Operating costs contained

During 2013, the Group continued to manage operating costs effectively, with improvements across most cost categories, particularly staff, property, commercial and office costs. On a like-for-like basis, total operating and direct costs rose by 2.9%, a slower rate of growth than for revenue.

On a like-for-like basis, the average number of people in the Group decreased by 0.1% in 2013. On the same basis, the number of people in the Group at 31 December 2013 increased by 0.7% compared with the end of 2012. These average and point-to-point figures reflect the continuing sound management of headcount and staff costs in 2013 to balance revenues and costs. Also on a like-for-like basis, revenues increased by 3.5% and gross margin or net sales were up 3.4%.

Reported staff costs, excluding incentives, rose by well over 5% and by over 5% in constant currency. Staff costs included £27 million ($43 million) of severance costs compared with £51 million ($82 million) in 2012. Incentive costs amounted to £328 million ($521 million) which was over 17% of headline operating profit before incentives and income from associates, compared with £291 million ($462 million) or well over 16% in 2012.

Performance in parts of the Group’s Data Investment Management custom businesses, Public Relations & Public Affairs, Healthcare Communications and direct, digital and interactive businesses fell short of the target performance objectives agreed for 2013, as the like-for-like revenue growth rate was slower in the first nine months of the year, although most improved in the final quarter. Our objective remains to pay out approximately 20% of operating profit before bonus and taxes at maximum and 15% at target and, in some cases, 25% at ‘super-maximum’.

Headline PBIT margins, before all incentives and income from associates, were 17.3%, up 0.4 margin points, compared with 16.9% last year. The Group’s staff cost to revenue ratio, including incentives, decreased by 0.1 margin point to 58.8% compared with 58.9% in 2012, indicating an improvement in productivity.

Part of the Group’s strategy is to continue to ensure that variable staff costs (incentives, freelance and consultants costs) are a significant proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slowdowns. In 2013, the ratio of variable staff costs to total staff costs was 12.7%, compared with 11.4% in 2012 and 9.7% in 2009. As a proportion of revenue, variable staff costs were 7.5% in 2013 compared with 6.7% in 2012 and 5.7% in 2009. The business is, therefore, well positioned if current market conditions deteriorate.

As a result of all this, headline PBIT rose by well over 8% to £1.662 billion from £1.531 billion, up 9% in constant currencies. Reported PBIT rose almost 13% to £1.478 billion from £1.311 billion, up well over 13% in constant currencies, in part due to exceptional gains of £36 million arising on the disposal of minority investments and the re-measurement of certain of our equity interests where we have acquired a majority stake.

Net finance costs (excluding the revaluation of financial instruments) were £204 million, down almost 5% from £214 million in 2012. This reflected the beneficial impact of lower net debt funding costs and higher income from investments, partially offset by the cost of higher average gross debt, due to pre-funding of 2014 debt maturities. Headline profit before tax increased by well over 10% (over 11% in constant currencies) to £1.458 billion and reported profit before tax was up well over 18% (over 19% in constant currencies) to £1.296 billion.

The Group’s tax rate on headline profit before tax was 20.2%, compared with 21.2% in 2012, and on reported profit before tax was 21.9% against 18.1% in 2012. The difference in the reported tax rate is primarily due to significant deferred tax credits arising in the prior year in relation to acquired intangibles that were non-recurring items.

Diluted headline earnings per share rose over 10% (well over 9% in constant currencies) to 80.8p and diluted reported earnings per share increased by almost 11% (well over 10% in constant currencies) to 69.6p.

Chapter 6 of 13

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