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Triple Flag Precious Metals Corp. (TRFPF) CEO Shaun Usmar on Q2 2022 Results – Earnings Call Transcript

Triple Flag Precious Metals Corp. (OTCPK:TRFPF) Q2 2022 Earnings Conference Call August 10, 2022 10:00 AM ET

Company Participants

Shaun Usmar – CEO

Sheldon Vanderkooy – CFO

James Dendle – VP, Evaluations and IR

Conference Call Participants

Fahad Tariq – Credit Suisse

Josh Wolfson – RBC Capital Markets

Greg Barnes – TD Securities

Cosmos Chiu – CIBC

Tanya Jakusconek – Scotiabank

Brian MacArthur – Raymond James

Mikel Abasolo – Solo Capital Management

Operator

Hello. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Triple Flag Q2 2022 Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Mr. Shaun Usmar, CEO.

Please go ahead, sir.

Shaun Usmar

Lisa, thanks, and good morning, everyone, and thanks for joining us to discuss Triple Flag’s second quarter results. Today, I’m joined by my partners, our CFO, Sheldon Vanderkooy; and my Vice President, Evaluations and IR, James Dendle.

Turning to Slide 4. We’re pleased to report solid results for the second quarter. Gold equivalent ounces sold in the second quarter declined versus last year’s record results for the same period due mostly to quarter-end timing of shipments and a higher gold-silver ratio. But this still represented our third best quarter of operating cash flow in the life of the company.

We expect full year 2022 gold equivalent ounce sales to be weighted to the second half of the year with sales volumes of gold and silver on track for a record in 2022. Operating performance across the portfolio was broadly in line with our expectations with underperformance of our two ramp-up assets at Pumpkin Hollow and Gunnison, both in the U.S., offset by solid performance at the other 13 operating assets. James will provide a bit more color in his asset update a bit later, and Sheldon will cover the financial results in more detail shortly.

We’re also pleased to announce that after our first full year as a listed company, we’re increasing our annual dividend by 5% from US$0.19 per share to US$0.20 per share, equating to a sector-leading dividend yield of around 1.8%. This is made possible due to the underlying delivery of our portfolio, and we believe it is important to return capital to our shareholders as we continue to grow our business.

As well, today, we announced that Triple Flag is in the process of applying to list our common shares on the New York Stock Exchange to increase our trading liquidity and provide greater access to U.S. investors. Upon receipt of all our required approvals and completion of the New York Stock Exchange listing process, Triple Flag will publicly announce its first trading date on the stock exchange and will trade on both the NYSE and the TSX under the symbol TFPM.

On the corporate development front, our team continues to be extremely active. We’ve evaluated many deals this year, engaged in several bilateral deal opportunities and conducted various site visits.

We’ve seen the deal landscape become unusually aggressive over the past 12 to 18 months amongst larger peers. And implied consensus returns are generally being notably lower than historic norms, including on riskier development-stage assets, which we’ve seen dominate the deal pipeline population and at a time of significant cost and capital inflation and supply chain disruption.

We see this as a temporary phenomenon against an increasingly attractive landscape for alternative financing in the mining sector as debt and equity become more expensive and unreliable sources of capital for miners in this inflationary environment.

Although we have ample liquidity for new deals at nearly US$700 million, we feel no pressure to transact for the sake of growth at the expense of value, and we’ll continue to remain disciplined as we look to deploy capital in the best way possible to grow value per share in keeping with our strategic focus as a high-margin precious metals investment vehicle.

Consistent with this patient and disciplined approach, we previously announced the exclusive nonbinding AUD 10 million royalty and US$80 million stream agreement with Orion Minerals on the Prieska Copper-Zinc Project in South Africa as well as the royalty we acquired on the Sofia gold project in Chile for US$5 million.

The portfolio is delivering organic growth, both in the short term and medium to long term. Steppe Gold resumed leaching from ATO Phase 1 in March and they’re advancing to ATO Phase 2 expansion. At Buriticá, the processing facility is currently undergoing a ramp-up expansion to 4,000 tonne a day that is expected to be reached later this year.

Northparkes achieved record plant throughput in May of 682,000 tonnes following the completion of the expansion program and the ramp-up of the E26 Lift One North block here. James will comment further on the many development highlights within the portfolio.

I’ll now turn it over to Sheldon to discuss our financials for Q2 2022.

Sheldon Vanderkooy

Thank you, Shaun.

We had a solid quarter that was in line with our expectations, and we remain on track for the balance of 2022. On July 12, we pre-released our Q2 metal sales, which totaled 19,500 in the quarter. In H1 as a whole, we have achieved 40,000 GEOs.

Our 2022 expected production is weighted to the back half of the year and we remain on track to achieve our 2022 expected guidance of between 88,000 and 92,000 GEOs. Q2 metal sales were impacted by a higher gold-silver ratio and also by timing of shipments near quarter end, but the portfolio continues to perform consistent with our expectations.

Adjusted net earnings came in at just under $15 million or $0.10 per share. A key measure for us is the operating cash flow we are able to generate. Operating cash flow in the quarter was $30 million, representing our third highest quarter yet for operating cash flow. On a per-share basis, we realized operating cash flow of $0.19 per share. We are very pleased to announce an increase in our dividend to $0.05 per share per quarter. We are pleased to achieve this dividend increase one year following our IPO.

Turning to Slide 6, I’d like to comment on the consistently high margins we have realized. The dominant economic story of 2022 has been the sharp increase in inflation to levels not seen in over 40 years and a consequent sharp increase in interest rates. The streaming and royalty model is very well suited to a high-inflation environment.

We have top line revenue exposure, allowing us to benefit from general price increases, but shielding us from operating and capital cost inflation. We don’t experience the operating leverage that mining companies do and have experienced very consistent margins despite volatility in price levels and that, in turn, results in stable cash flows as illustrated on the next slide.

Slide 7 sets out the strong and consistent quarterly cash flows we have realized over the past two years. These dependable cash flows give us the confidence to increase our quarterly dividend in the current inflationary environment. Since our IPO, we have already paid $30 million in dividends to shareholders, and we are increasing our dividend rate going forward. On a quarterly basis, this now represents approximately $7.8 million in aggregate, which is comfortably supported by cash flow generation of the portfolio.

Turning to Slide 8. Our cash balance at the end of the quarter was $74 million, and we are debt-free. We have maintained our discipline with respect to new stream and royalty acquisitions as conditions for acquisition of new streams and royalties have become more competitive over the past year. We believe that there will be good opportunities to deploy cash in the future, but we will continue to maintain discipline and are happy to build cash in the meantime.

This management team are also shareholders with a significant stake in the business. We will always guard shareholder value and never pursue growth for growth’s sake. The higher interest rate environment does not affect our financials. We have no debt drawn, and indeed, we benefit through higher rates on our cash deposits.

Last, I’d like to turn to Slide 9 to quickly highlight our asset diversification, our strong precious metals focus and our strong focus on Tier 1 mining jurisdictions. We are well diversified by asset with no asset exceeding 30% of Q2 revenues. Nearly 60% of our Q2 revenues were from gold and nearly 35% were from silver, maintaining the strong 90%-plus precious metals focus.

And finally, our portfolio is predominantly focused on Tier 1 mining jurisdictions. Our single largest country exposure is Australia. And other than Australia, we are predominantly weighted in North and South America. Today’s environment has an increased focus on jurisdiction risk, and our portfolio is very well positioned in that respect.

I’ll now ask James to speak to some of the asset highlights.

James Dendle

Thanks, Sheldon.

Production across the portfolio was generally in line with expectations. As Shaun mentioned, Northparkes achieved record plant throughput in May of 682,000 tonnes, which represents an annualized rate of over 8.1 million tonnes per annum, which is significantly beyond the stated nameplate capacity of 7.6 million tonnes per annum following the completion of the recently completed expansion program.

Ramp-up of E26 Lift One North and the cave performance is in line with expectations. Rail disruptions have occurred between Parkes and Port Kembla due to severe weather causing flooding and land slips at points in the route utilized by Northparkes as well as industrial action by the Pacific National bulk rail. Concentrate shipments have continued using an alternative rail provider that takes a longer route between the mine and the port. This has not impacted us and the main line is expected to be back online in Q3.

Northparkes is progressing in order-of-magnitude study on new zones that is proximal to existing mine infrastructure called MJH, which has not yet been included in the mineral resource and mineral reserve. We’ll provide more updates as studies progress. Staying in Australia. Fosterville has delivered strong performance year-to-date. Agnico expects third quarter production to be lower than second quarter. However, the fourth quarter is expected to be the strongest of the year.

In the second quarter of 2022, the Robbins Hill and Lower Phoenix exploration declines were completed. The completion of these exploration drifts puts the company in a good position to accelerate the exploration and conversion drilling in these prospective areas in the second half of 2022.

Also in Australia, Aurelia reported its highest quarterly mine tonnages, backfill placement, mill tonnages and gold production at Dargues. We noted in the first quarter that the mine was impacted by record rainfall in Southeastern Australia.

During the second quarter, water levels reduced and the planned tailings storage facility raise is now expected to be completed in September. Dargues is also progressing regulatory approvals for additional mechanisms to manage tailings storage facility water levels.

The Cerro Lindo in Peru performed as planned despite the challenges of processing higher proportions of harder volcanic ore during the year. Silver grades in the first half of the year have been higher than average, and we will continue to see the benefit of this enough sales during the second half of 2022, reflecting the roughly 4-month lag between mine production and saleable metals.

At ATO Mongolia, mining proceeded ahead of schedule for the year and heap leaching is proceeding as planned. Steppe is currently constructing the crusher and other surface infrastructure for the fresh rock expansion. The status of reagents is good with additional deliveries expected in August.

Turning to the U.S. At Pumpkin Hollow, Nevada Copper announced it had encountered weak rock structures in the main ramp at the East South Zone, which restricted access to the planned stoping zones. Activities were adjusted to develop plans to address this while prioritizing development work through the dike structure on priority headings for the Northeast mining zone, which has significantly higher copper grades and better geotechnical conditions. The work on this is close to complete, but liquidity constraints have forced the curtailment of underground mining activities.

Last week, the company announced that it had advanced restart plans of Pumpkin Hollow, which were focused on accelerating capital items followed by the development of significant stope inventory in advance of a mill restart and completion of the ramp-up. The company has secured interim financing and is in discussions with financing partners, including Triple Flag, to secure a longer-term funding package to finance the restart and ramp-up to commercial production.

Excelsior reduced operations at the Gunnison project wellfield while work on the Johnson Camp Mine restart and planning for wellfield stimulation trials aimed at improving flow rates and sweep efficiency of the wellfield is undertaken with the objective of overcoming the challenges associated with CO2 generation. Drilling results for the JCM pits have been encouraging. Leach pad permitting is ongoing and test work and drilling activities continue at site. Delays in stream deliveries due to Pumpkin Hollow and Gunnison did not impact Triple Flag’s 2022 guidance.

Closer to home, we’ve been pleased to see mining rates exceed 8,000 tonnes a day for the fourth consecutive quarter at Young-Davidson. Since we acquired the royalty in 2018, we’ve benefited from the excellent work that Alamos has undertaken to expand Young-Davidson and provide the long-term lower mine infrastructure.

I’ll turn the presentation back to Shaun.

Shaun Usmar

Thanks, James.

During the second quarter, we released our 2021 sustainability report, showcasing our contributions and commitment to helping evolve market-leading ESG performance. Our scholarship programs at ATO, Northparkes and RBPlat continue to provide support for young people interested in careers in the mining sector.

We continue to be carbon-neutral for all our Scope 1, 2 and 3 emissions since starting this business by purchasing offsets and are now working on setting out our road map towards net zero emissions by 2050. Finally, we joined the World Gold Council in May and are proud to support responsible development across the gold supply chain as an active part of this industry forum.

On to the next slide. We built this business over the past six years with the major streaming and royalty competitors in mind as a way to create value for our investors and mining partners alike. For our mining partners, we held the view that precious metals royalties and streams presented an underappreciated opportunity to satisfy the growing capital needs for underserved miners in a competitive and symbiotic manner, satisfying the needs of the sector requiring large amounts of long-term capital.

For our investors, we chose to demonstrate the benefits of the precious metal streaming and royalty business model to create value over time and offer a preferred investment vehicle for precious metals exposure. The value of the business model is on full display, as Sheldon mentioned, during these generational inflationary times, where our low overheads and the high margins of our portfolio underpins strong cash flow generation at a time when operating mines and development-stage assets are experiencing significant margin compression and growing liquidity pressures.

Our 15 operating assets have generated $115 million in free cash over the past 12 months, allowing us to pay a sector-leading dividend yield of 1.8% while our exploration and development-stage assets in our portfolio of 80 streams and royalties offer substantial organic growth in a portfolio that has grown gold equivalent ounces at a sector-leading CAGR of 26% since 2017 and is on track to grow again this year for the sixth consecutive year. Our investing track record and portfolio performance over the past six years has enabled us to derive a portfolio net asset value that is approaching double our net cash deployment since we started the business.

We trade at a modest multiple compared to our target peer set, allowing for ample re-rate potential as we continue to grow scale, diversification, liquidity and portfolio quality. Our portfolio duration ranks amongst the best with the sector leaders in more than 20 years, highlighting the quality of the key assets and the predominance of byproduct ounces from long-life base metal and PGM mines in the portfolio, which accounts for roughly 70% of our GEOs.

So finally, in summary, we delivered solid financial results in Q2 against a volatile market backdrop, highlighting the quality and value of the portfolio. We increased our dividend by 5%, further enhancing our dividend yield and intend to list on the New York Stock Exchange to increase the investor access and trading liquidity in our shares.

We’re on track to meet our 2022 guidance of between 88,000 and 92,000 gold equivalent ounces while delivering on our ESG objectives. Our business is producing strong cash flows, which are positioned to increase as the fully funded embedded organic growth within the portfolio is delivered across a number of assets.

We continue to consistently see a variety of deal opportunities that are concentrated predominantly in the US$100 million to US$300 million size range at the moment, particularly for development-stage assets, which are underserved in these challenging market conditions. We expect the outlook for deal opportunities to improve as more conventional forms of funding prove increasingly expensive and perhaps unreliable in this market and miners require additional liquidity due to cost and capital inflationary pressures.

Against this backdrop, having no debt and nearly US$700 million in available liquidity to deploy and value-enhancing deals for our portfolio is a strategic advantage that we will utilize intelligently and patiently in pursuit of growing our value per share. As major shareholders ourselves, our focus remains on disciplined deal execution and value creation, pursuing sensible and accretive deals in a patient manner rather than pursuing growth at any cost.

I believe that the current market is setting up nicely for an acute need for knowledgeable, patient, long-term capital in the mining and metals sector, providing opportunities for us and our competitors to pursue further value-enhancing acquisitions. We’re well placed in this environment to grow value for our investors in time. We sincerely appreciate the support and trust of our stakeholders, and we look forward to providing further updates soon. Thank you.

And we’ll turn it back over to the operator, and we are happy to answer any questions anyone has.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Fahad Tariq with Credit Suisse.

Fahad Tariq

Hi, good morning. Thanks for taking my question. Maybe looking ahead to 2023, if you could discuss how we should think about this production guidance for next year, given the issues, particularly at Pumpkin Hollow and Gunnison. I appreciate that there’s no impact to 2022 from the issues at those mines, but I’m just trying to get a sense of are you still confident in the 110,000 ounce average for the next several years? How does this – how do these issues impact next year in particular? Thanks.

Shaun Usmar

Fahad, yes, thanks for the question. Look, we’re not providing 2023 and beyond guidance at this time. I think we recently reaffirmed our outlook. And if you look at the combination of things that are included in that portfolio and maybe you contrast that with some of the things that you and others have looked at that have taken place in the sector recently, I mean there are NAVs that are being attributed to assets that are quite a long way out from funding, that are quite some time out, in some cases, from even permitting that are being included in those sort of time frames.

In our case here, we’re talking assets that essentially, if you look at our portfolio, I think it’s about 90% that are really by value are in the sort of operating and certain ramping categories. We will provide that guidance at a sort of opportune future time. But you can see what the portfolio has done to date, what it’s on track to do this year, and I think our portfolio continues to be sort of well placed. So stay tuned, we’ll give you the timely guidance shortly.

Fahad Tariq

Okay. And maybe without getting into the specifics, but do you feel there are offsets in the portfolio if, for example, underground development at Pumpkin Hollow remains delayed for some time? Or the Johnson Camp doesn’t come online in next year at Gunnison? I’m just trying to get a sense of like are there offsets in the portfolio where you can see production growth?

Shaun Usmar

I guess the best way to answer that would be to look at our natural orientation so far. So if you consider that, notwithstanding that the gold-silver ratio, I think, had gone from this time last year at 68% to 83% and I think we’re projecting over 90% for the remainder of the year and then you look at the performance this year even with the underperformance of those ramping assets, our actual volumes that we’ve included in guidance for this year are tracking at the top end or beyond the physical numbers, excluding the price movement.

So you see our natural orientation and we’ll continue to maintain that posture. So that just points to the, I think, just the reality that we always have things in the portfolio that could be pluses or minuses. And we’re always going to maintain a sort of slightly conservative posture as we set guidance. And so yes, I believe it’s there and we can’t really comment at this point as to what’s going to happen in ’23 and beyond. I just think our portfolio when you compare to the peer set is actually generally more mature than the many others out there from a risk perspective.

Fahad Tariq

Okay. Great. Appreciate that color. And maybe just one last question. On the deal pipeline, you mentioned most of the opportunity set that you’re looking at right now is between $100 million and $300 million. Can you just touch on like the types of geographies that you’re looking at? I know there’s a certain preference for Triple Flag. I’m just trying to get a sense of where these development assets that are in the opportunity set, where are they located?

Shaun Usmar

Yes. Look, we are seeing, I’d say – I’ve sort of highlighted the $100 million to $300 million almost like on a histogram. We’re seeing a lot that are much smaller. I think we’ve seen the deal activity that took place probably the last year or so in that sort of smaller end become a little more subdued. And then on the big end, we’ve seen a lot of activity quite recently, including something over $0.5 billion quite recently.

We are active on some larger opportunities, but I think the fees for those is longer and it remains something that’s sort of less predictable. And jurisdictionally, I think as Sheldon has sort of alluded to in his comments, we’ve always said that our primary jurisdiction’s really, call it, Australia and the Americas. And only in circumstances where we’ve got a very solid case, good return, security of tenure where we’d go elsewhere. And I think that framework, particularly in these times, remains as relevant right now as it ever has been.

Jurisdictionally, it’s definitely concentrated more in those areas. I think the Orion Minerals one, which is still yet to reach the funding milestone and finalization of the documentation, is sort of the one small exception and there’s – we’ll see how that unfolds. But that would be really how to think about it. We continue to prioritize our core jurisdictional exposures.

Fahad Tariq

Understood. Thank you, Shaun.

Operator

Your next question comes from the line of Josh Wolfson with RBC Capital Markets.

Josh Wolfson

Thanks. On the topic of Gunnison, just because I’m a little bit less familiar with the different parts of the camp. With the recent operating changes, is it reasonable to expect any production for the remainder of the year or 2023 in the event that the economics or – pending the economic decision?

Shaun Usmar

James, do you want to…

James Dendle

Yes. Josh, it’s James. So yes, look, the way it’s split out is you essentially have the very large entity leach deposits. And then there’s the Johnson Camp Mine, which is a series of open pits and related mineralization that is connected to the SX-EW plant that treats the fluids from the entity leach. So for the balance of the year, we expect to receive small quantities of copper in a manner broadly consistent with what we have received to date this year.

As to 2023, the company is working through their analysis of the restart of the Johnson Camp open pits as well as their analysis and test work associated with getting the entity leach up and running again. So we’ll have to await their determination on those two elements before making any sort of statement on what we expect from that operation in 2023. But there will be some contribution this year. There’s essentially residual copper in the leach system.

Josh Wolfson

Okay. And sorry, beyond the residual component, is there any additional production we can expect? Or is that until they make or sort of determine the economic outcome?

James Dendle

Yes, that’s it until they determine the outcome of the work that’s ongoing at the moment. But that residual production is sort of not far off what we’ve been receiving year-to-date, again, which is obviously a fairly modest figure.

Josh Wolfson

Okay. And along the same lines, I know the company doesn’t provide the 2023 guidance at least as of today. But looking at the existing 5- and 10-year guidance, what proportion of that would have been represented by Gunnison and Pumpkin Hollow?

Shaun Usmar

Josh, we’ll confirm – I think it was around or just under 10% over that time frame. And so then there’s just a question of absolute timing that’s associated with that. I think particularly in the Nevada Copper case, our team has been to the site fairly recently. We see the line of sight to the production. We’re working on with the team on the liquidity side. And I think importantly, we’re actually very supportive of what we’re seeing with the CEO and the senior team.

And I think the key thing, just given some of the earlier comments, we’ve got members on our team like John Cash, who’ve spent decades in Nevada, and actually confirm that from that point of view, it’s some of the best ground conditions that they’ve seen in Nevada. So I think for us, it’s just a question of timing associated with that.

Josh Wolfson

And then one last question. With the new U.S. listing, that opens the stock up obviously to a lot of potential shareholders. Is there any evaluation of ways or mechanisms to improve liquidity along with the listing? Or is that sort of a secondary thought?

Sheldon Vanderkooy

Josh, it’s Sheldon. I’ll take that one. I mean I think the first thing we should maybe just make explicitly clear is that no offering of shares is contemplated at this time in connection with the listing. So this is just a listing where we’ll have the access to the U.S. market that will free up U.S. retail. And there are some case studies out there in which Canadian companies have cross-listed to the States and seen nice increases in their liquidity. So we see that as a positive catalyst for the liquidity.

Josh Wolfson

Okay. Those are all my questions. Thank you.

Shaun Usmar

Thanks, Josh.

Operator

Your next question comes from the line of Greg Barnes with TD Securities.

Greg Barnes

Yes. Thank you, Shaun. As far as I can tell from reading through the Nevada Copper disclosure, they’re looking for a funding package in the range of, I believe, around $70 million. Is that your understanding as well?

Shaun Usmar

Look, I’m not going to front run, Greg, the team on that. Look, we’ve been working with them. And I think our priority with the management team is ensuring that they’ve got the liquidity they need to get through to commercial production. So they will be putting statements out when they’re ready. They’ve got a number of supportive shareholders.

And I just think the context for us other than the site visit that we’ve been on is when you look around and you saw BHP’s announcement or at least stated in the known figures, it was OZ Minerals and others. You saw Metso last year. There’s not a lot of U.S. copper mines with newer built underground mines and open pit projects. In this situation, they’re pretty scarce and you’ve got nearly – I think it’s $900 million or so of actual assets associated with this already. We’re very constructive on copper and the copper outlook. And I think the team will find the support it needs, and we’ll be part of helping them get through that.

Greg Barnes

For James then, on these higher-grade zones they’re trying to get to, how far away in terms of development work required are they to getting there through this more tricky well?

James Dendle

Yes. I mean if you look at the dike crossings, there’s basically three dike crossings. When we were at site, they have virtually completed one. They’re partway through the second. And the third is not required imminently. But in reality, Greg, the dike crossings, whilst they have represented a challenge for the company, there’s no material reason that this should represent a challenge going forward.

The dike – the actual bad ground associated with the dike is only about five to 10 feet thick, depending on the angle of the development, right? So it’s not a hugely problematic zone. So it should really be a nonevent.

And then the total meters developed are pretty limited. And I haven’t got a figure to hand, but the figure that I do have in mind is the development one has to do to set up all the stoping infrastructure and all the cross-cuts, which is still a fair bit of work to do. But really, there shouldn’t be any impediment to setting up that East North zone for proactive mining at the rates contemplated in the study.

Greg Barnes

Okay. So timing on that, assuming they get the funding, James, are we talking six months, five months? What do you think?

James Dendle

The company is working through the engineering of that, Greg. But with the development that’s ongoing, some of the additional infrastructure work that’s required to complete that, I think it’s going to take a bit of time. But I won’t comment specifically on that timing right now. Again, I don’t want to get ahead of the company’s disclosures.

Greg Barnes

Then turning to Gunnison and looking through the technical report they put out earlier this year, as far as I can tell, the washing or the cleansing of the wellfield will take 12 to 15 months to wash out the CO2 and what have you. So likely no production there in 2023. And then the Johnson Camp development, it’s still a question mark how that goes ahead. And that will take a year or so, I assume. So just judging from that, we’re at least a year away from – probably 1.5 years away from additional production from Gunnison. Is that fair?

James Dendle

Yes. I think, again, Excelsior are in a position where they’re currently drilling out parts of the Johnson Camp. There is historical drilling that they’re looking to assess and prove up. So we don’t have a clear picture right now as to what the ramp-up of Johnson Camp would look like, presuming they go ahead with it.

On the entity leach side of things, there’s the raffinate neutralization and the wellfield stimulation. Depending on the performance of the wellfield stimulation, it might negate the need for the raffinate neutralization, which could speed things up. But again, they’ve got work to do in order to determine which of those options or which combination of options between stimulation and raffinate neutralization is the best one. So until they’ve come to that determination, I think it will be challenging to put an exact timing on when we can expect to see the ramp-up commence – will recommence on the wellfield.

Greg Barnes

Okay. That’s helpful. Thanks James.

Operator

[Operator Instructions] Your next question comes from the line of Cosmos Chiu with CIBC.

Cosmos Chiu

Hi, thanks, Shaun, Sheldon, and James for the conference call. Maybe first on Northparkes, good to see that there was record plant throughput in May, 682,000 tonnes. I think, James, as you mentioned, that’s higher than nameplate. Could you maybe talk about – is this a sustainable level of throughput that we can expect? Or could it go even higher with the expansion now complete?

James Dendle

Yes. Good question, Cosmos. Thanks. Look, the mine had the opportunity to run at those throughputs as they had good levels of surface stockpiles. The E26 Lift One North block cave is actually slightly exceeding plan, which led to part of that outperformance. What it does point to is that there is potentially more capacity in the plant. There are other expansion opportunities to take it beyond even at plus 8 million tonne level. So those expansion opportunities are very much dependent on the availability of new mining areas and ore feed.

So with some of the studies that the mine is doing at the moment, it does represent an opportunity in the future to see further output from Northparkes above the 7.6 million tonnes per annum level. There are various studies ongoing at the moment. So that’s something we’re watching closely, and we look forward to providing update when those studies work through.

I think, particularly with E22, there’s a good opportunity around that. And that’s before any additional discovery that they might make with those deposits. They’ve got a lot of mineralization there, and it’s really about maximizing the underground infrastructure in order to fill the surface capacity.

Shaun Usmar

Yes, Cosmos. I think just to add just broader color as well. And I think it’s a point we try to emphasize in the headlines and then in some of the details, James did mention the – there’s the operating piece where the controllables are going well. But you have seen these weather and logistic events that have created sort of timing issues.

So hence, the commentary on, call it, the year-over-year and then moving to the back end of the year – and we’ve been seeing, I think, I might have seen Greg’s comments even on things like Buriticá where they’re performing really well. They’re doing great stuff, but there’s just timing differences on a quarterly lens. So we’re very happy with how the operating teams themselves are performing. Just at times, there’s lags between when they get that and when they – when we finally get to turn out. And they’re not significant. We don’t have like huge working capital delays, as you know.

Cosmos Chiu

Of course. And speaking of new discoveries, maybe switching gears a little to Cerro Lindo. Clearly – and a very important asset for Triple Flag. Even better if silver prices were higher, but I’m sure that will come one day. As you mentioned, Shaun, in your MD&A, they’ve recently made a new discovery, VMS deposit discovery, the Pucasalla. Just wondering, is there any kind of timing in terms of when some of those new discoveries could come in? Maybe not so much – maybe it’s Pucasalla, but maybe some of the other ones that you might have highlighted in the MD&A as well.

Shaun Usmar

Yes. I’ll ask Jim to comment. We’re actually heading out both to Buriticá as well as Cerro Lindo in the next few weeks now that we can travel again. So we’ll certainly have more color for subsequent calls. But James, do you want to expand?

James Dendle

Yes. So Pucasalla is quite a long way North of the mine. It’s outside of the stream area. The stream area extends to Southeast, which is a very prospective area for VMS mineralization. And they’ve actually been mining new zones over the last couple of years that have been discovered since we made the investment. So like for OB9, which is the zone that’s being mined at the moment, is a copper zone with very high silver grades, which is part of driving the silver performance we’ve seen of late.

So what we expect for that mine is for them to continue to find extensions for Cerro Lindo towards the Southeast. At the same time, Pucasalla represents the opportunity to provide incremental additional mill feed to keep the concentrator going long after the current reserve life. And then there are certain areas within the stream area that have the potential to yield Cerro Lindo-size deposits of meaningful scale that are currently being explored.

The exploration work associated with that is quite time- and labor-intensive, so Nexa are currently putting in underground development and some quite long drill holes in order to test those areas. And the reason it’s underground is, of course, because of the hilly topography in that area. So we’re very excited about the extension of Cerro Lindo. It’s already significantly replaced the silver reserve from the time of our investment to today. So they have the track record. And they have – it is next flagship assets, but heavily incentivized to extend the life of it through exploration expenditures.

Cosmos Chiu

Great. And maybe one last question, switching gears a little bit, once again. It’s always good to see – it’s great to see that Renard contributing once again. Shaun, could you maybe talk about diamond prices? I’m sure you’re closer to the market than I am. It’s been a while since I last saw them made. And then profitability at the asset and the sort of longer-term projection too?

Shaun Usmar

Yes. I’m close to the city as in – from my wedding days, so I’m not quite sure but I’m in market myself. Look, I think when you look at the, call it, the restock case that was there, it was in diamond prices close to, I think, $55 a carat. I think the last number was more like $132 a carat, the last batch. And so that obviously points to quite significant contribution margins that are coming from that operation.

I think it also points to the resilience and also the experience of this team who have – are really waiting through and being patient to realize value on assets. So I know there’s been questions around timing associated with certainly the ramping assets that we’ve talked about. Bear in mind, we’ve had five assets, ramped three of them, we’ve had two delays. And this is something that was about 1% of NAV that I think we’ve really demonstrated the ability to not just conserve value but move – create – move forward with that and realize value for our investors.

On the go forward, I’m going to see if Sheldon has anything he wants to add to that. I think, obviously, we’re part of the consortium there. The diamond market appears to be reasonably robust. So anything to share?

Sheldon Vanderkooy

Yes. So thanks, Shaun. Thanks, Cosmos. It has been a good news story for us. We’ve been getting – we’ve been – so first of all, in the smaller-sized diamonds, which Renard has a lot of, we’ve actually seen stronger pricing. And part of that is the diamond supply chain and part of that is Argyle going offline, and that’s actually been a bit a positive catalyst. And that’s something that I think that was a long time coming and it was a little slower in coming, I think, than some people thought. But that’s now happened and we’re seeing some good tailwinds there.

One of the things with the Renard stream, we had been, as you know, not been getting the cash flow from that for a while. That’s now been turned on. We’re getting the full cash flow from that, and they’re actually paying back some of the – what had been effectively picked before. And we saw that in Q2, and I expect we’ll see that going forward because the underlying operation is generating positive cash flows, and that’s what it’s all about. So we’re actually really excited about that story. It’s a good one.

Shaun Usmar

Yes. And I guess the only other thing, Cosmos, obviously, the world is a pretty complicated place right now with Russia-Ukraine and what’s happening with Russia’s supply, and that is probably fairly supportive for the supply outlook for this mine.

Cosmos Chiu

Yes, thanks again, Sheldon and James. Those are the questions I have and thanks again for answering my questions.

Shaun Usmar

Thanks Cosmos.

Operator

Your next question comes from the line of Tanya Jakusconek with Scotiabank.

Tanya Jakusconek

Great. Good morning, everybody. Thank you for taking my questions. Just a gentle reminder that I know, Cosmos, you mentioned diamonds for weddings. But diamonds are beyond just weddings, right? So I have a couple of questions, just some admin for us. Maybe, Sheldon, just on the listing on the New York Stock Exchange, when are you expecting that? And what sort of cost should we think about going forward beyond 2022 for this listing?

Sheldon Vanderkooy

Tanya, I would say it’s pretty imminent that I would look to see filings being made in the next couple of weeks. And by filings, I mean, SEC filings of documentation and then the shares would actually be trading probably on a one or two lag after that. So I would expect the shares to be up and trading if not by the end of the month, then shortly into the next month.

In costs, we wanted to give people some guidance and so there’s a number of onetime costs that are going to be coming through in H2. And so we kind of see about US$600,000 of costs in H2 of ’22. On a run rate basis, it will be a little less than that. So it’s probably going to be maybe $1 million or $2 million on a run rate basis going forward. And those are really just the D&O insurance premiums go up, the audit fees go up when you have a U.S. listing, there’s New York listing fees, and there’s probably some incremental legal spend as well when you have to just be cognizant of the U.S. rules.

Shaun Usmar

And Tanya, just to add, I mean, we were going through it yesterday. We’ve actually – even though there’s increases, I think we’ve been pleasantly surprised compared to expectation about a year ago in things like D&O. So that was reasonably positive compared to expectations not that long ago with what’s happened to that market. And to your other point, having just gone through my wife’s 50th and contributing to demand on earrings, I agree, it’s not just weddings on diamonds.

Tanya Jakusconek

Good. Okay. So Sheldon, so the $1 million to $2 million 2023 per annum going forward would be reasonable to your G&A?

Sheldon Vanderkooy

That’s right. Yes.

Tanya Jakusconek

Okay. So I’ll leave diamonds and – although I could talk about diamonds all the time, but I’ll leave diamonds and G&A for now. And if I can move on to perhaps the royalty in precious metals stream. Can I just get an update on where we are in some of the critical steps to get this going through, just as a reminder? There was just very little in the release.

Shaun Usmar

Yes. I’ll start and I’ll ask Sheldon to expand. But we’ve – I think the rate-determining step from our vantage point is twofold. One is just the documentation, which is taking its course. But primarily, the ability of them to raise the additional AUD 20 million because importantly, we’ve set this up so that really the funds that we put in, as you’ve seen in other deals, are really contingent upon them achieving the minimum funding requirements that are there.

I believe they’re advancing and advancing quite nicely with that. But it’s up to them to be able to finalize the AUD 22 million, secure the AUD 10 million. And then, of course, the other will be contingent on the studies and things like that, that are there to follow. Anything you wish to contribute to that?

Sheldon Vanderkooy

No, I think that covers that. I mean the legal documentation, I would expect that to be completed in Q3, but it’s really the AUD 20 million. That’s the gating I don’t forget.

Tanya Jakusconek

Okay. Thanks for that. That’s what I thought, but I just wanted to know if there was anything else. And then maybe just lastly, if I could ask, just back on your – on the transaction environment, M&A environment, and thank you for the size of $100 million to $300 million. Can I ask, like, you mentioned more in the development or helping fund development-stage projects. I was quite surprised about the royalties available and it’s still there in the market. So I just wanted to ask whether you are seeing any royalty portfolios and/or others out there that would be of interest? Or are there any more? Or are there not the size of funding of the projects?

Shaun Usmar

Yes. Tanya, it’s a really good question. The funny thing is if I look back, I suppose, over six years now, the – some of this stuff, you can forecast and you put a lot of time in. Even the recent transaction, I think I heard Bill comment that we tracked that for 14 years. I guess, we tracked it before.

But some of these things emerge and they’re quite visible. But I’m always surprised at how some of these things seem to emerge which are less visible. And even last week, we’ve seen some things in the Americas come to the fore, which just really were not visible.

So I think that fairly steady cadence of opportunity set seems to be a consistent theme that’s there. The one thing – and you saw my comments, we’ve seen – particularly single-asset producers and even intermediates, we’ve seen majors. I mean look at some of the issuers in the last period. Some on this call have talked about year-on-year operating cost and capital cost increases for majors and others of 7.5% to 15%. We’ve seen some logistical challenges.

And then we’ve seen big issuers like Newmont and others talk 12 to 18 month delays in key projects and 15% to 25% increases in capital. So I think the sector as a whole is starting to really reveal some of those pressures. And I think if you’re a large company, as some of those guys are, they’re well capitalized and it’s a bump in the road. But I do believe that for other businesses, particularly with this inflationary environment and you saw the jobs report on Friday, we’re going to see more rate increases. And I do think the inflation situation is perhaps with us for some time. Debt’s more expensive.

Margins have definitely compressed. And we’re seeing some issues with their equity from a year or so ago down 70%, 80%. So equity is very dilutive. I think it’s a very constructive environment. So to your question, yes, we continue to see these royalty portfolios. Variable quality, as always. But I think for broader funding, particularly with stream funding by products and otherwise, I think it’s setting up actually as a very interesting environment for the next 12 months-plus.

Tanya Jakusconek

Do you see opportunities of creating royalties? I understand that streams is better taxation for operator to do the – to fund their projects. But sometimes, if you’re strained by your abilities and you need the funding, obviously, royalties is another form of funding. Are you seeing opportunities in royalties in some of these?

Shaun Usmar

Yes. The short answer is yes. I mean we’re active on some right now. The caveat is they’re not usually then particularly large checks for the reasons you’ve alluded to. And as I say, tactically for us, the analysis I just took our Board through yesterday is looking at some of the recent deal activity, the terms they’re on, just challenging our thought process saying, what, if anything, if we deployed, would we perhaps feel different about how do we think about this?

Because we’ve got significant growth, we’ve got a lot showing there. But once you’ve deployed some of this capital, it does restrict your degrees of freedom as you go through it. So I think for us, as we look through it, our prioritization, if you remember, Tanya, on formation, I think is as relevant today as it was six years ago. And by that, I mean, normally $100 million to $500 million checks. We’ve done smaller, we’ve done bigger.

But usually, producing on your producing assets worth a lot of optionality on the back end because I think, particularly in this environment, there’s more likely to be a lot of these studies, which NAVs have been built on are rearward looking. I think you will see revisions of those in the sector, and I think you will see more delays over time. And I don’t believe that’s priced in at the moment, so I think that creates a time lag but I think it creates opportunity.

Tanya Jakusconek

The $100 million to $300 million sort of streams in under $100 million, let’s say, on royalties?

Shaun Usmar

I think that’s fair.

Tanya Jakusconek

Okay, great. Thank you so much.

Shaun Usmar

Thank you.

Operator

Your next question comes from the line of Brian MacArthur with Raymond James.

Brian MacArthur

Good morning. Most of my questions have been answered. But can you just remind me on ATO because it looks like you said they’re getting leach in there. How much delay there is until you get it? Because it looks like their third quarter is supposed to be pretty good. And the second part of the question then is how that cap works again? I mean, is it on a true annual basis or a quarterly run rate? Just any guidance on how you think that might play out now that, that looks like it’s catching up.

Shaun Usmar

Brian, great questions. It’s always unfortunate when other people steal your thunder in the sequence, right? Yes. So look, ATO, I think you’ve seen it’s another example, I think, of the patience of this model. If you’re an equity investor, you carry the fixed costs and the cash associated with the delays that they experienced with the reagent shortfall.

They’ve done well to secure supply. They are not limiting the ramp-up with the ounce provision and rock on the pad – crushed rock on the pad. It’s really more taking a cautious approach on just as they look at access to reagents from multiple sources.

So you can see their guidance, I think they are guiding, as you said, for – they did pretty well restarting earlier this year, and they’re guiding for that to continue to ramp into Q3 and beyond. The cap is not a function of their current oxide arrangement, which is really the initial basis of our investments. Recall it was sort of a high teens return on that back at $1,250 gold. And it was something which really had a pretty quick payback, so we’ll have our cash back on the original investment likely this year.

The cap applies really to the fresh rock where we’ve got no incremental investment due. And that study is ongoing. And I think the company has provided some meaningful guidance, and they’re also making major progression on the crusher that they’ve been installing on that.

But I don’t know, James, if anything you wish to add to that?

James Dendle

Yes. I mean the actual cap on that, Brian, comes in after we’ve streamed 46,000 ounces. And then the annual cap is 7,100 ounces of gold and 59,300 ounces of silver. And that basically takes you slightly beyond the originally stated mine life for the oxide deposit.

Brian MacArthur

So as you catch up here effectively in the near term, you get everything? There’s nothing that’s going to cut you off or anything?

James Dendle

No, we don’t get cut off, yes.

Brian MacArthur

Okay. Thank you very much.

Shaun Usmar

Thanks, Brian.

Operator

Your next question comes from the line of Mikel Abasolo with Solo Capital Management.

Mikel Abasolo

Hello, thank you for taking my question. I think that my question has been partially addressed, but I think from a different angle. The thing is I see stock prices of junior and senior miners coming down, and cash flow is still healthy despite cost inflation that you’ve mentioned. I mean, in that environment, shouldn’t capital be deployed in buying stocks rather than developing mines? Do you see that happening? And if that is the case, I mean, will the logic suggest that a small miner, instead of talking to Triple Flag for capital to develop a new project, that they should be talking to some of the big guys and try to sell their stock to them or sell their mines to them and buy back their own stock? I mean, is this arbitrage that I’m talking about reasonable or fact-based, actually? How do you see that?

Shaun Usmar

Yes, it’s a very good and quite broad question. You’re talking about the fundamental mix or buy decision that I think every management team confronts as they sort of consider the strategic alternatives over time. And to your point, I think we’ve seen in the news just this week, the BHP moves on OZ Minerals, which, of course, the management team sort of described as opportunistic despite, as I recall, I think a 32% premium that was implied by that bid.

So to your point, I don’t think it’s easy to make broad generalizations for different businesses at completely different ends of the development spectrum from exploration pre-revenue development, where they are dealing with some of these supply chain and inflationary pressures.

And then there’s a question of their access to funding, which I do think represents an opportunity set. And to your point, if they are going to perhaps look to sell themselves as a means to be able to unlock shareholder value, is that the right time for them to be able to do that? Or is it an opportunistic time for the acquirer to be able to do that?

So I think there’s enough – you don’t want to sell from a position of weakness. If the teams believe they have the ability to successfully execute in this environment, usually, that can actually have a significant discount to a lot of those assets would trade at, unlock that and set themselves up for a more valuable outcome for their shareholders. Of course, there’s risk associated.

So I don’t think there’s any one general rule that can be applied. I think it’s very specific to each situation. But I do think you’re going to see a lot of guys out there shopping for copper assets at this time – well, not just copper assets. I think that it’s an interesting environment for shopping, perhaps, for some of these strategics.

Mikel Abasolo

Okay. And if I may, looking at your presentation and looking at the accounts, I see when you adjust – when you go from net earnings to adjusted EBITDA, I see a line that says decrease/increase in fair value of investments, and I see a decrease of $3.8 million. What’s in your portfolio of investments? Is that stakes in miners, by any chance?

Shaun Usmar

I’ll ask Sheldon to comment on the specifics, but I’ll just say a lot of the people on this call know that for the last six years, our strategy has been very clear that we are – we take very limited equity exposure in our approach to investing in streams and royalties. And ordinarily, when we do, it’s part of a much larger funding package. So where we’ve had limited equity alongside say putting a new stream in place, it’s been a small check on a relative basis. And ordinarily, we will look to monetize and cycle out of that in order to minimize that volatility. But Sheldon?

Sheldon Vanderkooy

Yes, certainly. And as Shaun said, we have a relatively small portfolio of equity investments. And you’ll find that on the balance sheet, it’s listed as the investment and then it’s referenced in note 7.

So like at the quarter end, it was about $5.3 million. And then note seven gives you the detail as to what that consists of. We’ve harvested some gains, GoldSpot and Talon, and we’ve also, as you see, have some losses reflected through there. And it’s somewhat volatile when it comes through the income statement, and we don’t regard that as part of our core business.

Mikel Abasolo

Okay, thank you very much.

Shaun Usmar

Thanks, Mikael.

Mikel Abasolo

Thank you.

Operator

At this time, there are no further questions. Are there any closing remarks?

Shaun Usmar

Lisa, thank you. Look, just thanks to all. Look, we’re trying to evolve the format, obviously, to touch on the high points and really have the sort of engagement that I think we’ve got on this call, which we really appreciate. I think the questions are thoughtful. I believe the environment is really interesting at the moment for not just ourselves but for the sector at large.

I think it creates – it sets the table for a good opportunity. And look, at the end of the day, you’ve seen the track record and really quite an undemanding multiple and implied valuation for a diverse, significantly growing high-margin portfolio that at the moment is trading at a dislocated value compared to where we’ve seen assets trade – single assets trade in the market with peers.

So I think this team continues to stay the course. We are – we’ll continue to be transparent, keep you informed. And on a parting point, I’d just encourage those of you with the interest there, we put out our second sustainability report. I think the best form of flattery is when you’ve got competitors reaching out actually looking to engage on our approach, which we’ve been receiving, and we’ll continue to be part of evolving that process and thought process. I think it is very key to be a good catalyst for this in the sector, and that’s what we aim to do.

So thanks, everyone, and enjoy the rest of your day.

Operator

This concludes today’s conference. You may now disconnect.

High Liner Foods Incorporated (HLNFF) CEO Rodney Hepponstall on Q2 2022 Results – Earnings Call Transcript

High Liner Foods Incorporated (OTCPK:HLNFF) Q2 2022 Earnings Conference Call August 10, 2022 2:00 PM ET

Company Participants

Kimberly Stephens – Vice President, Finance

Rodney Hepponstall – President and Chief Executive Officer

Paul Jewer – Executive Vice President and Chief Financial Officer

Conference Call Participants

George Doumet – Scotiabank

Kyle McPhee – Cormark Securities

Sabahat Khan – RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the High Liner Foods Incorporated Conference Call for Results of the Second Quarter of 2022. [Operator Instructions] This conference call is being recorded today, Wednesday, August 10, 2022, at 2:00 p.m. Eastern Time for replay purposes.

I would now like to turn the call over to Kimberly Stephens, Vice President of Finance for High Liner Foods. Please go ahead.

Kimberly Stephens

Good afternoon, everyone. Thank you for joining the High Liner Foods conference call today to discuss our financial results for the second quarter of 2022. On the call from High Liner Foods is Rod Hepponstall, President and Chief Executive Officer; and Paul Jewer, Executive Vice President and Chief Financial Officer.

I would like to remind listeners that we use certain non-IFRS measures and ratios when discussing our financial results as we believe these are useful in assessing the company’s financial performance. These measures are fully described and reconciled to IFRS measures in our MD&A.

Listeners are also reminded that certain statements made on today’s call may be forward-looking statements that are subject to risks and uncertainties. Management may use forward-looking statements when discussing the company’s strategy and business in the future. Actual operating or financial results could differ materially from those anticipated in these forward-looking statements.

High Liner Foods includes a thorough discussion of the risk factors that can cause its anticipated outcomes to differ from the actual outcomes in its publicly available disclosure documents, particularly in its annual report and annual information form. Please note that High Liner Foods is under no obligation to update any forward-looking statements discussed today.

Earlier today, High Liner Foods reported its financial results for the second quarter ended July 2, 2022. That news release, along with the company’s MD&A and unaudited condensed interim consolidated financial statements for the second quarter of 2022 have been filed on SEDAR and can also be found in the Investor Center section of the High Liner Foods website. If you would like to receive our news releases in the future, please visit the company’s website to register.

Lastly, please note that the company reports its financial results in U.S. dollars, and therefore, the results to be discussed today are also stated in U.S. dollars, unless otherwise noted. High Liner Foods common shares trade on the Toronto Stock Exchange and are quoted in Canadian dollars.

I will now turn the call over to Rod for his opening remarks.

Rodney Hepponstall

Hello, everyone. Thank you for joining us today to discuss our financial results for the second quarter of 2022. First, I’d like to take this opportunity to welcome our new Vice President of Finance, Kimberly Stephens. Kimberly really brings over 10 years of experience in the public markets, and we are excited to have her as part of the High Liner Foods team.

During the second quarter, we delivered year-over-year growth in sales, volume and gross profit. We increased sales volume by 8.4 million pounds or 16.7%. We increased sales by $63.7 million or 33.6%. We increased gross profit by $12.1 million or 27.3% and we increased adjusted EBITDA by $5.9 million or 31.1% to $25.5 million.

We experienced continued strong demand for our products across our foodservice and retail businesses. In foodservice, our second quarter sales were strong in all segments and species with particularly high demand for our products from schools, hospitals and other non-commercial businesses as in-person dining in these establishments continue to ramp up following pandemic-related closures.

In the time of significant supply challenge across all industries, our global diversified supply chain continues to be a source of competitive advantage for us. And thanks to the resilience and the teamwork of our people, we are increasingly turning a time of supply challenge and constraint into a time of significant market opportunity for High Liner Foods. Our team is working to effectively mitigate supply chain risk, invest in inventory and leverage the benefits of our scale and diversified supply chain. This approach is helping us drive year-over-year growth in the near term, and we believe will strengthen our ability to continue to do so as supply conditions normalize over time.

As we increase sales and demonstrate the quality of our products and reliability of our supply to our customers, we continue to make significant gains in market share. In Q2, we built on our first quarter gains such that our overall market share in both channels on both sides of the border is higher today compared to the prior year. We are reasserting our market leadership in the areas where we are traditionally strong such as U.S. food service and Canadian retail and making headways in the areas for targeted growth, such as quick service and casual dining and U.S. retail.

We are performing particularly well in the premium and value end of the pricing spectrum and anticipate these offerings will continue to have significant appeal to consumers given current economic headwinds. With another strong quarter under our belt, we are increasingly confident in our ability to deliver adjusted EBITDA growth. And despite the challenges of our operating environment, I am optimistic about the opportunity ahead as we execute against our strategy to become a North American leader in branded value-added seafood.

I will now hand the call over to Paul to review our financial performance, I will speak to you again shortly to provide more color on our activities during the quarter and outlook for the year ahead.

Paul Jewer

Thank you, Rod, and good afternoon, everyone. Please note that all comparisons provided during my financial review of the second quarter of 2022 are relative to the second quarter of 2021, unless otherwise noted. Sales volume increased in the second quarter by 8.4 million pounds to 58.8 pounds. In our foodservice business, sales volume was higher due to strong demand for our products from our customers and supported by reduced COVID-19 restrictions on the company’s foodservice customers in 2022 as compared to 2021.

The increase in sales volume was also due to growth in our retail business due to marketing efforts and increased sales in newer product lines and new business in both foodservice and retail with almost no lost business. These increases were partially offset by the impact of global supply challenges on raw material supply to North America. That impacted the company’s sales volumes by an estimated 4 million pounds or 6.8% in the second quarter.

Sales increased in the second quarter by $63.7 million to $253.5 million, reflecting higher sales volumes discussed previously as well as pricing actions related to inflationary increases on input costs. In addition, the weaker Canadian dollar in the second quarter of 2022 compared to the same quarter of 2021 decreased the value of reported U.S. dollar sales from our Canadian dollar-denominated operations by approximately $2.6 million relative to the conversion impact last year.

Gross profit increased in the second quarter by $11.9 million to $56.3 million, and gross profit as a percentage of sales decreased by 120 basis points to 22.2% as compared to 23.4% in the second quarter of 2021. The increase in gross profit dollars reflects the higher sales volume and pricing actions, as mentioned previously.

The decline in gross profit percentage was largely driven by the impact of inflation as we took pricing action to cover higher input costs. In addition, the weaker Canadian dollar decreased the value of reported U.S. dollar gross profit from our Canadian operations in 2022 by approximately $600,000 relative to the conversion impact last year.

Adjusted EBITDA increased in the second quarter by $5.7 million to $25.3 million, and adjusted EBITDA as a percentage of sales decreased to 10% compared to 10.3%. The increase in adjusted EBITDA is a result of the increase in gross profit, partially offset by the increase in net SG&A expenses and in distribution expenses.

In addition, the weaker Canadian dollar decreased the value of reported adjusted EBITDA in U.S. dollars from our Canadian operations in 2022 by approximately $200,000 relative to the conversion impact last year. Reported net income increased in the second quarter by $11 million to $19 million and diluted earnings per share increased by $0.31 to $0.54. The increase in net income was largely due to the increase in adjusted EBITDA and a decrease in share-based compensation expense, as well as $10 million from insurance proceeds that were received during the second quarter of 2022, which are described in the financial statements.

Excluding the impact of certain non-routine and noncash expenses that are explained in our MD&A, including the $10 million insurance proceeds discussed earlier, adjusted net income in the second quarter of 2022 decreased by $400,000 or 3.8% to $10 million, and correspondingly, adjusted diluted earnings per share decreased $0.01 to $0.29 compared to $0.30 in the same period in the prior year.

Turning now to cash flows from operations in the balance sheet. Net cash flows provided by operating activities in the second quarter of 2022 increased by $3.4 million to an inflow of $9.3 million compared to an inflow of $5.9 million in the same period in 2021 due to the increase in net income as discussed earlier, as well as lower interest and income taxes paid, offset by changes in noncash working capital.

During the second quarter, the company put our financial flexibility and capacity to work investing and, in some cases, prepaying for inventory to manage supply chain disruptions and support service levels for our customers. This impacted the company’s noncash working capital.

Net debt at the end of the second quarter of 2022 decreased by $1 million to $294.2 million compared to $295.2 million at the end of the first quarter, primarily reflecting lower long-term debt and lease liabilities, partially offset by higher bank loans.

Net debt to adjusted EBITDA was 3x at July 2, 2022, compared to 3x at the end of fiscal 2021. In the absence of any major acquisitions or unplanned capital expenditures in 2022, we expect this ratio to be slightly below the company’s long-term target of 3x at the end of fiscal 2022.

I will now turn the call back over to Rod for some final remarks before opening up the call to questions. Rod?

Rodney Hepponstall

Thanks, Paul. As the numbers demonstrate, our strategy is working and our business is operating effectively and efficiently. We have proven our ability to withstand significant pressure in an operating environment. Our job is now to stay the course and to maximize every opportunity to demonstrate the High Liner Foods value proposition to our customers and consumers.

This means that, we will continue to leverage our competitive advantage to expand distribution and position High Liner Foods for ongoing growth once supply normalizes. We successfully expanded distribution in U.S. foodservice and U.S. retail during the second quarter and are confident that there is more to come as customers continue to seek out the quality of our products, especially branded value-added and the reliability of our supply.

We will also continue to work with our foodservice customers to find innovative ways to feature seafood on the menu. We’re excited about the potential to demonstrate how we sell — how well seafood can fare in QSR and are actively exploring menu innovations with our customers.

In the second quarter, this led to a new partnership with a leading QSR customer with a limited time menu offer that is in the market right now.

We will keep investing in our brands, value-added offering in support of our growth strategy and in recognition of growth potential of our High Liner quality products. In foodservice, our branded value-added products continue to help ease the pain related to the tight labor market on both sides of the border.

Operators are drawn to products that deliver value and convenience to them without sacrificing taste or menu appeal for customers. For example, we are having particular success converting operators to branded value-added products with our best-selling Country Style cod, Alaskan pollock wings and breaded shrimp.

On the retail front, our branded value-added products gained popularity during the pandemic, and we believe that consumers now have a better appreciation of how easy it can be to enjoy restaurant quality seafood at home. In an inflationary environment, we anticipate that, that appeal of an elevated dining experience at home will continue. Our value-added offering isn’t only for premium — for the premium end of the market. With brands like Fisher Boy, we are also able to capture consumers motivated by price point and convenience. We have recently expanded our reach into the segment of the market through a leading U.S. discount chain.

To date, we have rolled out products such as our Fisher — as our fish sticks and popcorn shrimp to approximately 7,000 stores with an expected near-term growth of 10% beyond that. The partnership with the discount retailer is well-timed given the inflationary environment, and we are excited to offer quality seafood at affordable prices for the most cost-conscious consumer.

To further support our marketing position in this regard, we are offering new pack sizes and price points to attract shopper seeking value in other major retailers. We will continue to double down on what is working. From a product perspective, this means expanding distribution on our best-selling products and working to replicate that success.

Right now, our Canadian test of our successful Sea Cuisine skin-pack line is in market with selected locations of one of our major customers. This initial reaction has been extremely positive. We have the benefit of experience with this brand and are applying insights with respect to demographic appeal and consumer purchase patterns to inform our market test and rollout patterns.

For now, we are trialing three products: our best-selling Potato and Herb Crusted Cod, Honey Chipotle Salmon and Teriyaki Sesame Salmon. We expect the market trial to continue until the end of the year, and we begin to expand distribution strategically in early 2023.

We will continue to support our brands with marketing dollars and e-commerce initiatives. We are active in this regard in Q2 and the timing served us well because many others in the industry have eased off promotional activity due to the lack of supply.

Our approach has been extensive, covering national television, online paid search advertisement, social media and influencer engagements. And it almost goes without saying that we are dedicated — we have dedicated significant time and resources to mitigate ongoing supply chain risk. When it comes to our supply chain, there is no doubt that the investments we have made over the past five years to drive the efficiency and the global integration is a competitive edge for us today in today’s market.

Our team are doing tremendous job at turning a time of supply constraint into opportunity for our business. The strength of our balance sheet enables us to continue to invest in inventory. Nonetheless, significant challenges with the global supply chain persists, and we are not immune from the impact. As Paul mentioned, once again, we are unable to fulfill fully satisfy demand of our products in this quarter. The overhang of uncertainty regarding the future supply chain remains.

We are fortunate to have the diversity and relationships in place to help us navigate this and believe that ongoing work to invest in inventory, drive continuous improvement and further advance diversification will continue to serve us well.

Lastly, we will continue to realize our purpose to reimagine seafood to nourish life and maintain a steady supply of seafood across North America. We will continue to use our purpose to guide all aspects of our business from future innovation to how we engage with our stakeholders. It is an exciting time to be part of High Liner Foods, and I look forward to building on our momentum in the third quarter and beyond.

With that, I will wrap the call up once again to reiterate my confidence in our ability to deliver another year of adjusted EBITDA growth.

I will now turn the call over to the operator for questions-and-answer period. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from George Doumet at Scotiabank.

George Doumet

Congratulations on a really good quarter. I was just wondering if you can maybe give us a little bit of color on those 8 million pounds increase in terms of volumes. How much of that came from foodservice? I think you spoke to retail, so maybe some color there. Are you seeing at all any demand destruction or trade down either at retail or food service from the higher pricing?

Paul Jewer

Yes. No, at this point, George, thankfully, we aren’t seeing any increase in demand. In fact, demand continues to exceed our expectations, which is partially what’s leading to the shortages that we talked about. And the good news is we’re seeing increases in volume across both retail and foodservice. Foodservice, stronger than retail. We talked about, in particular, the recovery from COVID and the strong demand that we’re seeing for our products, but really pleased with the performance in both channels.

George Doumet

Okay. And you used to give us a little bit of a breakdown in terms of where foodservice sits versus pre-pandemic levels in the past. Can you maybe share that with us today?

Paul Jewer

Yes, we’re essentially just slightly below 2019. We’ve gotten to the point now where the recovery has allowed us and our performance has allowed us to get to that level.

George Doumet

Okay. And more of a general question. Just wondering to what extent you’d be able to hold price in the eventuality that we see kind of substantial deflation in our input costs over the next little bit.

Rodney Hepponstall

Well, I think that has a number of factors in it. Number one, we believe that we’re driving real value for our customers and the price value equation is significant. I think that depends on what the global supply chain looks like, right? As — our supply chain has truly proven to be a competitive advantage and kept our customers in stock with product where our competitors have struggled a bit more, we will certainly support our ability to maintain pricing levels in — even in a deflationary environment.

George Doumet

Yes. I guess my question was related more to like featuring a promo. Like, I mean, if you can talk to the level — to what extent that can come back if it does or any ability to maybe hold margins in that context?

Paul Jewer

Yes. Certainly, in retail, George, there will be an opportunity, we hope, for us to continue to promote our products and reinvest in the opportunity to grow volumes in that channel. That will be the case if we had the opportunity to do so with lower costs.

George Doumet

Okay. And just one last one for me, Paul. Your leverage guidance suggests another year of, like, I guess, quite a bit of working capital requirements. Can you maybe — I know it ebbs and flows but can you maybe talk to how we should think of that working capital requirement or any number that you want to share with us for the year?

Paul Jewer

Yes. I mean at this stage, George, I think we’ll see some improvement in our working capital position by the time we get to the end of 2022. And that’s what’ll allow us to be slightly better than where we are today from a leverage perspective. 2023 at this stage, too hard to call. I mean our goal, obviously, is to get to a better supply position and if there is some deflation, then obviously, that’ll support lower working capital levels as well.

But we see no reason at this stage in 2023 that we can’t continue to drive leverage lower and continue to drive cash flow higher.

Operator

Next question is from Kyle McPhee at Cormark Securities.

Kyle McPhee

Just to start, can you quantify more specifically what the year-over-year pricing gain was in Q2?

Paul Jewer

In terms of how much of the sales growth was driven by inflation versus volume? So I think you see from a…

Kyle McPhee

Yes. Yes, the inflation in the revenue. What was that number?

Paul Jewer

Yes. So the volume growth was 8.4 million pounds in total and our sales dollars were up $63.6 million. So volume was up 16%. Sales were up 33%. So you can see the gap there, Kyle, in terms of how much was driven by the substantial inflation. And that inflation made its way into the cost goods line and into the sales dollars line. And that’s why you saw that little bit of compression in margin as a percentage.

Kyle McPhee

Okay. Okay. So you’re implying the entire volume versus revenue dollars is gapped with pricing?

Paul Jewer

Right. Yes.

Kyle McPhee

Okay. And then are there more pricing gains to come? Or are upcoming quarters — or the pricing gains that show really just the kind of year-over-year lapping dynamic from prior pricing gains?

Paul Jewer

Yes. Most of the cost increases we’ve seen are year-over-year cost increases and we’ve had the price to reflect that. At this point, we’re certainly hoping that we won’t have to do more price increases or face higher cost increases. And — but we’ll continue to monitor that closely and look for some opportunities, if there is deflation, to continue to look for opportunities to drive more value, as Rod spoke of, and drive more volume in the business.

Kyle McPhee

Got it. Okay. And then I just wanted to dig in to your volume growth. I know regaining of the prior COVID drag and foodservice channels was part of that. But by my math, that really only explains about 70% of the volume growth you reported. So it looks like you still have meaningful organic growth from other sources as well and kind of — it worked out to low to mid-single-digit range. So does that sound about right? And Rod, you walked through a lot of the growth drivers, but what are the kind of the main volume growth drivers that explain this math? Like the main thing that…

Paul Jewer

Yes, I think there’s — yes, yes, a couple of things we’d highlight for sure. Innovation was very good in the quarter. So that drove new product growth. And as I mentioned, we had very little in the way of lost business, so that was all incremental. The other thing that I’d highlight is we did have distribution gains. And we talked about a couple of really strong customer examples where customer acquisition and distribution gains supported the volume growth as well.

Rodney Hepponstall

Yes. If I can add. I think there’s one other thing. We’ve talked about this over the last several years with us really positioning ourselves with the right customers for growth, particularly in the foodservice market. We are partnered with the top 4 leading broadline distributors in both their strategic partner and our brand as well as their brand. And if you look at their performance, they are taking share in the market. So by the nature of the right customer strategic alignments, we’re growing as well. So we can — expect that to continue.

Kyle McPhee

Okay. And just on the first part of that question, does that kind of math sound right? That beyond just the COVID lapping gains, it’s kind of low to mid-single-digit organic volume growth?

Paul Jewer

Yes, I think that’s right. Yes, there was some COVID impact, but that wasn’t what we would point to as the only reason for our growth. We’re very pleased with our commercial performance and the demand that we’re seeing in the business.

Operator

Next question comes from Sabahat Khan at RBC Capital Markets.

Sabahat Khan

Great. I guess maybe just starting with a bigger picture question. I think over the last couple of years, the company has undergone quite a bit of a transition. And if you were to comment on, and I know that we’re coming out of the pandemic, sort of what inning we are in this sort of transformation versus when you think kind of going a bit more of a forward foot, a bit more aggressive with the growth initiatives, whether it’s M&A, whether it’s other initiatives. Where would you say we are, I guess, in sort of the repositioning of the business that you’ve kind of undertaken over the last couple of years?

Rodney Hepponstall

Yes. Sabahat, I appreciate the question, although I’d put it in different context. Although I’m baseball fan, it does contemplate a completion at the endgame. So we’ll — we’re well on our way. I would say, if we think about this as a journey, we are going to continue to push ourselves to be the leading branded value-added seafood supplier in North America. I think if we think about how we’ve positioned the organization, and to your point, are positioned to accelerate our growth, I think you’re seeing that now. The organization has been absolutely aligned from the One HLF which was our — one of our initiatives to maximizing our supply chain and all the work we’ve talked about over the last three, four years.

So if we think about the work we did in our supply chain, specifically three years ago, that has really positioned us and proven to be an absolute competitive advantage. If you think about the changes we’ve made in our sales and marketing area, that has allowed us to take that strength from a supply chain perspective and show up very, very differently on our customers, not only in how we bring innovation to the marketplace, but also how we engage with our customers, using far more analytics and fact-based propositions to help drive and increase consumption of seafood in both the retail and foodservice channels.

So I would say, while I’d love to tell you that we’re midway on our journey, I think that we’re probably maybe a third-way of a continuous journey. So I’m not sure there’s even a factual number to give it, but we feel good about where we’re at.

Paul Jewer

Yes. And Sabahat, just to add to that, in addition to all we’ve accomplished to get to this level of organic growth that the numbers clearly reflect, the other part of your question was other opportunities for accelerated growth, M&A, and we’re in a position to really move on that if the right opportunity presents itself at the right price and it aligns with what we’re doing from a strategy perspective. We’ve clearly got nothing to announce or talk about, but we’re well prepared should those opportunities present themselves.

Sabahat Khan

And then I guess just following up on this last comment there. I guess are there any obvious areas of your business that you sort of identified that, look, whether it’s retail, certain category or it’s foodservice or geography, like, is there — is it kind of the categories to speak to that and historically involve with? Or has kind of the focus shifted as we come out of pandemic? Maybe there’s different consumption trends. Just kind of your perspective on where you see the opportunity, where you see, maybe, there is a piece to add to the puzzle here.

Rodney Hepponstall

Yes. I think that’s one of the beauties of our business. We are not short of opportunities. If we take a look at our retail — Canadian retail business, that’s certainly around driving consumption and frequency of purchase. There’s significant plans underway for that. If we look at our U.S. retail business, it’s about distribution gains and partnering with new exciting customers, and we’ve talked about that. And we’ve — quite frankly, with this discount retailer, I think that’s a great example of executing against the playbook.

In our foodservice business, while we feel extremely confident about our position and continue to take share in the marketplace, we have opportunity, as outlined in segments like QSR, where we historically have not been the leader in that marketplace. But with the evidence on this most recent LTO, which is surpassing our early expectations, we’re proving to be more effective in our targeted approach. So I think there’s ample opportunity across all legs of our business.

Paul Jewer

Yes. And just to add to that, Sabahat, clearly, with the size of the U.S. market, that will be our larger growth opportunity. You see the strength of our presence in Canada. We’ve got a very strong presence in U.S. foodservice that we know we can continue to grow upon, and we’ve got lots of opportunity in U.S. retail.

Sabahat Khan

Okay. Great. And then, I guess, just kind of last question. I think, Rod, when you sort of joined the company kind of in the initial quarters, call it, erstwhile, we saw the benefit in the results kind of on the cost side, things are being streamlined. Based on what you see in the business today, should we expect the combination of both revenue growth and sort of continued margin improvement? How should we think about the algorithm to get sort of the EBITDA and earnings throughout over the next one, two years?

Rodney Hepponstall

Yes. There’s a question. Early on, we focused on maximizing the opportunity to drive bottom line growth while making the appropriate adjustments in our product portfolio and customer portfolio. I would say we are certainly now in a place where we intend on both driving top line and bottom line growth. We have an emphasis on continuous improvement, and we’ll attempt to drive — as we have proven to, over the last several years, drive efficiencies through our business that will help us either secure new business with the right customers or expand margins.

Sabahat Khan

So just kind of based on current visibility, you do see opportunities for kind of ongoing organic growth over the next — as you come out of the pandemic and things normalize?

Rodney Hepponstall

Without questions. Yes.

Operator

Thank you. There are no further questions. You may proceed.

Rodney Hepponstall

Thank you. I’d like to thank you for joining the call today. We look forward to updating you with our results for the third quarter of 2022 on our next conference call in November.

Please stay safe and well.

Operator

Ladies and gentlemen, this concludes our conference call for today. We thank you for participating, and we ask that you please disconnect your lines.

OceanaGold Corporation (OCANF) CEO Gerard Bond on Q2 2022 Results – Earnings Call Transcript

OceanaGold Corporation (OTCPK:OCANF) Q2 2022 Earnings Conference Call July 28, 2022 5:30 PM ET

Company Participants

Sabina Srubiski – Investor Relations

Gerard Bond – President and Chief Executive Officer

Scott McQueen – Chief Financial Officer

Scott Sullivan – Chief Operating Officer, Asia-Pacific

David Londono – Chief Operating Officer, Americas

Brian Martin – Senior Vice President, Business Development and Investor Relations

Conference Call Participants

Ovais Habib – Scotiabank

Mike Parkin – National Bank

Operator

Good morning and afternoon, ladies and gentlemen. Welcome to the OceanaGold 2022 Second Quarter Results Webcast and Conference Call. [Operator Instructions] Also note that the call is being recorded on Thursday, July 28 at 5:30 p.m. Eastern Time. And I would like to turn the conference over to Sabina Srubiski. Please go ahead.

Sabina Srubiski

Thank you, Sylvie. Good evening and good morning. Welcome to OceanaGold’s second quarter 2022 results webcast and conference call. I am Sabina Srubiski, Director of Investor Relations for OceanaGold. I’m joined today by Gerard Bond, OceanaGold’s President and CEO; Scott McQueen, Chief Financial Officer; Scott Sullivan, our current Chief Operating Officer, Asia-Pacific; and soon to be Chief Technical and Projects Officer; David Londono, our Chief Operating Officer, Americas; Brian Martin, our new Senior Vice President, Business Development and Investor Relations, is taking time to be with his family following the birth of their second child, and we wish them all the best.

Before we proceed, please note that references in this presentation adhere to International Financial Reporting Standards, and all financial figures are denominated in U.S. dollars unless otherwise stated. Also, please note that the presentation contains forward-looking statements, which, by their very nature, are subject to some degree of uncertainty. There can be no assurances that our forward-looking statements will prove to be accurate as future results and events could differ materially. I refer you to the disclaimers, including those on the forward-looking statements in our presentation.

I will now turn the call over to Gerard Bond.

Gerard Bond

Thanks, Sabina. Good evening, good afternoon, good morning, everyone. Thanks for taking the time to dial-in today. I’ve now been President and CEO of OceanaGold for 4 months. And some of you may recall that while I am joining the company, I stated my goals were just safely and responsibly drive improved operating and financial performance, realize the full potential of the company’s growth opportunities and to maximize free cash flow generation, value and returns to shareholders.

In recent months, I’ve met with a large number of our shareholders, some of whom have been strong supporters of OceanaGold for many years. It is clear that our shareholders see the growth and value potential in our portfolio of assets and they are relying on management to execute to plan. So today, I am pleased to report on how we’ve gone in the second quarter and year-to-date, which is very much in line with plan. Also, what we expect for the remainder of the year and to take the opportunity to update you on a few other developments. I described our second quarter results as solid. They were in line with plan and led to a strong first half performance.

As a result, we have been – sorry I just got a backup call from our operator. As a result, we’ve been able to strengthen our balance sheet from where it was at the start of the year with lower drawn debt and then improved leverage ratio. Today, we’re also updating our 2022 guidance. Gold production guidance is unchanged with expected higher gold production from Haile and Didipio, offsetting lower production expected from Waihi. The Didipio’s strong production performance, both year-to-date and looking forward, has also allowed us to increase copper production guidance for the full year.

Our expected all-in sustaining cost has increased by around $100 per ounce or 7.5%, primarily due to inflationary impacts. And we’re now expecting lower total capital expenditures for the 2022 year. Scott McQueen will walk you through our guidance changes shortly. Earlier this week, we announced some of new executive leadership deployments. And today, I’m pleased to announce one more new appointment to the team, our new Executive Vice President, Sustainability. Finally, later in the presentation, I’ll cover off on our delisting from the ASX, which was separately announced this morning and the planned move of our corporate headquarters to Vancouver in coming months.

First, let’s review the highlights of the second quarter results. Just before I do, operator, can you just check that I’m online. I’ve got the calls from the back-up line from you. Is everyone able to hear me?

Operator

Yes, so you’re coming in nice and clear.

Gerard Bond

Fantastic. Okay. Well, everyone can take comfort that the backup line also works. So just to start with the highlights of the second result – second quarter. The health and safety of our workforce is our top priority. And at the end of the second quarter, we had a total recordable injury frequency rate of 2.7 per million hours worked, which is an improvement from the previous quarter and a good reflection of the care being taken across our business to keep each other safe. Our injury rates are currently highest at Macraes and as part of the focus to reduce injuries there, the site held 2 safety stop days in the quarter to make clear our commitment to a safer workplace.

In the quarter, we also commenced Safety Maturity Assessments at all of our sites, which have now been completed. And what these will do, will feed into the development of a new 3-year safety strategy that will look to make all of our workplaces even safer. COVID-19 had a variable impact across our business during the quarter. There was a quarter-on-quarter increase in COVID-related absenteeism at Macraes, where 70% of the workforce experienced COVID-19 related absenteeism during the quarter.

At Waihi, the level of COVID-related absenteeism was down quarter-on-quarter, but still disrupted the attendance of around one-third of the workforce in the period. Haile had no COVID-related absenteeism, and Didipio reported only 1 case in the quarter. Going forward, we expect COVID-19 related absenteeism to persist in New Zealand over the rest of this year, and we’ll continue to monitor and manage COVID-related risks at all of our operations.

On to production. Consolidated gold production in the second quarter was 112,000 ounces, in line with our full year plan. As we said at the start of the year, we anticipated that the second and third quarter production for 2022 would be softer than the first quarter, mainly due to grade, before strengthening again in the fourth quarter. Second quarter consolidated cash costs were $1,903 per ounce and our all-in sustaining cost was $1,430 per ounce, reflecting both lower production and also inflationary pressures, mainly higher fuel and energy prices. Lower copper prices also impacted our unit costs. Year-to-date, our all-in sustaining cost is $1,243 per ounce.

For the third quarter in a row, we delivered positive free cash flow. This enabled us to repay $50 million of drawn bank debt in the quarter, which further strengthens our balance sheet and we will reduce future financing costs. Our leverage ratio was below 0.4x at period end. Free cash flow generation, balance sheet deleveraging and our return to paying dividends in due course remains an important focus for the company. And this allows us to both invest in high-value growth opportunities whilst also providing a return to shareholders.

Because it’s so important, I will touch on the delayed receipt of the Haile SEIS and the associated permits. We’ve been recently advised by the regulators that the SEIS is in the very final stage and is close to being published. And I know I’ve been saying this around 2 months now. Well, ever since I’ve been told by the regulators that it was close to being published. However, all indications are, and our expectation is that the SEIS will be issued imminently. David Londono will talk about this later in the call.

First, I’ll just hand over to Scott McQueen to provide an overview of our financial results. Scott?

Scott McQueen

Thank you, Gerard, and hello, everyone. Starting on Slide 5, which includes an overview of our financial results, as Gerard mentioned and we previously flagged, the second quarter was not expected to be as strong as the first due largely to changes in the grade profile at Haile. Nonetheless, it’s pleasing to report that the second quarter results were in line with expectations and as a group reflects continued delivery of the plan. As illustrated on the slide, our second quarter revenue came in at $229 million. EBITDA was just on $75 million, while our adjusted net profit after tax was $32.5 million. This equated to $0.05 per share fully diluted, a slight beat when compared to analyst consensus of around $0.04 per share.

It’s worth noting that the primary adjustment to earnings for the quarter was a $12 million unrealized non-cash FX translation loss on the revaluation of U.S. dollar debt held by our New Zealand subsidiaries. While this is negative noise in the P&L during the quarter, the lower exchange rate does provide real benefits in terms of costs and cash flow through lower New Zealand dollar denominated expenditure in U.S. dollar terms.

Operating cash flow for the quarter was just on $80 million. While this was lower than the first quarter, it is a significant improvement over the same period last year. Net operating cash flow before working capital movements was $0.13 per share fully diluted, which was in line with analyst consensus. The company generated a further $9 million of free cash flow in the second quarter, lifting first half free cash flow to a strong $72 million. This could have been stronger, but weather during the final week of the quarter delayed our final 3,000 ounce ore shipment out of Didipio.

Our solid financial performance has translated to a strong balance sheet. As at 30 June, the company held immediately available liquidity of just over $230 million, including $150 million in cash and $80 million in undrawn credit facilities. This is after our $50 million discretionary debt repayment, which we made in June. Net debt, inclusive of equipment leases as at the June 30 stood at $156 million, a 34% reduction relative to December 31, 2021.

Moving to Slide 6, which provides an overview of our updated 2022 production and cost guidance, our delivery to plan across the first half has provided a foundation from which we were able to reaffirm our 2022 consolidated production guidance as we continue to expect to produce between 445,000 and 495,000 ounces of gold over the full year. However, as Gerard mentioned, like many others in our sector, we have seen material inflation-related increases in key input costs across the business.

The largest single driver being increased diesel costs driven by higher oil prices. However, we have also seen notable increases to varying degrees across our operations and the cost of energy, explosives, mechanical parts, consumables, labor and services. While each operation continues to face some slight specific cost inflation challenges, many of which we can directly control. Our focus remains on what we can control. Cost optimization through operational productivity and efficiency improvements. We have a number of programs in progress to do this. As a result of these inflation impacts, combined with reduced copper and silver prices impacting expected by-product revenue, the company is increasing full year consolidated all-in sustaining cost guidance by $100 per ounce or around 7.5%. As illustrated, we now expect our full year 2022 consolidated all-in sustaining costs to range between $1,375 and $1,475 per ounce. This is, of course, subject to achieving our production guidance and the ongoing direction of cost inputs, oil prices and copper prices.

Looking into each assets, how it’s pleasing to report that we are increasing the full year gold production guidance by around 15,000 ounces to 165,000 to 175,000 ounces. This increase reflects the strong production across the first half of 2022, driven by consistent operations and a positive reconciliation of all tons relative to plan. As higher production, combined with the sustaining capital reductions has allowed us to maintain Haile’s all-in sustaining cost guidance unchanged at $1,500 to $1,600 per ounce despite the inflationary cost pressures experienced at Haile to-date.

While it also represents no change in total cash spend, we have included a $20 million reclassification of waste mining costs, which were previously included as capitalized as part of sustaining capital, which we now expect to expense directly to mining cash costs. Production profit at Haile is expected to be marginally lower across the third quarter as mining continues in lower grade zones at the Haile pit before grade and production increases in the fourth quarter. Haile’s all-in sustaining cost profile is expected to reflect the production profile.

Moving to Didipio, where a strong ramp-up and steady progress at full capacity across the second quarter has also allowed us to increase full year production guidance there by 10,000 ounces to 110,000 to 120,000 ounces of gold. Copper production guidance for 2022 is also increased 1,000 tons to 12,000 to 14,000 tons. However, the recent sharp decline in copper prices combined with cost inflation impacts primarily grid power has led to an increase of Didipio’s all-in sustaining costs to $600 to $700 per ounce, up from $500 to $600 previously. Gold production is expected to taper off slightly in the third quarter, based on the grade profile before returning to previous quarterly production rates in the fall.

We are reaffirming Macraes full year production guidance at 145,000 to 155,000 ounces of gold as the operation makes steady progress against its plan. However, due to inflationary cost impacts there, we are increasing the site all-in sustaining cost to $1,450 to $1,550 per ounce, up from the $1,300 to $1,400 previously. Gold production is expected to be spread evenly throughout the remaining two quarters of the year at Macraes.

We are revising guidance at Waihi, due to reconciliation and productivity challenges experienced in the first half. We now anticipate 2022 full year production of Waihi to be between 35,000 and 45,000 ounces of gold. Based on this lower production, all-in sustaining costs are now expected to range between $2,000 and $2,100 per ounce. This is despite some cost reductions and deferral of sustaining capital the team have identified in response to the first half challenges. On a positive note, the production in the second half at Waihi is expected to be significantly stronger than the first half at a lower corresponding all-in sustaining cost than it’s been reported today.

Moving to Slide 7 which provides a visual summary of the changes to our all-in sustaining cost guidance for 2022. What we are showing on this slide is indicative terms from left to right are our estimates that the drivers have changed from the midpoint of original all-in sustaining cost guidance per ounce to the midpoint of our updated sustaining cost per ounce. As mentioned, diesel is the largest impact, which affects our open pit operations most acutely. And combined with energy costs, which have been most materially impactful at Didipio, where grid tariffs have increased given the coal and gas mix included. However, the inflationary impact has been broadly felt across a range of inputs, including but not limited to, explosives, mechanical parts on mobile and fixed equipment, general consumables, labor and services.

As represented by the middle green bar, costs have benefited from a significant decline in the New Zealand dollar exchange rate, meaning in U.S. dollar terms, our New Zealand dollar denominated costs are reduced. As a significant copper and silver producer, we are also forecasting the recent metal price reductions to deliver lower revenue and, therefore, lower by-product credits across the second half. And finally, we have ignoring the reclassification of mining costs, some modest reductions in sustaining capital, mainly at Waihi. While we can’t control inflation impacts, we are focused on productivity and efficiency improvements and procurement excellence to mitigate the impact.

Moving onto Slide 8 and our capital expenditure, in addition to revising our production and cost guidance, we are also revising our capital expenditure with several reductions expected across the full year. Starting with Haile, where we are reducing total capital expenditure by approximately $20 million to between $145 million and $165 million, this mainly reflects the previously mentioned reclassification of waste material included as capitalized mining now moving into mining cash costs. At Waihi, we have reduced both sustaining and growth capital, which combined represent a $10 million reduction in guidance to between $50 million and $60 million. Both our deferrals as a team focused on operational delivery, the largest change being deferral of a planned power upgrade, not required at current or expected operating levels in 2022.

A small reduction in growth capital is also included at Macraes, mainly the result of less than planned allocation of development costs at Golden Point Underground to growth capital. Timing is important to touch on, also given the lower year-to-date expenditure relative to our full year guidance. This reflects the second half weighting of our capital plans, especially at Haile and to a lesser extent, to Didipio, where it reflects the ramp up of capital projects. At Haile, the weighting of CapEx to the second half reflects the timing of the SEIS and associated permits were approximately $35 million to $40 million in sustaining capital and $30 million to $35 million in growth capital expected in the second half of the year, but is dependent on the timing of the SEIS.

I will now turn the call over to our Chief Operating Officer, Americas; David Londono, to talk about the Haile operation.

David Londono

Thank you, Scott, and hello, everyone. The Haile operation has maintained a low injury frequency rate over the last 12 months and reported 1.7 recordable injuries per million hours at the end of the second quarter of 2022. I’m very proud of the team for continuing to place the health and safety of all of us. Haile continues to deliver the plan with mining at Ledbetter phase 1 completed the first quarter, after which mining transitioned to a lower grade pit in the second quarter. As a result, second quarter production was 37,958 ounces, a decrease of 37% compared to the first quarter. Year-over-year, this represents a 34% decrease also due to lower mined grade during the period.

Second quarter site all-in sustaining cost was $1,432 per ounce with cash cost of $905 per ounce. Quarter-on-quarter, the 32% increase in all-in sustaining costs reflects the lower grade mine, resulting in lower production and sales and taking into account the inflationary cost impact that we previously mentioned. Total mining was 21% lower quarter-on-quarter as a result of mining at Haile pit, which is consistent with the mine plan. This was partially offset by positive reconciliation on ore tons from the Haile pit with ore found in areas of historical workings that were assumed to be voids in the resource model.

Mill throughput continues to improve as a result of the operational improvements such as increased ore fragmentation and mill utilization. Total mill feed was 29 million tons, 3% higher than the prior quarter. It is important to note that these operational results were achieved in conjunction with the planned shutdown that took place in the quarter. This included some maintenance activities scheduled for completion in the fourth quarter of this year. Works completed in the second quarter included a full SAG reline, ball mill gear box alignment, precautionary non-destructive testing of both mills, which found no issues as well as crusher works.

Progressive carbon-in-leach work which been ongoing over the past 2 years was also completed during this shutdown. While these activities did result in increased maintenance costs in the second quarter, this will reduce fourth quarter planned maintenance, increasing availability and utilization of the examining circuits. Average mill feed gold grade of 1.67 grams per ton was approximately 34% lower quarter-on-quarter, mainly due to materials supplied from Haile pit Phase 1 being at a lower average grade, which is consistent with the mine plan.

Mining costs increased 5% quarter-on-quarter, primarily as a result of higher consumable prices, including diesel and mechanical parts. On planned maintenance work on the mobile fleet also contributed to the variance. Reducing our planned maintenance continues to be a primary focus of the Haile management team. Processing unit costs per ton milled increased 5% quarter-on-quarter due to higher costs related to reagents and mechanical and electrical parts. These inflationary impacts were partially offset by lower consumption of reagents, which was achieved through a more effective ore blended plan. This plan was implemented to optimize throughput and contract the rising cost of the reagents that we have seen.

We’ve been able to optimize blending through improved communication between processing, mine operations and mine planning using long and short-term planning to anticipate our characteristics. This, along with blast fragmentation is helping improve the mill’s performance. Consistent with performance and land utilization has also led to optimal reagent irrespective of mill. Additionally, by effectively using the advanced control system to determine reagent needs, based on throughput and ore characteristics, we’re able to reduce wastage, and therefore, better control the volume of reagent uses. The technical team continuously conducts and constantly collects data to analyze and better predict how recovery can be maximized without wasting reagents.

Now for an update on permit at Haile. During the second quarter, we received a National Pollutant Discharge Elimination System permit and the construction permit for the water treatment plant expansion. This allows us to increase water discharge rates to 3.5 million gallons per day, up from 1.75 million gallons. Expansion of the water treatment plant is well advanced. And we expect these to be fully commissioned by the first half of next year. The company views this as a substantial development, which will allow the operations to better manage water levels, thereby reducing operational risk and improving operational efficiency.

I will also reiterate that the publication of the final SEIS is imminent. As we have been advised that the document is in the final stages of formatting before it’s ready to upload into a national register and go into production for publication. The final SEIS, the record decision and all related credits are required to start development for the Haile underground mine and to expand the operating footprint to allow for additional potentially acid generating waste containment facilities, Our product facilities and expanded tailings storage facilities.

For this past year and while this permit has been progressing, we have been reviewing and implementing alternatives to reduce any potential impacts to the delay it has caused.

As an example, we were using more accurate interpolation techniques that help us reduce the volume of PAG materials, expanding the life of the current storage areas. We have also modified and designed the waste PAG area to allow for equipment to continue excavations in the areas that are within the current permitted area. By reducing PAG drop sizes we have extended the life of the current PAG storage area to the third quarter of 2023. The delay and restate of the final SEIS, the record decision and subsequent terms does not affect 2022 production and has very limited impact on the 2023 mine plan. There is, however, potential for first underground ore production to slip beyond 2023.

I will now turn the call over to Scott Sullivan to discuss the results from Didipio and our New Zealand operations.

Scott Sullivan

Thank you, David, and hello, everyone. After an exceptional ramp-up, Didipio continued its excellent operational performance and operated at its full underground mining rates of 1.6 million tons per annum throughout the entire quarter, while continuing to maintain a strong standard of safety. The site reported one recordable injury per million hours worked at the end of the quarter, and pleasingly, had only a single case of COVID-19 in the quarter.

Didipio maintained steady production and produced 29,269 ounces of gold and 3,794 tons of copper during the quarter. Didipio’s second quarter AISC was $609 per ounce, while cash costs were $519 per ounce. The quarter-on-quarter increase mainly related to lower copper byproduct revenue and higher sustaining capital expenditure. Despite the increase, this operation continues to generate strong margins.

Total material mined in the second quarter was 397,000 tons, a 29% decrease compared to the prior quarter, as during the prior quarter, the operation mined 177,000 tons of material from the base of the open pit related to the Crown Pillar Strengthening Project. The second quarter did see an increase in underground tons mined as a result of achieving full mining results for a full quarter.

Mill feed in the second quarter was 1.06 million tons, an increase of 22% quarter-on-quarter as the mill control expert system came back online in the second quarter after waiting on parts, which arrived late in the first quarter. Mill feed grade was 0.97 gram per ton gold and 0.4% copper, slightly lower than in the first quarter as a result of less high-grade ore being blended during the period. And mill feed composition for the second quarter was approximately 34% from underground ore and 66% from low-grade surface ore stockpiles.

In the second quarter, the company received the amended Environmental Compliance Certificate from the Philippines Department of Environment and Natural Resources. This raised the regulated throughput limit on the Didipio processing plant from 3.5 million tons per annum to 4.3 million tons per annum. The company expects to process approximately 3.9 million to 4.0 million tons this year and will also pursue several operational efficiencies in order to further increase plant throughput into the future.

It’s also important to note that in accordance with the FTAA renewal terms signed in July 2021, Didipio mine made the first delivery of gold dore to the Central Bank of the Philippines following the signing of the purchase agreement between OceanaGold Philippines and the government. And in line with the terms of the FTAA renewal, OceanaGold Philippines shall offer for purchase no less than 25% of its annual gold dore production at fair market price and mutually agreed upon terms to the Central Bank of the Philippines.

Just move on to Slide 13. Macraes continues to work on infilling a stronger safety culture. And during the quarter, reported a total injury frequency rate of 6.6 per million manhours, down from 7.8 in the first quarter. And despite impacts from the workforce from COVID-19-related absenteeism, as previously mentioned on the call, Macraes delivered another steady quarter, producing 36,868 ounces of gold. Production decreased slightly quarter-on-quarter on the lower underground grade mine, resulting in lower mill feed grade, which was partially offset by higher recoveries.

Cash costs were $942 per ounce, while AISC was $1,458 per ounce with the primary driver for the quarter-on-quarter increase being inflationary cost impacts from diesel, explosives and parts and mobile fleet maintenance. Total mining movements increased 3% quarter-on-quarter and were in line with the mine plan. Mining activities occurred in Deepdell, Frasers West, Gay Tan and Innes Mills open pits and at Frasers and Golden Point undergrounds.

Development rates at Golden Point underground during the second quarter continued to be impacted by poor ground conditions encountered as development continued to cross the Golden Point fault at several planned points. During the quarter, the mine plan was re-assessed to reduce the planned number of fault crossings, which is expected to reduce the impact of poor ground conditions on development rates moving forward. In early July, first stope development ore at Golden Point underground was mined. Mill feed increased slightly quarter-on-quarter, despite an increased percentage of hard Deepdell ore being processed during the quarter. Mill feed grade was 0.96 grams per ton gold in the second quarter, which was marginally lower than the first quarter due to average underground grade mined being lower.

Macraes has been in operation for more than 31 years and studies are currently underway to support a resource consent application that would expand Brownfield operations and extend the life of our mine beyond 2028. These studies are expected to be completed in the fourth quarter of this year and we anticipate lodging the resource consent application in the first quarter of 2023.

Moving to Slide 14, on to Waihi. Waihi’s total recordable injury frequency rate increased slightly from 3 to 4.5 per million hours worked given that our priority is to safely deliver production, site management and our people are focused on bringing this injury rate down. Whilst challenges still persist at Martha Underground, the operation did see improved mining rates and reconciliation as mining centered on areas better defined by grade control drilling.

In the second quarter, Waihi produced 8,201 ounces of gold, representing an increase of 21% quarter-on-quarter. This improvement was supported by the accelerated grade control drill program, increased development and improved stoping performance. During the quarter, the first remnant stope was successfully mined and it delivered slightly higher tons and grade than planned, although it took longer than scheduled to mined. Waihi is looking to optimize the remnant mining areas which represent approximately 30% of the resource post-2023, and we expect improved productivities moving forward.

During the quarter, Waihi mined 204,500 tons of material, including 77,600 tons of ore. Mill feed for the second quarter was 78,000 tons, 6% higher than the first quarter and gold recoveries increased 2% quarter-on-quarter as a result of accessing higher grade areas of the mine and process improvements within the plant, including adjusting mill operating parameters to improve grind performance and throughput.

This quarter’s reconciliation of ore mined to reserve was 87% on tons, 82% on grade and 71% on metal. And while the initial Martha Underground mining areas have been challenging from a reconciliation perspective, the grade control drilling data we now have has directed mining into areas of higher confidence. And we expect mining rates will continue to increase over the coming quarters as capital development is re-established and mining schedules rebalanced.

However, there is a risk that annual production rates may not reach levels previously anticipated in the March 2021 Feasibility Study Report. Longer-term production targets will be clarified once the life of mine plan design and scheduling is completed later this year. We still anticipate that Waihi production in 2023 and beyond will be materially higher than 2022. And we are laser-focused on ensuring the redesign, process results and positive free cash flow over the mine’s operating life as we continue to advance the Waihi North project.

Turning to this project. We have lodged the consent application with the Hauraki District and Waikato Regional Councils. The counselors are undertaking a completeness review of the application, which is to be followed by a phase of public consultation. And once completed, the councils will determine the hearing process, formally considering the consent application. Alongside the consent application, the company continues to advance technical studies and exploration at Wharekirauponga to support the delivery of pre-feasibility study. As drilling debate strongly supports further growth of the resource, analysis is being undertaken to better understand mine design opportunities and the optimal target size for the mine’s resource in support of the pre-feasibility study.

I’ll now turn the presentation back over to Gerard. Thanks, Gerard.

Gerard Bond

Thanks, Scott. So all in all, a busy and solid quarter and a big thank you to everyone at OceanaGold for their dedicated hard work to safely and responsibly deliver the outcomes we’ve shared with you this morning.

I thought I’d take the opportunity on the call to cover off some recent announcements. We announced earlier this week a change structure and additions to our technical bench strength at the executive team level. These changes include the addition of Peter Sharp as Chief Operating Officer, Asia Pacific. Peter is a very experienced mining executive with over 25 years of industry experience having previously worked with Newcrest Mining, South 32 and BHP. He’s an excellent safety, people and business leader and will be based in Brisbane when he commences with us in October 2022.

David Londono, previously Executive General Manager of the Haile Gold Mine in the U.S. has been promoted to be Chief Operating Officer, Americas. David has done a tremendous job at Haile so far, and this is a well-earned promotion as he continues his transformation of Haile. Scott Sullivan, previously our Chief Operating Officer, will take on the new Chief Technical Projects Officer role in October and will lead Group-wide technical functions and provide strategic direction on studies and execution of major projects across our business. There is an enormous amount of data here and Scott’s deep technical expertise combined with his understanding of our business makes him a clear choice of person for such a role.

Craig Feebrey, our current EVP Exploration and Development, will return to his previous role of Exploration EVP to focus fully on the company’s mineral resources, exploration portfolio and future exploration opportunities. This is a critical area for any gold mining company, and I’m pleased to have someone of Craig’s experience and capability in this role. And today, I’m pleased to advise that Megan Sersi is joining us as Executive Vice President of Sustainability towards the end of this year. Megan is a highly experienced executive in this area and brings to the role particular expertise in social performance, human rights, climate change, environment and considerable stakeholder engagement experience on large and complex projects. I’m delighted that she’s joining the team. And I’m really pleased to get these critical leadership roles filled by highly experienced and committed leaders. I look forward to them making a strong positive impact and to help accelerate the realization of the company’s strategy.

Today, you’ll also likely have seen that we announced we’ve received in principal approval from Australian Stock Exchange of our request to delist from the ASX. There are a number of drivers of this decision, mainly that the level of shares held and traded by the ASX has reduced at very low levels. And there is a cost and operational simplification benefit for us to consolidate our trading on the one larger and more liquid exchange, the TSX. Though delisting occurs relatively promptly, we’re taking great care to ensure that share entitlements listed on the ASX can transition to the TSX as seamlessly as possible or have access to a share sale facility to allow a fully reflective share price to be obtained by anyone needing to sell their ASX shares at no cost.

Separately, we also announced today that I expect to be relocating to Vancouver, Canada in coming months, which in due course, will become the corporate headquarters for the company. This change is driven by the fact that most of our equity analysts, most of our shareholders, most of our trading is done in North America. The time zone is also more favorable for coverage for all of the sites in our portfolio.

Finally, I’d like to close out the formal presentation by reiterating our focus on delivering value to shareholders. The strong first half results prove that our business sits on solid operational and financial foundations. However, we have plenty of opportunities for improvement, which is particularly important in the current context of increased input costs and low, they are still very attractive metal prices. Our core focus remains working safely and responsibly, managing risks and executing on business plans in an operationally disciplined way, optimizing production and lowering cost to maximize the generation of free cash flow and investing capital and using our exploration capability wisely to deliver a profitable growth and attractive returns to shareholders.

I’ll now turn the call back to the operator to take any questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And your first question will be from Ovais Habib at Scotiabank. Please go ahead.

Ovais Habib

Hi, Gerard and OceanaGold team. First of all, please pass my congrats to Brian. And then going forward, just a couple of questions from me, so just number one, Gerard, in regards to the SEIS and how you’ve consistently pointed out towards the delay in receiving the permit not impacting 2022 guidance. At what point do you think this starts to impact 2023 guidance from where we are sitting at right now? And second part of the question is, if you do receive the permit in the next week or so how fast can you start the development work at Haile?

Gerard Bond

Yes, thanks, Ovais. I’ll go ahead and answer the question. David, if you can supplement anything that I’ve missed. I reminded that the 2023 contribution from Haile underground is actually quite small. And if you look at the technical report that we put out, you can see that there was a very small percentage of ore feed impact in 2023. So if there is a delay, the consequence of that is not a loss of feed in total, but a slight loss of grade because we know the underground feed is going to be higher grade than the open pit material. So there would be a small impact if there was further delay that caused that underground ore feed to slip one year. But all that would happen from a value perspective has minimal impact because it just means that more of the ore will feed into the later years. So in summary, a very small impact on 2023 numbers that we’ve put out today.

How fast can we go? Well, look, I can – having been there twice in recent months, I can tell you the team there are absolutely ready. And they have not – although they have taken great care to make sure that the delay has meant that their time has been spent doing everything to enable a very clean run at developing the underground once they do get the nod. So we’ve been able to – this is probably going to be the best prepared underground mine commencement in history because we’ve had the benefit of readying everything in relation to it and taking the opportunity to optimize other associated projects that are going to give us some benefit such that when we do go underground, again, the linear and critical path to getting the ore feed is going to be very narrow and much more in our control than it might have otherwise been. David, is there anything you want to add to that answer?

David Londono

I’d just add to that. Gerard, thank you. But one comment is, on the feed in 2023 to replace underground ore because the underground ore is harder, we will process less tons. Now if we can process underground ore, we will process much more open pit ore which will partly be similar ounce output for 2023.

Ovais Habib

Okay, thanks both David and Gerard for that. And then just a question on what you’ve produced so far in the first half versus going into the second half. Maybe you’ve covered it and I missed it, I apologize for that. But in terms of the second half, I mean, is there a significant kind of movement in terms of going from Q2 to Q3 and then Q3 to Q4 in terms of production and cost guidance?

Gerard Bond

If you’re referring to the company as a whole, Ovais, or Haile specifically?

Ovais Habib

No, company as a whole on a consolidated business.

Gerard Bond

Okay, so primarily due to grade, we expect the third quarter to be, as we said at the start of the year, to be not as strong as the first, probably in line with the second or thereabouts and then finish strongly in the fourth. Now from a cost perspective, the – as Scott McQueen mentioned, our capital expenditure works we expect to be higher in the second half. So you could expect that the sustaining capital element of that would have an impact on all-in sustaining costs. Inflationary impacts, we’ve made an estimate using market prices today and our best knowledge, and that’s reflected in the guidance. So the third quarter, from a unit cost perspective, you can imagine will be weaker than what we expect to get with much better volumes in the fourth and final quarter.

Ovais Habib

Perfect. That’s it for me and really good to see Haile, Didipio, as well as Macraes looking stronger going into the second half and production guidance is increases.

Gerard Bond

Thanks, Ovais.

Operator

Thank you. [Operator Instructions]

Sabina Srubiski

I’ve actually got a question from somebody who’s on the webcast. The question is, does the relocation of the corporate HQ to Vancouver being OceanaGold’s M&A strategy will be geared towards North American assets?

Gerard Bond

Thanks, Sabina and weblink. Not necessarily. I mean, I think it’s fair to say that there are a number of opportunities that are in North America. And so certainly, to the extent that they present themselves is interesting to us, being located there would make such activity easier. But that’s not the primary reason. The primary reason, as we said, is to be closer to our market, closer to our equity analysts, closer to our shareholders. And just a reminder too, the head company of OceanaGold is actually Canadian. So it’s more of a coming home than anything else.

Operator, are there any other questions?

Operator

Actually, we do now have another phone question from Mike Parkin at National Bank.

Mike Parkin

Hi, guys. Thanks for taking my questions. Could you just go into, I think you called it the Crown Pillar Strengthening Project at Didipio. Can you just remind me exactly what’s involved there and what’s driving that?

Gerard Bond

Sure. Scott Sullivan, it’s for you.

Scott Sullivan

Thank you. So the bottom of the open pit was in a fairly weak ground that given that we’re mining underneath it to be able to extract safely underneath it to the levels that we wanted. Our plan basically was to mine out layers of that from the bottom of the pit and replace it with a cemented fill which was actually stronger than the initial ground. So we’ve got two benefits out of that. One, we created, I guess, an artificially strengthened Crown Pillar for subsequent underground operations. And we also got some extra ore out of the open pit, which was slightly higher, about the same gold grades and slightly higher copper grades than underground. So we benefited from that displacing the open cut stockpile ore. So dual benefit there.

Mike Parkin

Is that I recall you pulling additional tons at of the pit like a cup, maybe it’s like 3 years ago now. Is that the last time you extracted ore from the pit and now you’re just finishing off the strengthening component of it?

Scott Sullivan

Yes, this is – the recent mining has been truly in this Crown Pillar Strengthening Project. Nothing out of the residual cutbacks or anything in the open pit. That’s fully completed.

Mike Parkin

Okay, alright. Thanks, that’s it for me, guys.

Gerard Bond

Thanks, Mike.

Operator

At this time, we have no other phone questions.

Gerard Bond

Okay. Well, that concludes our webcast and conference call. A replay will be available on our website later today. On behalf of the management team and everyone at OceanaGold, I appreciate you joining us and wish you a very pleasant rest of day. Bye for now.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.

TMX Group Limited’s (TMXXF) CEO John McKenzie on Q2 2022 Results – Earnings Call Transcript

TMX Group Limited (OTCPK:TMXXF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Company Participants

Paul Malcolmson – Vice President, Enterprise, Sustainability and Investor Relations

John McKenzie – Chief Executive Officer

David Arnold – Chief Financial Officer

Conference Call Participants

Geoff Kwan – RBC Capital Markets

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank

Operator

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Q2 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday July 29, 2022.

I would now like to turn the conference over to Paul Malcolmson, VP, Enterprise, Sustainability and Investor Relations. Please go ahead.

Paul Malcolmson

Well, thank you, Michelle, and good morning, everyone. I hope that you and all of your families are staying well and enjoying the summer. Thank you for joining us this morning for the second quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday afternoon and a copy of our press release is available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following opening remarks, we’ll have a question-and-answer session.

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

And with that, I’d like to turn the call over to John.

John McKenzie

Thank you, Paul and good morning, everyone. Thank you so much for joining us today to discuss TMX Group’s financial performance for the second quarter and for the first six months of the year. And let me start by echoing Paul’s comments in terms of wishing everyone an excellent summer, a well-deserved good summer after two years that have been more challenging.

Now, David will join us in a few minutes to take you through the second quarter results in detail, but before he does, my comments this morning will really focus on TMX’s Group’s performance throughout the first half of the year, the progress that we are making on our enterprise growth initiatives, and the proactive measures TMX has undertaken in an effort to address the needs of our broad and diverse stakeholder group, and to help push the evolution of our capital markets ecosystem to ensure we maintain our competitive edge into the future.

Now, in many respects, and this is no secret to anyone listening, the 2022 business environment looks very different from the same time last year. Macroeconomic conditions, geopolitical events, including the conflict in Ukraine, rising interest rates and inflation concerns have negatively impacted global markets. And it is a stark reality for our clients and peers across the financial industry and people around the world. But before we begin to examine the business impacts, I want to take a moment to pause and send our thoughts out to support all those people who are directly and indirectly affected by these global challenges.

Now, turning to our performance. Overall, TMX continued to deliver positive results. Both for the second quarter and the first six months of the year, despite the impact of significant and persistent headwinds on some of our key businesses, including capital raising and equity trading activity. TMX reported revenue of $573.2 million for the first six months of the year, which is a 15% increase from the same period of 2021, due to higher revenue from derivatives Trading and Clearing, Trayport, and Capital Formation.

Increased revenue was partially offset by lower revenue from equities in Fixed Income Trading and Clearing, due to lower trading volumes on the Toronto Stock Exchange and TSX Venture Exchange. [The higher] [ph] revenue included $60.3 million in revenue from BOX, which was consolidated in January 2022, as well as revenue from our 2021 acquisitions. 21.1 million from AST Canada acquired in August 2021 and 0.8 million from Trade Signal acquired in June 2021.

Now, excluding revenue from last year’s acquisitions, revenue was down 1% from the first six months of 2021. And on an adjusted basis, diluted earnings per share was 3.71 in the first six months, a decrease of 2% from 2021. Total operating expenses increased 27%, compared to last year or 4% when you exclude expenses related to BOX, AST Canada, and Trade Signal.

And TMX’s performance in the first half of 2022 again highlights the power of our resilient business model and underscores the efficacy of our adaptive long-term diversification strategy. TMX’s corporate purpose is to make markets better and [empower bold ideas] [ph] and it’s a central and guiding theme in that strategy. Our pledge to our vast and varied group of stakeholders and we never lose sight of the importance of our role at the center of the market and what this ecosystem of opportunity means to the country’s economy and the people in the communities from coast to coast.

Now, turning to each of our business areas. Revenue from capital formation in the first six months of 2022 was 137.2 million or 5% increase from last year, and the year-over-year increase reflected the inclusion of revenue from AST Canada and higher revenue from initial and sustaining listing fees, partially offset by lower additional listing fees reflecting a decrease in the number of financing transactions and dollars raised on TSX and TSX Venture.

And coming off a record [second 2021] [ph], gold conditions have been less favorable for capital raising in 2022, due to inflation concerns, rising interest rates, and increased volatility. And while the IPO markets slowed year-over-year, we proudly welcome new listings to the market in the first half of 2022, including Bausch & Lomb, Ivanhoe Electric, Dream Residential REIT, and two large [Florida based SPACs] [ph] Agrinam Acquisition Corporation and FG Acquisition Corp.

And we remain actively engaged with potential IPO candidates in all sectors, as well as deal makers from across the interconnected ecosystem. And we also continue to see evidence of the strength of TMX’s unique value proposition for companies looking to access public markets. TSX Ventures’ signature Capital Pool Company program is thriving and despite the overall challenging capital raising conditions. TSX Venture added 46 new CPCs in the first half of 2022, a 24% increase over the first half of 2021.

Now, consistent with TMX’s corporate purpose, our work to ensure we remain a market of choice for the next wave of great companies poised to come to market is proactive and it’s an always on campaign. So, in June, TSX Venture launched Venture Forward. It’s a new community driven program focused on strengthening Canada’s crucial public venture market. This collaborative long-term initiative is designed to engage our public venture stakeholders, including entrepreneurs, investors, financiers, lawyers, and advisors to help identify priority challenges and friction points and map out a plan to pursue workable solutions.

We have begun to reach out to stakeholders to help frame the issues and our next steps include developing near and longer-term plans and we intend to publish highlights of our findings and feedback along the way with planned next steps by the end of the year. June also marked the in-person return to the Prospectors and Developers Association of Canada or PDAC Convention.

And for years, our exchanges have proudly supported this massively popular and annual event, which brings mining companies, investors, and policymakers from all over the world together into Toronto. And it makes good sense. TMX is the world’s premier marketplace for resource companies to raise capital. More than 40% of the world’s public mining company are listed on TSX and TSX Venture. And we were honored this year to participate in the International Mines Ministers Summit at PDAC 2022.

The theme of this year’s summit, an annual meeting of leading mining representatives and governments from around the world was ESG and emissions reductions, and the increased production of lithium, nickel, copper, and other essential minerals in the global efforts to achieve net zero. And we shared TMX’s perspectives with the ministers on how governments can help support a thriving mining sector by minimizing regulatory burden where appropriate by committing to make the necessary infrastructure investments and to fostering collaboration with local communities and specifically indigenous communities.

Mining is a rapidly evolving industry. And as the transition to low carbon economy continues to gain momentum, investors are paying close attention. And so, we recently launched a new benchmark to serve the needs of investors seeking increased exposure to and deeper insights into the clean tech and energy transition story. The new S&P/ TSX Battery Metals Index measures the performance of TSX and TSX Venture listed companies focused on the exploration, development, and production of select commodities that serve as significant inputs and the decarbonization of the transportation sector.

Now, I’d like to turn to derivatives. Excluding BOX, revenue from derivatives trading and clearing was 75.3 million in the first six months of 2022, an increase of 5% from last year. Now, the increase was driven by 15% higher revenue from CDCC, due to repo dealer activity and fee changes and a 2% increase in revenue from Montreal Exchange, reflecting higher overall volumes and fee changes on the SXF, particularly offset by a slightly unfavorable product and client mix.

Total volume increased 2% over the first half of 2022 with strong growth in overall open interest at June 30, 2022, up 25%, as compared to the same point last year. Now, in the midst of a volatile and turbulent market environment, investor demand for tools to effectively and efficiently manage risk increased year-over-year. Volumes traded in options grew 21% over the first half of 2021, led by trading in the energy and financial sectors and reflecting increased activity from our institutional investors, as well as our retail client base.

Trading in ETF options also gained strong momentum, particularly in the second quarter amongst institutional investors with volumes up 11%, compared to the first six months of 2021. And volume in Index futures trading was up 19% in the first half of the year, compared to 2021 as clients move to manage exposure to volatility in equity markets.

The first half of the year was also marked by sustained growth in our newer government of Canada bond futures contracts with 38% increase in the volume traded in the CGF or the five-year contract and 155% increase in volumes traded in the CGZ, our two-year contract. These recent additions to our product suite are proving effective and creating efficient cross market trade opportunities and continue to gain in profile among global investors.

Now, the maturation of the CGF product itself is a definitive success story. As it has now reached levels of liquidity where introductory incentives are no longer required to sustain its growth.

Moving now to Trayport, revenue in the first half of the year was 79.2 million, a 7% increase from the first half of 2021, 14% in common currency or pound sterling, and driven by an 18% increase in trader subscribers, annual price adjustments, and consultancy revenues.

Now, the conflict in the Ukraine and the impact of the corresponding sanctions continue to drive increased volatility and global energy trading markets. And Trayport’s core network of dynamic tools and solutions supports the needs of traders across the European energy markets and connects clients to execution venues and clearinghouses across key power and natural gas markets.

Now, while primarily focused on meeting the demands of a robust market, during the first half of 2022, Trayport also successfully advanced on its global strategy to diversify and to move into new asset classes and geographies. In June, Trayport announced a minority investment in Ventriks, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence.

And under a new partnership agreement, Trayport will further expand its product offering to meet the growing client demand for data and analytics. The Ventriks solution complements Trayport’s existing suite of data, automated and algorithmic trading tools and will further enhance decision making and improve the overall trading experience.

In closing today, I want to commend as always our people for the work that they do and their everyday contribution to TMX’s success. And specifically to thank our team of professionals for their efforts this summer in transitioning TMX into a hybrid working environment. I’m very confident that a new balance of virtual and in-person work will ultimately prove more stimulating, engaging and productive for all of us. And we don’t have to look too far for compelling and relevant examples of the value of renewed in-person engagements.

In June, our team hosted two annual trading conferences in-person for the first time since 2019, the TMX Equity Conference in Toronto; and the Canadian Annual Derivatives Conference or CADC in Montreal. Each of these signature events brings together professionals and industry experts, our partners across the capital markets ecosystems to share perspectives on the current and future state of our markets and to exchange ideas on challenges and opportunities across the Canadian equities, fixed income, and derivatives landscape.

So, I’d like to thank everyone in the markets division to our stellar marketing and support teams for pulling together two extremely successful and well attended events. In addition, last week, we also took an important step forward towards TMX’s reconciliation journey. A diverse group of business leaders from across TMX gathered in Wendake, a First Nation in Quebec to participate in an immersive shared learning experience to develop TMX’s foundational principles and philosophies for reconciliation.

This two-day session featured a productive open exchange of ideas and perspectives, highlighted by invaluable insights and experience shared by members of our host community, The Huron-Wendat Nation. The efforts of the team and the contribution from our generous hosts will help to define the long-term vision of end tactics for how TMX can contribute to a future of shared prosperity for indigenous businesses and communities. This should be no surprise. This is what we do at TMX.

TMX is a purpose-driven people-driven organization. Employees across the enterprise are unified by our unwavering commitment to make markets better and empower bold ideas. And this mindset fuels all of our clients and stakeholder engagements and guides our business and corporate initiatives during robust and thriving markets and even more importantly when challenging conditions negatively impact key components of our ecosystem.

In all market conditions, the pursuit of meaningful ways to do better, to be better is constant. And for TMX, making markets better includes ensuring that we have the most resilient, robust and reliable operating systems and protocols, constantly striving to adapt our products and services across the franchise to meet the evolving need of the modern marketplace and our increasingly global client base, and activating TMX as a leading voice for measures to create conditions for our enduring success.

So with that, let me say thank you and will turn the call over to David.

David Arnold

Thank you, John, and good morning, everyone. As John mentioned, our results for the second quarter reflect the continued resiliency of our diverse business model with overall revenue growth of 17%, including increases across all of our business segments. Revenue, excluding the Boston Options Exchange or BOX for short, which we consolidated on January 3 this year, AST Canada, which we acquired on August 12, 2021; and Trade Signal, which Trayport acquired on June 1, 2021 was up 1% in the quarter, compared with last year.

We managed our cost increases to below the current rate of inflation in Canada in the second quarter with operating expenses, excluding BOX, AST Canada and Trade Signal, up 7%, compared with Q2 of 2021 and year to date when compared with the same six-month period a year ago, our costs are only up 4% well below the current rate of inflation in Canada.

We reported an increase of 20% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q2 of 2021 where we incurred a 19.8 million charge due to a UK corporate income tax rate change, as well as an increase in income from operations of 5.4 million, compared with Q2 of 2021. Our adjusted diluted earnings per share decreased slightly by 1%, largely driven by higher operating expenses, partially offset by higher revenue.

Turning now to our businesses. We saw year-over-year revenue increases in all of our segments and I will start with the businesses that saw the largest year-over-year increases. Revenue in derivatives trading and clearing grew by 89% this quarter, compared to Q2 of 2021, since we now consolidate BOX and that represents 27.3 million of revenue, which is included in this segment for Q2.

Volumes on BOX increased by 20% compared Q2 of last year and BOX’s market share and equity options grew 6%, up 1% from Q2 of 2021. Derivatives trading and clearing revenue excluding BOX was up 9% in the quarter, driven by a 16% increase in CDCC revenue, and a 6% increase in revenue from the Montreal Exchange.

The Montreal Exchange revenue increase reflected first, a 2% volume increase this quarter, compared with Q2 of 2021; second, a favorable product and client mix; and third, positive impact on trading fees on the heels of the pricing changes for our S&P, TSX 60 Index Standard Futures or SXF, which came into effect in January of this year.

Turning to capital formation. Revenue grew by 6% this quarter, which included approximately 12.2 million of revenue related to AST Canada. Excluding AST Canada, revenue in the quarter decreased 12% in capital formation, primarily on the heels of lower additional listing fees in the quarter, due to decreases in both the total number of financings and the total financing dollars raised, and a slight decrease in initial listings fees.

The additional listing fees decrease on TSX reflected a 27% decrease in the number of additional listing transactions billed at the maximum listing fee of 250,000 and a 16% decrease in the number of transactions below the maximum fee when compared to very strong levels of activity in Q2 of last year. This decrease was partially offset by higher sustaining listing fees in the quarter, reflecting an increase in the market capitalization of TSX and TSX venture issuers at December 31, 2021 over the prior year.

Revenue in our Global Solutions Insight & Analytics Segment was up 5% over Q2 of 2021 with increases from both Trayport and TMX data links. Revenue from Trayport was up 5% in Canadian dollars or 14% in pound sterling. A 14% increase in pound sterling was primarily driven by a 17% increase in trader subscribers, annual price adjustments, and a one-time consultancy revenue for development services.

Revenue in our TMX data links business, including colocation, grew 5% driven by increases in data feeds, colocation, as well as benchmarks and indices, partially offset by a reduction in revenue from lower usage based quotes. There was a favorable foreign exchange impact of approximately 1 million from a weaker Canadian dollar relative to the U.S. dollar this quarter when compared with Q2 of 2021, which accounts for roughly 2% of the 5% year-over-year increase.

The average number of professional market data subscriptions for TSX and TSX Venture products decreased by 3% in the quarter, compared with last year where subscriptions on the Montreal Exchange were up 3%. Revenue from our equities and fixed income trading and clearing segment was up 3% in the quarter.

Within the segment, equities and fixed income trading revenue increased 7% in the quarter, compared with Q2 of last year, despite a 9% decline in overall volumes of securities traded on our equities marketplaces, reflecting a favorable product mix within TSX and the impact of April 2022 price changes on continuous trading for securities with a share price below $1.

While trading volumes on TSX securities increased by 9% in the quarter, volumes on TSX Venture Exchange and TSX Alpha Exchange decreased by 39% and 11% respectively when compared with Q2 last year, which is why our overall volumes of securities, traders on equities marketplaces is down 9%.

Despite overall volumes of securities traded on equities marketplaces being down, our market share increased by 5%. On the fixed income trading side, revenue increased by – revenue increased versus Q2 a year ago, reflecting higher activity in Government of Canada bonds and swaps. Revenue from our CDS business was down 2%, reflecting lower issuer services and corporate action revenue, partially offset by higher revenue from custodial fees and standby liquidity facilities, compared with Q2 a year ago.

Turning to our expenses. Operating expenses in the second quarter increased by 32%, compared to Q2 last year. Included in this increase are the costs associated with BOX, which we now consolidate, as well as the two acquisitions, namely AST Canada and Trade Signal, as well as costs associated with those transactions, namely AST integration costs, amortization of acquired intangibles for AST Canada and BOX, and the transition services agreement with AST. All of which in aggregate amounted to 28.7 million of expenses in Q2 of 2022.

Excluding the aggregate amount of expenses associated with BOX, AST Canada, and Trade Signal, which I just mentioned, this translates into a year-over-year increase of 7% for operating expenses, compared with Q2 of last year. The higher expenses reflected higher headcount in payroll costs, increased long-term employee incentive plan costs, as well as increased expenses for travel and entertainment, including hosting our conferences and events, which are returning to in-person after our hiatus during the last few years.

In addition, expenses were reduced in the second quarter of last year due to a release of a provision for restoration costs for our data center. These increases in costs were partially offset by lower short-term employee incentive time costs, lower severance, and acquisition and related costs related to AST Canada in Q2 of 2021.

Turning to our integration of AST Canada, our integration of AST Canada continues to progress very well. We expect total revenue and expense synergies of approximately 10 million, which is up 25% versus our previous estimate of 8 million, which will be substantially achieved by the end of 2024.

As it relates to 2022, we now expect at least 3.5 million of these cost synergies in 2022, which is up from our original estimate of 2 million for 2022. We continue to expect integration costs related to AST Canada of approximately 20 million over the 16 month period from September 1 of last year till the end of this fiscal year December 31.

Looking at our results sequentially, revenue only decreased 1 million from Q1 of 2022 to Q2 of 2022, which reflected lower equities and fixed income trading and derivatives trading and clearing revenue, which was primarily driven by lower BOX volumes in the quarter. This was mostly offset by higher capital formation revenue, driven by higher other issue services revenue and additional listing fees revenue from Q1 to Q2 of this year.

Operating expenses increased 2.5 million or 2% from Q1, including an increase of 3.7 million related to AST integration. There were also increases in technology spending, director fees, travel, and performance incentives. These were partially offset by lower salaries and payroll taxes of 3.2 million, lower legal fees, and lower termination allowances.

Turning now to our balance sheet. In the second quarter of 2022, we spent 61.3 million repurchasing 460,000 of our common shares under our normal course issuer bid program. Our debt-to-adjusted EBITDA ratio was 1.7x at the end of the quarter. And we also held over 432 million in cash and marketable securities at the end of the quarter, which is approximately 227 million in excess of the 205 million we target to retain for regulatory and credit facility purposes.

Last night, our Board of Directors approved a quarterly dividend of $0.83 per common share payable on August 26 to shareholders of record as of August 12. In the second quarter, we paid out 44% of our adjusted earnings per share, which is marginally below the midpoint of our target payout ratio of 40% to 50%.

So that concludes my formal remarks. And I’d now like to turn the call back to Paul for our Q&A period.

Paul Malcolmson

Thanks, David. Michelle, could you please outline the process for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.

Geoff Kwan

Hi, good morning. John, you were talking earlier just being engaged on the Issuer side and the pipeline. Just wondering if you can expand on that a little bit. Just how it’s changed in recent months, both on the IPO, but also the follow on, for whatever visibility you have? Just trying to get a sense as to things are looking a little bit better.

John McKenzie

Yes, I’m happy to do that, Geoff. Thanks for the question. It’s an interesting dynamic when you look at the activity in 2022 because when you look at it simply in reference to 2021, it looks quite challenging, but interestingly if you actually have a look back and look at our 2022 activity both across the senior market and the venture market as compared to call it the four years before 2021 you’re going to find this is actually one of the strongest markets that we’ve had.

So, I think that’s why actually some folks are surprised that we’re not seeing larger revenue challenges than they would have expected in this marketplace. So, with respect to your pipeline question, the pipeline actually for new issues continues to grow. It’s difficult to give guidance in terms of when companies can come to market because it really is around market conditions for them to do their financing, but that’s why we wanted to reflect some of the names that actually got a public financing done because those are ones that actually become benchmarks for other transactions to build off in the future.

So, we do see that positive momentum in terms of potential listings, but it’s hard to say what time they’d come to market. The other silver lining that we talked about a bit in the comments was the activity that you see in venture around, particularly around CPC. So, Capital Pool Company programs because they’re founder base, they’re less sensitive to what’s going on in both market volumes and valuation and volatility.

And so those transactions are getting done even in difficult markets. And I think I said earlier, they’re up about 24% year-over-year and we’ve listed almost 50 new ones this year. So that gives you a bit of context. We are continuing to see financing transactions. You see that in the transaction data that the transaction activity is still robust, but just at smaller size than you would have seen last year. So, in another way that actually impacts our revenue because we’re actually seeing fewer transactions that are capping out at the caps because they are smaller sized deals.

So, overall, all things, if it wasn’t for 2021, we would be talking about what a healthy market this is. And it’s only in reference to last year that you’ve seen the delta.

Geoff Kwan

Okay. Thanks for that. My next question was on the TSX Trust AST Canada. You’ve talked about that sensitivity of 25 basis points higher rate is roughly about 2.5 million of additional annual revenue, the bank turnover over net rates up 225 basis points so far this year. Now, is that interest rate sensitivity based on the overnight rate or is there another interest rate benchmark just because if we use the overnight rates, that would imply kind of like 22.5 million of annual revenue and just wondering how much of that would have been captured in the Q2 revenues?

David Arnold

So, thanks, Geoff. It’s David. I’ll start and maybe John can add any extra color. It’s not as simple as monitoring a Bank of Canada overnight rate change and then extrapolating it fully to the trust revenue line on net interest income, primarily because really a couple of factors. One is, not all of the deposits that we receive generate the same level of net interest income.

On some of our arrangements, the arrangements with the clients have us testing on some of the rate hikes to them. So, not as easy as doing that. And then what I would say in Q2 is given the timing of the rate hikes it had a modest impact. It will have a more material impact in Q3. And then the third thing, which is very important is balances, right. Balances fluctuate depending on various corporate actions. And we struggle internally to predict those because it’s like predicting capital formation or derivatives trading revenue, which is very much market driven.

So, those would be the variables that play, but the key takeaways, it isn’t a straight line. And we would look to anywhere between $4 million to $5 million of net interest income over the course of this year given where rates are, but once again, Bank of Canada have a rate meeting coming in September. So, we’ll have to stay tuned on that too.

Geoff Kwan

The 4 million to 5 million that’s what you’re saying, I guess relative to what we saw in Q2 that would be the annual lift given where rates are today?

David Arnold

Yes.

Geoff Kwan

Okay. And then just my last question was just on Trayport. The average total subscribers I think was down very slightly, kind of quarter-over-quarter. Obviously, it’s had a very good gradual increase since you acquired it. Just wondering if there’s any color you can give on that?

David Arnold

Great. So, quickly before we do that, John, Geoff, I wanted to make sure I heard your question or answered it correctly. So, when I said the 4 million to 5 million that’s for the balance of this year, right? We think it’s about 8 million for the full-year. Hope it helps.

John McKenzie

And I’m laughing a bit, Geoff on the question on Trayport, because it’s – we only ever get asked about the sequential, if the sequential is down or the year-over-year if the year was down because I’m going to remind everyone that year-over-year we’re up 17%. So, I’m going to take that opportunity to do that. On the sequential piece, all you’re actually seeing there is a restructuring in terms of one of the activities in a single broker that offset what otherwise would have been subscriber growth sequentially. And so what I mean by that is a broker had an underperforming desk that they chose to wind down, it would have had some dedicated traders associated with it.

So, those trader subscriptions are no longer there because that business of that broker isn’t there anymore and that offset what otherwise would have been growth in the quarter. So, it’s nothing to take any concern to in terms of the overall strength through the health of the business. And I think we indicated in David’s notes about 9 new net paying clients in the quarter as well, which will contribute to subscriber growth in the future quarters, but that was the step down in terms of that sequential impact.

Geoff Kwan

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you and good morning.

John McKenzie

Good morning.

Etienne Ricard

On equity trading, could you please comment on how competitive dynamics have changed since CBOE closed on the acquisition of NEO back in June, if at all?

John McKenzie

Yes, to be [candidate] [ph], they really haven’t changed any material way. So, CBOE was already active in Canada with their ownership of MATCHNow, NEO already an active player. So, we haven’t seen material changes or material changes in the business model and you’ll see that in terms of our overall market share continues to be pretty much either flat to up from where we’re a year ago.

So, it’s something that we are constantly monitoring and constantly engaging with clients to make sure that we are meeting their needs. We talked earlier about the actual trade conference that we just initiated in June. That was extremely effective in terms of bringing up the trading community, understanding what their pain points are, their net needs are, and also the stress test some of our ideas in terms of market reform and get real life feedback from the trading community.

So, our competitive position here continues to be to focus on what the client needs are, so they don’t need to trade anywhere else.

Etienne Ricard

Understood. And on TSX Trust, given you have previously noted this business, has a higher growth potential over time, could you comment on what led to lower trends for agency fees on an organic basis year-over-year?

John McKenzie

I mean that would be a combination of all the fees within trust, so [transformation] [ph] to trust activity. So, very much like the other parts of the TSX and TSX Venture financing area when we have lower transaction activity. They’re also lower trust or transfer or corporate actions.

So, the overall book of business, the overall client base continues to grow in trust and transfer, but you have lower activity levels in the first half of the year, as compared to a year ago.

Etienne Ricard

Okay, great. And I think you’ve been buying back stock more actively in Q2, looking forward should we expect you to become more meaningful acquirers of your stock?

David Arnold

Good question, Etienne. You’re right. We did purchase a substantial amount of our normal course issuer bid authorized allotment this quarter. It isn’t something that we actually direct. We have a standing order based on a ratio and a broker of record then executes accordingly. We have about 5,000 of our normal course issuer bid outstanding, and we are evaluating various different capital deployment strategies, right.

And one of the things we have to obviously do is look to the organic growth initiatives that we have underway, as well as sunsetting some of our very large initiatives like our post-trade modernization, which as you know now goes into industry testing. And so given the opportunities that we have for capital deployment, whether it be for organic growth, whether it be for dividend increases, increased share buybacks or M&A activity as we monitor what transpires on the pricing front in the marketplace, I would stay tuned, but right now we’ve got about 5,000 remaining to go.

John, do you want to add anything?

John McKenzie

My simple summary of David’s comments is, we are remaining and keeping our flexibility in what has been a bit more of an unsettling marketplace. So, we are evaluating all tools and want to maintain a maximum flexibility and the strength of our balance sheet so that we can actually take advantage of opportunities as they come.

Etienne Ricard

Thank you very much.

Operator

Thank you. Your next question comes from Graham Ryding of TD. Please go ahead.

Graham Ryding

Hi, good morning. We saw a nice lift quarter-over-quarter in AST revenue, was that largely higher margin income or would you attribute that to?

John McKenzie

Margin income was part of it, but there were a couple of other parts of the business that did well. And so, I wouldn’t say it is all margin income at all, Graham.

Graham Ryding

Okay. I know, you don’t give specific expense growth, but maybe you could just help us think about – the growth we saw this quarter if you strip out the acquisition was 7% year-over-year. I think it was 2% year-over-year last quarter. So, how should we be thinking about what’s a reasonable expense growth expectation, should we be thinking closer to, sort of the 4% you’ve done year to date or is this 7% growth in this quarter potentially a run rate for expense growth.

John McKenzie

Yes, I would guide you towards closer to the first half of the year cumulative for the 4% to 5% kind of range.

Graham Ryding

Okay. That’s helpful. On the derivatives side, your interest rate derivative volumes are actually down year-over-year. That surprises me somewhat. I just thought in an environment of rising rates that might actually foster higher interest rate derivatives activity. Could you provide any color there, John?

John McKenzie

Yes, I’m happy to. So, in the long-term, you’re absolutely right, Graham. And so when you actually – you see growth in terms of other parts of the interest rate curve, the challenge in the short-term and particularly the challenge this year is the biggest impact year-over-year has been in the products like the back. So, the short-term [30-day] [ph] products. And when we’re in an environment where they are rapidly changing Bank of Canada rates and they are not predictable in terms of timing or amounts, that’s difficult for speculators or hedgers or other people to use those products.

So, what I would call it is, it’s not constructive volatility in the short-term when there’s not good predictability about those rate changes. So, as that normalizes in a higher rate environment, you’re absolutely right that will give more tailwinds to support the product, but in the short-term, when the timing and size of Bank of Canada rates changes are less predictable, it’s harder for people to use those products and they take on more risk when they’re doing them, which is not the intent of the product. So, we do see this being as a short-term issue as bank rates make some quick changes and then that will stabilize and give more tailwind.

Graham Ryding

Okay, that’s helpful. And my last question, if I could, just the CDS modernization project. I think it’s on track to finish in the first half of 2023. Is there potential here that this could be pushed out further and the CapEx could be increased again or how you’re feeling about that project at this stage?

John McKenzie

I’m feeling cautiously optimistic. Is that hedging enough for you? We spent a lot of time on this on a regular basis. I’m going to take the opportunity to give a shout out to the folks that are working on us because this has been an extremely challenging initiative, especially in the backdrop of COVID anytime you’re doing large scale software development in multiple jurisdictions and you can’t put people in the same room to solve challenges that does make the time to do things like user acceptance testing and finalizing the development and much more challenging to finish, but what we had in the last couple of weeks and we’ve been through two different board sessions on this was a significant milestone in terms of that we are now nearly complete all of our internal user testing and have announced to the Street when we are going to be going live in mid-September for industry test and development.

And we’ve committed to the industry at least 9 months to do that. So that gives us the higher degree of kind of cautious optimism around the timing to execute this because we’re now at a place where we’ve got the product. It meets the needs. It’s functional, and we can put it in the hands of the clients starting in September, so they can do their own testing and development over the next year to be ready to go live in 2023.

The estimates that we’ve given both around timing and around total capital are all reflective of that, and reflects some contingency that there still could be some unknown challenges as we go through that process. So, best information we have at the time and a reasonable degree of certainty in terms of that real milestone that’s come through that we’re going to be live in market in the fall this year.

Graham Ryding

Okay. That’s it for me. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Jaeme Gloyn of National Bank. Please go ahead.

Jaeme Gloyn

Yes, thanks. Good morning. The quarter included a lot of good to see pricing increases across various businesses. Somewhat unexpected, I guess, or maybe wasn’t necessarily hinted at on previous quarters. Is there anything that you can share in terms of what’s in the pipeline from other price increases that could be in proposal stages or something that you’re [work shopping] [ph] in the background?

John McKenzie

Yes. Jaeme, I appreciate the question. And so, I mean, obviously, I can’t share things that we haven’t made public yet in terms of either filing with regulators or notices to clients, but what I will let you know is that we are actually actively looking at those other businesses that weren’t part of the price changes we’ve already announced.

So, businesses like listings and capital formation for in some cases we haven’t done pricing on the senior market, I think in four years and on the venture market in 10 years, we are looking at what are the appropriate changes we can make there that are still consistent with maintaining a very strong competitive position both domestically and globally. And that’s one we are actually looking at. And I would expect to be communicating both with regulators in the street in the near-term.

Jaeme Gloyn

Okay great. And then just in terms of some of the new trading initiatives, I assume these are coming from customer driven demands. Can you, sort of maybe elaborate on what you’re expecting from a – are there market share benefits for TMX? Are there fee benefits for TMX like what are the knock-on effects for your business by introducing some of these new products and tools?

John McKenzie

It actually depends on the tools. So, some of them are actually about driving incremental market share. Incremental also strengthen liquidity, so over the overall quality of the volume as well. In some cases like the work that we did on market on close and the work we’re doing on dark, those are also, as you said, those are premium offerings that drive also a higher yield. So, they’re more valuable products to the street and they command a premium in terms of the revenue impact.

And I think you’re seeing some of that in terms of the revenue growth in equity trading year-over-year because while volume is off, the actual yield is up and the overall revenue growth is there. So, you’re exactly right. It is a combination of those pieces and it’s driven specifically by identified client needs of the community.

Jaeme Gloyn

Okay. And if I’m thinking about it, maybe more bit of a modeling question, I guess, right now, but we’re seeing higher capture rates flowing through on equities and trading. Now there’s some noise [indiscernible] fixed income is in there too, but is there more upside to let’s say revenue per contract trade or for equity trade in the last couple of quarters given some of these new initiatives or are you seeing like that as maybe more of a high watermark? Just trying to get a little bit more insight into where the revenue per trade can trend towards over the next several quarters to years?

John McKenzie

Yes. So, you’ve got to look at two things. Yes, we’re seeing more premium revenue in terms of the mix year of revenue in terms of the kind of amount of the volume that’s in the closure in those other dark products, but it’s also, Jaeme look at the shift in terms of the trade across higher value securities across all markets. So, we’ve got trade value growth in TSX, I think year-over-year, we’re up about 17% in dollar value traded, where venture has declined somewhat year-over-year.

So when you’ve got the higher stock prices, you also have a higher tier in terms of revenue capture because of the lower share prices on some of the venture stocks are at different capture rate as well. So, you’ve got to look at that business mix as well.

Jaeme Gloyn

Yes, understood, but absent any changes in business mix or assuming that’s all equal like the…

John McKenzie

Sustainable.

Jaeme Gloyn

Yes, okay. Good stuff. Okay. That’s it for me. Thank you.

John McKenzie

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

Paul Malcolmson

Well, thank you, Michelle. And just before we close, I want to give you two updates from the Investor Relations team. Amanda Tang, who most of you know well, will be off to maternity leave for the next year or so. Just this past Monday Amanda had of boy. Their second son now and everyone is doing very well. Congratulations, Amanda from all of us. While Amanda is off, [indiscernible] will be filling in for Amanda. Most recently, [Technical Difficulty] financial planning and analysis function, and I know you’ll all enjoy working with [indiscernible].

In closing, I want to thank everyone for listening today. If you have any further questions, the contact information for media, as well as for Investor Relations is in our press release and we’d be happy to get back to you. Stay well and have a good weekend everyone.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

TMX Group Limited’s (TMXXF) CEO John McKenzie on Q2 2022 Results – Earnings Call Transcript

TMX Group Limited (OTCPK:TMXXF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Company Participants

Paul Malcolmson – Vice President, Enterprise, Sustainability and Investor Relations

John McKenzie – Chief Executive Officer

David Arnold – Chief Financial Officer

Conference Call Participants

Geoff Kwan – RBC Capital Markets

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank

Operator

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Q2 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday July 29, 2022.

I would now like to turn the conference over to Paul Malcolmson, VP, Enterprise, Sustainability and Investor Relations. Please go ahead.

Paul Malcolmson

Well, thank you, Michelle, and good morning, everyone. I hope that you and all of your families are staying well and enjoying the summer. Thank you for joining us this morning for the second quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday afternoon and a copy of our press release is available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following opening remarks, we’ll have a question-and-answer session.

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

And with that, I’d like to turn the call over to John.

John McKenzie

Thank you, Paul and good morning, everyone. Thank you so much for joining us today to discuss TMX Group’s financial performance for the second quarter and for the first six months of the year. And let me start by echoing Paul’s comments in terms of wishing everyone an excellent summer, a well-deserved good summer after two years that have been more challenging.

Now, David will join us in a few minutes to take you through the second quarter results in detail, but before he does, my comments this morning will really focus on TMX’s Group’s performance throughout the first half of the year, the progress that we are making on our enterprise growth initiatives, and the proactive measures TMX has undertaken in an effort to address the needs of our broad and diverse stakeholder group, and to help push the evolution of our capital markets ecosystem to ensure we maintain our competitive edge into the future.

Now, in many respects, and this is no secret to anyone listening, the 2022 business environment looks very different from the same time last year. Macroeconomic conditions, geopolitical events, including the conflict in Ukraine, rising interest rates and inflation concerns have negatively impacted global markets. And it is a stark reality for our clients and peers across the financial industry and people around the world. But before we begin to examine the business impacts, I want to take a moment to pause and send our thoughts out to support all those people who are directly and indirectly affected by these global challenges.

Now, turning to our performance. Overall, TMX continued to deliver positive results. Both for the second quarter and the first six months of the year, despite the impact of significant and persistent headwinds on some of our key businesses, including capital raising and equity trading activity. TMX reported revenue of $573.2 million for the first six months of the year, which is a 15% increase from the same period of 2021, due to higher revenue from derivatives Trading and Clearing, Trayport, and Capital Formation.

Increased revenue was partially offset by lower revenue from equities in Fixed Income Trading and Clearing, due to lower trading volumes on the Toronto Stock Exchange and TSX Venture Exchange. [The higher] [ph] revenue included $60.3 million in revenue from BOX, which was consolidated in January 2022, as well as revenue from our 2021 acquisitions. 21.1 million from AST Canada acquired in August 2021 and 0.8 million from Trade Signal acquired in June 2021.

Now, excluding revenue from last year’s acquisitions, revenue was down 1% from the first six months of 2021. And on an adjusted basis, diluted earnings per share was 3.71 in the first six months, a decrease of 2% from 2021. Total operating expenses increased 27%, compared to last year or 4% when you exclude expenses related to BOX, AST Canada, and Trade Signal.

And TMX’s performance in the first half of 2022 again highlights the power of our resilient business model and underscores the efficacy of our adaptive long-term diversification strategy. TMX’s corporate purpose is to make markets better and [empower bold ideas] [ph] and it’s a central and guiding theme in that strategy. Our pledge to our vast and varied group of stakeholders and we never lose sight of the importance of our role at the center of the market and what this ecosystem of opportunity means to the country’s economy and the people in the communities from coast to coast.

Now, turning to each of our business areas. Revenue from capital formation in the first six months of 2022 was 137.2 million or 5% increase from last year, and the year-over-year increase reflected the inclusion of revenue from AST Canada and higher revenue from initial and sustaining listing fees, partially offset by lower additional listing fees reflecting a decrease in the number of financing transactions and dollars raised on TSX and TSX Venture.

And coming off a record [second 2021] [ph], gold conditions have been less favorable for capital raising in 2022, due to inflation concerns, rising interest rates, and increased volatility. And while the IPO markets slowed year-over-year, we proudly welcome new listings to the market in the first half of 2022, including Bausch & Lomb, Ivanhoe Electric, Dream Residential REIT, and two large [Florida based SPACs] [ph] Agrinam Acquisition Corporation and FG Acquisition Corp.

And we remain actively engaged with potential IPO candidates in all sectors, as well as deal makers from across the interconnected ecosystem. And we also continue to see evidence of the strength of TMX’s unique value proposition for companies looking to access public markets. TSX Ventures’ signature Capital Pool Company program is thriving and despite the overall challenging capital raising conditions. TSX Venture added 46 new CPCs in the first half of 2022, a 24% increase over the first half of 2021.

Now, consistent with TMX’s corporate purpose, our work to ensure we remain a market of choice for the next wave of great companies poised to come to market is proactive and it’s an always on campaign. So, in June, TSX Venture launched Venture Forward. It’s a new community driven program focused on strengthening Canada’s crucial public venture market. This collaborative long-term initiative is designed to engage our public venture stakeholders, including entrepreneurs, investors, financiers, lawyers, and advisors to help identify priority challenges and friction points and map out a plan to pursue workable solutions.

We have begun to reach out to stakeholders to help frame the issues and our next steps include developing near and longer-term plans and we intend to publish highlights of our findings and feedback along the way with planned next steps by the end of the year. June also marked the in-person return to the Prospectors and Developers Association of Canada or PDAC Convention.

And for years, our exchanges have proudly supported this massively popular and annual event, which brings mining companies, investors, and policymakers from all over the world together into Toronto. And it makes good sense. TMX is the world’s premier marketplace for resource companies to raise capital. More than 40% of the world’s public mining company are listed on TSX and TSX Venture. And we were honored this year to participate in the International Mines Ministers Summit at PDAC 2022.

The theme of this year’s summit, an annual meeting of leading mining representatives and governments from around the world was ESG and emissions reductions, and the increased production of lithium, nickel, copper, and other essential minerals in the global efforts to achieve net zero. And we shared TMX’s perspectives with the ministers on how governments can help support a thriving mining sector by minimizing regulatory burden where appropriate by committing to make the necessary infrastructure investments and to fostering collaboration with local communities and specifically indigenous communities.

Mining is a rapidly evolving industry. And as the transition to low carbon economy continues to gain momentum, investors are paying close attention. And so, we recently launched a new benchmark to serve the needs of investors seeking increased exposure to and deeper insights into the clean tech and energy transition story. The new S&P/ TSX Battery Metals Index measures the performance of TSX and TSX Venture listed companies focused on the exploration, development, and production of select commodities that serve as significant inputs and the decarbonization of the transportation sector.

Now, I’d like to turn to derivatives. Excluding BOX, revenue from derivatives trading and clearing was 75.3 million in the first six months of 2022, an increase of 5% from last year. Now, the increase was driven by 15% higher revenue from CDCC, due to repo dealer activity and fee changes and a 2% increase in revenue from Montreal Exchange, reflecting higher overall volumes and fee changes on the SXF, particularly offset by a slightly unfavorable product and client mix.

Total volume increased 2% over the first half of 2022 with strong growth in overall open interest at June 30, 2022, up 25%, as compared to the same point last year. Now, in the midst of a volatile and turbulent market environment, investor demand for tools to effectively and efficiently manage risk increased year-over-year. Volumes traded in options grew 21% over the first half of 2021, led by trading in the energy and financial sectors and reflecting increased activity from our institutional investors, as well as our retail client base.

Trading in ETF options also gained strong momentum, particularly in the second quarter amongst institutional investors with volumes up 11%, compared to the first six months of 2021. And volume in Index futures trading was up 19% in the first half of the year, compared to 2021 as clients move to manage exposure to volatility in equity markets.

The first half of the year was also marked by sustained growth in our newer government of Canada bond futures contracts with 38% increase in the volume traded in the CGF or the five-year contract and 155% increase in volumes traded in the CGZ, our two-year contract. These recent additions to our product suite are proving effective and creating efficient cross market trade opportunities and continue to gain in profile among global investors.

Now, the maturation of the CGF product itself is a definitive success story. As it has now reached levels of liquidity where introductory incentives are no longer required to sustain its growth.

Moving now to Trayport, revenue in the first half of the year was 79.2 million, a 7% increase from the first half of 2021, 14% in common currency or pound sterling, and driven by an 18% increase in trader subscribers, annual price adjustments, and consultancy revenues.

Now, the conflict in the Ukraine and the impact of the corresponding sanctions continue to drive increased volatility and global energy trading markets. And Trayport’s core network of dynamic tools and solutions supports the needs of traders across the European energy markets and connects clients to execution venues and clearinghouses across key power and natural gas markets.

Now, while primarily focused on meeting the demands of a robust market, during the first half of 2022, Trayport also successfully advanced on its global strategy to diversify and to move into new asset classes and geographies. In June, Trayport announced a minority investment in Ventriks, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence.

And under a new partnership agreement, Trayport will further expand its product offering to meet the growing client demand for data and analytics. The Ventriks solution complements Trayport’s existing suite of data, automated and algorithmic trading tools and will further enhance decision making and improve the overall trading experience.

In closing today, I want to commend as always our people for the work that they do and their everyday contribution to TMX’s success. And specifically to thank our team of professionals for their efforts this summer in transitioning TMX into a hybrid working environment. I’m very confident that a new balance of virtual and in-person work will ultimately prove more stimulating, engaging and productive for all of us. And we don’t have to look too far for compelling and relevant examples of the value of renewed in-person engagements.

In June, our team hosted two annual trading conferences in-person for the first time since 2019, the TMX Equity Conference in Toronto; and the Canadian Annual Derivatives Conference or CADC in Montreal. Each of these signature events brings together professionals and industry experts, our partners across the capital markets ecosystems to share perspectives on the current and future state of our markets and to exchange ideas on challenges and opportunities across the Canadian equities, fixed income, and derivatives landscape.

So, I’d like to thank everyone in the markets division to our stellar marketing and support teams for pulling together two extremely successful and well attended events. In addition, last week, we also took an important step forward towards TMX’s reconciliation journey. A diverse group of business leaders from across TMX gathered in Wendake, a First Nation in Quebec to participate in an immersive shared learning experience to develop TMX’s foundational principles and philosophies for reconciliation.

This two-day session featured a productive open exchange of ideas and perspectives, highlighted by invaluable insights and experience shared by members of our host community, The Huron-Wendat Nation. The efforts of the team and the contribution from our generous hosts will help to define the long-term vision of end tactics for how TMX can contribute to a future of shared prosperity for indigenous businesses and communities. This should be no surprise. This is what we do at TMX.

TMX is a purpose-driven people-driven organization. Employees across the enterprise are unified by our unwavering commitment to make markets better and empower bold ideas. And this mindset fuels all of our clients and stakeholder engagements and guides our business and corporate initiatives during robust and thriving markets and even more importantly when challenging conditions negatively impact key components of our ecosystem.

In all market conditions, the pursuit of meaningful ways to do better, to be better is constant. And for TMX, making markets better includes ensuring that we have the most resilient, robust and reliable operating systems and protocols, constantly striving to adapt our products and services across the franchise to meet the evolving need of the modern marketplace and our increasingly global client base, and activating TMX as a leading voice for measures to create conditions for our enduring success.

So with that, let me say thank you and will turn the call over to David.

David Arnold

Thank you, John, and good morning, everyone. As John mentioned, our results for the second quarter reflect the continued resiliency of our diverse business model with overall revenue growth of 17%, including increases across all of our business segments. Revenue, excluding the Boston Options Exchange or BOX for short, which we consolidated on January 3 this year, AST Canada, which we acquired on August 12, 2021; and Trade Signal, which Trayport acquired on June 1, 2021 was up 1% in the quarter, compared with last year.

We managed our cost increases to below the current rate of inflation in Canada in the second quarter with operating expenses, excluding BOX, AST Canada and Trade Signal, up 7%, compared with Q2 of 2021 and year to date when compared with the same six-month period a year ago, our costs are only up 4% well below the current rate of inflation in Canada.

We reported an increase of 20% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q2 of 2021 where we incurred a 19.8 million charge due to a UK corporate income tax rate change, as well as an increase in income from operations of 5.4 million, compared with Q2 of 2021. Our adjusted diluted earnings per share decreased slightly by 1%, largely driven by higher operating expenses, partially offset by higher revenue.

Turning now to our businesses. We saw year-over-year revenue increases in all of our segments and I will start with the businesses that saw the largest year-over-year increases. Revenue in derivatives trading and clearing grew by 89% this quarter, compared to Q2 of 2021, since we now consolidate BOX and that represents 27.3 million of revenue, which is included in this segment for Q2.

Volumes on BOX increased by 20% compared Q2 of last year and BOX’s market share and equity options grew 6%, up 1% from Q2 of 2021. Derivatives trading and clearing revenue excluding BOX was up 9% in the quarter, driven by a 16% increase in CDCC revenue, and a 6% increase in revenue from the Montreal Exchange.

The Montreal Exchange revenue increase reflected first, a 2% volume increase this quarter, compared with Q2 of 2021; second, a favorable product and client mix; and third, positive impact on trading fees on the heels of the pricing changes for our S&P, TSX 60 Index Standard Futures or SXF, which came into effect in January of this year.

Turning to capital formation. Revenue grew by 6% this quarter, which included approximately 12.2 million of revenue related to AST Canada. Excluding AST Canada, revenue in the quarter decreased 12% in capital formation, primarily on the heels of lower additional listing fees in the quarter, due to decreases in both the total number of financings and the total financing dollars raised, and a slight decrease in initial listings fees.

The additional listing fees decrease on TSX reflected a 27% decrease in the number of additional listing transactions billed at the maximum listing fee of 250,000 and a 16% decrease in the number of transactions below the maximum fee when compared to very strong levels of activity in Q2 of last year. This decrease was partially offset by higher sustaining listing fees in the quarter, reflecting an increase in the market capitalization of TSX and TSX venture issuers at December 31, 2021 over the prior year.

Revenue in our Global Solutions Insight & Analytics Segment was up 5% over Q2 of 2021 with increases from both Trayport and TMX data links. Revenue from Trayport was up 5% in Canadian dollars or 14% in pound sterling. A 14% increase in pound sterling was primarily driven by a 17% increase in trader subscribers, annual price adjustments, and a one-time consultancy revenue for development services.

Revenue in our TMX data links business, including colocation, grew 5% driven by increases in data feeds, colocation, as well as benchmarks and indices, partially offset by a reduction in revenue from lower usage based quotes. There was a favorable foreign exchange impact of approximately 1 million from a weaker Canadian dollar relative to the U.S. dollar this quarter when compared with Q2 of 2021, which accounts for roughly 2% of the 5% year-over-year increase.

The average number of professional market data subscriptions for TSX and TSX Venture products decreased by 3% in the quarter, compared with last year where subscriptions on the Montreal Exchange were up 3%. Revenue from our equities and fixed income trading and clearing segment was up 3% in the quarter.

Within the segment, equities and fixed income trading revenue increased 7% in the quarter, compared with Q2 of last year, despite a 9% decline in overall volumes of securities traded on our equities marketplaces, reflecting a favorable product mix within TSX and the impact of April 2022 price changes on continuous trading for securities with a share price below $1.

While trading volumes on TSX securities increased by 9% in the quarter, volumes on TSX Venture Exchange and TSX Alpha Exchange decreased by 39% and 11% respectively when compared with Q2 last year, which is why our overall volumes of securities, traders on equities marketplaces is down 9%.

Despite overall volumes of securities traded on equities marketplaces being down, our market share increased by 5%. On the fixed income trading side, revenue increased by – revenue increased versus Q2 a year ago, reflecting higher activity in Government of Canada bonds and swaps. Revenue from our CDS business was down 2%, reflecting lower issuer services and corporate action revenue, partially offset by higher revenue from custodial fees and standby liquidity facilities, compared with Q2 a year ago.

Turning to our expenses. Operating expenses in the second quarter increased by 32%, compared to Q2 last year. Included in this increase are the costs associated with BOX, which we now consolidate, as well as the two acquisitions, namely AST Canada and Trade Signal, as well as costs associated with those transactions, namely AST integration costs, amortization of acquired intangibles for AST Canada and BOX, and the transition services agreement with AST. All of which in aggregate amounted to 28.7 million of expenses in Q2 of 2022.

Excluding the aggregate amount of expenses associated with BOX, AST Canada, and Trade Signal, which I just mentioned, this translates into a year-over-year increase of 7% for operating expenses, compared with Q2 of last year. The higher expenses reflected higher headcount in payroll costs, increased long-term employee incentive plan costs, as well as increased expenses for travel and entertainment, including hosting our conferences and events, which are returning to in-person after our hiatus during the last few years.

In addition, expenses were reduced in the second quarter of last year due to a release of a provision for restoration costs for our data center. These increases in costs were partially offset by lower short-term employee incentive time costs, lower severance, and acquisition and related costs related to AST Canada in Q2 of 2021.

Turning to our integration of AST Canada, our integration of AST Canada continues to progress very well. We expect total revenue and expense synergies of approximately 10 million, which is up 25% versus our previous estimate of 8 million, which will be substantially achieved by the end of 2024.

As it relates to 2022, we now expect at least 3.5 million of these cost synergies in 2022, which is up from our original estimate of 2 million for 2022. We continue to expect integration costs related to AST Canada of approximately 20 million over the 16 month period from September 1 of last year till the end of this fiscal year December 31.

Looking at our results sequentially, revenue only decreased 1 million from Q1 of 2022 to Q2 of 2022, which reflected lower equities and fixed income trading and derivatives trading and clearing revenue, which was primarily driven by lower BOX volumes in the quarter. This was mostly offset by higher capital formation revenue, driven by higher other issue services revenue and additional listing fees revenue from Q1 to Q2 of this year.

Operating expenses increased 2.5 million or 2% from Q1, including an increase of 3.7 million related to AST integration. There were also increases in technology spending, director fees, travel, and performance incentives. These were partially offset by lower salaries and payroll taxes of 3.2 million, lower legal fees, and lower termination allowances.

Turning now to our balance sheet. In the second quarter of 2022, we spent 61.3 million repurchasing 460,000 of our common shares under our normal course issuer bid program. Our debt-to-adjusted EBITDA ratio was 1.7x at the end of the quarter. And we also held over 432 million in cash and marketable securities at the end of the quarter, which is approximately 227 million in excess of the 205 million we target to retain for regulatory and credit facility purposes.

Last night, our Board of Directors approved a quarterly dividend of $0.83 per common share payable on August 26 to shareholders of record as of August 12. In the second quarter, we paid out 44% of our adjusted earnings per share, which is marginally below the midpoint of our target payout ratio of 40% to 50%.

So that concludes my formal remarks. And I’d now like to turn the call back to Paul for our Q&A period.

Paul Malcolmson

Thanks, David. Michelle, could you please outline the process for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.

Geoff Kwan

Hi, good morning. John, you were talking earlier just being engaged on the Issuer side and the pipeline. Just wondering if you can expand on that a little bit. Just how it’s changed in recent months, both on the IPO, but also the follow on, for whatever visibility you have? Just trying to get a sense as to things are looking a little bit better.

John McKenzie

Yes, I’m happy to do that, Geoff. Thanks for the question. It’s an interesting dynamic when you look at the activity in 2022 because when you look at it simply in reference to 2021, it looks quite challenging, but interestingly if you actually have a look back and look at our 2022 activity both across the senior market and the venture market as compared to call it the four years before 2021 you’re going to find this is actually one of the strongest markets that we’ve had.

So, I think that’s why actually some folks are surprised that we’re not seeing larger revenue challenges than they would have expected in this marketplace. So, with respect to your pipeline question, the pipeline actually for new issues continues to grow. It’s difficult to give guidance in terms of when companies can come to market because it really is around market conditions for them to do their financing, but that’s why we wanted to reflect some of the names that actually got a public financing done because those are ones that actually become benchmarks for other transactions to build off in the future.

So, we do see that positive momentum in terms of potential listings, but it’s hard to say what time they’d come to market. The other silver lining that we talked about a bit in the comments was the activity that you see in venture around, particularly around CPC. So, Capital Pool Company programs because they’re founder base, they’re less sensitive to what’s going on in both market volumes and valuation and volatility.

And so those transactions are getting done even in difficult markets. And I think I said earlier, they’re up about 24% year-over-year and we’ve listed almost 50 new ones this year. So that gives you a bit of context. We are continuing to see financing transactions. You see that in the transaction data that the transaction activity is still robust, but just at smaller size than you would have seen last year. So, in another way that actually impacts our revenue because we’re actually seeing fewer transactions that are capping out at the caps because they are smaller sized deals.

So, overall, all things, if it wasn’t for 2021, we would be talking about what a healthy market this is. And it’s only in reference to last year that you’ve seen the delta.

Geoff Kwan

Okay. Thanks for that. My next question was on the TSX Trust AST Canada. You’ve talked about that sensitivity of 25 basis points higher rate is roughly about 2.5 million of additional annual revenue, the bank turnover over net rates up 225 basis points so far this year. Now, is that interest rate sensitivity based on the overnight rate or is there another interest rate benchmark just because if we use the overnight rates, that would imply kind of like 22.5 million of annual revenue and just wondering how much of that would have been captured in the Q2 revenues?

David Arnold

So, thanks, Geoff. It’s David. I’ll start and maybe John can add any extra color. It’s not as simple as monitoring a Bank of Canada overnight rate change and then extrapolating it fully to the trust revenue line on net interest income, primarily because really a couple of factors. One is, not all of the deposits that we receive generate the same level of net interest income.

On some of our arrangements, the arrangements with the clients have us testing on some of the rate hikes to them. So, not as easy as doing that. And then what I would say in Q2 is given the timing of the rate hikes it had a modest impact. It will have a more material impact in Q3. And then the third thing, which is very important is balances, right. Balances fluctuate depending on various corporate actions. And we struggle internally to predict those because it’s like predicting capital formation or derivatives trading revenue, which is very much market driven.

So, those would be the variables that play, but the key takeaways, it isn’t a straight line. And we would look to anywhere between $4 million to $5 million of net interest income over the course of this year given where rates are, but once again, Bank of Canada have a rate meeting coming in September. So, we’ll have to stay tuned on that too.

Geoff Kwan

The 4 million to 5 million that’s what you’re saying, I guess relative to what we saw in Q2 that would be the annual lift given where rates are today?

David Arnold

Yes.

Geoff Kwan

Okay. And then just my last question was just on Trayport. The average total subscribers I think was down very slightly, kind of quarter-over-quarter. Obviously, it’s had a very good gradual increase since you acquired it. Just wondering if there’s any color you can give on that?

David Arnold

Great. So, quickly before we do that, John, Geoff, I wanted to make sure I heard your question or answered it correctly. So, when I said the 4 million to 5 million that’s for the balance of this year, right? We think it’s about 8 million for the full-year. Hope it helps.

John McKenzie

And I’m laughing a bit, Geoff on the question on Trayport, because it’s – we only ever get asked about the sequential, if the sequential is down or the year-over-year if the year was down because I’m going to remind everyone that year-over-year we’re up 17%. So, I’m going to take that opportunity to do that. On the sequential piece, all you’re actually seeing there is a restructuring in terms of one of the activities in a single broker that offset what otherwise would have been subscriber growth sequentially. And so what I mean by that is a broker had an underperforming desk that they chose to wind down, it would have had some dedicated traders associated with it.

So, those trader subscriptions are no longer there because that business of that broker isn’t there anymore and that offset what otherwise would have been growth in the quarter. So, it’s nothing to take any concern to in terms of the overall strength through the health of the business. And I think we indicated in David’s notes about 9 new net paying clients in the quarter as well, which will contribute to subscriber growth in the future quarters, but that was the step down in terms of that sequential impact.

Geoff Kwan

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you and good morning.

John McKenzie

Good morning.

Etienne Ricard

On equity trading, could you please comment on how competitive dynamics have changed since CBOE closed on the acquisition of NEO back in June, if at all?

John McKenzie

Yes, to be [candidate] [ph], they really haven’t changed any material way. So, CBOE was already active in Canada with their ownership of MATCHNow, NEO already an active player. So, we haven’t seen material changes or material changes in the business model and you’ll see that in terms of our overall market share continues to be pretty much either flat to up from where we’re a year ago.

So, it’s something that we are constantly monitoring and constantly engaging with clients to make sure that we are meeting their needs. We talked earlier about the actual trade conference that we just initiated in June. That was extremely effective in terms of bringing up the trading community, understanding what their pain points are, their net needs are, and also the stress test some of our ideas in terms of market reform and get real life feedback from the trading community.

So, our competitive position here continues to be to focus on what the client needs are, so they don’t need to trade anywhere else.

Etienne Ricard

Understood. And on TSX Trust, given you have previously noted this business, has a higher growth potential over time, could you comment on what led to lower trends for agency fees on an organic basis year-over-year?

John McKenzie

I mean that would be a combination of all the fees within trust, so [transformation] [ph] to trust activity. So, very much like the other parts of the TSX and TSX Venture financing area when we have lower transaction activity. They’re also lower trust or transfer or corporate actions.

So, the overall book of business, the overall client base continues to grow in trust and transfer, but you have lower activity levels in the first half of the year, as compared to a year ago.

Etienne Ricard

Okay, great. And I think you’ve been buying back stock more actively in Q2, looking forward should we expect you to become more meaningful acquirers of your stock?

David Arnold

Good question, Etienne. You’re right. We did purchase a substantial amount of our normal course issuer bid authorized allotment this quarter. It isn’t something that we actually direct. We have a standing order based on a ratio and a broker of record then executes accordingly. We have about 5,000 of our normal course issuer bid outstanding, and we are evaluating various different capital deployment strategies, right.

And one of the things we have to obviously do is look to the organic growth initiatives that we have underway, as well as sunsetting some of our very large initiatives like our post-trade modernization, which as you know now goes into industry testing. And so given the opportunities that we have for capital deployment, whether it be for organic growth, whether it be for dividend increases, increased share buybacks or M&A activity as we monitor what transpires on the pricing front in the marketplace, I would stay tuned, but right now we’ve got about 5,000 remaining to go.

John, do you want to add anything?

John McKenzie

My simple summary of David’s comments is, we are remaining and keeping our flexibility in what has been a bit more of an unsettling marketplace. So, we are evaluating all tools and want to maintain a maximum flexibility and the strength of our balance sheet so that we can actually take advantage of opportunities as they come.

Etienne Ricard

Thank you very much.

Operator

Thank you. Your next question comes from Graham Ryding of TD. Please go ahead.

Graham Ryding

Hi, good morning. We saw a nice lift quarter-over-quarter in AST revenue, was that largely higher margin income or would you attribute that to?

John McKenzie

Margin income was part of it, but there were a couple of other parts of the business that did well. And so, I wouldn’t say it is all margin income at all, Graham.

Graham Ryding

Okay. I know, you don’t give specific expense growth, but maybe you could just help us think about – the growth we saw this quarter if you strip out the acquisition was 7% year-over-year. I think it was 2% year-over-year last quarter. So, how should we be thinking about what’s a reasonable expense growth expectation, should we be thinking closer to, sort of the 4% you’ve done year to date or is this 7% growth in this quarter potentially a run rate for expense growth.

John McKenzie

Yes, I would guide you towards closer to the first half of the year cumulative for the 4% to 5% kind of range.

Graham Ryding

Okay. That’s helpful. On the derivatives side, your interest rate derivative volumes are actually down year-over-year. That surprises me somewhat. I just thought in an environment of rising rates that might actually foster higher interest rate derivatives activity. Could you provide any color there, John?

John McKenzie

Yes, I’m happy to. So, in the long-term, you’re absolutely right, Graham. And so when you actually – you see growth in terms of other parts of the interest rate curve, the challenge in the short-term and particularly the challenge this year is the biggest impact year-over-year has been in the products like the back. So, the short-term [30-day] [ph] products. And when we’re in an environment where they are rapidly changing Bank of Canada rates and they are not predictable in terms of timing or amounts, that’s difficult for speculators or hedgers or other people to use those products.

So, what I would call it is, it’s not constructive volatility in the short-term when there’s not good predictability about those rate changes. So, as that normalizes in a higher rate environment, you’re absolutely right that will give more tailwinds to support the product, but in the short-term, when the timing and size of Bank of Canada rates changes are less predictable, it’s harder for people to use those products and they take on more risk when they’re doing them, which is not the intent of the product. So, we do see this being as a short-term issue as bank rates make some quick changes and then that will stabilize and give more tailwind.

Graham Ryding

Okay, that’s helpful. And my last question, if I could, just the CDS modernization project. I think it’s on track to finish in the first half of 2023. Is there potential here that this could be pushed out further and the CapEx could be increased again or how you’re feeling about that project at this stage?

John McKenzie

I’m feeling cautiously optimistic. Is that hedging enough for you? We spent a lot of time on this on a regular basis. I’m going to take the opportunity to give a shout out to the folks that are working on us because this has been an extremely challenging initiative, especially in the backdrop of COVID anytime you’re doing large scale software development in multiple jurisdictions and you can’t put people in the same room to solve challenges that does make the time to do things like user acceptance testing and finalizing the development and much more challenging to finish, but what we had in the last couple of weeks and we’ve been through two different board sessions on this was a significant milestone in terms of that we are now nearly complete all of our internal user testing and have announced to the Street when we are going to be going live in mid-September for industry test and development.

And we’ve committed to the industry at least 9 months to do that. So that gives us the higher degree of kind of cautious optimism around the timing to execute this because we’re now at a place where we’ve got the product. It meets the needs. It’s functional, and we can put it in the hands of the clients starting in September, so they can do their own testing and development over the next year to be ready to go live in 2023.

The estimates that we’ve given both around timing and around total capital are all reflective of that, and reflects some contingency that there still could be some unknown challenges as we go through that process. So, best information we have at the time and a reasonable degree of certainty in terms of that real milestone that’s come through that we’re going to be live in market in the fall this year.

Graham Ryding

Okay. That’s it for me. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Jaeme Gloyn of National Bank. Please go ahead.

Jaeme Gloyn

Yes, thanks. Good morning. The quarter included a lot of good to see pricing increases across various businesses. Somewhat unexpected, I guess, or maybe wasn’t necessarily hinted at on previous quarters. Is there anything that you can share in terms of what’s in the pipeline from other price increases that could be in proposal stages or something that you’re [work shopping] [ph] in the background?

John McKenzie

Yes. Jaeme, I appreciate the question. And so, I mean, obviously, I can’t share things that we haven’t made public yet in terms of either filing with regulators or notices to clients, but what I will let you know is that we are actually actively looking at those other businesses that weren’t part of the price changes we’ve already announced.

So, businesses like listings and capital formation for in some cases we haven’t done pricing on the senior market, I think in four years and on the venture market in 10 years, we are looking at what are the appropriate changes we can make there that are still consistent with maintaining a very strong competitive position both domestically and globally. And that’s one we are actually looking at. And I would expect to be communicating both with regulators in the street in the near-term.

Jaeme Gloyn

Okay great. And then just in terms of some of the new trading initiatives, I assume these are coming from customer driven demands. Can you, sort of maybe elaborate on what you’re expecting from a – are there market share benefits for TMX? Are there fee benefits for TMX like what are the knock-on effects for your business by introducing some of these new products and tools?

John McKenzie

It actually depends on the tools. So, some of them are actually about driving incremental market share. Incremental also strengthen liquidity, so over the overall quality of the volume as well. In some cases like the work that we did on market on close and the work we’re doing on dark, those are also, as you said, those are premium offerings that drive also a higher yield. So, they’re more valuable products to the street and they command a premium in terms of the revenue impact.

And I think you’re seeing some of that in terms of the revenue growth in equity trading year-over-year because while volume is off, the actual yield is up and the overall revenue growth is there. So, you’re exactly right. It is a combination of those pieces and it’s driven specifically by identified client needs of the community.

Jaeme Gloyn

Okay. And if I’m thinking about it, maybe more bit of a modeling question, I guess, right now, but we’re seeing higher capture rates flowing through on equities and trading. Now there’s some noise [indiscernible] fixed income is in there too, but is there more upside to let’s say revenue per contract trade or for equity trade in the last couple of quarters given some of these new initiatives or are you seeing like that as maybe more of a high watermark? Just trying to get a little bit more insight into where the revenue per trade can trend towards over the next several quarters to years?

John McKenzie

Yes. So, you’ve got to look at two things. Yes, we’re seeing more premium revenue in terms of the mix year of revenue in terms of the kind of amount of the volume that’s in the closure in those other dark products, but it’s also, Jaeme look at the shift in terms of the trade across higher value securities across all markets. So, we’ve got trade value growth in TSX, I think year-over-year, we’re up about 17% in dollar value traded, where venture has declined somewhat year-over-year.

So when you’ve got the higher stock prices, you also have a higher tier in terms of revenue capture because of the lower share prices on some of the venture stocks are at different capture rate as well. So, you’ve got to look at that business mix as well.

Jaeme Gloyn

Yes, understood, but absent any changes in business mix or assuming that’s all equal like the…

John McKenzie

Sustainable.

Jaeme Gloyn

Yes, okay. Good stuff. Okay. That’s it for me. Thank you.

John McKenzie

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

Paul Malcolmson

Well, thank you, Michelle. And just before we close, I want to give you two updates from the Investor Relations team. Amanda Tang, who most of you know well, will be off to maternity leave for the next year or so. Just this past Monday Amanda had of boy. Their second son now and everyone is doing very well. Congratulations, Amanda from all of us. While Amanda is off, [indiscernible] will be filling in for Amanda. Most recently, [Technical Difficulty] financial planning and analysis function, and I know you’ll all enjoy working with [indiscernible].

In closing, I want to thank everyone for listening today. If you have any further questions, the contact information for media, as well as for Investor Relations is in our press release and we’d be happy to get back to you. Stay well and have a good weekend everyone.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

TMX Group Limited’s (TMXXF) CEO John McKenzie on Q2 2022 Results – Earnings Call Transcript

TMX Group Limited (OTCPK:TMXXF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Company Participants

Paul Malcolmson – Vice President, Enterprise, Sustainability and Investor Relations

John McKenzie – Chief Executive Officer

David Arnold – Chief Financial Officer

Conference Call Participants

Geoff Kwan – RBC Capital Markets

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank

Operator

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Q2 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday July 29, 2022.

I would now like to turn the conference over to Paul Malcolmson, VP, Enterprise, Sustainability and Investor Relations. Please go ahead.

Paul Malcolmson

Well, thank you, Michelle, and good morning, everyone. I hope that you and all of your families are staying well and enjoying the summer. Thank you for joining us this morning for the second quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday afternoon and a copy of our press release is available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following opening remarks, we’ll have a question-and-answer session.

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

And with that, I’d like to turn the call over to John.

John McKenzie

Thank you, Paul and good morning, everyone. Thank you so much for joining us today to discuss TMX Group’s financial performance for the second quarter and for the first six months of the year. And let me start by echoing Paul’s comments in terms of wishing everyone an excellent summer, a well-deserved good summer after two years that have been more challenging.

Now, David will join us in a few minutes to take you through the second quarter results in detail, but before he does, my comments this morning will really focus on TMX’s Group’s performance throughout the first half of the year, the progress that we are making on our enterprise growth initiatives, and the proactive measures TMX has undertaken in an effort to address the needs of our broad and diverse stakeholder group, and to help push the evolution of our capital markets ecosystem to ensure we maintain our competitive edge into the future.

Now, in many respects, and this is no secret to anyone listening, the 2022 business environment looks very different from the same time last year. Macroeconomic conditions, geopolitical events, including the conflict in Ukraine, rising interest rates and inflation concerns have negatively impacted global markets. And it is a stark reality for our clients and peers across the financial industry and people around the world. But before we begin to examine the business impacts, I want to take a moment to pause and send our thoughts out to support all those people who are directly and indirectly affected by these global challenges.

Now, turning to our performance. Overall, TMX continued to deliver positive results. Both for the second quarter and the first six months of the year, despite the impact of significant and persistent headwinds on some of our key businesses, including capital raising and equity trading activity. TMX reported revenue of $573.2 million for the first six months of the year, which is a 15% increase from the same period of 2021, due to higher revenue from derivatives Trading and Clearing, Trayport, and Capital Formation.

Increased revenue was partially offset by lower revenue from equities in Fixed Income Trading and Clearing, due to lower trading volumes on the Toronto Stock Exchange and TSX Venture Exchange. [The higher] [ph] revenue included $60.3 million in revenue from BOX, which was consolidated in January 2022, as well as revenue from our 2021 acquisitions. 21.1 million from AST Canada acquired in August 2021 and 0.8 million from Trade Signal acquired in June 2021.

Now, excluding revenue from last year’s acquisitions, revenue was down 1% from the first six months of 2021. And on an adjusted basis, diluted earnings per share was 3.71 in the first six months, a decrease of 2% from 2021. Total operating expenses increased 27%, compared to last year or 4% when you exclude expenses related to BOX, AST Canada, and Trade Signal.

And TMX’s performance in the first half of 2022 again highlights the power of our resilient business model and underscores the efficacy of our adaptive long-term diversification strategy. TMX’s corporate purpose is to make markets better and [empower bold ideas] [ph] and it’s a central and guiding theme in that strategy. Our pledge to our vast and varied group of stakeholders and we never lose sight of the importance of our role at the center of the market and what this ecosystem of opportunity means to the country’s economy and the people in the communities from coast to coast.

Now, turning to each of our business areas. Revenue from capital formation in the first six months of 2022 was 137.2 million or 5% increase from last year, and the year-over-year increase reflected the inclusion of revenue from AST Canada and higher revenue from initial and sustaining listing fees, partially offset by lower additional listing fees reflecting a decrease in the number of financing transactions and dollars raised on TSX and TSX Venture.

And coming off a record [second 2021] [ph], gold conditions have been less favorable for capital raising in 2022, due to inflation concerns, rising interest rates, and increased volatility. And while the IPO markets slowed year-over-year, we proudly welcome new listings to the market in the first half of 2022, including Bausch & Lomb, Ivanhoe Electric, Dream Residential REIT, and two large [Florida based SPACs] [ph] Agrinam Acquisition Corporation and FG Acquisition Corp.

And we remain actively engaged with potential IPO candidates in all sectors, as well as deal makers from across the interconnected ecosystem. And we also continue to see evidence of the strength of TMX’s unique value proposition for companies looking to access public markets. TSX Ventures’ signature Capital Pool Company program is thriving and despite the overall challenging capital raising conditions. TSX Venture added 46 new CPCs in the first half of 2022, a 24% increase over the first half of 2021.

Now, consistent with TMX’s corporate purpose, our work to ensure we remain a market of choice for the next wave of great companies poised to come to market is proactive and it’s an always on campaign. So, in June, TSX Venture launched Venture Forward. It’s a new community driven program focused on strengthening Canada’s crucial public venture market. This collaborative long-term initiative is designed to engage our public venture stakeholders, including entrepreneurs, investors, financiers, lawyers, and advisors to help identify priority challenges and friction points and map out a plan to pursue workable solutions.

We have begun to reach out to stakeholders to help frame the issues and our next steps include developing near and longer-term plans and we intend to publish highlights of our findings and feedback along the way with planned next steps by the end of the year. June also marked the in-person return to the Prospectors and Developers Association of Canada or PDAC Convention.

And for years, our exchanges have proudly supported this massively popular and annual event, which brings mining companies, investors, and policymakers from all over the world together into Toronto. And it makes good sense. TMX is the world’s premier marketplace for resource companies to raise capital. More than 40% of the world’s public mining company are listed on TSX and TSX Venture. And we were honored this year to participate in the International Mines Ministers Summit at PDAC 2022.

The theme of this year’s summit, an annual meeting of leading mining representatives and governments from around the world was ESG and emissions reductions, and the increased production of lithium, nickel, copper, and other essential minerals in the global efforts to achieve net zero. And we shared TMX’s perspectives with the ministers on how governments can help support a thriving mining sector by minimizing regulatory burden where appropriate by committing to make the necessary infrastructure investments and to fostering collaboration with local communities and specifically indigenous communities.

Mining is a rapidly evolving industry. And as the transition to low carbon economy continues to gain momentum, investors are paying close attention. And so, we recently launched a new benchmark to serve the needs of investors seeking increased exposure to and deeper insights into the clean tech and energy transition story. The new S&P/ TSX Battery Metals Index measures the performance of TSX and TSX Venture listed companies focused on the exploration, development, and production of select commodities that serve as significant inputs and the decarbonization of the transportation sector.

Now, I’d like to turn to derivatives. Excluding BOX, revenue from derivatives trading and clearing was 75.3 million in the first six months of 2022, an increase of 5% from last year. Now, the increase was driven by 15% higher revenue from CDCC, due to repo dealer activity and fee changes and a 2% increase in revenue from Montreal Exchange, reflecting higher overall volumes and fee changes on the SXF, particularly offset by a slightly unfavorable product and client mix.

Total volume increased 2% over the first half of 2022 with strong growth in overall open interest at June 30, 2022, up 25%, as compared to the same point last year. Now, in the midst of a volatile and turbulent market environment, investor demand for tools to effectively and efficiently manage risk increased year-over-year. Volumes traded in options grew 21% over the first half of 2021, led by trading in the energy and financial sectors and reflecting increased activity from our institutional investors, as well as our retail client base.

Trading in ETF options also gained strong momentum, particularly in the second quarter amongst institutional investors with volumes up 11%, compared to the first six months of 2021. And volume in Index futures trading was up 19% in the first half of the year, compared to 2021 as clients move to manage exposure to volatility in equity markets.

The first half of the year was also marked by sustained growth in our newer government of Canada bond futures contracts with 38% increase in the volume traded in the CGF or the five-year contract and 155% increase in volumes traded in the CGZ, our two-year contract. These recent additions to our product suite are proving effective and creating efficient cross market trade opportunities and continue to gain in profile among global investors.

Now, the maturation of the CGF product itself is a definitive success story. As it has now reached levels of liquidity where introductory incentives are no longer required to sustain its growth.

Moving now to Trayport, revenue in the first half of the year was 79.2 million, a 7% increase from the first half of 2021, 14% in common currency or pound sterling, and driven by an 18% increase in trader subscribers, annual price adjustments, and consultancy revenues.

Now, the conflict in the Ukraine and the impact of the corresponding sanctions continue to drive increased volatility and global energy trading markets. And Trayport’s core network of dynamic tools and solutions supports the needs of traders across the European energy markets and connects clients to execution venues and clearinghouses across key power and natural gas markets.

Now, while primarily focused on meeting the demands of a robust market, during the first half of 2022, Trayport also successfully advanced on its global strategy to diversify and to move into new asset classes and geographies. In June, Trayport announced a minority investment in Ventriks, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence.

And under a new partnership agreement, Trayport will further expand its product offering to meet the growing client demand for data and analytics. The Ventriks solution complements Trayport’s existing suite of data, automated and algorithmic trading tools and will further enhance decision making and improve the overall trading experience.

In closing today, I want to commend as always our people for the work that they do and their everyday contribution to TMX’s success. And specifically to thank our team of professionals for their efforts this summer in transitioning TMX into a hybrid working environment. I’m very confident that a new balance of virtual and in-person work will ultimately prove more stimulating, engaging and productive for all of us. And we don’t have to look too far for compelling and relevant examples of the value of renewed in-person engagements.

In June, our team hosted two annual trading conferences in-person for the first time since 2019, the TMX Equity Conference in Toronto; and the Canadian Annual Derivatives Conference or CADC in Montreal. Each of these signature events brings together professionals and industry experts, our partners across the capital markets ecosystems to share perspectives on the current and future state of our markets and to exchange ideas on challenges and opportunities across the Canadian equities, fixed income, and derivatives landscape.

So, I’d like to thank everyone in the markets division to our stellar marketing and support teams for pulling together two extremely successful and well attended events. In addition, last week, we also took an important step forward towards TMX’s reconciliation journey. A diverse group of business leaders from across TMX gathered in Wendake, a First Nation in Quebec to participate in an immersive shared learning experience to develop TMX’s foundational principles and philosophies for reconciliation.

This two-day session featured a productive open exchange of ideas and perspectives, highlighted by invaluable insights and experience shared by members of our host community, The Huron-Wendat Nation. The efforts of the team and the contribution from our generous hosts will help to define the long-term vision of end tactics for how TMX can contribute to a future of shared prosperity for indigenous businesses and communities. This should be no surprise. This is what we do at TMX.

TMX is a purpose-driven people-driven organization. Employees across the enterprise are unified by our unwavering commitment to make markets better and empower bold ideas. And this mindset fuels all of our clients and stakeholder engagements and guides our business and corporate initiatives during robust and thriving markets and even more importantly when challenging conditions negatively impact key components of our ecosystem.

In all market conditions, the pursuit of meaningful ways to do better, to be better is constant. And for TMX, making markets better includes ensuring that we have the most resilient, robust and reliable operating systems and protocols, constantly striving to adapt our products and services across the franchise to meet the evolving need of the modern marketplace and our increasingly global client base, and activating TMX as a leading voice for measures to create conditions for our enduring success.

So with that, let me say thank you and will turn the call over to David.

David Arnold

Thank you, John, and good morning, everyone. As John mentioned, our results for the second quarter reflect the continued resiliency of our diverse business model with overall revenue growth of 17%, including increases across all of our business segments. Revenue, excluding the Boston Options Exchange or BOX for short, which we consolidated on January 3 this year, AST Canada, which we acquired on August 12, 2021; and Trade Signal, which Trayport acquired on June 1, 2021 was up 1% in the quarter, compared with last year.

We managed our cost increases to below the current rate of inflation in Canada in the second quarter with operating expenses, excluding BOX, AST Canada and Trade Signal, up 7%, compared with Q2 of 2021 and year to date when compared with the same six-month period a year ago, our costs are only up 4% well below the current rate of inflation in Canada.

We reported an increase of 20% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q2 of 2021 where we incurred a 19.8 million charge due to a UK corporate income tax rate change, as well as an increase in income from operations of 5.4 million, compared with Q2 of 2021. Our adjusted diluted earnings per share decreased slightly by 1%, largely driven by higher operating expenses, partially offset by higher revenue.

Turning now to our businesses. We saw year-over-year revenue increases in all of our segments and I will start with the businesses that saw the largest year-over-year increases. Revenue in derivatives trading and clearing grew by 89% this quarter, compared to Q2 of 2021, since we now consolidate BOX and that represents 27.3 million of revenue, which is included in this segment for Q2.

Volumes on BOX increased by 20% compared Q2 of last year and BOX’s market share and equity options grew 6%, up 1% from Q2 of 2021. Derivatives trading and clearing revenue excluding BOX was up 9% in the quarter, driven by a 16% increase in CDCC revenue, and a 6% increase in revenue from the Montreal Exchange.

The Montreal Exchange revenue increase reflected first, a 2% volume increase this quarter, compared with Q2 of 2021; second, a favorable product and client mix; and third, positive impact on trading fees on the heels of the pricing changes for our S&P, TSX 60 Index Standard Futures or SXF, which came into effect in January of this year.

Turning to capital formation. Revenue grew by 6% this quarter, which included approximately 12.2 million of revenue related to AST Canada. Excluding AST Canada, revenue in the quarter decreased 12% in capital formation, primarily on the heels of lower additional listing fees in the quarter, due to decreases in both the total number of financings and the total financing dollars raised, and a slight decrease in initial listings fees.

The additional listing fees decrease on TSX reflected a 27% decrease in the number of additional listing transactions billed at the maximum listing fee of 250,000 and a 16% decrease in the number of transactions below the maximum fee when compared to very strong levels of activity in Q2 of last year. This decrease was partially offset by higher sustaining listing fees in the quarter, reflecting an increase in the market capitalization of TSX and TSX venture issuers at December 31, 2021 over the prior year.

Revenue in our Global Solutions Insight & Analytics Segment was up 5% over Q2 of 2021 with increases from both Trayport and TMX data links. Revenue from Trayport was up 5% in Canadian dollars or 14% in pound sterling. A 14% increase in pound sterling was primarily driven by a 17% increase in trader subscribers, annual price adjustments, and a one-time consultancy revenue for development services.

Revenue in our TMX data links business, including colocation, grew 5% driven by increases in data feeds, colocation, as well as benchmarks and indices, partially offset by a reduction in revenue from lower usage based quotes. There was a favorable foreign exchange impact of approximately 1 million from a weaker Canadian dollar relative to the U.S. dollar this quarter when compared with Q2 of 2021, which accounts for roughly 2% of the 5% year-over-year increase.

The average number of professional market data subscriptions for TSX and TSX Venture products decreased by 3% in the quarter, compared with last year where subscriptions on the Montreal Exchange were up 3%. Revenue from our equities and fixed income trading and clearing segment was up 3% in the quarter.

Within the segment, equities and fixed income trading revenue increased 7% in the quarter, compared with Q2 of last year, despite a 9% decline in overall volumes of securities traded on our equities marketplaces, reflecting a favorable product mix within TSX and the impact of April 2022 price changes on continuous trading for securities with a share price below $1.

While trading volumes on TSX securities increased by 9% in the quarter, volumes on TSX Venture Exchange and TSX Alpha Exchange decreased by 39% and 11% respectively when compared with Q2 last year, which is why our overall volumes of securities, traders on equities marketplaces is down 9%.

Despite overall volumes of securities traded on equities marketplaces being down, our market share increased by 5%. On the fixed income trading side, revenue increased by – revenue increased versus Q2 a year ago, reflecting higher activity in Government of Canada bonds and swaps. Revenue from our CDS business was down 2%, reflecting lower issuer services and corporate action revenue, partially offset by higher revenue from custodial fees and standby liquidity facilities, compared with Q2 a year ago.

Turning to our expenses. Operating expenses in the second quarter increased by 32%, compared to Q2 last year. Included in this increase are the costs associated with BOX, which we now consolidate, as well as the two acquisitions, namely AST Canada and Trade Signal, as well as costs associated with those transactions, namely AST integration costs, amortization of acquired intangibles for AST Canada and BOX, and the transition services agreement with AST. All of which in aggregate amounted to 28.7 million of expenses in Q2 of 2022.

Excluding the aggregate amount of expenses associated with BOX, AST Canada, and Trade Signal, which I just mentioned, this translates into a year-over-year increase of 7% for operating expenses, compared with Q2 of last year. The higher expenses reflected higher headcount in payroll costs, increased long-term employee incentive plan costs, as well as increased expenses for travel and entertainment, including hosting our conferences and events, which are returning to in-person after our hiatus during the last few years.

In addition, expenses were reduced in the second quarter of last year due to a release of a provision for restoration costs for our data center. These increases in costs were partially offset by lower short-term employee incentive time costs, lower severance, and acquisition and related costs related to AST Canada in Q2 of 2021.

Turning to our integration of AST Canada, our integration of AST Canada continues to progress very well. We expect total revenue and expense synergies of approximately 10 million, which is up 25% versus our previous estimate of 8 million, which will be substantially achieved by the end of 2024.

As it relates to 2022, we now expect at least 3.5 million of these cost synergies in 2022, which is up from our original estimate of 2 million for 2022. We continue to expect integration costs related to AST Canada of approximately 20 million over the 16 month period from September 1 of last year till the end of this fiscal year December 31.

Looking at our results sequentially, revenue only decreased 1 million from Q1 of 2022 to Q2 of 2022, which reflected lower equities and fixed income trading and derivatives trading and clearing revenue, which was primarily driven by lower BOX volumes in the quarter. This was mostly offset by higher capital formation revenue, driven by higher other issue services revenue and additional listing fees revenue from Q1 to Q2 of this year.

Operating expenses increased 2.5 million or 2% from Q1, including an increase of 3.7 million related to AST integration. There were also increases in technology spending, director fees, travel, and performance incentives. These were partially offset by lower salaries and payroll taxes of 3.2 million, lower legal fees, and lower termination allowances.

Turning now to our balance sheet. In the second quarter of 2022, we spent 61.3 million repurchasing 460,000 of our common shares under our normal course issuer bid program. Our debt-to-adjusted EBITDA ratio was 1.7x at the end of the quarter. And we also held over 432 million in cash and marketable securities at the end of the quarter, which is approximately 227 million in excess of the 205 million we target to retain for regulatory and credit facility purposes.

Last night, our Board of Directors approved a quarterly dividend of $0.83 per common share payable on August 26 to shareholders of record as of August 12. In the second quarter, we paid out 44% of our adjusted earnings per share, which is marginally below the midpoint of our target payout ratio of 40% to 50%.

So that concludes my formal remarks. And I’d now like to turn the call back to Paul for our Q&A period.

Paul Malcolmson

Thanks, David. Michelle, could you please outline the process for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.

Geoff Kwan

Hi, good morning. John, you were talking earlier just being engaged on the Issuer side and the pipeline. Just wondering if you can expand on that a little bit. Just how it’s changed in recent months, both on the IPO, but also the follow on, for whatever visibility you have? Just trying to get a sense as to things are looking a little bit better.

John McKenzie

Yes, I’m happy to do that, Geoff. Thanks for the question. It’s an interesting dynamic when you look at the activity in 2022 because when you look at it simply in reference to 2021, it looks quite challenging, but interestingly if you actually have a look back and look at our 2022 activity both across the senior market and the venture market as compared to call it the four years before 2021 you’re going to find this is actually one of the strongest markets that we’ve had.

So, I think that’s why actually some folks are surprised that we’re not seeing larger revenue challenges than they would have expected in this marketplace. So, with respect to your pipeline question, the pipeline actually for new issues continues to grow. It’s difficult to give guidance in terms of when companies can come to market because it really is around market conditions for them to do their financing, but that’s why we wanted to reflect some of the names that actually got a public financing done because those are ones that actually become benchmarks for other transactions to build off in the future.

So, we do see that positive momentum in terms of potential listings, but it’s hard to say what time they’d come to market. The other silver lining that we talked about a bit in the comments was the activity that you see in venture around, particularly around CPC. So, Capital Pool Company programs because they’re founder base, they’re less sensitive to what’s going on in both market volumes and valuation and volatility.

And so those transactions are getting done even in difficult markets. And I think I said earlier, they’re up about 24% year-over-year and we’ve listed almost 50 new ones this year. So that gives you a bit of context. We are continuing to see financing transactions. You see that in the transaction data that the transaction activity is still robust, but just at smaller size than you would have seen last year. So, in another way that actually impacts our revenue because we’re actually seeing fewer transactions that are capping out at the caps because they are smaller sized deals.

So, overall, all things, if it wasn’t for 2021, we would be talking about what a healthy market this is. And it’s only in reference to last year that you’ve seen the delta.

Geoff Kwan

Okay. Thanks for that. My next question was on the TSX Trust AST Canada. You’ve talked about that sensitivity of 25 basis points higher rate is roughly about 2.5 million of additional annual revenue, the bank turnover over net rates up 225 basis points so far this year. Now, is that interest rate sensitivity based on the overnight rate or is there another interest rate benchmark just because if we use the overnight rates, that would imply kind of like 22.5 million of annual revenue and just wondering how much of that would have been captured in the Q2 revenues?

David Arnold

So, thanks, Geoff. It’s David. I’ll start and maybe John can add any extra color. It’s not as simple as monitoring a Bank of Canada overnight rate change and then extrapolating it fully to the trust revenue line on net interest income, primarily because really a couple of factors. One is, not all of the deposits that we receive generate the same level of net interest income.

On some of our arrangements, the arrangements with the clients have us testing on some of the rate hikes to them. So, not as easy as doing that. And then what I would say in Q2 is given the timing of the rate hikes it had a modest impact. It will have a more material impact in Q3. And then the third thing, which is very important is balances, right. Balances fluctuate depending on various corporate actions. And we struggle internally to predict those because it’s like predicting capital formation or derivatives trading revenue, which is very much market driven.

So, those would be the variables that play, but the key takeaways, it isn’t a straight line. And we would look to anywhere between $4 million to $5 million of net interest income over the course of this year given where rates are, but once again, Bank of Canada have a rate meeting coming in September. So, we’ll have to stay tuned on that too.

Geoff Kwan

The 4 million to 5 million that’s what you’re saying, I guess relative to what we saw in Q2 that would be the annual lift given where rates are today?

David Arnold

Yes.

Geoff Kwan

Okay. And then just my last question was just on Trayport. The average total subscribers I think was down very slightly, kind of quarter-over-quarter. Obviously, it’s had a very good gradual increase since you acquired it. Just wondering if there’s any color you can give on that?

David Arnold

Great. So, quickly before we do that, John, Geoff, I wanted to make sure I heard your question or answered it correctly. So, when I said the 4 million to 5 million that’s for the balance of this year, right? We think it’s about 8 million for the full-year. Hope it helps.

John McKenzie

And I’m laughing a bit, Geoff on the question on Trayport, because it’s – we only ever get asked about the sequential, if the sequential is down or the year-over-year if the year was down because I’m going to remind everyone that year-over-year we’re up 17%. So, I’m going to take that opportunity to do that. On the sequential piece, all you’re actually seeing there is a restructuring in terms of one of the activities in a single broker that offset what otherwise would have been subscriber growth sequentially. And so what I mean by that is a broker had an underperforming desk that they chose to wind down, it would have had some dedicated traders associated with it.

So, those trader subscriptions are no longer there because that business of that broker isn’t there anymore and that offset what otherwise would have been growth in the quarter. So, it’s nothing to take any concern to in terms of the overall strength through the health of the business. And I think we indicated in David’s notes about 9 new net paying clients in the quarter as well, which will contribute to subscriber growth in the future quarters, but that was the step down in terms of that sequential impact.

Geoff Kwan

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you and good morning.

John McKenzie

Good morning.

Etienne Ricard

On equity trading, could you please comment on how competitive dynamics have changed since CBOE closed on the acquisition of NEO back in June, if at all?

John McKenzie

Yes, to be [candidate] [ph], they really haven’t changed any material way. So, CBOE was already active in Canada with their ownership of MATCHNow, NEO already an active player. So, we haven’t seen material changes or material changes in the business model and you’ll see that in terms of our overall market share continues to be pretty much either flat to up from where we’re a year ago.

So, it’s something that we are constantly monitoring and constantly engaging with clients to make sure that we are meeting their needs. We talked earlier about the actual trade conference that we just initiated in June. That was extremely effective in terms of bringing up the trading community, understanding what their pain points are, their net needs are, and also the stress test some of our ideas in terms of market reform and get real life feedback from the trading community.

So, our competitive position here continues to be to focus on what the client needs are, so they don’t need to trade anywhere else.

Etienne Ricard

Understood. And on TSX Trust, given you have previously noted this business, has a higher growth potential over time, could you comment on what led to lower trends for agency fees on an organic basis year-over-year?

John McKenzie

I mean that would be a combination of all the fees within trust, so [transformation] [ph] to trust activity. So, very much like the other parts of the TSX and TSX Venture financing area when we have lower transaction activity. They’re also lower trust or transfer or corporate actions.

So, the overall book of business, the overall client base continues to grow in trust and transfer, but you have lower activity levels in the first half of the year, as compared to a year ago.

Etienne Ricard

Okay, great. And I think you’ve been buying back stock more actively in Q2, looking forward should we expect you to become more meaningful acquirers of your stock?

David Arnold

Good question, Etienne. You’re right. We did purchase a substantial amount of our normal course issuer bid authorized allotment this quarter. It isn’t something that we actually direct. We have a standing order based on a ratio and a broker of record then executes accordingly. We have about 5,000 of our normal course issuer bid outstanding, and we are evaluating various different capital deployment strategies, right.

And one of the things we have to obviously do is look to the organic growth initiatives that we have underway, as well as sunsetting some of our very large initiatives like our post-trade modernization, which as you know now goes into industry testing. And so given the opportunities that we have for capital deployment, whether it be for organic growth, whether it be for dividend increases, increased share buybacks or M&A activity as we monitor what transpires on the pricing front in the marketplace, I would stay tuned, but right now we’ve got about 5,000 remaining to go.

John, do you want to add anything?

John McKenzie

My simple summary of David’s comments is, we are remaining and keeping our flexibility in what has been a bit more of an unsettling marketplace. So, we are evaluating all tools and want to maintain a maximum flexibility and the strength of our balance sheet so that we can actually take advantage of opportunities as they come.

Etienne Ricard

Thank you very much.

Operator

Thank you. Your next question comes from Graham Ryding of TD. Please go ahead.

Graham Ryding

Hi, good morning. We saw a nice lift quarter-over-quarter in AST revenue, was that largely higher margin income or would you attribute that to?

John McKenzie

Margin income was part of it, but there were a couple of other parts of the business that did well. And so, I wouldn’t say it is all margin income at all, Graham.

Graham Ryding

Okay. I know, you don’t give specific expense growth, but maybe you could just help us think about – the growth we saw this quarter if you strip out the acquisition was 7% year-over-year. I think it was 2% year-over-year last quarter. So, how should we be thinking about what’s a reasonable expense growth expectation, should we be thinking closer to, sort of the 4% you’ve done year to date or is this 7% growth in this quarter potentially a run rate for expense growth.

John McKenzie

Yes, I would guide you towards closer to the first half of the year cumulative for the 4% to 5% kind of range.

Graham Ryding

Okay. That’s helpful. On the derivatives side, your interest rate derivative volumes are actually down year-over-year. That surprises me somewhat. I just thought in an environment of rising rates that might actually foster higher interest rate derivatives activity. Could you provide any color there, John?

John McKenzie

Yes, I’m happy to. So, in the long-term, you’re absolutely right, Graham. And so when you actually – you see growth in terms of other parts of the interest rate curve, the challenge in the short-term and particularly the challenge this year is the biggest impact year-over-year has been in the products like the back. So, the short-term [30-day] [ph] products. And when we’re in an environment where they are rapidly changing Bank of Canada rates and they are not predictable in terms of timing or amounts, that’s difficult for speculators or hedgers or other people to use those products.

So, what I would call it is, it’s not constructive volatility in the short-term when there’s not good predictability about those rate changes. So, as that normalizes in a higher rate environment, you’re absolutely right that will give more tailwinds to support the product, but in the short-term, when the timing and size of Bank of Canada rates changes are less predictable, it’s harder for people to use those products and they take on more risk when they’re doing them, which is not the intent of the product. So, we do see this being as a short-term issue as bank rates make some quick changes and then that will stabilize and give more tailwind.

Graham Ryding

Okay, that’s helpful. And my last question, if I could, just the CDS modernization project. I think it’s on track to finish in the first half of 2023. Is there potential here that this could be pushed out further and the CapEx could be increased again or how you’re feeling about that project at this stage?

John McKenzie

I’m feeling cautiously optimistic. Is that hedging enough for you? We spent a lot of time on this on a regular basis. I’m going to take the opportunity to give a shout out to the folks that are working on us because this has been an extremely challenging initiative, especially in the backdrop of COVID anytime you’re doing large scale software development in multiple jurisdictions and you can’t put people in the same room to solve challenges that does make the time to do things like user acceptance testing and finalizing the development and much more challenging to finish, but what we had in the last couple of weeks and we’ve been through two different board sessions on this was a significant milestone in terms of that we are now nearly complete all of our internal user testing and have announced to the Street when we are going to be going live in mid-September for industry test and development.

And we’ve committed to the industry at least 9 months to do that. So that gives us the higher degree of kind of cautious optimism around the timing to execute this because we’re now at a place where we’ve got the product. It meets the needs. It’s functional, and we can put it in the hands of the clients starting in September, so they can do their own testing and development over the next year to be ready to go live in 2023.

The estimates that we’ve given both around timing and around total capital are all reflective of that, and reflects some contingency that there still could be some unknown challenges as we go through that process. So, best information we have at the time and a reasonable degree of certainty in terms of that real milestone that’s come through that we’re going to be live in market in the fall this year.

Graham Ryding

Okay. That’s it for me. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Jaeme Gloyn of National Bank. Please go ahead.

Jaeme Gloyn

Yes, thanks. Good morning. The quarter included a lot of good to see pricing increases across various businesses. Somewhat unexpected, I guess, or maybe wasn’t necessarily hinted at on previous quarters. Is there anything that you can share in terms of what’s in the pipeline from other price increases that could be in proposal stages or something that you’re [work shopping] [ph] in the background?

John McKenzie

Yes. Jaeme, I appreciate the question. And so, I mean, obviously, I can’t share things that we haven’t made public yet in terms of either filing with regulators or notices to clients, but what I will let you know is that we are actually actively looking at those other businesses that weren’t part of the price changes we’ve already announced.

So, businesses like listings and capital formation for in some cases we haven’t done pricing on the senior market, I think in four years and on the venture market in 10 years, we are looking at what are the appropriate changes we can make there that are still consistent with maintaining a very strong competitive position both domestically and globally. And that’s one we are actually looking at. And I would expect to be communicating both with regulators in the street in the near-term.

Jaeme Gloyn

Okay great. And then just in terms of some of the new trading initiatives, I assume these are coming from customer driven demands. Can you, sort of maybe elaborate on what you’re expecting from a – are there market share benefits for TMX? Are there fee benefits for TMX like what are the knock-on effects for your business by introducing some of these new products and tools?

John McKenzie

It actually depends on the tools. So, some of them are actually about driving incremental market share. Incremental also strengthen liquidity, so over the overall quality of the volume as well. In some cases like the work that we did on market on close and the work we’re doing on dark, those are also, as you said, those are premium offerings that drive also a higher yield. So, they’re more valuable products to the street and they command a premium in terms of the revenue impact.

And I think you’re seeing some of that in terms of the revenue growth in equity trading year-over-year because while volume is off, the actual yield is up and the overall revenue growth is there. So, you’re exactly right. It is a combination of those pieces and it’s driven specifically by identified client needs of the community.

Jaeme Gloyn

Okay. And if I’m thinking about it, maybe more bit of a modeling question, I guess, right now, but we’re seeing higher capture rates flowing through on equities and trading. Now there’s some noise [indiscernible] fixed income is in there too, but is there more upside to let’s say revenue per contract trade or for equity trade in the last couple of quarters given some of these new initiatives or are you seeing like that as maybe more of a high watermark? Just trying to get a little bit more insight into where the revenue per trade can trend towards over the next several quarters to years?

John McKenzie

Yes. So, you’ve got to look at two things. Yes, we’re seeing more premium revenue in terms of the mix year of revenue in terms of the kind of amount of the volume that’s in the closure in those other dark products, but it’s also, Jaeme look at the shift in terms of the trade across higher value securities across all markets. So, we’ve got trade value growth in TSX, I think year-over-year, we’re up about 17% in dollar value traded, where venture has declined somewhat year-over-year.

So when you’ve got the higher stock prices, you also have a higher tier in terms of revenue capture because of the lower share prices on some of the venture stocks are at different capture rate as well. So, you’ve got to look at that business mix as well.

Jaeme Gloyn

Yes, understood, but absent any changes in business mix or assuming that’s all equal like the…

John McKenzie

Sustainable.

Jaeme Gloyn

Yes, okay. Good stuff. Okay. That’s it for me. Thank you.

John McKenzie

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

Paul Malcolmson

Well, thank you, Michelle. And just before we close, I want to give you two updates from the Investor Relations team. Amanda Tang, who most of you know well, will be off to maternity leave for the next year or so. Just this past Monday Amanda had of boy. Their second son now and everyone is doing very well. Congratulations, Amanda from all of us. While Amanda is off, [indiscernible] will be filling in for Amanda. Most recently, [Technical Difficulty] financial planning and analysis function, and I know you’ll all enjoy working with [indiscernible].

In closing, I want to thank everyone for listening today. If you have any further questions, the contact information for media, as well as for Investor Relations is in our press release and we’d be happy to get back to you. Stay well and have a good weekend everyone.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

TMX Group Limited’s (TMXXF) CEO John McKenzie on Q2 2022 Results – Earnings Call Transcript

TMX Group Limited (OTCPK:TMXXF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Company Participants

Paul Malcolmson – Vice President, Enterprise, Sustainability and Investor Relations

John McKenzie – Chief Executive Officer

David Arnold – Chief Financial Officer

Conference Call Participants

Geoff Kwan – RBC Capital Markets

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank

Operator

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Q2 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday July 29, 2022.

I would now like to turn the conference over to Paul Malcolmson, VP, Enterprise, Sustainability and Investor Relations. Please go ahead.

Paul Malcolmson

Well, thank you, Michelle, and good morning, everyone. I hope that you and all of your families are staying well and enjoying the summer. Thank you for joining us this morning for the second quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday afternoon and a copy of our press release is available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following opening remarks, we’ll have a question-and-answer session.

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

And with that, I’d like to turn the call over to John.

John McKenzie

Thank you, Paul and good morning, everyone. Thank you so much for joining us today to discuss TMX Group’s financial performance for the second quarter and for the first six months of the year. And let me start by echoing Paul’s comments in terms of wishing everyone an excellent summer, a well-deserved good summer after two years that have been more challenging.

Now, David will join us in a few minutes to take you through the second quarter results in detail, but before he does, my comments this morning will really focus on TMX’s Group’s performance throughout the first half of the year, the progress that we are making on our enterprise growth initiatives, and the proactive measures TMX has undertaken in an effort to address the needs of our broad and diverse stakeholder group, and to help push the evolution of our capital markets ecosystem to ensure we maintain our competitive edge into the future.

Now, in many respects, and this is no secret to anyone listening, the 2022 business environment looks very different from the same time last year. Macroeconomic conditions, geopolitical events, including the conflict in Ukraine, rising interest rates and inflation concerns have negatively impacted global markets. And it is a stark reality for our clients and peers across the financial industry and people around the world. But before we begin to examine the business impacts, I want to take a moment to pause and send our thoughts out to support all those people who are directly and indirectly affected by these global challenges.

Now, turning to our performance. Overall, TMX continued to deliver positive results. Both for the second quarter and the first six months of the year, despite the impact of significant and persistent headwinds on some of our key businesses, including capital raising and equity trading activity. TMX reported revenue of $573.2 million for the first six months of the year, which is a 15% increase from the same period of 2021, due to higher revenue from derivatives Trading and Clearing, Trayport, and Capital Formation.

Increased revenue was partially offset by lower revenue from equities in Fixed Income Trading and Clearing, due to lower trading volumes on the Toronto Stock Exchange and TSX Venture Exchange. [The higher] [ph] revenue included $60.3 million in revenue from BOX, which was consolidated in January 2022, as well as revenue from our 2021 acquisitions. 21.1 million from AST Canada acquired in August 2021 and 0.8 million from Trade Signal acquired in June 2021.

Now, excluding revenue from last year’s acquisitions, revenue was down 1% from the first six months of 2021. And on an adjusted basis, diluted earnings per share was 3.71 in the first six months, a decrease of 2% from 2021. Total operating expenses increased 27%, compared to last year or 4% when you exclude expenses related to BOX, AST Canada, and Trade Signal.

And TMX’s performance in the first half of 2022 again highlights the power of our resilient business model and underscores the efficacy of our adaptive long-term diversification strategy. TMX’s corporate purpose is to make markets better and [empower bold ideas] [ph] and it’s a central and guiding theme in that strategy. Our pledge to our vast and varied group of stakeholders and we never lose sight of the importance of our role at the center of the market and what this ecosystem of opportunity means to the country’s economy and the people in the communities from coast to coast.

Now, turning to each of our business areas. Revenue from capital formation in the first six months of 2022 was 137.2 million or 5% increase from last year, and the year-over-year increase reflected the inclusion of revenue from AST Canada and higher revenue from initial and sustaining listing fees, partially offset by lower additional listing fees reflecting a decrease in the number of financing transactions and dollars raised on TSX and TSX Venture.

And coming off a record [second 2021] [ph], gold conditions have been less favorable for capital raising in 2022, due to inflation concerns, rising interest rates, and increased volatility. And while the IPO markets slowed year-over-year, we proudly welcome new listings to the market in the first half of 2022, including Bausch & Lomb, Ivanhoe Electric, Dream Residential REIT, and two large [Florida based SPACs] [ph] Agrinam Acquisition Corporation and FG Acquisition Corp.

And we remain actively engaged with potential IPO candidates in all sectors, as well as deal makers from across the interconnected ecosystem. And we also continue to see evidence of the strength of TMX’s unique value proposition for companies looking to access public markets. TSX Ventures’ signature Capital Pool Company program is thriving and despite the overall challenging capital raising conditions. TSX Venture added 46 new CPCs in the first half of 2022, a 24% increase over the first half of 2021.

Now, consistent with TMX’s corporate purpose, our work to ensure we remain a market of choice for the next wave of great companies poised to come to market is proactive and it’s an always on campaign. So, in June, TSX Venture launched Venture Forward. It’s a new community driven program focused on strengthening Canada’s crucial public venture market. This collaborative long-term initiative is designed to engage our public venture stakeholders, including entrepreneurs, investors, financiers, lawyers, and advisors to help identify priority challenges and friction points and map out a plan to pursue workable solutions.

We have begun to reach out to stakeholders to help frame the issues and our next steps include developing near and longer-term plans and we intend to publish highlights of our findings and feedback along the way with planned next steps by the end of the year. June also marked the in-person return to the Prospectors and Developers Association of Canada or PDAC Convention.

And for years, our exchanges have proudly supported this massively popular and annual event, which brings mining companies, investors, and policymakers from all over the world together into Toronto. And it makes good sense. TMX is the world’s premier marketplace for resource companies to raise capital. More than 40% of the world’s public mining company are listed on TSX and TSX Venture. And we were honored this year to participate in the International Mines Ministers Summit at PDAC 2022.

The theme of this year’s summit, an annual meeting of leading mining representatives and governments from around the world was ESG and emissions reductions, and the increased production of lithium, nickel, copper, and other essential minerals in the global efforts to achieve net zero. And we shared TMX’s perspectives with the ministers on how governments can help support a thriving mining sector by minimizing regulatory burden where appropriate by committing to make the necessary infrastructure investments and to fostering collaboration with local communities and specifically indigenous communities.

Mining is a rapidly evolving industry. And as the transition to low carbon economy continues to gain momentum, investors are paying close attention. And so, we recently launched a new benchmark to serve the needs of investors seeking increased exposure to and deeper insights into the clean tech and energy transition story. The new S&P/ TSX Battery Metals Index measures the performance of TSX and TSX Venture listed companies focused on the exploration, development, and production of select commodities that serve as significant inputs and the decarbonization of the transportation sector.

Now, I’d like to turn to derivatives. Excluding BOX, revenue from derivatives trading and clearing was 75.3 million in the first six months of 2022, an increase of 5% from last year. Now, the increase was driven by 15% higher revenue from CDCC, due to repo dealer activity and fee changes and a 2% increase in revenue from Montreal Exchange, reflecting higher overall volumes and fee changes on the SXF, particularly offset by a slightly unfavorable product and client mix.

Total volume increased 2% over the first half of 2022 with strong growth in overall open interest at June 30, 2022, up 25%, as compared to the same point last year. Now, in the midst of a volatile and turbulent market environment, investor demand for tools to effectively and efficiently manage risk increased year-over-year. Volumes traded in options grew 21% over the first half of 2021, led by trading in the energy and financial sectors and reflecting increased activity from our institutional investors, as well as our retail client base.

Trading in ETF options also gained strong momentum, particularly in the second quarter amongst institutional investors with volumes up 11%, compared to the first six months of 2021. And volume in Index futures trading was up 19% in the first half of the year, compared to 2021 as clients move to manage exposure to volatility in equity markets.

The first half of the year was also marked by sustained growth in our newer government of Canada bond futures contracts with 38% increase in the volume traded in the CGF or the five-year contract and 155% increase in volumes traded in the CGZ, our two-year contract. These recent additions to our product suite are proving effective and creating efficient cross market trade opportunities and continue to gain in profile among global investors.

Now, the maturation of the CGF product itself is a definitive success story. As it has now reached levels of liquidity where introductory incentives are no longer required to sustain its growth.

Moving now to Trayport, revenue in the first half of the year was 79.2 million, a 7% increase from the first half of 2021, 14% in common currency or pound sterling, and driven by an 18% increase in trader subscribers, annual price adjustments, and consultancy revenues.

Now, the conflict in the Ukraine and the impact of the corresponding sanctions continue to drive increased volatility and global energy trading markets. And Trayport’s core network of dynamic tools and solutions supports the needs of traders across the European energy markets and connects clients to execution venues and clearinghouses across key power and natural gas markets.

Now, while primarily focused on meeting the demands of a robust market, during the first half of 2022, Trayport also successfully advanced on its global strategy to diversify and to move into new asset classes and geographies. In June, Trayport announced a minority investment in Ventriks, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence.

And under a new partnership agreement, Trayport will further expand its product offering to meet the growing client demand for data and analytics. The Ventriks solution complements Trayport’s existing suite of data, automated and algorithmic trading tools and will further enhance decision making and improve the overall trading experience.

In closing today, I want to commend as always our people for the work that they do and their everyday contribution to TMX’s success. And specifically to thank our team of professionals for their efforts this summer in transitioning TMX into a hybrid working environment. I’m very confident that a new balance of virtual and in-person work will ultimately prove more stimulating, engaging and productive for all of us. And we don’t have to look too far for compelling and relevant examples of the value of renewed in-person engagements.

In June, our team hosted two annual trading conferences in-person for the first time since 2019, the TMX Equity Conference in Toronto; and the Canadian Annual Derivatives Conference or CADC in Montreal. Each of these signature events brings together professionals and industry experts, our partners across the capital markets ecosystems to share perspectives on the current and future state of our markets and to exchange ideas on challenges and opportunities across the Canadian equities, fixed income, and derivatives landscape.

So, I’d like to thank everyone in the markets division to our stellar marketing and support teams for pulling together two extremely successful and well attended events. In addition, last week, we also took an important step forward towards TMX’s reconciliation journey. A diverse group of business leaders from across TMX gathered in Wendake, a First Nation in Quebec to participate in an immersive shared learning experience to develop TMX’s foundational principles and philosophies for reconciliation.

This two-day session featured a productive open exchange of ideas and perspectives, highlighted by invaluable insights and experience shared by members of our host community, The Huron-Wendat Nation. The efforts of the team and the contribution from our generous hosts will help to define the long-term vision of end tactics for how TMX can contribute to a future of shared prosperity for indigenous businesses and communities. This should be no surprise. This is what we do at TMX.

TMX is a purpose-driven people-driven organization. Employees across the enterprise are unified by our unwavering commitment to make markets better and empower bold ideas. And this mindset fuels all of our clients and stakeholder engagements and guides our business and corporate initiatives during robust and thriving markets and even more importantly when challenging conditions negatively impact key components of our ecosystem.

In all market conditions, the pursuit of meaningful ways to do better, to be better is constant. And for TMX, making markets better includes ensuring that we have the most resilient, robust and reliable operating systems and protocols, constantly striving to adapt our products and services across the franchise to meet the evolving need of the modern marketplace and our increasingly global client base, and activating TMX as a leading voice for measures to create conditions for our enduring success.

So with that, let me say thank you and will turn the call over to David.

David Arnold

Thank you, John, and good morning, everyone. As John mentioned, our results for the second quarter reflect the continued resiliency of our diverse business model with overall revenue growth of 17%, including increases across all of our business segments. Revenue, excluding the Boston Options Exchange or BOX for short, which we consolidated on January 3 this year, AST Canada, which we acquired on August 12, 2021; and Trade Signal, which Trayport acquired on June 1, 2021 was up 1% in the quarter, compared with last year.

We managed our cost increases to below the current rate of inflation in Canada in the second quarter with operating expenses, excluding BOX, AST Canada and Trade Signal, up 7%, compared with Q2 of 2021 and year to date when compared with the same six-month period a year ago, our costs are only up 4% well below the current rate of inflation in Canada.

We reported an increase of 20% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q2 of 2021 where we incurred a 19.8 million charge due to a UK corporate income tax rate change, as well as an increase in income from operations of 5.4 million, compared with Q2 of 2021. Our adjusted diluted earnings per share decreased slightly by 1%, largely driven by higher operating expenses, partially offset by higher revenue.

Turning now to our businesses. We saw year-over-year revenue increases in all of our segments and I will start with the businesses that saw the largest year-over-year increases. Revenue in derivatives trading and clearing grew by 89% this quarter, compared to Q2 of 2021, since we now consolidate BOX and that represents 27.3 million of revenue, which is included in this segment for Q2.

Volumes on BOX increased by 20% compared Q2 of last year and BOX’s market share and equity options grew 6%, up 1% from Q2 of 2021. Derivatives trading and clearing revenue excluding BOX was up 9% in the quarter, driven by a 16% increase in CDCC revenue, and a 6% increase in revenue from the Montreal Exchange.

The Montreal Exchange revenue increase reflected first, a 2% volume increase this quarter, compared with Q2 of 2021; second, a favorable product and client mix; and third, positive impact on trading fees on the heels of the pricing changes for our S&P, TSX 60 Index Standard Futures or SXF, which came into effect in January of this year.

Turning to capital formation. Revenue grew by 6% this quarter, which included approximately 12.2 million of revenue related to AST Canada. Excluding AST Canada, revenue in the quarter decreased 12% in capital formation, primarily on the heels of lower additional listing fees in the quarter, due to decreases in both the total number of financings and the total financing dollars raised, and a slight decrease in initial listings fees.

The additional listing fees decrease on TSX reflected a 27% decrease in the number of additional listing transactions billed at the maximum listing fee of 250,000 and a 16% decrease in the number of transactions below the maximum fee when compared to very strong levels of activity in Q2 of last year. This decrease was partially offset by higher sustaining listing fees in the quarter, reflecting an increase in the market capitalization of TSX and TSX venture issuers at December 31, 2021 over the prior year.

Revenue in our Global Solutions Insight & Analytics Segment was up 5% over Q2 of 2021 with increases from both Trayport and TMX data links. Revenue from Trayport was up 5% in Canadian dollars or 14% in pound sterling. A 14% increase in pound sterling was primarily driven by a 17% increase in trader subscribers, annual price adjustments, and a one-time consultancy revenue for development services.

Revenue in our TMX data links business, including colocation, grew 5% driven by increases in data feeds, colocation, as well as benchmarks and indices, partially offset by a reduction in revenue from lower usage based quotes. There was a favorable foreign exchange impact of approximately 1 million from a weaker Canadian dollar relative to the U.S. dollar this quarter when compared with Q2 of 2021, which accounts for roughly 2% of the 5% year-over-year increase.

The average number of professional market data subscriptions for TSX and TSX Venture products decreased by 3% in the quarter, compared with last year where subscriptions on the Montreal Exchange were up 3%. Revenue from our equities and fixed income trading and clearing segment was up 3% in the quarter.

Within the segment, equities and fixed income trading revenue increased 7% in the quarter, compared with Q2 of last year, despite a 9% decline in overall volumes of securities traded on our equities marketplaces, reflecting a favorable product mix within TSX and the impact of April 2022 price changes on continuous trading for securities with a share price below $1.

While trading volumes on TSX securities increased by 9% in the quarter, volumes on TSX Venture Exchange and TSX Alpha Exchange decreased by 39% and 11% respectively when compared with Q2 last year, which is why our overall volumes of securities, traders on equities marketplaces is down 9%.

Despite overall volumes of securities traded on equities marketplaces being down, our market share increased by 5%. On the fixed income trading side, revenue increased by – revenue increased versus Q2 a year ago, reflecting higher activity in Government of Canada bonds and swaps. Revenue from our CDS business was down 2%, reflecting lower issuer services and corporate action revenue, partially offset by higher revenue from custodial fees and standby liquidity facilities, compared with Q2 a year ago.

Turning to our expenses. Operating expenses in the second quarter increased by 32%, compared to Q2 last year. Included in this increase are the costs associated with BOX, which we now consolidate, as well as the two acquisitions, namely AST Canada and Trade Signal, as well as costs associated with those transactions, namely AST integration costs, amortization of acquired intangibles for AST Canada and BOX, and the transition services agreement with AST. All of which in aggregate amounted to 28.7 million of expenses in Q2 of 2022.

Excluding the aggregate amount of expenses associated with BOX, AST Canada, and Trade Signal, which I just mentioned, this translates into a year-over-year increase of 7% for operating expenses, compared with Q2 of last year. The higher expenses reflected higher headcount in payroll costs, increased long-term employee incentive plan costs, as well as increased expenses for travel and entertainment, including hosting our conferences and events, which are returning to in-person after our hiatus during the last few years.

In addition, expenses were reduced in the second quarter of last year due to a release of a provision for restoration costs for our data center. These increases in costs were partially offset by lower short-term employee incentive time costs, lower severance, and acquisition and related costs related to AST Canada in Q2 of 2021.

Turning to our integration of AST Canada, our integration of AST Canada continues to progress very well. We expect total revenue and expense synergies of approximately 10 million, which is up 25% versus our previous estimate of 8 million, which will be substantially achieved by the end of 2024.

As it relates to 2022, we now expect at least 3.5 million of these cost synergies in 2022, which is up from our original estimate of 2 million for 2022. We continue to expect integration costs related to AST Canada of approximately 20 million over the 16 month period from September 1 of last year till the end of this fiscal year December 31.

Looking at our results sequentially, revenue only decreased 1 million from Q1 of 2022 to Q2 of 2022, which reflected lower equities and fixed income trading and derivatives trading and clearing revenue, which was primarily driven by lower BOX volumes in the quarter. This was mostly offset by higher capital formation revenue, driven by higher other issue services revenue and additional listing fees revenue from Q1 to Q2 of this year.

Operating expenses increased 2.5 million or 2% from Q1, including an increase of 3.7 million related to AST integration. There were also increases in technology spending, director fees, travel, and performance incentives. These were partially offset by lower salaries and payroll taxes of 3.2 million, lower legal fees, and lower termination allowances.

Turning now to our balance sheet. In the second quarter of 2022, we spent 61.3 million repurchasing 460,000 of our common shares under our normal course issuer bid program. Our debt-to-adjusted EBITDA ratio was 1.7x at the end of the quarter. And we also held over 432 million in cash and marketable securities at the end of the quarter, which is approximately 227 million in excess of the 205 million we target to retain for regulatory and credit facility purposes.

Last night, our Board of Directors approved a quarterly dividend of $0.83 per common share payable on August 26 to shareholders of record as of August 12. In the second quarter, we paid out 44% of our adjusted earnings per share, which is marginally below the midpoint of our target payout ratio of 40% to 50%.

So that concludes my formal remarks. And I’d now like to turn the call back to Paul for our Q&A period.

Paul Malcolmson

Thanks, David. Michelle, could you please outline the process for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.

Geoff Kwan

Hi, good morning. John, you were talking earlier just being engaged on the Issuer side and the pipeline. Just wondering if you can expand on that a little bit. Just how it’s changed in recent months, both on the IPO, but also the follow on, for whatever visibility you have? Just trying to get a sense as to things are looking a little bit better.

John McKenzie

Yes, I’m happy to do that, Geoff. Thanks for the question. It’s an interesting dynamic when you look at the activity in 2022 because when you look at it simply in reference to 2021, it looks quite challenging, but interestingly if you actually have a look back and look at our 2022 activity both across the senior market and the venture market as compared to call it the four years before 2021 you’re going to find this is actually one of the strongest markets that we’ve had.

So, I think that’s why actually some folks are surprised that we’re not seeing larger revenue challenges than they would have expected in this marketplace. So, with respect to your pipeline question, the pipeline actually for new issues continues to grow. It’s difficult to give guidance in terms of when companies can come to market because it really is around market conditions for them to do their financing, but that’s why we wanted to reflect some of the names that actually got a public financing done because those are ones that actually become benchmarks for other transactions to build off in the future.

So, we do see that positive momentum in terms of potential listings, but it’s hard to say what time they’d come to market. The other silver lining that we talked about a bit in the comments was the activity that you see in venture around, particularly around CPC. So, Capital Pool Company programs because they’re founder base, they’re less sensitive to what’s going on in both market volumes and valuation and volatility.

And so those transactions are getting done even in difficult markets. And I think I said earlier, they’re up about 24% year-over-year and we’ve listed almost 50 new ones this year. So that gives you a bit of context. We are continuing to see financing transactions. You see that in the transaction data that the transaction activity is still robust, but just at smaller size than you would have seen last year. So, in another way that actually impacts our revenue because we’re actually seeing fewer transactions that are capping out at the caps because they are smaller sized deals.

So, overall, all things, if it wasn’t for 2021, we would be talking about what a healthy market this is. And it’s only in reference to last year that you’ve seen the delta.

Geoff Kwan

Okay. Thanks for that. My next question was on the TSX Trust AST Canada. You’ve talked about that sensitivity of 25 basis points higher rate is roughly about 2.5 million of additional annual revenue, the bank turnover over net rates up 225 basis points so far this year. Now, is that interest rate sensitivity based on the overnight rate or is there another interest rate benchmark just because if we use the overnight rates, that would imply kind of like 22.5 million of annual revenue and just wondering how much of that would have been captured in the Q2 revenues?

David Arnold

So, thanks, Geoff. It’s David. I’ll start and maybe John can add any extra color. It’s not as simple as monitoring a Bank of Canada overnight rate change and then extrapolating it fully to the trust revenue line on net interest income, primarily because really a couple of factors. One is, not all of the deposits that we receive generate the same level of net interest income.

On some of our arrangements, the arrangements with the clients have us testing on some of the rate hikes to them. So, not as easy as doing that. And then what I would say in Q2 is given the timing of the rate hikes it had a modest impact. It will have a more material impact in Q3. And then the third thing, which is very important is balances, right. Balances fluctuate depending on various corporate actions. And we struggle internally to predict those because it’s like predicting capital formation or derivatives trading revenue, which is very much market driven.

So, those would be the variables that play, but the key takeaways, it isn’t a straight line. And we would look to anywhere between $4 million to $5 million of net interest income over the course of this year given where rates are, but once again, Bank of Canada have a rate meeting coming in September. So, we’ll have to stay tuned on that too.

Geoff Kwan

The 4 million to 5 million that’s what you’re saying, I guess relative to what we saw in Q2 that would be the annual lift given where rates are today?

David Arnold

Yes.

Geoff Kwan

Okay. And then just my last question was just on Trayport. The average total subscribers I think was down very slightly, kind of quarter-over-quarter. Obviously, it’s had a very good gradual increase since you acquired it. Just wondering if there’s any color you can give on that?

David Arnold

Great. So, quickly before we do that, John, Geoff, I wanted to make sure I heard your question or answered it correctly. So, when I said the 4 million to 5 million that’s for the balance of this year, right? We think it’s about 8 million for the full-year. Hope it helps.

John McKenzie

And I’m laughing a bit, Geoff on the question on Trayport, because it’s – we only ever get asked about the sequential, if the sequential is down or the year-over-year if the year was down because I’m going to remind everyone that year-over-year we’re up 17%. So, I’m going to take that opportunity to do that. On the sequential piece, all you’re actually seeing there is a restructuring in terms of one of the activities in a single broker that offset what otherwise would have been subscriber growth sequentially. And so what I mean by that is a broker had an underperforming desk that they chose to wind down, it would have had some dedicated traders associated with it.

So, those trader subscriptions are no longer there because that business of that broker isn’t there anymore and that offset what otherwise would have been growth in the quarter. So, it’s nothing to take any concern to in terms of the overall strength through the health of the business. And I think we indicated in David’s notes about 9 new net paying clients in the quarter as well, which will contribute to subscriber growth in the future quarters, but that was the step down in terms of that sequential impact.

Geoff Kwan

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you and good morning.

John McKenzie

Good morning.

Etienne Ricard

On equity trading, could you please comment on how competitive dynamics have changed since CBOE closed on the acquisition of NEO back in June, if at all?

John McKenzie

Yes, to be [candidate] [ph], they really haven’t changed any material way. So, CBOE was already active in Canada with their ownership of MATCHNow, NEO already an active player. So, we haven’t seen material changes or material changes in the business model and you’ll see that in terms of our overall market share continues to be pretty much either flat to up from where we’re a year ago.

So, it’s something that we are constantly monitoring and constantly engaging with clients to make sure that we are meeting their needs. We talked earlier about the actual trade conference that we just initiated in June. That was extremely effective in terms of bringing up the trading community, understanding what their pain points are, their net needs are, and also the stress test some of our ideas in terms of market reform and get real life feedback from the trading community.

So, our competitive position here continues to be to focus on what the client needs are, so they don’t need to trade anywhere else.

Etienne Ricard

Understood. And on TSX Trust, given you have previously noted this business, has a higher growth potential over time, could you comment on what led to lower trends for agency fees on an organic basis year-over-year?

John McKenzie

I mean that would be a combination of all the fees within trust, so [transformation] [ph] to trust activity. So, very much like the other parts of the TSX and TSX Venture financing area when we have lower transaction activity. They’re also lower trust or transfer or corporate actions.

So, the overall book of business, the overall client base continues to grow in trust and transfer, but you have lower activity levels in the first half of the year, as compared to a year ago.

Etienne Ricard

Okay, great. And I think you’ve been buying back stock more actively in Q2, looking forward should we expect you to become more meaningful acquirers of your stock?

David Arnold

Good question, Etienne. You’re right. We did purchase a substantial amount of our normal course issuer bid authorized allotment this quarter. It isn’t something that we actually direct. We have a standing order based on a ratio and a broker of record then executes accordingly. We have about 5,000 of our normal course issuer bid outstanding, and we are evaluating various different capital deployment strategies, right.

And one of the things we have to obviously do is look to the organic growth initiatives that we have underway, as well as sunsetting some of our very large initiatives like our post-trade modernization, which as you know now goes into industry testing. And so given the opportunities that we have for capital deployment, whether it be for organic growth, whether it be for dividend increases, increased share buybacks or M&A activity as we monitor what transpires on the pricing front in the marketplace, I would stay tuned, but right now we’ve got about 5,000 remaining to go.

John, do you want to add anything?

John McKenzie

My simple summary of David’s comments is, we are remaining and keeping our flexibility in what has been a bit more of an unsettling marketplace. So, we are evaluating all tools and want to maintain a maximum flexibility and the strength of our balance sheet so that we can actually take advantage of opportunities as they come.

Etienne Ricard

Thank you very much.

Operator

Thank you. Your next question comes from Graham Ryding of TD. Please go ahead.

Graham Ryding

Hi, good morning. We saw a nice lift quarter-over-quarter in AST revenue, was that largely higher margin income or would you attribute that to?

John McKenzie

Margin income was part of it, but there were a couple of other parts of the business that did well. And so, I wouldn’t say it is all margin income at all, Graham.

Graham Ryding

Okay. I know, you don’t give specific expense growth, but maybe you could just help us think about – the growth we saw this quarter if you strip out the acquisition was 7% year-over-year. I think it was 2% year-over-year last quarter. So, how should we be thinking about what’s a reasonable expense growth expectation, should we be thinking closer to, sort of the 4% you’ve done year to date or is this 7% growth in this quarter potentially a run rate for expense growth.

John McKenzie

Yes, I would guide you towards closer to the first half of the year cumulative for the 4% to 5% kind of range.

Graham Ryding

Okay. That’s helpful. On the derivatives side, your interest rate derivative volumes are actually down year-over-year. That surprises me somewhat. I just thought in an environment of rising rates that might actually foster higher interest rate derivatives activity. Could you provide any color there, John?

John McKenzie

Yes, I’m happy to. So, in the long-term, you’re absolutely right, Graham. And so when you actually – you see growth in terms of other parts of the interest rate curve, the challenge in the short-term and particularly the challenge this year is the biggest impact year-over-year has been in the products like the back. So, the short-term [30-day] [ph] products. And when we’re in an environment where they are rapidly changing Bank of Canada rates and they are not predictable in terms of timing or amounts, that’s difficult for speculators or hedgers or other people to use those products.

So, what I would call it is, it’s not constructive volatility in the short-term when there’s not good predictability about those rate changes. So, as that normalizes in a higher rate environment, you’re absolutely right that will give more tailwinds to support the product, but in the short-term, when the timing and size of Bank of Canada rates changes are less predictable, it’s harder for people to use those products and they take on more risk when they’re doing them, which is not the intent of the product. So, we do see this being as a short-term issue as bank rates make some quick changes and then that will stabilize and give more tailwind.

Graham Ryding

Okay, that’s helpful. And my last question, if I could, just the CDS modernization project. I think it’s on track to finish in the first half of 2023. Is there potential here that this could be pushed out further and the CapEx could be increased again or how you’re feeling about that project at this stage?

John McKenzie

I’m feeling cautiously optimistic. Is that hedging enough for you? We spent a lot of time on this on a regular basis. I’m going to take the opportunity to give a shout out to the folks that are working on us because this has been an extremely challenging initiative, especially in the backdrop of COVID anytime you’re doing large scale software development in multiple jurisdictions and you can’t put people in the same room to solve challenges that does make the time to do things like user acceptance testing and finalizing the development and much more challenging to finish, but what we had in the last couple of weeks and we’ve been through two different board sessions on this was a significant milestone in terms of that we are now nearly complete all of our internal user testing and have announced to the Street when we are going to be going live in mid-September for industry test and development.

And we’ve committed to the industry at least 9 months to do that. So that gives us the higher degree of kind of cautious optimism around the timing to execute this because we’re now at a place where we’ve got the product. It meets the needs. It’s functional, and we can put it in the hands of the clients starting in September, so they can do their own testing and development over the next year to be ready to go live in 2023.

The estimates that we’ve given both around timing and around total capital are all reflective of that, and reflects some contingency that there still could be some unknown challenges as we go through that process. So, best information we have at the time and a reasonable degree of certainty in terms of that real milestone that’s come through that we’re going to be live in market in the fall this year.

Graham Ryding

Okay. That’s it for me. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Jaeme Gloyn of National Bank. Please go ahead.

Jaeme Gloyn

Yes, thanks. Good morning. The quarter included a lot of good to see pricing increases across various businesses. Somewhat unexpected, I guess, or maybe wasn’t necessarily hinted at on previous quarters. Is there anything that you can share in terms of what’s in the pipeline from other price increases that could be in proposal stages or something that you’re [work shopping] [ph] in the background?

John McKenzie

Yes. Jaeme, I appreciate the question. And so, I mean, obviously, I can’t share things that we haven’t made public yet in terms of either filing with regulators or notices to clients, but what I will let you know is that we are actually actively looking at those other businesses that weren’t part of the price changes we’ve already announced.

So, businesses like listings and capital formation for in some cases we haven’t done pricing on the senior market, I think in four years and on the venture market in 10 years, we are looking at what are the appropriate changes we can make there that are still consistent with maintaining a very strong competitive position both domestically and globally. And that’s one we are actually looking at. And I would expect to be communicating both with regulators in the street in the near-term.

Jaeme Gloyn

Okay great. And then just in terms of some of the new trading initiatives, I assume these are coming from customer driven demands. Can you, sort of maybe elaborate on what you’re expecting from a – are there market share benefits for TMX? Are there fee benefits for TMX like what are the knock-on effects for your business by introducing some of these new products and tools?

John McKenzie

It actually depends on the tools. So, some of them are actually about driving incremental market share. Incremental also strengthen liquidity, so over the overall quality of the volume as well. In some cases like the work that we did on market on close and the work we’re doing on dark, those are also, as you said, those are premium offerings that drive also a higher yield. So, they’re more valuable products to the street and they command a premium in terms of the revenue impact.

And I think you’re seeing some of that in terms of the revenue growth in equity trading year-over-year because while volume is off, the actual yield is up and the overall revenue growth is there. So, you’re exactly right. It is a combination of those pieces and it’s driven specifically by identified client needs of the community.

Jaeme Gloyn

Okay. And if I’m thinking about it, maybe more bit of a modeling question, I guess, right now, but we’re seeing higher capture rates flowing through on equities and trading. Now there’s some noise [indiscernible] fixed income is in there too, but is there more upside to let’s say revenue per contract trade or for equity trade in the last couple of quarters given some of these new initiatives or are you seeing like that as maybe more of a high watermark? Just trying to get a little bit more insight into where the revenue per trade can trend towards over the next several quarters to years?

John McKenzie

Yes. So, you’ve got to look at two things. Yes, we’re seeing more premium revenue in terms of the mix year of revenue in terms of the kind of amount of the volume that’s in the closure in those other dark products, but it’s also, Jaeme look at the shift in terms of the trade across higher value securities across all markets. So, we’ve got trade value growth in TSX, I think year-over-year, we’re up about 17% in dollar value traded, where venture has declined somewhat year-over-year.

So when you’ve got the higher stock prices, you also have a higher tier in terms of revenue capture because of the lower share prices on some of the venture stocks are at different capture rate as well. So, you’ve got to look at that business mix as well.

Jaeme Gloyn

Yes, understood, but absent any changes in business mix or assuming that’s all equal like the…

John McKenzie

Sustainable.

Jaeme Gloyn

Yes, okay. Good stuff. Okay. That’s it for me. Thank you.

John McKenzie

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

Paul Malcolmson

Well, thank you, Michelle. And just before we close, I want to give you two updates from the Investor Relations team. Amanda Tang, who most of you know well, will be off to maternity leave for the next year or so. Just this past Monday Amanda had of boy. Their second son now and everyone is doing very well. Congratulations, Amanda from all of us. While Amanda is off, [indiscernible] will be filling in for Amanda. Most recently, [Technical Difficulty] financial planning and analysis function, and I know you’ll all enjoy working with [indiscernible].

In closing, I want to thank everyone for listening today. If you have any further questions, the contact information for media, as well as for Investor Relations is in our press release and we’d be happy to get back to you. Stay well and have a good weekend everyone.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

TMX Group Limited’s (TMXXF) CEO John McKenzie on Q2 2022 Results – Earnings Call Transcript

TMX Group Limited (OTCPK:TMXXF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Company Participants

Paul Malcolmson – Vice President, Enterprise, Sustainability and Investor Relations

John McKenzie – Chief Executive Officer

David Arnold – Chief Financial Officer

Conference Call Participants

Geoff Kwan – RBC Capital Markets

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank

Operator

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Q2 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday July 29, 2022.

I would now like to turn the conference over to Paul Malcolmson, VP, Enterprise, Sustainability and Investor Relations. Please go ahead.

Paul Malcolmson

Well, thank you, Michelle, and good morning, everyone. I hope that you and all of your families are staying well and enjoying the summer. Thank you for joining us this morning for the second quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday afternoon and a copy of our press release is available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following opening remarks, we’ll have a question-and-answer session.

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

And with that, I’d like to turn the call over to John.

John McKenzie

Thank you, Paul and good morning, everyone. Thank you so much for joining us today to discuss TMX Group’s financial performance for the second quarter and for the first six months of the year. And let me start by echoing Paul’s comments in terms of wishing everyone an excellent summer, a well-deserved good summer after two years that have been more challenging.

Now, David will join us in a few minutes to take you through the second quarter results in detail, but before he does, my comments this morning will really focus on TMX’s Group’s performance throughout the first half of the year, the progress that we are making on our enterprise growth initiatives, and the proactive measures TMX has undertaken in an effort to address the needs of our broad and diverse stakeholder group, and to help push the evolution of our capital markets ecosystem to ensure we maintain our competitive edge into the future.

Now, in many respects, and this is no secret to anyone listening, the 2022 business environment looks very different from the same time last year. Macroeconomic conditions, geopolitical events, including the conflict in Ukraine, rising interest rates and inflation concerns have negatively impacted global markets. And it is a stark reality for our clients and peers across the financial industry and people around the world. But before we begin to examine the business impacts, I want to take a moment to pause and send our thoughts out to support all those people who are directly and indirectly affected by these global challenges.

Now, turning to our performance. Overall, TMX continued to deliver positive results. Both for the second quarter and the first six months of the year, despite the impact of significant and persistent headwinds on some of our key businesses, including capital raising and equity trading activity. TMX reported revenue of $573.2 million for the first six months of the year, which is a 15% increase from the same period of 2021, due to higher revenue from derivatives Trading and Clearing, Trayport, and Capital Formation.

Increased revenue was partially offset by lower revenue from equities in Fixed Income Trading and Clearing, due to lower trading volumes on the Toronto Stock Exchange and TSX Venture Exchange. [The higher] [ph] revenue included $60.3 million in revenue from BOX, which was consolidated in January 2022, as well as revenue from our 2021 acquisitions. 21.1 million from AST Canada acquired in August 2021 and 0.8 million from Trade Signal acquired in June 2021.

Now, excluding revenue from last year’s acquisitions, revenue was down 1% from the first six months of 2021. And on an adjusted basis, diluted earnings per share was 3.71 in the first six months, a decrease of 2% from 2021. Total operating expenses increased 27%, compared to last year or 4% when you exclude expenses related to BOX, AST Canada, and Trade Signal.

And TMX’s performance in the first half of 2022 again highlights the power of our resilient business model and underscores the efficacy of our adaptive long-term diversification strategy. TMX’s corporate purpose is to make markets better and [empower bold ideas] [ph] and it’s a central and guiding theme in that strategy. Our pledge to our vast and varied group of stakeholders and we never lose sight of the importance of our role at the center of the market and what this ecosystem of opportunity means to the country’s economy and the people in the communities from coast to coast.

Now, turning to each of our business areas. Revenue from capital formation in the first six months of 2022 was 137.2 million or 5% increase from last year, and the year-over-year increase reflected the inclusion of revenue from AST Canada and higher revenue from initial and sustaining listing fees, partially offset by lower additional listing fees reflecting a decrease in the number of financing transactions and dollars raised on TSX and TSX Venture.

And coming off a record [second 2021] [ph], gold conditions have been less favorable for capital raising in 2022, due to inflation concerns, rising interest rates, and increased volatility. And while the IPO markets slowed year-over-year, we proudly welcome new listings to the market in the first half of 2022, including Bausch & Lomb, Ivanhoe Electric, Dream Residential REIT, and two large [Florida based SPACs] [ph] Agrinam Acquisition Corporation and FG Acquisition Corp.

And we remain actively engaged with potential IPO candidates in all sectors, as well as deal makers from across the interconnected ecosystem. And we also continue to see evidence of the strength of TMX’s unique value proposition for companies looking to access public markets. TSX Ventures’ signature Capital Pool Company program is thriving and despite the overall challenging capital raising conditions. TSX Venture added 46 new CPCs in the first half of 2022, a 24% increase over the first half of 2021.

Now, consistent with TMX’s corporate purpose, our work to ensure we remain a market of choice for the next wave of great companies poised to come to market is proactive and it’s an always on campaign. So, in June, TSX Venture launched Venture Forward. It’s a new community driven program focused on strengthening Canada’s crucial public venture market. This collaborative long-term initiative is designed to engage our public venture stakeholders, including entrepreneurs, investors, financiers, lawyers, and advisors to help identify priority challenges and friction points and map out a plan to pursue workable solutions.

We have begun to reach out to stakeholders to help frame the issues and our next steps include developing near and longer-term plans and we intend to publish highlights of our findings and feedback along the way with planned next steps by the end of the year. June also marked the in-person return to the Prospectors and Developers Association of Canada or PDAC Convention.

And for years, our exchanges have proudly supported this massively popular and annual event, which brings mining companies, investors, and policymakers from all over the world together into Toronto. And it makes good sense. TMX is the world’s premier marketplace for resource companies to raise capital. More than 40% of the world’s public mining company are listed on TSX and TSX Venture. And we were honored this year to participate in the International Mines Ministers Summit at PDAC 2022.

The theme of this year’s summit, an annual meeting of leading mining representatives and governments from around the world was ESG and emissions reductions, and the increased production of lithium, nickel, copper, and other essential minerals in the global efforts to achieve net zero. And we shared TMX’s perspectives with the ministers on how governments can help support a thriving mining sector by minimizing regulatory burden where appropriate by committing to make the necessary infrastructure investments and to fostering collaboration with local communities and specifically indigenous communities.

Mining is a rapidly evolving industry. And as the transition to low carbon economy continues to gain momentum, investors are paying close attention. And so, we recently launched a new benchmark to serve the needs of investors seeking increased exposure to and deeper insights into the clean tech and energy transition story. The new S&P/ TSX Battery Metals Index measures the performance of TSX and TSX Venture listed companies focused on the exploration, development, and production of select commodities that serve as significant inputs and the decarbonization of the transportation sector.

Now, I’d like to turn to derivatives. Excluding BOX, revenue from derivatives trading and clearing was 75.3 million in the first six months of 2022, an increase of 5% from last year. Now, the increase was driven by 15% higher revenue from CDCC, due to repo dealer activity and fee changes and a 2% increase in revenue from Montreal Exchange, reflecting higher overall volumes and fee changes on the SXF, particularly offset by a slightly unfavorable product and client mix.

Total volume increased 2% over the first half of 2022 with strong growth in overall open interest at June 30, 2022, up 25%, as compared to the same point last year. Now, in the midst of a volatile and turbulent market environment, investor demand for tools to effectively and efficiently manage risk increased year-over-year. Volumes traded in options grew 21% over the first half of 2021, led by trading in the energy and financial sectors and reflecting increased activity from our institutional investors, as well as our retail client base.

Trading in ETF options also gained strong momentum, particularly in the second quarter amongst institutional investors with volumes up 11%, compared to the first six months of 2021. And volume in Index futures trading was up 19% in the first half of the year, compared to 2021 as clients move to manage exposure to volatility in equity markets.

The first half of the year was also marked by sustained growth in our newer government of Canada bond futures contracts with 38% increase in the volume traded in the CGF or the five-year contract and 155% increase in volumes traded in the CGZ, our two-year contract. These recent additions to our product suite are proving effective and creating efficient cross market trade opportunities and continue to gain in profile among global investors.

Now, the maturation of the CGF product itself is a definitive success story. As it has now reached levels of liquidity where introductory incentives are no longer required to sustain its growth.

Moving now to Trayport, revenue in the first half of the year was 79.2 million, a 7% increase from the first half of 2021, 14% in common currency or pound sterling, and driven by an 18% increase in trader subscribers, annual price adjustments, and consultancy revenues.

Now, the conflict in the Ukraine and the impact of the corresponding sanctions continue to drive increased volatility and global energy trading markets. And Trayport’s core network of dynamic tools and solutions supports the needs of traders across the European energy markets and connects clients to execution venues and clearinghouses across key power and natural gas markets.

Now, while primarily focused on meeting the demands of a robust market, during the first half of 2022, Trayport also successfully advanced on its global strategy to diversify and to move into new asset classes and geographies. In June, Trayport announced a minority investment in Ventriks, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence.

And under a new partnership agreement, Trayport will further expand its product offering to meet the growing client demand for data and analytics. The Ventriks solution complements Trayport’s existing suite of data, automated and algorithmic trading tools and will further enhance decision making and improve the overall trading experience.

In closing today, I want to commend as always our people for the work that they do and their everyday contribution to TMX’s success. And specifically to thank our team of professionals for their efforts this summer in transitioning TMX into a hybrid working environment. I’m very confident that a new balance of virtual and in-person work will ultimately prove more stimulating, engaging and productive for all of us. And we don’t have to look too far for compelling and relevant examples of the value of renewed in-person engagements.

In June, our team hosted two annual trading conferences in-person for the first time since 2019, the TMX Equity Conference in Toronto; and the Canadian Annual Derivatives Conference or CADC in Montreal. Each of these signature events brings together professionals and industry experts, our partners across the capital markets ecosystems to share perspectives on the current and future state of our markets and to exchange ideas on challenges and opportunities across the Canadian equities, fixed income, and derivatives landscape.

So, I’d like to thank everyone in the markets division to our stellar marketing and support teams for pulling together two extremely successful and well attended events. In addition, last week, we also took an important step forward towards TMX’s reconciliation journey. A diverse group of business leaders from across TMX gathered in Wendake, a First Nation in Quebec to participate in an immersive shared learning experience to develop TMX’s foundational principles and philosophies for reconciliation.

This two-day session featured a productive open exchange of ideas and perspectives, highlighted by invaluable insights and experience shared by members of our host community, The Huron-Wendat Nation. The efforts of the team and the contribution from our generous hosts will help to define the long-term vision of end tactics for how TMX can contribute to a future of shared prosperity for indigenous businesses and communities. This should be no surprise. This is what we do at TMX.

TMX is a purpose-driven people-driven organization. Employees across the enterprise are unified by our unwavering commitment to make markets better and empower bold ideas. And this mindset fuels all of our clients and stakeholder engagements and guides our business and corporate initiatives during robust and thriving markets and even more importantly when challenging conditions negatively impact key components of our ecosystem.

In all market conditions, the pursuit of meaningful ways to do better, to be better is constant. And for TMX, making markets better includes ensuring that we have the most resilient, robust and reliable operating systems and protocols, constantly striving to adapt our products and services across the franchise to meet the evolving need of the modern marketplace and our increasingly global client base, and activating TMX as a leading voice for measures to create conditions for our enduring success.

So with that, let me say thank you and will turn the call over to David.

David Arnold

Thank you, John, and good morning, everyone. As John mentioned, our results for the second quarter reflect the continued resiliency of our diverse business model with overall revenue growth of 17%, including increases across all of our business segments. Revenue, excluding the Boston Options Exchange or BOX for short, which we consolidated on January 3 this year, AST Canada, which we acquired on August 12, 2021; and Trade Signal, which Trayport acquired on June 1, 2021 was up 1% in the quarter, compared with last year.

We managed our cost increases to below the current rate of inflation in Canada in the second quarter with operating expenses, excluding BOX, AST Canada and Trade Signal, up 7%, compared with Q2 of 2021 and year to date when compared with the same six-month period a year ago, our costs are only up 4% well below the current rate of inflation in Canada.

We reported an increase of 20% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q2 of 2021 where we incurred a 19.8 million charge due to a UK corporate income tax rate change, as well as an increase in income from operations of 5.4 million, compared with Q2 of 2021. Our adjusted diluted earnings per share decreased slightly by 1%, largely driven by higher operating expenses, partially offset by higher revenue.

Turning now to our businesses. We saw year-over-year revenue increases in all of our segments and I will start with the businesses that saw the largest year-over-year increases. Revenue in derivatives trading and clearing grew by 89% this quarter, compared to Q2 of 2021, since we now consolidate BOX and that represents 27.3 million of revenue, which is included in this segment for Q2.

Volumes on BOX increased by 20% compared Q2 of last year and BOX’s market share and equity options grew 6%, up 1% from Q2 of 2021. Derivatives trading and clearing revenue excluding BOX was up 9% in the quarter, driven by a 16% increase in CDCC revenue, and a 6% increase in revenue from the Montreal Exchange.

The Montreal Exchange revenue increase reflected first, a 2% volume increase this quarter, compared with Q2 of 2021; second, a favorable product and client mix; and third, positive impact on trading fees on the heels of the pricing changes for our S&P, TSX 60 Index Standard Futures or SXF, which came into effect in January of this year.

Turning to capital formation. Revenue grew by 6% this quarter, which included approximately 12.2 million of revenue related to AST Canada. Excluding AST Canada, revenue in the quarter decreased 12% in capital formation, primarily on the heels of lower additional listing fees in the quarter, due to decreases in both the total number of financings and the total financing dollars raised, and a slight decrease in initial listings fees.

The additional listing fees decrease on TSX reflected a 27% decrease in the number of additional listing transactions billed at the maximum listing fee of 250,000 and a 16% decrease in the number of transactions below the maximum fee when compared to very strong levels of activity in Q2 of last year. This decrease was partially offset by higher sustaining listing fees in the quarter, reflecting an increase in the market capitalization of TSX and TSX venture issuers at December 31, 2021 over the prior year.

Revenue in our Global Solutions Insight & Analytics Segment was up 5% over Q2 of 2021 with increases from both Trayport and TMX data links. Revenue from Trayport was up 5% in Canadian dollars or 14% in pound sterling. A 14% increase in pound sterling was primarily driven by a 17% increase in trader subscribers, annual price adjustments, and a one-time consultancy revenue for development services.

Revenue in our TMX data links business, including colocation, grew 5% driven by increases in data feeds, colocation, as well as benchmarks and indices, partially offset by a reduction in revenue from lower usage based quotes. There was a favorable foreign exchange impact of approximately 1 million from a weaker Canadian dollar relative to the U.S. dollar this quarter when compared with Q2 of 2021, which accounts for roughly 2% of the 5% year-over-year increase.

The average number of professional market data subscriptions for TSX and TSX Venture products decreased by 3% in the quarter, compared with last year where subscriptions on the Montreal Exchange were up 3%. Revenue from our equities and fixed income trading and clearing segment was up 3% in the quarter.

Within the segment, equities and fixed income trading revenue increased 7% in the quarter, compared with Q2 of last year, despite a 9% decline in overall volumes of securities traded on our equities marketplaces, reflecting a favorable product mix within TSX and the impact of April 2022 price changes on continuous trading for securities with a share price below $1.

While trading volumes on TSX securities increased by 9% in the quarter, volumes on TSX Venture Exchange and TSX Alpha Exchange decreased by 39% and 11% respectively when compared with Q2 last year, which is why our overall volumes of securities, traders on equities marketplaces is down 9%.

Despite overall volumes of securities traded on equities marketplaces being down, our market share increased by 5%. On the fixed income trading side, revenue increased by – revenue increased versus Q2 a year ago, reflecting higher activity in Government of Canada bonds and swaps. Revenue from our CDS business was down 2%, reflecting lower issuer services and corporate action revenue, partially offset by higher revenue from custodial fees and standby liquidity facilities, compared with Q2 a year ago.

Turning to our expenses. Operating expenses in the second quarter increased by 32%, compared to Q2 last year. Included in this increase are the costs associated with BOX, which we now consolidate, as well as the two acquisitions, namely AST Canada and Trade Signal, as well as costs associated with those transactions, namely AST integration costs, amortization of acquired intangibles for AST Canada and BOX, and the transition services agreement with AST. All of which in aggregate amounted to 28.7 million of expenses in Q2 of 2022.

Excluding the aggregate amount of expenses associated with BOX, AST Canada, and Trade Signal, which I just mentioned, this translates into a year-over-year increase of 7% for operating expenses, compared with Q2 of last year. The higher expenses reflected higher headcount in payroll costs, increased long-term employee incentive plan costs, as well as increased expenses for travel and entertainment, including hosting our conferences and events, which are returning to in-person after our hiatus during the last few years.

In addition, expenses were reduced in the second quarter of last year due to a release of a provision for restoration costs for our data center. These increases in costs were partially offset by lower short-term employee incentive time costs, lower severance, and acquisition and related costs related to AST Canada in Q2 of 2021.

Turning to our integration of AST Canada, our integration of AST Canada continues to progress very well. We expect total revenue and expense synergies of approximately 10 million, which is up 25% versus our previous estimate of 8 million, which will be substantially achieved by the end of 2024.

As it relates to 2022, we now expect at least 3.5 million of these cost synergies in 2022, which is up from our original estimate of 2 million for 2022. We continue to expect integration costs related to AST Canada of approximately 20 million over the 16 month period from September 1 of last year till the end of this fiscal year December 31.

Looking at our results sequentially, revenue only decreased 1 million from Q1 of 2022 to Q2 of 2022, which reflected lower equities and fixed income trading and derivatives trading and clearing revenue, which was primarily driven by lower BOX volumes in the quarter. This was mostly offset by higher capital formation revenue, driven by higher other issue services revenue and additional listing fees revenue from Q1 to Q2 of this year.

Operating expenses increased 2.5 million or 2% from Q1, including an increase of 3.7 million related to AST integration. There were also increases in technology spending, director fees, travel, and performance incentives. These were partially offset by lower salaries and payroll taxes of 3.2 million, lower legal fees, and lower termination allowances.

Turning now to our balance sheet. In the second quarter of 2022, we spent 61.3 million repurchasing 460,000 of our common shares under our normal course issuer bid program. Our debt-to-adjusted EBITDA ratio was 1.7x at the end of the quarter. And we also held over 432 million in cash and marketable securities at the end of the quarter, which is approximately 227 million in excess of the 205 million we target to retain for regulatory and credit facility purposes.

Last night, our Board of Directors approved a quarterly dividend of $0.83 per common share payable on August 26 to shareholders of record as of August 12. In the second quarter, we paid out 44% of our adjusted earnings per share, which is marginally below the midpoint of our target payout ratio of 40% to 50%.

So that concludes my formal remarks. And I’d now like to turn the call back to Paul for our Q&A period.

Paul Malcolmson

Thanks, David. Michelle, could you please outline the process for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.

Geoff Kwan

Hi, good morning. John, you were talking earlier just being engaged on the Issuer side and the pipeline. Just wondering if you can expand on that a little bit. Just how it’s changed in recent months, both on the IPO, but also the follow on, for whatever visibility you have? Just trying to get a sense as to things are looking a little bit better.

John McKenzie

Yes, I’m happy to do that, Geoff. Thanks for the question. It’s an interesting dynamic when you look at the activity in 2022 because when you look at it simply in reference to 2021, it looks quite challenging, but interestingly if you actually have a look back and look at our 2022 activity both across the senior market and the venture market as compared to call it the four years before 2021 you’re going to find this is actually one of the strongest markets that we’ve had.

So, I think that’s why actually some folks are surprised that we’re not seeing larger revenue challenges than they would have expected in this marketplace. So, with respect to your pipeline question, the pipeline actually for new issues continues to grow. It’s difficult to give guidance in terms of when companies can come to market because it really is around market conditions for them to do their financing, but that’s why we wanted to reflect some of the names that actually got a public financing done because those are ones that actually become benchmarks for other transactions to build off in the future.

So, we do see that positive momentum in terms of potential listings, but it’s hard to say what time they’d come to market. The other silver lining that we talked about a bit in the comments was the activity that you see in venture around, particularly around CPC. So, Capital Pool Company programs because they’re founder base, they’re less sensitive to what’s going on in both market volumes and valuation and volatility.

And so those transactions are getting done even in difficult markets. And I think I said earlier, they’re up about 24% year-over-year and we’ve listed almost 50 new ones this year. So that gives you a bit of context. We are continuing to see financing transactions. You see that in the transaction data that the transaction activity is still robust, but just at smaller size than you would have seen last year. So, in another way that actually impacts our revenue because we’re actually seeing fewer transactions that are capping out at the caps because they are smaller sized deals.

So, overall, all things, if it wasn’t for 2021, we would be talking about what a healthy market this is. And it’s only in reference to last year that you’ve seen the delta.

Geoff Kwan

Okay. Thanks for that. My next question was on the TSX Trust AST Canada. You’ve talked about that sensitivity of 25 basis points higher rate is roughly about 2.5 million of additional annual revenue, the bank turnover over net rates up 225 basis points so far this year. Now, is that interest rate sensitivity based on the overnight rate or is there another interest rate benchmark just because if we use the overnight rates, that would imply kind of like 22.5 million of annual revenue and just wondering how much of that would have been captured in the Q2 revenues?

David Arnold

So, thanks, Geoff. It’s David. I’ll start and maybe John can add any extra color. It’s not as simple as monitoring a Bank of Canada overnight rate change and then extrapolating it fully to the trust revenue line on net interest income, primarily because really a couple of factors. One is, not all of the deposits that we receive generate the same level of net interest income.

On some of our arrangements, the arrangements with the clients have us testing on some of the rate hikes to them. So, not as easy as doing that. And then what I would say in Q2 is given the timing of the rate hikes it had a modest impact. It will have a more material impact in Q3. And then the third thing, which is very important is balances, right. Balances fluctuate depending on various corporate actions. And we struggle internally to predict those because it’s like predicting capital formation or derivatives trading revenue, which is very much market driven.

So, those would be the variables that play, but the key takeaways, it isn’t a straight line. And we would look to anywhere between $4 million to $5 million of net interest income over the course of this year given where rates are, but once again, Bank of Canada have a rate meeting coming in September. So, we’ll have to stay tuned on that too.

Geoff Kwan

The 4 million to 5 million that’s what you’re saying, I guess relative to what we saw in Q2 that would be the annual lift given where rates are today?

David Arnold

Yes.

Geoff Kwan

Okay. And then just my last question was just on Trayport. The average total subscribers I think was down very slightly, kind of quarter-over-quarter. Obviously, it’s had a very good gradual increase since you acquired it. Just wondering if there’s any color you can give on that?

David Arnold

Great. So, quickly before we do that, John, Geoff, I wanted to make sure I heard your question or answered it correctly. So, when I said the 4 million to 5 million that’s for the balance of this year, right? We think it’s about 8 million for the full-year. Hope it helps.

John McKenzie

And I’m laughing a bit, Geoff on the question on Trayport, because it’s – we only ever get asked about the sequential, if the sequential is down or the year-over-year if the year was down because I’m going to remind everyone that year-over-year we’re up 17%. So, I’m going to take that opportunity to do that. On the sequential piece, all you’re actually seeing there is a restructuring in terms of one of the activities in a single broker that offset what otherwise would have been subscriber growth sequentially. And so what I mean by that is a broker had an underperforming desk that they chose to wind down, it would have had some dedicated traders associated with it.

So, those trader subscriptions are no longer there because that business of that broker isn’t there anymore and that offset what otherwise would have been growth in the quarter. So, it’s nothing to take any concern to in terms of the overall strength through the health of the business. And I think we indicated in David’s notes about 9 new net paying clients in the quarter as well, which will contribute to subscriber growth in the future quarters, but that was the step down in terms of that sequential impact.

Geoff Kwan

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you and good morning.

John McKenzie

Good morning.

Etienne Ricard

On equity trading, could you please comment on how competitive dynamics have changed since CBOE closed on the acquisition of NEO back in June, if at all?

John McKenzie

Yes, to be [candidate] [ph], they really haven’t changed any material way. So, CBOE was already active in Canada with their ownership of MATCHNow, NEO already an active player. So, we haven’t seen material changes or material changes in the business model and you’ll see that in terms of our overall market share continues to be pretty much either flat to up from where we’re a year ago.

So, it’s something that we are constantly monitoring and constantly engaging with clients to make sure that we are meeting their needs. We talked earlier about the actual trade conference that we just initiated in June. That was extremely effective in terms of bringing up the trading community, understanding what their pain points are, their net needs are, and also the stress test some of our ideas in terms of market reform and get real life feedback from the trading community.

So, our competitive position here continues to be to focus on what the client needs are, so they don’t need to trade anywhere else.

Etienne Ricard

Understood. And on TSX Trust, given you have previously noted this business, has a higher growth potential over time, could you comment on what led to lower trends for agency fees on an organic basis year-over-year?

John McKenzie

I mean that would be a combination of all the fees within trust, so [transformation] [ph] to trust activity. So, very much like the other parts of the TSX and TSX Venture financing area when we have lower transaction activity. They’re also lower trust or transfer or corporate actions.

So, the overall book of business, the overall client base continues to grow in trust and transfer, but you have lower activity levels in the first half of the year, as compared to a year ago.

Etienne Ricard

Okay, great. And I think you’ve been buying back stock more actively in Q2, looking forward should we expect you to become more meaningful acquirers of your stock?

David Arnold

Good question, Etienne. You’re right. We did purchase a substantial amount of our normal course issuer bid authorized allotment this quarter. It isn’t something that we actually direct. We have a standing order based on a ratio and a broker of record then executes accordingly. We have about 5,000 of our normal course issuer bid outstanding, and we are evaluating various different capital deployment strategies, right.

And one of the things we have to obviously do is look to the organic growth initiatives that we have underway, as well as sunsetting some of our very large initiatives like our post-trade modernization, which as you know now goes into industry testing. And so given the opportunities that we have for capital deployment, whether it be for organic growth, whether it be for dividend increases, increased share buybacks or M&A activity as we monitor what transpires on the pricing front in the marketplace, I would stay tuned, but right now we’ve got about 5,000 remaining to go.

John, do you want to add anything?

John McKenzie

My simple summary of David’s comments is, we are remaining and keeping our flexibility in what has been a bit more of an unsettling marketplace. So, we are evaluating all tools and want to maintain a maximum flexibility and the strength of our balance sheet so that we can actually take advantage of opportunities as they come.

Etienne Ricard

Thank you very much.

Operator

Thank you. Your next question comes from Graham Ryding of TD. Please go ahead.

Graham Ryding

Hi, good morning. We saw a nice lift quarter-over-quarter in AST revenue, was that largely higher margin income or would you attribute that to?

John McKenzie

Margin income was part of it, but there were a couple of other parts of the business that did well. And so, I wouldn’t say it is all margin income at all, Graham.

Graham Ryding

Okay. I know, you don’t give specific expense growth, but maybe you could just help us think about – the growth we saw this quarter if you strip out the acquisition was 7% year-over-year. I think it was 2% year-over-year last quarter. So, how should we be thinking about what’s a reasonable expense growth expectation, should we be thinking closer to, sort of the 4% you’ve done year to date or is this 7% growth in this quarter potentially a run rate for expense growth.

John McKenzie

Yes, I would guide you towards closer to the first half of the year cumulative for the 4% to 5% kind of range.

Graham Ryding

Okay. That’s helpful. On the derivatives side, your interest rate derivative volumes are actually down year-over-year. That surprises me somewhat. I just thought in an environment of rising rates that might actually foster higher interest rate derivatives activity. Could you provide any color there, John?

John McKenzie

Yes, I’m happy to. So, in the long-term, you’re absolutely right, Graham. And so when you actually – you see growth in terms of other parts of the interest rate curve, the challenge in the short-term and particularly the challenge this year is the biggest impact year-over-year has been in the products like the back. So, the short-term [30-day] [ph] products. And when we’re in an environment where they are rapidly changing Bank of Canada rates and they are not predictable in terms of timing or amounts, that’s difficult for speculators or hedgers or other people to use those products.

So, what I would call it is, it’s not constructive volatility in the short-term when there’s not good predictability about those rate changes. So, as that normalizes in a higher rate environment, you’re absolutely right that will give more tailwinds to support the product, but in the short-term, when the timing and size of Bank of Canada rates changes are less predictable, it’s harder for people to use those products and they take on more risk when they’re doing them, which is not the intent of the product. So, we do see this being as a short-term issue as bank rates make some quick changes and then that will stabilize and give more tailwind.

Graham Ryding

Okay, that’s helpful. And my last question, if I could, just the CDS modernization project. I think it’s on track to finish in the first half of 2023. Is there potential here that this could be pushed out further and the CapEx could be increased again or how you’re feeling about that project at this stage?

John McKenzie

I’m feeling cautiously optimistic. Is that hedging enough for you? We spent a lot of time on this on a regular basis. I’m going to take the opportunity to give a shout out to the folks that are working on us because this has been an extremely challenging initiative, especially in the backdrop of COVID anytime you’re doing large scale software development in multiple jurisdictions and you can’t put people in the same room to solve challenges that does make the time to do things like user acceptance testing and finalizing the development and much more challenging to finish, but what we had in the last couple of weeks and we’ve been through two different board sessions on this was a significant milestone in terms of that we are now nearly complete all of our internal user testing and have announced to the Street when we are going to be going live in mid-September for industry test and development.

And we’ve committed to the industry at least 9 months to do that. So that gives us the higher degree of kind of cautious optimism around the timing to execute this because we’re now at a place where we’ve got the product. It meets the needs. It’s functional, and we can put it in the hands of the clients starting in September, so they can do their own testing and development over the next year to be ready to go live in 2023.

The estimates that we’ve given both around timing and around total capital are all reflective of that, and reflects some contingency that there still could be some unknown challenges as we go through that process. So, best information we have at the time and a reasonable degree of certainty in terms of that real milestone that’s come through that we’re going to be live in market in the fall this year.

Graham Ryding

Okay. That’s it for me. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Jaeme Gloyn of National Bank. Please go ahead.

Jaeme Gloyn

Yes, thanks. Good morning. The quarter included a lot of good to see pricing increases across various businesses. Somewhat unexpected, I guess, or maybe wasn’t necessarily hinted at on previous quarters. Is there anything that you can share in terms of what’s in the pipeline from other price increases that could be in proposal stages or something that you’re [work shopping] [ph] in the background?

John McKenzie

Yes. Jaeme, I appreciate the question. And so, I mean, obviously, I can’t share things that we haven’t made public yet in terms of either filing with regulators or notices to clients, but what I will let you know is that we are actually actively looking at those other businesses that weren’t part of the price changes we’ve already announced.

So, businesses like listings and capital formation for in some cases we haven’t done pricing on the senior market, I think in four years and on the venture market in 10 years, we are looking at what are the appropriate changes we can make there that are still consistent with maintaining a very strong competitive position both domestically and globally. And that’s one we are actually looking at. And I would expect to be communicating both with regulators in the street in the near-term.

Jaeme Gloyn

Okay great. And then just in terms of some of the new trading initiatives, I assume these are coming from customer driven demands. Can you, sort of maybe elaborate on what you’re expecting from a – are there market share benefits for TMX? Are there fee benefits for TMX like what are the knock-on effects for your business by introducing some of these new products and tools?

John McKenzie

It actually depends on the tools. So, some of them are actually about driving incremental market share. Incremental also strengthen liquidity, so over the overall quality of the volume as well. In some cases like the work that we did on market on close and the work we’re doing on dark, those are also, as you said, those are premium offerings that drive also a higher yield. So, they’re more valuable products to the street and they command a premium in terms of the revenue impact.

And I think you’re seeing some of that in terms of the revenue growth in equity trading year-over-year because while volume is off, the actual yield is up and the overall revenue growth is there. So, you’re exactly right. It is a combination of those pieces and it’s driven specifically by identified client needs of the community.

Jaeme Gloyn

Okay. And if I’m thinking about it, maybe more bit of a modeling question, I guess, right now, but we’re seeing higher capture rates flowing through on equities and trading. Now there’s some noise [indiscernible] fixed income is in there too, but is there more upside to let’s say revenue per contract trade or for equity trade in the last couple of quarters given some of these new initiatives or are you seeing like that as maybe more of a high watermark? Just trying to get a little bit more insight into where the revenue per trade can trend towards over the next several quarters to years?

John McKenzie

Yes. So, you’ve got to look at two things. Yes, we’re seeing more premium revenue in terms of the mix year of revenue in terms of the kind of amount of the volume that’s in the closure in those other dark products, but it’s also, Jaeme look at the shift in terms of the trade across higher value securities across all markets. So, we’ve got trade value growth in TSX, I think year-over-year, we’re up about 17% in dollar value traded, where venture has declined somewhat year-over-year.

So when you’ve got the higher stock prices, you also have a higher tier in terms of revenue capture because of the lower share prices on some of the venture stocks are at different capture rate as well. So, you’ve got to look at that business mix as well.

Jaeme Gloyn

Yes, understood, but absent any changes in business mix or assuming that’s all equal like the…

John McKenzie

Sustainable.

Jaeme Gloyn

Yes, okay. Good stuff. Okay. That’s it for me. Thank you.

John McKenzie

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

Paul Malcolmson

Well, thank you, Michelle. And just before we close, I want to give you two updates from the Investor Relations team. Amanda Tang, who most of you know well, will be off to maternity leave for the next year or so. Just this past Monday Amanda had of boy. Their second son now and everyone is doing very well. Congratulations, Amanda from all of us. While Amanda is off, [indiscernible] will be filling in for Amanda. Most recently, [Technical Difficulty] financial planning and analysis function, and I know you’ll all enjoy working with [indiscernible].

In closing, I want to thank everyone for listening today. If you have any further questions, the contact information for media, as well as for Investor Relations is in our press release and we’d be happy to get back to you. Stay well and have a good weekend everyone.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

TMX Group Limited’s (TMXXF) CEO John McKenzie on Q2 2022 Results – Earnings Call Transcript

TMX Group Limited (OTCPK:TMXXF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Company Participants

Paul Malcolmson – Vice President, Enterprise, Sustainability and Investor Relations

John McKenzie – Chief Executive Officer

David Arnold – Chief Financial Officer

Conference Call Participants

Geoff Kwan – RBC Capital Markets

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank

Operator

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Q2 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday July 29, 2022.

I would now like to turn the conference over to Paul Malcolmson, VP, Enterprise, Sustainability and Investor Relations. Please go ahead.

Paul Malcolmson

Well, thank you, Michelle, and good morning, everyone. I hope that you and all of your families are staying well and enjoying the summer. Thank you for joining us this morning for the second quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday afternoon and a copy of our press release is available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following opening remarks, we’ll have a question-and-answer session.

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

And with that, I’d like to turn the call over to John.

John McKenzie

Thank you, Paul and good morning, everyone. Thank you so much for joining us today to discuss TMX Group’s financial performance for the second quarter and for the first six months of the year. And let me start by echoing Paul’s comments in terms of wishing everyone an excellent summer, a well-deserved good summer after two years that have been more challenging.

Now, David will join us in a few minutes to take you through the second quarter results in detail, but before he does, my comments this morning will really focus on TMX’s Group’s performance throughout the first half of the year, the progress that we are making on our enterprise growth initiatives, and the proactive measures TMX has undertaken in an effort to address the needs of our broad and diverse stakeholder group, and to help push the evolution of our capital markets ecosystem to ensure we maintain our competitive edge into the future.

Now, in many respects, and this is no secret to anyone listening, the 2022 business environment looks very different from the same time last year. Macroeconomic conditions, geopolitical events, including the conflict in Ukraine, rising interest rates and inflation concerns have negatively impacted global markets. And it is a stark reality for our clients and peers across the financial industry and people around the world. But before we begin to examine the business impacts, I want to take a moment to pause and send our thoughts out to support all those people who are directly and indirectly affected by these global challenges.

Now, turning to our performance. Overall, TMX continued to deliver positive results. Both for the second quarter and the first six months of the year, despite the impact of significant and persistent headwinds on some of our key businesses, including capital raising and equity trading activity. TMX reported revenue of $573.2 million for the first six months of the year, which is a 15% increase from the same period of 2021, due to higher revenue from derivatives Trading and Clearing, Trayport, and Capital Formation.

Increased revenue was partially offset by lower revenue from equities in Fixed Income Trading and Clearing, due to lower trading volumes on the Toronto Stock Exchange and TSX Venture Exchange. [The higher] [ph] revenue included $60.3 million in revenue from BOX, which was consolidated in January 2022, as well as revenue from our 2021 acquisitions. 21.1 million from AST Canada acquired in August 2021 and 0.8 million from Trade Signal acquired in June 2021.

Now, excluding revenue from last year’s acquisitions, revenue was down 1% from the first six months of 2021. And on an adjusted basis, diluted earnings per share was 3.71 in the first six months, a decrease of 2% from 2021. Total operating expenses increased 27%, compared to last year or 4% when you exclude expenses related to BOX, AST Canada, and Trade Signal.

And TMX’s performance in the first half of 2022 again highlights the power of our resilient business model and underscores the efficacy of our adaptive long-term diversification strategy. TMX’s corporate purpose is to make markets better and [empower bold ideas] [ph] and it’s a central and guiding theme in that strategy. Our pledge to our vast and varied group of stakeholders and we never lose sight of the importance of our role at the center of the market and what this ecosystem of opportunity means to the country’s economy and the people in the communities from coast to coast.

Now, turning to each of our business areas. Revenue from capital formation in the first six months of 2022 was 137.2 million or 5% increase from last year, and the year-over-year increase reflected the inclusion of revenue from AST Canada and higher revenue from initial and sustaining listing fees, partially offset by lower additional listing fees reflecting a decrease in the number of financing transactions and dollars raised on TSX and TSX Venture.

And coming off a record [second 2021] [ph], gold conditions have been less favorable for capital raising in 2022, due to inflation concerns, rising interest rates, and increased volatility. And while the IPO markets slowed year-over-year, we proudly welcome new listings to the market in the first half of 2022, including Bausch & Lomb, Ivanhoe Electric, Dream Residential REIT, and two large [Florida based SPACs] [ph] Agrinam Acquisition Corporation and FG Acquisition Corp.

And we remain actively engaged with potential IPO candidates in all sectors, as well as deal makers from across the interconnected ecosystem. And we also continue to see evidence of the strength of TMX’s unique value proposition for companies looking to access public markets. TSX Ventures’ signature Capital Pool Company program is thriving and despite the overall challenging capital raising conditions. TSX Venture added 46 new CPCs in the first half of 2022, a 24% increase over the first half of 2021.

Now, consistent with TMX’s corporate purpose, our work to ensure we remain a market of choice for the next wave of great companies poised to come to market is proactive and it’s an always on campaign. So, in June, TSX Venture launched Venture Forward. It’s a new community driven program focused on strengthening Canada’s crucial public venture market. This collaborative long-term initiative is designed to engage our public venture stakeholders, including entrepreneurs, investors, financiers, lawyers, and advisors to help identify priority challenges and friction points and map out a plan to pursue workable solutions.

We have begun to reach out to stakeholders to help frame the issues and our next steps include developing near and longer-term plans and we intend to publish highlights of our findings and feedback along the way with planned next steps by the end of the year. June also marked the in-person return to the Prospectors and Developers Association of Canada or PDAC Convention.

And for years, our exchanges have proudly supported this massively popular and annual event, which brings mining companies, investors, and policymakers from all over the world together into Toronto. And it makes good sense. TMX is the world’s premier marketplace for resource companies to raise capital. More than 40% of the world’s public mining company are listed on TSX and TSX Venture. And we were honored this year to participate in the International Mines Ministers Summit at PDAC 2022.

The theme of this year’s summit, an annual meeting of leading mining representatives and governments from around the world was ESG and emissions reductions, and the increased production of lithium, nickel, copper, and other essential minerals in the global efforts to achieve net zero. And we shared TMX’s perspectives with the ministers on how governments can help support a thriving mining sector by minimizing regulatory burden where appropriate by committing to make the necessary infrastructure investments and to fostering collaboration with local communities and specifically indigenous communities.

Mining is a rapidly evolving industry. And as the transition to low carbon economy continues to gain momentum, investors are paying close attention. And so, we recently launched a new benchmark to serve the needs of investors seeking increased exposure to and deeper insights into the clean tech and energy transition story. The new S&P/ TSX Battery Metals Index measures the performance of TSX and TSX Venture listed companies focused on the exploration, development, and production of select commodities that serve as significant inputs and the decarbonization of the transportation sector.

Now, I’d like to turn to derivatives. Excluding BOX, revenue from derivatives trading and clearing was 75.3 million in the first six months of 2022, an increase of 5% from last year. Now, the increase was driven by 15% higher revenue from CDCC, due to repo dealer activity and fee changes and a 2% increase in revenue from Montreal Exchange, reflecting higher overall volumes and fee changes on the SXF, particularly offset by a slightly unfavorable product and client mix.

Total volume increased 2% over the first half of 2022 with strong growth in overall open interest at June 30, 2022, up 25%, as compared to the same point last year. Now, in the midst of a volatile and turbulent market environment, investor demand for tools to effectively and efficiently manage risk increased year-over-year. Volumes traded in options grew 21% over the first half of 2021, led by trading in the energy and financial sectors and reflecting increased activity from our institutional investors, as well as our retail client base.

Trading in ETF options also gained strong momentum, particularly in the second quarter amongst institutional investors with volumes up 11%, compared to the first six months of 2021. And volume in Index futures trading was up 19% in the first half of the year, compared to 2021 as clients move to manage exposure to volatility in equity markets.

The first half of the year was also marked by sustained growth in our newer government of Canada bond futures contracts with 38% increase in the volume traded in the CGF or the five-year contract and 155% increase in volumes traded in the CGZ, our two-year contract. These recent additions to our product suite are proving effective and creating efficient cross market trade opportunities and continue to gain in profile among global investors.

Now, the maturation of the CGF product itself is a definitive success story. As it has now reached levels of liquidity where introductory incentives are no longer required to sustain its growth.

Moving now to Trayport, revenue in the first half of the year was 79.2 million, a 7% increase from the first half of 2021, 14% in common currency or pound sterling, and driven by an 18% increase in trader subscribers, annual price adjustments, and consultancy revenues.

Now, the conflict in the Ukraine and the impact of the corresponding sanctions continue to drive increased volatility and global energy trading markets. And Trayport’s core network of dynamic tools and solutions supports the needs of traders across the European energy markets and connects clients to execution venues and clearinghouses across key power and natural gas markets.

Now, while primarily focused on meeting the demands of a robust market, during the first half of 2022, Trayport also successfully advanced on its global strategy to diversify and to move into new asset classes and geographies. In June, Trayport announced a minority investment in Ventriks, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence.

And under a new partnership agreement, Trayport will further expand its product offering to meet the growing client demand for data and analytics. The Ventriks solution complements Trayport’s existing suite of data, automated and algorithmic trading tools and will further enhance decision making and improve the overall trading experience.

In closing today, I want to commend as always our people for the work that they do and their everyday contribution to TMX’s success. And specifically to thank our team of professionals for their efforts this summer in transitioning TMX into a hybrid working environment. I’m very confident that a new balance of virtual and in-person work will ultimately prove more stimulating, engaging and productive for all of us. And we don’t have to look too far for compelling and relevant examples of the value of renewed in-person engagements.

In June, our team hosted two annual trading conferences in-person for the first time since 2019, the TMX Equity Conference in Toronto; and the Canadian Annual Derivatives Conference or CADC in Montreal. Each of these signature events brings together professionals and industry experts, our partners across the capital markets ecosystems to share perspectives on the current and future state of our markets and to exchange ideas on challenges and opportunities across the Canadian equities, fixed income, and derivatives landscape.

So, I’d like to thank everyone in the markets division to our stellar marketing and support teams for pulling together two extremely successful and well attended events. In addition, last week, we also took an important step forward towards TMX’s reconciliation journey. A diverse group of business leaders from across TMX gathered in Wendake, a First Nation in Quebec to participate in an immersive shared learning experience to develop TMX’s foundational principles and philosophies for reconciliation.

This two-day session featured a productive open exchange of ideas and perspectives, highlighted by invaluable insights and experience shared by members of our host community, The Huron-Wendat Nation. The efforts of the team and the contribution from our generous hosts will help to define the long-term vision of end tactics for how TMX can contribute to a future of shared prosperity for indigenous businesses and communities. This should be no surprise. This is what we do at TMX.

TMX is a purpose-driven people-driven organization. Employees across the enterprise are unified by our unwavering commitment to make markets better and empower bold ideas. And this mindset fuels all of our clients and stakeholder engagements and guides our business and corporate initiatives during robust and thriving markets and even more importantly when challenging conditions negatively impact key components of our ecosystem.

In all market conditions, the pursuit of meaningful ways to do better, to be better is constant. And for TMX, making markets better includes ensuring that we have the most resilient, robust and reliable operating systems and protocols, constantly striving to adapt our products and services across the franchise to meet the evolving need of the modern marketplace and our increasingly global client base, and activating TMX as a leading voice for measures to create conditions for our enduring success.

So with that, let me say thank you and will turn the call over to David.

David Arnold

Thank you, John, and good morning, everyone. As John mentioned, our results for the second quarter reflect the continued resiliency of our diverse business model with overall revenue growth of 17%, including increases across all of our business segments. Revenue, excluding the Boston Options Exchange or BOX for short, which we consolidated on January 3 this year, AST Canada, which we acquired on August 12, 2021; and Trade Signal, which Trayport acquired on June 1, 2021 was up 1% in the quarter, compared with last year.

We managed our cost increases to below the current rate of inflation in Canada in the second quarter with operating expenses, excluding BOX, AST Canada and Trade Signal, up 7%, compared with Q2 of 2021 and year to date when compared with the same six-month period a year ago, our costs are only up 4% well below the current rate of inflation in Canada.

We reported an increase of 20% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q2 of 2021 where we incurred a 19.8 million charge due to a UK corporate income tax rate change, as well as an increase in income from operations of 5.4 million, compared with Q2 of 2021. Our adjusted diluted earnings per share decreased slightly by 1%, largely driven by higher operating expenses, partially offset by higher revenue.

Turning now to our businesses. We saw year-over-year revenue increases in all of our segments and I will start with the businesses that saw the largest year-over-year increases. Revenue in derivatives trading and clearing grew by 89% this quarter, compared to Q2 of 2021, since we now consolidate BOX and that represents 27.3 million of revenue, which is included in this segment for Q2.

Volumes on BOX increased by 20% compared Q2 of last year and BOX’s market share and equity options grew 6%, up 1% from Q2 of 2021. Derivatives trading and clearing revenue excluding BOX was up 9% in the quarter, driven by a 16% increase in CDCC revenue, and a 6% increase in revenue from the Montreal Exchange.

The Montreal Exchange revenue increase reflected first, a 2% volume increase this quarter, compared with Q2 of 2021; second, a favorable product and client mix; and third, positive impact on trading fees on the heels of the pricing changes for our S&P, TSX 60 Index Standard Futures or SXF, which came into effect in January of this year.

Turning to capital formation. Revenue grew by 6% this quarter, which included approximately 12.2 million of revenue related to AST Canada. Excluding AST Canada, revenue in the quarter decreased 12% in capital formation, primarily on the heels of lower additional listing fees in the quarter, due to decreases in both the total number of financings and the total financing dollars raised, and a slight decrease in initial listings fees.

The additional listing fees decrease on TSX reflected a 27% decrease in the number of additional listing transactions billed at the maximum listing fee of 250,000 and a 16% decrease in the number of transactions below the maximum fee when compared to very strong levels of activity in Q2 of last year. This decrease was partially offset by higher sustaining listing fees in the quarter, reflecting an increase in the market capitalization of TSX and TSX venture issuers at December 31, 2021 over the prior year.

Revenue in our Global Solutions Insight & Analytics Segment was up 5% over Q2 of 2021 with increases from both Trayport and TMX data links. Revenue from Trayport was up 5% in Canadian dollars or 14% in pound sterling. A 14% increase in pound sterling was primarily driven by a 17% increase in trader subscribers, annual price adjustments, and a one-time consultancy revenue for development services.

Revenue in our TMX data links business, including colocation, grew 5% driven by increases in data feeds, colocation, as well as benchmarks and indices, partially offset by a reduction in revenue from lower usage based quotes. There was a favorable foreign exchange impact of approximately 1 million from a weaker Canadian dollar relative to the U.S. dollar this quarter when compared with Q2 of 2021, which accounts for roughly 2% of the 5% year-over-year increase.

The average number of professional market data subscriptions for TSX and TSX Venture products decreased by 3% in the quarter, compared with last year where subscriptions on the Montreal Exchange were up 3%. Revenue from our equities and fixed income trading and clearing segment was up 3% in the quarter.

Within the segment, equities and fixed income trading revenue increased 7% in the quarter, compared with Q2 of last year, despite a 9% decline in overall volumes of securities traded on our equities marketplaces, reflecting a favorable product mix within TSX and the impact of April 2022 price changes on continuous trading for securities with a share price below $1.

While trading volumes on TSX securities increased by 9% in the quarter, volumes on TSX Venture Exchange and TSX Alpha Exchange decreased by 39% and 11% respectively when compared with Q2 last year, which is why our overall volumes of securities, traders on equities marketplaces is down 9%.

Despite overall volumes of securities traded on equities marketplaces being down, our market share increased by 5%. On the fixed income trading side, revenue increased by – revenue increased versus Q2 a year ago, reflecting higher activity in Government of Canada bonds and swaps. Revenue from our CDS business was down 2%, reflecting lower issuer services and corporate action revenue, partially offset by higher revenue from custodial fees and standby liquidity facilities, compared with Q2 a year ago.

Turning to our expenses. Operating expenses in the second quarter increased by 32%, compared to Q2 last year. Included in this increase are the costs associated with BOX, which we now consolidate, as well as the two acquisitions, namely AST Canada and Trade Signal, as well as costs associated with those transactions, namely AST integration costs, amortization of acquired intangibles for AST Canada and BOX, and the transition services agreement with AST. All of which in aggregate amounted to 28.7 million of expenses in Q2 of 2022.

Excluding the aggregate amount of expenses associated with BOX, AST Canada, and Trade Signal, which I just mentioned, this translates into a year-over-year increase of 7% for operating expenses, compared with Q2 of last year. The higher expenses reflected higher headcount in payroll costs, increased long-term employee incentive plan costs, as well as increased expenses for travel and entertainment, including hosting our conferences and events, which are returning to in-person after our hiatus during the last few years.

In addition, expenses were reduced in the second quarter of last year due to a release of a provision for restoration costs for our data center. These increases in costs were partially offset by lower short-term employee incentive time costs, lower severance, and acquisition and related costs related to AST Canada in Q2 of 2021.

Turning to our integration of AST Canada, our integration of AST Canada continues to progress very well. We expect total revenue and expense synergies of approximately 10 million, which is up 25% versus our previous estimate of 8 million, which will be substantially achieved by the end of 2024.

As it relates to 2022, we now expect at least 3.5 million of these cost synergies in 2022, which is up from our original estimate of 2 million for 2022. We continue to expect integration costs related to AST Canada of approximately 20 million over the 16 month period from September 1 of last year till the end of this fiscal year December 31.

Looking at our results sequentially, revenue only decreased 1 million from Q1 of 2022 to Q2 of 2022, which reflected lower equities and fixed income trading and derivatives trading and clearing revenue, which was primarily driven by lower BOX volumes in the quarter. This was mostly offset by higher capital formation revenue, driven by higher other issue services revenue and additional listing fees revenue from Q1 to Q2 of this year.

Operating expenses increased 2.5 million or 2% from Q1, including an increase of 3.7 million related to AST integration. There were also increases in technology spending, director fees, travel, and performance incentives. These were partially offset by lower salaries and payroll taxes of 3.2 million, lower legal fees, and lower termination allowances.

Turning now to our balance sheet. In the second quarter of 2022, we spent 61.3 million repurchasing 460,000 of our common shares under our normal course issuer bid program. Our debt-to-adjusted EBITDA ratio was 1.7x at the end of the quarter. And we also held over 432 million in cash and marketable securities at the end of the quarter, which is approximately 227 million in excess of the 205 million we target to retain for regulatory and credit facility purposes.

Last night, our Board of Directors approved a quarterly dividend of $0.83 per common share payable on August 26 to shareholders of record as of August 12. In the second quarter, we paid out 44% of our adjusted earnings per share, which is marginally below the midpoint of our target payout ratio of 40% to 50%.

So that concludes my formal remarks. And I’d now like to turn the call back to Paul for our Q&A period.

Paul Malcolmson

Thanks, David. Michelle, could you please outline the process for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.

Geoff Kwan

Hi, good morning. John, you were talking earlier just being engaged on the Issuer side and the pipeline. Just wondering if you can expand on that a little bit. Just how it’s changed in recent months, both on the IPO, but also the follow on, for whatever visibility you have? Just trying to get a sense as to things are looking a little bit better.

John McKenzie

Yes, I’m happy to do that, Geoff. Thanks for the question. It’s an interesting dynamic when you look at the activity in 2022 because when you look at it simply in reference to 2021, it looks quite challenging, but interestingly if you actually have a look back and look at our 2022 activity both across the senior market and the venture market as compared to call it the four years before 2021 you’re going to find this is actually one of the strongest markets that we’ve had.

So, I think that’s why actually some folks are surprised that we’re not seeing larger revenue challenges than they would have expected in this marketplace. So, with respect to your pipeline question, the pipeline actually for new issues continues to grow. It’s difficult to give guidance in terms of when companies can come to market because it really is around market conditions for them to do their financing, but that’s why we wanted to reflect some of the names that actually got a public financing done because those are ones that actually become benchmarks for other transactions to build off in the future.

So, we do see that positive momentum in terms of potential listings, but it’s hard to say what time they’d come to market. The other silver lining that we talked about a bit in the comments was the activity that you see in venture around, particularly around CPC. So, Capital Pool Company programs because they’re founder base, they’re less sensitive to what’s going on in both market volumes and valuation and volatility.

And so those transactions are getting done even in difficult markets. And I think I said earlier, they’re up about 24% year-over-year and we’ve listed almost 50 new ones this year. So that gives you a bit of context. We are continuing to see financing transactions. You see that in the transaction data that the transaction activity is still robust, but just at smaller size than you would have seen last year. So, in another way that actually impacts our revenue because we’re actually seeing fewer transactions that are capping out at the caps because they are smaller sized deals.

So, overall, all things, if it wasn’t for 2021, we would be talking about what a healthy market this is. And it’s only in reference to last year that you’ve seen the delta.

Geoff Kwan

Okay. Thanks for that. My next question was on the TSX Trust AST Canada. You’ve talked about that sensitivity of 25 basis points higher rate is roughly about 2.5 million of additional annual revenue, the bank turnover over net rates up 225 basis points so far this year. Now, is that interest rate sensitivity based on the overnight rate or is there another interest rate benchmark just because if we use the overnight rates, that would imply kind of like 22.5 million of annual revenue and just wondering how much of that would have been captured in the Q2 revenues?

David Arnold

So, thanks, Geoff. It’s David. I’ll start and maybe John can add any extra color. It’s not as simple as monitoring a Bank of Canada overnight rate change and then extrapolating it fully to the trust revenue line on net interest income, primarily because really a couple of factors. One is, not all of the deposits that we receive generate the same level of net interest income.

On some of our arrangements, the arrangements with the clients have us testing on some of the rate hikes to them. So, not as easy as doing that. And then what I would say in Q2 is given the timing of the rate hikes it had a modest impact. It will have a more material impact in Q3. And then the third thing, which is very important is balances, right. Balances fluctuate depending on various corporate actions. And we struggle internally to predict those because it’s like predicting capital formation or derivatives trading revenue, which is very much market driven.

So, those would be the variables that play, but the key takeaways, it isn’t a straight line. And we would look to anywhere between $4 million to $5 million of net interest income over the course of this year given where rates are, but once again, Bank of Canada have a rate meeting coming in September. So, we’ll have to stay tuned on that too.

Geoff Kwan

The 4 million to 5 million that’s what you’re saying, I guess relative to what we saw in Q2 that would be the annual lift given where rates are today?

David Arnold

Yes.

Geoff Kwan

Okay. And then just my last question was just on Trayport. The average total subscribers I think was down very slightly, kind of quarter-over-quarter. Obviously, it’s had a very good gradual increase since you acquired it. Just wondering if there’s any color you can give on that?

David Arnold

Great. So, quickly before we do that, John, Geoff, I wanted to make sure I heard your question or answered it correctly. So, when I said the 4 million to 5 million that’s for the balance of this year, right? We think it’s about 8 million for the full-year. Hope it helps.

John McKenzie

And I’m laughing a bit, Geoff on the question on Trayport, because it’s – we only ever get asked about the sequential, if the sequential is down or the year-over-year if the year was down because I’m going to remind everyone that year-over-year we’re up 17%. So, I’m going to take that opportunity to do that. On the sequential piece, all you’re actually seeing there is a restructuring in terms of one of the activities in a single broker that offset what otherwise would have been subscriber growth sequentially. And so what I mean by that is a broker had an underperforming desk that they chose to wind down, it would have had some dedicated traders associated with it.

So, those trader subscriptions are no longer there because that business of that broker isn’t there anymore and that offset what otherwise would have been growth in the quarter. So, it’s nothing to take any concern to in terms of the overall strength through the health of the business. And I think we indicated in David’s notes about 9 new net paying clients in the quarter as well, which will contribute to subscriber growth in the future quarters, but that was the step down in terms of that sequential impact.

Geoff Kwan

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you and good morning.

John McKenzie

Good morning.

Etienne Ricard

On equity trading, could you please comment on how competitive dynamics have changed since CBOE closed on the acquisition of NEO back in June, if at all?

John McKenzie

Yes, to be [candidate] [ph], they really haven’t changed any material way. So, CBOE was already active in Canada with their ownership of MATCHNow, NEO already an active player. So, we haven’t seen material changes or material changes in the business model and you’ll see that in terms of our overall market share continues to be pretty much either flat to up from where we’re a year ago.

So, it’s something that we are constantly monitoring and constantly engaging with clients to make sure that we are meeting their needs. We talked earlier about the actual trade conference that we just initiated in June. That was extremely effective in terms of bringing up the trading community, understanding what their pain points are, their net needs are, and also the stress test some of our ideas in terms of market reform and get real life feedback from the trading community.

So, our competitive position here continues to be to focus on what the client needs are, so they don’t need to trade anywhere else.

Etienne Ricard

Understood. And on TSX Trust, given you have previously noted this business, has a higher growth potential over time, could you comment on what led to lower trends for agency fees on an organic basis year-over-year?

John McKenzie

I mean that would be a combination of all the fees within trust, so [transformation] [ph] to trust activity. So, very much like the other parts of the TSX and TSX Venture financing area when we have lower transaction activity. They’re also lower trust or transfer or corporate actions.

So, the overall book of business, the overall client base continues to grow in trust and transfer, but you have lower activity levels in the first half of the year, as compared to a year ago.

Etienne Ricard

Okay, great. And I think you’ve been buying back stock more actively in Q2, looking forward should we expect you to become more meaningful acquirers of your stock?

David Arnold

Good question, Etienne. You’re right. We did purchase a substantial amount of our normal course issuer bid authorized allotment this quarter. It isn’t something that we actually direct. We have a standing order based on a ratio and a broker of record then executes accordingly. We have about 5,000 of our normal course issuer bid outstanding, and we are evaluating various different capital deployment strategies, right.

And one of the things we have to obviously do is look to the organic growth initiatives that we have underway, as well as sunsetting some of our very large initiatives like our post-trade modernization, which as you know now goes into industry testing. And so given the opportunities that we have for capital deployment, whether it be for organic growth, whether it be for dividend increases, increased share buybacks or M&A activity as we monitor what transpires on the pricing front in the marketplace, I would stay tuned, but right now we’ve got about 5,000 remaining to go.

John, do you want to add anything?

John McKenzie

My simple summary of David’s comments is, we are remaining and keeping our flexibility in what has been a bit more of an unsettling marketplace. So, we are evaluating all tools and want to maintain a maximum flexibility and the strength of our balance sheet so that we can actually take advantage of opportunities as they come.

Etienne Ricard

Thank you very much.

Operator

Thank you. Your next question comes from Graham Ryding of TD. Please go ahead.

Graham Ryding

Hi, good morning. We saw a nice lift quarter-over-quarter in AST revenue, was that largely higher margin income or would you attribute that to?

John McKenzie

Margin income was part of it, but there were a couple of other parts of the business that did well. And so, I wouldn’t say it is all margin income at all, Graham.

Graham Ryding

Okay. I know, you don’t give specific expense growth, but maybe you could just help us think about – the growth we saw this quarter if you strip out the acquisition was 7% year-over-year. I think it was 2% year-over-year last quarter. So, how should we be thinking about what’s a reasonable expense growth expectation, should we be thinking closer to, sort of the 4% you’ve done year to date or is this 7% growth in this quarter potentially a run rate for expense growth.

John McKenzie

Yes, I would guide you towards closer to the first half of the year cumulative for the 4% to 5% kind of range.

Graham Ryding

Okay. That’s helpful. On the derivatives side, your interest rate derivative volumes are actually down year-over-year. That surprises me somewhat. I just thought in an environment of rising rates that might actually foster higher interest rate derivatives activity. Could you provide any color there, John?

John McKenzie

Yes, I’m happy to. So, in the long-term, you’re absolutely right, Graham. And so when you actually – you see growth in terms of other parts of the interest rate curve, the challenge in the short-term and particularly the challenge this year is the biggest impact year-over-year has been in the products like the back. So, the short-term [30-day] [ph] products. And when we’re in an environment where they are rapidly changing Bank of Canada rates and they are not predictable in terms of timing or amounts, that’s difficult for speculators or hedgers or other people to use those products.

So, what I would call it is, it’s not constructive volatility in the short-term when there’s not good predictability about those rate changes. So, as that normalizes in a higher rate environment, you’re absolutely right that will give more tailwinds to support the product, but in the short-term, when the timing and size of Bank of Canada rates changes are less predictable, it’s harder for people to use those products and they take on more risk when they’re doing them, which is not the intent of the product. So, we do see this being as a short-term issue as bank rates make some quick changes and then that will stabilize and give more tailwind.

Graham Ryding

Okay, that’s helpful. And my last question, if I could, just the CDS modernization project. I think it’s on track to finish in the first half of 2023. Is there potential here that this could be pushed out further and the CapEx could be increased again or how you’re feeling about that project at this stage?

John McKenzie

I’m feeling cautiously optimistic. Is that hedging enough for you? We spent a lot of time on this on a regular basis. I’m going to take the opportunity to give a shout out to the folks that are working on us because this has been an extremely challenging initiative, especially in the backdrop of COVID anytime you’re doing large scale software development in multiple jurisdictions and you can’t put people in the same room to solve challenges that does make the time to do things like user acceptance testing and finalizing the development and much more challenging to finish, but what we had in the last couple of weeks and we’ve been through two different board sessions on this was a significant milestone in terms of that we are now nearly complete all of our internal user testing and have announced to the Street when we are going to be going live in mid-September for industry test and development.

And we’ve committed to the industry at least 9 months to do that. So that gives us the higher degree of kind of cautious optimism around the timing to execute this because we’re now at a place where we’ve got the product. It meets the needs. It’s functional, and we can put it in the hands of the clients starting in September, so they can do their own testing and development over the next year to be ready to go live in 2023.

The estimates that we’ve given both around timing and around total capital are all reflective of that, and reflects some contingency that there still could be some unknown challenges as we go through that process. So, best information we have at the time and a reasonable degree of certainty in terms of that real milestone that’s come through that we’re going to be live in market in the fall this year.

Graham Ryding

Okay. That’s it for me. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Jaeme Gloyn of National Bank. Please go ahead.

Jaeme Gloyn

Yes, thanks. Good morning. The quarter included a lot of good to see pricing increases across various businesses. Somewhat unexpected, I guess, or maybe wasn’t necessarily hinted at on previous quarters. Is there anything that you can share in terms of what’s in the pipeline from other price increases that could be in proposal stages or something that you’re [work shopping] [ph] in the background?

John McKenzie

Yes. Jaeme, I appreciate the question. And so, I mean, obviously, I can’t share things that we haven’t made public yet in terms of either filing with regulators or notices to clients, but what I will let you know is that we are actually actively looking at those other businesses that weren’t part of the price changes we’ve already announced.

So, businesses like listings and capital formation for in some cases we haven’t done pricing on the senior market, I think in four years and on the venture market in 10 years, we are looking at what are the appropriate changes we can make there that are still consistent with maintaining a very strong competitive position both domestically and globally. And that’s one we are actually looking at. And I would expect to be communicating both with regulators in the street in the near-term.

Jaeme Gloyn

Okay great. And then just in terms of some of the new trading initiatives, I assume these are coming from customer driven demands. Can you, sort of maybe elaborate on what you’re expecting from a – are there market share benefits for TMX? Are there fee benefits for TMX like what are the knock-on effects for your business by introducing some of these new products and tools?

John McKenzie

It actually depends on the tools. So, some of them are actually about driving incremental market share. Incremental also strengthen liquidity, so over the overall quality of the volume as well. In some cases like the work that we did on market on close and the work we’re doing on dark, those are also, as you said, those are premium offerings that drive also a higher yield. So, they’re more valuable products to the street and they command a premium in terms of the revenue impact.

And I think you’re seeing some of that in terms of the revenue growth in equity trading year-over-year because while volume is off, the actual yield is up and the overall revenue growth is there. So, you’re exactly right. It is a combination of those pieces and it’s driven specifically by identified client needs of the community.

Jaeme Gloyn

Okay. And if I’m thinking about it, maybe more bit of a modeling question, I guess, right now, but we’re seeing higher capture rates flowing through on equities and trading. Now there’s some noise [indiscernible] fixed income is in there too, but is there more upside to let’s say revenue per contract trade or for equity trade in the last couple of quarters given some of these new initiatives or are you seeing like that as maybe more of a high watermark? Just trying to get a little bit more insight into where the revenue per trade can trend towards over the next several quarters to years?

John McKenzie

Yes. So, you’ve got to look at two things. Yes, we’re seeing more premium revenue in terms of the mix year of revenue in terms of the kind of amount of the volume that’s in the closure in those other dark products, but it’s also, Jaeme look at the shift in terms of the trade across higher value securities across all markets. So, we’ve got trade value growth in TSX, I think year-over-year, we’re up about 17% in dollar value traded, where venture has declined somewhat year-over-year.

So when you’ve got the higher stock prices, you also have a higher tier in terms of revenue capture because of the lower share prices on some of the venture stocks are at different capture rate as well. So, you’ve got to look at that business mix as well.

Jaeme Gloyn

Yes, understood, but absent any changes in business mix or assuming that’s all equal like the…

John McKenzie

Sustainable.

Jaeme Gloyn

Yes, okay. Good stuff. Okay. That’s it for me. Thank you.

John McKenzie

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

Paul Malcolmson

Well, thank you, Michelle. And just before we close, I want to give you two updates from the Investor Relations team. Amanda Tang, who most of you know well, will be off to maternity leave for the next year or so. Just this past Monday Amanda had of boy. Their second son now and everyone is doing very well. Congratulations, Amanda from all of us. While Amanda is off, [indiscernible] will be filling in for Amanda. Most recently, [Technical Difficulty] financial planning and analysis function, and I know you’ll all enjoy working with [indiscernible].

In closing, I want to thank everyone for listening today. If you have any further questions, the contact information for media, as well as for Investor Relations is in our press release and we’d be happy to get back to you. Stay well and have a good weekend everyone.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

TMX Group Limited’s (TMXXF) CEO John McKenzie on Q2 2022 Results – Earnings Call Transcript

TMX Group Limited (OTCPK:TMXXF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Company Participants

Paul Malcolmson – Vice President, Enterprise, Sustainability and Investor Relations

John McKenzie – Chief Executive Officer

David Arnold – Chief Financial Officer

Conference Call Participants

Geoff Kwan – RBC Capital Markets

Etienne Ricard – BMO Capital Markets

Graham Ryding – TD Securities

Jaeme Gloyn – National Bank

Operator

Good morning, ladies and gentlemen, and welcome to the TMX Group Limited Q2 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday July 29, 2022.

I would now like to turn the conference over to Paul Malcolmson, VP, Enterprise, Sustainability and Investor Relations. Please go ahead.

Paul Malcolmson

Well, thank you, Michelle, and good morning, everyone. I hope that you and all of your families are staying well and enjoying the summer. Thank you for joining us this morning for the second quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday afternoon and a copy of our press release is available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following opening remarks, we’ll have a question-and-answer session.

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

And with that, I’d like to turn the call over to John.

John McKenzie

Thank you, Paul and good morning, everyone. Thank you so much for joining us today to discuss TMX Group’s financial performance for the second quarter and for the first six months of the year. And let me start by echoing Paul’s comments in terms of wishing everyone an excellent summer, a well-deserved good summer after two years that have been more challenging.

Now, David will join us in a few minutes to take you through the second quarter results in detail, but before he does, my comments this morning will really focus on TMX’s Group’s performance throughout the first half of the year, the progress that we are making on our enterprise growth initiatives, and the proactive measures TMX has undertaken in an effort to address the needs of our broad and diverse stakeholder group, and to help push the evolution of our capital markets ecosystem to ensure we maintain our competitive edge into the future.

Now, in many respects, and this is no secret to anyone listening, the 2022 business environment looks very different from the same time last year. Macroeconomic conditions, geopolitical events, including the conflict in Ukraine, rising interest rates and inflation concerns have negatively impacted global markets. And it is a stark reality for our clients and peers across the financial industry and people around the world. But before we begin to examine the business impacts, I want to take a moment to pause and send our thoughts out to support all those people who are directly and indirectly affected by these global challenges.

Now, turning to our performance. Overall, TMX continued to deliver positive results. Both for the second quarter and the first six months of the year, despite the impact of significant and persistent headwinds on some of our key businesses, including capital raising and equity trading activity. TMX reported revenue of $573.2 million for the first six months of the year, which is a 15% increase from the same period of 2021, due to higher revenue from derivatives Trading and Clearing, Trayport, and Capital Formation.

Increased revenue was partially offset by lower revenue from equities in Fixed Income Trading and Clearing, due to lower trading volumes on the Toronto Stock Exchange and TSX Venture Exchange. [The higher] [ph] revenue included $60.3 million in revenue from BOX, which was consolidated in January 2022, as well as revenue from our 2021 acquisitions. 21.1 million from AST Canada acquired in August 2021 and 0.8 million from Trade Signal acquired in June 2021.

Now, excluding revenue from last year’s acquisitions, revenue was down 1% from the first six months of 2021. And on an adjusted basis, diluted earnings per share was 3.71 in the first six months, a decrease of 2% from 2021. Total operating expenses increased 27%, compared to last year or 4% when you exclude expenses related to BOX, AST Canada, and Trade Signal.

And TMX’s performance in the first half of 2022 again highlights the power of our resilient business model and underscores the efficacy of our adaptive long-term diversification strategy. TMX’s corporate purpose is to make markets better and [empower bold ideas] [ph] and it’s a central and guiding theme in that strategy. Our pledge to our vast and varied group of stakeholders and we never lose sight of the importance of our role at the center of the market and what this ecosystem of opportunity means to the country’s economy and the people in the communities from coast to coast.

Now, turning to each of our business areas. Revenue from capital formation in the first six months of 2022 was 137.2 million or 5% increase from last year, and the year-over-year increase reflected the inclusion of revenue from AST Canada and higher revenue from initial and sustaining listing fees, partially offset by lower additional listing fees reflecting a decrease in the number of financing transactions and dollars raised on TSX and TSX Venture.

And coming off a record [second 2021] [ph], gold conditions have been less favorable for capital raising in 2022, due to inflation concerns, rising interest rates, and increased volatility. And while the IPO markets slowed year-over-year, we proudly welcome new listings to the market in the first half of 2022, including Bausch & Lomb, Ivanhoe Electric, Dream Residential REIT, and two large [Florida based SPACs] [ph] Agrinam Acquisition Corporation and FG Acquisition Corp.

And we remain actively engaged with potential IPO candidates in all sectors, as well as deal makers from across the interconnected ecosystem. And we also continue to see evidence of the strength of TMX’s unique value proposition for companies looking to access public markets. TSX Ventures’ signature Capital Pool Company program is thriving and despite the overall challenging capital raising conditions. TSX Venture added 46 new CPCs in the first half of 2022, a 24% increase over the first half of 2021.

Now, consistent with TMX’s corporate purpose, our work to ensure we remain a market of choice for the next wave of great companies poised to come to market is proactive and it’s an always on campaign. So, in June, TSX Venture launched Venture Forward. It’s a new community driven program focused on strengthening Canada’s crucial public venture market. This collaborative long-term initiative is designed to engage our public venture stakeholders, including entrepreneurs, investors, financiers, lawyers, and advisors to help identify priority challenges and friction points and map out a plan to pursue workable solutions.

We have begun to reach out to stakeholders to help frame the issues and our next steps include developing near and longer-term plans and we intend to publish highlights of our findings and feedback along the way with planned next steps by the end of the year. June also marked the in-person return to the Prospectors and Developers Association of Canada or PDAC Convention.

And for years, our exchanges have proudly supported this massively popular and annual event, which brings mining companies, investors, and policymakers from all over the world together into Toronto. And it makes good sense. TMX is the world’s premier marketplace for resource companies to raise capital. More than 40% of the world’s public mining company are listed on TSX and TSX Venture. And we were honored this year to participate in the International Mines Ministers Summit at PDAC 2022.

The theme of this year’s summit, an annual meeting of leading mining representatives and governments from around the world was ESG and emissions reductions, and the increased production of lithium, nickel, copper, and other essential minerals in the global efforts to achieve net zero. And we shared TMX’s perspectives with the ministers on how governments can help support a thriving mining sector by minimizing regulatory burden where appropriate by committing to make the necessary infrastructure investments and to fostering collaboration with local communities and specifically indigenous communities.

Mining is a rapidly evolving industry. And as the transition to low carbon economy continues to gain momentum, investors are paying close attention. And so, we recently launched a new benchmark to serve the needs of investors seeking increased exposure to and deeper insights into the clean tech and energy transition story. The new S&P/ TSX Battery Metals Index measures the performance of TSX and TSX Venture listed companies focused on the exploration, development, and production of select commodities that serve as significant inputs and the decarbonization of the transportation sector.

Now, I’d like to turn to derivatives. Excluding BOX, revenue from derivatives trading and clearing was 75.3 million in the first six months of 2022, an increase of 5% from last year. Now, the increase was driven by 15% higher revenue from CDCC, due to repo dealer activity and fee changes and a 2% increase in revenue from Montreal Exchange, reflecting higher overall volumes and fee changes on the SXF, particularly offset by a slightly unfavorable product and client mix.

Total volume increased 2% over the first half of 2022 with strong growth in overall open interest at June 30, 2022, up 25%, as compared to the same point last year. Now, in the midst of a volatile and turbulent market environment, investor demand for tools to effectively and efficiently manage risk increased year-over-year. Volumes traded in options grew 21% over the first half of 2021, led by trading in the energy and financial sectors and reflecting increased activity from our institutional investors, as well as our retail client base.

Trading in ETF options also gained strong momentum, particularly in the second quarter amongst institutional investors with volumes up 11%, compared to the first six months of 2021. And volume in Index futures trading was up 19% in the first half of the year, compared to 2021 as clients move to manage exposure to volatility in equity markets.

The first half of the year was also marked by sustained growth in our newer government of Canada bond futures contracts with 38% increase in the volume traded in the CGF or the five-year contract and 155% increase in volumes traded in the CGZ, our two-year contract. These recent additions to our product suite are proving effective and creating efficient cross market trade opportunities and continue to gain in profile among global investors.

Now, the maturation of the CGF product itself is a definitive success story. As it has now reached levels of liquidity where introductory incentives are no longer required to sustain its growth.

Moving now to Trayport, revenue in the first half of the year was 79.2 million, a 7% increase from the first half of 2021, 14% in common currency or pound sterling, and driven by an 18% increase in trader subscribers, annual price adjustments, and consultancy revenues.

Now, the conflict in the Ukraine and the impact of the corresponding sanctions continue to drive increased volatility and global energy trading markets. And Trayport’s core network of dynamic tools and solutions supports the needs of traders across the European energy markets and connects clients to execution venues and clearinghouses across key power and natural gas markets.

Now, while primarily focused on meeting the demands of a robust market, during the first half of 2022, Trayport also successfully advanced on its global strategy to diversify and to move into new asset classes and geographies. In June, Trayport announced a minority investment in Ventriks, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence.

And under a new partnership agreement, Trayport will further expand its product offering to meet the growing client demand for data and analytics. The Ventriks solution complements Trayport’s existing suite of data, automated and algorithmic trading tools and will further enhance decision making and improve the overall trading experience.

In closing today, I want to commend as always our people for the work that they do and their everyday contribution to TMX’s success. And specifically to thank our team of professionals for their efforts this summer in transitioning TMX into a hybrid working environment. I’m very confident that a new balance of virtual and in-person work will ultimately prove more stimulating, engaging and productive for all of us. And we don’t have to look too far for compelling and relevant examples of the value of renewed in-person engagements.

In June, our team hosted two annual trading conferences in-person for the first time since 2019, the TMX Equity Conference in Toronto; and the Canadian Annual Derivatives Conference or CADC in Montreal. Each of these signature events brings together professionals and industry experts, our partners across the capital markets ecosystems to share perspectives on the current and future state of our markets and to exchange ideas on challenges and opportunities across the Canadian equities, fixed income, and derivatives landscape.

So, I’d like to thank everyone in the markets division to our stellar marketing and support teams for pulling together two extremely successful and well attended events. In addition, last week, we also took an important step forward towards TMX’s reconciliation journey. A diverse group of business leaders from across TMX gathered in Wendake, a First Nation in Quebec to participate in an immersive shared learning experience to develop TMX’s foundational principles and philosophies for reconciliation.

This two-day session featured a productive open exchange of ideas and perspectives, highlighted by invaluable insights and experience shared by members of our host community, The Huron-Wendat Nation. The efforts of the team and the contribution from our generous hosts will help to define the long-term vision of end tactics for how TMX can contribute to a future of shared prosperity for indigenous businesses and communities. This should be no surprise. This is what we do at TMX.

TMX is a purpose-driven people-driven organization. Employees across the enterprise are unified by our unwavering commitment to make markets better and empower bold ideas. And this mindset fuels all of our clients and stakeholder engagements and guides our business and corporate initiatives during robust and thriving markets and even more importantly when challenging conditions negatively impact key components of our ecosystem.

In all market conditions, the pursuit of meaningful ways to do better, to be better is constant. And for TMX, making markets better includes ensuring that we have the most resilient, robust and reliable operating systems and protocols, constantly striving to adapt our products and services across the franchise to meet the evolving need of the modern marketplace and our increasingly global client base, and activating TMX as a leading voice for measures to create conditions for our enduring success.

So with that, let me say thank you and will turn the call over to David.

David Arnold

Thank you, John, and good morning, everyone. As John mentioned, our results for the second quarter reflect the continued resiliency of our diverse business model with overall revenue growth of 17%, including increases across all of our business segments. Revenue, excluding the Boston Options Exchange or BOX for short, which we consolidated on January 3 this year, AST Canada, which we acquired on August 12, 2021; and Trade Signal, which Trayport acquired on June 1, 2021 was up 1% in the quarter, compared with last year.

We managed our cost increases to below the current rate of inflation in Canada in the second quarter with operating expenses, excluding BOX, AST Canada and Trade Signal, up 7%, compared with Q2 of 2021 and year to date when compared with the same six-month period a year ago, our costs are only up 4% well below the current rate of inflation in Canada.

We reported an increase of 20% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q2 of 2021 where we incurred a 19.8 million charge due to a UK corporate income tax rate change, as well as an increase in income from operations of 5.4 million, compared with Q2 of 2021. Our adjusted diluted earnings per share decreased slightly by 1%, largely driven by higher operating expenses, partially offset by higher revenue.

Turning now to our businesses. We saw year-over-year revenue increases in all of our segments and I will start with the businesses that saw the largest year-over-year increases. Revenue in derivatives trading and clearing grew by 89% this quarter, compared to Q2 of 2021, since we now consolidate BOX and that represents 27.3 million of revenue, which is included in this segment for Q2.

Volumes on BOX increased by 20% compared Q2 of last year and BOX’s market share and equity options grew 6%, up 1% from Q2 of 2021. Derivatives trading and clearing revenue excluding BOX was up 9% in the quarter, driven by a 16% increase in CDCC revenue, and a 6% increase in revenue from the Montreal Exchange.

The Montreal Exchange revenue increase reflected first, a 2% volume increase this quarter, compared with Q2 of 2021; second, a favorable product and client mix; and third, positive impact on trading fees on the heels of the pricing changes for our S&P, TSX 60 Index Standard Futures or SXF, which came into effect in January of this year.

Turning to capital formation. Revenue grew by 6% this quarter, which included approximately 12.2 million of revenue related to AST Canada. Excluding AST Canada, revenue in the quarter decreased 12% in capital formation, primarily on the heels of lower additional listing fees in the quarter, due to decreases in both the total number of financings and the total financing dollars raised, and a slight decrease in initial listings fees.

The additional listing fees decrease on TSX reflected a 27% decrease in the number of additional listing transactions billed at the maximum listing fee of 250,000 and a 16% decrease in the number of transactions below the maximum fee when compared to very strong levels of activity in Q2 of last year. This decrease was partially offset by higher sustaining listing fees in the quarter, reflecting an increase in the market capitalization of TSX and TSX venture issuers at December 31, 2021 over the prior year.

Revenue in our Global Solutions Insight & Analytics Segment was up 5% over Q2 of 2021 with increases from both Trayport and TMX data links. Revenue from Trayport was up 5% in Canadian dollars or 14% in pound sterling. A 14% increase in pound sterling was primarily driven by a 17% increase in trader subscribers, annual price adjustments, and a one-time consultancy revenue for development services.

Revenue in our TMX data links business, including colocation, grew 5% driven by increases in data feeds, colocation, as well as benchmarks and indices, partially offset by a reduction in revenue from lower usage based quotes. There was a favorable foreign exchange impact of approximately 1 million from a weaker Canadian dollar relative to the U.S. dollar this quarter when compared with Q2 of 2021, which accounts for roughly 2% of the 5% year-over-year increase.

The average number of professional market data subscriptions for TSX and TSX Venture products decreased by 3% in the quarter, compared with last year where subscriptions on the Montreal Exchange were up 3%. Revenue from our equities and fixed income trading and clearing segment was up 3% in the quarter.

Within the segment, equities and fixed income trading revenue increased 7% in the quarter, compared with Q2 of last year, despite a 9% decline in overall volumes of securities traded on our equities marketplaces, reflecting a favorable product mix within TSX and the impact of April 2022 price changes on continuous trading for securities with a share price below $1.

While trading volumes on TSX securities increased by 9% in the quarter, volumes on TSX Venture Exchange and TSX Alpha Exchange decreased by 39% and 11% respectively when compared with Q2 last year, which is why our overall volumes of securities, traders on equities marketplaces is down 9%.

Despite overall volumes of securities traded on equities marketplaces being down, our market share increased by 5%. On the fixed income trading side, revenue increased by – revenue increased versus Q2 a year ago, reflecting higher activity in Government of Canada bonds and swaps. Revenue from our CDS business was down 2%, reflecting lower issuer services and corporate action revenue, partially offset by higher revenue from custodial fees and standby liquidity facilities, compared with Q2 a year ago.

Turning to our expenses. Operating expenses in the second quarter increased by 32%, compared to Q2 last year. Included in this increase are the costs associated with BOX, which we now consolidate, as well as the two acquisitions, namely AST Canada and Trade Signal, as well as costs associated with those transactions, namely AST integration costs, amortization of acquired intangibles for AST Canada and BOX, and the transition services agreement with AST. All of which in aggregate amounted to 28.7 million of expenses in Q2 of 2022.

Excluding the aggregate amount of expenses associated with BOX, AST Canada, and Trade Signal, which I just mentioned, this translates into a year-over-year increase of 7% for operating expenses, compared with Q2 of last year. The higher expenses reflected higher headcount in payroll costs, increased long-term employee incentive plan costs, as well as increased expenses for travel and entertainment, including hosting our conferences and events, which are returning to in-person after our hiatus during the last few years.

In addition, expenses were reduced in the second quarter of last year due to a release of a provision for restoration costs for our data center. These increases in costs were partially offset by lower short-term employee incentive time costs, lower severance, and acquisition and related costs related to AST Canada in Q2 of 2021.

Turning to our integration of AST Canada, our integration of AST Canada continues to progress very well. We expect total revenue and expense synergies of approximately 10 million, which is up 25% versus our previous estimate of 8 million, which will be substantially achieved by the end of 2024.

As it relates to 2022, we now expect at least 3.5 million of these cost synergies in 2022, which is up from our original estimate of 2 million for 2022. We continue to expect integration costs related to AST Canada of approximately 20 million over the 16 month period from September 1 of last year till the end of this fiscal year December 31.

Looking at our results sequentially, revenue only decreased 1 million from Q1 of 2022 to Q2 of 2022, which reflected lower equities and fixed income trading and derivatives trading and clearing revenue, which was primarily driven by lower BOX volumes in the quarter. This was mostly offset by higher capital formation revenue, driven by higher other issue services revenue and additional listing fees revenue from Q1 to Q2 of this year.

Operating expenses increased 2.5 million or 2% from Q1, including an increase of 3.7 million related to AST integration. There were also increases in technology spending, director fees, travel, and performance incentives. These were partially offset by lower salaries and payroll taxes of 3.2 million, lower legal fees, and lower termination allowances.

Turning now to our balance sheet. In the second quarter of 2022, we spent 61.3 million repurchasing 460,000 of our common shares under our normal course issuer bid program. Our debt-to-adjusted EBITDA ratio was 1.7x at the end of the quarter. And we also held over 432 million in cash and marketable securities at the end of the quarter, which is approximately 227 million in excess of the 205 million we target to retain for regulatory and credit facility purposes.

Last night, our Board of Directors approved a quarterly dividend of $0.83 per common share payable on August 26 to shareholders of record as of August 12. In the second quarter, we paid out 44% of our adjusted earnings per share, which is marginally below the midpoint of our target payout ratio of 40% to 50%.

So that concludes my formal remarks. And I’d now like to turn the call back to Paul for our Q&A period.

Paul Malcolmson

Thanks, David. Michelle, could you please outline the process for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.

Geoff Kwan

Hi, good morning. John, you were talking earlier just being engaged on the Issuer side and the pipeline. Just wondering if you can expand on that a little bit. Just how it’s changed in recent months, both on the IPO, but also the follow on, for whatever visibility you have? Just trying to get a sense as to things are looking a little bit better.

John McKenzie

Yes, I’m happy to do that, Geoff. Thanks for the question. It’s an interesting dynamic when you look at the activity in 2022 because when you look at it simply in reference to 2021, it looks quite challenging, but interestingly if you actually have a look back and look at our 2022 activity both across the senior market and the venture market as compared to call it the four years before 2021 you’re going to find this is actually one of the strongest markets that we’ve had.

So, I think that’s why actually some folks are surprised that we’re not seeing larger revenue challenges than they would have expected in this marketplace. So, with respect to your pipeline question, the pipeline actually for new issues continues to grow. It’s difficult to give guidance in terms of when companies can come to market because it really is around market conditions for them to do their financing, but that’s why we wanted to reflect some of the names that actually got a public financing done because those are ones that actually become benchmarks for other transactions to build off in the future.

So, we do see that positive momentum in terms of potential listings, but it’s hard to say what time they’d come to market. The other silver lining that we talked about a bit in the comments was the activity that you see in venture around, particularly around CPC. So, Capital Pool Company programs because they’re founder base, they’re less sensitive to what’s going on in both market volumes and valuation and volatility.

And so those transactions are getting done even in difficult markets. And I think I said earlier, they’re up about 24% year-over-year and we’ve listed almost 50 new ones this year. So that gives you a bit of context. We are continuing to see financing transactions. You see that in the transaction data that the transaction activity is still robust, but just at smaller size than you would have seen last year. So, in another way that actually impacts our revenue because we’re actually seeing fewer transactions that are capping out at the caps because they are smaller sized deals.

So, overall, all things, if it wasn’t for 2021, we would be talking about what a healthy market this is. And it’s only in reference to last year that you’ve seen the delta.

Geoff Kwan

Okay. Thanks for that. My next question was on the TSX Trust AST Canada. You’ve talked about that sensitivity of 25 basis points higher rate is roughly about 2.5 million of additional annual revenue, the bank turnover over net rates up 225 basis points so far this year. Now, is that interest rate sensitivity based on the overnight rate or is there another interest rate benchmark just because if we use the overnight rates, that would imply kind of like 22.5 million of annual revenue and just wondering how much of that would have been captured in the Q2 revenues?

David Arnold

So, thanks, Geoff. It’s David. I’ll start and maybe John can add any extra color. It’s not as simple as monitoring a Bank of Canada overnight rate change and then extrapolating it fully to the trust revenue line on net interest income, primarily because really a couple of factors. One is, not all of the deposits that we receive generate the same level of net interest income.

On some of our arrangements, the arrangements with the clients have us testing on some of the rate hikes to them. So, not as easy as doing that. And then what I would say in Q2 is given the timing of the rate hikes it had a modest impact. It will have a more material impact in Q3. And then the third thing, which is very important is balances, right. Balances fluctuate depending on various corporate actions. And we struggle internally to predict those because it’s like predicting capital formation or derivatives trading revenue, which is very much market driven.

So, those would be the variables that play, but the key takeaways, it isn’t a straight line. And we would look to anywhere between $4 million to $5 million of net interest income over the course of this year given where rates are, but once again, Bank of Canada have a rate meeting coming in September. So, we’ll have to stay tuned on that too.

Geoff Kwan

The 4 million to 5 million that’s what you’re saying, I guess relative to what we saw in Q2 that would be the annual lift given where rates are today?

David Arnold

Yes.

Geoff Kwan

Okay. And then just my last question was just on Trayport. The average total subscribers I think was down very slightly, kind of quarter-over-quarter. Obviously, it’s had a very good gradual increase since you acquired it. Just wondering if there’s any color you can give on that?

David Arnold

Great. So, quickly before we do that, John, Geoff, I wanted to make sure I heard your question or answered it correctly. So, when I said the 4 million to 5 million that’s for the balance of this year, right? We think it’s about 8 million for the full-year. Hope it helps.

John McKenzie

And I’m laughing a bit, Geoff on the question on Trayport, because it’s – we only ever get asked about the sequential, if the sequential is down or the year-over-year if the year was down because I’m going to remind everyone that year-over-year we’re up 17%. So, I’m going to take that opportunity to do that. On the sequential piece, all you’re actually seeing there is a restructuring in terms of one of the activities in a single broker that offset what otherwise would have been subscriber growth sequentially. And so what I mean by that is a broker had an underperforming desk that they chose to wind down, it would have had some dedicated traders associated with it.

So, those trader subscriptions are no longer there because that business of that broker isn’t there anymore and that offset what otherwise would have been growth in the quarter. So, it’s nothing to take any concern to in terms of the overall strength through the health of the business. And I think we indicated in David’s notes about 9 new net paying clients in the quarter as well, which will contribute to subscriber growth in the future quarters, but that was the step down in terms of that sequential impact.

Geoff Kwan

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Etienne Ricard of BMO Capital Markets. Please go ahead.

Etienne Ricard

Thank you and good morning.

John McKenzie

Good morning.

Etienne Ricard

On equity trading, could you please comment on how competitive dynamics have changed since CBOE closed on the acquisition of NEO back in June, if at all?

John McKenzie

Yes, to be [candidate] [ph], they really haven’t changed any material way. So, CBOE was already active in Canada with their ownership of MATCHNow, NEO already an active player. So, we haven’t seen material changes or material changes in the business model and you’ll see that in terms of our overall market share continues to be pretty much either flat to up from where we’re a year ago.

So, it’s something that we are constantly monitoring and constantly engaging with clients to make sure that we are meeting their needs. We talked earlier about the actual trade conference that we just initiated in June. That was extremely effective in terms of bringing up the trading community, understanding what their pain points are, their net needs are, and also the stress test some of our ideas in terms of market reform and get real life feedback from the trading community.

So, our competitive position here continues to be to focus on what the client needs are, so they don’t need to trade anywhere else.

Etienne Ricard

Understood. And on TSX Trust, given you have previously noted this business, has a higher growth potential over time, could you comment on what led to lower trends for agency fees on an organic basis year-over-year?

John McKenzie

I mean that would be a combination of all the fees within trust, so [transformation] [ph] to trust activity. So, very much like the other parts of the TSX and TSX Venture financing area when we have lower transaction activity. They’re also lower trust or transfer or corporate actions.

So, the overall book of business, the overall client base continues to grow in trust and transfer, but you have lower activity levels in the first half of the year, as compared to a year ago.

Etienne Ricard

Okay, great. And I think you’ve been buying back stock more actively in Q2, looking forward should we expect you to become more meaningful acquirers of your stock?

David Arnold

Good question, Etienne. You’re right. We did purchase a substantial amount of our normal course issuer bid authorized allotment this quarter. It isn’t something that we actually direct. We have a standing order based on a ratio and a broker of record then executes accordingly. We have about 5,000 of our normal course issuer bid outstanding, and we are evaluating various different capital deployment strategies, right.

And one of the things we have to obviously do is look to the organic growth initiatives that we have underway, as well as sunsetting some of our very large initiatives like our post-trade modernization, which as you know now goes into industry testing. And so given the opportunities that we have for capital deployment, whether it be for organic growth, whether it be for dividend increases, increased share buybacks or M&A activity as we monitor what transpires on the pricing front in the marketplace, I would stay tuned, but right now we’ve got about 5,000 remaining to go.

John, do you want to add anything?

John McKenzie

My simple summary of David’s comments is, we are remaining and keeping our flexibility in what has been a bit more of an unsettling marketplace. So, we are evaluating all tools and want to maintain a maximum flexibility and the strength of our balance sheet so that we can actually take advantage of opportunities as they come.

Etienne Ricard

Thank you very much.

Operator

Thank you. Your next question comes from Graham Ryding of TD. Please go ahead.

Graham Ryding

Hi, good morning. We saw a nice lift quarter-over-quarter in AST revenue, was that largely higher margin income or would you attribute that to?

John McKenzie

Margin income was part of it, but there were a couple of other parts of the business that did well. And so, I wouldn’t say it is all margin income at all, Graham.

Graham Ryding

Okay. I know, you don’t give specific expense growth, but maybe you could just help us think about – the growth we saw this quarter if you strip out the acquisition was 7% year-over-year. I think it was 2% year-over-year last quarter. So, how should we be thinking about what’s a reasonable expense growth expectation, should we be thinking closer to, sort of the 4% you’ve done year to date or is this 7% growth in this quarter potentially a run rate for expense growth.

John McKenzie

Yes, I would guide you towards closer to the first half of the year cumulative for the 4% to 5% kind of range.

Graham Ryding

Okay. That’s helpful. On the derivatives side, your interest rate derivative volumes are actually down year-over-year. That surprises me somewhat. I just thought in an environment of rising rates that might actually foster higher interest rate derivatives activity. Could you provide any color there, John?

John McKenzie

Yes, I’m happy to. So, in the long-term, you’re absolutely right, Graham. And so when you actually – you see growth in terms of other parts of the interest rate curve, the challenge in the short-term and particularly the challenge this year is the biggest impact year-over-year has been in the products like the back. So, the short-term [30-day] [ph] products. And when we’re in an environment where they are rapidly changing Bank of Canada rates and they are not predictable in terms of timing or amounts, that’s difficult for speculators or hedgers or other people to use those products.

So, what I would call it is, it’s not constructive volatility in the short-term when there’s not good predictability about those rate changes. So, as that normalizes in a higher rate environment, you’re absolutely right that will give more tailwinds to support the product, but in the short-term, when the timing and size of Bank of Canada rates changes are less predictable, it’s harder for people to use those products and they take on more risk when they’re doing them, which is not the intent of the product. So, we do see this being as a short-term issue as bank rates make some quick changes and then that will stabilize and give more tailwind.

Graham Ryding

Okay, that’s helpful. And my last question, if I could, just the CDS modernization project. I think it’s on track to finish in the first half of 2023. Is there potential here that this could be pushed out further and the CapEx could be increased again or how you’re feeling about that project at this stage?

John McKenzie

I’m feeling cautiously optimistic. Is that hedging enough for you? We spent a lot of time on this on a regular basis. I’m going to take the opportunity to give a shout out to the folks that are working on us because this has been an extremely challenging initiative, especially in the backdrop of COVID anytime you’re doing large scale software development in multiple jurisdictions and you can’t put people in the same room to solve challenges that does make the time to do things like user acceptance testing and finalizing the development and much more challenging to finish, but what we had in the last couple of weeks and we’ve been through two different board sessions on this was a significant milestone in terms of that we are now nearly complete all of our internal user testing and have announced to the Street when we are going to be going live in mid-September for industry test and development.

And we’ve committed to the industry at least 9 months to do that. So that gives us the higher degree of kind of cautious optimism around the timing to execute this because we’re now at a place where we’ve got the product. It meets the needs. It’s functional, and we can put it in the hands of the clients starting in September, so they can do their own testing and development over the next year to be ready to go live in 2023.

The estimates that we’ve given both around timing and around total capital are all reflective of that, and reflects some contingency that there still could be some unknown challenges as we go through that process. So, best information we have at the time and a reasonable degree of certainty in terms of that real milestone that’s come through that we’re going to be live in market in the fall this year.

Graham Ryding

Okay. That’s it for me. Thank you.

Operator

Thank you. [Operator Instructions] The next question comes from Jaeme Gloyn of National Bank. Please go ahead.

Jaeme Gloyn

Yes, thanks. Good morning. The quarter included a lot of good to see pricing increases across various businesses. Somewhat unexpected, I guess, or maybe wasn’t necessarily hinted at on previous quarters. Is there anything that you can share in terms of what’s in the pipeline from other price increases that could be in proposal stages or something that you’re [work shopping] [ph] in the background?

John McKenzie

Yes. Jaeme, I appreciate the question. And so, I mean, obviously, I can’t share things that we haven’t made public yet in terms of either filing with regulators or notices to clients, but what I will let you know is that we are actually actively looking at those other businesses that weren’t part of the price changes we’ve already announced.

So, businesses like listings and capital formation for in some cases we haven’t done pricing on the senior market, I think in four years and on the venture market in 10 years, we are looking at what are the appropriate changes we can make there that are still consistent with maintaining a very strong competitive position both domestically and globally. And that’s one we are actually looking at. And I would expect to be communicating both with regulators in the street in the near-term.

Jaeme Gloyn

Okay great. And then just in terms of some of the new trading initiatives, I assume these are coming from customer driven demands. Can you, sort of maybe elaborate on what you’re expecting from a – are there market share benefits for TMX? Are there fee benefits for TMX like what are the knock-on effects for your business by introducing some of these new products and tools?

John McKenzie

It actually depends on the tools. So, some of them are actually about driving incremental market share. Incremental also strengthen liquidity, so over the overall quality of the volume as well. In some cases like the work that we did on market on close and the work we’re doing on dark, those are also, as you said, those are premium offerings that drive also a higher yield. So, they’re more valuable products to the street and they command a premium in terms of the revenue impact.

And I think you’re seeing some of that in terms of the revenue growth in equity trading year-over-year because while volume is off, the actual yield is up and the overall revenue growth is there. So, you’re exactly right. It is a combination of those pieces and it’s driven specifically by identified client needs of the community.

Jaeme Gloyn

Okay. And if I’m thinking about it, maybe more bit of a modeling question, I guess, right now, but we’re seeing higher capture rates flowing through on equities and trading. Now there’s some noise [indiscernible] fixed income is in there too, but is there more upside to let’s say revenue per contract trade or for equity trade in the last couple of quarters given some of these new initiatives or are you seeing like that as maybe more of a high watermark? Just trying to get a little bit more insight into where the revenue per trade can trend towards over the next several quarters to years?

John McKenzie

Yes. So, you’ve got to look at two things. Yes, we’re seeing more premium revenue in terms of the mix year of revenue in terms of the kind of amount of the volume that’s in the closure in those other dark products, but it’s also, Jaeme look at the shift in terms of the trade across higher value securities across all markets. So, we’ve got trade value growth in TSX, I think year-over-year, we’re up about 17% in dollar value traded, where venture has declined somewhat year-over-year.

So when you’ve got the higher stock prices, you also have a higher tier in terms of revenue capture because of the lower share prices on some of the venture stocks are at different capture rate as well. So, you’ve got to look at that business mix as well.

Jaeme Gloyn

Yes, understood, but absent any changes in business mix or assuming that’s all equal like the…

John McKenzie

Sustainable.

Jaeme Gloyn

Yes, okay. Good stuff. Okay. That’s it for me. Thank you.

John McKenzie

No problem.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

Paul Malcolmson

Well, thank you, Michelle. And just before we close, I want to give you two updates from the Investor Relations team. Amanda Tang, who most of you know well, will be off to maternity leave for the next year or so. Just this past Monday Amanda had of boy. Their second son now and everyone is doing very well. Congratulations, Amanda from all of us. While Amanda is off, [indiscernible] will be filling in for Amanda. Most recently, [Technical Difficulty] financial planning and analysis function, and I know you’ll all enjoy working with [indiscernible].

In closing, I want to thank everyone for listening today. If you have any further questions, the contact information for media, as well as for Investor Relations is in our press release and we’d be happy to get back to you. Stay well and have a good weekend everyone.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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