TMX Group CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: TMX Group (TMXXF)

TMX Group, Inc. (TMXGF.PK) Q4 2010 Earnings Call February 9, 0000 8:00 AM ET

Executives

Paul Froud – Investor Relations

Tom Kloet – Chief Executive Officer

Michael Ptasznik – Senior Vice President and CFO

Analysts

John Reucassel – BMO Capital Markets

Doug Young – TD Newcrest

Paul Froud

Yeah. Thank you, Xavier. And with that, we’re going to move to the second portion of our call. Now, we’ll focus on the Fourth Quarter 2010 Results. Tom, we’ll go over to you?

Tom Kloet

Okay.

Michael Ptasznik

We just take a moment here, because there might have some noise in the room and we want to make sure all the participants can hear well.

Paul Froud

Just hang-out 30 seconds while we get back. And we will proceed.

Tom Kloet

Okay. Thank you, Paul. I’ll keep my remarks brief and but I do want to spend a few minutes discussing TMX Group’s performance in the fourth quarter of 2010 and then, actually we’ll happy to answer your questions after that.

We are quite pleased with our financial and operational performance this quarter, all of our markets posted record breaking trading volumes, contributing the TMX Group’s solid revenue growth. I’ll start with our equity’s business.

Simply first, we had great year in the listing business. Toronto Stock Exchange and TSX Venture Exchange welcome 490 new Canadian issuers to the market. We are proud that businesses in Canada, CTSX and TSXV add their home exchange.

We’re also very pleased that there were record number of 55 international listing in our exchanges. This achievement is due to our efforts in 2010 certainly, but I think we can also stop this number of new listings up to our earlier efforts, we built out. We continue to invest in business development efforts throughout the economic downturn and now I can see that we have earned a return on this investment and time and resources.

You saw in our monthly trading statistics that TSX Venture Exchange had a very strong year, surging to pre-recession trading levels. Our two exchanges together also set a combined trading volume and transaction record during the fourth quarter.

Combined equity market share remained stable throughout 2010. We think that this is the case because, one, we made the necessary investments to give our trading enterprise market leading, two, we introduce pricing changes earlier in the year to maintain our competitiveness and three, we introduced innovative new trading products to meet new and evolving market needs.

For example in the fourth quarter, we launched our Smart Order Router turnkey and announced new non-display order types, which will meet our customer trading needs while maintaining market integrity. Focusing on those three drivers, we’ll continue to keep our marketplace very competitive in the future.

Turning to derivatives now, the Montreal Exchange had another excellent quarter posting several trading records, compared to 2009 trading volume was up 28% and open interest was up 30% for the year.

Excuse me, during the fourth quarter; MX launched a volatility index, the S&P/TSX 60 Index which compliments the S&P/TSX 60, the leading equity index in Canada. The SOLA Technology team also successfully implemented the derivatives trading platform on broad (inaudible).

Turning to our energy business, NGX achieved a record in trading volume in 2010 was level through passing the previous record set in 2009 about 13%. Importantly during the quarter, NGX announced that it will provide the Alberta Department of Energy with an Alberta Natural Gas Price Index, which forms the bases of the royalty obligations for Alberta energy producers. In last month as I indicated earlier in our conversation, NGX announced that has expanded it successful alliance with the IntercontinentalExchange to include U.S. and Canadian crude oil products.

Our information services business experienced solid growth in both data subscriptions and in revenue during the fourth quarter. Our customers have been installing their trading system at our new collocation facility and we are pleased with the incremental revenue that it is already generated.

That was a fast look at our key achievements in the fourth quarter and in 2010. I’ll now turn it over to Michael, who will take you through financial results for the quarter and year ended December 31, 2010. Michael?

Michael Ptasznik

Thank you, Tom, and good morning, everyone. Taking Tom’s lead I will make my comments brief this morning and a lot of time for your questions. I won’t go to every item in this morning’s Q4 press release, but I did want to touch on some important highlights.

Revenue was $151.5 million in Q4 2010, down $2.1 million, 1% compared with the $153.6 million for Q4 2009. However, if you exclude the one-time SOLA license fee that we received from the LSE of $13.5 million in Q4 2009, revenue was actually up 8% compared to last year.

Revenue from issuer services, fixed income trading, derivatives trading and clearing, as well as information services which was formally called market data, all increased in Q4 2010 over Q4 2009. This was somewhat offset by decline in equity trading revenue over that same period.

Now, it’s unfortunate that we one day we should begin our IFRS gap reporting last quarter, in the fourth quarter 2010, there was a significant surging in listings activity, as you saw in the results revenue built exceeded revenue received by $22.7 million in the quarter, which would have been approximately $0.20 per share.

We also have higher operating expenses in Q4 2010, compared with Q4 2009, this is primarily due to higher compensation benefit and G&A. The higher comp expenses related to our long-term performance incentives that are tied to share price appreciation. We saw a 17% increase in the share price in the quarter. In addition, we also saw commission based incentives and higher organizational transition costs in Q4.

General and administration expenses were higher due to corporate development costs, which I now happy to tell you a partner related to work that we’ve been doing on the merger with LSE Group and higher marketing expenses. As we continue to promote our products and our brand. As well as, there is $1.3 million one-time lease liability adjustment which was recognized last year.

Net income was $49.1 million or $0.66 per common share for Q4 2010, compared with the net loss of $26.8 million or $0.36 per common share for Q4 ’09. Net income for Q4 2010 was reduced by $1.7 million or $0.02 per common share as a result of non-cash write-down of our 19.9% interest in EDX to its estimated fair value.

On an adjusted basis, net income for Q4 2010, was $50.8 million or adjusted EPS of $0.68 per common share, lower than the adjusted net income for Q4 2009 was $50.9 million or adjusted EPS of $0.82 per common share. However, again, $0.82 includes $0.14 from the SOLA license fee. So if you exclude the License fee EPS would have been flat year-over-year.

Turning now to our sequential performance, we saw sustain momentum across our business. Revenue in Q4 2010 increased over revenue in Q3 2010, primarily due to significantly higher cash market trading revenue driven by 39% increase in volumes, as well as higher derivatives trading and clearing revenue.

Net income was slightly low in Q4 2010, compared with Q3 2010, due to higher comp and benefit costs, largely as a result of our higher short and long-term incentives, merger-related corporate development costs and higher marketing expenses. As well as I mentioned the $1.7 million write-down on EDX.

Turning briefly now to our full year results, revenue was $575.5 million in 2010, up 3% compared to 2009, reflecting increase revenue from issuer services, cash market fixed income trading, Canadian derivatives market trading and clearing, information services and energy markets trading and clearing. This is partially offset by lower revenue from cash markets equity trading, U.S. derivatives market trading and tax services.

Net income for 2010 was $196.5 million or $2.64 per common share on a basic and dilutive basis, compared with net income of $104.7 million or $1.31 per common share on a basic and dilutive basis for 2009, representing an increase of net income of 88%.

Operating expenses in 2010 were $286.5 million, up $9.6 million or 3% from $276.9 million in 2009, primarily due to higher costs related to incentive base compensation, technology initiative, corporate development and marketing expense.

Cash and marketable securities totaled approximately $330 million at December 31, 2010, an increase of $139 million from December 31, 2009. We generated over $280 million in cash flow from operations in 2010, a 37% increase over 2009. We currently have $430 million of debt, which we will refinance before the end of Q1 2011 in a manner that takes the transaction into consideration.

And finally, the Board declared a quarterly dividend of $0.40 per common share will be paid on March 11, 2011 to shareholders of record at the close of business on February 25, 2011. The plan is to continue with dividend payments until the transaction closes with the last dividend being prorated.

With that, I would like to turn things back to Paul for the Q&A session.

Paul Froud

Thanks, Michael. Operator, could you please outline the process for the question-and-answer session.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Your first question comes from the line of John Reucassel of BMO Capital Markets. Your line is now open.

John Reucassel – BMO Capital Markets

Good morning, again, Tom and Michael. Just, I want to get back to the proposed transaction and I just want to make sure, I understand what the TMX shareholders being asked to look at here it is, you are going to own less of the merge and so 45% merger entity and have the lower dividend, and in exchange for that, I just want to make sure, is it clear, you would expect this entity to grower faster than TMX on the standalone basis? Is that right, Tom, do I have that right?

Tom Kloet

Well, certainly on the second part, yeah, I think that merging our institution to a global enterprise will give us opportunities that will allow us to expand the revenue base faster than we could on our own, I think, that absolutely fair, that’s clearly one part of the vision of this combination.

John Reucassel – BMO Capital Markets

So if you could put a number, like if and sustainable earnings growth, I know, Michael doesn’t like to talk about it but this might now be the time when you are talking (inaudible) sustainable earnings growth that TMX, I know you want to throw over 10% or 12%. So pro forma that deal is this 12 to 15 EPS growth or what are the numbers that we can?

Michael Ptasznik

Yeah. John, we are not -- we're not going to give revenue guidance. That’s been our policy that we don’t. We’re going to continue not do that. We’ve given it a part of a deal and overall view of what the combine institution will generate revenue growth. I’m sympathetic for your desire to get and I absolutely understand it but that’s the institution is back and I do that. That’s not what we’re going to do.

Tom Kloet

John, may be if I can add, you can think about it, if you have a TMX item and if you believe that LSE Group has similar growth prospects as standalone and then we’ll also try to articulate the growth, the synergies, the revenue synergies of 35 million, I think, it’s 35 million pound and you’re going to -- 160 million Canadian in your file, is what the target is. So that’s the additional growth on top of the individual growth of the two businesses on their own. So that’s where you get the -- the increments were bumped, if you’re looking for some sort of target. Whatever, you guys have looked into your assumptions; with respect to the growth prospect is an additional 160 million targeted growth between the two organizations together.

With respect to the dividend policy, the idea is and it is very consistent with the concept of being a merger and a merger of equal share, is that the combination of both of our dividend payments together, both of the individual’s total amount of cash, I guess, added together and that will be the first payment for the new organization. However, it is important to note that both of our organizations have actually very similar approaches with respect to our dividend and we will be taking it over time. They terminate a -- The LSE Group terms it a progressive dividend policy which is very consistent with our approach of trying to raise our dividend over time as earnings and cash flow growth.

So while you’re staying in the short term end, there may be a lower yield over the long-term both the organization individually and then coming together, we’ll look to try and increase that dividend as the earnings and cash does increase.

John Reucassel – BMO Capital Markets

So Michael, put another way, the higher EPS growth platform should lead to higher dividend growth potential.

Michael Ptasznik

That’s a plan only but the kind of work is going to get us there. Yeah, that’s the plan, John.

John Reucassel – BMO Capital Markets

Okay. I think for one of us it’s worth, I think, the question from Charles is going to be here is the merger of Equals but you are being a minority partner of 45%. I understand Equals but it is a modest premium to the shares. Anyway, you guys -- no not, I just wanted to pass it along and we’ll still watch over the next few months.

Michael Ptasznik

Thanks, John.

Paul Froud

But if, John, if I can just -- I'm going to jump in and just make one comment because I think it is important for people to know. The 45-55 split, if you look at a whole host of demographics in terms of, one could look at revenues, one could look at net income, one could look at billed net income. That struck me as we looked at the dealers, exactly the right space for that ownerships but to come out. I’m happy that it came out with a premium we just articulated. But I think it’s a very fair split of the business based on the sides of the business and where we ended this partnership at.

And I think it’s reflective of our two merger of equal size virtually. Any analysis one would do whether it’s the board composition, the management composition, how Xavier and I are splitting responsibilities and how the structure of the organization is going to work. This is a true merger of Equals under any definition from our perspective.

John Reucassel – BMO Capital Markets

Okay. Great. And just, will you -- might be, will you reporting quarterly or just biannually thrice a year?

Paul Froud

We will still do -- because we’re going to be listed on the TFX [ph] we will continue to report on a quarterly basis.

John Reucassel – BMO Capital Markets

Thanks. Okay. Thank you.

Paul Froud

So you not done with us on a quarterly basis.

Operator

Your next question comes from the line of Graham Riding [ph] from TD Newcrest. Your line is now open.

Doug Young – TD Newcrest

It’s Doug again. I guess, first question, Michael, you said there is some one-time corporate development cost related to the merger. Can you just split what that was?

Michael Ptasznik

Yeah. I think, it’s included in the release. I think it is 1.3 million in the quarter and -- sorry 1.2 and 2.6 on the year, 2.8 on the year. Thanks Paul.

Doug Young – TD Newcrest

And then there was also an EDX write-down, 1.7, that was Q4.

Michael Ptasznik

Correct. And that was $0.02 on an EPS basis.

Doug Young – TD Newcrest

$0.02. And there wasn’t anything else unusual.

Michael Ptasznik

The only one that I highlighted was the (inaudible) because the share price appreciation had a fairly significant impact on the compound benefits line and that’s due to the -- I think the share prices are 70% in the quarter.

Doug Young – TD Newcrest

Did you quantify how much that was?

Michael Ptasznik

No. I don’t think we (inaudible) for you.

Doug Young – TD Newcrest

Okay. And then Tom, just on the deal, obviously, the big opportunity the people have been looking for in Canada for you guys has been the movement of OTC derivative (inaudible) and to the third-party clear corp. and obviously this has been a move globally but you have wanted the made in Canada solution. So I’m curious your views now with this merger. Does this put you in a better position to capitalize on that and/or is it more difficult. Sell now is a made-in-Canada solution.

Tom Kloet

It clearly makes it as clearly beneficial to that effort. The reason I say that is TMX Group as a regulated entity and CDCC has a regulated entity. We’ll continue to be regulated by Canadian authorities with significant shareholding in Canada. So I still feel though that as a made in Canada solution. And we’re -- you know, I think, we’re pretty advanced in our thinking on a relative basis, in terms of the OTC derivatives space.

Though, one other things that I think this helps is LSE does have a European based clearing house and one of the key is that I think, our market participants, our domestic Canadian market participants are going to lot is interoperability at the clearing level for OTC derivative products. This gives us a step towards that. I don’t think it takes us all the way to where we need to go but we’re making a step here. Xavier and I have talked a lot about the OTC space we have.

Big ambitions around that and as you’ve seen in some of the other call, so I think you should watch the tape on this over the next period, months and years may be. We have real opportunities here and I’m probably more excited about that aspect of potential then I was before the transaction.

Doug Young – TD Newcrest

And that’s obviously and your guidance are revenue synergies or is that or you be conservative -- are you being conservative in terms of what that could be or do you think there is further upside within that on the revenue synergy side?

Tom Kloet

It’s always hard to target the revenue synergies. You know, they are -- why we think that the …

Paul Froud

The market doesn’t exist anywhere.

Tom Kloet

It’s hard to do that. We have been somewhat behind those revenue synergies, obviously to come up with those numbers but when you’re looking five years obviously, we looked at what will make sense and how we think we can get there. But obviously we think that there are significant upside potential in the organization and that with some of these products, you either hit or miss. And if you get a hit, you could actually get a significant home run and it could be significantly larger but unfortunately the foot side of that is if it’s a miss then you have to deal with that.

So we think that the number that we put out there is a 160 million in your file is the right place for us to target but obviously or organizationally we’re going to look to achieve greater numbers.

Doug Young – TD Newcrest

And just lastly on the repo side, is that up and running now in Canada and can you talk about how that has been going so far?

Tom Kloet

Repo is not up and running yet in consultation with the dealing community. What we decided to do is combine. We had a four phase introduction where we had hope to introduce the first phase in the back end of 2010. In consultation with the community, the community has come back and said, let’s combine a couple of these phases and introduce it in the second half of 2012. And when your client asked you to do that, that’s the right – excuse me -- 2011, I said 2012, I meant 2011. Pardon me.

When your client ask you to do something like that you clearly want to listen to them, it clears a lot of work on their side as well. And if by combining, it gets a bit granular to describe the various phases but if by combining the two phases, we make the product that much more interesting for our dealer side colleagues. We’re happy to address that need.

Doug Young – TD Newcrest

Thank you.

Paul Froud

Doug, I’m just going to add one quick or two quick items to the other questions about any one time things in the quarter. Just to remind you that, if you’re comparing versus last year 2009, it was lease liability reversal of $1.3 million. So that benefited that quarter and then this is a bit of a tariff but on the -- of the taxes, because we had such a strong quarter from a cash bill or (inaudible) standpoint, we actually end up with -- if any thing happen on the taxes is that there actually one, it is about a $0.01 there of additional tax expense because of the deferral of those revenues to future periods where the interest -- income tax rates are lower.

So it’s not worth getting all the detail but they are followed by another stand that came off of the EPS because of the difference in the way that we handle the revenue received on the listings basis.

Doug Young – TD Newcrest

Okay. Thank you.

Tom Kloet

Thanks Doug. Operator, do we have any other questions.

Operator

(Operator Instructions)

Tom Kloet

Doesn’t sound like there are any other folks in the queue, so just want to thank everyone for listening today the contact information for media as well as for investor relations, is in both of the press releases we issued today and we’ll be happy to take any further questions. Once again, thank you for joining us and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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