TMX Group Limited (X) Earnings Call Transcript & Summary

Very early. Yes, they're not anywhere near as developed as the U.S. market. So having more independent dealers with retail books that provide those products is good for the development of that industry. Like we're seeing good growth in both of our listed options, options on ETF and single name futures, but it's actually been driven by as much institutional as it has been retail.

And TMX is currently exploring digital assets. What are the considerations being made before putting digital assets directly on to the exchanges?

The 2 biggest considerations are -- so we've largely, what I'll say, solutioned in terms of how to put Bitcoin on exchange, trade it through the existing distribution network and centrally clear it and settle it. The 2 challenges that we're working on now is the liability regime. Can you get the risk management regime right so that you can't locate the asset? Where does that liability sit? So that the liability that's different around digital assets doesn't spill over in traditional equities and fixed income that are in our depository, because we run the depository and clearing house too. So we can solve for that, the custody of it. But the second piece, quite frankly, is that the market demand that was there a year ago isn't there today. The collapse of FTX did two things, which is it actually made the solution we were looking on -- looking at, a whole lot more valuable and people were turning to us, because we can create a solution that's using existing infrastructure, it's well regulated, it's fully risk-managed, and it solves all those problems that exist in the crypto market. But at the same time, the client demand to offer it to their clients is a bit more hesitant now than it was a year ago. So we're ready with two solutions. We've got a design for cash trading. We also have a design for futures trading on Bitcoin and Ether. So for asset managers that are holding those assets in products or ETFs or mutual funds, we could give them a risk management tool. And really, it's about client readiness and ready to adopt. It would be the major piece in terms of when we would bring that to market.

And within your derivatives trading business, the firm continues to experience a very healthy growth. What products on the Montréal Exchange are experiencing the most utilization?

The most utilization would come from the fixed income futures. Those are global products, and they give you both, the fixed income risk management tools for international traders, they can be used as a foreign exchange management tool as well because of that interplay between rates. And what we've been doing with those products is we've always had really strong 10-year product and short-term 30-day product. And what we're doing right now is actually building out the curve, adding more liquidity in a 2-year, a 5-year, a 30-year and actually converting the 30-day product from what was a Cedar-based future, Cedar is the equivalent of LIBOR. And like everywhere else, we are moving away from that rate product in Canada to an overnight rate that's a community-based rate. So we've added a new product in that. Both those products are having substantial pickup this year as interest rates have normalized. So they're really well adopted. You're going to see very strong growth in that interest rate product curve throughout 2023. But we also -- and this is different to some of the U.S. markets, we trade both, the futures and the options, in the same vertical. So we have all the equity options, ETF options, single-name, futures and ETF futures. And they've all been growing 20%, 30% as well.

And just offering all the different types of derivatives in a single channel have complementary benefits for the way institutions are using those in their trading workflows?

I'd say less on the trading workflows and more in the capital efficiency and the clearing side, because it's all centrally cleared in a central book. And so you get all the capital offsets and the efficiency for the dealers to be in that same book.

And maybe talk to some of the other derivatives products on the exchange, and what is the growth appetite there?

We have lots of appetite. The challenge is always ensuring that we're bringing products to market that there's client demand for. And so what we're not trying to do is bring derivative products on just because we can, and then they don't get traded. And I'll give you one odd example of one that hasn't had the uptick. We thought there was a lot of market demand for ESG-based futures. So we launched ESG tilted index futures on the exchange. There's been very little uptake in it. Because it seems that most people that are ESG-based investing are doing their own analysis in their houses in terms of what they want to invest in, and they are not looking for a third-party product to do it. But it was still based on where we believe the client demand was. So everything is client based. If we do a Bitcoin future, it's because we get clients that want the products so they can actually solve a risk management challenge they've got in their own shop.

And as you think about like workflow innovations, you've seen some of the U.S. exchanges kind of change the way investors can trade upon their platforms. Is there an opportunity similar to that for TMX?

Only in partnership with the dealers, because we're not the front end to the retail trade. So it's working with those banks, with those independent dealers to bring new product, and that's where we work. Where we work more on the innovation side is actually working with some of the product creators. So what you'll find unique in the Canadian market different from the U.S. is probably substantially more innovation around the types of ETFs we can bring to the market before anywhere else in the world. First market to launch digital asset ETFs, Bitcoin ETFs, Ether future ETFs, complex, double up, double down with embedded derivatives. So we've got some unique ETF manufacturers. And as a listed market, we work with them in terms of constructing those products, so that they're ready for public market.

And can you walk through Global Solutions, Insights and Analytics, what makes up that segment? And how do you think about the future growth prospects?

So I mean, the simplest way is to divide it into 2 pieces, which is our Data Links business, which is the data business coming from all of our exchanges. So TSX, TSX Venture, Alpha, Montréal Exchange and the ancillary corporate information around that. That's a business that historically was more mature, kind of growing with GDP. We've been working to accelerate growth in that franchise. And so that's also where we're driving growth in our index business, our benchmark business, co-location for our clients. We're adding more bundled data products. We're doing more international sales. And in the last couple of years have been growing that business anywhere kind of 4% to 7%. And if you see our new guidance for the company now, you'll see that for the Data Links business, we're looking to continue to grow that at kind of that mid-single plus rate in terms of where we can price, where we can add products, where we can bundle and keep adding more analytics solutions, index solutions, new corporate event data and global sales. So I'd like to say in that business, it's not about we need to hit a home run. We're just going to singles and singles and singles to grow the business faster and create a deeper penetration into the clients in terms of things that they need. So that's the Data Links piece. The other piece is Trayport, which we touched on in the beginning. And Trayport is our European-based, London-based energy aggregation platform. And what Trayport does is aggregates basically every major liquidity pool for over-the-counter energy market and exchange-based energy market trading onto a single screen, the way Bloomberg would do for you for fixed income. There's -- it's unique. It's the only platform like it in the world. And if you are a European energy trader that wants to be able to trade German gas, you need Trayport to be able to see the whole market. And so with that business, we acquired it at the end of 2017, we've been growing that double digit every single year since we've acquired it, and we believe we've got runway to continue to grow at high single, low double digit going into the future by doing a number of key things. We keep adding products to the platform, so more different energy products for people to trade. That helps us bring more traders onto the platform and the trader subscribers have been growing double digits every year since we acquired it. We're adding more enhanced solutions, so premium products on top, algorithmic trading, data analytics, advanced charting, those types of things. So very much like a Bloomberg, you've got your base product, and you can buy premiums on top, we're bringing that same capability in the energy world. And then the third piece of growth is we're building it out internationally. And so in some cases, it's just about bringing international products onto the existing platform like we do with Japan and Korea, the Japan-Korea Marker for gas in that region, or we actually trade Henry Hub gas pricing in Europe to provide a benchmark price for LNG. But we're also building out in the U.S. market over the last couple of years and starting to add liquidity providers in the U.S., so that we can start to replicate what Trayport has in Europe, in U.S., where there's an equivalent size market to build. And there isn't an incumbent to display. So it's actually changing the way people behave and how they do business in the past. All those things give us confidence we can keep growing at this kind of high growth rate going forward.

Yes. And at this point, we can pause for audience questions. Like please raise your hand, and they'll bring you a microphone. And while we're organizing the questions, can you spend a moment on pricing power across the platform? Trayport has CPI built into its multiyear agreements. What about some of the other products on the platform?

Yes. So -- and just the level of that. So CPI built in, all of our agreements are multiyear. Our CPI impact for 2023 is going to be 7% to 8%. So it's going to be a meaningful step-up in pricing in 2023. The other parts of the business, particularly the ones that are all part of the regulated either exchanges or clearing house. We have pricing power as long as I believe we are not abusing our market position, and we're demonstrating value for the clients and continued investment in the franchise. And so with that, we've been able to make pricing changes across listings, data, equity trading, futures trading, all within the past year. And what we don't do is go in and say, we're going to go 3% across everything. We look at the businesses and look at where do we have opportunities to step up, where do we compare against our competitors in the market, both in Canada and globally, and where have we invested in the value proposition that we can justify making changes? And we've done that within data. We've done it with listings. We made a really interesting change this year with our data business, which was actually to get approval for what we call half CPI. And so that's not an automatic price increase, but actually it's like a pre-approval for us to come and make changes those to the data fees on a regular basis as long as they're in that range. And what I've been trying to do with the organization is ensure that pricing is something that we look at on a regular basis as opposed to come out with big bangs every once in a while because those are a lot harder to execute. They're harder on the clients, they're harder to put through the system where if you're regularly looking at your business and your value proposition and making a couple of changes here and there, much more acceptable from the entire industry. And that's what we found through all the regulatory approvals we've had in the last year is that we haven't had anything we weren't able to execute.

And since we talked about the entire business, and we talked about the different segments, what is your organic growth outlook for each of these segments? And how does that maybe compare to your expense outlook over the next 3 years versus longer term?

So the organic outlook, and we actually give good new guidance in our material for this, is we broke it out into kind of strong growth and market growth period. But the way I would say it is that businesses like derivatives, like Trayport, like our TSX Trust business, which we didn't talk to, which is part of our Capital Formation business and is now an $85 million business that's grown into. All of these are businesses that we believe that we can grow high single, low double digit for the foreseeable future. Our Market Data Links business, we think we can grow at kind of that mid plus. Our broad Capital Formation business because of the uniqueness of our 2-tier model of venture and senior and our track record of bringing new companies in and adding new services, we've been growing that at mid-singles and are going to in the future. And then I'd say the more traditional equity trading and clearing that are more mature, that will grow with the market. And so as the market grows, it will grow with it, we're going to maintain our market share. But it's not an area -- it's the most competitive area, lowest barriers to entry. So I don't see a big expansion of market share risk, those types of things. So that's kind of how we think about the growth rate. So as a firm, when you put those pieces together and you work through the cycles because you have to have a long-term outlook on this, because there's a piece of the business that's still transactional, which will move up and down in quarters. But over that long term, you can grow the business above mid-single digits and manage our cost base at the same time to what we kind of guide to as what we call kind of flat to inflation. We're largely a fixed cost-based business. There's very little variable costs as we grow this. We made a lot of investments to ensure the business is scalable. And so that each dollar of revenue doesn't have a lot of incremental cost to it. Our biggest costs are our talent base which is almost 2/3 of our cost base. And we face the same cost pressures that everyone else does. And I'd guide you kind of to kind of 3.5% to 4% is what we're seeing for our own organization globally. But again, we're going to manage that below inflation. And so the outlook to that is over the long term, we should be able to grow our bottom line double digit and get that scale leverage benefit of being able to grow revenues faster than the expense base.

Maybe just coming back to the TMX Trust business, you just mentioned. Explain what that is, and why you're excited about that business?

The TSX Trust is its transfer agency and trustee services, primarily to our public companies, but also to private companies that aren't public yet. If you think about kind of who we compete with the world, Computershare is the bigger competitor in Canada. We're the #2 that's chipping away at them. And when we first got into the Trust business, really a decade ago, we were a very small player, 13% of the market, we're now in the mid-30s in terms of market share. We made an acquisition along the way of AST Canada to bolster our capabilities and add more blue-chip clients to it. We can take advantage of the relationship we have with issuers before they go public to help them understand how we can help them in all the different services they need. And so when it comes to kind of winning new business, even though we're a 30-ish percent of the market, we're winning more than 50% of the new business. We've got the majority of the ETFs on our platform as well. And so it's a mixture in that revenue base of recurring revenues, because it's an annual recurring relationship with those clients. There's transactional pieces as well, because we work for them on the trustee mandates for corporate actions and [ debts, ] debt issuance, those types of activities. So again, trying to meet all the needs of a capital razor with an expanded set of services. And then the piece that's become more interesting over the last year is as we've had bigger names and we're handling their cash for them as part of their transactions, we have a net interest income opportunity that we didn't have really in a material way 2 years ago. And so we kind of -- we guide folks that every quarter point of interest rate growth as our interest rate over time, is worth approximately $2 million to $2.5 million of annual run rate revenue because of that net interest income spread that we get in our client relationships. It's hard to give it to you more specific than that because it is -- each relationship is different with the client. And what amount of cash that we're holding and over what duration really depends on what we're holding it for? Is it a dividend? Is it a corporate event? Is it for an M&A activity? Those all drive the mix. But the more we see more M&A activity, more corporate action [ events, ] the more that cash base will grow and the more net interest income revenue that will grow in. So this is a business that with that piece, the depth of capabilities we have, the client mix we have, that we really believe we can continue to grow this at double digit, and we can take share away from an incumbent like Computershare with the simple objective our team has is that we will be #1 in this market. We will grow our way in through acquisition of clients to be the #1 player in the market.

And with that, I think this is a good place to pause. John, thanks again for joining us.

It's a pleasure. Thank you.