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Edited Transcript of INTL earnings conference call or presentation 7-May-20 1:00pm GMT

Q2 2020 INTL FCStone Inc Earnings Call

Jun 12, 2020 (Thomson StreetEvents) -- Edited Transcript of INTL FCStone Inc earnings conference call or presentation Thursday, May 7, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sean Michael O'Connor

INTL FCStone Inc. - President, CEO & Executive Director

* William John Dunaway

INTL FCStone Inc. - CFO

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Conference Call Participants

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* Justin James Hughes

Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager & Principal

* Paul Dwyer

Punch & Associates, Inc. - Director of Research

* Russell Chad Mollen

Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the INTL FCStone Second Quarter Fiscal Year 2020 Conference. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your CFO, Mr. Bill Dunaway. Sir, you may begin.

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William John Dunaway, INTL FCStone Inc. - CFO [2]

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Good morning. Thank you, operator. Welcome to the earnings conference call for our fiscal first quarter (sic) [second quarter] ended March 31, 2020. After the market closed yesterday, we issued a press release reporting our results for our second fiscal quarter of 2020. This release is available on our website at www.intlfcstone.com as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly and year-to-date results. You'll need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's conclusion.

Before getting underway, we are required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance.

With that, I'll now turn the call over to Sean O'Connor, our CEO.

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [3]

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Thanks, Bill. Good morning, everyone, and thanks for joining our fiscal 2020 second quarter earnings call. I also hope that all of you and your families are healthy and well. I think it goes without saying that this is a historic moment for the world. And firstly, our heartfelt sympathies go out everybody who has lost loved ones and also to the millions and millions of people who have lost their livelihoods and businesses. This is an event that will have a significant and major global economic and social repercussions, which are still unclear at this time. My personal view is that many trends we saw playing out prior to this event will be dramatically accelerated and weak businesses without demonstrable value-add to clients and without strong capital support are going to be in for a difficult time. I'm confident that we will navigate our way through this turmoil, and we will find ourselves in a stronger position when we achieve the new normal, whatever that looks like. I think our focus on providing durable and value-added services to our clients, our focus on capital and book value and our common sense and robust approach to risk management will stand us in good stead.

I would like to thank the entire INTL team over 2,100 people around the world for your amazing commitment to our clients and your willingness to embrace the challenges head on. And also to my exceptional and now battle-hardened management team who quickly responded by running towards problems and not away from them. I am very proud of our franchise, and I'm certain, we'll come out of the situation stronger and better.

At the outset of the COVID crisis, we adopted a simple 4-point plan. First, keep all of our employees and their families safe. This was made possible by our exceptional IT team who quickly saw the situation unfolding and upgraded our systems and capabilities to allow for a seamless widespread move to a work-from-home environment. We are currently about 95% work from home. I do not believe that a work-from-home environment is a good long-term format for a business like ours as it leads to increased operational risk, reduced connectivity with the markets and less collaboration among teams, which makes us good at what we do. However, so far, we have managed to operate effectively.

Second point, continue to be there for our clients without assuming major risk, no matter how crazy or volatile the markets are. This is the time we establish our credentials and differentiate your franchise with clients who value strength, consistency and honesty. We did see a number of players, some very large and respected names, [withdrawal] pricing or market access to clients and potentially system outages. I'm proud to say that we were there consistently at all times for our clients, and I believe this was noticed by our clients, and we'll see long-term benefits as a result.

Third point, reduce our risk, our inventory and take a very defensive position to ensure highest possible levels of liquidity and allow us to continue to appropriately service our clients. Throughout this crisis, we have remained liquid. We have reduced our exposure, which is always hedged to these volatile markets where dislocations can happen.

And lastly, point four, work with our clients, so they have a full appreciation of their own risk and like us, reduce their exposure. In this sense, we take on the role of risk management -- risk managers for our clients, and while they may not want to consider reducing exposure initially, most thank us afterwards. Our team was very active in getting ahead of this and working with clients to make sure they're able to survive or even take advantage of the situation.

As you can see from our results, we weathered the first phase of the crisis, which was characterized by some amazing historic volatility, more on this later. I do think we're entering a different phase now. And maybe there will be less volatility, but we are now seeing a breakdown of supply chains and liquidity risk rippling through the markets. This was most obvious in the oil markets where WTI traded down to negative territory for the first time in history. And indeed, had close to a $50 price move in under an hour from positive to negative.

We also saw gold futures contract dislocate from the physical price as refineries close and delivering gold into futures contracts became difficult. The same is now happening with meat. When the supply chains breakdown in ways we've never seen before, the derivative contracts can become untethered from the underlying price leading to unpredictable results. We have also seen the same in Securities markets with the unprecedented Fed intervention into munis and high-yield and many hedging products not being as effective as they once were.

The team here at INTL will continue to stay focused, implement our 4-point plan and run towards problems quickly. As we have always said, our business benefits from volatility, but extreme volatility and now perhaps market dislocation can cause client stress and increase credit provisions as a result. If we do our jobs well, the increased revenue should more than offset the increased provisions, and the net results should still be enhanced for our shareholders.

In this regard, our business operated as designed, and although we had higher credit provisions for the quarter, we also saw much higher revenues and as a result a better mix earnings.

Longer term, we're all wondering what the new normal looks like. I think for us, we are likely to see lower interest rates for some time, perhaps higher volatility than they exist and the existing trend of consolidation in our industry will accelerate as some players fall by the wayside and others see safety and benefit and scale.

On balance, we may see the negative impact of interest rates offset by the benefits of volatility and an opportunity to acquire clients and businesses, much like we did after the financial crisis 10 years ago.

Now moving on to our financial results for the quarter. We obviously benefited dramatically from increased volatility in almost all areas, which drove transaction volumes up 50% or more, except in our fixed income area, although here, we saw a significant widening of spreads.

Also notable that the increased volumes drove up our float by about $700 million or 25%, which helped offset the interest rate declines. This strong growth in underlying volumes resulted in quarterly records for almost every financial metric.

Our net operating revenues were $243 million, up 47% while our total expenses were up 34%, largely due to variable compensation, driving net income up 65% to a record $39.3 million for the quarter. Our diluted EPS was $2, up 68%, which resulted in an ROE of 25%. This strong quarter also impacted the year-to-date period, with net operating revenue up 32% and total expenses up 27%, resulting in a 34% increase in net earnings.

Our diluted EPS for the 6-month period was $2.84 and our ROE for the 6-month period was 18%. ROE on tangible equity is increasingly the market convention for banks and financial services companies and using this metric would increase our ROE by several percentage points.

Some highlights. The big standout was our Security segment, which produced record revenues and record segment income driven by volatility in both equities and fixed income markets. On the equity side, revenues were driven mainly by volume, while in the fixed income side, largely due to spread widening. In aggregate, operating revenues for Securities was up 61% for the quarter and 40% for the year-to-date. Segment income was up 225% for the quarter and 98% for the year-to-date, really, an amazing performance by our securities team.

Also notable that for the first time ever, our Securities segment eclipsed commodities hedging to become our biggest segment, both in terms of operating revenues and segment income. I'm hoping this spurs some internal competition between our segments here.

Commercial hedging had its best revenue quarter ever, with strong growth across daily all product verticals in both futures and OTC. Segment income was up 19% for the quarter and 32% for the year-to-date.

Physical commodities operating revenues was up 21% and segment income up 23% due to a strong performance on the precious metal side in Asia and also the recently acquired CoinInvest platform. The precious metals results are understated on a mark-to-market basis due to the derivative market dislocation I mentioned earlier on the gold contract, which is mostly reversed in April and May. Segment income was up 26% for the year-to-date on the physical side.

Clearing execution increased operating revenues by 31% driven by volume increases on listed derivatives and foreign exchange, but offset a little bit by lower interest rates on our client float. Segment income was up 41% for the quarter, but down 6% for the year-to-date period.

Global Payments grew operating revenue 7% off the back of a 25% increase in the number of payments, although revenue capture declined 15% due to fewer large transactions, which are very profitable for us. Segment income was up 9% for the quarter and 5% for the year-to-date period. Bill will be providing more details on these segment results later.

Moving on to recent acquisitions and growth initiatives. Officially, about a year ago or so, we made 3 tuck-in acquisitions, which were all loss-making at the outset. We highlighted in previous calls that these acquisitions were projected to reach breakeven within the year and start to be accretive thereafter, just running through them.

Firstly, CoinInvest, our wholesale and retail platform to distribute precious metals, bars and coins was acquired in April 2019, about a year ago. This business operated at small losses that was integrated into INTL, which allowed us to provide them wholesale acquisition of inventory at much better pricing. This business really came into its own during the last quarter and generated $4.5 million in pretax contribution for the quarter alone. This has more than justified the modest premium we paid for the business and has now established INTL as a major participant in this end of the market. There are also exciting synergies with the GAIN client bases. We can now offer there 130 retail clients the ability to acquire precious metals on a digital platform.

GMP was a loss-making agency fixed income business with a strong presence in corporate and distress as well as high-yield fixed income as well as emerging markets and specs. This business was acquired with a close to $4 million annual burn rate, and I'm glad to report it's now solidly and consistently profitable.

In addition, we now have a much broader product offering and many of these products like high-yield and distressed are now coming into their own, given recent events.

And thirdly, prime brokerage. Just about a year ago, we acquired a very respected and competent team to build an institutional prime brokerage capability for us. This required us to build the necessary infrastructure, which required about a $3 million cash burn per annum. We also acquired an outsourced trading business to bolster this capability. I'm now pleased to report that this activity is now making a contribution to the bottom line and has really ramped up on-boarding and getting traction with clients.

These initiatives, along with several others, added a $10 million to $12 million cash burn in the prior year, and we consider them all to be attractive business acquisitions at the right price despite the short-term losses they may incur. I'm now very pleased to report that these investments have delivered as anticipated and are now making contributions to the bottom line. We remain convinced that these businesses will be significant contributors to earnings over the next couple of years. And will also add significantly to the overall franchise value of INTL.

Moving on in early October, as we reported, we closed the acquisition of the UOB business in Singapore and have now largely completed the integration of system and clients onto the INTL platform. The business is now running at slightly better than breakeven, which is marginally below where we had envisaged it to be due to lower interest rates and some of the clients that came across being too large risk-wise for us. We have now started to see a cadence of new clients being onboarded and see some meaningful additional cost synergies on the IT and infrastructure side that can be realized over the next 3 quarters. We believe this business will be at a nicely positive run rate by fiscal year-end and well poised to grow into a meaningful part of our international execution and clearing platform.

In December, we announced we had reached agreement to acquire the Brokerage business of Tellimer, formerly known as Exotix. This is a well-known and respected franchise specializing in providing institutional investors with access to equity and debt markets in emerging and frontier markets. Happy to report this transaction was closed on April 1, 2020, and we're already seeing the benefits of their add and lots of synergies with our existing businesses.

In early January, we reached agreement to acquire German-based GIROXX. This is a company that provides an online platform for FX hedging and payments and primarily at European Union-based midsized corporations. We see a tremendous opportunity to provide the GIROXX clients with a more integrated and expanded payments capability using our global payments network as well as a more comprehensive suite of hedging solutions for commodities and interest rates. This will allow us to offer a unique digital payment and risk management platform for small- and medium-sized clients. We see this as a global offering, which should allow us to effectively and efficiently access these midsized commercial clients in other geographic locations and further leverage our financial platform.

Regulatory approval for this transaction was obtained in April 2020, and I am pleased to report that this transaction is now closed and that happened on May 5.

Related to this, we are in final discussions to acquire a small U.S. company, which will allow us to quickly roll out the GIROXX platform to small- and medium-sized corporations in the U.S. The combination of our global delivery network, digital platform of GIROXX will allow us to significantly bolden our offering and footprint in the U.S. as well as in Europe.

As you all probably know, we signed a definitive merger agreement with GAIN Capital to acquire their business. The proxy has been delivered to GAIN shareholders with the shareholder vote set for June 5. We have voting agreements for 44% of the votes and need 50% plus 1 share to approve the transaction. At the same time, we are well down the path of obtaining the necessary regulatory approvals and hope closing can occur by mid-summer. We have started the integration with the GAIN team and are now even more convinced of the commercial logic of combining these 2 franchises in order to become one of the leading global financial platforms. GAIN brings a digital platform with a global reach into the retail and professional trader market, which we can enhance with additional products, while at the same time, internalizing clearing costs for greater efficiency. GAIN provides us with the digital assets and expertise to better and faster digitize our institutional offerings.

As you would expect, GAIN is driven by many of the same metrics we are, mainly volatility, which was validated by their recently announced Q1 results.

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

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William John Dunaway, INTL FCStone Inc. - CFO [4]

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Thank you, Sean. I'll be referring to slides and the information we have made available as part of the webcast, specifically starting with Slide #3, which shows our performance over the last 5 fiscal quarters.

As shown, it is a very strong second quarter, representing record net income, earnings per share and return on equity. Net income was $39.3 million, which represents a $23 million increase over the immediately preceding quarter and a $15.9 million increase versus the prior year.

It's important to note that the prior year quarter includes a $5.4 million bargain purchase gain on the acquisition of GMP Securities.

Earnings per share were $2 per diluted share in the second quarter as compared to $0.84 and $1.21 per share in the immediately preceding and prior year quarters, respectively.

Moving on to Slide #4, which represents a bridge between operating revenues for the second quarter of last year to the current period, operating revenues were $366.8 million in the current period, up $95.7 million or 35% over the prior year.

As Sean noted, the widespread volatility across asset classes due to the COVID-19 pandemic drove significant growth in operating revenues across our operating segments, with the exception of possibly our Global Payments segment, which still added $2 million or 7% growth in operating revenues as compared to the prior year quarter.

Standing out here, our Securities segment added $45.3 million or 62% in operating revenues versus the prior year. Within this segment, equity capital markets nearly doubled its revenues, adding $30.4 million off the back of 134% volume growth as customer demand increased and our market share grew as some competitors stepped away from the market.

Desk Capital Markets also had a strong quarter, adding $14.4 million in operating revenues versus the prior year, with spreads widening 59% versus the prior year as despite unprecedented monetary policy actions, fixed income markets remained highly volatile through the end of the quarter.

Operating revenues increased in our Commercial Hedging segment by $21.1 million versus the prior year to $101.7 million. Exchange-traded revenues increased 22%, particularly in the domestic and Latin American markets as well as in our expansion efforts in Europe and Canada. Over-the-counter revenues increased 46% versus the prior year primarily driven by volatility in energy markets. Interest income in this business declined $2.3 to $5 million for the quarter driven by results of declines in short-term rates, which was partially offset by a 3% increase in average client equity to $944 million.

Our Clearing and Execution Services segment had a strong quarter, adding $22.9 million or 31% in operating revenues, as significant volatility in the global markets drove 71% and 62% increases in exchange-traded and FX prime brokerage volumes.

In addition, independent wealth management added $5.3 million or 30% in operating revenues versus the prior year.

Our most interest rate sensitive segment, this segment saw a 26% decline in interest income to $6.9 million and fee income related to customer suite balances declined $600,000 to $3.1 million. However, on a positive note, average client equity increased 47% to $1.5 billion, and FDIC sweep balances increased 24% to $957 million.

Finally, physical commodities increased operating revenues $4.2 million or 21% versus the prior year driven by a $2.8 million increase in precious metals operating revenues as well as a $1.4 million increase in physical ag and energy. Precious metals revenues increased as the number of gold equivalent ounces traded increased 56% versus the prior year. However, growth was tempered by mark-to-market declines related to the dislocation between cOMEX listed futures and over-the-counter precious metals contracts due to the shutdown of global refiners and flight cancellations due to COVID-19.

The next slide #5 represents a bridge from 2020 second quarter pretax income of $30.9 million to pretax income of $56.1 million in the current period. The significant operating revenue growth in our Securities segment led to a $26.6 million increase in segment income versus the prior year. Non-variable direct expenses in this segment increased $3.8 million versus the prior year as a result of continued build-out of several recent initiatives and variable compensation as a percentage of operating revenues increasing versus the prior year due to the strong performance for the quarter.

Commercial Hedging segment income increased $5.6 million as a result of the strong growth in operating revenues. However, this was partially offset by a $3.2 million increase in bad debt expense.

CES segment income increased $4.7 million versus the prior year as a result of the increase in operating revenues partially offset by $800,000 or 7% increase in non-variable direct expenses. Physical commodities and Global Payments added $1.8 million and $1.4 million, respectively, versus the prior year period.

Finally, the net cost in unallocated overhead increased $14.9 million versus the prior year, $5.4 million of this variance was driven by the bargain purchase gain on the GMP acquisition in the prior year noted earlier.

In addition, compensation and benefits increased $6.4 million, of which $3.5 million was variable compensation increases driven by the strong performance for the quarter. Fixed compensation increased $2.9 million and was spread out across several administrative departments, including IT, compliance and accounting. Other expenses increased $2 million, primarily related to the cost of our biannual global sales meeting and customer global market outlook conference held in February.

Slide #6 shows the interest in fee income on our investment of client funds in our exchange-traded futures and options businesses as well as client balances held in our correspondent clearing and independent wealth management businesses.

As noted on this slide, our earnings on these balances have declined $5.3 million versus the prior year to $11.3 million, as our yield on these balances has declined to 101 basis points to 1.34% in the current period due to the effect of the Fed's actions over the last 12 months.

Moving on to Slide #7, our quarterly financial dashboard. I'll just highlight a couple of items of note. Variable expenses represented 62.7% of our total expenses for the quarter, well above our target of keeping more than 50% of our total expenses variable in nature. We reported net income of $39.1 million in the second quarter, which brings our net income for the trailing 12 months to $99.1 million. The quarterly results yielded a 24.9% return on equity, well above our stated target of 15%. Our total assets increased 16% versus the prior year primarily due to strong growth in client balances.

Finally, in closing out to review the quarterly results, our book value per share increased $4.86 to close out the quarter at $33.75 per share.

Next, I will move on to the discussion of the year-to-date results and refer to Slide #8. Year-to-date operating revenues were $107.8 million or up 20% to $643.6 million in the current fiscal year. All segments of our business reported increases in operating revenues as compared to the prior year-to-date period. The largest increase was in our Securities segment, which added $57.4 million driven by strong growth in both equity and debt capital market volumes as well as increase in interest income related to our securities lending and domestic fixed income activities.

In addition, our Commercial Hedging segment increased operating revenues $31 million or 22% versus the prior year primarily driven by 58% and 13% increases in OTC and exchange-traded transactional volumes, respectively. This is partially offset by a $4.2 million decline in interest income.

Physical commodities segment added $10 million versus the prior year-to-date period primarily driven by the acquisition of CoinInvest as well as the increased customer demand from precious metals in general as well as improved performance in biodiesel feedstock markets.

Our Global Payments and CES segments added $3.7 million and $3.6 million, respectively, versus the prior year-to-date period. In the CES segment, it's of note that the prior year comparative period includes a $2.7 million settlement received in the Barclays last look matter.

Moving on to Slide #9. Pretax income increased $22.5 to $77.8 million for the current year-to-date period. All segments increased segment income versus the prior year, except for our Clearing and Execution Services segment, which declined $1.9 million. However, when factoring in the $2 million net settlement in the Barclays last look matter in the prior year, the segment was flat year-over-year.

The largest increase was in our Securities segment, which added $27.3 million in segment income driven by the strong growth noted on the previous slide. Partially offset by $8.7 million increase in non-variable direct expenses and an increase in variable compensation as a percentage of revenue driven by increased performance.

Commercial Hedging added $13.8 million of segment income, with growth in operating revenues partially offset by a $3.1 million increase in bad debt expense.

Our Physical Commodities segment added $3.5 million in segment income versus the prior year. However, it's of note that the prior year includes a $2.4 million recovery on the bad debt on physical coal.

In addition, our Global Payments segment added $1.7 million in segment income versus the prior year.

Finally, the net costs in unallocated overhead increased $21.9 million versus the prior year, $5.4 million of variances related to the GMP bargain purchase noticed earlier in the prior year.

Compensation and benefits increased $10.4 million of which $4.3 million represented an increase in variable compensation due to improved performance.

I will finish up with a review of the year-to-date dashboard. Variable expenses are above our internal target of exceeding 50% of the total expenses, coming in at 60.4% of the total expenses. Net income was $55.6 million for the current year-to-date period, a 34% increase over the prior year period. The return on equity for the year-to-date period is 17.9%, which is above our internal target of 15%.

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

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [5]

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Thanks, Bill. This has, obviously, been a highly unusual and in many ways, historic time. I think the financial results we have produced validate our business model, our philosophy around adding value to clients and how we manage risk. We have made good progress in integrating and turning to account many of the initiatives undertaken over the last year or so. The upcoming quarters will not be easy, and we have to navigate our way through a variety of risks and market dislocations. We will remain vigilant and cautious, but I am optimistic we'll emerge stronger and bigger than before.

While the future environment may be challenging for us with low volatility and lower interest rates, I'm certain there will be a reordering of our industry and opportunities to pick up valuable clients, people and businesses that will allow us to increase our market share and increase the value of our franchise. We've already seen this starting to happen. And in the last 3 months have seen the strongest onboarding of clients in nearly 10 years and have many talented professionals wanting to join us.

We believe that the GAIN acquisition will be strongly accretive in every sense, financially, strategically and with the intellectual assets to enhance our strategy to become the best-in-class financial platform, connecting clients to the global markets across asset classes, offering vertically integrated execution and clearing.

With that, I'll turn it over to the operator and see if we have any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question comes from the line of Justin Hughes with Philadelphia Financial.

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Justin James Hughes, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager & Principal [2]

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And congratulations on impressive quarter. I think it's the highest return on equity, I assume the company put out.

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [3]

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And a nice following wind, I guess.

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Justin James Hughes, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager & Principal [4]

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Yes. I was wondering if we could -- and the losses, given the volatility, you managed very well as well, but I was wondering if you could talk about April when oil went negative, obviously, tremendous amount of volatility there. We saw Interactive Brokers preannounce a big credit loss. Is April kind of more of the same of what we saw from 1Q high volatility with manageable credit losses? Or can you give us a little bit of preview on the give and take there between volatility and credit losses.

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [5]

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Okay. So a couple of things. As I mentioned, our business model is such that when we see extreme events, obviously, we make a lot more money, but we tend to have some charge-offs. And I think I said that earlier. I think you can see that in our Q1 results. I think that's the pattern we're going to see going forward, right? January?

With regard to the dislocation in the energy markets, I mean, I don't think anyone has ever seen anything like that. And obviously, historic. We will likely incur some small provisions against that. They're not going to be material or tracking in any way, sort of single digits of millions. But I don't know if you picked up. And one of the reasons we put this in our filing is we were very quick in terms of when we saw that happening, getting our customers to move out of the front month contract, which we believe had become untethered to the underlying price and it became irrational. And actually, we put out a letter. That letter was picked up on Bloomberg. I'm not sure if you saw that, where we were sort of really pushing people out of that contract. And one of the reasons we just mentioned all of that is because I think some of our shareholders and investors actually saw those letters and was wondering what was going on. The good news is I think almost every market participant followed us in that action. So I think almost everyone now is forcing their customers out of the front month, particularly as it gets close to delivery just because of the sort of dislocation that's happened. So that's the story around the sort of the oil side of the business. I would say, generally, what we're seeing is probably the volatility has declined. If you just look at the VIX. So I don't think we're going to see the same kind of positive situation as we saw in March, but it's still elevated versus where it was prior to the crisis. So I think we'll continue to see by -- sort of longer-term trends higher volatility. If we have extreme events out there that does give rise potentially to some credit exposure for us. If we do our jobs right that will still be a net positive. But I think the volatility we saw in March was just really exceptional. And fortunately, we benefited from that, but I think that impact is being somewhat muted as we stand now. But it's a change. So I just don't know. So Justin, I don't know, does that answer your question?

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Justin James Hughes, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager & Principal [6]

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Yes, it does. Just because like you said, the start -- the move in oil is unprecedented so I'm just wondering let me check you on that one...

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [7]

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It was crazy.

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Justin James Hughes, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager & Principal [8]

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And then the -- thank you for quantifying the interest rate headwind. It looks like, I think, $0.94 in the presentation. It looks like that includes money market fund fee waivers, correct?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [9]

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Yes. We try to aggregate everything related to our float all in one this year.

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Justin James Hughes, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager & Principal [10]

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Are there any offsets you can do? I mean, now it's going to -- it's probably going to cost you money to hold these balances. Is there any -- can you add fees or anything else to offset this revenue headwind?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [11]

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Yes. Well, a couple of things. I mean, firstly, we are in a borrower situation. So there is a natural offset on our borrowings cost, right? So that's somewhat helpful. If we assist with negative interest rates, us and the rest of the industry, are going to have to figure out how we turn that from being a net cost to being a positive because our business model is predicated on us earning something on the float. I mean, you saw the big move with the discount brokers going to 0% commissions. I mean, part of that was the float kind of gives you some earnings, right? And if that doesn't happen, you're going to either have to charge fees or do something. So you're correct, I think if that perpetuates, we'll have to do something. At the moment, we don't believe we're in sort of negative territory in aggregate. The other things we can do in certain parts of our business is we are able to roll our exposure out along the curve. We've done this previously. Sort of, I guess, 3, 4 years ago when we had 0 and in short instances, negative interest rates on T-bills, we rolled our exposure out to sort of the 2-year mark on the curve. So there are things we can do to manage that. It's not perfect, and it doesn't apply necessarily to all the aspects of our float. But we will pull whatever levers we can to make sure that we maximize the return on that and if necessary, change our business model slightly, if we believe it's going to perpetuate.

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Operator [12]

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Your next question comes from the line of Russell Mollen with Nine Ten Capital.

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Russell Chad Mollen, Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal [13]

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Sean, how are you doing?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [14]

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I'm doing good, Russell. And by the way, I keep telling everyone, you were the smartest guy I know because in February, you were telling everyone, this was going to be a major pandemic. So kudos to you.

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Russell Chad Mollen, Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal [15]

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I would have positioned my portfolio a little bit better than what my initial thoughts were. So I'm not that smart. So you kind of answered it before, but you've probably seen lots of crazy stuff in your career. Where does negative oil stack in all the crazy things that you've seen in your career?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [16]

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It's going to be my top 3, I would say. I mean, never in my wildest dreams that I think that a commodity would ever go negative. I mean it's probably top one. I mean it's just unprecedented. And the speed of the move was crazy. So yes, it's definitely up there.

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Russell Chad Mollen, Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal [17]

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And I mean you mentioned this. So you have some credit provisions or whatever, but it's not being material. I'm just kind of -- walk me through what you guys were doing. I mean, you said it a little bit in terms of moving people out of front month, but like how was there not just major impacts on your business? And are there competitors out there that you saw or are seeing that have just taken it completely on the chin from the negative oil?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [18]

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P

Yes. So the only things that I can tell you are things that are public. I mean, there's nothing else that I know. But Interactive Brokers announced. And this is also the Bloomberg article that announced our letter and everything. So they announced that about $88 million of losses. We had some small losses. I'm sure there were lots of small losses scattered throughout the industry. The estimate of the aggregate losses, and it's hard to know because it moved so quickly, both up and down. I mean in a bizarre way, you never reacted at all to the situation. By the end of the day, everyone was positive. We don't run our business that way. We react immediately. And so does everyone else. But the estimates of the losses could be anywhere from $150 million to $1 billion, but no one knows exactly sort of when people were liquidated or what happened. They just take the size of the moves times the open interest. So there could be people out there who have significant losses. I just don't know.

The other thing we know is a very large Singaporean energy business effectively filed for bankruptcy, very large, very well-respected name, rumored to have very significant losses overall. And there are a couple of similar companies out there who are rumored to have losses. So there's going to be pain out there. Obviously, it's also going to be the frackers and the producers -- the pain is going to be throughout the industry. I don't know if that answered your question, but...

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Russell Chad Mollen, Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal [19]

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Yes. From a risk management perspective, what we saw in March and early April, was it a situation where you were having to kind of have direct oversight on every single thing that was happening? Or you sort of have all the systems in place where it was being managed the way it should be based on kind of what you've put in place in that common sense approach?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [20]

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Yes. I have to say, we've been through a number of these things now. As I sort of said, I kind of feel we have a really good battle hardened sort of management team. I mean, we came through the financial crisis. We went through the flash crash. I mean, we haven't got everything right, right? I mean, you know we had some issues where things didn't work exactly as planned. But over the last 10 years, we've managed to massively accrete our capital. I think we've been in aggregate, massively profitable, and we've learned along the way. And I have to say I was really, really proud of my team. I mean, there was no panic. Everyone was working from home, totally calm, and we relied on the system we had in place to protect us. I think if you don't have all of those foundational things in place and something like this hits you, you can't build them on the fly, right? And you can't manage a business our size on an ad hoc basis. So I think this really comes down to making sure you institutionalize your approach, that you have the right controls in place. You have the right people doing the right things. And you have smart people who can deal with exceptions quickly and run towards the problems as they start emerging, and that is very much our approach. So honestly, it's pretty sort of calm for us. I mean, there were things we had to dump on and we saw risk study to pop up like WTI, and we immediately got on and in days got all our customers out of the contract. And -- but there wasn't panic, and it wasn't like everyone was running around sort of hair on fire. But I think it's because we have tight team, we've been together a long time. We've seen a lot. And I think we have, hopefully, the right kind of controls and infrastructure in place. But it ain't over yet. So we understand we should stay guided and stay vigilant and make sure that we kind of do our jobs.

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Russell Chad Mollen, Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal [21]

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Got it.

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [22]

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Does that answer your question, Russell or...

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Russell Chad Mollen, Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal [23]

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Yes. It does.

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [24]

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Yes. Okay.

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Russell Chad Mollen, Nine Ten Capital Management, LLC - Founding Partner, Portfolio Manager & Principal [25]

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I have one more question. And now I'm blanking on it. So I think I'm good.

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Operator [26]

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(Operator Instructions)

Your next question comes from the line of Paul Dwyer with Punch & Associates.

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Paul Dwyer, Punch & Associates, Inc. - Director of Research [27]

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Nice job navigating Q1 -- I guess, your Q2. But could you spend a little more time talking about how payment segment has seen any issues from coronavirus?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [28]

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Yes. I guess the 2 things we've noticed there is -- obviously, there's been sort of a traction in trade and sort of cross border activity. That ultimately feeds into the payments business, right, because there is just less cross border stuff happening. So that's a pretty negative general trend. And I think we're probably still at the front end of that. So hopefully, that turns around at some point. So that's sort of generally negative. We didn't really see that in this quarter because the number of payments went up, but the payments were a lot smaller, right? So there are signs out there that, that is not naturally going to be a positive trend for us.

The thing that really hurt us this quarter is we had been getting a lot of, for us, sizable payments coming through the system related to capital investments, dividend payments, those kind of things. So it wasn't sort of the $100,000 payments, it was the $5 million payments. And obviously, we just make a lot more money on a bigger payment. And that was noticeable in how quickly that dropped off. So those nice big payments where we make a -- we make obviously a smaller percentage on those, but the absolute dollars is bigger. That really helps sort of boost our P&L. So I guess those are the sort of 2 trends. I think the second one was the one that impacted us more in the quarter. We continue to see a good flow of payments. I think they are smaller. And I think if the world sort of stays shut, you're probably going to start to see that reverse a little bit, I would suggest. But that's kind of my views on it.

But what we did tell you in my introductory remarks was one of the things we're pretty excited about is the sort of GIROXX platform. And we think there's an opportunity for us to really roll out to a new customer segment, which would be sort of small SME-type customers. You can't do that manually. I think there are some incumbent who're trying to do it and not doing it very well. And we think if we can roll out a digital platform there, we can start accessing on a broad basis, a new customer base for us. So that's a whole new sort of opportunity for payments. We believe we have all the pieces in place with the GIROXX acquisition. This little company we are buying in the U.S. is going to give us the ability to roll that up pretty quickly. And we think there are other places in the world where there's some application for that. That's not going to be instantaneous, like everything. I mean, when you start to build the business, it's going to take months, quarters and years to get there. But I think we feel pretty confident that there's an exciting kind of new chapter in the payments business ahead of us here.

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Paul Dwyer, Punch & Associates, Inc. - Director of Research [29]

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Okay. Great. And then changing gears a bit. Any update you can provide on the debt capital raise for GAIN Capital?

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [30]

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Yes. So we're working with Jefferies. Perversely and surprisingly, the markets actually look fairly stable at the moment, and the high-yield issuance has been pretty active. So we're sort of in-process with getting ourselves organized to get the capital in place in good time for the closing of that transaction. So all underway and kind of all on track.

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Paul Dwyer, Punch & Associates, Inc. - Director of Research [31]

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Perfect. Okay. And then maybe just last for me is you talked a lot about additional consolidation and opportunities over the next few years here. What do you think would make sense to add to the platform in terms of another leg? Or are you looking at just adding scale to the existing platform? Just talk a little bit more about what you're thinking the big picture there.

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [32]

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Yes. So I think the thing that makes our platform more valuable to customers is to make sure that we have sort of the one-stop shop for execution and clearing. So it's a little bit like a network, right, a network that goes to one place is not really valuable. So over the last 10 years, we've tried to add all of the markets and venues that we think are interesting to clients. That's sort of a never-ending process. I mean I think UOB acquisition was great for us because it positioned us well in some of the key exchanges and markets up in the Far East. So I think we'll continue to sort of add products and capabilities, and that will be sort of just a never-ending thing we have to do to keep our network relevant and to keep it exciting and sort of front and center with our customers. I think the more important thing now, given that we believe we already have kind of one of the best networks for execution and clearing out there cross-market, cross-product other than the bulge-bracket banks. What we really need now is more volume through the pipes. So that's going to require us to push out into more customer segments. To do that properly, we need to make sure we have the right sort of on-ramps onto our network. I mean, you can't use a very high-touch broker resist model for retail, for example. And you can't use a no-touch, no-service model for large customers that have complex solutions. So you've got to figure out how do you build those on-ramps to get that flow into your pipes. That's the tricky part of it. And I think we're doing well on that. And frankly, that was the real attraction with GAIN. They've got a highly digitized, very efficient on-ramp for smaller customers, and we think we can deploy that on-ramp through our businesses and make that on-ramp less, more frictionless and more attractive to customers. So I think that's really what we're looking for is how do we pick up more volume and more customers through consolidation. And ultimately, we want to own the end customer. We not sit it down. We're not a virtue. We want to own the end customer. We don't want to just be providing our services to other market competitors. So we really want to own that end customer. We want to provide that end customer with a platform that allows him to do whatever they want to do. We want to be part of the market structure. We want to provide the clearing and the execution and we need to build the right capabilities and the right platforms to do that efficiently. So that's really kind of what we're pushing through now is how do we build those on ramps? How do we get more customers? Do we acquire? Do we grow organically? Do we merge with someone? I mean those are all things we think about.

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Operator [33]

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At this time, there are no further questions.

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Sean Michael O'Connor, INTL FCStone Inc. - President, CEO & Executive Director [34]

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All right. So if we have no one else, I would just like to thank everyone for joining. Once again, our thoughts with the countless millions of people that have not fared well, and we certainly know we're amongst the lucky ones. We'll do all that we can to get to that new normal and be in a position to take advantage. I would like to thank all of our clients for trusting us through these difficult times. And once again, to our amazing and talented team out there, these guys have been warriors for us. So thank you, and we will be speaking to you in about 3 months' time. Thanks.

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Operator [35]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.