William J. Dunaway - Chief Financial Officer and Chief Accounting Officer Scott Julian Branch - Chief Operating Officer, Director, Deputy Chairman of IAHC (Bermuda) Ltd, Chief Executive Officer of INTL Assets, Inc, President of INTL Assets Inc, President of OTCL and Director of OTCL

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

Welcome to our earnings conference call for the third quarter of fiscal 2012, ended June 30, 2012. After the market closed yesterday, we issued a press release reporting our results for the fiscal third quarter.

The press 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 the quarterly and year-to-date results. This slide presentation is available by clicking on the Investor Relations link on the website and then going into the Events & Presentations page.

You'll need to sign on to the live webcast in order to view the presentation. Both the presentation and the archives of the webcast will be also available on our website after the call's conclusion.

Before getting underway, I'd 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 Commodities business.

As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the U.S., which I'll refer to as GAAP, to carry derivatives at fair market value but physical commodities inventory at the lower of cost or market value, may have 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 often recognized in different periods.

Additionally, in certain circumstances, GAAP does not require 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 commodities business, 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. We also calculate commodity trader bonuses on the basis of fully mark-to-market results, not the GAAP results.

Readers of our Form 10-Q filing should look at the selected summary financial data for information within Item 2, Management Discussion and Analysis of financial condition and results of operation or MD&A, 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're 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 meanings 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'll now turn the call over to Scott Branch, the company's Chief Operating Officer.

Thanks, Bill, and good morning, everyone. Just to note that Sean O'Connor, our CEO, who normally makes these presentations, is actually on the line.

He is calling in remotely, and because we weren't completely confident of communications, we thought it was best that I give the presentation. He will be available, likely, at the end of the call for Q&A if the communications continue to prevail.

And we also have Pete Anderson here with us as well. So in Q3 2012, we've produced a GAAP net income from continuing operations of $4.7 million and a mark-to-market or adjusted net income of $5.3 million.

This was almost double the immediately preceding GAAP results for Q2 2012, up $2.4 million and a 39% increase over the adjusted net income of $3.8 million. A year ago, we had a GAAP net income of $10.4 million and adjusted net income of $9.2 million in very favorable market conditions.

Our adjusted operating revenues were $124.7 million, another record quarterly revenue for the company. This represented an increase of $21 million or 20% from a year ago.

These results demonstrated trends of modest improvement that started in the preceding quarter and continued through Q3. The main driving factors behind this improvement were continued improvements in new growth initiatives.

The most significant was the LME activities with operating revenues jumping 28% from $5.4 million in the preceding quarter to $6.9 million in Q3. As a result, our LME activities went from producing a small profit in Q2 to a $1.2 million profit in Q3.

We also saw improvements in the TRX acquisition, our Australian and Chinese initiatives as well as investment banking, which all began to approach or breakeven levels or produce modest profits. Second point is that, overall market conditions started to improve from the headwinds we experienced during prior quarters, but we're still kind of choppy and inconsistent.

Malaise dominated the markets during much of the quarter but showed better signs at the end of the quarter. The increased volatility at the end of the quarter led to mild improvements in most of our existing activities.

And finally, we have now capped increases in fixed expenses mainly related to some of the growth initiatives that I mentioned earlier, which are virtually unchanged from Q2 to Q3. As Sean mentioned in our last call, it's not an easy decision to seize opportunities and start new initiatives in a challenging market environment.

No matter how carefully reviewed or well-managed, costs almost always come before revenues. Overall, we could probably have done a slightly better job in managing some of these initiatives but we're pleased with these decisions and are now clearly starting to see the benefits of these growth initiatives come through to make a contribution to our bottom line.

As we have cited on numerous occasions, our primary objective is not for the results but long-term growth and book value per share. The generally weak and choppy market conditions we experienced in Q3, although improved from the prior quarter, mask some fundamental strengths and improvements in many of our existing activities.

First of all, our focus on providing value-added advice, execution and clearing to primarily midmarket commercial customers has allowed these activities to grow and remain profitable in this environment, and fund continued growth in other areas. Secondly, many of our competitors are struggling to adapt to a continuing reality that includes reduced volumes, low interest rates, mispricing and regulatory change.

Some firms, including MF Global, Penson and Peregrine, have collapsed under the pressure. While overcapacity still remains, we are beginning to see less pricing pressure and growing client acquisition opportunities.

Although we remain selective in both risk and pricing, we have been adding new customers at an unprecedented rate over the past 2 quarters. In Q3, we opened more than 1,100 new accounts.

This is more than double the number of accounts we opened in the same quarter last year. We have yet to see the full potential of this expanding customer base.

And thirdly, we have made significant investments in technology that enable us to handle significantly increased volumes, process transactions more efficiently, better manage risk and provide better management reporting. We are now turning our attention to customer facing technology that should strengthen our existing relationships and attract new customers.

So in summary, we are beginning to see the rewards of our recent expansion initiatives come through in acceptable results, although below our objectives, under weak market conditions. We've seen some improvements in more recent months, and are well-positioned to benefit from any future improvements in market conditions.

I'll give a short summary at the end. But now I'll turn you over to Bill Dunaway for a more detailed discussion of the financial results.

Bill?

Thank you, Scott. I'd like to start my discussion with a review of the quarterly results and refer to the third page of the slide presentation titled Quarterly Financial Dashboard.

This slide lays out the quarterly operating results as well as 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. As Scott mentioned, adjusted operating revenues were a record $124.7 million for the current period, up 20% from $103.5 million in the third quarter of last year.

Adjusted operating revenues were $121.9 million in the second quarter of 2012. Every segment of the company experienced growth in adjusted operating revenues in the third quarter, as compared to the prior year, led by a 74% increase in the Clearing and Execution operating revenues.

Looking at our revenues on a segmental basis, adjusted operating revenues in our core Commodity & Risk Management Services segment increased 7% from $63.6 million in the prior year period to $67.9 million in the third quarter of 2012. Adjusted operating revenues were relatively flat for the period versus second quarter revenues of $68 million.

Our CRM segment is further broken down into 3 product lines: soft commodities, precious metals and base metals. Starting with the soft commodities, operating revenues increased 7% to $54.7 million in the third quarter as compared to the prior year period.

Exchange traded contract volume increased 9% to 974,000 contracts as compared to the prior year, driving a 7% or $1.1 million increase in commission and clearing fee revenues. OTC contract volumes in this product line increased 52% as compared to the prior year to 467,000 contracts, driving a $3 million increase in OTC revenues.

Both of these volume increases were primarily driven by increased volatility in agricultural commodities as a result of U.S. weather conditions, as well as continued strong demand out of Latin America, South America and Europe.

Partially offsetting these revenue gains was a 64% decrease in interest income to $900,000 driven by a 10% decline in average investable client balances to $857 million as well as lower short-term interest rates. In our precious metals product line, adjusted operating revenues decreased from $6.6 million in the prior year to $2.8 million in the third quarter, primarily driven by a 19% decrease in the number of ounces traded, as well as tighter spreads.

Adjusted operating revenues in our base metals product line increased from $5.7 million in the third quarter of 2011 to $10.4 million in the current period. Primarily as a result of the revenues contributed by the LME Metals team.

The LME Metals team, which was added in the middle of the first quarter of this fiscal year, added $6.9 million to adjusted operating revenues to the current quarter after contributing $5.4 million in the second quarter of this fiscal year. Moving on, in our Foreign Exchange segment, operating revenues increased 15% in the third quarter to $16.5 million as compared to the $14.3 million in the prior quarter -- prior year quarter.

The operating revenues in the company's Global Payments product line continue to grow, increasing from $7.4 million in the third quarter of 2011 to $10 million in the third quarter of 2012. As volumes increased 24%, as the company continued to benefit from an increase in the number of financial institutions, which utilize our Global Payments platform.

The customer's speculative Foreign Exchange product line operating revenues declined $100,000 to $1.9 million in the third quarter as compared to the prior year. The operating revenues in our customer hedging activity increased 38% over the prior year to $2.2 million, primarily driven by an increase of hedging by customers in our Brazil operations.

The proprietary foreign exchange arbitrage desk, which arbitrages the cash versus the exchange traded markets, experienced a 25% decline in operating revenue to $2.4 million, primarily as a result of a decrease in arbitrage opportunities in the exchange traded, foreign exchange markets. Moving onto our Security segment, operating revenues increased by 56% from $5.5 million in the prior year to $8.6 million in the current quarter.

This segment includes 2 product lines: the equity market-making business and the debt capital market. Operating revenues in the equity market-making business increased 13% over the prior year to $5.1 million, driven by a 7% increase in the number of trades.

Operating revenues in our debt capital markets product line, which includes the investment banking activities of INTL province increased from $1 million in the prior year to $3.5 million in the current quarter. In the Clearing and Execution Services segment, operating revenues in the segment were $27.7 million for the third quarter of 2012 compared to $15.9 million in the prior year.

Commission and clearing fee revenues increased 89% from $14.2 million in the prior year to $26.9 million in the third quarter of 2012. As a result of 108% increase in exchange traded volume.

This increase was primarily driven by accounts transferred to the company from MF Global during the first quarter of 2012, and it's a little misleading because breaking down this increase, commission revenue increased $4.3 million while clearing fee revenue, which is generally a pass-through to the exchange, increased $8.3 million. Interest income declined 20% to $400,000 in the third quarter, driven by lower short-term interest rates as well as a 3% decline in average customer deposits to $804 million as compared to the prior year.

Operating revenues in our Other segment, which contains both our asset management and commodity origination and Financing product lines, increased from $3.3 million in the prior year to $3.8 million in the third quarter of 2012. Our assets under management as of June 30, were $489 million compared with $352 million as of the prior year.

Operating revenues in the asset management product line increased $300,000 to $2.3 million in the third quarter of 2012. Operating revenues in the grain financing and physical commodity origination product line increased $100,000 to $1.5 million in the current period.

Moving onto the expense side of things. Noninterest expenses were $111 -- $115.3 million for the third quarter of 2012, for an increase of 34% over the $86.1 million in the third quarter of last year.

Noninterest expenses were $112.4 million in the second quarter of this year. Internally, the company started to keep variable expenses as a percentage of total expenses in excess of 50%.

During the current period, the majority of noninterest expenses were variable, with 56% of total noninterest expenses being variable in nature as compared to 43% -- 53% in the prior-year period. The nonvariable expenses include both fixed expenses as well as bad debts and impairments.

During the third quarter of 2012, we recorded $600,000 of net bad debt or -- and impairment expense, primarily related to a Brazil agricultural client, as compared to $1.2 million in the prior-year period. Fixed expenses were $50.3 million for the third quarter of 2012, which represents $11.2 million increase over the third quarter of last year, primarily as a result of recent acquisitions.

However, this does reflect a $300,000 decrease, as compared to the second quarter of the current fiscal year in fixed expenses. Communication and data services expense increased $2.1 million primarily due to increases in market information expense and trading software costs following the acquisitions of Ambrian commodities, the LME Metals Team and TRX Futures, as well as the expansion of our soft commodities and foreign exchange activities.

Occupancy and equipment rental increased $600,000, primarily as a result of the relocation of our London offices in conjunction with these acquisitions discussed directly above. In addition, depreciation and amortization expense increased $600,000 over the prior-year period as a result of additional technology infrastructure placed into service since the beginning of the year.

The company targets to keep total compensation expense as a percentage of operating revenues at less than 40%. However, with the growth initiatives mentioned above, total compensation-related expenses represented 43.8% of total adjusted operating revenue in the current period, above our internal target.

The compensation and benefits expense increased by 24% from $44 million to $54.6 million in the current quarter. The variable portion of compensation and benefits increased by 20% from $22.1 million in the third quarter of 2011 to $26.6 million in the third quarter of 2012, mainly as a result of the 20% increase in adjusted operating revenue.

The fixed portion of compensation and benefits increased 28%, from $21.9 million in the third quarter of last year to $28 million in the third quarter of the current year, primarily as a result of the acquisitions discussed earlier, as well as an expansion of the investment banking and IT development departments. Stock-based compensation, including stock options and restricted stock expense in the current period was $1.5 million compared with $500,000 in the prior year.

The average number of employees increased to 1,064 for the third quarter of 2012 as compared to the 854 in the prior-year period. The adjusted net income from continuing operations for the third quarter was $5.3 million versus $9.2 million in the prior year.

Looking at it on a trailing 12 month, adjusted net income and adjusted EBITDA decreased 63% and 47%, respectively over the prior-year period. The company looked to achieve a minimum return on equity of 15% or greater on its adjusted stockholders' equity.

The return on equity for the third quarter was 6.6% as compared to 12.8% in the prior-year period. Looking at the balance sheet, total assets increased 3% to $2.7 billion while adjusted stockholders' equity closed the period at $316.9 million, a 9% increase over the prior year.

On July 23, the shareholders of the LME Holdings voted to approve the sale of the LME to the Hong Kong Exchanges and Clearing Ltd. Based on the proposed sale price of the ordinary shares, the shares of the LME held by the company are valued at $8.4 million on the balance sheet as of June 30, 2012.

The company's shares in the LME reflect an unrealized gain of $6.1 million, net of income tax expense of $1.9 million, which is recorded in the equity section of the balance sheet in Other Comprehensive Income. Upon closing of the sale, the company will reclassify this unrealized gain on the shares and accumulated OCI and recognize the realized gains in the current period's earnings.

Additionally, in August 12, 2011, the company's Board of Directors authorized the repurchase of up to 1 million shares of the company's outstanding common stock. During the third quarter, the company repurchased 150,000 shares of its outstanding common stock in open market transactions in the aggregate amount of $2.8 million.

Another key metric the company focuses on is keeping a 1:1 ratio between revenue-generating employees and administrative or operating 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 decreased 3% with the growth initiatives discussed earlier causing the drop to $468,000 per employee. 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 out the quarter at $16.67 per share.

Moving on to the next slide of the presentation, I'll speak briefly on the year-to-date results for the fiscal year. Adjusted operating revenues increased 9% over the prior year to $339.7 million.

All of the company's operating segments realized growth in revenues over the prior-year period with the exception of the Commodity and Risk Management segment, which declined 1% as compared to the prior year. As with the quarterly results, total noninterest expenses increased 24% to $322.6 million, primarily as a result of both the acquisitions made -- as the result of the acquisitions made during the last 18 months.

Variable costs represented 54% of total expenses, keeping in line with the company's goal of having a primarily variable expense model. In total, compensation expense as a percentage of adjusted operating revenues, was over the company's target at 45.8% as a result of the growth initiatives discussed earlier.

Adjusted net income from continuing operations for the 9 months ended June 30, was $6.7 million, a 75% decline as compared to the prior-year comparable period. For the year-to-date period, the company achieved a 2.9% return on adjusted stockholders' equity, well below our target of 15%.

Through the first 9 months of the fiscal year, the annualized revenue per employee decreased 14% to $442,000, which is below the company's stated goal of $500,000, while the average number of employees increased to 1,022 for the first 9 months of the fiscal year. Finally, I'd like to touch on some recent developments in our industry following the bankruptcy filing of MF Global in the first fiscal quarter, as well as the more recent collapse of Peregrine Financial, or PFGBest, we are concerned with the perception of the exchange traded futures and options industry, particularly in light of potential shortfalls in customer segregated assets of these firms.

As mentioned on previous conference calls, our FCM, FCStone LLC, invested customer assets primarily in short-term treasury securities and approved money market mutual funds, and has never invested in sovereign debt instruments. We welcome recent regulatory reforms in our industry including semimonthly in filings of segregated investment detail reports with the CFTC.

Direct electronic confirmation of segregated balances held at depositories, as well as daily filings for each FCM of the their daily excess segregated assets. And with that, I would like to turn it over to Scott to wrap up.

Thanks, Bill. Although our quarter's adjusted ROE of 6.6% is below our target, we believe it demonstrates that we are on the right track.

We have both undertaken a meaningful expansion and at the same time, produced a moderate result under continuing weak market conditions. We can't predict when market conditions will improve, but we now have a large platform in place to reap greater benefits when volatility increases or interest rates go up.

Irrespective of market conditions, we should see continued improvements as we generate additional revenue from the new initiatives that we've undertaken, and customer expansion for our existing activities. With much of this incremental revenue dropping through to the bottom line.

At the end of the last quarter's call, Sean fielded a question about stock buybacks. As mentioned in our filings and during Bill's presentation, we did buy back shares during the quarter.

This was done under predetermined parameters based on book value per share. As I stated earlier, compounding book value per share is our main objective.

Over the past 10 years, we have increased book value per share at a compound rate of 26% per annum. This increase was roughly equally split between net income and capital transactions.

We will continue to focus on creating shareholder value through both means in a disciplined passion over the long term. Including situations where the market's sometime erratic valuation will almost certainly provide future opportunities for us to build buyback and issue stock on an attractive basis.

With that, I'd now like to turn it back over to the operator to open up us -- us for the question-and-answer session. So Nicole.

Okay, Nicole, it appears that we don't have any questions. We appreciate everyone who's joined us on the call this morning, and look forward to speaking with you all, again, in the next quarter.

Thank you very much.