WPP (NASDAQ:WPPGY) today reported its 2014 Preliminary Results. Key figures
|£ million||2014||∆ reported1||∆ constant2||2013|
|Net sales margin5||16.7%||0.2*||0.3*||16.5%|
|Profit before tax||1,452||12.0%||21.3%||1,296|
|Profit after tax||1,152||13.8%||23.1%||1,012|
|Headline diluted EPS6||84.9p||5.1%||12.6%||80.8p|
|Dividends per share||38.20p||11.7%||11.7%||34.21p|
Full Year highlights
- Reported billings at £46.186 billion, up 6.8% in constant currency driven by a strong leadership position in net new business league tables
- Revenue growth of 4.6%, with like-for-like growth of 8.2%, 3.1% growth from acquisitions and -6.7% from currency
- Like-for-like revenue growth in all regions, led by strong growth in North America, United Kingdom and Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, and by all sectors, with particularly strong growth in advertising and media investment management and branding and identity, healthcare and specialist communications (including direct, digital and interactive)
- Like-for-like net sales growth at 3.3%, with the gap compared to revenue growth more than the first half, as the scale of digital media purchases in media investment management and data investment management revenue continues to increase
- Headline EBITDA growth of 0.7%, and up 7.5% in constant currency, reflecting currency headwinds, but giving 0.2 margin points improvement, to 19.0% on net sales, with like-for-like operating costs (+3.1%) rising slower than net sales
- Headline PBIT increase of 1.1% to £1.681 billion, up 8.0% in constant currency
- Net sales margin, a more accurate competitive comparator, up 0.2 margin points to an industry leading 16.7%, up 0.3 margin points in constant currency, in line with target
- Exceptional gains of £196 million largely representing gains on the AppNexus and Rentrak transactions completed in the second half, together with other gains of £45 million, including gains on the re-measurement of the Group's equity interests, partly offset by £89 million of restructuring costs, £39 million of IT transformation costs and £7 million of investment write-downs, giving a net exceptional gain of £61 million
- Headline diluted EPS up 5.1%, up 12.6% in constant currency and reported diluted EPS up 15.7%, up 24.9% in constant currency, reflecting strong like-for-like revenue growth, acquisitions and margin improvement
- Final ordinary dividend of 26.58p up 12.4% and full year dividends of 38.20p per share up 11.7%
- Targeted dividend pay-out ratio of 45%, achieved in 2014, one year ahead of original schedule
- Return on equity8 up to 15.0% in 2014, up 0.6 percentage points from 14.4% in 2013, versus a weighted average cost of capital of 6.1% in 2014 and 6.5% in 2013. During 2014 the value of the Group's non-controlled investments rose by £398 million, to £669 million from £271 million, reflecting the increasing value of its content businesses, primarily Vice, and the technology partnerships formed during the year with AppNexus and Rentrak
- Average net debt flat, at £3.001 billion compared to last year, at 2014 exchange rates, reflecting the significant incremental net acquisition spend and share re-purchases of £588 million, offsetting the improvements in working capital at the period end
- Creative and effectiveness excellence recognised again in 2014 with the award of the Cannes Lion to WPP for the most creative Holding Company, for the fourth successive year, since the awards inception and another to Ogilvy & Mather Worldwide, for the third consecutive year, as the most creative agency network. In another rare occurrence in our industry, in 2014 Grey was named Global Agency of the Year 2013 by both US trade magazines Ad Age and Ad Week. For the third 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 digital raised from 35-40% to 40-45% over the next five years
- January 2015 | Like-for-like revenue up 6.7% for the month, with like-for-like net sales, a more accurate competitive comparator up 3.9%, stronger than the final quarter of 2014 and 2014 itself
- FY 2015 budget | As in 2014, like-for-like revenue and net sales growth of over 3% and headline operating margin target improvement for both of 0.3 margin points, excluding the impact of currency
- Dual focus in 2015 | 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/net sales ratio to enhance operating margins
- Long-term targets | 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 the application of new technology; improvement in staff costs/net sales margin ratio of 0.2 to 0.4 margin points p.a. depending on net sales growth; operating margin expansion of 0.3 margin points or more on a constant currency basis; and headline diluted EPS growth of 10% to 15% p.a. from revenue growth, margin expansion, strategically targeted small and medium-sized acquisitions and share buy-backs
|£ million||2014||∆ reported||∆ constant9||∆ LFL10||Acquisitions||2013|
|Net Sales analysis|
|£ million||2014||∆ reported||∆ constant||∆ LFL||Acquisitions||2013|
Reportable revenue was up 4.6% at £11.529 billion. Revenue on a constant currency basis was up 11.3% compared with last year, reflecting foreign currency headwinds, chiefly due to the strength of the pound sterling against the US dollar and euro in the first nine months, to some extent offset by the weakness of the pound sterling against the US dollar, Japanese yen, Australian dollar and Indian rupee in the final quarter. 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 revenue was up 9.9% to $18.956 billion and headline earnings before interest and taxes up 4.6% to $2.740 billion, which compares with the $15.318 billion and $2.051 11 billion respectively of the second largest United States-based competitor. Euro reportable revenue was up 10.4% to €14.323 billion and headline earnings before interest and taxes up 7.0% to €2.100 billion, which compares with €7.255 billion and €1.182 12 billion respectively of the third largest European-based competitor.On a like-for-like basis, which excludes the impact of currency and acquisitions, revenue was up 8.2%, with net sales up 3.3%. In the fourth quarter, like-for-like revenue was up 7.8%, following like-for-like growth in the third quarter of 7.6%, due to stronger growth in the fourth quarter in North America, the United Kingdom and Western Continental Europe, offset by lower growth in Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe. Operating profitability Headline EBITDA was up 0.7% to £1.910 billion from £1.896 billion and up 7.5% in constant currencies. Group revenue is more weighted to the second half of the year across all regions and sectors, and, particularly, in the faster growing markets of Asia Pacific and Latin America. As a result, the Group's profitability and margin continue to be skewed to the second half of the year, with the Group earning approximately one-third of its profits in the first half and two-thirds in the second half. Headline operating profit for 2014 was up 1.1% to £1.681 billion from £1.662 billion and up 8.0% in constant currencies.
Net sales margin was up 0.2 margin points to 16.7% and up 0.3 margin points in constant currency, in line with the Group's margin target, compared to 16.5% in 2013. The net sales margin of 16.7% is after charging £37 million ($63 million) of severance costs, compared with £27 million ($40 million) in 2013 and £313 million ($512 million) of incentive payments, versus £328 million ($517 million) in 2013. Constant currency operating margins improved 0.3 margin points, in line with the full year margin target. Over the last three years, reported operating margins have improved by 1.2 margin points and by 1.7 margin points, excluding the impact of currency.Given the significance of data investment management revenue to the Group, with none of our parent company competitors presently represented in that sector, net sales is a more meaningful measure of comparative top-line growth, although we know competitors do have significant barter, telesales, food broking and field marketing operations, where the same issue may arise. Net sales is a more appropriate measure because data investment management revenue includes pass-through costs, principally for data collection, on which no margin is charged. In addition, the Group's media investment management sub-sector is increasingly buying digital media for its own account and, as a result, the subsequent billings to clients have to be accounted for as revenue, as well as billings. We believe a number of our competitors face the same issue, and as a result reporting practices should be standardised. Thus, revenue and revenue growth rate will increase, although net sales and net sales growth rate will remain the same and the latter will present a clearer picture of underlying performance. Because of these two significant factors, the Group, whilst continuing to report revenue and revenue growth, will focus even more on net sales margins. In 2014 the reported headline net sales margin was up 0.2 margin points to 16.7%, achieving the highest reported level in the industry.
On a reported basis, operating margins, before all incentives 13 and income from associates, were 19.1%, up 0.1 margin points, compared with 19.0% last year. The Group's staff cost to net sales ratio, including severance and incentives, decreased by 0.3 margin points to 64.0% compared to 64.3% in 2013, indicating increased productivity.Operating costs During 2014, the Group continued to manage operating costs effectively, with improvements across most cost categories, particularly staff and property costs. Reported operating costs 14 fell by 0.5%, rose by 5.9% in constant currency and by 3.1% like-for-like. On all bases, the growth in costs was lower than the growth in revenue. Reported staff costs, excluding incentives, fell by 0.4%, up 6.1% in constant currency. Incentive payments amounted to £313 million ($512 million), which were 16.3% of headline operating profit before incentives and income from associates, compared with £328 million ($517 million) or 17.1% in 2013. Performance in parts of the Group's data investment management custom businesses, public relations and public affairs, branding & identity, healthcare and direct, digital and interactive businesses fell slightly short of the target, maximum and super-maximum performance objectives agreed for 2014. Achievement of target generates 15% of operating profit before bonus as an incentive pool. On a like-for-like basis, the average number of people in the Group, excluding associates, in 2014 was 121,397, compared to 120,279 in 2013, an increase of 0.9%. On the same basis, the total number of people in the Group, excluding associates, at 31 December 2014 was 123,621 compared to 124,124 at 31 December 2013, a decrease of over 500 or 0.4%. These average and point-to-point data reflect the continuing sound management of headcount and staff costs in 2014 to balance revenue and costs. On the same basis revenue increased 8.2% and net sales 3.3%.
Exceptional gains and restructuring costsAs mentioned in the Group's Third Quarter Trading Update, two technology partnerships - AppNexus and Rentrak - were announced in the second half of 2014. These two transactions gave rise to a gain of £151 million. In addition, the Group disposed of part of its investment in oOh!Media (following the IPO) and realised gains on the re-measurement of equity interests, following acquisition of controlling interests. In total, these gains amounted to £196 million, which in accordance with prior practice, have been excluded from headline profit. In the final quarter of the year, the Group took a restructuring provision of £128 million, largely for severance, to further adjust the Group's cost base, primarily in the mature markets of Western Europe. The provision also includes costs of £39 million in relation to the IT transformation project, which will start to deliver savings in 2016. Interest and taxes Net finance costs (excluding the revaluation of financial instruments) were down 17.5% at £168.0 million, compared with £203.6 million in 2013, a decrease of £35.6 million. This reflected the beneficial impact of lower net debt funding costs and higher income from investments, partially offset by the cost of higher average gross debt, due to pre-funding of 2014 debt maturities. The headline tax rate was 20.0% (2013 20.2%) and on reported profit before tax was 20.7% (2013 21.9%). Earnings and dividend Headline profit before tax was up 3.7% to £1.513 billion from £1.458 billion, or up 11.6% in constant currencies. Reported profit before tax rose by 12.0% to £1.452 billion from £1.296 billion. In constant currencies, reported profit before tax rose by 21.3%. Reported profit after tax rose by 13.8% to £1.152 billion from £1.012 billion. In constant currencies, profits after tax rose 23.1%. Profits attributable to share owners rose by 15.0% to £1.077 billion from £937 million. In constant currencies, profits attributable to share owners rose by 24.2%.
Headline diluted earnings per share rose by 5.1% to 84.9p from 80.8p. In constant currencies, earnings per share on the same basis rose by 12.6%. Reported diluted earnings per share rose by 15.7% to 80.5p from 69.6p and increased 24.9% in constant currencies.As outlined in the June 2013 AGM statement, the Board gave consideration to the merits of increasing the dividend pay-out ratio from the then current level of approximately 40% to between 45% and 50%. Following that review, the Board decided to target a further increase in the pay-out ratio to 45% over the next two years and, as a result, declared an increase of 20% in the 2013 final dividend to 23.65p per share, which together with the interim dividend of 10.56p per share, made a total of 34.21p per share for 2013, an overall increase of 20%. This represented a dividend pay-out ratio of 42%, compared to a pay-out ratio of 39% in 2012. Given your Company's strong progress, your Board declares an increase of 12.4% in the final dividend to 26.58p per share, which together with the interim dividend of 11.62p per share, makes a total of 38.20p per share for 2014, an overall increase of 11.7%. This represents a dividend pay-out ratio of 45%, compared to a pay-out ratio of 42% in 2013. The record date for the final dividend is 5 June 2015, payable on 6 July 2015. The achievement of the targeted 45% dividend pay-out ratio one year ahead of schedule now raises the question of whether the pay-out ratio target should be raised further, a question your Board will be shortly considering. Further details of WPP's financial performance are provided in Appendices 1, 2 and 3. Regional review The pattern of revenue and net sales growth differed regionally. The tables below give details of revenue and net sales, revenue and net sales growth by region for 2014, as well as the proportion of Group revenue and net sales and operating profit and operating margin by region;
|£ million||2014||∆ reported||∆ constant15||∆ LFL16||% group||2013||% group|
|W Cont. Europe||2,569||-0.9%||5.1%||3.8%||22.3%||2,592||23.5%|
|AP, LA, AME, CEE17||3,420||4.6%||15.8%||8.0%||29.7%||3,268||29.7%|
|Net Sales analysis|
|£ million||2014||∆ reported||∆ constant||∆ LFL||% group||2013||% group|
|W Cont. Europe||2,143||-3.4%||2.5%||1.1%||21.3%||2,218||22.0%|
|AP, LA, AME, CEE||3,054||1.6%||12.5%||4.6%||30.3%||3,007||29.9%|
|Operating profit analysis (Headline PBIT)|
|£ million||2014||% margin*||2013||% margin*|
|W Cont. Europe||277||12.9%||272||12.3%|
|AP, LA, AME, CEE||561||18.3%||568||18.9%|
North America, with constant currency revenue growth of 10.5% in the final quarter and like-for-like growth of 9.4%, maintained the strong growth seen in the first nine months, an improvement over the third quarter year-to-date constant currency growth of 9.8%. Particularly strong growth was achieved in media investment management and parts of the Group's public relations & public affairs, healthcare and direct, digital and interactive operations. On a full year basis, constant currency revenue was up 10.0%, with like-for-like up 9.5%. Net sales were up 3.4% in constant currency, with like-for-like up 3.0%.The United Kingdom's rate of growth in the final quarter was slightly above quarter three, with constant currency revenue up 15.0%, compared to 14.9% in quarter three, with like-for-like growth of 11.5%, well ahead of the 10.2% in quarter three. The Group's advertising and media investment management and public relations and public affairs businesses performed particularly well. Despite the improvement in revenue, net sales slowed in the final quarter, with constant currency growth of 4.6% compared to 7.3% in quarter three, as the Group's data investment management, branding & identity and healthcare agencies were lower. On a full year basis, constant currency revenue was up 16.0%, with like-for-like up 12.9%. Net sales were up 7.1% in constant currency, with like-for-like up 4.8%, the strongest performing region. Western Continental Europe, somewhat contrary to the macro-economic picture, showed significant improvement in the final quarter, partly driven by acquisitions, with constant currency revenue up 7.4% and like-for-like revenue up 5.3%, compared to 5.3% and 4.3% respectively in quarter three. Similarly, net sales growth on a constant currency basis was up 4.1% in the final quarter, compared to 2.9% growth in quarter three. On a like-for-like basis, net sales were up 1.6% in the final quarter, slightly above the 1.5% growth seen in quarter three. For the year, Western Continental Europe revenue grew 3.8% like-for-like (4.8% in the second half), compared with 0.5% in 2013, with net sales growth of 1.1% like-for-like (1.6% in the second half), compared to -1.3% in 2013. Germany, Italy, the Netherlands and Turkey all showed good growth in the final quarter, but Austria, Belgium, France, Spain and Switzerland were tougher. In Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, revenue growth in the fourth quarter was fastest overall, as it was in quarter three, up 16.0% in constant currency and up 6.5% like-for-like. Growth in the fourth quarter was driven principally by Asia Pacific and Africa, the CIVETS 18 , Next 11 19and the MIST 20. Central and Eastern Europe, after a difficult first quarter, improved during the balance of the year, with full year like-for-like revenue growth over 6%. Constant currency net sales growth was 12.5% overall, with like-for-like net sales up 4.6%. In Asia, India, Indonesia, Vietnam and Bangladesh had double-digit like-for-like growth, with Japan and Korea more challenging. Latin America showed some softening in the second half, with like-for-like net sales growth of 3.6% compared with 5.9% in the first half, as parts of the Group's businesses in Brazil and Chile slowed. The Middle East improved in the final quarter, with like-for-like net sales growth over 5% and 3.5% for the full year. Africa also grew strongly, with like-for-like net sales up over 7% in the final quarter and up 5.3% full year, driven by the Group's media investment management and public relations and public affairs businesses. In Central & Eastern Europe, like-for-like revenue was up almost 5% in the fourth quarter, down slightly from 5.3% in quarter three, with Poland, Russia and the Slovak Republic up strongly. On the same basis, full year revenue was up 6.3% with net sales up 5.1%. Full year revenue for the BRICs 21 , which account for over $2.4 billion of revenue, was up over 8% on a like-for-like basis, with the Next 11 and CIVETS up over 18% and over 10% respectively. The MIST was up almost 18%. In 2014, 29.7% of the Group's revenue came from Asia Pacific, Latin America, Africa and the Middle East and Central & Eastern Europe - the same as 2013, with the strength of sterling against the currencies of many of the markets in the region still having a significant impact. On a net sales basis this increased to 30.3% (29.9% in 2013) compared with the Group's strategic objective of 40-45% in the next five years.
Business sector reviewThe pattern of revenue and net sales growth also varied by communications services sector and operating brand. The tables below give details of revenue and net sales, revenue and net sales growth by communications services sector, as well as the proportion of Group revenue and net sales for 2014 and operating profit and operating margin by communications services sector;
|£ million||2014||∆ reported||∆ constant22||∆ LFL23||% group||2013||% group|
|Data Inv. Mgt.||2,429||-4.7%||1.5%||0.6%||21.1%||2,549||23.1%|
|PR & PA25||892||-3.1%||2.6%||2.5%||7.7%||921||8.4%|
|BI, HC & SC26||3,074||3.5%||9.5%||4.0%||26.7%||2,970||27.0%|
|Net Sales analysis|
|£ million||2014||∆ reported||∆ constant||∆ LFL||% group||2013||% group|
|Data Inv. Mgt.||1,749||-5.1%||0.9%||0.6%||17.4%||1,844||18.3%|
|PR & PA||880||-3.0%||2.7%||2.7%||8.7%||907||9.0%|
|BI, HC & SC||2,934||2.5%||8.6%||2.5%||29.2%||2,861||28.4%|
|Operating profit analysis (Headline PBIT)|
|£ million||2014||% margin*||2013||% margin*|
|Data Inv. Mgt.||273||15.6%||264||14.3%|
|PR & PA||139||15.8%||134||14.7%|
|BI, HC & SC||433||14.7%||440||15.4%|
In 2014, 36% of the Group's revenue and net sales came from direct, digital and interactive, up over 1.0 percentage point from the previous year with revenue growing well over 11% like-for-like over 2013.Advertising and Media Investment Management In constant currencies, advertising and media investment management was the strongest performing sector, with constant currency revenues up almost 21% in the final quarter and like-for-like up almost 15%, slightly down on the third quarter like-for-like growth of 17%. Advertising grew well in Africa and the Middle East, but was slower in the mature markets of North America and Western Continental Europe. Media investment management showed strong like-for-like growth across all regions and especially in North America, the United Kingdom and Asia Pacific. Of the Group's advertising networks, Ogilvy & Mather and Grey performed well, with J. Walter Thompson Worldwide performing strongly in the United Kingdom and Asia Pacific. However, the Group's advertising businesses in Western Continental Europe generally remained challenged, with like-for-like revenue under pressure and with slower activity in North America in the fourth quarter. Growth in the Group's media investment management businesses has been very consistent throughout the year, with constant currency and like-for-like revenue up strongly for the year, with a stronger second half. tenthavenue, the "engagement" network focused on out-of-home media, also performed strongly in the fourth quarter, with like-for-like net sales growth up 14.0%. The strong revenue and net sales growth across most of the Group's businesses, partly offset by the challenges in the Group's advertising businesses in Western Continental Europe and North America noted above, resulted in the combined reported operating margin of this sector improving by 0.1 margin points to 18.6% and by 0.2 margin points in constant currency. In 2014, J. Walter Thompson Worldwide, Ogilvy & Mather, Y&R, Grey and United generated net new business billings of £898 million ($1.436 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 £4.377 billion ($7.002 billion). The Group totalled £5.831 billion ($9.330 billion), slightly down on the record year in 2013 of £6.119 billion ($9.791 billion).
Data Investment ManagementOn a constant currency basis, data investment management revenue fell 1.0% in the fourth quarter, with like-for-like revenue down 1.2%, due to weaker custom sales in the United Kingdom, Asia Pacific and Latin America and continuing softness in parts of the Group's syndicated businesses in North America. Net sales showed a similar pattern with constant currency net sales down 0.6% and down 1.0% like-for-like. On a full year basis, constant currency revenue was up 1.5%, with like-for-like revenue up 0.6%, with the second half weaker than the first half, partly the result of stronger comparatives in the second half of 2013. More significantly, net sales were stronger, with constant currency up 0.9% and like-for-like growth of 0.6% for the full year, together with an improvement in the custom research parts of the business compared with last year. There seems to be a growing recognition of the value of "real" data businesses, rather than those that depend on third party data. Reported operating margins improved 1.3 margin points to 15.6% and by 1.2 margin points in constant currency. Good cost control, the continued benefits of restructuring and the disposal of a call centre operation in the United States contributed to the improvement in operating margin. Although there has been further improvement during 2014, the slowest sub-sector continues to be like-for-like net sales growth in the custom businesses in mature markets, where discretionary spending remains under review by clients. Custom businesses in faster growth markets, although slightly weaker than 2013, remain robust, with strong like-for-like revenue and net sales growth. Public Relations and Public Affairs In constant currencies the Group's public relations and public affairs businesses returned to top-line growth, with full year revenue up 2.6% in constant currency and up 2.5% like-for-like. The fourth quarter was particularly strong, up 5.1% like-for-like, with strong growth in North America, the United Kingdom and Asia Pacific. Burson-Marsteller, Cohn & Wolfe and the specialist public relations and public affairs businesses performed well, with H+K Strategies more challenged. An improving top-line and good control of costs resulted in the operating margin improving by 1.1 margin points to 15.8% and by 1.3 margin points in constant currency.
Branding and Identity, Healthcare and Specialist CommunicationsAt the Group's branding and identity, healthcare and specialist communications businesses (including direct, digital and interactive), constant currency revenue grew strongly at 11.2% in the fourth quarter, with like-for-like growth of 4.3%, an improvement over the third quarter. Net sales were up 9.7% in the fourth quarter with like-for-like up 1.5%, similar to the third quarter. Full year revenue was up 9.5% in constant currency and 4.0% like-for-like. The Group's direct, digital and interactive businesses, especially OgilvyOne, JWT Mirum (the digital arm of J. Walter Thompson Worldwide), WPP Digital, VML and AKQA performed strongly, with parts of the Group's healthcare and branding & identity businesses slower. Operating margins, for the sector as a whole, fell 0.7 margin points to 14.7% and by 0.6 margin points in constant currency, as parts of the Group's direct, digital and interactive businesses in Western Continental Europe, together with branding & identity and healthcare slowed. Client review Including associates, the Group currently employs almost 179,000 full-time people (up marginally from the previous year) in over 3,000 offices in 111 countries. It services 355 of the Fortune Global 500 companies, all 30 of the Dow Jones 30, 71 of the NASDAQ 100 and 826 national or multi-national clients in three or more disciplines. 534 clients are served in four disciplines and these clients account for over 53% of Group revenue. 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 426 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. Horizontality is clearly becoming an increasingly important part of our client strategies, particularly as they continue to invest in brand in slower-growth markets and both capacity and brand in faster-growth markets.
Cash flow highlightsIn 2014, operating profit was £1.507 billion, depreciation, amortisation and goodwill impairment £393 million, non-cash share-based incentive charges £102 million, net interest paid £179 million, tax paid £290 million, capital expenditure £214 million and other net cash outflows £151 million. Free cash flow available for working capital requirements, debt repayment, acquisitions, share buy-backs and dividends was, therefore, £1.168 billion. This free cash flow was absorbed by £495 million in net cash acquisition payments and investments (of which £34 million was for earnout payments, with the balance of £461 million for investments and new acquisition payments net of disposal proceeds), £511 million in share buy-backs and £460 million in dividends, a total outflow of £1.466 billion. This resulted in a net cash outflow of £298 million, before any changes in working capital. A summary of the Group's unaudited cash flow statement and notes as at 31 December 2014 is provided in Appendix 1. Acquisitions In line with the Group's strategic focus on new markets, new media, data investment management and horizontality, the Group completed 65 transactions in the year; 36 acquisitions and investments were in new markets, 53 in quantitative and digital and one in healthcare in the United States. Of these, 25 were in both new markets and quantitative and digital. Specifically, in 2014, acquisitions and increased equity stakes have been completed in advertising and media investment management in Canada, the United States, the United Kingdom, France, the Netherlands, Poland, Russia, Turkey, the Middle East, South Africa, Peru, Australia, China, India and Vietnam; in data investment management in the United States, the United Kingdom, France, Italy, the Netherlands, Romania, Spain, the Kingdom of Saudi Arabia and the United Arab Emirates; in public relations and public affairs in China; in direct, digital and interactive in the United States, the United Kingdom, China and Vietnam; in healthcare in the United States. There appears to be some growing evidence that excessive, competitive acquisition pricing together with lower standards for compliance, driven by a desire to play catch-up are resulting in slower, and even negative growth rates for competitors with several acquired companies in Brazil, India and China.
As mentioned in the Group's Third Quarter Trading Update, two important technology partnerships were announced in the second half, underlining one of the Group's strategic objectives of developing data and applying technology to enhance clients' marketing effectiveness. Firstly, in September with AppNexus, to strengthen the technology backbone of Xaxis. Secondly, in October, a similarly structured partnership with Rentrak to develop new techniques for off-line and digital television and film audience measurement. In both cases, the Group contributed technology assets and invested cash for significant minority interests. This approach enables the Group to effectively leverage its existing technology assets, without "plonking" down extravagant sums in riskily structured transactions. A trifecta of these more measured partnerships was completed with comScore, the market leader in internet audience measurement, in February 2015.Balance sheet highlights Average net debt in 2014 was flat at £3.001 billion, compared to 2013, at 2014 exchange rates. On 31 December 2014 net debt was £2.275 billion, against £2.240 billion on 31 December 2013, an increase of £35 million (a decrease of £21 million at 2014 exchange rates). The increased period end debt figure reflects the significant incremental net acquisition spend of £274 million and incremental share re-purchases of £314 million, more than offsetting the improvements in working capital at the period end. This trend has continued in the first five weeks of 2015, with average net debt of £2.385 billion, compared with £2.257 billion in the first five weeks of 2014, an increase of £128 million (an increase of £58 million at 2015 exchange rates). The net debt figure of £2.275 billion at 31 December, compares with a current market capitalisation of approximately £20.4 billion ($31.1 billion), giving an enterprise value of £22.7 billion ($34.6 billion). The average net debt to EBITDA ratio remains at 1.6x, at the low end of the Group's target of 1.5-2.0x. Clearly, there is scope for more leverage.
Your Board continues to examine ways of deploying its EBITDA of over £1.9 billion (over $3.1 billion) and substantial free cash flow of almost £1.2 billion (almost $1.9 billion) per annum, to enhance share owner value. The Group's current market value of £20.4 billion implies an EBITDA multiple of 10.7 times, on the basis of the full year 2014 results. Including year-end net debt of £2.275 billion, the Group's enterprise value to EBITDA multiple is 11.9 times.A summary of the Group's unaudited balance sheet and notes as at 31 December 2014 is provided in Appendix 1. Return of funds to share owners Dividends paid in respect of 2014 will total £503 million for the year. Funds returned to share owners in 2014 totalled £0.97 billion, including share buy-backs, an increase of 63% over 2013. In 2013 funds returned to share owners were £0.59 billion. In the last five years, £2.65 billion has been returned to share owners and over the last ten years £4.3 billion. In 2014, 41.0 million shares, or 3.0% of the issued share capital, at the top-end of our target range, were purchased at an average price of £12.45 per share, with 2.0% of the issued share capital being cancelled. So far in 2015 a total of 5.2 million shares, or 0.4% of the issued share capital, were purchased at an average price of £14.26 per share. Current trading January 2015 like-for-like revenue was up 6.7%, with net sales up 3.9%, reflecting both a strong start to the year and the continuing divergence between revenue and net sales in the Group's media and data investment management businesses as noted earlier. All regions, except Latin America, were up, with Asia Pacific and Africa & the Middle East up well above the average net sales growth. All sectors strengthened, with advertising and media investment management, data investment management and direct, digital and interactive, up the strongest.
OutlookMacroeconomic and industry context 2014, the Group's twenty-ninth year, was another record year, following successive post-Lehman record years in 2011, 2012 and 2013. In some respects 2014 was more difficult than 2013, with the impact of the so-called faster growth markets of Asia Pacific, Latin America, Africa & the Middle East and Central and Eastern Europe, growing more slowly than usual, offset to some extent by stronger North American and United Kingdom markets. Functionally, advertising and media investment management and direct, digital and interactive continued to prosper, whilst data investment management, public relations and public affairs and branding and identity and healthcare grew more modestly. Overall, having started the year budgeting revenue and net sales growth of over 3%, we progressively increased our forecasted revenue growth, finally achieving like-for-like revenue growth of an industry-leading 8.2%. Net sales grew more modestly at 3.3%, growing faster in the first half, than the second, although weaker and stronger comparatives respectively in 2013 are partly the reasons. Equally importantly, we reached our margin improvement target of 0.3 margin points on a constant currency basis, through balanced control of staff costs and headcount. Despite the significant strengthening of sterling against the dollar and most of the faster growth markets' currencies, which began in the fourth quarter of 2013 and continued for much of 2014, our margin in reportable sterling terms improved by 0.2 margin points. As a result profitability improved at all levels, whilst incentive pools were largely maintained at above target performance. This performance was especially creditable at a time when clients were, and continue to be, faced with sluggish nominal and real GDP growth, particularly in the BRICs and Next 11 markets, and with little or no inflation and therefore limited pricing power, and with short-term institutional investment and activist investor pressure, all of which result in financial and procurement focus on reducing costs to deliver promised or expected results. Given current macro-economic and geopolitical uncertainties, these pressures within our industry are unlikely to lessen in the short-term, with clients understandably continuing to demand more for less and consolidating competitors discounting their pricing heavily or offering guarantees, particularly in media investment management, to defend their incumbent positions.
So why will the client climate remain uncertain? After all, profits as a proportion of GDP remain at record levels, corporates have deleveraged since Lehman and sit on at least $7 trillion of net cash, on solid balance sheets and on record stock market valuations. With deflation the worry, rather than inflation, fears of wage and cost inflation are limited and lessened by commodity price falls, particularly in oil and energy, which is effectively a tax reduction for consumers. All seems benign and rosy. Well, those known flapping grey swans remain and black ones can always surprise.There still are at least five "grey swans", although the sixth, in the case of the United Kingdom, the Scottish Referendum, seems to have flapped away, at least for the moment. Firstly, despite some improvement, the Eurozone remains fragile. True, Spain is improving, but with still unacceptably high levels of unemployment, particularly amongst the young. Italy shows a few signs of life, particularly in the North and Germany some strength, driven by the impact of a weak Euro on export prices. Some of the peripheral markets are also in better shape, like Ireland and Portugal. The European Central Bank is openly embracing quantitative easing and we have the strange counterbalancing forces of the Federal Reserve suggesting a tightening, at the same time as the Europeans, Japanese and Chinese are loosening. However, France remains difficult and shocks to the system, like Greece, could always become contagious, if settlement compromises are made. And there is the possibility of populist progress at the Spanish elections too. Second, the litany of woes remain in the Middle East. Concerns around ISIS may have upstaged Syria, Libya, Afghanistan, Palestine and Israel, but those problems have not gone away - although there may be some scope for a nuclear agreement with Iran, thus possibly, opening up an 80 million plus people market and Egyptian prospects may have improved too and re-opened an 80-90 million plus people market.
Third, there are continuing fears around the BRICs and Next 11, particularly in relation to the larger markets of Brazil, Russia and China. Most, if not all of these markets suffered a slowdown in 2013, which continued into 2014 and looks likely to continue into 2015. This economic pressure has been intensified by the fall in commodity prices, particularly oil, for those countries that are net oil producers and exporters. However, overall, they still remain faster growth markets than the slower growth mature markets of the West and will remain a core part of our strategy.We also remain undiminished bulls on China. In only its first two years, the new leadership immediately addressed issues of corruption and its first Plenum document reinforced the strategic directions of the Twelfth Five Year Plan, with an emphasis on lower quantum, higher quality GDP growth, a switch to consumption from savings, a healthcare and social security safety net and a strengthening of the service sector. The Thirteenth Five Year Plan is likely to do the same. There is a consistency and realism in the approach that looks likely to win through, whilst a $10 trillion Chinese GDP growing today at even 5%, has an even bigger delta effect on the World's $70 trillion GDP, than a $3 trillion Chinese GDP, growing at 10% ten years ago. We also remain bullish on Russia, but only in the medium- to long-term. In the short- to medium-term Russia's GDP growth will be limited or negative, particularly with the oil price south of $80 and sanctions still in place. Perhaps the Minsk agreement and Ukrainian ceasefire will improve the situation, but in 2015, Russian GDP looks as though it will decline by at least 5%. Brazil, also remains difficult with flattish GDP and re-elected President Dilma Rousseff only doing half of what markets want her to do. The one BRIC star, at the moment, remains India, with the new Prime Minister Modi having made a fast start. Elsewhere, Indonesia, Vietnam, Mexico, Colombia, Peru, Nigeria and South Africa remain high on the agenda, albeit tempered by geopolitical uncertainties. Iran and Cuba remain economic possibilities.
However, the continued increase 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. On its 25th Anniversary, CNBC together with PwC took a look at the World in 25 more years. China was projected as the world's biggest economy with GDP of $34 trillion versus $10 trillion now, the USA second at $28 trillion (but still with markedly higher GDP per capita) versus $17 trillion now, and India third. India would be the most populous nation with 1.6 billion people and China second with 1.4 billion. We continue to significantly focus our future on the growth of these markets.Fourth, although the United States GDP is now growing at around 3% and will be one of the World's major economic G2 engines again in 2015, there are still the issues of dealing with the US deficit and a record level of $16 trillion of debt in the most effective way. In addition, we have to come off the post-Lehman cheap money drug at some time and the scale and speed of tapering remains the key issue for the continued strength of equity markets. The impact of Federal Reserve easing and tapering remains the elephant in the room. Fifth, and finally, the increasingly uncertain result of the United Kingdom's General Election may crimp the strong United Kingdom economic recovery, which equals or even exceeds the United States strength, albeit relatively. If the Conservatives win outright (unlikely?) or lead a coalition or even form a minority government, there will be a Referendum on the EU in 2016 or 2017, which will cause significant uncertainty. If Labour wins outright (also unlikely?), or leads a coalition (more likely with the SNP?) or forms a minority government, it will win partly on a "bashing business" manifesto, which may resonate at the ballot box. All seems a case of "Morton's Fork". Either way, the United Kingdom economy may slip into the political cycle again, with austerity in the early part of the five year cycle to deal with the continuing Budget deficit and better times around the next election in five years' time (or earlier?) - just like the current Chancellor has done so brilliantly for the Coalition, in their first term.
So all in all, whilst clients may be more confident than they were in September 2008 post-Lehman, with stronger balance sheets, sub-trend global GDP growth at around 3.0-3.5% real and 5.0-5.5% nominal, combined with these levels of uncertainty and strengthened corporate governance scrutiny, make them unwilling to take further risks. They remain focused 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 2015, with continued caution being the watchword. There is certainly no evidence to suggest any such change in behaviour so far in 2015, although one or two institutional investors are saying that they are tiring with some companies' total focus on short-term cost cutting and would favour strategies based more on top line growth.The pattern for 2015 looks very similar to 2014, but with no maxi- or mini-quadrennial events like the Olympics, or FIFA World Cup or United States Presidential Election (as there will be in 2016), to boost marketing investments. Forecasts of worldwide real GDP growth still hover around 3.0 to 3.5%, with inflation of 2.0% giving nominal GDP growth of around 5.0 to 5.5% for 2015, 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. Advertising should grow at least at a similar rate as GDP, buoyed by incremental branding investments in the under-branded faster growing markets.
Although consumers and corporates both 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 the former leading Chief Investment Officer of one of the largest investment institutions said perceptively, 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 regarded as an alternative way of doing this, particularly funded by cheap long-term debt, but we believe clients may regard this as a more risky way than investing in marketing and brand and hence growing market share.All in all, 2015 looks to be another demanding year, although a weaker UK pound against a stronger US dollar would provide a modest currency tailwind and positive impact on profits, unlike the fierce currency headwind in 2014. Financial guidance The budgets for 2015 have been prepared on a cautious basis as usual (hopefully), but continue to reflect the faster growing geographical markets of Asia Pacific, Latin America, Africa & the Middle East and Central & 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 Western Continental Europe. Our 2015 budgets show the following;
- Like-for-like revenue and net sales growth of over 3%
- Target net sales margin improvement of 0.3 margin points excluding the impact of currency
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. We may, in addition, decide that an even more significant proportion of operating company incentive pools are funded and allocated on the basis of Group-wide performance in 2015 and beyond. Horizontality has been accelerated through the appointment of 46 global client leaders for our major clients, accounting for over one third of total revenue of almost $19 billion and 16 country managers in a growing number of test markets and sub-regions. 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 and shopper marketing industries and the resulting "team" pitches. Whilst talent and creativity (in the broadest sense) remain the key differentiators between us and our competitors, increasingly differentiation can also be achieved in three additional ways - through application of technology, for example, Xaxis and AppNexus, through integration of data investment management, for example, Kantar, Rentrak and comScore, and investment in content, for example, Imagina, Vice, Media Rights Capital, Fullscreen, Indigenous Media, China Media Capital and Bruin.Our business remains geographically and functionally well positioned to compete successfully and to deliver on our long-term targets:
- Revenue and net sales growth greater than the industry average
- Improvement in net sales margin of 0.3 margin points or more, excluding the impact of currency, depending on net sales growth and staff cost to net sales ratio improvement of 0.2 margin points or more
- Annual headline diluted EPS growth of 10% to 15% p.a. delivered through revenue growth, margin expansion, acquisitions and share buy-backs
Buy-back strategyShare buy-backs will continue to be targeted to absorb any share dilution from issues of options or restricted stock. However, given the operating and net sales margin targets of 0.3 margin points, the targeted level of share buy-backs will be 2-3% of the outstanding share capital. If achieved, the impact on headline EPS would be equivalent to an incremental improvement of 0.2 margin points. In addition, the Company does also have considerable free cash flow to take advantage of any anomalies in market values, particularly as the average 2014 net debt to EBITDA ratio is 1.6 times, at the low end of our market guidance of 1.5-2.0 times. Acquisition strategy There is still 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, Brazil and India. Transactions will be focused on our strategy of new markets, new media and data investment management, including the application of new technology and big data. Net acquisition spend is currently targeted at around £300 to £400 million per annum, excluding slightly more significant "one-offs", like IBOPE in Latin America and comScore. We will continue to seize opportunities in line with our strategy to increase the Group's exposure to:
- Faster growing geographic markets and sectors
- New media and data investment management, including the application of technology and big data
Last but not least………When WPP advertises for applicants to its annual Marketing Fellowship programme, the headline reads, Ambidextrous Brains Required. Some people say they do not know what that means; but all those in whom WPP would be particularly interested understand immediately. More than in most occupations, to be successful in marketing communications, you need not only to be able to speculate with unrestrained imagination, but also to scrutinise concepts and ideas with a forensic rigour. The normal shorthand is to say that exceptional marketing is part science and part art: and, as shorthand, that is probably true. It is more and more widely recognised that strong and profitable brands appeal at least as much to the emotions as they do to the reason. Effective brand communicators are those who instinctively understand that truth and delight in working with it. In a report of this kind, a year's achievements, if only for fiduciary reasons, have to be expressed almost entirely in terms of numbers. But it must never be forgotten that those numbers are the end product of the personal achievements of tens of thousands of individual people; and people, what's more, of unusual talent. They have ambidextrous brains; that is why our clients come to us; and why they deserve our gratitude and very public recognition. To access WPP's 2014 preliminary results financial tables, please visit 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.
|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||Headline profit before interest and tax, as a percentage of net sales|
|6||Diluted earnings per share based on headline earnings|
|7||Diluted earnings per share based on reported earnings|
|8||Return on equity is headline diluted EPS divided by equity share owners funds per share|
|9||Percentage change at constant currency exchange rates|
|10||Like-for-like growth at constant currency exchange rates and excluding the effects of acquisitions and disposals|
|11||EBITA, defined as operating income before interest, taxes and amortisation and including merger related costs of $9 million|
|12||Operating margin including €7 million related to merger and acquisition costs|
|13||Short and long-term incentives and the cost of share-based incentives|
|14||Excluding direct costs, goodwill impairment, amortisation of acquired intangibles, investment gains and write-downs (in 2014 exceptional gains were £196 million, restructuring charges and costs in relation to the IT transformation project were £128 million and investment write-downs were £7 million)|
|15||Percentage change at constant currency exchange rates|
|16||Like-for-like growth at constant currency exchange rates and excluding the effects of acquisitions and disposals|
|17||Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe|
|18||Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (accounting for almost $950 million revenue, including associates)|
|19||Bangladesh, Egypt, Indonesia, South Korea, Mexico, Nigeria, Pakistan, Philippines, Vietnam and Turkey - the Group has no operations in Iran (accounting for over $950 million revenue, including associates)|
|20||Mexico, Indonesia, South Korea and Turkey (accounting for over $710 million revenue, including associates)|
|21||Brazil, Russia, India and China (accounting for almost $2.9 billion revenue, including associates)|
|22||Percentage change at constant currency exchange rates|
|23||Like-for-like growth at constant currency exchange rates and excluding the effects of acquisitions and disposals|
|24||Advertising, Media Investment Management|
|25||Public Relations & Public Affairs|
|26||Branding and Identity, Healthcare and Specialist Communications|