StoneX Group Inc (SNEX) 2009 Q2 法說會逐字稿

Good afternoon. My name is Anita and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal year 2009 second-quarter earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Brian Sephton. Sir, you may begin your conference.

Thanks Sanita. Good afternoon everyone. My name is Brian Sephton, CFO of International Assets Holding Corporation. I will be hosting this earnings conference call for the second quarter of fiscal 2009 ended March 31, 2009.

We have a simple format planned for today. It should last no more than 15 minutes before questions and answers. Sean O'Connor, our COO, will then present an overview of the quarter's results and deal with the internal and operational developments since our last call.

I will take you through the recent earnings release. Sean will wrap up briefly and then we will take questions. If any listeners have suggestions on the format and content of this and future calls, please do not hesitate to contact the Company through the investor relations e-mail address on our website, www.INTLassets.com.

We filed our Form 10-Q for the fiscal quarter ended March 31, 2009 with the SEC yesterday. It is posted on our website under the SEC filing section of the investor relations tab.

Before moving on, we are required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto as well as the most recent Form 10-Q filed with the SEC on May 11, 2009. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the Company's control including adverse changes in economic, political and market conditions; losses from the Company's market-making and trading activities arising from counterparty failures and changes in market conditions; the possible loss of key personnel; the impact of increasing competition; the impact of changes in government regulation; the possibility of liabilities arising from violations of federal and state securities laws; and the impact of changes in technology in the securities, foreign exchange and commodities dealing and trading industries.

Although the Company believes that its forward-looking statements are based upon reasonable assumptions regarding its business, 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. And I should have mentioned in case there's any alarm, Scott Branch is traveling and that's the reason he's not on this call. He normally is a participant. I'll now hand you over to Sean O'Connor.

Thanks Brian and thanks everyone for joining us. Let me apologize up front. I'm losing my voice. I've picked up a cold, hopefully not the swine flu. So I'll try and get through this as best I can.

Once again, I'm pleased to say that in spite of this very difficult environment we find ourselves in and contrary to the industry as a whole, International Assets produced on a mark to market basis an ROE of 21% for the six months to date. I'm not sure too many financial services companies have achieved that over the same period.

Q2 2009 was another good quarter for INTL with net earnings of $4.3 million, up slightly from Q1 2009. This was possible due to very strong performances from our core trading businesses.

Once again, we have seen the benefit of our niche-based customer model as well as having multiple and diversified revenue streams which have served to protect our bottom line despite volatile conditions in some of our businesses over this period. For the six months to date after all items, we were roughly in line with last year's performance with net earnings of $8.5 million for the six months to date.

This is despite last year being boosted by very good results from our seed capital investments and in the current year us having to deal with some significant write-downs and provisions which aggregated close to $5 million for the current six-month period. These one-off items for the current quarter reduced our net earnings by $1.4 million or $0.14 per share.

I'd like to run through some developments which have been announced during the quarter since we last had our call. As mentioned last time, our Consilium joint venture which housed the bulk of our assets under management has been through a really tough time.

We have just recently agreed to exit our joint venture with Consilium. The net result of this will still be a $500,000 charge in the current quarter which we have taken to cover future operating losses and obligations to Consilium. In return, we will cancel the restricted shares and options they hold which amounts to about 20,000 shares in total.

We have now successfully concluded the buyout of our joint venture partner in Dubai. This is our precious metals related business for an amount of $3 million in cash plus a rebate of the profits generated from this customer with us.

This will allow us to run this business as an integrated part of a growing precious metals business. Third item is we recently acquired SIPSA which is an institutional stockbroking firm in Argentina.

We paid an amount of approximately $1.7 million for this acquisition, most of which was represented by the value of a stock exchange membership and some cash. In addition, we have an earnout arrangement with them. This was a nice bolt-on acquisition with our Gainvest activities, giving them much greater capabilities on the trading side and much greater diversity in their income.

Key points on the financials Brian will cover in more detail. The FX business had their best ever quarter and commodities were up significantly with an all-time record for the gold business led by our new Singapore operation and also record for our copper business over the last six months which is a new initiative started last year. Our equity business returned to a more normal run rate after the exceptional Q1 results.

We also saw some good net margin expansion, that is net earnings to revenues. Percentage moved from 13.5% in Q1 to 15.7% in Q2, so just over 2% increase. Thus with revenues down 11% from Q1, we ended up with net earnings up 16% from Q1. The main reasons for this margin expansion was as follows.

Firstly, income tax was down to 16% from 37%. This is largely due to increased precious metals revenues in Singapore and Dubai which are low tax jurisdictions for us and large FX revenues in the UK which has a 28% tax compared with the average of 38% in the US.

The US is now by far our highest tax jurisdiction corporate-wise which is something to think about, I guess. Our equity trading business, the second reason equity trading business generally has much lower margins than any of our other businesses and this is due to the high proportion of revenues that are accounted for by clearing costs. That's a high-volume business. The equity business accounted for a disproportionate share of Q1 revenues and much less so in Q2.

During Q2 we took a 100% provision against some Chinese performance risk on the commodity side. We have no remaining exposure on this. And in addition, we took the provision for the costs of unwinding Consilium which I mentioned earlier. In total, these provisions for the current quarter were about $2.3 million.

During the current quarter, we showed a profit on our seed capital investments of $1.2 million versus a write-down of $2.8 million in Q1. We are hopeful that we should not see any further write-downs and if we are patient and lucky, we may see some write-backs as markets improve, particularly on the emerging market side.

So despite continued growth in all of our trading businesses, we continue to be very liquid, using very little of our committed funding currently. At the end of the quarter, we had cash of $49 million and unutilized borrowing capacity of around $120 million through our various facilities.

In addition, we have actively been liquidating our seed capital investments and should have this substantially completed during the next quarter which should free up additional cash of around $25 million. The surplus liquidity together with strong operating cash flow will give us significant liquidity at the center. This should allow us to take advantage of any opportunities that arise as well as grow our core trading activities.

Now in the past, we have been criticized for our very low-key approach on investor relations and talking about the Company generally. So I would like to change that and this is my opportunity for a shameless PR plug for International Assets. So here goes.

Some of you may have noticed that we showed up in the Fortune 500 list at number 140. This was largely as a result of us having to a report our physical commodities revenues on a gross basis.

Although this is consistent with other industrial companies such as Wal-Mart and people like that, it's really not how we look at our revenues. If we annualize our Q2 revenues which were $15 billion for the quarter, that would place us on the list at about number 40 which would be right next to Microsoft which is kind of interesting.

In addition, we showed up in a number of the categories very well in terms of the bang for the buck. This is revenue per employee, revenue per dollar of equity and revenue per dollar of assets. We were number one in all three categories.

Perhaps more interesting was the fact we were 12th in terms of ten-year return to shareholders. We were 16th in terms of five-year growth in profits.

In terms of the absolute amount of equity, assets and profits; we're also well inside the top 500 on the overall list which actually numbered 1000. In addition, on the weekend, we were rated number 112 in Barron's list of the top 500 companies which is more focused on investments returns.

So, that's the end of my shameless plug. I'll now hand you over to Brian Sephton who will deal with the numbers. Brian, thank you.

Thanks Sean. May I remind you that we do not give future revenue or earnings guidance. This review covers the second quarter of fiscal 2009 ended March 31. The year-on-year comparison relates to the corresponding quarter last year.

As a caution to listeners, the fully marked to market numbers are not in accordance with GAAP. The differences between the GAAP and fully marked to market numbers arise in our commodities business segment. In all of our other business segments, GAAP and marked to market numbers are the same.

For a full reconciliation between the GAAP and the non-GAAP adjusted marked to market numbers and our reasons for discussing the non-GAAP numbers, please see page 21 of our Form 10-Q. And whenever I talk about an adjusted number on this call, I'm talking about a non-GAAP number.

I should point out that there are minor errors on two tables in the MD&A section of the Form 10-Q that we filed yesterday on pages 21 and 22. The errors relate to an interchanging of numbers for discontinued operations and minority interests and do not affect the financial statements or notes nor do they affect disclosures of adjusted operating revenues, adjusted net income or adjusted EBITDA.

This is an amendment and not a restatement that we will be filing today. It is an amended Form 10-Q filed today as a Form [10-Q-A] to correct these disclosures.

This quarter's adjusted numbers were slightly lower than those of the same quarter last year but given the effects of the global financial crisis, we are pleased with the result, especially the performance of our foreign currency and commodities trading businesses. The Company's adjusted operating revenues were $27.5 million this quarter compared with $30.2 million in the same quarter last year.

Non-interest expenses increased 7% from $18.4 million last year to $19.7 million this year. Interest expense decreased by 18% from $2.8 million to $2.3 million.

The Company's adjusted pro forma net income for the quarter was $4.3 million, down 2% from $4.4 million last year. Interest paid during the quarter at $2.3 million compared with $3.3 million in the prior year. Interest to convertible notes holders has decreased from about $475,000 to $320,000 following the conversions in September and October of 2008.

The Company also pays lower interest rates at the moment in absolute terms and we are doing so on decreased bank balances. Our interest rate swaps have the effect of increasing our reported interest expense during the quarter by about $590,000.

Of our total non-interest expenses, 38% were fixed and 62% were variable compared with 46% fixed and 54% variable in the prior year. Compensation and benefits, our biggest expense, make up 53% of total non-interest expenses in the current quarter compared to 60% last year.

Comparing the March 2009 quarter with the December 2008 quarter, in other words Q2 with Q1, adjusted operating revenues were $31 million in Q1 and $27.5 million in Q2, an 11% decrease. Non-interest expenses decreased 8% from $21.3 million to $19.7 million.

Interest expense was $2.3 million in both quarters. Adjusted pro forma net income was $4.2 million in the December quarter, increasing to $4.3 million in the March quarter.

Our tax rate, as Sean has noted, has decreased significantly due to a large proportion of our profits having been made in Dubai, Singapore and the United Kingdom. The negative this quarter was the $2.3 million bad debt and impairment charge compared with $1.1 million in the same quarter last year.

Of the $2.3 million charge, $1.8 million related to the exposure in China on our commodities business and $0.5 million related to the impairment charge on INTL Consilium's withdrawal. We have disclosed a subsequent event that this agreement to withdraw from INTL Consilium was signed on May 8 -- that's last Friday -- and has an effective date of April 30, 2009.

We will account for the results of INTL Consilium as discontinued operations with effect from our June 2009 quarter. There were no conversions of our convertible notes during the quarter and the balance of the convertible notes at March 31 was $16.7 million.

Total assets at the end of March 2009 were $365 million compared with $438 million at the end of September 2008. Our balance sheet at the end of March remained very liquid with total cash and cash equivalents of $49 million. 91% of our assets consisted of cash, cash equivalents, short-term receivables, financial instruments and commodities inventory.

Our commodities inventory increased from $57 million at the end of September to $75 million at the end of March stated at the lower of cost or market value. The market value of this inventory is approximately $78 million i.e. $3 million higher on the cost basis.

About 84% of our inventory was made up of precious metals and the balance in base metals. Borrowings excluding the $16.7 million of convertible notes were at $80.7 million at the end of March compared with $120 million at the end of September. And total third-party assets under management in the asset management segment decreased from $0.8 million at the end of December to $0.7 million in March. I'll now hand you back to Sean to wrap up.

Thanks Brian. Those of you who have listened to the call before know that as management, the key metric for us is ROE. We are very pleased that during this turbulent time we've managed to exceed our targets of 20% with an ROE above that and we think this is a validation of our niche customer-centric strategy.

And with the increased liquidity we're building up, we look forward to see if there are any opportunities for us to take advantage of the situation and to grow our existing businesses or get into some new niche businesses. So, we would now like to take any questions. Anita, if you're there, if there are any questions, if you could let people through?

(Operator Instructions) Graeme Rein.

I would like to drill down into the asset management a little bit if possible. I think you had $3.3 million in contribution for the quarter. Can you break that down between how much was investment gain, how much was Consilium and how much was INTL capital and Gainvest?

Graeme, let me get back to you on that breakdown.

Well $1.2 million was investment gains on the seed capital and we're withdrawing that capital now. The Gainvest operation did very well during the quarter. Brian will dig out the numbers for you.

But their assets under management hit an all-time record. We have increased the fees we are paid on that product and in fact we now are the number one fixed income fund -- listed fixed income fund in Argentina. So that did very well and that's probably the bulk of the revenues over and above the seed capital contribution.

So the $700 million in assets under management, how much of that is Consilium that is going away?

Well most of the reduction obviously is Consilium. That accounted for the bulk of the assets. And I think by the time all is said and done, we'll probably be looking at ex Consilium in the $300 million range.

You mentioned you're liquidating your investments in managed funds.

We've been doing that for a while. Part of the strategy was to put our capital in to create track records for new products which we succeeded with prior to the kind of financial fallout. So it didn't work as planned but I think the strategy was the right one and given that those products we are not going to be marketing anymore, some of which are done by Consilium, we are liquidating that cash.

Is that decision linked at all to trying to refinance some of the debt facilities you have upcoming?

No, well the decision to liquidate the seed capital or the decision to pull out of Consilium?

No, no, to liquidate the seed capital (multiple speakers)

Neither of those decisions was based on the rollover of our syndicated loan. It was just an allocation of capital and our job at some level if we want to be ROE driven is to make prudent capital allocation decisions to our business and it was really looking at the environment and deciding where we thought we could get the best bang for the buck.

Okay, can you talk generally about how that -- those discussions are going in rolling over that commodities facility?

Yes, we're speaking to all banks. We have two banks that are probably not going to participate and we knew that six months ago. One of them actually has pulled out of business entirely kind of two months after they did the deal with us.

Fortunately it was a committed facility. We have found probably two additional parties to take their place and it seems to be proceeding. But as with everything, it's difficult dealing with the banks and it costs you more money.

My anticipation is that we will end up getting what we need but it will cost us more. To a certain extent though, we're an absolute cost borrower. So the increased spread gets offset by LIBOR being so much lower and hopefully that continues this year and hopefully in a year's time, we are looking at a different situation.

Then the last thing, can you talk more about the Forex business? What's changing there? I think you said you had more customers but are there any changes in the kind of underlying competitive environment that are notable?

I think there are probably three things going on. One, spreads in some of the exotic markets have really widened out through this crisis particularly in Africa and some of the smaller markets and I guess the reason is a lot of kind of hot investment money went in there through the sort of end of the liquidity boom and it's coming out and spreads have widened out.

So that's great for us. Additionally I think we have probably picked up more customers as people have become sort of leery of dealing with banks and have sort of now been open to considering alternatives. So I think it's margin expansion and probably growth of the customer base for those two reasons.

Thanks for taking my questions.

Jeremy Hellman.

On the equities market making business, can you expand a little bit on how that fared on a month-to-month basis within the quarter? Did it kind of mirror the overall kind of performance of world markets and kind of on the heels of that then considering where markets are, here we are in mid-May, has it rebounded thus far through Q2 then?

Firstly, we don't talk about anything other than our historical results. So we don't want to get too specific on that because we don't give any forward-looking information.

But I think it's probably fair to say that business has thrived on panic and market dislocations and I think those were probably at its peak in our first quarter which is why we had such an exceptional result from the equities business. And I don't think that was in any way sustainable. I think we said that on the call.

Clearly the business as you can see from the Q2 results have settled down to probably a more even track relative to last year, maybe slightly below that. But we think it's doing fine and operating well.

Clearly this environment is not good for that business. We like panic or we like bull markets, but sort of grinding bear markets, you tend to find that people just don't do much.

But that's been offset by just a change in the competitive landscape and the team has done really well and I think is picking up more business from more places than ever before. People are refocusing their efforts in some of the larger institutions and not competing with us or doing it internally and handing the business off to sort of dedicated experts like us. So I don't know what else to say other than that's sort of the environment and I think we are in a good spot there.

And I forget which one of your comments included a point about looking at some other businesses that might be interesting. Can you expand on that a little bit, what you might be looking at specifically?

No, obviously can't mention anything we're looking at. But we tend to like businesses that have sort of certain characteristics and I think if you read our Q, I think we set out what we like. We like niche businesses. We like customer businesses. We like businesses that have a high service component to them and businesses where we can build and defend a revenue stream for a period of time.

In markets like this, you often think there are opportunities. But I think you've really got to think beyond the obvious and say is this an opportunity worth getting into because you're probably are going to make money for the next six or 12 months but what then?

We've looked a lot of those opportunities and we've just said we just don't think this is a defensible business for a company of our size and capabilities. And you know, it's all great making money for six or 12 months, but we want to build a business.

So there are a lot of things we've looked at and haven't passed muster with us. So we tend to be quite picky and we're also very patient.

So we're going to wait for the right opportunities that fit with our strategy. And if we don't, I think our core businesses are going to grow in this current environment at a very high rate and we have managed to pull off compound growth in revenues in excess of 50% over the last six years and we think we can carry on doing that.

(Operator Instructions) Margaret Katri.

I was interested just to hear the reasons why the joint venture with Consilium is no longer going forward. Could you just expand on that?

From our point of view, this was a business that ramped up very rapidly during 2008 -- 2007, 2008. And the real driving force for that was a subadvisory agreement that Consilium had originally with AmEx bank but that division or business was sold to StanChart.

So what happened it was a seed cap that was owned by StanChart that was really responsible for gathering the assets and we were managing certain share classes within that seed cap so it was a great arrangement for us. They raised the money, we managed it. We had sort of outsourced the capital raising side of the business.

It wasn't sort of two and 20 type money. It was more sort of mutual fund type pay scales with a bit of an incentive fee. That's really ramped our assets up very dramatically.

And in the turmoil, unfortunately we got hit sort of I suppose maybe unfairly because our funds had performed very well and people tended to sell what they were in the money on rather than what they lost money on initially. And secondly, all of those seed caps had daily liquidity. Whereas people were locked up in some hedge funds, this represented sort of ready money.

So there was a massive outflow. Some of the funds got gated by StanChart and in fact, StanChart has now wound that business down and sort of sold the remnants of it. So the sort of whole basis for our asset gathering was sort of out of our control and you know has sort of ended.

So it's left us a fairly small business which has to rebuild itself. And I think in the discussions with the individuals, they have done a great job. They've got great track records. I think it's a very difficult environment going forward and I think it's sort of a long haul to rebuild that business and maybe they'll do it very quickly. I'm not sure.

But I think our view was that if we can't provide significant amounts of seed capital to get them to the next level, which we couldn't -- I mean we sort of prudently wanted to deploy our capital elsewhere. There was no real value added for us being part of that joint venture.

And on the other hand, if it remains a small business, it's sort of unfair for us to sit there and sort of collect 50% of what gets made because we're just not adding a lot of value. It seemed to us the combination of unlucky circumstances, market conditions and the environment going forward and sort of our focus and where we wanted to put our capital just seemed like it was a good opportunity to redeem the joint venture and we wish those guys well. I hope they're very successful and we know them very well and I think they will be very successful. Make sense?

(Operator Instructions)

Are there any other questions waiting Anita?

There are no further questions.

Okay, well I think we can wrap it up then. Thanks everyone for participating and we will see you in three months. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, this has concluded today's conference call. You may now disconnect your lines.