Alexander Proudfoot has a unique and compelling offering that
produces real and sustainable performance improvement for its
clients. The business has a global reach and a flexible capability
and is well placed to grow in those industry sectors where it has a
strong track record of success, in both developed and emerging
markets. It continues to operate very effectively in emerging
market locations and in 2014 nearly 60% of total revenues related
to work delivered outside North America and Western Europe (2013:
nearly 50%). The strategy of the MCG Board and the Alexander
Proudfoot management team is to build on these existing strengths,
and to develop and invest in the offering, in order to provide a
more stable revenue base and establish a sound platform for long
term profitable growth.
Kurt Salmon
Results for the year
Kurt Salmon's reported revenue for 2014 was GBP181.9m, GBP6.6m
or 3.5% lower than 2013 revenues of GBP188.5m. Revenues in 2013
included GBP5.0m from the Cleversys business which was sold in
September of that year. On a constant currency basis 2014 revenues
would have been GBP191.7m, an increase of 2% on the previous year,
or more than 4% if the Cleversys revenues in 2013 are excluded.
Underlying operating profit for 2014 was GBP13.4m (2013:
GBP13.8m) representing a slightly improved margin of 7.4% (2013:
7.3%).
The number of staff employed by Kurt Salmon increased during the
year from 1,131 at the end of 2013 to 1,161 at the end of 2014. The
overall increase in headcount mainly reflects a deliberate increase
in capacity in North America in response to growth in demand,
whilst in Europe there has been some net recruitment on a smaller
scale. Kurt Salmon continues to recruit in the higher growth
sectors and geographies within the business. Average headcount
during 2014 was lower than the previous year at 1,140 (2013:
1,227), reflecting the impact of the initiatives which reduced
headcount during 2013.
Review of operations
Kurt Salmon is organised on the basis of geography and global
industry verticals. Kurt Salmon has its headquarter operations in
Paris and New York. In Continental Europe Kurt Salmon operates from
offices in France, Germany, Belgium, Luxembourg and Switzerland. It
operates in the UK from MCG's head office location in London, and
in the United States from offices in New York, Atlanta and San
Francisco. In Asia, Kurt Salmon has offices in Tokyo, Shanghai and
Hong Kong.
Kurt Salmon's operations in North America represent nearly 40%
of the division as a whole, the largest element of which is the
retail and consumer goods practice which contributed nearly
two-thirds of North American revenues in 2014. This practice
delivered an impressive performance in 2014, growing revenues by
more than 12% on a constant currency basis. The business has
benefited from increasing demand from US retail clients facing the
challenges of adapting business models and operations to a digital
environment. Kurt Salmon's healthcare consulting practice
represents around 20% of North American revenues and continued to
make good progress, growing revenues by nearly 7% on a constant
currency basis. Kurt Salmon's other activities in North America are
represented by its New York based financial sector and related CIO
Advisory practices which in aggregate delivered slightly lower year
on year revenues on a constant currency basis.
Kurt Salmon's French consulting practice produced about 40% of
divisional revenues in 2014 and market conditions in France have
therefore continued to be a key driver for the business as a whole.
Kurt Salmon remains a leader in the French management consulting
market with a stable blue chip client base and a high proportion of
its annual revenues derived from clients who have been
commissioning work from Kurt Salmon for many years. Demand for Kurt
Salmon's services was broadly stable during the year, but the year
did not bring clear signs of growth in the French market and
business sentiment remained fragile. Overall revenues in France
were some 4% lower than the previous year on a constant currency
basis but this was exacerbated in terms of reported results by the
weaker Euro. Headcount in France increased slightly during 2014,
mainly through recruitment at more junior levels.
Elsewhere in Europe, Kurt Salmon's operations in the UK,
Germany, Luxembourg, Belgium and Switzerland together represented
approximately 15% of total divisional revenues in 2014. In
aggregate these other European practices performed well in 2014,
generating near double-digit revenue growth on a constant currency
basis, led by a particularly strong performance from the retail
practices in Germany and the UK.
In Asia the Kurt Salmon retail consulting operations in China
and Japan have continued to make progress but these are a
relatively small component of the division as a whole and reported
revenues in 2014 were affected by significant currency
headwinds.
The overall underlying operating profit margin for Kurt Salmon
overall in 2014 was slightly better than the previous year at 7.4%,
on slightly lower reported revenues. While margins in the French
business remain weaker than those in North America at this stage,
France remains an important and profitable market for Kurt Salmon.
In Kurt Salmon's North American operations there are good short
term prospects for organic growth and management will continue to
explore opportunities for investment, recognising the need to
balance the impact of costs associated with promoting growth
initiatives with the overall profitability of the business.
Summary
The Group's reported results for 2014 are in line with our
revised expectations highlighted in the trading update on 6 October
2014. The primary driver of what is a disappointing overall result
for the Group was the performance of Alexander Proudfoot, which
experienced a year of planned change and weak revenues, and strong
currency headwinds.
Alexander Proudfoot has been a successful and highly profitable
business for many years, but it has always suffered from volatility
in its revenues from quarter to quarter, and has not been able to
grow revenues consistently year on year. The MCG board decided in
March 2014 to make a number of changes designed in part to mitigate
revenue volatility, but primarily to restore the growth potential
of business for the longer term. This has involved some investment
and additional cost, and consequent margin erosion in 2014, which
unfortunately has coincided with a year in which revenues were weak
in both the first and second halves. As a result the business has
reported a small underlying operating loss, for the first time in
more than a decade. Good progress has been made with the "growth
plan" initiatives so far and these continue in 2015, with some
further adverse margin impact this year, but alongside an
encouraging revenue trend at this stage of the year, which, if
maintained, should restore the business to profitability.
Kurt Salmon's performance provided a contrast between its two
largest markets in France and North America, which each produced
around 40% of divisional revenues. In North America both the retail
and consumer goods and the healthcare practices produced excellent
underlying revenue growth in US Dollars, and good margins. In
France activity levels were broadly flat year on year, although
total revenues in Euros were slightly lower than 2013, in a market
which continues to be affected by macroeconomic weakness and shows
few clear signs of growth. In overall terms Kurt Salmon increased
underlying revenues on a constant currency basis by more than 4%,
and slightly increased its underlying operating profit margin, but
currency headwinds led to a reported decrease in revenue and profit
in absolute terms.
Net debt has decreased year on year to GBP33.6m (2013: GBP39.8m)
and remains at a comfortable level in relation to the Group's bank
facility and covenant requirements. The normal phasing of cash
flows means that indebtedness tends to increase towards the half
year stage with stronger cash generation in the second half of the
year, as was the case in 2014.
Outlook
Kurt Salmon has had a good start to 2015, with continuing strong
demand in North America. In France our business has seen some
benefit in the first two months of the year from a slightly more
optimistic outlook amongst some clients, perhaps partly in
anticipation of a positive impact on businesses from a weaker Euro
and Quantitative Easing in the Eurozone. The current order book in
Kurt Salmon is slightly higher than the same period last year. For
Kurt Salmon overall, we expect the trends we saw in 2014 to
continue in 2015. As we increase the pace of recruitment this year
in our growth markets there is likely to be some negative margin
impact in the short term before new senior employees become fully
productive.
Alexander Proudfoot has had a satisfactory start to 2015. There
is a promising pipeline of opportunities at this stage, although
the current order book is a little lower than the same stage last
year and the rate of order input will need to build from current
levels to meet our objectives over the course of the year as a
whole. The new and enhanced offerings which we have developed have
had some recent success with clients. The investment and change
initiatives that we launched in 2014 are continuing this year and
will continue have some adverse effect on profitability, as we
build a firmer platform to generate revenue growth.
Recent shifts in exchange rates, if they persist, are likely to
have some impact on MCG's reported results in 2015 compared with
2014. The Group's reported results will benefit from a stronger US
Dollar, but a weaker Euro will have the opposite effect on reported
revenues and profits in Sterling.
We will continue to work to develop our businesses with
selective investment and recruitment in those sectors and
geographies where there are good prospects for profitable growth in
order to deliver value to our shareholders.
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