FCStone Group, Inc. F4Q08 (Qtr End 08/3108) Earnings Call Transcript

| About: FCStone (FCSX)

FCStone Group, Inc. (FCSX) F4Q08 Earnings Call November 13, 2008 9:00 AM ET


William J. Dunaway - Chief Financial Officer

Paul G. Anderson – President and Chief Executive Officer


Richard Repetto - Sandler O'Neill & Partners

Niamh Alexander - Keefe, Bruyette & Woods

Michael Vinciquerra - BMO Capital Markets

Christopher Allen - Banc Of America Securities

Mark Lane - William Blair & Company


Welcome to the FCStone Group 2008 fourth quarter and full-year earnings conference call. (Operator Instructions) This call is being recorded today, Thursday, November 13, 2008. I would now like to turn the conference over to Bill Dunaway, Chief Financial Officer.

William J. Dunaway

I would like to welcome you to FCStone’s fiscal fourth quarter and year end 2008 earnings conference call. Shortly before the market opened today, FCStone issued a press release reporting its earnings for the fiscal fourth quarter and full year 2008. The press release is available on our web site at www.fcstone.com. Additionally, we are conducting a live web cast of this call which will also be available on our web site after the call’s conclusion.

During today’s call, Pete Anderson, our President and CEO, will first provide an overview of our results and commentary on our business in the current market environment. I will then provide details on the financial performance of the fourth quarter and year end. Pete will then conclude our presentation with some closing remarks before we open the question up for some Q&A.

Please note that today’s conference call is copyrighted material of FCStone and cannot be rebroadcast without the company’s express written consent.

I would also like to remind you that during the course of this call management may make projections or other forward-looking remarks regarding future events or the future financial performance of the company. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial means. It is important to note that such statements about FCStone’s estimated or anticipated future results, prospects, or other non historical facts, are forward-looking statements and reflect FCStone’s current prospective of the existing trends and information as of today’s date. FCStone disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Actual results can be affected by inaccurate assumptions, including the risks, uncertainties, and assumptions described in the company’s filings with the Securities and Exchange Commission. In light of these, risks, uncertainties, assumptions, and forward-looking statements in this earnings call may not occur and actual results could differ materially from what was anticipated or implied in the forward-looking statements. When you consider these forward-looking statements you should keep in mind the risk factors and other cautionary statements during the earnings call.

I would now like to turn the call over to Pete Anderson, our President and CEO.

Paul G. Anderson

I would first like to welcome and thank everyone for joining our call this morning. I am happy to be representing FCStone for its fiscal 2008 fourth quarter and year-end results conference call.

As you can see from this morning’s release, our fourth quarter and year-end numbers continue to show strong revenue and earnings results. Although the economy has experienced significant headwinds and difficulties, FCStone just completed a successful year as revenues, net of the cost of commodities sold, rose 30.7% from $257.5 million to $336.5 million year-over-year.

Even more important, income from continuing operations of $47.4 million was up significantly versus fiscal 2007 of $33.6 million.

Exchange-based futures and options transactions volume increased 61.7%, from 61.0 million contracts in fiscal 2007 to 98.6 million contracts in fiscal 2008.

The company’s OTC volume increased by 81.2%, from 751,000 contracts in fiscal 2007 to 1.4 million contracts in fiscal 2008.

Our success over the past year has been significant in our traditional core business of serving grain origination and production customers, as well as the renewable energy group, liquid and gas energy markets, the international markets, food service and specialty products. This success has been based on the philosophy, mission, and culture at FCStone of focusing on the best alternative to manage the customer’s risk and benefit their profitability.

We believe that the company will continue to advance in the current market environment and anticipate solid growth prospects in each of core business segments that have been the foundation of FCStone.

Before we review the company’s performance for our fourth fiscal quarter and year end I would like to briefly address some of the recent macroeconomic events that have impacted the markets and FCStone.

Similar to our earnings report for the third fiscal quarter, the fourth fiscal quarter represented a period of substantial headwinds for companies in the financial services arena, as well as the deleveraging of commodity markets around the world. FCStone has felt the effects of this deleveraging of commodity markets in the form of a rapid decline of open interest and futures as well as OTC instruments in the fourth quarter of fiscal 2008 as well as the first quarter of fiscal 2009.

Credit is extremely tight for virtually all commodities in all regions around the world. This credit tightness translates into smaller positions held for shorter durations that provide greater liquidity in case of sharp upward pressure in any of the various commodity markets.

This move to essentially a spot market with shorter tenured positions could create essentially the same amount of volume, or potentially a greater volume in specific commodities.

As the company went through this period of commodity deleveraging and declining commodity values revenues, net of the cost of commodities sold, for the fourth quarter rose 17%, from $75.4 million in fiscal 2007 to $87.9 million in the fourth quarter of fiscal 2008.

However, income from continuing operations for the fourth quarter decreased 33% from $12.1 million to $8.1 million year-over-year.

FCStone recently reported that it expects to incur up to a $25.0 million pre-tax bad debt provision for the first quarter of fiscal 2009 in connection with losses by three domestic accounts for which FCStone serves as the clearing firm, or counter party. These losses, driven by unprecedented volatility in the commodity and foreign exchange markets relate primarily to a significant energy trading account, and to a lesser extent, a renewable fuels account and a foreign exchange account. These losses, if realized on an after-tax basis, would be approximately $15.0 million.

FCStone experienced no material impacts from credit issues during the fourth quarter of our fiscal 2008.

We recognize that this potential loss is significant and we want to assure our customers, industry participants, and shareholders that we take this situation very seriously and are making every effort to strengthen our controls, oversight, and systems.

The company has taken steps to ensure that this situation that developed in this account will not occur again.

All of the accounts in our Commodity and Risk Management and Clearing and Execution segments are continually being reviewed for creditworthiness, credit capacity, position limits, tenure, and volumes. FCStone has also engaged a nationally recognized consulting firm to review all the company’s procedures, processes, controls, and systems.

During the unprecedented volatile times FCStone places an extremely high priority on continuing to explore initiatives that would expand risk control and provide additional oversight to all platforms, processes, credit, and risk exposure.

Following this exhaustive and ongoing review of customer accounts, we are confident in saying at this time that no substantial customer accounts are in a position similar to the energy account we have discussed today.

Despite this bad debt expense, FCStone believes that its capital position and liquidity remains very strong. The company has credit lines for its core operations totaling $511.0 million, which includes $56.0 million in committed subordinated debt lines available for regulatory purposes, $270.0 million of committed revolving margin lines, and $185.0 million of available commodity repo financing line.

Current outstanding balances under these facilities consists solely of $16.0 million in subordinated debt and $17.0 million in repo financing as of August 31, 2008, and as of August 31, 2008, we had $228.0 million of stockholders’ equity.

Our futures commission merchant subsidiary, FCStone LLC, had minimum regulatory capital requirements as of November 12, 2008, totaling $52.8 million. At that time the company had capital in excess of the regulatory requirement of $30.3 million and access to additional capital from investments of $18.3 million and sub-debt of $40.0 million, bringing the total available excess capital to $88.6 million.

Combined with our ongoing strong operating cash flow, we believe we are in a strong financial position and can continue to execute our strategic initiatives and grow the business.

As we just discussed, this past year has been a period of unprecedented volatility in virtually every commodity market and region the FCStone deals in. This volatility was demonstrated in both the Commodity and Risk Management Services segment as well as the Clearing and Execution segment of the company.

The world has experienced record high prices in agriculture, energy, soft products, currencies, metals, financials and stock indices. These record-setting increases in price and accelerated declines in value have stressed the capabilities and capacity of the various industries and commodities that FCStone has targeted.

The difficulty this extreme leverage has precipitated is restricting many market participants ability to carry inventories and finance the margin requirements to maintain hedge positions or structures to manage risks. Financing and leverage provided by lenders, both domestically and world-wide, were expanded through this difficult period and have seen significant reductions with the recent declines in commodity prices.

With this deflation in commodity prices we have seen a retraction in leverage across the board in all commodities and we don’t anticipate leverage being expanded any time soon and anticipate the current tightness in credit will continue at least through the first two quarters of fiscal 2009, and should relax as we see some stabilization of commodity markets going forward.

Driven by the volatility, demand, and uncertainty in commodities on a world-wide scale, we continue to experience increased interest in virtually product line and region. We believe with FCStone’s expertise in agricultural commodities and the energy industry, that we are well positioned to assist ethanol and bio-diesel producers in managing their commodity input and production risks.

Around the world other areas of growth and expansion include natural gas, energy producers, consumers, weather derivatives, forced products, food and dairy products, cotton and textile, carbon emissions, technology, and foreign exchange.

So far this quarter we have seen significant interest and growth in nearly all of the commodity areas we serve. FCStone’s Risk Management consultants continually react to the changing needs of the customer by identifying new products, structures and solutions to manage their commodity risks.

The company also continues to expand internationally with our efforts in Latin American and the substantial growth we have seen in Brazil. The company’s focus in Brazil is in our historical core business of commercial grain handling and production agriculture.

We have also seen a significant growth opportunity in sugar, ethanol, coffee, cattle, foreign exchange, and fee revenue from our integrated risk management program.

Revenues in the Latin American division increased by 120% versus fiscal 2007. With the demand for grain production increasing domestically in the U.S. we will continue to see additional production expansion in Brazil, targeted to supply the growing demand for protein across Asia and China in particular.

With the acquisition of Globecot and their customer base across Asia, we intend to leverage those relationships in the cotton industry to offer our agricultural, energy, and alternative products to that customer base. This network of customers is located across Asia but in particular, China, India, and Australia.

In order to both service as well as accelerate our growth, we continue to reassess and develop our training programs to address new and developing products and industries that have growth potential. In fiscal 2007 the consultant network increased by 16 to 118 and our goal for fiscal 2008 had been to add an additional 20 consultants to the various market segments and geographic regions of FCStone.

FCStone ended fiscal 2008 with 130 consultants, trainees, and interns. Although the net count increased by 12, we saw some attrition in consultants with some moving back into industry, retiring, or leaving the industry due to a lack of production. We will focus our efforts to ramp up additional consultant capacity in the divisions, regions, and markets that warrant it and to increase the productivity of our current consultant network.

Acquisitions will also be a significant focus of the company to accelerate growth in the markets we currently serve as well as the niche markets where we don’t have the consultants’ expertise in-house.

The other acquisition that FCStone made this past year was of Downes-O’Neill. Downes-O’Neill is a prime example of an organization in the dairy and food service industry that has a similar philosophy in managing risks and a commitment to their customers that FCStone is founded on. This particular acquisition brought over 400 dairy and food service customers to FCStone in one transaction, increasing that division’s customer base ten-fold, making FCStone the premier risk management firm in the dairy industry.

Going forward, FCStone will pursue similar opportunities and be opportunistic on the M&A front.

FCStone’s focus as we move forward is to concentrate on our core services and products of commodity risk management and consulting in the industries and commodities that have been targeted by the company. Two areas that we will continue to pursue and developing the Commodity and Risk management Services segment include Agora-X and FCStone Carbon.

In the case of Agora-X, the new ECN for OTC instruments that we have developed in partnership with NASDAQ will provide liquidity, transparency, and trading efficiency for FCStone, our clients, and the qualified institutional participants. We will also provide a cleared instrument for participants in the OTC markets.

FCStone Carbon technology initiatives will provide the renewal energy industry greater efficiency and production and will in turn create greater margins for their customer base or for that customer base to manage.

Recently FCStone Carbon invested in an initiative that will enable the groups to aggregate the carbon credits produced by minimum pillage throughout the company’s commercial grain network.

FCStone looks forward to building on the momentum generated over the previous year and we intend to leverage the industry dynamics that are in place to drive our volumes and the growth of the company in the future. We continue to demonstrate our value to our clients through the services and products provided by our network of risk management consultants and their ability to utilize the various platforms available to them. This in turn facilitates the development of long-term partnerships with our clientele in managing their commodity risks.

Finally, the initiatives that have been implemented over the past several years in renewable energy, international effort, food service, livestock, forest products, foreign exchange, and the energy markets are beginning to hit their stride and have allowed us to offer expanded product services and instruments to both our current and new clientele.

We believe this is clearly reflected in our sales, profit, and volume growth. Despite a challenging economy for many companies, we believe we are a unique due to the fact that FCStone is positioned for long-term success and to increase shareholder value.

Now I would like to turn the call over to Bill Dunaway, our CFO, for a detailed financial review.

William J. Dunaway

As Steve mentioned, we are pleased to report continued growth across our core operating segments during the fiscal fourth quarter, as revenues, net of the cost of commodities sold, reached $88.3 million. Compared to the prior-year period of $75.8 million, the fourth quarter revenues increased 16.5%.

Our pre-tax income from continuing operations is $15.5 million for the quarter compared to $19.2 million for the same period last year. Our net income, which includes the loss from discontinued operations, was $7.3 million for the fourth quarter this year, compared to $11.9 million for the prior-year period.

I would like to now take a few minutes to talk to the main components of the quarter’s results, starting with the $12.5 million increase in revenues.

First, commission and clearing fees were up more than $2.9 million, or 6.8%, with approximately $2.3 million of this increase coming from exchange trade and the other $600,000 of this increase coming from our Forex commissions.

Next, our service, consulting, and brokerage fees, which are primarily our OTC product brokerage fees, were up about $10.4 million for the quarter over last year, which is nearly 56% more than last year’s fourth quarter. Again, the bulk of this increase for the quarter came from our renewable fuels, energy and Brazilian operations.

Interest income was nearly in line with the same period last year, down approximately $1.0 million. By higher customer margin balances interest rates were significantly lower than last year.

Our total balance sheet assets were $2.42 billion as of August 31, 2008, whereas at August 31, 2007, they were $1.4 billion.

As we look at total expenses, our expenses, net of the cost of commodities sold, increased approximately $16.4 million for the quarter over the same period last year.

Upon a closer examination of the expenses, revenue- and volume-related variable expenses of broker commissions and compensation, as well as benefits, pit brokerage and clearing fees, accounted for approximately $15.7 million of the increased expenses, which included the $1.5 million charge for freezing our defined benefit pension plan and the $2.8 million of previously unrecognized clearing fees. This increase was offset by lower introducing broker expenses of $2.4 million.

Taking a look at the performance within the two main business segments, our Commodity and Risk Management full-service segment generated operating income of $13.3 million compared to $19.1 million last year. Benefits seen with increased OTC revenues were offset by $2.1 million in lower interest revenue from this segment. Exchange-related commission and clearing also went down by around $600,000.

The prior-year quarter also included the $4.2 million gain on CME and Chicago Board of Trade stock sales and dividends.

The CRM segment experienced an 22.7% increase in exchange-traded volume and 37.2% increase in the OTC transactions when compared to the prior-year period.

Our Clearing and Execution segment had operating income of $5.1 million compared to a $1.2 million loss in the prior-year period. The segment had a 12.2% increase in commissions and clearing fee revenues and higher interest income of about $1.4 million.

The prior-year period included the loss of $5.6 million on investments managed by Sentinel Management. This segment experienced a 64.3% increase in volume growth over the prior-year period.

Reviewing our balance sheet, our total assets are $2.3 billion as of August 31, 2008, up from $1.42 billion as of August 31, 2007. This $960.0 million increase was primarily due to approximately $727.0 million in additional customer segregated funds and $222.0 million from additional over-the-counter customer-related margins and open positions.

The primary reason driving these increases was the continue commodity volatility and the resulting increased trading volume of our customers, especially in the renewal fuels, energy and Brazilian areas.

Moving on to a few special items of note. In the fourth quarter we decided to freeze our defined benefit pension plan effective September 1, 2008, and incurred a $1.5 million expense related to this decision. This decision, however, will result in a benefits savings of approximately $1.5 million in the upcoming fiscal year 2009.

In addition, during the fourth quarter we recognized a charge of $2.8 million in previously unrecognized clearing fees, as discussed earlier in the CRM segment. This charge related to an incorrect amount being set up as a pre-paid clearing fee related to clients who were charged commissions and fees on a round-turn basis.

Finally, our effective tax rate for the fourth quarter of 2008 was 47.5% as a result of an increase in our state tax provisions. Our year-end tax provisions were increased after reviewing the state tax apportionment factors in our 2007 tax return, which was filed at the end of June. This resulted in an increased state income tax, which increased our effective income tax by about 2% for the entire fiscal 2008.

Now I would just like to walk through a comparison of year-over-year fourth quarter net income from continuing operations, in light of the items I just discussed.

We reported today $8.1 million in net income from continuing operations for our fiscal fourth quarter 2008. Adjusted for the after-tax effect of the punching charge of $800,000, $1.5 million related to clearing fees, and an increase in income tax expense of $1.25 million, our adjusted net income from continuing operations is approximately $11.9 million as compared to $11.1 million in the prior-year quarter after adjusting for stock sales and the Sentinel Management charge.

One additional item I would like to discuss is the sale of our excess CME stock in our current fiscal quarter. The merger of the CME and NYMEX resulted in us holding more shares of CME stock than is required for clearing membership. We sold our excess shares in the current quarter, which resulted in cash proceeds of $9.0 million and a realized gain on the sale of the stock of $6.4 million.

Finally I might add, with this fourth quarter performance, our fiscal 2008 revenues, net of the cost of commodities sold, was $336.4 million compared to $257.7 million in the prior year, which represents an increase of 30.5%.

In addition, our fiscal 2008 net income from continuing operations was $47.4 million, or $1.64 per share, compared to $33.6 million, or $1.34 per share, in the prior year.

I think it is apparent that operationally we had another strong quarter and fiscal year. We remain excited about the core growth of our company as we move forward.

With that I would like to turn it back over to Pete for some concluding remarks.

Paul G. Anderson

Before we move into the Q&A portion of the call, I would like to leave you with some closing comments and thoughts. There is no doubt that 2008 was a challenging year, both on company-specific level as well as for the financial services sector in the broader economy.

While we have certainly taken our lumps this year, I don’t want our shareholders, employees, or customers to lose sight of the fact that we are in a stronger and more competitive position than many public financial services companies, due to the fact that our underlying core business remains stronger than it has ever been.

We just reported a record year in which we grew the business more than 30%.

We believe the continued execution of our strategy will demonstrate to both our current and prospective investors that our value proposition remains fully intact. Reinforcing that fact is the pipeline for new business that remains better than it has ever been. The volatility in each of our markets continues to generate record volumes, record equity and regulatory capital levels as well as access to credit lines.

This puts us in a position of strength financially, not only to navigate this unique environment but also to be well positioned to capitalize on the eventual economic rebound. Despite the issues we have dealt with in the past year, I am confident we will continue to grow the business and achieve our strategic initiatives, positioning FCStone for long-term success and increased shareholder value.

With that we will turn it over for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Richard Repetto - Sandler O'Neill & Partners.

Richard Repetto - Sandler O'Neill & Partners

The first question is an update on the bad debt. Any new developments there in working off the position or the collection efforts with the IB?

Paul G. Anderson

We are basically in the same position as we were a week ago. We continue to work out of the position and settle it off and that is still where we are.

Richard Repetto - Sandler O'Neill & Partners

Solid results on the revenue line, and we are 80% through the current quarter. Could you give us some color? Volumes are down and the outlook you were painting was positive but there was a little bit of mix when you talked about the tight credit. So if you can give us any color how the business is running through 80% of the quarter here.

Paul G. Anderson

As I said, we saw a decline in open interest through the fourth quarter and we continue to see that through the first quarter this fiscal year. And I think as far as earnings and revenue, over this quarter, really even the first two quarters of this fiscal year, are going to be in line with probably a year ago as far as volumes and expectations. And a lot of that due to a tightness in credit, not only here domestically but really around the world.

And then once we see liquidity come back into the credit markets and more stability, then we believe over the last two quarters of our fiscal year we will see volumes really ramp up again.

Richard Repetto - Sandler O'Neill & Partners

Just trying to get a feel for the tangible book bill. And you said something about $2.8 million of clearing fees that weren’t previously recognized. I’m not sure whether I heard that properly.

William J. Dunaway

We’ve got roughly $7.0 million worth of intangible and good will on the balance sheet, if that gets to the question you are asking about.

Richard Repetto - Sandler O'Neill & Partners

That helps. And this other $2.8 million?

William J. Dunaway

It was a $2.8 million correction of an accounting error related to setting up pre-paid clearing fees for our clients that spanned the last couple of years. It relates to clients we charge on a round-turn basis so they’re not charged until they close out their position. So when the clearing fees come in from the exchange you set up a pre-paid because you are not collecting from the client until you realize the close out and it was just an error in the calculation we ended up catching here in the fourth quarter and wrote that down to $2.8 million.

Richard Repetto - Sandler O'Neill & Partners

The error has been corrected so it shouldn’t be in the run rate going forward.

William J. Dunaway

Correct. If you take the $2.8 million of where the clearing fees are now, it’s more reflective of what the run rate is going forward.


Your next question comes from Niamh Alexander - Keefe, Bruyette & Woods.

Niamh Alexander - Keefe, Bruyette & Woods

In your prepared remarks, you feel like you will get back to growth after a couple of quarters, just given where the industry and the challenging market environment we are in, but still you’re freezing your benefits and your pensions. Are you concerned about cash? Are you concerned about some other elements of growth? What’s behind that?

Paul G. Anderson

From a cash perspective we are trying to be prudent and conservative as far as basically maintaining the capital that we have. And really, the pension decision was just the exposure of the funding going forward. And we recognized that the risk associated with that was pretty substantial. As we froze our pension plan we wanted to also increase our benefits from a contributory standpoint for our employees, and we have done that to some degree. But it was really a matter of looking at the risks associated with maintaining the pension going forward.

As far as the first two quarters this year, to some degree we have seen with the deflation or deleveraging of commodities, on the consumption side people are really looking for a bottom in the market before they really step back in, to cover the consumption side. And we’ve seen significantly higher prices than the market currently is on the ag side and so a lot of this year’s production, to some extent, has been sold at higher levels, and now we’re looking at significantly lower levels and to I think some of that additional liquidity in the marketers basically selling grain going forward, is going to be spread out throughout the year.

But right now I think the producer, from a farmer perspective, has a substantial amount of cash and liquidity in his pocket and is not necessarily looking to sell in the immediate future.

Niamh Alexander - Keefe, Bruyette & Woods

Just given the pull back in the stop prices, are they just thinking they don’t want to lock in prices at these levels or is their less need for the risk management function or the hedging function right now?

Paul G. Anderson

To a large extent, when you see a decline in market stability or the market flattens out, it really comes down to our customer base, whether it’s commercial elevator network or on the consumption side, really hedges and maintains the positions based on the supply and demand, or really the supply that comes through the market.

And last year was a record crop as far as corn production. This year it’s really about the second-largest crop we have seen in corn, roughly around 12.0 billion bushel. And that crop is basically coming through the country elevator network today and at some point will be merchandised and/or sold through that network.

And like I said, the difference right now is there has been a substantial amount and infusion of cash from a producer’s perspective and so I think they will stand on the sidelines and see what the market does for some period of time.

Niamh Alexander - Keefe, Bruyette & Woods

Does it still pay them to actually produce a product at these prices?

Paul G. Anderson

It does at this level. I think a lot of the input costs also ran up with the price in the grain complex and a lot of those inputs have really devalued or come down significantly in fertilizer prices, seed, across the board. So to some extent the input costs follow, basically, the production value of that grain.

Niamh Alexander - Keefe, Bruyette & Woods

And just on Agora-X, can you give us an update on where are and are you getting close to finalizing your caring? And with the regulators, where you are there and should we expect a roll out?

Paul G. Anderson

As far as the energy side of the business, from a regulatory perspective, that’s done. We are talking to the CFTC about the ag side of the business and hope to have some answer there, as far as moving from bilateral transactions to basically a matching engine. From a testing standpoint, basically the platform is, for all practical purposes, ready to be rolled out. We are in the process of bringing various front ends to the platform and we are currently testing that with our own book of business today.

And our hope is by the end of the calendar year to have those front ends in place and move forward.

Niamh Alexander - Keefe, Bruyette & Woods

But on the caring side of it, will it be essentially cared and who is the carer?

Paul G. Anderson

We are still in the process of negotiating that. We have talked to the NYMEX. I think we have come to an agreement, to a large extent, with them. We continue to talk to CME as the two exchanges consolidate and we anticipate that that will be done.


Your next question comes from Michael Vinciquerra - BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets

You have touched on this a little, talking about the drop in overall commodity prices, but can you actually just give us the pros and cons of the steep drop in commodity prices to your business? Obviously some of your clients benefit from requiring lower margin but also from your perspective the lower margin is going to mean lower interest-earning balances. Can you kind of balance it out and tell me how that affects your overall outlook?

Paul G. Anderson

We saw a lot of volatility as the market escalated and we have seen a lot of volatility as the markets come down and so from a margining requirement, that hasn’t changed dramatically. What it has done though, to a large extent, as I said earlier, when you are a producer of a commodity, whether it’s ag or energy, and you have been selling at record levels, and all of a sudden it’s cut by 50%, your desire to continue to liquidate or sell your production, it’s just not as great. You have seen those higher prices and the expectation is to get something more in those terms.

The other issue, from a consumption standpoint, basically the consumption side, whether you are in renewable fuels or you are a processer or a manufacturer, whatever your consumptions needs are, you also saw record prices and now those prices have come down significantly. And really, everybody is looking for basically a bottom, or what we think is a bottom, whether you’re buying corn or diesel fuel or natural gas, whatever your consumption need might be.

And then I think once we see that bottom then you will see a lot of the consumption side come into the market, as well as on a seasonal basis, when producers need cash, whether it’s you’re producing crude or corn, at some point you continue to need to move forward with your process whether it’s inputs for spring planting or taxes or whatever those issues might be, that’s when they will come back into the market.

Michael Vinciquerra - BMO Capital Markets

So as your clients put on new positions, with commodities at much lower levels, does that indicate that you’re going to have lower margin on those contracts, simply because of the prices and therefore your segment assets might be expected to show some pressure this quarter?

Paul G. Anderson

I think from an open interest standpoint, open interest has come down substantially, and I think you’ve just got sheer number of volumes, or sheer number of contracts are open interest, but at some point that will reflect in the segment assets.

Michael Vinciquerra - BMO Capital Markets

But you’re saying it’s the volume, not the value of the assets that really pushes the segment asset number around?

Paul G. Anderson


Michael Vinciquerra - BMO Capital Markets

As far as the tax rate goes, what are we thinking about for an ongoing tax rate? I’m not sure I quite understand the 11% delta. It goes from 37% to essentially 47% to 48% this quarter, on a sequential basis. Can you talk through that?

William J. Dunaway

On a go-forward basis it’s going to be around that 39.5%. If you look at it for a full year, the effective rate was about 39.5% and that’s what it will be, approximately that, on a go-forward basis.

The first three quarters are obviously at a lower rate and so really to capture that 2% additional effective tax we did in our calculations after filing the return and reviewing the state tax apportionment in the fourth quarter, we had to book some additional expense there. But on a go-forward basis that run rate is just going to be a little bit higher there, around 2%.


Your next question comes from Christopher Allen - Banc Of America Securities.

Christopher Allen - Banc Of America Securities

In terms of the pension charge, was that in the employee comp line or the employee benefit line?

William J. Dunaway

That would be in the employee benefit line.

Christopher Allen - Banc Of America Securities

And just looking at the employee comp as a percentage of revenues after interest income, they jumped up about 25%. What drove that? That’s about the highest level we’ve seen over the last two years.

William J. Dunaway

You’re looking at it from a percentage of commission clearing fees and service and brokerage?

Christopher Allen - Banc Of America Securities


William J. Dunaway

It’s marginally higher than where we were May 31. I’m showing about 24% there. We talked on the third quarter call that we had brought on a group of Forex salesmen and there was some increased pay outs to them related to getting them to come over to us. We had about $800,000 of that that continued on into the fiscal fourth quarter. On a go-forward basis that won’t be there. They have reached their target and going forward they will be much more in line, around 20% of the revenues. So that will look a little more normalized on a go-forward run rate.

And once again, much like in the third quarter, in the fourth quarter we had four quarters of de-acquisitions that we did towards the end of the second quarter, so you are picking up the added salaries and some of the broker comp from the new acquisitions that we made, as well. And just general adding staff factors into that as well, as we continue to expand our credit and oversight and compliance staff.

Christopher Allen - Banc Of America Securities

Adjusting for the Forex, going forward, after you adjust for that it will probably come down from this quarter but remain elevated relative to prior quarters?

William J. Dunaway

Yes, I think so, a little bit. But ultimately the long-term growth plan for the acquisitions that we made is really to get them to do more of the over-the-counter business. They’ve been trying to focus on consultant business and exchange traded stuff. So ultimately we would like to grow their business through the use of over-the-counter products, which we think are real applicable to the industries they’re in. So that should help that percentage as well.

Christopher Allen - Banc Of America Securities

And turning to the Clearing and Execution business, the exchange rate of volumes there declined pretty meaningfully on a sequential basis, down 20%, but the RPCs seemed to pop up to about $1.50 per contract. Did you see lower contribution levels from higher-frequency customers? Did you lose any customers? What happened to explain the differentials there?

William J. Dunaway

We didn’t lose any customers, per se. if you remember back to the fourth quarter of last fiscal year, we talked about the real pops that we had in the Clearing and Execution side from an execution standpoint, number of contracts.

We brought on that group of customers that were electronic traders, lot of volume, very low margin business. With the commodity volatility that you have seen in the markets, some of their business, they are trading a little less volume. So virtually that entire drop is going to be really coming from that high-volume, low margin business.

So as you saw some of the volatility there, some of that business trailed off, which in doing so, the volume is going to drop but it is going to increase our rate per contract on that side because, once again, it’s a very low margin business.


Your next question comes from Mark Lane - William Blair & Company.

Mark Lane - William Blair & Company

Could you be more specific on what you are seeing in the current quarter business trends? You had suggested that the first half could be flattish relative to the first half of last year, but at the same time you said that segregated assets really hadn’t dropped much but your segregated asset levels at the end of the year are roughly 40% higher than they were at the beginning of the year. So to get sort of flattish revenue in the first half, I don’t understand how you couldn’t have a drop in segregated assets. Can you be more specific in exactly what you are seeing, maybe where your segregated assets have actually gone for the first two months of the quarter?

William J. Dunaway

As you saw, they had come off a little bit with the September number we filed and I think that what Pete was alluding to was he was talking that we thought some of those levels were going to be kind of in line with where we were at the beginning of last year. You know, we basically ended up the fourth quarter of 2007 a little under $1.0 billion in segment assets. And I don’t know that we will get back down to those levels, but I think as the open position continues to come down while we wait to get that new year’s crop that Pete talked about, as people build positions, I think you’re going to see that come down for a little bit here and then later on in the year the headwinds are apt to pick back up.

Paul G. Anderson

We don’t anticipate that they will go to the levels that we saw a year ago, but they have kind of stabilized toward the end of the fiscal year’s level but by the same token, we’re not seeing a lot of the liquidity or a lot sales or a lot of grain coming into the market, just because of substantially more value in the grain that’s already been sold.

Mark Lane - William Blair & Company

What is the plan for the expansion, or the management of the size of the consulting group for this year?

Paul G. Anderson

We’re going to continue to try and ramp up, especially where we really see significant demand. Brazil continues to grow and we have really just scratched the surface there. Food service is really starting to ramp up and there is as much demand there as we have seen in quite some time.

Where we are going to really look to develop, either through trainees or hires out of industry, are those segments that really have a lot of demand. Energy is another area, especially with the volatility we have seen in natural gas and liquid fuels, has a lot of demand today, across the board.

And so it’s really going to be targeted towards those industries that are really looking for the consulting expertise and experience that our consultants can bring to the table.

Last year we had hoped that we would get up to an additional 20. I would still like to see that level but it’s going to be based on a combination of potential acquisitions, and the right commodities in the right regions as far as trainees and try and ramp it up where it is most efficient.

Mark Lane - William Blair & Company

You mentioned that the Latin American revenue was up 120% year-over-year. Could you give us a total revenue number for that region for fiscal 2008?

William J. Dunaway

I don’t know that we will get into the exact dollar revenues. I don’t think it’s much more than 10% to 15% of total revenues coming out of our Latin America and Brazil operation.


Your next question is a follow-up from Niamh Alexander - Keefe, Bruyette & Woods.

Niamh Alexander - Keefe, Bruyette & Woods

With regards to the election recently, how do you think that positions your [inaudible], specifically with regards to regard to renewable energy and the focus on renewable energy, because that’s been a whole kind of emerging base for you, how do you feel about that going into the new year?

Paul G. Anderson

I think there has been a commitment from the new administration coming into Washington with renewable fuels and really I think renewable energy across the board. And so I think from that perspective I think it will help in that industry and a commitment there to try and enhance as many opportunities and alternatives as there are in energy. And renewable fuels in particular.

So I think if anything, that will benefit the organization going forward.

Niamh Alexander - Keefe, Bruyette & Woods

And then the pull back in the corn prices should be good for that business, too, as well, right?

Paul G. Anderson

It’s really a matter of the value between corn and the input of corn, natural gas, and energy. So the decline in corn has helped but we have also seen a substantial decline in basically liquid fuels or gasoline prices as well. So it’s really a matter of managing that processing margin between your inputs and output and it’s really almost by organization. It depends on how much debt each specific organization has as far as long-term debt and their specific organization and situation from a balance sheet perspective.


This does conclude the Q&A session for today.

Paul G. Anderson

I would like to thank everyone for joining on the call today and your interest in FCStone. I would also like to reiterate that we remain committed to executing on our strategic initiatives and ensuring the long-term success of FCStone. We look forward to speaking to everyone again on our first quarter call in January.


This concludes today’s conference call. If you would like to listen to a replay of today’s conference please dial 800-405-2236 or 303-590-3000 with the pass code 11122158.

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