Letter to share owners*
Dear share owner
PP's twenty-second year was another model year, our best yet, with key measures exceeding any previous year. Our performance conformed closely to the financial model we have developed, with constant currency revenues rising 5-10% and profits 10-15%.
Despite these record results, disappointingly, total share owner return declined, with your share price falling over 6% from 690.5p to 647.0p over the year, principally due to the implications of the sub-prime crisis, but dividends rose 20% to 13.45p. Since the year end, your share price has fallen further, principally due to the chaos in financial markets, to 616.0p at the time of writing. Given the considerable management share ownership in your Company, management has shared that pain.
Billings were up over 5% to £31.7 billion. Revenues were up 5% to £6.2 billion. Operating margin was up half a margin point to 15.0%. Headline EBITDA (or headline earnings before interest, taxes, depreciation and amortisation, which is a key metric that private equity firms use for valuing companies) rose 7% to £1.1 billion. Headline PBIT – that is, profit before goodwill impairment/write-downs, amortisation and impairment of acquired intangible assets, share of exceptional gains of associates, interest, tax and investment gains and write-downs (what a mouthful!) – was up 8% to £928 million. Headline profit before tax was up almost 7% to £817 million. Profit before tax was up over 5% to £719 million. Headline diluted earnings per share were up over 9% to 46.0p and reported diluted earnings per share up 8% to 38.0p.
These results reflect growth in all regions – North America, the UK, Continental Europe, Asia Pacific, Latin America, Africa and the Middle East – although the slowest growth area remained the UK. Similarly, growth was encouraging across all communications services sectors – Advertising, Media Investment Management, Information, Insight & Consultancy, Public Relations & Public Affairs, Branding & Identity, Healthcare and Specialist Communications. As in 2004, 2005 and 2006 we were firing on all cylinders.
These results also reflected continued improvement in productivity, with like-for-like revenues up 5.0% and average headcount on the same basis up 4.6%. Free cash flow was £698 million. Average net debt rose over £300 million to almost £1.5 billion in constant 2007 exchange rates, principally reflecting acquisition expenditure of £675 million and share buybacks of £415 million. Operating margins improved significantly, too, to record levels – up one half of a margin point to 15.0%.
The rest of this letter to you is based on constant currency comparisons, which are more meaningful, given currency movements. On a like-for-like basis revenues were up 5.0% for the year, up 5.3% in the first half and 4.8% in the second half. This appears to have been above the growth in the worldwide market, with the Group increasing market share.
Revenue growth was also consistently strong in successive quarters, on a like-for-like basis up 4.3%, 6.2%, 4.7% in the first three quarters and 4.9% in the fourth quarter, our total revenues in the last quarter surpassing all competitors. The momentum continued in the first quarter of 2008, with like-for-like revenues up 4.8%. Our like-for-like revenue objective for 2008 remains a better performance than the 5.0% of 2007, well in line with, or above, forecasts for the advertising and marketing services industry and worldwide GNP growth, thus continuing growth in market share.
* This Letter to share owners should be read in conjunction with and as part of the management report set out in the Directors' report in How we behave. The statements made in the Forward looking statements in the Review of operations apply equally to this Letter to share owners.