MMC Management Consulting Group Plc

Underlying operating profit in 2014 was GBP11.8m (2013: GBP21.2m), the GBP9.4m reduction principally reflecting the impact of lower revenues and margins in Alexander Proudfoot, resulting in a loss for the year as a whole in that business of GBP1.6m. Underlying operating profit in Kurt Salmon was slightly lower than the previous year in absolute terms at GBP13.4m, although the margin improved slightly on 2013.

Underlying operating profit for 2014 reflects a charge of GBP2.4m relating to share awards made to employees (2013: GBP3.9m). During the year 105 senior employees received awards over approximately 9.4 million shares in total, generally vesting over three years and conditional upon continued employment, and in some cases also subject to financial or share price performance. At the year end there were outstanding awards in place over 35.5 million shares relating to 141 employees (2013: 48.8 million shares and 135 employees). Some 24.0 million of these share awards, should they vest, are required to be satisfied from existing MCG shares, and the other awards may be satisfied from existing or new shares. The Group's employee benefit trusts held 8.5 million shares at the year end for this purpose, and a further 2.4 million treasury shares were held by the Group which may be used to satisfy share awards.

The Groups reported non-recurring expenses of GBP2.9m in 2014 (2013: GBP1.5m) which are largely related to the change initiatives implemented in Alexander Proudfoot and mainly comprises redundancy costs and the costs associated with the departure of the former Chief Executive of that business in March 2014.

The charge for amortisation of acquired intangibles was GBP0.8m (2013: GBP2.2m). Consequently the profit from operations decreased to GBP8.1m (2013: GBP17.5m), representing a margin of 3.3% (2013: 6.8%).

The net interest expense was lower at GBP3.2m (2013: GBP3.5m). In accordance with IAS 19R the reported net interest charge for 2014 includes an imputed charge in relation to defined benefit pensions of GBP0.8m (2013: GBP1.2m).

The profit before tax was lower at GBP4.9m (2013: GBP14.0m). The tax charge was GBP5.9m (2013: GBP4.9m). After adjusting for non-underlying items, the underlying effective tax rate was 89% (2013: 34%). The significant increase in the tax charge and the underlying tax rate in 2014 reflects the impact of project-specific tax charges in the Alexander Proudfoot business in certain geographies, together with revenue-based taxes or unrelieved losses in certain jurisdictions. A large component of the GBP5.9m tax charge for the year is a GBP2.8m non-cash item relating to the utilisation of part of the deferred tax asset relating to brought forward losses.

Consequently, there was a loss for the year attributable to the shareholders of GBP1.0m (2013: a profit of GBP9.1m). Underlying earnings per share were 0.2p (2013: EPS 2.4p) and the basic loss per share was 0.2p (2013: EPS 1.9p).

Balance sheet and dividend

The weak first half revenue performance in Alexander Proudfoot resulted in net debt rising to GBP48.0m at the half year stage, however strong cash generation from operations in the second half reduced net debt by GBP14.4m to GBP33.6m at the end of the year (2013: GBP39.8m). This equates to 2.04x adjusted EBITDA for 2014 as measured for the purpose of the Group's borrowing facility, an increase from 1.46x at the previous year end, reflecting lower profits in 2014. As a precautionary measure in order to provide some additional headroom the maximum leverage covenant has been increased at the next two quarterly testing dates in March and June 2015, from 2.75x to 3x. Positive working capital movements meant that cash generated by operations was GBP17.6m, significantly higher than in the previous year (2013: GBP6.7m).

During 2014 the Group's employee benefit trusts purchased 3.8 million of the Company's ordinary shares of 1p each for a total consideration of GBP1.0m.

The interim dividend for 2014 of 0.23p per share was paid on 6 January 2015. The Board is recommending, subject to shareholder approval, an unchanged total dividend for the year of 0.825p per share. The directors therefore recommend, subject to shareholder approval, a final dividend for 2014 of 0.595p per share to be paid on 7 July 2015 to shareholders on the register on 15 May 2015.

Alexander Proudfoot

Results for the year

Alexander Proudfoot's reported revenue for 2014 was 12% lower than 2013 at GBP60.9m (2013: GBP68.8m). The year on year comparison has been affected by a significant negative currency translation effect; at constant exchange rates 2014 revenues would have been GBP66.2m, a decrease of 4% on 2013.

The business reported a broadly break even position for the first half of 2014 on revenues of GBP31.3m and a loss of GBP1.7m in the second half on slightly weaker revenues of GBP29.6m, compared with underlying operating profit of GBP7.4m and a margin of 10.8% for 2013 as a whole. The loss for 2014 reflects both the margin impact of weaker revenues and, as expected, the impact of additional expenses and investment associated with the change initiatives announced in March 2014.

The number of staff employed by Alexander Proudfoot decreased from 337 at the end of 2013 to 327 at the end of 2014. Whilst overall headcount has reduced slightly at the year end there has been investment in people and capabilities during 2014, in particular in adding industry sector expertise and strengthening the team of executives responsible for business development. Average headcount during 2014 was slightly higher than the previous year at 343 (2013: 332).

Review of operations

During 2014 Alexander Proudfoot was organised on the basis of six business units: Europe, North America, Africa, Brazil, Chile and Hong Kong. The business is headquartered in Atlanta in the United States. Alexander Proudfoot serves clients globally, and frequently the project delivery location lies outside the geography of the business unit from which it is sold and managed. In the second quarter of 2014 a dedicated natural resources business unit was established, working across geographies.

Alexander Proudfoot had a slow start to 2014. The opening order book at the beginning of the year was stronger than at the same time in 2013, but the rate of order input in the first quarter was lower than in the second half of 2013 and so revenues were consequently weaker. There was some improvement in order input at the half year stage, but the third quarter was disappointing and saw the postponement of certain significant planned client projects from 2014 to 2015, affecting the North American business unit in particular. As a result the trading update on 6 October 2014 reported that MCG expected Alexander Proudfoot to deliver second half revenues in 2014 close to those in the first half of the year and a small operating loss for the year as a whole; actual results for the year are in line with these revised expectations.

The revenue weakness in 2014 was not obviously driven by common macroeconomic factors across all geographies. Revenues in the North American business unit, representing around one third of total revenues in 2014, were significantly weaker than in 2013. In Europe 2014 revenues were broadly stable versus 2013. Elsewhere the business units in Brazil and Africa reported weaker revenues, whilst revenues from the business units in Latin America and Asia were higher than the previous year.

The proportion of work for clients in the natural resources sector was higher than in 2013, at around half the total revenue for the year (2013: approximately one-third), and higher in absolute terms. Alexander Proudfoot continues to excel in this sector, where the business has a distinctive offering well suited to the practical operational issues faced by its clients in often difficult locations. Alexander Proudfoot's work in natural resources is diverse, ranging from precious metals to aggregates and phosphates. Work for clients in the oil and gas sector has been a relatively small proportion of the total and has not been significantly affected by falling oil prices. Alexander Proudfoot has continued to find success across a range of other industries, with the financial services and manufacturing sectors again being the most significant sources of revenue after natural resources clients.

In March 2014 the then Chief Executive of Alexander Proudfoot stepped down and the MCG Board announced that it intended to invest in and develop the Alexander Proudfoot offering in order to help build a more stable and predictable revenue base and drive top-line growth. A series of initiatives have been implemented to enhance sales and operations, introduce innovations relating to the offering and to explore new contracting models with clients. Good progress was made during 2014 with these changes which we believe will in time deliver improved performance. As previously reported, these initiatives have required investment principally in recruitment and lower utilisation,and have had an adverse effect on underlying profit in 2014 estimated at more than GBP2m in the year, compounding the margin impact of weaker than expected revenues. Much of the focus of the change initiatives has been on the North American operations, and the adverse margin impact in 2014 has been most apparent here.

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