London: Management Consulting Group PLC warned this week that continuing market weakness in Europe and a knock-on effect in its financial services practice world-wide mean that it will not meet its expectations for the current financial year.
In a trading update ahead of the announcement of its 2012 interim results on 2 August the Group said that the performance of its businesses has been mixed, with good progress in the United States and in emerging markets being offset by the "negative impact of uncertainty and weakness in the Eurozone which has particularly affected the Group's operations in Europe and the global practice serving the financial services sector."
In particular, MCG's Kurt Salmon practice is struggling in France and Benelux.
Nick Stagg, Chief Executive, commented, "The uncertainty and volatility in the Eurozone is overshadowing the progress we are making in most parts of our businesses.
"At this stage we are cautious on the outlook for the remainder of the year in the light of the global macroeconomic situation. We may not see the improved overall performance this year that we previously expected, however we continue our strategy to drive profit from our business and expand in more robust geographical areas such as Asia, the US, Latin America and Africa, as well as industry sectors such as retail and consumer and natural resources.
"We are in a strong financial position and we have the ability to invest in our business, including small in-fill acquisitions. We believe that over the long term our share price has not reflected the underlying value of our business and it is appropriate that we consider other ways to increase shareholder returns.
"As the global economic situation improves and the Eurozone uncertainty is resolved, and if this undervaluation persists, we will consider utilising up to 50% of the free cash we generate for share buy backs."
In its update MCG says Alexander Proudfoot has continued to perform well, with good levels of activity from the natural resources sector and in emerging markets.
The Brazilian and South African business units have had a successful first half. A new Latin American business unit has been established in Santiago in Chile to serve as a base for work in Spanish-speaking Latin America.
In Europe, MCG says Alexander Proudfoot has coped well with macro economic uncertainty and has continued to benefit from opportunities to sell projects to European headquartered businesses which are delivered in other geographies. In North America the performance of the business has been a little slower than expected. MCG says Alexander Proudfoot is well placed to develop further in markets where economic growth remains robust in spite of weak prospects for growth in developed economies, and enters the second half of the year in a strong position.
The Group's statement says that Kurt Salmon's operations in North America, mainly focused on the retail and consumer goods sector, have performed well.
The Healthcare consulting practice in the US is making good progress and was recently enhanced by the acquisition of New Albany Healthcare, announced on 7 June. The smaller US financial sector practice has been adversely affected by wider uncertainty in the banking sector driven by issues in the Eurozone. The new operation in China is making excellent progress, MCG says.
However the picture for Kurt Salmon in Europe is not so positive.
The Group's statement says, "Kurt Salmon's European operations had a slow start to the year and are expected to report results for the first half which are below management expectations. Continuing uncertainty over the future of the Eurozone, and the recent national elections in France, have adversely affected the French and Benelux businesses in the first half, in particular in relation to work for financial services and public sector clients. Some client projects have been deferred and prospective clients have been cautious in procuring new consulting projects, providing more challenging conditions for the efficient deployment of our staff resources. In response, action is being taken by the management of Kurt Salmon which is designed to improve performance in the second half.
"At this stage of the year demand for Kurt Salmon's services in its key markets appears to be stable or improving, rather than worsening further, however there are no signs that the current weakness and uncertainty in European markets will ease in the next few months and we expect that this will continue to affect the performance of Kurt Salmon in the second half of the year.
"As a result, assuming that the macro-economic environment does not improve significantly, the Board expects that the performance of the Group for 2012 as a whole will be below our expectations at the beginning of the year."
As MCG reported in its interim figures, the first half of the year is not cash generative as a result of the timing of the payment of the Group's annual bonuses from the previous financial year. As expected, the Group's net indebtedness at 30th June 2012 is likely to be in the range £35-40m. The Group says it continues to focus on cash generation and expects to generate cash to further reduce net indebtedness over the course of the financial year.