William J. Dunaway - Chief Financial Officer and Chief Accounting Officer Scott Julian Branch - Chief Operating Officer, Director, Deputy Chairman of IAHC (Bermuda) Ltd, Chief Executive Officer of INTL Assets, Inc, President of INTL Assets Inc, President of OTCL and Director of OTCL

Good day, ladies and gentlemen, and welcome to the INTL FCStone Third Quarter 2012 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Bill Dunaway. Please go ahead.

Good morning. My name is Bill Dunaway, CFO of INTL FCStone. Welcome to our earnings conference call for the third quarter of fiscal 2012, ended June 30, 2012. After the market closed yesterday, we issued a press release reporting our results for the fiscal third quarter. The press release is available on our website at www.intlfcstone.com as well as a slide presentation, which we will refer to on this call in our discussions of the quarterly and year-to-date results. This slide presentation is available by clicking on the Investor Relations link on the website and then going into the Events & Presentations page. You'll need to sign on to the live webcast in order to view the presentation. Both the presentation and the archives of the webcast will be also available on our website after the call's conclusion. Before getting underway, I'd like to cover a couple of housekeeping items. On these conference calls and in the management discussion portions of our SEC filings, we present financial information on a non-GAAP basis in order to take into account mark-to-market adjustments in our Commodities business. As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the U.S., which I'll refer to as GAAP, to carry derivatives at fair market value but physical commodities inventory at the lower of cost or market value, may have significant temporary impact on our reported earnings. Under GAAP, gains and losses on commodities inventory and derivatives, which the company intends to be offsetting, are often recognized in different periods. Additionally, in certain circumstances, GAAP does not require us to reflect changes in estimated values of forward commitments to purchase and sell commodities. For this reason, we believe that the GAAP numbers do not reflect the commercial results of…

Thanks, Bill, and good morning, everyone. Just to note that Sean O'Connor, our CEO, who normally makes these presentations, is actually on the line. He is calling in remotely, and because we weren't completely confident of communications, we thought it was best that I give the presentation. He will be available, likely, at the end of the call for Q&A if the communications continue to prevail. And we also have Pete Anderson here with us as well. So in Q3 2012, we've produced a GAAP net income from continuing operations of $4.7 million and a mark-to-market or adjusted net income of $5.3 million. This was almost double the immediately preceding GAAP results for Q2 2012, up $2.4 million and a 39% increase over the adjusted net income of $3.8 million. A year ago, we had a GAAP net income of $10.4 million and adjusted net income of $9.2 million in very favorable market conditions. Our adjusted operating revenues were $124.7 million, another record quarterly revenue for the company. This represented an increase of $21 million or 20% from a year ago. These results demonstrated trends of modest improvement that started in the preceding quarter and continued through Q3. The main driving factors behind this improvement were continued improvements in new growth initiatives. The most significant was the LME activities with operating revenues jumping 28% from $5.4 million in the preceding quarter to $6.9 million in Q3. As a result, our LME activities went from producing a small profit in Q2 to a $1.2 million profit in Q3. We also saw improvements in the TRX acquisition, our Australian and Chinese initiatives as well as investment banking, which all began to approach or breakeven levels or produce modest profits. Second point is that, overall market conditions started to improve from the headwinds…

Thank you, Scott. I'd like to start my discussion with a review of the quarterly results and refer to the third page of the slide presentation titled Quarterly Financial Dashboard. This slide lays out the quarterly operating results as well as related balance sheet information in comparison to the prior-year period as well as in some cases, the internal target, which management has for our operating results. As Scott mentioned, adjusted operating revenues were a record $124.7 million for the current period, up 20% from $103.5 million in the third quarter of last year. Adjusted operating revenues were $121.9 million in the second quarter of 2012. Every segment of the company experienced growth in adjusted operating revenues in the third quarter, as compared to the prior year, led by a 74% increase in the Clearing and Execution operating revenues. Looking at our revenues on a segmental basis, adjusted operating revenues in our core Commodity & Risk Management Services segment increased 7% from $63.6 million in the prior year period to $67.9 million in the third quarter of 2012. Adjusted operating revenues were relatively flat for the period versus second quarter revenues of $68 million. Our CRM segment is further broken down into 3 product lines: soft commodities, precious metals and base metals. Starting with the soft commodities, operating revenues increased 7% to $54.7 million in the third quarter as compared to the prior year period. Exchange traded contract volume increased 9% to 974,000 contracts as compared to the prior year, driving a 7% or $1.1 million increase in commission and clearing fee revenues. OTC contract volumes in this product line increased 52% as compared to the prior year to 467,000 contracts, driving a $3 million increase in OTC revenues. Both of these volume increases were primarily driven by increased volatility…

Thanks, Bill. Although our quarter's adjusted ROE of 6.6% is below our target, we believe it demonstrates that we are on the right track. We have both undertaken a meaningful expansion and at the same time, produced a moderate result under continuing weak market conditions. We can't predict when market conditions will improve, but we now have a large platform in place to reap greater benefits when volatility increases or interest rates go up. Irrespective of market conditions, we should see continued improvements as we generate additional revenue from the new initiatives that we've undertaken, and customer expansion for our existing activities. With much of this incremental revenue dropping through to the bottom line. At the end of the last quarter's call, Sean fielded a question about stock buybacks. As mentioned in our filings and during Bill's presentation, we did buy back shares during the quarter. This was done under predetermined parameters based on book value per share. As I stated earlier, compounding book value per share is our main objective. Over the past 10 years, we have increased book value per share at a compound rate of 26% per annum. This increase was roughly equally split between net income and capital transactions. We will continue to focus on creating shareholder value through both means in a disciplined passion over the long term. Including situations where the market's sometime erratic valuation will almost certainly provide future opportunities for us to build buyback and issue stock on an attractive basis. With that, I'd now like to turn it back over to the operator to open up us -- us for the question-and-answer session. So Nicole.

[Operator Instructions]

Okay, Nicole, it appears that we don't have any questions. We appreciate everyone who's joined us on the call this morning, and look forward to speaking with you all, again, in the next quarter. Thank you very much.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.