Business review

Chief Executive's review

"The Group enters the second half of 2011 with a strong order book and healthy project pipeline. We continue to focus on improving operational efficiency and profitability, whilst investing for growth. Whilst revenue visibility remains relatively short and the global economic outlook remains uncertain, the indicators are promising at this stage and the Board looks forward to continuing progress over the remainder of the year."

Nick Stagg, Chief Executive

We are satisfied with the performance of both divisions in the first half of the year. The changes made last year have helped contribute to a much improved performance compared with the first half of last year.

Alexander Proudfoot

Alexander Proudfoot develops and implements operational improvements to increase productivity or reduce costs for its clients. Working with its clients, Alexander Proudfoot improves their top line performance through increased throughput and revenue, and their bottom line through reduced operational costs and improved efficiency. A critical element of its focus is improving the effectiveness of management and implementing sustainable change. Alexander Proudfoot’s projects deliver significantly increased profitability with benefits to clients often running into millions of pounds and a typical return on investment within twelve months.

Alexander Proudfoot’s revenue for the first half of 2011 was 85% higher at £44.4m (H1 2010: £23.9m). Alexander Proudfoot had not performed well in the first half of 2010, but first half revenue for 2011 was also 16% or £6.1m higher than the second half of 2010. Operating profit for the first half of 2011 was £5.8m compared with an operating loss in the first half of 2010 of £0.2m. The operating profit margin was 13.2% compared with -0.9% in the first half of 2010.

Alexander Proudfoot delivered very strong revenue growth in the second half of 2010 and revenues have continued to grow strongly into the first half of 2011. Alexander Proudfoot’s business units are based in Europe, the United States, South Africa and Brazil, from which it serves clients globally. All its business units have reported increased revenues in the first half of 2011 although the rate of growth in the North American operations has been lower than in other geographies. The business has seen good ongoing demand from clients in the natural resources sector and growth in revenues from projects delivered in emerging markets, in particular in Southern Africa and Latin America. In the first half of 2011 there has been an increasing trend for work sold in Europe and North America to be delivered elsewhere, for example, in Botswana, Russia and Peru. Projects won during 2011 in the natural resources sector and in emerging markets have typically been larger than average, although the sometimes remote and challenging project locations have had higher delivery costs and this has had some impact on profit margins.

Alexander Proudfoot has demonstrated over many years that it has an offering that produces very attractive returns for its clients. It is performing well in the current market, taking advantage of the opportunities provided by the pressure on producers in the natural resources sector to improve productivity and efficiency in extraction and processing. As global demand for commodities remains strong there are opportunities for further growth in this sector. Alexander Proudfoot’s clients are generally large international organisations and, whilst the business does not necessarily produce a regular cycle of recurring work with the same client, many clients do commission further work at some stage, and most act as references for sales to other customers. Management is continuing to work to enhance sales processes across the business, increasing the focus on building long term relationships with existing and prospective clients as well as driving individual project sales.

The current order book for Alexander Proudfoot is at a higher level than at any time during 2009 and 2010, providing some visibility on the revenues into the beginning of the fourth quarter of 2011. The pipeline of prospects is also encouraging at this stage of the year, although as is usual in our business the conversion of these into revenue remains a key factor in the performance of the business over the remainder of the year.

Kurt Salmon

Kurt Salmon was established on 1 January 2011 from the merger of Ineum Consulting and Kurt Salmon Associates. Prior to that date both divisions reported and were managed as separate business segments and references to 2010 numbers below represent a pro forma aggregation of Ineum Consulting and Kurt Salmon Associates.

Kurt Salmon is a global management consultancy business which partners with its clients to drive strategies and solutions that make a lasting and meaningful impact on their businesses. The business operates internationally in certain key industry verticals and has a particular focus in retail and consumer products and in financial services. It also provides functional expertise around, for example, offerings to CIOs and CFOs. Kurt Salmon now operates in fifteen countries around the world, the largest operations being in North America and Continental Europe, together with a presence in some markets in Asia.

Kurt Salmon’s revenue for the first half of 2011 was £111.2m. This was £3.8m or 4% higher than the corresponding first half revenue in 2010 of £107.4m, and £10.4m or 10% higher than the second half revenue in 2010 of £100.8m. Underlying operating profit for the first half of 2011 was £9.5m representing a margin on revenue of 8.5%. In 2010 the underlying operating profit for the first half was £12.6m and the margin was 11.7%. In the second half of 2010 margins weakened and the first half operating profit margin for 2011 reflects a significant improvement on the previous six months.

Kurt Salmon has made good progress in the first half of 2011 in all of its key markets. The retail and consumer products consulting practice recovered strongly in 2010 and delivered further revenue growth in the first half of 2011, despite consumer spending in Western markets remaining fragile in the face of continued economic uncertainty. Kurt Salmon’s financial services consulting practice has performed strongly in Continental Europe and is developing well in North America, following the appointment in April this year of Alan K Merrill as global head of the practice, based in New York. The creation of Kurt Salmon is allowing the business to combine its capabilities in key industry sectors and its functional expertise to exploit opportunities to broaden the offering provided to clients. For example, it has recently won a significant project with a major retail European bank to develop a programme to transform its customer relationship experience with its retail customers. This project is an example of Kurt Salmon applying its expertise in the retail experience for consumers to operations in the financial services sector.

The Continental European operations of Kurt Salmon have performed well in the first half of 2011. In France, which is the largest of the European operations, the business has increased revenues and profitability compared with the second half of 2010. This reflects some improvement in confidence in the market, and management focus on improving operational efficiency. In the UK, where Kurt Salmon has a relatively small operation and where the overall supply of consulting services is high relative to current demand, results overall have been somewhat disappointing in the first half.

In North America, the largest element of Kurt Salmon’s activities relates to the retail and consumer goods practice, which had a good start to the year. Some recent indicators have suggested that growth in the retail offering may be slowing somewhat, reflecting client concerns about the pace of economic recovery in the United States. Revenue and profit in the US healthcare consulting practice has increased, and this practice is well placed to benefit from longer term trends in healthcare spending.

In Asia, the Japanese business unit suffered in the aftermath of the natural disasters earlier this year but has continued to work with its retail clients in difficult circumstances, and business confidence in Japan now appears to be improving. Kurt Salmon has a developing relationship with a small retail consulting business in China, which trades under the Kurt Salmon name under a license agreement, and is seeing an increase in its activity in the region as Asian consumer markets expand.

Kurt Salmon is an established global consulting brand with a long heritage. It is well placed to develop as a significant player in the consulting market in the industry and functional areas where its expertise is focused. The business has scope for organic growth in markets where it is already established and will look to build its presence in markets where it currently lacks scale. Alongside investment for growth, the management of Kurt Salmon will continue to work to improve operational efficiencies in the business to enhance the underlying profit margin.

The current order book for Kurt Salmon is at a higher level than at any time during 2009 and 2010. The pipeline of prospects is also promising, although visibility into the fourth quarter is limited at this stage of the year.

Outlook

Trading in the first six months of 2011 has been encouraging. The recovery in Alexander Proudfoot has continued, and Kurt Salmon has made good progress in key areas. Conditions in most of the markets in which the Group operates have been improving slowly during the first half of 2011, although many clients remain cautious, and the lead time to convert sales opportunities into revenue continues to be more extended than has been experienced in prior years.

Healthy underlying cash generation has helped to further reduce the Group’s net debt to £51.7m at 30 June 2011. The normal phasing of cash flows means that historically the second half of the year tends to see stronger cash generation and the Board continues to expect this to be the case in 2011.

MCG enters the second half of 2011 with a strong order book and healthy project pipeline and the Group is trading in line with management expectations. We continue to focus on improving operational efficiency and profitability whilst investing for growth. Although the global economic outlook remains uncertain, the indicators are promising at this stage, and the Board looks forward to continuing progress over the remainder of the year.

Nick Stagg
Chief Executive