TMX Group Limited

Paul Malcolmson – Director of Investor Relations Lou Eccleston – Chief Executive Officer John McKenzie – Chief Financial Officer

Paul Holden – CIBC Graham Ryding – TD Securities

Thank you, Carol, and good morning. Thank you, everyone, for joining us today for the third quarter 2016 conference call for TMX Group.

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

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

Before we begin, I want to remind you that certain statements made on the call today may be considered forward-looking. And I’d refer you to the risk factors in today’s press release and reports filed by TMX with regulatory authorities.

Now I’d like to turn it over to Lou.

Thank you, Paul. Good morning, everyone, and thank you for joining us on the call today.

As reported last night’s earnings release, TMX delivered positive performance in the third quarter, reflecting an increase in activity and demand for our solutions across the marketplaces that we serve. This, combined with the progress we’ve made in building a more streamlined, efficient and responsive organization.

We have taken crucial, deliberate steps this year to strengthen, strategically realign, and position TMX for enduring success. Yesterday, we also announced a historic 12.5% increase in our quarterly dividend to CAD0.45 per share.

This marks the first dividend increase for TMX Group Limited following the leveraged buyout or Maple transaction in 2012. Our disciplined approach to debt reduction, intelligent business investment strategy and commitment to growth have enabled us to increase returns to our dedicated shareholder base.

Since 2012, we have repaid over CAD500 million in debt and returned TMX to profitable growth. And we remain committed to delivering consistent increasing value to our shareholders.

Most importantly over the last two years, we have generated increased shareholder value while also setting a transformative strategic course for the organization. John is going to take you deeper into the earnings in a few minutes, but I want to talk about the opportunities that lie ahead.

We have a huge opportunity here to grow TMX into a powerful global brand, to reach beyond the grasp of a traditional niche market, and seize the role of a broadly recognized world leader. We have made great progress in the last few months to set TMX up to be a world leader.

I think it’s important to make this clear from the offset here that for all of our stakeholders across the marketplace, expenses are down, but not at the expense of our business. In fact, TMX is changing to improve moving forward rather than scaling back.

In September, we announced details around the strategic realignment process. John will update you on that progress we’re making and achieving those cost savings, but the fact is that we are evolving into a new TMX.

And the new TMX is not a new concept. It’s a direct result of clear signals we were receiving from our wide range of clients as well as from our own employees.

What the future promises is not predictable: cyclical forces, more change, increased competition and the ceaseless proliferation of technology. We are preparing TMX to thrive in that future.

The successful redesign requires to take on four vital steps. The first priority was to leverage our existing capabilities.

TMX had been operating as individual business, including in areas where we have complementary businesses and overlapping client bases. We’ve adapted the structure of our operations and client service teams in order to provide the level of efficiency and service excellence our clients require to compete.

Good example is in our clearing businesses, CDS and CDCC, where we have moved to centralize groups to serve clients better. Similarly, we are redesigning our equities and derivatives trading services teams to seamlessly serve our trading clients better everyday.

We need to be one TMX for our clients to connect to and to interact with. Another crucial thing we needed to do was reduce the number of levels of management across the organization.

We had too many layers for a company our size and it significantly inhibited our ability to make decisions at the pace of our business. The new streamlined TMX structure is designed to be more agile and to expedite decision-making in pursuit of responses and anticipatory solutions.

We also initiated a major redesign of our technology group. Jean Desgagne, President and CEO, Global Enterprise Services, began that wide scale project last year and accelerated the effort in July with the addition of Jay Rajarathinam as Chief Information Officer.

Jay has taken the lead in defining and implementing TMX’s overall technology vision and strategy with a primary focus on operations and integrations initiatives. On the innovation side, we appointed John Lee as our new head of innovation and enterprise delivery.

John is responsible for delivering our major new technology products and will lead our efforts to explore and develop capabilities in emerging technologies such as block chain and machine learning, which brings me to our fourth key step. Across TMX, we needed to better appropriate our talent base and allow flexibility to bolster that roster where and when necessary.

We shifted more than 100 positions across divisions, we elevated 20 new leaders from within TMX and expanded the scope of mandates of many roles throughout the entire organization. We also reached outside of TMX to help fill critical talent gaps with 13 new talented individuals joining our team.

Just last week, we announced the hiring of Brady Fletcher as the new head TSX Venture Exchange in Vancouver. Brady is a veteran of the venture community.

He’s got a diverse and unique background in key elements of that vital ecosystem. Been an investment banker, an advisor for a venture capital firm and startup tech entrepreneur.

Brady’s well-rounded experience and perspective fits squarely with the exciting new direction of TSX today. We’re confident that Brady is the kind of leader we need to fulfill the commitments of the venture revitalization initiative and to accelerate the new innovation platform and ultimately to expand and grow the world’s most successful capital formation continuum well into the future.

These steps are to ready TMX for the heavy lifting of the next two phases of our evolution. That’s technology integration and driving sustained profitable growth.

The kick started evolution of TMX aligns well with Canada’s innovation agenda, which is an initiative that is gaining momentum as politicians and business leaders across the country embrace the need to support a national economic framework that builds on our resources franchise and extends to innovation companies and digital entrepreneurs. And TMX is eager to participate.

This month in Toronto and Montreal, the first meetings were held of the Advancing Innovation Roundtable, a new independent working group sponsored by TMX which features senior executives from the investment and capital formation communities across Canada. The mission of the Roundtable is to find later-stage funding solutions for Canadian innovation companies.

And this is in sectors such as technology, clean tech, life sciences and advanced manufacturing. The idea and the focus here is power growth beyond seed and startup.

The broad participation in this initiative speaks highly of the collaborative spirit and vision of the Canadian business community. Stakeholders, and in some cases, competitors working side-by-side to explore ways to strengthen the foundation of this country’s economic ecosystem and add weight to our footprint in the global marketplace.

Truth is, Canada’s innovation community is the real deal. It’s gaining recognition around the world and TMX, Canada’s markets, are heavily involved.

Canada’s emerging technology ecosystem is building a strong reputation throughout Silicon Valley and in other tech centers like Israel as entrepreneurs around the globe become increasingly aware that a public listing on TSX has to be part of the conversation as they explore ways to grow their companies. International investors and companies are learning Canada boasts an attractive world-class marketplace with high-quality talent, excellent universities and innovation hubs, supportive government policies and a strong culture of entrepreneurship.

That momentum continues to build on TSX and TSXV as the technology and innovation sector is the fastest growing sector on our exchanges with over 50 new listings and more than CAD15 billion in equity capital raised since the start of 2015. The reality is that we already are far more than a regional stock exchange.

And while we’re certainly proud of our legacy, work remains. We have to build on it and expand the legacy going forward.

With a long-term view, TMX has completed a first step in a bold and vital reshaping while delivering meaningful value for our shareholders. With that, I’m going to turn over to John to give you some details.

Well, thank you very much, Lou and good morning to everyone on the call. As you will have seen in our release, Q3 was another solid quarter.

With a third quarter that often tends to be seasonably slower, continued market volatility drove increases in volumes across our equity, energy and derivative markets, translating into 3% overall revenue growth. Our success in continuing to manage costs continued into the third quarter as operating expenses before strategic realignment expenses declined year-over-year by approximately CAD5 million for the third consecutive quarter.

And we again benefited from the leverage in our business model as the 3% growth in revenues combined with a 5% reduction in costs resulted in a 7% increase in reported earnings per share and 27% increase in adjusted earnings per share over last year. Now I’d like to take a minute to explain the change in our financial reporting relating to BOX.

As you may recall, in early 2015, BOX launched program to incent subscribers to provide liquidity. In exchange for providing this liquidity and a nominal cash payment, subscribers received volume performance rights, or VPRs.

Comprised of class C units of BOX and an order flow commitment. The VPR’s vest over the five-year order flow commitment period if minimum volume targets are achieved, but may vest earlier.

Under the VPR program, subscribers being entitled to immediate economic participation in BOX for VPRs held. As of July 1, 2016, we determined that we did not hold majority voting power on the Board of Directors as class C units in certain vested VPRs became entitled to vote at Board meetings.

As of this date, we no longer consolidate the BOX revenues and operating expenses as we ceased to hold the majority vote of power on the Board of Directors and exercise control. As a result, our financial results from July 1 onward do not include the results of BOX other than our share of BOX’s net income or loss, which is reflected in the share of net income loss from equity accounted investees.

For periods prior to July 1, 2016, our financial results continue to include the results from BOX on a consolidated basis. Also effective July 1, 2016, derivatives revenue now includes revenue from the licensing of solar technology and providing other services to BOX.

This revenue was previously eliminated when BOX’s operating results were consolidated in our financial statements. One last point on BOX.

During Q3 2016, we recorded non-cash income tax adjustment of approximately CAD2 million net, largely related to the deconsolidation of BOX’s results which reduced our overall income tax expense. The net impact from deconsolidating BOX was a CAD3.7 million reduction in revenue in Q3 2016 compared with Q3 2015.

Excluding this impact, TMX revenue would have been approximately 5% higher than the previous quarter. I’ll begin talking about our third-quarter results on a year-over-year basis.

As I mentioned, the increase in net income in Q3 2016 over Q3 2015 reflected the higher revenue, lower operating expenses before strategic realignment expenses, and non-cash income tax adjustments of CAD2 million net related to BOX. The lowering operating expenses were partially offset by the write off of CAD2.8 million in costs related to discontinued products.

Finally, we incurred lower net finance costs in Q3 2016 compared to Q3 2015. On a reported earnings basis, the positive impacts were somewhat offset by higher strategic realignment expenses.

Looking at our top line, there were increases in efficient markets, largely driven by equity and energy trading, market insights and capital formation revenue, somewhat offset by the reduction in derivatives revenue. The increase in efficient market revenue reflected a significant increases in the volume traded in Q3 2016 compared to Q3 2015.

In the case of equities, there was a 17% increase in volumes traded on our marketplaces and a 14% increase in energy volumes traded on NGX over the same period. Increased market insights revenue reflected higher recoveries related to underreported usage of real-time quotes in prior periods.

Somewhat offsetting this increase, there was a decline in razor risk revenue and a 5% decrease in the average number of professional market data subscriptions from TSX and TSX Venture products. Capital formation revenue increased by 3% over last year.

Additional listing fees in Q3 2016 increased over the prior year reflecting a 3% increase in the number of transactions billed on TSX. In addition, there was an increase in additional sustaining fees on TSX Venture reflecting a significant increase in the number of financings and the amount of financing dollars raised.

The increase in this revenue was also attributable to favorable impacts from an increase in the maximum additional listing fee on TSX effective February 1, 2016. Partially offsetting this increase, initial listing fees on TSX and TSX Venture for Q3 2016 were lower than Q3 2015, reflecting a decrease in the amount of IPO financing dollars raised.

There was also a decrease in sustained listing fees on TSX and TSX Venture due again to a decrease in the number and market capitalization of issuers at the end of 2015 compared to the end of 2014. In derivatives, there was a CAD3.7 million reduction in revenue due to the changes in accounting for BOX that I discussed earlier.

This was somewhat offset by higher revenue from MX due to a 2% increase in volumes and higher average revenue per contract. Turning to costs.

Operating expenses before strategic realignment expenses in Q2 2016 were down 5% from last year. Effective July 1, 2016, we excluded operating expenses related to BOX when we ceased to consolidate BOX’s results from operations.

There were reduced costs related to the exclusion of BOX operating expenses, overall lower head count following our strategic realignment initiative, razor risk, SG&A and depreciation and amortization. The decreases in costs were partially offset by the write off of CAD2.8 million in costs related to discontinued products and higher employee performance incentive plan costs in the quarter.

Income from operations before strategic realignment expenses increased by 15% in Q3 2016 over Q3 2015, reflecting the 3% increase in revenue and 5% drop in operating costs before strategic realignment expenses, again showing the benefits we could realize in our operating model when revenue growth is combined with improved efficiency in our operations. Now, strategic realignment expenses increased significantly from Q3 2015 to Q3 2016, reflecting CAD16.5 million in severance costs related to the initiative we announced in September 2016.

As we said in September, we are targeting further cost reductions before strategic realignment expenses related largely to compensation and benefits of CAD8 million to CAD10 million per year on a run rate basis to be realized by the end of 2016 and a further CAD3 million to CAD5 million per year in additional savings on a run rate basis to be realized by the end 2017 net of the costs associated with new employees that may be hired as we reinvest in our strategic pillars. Approximately 95 full-time positions and about 20 consultants and contractors are being impacted net of these new hires.

We expect the majority of these headcount reductions will be completed by the end of Q1 2017. Overall, today, our headcount is down by 60 employees from 1,173 at the end of Q2 2016 to 1,113 at the end of this past quarter.

Looking at our financial results sequentially, revenue in Q3 2016 decreased over Q2 2016, reflecting the accounting change related to BOX as well as the reduction in capital formation and efficient markets revenue reflecting less active equity market conditions compared with Q2 2016. Operating expenses before strategic realignment expenses for Q3 2016 decreased by 2% compared with Q2 2016, reflecting the accounting change on BOX and a reduction in costs attributed to overall lower head count.

There were also reduced commodity tax and marketing expenses in Q3 2016 compared to Q2. These decreases in expenses were offset by higher employee performance incentive plan costs and higher information and trading system expenses, partially attributable to the write-up of costs related to discontinued products.

Income from operations before strategic realignment expenses decreased 13% from Q2 2016, reflecting the lower revenues, somewhat offset by lower operating expenses before strategic realignment expenses. Now, onto our balance sheet.

We reduced our debt by about CAD54 million during the first nine months of this year. At the end of September, we had about CAD20 million outstanding under our commercial paper program.

Subsequently, on October 3, our CAD350 million of series C debentures were repaid. This was partially refinanced with proceeds from our commercial paper program and with the remainder repaid with our cash on hand.

Yesterday, our Board declared a quarterly dividend of CAD0.45 per common share, an increase of 12.5% to be paid on December 2, 2016 to shareholders on record November 18, 2016. Our intention over the long-term is to maintain a dividend payout ratio that is consistent with our domestic and international peer group.

Our disciplined approach to reducing debt from the Maple transaction has allowed us to repay over CAD500 million since August 1, 2012. And as we continue to work to generate profitable growth going forward, we will remain committed to building shareholder value through pragmatic reinvestments in the business, enhanced shareholder returns and further reductions in our debt.

At this point, I will now turn back the call to Paul for a question-and-answer session.

Thanks, John. Carol, could you please recap the process for the question-and-answer session?

Thank you. Good morning.

Just a couple questions for you. First I think is pretty straightforward.

In terms of the payout ratio, so you say you’re benchmarking that relative to domestic and international peers. I can probably figure out who your international peers might be, but wondering who you’re using as your domestic peers and maybe more straight to the point, you can give us what you are seeing as a payout range for those peers?

We look at the peer group, it is pretty focused. It’s the Canadian domestic peers we’re looking at the Canadian financial sectors of the banks and insurance companies on an international basis, it is the international global exchange groups that we’re looking at.

And we’re not setting a specific payout ratio target for TMX, but we’re going to benchmark that group, and if you look at that group, the domestic group is generally in that 40% to 50% range and the international group is a bit broader, anywhere from 30% to 70%.

Okay. That’s very helpful.

Thank you for that. And then second question, and this one would be for Lou, ties into part of the next transformation steps in terms of sustained profitable growth.

So if I look at the results year-to-date, you’ve seen great bottom-line increase in earnings but revenue growth has only been 2%. So I’m guessing in terms of sustained profitable growth, you’re going to need something higher in terms of revenue.

And I don’t want to pigeon hole you into putting out any kind of guidance numbers or a specific number, but what do you think a reasonable venue growth rate is for this business over the medium-term? Are we talking mid-single-digits, high-single-digits?

Yes, I think it’s back to thinking about where the peers, certainly from the exchange group, and if you look at that group, you can get a feel for what growth rates are across the board. We said with the launch of the new businesses like TMX analytics, all the work we’re doing around capital formation, that we were hoping to start to see that kick in in terms of revenue growth, we said into 2017 and especially as you get towards the latter half of 2017.

But if you look at that group, I mean, mid-single-digits is a pretty reasonable benchmark for revenue growth and we are committed to that being profitable growth.

Thank you. And then final question is with respect to the technology integration transformation.

I assume that will also come with, or potentially will come with, significant operational cost savings?

You know, there will hopefully be some in there for sure, but right now, that work it’s ongoing. As we said, we’re focused on the depository and clearing first.

So the work is as planned actually progressing along. We will need regulatory approval to proceed with that work.

So as we said, we are hoping to have that in a state that we can talk to you about that as you get toward the end of first quarter next year. But that’s, it is progressing as planned and so, I think in our original statement when we talked about it in September, we talked about that we are focusing on some additional cost savings there.

But you can’t really finalize that until you finalize all of the specifications and what will happen and get the proper approvals.

Okay. That’s fair.

Okay. That’s all the questions I had.

Thank you.

Good morning.

Good morning, Graham.

Your target of CAD8 million to CAD10 million in expense synergies this year as a run rate, was any of that realized in the quarter or should we think about that as coming through in Q4?

Yes, I think you could see by the step-down that we had in employment in the quarter and the reduction in overall costs, if you exclude the CAD2.8 million that we had in terms of write-off, there would be some of that reflected in the quarter. But the majority of the 60 employees that moved on from the organization were in the back half of Q3, so the majority of that benefit is still to come.

Okay. Thank you.

TMX analytics, just could you just provide an update? I just feel like there’s a lot of products you are looking at.

Could you just provide an update on what products you have now and what you’re looking to roll out further, if any?

Yes, there’s two modules already out in the marketplace. One around understanding trading patterns and developing trading strategies.

There’s another module that’s already just been released around transaction cost analysis and so what we’re looking at as we go forward, both from a data integration and additional suite of offerings is really based on the biggest demands in the marketplace. So we are finalizing now what that will be there, but there will be several more offerings but it’s going to be really based on the demand.

As we get into January, we’ve targeted what we’re going to look at for releases through the year. So as we move through the first quarter, we’ll be able to give you a lot more detail around which kinds of modules, what specific modules are coming through the course of the year.

But we’re going to be finalizing the new offerings for 2017 in January.

Okay. It sounds like it’s still early days on a revenue impact.

You’re sort of looking at second half of 2017?

Yes, I think that’s, Graham, I agree and I think that is where we’ve said we would be. But I will say that it’s out there.

We have several commercial clients already on board contracted and a healthy pipeline so it’s off to a good start.

Okay. Great.

And then, John, the number of listings transactions, they were up modestly year-over-year but your actual additional listing fees were up, I think, 28% year-over-year. Is that largely attributable to the fee increase that you brought through earlier in the year or what’s going on there?

Yes, it’s going to be a combination of fee changes and also the mix of the types of transactions in terms of the size of the transactions and significant increase in what came from venture. You’ll see fewer transactions that are capping out.

Got it. Okay.

That’s it for me. Thank you.

Okay. Well, thank you, Carol, and thank you, everyone, for listening today.

The contact information for media as well as investor relations is in today’s press release and we would be happy to take further questions through the day. Again, thank you for joining us and have a great weekend.