StoneX Group Inc (SNEX) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the INTL FCStone fourth-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Bill Dunaway. You may begin.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone. Welcome to our earnings conference call for the fourth quarter of fiscal 2012, ended September 30, 2012. After the market closed yesterday, we issued a press release reporting our results for the fiscal fourth quarter. The press release is available on our website at www.INTLFCStone.com, as well as a slide presentation, which we will refer to on this call in our discussions of the quarterly and annual results.

This slide presentation is available by clicking on the Investor Relations link on the website and then going into Events and Presentations page. You will then need to sign on to the live webcast in order to view the presentation. Both the presentation and an archive of the webcast will be available on our website after the call's conclusion.

Before getting underway, I'd 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 marked-to-market differences in our adjustments in our physical commodities product lines, which are included in both our CRM and other segments.

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 commodity inventories 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, 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 physical commodity productline businesses and therefore the Company as a whole. Instead, we assess all of our businesses, as do our banks, on a fully marked-to-market basis in our daily and monthly internal financial reporting.

Readers of our Form 10-K filing should look at item six in our selected summary financial information for a summary of both GAAP and non-GAAP information. This section also gives the 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 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 Form 10-K 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 Security Exchange Act of 1934.

These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the Company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the Company's actual results will not differ materially from any results expressed or implied by the Company's forward-looking statements.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of 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 Chief Executive Officer.

Thanks, Bill, and good morning, everyone, and thanks for joining the call. Just want to say up front I have a pretty bad cold, so if I sound weird, that's why. I may also start coughing and spluttering as well. Hopefully it doesn't happen.

Anyhow, in fourth quarter 2012, we produced record adjusted operating revenues again of $125 million, just very slightly beating the previous record set last quarter. We also achieved an all-time best in adjusted net income of $12.5 million for the quarter.

The fourth-quarter results represent an ROE of nearly 16%, which is right in line with management's targets of a minimum of 15%.

Compared to a year ago, our adjusted revenues were up 21% and our adjusted earnings were up 166%. All of our segments except for Foreign Exchange showed strong growth in revenues compared to a year ago.

On a sequential basis compared to Q3 2012, our revenues were up very slightly and adjusted earnings up 135%.

Turning to the overall fiscal year results, our adjusted revenues were up 12%, with all of our segments showing revenue growth. Adjusted fiscal year net income was down 40% from a year ago and our fiscal-year ROE was just over 6%, well below our target.

In the investor presentation made available for this call, there is a chart -- I believe it is the first slide -- showing net earnings both on a GAAP and adjusted basis for each of the last four quarters. This chart shows a strong positive trend in adjusted earnings, starting with Q1 being a loss of $2.4 million, followed by a strong and steady increase, culminating in the record Q4 results of $12.5 million.

I think it might be useful to give you some color on our progression through the year and the trend it shows so you can better evaluate our performance. I would warn against extrapolating this trend.

Third point, almost exactly a year ago, in our first quarter, the industry experienced a failure of MF, quickly followed by the failure of Peregrine, which had a significant impact on our results for both Q1 and Q2. While it is hard to come up with hard empirical data, it is my best guess that this loss in revenue could easily have accounted for $10 million to $$12 million of net after-tax earnings over the first two quarters.

In addition to this, we had expansion costs related both to the metals team and the related support and infrastructure costs we incurred as they ramped up revenues, as well as our investment banking initiative and a couple other smaller business expansions. In aggregate, these resulted in post-tax losses of around $7 million to $10 million, both of which were incurred in the first two quarters.

Excluding the bottom-line estimated impact of these two items, we would have had a more normal $7 million to $8 million earnings per quarter, which would have still been below our target, but would have resulted in a flatter and perhaps a more understandable trend.

Some other general comments and observations which may be relevant. We made three significant acquisitions during the year, the largest of which was the unplanned acquisition of the metals team in the first quarter, following the failure of MF Global. We are thrilled with this acquisition, which is now really showing great bottom-line contributions. In addition, we are ranked by an industry survey as number one London Metals Exchange broker for 2012. This is now a real franchise business for us.

Second, the TRX Soft business was acquired as a tuck-in acquisition in Q3, and has now been integrated and seems to be jelling nicely. We have had some initial limited success in selling some of our other capabilities, such as OTC and Structured Products to their customer base.

Third, we announced during the year and then closed yesterday the acquisition of Tradewire. This is a Miami-based team of deep and broad institutional customers in Latin America that currently have only offered securities execution, but are now planning to offer a full range of products, including futures, foreign exchange and investment banking services to these institutional customers. 30 days in the process, but already some encouraging signs.

As Scott mentioned last quarter, there has been continued incremental improvements in our other expansion initiatives. Investment Banking has been a tough business for us, compounded by the decision to ramp up capacity a year ago when good talent was available and it seemed like market conditions were about to turn. As we all now know, conditions did not improve, and in fact may have got worse. We have faced and executed some tough decisions in this business and are pleased that we achieved a breakeven result in Q4 and expect a modest bottom-line contribution for 2013.

We have also made incremental progress in our Australian, Singaporean, European and Chinese growth initiatives, where we are trying to push out our core capabilities into new regions which hold significant long-term growth potential for us. Our business is a high-touch, value-added service and customer acquisition, especially in new regions, a long process. I am pleased to say that we are now seeing tangible progress and incremental revenues coming out of all of these initiatives.

Over the last year, the management team has focused on costs and efficiencies. For the first time in three years, we embarked on a fairly aggressive expansion -- sorry -- for the first time in three years when we started on a fairly aggressive expansion, we now see our fixed costs flattening out, and in some areas showing some small declines. Management's primary objective is to sharpen our focus of integrating all of our acquisitions, growth initiatives and new capabilities to realize both revenue synergies and cost efficiencies.

Finally, a word on market conditions. During fiscal 2012, we started the year with some of the worst market conditions we've ever experienced, caused by the MF collapse, which had a dramatic effect on industry volume. This was followed by the Peregrine fraud, serious issues at Penson, a large securities clearer in our space, and problems at Knight Capital. In addition, we've had the euro crisis and LIBOR fixing, which is troublesome for the banks and a number have started pulling back on the futures and commodities space.

In addition to all of that, we have been dealing with probably the most significant regulator overhaul our industry has ever seen in the form of Dodd-Frank, which added direct costs and created uncertainty in the market with our customers and confusion and withdrawal from some market participants. The effects of Dodd-Frank are not yet behind us, and derivative regulatory reform will affect us globally for some years to come, accompanied by increasing compliance costs.

On the bright side, we did see fairly dramatic uptick in agricultural commodity prices and volatility as a result of the very bad drought experienced in the Midwest. This certainly had a positive impact on our Q4 results; high prices and increased volatility is the best situation for us.

Currently, confidence remains low due to political uncertainty, although we are hopeful that if our politicians can stay out of the way, we may see slightly improving conditions next year.

So all in all, probably some of the toughest market conditions we experienced, with most market volumes having declined fairly materially, not only this year but for the last three successive years now. I am pleased to see that we believe we have fared pretty well in this situation.

Our operating revenues in every one of our market segments is up on last year. Some of our key segments have shown dramatic increases in volumes compared to last year. Our OTC volumes are up 38%. Our exchange traded volumes are up 59%. Of course, in some areas, spread compression has offset volume increases. We are still seeing a high rate of customer on-boarding, with over 4000 new customers having been signed up during the year.

All of this would seem to indicate that we are picking up fairly substantial market share as our competitors withdraw from the market, collapse or struggle to maintain momentum.

In summary, a very tough year in which we were able to make some key opportunistic acquisitions to expand our franchise, incrementally push forward on a number of organic growth initiatives, and which culminated in our best-ever quarter, although the overall result for the year was below expectations.

I will not hand you over to Bill Dunaway for a more detailed discussion of the financial results. Bill?

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

Adjusted operating revenues were a record $124.8 million for the current period, up 21% from the $103.5 million in the fourth quarter of 2011. Adjusted operating revenues were $124.7 million in the third quarter of 2012. Every segment of the Company experienced growth in adjusted operating revenues in the fourth quarter as compared to the prior year, with the exception of the Foreign Exchange segment.

Looking at our revenues on a segmental basis, adjusted operating revenues in our core Commodity and Risk Management Services segment increased 17%, from $58.9 million in the prior-year period to $69.2 million in the fourth quarter of 2012.

Adjusted operating revenues in this segment were $1.3 million -- increased $1.3 million over the third quarter revenues of $67.9 million dollars.

Our CRM segment is further broken down into three different product lines, soft commodities, precious metals and base metals. Starting with soft commodities, operating revenues increased 7% to $57.8 million in the fourth quarter as compared to the prior-year period. Exchange traded volumes were 956,000 contracts, which was a 29% increase over the fourth quarter of the prior year, which drove a $2.8 million increase in commission and clearing fee revenues, primarily in domestic grain markets as well as Latin America and China.

OTC contract volumes in this product line increased 25% as compared to the prior year to 445,000 contracts, driving a $1.5 million increase in OTC revenues. This volume increase was primarily driven by increased volatility in the agricultural commodities as a result of US weather conditions.

Average investable client balances were $1.1 billion for the current period as compared to $883 million the prior-year period.

Adjusted operating revenues in our precious metals product line decreased $4.6 million in the prior-year period to $3.7 million in the fourth quarter, primarily driven by a 27% decline in the number of ounces traded as a result of rising gold prices.

Adjusted operating revenues in our base metals product line increased from $600,000 in the fourth quarter of 2011 to $7.7 million in the current period, primarily as a result of the revenues contributed by the LME metals team. The LME metals team, which was added in the middle of the first quarter of this fiscal year, added $8.1 million to adjusted operating revenues to the current quarter.

In our Foreign Exchange segment, operating revenues decreased 13% in the fourth quarter to $15.2 million as compared to the $17.5 million in the prior-year quarter. Within this segment, the Company's global payments product line had another strong quarter, increasing operating revenues from $9.2 million in the prior year to $9.8 million in the fourth quarter of 2012, as volumes increased 14%.

Operating revenues in the customer speculative foreign exchange product line declined $500,000 to $2.1 million in the fourth quarter as compared to the prior year. And operating revenues from customer hedging activity decreased from $2.1 million in the prior year to $500,000 in the current period, primarily as a result of a decrease in volatility in the Brazilian real during the period, which caused lower customer hedging activity.

The proprietary foreign exchange arbitrage desk, which arbitrage is the cash versus the exchange traded markets, experienced a 27% decrease in operating revenues to $2.7 million as compared to the prior year. This was primarily due to a decrease in arbitrage opportunities in the exchange traded foreign exchange markets. However, this was a slight increase over the $2.4 million in revenues in the third quarter.

Now moving onto our Securities segment, operating revenues increased by 52%, from $7.3 million in the prior year to $11.1 million in the current quarter. This segment includes two product lines, the equity market-making business and the debt capital markets. Operating revenues in the equities market-making business increased 30% over the prior year to $6.2 million in the current quarter, despite a 27% decline in the number of trades, as the margin per trade nearly doubled.

Operating revenues in our debt capital markets product line, which includes both investment banking activities as well as debt trading, increased from $2.6 million in the prior year to $5 million in the current quarter, primarily driven by debt trading in Argentina.

In the Clearing and Execution Services segment, operating revenues were $22.9 million in the fourth quarter of 2012 as compared to $14.7 million in the prior year. Commission and clearing fee revenues increased 60%, from $13.9 million in the prior year to $22.2 million in the fourth quarter of 2012, as a result of a 75% increase in exchange traded volumes. This increase was primarily driven by accounts transferred to the Company from MF Global during Q1 of 2012, but it's a little misleading because breaking down this increase, commission revenues increased $3.3 million, while clearing fee revenues, which is generally a pass-through to the exchange, increased $4.9 million.

The average investable client balances were $746 million for the current period as compared to $858 million the prior-year period.

Operating revenues in our Other segment, which contains both our asset management and commodity origination and financing product line, increased from $5.1 million in the prior year to $6 million in the fourth quarter of 2012. The assets under management on September 30, 2012 were $482 million compared with $385 million as of September 30, 2011.

Operating revenues in the asset management product line decreased from $3.1 million in the prior year to $2 million in the current period. Operating revenues in the grain financing and physical commodity origination product line doubled as compared to the prior-year period, up to $4 million, as we have expended both our physical commodity team as well as our available credit facilities for financing operations.

Moving on to the expense side of things, noninterest expenses were $104.2 million for the fourth quarter of 2012, an increase of 12% over the $92.9 million in the fourth quarter of last year. However, this represented a 10% decrease as compared to the $115.3 million in the third quarter of this year.

Internally, the Company targets to keep variable expenses as a percentage of expenses in excess of 50%. During the current period, the majority of noninterest expenses were variable, with 55% of total noninterest expenses being variable in nature as compared to 58% in the prior-year period.

Non-variable expenses include fixed expenses, as well as bad debts and impairments. During the fourth quarter of 2012, we recorded $800,000 of impairment expense on intangible assets acquired, which had previously been identified as having indefinite lives.

Fixed expenses were $45.6 million for the fourth quarter of 2012, which represents a $7.2 million increase over the fourth quarter of last year, primarily as a result of acquisitions made during fiscal 2012, including Ambrian Commodities, the LME metals team and TRX Futures, as well as the expansion of our global soft commodity and foreign exchange activities.

This, however, reflects a $4.7 million decrease as compared to the third quarter of the current fiscal year, as recent cost-saving initiatives have begun to show tangible results.

The Company targets to keep total compensation expense as a percentage of operating revenues at less than 40%, and for the first time since the first quarter of 2011, we have met this goal, with total compensation-related expenses representing 37.6% of total adjusted operating revenues in the current period.

Compensation and benefits were $46.9 million in the current quarter as compared to $47 million in the prior year. The variable portion of compensation of benefits decreased 24% from $29.7 million in the fourth quarter of 2011 to $22.4 million in the current quarter, while the fixed portion of compensation of benefits increased 42% from $17.3 million in the fourth quarter of 2011 to $24.5 million in the current period, primarily as a result of the acquisitions noted earlier.

The average number of employees increased to 1074 for the fourth quarter of 2012 as compared to 901 in the prior-year period.

The adjusted net income from continuing operations for the fourth quarter was a record $12.5 million versus $4.7 million in the prior year.

Looking at the trailing 12 months, adjusted net income and adjusted EBITDA decreased 40% and 33%, respectively, over the year-ago period.

The Company looks to achieve a minimum return on equity of 15% or greater on its adjusted stockholders' equity, which was met in the fourth quarter at 15.6% as compared to a 6.2% return on equity for the prior-year period. Total assets on the balance sheet increased 12% to just under $3 billion, while adjusted stockholders' equity closed the period at $328 million, a 9% increase over the prior year.

On July 23, 2012 the shareholders of LME Holdings voted to approve the sale of the LME to the Hong Kong Exchanges & Clearing Ltd. Based on the proposed sale price of the ordinary shares, the shares of the LME held by the Company are valued at $8.7 million on the balance sheet as of September 30, 2012. The Company's shares in the LME reflect an unrealized gain of $6.3 million, net of income tax of $2 million, which is recorded in the equities section of the balance sheet in OCI. Upon closing of the sale, the Company will reclassify the unrealized gain in the shares and accumulated OCI and recognize the realized gain in the current-period earnings.

On August 12, 2011, the Company's Board of Directors authorized the repurchase of up to 1 million shares of the Company's outstanding common stock. During the fourth quarter, the Company repurchased 67,507 shares of its outstanding common stock in open market transactions in the aggregate amount of $1.2 million. On November 15, 2012, the Company's Board of Directors amended this authorization to allow for repurchases of up to an aggregate of 1.5 million shares.

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 was $465,000 per employee.

Finally, in closing out the review of the quarterly results, the trailing 12 months of results have led to an increase of 7% in the book value per share, closing out the quarter at $17.32 per share.

Moving on to the next slide of the presentation, I will speak briefly on the annual results for fiscal 2012. Adjusted operating revenues increased 12% over the prior-year period to a record $464.5 million. All of the Company's operating segments realized growth in revenues over the prior-year period, with the Securities and CES segments growing at 31% and 42%, respectively.

As with the quarterly results, total noninterest expenses increased 21% to $426.8 million, primarily as a result of the acquisitions made during the last 18 months.

Variable costs represented 55% of total expenses, keeping 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 43.6% as a result of the growth initiatives discussed earlier.

Adjusted net income from continuing operations for the 12 months ended September 30, 2012 was $19.2 million, a 40% decline as compared to the prior-year comparable period. For the year-to-date period, the Company achieved a 6.1% return on adjusted stockholders' equity, below the 11.6% for fiscal 2011 and our internal target of 15%.

For the fiscal year, the annualized revenue per employee decreased 10% to $449,000, which is below the Company's stated goal of $500,000, while the average number of employees increased to 1035 from 829 in the prior year.

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

Thanks, Bill. This marks almost exactly the 10th anniversary since Scott and I invested in International Assets, as our company used to be called, and took over the management. It has been quite a ride and perhaps a good opportunity to recap the Company's longer-term performance.

Over that time, we have grown from around 10 people to over 1000 people, up 100-fold. Our equity capital has grown 150-fold. We were essentially a startup and are now increasingly recognized as a franchise in the commodity space as well as some other niche areas in the financial markets.

Our book value per share, our key measure metrics, has grown from around $1.40 to $17.31, up 12 times, or a compound annual growth rate of nearly 30% over a 10-year period.

Our industry is going through a wrenching change and it is almost a monthly occurrence that we find one of our competitors or market participants either closing down, going bankrupt or merging and consolidating with someone else. Tough market conditions and massive regulatory changes have found many business models wanting.

We are more convinced than ever that our strategy of providing a high-touch, value-added service to midsize customers is the right one. Many of our customers are struggling with evermore complex markets and increased volatility, and are looking for a real partner to help them access and use the financial markets, rather than being at their mercy.

It is tough going right now, and other than the fourth quarter of fiscal 2012, we have not made the level of returns we would like. However, our franchise is strong, it's growing, and it's increasingly becoming recognized by customers and competitors alike. The industry is reducing capacity, and capital is being allocated away from flawed business models. In due course, this should result in increased pricing power and better returns for our shareholders. And of course, if we ever see some real interest rates, we will be able to make some real money.

As Bill mentioned, we continued to buy back shares during the quarter using a disciplined, predetermined basis based on book value per share.

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

(Operator Instructions) Bartley Cohan, private investor.

I just had one question, not really related to this quarter. But I was curious what your thoughts were on -- like, basically, the fuel business, if you had any -- like getting gasoline and diesel to customers.

The reason why I was asking -- I was reading the World Fuel Services Annual Report and it seems to be sort of that asset light, with many customers. And I remember your annual reports of talking about getting into niche markets and maybe being a little more sophisticated than the competition. And it just seemed like -- I was just curious if you had any thoughts of --. I know you guys have been expanding very quickly. I was just curious about --

The short answer is no, we're not getting into that business. We are involved in the fuel industry and do deal with people who deal with diesel, with gasoline and the distribution thereof. But we are really dealing with them in terms of hedging their risk related to that. So it's not something we are involved in, but we might take a look at it following this and just see what's going on out there. We're always interested in looking at opportunities, but certainly not on the radar for us right now.

Okay. Congratulations on the quarter.

Thank you.

[Mayer Sinia], IW Capital.

Great quarter. I had two questions. The first, could you talk about the growth in Brazil and China? Is there anything that has surprised you about the business there?

Firstly, Brazil has probably been one of our standout areas over the last three years, and just massive growth in the agricultural sector down there. Customers who are large but relatively unsophisticated in the financial markets looking for help. So sort of a perfect matchup for how we do business.

And we have opened five offices now in Brazil. The reason for doing that is we try and put our people close to where the customers are. So we are in some really kind of remote areas in Brazil now where we've set up an office with three, four guys; they want to be where they can see their customers every week, every day. And we just see a lot of growth. And we just had our monthly call with those guys yesterday, and they see that growth continuing.

It is clear to anyone, I think, who follows the agricultural world that Brazil had already become and will continue to become a powerhouse, and probably at some point even be larger than the US in terms of its production. So definitely a place we want to be, very profitable for us and lots of growth potential.

In terms of China, we do a lot of business in China. China is very difficult. They have lots of regulations. But certainly we can say that all the large state-owned businesses that have been authorized to deal on the markets internationally generally have dealt and do deal with us on a continual basis.

So they know us well. We are almost a household name in China, perversely. We are expanding our physical side of our business. We do a lot of our metals business. We sell to commercial customers in China. We are starting to do that on the ag side.

So China is very interesting for us, and we've just opened last year a locally-based -- what they call a local foreign entity. This is basically a domestic Chinese company that now allows us to become active in the domestic market. So we can trade domestically with customers either in physical transactions or with financial transactions. So we can trade on the Shanghai, the Dalian Exchange, now domestically. So that for us is kind of an interesting add-on. So early days with that, and we will have to see how that plays out.

But China and commodities are just so interwoven and linked, and it is a big area for us.

Okay. Thanks for that answer. The second question I had was I wanted to revisit a question from a past call. Could you provide some color on your ability to push rate with your Clearing and Execution Services?

Yes, well, that is the eternal question. We are always waiting for that to happen. And I guess logically what you see is an industry on the FCM side, not only -- to be clear, I don't think we think of ourselves as just an FCM. We have a lot of capabilities. We build our business around our customers. Trading on exchanges is one capability that our customers need. So we are an FCM, but we are not just an FCM, just to put that out there.

And Bill has probably got the exact numbers, but I think exchange commissions are now 30% of our aggregate revenues, Bill, or 40%?

Yes, that's about right.

So less than half definitely, way less than half. But the industry, the FCM industry as a whole, by my guess, has been basically unprofitable for three years. It was all built on an interest-rate model, interest rates have gone to zero, and a lot of people have been struggling with that. And the problem is with volumes having generally declined, not only do you have an unprofitable business, but you also have surface capacity and a model that has high fixed costs.

So it reminds me a lot of the airline industry. So what happens in that environment is everyone is trying to find that marginal dollar. And instead of people pushing prices up, they tend to push prices down, which is totally perverse and illogical and irrational. But when you've got a high fixed cost and you're losing money, every little dollar you make that is marginal and helps cover your fixed costs, you'll chase that dollar.

So what we've found is generally a tougher environment as interest rates went down. I suspect now we are starting to see that turn, with MS and Peregrine and a couple other people -- some of the French banks are pulling out of the business -- it seems now that capacity may start to be pinching a little bit. And when capacity starts to stabilize, that is when pricing power returns. And I certainly think that pricing power is starting to return slowly.

I think the other thing we find increasingly is people are becoming more discerning about who they deal with. So we have not chased our prices down. We believe we offer a good high-level service to customers. We are a sound company, we're public, we have a lot of capital supporting our business. And for that comfort and safety, our customers should be prepared to pay a premium. And I think customers are now coming to that same conclusion.

I think previously, the view was all the FCMs are regulated, so I can just go deal with the cheapest guy, because I don't have to worry about who I deal with. I think this was totally flawed, yet another example of sort of when there's regulation, unintended consequences and moral hazard. And I think customers are now starting to become more discerning.

And we find -- one of the reasons we've had 4000 new customers come in, customers are coming to us, saying, you guys seem to be growing. You're surviving. I want to deal with you and it's not so much a price issue anymore.

But early stages of all of those things, so we think there is a big adjustment that has to happen. We have just recently heard that one or two of our competitors have started changing the way they've priced, started to increase pricing, and we welcome that. The industry needs to be healthy. The industry needs to make an appropriate return on the capital. Because I think people need this industry to be around.

So that's my view. Scott, I don't know if you have anything else to add.

The only additional comment I would make is that Sean's comments about FCMs generally really have to do with raw, non-value-added clearing and execution services, which is something that we offer to a subsegment of our customer base, but is not what we do with the bulk of our core customers, where we provide a value-added service and an advisory service and make significant higher revenue from those customers than the industry standard.

Although it is important to us to see that the price of those non-value-added, raw clearing execution services returns to a more reasonable level, it isn't the core part of our earnings stream.

Have we answered your question?

Yes, thanks. Appreciate the answer.

Justin Hughes, Philadelphia Financial.

Good morning. I was just wondering -- I noticed your comp ratio ticked down to 38% in the quarter. What should we model going forward? Because that is a six point drop from just kind of last quarter.

Okay, well, we have stated that our objective is to be at 40% or below. And if you have a look at the little slides, we've kind of on the far right highlighted to you what we as management are trying to shoot for. So that is what I would use.

Now, you are going to have to make a judgment as to whether we are going to hit our various metrics or not. But that is what we are shooting for. That is kind of how we've designed the business. Those are the metrics we have given to our division managers and asked them to manage to.

That can move around a little bit depending on sort of the business mix, where you are in the cycle with developing new activities. Typically, when you start a new business, you have 100% comp ratio -- right -- because it is all costs and no revenues. Or in fact it's almost -- I don't know -- sort of -- it impacts the rest of the business negatively.

And then as revenues start coming in, you start at 100%, and hopefully once the business scales itself to the right size, you start drifting in. We have a lot of businesses where they are still pretty early in the development cycle. So they have a higher ratio. And as they start coming into line, we start slipping below that target. So that is how it can move around a little bit.

Yes, so that would all suggest that should be a little bit above your target of 40%, and you came in at 38%. Were there any year-end catch-ups in there?

There were some year-end catch-ups. We -- the fourth quarter is always tough, because we pay -- all our revenue-producing people are paid sort of quarterly or monthly or whatever. We tend to accrue during the year for all the support people, the executive management and so on. And then we sort of true that up in the fourth quarter depending on how the final results come out.

And of course, the senior executive group -- and it's not just me, but basically all the senior managers track my compensation targets. They are all a percent of what I am. We are completely subject to what our compensation committee says at year-end. So sometimes we are a little more enthusiastic than they are and sometimes it is the other way around; although that doesn't happen often, I might add. So there is a little bit of true-up in the fourth quarter.

Okay. And then my second question -- Leucadia obviously bought Jefferies in the last month, and they have a company [box] that appears to be in the same businesses as you. How does that change your relationship with Leucadia, now that they own possibly a big competitor of yours?

Good question. We have a very good relationship with Leucadia, and the principals of Leucadia and Justin, who sits on our Board, have been with us right from the beginning. Clearly, we are a very small business and the investment in us is tiny relative to the size of Leucadia.

They have made a very significant bet and now followed through with the merger with Jefferies. Jeffries in many ways doesn't really compete with us. They are just at a totally different level and I think have ambitions to be the sort of next bulge bracket firm, whereas we've very much focused on sort of midmarket commercial customers.

But we do overlap on the commodities side. They bought Pru Bache. They've taken on teams, they have just joined the London Metal Exchange. So we are clearly now sort of directly competing, and I would say it is probably appropriate at the closing of that deal, if it indeed goes ahead, that Leucadia probably has to step off our Board, I would say. So we will see; that will all get decided in February.

In terms of their investment in us, there is no legal or ethical reason why they can't invest in us. And I'm not sure we necessarily mind that they are invested in us. But they also may choose to -- it is a non-core investment at that point. I think they may decide to sell the stock, so --. And again, they tend to be value guys and they tend to ride out cycles, and they may just say it's kind of on the for-sale list, but we think it is worth a lot more than it is now and will just wait and eventually sell the stock when we think it is at full value.

So it's very hard to predict what's going to happen. But you know, we still have a great relationship with the individuals there. In fact, I've personally met with them in the last couple weeks. Tonight, in fact, I'm meeting with one of them. So very cordial relationships, great guys, they've been very supportive of us. But we just have to make sure that we all do the right thing.

Okay, thank you.

I am showing no further questions in the queue at this time. I'll hand the call back to Mr. O'Connor for closing remarks.

All right. I don't think we have any more questions, so we would like to thank everyone for participating in the call, thank you for supporting us and wish you and yours great holiday season. Thanks very much.

Thank you. Ladies and gentlemen, this concludes the conference. You may all disconnect and have a wonderful day.