Source: London Stock Exchange
London Stock Exchange Group PLC announces preliminary results for the year ended 31 March 2012.
• Excellent progress in delivering growth and diversification strategy
• Scale, scope and reach of Group transformed through organic growth and acquisitions
• Strong financial performance, growth achieved across all business segments in a highly competitive environment
• Total income up 21 per cent at £814.8 million (2011: 674.9 million); revenue up 10 per cent at £679.8 million (2011: £615.9 million)
• Operating profit up 27 per cent at £358.5 million (2011: £283.0 million); adjusted operating profit1 up 30 per cent at £441.9 million (2011: £341.1 million)
• Profit before tax up 169 per cent at £639.7 million which includes recognition of the value of our existing interest in FTSE (2011: £238.2 million); adjusted profit before tax1 up 35 per cent at £400.6 million (2011: £296.3 million)
• Basic EPS up 243 per cent at 193.6 pence (2011: 56.4 pence); adjusted EPS1 up 36 per cent at 100.6 pence (2011: 73.7 pence)
• Proposed final dividend up 6 per cent to 19.0 pence per share; total dividend for the year increased 6 per cent to 28.3 pence per share
Chris Gibson-Smith, Chairman, London Stock Exchange Group, said:
"This has been a very significant year for our business. The successful execution of our strategy has produced tangible operational and financial benefits and we have delivered growth, diversification and performance.
"Looking ahead, we are excited by the opportunities for the business. In particular our full ownership of FTSE and our shareholder approved transaction with LCH.Clearnet will continue to transform our organisation. We are well placed and remain firmly focused in our pursuit of driving long-term shareholder value."
Commenting on the year, Xavier Rolet, Chief Executive, London Stock Exchange Group said:
"We have delivered a 27 per cent growth in operating profit and a 169 per cent uplift in profit before tax, seen strong performances across all four business divisions and made significant progress on our diversification strdiversification strategy. We have made great progress this year.
"Building long-term partnerships with our customers, successfully integrating new acquisitions and delivering on our stated cost and revenue synergies will continue to be the key areas of focus for us. Our dynamic, highly competitive landscape presents good opportunities for growth particularly in the areas of risk management and intellectual property. We will continue to innovate across our markets, products and services and we expect to make further good strategic progress."
• Strong growth in total income up 21 per cent at £814.8 million (2011: £674.9 million); revenue up 10 per cent at £679.8 million (2011: £615.9 million); total income and revenue up 16 per cent and 5 per cent respectively on an organic, constant currency basis
• Statutory operating profit increased 27 per cent at £358.5 million (2011: £283.0 million); adjusted operating profit1 increased 30 per cent at £441.9 million (2011: £341.1 million)
• Profit before tax increased 169 per cent to £639.7m (2011: £238.2m), including a £324.3m gain reflecting the value of the 50 per cent of FTSE already owned by the Group not previously reflected in our accounts; adjusted profit before tax1 rose 35 per cent to £400.6 million (2011: £296.3 million)
• Adjusted basic earnings per share1 up 36 per cent to 100.6 pence (2011: 73.7 pence); basic earnings per share up 243 per cent to 193.6 pence (2011: 56.4 pence)
• Operating expenses on an organic, constant currency basis2 increased by 5 per cent, reflecting higher variable staff compensation costs as a result of the Group's strong financial and share price performance; otherwise, underlying costs remain broadly flat
• Net cash flow from operations increased strongly, up 21 per cent to £462.4 million (2011: £381.8 million) with free cash flow per share of 103.5 pence (2011: 80.4 pence); pro forma gearing3 of 1.4x operating net debt: adjusted EBITDA (2011: 1.0x)
• Proposed final dividend up 6 per cent to 19.0 pence per share; total dividend for the year increased 6 per cent to 28.3 pence per share. The final dividend will be paid on 20 August 2012 to shareholders on the register on 27 July 2012
1 before acquisition amortisation and non-recurring items
2 before acquisitions and disposals, and adjustment for estimated inflation
3 As if the Group owned 100 per cent of FTSE for the entire year ended 31 March 2012
Strategic and Operational Highlights:
• Acquisition completed of the remaining 50 per cent of FTSE - full ownership of a highly valuable, leading global index business provides excellent growth opportunities across the Group
• Shareholder approval received for acquisition of 60 per cent majority stake in LCH.Clearnet - will secure a leading role in global market infrastructure for the Group, in partnership with customers; antitrust process is underway with OFT in the UK and with Spanish and Portuguese authorities
• The Group's primary markets remain attractive to issuers, with 159 new companies joining our markets during the year, including 40 international issuers
• MOT introduced an innovative bond distribution model, the first offering of "BTP Italia" raising €7.3 billion; in addition, 500 new bonds were listed on MOT (up 120 per cent on prior year) with a nominal value of €719 billion; the UK electronic retail bond market, ORB, has now assisted companies in raising over £1.5 billion in two years since launch
• Demand for UnaVista Confirmation and Swaps Portals remains strong; the FSA Transaction Reporting Service acquired during the year further strengthens the offering and broadens the customer base
• The high performance MillenniumIT trading system has exceeded expectations since implementation on LSE and Turquoise; go live on Borsa Italiana MTA cash market is expected in summer 2012
• Developing technology partnerships has been a cornerstone of the Group's strategy and includes ongoing projects with the Delhi Stock Exchange, the Mongolian Stock Exchange, Johannesburg Stock Exchange and Oslo Bors
The Group is continuing its transformation, in an industry that is undergoing widespread structural and regulatory change. The current macro economic environment, particularly in Europe, is evolving rapidly and remains uncertain, but the Group's breadth and diversity continues to provide resilience and a strong platform from which to seek opportunities. The business is alert and responsive to the markets in which it operates and remains focused on integrating its new acquisitions, delivering on stated cost and revenue synergies and driving performance. The Group expects to make further good strategic progress in the year ahead.
Chief Executive's Review
Introduction and overview
This has been a notable year for the Group. We have delivered a strong financial performance, made significant progress on our diversification strategy and we begin the year ahead strongly placed to take advantage of the opportunities that our dynamic and evolving landscape continues to present.
Our business now represents a well diversified international portfolio of markets, products and services, spread across both asset class and geography. This breadth of offering gives the Group greater scope to continue to pursue the strategy that we outlined nearly three years ago of 'getting in shape', 'leveraging our assets' and 'developing opportunities'. This strategy is now delivering real results, providing the Group with growth, performance and resilience. We are pleased to report that this strategic focus has delivered a strong financial performance with the Group reporting total income of £814.8 million, a 21 per cent increase on the prior year and adjusted operating profit up by 30 per cent to £441.9 million. We also remain firmly focused on cost discipline and continued to deliver improved operational efficiencies.
Our business is made up of four growth-focused complementary business divisions: Capital Markets; Post Trade Services; Information Services; and Technology Services. All four areas performed well during the year and reported a number of highlights.
Our fixed income markets grew 10 per cent while our UK and Italian cash equities markets and our derivatives operations were broadly flat in revenue terms. Our primary markets delivered good growth with an increase in total revenues for the year of eight per cent, though adverse market volatility in the second half of the year did impact on issuance levels and secondary market trading.
Small and Medium Sized enterprises (SMEs) are the key to driving economic growth in the UK and across Europe. Throughout the year we have been active proponents of initiatives that look to create a thriving ecosystem for these companies, helping them to become the corporate success stories of tomorrow. Our dedicated equity markets for SMEs continue to develop, providing access to equity investment for a wide range of companies. Our retail bond markets, MOT in Italy, and ORB in the UK, have been the source of a significant number of successful placements. Since it was launched just two years ago, ORB has raised over £1.5 billion, demonstrating the need for such a platform in the UK. BTP Italia, a new Italian government bond dedicated to retail investors, raised €7.3 billion when it launched on MOT in March 2012, reinforced MOT's position as the preferred platform for Italian government bonds, for both private and professional investors. During the year, 500 new bonds were also listed on MOT with a nominal value of €719 billion.
The year also saw the launch of Turquoise Derivatives, which combined the Group's existing derivatives platform, EDX, with the MTF business that we own in conjunction with some of our key customers. Turquoise Derivatives has already firmly established itself as the leading EU marketplace for trading Russian equity and index derivatives and now also offers trading in FTSE 100 Index Futures and Options. This new offering has been greeted with much enthusiasm from customers and we hope in the future to develop a wider range of index products through FTSE that can be traded on Turquoise Derivatives.
The Group celebrated ten years of trading on its International Order Book (IOB) in 2011. It has demonstrated tremendous growth since its inception and is now the world's most liquid market for trading in Global Depositary Receipts (GDRs). It has raised over £40.6 billion in primary and secondary market issues for companies from 48 countries and continues to attract interest from global companies looking to list their GDRs in London.
Post Trade Services
In 2009, we stated our commitment to developing the Group's post trade capabilities, especially in clearing. Since then this business has made increasingly significant contributions to Group income, driven by growth in clearing volumes and increased treasury income from our central counterparty business, CC&G.
This year our Post Trade division delivered organic revenue up 10 per cent reflecting growth across all core areas of this strongly performing business. Including net treasury income, total income grew by well over 50 per cent. Demand for the cash we place on deposit in the Italian inter-bank market remained strong through the year and the spreads achieved remained high. Looking forward, we expect that as market conditions improve and increasing stability returns to the inter-bank market this will result in a more normalised return from our treasury management activities.
On 9 March the Group announced its intention to acquire a majority stake of up to 60 per cent in LCH.Clearnet Group. This transformative deal, which has recently received the overwhelming support of both sets of shareholders, will secure a leading role in global infrastructure for the enlarged Group in partnership with our customers. The transaction pioneers an open-access, horizontal model, working with our customers for the benefit of the market as a whole.
Responding to market demand for trusted, efficient, scaled international infrastructure providers, the transaction further builds upon the Group's existing post trade offering. We are in the process of obtaining the necessary regulatory and antitrust approvals and expect to complete the transaction by the fourth quarter of 2012.
In December we were delighted to announce that we had acquired the 50 per cent of FTSE that we did not already own for £450 million. FTSE is a world-leading global index business and for the last five years, it has grown at an impressive CAGR of over 20 per cent, reflecting its justly deserved reputation for innovation and customer focus, as well as its globally recognised international brand and its portfolio of 200,000 indices across 80 countries.
Entirely consistent with our strategy, this acquisition brings to the Group great opportunities for our customers to benefit from complementarity within our combined businesses. FTSE is a strong fit with our listed derivatives operations, it will help with the development of new tradable products, it will enhance our global reach and provide additional exposure and growth opportunities in indices, data and analytics. Importantly it also increases our direct exposure to global buy-side firms.
FTSE is a business with a proven track record, strong management and very good growth characteristics, and we look forward to developing the business further over the coming months.
Elsewhere within Information Services, we also completed the acquisition of TRS, the FSA's Transaction Reporting Service and clients have now been migrated onto our in-demand UnaVista platform.
UnaVista is a clear success story and has recently signed a number of leading brokerage firms to its Swaps Portal Service. Demand for its products remains strong and its community of global users continues to grow.
MillenniumIT has transformed the technology offering of the Group. Its low-latency, highly scalable trading platform has been in place on the UK cash equities market for a full year and Turquoise for 18 months. This new platform has revolutionised how customers view the Group's technology offering and we are already well advanced on our plans to migrate Borsa Italiana to the platform later this year.
As well as delivering technology for the Group, MillenniumIT has successfully grown its third-party capital markets customer base around the world. Over the year we announced a number of notable contract wins including the supply of trading systems to the Delhi Stock Exchange. We have also continued to make progress on previously announced wins including to the Mongolian Stock Exchange and Johannesburg Stock Exchange.
Low cost, flexible, resilient technology remains a cornerstone of our operations and we continue to actively invest in our skills, expertise and capabilities in this area, including the further expansion of our technology campus in Colombo, Sri Lanka.
We have made significant progress over the last year in delivering on our strategic objectives. The Group is in very good shape and our business is increasingly well balanced and well diversified.
We continue to operate in an environment where new regulation and regulatory change dominate. Fundamental shifts in the way markets are structured and governed creates significant opportunities and challenges for us, and we remain alert and responsive to these changes. We have been encouraged by progress to date, in particular around proposals which will have significant implications for competition, especially in the exchange traded derivatives space. Although the outcome of all this regulatory change is not clear, the Group is committed to active engagement and discussion with policy makers around the world, promoting safe, efficient, competitive, innovative, successful capital markets - those in which all participants can thrive.
Over the coming year we will remain focused on successfully integrating new acquisitions, delivering on the stated cost and revenue synergies. We will continue to partner with our customers to drive innovation and new services and build on the success of our 'with customer' models already in place at MTS and Turquoise.
We are continuing our transformation, in an industry that is undergoing widespread structural and regulatory change. The current macro economic environment, particularly in Europe, is evolving rapidly and remains uncertain, but the Group's breadth and diversity continues to provide resilience and a strong platform from which to seek opportunities. As a team, we remain resolutely focused on our strategy, in navigating the complex global macro economic environment and in delivering shareholder value. We are excited about the opportunities available to us and we expect to make further good strategic progress.
The following is a review of the Group's financial performance for the year.
The Capital Markets division delivered a good performance against a background of market instability. Growth was mainly driven by good results in Primary Markets and Fixed Income.
Growth in annual fees was underpinned by a 10 per cent increase in market capitalisations on the UK Main Market in the year to November 2010, which formed the basis for charging in the period to 31 March 2012. This was partially offset by a two per cent decrease in the number of companies on the UK Main Market and a five per cent decrease in the number of companies on AIM. In Italy, where fees are set at calendar half years based on the average market capitalisations from the previous six months, rises in market capitalisation in the six months to June 2011 offset the negative impact of subsequent falls. Italian company numbers were broadly flat throughout the period and ended the year at 292.
Total money raised on our markets in the year was £36.0 billion (2011: £40.3 billion). Admissions for our primary markets continued to be affected by economic uncertainty with the number of new issues on the Main Market down 17 per cent to 57 and on AIM down 12 per cent to 89. However, an improving mix of issue size and an increase in the number of further issues on the Main Market resulted in an overall increase in revenues of 12 per cent.
On our cash equities market in the UK, the average daily value traded was stable at £4.7 billion (2011: £4.7 billion). Pricing changes implemented during the year led to a three per cent decline in the average yield on the SETS order book to 0.69 basis points, but helped improve our share of value traded, which was 65.2 per cent in March 2012. In Italy, order book volume increased one per cent to 260,000 per day (2011: 257,000). Revenue from Turquoise equities, our pan-European equities platform, grew 43 per cent in the year as the platform saw market share gains in lit trading of two percentage points to an average of five per cent for the year.
IDEM derivative contract volumes were up one per cent from the prior year. Within Turquoise revenues from Russian derivatives were down as a result of pricing changes and the introduction of a further market maker to promote additional buy-in from key market participants.
In fixed income, MOT volumes grew 41 per cent and there was good growth in admissions following the long term refinancing deployed by the ECB since December 2011. In MTS, good performance of our EuroMTS, French and Bondvision markets more than offset a decline of volumes in the Italian cash market.
Other capital markets revenues of £46.2 million primarily comprise fees for membership of and connectivity to our markets.
Post Trade Services
In Post Trade Services, a significant increase in net treasury income through the CCP business led to a 52 per cent increase in total income to £228.5 million. Total revenue was up 10 per cent on an organic, constant currency basis, which excludes Servizio Titoli as it was disposed of with effect from 1 April 2011.
Clearing volumes in cash equities and derivatives were up marginally. Higher volumes on our MOT and MTS markets led to an increase in revenues from fixed income clearing, which combined with an increase in other clearing fees from guarantee deposit, fails and buy-in commissions resulted in an overall increase in clearing revenues of 14 per cent.
Settlement contract volumes were negatively impacted by increased netting prior to settlement, but this was more than offset by the launch of BTP Italia, the new primary auction structure for government bonds.
Custody and other revenue grew organically by 10 per cent. The average value of assets under management grew two per cent. Revenue also benefited from the full year impact of the new fees schedule introduced for bond issuer clients last year and an increase in the levels of corporate bonds held under custody following action taken by the ECB and Italian government to guarantee corporate bonds in reaction to the monetary crisis.
Net treasury income benefited from continued growth in fixed income volume through the CCP which led to average initial margin held increasing 36 per cent to €9.4 billion (2011: €6.9 billion), in line with growth trends over recent years. The percentage of initial margin held in cash averaged 78 per cent. The volatility in Italian markets and low liquidity in the Italian interbank market combined with the Group's active treasury management elevated the returns made, which also benefited from a period of elevated Eonia/Euribor spread, although this has recently returned to more normal levels. Net treasury income for April 2012 was £8.7 million.
Real time data fees benefited from a full year contribution from the new billing arrangements introduced last year and increased revenues from non-display trading contracts. These offset a three per cent decrease in professional terminals receiving UK real time data to 90,000, with professional terminals receiving Italian real time data flat at 139,000.
In December 2011, the Group acquired the outstanding 50 per cent of FTSE which it did not already own, from Pearson plc, for total consideration of £450 million (before adjusting for acquired debt). FTSE significantly diversifies the Group's business into indices, data and analytics, as well as into new geographies and different customer bases, creating new growth opportunities for the Group. FTSE's own revenue growth has been strong, up 18 per cent in the year ended 31 March 2012.
Other information services continued to perform well with particular strength in SEDOL, which provides unique identification for a range of global tradable securities, and our post trade data matching service, UnaVista. In August, the Group announced the acquisition of Transaction Reporting Service (TRS), the FSA's Approved Reporting Mechanism, for consideration of £15 million. TRS clients have subsequently been migrated to the functionally enriched UnaVista platform and can now benefit from a significantly improved product and access to a wide range of value added solutions.
MillenniumIT continued to perform well in the year. As well as developing technology for the Group, MillenniumIT systems went live at the Chittagong Exchange in Bangladesh and Tullett Prebon. Technology was also delivered to the Mongolian Stock Exchange.
The Group's server co-location and hosting services showed good growth in Italy, with customers looking to leverage maximum benefit from the low latency Sola derivatives platform. Our ASP business continued to attract new customers, whilst expanding its offering to existing customers. In the UK, hosting revenues continued to grow in the second full year since launch. This growth was offset by a reduction in revenues from the full year impact of the transfer of our external communications network to a third party, which also removed all associated costs from the Group.
Operating expenses before amortisation of purchased intangibles and non-recurring items grew five per cent on an organic and constant currency basis. This increase was mainly driven by a £12.1 million increase in variable staff compensation costs, including share awards, reflecting the improved performance of the Group and accretion in the Group's share price. Acquisitions contributed a seven per cent increase in operating expenses, driven by FTSE, whose costs were consolidated from mid-December 2011.
Non-recurring costs of £28.5 million were mainly professional fees incurred in relation to the FTSE and LCH.Clearnet transactions. The Group also recorded a non recurring profit on acquisition/disposal of £324.3 million, principally the fair value mark up of our existing interest in FTSE as required on gaining control of the business.
Finance income and expense and taxation
Net finance costs decreased by £2.2 million as a result of charges in the prior year relating to the cancellation of €120 million of interest rate swaps and the refinancing of revolving credit facilities. This outweighed marginally higher interest charges in the current year due to increased levels of debt following the FTSE acquisition in December 2011 and arrangement fees in relation to a new £350 million committed revolving credit facility.
The Group's effective tax rate on profit before amortisation of purchased intangibles and non recurring items was 29.2 per cent (2011: 30.3 per cent). This reflects the reduction in the UK tax rate and the mix of profits, with our Italian business subject to higher tax rates.
Cashflow and Balance Sheet
The Group's business continued to be strongly cash generative during the year, with cash generated from operations up 21 per cent to £462.4 million. Total investment in the year was £488.6 million as the Group spent £496.1 million on the purchase of shares in FTSE, CC&G and TRS and £33.4 million on capital expenditure, partially offset by €32.4 million received from the sale of Servizio Titoli.
At 31 March 2012, the Group had net assets of £1,449.7 million (2011: £1,137.0 million). Intangible assets increased by £723.0 million, mainly reflecting goodwill and purchased intangible assets recognised on the acquisition of FTSE (including the revaluation of our existing interest). The central counterparty clearing business assets and liabilities within CC&G largely offset each other but are shown gross on the balance sheet as the amounts receivable and payable are with different counterparties. Lower derivative and repurchase agreement balances led to lower gross year end positions.
The Group's UK defined benefit pension plan showed a deficit of £9.8 million at 31 March 2012 (2011: surplus £37.6 million). The actuarial loss recognised in the year includes £33.1 million in relation to the buy-in of the existing pensioner liabilities in April 2011, being the excess of the premium paid over the related liabilities transferred. The contract for the buy-in includes an obligation to insure the liabilities of new retirees over the next five years on consistent pricing terms for a premium currently estimated to be £45 million. The plan closed to future accruals with effect from 31 March 2012.
Net debt, facilities and credit rating
At 31 March 2012, the Group had operating net debt of £703.0 million after setting aside £165.0 million to meet regulatory, clearing and commercial requirements. We are currently in discussions with Banca d'Italia about a possible increase in the regulatory capital requirements of CC&G, which would be expected to be met from the year end cash resources. In the year, the Group's gross borrowings increased by £258.0 million, mainly as a result of drawing on existing facilities to fund acquisitions.
In December 2011, the Group secured a new two year £350 million committed revolving credit facility in connection with the acquisition of LCH.Clearnet which expires if the acquisition does not complete. The facility may be extended for one year at the Group's discretion. The Group has committed credit lines totalling £1.4 billion, with £1.1 billion extending to December 2014 or beyond.
The Group's interest cover (the coverage of net finance expense by earnings before interest, taxation, depreciation and amortisation, both before non-recurring items) improved to 11.8 times (2011: 8.7 times). The Group's operating net debt to adjusted EBITDA was 1.4 times (2011: 1.0 times) on a pro forma basis as if the Group had owned 100 per cent of FTSE for the whole year, down from 1.6 times immediately after the FTSE acquisition. On the same pro forma basis, assuming completion of the acquisition of 60 per cent of LCH.Clearnet Group and using its financial results to 31 December 2011, the enlarged Group operating net debt to adjusted EBITDA would be 2.0 times, down from 2.1 times as announced on 9 March 2012.
The Group's long term credit ratings remain at A- with Standard & Poor's and Baa2 with Moody's. Standard & Poor's has moved the outlook for its rating to Credit Watch Negative and Moody's has retained its negative outlook as a result of the announcement of the proposed acquisition of LCH.Clearnet Group and the consequent likely increase to the Group's leverage. Both agencies are expected to clarify their ratings on completion of the acquisition.
The Group's principal foreign exchange exposure arises as a result of translating the Group's euro earnings, assets and liabilities from our Italian business into sterling. A €5c movement in the average £/€ rate for the year would have changed the Group's operating profit for the year before amortisation of purchased intangibles and non-recurring items by approximately £12 million.
The Group monitors its exposure to the sovereign debt crisis in the Eurozone and the impact of austerity measures being adopted, specifically in respect of our operations in Italy and more generally because of the potential impacts on other areas of our business.
Earnings per share
The Group recorded an adjusted basic earnings per share, which excludes amortisation of purchased intangible assets and non recurring items, of 100.6 pence, an increase of 36 per cent (2011: 73.7 pence). Reflecting the non-recurring revaluation of our existing interest in FTSE, basic earnings per share increased 243 per cent to 193.6 pence (2011: 56.4 pence).