Thank you for standing by. And welcome to the StoneX Group Third Quarter Fiscal Year '21 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Bill Dunaway, CFO. Sir, you may begin.

Good morning. This is Bill Dunaway. My apologies to all of you on the call here for starting a little late. The conferencing center was having some technical difficulties. So I appreciate all of you hanging around here a little bit with us. Welcome to our earnings conference call for our third quarter ended June 30, 2021. After the market closed yesterday, we issued a press release reporting our results for our third fiscal quarter of 2021. This release is available on our website at www.stonex.com, as well as a slide presentation, which we'll refer to on this call in our discussions of our quarterly results. You'll 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 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 Sean O'Connor, the company's CEO.

Thanks, Bill. Good morning, everyone and thanks for joining for our third quarter earnings call. In Q3, we once again reported strong results that exceeded our 15% ROE target despite near zero interest rate yields on our client float. During the June quarter, market conditions remained somewhat positive for us, but perhaps less low than in prior quarters, as we started to see a normalization of the markets post the COVID disruption of a year ago, although, we did see heightened volatility in commodities, particularly, in agricultural markets. So if you could turn to Slide 4 in the earnings deck, we'll go through that. Operating revenues were up a strong 34% for the quarter and 33% for the year-to-date period. Operating revenue significantly increased in all product areas with the exception of securities, which was - which were up modestly, and physical contracts, which declined 5% as compared to very strong prior quarter, which benefited from increased demand for precious metals at the outset of the pandemic. Operating revenue growth was driven by strong volumes, which were up across the board with the exception of listed derivatives, where we saw a small decline of 5% as a result of a 10% reduction in our larger Institutional segment, which more than offset an 18% increase in our Commercial segment. Revenue capture was up a very strong 46% for listed derivatives with increases in both our Commercial segment, as well as with our Institutional clients, where we have been actively repricing our offering. Revenue capture was up 64% for OTC contracts off the back of increased volatility in the commodity sector that was down 42% for securities, although, this was offset by significant volume increases. Revenue capture was down slightly for Global Payments, although it's offset by higher volumes resulting in a…

Thank you, Sean. I'll be starting on Slide 8, which shows our consolidated income statement for the third quarter of fiscal 2021. Sean covered many of the consolidated highlights for the quarter. So I'll just highlight a few and then move on to a segment discussion. Transaction-based clearing expenses were up 21% to $67.1 million in the current period, primarily related to the increase in listed derivative operating revenues, as well as the incremental costs of the GAIN business acquired. Introducing broker commissions were up 74% to $41.8 million in the current period, primarily as a result of the incremental costs of GAIN, as well as the increased activity in independent wealth management and listed derivatives. Interest expense increased $3 million versus the prior year, primarily due to higher average borrowings on short-term financing facilities or subsidiaries and an increase in securities lending activities. Interest expense on corporate funding increased $6.2 million versus the prior year, primarily as a result of the senior secured note issuance late in the third quarter of fiscal 2020 related to the GAIN acquisition, partially offset by lower average borrowings on our senior secured credit facility. Variable compensation increased $23.9 million versus the prior year and represented 34% of net operating revenues comparable to the 34% of net operating revenues in the prior year period. The increase in variable compensation was related to growth in operating revenues. Fixed compensation increased $20.9 million versus the prior year with the growth primarily related to the GAIN acquisition, as well as $3.2 million in severance costs as noted on Slide 5. The prior year period included $700,000 in severance costs. Other fixed expenses increased $32.4 million versus the prior year, primarily driven by the acquisition of GAIN, including $2.6 million in incremental amortization of intangibles acquired. In addition,…

Thanks Bill. Turning now to Slide 16, which summarizes the high level strategic objectives that management is focused on, as well as the key projects we have in flight to address each of these objectives. Most of these projects are ongoing, but some quick updates and highlights. First, in the first column there building our ecosystem, we want to stay relevant to our clients, both existing and new clients by adding products, services, and capabilities and creating the best ecosystem to connect them to the global financial markets. There are two areas we're focusing more attention on both driven by increased client interest. First, cryptocurrency remains a hot topic and a growing market. We actively support our Institutional and Retail clients by facilitating trading in a growing number of listed derivatives, as well as publicly listed entities, such as Bitcoin exchanges and other market participants. This is a growing revenue source for us and we want to remain relevant to our clients by ensuring we provide access to this growing ecosystem, as well as market intelligence around this space. That said, it is unlikely we will enter into physical crypto and wallet space anytime soon. The second area we're spending time on is carbon trading, which is another growing market propelled by the Global ESG initiative. Again, our role is to provide clients with access to all carbon credit instruments. In addition, we have a role in educating our clients on how best to participate in this marketplace. Many of our agricultural clients are potential sources of carbon credits which can be monetized for them. In Brazil, we are now an authorized participant of the local carbon certification process which allows these credits to be traded. Just recently, we're appointed by one of the largest ESG funds in Brazil with…

[Operator Instructions] And our first question comes from Dan Fannon from Jefferies. Your line is open.

Thanks, good morning. Sean, I guess the first question is just…

So, Dan before…

Go ahead.

Before you start, Dan, I want to ask you how often do you get your estimates right to the penny?

Yes, that's usually not the case.

Congratulation.

Yes, that was a unique one. But I guess my first question was just on the ROE targets and understanding that some of it's just math in terms of the growth in the capital base.

Yes.

But you did seem a bit more cautious just generally on just kind of a near-term and potentially longer-term ability to achieve that. So hoping you could just expand upon that a little bit more?

Sure. I think the financial businesses generally do correlate to an ROE range, right. And part of that is because you need capital to support the business and increased revenues generally require increased capital and increased footprint and so on. So I tend to think those laws of sort of gravity or laws of nature exist in financial businesses. Now clearly if you look at the environment now it's a pretty unusual environment and whether it's Goldman Sachs or Jefferies or loss, we are putting up ROE numbers that are well into the 20s. I don't think that's a sustainable situation long-term. I think that is somewhat of an aberration. And I think the market is reflecting that in sort of the low PEs that all these companies are trading at right. So I think the question for us is always look through the cycles, set yourself a long-term ROE target and manage around that. So if you go back to pre-COVID, we were tracking at 15%, 16%, 17% ROE somewhere around there, we made the GAIN acquisition, and if you look at the investor presentation we put out, we said that we think the increased scale of GAIN in addition to the fact that, that business was acquired without the issuance of additional equity. So it was going to sort of keep equity constant, but we had an additional revenue source. Our view was that could push our ROEs closer to the 20% range. So our view was all things being equal, we should be sort of 15% plus, but that assumption is a normalized market environment, normalized interest rate environment and sort of GAIN operating as envisaged. Clearly, we're not in that environment now, but we have pretty conducive market conditions. We have zero interest rates and the net results as we've been sort of above even the top end of that expectation going forward. So all things considered, it's really hard to predict how things are going to track out. I do think COVID is going to be more bumpy that would probably argue for sort of slightly higher volatility generally, although it may be sporadic, and I think at some point we're going to see interest rates kick in, which for us is going to be a big push. So I think we sort of come back to - we should be between 15%, 17%, 18% ROE sort of depending on the environment and dependent on where interest rates are, and I think that's sort of a long-term kind of target we set ourselves. Does that make sense or --

Yes, no, no, that does, that does.

Yes.

So thank you for that. My next question is just on the RBC in the listed derivatives which increased a lot. I think in your prepared comments you mentioned around the pricing changes or proactiveness you guys have had, if you could just kind of expand upon that thinking about the stickiness of these types of levels?

Yes, I - this has been a tough thing for us to do. So if you think about particularly in our Institutional segment, we have a sort of somewhat undifferentiated offering. I mean we always think we better than the competition because we serve them better and all of that, but there are a number of firms who compete with us directly in that offering. And that business model was always priced assuming interest rates, we're going to give you the revenue needed to make the ROEs on the capital resources committed to the business, obviously that changed. And we have to sort of think about how we're going to deal with that business, I mean, otherwise it should be a significant drag on our ROE. And I think what you found also over the last five years is a consolidation of the industry and a reduction of surplus capacity, which means pricing power has returned a little bit to the clearers whereas before you know it was the most aggressive guy on the margins at the price. So I think it's indicative of clearing becoming a more valuable commodity, less capacity and people may be also valuing our increased capabilities over time that people will come here and they can trade different asset classes, and we sat down with some of these folks, and we just said, in this environment, we're just not making the logical return on the capital resources, we're putting up to support your business. And to be honest, for the most part, our clients got it. I mean, they were like, yes, you're running a business, we understand, we don't want to be materially off market here, but we get the point, we like the relationship with you guys, you serve us well. And honestly, not all the clients, but a significant portion of the clients accepted some renegotiation of the rates, which we're not trying to gouge our customers. I think we're just trying to right-size that business model to make sure that we make the right return on capital, otherwise, if we keep doing that, we don't - and we can't justify the return of capital, we start reallocating capital out right and that doesn't help our clients. So I think it was an interesting process we went through. It's never easy to call up a long relationship and say, hey, we have to push your prices up. But I think we explained them in the right way and you can see the results. I think customers generally sort of accepted that argument. So I believe that lots of hard work in sort of calling customers up and having that conversation.

And just one thing I would add there, I guess, Dan. I would say that also, there was a pretty significant increase in the rate per contract on the commercial side as well. With - when you see a lot of ag volatility like we saw in this quarter and even to some extent last quarter, you tend to see not only our - some of our big - some of our commercial clients that tend to be a little bit higher RPC than some of the others, but you also have the introducing brokers, which tend to be - they cover individual farmers, you start seeing a lot of activity from them and you start seeing, it's a bit of a gross-up issue where you start seeing higher overall commissions, which drive higher overall RPC, but then you see a pretty good increase in introducing broker commissions that come in there as well. So it nets out lower, but you're going to see a bigger kind of top-line RPC, just because those individuals are paying a higher rate than a large commercial client is. So hopefully that sheds a little bit more light there.

Yes, that's helpful. And then just shifting to Global Payments, that was a portion of the business that was from a mix perspective impacted by COVID. Just thinking about the outlook for that both from a capture and just kind of volume perspective, how should we think about that business from here?

So you're correct, that business was affected by COVID pretty dramatically, and I think is now sort of back on track largely. I mean, depending on what happens going forward clearly. We're pretty optimistic about our payments business honestly because we continue to get sort of internal traction of the banks, and we always think there is a lot of room for us to grow inside of those bank relationships, right, because you would think the banks are sort of super-organized and all the payments come through to one place and not automatically routed, but they are not. I mean these banks have lots of different divisions and different entities and we have to sort of work with them to go through all of that. So I think there is a good sort of track record, a good track in front of us there. But additionally, I think as we've mentioned before with the GIROXX acquisition, we are now rolling out a sort of a digital offering to smaller companies that we haven't really done before. We've really relied on the banks to pick up some of that flow. We're now going to start that and we're going to do it in Europe, the US, and Brazil. So that's a big initiative for us. And additionally, we're sort of refocusing our efforts on trying to make sure that every one of our 450,000 retail customers and 30,000 commercial institutional customers use us to make their payments, and we really haven't integrated that offering yet. So that's pretty exciting for us as well. And that's just mining the internal client base is pretty significant right now. So those are sort of the two things that are on the table. We've seen a lot of these payments providers come to market. It's…

Understood. And just lastly for me, you mentioned the crypto potential opportunity, and curious if that's just an expansion of kind of GAIN's retail offering or if that's something institutionally, and then within that construct just the M&A kind of outlook, is that - is that a capability that you are just going to be launching organically or something as you look at expanding that, that could be part of the broader kind of inorganic strategy?

It was actually interesting because we think we've been sort of watching like everyone sort of crypto all over the headlines, right. And we actually did sort of a look internally, and we are sort of surprised that how much of revenue we are actually getting at the moment from our clients, who trading in the crypto ecosystem. I mean we make markets in a lot of the public companies, right. We trade all the derivative contracts. So it's actually a meaningful subset of our current businesses, but we've never really sort of thought of it as an ecosystem to go and offer to our clients. And I think we're putting some good research and market intelligence around that, now, we're starting to think a little bit more holistically about what are the other assets in that ecosystem, we should be providing access to our clients, how do we sort of think about the ecosystem better. I mean what we're not going to do is sort of wallets become an exchange and so on. But what we want to do is make sure that as new trading venues pop up. as new instruments pop up with this ecosystem, we sort of thoughtfully think about how we can provide our clients access to that. So that's sort of our current approach to it, and the same thing with carbon. Carbon, I think is a massively growing market. And it's still a little bit of the Wild West out there. I mean you have sort of listed derivative contracts, there's new - there's new contracts coming on in Singapore and elsewhere, and we want to be at the forefront of providing liquidity to our clients in those contracts. And there's also a lot of OTC trading that's happening, and a lot of our commercial clients want to be a part of that. So we've got to figure out how we can be proactive and facilitate our customer demand and interest in these two areas, and we're already making a lot of money in both of them. So it's just a question of being a little bit more focused and thoughtful around it.

And just to clarify, so the crypto that's both through your Retail and Institutional segments then, that's the way to put it.

Correct, correct, yes.

Okay.

Yes, exactly.

[Operator Instructions] And I'm showing no further questions at this time. And now I'd like to turn the conference back over to Sean O'Connor for any closing remarks.

Okay. Well, thanks everyone for joining the call. Enjoy the end of summer here, and we will be speaking to you soon. Thank you.

Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone have a wonderful day.