TMX Group Limited

Michael Ptasznik - Chief Financial Officer and Senior Vice President Paul Malcolmson - Director of Investor and Government Relations Thomas Kloet - Chief Executive Officer, President and Director

Doug Young - TD Newcrest Capital Inc. Edward Ditmire - Macquarie Research John Reucassel - BMO Capital Markets Canada Paul Holden - CIBC World Markets Inc.

Shubha Khan - National Bank Financial, Inc. Phil Hardie - Scotia Capital Inc.

Justin Schack - Rosenblatt Securities

Well, I think the short answer to your question is with respect to whether or not visas entry into the Canadian brokerage business. I’ll remind everybody that one, we're not merging the exchanges themselves only the holding company and the support structure around the holding company.

And second, the marketplaces will continue to operate under the existing regulatory structures that they do, meaning, the TSX will still be regulated by the Canadian Regulatory Structure, however they're involved. Same thing with Venture Exchange, same thing with MX, same thing with CDCC, and I don't think our combination necessarily makes it -- reduces the barrier to entry for new brokerage firms coming in.

It certainly does globalize our business, I think that's an important factor. We do become an element of an international player and I think it makes this institution stronger, as well as providing some new products for our stakeholders.

But I don't think it eases the entry of new brokers anymore than it sees today.

What it does do is through the connectivity that we plan on setting up between us and the LSE, helps facilitate the access for investors to come through and could be brokers as well. But whether they choose to execute through Canadian brokers, then that volume could actually increase some of the activity here, it is a plan.

So it could bring additional order for us to those Canadian dealers by making it easier for investors on the other side of the Atlantic to be able to come over to our marketplace.

Just first question, when is the shareholder vote? And when is the circular expected to come out?

Well, what we are doing, Doug, is we're holding our annual general meeting and special meeting of shareholders on June 30. And notification of this spec was made through the normal process.

That meeting includes an advisory vote on our approach to compensation. The classes, what's now classic say on pay for us, which is the special business.

We're in an advance stage of planning for a merger special meeting and expect to make that timetable for this public in due course.

And the circular?

Same thing with the circular.

So maybe the next month we should learn more about that?

Well, as I said, we'll make that as we align the date, we'll make it public.

Okay. And then just, Michael, just a few number questions, tax rate, is this what we should be expecting?

And the trust revenue related to conversion, can you quantify that or give us a sense what the impact was?

So from a tax rate standpoint, that is roughly the range that we expected to see this year, barring any significant items. And then with respect to the income trust, it's roughly around $3 million for the quarter.

I'm just wondering to what extent, if you guys -- when you guys achieve cost savings from the proposed merger after it goes through, to what extent does that give you more flexibility to be more aggressive on pricing?

Well, I think that like whenever we put a cost decrease into our marketplace, the idea is some of the benefit of that goes to the client base and some of it goes to the shareholders. And I think -- it's a bit premature for us to say or even state what an overall policy on that is going to be.

But clearly, we recognize we operate in competitive marketplaces, and that's important. And it's also important that our shareholders get the reward for the efforts the company makes, our efficiency, and our job is to balance those 2 needs.

But it's a bit premature to try to suggest that X percent of that cost savings is going to go one way versus the other way.

You were right, I guess I was just trying to establish that that's part of the thought process there, it's not always -- the shareholders get everything this does give you more flexibility to be more competitive on the cash equities side particularly.

Well, for sure. We recognize that it is a competitive marketplace.

We happen to think right now, given as I've said before, we offer the lowest regular Continuous Limit Order Book pricing, and it hit our rewards tier. On the TSX, I believe the incremental spread is $1 million.

And the same thing in the low-CLOB marketplace, I think we're offering great value.

Just because – it’s $0.5 million in the..

Excuse me, $0.5 million, sorry.

In the low-CLOB market.

Yes, $0.5 million, I'm sorry. So even better than that.

Even lower.

But we're continuing to offer the lowest continuous order book price.

I did have a quick question on market data. So there were some reports in the media recently, late April, about ongoing discussions between yourselves and the brokerage industry.

I think it's with the IIAC specifically, about changes to market data fees, and the report I read suggested that there could be a cut of up to 25% in those fees. Can you give us any details on that, where you stand with your discussions with the IIAC or even any other stakeholders?

Well, I think the news report you're referring to suggest that we were negotiating. There's no agreement being negotiated with IIAC just to be clear.

We do meet regularly with important stakeholders like the IIAC, however, we don't -- it's not our normal activity to enter into agreements with an industry association like IIAC. We arrange fees directly with our clients and are in regular conversation with our clients.

Although, we are quite interested to hear what the industry association thinks of our fees as well as other matters, so we do and want to be clear, we do want to maintain a dialogue, but the idea that we were negotiating was I think purely speculative.

Great. Thank you very much, everyone, for listening today.

The contact information as well -- is in our press release for Investor Relations and Media and be happy to take any further questions that you have today. Once again, thank you, and have a great day.

Thank you, Michelle, and good morning. Thank you, everyone, for joining us today for the first quarter 2011 conference call for TMX Group.

As you know, we announced our first quarter results this morning. A copy of the press release is available on our website, tmx.com, under Investor Relations.

Today, we have with us, Tom Kloet, our Chief Executive Officer; and Michael Ptasznik, our Chief Financial Officer. Following opening remarks from Tom and Michael, we will have a question-and-answer session.

Before we begin, I would remind you that certain statements made on the call today may be considered forward-looking, and I would refer you to the risk factors outlined in today's press release and in reports filed by TMX Group with regulatory authorities. Now I'd like to turn the call over to tom.

Thank you, Paul, and good morning, everyone, in North America, and good morning in Europe who might be listening in on our call this morning. As you can see in the earnings report we issued earlier this morning, the first quarter of 2011 was very successful for TMX Group.

Our financial and operational results were both excellent. But beyond our performance, the first quarter of 2011 marked an historic period for our company with the announcement of our proposed merger with the London Stock Exchange Group.

Since we announced the merger on February 9, 2011, we have had about 1,000 meetings with our many stakeholders. We have spoken to customers, shareholders, governments, regulators and industry groups.

Clearly, a great deal of effort has been invested. However, I think our results clearly demonstrate that we have remained focused on the effective day-to-day operation of our business.

I thank our customers and partners for their continued confidence in TMX, and I thank our team for their continued commitment to excellence during this period. I'll spend a few minutes now reviewing our operational performance before turning it over to Michael to discuss our financial result with you.

I'll start with our Cash Equities business. Financing at TSX Venture Exchange exceeded first quarter 2010 levels by 97% and total financing on TSX was 18% ahead of the first quarter of last year.

Together, Toronto Stock Exchange and TSX Venture Exchange welcomed 91 new companies, including 67 initial public offerings, once again clearly demonstrating the value of being listed on TSX or TSXV. Trading volumes on TSX and TSX Venture Exchange also -- was also solid during the first 3 months of 2011.

Compared to the first quarter of 2010, trading on TSX Venture Exchange and TSX were up 64% and 20%, respectively. Activity on the other TMX Group markets also significantly exceeded those 2010 levels.

Montréal Exchange posted record trading volume for the month of March, as well as for the first quarter of 2011. MX volumes for the quarter exceeded the same period last year by 46% and open interest was up 36% in the first quarter of 2011 compared to the first 3 months of last year.

Our Natural Gas Exchange again turned in a solid performance for the quarter. Total energy volume traded and cleared during the first quarter of 2011 exceeded the same period last year by 24%.

TMX Group has also had a successful quarter in terms of our business initiatives across the company. Staying for a moment with our Energy business, during the quarter, NGX announced and successfully implemented the expansion of its trading and clearing agreement with the IntercontinentalExchange in the crude oil.

In addition, NGX opened 2 new trading hubs in the U.S. bringing the total number to 32.

Our new Dark Order type was successfully introduced on Toronto Stock Exchange and the TSX Venture Exchange during the quarter. They provide very useful trading tools to our client in a manner that preserves market integrity.

I am very pleased with the progress of TMX Select, our new equities alternative trading system. TMX Select will support visible and non-visible orders on TSX and TSX Venture listed securities.

It will offer enhanced functionality, very competitive pricing and a new source of liquidity to our trading customers. TMX Select is currently in client testing and we are working towards its launch at the end of June, pending regulatory approval of course.

Our information services area, Datalinx, introduced TMXnet GTA during the quarter. It provides ultra high-speed direct links to our data centers, as well as to Canadian and U.S.

data feed, TMX Information Processor products and TMX's co-location facility. TMX Datalinx also launched TMX PowerStream, a real-time streaming market data application that provides viable access to market data, research information and importantly, technical analysis.

In our Derivatives business earlier this week, LSE Group's Turquoise Derivatives market successfully migrated to Montréal Exchange SOLA trading platform. In addition, MX recently launched a new video portal which we hope will increase awareness to the asset class among retail investors.

M-X.TV provides online derivatives education tools for retail investors, with varying levels of knowledge ranging from the beginner to the advanced. Our derivatives clearing house, CDCC [Canadian Derivatives Clearing Corporation], entered into a Memorandum of Understanding to create a swap clearing link with New York Portfolio Clearing.

This is the first of what we expect will be many clearing house linkages, as we strive to create a "made in Canada" OTC [over-the-counter] clearing structure for the Canadian market. This international operability will be critical to our solution success.

Looking ahead now, TMX Group will continue to focus on the successful operations of our business without distraction. I just mentioned our OTC clearing efforts.

The CDCC team is also continuing to work on the clearing solution for repos in the fixed income market. We're expecting a fourth quarter implementation for that product.

In terms of trading technology, we are continuing to implement a multiphase initiative to expand the infrastructure across our trading and data enterprise. Specifically, we are increasing our throughput capability by expanding our internal networks, storage and application servers.

The first expansion phase was completed in the first quarter of last year and the second phase is well underway. And of course, the entire company would continue to make customer service and product development key priorities.

The second quarter will be an important one for our merger with the London Stock Exchange Group. I will now give you a short status update on the merger approval process.

In April, we received the Ontario Select Committee's report on our agreement, which captured the input from 4 days of public hearings, as well as the committee members' views. We are reviewing it very carefully and we'll be considering its recommendations.

We will also be considering the input of other constituents who will weigh in on the field, including provincial regulators and the federal government. At the end of April, we announced that the Investment Canada Act application has been made.

And earlier this morning, we announced that we have submitted our applications to the provincial regulators, which have jurisdiction over our operations. You will recall that we have said that we expect the deal to close late fall.

We have allocated this time and our plans for these regulatory processes, because we understand and respect the fact that careful review is required. We welcome this input.

A few minutes ago, I told you about the 1,000 meetings we have participated in so far. If we didn't think the merger was the right idea, believe me, telling our story literally hundreds of times would be a pretty heavy burden.

But I'm happy to speak about our merger because we believe that it is in Canada's best interest to have a globally competitive, yet domestically focused capital marketplace. And we believe that our customers, shareholders and the markets we serve will directly benefit from this strong partnership with the London Stock Exchange Group.

That leads me to my final point. I ordinarily let Michael cover our financial issue with you, but there is one number that I'd like to comment on myself.

You will note that during the first quarter of 2011, our merger-related costs were $8.3 million. That's a lot of money.

I think that the size of our investment in both money and time, very clearly underlines the merger's importance, as well as our commitment to its successful completion. I can assure you that this is not an investment that management or our board made lightly.

We have made this investment because we are convinced this merger represents an unparalleled opportunity for our company. Everyone is entitled to his or her opinion, but I'd like to stress that this not a deal we have to do, it is a deal we want to do.

I will now turn it over to Michael to review TMX Group's first quarter 2011 financial performance.

Thank you, Tom, and good morning, everyone. Revenue in the first quarter was up 17% compared with first quarter of 2010, reflecting significant activity increases across our key drivers.

Net income was $64.3 million, an increase of 13% compared with $56.7 million in Q1 2010. EPS was $0.84 per common share on a diluted basis for Q1 '11, up 9% compared with $0.77 per common share on a basic and diluted basis for Q1 2010.

The increase was due to the overall higher revenue, partially offset by legal advisory and other costs incurred during Q1 2011, related to our proposed merger with LSEG, a commodity tax adjustment and higher costs associated with the short- and long-term employee incentive plan. On an adjusted basis, diluted EPS was $0.97 for Q1 2011, 26% higher than the first quarter of last year.

As with previous calls, I won't cover every item in this morning's press release, but I do want to go over some of the key highlights before we turn to your questions. Tom talk about the increased financings on Toronto Stock Exchange and TSX Venture Exchange, and under IFRS [International Financial Reporting Standards], we now see evidence of this in our reported revenue.

Revenue from Issuer Services in Q1 2011 was up 26% versus Q1 2010. The increase was driven by increased sustaining fees, primarily due to the higher overall market capitalization over issuers at the end of 2010 compared with the end of 2009.

Onetime initial listing fees for income trust conversions and by the continued strength of secondary financing. Derivatives trading and clearing revenue was up 43% over Q1 in 2010, reflecting a surge in volumes on MX, CDCC and BOX [Boston Options Exchange].

MX volumes increased by 46%, reflecting increased trading in the BAX and CGB contracts, as well as ETF [Exchange Traded Fund] and equity options. And BOX volumes were up 79% compared with Q1 of last year.

Our energy volumes were up 24% on NGX, a full quarter of revenue from short-term energy brokers also contributed to the increased energy markets' revenue, as its revenue was included in Q1 2010 results from February 1. Information services revenue increased 7% compared with Q1 2010, due to higher revenue from co-location services, index data licensing, fixed income indices and usage based quotes.

Somewhat offsetting these revenue increases across derivatives markets, energy markets and information services, was the impact of the depreciation of the U.S. dollar against the Canadian dollar in Q1 2011 compared with Q1 2010.

Operating expenses in Q1 '11 were $77.1 million, up 11% from Q1 '10, primarily due to commodity tax adjustment and higher costs associated with short- and long-term employee incentive plan. This increase was somewhat offset by lower costs following the decommissioning of legacy hardware and lower depreciation and amortization costs.

Turning briefly now to our sequential performance. Revenue in Q1 2011 increased over revenue in Q4 2010 due to a higher derivatives trading and clearing revenue and cash equity trading revenue, largely offset by lower revenue from issuer services, energy trading and also technology services and other revenue.

Net income for Q1 '11 decreased over Q4 2010, primarily due to costs associated with the proposed merger with LSEG and the increase in G&A expenses related to the commodity tax adjustment. Cash and marketable securities totaled approximately $378 million at March 31, 2011, an increase of $46 million from December 31, 2010.

We generated over $72 million in cash flow from operations in Q1 '11 and paid $30 million in dividends in the quarter. We currently have $430 million of debt under a 3-year term loan, which we established on April 30, 2008, when we acquired MX.

On March 31, 2011, we extended and amended this facility. It is now due to expire on March 31, 2012 or 180 days after the completion of the merger with LSEG if earlier.

And finally, the board declared a quarterly dividend of $0.40 per common share to be paid on June 10, 2011 to shareholders of record, at the close of business on May 27, 2011. And with that, I will turn the call back to Paul for the Q&A session.

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

I wonder if you could just give a little bit more color in terms of central counter-party clearing process. And kind of what the update in terms of progress through that is?

Well, I referenced those -- the 2 efforts in our -- in my earlier comments with respect to the fixed income repo facility. We continue to work with the industry, and I think progress is going very well towards a launch in the fall.

With respect to the broader repo arrangement -- the broader OTC clearing arrangement, we continue to work with the industry on its efforts to bring a OTC clearing -- derivative clearing solution to the marketplace. There's an industry organization that's really driving most of those discussions, and we continue to work with them on the development of that.

I am quite excited about the MOU we signed with New York Portfolio Clearing, because we think interoperability will be an important aspect of our development of a network of clearinghouses that will operate in this space, so I'm quite excited about that.

Okay. And just in terms of the details with the repo clearing, maybe just give a bit of background in terms of some of the delay in terms of the expected launch in that.

Possibly, what the issues were that you're working around? And how that's progressing?

Well, I think the biggest thing was that the product -- as more of the work was done once it got through the IIAC [Investment Industry Association of Canada] committee into the broader industry committee, there were some changes in what the industry wanted and there was some work that needed to be done at the back-office level of the user institutions that I think was real critical in making sure that the end product we came up with was successful. We altered some of the staging of the phases, and I think the end product is now something that the industry seems quite happy with.

Okay, great. Maybe just turn over to the co-location expansion, in terms of the rate of adoption with that increased capacity, are you on track or in line with your expectations on that?

And potentially, can you comment on how much capacity currently there is left there?

Well, we clearly are in the process of selling those co-location, those new co-location facilities we're building. I think we're pleased with how the sales pipeline has gone, like with the introduction of the first co-location facility that take-up has been quite good.

We always want to manage to have excess capacity because it's important that we always be able to take on new participants or even historic participants that want to either add equipment to the co-location facility or bring new parts to their business into it. So we always manage to have some excess capacity, but we're pleased with the sales pipeline so far.

Are you able to give any color in terms of how much excess capacity there is there? Is it 50%, is it 75%, 25%, just an idea?

I think we consider that to be confidential information, Phil.

Wanted to get a little bit more detail perhaps on how you see this merger approach unfolding in terms of when we should look for decisions from Industry Canada, perhaps from the provincial regulators and the shareholder vote? How that sort of lines up with your late fall expectation for closing?

Obviously, the regulatory approvals are in the hands of the respective regulators. When the hearings will be and when, how those processes continue to unfold are really in the hands of the regulators.

We've indicated that in my earlier comment that in April, at the end of April, we filed our federal filings under the Investment Canada Act and then this morning, we completed filing with the provincial regulators here. That all starts the process of the hearing process, and obviously, those things are all in the control of the regulators.

So when we look at the landscape as a whole and we have kind of a macro timeline in mind, it all continues to line up to a fall or fourth quarter decision-making. So I think we remain confident that we're on that schedule, but exactly when the hearings will be and specific dates on when everything will unfold, much of that is outside of our control.

Okay. Next question is with respect to market share on equity trading volumes, lost a few points of market share in Q1 versus Q4.

Any comments with respect to why you think the market share declined sequentially and perhaps, initiatives to get that share back?

Well, I'll talk about initiatives. I think we recognize that we're in a competitive environment, and we're competing hard, as I've said before, we compete hard for every share of market shares that we can get.

We continue to kind of lead our competitive effort with our 3-kind of principal approaches. One is to continue work on our technology so that we maintain the leading-edge technology in our business.

Second is we continue to introduce innovative products, TMX Select is an important initiative around that. Going back to technology, I referenced the enterprise expansion in my prepared comments, that's clearly an effort around technology.

In terms of innovative products, TMX Select is the really important one. The Dark Order effort is important, we're pleased with the initial traction we're getting on that.

And then I think the third thing is competitive pricing. You, no doubt, saw that we introduced some price changes already this year.

In my quote in the press release, I remind the community that for regular Continuous Limit Order Book trading in our market, we remain the lowest priced in Canada, even for those entities that might financially supporting our competitor.

Just a couple of quick questions. I apologize if you mentioned this, Tom, but the -- it looked like there was a plan market data fee cut, could you update us on that?

Or is that what's happening or the plans there?

Well, we can, with respect to market data fee, like any other fee we have in the marketplace we continuously look at them to make sure that they are competitive. We believe, and what we hear from many of our constituents, that we still provide the most value per dollar spent for market data in our marketplace.

We firmly believe that. Obviously, we look at our pricing and the competitive dynamics around it, and that's a continuous effort.

But I didn't say anything, nor did we announce a change in pricing yet.

Okay, I'll have to go back and see where that was, but okay. And then Tom, there's a lot of talk in the paper about banks and their view of this transaction and whatnot, and what banks can do, just from a public shareholder perspective, have the banks approached you about Alpha or the CDS [Clearing and Depository Services] or any of these other initiatives that we keep hearing about in the paper?

Well, I mean, I'm not going to speculate on any rumor or respond to any rumor you see in the press. We, although, what I will say John is, we remain 100% focus on completing our merger agreement with LSE Group.

Because we believe that it's the best deal for our stakeholders for the company and for the Canadian capital markets for their development. That's where our focus is.

But I'm not going to comment on any rumors I see in the paper or hear about.

I had to ask, Tom. Okay.

Last just, is on the BOX. Is this a sustained turnaround that we're seeing at the BOX?

Or could you talk a little bit about the developments there?

Well, I'm quite pleased with BOX's progress. If you go back over the last 18 months, we'd run Tony McCormick the new CEO at BOX, with a great deal of industry experience, is the next head of the options products at Schwab among other things, has great industry contacts, knows a lot about the U.S.

equity options market. And I think what Tony and his team have done is, they've continued to extend customer outreach to the various market participants in the U.S.

equity options market. We have gained back important market share.

We have continued to develop the SOLA technology, with some new implementations for BOX. I'm particularly pleased with some of the market opening things we've done recently.

I think it's just becoming more competitive every day, BOX is becoming more competitive everyday with the marketplace, and I'm quite pleased by its progress.

And, Tom, I'm going to apologize, I should know it, but have they changed the pricing structure at BOX?

We changed it quite some time ago.

But there's been nothing in the last quarter or two that’s…

No, nothing in the last quarter, but on top of the change in pricing we did last year, we've continued the customer outreach in there to bring in new participants in the BOX.

My questions actually have been answered.

I have a question, is there something about the proposed combination between LSE and TMX that would maybe lower barriers to entry in Canadian brokerage? Or some other change to the business that could have the Canadian banks concerned about the merger's implications for their businesses?