LSE.L Regulatory News (LSE)

3 August 2017

LONDON STOCK EXCHANGE GROUP PLC

INTERIM RESULTS FOR THE 6 MONTHS ENDED 30 JUNE 2017

Unless otherwise stated, all figures below refer to continuing operations1 for the six months ended 30 June 2017. Comparative figures are for continuing operations for the six months ended 30 June 2016 (H1 2016).

· Strong financial performance with income growth across all business areas and 23% AEPS growth

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

H1 2017 Highlights

· Continued strong financial performance with income growth across core business areas - in particular, in Information Services, including strong results at FTSE Russell, and OTC clearing at LCH

· Revenue up 18% to £853 million (H1 2016: £722 million); total income up 20% to £946 million (H1 2016: £786 million)

· Adjusted operating profit2 up 20% at £398 million (H1 2016: £333 million), with underlying operating expenses on an organic and constant currency basis up 5% as the Group continues to invest in growth and efficiencies

· On a reported basis: operating profit of £305 million (H1 2016: £199 million); profit before tax up 69% to £277 million (H1 2016: £164 million); profit after tax of £208 million (H1 2016: £114 million) and £186 million including discontinued operations (H1 2016: loss of £16 million)

· Adjusted EPS2 up 23% at 71.2 pence (H1 2016: 57.7 pence); basic EPS up 84% to 50.4 pence (H1 2016: 27.4 pence)

· Interim dividend increased 20% to 14.4 pence per share (H1 2016: 12.0 pence per share) in line with our stated dividend policy; £200 million share buyback ongoing

· Strong balance sheet position with leverage of 1.2 times adjusted pro forma net debt:EBITDA, notwithstanding continued investment spend, acquisition of Mergent and ongoing share buybacks

· Announced acquisition of The Yield Book and Citi Fixed Income Indices, including the World Government Bond Index, for total cash consideration of $685 million (£535 million)

· Investor Update event in June highlighted the good progress in executing our strategy, with new information on targeted revenue growth and continued cost control - expected to deliver further improvement to operating leverage, delivering enhanced operating margins and shareholder value

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

"The Group has produced a strong financial performance, with good income growth across all of our core business areas. FTSE Russell and LCH OTC clearing services performed strongly, with double-digit growth at both businesses.

"As well as continuing to deliver organic growth, during the period we announced the acquisition of The Yield Book and Citi Fixed Income Indices business. At our Investor Update in June, we set out targets for further strong financial performance, based on continued execution of our successful growth strategy. The Group remains well placed, diversified both by business activity and by geography. Our Open Access approach and strong customer partnerships also position us well for the implementation of MiFID II, starting in just over 20 weeks' time."

1 continuing operations exclude business sold, being Russell Investment Management

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

Organic growth is calculated in respect of businesses owned for at least 6 months in either period and so excludes ISPS, Mergent, SwapMatch and Russell Investment Management. The Group's principal foreign exchange exposure arises from translating our European based Euro and US based USD reporting businesses into Sterling.

Further information is available from:

Additional information on London Stock Exchange Group can be found at www.lseg.com

The Group will host a conference call of its Interim Results for analysts and institutional shareholders today at 08:30am. On the call will be Xavier Rolet (CEO), David Warren (CFO) and Paul Froud (Head of Investor Relations).

To access the telephone conference call dial 0800 694 0257 or +44 (0) 1452 555 566

Conference ID: 5665 0921

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

Chief Executive's Statement

Overview

The Group has delivered a strong H1 2017 performance as we continue to execute successfully on our strategy, further developing our position as a global, open access market infrastructure business. We launched new products, including the SwapAgent service at LCH for uncleared products and the International Securities Market, a market for primary debt issuance, in London. During the period we completed the acquisition of Mergent, a US-based data and analytics business, and announced the acquisition of The Yieldbook and Citi Index business from Citi, which will strengthen our index and data capabilities in fixed income products. Although the planned merger with Deutsche Börse was not successful, in June we set out clear plans for continued growth in our core business lines and provided targets for further financial improvements over the next two years.

The Group's results reflect strong top line growth in both the Information Services division and at LCH. FTSE Russell delivered a double-digit increase in revenue and Mergent provided additional contribution as it was integrated into the business. At LCH, the OTC clearing services produced another strong performance, with further growth in the established SwapClear business, as well as notable pick-up in CDS and Forex clearing operations. In Capital Markets, the Primary markets businesses showed good progress with an increase in the number of new issues and money raised. Against strong comparatives and challenging trading conditions, Secondary markets saw lower year-on-year trading levels and a small reduction in underlying revenues. Similarly, clearing activity in our Italian post trade businesses reflected the lower trading volumes, offset by stronger settlement, custody and net treasury income.

Underlying operating costs (on an organic and constant currency basis, and excluding cost of sales) increased by 5%. We are benefitting from ongoing cost savings and integration efficiencies, while also continuing to invest in growth opportunities as well as Group infrastructure as our size and geographic scale increases. As we set out at our Investor Update in June, we are confident of delivering further cost savings and holding cost increases to an average of just 4% until the end of 2019.

Our balance sheet remains strong, notwithstanding the investments during the period, as well as the commencement of a £200 million share buyback programme. In line with the Group's progressive dividend policy, we have increased the interim dividend by 20%, to 14.4 pence per share.

Key developments over the period are highlighted below:

- LSEG to acquire The Yield Book and Citi Fixed Income Indices

- The Government Pension Investment Fund of Japan - the largest pension fund in the world with over $1.3 trillion in assets - selected the new FTSE Blossom Japan index as a core ESG benchmark through its flagship fund. The index is constructed using FTSE Russell's ESG Ratings data model

- Launch of LCH SwapAgent, a service designed to simplify the processing, margining and settlement of non-cleared derivatives

- CDSClear launched client clearing

- LCH SA commenced repo clearing on German debt

- International Securities Market, a market for primary debt issuance, launched in London

- AIM reached £100 billion capital raised since launch, of which 60% has been through further issues by existing companies

- ELITE reached more than 600 companies from 25 countries and, in July, announced partnerships with CDP and NUO to help further expand its offering globally

- 1,000 Companies to Inspire Britain 2017 report issued

- LSEG ESG Reporting Guidance published, responding to demand from investors for a more consistent approach to ESG reporting

Further commentary on the Group's performance from continuing operations in the six month period is provided below.

Operational Performance

Revenue for Information Services, the Group's largest business segment, increased 24% to £355 million (up 13% on an organic constant currency basis). This result reflects the continued strong performance by FTSE Russell, with revenue up 16% on an organic constant currency basis to £261 million, as well as the first time contribution of £15 million from Mergent, the US data business acquired at the start of the year. In addition, revenue from real time data increased 3% while other information services grew 8%, both on an organic constant currency basis. Cost of sales on an organic constant currency basis rose 9%, with 13% growth in gross profit on an equivalent basis at £325 million.

Total income for Post Trade Services - LCH, the Group's majority-owned global clearing business, rose 31% to £270 million (up 22% at constant currency). OTC clearing revenue increased 19% on a constant currency basis, driven by another strong performance at SwapClear. As well as a 35% increase in IRS notional cleared, the principal drivers of this growth were a 33% rise in clearing of client trades and further growth in compression services, with $312 trillion compressed in H1 (H1 2016: $178 trillion). There was good progress also at both the CDSClear and ForexClear services, with member numbers up 18% and 17% respectively, and uplift in the notional value cleared by both businesses.

Non-OTC products clearing revenue rose 14% (up 5% at constant currency). Cash equities clearing volume increased 21%, while the Fixed Income and Derivative services recorded 23% and 9% growth respectively in volumes cleared. LCH net treasury income increased 45% at constant currency, with an increase in average cash collateral, up 41% to €86.5 billion, driven in large part by the growth in IRS client clearing. Cost of sales for LCH rose 58% in constant currency terms, mainly reflecting the share arrangements across a number of the clearing services, with a resulting 17% increase in gross profit on a constant currency basis, at £230 million.

Total income for Post Trade Services in Italy, comprising CC&G and Monte Titoli, increased 8% to £74 million (down 2% at constant currency). Cost of sales increased 47% (charges for using the T2S service), while gross profit rose 5% to £66 million (down 5% at constant currency). Clearing revenue was flat on a reported basis (declined 10% at constant currency), reflecting lower clearing volumes in Italian equities, derivatives and fixed income markets. Settlement and custody revenue rose 27% (up 15% at constant currency) principally reflecting a small increase in settlement instructions and assets under custody up 2% to €3.24 trillion. Treasury income reduced 16% on a constant currency basis to £19 million, reflecting lower spreads over the period.

Capital Markets increased H1 revenue by 4% while cost of sales reduced by 23% following a lower contribution from Turquoise, resulting in a 6% increase in gross profit to £181 million (in constant currency terms, revenue was 1% lower while gross profit rose 1%). In primary markets revenue rose 8%, in part reflecting an increase in number of new issues to 84 in the first half of the year (H1 2016: 74), plus growth in UK and Italian money raised, to £23.8 billion raised (H1 2016: £11.8 billion).

In secondary markets, equities trading revenue increased 1% (down 2% in constant currency), reflecting lower trading levels at Turquoise and at Borsa Italiana, partly offset by a 7% rise in UK value traded. Fixed income and derivatives trading revenue increased 7% (down 3% at organic constant currency), with a 14% decline in derivatives volumes and a 7% reduction in repo and cash trading at MTS.

Technology Services revenue increased 8% (flat on an organic and constant currency basis), to £41 million.

Financial Summary

Unless otherwise stated, all figures below refer to continuing operations for the six months ended 30 June 2017. Comparative figures are for continuing operations for the six months ended 30 June 2016 (H1 2016). Variances are also provided on an organic and constant currency basis.

1 Organic growth is calculated in respect of businesses owned for at least 6 months in either period and so excludes ISPS, Mergent, SwapMatch and Russell Investment Management. The Group's principal foreign exchange exposure arises from translating our European based Euro and US based USD reporting businesses into Sterling.

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

The Group has performed well. Revenue increased 18% to £853 million (H1 2016: £722 million), and up 10% on an organic and constant currency basis. As described in the operational performance section above, all core business segments reported headline year-on-year increases, with strong contributions from LCH and Information Services. Total income rose 20% to £946 million (H1 2016: £786 million), including a one-off gain of £6.6 million for disposal of a non-core asset, and up 12% on an organic and constant currency basis. Cost of sales increased 22% in underlying terms to £102 million, (up 32% as reported) primarily as a result of the growth in LCH and FTSE Russell, with gross profit increasing 19% to £844 million.

Operating expenses rose by 5% on an organic and constant currency basis and excluding cost of sales. On a headline basis, costs excluding depreciation and amortisation were 18% higher at £399 million (H1 2016: £337 million), which includes one-off foreign exchange items of £11 million reflecting the closing out of balance sheet positions (mainly related to the Russell Investment Management disposal) and £6 million relating to one-off minor restructurings and other expenses. We remain in a period of heightened investment in organic growth and efficiency projects as we build up Group infrastructure on an increasingly international basis. Depreciation at £46 million is 28% higher than last year, reflecting investments across the Group over the past year.

Adjusted operating profit for the period, before amortisation of purchased intangible assets and non-recurring items, increased 20% to £398 million (H1 2016: £333 million). Operating profit was £305 million (H1 2016: £199 million).

Net finance costs were £28 million (H1 2016: £35 million) following the redemption of a £250 million bond last year and €180 million Preferred Securities at LCH in May 2017. Profit before tax was £277 million (H1 2016: £164 million). The underlying effective Group tax rate for the period was 23.8%, slightly higher, as expected, than the rate for the year ended 31 December 2016 (22.3%).

Adjusted basic EPS, before amortisation of purchased intangible assets and non-recurring items, increased 23% to 71.2 pence (H1 2016: 57.7 pence) while basic EPS was 50.4 pence (H1 2016: 27.4 pence).

On a reported basis, including discontinued operations (principally relating to Russell Investment Management, which was sold 1 June 2016), profit after tax was £186 million (H1 2016: £(16) million), with basic earnings per share of 44.1 pence (H1 2016: basic loss per share of 10.4 pence).

Net cash inflow from operating activities was £275 million (H1 2016: £28 million), the increase reflecting stronger cash generation as well as lower comparative tax payments which last year included a gain on sale of Russell Investment Management. Capital expenditure in the period amounted to £88 million, excluding £5 million proceeds on disposals (H1 2016: £57 million). Looking ahead, we expect capex to run at a slightly higher level in H2 as we continue to invest in further product development and projects to help scale-up our business. Net cash generated after capex, other investing activities (excluding Mergent acquisition) and dividends, was £79 million (H1 2016: £276 million, including Russell Investment Management proceeds and tax paid). Free cash flow per share on the same basis was 59.4p pence (30 June 2016: 107.7 pence).

Committed, undrawn credit lines available for Group purposes at 30 June 2017 totalled over £1 billion, extending out to 2021. During the period, the Group took the opportunity to extend its £600 million revolving credit facilities to increase financial flexibility. It also arranged a $750 million committed, revolving credit line on similar terms to comfortably accommodate the funding requirements related to the acquisition of the Citi Yield Book and Fixed Income Indices businesses which is on track to close in H2 2017. The Group will continue to explore its refinancing options as it moves through 2017, taking opportunities that present themselves to underpin the debt capital structure of the Group.

At 30 June 2017, adjusted net debt had increased to £1,005 million (after setting aside £843 million of cash for regulatory and operational support purposes). The increase was primarily driven by the acquisition of Mergent at the start of the period, redemption in full of the LCH Group Preferred Securities and the buying back of its own shares by LSEG under the £200m programme, announced at the end of March 2017. Adjusted pro forma net debt: EBITDA increased as a result to 1.2 times (from 1.1 times at 31 December 2016), reflecting the continued strong organic cash generation during the period. On a pro forma basis with the inclusion of the proposed acquisition of The Yield Book and Citi Fixed Income Indices, for total cash consideration of $685 million (£535 million), net debt:EBITDA is 1.8 times.

During the period, Standard & Poor's upgraded its long term rating of LSEG to A- with a stable outlook and withdrew the rating of LCH Group at that issuer's request following the redemption of its securities noted above. Moody's upgraded LSEG in July, to an A3 rating with a stable outlook.

The Group had net assets of £3,507 million at 30 June 2017 (31 December 2016: £3,614 million), including £1,170 million in cash and cash equivalents (31 December 2016: £1,151 million).

The Group's principal foreign exchange exposure arises as a result of translating and revaluing its foreign currency earnings, assets and liabilities into LSEG's reporting currency of Sterling. For the 6 months to 30 June 2017, for continuing operations, the main translation exposures for the Group were its Euro reporting businesses (accounting for c.33% of Group income and c.30% of Group expenses) and its US dollar reporting businesses (accounting for c.25% of income and c.16% of expenses). A 10 Euro cent movement in the average £/€ rate for the six months and a 10 cent movement in the average £/US$ rate for the six months would have changed the Group's operating profit for the period before amortisation of purchased intangible assets and non-recurring items by approximately £10 and £5 million in each event.

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.

Interim Dividend

In line with the Group's dividend policy, the interim dividend is calculated as one-third of the prior full year dividend. Accordingly, the Directors have declared an interim dividend of 14.4 pence per share, an increase of 20% (H1 2016: 12.0 pence per share). The interim dividend will be paid on 19 September 2017 to shareholders on the register on 25 August 2017.

Outlook

The Group has performed well in H1, with our core businesses continuing to grow and further investments made in new products and acquisitions. We expect to deliver increased shareholder returns and in June we set out targets for continued growth and improving financial performance, comprising the following:

FTSE Russell

· Continued double-digit revenue growth - 2017-2019

LCH

· Continued double-digit revenue growth in OTC clearing - 2017-2019

· Accelerating EBITDA margin growth - approaching 50% by 2019 (2016: 35.6%)

LSEG

· Group operating expenses held at c.4% p.a. increase 2017-2019 while Group continues to develop and deliver revenue growth

· Next phase cost saves of £50m p.a. - by exit 2019

· Group EBITDA margin c.55% by 2019 (2016: 46.5%)

The Group's global businesses are well positioned in a changing regulatory environment. New services and product innovation, diversification by business activity and geography, strong customer partnerships and operating a full range of open access market infrastructure services will support the achievement of our targets.

Xavier R Rolet KBE

Group Chief Executive

3 August 2017

Operating Performance - Key statistics

To assist investors in understanding the underlying performance of the Group, percentage changes are also presented on an organic constant currency basis.

Information Services

The Information Services division consists of global indices products, real time data products and a number of other discrete businesses including trade processing operations, desktop and work flow products.

1 Excludes Mergent from FTSE Russell Indexes and ISPS from Other information services

Post Trade Services - LCH

This LCH division principally comprises the Group's majority owned global clearing business.  

Post Trade Services - CC&G and Monte Titoli

This division comprises the Group's Italian-based clearing, settlement and custody businesses.  

Capital Markets

Capital Markets comprises the Group's primary markets activities, providing access to capital for corporates and others, and the secondary market trading of cash equities, derivatives and fixed income.

1 Excludes SwapMatch from Secondary Markets - Equities

Technology Services

Technology Services comprises technology connections and data centre services for clients of London Stock Exchange and Borsa Italiana, plus the MillenniumIT software business, based in Sri Lanka, which provides technology for the Group as well as third party sales and enterprise services.

Basis of Preparation

Results for the European and US businesses have been translated into Sterling using the exchange rates set out below. Constant currency growth rates have been calculated by translating prior period results at the average exchange rate for the current period.

Condensed CONSOLIDATED Income Statement

Condensed CONSOLIDATED STATEMENT of comprehensive income

Condensed CONSOLIDATED balance sheet

Condensed CONSOLIDATED cash flow statement

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.

Condensed CONSOLIDATED STATEMENT OF CHANGES IN EQUITY