Half Year Report London Tuesday 18 November 2008

Transcription

1 Half Year Report 2008 London Tuesday 18 November 2008

2 Financial results Strong growth in revenue, profit, EPS and dividend +22% +27% +8% +12% Revenue Profit* EPS** Dividend*** * Pre-tax profit before amortisation and impairment of intangibles arising on consolidation and exceptional items. ** Adjusted basic *** Interim dividend per share 2

3 Agenda 1 Financial Review 2 Business Review 3 Strategic Outlook 3

4 Financial performance Strong top and bottom line performance Electronic and post trade business continues to deliver on its potential Investment opportunities have been taken especially in voice broking Investments impact underlying profit growth, particularly in US Cost control maintained Cash generative and strong balance sheet 4

5 Profit before tax Headline Results 6 months to Sept 08 m 6 months Var. to Sept 07 m Underlying growth Revenue % Net operating expenses Operating profit Net finance charge Associates (581) 183 (13) 4 (465) 161 (2) 2 (25)% 14% n/m 100% % % 8% Profit before tax % Sept 08 Sept 07 3 Operating profit margin 24% 26% Revenue Operating profit The above table excludes amortisation and impairment of intangibles arising on consolidation and exceptional items. Underlying growth excludes the impact of foreign exchange and net acquisitions. 5

6 Segmental analysis Headline Results 6 months to Sept 08 m Variance vs prior period Underlying growth Voice Revenue Operating profit Operating profit margin % 22% 6% (2)% % Electronic 26% Electronic (inc. post trade) 20 Revenue Operating profit Operating profit margin Information % 24% 34% 3% Voice 8% 13% Revenue Operating profit % 0% 0 Revenue 0% Op Profit 0% Revenue Op Profit Operating profit margin 50% (5)% The above table excludes amortisation and impairment of intangibles arising on consolidation and exceptional items. Underlying growth excludes the impact of foreign exchange and net acquisitions. 6

7 Analysis of ICAP operating profit Operating profit* 6 months to Sept 2007 Operating profit* 6 months to Sept % 6% 29% 64% 34% 60% Voice Electronic (inc. post trade) Information Voice Electronic (inc. post trade) Information *Operating profit excludes amortisation and impairment of intangibles arising on consolidation and exceptional items. 7

8 EMEA Headline results 6 months to Sept 2008 m Variance vs prior period Underlying growth % Revenue % 15 Net operating expenses (270) (26)% Operating profit 91 11% 10 10% 9% 5 Sept 08 Sept 07 Operating profit margin 25% 28% 0 Revenue Operating profit The above table excludes amortisation and impairment of intangibles arising on consolidation and exceptional items. Underlying growth excludes the impact of foreign exchange and net acquisitions. 8

9 Americas Headline results 6 months to Sept 2008 m Variance vs prior period Underlying growth % Revenue % Net operating expenses (230) (22)% Operating profit 66 6% 5 5% Sept 08 Sept 07 Operating profit margin 22% 25% 0 Revenue 0% Operating profit The above table excludes amortisation and impairment of intangibles arising on consolidation and exceptional items. Underlying growth excludes the impact of foreign exchange and net acquisitions. 9

10 Asia Pacific Headline results 6 months to Sept 2008 m Variance vs prior period Underlying growth Revenue % % 40 Net operating expenses (81) (31)% 35 38% Operating profit 26 53% % Sept 08 Sept Operating profit margin 24% 22% 5 0 Revenue Operating profit The above table excludes amortisation and impairment of intangibles arising on consolidation and exceptional items. Underlying growth excludes the impact of foreign exchange and net acquisitions. 10

11 Net operating expenses 6 months to Sept 2008 Voice investment m IT Investments Acquisitions Lehman Provisions Other 581 Cash Equities UK, US, AP Emerging Markets Brazil Credit US CDS Innovation e.g. Insurance Property FX Bonus Sept 07 FX & Acquisitions, Other Sept 08 Performance Investments & Bonus Increased IT The above table excludes amortisation of intangibles arising on consolidation and exceptional items. 11

12 Impact of investments Investment KPI s Sept 2008 Sept 2007 Revenue from new business started or acquired in last 3 years 27% 19% IT spend/revenue % 12% Staff compensation/revenue 58% 57% Revenue per voice broker 268k 248k Voice broker increases Voice brokers (Mar 08) 2,136 Focus areas* Reallocated - 15 Voice brokers (Sept 08) 2,270 * Includes Link Brokers 12

13 Impact of exchange rates Impact on 2008/9 operating profit Transactional m Translational m Total m Six months to Sept Estimate of full year to Mar 09 impact Assumes $1.50/ and 1.20/ for the balance of the year, giving 2008/09 yearly translational rates of $1.74/ and 1.24/ Estimated effective transactional rates for full year to March 2009 are $1.87/ and 1.36/ 13

14 Exchange rate sensitivities 2009/10 Updated full year unhedged impact of 10c movements 2009/10 onwards on operating profit Transactional m Translational m Total m Dollar* Euro** 13 n/a 13 Estimated impact at current FX rates for 2009/10 on operating profit *** Transactional m Translational m Total m Dollar Hedged 2009/10 $1.67/ Euro 14 n/a 14 Hedged 2009/ / Total 64 * Variance of 10c movement vs $1.87/ transactional and $1.74/ translational ** Variance of 10c movement vs 1.36/ *** Assumes $1.50/ and 1.20/ for balance of 08/09 and 09/10 14

15 Earnings Profit before tax* 6 months to Sept 2008 m months to Sept 2007 m 161 Amortisation and impairment of intangibles Exceptional items Tax Profit for the period Attributable to: Equity holders of parent Minority interests Interim dividend Earnings per share basic Earnings per share adjusted basic (26) - (59) p 13.2p 17.2p (17) (3) (55) p 12.6p 15.4p * Before amortisation and impairment of intangibles arising on consolidation and exceptional items. Note: At reported exchange rates. Adjusted weighted average number of shares six months ended September m (September m) 15

16 Movement in free cashflow Profits vs free cashflow Year to Year to 6 months Mar 07 Mar 08 to Sept 08 m m m Cash from operations Profit pre-amortisation Free cashflow m 220 Cash > Profit (40) (22) Calculation of free cashflow 6 months to Sept 08 m 6 months to Sept 07 m (38) Cash from operations Interest and tax Cash flow from operating activities Capital expenditure Dividends from associates and investments Free cash flow 151 (57) 94 (23) (59) 126 (19) Sep-07 Operating increase in cash Year on year settlement timing Short term working capital 151 Sep-08 16

17 Net borrowings m 100 Movement in net borrowings (59) 75 (92) (129) (243) (38) -300 Mar-08 Free cashflow Dividends and share buybacks Acquisitions Other Sep-08 17

18 Funding and balance sheet ICAP debt finance Balance sheet US private placement - $193m due 2015 Core revolver - 520m to March 2011 Link acquisition facility - 135m January 2011 No refinancing required before 2011 As at 30 September 08 Cash Gross debt Net debt Gross debt/ebitda 30 September m 694m 243m

19 Financial summary Strong top and bottom line performance Electronic business continues to deliver on its potential and improve margins Investment opportunities have been taken Cost control maintained Cash generative and strong balance sheet 19

20 Agenda 1 Financial Review 2 Business Review 3 Strategic Outlook 20

21 A business model for troubled markets 1. Scale and diversity Three individually strong and synergetic businesses voice, electronic and post trade, all market leaders in their field Highly diversified revenues by asset class/product Over 1,500 customers worldwide in 76 countries No more than 5% of group revenues from any one customer 2. Low risk profile No proprietary risk taking ~90% of business name give up or CCP guaranteed; rest settled through clearing houses 3. Minimal leverage Net debt of 243m 4. Strong cash generator Since April 2006: 497m free cash flow generated = 100% of net profit 21

22 Well diversified revenues ICAP group revenues by asset class ( m) Group revenues by customer Other customers 41% 43% Top 10 customers Rates 53% 42% 16% FX Emerging Markets Equities Credit Commodities 15% 8% 9% 11% 6% 14% 14% 10% 8% 10% FY 2005/2006 1H 2008/2009 Top customers Group revenues by market type Derivatives 57% 43% Cash 22

23 Exceptional market conditions Market conditions Massive credit write-downs Accelerated deleveraging of balance sheets Growing macroeconomic stress Increasing financial market stress Emergency central bank intervention Very high volatility in commodity, equity and related markets Impact on ICAP Very high trading volumes as risky assets are liquidated Very high trading volumes in safe haven assets Market share gains as volumes migrate to deepest liquidity pools Liquid, high volume products prosper, structured products suffer 23

24 produced a record first half ICAP segment Revenue* growth Year on Year Major themes Rates +23% Record transaction volumes in derivatives and cash Strong growth in inflation markets Liquidity attracting liquidity in time of extreme volatility Credit +5% CDS volumes resilient Wider corporate bond bid-ask spreads Increased e-trading FX +16% Record transaction volumes Continued growth in customer base and prime broker business Further investment in system performance Focus on EM and NDFs Commodities +25% Record oil and emissions volumes Strong growth in EU, US natural gas Record electricity volumes in EU and US Increased OTC clearing Successful expansion in soft commodities Equities +67% Continuing build out of cash equities in UK,US and Asia Integration of Link completed, combined market share grown since acquisition Weaker performance in structured equity derivatives Emerging Markets +3% Acquisition of Arkhe in Brazil Joint venture with BCIE in Central America Expansion into frontier African markets * Reported revenues 24

25 Continuing investment in new markets 1. Shipping Acquisition and successful integration of Capital Shipbrokers has balanced ICAP business mix Growth in wet freight market offsetting collapse in dry bulk market New product and infrastructure development and ancillary services will boost performance 2. Emerging markets Acquisition of Arkhe, a leading Brazilian broker for an initial consideration of US$17 million, expanding ICAP s LATAM footprint JV with BCIE to develop Central American capital markets 3. Equity derivatives Integration of Link business completed Big, liquid index markets have grown at expense of smaller single stock markets Combined market share grown since acquisition 4. Cash equities Further staff hires completed in UK, US and Asia; and more to come Already dealing with >150 institutional accounts Developing electronic execution capability; target is >50% of business to be electronic Cross-fertilisation of market knowledge a clear advantage for ICAP 25

26 The aftermath of the crisis: shorter term 1. Consolidation will concentrate market share and improve pricing Market share will concentrate further in the hands of major global banks and brokers Liquidity and risk will be more rationally priced; spreads will be wider 2. Lower leverage will boost spreads and derivative volumes Spreads on balance sheet products will rise Risk taking will move off balance sheet, boosting derivative volumes Average yield on ICAP product mix will rise 3. Less adventurous investors will shift to liquid, high volume products Boost for products and markets that represent the bulk of ICAP s business 4. Lower volatility, but better trading environment Lower volatility will reduce correlation and restore hedge efficiency Fundamental economic imbalances remain Low short end rates, steeper yield curves create favourable trading conditions 5. Increased regulatory oversight will boost e-trading and clearing Boost for electronic trading Boost for clearing of more OTC markets CCP/clearing solutions reduce costs and increase trading volumes CCP/clearing solutions create new post trade business opportunities 26

27 Consolidation in FX Over the past decade spot FX trading has consolidated hugely Top 5 banks in 1998: 27% Top 5 banks in 2008: 61% ICAP FX market share has risen from ca. 5% to 63% Other IDB market share has fallen from 90% to 10% No. of banks accounting for 75% of global FX turnover ADV in $Trillion Consolidation of interbank market has boosted e-trading and increased market share and revenues of the leading IDB US Japan Sw itzerland UK Total FX turnover 0 Source:BIS 27

28 The aftermath of the crisis: shorter term 1. Consolidation will concentrate market share and improve pricing Market share will concentrate further in the hands of major global banks and brokers Liquidity and risk will be more rationally priced; spreads will be wider 2. Lower leverage will boost spreads and derivative volumes Spreads on balance sheet products will rise Risk taking will move off balance sheet, boosting derivative volumes Average yield on ICAP product mix will rise 3. Less adventurous investors will shift to liquid, high volume products Boost for products and markets that represent the bulk of ICAP s business 4. Lower volatility, but better trading environment Lower volatility will reduce correlation and restore hedge efficiency Fundamental economic imbalances remain Low short end rates, steeper yield curves create favourable trading conditions 5. Increased regulatory oversight will boost e-trading and clearing Boost for electronic trading Boost for clearing of more OTC markets CCP/clearing solutions reduce costs and increase trading volumes CCP/clearing solutions create new post trade business opportunities 28

29 Wider spreads and derivatives trading Current bid-ask spreads (pre-crisis = 100) ICAP cash vs derivatives revenues 47% 43% Interest Rate Options** 133 Cash Derivatives European cash equities* % 57% US/European single name CDS - index names* 333 1H 08/09 1H 07/08 1H 08/09 Tier 1 Single Name European OTC equities** % 56% 46% 54% Interest Rate Sw aps* 175 Interest Rates Credit Investment Grade Corporate Bond* % 14% % 86% * Bid-offer spread (indexed) ** Volatility points (indexed) Source: Deutsche Bank, ICAP FX Commodities 29

30 The aftermath of the crisis: shorter term 1. Consolidation will concentrate market share and improve pricing Market share will concentrate further in the hands of major global banks and brokers Liquidity and risk will be more rationally priced; spreads will be wider 2. Lower leverage will boost spreads and derivative volumes Spreads on balance sheet products will rise Risk taking will move off balance sheet, boosting derivative volumes Average yield on ICAP product mix will rise 3. Less adventurous investors will shift to liquid, high volume products Boost for products and markets that represent the bulk of ICAP s business 4. Lower volatility, but better trading environment Lower volatility will reduce correlation and restore hedge efficiency Fundamental economic imbalances remain Low short end rates, steeper yield curves create favourable trading conditions 5. Increased regulatory oversight will boost e-trading and clearing Boost for electronic trading Boost for clearing of more OTC markets CCP/clearing solutions reduce costs and increase trading volumes CCP/clearing solutions create new post trade business opportunities 30

31 ICAP liquid vs. structured product mix Relative revenue mix: Dealers vs ICAP Structured Products % Over the decade to 2007, dealer dependence on structured products soared Liquid Products % IDBs did not participate in this trend Typical Leading Dealer 1996 Current ICAP ICAP extremely well positioned to benefit from a resurgence of interest in liquid, high volume products due to: Total Market: $8.7bn Overall IDB market: Electronic vs. Voice revenues 2007 ICAP overall share = 30-31% Electronic Voice strength of technology and electronic broking low cost base compared to dealers unconflicted intermediary status 31

32 The aftermath of the crisis: shorter term 1. Consolidation will concentrate market share and improve pricing Market share will concentrate further in the hands of major global banks and brokers Liquidity and risk will be more rationally priced; spreads will be wider 2. Lower leverage will boost spreads and derivative volumes Spreads on balance sheet products will rise Risk taking will move off balance sheet, boosting derivative volumes Average yield on ICAP product mix will rise 3. Less adventurous investors will shift to liquid, high volume products Boost for products and markets that represent the bulk of ICAP s business 4. Lower volatility, but better trading environment Lower volatility will reduce correlation and restore hedge efficiency Fundamental economic imbalances remain Low short end rates, steeper yield curves create favourable trading conditions 5. Increased regulatory oversight will boost e-trading and clearing Boost for electronic trading Boost for clearing of more OTC markets CCP/clearing solutions reduce costs and increase trading volumes CCP/clearing solutions create new post trade business opportunities 32

33 ICAP revenues and market volatility Revenues m ICAP Half Year Group Revenues vs VIX Volatility Index 1H 2008/9 R 2 = Zero correlation between ICAP revenues and VIX over 6 ½ years from 2002/3 Higher revenue not necessarily associated with high volatility, low revenues with low volatility VIX Volatility Index New market, business and product development more important than volatility 33

34 The aftermath of the crisis: shorter term 1. Consolidation will concentrate market share and improve pricing Market share will concentrate further in the hands of major global banks and brokers Liquidity and risk will be more rationally priced; spreads will be wider 2. Lower leverage will boost spreads and derivative volumes Spreads on balance sheet products will rise Risk taking will move off balance sheet, boosting derivative volumes Average yield on ICAP product mix will rise 3. Less adventurous investors will shift to liquid, high volume products Boost for products and markets that represent the bulk of ICAP s business 4. Lower volatility, but better trading environment Lower volatility will reduce correlation and restore hedge efficiency Fundamental economic imbalances remain Low short end rates, steeper yield curves create favourable trading conditions 5. Increased regulatory oversight will boost e-trading and clearing Boost for electronic trading Boost for clearing of more OTC markets CCP/clearing solutions reduce costs and increase trading volumes CCP/clearing solutions create new post trade business opportunities 34

35 G20 Washington summit Common Principles for Reform of Financial Markets 9. Enhancing Sound Regulation: We pledge to strengthen our regulatory regimes, prudential oversight, and risk management while ensuring that regulation is efficient, does not stifle innovation, and encourages expanded trade in financial products and services. Action Plan to Implement Principles for Reform Prudential Oversight Immediate Actions by March 31, 2009: Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes. 35

36 OTC Clearing: good for volumes Total post trade cost cleared vs. bilateral Trading volumes vs. post trade costs ,000 Cost per ticket (US$) ~$200 ~$180 ~$220 ~$1 ~$ Average Cost per Trade Commodity Derivatives OTC Equity Deriv. Rates Derivatives Credit Deriv FX Derivatives Rates FX 1 Listed Derivatives Cash equities 0.1 CDS IRS Commodity Bilateral products Listed Derivative Cash Equity Cleared products ,000 10, ,000 Average Daily Number of Trades (000 s) Source: BCG, company estimates Source: BCG 36

37 The aftermath of the crisis: longer term 1. Global mega trends still favour our business Shifting demographics Economic power migrating towards emerging markets Mounting pressure on natural resources Work out of huge trade, financial imbalances Accelerating pace of change driven by technology Growth of derivatives to manage risk more efficiently 2. Restructuring of global financial market infrastructure will create huge opportunities for ICAP Overhaul of market infrastructure, liquidity and risk management Clearing of OTC products Greater focus on e-trading Huge focus on post trade impact on risk management 3. Retrenchment in banking will create significant new business opportunities for an unconflicted, independent broker 37

38 ICAP and Post Trade Services Post Trade: a $12bn opportunity ICAP objectives OTC Derivatives ~$12.0bn ~$6.4bn 1% of transaction count; 50% of dealer costs >$4bn annual risk capital cost Average cost/trade ~$40 excluding risk What are we trying to do? Cut trade processing costs and increase capacity Reduce operational, market and credit risk Increase customer footprint by offering open platforms FX, Cash Rates Listed Markets ~$1.7bn ~$3.9bn 97% of transaction count; 32% of dealer costs V low risk capital cost Average cost/trade ~$0.3 How are we going to do it? Leveraging technology Exploiting the network effect Aligning with the sell-side Minimal disruption to existing market structure and workflows Focusing on transaction fees, not software/solution licensing Leveraging other people s capital 38

39 Current ICAP Post Trade Services Service description 1. Trade Processing (Confirmation, Affirmation, Allocations, Netting, Limit Monitoring etc.) 2. Portfolio Compression Brand Harmony, TRL Confirm.Info TriReduce Provider Traiana Confirm.Info TriOptima 3. Portfolio Reconciliation TriResolve 4. Portfolio risk reduction Reset Reset 39

40 Continuing strong volume growth Average Harmony Message Center transactions per day (000s) Number of trades ( 000) terminated by TriReduce 142 1, Q1 Q2 Q3 Q4 Q1 Q2 Q Number of trades (m) reconciled by TriResolve Q1-Q Nominal volume of Reset matches (US$ trillion) Q1 Q2 Q3 Q4 Q1 Q2 Q Q1 Q2 Q3 Q4 Q1 Q2 Q

41 Summary Extraordinary turbulence in global capital markets continues to create excellent trading conditions for ICAP ICAP s business model and diversity of activities is a major source of strength Likely future changes in both execution and post trade create significant opportunities for ICAP ICAP will continue to invest to take advantage of these opportunities 41

42 Agenda 1 Financial Review 2 Business Review 3 Strategic Outlook 42

43 Strategic Outlook Opportunities for ICAP Drivers of activity in the OTC markets remain Significant change for the wholesale markets and the banking industry following current crisis Positive longer term trends ICAP remains a strong profitable business with scale and diversity to adapt in changing markets 43

44 Half Year Report 2008 London Tuesday 18 November 2008