WPP 2012 Preliminary Results
Billings of over £44.4 billion
Revenues up 3.5% at almost £10.4 billion
Operating margin at historical high of 14.8%, up 0.5 margin points
Headline profit before interest and tax £1.5 billion, up over 7%
Headline profit before tax £1.3 billion, up over 7%
Profit before tax £1.1 billion, up over 8%
Headline diluted earnings per share of 73.4p, up over 8%
Dividends per share of 28.51p, up almost 16%
Over last two years reported operating margins up 1.6 margin points; headline diluted earnings per share up almost 30%; dividends per share up 60%; dividend pay-out ratio up from 31% to 39%
EPS headline diluted5
Dividends per share
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
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;
W Cont. Europe
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)
W Cont. Europe
AP, LA, AME, CEE
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