Ladies and gentlemen, thank you for standing by. And welcome to the StoneX Second Quarter Earnings Conference Call. Please note that today’s call is being recorded. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Bill Dunaway, company’s CFO. Bill, the floor is yours.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our second quarter ended March 31, 2021. After the market closed yesterday, we issued a press release reporting our results for the second fiscal quarter of 2021. This release is available on our website at www.stonex.com, as well as a slide presentation we will refer to on this call and our discussions on our quarterly results. You will need to sign on to the live webcast in order to view the presentation. 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 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 include known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although, the company believes that the 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. Sean?

Thanks, Bill. Good morning, everyone and thanks for joining our second quarter earnings call. In the second quarter, we reported very strong results across the Board, despite near zero interest rates on our client float. We handily beat the prior year record quarter where we benefited from unprecedented market volatility due to the onset of COVID. Our trailing 12-month results are also very strong as our company has grown its capabilities, expanded its client footprints, gained market share and has made significant progress in the integration of the Gain transaction. During the market -- during the March quarter, the market environment was positive for us with buoyant equity market, increased volatility in many of the commodity markets, including copper and bronze, which hit multiyear highs. So turning to the slide deck and starting on slide four, dealing with our product results and the key metrics. The key takeaway here is we managed to increase operating revenues 29% in aggregate, despite comparing against last year’s exceptional results, where volumes spiked and volatility and market dislocation increased revenue capture, all due to the onset of COVID. Operating revenue increased in all product areas, except OTC derivatives. Volumes were up across the Board, except for listed derivatives, where we saw a large decline from the institutional segment. This declined again against the very strong prior year quarter. Revenue capture was down in OTC derivatives, as well as securities, due largely to lower market volatility versus the prior year quarter. The notable exception here was listed derivatives where revenue capture increased, as a result of a change in the business mix, as well as a successful effort to re-price our lower margin institutional business upwards, because of the decline in interest rates. Securities was again a standout, with average daily volume up 34%, although…

Thanks, Sean. I will be starting on slide number eight, which shows our consolidated income statement for the second quarter of fiscal 2021. Sean covered many of the consolidated highlights for the quarter, so I will just highlight a few and then move on to segment discussion. Transaction based clearing expenses were up 17% to $74.8 million in the current period, primarily related to increased volumes in equity capital markets and the incremental cost of Gain, which was partially offset by lower listed derivative volumes. Introducing broker commissions were up 38% to $40.8 million in the current period, primarily as a result of the incremental cost of Gain, plus increased activity in our independent wealth management business. Interest expense, which is related -- primarily related to our fixed income, securities lending and physical commodity activities declined $16.7 million versus the prior year, primarily as a result of the decline in short-term interest rates, which was partially offset by increased borrowings in our physical business. Interest expense on corporate funding increased $8.3 million versus the prior year, primarily as a result of the senior secured note issuance in the third quarter of fiscal 2020 related to the Gain acquisition. Variable compensation increased $23.4 million versus the prior year and represented 32% of net operating revenues, while they represented 34% of net operating revenues in the prior year period. The increase in variable compensation was related due to the growth in operating revenues versus the prior year period. Fixed compensation increased $24.9 million versus the prior year with the growth in related to acquisitions completed subsequent to the end of the prior year quarter. Increased headcount related to strategic initiatives, which Sean touched on in his comments, as well as growth in support areas support these initiatives. Other fixed expenses increased $25.8…

Okay. Thanks, Bill. I think you will also notice that we included a slide in there, which was requested by many of you showing our float and our sensitivity to interest rates on slide 15. I think that’s self explanatory. So let’s move on to slide 16. This summarizes the high level strategic object -- objectives that management is and has been focused on and will allow us to capture the opportunity we see before us. This is a similar to the slide we showed last time, so I will go through it very quickly. Firstly, we want to continue to build our ecosystem. We want to stay relevant to our clients, existing and new clients by adding products and services, creating the best financial ecosystem to connect them to the global markets. We are customer centric business and we need to consistently work at growing our customer footprint into new markets and expanding market share where we have existing customers and looking to serve new customer segments and channels. Gain provided us access into the retail self directed trading market, which is significant and growing. We have all the capabilities to service customers of all types and have a large addressable market in front of us with very low market penetration currently. We will not achieve the necessary growth and scale unless we better enhance technology to digitize our offering. This will not only enhance customer engagement, but increase scalability and increase margins. This requires a rethink of our processes front to back, which has been under way for some years but has now accelerated with the acquisition of Gain. And then, lastly, our business is supported by capital and we need to underpin our growth with internally generated capital resources and where appropriate access the capital markets in…

Thank you. [Operator Instructions] Our first question comes from the line of Dan Fannon of Jefferies. Your line is open.

Thanks. Good morning, gentlemen. My first question is on the listed derivatives, RPC, obviously, came in a little bit better. You mentioned a couple of things in terms of why that happened and one of which was focused on improved pricing, so just curious about the sustainability at this level and some of the inputs that drove that this quarter?

Okay. Well, welcome Dan. Let me start and then Bill can chip in later. So I think there were two things going on, obviously, we saw on a relative basis a decline on the institutional side, which is our lower priced offering versus the commercial side. So there was a little bit of a sort of a business mix toward a higher priced product. And then, additionally, on the institutional side, which you can clearly see with the institutional metrics, we have systematically been trying to re-price some of our lower price customers. And it’s not an easy thing to do, these are tough conversations, and I think we approached them with Kanda [ph] to our clients. I think our clients appreciate what we are doing. So then we support them with capital. We support them with infrastructure and if, in the aggregate, we are not getting the right return, that’s not a good relationship for us in the long-term. So it’s not going to end well for them either, right? So those conversations have gone pretty well. I think people realized that we are trying to be fair and reasonable. I would say it’s also quite hard at the moment to move accounts. I think sort of pricing pressure has turned a little bit in favor of the clearing terms, because we are still seeing a lot of banks sort of pushing out clients and not a lot of people have the breadth of market access than we have. So, obviously, there is a market and you have to be competitive. But I think the pressures have abated a little bit in terms of sort of people driving pricing downward. So I think all of that speaks to this probably being okay for us and sustainable. I mean, you do have to be prepared at some level not to compete for low price business and to walk away if necessary. That hasn’t happened with us. So I think we are in a good place with that. We may find if interest rates start to spike, there may be kind of a review of the conversation, right, because some of these banks may come back to us and say, well hang on, the economics have moved up a little bit more in your favor now so can we maybe rethink the overall relationship. So I think there is a potential for that, but I think that would be a sort of a high quality problem for us at that point. Bill, I don’t know if you have anything to add on that.

Sure. I mean, the only other aspect that you didn’t touch on, Sean, would be last year the volumes on the London Metals Exchange were really quite high with the onset of the pandemic, right? So if we just kind of isolate them, their volume is down about 30% versus last year and a lot of that -- there is a spread component in the LME business that’s a little different than the U.S. futures exchanges. So it was more high volume kind of lower RPC last year, which I would say, is a bit of an anomaly. And what it’s been replaced with volume-wise part -- about half of that volume has been replaced with higher volumes in the U.S. ag markets, where we have a higher RPC just naturally. And so, with the kind of coordination of those two items kind of is a component that led to that rise in RPC, in addition to what Sean said that’s kind of the re-pricing on the straight futures and options business in the institutional segment, if that makes sense.

Yeah. That makes sense. Okay. Thank you. And then I have a question on expenses. Obviously, variable comp growing with the revenue and profitability makes sense. The fixed compensation seems to grow a little bit faster than I would have expected. So I think there were a few things, you talked about in some of the comments around acquisitions that added. So I just want to make sure if this is a reasonable run rate or if there is seasonal stuff that makes this past quarter higher or just trying to think about the trajectory from here in fixed compensation?

Sure. Sure, Dan. Thanks. There was about, I think, we mentioned in the comments -- in the filing about $1.8 million in severance that was in Q1, if you are looking at as compared to the immediately preceding Q1. It was in Q2 versus immediately preceding Q1, sorry, which kind of drives that up a bit. I would also say the -- there is some long-term incentive increase of about $1.2 million that went up from Q1 to Q2 with much better performance on a stated GAAP ROE basis. While it’s -- we consider it non-variable because it doesn’t necessarily flow directly with the revenues each quarter, you do see increases when you see outsized performance. And then the remainder is mostly kind of the beginning of the calendar year reset with payroll taxes, healthcare, I am sorry, payroll taxes, retirement, some increases related to kind of paying time off accruals with the fourth calendar quarter or first fiscal quarter for us. You have some of those write-off of those balances that can be carried over and then you are starting a new here in the first calendar quarter. So I’d say, in all, kind of benefits -- non-share-based benefits were up about $7 million -- a little over $7 million kind of Q1 to Q2, and I would say, probably, $4 million of that or so, little better than half of that is kind of just related to kind of the beginning of the calendar year kind of -- I wouldn’t call them abnormal because it happens every year, but those are tick-ups you see in the first calendar quarter. But I would expect them to go down, particularly with the retirement charges and payroll taxes as the front office people meet some of those limits that are on those expenses.

Okay. That makes sense. And then just on the retail rollout, it was mentioned a few times throughout your prepared remarks, Sean. So just to be clear, this is a offering that you are looking to start with city index or the retail platform in Europe expanding kind of direct equity capabilities that, ultimately, you think will -- you will then push to the U.S. or just want to talk about the timeline and kind of opportunity set you see with that?

Okay. So I think one of the underlying sort of long-term strategic thesis is for us acquiring Gain was to try and add our broader product capability set to their self directed platform, and obviously, that we are bringing in a self directed platform and a new customer segment for us. So that -- those things are harder to do than it sounds like but that’s the plan. And we have identified that the biggest part of that is to add more of a sort of a cash equities components to the Gain platform. It’s going to be rolled out in slightly different ways just because of the regulatory differences between Europe and the rest of the world and the U.S. The good news in the U.S., we obviously are a broker dealer, we are retail broker dealer, we clear equities, we do it all, but it all happens in sort of different regulatory entities. In the U.K., we have been probably doing that a little bit simply. But on the flip side, we don’t clear international securities ourselves. So, we are having to do kind of a work around there. So last time we showed, both of these projects are in flight, both in the U.K. and the U.S., and we will have to see exactly how they sequence in. But we are hoping that within a 12-month period or so that we will have roll out both markets of at least an initial offering and then we will sort of iterate from there. So it’s a big project. It’s a project that I think we all think will fundamentally reposition both the Gain and the StoneX business and allow us to compete actively in that self directed space. I think in the U.S., there are not many people I know of that on a retail self directed basis can offer futures equities even potentially fixed income and foreign exchange, and that’s our desire, right, to offer that both in the U.S. and in Europe. So long story short, it’s a dual track just because the capability set that we have and the regulatory environments are different in both jurisdictions, but we are pushing on both of them at the same time. Currently, we think we will probably have it launched first in Europe and then in the U.S., but that timing could change just depending on how things come together. Does that answer your question, Dan?

Yes. No. It does. It does. And then my final question is just on the M&A environment. Currently, I know obviously you have been very acquisitive over time. How would you characterize the kind of opportunity set today versus other periods and maybe how much time you guys as a management team are spending on those inorganic opportunities versus organic?

Yeah. So we, obviously, see a lot of stuff, I mean, people know us as a consolidator and acquirer. So I think we are sort of in the flow of the transactions, if you like. Typically, we see anything from 50 to 100 opportunities in that 12-month period. I would say, what’s different now from my perspective and maybe sort of the way we think about things a little bit. But you have got a lot of the potential targets we would look at who have benefited from very buoyant market conditions. So a lot of them are sort of at peak revenue or peak earnings through a long-term cycle, right? And then on top of that, you see all the craziness in the current markets, whether it be driven by specs or bitcoin or how some valuations have just accelerated and a lot of these potential sellers are looking to put extremely high multiples on sort of peak earnings. That’s not going to be a trade we are going to be on the other side of. So we tend to be a very disciplined value buyers. I think there are lots of people who are looking to monetize at those kind of the peak valuation levels and some of them work. But I think we want to make sure we stay so sort of focused and disciplined around compounding our book value, buying businesses we believe we can add value to, I mean, there is no point in us buying a fully priced asset, paying good money for it and not being able to make it better, right, because what’s the point, how do our shareholders benefit from that? So I think we have just got to stay very focused. So in the context of that environment, I would say, it’s probably fairly unlikely we would do something meaningful until market conditions change. Now they could change fast and it’s hard to know what things will look like in six months or 12 months. But certainly, in this environment, it seems to be a seller’s market, not a buyer’s market, if that makes sense.

Yes. It does. Thanks for taking all my questions.

Okay. Operator, do we have any more questions?

Thank you. [Operator Instructions]

All right. It looks like we don’t have any more questions. So let me just close by saying this has really been a tremendous, and perhaps, transformational 18-month period for us, starting with the Gain transaction, the COVID effect both on us personally and on the markets and now culminating with our best quarter ever. None of this would have been possible without the amazing folks at StoneX and Gain, and their dedication and determination to serve our clients no matter what. Really a great privilege to be part of this amazing company, I am really excited about our trajectory and where we are heading. So thank you for joining. We will chat again in three month’s time and enjoy the summer everyone. Thank you.

And again, ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You can now disconnect. Have a great day.