Good day, ladies and gentlemen, and welcome to INTL FCStone First Quarter Fiscal Year 2019 Earnings Conference 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 Bill Dunaway, CFO. Mr. Dunaway you may begin.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fiscal first quarter ended December 31, 2018. After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2019. 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. 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 meaning of 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 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. 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 first quarter earnings call. Our strong earnings and momentum from 2018 continued into our first quarter of fiscal 2019. Despite most banks reporting a decline in trading revenues in the December quarter, we reported a 25% increase in operating revenues from a year ago and up 9% sequentially from Q4. All of our businesses recorded strong increases in transactional volumes with the only exception being FX Prime Brokerage. All of our segments except Commercial Hedging showed double-digit growth in both; operating revenue and segment income. Commercial Hedging had stronger transactional volume growth, but reduced revenues. Segment income was a record in our Global Payments and Clearing & Execution Services segment as well as in our Equity Capital Markets business because of increased volatility and market share. We achieved an increase in pretax income of 31% versus a year ago and up 19% sequentially from Q4. Net earnings were $18.2 million versus a loss of $6.9 million a year ago due to the impact of the new tax legislation in the prior year period. This also represented a 16% growth in net income over the immediately preceding fourth quarter. Our EPS was $0.94 a share and our ROE was just over 14%. On a trailing 12-month basis our EPS is now $4.18 per share. Some highlights before I hand off to Bill. We had some noise in our numbers this quarter which I would like to highlight. In our Commercial Hedging segment, our structured product and OTC business was negatively affected by approximately $11 million in unrealized mark-to-market losses at the end of the first quarter. This was due to year-end lack of liquidity, which was more severe than normal this year, which caused some longer-dated positions to trade…

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 chart depicts our net income, earnings per share and ROE over the last five quarters. As shown, net income in the first quarter of 2019 was $18.2 million, which represents a $2.5 million improvement over the immediately preceding quarter. In the prior year comparative quarter, we reported a net loss of $6.9 million. However, in that period we recorded a charge to income tax expense related to the enactment of tax reform in the amount of $20.9 million. Moving onto slide number four which represents a bridge between operating revenues for the first quarter of last year to the current period. Operating revenues were a record $264.7 million in the current period, up $52.1 million or 25% over the prior year. As shown, all operating segments showed revenue growth over the prior year with the exception of Commercial Hedging. This growth was led by our Securities segment, which added $26 million or 60% in operating revenue versus the prior year. Within this segment, Equity Capital Markets had a record quarter adding $20 million in operating revenues versus the prior year as the dollar volume increased 75%. In addition, Debt Capital Markets added $6.3 million in operating revenues primarily driven by an increase in interest income in our domestic business driven by higher short-term interest rates, which was partially offset by weaker revenues from our Argentina and municipal securities businesses. Our Clearing & Execution Services segment added $23 million or 32% in operating revenue as compared to the prior year driven by a $14.5 million increase in exchange-traded revenues as volumes increased by 57%…

Unlike many of our competitors and banks, we recorded one of our best quarters in terms of core operating performance. Our model allows us to offer a wide range of products and capabilities to our clients, making us more relevant to each client and in turn making each client more valuable to us with more diversified and predictable revenues. Furthermore, unlike more narrowly focused firms, we can leverage our central infrastructure and capital across many different business lines, creating operational leverage and producing better returns on capital. This business model offering our clients vertically integrated execution and clearing in all major asset classes is being validated both through our increased market share as well as through our financial performance, which we believe is best-in-class. We believe that this is a winning formula for both our clients and our investors. With that, I'd like to turn it back to the operator and open up for a question-and-answer session. Operator?

Thank you. [Operator Instructions] First question comes from Paul Dwyer from Punch & Associates. Your line is now open.

Hey, good morning, guys.

Hey, Paul.

To start maybe, can we talk about your ability to drive operating leverage on the unallocated cost relative to segment income and just kind of how you think about how fast unallocated costs will grow in the future?

Good question. We are very focused on trying to keep our central overhead cost increases well below the rate at which our segment income grows. I mean that's what causes our operational leverage. And to do that what we are working on is really two things to more tightly integrate our offerings systems-wise and support-wise to try and eliminate costs and create synergies. So for example, we've acquired a lot of businesses over time. We don't want to have a separate accounting team, separate credit team, separate compliance teams. We're trying to sort of centralize those things. And then the second thing we're doing which is probably costing us money in the short term is we need to build a much more scalable infrastructure so that -- and this is our objective is that every incremental transaction really cost us close to zero. And at the moment, we are trying to drive that through technology. So if you look probably over the last three years or four years, we've had pretty substantial uplifts in our technology spend as we're trying to achieve that. And we're not trying to do it sort of in a big bang approach. I think that could be highly detrimental. People who try to sort of introduce enterprise-wide systems normally fail, but we're spending a lot of money on trying to get to a more scalable infrastructure. I think we are making progress on that side and I think that cost will start to flatten. And hopefully that will allow us to achieve that objective of keeping our central overhead cost growth lower than the growth in our segment income. So those are two things we're trying to do is create the internal synergies where we can and organize ourselves smarter. And I think we've done a reasonably good job of that and build better technology. And we're sort of three years, four years in to a pretty big incremental build. And I think that will be ongoing for a while, but I think we're starting to see some good progress on that side. Did that answer your question Paul?

Yes. It does I think. And then so are there costs running through this that will fall off eventually? Or is it more that the things will moderate?

Yes. We always think when you sort of agree to these big IT uplifts in costs that maybe they'll go away. I don't think actually that's realistic. What I'm hoping is that will flatten and those costs will allow us to create more scalable infrastructure and they will flatten in absolute terms. So I wouldn't think that you should anticipate our costs reducing. But if we do our jobs right, our cost should flatten at some point.

Okay. Two more questions if that's all right.

Yes sure. Go ahead.

What do you think is a reasonable timing to have some sort of estimate for this OptionSellers potential bad debt?

Okay. Obviously can't go into too much detail because we're sort of involved in litigation all around here. But honestly, this is going to be multiple quarters before I think we have a clearer picture. We are going through a legal process. That's most likely going to involve an arbitration of some sort. We are filing all that paperwork now. So I think towards the end of this fiscal year, we should have much greater clarity. I mean that's the part of this that I can tell you right now. It's certainly not going to be resolved in the next three months or something. I mean that's for sure.

Okay. That's fine. And then can you talk -- so I understand, short-term interest rate movement of the business and how that impacts it. Can you talk a little bit about how the slope of the yield curve impacts earnings?

Well, two thoughts on that. So firstly, we have a float and our float is pretty much sitting at the 3-month T-bill rate. We invest that both with banks and in T-bills so that's probably a good proxy. So that's sort of the bulk of our net interest carry, right? We have historically and if I go back three, four years ago, when the T-bill rate was basically zero, we did see an opportunity to create a ladder after two years because we were basically getting 60, 70 basis points at the two-year mark. So we created a ladder of treasuries which just sort of rolled off and we just replaced them which allowed us to actually capture on average about 50 basis points. And this is from memory I may be a little bit off, but, about 50 basis points when the short-term rate was zero. We will use the yield curve, if it presents an opportunity to us. I don't think we'll ever want a ladder our exposure out beyond more than say two years. As you know that's kind of very flat right now, so it doesn't present us an opportunity to enhance our yield over what we're getting now on the short-term basis, so that's kind of one part of it. The second part of it is in our rates business, we carry fairly large inventories in mortgage-backed and other things which are hedged and are funded. And they are largely funded at about the three-year -- three-month rate. And obviously they earn a rate that's slightly higher. Honestly, the hedges end up probably negating a lot of that yield curve benefit we might get but oftentimes, there's just a little dip we kind of squeeze out there. But I don't think it's material. So if we didn't hedge those positions obviously we'd be getting kind of a carry on the yield curve, if there was one. But honestly we don't see much of that just because we hedge everything. Does that answer your question Paul? Okay.

Yes, they do. And then just last for me is kind of what the M&A landscape looks like for you going forward? And kind of -- where do you -- what's interesting you? And where do you want to go next for acquisitions?

Yes. This is always kind of a funny conversation we have with people because as you know we've done maybe 20 M&A deals over the last sort of 10 years, but we certainly don't have a list on the wall somewhere of companies we'd like to buy. I mean, I think that's very dangerous. You end up sort of falling in love with things and overpaying. But what we do, do is we have got ourselves known as a potential buyer that can move quickly that executes and can close transactions. And as a result of that we see what's going on. So we're definitely in the flow of acquisitions. And just to give you some sense of it during 2018, we probably were presented with roughly 50 opportunities that we looked at. We probably got pretty seriously engaged on maybe 10 and we sort of did two I think. So yes, we're pretty disciplined and picky. We will continue that process. And what we're really looking for is businesses that either bring clients or capabilities we don't have first of all and businesses we can add value to. There's no point in us buying something that we can't do a lot with. So we want businesses that can do better on our platform, we can add value to that can cross-sell to our clients whatever it is. So that's sort of our basic screen and we'll keep looking. So we're pretty opportunistic I would say. As we fill out our offering I think there's less things that fit and you start to look at things that are maybe more duplicative and then you're sort of just thinking about cost synergies. Up until now, we really haven't done a lot of transactions that are just driven by cost synergies, but we're probably going to start to see that a little more. And I think as we've grown and become known in the market, we're also seeing talent just wanting to move across to us. So we've actually recruited a lot of pretty senior people that are bringing with them their relationships. So that's obviously another way you grow your business. I mean, it's almost like buying small decks of business, right? So that's sort of our approach. We don't have any big deals in the works. We don't want to sort of chase anyone. We want to be nimble. We want to be disciplined and we want to be patient in how we build out our business. And frankly, our business is doing great. So we don't feel compelled or under pressure to have to do something to change our trajectory. I mean, we are making better returns than any of our competitors. We are seeing customers on-boarding with us and we're seeing talent wanting to work here. So it seems like what we're doing is good. And therefore, we are afforded the luxury of being disciplined. And I think we want to stay that way. Is that helpful, Paul?

Okay. Yes, yes. That's very helpful. I'd agree. Really nice quarter, guys. That's all I have. So thanks, Sean. We will talk again soon.

Thanks for the questions. Appreciate it.

Yeah. Bye-bye.

[Operator Instructions]

All right. Operator, I don't see any questions up on the list here, so I think we'll call it a day. So thanks everyone for participating and we will speak to you again in about three months. Thank you.

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