Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Bill Dunaway – CFO

Pete Anderson – President, CEO

Analysts

Mike Vinciquerra – BMO Capital Markets

Chris Allen – Banc of America Securities

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 standing by. Welcome to the FCStone Group 2008 first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over 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 fiscal first quarter 2008 earnings conference call. Shortly before the market opened today, FCStone issued a press release reporting its earnings for the fiscal first quarter 2008. The press release is available on our website at www.fcstone.com, additionally we are conducting a live webcast of this call, which will also be available on our website after the call is concluded.

During today’s call, Pete Anderson, our President and CEO will first provide an overview of our results and commentary on our business. I will then provide details on our financial performance for the first quarter. Pete will then conclude our presentation with some closing remarks before we open the call 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’d also like to remind you that during the course of this call, management will make projections or other forward looking remarks regarding future events of 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 need. It’s important to note that such statements about FCStone’s estimated or anticipated future results, prospects or other non-historical facts or forward looking statements can reflect FCStone’s current perspective 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 inthe company’s filings with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward looking statements in this earnings call may not occur and actual results could differ materially from those anticipated or implied inthe forward looking statements. When you consider these forward looking statements, you should keep inmind these risk factors and other cautionary statements during this earnings call. I’d now like to turn the call over to Pete Anderson, our President and CEO.

Pete Anderson

Thank you Bill. I want to welcome everyone and thank you for joining our call this morning. I’m happy to be representing FCStone for its fiscal 2008 first quarter results conference call which represents the beginning of our first full fiscal year as a public company and as you can see from this morning’s release, our first quarter continued to show strong revenue and earnings growth. This growth continues to be driven by our focus on our core business segments of commodity risk management, services and the clearing and execution segment for exchange based as well as OTC derivative instruments.

Revenue for the first quarter fiscal 2008 is $75.5 million which is up 29% from $57.3 million inthe first quarter of fiscal 2007. Net income for the first quarter of fiscal 2008 is $13.1 million or $0.45 per diluted share which represents a significant increase over first quarter fiscal 2007 net income of $6.3 million or $0.29 per diluted share.

The growth and success with thecore initiatives and business segments starts with the agricultural and energy markets in both their production and consumption of various commodities. Our core of grain production and consumption clientele are experiencing 40 year highs with unprecedented volatility inall of the commodities they deal in. This is being driven primarily by the mandated demand for both corn and soybeans inthe renewable fuels industry.

The demand generated by the growth and expansion of the renewable energy industry has resulted in the largest increase and largest crop of corn production inUS history atan estimated 3 billion plus bushels. This record supply of corn is also being met with record demand from not only the renewable energy industry but also worldwide demand and consumption. Specifically this past year the industry experienced an unprecedented shift in acreage from soybeans and cotton to corn. This extraordinary competition for acreage production is driving the extreme volatility that the entire grain complex is experiencing and that FCStone benefits from with increased volume.

In the energy complex, the crude markets just established new record highs with unprecedented premiums for political risk. Renewable energy division has added a number of new clients in ethanol as the industry continues to expand and consolidate, while bio-diesel is one of the fastest growing business segments inthe company. Driven by this increased volatility inthe strategic markets and segments that FCStone has targeted, we anticipate continued growth and demand for the risk managements services, products and platforms that the company provides.

The company’s presence internationally also continues to expand, especially inBrazil, where the focus is on the company’s core competency of commercial grain production and handling. Other commodities and industries that represent significant growth inBrazil include sugar, ethanol, coffee, foreign exchange and consulting. Furthermore, theChina division continues to add clientele in commercial grain processing and handling, metals, energy, cotton and FX.

Three of the futures commissions merchants or FCMs approved to trade directly on exchanges outside of China opened accounts that clear through FCStone during the quarter. As theUnited States market and domestic demand for grain increases, we expect Brazil to see continued expansion in grain production and China representing the consumption side of worldwide demand.

FCStone’s growth initiatives continue to be implements and accelerated with the added financial capacity the company now has as a result of last year’s successful IPO. This expansion includes our traditional forward businesses of agriculture and energy as well as renewable energy, international markets, food service, weather, livestock, forest products, carbon credits and foreign exchange. Spearheading this growth are FCStone’s risk management consultants which are truly the foundation upon which much of our success is built. These consultants are responsible for developing customer relationships, analyzing the commodity risks of our customers, developing strategies to mitigate this risk and executing these strategies atthe direction of the customers.

Furthering our growth avenues, we continue to reassess and develop our training program to address new and developing products in industries that have growth potential. In fiscal 2007, the consultant network increased by 16 to 118 and our goal for fiscal 2008 is to add an additional 20 consultants to the various market segments and geographic regions of FCStone.

In addition to achieving organic growth through current and developing clientele and new consultant capacity, FCStone is also looking to grow through the acquisition of organizations that have similar philosophies in managed risk and servicing their customer base. The recent acquisition of Downes-O’Neill [unintelligible] premier risk managements firm inthe dairy industry is a prime example of the type of organization that FCStone is interested in partnering with and consolidating to offer the various platforms, instruments and services that we can provide. This acquisition demonstrates our commitment to strengthening our presence and service offering inthe dairy and food service industry while significantly ramping up the company’s expertise and experience and capacity in this area.

This acquisition will add five new consultants to the FCStone network. FCStone will continue to have discussions regarding potential acquisitions with firms that have similar interests and philosophies in servicing clientele and we will continue to remain disciplined regarding the price that we’d be willing to pay and the return we would need to see from such opportunities. The company focus and interest regarding strategic acquisitions is inall of the various commodities and industries we serve both domestically and internationally.

Moving on to other areas that would be of interest to our shareholders, I’d like to discuss the consummation of an agreement with OMX and Agora-X. OMX is a leading expert inthe exchange industry and has signed an agreement with Agora-X to provide a complete hardware, software and operations solution to support its new ECM platform scheduled for launch in mid-2008. Agora-X is a Delaware Limited Liability Company based inKansas City founded by FCStone Group Inc., the company was formed to develop an electronic communications network or ECM for over the counter or OTC commodity contracts designed to help eligible institutional participants achieve a strategic advantage inthe rapidly growing OTC commodities market.

While designed for a range of contract types, the ECM will initially target OTC option lookalikes in specific energy and agricultural commodities as well as all commodities swaps. The current OTC market is inefficient as an all-around market and we feel there is a significant opportunity to build through Agora-X, a more efficient platform for FCStone and other market participants. By doing so, we are able to bring the best markets and prices to our customers. We are exciting about the opportunities this agreement could present for FCStone and our clients.

Moving on to the carbon space, FCStone is helping its customers and client base mitigate environmental risk. FCStone carbon aims to create, represent and market technologies that improve efficiencies inthe renewable energy sector as well as other industries. FCStone is offering to the renewable energy industry not only a carbon marketing platform, but also a suite of technologies and services that will help them find a pathway to being a lower cost producer and a low emitter. FCStone has been integrative in linking those technologies to reduce costs and risk to the creation of green house gas emission credits or environmental emissions credits. FCStone carbon continues to develop aggregation agreements to develop technology and perfect the credit carbon inventory that ithas acquired. While the company recently cancelled its first carbon credit transaction as a result of some terms over the counter party’s credit risk, we have several promising prospects inthe pipeline for this service.

The green diesel bio-diesel plant is going through an equipment upgrade to increase production to the design capacity as a result of the necessity to upgrade the facility with the most current and advanced technology, we have assumed a majority interest in the facility by way of an additional loan. This upgrade should be completed by the end of the first half of calendar 2008.

One last area of importance for FCStone is interest rates. Interest rates, which continue to soften, but that weakness in interest income should be offset somewhat by the growth in customer funds, investment in alternative instruments and continued direct hedging of interest rates.

As I’ve said before, many of the initiatives that the company implemented over the previous six to seven years are just hitting their stride. In particular, the international effort is experiencing the fastest growth in the company, while the renewable energy group manages a large segment of the independent producers inthe ethanol and bio-diesel industry. Our clearing and execution business also continues to benefit from the consolidation of the industry. Inthe other targeted areas it is a process of education and customer development. We see that education process accelerating inthe dairy and food service, weather, fuel surcharge, carbon credits and foreign exchange.

In conclusion, we are pleased with the success we achieved inthe first quarter and believe that the market conditions which currently exist will continue to present us with opportunities to expand our business. Furthermore, we believe that the traditional commitment to our clients best interest, the strength of the FCStone consultant’s experience and expertise and alternative platforms to manage our client’s risk will continue to drive growth and development of FCStone over the long term.

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

Bill Dunaway

Thank you Pete. As Pete mentioned, we are pleased to report a strong start to fiscal 2008 with first quarter revenues net of thecost of commodities sold of $73.7 million, compared to the prior year of $57.3 million, the first quarter’s revenue increased 29%.

Our pretax income was $21 million for the quarter, compared to $10.1 million for the same period last year. Without the several onetime items noted of $2.9 million, or pretax income was $18.1 million for the quarter, compared to $10.1 million for the same period last year. Furthermore, our net income was $13.1 million for the first quarter this year, or $11.3 without the special items, compared to $6.3 million last year. Again the one time items during the quarter related to the gain on the sale of the Chicago Board Options Exchange Trading Rights and a gain on the sale of CME Group [unintelligible] common stock.

Now let me take a few minutes to talk through the main components of the quarter’s results, starting with the $16.4 million net revenue increase. First, commissions and clearing fees were up $6.5 million or 20% with approximately $6.1 million of the increase coming from exchange trades and the other $0.4 million of this increase coming from our forex commissions and clearing fees.

Next, our service consulting and brokerage fees, which are primarily our over the counter product brokerage fees were up about $7.2 million for the quarter over last year or approximately 79%. The bulk of this increase this year was in our renewable fuels and Brazilian operations.

Our interest income was $13.4 million, up $5 million from the same period last year, of which $4 million came from our commodity risk management and clearing and execution segment with the balance mostly from our financial services segment repurchase program. Of course most of that program’s interest income is offset by the interest expense of the repurchase program. The biggest increase in the commodity risk management and clearing and execution segments interest was related primarily to higher customer segregated funds and over the counter margin deposits that we were carrying during the quarter.

Our total balance sheet assets were over $1.7 billion inNovember 30, 2007, whereas on August 31, 2007 they were just over $1.4 billion. Also, as we no longer consolidate our grain merchandizing business, such first quarter revenues from that segment were $6.1 million lower than last year.

As we look at total expenses, our expenses net of costs of commodities sold increased approximately $5.8 million for the quarter over the same period last year. Upon a closer examination of the expenses, revenue volume related variable expenses of broker commissions and compensation as well as the benefits in pit brokerage and clearing fees and IV commission accounted for approximately $7.4 million of the increased expenses. Net of grain merchandise related cost reduction, interest expense was lower by $1 million, primarily due to the sale of part of our majority interest in our grain merchandizing segment that we now no longer consolidate. Such grain merchandizing segment had about $4 million in non-interest expenses inthe prior year quarter and none in this quarter since we no longer consolidate it. Also [unintelligible] that expense was $1.3 million lower than the prior year.

As we noted, we had two, onetime or special items inthe quarter. First we had a $2.6 million pretax gain on the sale of CME stock we owned in excess of our required holdings as a result of the Chicago Board of Trade, Chicago Mercantile Exchange merger this summer. Secondly we had a $0.5 million pretax gain from the sale of the CBOE trading rights. The effect of these items netted to an additional net revenue and pretax income of $2.9 million and after-tax net income of $1.8 million. It is our intent to sell any significant excess exchange stock above our required amounts needed for clearing purposes.

We will next look at our two main business segments, our C&RM full service segment and our clearing and execution segment. The commodity risk management full service segment generated operating income of $17.2 million or $14.3 million for the quarter before the one time income item, compared to $7.6 million last year. This segment benefitted from significantly higher over the counter revenues as noted earlier and interest income was up $2.5 million primarily as a result of the much higher customer segregated funds and over the counter margin deposits. Commissions and clearing fees were slightly lower that appears farmer producers are holding their crops to sell after theJanuary 1, 2008 and the new tax year. Finally you can see also the segment’s income margins continue to be very favorable.

Our clearing and execution segment had operating income of $5.2 million compared to $3.6 million inthe prior year. The segment had a 37% increase in commissions and clearing fees revenue and also higher interest rate income, primarily as a result of higher seg fund balances.

Reviewing our balance sheet, our total assets are $1.7 billion at November 30, 2007, up from approximately $1.4 billion atAugust 31, 2007. This $329 million increase was due to approximately $85 million in additional customer segregated funds, $142 million from additional over the counter customer margins and accounts, $67 million from our financial services repurchase program and approximately $18 million from our consolidation of Green Diesel LLC after our acquisition of the majority interest in that entity. The primary reason for most of these increases was the continued commodity volatility and the resulting increased trading volume of customers, especially inthe renewable fields, energy and Brazil areas.

Moving on to one additional item, although it took place following the close of the first quarter, we announced our strategic acquisition of Downes-ONeill on December 12, 2007. Theall cash transaction closed on December 31, 2007. As noted previously, the acquisition is expected to be accretive immediately. As part of our growth initiatives, we will continue to evaluate all opportunities to further our vision of providing the best services to our customers across the board in respective commodity markets.

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

Pete Anderson

Thank you Bill. FCStone remains committed to its mission of improving our customer’s bottom line results by leveraging the expertise and experience of our consultants as well as utilizing the most appropriate platform or instrument to manage commodity risk. FCStone intends to leverage the industry dynamics and momentum that arein place to drive our volumes and growth of the company in the future. We believe the company is well positioned for long term success and to drive shareholder value. That concludes our prepared remarks, we would now like to open up the call to questions, operator.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question and answer session. As a reminder if you have a question please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, press star followed by the two. If you are on a speakerphone you need to pick up the handset before making a selection. Our first question comes from the line of Mike Vinciquerra from BMO Capital Markets, please go ahead.

Mike Vinciquerra – BMO Capital Markets

Thank you, congratulations, good morning guys. First of all, wanted to just geta sense, there’s a lot of the moving parts here obviously with all your different clients, but inthe CES segment, how much of your revenue gain there quarter over quarter in terms of commission and clearing fees related to these new professional trading groups that you guys have signed and I also presume that was the majority impact on your rateper contract inthe exchange traded side.

Bill Dunaway

Yeah, Mike, that is the majority of the contract increase that you saw quarter over quarter. We have not broken out, you know we don’t break out any customer data as far as segmenting in those new customers as they come on, but, the new business that was added was fairly high volume, low margin based business so it’s not going to be, it’s going to be under $1.00 per contract that that new customer adds to the commission growth.

Mike Vinciquerra – BMO Capital Markets

Okay, thank you for that. And then just kind of staying inthe same segment, the interest income, that’s where the growth in interest income was really from CES during the quarter, I presume again it related to these new clients that you’ve brought on board. First that question then I’ll follow up.

Bill Dunaway

Some of that Mike but actually it’s kind of an across the board, just with the continued increase commodity volatility and the high seg fund balances, contributed more than just the addition of that client. That client did obviously bring additional customer seg funds but it was a little bit broader than that.

Mike Vinciquerra – BMO Capital Markets

Okay and then just staying on interest, this is a question I get frequently from your investors, I show interest income being up about 13.5% sequentially and ending client assets up about 8%, so either the ending balance just doesn’t give us a full dynamic of what went on inthe quarter or you actually increased your spread somehow during the quarter which kind of goes against what we’ve seen from lower short term rates, can you just talk about the dynamics of your interest income and what we might anticipate going into the February quarter here?

Bill Dunaway

Well a little bit of that ends up being kind of a product mix Mike. As we’ve got, you’re right in that the quarter end balances kind of do provide you a snapshot and they can obviously be fairly vulnerable during the quarter but we also saw, one thing that’s helpful, especially inthe clearing and execution segment where we pay back a little bit more of the interest to the clients, we had in addition to our investible funds, you know therate on those goes down but also the interest that we pay off to those clients has kind of dropped. So, it doesn’t hurt us quite as badly with that aspect of the business, but what you saw is we had more and more clients that we were actually charging some interest to based on their options positions inthe clearing and execution segment and that actually kind of adds to the bottom line as they do some options strategies.

Mike Vinciquerra – BMO Capital Markets

Okay, that’s helpful and should we anticipate just looking forward that your rate earned is going to come down a bit and if you continue to grow balances, hopefully that offsets the decline from rates, you will be affected by lower rates I guess is the point?

Bill Dunaway

Yeah I mean we will be affected by lower rates, we’ve done some things to try to mitigate that, as Pete mentioned in his call there, the portion of our interest rate exposure that we have done direct hedges on, so that should continue to benefit us going forward and also we’ve got a large portion of the assets invested in the money market funds that are pledged to the Chicago Merc and the New York Merc and the New York Board of Trade which [unintelligible] and know that those haven’t dropped quite as precipitously as the 90 day treasury, which we’re often pegged to. Yeah we obviously are affected by the lower rates but we anticipate with the volatile commodity markets, we’ll continue to see growth in our seg funds with the higher volatility, higher margin deposits.

Mike Vinciquerra – BMO Capital Markets

Great, okay, thanks Bill, thanks Pete.

Operator

Thank you our next question comes from the line 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 talked about the 90 day treasury as a good benchmark in terms of what to think about and the average end of day treasury was down about 100 bips sequentially quarter to quarter and you look at your average balance in the customer segregated assets you report to the CFC, the numbers that I’m calculating you know the 50 bip increase in the yield, I mean just some options related transactions, seems to bea lot more than that to me. Can you give us any additional color there?

Bill Dunaway

Well I mean a little bit of it Chris is right now you do have such a disconnect with the 90 day treasury, it’s trading at such a spread tip to LIBOR or even some of the other funds that traditionally you’re correct, the 90 day treasury has always kind of been the benchmark that we’ve used but right now because of that disconnect I mean we’re not going out and buying a lot of direct 90 day treasuries, it doesn’t benefit you to, so, you know the other benefit that has really helped us is the interest rate hedging that we have done, so that continues to benefit us, as I mentioned the money market funds that are paying us a substantial spread to, the 90 day treasure, so that kind of helps.

Pete Anderson

And [Ben], part of the issue Chris is there is a substantial amount of assets or funds that come through the OTC platform as well that’s increased and that doesn’t necessarily show up as seg funds on an exchange basis.

Chris Allen – Banc of America Securities

And then just moving to the expense side, I mean for methe biggest surprise was introducing broker commissions, I mean we saw a decline in commission levels so it [unintelligible] so lowest level of introducing broker commissions we’ve seen since fourth quarter ’06, curious there.

Pete Anderson

Yeah, the majority of that, probably two-thirds of that drop it was related to our forex business. You know the fourth quarter we had a very strong forex commission business and with that there are introducing broker payments that went out so if you kind of combine the slightly lower volumes than we had on the exchange with the significantly lower forex business fourth quarter to first quarter, that explains virtually allthe drop that we had in introducing broker commissions.

Chris Allen – Banc of America Securities

Gotcha, okay and then just looking forward, Pete you had alluded to it a little bit in terms of where volumes, I mean where the activity seems to be going, we’re seeing fairly big volume pickups on the agricultural side right now, is there any reason to think [unintelligible] kind of participated in that and also what’s kind of the outlook in terms of Brazil and China in terms of contribution, not looking for any specific numbers just kind of a general feel.

Pete Anderson

I think as we’ve talked before Mike you know if you look at just the underlying supply and demand numbers we went from a 10 billion bushel corn crop last year to 13 billion bushel corn crop. At some point a significant part of that volume or that increase in volume will hit our books from a production standpoint as well as the consumption went from basically I think total units went from about a little over 11 billion bushel to almost 13 billion bushel this year and a significant part of that consumption will also hit our books and here domestically so our volume should reflect that over the next nine months of the crop cycle.

And then Brazil continues to really pick up some of the slack and lack of production, especially as we go forward and really the markets in general competing for acres both here and on a worldwide basis and a lot of that new production at least in soybeans and even to some degree we’re starting to seea bit of an increase in corn crops Brazil and Latin America, that will pickup and really continue to accelerate, I think our pace of growth across Brazil.

And then the demand from China is about as great as it’s ever been, so, the domestic demand is huge as well as worldwide demand and over time I think our volume and growth will reflect that, driven by allthe volatility that we see probably as much today specifically today, Friday and today, as much as any time.

Chris Allen – Banc of America Securities

Great, thanks a lot guys.

Operator

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

Rich Repetto – Sandler O’Neill & Partners

Good morning guys, I guess first question, historically you had broken out volumes between theCRM and then the clearing and execution atthe exchange volume, could you give us those numbers for this quarter?

Bill Dunaway

Yeah that’ll actually bein theQ that we file later today. The exchange volumes for the first quarter inthe CRM was 655,894 long term contracts. The clearing and execution was 22,620,917 and then the over the counter volume was 301,258.

Rich Repetto – Sandler O’Neill & Partners

301,258, okay, that’s helpful. And I guess I know this number I purely missed because I heard you sayit I just didn’t getit but the FX this quarter I know was $4.9 million last quarter, the fees

Bill Dunaway

It was actually five, yeah this quarter it would be $1.267 million Rich.

Rich Repetto – Sandler O’Neill & Partners

Okay so that introducing the expense side for introducing broker, so, I heard you say two-thirds correlated to thechange in FX, is the other third related to, well where is the other third, just trying to understand the other third.

Bill Dunaway

The other third, probably the majority of it was just drop in IB payments in the commodity risk management segment related to our exchange business and also the clearing and execution the introducing broker payments were down as well so just kind of more tied to exchange volume than anything, just the IB’s that we have did less than a million.

Rich Repetto – Sandler O’Neill & Partners

Okay and well I guess I would saythe increase inthe professional trading groups that you see and I know that will hit therate per contract [unintelligible] but overall you saw your margins go up, is it safe to say that, you know because, I’m assuming it’s done directly electronically, that the margin on business like this, even though it’s a lower rate is higher margin than your other business, is that a high margin? Incremental margin.

Bill Dunaway

Well on the clearing and execution side it doesn’t really increase the margin related to it because you end up collection from the client the commission and the clearing fee from the client then you end up seeing an expense for that clearing fee comes through the C&L as well, so I think the increase, I think the expansion inthe margins has come more from our over the counter business and thecore commodity risk management exchange business.

Rich Repetto – Sandler O’Neill & Partners

Okay then I guess the question is then do you continue to grow with these professional trading groups, so, what impact on the margin would it have?

Bill Dunaway

Well you know we continue to get more and more of those professional trade itin the clearing and execution side while it could because the volume is yields we just pointed out areso significantly higher in the clearing and execution side because it’s high volume lower margin business, that can affect the overall margin of the company but as we go forward but it’s still going to be you know we still look to add that type of business because it brings in the incremental dollars to the bottom line, it’s still very profitable business, it just won’t be atthe 30% margin that you may experience in the commodity risk management segment.

Rich Repetto – Sandler O’Neill & Partners

Okay, thanks guys, excellent quarter.

Operator

Thank you our next question comes from the line of Mark Lane with William Blair & Company, please go ahead.

Mark Lane – William Blair & Company

Good morning. On the acquisition, can you give us just some idea the revenue contribution from the transaction?

Bill Dunaway

You know it’s fairly minor, Mark, I think it’s more of akey acquisition to round out a product line that we don’t currently service as much as we seethe need to, so it’s something that is fairly immaterial the way it stands now, it’s more of a growth strategy in adding the additional consultants that we did through the…

Mark Lane – William Blair & Company

Would there be any delay in executing consulting related business from these new consultants, are they, the deal closed on December 31, are they executing business through you already?

Bill Dunaway

Correct, I mean we’ve brought them over their already engaged in consulting type of work and the exchange business is already coming over. So there’s no delay at all.

Pete Anderson

And the real advantage the real opportunity Mark is plugging in their expertise and experience inthe utilization of our OTC platform as well as the expertise and experience they bring to the food service industry that we’re pursuing as well, so it’s a real winwin for both of us.

Mark Lane – William Blair & Company

And last quarter you were pretty open about being in discussions or talking with small consulting groups, was this the firm that you were specifically talking about or are there other firms of this type that you’re…

Pete Anderson

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

Mark Lane – William Blair & Company

So there are other firms similar to this that you’re still having discussions with?

Pete Anderson

Yeah.

Mark Lane – William Blair & Company

Okay and the C&RM margin was over 40% this quarter if you take out the gain, is that, I know it’s the first quarter and so you know there’s some estimates on comp and that sort of stuff, but why wouldn’t that be a decent run rate if you’re hedging some of your interest rate exposure and mitigating some of the impact from lower rates?

Bill Dunaway

Well you know I think you nailed it on the head, interest income is obviously one of the things that really brought it from 25% in the same period to over 40% now and in addition if you look, the two biggest increases in that segment were the service consulting and brokerage fees and the interest, you know the majority of the service consulting brokerage fee is that over the counter that carries with itthe higher margins, so those two pieces are really what drove the margin expansion that you saw there.

Mark Lane – William Blair & Company

Okay and then lastly, this OMX agreement is this anything that’s meaningful or is this, what are your expectations there?

Pete Anderson

Our real expectations Mark are number one just as we’ve said, the real issue with the OTC markets is to a large extent, it’s a call around market and I think there’s a lot more efficient way for us as participants in that market to capture the best pricing for our customer and ultimately for FCStone and the other participants that are utilizing or dealing inthe OTC market, we think this is the avenue that will accomplish that and our hope is that we see significant commitment from other participants and that volume grow and if it does I think it will number one benefit our client as well as you know capturing some of the value of our deal flow as well as the other participants in that effort.

Mark Lane – William Blair & Company

But are you consulting with them on building this system or…

Pete Anderson

[Overlay, unintelligible] a lot of time going through the design phase, in fact we probably spent almost six months going through that process and we’ll continue to consult with them as we finalize and develop the platform.

Mark Lane – William Blair & Company

Could you get any ongoing revenue stream, volume based revenue stream from that?

Pete Anderson

We hope to, if there is significant participation along with those other organizations that would participate, we’d be one of a number of participants and owners going forward.

Mark Lane – William Blair & Company

Okay, thank you.

Bill Dunaway

Mark, I think that is twofold I think it would actually be growth from the investment in Agora-X and also just providing that more efficient platform for our over the counter customers trading inthe over the counter, we’d look at seeing an increase in volumes that way.

Mark Lane – William Blair & Company

Okay, great, thank you.

Operator

Thank you our next question comes from the line 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 the size of acquisition as far as maybe what the seg assets go for the Downes-O’Neill?

Bill Dunaway

You know, once again James, it’s minor, it’s less than 5% of what we currently hold, so it’s not, it’s more of a growth and expansion of our platform than a real sizable acquisition.

James Rhee – Keefe, Bruyette & Woods

Right, right, okay and I guess as far as the Agora-X platform goes, just switch bases here, I guess just trying to figure out, it does seem like you guys are using this platform to more or less kind of leverage, it’s something that you guys are developing for your internal deal flow but I guess how aggressively are you guys going out there to actually kind of market this platform or atthe same time try and build traction, have you been speaking with other institutions to try and build up some interest?

Pete Anderson

Yeah we’ve talked to a number of other institutions and participants inthe OTC market and there is significant interest, in fact we’ve basically have a commitment from two or three organizations that want to be participants and we are going to really actively pursue that as we approach the conclusion the development of the platform.

James Rhee – Keefe, Bruyette & Woods

Okay, alright thanks a lot.

Operator

Thank you and our next question is a follow up question coming from the line of Mike Vinciquerra, please go ahead.

Mike Vinciquerra – BMO Capital Markets

Thank you, just one more question on Agora, have you looked atthe possibility of taking some minority investors in that, it seems like the ECM on the equity side for instance have been successful, have take minority investors who really helped to get to a level of liquidity that brought additional folks in and forced people to pay attention, is that something you’re considering?

Pete Anderson

Yeah, effectively that’s the model we’re looking at and probably will be using Mike.

Mike Vinciquerra – BMO Capital Markets

Okay and then just on the international side, just international as a whole, can you give us potentially the percentage of either volume or revenue coming from outside the US during the quarter, maybe compare that to last quarter or a year ago Bill?

Bill Dunaway

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

Mike Vinciquerra – BMO Capital Markets

Okay, safe to say though based on your comments Pete about Brazil that international is still growing faster than theUS?

Pete Anderson

Yes.

Mike Vinciquerra – BMO Capital Markets

Okay and then finally, international consultants, dedicated consultants to the international markets, where does that stand atthe end of the quarter?

Pete Anderson

I think we were still at basically what we had termed qualified or full service consultants we’re at 16 and we just added three more trainees basically within the last week or so.

Mike Vinciquerra – BMO Capital Markets

Okay, thanks again.

Operator

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

Rob [Walgemass] – Insight Investments

Hey guys, nice quarter, just had a couple quick questions for you, one is related to lower interest rates, you had mentioned that you had some hedges in place and some other programs to mitigate some of the effects of lower interest rates on your interest income, can you tell us a little bit more about those h edges and when you actually took some of those positions?

Pete Anderson

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

Rob [Walgemass] – Insight Investments

And the, Bill when I spoke with your predecessor, probably about six months ago, he seemed a bit concerned about lower interest rates, if that were to happen inthe future which of course it has started to happen and you guys don’t seem as concerned and just wondered if that is because of some of these hedges you guys put on or you know if there are some other factors?

Bill Dunaway

You know we’re obviously concerned because it does drop to the bottom line but I mean we’ve actively managed the risk and looked at ways that we could protect ourselves through different investments and the hedging aspect of it so and you know he participated in those conversations as well soit was kind of a strategy with all of us looking at it and short term interest rates area concern but we’re doing what we need to in order to protect ourselves.

Rob [Walgemass] – Insight Investments

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

Bill Dunaway

Nothing that we’ve put out there or really prepared to discuss, like we indicated, 90 day treasury traditionally has been the benchmark but you’ve seen such a disconnect between with the flight to quality with the 90 day treasury that it’s a little more difficult to track. What we’re generally looking at is kind of a blend of overnight rates, money market funds, graded money market funds and then some treasuries thrown in there.

Rob [Walgemass] – Insight Investments

Okay, thank you very much.

Operator

Thank you, ladies and gentlemen if there are any additional questions at this time please press star followed by the one at this time. As a reminder if you’re on a speakerphone you need to pick up the handset before pressing star one. I’m showing there’s no further question queue, I’ll turn it back over to management.

Pete Anderson

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

Operator

Thank you, ladies and gentlemen this concludes the FCStone Group 2008 first quarter earnings conference call, if you’d like to listen to a replay of today’s call please dial 303-590-3000 or 800-405-2236 enter the passcode 11106090. Once again that is 303-590-3000 or 800-405-2236 enter the passcode 11106090. Thank you for your participation for using ACC teleconferencing, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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