StoneX Group Inc (SNEX) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the FCStone Group 2008 second quarter earnings conference call. (Operator Instructions). This conference is being recorded Thursday, April 10, 2008.

I would now like to turn the conference over to Bill Dunaway, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Great. Thank you, and good morning, everyone. I'd like to welcome you to FCStone's fiscal second quarter 2008 earnings conference call. Shortly before the market opened today, FCStone issued a press release reporting its earnings for the fiscal second quarter 2008. The press release is available on our website at www.fcstone.com. Additionally, we are conducting a live webcast of this call, which will also be available on our website after the call's conclusion.

During today's call, Pete Anderson, our President and CEO, will first provide an overview of our results and commentary on our business and the current market environment. I will then provide details on our financial performance for the second quarter and year-to-date. 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 non-historical 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 in this earnings 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 during the earnings call.

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

Thank you, Bill. I want to welcome everyone and thank you for joining the call. We just completed our first 12 months as a public company during a time of extraordinary volatility in the commodity and financial markets. It has been an exciting time for FCStone with substantial growth in both revenues and profitability.

As you can see from this morning's release, our second quarter numbers continue to show strong revenue and earnings results, as we continue to manage the business to represent the best interests of our customers and to create shareholder value. Our results have been driven by our focus on our core business segment of Commodity and Risk Management Services, which has shown steadily improved performance. The Clearing and Execution business segment also continues to experience strong performance.

Revenue for the second quarter of fiscal 2008 was $91.2 million, which was up 51% from $60.2 million in the second quarter of fiscal 2007. Net income for the second quarter of fiscal 2008 was $12.1 million or $0.42 per diluted share, which represents an increase over second fiscal quarter 2007 net income of $6.9 million or $0.32 per diluted share. Excluding the one-time loss of discontinued operations of Green Diesel, net earnings for the second quarter of fiscal 2008 would have been $17.7 million or $0.61 per diluted share.

Before we discuss the Company's achievements for our second fiscal quarter, I would like to briefly address some of the recent macroeconomic events that have impacted the market. As most of you are undoubtedly aware, there have been some substantial headwinds for companies in the financial services arena, primarily stemming from credit issues related to structured financial products. In a recent press release, FCStone stated the Company has no direct exposure to subprime mortgage-backed securities or auction rate securities, nor does the Company use third party repo lines to provide liquidity to its regulated entity FCStone LLC.

The Company does have operational exposure to the over-the-counter or OTC commodity markets. As an integral part of its service to its customers, the Company provides customer access to OTC markets by acting as a principal in the OTC trades with customers. Customer trades are in turn offset by either OTC contracts with major counterparties or by futures or both. The Company continues to deal with all of its major traditional major OTC counterparties and is comfortable with these relationships.

FCStone continues to mitigate its credit risk by ensuring that performance of its major counterparties through credit default swaps [portray] credit insurance with excess coverage in place for all of our major counterparties. The most significant risk for FCStone in the current environment of credit tightening is in our client's ability to maintain adequate credit lines to finance the necessary inventories and inputs in their operations, as well as the substantial margin requirements necessary to hedge those positions.

Thus far, lenders in agriculture energy and other industries have done a commendable job in providing the necessary leverage to finance the unprecedented increase and value of commodity positions of our mutual customers. We communicate closely with our customers and their lenders to ensure that they're able to carry the inventories positioned and additional leverage needed under current conditions.

In terms of the impact to either FCStone's operations or customers, I want to be very clear. We have witnessed no fundamental change to our operating model. We are operating under the same kinds of risks, assumptions and opportunities today as we were 90 days ago. Nevertheless, rest assured that we are prudently monitoring domestic and international economic environments, both for our customers and FCStone as a whole. We believe that we have the people and the processes in place to mitigate any potential issues that may arise, but we are continually seeking ways to improve our methods, operating standards, and contingency plans for unusual market events.

Most recently, the Company increased its margin credit line and subordinated credit capacity significantly in anticipation of possible further increases in margin requirement and continuing volatility in the markets. And, we continue to explore further measures. Bill will provide additional details in his comments.

With one exception to be discussed later, FCStone's growth initiatives continue to be implemented and accelerated in the current environment. The growth in all market segments of the Company has been driven by extraordinary volatility in virtually every commodity and financial market around the world. This volatility is a reflection of the demand and consumption of underlying energy, agricultural products, metals, and soft commodities around the globe, as well as the increased speculative interest in commodities as an investment asset class. All of the demand for additional production and inventories of underlying commodities has taken place during a period of tightening credit access. This atmosphere has increased the necessity to manage volatility through conservative Risk Management Services, products, platforms, and structures, as offered by FCStone.

The need to manage risk of price, position, logistics, credit, and execution and production and consumption is as great in our traditional market segments of agriculture and energy as we have ever experienced. Beyond our traditional core businesses of agriculture and energy, we anticipate continued growth of opportunity in the areas of renewable energy, international markets, food service, weather, livestock, forest products, carbon credits, and foreign exchange.

The driving force in our growth has been, and continues to be, our team of risk management consultants, who are truly the foundation upon which much of our success is built. These consultants are responsible for developing customer relationships, analyzing the commodity risk of our customers, developing strategies to mitigate this risk, and executing these strategies at the direction of the customers.

Internationally, the Company continues to expand in Brazil, where the focus is on the Company's core competency of commercial grain production and handling. Other commodities and industries that represent significant growth in Brazil include sugar, ethanol, coffee, foreign exchange, and consulting. As the US market and domestic demand for grain and production increases, we expect Brazil to see continued expansion in grain production and export, with China driving the consumption side of worldwide demand. Our China division continues to add customers in commercial grain, processing and handling, metals, energy, cotton, and foreign exchange.

In order to sustain our growth, we continue to reassess and develop our training programs to address new and developing products, as well as additional industries that have growth potential. In fiscal 2007, the consultant network increased by 16 to 118, and our goal for fiscal 2008 is to add an additional 20 consultants to the various market segments and geographic regions of FCStone. FCStone currently has 130 consultants, trainees, and interns, and our consultant numbers have increased by hiring established industry expertise, our internal training program, and through acquisition.

The recent acquisition of Downes O'Neill, our premier risk management firm in the dairy industry, is a prime example of the type of organization that FCStone is interested in acquiring. Not only does this provide FCStone with a new customer base, the acquisition has also added five new consultants to the FCStone network. In addition to Downes-O'Neill, we've also made progress toward our long-term growth strategy through the acquisition of Globecot, Inc. and The Jernigan Group, LLC. Through this acquisition, we have created a new cotton and textile division, which is providing expertise in the global cotton and textile segment for both current and potential FCStone customers throughout the world; all of this while adding six experienced cotton and textile consultants.

FCStone will continue to have discussions regarding potential acquisitions with firms that have similar interests and philosophies in serving customers, and will continue to remain disciplined regarding the price we'd be willing to pay and the return we would need to see from such opportunities. The Company's focus and interest regarding strategic acquisitions is in all the various commodities and industries we serve, both here domestically and internationally.

FCStone historically has prided itself in being an innovator in the risk management industry, and made substantial investments to incubate specific programs, products, or market segments for the benefit of our customers and the Company. Examples of this would include our OTC platform, FCStone trading that was started in the mid-1990s. The International division was developed over a 10-year period in Latin America and Asia, and the Renewable Energy division was organized in the late 1990's prior to the significant run-up in ethanol demand.

Our direct investment in Agora-X and its proposed new electronic communications network, which was discussed in our last quarter earnings call, is just such an investment in the future for FCStone. The company was formed to develop an electronic communications network for OTC commodity contracts, designed to help eligible institutional participants achieve a strategic advantage in the rapidly growing OTC commodity market. The Agora-X platform will trade commodity OTC options and swaps in energy, and OTC swatches and swaps in agricultural products for institutional OTC trading firms. Our vision is for the platform to provide liquidity, transparency, and trading efficiency for FCStone, our clients, and qualified institutional participants.

We were very pleased to announce the participation of NASDAQ OMX in this project during the second fiscal quarter. The NASDAQ OMX group has agreed to invest up to $7.5 million as a co-owner of this platform.

Another initiative that FCStone has been incubating is in the carbon market. FCStone is helping its customer base mitigate carbon emissions. FCStone Carbon aims to create, represent, and market technologies that improve efficiencies in Renewable Energy Industry sector, as well as livestock, grain production, and processing segments. FCStone is offering to all of these industries not only a carbon marketing platform, but also a suite of technologies and services that will help find a pathway to being a low-cost producer and a low carbon emitter.

FCStone Carbon continues to develop aggregation agreements, technology, and the carbon credit inventory that it has acquired. To date, the Company has several aggregation agreements that represent creation of significant tons of carbon credits annually after underlying protocols are validated and verified. To date, FCStone has marketed 395,500 tons of carbon credits, realizing about $520,000 of revenue. As the carbon market matures, we believe FCStone Carbon is positioned to effectively represent our customers in marketing their carbon credit production or emission credit needs.

While FCStone continues to innovate and pursue commodity related opportunities, it recognizes that it must continually evaluate its commitment to new ventures. One initiative in an area that FCStone has decided to exit arises from its participation in a venture to develop an innovative biofuels plant. The Green Diesel operation was expected -- based on expert investigations and plant developer representations -- to create a plant based on a novel continuous flow process of production that was represented to be cost-effective to build, to operate, and to maintain. Despite extensive effort, the plant has not met our expectations. After almost two years of development and substantial investment by Green Diesel, the plant developer and FCStone, the plant has not yet passed biodiesel production commissioning tests.

As a result, we have decided not to continue with development and are in the process of closing the plant. We are proceeding with an effort to sell the plant as it is. Although FCStone believes the plant may have a liquidation value, such value cannot be determined or reasonably estimated. However, we are seeing interest in the facility and expect to realize a fair valuation during the second half of the fiscal year. As a result, FCStone will recognize a one-time loss on the closure of this plant, net of tax in the amount of $5.7 million, representing a write-down of FCStone's entire investment.

The last area of importance for FCStone is interest income. Interest rates continue to soften, but that weakness in interest rates has been offset by the significant growth in customer funds, prudent investment management in secure lawful investments, and continued direct hedging of interest rates. Customer funds have grown to $1.45 billion at the end of our second fiscal quarter 2008 versus $861 million during the same period a year ago. The Company invests a majority of customer funds and exchange-approved money market funds and treasuries, with a smaller portion placed in overnight reverse repurchase agreements on treasuries. Hedge gains were accrued on a mark-to-market basis for the second fiscal quarter of 2008; all of this is reflected in interest income of $18.8 million for second quarter fiscal 2008 versus $10.7 million for the same period in 2007.

Now I would like to turn the call over to Bill Dunaway, our CFO, for a detailed financial review. Bill?

Thanks, Pete. As Pete mentioned, we are pleased to report continued growth in our second fiscal quarter, as revenues net of costs and commodities sold reached $91.2 million. Compared to the prior year period of $60.2 million, the second quarter revenues increased 52%. Our pretax income was $28.5 million for the quarter compared to $11.1 million for the same period last year. And our net income was $12.1 million for the second quarter this year compared to $6.9 million for the prior-year period.

As Pete noted, during the second quarter, we wrote down our investment in Green Diesel's developmental stage biodiesel facility. This impairment loss is reflected in the $5.7 million loss on discontinued operations, net of tax, reflected during the second quarter. In completing the disposal of the facility, we may incur up to $3 million in additional charges during the second half of fiscal 2008. Our net income from continuing operations was $17.8 million for the second quarter this year; 154% increase compared to the $7 million for the prior-year period.

Now, let me take a few minutes to talk through the main components of the quarter's results, starting with the $31 million increase in revenues. First, commissions and clearing fees were up nearly $13 million or 38%, with approximately $14.5 million of this increase coming from exchange trades, offset by a $1.7 million decrease in our forex commissions and clearing fees. Next, our service, consulting and brokerage fees -- which are primarily our over-the-counter product brokerage fees -- were up about $14.4 million for this quarter over last year, which is more than 1.5 times the fees recorded in the second quarter of fiscal year 2007.

The bulk of the increase for this quarter came from our energy renewable fuel and Brazilian customers. Our interest income was up 18.9 million, up $8.1 million from the same period last year. The entire $8.1 million increase is attributable to the account balances held in our Commodity and Risk Management Services and Clearing and Execution Services segment, with a $700,000 decrease in our Financial Services segment being offset by a $700,000 increase in our Corporate segment. The significant increase in the Commodity Risk Management and Clearing and Execution segments was a result of much higher customer segregated funds in over-the-counter margin deposits that we are carrying during the quarter, and a $4.4 million mark-to-market gain on our interest rate hedges. Our total marked balance sheet assets were just below $2.5 billion at February 29, 2008, whereas on August 31, 2007, they were just over $1.4 billion.

As we look at total expenses, our expenses net of the costs of commodities sold increased approximately $13.7 million for the quarter over the same period last year. Upon a closer examination of the expenses, volume-related variable expenses of broker commissions and compensation, as well as benefits, paid brokerage, and clearing fees, accounted for about $14.5 million of the increased expenses. This increase was partially offset by lower interest expense of $2.4 million due to the sale of our part of the majority interest of our Green Merchandising segment that we no longer consolidate, and the reduction of subordinated and general corporate debt, which is paid off as a result of the IPO. Other expenses increased by $1.8 million due to an increase in professional fees, insurance premiums, and volume-based data processing fees.

Taking a look closer at the performance within our two main business segments, our CRM Full Service segment generated operating income of $21.8 million compared to $9.2 million last year. This segment benefited from significantly higher over-the-counter revenues -- as noted earlier -- and interest income was up $2.8 million, primarily as a result of the much higher customer segregated funds and over-the-counter margin deposits. Commissions and clearing fees also finished higher by $1.4 million. We continue to be pleased with the favorable margins in this core business segment.

Our Clearing and Execution segment had operating income of $8.7 million compared to $3.4 million in the prior year. The segment had a 56% increase in commissions and clearing fees revenue and also higher interest income by $5.3 million, primarily as a result of higher customer segregated balances.

Reviewing our balance sheet, our total assets are $2.46 billion as of February 29, 2008, up approximately $1.42 billion -- up from approximately $1.42 billion at August 31, 2007. This $1.04 billion increase was due to approximately $455 million in additional customer segregated funds; $424 million from additional OTC customer margin deposits and open positions; $100 million from our Financial Services Repurchase Program; and a $21 million increase in forex deposits. The primary reasons for these increases was the continued commodity volatility and the resulting increased trading volume and margin deposits.

As Pete mentioned earlier, we have recently expanded our margin call credit facilities to address increased margin requirements and the continued volatility in the commodity markets. Our margin call credit facilities have been increased by 100 million to a total of 170 million. In addition, we have recently increased our subordinated debt facility by 12 million to a total of 15 million. We will continue to evaluate our credit facility to ensure they are at appropriate levels.

During the second quarter, we were pleased to announce the recent additions of Globecot, Inc. and The Jernigan Group, LLC, as well as Downes O'Neill, LLC to our product offering. As noted previously, these acquisitions are expected to be accretive immediately as part our growth initiatives, and we will continue to evaluate all opportunities to further our vision of providing the best services to our customers across-the-board in respective commodity markets.

With that, I'll turn it back over to Pete for some concluding remarks.

Thank you, Bill. Overall, we believe that the traditional commitment to the best interest of our customers, the strength of the FCStone consultants experience and expertise, and our various alternative platforms to manage our customer's risk will continue to drive the growth and development of FCStone. The Company will continue to expand the business and grow over the long-term, while also thriving in the current market conditions.

With that, operator, Eric, we'll take questions now.

(Operator Instructions). Chris Donat, Sandler O'Neill.

It's Chris Donat. I'm just trying to get a better handle on your exchange traded volumes and seeing if there's some way we can track them more accurately. As I look back over your volumes historically, it seems like when you go back to, say, fiscal 2006 and early '07, your exchange rate volumes would be pretty flat quarter on quarter, maybe moved by a single digit number. And I know you added the professional traders toward the end of fiscal '07.

Can you give us a sense of where the volume came from in this past quarter? Is it from the professional traders? Is it from your regular kind of elevator customers getting more active? Is it from new customers?

If we look at kind of the increase in exchange fitted volumes from the first quarter to the second quarter, about $250,000 of it came from the commodity risk management side. So that's going to be our core customer base. And about $4 million of that increase came from the Clearing and Execution segment.

You know, what you've seen is in that Clearing and Execution segment starting in the fourth quarter of last year, you know, you did see that dramatic rise with the addition of that group of professional traders. And I think in the Clearing and Execution side, you were just really seeing, as the markets start to trade more and more electronically, you get a lot more people; a lot of our professional traders that were on the floors of the exchanges are moving upstairs and are allowed not only to just trade in the commodities that they were traditionally dealing in with, but trading electronically now have access to more commodity markets. And it's just helped drive the continued growth in exchange traded volumes.

Okay, so these are -- this is trading going on in the CME group and at NYMEX and in other exchanges also?

And the ICE Cleared. We do a lot of what used to be the NYBOT, which is now ICE Cleared in the soft commodities and at the NYMEX and the energy and the metals.

Okay. So, based on that being really only 250,000 contracts coming out of CRM, it's not -- they're not really moving that much. It's more the new professional traders?

On the exchanges, yes. Where you're seeing more growth is in the over-the-counter, in the commodity risk management side. It did represent the 250, in the commodity risk management side obviously showed what was a significant increase over what you saw in the second quarter.

Right. And then, I'm not sure I caught the exact number there on the FX commissions, I think you said $1.7 million increase?

From last year.

From last year?

-- from the (multiple speakers) quarter of 2007.

So the absolute number in FX commissions, can you give that to me or --?

It was roughly -- for the second quarter, about 2.6 million.

Okay. And then just on the interest expense, I want to make sure I got this right. You said the 4.4 -- or interest income -- $4.4 million mark-to-market gains from hedging?

Yes.

Okay. And that's -- as we sit from outside the Company and try to model, any suggestion for -- I know you've hedged it going out, but how far out are these hedges? Can we expect similar sorts of things in future quarters or how should we look at it?

I mean, generally, we've gone out about two years with the hedges. One thing that we will see going forward is because of FASB, we have mark-to-marketed these interest rate derivatives that we have in place. So, you're not going to quite get the smoothing that's intended from a true hedged position, but you realize the mark-to-market gain here at February 28.

Okay. When you say you've gone out two years, you put some of these on six months ago, a year ago?

We started right at about the end of last fiscal year.

Okay. Does that mean -- would I be correct then in thinking about this as you had $4.4 million in gains, we should expect to see low single digit millions of gains going forward from hedging for a few quarters?

You know, we can't really predict what the interest rate environment will do. But I would say that you're on the right track, as far as I don't think you'll continue to see, unless there's significant drops; because it's all mark-to-market in this quarter, I don't think you'll see the sizable gain going forward from the collar.

Okay. So if, yes, because of the collar, if rates are similar to where they were before, you've marked it to market and there we are.

Yes.

Mark Lane, William Blair & Company.

Just a few. First, Pete, on the number of consultants, so, you've gone from 118 to 130, but 11 of those have come from acquisitions, if I understand it correctly. Why haven't you been able to or been willing to hire more external consultants?

Oh, to some degree, we have. That also takes into consideration some attrition. A handful of consultants that just went back in the industry. We had one satellite office that we closed where we had a couple of consultants in that office that had just not produced. And so, basically we've added a couple from industry, as well as through acquisition and expanded through our training program is well.

So, how do you expect to get another 10 consultants in the second half?

We continue to look for and have discussions with other acquisition alternatives and targets as well as we're looking for people in the industry, and to some degree, have targeted some of the new initiatives that we put in place over the last couple of years in, let's say, specifically food service. We recently hired a new consultant in forest products. We're looking for additional capacity there and it really comes down to really finding the expertise. And, in a number of cases, it still comes down to we've done it like we haven't traditionally in the past, by hiring some of our best clients and customers as they mature become pretty sophisticated.

Okay, Bill, can you talk about some of the variable costs, some of the variable trading costs, the pit brokerage clearing fees, the ID commissions, why there seems to be such a variance from commission growth this quarter?

Well, you're still saying kind of a little bit when you're looking year-over-year and you're still seeing a significant drop in the commissions. Over $1 million drop, about $1.3 million of the drop in IB commissions is coming from that forex business, as we -- kind of like we talked about in the first quarter, where you kind of had some real ramp-up in growth last year in the forex, and a fair portion of that had an ID commission tied to it. And the business is starting to ramp up again, but we're not at the levels we were last year.

Okay, so the IB is lower because forex is lower, is what you're saying. Right?

Yes.

Okay, what about the pit brokerage and clearing? It's up over 70% and commission growth is under 40%.

70 -- as a percentage, pit brokerage and clearing fees kind of as a percentage of -- there's -- you're seeing it up over 70%.

25 versus 15, right?

Yes. You -- you know, you're starting to see -- with fees going up with some of the exchanges, you're seeing more and more charges related to electronic trading. But we'd have to dig into a little bit more to see what else there is. But I mean, really the majority of that is just volume-related and kind of product mix of what exchanges people are trading on, and also whether or not we have -- a little bit of the product mix becomes where we're directly charging the client a commission rate with the fee in it versus one that is charged just a net fee.

Okay. Back on the interest income. So, what is the collar tied to, treasury rates? Or what is it tied to?

It's a LIBOR hedge.

Okay, LIBOR hedge. So, I mean, if LIBOR hadn't changed between today and the end of the quarter, I mean, you'd have zero mark-to-market gains, right? I mean, the way that that hedge is set up?

Well, yes, the way the hedge is -- yes, the way a hedge works -- yes, if there's no change in LIBOR between the beginning and end of the quarter, yes, you'll be virtually flat there.

Right. So, can you just remind us in terms of customer funds outside -- get rid of the Financial Services business, what the mix of investment was by area -- treasuries, money markets, repo's?

At the end of the quarter, we were looking at about 40% of the funds were invested in -- somewhere about 40, 45% of the funds were invested in money market funds, and the rest in direct treasuries or overnight repo's.

Okay. And so that we're talking about three six-month treasuries?

Correct.

How much discretion do you have in changing that mix as you move forward or extending the duration of the treasury component?

We have kind of full discretion as weighing the risks associated with certain investments and we're not going to get into some of the auction rates and some of the other areas where there's been issues. So, we're staying fairly conservative and with what we want to maximize interest in the Company, we also -- preservation of the capital is the number one driver for us. So, where it merits, we'll go farther out on the treasury curve; when it comes to getting into some more exotic investments, that's something that we're not really looking to do now.

And how would you compare the overnight repo rates to treasury rates?

They track. They're fairly -- certainly now you've seen, in this quarter, you've seen more of a disconnect between those than you ever have, with the flight to quality, but they -- traditionally, they've been fairly -- they've correlated pretty well.

Mike Vinciquerra, BMO Capital Markets.

I want to follow up just on the -- I think, Bill, you went through where the balance growth had come from on a -- I think you were talking about a year-over-year basis. You were hitting on the OTC margin versus the segregated assets. Can you just walk through those numbers for us again?

Well, we were actually going through August 31 to February on the balance sheet. And that would been -- let me pull my note back out here. Customer segregated assets grew 455 million from August 31 to February 29. 424 million of the increase on the balance sheet came from over-the-counter margin deposits. I will note that on that, a portion of that is the open contracts; the open mark-to-market value of contracts on the OTC, which is not necessarily investable asset, and those increased by about 270 million.

So, of the $455 million, there are $424 million in the OTC deposits and about $170 million of that is not an interest item. It's just a mark-to-market gain -- or mark-to-market value increase of open positions carried by clients. $100 million of it came from the additional activity in the Financial Services segment and about $21 million increase came in the forex deposit.

Okay, thank you. And then just on the -- one more time on the interest income. You had the gain this quarter. The way I think about it, you were a gain on the collar. You recognized that essentially to where it is at the end of the quarter. So, it's kind of a -- it's a catch-up but it already reflects the value created in that collar by the lower interest rates.

So, we will actually, though, see the impact on your underlying investment of the funds coming as the quarter progresses now that we've had these seg cuts. Is that -- am I thinking about it right that your core and interest income will actually be your -- your yield at least will be sliding over the next 90 days or so. So, at the end of this quarter, we'll see the yield on your client assets. It will be more reflective and it was essentially overwhelmed by the collar gain this quarter. Am I saying that right?

Correct -- yes, I think you're on the right track, Mike.

Okay. All right, so, we saw an outside -- when I look at your numbers, just to put it this way, your segregated assets actually grew less than your interest income this quarter, but once I back out the $4.4 million gain, we start to see the real trendline in terms of where your yields are.

Correct. And also you really have to factor in the total investable assets we have, because we have more than just the segregated assets of $1.4 billion. When you start factoring in the investable OTC deposits and the cash, the corporate cash on the books, as well as forex deposits and the notes receivable and the Financial Services segment, the total interest earned assets is more than $1.4 billion. But you're on the right track. We obviously would have -- in the underlying assets, you would have realized some of the interest rate decline already in the second quarter with those -- the Fed cuts that were there, especially where it related to overnight repurchase agreements and stuff where you don't have an extended maturity on those.

Sure, okay. Makes sense. And then just last thing from me, just -- you had mentioned that you guys have been establishing some additional liquidity at the corporate level recently. Can you talk about just under what scenarios you guys actually need to cap liquidity yourselves? Is it primarily for when you're waiting for your clients to post additional margin, you have to float that on an overnight basis with the exchanges?

Yes, I mean, that's right on, Mike. It's virtually -- we said, you know -- it's mostly tied to our exchange traded business to where we settle up twice a day with all the exchanges. You settle up in the afternoon for the day's activities -- for a portion of the day's activity, kind of a mid-day inner-day snapshot. You settle up with the exchange and then we actually -- the residual effect between where they take that snapshot and the true settlement, you settle up the next morning. But there is either an inflow or an outflow of funds in the afternoon that we've got to make to the exchanges, and we'll be settling up all that with the majority of our clients the next day.

Okay, great. That's helpful. Thanks, guys. Congratulations on the quarter.

Richard Repetto, Sandler O'Neill.

I'll make it brief because Chris already asked a few questions. But I guess the first thing on the seg cash, just directionally, in March, just nothing we need to know, but directionally, did it go up or down? You know, we've seen more volatility or at least more volatility in some of the commodities, so I'm just trying to get a more real-time gauge.

You have seen it; it's grown throughout the quarter. But I think that -- it wasn't all right at February 29, if that's your question. It's kind of grown throughout the quarter.

Well, no, my question is, from the end of the quarter of February 29 to now, where a month or more after that, just directionally, where has it gone since the end of February?

You know, Rich, we just -- margin -- you know, we don't really give guidance or really anything forward, but I mean, I will say to you you've seen continued expansion of margin requirements at exchanges, which has been one of the drivers of our customer seg deposits.

Understood. Okay. And then the discontinued ops, we can see the impact in this quarter clearly as you broke it out. I'm just trying to see was there an impact -- if you backed that out, it's $0.60 plus in this quarter. I'm trying to see whether it impacted prior quarters -- was there -- and expenses and investment spending in prior quarters that we couldn't see because it was in the other expenses?

Yes, I mean, it was pretty de minimis in the previous quarter. What any loss from continued discontinued operations would be, it would be -- it was under $100,000. But the $0.60, you lost me on the effect of it. It ends up being about $0.19, the discontinued loss on a fully diluted basis.

And then you go from 42 up to 61.

Yes.

That's right. The $0.60 I'm saying --

I'm sorry, I (multiple speakers) --

I rounded by a penny.

I thought you were indicating that the loss on a per-share basis was $0.60. So, my apologies.

No, I --

I misunderstood you.

Got you. And then the very last question, the margins were stellar in both segments. Incremental margins were very high. Is this a fair rate, I guess, of margins going forward, if you -- I guess that's the question. The sustainability of margins --

Well, once again, we don't do the forward projections a whole lot. I will say that we obviously benefited from a margin standpoint from the continued growth in interest income, as we've talked here a little bit. You're going to feel some pressure on that, now that we've realized the mark-to-market gain on the interest rate collar.

But you know, the other portion that really helped, has helped to increase some of those margins has been the continued growth in our over-the-counter business. That's something that we're looking to continue to grow that business with these acquisitions that we've brought on; those were traditionally just exchange traded businesses that we'll look to continue to expand into those markets to start trading over-the-counter. So, we think that we can continue to grow that over-the-counter business, but we will feel some pressure on margins from an interest rate standpoint.

Great. Congrats, guys, on a great quarter.

Chris Allen, Banc of America Securities.

Great quarter. Just a couple of quick questions. Can you all just think about what the impacts from the acquisitions were during the quarter? Was it material to earnings or --?

I'm sorry. You cut out a little bit there, Chris. What was --?

Sorry. I was wondering if you could provide some clarity on what the impact of the acquisitions was during the quarter? Was it material to earnings or not?

We haven't disclosed that yet. I think that because they came in kind of late in the quarter, it's - you're obviously -- it's not going to be material to the quarter at this point. I think really, what those two acquisitions are doing for us is really expanding our product offering into both commodities that we have not traditionally been leaders in and also geographic locations. So it's really more of a growth story acquisition than what the immediate effect was. But they -- we do, like we had mentioned, expect those to be accretive right out of the gate.

And then the other issue, Chris, is that I think, as Bill said awhile ago, those two segments have not traditionally utilized OTC products. And our intent is to really ramp that up in both the textile and cotton markets, as well as the dairy industry, and really leverage the dairy expertise into our food service group.

Got you. Is one way to think about it is that you added, I guess, eight consultants between the two acquisitions, think about that from a production per consultant basis. Are they kind of in line with what your normal consultants produce?

I think some of them are. I think really with the added OTC platform and fee-based processes that we utilize to really educate and develop customers, we're really educating that new network in the cotton and textile as well as the food service and dairy. And I think leveraging that will see that ramp up over time.

Great. One of the things that people are chattering about obviously these days is counterparty credit risk. Can you just give us some insight into your view of the health of your kind of core customers in your consulting business?

Well, you know, as I said earlier in my comments, our counterparty risk is really pretty minimal. From an exchange standpoint, it's basically all treasury instruments and the exposure there is pretty insignificant. From an OTC standpoint, we're really comfortable with all of our counterparties and have them insured against default, either through outright swaps or outright insurance. And so, those we're really comfortable with, as well.

Our risk on a day-to-day basis is really with our client and their ability to procure financing. And you know, the industry, both ag and energy, has been really volatile, but as I said earlier, I really commend the lenders in both these industries that have really stepped up, provided the financing to a large extent to carry the inventories and also the positions with us and really the rest of the industry and have really stood in there and provided that financing. You know, I think, to a large extent, it's been substantially leveraged above what we've seen historically. But we're also on a new paradigm I think as far as price. So, to their credit again, those lenders have really stepped up.

Great. And then just thinking about the agricultural markets and energy markets right now into your third quarter, just looking at the volumes, pricing, volatility levels, it doesn't seem like anything has fallen off. I mean, from an industry perspective, has the volatility been stabilized at this higher level right now? And what are your thoughts just in terms of where it can it go from here?

I think that's part of the difficulty for the industry today is just the extreme volatility that we see in the markets. Recently, the limits were expanded for grains, specifically in corn, wheat and soybeans, which to some degree, puts more pressure on the commercial participant in the market to really provide adequate capital and credit lines to really margin those positions and the volatility that comes with that. And, so it's as volatile as I've ever seen in my experience and my career, in ag as well as energy. And you know, to a large extent, as I said earlier, that's really mandated by renewable fuels as well as really export demand is really strong on a worldwide basis, driven to some degree by the weakness of the dollar. So, that demand at least from our perspective is probably not going to go away any time soon.

Great. And then just one final question. It sounds like you guys are starting to -- the ball's starting to roll a little bit more in China right now. Are you seeing any material impact from China yet? Or is that still just something that's going to take a little more time?

No, from a regulatory standpoint, there's still only a number of commercial firms that are really approved to trade directly outside the country. And so, those volumes continue to increase, but at some point from a regulatory standpoint, once those hurdles are eliminated, that's when I think it will see significant growth out of China, in particular.

One of the things that has and will help going forward is with the acquisition of Globecot and Jernigan. They've had a significant presence in cotton across Asia, and I think that will help enhance our efforts as we move forward.

Great. Thanks a lot, guys, and great quarter.

Niamh Alexander, KBW.

Good morning. Congratulations on the quarter. I have a few quick questions at this point. If I could go back to the CRM business, because that was the biggest dollar volume and growth as well as proportionately, and if we look at that brokerage, service consulting and brokerage revenue -- you mentioned in the prepared remarks that it was primarily Brazil, renewable energy trading there, but even if I look at Q-on-Q, so sequentially you've seen strong growth. Can you maybe help me understand what drove some of the strength sequentially rather than kind of year-on-year? I'm trying to gauge maybe how much Brazil is adding to it, if there's some help in offset some of the seasonality. Thanks.

Niamh, we don't really break it out by dollar figure among the different individual groups of customers. But Brazil obviously continues to be one of the strongest growth areas for us. We're rapidly adding more consultants down there and customers. So, really the Brazil and the renewable fuels and also other areas of Latin America have been a real strong driver, and then just even domestically here, the energy markets have really helped to drive that over-the-counter growth.

Okay, that's helpful, thank you. And then if I could go back to the current market environment, and we're hearing a lot now the CFTC is hosting a public meeting because there's -- I guess, some of the grain elevators are struggling with these increasing margin requirements and then with lenders.

Can you help me understand what, if anything, might come out of some of these -- the grain community pushing right now to, I guess, for slowdown and the increasing of the position limits and offset, shall we say, some of the speculation in the market, if that's possible?

I think right now that the grain industry to a large extent has really stepped back to almost a spot market in trying to reduce the exposure from a forward cash purchase book or a purchasing program, and really tried to move into a spot market to eliminate as much of the margining requirements, as risk is possible. And as far as the CFTC, we've said from the beginning that traditionally we thought that the limits had been adequate and to some degree, those lower limits took some of the steam out of the market and the emotion out of the market. But I guess, from our perspective, we don't necessarily see that being rolled back. I do think that what will happen is, is there will be significantly fewer opportunities for producers to book for cash contracts just based on the exposure that it takes to carry those positions from one crop year to the next.

Okay, that's helpful. And then just lastly if I may, the exchanges and stocks like yours have all kind of gotten hit hard in the last quarter, the last calendar quarter, on fears of deleveraging across the market. Are you seeing any change in behavior in, for example, your professional trading customers? I mean, there's always going to be a need for your core customers to hedge and to take positions, but in the professional trading community, has there been any change in trading behavior? Any pullback or is the deleveraging impacting trading revenue there at all?

I don't think we've seen any real pullback at this point. In fact, as Bill said earlier, I think the one thing we've experienced is as the professional trader moved from the floor or the pit to upstairs, those that have migrated really moved from trading the one commodity to multiple commodities. And I think that's where we've seen significant volumes ramp up as that migration has taken place.

Okay, that's helpful. Thanks for taking my questions.

At this time, we have time for one final question. Our last question is a follow-up from Mike Vinciquerra. Please go ahead.

Okay. Just wanted -- one question on the OTC side. We had to kind of back into the average RPC for your over-the-counter contracts, because you've got consulting fees in there and so forth. But when I look at it, it looks like it may have jumped somewhere in the order of $10 per contract sequentially. And last quarter, when it had dipped, I think, though, you had mentioned that there was -- it was either forex or less weather trades, one or the other. Can you talk about the impact on the average RPC in the over-the-counter side, if I'm looking at it appropriately?

I think what we said in the first quarter was that we had done quite a bit of fairly vanilla exchange look-alike type of hedging in that first quarter, that had with it a little lower margin requirement. And I think what we're seeing in the second quarter is a little bit more structured products, where you tend to have a little more work involved and that they'll tend to have a little bit higher incremental margin.

That's somewhere between what we saw last quarter and this quarter. That's probably a reasonable range when we're trying to make projections going forward (multiple speakers)?

Yes, I think that would be a correct statement.

Okay, thanks, guys.

This does conclude our question-and-answer session. I would like to turn to call back over to management for any concluding remarks they may have.

Okay, I'd just like to -- thanks to everyone for joining us on the call today and we look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, this does conclude the FCStone Group 2008 second quarter earnings conference call. You may now disconnect, and AT&T would like to thank you for your participation. Have a pleasant day.