StoneX Group Inc (SNEX) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentleman, and welcome to the International Assets Holding Corporation first quarter 2010 earnings teleconference call. As a reminder this conference call is being recorded today, February 17, 2010.

During the presentation all participants will be in a listen-only mode. Afterward you will be invited to participate in the question-and-answer session.

At this time I would like to turn the call over to Bill Dunaway, CFO of International Assets Holding Corporation. Please go ahead.

Good morning. My name is Bill Dunaway, CFO of International Assets Holding Corporation. Welcome to our earnings conference call for the first quarter of fiscal 2010 ended December 31, 2009. We issued our earnings press release after the close of business yesterday and filed our 10-Q with the SEC.

Before getting underway I would like to cover a couple housekeeping items. On these conference calls and in the management discussion portions of our SEC filings we present financial information on a non-GAAP basis in order to take into account mark-to-market adjustments in our commodity and risk management business.

As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the United States, which I will refer to as GAAP, to carry derivatives at fair market value but physical commodities inventory at the lower of cost 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 commercial results of the commodities business and therefore of the Company as a whole.

Instead we assess all of our businesses, as do our banks, on a fully mark-to-market basis on our daily and monthly internal financial reporting. We also calculate commodities traders' bonuses on the basis of fully mark-to-market results not the GAAP results.

Readers of our Form 10-Q filing should look at item two in our selected summary of financial information for a summary of both the 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 recently filed financial statements and notes thereto, as well as the most recent Form 10-Q filed with the SEC this morning.

This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties which are detailed in our filings with the SEC.

Although the Company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurance 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 new information, future events, or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance.

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

Thanks, Bill, and good morning, everyone. In summary, the first quarter of 2010 played out very much like the prior quarter, that is Q4 last year, with little change in the overall business conditions.

While that translates to disappointing quarterly results, we are feeling increasingly good about our longer-term story as we learn more about the opportunities presented by the combination with FCStone. That story, as mentioned last time, will play out over time but even with the difficult market conditions we are dealing with presently I do continue to believe that we will make a satisfactory return on capital for the overall year.

This is our first full quarter as a merged company and we are introducing our new segment reporting structure to reflect the activities of the combined INTL and FCStone. Bill will later go through this in his discussion of the quarterly results and let you know how we have arrived at the current segment presentation.

As mentioned, we will focus our attention and comments on the fully mark-to-market non-GAAP numbers which we believe better represent the commercial reality.

Our results are significantly below our target return on equity which now stands at 10% for the trailing 12 months on average equity over that period. We have set our minimum target at 15% with a desire to make greater than 20% per annum. As we said on the last call, we are likely to end the 2010 fiscal year below our target range but expect to reach or exceed that minimum target in the medium-term.

Bill will take you through all the numbers but perhaps I could give you a high-level summary of how we see things playing out over the last quarter. On the balance sheet side there was really no material change from a quarter ago with the exception of bank borrowings, which were down $117 million from $165 million to $48 million, and of that $25 million being the subordinated debt at the FCM level. The sub debt was paid down a further $15 million at the beginning of January.

During the quarter we received $41 million in tax refunds which had previously been shown on the balance sheet as a receivable. We still have approximately $2 million of refunds to collect from previously paid taxes. This $41 million cash received was used to repay the sub debt line.

The merger has allowed us to pool our total capital resources and manage the combined liquidity centrally. One of the immediate benefits we realized in the merger was significantly better liquidity, which is a result of (inaudible) being largely unborrowed for extended periods of time except for the sub debt line and at times have very large cash surpluses to invest.

While he did anticipate some benefits in this regard, I think we are positively surprised with the results. All things being equal, this should result in an interest savings in the $2 million per annum range and this surplus available capital allows us to move ahead confidently with our longer-term growth plans.

Now dealing with the earnings. Conditions remain very difficult with much less volatility and generally less activity from our customers. On the commodity side this was in large part due to the tight credit environment which has made it difficult for commercial entities to hedge as they would like. The weather was also a contributing factor with the largest but the slowest harvest on record, and early snows which have likely pushed some of the soft commodity revenues into the March quarter.

Versus a year ago the segregated funds balance was down 36% and contract volumes overall down 66% demonstrating the tough conditions on the soft commodity side of the business versus a year ago. The securities business was also down dramatically against a year ago, some $40 million less in revenues of which about 50% has historically dropped to the pretax line.

The prior-year quarter produced an exceptional result for us due to the Lehman issue and the resulting market volatility. Therefore it was a result that was unlikely to be repeated anytime soon. The comparison is made worse with a weaker than normal current quarter.

Offsetting this reduction in revenues were slightly better results from both the FX and the base metals side of the business.

Our segmental presentation in the 10-Q shows the results after both variable and fixed costs, which should give you some sense of inherent operational leverage in each of our business segments.

Our gross margin, that being operating revenues less all variable costs, is around 58% for the CRM segment as well as the FX segment and around 50% for the Securities segment and much lower at 14% for the Clearing segment, which is of course much more dependent on interest rates to generate revenue. This gives us a lot of room for upside as interest rate and market conditions improve and we see an increase in revenues.

On the cost side we have included some information on the breakdown between variable and fixed costs. Interestingly the ratio has hardly changed since the merger and we continued to work hard to keep our fixed costs low. Fixed costs represent less than half our total costs which allows us to weather these downturns and protect our franchise for the long term. Clearing and related expenditures are now a much bigger portion of the overall cost structure than before.

We are continuously reviewing our various growth initiatives and allocation of capital and post merger had to start reordering our priorities in terms of our longer-term strategic plan. This is an ongoing process but it is essential to ensure we achieve our ROE targets.

Some general comments on this. You may have seen the Agora-X announcement last night whereby effective March 2010 quarter, basically effective from January 1, NASDAQ provided the funding required for the next phase of the buildout and thereby increasing their holding in Agora-X. This investment came to us through the FCStone transaction.

While we think of Agora-X is positioned to be a successful platform as increased transparency and streamlined execution are brought to OTC trading, we think our shareholders are better served if we allocate our capital to core revenue-generating enterprises. We are maintaining an equity stake of 15% in Agora with an option on a further 10% at market value. But at this level we have removed our funding requirements and we will participate as a passive equity investor.

In the December quarter our share of the Agora losses was $900,000. This will be dramatically reduced in the coming quarters.

Over the last year we have aggressively rolled out a number of new initiatives to expand our franchise and we have now installed the necessary infrastructure and are now bearing the related cost base. I guess you could say all of these activities are now kind of at maximum cost burn. These initiatives have already started to sign up customers and we believe that the cash burn on these initiatives should start declining as revenues build.

Current cost for these is in the $1.3 million per quarter range and we see this reducing in the coming quarters as revenue starts to build. This is a high priority for us and we have dedicated large resources to making sure that this happens.

During the quarter we wrote down a copper recycling venture we had funded which resulted in a $700,000 charge. We will also be restructuring our Dubai Asset management business which is currently costing us about $350,000 per quarter. The quarter's results also reflect professional fees of approximately $700,000 that were related to the merger but incurred post merger for audit and tax services.

All of these factors contributed to charges in the December quarter of close to $4 million. The costs relating to Agora, our investment write-down, and the professional fees should not be recurring. The balance of the costs we hope will start to decline as the cash burn on our new initiative reduces in the coming quarters.

Turning to the FCStone merger integration. We have been hard at work integrating the companies quickly and with minimal disruption. The complementary nature of the mergers made this easier and I believe we are largely through the initial stage of this process. A high priority was to ensure our salesforce was integrated and energized to offer a wider menu of products to existing and new customers.

Recently we held our first companywide meeting for all brokers, traders, and consultants since the merger. We believe this was very positive. The combined salesforce is now getting down to the work of driving revenues as they understand the power of the combination of the INTL and FCStone platforms.

We have already seen some early successes having cross-sold INTL's ForEx and capital market services into the FCStone customers. We look forward to leveraging our expertise and breadth of service to further expand our engagements with customers as we move forward.

We have also made some real progress on integrating and upgrading the accounting and perhaps more importantly the risk processes. On the accounting side, Bill and his team did very well. We have consolidated all the accounting on to one system and the accounting team is now fully integrated.

On the risk side we have added a significant robustness to the process and put clear policies and procedures in place. In addition, we have completed a fairly major systems enhancement to allow us to proactively monitor and identify any outsize risks. We believe we have made substantial progress on this.

In the next couple of quarters we will start to focus on the operational areas which should result in some ongoing streamlining and efficiencies.

So to wrap up, business conditions continue to be difficult and that was reflected in our results. But it's also a very important time for us as we do the internal and external work necessary to take advantage of the full power of our company's newly combined platform. We are managing the short term but preparing carefully for the long-term where we believe good opportunities to generate returns await us.

I will now hand you back to Bill for a discussion of the financial results. Bill?

Thank you, Sean. 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 difference between the GAAP and fully mark-to-market numbers arise in our Commodity & Risk Management Services segment. In all of our other business segments GAAP results and mark-to-market results are the same.

Looking at the first-quarter comparisons versus the year-ago period adjusted operating revenues were $65.2 million this quarter compared with adjusted operating revenues of $29.8 million in the year-ago period. In our 10-Q filing for the quarter we have included unaudited pro forma results for the three months ended December 31, 2008, as if the acquisition of FCStone had occurred on October 1, 2008. Under this presentation pro forma adjusted revenues for the first quarter of 2009, the previous year, for INTL and FCStone combined would have been $118.8 million.

Given the extraordinary loss item in the first quarter which resulted from a state tax rate adjustment to divert tax assets post merger, it may be more useful to look at the adjusted EBITDA number which showed $6.6 million in the current quarter versus $9.9 million a year ago. Either way this is an expected but nonetheless disappointing result due to the more difficult environment overall characterized by lower volumes and less volatility across all asset classes versus a year ago.

As this is our first quarterly earnings report of post merger combined results, I will provide more detail on our new business segments now. Our five reporting segments are now commodities and risk management services, foreign exchange, securities, clearing and execution services, and an other segment.

To provide more color on each, commodity and risk management services combines the FCStone CRM segment with the International Assets physical metals business to form our largest segment. This segment now houses all of our commodities activities including exchange-traded futures and options, over-the-counter derivatives, and physical trading.

Adjusted operating revenues increased from $7.7 million in the first quarter for this segment of 2009 to $29 million in the first quarter 2010 with $20.8 million of the increase attributable to the inclusion of the FCStone operations. Revenues in FCStone's historical CRM business were off significantly from the prior year due to the low interest rate environment and lower volumes in agriculture exchange traded products exacerbated by the poor weather in December and lower OTC volumes, particularly in renewable fuels in Brazil.

Precious metals adjusted operating revenues declined 45% year-over-year from dampened business activity due to higher price. While base metals adjusted operating revenues more than doubled due to increased demands in the Far East and wider spreads augmenting trading process while rising lead prices contributed to greater arbitrage opportunities. Total metals adjusted operating revenues were up $3.2 million over the fourth quarter of 2009 or 64%.

CRM's segment operating income of $9.8 million on revenues of $29 million demonstrates the strong margins inherent in its largely variable expense structure. For the quarter ended December 31, 2009, average customer segregated balances were $868 million compared to the pro forma reported average customer segregated balance in the prior-year quarter of $1.2 billion. Overall exchange traded futures contract options were $867,000 for the current year quarter.

The foreign exchange segment consists of the INTL global payments and trading activities as well as the FCStone ForEx activities which consists of customer clearings and execution on spot trading as well as proprietary operation arbitraging cash and futures on the foreign exchange. Adjusted operating revenue in the first quarter totaled $13.1 million compared to an adjusted $5.4 million in the year-ago quarter. Excluding the operating revenues from FCStone operations of $7.2 million, operating revenues increased $0.5 million or 10% year-over-year.

The improved performance in ForEx was due to wider spreads on currencies of developing countries and increased customer base primarily from financial institutions and our ability to offer an electronic transaction order system to our customers. Segment operating income increased from $2.5 million in the first quarter of 2009 to $6.2 million in 2010 with FCStone operations contributing $2.9 million.

The securities segment is a combination of the International Assets equity market making business and the debt capital markets. Difficult conditions persist in this segment with adjusted operating revenues declining 72% year over year to $5.4 million due to lower volumes, dampened volatility, and tighter spreads. These results were relatively flat with our fourth-quarter revenue numbers.

Operating revenues in the equities market making business decreased 75% year over year as compared to the prior-year quarter in which the business experienced unprecedented volatility in volumes while operating revenues to debt capital markets business declined by 34% year over year due to continued negative sentiment stemming from the financial crisis. Securities segment operating income was $1.4 million compared to an adjusted $11.3 million in the prior-year quarter.

Clearing and execution services remains a historically recorded FCStone CES segment. Adjusted operating revenues in the quarter were $16.1 million revenues for this segment were negatively affected by low volatility in the exchange traded markets as well as historically low short-term interest rates. The CES segment operating income was $900,000 in the first quarter of 2010.

Finally the other segment includes International Assets historical asset management group and FCStone's historical financial services segment. Adjusted operating revenues were $2.2 million in the current year quarter compared to a net loss of $1.4 million in the prior year quarter. In the prior-year quarter the Company had suffered investment losses of $2.9 million due to the financial crisis.

Including the $300,000 in FCStone revenues operating revenues were $1.9 million in the quarter. Segment operating income was breakeven in the first quarter of 2010 compared to a segment loss of $3.1 million in 2009.

Non-interest expenses totaled $58.8 million compared to $20.1 million last year. Excluding expenses in the FCStone operations of $41.7 million, non-interest expenses decreased $3 million or 15% year-over-year. Of our total non-interest expenses 43% were fixed and 57% were variable compared with 42% fixed and 58% variable in the prior year.

Compensation and benefits made up 42% of total non-interest expenses in the first quarter compared with 64% in last year's period. Interest expense increased by 9% to $2.5 million in the first quarter of 2010. Excluding the interest expense in the FCStone operations of $900,000 interest expense declined $700,000 or 30% primarily due to reductions in borrowings given lower trading volumes.

Of course, interest rates remain significantly lower in the prior-year period. Interest paid during the quarter was $2.1 million compared with $2.6 million in the prior year.

In the first quarter we recorded an impairment charge of $700,000 on the assets of our 55% owned consolidated subsidiary INTL [CRMN]. The Company's adjusted net income attributable to its common shareholders was $2.7 million for the first quarter of 2010 as compared to $4.2 million in the prior-year quarter. Pro forma adjusted net income attributable to common shareholders, which includes the FCStone operations, was $14.7 million in the year-ago quarter.

On a GAAP basis the first-quarter 2010 net loss was $4.2 million compared to net income of $3.3 million in the year-ago quarter.

The current quarter includes a $3.4 million extraordinary loss from a purchase price adjustment relating to the production in the Company's consolidated effective state income tax rate based on a revised estimate and the effect these lower rates have on deferred tax assets acquired in the FCStone transactions. Previously in the fourth quarter of 2009 the Company had experienced an extraordinary gain of $18.5 million related to the acquisition.

As Sean discussed, we recently reduced our stake in Agora-X to 15% subsequent to the end of the quarter. As a minority stakeholder we will no longer be required to consolidate Agora-X's financial statements as we will be recording our percentage of their operating results on the equity method.

We recorded an income tax benefit of $600,000 for the first quarter of the fiscal year 2010 compared to income tax expense of $2.5 million for the prior-year first quarter. For the three months ended December 31, the Company's effective tax rate was 35% compared to 42% for the prior year. We elected to carry back the net operating loss from FCStone's year ended August 31, 2009, to recapture taxes paid in the prior two fiscal years and therefore receive income tax refunds totaling $41.1 million during the quarter ended December 31, 2009.

Looking at our balance sheet at December 31 total assets were $1.4 billion compared with $1.6 billion at the end of September 2009. The balance sheet is very liquid with cash and cash equivalents of $71.8 million. 95% of our assets that consist of cash, cash equivalents, deposits and receivables from exchanges and counterparties, financial instruments, and commodities. Our commodities inventory increased $1.6 million from the end of September 2009 to $108.6 million at the end of December 2009 stated at the lower of cost or market.

Borrowings, excluding the $16.7 million of convertible notes and the subordinated debt of $32 million, were at $16 million at the end of December compared with $109 million at the end of September.

With that I would like to turn it back to Sean to wrap up.

Thanks, Bill. So in summary, current trading conditions remain difficult and interest rates, which are a major driver on the bottom line, remain at historic lows. However conditions to acquire both talent and customers remain very favorable for us.

With our strong capital backing and liquidity our international footprint we are aggressively pushing to expand the depth and breadth of our customer relationships. As we do this we are becoming increasingly confident that there is a substantial opportunity and a real need for our services by mid-sized commercial entities, which is our sweet spot.

The European market in a number of our verticals is much bigger than the US market. The opportunity in Brazilian agriculture could be as large as the US, and Argentina, Australia, and Africa are each sizable opportunities. We have already dedicated on-the-ground presence to each of these markets and have started to ramp up our capabilities. This will be a long-term project, but the upside is very large.

In addition, we are looking to leverage and build our private offering across all platforms to ensure that we capitalize on all opportunities within futures, OTC, or physical trading.

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

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

Good morning, Sean. Good morning, Bill. I think this is more of a Bill question but, Sean, step in if you want. In terms of interest rate sensitivity -- really two parts to this -- is there any way to quantify say what a 100 basis point increase in fed funds would do for you or at least mechanically can you go through where you are sensitive to rising rates?

I am sort of familiar with the old FCStone business and where the sensitivities are but also just I want to make sure I understand what is going on with International Asset too.

Chris, the majority of the interest-earning balances are going to be coming from the FCStone historical business. We are probably roughly 25% in kind of Treasury bills and agencies with a pretty good chunk of agencies and bonds there that are earning still a relatively good rate, a little over 1%.

The money market funds are making up the rest of it, probably the bulk of it. And those are down in the 30%, 35% at this point so on that billion dollars worth of [seg] funds that were nearly non-deposit right now, we are going to retain probably roughly -- with the current market that we have probably about 80% of that. So rates rising 100 basis points you are looking at a rather significant chunk. It's going to be a multiple of where we are now given the net rates less than 1% on the portfolio.

Chris, maybe just to add some color there as well, we are indirect beneficiaries of higher interest rates on our gold trading book where we implicitly charge people interest on their short balances with us. It's kind better for us if interest rates are slightly higher but I don't think it's a material add-on to the FCStone side. The most of the interest rate upside comes from the FCStone seg funds business.

Okay. And I think, if I heard this correctly also, there is some financing cost for a trading book too. Is that material or not really?

Well, I think that was kind of implicit anyway in our side of the business. So there has got to be some set off between our borrowings to finance our physical and the interest earnings we get from FCStone. But if you want to look at it on an incremental basis I would just look at the seg funds and make an interest assumption on the seg funds. That would be the incremental difference.

Okay. And, Bill, to make sure I get it, so call it 100 basis point increase, roughly 80% would go to --?

Pretax.

Okay.

On an annualized basis that is about $8 million. So it's a couple million dollars a quarter.

Yes. It's probably worth noting as well, Chris, that we have been putting our heads together and we think we need to think more about how we manage our interest rate exposure. We are effectively long interest rates and we don't just want to just sit there long interest rates at the short end of the curve without kind of thinking about that.

So we have done some work. We are working with our banks to see if there is a more intelligent way for us to harvest the greatest return from that asset, which is really the seg funds. Can we make more about that? So nothing that we have done yet, but certainly something that is exercising our minds. Hopefully, we can extract more value even in the current environment out of that asset.

Okay, great. And then just if you could give a little more color, you talked about some of the early success you have had in the cross-selling of international assets. I didn't catch it all. It was ForEx and another product --.

Capital markets. Also, there is little boutique investment banking business. We have suddenly just fallen into this and the guys involved they can't believe what is going on because they had, I don't know, 10 or 15 mandates from FCStone clients in Brazil to go and raise capital for them and find them bank financing and so on.

So we think there is kind of an interesting opportunity there to bring those guys, particularly in Brazil and Argentina, to bring them on and try and see whether we can help our customers with their financing. Traditionally we have done that we just haven't had kind of an embedded client base.

So that is going very well. That is a tough business. You work hard and eventually you get a few deals to click and the fees can be substantial, so that is moving well.

The other side which is ramping up as well is on the foreign exchange side. There are now a number of clients who are dealing with us on a fairly regular basis and even a number of banks that have come through the FCStone side of the business. We also think there is a sizable opportunity in Brazil to combine FX with what we are doing for the customers on the commodity side because most of those customers export their commodities and they have FX exposure that needs managing.

So we are kind of excited about that. As you know, we didn't put big numbers out there or make kind of big projections on synergies. But it's interesting, it's starting to really happen now and it's exciting.

Okay. Yes, I just wanted to make sure because I hadn't recalled you saying much about it but that sounds like the early indicators are positive.

Yes, exactly but early days. This stuff takes time to filter through but it looks like there is definitely an opportunity there that we can jump on.

Okay, and is it safe to say that the ForEx would really be the low hanging fruit there? That you --

I think that is probably the most obvious one. I think the other benefit, and I sort of alluded to it in my closing comments, there is probably more going on in terms of building just the franchise out internationally. And I think there has been a lot of synergy with that. We just had offices and infrastructure in the right place and I think we are able to ramp up some of what FCStone was doing already.

We have got a new operation in Dublin which is really leveraging off our London -- they are literally signing up customers as we speak in Europe so that is really kind of going. Australia is kind of poised at the moment. There is a whole bunch of conferences kicking off in the next month. Pete is going to go out there to do and that is kind of his real strength so we are really excited about that.

We just hired some guys in Argentina which kind of happened in three weeks so we are up and going in the markets down there. So there is a lot of stuff going on all over the place and I think we have accelerated that through the merger than otherwise would have been the case. But again this stuff takes time to come through in the numbers. But it's exciting stuff and we are putting a lot of effort into it.

Okay. And then just on the expense side you talked about that you fully integrated the accounting already and you put in a new risk management system and you are going to move on to operational sources. Fixed costs, is it safe to say we expect them to decline over time or are we going to see that sooner or later?

Well, when we went into this merger we didn't make any projections or assumptions on fixed cost savings. And I think you should assume that there is not going to be any material reductions. But what I think we need to do given what we see ramping up potentially longer term on the front end side, we need to get more streamlined and efficient so we can handle greater volumes with the current infrastructure. I think that is kind of more how we are approaching it.

Clearly, at the moment you could make the argument that at activity levels currently we probably have a fixed cost base that is too high. But we see that as a temporary phenomenon and we see coming down the track a year, 18 months down the track a lot of these new initiatives kicking in. We are going to ramp up volumes significantly.

So I think it's a good time for us to get our house in order and make sure we can take those volumes efficiently and without any increase in fixed costs.

Okay. Thanks for taking my call.

Yes, not a problem.

Graeme Rein, Bares Capital.

Good morning. Sean, can you talk a little bit about the capital structure? You mentioned you were at times even almost fully equity funded. How do you see that changing over the next year or two? Do you have enough opportunities to deploy capital?

Yes, clearly I think we are positively impressed by -- when we put the operations together and centrally manage liquidity we seem to squeeze more juice out of the orange when we did that than we anticipated. It also helped that we got $41 million back from the IRS.

We, at times, have been sitting as a significant depositor of cash. No bank line is drawn other than the sub debt and sitting on big amounts of money in sort of overnight money markets which is not a great situation for us.

But a little bit to what we said to Chris earlier, we do see things ramping up over the next 12 to 18 months. I am keen to make sure we expand our lines of credit, we expand our funding sources so that we are ready to take on that volume when it comes. And that will require some financing.

So we probably do look a little under leveraged and maybe over capitalized at this point, but I think that is going to turn around in the next 12 to 18 months. So we are kind of happy where we are. I think we have considered ourselves if you look at our borrowing lines a significantly under leveraged financial services company. Our total lines are less than our equity, but in the current environment it's tough to get banks to think that way.

So we will continue to push out and see how we can expand our sources of capital. But at the moment we have got more than we need and we are well placed to fund and aggressively push forward with our expansion.

Okay. If the price goes below book value per share, would you consider repurchasing shares or is that sort of lower on the priority list?

We have one issue with buying back shares and that is our convertible debt. There is a prohibition in our convertible debt on buying back shares. If we do buy back shares we effectively have to redeem the convertible debt at a premium, a 10% premium, so that makes it expensive to do unless you are going to do a significant transaction.

But let me put it this way, if we didn't have that restraint or constraint on us, I think we would be actively looking to buy back stock at these levels.

Okay. And then the last thing, you and Scott have sort of had an entire quarter to look at the clearing business. How has that gone? Is it significant differentiator for the CRM clients to have that capability or is that the type of business you might want to divest at some point in the future?

I am not sure we have made up our minds on that. I do think it is very closely integrated to what we do. Being members on the exchange I think does set you apart. I think it's kind of valuable real estate and it's probably worth having.

What we have really focused our attentions on, not only this quarter but even prior to the merger working with FCStone, is making sure we understood the risk on the CES side. We have reduced the client base and the volumes fairly significantly in that business and we have largely moved out the low volume, high-risk business which was sort of the low margin business as well.

So we have got a much smaller clearing business now but the margins are better and the business is still kind of making a bottom line for us. I think in a more normal interest rate environment it could be an interesting business. But we are always reconsidering our options, looking where we can best allocate our capital, and how we can get our target returns out of the business.

So for now it has been right-sizing and dealing with the risk side of that business and I think we made great progress there. I think as the over the next couple quarters as they unfold we will keep all options open, but no definite plans at this point.

Okay. Thanks for taking my questions.

(Operator Instructions) William Jones, Singular Research.

Thank you. Sorry if I missed it but I think earlier you stated that your long-term goal is 20% return on equity and that you will likely be below that for 2010 due to the market conditions I guess and the merger. But that you -- I think you said you still expect a satisfactory ROE. Is there a revised goal for 2010?

No, we don't publish any forward-looking metrics at all but I guess if this is guidance I think we are sort of saying we will be below the 15% level. We have thought 15% to be the minimum and we really try to shoot for 20%. Given the market environment and given that we are putting these two companies together and there is a lot going on at the moment and we are investing a lot in future growth, which is costing us money right now, we think we will probably be below that target.

I think we said that at the time of the merger and we are consistent on that. So I don't know if that is helpful but that is our view at the moment.

Okay, thank you.

[Kimberly Oates], [Bravo Bank].

Sean, this is a question for either you or Bill. But when you are talking about the segmentation it sounded like you are carrying the customer seg funds in the commodities and risk management segment instead of in the clearing and execution services. I just wanted to see am I getting that right, and if so what is the rationale for that?

Go ahead, Bill.

Kim, customer seg funds will be carried in both just the same way they had been historically with FCStone. The commodity risk management clients that we have that are trading on the exchanges we will be carrying their exchange traded funds in the commodity and risk management segment. And then all the clearing and execution clients that we are just providing those services to, their seg funds and their interest income will be reported in the clearing and execution segment.

Okay. And then just as follow-on to that --

So in terms of reporting just to be clear -- in terms of reporting it will be the interest relating to the seg funds of the CRM customers will be in CRM and the clearing customers in the CES segment.

Correct.

But all of these are customers of our FCM. They are just one big customer base in the FCM. We have just split them up based on the nature of the customer and the margins we make and how we deal with those customers into clearing and CRM.

Okay. Then just as a follow-on to a prior question, as you evaluate the business of the FCM you will look at the impact of the seg funds across those two segments?

Absolutely, yes.

Okay.

I guess what you are really saying is you can't just look at the CES and that is true. There is some element of being in FCM that resides in the CRM segment because there is seg funds and interest earnings that come from the CRM customers. So you have got to look at the totality of it.

Right. Okay, thank you.

[Bartley Cohen], Private Investor.

Two quick questions. One is if you were to look at the past year, do you think -- what would you think were the mistakes that International Assets made or that you wish you could have done differently?

The past year what could we have done differently. Man, that is a good question. There are always things that I suppose when things have passed you say, man, we should have done that. We could have cut some of our exposures quicker. We did have some write-offs on positions during the course of the last year. None of it was material.

I think maybe the things we got right were we were probably the only financial company in the world that had record earnings in 2008 and was 30% up in 2009 and was in a position to execute a substantial transaction because we got ourselves very liquid. So I think looking back on it that is clearly the plus side.

Could we have been smarter? Yes, we could have done things a bit differently and probably avoided some kind of small mistakes along the way. But I don't think we sit here and think back and say, man, we made any huge mistakes. And you know a lot of that is luck. It's not like we are the smartest guys in the world.

I think it's just we are small company. We think about stuff. We worry about liquidity and I think a lot of people didn't worry about liquidity and that is what really hurt them in 2008 and 2009.

I guess maybe we could have been more aggressive in bringing on talent when the crisis really hit, but we tend to be very picky. And we want to do things in a sensible way and get people that we really fit how we want to build our business. I think looking back on it maybe we missed a little bit of an opportunity to ramp up talent.

But I think on the flip side I think the transaction we managed to do with FCStone was a one in a lifetime deal for both companies. So I think we came out at a back end of a very difficult environment as a totally different company, so I think we are pretty pleased with how things played out in what was kind of the worst environment in our memory certainly.

But that is it. There are always things you could have done smarter.

Yes. Nothing material though?

Nothing I can think of that is material, no.

The other thing, how is Scott Branch doing? He is not going on the calls anymore or --?

We got to tag team a little bit so Scott is actually away for the next two weeks so he is not in the office. He is having some well-deserved R&R. Scott has been working very hard on a lot of the integration issues we mentioned and I think has made substantial progress on the risk management side. We are really pleased with how that has come along.

Risk management is just a never-ending task and you are always trying to do it smarter, but I think we have really ramped things up significantly over the last three months. So, yes, Scott will probably be talking on the next call a little bit more about that.

Okay. Thanks for everything.

All right. You are very welcome. Thank you.

At this time --

Operator, are there any more calls?

Not at this time.

Okay. Well, I think thanks very much everyone. Thanks for participating and we look forward to our call in three months time. Thank you.

Ladies and gentlemen, this does include today's conference call. Thank you for your participation.