StoneX Group Inc (SNEX) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the INTL FCStone fourth-quarter FY15 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Chief Financial Officer Mr. Bill Dunaway. Sir, you may begin.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone. Welcome to our earnings conference call for our fiscal fourth quarter and full year ending September 30, 2015. After the market closed yesterday, we issued a press release reporting our results for the fiscal fourth quarter and our full fiscal year.

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 annual 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 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-K filed with the SEC. This discussion may contain forward-looking statements within the meanings of the 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 it's 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 CEO.

Thanks, Bill, and good morning, everyone, and welcome to our FY15 fourth-quarter earnings call. Fiscal fourth quarter was a record for us by a wide margin in almost every respect. We achieved record operating revenues of $179 million, up 37% from a year ago, and up 18% from the preceding third quarter.

Net earnings were a record $21 million, up over threefold from a year ago, and up 73% from the prior quarter. Earnings per share for the quarter were $1.12, again, up over threefold from a year ago. ROE was an outstanding 21.6%, which lifted our ROE for the fiscal year to our target of 15%. It's taken me a long time to be able to say that. In fact, we made more net earnings this quarter than we made in each of the prior fiscal years.

Our very strong operating results for Q4 were well above the trend line we established over the last six quarters as we experienced some good tailwinds due to increased market volatility as the world considered the impact of higher US interest rates finally. This created good market conditions in the equity markets, as well as the FX markets, and some exceptional conditions for our Global Payments business as spreads widened out in some key markets.

In addition, these quarterly results were in aggregate positively impacted by non-core operating events, of which the aggregate effect on net income was a positive $3.4 million, or $0.17 per share. Excluding these items, our core net earnings for the quarter was still a very strong $17.7 million, or $0.92 [a quarter.] Bill will provide more details on these items in his section.

Over the last six quarters, we have experienced a study upward trend in performance due to strong growth in underlying transaction volumes which continued into the fourth quarter. FX prime brokerage is up close to 100% from over a year ago, Global Payments up 52%, equity market-making and OTC volumes rose 36% and 38%, respectively. Some highlights for the quarter -- Bill will run through these in more detail later -- Securities, again, was a strong performer with net segment income up nearly threefold due to the acquisition of the rates business but also a strong performance from the equity market-making business.

Global Payments continued its strong organic growth as more banks moved through the adoption curve, and we benefited from exceptional market conditions in some of our core areas as emerging market currencies recalibrated to the dollar. Commodities, our largest segment, showed strong bottom line growth.

Looking at the year overall, we also set records at almost every level. We achieved record operating revenues of $624 million, up 27% from a year ago, and net earnings were a record $56 million, up nearly threefold from a year ago.

Earnings per share was $2.87, again up nearly threefold from a year ago, and the ROE for the fiscal year was 15%. We believe that 15% is an achievable long-term target, which may not be met at all stages of the cycle, and certainly we fell well below this during the past few years as we faced strong headwinds and were investing in new capabilities in our business. And of course, in Q4 we were well above this target as we experienced a positive market environment.

As mentioned above, revenue increases were, again, driven by very impressive growth in volumes across the board when compared to last year. With impressive increases by Global Payments, up 70% year-on-year, precious metals up 60%, foreign-exchange prime brokerage up 40%, equity market-making up 44%, and our OTC business up 24%.

These volume increases stand in strong contrast to our industry overall and are indicative of increases in market share and expansion in our underlying customer base. In addition, volatility has started to increase generally in all the markets we operate in and conditions are generally becoming more favorable, which together with an increased [fine] footprint should help drive continued growth in revenues.

In terms of segment income, both our Global Payments and Securities businesses have grown significantly over the year and have achieved critical mass. Global Payments has achieved this organically by leveraging the unique product offering and technology platform. Securities business are combination of organic growth of the market-making activities combined with the acquisition of the rates business, which I remind you is only included for nine months of the year.

This is a significant change for us and has resulted in a better balanced portfolio of businesses for us. Our strong revenue growth combined with operational leverage as we better scaled our platform led to a dramatic change in our bottom line. Our pretax margin on incremental operating revenue we generated in FY15 was close to 40%. Or put another way, the 27% increase in operating revenues led to a 200% increase in pretax earnings, a factor of over seven times. Small increases in operating revenues matter a lot.

On the cost side, we continue to remain vigilant and disciplined with fixed costs, including fixed compensation up 7% inclusive of the addition of the G.X. Clarke rates business. Having completed the consolidation of our US-based broker-dealer and government securities dealer with our US-based FCM, we are now looking to consolidate our swap dealer during 2016.

This is dependent on receiving final capital rules from the regulator. We are starting to see the benefits of capital efficiencies and will begin focusing on rationalizing systems and infrastructure costs in the coming year. During the fourth quarter, we took the decision to exit from our investment banking activity.

This business never gained the traction we're anticipated and proved to be less of a strategic fit with our core client base at [envisage]. This business was operating at about break-even for the last two years, and as such, should not have a material impact on our results going forward.

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

(Technical difficulties) Thank you, Sean. I would like to discuss my discussion with quarterly results. I will be (technical difficulties) 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 fourth quarter of last year to the current fiscal fourth quarter.

As noted on the slide, fourth quarter revenues were $178.7 million, which represents a 37% increase as compared to the $130.6 million in the prior year. As Sean mentioned, in the fourth quarter we completed the merger of our US-based broker-dealers and our FCM. As a result of this merger, available-for-sale investments carried in the FCM, both US treasuries and exchange firm common stock, were transferred into the trading category at fair value in accordance with the accounting requirements for broker-dealers.

This resulted in $5.4 million of pretax unrealized gains not previously recognized in earnings being included in operating revenues in our corporate unallocated segment in the fourth quarter. Outside of that increase, the most notable change was an $18.3 million, or 84%, increase in Securities segment operating revenues. The largest driver of this increase was in debt trading which added $11 million in operating revenues versus the prior year, primarily as a result of the acquisition of G.X. Clarke at the beginning of our second fiscal quarter.

In addition, equity marketing revenues increased $5.5 million versus the prior year as transactional volumes increased 36%. The second largest gain in operating revenues was in our Global Payments segment, which added $9.9 million in incremental revenues to a record $25.3 million. An increase in payments from financial institutions drove transactional volumes to increase 52%, while favorable market conditions drive an 8% increase in our average revenue per trade to $286.85 per payment.

Operating revenues in our core Commercial Hedging segment increased $7.4 million, or 12%, to $67.1 million. This increase was driven by a 20% revenue growth in exchange rated market primarily on the LME and in agriculture and energy commodities. In addition, OTC revenues increased 7% versus the prior year as a result of a 38% increase in OTC volumes, primarily in grain and energy commodities which were partially offset by declines in cotton, sugar and food service. Finally, CES operating revenues increased $3 million, primarily as a result of the increased prime brokerage activity and higher interest income, while Physical Commodities segment operating revenues declined modestly.

Moving on to slide number 4, which represents a bridge from the fourth quarter pretax income in 2014 to the current period, the biggest contributors to the overall $21.4 million increase in pretax income was the Securities segment, which increased $8.7 million, and the Global Payments segment which increased $7 million as a result of the significant increases in operating revenues in those segments.

The segment income in the Commercial Hedging segment increased $4.3 million, while an increase in foreign-exchange prime brokerage volumes, which increased 96% over the prior year, drove the $1.6 million increase in CES segment income. Physical Commodities segment income declined $2.3 million, primarily as a result of the $1.9 million increase in bad debt expense related to a customer in the renewable fuels industry.

Unallocated overhead, as you see in the graph, represented a $2.1 million favorable variance this quarter with the available-for-sale positive adjustment of $5.4 million being partially offset by increased costs related to the acquisition of G.X. Clarke, as well as an increase in variable compensation related to the strong growth in Company performance. Overall interest income increased $14.1 million to $16.7 million in the fourth quarter.

Historically, our interest income has been driven 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 at the beginning of our second quarter resulted in a significant change to our aggregate level of interest income, adding $7.9 million in interest income during the fourth 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 an $800,000 increase in interest income in our Commercial Hedging and CES segments.

This was a result of the continued implementation of our interest rate management program which included the purchase of medium-term US Treasury notes and the utilization of interest rate swaps, partially offset by a 12% decline in average customer segregated deposits to $1.7 billion. Overall, our portfolio of treasury and market fund investments averaged $1.4 billion for the quarter, which combined with the $375 million in interest rate swaps earned $2.3 million in interest income for an average yield of 65 basis points. The overall portfolio, including the US Treasuries and swaps, had a weighted average duration of approximately 19 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 60.1% of our total expenses for the quarter and non-variable expenses, which are made up of both fixed expenses and bad debt expense, increased $5.7 million, or 11%, primarily driven by the G.X. Clarke acquisition.

Net income from continuing operations for the fourth quarter was $21.1 million versus $5.8 million in the prior year, which resulted in us exceeding our long-term goal of a 15% Return on Equity achieving a 21.6% ROE for the period. Finally, in closing out the review of the quarterly results, the trailing 12-month results have led to a 15% increase in book value per share, closing out the quarter at $21.11 per share.

Next, I will move on to slide number 7 for a discussion of the 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 $49.5 million in operating revenue as a result of both the G.X. Clarke acquisition and a 44% increase in equity market-making volume.

Our core Commercial Hedging segment revenues increased $38.4 million, or 17%, versus the prior year driven by both exchange traded and OTC volume growth, particularly in agricultural and LME metals markets. Global Payments revenues continue to grow, adding $21.7 million in the year-to-date results to a record $77.1 million as volumes increased 70% versus the prior fiscal year. CES and Physical Commodities segment revenues added $9.7 million and $2.5 million, respectively.

Moving on to slide number 8, which represents a bridge from the prior fiscal year pretax income to the current year, similar to the growth in operating revenues segment income in the Commercial Hedging and Securities segment saw the largest dollar increases in segment income as a result of strong growth in operating revenues. In addition, Global Payments segment income increased $15 million, or 53%, as compared to the prior fiscal year. These gains were partially offset by a $7.2 million increase in unallocated overhead, which is primarily driven by the acquisition of G.X. Clarke, as well as an increase in variable compensation related to strong growth and Company performance.

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 184% over the prior fiscal year to $55.7 million, which represented a 15% ROE for the current fiscal year results. In addition, we have exceeded our internal target for the year-to-date period in average revenue per employee, which reached $524,000 per employee in the current year.

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

Thanks, Bill. We believe that over the last six quarters or so we have seen an improving trend in our results, with Q4 probably above that trend line due to exceptional and positive market conditions and a change in how we account for our Treasury holdings. We are now operating close to our long-term targets and the potential we believe is inherent in our business.

We are uniquely placed in our ever-changing financial services industry, able to provide execution, market intelligence, advice and post-clearing services in nearly every asset class and market globally. As a consequence, we are ideally positioned to take advantage of consolidation among smaller monoline firms struggling with increased costs and capital requirements, as well as the retreats of the larger banks from smaller mid-sized clients requiring multi-asset execution capability.

We also have a unique and fast-growing Global Payments business, which provides a last mile capability in over 130 international markets. During 2015, this business gained critical mass and has now been become a leading provider of international payment services to many of the world's largest banks. This is a fast-growing, highly scalable business with very high net margins.

We believe, and we have been told by many others, that this is an extremely valuable property. To allow our shareholders to have a better appreciation for this tremendous business, we broke it out as a separate segment in 2014.

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

Thank you.

(Operator Instructions)

Jeremy Hellman with Singular Research.

Hi, guys.

Hey, Jeremy.

You are, obviously, a really impressive report, great year, but, as you know, Wall Street can be ruthless and so the question always comes down to what is next? And along that line, with the Jobs Act opening crowds funding, I was wondering if you have any interest in looking at getting into that line of business, maybe buying one of the many crowd funding portals out there or building your own?

Jeremy, honestly, I don't think we have any interest in that. I think we have got our plate full. We have got lots of opportunities in our core businesses, and I think that's what we're really going to be focusing on. We are in a really interesting space in our industry right now, cross currents of smaller firms struggling, banks pushing out customers, and us having a unique capability to service those clients, and I think that's where we need to focus our efforts.

Okay, that makes sense. And kind of taking that feedback a little bit further then, are you in a position now where you are getting a lot of inbound calls, as you put it, from monoline providers who might be looking for a platform such as yours where they can leverage their business a little bit better and gain a little bit of safety in numbers maybe?

That would be yes.

All right, very good to hear.

We are receiving calls every week, every month, about businesses that are struggling and would like to find a way to partner with us, for us to purchase them, some way leverage our platform. At the moment, kind of a full-time job just looking through those opportunities.

We are very particular. We want to make sure the businesses are a fit. We want to be in businesses that solve real problems for real customers.

A lot of businesses don't do that. And then, of course, we have got to make sure the businesses create value for our shareholders, and a lot of these businesses create value for the employees but not necessarily for the shareholders. Once we go through that kind of filter, very few of those opportunities are attractive, but there are opportunities out there and a lot of them are coming to us.

All right, great. Once again, great year, guys, and looking forward to what next year holds.

Okay, thank you.

(Operator Instructions)

Erick Sonne with Private Capital Management.

Hi, good morning, guys.

Hey, Erick, how are you?

I'm doing great, thank you. I have a question on the Global Payments business. With regards to the higher revenue per trade, what percent -- basically, how much of that higher spread is actually explained by the high volatility in currency markets relative to any sort of a structural change in terms of the customer base?

Well, I think you've got to look at it two ways. We give pretty clear metrics on both the payments volume, as well as the revenue per trade, and I think the payments volume and the increases there speak to increased customer engagement, particularly with the larger banks, the addition of new customers. And that's, I think, probably the best gauge of the underlying performance of the Company.

What you did see this quarter was the revenue per trade actually increased. I think we have, for many quarters, been saying to people that it is our anticipation that that would probably decrease over time as the business mix changed. The delta between the increase and the decrease, I think, was largely due to abnormal but favorable market conditions.

The currency markets in some of the markets we do business in are in turmoil, or were in turmoil as a result of the change in the dollar, particularly the commodity-based currencies and that just led to a blowout of the spread. Obviously, that's something that is not repeatable.

We like it when it happens and we will take it when it happens. I think you should look to the underlying growth in Payments as a better long-term indicator of where this business is, and probably look at a long-term trajectory of the revenue per payment. I think that's an anomaly right now that it's gone up.

Okay, so from an analytical perspective, basically using the Q3 base as a way of looking at revenue per trade and basically understanding the underlying trends in volumes is the correct way to do it?

That's what I would suggest, yes.

And if you had to characterize in terms of what inning are we finding ourselves in terms of the growth trajectory and on-boarding of clients, banking clients in the Global Payments business, what do you think we are in it?

What inning are we in? That's an interesting question. I would say we are in the first third of the baseball game here. Maybe inning three, if I had to pick. Very hard for us to know how deep.

I have said this before on conference calls. When we're dealing with these huge international banks that are very large and have lots of divisions and areas within them, it's quite hard to know how deep and how far you can go. So we want to temper our expectations.

I think if we were out in Silicon Valley we would look at addressable market and put an adoption factor on it, and I think we would be telling you we are not even in the first inning right now. But I think the reality is it's harder than you think and it takes longer than you imagine, but I still think -- we are closer to the middle part of it than we are to the end.

Excellent. And then, on your prepared remarks, you mentioned that this is an extremely valuable property. For that reason, you actually highlighted and broke it out in 2014. What else do you think you need to do in order to highlight the value of this property going forward, if the market doesn't recognize it? What are you prepared to do?

Well, I think like any rational business, we need to make sure that we create long-term value for our shareholders, and at some point if that's not recognized, we will have to consider more drastic means to unlock that value. And clearly at some fantastic price, something is always for sale.

But we like building businesses. We think this is a core franchise that's going to be much, much bigger than it is now, and so we have no real interest in doing of the anything other than growing this business.

It is generating an enormous amounts of cash for us, it's highly leverageable and scalable but great margins. You don't give up assets like that easily or cheaply.

No, I agree. And then on -- thinking about the business generally, relative to the coming interest rate hike, and maybe a trajectory for higher interest rates over time, how sensitive are we to interest rates? I know you guys in the past have actually shown sensitivity to 100-basis-point moves, is that more or less the same? That hasn't changed? How should we think about it in terms of incremental --?

Well, I think you've got to start thinking about it a little differently than, say, maybe a year or six quarters ago. As we have explained, we have tried to maximize our interest rates opportunity by swapping out interest rates out on the curve, and if you refer back to Bill's slide, what slide is it, Bill?

Slide number 5.

Sorry, Bill?

Slide 5.

Yes. So I think what you've really got to think about at the moment is we have laddered investments with a weighted duration at the moment of about 19 months. We are earning 60-odd basis points on that portfolio. In an entirely static environment, if the interest curve stayed exactly the same, and didn't move, we could probably ratchet that up as we roll our front ends back to the back end of the ladders.

Over time, we could probably get to 100 to 110 basis points and any move beyond that will require the interest rate curve to move upward. Now clearly, if the interest rate curve moves upwards, we're not going to catch all of that at once because we already have investments. They are laddered, they roll off every quarter. We will move into that higher interest rate curve slowly over time.

I guess you have got to take a long-term view on what you think the zero to three-year part of the interest curve is going to look like and give us some time to roll into that scenario if you assume it's higher. What is interesting is we always keep about 30% of our [seg] funds in the very short end of the curve. We don't swap those out. That's part of our policy just for liquidity purposes.

The benchmark rate for that part of the portfolio is T-bills normally. T-bills in the last quarter have moved from about 1 basis point to 22 basis points. So that's a pretty big impact for us immediately on the front end. But do the math, we rotate between $1.6 billion in [seg] funds to $2.2 billion at the peak as we move through the cycles.

We are currently making about 60-odd basis points, all things being equal we think that could get to 1%. Anything beyond that, will require interest rates to move in our favor. But that's the simple math.

We also have with G.X. Clarke, we do have inventory in that business, which is largely treasuries, mortgage-backs, asset-backs, and, clearly, there is on our inventory a funding spread we have on that inventory. And, clearly, if interest rates go up, depending on how the shape of the curve changes, we may see a greater carry on that inventory than previously, and that could also be material.

Excellent. Thank you for the color. One quick question.

Sure, yes, go on.

Staying with G.X. Clarke, how much did G.X. Clarke actually added to revenues, to the securities revenues this year?

Bill, do you have -- firstly, while Bill is getting that number for you, bear in mind, it was only in our numbers for nine months because that acquisition closed on 1 January. So, Bill, what was the nine-month revenue add?

$31.4 million, Erick.

Thank you very much. Well, thank you very much, guys, for building a great Company. Thank you.

Okay, thank you. All right, guys, we don't see any other calls. Last chance, if anyone wants to ask a question.

(Operator Instructions)

Okay, I think that's it. Thanks very much for joining us. We will be speaking to you next time in early February. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.