StoneX Group Inc (SNEX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the INTL FCStone second quarter 2012 earnings call. Just a reminder that today's call is being recorded. At this time, I would like to hand the call over to Mr. Bill Dunaway. Please go ahead, sir.

Good morning, My name is Bill Dunaway, CFO of INTL FCStone, Inc. Welcome to our earnings conference call for the second quarter of fiscal 2012 ended March 31, 2012.

After the market closed yesterday, we issued a press release reporting our results for the fiscal second quarter. The press release is available on our website at www.intlfcstone.com, as well as a slide presentation, which we'll refer to on this call in discussions of our quarterly and year-to-date results.

The slide presentation is available by clicking on the Investors Relations link on the website and then going into the Events and Presentation page. You'll need to sign on to the live webcast in order to view the presentation. Both the presentation and an archive of the webcast will also be available on the website after the call's conclusion. Before getting underway, I would like to cover a couple of 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 commodities business. As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the US, which from now on I will refer to as GAAP, to carry derivatives at fair market value, but physical commodities inventory at the lower of cost-to-market value may have a significant temporary impact on our reported earnings.

Under GAAP, gains and losses on commodities inventories and derivatives, which the Company intends to be offsetting, are often recognized in different periods. Additionally, in certain circumstances, 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 commodity trader bonuses on the basis of fully mark-to-market results, not the GAAP results. Readers of our Form 10-Q filing should look at the selected financial summary information within item two, Management's Discussion and Analysis of Financial and Results of Operation, or MD&A, for a summary of both GAAP and non-GAAP information. This section also gives a reconciliation between GAAP and non-GAAP information required by the SEC. Please note that whenever we talk about an adjusted number on this call, we are talking about a non-GAAP number.

Secondly, we're 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 note thereto, as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities of Act 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 it's 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 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, the Company's CEO.

Thank you, Bill, and good morning, everyone. For the Q2 2012, we produced a GAAP profit from continuing operations of $2.4 million and a mark-to-market or adjusted profit, which is the way we look at it, of $3.8 million. This was significantly better than the immediately proceeding quarter, Q1, where we recorded a small GAAP loss of $500,000 and a mark-to-market loss of $2.4 million. A year ago, we had adjusted earnings of $6.6 million.

Our adjusted operating revenues were $122 million, an all-time record for the Company. This represented an increase of $23 million, or 23% from a year ago, and up $29 million, or 31%, from the previous quarter. These results, while improved from Q1, are significantly below our expectations and perhaps it would be helpful as we tried to do in the last call to lay out the key drivers for these results over the last couple of quarters.

Firstly, we took a decision about a year ago to undertake a fairly meaningful expansion, which encompassed ramping up our activities in Europe and Asia, leveraging the infrastructure we had out there, obtaining LME membership to leverage our physical metals business, and during the course of this expansion, we were presented with some attractive opportunities in the form of Ambrian commodities and then later the MF Global LME team. This made the scale of this expansion much more significant.

While not planned and anticipated, we believed that this was an opportunity to transform our capabilities. This expansion add a significant cost to our business as most of these undertakings were Greenfield operations, including the LME, where we had to start again with each customer. And, obviously, in these situations, you get the costs a long time before you see the revenues.

The second point is general market conditions started to turn much less positive for us generally about six months ago and turned into what I would call moderate headwinds. The results being that our existing businesses started to slow down, which was exacerbated with all of the activity around the MF collapse and some particular industry issues on the AG side, which we went into last quarter. This led to a reduction in revenues from our existing businesses just at the same time when we're adding costs for these new expansion initiatives.

What we have seen in the most recent quarter is a fairly material increase in revenues as a result of some traction we're getting from these new activities and slightly better market conditions. It's never easy to navigate uncertain and cyclical market conditions and take advantage of opportunities to grow and expand the franchise because most times, the opportunities exist when market conditions are least favorable.

As most of you who have listened to our calls before know, we do not run our business for short-term results, and rather we are focused on building a larger, much, much more profitable business for the long-term. This quarter's revenue increase, while fairly significant, still did not deliver the bottom line results we want. To understand this better, let me take you through how these increased revenues move through our income statements.

Starting off, compared to a year ago, we had additional revenues of $23 million. Around $7 million of this increase went to exchange fees. This is a higher proportion of revenue than normal, reflecting a change in the business mix in our clearing business, largely due to adding higher volume, lower margin customers from MS Global.

Our front office fixed costs went up about $8 million from last year, and our central overhead and support costs went up by a similar amount, also by $8 million. Both of these numbers, ie., $16 million in total, was a result of the expansion initiative mentioned above resulting in a 28% increase in headcount. And just to be clear, this not just the LME business, we have a number of initiatives that have been underway for over a year.

The net result of that was very little change to the bottom line year-over-year, as all of the revenue gains were effectively offset with expansion costs and less effective revenue retention for the firm. Hopefully, this puts the recent results and some of the longer term issues behind that in context for you. Bill will take you through the details shortly.

I'd like to touch on a couple of other items. Firstly, the LME team delivered $5.4 million in revenues in their very first quarter with us and effectively having to restart their business from scratch, they covered all of their costs and delivered us a bottom line, positive results. We're thrilled with. We think this is an incredible performance. The business is still in the initial ramp-up stage and we expect continuing and increasing momentum going forward.

Additionally, as most of you have probably seen, we closed the TRX transaction we've been talking about for a while. We received approval from the regulators to do that. This is a London-based niche clearing firm for commercial coffee and cocoa, coffee being one the verticals that we focused on through our Hencorp acquisition and where we believe we have a leading expertise.

This is a small tuck-in acquisition that will give us clearing capabilities on Liffe and ICE UK, and comes along with a customer base and revenues. So hopefully with that acquisition, we'll see incremental costs matching incremental revenues from the get go. The purchase consideration was based on cash book value, so no goodwill was paid.

We've also made some progress eliminating unproductive overhead. We need to make sure that we remain efficient and cost focused, particularly when you've undergone a massive or substantial ramp-up in activities and expansion initiatives. We need to make sure that we go back and circle back and make sure that all those cuts are being productive and efficient. This is an ongoing process and we think we're making progress there.

I guess one other item to report is we made some fairly significant progress on the legal front. Again, as reported, the SEC concluded its formal investigation of FCStone's disclosures and accounting around the losses in the energy accounts starting in 2008.

The SEC informed us that the investigation was closed and no further action, so we were really pleased about that. More recently, the class-action lawsuit filed against FCStone and its directors has been settled by our insurers at no cost to the Company. This still has to be approved by the court, but we're hopeful that it will happen. So, again, good news there.

So in summary, we've had fairly impressive revenue growth over the quarter in difficult market conditions, largely due to our new initiative, especially the LME, which has started to generate incremental revenue for us. Unfortunately, most of this increased revenue went out in the form of increased costs of expansion over the last year and slightly less effective revenue retention.

We're still in the early stages of seeing this expansion and initiative ramp-up from a revenue prospective. And as revenues grow from here on in, most of this increase should drop to the bottom line, as our fixed costs have now stabilized and, in some instances, we're finding ways to cut some costs and generate efficiencies.

With that, I'll hand you over to Bill Dunaway for a discussion of the financial results in more detail. Bill.

Thank you, Sean. I would like to start my discussion with a review of the quarterly results and refer to the third page of the slide presentation titled Quarterly Financial Dashboard. This slide lays out the quarterly operating results, as well as related balance sheet information in comparison to the prior year period, as well as in some cases the internal target which management has for our operating results.

Adjusted operating revenues were $121.9 million for the current period, up from 23% from the $99 million in the second quarter of 2011. Adjusted operating revenues were $91.3 million in the first quarter of this year. Every segment of the Company experienced growth in adjusted operating revenues in the second quarter, as compared to both the prior year, as well as the first quarter of 2012, with the exception of the foreign exchange segment, which was flat with the prior year and down 27% versus the first quarter.

Operating revenues for the second quarter includes the realized gain of $600,000 on interest rate swap positions entered into to manage a portion of our aggregate interest rate position, which represents the true cash flows of these swaps. In addition, we recorded a mark-to-market gain of $1.1 million on the current period, with a net (inaudible) effect of these swaps in the current quarter was $1.7 million pre-taxed gain.

As of March 31, 2012, we had a $865 million in notional LIBOR-based interest rate swaps outstanding. Adjusted operating revenues in our core commodity and risk management services segment increased 23% from $53.5 million in the prior year to a record $68 million in the second quarter of 2012. Adjusted operating revenues were $46.8 million in the first quarter of 2012.

Exchange traded volumes were 967,000 contracts, which was relatively flat with the prior year. Over-the-counter contract volumes in this segment increased 57%, as compared to the prior year, to 411,000 contracts, primarily driven by strong volumes out often Mexico and Europe in the agricultural grain markets, as well as to the lesser extent, the coffee markets in Latin America. These increases in volumes, combined with continued structured product volume in Brazil, helped to drive a $10.3 million increase in overall OTC revenues.

Average investable client balances decreased 15% in the segment over the prior year quarter to $866 million, which was flat with the first quarter of 2012, primarily driven by the lower exchange traded margins. Adjusted operating revenues in our precious metals product line decreased 29% to $3.4 million in the second quarter, as compared to the prior year period. Despite a moderate increase in the number of ounces traded, primarily as a result of decreased activity in the Far Eastern markets.

Base medals adjusted operating revenues increased $5 million in the first quarter of 2011 to $10.5 million in the current period, primarily as the result of revenues contributed by the LME Metals team. The LME Metals team, which was an add in the middle of the first quarter, as Sean mentioned, added $5.4 million to adjusted operating revenues to the current quarter after contributing $1.4 million in the first quarter of the year.

In the foreign exchange segment, operating revenues were flat in the second quarter at $13 million, as compared to the prior year quarter, and down 27% as compared to the first quarter revenue of $17.9 million. The operating revenues in the Company's global payments product line increased from $7.3 million in the second quarter of 2011 to $8.6 million in the second quarter of 2012, as volumes increased 13%.

Operating revenues in this business were down 18%, however, from the record $10.5 million recorded in the first quarter of 2012, which was the result of record volumes traded. The customer speculative foreign exchange product line revenues were flat at $1.8 million in the second quarter as compared to the prior year.

Revenues from customers hedging activity increased to 300% from the prior year to $1.6 million, primarily driven by an increase of hedging by customers of our Brazilian operations. The proprietary foreign exchange arbitrage desk, which arbitrage is the cash versus the exchange traded markets, experienced a 69% decrease in operating revenues to $1.1 million, primarily as a result of a decrease in arbitrage opportunities in the exchange-traded foreign exchange markets.

In our securities segment, operating revenues increased 5% from $9.8 million in the prior year to $10.3 million in current quarter, and relatively flat with the $9.9 million in the first quarter of 2012. Within this segment, operating revenues in the equities market making business increased 11% to $6 million in the current quarter.

First quarter revenues were $7.7 million. Within this segment, revenues in our debt capital markets business were relatively flat from the prior year period at $4.3 million and up $2.1 million from the $2.2 million in the first quarter of 2012. Debt trading revenues increased $1.2 million as compared to the prior year, while investment banking revenues declined $1.2 million.

In the clearing and execution services segment, operating revenues in this segment were $25.4 million for the second quarter of 2012, compared to $18.3 million for the prior year, and $17.7 million in the first quarter of 2012. Commission and clearing fee revenues increased 45% from $16.9 million in the prior year to $24.5 million in the second quarter of 2012, as a result of a 74% increase in exchanged traded volume.

This increase was driven primarily by accounts transferred to the Company from MF Global during Q1 2012, but it's a little misleading because breaking down this increase in revenue, the commission revenue increased $1 million while clearing fee revenues collected from clients that passed through the exchange increased $6.1 million.

Interest income declined 37% to $500,000 in the second quarter of 2012, as average customer deposits declined 31% to $561 million, primarily as a result of industry conditions following the bankruptcy of MF Global. The other segment, which contains both our asset management and commodities origination and financing product lines, increased 16% to $3.6 million.

Assets under management as of March 31, 2012 were $466 million compared with $370 million a year ago. Operating revenues in the asset management product line increased $400,000 to $2.1 million in the second quarter, while operating revenues in the grain financing and physical commodity origination line were flat at $1.4 million.

Moving on to the expense side of things, total non-interest expenses were $112.4 million for the second quarter of 2012, an increase of 30% over the $86.4 million in the second quarter of last year. Non-interest expenses were $94.9 million in the first quarter of this year.

Looking at Dashboard, internally, the Company targets to keep variable expenses as the percentage of total expenses in excess of 50%. During the current period, the majority of non-interest expenses were variable with 55% of the total non-interest expenses being variable in nature as compared to 58% in the prior year. Non-variable expenses include fixed expenses as well as bad debt and impairments.

During the second quarter of 2012, we recorded virtually no bad debt expense, while the prior year included $2.1 million in expense, primarily related to the impairment loss on an investment in debt in the debt origination products line. Fixed expenses were $50.6 million for the second quarter of 2012, which represents a $15.6 million increase over the second quarter of last year, and a $5 million increase over the first quarter of 2012.

As Sean mentioned earlier, we've recently implemented several initiatives which have marginally added to operating revenues for the second quarter of 2012, however, they have not yet resulted in increased profitability. Most notable of which is the acquisition of can Ambrian Commodities Ltd., combined with the subsequent acquisition of the LME metals team.

In addition to adding the capabilities of the LME metals team, this initiative includes the buildout of our CRM, CES, foreign exchange prime brokerage, and OTC derivative trading capabilities in London. This resulted in a $2.4 million increase in fixed costs as compared to the second quarter of last year.

Occupancy and equipment rental costs increased $500,000 to $2.7 million in the second quarter of 2012, as compared to the prior year while they were flat with the first quarter of 2012. This increase was primarily driven by the expansion of our offices in London, New York, and Chicago.

In addition, depreciation and amortization expenses increased $800,000 over the prior year, as a result of additional technology infrastructure place into service since the prior year period. The Company targets to keep total compensation expenses a percentage of operating revenues at less than 40%. However, with the growth initiatives mentioned above, total compensation related to expenses represented 45.2% of total adjusted operating revenues in the current period, above our internal target but below 49.2% in the first quarter of the fiscal year.

The average number of employees increased to 1,040 for the second quarter, as compared to 810 in the prior year period. The adjusted net income from continuing operations for the second quarter was $3.8 million versus $6.6 million in the prior year. In the first quarter of the fiscal year, the Company recorded a net loss from continuing operations of $2.4 million.

Looking at the trailing 12-months, adjusted net income and adjusted EBITDA decreased 43% and 26%, respectively, over the prior year periods. The Company looks to achieve a minimum return of equity of 15% or greater on its adjusted stockholders' equity. The return of equity for the first quarter was $5.1 million, as compared to 9.8% in the prior year period.

Total assets on the balance sheet increased $260 million to $2.5 billion, while adjusted stockholders equity closed the period at $307 million, a 10% increase over the prior year. Another key metric the Company focuses on is keeping a one-to-one ratio between revenue generating employees and administrative or operating employees. Along these lines, the Company targets to have at least $500,000 in annualized revenues across the entire employee base.

For the current period, this metric decreased 4% with the growth initiatives discussed earlier causing the drop to $469,000 per employee. Finally, in closing out the review of the quarterly results, the trailing 12-months results have led to an increase of 4% in the book value per share, closing out the quarter at $16.10 per share.

Moving on to the next slide of the presentation, I'll speak briefly on the year-to-date results of the fiscal year. Adjusted operating revenues increased 3% over the prior year period to $215 million. All of the Company's operating segments realized growth in revenues over the prior year period, with the expectation of the commodity and risk management segment, which declined 6% as compared to the prior year.

As with the quarterly results, total non-interest expenses increased 20% to $207.3 million, primarily as a result of both the acquisitions made during the last 18 months and geographic expansions in South America, Europe, and Australia. Variable costs represent 54% of total expenses keep in line with the Company's goal of having a primarily variable expense model.

Total compensation expense as a percentage of adjusted operating revenues was over the Company's target at 46.9% as a result of the growth initiatives discussed earlier. Adjusted net income from continuing operations for the six months ended March 31, 2012 was $1.4 million, a 92% decline as compared to the prior year comparable period.

For the year-to-date period, the Company achieved a 1% return on adjusted stockholders equity below our target of 15%. Through the first six months of the fiscal year, the annualized revenue per employee decreased 19% to $429,000, which is below the Company's stated goal of $500,000, while the average number of employees increased to 1,002 for the first six months of the fiscal year

With that, I'd like to turn it back over to Sean O'Connor to wrap up.

Thanks, Bill. So we're certainly not happy with the level of profitability we have in Q2, but we are pleased with the very significant improvements in our results over Q1, and also with the growth, the material revenue growth we've seen, largely driven by some of these expansion activities we started a year ago that are starting to deliver results and gather momentum.

Better market conditions combined with the continued ramp-up with our new initiatives should drive revenues still higher, which will have a meaningful impact on our bottom line and deliver the kind of results we know we're capable of. Our aggressive approach to take advantage of short-term opportunities to grow our business and franchise has definitely hurt our short-term performance.

However, as I said earlier, we manage our business for long-term results and not for the next quarter, and we believe that we've been able to take some transformational steps at very attractive costs. We believe that the risks associated with these steps have been justified and will provide significant payoff down the road in terms of growth and profitability.

So with that, we're happy to take any questions. Operator?

(Operator Instructions). We'll take our first question from Graeme Rein with Bares Capital.

Good morning.

Hey, Graeme, how are you?

Doing well. I've got a few questions for you. The $5.4 million in revenue from the MF Global, how much of that was ring dealing team and how much of it was sort of signing up some of the old customers they've had and making progress on that front?

Well, first of all, I don't think we want to call it the MF team anymore.

Okay.

It's the LME team, and it's also a combination -- it's largely the ex-MF guys, but also the Ambrian guys, so let's just call it the LME team. I would say the split though is probably 60/40 in favor of the ring dealing team, roughly. We do have the specific numbers somewhere, but I don't have them in front of me.

The ring dealing team were less -- that business doesn't require a lot of work with the customers. There's very little documentation, it's a give-up business, you don't have to repaper anyone, and as long as you're in good standing in the ring and the individuals concerned have the relationships, you can basically be in business immediately.

In fact, the very third day in the office, the ring dealing team turned a profit, dealing with commercial customers, that's a longer term process. You've got to get paperwork in place, the customers want to know who they're dealing with, and that's just a longer term process. But that's ramping up pretty well now, so we're pleased with that.

Okay. In terms of the cost structure, do you feel like you're sort of at a new level of fixed costs or are there some costs that you've incurred that you'll be able to strip out over time, or do you just need revenue now to scale from on the new cost structure?

Well, I think it's both of the above. I would say we definitely reached a new level of costs. We've undertaken significant expansion, as we said, and it's not just the LME, I mean all over the place we've had expansion.

Brazil, our business is going so well down there, we're hiring people every month. There's just a lot of expansion everywhere. And I think over the course of the last year, we've really expanded the capacity of the Company significantly, and I think we're kind of set now. I don't see any major cost increase from here.

The second part of your question is I do think there is some opportunity for us to reduce costs. Clearly, when you undertake as many expansion initiatives as we have and you push your costs up 30% and your headcount up 30% over a year, not all of that is going to work exactly as you envisioned.

And you've got to give it time and you've got to make sure that people have a fair chance to build their business, but at some point, you have got to circle back and say, "Is this working in the way we think it's working and is this what we want to do?"And also, "Can we do this in a more efficient way?"

So I do think there's going to be some cost reductions. You may not see that in the aggregate because that may be offset by just sort of general slow expansion in other areas, and I don't think it's going to be material. But what we've got to make sure is that every dollar of overhead is productive, andI think there's a fair amount of overhead dollars that are not productive.

So that's really what we're really focusing on rather than absolute levels of costs. But I don't think that will go up materially. I think we'll cut down productive overhead, but that may not show up as a material number in the overall scheme of things. Does that make sense?

Yes, makes sense. Can you give an update on the China activities? Are you up and doing business there now?

Yes, that's another significant expansion for us. We have got 18 people, Bill, in China?

Yes.

So we've hired a lot of people. We've started -- we got licensed as a WOFE as they call it, which is a wholly-owned local enterprise. That has been funded with capital and that is -- China is a very complicated place to do business, and that itself took about three months to have happen. But we're now set and we are now starting to slowly ramp up local activities in China.

Again, because it's such a quirky place, we're doing it slowly, making sure that we go through a cycle with the transaction, but we're doing some local physical business in metals and in grains, we're starting to trade some of the local markets there. So that's gone from being costs and hiring people and building out to now just starting to deliver marginal revenues and hopefully that will escalate. So we're in business there.

Great. And the last thing, you've talked in the past about maybe looking at repricing some clearing services. Have you started to experiment with some of that or not yet?

I don't know, sometimes theory doesn't exactly work in practice. Our theory was that with the demise of MF, that a significant amount of capacity had been taken out of the clearing business and, therefore, it would be a great opportunity to increase rates. And I think people are starting to talk about that, but volumes have also come off a little bit, generally in the market.

And I think as far as capacity has disappeared, maybe volumes come down. So we certainly are not finding it easy to push rates, and we thought we would find it easier to be honest with you. I think the industry, as you know, Graeme, we've chatted about this before, I think the industry is underpricing its services and its risks as the moment, and most of the FCMs are unprofitable.

So I think it is in everyone's interest to get that business healthy and profitable. And I don't thinks it's even in the customers best interest for the industry to be unhealthy, but no one kind of sees that. Quick answer, we haven't been spectacularly successful. We continue to press on. I think that will turn in our favor over time. I just thought it would happen quicker.

Okay.

One key thing to point out, Graeme, our FCM is profitable, it is doing well.

Yeah, we're probably one of the few.

But it's a business that we certainly think we should see margin expansion given the level of risks that firms do take.

Right. Well, you guys have made lots of progress. Congratulations, and thanks for taking my questions.

You're welcome. Thank you.

We'll take the next question from Erin Caddell, Capstone.

Hi, can you hear me okay?

We can hear you fine.

Okay, I apologize; I'm calling from a cell phone and have a scratchy voice. But I want to actually follow-up on the last question about the regulatory environment as it relates to FCMs. There have been a number of discussions at the CFTC and by the exchanges about customer balance protection, there's some increased margin requirements, and increased audits and things like that. Just wondered if you could comment on the regulatory environment for FCMs broadly and specifically to the idea of allowing FCM customers to keep their balances at a clearing house or third-party bank, ie, away from the VFC in itself, and what your thought is on that proposal?

This is Bill Dunaway. I'll address a couple of those. As far as the changes that we've seen, there hasn't been a lot of material changes we've seen. The segregated funds and the regulatory capital issues, the FCMs are a highly regulated industry and have been for a long time.

There's a requirement to calculate your regulatory capital and the segregated balances on a daily basis; there always has been. However, now, there is probably the most significant change you've seen is now there's a daily filing requirement. So starting here at the beginning of this month, those reports are filed by noon Central Time with the exchanges or with the CFTC.

Regarding the exchanges and whether or not customers keep money with the exchanges versus the FCMs, that's a difficult discussion because ultimately while the exchanges may -- customers may feel safer with keeping the money at the exchanges, it does result in the exchanges turning around and wanting the FCMs to basically fund any unprofitable customers or loss making customers that there are, so it's still a situation to where money is having to be moved around and FCMs are having to cover their customers at the exchanges, so it's not really an equitable or efficient way of dealing with customer trades.

I think we feel that the current model of the customers maintaining the margin deposits with the FCM and the FCM covering those margins at the exchange on behalf of the customers is a good model. We need to have continued monitoring and adherence to the regs that are in place to maintain customer safety of their assets and have the exchanges continue with their audits. We go through an audit annually and they need to continue to monitor what FCMs can invest in, and I think they have done that.

That's probably one of the most significant changes you've seen is the removal of affiliate repo transactions and investment in things such as sovereign debt or other more risky investment options that FCMs could have. The FCStone FCM has never invested in either one of those type of transactions, and, ultimately, that's what led to some of MF demise.

If I could jump in. There's a lot of press out there and a lot of people say why is it going to be so complicated, why can't I just have my deposits in an account at JPMorgan or Bank of New York and so on. But if you understand how the mechanics of an FCM works, effectively, the FCM is margined instantaneously effective of the exchange, and the customers have a period of time to send their margin in.

And the FCM is the one who bridges those balances. And if you start segregating this out, the FCMs aren't going to require multiples of the amount of capital they have now, that in turn is going to increase the costs of dealing by multiples of what it is now, and no one wants that. So that's the problem. You can do whatever you want, but there's going to be a significant cost to that. And that increased cost is probably going to reduce liquidity, reduce volumes, and ultimately hurt the customers, so it's kind of a tradeoff.

At the moment, FCMs are unprofitable as an industry. They take a lot of risk for their customers, they have to support their customers with a lot of capital, it's a highly regulated industry. The problem is regulations, you know, you can make regulations, the question is how do you enforce compliance. The regulations are sound. It's compliance with the regulations that weren't sound, and the same thing happened at Bear Stearns, at Lehmans, the ratings, regulations, and regulators don't prevent problems, and frauds and bankruptcies. They just don't.

Anyway, we'll see what happens, but it's obviously an issue that's on everyone's minds, but I'm not sure there's an easy way to resolve it, other than maybe just tightening up the current process, which has been around for nearly 100 years, so there's some logic to it.

That's very helpful. Thank you very much for taking my question.

You're welcome.

(Operator Instructions). Up next is Steven Spartz, International Assets Advisory.

Good morning, Sean.

Hey, Steve, how are you?

Doing well, thank you. I have a question that goes back actually I think probably about three years or so ago. I know that --

I hope I remember.

Yeah, you have a good memory, I'm sure you will. I know that the question of a buyback at that point in time of the Company stock wasn't available because of some of the convertible notes that were out there. And I remember I think the stock was trading somewhere right around $14 a share, and you really felt that it was tremendously undervalued and a really a great buy and opportunity at that point and time, and proved to be correct as the stock price did very well after that. Here we are probably about three years later or so, and the Company much larger than what it was at that point in time, and done a great job of growing it. Has there been any thought with the stock price trading really towards its 52-week low of buying back shares? I think we are in a situation where you're able to do that now, correct?

Yeah, so let me respond to that. I think we did touch on this in one of more recent conference calls, so I'll try and summarize it quickly so we don't go through everything again. But, yes, you are correct. We couldn't do a buyback previously and we now can, and we've been in that situation probably for the last two quarters, so we are able do a buyback.

We have laid out a very mechanical process to our buyback and we have a buyback in place, which we announced. And the reason we did that is we think if you look at buybacks, about 95% of them end up being terrible because they're done for the wrong reasons. Generally, buybacks are done by management to try to support the share price or they're done to try and send a message of confidence to the market, and we just think that's exactly the wrong thing to do. In fact, our view is we want to take advantage of the market.

And the way we have looked at our buyback is our driving force in life is compounding our book value per share. And you're right, three years ago our book value was like $5 and now it's $16, and the share price hasn't really reflected that change. So we will scale in our buybacks relative to book value, and we want to buy more shares as we get closer to book value and less shares as we get above book value, so that's how we create value for our shareholders.

If we start buying large amounts of shares at premiums to book value, we actually reduce the book value per share after the buyback, and we don't want to do that. And we're going buy when it's really cheap. I'll flat out say it. If we're buying shares in the market, shareholders should know we are taking massive advantage of them because we know more than they do and we're going buy it when it's cheap.

So we'll put that out as (inaudible), but that's how we're going to approach it. So we have no interest in supporting the share price. As you know, we don't particularly care about the share price in the short-term. We care about building our business, building book value per share for the long-term and ultimately that will create a long-term share price gain. So we will use our buyback, but it's all related to book value and accreted value, rather than trying to send a message or support the share price.

You've done a great job of increasing the book value year on top of year. If I could ask you one more question,with all the growth that you're achieving, how many employees now?

We are North of 1,000.

1,064, Steve.

All right.

1,064, can you believe that, Steve? You remember five years ago when we were like 150?

Well, I know that when the spin-off occurred roughly ten years ago, I think it was about 30.

Exactly.

All right, great job.

All right, thank you.

You're welcome.

I'd like to give the phone audience a final reminder. (Operator Instructions).

All right operator, we can wrap up. Any more questions, no?

No further questions.

Okay. Well, thanks everyone, and we'll speak to you in three months. Thank you.

And, everyone, that does conclude today's conference. We would like to thank you all for your participation today.