TP ICAP Regulatory News (TCAP)

TP ICAP PLC

Financial and Interim Management Report - for the six months ended 30 June 2019

TP ICAP plc (the "Company") today announces its results for the six months ended 30 June 2019.

Financial highlights

Underlying (before acquisition, disposal and integration costs, and exceptional items)

·; Revenue of £922m (H1 2018: £910m)

·; Operating profit £158m (H1 2018: £155m)

·; Operating margin 17.1% (H1 2018: 17.0%)

·; Profit before tax £134m (H1 2018: £139m)

·; Basic EPS 19.3p (H1 2018: 19.2p)

Statutory (after acquisition, disposal and integration costs, and exceptional items)

·; Operating profit £107m (H1 2018: £50m)

·; Operating margin 11.6% (H1 2018: 5.5%)

·; Profit before tax £83m (H1 2018: £34m)

·; Basic EPS 11.8p (H1 2018: 2.3p)

A table showing Underlying and Statutory figures for each period, detailing the acquisition, disposal and integration costs, and exceptional items is included in the Financial review. H1 2019 figures include the impact of IFRS16, which are outlined in Note 2(d).

The average number of shares used for the basic EPS calculation for the period is 560m.

Operational performance

·; A resilient performance reflecting the benefit of a diversified business portfolio and cost discipline

·; Global Broking revenue fell 6% at constant exchange rates, against a backdrop of double digit revenue declines by our largest customers

·; Energy & Commodities revenue increased by 8% at constant exchange rates benefitting from acquisitions and team hires in 2018 and more favourable market conditions in power and gas

·; Strong revenue growth of 28% in Institutional Services which has benefitted from structural market changes and new hires

·; Data & Analytics revenue continues to grow at 12% reflecting new product launches, new clients and expanding existing client relationships

·; Integration programme on track for targeted annualised synergy savings of £75m by the end of 2019

Strategic highlights

·; Further electronification of services to enhance our broking capabilities and meet clients' evolving needs

·; Aggregation of liquidity across brands and products to give clients clearer access to best pricing and simpler workflows

·; Diversification of our customer base, range of services and geographic profile

·; Enhancing the links between our business divisions to maximise the Company's potential

Dividend

A 5.6p per share interim dividend (2018: 5.6p) will be paid on 8 November 2019 to shareholders on the register at close of business on 4 October 2019.

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Nicolas Breteau, CEO of TP ICAP plc, said:

"We have delivered a resilient performance and maintained our operating margins despite a decline in trading amongst the investment banks, and additional costs driven by increasing regulation and Brexit. At the same time we have stepped up investment in a range of new initiatives to improve client service and to promote greater hybrid and electronic trading.

As we enter the final six months of the integration program, we will achieve the £75m of synergy savings and deliver the benefits derived from offering access to the deepest OTC liquidity pools for wholesale trading alongside high levels of client service. 

During my first year as CEO, I have focused the business in those areas where we provide the greatest value to our clients and have the greatest competitive advantage. We have also made considerable organisational changes, made good progress on integration, are implementing an improved risk management framework and simplifying our legal entity structure.

We have made considerable progress on our strategic planning for growth from 2020 onwards in. Our budgeting and plans for this are underway and we will update the market in the New Year."

Forward looking statements

This document contains forward looking statements with respect to the financial condition, results and business of the Company. By their nature, forward looking statements involve risk and uncertainty and there may be subsequent variations to estimates. The Company's actual future results may differ materially from the results expressed or implied in these forward looking statements.

Enquiries:

Analysts and Investors

Robin Stewart, CFO

Direct: +44 ﴾0﴿20 7200 7603

email: robin.stewart@tpicap.com

Media

William Baldwin-Charles, Group Media Relations Director

Direct: +44 ﴾0﴿7834 524833

email: William.Baldwin-Charles@tpicap.com

Eilis Murphy

Brunswick Group LLP

Direct: +44 ﴾0﴿20 7404 5959

email: tpicap@brunswickgroup.com 

Further information on the Company and its activities is available on the Company's website: www.tpicap.com

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CEO review

My focus during the first six months of this year has been on building the platform from which we can deliver good returns for our shareholders. We have made good progress: we are nearing the end of the integration of Tullett Prebon and ICAP which will be completed by the year end and achieve our targeted synergies of £75m; we are deep into the process of implementing a new risk management framework; we are fully prepared for Brexit; and we have continued to strengthen management capability within the Company.

At the same time, we have made considerable progress on our strategic planning for long-term growth from 2020 onwards. Our budgeting and plans for this are underway and we will update the market on the content of these in 2020.

Financial performance

The Company delivered a resilient performance in the first half of 2019. Market conditions have been challenging for our Global Broking division, particularly given the decline in trading amongst our investment banking customers, but our strategic emphasis on diversification has resulted in strong growth in our other business divisions.

Revenue fell by 2% on a constant exchange rate basis to £922m and is up 1% on a reported basis. We achieved an underlying operating profit of £158m, an increase of 2% on the £155m reported for H1 2018. Our underlying operating profit margin of 17.1% was slightly higher than the 17.0% margin reported at H1 2018 and we reported an underlying profit before tax of £134m, down 4% from £139m. Statutory operating profit was £107m, up 114% on the prior year, with an operating profit margin of 11.6% (2018: 5.5%) and statutory profit before tax of £83m was £49m higher than reported in 2018.

Basic underlying earnings per share ("EPS") were 19.3 pence (basic statutory EPS 11.8p) and we are paying a dividend of 5.6 pence per share for the half year, in line with our previously stated guidance.

Regional performance

Revenue for the EMEA region was £458m, down 3% on the prior year comparative at constant exchange rates. Global Broking revenue in the region was down 7%, reflecting a decrease in revenue across all asset classes. The Americas reported revenue of £340m, in line with the prior year at constant exchange rates, with strong growth in Energy & Commodities and Institutional Services. In Asia Pacific, a 2% decline to £124m at constant exchange rates, reflected the difficult conditions in Global Broking, partially offset by strong growth in Energy & Commodities.

Our business divisions

We have continued to invest in our business through 2019. Last year we indicated that we had earmarked an additional £15m of investment to increase the hybrid and electronic business we conduct as well as to invest into our fast growing Data & Analytics (D&A) division. This extra investment is being used to: improve pre-trade client connectivity to our electronic platforms; develop our Nova matching engine to allow electronification of the credit and oil businesses; launch a non-deliverable forward (NDF) platform for Foreign Exchange (FX) in Asia; develop an electronic whiteboard and artificial intelligence (AI) programme in our Energy & Commodities business and invest in D&A to launch new products.

Diversification has also been a key priority for the business. This will continue as we look to serve the buy-side in all-to-all markets, maximise the value of our data and analytics and grow other non-broking revenue such as risk management and post-trade services.

We have placed a greater focus on collaboration between the four business divisions to capitalise on the clear connections between them and the divisions will increasingly look for opportunities to cross-sell.

Global Broking

Global Broking is our largest division covering Rates, Credit, Equities, Foreign Exchange & Money Markets, where we have market leading positions. We bring together buyers and sellers providing a range of professional intermediary services that enable them to execute trades successfully. We operate through Tullett Prebon and ICAP brands separately. We also offer clients a range of ways to interact with us - through voice, hybrid or electronically - depending on the nature of the market, product and transaction. One of our fundamental strengths is the long-established relationships we have with investment banks.

The conditions for the first six months of the year were challenging for our Global Broking business. Uncertainty created by Brexit, the softening of the US Federal Reserve's stance on interest rates and the potential for further quantitative easing in the Eurozone, have all impacted market volatility and volumes. The continuing low interest rate environment has also depressed activity in rates products, our largest asset class in Global Broking. Against this backdrop, we delivered a resilient performance, with revenues down 6% at £648m (H1 2018: £689m at constant exchange rates), as the major investment banks, our largest clients, reported a more significant drop in their trading performance for the first six months of the year.

To mitigate the tougher trading conditions, we are taking a number of actions to reduce both front and back office costs and will continue to maintain a focus on expenses without affecting our service to clients.

Despite the difficult market conditions there have also been areas of good performance and we continue to make progress in developing our hybrid and pure electronic business. Our key priorities remain aggregating liquidity from our competing brands; improving connectivity with our clients and delivering improved workflows for all products. For example:

·; In Rates, we successfully launched a hub for both brands in Singapore, Japan and Australia. The hub also provides an enhanced electronic workflow, making trade capture and Straight Through Processing (STP) seamless.

·; In Foreign Exchange, the recent launch of our Asian NDF platform provides global liquidity to clients from both our brands. Our foreign exchange options request for quote platform now has a majority of the large FX dealers electronically connected to provide auto pricing.

·; In Credit, we have successfully run pure electronic matching sessions and launched two new platforms in the US during the first half. One was a portfolio optimisation bond platform called Scrapbook and the other was Crosstrade, which enables asset management firms to transition bonds between funds.

·; Our post-trade services group is also performing well. In Matchbook, which helps clients mitigate their counterparty credit risk, we are seeing strong profit growth. Matchbook is being rolled out beyond its existing Rates and FX customer base to our Energy & Commodities division and we are increasing our collaboration with ClearCompress - a fintech company that provides a market leading compression service in cleared and uncleared interest rate swaps.

We will maintain this commitment to increase the electronification and innovation of our business to meet the changing demands of our clients.

Energy & Commodities

Energy & Commodities is our second largest division and operates through the Tullett Prebon, ICAP and PVM brands in all the key commodities markets including oil, gas, power, renewables, ferrous metals, base metals, precious metals, soft commodities and coal. Clients include regional banks, corporates, hedge funds and trading companies.

Revenues were up 8% at £187m for the half year on a constant exchange rate basis, as the business benefited from improved conditions in the power and gas markets, strategic hires and the acquisition of Axiom in November 2018. Oil revenues were slightly up despite challenging market conditions, with market uncertainty and localised over-supply creating downward pressure on oil volumes in the period. The diversity of products in the sector provides us with the potential to continue to expand our offering and revenue sources. In H1 2019 we added weather derivative and petrochemical broking and extended the activities of PVM from oil into gas and power in the US.

The energy and commodities broking industry is highly fragmented, particularly in the US. Following our global diversification strategy, we continued our approach of making bolt-on acquisitions with the purchase of Axiom and the hiring a new ICAP oil desk in H1 2019. These have been successfully integrated into our existing infrastructure. We have a core competency of successfully adding acquisitions and the incremental revenues to our existing business and believe there are further opportunities to do this.

We have continued to invest in new electronic solutions. For example, we have invested in an electronic whiteboard for our oil business, which is currently in live testing. The whiteboard enables the efficient capture of multiple data points from every client interaction. When fully deployed it will enable better sharing of liquidity across the desks, automatic calculation of spreads, and STP of executed trades. It will also feed through to the AI application which is currently being tested with a small number of users across the division. This AI application will equip our brokers with client-specific tailored analysis, with personalised feeds of news, pricing, historical patterns of activity and correlations, providing a better service to clients.

Today we announced a joint venture in China with Enmore Investment Group, called Enmore Commodity Brokers (Shanghai) Co. Ltd ("JV"). The JV will initially offer brokerage services in iron ore, coal, LPG and naphtha before expanding to other products over time. It will offer liquidity from three of our brands - Tullett Prebon, ICAP and PVM - to clients and vice versa. As part of the agreement, TP ICAP Data & Analytics has the exclusive right to distribute data from the JV internationally.

Institutional Services

Institutional Services provides trade ideas and agency execution to buy side clients including hedge funds, asset managers, and non-bank liquidity providers. The role of an agency brokerage is to offer the buy side access to the best price in the market from a wide range of different banks, whilst guaranteeing client anonymity and neutrality.

In our Institutional Services division, we achieved revenues of £23m in H1 2019, an increase of 28% over H1 2018 on a constant exchange rate basis. This growth has been achieved by initially focusing on products where we believe we can achieve early success - foreign exchange, listed derivatives, relative value execution and cleared interest rate swaps. There is strong momentum now in our offering, driven by a change in market dynamics as investment banks reorganise their sales coverage and reserve high touch services for their largest clients.

In addition, we also shifted our client focus from smaller players to top tier hedge funds. This change has created an opportunity for agency services that have expert people, a strong product offering and a global distribution network.

Through our core offering we are well positioned for growth and we are now expanding it by product and geography, in response to client demand. In September 2019 our new Foreign Exchange agency desk in Singapore will go live and we are also developing new offerings in credit and equity derivatives. We are actively recruiting to implement this strategy and this will be a main focus for the division in 2020.

Data & Analytics

Our Data & Analytics business provides unbiased data products that facilitate trading, enhance transparency, reduce risk and improve operational efficiency. It is the leading provider of OTC pricing data and has access to more OTC data than any other company globally. We have pricing, reference data and analytical tools for major asset classes and markets. We pride ourselves on our rigorous quality assurance processes, which ensure the integrity and robustness of our products.

In our Data & Analytics division we grew revenues by 12% in H1 2019 to £64m on a constant exchange rate basis. The strong top line momentum we saw at the end of last year continued into 2019 as we launched new products, attracted new clients as well as expanded our relationships with existing clients, as we are seeing additional demand for data as new regulatory requirements are brought into effect.

New client wins included hedge funds, sovereign wealth funds, market data and independent software vendors. Geographically they are spread across Europe, the Americas and Asia.

Our focus on product development is paying off as we launched 10 new products in the first half, compared to three in the comparative period in 2018. Data & Analytics continues to exhibit a strong growth trajectory coupled with attractive margins and recurring revenues underpinned by customer loyalty. While we have seen good organic growth within the D&A business, we see selective opportunities to accelerate that development.

The senior management team

In March, we highlighted the changes made to the senior management team. Now this team is in place, we are strengthening the next layer of management and ensuring the structure and reporting lines of the Company are efficient and drive accountability. We have appointed a new Chief Information Officer and we plan to appoint a new Group Head of Compliance later in 2019.

With regard to reporting lines the business was run along geographical lines until the end of H1 2019 and each of the regional heads ran a P&L. We have subsequently moved responsibility for revenue generation to the four global business divisions who are more closely aligned with their clients and needs. We have appointed new Regional CEOs who will have oversight of culture, risk, governance and the regional support functions to ensure that the support and control infrastructure in each region has the capability to support revenue generation and enhance the success of our business. Consequently, the new structure strengthens our governance significantly, resulting in a more streamlined senior management team with clearer responsibilities and accountability.

We now have a clear management structure for the Company, with four global business divisions operating alongside Corporate Services across three regions.

The integration

Twelve months ago, we reset the synergy target from the integration of Tullett Prebon and ICAP to £75m in order to strike a better balance between cost synergies and providing clients with high quality service, both now and in the long term. We have achieved a synergy run rate of £74m and will achieve the full £75m by the end of 2019.

Completing the integration has been a key priority for TP ICAP. We appointed Martin Ryan as Group Chief Operating Officer in December 2018 with the initial priority to oversee the process. Integration is now firmly on track with all major work scheduled to be completed this year.

While integrating the IT systems is a detailed and complex process, consolidating the two businesses onto one single platform will provide an infrastructure that is agile, scalable, efficient and will enable innovation. It will streamline post-trade processing which in turn will create efficiencies and reduce operational risk.

We are decommissioning 32 of our 78 core IT applications. By its nature, this work is back end loaded and therefore decommissioning will only take place in the last stages of integration. Additionally, we are consolidating our data centres. At the start of integration, we had 15 data centres and we plan to reduce that number to six, two in each region, with more workload moved onto cloud based infrastructure. Four data centres have been closed.

We continue to rationalise our real estate footprint. Since March, we have consolidated our offices in Hong Kong, Jakarta and Amsterdam. London-based Global Broking and support functions staff will move into a single location next year. The move of support functions to the new shared service centre in Belfast continues, and we expect to have around 300 employees there by early 2020.

We have previously stated our intention to reduce the number of legal entities within the Group. On completion of the ICAP transaction we had well over 200 separate legal entities, and we expect to reduce this number by about a half. The reduction in legal entities will simplify governance, accounting and audit processes as well as reduce future governance costs significantly. It will also streamline liquidity management making the flow of funds within the group easier and more efficient.

While there is still work to be done, we will complete the integration programme by the end of this year although activities to deliver further cost benefits and capital efficiencies from the ICAP acquisition will continue into 2020.

New risk framework

We are in the process of implementing our global risk management framework which has been designed to take into account the increased scale and diversity of our business and to respond to increasing regulatory requirements. This involves developing our risk-based management information and reporting processes to provide better linkage between the day-to-day management of risks in the business and the Company's risk appetite, governance and oversight.

We are making good progress and expect to complete the implementation at the end of the year. As part of this process, we have defined the minimum risk management requirements necessary which will be subject to formal attestation across the Company.

This framework is essential for us to discharge our responsibilities when the Senior Managers' and Certification Regime comes into force in 2019. A robust risk framework is also a competitive differentiator with clients and a factor in the assessment of regulatory capital.

Brexit

For some months we have been preparing for all Brexit eventualities, including the UK leaving the EU without a deal. As stated in March, 90% of our broking revenues are largely unaffected, however it still remains a significant regulatory and operational challenge for the Company.

There are two main business streams we need to consider when we leave the EU. The first is the business we carry out in the EU for EU clients, for which we need a legal entity and venues. We have set up and capitalised a new company in Paris called TP ICAP Europe and moved our French and German trading branches to sit under this company. We are in the process of moving our Spanish branch. This means that the business we currently transact from these offices is protected in the event of a Hard Brexit.

In March we stated that we had set up three new EU venues - one multilateral trading facility (MTF) and two organised trading facilities (OTF) - so that our EU activity can be conducted on MiFID II compliant venues. These venues are now authorised and conducting business. 

The second stream of business is the work we do for EU based clients through our broking desks in the UK. We are planning to protect this business by putting more front office staff in our EU offices and changing some of our workflows. We have also made plans to relocate iSwap, our electronic rates MTF, to Amsterdam.

The ultimate distribution of our staff between the UK and EU will depend on our clients' requirements and locations but, for the foreseeable future, we expect the UK to remain a major centre for financial, energy and commodities markets. While we await clarity as to the eventual outcome of Brexit, we regularly liaise with our clients to understand their plans to ensure we can continue to service them as effectively as possible.

Near term outlook

Three of our four business divisions continue to show positive trends, but the political and economic environment within which we operate continues to present us with both opportunities and challenges. However, I remain confident that with the renewed strategy we are developing, and our ongoing cost discipline, we are in a good position to navigate these challenges successfully and make the most of the opportunities we have to create value.

Concluding comments

I am pleased with the progress we have made in the first six months of 2019. While there is still more to do to complete the transformation of TP ICAP, I am heartened by what we have achieved and am confident we are on track.

We are deep into the process of designing a detailed strategy to ensure that we can deliver sustainable, profitable growth and I am excited about our future opportunities. Our employees are our most valuable asset and I would like to thank every one of them for their enormous contribution. With the capabilities of our skilled and dedicated employees, and supportive clients, I am confident that we will succeed.

Nicolas Breteau

Chief Executive Officer

6 August 2019

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TP ICAP PLC

Financial review

Statutory Income Statement

H1 2019

H1 2018

IFRS 16 leases

In line with International Financial Reporting Standards TP ICAP plc and its subsidiaries ("Group") have applied IFRS 16 for the year ending 31 December 2019. The impact of this change is set out in Note 2(d) of the Consolidated Financial Statements.

The impact on the income statement has been a £3m increase in operating profit and a £2m decrease in profit before tax, resulting in a reduction of EPS of 0.2p.

Our key financial and performance indicators for the first half of 2019 are summarised in the table below together with comparatives from the equivalent period in 2018.

Average broker headcount was 1% lower than the prior period, and with average contribution per broker in line with the prior year, the resulting broking contribution was 2% lower. 

The period-end broking support headcount of 1,798 was 5% higher than at the end of 2018, primarily reflecting planned investments made in control functions, in particular in risk, compliance, internal audit and technology.

The tables below analyse revenue by business division as well as revenue and underlying operating profit by region for H1 2019 compared with the equivalent period in 2018, at constant exchange rates.

A significant portion of the Group's activity is conducted outside the UK and the statutory revenue is therefore impacted by the movement in the foreign exchange rates used to translate the revenue from non-UK operations. The comparative data in the tables below therefore show revenue for H1 2018 translated at the same exchange rates as those used for H1 2019, with growth rates calculated on the same basis. The statutory revenue figures as reported for H1 2018 are shown in Note 5 to the Condensed Consolidated Financial Statements.

Revenue

Total revenue of £922m in H1 2019 was 1% higher than H1 2018 at actual exchange rates and 2% lower at constant exchange rates. 

Revenue by business division

Conditions in financial markets were challenging in H1 2019 for Global Broking with a considerable decrease in volatility and market volumes across asset classes relative to the strong conditions seen in 2018. As a result revenue declined by 6% on a constant exchange rate basis.

Within Global Broking, Rates revenue fell by 2% as expectations of rate increases were pushed back, reducing both spreads and volatility, against a backdrop of slowing economic growth and the impact of the US China trade war. Conditions in credit markets were challenging with a lack of new issuance, as well as restrictions on clients' balance sheets resulting in a 14% reduction in Credit revenue. There has also been a continued move towards electronic trading which has affected volumes. Equities revenue was down 9% against a very strong comparable in 2018 when the business benefitted from some significant volatility in the period. FX & Money Markets and Emerging Markets were down 8% and 6%, respectively.

Energy & Commodities revenue was 8% higher than H1 2018 at constant exchange rates. The division has benefitted from improving market conditions in power and gas after a difficult 2018 for these markets, as well as additional revenue derived from the acquisition of Axiom, and new hires resulting from the continued build out of the ICAP oil business. Underlying oil revenues increased 2% despite tough market conditions resulting from higher oil prices and localised over-supply across many of our regions.

Institutional Services revenue of £23m grew 28% compared to H1 2018 at constant exchange rates. The business continues to perform well in its core product offering in foreign exchange, listed derivatives, relative value execution and cleared interest rate swaps. This is led by client demand resulting from changing market dynamics as investment banks reorganise their sales coverage teams. New hires and continued improvement in client onboarding processes have also improved the performance of the business.

Data & Analytics revenue was 12% higher than H1 2018 at constant exchange rates with the business benefitting from the organic growth strategies implemented towards the end of 2018. There has been strong sales growth with an expanding client base as well as sales of new products and new use cases (risk management, compliance and regulatory reporting) to existing clients. During the period the business launched 10 new products as well as winning a number of new clients across Hedge Funds, Sovereign Wealth Funds, Market Data Vendors and Independent Software Vendors.

Revenue by region

EMEA

Revenue for the region was £458m and a decrease of 3% relative to H1 2018 at constant exchange rates. Global Broking revenue decreased overall by 7% with a decrease in revenue across all asset classes. Various factors have contributed to this, including Brexit, US trade tariffs, the softening of the Federal Reserve's interest rate stance and the potential for increased quantitative easing in the Eurozone.

Energy & Commodities revenue grew 2%, reflecting the benefit of emissions volatility driving volumes in a number of products in region. In particular there were improved conditions in UK and European power as well as gas markets. Revenues from oil products overall were flat year on year as more difficult trading conditions and lower volumes were offset by the new ICAP oil team hires.

Institutional Services has seen a 30% increase in revenue in the period led by increasing client demand and the impact of new hires.

Americas

Americas revenue of £340m was in line with the prior year at constant exchange rates, with strong growth in Energy & Commodities and Institutional Services offset by a 6% revenue decline in the Global Broking business.

Within Global Broking market conditions were challenging with lower volatility and market volumes in H1 compared with a very strong prior year period.

Rates revenue was down 1% as interest rate swaps markets struggled with lower levels of liquidity and a flattening yield curve.

Equities revenue was down 4% from H1 2018 as growth in new product segments was offset due to reduced volatility in 2019. Equities continues to be an area of investment and new product expansion for the region. U.S. Credit markets remained subdued, and revenue in the Credit business was down 12% on H1 2018.

Revenue in the FX & Money Markets and Emerging Markets businesses saw decreases year on year of 12% and 10%, respectively. This was the result of lower levels of volatility, de-risking by some of our primary clients in Forward FX and increased competition in Emerging Markets.

The Energy & Commodities division improved in H1 2019 with revenue up 19% compared with the prior year. Increased revenue in oil products and ethanol bolstered by the acquisition of Axiom Commodities in November 2018 added to the stronger performance of the existing business. Energy continues to be a targeted growth area for the region across the Tullett Prebon, ICAP and PVM brands.

Institutional Services also performed well in H1 2019 with revenues up 25% compared with H1 2018 as the business continues to expand its product offering. Institutional Services is still a relatively new business for TP ICAP Americas and remains an area for growth opportunities.

Asia Pacific

Revenue in Asia Pacific declined 2% in H1 2019 compared with the prior year at constant exchange rates, reflecting difficult conditions in the Global Broking business, partially offset by strong growth in Energy & Commodities.

Global Broking revenue in the region was down 5% year on year. Revenue in the Tullett Prebon brand was down 6% mainly due to the loss of the Hong Kong credit and bond desk at the end of 2018. In the ICAP brand, the decision to close loss-making offices in Korea at the beginning of 2019, and Indonesia at the end of 2018 drove a revenue decline of 8%. Within specific countries the Global Broking business performed well, such as in Australia and the Philippines where markets were more active, but there was a decline in Japan as there were few central bank or other economic factors to stimulate the market.

The Energy & Commodities business developed well in both scale and diversification and revenue grew 13%. The business saw continuing growth in the electricity business in Australia as well as good growth in the precious metals business. There was a strong recovery in the ICAP iron ore business in Singapore, where there was also improvement in business levels in the long-established fuel oil and crude desks and newer businesses including gasoline.

Underlying administrative expenses

Total underlying administrative expenses of £771m in H1 2019 were 2% higher than H1 2018 as reported and 1% lower at constant exchange rates.

Underlying administrative expenses

The table above sets out administrative expenses on the basis on which management chooses to view this area, divided principally between front office costs and management and support costs. Front office costs tend to have a large variable component to them and are directly linked to the output of our brokers. The largest element of this is broker compensation as well as other front office costs, which include travel and entertainment, telecommunications and information services, clearing and settlement fees as well as other direct costs. The remaining cost base represents the management and support costs of the Group and includes the costs associated with the Data & Analytics business.

The presentation above is different from Note 5 of the accounts as we have split out front office and management and support costs and we have shown this on a constant exchange rate basis.

Overall, the underlying cost base has seen a 1% decrease at constant exchange rates to £771m in H1 2019 compared with H1 2018. This has been substantially driven by continuing reductions in the front office and further support costs savings which have been offset by the additional costs we are incurring in respect of previously guided investments and increased legal and regulatory costs. Broker compensation costs decreased by £3m during the period reflecting the 2% decrease in broking revenue at constant exchange rates and an increase in the broker compensation ratio from 51.4% to 52.5%. 

There has been a £5m decrease in other front office costs which reflects reduced telecommunications costs arising from the renegotiation of unit pricing during the integration period and reductions in other third party costs.

The £6m reduction in other staff costs continues to be driven by the impact of synergy savings and other staff cost reductions.

Technology and related costs include the costs of all external technology services, including maintenance contracts, consultancy, non-front office market data services and communications costs. During the period these costs decreased 4% against H1 2018 with continued cost reductions being offset by the new initiatives to which we have previously guided.

Premises costs decreased by 4% in H1 2019 compared with the prior period reflecting the net lower cost of occupied premises in the period following the consolidation of our offices in New York, Singapore and Hong Kong.

The increase in other administrative costs of £9m mainly reflects the anticipated cost increases to which we have previously guided. These include costs associated with Brexit, risk and cyber security as well as legal and regulatory requirements and legal costs incurred in respect of a regulatory investigation in the US. 

The IFRS 16 adjustment in H1 2019 is a credit of £3m.

Synergy savings and administrative expenses

As at the end of June 2019 the cumulative annualised synergy savings achieved from the integration programme were £74m, an increase of £3m on the annualised £71m of synergy savings reported at the end of 2018. Of the £3m additional run rate synergies, £2m were recognised in the period.

Synergy savings reflect the reduction of underlying staff and other costs as a result of implementing the integration programme. 

The table below shows the movement in administrative expenses between H1 2018 and H1 2019 re- categorised to reflect the impact of the movement in synergy savings against other costs between the two periods. 

Overall, total synergy savings recognised in the period amount to £37m. This represents half of the £71m exit run rate synergies reported in 2018, plus £2m of additional synergies recognised in the first half of 2019. The £6m movement in synergy savings between the two periods equals the total £37m synergy savings recognised in H1 2019 less the £31m of synergy savings recognised in H1 2018.

Net cost reductions of £8m include savings in telecommunications costs, IT maintenance costs and non-synergy staff costs reductions.

The £3m reduction broker compensation reflects the decrease in broking revenue offset by the increase in the broker compensation ratio outlined above.

New investments of £4m include expenditure made in Data & Analytics and front office IT platforms. Planned increases of £7m include additional expenditure on Brexit, risk and cyber security and legal and regulatory costs. Both these increases were included in our earlier guidance.

Contribution

Broking contribution represents the revenue of our broking businesses (excluding Data & Analytics) less the total front office costs described above. An improvement in the absolute level of broking contribution is an important metric in driving earnings growth for the Group.

Broking contribution

In H1 2019 the overall level of contribution decreased by £14m or 4% to £319m. The overall contribution margin decreased by 0.6 percentage points to 37.2% driven by the impact of a 3% fall in revenue together with an increase in the broker compensation ratio to 52.5%, partially offset by lower other front office costs.

Data & Analytics contribution

Data & Analytics contribution represents the revenue of the Data & Analytics business less the direct costs associated with running the business, but excluding the cost of internally generated data from the broking businesses. An improvement in the absolute level of contribution is an important metric in driving earnings growth for the Group.

In H1 2019 the overall level of contribution increased by £5m or 14% to £42m. The overall gross contribution margin increased by 0.7 percentage points to 65.6% driven by a 12% increase in revenue at constant exchange rates.

Operating profit

The underlying operating profit of £158m is 2% higher than the prior year, with an underlying operating profit margin of 17.1% which is 0.1% up from H1 2018. 

Statutory operating profit of £107m was 114% higher than in H1 2018 and the statutory operating profit margin of 11.6% was 6.1 percentage points higher. Statutory operating profit is after exceptional and integration, acquisition and disposal related items and is described further below.

Underlying operating profit by region

The underlying operating profit and underlying operating profit margin by region shown below are compared against reported data for the prior period.

Underlying operating profit

Underlying operating profit margin by region

EMEA

Underlying operating profit in EMEA of £96m is 1% lower than H1 2018 (£95m and 2% lower excluding the impact of IFRS 16). With revenue 2% lower than the prior year at reported exchange rates, the underlying operating profit margin has increased by 0.1 percentage points to 21.0% (20.7% excluding the impact of IFRS 16). The slight decrease in the margin (excluding the impact of IFRS 16 on H1 2019) reflects a fall in broking revenue and contribution offset by increased contribution in Data & Analytics and an improvement in the regional management and support cost base.

Americas

The Americas underlying operating profit of £49m was 9% higher than H1 2018 (£47m and 4% higher excluding the impact of IFRS 16). Revenue in the Americas was 6% higher than the prior year at reported exchange rates, and the operating profit margin of 14.4% in H1 2019 was higher than H1 2018, as higher contribution in the region more than offset a higher net support cost base that included some one-off legal costs and the addition of Axiom's legacy infrastructure.

Asia Pacific

Underlying operating profit in Asia Pacific of £13m was in line with H1 2018, (with minimal impact from IFRS 16). The decline in Global Broking revenue in the period was offset by strong growth in Energy & Commodities and this resulted in very little change in the overall business performance in the region year on year. Underlying operating margin reduced slightly by 0.1% to 10.5%.

Exceptional and acquisition, disposal and integration items

The Group presents its Consolidated Income Statement in a columnar format to aid the understanding of its results by separately presenting its underlying profit before acquisition, disposal and integration costs and exceptional items. Underlying profit is reconciled to profit before tax in the Consolidated Income Statement and is disclosed separately to give a clearer presentation of the Group's underlying trading results.

Acquisition, disposal and integration costs are excluded from underlying results as they reflect the impact of acquisitions and disposals rather than underlying trading performance.

The £20m charge for integration costs related to the acquisition of ICAP includes professional fees and staff costs relating to planning, setting up and running the integration workstreams and staff severance costs. We are forecasting no more than £160m of cumulative integration costs by the end of the integration programme.

The major elements of the integration costs in H1 2019 continue to be staff costs, which include £4m of severance costs, and other costs of £10m of which the majority are consultancy costs relating to the technology strategy, scope for cost reduction, project management support and analysis, software development and quality assurance and support for the project to reduce and rationalise the legal entity structure.

A further £21m has been charged through the income statement reflecting the amortisation of intangible assets other than goodwill arising on acquisitions, reflecting brand value, the value of customer relationships and other intangible assets. This non-cash item is excluded from underlying results to present the performance of the Group's acquired businesses consistently with its organically grown businesses where such intangible assets are not recognised.

Other acquisition, disposal and integration costs of £4m include a £2m charge for adjustments to acquisition consideration, principally due to an increase in the expected deferred consideration on the COEX acquisition due to its strong performance. There are also £2m of other minor acquisition and disposal items that have been excluded from underlying results.

Exceptional items have been excluded from underlying results as they are non-recurring and do not relate to the underlying performance of the business. The £6m exceptional charge in the period reflects a £2m exceptional legal provision in connection with finalisation of a regulatory investigation in the US and a £4m business reorganisation cost relating to office moves in Hong Kong and Belfast.

Net finance expense

The underlying net finance expense of £24m is £8m higher than the £16m charged in H1 2018. The finance expense of £27m comprises £18m of interest expense on the Group's Sterling Notes (£15m of which relates to the £500m Sterling Notes issued in January 2017), £1m of fees relating to the amortisation of debt issue and bank facility costs, £2m relating to the commitment fee and interest on the drawdown of the revolving credit facility and other loans during the period. It also includes an additional £6m expense relating to the introduction of IFRS 16. The expense is offset by £2m of interest income and £1m of income on finance lease receivables.

Tax

The effective rate of tax on underlying profit before tax is 25% (2018: 26%). The rate is lower than the prior year, reflecting a greater impact from the reduction in the US federal rate of tax, due to a lessening of the impact of measures that broadened the US tax base. The effective rate of tax on reported profit before tax is 29% (2018: 74% due to the non-deductibility of the goodwill write-off), as some exceptional expenses are not tax deductible. The outlook for the underlying effective tax rate in 2020 is for a potential reduction of approximately 1% due to an expected reduction in the UK corporation tax rate.

Basic EPS

The average number of shares used for the basic EPS calculation of 560.0m reflects the 563.3m shares in issue less the 2.6m shares held by the Employee Benefit Trust at the beginning of the year, less the difference between the time apportionment element of the 2.0m shares repurchased in the market in April 2019 to satisfy deferred share awards made to senior management, and 0.1m of deferred shares that met their vesting requirements in May. The Employee Benefit Trust has waived its rights to dividends.

Underlying earnings per share for H1 2019 of 19.3p are 0.1p higher than for 2018.

Statutory earnings per share of 11.8p are 9.5p higher than in 2018 which was adversely impacted by a £58m impairment of goodwill.

Dividend

The Group's dividend policy is to maintain a full year dividend of 16.85p throughout the integration period. A 5.6p per share interim dividend ﴾2018: 5.6p﴿ will be paid on 8 November 2019 to shareholders on the register at close of business on 4 October 2019.

Cash flow

H1 2019

H1 2018

The cash flow presentation above reconciles the underlying cash flow generation, excluding the impact of acquisition, disposal and integration costs and exceptional items, to the reported net cash flow from operations. The impact on EBITDA of acquisition, disposal and integration costs and exceptional items was £25m during the period, principally relating to the costs of the integration.

During the period there was a £2m net inflow for initial contract payments ("ICPs") with the increased amortisation on previously spent ICPs more than offsetting the new ICP cash expenditure in the period. The working capital outflow of £112m includes £48m (2018: £46m) for settlement balances and fails that arise on matched principal business that have not completed settlement until after the June balance sheet date. The net outflow of £64m, after adjusting for settlement balances, reflects an increase in trade receivables, largely from the higher revenue in June 2019 compared with the end of 2018 and a reduction in the 2018 year-end bonus accrual after the payment of discretionary annual bonuses in the first quarter of 2019.

Capital expenditure of £19m in the period is lower than for the prior year which included the impact of office moves in New York, London, Singapore and Belfast. We expect full year capital expenditure of circa £70m in 2019 due to the expenditure in H2 2019 relating to our planned office move in London in 2020, as well as the costs of ongoing investments in the business.

Interest paid has increased from the prior year, reflecting both the impact of the refinancing in the period and the IFRS 16 inclusion of finance lease interest payments. Tax paid in the period is higher than the prior year as the Group no longer benefits from tax losses in the US.

After interest and underlying taxation payments in the period of £66m, the underlying free cash flow for the Group was an outflow of £5m. This £27m improvement on H1 2019 is driven by reduced capital expenditure as well as lower ICPs on broker contracts in the period.

The movement in net funds is summarised below:

Details of the Sterling Note & other debt refinancing in the period can be found in the next section.

The £52m drawn amount of the revolving credit facility at the year end was repaid in the period and as a result there is no balance drawn down at the end of the June. The adoption of IFRS 16 in the period has led to the recognition of lease liabilities of £150m that are now included in the total debt figure at the end of June.

Of the £781m cash and financial investments balance at the period end, £678m is held in 61 regulated entities to meet regulatory capital, margin and other trading requirements as well as accrued profits, and as such is treated as restricted within those Group entities. £82m is held in non-regulated entities for working capital requirements, in addition to accrued profits and £21m is held in corporate holding companies. 

The impact of IFRS 16 has been to move the Group from a net funds position of £55m to a net debt position of £95m as a result of the recognition of £150m lease liabilities. This impact is not recognised within the Group's banking covenant calculations.

Debt finance

The composition of the Group's outstanding debt, excluding lease liabilities, is summarised below.

On 24 May 2019 the Group issued a £250m 5.25% note due 2026 under its £1bn Euro Medium Term Note Programme. The proceeds of this were used to pay down the revolving credit facility ("RCF") drawings, repay the £80m bond that matured in June 2019 and to buy back £69m of the £500m 2024 bonds through a tender offer. As a result the Group's core gross debt has increased to £681m with a further ¥5bn (£37m) short term loan from our JV partner Tokyo Tanshi Co. Ltd maturing in September 2019.

The RCF was refinanced in December 2018 on improved terms increasing our overall facility to £270m from £250m. The revolving credit facility matures in December 2021 and was undrawn at the end of the period.

Exchange rates

The income statements and balance sheets of the Group's businesses whose functional currencies are not GBP are translated into sterling at average and period end exchange rates respectively. The most significant exchange rates for the Group are the US dollar and the Euro. The Group's current policy is not to hedge income statement or balance sheet translation exposure. Average and period end exchange rates used in the preparation of the financial statements are shown below.

Pensions

In 2017 the Group reported that the Trustee had insured the defined benefit liabilities of the UK pension scheme ("Scheme") through the purchase of a bulk annuity 'buy-in' policy from Rothesay Life. The policy is in the name of the Scheme and is a Scheme asset.

During 2019 the Trustee commenced proceedings to 'buy-out' the Scheme's liabilities, a process that will enable the Trustee to exchange the Scheme's bulk annuity policy for individual policies issued to, and directly held, by the Scheme's beneficiaries. To proceed with the 'buy-out', the Sponsor and Trustee commenced the wind-up of the Scheme. Prior to this, the Trustee had no right to unilaterally wind-up, or otherwise augment the benefits due to members and based on those limitations the net surplus was recognised in full by the Group. Under UK legislation, once a Scheme commences wind-up, the assets of the Scheme pass unconditionally to the Trustee to enable it to settle the Scheme's liabilities. As a result, the Group has applied the requirements of IFRIC 14, fully restricting the Group's recognition of the £55m net surplus by applying an asset recognition ceiling. The asset ceiling is recorded as a charge in other comprehensive income.

During the wind-up period, the Group will continue to restrict the recognition of the net surplus. Should any member benefits be augmented during this period, they will represent a past service cost and will be recorded as exceptional costs in the Income Statement as and when those benefits are agreed. Costs associated with the settlement of the Scheme's liabilities will also be recorded as exceptional costs in the Income Statement as and when incurred.

Following the full settlement of the Scheme's liabilities the Scheme will be wound-up and the Sponsor expects to receive the remaining assets. Any repayment received will also be subject to applicable taxes at that time, currently 35%. 

Regulatory capital

The Group's consolidated lead regulator is the FCA.

The Group has a waiver from the consolidated capital adequacy requirements under CRD IV. The Group's current waiver took effect on 30 December 2016, following the acquisition of ICAP, and will expire on 30 December 2026. Under the terms of the waiver, each investment firm within the Group must be treated as either a limited activity or a limited licence firm and comply with its individual regulatory capital resources requirements. TP ICAP plc, as the parent Company, must continue to maintain capital resources in excess of the sum of the solo notional capital resources requirements for each relevant firm within the Group (the 'Financial Holding Company test').

The terms of the waiver require the Group to eliminate the excess of its consolidated own funds requirements compared with its consolidated own funds ('Excess Goodwill') over the ten-year period to 30 December 2026. The amount of the Excess Goodwill must not exceed the amount determined as at the date the waiver took effect (the "Excess Goodwill Ceiling"). The Excess Goodwill Ceiling is reduced to nil in line with a schedule over ten years to December 2026, with the first reduction of 25% occurring from 1st July 2019. The Excess Goodwill Ceiling continues to reduce by 25% every 2.5 years on a straight line basis. The Group expects to reduce its Excess Goodwill in accordance to the declining Excess Goodwill Ceiling. The waiver also sets out conditions with respect to the maintenance of financial ratios relating to leverage, debt service and debt maturity profile.

The Group's regulatory capital headroom under the Financial Holding Company test calculated in accordance with Pillar 1 was £1,553m at the end of June 2019 (31 December 2018: £1,605m). Many of the Group's broking entities are regulated on a 'solo' basis and are obliged to meet the regulatory capital requirements imposed by the local regulator of the jurisdiction in which they operate. The Group maintains an appropriate excess of financial resources in such entities.

Information disclosure under Pillar 3 is available on the Group's website: www.tpicap.com.

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Condensed Consolidated Income Statement

for the six months ended 30 June 2019

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Condensed Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2019

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Condensed Consolidated Balance Sheet

as at 30 June 2019

1. Trade and other receivables, cash and cash equivalents, deferred tax liabilities and retained earnings as at 30 June 2018 have been restated for the adoption of IFRS 9 in 2018.

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Condensed Consolidated Statement of Changes in Equity

for the six months ended 30 June 2019

1. Retained earnings as at 1 January 2018 and 30 June 2018 have been restated for the adoption of IFRS 9 in 2018.

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Condensed Consolidated Cash Flow Statement

for the six months ended 30 June 2019