Ladies and gentlemen, thank you for standing by, and welcome to the StoneX Group Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, Bill Dunaway, CFO of StoneX Group Inc. Please go ahead, sir.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fiscal fourth quarter ended September 30, 2020. After the market closed yesterday, we issued a press release reporting our results for our fourth fiscal quarter of 2020. 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 in our discussions of our quarterly and fiscal year results. You'll need to sign on to the live webcast in order to view the presentation. The presentation and the 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 that 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 and Section 21E of the Securities Exchange Act of 1934. 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 assurance 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 will now turn the call over to Sean O'Connor, the company's CEO.

Thanks, Bill. Good morning, everyone, and thanks for joining our fiscal 2020 fourth quarter earnings call. I hope you and your families are all healthy and safe. 2020 will no doubt go down as a year we'll never forget. Far too many people have experienced the loss of loved ones, the loss of their businesses and the loss of their livelihoods. Our sympathy and our empathy go out to all of those whose lives have been disrupted by the COVID-19. For our part, we will also remember 2020 as a year of significant milestones and accomplishments for our company. Amid unprecedented market conditions, we achieved record results in nearly every respect. We completed a major strategic acquisition, and we rebranded our company with an eye towards our future. Challenging times like these truly put the character of your people and the resiliency of your business to the test, and I couldn't be proud of how StoneX and Gain teams performed across the board. We have a truly exceptional group of professionals and a business that not only has performed strongly, but has exceeded expectations. As you can see from the earnings release, there's a lot of noise in the numbers related to the Gain acquisition. In addition, we've also made some changes to how we report our numbers, so there's a lot to cover in this call. The general market environment for us in the fourth quarter was mixed. We saw volatility declined from the exceptional highs of the preceding quarter, although it was still perhaps higher on average than it was prior to the pandemic. We also suffered the full brunt of near-zero interest rates on our client float. On a positive note, we managed to grow our client float significantly, and it now stands at nearly $5 billion,…

Thank you, Sean. I will be starting with Slide #3, which shows our performance over the last 5 fiscal quarters. As shown, we followed the strong performance in our fiscal second and third quarters with a record $77.4 million in net income in the fourth quarter of 2020. This represents a return on equity of 42.5% and diluted earnings per share of $3.90 for the quarter and $8.61 for the fiscal year. As Sean noted, the fourth quarter results included $81.8 million gain on the acquisition of Gain Capital which closed on August 1, and as of note that this gain is nontaxable and, accordingly, there is no corresponding income tax provision recorded for this item in the quarter. Moving on to Slide #4, which represents a bridge between operating revenues for the fourth quarter of last year to the current period across our new operating segments Sean discussed earlier. Overall, operating revenues were $342.1 million in the current period, up $55.2 million or 19% over the prior year. The largest increase in operating revenues was in our Retail segment, which added $48.1 million versus the prior year, which is primarily driven by the incremental $42.9 million in FX and CFD revenues from the Gain acquisition. In addition, our retail physical gold business, which is the CoinInvest business acquired in 2019, added $3 million in operating revenues as a result of increased customer demand for physical coins and bars. Our Institutional segment added $3.2 million in operating revenues versus the prior year as a 19% increase in listed derivative volumes added $8.6 million in operating revenues versus the prior year and a 26% increase in average daily volume of securities transactions led to a $13.1 million increase in operating revenues in this segment. These increases were partially offset by a…

Thanks, Bill. For most people, 2020 will likely go down as one of the worst years in memory. But in many ways, it brought out the best in our company, shining a spotlight on our dedicated and talented people, our commitment to adding value to clients, our ability to manage risk and our disciplined approach to acquisitions and expansion. While the near-term operating environment may challenge us with lower volatility and lower interest rates, our business has proven to be resilient and is more diversified and better-scaled and with greater earnings power than ever before. I am certain that this environment will also bring a reordering of our industry and, with it, opportunities to pick up valuable clients, people and businesses that will allow us to continue to increase our market share and the value of our franchise. We remain vigilant and cautious in our approach, but I'm optimistic that we will emerge as a stronger and more substantial global franchise than before. We believe that the Gain acquisition will be strongly accretive financially and strategically as well as provide us with the intellectual assets to enhance our strategy and enable us to achieve our goal of becoming the best-in-class financial services franchise, connecting clients to the global markets ecosystems across asset classes and offering vertically integrated execution and clearing and providing a unique blend of digital platforms and high-touch expertise. In closing, I'd like to thank the entire StoneX team, which now encompasses nearly 3,000 people around the world, for their amazing commitment to our clients, for your willingness to embrace challenges head on. Also to my exceptional and battle-harden management team who quickly respond by running towards problems and not away from them. I am very proud of our franchise, and I'm certain we'll come through this period of unprecedented challenges stronger and better. Operator, let's open the line and see if we have any questions.

[Operator Instructions] Our first question will come from the line of Dan Fannon from Jefferies.

So to start, just trying to normalize some of the noise, as you put it, in the quarter and thinking about kind of run rating where we are today going into 2021 from an expense perspective. So you called out a few things. So I was hoping you could just reiterate what was kind of more onetime in nature in the quarter in the expenses, maybe the geography of where those charges or expenses were and then also update us on synergies and things that have already been realized with the Gain acquisition.

So Dan, why don't I start just at a high level, and then I'll throw the complicated part of the question over to Bill, how about that? So I guess the way I think about the quarterly earnings is -- and I sort of tried to lay that out a little bit is, if you think about disaggregating everything related to the acquisition, right, and for the meanwhile, and I'll come back to ignore sort of bad debts as well as the variable compensation that largely kind of came this quarter as an indirect result of the transaction, I think you're getting down to something like $1.25 in EPS, right? Now you need to sort of take a view on sort of bad debts and charge-offs, and that clearly is something that happens in our business. But I think I've been at pains to tell people is when we see these exceptional volatility situations, we make a lot of money, but we also see an increase in our charge-offs. And that's exactly what happened. It happened in different quarters. So I think you sort of need to normalize. And I think in a lot of ways, our annual results are probably a better reflection of sort of how that works. And the way I think about it, it's sort of the hangover after the party, right? Last quarter was the party. And this quarter, we had a little bit of the hangover. So I think that's how I would think about sort of the run rate for our quarter. Obviously, volatility was down for the entire quarter, we had the much lower interest rates on our float. And it's -- that's just how I think about the quarter on a stand-alone. Bill, I don't know if you want to add any more details to that.

Sure. A couple of items that Sean have touched on as well as myself. In the quarter, we did have $7.7 million worth of investment banking and fees related to both the acquisition in CoinInvest, the ones that had to be expensed as part of the note offering. So that's all showing up in kind of unallocated overhead section of the financials. And then in addition, related to the acquisition of Gain, when we bought them and brought them on, we evaluated their trade system and we had capitalized software on our book for kind of a rollout of a system to be used to reflect prime brokerage in some of our precious metal tradings that we found to be duplicative, right? We looked at Gain's platform. We saw that it would be the better choice, most of all because it will be one system instead of just adding another system in. And in total, that's about $5.7 million. Now about $1.6 million of that is allocated to our Commercial division, which is where the precious metal resides, but the lion's share of that was seen in the Institutional segment with the FX, our historical kind of FX prime brokerage, if that makes sense. Other notable, I guess, expense run rates, et cetera, we did have a spike out that looks like in corporate overhead. Part of that is the $7.7 million I just mentioned in the investment banking-related fees. We had a roughly $12 million -- $11 million to $12 million worth of increased interest expense related to the newly issued notes, right, being on for a full quarter. We had some of that last quarter. And then you had a total of about $12.2 million of overhead expenses related to Gain coming on for the quarter, of which $2 million of it was variable in nature. Does that kind of cover a few of the points you were looking for, Dan?

Yes. Yes, that's helpful. And I guess just on the Gain kind of expenses, Bill, just -- yes, go ahead.

Sorry, Dan, just to interject, I mean, it's probably less of a significant item, but the other thing to think about is we suffered the full interest charge on the notes while we only had the earnings of Gain for sort of 2 months, right? So you still got to adjust for that. And we also have the ability to call $100 million of the notes coming up here soon. So those are also items one has to adjust for, I think.

Right, right. And I guess, in terms of synergies or expense reductions associated with the Gain deal, was there anything there that you could point to? And then also just update on maybe the accretion you see. You highlighted it will be accretive and positive trends within it, but just any numbers around how you think that is trending, that business versus your original expectation.

Okay. So firstly, we haven't even had Gain in for a full quarter. So I think it'd probably be best for us to report around synergies and costs maybe in the December quarter when we've realized some of those. And I think if you remember at the time of the acquisition, we sort of broke out the synergies on the cost side into 2 broad buckets. One was the cost containment, I guess, or cost refactoring that Gain already had in flight but hadn't fully shown up in the numbers. So that's fully shown up in the numbers now because a lot of those actions were taken sort of in the March quarter and are now fully into the cost base that we've assumed. So that's been achieved because we are highly confident that, that would happen. So that's part of what we indicated to the market when we're doing pro forma numbers, I think, is being pretty largely achieved. The second bucket is really coming out of eliminating Gain as a separate public company and rationalization of some of the operating entities which is still ongoing. I mean we've certainly eliminated Gain as a public company, but we still are in the final stages now of merging the legal entities, and that's going to sort of trigger both the capital synergies and the remainder of the cost synergies, if that makes sense.

Yes, it does. And then if I could just follow up on the bad debt and understanding the volatility that resulted -- well, it seems like it would -- I would have expected those charges to occur more in the first half of the year or the first half of the calendar year than this quarter. Is it just a lag effect? And as you talk about kind of the pain out there across -- that could be exhibited across multiple industries, is that kind of your view that bad debts, given all of this, could still be a bit elevated as you think about looking ahead?

So just the bad debt specifically, and I can't get too granular [ due to ] client confidentialities and such, but one portion of it is related to a trading account that was owned by an introducing broker and that was triggered when energy went negative. And that introducing broker guaranteed the performance of that client. So we took a charge immediately when that happened. But what we have to do is assess the validity of -- or the ability of that introducing broker to make good on the balance. That introducing broker's business has got impacted and therefore we had to reassess the ability of that introducing broker to carry some of that bad debt and repay us. And so that's what we did. We trued that up. And that was a consequence of just a change in business. They lost some of their clients. They're not as profitable as they were before. And that only sort of became clear to us in the current quarter. The second part was a commercial customer that was involved in physical energy. And that business -- and I think this is true and you've seen the banks had to make provisions during the crisis. Unfortunately, we're not allowed to do that, we have to wait until the problem actually crystallizes. But there was a customer who got severely liquidity-challenged and they had problems and they failed as a counterparty to us. So in the sort of commercial world, I think there is a lag effect, right? I mean in the trading world, you close someone out, you sort of immediately know where you are. On the commercial side, people hang on and they try to work their way through their problems. And if their business is significantly impaired, it becomes a liquidity and ultimately a solvency issue, which is what happened for us. We don't think we have any more issues like that to deal with. Otherwise, obviously, we would have done something now. And I think there was not only sort of volatility, but there was also a dislocation. And I think, particularly in the energy side, that sort of dislocation where Brent and WTI blew out and storage locations were full and couldn't accept. So it was just a very weird situation. So -- and that was the ultimate cause of that.

Okay. That's helpful.

Does that answer your question?

Yes, it does. And so just last one for me. Given that we're over 2/3 of the way through the December quarter, any update just on kind of broad trends you could talk about that's happening -- that's happened subsequent to year-end? And kind of just anything there would be helpful.

I would just -- I mean, I guess we tried to sort of lay some of it out. Our business can change pretty fast on the volatility side. I mean it's really hard to try. Volatility is a major input for us. It's really hard for us to understand how volatility may track out because it could change in a heartbeat. So I think volatility, if you just look at the mix, you can see that's come down significantly from where it is in March. It is still slightly elevated. I think there's a lot of fiscal and monetary support which, at some point, has to be pulled out of the system or stopped. And how does that kind of give rise to volatility? Very hard to predict. But my guess would be I think volatility probably stays somewhat elevated, which I think is good for us. But what we do know for sure probably and with greater confidence is that interest rates are lower, right? So I think we know that -- we know what the impact of that is, and that's probably going to be an indicator or a factor that you can predict with greater certainty and it's going to probably take a longer time to correct. So that's obviously a negative for us. And I guess the question is, how do those 2 factors interact? And what's the net result of that? And then you've got to factor in net of the interest we're paying on the high-yield note, how does Gain add to that incrementally or not? And if you take the view that we pay down, and certainly we have the ability to do that, $100 million of the note, that significantly reduces the interest cost of the acquisition. And if you look at…

[Operator Instructions] And I'm not showing any questions on my end.

Okay. Well, thanks a lot. Thanks, everyone, for attending. I'd like to just take time to wish everyone on the call, you and your families, happy holidays in these strange times. Stay safe and enjoy the time with your families, if you can do it. Thanks very much. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.