Marex Group plc (MRX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Robert Coates, Head of Investor Relations for Marex. Thank you all for joining us today for our Full Year 2023 and Q1 2024 Conference Call. Speaking today are Ian Lowitt, our CEO; and Rob Irvin, our CFO. After our formal remarks, we will open up the call for questions. Before we begin, I would like to highlight that certain matters discussed in today's conference call are forward-looking statements relating to future events, management's plans and objectives for the business and the future financial performance for the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are referred to in the company's press release issued today and our prospectus, which was filed with the SEC on April 26. The forward-looking statements made today are as of the date of the call, and the company does not undertake any obligation to update these forward-looking statements. Finally, the speakers may refer to certain adjusted or non-IFRS financial measures on this call. A reconciliation of the non-IFRS financial measures to the most directly comparable IFRS measures is available in the company's press release issued today. A copy of today's release and the investor presentation can be found on the Investor Relations pages at marex.com. With that, I will now hand over to Ian.

Hello, and thank you for joining us for our results this morning, where we will discuss both our full year results for 2023 and our update for the first quarter. This is our first earnings call as a public company, although we were still a private company in the periods we're reporting on today. While our 2023 numbers were included in our IPO prospectus, because of the reporting restrictions around the IPO, we haven't disclosed our full year numbers directly to the market through a press release. We have various stakeholders who may not have read the prospectus, and so for ease of reference and full disclosure, we are providing an update on the full year numbers for 2023 in a press release today, alongside an update on the first quarter. We expect many of our new investors will be listening to this call, and we'd like to thank them for the work they do to understand our firm and for their support, and we're committed to delivering for them as a public company. I want to start out with a description of how and where we participate in the financial market ecosystem. Slide 4 illustrates how we play a critical role in connecting clients to markets and how our 4 services of Clearing, Agency and Execution, Market Making and Hedging and Investment Solutions fit together. We provide connectivity to producers and consumers of commodities as well as asset managers and hedge funds and act as the essential layer between our clients and the markets they need to access. At the heart of the firm is clearing, which provides the essential infrastructure to connect clients to exchanges and clearing houses. We also provide clients with access to liquidity either through Agency and Execution or Market Making. And if there is no on-exchange solution, we provide bespoke hedging services through our Hedging and Investment Solutions business. In combination, these 4 services reinforce one another and produce multiple entry points for our clients. We are looking to become more and more relevant in this connected layer by adding clients and increasing the amount of business we do with them in the provision of these interconnected services. Turning to Slide 5. You can see the evolution of the firm and the journey we've been on to create the company we are today, and it also highlights our continued momentum. As you can see, we have maintained our record of sequential growth over the past 9 years with compound annual growth of adjusted operating profit at 34%. We have seen this positive trend continuing into the first quarter of 2024. We continue to add clients to our platform with active clients up over 10% at around 4,500 at the end of the first quarter from the end of 2023. Over the past 9 years, we have grown through a variety of market conditions through a combination of organic and inorganic growth. Our intention is to ensure we have sufficient structural growth to offset cyclical headwinds. 2023 was an exceptional year for the firm, confirming our strong investment proposition and demonstrating our successful growth strategy. We have had a strong start to 2024. We've seen good levels of client activity on the platform, and I'm pleased to say this positive momentum has continued into the second quarter. The Cowen acquisition is performing well. We are pleased with the progress we've made, and we're excited about the opportunities that this acquisition, which completed in December last year provides us. Our Environmentals business continues to be an area where we see significant growth opportunities as we expand the services we provide and the geographies we cover in this important area. In 2023, we saw revenues increased 77% to $47 million. We are obviously delighted to have successfully completed our IPO in April. As you know, we raised $75 million of primary, and we are actively looking for ways to deploy this that will create value for our shareholders. Slide 7 shows exchange volumes for the exchanges we participate on as reported by FIA. The environment for 2023 versus 2022 was positive, but not overwhelmingly so. We saw 3.6% growth in the whole market in 2023 and 3.5% in Q1 from the end of last year. Within the total exchange volume, commodity contracts grew faster with a 13% increase in 2023 and a 9% increase in the first quarter of 2024, which is obviously helpful for our business. I would characterize the market environment as essentially average rather than positive. In 2023 and continuing into 2024, we've seen a reduction in volatility in commodity prices and a lower level of commodity prices relative to the exceptional levels that were caused by the invasion of Ukraine in 2022. This has resulted in a somewhat less supportive trading environment for our Market Making business in 2023 and continuing into 2024. Interest rates, however, rose significantly from the second half of 2022, and these have remained elevated through 2023 and year-to-date. This is a positive tailwind for our clearing business where we have significant client balances. We see a higher for longer operating environment for interest rates, which, again, is helpful for our business. Moving on to Slide 9. Against this market environment of average increases in volumes, lower commodity volatility in prices, we delivered very strong performance across all of our segments in both 2023 and increased revenue in every segment in the first quarter of 2024. The clearing business has benefited from significant growth in client volumes on our platform as well as higher interest income. Our Agency and Execution business has benefited from recent acquisitions, which are performing well. Our Market Making business rose 10% in the first quarter of 24% versus Q4 of '23, notwithstanding the reduction of volatility. And our Hedging and Investment Solutions business continues to deliver solid double-digit revenue and is an important source of organic growth and funding. Turning to Slide 10. In 2023, the ED&F acquisition transformed the scale of the firm, which makes our year-on-year comparisons less useful. Within Clearing, in the first quarter of 2024, market exchange volumes are up 4%, Marex volumes are up 16% and Marex revenue is up 10%. In Agency and Execution, in Energy, market volumes are up 9%, Marex volumes are up 10%, and Marex revenues are up 16%. In Securities, market volumes are up 1%, Marex volumes are up 17% and revenues are up 11%. We see this as evidence that we are gaining share and outperforming the market. We continue to make good progress on our growth initiatives in 2024. We are making significant progress in our Asia Pacific business. After becoming clearing members on ASX and SGX last year, we have brought new clients onto our platform and see this as an important driver of growth and margin improvement in the region. In the first quarter of this year, we became the first non-bank FCM to become an LCH swaps clearing member, and this is an area that we are particularly excited about. We continue to add new teams to increase our capabilities in select markets, including building out coverage of U.S. power and physical oil broking as we expand our capabilities in the energy markets. The recently acquired Prime Services and Outsourced trading business is performing well. We are onboarding new clients into this business, and it's contributing to growth in our Agency and Execution segment. We have a pipeline of potential M&A opportunities as our industry continues to consolidate. I'll now hand over to Rob, who will talk you through the financials.

Thanks, Ian, and good morning, everyone. As you can see, 2023 was a very strong year for Marex. We grew revenues by 75% to $1.245 billion, reflecting, in part, the full year effect of the transformational ED&F transaction, which we completed in the fourth quarter of 2022. And also strong organic growth, which contributed just over 1/3 of the revenue increase. This enabled us to grow operating profit to $230 million for the year, up 89%, and our adjusted operating profit margin increased to 18%, up 100 basis points on 2022 as we continue to drive scalability from our platform. Historically, we've had minimal adjustments between our adjusted operating profit and reported profit before tax. In 2023, these nonoperating items grew to just over $33 million, and there are 3 main drivers of this. Firstly, we incurred $10 million of costs associated with the IPO, predominantly legal costs and reauditing 2021 and 2022 to U.S. PCOB standards to support our U.S. listing. Secondly, we took a $10.7 million impairment on our volatility performance funds within our Capital Markets business. Although the business performed well in 2022, poor market conditions in '23 meant that it made a lot, given the current outlook for the business, where we prudently took an impairment on the asset. Thirdly, we incurred $6 million of owner fees that we paid to our private equity shareholders, which is a function of profitability. This ceased at the point of the IPO. Going forward, after the second quarter, we would expect minimal adjustments between our adjusted operating profit and our reported profit before tax. Given this, a key measure that we focus on as a management team is our return on adjusted operating profit after tax attributable to common equity holders. This return is calculated as follows: we tax effect our adjusted operating profit and then deduct the post-tax cost of our AT1 dividend, whilst the equity is the firm's total equity, excluding our AT1 capital. In 2023, our return on adjusted operating profit after tax attributable to common equity holders was 26%. turning to Slide 14. For this update, we're providing a comparison to the fourth quarter of 2023. There are no comparable numbers for the first quarter of '23 because as a private company, we were not required to do a suspensive close. We started this process from June last year in preparation for our U.S. listing. Thus, we will provide comparisons for the first half of '23 as well as the third and fourth quarters. We had a strong start to 2024 and are reporting revenues of $366 million for the quarter, up $40 million on the fourth quarter of 2023. Of this, 70% was organic growth and 30% was inorganic, notably from the recently acquired Prime Services business. Our adjusted operating profit was $68 million, up $15 million in the fourth quarter, primarily reflecting our strong revenue performance. Our adjusted operating profit margins increased to 19%, up 100 basis points on the full year 2023 as we continue to drive scalability from our platform. In the first quarter, we incurred $8.8 million of adjusting items, primarily relating to further IPO-related costs, which totaled $3.7 million; and secondly, $1.7 million of owner fees that we paid to our private equity holders. We expect to incur additional cash expenses in connection with the IPO in the second quarter of 2024. For example, we expect our national insurance tax expense related to the issuance of growth shares in connection with the IPO and costs for our offer related insurance to total $6 million. Our return on adjusted operating profit after tax attributable to common equity holders was 29% for the quarter. Moving to Slide 15. As you can see, average client balances have grown both year-on-year and from the fourth quarter of last year to the first quarter of 2024. As a result, net interest income rose to $122 million in 2023 and $36 million for the first quarter of 2024. The growth in average client balances reflects strong organic growth in the Marex business as well as the impact of the ED&F transaction in 2023. It's important to note that a high proportion of client balances have a fixed interest payout, which limits our exposure to changing interest rates. On approximately 60% of the balances, we share that the interest that we earn with our clients and typically earn a spread of between 100 and 120 basis points. On the remaining 40% of balances, we retain all of the net interest income. Our exposure to interest rate movement is on the 40% of balances where we keep all of the net interest income. We estimate that a 100 basis point decrease in rates would reduce adjusted operating profit by $20 million, and this is before any management actions like hedging and the expected future growth in the book. Let's now move to the balance sheet on Slide 16. Our balance sheet remains broadly stable for the first quarter of 2024 with total assets up 2% to just over $18 billion. Our balance sheet is simple and made up of highly liquid securities and cash. Approximately 85% of our assets and liabilities support client activity and net down to a small net exposure. Once netted off, we're left with a small residual balance sheet, which primarily consists of house cash and other assets against group liabilities, including the structured notes portfolio. The key message is that the group is not highly leveraged and has a low level of net debt. Turning to Slide 17. We continue to maintain prudent levels of surplus capital and liquidity, which supports our investment-grade credit ratings from S&P and Fitch. We hold significant surplus capital and liquidity to ensure that we're well positioned in periods of market turmoil. Our excess liquidity headroom over and above the regulatory threshold does move around depending upon our house positions and initial margin calls. Although it decreased at the end of the first quarter, it remains well within our normal operating range. As part of our successful IPO, we raised primary capital that will support the future growth aspirations of the firm. Turning to the next slide. I will conclude with a view on risk. We have a proactive and involved risk management approach at Marex. In Market Making, we are a client flow-driven business and do not take directional view on prices or indices. We have demonstrated a strong track record of managing risk with 100% positive trading months in the last 3 years and improving positive days. The percentage of profitable trading days improved in the first quarter within Market Making to 94%, up from 88% in the prior year. We've also materially grown the business while keeping the VAR, value at risk at around $2.5 million for the last 3 years. Finally, our credit risk is well managed with it representing a fraction of our revenue given careful monitoring and risk management. Thank you. I'll now hand you back to Ian for some concluding remarks.

Thanks, Rob. Turning to Slide 20 now. In terms of key metrics, the things that we as a management team are focused on are growth, margins and ROE, productivity and returns and lastly, quality of earnings. In terms of growth, what we are most focused on is increasing profit after tax to our common shareholders. In the first quarter, we delivered $49 million of operating PAT. In terms of margins, our operating PBT margin is up to 19%, continuing the steadily improving trend since 2021. And as Rob described to you, our reported ROE is 23%, and our ROE adjusted for nonoperating items is 29%. In terms of productivity in our business, operating PAT attributable to common equity holders per FTE is up to $87,000 on an annualized basis. Additionally, I'd like to highlight the improved quality and stability of our earnings with an increased monthly operating profit Sharpe ratio, which is now up to 5.1, reflecting our increasingly diversified business and reliable monthly operating profit. Moving to Slide 21. I hope that we provided you with useful insights into our performance in 2023 and the first quarter of 2024 and the good momentum within our business. We continue to be very proud of the scalable platform we have built at Marex. We're excited about the opportunity we have to grow the business by growing our products, our clients and our geographic reach. Today's results are another example of our track record of delivering organic growth combined with highly accretive value-enhancing acquisitions. Our diversified business offering, coupled with our client-driven model and prudent capital management makes Marex resilient and able to deliver a strong performance across a variety of market conditions. The successful IPO and additional capital raise increases our confidence in our ability to deliver future growth. I'd now like to open for questions.

[Operator Instructions] And the first question comes from the line of Ben Budish from Barclays.