Good day, ladies and gentlemen, and welcome to the INTL FCStone Second Quarter 2012 Earnings Call. Just a reminder that today's call is being recorded. At this time, I would like to hand the call over to Mr. Bill Dunaway. Please go ahead, sir.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone Inc. Welcome to our earnings conference call for the second quarter of fiscal 2012 ended March 31, 2012. After the market closed yesterday, we issued a press release reporting our results for the fiscal second 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 discussions of our quarterly and year-to-date results. The slide presentation is available by clicking on the Investor Relations link on the website and then going into the Events and Presentations page. 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, I'd like to cover a couple of housekeeping items. On these conference calls and in the Management's 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., and which from now on I'll refer to as GAAP, that carry derivatives at fair market value while physical commodities inventory at the lower of cost to market value, may have a 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 did 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…

Thank you, Bill, and good morning, everyone. For the Q2 2012, we produced a GAAP profit from continuing operations of $2.4 million and a mark-to-market or adjusted profit, which is the way we look at it, of $3.8 million. This was significantly better than the immediately preceding quarter, Q1, where we recorded a small GAAP loss of $500,000 and a mark-to-market loss of $2.4 million. A year ago, we had adjusted earnings of $6.6 million. Our adjusted operating revenues were $122 million, an all-time record for the company. This represented an increase of $23 million or 23% from a year ago and up $29 million or 31% from the previous quarter. These results, while improved from Q1, are significantly below our expectations and perhaps it would be helpful as we tried to do in the last call to lay out the key drivers for these results over the last couple of quarters. Firstly, we took a decision about a year ago to undertake a fairly meaningful expansion, which encompass ramping up our activities in Europe and Asia, leveraging the infrastructure we had out there, obtaining LME membership to leverage our physical metals business. And, during the course of this expansion, we were presented some attractive opportunities in the form of Ambrian Commodities, and then later the MF Global/LME team. This made the scale of this expansion much more significant. While not planned and anticipated, we believe that this was an opportunity to transform our capabilities. This expansion added significant cost to our business, as most of these undertakings were in effect greenfield operations including the LME business, where we have to start again with each customer. And obviously, in these situations, you get the cost a long time before you see the revenues. The second point is general market conditions…

Thank you, Sean. I would 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 the 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. Adjusted operating revenues were $121.9 million for the current period, up 23% from the $99 million in the second quarter of 2011. Adjusted operating revenues were $93.1 million in the first quarter of this year. Every segment of the company experienced growth in adjusted operating revenues in the second quarter as compared to both the prior year, as well as the first quarter of 2012 with the exception of the Foreign Exchange segment, which was flat with the prior year and down 27% versus the first quarter. Operating revenues for the first -- the second quarter includes the realized gain of $600,000 on interest rate swap positions entered into to manage a portion of our aggregate interest rate position, which represents the 2 cash flows of these swaps. In addition, we recorded a mark-to-market gain of $1.1 million on the current period. So the net P&L effect of these swaps in the current quarter was $1.7 million pretax gain. As of March 31, 2012, we had $865 million in notional LIBOR-based interest rate swaps outstanding. Adjusted operating revenues in our core commodity and Risk Management Services segment increased 23%, from $55.5 million in the prior year to a record $68 million in the second quarter of 2012. Adjusted operating revenues were $46.8 million in the first quarter of 2012. Exchange traded volumes were 967,000 contracts, which was relatively flat with the…

Thanks, Bill. So we're certainly not happy with the level of profitability we have in Q2 but we are pleased with the very significant improvement in our results over Q1 and also with the growth, the material revenue growth we're seeing. And largely driven by some of these expansion activities we started a year ago that are starting to deliver results and gather momentum. Better market conditions combined with a continued ramp up of our new initiatives should drive revenue still higher, which will have a meaningful impact on our bottom line and deliver the kind of results we know we're capable of. Our aggressive approach to take advantage of short term opportunities to grow our business and franchise has definitely hurt our short-term performance. However, as I said earlier we manage our business for long-term results and not for the next quarter, and we believe that we've been able to take some transformational steps at very attractive costs. We believe that the risks associated with these steps have been justified and will provide significant payoff down the road in terms of growth and profitability. So with that, happy to take any questions. Operator?

[Operator Instructions] And we'll take our first question from Greame Rein, Bares Capital.

I have a few questions for you. The $5.4 million in revenue from MF Global metals, how much of that was the ring dealing team and how much of it was sort of signing up some of the old customers they've and making progress on that front?

Well, first of all, I don't think we want to call it the MF team anymore, because it's the LME team. And as those are combinations, it's largely the ex-MF guys but also the Ambrian guys. So let's just call it the LME team. I would say the split though is probably 60/40 in favor of the ring dealing team roughly. I mean, we do have the specific number somewhere but I don't have them in front of me. Yes, the ring dealing team were less -- I mean, that business doesn't require a lot of work with the customers. I mean, there's very little documentation. It's a give up business. You don't have to repay for anyone. And as long as you're in good standing in the ring and the individuals concerned have the relationships, you can basically be in business immediately. And in fact, the very first day in the office, the ring dealing team turned a profit. The ring dealing with commercial customers that's a longer-term process. You've got to get paper work in place. The customers want to know who they're dealing with so that's just a longer-term process. But that's ramping up pretty well now. So we're pleased with that.

Okay. In terms of the cost structure, do you feel like you're sort of at a new level of fixed cost or are there some costs that you've incurred that you'll be able to strip out over time and or do you just need revenue now to scale from on the new cost structure?

Well, I think it's both of the above. I would say we definitely reached a new level of costs. I mean, we've undertaken significant expansion as we said and not just the LME guys. I mean, all over the place we've had expansion. I mean, Brazil -- our business is going so well down there. We're hiring people every month. There's just a lot of expansion everywhere. And I think over the course of the last year, we've really expanded the capacity of the company significantly. And I think we kind of set -- now, I don't see any major cost increase from here. The second part of your question is I do think there is some opportunity for us to reduce cost. I mean, clearly when you undertake as many expansion initiatives as we have, and you push your costs up 30% and your headcount up 30% over a year, not all of that is going to work exactly as you envisage. And you've got to give it time and you've got to make sure that people have a fair chance to build their business. But at some point you got to circle back and say is this working in the way we think it's working and is this kind of what we want to do. And also, can we do this in a more efficient way? So I do think there are going to be some cost reductions. You may not see that in the aggregate because that might be offset by just sort of general slow expansion in other areas. And I don't think it's going to be material. But what we've got to make sure is every dollar of overhead is productive and I think there's a fair amount of our overhead dollars that are not productive. So that's really what we're focusing on rather than absolute levels of cost. But our earnings will go up materially. I think we'll cut unproductive overhead but that may not show up as a material number in the overall scheme of things. Does that make sense?

Yes, makes sense. Can you give an update on the China activities? Are you up and doing business there now?

Yes, that was another significant expansion for us. I mean, we've got 18 people, Bill in China?

Yes.

So we've hired a lot of people. We started -- we got licensed as a WOFE as they call it, which is a wholly owned local enterprise that has been funded with capital and that is I mean, China is a very complicated place to do business and that itself took about 3 months there to have happen. But we're now set and we are now starting to slowly ramp-up local activities in China. Again because it's such a quirky place we're doing it slowly, making sure that we go through a cycle with the transaction. But we're doing some local physical business in metals and in grains. We're starting to trade some of the local markets there. So that's gone from being costs in hiring people and building out to now -- to starting to deliver marginal revenues and hopefully that will escalate. So we're in business there. So that's the exciting part.

And the last thing. You've talked in the past about maybe looking at repricing from the clearing services. Have you started to experiment with some of that or not yet?

Yes, we -- I don't know. Sometimes theory doesn't exactly work in practice. Our theory was that with the demise of MF, that a significant amount of capacity had been taken out of the clearing business and therefore it would be great opportunity to increase rates. And I think people are starting to talk about that. But volumes have also come off a little bit. Generally in the market and I think as far as this capacity disappeared maybe volumes come down. So we certainly are not finding it easy to push the rates. And we thought we would find it easy to be honest with you. And I think the industry is -- as you know Greame, we chatted about this before, I think the industry is under pricing its services and its risk at the moment. Most of the FCMs aren't profitable. So I think it is in everyone's interest to get that business healthy and profitable. And I don't think it's even in the customers' best interest for the industry to be unhealthy. But no one kind of sees that. So quick answer. We haven't been spectacularly successful. We continue to press on. And I think that will turn and happen over time. I just thought it would happen quicker.

And one key thing to point out, Greame that our FCM is profitable, it is doing well. But it's a business that we certainly think we should see margin expansion given the level of risk that firms do take.

We'll take the next question from Aaron Cadell [ph], CapStone.

I apologize. I'm calling from a cell phone and I have a scratchy voice but I want to actually follow up on the last question about the regulatory environment as it relates to FCMs. There's been a number of discussions at the CFTC and by the exchanges about customer balance protection, there's some increased margin requirements and increased audits and things like that. Just wonder if you could comment on the regulatory environment for FCMs broadly and specifically to the idea of allowing FCM customers to keep their balances at a clearing house or a third party bank, i.e. away from the FCM itself and what your thought is on that proposal.

This is Bill Dunaway. I'll address a couple of those. The -- as far as the changes that we've seen, there hasn't been a lot of material changes we've seen, I mean the segregated funds and the regulatory capital issues, the FCMs are highly regulated industry and have been for a long time. There's a requirement to calculate your regulatory capital and the segregated balances on a daily basis. There always has been. However, now there is -- probably the most significant change we've seen is now there's a daily filing requirement. So starting here at the beginning of this month, those reports are filed by noon, Central Time with the exchanges or with your -- with the CFTC. Regarding the exchanges and whether or not customers keep money with the exchanges versus the FCMs, that's a difficult discussion because ultimately, while the exchanges may -- customers may feel safer with keeping the money at the exchanges, it does result in the exchanges turning around and wanting the FCMs to basically fund any unprofitable customers or cut loss making customers that there are. So it's still a situation to where money is having to be moved around and FCMs are having to cover their customers at the exchanges. So it's not really an equitable or efficient way of dealing with customer trades. I think we feel that the current model of the customers maintaining the margin deposits with the FCM and the FCM covering those margins at the exchange on behalf of the customers is a good model. We just -- we need to have continued monitoring and adherence to the regs that are in place there to maintain customer safety of their assets and have the exchanges continue with their audits. We go through an audit annually and they need to continue to monitor what FCMs can invest in. And I think that they have done that. I mean, that's probably one of the most significant changes you've seen is the removal of affiliate repo transactions and investment in things such as sovereign debt or other more risky investment options that FCMs could have. The FCStone FCM has never invested in either one of those type of transactions. And ultimately that's what led to some of the MF demise.

So I, so, I mean, if I could just jump in I mean, there's a lot of press out there and a lot of people saying why is it going to be so complicated? Why can't I just have my deposits in an account at JPMorgan or Bank of New York and so on But if you understand how the mechanics of an FCM works. Effectively, the FCM is margins instantaneously effected at the exchange. And the customers have a period of time to send their margin in. And the FCM is the one who bridges those balances. And if you start segregating this out, the FCMs aren't going to require multiples of the amount of capital they have now. That in turn is going to increase the costs of dealing by multiples of what it is now and no one wants that. So, that's the problem. You can do whatever you want but there's going to be a significant cost to that. And that increased cost is probably going to reduce liquidity, reduce volumes and ultimately hurt the customers. So it's a kind of a trade-off. And at the moment, the FCMs are unprofitable as an industry. They take a lot of risk for their customers. They have to support their customers with a lot of capital. It's a highly regulated industry, the problem is regulations. You can make regulations, the question is how do you enforce compliance? The regulations are sound. It's compliance with the regulations that weren't sound. And the same thing happened at Bear Stearns at Lehman's, ratings, regulations and regulators don't prevent problems and frauds and bankruptcies. They just don't. So yes, anyway, we'll see what happens. But it's obviously, an issue that's on everyone's minds. But I'm not sure there's an easy way to resolve it other than maybe just tightening up the current process which has been around for nearly 100 years, I guess. So there's some logic to it.

[Operator Instructions] Up next is Stephen Sparks, [ph] International Assets Advisory.

I have a question that goes back actually, I think probably about 3 years or so ago. I know that...

I hope I remember.

Yes, you have a good memory. I'm sure you will. I know that the question of a buyback at that point in time of the company stock wasn't available because of some of the convertible notes that were out there. And I remember I think the stock was trading somewhere right around $14 a share and you really felt that it was tremendously undervalued and a really great buying opportunity at that point in time and proved to be correct as the stock price did very well after that. Here, we are probably about 3 years later or so in the company much larger than what it was at that point in time and done a great job of growing it. Has there been any thought with the stock price trading really towards its 52-week low of buying back shares. I think we are in a situation where you're able to do that now, correct?

Yes. So let me respond to that. I think we did touch on this in one of the more recent conference calls. So I'll try and summarize it quickly so we don't go through everything again. But yes, you are correct. We couldn't do a buyback previously and we now can. And we've been in that situation probably for the last 2 quarters. So we are able to do a buyback. Our we -- we have laid out a very mechanical process to our buyback and we have a buyback in place which we announced. And the reason we did that is we think if you look at buybacks, about 95% of them end up being terrible, because they are done for the wrong reasons. Generally, buybacks are done by management to try and support the share price or they've done to try and send a message of confidence to the market. And we just think that's exactly the wrong thing to do. In fact, our view is we want to take advantage of the market. And the way we have looked at our buyback is we -- our driving force in life is compounding our book value per share. And you're right. Three years ago, our book value was like $5 and now it's $16. And the share price hasn't clearly reflected that change. So we have -- we will scale in our buybacks relative to book value and we want to buy more shares as we get closer to book value and less shares as we get above book value. But that's how we accrete value for our shareholders. We start buying large amounts of shares at premiums to book value, we actually reduce the book value per share after the buyback. And we don't want to do that. So -- and we go and buy it when it's really cheap. That's really cheap. I mean, how flat I would say it. If we're buying shares in the market, shareholders should know we are taking massive advantage of them because we know more than they do and we're going to buy it when it's cheap. So yes we'll put that out as [indiscernible] , but that's how we're going to approach it. So we have no interest in supporting the share price. As you know we don't particularly care about the share price in the short term. We care about building our business, building book value per share for the long term and ultimately that'll create the long term share price gain. So we will use our buyback but it's all related to book value and accreting value rather than trying to send a message or support the share price.

Well, you've done a great job increasing the book value, year on top of year. If I could ask you one more question with all the growth that you're achieving, how many employees now?

We are north of 1,000.

1,064, Steve.

1,064. Can you believe that, Steve? Do you remember 5 years ago when we're like 150?

Well, I know that. When the spin off occurred roughly 10 years ago, I think it was about 30 so...

Exactly.

[Operator Instructions]

All right. Operator, I think -- I think you said wrap up. Are there any questions, anymore? No?

No further questions.

Okay. Well, thanks, everyone and we'll speak to you in 3 months. Thank you.

And everyone, that does conclude today's conference. We would like to thank you all for your participation today.