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Penny Machines

oil on canvas
22 x 20 in

Penny Machines
oil on canvas
23¾ x 29¾ in

Stack of Books
oil on canvas
30 x 24 in

Seven Suckers
oil on canvas
19 x 23 in

Twin Jackpots
oil on canvas
30 x 46 in

oil on canvas
20 x 26 in

Cake Slices
oil on canvas
20 x 16 in

Margin down for the year but stabilised in the second half

Headline PBIT margins fell to 11.7% for the year against 15.0% in 2008 (or against 14.3% if TNS were included for the whole of 2008), but, as mentioned above, the Group achieved a margin of 15.4% in the second half of the year, the same pro-forma margin as in the second half of 2008.

On a like-for-like basis the average number of people in the Group decreased 6.7% in 2009. On the same basis, the number of people in the Group at 31 December 2009 was 12.3% lower than at the end of 2008. As these figures illustrate, further action to reduce headcount was taken during the second half of 2009 with year-end headcount being 7.4% lower than at 30 June and 6.3% lower than at 31 July.

Reported staff costs, excluding incentives, were up 19.4%. Incentive payments (including the cost of share-based compensation) fell by almost 17% to £178 million from £214 million. Excluding these incentive payments, headline PBIT margins fell by 4.0 margin points from 17.8% in 2008 to 13.8% in 2009. Incentives represented almost 16% of headline operating profit before bonuses and income from associates, against almost 17% in 2008. Cash-based incentives totalled £123 million or just over 12% of headline operating profit before bonuses and income from associates against £151 million and almost 14% in 2008. The balance of £55 million in 2009 represents share-based incentives granted in previous years. Our objective remains to pay out approximately 20% of operating profit before bonus and taxes at maximum and 15% at target. Before severance costs, headline PBIT margins fell by 2.7 margin points to 13.2%.

Part of the Group’s strategy is to continue to ensure that variable staff costs (freelancers, consultants and incentive payments) are a significant proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slow-downs. In 2009, the ratio of variable staff costs to total staff costs fell to 9.7% compared with 11.4% in 2008 and 12.7% in 2007. As a proportion of revenue, variable staff costs were 5.7% in 2009 compared with 6.6% in 2008 and 7.4% in 2007.

On a reported basis, the Group’s staff cost-to-revenue ratio increased to 58.9% compared with 58.2% in 2008.

As a result of all this, headline PBIT fell 9% to £1,017 million from £1,118 million, down almost 17% in constant currencies. Reported PBIT fell over 11% to £819 million, almost 20% in constant currencies, reflecting a lower charge for goodwill impairment and investment write-downs, more than offset by higher charges for amortisation of intangible assets following the acquisition of TNS.

Net finance costs (excluding the revaluation of financial instruments) were £205 million, up from £150 million last year, reflecting higher average net debt as a result of the full year impact of the acquisition of TNS, partly offset by lower interest rates.

Headline profit before tax decreased by over 16% to £812 million and reported profit before tax fell by more than 11% to £663 million, although still above $1 billion for the fifth consecutive year.

The Group’s tax rate on headline profit before tax was 23.8%, a reduction of 1.5 percentage points from 2008, as a result of continuing tax planning initiatives.

Diluted headline earnings per share fell 20% to 44.4p and diluted reported earnings per share fell only 6% to 35.3p mainly because ‘re-measurement gains’ on financial instruments have not been included in headline earnings per share, unlike one of our US competitors. In addition, and prudently, no severance or integration expenses have been excluded in arriving at the same headline number. This again is not competitive practice, which is also odd.

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