Close Brothers Group plc · LSE:CBG
Close Brothers — Investor Presentation (February 2010)
47 slides from Close Brothers's investor presentation, Feb 1, 2010
Slide 1: Close Brothers Group Securities division
Close Brothers Group Close Brothers Group Securities division Presentation to Investors and Analysts 1 February 2010
Slide 2: Cautionary statement
Cautionary statement Regarding information in this presentation Certain statements included in this presentation may constitute "forward-looking statements" in respect of the Group’s operations, performance, prospects and / or financial condition. By their nature, forward-looking statements involve
Slide 3: Agenda
Agenda 1. Introduction – Preben Prebensen 2. Winterflood Securities – Julian Palfreyman, Philip Yarrow, Jerry Hansford 3. Close Brothers Seydler – Rene Parmantier 4. Mako – Chris Welsh 5. Questions & Answers Page 3
Slide 4: Introduction: Three strong businesses
Introduction Three strong businesses Winterflood Divisional contribution to adjusted operating profit(1) (twelve months to 31 July) – a leading market maker in UK equities making markets in more UK stocks than any 100% other London based market-maker 90% 27% 80% 73% Winterflood Close Brothers Seydle
Slide 5: Agenda
Agenda 1. Introduction – Preben Prebensen 2. Winterflood Securities – Julian Palfreyman, Philip Yarrow, Jerry Hansford 3. Close Brothers Seydler – Rene Parmantier 4. Mako – Chris Welsh 5. Questions & Answers Page 5
Slide 6: Introduction to Winterflood
Introduction to Winterflood Key themes • An independent, dedicated liquidity provider • Strong proprietary technology base • Robust and consistent financial performance • Scope for growth Page 6
Slide 7: History
History Experience and evolution over 20 years 1988 Founded by 37 staff from County Natwest 1993 Purchased by Close Brothers Group 1994 Launched Fixed Income trading 1995 AIM market formed by LSE 2000 Established International Trading Desk – EU and North America Established electronic trading platfo
Slide 8: What does Winterflood do?
What does Winterflood do? Pure dedicated market maker providing liquidity to the market • Largest UK market maker for retail brokers Order flow process dealing in over 12,000 securities • Only trades with regulated counterparties Retail investor Institutional investor • Trades on a principal basis o
Slide 9: Overview of Winterflood
Overview of Winterflood Diversified business covering a range of markets and securities Winterflood • Leading liquidity provider in UK and European stocks • 188 people – 93 traders and sales, 37 IT and 58 other back office(1) North Gilts and Exchange Investment Covered UK European American Fixed Tra
Slide 10: Winterflood team
Winterflood team Experience of management and traders CEO v Julian Palfreyman Founding Director 1988 Dealing Directors Investment Trusts Finance Electronic Trading Director Director Director Director Director Director Ian Throssell Co-founder v Richard Meaney Co-founder Spencer Crooks Co-founder v J
Slide 11: Client base
Client base Model facilitates interaction between institutional order flows and fragmented retail flows Retail stockbrokers • Traditional core client base, connected to c. 360 • Business relies on generating strong flow by offering competitive bid/offer prices • Small average bargain size of c.£5,00
Slide 12: Client proposition
Client proposition Why clients trade with Winterflood • Committed to providing liquidity in UK and EU equities • Low cost base provides ability to offer more Increased competitive pricing flow • Offers best execution benefiting from price improvement against the main exchange Enhanced customer • Mem
Slide 13: Winterflood technology
Winterflood technology Bespoke technology platform designed for clients • Large distribution network of electronic connections to stockbroking firms and institutions • Operates two electronic trading platforms – Winner and Win-X • Ownership of software since acquisition of Boot Computers in 2006 • I
Slide 14: Equity markets traded
Equity markets traded Execution services cover all major Western European and North American equity regulated markets Connected to 25 Exchanges and MTFs Toronto Vancouver Venture Exchange LSE and AIM PLUS Markets NASDAQ Euronext NYSE Deutsche Borse OTC Bulletin Board stocks AMEX Pink Sheets European
Slide 15: Trading systems
Trading systems Clients connect to two of the UK’s leading and proprietary e-trading platforms • Winner Retail Institutional – Internal platform providing access to in-house (via broker) (via e.g. Bloomberg) liquidity in over 10,000 instruments – Allows clients to receive one consolidated fill, yiel
Slide 16: Multi venue trading platform
Multi venue trading platform Introduction of MiFiD in 2007 beneficial to Winterflood • Introduction of more sources of liquidity Virtual consolidated order book strengthens model • Developed own trading platform through “virtual consolidated order book” – combines the primary exchange with Chi-X, BA
Slide 17: Key technology strengths
Key technology strengths Highly automated trading house based on proprietary technology • Speed and resilience provide competitive advantage • Continue to invest to further advance trading capabilities • Robust platform allows – Better trade execution – Greater automation for clients – Exceptional s
Slide 18: Financial performance
Financial performance Consistently profitable over time 240 201(1) 200 160 128 £ million 120 109 104 103 97 93 81 Adjusted operating 80 income 67 65 Adjusted operating 57 profit 47 47 38 39 40 40 36 35 27 24 24 17 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Loss 11 17 70 23 15 5 5 4 1 1
Slide 19: Key drivers
Key drivers Performance has been driven by increased volumes 50,000 60 54.3 42,364 50 40,000 44.6 40 Average bargains per day Income per bargain £ 30,000 28,930 27,407 27,437 23,092 30 19,588 20,000 22.0 17,786 20.0 20.3 19.5 20 15.8 14.3 14.8 12,576 10,299 11.6 12.0 10,000 9,215 10 5,138 0 0 1999 2
Slide 20: Cost structure
Cost structure Low fixed cost base supports strong operating margin 220 60% 56% 201 54% 200 2009: 48% – Fixed costs 50% 180 represented 33% of total costs 160 equivalent to 21% of total 39% 39% 38% income 40% 37% 37% 140 36% 36% Operating margin % 128 120 £ million 104 103 29% 30% 97 100 92 93 81 81
Slide 21: Risk Management
Risk Management Tight control process with strict trading limits and real time monitoring Risk Overview • Risk appetite has not changed through the cycle • No view on stock to impact trading decision Market Risk • Trading limits by sector • Real time mark to market valuations of all listed securitie
Slide 22: Risk Management
Risk Management Despite product and market expansion there has been a reduction in risk positions over time Average overnight bull/bear position in Equities and Fixed Income 70 64 65 61 60 58 60 52 48 49 50 44 46 45 45 43 40 40 40 36(1) 33 30 25 24 26 (1) 21 18 20 10 £ million 0 1999 2000 2001 2002
Slide 23: Financial summary
Financial summary Strong track record • Consistently profitable over the last 10 years whilst income streams have diversified • Income per bargain and average bargains remain key drivers of business performance • Impacted by retail investor appetite and market conditions • Low and flexible cost base
Slide 24: Growth opportunities
Growth opportunities Extend current offering and existing core business to wider client base globally • Capture US order flow in UK equities – US retail demand for non-US stocks principally channelled through institutions and represents an opportunity for Winterflood to increase order flow into UK/E
Slide 25: Winterflood's sustainable advantages
Winterflood’s sustainable advantages What differentiates Winterflood’s model • Pure market maker – Core activity and entire business focus – Single capacity, independent & unconflicted in its trading – No proprietary trading or primary business • Network connections and retail relationships – Deal i
Slide 26: Conclusion
Conclusion Winterflood has a strong, unique and resilient business model • Robust and consistent financial performance • Continue to focus and develop core business • Scope for growth by building existing business and taking advantage of opportunities in new markets Page 26
Slide 27: Agenda
Agenda 1. Introduction – Preben Prebensen 2. Winterflood Securities – Julian Palfreyman, Philip Yarrow, Jerry Hansford 3. Close Brothers Seydler – Rene Parmantier 4. Mako – Chris Welsh 5. Questions & Answers Page 27
Slide 28: Overview of Close Brothers Seydler Bank AG
Overview of Close Brothers Seydler Bank AG Summary Close Brothers Seydler Bank AG • Frankfurt based broker dealer which acts as an order book and bond specialist, market leading designated sponsor and focused small- and mid-cap house • Founded in 1994 as a Frankfurt Stock Exchange floor specialist •
Slide 29: Financial performance
Financial performance Stabilising profits Adjusted operating profit to 31 July (£ million) 29.7 30 25.4 25 23.3 21.8 20 £ million 15 10 8.8 8.0 5 4.0 1.5 0 (1) (2) (3) 2006 2007 2008 2009 Adjusted operating income Adjusted operating profit Notes: (1) FY 2006 impacted by £0.2 million provision agains
Slide 30: Core business areas
Core business areas Specialist Floor Trading and Designated Sponsoring Specialist Floor Trading Designated Sponsoring • Second largest specialist floor trader • Market making in micro, small and mid caps stocks (“Skontroführer”) on Frankfurt Stock Exchange to satisfy Xetra® liquidity requirements –
Slide 31: Strategic opportunities
Strategic opportunities Expand existing business capabilities • Expand Fixed Income activity – Acquire additional interbank and institutional end customer flow – New hires in sales team • Manage smoothly the transition in Deutsche Börse AG floor trading system – Ongoing dialogue with Exchange – Cons
Slide 32: Agenda
Agenda 1. Introduction – Preben Prebensen 2. Winterflood Securities – Julian Palfreyman, Philip Yarrow, Jerry Hansford 3. Close Brothers Seydler – Rene Parmantier 4. Mako – Chris Welsh 5. Questions & Answers Page 32
Slide 33: Overview of Mako Group
Overview of Mako Group Summary Background • Mako formed from 1999 buyout of Saratoga • Over 20 years trading experience • Core business is listed options market making • Close Brothers acquired 49.9% of Mako in October 2007 • 118 people covering Europe, US and Asia Market Making Investment Managemen
Slide 34: Financial performance
Financial performance Performance sensitive to market environment CBG share of profit after tax to 31 July • Significant outperformance when dislocation in market: - Sept – Nov 2008 “Lehman’s crisis” induced high 16 volatility and volumes; ideal market making H2 conditions £3.4 million - Jan 2008 So
Slide 35: Market making
Market making Overview of core business Mako Group • Mako’s core business is listed options market making Derivatives market making • Provides two way markets to official market members Fixed income desk (€, £ and $ interest rates, German and US • Order flow comes via independent brokers or governme
Slide 36: Market making risk management
Market making Tightly controlled risk management process to optimise risk/reward profile • Primary role of Mako Risk Management is to quantify, supervise, highlight and communicate the market risk relating to Mako’s trading activities • Objective to minimise revenue variability and increase the qual
Slide 37: Key drivers of business performance
Key drivers of business performance Volume and volatility dynamics Volume • Higher volume means • Higher volume means – increased trade flow so more market making profit – increased bargains so more market making profit – positions easy to close, so risk easier to manage – positions easy to close, s
Slide 38: Mako Investment Management
Mako Investment Management Pelagus Capital Fund launched in 2007 built Mako’s competencies in Investment Management • MIM manages Pelagus Capital Fund, a Fixed Return 200 Income Relative Value Fund (non-Credit) 150 • Won EuroHedge Fixed Income Fund of the Year in % Indexed 2008 and 2009 100 • Pelagu
Slide 39: Technology infrastructure
Technology infrastructure Bespoke technology platform fundamental to Mako’s business model • Technology is a key facilitator for all of Mako’s activities • Automated pricing and trading software is used to support voice-based market making and to generate an independent stand-alone revenue stream •
Slide 40: Business strengths
Business strengths Well established and robust core business responded well to recent “stress-test” • Developing and retaining talent and fostering strong culture and ethics • Strong business and technology infrastructure serving the front, middle and back offices • Diversified spread of business ty
Slide 41: Strategic opportunities
Strategic opportunities Leverage infrastructure and expertise to develop emerging businesses • Opportunity to leverage the core competencies developed in the market making business to develop investment management activities yielding a stable fee-based revenue stream – Investment in MIM infrastructu
Slide 42: Conclusion
Conclusion Securities division has interesting businesses with similar characteristics • Strong leadership and experienced people • Technology is a source of strength and competitive advantage • Risk management remains the key focus • Succeeded in challenging financial markets • Committed to providi
Slide 43: Agenda
Agenda 1. Introduction – Preben Prebensen 2. Winterflood Securities – Julian Palfreyman, Philip Yarrow, Jerry Hansford 3. Close Brothers Seydler – Rene Parmantier 4. Mako – Chris Welsh 5. Questions & Answers Page 43
Slide 44: Appendix
Appendix A Page 44
Slide 45: Biographies: Winterflood
Biographies Winterflood Julian Palfreyman FSI: Chief Executive Officer Born 1960. Joined Bisgood Bishop in 1979. Worked as a dealer in equities and also on LIFFE. Associate director at County NatWest after takeover of Bisgood Bishop before leaving to join Winterflood Securities as director in 1988.
Slide 46: Biographies: Close Brothers Seydler Bank AG
Biographies Close Brothers Seydler Bank AG René Parmantier – Board Member for Markets / CEO René has been with Close Brothers Seydler Bank AG since 2002. He is responsible for the trading divisions including Floor Specialist Trading, Fixed Income Trading, Equity Capital Markets and Equity Sales, and
Slide 47: Biographies: Mako
Biographies Mako David Segel – Chairman With extensive experience trading options on most of the world’s leading exchanges, coupled with a long history of success as an entrepreneur, both in and out of the financial markets, David is well equipped to oversee the Mako Group. A graduate from Yale Univ
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