Good morning, ladies and gentlemen, and welcome to the INTL FCStone Third Quarter 2019 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Bill Dunaway, CFO..

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fiscal third quarter ended June 30th, 2019, after the market closed yesterday, we issued a press release reporting our results for the third fiscal quarter of 2019.

This release is available on our website at www.intlfcstone.com, as well as a slideshow presentation we will refer to on this call and our discussions of the 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 are 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 meanings of the 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 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. Participants 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 2019 third quarter earnings call.

Market conditions continue to be generally less favorable during the quarter under review than they were a year ago, especially for our equity capital markets business that was positive for our commercial hedging business due to the unusually wet weather we experienced over the planting season in the US.

In the last week or so, we have seen some real volatility around interest rates -- interest rates, as it appears around a competitive currency devaluations was about to start combined with an acceleration of the trade war.

We had a 25 basis point cut and it now appears that may be followed with a further cut, which of course negatively affects the interest and fee income we receive on our customer floats. But this could be offset by the positive impact of increased volatility in these markets.

Our third quarter earnings were $16.3 million or $0.84 a share, down 32% or $7.7 million from a year ago. As you've seen from our recent announcements, we have made a number of small acquisitions and organic growth initiatives in the last year.

We run our business for the long term and believe in prudently investing to strengthen and grow our franchise.

We look to make disciplined acquisitions where we can add value for our shareholders and oftentimes [indiscernible] us acquiring businesses at a low price, but requires us to absorb costs and some negative earnings until we restructure and integrate the new capability. Organic expansion is also [indiscernible] until critical mass is achieved.

This is being the model we have followed for a number of years now and we believe it is a prudent and disciplined way to grow and expand our business. During the third quarter, the year expansion initiatives collectively contributed a $3.5 million on a pre-tax loss for the quarter and around $7.3 million for the year to date period.

These losses were anticipated and we believe these businesses are progressing to break even and in the medium term will drive earnings growth. In addition to the $3.5 million loss from the new initiatives, we recorded a $2.5 million unrealized mark to market loss in hedging our physical gold inventory.

This happens periodically and generally reverses quickly. This amount is in aggregate to a $6.1 million pre-tax drag, around $0.24 a share on the third quarter's results and explains the lion's share of the delta versus the prior year period, which also included the sensible lawsuit settlement of $2 million.

So netting off all of these items, our core earnings were slightly below those of a year ago, although down slightly on a run rate basis for the current fiscal year. For the year to date, our earnings were up 45% at $57.9 million or $2.99 per share, but that is largely a result of last year's tax adjustment for the new tax legislation.

Pre-tax and adjusting for the items mentioned above, we are roughly in line with last year's record pre-tax results. On a year-to-date basis, our ROE is 14.4%, very close to our long term target. Some highlights before I hand over to Bill.

Commercial hedging was the positive standout for the quarter with revenue up 11% due to some weather-related volatility mentioned above, which resulted in a 70% increase in segment income. OTC revenues where we enjoy higher margins were up a strong 19%. For the year to date, revenues and segment income were roughly unchanged from a year ago.

Our global payments business continues to grow with an 8% increase in revenue capture which, combined with an increased volume drove a 7% increase in segment income.

The addition of our swift hosting business, which we purchased last year, pushed up fixed costs and also incurred a small loss in the quarter which should be reversed in the current year -- in the coming year. On a year to date basis, segment income was up 17%.

Securities was a mixed bag with our rates business recording revenues up 83%, one of the best quarters in a number of years. And our institutional fixed income business overall showing strong segment income growth.

Offset against that was a weak quarter for the equity capital markets business exacerbated by startup costs related to prime brokerage and startup of the domestic institution equities business and also losses related to the newly acquired GMP businesses that was restructured.

It should be noted that the large increase in securities revenue was due to the addition of the GMP Securities business, as well as the growth of the securities lending business, which is a very low margin activity.

Operating revenues for our physical commodities business were similar to last year, although segment income was down largely due to the unrealized $2.5 million mark to market loss on hedging our inventory which I mentioned earlier. Excluding this item, segment income was roughly unchanged, although it's up 64% from a year ago.

Our Clearing and Execution segment, income was down 13% due to revenue declines in both the futures and options business as well as FX prime brokerage. Derivative voice brokerage, correspondent clearing and wealth management recorded good gains and revenues.

As mentioned last time, we'll be acquiring the futures and options clearing business of UOB Bank in Singapore. This is a well-established business owned by one of the premier banks in the region which will give us real critical mass in Asia. We are excited by this, which we believe is a transformational step for us in Singapore.

We are currently going through the regulatory process, but expect to close in Q4 or right after our fiscal year end. With that, I'll now hand you back to Bill Dunaway for a more detailed discussion on 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 three, which shows our performance over the last five fiscal quarters. The chart depicts our net income, earnings per share and return on equity over the last five quarters.

As shown, net income in the third quarter of 2019 was $16.3 million, which represents a $7.1 million decline over the immediately preceding quarter and a $7.7 million decrease over the prior year.

Moving on to Slide number four, which represents a bridge between operating revenues, for the third quarter of last year to the current period, operating revenues were $283.4 million in the current period, up $23.6 million or 9% over the prior year.

This growth was led by our security segment which added $24.3 million or 49% in operating revenues versus the prior year. Within this segment, equity capital markets added $6.5 million in operating revenue versus the prior year, primarily as a result of a $7 million increase in conduit securities like lending activities.

Excluding these activities, equity capital market's operating revenues declined $0.5 million, despite a 17% increase in the dollar volume traded, as the lower market volatility drove a decline in our spread capture portrayed.

In this segment, as Sean mentioned earlier, our debt capital markets had a strong quarter, adding $18.5 million in operating revenues versus the prior year, primarily driven by increased activity in our domestic fixed income business, as well as improved performance in our Argentina business and $2.9 million of operating revenues contributed by the newly acquired GMP Securities.

These gains were partially offset by $1.6 million decline in our municipal securities business. Operating revenues increased in our commercial hedging segment by $8.5 million versus the prior year to $86.4 million.

Exchange traded volumes increased 12%, driving a $3 million [Technical Difficulty] transactional revenues primarily in the domestic agricultural markets.

In addition, over-the-counter volume increased by 21% versus the prior year, driving a $5.1 million increase in OTC transactional revenues off the back of increased activity in both the North and South American grain markets.

Finally, interest income in this business increased 4% to $7 million driven by higher short term rates, which was partially offset by a 7% decline in the average client equity just over $900 million.

Our Global Payment segment had another strong quarter, adding $2.9 million or 11% versus the prior year to $28.9 million, as the number of payments made increased 2% and the average revenue per payment increased 8% versus the prior year.

This growth was driven by increased activity from our existing international banking clients, as well as the onboarding of several new banking clients during the third quarter.

Physical commodities declined $200,000 or 1% in operating revenues versus the prior year driven by $800,000 decrease in precious metals as a result of the $2.5 million unrealized mark-to-market loss, Sean discussed earlier.

Excluding this unrealized loss, precious metals' operating revenues increased $1.8 million or 25% -- on 25% growth in the number of ounces traded. In addition, physical ag and energy operating revenues added $600,000 versus the prior year due to increased activity in commodity financing programs.

Finally, operating revenues in our clearing and execution services segment declined $10 million or 11% as compared to the prior year. Exchange traded revenues declined $12.2 million as volumes decreased by 17% and the average rate per contract declined 16% versus the prior year.

Partially offsetting the decline in exchange traded volumes, interest income in the exchange traded business increased $800,000 driven by higher short term rates, which was tempered by a 19% decline in the average client equity to $1 billion.

In addition, operating revenues are FX prime brokerage business declined $1 million to $4.1 million in the current quarter as lower market volatility drove a 19% decline in volumes.

Partially offsetting these declines, correspondent clearing operating revenues increased $700,000, driven by an increase in interest in fee income earned on client balances driven by higher short term rates.

In addition, independent wealth management and derivative voice brokerage operating revenues increased $1.7 million and $800,000 respectively versus the prior year.

Finally, the $1.9 million decline in unallocated overhead operating revenues is primarily related to the net fluctuation in market value of economic hedges held against the Argentine peso and exchange stock held for preferential clearing rates from the prior year period to the current period.

The next slide, number five, represents a bridge from 2018, third quarter pre-tax income of $32.9 million to the net pre-tax income of $21.6 million in the current period.

Commercial hedging segment income increased $4.4 million as a result of the $8.5 million increase in operating revenues, combined with a $1.7 million decline in bad debt expense, which was partially offset by increases in variable and fixed compensation benefits of $2.2 million and $600,000 respectively.

Global Payments added $1 million in segment income to $17 million as a result of the increase in operating revenues, partially offset by a $1.4 million increase in non-variable expenses, as the result of the acquisition of PayCommerce and the addition of several new front office employees.

While operating revenues increased in our security segment, segment income declined $2.1 million versus the prior year.

Within this segment, equity capital markets income declined $3.6 million as the majority of the operating revenue growth in our conduit securities lending activities was offset by higher associated interest expense and our non-sec lending activity suffered from a weaker performance in our principal equity trading business as well as an increase in costs related to the startup of our equity prime brokerage and institutional sales businesses.

Segment income in our debt capital markets business increased $2 million driven by the increase in operating revenues, which was partially offset by higher interest expense, weaker performance in municipal securities, and increased costs associated with the acquisition of GMP Securities.

Physical commodities declined $2.3 million versus the prior year, primarily driven by unrealized mark to market loss in precious metals inventories mentioned earlier.

Moving on to the CES segment, while operating revenues in our CES segment declined $10 million versus the prior year segment, income declined a more modest $1.8 million due to increase in interest income as well as the lower transaction base clearing expenses in introducing broker commissions.

Finally, the $10.5 million increase in net cost in unallocated overhead were driven by the $1.9 million decline in operating revenues noted earlier, a $1.4 million increase in the costs associated with our recent acquisitions and initiatives, as well as increased headcount in several administrative departments and hired non trading technology and support costs related to various IT and client engagement systems.

Moving on, slide number 6 shows the interest in fee income on our investment of client funds and our exchange traded futures and options businesses, as well as the client balances held in our correspondent clearing and independent wealth management businesses.

As noted on this slide, our earnings on these balances have increased $2.8 million versus the prior year to $16.6 million as their yield on these balances has increased 61 basis points to 2.37% in the current period. Interest income on these balances remained relatively flat, versus the immediately preceding second quarter of 2019.

As Sean noted earlier, the Fed recently dropped short term rates by 25 basis points, and the bottom half of this slide shows our sensitivity to movements in both interest rates on our interest and fee income earned on client balances, both on upward and downward movements in short term rate.

Moving on to slide number seven, our quarterly financial dashboard, I would just highlight a couple of items. Variable expenses represented 59% of our total expense 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 $12.8 million, primarily driven by the recent acquisition of the GMP Securities, PayCommerce Financial Solutions, Carl Kliem and CoinInvest as well as as the launch of our new securities, prime brokerage and institutional sales initiative.

We reported net income of $16.3 million in the third quarter for an 11.6% return on equity below our stated target of 15%. Our total assets increased 38% versus the prior year, primarily due to increased activity in our domestic fixed income and securities lending activities.

Finally in closing, after the review of our quarterly results, our average revenue per employee declined 5% to $605,000 on an annualized basis, but still remains above our target of $500,000, and our book value per share increase $4 to close up the quarter at $29.83 per share.

Next, I'll move on to a discussion of year to date results and I'll refer to slide number 8. Year to date operating revenues were up $86.6 million or 12% to $809.2 million in current fiscal year. All segments of our business reported increases in operating revenues as compared to the prior year to date period with the exception of the CES segment.

The largest increase was in our security segment which added $67.4 million driven by growth in equity capital markets volumes, as well as increase in interest income related to our securities lending and domestic fixed income activities.

Our global payments and commercial hedging segment added $12 million and $9.1 million respectively, while our physical commodities segment added $7.8 million versus the prior year to date period. CES operating revenues declined $1.4 million versus the prior year.

Finally, the decline in unallocated overhead operating revenues is primarily related to the net fluctuation in the market value of economic hedges held against the Argentine peso, as well as the increase in elimination entries to eliminate gross ups [ph] among our segments.

Moving on to slide number nine for discussion of the variance in pre-tax income by segment for the year to date period, the largest variance was seen in our global payment segment, which added $7.3 million versus the prior year as a result, the 5% growth in the number of payments made as well as a 9% increase in the average revenue traded.

Our physical commodity segment added $4.7 million versus the prior year as the result of the increase in operating revenues, as well as a positive $3.4 million variance in bad debt expense on physical coal.

In addition, the CES segment added $4.3 million in segment income driven by the $2 million Barclays last look net settlement received in the first quarter as well as improved performance in the Correspondent Clearing and derivative voice brokerge business.

Segment income in our Securities segment increased $1.9 million as a result of a strong operating revenue growth noted earlier, which was tempered by higher interest expense in our institutional fixed income and securities lending activities as well as declines in performance in our municipal securities business.

Modestly offsetting these increases, commercial hedging segment income declined $800,000 as compared to the prior year.

Finally, the $21.5 million increase in net cost in the un-allocated overhead were driven by the decline in operating revenues noted earlier, up $4.4 million increase in the costs associated with our recent acquisitions initiative, as well as increased headcount in several administrative departments and higher non-trading technology and support costs related to various I.T.

and client engagement systems. Finally, I will touch on the year to date dashboard, which is slide number 10 in the presentation. Variable expenses are above our internal target of exceeding 50% of total expenses coming in at 59.7% of total expenses.

Net income was $57.9 million for the current year to date period as compared to $39.8 million in the prior year. With the prior year to date period, including a $20.1 million charge related to tax reform. The return on equity for the year to date period is 14.4%, slightly below our internal target of 15%.

With that, I would like to turn it back to Sean to wrap up..

Thanks, Bill. The improving conditions of 2018 seems to have given the way to slightly more challenging environment for us right now with an outlook for lower interest rates, but perhaps more volatility and improved trading conditions.

We are in many ways in uncharted territory with lots of cross-currents and unknowns, but we remain laser focused on serving our clients and the challenges while facing these markets. We continue to prudently invest and grow our franchise.

And while this can [indiscernible] performance, as it did this quarter, we are focused on the long term and confident that these modest investments will pay off well for us down the line.

We are a financial network that connects 20,000 institutional and commercial clients and over 80,000 retail clients with the global markets, which include 40 derivative exchanges, most international and domestic equity and fixed income markets, foreign exchange in over a 175 countries and a wide range of financial swaps.

Like any network, it becomes exponentially more valuable as we add desired markets and capability. In addition to connecting these clients to these markets, we also clear custody and settle their trades, which is durable, value business which is increasingly unique and requires capital systems and infrastructure.

This is a capability that is hard and expensive to replicate and in many ways has a motive [ph] around this, and is becoming more valuable as consolidation in our space continues. With that, I'll turn it back to the operator to open the Q&A session.

Operator?.

[Operator Instructions] Your first question is from the line of Bill Dezellem [ph]..

Thank you. A couple of questions.

First of all, would you talk about -- in more detail about the $3.5 million loss on the acquisitions and strategic initiatives?.

Sure. So that is a combination of two things. We started up two -- we started organically two initiatives one is on the prime brokerage side. We've hired a team of people. We believe we have the infrastructure to support the growth of that business. It's a missing customer segment for us.

That obviously entails some costs because you get the people up front and you get the revenue later. We think it is an important add for us. So that is proceeding well. In addition, we are expanding into the US institutional equities business.

We already have great touch points with a lot of these institutions on the international side, on the rates and fixed income side and just looking to expand our business there. But again, when you hire teams of people, you get cost before you get the revenues.

So on most of the initiatives, that is just a straight kind of cost or cash burn until those businesses reach break even, which we think that it will pretty soon. And then on the acquisition side, we tend to buy businesses that we think are attractively priced and businesses that we think we can turn around.

So rather than going and paying huge premiums for businesses that are operating very well, our view is we don't -- we go on to add a lot of value in that instance, the seller is extracting full price. We get a [Technical Difficulty]..

Sean, are you there and if so, you have gone quiet..

Yes, I'm sorry, it sounds like we might have lost Sean there real quick..

His line is still connected into the call..

Okay, I'll try to continue on there where Sean left off. So, you know, it's mainly related to the acquisitions that we've started to make.

You know, early last calendar year with the Carl Kliem acquisition, which really represented our, you know, our breakthrough strategy and then continued on with the acquisition of PayCommerce and CoinInvest and then most recently, GMP Securities, just rounding out our, you know, our overall capabilities.

And then, you know, certainly we over time, we start up new initiatives within organically within our business, and so, you know, we've taken on the project that's starting up kind of equity prime brokerage business and equity -- institutional sales with an equity, which is something that we see as key ways to grow our business going forward.

So, you know, it's mostly just related to the cost of those businesses while we try to get those up and running some of those acquisitions that we're doing, you know, were often buying businesses that we need to look at the cost and also look at opportunities to cross-sell growing in. So they will take some time for us to integrate..

Bill, would you be able to split that $3.5 million between the businesses that you have purchased versus the organic startups that are costing you money?.

You know, we haven't put that in the disclosures as now. But, you know, I think that it's probably two thirds, one third with two thirds of it being acquisitions and one third being startups..

Great, thank you. Let me shift, if I may, to the Global Payments business, volumes were only up 2%, which is -- which seems low relative to the activity taking place in the currency arena.

Would you talk to that? And then secondarily, do you see the ongoing trade issues benefiting or hurting volumes in that business, or is it even a relevant factor?.

Sure.

I do think that some of the revenue -- some of the volume growth that we've seen here is coming from the institutional -- the international bank clients that we have, and then we've seen some of that derived from kind of M&A activity and capital transactions in the international markets that we end up making the payments for those banking clients.

And I think we have seen some of that being tempered a bit..

Sorry, guys. My line dropped. Anyway, keep going Bill..

Okay, and so we have seen some of that being tempered a bit here in the most recent quarter. With the kind of geopolitical and the international and the environment being with the trade wars, etc and that dampened in a bit.

I think that perhaps you could see a bit of that going forward, but it's still kind of remains to be seen whether or not, that'll be a drag going forward, and I think that the addition of -- we still have a strong pipeline of new banks coming in and still quite a few banks that have been brought on that are still kind of in their infancy of getting started and taking on more and more payments in more and more countries from us..

And then let me shift, if I could to LIBOR that is going to be ending at some point here.

What impact, if any, does that have on your business or is it we need to simply be finding another measurement to put the OTC contracts in place?.

Sean, you are want me to take that?.

Yes, go ahead, Bill..

Okay. You know, I don't anticipate it having a huge impact on us. I mean, we do have some bank lines that are tied to LIBOR and we do a limited amount of interest rate swaps with clients hedging. But, I think they'll be just a pivot to another measurement in that space. So we don't -- I don't see it as having a material impact for us..

Great. Thank you..

Sure. Thank you..

[Operator Instructions].

All right.

Operator, do we have any other questions?.

I am showing no further questions at this time. I will now turn the conference over back to Sean O'Connor..

Okay. Well, thanks everyone. Enjoy the rest of the summer and we'll be speaking to you for our fiscal year-end call. Thank you..

Thank you..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect..