Financial review

Aegis delivered turnover of £9,351.2 million (2006: £8,230.2 million), an increase of 16.2% at constant currency and 13.6% at reported rates. This growth was substantially driven by increases in volumes in media planning and buying as a result of significant client wins at Aegis Media.

We grew total revenue by 14.2% at constant currency, and 11.0% at reported rates, to £1,106.4 million (2006: £996.9 million), principally as a result of exceptional organic growth in both Aegis Media and Synovate. Acquisitions made a revenue contribution of £36.3 million in the year.

Gross profit of £946.6 million (2006: £852.1 million) was up 14.0% at constant currency, and 11.1% at reported rates. Gross margin, expressed as revenue as a percentage of turnover, remained stable at Aegis Media at 7.6% (2006: 7.6%), with rapid growth in higher margin non-traditional services, including digital, offsetting continuing gross margin pressure in media planning and buying. Synovate’s gross margin, expressed as gross profit as a percentage of revenue, was down by 80bps to 63.1% (2006: 63.9%) as a consequence of the mix of services and studies. Group gross margin declined 30bps to 10.1% (2006: 10.4%).

Group underlying operating expenses grew in line with revenue at 14.3% to £800.4 million (2006: £719.5 million), an increase of 11.2% at reported rates. Staff costs as a percentage of revenue were 48.2% (2006: 47.2%). At Aegis Media, underlying operating expenses increased slightly ahead of revenue at 15.6%, reflecting investment in global initiatives, the impact of restructurings at Carat USA and reduced profitability in our Asia-Pacific business. The industry-leading Aegis Media underlying operating margin before associates declined slightly from 20.3% to 20.0%. Underlying operating costs at Synovate increased only 10.6% and helped the underlying operating margin to improve from 7.7% to 8.1%. Share scheme charges increased from £6.9 million to £9.1 million. As a result, our group underlying operating margin was broadly flat at 13.2% (2006: 13.3%).

Synovate’s operating margin expressed as operating profit on gross profit increased 80bps from 12.0% to 12.8%, ahead of the growth in operating profit on revenue, reflecting the contraction in Synovate’s gross margin as a result of changes in the business mix.

Income from associates increased from £1.2 million to £3.2 million. The majority of this is attributable to QJY Media, our Hong Kong-listed production and advertising associate. Along with the good growth in operating profit at both Aegis Media and Synovate, this performance helped group underlying operating profit to grow 13.7% at constant currency, and 11.7% at reported rates, to £149.4 million (2006: £133.8 million).

Our underlying profit before interest and tax are stated before net adjusting items of £(0.9) million. This is made up of a £2.0 million goodwill impairment, relating to Aegis Media Asia-Pacific and Synovate Asia-Pacific; a £1.2 million charge for amortisation of purchased intangibles (2006: £0.5 million), relating mainly to proprietary technologies; a £0.9 million loss on disposal of subsidiary companies in Japan and India; a £0.4 million loss on disposal of an associate in India; and a £3.6 million profit on the deemed disposal of part of our shareholding in QJY, following two new share issues in which we did not participate.

A reduced net interest charge of £16.7 million (2006: £17.6 million), in spite of higher average net debt arising from 17 acquisitions made in the year, reflects good Treasury management and higher interest receivable. In September we successfully completed a new US$125.0 million US private placement of seven and 10 year notes to refinance our maturing US$118.5 million US private placement. We managed our working capital to be broadly flat year-on-year, in spite of 16.2% growth in turnover, recording a small underlying working capital outflow of £6.3 million. Year end net debt was £245.2 million (2006: £206.9 million).

Our underlying pre-tax profit, after adjusting for the items impacting operating profit set out above and an IAS 39 fair value gain of £1.7 million (2006: gain of £6.9 million), was £132.7 million (2006: £116.2 million). This is an increase of 16.0% at constant currency and 14.2% at reported rates. The net impact of these adjusting items was to decrease underlying pre-tax profit by £0.8 million (2006: £2.7 million increase), as set out in the notes to the financial statements. As a result, statutory pre-tax profit of £133.5 million (2006: £113.5 million) was up 19.6% at constant currency and 17.6% at reported rates.

We made 17 acquisitions and increased investments in nine subsidiaries. We paid £79.8 million in upfront payments (2006: £23.1 million), with total outstanding deferred consideration estimated at £58.0 million (2006: £20.2 million). This was made up of £48.8 million in cash and £4.7 million in shares, subject to meeting agreed performance criteria. During the period we paid £48.3 million in consideration for acquisitions made in previous years (2006: £54.6 million).

Sterling strengthened significantly against the US dollar and related currencies, and to a lesser extent the Euro, in the period. This has had a significant effect on our results. (Had these rates applied the previous year, our 2006 reported revenue would have been £27.9 million lower and underlying profit before interest and tax £2.4 million lower.) The average rate against sterling was £1: US$2.0022, compared with £1: US$1.8441 in 2006. The period end rate was £1: US$1.9849 (31 December 2006: £1: US$1.9589). The average Euro rate against sterling was £1: €1.4613 compared with £1: €1.4669 in 2006. The period end rate was £1: €1.3606 (31 December 2006: £1: €1.4842).

Our statutory tax charge was £39.1 million (2006: £33.4 million), equivalent to a tax rate (including deferred tax on goodwill) of 29.3% (2006: 29.4%). The tax charge for the year includes a deferred tax expense of £3.9 million (2006: £1.5 million) for tax deductions in respect of goodwill. Our underlying tax charge was £35.2 million (2006: £33.3 million) and our underlying tax rate declined from 28.7% to 26.5%: the result of efficient tax planning.

Underlying diluted earnings per share increased by 18.8% at constant currency, or 17.1% at reported rates, from 7.0p to 8.2p. Statutory diluted earnings per share increased by 17.9% at constant currency, or 16.2% at reported rates, from 6.8p to 7.9p.

The Board is proposing a final dividend of 1.46p per ordinary share, making 2.3p for the year, an increase of 21.1%. This will be paid on 29 May 2008 to shareholders on the register at 2 May 2008.