StoneX Group Inc (SNEX) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the INTL FCStone Q1 fiscal year 2014 earnings conference. Today's conference is being recorded. At this time, I'd like to turn the call over to Mr. Bill Dunaway. Please go ahead, sir.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone. Welcome to our earnings conference call for our fiscal first quarter ended December 31, 2013.

After the market closed yesterday, we issued a press release reporting our results for the fiscal first quarter. This release is available on our website at www.INTLFCStone.com as well as a slide presentation which we will refer to on this call and our discussions of our quarterly results.

You will need to sign on to the live webcast in order to view the presentation. Both the presentation and an archive of the webcast will also be available on our website after the call's conclusion.

Before getting underway, I'd like to cover a couple of housekeeping items. On these conference calls and in the management discussion portions of our SEC filings, we present financial information on a non-GAAP basis in order to take into account marked-to-market adjustments in our physical commodity product lines, which are included in both our CRM and other segments.

As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the US, which I will refer to as GAAP, to carry derivatives at fair market value of physical commodities inventory at the lower cost to market value may have a significant temporary impact on our reported earnings. Under GAAP, gains and losses on commodities inventory derivatives which the Company intends to be offsetting are recognized in different periods.

Additionally in certain circumstances, GAAP does not permit us to reflect changes in estimated values of forward commitments to purchase and sell commodities. For this reason we believe that the GAAP numbers do not reflect the commercial results of our physical commodity product lines and, therefore, the Company as a whole. Instead, we assess all of our businesses, as do our banks, on a fully marked-to-market basis in our daily and monthly internal financial reporting.

Readers of our Form 10-Q should review the selective summary financial information within Item 2, Management's Discussion and Analysis of Financial Conditions and Results of Operations, for a summary of both GAAP and non-GAAP information. This section also gives the reconciliation between GAAP and non-GAAP information required by the SEC.

Please note that whenever we talk about an adjusted number on this call we're talking about a non-GAAP number.

Secondly, we are required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto, as well as the Form 10-Q filed with the SEC.

This discussion may contain forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act of 1934. These forward-looking statements 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 will now turn the call over to Sean O'Connor, the Company's Chief Executive Officer.

Thanks, Bill, and good morning, everyone, and welcome to our fiscal 2014 first-quarter earnings call.

Market conditions during much of the quarter were relatively unchanged and remained difficult as they had been for much of the prior 12 to 18 months. However, towards the end of the quarter and continuing into the current quarter, we have started to see some modest improvement in the general market environment. Volatility has increased, likely as the result of the Fed tapering and we believe that cyclical effects of the grain market have now started to turn.

In addition, we now have some stability around the regulatory environments and sometimes to make the changes required and can now turn our attention back to growing our customer base in revenues. It may be a bit too early to call for good weather, but certainly the skies seem to be clearing.

Turning to the numbers, I would like to start by pointing out that a year ago we had a number of significant nonrecurring items which significantly affects the comparison with the current quarter. This included the gain on the LME shares, (inaudible) deep water trade [seats] as well as the CFTC fine. In aggregate, these amounted to a net pretax gain of $7.7 million in the prior quarter.

Excluding these items the current quarter was roughly compiled of both a year ago and the most recent fourth quarter. Unfortunately, it is a disappointing result in light of our progress, although we remain profitable.

Our aggregate costs excluding transactional costs and interest were almost exactly the same as a year ago and around $3 million below the fourth quarter. As we mentioned on the previous call, management has been putting serious focus on cost, and despite regulatory pressures and some modest acquisition and growth initiatives, we have managed to keep costs in check.

Looking at our business segments, we had continued strong growth in the Securities segment revenues, up 36% over last year while the immediately preceding fourth quarter had been up 66% versus the prior year. Securities revenues were slightly below on a sequentially quarterly basis.

Continued strong growth in our FX and global payment segments, up 13% over last year while in the immediately preceding quarter they had been up 3% versus the prior year. These revenues were up 17% on a sequentially quarterly basis.

Our global payments business, which resides in our FX and global payments segments, had an all-time record quarter with revenues up 31% on a sequential quarterly basis and segment net income up substantially over the prior year.

Our clearing and execution business was up 6% this quarter and up 10% last quarter versus the prior period. That was down 6% on a sequential basis.

Our core commodities business, which we have talked about numerous times in the last couple of conference calls, which is our largest, was again down 7% for the quarter and last quarter was down 30% versus the prior year. Sequentially this business was down 1% and we believe has now largely bottomed out and should start picking up with the cyclical factors now working their way through the system.

Our LME business had a record quarter, with revenues up 23% on a sequentially quarterly basis and up 13% compared to a year ago.

So in summary, we have a number of bright spots and signs that the key cyclical headwinds that have been affecting us for the last 12 to 18 months may be starting to turn.

As we did on the last conference call, I would like to take some time to highlight one of our business units that we often do not spend much time talking about in these calls. Our securities trading business has been making significant strides during the last 18 months to broaden its product offerings, expand its customer base, and while most securities trading businesses seem to be struggling, we are showing strong growth in revenues: up 66% on the prior year in Q4 and up 36% in the prior year and the current quarter.

To our registered broker dealer, INTL FCStone Securities Inc., we provide a complete suite of execution services and securities. In line with our corporate strategy of focusing on niche opportunities, we focus on providing value-added solutions that facilitate cross-border trading which is more complex and involves foreign exchange as well as local understanding of market convention, liquidity, and settlement protocols. Our customers include the US-based regional and national broker-dealers and institutions investing or executing customer transactions in international markets, as well as foreign institutions seeking access in the US securities markets. We also have a broker-dealer in Argentina where we are active in providing institutional executions in the local capital markets.

In the US, we are one of the leading market makers in foreign securities including unlisted ADRs and foreign ordinary shares. The Company makes markets in approximately 800 ADRs and foreign ordinary shares in the OTC markets and will on request make prices in more than 8,000 ADRs in foreign common shares.

We were recently rated top market maker in over 2,000 security issues, according to Bloomberg.

We also provide a wide range of execution services across asset classes including fixed income, equities, and ETFs for domestic and internationally based financial services organizations on a commission basis. We also provide prime brokerage and piggyback clearing for international customers.

This business started 12 years ago as a specialist market-making analyst of ADRs and gained a reputation as a leading franchise in this market niche, servicing the largest financial organizations in the US. More recently, we have been able to leverage this franchise and these customer relationships into a more broadly based, high-touch agency execution model for international institutions.

Increasingly, mid-size international institutions are faced with more complex and costly US regulations and fewer mid-market domestic financial institutions able to service their needs, both on the execution side as well as on the clearing and prime brokerage side. We saw this as an opportunity to fill this customer need by leveraging our existing securities capabilities into more broadly based mid-market financial franchise, servicing these mid-sized foreign institutions.

The acquisition of Tradewire just over a year ago accelerated this transition bringing in-house relationships with the leading financial organizations in Latin America. The recent addition of our clearing services capability will further cement these relationships with these customers.

The global securities markets are large and have been subject to declining margins due to cheaper and more easily available technology providing Direct Market Access, commonly called DMA, leading to just intermediation of the traditional equity brokerage model. We believe that regulatory pressures and related costs combined with customers' desire to reduce trading counterparties will lead to continued consolidation and rationalization in the industry.

Our strategy in this environment is to continue to act as a liquidity provider and market maker in less liquid markets and to provide key customer niches with a high-touch, value-added service to facilitate their executions across asset classes.

We are very excited about our securities business. I think the team has done a fantastic job in expanding this franchise and its customer footprint in a difficult market environment.

So with that, I will hand over to Bill for a more detailed discussion of the financial results. Bill?

Thank you, Sean. I'd like to start my discussion with the review of the quarterly results and refer to the fourth page of the slide presentation, titled Quarterly Financial Dashboard. This slide lays out the quarterly operating results as well as the related balance sheet information in comparison to the prior-year period as well as, in some cases, the internal target which management has for our operating results.

Adjusted operating revenues decreased 4% to $111.3 million in the first quarter compared to $116.5 million in the prior year. The prior-year period benefited from a $9.2 million realized gain on the sale of our shares in the LME and Kansas City Board of Trade so excluding this gain, revenues increased $4 million or 3% as compared to the prior year.

Adjusted operating revenues decreased 2% from the $113.8 million recorded in the fourth quarter of 2013. Adjusted operating revenues declined in the core CRM segment as well as our other segments. However, all other segments of the Company experienced growth in adjusted operating revenues in the first quarter as compared to the prior year, highlighted by a 36% increase in adjusted operating revenues in our Securities segment.

Looking at our revenues on a segmental basis, adjusted operating revenues in our commodity and risk management services segment decreased 7% to $47.6 million in the first quarter compared to $51.4 million in the prior year. Adjusted operating revenues were relatively flat with the $48.1 million recognized in the fourth quarter of 2013.

Our CRM segment is further broken down into three product lines: soft commodities, precious metals, and base metals. Starting with soft commodities, operating revenues decreased 11% to $35.9 million in the first quarter compared to $40.5 million in the prior year. Fourth-quarter 2013 revenues were $38.5 million.

Exchange-traded contract volumes decreased 6% while OTC contract volumes increased 9%, respectively, over the prior-year period. Despite the decrease in exchange-traded contract volumes primarily driven by diminished hedging volumes for our domestic grain customers, commission and clearing fee revenues increased 4% to $16.5 million in the first quarter. The decline in soft commodities operating revenues is primarily driven by a $4.6 million decrease in overall OTC revenues, mainly in the Brazilian markets as the increased OTC volumes are more than offset by lower revenue recognized per transaction driven by lower commodity volatility.

Average investable client balances declined 25% versus the prior year to $790 million as the overall agricultural industry volumes in margin requirements are lower as compared to the prior year.

An 11% decline in the number of ounces traded drove a modest decline in adjusted operating revenues in our precious metals product line to $2.5 million for the first quarter as compared to $2.6 million in the prior year.

Fourth-quarter adjusted operating revenues were $2.6 million. As a result of our planned exit of the physical base metals business I want to separate the results of our physical base metals business from that of our nonphysical hedging business on the London Metals Exchange.

Adjusted operating revenues in the physical base metals business were $500,000 in the first quarter, which was flat with the prior year. In the second quarter of fiscal 2014, we will complete the exit of the physical base metals business and report the historical results of this business under discontinued operations. The exit from the physical base metals business will leave our LME metals operations unaffected. Operating revenues in this business increased 13% to a record $8.7 million in the first quarter as compared to $7.7 million in the prior year. This also represented a 23% increase over fourth-quarter 2013 revenues of $7 million.

Moving on to the foreign-exchange segment, operating revenues increased 13% to $18.3 million as compared to $16.2 million in the prior year. This also represented a 17% increase over fourth-quarter 2013 revenues of $15.6 million.

Operating revenues in our global payments product line, which Sean highlighted on our fourth-quarter earnings call, increased 34% to a record $13.6 million in the first quarter as compared to $10.1 million in the prior year. This also represents a 31% increase over fourth-quarter [2014] revenues of $10.4 million.

Operating revenues from customer foreign currency hedging activity decreased 28% to $1.5 million compared to $2.1 million in the prior year driven by lower volumes in the Brazilian market tied to lower commodity hedging in that region.

Operating revenues in the customer prime brokerage product line decreased $300,000 to $1.8 million in the first quarter as compared to the prior year. The proprietary foreign-exchange arbitrage desk, which arbitrages the cash versus the exchange traded market, experienced a 26% decrease in operating revenues to $1.4 million as compared to the prior year.

In our Securities segment, operating revenues increased by 36% to $17.6 million in the first quarter compared to $12.9 million in the prior year. This represents a 4% decrease over fourth-quarter revenues of $18.4 million. This segment includes two product lines, the equity market-making business and the debt capital markets. Operating revenues in the equities market-making product line increased 32% to $10.2 million in the first quarter compared to $7.7 million in the prior year. This did, however, represent a 17% decline as compared to the fourth-quarter 2013 revenues of $12.2 million.

Operating revenues in our debt capital markets product line, which includes both investment banking activities as well as debt trading, increased 44% to $7.5 million in the first quarter compared to $5.2 million in the prior year. This was a 21% increase over the $6.2 million recognized in the fourth quarter of 2013.

In the Clearing and Execution Services segment, operating revenues increased 6% to $23.8 million in the first quarter compared to $22.4 million in the prior year. So, it represented a 6% decrease versus a $25.2 million in adjusted operating revenues in the fourth quarter of 2013. Revenues increased over the prior year despite a 2% drop in exchange-traded volumes with an increase in the commission rate per contract offset this decline in volumes. Average investable client balances in the current period increased 35% as compared to the prior year to $915 million. Interest income has continued to be constrained by historically low short-term interest rates.

Adjusted operating revenues in our other segment, which contains both our asset management and commodity origination and financing product lines, decreased 10% to $4.4 million in the first quarter compared to $4.9 million in the prior year. Adjusted operating revenues were $6.7 million in the fourth quarter of 2013. Operating revenues in the asset management product line increased $2 million to $3.8 million in the first quarter compared to $1.8 million in the prior year. Adjusted operating revenues in the commodity, financing, and origination product line declined $2.5 million to $600,000 compared to $3.1 million in the prior year.

Take this slide number 4 of the dashboard, noninterest expenses were $106.7 million for the first quarter of 2014, which was a 3% increase as compared to the $103.4 million in the first quarter of last year. This increase was primarily driven by a $3.9 million increase in variable clearing and related expenses and introducing broker commissions. This represented a 5% decrease compared to the $112.2 million in the fourth quarter of 2013.

Internally, the Company targets to keep variable expenses as a percentage of total expenses in excess of 50%. During the current period the majority of the noninterest expenses were variable with 54% of total noninterest expenses being variable in nature as compared to 51% in the prior-year period. Non-variable expenses include fixed expenses as well as bad debt and impairments. During the first quarters of both 2013 and 2014, we recorded no significant bad debt or impairments.

Fixed expenses were $49.4 million in the first quarter of 2014, which represents a $1.4 million decrease compared to the prior-year period. Fixed expenses were $50.6 million in the fourth quarter of 2013.

The Company targets to keep total compensation expense as a percentage of adjusted operating revenue at less than 40%. And for the first quarter of 2014 we are above this goal at 41.7%, primarily as a result of the aggregate level of operating revenues. In the prior-year period, compensation and benefits were 40.1% of adjusted operating revenues.

Compensation and benefits expense decreased 1% to $46.4 million compared to $46.7 million in the prior year. The variable portion of compensation and benefits increased 4% to $20.5 million in the first quarter compared to $19.7 million in the prior year as a result of the increase in adjusted operating revenues net of the share sale in the prior year which had no variable compensation related to it. The fixed portion of compensation and benefits decreased $1.1 million to $25.9 million in the current period.

The average number of employees increased to 1,098 for the first quarter of 2014 as compared to 1,086 in the prior-year period.

Our second-largest expense is clearing and related costs which increased 2% compared to the prior-year period to $25.2 million. This increase was primarily driven by higher ADR conversion in exchange season and the Securities segment activity resulting from the acquisition of the accounts of Tradewire Securities during the prior-year period.

The adjusted net income from continuing operations for the first quarter was $1.2 million versus $7.5 million in the prior-year period. As mentioned before, the prior-year period benefited from the $9.2 million realized gain on the sale of our shares in the LME and Kansas City Board of Trade, which was $6.9 million on an after-tax basis.

Over the long term, the Company looks to achieve a minimum return on equity of 15% or greater on its adjusted stockholders' equity, and for the current period the Company was well below that target at 1.4%. The ROE for the prior-year period was 9.3%.

Total assets on the balance sheet decreased 6% to $2.7 billion while adjusted stockholders' equity closed the period at $338.7 million, a 5% increase over the prior year.

Another key metric the Company focuses on is keeping a one-to-one ratio between revenue-generating employees and administrative or operations employees. Along these lines, the Company targets to have at least $500,000 in annualized revenues across the entire employee base. For the current period, this metric was $406,000 per employee as compared to $429,000 for the prior-year period.

On December 11, 2013, the Company's Board of Directors replaced its previously authorized share repurchase plan. Under the new plan the Company may repurchase up to 1.5 million shares of its outstanding common stock. During the first quarter of 2014, the Company repurchased 63,800 shares of its outstanding common stock in open market transactions.

Finally, in closing out the review of the quarterly results, the trailing 12-month results have led to an increase of 4% in the book value per share, closing out the quarter at $17.66 per share.

With that, I would like to turn it back to Sean to wrap up.

Thanks, Bill. Despite the difficult markets, we have a number of businesses that are showing exceptional growth in hitting new records regularly. The cyclical headwinds that have affected our largest commodity business are now abating and perhaps turning. Increased volatility drives customer activity in all our businesses and our withdrawal from the markets by the Fed would seem to imply more volatility ahead.

So not yet exactly a tailwind, but it seems the winds are no longer head-on for us.

We have taken on board some comment from our shareholders about providing clearer, more detailed descriptions of our business to enable investors to better understand what we do and how we make our money. To this end, we will be revising and improving on the information we provide to our investors with the goal to provide better insight into this diverse global financial services company which we have built over the last 10 years.

With that, I would like to turn it back to the operator to open the question-and-answer session. Operator?

(Operator Instructions)

All right. Well, it doesn't seem like we have any questions so --.

I am sorry, sir. We do have some questions.

Okay. Go ahead.

Russell Mollen, Bares Capital.

Sean, a quick question for you. Is there any more detail you can provide on this recent announcement of the resignation of the CEO of FCStone?

Well, firstly, that press article was totally erroneous, so I think you should just disregard that. And secondly, I would refer you to our 8-K announcement. There's really not a lot else we can say about that. It was a mutual decision and refer to our 8-K.

Got it, okay.

(Operator Instructions) Will Settle, Woodmont Investment.

You mentioned improving conditions that you have had the volatility, et cetera. So is it safe to say that the write-off from last year and the late filing 10-K has not impacted customer activity?

Sorry, I am struggling to hear you, Will. Are you saying the delay in filing?

Yes, have you seen any fallout from having to delay the filing of the 10-K and restate the numbers?

There was definitely some short-term impact from customers from delaying our filings. We had -- as I think I discussed on the last call, we did have some customers who called us, particularly larger customers who tend to be more credit-sensitive, called us wanting to understand what was going on.

Very hard for us to know exactly what revenue impact that had, because you're not sure that people had done their trades for a period of time so they sort of have less exposure to you while they were assessing the situation or not. Not really sure that we can analyze that with any great insight, but I think once we filed, all our customers are dealing with us and I don't think there has been any long-lasting damage as a result of that. I think all of our customers are with us and it was only a few high-profile customers that had some concerns and wanted to understand what was going on.

And I think we are, again, really very comfortable with the answers we gave them. But I am sure there is some impact -- very hard for us to assess what that impact is in dollars and cents.

Okay, Great. And just secondly, on your last call, you gave lots of interesting detail around electronic payments business that you built out over the years. Any update, new wins, traction you can share with us on that front?

No, other than the soundbite I gave you. And I think in Bill's commentary he gave you a little bit more detail. But that business -- hold on, I am trying to find my notes now -- on a sequential basis, I think the revenue was up like 36%.

Sean, it was over -- over the prior year it was up 34%, Will. And over the prior quarter comparing this quarter versus the fourth quarter, it was up 31%. So it was up about $3.2 million over the most recent quarter here that we had in the fourth.

And total --

-- about $13.6 million.

And given what we chatted about last time, that we had put a lot of technology into that business to make it a more robust and scalable infrastructure, and I think you can make the assumption that a lot of that incremental revenue starts to drop to the bottom line. So when you start having growth of that sort of order of magnitude, it starts to become profitable very quickly.

I would caution, though, that the December quarter, so our first quarter, the one we just reported on, tends to be a good quarter for that business. It is year end, a lot of people are pushing payments out, truing up -- particularly in the [NGL] community, in the non-for-profit they are using up budgets, making sure they are truing up stuff. You have also got a lot of holiday-related payments that happen.

So it is a busy quarter. So I am not sure that one should initially annualize their quarterly quarter. But it is significant that was much higher than the prior year. So even if you look at it on a Q1 to Q1 basis, it was still up 30%. And it was nice sequential growth.

So any way you look at it, it was great growth. I just want to caution you that the Q1 is a strong quarter for them generally.

Okay. Thank you very much.

And gentlemen, we have no further questions. I will turn the call back to you for any additional or closing remarks.

No, I have nothing else. So thanks very much for your time and we will speak to you in two months. Thanks.

Thank you. And that does conclude today's conference. Thank you for your participation.