Good day. And thank you for standing by. Welcome to the StoneX Group Inc. Q3 Fiscal Year '23 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Dunaway. Please go ahead.

Good morning. My name is Bill Dunaway. Welcome to the earnings conference call for our third quarter ended June 30, 2023. After the market closed yesterday, we issued a press release reporting our results for our third fiscal quarter of 2023. This release is available on our Web site at www.stonex.com as well as a slide presentation, which we'll refer to on this call in our discussions of our quarterly and our year-to-date results. The presentation and an archive of the webcast will also be available on our Web site after the call's conclusion. Before getting underway, we're 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 there too, 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 in 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. All of 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 of 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 at any forward-looking statements are not guarantees of future performance. With that, I'll now turn it over to Sean O'Connor, the company's CEO.

Thanks, Bill. Good morning, everyone, and thanks for joining our earnings call. In the third quarter of fiscal 2023, we saw solid transactional volumes as well as revenue growth across almost all of our products, despite volatility generally moderating versus the prior period. Interest earnings on our client float increased significantly due to our capturing higher market rates that prevailed during this period. In aggregates, these results produced our strongest financial results ever, with a $3.25 diluted EPS and a 23.1% ROE on tangible equity. We believe that our results for the quarter and indeed for the year-to-date are significant positive outliers in our industry, as they have been for some years now. Turning to slide three in the earnings deck, which compares quarterly operating revenues by product versus the year ago; operating revenues were up a strong 47% in aggregate for the quarter and up 40% for the year-to-date, despite the generally more subdued market conditions. Aggregate revenues were up 10% versus the immediately preceding quarter. Listed derivatives revenue was up a slight 1% despite a decrease in volumes of 5% while revenue capture was up 9%. Revenues were down 3% versus the preceding Q2. OTC derivative revenue was up 43% versus the year ago and up 24% versus the immediately preceding quarter with volume surging 46% and revenue capture down slightly. Physical commodities revenues were up a strong 59% versus a year ago and up 50% versus the Q2 due to better results in ags and energy as well as the addition of CDI which was acquired in Q1 of this year. Securities revenues were up 76% although this is inflated due to the growth of much higher interest revenue in our fixed income business as a result of the Fed rate increases. As was the case last…

Thanks, Sean. I'll be starting on slide number eight which summarizes our consolidated income statement for the third quarter of fiscal '23. Sean covered many of the consolidated that highlights for the quarter, so I'll just highlight a few and then move on to a segment discussion. On the expense side, transaction-based clearing expenses declined 11% to 66.7 million in the current period, principally due to lower fees in the equity ADR space and global payments as well as a decline in FX, CFD and listed derivative volumes. Introducing broker commissions decreased 5% - or increased 5% to 43.4 million in the current period, principally due to increased activity in our commercial segment and both enlisted derivatives as well as the result of the CDI acquisition which was effective October 31, 2022. Interest expense increased a 187.9 million versus the prior year, principally as a result of a 144.9 million increase in interest expense related to our institutional fixed income business and a 31.6 million increase in interest paid on client balances. Both of these were results of significant increase in short-term interest rates. Interest expense on corporate funding increased 4.2 million versus the prior year, also as a result of an increase in the short-term interest rates as well as an increase in average borrowings. Variable compensation increased 6.6 million versus the prior year due to the increase in net operating revenues and represented 30% in net operating revenues in the current period, compared to 33% in the net operating revenues in the prior year period. Fixed compensation increased 17.8 million versus the prior year due to a 14% increase in headcount resulting from the expansion of our capabilities among our business lines as well as in support areas to facilitate this business growth. The effect of the annual…

Thanks, Bill. Let's move on to the final slide number 16. We achieved another set of excellent core operating results. Despite moderating volatility, our transactional revenue was up as was interest on our client float, validating our business model which continues to deliver best-in-class returns. For the quarter, we recorded a diluted EPS of $3.25, an ROE on stated book value of 21.6% and an ROE on tangible book value of 23.1%. For the trailing 12 months, we have recorded net income of $240.1 million or $11.31 in EPS equating to a 20.2% ROE on stated book. Our book value per share now stands at $64.9 up 24% versus a year ago. When our performance is viewed through a slightly longer-term lens such as trailing 12 months over the last two years, which evens out quarterly anomalies, our results continue to show strong upward trajectory, growing our revenues at a 29% compound annual growth rate and our adjusted earnings at a 37% compound annual growth rate. While trading conditions moderated with generally lower volatility, we believe that our growing and diverse business and multiple earning drivers will continue to drive growth and to deliver shareholder value. We continue to see growth in client trading volumes and new client acquisitions across our products and across our client segments, which again validates our business model and our growing relevance in our markets. We continue to invest in our financial ecosystem, expanding our products, our capabilities and our talent. We have a unique and broad financial ecosystem with a very large addressable market in front of us. Operator, let's open the line and see if we have any questions at this point.

Thank you. We will now conduct the question-and-answer session. [Operator Instructions] Our first question comes from Yehuda Weil of Blackbird Financial.

Hi, great quarter. I just have two questions. The first is, can you give us a picture of how much you're spending on growing StoneX One in marketing and infrastructure? And two, do you feel any pressure to pay higher interest rates on client float or risk them leaving to a competitor? Thank you.

Okay. Well, thanks for the questions. I appreciate it. So, dealing with the interest rate question first. I guess over the last two or three quarters as interest rates sort of rest is up above 3%-3.5%, we started to hear from most of our clients that they wanted to see some of that interest moved over to them. So, that has happened gradually. I don't think we've seen any greater push in the last quarters than we did in the previous quarter. At the moment, I think we're paying out on average about across and we have a variety of client bases and different payouts. But on balance, I think it's about 40% bonus on it of the normal interest rate we pay off. So, I think that's pretty much stabilized. On our FDIC sweep, we haven't really changed our interest rates there, which is we still capture the vast majority of the interest on that sweep. We have lost some of the larger clients who had large cash balances and moved into treasuries. But the bulk or the bulk of the remainder of the clients and our FDIC sweep have relatively small balances and not easy for them to go by treasuries or move the money around because the balances are relatively small. So, that's the biggest impact I think we've seen is on the FDIC sweep. And that started happening probably six or nine months ago. On StoneX One, we continue to develop StoneX One. It has been launched. It is out there. We are not spending material amounts of money marketing at this point. I think we're ramping that up slowly, so it's not a significant number. And I think, as I've said before, with all these digital initiatives of ours, you should see them as slow incremental moves, not things where we're going to flip the switch and you'll see the needle move immediately. I believe over time, though, that will be critically important for our growth. And we're very optimistic and have high hopes for all these digital initiatives, including StoneX One. So, it's rolling out slowly. We're starting to see subtraction. We are adding features to that. And you should see that start to ramp up, at a moderate rate over time is how we think about it. Does that answer your questions?

Yes, thank you.

Okay. Thank you.

Thank you. One moment for our next question. Okay. Our next question comes from Daniel Fannin of Jefferies, LLC.

Thanks. Good morning, Sean and Bill. Hope you're well.

Good morning.

Hey, Dan, how are you doing?

Good, thank you. So, I wanted just to chat about the environment because volumes and activity, frankly, your revenues have been strong for an extended period of time. And so, as you look at like the health of your markets, the health of your customers, I know it's very hard to predict volumes. But just want to get a sense of how you're thinking about sustainability and maybe factors like inflation that we haven't seen historically are ultimately going to make this more of a sustained kind of backdrop, just curious about your thoughts around that backdrop.

Yes. I mean, I don't want to get too far into the realm of prognostication on the financial markets because there's so many crosscurrents and unknowns at the moment. But what I would say is I think what our financial results are showing is there has definitely been a moderation in the heightened volatility we saw sort of the two years over COVID. That's definitely flattening out. I think you've seen that being reflected in the industry broadly. I think you've seen it being reflected in our numbers, particularly in the revenue capture numbers. We're starting to see for the first time in two years, some of those revenue captures in numbers either being down slightly or not growing. If you go back to the last eight quarters, every one of those charts, our revenue capture was higher and our volume was higher. So, I definitely think we're seeing more so due volatility showing up with tougher revenue-captured numbers. On the other side, we are still seeing broadly growth in volumes. And I think that's us really gaining market share continuously. I do think there is probably, generically, I think volume in the industry is probably starting to flatten as well just with tougher market conditions and all the excitements of COVID and all that dislocation in the rear-view mirror now. I think it's become a more stable market that's probably not showing sort of industry growth you've seen before. But despite that, we are putting up numbers that show growth. So, if you put those two things together, I would say I think we still feel good about our transactional revenue growing. You know, I don't think we're going to grow like we did in the two years during COVID, where every number was up 40%. But I think…

Yes. No, no. That's helpful. I appreciate the color. Just on that last part --

The other thing I would just like to add, just looking at our quarter there. I mean, in a funny way, I mean, we have this exceptional quarter. But when I look at it, our business really wasn't firing on all cylinders. We had a really good result on the commercial side, largely driven by OTC trading, that largely driven in Brazil, physical business on the renewable side. Our retail business is struggling versus a year ago but improved versus the quarter before. Our payments business steady upward trajectory, so that's good. But our institutional business is really challenged. If I look at that, we still have only got two of our four segments that were doing well. And the other two were doing so well, and yet we still produced record results. Maybe we're never going to see every cylinder in our business firing all at one time, but we certainly didn't see either exceptional market conditions. We didn't see every one of our businesses firing at the same time. What we did see is a very good interest rate environment, obviously. I still think there's upside for us if we can get some of these other businesses doing what we think they can do, right?

Okay. Just on the interest rates side, looking at slide 15, balance is coming down. Is that just the lower margin requirements at some of the clearinghouses? And then, as you think about, I guess, if rates keep rising, and it was asked this briefly, I think, in that other question, but we shouldn't - the sensitivity table here implies both rates going up and down and what that means for EPS. But are you assuming the same kind of pass-through or are you assuming changes in pass-through as the rate dynamic shifts?

Well, Bill can tell you what his assumptions are on that. Let me answer the first part of your question. So, in terms of the interest rate numbers there and declines and so on, I think the aggregate decline in our client floats. The biggest and most impactful portion of that was the FDIC sweep. We had to think about the calculus, do we up our payouts to all our clients to the level where we keep the marginal clients? Or do we keep it where it is and maybe lose some of those large marginal clients who have the flexibility to go buy treasuries? Our calculus was unless you're going to push the rates all the way pretty close to the T-bill rate, that's what it's going to take to keep that marginal client. So, we're probably better off letting some of those marginal clients trade out of the FDIC sweep. So, we lost about 300 million of the FDIC sweep, which is a very lucrative part of our client float. The remainder of our FDIC, the vast majority of it are a collection of very small individual balances. So, the propensity or the ability for those clients to move that cash out is it's probably pretty limited and it's not impactful to each of them individually, but obviously impactful for us in the aggregate. On the other side, on the derivatives collateral side, I think we had a small number of very large funds that had big balances with us who were trading particular strategies, who were withdrawn from those strategies. Those funds weren't very impactful for us because we had very high payouts to those clients because the funds were in the hundreds of millions of dollars individually and there was a lot of trading volume. So, we were able to pay back a lot of those funds and still get our desired return. So, those funds have left, but on the margin weren't as impactful on our interest retention. I think that's really what's happened. I mean, obviously, if volatility remains subdued and you generally see collateral levels move down by the exchanges, we will see that impact. But I think it was more of the two things I mentioned. Well, maybe you want to just touch on how we think about the payouts and variables up and down.

Sure, yes. And just to echo Sean's point, certainly on that commercial side, we saw earlier in the quarter, that particularly the ag markets, the margin requirements fall off. But with volatility coming into harvest, we did see them start to pick back up later in the quarter of June, but the big delta that Sean pointed out is the institutional and the FDIC side. Assumptions on the sensitivity, yes, we adjust those, we tweak those on a quarter-by-quarter basis stand. But not sizably, but it's pretty much right down there as far as retention right around what we're retaining right now as far as clients, paying out to clients and how much we're retaining. And we wouldn't anticipate, at this point that going - paying out much more than we are now, I think we're pretty close to the high water mark on what we would pay to clients. And we'd actually potentially see maybe that improve a little bit. As we've talked in the past, we have some interest rate swaps on that we legged into early in the cycle of these uptick and interest rates that some of those are going to start to roll off, some of those are lower rates than obviously current market environment is. So, we would actually anticipate probably, having a little bit more incremental margin on a go-forward basis. But right now they're kind of level-set at what we're seeing currently.

Okay. No, that's helpful. And just on the expenses and the outlook with revenue growth, there's obviously always growth in the variable component. But as you look at the - for you guys kind of next year, fiscally or just the broader investment spend, is there any trajectory that's different than what we've been seeing as you think about your planning and or projects that might be coming online or otherwise rolling off that maybe there's a little bit of benefit?

Good question, Dan. As we're heading into our budget and planning cycle here as we speak. So, we've obviously seen our costs ramp up significantly during the COVID years. And part of that was just this massive increase in volumes, we saw significant increase in our client's footprints, market share, all of those things. And there was a pretty big lift in our spend. So, if you look backwards at the trajectory, it was at the same ratio as our revenue was going up. I think we had some deficits that we had to catch up in certain areas, certain other support areas. I think we feel we have backfilled that now. And I think we could take on a fair amount of future growth without any significant investment in certain areas. And we are pushing hard now to try and get our costs curve refactored down. You know, I think we spend a lot of money, we put in a lot of infrastructure, we've invested in a lot of stuff. And if anything, I would like to see that trajectory flatten. And I think there's some scope for us to reprioritize, maybe think about reallocating spend rather than just adding. So, that's the view for our management at the moment is we need to push harder at the moment and make sure we set ourselves up. I think we've made all the investments we need to. I don't think there's going to be any massive reduction in investments, but I certainly would like to see the trajectory flatten significantly from where it's been over the last two years. So, we'll see if we can get there, but that's kind of the marching orders we've given all our people as we head into our planning cycle.

And I guess I would just add there, Dan. I mean, that being said, right, we're taking the steps necessary to try to control that. But I mean, inflationary pressures are still there, right? I mean, we've seen increases in market information, medical benefit costs have been going up. So, we're not a unicorn here. I mean we're a subject to the same kind of market events that everyone else is. So, we're going to do everything we can. But I mean, there's still that inflationary pressure that it's going to make some of the third-party costs difficult to maintain. But just we have to up our game about adherence to who we're paying and what we're paying and make sure it's the right number. But there is certainly some pressure there.

Did that answer your question, Dan?

Sorry. Lastly, just on M&A and the environment and evaluations maybe we're coming in, maybe not so much now, or just curious about the dialogue and or prospects as you think about capital deployment and potential inorganic opportunities today?

I would say we're seeing a little bit more activity and we're engaging more with potential opportunities. I think you've asked this question prior. I would say 18 months ago we weren't looking at much at all. So, I would definitely say that the cadence has increased. Our hip rate is extremely low because we like to be very disciplined around this. But it's good to see that there are more opportunities and the opportunities are generally speaking at more reasonable prices. They may not be the prices we like, but I would say they're more reasonable. So, I think it's certainly getting into an environment where there may be an opportunity down the line here to find some small bolt-on type acquisitions if we likely. So, definitely looking a little bit more favorable, but I wouldn't bank on anything, frankly. I think our hip rate is very low. We're very disciplined. And frankly, we have a lot going on internally, which is occupying a lot of our time and energy. So, the opportunities have to be very compelling to compete with what we already have on the table. On a separate but related matter, I think what we are seeing is a lot of talent acquisition. And I would say that I guess, our brand and our credibility and our reputation in the market has certainly been significantly enhanced over the last three years. And we are now entertaining conversations with impressive people, teams of people from larger competitors who are interested in potentially moving over here. And we've acquired some of those small teams. And some of those teams can be as impactful as a small acquisition in terms of the revenue they bring. So, I wouldn't discount the talent acquisition as a way to drive revenue. And in certain areas, we are bringing in some really nice people, not significant numbers, but I think teams and individuals that will make a difference. So, I think that's part of what we do as business as usual. But I think that environment has become more positive for us as we become better known in the market. And some of these people are telling us that, "I noticed StoneX. I'm unhappy I'm at a big bank, I don't like it there. I was thinking about joining you guys and I spoke to all my investors. And I've got incredible reviews on how great StoneX was. And I had no idea. So now, I really want to come work with you guys." So, it's great when you hear that and we started to hear that a lot from people. So, I will just add that in there as well.

Well, that's helpful. So, I think that's it for me. Thanks for taking all my questions.

Thanks, Dan.

Of course. Well, thank you, Dan. Operator, do we have any other questions lined up?

I'm showing no further questions at this time. So, I'll go ahead and turn the conference back to you for closing comments.

Okay. Well, thanks, everyone. Thanks for your attention. I wish everyone enjoyed the rest of the summer and also just a shout out to the very talented and amazing team at StoneX who continues to deliver phenomenal results for all our shareholders. So, well done team; great performance. And thanks, everyone. We'll see you in the fall. Cheers.

Thanks, everyone.

Okay. This concludes today's conference call. Thank you for participating. You may now disconnect.