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

Bartley Cohen – Private Investor Russell Mollen – Nine Ten Capital.

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

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

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fiscal third quarter ended June 30, 2018. After the market closed yesterday, we issued a press release reporting our results for our third fiscal quarter of 2018.

This release is made available on our website at www.intlfcstone.com as well as a slide presentation, which we will refer to on this call, in our discussion 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 website after the call’s conclusion.

Before getting underway, we’re required to advise you, and all the 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 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 Sean O’Connor, the Company’s CEO..

Thanks, Bill. Good morning, everyone, and thanks for joining our third quarter fiscal 2018 earnings call. We achieved another strong performance for the third quarter of fiscal 2018 with operating revenues up 31% over the prior year quarter and up 27% on a year-to-date basis.

Continued market volatility in some of our key markets resulted in increased customer activity and in some areas, a widening of spreads, which combined with the increases in short-term interest rates and average customer balances, resulted in growth in operating revenues across all of our operating segments, including record quarterly operating revenues in both Global Payments and Clearing and Execution segments.

We are now at a run rate to exceed $1 billion in operating earnings for the first time in the company’s history. Incidentally, our market capitalization also broke through the $1 billion mark during this quarter. Our earnings before tax more than doubled versus a year ago, both on a quarterly and a year-to-date basis.

Net income for the quarter was up 89%, but only up 33% for the year-to-date due to the impact of the tax legislation in Q1. Our diluted EPS for the quarter was a record $1.25 for the third quarter, up 89% versus the prior year and up nearly fourfold since Q1 in 2017.

Again, as a result of the impact of the tax legislation, the year-to-date EPS growth was more muted, up only 30% versus the prior year. Ignoring both impact of the tax legislation in Q1 and the physical coal matter in Q4, our EPS is now just over $4 on a trailing 12 months adjusted basis.

Our return on equity for the quarter was 20% for the second consecutive quarter, which we believe is a best-in-class performance. Just as a reminder, our ROE numbers are calculated on total equity and not tangible equity, which is the way a lot of other financial companies report this statistic.

Using tangible equity would boost these numbers by about 3 percentage points. Looking at the segment highlights. We had strong growth in transactional volumes except for debt trading, which had a tough quarter due to a flat yield curve and the FX Prime Brokerage business.

Global Payments’ volumes were down slightly due to change in how we transact some of our high-volume, low-value clients. We had strong growth in operating revenues across all of our segments, both on a quarterly and a year-to-date basis. Looking at segment income.

We saw exceptionally strong results for our Clearing and Execution Services and Commercial Hedging segments. Our Securities segment was down largely due to a $2.5 million gain on the sale of exchange shares in Argentina recorded within the last year’s comparative quarter.

On the expense side, we continued to focus on maintaining our variable cost model and limited the growth of our nonvariable expenses. To that end, variable expenses were now 63% of total expenses in the current period compared to 57% in the prior period.

Non-variable expenses increased 4% or $2.9 million year-over-year, primarily as a result of a $1.5 million increase in bad debt expense as well as a $1.1 million increase in professional fees. I would like to briefly comment on some items that were announced during the quarter.

Firstly, we acquired Carl Kliem, an interdealer broker based in Luxembourg. This business consists of 40 people that bring a long-standing and diverse client base consisting of over 400 institutions and banks, giving us a meaningful footprint in the EU market.

We believe that our more diverse capability and product set can add value and relevance to these clients and drive revenues making this a nice tuck-in acquisition. In addition, this is a fully regulated business within the European Union, giving us an elegant Brexit solution.

On the Global Payments front, we expanded our footprint by adding an office in Frankfurt to better serve our partnerships with existing clients and banks and push deeper into the European market, which, we believe, is still a significant opportunity for us. In addition, we finally received our upgraded regulatory license in Brazil.

Prior to this, we were operating under broker-dealer license, which limited payments we could do in-house to under $100,000 per transaction. After more than three years, we were granted a full FX license, placing us on an equal foot into the local banks in the region.

This is a very unique capability for an international company that took over three years to achieve. This is a key payments corridor for our growing base of clients and our new capability resulted in immediate threefold increase in revenue in the Brazil market.

Furthermore, we are now able to offer the full global payments capability to all banks and corporations inside Brazil, opening up a very new large market for us.

On the Metals front, as we have mentioned before on these calls, we have restructured and upgraded our Precious Metals business over the last year or two, using simple but effective and now industry-leading technology. This has enhanced the profitability of our business and positioned us as a leader in precious metals.

Our LME business has always been one of our franchise businesses constantly rated number one by customers. However, we believe that our business, while performing very well, needed a refresh and modernization. Over the course of the last quarter, we’ve made significant progress towards this goal.

We’ve restructured the team, brought in new talents, expanded and added to the product offering and merged the business with our Precious Metals business.

We believe that this will allow us to create a Metals division with a robust product offering and enhanced technology capability to provide efficient and fast pricing and a best-in-class customer experience. So with that, I’ll hold – hand you over to Bill Dunaway for a more detailed discussion of the 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.

The top of slide number 3 is a chart, which 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 effect of tax reform and the previously disclosed bad debt on physical coal.

There is no difference between our GAAP net income and adjusted net income for the third quarter of fiscal 2018. The bottom graph shows the strong growth we’ve seen over the last five quarters and our core operating results with the near doubling of our earnings per share and ROE for the current period in excess of our internal target of 15%.

Our net income was $39.8 million and earnings per share were $2.06 for the fiscal year-to-date period, while our adjusted net income was $60.9 million with an earnings per share of $3.18 for the fiscal year-to-date period.

Moving on to slide number 4, which represents a bridge between operating revenues for the third quarter of last year and the current year fiscal third quarter. Operating revenues were $259.8 million in the current period, up $62.2 million, or 31% versus the prior year.

As shown, all operating segments showed revenue growth over the prior year, led by our Clearing and Execution Services segment, which added $23.5 million or 36% in operating revenues, driven by a $22.1 million increase in exchange-traded revenues.

This growth in exchange-traded revenues were driven by both a 55% increase in customer volumes as a result of both market volatility and the onboarding of new customers as well as the $3.9 million increase in interest income.

In addition, our largest segment, Commercial Hedging, had second consecutive strong quarter, adding $20.8 million or 36% in operating revenues versus the prior year. This growth was driven by improved performance in both exchange-traded and OTC products as well as an increase in interest income.

Exchange-traded revenues increased $7.8 million or 24% versus the prior year, resulting from a 23% increase in customer volumes driven by increased volatility from uncertainties surrounding the effect of potential tariffs on the global agricultural and metal markets.

OTC revenues increased $9.6 million or 53% versus the prior year with growth coming from Brazilian grain market as well as increased activity in food service, dairy and energy. Interest income in this segment increased $3.4 million as a result of an increase in short-term rates and a 5% increase in average customer equity.

Our Securities segment added $9.9 million or 25% in operating revenues versus the prior year, driven by an $11.9 million increase in Equity Market-Making, as volumes in this business increased 42% and interest earned in securities lending increased $3.7 million.

This growth in Equity Market-Making was partially offset by a $1 million decline in debt trading. Interest income and debt trading added $2.8 million versus the prior year. However, trading results in our domestic and Argentinian fixed income businesses declined as a result of difficult market conditions.

In addition, as Sean noted in the prior year, benefited from a $2.5 million gain in the sale of exchange shares in our Argentine Debt Trading business.

Our Global Payments segment added $3.5 million in operating revenues or 16% to a record $26 million, with the number of payments relatively flat with the prior year period but the average revenue per payment increasing 18%.

This growth in operating revenue was a result of an increase in both the number of active clients and the total dollar value of payments made versus last year. Physical Commodities added $2.9 million or 24% 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 ounces traded doubled versus the prior year, driving the growth in Precious Metals while growth across multiple commodities including cotton, cocoa, edible oils and energy, drove the growth in Physical Ag and Energy.

The net gain in our unallocated overhead operating revenues includes a $2.6 million gain on economic hedges in place against the effect of the devaluation of the Argentine peso.

The next slide number 5 represents a bridge from 2017 third quarter pretax income of $15 million to $32.9 million in the current period, a 119% increase which demonstrates the strong core operating results versus the prior year.

In addition to the growth in operating revenues in our business segments, the current quarter benefited from a $2 million judgment received in final settlement of our claim in the Sentinel Management Group’s bankruptcy proceedings.

Within our operating segments, our Commercial Hedging segment added $9 million in segment income, driven by the increase in operating revenues, partially offset by a $2.2 million increase in bad debt expense.

Our CES segment added $7.2 million in segment income, while our Global Payments and Physical Commodities segment added $3.1 million and $800,000 in segment income, respectively. Physical Commodities segment benefited from a $700,000 recovery of bad debt expense booked in the second quarter of 2018.

These gains were partially offset by weaker performance in debt trading where segment income declined $2.6 million. While interest income in Securities segment increased $6.6 million versus the prior year, that was outpaced by a $7.8 million increase in the interest expense.

Slide number 6 shows the interest in fee income on our investments of customer funds in our Exchange-traded Futures & Options businesses as well as the customer balances held in our corresponding Clearing and Independent Wealth Management businesses.

As noted on this slide, our earnings on these balances have increased $6.3 million versus the prior year to $13.8 million, as our yield on these balances has increased 87 basis points to 176 basis points in the current period.

The bottom of this slide shows the potential annualized interest rate sensitivity, with the – which the balances held at the end of the current period based upon increase in short-term rates at various levels.

As shown 100 basis point increase in short-term rate has the potential to increase our net income by $15.3 million or $0.81 per share on an annualized basis. Moving on to slide number 7. Our quarterly financial dashboard, I’ll just highlight a couple of items of note.

Variable expenses represented 62.6% of our total expenses for the quarter, well above our target of keeping more than 50% of our total expenses variable in nature.

Non-variable expenses, which are made up of both fixed expenses and bad debt expense, increased $2.9 million or 4% versus the prior year, primarily as a result of the increase in bad debt expense discussed earlier as well as higher professional fees.

As noted earlier, we reported net income of a record $24 million in the third quarter for a 20.1% return on equity, above our stated target of 15%. Finally in closing, after review of the quarterly results, our book value per share increased $0.74 to close out the quarter at $25.82 per share.

We did not repurchase any of our common stock during the third quarter. Next, I’ll move on to a discussion of our year-to-date results and refer to slide number 8. Year-to-date operating revenues were $153.7 million, up 27% to $732 million in the current year-to-date period.

The largest increase was in our CES segment, which increased $55.9 million, driven by strong growth in exchange-traded volumes, while our Commercial Hedging segment added $40.4 million in operating revenues.

Securities segment added $33.1 million in operating revenues versus the prior year as a result of increases in Equity Market-Making volumes as well as increases in interest income related to our securities lending and domestic fixed income activities. Our Global Payments and Physical Commodities segment added $6.9 million, $7 million, respectively.

Unallocated overhead revenues increased $9.4 million as a result of a $3.1 million in gains on economic hedges against Argentine peso as well as the prior year period including a $5.8 million in unrealized losses on interest rate swaps and U.S. Treasuries held as part of our interest rate management program.

Moving onto slide number 9 for a discussion of the variance in pretax income by segment for the year-to-date period. The largest increase was seen in our Commercial Hedging segment, which added $23.6 million in segment income, while the CES segment added $16.8 million.

Our Global Payments added $6.3 million, while the Physical Commodities segment added $600,000 in the segment income versus the prior year-to-date period. Segment income in our Securities segment declined $3.4 million, driven by an increase in interest expense and weaker performance in our domestic and Argentinian debt trading businesses.

Finally, I will touch on the year-to-date dashboard, which is slide number 10 in the presentation deck. Variable expenses are above our internal target of exceeding 50% of our total expenses coming in at 61.4% of total expenses. Non-variable expenses increased $11.5 million or 5% over the prior year.

Net income was $39.8 million for the current year-to-date period as compared to $30 million in the prior year, while adjusted net income was $60.9 million. The return on equity for the year-to-date period was 11.3%, and on adjusted basis, our ROE was 15.7%. With that, I would like to turn it back to Sean to wrap up..

Thanks, Bill. It’s clear that our core earnings have been accelerating for a number of quarters now, as we have scaled our business by increasing our capabilities and client base. We have a scalable platform with high operational leverage with around 50% of incremental revenue dropping to the pretax line, which has driven our bottom line and ROE.

We believe that these more positive market conditions are returning to a more normalized situation in the capital markets with moderate volatility and interest rates. These market conditions have demonstrated the earnings power of our business model.

Despite better overall conditions, we continue to see a consolidation in our industry where scale is becoming a big issue for small players and banks continue to focus on larger clients. We have created a financial platform that connects 20,000 commercial clients and over 100,000 retail clients with over 40 exchanges and hundreds of execution venues.

We provided an integrated financial offering with high touch on electronic execution, market intelligence and post-trade clearing. Our integrated offering across these asset classes allows us to monetize this network with commissions and spreads through trade execution as well as earning interest on our $3-billion-plus of client balances.

Our ability to execute and clear almost any asset class and market is the unique offering in the mid-market financial services space and it’s driving client acquisition and allowing us to earn superior returns.

We have now achieved a fourfold growth in EPS since Q1, 2017 and a 20% ROE on stated book value for two consecutive quarters, which we believe is a best-in-class performance. We’re also very pleased to have broken through the $1 billion in market capitalization.

While it’s somewhat of an artificial barrier, we do feel it is an important milestone for our company. With that, I’d like to turn it back to the operator to open the question-and-answer session and let’s see if we can break out trend and get a question this time..

[Operator Instructions] And our first question comes from the line of Bartley Cohen from – as a Private Investor..

Hi, guys. Congrats on the quarter. Sean, my question was about Global Payments. I remember a few years ago, you were talking about like what inning you thought the business was in – as far as like the addressable market.

Do you still feel like this is the early innings? Or do you think the addressable market has expanded?.

Yes. So I think over time what we’ve done is we’ve obviously created a broader and better network. We now cover almost every market. We do it with scalable technology so we can handle more volumes. So a lot of that work has been put in place. We now have the largest banks in the world on our platform.

The real kind of scalability of this relates to how banks are actually doing the business. So if you – we sat with a couple of banks, and we said to them, okay, for these 130 markets tell us all the payments you’re sending to those markets, and how you are doing it.

And what we find is most of them are doing what we don’t want them to do, which is they send dollars to a correspondent bank, the correspondent bank charges them a opaque and very wide spread. And they have no control over the pricing they give to their clients.

And about even now, given where we are with all these banks and trying to educate them, like 5% of the payments are being done the way we want. So if you have to look at that in terms of addressable market, there’s still 95% of the payments we think these banks are doing in a very inefficient way.

So our challenge is try to get the banks to understand, pull this sort of curtain away, show them exactly kind of way they’re losing money. I think that banks have a deep desire to control the pricing to their clients because they’re on the hook.

And if we can get them to change how they have done business for these decades, I think our addressable market is huge. But it’s an education process, it takes a long time. The easy thing for us is to pick up the business where they’re aware of the inefficiencies in the market, and they’re looking for us to help them.

The longer-term challenge is can we change these banks and how they do the bulk of their business. And we slowly making incremental inroads into there, but it’s a big addressable market for us..

Thanks. That’s it. Congrats, again on the quarter..

Thanks very much. Appreciate it..

And our next question comes from the line of Russell Mollen from Nine Ten Capital. You may begin..

Hey, guys.

How are you doing?.

Hey Russell, good, and you?.

Good. Can you guys describe a little bit – I mean, you had a few comments there. But on the restructuring and the expansion of the metals through.

Maybe just kind of some more tangible examples, kind of, what you’re – what you saw you didn’t have, or what you’re trying to change and capture today that you didn’t have before?.

Yes.

I think, in general, what we’re trying to do across all of our businesses is make sure that we are thinking about changing, being innovative, staying relevant to our customers, and, certainly, that’s a protection for us from being disintermediated, right? Our businesses in some parts are pretty old-fashioned kind of relationship call-up-on-the-phone type businesses or at least they were 10 years ago, and we all know that, that status quo is probably not going to stay exactly the way it is.

So, honestly, we are looking at all of our businesses and trying to, sort of, challenge ourselves to get ourselves up the curve before someone else forces us to do that, which is not always easy, right? Because when things are going well, people’s view is, well, why should I change anything? So this isn’t necessarily isolated to Metals, but we have made some structural changes there.

So I think on the LME slide, we had a great business, a team that had been together for a long time and have been doing business for same exact way for 20 years probably.

And that’s good, I mean, they had a great business and great relationships, but we were trying to push hard and are pushing hard to make sure we think about how we can do the smartest. So we have put this business under the head of our Precious Metals business, who saw the light about three years ago in Precious Metals.

He was probably – I’m sure Barry wouldn’t mind me saying this, but he probably was one of our stone-age guys, so all the guys have done the same thing the same way for 30 years, and he certainly saw that he had to change, and he has made a remarkable change to that business, where we have launched all sorts of platforms. We’ve been the innovator.

We’ve been the disruptor in that market. Now it’s a small market, but I think people generally regard us as, kind of, a leader in that market in terms of innovation and how we’re dealing with clients. And everyone else just did it the same way for 30 years. So we thought it was a good time for us to think about the LME business.

The industry is pretty antiquated. Generally, there’s lots of people there who have been there for many, many years. And we’re trying to just do things differently and use kind of the experience that we had in precious metals. And I think we’ve got a very energized team right now.

I mean, they were a little resistant in the beginning because no one likes change. We had a couple of people leave because they didn’t like that. And we’ve found a whole bunch of new people. And we’ve added to the product offering.

For example, we didn’t have an options capability in that business because traditionally the team there didn’t like doing options. We’ve just rolled that out and it has really hit the ground running, and we’ve immediately made money almost from the first month. We’ve changed how the desk executes. We’re trying to give more efficient pricing.

We saw in to build some electronic interfaces to our clients. So I’m not sure all of this will necessarily work, but I think if we’re not innovating and we’re not trying new things, we increase the risk that someone else is going to figure it out for us, right? So we’re putting a big push on business.

Great business, absolutely a franchise for us and a business we think we can grow and expand..

So on the Precious Metals side because some of the things you’re talking about in terms of that you’ve changed is that some of those electronic platforms, some of those announcements you had, you are pushing for more execution there?.

So, I mean – this is going back now two years and I think we did have conversations on some of the calls about this. But we basically created two platforms that are sort of linked. The first one is just a straightforward execution platform.

And we now find we have some of the larger volumes on our execution platform of anyone and we put this in front of our clients that we used to actually calling their desk up, getting a trader to answer the phone and execute a price. At one point, we had 12 traders in the business. I think now we have two or three traders in the business.

Our volumes have probably gone up tenfold. We’ve narrowed in pricing, which customers like, and we’ve become the go-to place to find price discovery and just executing trades in the gold market. And then on the Physical side, which is an even more integrated market, it was sort of a call-around market.

It was whole bunch of guys who would call each other, what gold do you have? Where’s the inventory? What’s it going to cost to send it to the location I want? And it was just a call-around market, it was crazy. So we created a platform where everyone posted the inventory, everyone can see it.

We sort of act as the middleman so no one knows who the party is but they can see what’s out there. It automatically prices everything to the location you wanted to, including the freights and the cost of transport and stuff. And it’s just made it easy.

Someone can just click on our platform, they can instantaneously see where all the metal in the world is. And instead of calling 10 people and spending three hours, you can do it quickly. And people like that, and no one ever thought of it. And it’s not – I mean, this isn’t rocket science.

This is just simplifying workflows and making it easy for people to deal with us. And fundamentally, in the modern sort of Google, Facebook, Amazon world, people just want ease of use. They don’t have to pick up the phone to 10 people. So those are the kind of things we’ve done.

So please don’t think that we’re creating some black box or some rocket science here.

This is all just a question of slow incremental change for the better and not revolutionary change, right?.

Yes. Got it. Thanks..

Okay..

[Operator Instructions].

All right. It looks like we don’t have any more questions. So thanks, everyone, for your attendance and enjoy the rest of summer. And we will be speaking to you in December next, I guess. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a great day..