Bill Dunaway - CFO Sean O’Connor - CEO.

Analysts:.

Good day, ladies and gentlemen, and welcome to the INTL FCStone Q1 Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to Mr. Bill Dunaway, CFO. Sir, you may begin..

Good morning. My name is Bill Dunaway. Welcome to the earnings conference call for our fiscal 2018 first quarter ended December 31, 2017. 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.intelfcstone.com as well as a slide presentation that we will refer to on this call in our discussions of our quarterly. You’ll need to sign on to the live webcast in order to view the presentation.

Both the presentation and an archive of the webcast will also be available on our website after the call’s conclusion.

Before getting underway, we’re required to advise you and all participants should note, that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-Q filed with the SEC.

This discussion may contain forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the Securities and 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 could 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 Sean O’Connor, the Company's CEO..

Thanks, Bill. Good morning everyone and thanks for joining our fiscal 2018 first quarter earnings call. We achieved record operating revenues of $212.6 million in the first quarter of the fiscal year representing a 15% growth over the prior year.

Together with holding expenses to a 5% increase, this is also the income before tax of 18.6 million, which is one of our strongest ever first quarters of the fiscal year and represented a 121% increase over the prior year.

We achieved growth in operating revenues in all of our operating segment despite difficult market conditions in particular continued low market volatility in most of our key markets and also low commodity prices.

For the first quarter of fiscal 2018, we recorded a net loss of 6.9 million or $0.37 per share including an estimated one-time non-cash charge of 20.9 million or $1.12 per share related to the enactment of the tax reform.

Excluding the impact of the tax reform as well as the additional 1 million charge incurred on the Singapore coal matter, our core net income was $15 million representing core EPS of 0.78 per share. Our immediately prior Q4 core earnings excluding the impact of the Singapore coal chart was 15.8 million representing core EPS of $0.83 per share.

Looking at our segments, we expand our performances from Commercial Hedging which increased segment income of 37% primarily as a result of an increase in both OTC revenues as well as additional interest income as well as a $2.6 million decline in non-variable direct expenses due to a bad debt provision a year ago.

Our Clearing and Execution segment also started the strong growth at 84% primarily as a result of the increase in operating revenue as well as a 2.3 million decline in non-variable direct expenses.

Global Payments segment income increased to 11% driven by a 7% increase in the number of payments made combined with maintaining a steady average as revenue per payments versus the prior year. The Physical Commodities segment declined 1.9 million versus the prior year despite increased operating revenues.

This was partially due to additional $1 million related to the Singapore coal issue as well as the mark-to-market timing issues in our coal business.

Securities segment income declined 15% primarily as a result of a 5.4 million increase in interest expense in our debt trading business as well as a $1.5 million increase in transaction based clearing expenses in our equity market making business.

I'd like to briefly touch on the impact of the recent tax legislation on our current and forward earnings. As a global organization while we have never let tax considerations drive our business decisions, we have always thought to optimize our tax charge over the years. This has resulted in us minimizing our U.S.

taxes to the extent allowed and accumulating significant overseas with trade earnings in more favorable tax jurisdictions. As a consequence of that, we have a net operating loss in the U.S. which has been carried as an asset on our balance sheet.

The immediate net results of this new tax legislation, has been a $20.9 million charge which has been offset against our net operating loss, it's not a cash item.

We now have significantly less restrictions and being able to allocate the overseas capital and to move our liquidity throughout our entire organization which should allow a better optimization with capital.

Against this, we have lost the future benefit of our net operating loss which has now been monetized through the charges associated with the foreign accumulated earnings under this legislation combined with the decrease in its value resulting from the lower tax rate. In the near term, the lower U.S.

tax will not have a significant impact on our aggregate tax charge, as we have relatively little U.S. taxable income. However, most of our customers float revenue is based in the U.S. and any incremental interest earnings will now be taxable lower rate and that's more of that incremental benefit should drop the bottom line.

We have estimated that we should realize approximately 21 million in pretax earnings for a 100 basis points move in the short-term interest rates. This incremental revenue will now be tax at about a 14% lower tax rate than historically was the case. With that, I’ll hand you over to Bill Dunaway, for a more detailed discussion of our financial results.

Bill?.

Thank you, Sean. I’ll be referring to slides and the information we have made available as part of the webcast specifically starting with Slide number 3, which shows our performance over the last five fiscal quarters.

As Sean noted, in the first quarter we had several items of note including a provision of $20.9 million discreet tax charge related to the enactment of the Tax Cuts and Jobs Act and an additional $1 million bad debt expense on physical coal, which we discussed on our fourth quarter earnings call.

The 20.9 million tax charge is made up of an 8.9 million re-measurement of deferred tax assets and liabilities from a 35% federal corporate rate down to the new 21% effective rate and a 12 million charge related to the deemed repatriation transition tax on previously un-tax accumulated earnings and profits of our foreign subsidiaries.

The top of Slide number 3 of the chart which depicts our reported net income, earnings per share and ROE over the last five quarters while the bottom on the slide shows the same metrics on an adjusted basis.

We're moving in effect of the two items I just mentioned in the first quarter of fiscal 2018, as well as the $39.4 million bad debt on physical coal net of incentive recaptures in the immediately preceding fourth quarter.

The bottom graph shows the strong growth we have seen in the last few quarters in our core operating results which resulted in our adjusted ROEs of 13.2% and 12.1% for the fourth quarter of fiscal 2017 and the current period respectively, with the combined dollar $1.61 and adjusted earnings per share for the six months period.

Moving onto Slide number 4, which represents a bridge between operating revenues for the first quarter of last year to the current fiscal year first quarter, operating revenues were 212.6 million in the current period once again the record high and a $27.1 million increase over the prior year.

As shown all operating segments showed revenue growth over the prior year led by clearing an execution services segment, which added 8.6 million in operating revenues driven by a 7% increase in exchange credit volumes, combined with the 16% improvement in the average rate for contracts as well as a $2.3 million increase in interest income.

In addition, our larger segments Commercial Hedging added 4 million or 7% in operating revenues versus the last year. The growth was driven by a 4.6 million increase in OTC revenues primarily in our Brazilian grain and global soft businesses.

In addition, interest income increased 83% or 1.9 million in this segment versus the prior year off to back of a rise in short-term rates. These gains were partially offset by a $2.5 million decline in exchange stated revenues, driven by both lower domestic grain and LME metals revenues, both due to lower levels of market volatility.

Our Global Payments segment had another strong quarter adding at 1.5 million in operating revenues to 24.6 million with some interesting dynamics related to payment volumes. The number of payments made, were up 7% versus the prior year, but down approximately 10% versus the average volume seen in the third and fourth quarters of fiscal 2017.

Certain commercial customers who had been growing their payment volumes throughout fiscal 2017 changed the manner in which they were doing their payments.

These customers who previously transacted their individual high volume but low value payments through our platform open their own bank accounts in certain countries to which we had made payment into on their behalf. However, we still made the foreign currency funding payments into their accounts on an aggregated basis in these countries.

This resulted in a decrease number of payments made versus the immediately preceding third and fourth quarters as multiple payments were aggregated into a funding payment.

This resulted in both an increase in the average revenue per payment made and overall revenues versus those periods with the ancillary benefit of lowering our variable cost as the result of our reduction in the number of payments made.

Our Security segment added 5.6 million or 15% in operating revenues versus the prior year, driven by an 11% increase in the growth of dollar volume traded in the equity market making, as the result of on boarding our new customers and increased market share capture.

In addition, our debt trading business added 24% in operating revenues driven by increases in our domestic fixed income, municipal security and Argentina businesses. Physical Commodities added 800,000 in operating revenues versus the prior year with growth in our physical ag and energy business partially offset by a decline in precious metals.

The decline in precious metals was driven by a 1.3 million unrealized loss and derivatives positions held to get inventory security as a lower cost of market in our non-broker dealer subsidiaries.

These inventories turnover in a short period of time so we should just see the reversal of those losses in the second quarter of fiscal 2018, excluding these loss precious metals added 1.2 million in operating revenue versus the prior year.

Finally, operating revenues in the unallocated overhead segment increased 6.6 million versus the prior year mostly as a result of the 5.6 million unrealized losses on U.S. treasury notes and interest rates swaps in the prior year quarter related to our interest rate management program.

The next Slide number 5 represents a bridge from 2017 first quarter pretax income of 8.4 million to 18.6 million in the current period, a 120% increase which demonstrates the strong core operating growth realized versus the prior year.

Sean covered the variances in pretax income and our operating segment during his portion of the call, so I'll just note 2.1 million increased in our unallocated overhead segment.

This positive variance was a result of the prior period unrealized loss in the interest rate management program I just mentioned, which is partially offset by central overhead growth due to the additional headcount in several administrative functions as well as an increase in share base compensation and long term incentives.

Slide number 6 shows the interest income on our investments and our exchange for the future and options businesses as well as balances in our correspondent clearing and independent wealth management businesses.

As noted on this slide, our interest earnings and these balances have increased 3.9 million versus the prior year to 8.9 million, as our yield on these balances is increased 54 basis points to 117 basis points in the current period.

The bottom of the slide shows the potential annualized interest rate sensitivity which balances held at the end of the current period, based upon an increase in short-term rates at various levels. As Sean noted, a 100 basis points increase in short-term rates has a potential increase in our interest income by nearly 21 million on annual pretax basis.

In addition, on the 100 basis points increase the new tax legislation where tax fees earnings at a lower effective tax rate which resulted in incremental 2.8 million increase in after tax earnings, over historical tax rate is noted in the table.

Moving onto to Slide number 7 our quarterly financial dashboard, I would just highlight a couple of items in though. Variable expenses represented 58.4% of our total expenses for the quarter above our targeted keeping more than 50% of our total expense variable in nature.

Non-variable expenses which are made up both fixed expenses and bad debt expense increased 3.4 million or 5% versus the prior year. As noted earlier, we reported a net loss from continuing operations in the first quarter of 6.9 million or negative 6.2% ROE.

I'll remind you that excluding the effect of the tax reform and the 1 million bad debt charge related to the closing of our physical coal business, our adjusted net income in the first quarter was 15 million for a 12.1% ROE.

Finally, in closing out the review of the quarterly results, our book value per share declined $0.21 primarily as a result of the tax charge to $23.56 per share versus the prior year. We did not repurchase any of our common stock during the first quarter. With that, I would like to turn it back to Sean to wrap up..

Thank you, Bill. Our coal earnings as we described on this call earlier, for the last six months, have accelerated and are encouraging and starting to approach our 15% ROE target. This is despite a paired of low market volatility and low commodity prices.

In the late 2017, we started to see volatility increasing as it became clear that the fed was accelerating its effort to extricate itself from the market and allow them to normalize. This trend seemed to continue and perhaps accelerate in 2019 with the commensurate increase in volatility.

Obviously, we are all seeing a major spike in volatility over the last week or so. There are continuing signs of good economic growth in the U.S. combined with synchronized growth globally, all of which into support ongoing interest rate increases during 2018 and beyond.

Increased interest rates and increased volatility is very positive for our business. Our customers flat will not have the added benefits of the lower U.S. tax rates on these incremental earnings, while macro factors have turned more positive for us. We continue to work hard to drive organic growth in an industry that continues to consolidate.

With that, I’d like to turn it back to the operator and take any questions.

Operator?.

Operator:.

All right, it doesn’t look like we have any questions. So, once again, thanks for your time and attention, and we will be speaking to you in three months. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This includes today's program. You may all disconnect. Everyone have a great day..