Bill Dunaway - Chief Financial Officer Sean O'Connor - Chief Executive Officer

Russell Mollen - Bares Capital

Good morning. My name is Bill Dunaway, CFO of INTL FCStone.

Welcome to our earnings conference call for our fiscal first quarter ended December 31, 2013. After the market closed yesterday, we issued a press release reporting our results for the fiscal first quarter.

This release is available on our website at www.intlfcstone.com, as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly results. You will need to sign on to the live webcast in order to view the presentation.

Both presentation and an archive of the webcast will also be available on our website after the call’s conclusion. Before getting underway, I would like to cover a couple of housekeeping items.

On these conference calls and in the management discussion portions of our SEC filings, we present financial information on a non-GAAP basis in order to take into account mark-to-market adjustments in our physical commodity product lines, which are included in both our CRM and Other segments. As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the U.S., which I will refer to as GAAP, to carry derivatives at fair market value but physical commodities inventory at the lower cost of market value may have a significant temporary impact on our reported earnings.

Under GAAP, gains and losses on commodities inventory and derivatives, which the company intends to be offsetting, are recognized in different periods. Additionally, in certain circumstances, GAAP does not permit us to reflect changes in estimated values of forward commitments to purchase and sell commodities.

For this reason, we believe that the GAAP numbers do not reflect the commercial results of our physical commodity product lines and therefore the company as a whole. Instead, we assess all of our businesses, as do our banks, on a fully mark-to-market basis in our daily and monthly internal financial reporting.

Readers of our Form 10-Q should review the selected summary financial information within Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations for a summary of both GAAP and non-GAAP information. This section also gives the reconciliation between GAAP and non-GAAP information required by the SEC.

Please note that whenever we talk about an adjusted number on this call, we are talking about a non-GAAP number. Secondly, we are required to advise you and all participants should note that the following discussions should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-Q filed with the SEC.

This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC.

Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company’s actual results will not differ materially from any results expressed or implied by the company’s forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I will now turn the call over to Sean O'Connor, the company’s Chief Executive Officer.

Thanks, Bill and good morning everyone and welcome to our fiscal 2014 first quarter earnings call. Market conditions during much of the quarter were relatively unchanged and remained difficult as they had been for much of the prior 12 to 18 months.

However, towards the end of the quarter and continuing into this current quarter, we have started to see some modest improvements in the general market environment. Volatility has increased likely as a result of the Fed tapering and we believe that cyclical effects of the grain market have now started to turn.

In addition, we have – now have some stability around the regulatory environments and some time to make the changes required and can now turn our attention back to growing our customer base and revenues, but maybe a bit too early to call for good weather, but certainly the sky seem to be clearing. Turning to the numbers, I would like to start by pointing out that a year ago we had a number of significant non-recurring items, which significantly affect the comparison with the current quarter.

This included the gain on the LME shares, Kansas City Board of Trade feeds as well as the CFTC fine. In aggregate, these amounted to a net pre-tax gain of $7.7 million in the prior quarter.

Excluding these items, the current quarter was roughly comparable to both the year ago and the most recent fourth quarter. Unfortunately, it is a disappointing result in light of our targets, although we remained profitable.

Our aggregate costs, excluding transactional cost and interests, were almost exactly the same as the year ago and around $3 million below the fourth quarter. As we mentioned on the previous call, management has been putting serious focus on costs.

And despite regulatory pressures in some modest acquisition and growth initiatives, we have managed to keep cost in check. Looking at our business segments, we had continued strong growth in the Securities segment revenues, up 36% over last year, while the immediately preceding fourth quarter had been up 66% versus the prior year.

Securities revenues were slightly below on a sequentially quarterly basis. Continued strong growth in our FX and Global Payments segment up 13% over the last year, while in the immediately preceding quarter, they had been up 3% versus the prior year.

These revenues were up 17% on a sequentially quarterly basis. Our global payments business, which resides in our FX and Global Payments segment, had an all-time record quarter with revenues up 31% on a sequentially quarterly basis and segment net income up substantially over the prior year.

Our clearing and execution business was up 6% this quarter and up 10% last quarter versus the prior period, that was down 6% on a sequential basis. Our core commodities business, which we have talked about numerous times in the last couple of conference calls, which is our largest, was again down 7% for the quarter and last quarter was down 30% versus the prior year.

Sequentially, this business was down 1% and we believe it’s now largely bottomed out and should start picking up with the cyclical factors now working their way through the system. Our LME business had a record quarter with revenues up 23% on a sequentially quarterly basis and up 13% compared to a year ago.

So in summary, we have a number of bright spots and sign of the key cyclical headwinds that have been affecting us for the last 12 to 18 months maybe starting to turn. As we did in the last conference call, I would like to take some time to highlight one of our business units that we often do not spend much time talking about during these calls.

Our securities trading business has been making significant strides during the last 18 months to broaden its product offering expand its customer base, and while most securities trading businesses seem to be struggling, we are showing strong growth in revenues, up 66% on our prior year in Q4 and up 36% on the prior year in the current quarter. Through our registered broker dealer, INTL FCStone Securities Inc., we provide a complete suit of execution services and securities.

In line with our corporate strategy focusing on niche opportunities, we focus on providing value-added solutions that facilitate cross-border trading, which is more complex and involves foreign exchange as well as local understanding of market convention, liquidity and settlement protocols. Our customers include U.S.

based regional and national broker dealers and institutions investing or executing customer transactions in international markets as well as foreign institutions seeking access in the U.S. securities markets.

We are also a broker dealer in Argentina, where we are active in providing institutional executions in the local capital markets. In the U.S., we are one of the leading market makers in foreign securities, including unlisted ADRs and foreign ordinary shares.

The company makes markets in approximately 800 ADRs and foreign ordinary shares in the OTC markets and will, on request, make prices in more than 8,000 ADRs and foreign common shares. We were recently rated top market maker in over 2,000 securities issues according to Bloomberg.

We also provide a wide range of execution services across asset classes, including fixed income, equities and ETFs for domestic and internationally based financial services organizations on a commission basis. We also provide prime brokerage and piggyback clearing for international customers.

This business started 12 years ago as a specialist market maker in unlisted ADRs and gained the reputation as a leading franchise in this market niche servicing the largest financial organizations in the U.S. More recently, we have been able to leverage this franchise and these customer relationships into a more broadly based high-touch agency execution model or international institutions.

Increasingly, mid-sized international institutions are faced with more complex and costly U.S. regulations and fewer mid-market domestic financial institutions able to service their needs both on the execution side as well as on the clearing and prime brokerage side.

We saw this as an opportunity to full this customer needs by leveraging our existing securities capabilities into more broadly based mid-market financial franchise servicing these midsized foreign institutions. The acquisition of Tradewire just over a year ago accelerated the strong vision bringing in-house relations with the leading financial organizations in Latin America.

The recent addition of our clearing services capability will further cement these – the relationships of these customers. The global committed securities markets are large and have been subject to declining margins due to cheaper and more easily available technology providing direct market access or DMA leading to disintermediation of the traditional equity brokerage models.

We believe that regulatory pressures and related cost combined with customer’s desire to reduce trading counterparties will lead to continued consolidation and rationalization in the industry. Our strategy in this environment is to continue to act as a liquidity provider and market maker in less liquid markets and to provide key customer niches with a high-touch value-added service to facilitate their executions across asset classes.

We are very excited about our securities business. I think the team has done a fantastic job in expanding this franchise and its customer footprint in a difficult market environment.

So with that, I will hand over to Bill for a more detailed discussion of the financial results. Bill?

Thank you, Sean. I would like to start my discussion with a review of the quarterly results and refer to the fourth page of the slide presentation titled Quarterly Financial Dashboard.

This slide lays out the quarterly operating results as well as the related balance sheet information in comparison to the prior year period as well as in some cases, the internal target which management has for our operating results. Adjusted operating revenues decreased 4% to $111.3 million in the first quarter compared to $116.5 million in the prior year.

The prior year period benefited from a $9.2 million realized gain on the sale of our shares in the LME and Kansas City Board of Trade. So excluding this gain, revenues increased $4 million or 3% as compared to the prior year.

Adjusted operating revenues decreased 2% from the $113.8 million recorded in the fourth quarter of 2013. Adjusted operating revenues declined in the core CRM segment, as well as our other segment.

However, all other segments of the company experienced growth in adjusted operating revenues in the first quarter as compared to the prior year, highlighted by a 36% increase in adjusted operating revenues in our Securities segment. Looking at our revenues on a segmental basis, adjusted operating revenues in our Commodity and Risk Management Services segment decreased 7% to $47.6 million in the first quarter compared to $51.4 million in the prior year.

Adjusted operating revenues were relatively flat with the $48.1 million recognized in the fourth quarter of 2013. Our CRM segment is further broken down into three product lines: soft commodities, precious metals and base metals.

Starting with soft commodities, operating revenues decreased 11% to $35.9 million in the first quarter compared to $40.5 million in the prior year. Fourth quarter 2013 revenues were $38.5 million.

Exchange traded contract volumes decreased 6% while OTC contract volumes increased 9% respectively over the prior year period. Despite the decrease in exchange traded contract volumes primarily driven by diminished hedging volumes for our domestic grain customers, commission and currency revenue increased 4% to $16.5 million in the first quarter.

The decline in soft commodities’ operating revenues was primarily driven by a $4.6 million decrease in overall OTC revenues, mainly in the Brazilian markets as the increased OTC volumes were more than offset by lower revenue recognized per transaction driven by lower commodity volatility. Average investable client balances declined 25% versus the prior year to $790 million as the overall agricultural industry volumes and margin requirements were lower as compared to the prior year.

An 11% decline in the number of ounces traded drove a modest decline in adjusted operating revenues in our precious metals product lines, the $2.5 million for the first quarter as compared to $2.6 million in the prior year. Fourth quarter adjusted operating revenues were $2.6 million.

As a result of our planned exit of the physical base metals business, I want to separate the results of our physical base metals business from that of our non-physical hedging business on the London Metals Exchange. Adjusted operating revenues in the physical base metals business were $500,000 in the first quarter, which was flat with the prior year.

In the second quarter of fiscal 2014, we will complete the exit of the physical base metals business and we report the historical results of this business under discontinued operations. The exit from the physical base metals business will leave our LME metals operations unaffected.

Operating revenues in this business increased 13% to a record $8.7 million in the first quarter as compared to $7.7 million in the prior year. This also represented a 23% increase over fourth quarter 2013 revenues of $7 million.

Moving on to the Foreign Exchange segment, operating revenues increased 13% to $18.3 million as compared to $16.2 million in the prior year. This also represented a 17% increase over fourth quarter 2013 revenues of 15.6%.

Operating revenues in our global payments product line, which Sean highlighted on our fourth quarter earnings call, increased 34% to a record $13.6 million in the first quarter as compared to $10.1 million in the prior year. This also represents a 31% increase over fourth quarter 2014 revenues of $10.4 million.

Operating revenues from customer foreign currency hedging activities decreased 28% to $1.5 million compared to $2.1 million in the prior year driven by lower volumes in the Brazilian markets tied to lower commodity hedging in that region. Operating revenues in the customer prime brokerage product line decreased $300,000 to $1.8 million in the first quarter as compared to the prior year.

The proprietary foreign exchange arbitrage desk, which arbitrages the cash versus the exchange traded markets experienced a 26% decrease in operating revenues to $1.4 million as compared to the prior year. In our Securities segment, operating revenues increased by 36% to $17.6 million in the first quarter compared to $12.9 million in the prior year.

This represents a 4% decrease over fourth quarter revenues of $18.4 million. This segment includes two product lines, the equity market-making business and the debt capital markets.

Operating revenues in the equities market-making product line increased 32% to $10.2 million in the first quarter compared to $7.7 million in the prior year. This did, however, represent a 17% decline as compared to the fourth quarter 2013 revenues of $12.2 million.

Operating revenues in our debt capital market product line, which includes both investment banking activities as well as debt trading, increased 44% to $7.5 million in the first quarter compared to $5.2 million in the prior year. This was a 21% increase over the $6.2 million recognized in the fourth quarter of 2013.

In the Clearing and Execution Services segment, operating revenues increased 6% to $23.8 million in the first quarter compared to $22.4 million in the prior year, but represented a 6% decrease versus the $25.2 million in adjusted operating revenues in the fourth quarter of 2013. Revenues increased over the prior year despite a 2% drop in exchange traded volumes as an increase in the commission rate per contract offset this decline in volume.

Average investable client balances in the current period increased 35% as compared to the prior year to $915 million. Interest income has continued to be constrained by historically low short-term interest rates.

Adjusted operating revenues in our Other segment, which contains both our asset management and commodity origination and financing product lines, decreased 10% to $4.4 million in the first quarter compared to $4.9 million in the prior year. Adjusted operating revenues were $6.7 million in the fourth quarter of 2013.

Operating revenues in the asset management product line increased $2 million to $3.8 million in the first quarter compared to $1.8 million in the prior year. Adjusted operating revenues in the commodity financing and origination product line declined $2.5 million to $600,000 compared to $3.1 million in the prior year.

Back to Slide #4 on the dashboard, non-interest expenses were $106.7 million for the first quarter of 2014, which was a 3% increase as compared to the $103.4 million in the first quarter of last year. This increase was primarily driven by a $3.9 million increase in variable clearing and related expenses in introducing broker commission.

This represented a 5% decrease compared to the $112.2 million in the fourth quarter of 2013. Internally, the company targets key variable expenses as a percentage of total expenses in excess of 50%.

During the current period, the majority of the non-interest expenses were variable with 54% of total non-interest expenses being variable in nature as compared to 51% in the prior year period. Non-variable expenses include fixed expenses as well as bad debt and impairment.

During the first quarters of both 2013 and 2014, we recorded no significant bad debt or impairment. Fixed expenses were $49.4 million in the first quarter of 2014, which represents a $1.4 million decrease compared to the prior year period, fixed expenses were $50.6 million in the fourth quarter of 2013.

The company targets key total compensation expense as a percentage of adjusted operating revenue at less than 40%. And for the first quarter of 2014, we’re above this goal at 41.7% primarily as a result of the aggregate level of operating revenues.

In the prior year period compensation and benefits were 40.1% of adjusted operating revenues. Compensation and benefits expense decreased 1% to $46.4 million compared to $46.7 million in the prior year.

The variable portion of compensation and benefits increased 4% to $20.5 million in the first quarter compared to $19.7 million in the prior year as a result of the increase in adjusted operating revenues, net of the share sale in the prior year which had no variable compensation related to it. The fixed portion of compensation and benefits decreased $1.1 million to $25.9 million in the current period.

The average number of employees increased 1,098 for the first quarter of 2014 as compared to 1,086 in the prior year period. Our second largest expense is clearing and related costs, which increased 2% compared to the prior year period to $25.2 million.

This increase was primarily driven by higher ADR conversion and exchange fees in the Securities segment activity resulting from the acquisition of the accounts of Tradewire Securities during the prior year period. The adjusted net income from continuing operations for the first quarter was $1.2 million versus $7.5 million in the prior year period.

As mentioned before the prior year period benefited from the $9.2 million realized gain on the sale of our shares in the LME and Kansas City Board of Trade, which was $6.9 million on an after-tax basis. Over the long-term, the company looks to achieve a minimum return on equity at 15% or greater on its adjusted stockholders’ equity, and for the current period, the company was well below that target at 1.4%.

The ROE for the prior year period was 9.3%. Total assets on the balance sheet decreased 6% to $2.7 billion while adjusted stockholders’ equity closed the period at $338.7 million, a 5% increase over the prior year.

Another key metric the company focuses on is keeping a one-to-one ratio between revenue generating employees and administrative or operations employees. Along these lines, the company targets to have at least $500,000 in annualized revenues across the entire employee base.

For the current period this metric was $406,000 per employee as compared to $429,000 for the prior year period. On December 11, 2013 the Company’s Board of Directors replaced it’s previously authorized share repurchase plan.

Under the new plan, the company may repurchase up to 1.5 million shares of its outstanding common stock. During the first quarter of 2014, the company repurchased 63,800 shares of its outstanding common stock in open market transactions.

Finally, in closing out the review of the quarterly results, the trailing 12-month results have led to an increase of 4% in the book value per share closing up the quarter at $17.66 per share. With that I would like to turn it back to Sean to wrap up.

Thanks, Bill. Despite difficult markets, we have a number of businesses that are showing exceptional growth and hitting new records regularly.

The cyclical headwinds that have affected our largest commodities business are now abating and perhaps turning. Increased volatility drives customer activity in all our businesses and our withdrawal from the markets by the Fed which seemed to imply more volatility ahead.

So not yet exactly a tailwind, but it seems the wins are no long ahead on for us. We have taken on board some comments from our shareholders about providing clear and more detailed descriptions of our business to enable investors to better understand what we do and how we make our money.

To this end, we will be revising and improving on the information we provide to our investors with the goal to provide better insight into this diverse global financial services company, which we have built over the last 10 years. With that, I would like to turn it back to the operator to open the question-and-answer session.

Operator?

Alright. Well, it doesn’t seem like we have any questions or we have one, yes.

Okay, go ahead.

Hey, Sean. Quick question for you, is there any more detail that you can provide on this recent announcement of resignation of CEO of FCStone?

Well, firstly that First Article was totally erroneous. I think you should disregard that.

And secondly, I would refer you to our 8-K announcement, there is really not a lot as we can say about that with a mutual decision and with our [ph] 8-K.

Got it, okay.

Okay, alright.

Yes, good morning. You mentioned improving conditions like Fed’s volatility etcetera, so is it safe to say that the write-off last year and delayed filing the K has not impacted customer activity.

I’d say, yes. Sorry, I am struggling to hear you well.

Are you saying the delay in filing?

Yes, have you seen any fallout from having to delay the filing in the 10-K and restate the numbers?

There was definitely some short-term impact of customers from delaying our filings. I mean, we had as I think I discussed on the last call, we did have some customers who called us particularly larger customers who tend to be more credit sensitive called us wanting to understand what was going on.

Very hard for us to know exactly what revenue impact that had, because you are not sure that people that diverged trades for a period of time to sort of have less exposure to you while that we are sort of testing the situation or not, not really sure if we can analyze it with any great insight. But I think once we filed, all our customers are dealing with us, not only there has been any long-lasting damages resulted.

I think all our customers are with us. And I think only a few high-profile customers that had some concerns and wanted to understand what was going on and I think they were generally very comfortable with all the guidelines, but I am sure there is some impact, very hard for us to assess what that impact is (indiscernible).

Okay, great. And then just secondly on your last call, you gave lots of interesting detail around electronic payments business that you built out over the years, any update new wins traction that you can share with us on that front?

No, other than the kind of sound bite I gave you and I think in those commentary, we gave you little bit more detail, but that business, I am trying to find my next slide, on a sequential basis, I think the revenue was up like 36%.

Yes. Sean, it was over the prior year was up 34% well and over the prior quarter well comparing this quarter versus the fourth quarter, it was up 31%.

So, it was up about $3.2 million over the most recent quarter here that we had in the fourth – up $13.6 million.

And given what we chatted about last time that we had put a lot of sort of technology into that business to make it a more robust and sustainable infrastructure. And I think you can make the assumption that a lot of that incremental revenue starts to drop to the bottom line, right.

So when we start having growth of that sort of order of magnitude, it starts to become profitable very quickly. We caution though that in the quarter, so our first quarter, the one we just reported on tends to be a good quarter for that business.

It’s sort of year end, a lot of people are sort of pushing payments up, carrying up, particularly in the NGO community on the non-profit that kind of using our budgets making sure they are triggering up the size, you have also got a lot of sort of holiday related payments that happened in the busy quarter. So I am not sure if one should initially annualize that quarterly quarter, but it is significant that it grows much higher than the prior year.

So even if you look at it on a Q1 to Q1 basis is still up 30% and it was nice sequential growth. So anyway, you look (indiscernible) I just want to caution you that the Q1 is a strong quarter for them generally.

Okay, thank you very much.

Okay.

No, I have nothing else. So, thanks very much for your time and we will speak to you in three months.

Thanks.