8th Mar 2010 07:00
TULLETT PREBON PLC
PRELIMINARY RESULTS - for the year ended 31 December 2009
Tullett Prebon plc today announced its preliminary results for the year ended 31 December 2009.
Financial Highlights- Revenue £947.7m (2008: £943.6m)- Operating profit £170.8m (2008: £175.1m) (1)- Operating margin 18.0% (2008: 18.6%)(1)- Adjusted Profit before tax £157.0m (2008: £155.4m)(2)- Adjusted EPS 49.2p (2008: 47.1p)(3)
Notes
1. Operating profit and operating margin for 2008 are stated before exceptional items2. Adjusted Profit before Tax is stated before non cash gains and losses in
net finance income / (expense) and for 2008 is before exceptional items. A
reconciliation of Adjusted Profit before Tax to the Reported Profit before Tax
of £156.5m (2008: £137.0m) is shown in the Financial Review 3. Adjusted EPS is stated before non cash gains and losses in net finance
income / (expense) net of tax, prior year tax items, and for 2008 is before
exceptional items
Commenting on the results, Keith Hamill, Chairman of Tullett Prebon plc, said:
"The robust performance of the business during 2009 has been achieved despitecircumstances and events which have not always been helpful. It reflects thevalue of the service that the business provides to participants in the world'sover-the-counter ("OTC") financial markets, the continuing underlying need forthose markets and the benefits of actions taken by management.Revenue of £947.7m is slightly higher than reported for 2008. The operatingmargin for 2009 is 18.0%, reflecting the active management of our front officecosts, the benefit of the actions taken at the end of 2008 to reduce fixedsupport costs, the investments made in increasing the scale and breadth of thebusiness, and strong management control.
After lower financing costs, adjusted profit before tax of £157.0m compared with £155.4m in 2008. With a reduction in the effective tax rate to 33.8%, adjusted basic earnings per share were up 4% to 49.2p.
The business has low capital requirements and excellent cash flowcharacteristics. Operating cash flow for the year was £137.9m and at the endof the year net funds amounted to £9.0m (2008: net debt of £17.4m). Since thereturn of £301.5m of capital to shareholders in early 2007 the business hasreported net cash flow before dividends and debt repayments of £250m and overthe same period has paid £76m of dividends to shareholders.
The Board recognises that dividends are an important element of shareholder return and is recommending a final dividend of 10.0p per share, making the total dividend for the year 15.0p, an increase of 18% on the 12.75p per share paid for 2008. The final dividend will be payable on 20 May 2010 to shareholders on the register on 30 April 2010."
Terry Smith, Chief Executive, added:
"Although the world's financial markets have remained unsettled, overallactivity in the markets slowed in the second half of 2009 in comparison to theparticularly volatile markets experienced in the autumn of 2008 and into thefirst half of last year and, as expected, activity currently remains at thismore normal level.The underlying revenue run rate in the first two months of the year is 5% lowerthan a year ago at constant exchange rates. We expect this run rate againstprior year to improve, particularly in the second half. In addition, the neteffect of the broker defections in North America has been to reduce revenue by6%. The benefit from the actions that we have taken to mitigate the impact ofthe broker defections will increase during the year as the rebuilding programmecontinues and the new brokers hired build up to their full run rate of revenue.The eventual outcome of the regulatory debate about how to strengthen thefinancial system remains uncertain, but we are confident that our role as anintermediary in the OTC markets will continue to be vital and that our businesswill continue to add significant value to our customers. We have a welldiversified and robust business, and we are well positioned to respond to andto benefit from, changes in the way in which the OTC markets and our customersoperate and are regulated."Enquiries:Investors and analystsNigel Szembel, Head of CommunicationsTullett Prebon plc44 (0)207 200 7722PressCharlotte KirkhamM:Communications44 (0)207 920 2331
Further information on the Company and its activities is available on the Company's website: www.tullettprebon.com
Overview
The strong financial results for 2009 reflect the robustness of the businessand the value of the service that it provides to participants in the world'sover-the-counter ("OTC") financial markets, as well as the benefits of theinvestments made in increasing the scale and breadth of the business and theactions taken to control costs.Activity in many of the markets in which we operate was lower during 2009 than2008, particularly in the second half when activity in 2008 was boosted by theupheaval in financial markets following the collapse of Lehman Brothers.Revenue of £947.7m is slightly higher than reported for 2008, with lowerunderlying revenue due to reduced levels of market activity offset by morefavourable translation exchange rates for our North American and Asianoperations. Operating profit of £170.8m is £4.3m lower than for 2008,reflecting a reduction in operating margin. Given that there is someoperational leverage in the business, operating margins are adversely affectedby lower levels of underlying revenue, but at 18.0% for 2009 are only a littlelower than the 18.6% for 2008. This reflects the active management of ourfront office costs, the benefit of the actions taken at the end of 2008 toreduce fixed support costs, and strong management control.There has been significant structural change in the banking industry andadjustments to the business models of many of our customers following theunprecedented events in the world's financial markets during 2008, including areduction in risk appetite and financial sector leverage. This has resulted ina move of capital away from more complex structured products towards the moretraditional 'flow' products, towards cash products rather than derivatives, andtowards first derivatives rather than complex secondary and tertiaryderivatives. Volumes in emerging markets products, volatility products andequity related products have been particularly affected. The majority of ourbusiness, however, is in the more traditional 'flow' products of foreignexchange and interest rate swaps - although volumes were also generally lowerin these areas than in 2008 - and in government bonds and corporate bonds -where the level of activity during the year was supported by high levels ofissuance.The wholesale OTC markets are critical to the effective functioning of theworld's financial system. Tullett Prebon, as the world's second largestinter-dealer broker ("IDB"), has a vital role in facilitating trading in thesemarkets by finding and creating liquidity through price and volume discovery,and by providing clients with anonymity in their trading activities.
Politicians and regulators continue to debate the various proposals put forward in both the US and Europe to improve the efficiency and robustness of OTC derivatives markets - our own views on these matters are articulated below.
We
believe that the effective and efficient operation of OTC markets will continueto rely on intermediaries to provide liquidity and appropriate infrastructureto facilitate trading and risk management, and our expertise and depth ofliquidity pools make us well positioned to continue to provide valuable supportto our clients and to take advantage of opportunities that these proposalscreate.Our strategy is to continue to focus on providing services as an intermediaryin wholesale OTC markets, and to continue to build a business with the scaleand breadth to deliver superior performance and returns, whilst maintainingstrong financial management disciplines. The business is well diversified across both products and geographies and ourperformance in 2009 has benefited from the investments made in the last twoyears in increasing the scale and breadth of the business. In particular, ourbusiness in Europe has benefited from the investments made in Credit throughboth broker hires and the launch of an electronic broking platform, and inEnergy through the acquisitions of Primex and Aspen. Some of the emergingmarkets offer significant opportunities as their wholesale financial marketscontinue to develop and in October 2009 we announced that we had reachedagreement to acquire Convencao, one of the leading and most well respectedinterdealer brokers in Brazil, marking our entry to the on-shore Latin Americanmarket. The acquisition is conditional on approval from the Brazilianauthorities, including the Central Bank of Brazil, and is expected to completein the second quarter of 2010.We have continued to develop our electronic capabilities and market share. Ourfocus is on the 'hybrid' model under which electronic platforms build upon andsupport the business' excellent voice broking franchise and high leveltechnology to create a set of tools that enable our brokers to provide a fullbroking service to meet client demand. We have a growing suite of efficientand stable electronic platforms which are competitive with similar platformsprovided by our peers.In addition, we are developing our post trade risk management services. Inresponse to client demand we have extended the coverage of TP Match, our FRAmatching platform, to all major currencies in multiple tenors, enabling clientsin all three regions to reduce their interest rate risk. The recentlyannounced acquisition of OTC Valuations will complement our Information Salesbusiness and will allow us to meet the increasing demand for independentvaluation services. Revenues from our established Information Sales activitiestogether with 'hybrid' revenues from products that have established electronicexecution capability now represent approximately one-sixth of the group's totalrevenue.Between August and December 2009, 77 brokers on certain desks in our NorthAmerican business resigned following a raid on the business by BGC. Althoughthese brokers did generate substantial revenue, actions are being taken tostrengthen the management and organisation of our North American business,including replacing staff. We have hired new senior management to lead ourcredit and mortgage backed securities activities and are making progress inrecruiting brokers in these and other affected areas. Legal action is beingtaken against BGC and former employees in the US and also in London, andagainst former employees in Hong Kong who have unlawfully terminated theiremployment with us in order to join BGC, following raids earlier in the year onour London and Hong Kong businesses.
Our key financial and performance indicators for 2009 compared with those for 2008 are summarised in the table below.
Change 2009 2008 Constant Reported Exchange Rates Revenue £947.7m £943.6m + 0% -9%Operating profit £170.8m £175.1m -2% -11%Operating margin 18.0% 18.6% -0.6% points Broker headcount (year end) 1,612 1,653 -2%
Average revenue per broker (£'000) 565 548 + 3%
-7%
Broker employment costs : broking 58.0% 57.5% + 0.5% points
revenue Non-broker headcount (year end) 824 889 -7%
Reported revenue in 2009 of £947.7m was slightly higher than 2008, and was 9%lower at constant exchange rates. Year end broker headcount was 2% lower, andaverage revenue per broker at £565k was 7% lower at constant exchange rates. The reduction in broker headcount reflects the impact of the cost reductionaction taken at the end of 2008 and the decline in headcount in North Americadue to the defection of the brokers in the second half of the year, which hasoffset increased headcount in Europe and Asia Pacific.Reported operating profit for 2009 of £170.8m is 2% lower than in 2008 and is11% lower at constant exchange rates. The operating margin has reduced by 0.6%points to 18.0%. The objectives of the cost reduction action undertakentowards the end of 2008 to increase flexibility in front office costs and toreduce absolute support costs have been delivered. Broker compensation as apercentage of broking revenue has, however, increased by 0.5% points to 58.0%,driven by increases in North America and Asia due to inefficiencies in certaindesks as a result of revenue declines, and generally increased costs ofemployment across the business as a result of competitive pressures. Supportcosts have been significantly reduced, driven by reductions in headcount. Non-broker headcount of 824 at the end of 2009 is 7% lower than at the end of2008 and 13% lower than at June 2008.
Operating Review
The tables below analyse revenue and operating profit for 2009 compared with2008. A significant proportion of the group's activity is conducted outsidethe UK and the reported results are therefore impacted by the movement in theforeign exchange rates used to translate the results of non-UK operations. Inorder to give a more meaningful analysis of performance, revenue and operatingprofit growth rates for 2009 shown below are presented both as reported, andcalculated using translation exchange rates for 2008 consistent with those usedfor 2009. The commentary below refers to growth rates at constant exchange
rates.Revenue by product group Change Constant 2009 2008 Reported Exchange £m £m Rates Treasury Products 238.9 246.1 -3% -12% Interest Rate Derivatives 192.0 220.9 -13% -22% Fixed Income 317.1 282.1 +12% +2% Equities 74.0 94.2 -21% -29% Energy 100.6 81.5 +23% +13%
Information Sales and Risk Management 25.1 18.8 +34% +32%
Services 947.7 943.6 +0% -9% Revenue in many product areas was lower in 2009 than in 2008, reflecting thelower activity in the markets, particularly during the second half, whenrevenue in 2008 was boosted by the exceptional levels of volatility during theheight of the financial crisis.Within Treasury Products, which covers FX and cash, the reduction in revenue ismost marked in FX options and in emerging market FX forwards, includingnon-deliverable forwards, reflecting the reduction in risk appetite and capitaldeployed in those areas.Similarly, within Interest Rate Derivatives, the reduction in market activityin the product areas of interest rate options and emerging market interest rateswaps was more marked than the reduction in G7 currency interest rate swaps.The growth in revenue in Fixed Income reflects the strength of our franchise inthis area, and the high volume of activity in government and corporate bonds inboth Europe and North America, especially in the first half. Activity in creditderivatives in both regions has suffered due to regulatory uncertainty, and inNorth America revenue in the last quarter was affected by the brokerdepartures.
In Equities, revenue from both equity derivatives and cash equities was lower reflecting lower equity market values and lower activity.
Commodity markets have continued to be volatile and our Energy business hasbenefited from this and from the increased depth and breadth of the businessfrom the acquisitions of Primex and Aspen enhancing our presence and liquidityin a wide range of oil products.Our Information Sales business has continued to benefit from increasingcustomer demand for both real time and end of day data and from an expansion ofthe customer base. In addition, our post trade Risk Management Services havegrown strongly following the extension of the product and geographic coverageof TP Match.Revenue by region Change Constant 2009 2008 Reported Exchange £m £m Rates Europe 542.6 504.1 +8% +7% North America 318.0 339.6 -6% -23% Asia Pacific 87.1 99.9 -13% -30% 947.7 943.6 +0% -9% EuropeRevenue in Europe has increased by 7%. Broker headcount in Europe at 788 is 4%higher than a year ago and average revenue per broker has increased by 3%. Thebusiness has delivered strong growth in revenue in Fixed Income and Energy,benefiting from buoyant markets and the investments made in these areas overthe last two years. Revenue in Treasury Products and Interest Rate Derivativeshas been affected by lower activity in emerging market products. The Equitiesbusiness, which is the smallest product group in Europe, is mainly focused onequity derivatives which have suffered from both lower equity market values andlower volumes.In Fixed Income we have maintained our leading position in government bonds andhave re-established our presence and gained market share in corporate bonds andcredit derivatives following the actions taken in 2008, including the highlysuccessful launch of tpCREDITDEAL, our electronic platform. The region'sEnergy business has benefited from the expansion of coverage of a wide range ofoil products through the acquisitions in 2008 of Primex and Aspen, and from theinvestments made in establishing a presence in new products includingemissions, bio-fuels and coal.
North America
In North America, revenue fell by 23%. Year end broker headcount at 468 is 14%lower than at the end of 2008 due to the rationalisation and closure ofmarginal desks during the year and the broker departures in the last quarter. Average revenue per broker has also fallen compared with 2008 due to thegenerally lower levels of activity in most products, with the reduction inactivity most marked in emerging market products, volatility products and cashequities.Fixed Income continues to be the largest product group in the region andrevenue in this area slowed significantly in the second half following abuoyant start to the year, with the market in credit derivatives particularlyhit. In most other product areas the performance relative to 2008 was strongerin the second half than in the first half.
Asia
Our business in Asia is predominantly focused on Treasury Products and InterestRate Derivatives, which account for 90% of the region's revenue. We havemaintained our market share in our major products across the region but marketactivity was low throughout the year and revenue fell by 30%, with averagerevenue per broker 25% lower and average broker headcount also down. Revenuerun rates began to stabilise during the second half and revenue in the last twomonths of the year was higher than in 2008.Although the three largest centres in the region, Singapore, Hong Kong andTokyo, continue to account for over 80% of the region's revenue, we have wellestablished businesses in several other Asia Pacific financial centres,including our joint venture in Shanghai. The Energy business in the region hasincreased in scale with the addition of Aspen's Singapore based team, and wehave established a securities business in Tokyo to provide brokerage services,initially in equity derivatives, which was granted its license and commencedoperations in February 2010. Year end broker headcount in Asia at 356 is 2%higher than at the end of 2008. We are well positioned to benefit from theregion's return to growth. Operating profit by region (1)
Change Constant 2009 2008 Reported Exchange £m £m Rates Europe 123.2 108.1 +14% +13% North America 44.4 57.8 -23% -37% Asia Pacific 3.2 9.2 -65% -72% Reported 170.8 175.1 -2% -11% Operating margin by region (1) 2009 2008 Europe 22.7% 21.4% North America 14.0% 17.0% Asia Pacific 3.7% 9.2% 18.0% 18.6%
Note 1. Operating profit and operating margin for 2008 are stated before exceptional items.
Operating profit in Europe has increased by 13%, with the operating marginincreasing to 22.7%. The increased operating margin in Europe primarilyreflects the increased scale of the business and the actions taken to reduceboth front office and support costs. Broker employment costs as a percentageof revenue have reduced compared with 2008 reflecting the benefit from theactions taken at the end of that year, and the elimination of theinefficiencies experienced during 2008 resulting from the large number ofbrokers who joined the business building up to their full run rate of revenues.Operating profit in North America has reduced by 37% and the operating marginhas fallen to 14.0% mainly due to the reduction in revenue. Support costs havebeen reduced, but represent a higher percentage of revenue in 2009 than in2008. Broker employment costs as a percentage of revenue also increased duringthe year due to inefficiencies in certain desks as a result of revenuedeclines, together with increased costs of employment in the light ofcompetitor action.The business in Asia Pacific has a higher level of operational gearing than theother two regions due to the relatively high level of fixed support costsincurred in maintaining a presence across a number of centres. Operatingprofit in Asia has been driven lower by the reduction in revenue with theoperating margin falling to 3.7%. Broker employment costs as a percentage ofrevenue have increased due to the combination of revenue declines andincreasing competition.Financial ReviewThe results for 2009 compared with those for 2008 are shown in the table below. 2009 2008 £m £m Revenue 947.7 943.6 Operating profit (1) 170.8 175.1 Cash finance expense (13.8) (19.7) Adjusted Profit before tax (2) 157.0 155.4 Tax (53.0) (56.0) Associates 1.8 1.3 Minority interests (0.6) (0.5) Adjusted Earnings (3) 105.2 100.2 Weighted average number of shares 213.9m 212.8m Adjusted Earnings per share 49.2p 47.1p
Note 1. Operating profit for 2008 is stated before exceptional items
Note 2. Adjusted PBT reconciles to reported PBT as follows: 2009 2008
£m £mAdjusted Profit before tax 157.0 155.4 Exceptional items - (19.5) Non cash finance (expense)/income (0.5) 1.1 Reported Profit before tax 156.5 137.0 Note 3. Adjusted Earnings reconciles to reported Earnings 2009 2008as follows: £m £mAdjusted Earnings 105.2 100.2 Exceptional items - (19.5) Tax relief on exceptional items - 5.8 Non cash finance (expense)/income (0.5) 1.1 Deferred tax on non cash finance (expense)/income 0.2 (0.4) Prior year tax items 5.9 7.3 Reported Earnings 110.8 94.5 Finance Income/(Expense)The cash finance expense primarily comprises the interest payable on the fixedrate bonds and the floating rate bank debt, partly offset by the interestincome on cash deposits. The reduction in cash finance expense in 2009compared to 2008 reflects the lower average amount of bank debt outstanding andthe net benefit of lower interest rates, with the reduction in interest payableon the bank debt greater than the reduction in yield on the cash balances.Non cash finance income/(expense) items are excluded from adjusted profitbefore tax and adjusted earnings. These items comprise the mark to marketmovements on derivative financial instruments held at fair value through profitand loss, the amortisation of discount on deferred consideration and theexpected return and interest on pension scheme assets and liabilities. In 2008the pension related items netted to a credit of £1.6m, in 2009 these itemsnetted to a charge of £0.5m.
Tax
The effective rate of tax on adjusted profit before tax is 33.8% (2008:36.0%). The reduction in the effective rate compared with 2008 resultsprimarily from the increase in the proportion of taxable profits generated inthe UK relative to the US, together with the full year benefit of last year'sreduction in the UK statutory rate.Tax charges and credits arising on non cash finance income/(expense) items andprior year tax items are excluded from the calculation of the effective taxrate on adjusted profit before tax. Prior year tax items primarily reflect therelease of tax provisions made in previous years as tax matters are settled,and do not relate to current trading.
Adjusted Basic EPS
Adjusted Basic EPS is calculated using adjusted earnings shown in the table above and the undiluted weighted average number of shares in issue of 213.9m (2008: 212.8m).
Exchange and HedgingThe income statements of the group's non-UK operations are translated intosterling at average exchange rates. The most significant exchange rates forthe group are the US dollar, the Euro, the Singapore dollar and the JapaneseYen. The group's current policy is not to hedge income statement translationexposure.The balance sheets of the group's non-UK operations are translated intosterling using year end exchange rates. The major balance sheet translationexposure is to the US dollar. Until October 2008, the group had designated across currency interest rate swap as a net investment hedge of US$117m of theUS dollar denominated net assets. At that time the group decided todiscontinue the hedging of this balance sheet translation exposure. The swapwas therefore de-designated as a net investment hedge and a forward FX contractwas executed to close out the FX position inherent in the swap. Both the crosscurrency interest rate swap and the forward FX contract matured in August2009.
Average and year end exchange rates used in the preparation of the financial statements are shown below.
Average Year End 2009 2008 2009 2008 US dollar $1.55 $1.89 $1.61 $1.44 Euro €1.12 €1.28 €1.13 €1.03
Singapore dollar S$2.26 S$2.65 S$2.27 S$2.08
Japanese Yen ¥145 ¥198 ¥150 ¥130 Cash flow and financingCash flow before dividends and debt repayments and draw downs is summarised inthe table below. 2009 2008 £m £m Operating profit (1) 170.8 175.1 Share based compensation (0.4) 4.9 Depreciation and amortisation 8.2 7.8 EBITDA 178.6 187.8 Capital expenditure (net of disposals) (9.4) (14.9) Working capital (31.3) 20.2 Operating cash flow 137.9 193.1
Exceptional items - restructuring cash payments (6.8) (1.4)
Interest (11.7) (18.8) Maturity of derivative financial instruments (10.0) - Taxation (30.4) (39.1) Defined benefit pension scheme funding (8.1) (3.2) ESOT transactions 1.5 -
Dividends received from associates/(paid) to minorities 1.2 (0.5)
Acquisitions/investments (3.5) (3.9) Cash flow 70.1 126.2
Note 1. Operating profit for 2008 is stated before exceptional items
In 2009 the group has delivered a substantial operating cash flow, representingmore than 80% of operating profit. The working capital outflow of £31.3m in2009 reflects the unwind of the inflow in 2008 which was due to the unusuallyhigh levels of bonus accruals at the end of that year as a result of the highlevel of activity in the second half, and an increase in the broker sign-onprepayment balance. Net capital expenditure of £9.4m mainly relates toinvestment in electronic platforms and office fit-out work, including a newdata centre in New Jersey, and was slightly higher than depreciation andamortisation.The exceptional items cash payments of £6.8m in 2009 represent the completionof the cash outflows arising from the cost reduction actions taken at the endof 2008.
Interest payments in 2009 were lower than in 2008, in line with the lower profit and loss charge.
The maturity of derivative financial instruments, primarily the cross currency interest rate swap and the forward FX contract executed to close out the FX position inherent in the swap, resulted in a net cash outflow of £10.0m.
Tax payments in 2009 were lower than in 2008 mainly due to the increase in the proportion of the 2009 tax charge arising in the UK, where half of the liability is paid in the following year.
The group makes regular contributions to its defined benefit pension schemes tomatch the benefits paid and scheme expenses, and in January 2009 paid anadditional £4.5m of contributions under agreements with the trustees of theschemes aimed at eliminating the actuarial deficits by 31 December 2010. Additional contributions of £4.5m have also been made in January 2010.
Expenditure on acquisitions and investments in 2009 mainly comprises deferred consideration payments relating to Chapdelaine and Primex.
The movement in cash and debt is summarised below.
£m Cash Debt Net At 31 December 2008 405.2 (422.6) (17.4) Cash flow 70.1 - 70.1 Dividends (27.8) - (27.8) Debt repayments / draw downs (33.6) 33.6 - Debt issue costs (2.5) 2.5 - Effect of movement in exchange rates (15.2) 0.3 (14.9) Movements in fair value / amortisation of - (1.0) (1.0)costs At 31 December 2009 396.2 (387.2) 9.0
At 31 December 2009 the group held cash, cash equivalents and other financial assets of £396.2m which exceeded the debt outstanding by £9.0m.
On 6 July 2009 holders of £141.1m of the group's Eurobond due August 2014exchanged their holdings for the same amount of new notes due July 2016. Thegroup's borrowings at 31 December 2009 comprised these new notes, the remaining£8.8m of the Eurobond due August 2014, £240m drawn under the amortising bankterm loan facility, and a small amount of finance leases. The term loan issubject to repayments of £30m in each of January 2010 and January 2011, with £180m maturing in January 2012.
Pensions
The group has two defined benefit pension schemes in the UK which were acquired with Tullett and Prebon, both of which are closed to new members and future accrual.
The combined deficit of these schemes under IAS19 has reduced to £1.3m at 31December 2009 (2008: £8.5m). During 2009 the schemes' assets have increasedfrom £106.9m to £137.7m reflecting strong investment returns and the additionalcontributions, and the schemes' liabilities have increased from £115.4m to £139.0m mainly reflecting a reduction in the discount rate applied to theschemes' liabilities.
Return on capital employed
The return on capital employed in 2009 was 47% (2008: 50%) which has been calculated as operating profit divided by average shareholders' funds less net funds or plus net debt as appropriate, and adding back cumulative amortised goodwill and post tax reorganisation costs and exceptional items.
Regulatory Developments
Various proposals aimed at strengthening the financial system generally, and the operation of the OTC derivatives markets specifically, continue to be debated by regulators and politicians in both the United States and Europe.
There are three common objectives of the proposals directed at the OTC derivatives markets:
- A reduction in operational risk through increased standardisation of contracts
and increased use of electronic post trade processing,
- A reduction in counterparty risk through increased use of central
counterparties (CCPs) and higher collateralisation and capital charges for
bilateral contracts, and
- An increase in transparency through increased use of electronic trading
platforms and increased pre and post trade reporting and use of trade
repositories.
The proposals directed at reducing the systemic risk of individual financial institutions seek to do so through, amongst other matters, introducing increased capital and liquidity requirements, specific tax disincentives or levies, and restrictions on activities.
It is difficult at this stage to accurately judge how or when these proposalswill be implemented or to estimate the effect that these proposals will have onthe level of overall activity in the OTC markets. We are, however, confidentthat vibrant OTC markets will remain essential to the effective operation ofthe world's financial system, and that the role of intermediaries in thosemarkets, creating liquidity and facilitating efficient trading and riskmanagement, will be of increasing importance.
There remain a number of misconceptions about the proposals and their potential impact on OTC markets, how trading is undertaken, and how well positioned individual inter-dealer brokers and other trading venues are to respond and benefit. We put forward the following views.
It is neither practical nor desirable for all OTC derivatives to becomestandardised. One of the primary reasons that OTC markets exist is because ofthe need for financial institutions and end-users to manage their risks throughbespoke contracts. Restricting the range of products that are available tomanage risk positions would be counter productive to improving the strength ofthe financial system or the economy.Those OTC derivatives that are deemed to be standard will not all migrate totrading on exchanges. The proposals in both Europe and the US allow forstandardised OTC derivatives to be traded on venues other than exchanges,including Multilateral Trading Facilities in Europe (which our existingelectronic platforms in the region are registered as), and Alternative SwapExecution Facilities in the US, the current definition of which covers ouroperations. In addition it is not universally accepted that mandating tradingon organised markets is appropriate. In the UK the FSA argue that such a movewould be detrimental and that the regulatory objectives can be achieved byother means.It is inconceivable that OTC derivatives trading will all move onto pureelectronic platforms. Pure electronic platforms, without intervention orsupport from brokers, are suitable only for the very few highly liquid andhighly standardised OTC products, and these are already transacted on suchplatforms. The role of voice broking in providing liquidity will continue tobe required in all but the most standardised of products. The hybrid model inelectronic broking, under which electronic solutions operate together with andalongside voice brokers, is much more suitable for the majority of OTCderivatives products. Hybrid platforms have evolved from voice broking and theprovision of pricing and volume data into execution platforms and we believethat the process of "electronification" in OTC derivatives markets willcontinue to be evolutionary.It is not plausible that all OTC derivatives will move to being cleared througha CCP. Moves to central counterparty clearing transfer rather than eliminaterisk, and it is essential that CCPs are able to manage the risks effectively. Some products are unsuitable for central counterparty clearing and we agreewith the FSA that CCPs should not be forced to clear a product if they areunable to manage the risks of doing so. Nor does it follow that if an OTCderivative product is cleared by a CCP it will no longer be voice brokered. Interest rate swaps in the inter bank market have been successfully clearedthrough SwapClear since 1999 with over 60% of all inter-dealer swap volumes nowcleared through this facility. Interest rate swaps remain one of the largestvoice brokered OTC products.The OTC markets and the inter-dealer broker sector are not synonymous. Themajority of OTC transactions are undertaken directly between banks and othercounterparties. The proportion of the total market volume that is transactedthrough IDBs appears to be increasing. We believe that this trend is likely tocontinue as banks seek to gain the benefits of accessing deep liquidity andtrading anonymously, as well as facilitating reductions in their fixed costs,that are achieved by executing trades through IDBs.
Outlook
Although the world's financial markets have remained unsettled, overallactivity in the markets slowed in the second half of 2009 in comparison to theparticularly volatile markets experienced in the autumn of 2008 and into thefirst half of last year and, as expected, activity currently remains at thismore normal level.The underlying revenue run rate in the first two months of the year is 5% lowerthan a year ago at constant exchange rates. We expect this run rate againstprior year to improve, particularly in the second half. In addition, the neteffect of the broker defections in North America has been to reduce revenue by6%. The benefit from the actions that we have taken to mitigate the impact ofthe broker defections will increase during the year as the rebuilding programmecontinues and the new brokers hired build up to their full run rate of revenue.The eventual outcome of the regulatory debate about how to strengthen thefinancial system remains uncertain, but we are confident that our role as anintermediary in the OTC markets will continue to be vital and that our businesswill continue to add significant value to our customers. We have a welldiversified and robust business, and we are well positioned to respond to andto benefit from, changes in the way in which the OTC markets and our customersoperate and are regulated.
Consolidated Income Statementfor the year ended 31 December 2009 Notes 2009 2008 £m £m Revenue 3 947.7 943.6 Administrative expenses (781.2) (774.1) Other operating income 4 4.3 5.6 Exceptional items 5 - (19.5) Operating profit 170.8 155.6 Finance income 6 20.2 24.8 Finance costs 7 (34.5) (43.4) Profit before tax 156.5 137.0 Taxation (46.9) (43.3) Profit of consolidated companies 109.6 93.7 Share of results of associates 1.8 1.3 Profit for the year 111.4 95.0 Attributable to: Equity holders of the parent 110.8 94.5 Minority interests 0.6 0.5 111.4 95.0 Earnings per share Basic 8 51.8p 44.4p Diluted 8 51.2p 44.0p
Adjusted earnings per share is disclosed in note 8
Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2009 2009 2008 £m £m Profit for the year 111.4 95.0 Other comprehensive income: Revaluation of available-for-sale assets 0.9
0.5
Gain/(loss) on net investment hedge 2.5
(17.2)
Effect of changes in exchange rates on translation of (17.2) 46.5foreign operations Actuarial losses on defined benefit pension schemes (0.5)
(9.4)
Taxation (charge)/credit on components of other (1.9) 9.7comprehensive income Other comprehensive income for the year (16.2)
30.1
Total comprehensive income for the year 95.2 125.1 Attributable to: Equity holders of the parent 94.9 123.6 Minority interests 0.3 1.5 95.2 125.1 Consolidated Balance Sheetas at 31 December 2009 2009 2008 £m £m Non-current assets Goodwill 373.5 387.7 Other intangible assets 7.4 5.8
Property, plant and equipment 25.6 27.6
Interest in associates 3.5 3.5 Other financial assets 4.8 4.7 Deferred tax assets 13.7 18.0 428.5 447.3 Current assets Trade and other receivables 5,765.0 13,547.6 Other financial assets 30.1 30.2 Cash and cash equivalents 366.1 375.0
Derivative financial instruments - 4.6
6,161.2 13,957.4 Total assets 6,589.7 14,404.7 Current liabilities Trade and other payables (5,825.5) (13,648.5)
Interest bearing loans and borrowings (30.2) (30.6) Derivative financial instruments - (14.3)
Current tax liabilities (36.7) (28.9) Short term provisions (1.5) (2.2) (5,893.9) (13,724.5) Net current assets 267.3 232.9 Non-current liabilities
Interest bearing loans and borrowings (357.0) (392.0) Retirement benefit obligations (1.3) (8.5)
Deferred tax liabilities (8.1) (0.6) Long term provisions (7.8) (9.7) Other long term payables (9.1) (24.9) (383.3) (435.7) Total liabilities (6,277.2) (14,160.2) Net assets 312.5 244.5 Equity Share capital 53.8 53.8 Share premium 9.9 9.9 Reverse acquisition reserve (1,182.3) (1,182.3) Other reserves 128.6 139.9 Retained earnings 1,300.3 1,220.8
Equity attributable to equity holders of the parent 310.3 242.1
Minority interests 2.2 2.4 Total equity 312.5 244.5 Consolidated Statement of Changes in Equityfor the year ended 31 December 2009 Equity attributable to equity holders of the parent Share Reverse Re- Hedging Share premium acquisition valuation Merger and Own Retained Minority Total capital account reserve reserve reserve translation
shares earnings Total interests equity
£m £m £m £m £m £m £m £m £m £m £m Balance at 1 January 2009 53.8 9.9 (1,182.3) 1.4 121.5 23.9 (6.9) 1,220.8 242.1 2.4 244.5 Profit for the year 110.8 110.8 0.6 111.4 Other comprehensive income for the year 0.9 (16.3) (0.5) (15.9) (0.3) (16.2) Total comprehensive income - - - 0.9 - (16.3) - 110.3 94.9 0.3 95.2 Dividends paid in the year
(27.8) (27.8) (0.7) (28.5)
Sale of own shares 2.6 (1.1) 1.5 1.5 Shares used to meet share award exercises 1.5 (1.5) - - Increase in minorities' equity interests - 0.2 0.2 Debit arising on share-based payment awards (0.4) (0.4) (0.4) Balance at 31 December 2009 53.8 9.9 (1,182.3) 2.3 121.5 7.6 (2.8) 1,300.3 310.3 2.2 312.5 Balance at 1 January 2008 53.2 - (1,182.3) 0.9 121.5 (4.4) (20.7) 1,162.1 130.3 2.1 132.4 Profit for the year 94.5 94.5 0.5 95.0 Other comprehensive income for the year 0.5 28.3 0.3 29.1 1.0 30.1 Total comprehensive income - - - 0.5 - 28.3 - 94.8 123.6 1.5 125.1 Issue of share capital 0.6 9.9 10.5 10.5 Dividends paid in the year
(27.2) (27.2) (1.2) (28.4)
Shares used to meet share award exercises 13.8 (13.8) - - Credit arising on share-based payment awards 4.9 4.9 4.9 Balance at 31 December 2008 53.8 9.9 (1,182.3) 1.4 121.5 23.9 (6.9) 1,220.8 242.1 2.4 244.5 Consolidated Cash Flow Statementfor the year ended 31 December 2009 Notes 2009 2008 £m
£m
Net cash from operating activities 10(a) 85.3 136.0
Investing activities
(Purchase)/sale of other financial assets (0.8) 0.9
Interest received 5.0 11.5 Dividends from associates 1.9 0.5
Purchase of available-for-sale assets (0.1) (0.1) Purchase of intangible fixed assets (4.1) (3.4) Purchase of property, plant and equipment (5.2) (13.2) Proceeds on disposal of property, plant and equipment 0.2 - Investment in subsidiaries (3.4) (3.8) Net cash used in investment activities (6.5) (7.6)
Financing activities Dividends paid 9 (27.8) (27.2)
Dividends paid to minority interests (0.7) (1.0)
Sale of own shares 1.5 - Repayment of debt (30.1) (30.1)
Repayment of obligations under finance leases (3.7) (0.3) Eurobond issue costs (2.5) - Payments relating to net investment hedges (12.5) - Receipts relating to net investment hedges 2.5 - Net cash used in financing activities (73.3) (58.6) Net increase in cash and cash equivalents 5.5 69.8 Net cash and cash equivalents at the beginning of the year 374.9 262.1 Effect of foreign exchange rate changes (14.3) 43.0 Net cash and cash equivalents at the end of the year 366.1 374.9
Cash and cash equivalents 366.1 375.0 Overdrafts - (0.1)
Net cash and cash equivalents 366.1 374.9 Notes to the Consolidated Financial Statementsfor the year ended 31 December 2009
1. General information
Tullett Prebon plc is a company incorporated in England and Wales under the Companies Act.
2. Basis of preparation of accounts
Basis of accounting
The financial information included in this document does not constitute theGroup's statutory accounts for the years ended 31 December 2009 or 2008, but isderived from those accounts. Statutory accounts for 2008 have been delivered tothe Registrar of Companies and those for 2009 will be delivered following theCompany's annual general meeting. The auditors have reported on those accounts;their reports were unqualified and did not contain statements under sections237(2) or 237(3) of the Companies Act 1985 nor sections 498(2) or 498(3) of theCompanies Act 2006.
The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, these financial statements continue to be prepared on the going concern basis.
Basis of consolidationThe consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company made up to 31 December eachyear. Control is achieved where the Company has the power to govern thefinancial and operating policies of an investee enterprise so as to obtain
benefits from its activities.3. Segmental analysis
Analysis by geographical segment
2009 2008 £m £m Revenue Europe 542.6 504.1 North America 318.0 339.6 Asia Pacific 87.1 99.9 947.7 943.6 Operating profit Europe 123.2 108.1 North America 44.4 57.8 Asia Pacific 3.2 9.2
Operating profit before exceptional items 170.8 175.1
Exceptional items (note 5) - (19.5) Reported operating profit 170.8 155.6 Finance income 20.2 24.8 Finance costs (34.5) (43.4) Profit before tax 156.5 137.0 Taxation (46.9) (43.3)
Profit of consolidated companies 109.6 93.7 Share of results of associates 1.8 1.3
Profit for the year 111.4 95.0
There are no inter-segment sales included in segment revenue.
4. Other operating income
Other operating income represents receipts such as rental income, royalties,insurance proceeds, settlements from competitors, profit on asset disposals andbusiness relocation grants. Costs associated with such items are included inadministrative expenses.5. Exceptional items
The exceptional items in 2008 reflected the cost of actions taken to reduce operating costs, including the costs of desk closures, redundancies and the write down of sign-on payments which were considered to be impaired.
6. Finance income 2009 2008 £m £m
Interest receivable and similar income 3.4 11.5 Fair value gain on derivative instruments 9.0 4.6 Expected return on pension schemes' assets 6.5 8.7 Amortisation of discount on deferred consideration 1.3 -
20.2 24.8 7. Finance costs 2009 2008 £m £m
Interest payable on bank loans 4.6 17.2
Interest payable on Eurobond 11.5 12.4 Other interest payable 0.2 0.3
Amortisation of debt issue costs 0.9 1.4 Total borrowing costs 17.2 31.3 Amortisation of discount on deferred consideration - 0.5 Fair value loss on derivative instruments 10.3 4.5 Interest cost on pension schemes' liabilities 7.0 7.1
34.5 43.4 8. Earnings per share 2009 2008 Adjusted basic 49.2p 47.1p Basic 51.8p 44.4p Diluted 51.2p 44.0p
The calculation of basic and diluted earnings per share is based on the following number of shares in issue:
2009 2008 No. No. (m) (m) Weighted average shares in issue used for calculating basic and adjusted basic earnings per share 213.9 212.8 Contingently issuable shares 1.8 0.6 Issuable on exercise of options 0.7 1.3 Diluted weighted average shares in issue 216.4 214.7
The earnings used in the calculation of adjusted, basic and diluted earnings per share, are as described below:
2009 2008 £m £m Earnings 111.4 95.0 Minority interests (0.6) (0.5)
Earnings for calculating basic and diluted earnings per share 110.8 94.5 Exceptional items - 19.5 Expected return on pension schemes' assets (6.5) (8.7) Interest cost on pension schemes' liabilities 7.0 7.1 Amortisation of discount on deferred consideration (1.3) 0.5 Fair value movement on derivative financial instruments 1.3 -
Tax on above items (0.2) (5.4) Prior year tax (5.9) (7.3)
Adjusted earnings for calculating adjusted basic
earnings per share 105.2 100.2 9. Dividends 2009 2008 £m £m
Amounts recognised as distributions to equity holders in the year:
Interim dividend for the year ended 31 December 2009 of 5.0p per 10.7 - share
Final dividend for the year ended 31 December 2008 of 8.0p per 17.1 - share
Interim dividend for the year ended 31 December 2008 of 4.75p - 10.2 per share
Final dividend for the year ended 31 December 2007 of 8.0p per - 17.0share 27.8 27.2 In respect of the current year, the directors propose that the final dividendof 10.0p per share amounting to £21.4m will be paid on 20 May 2010 to allshareholders on the Register of Members on 30 April 2010. This dividend issubject to approval by shareholders at the AGM and has not been included as aliability in these financial statements.The trustees of the Tullett Prebon plc Employee Share Ownership Trust and thetrustees of Tullett Prebon plc Employee Benefit Trust 2007 have waived theirrights to dividends.
10. Notes to the cash flow statement
(a) Reconciliation of operating profit to net cash from operating activities 2009 2008 £m £m Operating profit 170.8 155.6 Adjustments for: Share-based compensation (0.4) 4.9
Profit on sale of other non-current financial assets - (1.3) Loss on sale of property, plant and equipment - 2.0 Depreciation of property, plant and equipment 6.1 6.5 Amortisation of intangible assets 2.1 1.3 Decrease in provisions for liabilities and charges (1.8) (5.4) Outflow from retirement benefit obligations (8.1) (3.2) Increase in non-current liabilities 0.7 0.7 Operating cash flows before movement in working capital 169.4 161.1 Decrease in trade and other receivables 4.4 13.1 (Increase) / decrease in net settlement balances (0.2) 5.1 (Decrease) / increase in trade and other payables (41.2) 26.1 Cash generated from operations 132.4 205.4
Income taxes paid (30.4) (39.1) Interest paid (16.7) (30.3)
Net cash from operating activities 85.3 136.0
(b) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and other short term highlyliquid investments with maturity of three months or less. Cash at bank earnsinterest at floating rates based on daily bank deposit rates. Short termdeposits are made for varying periods of between one day and one week dependingon the immediate cash requirements of the Group, and earn interest at therespective short term deposit rates.
For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise the following at 31 December:
2009 2008 £m £m Cash and cash equivalents 366.1 375.0 Bank overdrafts - (0.1) 366.1 374.9 11. Analysis of net funds At 1 Cash Non-cash Exchange At 31 January flow items differences December 2009 2009 £m £m £m £m £m Cash 229.6 (27.2) - (12.7) 189.7 Cash equivalents 142.7 32.5 - (1.6) 173.6 Client settlement money 2.7 0.1 - - 2.8 Cash and cash equivalents 375.0 5.4 - (14.3) 366.1 Other current financial 30.2 0.8 - (0.9) 30.1assets Total funds 405.2 6.2 - (15.2) 396.2 Overdraft (0.1) 0.1 - - - Bank loans within one year (30.0) 30.0 (30.0) - (30.0) Bank loans after one year (238.5) - 29.4 - (209.1) Loans due after one year (149.8) 2.6 (0.4) - (147.6) Finance leases (4.2) 3.7 (0.3) 0.3 (0.5) (422.6) 36.4 (1.3) 0.3 (387.2) Total net funds (17.4) 42.6 (1.3) (14.9) 9.0 OTHER INFORMATION
The Annual General Meeting of Tullett Prebon plc will be held at Level 37, Tower 42, 25 Old Broad Street, London EC2N 1HQ on 13 May 2010 at 2.30pm.
vendorRelated Shares:
TP ICAP