StoneX Group Inc (SNEX) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the FCStone Group fiscal third-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference call is being recorded today, Thursday, July 12, 2007. I would now like to turn the conference over to Bill Dunaway, Executive VP and Treasurer.

Great. Thank you, Mary, and good morning, everyone. I would like to welcome you to FCStone's fiscal third-quarter 2007 earnings conference call. Shortly before the market opened today, FCStone issued a press release reporting its earnings for the fiscal third quarter of 2007. The press release is available on our website at www.FCStone.com.

Additionally, we are conducting a live webcast of this call, which also will be available on our website after the call is concluded. During today's call, Pete Anderson, our President and CEO, will first provide an overview of our results and commentary on our business. Bob Johnson, FCStone's Executive Vice President and CFO, will then provide details on our financial performance for the third quarter. Pete will then conclude our presentation with some closing remarks before we open the call up for some Q&A.

Please note that today's conference call is copyrighted material of FCStone and cannot be rebroadcast without the Company's expressed written consent. I would also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the Company. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

It is important to note that such statements about FCStone's estimated or anticipated future results, prospects or other nonhistorical facts or forward-looking statements can reflect FCStone's current perspective of the existing trends and information as of today's date. FCStone disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Actual results can be affected by inaccurate assumptions, including the risks, uncertainties and assumptions described in the Company's filings with the Securities and Exchange Commission.

In light of these risks, uncertainties and assumptions, the forward-looking statements on this call may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements made on this call.

I would like to now turn the call over to Pete Anderson, our President and CEO.

Thank you, Bill. I would first like to thank everyone for joining our call this morning. I'm happy to be here representing FCStone for its fiscal 2007 third-quarter results conference call, which marks almost an entire full quarter of operating as a public company. As you'll note from this morning's earnings release, our third-quarter results showed continued strong growth following the successful IPO in March of this year.

Revenue for the third quarter of fiscal 2007 net of the cost of commodities sold is $64.4 million, which is up 35% from the $47.6 million in fiscal 2006. For the first nine months of fiscal year 2007, revenues net of the cost of commodities sold are $181.8 million, a 41% increase from the $129.2 million in the year ago period. Bob Johnson, FCStone's CFO, will provide additional detail on the Company's financial results in his portion of the call.

As a company, we continue to focus on our core business segment, risk management consulting. The consulting fee revenue, trading and execution business once again experienced strong momentum from both the OTC and exchange traded commodities. Our clearing and execution business segment also generated strong results during the quarter.

In addition to the financial results, I would like to recap the FCStone Group Inc. equity offering that concluded in March and raised approximately $131 million. Utilization of the proceeds included the payment of corporate subordinated debt, totaling $28.25 million. Approximately 15% of the original stockholders' holdings were redeemed, totaling $48.2 million and expenses of $1.2 million. Funds remaining are $53 million, of which $25 million has been used in FCStone LLC as regulatory capital in our exchange based platform. The remaining balance of $28.2 million is being held by FCStone Group Inc. as we look at various acquisition candidates, regional and product line expansion opportunities and technology and platform initiatives.

Before I discuss our strategic initiatives, I would like to talk a little about the overall markets and industries we service, including how economic fundamentals are driving these market segments. Our core grain production consumption clientele were experiencing ten-year highs with unprecedented volatility in the commodities they deal in. This is being driven primarily by the mandated demand for both corn and soybeans in the renewable fuels industry.

Specifically, we've seen a shift in acreage production of both soybean and cotton acres to corn. The shift to corn has increased projected planted acres of corn by approximately 14 million acres for the year versus 2006 production or an overall estimated production increase of 2.1 billion bushels. This translates to a 20% increase over 2006 production.

At the same time this additional corn production is developing, the mandated increase in demand from the ethanol industry will consume a significant percentage, if not all of this increased production. With such strong factors influencing prices on both the supply and demand side of production, you can see why volatility has been extreme.

As the domestic grain and energy markets are realigned to supply the renewable fuels industry here in the United States, the continuing worldwide demand for soybean production is migrating to Brazil. Estimates of increased soybean production in Brazil are 5% over the prior year's production. The sugar and ethanol industries in Brazil are also expanding, driven by higher prices, volatility and demand.

Keeping in mind the current environment of the various industries and commodities that FCStone services, our strategic focus is to provide the necessary instruments, strategies and platforms for a traditional core grain and energy clientele to manage their risk. A prime example of this was the recent development of an OTC structure that locks in the profit in the ethanol production process, which also required significantly less initial margin requirements versus an exchange based transaction. This allows the client to utilize the structure for a greater unit volume to lock in the profits with the same amount of working capital. This enables FCStone to provide greater volume and longer tendered instruments in our client base.

Internationally, we continue to expand our presence in Latin America with our consumption clientele, as well as throughout Brazil on the production side of the market in grains, sugars, renewable energy and foreign exchange. This particular business unit is one of the fastest-growing divisions in the Company.

Looking at Asia, China continues to provide the demand for virtually all the commodities FCStone deals in with a focus in grains, clearing and execution. Several of the Chinese FCMs that have committed to clearing through FCStone are being organized and processed. We expect three of these organizations to be clearing through FCStone within the next month.

The Company continues to target the expansion of our risk management services in areas such as foodservice, livestock, forest products, carbon credit and foreign exchange. The Renewable Energy division is another one of the business units that has seen significant growth and will expand as the industry grows in order to meet both economic and mandated demand. We anticipate the expansion in all of these areas to accelerate with the addition of experienced consultants, trainees and interns.

On that note, our goal by the end of the calendar year has been to add an additional 20 trainees or experienced consultants. So far this calendar year we have added six trainees in our domestic offices and five in our Brazil office, bringing our total consultant network to 116.

Approximately a month ago we had an orientation for the class of 2007 trainees that included eight trainees and four interns. We remain committed to recruiting top talent to build our pipeline of experienced consultants, which is the lifeblood of our Company.

Before I have Bob speak to our financial metrics, I would like to take a moment to discuss the sale of the majority interest in FGDI to our partner, Mitsubishi and the effect that has on the Grain Merchandising segment of the Company, as well as a few other points of interest.

On June 1, 2007, FCStone Group Inc. entered into an equity purchase agreement to sell a portion of its interest in FGDI LLC to Agrex Inc., a subsidiary of Mitsubishi and the other existing member of FGDI. Following the sale, FCStone retains a 25% interest in the equity of FGDI. Agrex paid the Company $6.75 million in exchange for 400,000 membership units held by the Company. We anticipate that under the applicable accounting standards, FGDI's revenues and expenses will no longer be consolidated in our consolidated statements of operations for future periods. Under the equity method of accounting, the Company will instead report its proportionate share of FGDI's net income as a single line item on its consolidated statement of operations.

Also the Company anticipates it will discontinue reporting a minority interest in FGDI. That said, we anticipate that FCStone will continue to utilize FGDI to facilitate principal cash frame transactions for our clientele where needed and appropriate. The merchandising expertise, logistical capabilities, financing capacity and worldwide access have been expanded and strengthened through this transaction with Mitsubishi, and we are excited about the opportunities that are still available for this business.

Another area that we believe is of interest to our shareholders is the final testing of the Green Diesel biodiesel plant, which has just completed preliminary production testing and proving. The plant has successfully produced biodiesel and is going through a final commissioning phase prior to commencing full capacity production within the next few weeks.

The other initiative that has started to show results is the consummation of our first carbon credit transaction. The anticipated sale involves 3 million tons of options over a period of five years and gross revenues of $1.1 million are in escrow as validation and verification of the tons are authenticated. We believe that the traditional commitments to our clients' best interests, the strength of FCStone's consultant experience and expertise and the alternative platforms to manage our clients' risk will continue to drive the growth and development of FCStone over the long-term.

With that, I would like to turn the call over to Bob Johnson for a financial review.

Thanks, Pete. As mentioned, we were pleased to report another quarter of strong growth, which is reflected in our third-quarter results here. Just to reiterate, our third-quarter revenue net of cost of commodities sold was $64.4 million, compared to $47.6 million in the prior year, which was an increase of 35%. Our pretax income was $12.9 million for the quarter compared to $6.4 million for the same period last year. Finally, our net income was $8.1 million for the third quarter compared to $4.1 million in the last year.

Now let me take a few minutes to talk to some of the main components of the quarter's results, and we will start with our $16.8 million net revenue increase. First our commission and clearing fees were up $7.5 million or 27% with approximately $4.2 million of this increase coming from our exchange traded business and the other $3.3 million of this increase coming from our ForEx commissions and clearing fees.

Next, our service consulting and brokering fees, which are primarily our over-the-counter product brokerage fees, were up about $1.6 million for the quarter over last year, approximately 17%. While we had a sizable increase in over-the-counter contract volume during the recent quarter, we didn't have any higher dollar weather-related over-the-counter trades like we had last year, which effectively lowered the average rate. The bulk of this increase this year was in our renewable fuels and Brazilian operations.

Our interest income was up $6 million from last year, of which about $4.8 million came from our CRM and clearing and execution segments with the balance mostly from our financial services repurchase program. Of course, most of that program's interest income is offset by interest income of the repurchase program when we draw on the lines of credit on that.

The big increase in the CRM and clearing and execution segments' interest income was related both to higher short-term interest rates, up from about 4.7 last year to just under 5% this year, and more significantly, much higher customer segregated and over-the-counter margin deposits that we are carrying. Our balance sheet assets at May 31st '07 were just over $1.5 million, whereas a year ago at May 31st they were just under $1.2 billion.

As we look at expenses, our expenses net of cost of commodities sold increased approximately $9.6 million for the quarter over the same period last year. Of that $9.6 million increase, our revenue volume related variable expenses of broker commissions and benefits, pit brokerage and clearing fees and IB commissions accounted for approximately $8.2 million of that number. Interest expense was up another $1 million due to the repurchase program plus additional borrowing at our Grain Merchandising segment, which was a result of higher grain prices. Finally, professional fees were higher due to the Sarbanes-Oxley compliance efforts and work in the carbon credits area.

We next looked at our two main business segments, our CRM full-service segment and our clearing execution segment. The CRM full-service segment generated operating income of $9.9 million for the quarter compared to $6.1 million last year. This segment benefited from increased commissions and clearing fees with most of that increase coming from our growing ForEx commissions business.

Our over-the-counter revenues were higher despite no large weather trades or significant green accumulator trades like we had in the last year. Interest income was up $3.1 million as a result of the higher short-term rates and much higher customer seg and over-the-counter margin deposits. You can see this segment's income margins continue to be very favorable at well over 30%.

Next our Clearing and Execution segment had operating income of $3.8 million compared to $3.3 million in the prior year with about a 16% increase in contract volume and higher interest income, again as a result of higher interest rates and higher seg fund balances. Also, our smaller Financial Services and Grain Merchandising segments saw significant improvements over the prior year period.

Reviewing our balance sheet, our total assets were just over $1.5 billion at May 31st, up from a little over $1 billion at August -- last year on August 31st. This $450 million increase was due roughly to about $240 million in additional customer seg funds, approximately $110 million from our additional over-the-counter customer margin accounts, $24 million from our financial services repo program and about $20 million from the Grain Merchandising segment. We also had about $53 million of this increase was a result of our IPO proceeds after the stock redemption and the debt repayment. The primary reasons for most of these increases were significant current year grain market rally, continued commodity volatility and then the resulting increased open positions, exchange margin increases and volume of our customers this year. As Pete noted, following the quarter, we sold part of our ownership of FGDI, and we expect to realize a onetime pretax gain on that sale of approximately $2.6 million in the fourth quarter.

Moving on to a couple other items, special items, as we noted in this morning's press release, FCStone's Board of Directors has approved a three-for-two stock split that will be distributed in the form of a 50% stock dividend. FCStone's stockholders of record at the close of business on September 17th will receive one additional share for every two shares of common stock held on that date. We intend to distribute the shares on September 27th.

The stock split will increase the number of shares in FCStone common stock outstanding from approximately 18.3 million currently to approximately 27.5 million. We believe that this stock split is a natural reaction to the Company's strong performance, as it allows for a more attractive entry point for new investors. We also believe it signals our confidence in the Company's future earnings growth.

Secondly, the Company announced today that it has filed a registration statement with the Securities and Exchange Commission relating to a proposed public offering of up to 4.3 million shares of common stock plus an additional 15% or 645,000 shares for the underwriters' over-allotment. This offering will be primarily for certain pre-IPO stockholders of FCStone, which is basically the prior grain cooperative shareholders of our Company. Please note that FCStone will not receive any proceeds from this offering, nor are any executive officers selling any shares in this offering.

Finally, I might add that with this third-quarter's performance, our nine-month revenues net of cost of commodities sold were $181.8 million compared to $129.2 million in the prior year, which represents an increase of 41%. And in addition, our net income was $21.3 million for the nine months compared to $11.4 million in the prior year. With that, I'll turn it back to Pete for some concluding remarks.

Thank you, Bob. FCStone looks forward to building upon the momentum generated following the IPO, as well as leveraging industry dynamics that are in place to drive our volumes and the growth of the Company in the future. We continue to demonstrate our value to our clients through the services and products provided by our network of risk management consultants and their ability to utilize the various platforms available to them. This in turn facilitates the development of long-term partnerships with our clientele in managing their commodity risks. Finally, the initiatives that have been implemented over the past several years in renewable energy, the international efforts, foodservice, livestock, forest products, foreign exchange and fuel surcharge are beginning to hit their stride and have allowed us to offer expanded products, services and instruments to both our current and new clientele. We believe this is clearly reflected in our sales, profit and volume growth. That concludes our prepared remarks. We would now like to open up the call to questions. Operator?

(OPERATOR INSTRUCTIONS) Rich Repetto, Sandler O'Neill.

First question, FX commissions, you broke it out, I believe, last quarter. Can we get some numbers on that this quarter?

Yes, it will be broken out in the 10-Q that we hope to file tomorrow. I was just -- I've got it here in front of me. Just a second. We had $3.6 million in commissions for ForEx trades in the quarter, which puts us at $8.8 million for the year -- for the nine months.

Got you. That's helpful. Then really what is very interesting is the interest, and I guess the spread that you're earning. I'm just trying to see whether we -- most of us analysts, we are equity-oriented, and it seemed like short-term rates went down, but your spread widened. And there was an increase in seg cash, but I am just trying to understand whether the driver here to this interest is just trading, or is it really the short-term rates or the balances?

It's mostly the balances. Short-term rates declined very slightly within the quarter, still significantly ahead of last year. Our open position -- all the exchanges have increased the margin requirements on most of the grain commodities. So during the quarter our [probably] average customer seg funds were quite high. You know, we started -- at the end of February I think our balance sheet had like over $1.5 billion in assets, and we ended the quarter at $1.5 billion. We were probably a little higher during the quarter. So the funds balance probably has a greater effect than the rates.

So much of that, Rich, is driven by just volatility as we go through any period.

Volatility of --?

Of the specific commodity as far as margin requirements and volumes.

And could you help me? When margin requirements go up because of volatility or because the exchange purely just changes them, is that going to --? What impact -- does that make seg balances -- will that go up, as well?

That would be reflected in our segregated fund balances, yes.

Okay.

It's basically the open trades that our customer has, the bigger volume we have there, the more open trades they have the more margin they put up.

I gotcha. And seg balances are the best way to measure those open trades?

Yes.

Okay. I think I would like to talk a lot more off-line about that. I guess last question would be, Pete, can you just go through the seasonal cycles? I mean, your net income increased from the prior quarter, and I am just trying to see for someone that is not as familiar with the ag cycle, what is the best quarter, and what can we expect I guess as far as just pure seasonal cycles going forward?

Traditionally the cycle, and for us and I think most of agriculture, has been really the fall. Our first quarter traditionally had been one of our best quarters and largest volume, but if you look at our third quarter, it was basically for us to some degree of perfect storm. You had a range of volatility in grains of about 30%, the same for energy. FX really volumes increased dramatically. Our Latin American volume increased significantly. All those factors coming together really made for the best quarter we have ever had, and a lot of that driven by volatility, as well.

So going forward, depending on where volatility is, we anticipate we will have continued growth going forward. But then volatility, to a large extent, really dictates extreme growth or expansion in any of these commodities or these industries. As we have moved into a lot of the new initiatives, what we have seen instead of the traditional first-quarter strong growth and then basically that crop cycle or that agricultural cycle moving or going lower into the third and fourth quarter, basically our volume has really flattened out to some degree based on the consumption side, as well as the production side of both ag commodities, as well as the energy side of the business, as well.

We're talking -- the fiscal, when you say quarters (multiple speakers)

Fiscal, our fiscal quarters.

Okay, that helps. Just one last follow-up on your volatility. How are you measuring the grain volatility, etc.?

Well, if you look at basically our third quarter, we had a-- versus December corn, which is new crop corn, you really had a trading range of almost $1.00. I think the high approached something like $4.30 a bushel and a low in the low $3 level. Just even the day-to-day volatility has really been extreme, so -- and that base with really a pretty substantial harvest this past fall and an anticipated really large crop.

As I said my comments, we are seeing increased production in corn acres by almost 14 million acres, and that converts into about a 20% increase in production. We're still, even today after those announcements and a larger expansion and carry out of inventory for next year -- I'm not sure where corn is trading right now -- but earlier in the day it even opened I think $0.03, $0.04 higher.

So that is the kind of volatility we are seeing based on, you know, there is a substantial amount of demand, but at the same time there's weather concerns right now, and that is really what is driving a lot of the volatility on the ag side. And then on the energy side, we've seen $55 crude, and most recently, $70 plus crude. And that is driven by, to a large extent, by demand and just supply.

Got it. Congrats on an excellent quarter.

Mike Vinciquerra, BMO Capital Markets.

My compliments to you guys, as well. I want to follow-up on Rich's first question, which I think is the biggest delta versus our estimates, just the interest income. Just dig a little bit deeper here. When we look at the seg funds, we can look at the CFTC site on a monthly basis, and then I know that you guys have some incremental margin you keep from your clients because you go above the minimums in certain cases. You've got OTC trading, but what was the average balance of customer assets available for investment during the period because we can only see the month-end numbers and then your quarter-end?

I think that's really, to some degree, a competitive issue, Mike, and I don't know that we want to really give that kind of number.

We did have a little higher during this quarter after February, prior to this month-end as we accumulated -- our historic customers accumulated positions, and then they kind of start shipping grain out. So it was a little higher, but I do not know that that is a number we want to publish.

Okay. Well, generally speaking, then, when we look at the CFTC numbers, we do need to tack something onto that on a monthly or quarterly basis for the excesses you may hold from some clients, as well as for the OTC margin you might hold. Is that correct?

Right. Yes, that's not a regulated part of the business, so those customer funds do not show up in seg funds. When you look at our balance sheet and you see this huge cash number, and we added a footnote on that, but the bulk of that has kind of been held in money market for our over-the-counter trading entity. And then some of the amounts, when you look at the balance sheet, when you see the proprietary part of the seg -- it is in the seg fund area, but it is not accounted as customer regulated seg funds. That is funds on deposit with our over-the-counter business that, instead of going to counterparty, it is close enough that they can offset it with an exchange product.

I see. Okay. I may follow-up with you on that, as well. On the interest expense line, a big drop on a quarter-over-quarter basis. I know it is somewhat the elimination of your -- of the expense or the outstanding debt with some of the IPO funds. Anything else going on in the interest expense line that should be noted?

No, I think that was the biggest part is just the retirement of significant amount of debt there the first, the middle of March.

Okay, and then more strategically I guess on the product side, Pete, you mentioned the renewable fuels a couple times. Can you just remind us exactly when you say renewable fuels are you talking strictly ethanol and biofuel trading, or are you talking about the sugar, corn, as well going into that? Just a little more detail on --

Our renewable fuels would really be the ethanol industry, as well as biodiesel, to a large extent and to some degree sugar based. But the bulk of it would be corn based and here in the US domestically. And it is really -- that relates to both managing the input side, corn and natural gas, as well as the production side of ethanol and the energy production.

I see. Has anyone else joined you? I know you were one of the first market makers in the pure ethanol contracts, if I'm not mistaken. Are there any other market makers that have joined that market?

No, not at this point, not that I am aware of.

Okay, and then Pete, you were also talking briefly about the carbon credits and how you had your first major transaction -- it looks like it is coming through now. Can you talk about the opportunity there? Is it a lot in Europe right now and it's starting to come to the States with some of these regional climate control groups that are getting together?

Yes, and we're at the point where we're really coming to a conclusion as far as really validation and verification of the existing inventories and relationships that we have. And as we get those initiatives completed and authenticated, then I think we'll be in a position where we can offer out those inventories to not only interested parties here domestically, but really on an international level, as well.

Okay, and then just one thing on the -- you mentioned three new Chinese clients. If I remember, you had roughly 10 or 12 before. What is the rough number of clients you have from that particular country?

We have, as far as the commercial side of the business we have 20 plus, as far as those that are approved to really trade outside of the country. And through those relationships we have dozens and dozens -- well, probably hundreds of related customers. Now through the FCM initiative, I think there is up to six FCMs that are approved to trade directly outside of China. Of those six I think probably four of them have committed to trading with us, and the other two are -- we're in discussions. Three of those six are really getting the facility to facilitate those transactions organized, and we anticipate -- we're really in the process of getting the systems in place to really start transacting that business almost immediately within the next 30 days.

That's great. Okay, very good. Thank you, guys.

Mark Lane, William Blair & Co.

Two areas of questions. First, you referenced large transactions and foreign exchange and some different types of transactions, but would you characterize this quarter as a typical quarter in terms of large deals, or was it particularly light? How would you characterize it?

You mean as far as really large transactions like, let's say, a weather transaction or something like that?

Yes, weather, foreign exchange, anything that you (multiple speakers)

Most of it is really just in the normal course of business and with large volumes from basically, like as I said earlier, kind of from all universes of the Company from our traditional commercial grain elevator network, as well as the renewable fuels side, the international market. Foodservice is starting to ramp up. Foreign exchange is from a large universe of customers both on the commercial hedged side, as well as basically retail side of the business. So it's basically all aspects of the Company really generating revenue. And I think the third quarter was really, as I said, reflects the volatility in all the industries that we're dealing in today and really spurred a significant amount of that volume and revenue in that third quarter.

And how about the OTC? There was a comment about, you know, that revenue was up. And there was also a comment about the contribution and the increase in the segregated assets that came from OTC margin balances. Can you give us an idea of what the OTC margin balance is for the overall company at the end of this quarter versus last quarter?

That's, again, Mark, that is one of those issues I think from a competitive standpoint we don't necessarily want to put that number out. I would say that in most cases, though, the margin requirements that we have based on the OTC products, will really be similar to the exchange base underlying product or instrument, if not less.

In a number of cases we will try and develop or structure a product that doesn't require as much margin. And a good example is the structured product that was developed in the ethanol or the renewable fuels group to provide to their customer base where you -- putting on the spread of natural gas and corn as the input and ethanol as the output, and that structured product margin requirement was significantly less than if you had put it on the various exchanges and the various margin requirements there.

Okay, but just to clarify, within the prepared remarks the increase in total company assets between -- over the last 12 months, $110 million of the increase was OTC margin balances? Is that correct?

And accounts, yes.

Okay.

If you look at our balance sheet under cash, a significant portion of that is from the over-the-counter cash that is invested into money market. Then if you look under commodity deposits and accounts receivable where you see the proprietary commodity balances, which all gets invested, it was like $68 million at May 31st. That is primarily the over-the-counter deposits also.

All right, perfect. Thank you.

Christopher Allen, Banc of America Securities.

Nice quarter. I just have a couple of kind of model questions. Just on the share count, does that fully reflect all options issued at this point?

It does for the quarter. As we go forward, that will probably rise somewhat. This 123, that has been a real -- we've got one of our CPAs and staff to work on this thing, and it is quite a new world with that 123(R) out there. This quarter we didn't -- the IPO wasn't effective for the whole quarter. So I would imagine next quarter as we go forward that is going to be a little higher number.

So somewhere north of $19 million?

I would guess.

Okay, and then just going back to Mike's question on the interest expense, clearly the debt paydown helped, but the notes payable line dropped by $150 million sequentially. I would think that that also factored into the decline in interest expense. Can you just give us some color there on how that impacted interest expense?

On the balance sheet, we were setting up the FGDI sale. There is assets held for sale and a liabilities held for sale, so some of that notes payable is included in that as (multiple speakers) segregate those items. So I don't think it went down quite that much. The repo -- the repurchase program kind of peaked out. I don't know that it peaked out in February or shortly thereafter, but that came down dramatically in the last part of the quarter. But still our interest expense on the repurchase program was probably higher this quarter than a year ago just because the volume had been higher. I think the bulk of it -- part of it probably was a little bit on the Grain Merchandising side, but the bulk of it was probably just the debt paydown.

Gotcha. Okay, and then just on the expense side, just looking at pit brokerage and commission fees, as a percentage -- basically on a per contract basis for the exchange traded volumes, that jumped from $1.14 in 2Q up to $1.24 in 3Q. I'm just wondering is it a mix issue? What's driving that up? Is it increases on the exchanges in terms of fees?

Well, part of it's increase with the exchanges on fees, and part would be a little bit if it's electronic or if it's something that goes through the pit and the pit broker is a little higher. But I would guess the bulk of that has probably been exchange increases.

Gotcha. So assuming a similar environment that will remain kind at the current levels going forward?

Right, and on our clearing and execution side, the commissions kind of get increased slightly with the increase in fees also, so that kind of hurts long-term wise the margin on that clearing and execution side because as some of that goes up, we have it covered with the commission increase.

Just lastly, do you guys -- I might have missed it -- do you guys provide over-the-counter volumes?

Yes, we put them in the 10Q. Hopefully that will be filed tomorrow. They will be significantly higher than a year ago, so the rates will be a little lower, but the revenues were higher.

And I know you guys don't like to talk about the contribution from Brazil specifically, but can you just give us some color in terms of how much of an impact it had on the growth from a sequential basis and how investors should be thinking about the potential down there right now?

I think, Chris, from the standpoint of increase in capacity, we are up to -- in fact, I think in Brazil specifically -- we're up to 16 consultants down there in Brazil now, as well as we've got six here in the Kansas City office for really servicing the Latin American group. So in total we've got 22 consultants. And that continues to ramp up in basically all the commodities that we're pursuing down there, grain, sugar, [processing], all those industries. So it has significant potential as we go forward.

Traditionally we have always believed that over time that that operation or that office and opportunity down there will compare to what our commercial, our traditional commercial agriculture and grain operation has been over the years here.

Just out of the 22 consultants, how many are actually contributing at what you might consider a full run rate right now?

Probably half of them, and the others -- the real difference down there with that operation is traditionally here in the domestic offices, our trainee program is really over a two-year period, and in that two years they are educated, they are developed, and usually in most cases they are up to speed covering themselves and really producing at the end of that two-year period or really starting to, where we've seen down there the demand for risk management services and intelligence and education is such that that is significantly faster, has [passed to the] 6 to 12 months in that operation down there.

Just one final question. The production per consultant, how does its compare in Brazil versus the US?

It is going to compare pretty favorably, if not exceed what the US production is.

Great. Thanks a lot, guys.

Christopher Middleton, Atlantic Equities.

I think this might tie into that last point. It was just on the commission line year-over-year where the actual rate of increase was relatively low versus number of consultants you're set to be adding. Could you just -- does that tie into the growth in consultancy in Brazil or has the makeup of your US consultants changed?

Yes, I think an overall increase in numbers. And we have significant capacity within the existing universe of consultants that we have had, as well as the new trainees and those trainees that are really just hitting the ground or hitting their stride.

Also, if you look at the service consulting and brokerage fees, that also is entirely broker production revenues.

Okay, and then just a quick question. Back on the segregated assets figure, in the monthly data that we can get hold of, the big jump in March, was that just exceptional? That does not seem to fit with seasonal patterns that we've seen in other years.

I think a significant part of that was just due to volatility and volumes moving through that volatility or that time period.

Okay, and then just last point, as we see generally sort of liquidity begin to tighten up, would that remove some more leveraged buyers from the market? Do you think that could have ramifications in terms of volatility going forward?

As far as basically more liquidity in our shares?

No, sorry, just in terms of we've got obviously credit conditions tightening, spreads tightening. If that tightens just liquidity generally, I guess big growth obviously in volatility as you've talked on prices and hedge funds. So do you see that maybe changing volatility going forward? Could that be a potential impact?

In most cases our experience, at least in agriculture and energy, is as credit and spreads tighten in some cases if anything what that usually ends up reflecting is in a lot of cases is more volatility because you have positions that normally would be held longer-term are liquidated or pushed into the market prior to when really the market really wants it. And so fundamentals usually come back into play over the long-term as far as pricing, but in the short-term a lot of times that creates more volatility.

That's great. Thank you very much.

Jon Braatz, Kansas City Capital.

Pete, I am trying to learn a little bit more about the Company, but you spoke earlier about the dramatic increase in corn acres. And I am trying to better understand if corn is singularly the most important crop or how important that is to your operations. And I ask that because everything else being equal, you could probably argue at this point in time that we might lose some corn acres next year. How important is corn to you in terms of your operations? Obviously, if they're not planting corn next year, they're going to plant soybeans, and I wonder if there is a trade-off there of any sort.

I thin to a large degree -- our traditional commercial agricultural network, and both at one time our cooperative members and the commercial customers that we deal with, both on the production side as well as consumption side, are a significant part of the organization still today and have been historically and corn as a major crop in both sides of production, as well as consumption. I think a lot of that demand for corn, though, really going forward to a large extent is really mandated to a large degree if you look at renewable energy or renewable fuels, specifically ethanol, and so we -- and that mandate really goes out to at least 2012. There's even discussions now as far as expanding or increasing that mandate and really the demand for continued production and expanded acres of corn.

So we are a reflection of really that production and the volatility associated with grain production, as well as utilization or usage of energy and production of energy. So we will reflect that over time as production increases or production decreases, and our goal has been really to link that production side of our business to the consumption side, both here domestically, and we've done that I think for a large extent in our traditional commercial grains network, as well as the utilization of that renewable energy. That is really what we've tried to do from Brazil to, let's say, China in soybean production and the usage and the consumption of that across Asia, specifically China.

I guess what I'm understanding is that the linkage is more important than sort of the gross production. If acres would fall off 5 million next year, you are going to maintain that linkage between the consumer and the producer, and that is what is really critical to your business?

Right, and traditionally what happens, let's say if you have a shortfall, you have a drought or some change in supply and even a drop-off of volatility to some extent, what happens is our customer base, our clientele basically that volume of supply will eventually be traded and cross our books through basically hedging programs and structures to manage that risk.

Thank you very much. Welcome to Kansas City.

[Skip Tate], Botti Brown.

My question is just more qualitative in nature. How do you -- can you spend a couple minutes and discuss how you hire and retain consultants?

Sure. Traditionally we -- there are two ways that we have looked at it. If we find someone that really philosophically looks at managing risk and servicing our clientele, our customer as we do and have traditionally with industry expertise, we will hire them basically immediately. The other avenue that we've utilized over the years that has really been successful has been an intern program where we bring in a number of interns on an annual basis, and taking that internship and looking at those specific individuals and then taking them through a two-year training program where they are assigned to a senior mentor or senior consultant that embeds them in that book of business and simultaneously gives that senior consultant more capacity, more time to pursue and develop new clientele, as well as service their existing customers.

Through that process that trainee is really ramped up over a two-year period with training programs in marketing, customer development, risk management or basically understanding the hedging alternatives and really educating them about how to utilize the systems and the services we provide. Then ultimately a number of our best consultants were our customers at one time or another throughout the life of the Company. And in fact, there's a number of those in almost each of the offices or regions, as well as a lot of the senior basically regional managers and senior management came from our customer base. I was a customer for ten or twelve years before I came to work for the Company.

Okay, great. In terms of retention, they're obviously compensated with commission, but are there other ways that you found have been helpful in retaining quality consultants?

I think our benefits are really competitive as far as providing that aspect of the employment, but I think to a large extent I think the retention -- and we have very little turnover traditionally -- and I think it is really the culture that we've tried to build of really the organization trying to provide the platforms and the instruments and the structure that that consultant brings to us as management and that they need for their customer. And we try to supply that alternative for their customer to manage their risks. That has really been the success of the organization, has been a reflection of whatever that client or that consultant needs for their client is developed and offered, and it is the multiple platforms that I think we provide for that consultant and through that consultant to their client that has really built the culture and the loyalty to the Company that we see today.

Great. Thank you very much.

Management, at this time I'll turn it to you for any closing comments you might have.

We appreciate the opportunity to update our shareholders, as well as the market, and we look forward to continued growth as we go forward. And through all of the initiatives that have been put in place over the last six or seven years and anticipate that we will continue to grow and prosper in those areas. Thank you.

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