United States Steel Earnings Call Insights: Clarification and CDS

On Friday, United States Steel Corporation (NYSE:X) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.


John Reucassel – BMO Nesbitt Burns: Just a clarification, Michael, if you could just help me. If I am looking at Page 12 of the MD&A and you have income from operations there of 61.1 million, if I want again EPS number on that for kind of the fully loaded pro forma, I just want to make sure I understand process. (Indiscernible) take out the non-controlling interest or the minority interest and then I’ll take out the financing costs which look to be like C$9.3 million, and then taxes. Is that about right, is that how you do that?

Michael Ptasznik – CFO: I think the C$9.3 million was only for the two months, John. You have to treat that as if it was for a full quarter.

John Reucassel – BMO Nesbitt Burns: So, and it’s disclosed in there – (indiscernible) the average rate on the C$1.5 billion of debt?

Michael Ptasznik – CFO: Yeah, it’s as disclosed – if you’re going to normalize this, you would take the C$1.5 billion of debt, use the rates that we’ve provided in the MD&A which I think is around 3.6 mark for the quarter, plus or minus 3.6, 3.7. So, you have the interest expense and…

John Reucassel – BMO Nesbitt Burns: The tax rate should we assume into the old TMX Group tax rate?

Michael Ptasznik – CFO: I mean, a normalized tax rate would be around the 27% range.

John Reucassel – BMO Nesbitt Burns: The amortization of this intangible, it looks like its tax deductible, but it’s going to be around for a long time. Is that correct?

Michael Ptasznik – CFO: It’s technically not tax deductible, but there is a future tax asset put on the book, so that when you do the P&L – from the P&L standpoint it is tax deductible, from a cash standpoint it is not.

John Reucassel – BMO Nesbitt Burns: So, it’s an accounting?

Michael Ptasznik – CFO: Exactly.

John Reucassel – BMO Nesbitt Burns: Two last questions; first, how much cash or capital – on the old format you had restricted cash. How much should we think about now that you have CDS and CDCC or in other regulators – how much do we think about your cash that you need to kind of keep around for business?

Michael Ptasznik – CFO: That number that’s – it’s in the MD&A – I don’t know which page number, but it’s in the MD&A. It’s about – C$250 million is the amount that we now believe is required to provide us enough capital for the recognition order purposes, in addition to working capital, plus some of the other requirements under CDS.

John Reucassel – BMO Nesbitt Burns: And last question Tom, I don’t want you to feel left out, and we’ll see. So, in the past TMX has given kind of medium to long-term growth targets. Are you guys willing to do that now given that you’ve seen Maple for a while?

Thomas Kloet – CEO: No, I think our – we don’t give – we haven’t given guidance now for quite some time, and it’s not the intent to give guidance now.


Jeff Fenwick – Cormark Securities: Just wanted to start off with a question on CDS here. You noted in the MD&A that they had lost the contract for IIROC over the last year and you have a few more that are up for competitive bid right now. What was the situation with the IIROC agreement there? Was that also a competitive bid, and I’m just trying to get a read on what kind of risk we have at the existing other contracts there?

Thomas Kloet – CEO: Just to clarify, first, the loss of the IIROC technology revenue was not a CDS event, first of all; it was a TMX event, and we had explained that last quarter. Because you may recall we had a revenue item that came in for the early end of that contract, and it wasn’t loss in a competitive bid. Essentially what happened was the IIROC had made a decision several years ago to create an inter-market surveillance system that would allow them, smartly I will add, to be able to do market surveillance across marketplaces not only have a multi-marketplace environment that’s really important to make sure that that execution requirements are fulfilled. Corresponding to that, they went to a – we were not in the business of building inter-market surveillance technology we hadn’t been in that business they went to a fairly well recognized vendor to do it, they achieved their goal bringing it in price correspondingly to that we made the determination upon working with IIROC that it was best for the marketplace that rather than IIROC use our old surveillance equipment to do the surveillance work they do over TSX and TSX Venture that the economics of having that work done via the system they bought was in the best interest of the marketplace. So, that’s what happened with that technology. There wasn’t a bid per se, but it is really the result of the market becoming multi-marketplace environment and IIROC became a vendor that could provide that kind of technology. So, that’s why that agreement ended and why in the last quarter we actually had revenue we recognized as a result of your early termination of that agreement. With respect to the CDS Inc. business which I think is what the second part of your question was. The CSA has in accordance with what the government does periodically, as I understand it, gone out to competitive bid process to see if there are other that essentially open up bidding for this contract. The contract’s been extended once already to CDS. It’s clear in our view that we continue to provide service that exceeds the SLA agreements or the service level agreements and that we’re an excellent vendor for that, but the CSA will go through its process and will see how that comes out. But I can’t give you any more of a read as to where that’s at. This is a process that will take some time for the CSA to work its way through. In the meantime, we’re trying to operate the system as best we can every day.

Jeff Fenwick – Cormark Securities: And maybe we can just flip it over to the other side of the perspective there around growth from CDS. I think it sounds like the REPO initiative you guys have been working on in clearing – the contribution is relatively modest today, and it looks like there was some commentary out of the government – or I think it was the Bank of Canada that maybe suggesting that it would be okay for the financial firms here in Canada to use global clearing entities other than you guys. How do you feel in terms of opportunities to grow new revenue areas for CDS going forward from here in the current environment?

Thomas Kloet – CEO: I think there are a number of – as we get to understand CDS better and understand the links between CDS and the rest of the organizations, I think there are a number of opportunities we can pursue to grow the product and services offering of CDS, well beyond the core clearing and depository services that it offers today. I remain optimistic that we’re going to have some new business development. That will take time. Some of it’s going to be via de novo new build or we may have to acquire some products and services as well and both among the CDS’s existing offerings or other parts of the institution’s offerings. With respect to – so I’m quite optimistic, now let me go back to the early part of your commentary and your question about REPO and OTC derivative clearing. With respect to the REPO project, I want to remind everybody that we have only completed phase one. It’s at least a three-phase project and probably a four-phase project with the next phase of phase two being where we allow the buy side to come into the REPO product offering. So, we’re in the early days and early stages of this offering. Now that CDS and CDCC represent the same corporate family, we’ll find that the development of that will be easier to manage for sure. But I remain optimistic that what we’ve provided gives real value to the marketplace and I think the Bank of Canada has been very clear about the fact that having REPO clearing is an important value and I think in the end this is a journey that will end well, but it’s a journey that we have to stay on and continue to work to develop the product and service. With respect to the OTC derivative clearing that we would hope would be on the other end of that process, Bank of Canada has allowed the market participants to use an international clearing organization or international clearing organizations to clear in the current term their interest rate swap contracts. We recognize that that the global reforms and the commitments of both the G8 finance ministers and then later ratified by the G20 leaders themselves committed to doing that. That’s an important part of the financial reform that’s going on here, but we view that – and I think in Bank of Canada’s comment – I don’t want to put words in their mouth, but I think they allowed for the fact that they would like to – they would like to see a domestic solution offered as well for those interest rate swaps that are executed among domestic counterparties. We continue to think we are the best entity to give that service, and, in fact, we feel stronger about it now that we have CDS as part of the family. So, we’ve not given up that view. We are studying the economics of it and the economics have to make sense for our shareholders, and we have to have the development path forward to do that. But the first step in that journey is to continue the REPO project and that’s where we are at is in the effort of implementing phase two. So, hope that helps to give you some clarity. These developments take time to both develop and to build the marketplace for.

Jeff Fenwick – Cormark Securities: And then, Michael, maybe just one quick one the amortization number there in the quarter how much of that would be over just two months or I am trying to get a sense what the run rate is going to look like going forward?

Michael Ptasznik – CFO: The 6.7 million is the incremental for the two month period.