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Profits up; cash flow strong

Headline PBIT margins rose to 15.0%, (a record and equivalent to almost 16% under old 2004 UK GAAP) from 14.5%, in line with our objective. This was particularly encouraging, as our income statement again reflected very large incentive pools for record performance. Pre-incentive headline PBIT margins were flat at 18.7%. Incentive payments fell slightly to £231 million from £247 million, principally reflecting the decline in option issuance, as we switch incentives from options to restricted stock. Total incentive payments (including share-based payments) were almost 21% of headline operating profits before bonuses, taxes and income from associates. Our objective remains to pay out approximately 20% at maximum and 15% at target, excluding share option costs.

Variable staff costs (freelance, consultants and incentive payments, including share option charges) now account for 7.4% of revenues, almost the same as the peak of 7.8% in 2004. This will provide a useful shock absorber for operating margins, should revenues again come under pressure. In a slowdown or recession, approximately half of these costs can be used to protect margins.

As a result of all this, headline PBIT rose to £928 million, well over $1 billion for the fourth year in a row and approaching $2 billion, up over 10% in constant currencies. Although 2007 was a strong year, some of our first-generation businesses continued to suffer and a non-cash impairment charge reflecting accelerated amortisation of goodwill of almost £44 million was taken, compared to £36 million in 2006. Pre-tax profits, therefore, rose by over 7% in constant currency to £719 million, more than $1 billion for the third time, and diluted headline earnings per share by almost 14% in constant currency to 46p. Free cash flow remained strong at £698 million. Cash flow strengthened as a result of improved working capital management and cash flow from operations.

Liquidity improved as well, and your Company remains comfortably geared. Net debt averaged £1.458 billion – up £305 million (at 2007 exchange rates). So far, in the first quarter of 2008, liquidity has continued to remain strong, with average net debt at £1,669 million. Headline interest cover in 2007 was over 8 times. Equity analysts appear comfortable with average net debt levels of more than twice EBITDA, which would be more than £2 billion based on our 2007 headline EBITDA.