StoneX Group Inc (SNEX) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the INTL FCStone fiscal year 2015 first quarter earnings call.

(Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today's call, Mr. Bill Dunaway. You may begin.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone. Welcome to our earnings conference call for the fiscal first quarter ending December 31, 2014.

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 in our discussions of our quarterly results. You'll need to sign on to the live Web cast 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, 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 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 Chief Executive Officer.

Thanks, Bill, and good morning, everyone, and welcome to our fiscal 2015 first-quarter earnings call. As we have mentioned on previous calls, we have had for some time now seen a steady and modest improvement to the overall market conditions and continued industry consolidation. All of this has resulted in a steady improving revenue environment for us.

Around this trend, we do, of course, see some short-term market impacts, which can positively or negatively push us off this trend line. During this quarter, we had some good market conditions and increased volatility in certain of our commodity verticals, most obviously energy, and we also had some negative impacts elsewhere, such as in Argentina.

Overall, this was our best quarter in two years. We think this stands in strong contrast to industry earnings reported this quarter, where most banks showed FICC trading revenues down substantially.

We recorded our second consecutive record in quarterly operating revenues, up 22% from a year ago. We realized net earnings of just short of $10 million for the quarter with an EPS of $0.49. Our ROE for the quarter was just short of 11%, a good improvement from previous levels but stood below our long-term target of 15%. Our net income was up 276% from a year ago, and up 62% from the immediately prior quarter.

I'll run through some highlights for the quarter. Bill will do this in more detail later.

The quarter was really all about the commercial hedging segment, which has had a difficult time over the last two years but really came through very strongly for us this quarter. Segment operating revenue was up 50% and segment income was up over 100% versus a year ago, and up 56% from the immediate two preceding quarters. Our exchanged based volumes and revenues were up close to 30%, representing a $7.5 million increase, with strong growth across all verticals, but LME being a stand [out] with revenue up 43% versus a year ago.

There was a more material change in our OTC base revenues in grains and energy verticals, which were up 89% in aggregate or $14.1 million. This revenue increase was driven almost entirely by expansion and spreads due to better market conditions as a result of volatility increasing.

Global payments showed and -- on the quarter a very strong volume growth with payments up 65% from a year ago, although revenue per trade declined by 32%, as we started processing smaller tickets for our bank partners, especially those in the early adoption phase. Physical commodities continue to improve nicely and clearing and execution had a strong quarter, largely off the back of the FX business, which benefited from increased FX volatility and client trading. We see the possibility for consolidation after the FXCM issue and are well placed to benefit from this.

On the negative side, our securities segment had a significant reduction with segment income, down 76% or $5.5 million versus a year ago. The vast majority of this is attributed to our Argentinian trading operation, which had been one of our top performers during 2014.

Strong intervention in the local bond market by the government affected us negatively. This impact cost us roughly 2% in ROE for the quarter. A similar result to last year by the Argentian business would have resulted in an ROE of around 14%. I mention this to demonstrate that if all our businesses performed well, we believe that our long-term target of 15% is achievable, even in the current low interest rate environment. We continue to focus on controlling fixed costs, which were up 2% versus a year ago. Variable compensation was up as a result of the increase and mix in operating revenues as well as the overall improved performance.

So overall, much better results I'm glad to see our commercial hedging business is starting to show some good results despite some of our competitors having a difficult time, and even talk of the commodity cycle being over. Here, the increased volatility assisted us but we believe that a nicely improving underlying trend is in place. This is validation of our approach to serve mid-sized customers, especially those requiring a [high-touch] risk management service.

As we discussed last time, we completed the G.X. Clarke acquisition at the beginning of the second quarter, in other words, on January 1st, 2015. We are very pleased with this acquisition, which closes a GAAP in our institutional offerings, being rates and government securities and brings us a deep and diversified client base of over 700 institutional clients that we hope in due course to leverage into other of our products. It is still early days but this business seems to be performing slightly ahead of our original expectations. Going forward, these financial results will be reported as part of our securities segment.

As discussed last time, we have now moved forward to consolidate our U.S. broker-dealer with our U.S.-based FCM and have filed the necessary applications with the various regulators. This is likely to take six to nine months. And once complete should result in a better utilization of capital and give us the ability over time to rationalize systems systems and infrastructure costs.

During the quarter, we continued to enhance our interest earnings from our segregated customer funds through laddered investments and short-term securities, which have added nicely to the net earnings.

I now hand you over to Bill Dunaway for a discussion of the financial results in nor detail. Bill?

Thank you, Sean. I'd like to start my discussion with a review of the quarterly results. I'll be referring to slides in the information we have made available as part of the webcast, specifically starting with slide number 3, which represents a bridge between the first quarter operating revenues from last year to the first quarter of 2015.

As noted on the slide, first quarter revenues were a record $137.5 million, which represents a 22% increase, as compared to the $112.9 million in the first quarter of 2014. As Sean noted, the biggest increase in operating revenues was in our commercial hedging segment, which increased $22.8 million or 50% to a record $68.4 million in the first quarter. This is partially driven by a 30% increase in exchange traded revenues, driven by improved customer activity in the divested grain markets, as well as increase in LME metals volume driven by growth in Chinese customer volumes, new client on boarding, partially as a result of the competitors scaling back as well as increased market volatility. Also driving the increase in commercial hedging revenues was a 89% increase in OTC commodity revenues, despite only a 2% increase in the number of OTC transactions. As the number of structured products traded and a widening of spreads driven by market volatility drove an increase in OTC revenues in both the agricultural and energy renewable fuel space.

The first quarter's performance in the segment was also a strong improvement over the immediately preceding quarter, the fourth quarter of 2014 as revenues increased 15%.

The second largest increase was in our clearing and execution services segment, which increased by $3.7 million to $31.2 million, driven by improved rate per contract earned in our exchange traded business, improved performance in our customer foreign exchange prime brokerage business as a result of the (inaudible) volatility, and a $500,000 increase in interest income.

Global payment segment revenues continue to grow as the number of payments grew by 65%. However, an increase number of smaller payments led to a decline in the average revenue per trade resulting in only 12% growth in operating revenues.

The notable change in the downside was a $4.2 million decline in the securities segment revenues. Equity market-making revenues increased $2.3 million versus the prior year. However, this is more than offset by difficult market conditions in Argentina, which led to a $4.4 million decline in overall debt trading revenues and a modest decline in asset management.

Moving on to slide number 4, which represents a bridge from the first quarter pretax income in 2014 to the current period, the biggest contributor -- the $9.7 million increase in pretax income between the two periods -- was the commercial hedging segment, which increased 106% or $12.8 million. This was also an $8.9 million or 56% increase over the immediately preceding quarter.

Similar to the discussion of operating revenues, the next largest increase in pretax income was a $2.3 million increase in the clearing and execution services segment, as a result of the increases in exchange traded and customers FX prime brokerage revenues, as well as a modest decline in fixed expenses.

The difficult market conditions in Argentina drove the $5.5 million decline in securities segment pretax income, while an increase in variable compensation due to the strong growth in overall company performance partially drove the $1.8 million increase in nonallocated overhead.

This quarter, we have included a new slide -- number 5 -- discussing the interest income and our futures commission merchant or FCM, which holds our customer segregated balances and is the source of the majority of our interest earning assets.

Our average customer segregated customer equity increased 21% to a record $2.1 billion for the first quarter. As discussed during our fourth quarter call, we have begun to take steps to take advantage of the steepening of the shorter end of the yield curve with limited purchases or treasury securities with somewhat longer durations and we plan to make further purchases in the future, along with reimplementing a revised interest rate swap strategy.

Overall interest income increased to $1.7 million or 121% to $3.1 million. This includes both our investment of these customer deposits as well as interest income related to commodity financing, export financing and other activities. The majority of this increase in interest income or $1.1 million was attributable to a 21% increase in customer balances as well as the implementation of this revised interest rate management strategy.

Overall, our portfolio of investments in the FCM averaged to $1.6 billion for the first quarter, earning $1.4 million in interest for an average yield of 35 basis points.

Excluding cash and money market mutual funds, we held approximately $970 million of U.S. Treasury investments at the end of the second quarter or first quarter, which had a weighted average duration of approximately 19 months.

Moving on to slide number 6, our quarterly financial dashboard. I will just highlight a couple of items of note. Variable expenses represented 58.5% of our total expenses for the quarter, and nonvariable expenses which are made of up of both fixed expenses and bad debt expenses increased $900,000 or 2%.

Net income from continuing operations for the first quarter was $9.4 million versus $2.4 million in the prior year quarter. Over the long term, we look to achieve a minimum return on equity of 15% or greater on our stockholders equity. And for the current period the company, we made strides in approaching that target achieving a 10.7% ROE.

Finally, in closing out the review of the quarterly results, the trailing 12-month results have led to increase of 6% in the book value per share closing out the quarter at $18.68 per share.

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

Thanks, Bill. I think this quarter validates our strategy of creating a business with diverse capabilities and revenue streams, which both better serves our growing client base and also protects the bottom line through market cycles. We have seen our commercial hedging whether a long and difficult period where many of our larger competitors have exited the market and some of our peer group continue to have a very tough time and there was even talk of the commodities super cycle being over.

In commodities as with all our businesses, we solve real needs for real clients and have stayed the course. As our recent results show, we have very significant operational leverage in our business model and on the marginal basis, most of our activities yield better than a 50% gross margin. During this current quarter, a 27% increase in net operating revenue led to a 249% increase in pretax income over the same quarter last year.

We believe that over the last six quarters or so, we have seen a gradually improving trend in our results. Of course, short-term market environments and sentiment can push us off the trend line either up or down. Our commodities and FX activities were probably beneficiary this quarter of the good market impact, while our securities business in Argentina had been reversed. But it seems to us a trend is emerging, despite the short-term impact due largely to a slowly improving market conditions and a slowly consolidating industry. The addition of G.X. Clarke, as well as better management of our interest rate exposure should add incremental earnings, which we believe may push that trend line higher.

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

(Operator Instructions) John Dunn, the Sidoti & Company.

Good morning, guys.

Hey, John. How are you? Good morning, John.

Good good. Morning. Could you talk about -- in the global payments line, sort of the tradeoff between higher volumes and lower -- the addition of the institutional clients and the lower D payment and how much -- with the tradeoff first of all and how much that might go on for with the onboarding process? Thanks.

Okay. Well, I think we've mentioned this a couple of times before that bringing the banks on for us allowed -- well, just to back up. Originally, we were involved mainly in the NGO and the corporate sector and we're dealing with high value payments. And the reason being is we had a very manual process and our cost of executing those transactions are pretty high.

Over the last three years, we've invested in technology, which has driven our processing costs down by orders of magnitude. I mean, we are now fractions of what we were, say, three years ago. And we saw an opportunity to enter the bank market. And typically the banks have many more payments, orders of magnitude more volume but the payments can be much smaller in size.

So the fact that we reconfigured our processes internally allowed us to go after that very big opportunity. And what we're starting to see now is the business mix changing in our business.

Up until recently, say a year ago, about 70% of our revenues was driven from the sort of NGO and corporate sector, and very little of it was coming from banks. But as we're on Boarding the banks, the volume is going up and the average ticket size is going down. We knew that would happen. That's exactly what we've decided to do. The total aggregate revenue opportunity with the smaller payments is multiples of our previous revenue opportunities.

So none of this is unexpected. I think we do find that when we onboard new banks, they tend to test us up by sending the smaller payments to see how we do so sometimes we see a little bit of an adverse business mix as we go through that adoption process. I'm not sure if that's what's happened. It may be what's happened.

We may see it even out a little bit as these banks become more comfortable with us and start sending the higher value payments through, but I don't have any specific data points to share with you on where we think that will level out.

What we do know is, our volumes are going to go up, we think a lot, and we think the average payment is going to go down, you know, by some amount. And, you know, I think we will see more as these banks onboard and we'll get more data points.

But none of what we're seeing is unusual to us. It happened a little fastthis quarter, and that may be because some of the new banks just entered high volume or small payments to check us out. So I think that's about as much as I can give you on that.

Got you. As you say, you held the higher revenue level from last quarter.

On the -- I know you talked about last quarter's higher bad debt provision, the elevated level in 4Q. Can you talk about -- I know it's hard looking forward, what sort of a run rate for that might be, a natural run rate?

You know, honestly, we sort of think that a natural bad debt run rate for us on an annual basis probably is about $3 million to $6 million pretax, right? Clearly, we don't want that to happen and we try very hard not for that to happen, but the reality is we're dealing with 12,000 companies around the world. And some of those companies have liquidity problems and as much as we protect ourselves, we may end up with small problems from time to time.

So that's kind of the run rate we have discussed with our boards. That's kind of how we've calibrated our risk management process. You know, in the context of what we think we should be making in a normal sort of quarter, that also seems to be about the right kind of number. That shouldn't be a material amount relative to our earnings and revenues. So that's kind of our thinking on it.

Clearly, what we tend to find is is those bad debts don't happen on a steady drip, drip basis. You tend to see a lot of it happen in one quarter and then nothing. And that's kind of our experience.

Got you. And then last one, you made quite a lot of progress in the last couple quarters in the ROE to 11% this quarter. What gets you to the 15% plus over the next year and a half, let's say?

Well, I think, as I said in my concluding remarks, we definitely feel that there is a trend developing for us, which is just us internally working better and cross-selling our products. We also are seeing sort of more customers coming onboard. And of course sort of market conditions seem to be normalizing.

So it feels to us -- again, as I said, I don't want to get into the could have, would have, should have kind of debate, but if we hadn't have had this hiccup in Argentina and maybe if we hadn't had bad debts at coming has the quarters, we would be at a run% of about 13% OE over the last six months.

So we're not that far away from 15% in a very bad interest rate environment. And then of course, we have G.X. Clarke coming onboard as well as sort of investing our -- investing our, say, funds a little bit more intelligently. Both of those are incremental to the current trend lines.

So, we're starting to feel that we're getting to a position where we may see us getting pretty close to that number over the next couple quarters not necessarily having to do anything different than what we're doing now.

Got you. Thank you very much.

Okay. Next question?

Jeremy Hillman, Singular Research

Hi. Good morning, everybody.

Hey, Jeremy.

Hey. A question on G.X. Clarke, wondering what the overlap there is with their existing accounts relative to your pre-existing account base. Is there a significant overlap or -- and whether there is or isn't. I just wanted to get a better sense on what your cross-sell opportunity is there.

Okay. I would say as a pretty blunt statement there is zero overlap at the moment with their customer base, which is good, so -- and in our current securities business, we've really struggled to make significant inroads into the institutional markets. We've never historically had relationships there. We really deal with financial intermediaries, broker dealers and banks and so on. We've not wanted to invest in heavy research components to get our offering in there. We know we can add value to the institutional market. It's just been a struggle to get there.

So having G.X. Clarke, who has sort of deep and long relationships with institutional investors, we think can only help the rest of our securities and futures offerings making inroads there.

We always are a little bit -- we don't place a huge synergy factor on deals. I mean, when we look at bringing businesses in, we assume zero synergies to justify the transaction and I think it always takes longer and it's harder than you think to cross-sell, but I do think there are reasonably good opportunities for us to do that.

They have 700, you know, tier 1, tier 2, tier 3 institutional accounts. Many of those can't accounts somewhere in their organization are executing trades in our sweet spot, which is, you know, international securities, FX futures, and our job over the next year or two is to make sure we mind that opportunity.

Right. Thanks. Yes. I think -- would you say it's fair to characterize that as the larger tier 1 institutions are going to be more likely to have multi-asset class products under their umbrella while the smaller entities may be more single asset class and so your opportunity is going to be a debt larger to your one end?

Yes. I -- we never do very well with the very large tier one customers in any of our products. We have those customers and we have certain -- very well-known name customers that deal with us. But really, our sweet spot is sort of the mid size customer.

So on the institutional side, I suspect we may be better suited to the mid-size institutional investor who maybe has a couple different fund strategies under their umbrella and maybe they have an international fund or a component for international securities and that's where we'll kind of get in there.

So we obviously will try, with the very large guys, but they tend to be so well covered by the tier 1 banks that really hard for us to get in there.

Okay. Thanks for that perspective.

Okay. Well, I don't see any more questions on the screen, so we'd like to thank everyone for their participation and we will be talking to you in about three months. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.