TMX Group Limited

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

Jaeme Gloyn - National Bank Financial

Thank you, Jack, and good morning everyone. Thank you, for joining us today for the second quarter 2017 conference call for TMX Group.

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

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

Before we begin, I just 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 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.

Thanks, Paul. Good morning, everyone, and thank you for dialing into the call this morning.

We're going to discuss TMX Group's results for the second quarter and year-to-date and look forward to updating you on our plans going forward. This is certainly an exciting time for TMX both in terms of achieving record setting financial performance and also the definitive steps we are taking in order to accelerate the expansion of our powerful Canadian franchise in the global markets.

Our results for the second quarter and year-to-date in 2017 reflect the fundamental strength of our streamlined organization, our diversified portfolio of core assets and the ongoing execution of our business strategy. Excluding the impact of the sale of Razor Risk, Atrium and the deconsolidation of BOX, Q2 revenue was up 3% compared to the prior year.

We also set a new record high in diluted earnings per share of $1.26 which is a 2% increase from last year. Operating expenses before strategic re-alignment expenses were down significantly with an 8% decrease from Q2 2016 which reflects the impacts from divesting and deconsolidating businesses.

John is going to take you through the numbers in detail in a few moments, but I want to highlight a few of the particular areas of compelling interest and also to point out where we're seeing evidence that the new TMX's proactive business development teams are rapidly and expectedly taking shape and contributing to our success. There was significant initial listing activity in the second quarter.

Through the end of June we added 150 new listings and that's a 56% increase over the first half of 2016. The surge in activity came from multiple sectors and resources for example 31 new mining listings year-to-date on TSX and TSXV that compares to 5 through June 30th of last year.

Also 20 new issuers in the burgeoning innovation sector ahead of the pace set in the first half of 2016 which was a record year as you'll recall for innovation listings on our exchanges. Within these numbers and it's important also to recognize the significant upturn in the size of the companies coming to market this year.

In fact, Toronto Stock Exchange had the best first half in the last five years with 25 new corporate issuers including eight new graduates from TSX Venture Exchange. Capital raised from corporate IPOs in the first half of the year totaled $3 billion.

Again, these new issuers come from the diverse range of sectors, from consumer brands like Canada Goose and Freshie, energy companies like Step [ph], Source Energy and Kinder Morgan to innovation sector companies like MedRelease, Sign Works, and RealMaps. Despite some reports this year to the contrary the entrepreneurial spirit at the heart of the Canadian capital market system beats strong.

Companies continue to seek access to funding via public markets and pursue their business goals and growth aspirations. Toronto Stock Exchange and TSX Venture Exchange present a dynamic vehicle for generating growth capital for any type of company and the vitality of our unique two-tiered system is intrinsic to the success of Canada's economy.

This vibrant proven breeding ground continued to perform well in the first half of 2017 where we had eight companies graduate from Venture to TSX and that's up from six in the first half of last year. So if we move now from corporate to another high profile product in our portfolio, a product pioneered actually at the Toronto Stock Exchange more than 25 years ago, if you line mark the listing of the 500 ETF on TSX which was INF [ph] we won five new providers in the first half of the year and listed 56 new ETFs.

The total number of ETFs has more than doubled now over the last five years and the market capital has also doubled to almost $130 billion over that time. Moving to Montreal, higher volumes drove increased revenue from our derivatives business in Q2 including a record-setting month of June in which total volume exceeded 10 million contracts for the first time in history.

New monthly volume highs in benchmarked products, the BAX and the SSF also contributed to increased revenue in Q2 compared with the same period last year. In fact, excluding BOX revenue from last year's comparative numbers, Q2 revenue from MX and CETC [ph] increased by 14% over Q2 last year.

And just a note on a release that just came out in the World Federation of Exchanges on performance data for the first half 2017 exchanged traded derivatives globally volumes ended the year 5% down and that's a big difference from what you are seeing in our portfolio. So turning now to our broader business, we are well into executing on the second year of our strategic growth plan.

Over the past year and a half TMX Group has returned to profitable growth delivering record results along with improved shareholder returns while increasing the regular dividend which his now in line with our peer group. Next I want to provide an update on our key initiatives.

With the rationalization of our portfolio of assets complete, in June we announced that we've selected Tata Consultancy Services to replace the legacy systems for CDS and CDCC Canada's clearing and settlement businesses and this is subject to regulatory approval where required. And this system is a single integrated technology platform called TCS BaNCS for Market Infrastructure.

This project will deliver multiple client benefits and increase our operating leverage. As you've heard me say Canada is our address but our addressable market is the world and we continue to chase our opportunities to expand our global footprint across the business whether it is the hiring of TMX representatives to engage closely with the merging tech companies in Israel or MX's new London based [indiscernible] International Business Development working to expand the full liquidity for various products we are on a path to global growth.

We have also made progress leveraging our across business capabilities to boost the strength and value of our existing client offerings. Over the last few months we have announced a number of innovation initiatives with TMX partnering with experts in the block room space to design and build prototypes of valuable client solutions in our trust and energy businesses.

Change is good for TMX and accepting change is choosing progress. The steps we've taken over the last two and a half years to embrace change and foster an adaptive culture at TMX, one of which our employees are powered to anticipate and respond to client needs across our business areas and across the every shifting marketplace are paying off.

As evident in our results the capacity for change has become an important part of our makeup. In fact yesterday we announced changes to our leadership group that are designed to continue our evolution and leverage a very talented team.

As a result of these changes several executives will be taking on new and expanded mandates. Over the last two and a half years the management team here has evolved in step with the new TMX.

We've had new leaders join the company from our client and peer communities and we've had long serving TMX employees elevated to new roles. Jean Desgagné has spearheaded a major part of TMX's recent transformation during his time leading our Global Enterprise Services team.

Effective immediately, Jean will now move into the newly created position of President & CEO, TMX Global Solutions, Insights and Analytics Strategies. Jean's mandate in this new position is to implement and oversee a cohesive TMX enterprise approach through innovative technology and data driven solutions.

The purpose of this is to enrich the client experience across TMX's capital markets community by providing ready access to benchmark data and analytics process. Jean will assume the oversight at existing Market Insights business.

John McKenzie, who you will hear from in a moment or two has now added to the duties of his role as Chief Financial Officer by taking on the administrative oversight of TMX Group's equities fixed income and derivatives clearing businesses, CDS and CDCC. Glenn Goucher continues in his role as the Head of CDS and CDCC, reporting to the Boards of those two clearing houses.

As most of you know, John has been a TMX employee for 17 years and he has held senior roles in finance as well as serving as past President for CDS. The change is also extended TMX Group's General Counsel's office where Cheryl Graden’s mandate has been expanded to include the oversight of enterprise risk management, as Senior Vice President, Group Head of Legal and Business Affairs, Enterprise Risk Management and Government Relations.

Cheryl joined the company in 2004 and held senior roles in the Calgary and Toronto offices before being promoted to the TMX Executive Committee in 2015. Jay Rajarathinam, who joined as Chief Information Officer in July 2016 has been promoted to TMX Group Executive Committee and will now report directly to me.

In addition to the above changes, Eric Sinclair, President, TMX Market Insights has announced that he will be retiring at the end of August. So I want to take this opportunity on behalf of the Board and everyone here at TMX to thank Eric Sinclair for his years of service to the TMX Group.

I think it is important to recognize not only the leadership role he played in building TMX's data business and helping to establish our track record of success, but also to salute him for the integrity and commitment he brought to his role every day. With that, I want to thank you for listening in so far and I'll turn the call now over to John McKenzie.

Well, thank you very much Lou. As you have seen last night, we reported a record quarterly diluted earnings per share this past quarter of $1.19 and record quarterly adjusted diluted EPS of $1.26.

While reported revenue declined 2% year-over-year our top line actually grew by 3% when excluding divested and deconsolidated businesses. There was solid revenue growth in fixed-income, derivatives and energy trading, as well as in revenue from CDS.

We continue to reduce cost as reflected in the 8% decline in operating expenses before strategic realignment expenses which reflects the impact from selling businesses and not consolidating BOX, all of which contributed to record income from operations which was up 7% over the second quarter last year resulting in increases in both reported and diluted earnings per share of 11% and adjusted diluted EPS of 2%. The increases in diluted EPS were partially offset by the impact from an increase in the number of weighted-average common shares outstanding in Q2 2017 compared with the same period last year.

Now turning to revenue. Capital formation revenue was essentially flat year-over-year.

Initial listing fees for Q2 2017 were up by $2 million or 118% over the last year largely reflecting an increase in the number of new issuers listed and IPO financing dollars raised on TSX. Revenue from initial listing fees on TSX Venture also increased driven by these same factors.

In fact from January to June, Toronto Stock Exchange had the best half in the last five years for new corporate issuers with 25 new corporate issuers including 17 new corporate listings and as Lou mentioned earlier 8 new graduates from TSX Venture. The total capital raised in the first half from corporate IPOs represented a diversified range of sectors totaling $3 billion in total capital.

There was an increase in sustained list increase on both TSX and TSX Venture of $0.9 million or 5% which was attributable to the increase in the market capitalization of our issuers at the end of 2016 compared with the end of 2015. Other issuer services revenue in the quarter was also higher compared to Q2 2016 reflecting an increase in revenue from TSX Trust related to transfer agent and corporate trust services.

Now these increases were largely offset by a decline in additional listing fees in Q2 2017 when compared to Q2 2016 reflecting a 25% decrease in the number of transactions billed on Toronto Stock Exchange, though somewhat offset by the higher additional listing fees on TSX Venture where there was an increase in financing dollars raised. Now on equity and fixed income trading, revenue was up 1% versus in Q2 2017 over last year driven by higher fixed income trading revenue on increasing activity in Government of Canada bonds and swaps.

This increase from higher fixed income trade revenue was largely offset by lower equity trading revenue for TSX. There was a 15% decrease in the overall volume of securities traded on our equities marketplaces.

Volumes on TSX and TSX Venture decreased by 17% and 14% respectively year-over-year, while volumes on the Alpha increased by 4% over the same period. CDS revenue increased by 10% from Q2 2016 to Q2 2017 primarily reflecting revisions to the fee schedule for issuer services implemented on March 1st 2017 and higher issuance activity in the quarter.

Derivatives Trading and Clearing revenues increased by 3% driven by higher revenue from MX and CDCC due to a 16% increase in volumes. The revenue increase was reduced by the impact from excluding BOX effective July 1, 2016 when we ceased to consolidate BOX's results from operations.

Partially offsetting this decrease also effective July 1, 2016 we have included revenue from licensing SOLA technology and providing other services to BOX. This revenue was previously eliminated when BOX's operating results were consolidated in our financial statements.

The net reduction in revenue related to Box was $3.3 million and now thankfully this will be the last quarter that we talk about the deconsolidation of BOX. Excluding BOX derivatives trading and clearing revenue from MX and CDCC increased by 14% in Q2 2017 over Q2 2016.

Energy Trading and Clearing revenue increased by 3% reflecting higher revenue from the natural gas exchange as Q2 2017 and a higher recapture of previously deferred revenues. The revenue increase was partially offset by lower revenue from Shorcan Energy Brokers and total energy volumes were 6% lower compared to Q2 2016 at NGX.

Natural gas volumes in Q2 2017 decreased over Q2 2016 as price volatility decreased in the market. The muted volumes were largely weather driven as Q2 2017 failed to bring a hot spring and early summer across the Southern U.S.

Market Insights revenue decreased by 11% year-over-year reflecting a decline of $2.2 million in revenue from Razor Risk which we sold on December 31, 2016 and $4.2 million in revenue from TMX Atrium which we sold on April 30, 2017. The decrease was partially offset by a favorable impact from U.S.

dollar revenues in Q2 2017 compared to Q2 2016 and higher revenue recoveries related to underreported usage of real-time quotes in prior periods. Excluding Razor Risk and TMX Atrium, revenue for Q2 2017 in Market Insights increased by 2% over Q2 2016.

Now turning to costs, operating expenses before strategic realignment expenses were down $8.2 million or 8% from Q2 2016. There were reduced costs related to Razor Risk and TMX atrium of approximately $3.5 million and $5.5 million respectively as well as lower compensation and benefits cost including employee performance incentive plan costs of $3.1 million following our strategic realignment initiative.

Effective July 1, 2016 we excluded operation expenses related to BOX when we ceased to consolidate BOX's results from operations a net reduction of approximately $3.5 million. Now these decreases in costs were partially offset by approximately $4.1 million of higher employee performance incentive plan costs and increased severance costs in the quarter not included as part of our strategic realignment expenses.

There was also a write-off of $0.8 million related to discontinued products as well as an increase, information and trading system project costs in Q2 2017. Now focusing on the compensation expenses, the higher costs of about $4 million that I mentioned included $1.7 million related to long-term performance incentives for current employees, which will move in the same direction as our share price.

There was another $1.2 million of increases related to short-term performance incentives for current employees and severance costs of about $1.2 million which were not part of our strategic realignment expenses but as mentioned last quarter our cost that we expect to incur from time to time as part of our ongoing business operations. Looking at our results on a sequential basis, revenue in Q2 2017 increased over Q1 2017 reflecting increases in capital formation, CDS, derivatives trading and clearing and energy trading and clearing revenue.

This was somewhat offset by decreases in Equities and Fixed-Income Trading as well as Market Insights Revenue including approximately $4.5 million related to TMX Atrium. Operating expenses in Q2 2017 decreased by $6 million from Q1 2017 largely reflected lower expenses of approximately $5.5 million from TMX Atrium.

Income from operations increased by 13% from Q1 2017 to Q2 2017, reflecting both the higher revenues and lower operating expenses in the quarter. Now, just a comment on the balance sheet, we've reduced our debt by almost $30 million during the first half of the year and have returned just over $52 million in capital to shareholders through dividends.

Our leverage as defined by our debt to adjust EBITDA ratio with 2.3 times and our net debt to adjusted EBITDA was 1.9 times at the end of June. Last night our Board declared quarterly dividend of $0.50 per common share to be paid on September 8, 2017 to shareholders of record on August 25, 2017.

At 40%, this payout ratio was within the range of our domestic and national peers as comparing to earlier. Now, at this point, I will turn the call back to Paul for the question and answer session.

Thank you, John. Jack, could you please outline the process for the question-and-answer session?

Hi, good morning. My first question is just on the clearing integration initiative, just wondering if you can give us a timeline of implementing this new platform?

What sort of expense are you expecting related to the implementation? And then lastly, what kind of run rate savings versus what you are spending on your clearing platforms today?

Yes, it’s really good question. And unfortunately, this isn’t the quarter where we're going to be able to provide that level of detail with you but we will in good time.

The timeline for the initiative is this is a complex and large technology change that affects not just our systems but the integration of systems with our key clients. So, we are working with the industry in terms of what the appropriate time line is to do that, so that we can minimize the impact to our participants.

So, you are looking at something that is going to be multiyear implementation and as soon as we get to a point where we can actually be more definitive on both the timing, we will be able to share target timing with you as well as the investment and the savings we expect to generate.

Okay, thank you. And then just could you give us any color on what kind of margin lift do you expect from these recent divestitures of Atrium and Razor Risk?

Yes, I am going to let you do your own math on that particular piece, but I think you will see in the results that we've got quarter-over-quarter that's largely reflected in the margin left in those changes and in both of those businesses, and I will give you - in the context of Atrium in general, Atrium in general has generated about $6 million in revenue and around $6 million in expenses per quarter, so not generating margin at all. So when you take those components out you get immediately couple of points and margin lift from that.

Okay, and just lastly if I could, just on the TSX drag it seems that you are recent new market share on new business, could you give us any color on what kind of market share are you are getting and how long can we expect before that kind of there is a noticeable impact on your other issuer services revenue lines?

Well, I think if you look at it on year-over-year you have already seen a noticeable impact on the other issuer services, where we have seen double-digit increases in that business year-over-year. Market share is varying by period, but if I give you a couple of examples as in terms of the total transfer agent market, you know we operate generally in the mid teens and that’s growing from where when we acquired the business in the low teens.

But in terms of winning new issues, so when a new issue comes to market and they are competing with the incumbent trust and transfer agents for those businesses we are winning this much as to 30% to 40%, 50% in some periods of that new business and it will vary from period to period. The exciting piece of that business though on where the next component of growth comes from is in the trust mandate.

So, beyond just the transfer agent mandates where we look at market share but the trust mandate that you see in terms of where you can act as trustee for clients and that’s a new development because we only received that trust license just over a year ago, but you would have seen recent announcement of a new car agreement with [indiscernible] and that’s exactly the kind of example of the new type of business where we are winning in that business now.

Okay, thanks for your time.

Yes, good morning. My first question is on the design diversification of the listing space, obviously really good quarter for listings both on TSX and TSXV, but looking at the MIG data, you know it looks like we are just struggling to get international and as well as technology, now these things are timing and single goal buzz, we’re hoping if you can just give us a little bit of color around any successes or may be speed bumps on the road to getting a more tech innovation international listings?

Yes, well, I think you have to look at us compared to what our peer group is doing around the world and we are towards the top, again in this quarter. So, as we put more people all around the world and get our story told and you will see in the back half of the year we’re going to be more in the digital communication and branding and that’s going to support the people around the world.

So you saw the announcement about new head of development in Tel Aviv. We got a person on the ground in California.

We are putting more people and you will see more of that, so we will keep adding to that, but when you look at the trends, the trends are really positive. So, right now, in the innovation sector we are ahead of last year’s pace which was a record year.

So, I think that’s the key and you are looking at now approaching something like 40% of our new listings in the innovations sector, on top of the fact that you've had a resurgence in resources. So, those two things together you know keep us growing quite solidly globally, particularly when you compare to the peers.

So, we are going to keep focused on that. We are going to keep adding resources around the world and you will see lots more communications initiatives to support the people that we are putting on the ground when we get into the back half of the year.

Okay, thanks. And one more just in terms of market share looking at the IROC data, looks like NASDAQ is may be finally starting to make a little bit of a push, Aequitas obviously picking up a little bit, and in your MD&A comments you sort of mentioned that its partially attributed to listings that are on the TMX or TSX.

So that from my take would be ETFs, but may be you could just sort of talk about what are the other contributing factors and what do you think about where NASDAQ Aequitas is driving? And then I guess part of that non-listing would also be the CSE as well, so may be just outside of those factors?

Okay, well, I mean we haven’t seen the changes that you are putting out which are changes. We haven’t seen that really attributed to NASDAQ or Aequitas.

I mean we think that the ballpark for that is coming from the additional listings on CSE of which you know for the record most of which would not qualify to be on our venues. And secondly, from dark pools would match now, and so when you look at that and remember market share is not a direct correlation to revenue and it is not something that we battle each percentage point over.

We are much more concerned with the fundamentals of the business. But you also may notice that our dark pool types have been approved and we expect to have that launched in Q4 this year and to counter at least that portion of the market share that has gone into dark pools as that demand is out there, so we will be addressing that.

And the CSE market share it’s not like we are losing listings to CSE. It’s really a different market which has lot of complexities to it, but they are not losses for TMX venues.

So, I think most of the 5% to 6% that you see we think is coming from those two areas, not NASDAQ and Aequitas.

Okay, and just to may be dig into that a little bit, the revenue that you are getting from dark pools, or that you will potentially get from dark pools, how does that compare to traditional trading?

Yes, I am not sure we can make that comparison right now. I mean again, we haven’t even launched it yet, and again we are much more focused right now on addressing the demand in the market place by adding those letter types in.

So, it’s not so much a brand new business with a brand new revenue model, it’s really an extension of our existing offering today.

Okay, great, that’s it from me, thanks.

Okay. [Operator Instructions]

We have one question on the web, so I will read that from Fred Masada at Schwartz & Company. He is asking for an update on Canada these firms with U.S.

operations that want to list on our exchanges.

Okay, well, I will just make a few comments on that and first I think you got to be sure to separate in our portfolio anyway listings on our venues TSX and TSXV versus clearing in CDS. So, they are not the same thing.

They are differences there and when you think about listings it’s pretty straightforward. I mean our policies are published and transparent and enforced.

So, you know if you have any questions about whether or not a company could list, you could go to those polices and compare to that. We never talk about particular issue regarding listings, but listings are very straightforward.

I think the issue more in the media lately has been around clearing and that’s a much more complex issue versus listings and it has to do with legal issues in the U.S. There are no issues for kind of these companies in Canada that are following legal guidelines.

So the issues only come when they have U.S. operations.

But for listings it’s very straightforward and you can look at our policies and that’s what we enforce.

Okay, thank you Jack 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’d be happy to take further questions through the day.

Once again, thank you and have a great day.