StoneX Group Inc (SNEX) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to International Assets Holding Corporation fourth quarter and full year 2009 earnings conference call. As a reminder this conference call is being recorded. Today, December 15, 2009. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in the question and answer session. At this time I would like to turn the call over to Mr. Bill Dunaway, CFO of International Assets Holding Corporation.

Good morning, my name is Bill Dunaway, CFO of International Assets Holding Corporation. Welcome to our earnings conference call for the fourth quarter of Fiscal 2009 ended September 30, 2009. We issued our earnings press release after the close of trading yesterday. At that same time we also filed with the SEC our Form 10-K for the fiscal year ended September 30, 2009 and a separate 8-K containing full fiscal year financial results for FC Stone which merged with International Assets on September 30. All of this information is posted on our website intlassets.com.

Our format will be a little more complicated than usual as we would like to cover both the INTL results as well as the fourth fiscal quarter for FC Stone which was completed prior to the merger and thus have not been consolidated into the INTL results as reported. We've had the following format planned for today. It should last no more than 20 to 30 minutes before questions and answers.

Sean O'Connor, our CEO, will give an overview of the INTL Q4 and Fiscal 2009 results as well as comments on the recently completed merger. Pete Anderson our President will address FC Stone's results. I will then take you through the financial details presented in the recent earnings release and finally Sean will wrap up briefly and we will take questions.

Before getting under way I'd like to cover a couple housekeeping items. First since we have a number of listeners on this call who are new to International Assets I want to note on the conference calls and management discussions portions of our SEC filings we present financial information on a non-GAAP basis in order to take into the account the mark-to-market adjustments in our commodities business. As discussed on previous conference calls and in our filings the requirements of accounting principles generally accepted in the US or GAAP to carry derivatives at fair market value but physical commodities inventory at the lower of costs or market value may have a significant temporary impact on our reported earnings.

Under GAAP, gains and losses on commodities inventory and derivatives which the Company intends to be offsetting are often recognized in different periods. Additionally, GAAP does not require us to reflect changes in estimated values of forward commitments to purchase and sell commodities. For this reason we believe that the GAAP numbers do not reflect the commercial results of our commodities business and therefore the Company as a whole. Instead, we assess all of our businesses as do our banks on a fully mark-to-market basis in our daily monthly and internal financial reporting. We also calculate commodities traders' bonuses on the basis of fully mark-to-market results, not GAAP results.

Readers of our Form 10-K filing should look at Item 6 our selected financial data for a summary of both GAAP and non-GAAP information. This section also gives the reconciliation between GAAP and non-GAAP information that the SEC requires us to give. Please note that whenever we talk about an adjusted number on this call we are talking about a non-GAAP number.

Secondly we are required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto as well as the most recent Form 10-K filed with the SEC on December 15, 2009. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties which are detailed in our filings with the SEC. Although the Company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the Company's actual results will not differ materially from any results expressed or implied by the Company's forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of the new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance.

With that, I'll now turn the call over to Sean O'Connor.

Thanks, Bill, add grand morning everyone. This is our first conference call post the FC Stone transaction and I'd like to first of all welcome all of the FC Stone shareholders to this call. We have a lot to cover today. Obviously we'll deal with the International Assets Q4 and fiscal year results as well as some comments on the progress with the merger. Although FC Stone is no longer a separate entity, we are also providing details on FC Stone Q4 and fiscal results to help you evaluate their performance. Due to the timing of the merger close, we are able to present a combined balance sheet and so for the first time we can also share with you the book value of the go forward Company.

Dealing first with International Assets Q4. Overall a disappointing quarter, down from just over $4 million in adjusted earnings in each of the previous three fiscal quarters, although better than the breakeven result of Q4 a year ago. Generally speaking, we found the market conditions starting in the Summer to be more challenging than earlier in the year, with less volume and less volatility in all asset classes. Revenues versus a year ago were down 6% but lower costs, interest, and tax resulted in better net earnings. Comparing the revenues by business line is difficult due to the massive turmoil in the markets a year ago which provided a significant benefit for the equities business and writedowns on the seat capital in asset management.

Our GAAP results include an $18.5 million gain related to the purchase accounting treatment applied to the merger with FC Stone. Our adjusted shareholder funds now stands at $246 million and book value per share is $14.16. Relative to our fiscal third quarter on a sequential basis, adjusted operating earnings declined 27%, the bulk of which was attributed to a 40% decline in foreign exchange which was off its record results in the third quarter. Equity trading was down 29% while commodities was up 18%. Both equities and foreign exchange tend to see lower volumes in the Summer months which accounts for some of the decline, although lower trading volumes overall and less volatile markets exacerbated this decline. So while Q4 presented its challenges and was complicated with the effort required to complete the merger, we think it was overall a successful year for the Company in fiscal 2009. Especially in light of the historic disruption in the global financial markets. I would like to make the following observations on our fiscal year as a whole.

Firstly, despite a very difficult environment where many financial firms experienced significant difficulties, we managed to record another record adjusted net income excluding the extraordinary gain which was up 30% over the 2008 number which itself was a record on a continuing operations basis. We believe this performance stands in stark contrast to the rest of the financial sector.

This bottom line result was achieved largely by defending our 2008 revenues during a very difficult year, where generally customer volumes contracted. During this time our consistent focus on customer service set us apart from our competitors and allowed us to increase market share, offsetting the decline in activity per customer. Our focus on very tight control of fixed costs allowed us to increase earnings in this difficult environment.

We achieved an adjusted ROE, that's return on equity, which is our major management objective of 16% for the year. We remain very liquid with borrowings excluding the convertible notes averaging $91 million and cash and cash equivalents of $75 million with significant available borrowing capacity. And finally, we are able to close on a significant transaction, the merger with FC Stone, which we believe sets the stage for a new and exciting chapter for International Assets. The merger will allow us to more effectively leverage the combined activities to generate even more earnings. We are in a very good position to push forward to aggressively grow the business and have the capital resources to do so.

The merger with FC Stone coincided almost exactly with the seven year anniversary of the current management team taking over International Assets. At this juncture and especially for our new shareholders it may be worthwhile reviewing the highlights over the seven year period.

Our business model like that of FC Stone has never been based on proprietary or directional trading, high leverage, or complex products. We offer commercial entities a high tech solution for their financial needs. Our adjusted book value per shares increased eight times in seven years or compound annual growth rate of close to 35%. Despite a large drop in our share price during the financial crisis, we remain one of the top performing financial services stocks in the US over this period having increased from about $0.60 to $15. Adjusted shareholder funds have increased from $4 million to $246 million over this period, up 62 times and employees have increased from 12 to 625. We are very proud of our track record over the last seven years and are excited to have an opportunity to build on it as we move into a new chapter with FC Stone.

I'll now hand you over to Pete Anderson for comments on FC Stone results. Pete?

Thank you, Sean, and good morning, everyone. I'd first like to comment on how well the two companies have come together, in the early days of the merger. International Assets is a perfect partner for FC Stone and provides a great platform to continue the growth of our commodity risk management consulting business for the benefit of our customers and our people. Both personally and with Sean, I've been spending a lot of time with FC Stone consultants and customers around the world in recent weeks. The power of our combined platform resonates with our people and customers alike with our unique capabilities and energized and talented consulting group and industry dynamics that favor our approach to business, we think we have an exciting opportunity.

Bill's going to give you the specific on FC Stones results but as we had indicated on our third quarter call over the Summer, FC Stone experienced significant headwinds throughout fiscal 2009. Revenues and earnings were down in our fiscal Q4 over the prior year as we had anticipated giving significantly lower contract volumes and extremely low interest rates. This has been a period of unprecedented global economic turmoil. Credit and leverage capacity has been in gridlock and in many industries and regions we saw at the beginning of the year a collapse and deleveraging of the commodity markets. While those conditions are beginning to ease and in some cases turn around, they made for a difficult fiscal year for FC Stone.

As those who have followed us know, we responded to these challenges by sharpening our focus on our key assets and core competency commodity risk management. We reduced large account exposures and significantly revised risk management practices in our clearing and execution business as well. These activities exacerbated our reported declines in contract volumes since we were strategically reducing exposure in our clearing and execution business.

Today, despite poor 2009 results overall our commodity risk management consulting business is performing profitably. Our customer relationships are sound and the need of our customers to manage risk of price, position, logistics and execution in production and consumption is as great in our traditional market segments of agriculture and energy as we have ever experienced.

Further we have started to see several encouraging signs in our business. We've seen a fourfold increase in revenue from the foodservice segment over the past year. The beginnings of recovery are emerging in renewable energy, where we are seeing widest profit margins in over 18 months. Our traditional energy segment has nearly doubled in the past year. Farmers are completing what is shaping up to be a record corn and soybean harvest and finally, access to credit has improved dramatically for domestic clients and internationally is beginning to ease as well.

Looking ahead beyond our traditional core businesses of agriculture and energy, we anticipate renewed and continuing growth of opportunities in the areas of renewable energy, international markets, foodservice, weather, livestock, forest products and foreign exchange. Further the diversity and capital strength gained by combining forces with International Assets opens new opportunities for us and accelerates the opportunities we were already pursuing. Those include international expansion. We were already gaining traction in Europe and Australia before the merger and now with the International Assets, FC Stone combination we are poised to accelerate international growth.

So in summary the FC Stone business is emerging from the commodity markets downturn in what we believe is a strong position having refocused on our core expertise of commodity risk management and with bright growth opportunities both in new commodity verticals and geographically. That potential is enhanced hopefully accelerated by our combination with International Assets and we couldn't be more delighted with what we're hearing and seeing in the marketplace so far. I'll now turn the call over to Bill Dunaway for a more detailed review of our financial performance.

Thank you, Pete. Today I'm going to discuss International Assets fourth quarter and fiscal year performance and also FC Stone's fiscal fourth quarter ended August 31, 2009. The transaction combining FC Stone and International Assets closed on September 30, so we're able to provide a balance sheet for the combined Company, however please note the results of FC Stone for the year-ended August 31, are not reflected in INTL's results for the fiscal year. We have also included five years of pro forma combined historical financials in our 10-K for your use in evaluating the combined Company.

Turning first to International Assets results let me remind everyone as I said at the outset of the call that the fully mark-to-market numbers are not in accordance with GAAP. The differences between the GAAP and fully mark-to-market numbers, a rise in our commodities business segment, in all of our other business segments, GAAP and mark-to-market numbers are the same.

Also please note that we ended our partnership in INTL Consilium during the fiscal third quarter of this year. The current and historical results of INTL Consilium and of the Hong Kong Company we closed in October 2008 are reported as discontinued operations. The discussions that follow deal with our continuing operations.

Looking at INTL's fourth quarter comparison versus the year ago period, adjusted operating revenues were $17.6 million this quarter compared with $18.7 million in the same quarter last year. The comparison reflects 58% growth in adjusted operating revenues from our commodities business driven by favorable spreads in metals. This was offset by difficult conditions in our equities trading where operating revenues were down 60% to $3.5 million and foreign exchange which was off 10% to $6.4 million. Both of these businesses face lower volumes and spreads in Q4 though stronger performance earlier in the year left both businesses up on an earnings basis for the full fiscal year.

Non-interest expenses improved by 2% from $16 million last year to $15.7 million this year. Of our total non-interest expenses, 48% were fixed and 52% were variable compared with 44% fixed and 56% variable in the prior year. Compensation and benefits made up 50% of our total non-interest expenses in the fourth quarter compared with 53% in last year's period. Interest expense decreased by 40% from $3 million to $1.8 million due primarily to reductions in borrowings given lower trading volumes. Of course, interest rates are also significantly lower than in the prior year period as well. Interest paid during the quarter was $1.6 million compared with $2.5 million in the prior year. Interest to convertible noteholders has decreased from about $465,000 to $320,000 following the conversions in September and October of 2008.

The Company is also paying lower interest -- rates of interest on decreased bank borrowings. Our interest rate swaps had the effect of increasing our reported interest expense by about $605,000 for the quarter.

The Company's adjusted pro forma net income from continuing operations for the fourth quarter of 2009 was $800,000, up from approximately breakeven in the year ago quarter. On a GAAP basis, INTL lost $1.8 million from continuing operations in the quarter compared with a $2.5 million profit in the prior year quarter. The loss was offset by an extraordinary gain of $18.5 million related to the purchase accounting treatment of the FC Stone merger. Including the gain, GAAP net income for the quarter was $16.7 million or $1.62 per diluted share.

Our tax rate each quarter depends on the geographic mix of our earnings. The overall rate in fiscal 2009 has decreased from 2008 due to an increasing proportion of our profits having been earned in Dubai, Singapore and the United Kingdom. The effect of this mix was highlighted in the fourth quarter this year when we realized a $2.2 million tax benefit.

There were no conversions or convertible notes during the quarter and the balance of the convertible notes at September 30 was $16.7 million. Comparing our fourth quarter results on a sequential basis to the fiscal third quarter, one will see the impact of lower activity throughout our businesses in the fourth quarter. This reflects general market conditions but also some of the seasonal effect of the summer months that comprise the first two months of the quarter.

Adjusted operating revenues is $17.6 million were down from the $24 million in the June quarter. Non-interest expenses of $15.7 million in the fourth quarter were down from the $16.3 million reported in the June 2009 quarter. Interest expenses were up modestly in Q4 on a sequential basis at $1.8 million compared to the $1.6 million in the June quarter. Our adjusted pro forma net income from continuing operations of $800,000 in the fourth quarter compares with $4.3 million in the June quarter.

Now looking at the full fiscal year, I'll summarize a few key metrics. Adjusted operating revenues rose 9% to $98.2 million. Non-interest expenses were up 12% to $70.4 million with clearing and related expenses comprising the largest percentage increase. Interest expense was 29% lower than the prior year at $8 million. And adjusted pro forma net income from continuing operations was up 30% to $14.2 million. GAAP income from continuing operations was $9.8 million for the year compared with $27.7 million in 2008. Including the extraordinary gain, net income for the year was $27.6 million or $2.80 per diluted share.

Results for the full year reflect an improved performance in commodities trading, particularly the precious metal side of our business and acceleration of activities in Dubai and Singapore. Adjusted operating revenues from precious metals grew by more than 70% offsetting a 34% decline in revenues from base metals trading driven by declines in base metal prices. While equity trading was basically flat on the year from an operating revenue perspective, all other segments showed growth. Foreign exchange operating revenues increased 28% over 2008 due to both a larger customer base and wider spreads due to the global financial crisis. We expanded our debt capital markets business with an acquisition in Argentina and the hiring of a team in Singapore and we showed solid growth in fee income in our asset management group.

On an adjusted basis the contribution of all of INTL's business segments grew by a net of 9% over 2008. Our balance sheet at year-end reflects the closing of the merger with FC Stone as I noted earlier. Total assets were $1.6 billion compared with $438 million at the end of September 2008. Of the $1.6 billion total, $1.2 billion was the result of a merger with FC Stone. GAAP net asset value of the combined Company at September 30 was $239 million. The balance sheet is very liquid with cash and cash equivalents of $75 million and 88% of our assets consisted of cash, cash equivalents, deposits and receivables from exchanges and counterparties, financial instruments and commodities.

Our commodities inventories increased from $57 million at the end of September 2008 to $107 million at the end of September 2009. Stated at the lower of cost of market value. The market value of this inventory is approximately $119 million. Borrowings excluding the $16.7 million of convertible notes were at $109 million at the end of September compared with $120 million at the end of September 2008.

On that note, let me transition to FC Stone's fourth fiscal quarter which ended on August 31. We filed an 8-K yesterday evening that included the full fiscal year results and in our press release last night we included summary fourth quarter results. In the interest of time I'm going to focus here on those fourth quarter results.

Fourth quarter revenues net of the cost of commodities sold were $48.7 million compared to $88.3 million in the quarter ended August 31, 2008, reflecting continuing challenges in the commodity markets evidenced by softer contract volumes and a low interest rate environment compared to last year; however stability in our core risk management or consulting revenues offset some of the revenue weaknesses in the quarter. Average customer segregated assets decreased 44% to $925 million compared to the fourth quarter of 2008. Exchange traded contract volumes declined year-over-year to 9.2 million contracts from 21.5 million primarily due to a decline in market participants in our clearing and execution business as well as actions taken by management to reduce exposure to larger and longer tenant third party clearing accounts.

Over-the-counter contract trading volume was 73,000 for the fourth quarter of 2009 versus 396,000 contracts in the fourth quarter of 2008. This decline was primarily a result of continuing difficult market conditions in our Brazil or renewable fuels division in the current quarter compared to record fourth quarter volumes in 2008. We recorded a net loss of $4.5 million for the fourth quarter compared to net income of $8.1 million for the same period last year, excluding special items in 2009 fourth quarter including an impairment of goodwill, intangibles and other assets, legal and professional fees primarily related to the merger which were offset by the sale of our remaining ownership in the grain merchandise or FTDI, our non-GAAP adjusted net loss for the quarter was about $800,000.

Looking briefly at the segments. Commissions and clearing fees were $30.1 million, down approximately 35% from the prior year period. This decline is reflective of lower volumes I mentioned before that -- we saw a continuing trend toward improving commission rates per contract due to the relative strengthen our CRM business offset by declines in our clearing and execution segment.

Service consulting and brokerage fees were $11.1 million for the quarter down from a record $28.9 million a year ago quarter. This decline is primarily due to volume related reductions and over-the-counter brokerage fees as a result of the continued capital constraints faced by our commercial customers most notably in Brazil as well as market conditions in renewable fuel. Interest income declined approximately 77% in the quarter to $2.5 million due to the persistently low interest rate environment. Total costs and expenses in the quarter were $57.1 million compared with the $72.9 million in the year ago fourth quarter. I will now hand you back to Sean O'Connor to wrap up.

Thanks, Bill. The merger of International Assets and FC Stone has created a unique customer centric business with a global footprint and a great opportunity for longer term shareholder value creation. We are going after that opportunity by pursuing a simple strategy, delivering high value add, high touch execution and risk management advisory services, focused on mainly mid sized commercial companies. We believe it's a business model that requires a patient, long term approach, but results in deep customer relationships and attractive growth in ROEs, and is generally insulated from competition from larger financial services players.

Our expanded management team has gotten down to work and been out in the field talking to customers and we continue to believe there is significant untapped potential. I'm very happy with the progress and we believe that we are taking positive steps to reenergize the FC Stone marketing machine after a traumatic year while also streamlining infrastructure and instituting a more robust risk management process.

Long term our enthusiasm for the combination is very high; however it's important to balance that against nearer term realities. The current business environment remains difficult. We will continue to battle headwinds in the form of low interest rates and reduced activity levels from customers in the coming quarters. That is a fact of life in the markets right now but we did not enter into this transaction for a quick win.

The management team are significant shareholders. We make decisions based on an objective of long term value creation, not on the marketplaces quarterly expectations of us. The FC Stone combination is a two to three year project that we believe will result in a much larger pay off down the road if we remain persistent and patient. In the meantime we are focused on trying to produce a satisfactory return on capital and taking concrete steps to realize the significant long term potential for all shareholders. With that I'd like to turn it back to the Operator and to open the line for the question and answer session. Operator?

(Operator Instructions) We'll go to Graeme Rein of Bares Capital.

Good morning. Sean, on the equity market making business, is it just a function of market conditions or has there been any change in competitive position or competitive dynamics there or is it just no volume and no volatility in spreads coming in?

Certainly, no change in the competitive dynamics that we are aware of. If we monitor our market share and look at sort of objective data points say on the pink sheets, we are as high up as we've ever been. I think it's just honestly, we've driven ultimately by retail flow, retail investors have been hurt. I think the panic is over and now people have just settled into sort of doing nothing so I think it's just a volume kind of issue and a Summer issue. We have seen slightly better results coming up more recently and I think that's sort of echoed in some other people on the equity markets and if you look at volumes on the exchanges you'll see they are down as well recently. So that's our sense.

Okay, and asset management, that's all fee income, right? There's very little proprietary capital in the asset management business right now.

That's correct. A year ago in Consilium we had a fairly sizeable amount of proprietary capital when we were launching a couple new products. That's been reduced down and we have something like $5 million in total. We just launched a new product in Argentina and we kicked that off with $4 million and they've already sort of raised $10 or $15 million external money, we'll probably start redeeming that [seed] capital at some point soon.

Okay, and then since you closed the transaction, has there been any surprises, positive or negative that you might want to share? I'm sure nothing happens exactly how you expected but any insight on anything you didn't expect from the transaction would be helpful.

Okay, well, I'll start and Pete, maybe if you could comment after me as well so you'll get both sides.

No, I think we're really excited about the transaction. I think more and more as we get to know the FC Stone folks and what they are up to and their customers and their business, I think we just see that there's a fantastic customer base there, a fantastic business model and if anything, I think we're sort of more enthused. I think also long term we think now that we sort of compared notes and have some time to digest everything, we think there's a lot we can do to enhance the kind of margins we're making out of that business and that's going to be sort of a two to three year pay off for us, but we think we can move this business into a sort of different business model over time which will allow us to capture a lot more, so obviously, we'll see how things transpire but so far, I think more positive than we envisaged but lots of work. We are all running around pretty busy at the moment and Pete and I have been on the road pretty much three months constantly now, so all in all I think it's been very good from our perspective. Pete, I don't know what your view would be.

Yes, I'd echo that, and I think our original number of the reasons were additional capital and leverage and capacity when we looked at the merger and not necessarily from synergies to a large extent but I think what I've been really pleased with is that there are I think significantly more opportunities than what we anticipated and especially in FX around the world. Our commercial customers especially in foodservice and a lot of the manufactures that we deal with have needs that I think we can really leverage to the INTL FX platforms and we're starting to see that, the administrative functions and capacity that the INTL side of the business has in Singapore and Dubai, and really around the world, we're starting to leverage. We're bringing in a small team into the Dubai office, we're expanding in Australia and we'll utilize the Singapore office to leverage into the (inaudible) for that region, so it's real exciting and as Sean said, I think there are far more opportunities than what we really anticipated and it's an exciting time as we move forward.

Okay, well thanks for taking my questions.

Thanks. Operator, another question?

And that is Rich Repetto of Sandler O'Neill is next.

Yes, hi guys. I guess a question on FC Stone to Pete and Bill more. But I guess I'm just trying to get a feel what more current conditions are like say through the November or are they, are we continuing to see a slowing and then what impact has been sort of the tightening on credit on small businesses, what's the impact there? And then lastly, any of these regulatory changes, do you see any that the US is contemplating for financial reform, do you see how that impacts FC Stone's business?

Yes, I think through the end of our fiscal year, through the end of August, we continued to see decline in volumes and a lot of that is really driven, Rich, especially the significant declines on the clearing and execution side of the business where we really just stepped away from the mark-to-market execution and clearing or the market making execution and clearing and the clearing and execution side of the business and it's, that I think we'll continue to see a decline in that side of the business.

Now the commodity risk management side, the fourth quarter was basically continued to -- well, in fact the fourth quarter improved over our third quarter as far as the commodity risk management side of the business and if you look at the industry or comparison of the industry, if you look at just specifically commodities even for the CME over the last let's say nine months since the beginning of the year, that was off I think roughly about 28%, something like that, and year-over-year, the last year's quarter or basically our final quarter or fourth quarter and if you compare that to the CME, that was down about 23% where our commodity risk management volume was down about 18% and so, on that side of the business, we're pretty comparable I think to the peers if not even a little bit better.

Now, as we go into this first quarter of this fiscal year, we've already started to see basically I think an improvement in OTC volume as well as exchange base volume on the commodity risk management side and I think a lot of that's driven by improved margins in renewable fuels. We've got a huge corn crop and I think it's yet to be seen whether it's a record corn crop but it's going to be right at a record corn crop and same thing with the soybean crop so our historical volumes in ag products I think will be driven by that huge volume that's out there, and really the demand coming from renewable fuels as well.

And then I think to answer your final question as far as credit here domestically, even from the beginning it's not been as difficult as really credit around the world but we've seen a loosening or more liquidity in ag products here, to some degree energy as well, and really up until just the last month in Brazil and internationally credit has really been tight.

We've not seen any of the international banks really come back into Latin America to a large extent but we really are starting to see and really building relationships with regional banks around the world and to a large extent that's driven by the relationships at International Assets staff and management have with those regional banks, to some degree leveraged by the relationships that they have their through FX platforms and I think we'll really benefit from that as we go forward.

And Pete, any comments on the financial reform package, the movement for OTC derivatives to be cleared? Do you see that as a positive for your business?

I think we will see more transparency and really basically mandated responsibility of showing more transparency and really reporting on an ongoing basis and we've always been an advocate of basically additional transparency and from a clearing perspective, I think before it's done, the bulk of at least what I'd call vanilla transactions and instruments will be cleared.

Now from a capital perspective, I don't think we'll see the required increases that maybe we anticipated even six months ago or last winter but I do think there will be probably as much as let's say 10%, 15% and a requirement to bring probably FX platforms into a clearing operation which will require additional capital as well as some capital requirements for the OTC products that will have to be cleared as well.

If I could just chime in there, I think the way we think about that is, our core asset here is the relationships with the customers, and that's what we focused on and to a certain extent we believe we have the platforms and the capital to handle however the regulators want us to deal with that business, but that's very much a secondary issue for us. Our major issue and our major focus is the relationship with the customers of solving their financial problems and if we do that right we think we can figure the rest out and that applies anywhere in the world.

Got it. Thanks very much. That's helpful.

Thanks, Rich.

(Operator Instructions) We'll go next to Bill Jones of Singular Research.

Hi guys. I was wondering if you could comment on the financial crisis in Dubai and how that may or may not affect you.

Well, it seems to change by the day. I mean if you read the papers today, there's sort of no crisis going on there, but yes, it was obviously a big surprise, there's been a lot of excesses in Dubai which everyone has written about and the view was always that there was enough oil and Abu Dhabi would go back to buying and that wasn't the case and I think that was a shock for everyone. In terms of our business, our business is dealing with commercial entities who are involved in the metals business, mainly the precious metals business. Many of them are actually Indian based businesses that use Dubai as a purchasing base, so we really deal with those commercial entities.

Obviously with what we've seen happening in the rest of the world is when you have something like this come out of nowhere, you've always got to kind of think about what's the next shoe to drop and will there be a massive liquidity, will there be a massive liquidity problem and will that liquidity problem kind of impact our clients, and we jumped on it right away. We reduced our exposures with our clients, they were all very liquid, were happy to pay us back and so far we don't have any signs of any liquidity problems with our commercial customers but we're not involved in real estate, we don't have exposures to local banks there, we really deal with commercial entities and thus far they seem to be unaffected and we are watching very closely and as I say no signs at the moment but something we'll keep a close eye on.

Thank you.

Okay. Operator, do we have any other questions?

We'll go next to Mike Vincequarra of BMO Capital Markets.

Good morning guys. One question, you'd mentioned the strength in the precious metals area and I'm just curious if that's mostly a function of the pricing and the demand for gold and things like that right now and if that's something that you've seen continuing over the last couple of months and expect it to be an area of strength? And secondarily, on the base metals, is that more going to be a function of strength and the global economy and the demand for those as construction and so forth, such as to pick back up?

Let's just deal first with precious metals. Actually for our business, high precious metals prices isn't great. We're dealing with end-users, people in the Far East, I mean we don't deal with end-users per se but that's really where the flow is going and they tend to use gold as a store of wealth and tend to buy when it's cheap and actually tend to turn in their jewelry into scrap when prices are high, so we did see in the early part of the year probably the bulk of our, well we had a disproportionate amount of our precious metals earnings coming through in the beginning of the year. Part of that was a function of a currency arbitrage in Vietnam and other places but typically we do better when gold is kind of lower than it is now.

We don't deal with hedge funds. We don't deal with speculative investors or ETFs and those are the people participating in the market now and the view generally that we have is gold has now become dominated by sort of the financial players and if you speak to the commercial players, none of them like where the current prices are.

Having said that, we make much bigger margins when we see scrap flows going the other way which is what's happening now but the volumes are lower so I don't know, I've given you a lot of information there but bottom line, we haven't been a huge beneficiary of the price shooting up. That really hasn't been helpful to us.

So there's pluses and minuses when prices are high and low so that doesn't sound like it affects you too much when it comes to the real bottom line?

Correct. What we like to see a little bit is the sort of price going up and then dropping back a bit and then suddenly you find a lot, so we need kind of volatility is what works for us best. Something that's just going in a straight line up in our gold business is not helpful.

Very good. Sounds like many other markets we talk about.

Yes, exactly. And then on the base metals side that's probably a slightly different animal because there we are dealing with commercial entities that are influenced largely by commercial and economic activity and what's interesting at the moment is we're doing a lot of business in China on the base metals side and what we are seeing is very little interest from the commercial businesses here in the US. And in fact what we're doing is taking metal out of the US by and large and putting it into China and we're getting very good spreads doing that and if you just read the newspapers and see what's going on in China and the massive stimulus program and I think that is driving a lot of what we are involved in at the moment so that's one thing.

The other part of the base metals business is we do, we are beneficiaries of sort of arbitrages particularly when the markets move up quickly we tend to be able to buy off grade material kind of at old prices if you would like so that the spreads widen in a rising market and that's really helping us out now particularly on the lead side.

Great. Thanks very much, Sean.

Okay. Operator, do we have anymore questions?

No, we do not. At this time I'll turn the conference back to Mr. O'Connor for any additional remarks.

Okay. Well, thanks, everyone. We look forward to speaking to you again soon. It will only be about two months before our next quarterly call and thanks very much for joining us on this one. Thank you.

That concludes today's conference call. We thank you for your participation.