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Edited Transcript of TLPR.L earnings conference call or presentation 6-Aug-19 8:00am GMT

Half Year 2019 TP ICAP PLC Earnings Call

London Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of TP ICAP PLC earnings conference call or presentation Tuesday, August 6, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew A. Polydor

TP ICAP plc - CEO of TP ICAP Energy & Commodities

* Eric Sinclair

TP ICAP plc - Head of Data & Analytics Division

* Nicolas Noel Andre Breteau

TP ICAP plc - Group CEO & Executive Director

* Robin James Stewart

TP ICAP plc - CFO & Executive Director

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Conference Call Participants

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* Justin Graham Bates

Canaccord Genuity Corp., Research Division - Financial Analyst

* Nicholas Michael Watts

Redburn (Europe) Limited, Research Division - Analyst

* Vivek Raja

Shore Capital Group Ltd., Research Division - Analyst

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Presentation

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [1]

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Well, good morning, everyone, and welcome to our 2019 interim results presentation. This is our agenda for today. I will give you a brief introduction, and Robin will take you through our financial performance. After that, I will talk more about our 4 business divisions before we move on to Q&A.

Starting with the financial highlights, which we are reporting for the first time under IFRS 16. Against the backdrop of challenging market conditions, we delivered a resilient performance in the first half. Revenues of GBP 922 million, were down 2% on a constant currency basis and up 1% as reported.

Underlying operating profit increased 2% to GBP 158 million. Operating profit margin was 17.1%, and profit before tax was down 4% percent at GBP 134 million. Earnings per share were 19.3p, and we are paying a dividend of 5.6p per share for the last year in line with our guidance. Robin will talk later about the impacts of IFRS 16 so that you can better understand the underlying trends.

We are now in the last 6 months of the integration, and our focus has been on delivering the priorities that I set out in March so that we have a solid platform from which we can deliver future growth. The work we are doing this year is all about creating an organization that is agile, efficient and more responsive to client needs. At the same time, we are now working on our strategic roadmap, and we will present this to you in the new year. So let me remind you of those priorities which are to establish a strong management team, deliver the integration, create a risk framework for the size appropriate for the size of our business and ensure that we are prepared for Brexit.

I'd like to update you on each of these before I hand over to Robin. Starting with management and governance. In March, I told you about the changes I have made to our leadership team, including the appointment of new CEOs for our 4 business divisions, as well as our new COO whose main priority is to complete the integration process. Since then, we have replaced our Chief Information Officer, given the importance of technology in our business. We are appointing a new Head of Group Compliance, and we have appointed new CEOs for our 3 regions in line with the change in their responsibilities.

Accountability for running the P&L but also managing allocated cost now lies with the CEOs of over 4 global business divisions, which are much more closely aligned with our clients and their needs. From now onwards, our regional CEOs are responsible for managing our relationships with local regulators, implementing our new risk framework and ensuring our support and control functions are fit for our purpose. These new structure reinforces our governance significantly. It has also led to a more streamlined senior management team and a lower cost.

Now moving on to the integration. Our run rate of synergies is on course for GBP 75 million by the year-end, in accordance with our guidance last year. Martin Ryan, who is sitting there, our Chief Operating Officer, has a strong grip on the integration process, and we are on track to complete all the major work this year. We continue to reduce the number of premises we operate from. Last year, we brought our brokers together in New York and Singapore, and since March, we have consolidated the offices in Hong Kong, Jakarta and Amsterdam as well as closing one of our office in both Korea and Indonesia. We are on track to move our London staff into one building in Bishopsgate next year.

We also continue to move support staff such as IT, operations, compliance, procurement to our new shared service center in Belfast, where we expect to have around 300 people by the prelims. We are making good progress with system integration. We continue to complete several hundred desk migrations each month onto common platforms for a wide range of products. Our preparation to decommission 32 out of our 78 core IT applications is on track, and we are on course to reduce 15 data centers to 6. As we do this, we are moving more workload into the cloud. This will give us a common IT platform that is agile, scalable and efficient.

At the same time, we continue to simplify our legal entity structure with the aim of reducing the number of entities by about 50%. This will simplify the governance, accounting and audit process and will reduce future governance costs. It also helps to streamline liquidity management, making the flow of funds up to group easier and more efficient.

Another important priority is to embed our new risk management framework. We started a full review of our risk framework last year, taking into account regulatory expectations as well the scale of our business. We are making good progress and expect to complete the implementation of the new framework by the end of this year. This work is essential to discharge our responsibilities when the senior management regime comes into force for us at the end of December 2019. A robust risk framework is also a competitive differentiator with our clients and a factor in the assessment of regulatory capital.

Lastly, I want to mention our preparations for Brexit. As I told you in March, 90% of our broking revenues are largely unaffected, but there are 2 main business streams we need to consider when we leave the EU. The first is the business we carry out in the EU for EU clients, for which we need a legal entity and venues. We have set up and capitalized a new company in Paris called TP ICAP Europe. Our French and German branches are now part of it. Our Spanish branch will soon be part of it, and this means that the business we currently transact from these offices is protected in the event of the hard Brexit.

In March, if you remember, I told you that we have set up 3 EU venues, 1 MTF and OTFs, so that our EU activity can be connected on MiFID II venues. These venues are now -- have now received regulatory approval and are conducting business. The second stream in the work we do for EU is the one -- for the work we do for EU-based clients but going through our broking desks in the U.K. We are planning to protect this business by putting more front office staff in the EU offices and changing some of our workflows.

We have also made plans to relocate i-Swap, our electronic rates MTF to Amsterdam. We have no further clarity about what Brexit will entail since we spoke with you in March, but we remain in close touch with our clients to understand their plans, and we believe we have made contingency plans for all possible outcomes.

With that, I will now ask Robin to take you through our financial performance.

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Robin James Stewart, TP ICAP plc - CFO & Executive Director [2]

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Thanks, Nico. As you've heard, the business delivered a resilient performance during the first half. Global Broking was impacted by lower volumes and challenging market conditions, but we benefited from the diversification of our business with strong growth in Energy & Commodities, Institutional Services and Data & Analytics. We also maintained our operating profit margin through good cost control. As Nico said earlier, this is the first time we are reporting numbers under IFRS 16. As usual, I'll focus on the underlying performance of the business before exceptional one-offs and acquisition-related items.

So let me start with the income statement. Overall revenue of GBP 922 million decreased 2% on a constant currency basis and was up 1% on a reported basis. Operating profit of GBP 158 million was 2% up on the prior year, and this led to an operating profit margin of 17.1%, up from 17% for the same period last year. Net finance costs were GBP 24 million, and taken together, this resulted in profit before tax of GBP 134 million. The tax rate was 25% in line with our guidance, underlying earnings were GBP 108 million, and underlying earnings per share increased to 19.3p.

This slide shows the impact of IFRS 16 on the income statement. As you can see, it has resulted in a GBP 3 million increase in underlying operating profit and a GBP 2 million decrease in the underlying profit before tax, resulting at a decline of 0.2p in our earnings per share. I'll talk about the impact of IFRS 16 on the balance sheet later.

Turning now to revenue by business division. From here onwards, I'll use numbers on a constant currency basis unless otherwise stated. Global broking revenues decreased 6% to GBP 648 million, with a decline in all asset classes as a result of lower volatility in market volumes. As you know, this performance is favorable compared to the trading performance of the major investment banks for the first half. Energy & Commodities grew 8% to GBP 187 million as oil prices rose, market conditions in power and gas improved and as we benefited from the acquisition of Axiom in November last year. We also made new hires as we continues to build out the ICAP Oil business.

Our agency broking business Institutional Services grew 28% to GBP 23 million under the leadership of John Ruskin who joined the business with Coex. John has restructured this business with a focus on products and clients that generates stronger growth. Data & Analytics grew 12% to GBP 64 million as it more than doubled the number of new product launches in the first half compared with the same period last year and continue to win new clients.

Looking at the breakdown by asset class in Global Broking on the pie chart in the middle. Rates fell 2% to GBP 288 million as expectations of rate increases were pushed back, reducing both spreads and volatility against the background of slowing economic growth and the impact of the U.S.-China trade war. FX & Money Markets decreased 8% to GBP 100 million; Emerging Markets were down 6% to GBP 108 million; and Equities fell 9%, or GBP 102 million against the strong first half in 2018. Credit markets were also challenging. A lack of new issuances as well regulatory restrictions on the size of clients' balance sheets resulted in a 14% decline in revenue to GBP 50 million. We are taking action to reduce cost and respond to these market conditions, which I'll talk about later.

Moving on, let's look at revenue by region in the chart on the right. In Europe, the Middle East and Africa, it decreased 3% to GBP 458 million. Revenue in the Americas is broadly stable at GBP 340 million, and Asia Pacific was down 2% to GBP 124 million. This was partly the result of our decision to close loss-making offices in Korea and Indonesia as well as the departure of some brokers in Hong Kong in 2018.

So turning now to the integration. As you've heard from Nico, we are on track with the integration, and have delivered GBP 74 million of annualized synergies, up from GBP 71 million at the end of 2018 and on course to deliver GBP 75 million by the year-end. We spent GBP 20 million on the integration in the first half and expect to incur further cost of around GBP 10 million by the year-end in line with our guidance.

Moving on now to administrative expenses. Total underlying admin cost of GBP 771 million were down 1% on a constant currency basis and up 2% as reported. You'll recall that we look at these costs in 2 categories: front-office costs and management and support costs. The 1% in reduction in front-office cost of GBP 539 million was driven by a GBP 5 million decrease as we negotiated unit cost reductions on items such as telecoms and clearing. There was also a GBP 3 million reduction in broker compensation resulting from the lower revenue.

Management and support costs were in line with the first half of 2018 at GBP 232 million. We reduced support staff costs by GBP 6 million as a result of both synergies and cost savings made in response to market conditions. This was offset by an increase of GBP 9 million, which includes the planned cost and new investments that we gave you guidance on last year.

This slide shows the movement in admin costs year-on-year for the first half. We recognized GBP 6 million more synergies savings in the P&L this year than last, and we made further net cost reductions of GBP 8 million, which comprise savings in telecommunications and IT maintenance as well as a reduction in support staff cost of GBP 4 million, made in response to the market environment. We continue to identify further savings in the second half.

As I mentioned, there was a reduction in broker compensation of GBP 3 million as a result of the decrease in revenues, offset by an increase in the broker compensation ratio to 52.5%. These cost reductions were offset by 2 increases. We made GBP 4 million of new investments that are part of the GBP 15 million investment in developing our electronic capability and data analytics business that we told you about last August. GBP 7 million of planned increases comprise Brexit, risk and cybersecurity as well as legal and regulatory cost that are part of the GBP 15 million of additional cost for 2019 that we guided you to last year. There was also a credit of GBP 3 million as a result of IFRS 16.

Moving on now to look at contribution. As you know, contribution represents the revenue of the businesses less direct cost. Broking contributions decreased by 4% to GBP 319 million. Contribution margin was slightly lower at 37.2% as a result of a 3% fall in revenues, together with the increased broker compensation ratio, partly offset by a reduction in other front-office costs. Data & Analytics contribution also excludes the cost of data generated by the broking businesses. It grew 14% to GBP 42 million, driven by the revenue growth of 12%, and contribution margin increased to 65.6%.

This slide shows a breakdown of underlying operating profit and reported exchange rates. As I told you earlier, underlying operating profit grew 2% to GBP 158 million and operating profit margin grew to 17.1%. Excluding the impact of IFRS 16, this would have been GBP 155 million in line with last year, and the margin would have been 16.8%.

Operating profit in Europe, the Middle East and Africa declined 1% to GBP 96 million. In the Americas, it grew 9% to GBP 49 million, where operating profit and margins benefited from efficiencies as a result of the integration process. And in Asia, operating profit and margin were more or less in line with last year at GBP 13 million and 10.5%, respectively. The difference in margins between the regions reflects the scale of our business in each region.

I'm going to turn now to items that are not included in the underlying performance. Exceptional and acquisition-related items amounted to GBP 42 million after tax. Integration cost of GBP 20 million that I mentioned earlier comprise of running the integration work streams and staff severance costs. There's also a charge of GBP 21 million for the amortization of acquired intangible assets arising on consolidation relating to the value of brands and customer relationships. This is a recurring noncash charge. As Nico said earlier, earnings for the first half of GBP 108 million translated into earnings per share of 19.3p, and we have announced an interim dividend of 5.6p per share. As you would expect, we are maintaining our policy of awarding a total dividend of 16.85p throughout the integration period.

So turning now to cash flow. Cash generated from operations amounted to GBP 80 million on an underlying basis compared with GBP 53 million in the same period last year. There was a GBP 2 million inflow from initial contract payments as payments made in the first half were lower than the amortization expense, charged through the income statement.

Working capital outflows were seasonally high in the first half of the year. This is a result of discretionary bonus payments made in the first quarter and an increase in trade receivables at the end of the half year as the business generates more revenue in June than in December. This generally leads to a corresponding increase in settlement balances. The working capital outflow here of GBP 112 million includes GBP 48 million for settlement balances that cleared immediately after the period end, compared with GBP 46 million last year.

Capital expenditure was GBP 19 million. This is lower than last year where we made office moves in New York, Singapore and Belfast as well as moving our Energy & Commodities business into 1 office in London. CapEx will increase in the second half as we take over the lease of our new City of London office, and we continue to expect CapEx in the region of GBP 70 million for the full year.

Tax payments increased to GBP 39 million against the low comparator in the first half last year, and interest payments increased to GBP 27 million compared to GBP 16 million last year. This is a result of refinancing some of our debt during the first half and includes the impact of GBP 5 million from IFRS 16, which recategorizes depreciation on leases into an interest expense. Underlying free cash flow was an outflow GBP 5 million, an improvement of GBP 27 million on the first half last year, reflecting the lower levels of CapEx and initial contract payments to brokers.

Looking at the balance sheet. There are 3 areas I want to comment on: pension assets, deferred tax and tax and the impacts of IFRS 16. We no longer carry a GBP 55 million pension asset on the balance sheet relating to the U.K. defined benefit pension scheme. This is a result of our instruction to the pension trustee in April to wind up the scheme, following their decision to ensure their liabilities through the purchase a bulk annuity policy from Rothesay Life. This both protects the retirement income of our pension scheme members and derisks our balance sheet.

During the wind-up period, any further cost associated with the settlement of the schemes' liabilities will be recorded as exceptional cost in the income statement. And on completion, we expect the residual asset net of deferred tax of around GBP 30 million to be returned to the company as cash. The removal of this pension asset has reduced our deferred tax liability from GBP 123 million last year to GBP 98 million at the end of the first half. There's also an impact from IFRS 16 as we move operating lease commitments onto the balance sheet which were previously off balance sheet. This is a result of the recognition of right-of-use assets of GBP 101 million and lease liabilities of GBP 150 million.

Moving on now to look at our debt profile. We issued a GBP 250 million sterling note in May at 5.25% which matures in 2026. The proceeds of this were used to refinance the GBP 80 million bond that matured at the end of June, pay down the outstanding drawing on the revolving credit facility and buy back GBP 69 million of our GBP 500 million bond that matures in 2024. As a result, our debt has increased to GBP 726 million, but this also includes the GBP 37 million short-term loan from one of our JV partners that we expect to repay in the second half.

Our total cash, cash equivalents and financial assets -- financial investments has reduced slightly from GBP 800 million at the year-end to GBP 781 million. GBP 678 million of this is held in 61 regulated entities, GBP 82 million is held in nonregulated entities for working capital purposes and GBP 21 million is held in corporate entities.

So moving on to look at our net funds. This shows the movement in total funds and debt that I've just taken you through, and you can also see that the impact of IFRS 16 has moved our net cash position of GBP 55 million to a net debt position of GBP 95 million to the recognition of GBP 150 million of lease liabilities. But this has no impact on our banking covenants.

Before I close, I'd like to remind you of our obligations under CRD IV. When we completed the acquisition of ICAP, the FCA granted us a 10-year waiver from the consolidated capital supervision test in line with other limited licensed firms like ours. Instead, the group only has to comply with the financial holding company test. We currently have a deficit from the Consolidated Supervision Test as goodwill is not eligible capital under CRD IV. The only eligible capital is net tangible capital. So the group is eliminating its deficit through retention of earnings, and we need to set aside around GBP 25 million a year to be compliant by the time the waiver expires at the end of 2026. At the beginning of July, the allowable deficit reduced for the first time by 25% in line with our agreed plan with the FCA, and we remain well within that allowable deficit.

I'd like to conclude with guidance for the full year. It has been a strong start for the second half, but there are many uncertainties, including Brexit, so our revenue guidance is low single-digit growth. We continue to expect additional planned costs of GBP 15 million and additional investments of GBP 15 million in 2019, with the majority of this investment falling in the second half. We expect the broker compensation ratio to be around 52.5%, and we are on track to achieve GBP 75 million of annualized integration synergies by the year-end, with the total full year of cash cost to achieve of around GBP 30 million.

We gave you an estimate in March of the impact of IFRS 16. Now that we are reporting under IFRS 16, we have a better view and expect it to have a positive impact on full year net operating profit of GBP 9 million and a negative impact on net profit before tax of GBP 2 million. This reflects a decrease in operating expenses of around GBP 32 million, an increase in depreciation of around GBP 23 million and an increase in net interest expense of GBP 11 million. We now expect total net interest expense for the full year of about GBP 50 million, including the impact of IFRS 16. Finally, we continue to expect CapEx in the ratio of GBP 70 million, taking into account the cost of our premises relocation program.

So in summary, we're reporting a resilient performance. Global Broking was impacted by lower volatility in volumes, but we benefited from the diversification of our business and maintained our operating profit margin through good cost control.

Thank you very much. I'll now hand you back to Nico.

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [3]

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Thank you, Robin. I'd now like to talk in more detail about some of our initiatives in our 4 business divisions. As we told you last year, we are investing an additional GBP 15 million in 2019 to increase our hybrid and electronic offering and grow our Data & Analytics business. This is being deployed in 6 projects, which cover creating greater client connectivity to our electronic platforms, developing our Nova matching engine to electronify our credit but also our oil business, launching an Asia and India platform for foreign exchange, developing artificial intelligence in Energy & Commodities as well as launching new products in Data & Analytics. We are also increasing our diversifications as our 3 smaller business divisions deliver a strong growth. Taken together, Energy & Commodities, Institutional Services and Data & Analytics have grown 10% year-on-year and now represent 30% of the group revenue.

Since I became CEO, I've also encouraged much greater collaboration between the divisions to capitalize on the clear connections between them. You will hear these things elaborated in more detail as I talk about each division starting with Global Broking. As you know, Global Broking is our largest division where we have market-leading positions in Rates, Equities, Foreign Exchange and Money Markets. Market conditions were challenging in the first half of the year, and revenue for Global Broking was down 6% as major investment banks reported a more severe decline in their sales and trading performance. Against this backdrop, we delivered a creditable performance. As Robin said earlier, we are reducing our cost base in response to these environment. This includes replicating the more efficient and streamlined structure of our U.S. support functions in the other regions.

Despite challenging market conditions, there have also been areas of good performance, and we continue to make progress, developing our hybrid and pure electronic business. Key priorities here are: the aggregation of liquidity, improved client connectivity and the delivery of exchange-like workflows for all products. Making all the liquidity on our -- of our competing brands available via single user interface remains a primary goal. We now have aggregated execution services in rates -- numerous products in rates, foreign exchange and also credit products. As a result, the client can see live historic prices from both Tullett Prebon and ICAP from a single login. Clients are now able to access better pricing, while TP ICAP Europe generates more business.

Our post-trade services group is also performing well, while the profitability of our core service MATCHBOOK grew at more than 3x the rate of revenue year-on-year as the business scales. Until now, MATCHBOOK was -- has offered risk mitigation services in our global broking divisions, mostly in Rates and FX. We are now extending our MATCHBOOK technology to Energy & Commodities. This is one example of the collaborations between the business division that I mentioned. We have also deepened our collaboration with ClearCompress. It's a fintech company which is providing post-trade compression in cleared and uncleared interest rate swaps. We believe this is an excellent addition to our post-trade solutions.

Moving on to Energy & Commodities, which is our second largest division with a much more diverse client base than Global Broking, including regional banks, corporates, hedge funds and trading companies. Energy & Commodities has grown 8% year-on-year as we added strategic highs and benefited from the acquisition of Axiom last November, which specializes in oil and grains. The U.S. Energy Broking business is still very fragmented, and we believe there is an opportunity to build on our success in making bolt-on acquisitions there. Energy & Commodities represents an all-to-all market with considerable scope for the expansion of hybrid and electronic offerings.

One project that we have invested in is an electronic whiteboard for our oil business, which is currently in live testing with a small number of desks. This whiteboard enables us to capture multiple data points in every client interaction. When fully deployed, it will enable better sharing of liquidity across the desks, automatic calculation of spreads but also a seamless processing of executed trades. The data that we capture from this whiteboard also helps populate the artificial intelligence application I talked about in March. This application provides broker with information, data and insights throughout to help them sell more effectively to clients.

In addition, we have announced this morning a new joint venture in China with Enmore Investment Group. The JV, which is based in Shanghai, will be called Enmore Commodity Brokers. It will initially offer brokerage services in iron ore, coal, LPG and naphtha before expanding to other products over time. It will offer liquidity to clients from 3 of our brands, Tullett Prebon, ICAP but also PVM. And as part of the agreement, TP ICAP has exclusive right to distribute data from the JV internationally.

Moving on to Institutional Services. This provides trade ideas and agency execution to buy-side clients, including hedge funds, asset managers and sometimes nonbank liquidity providers. The role of agency brokerage is to offer the buy-side access to the best price in the market from a wide range of sources, while guaranteeing anonymity and neutrality. Institutional Services grew revenue by 28% as we refocus the business. We have concentrated initially on products where we can achieve early success, foreign exchange, listed derivatives, relative value execution and cleared interest rate swaps. We have also shifted our focus from very small clients to top tier hedge funds. There is a strong momentum now in our agency offering, driven by a change in market dynamics as investment banks reduce their sales coverage. Our core offering position us well, and we are now expanding both by product but also geography in response to client demand. So, for example, we will go live in September with an FX agency desk in Singapore.

Our Data & Analytics division is the leading provider of OTC pricing data, harvested from both Global Broking and Energy & Commodities. As the world's leading interdealer broker, we have access to more data than any other player. As MiFID II has imposed new reporting obligations on our clients, along with the need to demonstrate best execution, they need access to data in order to comply. Data & Analytics grew 12% year-on-year. This was partly driven by the launch of 10 new products during the first half, compared to 3 in the same period last year. We have also hired talent in risk products, in benchmarks and indices, because these are areas where we want to expand into as we move up the content value chain. While we have seen good organic growth within Data & Analytics, we see also selective opportunities to accelerate this development. So as you can see, there is progress in across all the divisions.

In conclusion, we continue to work hard to create a solid platform from which we can grow next year. We start from a very strong base. Our large pools of liquidity and strong client relationships put us at the heart of financial markets around the world. But I believe that we are much more than a traditional interdealer broker. We are also the leading intermediary in Energy & Commodities. We are building a strong agency franchise. We are the largest provider of OTC data, and we continue to develop our post-trade services. We are accelerating the development of our technology. We are aggregating more of our liquidity, and we continue to increase our diversification, but most importantly, we have invested in the business whilst still maintaining our operating margin. At the same time, we have made considerable progress in developing our strategic plan from 2020 onwards in order to unlock the true value of the business and deliver sustainable growth in the future.

This work is well underway, and we will update the market in the new year. Thank you very much, and we are now happy to take questions.

Just a quick reminder. For the benefit of those dialing in, would you please wait for the microphone and tell us your name and organization before you ask a question. Thank you.

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Questions and Answers

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Unidentified Analyst, [1]

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It's [Goddrick Cambray] from JPMorgan. Two questions. Firstly, in terms of the OTC pricing data, clearly you're a leading provider in that. How do you expect to monetize that better because you've got a lot of information there? And what sort of routes are using to monetize that in the future? So that's the first question. And then the second question just around the electronification in markets like Energy & Commodities, what are the trends you're seeing there?

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [2]

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Pardon me, the second question is on Energy & Commodities?

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Unidentified Analyst, [3]

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Just with the electrification in asset classes like Energy & Commodities. What are the trends you're seeing there?

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [4]

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Would you want to take -- I suggest Eric Sinclair, who is heading our Data & Analytics division, will answer your first question.

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Eric Sinclair, TP ICAP plc - Head of Data & Analytics Division [5]

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Thank you for your question. So in terms of monetizing our data, just one thing I wanted to highlight is that John Abularrage and Andrew Polydor are not only providing us with the world's greatest breadth of OTC data, but they're actually providing it post-analytics, so they have some very advanced analytics that are actually filling the gaps that our clients need. So in some asset categories, there may not be the breadth of liquidity in native raw activity, and they have some very advanced analytics that's actually driving the growth. So the growth you saw in H1, it's from launching new products based on the data they're providing to us.

The second thing that gives us a competitive advantage is we have better technology that helps ensure the data quality. We run that through processes, things like erroneous data fields and whatnot are traps, so the quality of our data competitively is much richer than our competitors have. The other thing we're finding though that all the monetization is driven by client need. And our clients, particularly on the buy-side, need neutral, independent data that is of high-quality to meet things like the global investment performance standards and evaluation purposes and whatnot. So we're at early stages. It's been a great year, I mean, compared to where we were last year. We're launching much more products. We're in partnership with Global Broking and our partners in Energy & Commodities, so there's a lot more to come down the path, so we're very excited about that.

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [6]

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Your second question is about the trend in electronification on the Energy & Commodities. So maybe I'll start, and Andrew Polydor who is heading the division will complete what I have to say. But this is probably an industry which is less electronified than Global Broking than financial products at the moment. It's also because it's also an industry which is much more fragmented, particularly in the U.S. So our intention being the leader in oil is to really push electronifications in that segment. So I mentioned the whiteboard investment that we've made. So it is changing the dynamic of how the brokers are interacting with our clients but also how we pool liquidity. So it means that interest on the given product are shared within desk but now between different brands as well. So you could see the trend of pushing the aggregation of that liquidity on a single platform. You want to add something, Andrew?

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Andrew A. Polydor, TP ICAP plc - CEO of TP ICAP Energy & Commodities [7]

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No.

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Nicholas Michael Watts, Redburn (Europe) Limited, Research Division - Analyst [8]

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Nick Watts from Redburn. I had 3 questions, please. The first one was just around broker compensation. You guided that, I think, at full year to 52% to now at 52.5%. Could you perhaps just talk about the recruiting environment at the moment for brokers across the different product categories?

The second question was around the FCA charge you took last year, the increased capital they demanded you hold. In terms of -- do you think you will get some of that back once you've -- the risk framework is overhauled?

And then the last question is just around -- again, going back to the electronification trend. Obviously, in the credit market in particular, you've seen a drop off in revenue. You mentioned the Nova matching engine. Could you just talk a bit about how quickly you can bring on stream pure electronic credit solutions?

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Robin James Stewart, TP ICAP plc - CFO & Executive Director [9]

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So we got it to 52% last year, and now we're at 52.5%. I think that's very much a function of very much the investment that we pushed into securing some of our brokers in the Global Broking space but also building out the Energy & Commodities business last year, particularly in the ICAP oil space. As you probably know, the Energy & Commodities compensation ratio for brokers is much higher. It's ticking up. It's towards 60%, but that's market rate, which sort of leads me into your second question. And that's at a -- it is still a very competitive environment.

And whilst we still see -- we're still seeing challenges in our traditional customer base, it almost means that good brokers are even more valuable, and we're seeing a lot of pressure from some of our competitors who are potentially looking at buying revenue at all cost. We are very clear that we will -- we want to maintain our best brokers. We want to hire -- we still want to hire the best brokers out there, but we're also focused on ensuring that we retain our margins on the bottom line.

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [10]

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You asked about the regulatory capital. Yes, it's true. So following a review in 2017, you remember that the FCA increased several of our peers. As a result, we have an increase of GBP 89 million of regulatory capital. So our response was -- is to embed the risk framework as I've mentioned. So there are several phases in this process. The first was to do an assessment of the situation, deliver a plan -- an execution plan and get that validated by the FCA. So this Phase 1 is done now. We are in full implementation. So we have started dialogue with the FCA about reducing some of those [spillouts]. They are very receptive to that. It's the decision of the FCA, but we're optimistic, and we'll let you know as we go from the news coming from FCA.

You asked about the credit -- the credit environment. It's true that we have suffered from a decrease in revenue. It's a small business for us, as you've seen, GBP 15 million of revenue year-to-date. But market access has done well in offering an all-to-all electronic market. So as I mentioned, we are working really hard in our strategic roadmap. We will -- we're making preparations, and we are obviously looking, when it comes to credit, about accelerating tremendously the electronification of that business but also rules to access -- to propose an all-to-all offering. So we'll be more specific next year, but this is our intention to catch up on that product.

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Justin Graham Bates, Canaccord Genuity Corp., Research Division - Financial Analyst [11]

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It's Justin Bates from Canaccord. I ask you if you could help us think about dividend policy from FY '20 onwards and does that tie into your thinking? You seem to be guiding to perhaps acquisitions in Data & Analytics, and I'm just wondering whether or not growth is going to be -- is going to occur at the expense of dividend growth and dividend will be maintained. I don't know if it's too early to comment on that, but perhaps you could give some help.

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Robin James Stewart, TP ICAP plc - CFO & Executive Director [12]

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Justin, indeed, I would say it's too early to comment. We've always said we'll maintain the dividend during the integration period at 16.85p, which we are. I think as Nico alluded to, we are -- our expectations are to come to the market some time around the prelims or thereafter to talk about our strategy and our strategic aspirations to create value in the organization. And as part of that, we fully expect to be -- to provide much greater clarity on our capital allocation policy, which will then capture what our expectations are on the dividend.

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [13]

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I think we have a question at the back -- on the phone.

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Operator [14]

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The question comes in from the line of Vivek Raja calling from Shore Capital.

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Vivek Raja, Shore Capital Group Ltd., Research Division - Analyst [15]

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Couple of cost -- a couple of questions on cost, please. So the first one is about, obviously, the synergies on the integration. So you're sort of tracking towards the GBP 75 million, which you have guided you'll achieve by the end of this year. You're at GBP 74 million now. The only bit I'm confused about is -- was on the IT systems and the applications. As you said, back-end loaded. That's sort of the wording you're using in the press release. So I'm just a bit confused as to why -- whether there should potentially be more cost savings which aren't reflected within that GBP 75 million once those IT applications are turned off.

And the second question I wanted to ask is, I appreciate Brexit is largely on there in terms of what the impact to the business will be, but that -- to the extent that you have to move more brokers to your European Union subsidiaries, would that be included within your 52.5% broker comp ratio guidance for the current year?

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Robin James Stewart, TP ICAP plc - CFO & Executive Director [16]

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So just looking at the first question on synergies. I think for us, we're very adamant and rigid on -- that we will achieve the GBP 75 million of annualized savings. Yes, there is still a lot of work to do to complete the integration, and the GBP 10 million more of additional cash -- or additional cost that we were guiding to for the second half are very much about completing a lot of the integration work streams. I think it's fair to say that a lot of the savings that we currently are booking and have shown very much reflect the reduction in head counts in -- which have almost accelerated ahead of the completion on a lot of those integration work streams, so that's why we wouldn't expect to push that number up higher because we've already banked that savings. We still got the heavy lifting to do to complete the activity which effectively allows us to have that better lower head count in the organization. On Brexit, did you want to take that?

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Nicolas Noel Andre Breteau, TP ICAP plc - Group CEO & Executive Director [17]

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Yes. So yes, your question on Brexit is more about the business transacted by EU-based clients with our U.K. desks. So a response to potentially in no-deal Brexit is to change our workflows and potentially have more people on the ground. So in case of a hard Brexit, there will be a transition phase where we might have some of our brokers relocating to Amsterdam, Paris, Frankfurt or Madrid. We have put a transition budget for that. Our intention after that if need be is to have people relocated permanently or hire or do bolt-on acquisitions locally.

So all in all, what we've seen with our, because we already people in all these offices, is that all in all, it doesn't impact our broker comp ratio because the average payouts on the continent is and slightly lower. So if you add social charges, you add up with relatively the same in the same zone. So we do not plan for an effect of increase on broker comp because of Brexit.

No more questions? No. Well, I want thank you very much for attending this morning. Bye-bye.