TMX Group, Inc. (TMXGF) Q4 2015 Earnings Conference Call February 12, 2015 8:00 AM ET
Kristine Cheng - IR
Lou Eccleston - CEO
Michael Ptasznik - CFO
Marko Kais - TD Securities
Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the TMX Group Fourth Quarter Results Conference Call. [Operator Instructions]. [Woman] in Investor Relations, Kristine Cheng, you may begin your conference.
Thank you, operator and good morning. I’m Kristine Cheng and today I will be stepping in for Paul as he recovers [entirely], we wish him a speedy recovery. Thank you everyone for joining us today for the fourth quarter 2015 conference call for TMX Group. As you know, we announced our fourth quarter 2015 and full 2015 result yesterday evening. A copy of the 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 would like to remind you that certain statements made on this call today may be considered forward looking, and I would refer you to the risk factors outlined in today's press release and reports filed by TMX Group regulatory authorities. Now I would like to turn the call over to Lou.
Thank you, Kristine and good morning everyone thank you very much for joining us. I want to echo Kristine’s best wishes for Paul for a speedy recovery. In 2015 we successfully advanced a number of important initiatives that were designed to prepare and position TMX to compete effectively in what is volatile and evolving market place ahead.
We took significant steps during the year to evolve TMX. We streamlined our organization, mobilized our ability to develop client solutions faster, and ultimately to become a digital organization that can grow and adapt with the pace required by our very diverse client base. These are what I’ll refer to as foundational successes of 2015, and these enabled us to enter 2016 in execution mode.
2015 was also an exceedingly difficult year for many of our clients across the Canadian capital markets. While global economies and financial markets continue to face large scale immediate and longer term challenges, Can has been profoundly impacted due to our particular vulnerability to swings in commodity values. These prevailing factors that slowed economic growth in the country and the expectation is that Canada can expect to feel the effect of the downturn continued at least in the near term.
So while putting a timeframe on recovery is certainly inexact science. One thing does seem certain; by the time the Canadian economic rebound is in full balance, the capital market landscape in this country will already look very different. The markets we compete in are in a perpetual state of change and as a direct result TMX today looks very difficult from TMX at this time last year.
Now on previous calls and in face to face meetings with many of you listening in this morning, I’ve outlined our future plans and emphasized our will to push TMX to be client focused technology driven solutions provider. To be clear, this is not a tweak; in reading our company for the future we made significant changes in one year.
So I just want to open this morning by putting the progress we made in 2015 in perspective. Following the completion of our strategic review, we announced the realignment of the organization and the goal was integrating our operations, clearing risk and trading platforms across Canada. At the same time, we set new priorities for investment to drive organic growth.
The objective is to realize the value of this company’s portfolio capabilities that has historically been entrenched in individual businesses to integrate these capabilities and put them to work together to realize greater value for clients and for shareholders. This new path requires that we make important choices in terms of our talent across the company and have started with the executive committee.
Jean Desgagne assumed a new created role, Head of Global Enterprise Services. Jean has spent the last six months transforming the functions accountable for the delivery of our operations, our technology, our transaction services and procurement and bringing them in to an integrated, efficient, effective and client focused support organization for all of TMX.
We have the initial capital here and under Jean’s leadership, we are very much on the path to becoming a digital enterprise that leverages new technologies in order to reduce time to market and create competitive advantages.
In early January, Jean brought in Anthony Di Iorio as Chief Digital Officer. Anthony is one of the world’s most prominent experts in blockchain, digital currencies and disruptive technologies. He co-founded the Ethereum project; he is a CEO as founder of Decentral and Decentral Consulting Services, and serves the Fintech Advisor at MaRS Discovery District. Anthony also teaches the Master’s level course on Disruptive Innovations.
Together Anthony and Jean are leading the critical initiative of formalizing the TMX digital strategy for the future. We’ve already announced three initiatives that serve as great example of that emerging digital capability; AgriClear, [NGX] and Market Insights. TMX Group of January 2015 could not have executed on any of these opportunities.
Just weeks after we introduced the pillars of our new growth strategy, last year we announced the launch AgriClear, the first initiative under the market solutions pillar. It’s unique platform it applies NGX’s physical trading and clearing capabilities of price discovery, facilitation delivery and reduce risk in obtainment, necessities and physical commodities market and in a brand new business.
So it’s a startup new for TMX, but this business has building a community quickly and has started seeing the first signs of commercial uptick. This week we announced two new partnerships with American Akaushi Association and HeartBrand Beef. American Akaushi Association will promote the use of AgriClear to its members and Texas beef producer HeartBrand Beef will utilize AgriClear in our settlement services for cattle procurement.
We move to (inaudible) in our more traditional markets as well. Under our efficient markets pillar, we’ve worked closely with our clients to develop a new mutual fund transaction platform called NAVex. This will enable bulk trading in automated portfolio allocation of mutual funds, while providing manufacturers with meaningful savings.
NAVex is another example of leveraging our proven market infrastructure, as well as our new agility in responding to market needs. And again, our business initiative at this innovative scope with 28 members already in the working group, including most of Canada’s largest fund managers, would never have been possible under our former TMX Group structure.
We announced that project in November 2015 and are on track to launch near the end of Q2 this year. Later this month, we’ll officially launch TMX Analytics as our first offering in a new Market Insights pillar, which is expanded to include not just Canadian, but also US content.
We will come to market with a suite of analytics focused on real time trading and analysis around effective trade execution strategies that are web delivered and cloud based. Right behind that, the next offering in our play point is around global content and analytics, with the objective of becoming the preferred provider of on-demand, global equities time series and related analytics.
Our goal is to work with global content providers such as Thomson Reuters and Bloomberg to distribute and grow our offerings. We’re now live with a market global hedge fund already with these products and have a robust pipeline of qualified prospects featuring global buy side firms and tier one [events].
To support that and continue to grow that business, we’re aggressively building out a data science team that will drive growth with Market Insights. This is another example of innovative scope that simply would have been possible a year ago.
Continuing on our path of organizational transformation, we brought in new leadership for our core equity capital markets business. Nick Thadaney joined us as Head of TMX Equity Capital Markets on September 1, and Nick had spent a great deal of time since he joined face-to-face with our equities and listings clients working to help brand TMX much closer to our clients and enable us to build a better understanding of their needs. Nick is also leading the revitalizing TSX venture exchange initiative.
In equities trading, we’ve undertaken proactive measures to enhance the client experience for our wide range of investors with a whole series of changes, as we relaunched our aftermarket last year, initiated phase one of changes to our maker-taker fee model, and launched long life orders in November.
The early returns have been very encouraging and are indicative of the value of maintaining strong relationships with our clients. In another very significant accomplishment last month, we announced the renewal of the multi-year index operation and license agreement between TSX and S&P Dow Jones Indices, further extending our long standing and successful partnership.
This agreement ensures that market participants will continue to have access to a comprehensive suite of investible indices for the Canadian equity markets as well North American and global markets. Our agreement covers the creation and publication of all S&P/ TSX indices by also providing Montreal exchange with right to list features and options on the S&P/TSX indices. This agreement allows to continue to advance benchmark innovation and integrity in the Canadian market.
So it’s been a busy 15 months, I think it’s fair to say. In my time here, we’ve been preparing for increased domestic competition and new market entrants. It was not a matter if but when we would see intensified competition; such is the unrelenting nature of business in today’s economy.
Most importantly, what I want to stress is that we are ready. That’s what we’ve been preparing for, for the last 15 months. So wrapping up before I hand it over to Michael, I want to reiterate that we have accomplished what we set out to do to be ready for 2016 and the future.
Planning is over and we are well in to execution mode. We will continue to progress in our integration evolution and innovation efforts as we move through 2016. We will keep improving and driving the profitable growth this year. We are embedded and intrinsic to Canada’s economy.
TMX are Canada’s market for the world. TSX and TSX B list of companies employ over 3.5 million people around. Our National Clearing Houses, CDS for equities and CDCC for derivatives are designated systemically important by the Bank of Canada and on top of that franchise, we are building an innovation company for the future.
It’s important to understand both those things when you think about our company. Our plans remain on track, we are confident that as macroeconomic factors stabilize and when recovery begins, we will benefit exponentially. TMX is emerging as an efficient, innovative, client centric organization that is better equipped to compete in Canada and around the globe today than we were a year ago. Again we are ready. Michael, over to you.
Thank you Lou and good morning everyone. In the context of our strategic realignment program, we’re going to take in a number of changes this quarter. First, as you have seen in the Q4 ’15 results and the press release issued on Wednesday, we’ve aligned our operating segments to our strategic pillars. This lines up our reporting structure with how we review the business.
Another important exercise this quarter was the revaluation of our assets. When we completed the Maple transaction in Q3 of 2012, all of our assets were revalued and we put a significant amount of goodwill and intangibles on the books. Since then we have seen the downturn in commodity prices and the effect on the mining and oil and gas sectors.
And while we are working on the revitalization plan that Lou mentioned in his remarks to drive growth in all sectors the current economics of the venture market have been negatively impacted by the research sector pullback. This has resulted in the impairment in the value of goodwill and intangible assets and listings and trading aspects of our business and impacted the results this quarter.
We also incurred strategic realignment cost of $8.2 million in Q4 ’15, 7.9 million in severance and related cost and another 0.3 million in professional fees. We’ve made some key organizational changes since announcing our strategic pillar in mid-2015, and continued to do so in Q4 ’15 in order to become more efficient and to align our organization with our vision of being a technology driven solutions provider.
Turning to our operating results for the fourth quarter on a year-over-year basis, revenue decreased by 3% and operating expenses before strategic realignment expenses increased slightly by 1%. This translated to a 10% decline in income from operations before strategic realignment expenses.
Reported EPS was a loss of $2.92 per share inQ4 compared with $0.76 per share one year ago. The decline in reported EPS was largely attributable to impairment expense on goodwill and intangible assets of 215.8 million which had an EPS impact of $3.57 and strategic realignment expenses of 8.2 million which had an EPS impact of $0.11.
Adjusting for these items and the amortization of intangibles which had an EPS impact of $0.11 per share, adjusted EPS was down 6% from $0.93 to $0.87. In terms of revenue, there were increases in Market Insight and energy trading and clearing revenue, offset by lower capital formation and equity and fixed income trading revenue. Overall, total revenue was down 3% year-over-year.
Market Insights revenue which was up 9% over Q4 of last year benefited from the strong US dollar. The results were higher revenue from TMX Atrium Wireless and higher revenue recoveries related to under reported usage of real time quotes in prior periods of 1.1 million.
The appreciation of the US dollar also helped energy trading and clearing revenue this quarter, along with higher volumes on NGX. Natural gas and power revenue increased partially offset by higher deferred revenue. Revenue from equity and fixed income trading decreased by 14% reflecting lower total volume across our venues.
While trading volume across all market places in Canada was down almost 14% year-over-year, our market share declined as well. The decline in market share was not unexpected as we closed TMX Select and Alpha was relaunched as an unprotected market place. These changes are made as part of the larger initiative to simplify and improve the trading experience for our clients. The impact of the volume decrease was somewhat upset by a more favorable product mix.
Capital formation revenue was down 13% in Q4 ’15 versus Q4 ’14. The decline was largely in initial and additional listing fees. As I mentioned earlier, resource based companies and especially those listed on TSX Venture continue to be impacted by the low commodity prices. The value financing from TSX Venture was down 56% year-over-year with mining and oil and gas issuers accounting for almost 90% of the decrease. The number of new listings on TSX Venture was down from 29 in Q4 ’14 to 20 in Q4 ’15.
On TSX the number of new listings was down to 11 from 38 a year ago, and there were 9% tier building transaction that generated additional listing fees. Sustaining fees were higher on TSX in Q4 ’15 versus Q4 ’14 due to higher market capital on TSX at the end of 2014 versus ’13 and an increase in the maximum sustaining fee that came to effect on January 1 of ’15. Other issuer services revenue was also lower, reflecting the sales of Equicom in July of 2015.
Derivatives revenue decreased by 4% year-over-year, effective Q1 ’15 Fox market participants BOX market participants received volume performance rates as in incentive to provide volume and the associated cost that was recorded as a reduction in revenue. This was the major factor in the decline in BOX revenue from Q4 ’14 to Q4 ’15.
Partially offsetting this decrease in revenue was an increase in the volume of 27% on BOX and the positive impact of a stronger US dollar. MX had a record year in 2015 with 76.7 million contracts traded. Q4 ’15 volume was up 4% over Q4 last year, led by growth in ETF contract. This was offset by the impact of ETF caps introduced in 2015.
On the cost side, offering expenses before strategic realignment expenses were up 1% year-over-year. There was an increase in cost related to Razor Risk and Atrium Wireless, partially offset by the reduction in expenses related to Equicom. The unfavorable impact of a weaker Canadian dollar relative to other currencies on expenses was approximately $3 million year-over-year. On a sequential basis, revenue was 1% higher than Q4 ’15 versus Q3 ’15. With higher Razor Risk and energy trading and clearing revenue offsetting (inaudible) capital formation and derivatives revenue.
Operating expenses increased 6% from Q3 ’15 to Q4 ’15. The increase reflects higher costs associated with higher Razor Risk revenue, higher IT cost, lower capitalization of labor and higher marketing and project costs. These increases were somewhat offset by lower cost related to employee performance incentive plans and a reduction in Equicom cost.
In Q4 ’15, we reduced our debt by approximately $40 million which translates to approximately 165 million in total debt repayment in 2015. Our debt-to-EBITDA ration is now 3.4 times on an LTM basis. Debt repayment will continue to be the primary use of cash - excess cash in 2015.
And yesterday our Board declared a quarterly dividend of $0.40 per common share to be paid on March 11, 2016 to shareholders of record on February 26 of 2016.
At this point, I will turn the call back to Kristine for the Q&A session
Thanks Michael. Operator, could you please outline the process for the question and answer session.
[Operator Instructions] our first question comes from the line of Marko Kais with TD Securities. Your line is open.
Marko Kais - TD Securities
I just wondered is there any update on the search for the Commercial Chief Officer?
Actually its ongoing, we have spoken to lots of really interesting folks out in the market place, and I’d say that we’ll have a decision on that probably in the next several weeks. And what we are really thinking about now is as we’ve evolved and particularly as we’ve evolved the organization and brought in new folks as well like Nick and others, we’re just trying to make sure we get that right, the right talent set and what’s the right alignment of the organization. So I think the other to mention with that is, that we haven’t waited to move on evolving our organization for that position to be filled. So creating sales capabilities, building business development teams, that’s all ongoing even as the searches continue.
So progress has already begun around those things that we were looking for from that individual, and I think one way or the other we’ll have a solution on that in the reasonably near future. But the firm is progressing along those lines even without that individual onboard.
Marko Kais - TD Securities
And I also noticed there was lower average fees in the Montreal Exchange, was that a reduction in rates or was is just driven by the trading mix within the quarter.
Sorry, could you repeat the question.
Marko Kais - TD Securities
Regarding the lower average fees in the Montreal Exchange, were there a reduction in fees charged or was it reflective of the trading mix within the quarter.
The combination of trading mix plus also we had put in caps on the ETF fees.
Marko Kais - TD Securities
Just lastly within your (inaudible) pillar I was just wondering what’s the breakdown of the topline between the traditional data business and Razor Risk and TMX Atrium that’s in there.
There’s a graph in the MD&A that gives you the pie chart that shows you the breakdown of the different business segments, it’s probably best to just take a look at that.
As there are no further questions at this time, I’ll turn the call back over to Ms. Cheng for closing remarks.
Thank you for listening in today. Contact information for Media and Investor Relations today’s press release and we will be happy to take further questions. Thank you for joining us today.
Sorry Operator, we just want to make sure that there is nothing wrong at the system and that there’s no other call queue out there. Everything is working?
Everything is working great. The queue is still open [Operator Instructions].
Okay. We are available for questions after Kristine’s number is available and I can also be reached if people have any different questions. Thanks very much.
This concludes today’s conference call. You may now disconnect.
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