Management Consulting Group PLC Final Results -3-

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.