Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the StoneX Group Inc. First Quarter Fiscal Year 2023 Conference Call. 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] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host today, Mr. Bill Dunaway, Chief Financial Officer. Please go ahead, sir.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our first quarter ended December 31 2022. After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2023. 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 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, 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.

Thanks, Bill. Good morning, everyone, and thanks for joining our fiscal 2023 first quarter earnings call. The first quarter of fiscal 2023 was marked with the continuing effect of inflationary pressures on global markets and significant increases in short-term interest rates. Volatility continued in both financial and physical markets, however, at a more diminished level than we experienced for much of fiscal 2022, especially towards the end of the quarter. Turning to slide three in the earnings deck, which compares quarterly operating revenues by product versus a year ago. Listed derivative revenues were essentially flat as higher volumes were offset by lower revenue capture. Revenue from over-the-counter derivatives were down 9% off the back of lower volumes and slightly tighter spreads. Physical revenues were up a strong 46%, due to the addition of CDI, as well as good results from the precious metals activity. This was despite a $4.2 million mark-to-market loss on derivatives held against inventories, which should reverse next quarter. Securities operating revenues were up 91% as a result of significantly higher volumes and also interest rates. While the higher interest rates helped drive the increase in securities operating revenue, we experienced significant increase in interest expense related to our fixed income trading as well. This happens as when we trade bonds, we earn the carried interest on our positions, but also incur related interest expense on financing the securities, which results in a bit of a gross up on the income statement. We have changed our method of calculating securities rate per million revenue capture for this quarter and the prior year to address this and are now deducting the related interest expense associated with our fixed income trading. Factoring this in, the securities rate per million declined 20% to $422 in the first quarter, as compared…

Thank you, Sean. I will be starting with slide number eight, which shows our consolidated income statement for the first quarter of fiscal 2023. Sean covered many of the consolidated highlights for the quarter, so I'll highlight a few more and then move on to a segment discussion. Transaction-based clearing expenses declined 5% to $67.3 million in the current period, primarily due to lower fees and equity products and the decline in FX/CFD contracts average daily volume. Introducing broker commissions declined 4% to $36.8 million in the current period principally due to declines in our independent wealth management and retail FX/CFD business, which was partially offset by incremental expense from the CDI acquisition. Interest expense increased $138.6 million versus the prior year, primarily as a result of the $93.3 million increase in interest expense related to our institutional fixed income business, which Sean noted earlier, as well as a $36.1 million increase in interest paid to clients on their deposits as a result of the significant increase in short-term interest rates. Interest expense on corporate funding increased $2.6 million versus the prior year, also as a result of the increase in short-term interest rates, as well as an increase in average borrowings. Variable compensation increased $18.1 million versus the prior year, due to the 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 $5.9 million versus the prior year with the growth principally related to salary and benefit costs of increased head count, which increased 13%, as compared to the prior year, which was partially offset by an increase in deferred compensation. Other expenses increased $23.7 million as compared to the prior year to $110.2 million, which also…

Thanks, Bill. Let's move on to the final slide, 16. We achieved very strong results in the fiscal first quarter 2023, delivering double-digit increases in operating revenues and net income, which resulted in diluted EPS of $3.62 and an ROE of over 27% for the quarter. These results included a $23.5 million non-taxable gain on the acquisition of CDI, which contributed $1.11 of earnings per diluted share and a significant increase in interest income, reflecting the growth in our client assets and higher interest rate environment. While trading conditions moderated towards the end of the first quarter, the multiple drivers of our business, including our disciplined approach to acquisitions, the strong growth in client assets and our core operating performance, exemplify the diversity in our operating model. We believe that these multiple drivers and our ongoing investments position us to continue to empower our clients and drive our growth and deliver shareholder value. When our performance is viewed through a slightly longer-term lens such as trailing 12-months over the last two years, which evens our quarterly anomalies, our results continue to show a strong upward trajectory, growing our revenues at a 28% CAGR and our adjusted earnings at a 44% CAGR. We continue to see strong growth in client trading volumes and client assets across all products and all client segments, which speaks to growth in our underlying client engagements. We continue to invest in our financial ecosystem, expanding our products, capabilities and talent. We have a unique and a comprehensive financial ecosystem with a very large addressable market in front of us. I would just like to note that this week represents the 20th anniversary of the investment into what would become StoneX. 20-years ago, the stock price was $0.64 and the market value of the company was $1.5 million, and the annual operating revenues were well less than $10 million. Over the past 20-years, we have compounded operating revenues at 32% per annum, shareholder equity at 29% per annum. And by harnessing the phenomenal power of compounding, we have increased the market value of the company over 130 times. Our commitment to our clients, our discipline around risk and acquisitions and our long-term owner-based approach to investing into and growing our business have all been key underpinnings of the success. While we are proud of our track record and believe that it is largely unmatched by our peers, we also believe that we are still in the early stages of the opportunity that is available and in front of us. I have no doubt that the next 10 years are likely to be much more -- for StoneX than the last 20 were. Operator, let's open for questions.

Thank you. [Operator Instructions] I'm showing we have a question coming from the line of Daniel Fannon with Jefferies.

Hi, thanks for taking my question. This is actually June on behalf of Dan. So maybe we can just start off with a quick discussion on the current environment and maybe just on 2023, how has that started versus what was the backdrop of 2022.

Sure. Obviously, things can change fast in our business. So these general comments can change by the minute. I think if you go back to our discussion at year-end, my view was we were going to continue to see somewhat elevated volatility, which is obviously a key driver for our business. And that volatility would be higher than it was pre-pandemic, but maybe slightly lower than it had been for the last two years. And I think that's what we still see. Things obviously quieted down last quarter over the Christmas period. And maybe it was just the way the days fell over Christmas. It might also be that it was such a rough last quarter that I think a lot of people sort of closed down. In the beginning of December, it went down. We've seen things pick up to a more normal cadence here in January. So I think we're going to see an environment that is moderately good for us on the volatility side, not quite as good as it was in COVID, but better than it was pre-COVID. And I think that will continue for some time yet. On the other side, we're obviously now starting to feel the full impact of interest rate increases. We always forget how quick and how fast these interest increases came about. And we really only started to see them showing up in our financial results by any magnitude in the fourth quarter. And obviously, now we're starting to get to the point where we've seen that interest really kick in. And I think we're going to be in an environment where interest rates are sort of either side of 4% for a while. I mean I'm not sure they'll stay at 5%, which is where it looks like they're going. But I don't see a sort of a 2% environment out there anytime soon. That's obviously very attractive for us, and that's a much better environment than we've had at any point in time over the last four years, I mean, and certainly better than last year. I mean, last year, as I said, we only saw a very small benefit from the interest rates. So I would say if you put those two things together, I think it's a pretty good environment for us, honestly. The interest rate impact is material. And I think we're still in a decent environment for volatility. So that would be my view. So as I said, things can change dramatically -- quickly in our business. Obviously, volatility changes faster than interest rates do. But I think this is going to be a good environment for us for at least 12 to 18 months. I mean beyond that, hard to know how far interest rates might go down, but I still don't see them going to below 2%. So anything above 2.5% for us is a very attractive environment in our business. Does that answer your question, June?

Yes, yes, absolutely. That was super helpful. And then since you mentioned interest rates and just it seems like markets pricing interest rates going down maybe at some point this year or next, so just on the way down as your earnings sensitivity to rates sort of similar -- will be somewhat similar on the way up versus way down? Or is there some kind of dynamic here?

Yes, it will be the same. I mean, the assets sort of might take a little quicker to reprice from the way down. But the dynamic will be the same. I mean, obviously, our incremental take of interest as it goes up reduces, because we pay more weight to clients. And on the way down, same thing happens. We take more of the interest rate on the way down. So it's a little bit muted each way as you get sort of above 3%. But it should be symmetrical.

And maybe just in terms of margin balance -- margin requirements and client balances, do you see any dynamics between that related to interest rates -- interest rate changes?

Yes. We have seen some small changes here and there. I mean I think they're largely immaterial. But certainly, in our equity clearing business, we've seen some retail clients take money or full deposits. I don't know if that's because they could find higher interest rates elsewhere or people were starting to buy into the market rather than having money on the sidelines. But we've seen that go down 1% or something. And then on the other side of our business, it obviously depends on the volatility in the markets because that somewhat drives how much margin people have to leave with us. So if volatility moderates a little bit, we may see a little bit of a pullback on our aggregate client balances. The top sort of, I guess, 10% or 15% of our client balances tends to be more volatile. But there's a core level of client balances there, which sort of just underpins our client footprint, right? And as long as markets are reasonably active, that's probably going to be reasonably stable. But it could move around on the margin just a little bit for those reasons.

Got it. Got it. And just specifically on the Retail business. You mentioned capture rate decline was mostly due to diminishing market volatility. So going forward, what would you describe as a normalized rate? And maybe you can go a little bit more in depth on the dynamics of just market volatility and the rate that we're seeing here.

Yes. So we have data around sort of revenue capture in that business over a long period of time. And it's pretty damn stable over a period of time. What we do see is, in the short-term, weekly, monthly, even quarterly, there can be quite a lot of volatility in that revenue capture. So I would say something around $90, $95 in terms of revenue capture on the CFDs is sort of about where we think the long-term average is. I mean that obviously also differs with product mix because we make a lot less on the FX than we do say on indices. So something in that region is probably where we'd like to see it. Now we are at 82 this quarter. So we were significantly below the sort of 9,500 type level that we see as the long-term average. But if you look at the prior quarter a year ago, we're at 115. And in the immediately preceding quarter, we had 140. So I would say we're sort of massively overachieved in those quarters. And you trend back to the mean at some point. We're probably going to see a couple of quarters where we're going to underperform to bring that average back in line with the sort of 95, 100 type levels that we think is sort of the long-term average. So we certainly saw exceptional market conditions over the last 12 to 18-months in that business. Our revenue capture was above trend. And now we've seen a bit of a tougher environment and now we're below trend. So we should be evening out somewhere in the middle here over time.

Understood. Thank you. And maybe, Bill, just a quick one for you. I understand that the business is doing well, but how are you thinking about fixed expenses for 2023?

Well, certainly, it's something that we look to try to continue to control, right? And the increase was relatively modest from Q4 into Q1 here. We're cognizant that, obviously, we're riding the tailwind a bit of higher interest rates and slightly elevated volatility. So I think that the growth that we kind of saw over Q4 to Q1 is probably more indicative of what we would expect going forward versus when you looked at Q1 versus last year Q1 with a relatively sizable increase in fixed expenses, kind of, due to what Sean's talked about on previous calls, us trying to digitize the business and expand our offerings. But our expectation is that would moderate here on a go-forward basis like it did from Q4 to Q1.

Got it. Got it. And then just lastly on M&A. Do you think you're still sort of digesting the CDI acquisition or you are kind of looking for more opportunities at this point?

I'll take that, Bill, if you like. So CDI is a relatively small deal for us. I mean, it had a disproportionate impact on our financial statements through, sort of, how you have to account for these things. That deal is going to be digested, I think, pretty easily and quickly by us. So it is not a gating factor for us looking at anything else at this point. And we're always in the market. We're always looking at opportunities. I would say, and I've said this on previous calls, up until now, we've seen financial businesses hit peak earnings, and we've seen owners want to put sort of spat multiples on peak earnings, which obviously -- of no interest to us. And I think we were well served not getting involved in any acquisitions on that basis. What we're now seeing is, obviously, as you read in the press and see everywhere is a totally different environment, right? Some of these businesses are now not performing so well, and they've realized that it was maybe a little bit of a COVID sort of bump that got them there. And additionally, funding has dried up for a lot of the sort of start-up businesses, and a lot of them are sort of halfway down the road of building out their capabilities. So we're seeing a lot of those kind of opportunities. We're not a -- we don't like to take sort of -- I guess we start businesses all the time ourselves, but we don't think of ourselves as venture capitalists. So we will look at those businesses. And if we think there is real capability there and real opportunity and with a modest amount of additional investment bias, we can bring those to accounts and grow our ecosystem. That's…

Okay, that was super helpful. Thanks again for taking all my questions.

Of course. Thank you. Operator, do we have any other questions?

Thank you. Yes, sir. [Operator Instructions] And our next question coming from the line of Paul Dwyer with Punch & Associates Investment.

Hi, good morning, guys.

Hey, Paul. How are you doing?

Thanks for taking my questions.

Good morning.

Good. Maybe just to follow-up on CDI. Can you spend -- I think it's only like a $40 million deal. Can you talk about what drove this gain on the acquisition?

Yes. I mean I don't want to get too much in the weeds on this, but this was a sole proprietorship. And I think we sort of said some of when we announced we were doing the deal a quarter ago. One of our top employees in Brazil joined the company, I think it's five, six years ago to become sort of the heir apparent. We were sad to see him go, and he was a tough competitor in the cotton business for us. And when the principal wanted to sell his business, he immediately thought of us and said this is right up StoneX's alley, let's call them. And there was no process. We just did a deal. I think the owner took the view that if I can just get my capital out of the business, and there was a big tax advantage for him, he had let the profits remain inside the company because, as I understand it, this tax treatment would be -- he would be taxed on anything he took out of the company. But if he sold the company, that would be a tax-free receipt for him. So there was a significant tax advantage for him to sell a business that accumulated sort of capital over the years. So the pressure price is sort of in the $30 million, which was tangible book value. That was the deal we did. And there were a few sort of add-on payments based on the results of the company on a cash basis up until December. So we made some small additional payments. So that's the deal we did. I think that's the deal he wanted. There wasn't huge amounts of negotiation. I think that's the deal he was looking for. The difference is, for him, he…

Yes. Okay. Sounds like a nice deal. On Global Payments, it seems like it's continuing to accelerate in its growth. Can you just spend a little more time talking about what the drivers have been to get the acceleration and just the general landscape for that segment?

Yes. I mean definitely, we sort of feel that, that business has got sort of renewed energy and we're starting to invest in the business in sort of new angles, which I think maybe three, four, five years ago, we weren't doing so much because our core business was sort of [on affair] (ph). And that's always frustrating to me is when businesses do well, people stop investing because they're sort of busy making money, right? And I think we've always got to do both. You've got to take advantage and make hay while the sun shines, but you've also got to sort of -- you've got to think about investing in your business, because we want to grow the franchise. And sometimes those market conditions that make your business profitable or sustainable in the long-term unless you invest. So I think with the payments business, we pushed them really hard about two, three years ago to really think about how to sort of reinvest and grow the business. And they are -- we're making big investments in that business right now. And not a lot of that is showing up yet in the P&L. But I think it sort of energized the team. We've got a lot more sort of younger people in the team. We've recruited people. All these new initiatives are very much technology-based. So we've recruited sort of younger technology-based people. So sort of feel good about the general sort of tone of the business and where it's taking us and our local payments capability when we launched that, I think, would be very significant, potentially for us. In terms of why the business is doing better now, I think this perversely was one of the businesses that didn't experience a COVID, kind of, tailwind. People stopped investing overseas. I mean, the payments where we really make a lot of money on with corporations are investing and making larger size payments into the subsidiaries, a lot of that slowed down during COVID is now picking up. So I think, on the margin, I would say that sort of high-level takeaway is COVID was sort of a tough environment for this business, and we're getting back to a more normalized environment, which is a little bit the opposite of some of our other businesses, right? So that's what I would describe it generally. Yes.

Okay, great. Yes, that's perfect. And then really nice operating leverage again this quarter. just big picture, how do you think about continuing to be able to drive, I guess, segment income relative to unallocated costs, particularly if the interest rate benefits are now starting to be more accurately reflected in the business.

Well, when you say we got better operating leverage, my response to that would be finally. So we always seem to be investing so much in trying to make our infrastructure more efficient, more scalable. But in the short-term, it's just a net add in costs. And you sort of hope that, at some point, you start to see those benefits of scalability and that operational leverage sort of come to the fore. So it's been a long time in coming. And hopefully, we're now getting to the point where we will see our aggregate, sort of, unallocated cost base sort of level out. And if we can continue to keep the volumes and the revenues going up, I mean, we should have very significant operating leverage going forward. It's hard to do, because not only are you trying to digitize your business and leverage technology better, but there's always a continual push on costs from the regulators and the environment, right? The regulators are always imposing more and more costs on us, more and more processes. Some of that's good. Some of that maybe is more than is required, but you have to continuously, sort of, work with that environment. And then as we're all digitizing, so you have to deal with things like cybersecurity and all the costs that are related to that. And those costs are going up faster than even the high inflation we're seeing at the moment. So there's -- even though we're starting to flatten out at some point, there are some real pushes to costs here that we've managed to work with, and there's going to be a challenge going forward. But we definitely feel we should be tapping out. We've made some major investments over the last 10-years. I think we're starting to see a little bit of the payoff for that. So hopefully, that will continue. Obviously, it always looks better when you have interest coming in and a positive environment, because your revenues grew, kind of, faster than your cost at that point. And always remember that without interest, we have zero cost against that, right? There's no operational costs, no systems cost. So the operational leverage on interest is 100%, right? So that also skews the numbers a little bit. So I sort of rambled on it. Did I answer your question, Paul?

Yes. No, that's great. That's perfect. And then just last for me, in terms of just being able to continue to grow the core business, it sounds like you're having no issues with market share gains, but any color you can add just the current competitive landscape and the ability to keep taking market share?

Yes. I mean we seem to be organically, sort of, growing our market share in line with what's happened over the last five to 10 years, which is 10% to 15% incremental growth in customers and activity. And we're giving you guys some of the data now on revenue capture. I mean, there was always the argument that you tend to face revenue capture pressure. But if you look at it over sort of five or 10 years, we haven't seen any material decline in our margins on the revenue capture side. That may happen at some point, and it's happened in some of our activities. But generally speaking, we managed to maintain our pricing. And we've managed to increase our market share in our client base. And I don't see any reason why that won't continue. I mean, I do think maybe the environment has given us a boost because volatility was high and revenue capture was higher. So it sort of looked a bit better than it was. But underlying that trend has been a pretty steady kind of organic growth in customers. And that's the core long-term driver for us. And I think we feel good. That's in fact and in some ways, relative to the comments I made at the end, I think the next 10-years is going to be much more exciting than the last 20. And the reason I say that is I think we're getting to sort of a tipping point in scale, in acceptability from counterparties. People know who we are. People want to come and work here. Clients see the value in our offering. I mean five or 10-years ago, we were a tiny little business that no one had heard of. And if I think back 10-years ago where we were sitting and how we managed to grow, I'm sort of like holy [Indiscernible], we managed to pull that off, right? And I think this does become a little bit easier as you get a little bit of scale and as you grow your ecosystem. So not that I'm saying it's easy, but I think there's an opportunity for us to continue that trend and feel confident about it. So anyway, we'll see, but that would be my view.

Okay, great. That’s it from me. Thank you for the time.

Yes, of course. Operator is there anyone else?

I'm not showing any further questions at this time.

Okay. Well, thanks, everyone, for attending. I appreciate your support, and we will be speaking to you in three months' time. Thanks very much. Bye-bye.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.