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Article Excerpt
JOHN NAPIER, CHAIRMAN AND INTERIM CEO, AEGIS GROUP PLC: Good morning everyone, my name is John Napier and welcome to this results presentation. So the format today is quite straightforward. I will give an overview of results. You'll have a financial review. There will be an outlook section and we will obviously talk about -- have a healthy Q&A exchange, I have no doubt.
But first a few general comments. I became Chairman of Aegis in July and took on the Chief Executive's duties on an interim basis in December. Since arriving I've had some overriding priorities. Now it's quite normal for me when I join any business at any capacity, non-executive Chairman or what, that I do my own rigorous review of their operating performance. Now what that shows is that basically we've got two well managed businesses that are growing strongly.
There is evidence as you expect with any businesses that have had a high growth history of a pattern of commitment to cost, particularly in budgeting, in advance of secured revenue. This is quite clever when you've got ever highly growing markets, but it can have a small but important limiting effect on margins. And what I call a Keynesian, for those that study the great economist, stickiness relating to variable wage and performance payments, they tend to get baked into budgets as time progresses.
I clearly also needed to see whether Aegis could respond appropriately to what I perceived and I could see from outside the Company and had some experience of, a major sea change occurring in the economy at our marketplace. And basically the downturn has affected media later than most other sectors, and it may have affected, for that reason, slightly more savagely.
I wanted to also look at what our underlying service offerings were and how they were perceived, and I certainly wanted to look at reporting treasury and cash management. Now these sort of priorities have impacted on the 2008 results and have informed the 2009 the budget.
So they have fed into a cost reduction program announced today which --we're taking an exceptional charge of GBP39.4 million in '08 and '09, and expect full year benefits of GBP20 million. I'll come back to that program in more detail.
So if we go back to the financial highlights and you can see on this slide looking at the Group P&L, they show a very good set of results. Revenues up 21.3%. You can see the numbers there, operating profit 26.8%, PBIT up 25.7%.
Now obviously there is a very strong currency effect. So at constant currency 10.1%, 10.7%, 9.3% for PBIT, still a good set of results. And pretty exceptional earnings per share at 10.3p, an increase of 9.6% at constant currency and that has enabled us to pay with confidence a full year dividend up by 8.7p (sic - see presentation).
Now what additional factors -- I've mentioned the currency, within the entrails of the reporting systems within the Company and as presented, we've got a strong improved gross-to-net revenue conversion which has been very strongly demonstrated by Synovate in the USA. We've got a higher proportion of growth overall from acquisitions, some 55%, 54%, which includes the completion of over 20 acquisitions; 16 in Aegis Media and 4 in Synovate.
The acquisition growth number is an irritation to me because it's based on this global -- this gross revenue concept which gets distorted if you get higher rates of gross-to-net revenue conversion. So if I adjusted for that, you'd reverse the figures of acquisition effect, they'd be something like 60% organic and 40% acquisitions. And I'm not going to get into that debate today. But it seems that the figures as presented can be -- don't reflect necessarily on that particular line the true reality of what's going on, but it's not a negative, it's just a nice academic point.
Now the geographic profit performance was reasonably consistent with prior year. The main regional variances were in Aegis Media where Europe and the Middle East clearly offset a weaker US performance. Synovate had an excellent US result.
So starting with Aegis Media, you're all familiar with this slide. We won't be giving profit results within region as they are still and will remain commercially sensitive.
Some general points, report constant currency, we'll go straight to that if you like, was 10%. Organic growth was 6.1%, acquisitions made up the balance; here's my 60/40 emerging.
Digital remained important throughout the world. It now makes up 29% of Aegis Media and grew faster than our offline business. With a reported growth in operating profit at 17.5% but, at constant currency, less at 3%, Carat USA has given a nasty nip in the bum, if I may use that phrase. It put a dent in Aegis Media organic revenue growth which would have been 9.1% in the year against the 6.1% achieved. So most of that variance is entirely explained by the one area in the world where we didn't perform well on a year-to-year basis.
And Carat USA operating profit actually fell [nine point million], and so without this, growth in Aegis Media operating profit at constant currency, would have been 9.1%. So there is the explanation for the kink in those numbers.
Now all other regions performed well, except possibly for the movement in Aegis Media central cost. And since Jerry joined and took executive control, well he's been here for 10 years but since he got his hands on the total business, he has taken action to address both the cost base of Carat USA and the growth in the central costs in the second half.
So if I take it region by region relatively quickly. Europe and the Middle East remains the power house. Currency was a big factor here because of the euro relativity. UK had an excellent result, although Posterscope faced tough trading throughout the year. Eastern Europe and Russia did well. Relative improvements in performance from Germany and France especially in digital and value added. The Nordics maintain their excellent progress. Weaker areas were, guess what, Spain and Italy.
Onto the USA. I've mentioned it a few times already but just let me add a little bit more detail. Clearly the underlying issues have been that new business gains have been very poor in recent years. As a consequence, normal client churn has impacted on our results. Action was taken to address the immediate balance of resource and revenue, a new President of Carat USA has been appointed, who has got extensive experience in US and UK and with Carat.
Encouragingly as we speak, business winds have turned positive in recent times and we are significantly strengthening management with new hires. That one result does mask a very strong performance for all other USA operations, whether they be in Aegis or be in Synovate. So the message is the USA market remains a key market for us. And make no mistake, we plan to succeed in that business.
Moving on to Asia Pacific, as you can see it remains a very strong growth area. Revenue growth was matched by excellent operating profit growth. Main drivers China, Taiwan, Australia, a boost from the Olympics in China. Good development in Hong Kong and Singapore, India, Malaysia and Thailand, all grew steadily. Japan and Korea had some minor specialist issues around agencies, which have been addressed. We have made good progress improving our service offering, market penetration and overall performance. Asia Pacific actually made a significant step forward such that it came of age and really demonstrated the strong benefits and its market potential.
So in summary on Aegis Media I'd say, good performance, in a changing year for media industries. With one exception, we did well in all our markets. Our strategy remains to take advantage of the geographic footprint; to maintain and develop a strong market position in the EMEA; to fix our Carat operations in the US; and to prioritize and progress developments in the emerging markets of China and the Far East.
Now you've heard it many times, and I'm going to say it again, that we continue to develop our digital network, still the single largest in the world, and to invest in the development of an expansion of specialist expertise.
Further innovation in developing integrated digital and database services remain key elements of addressing, and continuing elements of addressing, client's needs. Clearly we'll still use a mix of organic development and specialist acquisitions to further those aims.
As a leading supplier, we believe we have the capacity to effectively operate locally, regionally and globally. And if the proof of the pudding is in the eating, we've started 2009 with some very important client wins. Kellogg's, Vodafone, Credit Agricole, in fact I think it reflects the best ever first quarter for Aegis Media with over a GBP1 billion of net new billings. So not a bad start to 2009.
Moving on now to Synovate, and starting with a summary at the top, we had good growth in net revenue and operating profit across the piece. In the US, excellent profit results were achieved through better gross-to-net revenue conversion and cost efficiencies.
In the past, I'm coming back to my net revenue argument, I think Adrian championed it for some years, but I think on this I could say at this stage I agree but we're not going to rush in and make any hasty adjustments to anything. But organically net revenue was up 5.1% and acquisitions made up the balance at 55 at constant currency.
We continue to invest in the business, both to drive global efficiency improvements, methods of working and service initiatives, especially in retail. Now probably in Synovate there had been [anticipatory] and expansion resource. In-year action was taken and a detailed corrective program is in action. It's taking longer and hence it's in 2008, 2009 as well. Given the scale and number of units, we've got to be very careful here about how we take the tailoring, and we don't throw babies out with bath water, and we retain key capability, and therefore this takes care and that gives the exceptional charges arising in '09.
So going back region by region again, EMEA was good. Strongest growth rates for the region were the emerging markets of Russia and Africa followed by the Middle East. Germany and Scandinavia were more challenging, because of exposure to automotive, and the media paradoxically. France and Spain improved their performance.
In the UK, good progress was made. In the year all operations were integrated into a single unit in the first half, which had a diversionary effect. What I call the well known head office effect, not that I have a head office. But that disruption was offset by good business winds in the last quarter.
In the Americas, it's really quite a different pattern of profit contribution with reported net revenue up very significantly compared to gross. And this is where you get this point being demonstrated very strongly. So it improved from outsourcing and offshoring data services, and grew strongly in constant currency, despite weaker market conditions in the US overall.
So Synovate, in fact, USA delivered very strong growth in operating profit. And the emerging markets in Latin America also contributed.
Coming to Asia Pacific, again we delivered the strongest growth in revenue and profit in parallel to the performance of, say, Aegis Media. Japan delivered a strong result, Australia grew well, South Asia performance was...
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