Income statement

Revenue

Reported revenue for the year increased by 17.0% to £972.8m (2007: £831.6m). Revenue benefited from the weakening of Sterling during the year, and using constant currencies, revenue increased by 7.9% to £897.4m. As in previous economic slowdowns, permanent placement activity was affected earlier than temporary, with the latter being more resilient to slowing activity levels. As the economic slowdown spread during the course of the year, this trend was reflected in revenue from temporary placements increasing by 19.4% to £524.4m (2007: £439.1m), representing 53.9% (2007: 52.8%) of Group revenue. Revenue from permanent placements was £448.4m (2007: £392.6m), an increase of 14.2%.

Gross profit

Gross profit for the year increased by 15.6% to £552.7m (2007: £478.1m). The reported gross margin also benefited from Sterling’s weakness, and using constant currencies, gross profit grew by 5.8% to £505.7m. The Group’s gross margin decreased to 56.8% (2007: 57.5%) as the result of a slight shift in the mix of business between permanent and temporary placements. Gross profit from temporary placements grew faster at 19.7% to £127.0m (2007: £106.1m) and represented 23.0% (2007: 22.2%) of Group gross profit. The gross margin achieved on temporary placements was maintained at 24.2% (2007: 24.2%). Gross profits from permanent placements grew at a slower rate than temporary at 14.4% to £425.7m (2007: £372.0m) with the gross margin increasing slightly to 94.9% (2007: 94.8%).

Operating profit and conversion rates

As a result of the Group’s organic long-term growth strategy, tight control on costs and profit-based bonuses, we have a business model which is operationally geared. The majority of our cost base, around 75%, relates to our staff with the other main components being property and information technology costs. With a strategy of organic growth, the Group incurs start-up costs and operating losses as investments are made to grow existing and new businesses, open new offices and launch new countries. Furthermore, significant increases in headcount mean that it takes time to train staff before they become fully productive. These characteristics of our growth strategy and the levels of investment impact on the conversion rates in any one reporting period.

Generally, in years when economic conditions are benign, revenue and gross profits grow, with operating profits growing at a faster rate due to a combination of higher productivity, stronger pricing and greater utilisation of infrastructure. In order to grow we need to increase our headcount and ensure that we have infrastructure to house and support them. When economic conditions weaken and recruitment activity slows, these factors work in reverse and are compounded by a shortening of earnings visibility.

The majority of our permanent placement activity is undertaken on a contingent basis which means on those assignments we only generate revenue when a candidate is successfully placed in a role. Our short-term visibility on these earnings is provided by the number of assignments we are working on, the number of candidates we have at interview and the stage they are at in the interview process. The average time to complete a placement from taking on an assignment to successfully placing a candidate tends to lengthen in a downturn, reducing productivity, and the risk of the candidate being rejected or the assignment being cancelled increases, thereby further reducing our earnings visibility.

In a downturn, activity levels can slow quickly and revenue can decline even faster due to the contingent nature of a large proportion of our placements. The main opportunity for reducing our own cost base is headcount, but these reductions tend to lag the declines in revenue due to the shortening visibility. The majority of the initial reductions in our headcount occur through natural attrition, without incurring significant restructuring charges, however, if greater reductions become necessary, such charges may be incurred.

In 2008, while we recorded an increase in gross profit of 15.6%, approximately two-thirds of this growth was due to currency movements. As very few of our transactions are cross border our costs are therefore impacted in a similar manner when translated and reported in Sterling. The growth we achieved in gross profits was mostly achieved in the first half of the year, with headcount and infrastructure being added to support this growth and to develop longer term opportunities. The increasingly rapid decline in activity during the second half, with lower gross profits together with a lagged reduction in headcount, has resulted in significantly reduced operating profits in the second half of the year of £55.6m, compared to £84.9m generated in the first half of the year.

This gearing effect reduced the Group’s conversion rate for the year to 25.4% (2007: 31.3%). The movement in the conversion rates of the four regions reflects the different timings and degrees of slowing they experienced, with the conversion rate in the Americas remaining the lowest due to the greater level of recent new investment and business start-ups and with North America being the hardest hit by the crisis.

As a result of the number of staff and office start-up costs added in the first half of the year, reported administrative expenses in the year increased by 25.4% to £412.2m (2007: £328.7m). This increase is also partly due to the movements in currencies, using constant currencies they increased by 14.8% to £377.2m. While no significant restructuring charges were incurred in reducing headcount by over 10% in the second half of the year, they have been more than offset by £4.8m of foreign exchange gains. Administrative expenses also included £6.9m of share-based charges (2007: £7.2m) in respect of the Group’s deferred annual bonus scheme, long-term incentive plans and executive share option schemes. The slight reduction in these share-based charges, is due to a combination of lower employers’ social charges as a consequence of the reduction in the share price from 288.0p at the end of 2007, to 214.75p at the end of 2008 and amendments to assumptions on the likelihood of awards vesting.

Net interest

The Group has a net interest charge for the year of £0.4m (2007: £2.0m). As the financial crisis deepened and the economic outlook deteriorated, we adopted an increasingly cautious approach to the Group’s funding position. The reduction in the net interest charge for the year reflects the strengthening of the Group’s financial position partly offset by lower returns on cash as interest rates reduced.

Taxation

Tax on profits was £42.7m (2007: £45.7m), representing an effective tax rate of 30.5% (2007: 31.0%). The rate is higher than the effective UK Corporation Tax rate for the year of 28.5% due to disallowable items of expenditure and profits being generated in countries where the corporate tax rates are higher than the UK’s. The effective rate is lower than in 2007 primarily as a result of the UK corporation tax rate reducing from 30% to 28% in April 2008.

Share repurchases and share options

It is the Group’s intention to continue to use share repurchases to return surplus cash to shareholders and to satisfy awards under the Group’s incentive share plan and deferred annual bonus plan. Reflecting the more cautious approach to the Group’s funding position, 7.2m shares were repurchased at a cost of £16.8m. 6.7m of these shares were cancelled, with the remaining shares purchased by the Group’s employee benefit trust to satisfy future share plans awards.

At the beginning of 2008, the Group had 11.1m share options outstanding of which 3.1m had vested. In March 2008, 3.1m share options were granted. During the course of the year options were exercised over 1.3m shares, generating £2.2m in cash and 0.8m share options lapsed. At the end of 2008, 12.2m share options remained outstanding of which 4.0m had vested.

Earnings per share and dividends

In 2008, basic earnings per share were 30.3p (2007: 31.1p) and diluted earnings per share were 29.9p (2007: 30.6p). The weighted average number of shares for the year was 321.5m (2007: 327.5m) reflecting the shares repurchased during the year and the new shares issued to satisfy option exercises.

A final dividend of 5.12p (2007: 5.6p) per ordinary share is proposed which, together with the interim dividend of 2.88p (2007: 2.4p) per ordinary share, makes an unchanged total dividend for the year of 8.0p (2007: 8.0p) per ordinary share. The proposed final dividend, which amounts to £16.3m, will be paid on 8 June 2009 to those shareholders on the register as at 8 May 2009.

Balance sheet

The Group had net assets of £210.7m at 31 December 2008 (2007: £107.9m). The increase in net assets principally relates to the profit for the year of £97.3m, currency movements of £40.1m, the credits relating to share schemes of £7.3m and cash received from the exercise of share options of £2.2m, offset by share repurchases of £16.8m and dividends paid of £27.3m.

Our capital expenditure is driven primarily by two main factors being headcount, in terms of office accommodation and infrastructure and the development and maintenance of our IT systems. The project to replace our current recruitment IT system with the next generation is progressing well and we anticipate that the first full implementations will take place later this year with the roll out continuing throughout 2010 in order to mitigate the implementation risks. Capital expenditure, net of disposal proceeds, increased to £26.4m (2007: £12.8m) reflecting the increase in headcount, the opening and expansion of a number of offices and the investment in new systems.

The most significant items in the balance sheet is trade receivables, which were £168.4m at 31 December 2008 (2007: £160.9m). While the reported trade receivables has increased from the amount reported at the end of 2007 this increase is due to the movement in exchange rates during the year. Restating the trade receivables at the end of 2007 using exchange rates at the end of 2008 results in £192.5m of trade receivables. The reduction in trade receivables on a constant currency basis reflects the reduced activity, particularly in the fourth quarter of 2008, and an improvement in debtor days. Despite a higher proportion of Revenue being generated outside the UK, where our debtor days tend to be higher than in the UK, Group debtor days reduced to 56 (2007: 58 days).

Cash flow

At the start of the year, the Group had net cash being cash and cash equivalents less bank overdrafts and loans of £10.3m.

During the year, the Group generated net cash from operating activities of £185.2m (2007: £148.7m), being £151.4m (2007: £157.2m) of EBITDA, £6.7m (2007: £6.8m) of share scheme non cash charges and a reduction in working capital requirements of £27.1m (2007: increase of £15.1m).

The principal payments were:

• £26.4m (2007: £12.8m) of capital expenditure, net of disposal proceeds, on property, infrastructure, information systems and motor vehicles;
• taxes on profits of £53.4m (2007: £36.5m);
• dividends of £27.3m (2007: £21.8m); and
• share repurchases of £16.8m (2007: £74.9m).

£2.2m (2007: £8.7m) was received in the year from the issue of new shares to satisfy share option exercises.

With cash being generated outside the UK and the weakness of Sterling, particularly at the end of 2008, £21.4m (2007: £4.0m) of exchange gains were recorded in the year.

At 31 December 2008, the Group had net cash of £94.3m.

Net cash and Group borrowing facilities

At 31 December 2008, the Group had net cash of £94.3m (2007: £10.3m). The net cash position comprised gross cash deposits of £157.0m with 12 separate banks. £62.7m was legally offset directly against borrowings in the ABN Amro cash pool.

The Group has a 364 day £50m multi-currency committed borrowing facility that expires at the end of May 2009. This facility has an option that would allow the Group to draw down all or part of the facility during May 2009 for a term expiring in May 2011.

Key Performance Indicators (“KPIs”)

Financial and non-financial key performance indicators (KPIs) used by the Board to monitor progress are listed in the table below. The source of data and calculation methods year-on-year are on a consistent basis.

The movement in KPI’s are in line with expectations set out in the discussion on operating profit and conversion rates in the financial review. The ratio of fee earners to support staff at the end of 2008 has reduced from the level at the end of 2007. This ratio improves when Group grows and headcount increases but tends to decline when Group headcount reduces as the infrastructure staff to support a higher number of teams, offices and countries cannot be flexed as quickly as fee generating staff.

Going concern

The Board has undertaken a recent and thorough review of the Group’s budget, forecasts and associated risks and sensitivities. Despite the significant uncertainty in the economy and its inherent risk and impact on the business, the Board has concluded, given the level of cash in the business, the geographical and discipline diversification, limited concentration risk, as well as the ability to manage the cost base, that the Group has adequate resources to continue in operational existence for the foreseeable future, being a period of at least twelve-months from the date of approval of accounts. As a result, the going concern basis continues to be appropriate in preparing the financial statements. For further details on going concern refer to the Corporate Governance page.

Foreign exchange

The Group operates in 28 countries around the world and carries out transactions that are recorded in seventeen local currencies. The Group reports its Income Statement and Cash Flow Statement results in Pounds Sterling using the average exchange rate for each month to translate the local currency amounts into Sterling. The Balance Sheet is translated using the exchange rates at the Balance Sheet date.

As a service company, most of the Group’s transactions are within the territory in which the local business operates and consequently there are few cross-border transactions between Group companies. However, royalties are charged for the use of the Group’s trademarks and management fees are charged for Group and regional functions that provide services to other Group subsidiary companies. Foreign exchange gains and losses are recognised in accordance with IFRS on the settlement of these transactions where the cash received when converted into Sterling differs from the amounts previously recorded in the Income Statement. These exchange gains and losses are included within operating profit.

The table below shows the relative movements of the Group’s main trading currencies against Pounds Sterling during 2008, when compared to those prevalent during 2007. In all cases, Sterling has weakened against these main trading currencies.

Treasury management and currency risk

It is the Directors’ intention to continue to finance the activities and development of the Group from retained earnings, and to operate the Group’s business while maintaining a strong balance sheet position. In a generally benign economic environment this equates to maintaining the Group’s net cash/debt position within a relatively narrow band, with cash generated in excess of these requirements being used to buy back the Group’s shares. In an economic downturn a more cautious funding position is adopted with the Group being managed in a net cash position.

Cash surpluses are invested in short-term deposits, with any working capital requirements being provided from Group cash resources, Group facilities, or by local overdraft facilities. The Group has a multi-currency notional cash pool between the Euro zone subsidiaries and the UK-based Group Treasury subsidiary. The structure facilitates interest and balance compensation of cash and bank overdrafts. It is the intention to extend the scope of the participation to other Group companies.

The main functional currencies of the Group are Sterling, Euro and Australian Dollar. The Group does not have material transactional currency exposures, nor is there a material exposure to foreign denominated monetary assets and liabilities. The Group is exposed to foreign currency translation differences in accounting for its overseas operations. Our policy is not to hedge this exposure.

In certain cases, where the Group gives or receives short-term loans to and from other Group companies with different reporting currencies, it may use foreign exchange swap derivative financial instruments to manage the currency and interest rate exposure that arises on these loans. It is the Group’s policy not to seek to designate these derivatives as hedges.

Principal risks and uncertainties

The management of the business and the execution of the Group’s strategy are subject to a number of risks. The following section comprises a summary of the main risks Michael Page International plc believes could potentially impact the Group’s operating and financial performance.

People

The resignation of key individuals and the inability to recruit talented people with the right skill-sets could adversely affect the Group’s results. This is further compounded by the Group’s organic growth strategy and its policy of not externally hiring senior operational positions. Mitigation of this risk is achieved by succession planning, training of staff, competitive pay structures and share plans linked to the Group’s results and career progression.

Macro economic environment

Recruitment activity is largely driven by economic cycles and the levels of business confidence. The Board look to reduce the Group’s cyclical risk by expanding geographically, by increasing the number of disciplines, by building part-qualified and clerical businesses and by continuing to build the temporary business.

A substantial portion of the Group’s gross profit arises from fees which are contingent upon the successful placement of a candidate in a position. If a client cancels the assignment at any stage in the process the Group receives no remuneration. As a consequence the Group’s visibility of gross profits is generally quite short and reduces further during periods of economic downturn as currently being experienced.

Competition

The degree of competition varies in each of the Group’s main regions. In the UK, Australia and North America, the recruitment market is well developed, highly competitive and fragmented. The characteristics of a developed market are greater competition for clients and candidates, as well as pricing pressure. In EMEA, Latin America and Asia, the recruitment market is generally less developed with a large proportion of all recruitment being carried out by companies’ internal resources rather than through recruitment specialists. This is changing due to changes in legislation, increasing job mobility and the difficulty internal resources face in sourcing suitably qualified candidates and managing compliance.

If the Group does not continue to compete in its markets effectively, by hiring new staff, opening and expanding offices and continuing the discipline roll-outs, there is a risk that competitors may beat us to key strategic opportunities, which may result in lost business and a reduction in market share. This risk is mitigated by meetings of the Main Board, Executive Board and Regional and Country Management Boards where Group strategy is continually reviewed and decisions made over the allocation of the Group’s resources, principally people.

Technology

The Group is reliant on a number of technology systems to provide services to clients and candidates. These systems are dependent on a number of important suppliers that provide the technology infrastructure and disaster recovery solutions. The performance of these suppliers are continually monitored to ensure business critical services are available and maintained as far as practically possible. Due to the rapid advancement of technology, there is a risk that systems could become outdated with the potential to affect efficiency and have an impact on revenue and client service. This risk is mitigated by regular reviews of the Group’s technology strategy to ensure that it supports the overall Group strategy.

Legal

The Group operates in a large number of jurisdictions which have varying legal and compliance regulations. The Group takes its responsibilities seriously and ensures that its policies, systems and procedures are continually updated to reflect best practice and to comply with the legal requirements in all the markets in which it operates. In order to reduce the legal and compliance risks, fee earners and support staff receive regular training and updates of changes in legal and compliance requirements.

Stephen Puckett

Group Finance Director
5 March 2009