Good day, ladies and gentlemen, and welcome to the StoneX Group Inc. Q2 FY '24 Earnings Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Bill Dunaway, Chief Financial Officer. You may begin.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our second quarter ended March 31, 2024. After the market closed yesterday, we issued a press release reporting our results for our second 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 in 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-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 include 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 could 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 second quarter earnings call. The second quarter of fiscal 2024 was a solid result for us, with earnings up 27% and EPS up 25% versus the prior year period. The current quarter includes a $9.1 million or approximately $0.20 per share unrealized loss on derivative position used to hedge our gold inventory. We don't elect hedge accounting on these inventories, so these losses will be reversed when this inventory is sold. For the 6 months to date, we recorded earnings of $122.2 million or $3.76 per share, excluding acquisition gains in the prior period relating to CDI. This represents an increase of 29% for the year-to-date period. Turning to Slide 3 and a summary of our second quarter and trailing 12 months results. We recorded operating revenues of $818.2 million, up 16% versus the prior year. Our operating revenues include not only interest earned on our client floats, 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 6% versus the year ago number and relatively flat versus the immediately prior quarter. Total compensation and other expenses were up 4% for the quarter, with variable compensation up 2%, which was below the net operating revenue growth rate of 6%. Fixed compensation and related costs were flat versus a year-ago and were up 15% compared to the immediately prior quarter. The prior year amount included a severance amount in the amount of $12.1 million versus $1.1 million in the current quarter. Net income was $53.1 million for the current period, up 27% over the prior year quarter, however 23% down on the immediately preceding quarter. This represents…

Thank you, Sean. I'll be starting with Slide #8, which summarizes our consolidated income statement for the second quarter of fiscal '24. Sean covered many of the consolidated highlights relating to operating revenues for the quarter, so I will just cover the consolidated expense fluctuations and then move on to a segment discussion. Transaction based clearing expenses increased 13% to $78.5 million in the current period as a result of the increases in listed derivative and securities volumes as compared to the prior year. Introducing broker commissions were relatively flat with prior year at $42 million in the current period. Interest expense increased $80.5 million versus the prior year, primarily as a result of the $78.6 million increase in interest expense related to our institutional fixed income business as well as the $5.7 million increase in interest expense related to securities lending activities. Both of these were due to increases in short-term interest rates, and in addition in the case of the fixed income business, increased volumes. Interest paid on client balances on deposits declined $5.8 million as compared to the prior year due to declines in average client float. Interest expense on corporate funding increased $1.3 million versus the prior year as a result of the incremental issuance of our senior secured borrowings, partially offset by lower average borrowings on our revolving credit facility. I will expand on this topic later on this call when I cover the new note issuances. Variable compensation increased $1.9 million versus the prior year and represented 29% of net operating revenues in the current period compared to the 30% in the net operating revenues in the prior year. This decline in variable compensation as a percentage of net operating revenues is a result of the increase in net interest and fee income earned…

Thanks, Bill. We are aware that there has been some renewed investor interest and some activity in our market sector, and we thought it might be worthwhile to touch on our strategy and what is driving our results currently, particularly for any new shareholders that may be listening. Slide 14 sets out our high-level strategic objectives that we are focused on. This basic approach and strategy has been unchanged for over 15 years and has served us well. Before dealing with the strategy, perhaps it would be helpful to give our views on how we have seen the market structure and our competitive environment changing, and how our strategy aligns with that. Following the financial crisis 15 years ago, there was a comprehensive and significant response from the regulators around the world to create a more robust and durable financial market. The key impacts of this were a massive increase in costs due to more complex process and oversight, 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. As a result, there has been a fairly dramatic consolidation in our industry. This can be evidenced by looking at clearing FCMs or broker dealers, which have massively reduced in numbers over this period. We have directly participated in this process through some of the acquisitions we have made. We have made over 30 acquisitions over this period. And we've also benefited indirectly as clients have been forced to find new firms to deal with. In addition, we have seen a fairly significant withdrawal from our market by the big banks as capital requirements have forced them to reevaluate their strategy. The large banks in aggregate still account…

We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Dan Fannon with Jefferies.

I guess to start, you touched on this topic, but volumes were generally strong across the board in the quarter, but the rate per contract or fee for million outside of FX was generally lighter. So I was hoping you could talk about the trends within the Commercial and Institutional segments. And I believe you indicated some mix of like lower AGs in certain segments. So just would be to get a little more color around that trend on the capture rates and how you think about that prospectively?

Well, I think our capture rates, as you know, probably refract sort of market conditions in terms of volatility, right? When markets become more volatile, we tend to see revenue capture expand. And when markets become sort of either trending or sort of flat line and volatility declines, we tend to see them narrow in. And I think this is probably the same as what we've seen for the last 2 or 3 quarters, actually, if you go back, which is generally speaking, with some exceptions, volumes continue to go up, but revenue capture tending to be a little bit more, kind of, I guess, varied up and down depending on what product. And I guess that just speaks to sort of a normalization and volatility across the board. I mean, we now see the mix in sort of the low teens, which is sort of back where it was in '19. And that's starting to play through into some other markets. But the one thing I know for sure, having been in this business for over 40 years is volatility doesn't stay low for long, and it also doesn't stay at peak for loss. So I think it is a volatility itself is volatile, and it's hard, I think, to determine a long-term trend on that because it really depends on short-term market conditions is all I can say. I don't know, Bill, if you have anything to add on that.

Yes. I mean, a couple of pieces, Dan, as we talked a little bit comes an interplay between the commercial and the institutional segments. And certainly, on the commercial side, post -- during the COVID era and then kind of surrounding the Russian invasion of Ukraine, you kind of saw there is a spread component to that in the London market when it comes to even unlisted derivatives and those were quite wide. So you've seen that trend down. And then it kind of stabilized. And then here I would say for the last 3 or 4 consecutive quarters on the commercial side, we've turned it down a little bit further. And a lot of that has been actually picking up some pretty good sized large commodity intermediaries that are a little bit higher volume, a little lower rate. And at the same time here recently commodity volatility just kind of fallen off a little bit. So you saw a little bit lower activity, but generally higher volume from some commodity intermediaries. And on the institutional side, it's been the same thing. The client acquisition, you've seen the volumes go up particularly on that institutional side. And that thus capturing some more ETFs and then some larger groups that are starting to really do a lot of volume through us, tends to be lower volume lower rate per contract. But overall, a good thing. We want more and more volume going through our pipes. It's just a little bit incrementally lower RPC. But I wouldn't -- it's kind of stabilized though at this most recent quarter versus last quarter at least in the institutional side. So I wouldn't see meaningful down from here.

Okay, great. That's helpful. And then on the retail side, where clearly the fee per million for the second quarter in a row has been well above the trends. I think you also cited mix there. I guess as you look underneath the hood a little bit at the customer base or I don't know channels for where that's coming like sustainability, is that anything you could speak to or is it still obviously again volatility being a big component of that business, but curious about maybe an outlook there?

Yes. I think there's volatility in product mix clearly, but I would say sort of revenue capture at $120 level, honestly, is probably unsustainable for a significant period of time. Our view is that it's probably normalizes at around sort of 90-ish, is sort of our 90% to 100% is our expectation. But sometimes these trends can go on longer than you think. So obviously, we'll take as much as we can get when we can get it. I would say another comment on the retail business is, and if you remember when we did the acquisition of GAIN, our thought was that, if we could intelligently combine the retail flow we had in things like golds and oils and corn and even FX with the flows we're getting from our commercial and institutional clients that would provide us a more efficient internalization mechanism, because there's A, just greater flow and B, the different nature of the flows allows you for greater opportunity for spread capture internally. And I think as we sort of build those pipes out and as that's happened, my sense is we are driving to a slightly higher average over time. I mean, it will still be somewhat volatile, but I think we are starting to see sort of tangible signs of the success of that strategy we laid out a couple of years ago that we are now sort of having all of that flow centralized through one pipe. And I think we are starting to see sort of an increase in the average. But I don't think 120 is going to be the average. So, I mean, I still think we above trend there. Does that make sense?

Yes, understood. I guess I was hoping to now tie some of the comments you mentioned around the longer-term strategies of technology with expenses and the potential for margin expansion in the kind of 1- to 2-year time period versus certainly, I know your comments were longer term. But as you think about where we sit with expenses thus far on the fixed side, are these good run rates as we think about the remainder of the year? And when do you really start -- do you think you'll see some of that operational leverage from the investments you're making today?

Yes. Well, I'll just give you a high-level overview, and then I'll hand off to Bill here, who has all the details. I think we did a fairly significant ramp over the last 2 years -- 2, 3 years in terms of our infrastructure. We obviously acquired gain. We saw a very big jump in our volumes over that period, and it sort of led to a step change in us having to spend money to invest in the infrastructure to support that and in more technology rather than more people necessarily. So I think the bulk of that spend has happened. I don't think that we're initially going to see costs come down. I mean I just don't think costs come out. So we're fighting very hard to like level costs off. But what should happen is we should have dramatically more scalability from here on in. So having made that step change in all the infrastructure from compliance to KYC to risk, to front-end technology development and so on. If we start to see volume increases, which we continue to see and we hope for, we should see a much higher incremental margin on that growth because hopefully, we can kind of keep our costs where they are now. So that's our plan. And you can kind of see what our growth run rates are. And if we continue on those growth run rates and we can keep our expenses down to low single digits, and we can kind of grow our top line in the 15% plus range. I mean you're going to start to see that operational leverage show up pretty quick, I think. I mean Bill, over to you, do you agree on?

Yes. Dan, and to your point, as far as Sean saying the cost being there, as I pointed out that the natural non-variable salary piece from Q1 to Q2 was actually relatively modest growth. We are up from last year, but I think we've even touched on the last couple of calls. I think the actual headcount we’re starting moderate -- starting to see that level off a little bit. Obviously, this quarter you had some anomalies somewhat on the expense side. Some of it's seasonal as we talked about last year with benefits, taxes, retirements, PTOs that kind of get reset at the beginning of the year. So that's probably $3 million to $4 million. We had some fluctuations in deferred comp, but it's probably another couple of million dollars on the comp side. So overall comp, I would expect to at least trend down probably $4 million to $6 million from where it is right now just because of that seasonal activity. And then certainly also in the quarter, as I touched on, we reordered the office in London that added about $1.8 million in total of kind of recharges with, kind of, consolidation of offices there and write off of some of the leaseholds. So the run rate on occupancy, I would expect to probably be about $1.5 million lower than it is now for the current quarter. And then certainly professional fees probably a couple million dollars high here in the current quarter. And then the sales comps we talked about it's about $4 million in there. So overall net you're probably somewhere in the $11 million, $12 million a little bit higher this quarter than we would expect going forward. But things do change, right. I mean, but that's, kind of, our current expectation.

I guess, Dan, one other thing to mention on that is sort of strategically and long-term, we've sort of back to the point now where we pushing a lot of our incremental hires into the lower cost or more efficient jurisdictions. It's something we've done for a while, but we think we've got a critical mass. We now have about 400 people in India. We have 350 people in Krakow, Poland. We're spinning up centers in Colombia, where we're finding lots of great talent at sort of fractions of U.S. prices. Our Birmingham office is a great office for us and sort of becoming our operational center, moving people out of expensive Chicago and New York real estate and price points. So, we're really pushing that hard now. And I think you might not see it show up in heads, but you should see it show up in dollars. So that's something we're working towards as well.

Great. That's helpful. And then I guess, Bill, just looking at the cash balances and client balances and interest income sensitivities we get. But also wanted to get some color around the hedges that you have in place and as they roll off. How we should think about what the sensitivity is or the duration of those contracts and maybe the impact on a prospective basis?

Sure. Yes, Dan, the big ones that we've talked about previously, the really early on ones we had did roll off, right? So that was a nice component here from Q1 to Q2 of them rolling off. I would say that currently where we're at now, gross yield is a little shy of 5% and net of paying out what we're paying to clients at like 330. So we saw probably a 50 basis point pickup [Technical Difficulty] as those -- some of those hedges rolled off and on a net basis about 75 basis points pickup. So I'd say this is kind of where we are now. We've still got some on, but they're rolling off and we've been cautious to go into the market now just given to where we are in the Fed cycle of cutting in the inverted market that we're seeing. So I'd say we're pretty pegged currently generally to the 3 month, following that 3 to 6 months maturity probably with the outstanding few that we do still have on.

But they're not going to make a material difference.

They will make -- yes, they should make a material difference in the rate. Go ahead, Dan. Sorry. As far as the balances, we've kind of come off a little bit of that touched on in my stated remarks with lower commodity volatility brings lower margin requirements on the commercial side. And so that's driven some of the balances a little bit lower. And on the institutional side, you've kind of had high watermark early last fiscal year into mid fiscal -- last fiscal year when we had a lot of institutional clients doing a lot of interest rate plays that drive a lot of funds. Some of those opportunities have dried up and also the margin requirements affect them as well. That's where you've seen a little bit of the balances go down.

But we weren't retaining much interest.

Correct. Yes. The net-net as you can see, we are paying out quite a bit of interest on some of those clients. So overall, the margin -- the net margin has expanded versus where we were a year ago, despite those lower balances.

Great. Okay. That's helpful. And then just lastly for me, Sean, just to clarify some of the comments or expand upon around M&A in the current environment, you mentioned valuations coming down a bit. I guess as you think about your current backlog discussions, how does that compare to say this time last year? And maybe in terms of the appetite for small versus large, where does it sit today based on those conversations?

I would say it's been sort of a trend over the last sort of year or so where I think things are coming into a more normalized range valuation wise. I mean, we sort of dealt with the sort of craziness of COVID, and it takes a while for people to adjust to kind of what's normal. And I think that's starting to happen. And we certainly see fair amounts of opportunities coming to us at the moment. And they seem to be more reasonably priced. So, if that all holds, it probably argues that we are -- there's a higher probability we may do something than say 2 years ago. But with M&A, it's really hard. I mean, we stay very disciplined around this. We don't chase deals. We don't chase price. We found that bad things happen when you do that. But certainly, it looks more encouraging than it did even a year ago. So doesn't initially mean we'll do anything, but it's certainly more encouraging. Operator, do we have any other questions?

[Operator Instructions].

All right. Well, I don't see any questions popping up. So just like to say thanks to everyone for attending our conference call. Appreciate all the support and we will speak to you in 3 months' time. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.