FCSX Notes

10Q – 2/28/07 (Q2)

• Other assets: Has taken delivery of grain for benefit of customer resulting in $18.6m asset

• Definied benefit plan covers substantially all employees

• Provide both execution and clearing services to clients

• 4 segments

  • Commodity & risk management services (C&RM)

  • Clearing and execution services

  • Financial services

  • Grain merchandising

• High commodity price volatility drives demand for risk management

• Financial performance generally benefits from rising interest rates

• Revenue period to period has less meaning because includes sale of commodity which is offset by purchases

• Risk management consultants compensated based on revenue they produce

• Strong growth in net income driven by contract trading volume, higher interest rates and larger customer balances

• Participation in renewable fuels helped drive volume increase

• Revenue (net of commodity sale/purchase) up 42% QoQ

IBD 6/13/07

• Provides risk management consulting to commodity wholesalers, end users, and producers.

• Clients have at least $5m a year exposure to commodities markets

• Q2 EPS up 78% to $0.41, Revenue up 50% to 403.5m

• Heightened volatility driving growth as clients more uncomfortable managing the risk alone

• Employs 110 consultants

• Some clients have been with the firm 30 years

• Potential to build more with livestock and food services

Observations 6/13

• Announced sale of portion of FGDI (still retains 25% ownership) for 6.75m – grain merchandiser

• Trading at 32.5x 07 eps, 29.5x ’08 expectations

6/26/07 – WMB conference notes

• Company on track to expand risk management consulting base by 20 professionals this year

• International expansion key priority (prospects in Brazil and China)

  • Has developed FCM relationships with access to china markets

  • Has a foothold in Brazil so one step ahead of potential competition

• Sale of majority position in Grain merchant frees up capital for other strategic acquisitions

Q3 (May) release and conf call

• Rev (net) 64.4m versus 47.6m y/y up 35%. NI 8.1m ($0.43 eps) versus 4.1m (0.28)

• Higher exchange traded volumes related to grain and energy volatility, higher OTC vol, strength in financial services program, forex commissions, interest rates.

• Expenses – higher broker commissions, clearing fees and increased interest expense

• “Continued traction in targeted growth areas” (Brazil and China)

• Segments – all four showed gains, financial services and grain merchandising both profits versus loss last year

• 3/2 split (50% stock dividend) Sept 17 record

• Balance sheet cash held for looking at various acquisition candidates and expansion opportunities.

• Renewable energy programs pushing grain prices and volatility much higher.

• Worldwide demand for soybean production migrating to Brazil

• Several china FCM’s in the pipeline with 3 expected to be online next month

• Appear to be on course to reach goal of adding 20 new consultants in calendar 2007

• Registered to sell 4.3m shares (pre-IPO stockholders) FCSX not receiving proceeds and executives not selling shares – expected August 2007

• Should file 10Q 7/13

• 20 direct china customers in the pipeline approved to trade outside the country – represents dozens of indirect relationships.

BMO report 7/16/07

• substantially increasing expected performance based primarily on stronger projected net interest income.

• Had not been counting non-CFTC balances – als has used IPO funds to pay down debt and cut interest expense

Earnings Release and Conference Call (11/15/07)

• Revenue $75.6m versus 52.7m (up 43%); Net Income 12.0m or $0.42 per share versus 3.9m or 0.18

• Higher revenue due to three primary categories

  • Exchange Traded volumes with increased volatility in grain and energy markets

  • Higher OTC volumes especially in renewable fuels

  • Increased Foreign Exchange commissions and interest income on higher balances

• Continuing to build network of risk management consultants

• Four international offices 1)Capenos Brazil, 2)Beijing China, 3)Winnipeg Canada, 4)Dublin Ireland

  • China represents consumption side

• Total consultants and trainees increased from 102 to 118 – expect to add 20 consultants in 2008

• Record supply of corn being met not only by energy demand but also traditional consumption demand

• Collapse of Sentenel due to credit crisis in August was unfortunate but FCSX is protected against similar situation happening again

• Weakness in rates should be offset by growth with customer funds

• Holdings in CME being liquidated above amount needed for clearing

• CFO resigning after Jan 3008 annual meeting (Bob Johnson) but will remain involved in an advisory role

  • Will be replaced by William J Dunaway (currently EVP and Treasurer)

• Volumes picked up considerably due to a couple new clients with high volumes and lower rates

• FX was a great quarter and revenue may drop off next quarter but as a general trend is becoming part of strategy for more and more clients

• Some delays in ethanol plants may continue as overall margins have decreased but some new plants will be completed and FCSX should participate in added volumes

• First quarter looking good but following spectacular Q4 which will make comps tough

• 40-50% of ethanol producers work with FCSX and as total industry grows, hope to maintain market share – maybe increase

BMO report 11/16/07

• RPC $2.12 in Q4 versus $2.50 in Q3 due to additional large scale clients

• OTC was particularly strong with higher volumes and higher RPSC likely due to more FX transactions

• Four drivers of success:

  • Addition of large professional trading clients

  • Robust volatility in Agriculture and energy markets

  • Expansion into rapid growth Brazil markets

  • Exposure to ethanol and biofuel markets

• Potential for FCSX to add additional high volume clients

• Margins very attractive and likely to continue to improve

• Investment in Green Diesel plant on hold as retrofitted with different technology

  • Should not require additional investment but pushes production back a few months

• First carbon credit transaction likely to be completed in Q1

• Some speculation FCSX could make an attractive takeover candidate but nothing appears to be in the works.

 

EPS Release and Conf. Call for Q1 (ending Nov 2007) – 1/14/08

-          Revenues (net of commodity costs) 73.7m up 29%, EPS 0.45 versus 0.29 (55%)

-          Growth in exchange traded volumes due to volatility in grain and energy markets, higher OTC volumes and higher interest income from segregated accounts

-          “Anticipate continued demand for our products and services.”

-          Commodity and risk management segment revenue up 44%

-          Clearing and executions services segment revenue up 38%

-          Recent transaction with Downes O’Neil significantly boosts risk management presence in Dairy industry

-          Continue to evaluate acquisitions of firms with same interests and philosophies

-          Demand generated by renewable energy industry has resulted in largest increase and largest crop of corn production in US history

-          Anticipate continued growth in demand for risk management

-          Expansion in Brazil including a diverse assortment of commodities (Sugar, ethanol, coffee, foreign exchange, and consulting) – Represents the supply side of the equasion

-          China division adding new clientele

o        3 of the future commission merchants approved to trade outside China opened accounts with FCSX – Represents the demand side

-          Added 16 consultants in 2007 (total 118) and expect to add 20 in 2008

-          Agreement with OMX to develop an ECN to trade OTC contracts more efficiently

-          Green Diesel and biodiesel plant should be complete by end of calendar first half 2008

-          Softening interest rates are a headwind but should be offset by increase in customer funds (company also hedging some exposure to declining rates

-          Total Balance sheet assets $1.7b

MF Press Release 3/17/08

-          Company says it has “sufficient funding” to conduct business in normal course and no exposure to sub-prime MBS

-          Uses “third party repo lines” but has alternative funding if these lines unavailable – 1.4b in committed undrawn credit facilities

-          Joe Lewis not a client (rumors his BSC loss will force him to liquidate other positions)

 

BOA Release 3/17/08

-          Believe potential MF-related issues will not affect FCSX to a meaningful level

-          Unlike MF, FCSX does not run a fixed income prime brokerage book or repo book – has minimal amount of activity in interest rates and equities

 

FCSX Statement after close on 3/17

-          No direct exposure to sub-prime MBS or auction rate securities.  Does not use 3^rd party repo lines to provide liquidity

-          Continues to trade with all counterparties

-          Current volatility continues to demonstrate the need for the services we provide.

 

EPS Release and conf call – 4/10/08

-          Q2 (ending 2/29) revenue $91.2m versus 60.1m y/y (up 52.%), net income $0.42 per share versus 0.32 y/y

o        From continuing operations EPS was 0.61 versus 0.32 last year

-          Results driven by higher exchange traded and OTC volumes related to high volatility in energy and agricultural markets

-          After testing biodiesel fuel plant, decided to sell plant asseta and inventory

o        Recorded 10.8m loss as market value likely below carry value on books

-          Volatility fostered atmosphere which increased necessity to manage volatility through risk management services

-          No exposure to sub-prime mortgage securities or auction rate securities.  Does not use 3^rd party repo lines to provide liquidity

-          Counterparty risk is still an issue as FCSX serves as intermediary on many trades

o        Risk mitigated through credit default swaps

o        Clients currently facing higher margin and other requirements creating difficulty in maintaining comprehensive hedges for some

-          Witnessed no change to operating business model in last 90 days

-          Continues to expand in Brazil covering primarily grain production but also sugar, ethanol, coffee, forex and consulting

o        China adding customers in grain, metals, energy, cotton and forex

-          Acquisitions of Downes O’Neil, Jernigan Group, and Globecott expand customer base and are tracking well

o        Will continue to discuss acquisitions

-          Carbon initiative should offer customers market for trading carbon credits

-          Customer funds $1.45b versus 861m year ago so while interest spreads are pressured, higher balances led to increase in interest income

 

WMB Report 4/11/08

-          Significantly higher revenue and margins in both major businesses with no slowing near term

-          Continued volatility in commodity markets driving unprecedented demand for FCSX risk management

-          Moving 2008 estimate (year end August) to $1.93 and 2009 estimates to $2.00

-          Susceptible to clients failing to meet margin calls but stricter frules due to volatility should prevent material losses.

WMB Report 6/22/08

-          Near-term momentum strong, driven by volatility in agricultural prices – offset by lower short-term rates

-          Credit crisis creating difficulty in that customers find it difficult to fund margin positions

o        Margin requirements have increased with unprecedented volatility

o        Flooding may not increase risk management business due to higher margin costs

-          Continue to ramp number of consultants as business grows

Press Release 11/3/08

-          Expects to set aside $25m for bad debts in Q1 (ending November)

o        Appears to be 3 accounts in question – energy trading account and smaller renewable fuels account and forex account

o        Expects bad debt provision to be adequate

-          Company added to risk management staff – completed complex review of all accounts

-          Capital position and liquidity remains strong - $511m in credit lines of which $33m currently drawn

o        5/31 – stockholders equity of $217m

-          Company will release EPS 11/13