Q4 2019 Earnings Call
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Sounds like their hands a conference over to your speaker today fall Malcolmson. Thank you. Please go ahead Sir.
Thank you, Chris and good morning, everyone. Thank you for joining US this morning for the fourth quarter 2019 conference call for TMX group.
You know, we announced or fourth quarter results last evening, a copy of our press release is available on our website TMX dot com under Investor Relations.
This morning, we have with this John Mckenzie, our interim Chief Executive Officer, and Chief Financial Officer.
<unk> opening remarks, we'll have a question and answer session.
Before we start I want to remind you that certain statements we make on the call today, maybe considered forward looking I refer you to the risk factors outlined in today's press release and reports filed by TMX group with regulatory authorities now I'd like to turn the call over to John.
Well, thank you Paul and good morning, everyone and thanks for dialing in as Paul mentioned, we reported results for the fourth quarter and full year 2019 last night.
Before we get into the detailed financial results and talk about TMX group's 2019 performance I want to take a moment at the outset. This morning to outline the organizations key immediate term priorities.
With local sounds retirement last month, our company is in a period of transition and while I have no specific updates to share with you today from the board in terms of the new CEO search process I want to emphasize that lose departure in no way alters the company's course.
The Amex's senior management team and all TMX employees are fortunate hadn't 2020 focused on serving clients across our markets in a way they expect and deserve and on the execution of our growth strategy.
Our mandate is simple don't Miss a step and I fully expect will be successful meeting that.
Now for this morning, I want to focus my comments on the progress we have made during the past 12 months and into the first few weeks of 2020 in setting the stage for TMX strategy and business plan going forward.
Following which Paul will take you through the 2019 Q4 results in a bit more detail.
Now as many of notice even a quick high level look at some of the key performance indicators will tell you market conditions for 2019 presented a significant challenge for the financial services industry and the exchange sector.
Uncertainty fueled by macroeconomic and geopolitical factors led to a global slowdown in capital markets activity.
And while these factors have had a negative impact on some of our businesses and growth drivers. The work we have done to transform TMX over the last five years from a traditional or regional exchange into a global solutions provider has enabled us to deliver value to clients and positive results even during difficult markets.
Look into the future the balance we have achieved in reshaping. The makeup of our business model, a diverse and complimentary portfolio of assets with the shift to more recurring revenue sources has strengthened our enterprise for the long term.
Recurring revenue compromised, 52% of total TMX group revenues in 2019.
Now turning to our 2019 results.
Overall revenue in 2019 was down 13.8 million or 2% when compared with 2018 due to softer capital markets activity and particularly a decrease in financing activity on our equity exchanges and lower activity in our equity and fixed income trading products.
Helping to partially offset the decrease was solid revenue growth from Trayport, Our London based network and platform for global wholesale energy markets and from our core derivatives business of Montreal exchange and CDC C.
Importantly, TMX his financial performance also continue to reflect the benefits of consistent cost management discipline with overall expenses down 6%.
Income from operations increased and 29 team by 13.4 million from 2018 or 4%. While net income was 247.6 million for 2019 down 13% from 2018 and earnings per share was for 38 on a diluted basis down 14% from 2018 as these new.
There is included both impairment charges and gains on sales in the previous period.
On an adjusted basis net income was up 4% and earnings per share grew by 3% from 2018.
At all times, but especially in the midst challenging markets, we must remain focused on executing our cohesive global strategy.
And in 29 team, we advance our roadmap for growth.
Our enterprise strategy is centered around TMX is growth champions the business areas, we have identified as having the highest growth potential capital formation derivatives and trayport.
Across these growth champions, we are focused on capitalizing on secular trends or longer term consistent patterns in the marketplace to drive growth. While also looking for targeted opportunities to leverage TMX capabilities into new markets.
In capital formation, we continue our global expansion efforts targeting specific regions, where our unique ecosystem in sectoral expertise give TMX a competitive edge.
The ability of Toronto stock exchange and TSX venture exchange to serve a company's full spectrum of needs from early stage to senior issuer and support each phase that evolution with a sophisticated investor community separates TMX and Canada's markets from our global peers.
And 29 team, while one or two high profile companies, who chose not to go public grab the media spotlight a closer look at TMX as capital formation business reveals many more significant wins.
TMX continued to build on our track record of enabling growth and the innovation sector and the S&P TSX Tech index was up more than 60% in 2019 outperforming all the major North American disease.
Our markets welcome to 40, new innovation companies last year, including high profile IPO is like life Lightspeed and the Chivo.
And despite the slower financing environment, we had a number of significant capital raises in the tech sector Descartes raised 325 million in June and Shopify raised over 900 million in September.
December also marked a major secondary financing in the mining sector as well with good tank of mining raising 7.7 billion through a rights offering.
In total there were 146, new listings on Ts ECS and TSS entering 2019, excluding investment funds a number that stacks up very well when you look at listen activity around the world. In fact, we added more new listings last year than any other Martin exchange in North America.
TMX exchanges ranked number two in the world and new listings for 2019, according to the World Federation of exchanges.
Our strategic push to expand TSX and TSX ventures footprint in targeted regions and sectors gained momentum in 2019.
Where again, we ranked number two in new international listings, among our peers for 2019 and number one in North America.
We are consistently asked by analysts investors discuss our listing pipeline. The focus is not on just one or two potential new listings.
Our capital formation team sees the addressable market and a different bigger way there are thousands of companies and all sectors and regions around the world that need what we do to achieve their growth objectives.
Our long term pipeline over 1500 companies is vibrant and strong and has built to compete.
Now turning to derivatives and derivatives, we are focused on moving to capitalize on the growing demand, particularly on the buy side for derivatives products in global markets by expanding Amex's existing international sales network in foreign markets.
We see this is a growth opportunity and look for tens team is working closely with our existing clients to increase investor awareness of key Canadian benchmarks and liquidity and MX a signature products.
Volume traded during our extended hours now represents approximately 4% overall volume and we're on track to extend this into Asia and 2021.
On the product front the performance of the rebooted five year government of Canada Bond futures contract or CGF has been a major win for amex.
Participants have responded to a new market maker program designed to develop the midpoint of the Canadian listed yield curve.
Since its relaunch in December 2018 average daily volume on the CGF contract more than tripled and open interest up was up almost 200% a yearend.
Overall revenue from MX, and CDC was up 3% compared to last year, driven by higher volumes and our signature products as well as higher revenue from repo clearing.
Now while overall volumes were up for 2019, MX volumes were down in the fourth quarter when compared to 2018.
Paul will take you through the quarterly numbers on a few minutes, but I wanted to point out the despite the slower quarter to finished 2019 open interest remains strong at the end of year compared with 2018, and that's an important measure to look at in terms of gauging the flow of money into the market.
Open interest on December 31st 2019 was up 11% overall from the end of the previous year, including a 20% increase in the futures products.
And we are seeing encouraging signs the derivatives markets to start 2020 with MX volumes for January up 14% over the first month of 2019.
Moving on now to Trayport the business continued to deliver strong revenue growth during 2019.
Revenue from the core subscriber business, including Desertec was up 15% in Sterling over 2018, with a 7% increase in the average revenue per user.
Trayport also took significant step forward in a strategy to capitalize on secular trends in energy market trend right and secular energy market trends.
Including the shift to cleaner and renewable sources and the evolution of how when where these transactions take place with the globalization and digitization of marketplaces.
Brokers using trayport are a substantial source of liquidity in the burgeoning global liquid natural gas market.
Activity in the signature European and Asian benchmark LNG contracts accessible through Trayport system increased significantly year over year with 2019 volume and the TTF contract truck contract up 39% compared with 2018 and the JK Atms at an all time high of average daily volume in November.
In the spring of 2019, Trayport acquired Vienna base visit Tech a leading provider of European short term energy trading solutions visits ex advanced algorithmic trading capabilities have now been integrated into jewel tree ports core treating screen.
Trayport also establish an entry point to the U.S. energy market with November's agreement with the nodal exchange, Washington, DC base due to exchange serving commodity markets.
U.S. energy contracts will be available on Trimboard screens this quarter and the Jewel network has expanded to include nodal trading participants.
We have made so much progress in the last few years, increasing TMX global footprint and becoming the TMX, we need to be indispensable to clients valuable to investors.
As announced last night, the TMX Group Board of directors declared a dividend of 66 cents on each common shares outstanding payable on March 13, 2022 shareholders of record at the close of business on February 20, Eightth, our payout ratio was 50% within the range of our domestic and international peers.
The board also approved fruit a plan to repurchase up to 560000 common shares or approximately 1% of our common shares outstanding by way of a normal course issuer bid subject to regulatory approval.
This decision reflects the high level of confidence, we haven't our strategy and TMX his ability to deliver solid operating results returning capital to shareholders by way of an empty IB will also help to offset the impact of dilution created by the exercise of share options.
We are planning to complete our filing with the Toronto stock exchange this quarter.
With that I will thank you for your attention and look forward to your questions later on and turn the call back to Paul.
Thanks, John.
Given the John covered the full year results I'll focus my comments on the fourth quarter.
Diluted earnings per share in Q4 was 84 cents down from $1.24 last year, reflecting a noncash impairment charge of 32 cents per share relating to shore can in Q4 adjusted diluted EPS was in line with Q4 last year at $1.31 revenue was 202.8 million into fourth quarter downfall.
<unk> percent from Q4 of 18, mainly due to decreases in revenue from capital formation equities and fixed income trading derivatives trading and clearing as well as other revenue. These were somewhat offset by increases in trayport and CBS revenue.
Lower revenue was largely offset by reduced operating expenses.
Now turning to specific business areas capital formation revenue declined by 6% compared with Q4 of the team. The decrease was mainly driven by the decline. In addition to listing fee revenue on TSX venture exchange due to a lower number a financings as well as old as lower dollars raised.
In addition, the number of transactions build on Toronto stock exchange declined by 2% from last year.
Revenue from sustaining listing fees was also down as was the case in prior quarters for 2019.
Revenue from equities and fixed income trading was down 21% in Q4 19, compared with Q4 of last year, reflecting a 25% decrease in overall volumes on all of our equity exchanges, partially offset by the impact of a favorable product mix.
And looking at the comparative periods important to keep in mind that the fourth quarter of 2018 was an especially high volatility and high volume quarter for equity trading.
In addition, there was a decrease in fixed income trading revenue in Q4 up 19, largely due to decreased activity in government of Canada bonds.
Revenue from derivatives trading and clearing decreased 5% from Q4 of 18, driven by a 7% reduction in revenue from Amex and CDC.
Amex volumes were down 9% and the impact was partially offset by an increase in revenue from repo clearing in Q4 of 19 compared to last year.
Helping to partially offset these decreases in revenue during the fourth quarter, we continued to see strong performances from both Trayport and Cvs.
Revenue from trade for its core subscriber business, which includes visit attack was up 13% over Q4 of 18.
The number of trader subscribers grew by 10% and total traders grew by 7% over the same quarter last year.
The key average revenue per user metric or ARPU for the core subscriber business was up 6% in Q4 of 19 over last year.
Cts revenue increased by 8%, reflecting revisions to the fee schedule for issuer services and increased international revenue.
In addition, certain recoverable costs related to Cdss clearing operation. Previously noted are now included in both Cvs revenue and in selling general and administrative expenses. The amounts reclassified to Cvs revenue were 5.3 million in Q4 of 19 and 3.6 million in Q.
[music] four of 18.
Both of these represented annual amounts.
Turning to operating expenses overall costs were down 7% or almost $8 million compared with Q4 of 18.
The decrease in cost was largely related to short and long term employee performance incentive plan cost afford a half million and $2.7 million respectively.
The long term employee performance incentive plan costs increased by approximately $1.3 million due to the appreciation in our share price.
Were more than offset by the reversal of an accrual of approximately $4 million relating to long term employee performance incentives that were forfeited as we discussed in our press release last night.
As mentioned in offsetting this decrease recoverable costs related to Cts are now included in ESG anyway.
The year over year increase was 1.7 million.
Overall income from operations was essentially unchanged from Q4 of last year.
Now just looking at our results on a sequential basis income from operations increased from Q3 to Q4 due to the higher revenue, which was partially offset by higher operating costs.
Revenue in Q4, 19 was up six and a half million dollars or 3% from Q3, reflecting increases in both Cts and GSK revenue. This was mainly driven by recoverable costs of $5.3 million related to see the US which are now included in the Cts revenue line.
The increases were partially offset by decreases in capital formation, and equities and fixed income trading and clearing.
Operating expenses increased from Q3 to Q4 of 19 by 1.6 million again. This is driven by the Reclass of the 5.3 million of Cts cost to ESG today.
There was also an increase in operating costs relating to SGN, a expenses, including project spending and fees and also it increased relating to staffing costs.
The increases were largely offset by a decrease in short and long term employee performance inside of plan costs of approximately 2.3 million and 8 million respectively.
The latter cost decreased by about $4 million due to the decrease in our share price between Q3 in Q4 as well as the reversal of the accrual of approximately $4 million relating to the long term comp or incentives that were forfeited as I mentioned a moment ago.
Net income in Q4, 19 was down 23% sequentially largely driven by the impairment charge of $18 million in Q4 related to shark him.
Based on current assumptions, we determined that the fair value for short can was below carrying value and therefore took the impairment charge.
On an adjusted basis, our diluted earnings per share for Q4 was up 5% from Q3. The increase was mainly due to the increased revenue, partially offset by slightly higher operating expenses.
Turning to Capex for a moment, we want to give you a brief update on the modernization of our clearing pot platforms, specifically on phase two relating to Cts.
So to recap, we spent 22 and a half million up to the end of 2018, and 21.3 million 2019 related to this phase II.
Overall, we expect to incurred between 95, and a 105 million in capex over the entire project.
We plan to complete this project by the end of 2021, and we'll continue to provide updates on estimates for Capex and timing as this project progress.
Last December Cts filed or proposal to make two changes to the existing fee model. The first and most significant change is the proposal to modify its fee model by eliminating the rebates that are paid annually to participants.
The second changes the elimination of network connectivity fees currently paid by participants.
The list elimination of rebates is being proposed to ensure that we can make the significant investment that I, just mentioned to modernize CDN technology and to have adequate funding for ongoing future technology upgrades.
Cts is proposing to permanently emanate. The 50 50 rebate on core Cts services and the additional fixed rebate of $4 million annually.
The total rebates were about $10 million in 2019.
Cts also proposes to eliminate port and network connectivity fees in 2019 participants paid one and a half million in port fees and 1.7 million in network fees.
The proposed fee changes will impact participants differently.
But all changes are considered as a package about a third of participants so those paying less than $1 million in annual Cts core fees will have an overall decrease and their CBS buildings.
And heavier users of course services, so those paying over a million dollars will have an overall increase and fees.
All these proposals are subject to regulatory approval.
Just to comment on the balance sheet were reduced our debt by about 80 million from the end of 2018 to the end to 2019.
Our debt to adjusted EBITDA ratio was 2.1 at the end of 2019 down from 2.4 times at the ended 2018.
We also held almost 230 million of cash and marketable securities at the ended the year about $45 million in excess of 185 million, we target to retain for regulatory and credit facility purposes.
Now I'd like to turn the call back to Chris to outline the process for the Q and a session.
Thank you Sir.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from Melinda ROI with Deutsche Bank. Your line is open.
Good morning, everyone.
Okay.
And with Trayport. So we saw strong increasing the number scriber is.
Until basis, but it seemed like the revenue kind of flat groundbirch right. So.
This is.
More of a timing issue or something else going on.
Yes, you've indicated the right answer there, which is more of a timing into issue in terms of when we sign up new contracts. The period in terms of where we start to recognize revenue from them and there's also a sequential piece between Q3 in Q4 that some of the new clients that we brought on particularly with things like Desertec that would have had larger onetime revenues associate.
With them that don't reflect into the revenue stream going forward. So it's a combination of those things both in terms of new contracts with new clients, but not seen the revenue flow through yet and that's just a timing piece and also some one times.
Okay and then just.
A quick follow up on that.
Could you give us an update on the initial reception vis ODAC after that recent integration on the digital platform.
Maybe.
Can leverage.
Tax.
Algorithmic trading strategies.
So I am actually happy to be able to say that within the last.
Number of weeks, we've seen net new contracts with existing tree participants and now have visited tech as an application included in them. So that will be both enhanced service to those clients part of the integrated offering and enhance value in terms of the contract value from a trayport standpoint. So we are seeing that already I've seen two new contracts that the the team was able to celebrate just.
This month.
With respect to the next question around using it with other asset classes focus right now is using it in deploying it with the tree port customer base.
We are going to have a broader look in terms of how we use those analytic capabilities throughout all of TMX, but that is a longer term piece and the focus right. Now again is there an integration and selling to trade for clients.
Okay, great. Thank you so much.
Your next question comes from Nick.
The capital markets. Your line is.
Okay. Thanks.
To start with the question on a leverage ratio I think Paul alluded to in your comments.
I'd to use excess cash flow to repay debt through 2019.
The leverage ratio now at 2.1, a declining have you have you started to engage in a discussion on other forms of capital return like buybacks or moving the goal posts on the payout ratio or are you just comfortable continued to de lever as long as the cash flow profile supports it.
Nick It's fair to say that we have active conversations on all those components I will point you to the one piece that we did take through the board. This month with was to put an end see IB in place.
Recognized from a use of cash standpoint, it's not a large antebi, but an issuer bid of 1% at current share prices would use approximately 70 million of cash as exercise and how much additional cash comes in through the exercise of options will impact the net amount of what we see in the books.
But the focus really is continuing to see where can we invest to expand the business and accelerate the strategy.
So the while we were at the lower end of the leverage ratio now our team has been active in a number of areas in terms of looking at potential investments to accelerate the business.
The challenge be in the marketplace. Today is some of the valuations. We see are very high for assets that may not make sense and so we are keeping a disciplined approach to it but expect us to continue to look for opportunities to use that cash generation to find ways to accelerate the strategy.
With respect to the other part of your question, we're going to continue to look at ways to enhance shareholder value. So the the launch of the NC IB. This time was one of those pieces and we will continue to look at both dividend payout ratios, both our own and how we compare to a peer group going forward.
Okay. Okay got it and then just one other one for me I just wanted to ask.
But what factors triggered the write down of pure can in the fourth quarter I just wanted to give us a little bit color on that and trading volumes have been trending lower.
Hi, hard to assess from the public disclosure so I thought I'd just ask you directly.
Yes, that's a great question, Nick and I'm going to take you back a number of years two to give you the full answer on it which is.
You got to go all the way back to actually the Maple transaction in 2012, which with that transaction all of the assets that were part of the TMX franchise on the of the time were written up to the market value that deal at $50 a share.
Every year, we do re look at that mix of assets and look at our strategy and see if the if the growth forecast continue to support the asset positions of the balances that we have on our balance sheet.
And shore can while short cans are really important piece of business. It provides a really critical client service in the fixed income space. It is one or more traditional marketplace and what we saw on our strategy, where our focus for growth is going forward as we didnt see the long term growth in that business that would support the valuation that were carried on the balance sheet, where we really see the growth is on.
The comparable futures products and as we saw in the discussion around MX the strength that you're seeing on the five year the potential that we have to launch the two year. This year and continue to expand the yield curve products, that's where we see the long term growth around the fixed income products and less so in the cash based products on the short end side. So it's really about reflecting it being more of.
A traditional cash based marketplace and not one of the growth champions as we talked about in the call.
Okay got it.
Thanks, John that's it for me.
Your next question comes from Jeremy Campbell with Barclays. Your line is open.
Okay, great. Thanks.
Hey, John.
What we've seen in the U.S market fully robust rates derivative curve enables greater trading ability for trading the curve as well as let big financial institutions hedge more granular Lee. So I guess now that you've had some success and kind of relaunching. The five year with a lot of NOI growth over the past year. So can you give us a sense of your appetite for and maybe.
The potential timing of further filling out that rate derivative curve with perhaps a two year and a seven year contract.
Yes, I would just in terms of my comment I was just talking with Nick the the real focus in the next launches the two year.
So were strong in the short term in the 30 day, the five years picking up steam and the tenure is strong now the five year, there's still a lot of room to grow in the five year, rather as it as it goes when you compare to what we trade in the 10 year today in terms of average daily volume tenures trading at a 125000 plus transaction today and so what we're getting.
A lot to strengthen the five year.
Theres still a multiple fold increase that we can see in that from the year yield curve, but that is the next product launch is the two year I don't have the specific timing for you today, but we will follow up on that and come back John.
Great and then maybe just a little bit on Trayport too I know you guys Youve gotten that told in the U.S Mark with the nodal.
Partnership that you guys have last time around but just kind of wondering if you can help us kind of thing through what the optionality as of geographic expansion on the Trayport platform outside of the core European market.
Yes, so nodal what we.
That we announced last quarter is progressing well it it's a matter on that and anything else. It's fairly early stages is attracting the customers specifically the brokers, but anything like that where.
Where the product has.
Very very fragmented market.
Trayport can bring a lot of value in just in bringing.
The buyers and sellers together and showing the prices all on one place which is on the digital screen.
All right. Thanks, guys.
Your next question comes from Jamie glowing National Bank.
And just.
Thank you good morning.
Good morning, James facility.
Chris questions related to TSX Trust and I guess within the other issuer services line item. There is a decline looking at 2019 versus 2018.
This is a business that you're targeting for above mid single digit growth.
Gross Im just wondering if you can give us it will give more color, but what happened in 2019 and why this is going to change favourably in 2020.
Yes, I'm happy to and.
Let me start with the macro trends that we're working through and Paul is going back me up with some more of the detailed points later on.
When you actually saw and trust was exactly the same impact that impact the overall capital formation business, which is there's a portion of the trust business that is recurring run rate business in terms of the agreements with with clients for transportation services, but there is a piece it also.
Is acting and supporting those companies and in corporate transactions. So M&A transactions, new financings ipos those types of things do that new offerings, and that's an area where very much like capital formation, because the substantial downtick in terms of financing activity in related M&A transactions those transaction based activities just.
Didnt happen in the trust business the same way they did in 2018 when you actually look at the client base in terms of the market share of transfer agent clients under trust and we actually expanded it throughout the year. So net wins in terms of new client adds.
And Paul Correct me, if I have my numbers wrong, but I believe growing to 23% in terms of total market share our win rates on new clients that is a new clients that are going IPO in terms of who they choose for transfer agent.
Within the 70 plus percent range.
Really strong activity measures that terms as continues to reinforce that we believe this is a long term double digit growth business.
But with a short term impact because that transaction activity wasn't there. The other element that's no different interest for other parts our franchise around transaction activity as we actually generate income from net income spreads from the cash that we hold on behalf of those clients. So those cash positions were during the year were down substantially again related.
Two less activity as we continued to build the client base going forward and we see a return in those activity drivers and more cash balances that come in I would expect all those revenue numbers to grow in the new year.
And just to add a boat, 50% to 60% of that trust business is recurring revenue. So similar to our own business you still have that kind of 40, 45% component that's going to be dependent on the market activity that that John described.
Thank you.
Terms of the compensation and benefits.
As highlighted than a decrease in sort term and performance incentive plan.
Costs was four and a half million Im just wondering.
Describe what were the biggest drivers of a reduction in short term employee performances.
Comp.
The only in one of the.
One of the things we've talked to many investors around is ensuring that our performance plans and how we pay employees are consistent with the direction that we give to shareholders. So if you go back to the the long term guidance that we talked to Jamie around mid singles on revenue double digits on earning those are the same targets. Although in terms of the details of our budget that are built into our.
Short term incentive plan. So while we had a positive year on a lot of the metrics on moving the business forward with the revenue not hitting that mid singles that directly impacted what was the formation of our incentive pool for our employees.
There will be a lot more disclosure on this actually when we get to the management information circular that comes out and I believe March April and where we actually show the details of the scorecard metrics in terms of operating income in revenue, what the targets, where and how we performed against them, but that the basic pieces that revenue growth in 2019 wasn't where we wanted to be in year, we still have the same.
Same expectation in the long term, but thats whats driving that impact in the short term.
Okay, great that makes sense.
In in the CBS.
With me.
Even excluding the 5.3 million refinancings impacts the revenues increased pretty solidly.
Good morning explanations was due to increased internationals sources can you explain what's going on and Cdss driving licence increase.
And Thats ex the accounting change.
As of the two additional things that we're driving revenue increases there is there still so there's some so flow through from pricing that we took a number of years ago around issuer fees that thats now really fully in at the end of 19, but you also picked up on the other interest in piece was one of the interest in services at Cvs provides an its unique to Cts that other clearing houses in the world.
Provide is access to the us market. So it allows the participants in Canada directly act, that's DTCC and move positions back and forth trade use securities seamlessly between the Canadian and US clearing houses the pricing model for that is to charge a premium on the U.S fees.
Charge, a premium related to that service itself, but also provisioning the liquidity arrangements and the risk management function that goes around that and what you saw 19 is to substantially increase in the demand or usage of those products in terms of cross border transactions by both Canadian and us clients in accessing each other's marketplaces.
Okay interesting Anderson ill re queue.
Your next question comes from Paul Holden.
Your line is.
Thanks, Good morning.
So one quick one regarding the CEO transition, obviously important topic I mean can at least give us a sense of expected timing around a decision.
I mean, no. One then we would like but better than I would.
And with the what I'd like to get I'll give you the more context, because the CEO transition is not something that was started just now.
It was always expected that Lou would be retiring at the end of 2020 I think if you read between the lines in terms of his contract details I went in the circular last year you can see how the board structured that extension with Lou.
So the board was already actively engaged in the process in 19 to prepare for CEO succession and transition in 2020 in terms of search firms in place development programs for internal candidates et cetera, et cetera, and so when we hit the ground in 2020. It really was activating a plan that was already in place.
The direction that they provided publicly is the right direction, which has the board is looking at both external and internal candidates and given that the process was really already underway I think that can give you an indication of expectation around timing. Unfortunately, I can't be more definitive than that okay.
Thank you.
In terms of the Cts the change in an accounting can you give us sense of the nature of those recoverable expenses that are now being included in revenue and really I'm asking sort of help me think true how they can model it going forward because it relatively stable number is a transaction based.
Yes, it's a relatively stable number thats why Paul indicated to the numbers that in Q4, our annual basis. The nature of those costs are our fees that we charged to participants to pass through the costs of liquidity lines that we've put in place to support the products. Now. These are liquidity lines that we put in place really as it relates to.
Through the emerging PMI principles around cover one liquidity, ensuring that we have enough liquidity if there's any failure in the marketplace. We put substantial new lines in the cost of those lines are charged back to the participants based on how much risk they bring to the platform, but they are largely.
Steady state year after year, there shouldn't be material changes between them.
When we initially put them in place we've treated as a pure pass through and then upon reflection in terms of the counter to the end of the year. This was something that made sense to be on the actual income statement, both from a revenue and extend standpoint as opposed to just being off income statement.
Okay.
And then as you think about capital budgeting for 2020.
Just on more than thank you probably have to plan in place but.
What are the major areas of investment for 2020, whether that's sort of.
Are there to capitalize expense or just.
As incurred expense what are the majors.
From a capital budget standpoint in terms of the existing business in the organic strategy. It really is the run rate capex that we've guided you to in the past the 20 to 30 million in terms of Runrate Capex and the only material piece outside of that is the continued investment in the post trade modernization initiative as Paul talked too.
So we have given you I know, we've been promising for quarters, but giving you more disclosure now in terms of what that actually looks like.
The end the pieces that are new in there in terms of the proposal we put in the regulators in terms of how to funded all long term basis.
Okay.
If I think about that 20 or 30 million. So that's just sort of sustaining capex I think for about.
Growth related investments and again, whether its capitalized or just expense what do you view is your major areas of investment.
And that actually include sustaining and growth related investments. So a couple of the highlights in terms of the things that you're seeing in there both in last year. In this year is weve within the substantial internal development around analytics products for Trayport that we expect to be live on in 2020.
We expect in that 2020, we'll be putting some investment into our colocation facilities. So we can expand that for clients, which will be enhance revenue opportunity and also enhance service offering for clients, but it all still fits within that bucket of guidance kind of 20 to 30 million.
Okay.
And then final one from me.
It looks like you may have a new competitor coming in the derivatives market and 2020.
Hey, kind of initial thoughts or comments around that how your.
Prepared for a competition.
Segment.
Our position as consistent as it in the past we welcome all come competition in the marketplace. It only serves to make sure that we are sharper in terms of the products and services, we provide and our focus is going to be continue to execute on our driven growth strategy incremental products incremental operating hours in different regions and sailing and selling to more clients out there so no change.
Engine strategy will just continue to push ahead.
Okay, great. Thank you.
Your next question comes from Jeff Kwan RBC capital markets. Your line is open.
Hi, Good morning, just wanted to go back to the Cds CTC modernization.
With the increase kind of price tag of implementing it can you just remind me I mean it.
You alluded to I guess, there whats going to be probably higher cost to it.
But just in terms of let's necessarily driving it.
And is there going to be any sort of incremental savings and how to kind of think about what the payback periods on that investment is going to be.
Yes, Thats, Jeff that's a great question than it was if I remember some of the the indicators that we were trying to give throughout 19 was that the the capex spend the general the run rate spend was indicative of what we would expect over the life of the project and that's largely consistent with with the guidance, we're giving you in terms of the the total capex expectations.
The real driver in terms of kind of what's different from when we initially launch the product or the project was the level of complexity of customization in the Canadian market.
The intricacy of making sure that we met the client needs in a way that was as seamless as possible.
And the time it takes to do that so in terms of really developing the rights that are requirements and making the appropriate modifications to the product to do that so when we look at the that went with the Capex spend it really is a factor of timing is largely licensing and software development as opposed to heavy capex. This isn't a heavy capital plan.
Form that we're building.
It doesn't have any material change on the guidance again the pass around savings there is a component of our run rate, which is the the the operating cost of supporting this project, which will also we will look to wind down at the end of the project, but we'll give more guidance of that farther into the curve.
But the pizza, we reflected on when we had a more visibility to what it was going to take to initiate this for the marketplace. The level of complexity in the requirements were needed and the amount than of what that spend would be because of the expanded timeframe.
It was the right time for us to go back and say what are the economics of the Cts business. How do we make sure that is the enterprise we're getting the right return for the investments, we're making in it and Thats why Weve made the proposal to.
To modify the fee scheduled to take the rebates off and to give some breaks on connectivity fees.
Participants at the same time, it's all around ensuring that Cdis is getting the right return for the substantial investment we put into it.
But I guess would it be Sandra say, then since the expected savings hasn't changing.
That.
These modernization sorry modernization is kind of.
Required.
In the bigger picture of trying to move this business forward.
But because of increased costs that you know again, whether it's from a return perspective or payback period.
Not.
Quick as what was initially contemplated.
Yes, but you've got to look at it in context of the proposals for changing the revenue model in the same time not just the savings piece. So those are all part of the how the project pays back and how you fund future technology as well.
Okay. So in terms of the fee model may change going forward as a result.
What you're trying to accomplish that.
The way exactly and it's it's for all of us to remember that the the service at Cvs provides to the Canadian capital market is a critical service, it's a systemically important risks system.
And it has to be available and modernize for the entire industry. So it's it is a must do type of initiative and the combination of the savings we expect to get from moving onto a more efficient hot hardware and more efficient platform.
Plus.
The modifications were looking to make around the fee model. That's those are the two components to provide the appropriate return around the investment.
Got it Okay and just one last question small window, it's just going back to the short Ken impairment.
$2 million or you will see like roughly ballpark how much of that.
The gross asset value the right 10 represented.
Im not exactly but it looked at it being about less than half.
Okay perfect. Thank you Beth and then just mechanically we actually continue to carry it at a higher value than what we originally acquired upward.
Okay. Thanks.
Your next question comes from Graham writing of TD Securities. Your line is open.
Good morning, maybe I could start with.
Before just to be clear the revenue per subscriber number drop quarter over quarter is that.
Because of bringing on the nodal exchange and those subscribers.
No that wasn't related to nodal Graham no.
So what can you give any color on what was driving the drop in revenue per subscriber.
Yes, I think I think John was alluding to that earlier when we're just talking about about.
The change from Q3, two Q4, so really the.
The two factors some of the longer dated contracts, where predictably enterprise agreements, where you will see an increase.
Substantial increase in the number of subscribers.
Revenue from those may not.
Start to materialize immediately in quarter and the second factor was just that we had more lumpiness in Q3, and some non subscriber revenue that wasn't there in Q4, so that those are really the two items.
That accounted for the decrease in Sterling terms from Q3 to Q4, you'll see in when you in Canadian dollar terms were actually still up in Trayport from Q3 to Q4.
Okay, and the Lumpiness is a around visited correct.
Would have been part of it.
Okay example, that the algo trading capabilities they are.
Okay.
That helps what about.
Organic growth for Trayport. After you adjust for this attack and also the Divesture of.
Can tick.
On T. goes on so you're right just in constant currency.
Growth the Trayport.
Right. So contigo that was sold November of last year of Vizio Tech came in.
May of this year I think I think in our release, we did talk about what it was on a normalized it wasn't a significant change I don't to the to the organic growth rate.
Well I think you disclose 13% growth, including this attack what was the what was the growth if you took that out.
Let us come back Joe because I don't know about half from us right out yet.
Okay.
We have it for all of the GSA Graham I don't think we broke it out.
Yes for Trayport and visitor.
Okay I'll follow up with your non yes definitely.
Okay, and then just the timing around the CBS proposal for the increased fees. It sounds like if you've got a decent argument and why.
You should get these higher fees, but do you have any idea around potential timing of this proposal.
The.
It will take as long as it takes.
Now I hate to be glib about it but these are the regulatory process around a material business arrangement like this is complicated.
The material, we gave you in and we can actually point you to the actual public commentary document, we actually took it to market in December.
Because it's a regulated entity from a few standpoint, a change like this goes through a public commentary period for regulatory review that period ends on the 18th of February.
At which point it will start the process in terms of the regulatory review any thoughts around anything we might need to do or the timing that comes out of it. So I can't give you guidance or indication of timing yet only that we've been an active discussion with the multiple regulators on this for probably the last six months and terms over this was our intention in terms of the right way.
To fund technology going forward.
We are in the process. So that is why that we're kind of silent on timing because we need to work through that program with the regulators and the clients.
Okay got it understood.
And then on that same topic just on the regulatory front. So the CSC just recently came out with the.
Moving forward with the trading fee rebate pilot study.
Yes, coming from your perspective, it's a concern that if this.
If rebates to get prohibited.
Is that going to potentially impact your equity trading volumes could those decline and then.
So how much revenue.
What's the percentage of your revenue that's potentially exposed to this this regular regulatory change.
So a couple of things that I will comment on their first of all the what the CSC approved was going ahead with the pilot if the U.S. goes ahead.
Which is one of the pieces that we push for that Theres. No reason why you would do that pilot in Canada. We also believe in terms of the feedback we provided as there was no reason why they should do it at all when you can actually observe the impact of the U.S study rather than potentially putting at risk any liquidity in the K marketplace.
So that being said and we've got a commentary out in the public domain in terms of our views on it the we're already showing lower rebates than the U.S market as it is so we separated number a couple of years ago. The rebates that are provided for non into listed companies versus the ones that are inter listed the inter listen ones have similar model as to what you havent.
Yes, but on the non inter listens, we were already moving a process of we were bringing those rebates down overtime and we think thats the right way to do it as you move these things over time as rather than making one large scale change.
Our concern with the pilot is what the pilot ends of doing isn't as a putting different public companies in different buckets. So two public companies in the same sector could have different fee arrangements around them, which could impact their liquidity and we don't think it's appropriate to advantaged or disadvantaged certain companies based on what is a fee pilot with questionable necessity.
So thats our view on the pilot in terms of the revenue side as you know equity trading continues to be the smallest component our revenue less than 9% and this actually primarily affects active trading we don't think that a change like this if it actually came to pass to move the rebates would materially impact our economics in anyway.
Okay and then.
With CBS be impacted if your equity volumes are impacted due CBS revenue get impacted as well.
There is a component of Cdis revenue that is clearing fees, but it is the smallest piece of the cdrs revenue bucket the bulk of Cts revenue deals more with the the clearing of larger ODC transactions in custody fees and entitlements and corporate actions.
Okay.
That's it for me thank you.
And Graham just to come back to Entre part C of organic revenue growth was 9% for Q4 and 12% for full year 2019.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Next question comes from James going of National Bank. Your line is open.
Yes. Thanks.
Just want to come back on.
Yes, hi.
Revenue growth.
There were some price changes implemented in each to 29 team can you explain those price changes were and is this something that we should expect on on annual basis or is this a onetime.
I think what maybe you're thinking of Graham we talked about some of the initiatives around enterprise deals as an example that would have been relatively small in terms of the impact on 2019, there would have been some price increases there are changes around index products as well, but.
Relatively.
Small impact in terms of last year.
Okay, and then also on that.
In that segment. This is excluding transport of course.
Hi revenues from recoveries related to under water usage real time quotes co location benchmarks and indices.
Any of those drivers unseasonably high and if so.
No I Wouldnt say, so no and we are moving more away from doing these regular audits of customer. So I would say probably over time youre going to see.
Less noise around that and the GSA line as well.
The other piece will take all indicating indicated a little bit when we talked about potential capex capital spend for this year. Our intention is to expand that collocation facility. So our colocation facility has capacity for 200 racks. It's completely sold out we've got client demand for more so we are working on the strategy of expanding at roughly 25% should take us them.
Most of this year to build that out, but then we expect to be selling that in the back half the year.
Okay, great. Thank you.
Your next question comes from Graham writing of TD Securities. Your line is.
Just a quick follow up on the capital formation side sustaining fees for 2020, if you provided some guidance there sorry, I missed it but.
You have an outlook for how thats going to trend.
Yes for sustaining fees.
We talked about a little bit last night, so it would be less than $1 million on the Toronto stock exchange and relatively flat for venture for this year.
That sounds low is that just because there's a large portion of your TSX.
Listed issuers that are at the Max fee already.
Yes, Theres a couple of factors like that so you're absolutely right. There is the mix factor in there which is a large portion that are at the Max.
A lot of new issuers beyond the corporates in 2019 that SDTS played a much smaller fees, so you're not seeing that same mix impact.
And given the just the simple challenges in the 2019 market I think we'd about 16 fewer corporates in terms of fewer listings year over year and some of them were large ones like westjet taken private that's at the Max things like that so it's a mix impact and a slightly smaller issuer base on the senior market.
Okay. That's helpful. Thank you.
There are no further questions at this time I will now turn the call to Mr. most.
Thanks, Chris 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 again. Thank you for joining us and have a great day.
This concludes todays conference call you may now disconnect.
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