TP ICAP Group PLC (TCAP) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the TP ICAP plc Annual General Meeting 2020. I will now hand over to your chair.

Good afternoon, everyone, and welcome to the 14th Annual General Meeting of TP ICAP plc. I'm pleased to advise that we have a quorum, and I declare the meeting open. I am Richard Berliand, the Chairman of the company, and I'm joined on the line today by members of the Board of Directors; and by Richard Cordeschi, the Group Company Secretary. This year, in response to the COVID-19 pandemic and in light of the U.K. government's compulsory measures prohibiting public gatherings of more than 2 people and nonessential travel, we wanted to ensure that the AGM would still be accessible to shareholders. We therefore put in place arrangements for shareholders to attend the meeting by electronic meeting means. And I'm delighted to be able to extend a warm welcome to our shareholders who are participating online through our virtual meeting platform. I would now like to introduce our Board. Nicolas Breteau, our Chief Executive Officer; Robin Stewart, our Chief Financial Officer; and Philip Price, Executive Director and Group General Counsel. Our other Directors present are: Michael Heaney, Nonexecutive Director and Interim Chair of the Risk Committee; Angela Knight, Senior Independent Director and Interim Chair Designate of the Remuneration Committee; Edmund Ng, Nonexecutive Director; Roger Perkin, Nonexecutive Director and Chair of the Audit Committee. We are also joined for the first time by Angela Crawford-Ingle, Nonexecutive Director; and Mark Hemsley, Nonexecutive Director, who both joined the Board in March 2020. Angela brings substantial experience, including relevant financial experience to the Board, both from her executive career as a partner of PricewaterhouseCoopers and also from her other nonexecutive directorships. Mark brings the benefit of his wide experience of capital markets and exchanges from his executive career in the industry as well as insight into large-scale technology, infrastructure and operational transformations. I'm confident that if elected, both Angela and Mark will strengthen Board discussion and oversight of the business. Finally, we have Lorraine Trainer, Nonexecutive Director and current Chair of the Remuneration Committee. As previously advised, Lorraine has decided not to seek reelection today and I will consequently step -- and will consequently step down from the Board at the end of this meeting. I would like to take this opportunity now to thank Lorraine for her valued contribution to the Board, and on behalf of my colleagues, to wish her all the best for the future. I would also like to thank David Shalders for his significant contribution to the Board. David stepped down as a Nonexecutive Director of the company last October when he took up a role at the London Stock Exchange. Again, on behalf of my colleagues, I would like to wish David all the best for the future. All shareholders will have received a copy of the annual report and accounts for the year ended 31st of December 2019 together with a separate document setting out the notice of this meeting and the business of the meeting. I propose to take the notice as read. Please refer to the notice of meeting for information and an explanation on the resolutions that are being voted on today. I do not propose to summarize them again before we commence the formal voting process and consider any questions that you may have about the annual report and accounts in general and any of the resolutions, in particular. An AGM statement and trading update was released to the London Stock Exchange this morning, giving an update on the company's progress since the beginning of the year. This statement is available on the company's website. I also propose to take this statement as read. Before we turn to the formal business of the meeting, I would now like to invite Nicolas Breteau to give a short presentation on the business. Nico?

Thank you, Chairman, and good afternoon, everyone. I will start by providing the financial highlights of 2019, and we'll talk after that briefly about our key successes from last year, the strategic themes we have identified for our medium-term growth. I will then talk about how we have adapted to COVID-19, responded to the crisis and finish with our revenue numbers for the first quarter of this year. Starting with the financial highlights. So we've delivered a resilient performance in 2019. Global Broking experienced mixed market conditions, but we benefited from our increased diversification. The non-Global Broking divisions, Energy & Commodities, Institutional Services and Data & Analytics, all did double-digit revenue growth. Overall, revenue grew 4% on a reported basis and 1% on a constant currency basis to just over GBP 1.8 billion. The underlying operating profit increased 1% on a reported basis to GBP 279 million, including a negative impact of GBP 8 million from exchange rates. Our underlying operating profit margin was 15.2% and profit before tax was GBP 230 million. [ Basic EPS ] for the full year was 33.8p and our total dividend for the year is in line with our guidance at 16.85p. Let me reflect on a few key successes. As well as delivering a good performance in 2019, I believe we've made significant operational progress. I'm pleased to say that we saw the end of the integration, the ICAP integration, and we've delivered synergies of GBP 80 million above our reverse target of GBP 75 million, with a total cost to do it of GBP 164 million. Now that we finished the integration, we have a common platform across the business that is scalable, capable of innovation and which enables us to increase efficiency and reduce operational risk. My first priority when I took up my role was to put in place a senior management team that could meet the immediate needs of delivering the integration, but also stabilizing the business. Since then, strength in the team was also my objective by appointing individuals capable of implementing our future growth plans. We have 12 new people in the 15-strong senior team. We have strengthened governance. First, we moved responsibility for the P&L from the regions to our 4 business divisions, which are more closely in touch with client needs. And secondly, we've continued to reduce the number of legal entities. Three objectives here: simplify our business, reduce governance costs and make the flow of funds to group more efficient. So on that project to reduce legal entities, we've made some good progress so far and reduced the overall number by about 80. Another important challenge was to design and implement our new risk management framework in 2019. And we've run the diagnostic, designed the plan and started to implement the plan. Now we are embedding this within the organization. This framework, as you know, is a key factor in the assessment of regulatory capital. These steps have led the foundation for the proposed redom -- redomiciliation of the group from London to Jersey, subject to regulatory and shareholder approval. The redomicile, together with the reduction in legal entities, gives us more financial flexibility, greater ability to compete and effective governance. We will issue a shareholder prospectus in relation to the redom in due course. In terms of development, we have also announced the proposed acquisition of a broker named Louis Capital last December. This broker specializes in cash equities, equity derivatives and fixed income. It's important for us because it has a strong customer franchise in Continental Europe and that paves the way to a stronger footprint for Brexit. It adds 70 brokers to our business, but also offers a breadth of products that complement our existing offering. Finally, listing the achievements, we have put in place plans to ensure that we are prepared for Brexit to ensure we can continue to serve our clients under all scenarios, including [ no deal ]. I just want to remind you that 90% of our current broking revenues are largely unaffected by Brexit. Now moving on to strategy. We've been busy also in 2019 to design our growth strategy for the medium term. We believe that TP ICAP is in a strong position. We're the world's largest interdealer broker. We have a leading position in some assets like energy and commodities. We have a very strong buy side agency franchise. And we are the largest provider of OTC data. We have the best and revolve a library of data, OTC data. But we also recognize that our industry is undergoing enormous change. The market structures are evolving. Our clients are looking for more efficient ways to discover prices, different ways to access liquidity and also get their trades confirmed. We have also noticed the pressure from regulation. It is increasing and driving demand for new services. To drive our medium-term sustainable profitable growth, we will focus our development around 3 strategic themes or pillars, if you want. The first is [indiscernible] liquidity. When we put Tullett and ICAP together, we have created a leading position in almost all the markets in which we operate. They give us the deepest [ liquidity ] pools. So we would [ operate ] using both brands commercially, but we want to give access to the clients to an aggregated pool of liquidity. Our second thing is [ technology evolution ]. In fact, it's our ability to offer clients access to the liquidity via a single user interface, and that's highly dependent on technology. We want to increase the amount of business we deliver electronically. Our industry is evolving. When we were doing 100% of our business through voice 3 or 4 years ago, now it's a much more hybrid or pure electronic way to trade with our -- to interact with our clients. Our third theme on strategy is diversification. We've already seen the benefits of our 3 fast-growing business divisions because now they represent about 1/3 of our revenue and contribution, but we will continue to push the diversification of our customer base and our service offering. We want to service the buy side in [ all to our ] markets. We want to maximize the value of our data business. Now I'd like to move to our response to COVID-19. So for us, the global impact of COVID-19 presented significant challenges, but we were quick to act and we took some steps to ensure the safety of our staff and to maintain our client services. You know that we operate in 28 countries globally, so we had to tailor that strategies to individual government advices and positions. In our largest markets, we sent the vast majority of support staff home to allow the brokers to disperse, distantiate across our offices and others were sent to work in recovery sites. Significantly, we sourced, installed and rolled out a digital solution in a very short space of time that enabled many of our brokers to work from home. This solution has been made available, where appropriate, to brokers across all of our regions. At the same time, we have maintained high standards of control and governance. So we've kept in very, very close touch with the regulators in each country to make sure that we were acting in line with their position regarding surveillance of broking and trading activities. We have also, through our annual ICAP Charity Day, given back to the communities where we work. And in response to COVID, we have directed our disaster recovery fund to international and local charities that are working to minimize the impact of the virus. We have donated, for example, 20,000 facemasks to health centers in the U.K. and in the U.S. We have encouraged our U.K. staff to take up the 2.6 Challenge. That's a challenge that was put in place to help charities that suffered from the cancellation of the London Marathon. And we have introduced virtual volunteering opportunities for our staff with our chosen charities. Now a word about the performance in the first quarter of 2020. The performance was strong with revenues up 17% to GBP 547 million on a reported currency basis. If I break it down by division, Global Broking revenue was up 10% at GBP 363 million. We saw in Global Broking good performance across all asset classes, but particularly strong activity in rates and equities. In the other fast-growing non-Global Broking businesses, we have seen also strong double-digit performance. In Energy & Commodities, our revenue was strongly up by 27% to GBP 118 million. And here, again, all asset classes performed strongly as the macro conditions proved favorable during the period. Our agency business called Institutional Services, it's still [indiscernible] 85%, benefiting from new hires, new clients but also increased client activity, demonstrating the resilience of the agency broking model. And last but not least, our Data & Analytics business had another good quarter with a revenue growth of 10%. And they continue to launch new products and diversified revenues through selling new products to new but also existing clients. The quarter was characterized by higher volatility and volumes in the market, particularly in the month of March. We also believe that we have gained market share during this period due to our strong global franchise and client focus. I think -- I believe that in the time of crisis, the clients are concentrated where they saw the largest pools of liquidity. Since the start of April, we've seen lower levels of volatility and volumes, and the month is kind of a return to normal if we compare to last year. So to finish, I believe TP ICAP is in a very strong position. We have a strong balance sheet, sufficient cash resources and access to liquidity to continue to weather the impact of the COVID. Thank you for your time. And now I will hand back to the Chairman. Thank you.

Nicolas, thank you very much for that. I will now turn to the formal business of the meeting. I should explain that as indicated in the notice of the meeting, voting on the resolutions will be conducted online by way of a poll. Let me now take a few moments to explain the voting procedure that we will use today. Voting on the resolutions is open now. For those shareholders attending online using the online meeting platform, the voting icon will appear on the navigation bar. Once you click on this, the resolutions will appear on your screen, along with the for, against and withheld voting options. Please note that a vote withheld is not a vote in law and will not be counted as a vote for or against the resolution. Simply select one of these options to cast your vote. If you change your mind, simply select another option. You can change your vote as many times as you wish up until the close of the poll. Your vote will have been submitted when, having selected it, the voting option icon changes color and a Vote Received message appears. There is no final submit button as the voting is live. If any person attending the meeting online is having any difficulties using the platform, there is a user guide that has been prepared that you can access through the platform on the Information tab that should address any questions you might have. Please note that only shareholders, proxy holders or shareholder representatives may vote. Each shareholder present in person is entitled to 1 vote for every share registered in his or her name and each corporate representative or proxy is entitled to 1 vote for each share which he or she represents. Many shareholders have already sent in a proxy, appointing me to vote on their behalf. I will vote as they have instructed me. If they have given me discretion as to how to vote, I should be voting in favor of the resolution concerned on their behalf. For your information, the proxies that I hold, including those that give me discretion on voting, are at least 88.48% in favor of each of the resolutions. You can vote at any time during the proceedings until I declare the voting closed. I will close the voting after all resolutions have been considered once we have concluded the Q&A section of the meeting. I will give you a clear prompt later in the meeting to warn of the close of voting. I would now like to offer shareholders the opportunity to ask questions on the annual report and accounts or any of the resolutions to be voted on. You could now start submitting questions using the online meeting platform, which we'll address later -- which we will address later in the proceedings. If you wish to ask a question, please click on the message icon located at the bottom of your screen if viewing from a phone or the top of your screen if viewing from your laptop. Type your message into the Ask a Question box and click the arrow button to the right-hand side of the Message box.

While we are waiting for questions to be received, I will take this opportunity to pose a question that was sent in just before the meeting from one of our shareholders. The question is the following: Although the underlying result is satisfactory, it has, in recent years, been marred by acquisition/disposal costs so that the statutory outcome is much lower. This charge is made up of some ongoing costs such as amortization of intangibles, plus some one-offs, integration costs, impairment, et cetera. Have we now seen the end of the latter category? If not, for how long do you expect these to continue? Given the nature of the question, I'm going to ask Robin Stewart, our CFO, if he would respond.

As I mentioned in our 2019 year-end results presentation in March, many of these one-off items will not recur, with the exception of the noncash amortization of acquisition intangibles, which mainly relate to historical acquisitions. However, we still expect to incur some additional one-off costs in 2020 that relate to our intention to restructure the group under a new group holding company in Jersey. And finally, any additional potential goodwill impairment, which is a noncash item, would have to be assessed on an ongoing basis on every region's future estimated profitability. And whilst we don't currently expect any impairment, we are monitoring this closely in the vastly changing environment that we are operating in.

Thank you, Robin, for that. Nico, we have a question that has just come through. What are the revenue expectations for the year ahead?

So we have -- we are guiding -- we are really taking caution in the guidance for revenue expectations because we think that if we look at Global Broking, which accounts for still 66% of our overall revenues, we might see a reduction in the activity in the coming 2 quarters. You've seen an increase of government issuance, and that's positive for our business, but at the same time, a very low rate environment and quantitative easing is kind of counteracting that benefit in terms of activity. So we think also that the banks might be really on the cautious side on the other side of the COVID crisis. So we are very cautious on that part. We think that Data & Analytics will continue its development, but there will be a bit of a slowdown for a quarter because we haven't been able to see and meet our clients as much as we would like to. And we will continue to -- most probably to have double-digit growth on the other diversification businesses. So overall, we are very cautious and would say it's going to be an, overall, probably lower single-digit growth of revenue in 2020.

Thank you, Nico. To our shareholders who are online, please, if you have any other questions, please could I ask you to submit them now? I will give a 30-second pause just to see if any others come through. But please, can I also remind shareholders to vote at this time? There will be a 2-minute wait while we do that. I have a second question, Nico, for you, if I may. Like many institutions in the banking industry, are you expecting some redundancies?

So we do not expect redundancies for the time being. We have not laid off anybody. We have not furloughed any employees. We have not requested a government help. We've been very busy. We have, as you know, a strategic transformation agenda for which we will need additional resources and skills. So for the time being, we have not -- we are not expecting. Now as I said just on the question -- on the answer to the question before, we are on the cautious side because this crisis is not over yet. And so I just want to remain cautious, but we are not expecting for the time being, no.

Thank you, Nico. I'm now going to pause for 30 seconds to see if there are any further questions to come in. As there are no further questions, the poll will remain open for a further few minutes to enable any shareholders who have not yet done so to finish their voting. We will now pause for 2 minutes for the voting to be completed. [Voting]

Nico, we have 1 further question while the 2 minutes are running. Do you have any views on the switch from voice to electronic broking?

So what has been noticeable is that the reaction to the market to high volatility has been different. So if you look at rates, most of the clients have reverted to voice because they are [ go ] with electronic you sent to stream in a central limiter or the books and to come into firm prices. So seeing really a growth of voice versus electronic areas. We have, in example, the treasuries. On the other end market, we've seen a big increase of electronic. We've seen on the FX also more volume match. So my overall view is that in times of high volatility, there is always a comfort for the clients to use the voice brokers, but the overall trend post this crisis, I think will remain to move to more electronification of our business. So this is why it's really one of the pillars of our strategy.

Thank you, Nico. Ladies and gentlemen, the poll is now closed, and the provisional results indicate that all resolutions are carried. The results of the poll will be announced to the London Stock Exchange later this afternoon and will also be published on the company's website. That concludes the formal business of the meeting. Thank you very much to everybody for attending.