Marex Group plc (MRX) Earnings Call Transcript & Summary

Good morning. Welcome to Day 2 of our financial services conference. I'm Ben Budish, Barclays analyst covering the U.S. brokers, asset managers and exchanges. And with us kicking off today, Ian Lowitt, CEO of Marex Group. Ian, thanks so much for being here. Welcome.

Thanks, Ben. Thanks for inviting us. And thanks to everybody here in the audience who braved the 7:30 start to hear about Marex.

Well, That's a good place to start. So Marex is one of the newest publicly traded companies at the conference. Can you maybe just talk a bit about what Marex does, what's the key value proposition that you're providing to your clients?

Sure. Yes. As you mentioned, we're recently listed, we listed towards the end of April. So we're, whatever that is, a little bit less than 5 months as a public company. It's -- we've been doing well. So it felt like it's been going pretty well. Becoming a public company listing on NASDAQ, I think was the right step for the firm given all the success we've had, had growing the firm over circa the last decade or so. We have been able to increase profitability sequentially every year for essentially a decade now with 34% average growth, and we're on track for another very strong year this year. So with that track record, I think that there was receptivity in the public markets, and we were able to let successfully, and the stock has performed well since then. So we're extremely pleased about that. And then there were all these sort of intangible benefits that we are sort of receiving as a public company, where I just think with the added scrutiny that you get as a public company, there's just a lot more sort of comfort that various stakeholders have in your firm, whether that's your clients, prospective clients, regulators, rating agencies, banks, even staff. So that's all terrific. And obviously, as a public company, you have sort of a currency that makes you more credible around acquisitions and the stock itself is the way to bring the firm together. So all of that's going extremely well. In terms of your question about what Marex does, I mean, typically, I think if people are trying to understand Marex, it's sort of useful to just understand the ecosystem that we're a part of. People are very familiar with how important infrastructure is to the success -- successful functioning of the financial markets. And as people think about infrastructure, typically, they think about the exchanges and the clearing houses. And I think that's largely because those firms have just been so successful and they represent sort of a substantial amount of market cap. And so, so many of the investors are just very familiar with the CMEs, the ISAs, other sort of exchanges. What I think people have sort of spent less time trying to understand, in part because there are very few firms that make this their business as Marex does is how do people connect to those exchanges. Because if you're an ISA or you're CME, you're not dealing directly with the firms you're working through clearing members, of which Marex is one and one of the largest. And they don't do the work to sort of assess their creditworthiness of sort of individual potential users of their service. And when it comes to making margin calls, if the futures or options actually move in value, they call the clearing member rather than the firm itself. And so there is a connective layer between the world of clients and the world of exchanges. And what Marex has done is sort of build out a business that's all about creating that connectivity between clients and those exchanges. And because you're providing that clearing service, typically, those clients are also looking for you to provide execution services either as agent or as market maker, and we've had a great success building that out. And then if there isn't an on-exchange instrument that works for a client, they look for a bespoke solution. We have an ability to do that. So that's essentially what the firm does. We're looking to build out that connectivity layer between clients and exchanges. We're having great success doing that, and we're also providing these ancillary services. And by being very focused on that, we've been able to deliver terrific track record.

Great. Well, maybe let's talk about some of your more recent results. So can you unpack a little bit about what we saw in the first half of this year, how the macro environment impacted the business, maybe some of the dynamics in the metals market where you particularly kind of surprised to the [ metal side ] in Q2?

Look, we obviously had a very strong first half. Revenues are up 27%. Profitability was up 28%. Extremely pleasing that, that was across all of our different segments. So we had double-digit growth across all of our segments. But as you point out, metals were sort of a standout. In terms of the backdrop, exchange volumes were up between 8% and 9%. That was skewed towards commodities, which were up around 22%, and that obviously plays to our benefit. And then in the second quarter, you had just an unusual and very positive environment for our business in the metals market, where some changes in how Russian metal was handled on the LME created a great deal of interest in the sort of metals product and quite a lot of sort of underlying volatility. And our business is set up to support clients. We were able, I think, to gain some amount of share and certainly position ourselves very successfully with a lot of clients there and generate a lot of profitability. What's sort of heartening and important about that whole episode is not just the impact it had on second quarter earnings, but on what it did in terms of being able to create credibility in the market that if you're sort of dealing with a counterpart, you want somebody who's completely reliable, who will cut your prices at whatever size you want to transact in. And Marex was able to establish that with a number of quite significant counterparts. And that positions us well to gain share going forward.

Great. And what about Q3? What are your -- what are you seeing so far? And maybe what's your kind of near-term outlook? How are you seeing the geopolitical environment impacting trading volumes, spreads, that sort of thing? Any thoughts on the potential impact of the upcoming election and activity on your platform?

That's a lot in that question. I think that we've certainly expected and are seeing sort of a more normalized environment in Q3. So it's not as sort of buoyant as what we saw in the second quarter, but it's still very strong and the firm is performing well. We did provide guidance to the market suggesting that we'd make between $280 million and $290 million this year. And that was sort of anticipating a more normalized environment for the rest of the year as well as interest rate declines in the sort of second half of the year. So we'd anticipated those changes broadly sort of playing out as we expected. In terms of how exposed we are to geopolitical events or sort of elections, I mean we've really tried to build a business that has a great deal of recurring revenues. And our clients engage with us essentially to hedge up their position. So in that circumstance, you're not dealing with sort of the firm taking risk, and we're just sort of servicing the flow of our clients. And as a consequence, while you're never completely insulated from those kinds of sort of macro items and geopolitical risk and elections, we've tried to insulate ourselves as much as we can. And so we don't anticipate those being particularly significant for us.

Understood. And I want to maybe dig into kind of your growth strategy a little bit, but just being the lazy analyst I am, I appreciate that you provided full year guidance. So just curious do you expect to provide guidance every time you report? What's your thoughts on how you're going to message to the Street?

Yes. I think that we certainly don't intend to provide guidance on a sort of continuous basis. We did feel though, based on how strong, in particular, our second quarter was where we were, as you know, about 50% ahead of sort of the consensus estimate, that we didn't want to leave the market with a view that we thought we could just continue at that pace. That would have been a sugar high. And really, we wanted to sort of signal that we anticipated the market returning to sort of more normalized levels, and that was sort of the reason that we provided that guidance. So I think that we would provide guidance when it feels to us that there's a real need for us to do that, but it's not intended to be regular.

Understood. So maybe digging into the growth strategy a little bit. You've identified a number of key initiatives, geographic expansion in the Middle East, APAC. Can you talk a little bit about the progress so far? And longer term, how big of an opportunity do you think these can be?

Yes. Look, I think that the way that we think about growth is that you need to add clients, and you need to do more business with your existing clients. That has a couple of dimensions to it. Obviously, if you expand geographically, you can add additional clients. And as you add our products, you could service your existing clients with sort of additional access to the firm, and you can do more with them. So that's really how we think about it. In terms of the specific geographic opportunities, the Middle East really does feel like an extremely vibrant area for us. We see a number of clients have moved from Europe and Switzerland, maybe in particular, and established themselves in the Middle East. There are a lot of staff who are that are keen to move with their clients or just sort of move to that region. With the acquisitions of ED&F and OTCex, we have a core of about 60 people. And we see genuine and substantial opportunity to service a client base that is sort of based in the Middle East. We also see an opportunity in APAC. We sort of added clearing to our offering by joining ASX and joining SGX. And that really has transformed what we can actually do with clients. You see so much power of bringing people on to your platform and see how that can sort of drive up the engagement you have with clients as well as sort of the level of profitability. So certainly, the adding of clearing to our offering in Australia has made a huge difference. We've recently expanded out into New Zealand, where we're offering a series of products to clients. And the clients that are being covered out of there are already seeing sort of the benefit of having access to the range of products we actually have within Marex. So that's all going very well. So we see lots of opportunity to expand out on the same model, servicing client flow, providing them with access to clearing and then servicing their liquidity requirements either sort of as an agent or as a market maker and adding in solutions, and it's working extremely well for us.

And I'm just curious, to what extent is the opportunity predicated on new clients that are specific to those geographies or servicing your already global clients that are already doing business there, but want to partner with you there? Or is it all...

Yes, it's really a combination of those 2 things. So probably more about sort of adding clients who are regional and then cross-selling them into other regions. So I think that's probably the bigger driver of that. But for example, SGX, there are clients we have in Europe who want to have access to that particular exchange. And so we're certainly seeing an opportunity to provide access for our existing clients to that product set. But probably the majority of it is adding new clients in that region providing them with local product, but then also giving them the opportunity to transact with a sort of broader set of products, and that's also a driver of growth for us.

Understood. Well, in addition to geographic expansion, you've talked about new products is a key part of the strategy. So how do new products fit in? What does the current road map look like?

Again, our intention is to increase the resilience of the firm by broadening it out and diversifying it. And adding new products really does make a big difference to our ability to meet that particular goal. Obviously, we have a number of different initiatives, but probably the 2 that are the most substantial for us are environmental where we just see real genuine interest for a large number of our clients to participate and engage in environmental products. And that's a business which is quite substantial for us already and growing quite quickly. And then the second is, within the clearing world, we're adding LCH swaps to our existing set of products. We're the first non-bank to obtain that license. And we see that as a very substantial opportunity for us. So we're sort of also adding in various ways physical oil trading, actually physical oil broking, some stuff in FX. So a couple of sort of smaller activities, but those 2 are probably the ones that are the stand out.

Got it. And you mentioned this a little bit before, but in terms of cross-selling clients to new products and how integral is to expanding the business rather than the product specific geographic specific, how much can you -- how much more can you do with your existing clients?

Yes, I think that that's the key for us. The amount of cross-sell that we actually have in the firm at the moment is indicative that this is a really substantial opportunity, but it still feels like it has an enormous amount of runway. And it's -- the best way that we know to increase sort of the resilience of the firm, the diversification of what we do, and there are many, many examples. I mean there's clearing clients that we have, who does sort of fixed income clearing with us in the U.S. When they look to expand to do energy trading in Europe, they engaged with us, they're clearing energy with us in Europe, and they're also looking for us to provide them with access to sort of liquidity in energy markets. That's just sort of a perfect example of how having that broader set of products as well as a very strong relationship gives you an opportunity to become much more relevant to those particular clients as well as sort of supporting all of those additional businesses. So it's a very real opportunity to us. And what we need to do is organize the firm in a way that puts us in the strongest possible position to sort of capture those cross-sell opportunities. And I think there are enough real examples inside the firm of the success of that, that it really has substantial traction.

Great. Maybe you could talk a little bit about your client base itself. What is the mix of users with real hedging needs versus financial players, speculators? And among that base, how do you think about the opportunities for growth?

I mean our base has sort of historically been very focused on sort of commodity, consumers and producers. And that was the Marex heritage, and that was sort of the core of what we actually did, and it was the predominance of our revenues. We realized that if we were going to continue with our track record of sequential growth through a whole range of different market environments, that it was sensible for us to diversify into a broader set of products and in particular, sort of the financial products, whether that's equities, it's sort of credit rates, FX. And we've had real success sort of adding to the commodities core, which still represents sort of probably 45% to 55% of our revenues, a series of sort of financial players who engage with us around the sort of financial products. Now the commodity players have an essential requirement to hedge out their -- either their consumption or their production of sort of commodities. And so that's extremely sort of sticky, recurring revenues. Financials may be a little bit more volatile, but it does allow us to establish ourselves as sort of a critical player providing sort of access to markets, either as agent or as market maker, and we're increasingly seeing those financial players, whether they be large banks or they be sort of asset managers or sort of private banks, utilizing the firm in all of those sort of different ways. So it's all about ways to create new avenues for growth as well as to add to the resilience and diversification of the firm.

Got it. Makes sense. Well, let's dive into some of the different parts of the business, maybe starting with clearing. It's the largest part of the business, growing meaningfully over the last couple of years. Maybe just to level set, how does this form the base of your business? You kind of alluded to this a little bit earlier. How does it form the base? How does it kind of play into the other parts of the business?

Yes. I mean, as you noted, so the clearing is about half the profitability of the firm. And it's also sort of the heart of the offering we make to clients. So as I sort of described earlier, if you want access to an exchange, you need to work through a clearing member, and we're setting ourselves up to be the largest nonbank sort of clearer and are enjoying sort of genuine success at that. It's a 50% plus margin business sort of in the current environment. So extremely attractive business. It's a hugely important relationship to the clients. That ability to access markets through our clearer is typically involving the CEO or the CFO in the decision on who you clearer is. It embeds the firm in sort of the downstream processes of your clients, you're providing them with sort of critical information for their sort of back-office processes for their risk management. It tends to involve a lot of work to get people onboarded. But once they are there, they remain sort of reliable clients for an extended period of time, and those revenues are easily forecasted and extremely resilient. So it's a terrific base to have your firm built around. And then as I sort of indicated earlier, it also sort of leads to other business in terms of supporting the flow of those particular clients. So we see a lot of potential growth. We're -- 2% of our total addressable market in our set of products. There's a great deal of share to be gained. And we're just very excited about our plans to build out to be the largest nonbank provider of service.

Can you expand on that a little bit, the process by which you gain share? What's the current state of competition in clearing? What sort of -- for investors that may be less familiar, what differentiates one clearer versus another, what makes one better than another, and how do you see competition unfolding versus the kind of traditional bank competitors?

Yes. I mean historically, the largest providers of these services have been banks and investment banks. And they still are the largest provider. But what I think is going on in this particular space is that the banks and the investment banks are sort of sharpening their focus with regard to which clients they want to service and which products they actually want to invest in. And to be a clearer, you have to continuously be updating sort of your systems. You need to be making fairly substantial investments. And you need to -- you want -- if you're going to sort of succeed at it, you really need to be very committed to it. And for a variety of reasons, many banks have sort of deemphasized this as sort of one of the offerings they provide to the marketplace. And what that's done is it's created a really important opportunity for firms like Marex who really are very comfortable just being a clearer and provider of sort of the ancillary liquidity services. And what clients are looking for is an investment-grade rating because being a clearer -- being somebody's clearer is critically important to them. They want to make sure that it's a sort of reliable player. They like the fact that this is sort of the core of our business. And so at times of stress, we're going to stick with our clients, and we've been able to demonstrate that over a series of periods of sort of dislocation in various markets, including the Ukraine invasion, the most recent sort of move in sort of copper prices, and there are others. So we find that, that sort of focus on customers, the fact that we're just into sort of servicing customers rather than taking any positions on behalf of the firm, the investment-grade rating, the fact that we could connect people to 58 different exchanges, which is probably a broader number of exchanges than anybody else that we're very comfortable in sort of servicing a very large number of contracts, both financial and physical I think sort of differentiates us. And it puts us in a spot where we're gaining share in a slow, but steady way, which I think is exactly the way we would want to do that.

Got it. Maybe one last question on clearing. So clearing, obviously benefits from growth in collateral balances, collateral requirements can change sometimes meaningfully over short periods of time. So can you talk a little bit about how balances have grown, shifted over the last few years? And maybe just one other kind of important financial aspect, how you share NII with your customers?

Yes. So as you point out, the exchanges set margin levels. And at periods of market turmoil, they tend to increase those margins, sometimes with a lag, but certainly, the balances that people have to place in order to maintain the same positions typically goes up when markets are much more volatile. And then when markets normalize, they tend to reduce the margin rate. So in terms of that, times of turmoil tend to mean that there's sort of more cash that clients have to post with you so you can post on their behalf to the exchanges, and that's obviously very good for your clearing business. What that also does though is takes some amount of liquidity out of those markets. And so it makes some of the sort of flow businesses sort of less active. The reverse of that, which is where the exchanges actually lower their margin level, it actually increases the amount of activity that we see in some sort of flow businesses. So you have natural offsets within our mix of businesses to that particular effect. They don't tend to happen that dramatically, but they can. And they tend to increase far faster than they decrease. But when we look at our overall client balances, they do tend to be higher when margin rates are higher. But underlying what's going on is sort of a gradual increase in our sort of normalized balances as we're adding clients to our platform. So we're adding probably between 3 and 5 clearing clients every week. And we're seeing our balances grow even in a normalized way, although there will be obviously fluctuations driven by the level of sort of margin required by the exchanges. In terms of interest income, obviously, when you're posting sort of cash to the exchanges, they pay you something for that. And to the extent that clients are leaving some balances with you, you invest at in, typically with banks on overnight and you're generating some return from that. So the clearing activity is more profitable when rates are higher, and we sort of anticipate that those will sort of come down over whatever it is, the next 15 months or so per the sort of forward curve. What we find is with about 60% of our balances, we share that interest income with our clients and typically take out a fixed amount, so between 100 and 150 basis points. And what that does is it lowers the sort of sensitivity of the firm's earnings when rates come down because for 60% of the balances, you're essentially just taking a fixed spread. And it's only on the 40% where we're retaining essentially all of those balances where we're impacted by declining rates.

Got it. Maybe moving over to the market-making part of the business. So the market-making segment had a really strong quarter, as we talked about earlier, driven by the Russian restrictions put in place on the LME. So how do you think about maybe high-level growth more broadly? And then for us, as we're thinking about activity in a given quarter and where we can track exchange volumes, we can get a sense for volatility. Obviously, we had this surprise where your spreads kind of widened driving the outsized profitability this quarter. So how should we be thinking about broader market activity and how it translates to your results?

Yes. Look, I think that not just within market-making, but more generally across the firm, the fact that we're involved in so many different asset classes really does dampen the volatility of the earnings in us. So while, obviously, we have an extremely strong metals franchise, we also have a strong franchise in ag options as well as we make markets in sort of refined oil products. So there's actually diversification within market making. And while there will be sort of periods where each of those are enjoying particularly sort of buoyant circumstances, as a sort of more general manner, we see a sort of minimum level of activity because most of the clients actually have sort of genuine needs, and they need to hedge out their exposures and they come to us to do that. And so the way I think about it is that there's a recurring level of revenue and profitability in market making, which is broadly at one level across the cycle. I mean it's going to move up and down a little bit. But then there are these opportunities that you get in particular markets when you have dislocation. And again, because what you're doing is servicing the floor, not taking risk position, what that does is it sort of creates a sort of positive upside. So we're looking to create a business that, at some level, the sort of flowed at some level of profitability, which is just sort of representative of the underlying flow and you'd expect that to be growing as we're gaining share. And then you have periods where you can you could generate additional profitability because the markets are just supportive. And that's the way I think we think about market making.

Got it. And what about from a risk perspective? How do you think about managing risk on a daily basis? How do you protect from black swan events?

Yes. I mean that's obviously the critical sort of skill that you need in a firm like ours. I think that because we focus on servicing customer flow, and we're genuinely not taking sort of proprietary risk in this, we're trying to make our market-making by example, be as close to agency as we possibly can, I mean, obviously, it's not identical, but you're trying to move the risk out as quickly as you can, and we operate with very modest levels of our $2 million to $3 million at 99.75% confidence. And so we're intrinsically, we're not exposed to a lot of risk, but obviously, there is risk. There's credit risk, there's some amount of market risk. And we're very attentive to it, very disciplined around it. And because this is just so the nature of our business, we've had an excellent track record of managing that.

Great. Maybe moving on now to your hedging and investment solutions business. So you issue structured notes, which you use and some capacity to fund other parts of the business. Perhaps just for those in the room or those listening, can you explain what exactly those are and how they kind of facilitate that funding?

Sure. So structured notes are essentially a way to embed a derivative in a Marex bond, which is sort of issued to whoever wants a particular investment return. So it could be the best of 3 equity stocks or some combination of that. So there's almost an infinite variety of how investors might choose to express particular views, which they then sort of embed in the structured notes. So the exposure on that is sort of hedged out completely. There's some amount of sort of sales credit that results from it, but we also generate a decent amount of cash. Now we don't -- we tend to just hold that cash on the balance sheet to be available to deal with sort of stresses in the marketplace so we can continue to support our clients. So what you'll see on our balance sheet currently is a level of residual cash just in sort of the corporate world, which is essentially matching the amount of liabilities that are created by sort of structured notes. But the knowledge that we have that excess liquidity gives us so much confidence that we can continue to support our clients through more challenging environments.

Understood. Maybe now pivoting to kind of capital allocation. So you've been very acquisitive over the years. How do you think about balancing margins, M&A, capital returns, dividends? What's sort of your priority? How do you -- what's the framework there?

Yes. I mean I think our sort of framework is, we're in the fortunate position of generating fairly substantial amounts of sort of capital each year. So at the guidance level that we've sort of indicated, we should be generating somewhat north of $200 million of profit after tax. And that's obviously available to support growth in the business. It's available to sort of provide a dividend. It's available to support M&A. Conceptually, it's also available to support buybacks. And we -- as you point out, you have to balance those different sort of requirements for capital. And I think the way we think about it is the first requirement is support the organic sort of growth of the business to ensure we remain investment grade as we are growing the firm. We see genuine benefit of sort of signaling to the market the health of our business and our prospects with a progressive sort of dividend, which we announced in our most recent quarter. And we -- as you point out, there's lots and lots of opportunity to consolidate in our space and make acquisitions. And we need to sort of balance all of those. And I think that the benefit of sort of operating at this level of profitability is that we are in a position where we can balance those all out.

Got it. And on the Q2 call, you mentioned there are some like bolt-on type acquisitions in the $10 million to $20 million range. You're hoping to close on some time in the back half of the year. Anything you can share there in terms of what sort of capabilities you're looking to add? Or how you may be trying to expand from a customer base perspective?

I mean I think the way we think about acquisitions is how do you acquire clients and how do you acquire sort of capabilities that you don't currently have. So that's how we're sort of thinking about it. We did raise the sort of primary in our IPO of $75 million, which is $70 million after the fees. And we've also sort of signaled the market that we're looking for 20% return on equity. So the 20% return on equity on the 70% to 75% gets you to $14 million, $15 million of earnings that we would look to generate as a result of the acquisitions that we're looking to do. What we are seeing is a pretty substantial number of opportunities at a whole range of scale and size. And it's really about making sure that the things that we do choose to proceed with do provide us with new clients, new capabilities. We are interested in expanding geographically such to the extent that one can actually find acquisitions that got to help with that, those are probably preferred. And we also know that we need to remain extremely disciplined around price because, again, we're a public company, everything is going to be examined. And I think that investors have seen a terrific track record of acquisitions, but also want to see that we're going to remain disciplined as we move forward, and we certainly have that discipline, and we'll bring it to bear.

Got it. Maybe one more question on capital allocation, in particular, thoughts on returning capital through repurchases versus dividends to the extent there are no acquisitions on the horizon that you would be looking to do immediately.

Yes. I think that it comes up in many conversations with sort of investors, and I think different people have different preferences. I believe that being able to signal the confidence that management and the Board has with regard to our longer-term prospects by paying a dividend and describing it as progressive is extremely valuable to investors and prospective investors. I think that's why the Board sort of chose to do a dividend. We also want to sort of limit dilution from any sort of stock plans. And so I think that, that will probably mean that we will be doing some buybacks at some point in the future to be determined exactly what that is. But we certainly see a role for both of those over time. And we're looking to balance all of those use of capital. Supporting our existing business and retaining the investment-grade rating is probably the most important. The dividend, buyback, and acquisitions and life is a balancing act as a management team, and we're looking to ensure we get that balance about right.

Great. Well that was just about everything I wanted to ask you, I'll turn it back to you, see if you have any closing comments?

Yes. I mean all I would say is, first of all, thanks to all of the investors who have sort of trusted the firm and have invested in us. We're very excited about our prospects. We certainly believe that we're in a very attractive marketplace. We've built a firm that's sort of capable of taking advantage of that opportunity, gaining share, continuing to add clients and do more business with those clients. And notwithstanding the expected get headwinds from interest rates coming down, which is definitely sort of a manageable level. We're setting up the firm so that we can deliver sequential growth. And we're very excited about our prospects.

Great. Well, we'll leave it there, Ian. Thank you so much. It was a pleasure to have you. Appreciate it.