TMX Group Limited

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

Edward Ditmire - Macquarie Research Chris Damas Stephen Boland - GMP Securities L.P., Research Division Geoffrey Kwan - RBC Capital Markets, LLC, Research Division Jeff Fenwick - Cormark Securities Inc., Research Division

Thank you, Sarah, and good morning. Thank you, everyone, for joining us this morning for the third quarter 2011 conference call for TMX Group.

As you know, we announced our third quarter 2011 results this morning. A copy of our 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 some opening remarks from Tom and Michael, we will have a question-and-answer session.

Before we begin, I remind you that certain statements made on the call today may be considered forward-looking, and I'll refer you to the risk factors outlined in today's press release and the reports that have been 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, and thank you for attending our call this morning. The third quarter of 2011 was very successful for the TMX Group.

I'm very pleased with our financial and operational performance, which we delivered in the face of the dramatically increased global market volatility and uncertainty that marked the period. I'll spend the next few minutes on our operational highlights before discussing our recent position to endorse the Maple Group offer.

I'll then turn it over to Michael to discuss our excellent third quarter financial results with you. Let's start with our equity business.

Total equity capital raised on Toronto Stock Exchange and TSX Venture Exchange during the third quarter of 2011 was $10.3 billion, which exceed the third quarter of 2010 by 27%. During the first 9 months of this year, our listing teams reviewed and facilitate almost 2,300 financings, helped our listed companies access capital they need to succeed in their business.

Toronto Stock Exchange welcomed 45 new issuers during the third quarter, which represented a 45% increase over the third quarter of 2010. TSX Venture Exchange added 65 new issuers in the third quarter of 2011, a 41% increase over the same period last year.

Yesterday, we were very pleased to announce that a recent World Federation of Exchanges report indicated that as of September 30, 2011, TMX Group equity exchanges were #1 in the world in a number of new listings. We are very proud of this achievement.

And it's not the first time we led the world in this regard, it's actually the third straight year. Trading for the 9 months ended 2011 continued to exceed 2010 levels on TMX markets.

TSX Venture Exchange was up 19% and Toronto Stock Exchange was up 6%. Volume on Montréal Exchange was up 46% and open interest on MX was up 33%.

Not surprisingly, MX set a number of trading records during the third quarter. NGX's volumes are down 11% year-over-year, due to lower natural gas prices and less price volatility.

TMX Group also had a successful quarter in terms of our business initiatives across the company. You will recall that at the end of July, TMX Group acquired Atrium Networks, which is an infrastructure provider that offers the capital market community highly scalable connectivity between multiple markets and trading venues.

The integration of this business in the TMX Datalinx is going very well, and TMX Group has added a number of important new client relationships since that acquisition closed. As you know, our new alternative trading system, TMX Select, was launched during the third quarter.

We are very pleased with the traction it is already gaining in the market. Its market share in September was double than what it was in August at 1.5% of all shares traded in Canada.

So it is clearly meeting end market needs. And because its fee model is so different, we don't think that it is pulling market share from TSX or TSX Venture.

In fact, total TMX Group equity trading market share was up slightly in the third quarter of 2011 compared to the second quarter of 2011. In August, the S&P/TSX Venture Select Index was launched.

This measures the performance of selected constituents in the S&P/TSX Venture Composite Index and provides Canadian investors with a new and innovative approach to tracking the performance of small cap Canadian stocks traded on the TSX Venture Exchange. In late October, we began the introduction of the second phase of our enterprise expansion project on the TSX Quantum trading enterprise.

The full implementation of this phase will wrap up on November 14. We think market participants will be very pleased with the significantly improved performance that will result.

I'd like to provide you with an update on our repo clearing initiative. CDCC continues to work with the dealer community and -- the dealer and user community to develop the infrastructure for central counterparty services for the Canadian fixed income market.

The planned go-live date for the first phase of this service has been scheduled for the fourth quarter of 2011. Although CDCC is prepared to implement the facility supporting the service in the fourth quarter, the go-live date has been shifted to the first quarter of 2012 to allow for additional industry testing of the system and controls.

Now let's turn to Maple briefly. At the end of October, TMX Group and Maple Group signed a support agreement, and our Board of Directors unanimously recommended that TMX Group shareholders accept the Maple offer.

In making its decision, TMX board evaluated Maple's proposal against 3 key criteria. The first, of course, the shareholder value.

The support agreement preserve the value of Maple's enhanced offer providing a meaningful premium on our share price. In addition, we secured a $39 million reserve termination fee payable if the agreement is not completed because it does not receive the necessary regulatory approvals.

The second criteria was the impact on the Canadian capital markets. With carefully considered adjustments, we assure TMX Group's independent governance as well as our ability to remain a central catalyst for Canada's markets.

We believe this transaction will deliver significant opportunities for TMX and deliver important benefits through capital market participants. It will also enhance Canada's competitiveness on the world stage.

Which leads to the third criteria, the company's future business plan. TMX Group will remain focused on growth and international expansion.

Competition from incumbent and new domestic players, as well as from strong international exchange group, remains fierce and will continue to increase. Through this agreement, our ability to execute a business plan focused on growth is improved and accelerated, and our company's global position is strengthened even further.

In all 3 criteria, the TMX board and management are confident in this decision and are extremely pleased to move forward. The approval process is underway and we are working closely with Maple to achieve the necessary approvals.

Let me turn your attention back to our third quarter now. Before I turn it over to Michael to review TMX's third quarter financial performance, I will conclude by reiterating the clear fact that the TMX Group is a strong company with the business plan, the team and the drive to compete very successfully and deliver outstanding operational and financial results.

Thank you. And now, I'll turn it over to Michael.

Thanks, Tom, and good morning, everyone. As Tom stated, we are pleased with our Q3 results and the continued growth across most of the major components of our business during the first 9 months of 2011 compared with last year.

Revenue in the third quarter was up 15%, compared with the third quarter of 2010, led by 3 of the key successes Tom highlighted a few minutes ago. Our derivatives business continued to flourish in the third quarter as MX again set volume records which, along with strong activity on BOX, led to a 52% increase in derivatives trading and clearing revenue over Q3 2010.

Issuer services revenue in Q3 '11 was up 15%, reflecting increased revenue from each of our 3 types of listing fees. And information services revenue increased 7% compared with Q3 2010, due primarily to revenue from TMX Atrium, which we acquired at the end of July, and higher revenue from fixed income entities and TMXnet.

The average number of MX data subscriptions was up 15% and the average number of cash market equity data subscriptions was up 5% on average versus Q3 2010. Also, we had both realized and unrealized net foreign exchange gains and U.S.

dollar receivables that are included in other revenue in the quarter. These increases were partially offset by lower revenue from energy trading and clearing and equity trading on TSX Venture Exchange.

Operating expenses in Q3 '11 were up 6%, primarily due to higher costs associated with short-term employee performance incentive plans, and overall increase in salary and benefit costs relating to increased headcount, merit increases and the inclusion of expenses related to TMX Atrium. We continue to make important investments in our leading technology.

The increase in headcount over the past year is largely due to adding resources in growing areas of our business, including TMX Atrium, issuer services and Canadian derivatives trading and clearing. The increase was somewhat offset by higher capitalization of costs associated with technology initiatives, lower organizational transition costs and lower bad debt expenses.

Net income attributable to TMX Group shareholders for the quarter was up 21% compared with Q3 '10, due to the higher revenue partially offset by the higher expenses and $2.4 million of LSEG and Maple-related costs. While income tax expense in Q3 '11 increased slightly over Q3 '10, the effective tax rate on the increased income was lower in Q3 '11 compared with Q3 '10.

Looking now at our sequential performance, revenue was down 1% in Q3 compared to Q2 '11 due to lower issuer services revenue, partially offset by higher revenue from derivatives market trading and clearing, information services and net foreign exchange gains on U.S. dollar account receivable.

Net income attributable to TMX Group shareholders for Q3 '11 increased over Q2 '11, primarily due to decreased LSEG and Maple-related costs, as well as lower G&A costs, partially offset by higher compensation and benefits. Cash and marketable securities totaled approximately $465 million as of September 30, 2011, an increase of $134 million from December 31, 2010.

We generated over $232 million in cash flow from operations in the first 9 months of 2011, a 15% increase over the first 9 months of last year, and we paid approximately $90 million in dividends. We currently have $430 million of debt under our term loan which was established on April 30, 2008 when we acquired MX.

We extended the facility at the end of March and is now due to expire on December 28, 2011. We're trying to extend the term loan prior to this date.

And finally, the board declared a quarterly dividend of $0.40 per common share to be paid on December 9, 2011, to shareholders of record at the close of business on November 25, 2011. While we have a significant cash position, in accordance with the terms of our support agreement, we will not be making any changes to our capital structure or dividend at this time.

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

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

So Tom, thanks for your color there on the repo initiatives. Just wondering if you can give us any other, maybe, details around how that rollout is going to work.

It's interesting to see that you are moving forward with it while you are expecting to move forward with the Maple deal as well. How do the pieces put together here with CDCC running this and then potentially rolling in CDS afterward?

Is there any implication around how that's going to play out?

Well, first, we're working very closely with CDS already on this initiative. As your question would infer, there is a security transfer involved in a repo trade, as I guess everybody would understand.

And as a result, we do have to work closely with CDS. For the last 6 months or so, we've been testing our newly developed software, which we wrote with our Montréal team.

And that's -- the testing of that software continues to go well. I think to answer your question, from my view, if we achieve the Maple agreement and it's approved by the regulators, I think it will enhance our ability to seamlessly deliver these kinds of services.

And as I've expressed before, I see the OTC repo project as the first initiative with a more broad OTC derivative clearing project behind it, which, as you know, Canada has kind of that -- in a position with the rest of the G-20 brethren, if you will, trying to implement. So the potential to combine CDS into the TMX Group is -- provides outstanding opportunities to provide an even better service to our end clients, and that's one of the things that I'm very excited as we look at the Maple opportunity or the broader opportunity of bringing CDS into the TMX Group.

And then with the repo initiatives in particular. Do you have client setup immediately start porting volume over there right away?

Or what should we expect in terms of the ramp of this business?

There is a steering committee that's been very active in overseeing this project, made up of the major repo participants in the Canadian capital market. They meet regularly.

Based on my read of their active involvement and participation in the project, I would expect that they'd be anxious to get the balance sheet release that this is going to provide. We're not giving any guidance in terms of exactly when the revenues will start other than to tell you when we expect to go live and how they'll roll in because it is a new product and services we're offering to the marketplace.

But it does provide very important balance sheet relief to the banks and dealers in the repo market. And I guess, the best proxy I'd give you to look around at other exchanges -- other clearing houses that implement such a thing and get a feel from that.

Maybe if we can just switch over then under the expense side of things. Quite a material step down there on your G&A line sequentially in the quarter.

So anything you can offer us there on how you managed to cut over 25% sequentially of that line?

I'll ask Michael to answer that, Jeff.

I think some of that is just due to the timing of being the summer for a couple of months. Some of the reductions that we saw there where in areas, such as promotion in marketing, some of our other legal consulting, et cetera, fees.

So while -- we're obviously happy that the costs were lower, some of it was just due to a timing factor with respect to where we are in some of our initiatives, et cetera.

So it's potential that as activity picks up through the end of the year, that you may start to see that begin to move a little bit higher?

Yes. I mean, if you look at the previous 2 quarters, we were at, I think, $23 million and $20 million and so, more a typical run rate just compared to what we were in that quarter.

And then Tom, I just wanted to circle back with the agreement with the Maple Group here, and you did highly the 3 areas that you focused on to make that decision to move forward with the support agreement. Can you just remind us, what are the particular areas here if something comes up where you could, in the interest of shareholders, change your mind and step back out of that deal, is that -- I think, there was some mention around valuations of some of the subsequent acquisitions of Alpha and CDS.

What other areas -- or could you have an eye on here if you needed to come back and change the deal from how we're step away from the deal?

Well, my understanding is, so we have a standard fiduciary out that should have in virtually any deal of this type, which gives our board the broad fiduciary ability to serve its various constituents. And if it decides it needs to change its recommendation, it can, and it can do so without a break fee payable to Maple.

Now that said, I just want to reiterate the fact that our board look at this deal very, very carefully over the last 3 or 4 months. We were actively engaged with the Maple team.

And just to reiterate my comments in the call the other day, we are in with this deal with both feet and we intend to work hard with our colleagues at Maple to get approval on this deal. So yes, if something happens, our board does retain its fiduciary right under the agreement.

But Jeff, I think that provided things continue to go forward as they are, I'm confident we will not exercise that right, and I hope we don't exercise that right.

And I think I'm just putting into context you just put up a very strong quarter year. The run rate of your business has been great through a weaker period.

And just from evaluation perspective, you start to wonder if you're getting enough of a premium on your business from the Maple Group?

Well, I think remember the -- I'll give you one guy's view and that is that remember the deal’s artfully structured such that there is both a share and a cash option. And I'm very confident in our business, but I'm very excited about the potential of our business should the deal go forward.

My first question was just with going -- falling up on the Maple support agreement. Are you able to talk about how the TMX board kind of separated that $50 bid price between, say, the TMX Group as a stand-alone entity with increased leverage?

And then the potential value being part of the combined Maple transaction also knowing -- I'm sorry, not knowing the Alpha and the CDS transactions. How those might ultimately be restructured in terms of if there are any restrictions?

Well, I think, Geoff, first off, it's impossible to speculate on any restrictions because we haven't even had hearings yet. So obviously, we didn't -- we have some understanding that there's a process here and we're going to go through that process.

But in terms of looking at the value, naturally, the company looks at -- and the board look at alternatives on a stand-alone basis and the alternatives of having the Maple transaction happen, with a potential opportunity to have both Alpha and CDS in the TMX Group, and made the determination that the company's prospects were stronger with the Maple arrangement and those -- and that business plan going forward, yet, we retain the fiduciary out. So I'm not going to disclose the numbers we looked at in terms of valuation, but the board did have -- expert both financial and legal advices, that work its way through that.

It was cognizant of our business plans. We run business plans going a couple of years forward.

They're aware of how we see our business continue to develop, but they also became aware of how we and our financial advisors look at the benefits of putting this deal together and determine that -- I think rightly determine that this was the better alternative.

Okay. And I guess, what I'm trying to get at is when take a look at and with respect to the Maple transaction.

Obviously, there's some uncertainty around what the regulators might ultimately rule. As I look to say, "Well, you've got a couple of perspective."

Or they can come back and say, "There's no restrictions or concerns on the transaction." Or they can come back and say, "Well, we're completely uncomfortable with it."

Maybe at some point in the middle is where Maple comes back and says, "Well, this is a little bit too much for us or this is just enough for us." And between those 2 parts, was there a view that there isn't enough of a value discrepancy that having the support agreement the TMX board was comfortable with?

It's a process, and I mean, we will go through a process of approval. And I think the important thing is that the Maple Group offer has within it the requirement of any regulatory approval.

And when you look at the package as a whole, our board felt as though the opportunity and the benefits that came with it, the package as a whole were in the best interest of the company.

Okay. The last question I had was just on the operational side.

How's the issuer pipeline looking kind of given you've had some volatility in the markets?

Well, we -- long run, we think it continues to look quite good. Naturally there is, as your comment would indicate, some volatility in the marketplace.

And there are issuers in different geographies that will take different views, and there are multiple going public routes that we give our company. But our team continues to work hard on business development.

We see in the short run the same kind of economic uncertainty that I think you're question infers. But over the longer run, and as if some of the issues in Europe, particularly around Greece and Italy and Spain get resolved and Europe gets in a stronger footing, we think companies will continue to look at the public markets as an excellent way to raise capital.

Our team is not slowing down its effort. I'm actually out at 2 listing venues outside of Toronto tomorrow, 2 listing forms outside of Toronto tomorrow seeing prospective companies.

And I think we continue to have success at bringing in companies that want to -- that view our markets as the best route to go public and I think that's evidenced by the WFE numbers I referred to in my comments. But you're right, the short-term issues that the global economy faces are important to us.

But long-term, we're building a listing form here that obviously the results would indicate people really value.

I wanted to know, if you looked at the Q3 results sequentially versus Q2, they were somewhat flattish to down. They were saved by the derivatives volumes and the swing in FOREX on the receivables, U.S.

receivables. So let's say the deal does not, again, one of the multiple hurdles that it requires, what's the prognosis for the business?

I mean, a year ago, the markets were trading as if the world was coming to an end. It didn't happen.

And now they're trading as if the world is not coming to an end but the system in Europe is trembling before us. So could you give us an idea of where the business will be in Q4 in 2012?

Well, October continued to be -- we would just recently issued our operating sets for October continues to be, as I recall, good. Certainly, the stock market performances in October were good overall, if you look at it globally.

I think, Chris, one thing I want to make sure and comment on is there is some seasonality with respect to our business. The summer months particularly the third quarter tend to be a little bit slower if you look at it over time.

But I think what we've built is a very diversified portfolio of businesses. You commented on -- and I'm not quibbling with the way you said it but you commented on being saved by derivatives.

Well, I would put it that our investment in derivatives is certainly paying off and MX having just outstanding volume results across the whole sector of risk management products that it offers with a 33% increase open interest, is very important foundation on which to build. And we're just continuing to focus on developing long-term growth.

We don't manage the company on a quarter-to-quarter basis but rather on a 2- to 3-year horizon. And I think the results that you see in our financial statements today are reflective of the investments we've made over the last 3 years and the fact that we do have that diversified portfolio of businesses.

But even all that aside, I think one of the things that I'd also say is we're pleased with our continued effort to improve our equity markets, particularly cash trading businesses. I think TMX Select was a very innovative opportunity for us where we brought to the marketplace something that certain constituencies have asked for, for a long time, which is pricing that's not had a -- not at a make or taker environment but at -- where the provider and taker of liquidity pay the same amount.

We now have 2 different pricing models out there as well as 2 different matching algorithm models out there, with not having booker preferencing in our Select product. And then add to that, that we started to get some success in our dark orders as well.

We continue to build a foundation. I guess, I'm giving you very long-winded answer to an open-ended question, but we're building a business here that has very, very strong long-term success factors -- success potential associated with it, and I'm very excited by our prospects.

Just a quick follow-up. It’s hard to predict the future, but to what degree do the results or did the results impact the board's decision to endorse the Maple offer?

I think I would say probably had minimal impact if any. I think what the board did look at was our long-range business plan and the potential that the executive management team and our financial advisor showed the board by putting together the arrangement with Maple.

I don't think I'm one of 12 board members but in my mind, the current quarter financial results were not a driver in any way but rather the opportunity take was an outstanding business plan and make it even better, and I'm very excited about that. I think that was the factor, Chris.

I'm not sure how cognizant they were where we were at on the quarter other than saying the public information we put out. They were much more focused on our business plan and looking at this arrangement with a forward view for what's good for the capital markets, as well as what's good for the company.

Just a quick question, Tom, on your thoughts on Alpha. There's been a lot of discussion on CDS but in the past.

You talked about a couple of years ago, the technology in Alpha, it was sort of off the shelf and you always thought that TMX technology was much superior. Maple did give a value of Alpha in the several presentations and in your undertakings to the OSC and similar that you're saying that depending on market participants, you may not need 2 ATSs in the future.

So I guess, is there a possibility here that you buy it and then shut it down after spending over $150 million?

Well, I think we'll look at that as we -- as you might guess, the conversation of Alpha are largely at the Maple level, not at the TMX level to date. And I think that I'll be in a better position to answer that question once we are engaged in a process that -- once there's a process that includes our engagement with Alpha.

That said, let me kind of go back to the overall context of your question. We introduced TMX Select, which is an ATS, by the way, and it is on our existing platform with our existing team, and innovated both the price model and as I've said before, some of the matching algorithm model.

Listening to some important comments from members of the community, I could foresee a world where we had some more ATSs within the group that interacted with the central limit order book of the TSX Exchange but that, again, offered innovative solutions, but things that we didn't necessarily want to introduce into the main market. And I think it's one of the beauties of owning your own software and having the kind of versatility and modularity that our structure has, is we can have multiple ATSs.

We may not. Actually, we may look at introducing things directly into the main market as well, but that flexibility of multiple ATSs would be important to us provided they all interact with the central lead order book.

And just following up on that, when I read the wording, I know there's a lot of time before you possible get some purchasing Alpha, but there's no time on it falling the actual closing of Maple. It has to be done under a reasonable time period, is that a fair statement?

Well I think that's fair. The other thing is that the support agreement and the offer from Maple has, as a contingency the approval to buy -- to acquire Alpha -- the regulatory approval to buy Alpha and CDS, but it doesn't require the deal before the take-up can happen.

So I don't think there's a timeline there and we'll work with our friends at Maple. That said -- absolute no time frame.

That said, don't misunderstand that comment either. I'm very anxious to bring all parts of this potential organization together.

But no, there isn't a time driver on that.

I have a question. If it were to get regulatory approval saying complete, I would imagine that the Maple transaction would trigger the change in control provisions and management contracts.

Would you anticipate that there would be new employment agreements in place that would alleviate that risk?

No, I wouldn't anticipate that. I would anticipate the management team would continue to stay as planned.

You don't think that there's a risk for having a different controlling ownership that would present any risk to the management team?

Well, I think we have employment agreements that have -- that will be, I guess, I’d say, part of the overall directive circular [ph] and will be embedded into what's put in public offering. But Maple stated that they would want the same team to be the team that leads it and management will be retained and from my conversations with them, frankly, I have no doubt about that.

Well, thank you very much, everyone, for listening today. The contact information for Media as well as Investor Relations is in today's press release, and we'd be happy to take any other questions you might have.

Once again, thank you for joining us and have a great day.