StoneX Group Inc (SNEX) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by.

And welcome to the INTL FCStone third quarter fiscal year 2015 earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to turn the floor over to Bill Dunaway.

Sir, the floor is yours.

Good morning.

My name is Bill Dunaway, CFO of INTL FCStone.

Welcome to our earnings conference call for our fiscal third quarter ending June 30, 2015.

After the market close yesterday, we issued a press release reporting our results for the fiscal third 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 and year-to-date 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 under way, 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'll now turn the call over to Scott Branch, the Company's President.

Thanks, Bill.

Good morning, everyone, and welcome to our fiscal 2015 third quarter earnings call.

Sean O'Connor, our CEO, is traveling at the moment so I'll be filling in to give a brief overview.

Overall fiscal Q3 was a solid quarter for us.

We are now operating very close to our long-term ROE target of 15% despite the low interest rates and generally low volatility environment.

As we have mentioned on previous calls, we have for some time been steadily and modestly improving the overall market conditions and continued industry consolidation.

A more normal interest rate environment could potentially add incrementally 5% to 7% of ROE to our results.

Net income was $12.2 million for the quarter, a shade below Q2 and up nearly four-fold from a year ago, and up nearly three-fold for year-to-date.

Our EBITDA for the quarter was just shy of $24 million, and for the trailing 12 months is running at $78.5 million.

Our diluted EPS for the quarter was $0.62, up three-fold from a year ago.

Year-to-date EPS for nine months was $1.78, up 2.5 times.

Operating revenues were 28%, up versus a year ago and just slightly below the record we achieved in Q2.

On a year-to-date basis, revenues were up 24%.

We continued to see very strong increases in transactional volumes versus the same quarter a year ago with our Global Payments area up nearly 70%.

The Year-to-date transactional activity probably provides a better picture and reflects strong results in all of our business units, the lowest increase being Futures at 6% and Global Payments and Precious Metals activities both up nearly 80%.

In some of these business units the activity growth is offset by lower revenue capture, but still a good overall result which has driven our topline revenues.

These are strong results and indicative of us winning a greater share of our existing clients' activity whilst bringing on new customers and making market share gains.

Some highlights for the quarter.

Bill will run through them in greater detail later.

Compensation, which is our greatest cost, accounting for nearly 50% of our overall cost base.

Our compensation costs increased directly in line with revenues as expected for both the quarter and year-to-date periods.

We have worked hard to make this cost as variable as possible, and closely aligned with revenue production which both protects the bottom line and provides faster and clearer [and] direct incentives.

The balance of our costs increased very slightly with professional fees down significantly.

All of our segments showed strong double-digit growth in segment revenues, except for Clearing which was up by 9%.

Standouts were the Global Payments business with a 34% increase in revenue, and Securities which was up 83%.

In terms of segment net income, all of our segments recorded very strong results for the quarter with Global Payments up 46%, and Securities up more than double.

Physical Commodities and Clearing had significant percentage increases off a lower base.

We continue to see signs of industry consolidation and an improving competitive environment.

The most tangible indicator in Q3 was Jefferies' exit from the Futures market.

In this environment we have selectively acquired both staff and customers, most notably in London.

We've now complete the consolidation of our US-based broker dealers and government securities dealers with our US-based FCM.

The bulk of our US customers now face a unified entity offering a larger capital base making for simplified cross-selling and a potential for cross-margining.

Over the coming quarters we should also see the benefits of capital efficiencies and will begin focusing on rationalizing systems and infrastructure costs as a result of these mergers.

We are hoping to get clarification from our regulators regarding finalized capital rules for our swap dealer, and if appropriate, will look to consolidate that entity into our merged broker dealer FCM.

During the quarter, we continued to enhance our interest earnings from our segregated funds through laddered investments and short-term US Treasuries, and interest rate swaps which added nicely to our net earnings.

I'll now hand you back to Bill Dunaway for a more detailed discussion of the financial results.

Thank you, Scott.

I would like to start my discussion with a review of the quarterly results.

I will 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 operating revenues for the third quarter of last year, to the current year fiscal third quarter.

As noted on the slide, third quarter revenues were $151.6 million which represents a 28% increase as compared to the $118.2 million in the prior year.

Current quarter operating revenues include a $1.2 million before-tax gain on the sale of common stock held in the intercontinental exchange.

The most notable change for the quarter was a $16.5 million or 83% increase in Securities segment operating revenues.

The largest increase within this segment was in Debt Trading which added $11.7 million in operating revenues versus the prior year primarily as a result of the acquisition of G.X. Clarke & Company at the beginning of the quarter which added $10.2 million in incremental operating revenues.

In addition within the Securities segment, equity market-making revenues increased $2.8 million versus the prior year as transactional volumes increased 57%.

The second largest gain in operating revenues was $7.3 million or a 13% increase in operating revenues in our core Commercial Hedging segment.

This increase was driven by a 17% revenue growth in exchange trading markets primarily on the LME and in Agricultural commodities.

In addition, OTC revenues increased 11% versus the prior year as revenues increased in Agricultural Commodities, in particular, grains, coffee and cotton, as well as in a relatively new offering of ours, interest rate products.

Global Payments segment operating revenues increased $4.6 million to $18.2 million, nearly matching the record revenues of the second quarter as an increase in payments from financial institutions drove transactional volumes to increase 67%, however, this resulted in the decline in the average payment size which led to a decrease in the average revenue per trade.

Finally, CES segment operating revenues increased $2.4 million primarily as a result of increased prime brokerage activity and higher interest income, while Physical Commodities segment operating revenues increased modestly with gains in previous metals being mostly offset by lower revenues on the Physical, Ags and Energy side.

Moving on to slide number 4 which represents a bridge from third quarter pre-tax income in 2014 to the current period, the biggest contributors to the overall $13.2 million increase in pre-tax income was the Securities segment which increased $7.9 million, and the Global Payments segment which increased $3.2 million as a result of the significant increases in operating revenues in those segments.

The segment income in the Commercial Hedging segment increased $2.1 million while an increase in interest income drove the $1.9 million increase in CES segment income.

Unallocated overhead increased by $2.7 million which was primarily driven by the acquisition of G.X. Clarke & Company which added $2.1 million of unallocated expenses as well as a $2 million increase in variable compensation related to strong growth in overall company performance.

These increases in unallocated overhead were partially offset by the $1.2 million before tax gain on the sale of our common stock held in the Intercontinental Exchange.

Overall interest income increased $8.5 million to $10.6 million in the third quarter.

Historically, our interest income has been by the average customer segregated equity in our Commercial Hedging and CES segments, as well as short-term interest rates.

Our acquisition of G.X. Clarke during the second quarter resulted in a significant change to our aggregate level of interest income, adding $6.5 million in interest income during the third quarter.

Slide number 5 shows the interest income in our Futures Commission Merchant, or FCM, which holds our customer-segregated balances, and is the source of the majority of our interest-earning assets.

The increase in interest income shown here, less a modest decline in our swap dealer, resulted in a $1.4 million increase in interest income in our Commercial Hedging and CES segments.

This is a result of the continued implementation of our interest rate management program which includes the purchase of medium term US Treasury notes, and the utilization of interest rate swaps partially offset by an 18% decline in average customer-segregated deposits to $1.5 billion for the quarter.

Overall, our portfolio Treasury and Money Market fund investments averaged $1.2 billion for the third quarter which combined with $300 million in interest rate swaps, earned $2 million in interest income for an average yield of 66 basis points.

The overall portfolio, including both the US Treasuries and the swaps had a weighted average duration of approximately 21 months at the end of the period.

Moving on to slide number 6, our quarterly financial dashboard, I would just highlight a couple of items of note.

Variable expenses represented 58.7% of our total expenses for the quarter, and non-variable expenses which were made up of both fixed expenses and bad debt expense increased $3.5 million or 7%, driven entirely by the G.X. Clarke acquisition.

Net income from continuing operations for the third quarter was $12.2 million versus $3.7 million in the prior year period which resulted in a 13% ROE nearly reaching our long-term goal of 15%.

Finally, in closing out the review of the quarterly results, the trailing 12-month results have led to a 12% increase in book value per share closing out the quarter at $20.12 per share.

Next I will move on to slide number 7 for a discussion of our year-to-date results.

This slide demonstrates strong revenue growth across all of our business segments.

The largest increase was in the securities segment which added $31.2 million in operating revenues as a result of both the G.X. Clarke acquisition and a 48% increase in equity market-making volumes.

Our core Commercial Hedging segment revenue increased $31 million or 19% versus the prior year, driven by both exchange traded and OTC volume growth primarily in the agricultural and LME metals markets.

Global Payment revenues continue to grow adding $11.8 million in the year-to-date results, while CES and Physical Commodities segment revenues added $6.7 million and $3.1 million, respectively.

Moving on to slide number 8 which represents a bridge from the prior year-to-date period to the current year, similar to the growth and operating revenues, segment income in the Commercial Hedging and Securities segment saw the largest increases in segment income.

In addition, Global Payment segment income increased $8 million or 39% as compared to the prior year-to-date period.

These gains were partially offset by a $9.3 million increase in unallocated overhead which is primarily driven by the acquisition of G.X. Clarke and Company which added $4.1 million of unallocated expenses.

In addition, excluding G.X. Clarke, variable compensation increased $5.7 million related to strong growth in company performance.

These increases in unallocated overhead were partially offset by the $1.2 million gain on the sale of the [ICE] exchange shares.

Finally moving on to slide number 9, the year-to-date dashboard, I will highlight just a couple of metrics.

Net income from continuing operations increased 156% over the prior year-to-date period to $34.6 million, which represented a 12.7% ROE for the current year-to-date results.

In addition, we have exceeded our internal target for the year-to-date period in average revenue per employee which reached $504,000 per employee in the current year.

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

Thanks, Bill.

We believe that over the last six quarters or so, we have seen a gradually improving trend in our results, and we are now operating nearer to our targets and the potential we believe is inherent in our business.

We believe that our multi-capability, multi-asset class business, which has been built over many years, is a key determinant of our long-term success.

This approach allows us to effectively and efficiently leverage our capital infrastructure and client relationships resulting in [sticky] meaningful relationships with our mid-size clients, and the potential for attractive long-term returns for our shareholders.

In the current environment, we are seeing numerous acquisition opportunities, especially among mid-size mono-line firms that cannot achieve the synergies on capital and infrastructure costs that we can with our multi-capability, multi-product approach.

We continue to adopt a cautious approach and will only proceed with acquisitions that fit our client-first culture at client relationships, and our capabilities that are priced appropriately.

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

Operator?

(Operator Instructions).

Jeremy Hellman with Singular Research.

Good morning, gentlemen.

Good morning, Jeremy.

Congrats on the results.

Looks like you guys are going to be in a good spot as interest rates start to pick up, but just kind of looking at the other side of the equation, kind of curious as to what you see is your biggest challenge over the next call it six to twelve-months -- in terms of things you can control, of course.

Interest rates and the like are out of your control, but within the business itself.

With that last caveat in place, before that I probably would have answered market volatility.

The two key drivers of our business are market volatility and interest rates.

We can't control either of those.

The things that we can control are the quality of the service that we provide to our customers and the extent that we make our products and services aware to customers and acquire new customers going forward.

That is always a continuing challenge for us.

It's something that we've put a lot of emphasis on.

And in the current environment with a slow industry consolidation going on, we probably find ourselves in a reasonably good position in terms of our ability to acquire new customers.

So frankly, looking out over the horizon in the next few quarters, don't really see anything that presents an unusual challenge for us, just simple basic hard work and, to some extent, the luck of the draw in what we get in terms of market volatility and interest rates.

Okay.

Thanks for that perspective.

And then speaking additionally on things that could be over the horizon, just kind of more of a thought question, do you envision developing or acquiring anything that would kind of speak to something like BitCoin or anything that would be of a similar evolution?

Yes.

Obviously our Payments business means that we focus a lot of attention on what's going on more broadly in the Payments world.

We follow developments in terms of virtual currencies and other technology solutions very closely.

The nature of our business is probably slightly different than a lot of what you see as the buzz going on in the Payments world.

A lot of the discussion in the Payments world is more on the retail end of the business.

We are more wholesale than retail, and really providing enhanced and simplified retail customer experience.

That ultimately results in the movement of funds from one place to another.

And those retail platforms with their enhanced customer experience ultimately still have to move funds through some mechanism, and we see that as an opportunity for us in many ways.

One of the analogies which isn?t quite perfect is we look at ourselves in the Payment space as a bit like Fedex or UPS is to Amazon.

We're not directly dealing with underlying retail customers, but to the extent that those technology platforms make it easier, simpler and quicker for customers to transact, someone's still got to deal with the last mile, and to a significant extent, that's what we do, and we actually see meaningful growing volumes for us in dealing with aggregators of commercial banks and other types of entities.

So from that side of what's going on in the payment world, we think we're very well positioned to be the kind of behind the scenes provider of that last mile.

In terms of something like BitCoin or other kind of technology frictionless payment mechanisms, that's something we watch closely as well.

As of yet, we haven?t seen any that have really succeeded in providing a lower cost service, and actually, they're beginning to face the challenges of a -- I wouldn?t say mature, but beginning to mature industry of dealing with fraud, regulation and all sorts of things like that.

So while the technology can be relatively frictionless, there are still material costs of preventing fraud, of dealing with regulation, et cetera, and I think most of those technologies will not prove to be as transformative as is often expected

Okay.

Appreciate that perspective and I do like that Fedex-Amazon example.

That's pretty enlightening.

Thanks, guys, and good luck.

Thank you.

Thanks, Mr. Hellman.

(Operator Instructions).

Okay.

Well, it doesn?t appear that there are any further questions.

Thank you all for listening and have a good day.

That brings the call to a conclusion.

Thank you, gentlemen, and thank you ladies and gentlemen for joining us today.

This will conclude today's conference.

Thank you for your participation and have a wonderful day.