LSE.L Regulatory News (LSE)

2 March 2018

LONDON STOCK EXCHANGE GROUP PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017

Unless stated otherwise, all figures in the highlights below refer to continuing operations1 for 12 months to 31 December 2017 and comparisons with the prior 12 month period on the same basis.

· Continued execution of strategy driving strong operational and financial performance - deployment of capital for acquisitions and organic investment to drive multiple growth opportunities

· Strong financial results - headline growth across all core business divisions - Information Services, Post Trade and Capital Markets - underpins confidence in delivery of three-year financial targets

· Well positioned to drive further growth as a diversified, global financial markets infrastructure business - operating on an Open Access basis in partnership with customers

2017 Highlights

· Total revenue up 17% to £1,768 million (2016: £1,515 million)

· Total income up 18% to £1,955 million (2016: £1,657 million)

· FTSE Russell delivered 33% revenue growth (up 15% on an underlying basis); LCH OTC revenues up 21% (up 17% on an underlying basis)

· Adjusted operating expenses2 up 6% on an organic and constant currency basis reflecting continued investment in growth and efficiency projects

· Adjusted operating profit3 up 18% at £812 million (2016: £686 million); operating profit up 47% at £626 million (2016: £427 million); adjusted EBITDA2 up 19% at £915 million (2016: £771 million)

· Adjusted EPS3 up 19% at 148.7 pence (2016: 124.7 pence); basic EPS of 153.6 pence (2016: 63.8 pence)

· Proposed final dividend increased to 37.2 pence per share - a 19% increase in the full year dividend to 51.6 pence per share - reflecting the strong outlook for the Group

· Capital management continues in-line with policy: £200 million share buyback completed; new medium term debt with €1 billion Eurobond issuance to support further growth and leverage reduced to 1.7 times

· New initiatives and achievements in the year include:

- SwapAgent started new service providing efficiencies for non-cleared products

- CurveGlobal making good progress one year on from launch and investing for next stage developments

- Completed acquisitions of The Yield Book and Mergent, further building data and analytics capabilities in our Information Services businesses

- Increased shareholding in LCH Group to 65.9% (up from 57.8%); expect to acquire a further 2% in March 2018

- Strong flow of IPOs in London and Italy helped companies raise over £44 billion in new and further issues

- Turquoise Block Discovery saw 600% rise in total value traded to €54.5 billion as customers started to adjust their trading strategies ahead of MiFID II

· Good progress on recruitment of new CEO with a strong field of high quality candidates

1 Continuing operations exclude businesses sold, being Russell Investment Management.

2 Before depreciation, amortisation and non-underlying items.

3 Before amortisation of purchased intangible assets and non-underlying items.

Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Russell Investment Management, SwapMatch, ISPS, Mergent and The Yield Book. The Group's principal foreign exchange exposure arises from translating and revaluing its foreign currency earnings, assets and liabilities into LSEG's reporting currency of Sterling.

Commenting on performance for the year, David Warren, CFO and Interim Group Chief Executive, said:

"We have delivered another year of strong performance with growth across all of our core businesses, including double-digit revenue increases at FTSE Russell and LCH OTC. The Group has also continued to invest in new initiatives and acquisitions to drive further expansion of our global client offering. Reflecting the strong results, as well as confidence in outlook and focus on shareholder returns, the dividend per share increased in line with earnings at 19%, and the Group completed a £200 million buyback during the year.

"The Group is strategically, operationally and financially well positioned to capitalise on a range of opportunities ahead and to enhance shareholder returns. We also remain focused on delivering the financial targets we have set for the next two years. Our Open Access approach in partnership with customers will enable us to benefit from MiFID II and to adapt to an evolving regulatory and macroeconomic environment."

Financial Summary

Unless otherwise stated, all figures below refer to continuing operations for the year ended 31 December 2017. Comparative figures are for continuing operations for the year ended 31 December 2016. Variance is also provided on an organic and constant currency basis.

1Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Russell Investment Management, SwapMatch, ISPS, Mergent and The Yield Book.The Group's principal foreign exchange exposure arises from translating and revaluing its foreign currency earnings, assets and liabilities into LSEG's reporting currency of Sterling.

2Before amortisation of purchased intangible assets and non-underlying items.

Unless otherwise stated, all figures refer to the 12 months ended 31 December 2017 and comparisons are against the same corresponding period in the previous year. 

Contacts:

London Stock Exchange Group plc

Further information

The Group will host a conference call on its Preliminary Results for analysts and institutional shareholders today at 09:00am (GMT). On the call will be David Warren (CFO and Interim CEO) and Paul Froud (Head of Investor Relations).

Participant UK Dial-In Numbers: 0800 376 7922

Participant Std International Dial-In: +44 (0) 2071 928 000

Conference ID # 408 9059

Presentation slides can be viewed at http://www.lseg.com/investor-relations

For further information, please call the Group's Investor Relations team on +44 (0) 20 7797 3322.

The information in the preliminary announcement of the results for the year ended 31 December 2017, which was approved by the Board of Directors on 1 March 2018, does not constitute statutory accounts as defined in Section 435 of the UK Companies Act 2006. The financial statements for the year ended 31 December 2016 were filed with the Registrar of Companies, and the audit report was unqualified and contained no statements in respect of Sections 498 (2) and 498 (3) of the UK Companies Act 2006. The financial statements for the year ended 31 December 2017 will be filed with the Registrar of Companies in due course.

In accordance with the Listing Rules of the UK Listing Authority, these preliminary results have been agreed with the Company's auditors, Ernst &Young LLP, and the Directors have not been made aware of any likely modification to the auditor's report to be included in the Group's Annual Report and Accounts for the year ended 31 December 2017.

The preliminary results have been prepared on a basis consistent with the accounting policies set out in the Group's Annual Report and Accounts for the year ended 31 December 2017.

Chief Executive's statement

Executing our Strategy

London Stock Exchange Group delivered another strong performance in 2017. We continue to successfully execute our strategy to grow and diversify the Group, operating on an Open Access basis in partnership with our customers. We have seen growth across all of our core business pillars - Intellectual Property, Risk and Balance sheet management and Capital Formation - and have continued to invest in new initiatives and acquisitions to drive further expansion and efficiencies. The Group is strategically, operationally and financially well positioned to capitalise on a range of opportunities ahead and to enhance shareholder returns. Confidence in our outlook led us to set financial targets at an Investor Update event in June, which will deliver growth in Group EBITDA margin to c.55% by 2019.

As a leading financial markets infrastructure group, we have continued to grow our global footprint, including strengthening our presence in Asia and in the United States. We have also made selective acquisitions that develop our client offering, while meeting our strict strategic and financial criteria. This included increasing our majority shareholding in LCH, the acquisition of Mergent and the acquisition of The Yield Book and Citi Fixed Incomes Indices, which provides opportunities to significantly enhance FTSE Russell's fixed income analytics and index business. These acquisitions also help to expand LSEG's presence in the United States, and our global distribution capabilities.

MiFID II Opportunities

The implementation of MiFID II, which took place on 3 January 2018, was a key focus for a number of our businesses and the transition to the new regulatory regime has in overall terms been very smooth for LSEG. I would like to thank everyone involved in the programme, which was a truly collaborative effort across the Group and provides us with further opportunities to differentiate ourselves with our customers.

Importantly, MiFID II embeds and recognises Open Access as a key principle in financial markets, and is one we have been operating under for a number of years. The new rules will introduce greater competition in financial markets, promoting transparency and innovation while helping to reduce costs and leading to better risk management. Our Open Access philosophy positions us well as we have a proven track record of operating businesses in partnership with our customers. As we stated in our Investor Update in June, a number of these businesses, such as LCH, CurveGlobal, Turquoise and MTS, are already beginning to benefit from the new MiFID II environment and we expect that they will be able to further grow their customer offerings.

Intellectual Property

In our Information Services Business, FTSE Russell continued to perform strongly delivering double-digit revenue growth, up by more than 30%. This is a consolidating sector where FTSE Russell has successfully differentiated itself through its global reach and breadth of offering. With the acquisition of The Yield Book, FTSE Russell is the most diverse index business globally in product terms and is well positioned to seek to benefit from the strong underlying industry trends, including the demand for broader multi-asset capabilities. As a result, FTSE Russell has further enhanced its position as a leading global index provider with approximately US$15 trillion of assets benchmarked to its indexes.

Indexes are firmly embedded across the investment process and FTSE Russell has the ability to provide customers with a comprehensive product range and a deeper data and analytics offering. Institutional clients remain the core client base for FTSE Russell. The decisions made by these clients around index selection, investment products and strategies have a great influence on the entire investment sector, creating a demand for products and services to execute the strategies, for example ETFs and structured products, tracking the indexes they use. Currently, over US$600 billion of ETF assets under management track FTSE Russell indexes. FTSE Russell is also well positioned in emerging markets with a strong track record of developing country-focused benchmarks. A number of indexes and partnerships were launched over the year including in Malaysia, China, Taiwan and Saudi Arabia.

The combination of client relationships and product capabilities also drives innovation, often in partnership with our customers, in areas such as environmental, social and governance (ESG). For example, FTSE Russell announced that the world's largest pension fund, The Government Pension Investment Fund of Japan (GPIF), selected the new FTSE Blossom Japan Index as a core ESG benchmark. The index uses FTSE Russell's innovative ESG Ratings data model and highlights a growing trend among asset owners to integrate ESG considerations into their investment strategies.

Also within Information Services, UnaVista, the Group's platform for all matching, validation and reconciliation needs, continues to help c.6,000 clients from around the world to meet their regulatory reporting including additional requirements under MiFID II.

Risk and Balance Sheet Management

In our Post Trade business, LCH Group achieved another strong performance with record volumes across multiple clearing services in 2017, driven by new business as well as additional flow from existing customers. SwapClear cleared over US$870 trillion of notional driven by significant on-boarding of new clients across Europe, the Americas and Asia Pacific. The SwapClear service now has more than 100 members and over 200 dealers clearing in 55 countries and remains the leading OTC rates liquidity pool in the world. Compression volumes also continued to rise, with over US$600 trillion compressed, up 59% on 2016, a further example of how the cycle of trading, clearing and compressing is becoming increasingly routine. The OTC clearing services delivered good, double-digit revenue growth in the year.

LCH is well-placed to address capital and margin challenges prevailing in the vast FX market, which trades around US$5 trillion a day. The introduction of new bilateral margin rules has been a catalyst for members to start centrally clearing with over US$11 trillion in notional cleared through ForexClear in 2017, compared to US$3.2 trillion in the previous year. The search for greater efficiencies is also driving growth in LCH's repo and CDS clearing services, which both continued to expand their product offerings. LCH SwapAgent, a new service for the non-cleared derivatives market, processed its first trades and also extended the efficiencies and infrastructure of clearing to the non-cleared Cross-Currency Basis Swap market.

The Group's post trade services in Italy also recorded a good performance with Monte Titoli delivering the benefits of T2S to its members.

Capital Formation

LSEG's range of debt and equity markets provides firms across the globe with access to deep and liquid pools of capital. Our markets in London and Italy helped companies raise over £44 billion in new and further issues welcoming companies such as Pirelli, Allied Irish Bank and Eddie Stobart. London Stock Exchange was the largest European exchange with 108 IPOs in 2017 and second globally by money raised. The ongoing success of London's AIM market, which saw a near 45% increase in new capital raised, is also being replicated on AIM Italia with 24 new admissions in 2017.

Our commitment to support growth SME companies was also demonstrated through ELITE, which has continued to expand globally, with partnerships secured in West Africa, Brazil, China and Saudi Arabia in 2017. We also confirmed the launch of the first ELITE Basket Bond, which is made up of ten innovative Italian ELITE companies. Over 700 companies from across 27 countries are now part of the ELITE community and we expect this number to continue to grow over the coming year.

In May, we launched our new International Securities Market (ISM) in London, an additional market for the issuance of primary debt targeted at institutional and professional investors, with a healthy pipeline of issuers. London Stock Exchange also continues to be at forefront of innovative green finance with the number of green bonds issued double that of the prior year.

CurveGlobal, the new interest rate derivatives platform, has built a firm foundation since launch reflecting a growing appetite for more capital-efficient and open alternatives to existing derivatives trading services. CurveGlobal is proving itself to be a highly efficient differentiator in the exchange traded derivatives space, offering genuine choice and liquidity to the market. Productive partnerships with inter-dealer brokers and technology providers are also helping to increase flow to the platform. Significantly, in the context of Best Execution rules under MiFID II, CurveGlobal products listed on LSE Derivatives Market (LSEDM) continue to be best price or tied the majority of the time.

Our pan-European trading platform, Turquoise, is working with customers as they adjust their trading strategies in response to MiFID II. Turquoise Plato Block Discovery, for example, set new records in 2017 with total value traded in the year up 600% to €54.5 billion.

LSEG Technology

The main focus of Technology is to underpin and support the development of in-house solutions for our capital markets, clearing and information businesses. Our technology, combined with our deep expertise in financial markets infrastructure, enables us to deliver market-leading services that put us at the forefront of new product ideas and innovation. In 2017, we announced that we would better position our technology offering by bringing several products and businesses together under a new LSEG Technology brand. As part of the re-organisation, we divested two small technology assets as we focus on the key development opportunities ahead.

We have continued to work on the application of a range of emerging technologies, including distributed ledger technology, cloud-enabled computing, machine learning and big data. LSEG takes an "active investment" approach, where we seek to combine the best of our domain expertise in financial markets infrastructure and technology with the best of the partner companies we choose to work with. For example, we are collaborating with IBM to create a distributed shared registry containing a record of all shareholder transactions and helping to open up new opportunities for trading and investing for European SMEs.

Summary

LSEG operates in a dynamic global industry and there will continue to be both new challenges and opportunities ahead. LSEG continues to perform strongly in an evolving macroeconomic, regulatory and political environment, including Brexit. With the UK set to leave the EU in March next year, LSEG has a responsibility to ensure the orderly functioning of our markets and to contribute to the financial stability of the global economy as a whole. LSEG currently serves clients in a number of geographies across the United Kingdom, Europe, United States and Asia and, as such, we have plans and options for continuing to provide a seamless service. Our partnership approach with our customers continues to enable us to understand their needs against a changing regulatory and market backdrop and to develop our products and services to help our clients with the challenges they face.

In summary, our strategic ambition remains the same - to deliver best in class capabilities, drive global growth and develop our customer partnership approach. Our highly capable and experienced management team remains focused on the opportunities ahead, to deliver the financial targets we have set for the next two years, while at the same time continuing to invest and expand. The Group is well positioned for further successful development and growth.

Financial review

The financial review covers the financial year ended 31 December 2017.

Commentary on performance uses variances on a continuing organic and constant currency basis, unless otherwise stated. Constant currency is calculated by rebasing 2016 at 2017 foreign exchange rates. Sub-segmentation of revenues are unaudited and are shown to assist the understanding of performance.

Cost of sales mainly comprise data and licence fees, data feed costs, expenses incurred in respect of share of surplus arrangements that are directly attributable to the construction and delivery of customers' goods or services, and any other costs linked and directly incurred to generate revenues and provide services to customers.

Highlights

· Total income of £1,955 million (2016: £1,657 million) increased by 18% and total revenue of £1,768 million (2016: £1,515 million) increased by 17%

· Adjusted EBITDA1 of £915 million (2016: £771 million) increased by 19%

· Adjusted operating profit1 of £812 million (2016: £686 million) increased by 18%

· Operating profit of £626 million (2016: £427 million) increased by 47%

· Adjusted basic earnings per share1 of 148.7 pence (2016: 124.7 pence) increased by 19%

· Basic earnings per share of 153.6 pence (2016: 63.8 pence) increased by 141%

Including discontinued operations:

· Total income of £1,955 million (2016: £2,048 million) decreased by 5%, and total revenue of £1,768 million (2016: £1,905 million) decreased by 7%. Adjusted operating expenses1 of £919 million (2016: £955 million) decreased by 4%

· Adjusted EBITDA1 of £915 million (2016: £798 million) increased by 15%

· Adjusted operating profit1 of £812 million (2016: £713 million) increased by 14%

· Operating profit of £603 million (2016: £530 million) increased by 14%

· Adjusted basic earnings per share1 of 148.7 pence (2016: 129.7 pence) increased by 15%

· Cash generated from operations of £852 million (2016: £618 million) increased 38%

· Year end operating net debt to pro-forma adjusted EBITDA at 1.7 times (2016: 1.1 times), within the Group's normal target range of 1-2 times

David Warren

Group Chief Financial Officer

1 London Stock Exchange Group uses non-GAAP performance measures as key financial indicators as the Board believes these better reflect the underlying performance of the business. As in previous years, adjusted operating expenses, adjusted operating profit, adjusted profit before tax and adjusted earnings per share all exclude amortisation and impairment of purchased intangible assets and goodwill and non-underlying items

1 Before amortisation of purchased intangible assets and non-underlying items

2 Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes ISPS, Mergent, SwapMatch and The Yield Book

Note: Variances in all tables are calculated from unrounded numbers

Commentary on the segments is done on a continuing basis unless stated otherwise

Information Services

1Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes ISPS, Mergent and The Yield Book

2 Operating expenses and operating profit variance percentage is shown on a reported basis only i.e. not on a constant currency basis. Variances will include underlying movements and foreign exchange effects

Information Services provides global indices products, real time pricing data, product identification, reporting and reconciliation services. Revenue was £736 million (2016: £595 million).

FTSE Russell's revenue was £546 million (2016: £409 million), including first time contributions from Mergent and The Yield Book. FTSE Russell revenue increased by 15%, with performance in line with the Group's announced double-digit growth target for FTSE Russell revenue. This performance was driven by increases in AUM levels in benchmarked ETFs and other investable products, as well as strong subscription renewal rates and data sales. Following the 2014 acquisition of Frank Russell Company, targets were set for both cost and revenue synergies, and in 2017 we achieved the three year target of US$78 million for cost synergies on time and met the five year target for revenue synergies of US$48 million, more than two years early.

Real Time Data revenue increased by 1% year on year due to a focus on enterprise licensing, while the number of terminals decreased by 10% to 180,000 (2016: 200,000) with the reduction largely in lower yield terminals.

Other Information Services revenues increased by 15%, mainly as a result of growth in both UnaVista, driven by continued user base expansion for regulatory reporting, trade confirmations and reconciliations especially in anticipation of MiFID II implementation in 2018, and SEDOL from continued licence growth.

Cost of sales rose by 4% mainly as a result of increased data charges and partnership costs, both related to growth in FTSE Russell revenues. Gross profit margin expanded as a result of revenue growth across the division.

Operating expenses of £291 million (2016: £204 million) increased by 43%, driven by the £32million net impact of Mergent and The Yield Book acquisitions and ISPS disposal, and foreign exchange movements due to the weakening of Sterling relative to the US Dollar. Cost increases were partially offset by the synergy achievement from the Russell Index acquisition.

Operating profit rose by 14% to £383 million (2016: £337 million), driven largely by FTSE Russell revenue growth and contribution from the acquisitions of Mergent and The Yield Book.

Post Trade Services - LCH

1 Operating expenses and operating profit variance percentage is shown on a reported basis only i.e. not on a constant currency basis. Variances will include underlying movements and foreign exchange effects

Post Trade Services - LCH comprises the Group's majority owned global clearing business. Total income was £562 million (2016: £447 million).

OTC clearing revenue increased by 17%, driven by SwapClear, predominantly in client clearing with trade volume increasing by 29% to 1,227,000 (2016: 952,000). SwapAgent executed its first trades in 2017, having launched in 2016, to simplify the processing, margining and settlement of non-cleared derivatives. 2017 performance is in line with the Group's announced double-digit growth target for OTC clearing.

Non-OTC clearing revenue increased by 7%, reflecting strong growth in Fixed Income volumes cleared. Clearing in repo and cash bond markets increased to €87.5 trillion (2016: €70.8 trillion). In 2017, RepoClear launched Sponsored Clearing, a service offering buy-side firms direct access to LCH, enabling firms to reduce their risk and maximise balance sheet efficiencies.

Other revenue, which includes non-cash collateral management fees and compression services grew by 38%.

Net treasury income increased by 39% to £120 million with a 26% increase in average cash collateral held to €84.5 billion, due to increase in OTC and RepoClear volumes (2016: €67.0 billion).

Cost of sales increased 47%, mainly due to growth in SwapClear and the associated increase in share of surplus. Gross profit increased by 17% to £474 million.

Operating expenses increased by 4% with foreign exchange movements due to the weakening in Sterling relative to the Euro and higher depreciation from investment to support growth, partially offset by the impact of cost saving initiatives.

LCH EBITDA margin increased by 8pp to 44% (2016: 36%), moving towards the announced target of c.50% by 2019.

Operating profit increased by 58% to £194 million (2016: £123 million).

Post Trade Services - CC&G and Monte Titoli

1 Operating expenses and operating profit variance percentage is shown on a reported basis only i.e. not on a constant currency basis. Variances will include underlying movements and foreign exchange effects

Post Trade Services provides clearing (CC&G), settlement and custody activities (both Monte Titoli). Total income (excluding inter-segmental income) was £151 million (2016: £147 million).

CC&G clearing revenues decreased by 14% influenced by a fall in derivatives clearing volumes mirroring trading performance on the Italian IDEM market. Monte Titoli revenues increased by 6%, due to growth of custody revenues from domestic and international clients who transferred their portfolios to Monte Titoli accounts, and the benefit of a full year of a new domestic pricing structure introduced from May 2016.

CC&G generates net treasury income by investing the cash margin held, retaining any surplus after members are paid a return on their cash collateral contributions. Net treasury income decreased by 9% mainly due to unfavourable spreads and lower cash held in 2017. The average daily initial margin at €11.1 billion is down 9% (2016: €12.1 billion) due to lower volatility and volumes from Italian fixed income markets.

Cost of sales rose by 28% largely as a result of the discount phase-out of the settlement acquisition cost from T2S in November 2016.

Operating expenses decreased by 21%, driven by the absence of 2016 globeSettle impairment costs of £8 million.

Operating profit increased by 34% to £71 million (2016: £53 million).

Capital Markets

1Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes SwapMatch

2 Operating expenses and operating profit variance percentage is shown on a reported basis only i.e. not on a constant currency basis. Variances will include underlying movements and foreign exchange effects

Capital Markets comprises Primary and Secondary Market activities. Revenue was £391 million (2016: £368 million).

Revenue increased by 3%, largely driven by Primary Markets performance, with revenue increasing by 19% as UK equity issuance rebounded strongly in the Main Market after prior year uncertainty following the UK referendum to leave the European Union.

The total amount of capital raised across our markets, both through new and further issues, increased by 73% to £44.2 billion (2016: £25.6 billion). There was a 45% increase with 194 new issues across our markets (2016: 134). The pipeline of companies looking to join our markets continues to look promising.

In Secondary Markets, in the UK average order book daily value traded rose by 4% at £5.3 billion (2016: £5.1 billion). Italian equity trading volumes decreased by 6% due to lower market volatility at 276,000 trades per day (2016: 295,000). Trading on Turquoise, our pan-European equities platform, decreased by 28% in average daily equity value traded, against a strong 2016 performance to €3.9 billion (2016: €5.4 billion), with some offset from growth in the higher margin Block Discovery trading.

Fixed Income, Derivatives and Other revenue decreased by 2%. The result reflects a 30% decrease in volumes on the Italian IDEM market, Fixed Income decreased with a decline of 6% in MTS Cash and BondVision notional value, and an 8% decline in MTS Repo.

Cost of sales decreased by 30% reflecting lower Turquoise lit book revenues with gross profit up by 5%.

Operating expenses increased by 15% to £195 million (2016: £169 million) with the main driver being foreign exchange movements due to the weakening in Sterling relative to the Euro.

Operating profit increased by 2% to £180 million (2016: £177 million).

Technology Services

1 Operating expenses and operating profit variance percentage is shown on a reported basis only i.e. not on a constant currency basis. Variances will include underlying movements and foreign exchange effects

Technology Services provides hosting solutions, client connectivity and software products for the Group and third parties. Third party revenue was £91 million (2016: £88 million).

Operating expenses increased by 31% to £84 million (2016: £64 million), driven by continued Group technology investment, centralisation of costs and foreign exchange movements due to the weakening in Sterling relative to the Euro and US Dollar.

The Technology segment made a loss of £2 million (2016: £12 million profit).

The Group disposed of two Technology businesses: MillenniumIT ESP was sold on 28 December 2017 and Exactpro was sold on 17 January 2018 post year end. These businesses generated a total of £30 million revenue, £22 million of cost of sales and £8 million operating cost in 2017.

Operating Expenses (Continuing Operations)

On a continuing basis, Group operating expenses before amortisation of purchased intangible assets and non-underlying items were £919 million (2016: £791 million).

Operating expenses increased by 6%. The Group cost base was adversely affected by £43 million of foreign exchange movements arising as a result of translating and revaluing its foreign currency costs, assets and liabilities into LSEG's reporting currency of Sterling. The main drivers of the constant currency cost base increase were variable staff costs and depreciation. Depreciation, amortisation and impairment increased by 34% to £103 million (2016: £77 million excluding £8 million globeSettle impairment) during the year. A similar increase is expected in 2018, as the Group continues to invest in core technology, react to regulatory change and deliver new products. In 2017, the Group achieved the previously announced run rate synergy targets for Frank Russell Company and LCH-related cost savings. Offsetting this was a £32 million net impact of inorganic items, being businesses owned for less than 12 months in either period, principally ISPS, Mergent and The Yield Book. The Group continues to exercise strong cost control and invest in new products to support growth. 2018 will see the effect of a full year of The Yield Book costs and recent Technology disposals.

Share of Loss after Tax of Associates

The £9 million loss reflects an increase in the Group's share of the operating loss of CurveGlobal to 43.38% (2016: 26%) following further investment, and a £4 million recognition of historic losses due to increased ownership share. Despite client focus on MiFID II implementation during 2017, CurveGlobal volumes continued to grow and open interest at the end of 2017 was 162,000 contracts (2016: 39,000 contracts).

Non-Underlying Items and Purchased Intangible Assets

Amortisation of purchased intangible assets decreased by £4 million to £153 million (2016: £157 million). Additional charges included £25 million of transaction-related costs, £7 million of restructuring costs and £8 million of integration costs. These were partially offset by a profit after tax of £7 million relating to the disposal of ISPS and MillenniumIT ESP businesses.

Finance Income and Expense and Taxation

Net finance costs were £62 million, down £1 million on the prior year on a continuing basis.

The effective tax rate ('ETR') for the year in respect of continuing underlying operations and including the effect of prior year adjustments, is 22.4% (2016: 22.5%). This reflects reductions in both the UK and Italian tax rates, the mix of profits in the Group and finalisation of prior year tax returns. The underlying ETR for 2017 excluding one-off items was 23.4%, and is expected to be similar in 2018.

The contribution of continued underlying operations in the US towards the ETR was stable in the period. US tax reform was signed into law in December 2017 with effect from 2018. However, we do not expect the lower Federal tax rate to have a material impact on the Group's combined underlying effective tax rate. In part this is due to the manner in which the US acquisitions have been financed and the introduction of a new base erosion anti-abuse tax (the BEAT), which will apply to intercompany transactions with the wider Group.

Cash Flow and Balance Sheet

The Group's business continued to be strongly cash generative during the year, with cash generated from continuing activities of £852 million (2016: £618 million).

At 31 December 2017, the Group had net assets of £3,752 million (2016: £3,614 million). The central counterparty clearing business assets and liabilities within LCH and CC&G largely offset each other but are shown gross on the balance sheet as the amounts receivable and payable are with different counterparties.

Net debt

At 31 December 2017, the Group had operating net debt of £1,639 million after setting aside £1,042 million of cash and cash equivalents held to support regulatory and operational requirements, including regulated cash and cash equivalents at LCH Group, and amounts covering requirements at other LSEG companies. Regulatory and operational cash increased by £194 million during the period to 31 December 2017 as a result of over £100 million surplus cash held in LCH, due to be distributed to LSEG in H1 2018, with the balance comprising cash retained at Monte Titoli (to support its CSDR obligations) and other regulatory and operational requirements.

The Group's gross borrowings increased by £787 million during the period to 31 December 2017, primarily due to the acquisitions of The Yield Book and Mergent as well as the completion of a £200 million share buy back programme.

The Group retained total committed bank facilities of £1,200 million during the financial year. A new facility of £600 million was arranged on improved terms whilst an existing facility, also of £600 million, was extended for a further year to November 2022. The new facility is a five-year commitment with two one-year extension options available to the Group, subject to lender approval.

In September 2017, the Group took advantage of favourable debt capital market conditions and extended its debt maturity profile by issuing €1 billion of bonds in two €500 million tranches under its updated £2 billion euro medium term notes programme. The bonds are unsecured and the tranches are due for repayment in September 2024 and September 2029. The coupons are fixed at 0.875% per annum and 1.75% per annum respectively. However, €700 million of the proceeds of the bonds have been swapped into USD as part of the Group's objective to match earnings in currency and protect key ratios, resulting in an effective blended rate of interest of 2.8% per annum overall. The Group redeemed in full LCH Group's €200 million Preferred Securities at the first Issuer Call date in May 2017; it also put in place a £1 billion euro commercial paper programme later in 2017 which, at the end of the year, remained unutilised.

With over £650 million of undrawn, committed bank lines available, together with strong cash generation, the Group continues to be well positioned to fund future growth, with scope for further refinancing in 2018/19 to underpin its longer term debt capital positioning.

The Group's interest cover, the coverage of net interest expense by EBITDA (consolidated earnings before net finance charges, taxation, impairment, depreciation and amortisation, foreign exchange gains or losses and non-underlying items), increased to 15.5 times (2016: 13.0 times) in the 12 months to 31 December 2017. This was driven primarily by earnings growth with interest costs remaining in line with 2016. The Group's organic cash generation remained strong but significant inorganic expansion increased leverage (operating net debt to EBITDA updated to account for the EBITDA of acquisitions or disposals undertaken in the period) to 1.7 times at 31 December 2017 (31 December 2016: 1.1 times). Leverage remains well within the targeted range of 1-2 times.

The Group's long-term credit ratings were raised on the back of strong growth and prudent leverage management. Moody's and S&P increased their ratings of LSEG to A3 and A- respectively and changed their outlooks to stable. LCH Group withdrew its rating upon redemption of its Preferred Securities but initiated new long term ratings with S&P at LCH Ltd and LCH SA to support business lines, with both ratings set at A+ with a stable outlook.

Foreign exchange

The Group's principal foreign exchange exposure arises as a result of translating its foreign currency earnings, assets and liabilities into LSEG's reporting currency of Sterling. For the 12 months to 31 December 2017, for continuing operations, the main exposures for the Group were its European based Euro reporting businesses and its US based operations, principally FTSE Russell, Mergent and The Yield Book. A 10 Euro cent movement in the average £/€ rate for the year and a 10 cent movement in the average £/US$ rate for the year would have changed the Group's continuing operating profit for the year before amortisation of purchased intangible assets and non-underlying items by approximately £23 million and £24 million, respectively

The Group continues to manage its translation risk exposure by matching the currency of its debt to the currency of its earnings, where possible, to ensure its key financial ratios are protected from material foreign exchange rate volatility.

Earnings per share

The Group recorded an adjusted basic earnings per share, which excludes amortisation of purchased intangible assets and non-underlying items, of 148.7 pence (2016: 129.7 pence). Basic earnings per share were 146.4 pence (2016: 43.5 pence).

Dividend

The Board is proposing a final dividend of 37.2 pence per share, which together with the interim dividend of 14.4 pence per share paid to shareholders in September 2017, results in a 19% increase in the total dividend to 51.6 pence per share. The final dividend will be paid on 30 May 2018 to shareholders on the register as at 4 May 2018.

Financial Targets

At the 12 June Investor Update event in 2017, the Group set out financial targets as below and continues to progress against the targets, as referenced earlier in the text.

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT of comprehensive income

CONSOLIDATED balance sheet

consolidated cash flow statement

1 Investments in available for sale financial assets have been reclassified from net cash flow generated from operations to cash flow from investing activities. Cash flows arising on available for sale financial assets are now presented within investment in government bonds. There is no impact to cash and cash equivalents at the end of the year as a result of this change.

2 Cash expenditure for the purchase of own shares by the Employee Benefit Trust in the prior year of £9 million was included in working capital movements.

3 Within cash from financing activities, the prior year net amount of receipts and repayments of borrowings has been re-presented to show the gross cash flows.

Group cash flow does not include cash and cash equivalents held by the Group's Post Trade operations on behalf of its clearing members for use in its operation as manager of the clearing and guarantee system. These balances represent margins and default funds held for counterparties for short periods in connection with this operation.

consolidated STATEMENT OF CHANGES IN EQUITY