Bill Dunaway – Chief Financial Officer Sean O'Connor – Chief Executive Officer.

Analysts:.

Good day, ladies and gentlemen, and welcome to the INTL FCStone Quarter Two 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 your host, Chief Financial Officer, Mr. Bill Dunaway. Sir, you may begin..

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fiscal second quarter ended March 31, 2018. After the market closed yesterday, we issued a press release reporting our results for our second fiscal quarter of 2018.

This release is available on our Web site at www.intelfcstone.com as well as a slide presentation which we will refer to on this call in our discussions of our quarterly and year-to-date results. You'll need to sign on to the live webcast in order to view the presentation.

The presentation and an archive of the webcast will also be available on our Web site 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 Section 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 second quarter fiscal 2018 earnings call. We achieved a sixth straight record quarter in operating revenues, up a strong 33% from a year ago, and up 22% sequentially from the immediately prior quarter.

We recorded our best ever quarterly earnings of $22.7 million, up 106% from the prior year. After adjusting for the Tax Reform, second quarter adjusted net income was up 46% from our immediately prior quarter. Our diluted EPS was a record $1.18, up 103% from a year ago, and on an adjusted basis up 47% sequentially versus the first quarter.

Our return on equity for the quarter was 20% and for the year-to-date period excluding the Tax Reform was just over 18%. Our ROE numbers are calculated on total equity not tangible equity. Tangible equity being the way a lot of other financial companies report the statistic. Using tangible equity reduce these numbers by around three percentage points.

The market environment we're operating has become increasingly positive for us over the last four to six quarters with interest rates increasing and volatility slowly and sporadically increasing to more normal levels as the Fed withdraws from the capital markets.

During the time to review, we certainly benefited from a spike in equity volatility around the Vics issue, which positively impacted our equities and futures hearing activities. Also we've benefited from higher interest rates on our $3 billion plus of customer flows.

Clearly more extremes spice us as we saw in the Vics are not sustainable, but it does seem that's moderately higher volatility has crept back into many of the asset classes such as metals and agricultural commodities offer best as political and other concerns.

We think this is a more normal situation, which is sustained will continue to be beneficial for us. We achieved very good growth in segment income in all of our operating segments.

Some brief highlights; commercial hedging segment which is our largest increase segment income impressive 48% from a year ago and was up 31% sequentially with strong growth in both futures in OTC revenues and revenue capture in the OTC business aided by increased volatility.

Global payment segment income increased 15% from a year ago that was down 7% sequentially due to seasonality with the December quarter always being our strongest for the payments business. In the current quarter payment volumes were flat that revenue per payment increased by 9%.

This normally was discussed last quarter and was due to very high volume but low value client favorably changing the way that process the payments with us. We have seen spread compression in some of our key markets in Africa to reduce the demand for dollars.

After nearly three years we received an upgraded regulated commission in Brazil along us to better facilitate clients flow into and out of this important market. This happened late in the quarter that has significantly boosted our Brazil payments revenues. The security segment income increased 9% from a year ago and was up 60% sequentially.

This quarter's result is driven by an 81% increase in operating revenues from our equity business largely due to the increased volatility in the banks.

I would like to highlight that this revenue increases was up the back of a 35% increase in volume as well as a 17% increase in revenue capture which highlights impact of volatility on both volumes and spreads in businesses where we act as a trader in facilitating client orders.

Physical commodity segment income increased 44% from a year ago and was up nearly fourfold sequentially. This was off the back of a 53% increase in precious metals revenues and 22% increase in the agricultural and energy activity. Appearing an execution services segment income increased an 61% from a year ago and 21% sequentially.

This is primarily due to record results for our future scaling business with volumes up 51% due to increased client activity as well as volatility. This was further aided by 21% increase in revenue factored growth contract as well as higher interest rates.

With that, I'll now hand it over to Bill Dunaway for a more detailed discussion of our financial results.

Bill?.

Thank you, Sean. I'll be referring to slide in the information we have made available as part of the webcast.

Specifically starting with slide number three which shows our performance over the last five fiscal quarters, the top of slide number three is a chart that depicts our reported net income earnings per share and ROE over the last five quarters while the bottom of the slide shows the same metrics on an adjusted basis.

Removing the effective tax reform in the previously that on physical coal, in the second quarter the only difference in our GAAP net income and adjusted net income was an $800,000 income tax benefit related to an adjustment provisional discrete tax charges taken in the immediately preceding first quarter related to the enactment of the Tax Cuts and Jobs Act.

The bottom graphs shows the strong growth we have seen over the last five quarters in our core operating result with the near doubling of our earnings per share and an ROE from the current period in excess of our internal target of 15%. Our adjusted net income was $36.9 million with earnings per share of $1.93 for the fiscal year-to-date period.

Moving on to slide number four which represent the bridge between operating revenues for the second quarter of last year to the current year fiscal second quarter.

Operating revenues were $260.2 million in the current period up $64.4 million or 33% versus the prior year that shown all operating segments showed revenue growth over the prior year but by our clearing and execution services segment which added $23.8 million or 37% in operating revenues driven by strong exchange traded revenue growth as noted by Sean earlier.

In addition our largest segment added strongest quarter ever, adding $15.6 million or 25% in operating revenues versus the prior year.

This growth was driven by improved performance in both exchange traded and OTC products as well as the increase in interest income, exchange traded revenues increased $6.4 million or 18% versus the prior year primarily as a result of increased volatility in prices in the U.S.

grain markets while OTC revenues increased $7.1 million or 34% with the growth coming from Brazilian grain market as well as increased activity in food service, dairy and cotton. Our securities segment added $17.6 million or 46% in operating revenues versus the prior year driven by strong performance in equity market making as Sean noted earlier.

This growth in equity market making was a result of increased customer volumes in a widening of spreads as well as a $3.6 million increase in interest income related to our securities lending activities.

In addition our debt trading business added $4.4 million in operating revenues driven by a $2.4 million increase in interest income and our domestic institutional fixed income business as well as increased performance in our Argentina in municipal securities businesses.

Our global payment segment added $1.9 million and operating revenue were 9% to $23.4 million with the number of payments relatively flat with the prior year period but the average revenue per payment increasing 9% versus the prior year.

Fiscal commodity debt is $4.3 million or 38% in operating revenues versus the prior year with growth in both our precious metals and physical ag and energy businesses.

The number of gold equivalent is traded double versus the prior year driving the growth in precious metals revenues while business expansion particularly in cotton grow to growth in physical ag and energy.

The next slide number five represents a bridge from 2017 second quarter pretax income of $14.3 million to $29.5 million, a 106% increase which demonstrates the strong core operating results versus the prior year.

Sean covered the variances in pretax income and our operating segments during his portion of this call but I'll just note a couple of items. While securities segment operating revenues increased 46%, segment income in that business increase $1.1 million or 9%.

Mostly driven by the strong performance in equity market making which was partially offset by weaker performance in debt trading, while interest income in debt trading increased $2.9 million versus the prior year that was outpaced by a $4.4 million increased interest expense.

The $3.1 million negative variance in our unallocated overhead segment was primarily driven increase in variable compensation related the improved overall companies performance as well as an increase in conference expenses related our by annual global sales may be.

Slide number six shows the interest in fee income on our investments in our exchange trade in futures and options business as well as customer balance is held in our corresponding clearing and independent wealth management businesses.

As noted on the slide, our earnings on these balances of increase $5.1 million versus the prior year to $10.8 million as the yield on these balances has increased 70 basis points to a 145 basis points in the current period.

The bottom of the slide shows the potential annualized interest rate sensitivity which the balance is held at the end of the current period based upon an increase in short term rates at variance levels.

As shown a 100 basis point increase in short a term rate has a potential increase our net income by $15 million or $0.79 per share on an annualized basis. Moving on to slide number seven; our quarterly financial report, I'll just highlight a couple of item in note.

Variable expenses represented 62.9% of our total expenses for the quarter well above our target of keeping more than 50% of our total variable expenses, variable in nature. Non-variable expense which are made up above fixed expenses and bad debt expense increased $5.2 million or 7% versus the prior year.

As noted earlier, we reported net income of $22.7 million in the second quarter for a 19.9% return on equity above our stated target of 15%. Finally in closing up the revenue of the quarterly results our book value per share increased $0.32 to close out the quarter at $24.74 per share.

We did not repurchase any of our common stock during the second quarter. Next I'll move on to a discussion of our year-to-date results and refereed to slide number eight yea-to-date operating revenues were up $91.5 million or 24% to $472.8 million in the current year-to-date period. The largest increase was in our CES.

Segment which increased $32.4 million driven by strong growth in exchange traded volumes while our securities segment added $23.2 million in operating revenues versus the prior year.

As a result of increases in equity market making volumes as well as an increase in interest income related to our securities lending and domestic fixed income activities. Our commercial hedging segment added $19.6 million in operating revenues primarily as a result of higher OTC revenues.

Well, our physical commodities and global payment added $5.1 million and $3.4 million respectively. Moving on to slide number nine for discussion of the variance in pretax income by segment for the year-to-date.

The largest increase was seen in our commercial hedging segment which added $14.6 million in segment income driven by the very strong second quarter performance. The growth in CES operating revenues resulted in a $9.6 million increase in segment income versus the prior year.

While global payments added $3.2 million or 13% in segment income versus the prior year day period. These increases were partially offset by modest declines in our securities and physical commodity segment. Finally I'll touch on the year-to-date dashboard which is slide number 10 in the presentation back.

Variable expenses there are above our internal target of exceeding 50% of total expenses coming in at 60.8%. Non-variable expenses increased $8.6 million or 6% over the prior year. Net income was $15.8 million for the current year-to-date period as compared to $17.3 in the prior year.

As noted earlier on an adjusted basis net income was $36.9 million in the current year-to-date period. The return on equity for the year-to-date was 6.9% well our average revenue generated per employee of 591,000 exceeded our internal target. With that, I'd like to turn it back to Sean to wrap up..

Thanks, Bill. Our operating revenues and core earnings have been accelerating for a number of quarters now, as we scaled our business by increasing our capabilities in our client base. We have created a financial platform that connects over 20,000 clients with over 40 exchanges and 100s of execution venues.

We have a scalable platform with high operational leverage, around 50% of incremental revenue for up to the pretax line. We have been steadily increasing our footprint and growing client's acquisition and volumes across our platform which has resulted in the steady and positive trend in our results.

The positive overall trends has not been impacted by improved market conditions with higher volatility and higher interest rates, , unleashing long dormant components of our business model and resulting in what we think is an industry leading ROE.

We believe as these more positive market conditions are return to more normalized situation in the capital market. Since the spike in volatility around the VIX issue, we have seen general in more widespread volatility across different asset process and we also anticipate that interest rate increases are not get over.

All of this is very positive for our business environment long-term. Despite the better overall market conditions we continue to see consolidation in our industry with scale as becoming a bigger issue for smaller players and based on and we continue to focus on the larger clients.

With that, I'd like to turn it back to the Operator and question and answer session.

Operator?.

Operator:.

Okay, well, thanks everyone for participating, and we will speak to you again in three months time. Thank you..

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