TMX Group Limited

Paul Malcolmson - Director, IR Lou Eccleston - CEO Michael Ptasznik - CFO

Paul Holden - CIBC World Markets Geoff Kwan - RBC Capital Markets Graham Ryding - TD Securities

Thank you, Carol and good morning, everyone. Thank you for joining us today for the third quarter 2015 conference call for TMX Group.

As you know, we announced our third quarter results last evening. A copy of our press release is available on our website, TMX.com, under Investor Relations.

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

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

Thank you, Paul. Good morning, everyone and thank you very much for joining us to discuss TMX Group's financial results for the third quarter of 2015.

In a few moments, Michael is going to take you through the numbers in detail on our earnings in the third quarter financial statements, but first, I'm going to spend a bit of time discussing our business. On the last call, I spoke about our organizational realignment and provided context around the pillars of our growth strategy.

In the scope of this new strategy, we've undertaken a number of transformative organizational, strategic and executive changes this year. And on that last call, we walked you to through those changes.

We highlighted the completion of the strategic review process and explained that we're now building execution plans for 2016. We're preparing to advance TMX to the next phase of our evolution and I can tell you today that we're on target to be in full execution mode in 2016.

And as we work to streamline, strengthen and reimagine TMX, we're pleased with that progress in Q3 despite the distinct challenges facing certain parts of our business. We do continue to feel the effects of the prevailing weakness in key commodity prices and for the short term, optimism for improvement remains subdued.

Two weeks ago, the Bank of Canada announced a downward revision to its GDP growth projections for the next two years, with the expectation that the Canadian economy will turn to full capacity in mid-2017. However, we saw several positive signs in our results this quarter, thanks to a diversified portfolio.

Our derivatives markets benefited from an upswing in activity and equity in ETF options in the third quarter. The Montreal Exchange set a record in total volume in Q3 2015 and through the first three quarters of the year, overall MX volumes were up 12% and open interest is up 26% over last year through September.

And our equity markets' ongoing weakness in the resource sector continue to have a major impact, particularly on TSX Venture Exchange. During our last call, I spent time on the topic of capital formation and discussed issues and initiatives we're undertaking to support, revitalize and grow TSXV which is such a critically important part of our equity market's continuum and the Canadian economy.

Since Nick Thadaney joined us in the beginning of September as new Head of TMX Equity Capital Markets, his daily calendar has been dedicated to meeting with a broad cross-section of clients and stakeholders across the entire country, with the goal to identify the key issues of impact and begin to build workable full-spectrum solutions. We're now operating with urgency to advance plans for the following TSX initiatives.

First is a simplification and streamlining of administrative processes for issuers. This should reduce existing hurdles and expedite the capital raised process.

Second, we're going to implement structural changes to TSXV to simplify the market for issuers and investors. And third, expand business development and our networking capabilities to accelerate growth of the TSXV franchise in the technology and innovation sector.

Simply put, we're working on a series of initiatives that we will move on in 2016. And the fact is, already, when you look at listings data for TSX and TSXV, you see evidence that TMX Group is becoming a preferred destination for digital entrepreneurs.

By the numbers, the technology and innovation sectors on TSX and TSXV have been growing significantly. Let me give you a few data points, 55 new technology and innovation companies have gone public on the exchanges since the start of 2014, that's more than any other industry sector, other than EPS; 14 new international technology innovation companies have gone public since the start of 2014, more than in any other sector; 12 technology and innovation companies have graduated from TSXV to TSX since the start of 2014.

That's the highest graduation rate across all sectors and as you all know, this is a very differentiating feature of what we offer the marketplace, the ability to incubate right up through enterprise-level companies. Technology and innovation companies have raised almost CAD17 billion in equity capital on our exchanges since the start of 2014.

The S&P/TSX Capped Information Technology Index which is the barometer for the sector, rose 40% in the last 21 months and in contrast, the S&P 500 Information Technology Index of U.S. companies was up 15% over the same period.

And by the way, as long as I'm giving you some data points, when you look at overall listings on our exchanges, September year to date we stand at 163. That is second only to Shanghai globally and is the head of NASDAQ, London and the New York Stock Exchange.

Canada's tech industry is thriving. It's poised for sustained success and some of the world's most exciting technology companies are being founded, built and funded in Canada.

And the new federal government has committed to an investment of CAD900 million for incubator and accelerator programs and those companies need a place to grow. I'm also very excited about what we're seeing in our market insights pillar, especially on our new data analytics products which will help clients make better trading and investment decisions.

We're working here to create a suite of capabilities that will help our clients derive more value from the massive amounts of data they have to deal with every day. We've developed our first analytics offering which is now in live production, with the commercial launch slated for Q1 2016.

We've also made good progress with our innovation lab, TMX eXplore. MaRS is our latest formal partnership recently announced and this adds to our existing relationships, including The Fields Institute, Rotman's Capital Markets Institute and Ryerson's Data Sciences Lab.

The goal of eXplore is twofold. We gave specific subject matter expertise which is then applied to our growth initiatives and we can establish TMX Group as the leader in building communities that support health innovators, entrepreneurs and clients by working in new ways within a collaborative ecoystem.

We're driving innovation in our core businesses, as well. In equities trading, under our efficient markets pillar, we've implemented important measures to restructure our equities trading offering in an effort to retain Canadian order flow and empower natural investors to trade with confidence with reduced market complexity.

In September, we launched an innovative new trading model on TSX op exchange and we also moved to reduce fragmentation and associated cost by closing Alpha's Interest Spread facility and TMX Select. These changes were made following close consultation with our clients and stakeholders, who provided valuable feedback.

So far, the over response is encouraging. We're confident that in the longer term, these changes will have a positive effect by improving execution quality for national investors and reducing dealer costs.

The next step in this series of targeted changes is the introduction of TSX's long life order type which is on track for launch later this month. Long-life orders are designated to allow investors, dealers and other non-latency-sensitive participants to more effectively and confidently participate in the market without having to compete on speed.

We believe that in issues like these, we'll over time, become landmark proof points in our client-driven success. In our market solutions pillar, AgriClear, our nascent virtual marketplace for trading cattle, continues to attract interest across the industry and build a client base.

Although it is still early, AgriClear is a good example of how TMS can leverage our capabilities and expertise across multiple areas. In this case, price discovery, delivery, payment and settlement which is solving a need in a completely new and transformative way, using technology.

We've spent a lot of time since our last update focusing inside our Company as well. Our global enterprise services team has been working across all businesses and infrastructure and operation teams to identify how we can deliver solutions faster and at lower cost.

And how we can improve the quality of our operations and our client service. To our shareholders, I think it's important to convey that we're on target for completing a capital plan, including a comprehensive investment strategy and cost-control measures, as we move into full execution mode in 2016.

The history of TMX's infrastructure and our future is solutions. This year's committed efforts to push the evolution of TMX is building a foundation to better serve our clients and increase shareholder returns.

We have accomplished a great deal so far this year to build a foundation for the future. We're confident that as we emerge from this period of transformation and move into 2016, we will maximize this Company's potential for profitable growth.

Thank you and with that, I'm going to turn over to Michael.

Thank you, Lou and good morning, everyone. I'll begin by talking about our third quarter results on a year-over-year basis.

For this past quarter, there was a 3% increase in revenue, a 6% increase in operating expenses and a 2% decline in income from operations. Reported EPS was CAD 0.67 per share compared with CAD0.73 per share last year and adjusted EPS was down CAD0.01 at CAD0.85.

The decline in reported EPS was largely attributable to strategic realignment expenses of CAD4.4 million and a CAD1.6 million income-tax adjustment related to BOX. Excluding strategic realignment expenses, income from operations for Q3 2015 actually increased by 5% on a year-over-year basis.

Strategic realignment expenses were CAD0.06 per share, related to the strategic transformation that we discussed last quarter. These included severance costs of CAD0.04 per share included within compensation and benefits and CAD0.02 per share of professional fees and exit costs related to the sale of Equicom included within G&A.

Turning to revenue, there were increases in information services in trading, clearing, depository and related revenue, partially offset by decreases in issuer services revenue and lower rates of risk revenue. Overall, there was a favorable impact from a weaker Canadian dollar relative to other currencies in Q3 of 2015 versus Q3 2014.

The impact was approximately CAD3 million pretax. In particular, information services revenue which was up 12% over Q3 of last year, benefited from the stronger U.S.

dollar. There was also increased revenue from Strike Technologies, our microwave network business which we acquired on October 31st last year and from the New Jersey to Toronto area microwave service we launched in July of this year.

These increases in revenue were partly offset by a reduction of CAD1 million in revenue recoveries related to underreported usage of real-time closing in prior periods. Revenue from cash markets trading and clearing increased by 1%, reflecting higher revenue from cash markets equity trading in Q3 2015 compared with Q3 2014.

The increase in revenue was partially offset by lower revenue from Shorcan due to lower volumes in government of Canada and provincial bonds. Derivative revenue increased by 9% over last year, with MX volumes up 19%, driven by higher equity and ETF option trading.

Revenue from BOX also increased, reflecting the positive impact from a stronger U.S. dollar and a 2% increase in trading volumes.

Revenue from energy trading increased by 11%, reflecting the stronger U.S. dollar, U.S.

power volumes and higher crude activity. The increased revenue for NGX was partially offset by a net deferred revenue in Q3 2015 compared with a net recovery in Q3 2014.

Issuer services revenue declined by 3% compared with last year, largely due to a decrease in additional listing fees. As you will have noted in our statistics, the number of transactions billed for Toronto Stock Exchange listed issuers generating additional listing fees dropped by 27% from 330 in Q3 last year to 240 this past quarter.

Initial listing fee revenue increased, reflecting an increase in the number of new issuers listed on TSX and higher revenue per new listing on TSX. Sustained fees increased, reflecting a higher market cap on TSX at the end of 2015, as well as the impact from an increase in the maximum sustaining fee, effective January 1, 2015.

Other issuer services revenue, reflecting the loss of revenue from Equicom which was sold in July of 2015, was partially offset by an increase in revenue from equity transfer [indiscernible]. Turning to cost, as I mentioned, operating expenses in Q3 2015 were up 6% compared to last year, largely driven by the CAD4.4 million of strategic realignment expenses.

During Q3 of 2015, we also incurred additional cost related to the microwave network business of Strike Technologies, partially offset by a reduction in expenses related to the operations of Equicom. Looking now at our financials on a sequential basis, revenue in Q3 2015 decreased by 2% compared with Q2 2015, reflecting a decline in additional listing fee revenue and a loss of revenue from Equicom, partially offset by an increase in information services revenue and derivatives markets trading revenue.

Operating expenses decreased by 1% from Q2 2015 to Q3 2015. The decrease in these costs reflected lower technology costs, reduced costs related to Razor Risk and lower expenses from Equicom.

These decreases were somewhat offset by higher costs related to employee performance incentive plans and increased strategic realignment expenses. We reduced our debt by about CAD78 million during Q3 and by approximately CAD124 million year to date, utilizing cash flow from operations and cash from subsidiaries following the review of the amount of cash required to be retained for regulatory purposes.

Our debt to EBITDA ratio is now 3.4 times on an LTN basis. Debt repayment will continue to be the primary use of excess cash in 2015.

And yesterday, our Board declared a quarterly dividend of CAD0.40 per common share to be paid on December 4, 2015 to shareholders of record on November 20 of 2015. With that, I will turn the call back to Paul for the Q&A session.

Thank you, Michael. Carol, could you please remind us of the process for the question-and-answer session.

A couple questions for you on the data analytics product that you are currently working on and plan to launch in Q1 2016. Just wondering if you can give us a little more flavor on what this current product is, what it's value proposition - intended value proposition to the market is?

Sure. Overall, think about TMX Insight, this whole idea of market insights, our investment pillar and what we're trying to do with our really analytics-driven, think of it as suite of capabilities.

So the goal, primarily, is to try to offer ways to provide real insight into massive amounts of data. Every client we talk to talked about the burden of massive amounts of data coming in.

How do I structure that data? How do I understand that data?

Am I missing opportunities? So the overall idea is to really leverage data mining and data science in a way that provides really practical, easy-to-use web-based analytics that a client can download simply from a website and use with our data, with their own data and third-party data.

So that's the overall proposition and that's the request we heard loud and clear. The first offering of that capability, Paul, is going to be really around trading outlets, understanding trade flows, understanding execution quality and how to really understand what is happening in a marketplace.

And it's consistent with actually, when you think about what we've done in our marketplace, particularly in our senior market, we're trying to create a venue where all types of trading can be, versus creating lots of different segmentation. But part of that is then, how do I analyze that marketplace?

How do I understand it? We've actually got one client already using the analytics in live production, to understand these trade flows.

But the idea is then to come out first with this. But don't think of it as this product and the next product and the next product.

Think of it as a suite of capabilities called TMX Insight that then grows as we continue to build out locations and it's all connected. So our ability to create applications quickly, our ability to provide web-based services that integrate with data feeds, if you think about everything we're doing with market insights, what we're doing with our global enterprise services, the whole Company coming together to be a technology-driven solutions provider.

So there's a value proposition around insight, understanding data. First offering will be about trading data.

It was a very big request and one that we thought we could fill quickly. And then we'll grow out from there.

The last piece that is also connected to that is TMX eXplore. The reason I mention that is that working with some of the best minds we have in this country and some other countries that going to university here, is that you're going to come up with lots of new ways of thinking about how do we go forward?

So the market insights piece is also a big function of the lab.

Okay. And when you say with the first iteration that will be launched in Q1 is around trading data, is this cash equities trading or is that multi--?

Yes, cash equities. Cash equities.

And then the follow-up question on that point, because the data point that one client's already using that I think is a positive is more around the commercialization of it and willingness to pay. I am assuming you've had those types of discussions with market participants in general.

Lots of conversations, yes. We've lots of conversations and again, this first offering is a result of those conversations.

We didn't sit in a room and think what might be helpful. The other point too, by the way, is when we talk about how do we think Alpha's going and the changes that we make in our own market, we actually are eating our own cooking and using those analytics to understand that data.

And we'll literally be reporting back to you how is that going over time, when you have more data using our own analytics.

Okay. Good.

Next question is related to AgriClear. Now you've been running it for several months now which isn't a long time but may be enough time where you can give us maybe a little bit of an update on early take-up or at least how the marketing is going to potential clients.

Yes, sure. It is still early and AgriClear is a true start up, as we've talked about, so you've got to think of it that way.

The, what I will call initial metrics that we're trying to do which is how many people are coming to the site, how much - how many registrants do you have, who is opening bank accounts, what is the pipeline of potential transactions that will occur, is actually going very well. Lots of good conversations.

We're talking to some big producers in the marketplace on being involved and engaged. I think the market itself hasn't helped us.

Unfortunately, although cattle is not traditionally included in the resource market, it's had a few of the same issues around the resource market in terms of pricing and that - and those issues. So it has been a bit of, I think, a drag in transactions, but overall, everything we hope to accomplish is in place in terms of people on the site with the potential to transact.

And I think now, what I have said to the team is it's really now around optimizing like you would at any brand-new offering. You've got to optimize that site and make sure we're doing everything we can at that initial base to drive transactions.

I think the next real test, because it's the way the industry works, is in the spring when they have what they call - there's a spring run, if you will. And that's when the bulk of the transactions - it happens in the spring and the fall.

So there will be transactions through the year, but there's a big barometer, I think in the spring, to see whether or not all this pipeline building, how much it converts into. But so far it looks very good and we're hopeful that we'll start to produce some revenues next year out of it.

Okay, good. So we can come back with the Q2 results and ask the same question then.

Exactly. I'm sure you will.

Final question is with respect to the change in the BOX ownership. So picked up a bit Q over Q.

Looks like one of the other equity owners put back their equity to MX or TMX. Do other minority equity holders also have the same put option rights?

No. At this point, really that's all - what's happening now with BOX is really a reflection of the volume - of the VPR plan that we have, the shareholder plan that we have in place, so that's what is causing the movement in BOX going forward.

So it's really dependent on whether - what happens with that and whether we get the volumes that we hope to out of that. That's what's going to drive that going forward.

Just had a question, on the market data side of your business, obviously, it's been a tough environment terms of on the subscriber side. But given the delays in terms of on the pluses and the minuses in terms of adding and when you lose some subscribers, is anything that you're seeing on more of on a real-time basis to suggest that we may see a recovery in terms of the quarter-over quarter changes on the subscribers?

Or is still a tough slug?

I think the answer is that from a subscriber standpoint, you're not going to see any major turnarounds in the subscriber numbers, given what is happening from an industry, there's quite a bit of change overall globally with respect to investment industry and eyeballs on screens as a result of that. Which is really the rationale for why we have diversified that business away from purely being a subscription basis to pure data feeds to the market insights business that Lou just was talking about plus some of the other changes that we've done over the last number of years, with respect to providing different types of data feeds, real-time feeds and analytic products, etcetera.

So I really think you're not going to see a change from the subscriber standpoint with respect to employment. What you're going to see is our focus being much more on insights, analytic products and other things that we've been working on.

I would just add, Michael's point is exactly right. I would just think that's - I think it's an indication of us realizing what is important to the client.

So while there's an issue around subscriber base and what's going to happen to subscribers, this is a question of how do you evolve? And if we talked about market insights, the other thing we're doing as part of our entire global enterprise services work is to think about how do we lower the cost of ownership for this data to clients too and the value, by thinking about how you integrate different feeds, how do you simplify that, how do you use more web-based delivery, how do you use cloud services?

So overall, there's a whole issue behind the scenes going on to lower that cost and provide more value. Because if you're going to put analytics on top of it, you don't want to have to put analytics on top of multiple feeds; you want to put analytics on top of a feed.

So that is all going on at the same time and I think in the end, the answer is there's issues with our clients and what's happening to seats and shares and things like that. But the data itself in the right form, with the right analytics, is more important than ever.

And that is really the key is how do you take advantage of that?

Okay. And then just the other question I had was on the deal pipeline.

Again, obviously, it's been a challenging past number of months. Just wondering relative to last time we were chatting, how you feel about it and what it looks like today versus maybe a few months ago.

Are you talking about IPOs?

New issue pipeline.

I think the October numbers just came out and those were reflective of the fact that the volatility that is happening is having an impact on listing activity. So the October numbers were not indicative of a really strong month.

And really, I do think that that is reflective of some of the volatility and some of the hesitation for companies to go to the marketplace. It was good to see Hydro go yesterday and we're very pleased to welcome them to the exchange.

And hopefully that will be a catalyst for other companies to start coming back to the market and it will be a bit of a settling down now. And that there is some pent-up demand for the financing and activities.

It's a question of whether the market is going to be in a position to be conducive to those companies coming public in a manner in which they feel comfortable in.

Sorry, from not actually what's happened, but what you see in terms of the early filings, relative quarter over quarter, does it look like it's getting a little bit better, flattish, maybe a little bit more worse?

Like I said, I think there's a number of companies that are looking at potential transactions, so there is definitely some pent-up demand. But whether those transactions turn into - or whether those actually complete themselves in the transaction, we'll have to see what happens over the next couple of months and quarters.

Lou, I was wondering if you could elaborate. You provided some details on your plans around the capital formation side, but I didn't get all of it.

In particular, you mentioned that there were some structural changes you were looking at. I wonder if you could elaborate there.

And I think you said there was three things you're focused on, networking, capabilities in the technology sector, but you want structural changes and another one that I may have missed.

Okay and our goal there, as you know, is to have an execution plan ready to go through in first quarter of 2016. So the three things, just we'll reiterate that, first was simplification and streamlining of the administrative processes for issuers.

So what does it take, what are the hurdles to go through administratively? And obviously, there's a cost and a time frame associated with that.

The second was the structural changes, literally how is TSXV constructed, tier 1, tier 2, NEX, et cetera. And then the third was the business development, expanding our network into that pipeline of technology innovation companies that is building very quickly.

Not just across Canada, by the way, but across Canada and North America, in particular, as well. So those are the three things.

We're finalizing which ones - right now I can tell you that we've got a list of things that we want to go after in each of the first two, things that we've spent a lot of time - I mentioned Nick has done a bunch of meetings, I have done a bunch of meetings. We've met with lots of clients all over Canada and there is an issue around what is - how difficult is it for a small company to go public?

What are the disclosures, filings, different things that they have to do? So we've got a series of things that we're prioritizing right now to go after that we think we can push through, both on our side and from a regulatory standpoint, that everybody is going to think makes a lot of sense and is going to be great for the companies and it is going to allow them to move faster, shorten the whole capital process.

So those are the things that we're working on now. And at the moment, there's a very long list, but by the time we finalize that plan in another several weeks moving into 2016, we're going to prioritize what we're going to go after first.

And then we'll have a list of secondary and tertiary objectives. But it's really around what can we do?

What do we control? What kind of dialogue can we have with regulators that they have indicated to us.

They want to do everything that they can, obviously, to help companies go public more quickly and more cost-effectively. So those are all of the things that we're looking at and there's a number of things - and these are the things, by the way, that we think we can impact quickly.

And then the third thing is to get out there. You've heard me talk about a sales culture, where we've got a search going on for chief client officer which is around that whole client-facing, client-relationship framework.

That is the kind of capability we need to get out there and make sure that these companies that are looking for capital really understand that there is, in fact, an extremely viable public channel. In fact, the most successful venture model in the world is sitting right here and we have got to make sure that the companies that are looking for capital know that.

So there is a range of administrative changes, some regulatory changes, some structural changes that we can make to simplify things and then just adding to our business development team.

Sounds like Q1 2016 you'll--

We'll have final plans, yes. But think about how do we structure TSXV?

What are some of the regulations that can be easily enhanced for people? And then thirdly, more feet on the ground out there, making sure people know what we have.

You made some changes on your equity trading structure in June, you adjusted your fees in the [indiscernible] and then obviously the new Alpha model rolled out in September. I'm just wondering if you can provide any feedback on what - any impact on volumes or client feedback, et cetera?

Yes. And we still have to keep watching it which we will.

And it's early in the process, but I will say, with lots of personal conversations with clients and in the trading data, the early response is very good. You look at Alpha, it is probably above our hopes in terms of what it has done for market share.

5.5% range in terms of daily, it has hit a peak of 6% pretty much right out of the gate. We've got clients telling us that the primary goal of Alpha was to get - fulfill at better cost structures from a natural order flow and that is happening.

People are telling us that is happening. So, so far, it is a positive start.

We have to keep watching it. And remember, it's a combination of things that we're putting together.

I mentioned, we've got the long-life order coming this month, later this month which we also have had very positive feedback on. Now we'll have to see positive results as well.

But so far for Alpha the start is a good one.

And on the first adjustments you've made to your May take fees, have you felt any impact on your volumes there?

Again, it's early days, but so far, we have also been pleased with that. But the numbers are coming in as is what we've expected.

And your plan there is still to do incremental changes on a six to nine month staging?

That is the plan. Obviously, we're going to continue to observe what happens in the marketplace, ours and competitively and so we're going to continue to look at that.

But yes, that is still currently the plan.

Graham, I think you can rest assured from us, the norm now is to make sure we're responsive to what is happening. We're going to keep watching what we have done.

It's a - we're in a changing environment. But anything we can do to continue to create a marketplace where multiple participants can be in, it's a behavioral-based marketplace.

We think and our clients keep telling us, is a far better alternative than segmentation and keep creating new market after new market after new market to serve niches. So we're going to keep down that road and that's where we have been.

We have been very consistent on that. And you'll just see our dialogues with our clients intensify to make sure we're responsive.

Great. Maybe I could just try to fit in one more.

Just on the information services revenues, obviously a big lift year over year. The U.S.

dollar impact I'm sure was material. I'm just wondering, Michael, if you could give us a little bit of color as to roughly the impact U.S.

dollar versus you brought in your new - your Microwave on the Strike side in the quarter and then offset from subscribers were down. I'm wondering if you can give me a little bit of color as to what the relative impact of those buckets were.

The U.S. dollar was about $3.3 million in the quarter, specifically on the information services business that's on the revenue side, there is a cost impact as well with some of the services we have, so the net impact is about CAD2.5 million in the quarter.

And I don't have the breakout of those other items for you at this point, some of it's because it's commercially sensitive. But that hopefully will help you with the analysis.

That is year over year?

Yes, Q3 2015 versus Q3 of 2014.

Thank you, Carol and thank you, everyone, for listening today. The contact information for media as well as for investor relations is in today's press release and we would be happy to take further questions.

Once again, thank you and have a great weekend.

Thank you, everybody.