WPP 2012 Preliminary Results
by Business Wire
WPP (NASDAQ:WPPGY) today reported its 2012 Preliminary Results.
|% revenues||2011||% revenues|
EPS headline diluted5
|Dividends per share||28.51p||15.9%||15.9%||-||24.60p||-|
1 Percentage change in reported sterling
2 Percentage change at constant currency exchange rates
3 Headline earnings before interest, tax, depreciation and amortisation
4 Headline profit before interest and tax
5 Diluted earnings per share based on headline earnings
6 Diluted earnings per share based on reported earnings
Full Year highlights
- Reported billings decreased slightly to £44.4bn, primarily reflecting the strength of the £ sterling, although up 1.6% in constant currency driven by leadership position in net new business league tables
- Revenue growth of 3.5%, with like-for-like growth of 2.9%, 2.9% growth from acquisitions and minus 2.3% from currency
- Like-for-like revenue growth in all but one region, characterised by particularly strong growth in Asia Pacific, Latin America, Africa and the Middle East and all but one sector(public relations and public affairs), with strong growth in advertising, media investment management and specialist communications
- Like-for-like gross margin growth at 2.4%, with slower growth in the Group’s consumer insight businesses in the mature markets of North America, the United Kingdom and Western Continental Europe
- Headline EBITDA growth of 7.0% giving 0.5margin point improvement, with operating costs (+2.8%) rising less than revenues
- Headline PBIT increase of 7.1% with PBIT margin rising by 0.5points to 14.8%, surpassing the previous historical pro forma high of 14.3%7 achieved in 2011
- Exceptional gains of £102 million on sales of stake in Buddy Media and New York property
- Exceptional restructuring charges of £93 million taken chiefly in respect of Western Continental European businesses and IT infrastructure
- Gross margin margins, a more accurate competitive comparator, up 0.6 margin points to an industry leading 16.1%
- Headline diluted EPS up 8.4% and reporteddiluted EPS down 2.6% (reflecting last year’sexceptional release of corporate tax provisions), with 15% higher final ordinary dividend of 19.71p and full year dividends of 28.51p per share up 15.9%
- Average net debt increased £373m (13%) to £3.203bn reflecting increased spending on acquisitions (chiefly AKQA) and higher dividends, partly offset by relative improvement in working capital
- Creative excellence recognised by the award, for the second consecutive year since its inception, of the Cannes Lion for the most creative Holding Company
- Over last two years alone headline diluted earnings per share up almost 30%, dividends per share up 60% and the dividend pay-out ratio increased from 31% to 39%
|7 Headline PBIT margin of 15.0% in 2008 adjusted to 14.3% for the full year impact of the acquisition of TNS|
Current trading and outlook
- January 2013 | Like-for-like revenues up over 2% for the month, ahead of budget and similar to the final quarter of 2012; like-for-like gross margin up the same
- FY 2013 budget | Like-for-like revenue and gross margin growth of around 3% and headline operating margin target of 15.3% up 0.5 margin points
- Dual focus in 2013 | 1. Revenue growth from leading position in faster growing geographic markets and digital, premier parent company creative position, new business, “horizontality” and strategically targeted acquisitions; 2. Continued emphasis on balancing revenue growth with headcount increases and improvement in staff costs/revenue ratio to enhance operating margins
- Long-term targets reaffirmed | Above industry revenue growth due to geographically superior position in new markets and functional strength in new media and consumer insight, including data analytics and application of new technology; improvement in staff costs/revenue ratio of 0.3to 0.6 margin points p.a. depending on revenue and gross margin growth; operating margin expansion of 0.5margin points or more; and PBIT growth of 10% to 15% p.a. from margin expansion and from strategically targeted small and medium-sized acquisitions
In this press release not all of the figures and ratios used are readily available from the unaudited preliminary results included in Appendix 1.Where required, details of how these have been arrived at are shown in the Appendices.
Review of group results
|£ million||2012||∆ reported|
8 Percentage change at constant currency exchange rates
9 Like-for-like growth at constant currency exchange rates and excluding the effects of acquisitions and disposals
Billings were down slightly at £44.4 billion, primarily reflecting the strength of the £ sterling. Billings were up 1.6% in constant currency. Estimated net new business billings of £3.894 billion ($6.231 billion) were won in the year, up almost 21% on last year, placing the Group first in all leading net new business tables. The Group continues to benefit from consolidation trends in the industry, winning assignments from existing and new clients. These wins continued into the second half of the year and the first two months of 2013 with several very large industry-leading advertising, digital and media assignments, the full benefit of which will be seen in Group revenues in 2013. There have been several recent significant gains, for example, in the pharmaceutical and healthcare industry.
Reportable revenue was up 3.5% at £10.373 billion. Revenue on a constant currency basis was up 5.8% compared with last year, but changes in exchange rates, chiefly reflecting the strength of the £ sterling primarily against the euro, reduced revenue by 2.3%. As a number of our competitors report in US dollars and in euros, appendices 2 and 3 show WPP’s Preliminary results in reportable US dollars and euros respectively. This shows that US dollar reportable revenues were up 2.5% to $16.459 billion and earnings before interest and taxes up 6.9% to $2.439 billion, which compares with the $14.219 billion and $1.90510 billion respectively of our closest competitor and that euro reportable revenues were up 10.8% to €12.796 billion and earnings before interest and taxes up 14.8% to €1.892 billion, which compares with €6.610 billion and €1.064 billion respectively of our nearest European-based competitor.
On a like-for-like basis, which excludes the impact of currency and acquisitions, revenues were up 2.9%, with gross margin up 2.4%, reflecting pressure on gross margins in the Group’s consumer insight custom businesses in the mature markets of North America, the United Kingdom and Western Continental Europe. In the fourth quarter, like-for-like revenues were up 2.5%, an improvement on the third quarter of 1.9%, due to stronger growth in all regions except North America. This reflects a reversal of the declining quarterly like-for-like revenue growth trend which went from 4% in quarter one, to 3% in quarter two and to 2% in quarter three in 2012.
|10 EBITA, defined as operating income before interest, taxes and amortisation|
Headline EBITDA was up 7.0% to £1.756 billion from £1.640 billion and up 10.7% in constant currencies. Group revenues are more weighted to the second half of the year across all regions and functions and particularly in the faster growing markets of Asia Pacific and Latin America. As a result, the Group’s profitability continues to be skewed to the second half of the year. Headline operating profit for 2012 was up 7.1% to £1.531 billion from £1.429 billion and up 11.1% in constant currencies.
Headline operating margins were up 0.5 margin points to 14.8%, in line with the Group’s margin target, compared to 14.3% in 2011, surpassing the previous pre-Lehman pro forma high equalled in 2011. The headline margin of 14.8% is after charging £51 million or $82 million of severance costs compared with £54 million or $84 million in 2011. In 2012 the impact of exchange rates reduced reported margins and like-for-like operating margins actually improved 0.7 margin points. Over the last two years, reported operating margins have improved by 1.6 margin points and by 1.8 margin points like-for-like.
Given the significance of consumer insight revenues to the Group, with none of our parent company competitors present in that sector, gross margin and gross margin margins are a more meaningful measure of comparative margin performance. This is because consumer insight revenues include pass-through costs, principally for data collection, on which no margin is charged and with the growth of the internet, the process of data collection is more efficient. Headline gross margin margins were up 0.6 margin points to 16.1%, achieving the highest reported level in the industry.
On a reported basis, operating margins, before all incentives11 and income from associates, were 16.9%, down 0.1 margin points, compared with 17.0% last year. The Group’s staff cost to revenue ratio, including incentives, increased by 0.3 margin points to 58.9% compared with 58.6% in 2011. Following intentional reductions in 2009 and 2010 after the Lehman crisis, the Group increased its investment in human capital, particularly in the latter part of 2011 and in early 2012, mainly in the faster growing geographic and functional markets (such as media investment management and digital) as like-for-like revenues and gross margin increased.
|11 Short and long-term incentives and the cost of share-based incentives|
During 2012, the Group continued to reap the benefits of containing operating costs, with improvements across most cost categories, particularly property, commercial and office costs.
Reported operating costs12, rose by 3.0% and by 5.0% in constant currency. On a like-for-like basis, total operating and direct costs rose 2.1%. Reported staff costs, excluding incentives, rose by 5.1% and by 7.1% in constant currency. Incentive payments amounted to £291 million or over $465 million, which was 16.6% of headline operating profit before incentives and income from associates, compared with £338 million or 19.9% in 2011. Performance in parts of the Group’s custom research, public relations and public affairs, healthcare and direct, digital and interactive businesses fell short of the maximum performance objectives agreed for 2012, as the like-for-like revenue growth rate slowed in quarters two and three in 2012. This followed the record profit and margin performance in 2011, when most of the Group’s operating companies achieved maximum incentive levels.
On a like-for-like basis, the average number of people in the Group, excluding associates, in 2012 was 114,490, compared to 112,717 in 2011, an increase of 1.6%. On the same basis, the total number of people in the Group, excluding associates, at 31 December 2012 was 115,711 compared to 116,230 at 31 December 2011, a decrease of over 500 or 0.4%. This point-to-point data reflects the adjustments in staff costs made later in 2012, as like-for-like revenues slowed after the first quarter of the same year. On the same basis revenues increased 2.9% and gross margin 2.4%.
As noted in the Third Quarter Trading Update in October 2012, the proceeds from the sale of the company’s stake in Buddy Media were received and, in addition, conditional contracts exchanged for the sale of the freehold of 285 Madison Avenue, the New York headquarters of Young & Rubicam Inc. The sale of 285 Madison Avenue was completed in December 2012 and these two transactions combined resulted in an exceptional gain of £102 million.
Offsetting this gain, an exceptional restructuring charge of £93 million was taken, the majority of which is to address certain structural issues within businesses primarily in Western Continental Europe and to balance staffing levels and align staff costs given anticipated levels of revenue. Although, Mario Draghi, as President of the ECB, has certainly improved the prospects of the Eurozone in the last year or so, it seems that, slow or stagnant growth in Western Continental Europe is likely to continue for some time. We may well only be half way through a lost decade, post-Lehman. In addition, the devastating effects of Hurricane Sandy, the significant loss of power in New York and the subsequent flooding which occurred, had some impact on the operational effectiveness of certain of the Group’s IT infrastructure and the Group has reviewed its back-office systems and made provision for the write-off of IT equipment. This will accelerate the Group’s overhaul of its approach to centralising IT services.
|12 Including, direct costs, but excluding goodwill impairment, amortisation of acquired intangibles, gain on sale of New York property, restructuring charges, costs in relation to changes in corporate structure and investment gains and write-downs|
Interest and taxes
Net finance costs (excluding the revaluation of financial instruments) were up 7.0% at £213.9 million, compared with £199.9 million in 2011, an increase of £14.0 million, reflecting higher average net debt, offset by lower funding costs.
The tax rate on headline profit before tax was 21.2% (2011 22.0%) and on reported profit before tax was 18.1% (2011 9.1%). The difference in the reported tax rate is primarily due to the exceptional release in 2011 of prior year corporate tax provisions following the resolution of a number of open tax matters.
Earnings and dividend
Headline profit before tax was up 7.2% to £1.317 billion from £1.229 billion, or up 12.3% in constant currencies.
Reported profit before tax rose by 8.3%, to £1.092 billion from £1.008 billion. In constant currencies, reported profit before tax rose by 14.6%.
Profits attributable to share owners fell by 2.1% to £823 million from £840 million, due to the exceptional release of prior year tax provisions in 2011. Excluding the impact of the exceptional tax credit attributable profits would have risen by 12.1% to £823 million from £734 million.
Headline diluted earnings per share rose by 8.4% to 73.4p from 67.7p. In constant currencies, earnings per share on the same basis rose by 13.1%. Reported diluted earnings per share decreased by 2.6% to 62.8p from 64.5p, again reflecting the release of prior year tax provisions in 2011 and increased 1.9% in constant currencies.
In line with the statement made with the Group’s 2010 Preliminary Results, announcing the intention to raise the dividend pay-out ratio from around a third to 40%, the Board declares an increase of 15% in the final ordinary dividend to 19.71p per share, which together with the first interim dividend of 8.80p per share, makes a total of 28.51p per share for 2012, an overall increase of 15.9%. The record date for the final dividend is 7 June 2013, payable on 8 July 2013. This represents a dividend pay-out ratio of 39% on headline diluted earnings per share, compared to a pay-out ratio of 36% in 2011. The Board has now largely achieved its objective of increasing the dividend pay-out ratio to approximately 40% and the Board will be continually reviewing whether the dividend pay-out ratio should be further increased in the range of 45% to 50%.
On 2 January 2013, the Scheme of Arrangement between WPP 2012 Limited and its share owners, in relation to the introduction of a new Jersey incorporated and United Kingdom tax resident parent company, became effective and new WPP, which has adopted the same name, WPP plc, became the new parent company of the WPP Group. As a consequence of the Group returning its tax residence to the United Kingdom, the dividend access plan and scrip dividend have been terminated.
Further details of WPP’s financial performance are provided in Appendices 1, 2 and 3.
The pattern of revenue growth differed regionally. The tables below give details of revenue and revenue growth by region for 2012, as well as the proportion of Group revenues and operating profit and operating margin by region;
|£ million||2012||∆ reported|
|% group||2011||% group|
|W Cont. Europe||2,439||-2.6%||3.7%||0.1%||23.5%||2,505||25.0%|
AP, LA, AME, CEE15
* Like-for-like gross margin growth of 3.0% in the UK and 2.4% for the Group
13 Percentage change at constant currency exchange rates
14 Like-for-like growth at constant currency exchange rates and excluding the effects of acquisitions and disposals
15 Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe
Operating profit analysis (Headline PBIT)
|£ million||2012||% margin||2011||% margin|
|W Cont. Europe||253||10.4%||284||11.3%|
|AP, LA, AME, CEE||526||16.9%||454||15.4%|
North America, with constant currency growth of 3.0% in the final quarter and like-for-like growth of -0.6%, was lower than the third quarter and first half, with relatively strong growth in the Group’s advertising and media investment management businesses, more than offset by parts of the Group’s consumer insight, public relations and public affairs and branding & identity, healthcare and specialist communications businesses. This seems to be indicative of continued pressure on discretionary client spending.
The United Kingdom, against market trends, showed continued strong growth in the fourth quarter with constant currency growth of 10.4% and like-for-like growth of 5.1%, with particularly strong growth in advertising and media investment management, partly offset by slower growth in consumer insight, branding & identity and healthcare communications.
Western Continental Europe, although relatively more difficult, showed some improvement in the fourth quarter, with constant currency revenues up 1.5% and like-for-like revenues down 0.7%, compared with -2.1% in quarter three. Italy, Turkey and (surprisingly) Greece grew, but Spain, Portugal, Scandinavia, France, the Netherlands and Switzerland were tougher, with the continuing effects of the Eurozone crisis impacting parts of Western Continental Europe.
In Asia Pacific, Latin America, Africa & the Middle East and Central and Eastern Europe, revenue growth in the fourth quarter was strongest, as it has been throughout 2012, up 8.1% in constant currency and up 7.3% like-for-like and stronger than quarter three. Growth in the fourth quarter was driven principally by the Middle East and Africa, Latin America, the BRICs16 and Next 1117 parts of Asia Pacific, the CIVETS18 and the MIST19. Central and Eastern Europe, after a difficult third quarter, improved significantly in the final quarter, with like-for-like growth of over 12% in Russia.
Latin America showed the strongest growth of all of our sub-regions in the year, with constant currency revenues up almost 13% and up well over 11% like-for-like. The Middle East & Africa showed the strongest growth of our sub-regions in the fourth quarter, with like-for-like revenues up almost 10%, with all sectors improving. In Central and Eastern Europe, like-for-like revenues were up 0.1% in the fourth quarter, compared with -6.1% in quarter three, with strong growth in Russia, Kazakhstan, the Ukraine and Romania but Poland, Hungary, the Czech Republic and Serbia remained more challenging. Full year revenues for the BRICs, which account for almost $2 billion of revenue, were up over 11%, on a like-for-like basis, with the Next 11 and CIVETS up almost 12% and over 11% respectively. The MIST was up over 11%.
In 2012, 30% of the Group’s revenues came from Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe – 0.6 percentage points higher compared with the previous year and against the Group’s strategic objective of 35-40% in the next two to three years.
|16 Brazil, Russia, India and China (accounting for over $2.6 billion revenues, including associates)|
|17 Bangladesh, Egypt, Indonesia, South Korea, Mexico, Nigeria, Pakistan, Philippines, Vietnam and Turkey (the Group has no operations in Iran) accounting for over $750 million revenues, including associates|
|18 Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (accounting for over $860 million revenues, including associates)|
|19 Mexico, Indonesia, South Korea and Turkey (accounting for almost $580 million revenues, including associates)|
Business sector review
The pattern of revenue growth also varied by communications services sector and operating brand. The tables below give details of revenue, revenue growth by communications services sector as well as the proportion of Group revenues and operating profit and operating margin by communications services sector;
|£ million||2012||∆ reported|
|% group||2011||% group|
PR & PA23
BI, HC & SC24
* Like-for-like gross margin growth of -1.1% in Consumer Insight and 2.4% for the Group
20 Percentage change at constant currency exchange rates
21 Like-for-like growth at constant currency exchange rates and excluding the effects of acquisitions and disposals
22 Advertising, Media Investment Management
23 Public Relations & Public Affairs
24 Branding and Identity, Healthcare and Specialist Communications
Operating profit analysis (Headline PBIT)
|£ million||2012||% margin||2011||% margin|
|PR & PA||136||14.9%||143||16.1%|
|BI, HC & SC||393||14.4%||360||14.3%|
In 2012, over 32% of the Group’s revenues came from direct, digital and interactive, up over 1.0 percentage point from the previous year and growing 6.7% like-for-like over 2011.
Advertising and Media Investment Management
In constant currencies, advertising and media investment management remained the strongest performing sector with constant currency revenues up 4.0% in the final quarter and like-for-like up 5.4%, considerably stronger than the third quarter like-for-like growth of 2.9%. Full year revenues were up 5.1% like-for-like.
Of the Group’s advertising networks, Ogilvy & Mather, which was named Network of the Year at Cannes, performed especially well in North America, the United Kingdom and Latin America, with Grey in North America even stronger. However, the Group’s advertising businesses in Western Continental Europe generally remained under pressure with like-for-like revenues down. Growth in the Group’s media investment management businesses has been very consistent throughout the year, with constant currency revenues up over 12% for the year and like-for-like growth up 11.0%. tenthavenue, the “engagement” network focused on out-of-home media, was established towards the end of 2010 and in 2012 showed strong revenue growth, with like-for-like revenues up over 7% following over 14% growth in 2011. The strong revenue growth across most of the Group’s businesses, together with good cost control, resulted in the combined reported operating margin of this sector improving by 1.6 margin points to 17.7%.
In 2012, Ogilvy & Mather, JWT, Y&R, Grey and United generated net new business billings of £1.087 billion ($1.740 billion).
In the same year, GroupM, the Group’s media investment management company, which includes Mindshare, MEC, MediaCom, Maxus, GroupM Search and Xaxis, together with tenthavenue, generated net new business billings of £2.148 billion ($3.437 billion).
On a constant currency basis, consumer insight revenues grew 2.8%, with gross margin up 0.8%. On a like-for-like basis revenues were up 0.8% with gross margin down 1.1%. The pattern of revenue growth seen in the first nine months, continued into the final quarter, with the mature markets of North America and Continental Europe difficult but counterbalanced by strong growth in the faster growing markets of Asia Pacific, Latin America, Africa & the Middle East. In the fourth quarter the United Kingdom also slowed. Reported operating margins fell 0.5 margin points to 10.0% (reported gross margin margins fell 0.4 margin points to 13.9%). The central issue continues to be like-for-like revenue growth in the custom businesses in mature markets, where discretionary spending remains under review by clients. Custom businesses in faster growth markets and syndicated and semi-syndicated businesses in all markets, remain robust, with strong like-for-like revenue growth.
Public Relations and Public Affairs
In constant currencies the Group’s public relations and public affairs businesses had a more difficult year with full year growth of 4.2% and like-for-like revenues down 1.0%, with continuing pressure in North America and Continental Europe across most of the Group’s brands, only partly offset by strong growth in the United Kingdom, Latin America and the Middle East & Africa. Operating margins fell by 1.2 margin points to 14.9%.
Branding and Identity, Healthcare and Specialist Communications
At the Group’s branding and identity, healthcare and specialist communications businesses (including direct, digital and interactive) constant currency revenues grew strongly at 10.2% with like-for-like growth of 2.6%. Like-for-like revenue growth slipped slightly in quarter four, due primarily to slower growth in parts of the Group’s branding & identity and healthcare communications businesses, but remained close to 2%. AKQA, the leading digital agency acquired in July 2012 performed well with full year like-for-like revenues up 10%. Operating margins, for the sector as a whole, improved slightly, up 0.1 margin points to 14.4%.
Including associates, the Group currently employs over 165,000 full-time people (up almost 7,000, from over 158,000 the previous year) in over 3,000 offices in 110 countries. It services 350 of the Fortune Global 500 companies, all 30 of the Dow Jones 30, 63 of the NASDAQ 100, 31 of the Fortune e-50 and 757 national or multi-national clients in three or more disciplines. 479 clients are served in four disciplines and these clients account for over 57% of Group revenues. This reflects the increasing opportunities for co-ordination and co-operation or “horizontality” between activities both nationally and internationally and at a client and country level. The Group also works with 357 clients in 6 or more countries. The Group estimates that well over a third of new assignments in the year were generated through the joint development of opportunities by two or more Group companies.
Cash flow highlights
In 2012, operating profit was £1.241 billion, depreciation, amortisation and goodwill impairment £429 million, non-cash share-based incentive charges £93 million, net interest paid £172 million, tax paid £257 million, capital expenditure £330 million and other net cash inflows £90 million. Free cash flow available for working capital requirements, debt repayment, acquisitions, share re-purchases and dividends was, therefore, £1.094 billion.
This free cash flow was absorbed by £587 million in net cash acquisition payments and investments (of which £87 million was for earnout payments and loan note redemptions with the balance of £500 million for investments and new acquisition payments net of disposal proceeds), £134 million in share repurchases and £307 million in dividends, a total outflow of £1.028 billion. This resulted in a net cash inflow of £66 million, before any changes in working capital.
A summary of the Group’s unaudited cash flow statement and notes as at 31 December 2012 is provided in Appendix 1.
In line with the Group’s strategic focus on new markets, new media and consumer insight the Group completed 65 acquisitions in 2012, 28 acquisitions and investments were classified in new markets (of which 20 were in new media), 27 in consumer insight, including data analytics and the application of technology, with the balance of 10 driven by individual client or agency needs.
Specifically, in 2012 acquisitions and increased equity stakes have been completed in advertising and media investment management in the United States, Germany, the Netherlands, the Slovak Republic, Turkey, Israel, Jordan, Brazil, Colombia, Mexico, Australia, China, South Korea, Thailand and Vietnam; in consumer insight in the United States, France, Germany, Turkey, UAE, Chile, China and Pakistan; in public relations and public affairs in the United States, Canada, the United Kingdom, Denmark, Finland, France, Russia and Australia; in direct, digital and interactive in the United States, the United Kingdom, Germany, Hungary, Russia, South Africa, Turkey, Australia, China, Indonesia, Pakistan and Singapore; and in healthcare in Hong Kong.
Balance sheet highlights
Average net debt in 2012 increased by £373 million to £3.203 billion, compared to £2.830 billion in 2011, at 2012 exchange rates. On 31 December 2012 net debt was £2.821 billion, against £2.465 billion on 31 December 2011, an increase of £356 million, reflecting increased spending on acquisitions (chiefly AKQA) and higher dividends, partly offset by relative improvements in working capital.
Your Board continues to examine ways of deploying its EBITDA of over £1.7 billion or over $2.8 billion and substantial free cash flow of almost £1.1 billion or over $1.7 billion per annum, to enhance share owner value. The Group’s current market value of £13.3 billion implies an EBITDA multiple of 7.6 times, on the basis of the full year 2012 results. Including year end net debt of £2.8 billion, the Group’s enterprise value to EBITDA multiple is 9.2 times.
A summary of the Group’s unaudited balance sheet and notes as at 31 December 2012 is provided in Appendix 1.
During September 2012, the Group successfully issued $500 million of 10 year bonds at a coupon of 3.625%, together with $300 million of 30 year bonds at 5.125%. This was the first time a company in our industry has issued 30 year debt and the bonds were well received by investors with strong demand for both. These bonds have improved the maturity profile of the Group’s debt.
Return of funds to share owners
Following the strong first-half results, your Board raised the interim dividend by 18%, around 5.0 percentage points higher than the growth in headline diluted earnings per share, a pay-out ratio in the first half of 34%. For the full year, headline diluted earnings per share rose by 8.4% and the final dividend has been increased by 15%, bringing the total dividend for the year to 28.51p per share, up 15.9%, 7.5 percentage points higher than the growth in headline diluted earnings per share. As indicated in the AGM statement in June 2012, the Board’s objective remains to increase the dividend pay-out ratio to approximately 40% over time compared to the 2010 ratio of 31%. In 2011, it reached 36% on headline diluted earnings per share and in 2012 this has risen to 39%. Dividends paid in respect of 2012 will total almost £360 million for the year.
In 2012, 16.2 million shares, or 1.3% of the issued share capital, were purchased at an average price of £8.30 per share, of which 6.7 million shares were cancelled.
Having largely achieved its target of a dividend pay-out ratio of 40%, as mentioned before, your Board will give consideration to the merits of increasing the pay-out ratio further.
January 2013 revenues were ahead of budget and on a like-for-like basis were up 2% with gross margin up similarly. All regions, except North America were up, with Asia Pacific, Latin America and Africa and the Middle East up the strongest. All sectors, except public relations and public affairs and branding & identity were up with media investment management, consumer insight and healthcare communications, up the strongest.
Macroeconomic and industry context
2012, the Group’s twenty seventh year, was like the previous year, a record year, but it felt very different. We reached our targets, but we got there ugly. Having budgeted 4% like-for-like revenue growth at the beginning of 2012, the first quarter started well on budget, if not ahead and with the quarter one revised forecast strengthening, investment in talent continued following the additions made at the end of 2011. However, as the like-for-like revenue growth rate started to slow in quarter two to 3% and, in turn, to 2% in quarter three, we did not start to make the cost adjustments quickly enough to counter the increased staff investment until quarters three and four, although we are now much better balanced for 2013, with the like-for-like number of people in the business slightly down at the end of the year compared with the beginning of 2012.
So why was 2012 such a difficult year? Clients were certainly in stronger shape with profits at an all-time high as a proportion of GDP, margins generally stronger, share prices rising as institutional investors rotated out of government securities and sitting on, in the case of US-based multi-nationals, over $2 trillion in cash with relatively unleveraged balance sheets. But, whilst clients were certainly in better shape than pre-Lehman in September 2008, they still lacked the necessary confidence given the "grey swans", or known unknowns. Black swans are the unknown unknowns which by definition we do not know what they are.
There are at least four, perhaps five now in the case of the United Kingdom. Firstly, the fragility of the Eurozone, certainly better since one of the Super Marios, Mario Draghi, took over as the President of the ECB, but still subject to potential shocks, for example, from elections in Italy or potential corruption problems in Spain. The Eurozone has also been aided by others stressing the need to reduce unemployment and surrendering the inflation rate constraint, for example, by the Chairman of the Federal Reserve Bank in the United States, the re-elected Prime Minister Abe in Japan and perhaps the new Governor of the Bank of England in the United Kingdom. This has certainly helped equity securities too.
Second, the problems of the Middle-East, are probably now, if anything, worse than a year ago, with heightened conflicts and tensions in Tunisia, Libya, Egypt, Gaza, Syria and above all, potential conflicts between Israel and Iran.
Third, a China or BRICs hard or soft landing, although all the evidence we have seems to point to a soft landing in China and continued growth in Brazil and India, and even stronger growth in Russia. The rise of the hundreds of millions in the new middle-classes in all these countries seems to be the real economic motive force, particularly for the fast moving consumer goods industries. Certainly, in the case of China, the West seems to have fundamentally misunderstood the significance of the 12th Five-Year Plan. That plan looks for lower quantum, but higher quality growth at around 7.5% p.a. compound (which we would kill for), combined with higher consumption, lower savings, a social security safety net and stronger services sector (almost a charter for WPP). The new politburo leadership seems to be another bull market signal.
Fourth, and most importantly, dealing with the US deficit and a record level of $16 trillion of debt in the most effective way. This remains the elephant in the room, as the United States is still twice the size of the Chinese economy at around $16 trillion GDP versus over $8 trillion out of a global total of around $65 trillion. The last minute attempts to deal with the problem in the US Congress on New Year’s Eve in 2012 only succeeded in kicking the can further down the road and the sequester is ill-equipped to help, having been really devised as a compromise measure in June 2011 never to be used. Neither will the sequester help growth in the first half of 2013 in the United States.
Finally, the decision to launch a referendum for Britain’s European Union membership, whilst no doubt being an astute political move, adds further uncertainty to the United Kingdom economy until after the next United Kingdom General Election in 2015.
So all in all, whilst clients may be more confident than they were in September 2008 pre-Lehman, with stronger balance sheets, these increased levels of uncertainty combined with strengthened corporate governance scrutiny make them unwilling to take further risks. They remain focussed on a strategy of adding capacity and brand building in both fast growth geographic markets and functional markets like digital and containing or reducing capacity, perhaps with brand building to maintain or increase market share, in the mature, slow growth markets. This approach also has the apparent virtue of limiting fixed cost increases and increasing variable costs, although we naturally believe that marketing is an investment not a cost. We see little reason if any for this pattern of behaviour to change in 2013, with continued caution being the watchwords. There is certainly no evidence to suggest any such change in behaviour so far in 2013.
The pattern for 2013 looks very similar to 2012, perhaps with increased client confidence balancing the lack of maxi- or mini-quadrennial events. Forecasts of worldwide real GDP growth still hover around 3%, with inflation of 2% giving nominal GDP growth of around 5% for 2013, although they have been reduced recently and may be reduced further in due course. Advertising as a proportion of GDP should at least remain constant overall, although it is still at relatively depressed historical levels, particularly in mature markets, post-Lehman and advertising should grow at least at a similar rate as GDP. The three maxi-quadrennial events of 2012, the UEFA Football Championships in Central and Eastern Europe, the Summer Olympics and Paralympics in London and last, but not least, the US Presidential elections in November did underpin industry growth but not, perhaps, as much as was thought, with money being switched from existing budgets, particularly in the cases of the UEFA Championships and Olympics. Although both consumers and corporates seem to be increasingly cautious and risk averse, they should continue to purchase or invest in brands in both fast and slow growth markets to stimulate top line sales growth. As a leading Chief Investment Officer of one of the largest investment institutions said recently, companies may be running out of ways of reducing costs and have to focus more on top line growth. Merger and acquisition activity may be another way of doing this, but maybe a more risky way than investing in marketing and brand and hence market share.
2013 looks to be another demanding year. There will be no maxi- or mini- quadrennial events and, as mentioned above, the United States deficit and debt remain ignored.
2014 looks a better prospect, however, with the World Cup in Brazil, the Winter Olympics in Sochi and, would you believe, another United States election - the mid-term Congressionals. The first two events will continue to reposition Brazil and Latin America and Russia and Central and Eastern Europe in the world’s mind, just like the Beijing Olympics did for China and Asia and the World Cup did for South Africa and the continent of Africa - and, possibly, London 2012 did for the UK .
The budgets for 2013 have been prepared on a somewhat more conservative basis than usual (hopefully) following the slowing like-for-like revenue growth rate in the middle two quarters of 2012, but continue to reflect the faster growing geographical markets of Asia Pacific, Latin America, Africa and Central and Eastern Europe and faster growing functional sectors of advertising, media investment management and direct, digital and interactive to some extent moderated by the slower growth in the mature markets of the United States and Western Europe. Our 2013 budgets show the following;
- Like-for-like revenue and gross margin growth of around 3%
- Target operating margin improvement of 0.5 margin points
In 2013, our prime focus will remain on growing revenues and gross margin faster than the industry average, driven by our leading position in the new markets, in new media, in consumer insight, including data analytics and the application of technology, creativity and “horizontality”. At the same time, we will concentrate on meeting our operating margin objectives by managing absolute levels of costs and increasing our flexibility in order to adapt our cost structure to significant market changes and by ensuring that the benefits of the restructuring investments taken in 2012 are realised. The initiatives taken by the parent company in the areas of human resources, property, procurement, information technology and practice development continue to improve the flexibility of the Group’s cost base. Flexible staff costs (including incentives, freelance and consultants) remain close to historical highs of around 7% of revenues and continue to position the Group extremely well should current market conditions change.
The Group continues to improve co-operation and co-ordination among its operating companies in order to add value to our clients’ businesses and our people’s careers, an objective which has been specifically built into short-term incentive plans. “Horizontality” has been accelerated through the appointment of over 30 global client leaders for our major clients, accounting for about one third of total revenues of $17 billion and country managers in a growing number of test markets. Emphasis has been laid on the areas of media investment management, healthcare, sustainability, government, new technologies, new markets, retailing, shopper marketing, internal communications, financial services and media and entertainment. The Group continues to lead the industry, in co-ordinating investment geographically and functionally through parent company initiatives and winning Group pitches. For example, the Group has been very successful in the recent wave of consolidation in the pharmaceutical industry and the resulting "team" pitches.
In the future, our business is, geographically and functionally, well positioned to compete successfully and to deliver on our long-term targets:
- Revenue and gross margin growth greater than the industry average including acquisitions
- Improvement in operating margin of 0.5 margin points or more depending on revenue growth and staff cost to revenue ratio improvement of 0.3 margin points or more
- Annual PBIT growth of 10% to 15% p.a. delivered through revenue growth, margin expansion and acquisitions
Uses of funds
As capital expenditure remains relatively stable, our focus is on the alternative uses of funds between acquisitions, share buy-backs and dividends. We have increasingly come to the view, that currently, the markets favour consistent increases in dividends and higher maintainable pay-out ratios, along with anti-dilutive buy-backs and, of course, sensibly-priced strategic acquisitions.
Share buy-backs will continue to be targeted to absorb any share dilution from issues of options or restricted stock, although the Company does also have considerable free cash flow to take advantage of any anomalies in market values, as it did last year.
There is a very significant pipeline of reasonably priced small and medium sized potential acquisitions, with the exception of Brazil and India and digital in the United States, where prices seem to have got ahead of themselves because of pressure on competitors to catch up. This is clearly reflected in some of the operational issues that are starting to surface elsewhere in the industry, particularly in fast growing markets like China and Brazil. Transactions will be focused on our strategy of new markets, new media and consumer insight, including the application of new technology and big data. Net acquisition spend is currently targeted at around £300 to £400 million per annum and we will continue to seize opportunities in line with our strategy to increase the Group’s exposure to:
- Faster growing geographic markets and sectors
- Consumer insight, including the application of technology and big data
So far in 2013, acquisitions have already been made in the first two months in the United Kingdom, Turkey, South Africa, Argentina, Colombia, Australia and the Philippines.
Last but not least……
All our most successful marketing clients follow marketing’s most fundamental rules: understand your consumers; know what they want; anticipate change; provide the answers; be constant in your delivery.
WPP, too, is a marketing company. Our consumers are our clients. And we try very hard to follow those same fundamental rules. A significant change that we were early to identify and first to satisfy has been the demand among some clients to be served not by a series of specialist agencies but by a dedicated team; a team made up of specialists from all relevant communications disciplines, who remain members of their specialist agencies, while at the same time collaborating on a daily basis to provide a truly integrated client service with no joins showing. This (at least in part) is what we mean by horizontality.
Rapid changes in technology, the fragmentation of media and the acknowledged success of many of the early teams have made this approach increasingly attractive to certain clients.
As a structure, it is less radical than it probably sounds. In the far-off days of ‘the full-service agency’, a client’s working account group – the only unit of real importance to the client - would be formed from specialists from each department: account management, planning, creative, media – and any of many others according to a specific client’s specific needs.
The team approach is similar; and, much like the agency account group, expects its members to have something approaching dual nationality. They are at once paid-up members of their specialist tribe, be it department or company - and committed members of the dedicated client team.
The needs of no two clients are the same. The team approach will never be universal. But seamless collaboration of this kind, with no compromise on quality, requires high degrees of understanding of the bigger picture: which, of course, is precisely why the client values it so highly.
Last year’s Group performance, as detailed in this report, was made possible by tens of thousands of talented individuals; each with a particular individual skill; some working entirely in groups within their companies and some in dedicated client teams; and all contributing to a greater whole.
They have earned our very public gratitude.
To access WPP's 2012 preliminary results financial tables, please visit: http://www.wpp.com/investor.
This announcement has been filed at the Company Announcements Office of the London Stock Exchange and is being distributed to all owners of Ordinary shares and American Depository Receipts. Copies are available to the public at the Company’s registered office.
The following cautionary statement is included for safe harbour purposes in connection with the Private Securities Litigation Reform Act of 1995 introduced in the United States of America. This announcement may contain forward-looking statements within the meaning of the US federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially including adjustments arising from the annual audit by management and the Company’s independent auditors. For further information on factors which could impact the Company and the statements contained herein, please refer to public filings by the Company with the Securities and Exchange Commission. The statements in this announcement should be considered in light of these risks and uncertainties.