WPP 2013 Interim Results

WPP 2013 Interim Results

• Billings up 5% at £22.7 billion

• Reportable revenues up 7.1% to over £5.3 billion

• Like-for-like revenue up 2.4%

• Operating margin of 12.0% up 0.5 margin points and 0.5 margin points like-for-like

• Headline profit before interest and tax £637 million up almost 12%

• Headline profit before tax £524 million (over half a billion pounds sterling in first half for first time) up over 12%

• Profit before tax £427 million up over 19%

• Headline diluted earnings per share 28.4p up over 10%

• Dividends per share 10.56p up 20%, a pay-out ratio of 37% versus 34% last year

• Targeted dividend pay-out ratio lifted to 45% within two years from current 40%

• Raising strategic targets for each of faster growing markets and new media sectors to 40-45% from 35-40% over the next five years

• Including all of associates and investments, revenues total over $23 billion annually and people well over 170,000

NEW YORK & LONDON--(BUSINESS WIRE)-- WPP (NAS: WPPGY) today reported its 2013 Interim Results.

First-half and Q2 highlights

• Billings increased by 5.0% to £22.7bn

• Revenue growth of 7.1%, with like-for-like growth of 2.4%, 3.1% growth from acquisitions and 1.6% from currency, reflecting a weaker £ sterling. Quarter two has seen significant improvement over the first quarter of the year

• Constant currency growth in all regions and business segments, except public relations and public affairs, with Q2 improvement in the USA and the UK, partly offset by slower rates of growth in the faster growing markets and the mature markets of Western Continental Europe. Continuing double-digit growth from Latin America and Africa

• Like-for-like gross margin growth in line with revenue growth at 2.4%, with data investment management (formerly consumer insight) and the United Kingdom growing faster than revenue

• Headline EBITDA growth of 10.6% delivered through organic revenue growth and by 0.4 margin point improvement, with operating costs up 6.3%, rising less than revenues

• Headline PBIT increase of 11.8% with PBIT margin rising by 0.5 margin points

• Gross margin margins, probably a more accurate competitive comparator, also up 0.5 margin points to 13.0%

• Headline diluted EPS up 10.1% driving a 20% higher interim ordinary dividend of 10.56p, in line with the Company's previous objective of reaching a 40% pay-out ratio, in the medium term

• Targeted dividend pay-out ratio raised to 45%, to be reached in two years

• Average net debt increased by £205m (+7%) to £3.128bn compared to last year, at 2013 constant rates, an improvement over the first four months figure. The higher average net debt figure continues to reflect the timing of significant acquisition payments, largely offset by the conversion, at 30 June, of £390 million of the £450 million Convertible Bond, but with a significant improvement in working capital in July and onwards

• Creative and effectiveness excellence recognised again in 2013 with the award of the Cannes Lion to WPP for the most creative Holding Company for the third successive year since its initiation, another to Ogilvy & Mather Worldwide for the second consecutive year as the most creative agency network and another to Ogilvy Brazil as the most creative agency. For the second consecutive year, WPP was awarded the EFFIE as the most effective Holding Company

• Strategy implementation accelerated in a pre- and post-POG (Publicis Omnicom Group) world as sector targets for fast growth markets and new media raised from 35-40% to 40-45% over next five years

Current trading and outlook

• July 2013 Revenues up stronger than the first half at 5.0% like-for-like for the month, the highest monthly growth rate this year, with year-to-date like-for-like revenue growth of 2.8%

• FY 2013 quarter 2 revised forecast Slight increase in like-for-like revenue growth from the quarter 1 revised forecast, which was itself over 3%, with the second half and third quarter stronger than first half and headline operating margin target, as previously, of 15.3% up 0.5 margin points

• Focus in 2013 1. Revenue growth from leading position in both faster growing geographic markets and digital, "horizontality", premier parent company creative and effectiveness position, new business strength 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 data investment management, including data analytics and application of new technology; improvement in staff cost/revenue ratio of 0.3 to 0.6 points p.a. depending on revenue and gross margin growth; operating margin expansion of 0.5 margin 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 interim results included in Appendix 1.Where required, details of how these have been arrived at are shown in the Appendices.

Review of group results

Revenues

Billings were up 5.0% at £22.7 billion. Estimated net new business billings of £2.613 billion ($4.180 billion) were won in the first half of the year, compared with £2.475 billion in the first half of 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, including several very large industry-leading advertising, digital and media assignments, the full benefit of which will be seen in Group revenues later in 2013 and in 2014. Pitch results following recent pharmaceutical client consolidations have benefited the Group's healthcare communications businesses significantly.

Reportable revenue was up 7.1% at £5.327 billion. Revenue on a constant currency basis was up 5.5% compared with last year, chiefly reflecting the weakness of the pound sterling against the US dollar, the euro and renminbi. As a number of our current competitors report in US dollars and in euros, appendices 2 and 3 show WPP's interim results in reportable US dollars and euros respectively. This shows that US dollar reportable revenues were up 4.7% to $8.211 billion, which compares with the $7.036 billion of our closest current competitor and euro reportable revenues were up 3.4% to €6.255 billion, which compares with €3.351 billion of our nearest current European-based competitor.

On a like-for-like basis, which excludes the impact of acquisitions and currency, revenues were up 2.4% in the first half, with gross margin also up 2.4%. In the second quarter, like-for-like revenues were up 2.7%, a significant strengthening over the first quarter's 2.1%, with gross margin up 2.8%, following 1.9% in the first quarter giving 2.4% for the first half. Client data continues to reflect increased advertising and promotional spending - with the former tending to grow faster than the latter, which from our point of view is more positive - across most of the Group's major geographic and functional sectors. Quarter two saw a continuation of the strength of advertising spending in fast moving consumer goods, especially. Nonetheless, clients understandably continue to demand increased effectiveness and efficiency, i.e. better value for money. Although corporate balance sheets are much stronger than pre-Lehman and confidence is higher as a result, the Eurozone, Middle East, BRICs hard or soft landing and US deficit uncertainties still demand caution. The $2 trillion net cash lying virtually idle in those balance sheets, still seems destined to remain so, with companies unwilling to take excessive acquisition risk (except perhaps in our own industry) or expand capacity, particularly in mature markets.

Operating profitability

Headline EBITDA was up 10.6% to £753 million and up 8.5% in constant currencies. Headline operating profit was up 11.8% to £637 million from £570 million and up 9.6% in constant currencies. It should be noted that our profitability tends to be more skewed to the second half of the year compared with our competitors.

Headline operating margins were up 0.5 margin points to 12.0% compared to 11.5% in the first half of last year, in line with the Group's full year margin target of a 0.5 margin point improvement. On a like-for-like basis, operating margins were also up 0.5 margin points.

Given the significance of data investment management revenues to the Group, with none of our direct parent company competitors significantly present in that sector, despite recent claims to the contrary, gross margin margins are a more meaningful measure of competitive comparative margin performance. This is because data investment management 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 becomes more efficient. Headline gross margin margins were also up 0.5 margin points to 13.0%.

On a reported basis, operating margins, before all incentives⁹, were 14.4%, up 0.4 margin points, compared with 14.0% last year. The Group's staff cost to revenue ratio, including incentives, decreased by 0.2 margin points to 60.9% compared with 61.1% in the first half of 2012. This reflected better staff cost to revenue ratio management through an improved balance in the growth of staff numbers and salary and related costs with revenue in the first half of 2013.

Operating costs

In the first half of 2013, reported operating costs¹⁰ rose by 6.5% and by 5.0% in constant currency, compared with reported revenue growth of 7.1% and constant currency growth of 5.5%. Reported staff costs excluding all incentives were flat at 58.5% of revenues and up slightly in constant currency. Incentive costs amounted to £127.9 million or 17.4% of headline operating profits before incentives and income from associates, compared to £127.4 million last year, or 19.0%, a slight increase of £0.5 million or 0.4%. Target incentive funding is set at 15% of operating profit before bonus and taxes, maximum at 20% and in some instances super-maximum at 25%. Variable staff costs were 6.9% of revenues, at the high end of historic ranges and, again, reflecting good staff cost management and flexibility in the cost structure.

On a like-for-like basis, the average number of people in the Group, excluding associates, was 116,073 in the first half of the year, compared to 116,461 in the same period last year, a decrease of 0.3%. On the same basis, the total number of people in the Group, excluding associates, at 30 June 2013 was 116,911 virtually flat with the 116,906 at 30 June 2012 and up only 434 or 0.4% on 116,477 at 1 January 2013, reflecting careful control of headcount increases. On the same basis both revenues and gross margin increased 2.4%.

Interest and taxes

Net finance costs (excluding the revaluation of financial instruments) were £113.3 million compared to £103.2 million in 2012, an increase of £10.1 million, reflecting higher levels of average net debt and lower interest earned on cash deposits.

The headline tax rate was 21.8% (2012 22.0%). The tax rate on reported profit before tax was 26.2% (2012 14.2%). In 2012 there was a significant deferred tax credit of £52 million (2013 £2 million) in relation to the amortisation of acquired intangible assets and other goodwill items, resulting in a lower reported tax rate.

Earnings and dividend

Headline profit before tax was up 12.2% to £524 million from £467 million, over half a billion pounds sterling in the first half for the first time and up 9.7% in constant currencies.

Reported profit before tax rose by 19.4% to £427 million from £358 million, or up 16.4% in constant currency, principally reflecting lower revaluation of financial instruments than in 2012.

Excluding the significant tax credit of £52 million in relation to the amortisation of acquired intangibles and other goodwill items in the first half of 2012, profits attributable to share owners rose by 23.3%, to £278 million from £226 million. In the first half of 2013 the tax credit amounted to £2 million. Profits attributable to share owners rose by 1.1% to £281 million from £278 million, again reflecting the exceptional tax credit in 2012.

Diluted headline earnings per share rose by 10.1% to 28.4p from 25.8p. In constant currencies, earnings per share on the same basis rose by 6.7%. Diluted reported earnings per share were down 0.5% to 21.5p and down 4.7% in constant currencies, both reflecting the impact of the exceptional tax credit in 2012.

In the AGM statement in June 2011, the Board set an objective to increase the dividend pay-out ratio to approximately 40% over time, compared to the 2010 ratio of 31%. This was largely achieved in 2012, some eighteen months later and as outlined in the June 2013 AGM statement, the Board has given consideration to the merits of increasing the dividend pay-out ratio from its current level of approximately 40% to between 45% and 50%. Following that deliberation, the Board has decided to target an increase in the pay-out ratio to 45% over the next two years and, as a result, declares an increase of 20% in the interim dividend to 10.56p per share, compared with the 10.1% growth in diluted headline earnings per share. The dividend pay-out ratio for the first half is, therefore, 37%, reflecting the stronger weighting of the final dividend, against 34% last year. The record date for the interim dividend is 11 October 2013, payable on 11 November 2013.

Further details of WPP's financial performance are provided in Appendices 1, 2 and 3.

Regional review

The pattern of revenue growth differed regionally. The tables below give details of revenue and revenue growth by region for the second quarter and first half of 2013, as well as the proportion of Group revenues and operating profit and operating margin by region;