Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Full Year 2024 StoneX Group Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Bill Dunaway, Chief Financial Officer. Sir, please go ahead.

Good morning. Welcome to our earnings conference call for our fourth quarter ended September 30, 2024. After the market closed yesterday, we issued a press release reporting our results for the fourth fiscal quarter of 2024. This release is available on our website at www.stonex.com, as well as a slide presentation, which we will refer to on this call and our discussion of our quarterly and full fiscal year 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 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-K to be filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended and Section 21-E 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 2024 fourth quarter earnings call. Starting on Slide 3 of the earnings deck. The fourth quarter of fiscal 2024 was a record result for us, with net income of $76.7 million and diluted earnings per share of $2.30 versus the comparative period a year ago, we were up 51% in net income and 48% in EPS. And as compared to the immediately preceding quarter, these measures were up 24% and 23% respectively. This represented an 18.5% ROE on stated book and a 19.4% ROE on tangible book value, despite a 21% increase in book value over the last year and a 60% increase over the last two years. We had record operating revenues of $920.1 million, up 18% versus the prior year. Just a reminder, operating revenues include not only interest earned on our client float, but also carried interest that is related to our fixed-income trading activities. Net operating revenues, which nets off interest expense as well as introducing broker commissions and clearing costs were up 13% versus a year ago, but down 3% versus the record achieved in the immediately preceding quarter. Total compensation and other expenses were up 8% for the quarter with variable compensation up 7%, in line with net operating revenue growth rate. Fixed compensation and related costs were up 14% versus a year ago, but were down 4% compared to the immediately preceding quarter. The strong finish to our fiscal years resulted in record full-year operating results for the third year in a row, which we believe validates our strategy and underscores the robust earnings potential of our franchise. Our full-year operating revenues were $3.4 billion, up 18% versus the prior year. Net income was a record $260.8 million, up 9% with adjusted…

Thank you, Sean. I'll be starting on Slide 8, which summarizes our consolidated income statement for the fourth quarter of fiscal '24. Sean covered many of the consolidated highlights related to the operating revenues for the quarter. So I'll just mention one item and then cover off consolidated expense fluctuations and then finish with a segment discussion. Operating revenues for the current quarter were unfavorably impacted by $4.5 million and unrealized losses on derivative positions related to inventories, carried at cost will record a realized gain on the sale of these inventories in the upcoming quarter. Similar in nature, the prior year quarter was unfavorably impacted in the amount of $200,000. Moving on to consolidated expenses, transaction-based clearing expenses increased 25% to $85.5 million in the current period as a result of increases in listed derivative and securities volumes as compared to the prior year. Introducing broker commissions increased 7% to $42 million in the current period. Interest expense increased $70.3 million versus the prior year, primarily as a result of the $68.6 million increase in interest expense related to our institutional fixed-income business as well as a $7.3 million increase in interest expense related to securities lending activities. Interest paid on client balances on deposit declined $7.7 million as compared to the prior year. Interest expense on corporate funding increased $1 million versus the prior year, principally due to incremental interest from our March 1st, 2024 issuance of senior secured notes due 2031. That issuance, which allowed us to extend our debt maturity profile and increase our long-term capital was a refinancing of our senior secured notes, which were due 2025. Interest expense on corporate funding decreased $9.8 million versus the immediately preceding quarter, which included incremental interest expense on the defeasement period following the notes due 2025 as…

Hi, Bill, it's Sean. If I could just interrupt you, your audio is going in and out a little bit. So I don't know if it's your headset or you want to answer to the phone.

Okay, sorry about that. Okay. Fixed compensation and benefits increased $1.8 million versus the prior year, primarily due to increased headcount. But decreased $2.6 million versus the immediately preceding quarter, primarily due to decreased employee benefits and severance costs. Other fixed expenses increased $600,000 versus the prior year, but were down $2.4 million versus the immediately preceding quarter with the decline versus the immediately preceding quarter being driven by a decline in professional fees. Partially offsetting these increases, we had a positive variance in bad debt net of recoveries of $7.6 million compared to the prior year. Segment income was $89.2 million for the period, an increase of 1% versus the prior year period, but declining 29% versus immediately preceding quarter. As a reminder, in the first quarter of fiscal '24, we started to allocate a portion of our corporate expenses to each of our four operating segments, including costs associated with compliance, technology, credit and risk, human resources and occupancy. We've provided this allocation in each of our segments for the current period and will continue to prospectively, however, we have not calculated similar allocations for previously reported periods. For the current period, this allocation of corporate costs for our Commercial segment was $8.9 million. Moving on to Slide 10, operating revenues in our Institutional segment increased $127.6 million versus the prior year, primarily driven by a $100.2 million increase in securities operating revenues compared to the prior year as a result of a 34% increase in the overall average daily volume of securities transactions, most notably in equity markets as well as higher interest income related to our fixed-income dealing activities as a result of an increase in interest rates. Outside of our fixed-income activities, interest and fee income earned on client balances, which is associated with our…

Thanks and apologies, everyone, for the poor audio. Bill, I think you need to switch up your headset immediately. So anyway, let me proceed. So Slide 13 sets up the high-level strategic objectives that we are focused on. This approach and strategy has remained unchanged for 15 years and has served us well and we presented it before. Given that this is year-end, however, we thought we'd like to review this and perhaps provide some examples of how we put the strategy into action during 2024. We remain in a very constructive industry environment, which aligns with our strategy, which is summarized on the slide. The comprehensive -- comprehensive and significant response from the regulators around the world to the financial crisis resulted in massive increase in cost due to more complex processes and oversell site as well as dramatically increased capital requirements. This made it difficult for smaller firms and those with narrow product offerings to generate sufficient revenue to remain viable given the cost and capital requirements, resulting in a fairly dramatic consolidation in our industry. The increased capital requirements, especially the Basel capital rules, which are punitive to trading operations have forced banks to reevaluate their strategy and focus on larger Tier-1 clients. The large banks in aggregate still account for the majority share of market, but they are retreating, which has created significant opportunities for us. Both of these factors, the lower-end consolidation and the withdrawal by larger banks has directly and positively impacted StoneX and has allowed us to post CAGRs close to 30% over the last 20 years. We still think there is a long way to go in this reordering of the market structure and with our broad and unparalleled capabilities and product set, we are ideally placed to continue to take advantage…

[Operator Instructions] And our first question will come from Dan Fannon with Jefferies. Your line is now open.

Thanks. Good morning, Sean and Bill.

Hi Dan, how are you doing?

I am doing well, thanks. I guess to start, I've got several questions on the segments just in terms of the quarter and maybe the outlook, but -- and both really centered around capture rates. So starting with the commercial segment, can you expand upon what happened in the listed as well as the OTC segment to take the kind of lower-fee per million in the quarter?

Bill, do you want to take that? So he's still with us. Sorry, Dan, can you hear me? We're having some audience?

I can hear you.

Yes, So Dan, I guess the story with the commercial business was, we had a tremendous quarter last quarter. That was a little bit driven by the LME. We had a good pop-in volatility in LME and I think -- and I think you saw that with some of our industry competitors. And that obviously was a bit more muted this quarter. And so that certainly had an impact on some of our revenue capture rates, particularly on the OTC side. So the OTC market was a tougher market for us, but very solid on the derivative side and feel good about sort of continued underlying growth. So I think that the noise you're seeing maybe quarter-to-quarter is sort of a reflection of market conditions, primarily the sort of LME sort of elevated conditions and then returning to normal.

Sorry, guys. Can you hear me?

Yes, what happened Bill?

Okay. I tried to switch to another headset and it didn't work, but you covered the question perfectly.

So is that on to your question, Dan?

Yes. So I guess we -- so we should look at last quarter as more of an abnormal level and this quarter is more of a, I don't know what you'd call normalized.

Yes, I would say derivatives, Dan, that was the highest that we've seen, right? And it came out of the LME business as Sean touched on. So I would say last quarter was an anomaly. And I think if you looked historically in that commercial segment, you were at high-5s, low 6s, 6.5 and we had spiked up over 7 in that June quarter, but I would expect it to be lower than that. And the OTC, this is probably the low watermark that we've seen over the trailing probably 12 to 15 quarters. And it was just a touch on a little bit more difficult market environment with lower volatility.

Okay. Okay. That's helpful. And then similarly on the Institutional segment, the listed derivatives, you also kind of seeing the rate per contract coming in, just is that just mix or can you talk about what happened there?

Yes. I think we're kind of very excited actually about our listed derivative business on the institutional side. And if you look at it sort of through a longer-term lens, I think the nature of that business has really transformed in many ways. And even if you go back longer, I mean, the traditional business of FC Stone was really to sort of clear what they called the locals. Basically, it was the floor traders. That was the business they had. So it was a bunch of small proprietary trading shops and the like. And it was a good business and we did very well. But that business has now transitioned into a truly institutional business. And you know the scale of the business is completely different. We're dealing with very large ETFs, funds, very large institutions that are looking to access the derivative markets. And we're very pleased about that. That's the direction we want to move in. And I think the reason we're accessing that market is for all the reasons I mentioned in the strategic section, the big banks aren't that interested in that business anymore. So these relatively large players are coming to us. They like our ecosystem, they love our service. And so that business has changed. Now when you're dealing with these very big customers, there's obviously a different sort of risk and different economics. On the risk side, a lot of these businesses are very low-risk because they tend to sort of just be long-only and they sort of leave a lot of cash with you. They're not sort of proprietary trading firms, but they are all pretty demanding on the -- on the commission side. So you have to sort of probably accept a lower commission rate, but obviously, the business is so much bigger. So I think we're seeing a little bit of a change both in sort of risk profile to a much more positive risk profile, a larger sort of customer base we really want, but it's sort of at a lower price point. So I would say that's the summary. Bill, do you agree with that? I mean...

Yes. That's correct.

Okay. That's helpful. And then just on the payments business, you talked about just the market dynamics in the quarter. I think you're continuing to see a little bit of -- of softness within that segment. Also was some potential inorganic activity with the CAB payments transaction. Can you sort of maybe tie those two together in terms of what the longer-term outlook in terms of igniting growth in the payment segment is?

Yes, sure. So I think we have been a leading disruptor in the payments business. I mean, we help people get money into non-G20 countries. That was a very opaque part of the market where clients were paying sometimes 5 percentage points in spread to acquire Kenyan shilling or whatever it was. And a lot of times, I didn't even know they were being charged that, right, because it was very hard to find the rates. And I think we went in and sort of professionalized that market, gave it transparency, became a super easy provider to banks and NGOs and people because they could come to one place and we could handle payments to 185 markets. We could do it at best execution. We could do it at spreads that were much lower. So we totally disrupted the sort of traditional correspondent banking market. And we dramatically lowered spreads in the process and I think established ourselves as sort of a meaningful participant in that market. I still think we've got a long way to go in terms of the addressable market, but I think we're sort of well-known in the business. That's the business we're in. And I think there have been some other people who have sort of tried to follow in our footsteps. Certainly, Care Payments is one of those as well as some others. And we know the Care Payments folks. We really like what they've done. It's a business we've looked at previously. And we still think there's a lot of commercial rationale for us to combine with someone like Care Payments. And the real issue at--the real issue we had recently was just sort of a value discussion around price. And as you saw, they announced there was an earnings kind of warning…

But that's certainly the point with payment. To answer your second question, we have, I think, a lot of exciting ideas in the pipeline on our own payments business. We've recruited a bunch of new people. We're going after new market segments. We're looking at collaborations with other folks. I mean, I can't get into lots of detail on the stuff, but we certainly see a way for us to dramatically expand and diversify our client base. We certainly have a proven ecosystem. We have all the major banks in the world dealing with us. We -- there's a lot more business we can get from them. So there are lots of levers we can pull and a lot of hard work ahead of us to execute on all of those opportunities. And hopefully, at some point, we get a little bit of help from the market and spreads kind of normalize a little bit. They're about as tight as we've ever seen them right now.

Okay. Understood. And then just on -- as we think about expenses and a lot of the commentary you gave around digitizing the business and the efficiencies that come with it, as you look through the next year and your budgets, and thinking about how we should think about kind of fixed-cost growth and the balance of investment versus some of that digitization. What's the -- how do you think about the longer-term kind of growth of that fixed-cost base?

Yes. Unfortunately, as you know, Dan, some of the stuff is you have to spend the money first before you can save it, right? So if you want to digitize, you have to build the infrastructure and the technology stack before you can start to see the back-end savings. Now we're part of the way through that. So we are -- even though we continue to invest, I think we are now starting to see some real savings. Now some of them maybe don't show up in absolute reductions, but what we're seeing is we're able to handle growth without any incremental costs. So we're seeing some scalability and some operational leverage starting to come in. I would say as a general point and Bill, correct me if I'm wrong. I mean, we're looking for pretty flat sort of expense growth scenarios for the next year or two. I mean, I don't think it's going to come down, but I certainly think we'll be at or around sort of inflationary-type increases. We're working very hard to do that. And that's hard to do when your business is growing and you're trying to expand, right, because you're having to realize efficiency somewhere else to pay for those investments you continue to make in your business. So I think that's the goal we have. It will be hard work to get there. You've also got the regulators sort of are in business to increase your costs and make things more difficult for you. So we've got a cost-push from the regulators. We got a cost-push because we want to invest in our business and expand our ecosystem, which we think is fundamental to our long-term success. But the offset to that should be, we should start to see some efficiencies and some operational leverage from some of the technology spend we've put in place already. So our hope is that that sort of nets out to a pretty small number. Bill, would you agree with that?

Yes, exactly. I'm pointless [technical difficulty].

Yes. And then just in terms of the fourth quarter, just some of the expense like the one-time or non-recurring stuff looks like D&A was a bit high, professional services a little bit low. I don't know if that's just -- are those good jumping off points or understanding the context of what you said earlier in terms of the marginal growth, but just on the line-item basis, is there any one saw the severance number, but any other kind of one-time items to just be aware of?

Yes, I would say the D&A, as you touched on, it's probably on a run-rate going-forward, is probably more in the high $14 million, maybe around $15 million on a quarterly basis. There's some -- there were some additional assets software put in service in Q4 and kind of mirroring up the policies around the world around that. But I would say that's a touch high. And as we touched on, there was a little bit of insurance recovery on professional fees. So I think we came in at $14.5 million. It's probably, at least in the immediate future, probably more $15 million, $16 million number.

Okay. Thanks for taking my questions.

Of course, thank you.

[Operator Instructions] Okay, I would now like to turn the call back to Sean O'Connor for closing remarks.

Well, thanks, everyone. Thanks for joining us again. I know it was a little bit of a long call. Hopefully, you stayed with us. I'm very pleased with the overall results and, as I said, thrilled with the StoneX team for all their hard work and thanks to all our customers for trusting us with your business. And on a final note, just like to wish all of those in the U.S. Happy Thanksgiving next week and Happy Holidays to everyone else. Thanks. Thanks all.

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