StoneX Group Inc (SNEX) 2010 Q4 法說會逐字稿

Good day and welcome to the International Assets Q4 FY10 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Bill Dunaway. Please go ahead, sir.

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 2010 ended September 30, 2010.

After the market closed yesterday International Assets issued a press release reporting its earnings for the fiscal fourth quarter of 2010. The press release is available on our website at www.InternationalAssets.com. Additionally, we are conducting a live webcast of this call which will also be available on our website after the call's conclusion.

Before getting under way I would like to cover a couple of housekeeping issues. Please note that we filed a Form 12b-25 last night to advise the SEC and the market that we would not be filing our annual report on Form 10-K for the period ended September 30, 2010, by the prescribed due date yesterday, December 14.

We would like to reassure everyone on this call that this is not indicative of any unresolved accounting issues or disagreements with our auditors. The delay is attributable to additional work required at the first fiscal year-end following the acquisition of FCStone Group on September 30, 2009, and to reflect the acquisitions made by the Company during the fiscal year. We will file a Form 10-K as soon as we are able to do so and expect that this will be by the end of the week.

Because we disclosed only earnings and no balance sheet information in our press release last night we are not able to discuss balance sheet information in any material detail.

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 commodities business. As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the US, 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 earnings. Under GAAP gains and losses on commodities inventory and derivatives, which the Company intends to be offsetting, are often recognized in differing 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 and monthly internal financial reporting.

We also calculate commodities traders' bonuses on the basis of full mark-to-market results, not GAAP results.

Our earnings release gives the reconciliation between GAAP and non-GAAP information that the SEC requires as us to give. Please note that when 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 10-K to be filed with the SEC. 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 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, the Company's CEO.

Thanks, Bill, and good morning, everyone, from a very chilly New York.

Before we get into earnings I would like to point out this morning that we announced that we have changed our ticker symbol from IAAC to INTL. INTL is a brand around which we have built our business over the last eight years and is also the trading identifier we use in all our markets that we trade.

We have been trying for many years to secure this ticker but it had previously been assigned to another company and only became available last week.

So moving on to the earnings. Overall the fourth quarter was very similar to the third quarter for us with slightly improved market conditions, especially towards the end of the quarter, with a pickup in commodity prices and especially agricultural commodities. Prices and volatility continued to increase after the fiscal year-end.

Bill will take you through the numbers in detail, but perhaps I could give you a high-level summary of how things played out for the quarter and then provide an overview of how we saw fiscal 2010 playing out overall.

On a non-GAAP mark-to-market basis our results for Q4 were below the level achieved in Q3 but better than a year ago. Adjusted operating earnings increased decreased slightly over Q3 and net adjusted earnings were $3.7 million, down 27% from Q3. The major reason for the decreased earnings, despite slightly increased revenues, was increased bad debts and provisions as well as increased professional fees.

We had a further extraordinary loss resulting from a [previous] price adjustment to the deferred tax assets relating to the acquisition of FCStone at the end of last fiscal year. GAAP earnings were negative for the quarter due to price increases in commodity inventory help. While the hedges are mark-to-market, GAAP requires the inventory of the physical commodities to be held at original cost price resulting in a timing mismatch.

On a mark-to-market basis we now have long-term equity capital in excess of $251 million and total bank facilities at year-end were $275 million, of which $115 million was drawn. We have renewed and increased our bank facilities post year-end to $290 million, of which $75 million is now committed for a three-year period.

Our recent acquisitions have absorbed close to $40 million of our surplus liquidity through the assumption of the targets' balance sheets as well as the upfront portion of the purchase considerations. Despite this we are very liquid with significant undrawn banking lines available to us.

The past fiscal year was marked by a number of positive strategic developments which started with our merger with FCStone. As you all know, corporate mergers are not easy to accomplish under the best of circumstances and there frequently are issues relating to differences in corporate culture, IT integration, overlapping markets, and personnel. I am gratified to say that in our case none of these issues posed a significant challenge.

We knew from the beginning that our companies were complimentary, that our corporate cultures were similar, and that there were many areas in which we could work together to create something that neither of the companies working alone could accomplish. But even so, I think we have all been pleased with how smoothly the merger was completed, how well we managed so far to validate the strategic thinking behind the merger and the degree to which we have realized the benefits of a larger combined balance sheet, a bigger global footprint, and broader service offering.

The merger last year created a new company with twice the net asset value, four times the assets, and three times the employees and with a much larger global reach and customer base than before. But this is only the beginning and it is our belief that we have only begun to scratch the surface of the possibilities created by this new corporate combination.

We have a lot of work ahead of us but have successfully negotiated the most difficult part of the integration process. We have a great deal of optimism about our future.

At the time of the merger we identified the opportunity to add certain capabilities to round out our combined product offering and allow us to maximize the profit potential inherent in our large global customer base. Most notably, we recognize the need to develop a more comprehensive OTC and structured products capability which would allow us to internalize margins that we were paying away to third parties. We also recognize the need for an investment banking capability that would allow us to leverage the physical trading and risk management capabilities we already had.

Given the demands of the merger integration, we had envisaged that this process would be achieved through steady, organic process which would take two to three years to achieve. Instead we are able to identify suitable acquisition targets that allowed us to build these capabilities during the past fiscal year, significantly ahead of plan.

Our acquisition of the Hanley Group companies in July has significantly improved our OTC and structured products capability and in September we establish an investment banking and advisory division with the acquisition of Provident Group led by a very experienced team of investment bankers to complement what we already had. While these have added to the challenge presented by the merger, it also created a new and more comprehensive range of capabilities that we believe are now unmatched by any of our competitors.

Another strategic objective was to take advantage of the market opportunities to grow our customer base. Again, we are fortunate in identifying some acquisition opportunities in the form of RMI and the Futures Division of Hencorp, both of which added expertise in certain verticals and also delivered to us broad customer relationships.

Even as we are integrating these acquisitions, we continue to aggressively pursue organic expansion in the key markets around the world, including Australia, Singapore, China, Europe, Argentina, and Brazil. Customer relationships take time, money, and patience to develop but we believe we are now starting to get some real traction in these markets.

In terms of the overall financial results for the year, again on an adjusted mark-to-market basis and excluding extraordinary items and discontinued operations, we achieved a 6% ROE. This is significantly below our long-term minimum target of 15%. Although we had anticipated that 2010 ROE would be lower and I think signaled that on our earlier conference calls, lower than our target, we came in even below that expectation for the following broad reasons.

Interest rates remained lower than we had expected at the beginning of the year. Volatility generally remained lower than we visaged for most of the year, although this started to pick up towards the end of the year. Costs associated with the acquisition and expansion plans, which were accelerated relative to original expectations, and higher than anticipated professional fees and write downs, which in the aggregate amounted to closed to $14 million.

That said, we believe that we achieved a reasonable result, especially when compared to our competitors and despite an unprecedented interest rate environment. In short it has been an extremely busy and productive year and we have managed to accelerate many of our strategic objectives. Our ability to provide risk management advisory services, execute and clear the full range of exchange-traded instruments and sophisticated and customized OTC products, act as principal to our customers and physical commodities, and if necessary embed risk management solution in these physical trades and advise our customers on the corporate finance needs is unmatched in the marketplace.

We have yet to see the full benefit of this broad and integrated product offering, but as we now execute on the strategic vision we should see meaningful bottom-line results for our shareholders.

In many parts of the world the concept of risk management is still little known or misunderstood. In Europe, where the renegotiation of the Common Agricultural Policy, CAP, in 2002 is almost certain to lead to reduction in tariffs, price supports, and subsidies the need for risk management has suddenly emerged as an urgent issue for any company that is exposed to commodity price fluctuations. We believe that this is a sizable global opportunity with many thousands of target commercial customers. It does, however, require a patient, long-term approach that will result in deep customer relationships with attractive returns and growth potential for the long term.

I will now hand you over to Bill Dunaway for a more detailed discussion of the financial results. Bill?

Thanks, 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 differences between the GAAP and fully mark-to-market numbers arise in our commodities and risk management services segment. In all other business segments GAAP results and mark-to-market results are the same.

As Sean mentioned in his comment, the merger with FCStone occurred on the last day of the fiscal year 2009 so I will mainly focus on the fourth quarter of 2010 results as compared to the third quarter of 2010 as year-over-year comparisons would not include FCStone's results for the prior year. However, I would like to start with financial highlights of fiscal 2010.

Adjusted operating revenues were $275 million, up 182% from fiscal 2009. The operations of FCStone contributed $187.6 million in operating revenues. This is down 25% from previous years' revenues of $248.9 million for the 12 months ended August 31, 2009. This is largely due to lower interest rates, reduced clearing volumes as this business was restructured, and less customer volume generated due to a lack of commodity volatility.

The legacy INTL businesses contributed $87.4 million in the operating revenues, which was down 10% largely due to a reduction in securities trading activity and a narrowing of spreads in the foreign exchange business despite increased volumes. However, these declines were partially offset by increases in metals revenues.

Non-interest expenses were $241.2 million, up 248% primarily as a result of the FCStone merger and, to a lesser extent, acquisitions completed during the fiscal year. Total employees increased to 729 from 195 prior to the acquisition of FCStone.

Adjusted net income for the year was $9.1 million as compared to $32 million in the prior year, which included the $18.5 million extraordinary gain on the acquisition of FCStone. Adjusted net income from continuing operations, which excludes the extraordinary gain and loss, was $15.2 million compared to $15.1 million in 2009. ROE in the year on this basis was 6.1%.

Total operating revenues under GAAP for the fourth quarter were $65.9 million as compared to $78.1 million for the third quarter of 2010. Adjusted operating revenues, which include the mark-to-market adjustment in our commodity and risk management businesses, increased by $4.2 million or 6% from $72.5 million in the third quarter 2010 to $76.7 million, indicating the business activity in the industries which we serve are showing signs of recovery with volumes increasing in most parts of our businesses.

Operating revenues for the fourth quarter include a mark-to-market gain of $2.3 million on interest rate swaps entered into during the quarter to manage a portion of our aggregate interest rate position as discussed on the second-quarter earnings call. The objective of these interest rate swaps is to invest the bulk of our customer segregated funds in high quality, short-term investments and swap the resulting variable interest earnings into a more stable medium-term interest stream at the holding company level.

Non-interest expenses increased $6.2 million to $68.2 million as compared to $62 million in the third quarter, mainly as a result of increased variable expenses related to the increase in operating revenues and a $2.5 million bad debt provision related to a customer in the precious metals business. Variable compensation increased $2.4 million to $13.6 million for the fourth quarter, while variable clearing and related expenses decreased $1 million to $16.1 million for the third quarter primarily related to lower volume in the clearing and execution segment.

Of our total non-interest expenses 50% were fixed, 50% were variable in the fourth quarter of 2010 compared with 46% fixed and 54% variable in the third quarter. Compensation and benefits made up 46% of total non-interest expenses in the fourth quarter compared with 42% in the third quarter.

Interest expense decreased slightly in the third -- in the fourth quarter to $2.4 million as compared to the $2.7 million in the third quarter of fiscal year with the decrease coming primarily due to a decreased level of borrowing during the quarter.

Now I will discuss the results in our various operating segments. As a reminder, the commodity and risk management services segment, which is our largest segment, combines the FCStone CRM segment with the International Assets physical metals business. 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 by 11% to $41.1 million in the fourth quarter as compared to $37.1 million in the third quarter. This increase was driven by a dramatic increase in volumes in agricultural commodities with significant increases in underlying volatility, as well as rising prices which resulted in near-record levels of open interest in corn, beans, and wheat carried by our customers. Over-the-counter revenues increased driven by a significant increase -- by activity from Brazil as well as the acquisition of the Hanley business.

Exchange traded volumes were up 62% from the third quarter and OTC contract volumes increased 22%. The increased revenues in the agricultural commodities was somewhat offset by lower revenues from precious metals despite slightly increased volumes and slower revenues and volumes in base metals.

Despite the increase in revenues in this segment, adjusted CRM segment income declined $4.3 million from $13.2 million in the third quarter to $8.9 million, primarily as a result of the bad debt provisions totaling $3.2 million primarily related to a precious metals customer who faced liquidity issues. While average customer-segregated balances increased over the quarter, interest income continued to be constrained by the effect of historically low short-term interest rates.

The foreign exchange segment consists of the International Assets global payments and trading activities as well as FCStone FX activities, which consists of clearing and execution of spot trading as well as a proprietary operation arbitraging cash and futures on foreign exchange. Operating revenues in the fourth quarter totaled $11.7 million, which was flat in relation to third-quarter revenues. Operating revenues in the global payments business was flat as compared to the $6.3 million in the third quarter as continued growth in customer volumes of 10% was offset by a narrowing of spreads in the currencies in which we transact.

Operating revenues in the proprietary arbitrage and customer clearing ForEx business decreased slightly from $5.4 million in the third quarter to $4.6 million as a result of narrowing with spreads on the arbitrage desk. Segment operating income increased from $5.2 million in the third quarter of 2010 to $5.6 million in the fourth quarter.

Operating revenues in the securities segment, which is a combination of the equity market making and debt capital markets business, increased $2 million from $4.2 million in the third quarter to $6.2 million in the fourth quarter of 2010. Revenues in our debt capital markets business increased to $2 million in the fourth quarter as compared to breakeven in the third quarter of 2010. Revenues in our equity market-making businesses were flat with third-quarter levels at $4.2 million.

The securities segment also contains the existing private placement activities of the Company as well as the newly established INTL Provident Group investment banking and advisory business. No meaningful revenues were realized from this business during the fourth quarter.

Securities segment income increased from $200,000 in the third quarter to $2.2 million in the fourth quarter.

Clearing and execution services remains as the historically reported FCStone CES segment. Adjusted operating revenues declined $2.6 million to $14.3 million in the fourth quarter as compared to $16.9 million in the third quarter of 2010. Revenues were affected by a $561,000 loss on silver positions acquired from an under margin customer.

Exchange traded volumes in this segment decreased 15% in the third quarter to 5.5 million contracts. Customer deposits in this segment increased over third-quarter levels. The CES segment income was $900,000 in the fourth quarter as compared to $500,000 loss in the third quarter of 2010.

Finally, the other segment includes INTL's historical asset management group and FCStone's historical financial services segment. Adjusted operating revenues were $2.1 million in the fourth quarter as compared to $2.4 million in the third quarter. Assets under management declined to $350 million as compared to $417 million in the third quarter of 2010.

Segment operating income was $1.2 million in the fourth quarter as compared to $750,000 in the third quarter of 2010. On a GAAP basis, the net loss attributable to common shareholders was $4.5 million for the fourth quarter or $0.26 per fully diluted share as compared to net income of $6.7 million or $0.38 in the third quarter of 2010. On a GAAP basis net loss on continuing operations was $3 million for the third quarter or $0.18 per fully diluted share as compared to net income of $8.6 million or $0.48 in the third quarter of 2010.

Adjusted net income from continuing operations was $3.7 million for the fourth quarter as compared to $5.1 million in the third quarter of 2010. Both net income from continuing operations and adjusted net income from continuing operations exclude the discontinued operations as well as the $2.8 million extraordinary loss in the current quarter. The $2.8 million extraordinary loss net of tax in the fourth quarter relates to a further purchase price adjustment related to the FCStone acquisition and the valuation of deferred tax assets and liabilities acquired, primarily related to state tax net operating loss carrybacks.

The balance sheet remains very liquid with a typically high proportion of our assets in cash, cash equivalents, deposits, and receivables from exchanges and counterparties, financial instruments, and commodities.

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

Thanks, Bill. While the past fiscal year has been one of tremendous change and growth, one thing has remained constant -- our focus on providing value-added solutions to our customers around the world. Our strategy has been and will remain straightforward -- to deliver high-value added, high touch execution, clearing, risk management advisory services focused on mainly mid-sized commercial customers.

In the process we will use our expertise, experience, technology, and capital to reduce risk, protect and enhance our customers' bottom lines, and provide efficient solutions. Overall, despite continuing weakness in the global economy and the prevailing uncertainty about its direction in the coming year, we are positive about our prospects going forward.

We took a strategic approach over the past year in assembling the pieces we need for a comprehensive suite of solutions. Now that these pieces are in place we are focusing on the execution of our strategy effectively and efficiently.

So with that I would like to turn it back to the operator and open up for the Q&A session. Operator?

(Operator Instructions)

The mark-to-market adjustment, Sean, is that mainly the historical base metals in the IAC business or is there something in the FCStone business that sort of magnifies the size of that?

Well, the quick answer is it's mainly the metals and I would say it's probably pretty evenly split between precious and base metals. The scope of our precious business has grown enormously so even though the price movements and the time periods are probably shorter, it's just bigger numbers.

So it's primarily the metals business, but we are expanding our physical capabilities as part of our strategic plan beyond metals. At some point in time we may find that the other commodities that give rise to the same effects, but for now it's mainly metals.

Okay. And can you talk a little bit about the initiative in Australia? How that is going, if it's yielding the customers you were looking for at this point?

Okay. Pete Anderson, are you on? Do you want to speak about that?

Yes, Sean and Graeme, our efforts down there have really started to get traction. We have got basically, I think, 14 people down there in total now; about half a dozen brokers or consultants.

Our target market, to a large extent, is our commercial, traditional, historical Ag segment of the market down there -- grain production and commercial grain handling, as well as the consumption side in the feed industry and really exporting and consumption. So it's really going back to our historical roots and just starting to catch traction.

In fact, we had a couple of our seminars and our last seminar was in July; we had about 20 major commercial customers from around the country and are working with a number of those as we move forward.

Okay, great. Sean, you mentioned 6% ROE. I know there has been so much activity this year and so many unusual costs and investments you have made. Do you seem 2011 as when you start to see a big improvement in the bottom line or is that a few years out still?

No, I sure hope so. It had better happen because I am a shareholder and I want that number to go up. So our anticipation is -- and dependent obviously on market conditions and such -- that we should now start to see that ROE ratchet up starting even probably in the first quarter. So that would be our intent.

There are a lot of pieces on the table. We are putting our heads down now to make it all work and, hopefully, we will see the ROE start to clip up. As we said when we started down this path at the beginning of this year, we thought this was a three-year plan to get ourselves back to the 15% level and that wasn't on the assumption of very high interest rates even because we expected muted interest rates. And I think we are still on target for that.

Okay, thanks a lot.

Chris Donat, Sandler O'Neill.

Good morning, Sean. Good morning, Bill. One question also looking out at 2011 or calendar 2011. The comp ratio this quarter was about 42% on adjusted revenues. Is that reflective of bringing on new businesses that aren't really producing revenues yet or is it sort of where the comp ratio is going to be? It has been more of like a low to mid 30%s kind of number prior.

Well, one of the problems is it's sort of somewhat related to revenues because there is a certain -- I mean we have a highly variable cost structure and particularly on the comp side, but there is a fixed element of cost, particularly on the support side. If revenues tick up we would expect that number to drift down.

Bill, I don't know what your view is but I think something in the mid 30%s is probably achievable for us on a reasonable revenue projection going forward.

Yes, I would agree, Sean. Some of it's just related to the acquisitions coming on late in the period.

Yes, I guess I was wondering if -- you said Provident for example. You mentioned it didn't really contribute any revenue; I don't know what the expense base is there.

That only came in -- that one of note only came in the last 10 or so days (multiple speakers) so that wouldn't have had a material effect.

Okay. And then second question on expenses. Just looking at the other non-interest expense and I guess the bad debt there. But is there anything else going on there that sort of you are at a higher run rate with the acquisitions or with integration that might -- those expenses might come down a little bit in the -- in coming quarters?

I would think -- there is nearly, a little over $8 million in professional fees this year and certainly some of that was related to the acquisitions we did and a few of the other matters. So I wouldn't expect to see -- wouldn't anticipate kind of that level of fees going forward.

Well, if you listened to my prepared comments, I think we saw -- it's hard to know what is non-recurring in this world. But there seem to be unanticipated, and hopefully non-recurring, items this year of about $14 million between legal fees, bad debts as we kind of went through our customer base and realigned that and kicked some customers out.

So that was sort of the number for this year and we are hoping it's going to be a lot less for next year. So that was a fairly material number in our expense line.

Right, okay. All right, thanks very much.

(Operator Instructions) [Stephen Sakar], [Sasflow Enterprises].

Good morning, gentlemen. Actually I have two quick questions. One is nothing to do with the results, just about the change of symbol. Personally I see a little potential for confusion between the new symbol and Intel. I have seen it on the Internet already and I am wondering whether -- what can be done to clarify and clear up that.

Well, firstly, I think probably Intel would have liked this symbol. They didn't move fast enough. But this is a branding we have used; you just need to look at our logo. For us we think INTL is a great branding for us because it's kind of the accepted global abbreviation for international and it's also in most trading systems, whether it be on Bloomberg, the pink sheets, on Reuters, you need a full symbol trading identifier. And we have already for years been using INTL as ours.

So this for us suits us really well. We have now -- in a lot of ways IAAC created more confusion because people just didn't know what that meant relative to our name. So, yes, there will probably be a bit of confusion with Intel but I am sure everything will get sorted out once all the services catch up and so on. So it will probably be a couple of days of seeing the wrong headlines and so on.

Yes. The second question is back to sort of a strategic issue; I am just curious as to what opportunities you see in Eastern Europe, if any. Is there anything going on there at a strategic level?

Does anyone want to take that? Pete?

Again, and to a large extent it's going back to, I think, our core business of agriculture; it's both production agriculture as well as commercial grain handling. We have a number of initiatives. In fact, we have put on a number of seminars in that region, the Ukraine, and that production is really starting to ramp up and be a significant part of global production and supply.

We have had a number of meetings and educational seminars in that region, as well as we are ramping up our offices in London and targeting, not only Eastern Europe, but all of Europe with basically the elimination of a significant amount of subsidies that have been utilized in the past. And so the volatility that we are experiencing is driving just more and more people to really have to look at managing risk. We think we will benefit from that.

We also have a dedicated resource in Turkey who is working with our London folks and our folks in Dubai. So we have a number of initiatives on the ground in Eastern Europe at the moment and a number of clients who we are dealing with and perspective clients.

Yes, we also have a base metals presence in Russia as well. He is growing our activities there.

Very good. Many thanks.

(Operator Instructions)

Are there any more questions, operator?

We have no further questions at this time.

Okay. Well, I think let's wrap it up. So thanks, everyone, for your attention and all the best for the holidays. We will speak to you early in the new year. Thank you.

That does conclude today's conference. We thank you for your participation.