Good day, ladies and gentlemen, and welcome to INTL FCStone's Fiscal Year 2014 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Bill Dunaway. Please go ahead, sir.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone. Welcome to our earnings conference call for the fiscal third quarter ending June 30, 2014. After the market closed yesterday, we issued a press release reporting our earnings for the fiscal third 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 of housekeeping items. As discussed on previous conference calls and in our filings, accounting principles generally accepted in the U.S., which I'll refer to as GAAP, require us to carry derivatives at fair market value but Physical Commodities inventory at the lower of cost or market value. Enough gains and losses on commodities inventory and derivatives, which company intends to be offsetting are often recognized in different periods. However, following the discontinuance of our physical base metals business, we believe these differences will no longer be material to our consolidated earnings. And we will no longer be reporting our results on a non-GAAP basis. Secondly, we're required to advise you, and all participants should note that the following discussions 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 Exchange 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 Chief Executive Officer

Thanks, Bill, and good morning, everyone, and welcome to our third quarter earnings call. As we mentioned during the last call, we have started to see some improving market conditions and for the prior quarter, that being our second fiscal quarter, we had benefited from some early positive market conditions in certain of our verticals. However, during the third quarter, we had a slightly more challenging environment, especially in May, where customer activity across the board dropped noticeably. While this did negatively impact our quarter's results, we continue to believe that the market environment is generally improving, although, more market volatility would be helpful. As I'm sure, you've all noticed market volatility is now pretty close to all-time lows, driven largely by coordinated central bank activity, which has dominated all of the markets. Overall, for the third quarter, we recorded aggregate revenues down 4%, net operating revenues down 7%, offset by a reduction in aggregate costs of 3%. Unfortunately, we had operational leverage working in reverse, and net income on a continuing operations basis was down 44%, although, overall net earnings were up 6%. On a year-to-date basis, the results are not directly comparable due to nonrecurring gains made in the prior period on the sale of our LME shares and exchange seats. Adjusting for these items, our post-tax income from continuing operations increased 24% year-on-year, reflecting better overall market conditions. Bill will later go into results in more detail, but just to give you some highlights. Our Global Payments business was again our star performer, with transactions volumes up 26% quarter-on-quarter and 29% for the 9 months to date versus the prior period. This resulted in quarterly revenues increasing 21% and segment net income increasing 30%. On a year-to-date basis, for the 9 months, revenues were up 31% and…

Thank you, Sean. I'd like to start my discussion with a review of the quarterly results and will refer to the fifth page of the slide presentation, titled quarterly financial dashboard. Operating revenues declined 4% in the third quarter of 2014 to $118.2 million as compared to the prior year, as a result of the declining clearing and execution services and Physical Commodities revenues. These declines in operating revenues were partially offset by strong operating revenues in Global Payments, which matched its record operating revenues in the first quarter of the current fiscal year, which is historically the strongest period for that business. In addition, Securities segment operating revenues recovered with a 25% increase in operating revenues versus the prior year. Interest income on customer deposits remained constrained by historically low short-term interest rates, however, as Sean mentioned, we have undertaken steps to take advantage of the steepening of the yield curve with limited purchases of treasury securities with longer durations. And we plan to make further purchases in the future along with reimplementing our revised interest rate swap strategy. Average customer equity, which generates the interest income for us continued to grow, increasing 8% to $1.8 billion as compared to the prior year. Looking at our operating segments, Commercial Hedging segment operating revenues increased 2% to $54.9 million in the third quarter compared to the prior year. In this segment, we serve our commercial clients through our team of risk management consultants, providing a high value-added service that we believe differentiates us from our competitors and maximizes the opportunity to retain our clients. These services span virtually all traded commodity markets, with the largest concentrations in grains, energy and renewable fuels, coffee, sugar, cotton and food service, as well as base metals listed on the LME. The increase in…

Thanks, Bill. As we have mentioned in the last couple of calls, we believe we are entering a more positive cycle for our business. With slowly improving market environments, market volatility which really can only increase, interest rate cycles starting to turn and a consolidating industry. We believe we've put together a fairly unique global platform allowing us to serve customer needs and we are well advantaged -- well placed to take advantage of these improving trends. None of this is likely to be explosive in the short term, but in combination should provide a steady long-term push to our revenues, which combined with our operational leverage should drive our net income to more acceptable levels. With that, I would like to turn it back to the operator to open for a question-and-answer session. Operator?

[Operator Instructions] And our first question comes from John Dunn from Sidoti & Company. John Joseph Dunn - Sidoti & Company, LLC: So just given the low-volume environment, can you talk about the business lines where you think you have the most capacity?

Well, I think, we've worked pretty hard across the board to scale our operations, put in some better systems and sort of make sure we can handle additional volume because it's clear, we need additional volume to kind of hit our targets here. And I think we can handle a decent amount of increased volume and activity in all of our business segments. And I would say, we could handle 30% to 50% increase in almost everything we do without running into any constraints, whether it be operational, liquidity or capital. Some of our businesses such as Global Payments, for example, we have a lot more capacity than that, that we can drive through that business, because it's just much less capital intensive. Not as liquidity intensive, it's reg -- it doesn't consume a lot of regulatory capital. So all in all, I think, we have some pretty good ability to grow, probably, easily in the 30% to 50% range from where we are now. And in some businesses, much higher than that. Don't know if that answers your question, does that? John Joseph Dunn - Sidoti & Company, LLC: That makes sense. And then just from a more macro standpoint. Can you just sort of list for us some of the factors you are looking forward that could help improve the environment and volatility as well? Obviously, the big one is interest rates, but anything beyond that?

Yes, I think, I tried to hit all the high points in my wrap up comments, but certainly, market volatility across all of the instruments we trade has a direct correlation to short-term volumes, I mean, clearly. Whether that be in the equity markets, whether it would be certain commodity verticals, foreign exchange. And for the most part, every single thing we trade is trading at close to all-time low volatility levels. I mean, there are certain commodity verticals, particularly last quarter, for example, coffee, and some of the energy things we traded, there was some good volatility there, and that's why we did well. So volatility is clearly a big factor for us. Interest rates is a big factor for us. I think, the other issues for us are sort of industry issues. We've come through this sort of massive period of regulatory change, which has required more capital, it's required more infrastructure costs. We feel, we're sort of through that now. I mean, 2 years ago, we were sort of in the thick of that, it was very distracting, I think we're through that. But that's provided a real burden on smaller players. And we're just constantly seeing a slow sort of reduction in the number of small players, people getting out of the business scaling back. And at the high-end, and I'm sure everyone on the call has noticed this, the big banks are also facing their challenges. I mean, they are having to sort of deal with a different way to look at capital, there's massive fundamental deleveraging happening in the banks, which I think it's still got a long way to go. And almost every bank we know of, has pulled out of our businesses, they've pulled out of the commodities business. They're getting out…

So we definitely have seen in the past, for example, when MF Global went down, and we had sort of some of the -- some of our more direct competitors have issues, we've seen big inflows of customers. We do handle in our clearing segment, we do handle smaller, lower value customers. And a lot of the customers out there are of that nature. And we tend to be a relatively high-cost provider in that business. I mean, we're trying not to race to the bottom, we are not looking to expand a very low margin, low-touch business. We're really looking for the higher value side. And that is a much smaller universe of customers. And we are at the moment seeing in our core of the Commercial Hedging business, between sort of energy, LME and the grain side. We are probably picking up a couple of hundred customers a quarter. And these are all sort of high-value customers. And I think we can do better than that. So that's what we've got to look for. The other thing we've got to look for is, we do know that over the last 3 or 4 years, customers have tended to, I think, just as a result of the fear in the financial markets, the fear of what happened of [ph] to MF Global, they tended to split their business around the market a little more. So even our existing customers, I think, there's a lot more business we can gain back, if we push harder on that. So the two things are greater share of wallet for my existing customers, as they become more comfortable with the situation and with us. And us going a little harder after those other customers. And if we could get to the 200, 300 high-touch customers a quarter, I think that will be an excellent goal for us to achieve. And that would be a very meaningful over a period of time for us.

Our next question comes from John Leonard from Singular Research.

I just have 2 questions, and first really just an observation on the Global Payments segment. I think, breaking the segment out on a standalone basis through the reorganization last quarter, is really is going to help investors better understand and appreciate the strong growth prospects there. And related to that segment, my question is, as the contribution as a percentage of net operating revenue continues to increase, do you see this segment offsetting some of the volatility of other segments such as Physical Commodities or Clearing and Execution?

Yes, definitely. I mean, Global Payments, just to repeat from ancient history, it really grew out of our FX business. And it's now become a payments business. And we don't see that, that is really linked to any market cycle we can see. This is fulfilling a sort of operational need that big banks have. There seems to be a general move by the big banks to get out of the correspondent banking business and to outsource this. And it seems to us that, that is unrelated to any sort of short-term market environments. Where we may be impacted by market environments in this business is, we do make more or less on a payment depending on what the FX spreads are in any one market. And we've gone through a period here of very low volatility in interest rates. Despite some of the things going on in the world today, we don't seem to see that translating into the markets in any great sense. But we have historically seen situations where there has been sort of a bit of financial distress that some of the FX rates in this local markets blowout. And when that happens, we can make a lot more money. But the kind of steady increase in customer volumes seems to be unrelated to any economic environment or financial market, but our profitability may be enhanced by some dislocation in the markets. So I don't know if I've answered the question correctly, but I think this business can grow in underlying volume terms regardless of market conditions, but I think we could make more money when conditions get a little stressed.

Great. That was a perfect answer. Just my second and last question is somewhat related. I know you talked about how the large banks are really pulling out. They really don't have the desire or the ability to compete for every customer now. On the smaller side, they really just can't compete with the middle and top tier. My question is that, as you continue to gain this new business again, do you see this really offsetting any quarterly decreases in volume or volatility or spread compression?

We are always fighting spread compression. And we try and insulate ourselves from that by going after sort of higher-touch customers, people who value our service, so that more commercial type customers. But the reality of our world is spread compression. So we're sort of always fighting that. I think we are well placed to offset that with -- through a consolidating industry, as we've discussed. I do think we are sort of a fairly unique franchise now in the sort of midmarket space. Most of the sort of competitors at our level tend to be mono-line kind of businesses, they do one thing. They're just an FCM or they just trade stocks or whatever. We're a broker-dealer, we're a swap-dealer, we're an FCA and we're global. This is kind of a pretty unique platform for sort of the more sophisticated customer that may not be large enough for JPMorgan. And I don't think there are too many people like us out there. And just sort of anecdotally, what we're seeing is -- I don't know, every week, every 2 weeks, we get a call, from a team of people of business, someone being dislocated from a bank, can we come and join you guys, our business is closing down. We don't have enough regulatory capital, because I'm at a small shop, whatever it is, a variety of reasons. In all of our businesses, commodities, securities, all over the place. The problem is a lot of these businesses just don't fit us very well. They're either very marginal sort of low-cost offerings, which we think ultimately will be disintermediated out by technology. So we don't want to spend in the way of that. They're proprietary trading businesses, we don't want to do that. So we really looking for those kind of opportunities that come to us, that really fit with our model of sort of serving real customers, real needs for the long term. I mean, that's kind of what we want to do, right? And we found a couple of those opportunities, and I think, we'll find some more. And aside from sort of discrete tape-ons [ph] of teams for buying of businesses, it's kind of a one customer at the time deal, and we have got a lot of people out there, and hopefully we're going to pushing them harder to go find new customers. Does that answer your question, sorry, again, I keep going on longer than you guys want me to, but...

We do have a question from Will Settle from Woodmont.

I apologize, if I missed everything, but could you repeat some of the change in the cash management approach and maybe, I know that's something you kind of played at for a while, but was some of that already implemented in the second quarter, excuse me, through June quarter?

Okay. So let me talk about that in a little bit more detail. Those of you who have sort of read the detail of our Qs, and maybe listen to our calls, know that, I would say 3 years ago, we took the view that, we were sitting on a big opportunity with our customer funds, which really earn us interest. We can't use that capital, it has to be segregated out for customers, it has to be placed in segregated accounts. But commercially, we get to keep the large portion of the interest return on those assets. And that's the sort of economic model in the futures clearing business. The problem is, keeping those funds in T-bills or exchange approved money market funds, we're making 6, 7 basis points, I mean expect a few to be 0. So about 3 years ago, we took the view that we would synthetically enhance that interest rates asset or interest rate earnings by swapping, using swaps and we would swap ourselves to the 2-year part of the curve. And what we would do is, we'd ladder ourselves out by doing sort of 1/8 of our aggregate interest-earning assets every quarter and we would end up with a strip of 2-year swaps. And ultimately, we would get the sort of 2-year moving average of the 2-year swap rate, right? So that was kind of what we did. We implemented that, it worked very well. We were given credit by the banks to do that. So we didn't really have to put any capital up against those trades that were done on bilateral credit lines. So the cost of capital to do that for us was 0. So it was just incremental earnings at that point. So we did that and, Bill, what is that sort of on a annualized basis, at its peak, what if that adds to the bottom line? I mean, it was probably, $4 million a year or something?

Yes.

Yes. So we did that. What happened is the curves started to flatten out about 2 years ago. And the incremental return, that those swaps were giving us, was sort of at the point where we didn't think it was worthwhile entering into those transactions. So a lot of those 2-year deals have rolled off over the last 2 years. And in fact, I think 2 quarters ago they'd all rolled out. So we constantly rethink this, and the other thing that sort of happened over the last 6 months is the regulatory changes to the interest rate market. The result of that is, we cannot do interest rate swaps the way we used to do them because we now have to put hard cash collateral up to our banks. Our banks can no longer extend bilateral lines to us for our interest rate swaps. So now we have a real capital cost, if we want to enhance our interest rate earnings. And what we're always trying to do is sort of do a kind of a cost benefit analysis, every time we put capital to work. So anyway, we sort of sat down, we relooked at it and basically we've decided, we're going to sort of extend our tenure on that interest-rate program, so we're not going to look just to the 2-year swap rate, but we're going look out to 5 years. And we're going to continue to ladder things, we don't want to take big sort of -- we don't want to put bigger amounts of money on discrete parts of the curve, because we believe we're in an interest rate environment that is increasing for us. So we want to make sure that we appropriately laddered. So that we have stuff maturing every quarter, that we…

So my question, the $400 million, is that pro rata, all these different, the swaps and the treasuries...

That is the whole -- that is the aggregate of all the laddering we've done over the last 2 quarters.

So if you are fully invested in today's rate environment, you'll be looking it 4x or 4.5x the $3 million in terms of the...

Correct. I mean, if we had to sort of just take a view, that we'd max out everything today, it would be depending on how that sort of -- where on the curve, we invested. It will probably be between $9 million and $14 million given the range, depending on sort of exactly where we invested on the curve.

That's a significant earning contribution...

Yes. What we're going to do is tie-up everything, at the far end of the curve, and then find that interest rate swap increasing very rapidly. So we're very keen to do it on a very laddered sort of portfolio approach.

And ultimately 2.5 years is all you are willing to step out anyway.

On a weighted average basis, yes.

Right. So the next question, July and August, you mentioned, contango, in the grain market, I believe it was for you [ph]. So could you give us an update in seeing better...

So for the first time in really a long time, and I don't know, when exactly, I don't if the details are available to me. We're in a carrying market in some of our big ag sectors, in corn and bean, which basically means, the sort of forward price is higher than the current price. And in that scenario, our core customers being the grain elevators, and therefore customers being sort of the produces, tend to hang on to grain longer. And remember, we still had this discussion about what drives our future revenues is how many bushels are sitting in the elevators. Well if those bushels sit around for longer, we make more money because they roll their hedges more often. So we're now in a situation where our customers are incentivized to keep as much of that -- as much of that corn and bean crop on hand and when they do that, they roll every quarter there are hedges with us. And of course, we make money every time they do that. We haven't had a carry market for a long period of time now, which meant -- basically means, there's been no incentive for the grain elevators, they really hold onto the corn or beans and that kind of pushed them out, just as and when the markets needed them. We're in is slightly different situation now. Traditionally, this is a kind of good set up for us. That make sense?

We do have a question from Russell Mollen from 910 Capital.

Can you just walk me through as a follow-up to that discussion on the sort of the cash management and going out of just $400 million. What are the sort of the risks associated with that type of move? If there are customer calls on their own funds, what are you exposed to by doing something like this other than the interest rate risk that you're taking that, you and Billy would be taking, but just on the other side of it, what can go wrong, I guess?

Well, let me try and see, if I can run through all of the risks. I mean, the first risk is sort of an opportunity cost, right? We lock up our money and it turns out it would have better, had we done nothing because short-term interest rate is going to 5%, and we're locked in at 2%. So that's not necessarily a cost or a risk. But it's sort of an opportunity cost. You sort of say, if we had not done that we would be making more money now. So and to address that, that sort of why we laddered our approach. We're earning more than we did before, but we want to make sure as the interest rates increase, we have instruments rolling off that we can replace at a higher rate or just leave at T-bill rate, if that's acceptable to us. So that's sort of the first commercial risk for us is, is the -- are we taking an undue opportunity cost by locking into something, when it would have been better maybe to do nothing and wait. Okay. So that's kind of a challenge for us and we always think about that. And laddering is how we address that. The other risk we have is, this ties up capital now. And that's the biggest change that's happened. So whether we go buy treasuries, or whether we enter into interest rate swaps, there is real capital that is used to do that. If we buy treasuries in the FCM, we have capital haircuts on that, which approximate the margin requirements if we do a swap. So either way, we're using capital to enhance and provide these earnings. And which is why we sat down and set ourselves some very hard targets about how much equity…

I would just add -- this is Bill. I would just add one thing, and it's not really a risk, but it's just more -- on the swap side of it as we enter into these swaps, those are derivatives and are going to have to be mark-to-marketed over the period, we are holding the swaps, so even though we've got a fixed, long-term rate, the short end of it is -- or the long end of it is floating short-term rates. So as those move up and down, we could see ultimately, mark-to-market moves in that derivative over time. And just remember, on the other side of that, we are actually holding short-term treasury bills, or money market funds. So we're kind of covered on that short-term side, but on the swap side you're going to see some noise, as it's mark-to-market. So in periods of just generally rising rates, or generally flat rates, it's not going to be a lot, but if interest rates do pop a little bit better, the curve steepens, you could see some mark-to-market noise on that, that ultimately will benefit on the physical side with the short-term rates as well, that will offset those cash flows. But just it could make earnings a little lumpy, one quarter or another.

We do have a question from Steven Spartz from International Asset Advisory.

I had a kind of a question concerning the return on equity. I know 5, 10 years ago, you kind of had a target more in that 16%, 18% and quite frankly, there were times where you were hit in the 20% and even a little bit higher at times. Now the target over the last few years, has been moving than 15% and here I think we just reported 4.4% on the ROE. What it's going to take to get it back up to 15% as far as level that we're achieving?

Well, we all wish for the good old days, when our business was unregulated. [indiscernible] This question has come up a lot, and a lot of our investors are kind of said to us, "Man, shouldn't you guys change your targets and aren't you being too aggressive." And our response to that has been, I mean, if you go back to -- geeze, I may get the year wrong, 2012, I believe was the year, in which we're in the middle of the financial crisis and things went great and -- but we had a little bit of volatility going on in the markets. We made a 16% ROE that year. So we feel that since then, we've come through a pretty tough period, where we've had a lot of regulatory change on the Dodd-Frank side. We've had market fallouts, because of MF Global, we've had droughts and things in our some of our biggest business areas. We've had volatility fall. So we've sort of had just -- I mean, it's all a sorry list of excuses. We've had a lot of things, working against us. And clearly, that's been reflected in a declining ROE, there's no doubt about it. So we always -- firstly, we always want to make sure our ROE is a long-term target, there's no point in having a target, if you are going to change it every time you have a small change in market conditions, because then it is not a target, it's just kind of a -- I don't know what it is at that point. We run our business for the long-term. We want to have long-term targets. And by definition, anything that is a cycle or is a short-term anomaly, it shouldn't cause you to change your long-term targets. And we…

That sounds good. You've done a great job considering, I think when you all took over the book value was what? Little bit below $2?

Yes, I think it was $1.70.

$1.70, and we're at 18%.

Yes, exactly. Well, thank you for that. To reiterate that, it isn't going to be easy to get there, and it is not going to happen quickly. But we think we can get that.

Operator, any more questions?

Mr. O'Connor, there are no further questions.

Wow, that was more questions than we have ever had on a conference call. So that's great. So we like it when people ask questions. So thanks everyone. Thanks for the people who asked questions, we appreciate it. And thanks for listening. We will talk next time.

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