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Executives

Bill Dunaway – CFO

Pete Anderson – President, CEO

Analysts

Mike Vinciquerra – BMOCapital Markets

Chris Allen – Banc of AmericaSecurities

Rich Repetto – Sandler O’Neill & Partners

Mark Lane– William Blair & Company

James Rhee – Keefe, Bruyette & Woods

Rob [Walgemass] – Insight Investments

FCStone Group, Inc. (FCSX) F1Q08 Earnings Call Transcript January 14, 2008 11:00 AM ET

Operator

Good morning ladies and gentlemen, thank you for standingby. Welcome to theFCStone Group 2008 first quarter earnings conference call. (Operator Instructions) I would now like toturn the conferenceover to Bill Dunaway, Chief Financial Officer, please go ahead sir.

Bill Dunaway

Great, thank you and good morning, everyone. I’d like to welcome you to FCStone’s fiscalfirst quarter 2008 earnings conference call. Shortly before themarket opened today, FCStone issued apress release reporting its earnings for thefiscal first quarter 2008. Thepress release is available on our website atwww.fcstone.com, additionally we areconducting a livewebcast of this call, which will also beavailable on our website after thecall is concluded.

During today’s call, Pete Anderson, our President and CEOwill first provide anoverview of our results and commentary on our business. I will then provide details on our financialperformance for thefirst quarter. Pete will then concludeour presentation with some closing remarks before we open thecall up for some Q&A. Please notethat today’s conference call is copyrighted material of FCStone and cannot berebroadcast without thecompany’s express written consent.

I’d also like to remind you that during thecourse of this call, management will make projections or other forward lookingremarks regarding future events of thefuture financial performance of thecompany. We have based these forwardlooking statements largely on our current expectations and projections aboutfuture events and financial trends that we believe may affect our financialcondition, results of operations, business strategy and financial need. It’s important to note that such statementsabout FCStone’s estimated or anticipated future results, prospects or othernon-historical facts or forward looking statements can reflect FCStone’scurrent perspective of theexisting trends and information as of today’s date. FCStone disclaims any intent or obligation toupdate these forward looking statements, except as expressly required bylaw.

Actual results can beaffected by inaccurate assumptions, including therisks, uncertainties and assumptions described inthe company’s filingswith the Securitiesand ExchangeCommission. Inlight of these risks, uncertainties and assumptions, theforward looking statements inthis earnings call may not occur and actual results could differ materiallyfrom those anticipated or implied inthe forward lookingstatements. When you consider theseforward looking statements, you should keep inmind these riskfactors and other cautionary statements during this earnings call. I’d now like to turn thecall over to Pete Anderson, our President and CEO.

Pete Anderson

Thank you Bill. Iwant to welcome everyone and thank you for joining our call this morning. I’m happy to berepresenting FCStone for its fiscal 2008 first quarter results conference callwhich represents thebeginning of our first full fiscal year as apublic company and as you can seefrom this morning’s release, our first quarter continued to show strong revenueand earnings growth. This growthcontinues to be drivenby our focus on our corebusiness segments of commodity risk management, services and theclearing and execution segment for exchangebased as well as OTC derivative instruments.

Revenue for thefirst quarter fiscal 2008 is $75.5 million which is up 29% from $57.3 million inthe first quarter offiscal 2007. Net income for thefirst quarter of fiscal 2008 is $13.1 million or $0.45 perdiluted share which represents asignificant increase over first quarter fiscal 2007 net income of $6.3 millionor $0.29 per dilutedshare.

Thegrowth and success with thecore initiatives andbusiness segments starts with theagricultural and energy markets inboth their production and consumption of various commodities. Our coreof grain production and consumption clientele areexperiencing 40 year highs with unprecedented volatility inall of thecommodities they deal in. This is beingdriven primarily by themandated demand for both corn and soybeans inthe renewable fuelsindustry.

Thedemand generated by thegrowth and expansion of therenewable energy industry hasresulted in thelargest increase and largest crop of corn production inUS history atan estimated 3 billionplus bushels. This record supply of cornis also being met withrecord demand from not only therenewable energy industry but also worldwide demand and consumption. Specifically this past year theindustry experienced anunprecedented shift inacreage from soybeans and cotton to corn. This extraordinary competition for acreage production is driving theextreme volatility that theentire grain complex is experiencing and that FCStone benefits from withincreased volume.

In theenergy complex, thecrude markets just established new record highs with unprecedented premiums forpolitical risk. Renewable energydivision has added anumber of new clients inethanol as theindustry continues to expand and consolidate, while bio-diesel is one of thefastest growing business segments inthe company. Driven by this increased volatility inthe strategic marketsand segments that FCStone hastargeted, we anticipate continued growth and demand for therisk managements services, products and platforms that thecompany provides.

Thecompany’s presence internationally also continues to expand, especially inBrazil, where thefocus is on thecompany’s corecompetency of commercial grain production and handling. Other commodities and industries thatrepresent significant growth inBrazil includesugar, ethanol, coffee, foreign exchangeand consulting. Furthermore, theChina divisioncontinues to add clientele incommercial grain processing and handling, metals, energy, cotton and FX.

Three of thefutures commissions merchants or FCMs approved to trade directly on exchangesoutside of Chinaopened accounts that clear through FCStone during thequarter. As theUnited Statesmarket and domestic demand for grain increases, we expect Brazilto see continuedexpansion in grainproduction and Chinarepresenting theconsumption side of worldwide demand.

FCStone’s growth initiatives continue to beimplements and accelerated with theadded financial capacity thecompany now has as aresult of last year’s successful IPO. This expansion includes our traditional forward businesses of agricultureand energy as well as renewable energy, international markets, food service,weather, livestock, forest products, carbon credits and foreign exchange. Spearheading this growth areFCStone’s risk management consultants which aretruly the foundationupon which much of our success is built. These consultants areresponsible for developing customer relationships, analyzing thecommodity risks of our customers, developing strategies to mitigate this riskand executing these strategies atthe direction of thecustomers.

Furthering our growth avenues, we continue to reassess anddevelop our training program to address new and developing products inindustries that have growth potential. Infiscal 2007, theconsultant network increased by 16 to 118 and our goal for fiscal 2008 is toadd an additional 20consultants to thevarious market segments and geographic regions of FCStone.

Inaddition to achieving organic growth through current and developing clienteleand new consultant capacity, FCStone is also looking to growthrough theacquisition of organizations that have similar philosophies inmanaged risk and servicing their customer base. The recentacquisition of Downes-O’Neill [unintelligible] premier risk managements firm inthe dairy industry is aprime example of thetype of organization that FCStone is interested inpartnering with and consolidating to offer thevarious platforms, instruments and services that we can provide. This acquisition demonstrates our commitmentto strengthening our presence and service offering inthe dairy and foodservice industry while significantly ramping up thecompany’s expertise and experience and capacity inthis area.

This acquisition will add five new consultants to theFCStone network. FCStone will continueto have discussions regarding potential acquisitions with firms that havesimilar interests and philosophies inservicing clientele and we will continue to remain disciplined regarding theprice that we’d bewilling to pay and thereturn we would need to seefrom such opportunities. Thecompany focus and interest regarding strategic acquisitions is inall of thevarious commodities and industries we serve both domestically andinternationally.

Moving on to other areas that would beof interest to our shareholders, I’d like to discuss theconsummation of anagreement with OMX andAgora-X. OMXis a leading expert inthe exchangeindustry and hassigned an agreementwith Agora-X to provide acomplete hardware, software and operations solution to support its new ECMplatform scheduled for launch inmid-2008. Agora-X is aDelaware Limited Liability Company based inKansas City founded by FCStoneGroup Inc., thecompany was formed to develop anelectronic communications network or ECM for over thecounter or OTC commodity contracts designed to help eligible institutionalparticipants achieve astrategic advantage inthe rapidly growingOTC commodities market.

While designed for arange of contract types, theECM will initially target OTC option lookalikes inspecific energy and agricultural commodities as well as allcommodities swaps. Thecurrent OTC market is inefficient as anall-around market and we feel there is asignificant opportunity to build through Agora-X, amore efficient platform for FCStone and other market participants. By doing so, we areable to bring the bestmarkets and prices to our customers. We areexciting about theopportunities this agreement could present for FCStone and our clients.

Moving on to thecarbon space, FCStone is helping its customers and client base mitigateenvironmental risk. FCStone carbon aimsto create, represent and market technologies that improve efficiencies inthe renewable energysector as well as other industries. FCStone is offering to therenewable energy industry not only acarbon marketing platform, but also asuite of technologies and services that will help them find apathway to being alower cost producerand a lowemitter. FCStone hasbeen integrative inlinking those technologies to reduce costs and risk to thecreation of green house gasemission credits or environmental emissions credits. FCStone carbon continues to developaggregation agreements to develop technology and perfect thecredit carbon inventory that ithas acquired. While thecompany recently cancelled its first carbon credit transaction as aresult of some terms over thecounter party’s credit risk, we have several promising prospects inthe pipeline for thisservice.

Thegreen diesel bio-diesel plant is going through anequipment upgrade to increase production to thedesign capacity as aresult of thenecessity to upgrade thefacility with the mostcurrent and advanced technology, we have assumed amajority interest in thefacility by way of anadditional loan. This upgrade should becompleted by the endof the first half ofcalendar 2008.

One last area of importance for FCStone is interestrates. Interest rates, which continue tosoften, but that weakness ininterest income should beoffset somewhat by thegrowth in customerfunds, investment inalternative instruments and continued direct hedging of interest rates.

As I’ve said before, many of theinitiatives that thecompany implemented over theprevious six to sevenyears are just hittingtheir stride. Inparticular, theinternational effort is experiencing thefastest growth in thecompany, while therenewable energy group manages alarge segment of theindependent producers inthe ethanol andbio-diesel industry. Our clearing andexecution business also continues to benefit from theconsolidation of theindustry. Inthe other targetedareas it is aprocess of education and customer development. We see thateducation process accelerating inthe dairy and foodservice, weather, fuel surcharge, carbon credits and foreign exchange.

Inconclusion, we arepleased with thesuccess we achieved inthe first quarter andbelieve that themarket conditions which currently exist will continue to present us withopportunities to expand our business. Furthermore, we believe that thetraditional commitment to our clients best interest, thestrength of theFCStone consultant’s experience and expertise and alternative platforms tomanage our client’s risk will continue to drive growth and development ofFCStone over the longterm.

With that I would like to turn thecall over to Bill Dunaway, our CFO for afinancial review. Bill.

Bill Dunaway

Thank you Pete. AsPete mentioned, we arepleased to report astrong start to fiscal 2008 with first quarter revenues net of thecost of commoditiessold of $73.7 million, compared to theprior year of $57.3 million, thefirst quarter’s revenue increased 29%.

Our pretax income was $21 million for thequarter, compared to $10.1 million for thesame period last year. Without theseveral onetime items noted of $2.9 million, or pretax income was $18.1 millionfor the quarter,compared to $10.1 million for thesame period last year. Furthermore, ournet income was $13.1 million for thefirst quarter this year, or $11.3 without thespecial items, compared to $6.3 million last year. Again theone time items during thequarter related to thegain on the sale of theChicago Board Options ExchangeTrading Rights and again on the sale of CMEGroup [unintelligible] common stock.

Now let metake a few minutes totalk through the maincomponents of thequarter’s results, starting with the$16.4 million net revenue increase. First, commissions and clearing fees were up $6.5 million or 20% withapproximately $6.1 million of theincrease coming from exchangetrades and the other$0.4 million of this increase coming from our forex commissions and clearingfees.

Next, our service consulting and brokerage fees, which areprimarily our over thecounter product brokerage fees were up about $7.2 million for thequarter over last year or approximately 79%. The bulk ofthis increase this year was inour renewable fuels and Brazilian operations.

Our interest income was $13.4 million, up $5 million from thesame period last year, of which $4 million came from our commodity riskmanagement and clearing and execution segment with thebalance mostly from our financial services segment repurchase program. Of course most of that program’s interestincome is offset by theinterest expense of therepurchase program. Thebiggest increase in thecommodity risk management and clearing and execution segments interest wasrelated primarily to higher customer segregated funds and over thecounter margin deposits that we were carrying during thequarter.

Our total balance sheet assets were over $1.7 billion inNovember 30, 2007, whereason August 31, 2007 theywere just over $1.4 billion. Also, as weno longer consolidate our grain merchandizing business, such first quarterrevenues from that segment were $6.1 million lower than last year.

As we look attotal expenses, our expenses net of costs of commodities sold increasedapproximately $5.8 million for thequarter over the sameperiod last year. Upon acloser examination of theexpenses, revenue volume related variable expenses of broker commissions andcompensation as well as thebenefits in pitbrokerage and clearing fees and IV commission accounted for approximately $7.4million of theincreased expenses. Net of grainmerchandise related costreduction, interest expense was lower by $1 million, primarily due to thesale of part of our majority interest inour grain merchandizing segment that we now no longer consolidate. Such grain merchandizing segment had about $4million innon-interest expenses inthe prior year quarterand none in thisquarter since we no longer consolidate it. Also [unintelligible] that expense was $1.3 million lower than theprior year.

As we noted, we had two, onetime or special items inthe quarter. First we had a$2.6 million pretax gain on thesale of CME stock weowned in excess of ourrequired holdings as aresult of the ChicagoBoard of Trade, Chicago Mercantile Exchangemerger this summer. Secondly we had a$0.5 million pretax gain from thesale of the CBOEtrading rights. Theeffect of these items netted to anadditional net revenue and pretax income of $2.9 million and after-tax netincome of $1.8 million. Itis our intent to sell any significant excess exchangestock above our required amounts needed for clearing purposes.

We will next look atour two main business segments, our C&RM full service segment and ourclearing and execution segment. Thecommodity risk management full service segment generated operating income of$17.2 million or $14.3 million for thequarter before the onetime income item, compared to $7.6 million last year. This segment benefitted from significantlyhigher over thecounter revenues as noted earlier and interest income was up $2.5 millionprimarily as a resultof the much highercustomer segregated funds and over thecounter margin deposits. Commissions andclearing fees were slightly lower that appears farmer producers areholding their crops to sell after theJanuary 1, 2008 and thenew tax year. Finally you can seealso the segment’sincome margins continue to bevery favorable.

Our clearing and execution segment had operating income of$5.2 million compared to $3.6 million inthe prior year. Thesegment had a 37%increase incommissions and clearing fees revenue and also higher interest rateincome, primarily as aresult of higher seg fund balances.

Reviewing our balance sheet, our total assets are$1.7 billion at November 30, 2007, up fromapproximately $1.4 billion atAugust 31, 2007. This $329 million increase was due toapproximately $85 million inadditional customer segregated funds, $142 million from additional over thecounter customer margins and accounts, $67 million from our financial servicesrepurchase program and approximately $18 million from our consolidation ofGreen Diesel LLC after our acquisition of themajority interest inthat entity. Theprimary reason for most of these increases was thecontinued commodity volatility and theresulting increased trading volume of customers, especially inthe renewable fields,energy and Brazilareas.

Moving on to one additional item, although ittook place following theclose of the firstquarter, we announced our strategic acquisition of Downes-ONeill on December 12, 2007. Theall cash transactionclosed on December 31, 2007. As noted previously, theacquisition is expected to beaccretive immediately. As part of ourgrowth initiatives, we will continue to evaluate allopportunities to further our vision of providing thebest services to our customers across theboard in respectivecommodity markets.

With that, I’d like to turn itback over to Pete for some concluding remarks.

Pete Anderson

Thank you Bill. FCStone remains committed to its mission of improving our customer’sbottom line results by leveraging theexpertise and experience of our consultants as well as utilizing themost appropriate platform or instrument to manage commodity risk. FCStone intends to leverage theindustry dynamics and momentum that arein place to drive ourvolumes and growth of thecompany in thefuture. We believe thecompany is well positioned for longterm success and to drive shareholder value. That concludes our prepared remarks, we would now like to open up thecall to questions, operator.

Question-and-AnswerSession

Operator

Thank you sir. Wewill now begin thequestion and answer session. As areminder if you have aquestion please press thestar followed by theone on your touchtone phone. If youwould like to withdraw your question, press star followed by thetwo. If you areon a speakerphone youneed to pick up thehandset before making aselection. Our first question comes fromthe line of MikeVinciquerra from BMOCapital Markets, please go ahead.

MikeVinciquerra – BMO Capital Markets

Thank you, congratulations, good morning guys. First of all, wanted to just geta sense, there’s alot of the movingparts here obviously with allyour different clients, but inthe CES segment, howmuch of your revenue gain there quarter over quarter interms of commission and clearing fees related to these new professional tradinggroups that you guys have signed and I also presume that was themajority impact on your rateper contract inthe exchangetraded side.

BillDunaway

Yeah, Mike, that is themajority of thecontract increase that you saw quarter over quarter. We have not broken out, you know we don’tbreak out any customer data as far as segmenting inthose new customers as they come on, but, thenew business that was added was fairly high volume, lowmargin based business soit’s not going to be, it’s going to beunder $1.00 percontract that that new customer adds to thecommission growth.

MikeVinciquerra – BMO Capital Markets

Okay, thank you for that. And then just kind of staying inthe same segment, theinterest income, that’s where thegrowth in interestincome was really from CES during thequarter, I presume again itrelated to these new clients that you’ve brought on board. First that question then I’ll follow up.

BillDunaway

Some of that Mike but actually it’s kind of anacross the board, justwith the continuedincrease commodity volatility and thehigh seg fund balances, contributed more than just theaddition of that client. That client didobviously bring additional customer seg funds but itwas a little bitbroader than that.

Mike Vinciquerra– BMO Capital Markets

Okay and then just staying on interest, this is aquestion I getfrequently from your investors, I show interest income being up about 13.5%sequentially and ending client assets up about 8%, soeither the endingbalance just doesn’t give us afull dynamic of what went on inthe quarter or youactually increased your spread somehow during thequarter which kind of goes against what we’ve seen from lower short term rates,can you just talk about thedynamics of your interest income and what we might anticipate going into theFebruary quarter here?

Bill Dunaway

Well alittle bit of that ends up being kind of aproduct mix Mike. As we’ve got, you’reright in that thequarter end balances kind of doprovide you a snapshotand they can obviously befairly vulnerable during thequarter but we also saw, one thing that’s helpful, especially inthe clearing andexecution segment where we payback a little bit moreof the interest to theclients, we had inaddition to our investible funds, you know therate on those goesdown but also theinterest that we payoff to those clients haskind of dropped. So, itdoesn’t hurt us quite as badly with that aspect of thebusiness, but what you saw is we had more and more clients that we were actuallycharging some interest to based on their options positions inthe clearing andexecution segment and that actually kind of adds to thebottom line as they dosome options strategies.

MikeVinciquerra – BMO Capital Markets

Okay, that’s helpful and should we anticipate just lookingforward that your rateearned is going to come down abit and if you continue to growbalances, hopefully that offsets thedecline from rates, you will beaffected by lower rates I guess is thepoint?

Bill Dunaway

Yeah I mean we will beaffected by lower rates, we’ve done some things to try to mitigate that, as Petementioned in his callthere, the portion ofour interest rateexposure that we have done direct hedges on, sothat should continue to benefit us going forward and also we’ve got alarge portion of theassets invested in themoney market funds that arepledged to the ChicagoMerc and theNew York Merc and theNew York Board of Trade which [unintelligible] and know that those haven’tdropped quite as precipitously as the90 day treasury, which we’re often pegged to. Yeah we obviously areaffected by the lowerrates but we anticipate with thevolatile commodity markets, we’ll continue to seegrowth in our segfunds with the highervolatility, higher margin deposits.

MikeVinciquerra – BMO Capital Markets

Great, okay, thanks Bill, thanks Pete.

Operator

Thank you our next question comes from theline of Chris Allen with Banc of America Securities, please go ahead.

Chris Allen– Banc of America Securities

Hey guys, how you doing, nice quarter. Following up on Mike’s question, inthe past you’ve talkedabout the 90 daytreasury as a goodbenchmark in terms ofwhat to think about and theaverage end of day treasury was down about 100 bips sequentially quarter to quarterand you look at youraverage balance in thecustomer segregated assets you report to theCFC, the numbers thatI’m calculating you know the50 bip increase in theyield, I mean just some options related transactions, seems to bea lot more than thatto me. Can you give us any additionalcolor there?

Bill Dunaway

Well I mean alittle bit of it Chrisis right now you dohave such a disconnectwith the 90 daytreasury, it’s trading atsuch a spread tip toLIBOR or even some of theother funds that traditionally you’re correct, the90 day treasury hasalways kind of been thebenchmark that we’ve used but right now because of that disconnect I mean we’renot going out and buying alot of direct 90 day treasuries, itdoesn’t benefit you to, so, you know theother benefit that hasreally helped us is theinterest rate hedgingthat we have done, sothat continues to benefit us, as I mentioned themoney market funds that arepaying us asubstantial spread to, the90 day treasure, sothat kind of helps.

Pete Anderson

And [Ben], part of theissue Chris is there is asubstantial amount of assets or funds that come through theOTC platform as well that’s increased and that doesn’t necessarily show up asseg funds on an exchangebasis.

Chris Allen – Banc ofAmerica Securities

And then just moving to theexpense side, I mean for methe biggest surprisewas introducing broker commissions, I mean we saw adecline in commissionlevels so it[unintelligible] solowest level of introducing broker commissions we’ve seen since fourth quarter’06, curious there.

Pete Anderson

Yeah, themajority of that, probably two-thirds of that drop itwas related to our forex business. Youknow the fourthquarter we had a verystrong forex commission business and with that there areintroducing broker payments that went out soif you kind of combine theslightly lower volumes than we had on theexchange with thesignificantly lower forex business fourth quarter to first quarter, thatexplains virtually allthe drop that we had inintroducing broker commissions.

Chris Allen – Banc ofAmerica Securities

Gotcha, okay and then just looking forward, Pete you hadalluded to it alittle bit in terms ofwhere volumes, I mean where theactivity seems to begoing, we’re seeing fairly bigvolume pickups on theagricultural side right now, is there any reason to think [unintelligible] kindof participated inthat and also what’s kind of theoutlook in terms ofBrazil and China interms of contribution, not looking for any specific numbers just kind of ageneral feel.

Pete Anderson

I think as we’ve talked before Mike you know if you look atjust the underlyingsupply and demand numbers we went from a10 billion bushel corn crop last year to 13 billion bushel corn crop. Atsome point a significantpart of that volume or that increase involume will hit our books from aproduction standpoint as well as theconsumption went from basically I think total units went from about alittle over 11 billion bushel to almost 13 billion bushel this year and asignificant part of that consumption will also hit our books and heredomestically so ourvolume should reflect that over thenext nine months of thecrop cycle.

And then Brazil continues to really pick up some of theslack and lack of production, especially as we go forward and really themarkets in generalcompeting for acres both here and on aworldwide basis and alot of that new production atleast in soybeans andeven to some degree we’re starting to seea bit of anincrease in corn cropsBrazil and Latin America, that will pickup and really continue to accelerate, Ithink our pace of growth across Brazil.

And then thedemand from China is about as great as it’s ever been, so, thedomestic demand is huge as well as worldwide demand and over time I think ourvolume and growth will reflect that, driven by allthe volatility that wesee probably as muchtoday specifically today, Friday and today, as much as any time.

Chris Allen – Banc ofAmerica Securities

Great, thanks alot guys.

Operator

Thank you our next question comes from theline of Rich Repetto with Sandler O’Neill, please go ahead.

RichRepetto – Sandler O’Neill & Partners

Good morning guys, I guess first question, historically youhad broken out volumes between theCRM and then theclearing and execution atthe exchangevolume, could you give us those numbers for this quarter?

Bill Dunaway

Yeah that’ll actually bein theQ that we file latertoday. Theexchange volumes forthe first quarter inthe CRMwas 655,894 long termcontracts. Theclearing and execution was 22,620,917 and then theover the countervolume was 301,258.

RichRepetto – Sandler O’Neill & Partners

301,258, okay, that’s helpful. And I guess I know this number I purelymissed because I heard you sayit I just didn’t getit but theFX this quarter I know was $4.9 million last quarter, thefees

Bill Dunaway

Itwas actually five, yeah this quarter itwould be $1.267million Rich.

RichRepetto – Sandler O’Neill & Partners

Okay sothat introducing theexpense side for introducing broker, so, I heard you saytwo-thirds correlated to thechange inFX, is the other thirdrelated to, well where is theother third, just trying to understand theother third.

Bill Dunaway

Theother third, probably themajority of it wasjust drop in IBpayments in thecommodity risk management segment related to our exchangebusiness and also theclearing and execution theintroducing broker payments were down as well sojust kind of more tied to exchangevolume than anything, just theIB’s that we have did less than amillion.

RichRepetto – Sandler O’Neill & Partners

Okay and well I guess I would saythe increase inthe professionaltrading groups that you seeand I know that will hit therate percontract [unintelligible] but overall you saw your margins go up, is itsafe to say that, youknow because, I’m assuming it’s done directly electronically, that themargin on business like this, even though it’s alower rate is highermargin than your other business, is that ahigh margin? Incremental margin.

Bill Dunaway

Well on theclearing and execution side itdoesn’t really increase themargin related to itbecause you end up collection from theclient the commissionand the clearing feefrom the client thenyou end up seeing anexpense for that clearing fee comes through theC&L as well, so Ithink the increase, Ithink the expansion inthe margins hascome more from our over thecounter business and thecore commodity riskmanagement exchangebusiness.

RichRepetto – Sandler O’Neill & Partners

Okay then I guess thequestion is then doyou continue to growwith these professional trading groups, so, what impact on themargin would it have?

Bill Dunaway

Well you know we continue to getmore and more of those professional trade itin theclearing and execution side while itcould because thevolume is yields we just pointed out areso significantlyhigher in theclearing and execution side because it’s high volume lower margin business,that can affect theoverall margin of thecompany but as we go forward but it’s still going to beyou know we still look to add that type of business because itbrings in theincremental dollars to thebottom line, it’s still very profitable business, itjust won’t be atthe 30% margin thatyou may experience in thecommodity risk management segment.

RichRepetto – Sandler O’Neill & Partners

Okay, thanks guys, excellent quarter.

Operator

Thank you our next question comes from theline of Mark Lane withWilliam Blair & Company, please go ahead.

Mark Lane – William Blair & Company

Good morning. On theacquisition, can you give us just some idea therevenue contribution from thetransaction?

Bill Dunaway

You know it’s fairly minor, Mark, I think it’s more of akey acquisition toround out a product linethat we don’t currently service as much as we seethe need to, soit’s something that is fairly immaterial theway it stands now,it’s more of a growthstrategy in adding theadditional consultants that we did through the…

Mark Lane – William Blair & Company

Would there beany delay in executingconsulting related business from these new consultants, arethey, the deal closedon December 31, arethey executing business through you already?

Bill Dunaway

Correct, I mean we’ve brought them over their alreadyengaged in consultingtype of work and theexchange business isalready coming over. Sothere’s no delay atall.

Pete Anderson

And thereal advantage thereal opportunity Mark is plugging intheir expertise and experience inthe utilization of ourOTC platform as well as theexpertise and experience they bring to thefood service industry that we’re pursuing as well, soit’s a real winwin for both of us.

Mark Lane – William Blair & Company

And last quarter you were pretty open about being indiscussions or talking with small consulting groups, was this thefirm that you were specifically talking about or arethere other firms of this type that you’re…

Pete Anderson

Yeah this is one of thefirms that we’ve been talking to.

Mark Lane – William Blair & Company

Sothere are other firmssimilar to this that you’re still having discussions with?

Pete Anderson

Yeah.

Mark Lane – William Blair & Company

Okay and theC&RM margin was over 40% this quarter if you take out thegain, is that, I know it’s thefirst quarter and soyou know there’s some estimates on comp and that sort of stuff, but whywouldn’t that be adecent run rate ifyou’re hedging some of your interest rateexposure and mitigating some of theimpact from lower rates?

Bill Dunaway

Well you know I think you nailed iton the head, interestincome is obviously one of thethings that really brought itfrom 25% in thesame period to over 40% now and inaddition if you look, thetwo biggest increases inthat segment were theservice consulting and brokerage fees and theinterest, you know themajority of theservice consulting brokerage fee is that over thecounter that carries with itthe higher margins, sothose two pieces arereally what drove themargin expansion that you saw there.

Mark Lane – William Blair & Company

Okay and then lastly, this OMXagreement is this anything that’s meaningful or is this, what areyour expectations there?

Pete Anderson

Our real expectations Mark arenumber one just as we’ve said, thereal issue with theOTC markets is to alarge extent, it’s acall around market and I think there’s alot more efficient way for us as participants inthat market to capture thebest pricing for our customer and ultimately for FCStone and theother participants that areutilizing or dealing inthe OTC market, wethink this is theavenue that will accomplish that and our hope is that we seesignificant commitment from other participants and that volume growand if it does I thinkit will number onebenefit our client as well as you know capturing some of thevalue of our deal flowas well as the otherparticipants in thateffort.

Mark Lane – William Blair & Company

But areyou consulting with them on building this system or…

Pete Anderson

[Overlay, unintelligible] alot of time going through thedesign phase, in factwe probably spent almost sixmonths going through that process and we’ll continue to consult with them as wefinalize and develop theplatform.

Mark Lane – William Blair & Company

Could you getany ongoing revenue stream, volume based revenue stream from that?

Pete Anderson

We hope to, if there is significant participation along withthose other organizations that would participate, we’d beone of a number ofparticipants and owners going forward.

Mark Lane – William Blair & Company

Okay, thank you.

Bill Dunaway

Mark, I think that is twofold I think itwould actually begrowth from theinvestment in Agora-Xand also just providing that more efficient platform for our over thecounter customers trading inthe over thecounter, we’d look atseeing an increase involumes that way.

Mark Lane – William Blair & Company

Okay, great, thank you.

Operator

Thank you our next question comes from theline of James Rhee with KBW, please go ahead.

James Rhee – Keefe,Bruyette & Woods

Hey guys, I guess questions have pretty much been answered,but I was wondering if you guys could kind of give some idea about thesize of acquisition as far as maybe what theseg assets go for theDownes-O’Neill?

Bill Dunaway

You know, once again James, it’s minor, it’s less than 5% ofwhat we currently hold, soit’s not, it’s more of agrowth and expansion of our platform than areal sizable acquisition.

James Rhee – Keefe,Bruyette & Woods

Right, right, okay and I guess as far as theAgora-X platform goes, just switch bases here, I guess just trying to figureout, it does seem likeyou guys are usingthis platform to more or less kind of leverage, it’s something that you guys aredeveloping for your internal deal flowbut I guess how aggressively areyou guys going out there to actually kind of market this platform or atthe same time try andbuild traction, have you been speaking with other institutions to try and buildup some interest?

Pete Anderson

Yeah we’ve talked to anumber of other institutions and participants inthe OTC market andthere is significant interest, infact we’ve basically have acommitment from two or three organizations that want to beparticipants and we aregoing to really actively pursue that as we approach theconclusion thedevelopment of theplatform.

James Rhee – Keefe,Bruyette & Woods

Okay, alright thanks alot.

Operator

Thank you and our next question is afollow up question coming from theline of Mike Vinciquerra, please go ahead.

Mike Vinciquerra– BMO Capital Markets

Thank you, just one more question on Agora, have you looked atthe possibility oftaking some minority investors inthat, it seems like theECM on the equity sidefor instance have been successful, have take minority investors who reallyhelped to get to alevel of liquidity that brought additional folks inand forced people to payattention, is that something you’re considering?

Pete Anderson

Yeah, effectively that’s themodel we’re looking atand probably will beusing Mike.

MikeVinciquerra – BMO Capital Markets

Okay and then just on theinternational side, just international as awhole, can you give us potentially thepercentage of either volume or revenue coming from outside theUS during the quarter,maybe compare that to last quarter or ayear ago Bill?

Bill Dunaway

We haven’t broke that down atall Mike as far as thecontribution of those.

MikeVinciquerra – BMO Capital Markets

Okay, safe to saythough based on your comments Pete about Brazilthat international is still growing faster than theUS?

Pete Anderson

Yes.

MikeVinciquerra – BMO Capital Markets

Okay and then finally, international consultants, dedicatedconsultants to theinternational markets, where does that stand atthe end of thequarter?

Pete Anderson

I think we were still atbasically what we had termed qualified or full service consultants we’re at16 and we just added three more trainees basically within thelast week or so.

MikeVinciquerra – BMO Capital Markets

Okay, thanks again.

Operator

Thank you our next question comes from theline of Rob [Walgemass] with Insight Investments, please go ahead.

Rob [Walgemass] –Insight Investments

Hey guys, nice quarter, just had acouple quick questions for you, one is related to lower interest rates, you hadmentioned that you had some hedges inplace and some other programs to mitigate some of theeffects of lower interest rates on your interest income, can you tell us alittle bit more about those h edges and when you actually took some of thosepositions?

Pete Anderson

No I don’t think we’d want to disclose our position or whenwe put those on necessarily but you know it’s pretty typical or commonpositions of utilizing swaps and collars or really looking ina floor with acap and we’ve done that over aperiod of time.

Rob [Walgemass] –Insight Investments

And the, Bill when I spoke with your predecessor, probablyabout six months ago, heseemed a bit concernedabout lower interest rates, if that were to happen inthe future which ofcourse it hasstarted to happen and you guys don’t seem as concerned and just wondered ifthat is because of some of these hedges you guys put on or you know if there aresome other factors?

Bill Dunaway

You know we’re obviously concerned because itdoes drop to thebottom line but I mean we’ve actively managed therisk and looked atways that we could protect ourselves through different investments and thehedging aspect of it soand you know heparticipated in thoseconversations as well soit was kind of astrategy with all ofus looking at itand short term interest rates area concern but we’redoing what we need to inorder to protect ourselves.

Rob [Walgemass] –Insight Investments

And then finally is there any way to quantify theimpact of lower rates if any going forward?

Bill Dunaway

Nothing that we’ve put out there or really prepared todiscuss, like we indicated, 90 day treasury traditionally hasbeen the benchmark butyou’ve seen such adisconnect between with theflight to quality with the90 day treasury that it’s alittle more difficult to track. Whatwe’re generally looking atis kind of a blend ofovernight rates, money market funds, graded money market funds and then sometreasuries thrown inthere.

Rob [Walgemass] –Insight Investments

Okay, thank you very much.

Operator

Thank you, ladies and gentlemen if there areany additional questions atthis time please press star followed by theone at this time. As areminder if you’re on aspeakerphone you need to pick up thehandset before pressing star one. I’mshowing there’s no further question queue, I’ll turn itback over to management.

Pete Anderson

Okay, thanks everyone for joining our call today and we lookforward to talking to you atour next quarterly earnings report. Thank you operator.

Operator

Thank you, ladies and gentlemen this concludes theFCStone Group 2008 first quarter earnings conference call, if you’d like tolisten to a replay oftoday’s call please dial 303-590-3000 or 800-405-2236 enter thepasscode 11106090. Once again that is303-590-3000 or 800-405-2236 enter thepasscode 11106090. Thank you for yourparticipation for using ACCteleconferencing, you may now disconnect.

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Source: FCStone Group, Inc. F1Q08 (Qtr End 11/30/07) Earnings Call Transcript
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