Tullett Prebon PLC Final Results (3208G)

TIDMTLPR

RNS Number : 3208G

Tullett Prebon PLC

03 March 2015

TULLETT PREBON PLC

Preliminary Statement of Results - for the year ended 31 December 2014

Tullett Prebon plc (the "Company") today announced its preliminary statement of results for the year ended 31 December 2014.

Operational Summary

   --       Appointed John Phizackerley Chief Executive 1 September 2014 
   --       Cost improvement programme implemented - reducing annual fixed costs by over GBP45m 
   --       Completion of PVM acquisition - Energy now accounts for 22% of group pro forma revenue

-- Hired Fixed Income brokers from Murphy & Durieu - broker headcount in the Americas now c550

   --       Settlement of all litigation between the Company and BGC 
   --       Finalising global strategic review 
   --       New Investment Firm Consolidation Waiver from the FCA running to 2024

Financial Highlights

Underlying, before exceptional and acquisition related items

(including PVM since acquisition on 26 November 2014)

   --      Revenue GBP703.5m (2013: GBP803.7m) 
   --      Operating profit GBP100.7m (2013: GBP115.4m) 
   --      Operating margin 14.3% (2013: 14.4%) 
   --      Profit before tax GBP86.6m (2013: GBP99.6m) 
   --      Basic EPS 32.3p (2013: 36.0p)

Reported, after exceptional and acquisition related items

(including PVM since acquisition)

   --      Profit before tax GBP33.5m (2013: GBP84.4m) 
   --      Basic EPS 11.2p (2013: 30.1p)

A table showing Underlying and Reported figures for each year, detailing the exceptional and acquisition related items, is included in the Financial Review.

Pro forma Underlying (including PVM for the full year 2014)

   --     Revenue GBP772.2m 
   --     Operating profit GBP112.1m 
   --     Operating margin 14.5% 
   --     Basic EPS 32.8p

Dividend

The Board is recommending an unchanged final dividend of 11.25p per share, making the total dividend for the year 16.85p per share, unchanged from that paid for 2013. The final dividend will be payable on 14 May 2015 to shareholders on the register at close of business on 24 April 2015.

The Board has considered whether the settlement money from BGC should be returned to shareholders or retained to fund business developments, including acquisitions. In the light of the opportunities to invest in products and services to facilitate our clients' strategies that would further strengthen our business and earn an attractive return on capital, the Board has decided that the funds should be retained for those purposes. The Board does not have any intention to hold capital in excess of the Company's regulatory and business development requirements.

Commenting on the results, John Phizackerley, Chief Executive of Tullett Prebon plc, said:

"Tullett Prebon has produced a robust set of results reflecting a strong operational performance in what was another challenging year for the interdealer brokerage sector. Due to ongoing cost discipline we have maintained our margins. Looking forward, we will continue to add products and services to facilitate our clients' strategies, incorporating content and technologies that add value. Our focus on conduct and culture emphasises our ongoing commitment to play a central role in global financial markets and to be viewed as a trusted partner. We will continue to look to make strides to exploit the opportunities in a consolidating marketplace.

The benefits from the acquisition of PVM and the arrival of brokers from Murphy & Durieu will flow through in 2015. PVM significantly increases the scale of the group's activities in the energy sector, and diversifies the group's client base, reducing our dependence on wholesale investment and commercial banks. We will continue to expand the data content for our high margin, growing, Information Sales business through the oil price data generated from the PVM business, and through other exclusive data content deals.

It remains difficult, however, to predict accurately the level of activity in the markets we serve. Revenue in the first two months of 2015, excluding PVM, and at constant exchange rates, is unchanged compared with the equivalent period last year. We will continue to show discipline on costs. The benefit of the actions we have taken through the cost improvement programme in 2014 will continue to flow through in 2015, particularly in the first half."

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:

Stephen Breslin, Head of Communications

Tullett Prebon plc

Direct: +44 (0)20 7200 7750

   email:    sbreslin@tullettprebon.com

Craig Breheny, Director

Brunswick Group LLP

Direct: +44 (0) 20 7396 7429

   email:    cbreheny@brunswickgroup.com

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

Overview

Market conditions remained challenging throughout 2014 as the overall level of activity in the financial markets remained subdued, although there was some pick-up in activity in some products and markets in the second half of the year.

In the light of the continuation of difficult market conditions a number of actions were taken during the year to further reduce headcount and other fixed costs in order to maintain flexibility in costs and to align the cost base with the lower level of revenue. The benefit of this cost improvement programme, together with the continued benefit from cost management actions taken in previous years, is reflected in the maintenance of the underlying operating margin at 14.3%, compared with 14.4% in the previous year, despite the reduction in revenue.

Market conditions and revenue

The group generates revenue from commissions it earns by facilitating and executing customer orders. The level of revenue is substantially dependent on customer trading volumes which are affected by the level of volatility in financial markets, by customers' risk appetite, and by their willingness and ability to trade.

Volatility is one of the key drivers of activity in the financial markets. Measures of financial market volatility, which reached post financial crisis lows during the first half of the year, picked up during the second half. The business experienced the effects of the pick-up in volatility most strongly in Asia Pacific and in some products in North America, but the level of market activity in Europe and the Middle East continued to be largely subdued reflecting the cyclical effect of further flattening and lowering of yield curves and spread compression in bond markets.

Market volumes also continue to be adversely affected by the more onerous regulatory environment applicable to many of our customers. Regulators worldwide have been adopting an increased level of scrutiny in supervising the financial markets and they continue to generally tighten the capital, leverage and liquidity requirements of commercial and investment banks, and to implement steps to limit or separate their activities in order to reduce risk. This has reduced risk appetite and reduced the willingness and ability of our customers to trade.

The introduction of new regulatory reforms directly affecting the operation of the OTC derivatives markets has also created some uncertainty and has resulted in the fragmentation of some liquidity pools which has also reduced market volumes.

Excluding PVM Oil Associates, which was acquired on 26 November 2014, revenue in 2014 was 10% lower than in 2013 at constant exchange rates. Consistent with the lower level of market activity, revenue in the first half of the year was 15% lower than last year, and was 5% lower in the second half.

Cost management and operating margin

In the light of the continuation of difficult market conditions a number of actions were taken during the year to further reduce headcount and other fixed costs. This cost improvement programme has involved the exit of 166 front office staff, 51 support and other staff, and the vacating of office space, reducing annual fixed costs by over GBP45m with an annualised operating profit benefit, as previously estimated, of around GBP35m. Just over half that amount has been realised in 2014, with the balance expected to flow through in 2015. The cost of these actions is GBP46.7m, of which GBP22.0m are non-cash charges, including the GBP3.2m write down of an employment incentive grant receivable that may not be recoverable due to the reduction in headcount. This cost has been charged as an exceptional item in the 2014 accounts.

The objectives of the cost improvement programme, and the objectives of actions taken in previous years, have been to preserve the variable nature of broker compensation and to reduce it as a percentage of broking revenue, and to generally reduce fixed costs throughout the business, in order to ensure that the business is well positioned to respond to less favourable market conditions and to maintain operating margins. Broker compensation costs as a percentage of broking revenue have reduced to 56.1% in 2014, 2.2% points lower than in 2013, and 3.7% points lower than in 2012. The overall contribution margin of the business after broker employment costs and other front office direct and variable costs was 2.0% points higher in 2014 than in the prior year, but reflecting the lower level of revenue, the absolute amount of contribution was 6% lower at constant exchange rates.

The management and support costs of the business are not directly variable with revenue. Despite the increase in the costs of the regulatory readiness project (which covers the development, launch and ongoing running costs of new electronic platforms and associated technology infrastructure, and additional compliance resources) to 3% of revenue compared with 2% in 2013, total management and support costs in 2014 are unchanged in absolute terms compared with 2013. As a percentage of revenue, however, the business's management and support costs are higher in 2014 than in 2013, offsetting the benefit from the higher contribution margin.

Business development

We have continued to focus on delivering innovative products and a first class broking service to our clients. Action has also been taken to develop and strengthen the broking business through hiring brokers and through acquisitions, and to develop the group's information sales and post-trade risk management services activities.

The Company completed the acquisition of PVM Oil Associates Limited and its subsidiaries ("PVM"), a leading independent broker of oil instruments, on 26 November 2014. PVM is focused entirely on Energy products, and has a long history as an international crude oil and products broker covering OTC swaps, forwards and physical crude oil and refined products, and exchange traded instruments including WTI, Brent and Gasoil futures. PVM's customers are major oil companies, independent refiners and producers, government agencies, trading houses, banks, investment funds and corporations.

The acquisition of PVM increases the scale of the group's activities in the Energy sector, particularly in Europe, and will give the group a significant presence in broking crude oil and petroleum products complementing its existing activities in these areas. Crude oil is the world's most actively traded commodity. The acquisition will also allow Tullett Prebon Information to expand its data offering to include the current and historical oil price data generated from the PVM business and to offer this data to a broader set of customers.

PVM's unaudited management accounts for the 12 months to December 2014 show revenue of $125.8m (GBP76.2m) with operating profit of $21.2m (GBP12.9m). In its audited accounts for the year ended 31 July 2013, PVM reported revenue of $107.5m, with operating profit of $18.2m. PVM's broker headcount at the end of 2014 was 129.

Information relating to the consideration for the acquisition of PVM, its balance sheet, and the impact on the group's Income Statement for 2014 and on a pro forma basis, is set out in the Financial Review below.

In early January 2015, the Company announced the expansion of its broking activities in North America through the acquisition of 40 brokers from Murphy & Durieu, a New York based inter-dealer broker. The 40 new brokers have expertise and access to deep liquidity pools in a wide range of fixed income products including corporate bonds, convertibles, municipal bonds and government securities, allowing the business to provide even stronger and better execution to clients in the US Fixed Income market.

For the fifth consecutive year the Company was voted number one in more product categories than any other single interdealer broker in Risk magazine's 2014 annual interdealer rankings published in September. Dealers across the wholesale banking markets in all three regions in which the business operates voted Tullett Prebon number one in 32 out of 99 categories, reflecting the Company's focus on first class service and delivery of flexible and innovative products.

The business was also named Commodity Derivatives Interdealer Broker of the Year at GlobalCapital's 2014 Global Derivatives Awards in October, Best Broker for Forward FX for the fourteenth year running at the 2014 FX Week Best Bank Awards in November, and Commodities Broker of the Year and Innovator of the Year in the 2014 Futures and Options World awards in December.

The majority of OTC product markets are not characterised by continuous trading, and depend upon the intervention and support of voice brokers for their liquidity and effective operation. The business has continued to focus on its hybrid electronic broking offering, deploying platforms to comply with regulatory requirements and to respond to market demand. The platforms we offer provide clients with the flexibility to transact either entirely electronically or in conjunction with the business's comprehensive voice execution broker network.

The business in all three regions is supported by the deployment of the group's electronic broking platforms. The platforms facilitate client trading through electronic execution or with voice broker support, and provide a range of functionality including streaming prices, analytics, and auction capability, and operate as highly efficient front end order management and trade capture systems for both brokers and customers.

The Company's swap execution facility, tpSEF Inc. ("tpSEF") started operating in October 2013 under its temporary registration from the CFTC. tpSEF provides swap execution services across the five major asset classes utilising many of the group's electronic broking platforms to satisfy the regulatory requirements relating to trade execution, trade reporting, audit trail, and submission to clearing for instruments required to be cleared. tpSEF offers execution services for both Required Transactions (certain interest rate and credit index instruments subject since February 2014 to the CFTC's mandatory clearing requirement and the "made available to trade" determination) and Permitted Transactions (all other instruments within the scope of the legislation). Third party analysis of the notional volume of trades reported through SEFs shows that the total volumes, including the dealer-to-client segment, have increased during 2014 and that the volumes in the dealer-to-dealer segment, and the market shares of the interdealer brokers within that segment, have been largely maintained.

In Europe, the implementation of EMIR, which contains provisions governing mandatory clearing requirements and trade reporting requirements for derivatives, is coming into effect in stages as the various technical standards are agreed. The requirement that details of derivative contracts must be reported to recognised trade repositories came into effect from 12 February 2014, the first clearing obligations are expected to come into effect during 2015, subject to the authorisation of a relevant CCP, and margin requirements for non-cleared trades will apply from 1 December 2015. The legislative framework governing permissible trade execution venues, and governance and conduct of business requirements for trading venues, (MiFID II) and a new regulation (MiFIR), has been adopted by the EU Council and Parliament, and the rules set out in MiFID II will become effective at the beginning of 2017.

The Information Sales business was awarded, for the fourth consecutive year, the title of Best Data Provider (Broker) at the Inside Market Data Awards in May. Clients continue to demand an ever higher standard of independent, quality data and the award, which is determined by an independent poll of end-users, reaffirms the industry's recognition of our position as the leading provider of the highest quality independent price information and data from the global OTC markets.

Whilst the vast majority of the trades we arrange for customers involve voice brokers, a growing proportion of our broking activity is supported by and relies upon the functionality provided by electronic platforms. The revenue from those products supported by electronic platforms, together with the revenue from the Information Sales and Risk Management Services businesses, accounted for over 30% of total revenue in 2014.

Our key financial and performance indicators for 2014, excluding PVM in order to aid the comparison with those for 2013, are summarised in the table below.

 
                                              2014        2013         Change 
                                        ----------  ----------  ------------- 
 
 Revenue                                 GBP696.0m   GBP803.7m          -10%* 
 Underlying Operating profit              GBP99.2m   GBP115.4m          -13%* 
 Underlying Operating margin                 14.3%       14.4%   -0.1% points 
 
 Average broker headcount                    1,625       1,702            -5% 
 Average revenue per broker (GBP'000)          400         430           -7%* 
 Broker employment costs : broking 
  revenue                                    56.1%       58.3%   -2.2% points 
 
 Broker headcount (year-end)                 1,573       1,687            -7% 
 Broking support headcount (year-end)          704         747            -6% 
 
  *At constant exchange rates

Average broker headcount during 2014 was 5% lower than during the previous year, with the year end broker headcount of 1,573 7% lower than at the end of 2013, reflecting the exit of headcount through the cost improvement programme. The lower level of market activity in 2014 is reflected in the reduction in average revenue per broker which, at GBP400k for 2014, is 7% lower than for 2013.

Including PVM and the 40 brokers acquired from Murphy & Durieu in January this year, the pro forma year end broker headcount was 1,742.

The year-end broking support headcount of 704 was 6% lower than at the end of 2013, reflecting the exit of staff through the cost reduction programme.

Operating Review

The tables below analyse revenue by region and by product group, and underlying operating profit by region, for 2014 compared with 2013.

Revenue

A significant proportion of the group's activity is conducted outside the UK and the reported revenue is therefore impacted by the movement in the foreign exchange rates used to translate the revenue from non-UK operations. The tables therefore show revenue for 2013 translated at the same exchange rates as those used for 2014, with growth rates calculated on the same basis. The revenue figures as reported for 2013 are shown in Note 3 to the Consolidated Financial Statements.

The commentary below reflects the presentation in the tables.

 
 Revenue by product group                  2014    2013 
                                           GBPm    GBPm     Change 
 
 Treasury Products                        190.5   203.1        -6% 
 Interest Rate Derivatives                140.6   166.9       -16% 
 Fixed Income                             186.5   218.0       -14% 
 Equities                                  39.5    41.6        -5% 
 Energy                                   100.0   101.6        -2% 
 Information Sales and Risk Management 
  Services                                 46.4    46.0        +1% 
                                         ------  ------  --------- 
 At constant exchange rates               703.5   777.2        -9% 
 Exchange translation                              26.5 
 Reported                                 703.5   803.7       -12% 
                                         ======  ======  =========

Revenue was 9% lower in 2014 than in 2013 at constant exchange rates, driven by lower volumes in the traditional interdealer broker product groups of Interest Rate Derivatives and Fixed Income in Europe and North America.

Revenue from Treasury Products (FX and cash) was 6% lower, reflecting the lower level of market activity in the major currency spot and forward FX markets in Europe and North America, partly offset by higher activity in emerging markets currencies, particularly in offshore Renminbi products and forward JPY in Asia Pacific.

Levels of activity in most Interest Rate Derivatives products (swaps and options) were subdued throughout the period reflecting the further flattening of yield curves for major currencies. Activity in Asia Pacific was generally stronger, particularly in the second half of the year.

The Fixed Income product group includes government and government agency bonds, corporate bonds and related derivatives. The decline in revenue reflects the generally subdued levels of activity in the government and government agency bond markets in Europe and North America, partly offset by higher levels of activity in emerging markets' bonds in North America.

Our Equities business in the Americas delivered a strong performance, with increases in revenue from both equity derivatives and the ADR and GDR conversion desk, but this was offset by lower activity in Europe, particularly in index options.

Revenue from Energy products, including the GBP7.5m of revenue from PVM since acquisition, was 2% lower than in 2013, held back by lower activity in power markets, and in some oil products and commodities particularly in the first half of the year.

Revenue from Information Sales and Risk Management Services was 1% higher than last year, with increased revenue from the Information Sales business through a combination of expansion in its customer base and the addition of new content sets distributed both directly and via its market data vendor customers, offset by lower revenue from Risk Management Services where market conditions have remained challenging reflecting low interest rate volatility.

 
 Revenue by region              2014    2013 
                                GBPm    GBPm     Change 
 
 Europe and the Middle East    405.6   465.6       -13% 
 Americas                      201.6   219.2        -8% 
 Asia Pacific                   96.3    92.4        +4% 
 At constant exchange rates    703.5   777.2        -9% 
 Exchange translation                   26.5 
 Reported                      703.5   803.7       -12% 
                              ======  ======  =========

Europe and the Middle East

Revenue in Europe and the Middle East, including GBP6.4m of revenue from PVM since acquisition, was 13% lower than in 2013. Broking revenue was 14% lower than last year, partly offset by growth in revenue from Information Sales. Revenue in the first half of 2014 was 18% lower than in 2013, and in the second half was 7% lower than in 2013.

The difficult market conditions severely affected the traditional major product areas of forward FX, interest rate swaps and government and corporate bonds, which account for a significant proportion of the revenue in the region. Revenue from emerging markets products held up better than those in the G7 currencies, including a good performance in South African Rand bonds and forward FX, benefiting from the opening of an office in Johannesburg, and in Eastern European and Turkish forward FX. Revenue from Energy and commodities was held back by weaker power markets, but with the inclusion of PVM was in line with the prior year.

The business has continued to develop its presence in the Middle East through further transfers of brokers from London during the year, and revenue from the offices in Dubai and Bahrain was 17% higher in 2014 than in 2013, reflecting the increase in broker headcount in those centres. Headcount in London, and in the offices in continental Europe, was lower than last year reflecting the transfers to the Middle East and the reduction through the cost improvement programme. Year end broker headcount in EMEA was 734. Average broker headcount for the region was 6% lower than last year, with average revenue per broker 10% lower than in the prior year reflecting the lower level of market activity.

Americas

Revenue in the Americas was 8% lower in 2014 than in 2013. Revenue in the first half was 13% lower than in the same period in 2013, with revenue in the second half 2% lower than in 2013.

The reduction in the overall level of market activity in the Americas in 2014 particularly affected the revenue from Interest Rate Derivatives and from government and agency Fixed Income, which were subdued throughout the year. The improvement in market conditions in North America in the second half of the year resulted in a much stronger performance in Treasury products (FX and cash) and in credit products, with revenue in the second half up 25% and 15% respectively compared with the same period a year earlier. The Equities business in the region performed strongly throughout 2014 with revenue from both equity derivatives and the ADR and GDR conversion desk up by over 25%, benefiting from the continued investment in the business. The business in Brazil experienced a sharp decline in revenue in the first half of the year reflecting a less buoyant economy and much reduced market activity, but conditions improved in the second half with revenue 7% higher than in the same period in the prior year.

Average broker headcount in the Americas was 3% lower than in 2013, with average revenue per broker 5% lower. Including the brokers hired from Murphy & Durieu who started with the business at the beginning of 2015 the pro forma year end broker headcount in the Americas was 542.

Asia Pacific

Revenue in Asia Pacific was 4% higher than last year. Broking revenue was 5% higher with revenue from the Risk Management Services business which is operated from the region slightly lower than last year reflecting the low interest rate volatility. Regional revenue was 4% lower in the first half than in the same period in 2013, with a 14% increase in the second half as market conditions improved.

Over 80% of the broking revenue in the region comes from Treasury products and Interest Rate Derivatives. Revenue from Treasury products was 14% higher than last year, benefiting from the high levels of activity throughout the year in offshore Renminbi products. Activity in many of the interest rate swaps markets in the region was lower in the first half than a year ago, but activity picked up in the second half, to leave revenue from Interest Rate Derivatives slightly higher for the full year. The region increased its revenue from Energy and commodities where it has continued to build its presence and extend its product coverage, particularly in oil products.

Average broker headcount in the region was 5% lower than in 2013, with average revenue per broker up 10%. Year end broker headcount in Asia Pacific was 337.

Underlying Operating profit

The revenue, underlying operating profit and operating margin by region shown below are as reported.

 
                                 Revenue             Underlying Operating 
                                                            profit 
                         -----------------------  ------------------------- 
 GBPm                      2014    2013   Change     2014     2013   Change 
 
 Europe and the Middle 
  East                    405.6   468.7     -13%     80.1     97.9     -18% 
 Americas                 201.6   233.9     -14%     10.5     10.4      +1% 
 Asia Pacific              96.3   101.1      -5%     10.1      7.1     +42% 
                         ------  ------  -------  -------  -------  ------- 
 Reported                 703.5   803.7     -12%    100.7    115.4     -13% 
                         ======  ======  =======  =======  =======  ======= 
 
 
 Underlying Operating margin by region     2014    2013 
 
 Europe and the Middle East               19.8%   20.9% 
 Americas                                  5.2%    4.4% 
 Asia Pacific                             10.5%    7.0% 
                                         ------  ------ 
                                          14.3%   14.4% 
                                         ======  ======

Underlying operating profit in Europe and the Middle East of GBP80.1m was 18% lower than in the prior year, and with revenue down 13% the underlying operating margin has reduced by 1.1% points, to 19.8%. Broker employment costs as a percentage of broking revenue have fallen by 1.1% points but the benefit of this has been offset by the operational leverage effect of lower revenue.

In the Americas the underlying operating profit of GBP10.5m is slightly higher than in 2013 despite the 14% reduction in revenue, and the underlying operating margin has improved to 5.2%. Broker employment costs as a percentage of revenue have been reduced significantly, and other front office costs have also been reduced. The broking contribution margin (before management and support costs) has improved by more than 3% points, but this benefit has been partly offset by the operational leverage effect of lower revenue.

Underlying operating profit in Asia Pacific has increased by over 40% to GBP10.1m, and the underlying operating margin in the region has increased to 10.5% from 7.0%. Broker employment costs as a percentage of broking revenue and other front office costs have been reduced, and the benefit of the higher contribution margin has been complemented by the operational leverage effect of the higher revenue.

Litigation

The legal actions that the Company had been pursuing against BGC Partners Inc. and certain of its subsidiaries (collectively "BGC") as well as former employees in the USA in response to the raid on the business by BGC in the second half of 2009 have concluded.

The outcome of the FINRA arbitration on the claims against BGC and former employees brought by the subsidiary companies in the United States which were raided by BGC, along with various claims asserted against those subsidiary companies, was determined in July 2014.

The Arbitrators determined that BGC and certain of the raided brokers should pay $33.3m in compensatory damages to the subsidiary companies on account of the claims against them. The Arbitrators also determined that the subsidiary companies should pay $6.1m in compensatory damages to a representative of the former equity holders of Chapdelaine Corporate Securities & Co. which the Company acquired in January 2007 on account of certain of their claims, and $0.2m (GBP0.1m) to one of the raided brokers. The net $27.0m (GBP16.0m) compensatory damages were received in August 2014.

The separate action taken by the Company and certain of its subsidiaries against BGC in the New Jersey Superior Court, alleging claims for racketeering, unfair competition, misappropriation of confidential information and trade secrets, and tortious interference, has also concluded.

The Company entered into an agreement with BGC on 13 January 2015 under which BGC will pay $100m (GBP66m) to the Company to settle the litigation in the New Jersey Superior Court. In a prior ruling, the Judge had dismissed the Company's claim under the New Jersey racketeering law, and any damages that would have been awarded by the jury in the case would therefore not have been subject to trebling.

The settlement agreement also settles all other outstanding litigation between the parties, which will now be dismissed, and includes a clause that prevents either party hiring desk heads and senior management from the other for one year from the date of the agreement.

The first $25m of the $100m settlement was paid to the Company in January 2015, and the balance of $75m will be paid to the Company before the end of March 2015. The income will be taxed in the UK at the standard rate of corporation tax applicable in 2015.

Consistent with the treatment adopted in previous years, the costs incurred in 2014 in relation to these actions, net of the compensatory damages received during the year, have been included as an exceptional charge in the income statement. The exceptional item in the income statement in 2014 is a net credit of GBP3.1m (2013: net charge GBP15.2m). The $100m settlement will be recognised in exceptional items in the income statement in 2015.

The Company has a duty to shareholders to seek to protect its legal rights and interests, and although legal action can be uncertain, protracted and expensive, the Company believes it is appropriate to take action in order to do so.

Financial Review

The results for 2014 compared with those for 2013 are shown in the tables below.

 
 2014 
--------------------------------------  -------------  -----------------  ----------- 
                                                             Exceptional 
   Income Statement                                      and acquisition 
   GBPm                                    Underlying      related items     Reported 
 
 Revenue                                        703.5                           703.5 
                                        -------------  -----------------  ----------- 
 
 Operating profit                               100.7                           100.7 
 Charge relating to cost improvement 
  programme                                                       (46.7)       (46.7) 
 Credit relating to major legal 
  actions                                                            3.1          3.1 
 Acquisition costs                                                 (1.8)        (1.8) 
 Amortisation of acquisition deferred 
  consideration                                                    (0.9)        (0.9) 
 Goodwill impairment                                               (6.8)        (6.8) 
 
 Operating profit                               100.7             (53.1)         47.6 
 Net finance expense                           (14.1)                          (14.1) 
                                        -------------  -----------------  ----------- 
 Profit before tax                               86.6             (53.1)         33.5 
 
 Tax                                           (16.9)                6.5       (10.4) 
 Associates                                       1.9                             1.9 
 Minorities                                     (0.4)                           (0.4) 
                                        -------------  -----------------  ----------- 
 Earnings                                        71.2             (46.6)         24.6 
                                        =============  =================  =========== 
 
 Average number of shares                      220.4m                          220.4m 
 Basic EPS                                      32.3p                           11.2p 
 
 
 2013 
---------------------------------------------------------------------------- 
 Income Statement                                 Exceptional 
  GBPm                               Underlying         items     Reported 
 
 Revenue                                  803.7                      803.7 
                                  -------------  ------------  ----------- 
 
 Operating profit                         115.4                      115.4 
 Charge relating to major legal 
  actions                                              (15.2)       (15.2) 
 
 Operating profit/(loss)                  115.4        (15.2)        100.2 
 Net finance expense                     (15.8)                     (15.8) 
                                  -------------  ------------  ----------- 
 Profit/(loss) before tax                  99.6        (15.2)         84.4 
 
 Tax                                     (22.4)           2.4       (20.0) 
 Associates                                 1.4                        1.4 
 Minorities                               (0.2)                      (0.2) 
                                  -------------  ------------  ----------- 
 Earnings                                  78.4        (12.8)         65.6 
                                  =============  ============  =========== 
 
 Average number of shares                217.8m                     217.8m 
 Basic EPS                                36.0p                      30.1p

Net finance expense

An analysis of the net finance expense is shown in the table below.

 
 GBPm                                       2014     2013 
 
 Receivable on cash balances                 1.4      1.8 
 Payable on Sterling Notes August 2014     (0.4)    (0.6) 
 Payable on Sterling Notes July 2016       (9.9)    (9.9) 
 Payable on Sterling Notes June 2019       (4.2)    (4.2) 
 Payable on bank facilities, including 
  commitment fee                           (1.5)    (1.7) 
 Amortisation of debt issue costs          (1.1)    (2.3) 
 Other interest                            (0.5)    (0.3) 
                                         -------  ------- 
 
 Net cash finance expense                 (16.2)   (17.2) 
 
 Net non-cash finance income                 2.1      1.4 
 
                                          (14.1)   (15.8) 
                                         =======  =======

The net cash finance expense of GBP16.2m in 2014 is GBP1.0m lower than in 2013. The reduction primarily reflects the non-recurrence in 2014 of the GBP0.9m of accelerated amortisation of debt issue costs recognised in 2013 that related to the bank debt that was repaid during that year.

The net non-cash finance income comprises the net of the expected return and interest on pension scheme assets and liabilities of GBP2.2m (2013: GBP1.9m), partly offset by the amortisation of the discount on deferred consideration.

Tax

The effective rate of tax on underlying PBT is 19.5% (2013: 22.5%). The 3.0% point reduction in the effective rate reflects the benefit of the reduction in the UK statutory rate of corporation tax to 21.5% for 2014, 1.75% points lower than for 2013, and the release of some provisions relating to tax uncertainties which have been resolved. Excluding the benefit from the release of provisions, the effective rate of tax on underlying PBT would have been 23.1% (2013: 24.4%).

The tax credit on exceptional items reflects the net tax relief recognised on those items at the relevant rate for the jurisdiction in which the charges are borne. No tax relief has been recognised on the exceptional charges and credits arising in the USA in either 2014 or 2013 due to the current low level of taxable profit in that jurisdiction. In addition, there is no tax effect relating to the non-cash charge for the impairment of goodwill.

Acquisition of PVM

The total consideration for the acquisition of the equity of the PVM, which had no debt, and on the assumption that the business had nil net working capital at completion, is $160.0m.

The initial consideration of $112.0m (GBP71.1m at the agreed exchange rate of $1.5747) was satisfied through the issue of 25.8m new Ordinary Shares in the Company.

Deferred consideration of up to $48.0m is subject to the achievement of revenue targets in the three years after completion, which together with any required adjustment to reflect the actual amount of working capital and available cash acquired at completion (estimated to be $10m), will be satisfied through the further issue of new Ordinary Shares in the Company, or cash, at the discretion of the Company. The payment of deferred consideration to an individual vendor is linked to their continued service with the business and the deferred consideration amount will therefore be amortised through the income statement over the three years following completion. This charge will be reported as an acquisition related item and not in underlying operating profit. The 2014 Income Statement includes a charge of $1.3m (GBP0.9m) for the period since completion of the acquisition, and the full year charge for 2015 will be $16m (GBP10.3m at the 2014 year end exchange). The charge is a capital item for the Company and does not attract corporation tax relief.

The group's estimate of the fair value of the net assets acquired is $17.9m, comprising fixed assets of $1.6m, net working capital liabilities of $11.1m and cash of $27.4m.

In the period from 26 November 2014, the date of completion of the acquisition, to the end of the year, PVM's revenue was GBP7.5m, with underlying operating profit, and PBT, of GBP1.5m, and underlying earnings of GBP1.1m, after a tax charge at an effective rate of 23.7% on underlying PBT, in line with the effective rate of tax applicable to PVM for the 12 months to 31 December 2014. The acquisition was therefore accretive to earnings per share, with earnings of 42.3p per share issued for the initial consideration, weighted for the period since acquisition.

PVM's unaudited management accounts for the 12 months to December 2014 show revenue of $125.8m (GBP76.2m), underlying operating profit of $21.2m (GBP12.9m), underlying PBT of $21.5m (GBP13.0m), and earnings of $16.3m (GBP9.9m). On a pro forma basis, assuming PVM had been acquired on 1 January 2014 and using PVM's unaudited management accounts for 2014, the acquisition would have been accretive to underlying earnings per share, with underlying earnings of 38.4p per share issued for the initial consideration.

Exceptional and acquisition related items

The GBP46.7m charge relating to the cost improvement programme, the GBP3.1m credit (2013: GBP15.2m charge) relating to the major legal actions, and the GBP0.9m charge relating to the amortisation of acquisition deferred consideration, are discussed above.

The GBP1.8m charge relating to acquisition costs reflects the legal and professional costs incurred in relation to the acquisition of PVM.

The GBP6.8m charge relating to goodwill impairment reflects the write down in the balance sheet carrying value of the group's business in Brazil. For the purposes of goodwill impairment testing, Brazil is regarded as a separate region of the group. The carrying value of the goodwill attributed to each region is tested for impairment annually. The estimated value for each region is compared with the balance sheet carrying value of the region, including goodwill, and any shortfall is recognised as an impairment. Market conditions in Brazil have been challenging in the last two years, and revenue has fallen by nearly one-quarter since 2012. The business continues to be profitable but the absolute level of operating profit has fallen below the level required to support the carrying value.

Basic EPS

The average number of shares used for the basic EPS calculation of 220.4m reflects the 217.7m shares in issue at the beginning of the year, plus 2.6m reflecting the 25.8m shares issued on 26 November 2014 in satisfaction of the initial consideration payable for PVM, plus the 0.3m shares that are issuable when vested options are exercised, less the 0.2m shares held throughout the year by the Employee Benefit Trust which has waived its rights to dividends.

Exchange and Hedging

The income statements of the group's non-UK operations are translated into sterling at average exchange rates. The most significant exchange rates for the group are the US dollar, the Euro, the Singapore dollar and the Japanese Yen. The balance sheets of the group's non-UK operations are translated into Sterling using year-end exchange rates. The major balance sheet translation exposure is to the US dollar. The group's current policy is not to hedge income statement or balance sheet translation exposure.

Average and year end exchange rates used in the preparation of the financial statements are shown below.

 
                          Average            Year End 
                    ------------------  ------------------ 
                        2014      2013      2014      2013 
 
 US dollar             $1.65     $1.56     $1.56     $1.66 
 Euro                EUR1.24   EUR1.18   EUR1.29   EUR1.20 
 Singapore dollar     S$2.09    S$1.95    S$2.07    S$2.09 
 Japanese Yen         Yen174    Yen151    Yen187    Yen174

Cash flow

 
                                                     2014     2013 
                                                     GBPm     GBPm 
 
 Underlying Operating profit                        100.7    115.4 
 Share-based compensation and other non-cash 
  items                                               0.9      1.0 
 Depreciation and amortisation                       13.6     11.9 
 Accelerated depreciation - fire damaged 
  assets                                                -      1.5 
                                                  -------  ------- 
 EBITDA                                             115.2    129.8 
 
 Capital expenditure (net of disposals)            (11.0)   (17.0) 
 Decrease in initial contract prepayment              8.7     16.6 
 Other working capital                             (21.9)   (21.7) 
                                                  -------  ------- 
 Operating cash flow                                 91.0    107.7 
 
 Exceptional items - cost improvement programme    (17.0)        - 
  2014 
 Exceptional items - restructuring 2011/2012        (0.9)    (3.2) 
 Exceptional items - major legal actions 
  net cash flow                                       3.1   (15.2) 
 Interest                                          (15.2)   (14.9) 
 Taxation                                          (15.9)   (27.5) 
 Dividends received from associates/(paid) 
  to minorities                                       0.8      0.7 
 Acquisitions/investments                           (8.7)    (2.3) 
 
 Cash flow                                           37.2     45.3 
                                                  =======  =======

The operating cash flow in 2014 of GBP91.0m represents a conversion of 90% (2013: GBP107.7m and 93%) of underlying operating profit into cash.

Capital expenditure of GBP11.0m includes the development of electronic platforms and 'straight through processing' technology, and investment in IT and communications infrastructure.

The initial contract prepayment balance has reduced further in 2014, as the payments in the year were lower than the amortisation charge.

The other working capital outflow in 2014 reflects an increase in trade receivables due to the higher revenue in December 2014 than in the same month in the previous year, reductions in bonus accruals due to the lower level of broking revenue throughout the second half of the year compared with the previous year and the reduction in management and support staff bonuses which are paid annually, and the payment in December 2014 of GBP5.5m of payroll related creditors included in the acquisition balance sheet of PVM reflecting the withholdings from payments made to staff shortly before completion of the acquisition.

During 2014 the group made GBP17.0m of cash payments relating to actions taken under the 2014 cost improvement programme, and GBP0.9m relating to the 2011/12 restructuring programme. Most of the remaining GBP8.0m of cash payments associated with the implementation of the cost improvement programme are expected to be made during 2015.

The major legal actions net cash inflow of GBP3.1m is in line with the credit in the income statement, and reflects the payments for legal costs made during the year, net of the $27.0m (GBP16.0m) compensatory damages awarded by the FINRA arbitrators that were received in August 2014.

Interest payments in 2014 reflect the income statement charge for net cash finance expenses excluding the charge for the amortisation of debt issue costs.

Tax payments in 2014 of GBP15.9m were lower than the payments made in 2013 primarily reflecting lower tax payments in the UK due to the reduction in the UK tax charge, lower net payments in Asia due to some refunds received in 2014, and the return of tax deposits previously paid in Brazil.

The cash payments relating to acquisitions and investments in 2014 includes the GBP1.8m of costs incurred in relation to the acquisition of PVM, and GBP1.4m of costs incurred in relation to the issuance of the equity to satisfy the initial consideration for that acquisition, together with the GBP3.6m payment to secure the release of the brokers from Murphy & Durieu, the GBP1.2m purchase of our former partner's equity interest in our main business in Japan which was previously operated as a joint venture, and the final GBP0.7m payment of deferred consideration relating to the acquisition of Convenção in Brazil.

The movement in cash and debt is summarised below.

 
 GBPm                                  Cash      Debt      Net 
 
 At 31 December 2013                  282.8   (227.6)     55.2 
 Cash flow                             37.2         -     37.2 
 Dividends                           (36.7)         -   (36.7) 
 Debt repayments                      (8.5)       8.5        - 
 Amortisation of debt issue costs         -     (0.6)    (0.6) 
 Cash acquired with subsidiaries       17.5         -     17.5 
 Effect of movement in exchange 
  rates                                 5.5         -      5.5 
 
 At 31 December 2014                  297.8   (219.7)     78.1 
                                    =======  ========  =======

At 31 December 2014 the group held cash, cash equivalents and other financial assets of GBP297.8m which exceeded the debt outstanding by GBP78.1m.

Debt Finance

The composition of the group's outstanding debt is summarised below.

 
                                     At 31   At 31 
                                       Dec     Dec 
 GBPm                                 2014    2013 
 
 6.52% Sterling Notes August 2014        -     8.5 
 7.04% Sterling Notes July 2016      141.1   141.1 
 5.25% Sterling Notes June 2019       80.0    80.0 
 Unamortised debt issue costs        (1.4)   (2.0) 
 
                                     219.7   227.6 
                                    ======  ======

The GBP8.5m Sterling Notes were repaid at their maturity in August 2014. In addition to the outstanding Notes, the group has a committed GBP150m revolving credit facility that has remained undrawn through the period, which matures in April 2016.

Pensions

The group has one defined benefit pension scheme in the UK following the merger during 2012 of the two schemes which were acquired with Tullett plc and Prebon Marshall Yamane. The scheme is closed to new members and future accrual.

The triennial actuarial valuation of the scheme as at 30 April 2013 was concluded in January 2014. The actuarial funding surplus of the scheme at that date was GBP64.2m and under the agreed schedule of contributions the Company will continue not to make any payments into the scheme.

The assets and liabilities of the scheme are included in the Consolidated Balance Sheet in accordance with IAS19. The scheme's invested assets returned 16% (net of fees) during the year, and the fair value of the scheme's assets at the end of the year was GBP255.7m (2013: GBP226.1m). The value of the scheme's liabilities at the end of 2014 calculated in accordance with IAS19 was GBP193.6m (2013: GBP175.6m). The valuation of the scheme's liabilities at the end of 2014 reflects the demographic assumptions adopted for the most recent triennial actuarial valuation and a discount rate of 3.7% (2013: 4.4%). Under IAS19 the scheme shows a surplus, before the related deferred tax liability, of GBP62.1m at 31 December 2014 (2013: GBP50.5m).

Return on capital employed

The return on capital employed (ROCE) in 2014, excluding PVM, was 20% (2013: 24%). ROCE is calculated as underlying operating profit divided by the average capital employed in the business. Capital employed is defined as shareholders' funds less net funds and the accounting pension surplus (net of deferred tax), adding back cumulative amortised and impaired goodwill and the post-tax reorganisation costs related to the integration of the Tullett and Prebon businesses.

The pro forma ROCE in 2014 for PVM calculated using the underlying operating profit per the unaudited management accounts for the full year 2014 and the value of the initial consideration is 20%.

Regulatory capital

The group's lead regulator is the Financial Conduct Authority. As part of the application for the change in control approval from the FCA for the acquisition of PVM the group applied for and has received a new Investment Firm Consolidation Waiver. The new waiver took effect on 25 September 2014 and will expire on 24 September 2024. Consistent with the previous waiver, under the terms of the new waiver each investment firm within the group must be either a limited activity or a limited licence firm and must comply with its individual regulatory capital resources requirements. Tullett Prebon 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 terms of the new 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 24 September 2024. The amount of the excess goodwill must not exceed the amount determined as at the date the waiver took effect and must be reduced in line with a schedule over the ten years, with the first reduction of 25% required to be achieved by March 2017. The Company expects to achieve this reduction within its current business plan. The waiver also sets out conditions with respect to the maintenance of financial ratios relating to leverage, debt service and debt maturity profile.

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.

Outlook

Tullett Prebon has produced a robust set of results reflecting a strong operational performance in what was another challenging year for the interdealer brokerage sector. Due to ongoing cost discipline we have maintained our margins. Looking forward, we will continue to add products and services to facilitate our clients' strategies, incorporating content and technologies that add value. Our focus on conduct and culture emphasises our ongoing commitment to play a central role in global financial markets and to be viewed as a trusted partner. We will continue to look to make strides to exploit the opportunities in a consolidating marketplace.

Consolidated Income Statement