Letter to share owners*
Dear share owner
WPP’s twenty-third year was in many ways another record year despite the financial catastrophes of 2008. Our performance conformed in many respects to the financial model we have developed, with both revenues and headline profits rising in the 5-10% range on a constant currency basis.
Despite these record results, disappointingly, total share owner return declined, with your share price falling over one-third from 647.0p to 402.5p during the year, principally due to the chaos in the financial markets. Dividends, however, rose 15% to 15.47p. Since the year end, your share price has increased to 419.0p at the time of writing. Given the considerable management share ownership in your Company, management has shared that pain, which has not been reduced by issuing options to senior management at bargain-basement prices or re-pricing old ones.
In October 2008, the Company successfully completed the acquisition of Taylor Nelson Sofres plc (TNS), a major information, insight and consultancy group, operating in over 80 countries with almost 17,000 people worldwide. Our results include the contribution of TNS for the last two months of the year.
Billings were up over 16% to £36.9 billion. Revenues were up almost 21% to £7.5 billion. Headline PBIT margin was flat at 15.0% against a target of 15.3%, including TNS. Headline PBIT – that is, profit before goodwill write-downs, investment gains and write-downs, amortisation and impairment of acquired intangible assets, share of exceptional gains/losses of associates, one-off costs of changes to our corporate structure, finance income/costs and taxation (what a mouthful!) – was up over 20% to £1,118 million, crossing £1 billion for the first time.
Headline EBITDA (or headline earnings before interest, taxation, depreciation and amortisation, which is a key metric that private equity firms, for example, use for valuing companies) rose over 20% to £1.3 billion.
Headline profit before tax was up over 18% to £968 million. Reported profit before tax was up almost 4% to £747 million, reflecting goodwill and investment write-downs. Diluted headline earnings per share were up over 21% to 55.5p and diluted reported earnings per share down 1% to 37.6p, again reflecting goodwill and investment write-downs.
Free cash flow remained strong at £777 million. Net debt averaged £2.2 billion in 2008, up just over £600 million at 2008 exchange rates, principally reflecting the net acquisition cost of TNS and other, smaller acquisitions. Net debt at 31 December 2008 was £3.1 billion compared with £1.3 billion last year. Headline interest cover in 2008 was 7.5 times. In the first two months of 2009, average net debt was £3.2 billion, the seasonal cash outflow at this time of year remaining the same as last year. With a current equity market capitalisation of approximately £5.3 billion, the total enterprise value of your Company is approximately £8.5 billion.
Following our 2008 results, our listed debt has maintained investment grade status with the rating agencies (Moody’s and S&P). Equity analysts also appear comfortable with average net debt levels of around 2.5 times headline EBITDA. This would equate to approximately £3.5 billion based on a pro forma 2008 EBITDA, including TNS for a full year.
- This letter to share owners should be read in conjunction with and as part of the management report set out in the section headed Directors’ report.