Welcome to StoneX Group's Second Quarter Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After the speakers’ presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Bill Dunaway, Chief Financial Officer, please go ahead.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our second quarter ended March 31, 2022. After the market closed yesterday, we issued a press release reporting our results for our second fiscal quarter of 2022. This report is available on our website at www.stonex.com as well as a slide presentation, which we will refer to on this call in our discussion of our quarterly and year-to-date 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 the following discussion should be taken in conjunction with the most recent financial statements and notes thereto and 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 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. 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. Sean O’Connor: Thanks,…

Thank you, Sean. I'll be starting with Slide number 8, which shows our consolidated income statement for the second quarter of fiscal 2022. Sean covered many of the consolidated highlights for the quarter. So I will just highlight a few and then move on to the segment discussion. Transaction based clearing expenses were up 2% to $76.5 million in the current period, primarily related to increases in OTC and listed derivative volumes as well as higher costs in our retail FX business, due to increases in client funding transactions. Introducing broker commissions, we were up 6% to $43.2 million in the current period due to increased activity in our listed derivative and wealth management businesses. Interest expense increased $3 million versus the prior year, primarily due to an increase in securities lending activities, as well as higher average borrowing on short-term financing facilities of our subsidiaries. Variable compensation increased $18.1 million versus the prior year due to an increase in net operating revenues and represented 31% of net operating revenues in the current period compared to 32% of net operating revenues in the prior year period. Fixed compensation increased $4 million versus the prior year with the gross principally related to salary and benefit cost of increased head count, which increased 10% as compared to the prior year. Other fixed expenses increased $27.9 million as compared to the prior year to $99.9 million. And were up $13.4 million versus the immediately preceding quarter. As compared to the prior year selling and marketing expenses increased $7.8 million and professional in fees increased $4.8 million. The increase in selling in marketing primarily relates to an increase in digital marketing in our retail FX business, and to a lesser extent cost related to our bi-annual global sales and strategy meeting. In addition, trading…

[Operator Instructions] Our first question comes from Daniel Fannon with Jefferies.

I was hoping you could just talk about the health of your customer base. Obviously predicting volumes and sustainability is something that is hard to do but given some of the extreme moves in the first quarter and some of the levels of volatility that occurred wondering if there's any kind of flow through or negative impact to your customer base and thinking about future activity, engagement, all of those metrics. Sean O’Connor: Yes. So as I mentioned in my prepared remarks, when we see extreme volatility obviously that translates into liquidity stress on our clients. We work hard to make sure clients are prepared for that. But obviously you do see bad debts and clients not being able to fully handle the stresses that come at them. So to a certain extent, we see a wash out of some of our clients. You can see that in our numbers, we had a $12 million bad debt write off. So that's clear evidence that there's some damage that always comes from these elevated volatility type situations. But honestly, I think in large part, as I said, I think we have a very good risk management system. And I think over time we really synced ourselves up with our clients and made sure they understand the risks they take. Because we obviously want to mitigate any of our client fallout, right? Because we hope these clients will be clients for a long period of time. So I would say given the extreme volatility we saw, I think our client base in general came through really well. I don't anticipate a huge fall off in activity, obviously that's dependent on ongoing market conditions largely, but I think most clients were able to weather the storm. Many of them have done very well…

Yes, no, that that's super helpful. And I guess just on the bad debt and if I think back when WCI went negative, the repercussions to your income statement were a lagged effect associated with some of that. So if you think about what occurred in the quarter was it across a handful of clients? Is it widespread? Is there the potential for insurance recovery? Just want to think about the breadth of that. Sean O’Connor: Yes. The one thing which becomes hard to predict is the sort of second and third derivatives of the initial event, right? So clients have performed, but if their clients become stressed and they have defaults, that kind of goes out the chain. We certainly anticipated in COVID that there would be a delayed effect. I think if you listen to my comments on the call, just post that March quarter, I think we sort of highlighted to people that there was so much dislocation in the supply chains that was very hard to know how this would roll out and that there would potentially be a lag effect on our bad debt. We don't see the same thing today. So I think the probability of a sort of a tail of bad debts relating to this volatility we've just seen is lower. I can't say zero. I mean, it is very hard to predict sort of the second and third derivative of these things, but I think we feel good about there being less of a risk of that. Now, obviously it depends on what happens going forward and do we see another state of extreme volatility or not? But I think generally speaking, we feel pretty good about where we are. Some of the, you know, we typically, when we review for bad debts, we always try to take a very conservative view. Obviously, we have to go through an accounting and GAAP analysis of how we decide to take bad debts, but if anything, we try to err on the side of conservatism we typically discount recoveries or potential recoveries from clients that we believe are weak or tenuous. But sometimes those clients come through and they pay us back. So I think there is some potential for some amounts of recovery for the amounts that we have written off. But I think they sort of fall below the threshold of being sort of comfortable and certain that that could happen. So I think it's possible, but I wouldn't rely on it. So does that answer your question, Dan?

Yep. That does. And shifting to the cost side growth in the fixed costs and obviously a very good revenue environment. So margins, or all of that kind of flow through is quite good, but if we think about the second half of this fiscal year the kind of exit run rates for some of these expense levels, should we anticipate kind of continued growth in some of these fixed costs you mentioned, we know that all the investments in growth initiatives that you're focused on, but I'm just curious about the trajectory or the pace of spend, as we think about your income statement or your expense budget for the second half of the year. Sean O’Connor: Yes. Well, Bill, maybe you can give more specific comments, but as a general comment, what I would say is some of the staffing up of some of the initiatives we envisage to happen during this year have been impacted just by the inability to hire people. So we are behind and have lots of positions that we thought would be filled still available. So to that extent, I think there is a potential for some increased spend coming at us over the next two quarters. But I think on a sort of overall incremental basis, it's small amounts of percentages versus kind of our current installed expense base. I think by and large, we have invested in most of the capabilities we want. I mean, certainly there's been a big investment in upgrading, our digital platforms and, you know, we, we starting to see the payoff of that, but that's largely been embedded. And as you can see on the security side, we can see there's been a big increase in fixed costs, and that maybe hasn't really sort of shown up with revenue as I think we mentioned last time we brought on a lot of new teams expanded into a lot of new areas. And as we know, that takes a couple quarters before those people become productive and some of them have to set out on the market and restrictions and so on. So I think those two things will start to work for us, but Bill, I don't know if you have any more specific comments for Dan on that.

Sure. Thanks, Sean. So when we're looking at the non-variable expenses, as Sean touched on, you know, certainly non-variable comp is up. If you're looking versus the most recent quarter, it's up about $8.3 million underlying that is really, $3.1 million that is true salary increase. I do think we'll see some incremental growth in that as Sean touched on, but the hiring market is certainly difficult. So whether we're successful in actually hiring them, I guess, is a little up in the air. But I would know, and I think we may be touched on this last call, our Q2 is the first quarter of the calendar year. And we do see a spike in payroll taxes and retirement contributions, et cetera, as kind of everybody's cycles reset. Right? So the employer contributions to both of those are higher at the beginning of the year. So I mean, those are both up $2.5 and $2.1 million respectively kind of sequentially versus the first quarter. So I would see some of that trailing down, Dan here as people have reached their maximums. And then, you know, looking at the other big spikes, as we mentioned in Sean's comments, selling and marketing up quite a bit versus both last year and sequentially and some of those flexes, right? Especially in that retail floor space, when they have periods of good volatility, we'll be spending more in order to try to get our name out there and more customer acquisition, so that was up about $3.4 million over the first quarter. And also, some of that, as we touched on was related to the large conference, we had that happens every couple of years, our global sales and strategy conference. So I wouldn't see that repeated. And that was probably in the tune of about $2 to $3 million. But other that I do think we'll see some incremental growth, I think you did see some of those things that were a bit higher just because of the timing of Q2 and, also to touch on there's some like non income taxes and trade errors that were somewhat elevated in the current quarter, just because of the volume and transactions that we have that are not technically variable, but do kind of flow with the business. Does that make sense?

Yes, that does. Okay. And then in terms of initiatives and Sean, the ones that you you've been talking about several of them for multiple quarters, I guess, in terms of the immediate contribution any specifics to the order for which you talked about, is it by the size the contribution, immediacy to roll out and seeing in the income statement or longer term, larger opportunity? Sean O’Connor: I think this is a medium to longer term incremental opportunity. I don't think any of these initiatives are going to sort of light up in the next quarter, notably. I think this is a steady kind of digitization of our platform, which will allow us to incrementally speed up our growth. And if we do that, right, that should show up in sort of better margins and better growth over time. But I don't think it's something you can model into sort of the next couple quarters or something. I just don't think it's going to show up that way.

Right. Okay. And in terms of as you are building new businesses, hiring additional teams and other, is there at the top of the house, any discussion around kind of the variable pays for performance, pay-out structure that occurs in most of your businesses? As you get more scale and as the platform gets more cloud and there's natural benefits of the brand, do the pay-outs ultimately come down to the benefits of--to accrue back to shareholders and ultimately returns over time. Should we think about more operating leverage in the business as you adjust the variable compensation commission kind of pay-out legacy practices? Sean O’Connor: So I would have a couple comments on that. I think we've proven over time that having a very transparent cash compensation plan for our people where they can work out what their compensation is on the back of a napkin has been a very powerful, positive force for us. It's allowed us, when we were a very small company to attract talented people, we are now pulling people out of the bulge bracket banks who want to come work for us because the big banks don't do it that way anymore. And we allow people who do well to make a lot of money with us. So I don't think we want to move away from that, which has been very successful for us. I do get your point that when you're small, you really need the people because there's no franchise value. But I do think we've got to be really careful with sort of meddling with that, because I think that could be problematic. What will happen potentially, what has happened is as these businesses have digitized, we have forced, and I think the teams have been willing to do this,…

Yep. That does. And then just lastly, for me, in terms of the current landscape the acquisition, potential opportunity, you mentioned, some of the fallout from and share gains that you're seeing organically. Is it also presenting itself in an M and a fashion in terms of some of the disruption that's occurring? Or should we think about it just more as customer ads and share gains versus any kind of bolt on type of business ads? Sean O’Connor: Yes, well, I would say our default situation is always to grow organically and we work hard to do that. And I think we're becoming known in the market, so we are seeing a lot of inbounds and a lot of sort of organic increases in our business. As I said, in my prepared remarks that always seems to increase when you go through a period of volatility, everyone starts to wonder if they're in the right place. And once there's movement in a client base, it becomes easier to grab some of that. So I think it's a pretty positive environment for organic growth. And I think that'll show up in our numbers. In terms of acquisitions. I think someone asked me, might have been you, Dan, last quarter, or even the quarter before sort of the landscape for acquisitions. And I think my response was the market is so overvalued and that overvalued mindset is scripted everywhere, and people are taking sort of historic record earnings and putting historically high multiples on it. And that's just not an environment where we are going to be enticed to buy something, right. I mean we want to be disciplined and deep value buyers of businesses that we can add a lot of value to. Having said that, I think that's changed a little bit, right. I mean, we've seen a lot of the excesses of the market have sort of rolled over. Many of them have round tripped. I mean, just look at Netflix or Zoom, so a lot of the SPACs where we were competing in M&A against SPAC alternatives. I mean, those haven't ended up very well for people. So some of the excesses are being run out of the market. I mean, it will take time before that reflects itself in sort of more reasonable price expectations. And then on the other side, when you go through these sorts of traumatic events, there are people who could end up with business models that either suffered some trauma or shareholders who maybe not so interested in holding those businesses. So I think the landscape's changed. I think it's becoming a little bit more conducive potentially to acquisitions, but just to be clear, there's nothing we see at the moment that's of any material interest at this point. So we will continue to organically grow our business. And if the right opportunity comes with the right price, we are always available to look at it.

At this time, there are no further questions. This concludes the question answer session. I would like to turn the conference back over to management for closing remarks. Sean O’Connor: All right. Well, thanks everyone. I appreciate your attendance today. And look forward to speaking to you in three months’ time. Thanks very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.