Tullett Prebon plc Annual Report 2010
The ﬁnancial results for 2010 reﬂect the enduring strength of the business in challenging market and competitive conditions, and the progress that has been made in re-establishing our position in North America.
Results The results are explained in detail in the Business Review. Revenue for the year of £908.5m was 4% lower than reported for 2009 mainly due to the effect of the defection of a large number of brokers in North America following the raid by a competitor called BGC in the second half of 2009. Underlying revenue, adjusting for these broker defections, was unchanged compared with the prior year. Given that market activity was more subdued overall in 2010 than in 2009 this was a good performance. Operating proﬁt of £152.4m was 11% lower than for 2009, reﬂecting a reduction in operating margin to 16.8%. There is some operational leverage in the business, and operating margins were adversely affected by lower levels of revenue. The operating margin was also adversely affected by the additional costs incurred in rebuilding the business in North America. This process of rebuilding the desks affected is now complete. After lower ﬁnancing costs, adjusted proﬁt before tax of £139.7m compares with £157.0m in 2009. With a reduction in the effective tax rate to 29.2%, adjusted basic earnings per share were 6% lower than last year at 46.4p. One of the most attractive features of the business is its excellent cash ﬂow generation. Operating cash ﬂow for the year was £132.0m and at the end of the year net funds amounted to £67.8m, an increase in the year of £58.8m. Dividends and shareholder returns The Company’s overall objective is to maximise returns to shareholders over the medium to long term, at an acceptable level of risk. The Company is not managed around the short term share price but we are mindful of the returns to our shareholders over time. Total shareholder return for 2010 was 43% which compares to the return from the FTSE 250 index of 28% and the General Financials sector index of 28%. This reﬂects the continuation of the recovery of the share price from a very low level at the end of 2008, but the Board remains aware that the earnings multiple currently applied to the Company continues to be only single digit. The Board recognises that dividends are an important element of shareholder return and is recommending a ﬁnal dividend of 10.5p per share, making the total dividend for the year 15.75p per share, an increase of 5% on the 15.0p per share paid for 2009. The ﬁnal dividend will be payable on 19 May 2011 to shareholders on the register on 26 April 2011. Financing The Company is conservatively ﬁnanced, which we consider is appropriate in current market circumstances. Since the year end the Company has entered into new £235m bank facilities that mature in February 2014 to replace the existing facilities that would have matured in January 2012. The facilities include a £115m committed revolving credit facility that allows the Company to reduce its gross borrowings whilst retaining all of its previous ﬁnancial ﬂexibility. The Company’s other signiﬁcant borrowing is through a £141m bond that matures in 2016. The Company therefore has an attractive debt maturity proﬁle.
In February this year, Fitch upgraded the Company’s credit rating to BBB with stable outlook. I am also pleased to be able to report that the Company’s two deﬁned beneﬁt pension schemes in the UK now both have a funding surplus, achieved through a combination of contributions and very good investment returns. These schemes, which became obligations of the Company through the acquisitions of Tullett and Prebon, had signiﬁcant funding deﬁcits at the time of acquisition, with an accounting deﬁcit of £37m at the end of 2005. At the end of 2010 the accounting surplus in the schemes was £24m. Strategy and return on capital Our strategy is to continue to focus on providing services as an intermediary in wholesale Over The Counter (‘OTC’) markets, and to continue to build a business with the scale and breadth to deliver superior performance and returns, whilst maintaining strong ﬁnancial management disciplines. We will continue to focus on those areas of business in which we have a strong advantage and the opportunity to make good returns. We are investing in the development of the business and in broadening its activities as an inter-dealer broker and in the related areas of information sales and risk management services. Return on capital is a key driver in our investment decisions and together with cash ﬂow and operating margin is one of the key measures the Board uses to assess the quality of the ﬁnancial performance. The return on capital employed was 40% in 2010, despite the reduction in operating proﬁt in the year. Regulatory developments There have been signiﬁcant developments during 2010 in the process of agreeing and introducing reforms designed to strengthen the ﬁnancial system and to improve the operation of the ﬁnancial markets. Although these developments will result in changes in the way in which some OTC trades are executed, reported and settled, we believe that the effective operation of the vast majority of wholesale OTC markets will continue to need broker support in providing liquidity, and that the introduction of the proposals will be positive for the business as the role of the intermediary in these markets is formalised. Risk The risk inherent in our activities is low. As an intermediary, the business does not take any trading risk and does not hold principal trading positions. The majority of our broking activities are on a Name Give-Up basis where the business is not at any time a counterparty to the trade, and in Matched Principal activities the business only holds ﬁnancial instruments for identiﬁed buyers and sellers in matching trades. Such transactions are settled rapidly and the business does not retain any contingent risks. The Board and the Audit Committee, chaired by my colleague Richard Kilsby, has continued to thoroughly analyse the risks faced by the business and the controls in place to mitigate and manage them. This process is helped considerably by the fact that the business is well controlled, transparent and prudently managed. The Board has good visibility of the ﬁnancial and operational