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Penny Machines

Cherries
oil on canvas
22 x 20 in
1981

Penny Machines
oil on canvas
23¾ x 29¾ in
1961

Stack of Books
oil on canvas
30 x 24 in
n.d.

Seven Suckers
oil on canvas
19 x 23 in
1970

Twin Jackpots
oil on canvas
30 x 46 in
1962

Ties
oil on canvas
20 x 26 in
1980

Cake Slices
oil on canvas
20 x 16 in
n.d.

Our six specific objectives

Our six objectives are summarised below, together with an assessment of how we performed against them in 2009. These objectives represent our key performance indicators (KPIs).

1 Continue to raise operating margins to the levels of the best-performing competition.

2 Continue to increase flexibility in the cost structure.

3 Improve total share owner return.

4 Continue to enhance the contribution of the parent company.

5 Place greater emphasis on revenue growth.

6 Further improve the quality of our creative output.

 

1 First, to continue to raise operating margins to the levels of the best-performing competition. 15% was achieved for two consecutive years, in 2007 and 2008. In spite of the margin decline in 2009, we continue to believe a margin of 18% is a tough, but realistic objective. BBDO, Dentsu and McCann have achieved this historically, although the pressure became too great in some instances.

Headline operating margins
*
Based on headline operating profit as defined here, excluding share of results of associates, and sourced from relevant public filings, adjusted to a comparable basis to WPP.

2 Second, to continue to increase flexibility in the cost structure. Great strides have been made in recent years. Peak flexibility was in 2004, when variable staff costs made up 7.8% of revenues. The decrease to 6.6% in 2008 and 5.7% in 2009 illustrates the value of this flexibility in mitigating margin deterioration in the face of falling revenues. However, we were still unable to match the historic low of 5.3% in 2002.

Change variable costs

3 Third, to improve total share owner return by maximising the return on investment on the Company’s £600 million (around $1.0 billion) free cash flow. There are broadly three alternative uses of funds:

  • Capital expenditure, which usually approximates the depreciation cost. Pressure here has eased as technology pricing has fallen, although in 2009 we invested more in real estate following lease renewals, particularly for Ogilvy and Grey in New York, to secure greater efficiencies.
  • Mergers and acquisitions, which have historically taken the lion’s share of free cash flow. Here we have raised the hurdle rate on capital employed so that our return on capital may be increased. Even so, there are still interesting opportunities, particularly outside the US, where pricing remains lower, despite the current financial crisis and where there is a closer fit with the Company’s strategic objectives. Private transactions remain more attractively priced at single-digit price-earnings multiples.

Our acquisition focus in 2009 was again on the twin opportunities of faster-growing geographic markets and new technologies, totally consistent with our strategic objectives in the areas of geography, new communication services and measurability.

The cost of the acquisition of TNS in 2008 was funded principally by debt. At the time of the transaction, we announced that, for the following two years, acquisitions would be limited to no more than £100 million per annum, the Group’s share buy-back program would be targeted up to 1% per annum and dividend growth at up to 15% per annum, using surplus cash generated to reduce debt. In 2009, the Group spent £63 million on initial acquisition payments, well within the target set.

  • Dividends or share buy-backs. We were the only FTSE 100 company to consistently increase its dividend by 20% per annum for the ten years up to 2007. In 2008 we increased the dividend by 15% and, in 2009, we maintained the dividend at the same level as the previous year. Given dividend cover of almost three times headline earnings in 2009 (four times in 2008) and a dividend yield of over 2% at the time of writing, we believe that there is scope to increase the dividend in the future.

A rolling share buy-back program appears to offer a more significant benefit to total share owner returns. In 2007 we boosted the target level of the share buy-back program from 2-3% of the outstanding share capital to 4-5%, spending over £400m in that year on buy-backs and a further £112 million in 2008. Following the acquisition of TNS, and in accordance with the target referred to above, buy-backs in 2009 were only £9 million, representing 0.2% of share capital, again well within the target set.

Distributions to share owners
1
Sum of share buy-backs and dividends paid divided by average shares in issue for the relevant period, as a % of the average share price for the relevant period.

4 Fourth, we will continue to enhance the value added by the parent company and build unique integrated marketing approaches for clients. WPP is not just a holding company focused on planning, budgeting, reporting and financial issues, but a parent company that can add value to our clients and our people in the areas of human resources, property, procurement, information technology and practice development. We will continue to do this through a limited group of 300 or so people at the centre in Dublin, London, New York, Tokyo, Hong Kong and Shanghai. This does not mean that we seek to diminish the strength of our operating brands, but rather to learn from one another. Our objective is to maximise the added value for our clients with their businesses and our people with their careers.

Many of our initiatives are possible because of the scale on which we now operate. In the optimum use of property, in information technology and in procurement generally, we are able to achieve efficiencies that would be beyond the reach of any individual operating company.

But it is also clear that there is an increasing requirement for the centre to complement the operating companies in professional development and client co-ordination. It is a relatively recent development for certain multinational marketing companies, when looking to satisfy their global communications needs, to make their initial approach not to operating companies, but directly to parent companies.

Such assignments present major, and increasingly frequent, opportunities for the few groups of our size. It is absolutely essential that we have the professional resources and the practice development capability to serve such clients comprehensively, actively and creatively. Initiatives involving some of the world’s largest marketers continue to gain momentum. The world’s largest advertiser is itself integrating its efforts around brands, in the areas of advertising, media investment management, market research, packaging design and public relations.

All our clients, whether global, multinational or local, continue to focus on the quality of our thinking, co-ordination of communications and price. In response, we focus on talent, structure and incentives.

 

5 Go to objective 5, Place greater emphasis on revenue growth.

 

 

6 Go to objective 6, Further improve the quality of our creative output.

 

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