Chief Executive’s Report

Strong operating and financial performance by Aegis in 2010 /

Aegis’s robust underlying operational performance in 2010, supported by management focus on these strategic objectives, translated into a strong set of financial results.

Total revenue for the year was £1,459.4m, up 8.4% at reported rates and up 6.4% at constant currency. Organic revenue growth for the Group was 5.8%, driven in particular by strong top line growth from our businesses in North America and faster-growing regions.

As was expected at the half year stage, both businesses delivered a continuing trend of improvement in organic growth in the second half, compared to the first half. As we anticipated, a combination of more challenging prior year revenue growth comparatives in the fourth quarter and the relative revenue weighting between the third and fourth quarters meant the trend rate of organic revenue growth was impacted in the fourth quarter of the year:

Aegis Group
Quarter
Half year
 Full Year
  Q110 Q210 Q310 Q410 H110 H210 FY10
Organic revenue change % 1.1 4.7 9.7 7.0 3.2 8.1 5.8

Aegis delivered a strong improvement in underlying operating profit for the year to £192.2m, an increase of 12.9% from the prior year at reported rates, and 12.3% at constant currency. There was a modest improvement in Group operating margin to 13.2% during 2010, an increase of 60 basis points from the prior year.

Our underlying earnings per share on a fully diluted basis increased by 5.2% at reported rates and 4.1% at constant currency, to 10.1p from 9.6p in the prior year.

Management’s re-focused strategic approach bolstered Aegis Media’s performance in 2010 /

Aegis Media’s management team implemented a re-focused strategic approach in 2010, the Power Brand strategy, based on delivering a consistent range of services integrated across one operating model through Carat, Vizeum, Posterscope, isobar and iProspect on a network basis. This re-focused strategic approach helped to support our performance in 2010 and will continue to do so going forward.

Aegis Media delivered organic revenue growth of 5.7% in 2010, with 7.4% organic revenue growth in the fourth quarter of the year. This was supported by another excellent new business performance, with net new business wins of $2.0 billion in billings. Operating margin was 18.6%, up 40 basis points at reported rates and 60 basis points at constant currency.

Our businesses in faster-growing regions performed extremely well in 2010. Our North American management team achieved further progress in revitalising our businesses there, while the health of Western European markets remained mixed.

Operational delivery was also driven by our excellent new business performance in 2010. New business wins were characterised by a return to a strong competitive position in the US, with Beiersdorf, Diageo, Relativity Media and Red Bull won during the year. Towards the end of the year, our North American team was also successful in renewing our long-standing Pfizer/Wyeth contract. Elsewhere around the world new business wins included Disney in Australia, Tiffany across Asia Pacific, Orange in Spain, Nokia in the Middle East and Anheuser Busch InBev in the UK. This new business momentum has continued into 2011, with a number of wins already recorded so far this year including Disney and Home Depot in North America, Fastweb in Italy, Kraft Cadbury in South Africa and Electronic Arts across Latin America.

Aegis Media’s performance in 2011 and beyond will be supported by the acquisition of Mitchell, which was completed in November 2010. The combination of Aegis Media’s global network and Mitchell’s outstanding capabilities in the Pacific region will create a compelling offering for clients, positioning us for continued growth in the wider Asia Pacific region.

Strong performance recovery at Synovate /

Following the global economic downturn in 2009, which had a significant impact on the ad hoc custom market research sector, 2010 saw a strong recovery in performance at Synovate. Sales rose 6.7%, with organic gross revenue increasing 5.9%, with organic gross revenue growth of 6.3% in the fourth quarter. Our strong performance in the second half, drove operating margin to 8.0%, up 90 basis points at reported rates and at constant currency.

Management’s clear focus on driving profitable sales, supported by a broad geographic network and extensive product portfolio, ensured an encouraging performance from Synovate in 2010, with a healthy 8.8% underlying increase in orders on hand achieved at year end. Performances from the vast majority of businesses across the Synovate network performed very well in 2010, particularly our business in North America.

With a strong foundation now in place, management is implementing a re-focused strategic approach to improve Synovate’s long term position in the global custom market research sector around the world. This strategic approach aims to increase traction and build momentum with key global clients, provide competitive differentiation through operational excellence, prioritise gateway geographies which represent key markets for international projects and expand our existing capabilities in key industrial verticals and research methodologies. The implementation of the first phase of this re-focused strategic approach across the organisation will be completed by the end of 2011.

Balance sheet strengthened & capital discipline maintained /

During 2010, we took a number of actions to strengthen our financial position. In April 2010, we launched a convertible bond, due in April 2015, to raise £190.6m, including the exercise of an over-allotment option. In July 2010, we re-financed our £450.0m revolving credit facility, lengthening its tenure to 2015.

Net debt fell from £398.4m at the end of the first half to £331.3m at the end of 2010, a year-on-year increase of £74.1m from the end of 2009. This increase was mainly due to acquisition spend, partially offset by strong operating cash flows in the second half of 2010.

Our covenant positions remain robust and we had undrawn available facilities at the end of the year totalling £450.0m (2009: £376.4m). Looking ahead, we aim to ensure that capital continues to be sensibly allocated and our cash pools remain well managed.

Outlook /

Our clients’ advertising and research expenditure for the first few months of this year is ahead of the same period in 2010, and their current indicated budgets for the remainder of 2011 suggest that this year-on-year trend will continue. In addition, the momentum Aegis has built through 2010 has continued into the first few months of 2011, with Aegis Media winning $1.5bn in net new business so far this year and Synovate starting the year with a healthy orders on hand position.

Given these positive signals for the short term outlook, and in spite of the relatively limited medium term visibility, we are increasingly optimistic about the prospects for our businesses this year. We therefore expect Group organic revenue growth for 2011 to be at least in line with the level achieved last year.

We experienced upward pressure on staff costs at both businesses in the second half of 2010. This will continue in 2011, with increasing headcount and pay reviews particularly in high growth regions, as well as an increase in bonuses where performance justifies.

Despite these cost pressures, given the Group’s momentum and our expectations for organic revenue growth this year, we expect underlying operating profit to improve further in 2011.

Jerry Buhlmann
Chief Executive Officer, Aegis Group plc