Financial review
"The Group's trading results for the first half of 2011 are in line with the Board's expectations at the time of the pre-close trading update issued on 30 June 2011."
Chris Povey, Finance Director
Exchange rates
The Group derives the majority of its revenue and operating profit and holds the majority of its assets and liabilities in Euros and US Dollars. The average exchange rates to Sterling used in the first half of 2011 were £1=€1.15 (2010: £1=€1.15) and £1=$1.61 (2010: £1=$1.53). The closing exchange rates to Sterling used in balance sheet translation were £1=€1.11 (2010: £1=€1.22) and £1=$1.60 (2010: £1=$1.50).
Revenue
Revenue for the first half of 2011 was £155.6m, 19% ahead of the corresponding figure for the previous year (2010: £131.3m). The major contributor to this increase was Alexander Proudfoot, which recorded revenue of £44.4m (2010: £23.9m), an increase of £20.5m. Revenue from Kurt Salmon was £111.2m (2010: £107.4m), an increase of £3.8m. Changes in exchange rates compared with the first half of 2010 have had a small negative impact on reported revenues, principally as a result of a somewhat weaker US Dollar depressing the Sterling value of revenues in that currency.
Geographically all areas recorded revenue growth compared with the corresponding period of 2010. The revenue from Europe was £93.9m (2010: £82.2m), the Americas £47.2m (2010: £44.9m) and the Rest of World £14.5m (2010: £4.2m). This analysis reflects the geographies in which the business units generating the revenues are located, and, particularly in the case of Alexander Proudfoot, does not correspond exactly either to the locations in which work is delivered or the currency in which revenue is billed.
Underlying operating profit
Operating profit for the first half of 2011 was £13.7m (2010: £11.2m). Underlying operating profit for the period increased by 24% to £15.3m (2010: £12.4m), principally relating to the profit improvement made by Alexander Proudfoot. Kurt Salmon’s underlying operating profit for the first half of 2011 showed an improvement on the second half of 2010.
Non-recurring items for the first half of 2011 netted to an expense of £0.3m (2010: £0.2m income). These comprise costs of £1.8m predominantly arising from the integration of Ineum Consulting and Kurt Salmon Associates, and income of £1.5m which is the release of part of a legal provision created on the acquisition of Kurt Salmon Associates that is no longer required by the Group. Amortisation of acquired intangibles was £1.3m (2010: £1.4m).
Interest
The total net finance costs for the period were £1.2m (2010: £1.9m). The decrease reflects the effects of lower net debt for the period following the refinancing in June 2010 and the strong cash generation from the second half of 2010. The Group has paid margins of 1.5% over LIBOR rates on its bank borrowings during the period.
Taxation
Profit before tax for the first half of 2011 was £12.5m (2010: £9.3m). Underlying profit before tax for the period was £14.1m (2010: £10.5m). The tax rate on the underlying profit before tax was 26% (2010: 35%) and includes the benefit of certain prior year items. The Group has tax losses in various jurisdictions and the underlying tax rate has benefited in recent years from the utilisation of these, particularly in France. However these have diminished and the ability to utilise those remaining is dependent on trading profitability.
Earnings per share
Basic earnings per share were 2.1p (2010: 2.0p per share). Underlying basic earnings per share increased to 2.4p (2010: 2.2p per share). Earnings per share for the first half of 2011 reflect the full year dilutive impact of new shares issued in the capital raising in June 2010.
Dividend
The final dividend for 2010 of 0.3p per ordinary share was paid on 6 July 2011 to shareholders on the register at 10 June 2011. The Board is declaring an interim dividend for 2011 of 0.2p per ordinary share (2010: 0.15p per share). The increase in the interim dividend in part reflects a rebalancing between the interim and final dividends. The interim dividend will be paid on 6 January 2012 to shareholders on the register on 2 December 2011.
Share capital
On 17 June 2010 a General Meeting of MCG approved the firm placing, placing and open offer of 113.7m new ordinary shares at 22p per share and up to 53.1m warrants at the same price. As at 30 June 2011 6.5m warrants had been exercised and 46.6m warrants remained outstanding. In the event that all these outstanding warrants are converted before they lapse on 31 December 2011, the further cash proceeds payable to MCG will be £10.2m.
Balance sheet
The Group’s net debt at 30 June 2011 was £51.7m (30 June 2010: £74.8m), which is £2.7m lower than the £54.4m reported at the end of 2010. In previous years the Group’s operations have not typically been cash generative in the first half of the year, primarily as a result of the timing of the payment of annual cash bonuses. As a result the Group has generated the majority of its cash in the second half of the calendar year and this trend is expected to continue in 2011.
Since 31 December 2010 £1.2m has been received as a result of the exercise of warrants issued in the capital raising in June 2010. In March 2011 the trustees of the MCG employee benefit trust purchased 4.2m of the Company’s shares for consideration of £1.5m for use in satisfying future awards under the Company’s employee share incentive plans.
The Group is financed by a multi-currency debt facility negotiated during 2007 and expiring in September 2012. At 30 June 2011 the gross debt drawn under this facility reflected in the Group balance sheet was £72.4m. The leverage covenant measure used in the debt facility agreement is a measure of the ratio of net debt to adjusted EBITDA, and was 1.7 at 30 June 2011. As a result the interest rate margin paid on the Group’s debt in the remainder of 2011 will be 1.15% above US Dollar Libor and Euribor, lower than the 1.5% margin paid in the first half.
The net post-retirement obligations liability principally relates to a closed US defined benefit scheme in Alexander Proudfoot and to a Kurt Salmon pension obligation in Germany and has decreased from £25.7m at 31 December 2010 to £24.9m at 30 June 2011. The reduction reflects improved asset performance and an increase in the discount rates used to calculate the liabilities of the US scheme.
The Board’s assessment in relation to going concern is included in Note 2 of the financial information.
There have been no transactions with or material changes to related parties that have materially affected the financial position or performance of the Group during the period.
Chris Povey
Finance Director
Summary of Financial review
Revenue for the first half of 2011 was 19% and underlying operating profit 24% ahead of the same period in 2010
Finance costs have decreased as a result of lower net debt and strong cash generation; interest margins will be lower in the second half
Interim dividend for 2011 of 0.2p per share (2010: 0.15p per share)
If all outstanding warrants are converted the cash proceeds in the second half will be £10.2m