certainly in our equity clearing business, we've seen some retail clients take money off of deposits. I don't know if that's because they could find higher interest rates elsewhere or people were starting to buy into the market rather than having money on the sidelines. But, you know, we've seen that go down, you know, 1% or something. And then on the other side of our business, you know, it obviously depends on the volatility in the markets because that somewhat drives how much margin people have to leave with us. So if, you know, if volatility moderates a little bit, we may see, you know, a little bit of a pullback on our aggregate client balances. You know, the top sort of, I guess, 10 or 15 percent of our client balances tends to be more volatile. But there's a core level of client balances there. which sort of just underpins our client footprint, right? And as long as markets are reasonably active, that's probably going to be reasonably stable. But it could move around on the margin just a little bit for those reasons.
spk11: Got it, got it. And just specifically on the retail business, you mentioned capture rate decline was mostly due to diminishing market volatility. So going forward, what would you describe as a normalized rate And maybe you can go a little bit more in depth on the dynamics of just market volatility and the rate that we're seeing here.
spk05: Yeah, so we have data around sort of revenue capture in that business over a long period of time. And it's pretty damn stable over a period of time. What we do see is in the short term, weekly, monthly, even quarterly, there can be quite a lot of volatility in that revenue capture. So I would say something around $95 in terms of revenue capture on the CFDs is sort of about where we think the long-term average is. I mean, that obviously also differs with product mix, because we make a lot less on the FX than we do, say, on indices. So, you know, something in that region is probably, you know, where we'd like to see it. Now we're at 82 this quarter. So we were significantly below the sort of 9,500 type level that, you know, we see as the long-term average. But if you look at, you know, the prior quarter a year ago, we're at 115 and, you know, in the immediately preceding quarter, we're at 140. So I would say we sort of massively overachieved in those quarters. And, you know, you tend back, you trend back to the mean at some point, you know, we're probably going to see a couple of quarters where we're going to underperform to bring that, you know, average back in line with a sort of 95, 100 type level that we think is sort of the long-term average. So we certainly saw exceptional market conditions over the last 12 to 18 months in that business. Our revenue capture was above trend. And, you know, now we've seen, a bit of a tougher environment, and now we're below trade. So we should be evening out somewhere in the middle here over time.
spk11: Understood. Thank you. And maybe, Bill, just a quick one for you. I understand that the business is doing well, but how are you thinking about fixed expenses for 2023?
spk14: Well, certainly, you know, it's something that we look to try to continue to control, right? And the increase was relatively modest from Q4 into Q1 here. You know, we're cognizant that obviously we're riding the tailwind a bit of higher interest rates and slightly elevated volatility. So, you know, I think that, you know, the growth that we kind of saw over Q4 to Q1 is probably more indicative of what we would expect going forward versus, you know, when you looked at Q1 versus last year Q1 with a relatively sizable increase in fixed expenses. You know, kind of due to what Sean's talked about on previous calls, you know, us trying to digitize the business and expand our offerings. But, you know, our expectation is that would moderate here on a go-forward basis like it did from Q4 to Q1.
spk11: Got it. Got it. And then just lastly on M&A, do you think you're still sort of digesting the CDI acquisition or kind of looking for more opportunities at this point?
spk05: I'll take that, Paul, if you like. So CDI is a relatively small deal for us. I mean, it had a disproportionate impact on our financial statements through sort of how you have to account for these things. That deal is going to be digested, I think, pretty easily and quickly by us. So it is not a gating factor for us looking at anything else at this point. And, you know, we're always in the market. We're always looking at opportunities. I would say, and I've said this on previous calls, you know, up until now, we've seen financial businesses hit peak earnings and we've seen owners want to put sort of SPAC multiples on peak earnings, which obviously is of no interest to us. And I think we were well served not getting involved in any acquisitions on that basis. what we're now seeing is obviously as you read in the press and see everywhere is a totally different environment, right? You know, some of these businesses are now not performing so well, and they've realized that, you know, it was maybe a little bit of a COVID sort of bump that got them there. And additionally, you know, funding has dried up for a lot of these sort of startup businesses. And a lot of them are sort of halfway down the road of building out their capabilities. So we're seeing a lot of those kinds of opportunities, You know, we're not a, you know, we don't like to take sort of, you know, I guess we start businesses all the time ourselves, but we don't think of ourselves as venture capitalists. So, you know, we will look at those businesses and if we think there is real capability there and real opportunity and with a modest amount of additional investment bias, we can bring those to account and grow our ecosystem. That's sort of interesting. But I think we're getting into a more interesting and more rational environment now for M&A. So I think it's still going to take another six to 12 months for that to sort of settle down and for people to become, you know, totally irrational around prices. But, you know, that could happen. I'm not saying that'll mean we go buy anything because I think, you know, we've expanded our footprint. We filled in a lot of our gaps and, you know, so our gaps are fewer and our needs are less. And Our default is always focus on organic growth. That's the way we can add to shareholder value the best. When we buy something, we have to make it significantly better than it was when we bought it. Otherwise, we've added no value. So our default is we grow our ecosystem. I think we're on a tremendous run at the moment. We seem to be garnering market share all over the place. um and the story is exciting at the moment and i think you know clients and talent and so on are taking notice of us so our default is you know just to continue doing what we think we're good at which is growing our business organically and if we see an opportunity to do it faster through you know a good accretive acquisition that is well priced we'll always think about that okay that was super helpful thanks thanks again for taking all my questions of course thank you
spk01: Thank you.
spk04: Operator, do we have any other questions?
spk01: Yes, sir. And as a reminder, ladies and gentlemen, to ask a question, please press star 1-1. 1-1, please, for our next question. And our next question coming from the line of Paul Dyer with Punch-In Associate Investment, Yolanda Selvin.
spk13: Hi. Good morning, guys. Hey, Paul. How are you doing? Thanks for taking my questions. Good morning. Good. Of course. Maybe just to... follow-up on CDI. Can you spend, I think it's only like a $40 million deal. Can you talk about what drove this gain on the acquisition?
spk05: Yeah, I mean, I don't want to get too much in the weeds on this, but this was a sole proprietorship, and I think we sort of said some of this when we announced we were doing the deal a quarter ago. You know, one of our top employees in Brazil joined the company, I think it was five, six years ago, to become sort of the heir apparent. We were sad to see him go, and he was a tough competitor in the cotton business for us. And when the principal wanted to sell his business, he immediately thought of us and said, this is right up Sponex's alley, let's call them. And there was no process, we just did a deal. I think the owner took the view that, you know, if I can just get my capital out of the business and there was a big tax advantage for him, he had let the profits remain inside the company because, as I understand it, his tax treatment would be he would be taxed on anything he took out of the company. But if he sold the company, that would be a tax-free receipt for him. So there was a significant tax advantage for him to sell a business that accumulated capital over the years. So the purchase price is sort of in the $30 million, which was tangible book value. That was the deal we did. And there were a few sort of add-on payments based on the results of the company on a cash basis up until December. So we made some small additional payments. So that's the deal we did. I think that's the deal he wanted. There wasn't huge amounts of negotiation. I think that's the deal he was looking for. The difference is, you know, for him, he always accounts for his basis, his company on a cash basis, which is how Swissgap does it. We have to account for the business on a mark-to-market basis. And their business, they have a significant portion of their next year's revenue contracted in. So we obviously had to mark that to market, which led to some of the gains. So, you know, we've now brought forward some portion of their next year's revenue And because we sort of, that came as part of the acquisition, that was a sort of part of the gain we realized. Additionally, you know, we have to go through an independent valuation process when we acquire businesses. And, you know, we use a third party to do that. They do it for all our acquisitions and they have to value the business independently. And they do look at things like the value of the relationships, the suppliers and so on. So there's an intangible write-up of, you know, the value of the contracts and the suppliers. I mean, if it were up to me, I would prefer, and I think Bill agrees, we'd prefer never to write up those intangibles because we just have to write them back down. And, you know, for me, intangibles aren't worth anything really. You know, it's not hard cash and that's how we think. So part of that is just sort of an accounting anomaly that happens. So we will have to write some of that down. but that's really the gist of it. So, you know, I, I, it was sort of a bizarre outcome when he saw how much of a game would show on a relatively small acquisition, but that's the reason.
spk13: Yeah. Okay. Sounds like a nice deal. Um, on, uh, on global payments, it, um, you know, it seems like it's continuing to, uh, uh, accelerate in its, in its growth. Um, Could you just spend a little more time talking about what the drivers have been to get the acceleration and just the general landscape for that segment?
spk05: Yeah, I mean, definitely we sort of feel that that business has got sort of renewed energy and we're starting to invest in the business in sort of new angles, which I think maybe three, four, five years ago we weren't doing so much because our core business was sort of on a tear. And that's always frustrating to me is when businesses do well people stop investing because they're sort of busy making money, right? And I think we've always got to do both. You know, you've got to, you know, take advantage and make hay while the sun shines. But you've also got to sort of, you know, you've got to think about investing in your business, you know, because we want to grow the franchise. And sometimes those market conditions that make your business profitable are sustainable in the long term unless you invest. So I think with, you know, with the payments business, we've pushed them really hard. you know, about two, three years ago to really think about how to sort of reinvest and throw the business. And, you know, we're making big investments in that business right now. And not a lot of that is showing up yet in the P&L, but I think it's sort of energized the team. We've got a lot more sort of younger people in the team. We've recruited people, you know, all these new initiatives are very much technology-based. So we've recruited sort of younger technology-based people. So sort of feel good about the general sort of, you know, tone of the business and where it's taking us and, you know, our local payments capability when we launched that, I think would be very significant potentially for us. In terms of why the business is doing better now, I think this perversely was one of the businesses that didn't experience a COVID kind of tailwind. You know, people stopped investing overseas. I mean, we, you know, the payments where we really make a lot of money are, you know, when corporations are investing and making larger size payments into their subsidiaries, a lot of that slowed down during COVID and is now picking up. So I think on the margin, I would say the sort of high level takeaway is COVID was sort of a tough environment for this business. And we're getting back to a more normalized environment, which is a little bit the opposite of some of our other businesses. Right.
spk03: So that's okay. Right. That's what I would describe it generally.
spk13: Yeah.
spk03: Okay. Yeah.
spk13: That's perfect. And then, you know, really nice operating leverage again this quarter. You know, just big picture, how do you think about continuing to be able to drive, you know, I guess segment income relative to unallocated costs, you know, particularly if the interest rate benefits are now starting to be more accurately reflected in the business?
spk05: Well, When you say we've got better operating leverage, my response to that would be finally. We always seem to be investing so much in trying to make our infrastructure more efficient, more scalable. But in the short term, it's just a net add in costs. And we sort of hope that at some point, you start to see those benefits of scalability and that operational leverage sort of come to the fore. So it's been a long time, you know, in coming and, you know, hopefully we're now getting to the point where we will see our aggregate sort of unallocated cost base sort of level out. And, you know, if we can continue to keep the volumes and the revenues going up, I mean, we should have very significant operating leverage going forward. It's hard to do because not only are you trying to digitize your business and leverage technology better, but there's always a continual push on costs from the regulators and the environment. The regulators are always imposing more and more costs on us, more and more processes. Some of that's good, some of that maybe is more than is required. But you have to continuously sort of, you know, work with that environment. And then, you know, as we're all digitizing, so you have to deal with things like cybersecurity and all the costs that are related to that. And those costs are going up faster than, you know, even the high inflation we've seen at the moment. So even though we're starting to flatten out at some point, there are some real pushes to cost here that, you know, we've managed to work with. um and and it's going to be a challenge going forward but um you know we definitely feel we should be tapping out we've made some major investments over the last 10 years i think we're starting to see a little bit of the payoff for that so you know hopefully hopefully that will continue obviously it always looks better when you have you know interest coming in and a positive environment because your revenues bring you know kind of faster than your cost at that point And always remember that with our interest, we have zero cost against that, right? There's no operational cost, no systems cost. So the operational leverage on interest is 100%, right? So that also skews the numbers a little bit. So anyway, I sort of rambled on. Did I answer your question, Paul?
spk13: Yeah, no, that's great. That's perfect. And then just last for me in terms of just being able to continue to grow the core business. Sounds like you're having no issues with market share gains, but any color you can add just to the current competitive landscape and the ability to keep taking market share? Yeah.
spk05: I mean, we seem to be organically sort of growing our market share in line with what's happened over the last five to 10 years, which is 10 to 15% incremental growth in customers and activity. you know, we're giving you guys some of the data now on revenue capture. I mean, you know, there was always the argument that, you know, you're going to face revenue capture pressure. But if you look at it over sort of five or ten years, we haven't seen any material decline in our margins on the revenue capture side. You know, that may happen at some point, and it's happened in some of our activities. But generally speaking, we've managed to maintain our pricing, and we've managed to increase market share and our client base and I don't see any reason why that won't continue I mean I do think maybe you know the environment has given us a boost because volatility was high and revenue capture was higher so it sort of looked a bit better than it was but underlying that trend has been a pretty steady kind of organic growth and customers and you know that's the core long-term driver for us and I think we feel good that that's intact and in some ways you know, relative to the comments I made at the end, you know, I think the next 10 years is going to be much more exciting than the last 20. And the reason I say that is I think we're getting to sort of a tipping point in scale, in, you know, acceptability from counterparties. People know who we are. People want to come and work here. Clients see the value in our offering. I mean, you know, five or 10 years ago, we were a tiny little business that no one had heard of. And, you know, if I think back, 10 years ago where we were sitting and how we managed to grow, I was sort of like, holy crap, how did we manage to pull that off, right? And I think this does become a little bit easier as you get a little bit of scale and as you grow your ecosystem. So not that I'm saying it's easy, but I think there's an opportunity for us to continue that trend and feel confident about it. So anyway, we'll see, but that would be my view.
spk13: Okay, great. That's it for me. Thank you for the time.
spk05: Yeah, of course. Operators, anyone else?
spk01: I'm not showing any further questions at this time.
spk05: Okay, well, thanks, everyone, for attending. I appreciate your support, and we'll be speaking to you in three months' time. Thanks very much. Bye-bye.
spk01: Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.
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