StoneX Group Inc (SNEX) 2014 Q2 法說會逐字稿

Good day and welcome to the INTL FCStone, Inc. 2014 second-quarter earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference 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 second quarter ending March 31, 2014. After the market close yesterday, we issued a press release reporting our results for the fiscal second 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 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 Commodities segment. 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 but Physical Commodities inventory at the lower of cost or market value, may have a significant temporary impact on our reported earnings.

Under GAAP, gains and losses on Commodities inventory and derivatives which the Company intends to be offsetting are often not recognized in -- are often 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 Commodities segment and therefore of 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 filings should review the selected financial information within Item 2, management's discussion and analysis of financial condition 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 are 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 second-quarter earnings call. As we mentioned during the last call, we saw some of the cyclical headwinds we have been experiencing for the last 18 months or so start to abate, especially on the grain side where we are now in a more normal weather cycle.

We had some positive market conditions in certain of the soft and energy markets this quarter where volatility picked up nicely, driving customer activity. For the quarter overall, we had record adjusted revenues of $129 million, up 12% from a year ago. We continue to keep nonvariable costs under control, despite strong legal and compliance pressures.

The net result was a strongly improved earnings compared to a year ago when we were in the middle of pretty severe headwinds. For the quarter on a continuing operation basis, we recorded net earnings of $7.4 million, which was up significantly from a year ago, and close to 9% on an ROE basis for the quarter; still below our target but starting to head in the right direction.

Our six months year-to-date results are not directly comparable to the prior-year period, due to the gains we made in the prior period on the sale of our shares in LME and Kansas City Board of Trade shares. Excluding these items, our adjusted net income for the year to date was up around [90%].

I will give you some brief highlights in each of our segments, and Bill will provide more detail shortly. I will also briefly discuss the new segment formats in a moment.

Firstly, Commercial Hedging, our largest segment, recorded revenues up 23% for the quarter, and the segment income up 69% for the quarter. Strong increase in activity across the board with futures transactional volumes up 14% and OTC volumes up 9%. This revenue increase was due to a more normal grain market. A good quarter for [soft swim] market volatility provided some exceptional market opportunities. Our energy and LME business all showed strong growth.

Overall, we are pleased with better results in the segment, and while some of the soft market opportunity we saw this quarter may not be repeatable, we still see further potential for our Brazil business which is still operating way below where it should be.

Global Payments showed an increase of 38% off the back of a 22% increase in transactional volume, as we continue to see increased volumes from our banks and institutional customers ramp up. This translated into a strong increase in segment income of 37% for the quarter.

Securities had a slower quarter with revenues down 4%, due to slower markets in Brazil and Argentina and margin compression in our key equities market-making business. We have made a number of small bolt-on acquisitions which we are still in the ramp-up stage for us. The combination of increased costs and reduced revenues led to a 30% decline in segment income.

Physical Commodities reported an 18% decline in adjusted operating revenues, which translated into better segment income through, although still fairly marginal and significantly below the historic run rates, for both precious metals and the ag side of this business. We have spent some time restructuring and reengineering this activity, particularly on the precious metals side and hopefully, we should start to see better results in due course.

On Clearing and Execution Services, we showed flat operating revenues for the quarter, but better segment income due to good cost control. Volumes were down 3%, but average pricing increased, hopefully the beginning of an industry trend.

So in summary, better overall market conditions, overall increased activities, and increased revenues combined with cost control delivered a much better bottom-line result. We certainly benefited from some positive market events and in certain sectors. But that said, we do not believe that we are firing on all cylinders yet. Management is focused on getting all parts of our business to deliver on its underlying potential.

We have a unique platform and I believe we are well placed to benefit from a continuing consolidation in our industry, driven by higher regulatory demands at the low end and a refocusing of larger banks at the high end. Bill will take you through each of these business segments in more detail.

Starting with this quarter, we have made some substantive changes to our reporting format to provide better and more detailed information. We have redefined our segments as a result of the growth and change in our businesses, and also have provided some operational and transactional data points for our key businesses.

Hopefully, this provides greater clarity and understanding of our various businesses, and allows all of our owners to fully appreciate and perhaps more appropriately value our various activities.

In terms of our segment changes, the new Commercial Hedging segment replaces what was previously known as the CRM segment. This really now encompasses all of our high-touch, high value-add commercial hedging and risk management relationships across all verticals, from grains to energy to foreign exchange.

We deliver a wide range of products to these customers, from exchange-traded contracts to advisory services to OTC and structured products. This is a high-margin service business.

Our second segment, Global Payments business, has been broken off separately, as we think this business has now gained sufficient scale and has sufficiently different operating metrics customers and valuation metrics than our other activities.

The Securities segment remains unchanged, except we have added in the asset management business to the segment to join equities, debt trading and investment banking businesses that have all historically been included under Securities.

Physical Commodities activities in both precious metals and agricultural and soft commodities markets are now grouped together.

Clearing and Prime Brokerage activities have been grouped together. This includes our lower margin clearing activity as well as the FX Prime Brokerage business. Both of these activities are lower margin activities where interest rates have a material impact on earnings.

We now also provide a table setting out key transactional metrics for the business in the earnings release and the additional data points provided in the 10-Q under each of the segmental discussions.

I will now hand over to Bill Dunaway for a discussion of the financial results.

Thank you, Sean. Sean has discussed both the operating segment reorganization and the inclusion of the selected data in our 10-Q filing. There is one additional item of note for the quarter. During the second quarter of last year as a result of the change in the management strategy in our base metals product line, we elected to pursue an exit of our physical base metals businesses.

We completed the exit of the physical base metals business during the second quarter of fiscal 2014. As such, we have re-classed the physical base metals activities in the financial statements for all periods presented as discontinued operations. We continue to operate the portion of our base metals business related to nonphysical assets, conducted primarily through the LME, and this is reported in our Commercial Hedging segment.

I would like to start my discussion with a review of the quarterly results, and will refer to the fourth page of the slide presentation titled quarterly financial dashboard. We experienced record adjusted operating revenues during the second quarter of 2014 of $128.6 million, a 12% increase from the prior year, driven by strong performance in both our Commercial Hedging and Global Payments segments.

As shown in the selected data table on our earnings release, all of the key transactional metrics increased versus the prior year with the exception of precious metals volumes and overall exchange traded volumes. However, as Sean mentioned, overall exchange traded revenues actually increased over the prior year.

Interest income on customer deposits remained constrained by historically low short-term interest rates. However, average customer equity which drives the interest income for us increased 7% to $1.7 billion compared to the prior year, driven by the increase in our customer volumes. The adjusted net income from continuing operations for the second quarter was $7.4 million versus $1.6 million in the prior-year period.

Looking at our operational segments, Commercial Hedging segment operating revenues increased 23% to $63.8 million in the second quarter compared to the prior year. In this segment, we serve our commercial clients through our team of risk management consultants, providing a high value-added service that we believe differentiates us from our competitors and maximizes the opportunity to retain our clients.

These services span virtually all traded commodities, with the largest concentrations in grains, energy and renewable fuels, coffee, sugar, cotton and foodservice, as well as base metal products listed on the LME.

As Sean mentioned earlier, the increase in our core Commercial Hedging operating revenues was primarily the result of an increase in both exchange traded and OTC customer volumes, driven by improving domestic agricultural markets as well as increased customer activity and volatility in the ethanol and global coffee markets. In addition, our LME metals business experienced continued volume growth and had a second consecutive quarter of record operating revenues at $10.1 million, partially attributed to expansion in the Far East markets.

Overall, Commercial Hedging segment income increased 69% to $22.6 million for the second quarter, driven by the increase in operating revenues partially offset by higher introducing broker expenses.

Operating revenues in our Global Payments segment experienced strong growth compared to the prior year, with operating revenues of $12.8 million nearly matching the record levels of first quarter of 2014, which is typically the strongest quarter of the fiscal year for this segment. This sustained growth is the result of continued acquisition of commercial bank clients and the successful implementation of a new back-office platform, which enables us to process increased volumes, including smaller notional payments, without requiring the hiring of additional support personnel.

Overall, Global Payments segment income increased 37% to $6.3 million for the second quarter, driven by the increase in operating revenues partially offset by the higher introducing broker expenses.

Operating revenues in the Securities segment decreased 4% compared to the prior year to $17.2 million in the second quarter. Operating revenues declined as increased revenues in the asset management business in Argentina were more than offset by declines in equity market-making and debt trading product lines, while investment banking revenues were flat with the prior year.

Equity market-making revenues declined 2% compared to the prior year, as a 25% increase in gross dollar volume was more than offset by a decline in the revenue per $100 traded. Difficult market conditions in South America was also a driver of the lower equity revenues, as well as lower debt trading revenues. However, those same conditions helped drive an increase in our asset management revenues out of Argentina where average assets under management increased 15% to $516 million.

Segment income decreased 30% to $3.8 million in the second quarter compared to $5.4 million in the prior year, primarily as a result of the decline in operating revenue.

Physical Commodities segment adjusted operating revenues decreased $1 million to $4.5 million in the second quarter. This segment consists of our physical precious metals trading and physical agriculture and energy commodity businesses. In precious metals, we provide a full range of trading and hedging capabilities, including OTC products to select producers, consumers and investors.

Our physical agriculture and energy commodity business provides financing to commercial commodity related companies against physical inventories including grain, lumber, meat, energy products and renewable fuels. Additionally, we engage it as a principal in the physical purchase in sales transactions related to inputs in the renewable fuels and feed ingredient industries.

The decline in operating revenue was primarily driven by an $800,000 decrease in our physical agriculture and energy commodity business. Precious metals adjusted operating revenues were relatively flat despite a 17% decline in the number of ounces traded.

Adjusted segment income increased 38% to $1.1 million in the second quarter compared to $800,000 in the prior year. This increase despite the lower revenues was a result of lower variable compensation as a result of the mix of business in the quarter.

Clearing and Execution Services operating revenue were relatively flat at $30.9 million in the second quarter. In this segment, we seek to provide competitive and efficient clearing and execution of exchange traded futures and options for the institutional and professional trader market segments, as well as providing prime brokerage foreign exchange services to financial institutions and professional traders.

Commission and Clearing fee revenue increased 5% to $25.7 million in the second quarter, despite a 3% decrease in exchange traded volume, as our average rate per contract improved over the prior-year period. Interest income remained constrained in this second quarter. However, customer segregated equity increased 32% to $897 million.

Operating revenues in our customer prime brokerage product line decreased 20% to $4.5 million in the quarter, despite a 45% increase in foreign exchange volumes as a result of declining spreads and lower performance on our arbitrage desk. Our foreign exchange arbitrage desk arbitrages the cash versus the exchange traded market.

Segment income increased to $2.1 million in the second quarter compared to $1.7 million in the prior year, primarily as the result of the increase in commissions and clearing fee revenues, partially offset by an increase in introducing broker commissions.

Moving on to noninterest expenses, they were $116.1 million for the second quarter, which was a 4% increase over the prior year, and 56% of these expenses were variable in nature. Transaction-based clearing expenses decreased 3% in the second quarter as a result of lower transactional charges in our Global Payments and FX Prime Brokerage activities, while introducing broker commissions increased $3.2 million in the second quarter and were 10% of adjusted operating revenues in the second quarter compared to 8% in the prior year.

The increase is primarily due to the addition of several new introducing broker relationships, particularly in our CES segment, as well as increased activity in our Global Payments and Commercial Hedging segments, and an increase in investment banking revenues which have an introducing broker associated with them.

Compensation and benefits expenses increased 3% to $52.7 million, with the variable portion of compensation or benefits increasing 9% to $24.6 million in the second quarter as a result of the increase in adjusted operating revenues. The fixed portion of compensation and benefits decreased 1% to $28.1 million in the second quarter.

Other non-compensation expenses increased 3% to $22.9 million in the second quarter, as a result of increases in communication and data services, professional fees, which was partially offset by lower depreciation and amortization expenses, primarily due to decreases in depreciation of technology equipment and amortization of intangible assets.

Interest expenses increased to $2.8 million in the second quarter compared to $1.6 million in the prior year. This increase is primarily related to the coupon interest and amortization of related debt financing costs, which aggregate to $1.1 million per quarter related to our offering of 8.5% senior notes due July 2020, completing during the fourth quarter of fiscal 2013.

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 below that target at 8.7%, which was a significant improvement over the 2.1% achieved in the prior year.

We target to recognize $500,000 in annualized revenue across the entire employee base, and for the second period, second quarter, this metric was $465,000 per employee as compared to $417,000 for the prior year.

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 second quarter of 2014, the Company repurchased 323,000 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 5% in the book value per share, closing out the quarter at $17.85 per share.

Two final notes. With regards to the year-to-date results for the six months ended March 31, 2014, adjusted net income was $8.5 million compared to $10.2 million in the prior year. I wanted to point out that the prior-year six-month period included a $5.8 million after-tax gain on the sale of our LME and Kansas City Board of Trade shares.

In addition, with regards to the remediation of the previously reported material weakness, we have completed our testing of the design and operating effectiveness of the new procedures implemented and have concluded that we have remediated the previous identified material weakness as of March 31, 2014.

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

Thanks, Bill. We have been through a difficult and tumultuous period in our industry. We have chosen to invest and expand and broaden our capabilities, products and services. We have also faced the changing regulatory landscape head-on. We are one of the first companies to invest in upgrading our regulatory framework to allow us to offer our customers an unparalleled capability. Others chose to retreat or become providers of more limited products and services.

As the industry starts to return to normal, we deftly see ourselves as a stable, well-capitalized franchise with a unique platform and capability in a consolidating marketplace. There is hardly a month goes by without us seeing a large player exiting from one of our core markets. Almost every large bank has now exited some part of their commodities activity, and many have exited some portion of their securities or FX activities as well.

All of this is good news for us, and we are well placed to pick up customers and relationships which will further serve to drive our growth in revenues. In our industry, our short-term results are critically affected by customer activity which in turn is driven by market variables such as economic activity, price levels and price volatility.

Ultimately, we cannot control these market forces and the impact on our short-term results, but we can focus on serving our customers, growing our footprint and controlling our costs. And these things will drive our long-term return to shareholders. These are the factors that the management team is focused on.

With that, I would like to turn it back to the operator and see if we have any questions. Operator?

(Operator Instructions). We have no questions at this time.

Okay. Well, we will leave it there. So thanks, everybody, thanks for listening, and we will speak to you again in a quarter's time. Thank you.

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