Profits up; margins firm
Headline PBIT margins remained at 15.0%, slightly down from the target margin of 15.3% for 2008, on the same basis, including TNS for two months, 0.2 margin points up on 2007 on the same basis.
The Group’s like-for-like headcount continued to grow faster than like-for-like revenue growth in the first half and third quarter, although this did not have a significant negative impact on achieving the Group’s operating margin target of 15.5% (excluding TNS) and 15.3% (including TNS), until the “Beijing bounce”, anticipated in the Group’s budget and reforecasts for the third quarter of 2008, failed to materialise. In the fourth quarter, better than anticipated revenue growth (also better than some competitors’), combined with decisive action to reduce like-for-like headcount growth, improved relative performance. The average like-for-like headcount growth for the year of 3.9%, contrasted sharply with the year end like-for-like headcount growth of 1.3%, as headcount fell through a mixture of non-replacement, the attrition rate and increased severance.
Incentive payments (including the cost of share-based compensation) fell by over 7% to £214 million from £231 million. Excluding these incentive payments, headline PBIT margins remained strong at 17.8%. Incentives represented almost 17% of headline operating profit before bonuses and income from associates, against almost 21% in 2007. Our objective remains to pay out approximately 20% at maximum and 15% at target, so our performance against our objectives is clear.
Part of the Group’s strategy is to continue to ensure that variable staff costs (freelancers, consultants and incentive payments) are a significant proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slow-downs. In 2007, the ratio of variable staff costs to total staff costs fell marginally by 0.3 percentage points to 12.7% and in 2008 to 11.4%. As a proportion of revenue, variable staff costs were 7.4% in 2007 and 6.6% in 2008. These variable staff costs provide a “shock absorber” to operating margins as revenues come under increasing pressure. We estimate that at least half of these variable staff costs can be reduced in the course of a recession. There is, therefore, a potential buffer of around 3 margin points.
On a reported basis, the Group’s staff cost-to-revenue ratio improved slightly to 58.2%.
As a result of all this, headline PBIT rose to £1,118 million (almost $2 billion), up over 6% in constant currencies. Although 2008 was a successful year overall, some of our first-generation businesses continued to suffer, resulting in a combined goodwill and investment write-down of £115 million compared to £44 million in 2007. Reported PBIT, therefore, fell by 6% in constant currency to £922 million.
Net finance costs (excluding the revaluation of financial instruments) were £150 million, up from £111 million last year, reflecting higher interest rates and increased average net debt due to cash spent on acquisitions, including TNS. Reported pre-tax profits, therefore, declined by over 13% in constant currency to £747 million, although still above $1 billion for the fourth consecutive year.
The Group’s tax rate on headline profit before tax was 25.3%, the same as 2007. Diluted headline earnings per share were up 5.5% in constant currency to 55.5p and diluted reported earnings per share were down over 18% on the same basis to 37.6p. Share owners approved the proposed change in tax domicile to Ireland in November 2008 with an unprecedented vote. Over 64% of our share owners voted and of those 99.5% voted in favour, a turnout and positive vote which has not been achieved by your Company before in similar situations.