LSE.L Regulatory News (LSE)

3 March 2017

LONDON STOCK EXCHANGE GROUP PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2016

Unless stated otherwise, all figures in the highlights below refer to continuing operations1 for 12 months to 31 December 2016 and comparisons with the prior 12 month period on the same basis.

· Continued execution against strategic objectives and investment drives multiple growth opportunities across each of our market-leading businesses

· Strong financial performance across all business areas with good control of underlying costs - positioned for delivering strong operational leverage

· Successful strategy based on customer partnership, innovation and an Open Access model makes the Group strongly positioned to make further progress as a well diversified financial markets infrastructure business with a global footprint

2016 Highlights

· Total income up 17% to £1,657.1 million (2015: £1,418.6 million)

· Total revenue up 14% to £1,515.6 million (2015: £1,324.7 million)

· Adjusted operating expenses2 continue to be well controlled, at £791.6 million - up 4% on an organic and constant currency basis as the Group invests in growth and efficiency projects

· FTSE Russell delivered strong growth and integration synergies of US$78 million p.a. are ahead of schedule; on track to reach €40 million of annual cost savings at LCH by end of 2017

· Adjusted operating profit2 up 17% at £685.8 million (2015: £584.7 million); operating profit of £426.8 million (2015: £404.4 million); adjusted profit before tax2 up 21% at £623.1 million (2015: £516.4 million)

· Adjusted EPS2 up 21% at 124.7 pence (2015: 103.4 pence); basic EPS of 63.8 pence (2015: 74.8 pence)

· Proposed final dividend increased to 31.2 pence per share - a 20% increase in the full year dividend to 43.2 pence per share - reflecting the strong outlook for the Group

· New initiatives and achievements in the year include:

- SwapClear saw a 25% increase in clearing volumes at over US$665 trillion notional and provided record compression of US$384 trillion; new portfolio margining service, LCH Spider, launched on an open access basis

- CurveGlobal, a new listed interest rate futures platform, successfully launched in partnership with major dealer banks and CBOE - onboarding a growing number of clients and increased trading flow

- Continued volume growth at CDSClear and ForexClear - driven by regulatory changes

- FTSE Russell launched a Low Carbon Economy data model and accompanying Green Revenue Index Series

- Announced acquisition of Mergent Inc., a leading US provider of business and financial information on companies, to further build the Information Services portfolio

- ELITE, our platform for high growth companies, now operational in 25 countries with nearly 500 companies

· Sale of Russell Investment Management successfully completed, for gross proceeds of US$1,150 million - resulting in an implied multiple of 18x EBITDA (pre synergies) for the retained, high growth Russell Indices business, now integrated with FTSE

· The Group continues to work hard on its proposed merger with Deutsche Börse AG - awaiting outcome of the European Commission Phase II process on or before 3 April 2017

1 continuing operations exclude businesses sold, being Russell Investment Management and Proquote.

2 before amortisation of purchased intangible assets and non-recurring items.

Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF. The Group's principal foreign exchange exposure arises from translating our European-based Euro and US based US Dollar reporting businesses into Sterling.

Commenting on performance for the year, Xavier Rolet, Group Chief Executive, said:

"The Group continues to execute against its strategic objectives, driving both short and longer term growth through organic investment and selective inorganic opportunities. This has resulted in another year of strong financial performance, with continued revenue growth, control of underlying expenses and a 21% increase in adjusted earnings per share. Each of our business areas delivered year-on-year growth, highlighting the strength in the diversity of our business, launching new products such as LCH Spider, new services in partnership with customers such as CurveGlobal and Turquoise Plato, and expanding our global footprint with acquisitions such as Mergent Inc.

"FTSE Russell produced another good top line performance and the integration savings are now mostly achieved, ahead of schedule. The LCH OTC clearing services performed well, particularly SwapClear and its compression services. We remain well positioned across all our businesses, underpinned by our Open Access approach and strong customer partnerships."

Financial Summary

Unless otherwise stated, all figures below refer to continuing operations for the year ended 31 December 2016. Comparative figures are for continuing operations for the year ended 31 December 2015. 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 Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF. The Group's principal foreign exchange exposure arises from translating our European based euro and US based dollar reporting businesses into Sterling.

2 before amortisation of purchased intangible assets and non-recurring items.

Unless otherwise stated, all figures refer to the 12 months ended 31 December 2016 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 Xavier Rolet (CEO), David Warren (CFO) and Paul Froud (Head of Investor Relations).

Participant UK Dial-In Numbers: 0800 694 0257

Participant Std International Dial-In: +44 (0) 1452 555 566

Conference ID # 7561 4680

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 2016, which was approved by the Board of Directors on 2 March 2017, 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 2015 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 2016 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 2016.

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 2016.

Chief Executive's Review

2016 has been another notable year of achievement for London Stock Exchange Group as we build on our position as a leading global markets infrastructure company. We have achieved a strong financial and operational performance with growth and investment across all of our core businesses, delivering on a number of new initiatives and developing our customer partnership approach. The Group is truly diversified by business activity, by geography and by currency, providing resiliency across market cycles and opportunity for continued growth. We operate a full range of Open Access market infrastructure services, at scale, around the world including in the UK, Europe, Asia and the US. This makes the Group well positioned to navigate political and macroeconomic changes in the coming years, adapting as needed to continue to serve our global customer base.

Partnership

Our customer partnership approach and Open Access operating model, which provides true customer choice, are distinctive and differentiating features of our business model which continue to deliver clear benefits. An example is Turquoise Plato, a new partnership which formally brings together, for the first time, buy-side, sell-side and trading venue to deliver increased efficiencies in anonymous European equity block trading. The rebranded Turquoise Plato Block Discovery and Turquoise Plato Uncross platforms have demonstrated strong growth throughout the year with record trading volumes, reflecting investor demand for trading services that will meet the requirements of the impending MiFID II regulation. CurveGlobal, a new interest rate derivatives venture, is another good example of partnership and a business that will also benefit from MiFID II regulation. Its innovative structure, bringing together LSEG with seven major dealer banks and another exchange, CBOE, makes it uniquely equipped to address the need for capital-efficient interest rates products. It has made a positive start since launching in September, offering genuine new competition for the market and making portfolio margining available to a greater number of market participants. The Group's technology companies, including MillenniumIT and GATElab have also continued to develop partnerships with exchange operators around the world including an ultra low-latency access gateway to the National Stock Exchange of India.

Global capital

LSEG remains firmly committed to promoting a financial ecosystem that helps businesses raise capital to grow. Long-term, patient, risk capital is the only way to drive growth and job creation not just in the UK but across Europe. We continue to promote initiatives such as our flagship ELITE programme supporting high growth SMEs, which now has more than 700 companies, advisers and investors across 25 countries within its community. As well as announcing ELITE partnerships in Israel, Morocco and Hungary, we also launched ELITE Club Deal, a new online private placement platform to help bridge the funding gap by bringing together professional investors and high growth companies. Despite a volatile market, the Group welcomed 134 companies to our markets in the UK and Italy raising a combined total of £25.6billion in new and further issues. AIM, now in its 22nd year, again demonstrated why it is recognised as the world's leading growth market with companies joining in 2016 seeing their average price performance rise by 41%. Since launch, AIM has enabled companies from across the UK and around the world to raise over £100 billion, underlying the market's ability to act as a vital source of growth capital.

In fixed income, London's position as a leading international financial centre is reflected in its ability to offer investors a wide range of innovative products and we have deepened our footprint in two of the world's high-growth economies, China and India. London Stock Exchange is the only international exchange outside Greater China that has bond listings from all four major Chinese banks as well as the China Development Bank and, in June 2016, we were honoured to be chosen as the venue for the listing of the first Chinese sovereign RMB bond to be issued outside of mainland China. In India, London Stock Exchange has the most comprehensive masala bonds offering of any major international exchange with the 33 masala bonds having raised the equivalent of around US$4.2 billion.

Sustainability

LSEG has supported investors and issuers in the transition to a low carbon and sustainable economy for over a decade, developing products and services in close collaboration with the market. FTSE Russell, in particular, has long been a pioneer in the development of ESG benchmarking tools. In June, FTSE Russell launched an advanced new data model that tracks companies generating green revenues, a critical component missing from investors' current sustainability models. The Low Carbon Economy (LCE) data model and accompanying Green Revenue Index Series complements FTSE Russell's existing benchmarks in this space, capturing managed exposure to companies engaged in the green transition on a country, regional or global basis. London Stock Exchange has been a leading innovator in the space of green bond issuance and was the first exchange to join the climate bonds initiative. There are currently 40 green bonds listed in London which have raised a combined US$10.5 billion across seven currencies and a diverse set of issuers. LSEG intends to continue broadening its offering and has launched a new Global Sustainable Investment Centre portal to bring together the Group's activities in this space.

Investment in growth and innovation

We continue to focus on investing for growth and on achieving the benefits of our integration projects from previous acquisitions through delivering the stated cost and revenue synergies from recent transactions.

FTSE Russell has continued to perform strongly in 2016 and we are already seeing positive results, ahead of schedule, from the integration of the two index businesses with new mandates, integrated sales systems and a growing global business. FTSE Russell indexes are used throughout the investment and trading value cycle and they are well positioned to capitalise, for example, on the rapid expansion of the ETF market. The global ETF market currently represents around US$3.5 trillion in assets under management and FTSE Russell's indexes are extensively being chosen as the benchmark for ETF issuers around the world. In November, we also announced the acquisition of Mergent Inc., a leading provider of business and financial information on public and private companies. The acquisition will support the growth of FTSE Russell's core index offering, supplying underlying data and analytics for the creation of a wide range of indexes.

In post trade, LCH launched its new portfolio margining service, LCH Spider, using the world's largest interest rate derivatives liquidity pool from SwapClear. LCH Spider allows users, on an Open Access basis, to maximise their margin offsets between OTC and listed derivatives and we have been pleased with member interest to date. In 2016, SwapClear saw a 25 per cent increase in clearing volumes, clearing a total US$666 trillion for its members and their clients. In addition, SwapClear compressed a record US$384 trillion in notional in 2016 as capital and balance sheet management continues to be a top priority for banks impacted by regulatory capital requirements. We have also seen members ramping up their clearing activity in LCH's broader OTC services with significant volume growth at its CDSClear and ForexClear services. The launch of LCH SwapAgent, due to go live later this year will deliver the improved standardisation, efficiency and simplicity that the non-cleared derivatives market has long been seeking.

Following the successful conclusion of the joint feasibility study between LSEG and the Shanghai Stock Exchange, it was confirmed, during the UK Government's Economic and Financial Dialogue (EFD) with the Government of China in November, that we would move to the next phase of researching and preparing implementation arrangements for the London-Shanghai Stock Connect. This is a long term project which will help domestic and international investors access markets and is a key part of the strategic partnership between our two exchanges.

Proposed Merger

The Group has worked hard on our proposed merger with Deutsche Börse, which received formal approval from both sets of shareholders. This would be an industry-defining combination, expanding our presence as a global markets infrastructure group, anchored in Europe and we firmly believe that it would deliver significant customer and shareholder benefits through the acceleration of our complementary growth strategies, products, services and geographic footprint. The next milestone is expected to be the outcome of European Commission Phase II process on or before 3 April 2017.

Outlook

One of the key events in 2016 was undoubtedly the vote by the citizens of the UK to leave the European Union. For LSEG, the immediate challenge presented by the vote was to ensure we maintained secure and stable markets for our customers, however volatile the conditions. We met this challenge admirably - across all of our markets and clearing houses - and I would like to offer my congratulations to everyone across the Group who was involved in delivering such seamless continuity. Of course, the more profound consequences of the UK Referendum will take much longer to work themselves out. However, as a well diversified Group with a global footprint, we are well positioned to adapt as needed and, most importantly, to follow and continue to serve our customers as they make decisions about their business.

We remain focused on delivering innovation, partnership and Open Access to our customers and value for our shareholders. The Group is strongly positioned and our commitment to partnering with customers and our Open Access philosophy means that the Group will be able to take full advantage of the MiFID II implementation from January next year. The new rules will deliver greater choice and competition to European financial markets and we are working closely with market participants to ensure a smooth transition. We continue to see opportunities for growth across all of our market-leading businesses and the Group will execute against its strategic objectives, driving both short and longer term growth through organic investment and selective inorganic opportunities.

Financial review

The financial review covers the financial year ended 31 December 2016.

Commentary on performance uses variances on a continuing organic and constant currency basis, unless otherwise stated. Constant currency is calculated by rebasing 2015 at 2016 foreign exchange rates. Sub-segmentation of revenues are unaudited and are shown to assist the understanding of performance.

Disclosure is provided for cost of sales which mainly comprise data and licence fees, data feed costs, expenses incurred in respect of revenue share 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

On a reported basis:

· Total income of £2,047.9 million (2015: £2,381.5 million) decreased by 14%, and total revenue of £1,905.1 million (2015: £2,285.4 million) decreased by 17%. Adjusted operating expenses* of £954.3 million (2015: £1,052.0 million) decreased by 9%

· Adjusted operating profit* of £713.6 million (2015: £709.6 million) increased by 1%

· Operating profit of £530.0 million (2015: £499.9 million) increased by 6%

· Adjusted basic earnings per share* of 129.7 pence (2015: 129.4 pence) was flat

· Cash generated from operations of £598.3 million (2015: £670.4 million) decreased 11%

· Year end operating net debt to adjusted EBITDA* at 1.1 times (2015: 1.7 times), within the Group's normal target range of 1-2 times

On a continuing basis:

· Total income of £1,657.1 million (2015: £1,418.6 million) increased by 17% and total revenue of £1,515.6 million (2015: £1,324.7 million) increased by 14%

· Adjusted operating profit* of £685.8 million (2015: £584.7 million) increased by 17%

· Operating profit of £426.8 million (2015: £404.4 million) increased by 6%

· Adjusted basic earnings per share* of 124.7 pence (2015: 103.4 pence) increased by 21%

· Basic earnings per share of 63.8 pence (2015: 74.8 pence) decreased by 15%

David Warren

Group Chief Financial Officer

* 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 profit, adjusted profit before tax and adjusted earnings per share all exclude amortisation and impairment of purchased intangibles assets and goodwill and non-recurring items. The non-recurring items for this year are larger than in previous years and the increase is primarily driven by transaction costs of £85.4 million and a loss after tax of £88.2 million relating to the disposal of the Russell Investment Management business.

1. Before amortisation of purchased intangible assets and non-recurring items.

2. Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF

1Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF.

2Operating 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 revenue, which mainly comprises Primary and Secondary Market activities, was £368.3 million (2015: £330.3 million).

Capital Markets revenue increased by 6% driven by strong Secondary Markets trading and robust Primary Markets performance. Continued strong equity trading volumes and value traded resulted in a 12% increase in equity trading revenue. Primary Markets revenues were in line with prior year on a constant currency basis despite the uncertainty created from the UK referendum, which led to a reduction in Main Market issuances.

In Primary Markets, the total amount of capital raised across our markets, both through new and further issues, decreased by 39% to £25.6 billion (2015: £41.7 billion). New issues for the UK Main Market decreased whilst there was an increase in UK AIM listings. In total there were 51 issues on our UK Main Market (2015: 88), 19 in Italy (2015: 27) whilst there were 64 on AIM (2015: 61). Looking ahead, the pipeline of companies looking to join our markets remains promising.

In Secondary Markets, Italian equity trading volumes increased by 5% due to market volatility to 295,000 trades per day (2015: 280,000). In the UK, average order book daily value traded rose by 4% at £5.1 billion (2015: £4.9 billion). Trading on Turquoise, our pan-European equities platform, delivered a 26% rise in average daily equity value traded, to €5.4 billion (2015: €4.3 billion).

Fixed income and Derivatives revenue was relatively unchanged reflecting a 10% increase in derivatives volumes, with growth mostly in Italian derivatives. This was offset by declines of MTS Cash and BondVision notional value by 3%, MTS Repo declined by 5%.

Cost of sales rose by 49% on strong Turquoise revenues with gross profit up by 4%.

Operating expenses increased by 17% on a year on year basis to £169.0 million (2015: £144.3 million) with the main driver being foreign exchange movements from a weakening in Sterling relative to the Euro.

Operating profit increased by 3% to £176.8 million (2015: £170.9 million).

1Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF.

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.

Post Trade Services income, which comprises of clearing (CC&G), settlement and custody activities (both Monte Titoli), was £146.3 million excluding inter-segmental income (2015: £119.1 million).

Clearing revenues decreased by 1% influenced by a fall in fails fees after European T2S settlement system go-live. Excluding fail fees, clearing revenues were favourable to prior year by 7% reflecting higher derivatives and equity clearing volumes. Settlement, custody and other revenues increased by 5% in the Monte Titoli business, mainly due to custody revenues following the pricing change applied from May.

CC&G generates net treasury income by investing the cash margin held, retaining any surplus or deficit after members are paid a return on their cash collateral contributions. Net treasury income increased by 29% benefitting from favourable spreads driving income in 2016. The average daily initial margin at €12.1 billion is substantially in line with 2015 (€12.3 billion).

Cost of sales rose by 68% as a result of a full year of Monte Titoli using the T2S settlement system with gross profit up by 6%.

Operating expenses increased by 33% with the main drivers being foreign exchange movements from a weakening in Sterling relative to the Euro and some specific technology assets impairment related to globeSettle (gS) of £7.8 million.

Operating profit increased by 1% to £52.4 million (2015: £51.8 million).

Post Trade Services - LCH

1Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF.

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.

Post Trade Services - LCH comprises the Group's majority owned global clearing business. Total income was £447.1 million (2015: £360.7 million).

OTC clearing revenue was £190.6 million with growth of 16% driven by continued strong growth in SwapClear, predominantly in client clearing with trade volume increasing by 40% to 952,000 (2015: 678,000). SwapClear membership increased to 107, after adjusting for the cessation of the US membership category (2015 comparable members 101, which is 116 including 15 US memberships).

Non-OTC clearing revenue decreased by 8%. Competitive forces in equities and derivative markets saw a 5% decline in revenues. Fixed income revenue was stable year on year following the favourable impact to clearing volumes as a result of leverage ratio rules for customers under Basel III, which offset the general volume decline in these markets.

Other revenue grew by 59% through increased non cash collateral fees and compression in SwapClear with a 17% increase to US$384 trillion compressed (2015: US $328 trillion). Compression increases the efficiency of portfolios which can lower regulatory capital requirements for customers.

Net treasury income increased by 29% to £82.2 million through an increase in average cash collateral held of 18% driven by growth in SwapClear.

Cost of sales increased 89% mainly due to growth in SwapClear and the associated increase in share of surplus which includes all income streams. However, gross profit increased by 9% to £391.3 million.

Operating expenses increased by 11% with the main driver being foreign exchange movements from a weakening in Sterling relative to the Euro, and higher depreciation from investment to support growth.

Operating profit increased by 36% to £123.5 million (2015: £90.9 million).

1Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF.

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. Information Services revenue was £594.7 million (2015: £517.4 million).

FTSE Russell's revenue increased by 7% driven by strong subscriptions and data sales, growth in index based products, and supported by continued high subscription renewal rates. Annual run rate revenue synergies following the 2014 acquisition of Frank Russell Company of US$30m are being targeted by the end of 2017 and are on track to be achieved ahead of schedule.

Real time data revenue increased by 7% year on year due to a focus on enterprise licensing and increased use of non-display applications, whilst the number of terminals decreased by 3% to 200,000 (2015: 207,000).

Other Information Services revenues rose by 6% mainly as a result of continued growth of both UnaVista, driven by continued user base expansion for regulatory reporting, trade confirmations and reconciliations, and SEDOL from continued licence growth.

Cost of sales rose by 15% mainly as a result of increased data charges and partnership costs, both related to growth in FTSE Russell revenues. Gross profit rose in line with revenue growth at 6%.

Operating expenses of £204.5 million (2015: £201.4 million) were broadly flat year on year with cost synergies relating to the integration of Frank Russell Company partially offset by investment to support growing revenues and foreign exchange movements from a weakening in Sterling relative to the US Dollar.

Operating profit rose by 24% to £335.8 million (2015: £270.6 million), driven largely by FTSE Russell.

1 Organic growth is calculated in respect of businesses owned for at least 12 months in either period and so excludes Exactpro, Proquote, Russell Investment Management, SwapMatch and XTF.

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.

Technology Services provides hosting solutions, client connectivity and software products for the Group and third parties. Third party revenue increased by 4% to £88.3 million driven by growth across the solutions offered.

Cost of sales decreased by 6% and combined with the strong revenue performance drove a gross profit increase of 11%.

Operating expenses increased by 8% to £63.6 million (2015: £58.8 million) driven by the centralisation of IT services into a shared services centre to drive operational efficiencies. In addition, there were set up costs related to the acquisition of Exactpro, continued Group technology investment and foreign exchange movements from a weakening in Sterling relative to the Euro.

Operating profit was up by 100% to £12.8 million (2015: £6.4 million).

Operating Expenses (Continuing Operations)

On a continuing basis Group operating expenses before amortisation of purchased intangible assets and non-recurring items were £791.6 million (2015: £708.4 million).

Operating expenses increased by 4% on an organic, constant currency basis. Net underlying costs, excluding inflation and the one-off impairment of specific technology assets relating to globeSettle, were up 1%. This reflects increases in expenditure, including depreciation, from investing in revenue-supporting projects, and preparing for regulatory change partially offset by achievement of cost synergies following the Frank Russell acquisition and LCH initiatives (which amounted to £36 million in 2016). The Group's underlying operating expenses, including depreciation and amortisation, are expected to rise slightly in the next year as we continue investment in a number of products and services that will drive further growth and improve operating efficiencies.

Discontinued Operations

Discontinued operations comprises the Russell Investment Management business and contributed adjusted operating profit of £27.8 million to the Group, before it was sold on 31 May 2016.

Non-Recurring Items and Purchased Intangible Assets

Additional charges included £85.4 million of merger and acquisition-related costs, £13.8 million of restructuring costs and £3.2 million of integration costs. There was also a loss after tax of £88.2 million relating to the disposal of the Russell Investment Management business.

Finance Income and Expense and Taxation

Net finance costs were £62.7 million, down £5.6 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 22.5% (2015: 24.0%). 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. Removing the prior year impact would give an underlying continuing ETR of 22.3%.

The UK tax rate is due to fall to 19% from 1 April 2017 to 17% in 2020 which we would expect to impact overall ETR in due course. The contribution of continued underlying operations in the US towards the ETR was stable in the period, however, there are uncertainties with regard to the future contribution of US continued underlying operations to ETR. This is due to potential changes to the US tax system to be proposed by the new US administration as well as changes proposed to existing US double tax treaties which have not yet come into force.

Cash Flow and Balance Sheet

The Group's business continued to be strongly cash generative during the year, with cash generated from operations of £598.3 million (2015: £670.4 million). Total cash inflow from investing activities in the year was £243.1 million (2015 outflow: £86.0 million) principally due to £409.1 million from the sale of the Russell Investment Management business, partially offset by £145.8 million of capital expenditure (2015: £117.3 million).

At 31 December 2016, the Group had net assets of £3,613.7 million (2015: £3,196.1 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.

At 31 December 2016, the Group had operating net debt of £882.1 million after setting aside £847.6 million of cash and cash equivalents held to support regulatory and operational requirements, including regulated cash and cash equivalents at LCH Group together with further amounts covering requirements at other LSEG companies.

The Group's gross borrowings decreased by £443.0 million during the period to 31 December 2016, with the proceeds of the Russell Investment Management disposal and free cash generated by the Group during the year (after capex, taxes, interest and dividends), applied to repay the 2006 10 year £250 million bond in July 2016 and reduce short dated bank borrowings.

In November 2016, the Group extended the £600 million unsecured, revolving, syndicated bank facility it had arranged in 2015, taking further advantage of favourable market conditions to extend the maturity profile of its debt and provide comfortable headroom for the medium term. The new facility is committed through to November 2021. The Group also took the opportunity to extend its other £600 million syndicated facility by 12 months to 25 June 2017 to provide additional financial flexibility in the short term. At 31 December 2016, the Group had debt and committed credit lines totalling £1,920.5 million, with maturities extending from May 2017 out to 2021. With over £700 million of undrawn bank lines available, together with strong cash generation and improving credit metrics (described below), the Group continues to be well positioned to fund future growth, with scope for further refinancing in 2017 to underpin its longer term debt capital positioning.

The Group's interest cover, the coverage of net finance expense by EBITDA (consolidated earnings before net finance charges, taxation, impairment, depreciation and amortisation, foreign exchange gains or losses and non-recurring items), increased to 13.0 times (31 December 2015: 11.7 times) in the 12 months to 31 December 2016. This was driven primarily by lower interest costs due to an overall reduction of debt and the repayment of the 2006 10 year £250 million bond in July with relatively low cost bank facilities. The Group's organic cash generation remained strong with leverage (operating net debt to EBITDA updated to account for the EBITDA of acquisitions or disposals undertaken in the period) reducing to 1.1 times at 31 December 2016 (31 December 2015: 1.7 times). The Group benefitted from the proceeds from the disposal of the Russell Investment Management business in the first half of the year and leverage now stands well within the targeted range.

The Group's long-term credit rating with both Moody's and S&P remained unchanged during the year, but improved outlooks from both agencies reflect the positive sentiment towards the Group derived from the Deutsche Börse AG merger announcement and the achievement of its leverage targets. Moody's maintained LSEG at Baa1 and changed its outlook from stable to positive. S&P kept its BBB+ rating unchanged and placed the Group on credit watch positive. For LCH, S&P maintained its A+ long term rating but moved the outlook from stable to credit watch negative with the potential outcome limited to a one notch downgrade subject to possible implications for that business should the merger proceed.

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 2016, for continuing operations, the main exposures for the Group were its European based Euro reporting businesses and its US based operations, principally FTSE Russell. A 10 Euro cent movement in the average £/€ rate for the year and a 10 cent movement in the average £/$ rate for the year would have changed the Group's continuing operating profit for the year before amortisation of purchased intangible assets and non-recurring items by approximately £25 million and £16 million, respectively.

The Group continues to manage its translation risk exposure by matching the currency of its debt (including debt effectively swapped from Sterling into currency) 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-recurring items, of 129.7 pence (2015: 129.4 pence). Basic earnings per share were 43.5 pence, a decrease of 54% (2015: 94.6 pence). The non-recurring items for this year are larger than in previous years and the increase is primarily driven by transaction costs of £85.4 million and a loss after tax of £88.2 million relating to the disposal of the Russell Investment Management business.

Dividend

The Board is proposing a final dividend of 31.2 pence per share, which together with the interim dividend of 12.0 pence per share paid to shareholders in September 2016, results in a 20% increase in the total dividend to 43.2 pence per share. The final dividend will be paid on 31 May 2017 to shareholders on the register as at 5 May 2017.

In addition, reflecting agreement as part of the proposed merger with Deutsche Börse AG, LSEG shareholders are entitled to receive a special dividend of 58.2 pence per share, which is an equalising payment to reflect the value attributable based on the proposed payment of a dividend by Deutsche Börse to its shareholders. The payment of the special dividend is contingent on completion of the merger of LSEG and Deutsche Börse AG, and will be paid to LSEG shareholders on the register at the earlier of 30 June 2017 and close of business on the date prior to closing.

FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT of comprehensive income

CONSOLIDATED balance sheet

consolidated cash flow statement

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