Good day, and thank you for standing by. Welcome to the StoneX Group Inc. Q4 Fiscal Year 2023 Earnings 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 is being recorded. I would now like to hand the conference over to your speaker, Bill Dunaway, CFO. Please go ahead.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fourth quarter ended September 30, 2023. After the market closed yesterday, we issued a press release reporting our results for our fourth 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 and our discussions of our quarterly and year-to-date results. The presentation and an archive of the webcast will also be available on our website 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 thereto as well as the Form 10-K to be 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 fourth quarter earnings call. During the fourth quarter of fiscal 2023, we saw a strong 33% growth in operational revenues despite generally moderating volatility, although we did see some really sharp moves in the interest rate markets. The extent and speed of the interest rate increases over the last 18 months is nothing short of historic, and has resulted in the general repricing of risk and financial assets across the board. While it would appear that the trajectory of interest rates may be flattening, I do not think we have seen the full force and brunt of these historic moves manifest themselves yet, and there's likely to be some further dislocation and financial stress as a result. This was a solid fourth quarter for us and a truly exceptional and another record-setting year for the company overall, validating our strategy and demonstrating the earnings power of our franchise. For the fourth quarter, we recorded operating revenues of $778 million, up 33% versus the prior year. Net operating revenues were up 4%, and compensation and other expenses were up 3% from a year ago, resulting in pre-tax income of $75.4 million, up 14% versus the prior year, which was a strong comparable quarter for us. Despite the increase in pre-tax income, a much higher effective tax rate, 32.8% versus 21.2% in the prior-year quarter, driven by discrete items and year-end adjustments in each period, resulted in a 3% decline in net income to $50.7 million, and a diluted EPS of $2.36, and an ROE of 15%. For the full year's results, the tax rates are relatively comparable at 26.2% for fiscal '23 compared to 25.3% in the prior year. Turning now to Slide 3 in the earnings deck, listed…

I will be starting with Slide number 8, which summarize our consolidated income statement for the fourth quarter of fiscal 2023. Sean covered many of the consolidated highlights for the quarter, so I will just highlight a few and then move on to a segment discussion. Transaction-based clearing expenses declined 1% to $68.6 million in the current period, while introducing broker commissions increased 5% to $39.2 million in the current period, principally due to increased activity in our Commercial segment, both in listed derivatives as well as a result of the CDI acquisition, which was effective October 31, 2022. Interest expense attributable to trading activities increased $175.6 million versus the prior year, primarily as a result of the $138.7 million increase in interest expense related to our Institutional fixed income business and a $27.2 million increase in interest paid to client on client balances, both of which were a result of the significant increase in short-term interest rates. Interest expense on corporate funding increased $1.7 million versus the prior year, also as a result of the increase in short-term interest rates, but partially offset by a decrease in average borrowings. Variable compensation declined $17.3 million versus the prior year and represented 28% of net operating revenues in the current period compared to 33% of net operating revenues in the prior-year period. This decline in variable compensation as a percentage of net operating revenues is a result of the significant increase in interest and fee income earned on client balances as compared to the prior year, as this revenue is typically not included in variable compensation payouts. Fixed compensation increased $17.3 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…

Thanks, Bill. Turning now to Slide 16, which sets up high-level strategic objectives that we have been focused on for the better part of 15 years now. We have included the slide before and went through it in some detail at the end of fiscal 2022, so we thought maybe a review and a quick update would be appropriate. First, building our ecosystem. We want to stay relevant to our clients, both existing and new clients, by adding products and services and creating the best financial ecosystem to connect them to the global financial markets. I believe StoneX is now becoming known as a growing and best-in-class financial services franchise. We continually invest in our ecosystem by acquiring talent, either individuals or teams, as well as investing in technology to expand our products and capabilities to better serve our clients. While these investments result in increased costs and expenditures, oftentimes well in advance of the ultimate benefits being achieved, they are essential to achieve the strategic objective. None of these projects in isolation will result in a significant change to our current growth trajectory and certain of these initiatives may not be viable in the long run. However, in aggregate and over time, we believe that these initiatives will bend our growth curve upwards. In addition, because many of these initiatives are digital in nature, we should see operational leverage and scalability start to kick in as well, and a steady improvement in margins as a result. Our fixed income group has strategically diversified into a broad spectrum of fixed income asset classes. This approach has proven to be highly beneficial, especially in recent quarters, and provided resiliency to our revenue streams amid the fluctuating interest rate environment. Notably, there has been a distinct shift in perception among institutional investors…

Certainly [Operator Instructions] Our first question will be coming from Daniel Fannon of Jefferies LLC. Your line is open.

Thanks. Good morning, gentlemen.

Good morning, Dan. How are you?

I'm doing well. Thank you. To start, this quarter, the revenue environment was still good. Actually, just looking at revenues growing year-over-year, this is the first time I remember variable compensation being down in the context of while revenues are growing, and obviously, fixed was up. But I just want to make sure, as I think about the component of variable versus fixed going forward, and if there's been any change or if there are changes as we think about payouts or how you're compensating employees that will drive just more shift towards fixed versus variable over time?

Yeah. Dan, I'll start just at a high level, and let Bill jump in. So I think, Dan, the best way to think about sort of variable is to correlate it to net operating revenues. Our gross operating revenues are before the interest charge, and obviously, you know there's kind of an accounting anomaly there on the fixed income side. It's before interest charges, it's before sort of brokerage and exchange fees. So, if you look at our net operating revenue, it was up, I guess, 4%, 5%, something like that. I don't have the number right in front of me. And I think you should look at variable related to that, because that's really kind of how most of the payout calculations work. And then, I would say one other factor. As I mentioned, we're always investing in teams of people, expanding initiatives. And oftentimes, we have some of those costs hitting before we have revenue. As the revenue starts to hit, you start to get variable comp to replace some of that -- or you get offsetting revenue, let me say it that way. So over time, if we just stopped investing in new products and new teams, you would see variable comp come down as a percentage because you would start to see those initiatives either be terminated or become successful, and you had offsetting revenue. And sometimes, there are a little bit of leads and lags on that, so you can see a little bit of fluctuation from quarter-to-quarter just depending on how those new initiatives are running through. But I'll stop there, and let Bill add anything he wants to add.

Sure. I mean, Sean, I think you nailed most of it. The only comment I'd make is, so looking -- focusing on a percentage of net operating revenue is the way to do it. And I think if you look at historically, we've probably been in the 31% to 32% of net operating range for variable comp. What you do see, and I tried to point it out in my section of the call today a little bit, as the interest and fee income on client balances has increased here, particularly year-over-year, that typically does not fall into variable compensation calculations. So you'll actually see variable comp as a percentage of net operating revenues kind of trend down a little bit as a percentage as interest and fee -- or client income goes up. We'll have conversely the opposite effect, if it goes the other way. So, I'd say the really low rate environment that we have been in, in the last two or three years or prior to the last 18 months, I should say, I think you're looking at probably like 32% of net operating revenues as a gauge and probably more like 29% to 30% in the current environment, if that helps.

Okay. I mean, I'm just looking at this quarter where variable on a net operating revenues basis, there is a bit of a divergence. There's nothing...

It's like 28% or so. No, nothing meaningful there.

Okay. And then a lot of discussion, Sean, just about what you're doing, digitizing expenses, getting more efficient initiatives, a lot of opportunity for growth. I guess in the context of the fixed expense budget as you think about next year and how -- what the puts and takes around all the things you're doing, and what that ultimately means from kind of how we should think about fixed expense growth?

Okay. So unfortunately, when you try and digitize and make your business efficient, you end up spending more money in the short term with the hope that eventually when these things kick in, you'll see some of the scale benefits emerging. So, we have been investing in a lot of these initiatives and other similar initiatives for a period of time now. I think we're sort of at max expenditure points on those initiatives right now. I don't see us taking on any other major new initiatives, and our hope is now that some of these initiatives we start to see on the back end, us gaining efficiency. Now I don't think that means the fixed cost will go down. I think what we should hope for is we can handle greater volume and growth without our cost increasing lockstep. I mean that's really what we're hoping for. It's scalability rather than seeing the costs come down. But we are not anticipating a significant increase in fixed costs. I mean, we've got an inflation push, and inflation is obviously higher than it's been for a while, and we'll probably see somewhere between 3% and 5% sort of embedded growth in those fixed costs. But we're not anticipating a sort of a step change in our fixed costs at this point. I think we took that step change a couple of years ago already.

Okay. And then one more on expenses. Bill, you mentioned a positive offset within bad debt. Can you -- just so we get a sense of what the -- normalize or what the actual expense was versus the recovery?

Yeah. It was, I think, a $1.5 million recovery in the Institutional segment, I think, is what we saw. You can kind of see if you look at the -- or $1.3 million, I guess, as I'm looking at the earnings deck here.

Okay. All right. Thank you. And then just one more on, I guess, expenses -- the recent news around the litigation associated with BTIG and some of the claims made within that. I know it's early, but I was hoping you could contextualize the businesses this impacts and any kind of first -- kind of outlook or comments on it.

Okay. Well, obviously, we can't comment on pending litigation. So -- but what I will say is we are aware of the complaint that was filed earlier this week. It seems to us that this action is more focused on media and attracting publicity than anything else because it appeared in the media before the complaint was even filed with the court. So, they went to press first. We're reviewing the complaint, but at this time, we don't believe any of these allegations of any merit. So, we will defend ourselves, we believe we're in a good position, and we don't think there's any merit. So that's about all I can tell you at this point. We're looking into it.

Understood. Okay. Thank you. And then I guess one more just on the environment. You have a lot of things that you mentioned you'd like to do and will do around expanding your client footprint as well as geographies and products. Can you talk about the inorganic opportunity today given the market volatility? And what that is presenting itself or not in terms of more opportunities? And how active is the pipeline for new transactions today versus kind of earlier this year?

Sure. Well, we never plan for acquisitions. I know that always sounds strange when we say it, given that we've done like 30 acquisitions. We always focus, first and foremost, on sort of the organic growth of our ecosystem and opportunity. And as I said, it's a very constructive environment, we believe for organic growth. I mean, I think the banks are going to be hit with another big capital charge. There was a big conference that the FIA held about that. They believe it could really affect the sort of trading and clearing business at the big banks as it has. That will just accelerate that, so that's good news for us. So that's our primary focus. That said, we do like to be in the pipeline. We included in most of the transactions that would be sort of sized for us, I think we see most of them. And I would say there's definitely been more interesting opportunities of late than there was probably over the last two years. As I said repeatedly, as we were sort of during the COVID years, things were crazy, people were having sort of big bumps in revenue, and obviously, multiples got to kind of hysterical levels. So at that point, we just didn't see anything that was even remotely interesting. I think we're now in a more normalized environment, and I think the push to consolidation continues. Smaller firms are struggling and they have to do something, and those are the kind of opportunities we tend to see. So, I think we're sort of back to a more normal cadence. But having said that, I don't think there's necessarily anything on the horizon that we think is close or sort of -- or could be meaningful, but we're definitely looking at more stuff, if that answers your question.

No, that's helpful. Thanks for answering all my questions.

Thank you, Dan.

I'm showing no further questions. I would now like to hand the call back to Sean for closing remarks.

All right. Well, thanks, everyone. It was a long call today. I appreciate all your attention. And I guess on a final note, I'd just like to wish all of those in the U.S. a happy Thanksgiving, and to everyone else, a great holiday season, and we will speak to you in the New Year. Thanks very much. Bye-bye.

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