StoneX Group Inc. (NASDAQ:SNEX) Q4 2022 Earnings Call Transcript

StoneX Group Inc. (NASDAQ:SNEX) Q4 2022 Earnings Call Transcript November 22, 2022

StoneX Group Inc. beats earnings expectations. Reported EPS is $2.49, expectations were $1.93.

Operator: Good day and thank you for standing by. Welcome to the StoneX Group Inc. Q4 Fiscal Year ’22 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Bill Dunaway, Chief Financial Officer. Sir, please go ahead.

Bill Dunaway: Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fourth quarter ended September 30, 2022. After the market closed yesterday, we issued a press release reporting our results for our fourth fiscal quarter of 2022. This release is available on our Web site 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. You will need to sign on to the live webcast in order to view the presentation. 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 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 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.

Photo by Kafui Yevu on Unsplash

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.

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Sean O’Connor: Thanks, Bill. Good morning everyone and thanks for joining us on our earnings call. During the fourth quarter of fiscal 2022, we continued to see the effects of inflationary pressures on the global markets, sharp increases in short-term interest rates and continued volatility in both financial and physical commodities markets. This has been a great fourth quarter for us and a truly exceptional and record setting year for the company overall, validating our strategy and demonstrating the earnings power of our franchise. We recorded operating revenues of 583.4 million, up 50% versus the prior year and total expenses were up 25% from a year ago and up 6% sequentially. This results in net income of 52.3 million, up 616% over the last year.

Diluted EPS came in at $2.49, which is up 592%, which produced a 19.8% ROE. Turning to Slide 3 in the earnings deck. For the fourth quarter, we realized very strong revenue growth of over 30% in each of our products, except for listed derivatives which was up 12%. Interest and fee income on client balances was up 522% as we started to see the impact of increased interest rates off the back of a 50% increase in our total client float, which now stands at 8.6 billion. This revenue increase was driven by strong double digit increases in transaction volumes across the board. The higher market volatility caused spreads to widen, resulting in improved revenue capture in the products where we act as a principal. The rate per contract for listed derivatives was down 4% versus the prior year largely due to a business mix where we had a higher proportion of institutional volume versus commercial volume.

Moving on to Slide 4. For the fiscal year as a whole, it was a very similar picture with product volumes up across the board and revenue capture up except for a slight decline in the rate per contract on listed derivatives and on securities. All of this data points towards increased client engagement driven by volatility as well as continuing strong growth in our underlying client base. It is notable that 65% of the annual increase in interest on our client flows was received in just the fourth quarter. Turning to Slide 5, and a summary of our fourth quarter and full fiscal year results. As I mentioned earlier, we recorded revenues of 583.4 million, up 50% versus the prior year. Total compensation and other expenses are up 25% for the quarter, with variable compensation up 53% in line with revenue growth.

Fixed compensation and related costs increased 3% from a year ago. The resulting net income of 52.3 million is up 616% and diluted EPS of $2.49 is up 592% with 19.8% ROE. This would equate to a 21.6% ROE on tangible equity. We realized record operating revenues for our commercial and institutional segments. In comparison with the immediately preceding quarter, our operating revenue was up 10%, our net income was up 7% and our diluted EPS was up 5%. Looking at the summary for the full year, this was a record year for us in almost every metric. Our operating revenues were a record 2.1 billion, up 26% over the prior year. Our net income was 207.1 million, up 78%. Our diluted EPS was $10.01 for the full year, up 74% and ROE was 21% despite equity increasing 39% over the last two years.

On a tangible equity basis, our ROE was over 23%. Our financial results were boosted by higher interest and fee income on our client float as short-term rates increased over the period, although the majority of our increase as I said earlier came in just the fourth quarter. This is obviously due to the speed and scale of the interest rate increases as well as the fact that our interest earning assets generally take about 45 days to reprice to new rates. Our average yield on our client float was 84 basis points for the year overall and 193 basis points for the fourth quarter. We are likely to see a continued ramp up of our interest earnings on this float as we continue to reprice our client float at the current rates. We ended Q4 ’22 with a book value of $52.70.

Turning now to Slide 6, our segment summary, just want to touch on a few highlights before Bill gets into more detail. For the quarter, segment operating revenue was up 51% and segment income was up 72%, with a very strong performance across all our client segments. Our commercial client segment was up 82% and segment income off the back of a 40% increase in operating revenues, with strong performances from our physical metals and ag and energy business as well as OTC derivatives, and of course higher interest rates. Our institutional segment realized an 87% increase in revenues, which translated to an 84% increase in segment income. This was largely due to a much improved performance from our security business versus a weak quarter a year ago, as well as the increase in interest and fee income.

Retail had another solid quarter with operating revenue up 18% driving segment income up 70%, demonstrating the operational leverage we have with a digital platform. Global payments revenue was up 29% and statement income up 33%, with double digit increases in both volumes and revenue capture. For the full fiscal year, segment operating revenue was up 26% and segment income was up 33%, again with strong performances across all of our client segments. Operating revenues were up more than 20% in each of our segments. Segment income showed similar increases with the exception of institutional, which was up 4%. These are strong quarterly results across all product groups and across all segments. But as we have said repeatedly, we’d like to take a long-term view on how we manage the company and grow our franchise.

As such, we believe that the best way to gauge our results and progress is to look at longer term performance such as the trailing 12-month results rather than specific quarters taken in isolation. Turning to Slide 7, which sets up our trailing 12-month financial performance. Just to note, these numbers have been adjusted for the accounting treatment related to the Gain acquisition as disclosed in our prior filings which appear in the reconciliation provided on the last page of this earnings deck. On the left hand side, the bars represent our trailing 12-month operating revenue over the last nine quarters. As you can see, this has been a smooth and strongly upward trend as we have steadily expanded our footprint and capabilities. Our revenues are up 61% over this period for a compound annual growth rate of 27%.

Our adjusted pre-tax income likewise has grown significantly with a 42% CAGR. On the right hand side, you can see our adjusted net income in the bars which is up 116% over the two years for a 47% CAGR. The dotted line represents our ROE which has remained above our 15% target, even though our capital has grown by 39% over this period. Lastly, you may have noticed that the format of the presentation has changed as we roll out a brand refresh. This will include a cleaner logo and an updated and more contemporary reflection of the organization that StoneX has become. With that, I’ll hand you over to Bill Dunaway for a discussion of the financial results. Bill?

Bill Dunaway: Thank you, Sean. I’ll be starting on Slide 8, which shows our consolidated income statement for the fourth quarter of fiscal 2022. 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 were up 7% to 69.1 million in the current period, primarily due to the increase in securities ADV and listed derivatives contract volumes. Introducing broker commissions declined 6% to 37.4 million in the current period and an increase in IB commissions from listed derivatives were more than offset by decreases in independent wealth management and retail FX and CFD business. Interest expense increased 63.5 million versus the prior year primarily as a result of a $44.5 million increase in interest expense related to our institutional fixed income and securities lending activities as well as a $13.7 million increase in interest paid to clients on their deposits as a result of the increase in short-term interest rates.

Interest expense on corporate funding increased 1.4 million versus the prior year, also a result of the increase in short-term rates. Variable compensation increased 44.7 million versus the prior year due to the increase in net operating revenues and represent 33% of net operating revenues in the current period compared to 32% in net operating revenues in the prior year period. Fixed compensation increased 2.6 million versus the prior year, with the growth principally related to salary and benefit costs with increased headcount, which increased 12% as compared to the prior year, which is partially offset by an increase in deferred compensation. Other fixed expenses increased 19.7 million as compared to the prior year to 106.4 million and were 4.7 million versus the immediately preceding quarter.

As compared to the prior year, selling and marketing expenses increased 4.1 million and professional fees increased 2.3 million. The increase in selling and marketing primarily relates to an increase in digital marketing in our retail Forex business. We have started to see increases in travel and business development, increasing 4.4 million as compared to the prior year. In addition, trade systems and market information increased 1.3 million, non-training technology and support increased 0.5 million and depreciation and amortization increased 2.5 million as compared to the prior year with these increases part of our initiative to expand our digital offerings. We had bad debt expense net of recoveries of 4.4 million for the quarter versus 6.7 million in the prior year period.

Net income for the fourth quarter of fiscal 2022 was 52.3 million and represented a 616% increase over the prior year and a 7% increase versus the immediately preceding quarter. Moving on to Slide 9, I will provide some information on our operating segments. As Sean noted earlier, it was a record quarter in our commercial segment, adding 52.5 million in operating revenues versus the prior year and 15 million when compared to the immediately preceding quarter. Within the segment, listed derivatives operating revenues declined 800,000 versus the prior year despite a 5% increase in contract volumes as a result of a 7% decline in the average rate per contract due to product mix. OTC derivatives operating revenues were 49 million for the quarter, which is up 14.5 million versus the prior year quarter, primarily as a result of a 31% increase in the average rate per contract as well as a 10% increase in OTC derivatives contract volumes, both of which were driven by continued volatility in agricultural, energy and soft commodities.

Operating revenues from physical transactions increased 25.2 million compared to the prior year as a result of a 13.3 million increase in precious metals operating revenues as well as an 11.9 million increase in physical ag and energy operating revenues. Finally, interest earned on client balances increased 13.3 million versus the prior year as a result of a 28% increase in average client equity as well as an increase in short-term interest rates following recent Fed actions. Segment income was 80.2 million for the period, an increase over the prior year period and preceding quarter of 82% and 11%, respectively. Moving on to Slide 10. Operating revenues in our institutional segment increased 120.3 million versus the prior year, primarily driven by $73.5 million increase in securities operating revenues compared to the prior year period, resulting from a 60% increase in securities rate per million as well as an 18% increase in the average daily volume of securities transactions.

This increase in securities ADV was primarily driven by increases in both equity and fixed income markets as a result of heightened volatility and increased market share. The increase in securities RPM was primarily driven by an increase in RPM in fixed income products, which is influenced by changes in interest rates. While the rise in interest rates positively impacted RPM for the quarter, it also resulted in an increase in interest expense for the period, which I will touch on momentarily. In addition, operating revenues increased 11.9 million and 2.4 million in listed derivatives and FX products, respectively, driven by continued volatility in global markets. Finally, interest and fee income earned on client balances increased 27.4 million versus the prior year as a result of the increase in short-term interest rates following recent Fed actions as well as increases in average client equity and average money market and FDIC sweep balances of 86% and 22%, respectively.

As I mentioned earlier, the rise in short-term interest rates drove an increase in interest expense for the period with interest expense increasing 59 million versus the prior year. Interest expense related to trading and securities lending activities increased 44.5 million as compared to the prior year, while interest paid to clients increased 12.5 million. Segment income increased 84% to 45 million in the current period as the result of a $52.2 million increase in net operating revenues. Variable compensation increased 66% to 20.1 million in line with the growth in net operating revenues. Fixed compensation and benefits increased 2.2 million versus the prior year as we build out our product offering while other fixed expenses increased 9.2 million, primarily a result of a $2.7 million increase in professional fees, a $1.7 million increase in trade systems and market information, a $600,000 increase in depreciation and amortization, a $0.5 million increase in travel and business development and a $400,000 increase in selling and marketing.

Segment income declined 2.7 million versus the immediately preceding quarter. Moving to the next slide. Operating revenues in our retail segment added 15.4 million versus the prior year, which is primarily driven by a $23.3 million increase in FX and CFD revenues as a result of a 57% increase in RPM, which was partially offset by a 7% decline in FX/CFD average daily volume as compared to the prior year. Operating revenues from securities transactions and physical contracts declined 3.8 million and 5.4 million, respectively, as compared to the prior year period. Operating revenues in the retail segment declined 6.7 million versus the immediately preceding quarter. Segment income increased 8.3 million versus the prior year, primarily as a result of the increase in net operating revenues.

This was partially offset by a $1.8 million increase in fixed compensation and benefits and an $8.6 million increase in fixed expenses as compared to the prior year. The increase in other fixed expenses was primarily driven by a $2.9 million increase in selling and marketing, a $2.5 million increase in depreciation and amortization and a $700,000 increase in travel and business development. Segment income declined 6.1 million versus the immediately preceding quarter. Closing out the segment discussion on the next slide, operating revenues in global payments added 9.9 million versus the prior year driven by a 19% increase in the average daily volume and a 12% increase in the rate per million as compared to the prior year. Non-variable expenses increased 2.2 million and it’s primarily related to the expansion of our payment offerings.

Segment income increased 33% to 24.4 million in the current period, however, represented a 1% decline versus the immediately preceding record third quarter of fiscal 2022. Moving on to Slide 13, which represents a bridge between operating revenues for the fourth quarter of last year to the current period across our operating segments. Overall operating revenues were 583.4 million in the current period, up 193.3 million or 50% over the prior year. I’ve covered the changes in operating revenues for our segments, however, the $4.8 million negative variance in revenues and unallocated overhead is primarily related to a negative variance in foreign currency revaluation and a FX hedge related unrealized loss. The next slide number 14 represents a bridge from 2021 fourth quarter pre-tax income of 4.9 million to pre-tax income of 66.4 million in the current period.

The negative variance in unallocated overhead of 9.5 million was driven by the $4.8 million negative variance in revenues I noted on the previous slide and a $10 million increase in variable compensation as a result of improved performance, which was partially offset by $2.5 million decrease in fixed compensation and benefits and a $5 million decline in other fixed expenses. Finally, moving on to slide number 15, which depicts our average invested client balances and associated earnings by quarter as well as a table which shows the annualized interest rate sensitivity for a change in short-term interest rates. The interest rate earned on these client balances increased 124 basis points to 193 basis points for the current period. As noted in the table, we estimate 100 basis point increase in short-term interest rates would increase net income by 28.4 million or $1.40 per share on an annualized basis.

With that, I would like to turn it back to Sean for a strategy discussion.

Sean O’Connor: Thanks, Bill. Before we get onto the next slide, I would just like to briefly touch on the Gain transaction we concluded almost exactly two years ago, right in the middle of COVID, which was our largest acquisition to date. The logic at the outset was the retail clients of Gain would bring flow in products we already trade that we could internalize with our existing trade flow, as well as provide clearing services and additional products that they did not have access to, especially in the U.S. We have made excellent progress on all of this as I’ll touch on later. We also saw the opportunity for some easy cost synergies, most of which had been realized, as well as acquiring quality incremental talent, especially on the digital marketing side.

As you will remember, the COVID volatility handed us an unexpected windfall prior to the closing of the transaction would significantly derisk the acquisition. Over the last few years, this business has exceeded the expectations we laid out for it at the time of the acquisition being buoyed by good market conditions. In addition, we executed well on all the integration objectives we laid out, and we now see retail trading flows a key part of our franchise. Turning now to Slide 16, which sets out our high level strategic objectives that we are all focused on. We included the slide before and went through it in some detail at the end of fiscal 2021, so an annual review and update is probably appropriate. As we have mentioned before, we have seen an increase in the cadence and delivery of a lot of our key projects and many of these are now through beta testing and have either been launched or are on the launch pad.

Our approach is always to introduce and market our new capabilities on a steady incremental basis. 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. But in aggregate and over time, we believe that these initiatives will bend the growth curve upwards. And because many of them are digital in nature, we should see operational leverage and scalability start to kick in, and a steady improvement in our margins. So looking at Slide 16, starting on the left hand side building our ecosystem, we want to stay relevant to our clients, existing and new, by adding products and services and creating the best financial ecosystem to connect them to the global financial markets.

On the equity side, we have now launched our electronic market making platform to internalize and capture spread on domestic NMS equities, while providing best execution. This is an area dominated by a limited number of large players and our broker dealer clients are interested in having alternative outlets for execution of these trades. We are leveraging our longstanding institutional relationships of over 20 years on the international equity side. We continue to successfully ramp up our number of clients as well as the number of names we execute on and are seeing increasing crossing rates and incremental revenue. We are very pleased with the results and performance of our platform and this is already accretive to the cost incurred. As we start to approach critical mass, this will start to add meaningful incremental revenues.

And we continue to believe that this is a significant long-term opportunity for us. As mentioned in previous quarters, the addition of the higher volume lower margin NMS stocks will affect our operational metrics for the securities side of our business. On the fixed income side, we have certainly been diversifying into different fixed income asset classes. This strategy paid off for us very well in recent quarters and provided resiliency to our revenues as the interest rate environment has changed. We have noticed a distinct change in perception from institutional investors as well as talent. We are now seen as a growing and successful fixed income franchise that can compete with the Tier 1 players. We have made some crucial hires from larger players and seen increased client adoption.

The crypto market has gone through some wrenching if predictable changes recently with consolidation and some of the access is being exposed and perhaps we’ll see a smaller, but more regulated market starting to emerge where clients are looking for trusted partners. No matter what our individual thoughts are about this, it is likely to remain an asset class that some of our clients will want to access, both on the institutional and the retail side. We will continue to support these clients by facilitating trading in a growing number of listed derivatives as well as publicly listed ETFs and other crypto industry participants. This is an incremental source of revenue for us and we want to remain relevant to our clients by ensuring that we provide safe access to this asset class.

Carbon trading is another growing market propelled by global ESG initiatives. Again, our primary role to date has been to provide our clients with access to all carbon trading instruments. In addition, we have a role in educating our clients on how best to participate in this marketplace. Many of our agricultural clients are potential sources of carbon credits which can be monetized. We have made good incremental progress and have a small but growing revenue stream and client base in carbon. StoneX recently became a member of the Nodal Exchange, which offers renewable fuels and pollutant contracts to support an increasing focus on corporate sustainability and carbon neutrality. The users of these products include energy refiners, distributors and producers to the energy traders, and environmental, social and governance fund managers.

Our payments business has made some key hires to develop the local currency pay in business in Brazil, and will soon thereafter begin to expand into other jurisdictions. This will allow us to provide an end-to-end payment services for our large existing clients that have had large in-country client bases. We can provide them an efficient way to get the dollars into the country as well as to collect the local payments from these clients to remit back to head office. This will be an attractive offering for these large corporate clients. On the retail side, our international City Index platform will introduce cash trading in equities for all clients in Q1 2023. This platform already offers over 15,000 OTC products designed for active traders. And these same clients will now have access to investment products directly on our platform.

This not only expands our product offering to these clients, but allows us to target a much larger universe of potential clients. In the U.S., the different regulatory framework adds significant complexity to offering a multi-asset class trading platform with different regulators, legal entities and related protocols and challenges. StoneX One is our U.S. based self directed platform allowing trading equity options as well as listed derivatives and will also be launched in Q1 2023. This will be available as a mobile version as well as a desktop pro version with enhanced functionality. We will soon have crypto FX and physical gold to both international and domestic StoneX One platforms, making this a very unique cross asset class execution capability.

Longer term, we can leverage our wealth management capability by adding robo-advisory portfolio management and even estate planning options for our larger retail clients. We continue to ensure that we offer broad access to products and marketplaces and exchanges that our clients want to access. We continue to offer new OTC products to address client needs and have invested in our technology stack to do this faster and more effectively. We are now introducing dozens of new products every month, some of which are new and industry leading such as the cattle swaps contract we introduced into Australia. In addition to incremental revenue, this positions StoneX as a leading innovator focused on adding value to our clients. Moving on to our second strategic objective, we are a client centric business and we need to consistently work at growing our client footprint into new markets and expanding market share where we have existing clients.

We will also seek to serve new clients segments and channels. We have all the capability to service clients of all types and have a large addressable market in front of us with very low market penetration currently. Obviously, as we enhance our financial ecosystem, we are able to offer a more compelling value proposition to our existing and potential clients. We continue to invest and grow our EU presence post Brexit with an expanding office in Frankfurt to serve as our existing European based clients and allowing us to more effectively market new clients in Europe which may not be adequately covered post Brexit. Our payments business has also launched its digital platform focused on small and medium-sized Brazilian enterprises, looking for a more efficient way to make international payments in both G20 plus non-G20 countries.

We will soon be launching this in Europe and the U.S. We are also adding our international payments capability to all of our existing internal platforms on the commercial side, further embedding ourselves with our existing commercial clients. During the coming year, we will start to apply digital marketing resources to ramp up adoption of this new digital payments platform. Over time, we will begin to offer these small and medium-sized corporations our entire suite of hedging products, which will be an additional client channel for these products and services. The addition of cash equities to the City Index platform as I mentioned earlier as well as the multi-asset platform in the U.S. StoneX One will not only allow us to gain wallet share from existing clients but allow us to more broadly market these platforms dramatically increasing our addressable market.

The pro version of these platforms should drive our business to appear in custody and prime brokerage offerings as well. On the securities side, we have very little client penetration outside of the U.S. despite our global product offerings in both equities and fixed income. We have now added a small team in Asia and bolstered our presence in London. In addition, we are bolstering our capabilities in London to enable a more fully fledged offering. We will not achieve the necessary growth and scale unless we continue to embrace technology and digitize our business. This will not only enhance client engagement, but increase scalability and margins. This initiative requires a rethink of our processes from front to back, which has been underway for some years now but has accelerated with the acquisition of Gain.

Many of our product initiatives mentioned above are digital in nature, so I’ll not mention them again. The advantage of digital offerings is that they dramatically expand your addressable market. Every client anywhere is a potential client and it offers scalability and operational leverage to enhance margins. We are increasingly using technology on the trading side. All of our trading platforms are designed to aggregate trading flow and internalize spreads so we can maximize the client revenue opportunity and minimize hedging costs. As we gain critical mass in trading volumes, the impact on revenue capture can be significant and should drive our margins. This is the methodology behind our NMS electronic market making initiative, but it’s now also being applied more generically throughout all of our principal trading activities.

We also spend considerable effort providing technology to help our clients be more effective, and in turn become more valuable and stickier to us. During the year, we launched StoneHedge for our Grain merchandizing clients. This platform is deployed throughout the clients’ enterprise, allowing them to price and also hedge Grain purchases in real time from mobile devices. This platform is integrated into the enterprise accounting system, allowing all data to be shared instantly driving efficiencies for our clients. This new platform provides trading efficiencies on our side and embeds us as a critical partner with our clients. Some time ago, we launched a digital platform for our OTC in structured products to allow commercial hedging clients to run intricate scenarios to determine the best product for their needs and instantly get quotes.

We are now planning to upgrade this platform to allow clients to instantly execute trades, which would further drive product adoption and increased efficiency on the trader. Our StoneX technology team provides technology support to our payments clients and bank counterparties by hosting their SWIFT connectivity, and in addition we provide API connectivity to SWIFT. We also work to integrate our payments platforms with our client enterprise systems giving us the same stickiness. We’re building out a full API storefront to allow more sophisticated clients to link directly into our systems and access the information they need in real time. A lot of these projects are underpinned by the success of our data link, which allows any user to come to one place to get normalized data from our many systems of records.

Instead of multiple point to point connections to the systems, information can be accessed from one place in near real time in an easily consumable form. This was a massive undertaking given how diverse our business is with over 20 systems of record. We continue to see validation of this approach as many of our internal departments as well as our client facing platforms can easily stand up applications. We continue to build an enhanced data link as we expand our business. Over the last year or so, our risk management team has made significant strides and is able to more easily aggregate and analyze data with real-time monitoring to enhance the monitoring of risk across the entire organization. We have now also virtually completed a multiyear conversion to our new Oracle-based system for accounting and HR and are seeing meaningful efficiencies and quicker and better access to granular information.

We have a large number of other projects underway throughout many of our support areas to better use technology to create efficiency and scalability in our infrastructure to drive operational leverage. These include a contract management system for our legal team, technology to better track and monitor internal audits and operational risk issues and incremental technology improvements for the compliance in KYC monitoring. Moving on to the last pillar there, which is compounding our capital, our business is supported by capital and we need to underpin our growth as internally generated capital resources and when appropriate access to capital markets and approach acquisition in a disciplined manner. The most important thing we can do is to continue to create a capital runway for our continued growth.

That is why we are focused on ROE. It is interesting to note that 10 years ago, we had little over $300 million in shareholder equity and only a slightly lower number of shares outstanding as we do now. Over this 10-year period, we have more tripled our shareholder funds organically, acquired over 15 businesses and significantly expanded our client footprint, all financed organically from retained earnings and the unbelievable power of compounding. During this growth, we have largely achieved our 15% ROE target, certainly not every year but on average over the period’s pretty close. This has happened despite the investments made in technology and infrastructure, the cost of developing new capabilities, the integration of a large number of acquisitions, and also despite low interest rates for extended periods of time.

Achieving our ROE targets will continue to be our North Star and we believe as we digitize the platform and gain scale that our margins and ROE should start to increase. Our strong earnings have resulted in us deleveraging our balance sheet such that we are now paying a lower spread on our bank borrowings, a ratchet that was built into our new facility. You also probably saw the recent announcement of our acquisition of CDI, a physical cotton business based in Brazil and Switzerland. This is a well known and established business which buys cotton from producers in Brazil and West Africa and sells it generally on a back to back basis to buyers in Asia. They hedge their own price exposure and also provide hedging services to their producer clients.

And in this activity, they are both a client and a credible competitor to our commercial hedging business in Brazil. One of our senior Brazilian brokers who headed up our cotton business in Brazil left some years ago to take up a senior leadership position in CDI. And when the founder wanted to retire and exit the business, we were approached. Combining our knowledge of hedging with our understanding of physical markets and supply chain is a compelling and differentiated offering, which we have leveraged in certain other commodity verticals in the U.S. and elsewhere, including renewable fuels and grains. This acquisition will allow us to make significant inroads in the cotton industry, especially in Brazil, which is growing fast. The transaction will be immediately accretive to earnings and does not require significant balance sheet usage.

Turning now to Slide 17. As a client driven organization, our long-term revenue growth is critically dependent on broadening and deepening and all of our strategy objectives are focused on this single objective to broaden and deepen our client base. In this slide, you can see our client numbers. While these clients may not all be active at every point in time, it does show that we are getting active and meaningful engagement from new clients and we are expanding our market share. Each of our segments has shown a better than 50% increase in client acquisition over the last two years. This number is also reflected in our client flow, which is up over 92% over the same period. Let’s move to the final slide, Slide 18. This was another strong quarter for us with good market condition and excellent results across all products and client segments.

We achieved earnings of 52.3 million, diluted EPS of $2.49 and an ROE on stated book of 19.8%. The quarter capped the best fiscal year in StoneX history, with earnings of 207.1 million, a diluted EPS of $10.01 and an ROE of 21% and 23.2% on a tangible equity basis. When our performance is viewed through a slightly longer term lens, such as trailing 12 months, over the last two years which evens our quarterly anomalies, our results continue to show a strong upward trajectory, growing our revenues at a 27% CAGR and our adjusted earnings at a 42% CAGR. We continue to see strong growth in client trading volumes and client assets across all products and all client segments, which speaks to growth in our underlying client base and client engagements.

We believe that this growth combined with the outlook for heightened general market volatility and increasing interest rates puts a real tailwind behind our business for the next year or two. In fiscal 2023, we will see a number of our digital platforms being launched, which will more tightly integrate our offerings by client type and make it more engaging for clients to interact with our financial ecosystem. While we have seen the increased costs associated with developing and launching these platforms, as we actively start to market them, we should further accelerate our growth and scalability that technology provides to increase margins and overall profitability. We continue to invest in our financial ecosystem expanding our products, capabilities and talent.

We have a unique and comprehensive financial ecosystem with a very large addressable market in front of us. While we have good market share in certain niche segments of the market, lots of whitespace remains in areas where we already have client relationships and demonstrated capabilities and now need to monetize these opportunities. One thing will always make remain constant for the StoneX team we will continue to dedicate ourselves to better serve our growing client footprint around the world by providing them with the best financial ecosystem and client service to access the global financial markets. The executive team and I are very proud of the talented StoneX team. They continue to propel us to new heights. On a final note, I would just like to wish all of those in the U.S. a Happy Thanksgiving and to everyone else, a great holiday season.

So with that, operator, let’s see if we have any questions.

Q&A Session

Operator: Thank you. . Our first question will come from Dan Fannon of Jefferies. Your line is open.

Dan Fannon: Thanks. Good morning.

Sean O’Connor: Hi, Dan.

Dan Fannon: I wanted to just follow up on the comments that were just around the interest rate sensitivity and clearly seeing it flow through the income statement. I think that comment, Sean, you made is that 60% of the benefit is, I think in the fiscal fourth quarter, was realized. So just want to think about from here prospectively, just kind of the flow through, the 45-day average thinking about, so incremental upside, what rates have done? And then I guess as you think about the sensitivity charts, we see that, but at what point — I guess is where do you think we are in terms of the realization based on current balances and current rates?

Sean O’Connor: So I would say if you look at that interest rate slide that we provided you, I forget what number it was —

Bill Dunaway: Slide 15.

Sean O’Connor: Slide 15, you can actually see on that actually the average yield per quarter. And you can see it was 193 basis points for the last quarter, Q3 was 69 basis points. So a massive increase, and then it was sort of 28 basis points. So I think we all forget how quickly and steeply interest rates kind of jacked up and it was all sort of in the summer, right? So it’s happened fairly recently. And because we sort of lagged by about 45 days, because normally most of our investments are 90-day T bills and we roll them, we sort of ladder them up, but it takes a little while for that to roll out. We’re sort of always a little bit behind the current interest rate curve. So I guess if you looked at — I don’t have the number to hand, but if you looked at what the average sort of three months T bill rate was in the last quarter, that’s probably closer to 4% frankly.

So we’re still a long way behind where current interest rates are. Now we’ll start catching up, particularly if the interest rate increase or slow down a little bit, we’ll start catching up. We still got a bit of a bow wave behind us, which will start to show up in upcoming quarters. So I don’t know if that explains it, Dan. I’m sure Bill has more granular detail. The other thing I would just also throw out there is it’s a little bit of an unknown for us, so we’re making our best guess here. But as we start to get to these levels of interest rates, clients obviously want to start participating in interest. So every interest rate increase is incremental, but it’s sort of less incremental than the prior one was because we have to pay some portion of that away.

So those are sort of the dynamics we’re dealing with. We’ve got sort of a bow wave where we’re still catching up to current market rates. And we’ve also got to recognize we’re going to start putting some of that incremental interest away. Anything else to add, Bill?

Bill Dunaway: No, I think that’s right, Sean. I think the average T bill rate was probably something in the 2.25, 2.5 range for the fourth quarter and I would anticipate for the fourth quarter us being somewhere in the 3% plus range for the fourth quarter as we kind of, as Sean said, catch up with where T bills rates are going and overnight rates are going, given no other market events occur that change anything. But as Sean touched on, they’ve been rapidly increasing.