William J. Dunaway - Chief Financial Officer and Chief Accounting Officer Sean Michael O'Connor - Chief Executive Officer, Director, Chief Executive Officer of IAHC (Bermuda) Ltd, Chief Executive Officer of INTL Trading Inc and Director of IAHC (Bermuda) Ltd

Good day, and welcome to the INTL FCStone Incorporated 2014 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bill Dunaway. Please go ahead, sir.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone. Welcome to our earnings conference call for our fiscal second quarter ending March 31, 2014. After the market closed yesterday, we issued a press release reporting our results for the fiscal second quarter. This 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 our discussions of our quarterly results. You will 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 housekeeping items. On these conference calls and in the management 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 Physical Commodities segment. As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the U.S., which I'll refer to as GAAP, to carry derivatives at fair market value but Physical Commodities inventory at the lower of cost or 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 not recognized in different -- are often recognized in different periods. Additionally, in certain circumstances, GAAP does not permit 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 reflect the commercial results of our Physical Commodities segment and therefore, of the company as a whole. Instead, we assess all of our businesses, as…

Thanks, Bill, and good morning, everyone, and welcome to our Fiscal 2014 Second Quarter Earnings Call. As we mentioned during the last call, we saw some of the cyclical headwinds we have been experiencing for the last 18 months or so start to abate, especially on the grain side, where are we now in a more normal weather cycle. We had some positive market conditions on certain of the soft [ph] and energy markets this quarter, where volatility picked up nicely, driving customer activity. For the quarter overall, we had record adjusted revenues of $129 million, up 12% from a year ago. We continue to keep non-variable costs under control despite strong legal and compliance pressures. The net result was a strongly improved earnings compared to a year ago when we were in the middle of pretty severe headwinds. For the quarter, on a continuing operation basis, we recorded net earnings of $7.4 million, which was up significantly from a year ago and close to 9% on an ROE basis for the quarter, still below our target but starting to head in the right direction. Our 6 months year-to-date results are not directly comparable to the prior year period due to the gains we made in the prior period on the sale of our shares in LME and Kansas City Board of Trade shares. Excluding these items, our adjusted net income for the year-to-date was up around 90%. I will give you some brief highlights in each of our segments, and Bill will provide more detail shortly. I will also briefly discuss the new segment formats in a moment. Firstly, Commercial Hedging, our largest segment, recorded revenues up 23% for the quarter and the segment income up 69% for the quarter. Strong increase in activity across the board with futures…

Thank you, Sean. Sean has discussed both the operating segment reorganization and the inclusion of the selected data in our 10-Q filing. There's one additional item of note for the quarter. During the second quarter of last year, as a result of the change in the management strategy in our base metals product line, we elected to pursue an exit of our physical base metals businesses. We completed the exit of the physical base metals business during the second quarter of fiscal 2014. As such, we have reclassed the physical base metals activities in the financial statements for all periods presented as discontinued operations. We continue to operate the portion of our base metals business related to nonphysical assets, conducted primarily through the LME, and this is reported in our Commercial Hedging segment. I would like to start my discussion with a review of the quarterly results and will refer to the fourth page of the slide presentation titled Quarterly Financial Dashboard. We experienced record adjusted operating revenues during the second quarter of 2014 of $128.6 million, a 12% increase from the prior year, driven by strong performance in both our Commercial Hedging and Global Payments segments. As shown in the selected data table in our earnings release, all of the key transactional metrics increased versus the prior year with the exception of precious metals volumes and overall exchange-traded volumes. However, as Sean mentioned, overall exchange-traded revenues actually increased over the prior year. Interest income on customer deposits remained constrained by historically low short-term interest rates. However, average customer equity, which drives the interest income for us, increased 7% to $1.7 billion compared to the prior year, driven by the increase in our customer volumes. The adjusted net income from continuing operations for the second quarter was $7.4 million versus…

Thanks, Bill. We have been through a difficult and tumultuous period in our industry. We have chosen to invest and expand and broaden our capabilities, products and services. We have also faced the changing regulatory landscape head on. We are one of the first companies to invest in upgrading our regulatory framework to allow us to offer our customers an unparalleled capability. Others chose to retreat or become providers of more limited products and services. As the industry starts to return to normal, we definitely see ourselves as a stable, well-capitalized franchise with a unique platform and capability in a consolidating marketplace. There is hardly a month goes by without us seeing a large player exiting from one of our core markets. Almost every large bank has now exited some part of their commodities activity, and many have exited some portion of their securities or FX activities as well. All of this is good news for us, and we are well placed to pick up customers and relationships, which will further serve to drive our growth in revenues. In our industry, our short-term results are critically affected by customer activity, which in turn is driven by market variables such as economic activity, price levels and price volatility. Ultimately, we cannot control these market forces and the impact on our short-term results. But we can focus on serving our customers, growing our footprint and controlling our costs. And these things will drive our long-term return to shareholders. These are the factors that the management team is focused on. With that, I would like to turn it back to the operator and see if we have any questions. Operator?

[Operator Instructions] We have no questions at this time.

Okay. Well, we'll leave it there. So thanks, everybody. Thanks for listening, and we will speak to you again in a quarter's time. Thank you.

That does conclude today's conference. Thank you for your participation.