StoneX Group Inc (SNEX) 2009 Q3 法說會逐字稿

Hello, this is the Chorus Call operator. Welcome to the FCStone third-quarter 2009 earnings conference call.

As a reminder, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). This conference is being recorded.

At this time, I would like to turn the conference over to Bill Dunaway, FCStone's Chief Financial Officer. Mr. Dunaway?

Great. Thank you, operator. Good morning, everyone. I would like to welcome you to FCStone's fiscal third quarter 2009 earnings conference call. At approximately 8 AM Eastern time this morning, FCStone issued its press release reporting its earnings for the fiscal third quarter of 2009. The press release is available on our website, 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 a commentary on our business in the current market. I will then provide details on the financial performance for the third quarter, and we will open the call up for some Q&A.

Please note that today's conference call is copyrighted material of FCStone and cannot be re-broadcast 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've based these forward-looking remarks largely on our current expectations or projections about future events and financial trends we believe may affect our financial condition, results of operations, business strategy and financial needs. It's important to note that such statements about FCStone's estimated or anticipated future results, prospects or other non-historical facts are forward-looking statements and may 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 written and 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 made during the earnings call.

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

Thank you, Bill. I would first like to welcome and thank everyone for joining our fiscal 2009 third-quarter results conference call this morning.

Late last week, we announced our plans to merge with International Assets Holding Corporation. This deal presents an exciting opportunity for FCStone and our shareholders. The transaction combines two leaders in specialized areas of the financial services markets with a focus on customer-centric, high-value-added businesses. For FCStone, we are merging with a partner who brings significant excess capital to the table that will be used to help accelerate our growth, and we will be running our company as a standalone entity with no interruption in our strategy or our service levels.

The merger announcement marks the conclusion of a period where we have refocused our business and also evaluated our future growth opportunities following the energy account losses experienced earlier this year. FCStone has a renewed focus on our core consulting business with a foundation in agriculture and energy, and our future growth is centered in our commodity risk management business. We're going to support that growth with a disciplined clearing and execution segment.

We are also optimistic about developments in the regulation of derivatives markets that could help adoption of our majority-owned Agora-X trading platform. These factors point to a bright long-term future for FCStone but in the near term, we are still managing through challenging commodity market conditions that are reflected in our third-quarter results.

Reduced credit capacity, pure market participants and lower volumes continue to be characteristics of the marketplace.

Total revenue for FCStone, net of commodities sold through the third quarter of fiscal 2009, was $41.6 million which was down 50% from $83.4 million in the third quarter of fiscal 2008.

Our reported loss for the third quarter of fiscal 2009 of $8.1 million, or $0.29 per diluted share, includes the impact of unusual items and expenses totaling $8.6 million, net of tax, or $0.31 per diluted share. These items are described in our press release, and Bill will also walk you through them. They include all remaining charges and expenses related to the energy account. Without these items, the net earnings for the third quarter of fiscal 2009 would have been approximately $500,000, net of tax, or $0.02 per diluted share.

Despite the headwinds affecting our performance, our core commodity risk management business continues to perform profitably. We are also seeing some spots of improving activity in a few verticals and geographic locations. However, volumes in general remain lower than prior-year levels. Open positions in our commodity risk-management business saw a 28% rebound from the levels at the end of our second quarter of 2009.

Energy OTC volumes were up from the second quarter but pricing is volatile, and we did not see any positive impact on margins. If the current volumes continue, we expect margins in this area to expand to more normal levels in the fourth quarter. Overall, OTC volumes meanwhile remain sluggish due largely to continuing pressures in renewable fuels.

As noted last quarter, some liquidity is beginning to return in the key market of Brazil, and we saw a 98% increase in revenue there over the second quarter of 2009. While these isolated developments don't mark a wholesale turn, they can be seen as signs of life.

I also want to update you on our investment in Agora-X. In recent weeks, as the Obama administration has put its financial reform proposals together, it is clear an effort will be made to move the private trading of derivative project products to major exchanges. We at FCStone support greater transparency in trading of OTC derivatives, which we believe would bring greater efficiency and liquidity to the OTC commodity markets.

We are an 80% owner of Agora-X, a full-service platform that is a key part of NASDAQ's strategy to advance the electronic trading of derivatives. NASDAQ owns the other 20% of Agora-X.

In the third quarter, we began sending OTC volumes through Agora-X and are happy to report that the platform performs flawlessly. Agora-X has clearing relationships with CME ClearPort and is currently negotiating clearing arrangements with several other organizations. Through Agora-X, we intend to play an active role in OTC contract negotiation, trading and execution for a state-of-the-art regulatory compliance system.

Overall, we think the best way to sum up the third quarter is it's a period in which we've put a final wrap on some of the key issues affecting the business. The financial aspects of the energy account are fully behind us. We have successfully renewed our credit facility. Our organization is fully aligned behind our core strengths in commodity risk-management consulting. Our balance sheet is sound, and we have adequate capital to meet all regulatory requirements. Of course, upon completion of the International assets merger, our path to growth and our capital position gain additional clarity and we structured the deal in a way in which our investors can participate.

Before handing off to Bill, I want to also mention our recent outlook conference in Chicago, which I believe a few of you even attended. This event was a great success with approximately 100 of our commodity risk-management clients attending. It helped to cement relationships and is consistent with our mission of helping customers better understand the markets that pose risk to them, whether they be producers or consumers. Our consultants spend considerable time working with and educating each customer, which is essential to forging a successful long-term relationship.

There are other firms out there that can help a customer execute trades, but there aren't many that provide the end-to-end navigation through the commodity markets that we do. This customer-oriented focus is at the heart of our business and will be the foundation of our growth, both now and into the future, as we partner with International Assets. As the commodity markets recover and the interest rate environment improves, we believe we are putting the Company in the best position to execute our business plan and capitalize on the opportunities before us.

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

Thank you, Pete.

Third-quarter revenues, net of the cost of commodities sold, were $41.6 million compared to $83.4 million in the prior-year period, reflecting continuing challenges in the commodity markets evidenced by softer contract volumes and related customer deposits and a low interest rate environment compared to last year. However, stability in our core risk-management consulting revenues offset some of the revenue weakness in the quarter, which demonstrates the continued demand for the services we provide to our customers.

Average customer-segregated assets decreased $751 million compared to the third quarter of 2008. Exchange-traded contract volumes declined year-over-year to 13.7 million contracts from 26.6 million, primarily due to a decline in active market participants in our clearing and execution business, as well as actions taken by management to reduce exposure to larger and longer-tendered third-party clearing accounts.

Third-quarter OTC contract trading volume was 81,277 in the third quarter of 2009 versus 294,041 contracts in the third quarter of 2008. While we are still seeing some constraints from the capital markets, exchange-traded volumes are beginning to witness a rebound and were up 10% month-over-month in May and in our core commodity risk-management services segment, volumes were up 14% over the second quarter of 2009.

We recorded a net loss of $8.1 million for the third quarter, compared to net income of $8 million for the same period last year.

As Pete mentioned earlier, the third-quarter results were impacted by several items of note. I will now go through them in a little bit more detail.

In the third quarter, we recognized a final bad debt provision of $3.5 million, net of tax, or $0.13 per diluted share, related to the energy trading customer account when we transferred substantially all of the positions and remaining obligations related to the account to a third party. This provision represents all of the remaining exposure to the energy trading customer account.

In addition, during the third quarter, we incurred $1.3 million in professional fees, net of tax, or $0.05 per diluted share. These professional fees were related to the disposition of the energy account and subsequent exploration of alternatives in the equity markets. Furthermore, we recognized approximately a $1.3 million charge, net of tax, or $0.05 per diluted share, related severance accruals related to the retirement of our Chief Accounting Officer -- or Chief Operating Officer.

Finally, we looked at $2.4 million loss, net of tax, or $0.09 per diluted share related to our minority investment in grain merchandiser FGDI LLC, resulting in the settlement of disputed commodity contracts. Many of you will recall that we sold a controlling stake in FGDI at the end of our third fiscal quarter of 2007 as we sought to reduce exposure to the international grain export market. We are currently exploring the possible sale of our remaining 25% investment in FGDI, and have signed a nonbinding letter of intent to sell the investment to the majority owner. FGDI is not seen as a core investment for FCStone.

With respect to the settlement of the disputed commodity contracts, we had no direct involvement in the commodity contracts and did not have any participation in the settlement proceedings. As with a non-controlling stake, we do not have operational oversight of FGDI.

Excluding all of these items, net income in the third quarter of 2009 was $501,000, or $0.02 per diluted share.

Now I will walk you through the main components of the quarter's revenues. First, commissions and clearing fees were $30.7 million, compared to $47.7 million in the year-ago quarter, due to a decline in exchange-traded contract volumes. Commission rate per contract expanded slightly in the quarter, most notably as a result of the volume decline being among lower-margin trades.

Next, our service consulting and brokerage fees were $9.7 million for the quarter, compared to $28.3 million in the year-ago quarter. This decline is primarily due to volume-related reductions in OTC brokerage revenues primarily relating to a challenging market for renewable fuels and a continued constraint on customer access to the financial credit archives, most notably in Brazil and Latin America.

IRMP consulting fee revenues continue their recent trend of modest growth from the prior-year period. Revenues from the OTC and ForEx trade desk declined $1.4 million in the third quarter of 2009, or from the third quarter of 2008.

Interest income declined to $3.5 million from $5.3 million in the same period last year due to significantly lower short-term interest rates on a lower level of customer-segregated assets and OTC deposits. Interest income for the third quarter 2008 included a $5 million loss from the liquidation of interest rate derivative contracts which have been entered into to manage a portion of our exposure to short-term interest rates. Net of the effect of this loss, in the third quarter of the previous year, interest income declined $6.8 million from the prior-year period.

While we expect the low interest rate environment to persist for the foreseeable future, we do expect to see growth in customer deposits. For example, during the third quarter, we began to see an increase in the amount of open positions carried by our traditional agricultural customers, as last year's corn production is marketed to these customers. To these customers.

Total costs and expenses in the quarter decreased to $69.5 million compared to $70.4 million in the year-ago quarter. Excluding the special items I described earlier and the cost of commodities sold, total costs and expenses for the quarter were $44.7 million, a 36% decrease from the year-ago period. This decrease is primarily driven by revenue-related costs of brokerage commissions, pit brokerage and clearing fees.

Moving onto the performance within our two main business segments, our CRM full-service segment net revenues were $21.9 million in the third quarter of 2009 compared to $44.4 million in the prior-year quarter. The decline was primarily due to lower interest rate income as well as pressure on both exchange-traded and OTC volumes. Exchange-traded volume in this segment declined 24.9% from the prior-year period to 674,170 contracts due to a lack of volatility in the commodity markets, continued constraint in the credit markets for our customers, and a continued delay from the previous-year corn crop from being marketed to our grain elevator customers.

During the third quarter, we did begin to see the previous year's crop added to our customers' positions and open interest in agricultural commodities grew by 28% over the end of the second quarter and exchange-traded volumes were up 14% over the second quarter of this fiscal year.

OTC volumes declined 72.4% from the prior-year period to 81,277 contracts, as the significant slowdown in the renewable fuels industry persists, and Latin America and Brazil volumes continue to be constrained from previous year levels due to economic conditions in those markets.

Segment income, before minority interest and income tax, for the third quarter of 2009 in the CRM segment was $2.3 million compared to $15.4 million in the prior-year quarter.

For the Clearing and Execution Services segment, revenues were $22 million for the third quarter of 2009 compared to $36.5 million in the prior-year quarter. Factors affecting the comparison include lower industry trading volumes, a smaller number of active market participants, and lower levels of volatility in the markets we serve.

The segment lost $4.7 million in the third quarter, compared to $1.3 million in the prior year's quarter. This segment loss was due to the final bad debt provision of $5.2 million, on a pretax basis, related to the energy trading account and related legal and professional fees. Excluding these items, third-quarter 2009 Clearing and Execution Services segment income would have been $1.3 million.

The Financial Services segment reported revenues of $500,000 in the third quarter ended May 31, 2009, compared to $2.4 million in the prior-year quarter. Net segment income was $160,000 for the third quarter, compared to $656,000 in the prior-year quarter. The commodity financing programs in this segment are not a primary source of revenue or profit for the Company and historically have been intended to serve as a complement to our Commodity and Risk Management Services segment, enabling us to provide additional value-added services to our customers.

Reviewing our balance sheet, our total assets are approximately $1.5 billion as of May 31, 2009, which is down from approximately $1.9 billion from the second quarter ended February 29, 2009. As I have indicated in the past, key items on our balance sheet, such as available cash and segregated account levels, are subject to daily business activity. Thus, the quarter and balance sheets are reflective only of a snapshot in time.

Average customer-segregated assets were $844 million for the third quarter of 2009, as compared to $978 million in the second quarter of 2009. This decline was primarily driven by a reduction in the Clearing and Execution Services segment as a result of lower levels of exchange-traded volumes.

The Company's Futuris Commission Merchant subsidiary, FCStone LLC, had minimal capital requirements as of July 7, 2009 totaling approximately $37.6 million. On that date, the Company had a capital in excess of its regulatory capital requirements of $17.1 million, access to additional capital obtainable by the elimination of haircuts on investments totaling $19.1 million, an undrawn subordinated debt of $15 million, bringing the total available excess capital to $51.2 million as of July 7, 2009.

As we recently announced, we have renewed our syndicated credit facility for $75 million, which meets the needs, given the current market environment. The $75 million revolving credit facility is an amendment to the Company's current facility, which renews it through June 23, 2010. The facility will be used for funding potential margin calls with exchanges pending collection of margin calls from its customers.

In addition to the revolving credit facility, FCStone has a subordinated debt facility of $55 million, of which $15 million is currently undrawn. Amounts drawn on the subordinated debt facility must be repaid on July 22, 2010. The subordinated debt facility provides FCStone LLC access with additional regulatory capital if required by future market conditions to support and to support our business growth. In short, our balance sheet is relatively liquid with adequate capital to meet all current regulatory requirements.

With that, I would like to turn it back over to the operator to open the question-and-answer session. Operator?

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

The first question for me is actually not related so much to earnings but just following up from the merger announcement last week. Can you give us an update on, now that they've probably had a pretty good chance to talk to customers, what the response has been in general?

Well, I think, in general, it has been really pretty positive. I think the benefits for us that we talked about today the other day on that call as far as, on a consolidated basis, increased from really about $160 million in equity, on a consolidated basis about $250 million. Free cash available for continued growth and leverage and capacity for FCStone on a consolidated basis gives us continued opportunities from an acquisition perspective, those kind of things. I think, thus far, it has been pretty relatively positive I think from our clients as well as the shareholders I've talked to.

Okay. Then shifting gears a little bit here but still sort of staying on the concept of capital, the CFTC has a proposed rule change out there to increase some I guess like an 8% to 10% increase on -- I'm not going to phrase it this well but whatever -- a capital increase. Would that have any impact on you? I think, Bill, you just said you are currently in compliance with all current rules. Would this potential rule have any impact?

Yes, I mean, even under the proposed rules, we would have sufficient capital to run our operations and support the business that we have. The proposed rules, which are out for (inaudible) in CFTC now, would increase capital requirements by about 32% for us because it will take both the customer and the noncustomer business capital requirements up.

Okay, but that's something you feel like you could relatively easily get to?

Yes. On the current business set, the numbers that I quoted in my release of the excess that we had --

Okay.

It would be about another $13 million over where we are with the current business right now. Really where that would come into effect is just, as the business continues to grow, the higher regulatory requirements just --

I think that's the key to it, Chris -- is, you know, we've got more than adequate capital to really maintain the status quo or throttle along with the business as it is. But we've got a number of opportunities that were at the door prior to the energy account and that issue. Those opportunities are still there today. We want to continue to pursue those, really pursue growth in the organization and at the same time even ramp up the Company here domestically, organically, as well as accelerate our international business. So I think that's the real benefit of the consolidation with International Assets. That gives us that capital to not only weather this increase in regulatory capital requirements but also look at those acquisition targets that we had in place as well as aggressively ramp up our international business.

Okay, that's helpful for understanding that. Then just really the last question for me on -- as we look at the customer deposits and the declines there -- I know you talked a bit about it -- but what is really driving the declines? What would it take to get an increase in deposits with you?

Well, I think that really the decline that we've seen here recently has been, if we are talking decline from last fall or the first quarter, it is going to be the decline in the overall business, both commodity risk management and clearing and execution, as we saw the deleveraging in the commodity markets last year and the crisis in the financial markets causing really a lower amount of volume in both segments.

But particularly in the second quarter to the third quarter, what we've seen more is just continued, both just continued constraint in the financial markets affecting our clearing and execution volumes. That has been driving the majority of the drop in customer-segregated deposits really from the second quarter to the third quarter.

I think, on the commodity risk management side of the business, we are actually starting to see a bit of an increase here, particularly late in the quarter, as we talk -- we are starting to see the previous year's agricultural crop come across the books. Open positions that we are carrying are growing, so we would expect, as that position -- it's second -- one of the largest crops that we've ever produced here domestically. We still have a substantial portion of that to come across the books. So we potentially expect to see at least that be a driver of customer deposits going forward for us the rest of this fiscal year and in the beginning of next.

Okay, thanks, that's helpful.

Niamh Alexander, KBW.

Good morning. Thanks for taking my questions. I just wanted to, I guess staying on the subject of regulatory changes, there's also [a lot of new] proposals out there but also this week, we saw the CFTC looking to kind of increase position limits in energy as well as agricultural. They are looking at futures, but they are also looking at the OTC market.

So help me understand. I mean, it seems like the head of the CFTC, a lot of his testimony in his speeches are focused on maybe kind of getting some regulatory purview of the OTC markets and maybe starting to introduce position limits there. How should we think about your business there? Because you do quite a lot of business in the OTC space with your CRM business.

I think we anticipate that, within probably the next year, that, to a large extent, a lot of -- at least in commodity markets that we deal in, the OTC products that we deal in will be mandated to provide additional transparency and really reporting and also clearing before it is said and done. We have always been an advocate of really the convergence of clearing and OTC products from the perspective of risk associated with credit and the counterparty. I think that will be a benefit to us to some degree. In fact, a lot of our energy OTC products have migrated to clearing versus CME, clear boards, and I think that it's been a benefit to us as well as our customers and so it eliminates risk associated with that.

The other opportunity for us is that Agora-X is I think one of the premier platforms that will provide that transparency and reporting capability and has really the functionality to trade a whole host of different structures and instruments that are, I think, pretty unique, at least in today's market.

Okay, so just if I thought about the CFTC also in addition to kind of introducing reporting -- because already the CFTC is getting these large trading reports from the dealers and people in the OTC markets, so they already see what's happening. But at the moment, do I understand correctly that they don't impose position limits in these over-the-counter markets? So, could it be disruptive to your business, or could it be an opportunity for your business if the CFTC then reaches in to start setting limits to dealers in the over-the-counter markets? Because right now, they are already doing it in agricultural markets and the futures.

You know, we've always had hedge exemptions, both within the exchanges, and so from our commercial customers' perspective, that won't necessarily affect our commercial customer because they do have hedge exemptions beyond historical limits that had been established, and so we don't anticipate that changing.

Now, I think where it will change our markets is there will be, I think, capital requirements established versus carrying the customer funds as an OTC product going forward, so there will be a necessity for additional capital versus those OTC positions. We will basically, I think, over time, have to segregate those funds and identify those funds for the CFTC, as well as volumes and transparency and pricing.

So the increase in capital requirements then would kind of be in addition to, say, for example, the common period that ended this week was primarily related to futures positions and the proposed increased capital requirements for those, you are also looking at increased capital requirements for the OTC business that you do, right?

Yes, we would anticipate that over time.

Okay, okay, that is helpful. Thanks. I guess, just secondly, if I could understand a little bit, you touched on the renewable energy business a few times in your prepared remarks. I think part of a big explanation may be for some of the slower trading volume. Can you help me understand? Are there certain issues that we could be looking towards to see -- I think there's some regulatory change that people are waiting for right now that seems to be kind of dampening investment in that space. But are there other few issues that kind of maybe the non-energy investors should be looking to, to kind of spark some trading activity again in that space?

The real difficulty in the renewable fuels to a large extent is just profitability and margin. That is really driven by energy prices versus the input costs of corn and natural gas. Now corn has come down significantly even over the last 30 days and profitability has improved, but it is still not anywhere near to the levels that it has been historically. That industry is really going through a cycle and a period. The demand is about as great as it has ever been, and the mandate continues to be there. So we anticipate, as we move forward with the volatility in energy prices, there will be opportunities for that industry to capture margins and lock in margins.

But the real difficulty today in renewable fuels is just credit availability and then capacity. Unfortunately, there is just not much credit available. Specifically, that is really being used, as far as any working capital that's available, it is really being used to carrying inventories of inputs, corn primarily, and build basically the production. There is just not a lot of working capital available to utilize towards risk management instruments.

Now, we are seeing new participants come into that market and new investment in some of those facilities. I think there will be an opportunity for us to participate as the industries recapitalize. But that is going to take some time because, like I said, it is a commodity and it is going through a cycle. As it comes out of that cycle, I think we will have an opportunity there.

The other area, from an OTC perspective, that has really been difficult has been Brazil or Latin America but Brazil in particular. To a large extent, that was driven by, as the world economy and credit really tightened, virtually all the international banks that were participants in Brazil a year ago offering a substantial amount of credit availability just pulled out of the country. Now, you've got basically one or two international banks let down there. They are looking really at premier organizations to work with. A couple of regional banks have started to provide some financing. Like we said in our presentation, we are starting to see some of that liquidity or some of that credit enable people to lock in prices and margins.

So it is really a matter of capital, liquidity and leverage. That is going to take some time to get back into some of these markets.

Okay, that is helpful. Thanks, Pete. Then real quick, if I may, for Bill, your interest income -- I guess have we finally bottomed in terms of a run rate yield, shall we say, for going forward? Absent any interest rate changes, we shouldn't be expecting any kind of mix shift in assets or anything like that?

No, you know I don't think the short-term interest rates can go much lower than they have gone now. I think we've kind of seen them bottom out in both the short term treasuries and also the money markets, at least is the trend we are seeing now.

You know, we are still primarily invested in about 60%, 65% of it in money market deposits up at the exchanges, another 30% to 35% in agencies, and then a smaller portion we really trimmed down as much as possible, all investment in the short term treasuries Treasury builds, just given the yield that you are seeing on those right now.

Okay, that's a slight shift in the mix but the yield is kind of -- it's a good run rate. I guess one last question -- there's another comment out -- paper from the CFTC out for proposal. They are kind of revisiting what instruments you can actually invest in. I know they've done it a few times before and haven't really changed things. But is that something that we should expect you guys to be commenting on, or how should we think about that?

No, really the proposal that I think that you are referring to really just takes the approved investment list for segregated deposits, so customers trading on domestic exchanges, and carries them over into trading customer secured at 30.7 contracts, which would be domestic customers trading on foreign exchanges. They had not expanded the CFTC Reg. 125 investment options that were afforded the customer seg deposits to the customer secured environment. At least the one that I think you are referring to is proposing to expand it to that customer secured as well. We don't do a tremendous amount of business on that side. I guess, even if I did, I would view it more as a positive as they are expanding the pool.

Okay. Thanks very much for taking my questions.

(Operator Instructions). Mike Vinciquerra, BMO Capital Markets.

Good morning. Some of the news I have been seeing about the corn crop this year says that the acreage planted and the amount that is actually in very good condition is at record levels. Is this a good indicator of what your business might look like over, say, the next 6 to 12 months? I assume that it is a forward indicator of the amount of crop that is going to have to be hedged in the marketplace.

Yes, and it And I think every day it seems like we get if not a daily rain across the corn belt at least every other day it seems like. It has been really beneficial. I think, even this past week, I think the percentage of good to excellent increased like 3% or 4% across the corn belt.

So that -- what production increase there is will reflect in our volumes across our commercial [entry elevator] network as well as from a producer or farmer perspective; that will also reflect in not only our books but also the number of IBs that are really focused on farmers and their risk and the alternatives that we provide through that network (inaudible) that we work with. So over time, it will reflect -- and I think, to some degree, especially as prices have seen some pressure because of this increase or anticipated increase in production, that over time will drive opportunities in the renewable fuels industry as well as you see lower prices and the ability to really lock those prices in.

So the input costs for some of your customers are actually falling in this case, and therefore that is actually a good thing for the renewable fuels side?

Renewable fuels and the livestock industry to a large extent has had a really difficult time as well because of the high cost of feed or corn or inputs. So I think it will help the livestock producer, both in cattle, pork poultry, basically in all aspects of it.

Okay. Can you estimate for us the percentage of your business with is still kind of coming from the traditional grain markets, you know, within a range maybe?

Oh, you know, if you really look at the business just across all aspects of it, especially even last year where we -- it's a new market, let's say like Brazil or even in the consumption side of Latin America, China. You know a lot of these markets -- a lot of the initiatives that we have put in place are still, for all practical purposes, really ag-related or grain-related. So it is still large.

Now, the traditional -- I would say the traditional grain production and commercial grain handling would be somewhere around 20%. But if you really look at ag in general, it is going to be 60%, 70%, just because it is ag-related, meaning it is either consumption or production of one kind or another.

That would be the commodity risk management segment that he is referring to.

Right.

Okay, very good, guys. Thank you. Just a couple of numbers questions on the expenses, Bill. You know, selling and broker commissions as a percentage of let's just say your commissions and service consulting and brokerage fees jumped substantially. I mean, I got it at a little over 31%; last quarter, it was about 27% and last year maybe 24%. Is this just a sign that you are -- I assume your compensation for the producers has come down, but it is really just reflective of the fixed cost of your salaries and benefits?

Yes, plus in that line item, Mike, will be the $1.9 million severance charges related to the retirement of our chief operating officer in the quarter that I mentioned during my portion of the script. So that is going to skew your percentages there.

Okay, that helps. Thank you. Then the same thing I guess on the other costs, the $10.8 million. What were the big components there? I'm assuming there is -- maybe the professional fees get lumped in that, the $1.3 million. Anything else in that line this quarter?

Yes, and just to be clear, the $1.3 million is an after-tax number. Pre-tax is $1.9 million, and that $1.9 million that I'm referring to is just the component of professional fees, legal and professional fees, that were kind of related to the energy group disposition and then the subsequent review of equity alternatives.

You know, overall, the biggest overall professional fees for the quarter were about $4.3 million in total. So that's really the biggest driver, and that's the biggest increase from the previous-year period. You know, some of that, like I said, about $2 million of that is related to kind of these items that we talked about in the quarter. Then the rest is really -- you know, recently there has been a lot of activity in Washington and we've spent a piece of money on Agora-X professional fees, just making sure we are completely in the right spot, from a regulatory environment, to really capture on the changing landscape in Washington.

Then our expansion into Australia and Europe, as we look to expand out and really grow through our Dublin office out into the entire EU, you know, it is taking some money to get some professional fees to get ramped up there and then as we really look to build on our recent acquisition in Australia, just to position ourselves as well, so a little bit of everything there contributing to the professional fees. But that's really going to be the biggest driver from a quarter-over-quarter and year-over-year -- in the other item.

Okay. Great, thanks, guys.

At this time, there are no further questions. I would like to turn the call back over to our speakers for any closing remarks.

Okay. We just want to thank everyone for participating in the call. We appreciate the interest and we look forward to talking to you next quarter. Thank you.

Thank you.

That does conclude today's conference call. Thank you all for participating. You may now disconnect.