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The fast read
For a quick, pre-digested, highly-compressed version of this Annual Report: please read below.
Who we are
WPP is the world leader in communications services. It comprises leading companies in all these disciplines:
- Media Investment Management
- Consumer Insight
- Public Relations & Public Affairs
- Branding & Identity
- Healthcare Communications
- Direct, Digital, Promotion & Relationship Marketing
- Specialist Communications
There are more than 150 companies within the Group – and each is a distinctive brand in its own right. Each has its own identity, commands its own loyalty, and is committed to its own, specialist expertise. That is their individual strength. Clients seek their talent and their experience on a brand-by-brand basis. Between them, our companies work with 354 of the Fortune Global 500, 28 of the Dow Jones 30, 60 of the NASDAQ 100 and 33 of the Fortune e-50.
It is also of increasing value to clients that WPP companies can work together, as increasingly they do: providing a tailor-made range of integrated communications services. Almost 700 clients are now served in three distinct disciplines. More than 440 clients are served in four disciplines, and these clients account for over 56% of Group revenues. Group companies now work with over 327 clients across six or more countries.
Collectively, over 138,000* people work for WPP companies; out of almost 2,400 offices in 107 countries.
- Including associates.
Why we exist
To develop and manage talent;
to apply that talent,
throughout the world,
for the benefit of clients;
to do so in partnership;
to do so with profit.
Within the WPP Group, our clients have access to companies with all the necessary marketing and communications skills; companies with strong and distinctive cultures of their own; famous names, many of them.
WPP, the parent company, complements these companies in three distinct ways.
- First, it relieves them of much administrative work. Financial matters (such as planning, budgeting, reporting, control, treasury, tax, mergers, acquisitions, investor relations, legal affairs and internal audit) are co-ordinated centrally. For the operating companies, every administrative hour saved is an extra hour to be devoted to the pursuit of professional excellence.
- Second, the parent company encourages and enables operating companies of different disciplines to work together for the benefit of clients. Such collaborations have the additional benefit of enhancing the job satisfaction of our people. The parent company also plays an across-the-Group role in the following functions: the management of talent, including recruitment and training; in property management; in procurement and information technology; in knowledge sharing and practice development.
- And, finally, WPP itself can function as the 21st-century equivalent of the full-service agency. For some clients, predominantly those with a vast geographical spread and a need for marketing services ranging from advertising through design and website construction to research and internal communications, WPP can act as a portal to provide a single point of contact and accountability.
What we think
After the threat of apocalypse, new centres of gravity
by Sir Martin Sorrell
2009 was very tough, a year of two halves, moving from staring into the abyss to a less-worse performance. Although 2010 has been flat so far, we expect top-line growth in the second quarter, albeit through easier comparatives. Mini-quadrennial events this year, including the FIFA World Cup and the Shanghai Expo, will further bolster results. We see similarly mild growth in 2011.
As we recover from the recession, a pattern is emerging of three-speed growth: slow in Western Europe, quicker in the US, and fastest in the BRICs and Next 11 countries, identified by Goldman Sachs.
Crosscut with this trend are big changes in function and technology in our industry – greater concentration on the traditional below-the-line disciplines of marketing services, growing migration to the internet and other technologies at the expense of older media forms.
WPP is well-placed to make the most of all these developments. Price pressure from global retailers, overcapacity in industry and subsequent discounting, the shortage of human capital, the growing needs of government as client and the power of the internet to shatter business models, point to the ever greater need for creativity, branding and innovation – basically what we do.
Why a Ruritanian Poltergeist can be as Valuable as an Automated Processing Plant
by Jeremy Bullmore
Both the Marketing Director and the Production Director have put in strong bids for bigger budgets. The Production Director needs a new robotic processing plant; the Marketing Director needs increased support for a successful multi-media campaign featuring a kilt-wearing Ruritanian poltergeist called Feliks. The Board listens attentively to both – but particularly in these difficult days, believes it more responsible to authorise additional Capex than additional promotional spend. Remarkable new research from Deutsche Bank, however, suggests in the strongest possible terms that a company’s assets, both tangible and intangible, need equivalent support and nourishment.
How we’re doing
|Headline operating profit2||£959m||£1,072m||-10.6|
|Reported operating profit||£762m||£876m||-13.0|
|Headline PBIT margin2||11.7%||15.0%||-3.3|
|Headline diluted earnings per share2,4||44.4p||55.5p||-20.0|
|Headline diluted earnings per ADR2,3,4||$3.48||$5.14||-32.3|
|Ordinary dividend per share||15.47p||15.47p||–|
|Ordinary dividend per ADR3||$1.21||$1.43||-15.4|
|Net debt at year-end||£2,640m||£3,068m||-14.0|
|Average net debt5||£3,448m||£2,206m||+56.3|
|Ordinary share price at year-end||609.5p||402.5p||+51.4|
|ADR price at year-end||$48.65||$29.59||+64.4|
|Market capitalisation at year-end||£7,658m||£5,053m||+51.6|
|At 14 April 2010|
|Ordinary share price||705.5p|
- The financial statements have been prepared under International Financial Reporting Standards (IFRS).
- Billings is defined in the Glossary.
- The calculation of ‘headline’ measurements of performance (including headline EBITDA, headline operating profit, headline PBIT, headline PBT and headline earnings) is shown in note 31 of the financial statements.
- One American Depositary Receipt (ADR) represents five ordinary shares. These figures have been translated for convenience purposes only using the income statement exchange rates shown in the consolidated income statement. This conversion should not be construed as a representation that the pound sterling amounts actually represent, or could be converted into, US dollars at the rates indicated.
- Earnings per share is calculated in note 9 of the financial statements.
- Average net debt is defined in the Glossary.
2009, our twenty-fourth year, was a brutal year for both WPP and the communications services industry as a whole. After a difficult first six months, however, the Group adjusted its cost base to falling like-for-like revenues and achieved the same pro-forma operating margins in the second half of the year as in the second half of 2008.
Billings were up almost 3% to £37.9 billion. Revenues were up over 16% to £8.7 billion. Our revenues exceeded all our competitors for the second consecutive year and by an increasing amount. Headline PBIT margin was 11.7% in 2009 against 15.0% last year (or 14.3% including TNS on a pro-forma basis for the whole of 2008).
Headline PBIT (profit before goodwill write-downs, amortisation and impairment of acquired intangible assets, investment gains/losses and write-downs, share of exceptional gains/losses of associates, one-off costs of changes to our corporate structure in 2008, finance income/costs, revaluation of financial instruments and taxation – apologies for the accounting mouthful) fell 9% to £1,017 million, but was above £1 billion for the second consecutive year.
Headline EBITDA (or headline earnings before interest, taxation, depreciation and amortisation) fell by less than 4% to £1.2 billion. Headline profit before tax was down over 16% to £812 million. Reported profit before tax was down over 11% to £663 million. Diluted headline earnings per share were down 20% to 44.4p and diluted reported earnings per share down over 6% to 35.3p. Headline interest cover in 2009 was 5.0 times. Dividends were maintained at 15.47p, the same level as 2008.
Like-for-like revenues, although relatively stable in the final quarter of 2008 post the Lehman crisis, fell by almost 6% in the first quarter of 2009 and the rate of decline accelerated to almost 11% in the second quarter. The Group was relatively slow to react to this in the first half, with headcount only falling by 2.8% on average and 5.8% point-to-point, although a more rapid response of cost reduction, in response to these accelerating revenue declines, might have damaged the franchise.
However, as like-for-like revenue declines started to become “less worse” at -9% in quarter three and -7% in the fourth quarter, the headcount average fell by 9% and by 12% respectively and point-to-point by 7.4% between 30 June and 31 December. As a result, operating margins in the second half were the same as pro-forma margins in the second half of 2008.
With a current equity market capitalisation of approximately £8.9 billion, the total enterprise value of your Company is approximately £12.1 billion, almost 10.0 times headline EBITDA.
Free cash flow and net debt
Free cash flow remained strong at £618 million. Net debt averaged £3.4 billion in 2009, up exactly £1.0 billion at 2009 exchange rates, reflecting the net acquisition cost and debt acquired of TNS of £1.3 billion and other, smaller acquisitions and earnout payments. Net debt at 31 December 2009 decreased to £2.6 billion compared with £3.1 billion last year, reflecting improved cash flows.
The impact of the recession was least felt in the UK and Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe. It was most keenly felt in North America and Western Continental Europe, particularly in the first six months.
There was relative improvement in the US in the third quarter, which continued into the final quarter of the year, with like-for-like revenues down 6.1%. Although the UK showed some softening in the third quarter compared with the second quarter, there was a marked “less worse” improvement in the final quarter, with like-for-like revenues falling less at -4.6%. The relative improvement in Western Continental Europe and Asia Pacific in the third quarter continued, with both regions showing significantly “less worse” growth in the final quarter. The Middle East continued to be challenging in the second half, while Latin America had a relatively strong year overall.
Markets outside North America now account for over 65% of our revenues, up from 61% five years ago.
Branding & Identity, Healthcare and Specialist Communications (including direct, digital and interactive) was least affected by the recession, with the improvement in the Group’s healthcare businesses, seen in the second quarter, continuing in the second half, with like-for-like growth in the final quarter of the year.
Pressure continued on the Group’s Advertising and Media Investment Management businesses, although the pressure seen by Media Investment Management in quarters two and three eased significantly in the final quarter.
Public Relations & Public Affairs also experienced a substantially “less worse” position in quarter four. Consumer Insight saw sequential quarterly improvement in the second half, with a marked improvement in the final quarter.
Marketing services rose to over 61% of our revenues in 2009, up from 56% in 2008, largely due to the impact of TNS on Consumer Insight.
Our key priorities
Our goal remains to be the world’s most successful provider of communications services to multinational and local companies, not just the largest. To that end, we have three key strategic priorities:
- Our immediate priority is to emerge from the financial crisis successfully.
- Medium term, to build upon the successful base we have established together with our recent acquisitions.
- Long-term, to increase the combined geographic share of revenues from the faster-growing markets to one-third; to increase the share of revenues of marketing services to two-thirds; to maintain the share of more measurable marketing services at 50% of revenues.
- Percentages are calculated on a constant currency basis. See definition in the Glossary.
- The calculation of headline PBIT is set out in note 31 of the financial statements.
- The Group previously reported Continental Europe as a geographical segment. Western Continental Europe is now reported separately, with Central & Eastern Europe included with Asia Pacific, Latin America, Africa & Middle East.
- Consumer Insight was previously reported as Information, Insight & Consultancy.
Who runs WPP
Chairman of the Nomination Committee
Member of the Compensation Committee
Sir Martin Sorrell
Chairman of the Corporate Responsibility Committee
Chief executive, WPP Digital
Member of the Audit Committee
Member of the Compensation Committee and Nomination Committee
Member of the Nomination Committee
David Komansky (regrettably retired 6 February 2009)
Stanley (Bud) Morten
Senior independent director (until April 2010)
Member of the Nomination Committee
Chairman of the Compensation Committee
Member of the Audit Committee
Senior independent director (from April 2010)
Member of the Audit Committee
Chairman of the Audit Committee
Members of the Advisory Board
How we behave
The Board of Directors as a whole is collectively accountable to the Company’s share owners for good corporate governance and is committed to achieving compliance with the principles of corporate governance set out in the Combined Code.
Our goal is to comply with relevant laws, regulations, and guidelines such as the Combined Code, the US Sarbanes-Oxley Act 2002, the NASDAQ rules and, where practicable, with the guidelines issued by institutional investors and their representative bodies.
WPP operates a system of internal control, which is maintained and reviewed in accordance with the Combined Code and the guidance in the Turnbull Report as well as the relevant provisions of the Securities Exchange Act 1934 and related SEC rules, as they currently apply to the Company. In the opinion of the Board, the Company has complied throughout the year with the Combined Code, the Turnbull Report and also with the relevant provisions of the Securities Exchange Act 1934 and SEC rules.
WPP’s Corporate Responsibility Committee, which is chaired by Paul Richardson, advises on policy, monitors emerging issues and co-ordinates communication among Group companies. WPP’s five most significant corporate responsibility issues are:
- The social and environmental impact of our work for clients.
- The impact of our work, including marketing ethics, compliance with marketing standards, protection of personal, consumer and corporate data and increasing transparency about our marketing practices.
- Employment, including diversity and equal opportunities, business ethics, employee development, remuneration, communication and health and safety. In 2009, WPP invested £39.9 million (2008: £42.6 million) in training and wellbeing across the Group.
- Social investment, including pro bono work, donations to charity and employee volunteering. In 2009, our total social investment was worth £14.9 million (2008: £14.6 million), equivalent to 2.2% of reported profit before tax. This includes £10.8 million in pro bono work (based on the fees the benefiting organisations would have paid for our work) and £4.1 million in donations.
- Climate change, including the emissions from energy used in our offices and during business travel.
How we’re rewarded
Executive remuneration policy is set by WPP’s Compensation Committee and is governed by three guiding principles:
- Alignment with share owner interests
The committee’s work during 2009 included:
- a review of the total compensation packages of the Group’s most senior executives relative to marketplace benchmarks to ensure competitiveness;
- the approval of all stock plan awards (including grants under LEAP III, Performance Share Awards (PSAs), Executive Share Awards (ESAs) and the Leaders and Partners programs);
- the approval of all incentive payments, payable in cash or in shares, for senior executives throughout the Group and setting appropriate targets for the Group chief executive and other executive directors;
- finalising the design of LEAP III after consultation with share owners, and securing approval of the plan at the General Meeting in June 2009; and
- consideration of the potential inclusion of clawback provisions in the Company’s share incentive plans.