Ladies and gentlemen, thank you for standing by, and welcome to the INTL FCStone Second Quarter Fiscal Year 2020 Conference. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your CFO, Mr. Bill Dunaway. Sir, you may begin.

Good morning. Thank you, operator. Welcome to the earnings conference call for our second quarter ended March 31, 2020. After the market closed yesterday, we issued a press release reporting our results for our second fiscal quarter of 2020. 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 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 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 assurance 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, our CEO.

Thanks, Bill. Good morning, everyone, and thanks for joining our fiscal 2020 second quarter earnings. I also hope that all of you and your families are healthy and well. I think it goes without saying that this is a historic moment for the world. And firstly, our heartfelt sympathies go out everybody who has lost loved ones. And also to the millions and millions of people that have lost their livelihoods and businesses. This is an event that will have a significant and major global economic and social repercussions, which are still unclear at this time. My personal view is that many trends we saw playing out prior to this event will be dramatically accelerated and weak businesses without demonstrable value-add to clients and without strong capital support are going to be in for a difficult time. I'm confident that we will navigate our way through this turmoil, and we will find ourselves in a stronger position when we achieve the new normal, whatever that looks like. I think our focus on providing durable and value-added services to our clients, our focus on capital and book value and our common sense and robust approach to risk management will stand as a good stead. I would like to thank the entire INTL team over 2,100 people around the world for your amazing commitment to our clients and your willingness to embrace the challenges head on. And also to my exceptional and now battle-hardened management team who quickly responded by running towards problems and not away from them. I am very proud of our franchise, and I'm certain, we'll come out of the situation stronger and better. At the outset of the COVID crisis, we adopted a simple four-point plan. First, keep all of our employees and their families safe. This was…

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 5 fiscal quarters. As shown, it is a very strong second quarter, representing record net income, earnings per share and return on equity. Net income was $39.3 million, which represents a $23 million increase over the immediately preceding quarter and a $15.9 million increase versus the prior year. It's important to note that the prior year quarter includes a $5.4 million bargain purchase gain on the acquisition of GMP Securities. Earnings per share were $2 per diluted share in the second quarter as compared to $0.84 and $1.21 per share in the immediately preceding and prior year quarters, respectively. Moving on to Slide number4, which represents a bridge between operating revenues for the second quarter of last year to the current period, operating revenues were $366.8 million in the current period, up $95.7 million or 35% over the prior year. As Sean noted, the widespread volatility across asset classes due to the COVID-19 pandemic drove significant growth in operating revenues across our operating segments, with the exception of possibly our Global Payments segment, which still added $2 million or 7% growth in operating revenues as compared to the prior year quarter. Standing out here, our Securities segment added $45.3 million or 62% in operating revenues versus the prior year. Within this segment, equity capital markets nearly doubled its revenues, adding $30.4 million off the back of 134% volume growth as customer demand increased and our market share grew as some competitors stepped away from the market. Desk Capital Markets also had a strong quarter, adding $14.4 million in operating revenues versus the prior year, with spreads widening…

Thanks, Bill. This has, obviously, been a highly unusual and in many ways, historic time. I think the financial results we have produced validate our business model, our philosophy around adding value to clients and how we manage risk. We have made good progress in integrating and turning to account many of the initiatives undertaken over the last year or so. The upcoming quarters will not be easy, and we have to navigate our way through a variety of risks and market dislocations. We will remain vigilant and cautious, but I am optimistic we'll emerge stronger and bigger than before. While the future environment may be challenging for us with low volatility and lower interest rates, I'm certain there will be a reordering of our industry and opportunities to pick up valuable clients, people and businesses that will allow us to increase our market share and increase the value of our franchise. We've already seen this starting to happen. And in the last 3 months have seen the strongest on-boarding of clients in nearly 10 years and have many talented professionals wanting to join us. We believe that the GAIN acquisition will be strongly accretive in every sense, financially, strategically and with the intellectual assets to enhance our strategy to become the best-in-class financial platform, connecting clients to the global markets across asset classes, offering vertically integrated execution and clearing. With that, I'll turn it over to the operator and see if we have any questions. Operator?

[Operator Instructions] The first question comes from the line of Justin Hughes with Philadelphia Financial.

And congratulations on impressive quarter. I think it's the highest return on equity, I assume the Company put out.

And a nice following wind, I guess.

Yes. I was wondering if we could, and the losses, given the volatility, you managed very well as well, but I was wondering if you could talk about April when oil went negative, obviously, tremendous amount of volatility there. We saw Interactive Brokers preannounce a big credit loss. Is April kind of more of the same of what we saw from 1Q high volatility with manageable credit losses? Or can you give us a little bit of preview on the give and take there between volatility and credit losses.

Okay. So a couple of things. As I mentioned, our business model is such that when we see extreme events, obviously, we make a lot more money, but we tend to have some charge-offs. And I think I said that earlier. I think you can see that in our Q1 results. I think that's the pattern we're going to see going forward, right? January? With regard to the dislocation in the energy markets, I mean, I don't think anyone has ever seen anything like that. And obviously, historic. We will likely incur some small provisions against that. They're not going to be material or tracking in any way, sort of single digits of millions. But I don't know if you picked up. And one of the reasons we put this in our filing is we were very quick in terms of when we saw that happening, getting our customers to move out of the front month contract, which we believe had become untethered to the underlying price and it became irrational. And actually, we put out a letter. That letter was picked up on Bloomberg. I'm not sure if you saw that, where we were sort of really pushing people out of that contract. And one of the reasons we just mentioned all of that is because I think some of our shareholders and investors actually saw those letters and was wondering what was going on. The good news is I think almost every market participant followed us in that action. So I think almost everyone now is forcing their customers out of the front month, particularly as it gets close to delivery just because of the sort of dislocation that's happened. So that's the story around the sort of the oil side of the business. I would say, generally, what we're seeing is probably the volatility has declined. If you just look at the VIX. So I don't think we're going to see the same kind of positive situation as we saw in March, but it's still elevated versus where it was prior to the crisis. So I think we'll continue to see by sort of longer-term trends of higher volatility. If we have extreme events out there that does give rise potentially to some credit exposure for us. If we do our jobs right that will still be a net positive. But I think the volatility we saw in March was just really exceptional. And fortunately, we benefited from that, but I think that impact is being somewhat muted as we stand now. But it's a change. So I just don't know. So Justin, I don't know, does that answer your question?

Yes, it does. Just because like you said, the start the move in oil is unprecedented so I'm just wondering let me check you on that one...

It was crazy.

And then the thank you for quantifying the interest rate headwind. It looks like, I think, $0.94 in the presentation. It looks like that includes money market fund fee waivers, correct?

Yes. We try to aggregate everything related to our float all in one this year.

Are there any offsets you can do? I mean, now it's going to it's probably going to cost you money to hold these balances. Is there any can you add fees or anything else to offset this revenue headwind?

Yes. Well, a couple of things. I mean, firstly, we are in a borrower situation. So there is a natural offset on our borrowings cost, right? So that's somewhat helpful. If we assist with negative interest rates, us and the rest of the industry, are going to have to figure out how we turn that from being a net cost to being a positive, because our business model is predicated on us earning something on the float. I mean, you saw the big move with the discount brokers going to 0% commissions. I mean, part of that was the float kind of gives you some of it, right. If that doesn't happen, you're going to either have to charge fees or do something. So you're correct, I think if that perpetuates, we'll have to do something. At the moment, we don't believe we're in sort of negative territory in aggregate. The other things we can do in certain parts of our business is we are able to roll our exposure out along the curve. We've done this previously. Sort of, I guess, three, four years ago when we had zero and in short instances, negative interest rates on T-bills, we rolled our exposure out to sort of the two-year mark on the curve. So there are things we can do to manage that. It's not perfect, and it doesn't apply necessarily to all the aspects of our float. But we will pull whatever levers we can to make sure that we maximize the return on that and if necessary, change our business model slightly, if we believe it's going to perpetuate.

Your next question comes from the line of Russell Mollen with Nine Ten Capital.

Sean, how are you doing?

I'm doing good, Russell. And by the way, I keep telling everyone, you were the smartest guy I know because in February, you were telling everyone, this was going to be a major pandemic. So kudos to you.

I would have positioned my portfolio a little bit better than what my initial thoughts were. So I'm not that smart. So you kind of answered it before, but you've probably seen lots of crazy stuff in your career. Where does negative oil stack in all the crazy things that you've seen in your career?

It's going to be my top three, I would say. I mean, never in my wildest dreams that I think that a commodity would ever go negative. I mean it's probably top one. I mean it's just unprecedented. And the speed of the move was crazy. So yes, it's definitely up there.

I mean you mentioned this. So you have some credit provisions or whatever, but it's not being material. I'm just kind of, walk me through what you guys were doing. I mean, you said it a little bit in terms of moving people out of front month, but like how was there not just major impacts on your business? And are there competitors out there that you saw or are seeing that have just taken it completely on the chin from the negative oil?

Yes. So the only things that I can tell you are things that are public. I mean, there's nothing else that I know. But Interactive Brokers announced. And this is also the Bloomberg article that announced our letter and everything. So they announced that, about $88 million of losses. We had some small losses. I'm sure there were lots of small losses scattered throughout the industry. The estimate of the aggregate losses, and it's hard to know because it moved so quickly, both up and down. I mean in a bizarre way, you never reacted at all to the situation. By the end of the day, everyone was positive. We don't run our business that way. We react immediately. And so does everyone else. But the estimates of the losses could be anywhere from $150 million to $1 billion, but no one knows exactly sort of when people were liquidated or what happened. They just take the size of the moves times the open interest. So there could be people out there who have significant losses. I just don't know. The other thing we know is a very large Singaporean energy business effectively filed for bankruptcy, very large, very well-respected name, rumored to have very significant losses overall. And there are a couple of similar companies out there who are rumored to have losses. So there's going to be pain out there. Obviously, it's also going to be the frackers and the producers, the pain is going to be throughout the industry...

Yes. From a risk management perspective, what we saw in March and early April, was it a situation where you were having to kind of have direct oversight on every single thing that was happening? Or you sort of have all the systems in place where it was being managed the way it should be based on kind of what you've put in place in that common sense approach.

Yes. I have to say, we've been through a number of these things now. As I sort of said, I kind of feel we have a really good battle hardened sort of management team. We came through the financial crisis, we went through the flash crash. I mean, we haven't got everything right, right? I mean, you know we had some issues where things didn't work exactly as planned. But over the last 10 years, we've managed to massively accrete our capital. I think we've been in aggregate, massively profitable, and we've learned along the way. And I have to say I was really, really proud of my team. I mean, there was no panic. Everyone was working from home, totally calm, and we relied on the system we had in place to protect us. I think if you don't have all of those foundational things in place and something like this hits you, you can't build them on the fly, right? And you can't manage a business our size on an ad hoc basis. So I think this really comes down to making sure you institutionalize your approach, that you have the right controls in place. You have the right people doing the right things. And you have smart people who can deal with exceptions quickly and run towards the problems as they start emerging, and that is very much our approach. So honestly, it's pretty sort of calm for us. I mean, there were things we had to dump on and we saw risk study to pop up like WTI, and we immediately got on and in days got all our customers out of the contract. And, but there wasn't panic, and it wasn't like everyone was running around sort of hair on fire. But I think it's because we have tight team, we've been together a long time. We've seen a lot. And I think we have, hopefully, the right kind of controls and infrastructure in place. But it ain't over yet. So we understand we should stay guided and stay vigilant and make sure that we kind of do our jobs.

Got it.

Does that answer your question, Russell or?

Yes. It does.

Yes. Okay.

I have one more question. And now I'm blanking on it. So I think I'm good.

[Operator Instructions]. Our next question comes from the line of Paul Dwyer with Punch & Associates.

Nice job navigating Q1, I guess, your Q2. But could you spend a little more time talking about how payment segment has seen any issues from coronavirus?

Yes. I guess the two things we've noticed there is obviously, there's been sort of a traction in trade and sort of cross border activity. That ultimately feeds into the payments business, right, because there is just less cross border stuff happening. So that's a pretty negative general trend. And I think we're probably still at the front end of that. So hopefully, that turns around at some point. So that's sort of generally negative. We didn't really see that in this quarter because the number of payments went up, but the payments were a lot smaller, right? So there are signs out there that, that is not naturally going to be a positive trend for us. The thing that really hurt us this quarter is we had been getting a lot of, for us, sizable payments coming through the system-related to capital investments, dividend payments, those kind of things. So it wasn't sort of the $100,000 payments, it was the $5 million payments. And obviously, we just make a lot more money on a bigger payment. And that was noticeable in how quickly that dropped off. So those nice big payments where we make a we make obviously a smaller percentage on those, but the absolute dollars is bigger. That really helps sort of boost our P&L. So I guess those are the sort of two trends. I think the second one was the one that impacted us more in the quarter. We continue to see a good flow of payments. I think they are smaller. And I think if the world sort of stays shut, you're probably going to start to see that reverse a little bit, I would suggest. But that's kind of my views on it. But what we did tell you in my introductory remarks…

Okay. Great. And then changing gears a bit. Any update you can provide on the debt capital raise for GAIN Capital?

Yes. So we're working with Jefferies. Perversely and surprisingly, the markets actually look fairly stable at the moment, and the high-yield issuance has been pretty active. So we're sort of in-process with getting ourselves organized to get the capital in place in good time for the closing of that transaction. So all under way and kind of all on track.

Perfect. Okay. And then maybe just last for me is you talked a lot about additionalconsolidation and opportunities over the next few years here. What do you think would make sense to add to the platform in terms of another leg? Or are you looking at just adding scale to the existing platform? Just talk a little bit more about what you're thinking the big picture there.

Yes. So I think the thing that makes our platform more valuable to customers is to make sure that we have sort of the one-stop shop for execution and clearing. So it's a little bit like a network, right, a network that goes to one place is not really valuable. So over the last 10 years, we've tried to add all of the markets and venues that we think are interesting to clients. That's sort of a never-ending process. I mean I think UOB acquisition was great for us because it positioned us well in some of the key exchanges and markets up in the Far East. So I think we'll continue to sort of add products and capabilities, and that will be sort of just a never-ending thing we have to do to keep our network relevant and to keep it exciting and sort of front and center with our customers. I think the more important thing now, given that we believe we already have kind of one of the best networks for execution and clearing out there cross-market, cross-product other than the bulge-bracket banks. What we really need now is more volume through the pipes. So that's going to require us to push out into more customer segments. To do that properly, we need to make sure we have the right sort of on-ramps onto our network. I mean, you can't use a very high-touch broker resist model for retail, for example. And you can't use a no touch, no service model for large customers that have complex solutions. So you've got to figure out how do you build those on-ramps to get that flow into your pipes. That's the tricky part of it. And I think we're doing well on that. And frankly, that was the real…

At this time, there are no further questions.

All right. So if we have no one else, I would just like to thank everyone for joining. Once again, our thoughts with the countless millions of people that have not fared well, and we certainly know we're amongst the lucky ones. We'll do all that we can to get to that new normal and be in a position to take advantage. I would like to thank all of our clients for trusting us through these difficult times. And once again, to our amazing and talented team out there, these guys have been warriors for us. So thank you, and we will be speaking to you in about 3 months' time. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.