Man Group plc - Annual Report 2007

In Brokerage, revenue arises from those businesses where Man Financial acts as intermediary and also from those businesses where it acts as a matched principal broker, such as foreign exchange, securities, metals and energy trading. Income earned on customer balances, which are held off balance sheet, is included within the revenue line as it is deemed that such income is akin to an administration fee.

The increase in revenue over the comparative period was 56%, reflecting the integration of the acquired Refco assets and the continued recruitment of other producer teams, growth in market share and the benefits of active markets. Profitability was also enhanced by the rise in US interest rates in the year and an increase in customer funds compared to the comparative period.

Asset Management margins	2007	2006	2005	2004	2003
Net management fee income ($m)	943	704	594	459	280
Management fees/FUM	1.6%	1.6%	1.5%	1.4%	1.3%
Net performance fee income ($m):
First half of year	221	166	31	55	54
Second half of year	137	284	88	181	124
Full year	358	450	119	236	178
Performance fees/FUM	0.6%	1.0%	0.3%	0.7%	0.9%
In the above table the figures for 2003 and 2004 are as they were presented under UK GAAP. The 2005 to 2007 figures are on an IFRS basis. Restating years 2003 and 2004 on an IFRS basis would not give rise to any significant differences.

Cost of sales increased 58% and relate to fees charged by the exchanges, fees paid to other brokers, rebates to introductory brokers and commissions paid to internal producer teams. There is no fixed element of these commissions; they are all based on sales volumes or profit contributions.

Other operating gains comprise gains on selling some surplus exchange memberships and other operating losses and some small foreign exchange losses.

Administrative expenses in Brokerage have increased 44% from $490 million in the comparative period to $704 million. Of the administrative expenses, $62 million relates to variable employee compensation.

The table below shows an analysis of the administrative expenses margins in Brokerage, excluding the exceptional items. The administrative expenses/income margin increased in 2006 as a result of the operating income in the acquired Refco businesses not covering overheads. In 2007, the benefits of the Refco integration have resulted in the administrative expenses/income margin improving significantly although the effect of this has been partly offset by the adverse impact of the change in the US dollar/sterling exchange rate applied to the significant sterling expenses of Brokerage’s London operations.

Net finance income of $11 million arises on non-segregated cash balances and investments in Brokerage, partly offset by interest expense on long-term debt to finance acquisitions and working capital requirements.

Brokerage margins	2007	2006	2005	2004	2003
Net operating income plus net interest income ($m)	959	642	529	481	335
Administrative expenses ($m)	704	490	381	361	260
Administrative expenses/income margin	73.4%	76.3%	72.0%	75.1%	77.6%
In the above table the figures for 2003 and 2004 are as they were presented under UK GAAP. The 2005 to 2007 figures are on an IFRS basis. Restating years 2003 and 2004 on an IFRS basis would not give rise to any significant differences.

As shown in the table below, the net exceptional items for the year resulted in a $6 million gain ($6 million loss net of tax).

As disclosed in the 2006 Annual Report, further exceptional Refco integration costs amounting to $12 million were incurred in the first half of the financial year ended 31 March 2007. These costs relate to the amortisation of retention payments to administrative staff, which have been spread over the core integration period of seven months following the Refco acquisition in November 2005.

The termination cost of the two US defined benefit pension schemes amounted to $18 million. These costs are non-recurring.

Up to 31 March 2007, $35 million of professional fees have been incurred, directly relating to the intended separation of the Brokerage business by means of an initial public offering on the New York Stock Exchange.

During the year Brokerage sold some of its surplus NYMEX seats, following the listing of NYMEX, realising a gain of $53 million.

In March 2007, Brokerage reached a settlement in relation to an exclusivity contract acquired with the purchase of the Refco assets. As a result of the settlement, Brokerage received income of $28 million and incurred direct costs of $10 million. The contract was deemed to have negligible value at the time of acquisition and there were no indications that this position had materially changed in the 12 months post acquisition, when provisional fair values of acquired assets can be amended in accordance with IFRS3.

Brokerage exceptional items	2007 $m	2006 $m
Refco integration costs	(12)	(70)
Termination costs of the defined benefit pension schemes in the US	(18)	–
Costs relating to the IPO of MF Global	(35)	–
Gain on sale of NYMEX seats	53	–
Gain on settlement of Refco contract	18	–
Net exceptional gain/(loss)	6	(70)

Discontinued operations – USFE
With effect from 1 October 2006, Man Group acquired a controlling interest in the United States Futures Exchange (USFE), a Chicago-based electronic futures exchange, which was formerly known as Eurex US, for a purchase price of $23 million in cash plus $3 million of acquisition costs. In addition, the Group made a capital injection of $35 million into USFE. USFE will offer new products targeted at buy-side customers such as hedge funds and retail investors, sectors in which Man has significant expertise and market exposure. The goal is to expand the volume in listed derivatives by broadening the range of exchange traded products to new and existing user groups, rather than competing with established futures exchanges. In connection with the separation transaction, Man Group will allocate a direct ownership interest of 48.1% in USFE to MF Global, and Man Group will retain an ownership interest of approximately 17%. Man Group’s remaining holding will be classified as an available for sale financial asset.

Tax
The tax charge for the year amounts to $280 million (2006: $222 million). The effective tax rate for continuing operations is 14.7% (2006: 16.8%). The bulk of the Group’s profits is earned in Switzerland and the UK and the current effective tax rate is consistent with this profit mix. The decrease in the rate in the year principally relates to two items: the Group pays a higher tax rate on performance fee income than on management fee income and the performance fee income element as a proportion of the total fee income has decreased in the year; and a number of outstanding issues were agreed with the UK and Swiss tax authorities during the year resulting in a release of some tax accruals. The effective rate on total profit before tax is 18.0% (2006: 18.0%). The decrease in the tax rate for continuing operations is offset by the increased proportion of more highly taxed profits in Brokerage.

The growth in the Group’s profitability has resulted in a significant increase in earnings per share in the year. Full details of earnings per share are given in Note 9 to the financial statements.

Cash flow
IFRS requires that the Group cash flow statement reflects the cash flows of the Group, including the discontinued operation. Hence, the analysis of the Group cash flows below includes Brokerage, albeit with some disclosure of the impact of Brokerage on the Group’s cash flows from operating, investing and financing activities in the year.

Net Group cash inflow for the year was $1,011 million, before shareholder distributions, driven off strong cash generation from operating profit. The statutory cash flow statement, which is presented in a different format, is given in the financial statements.

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