Margins reach new high, but affected by strength of sterling

Headline PBIT margins were up 0.3 margin points to a new historical high of 15.1%, compared to 14.8% in 2012. The impact of exchange rates reduced reported margins by 0.2 margin points, but on a constant currency basis margins increased by 0.5 margin points, and on a like-for-like basis by 0.6 margin points, more than in line with the Group’s margin target. Over the last three years, reported headline PBIT margins have improved by 1.9 margin points and by 2.3 margin points excluding the impact of currency.

Group revenues are more weighted to the second half of the year across all regions and functions, especially in the faster-growing markets of Asia Pacific and Latin America. The Group’s profitability and margins continue to be skewed to the second half and, in particular, the final quarter. The strengthening of sterling in the final quarter, particularly against the currencies of the faster-growing markets, therefore resulted in a reduction in the Group’s operating margins. This currency effect is exacerbated by the fact that disproportionate amounts of central overheads and incentive costs are paid in sterling and US dollars.

Given the significance of Data Investment Management revenues to the Group, with none of our parent company competitors presently represented in that sector, gross margin or net sales is a more meaningful measure of comparative top-line growth. This is because Data Investment Management revenues include pass-through costs, principally for data collection, on which no margin is charged. In addition the Group’s Media Investment Management sector is increasingly buying digital media on its own account and, as a result, the subsequent billings to clients have to be accounted for as revenue as well as billings. Thus, revenues and the revenue growth rate will increase, although gross margin and the gross margin growth rate will remain the same and the latter will present a clearer picture of underlying performance.

Because of these two significant factors, the Group, whilst continuing to report revenue and revenue growth, will focus even more on gross margin or net sales margins as well as operating margins in the future. Headline gross margin (or net sales) margins were up 0.4 margin points to 16.5%, achieving the highest reported level in the industry.

Chapter 6 of 13

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