Our six specific objectives
Here are six objectives which represent our key performance indicators (KPIs). For an assessment of how we performed against them in 2013, read on.
- Continue to improve operating margins on revenue and gross margin (net sales).
- Increase flexibility in the cost structure.
- Use free cash flow to enhance share owner value and improve return on capital.
- Continue to develop the value added by the parent company.
- Emphasise revenue growth more as margins improve.
- Improve still further the creative capabilities and reputation of all our businesses.
1 First, to continue to improve operating margins. In 2013, we achieved a margin of 15.1% on revenue, a new high, and 16.5% on gross margin (net sales), the highest-reported level in the industry.
We continue to believe a margin of around 18% or more on revenue, and well over 19% on gross margin or net sales, is a tough, but realistic, objective given that our best-performing companies in each services sector have already demonstrated they can perform at a combined Group margin of 17% on revenue.
In the future, we will focus more on headline PBIT as a percentage of gross margin or net sales, given it is a more meaningful competitive comparison.
The Group has embarked on a number of programs to improve operational effectiveness including process simplification, shared service centres, offshoring certain tasks to lower-cost markets and outsourcing. We are consolidating IT infrastructure and centralising systems development and applications to create efficiencies and focus investment. These programs are projected to deliver a 1.0 margin point benefit (excluding the impact of currency) over the course of the next three to five years.
2 Second, to increase flexibility in the cost structure. In 2013, flexible staff costs (including incentives, freelance and consultants) returned to historical highs of around 7.5% of revenues and continue to position the Group extremely well should current market conditions deteriorate.
3 Third, to enhance share owner value and maximise the return on investment on the Company’s substantial free cash flow of over £1.2 billion (or almost $2.0 billion) per annum. As capital expenditure remains relatively stable, there are broadly three alternative uses of funds: acquisitions, share buy-backs and dividends. We have increasingly come to the view, based on co-operative research with leading investment institutions that, currently, the markets favour consistent increases in dividends and higher sustainable pay-out ratios, along with anti-dilutive progressive buy-backs and, of course, sensibly-priced strategic acquisitions.
- Mergers and acquisitions. There is a very significant pipeline of reasonably priced small- and medium-sized potential acquisitions, with the exception of Brazil and India and digital in the US, where prices seem to have got ahead of themselves because of pressure on our competitors to catch up. This is clearly reflected in some of the operational and governance issues that are starting to surface elsewhere in the industry, particularly in faster-growing markets like Brazil, India and China.
Our acquisition focus in 2013 was again on the triple play of faster-growing geographic markets, new media and Data Investment Management, including the application of new technology and big data, totally consistent with our strategic priorities in the areas of geography, new communication services and measurability. In 2013, the Group spent almost £200 million on initial acquisition payments, net of cash acquired and disposal proceeds. Net acquisition spend is currently targeted at around £300-£400 million per annum and we will continue to seize opportunities in line with our strategy, as in the first quarter of 2014.
- Dividends. In 2011, the Board increased the dividend pay-out ratio objective to approximately 40% over time, compared to the 2010 ratio of 31%. This was largely achieved in 2012, some 18 months later, and ahead of schedule.
As outlined in the June 2013 AGM statement, the Board then gave consideration to the merits of further increasing the dividend pay-out ratio from 40% to between 45% and 50%. As a result of that review, the Board decided to target an increase in the pay-out ratio to 45% over the next two years and, following the strong first-half results, your Board raised the interim dividend by 20%, around 10 percentage points higher than the growth in headline diluted earnings per share and a pay-out ratio in the first half of 37%.
For the full year, headline diluted earnings per share rose by over 10% and the final dividend has also been increased by 20%, bringing the total dividend for the year to 34.21p per share, up 20%, 10 percentage points higher than the growth in headline diluted earnings per share. This represents a pay-out ratio of 42% for 2013 compared with 39% in 2012. Dividends paid in respect of 2013 will total almost £460 million for the year.
- Share buy-backs will continue to be targeted to absorb any share dilution from issues of options or restricted stock. However, given the reduced operating and gross margin (or net sales) margin targets of 0.3 margin points; improvement, the targeted level of share buy-backs will be increased from around 1% of the outstanding share capital to 2-3%. If achieved, the impact on headline diluted EPS would be equivalent to an 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 2013 net debt to EBITDA ratio is 1.6 times, at the low end of our market guidance of 1.5-2.0 times, and should come down further in 2014. Share buy-backs in 2013 cost £197 million, representing 1.4% of issued share capital.
4 Fourth, we will continue to develop 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, IT and practice development, including sustainability. We will continue to do this through a limited group of 400 or so people at the centre in London, New York, Tokyo, Hong Kong, Singapore, Shanghai and São Paulo. 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 in their businesses and our people in their careers.
Many of our initiatives are possible because of the scale on which we now operate. In the optimum use of property, in IT 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 coordination. 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 holding or 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. For our largest client, amongst others, we have implemented a seamless model, effectively a one-client agency within our Group. All our clients, whether global, multinational or local, continue to focus on the quality of our thinking, coordination of communications and price. In response, we focus on talent, structure and incentives.
Managing talent is the priority
Talent and its management therefore remain at the heart of our reason to be: that is what our clients pay us for. Development of our people and the way we manage that talent is a critical determinant of performance and on that critical dimension, we continue to make significant progress.
In developing highly-competitive incentives combined with extremely attractive working environments, we increasingly differentiate ourselves from our competitors and improve the attractiveness of WPP companies as destinations for talent. Our quarterly reviews with the operating companies have been structured to give more time and attention to talent and to clients. Our recruiting efforts throughout 2013 were especially fruitful as we successfully targeted and recruited top talent within and beyond our industry, often competing with investment banking, management consulting, new media and private equity offers. The war for talent is fierce and will intensify further, and there is more to be done.
The blueprint for our executive development curriculum has been completed, and our flagship client leadership training program, Maestro , now in its 11th year, is being continuously developed. The parent company and each of our operating companies have installed their own approach to performance assessment and succession planning, aimed at developing the careers of their people, improving the quality of feedback, coaching and mentoring they receive and providing for orderly succession. A senior management mentoring and development program, ‘The X Factor’, run by Charlotte Beers, the former chairman and CEO of Ogilvy & Mather and chairman of JWT, continues to prepare women for the next level of leadership in the Group.
In 2011, your Company teamed up with the Shanghai Art & Design Academy (SADA) to establish the WPP School of Marketing and Communications. This jointly run school offers China’s first professional marketing and communications three-year diploma program. This initiative continued in 2013, with the third intake of 100 students. After 19 years, the WPP Fellowship program remains (surprisingly) the only multi-disciplinary and multi-geographical recruitment and training initiative in the industry, with a lower acceptance rate than Harvard Business School's MBA program.
We continued to scrutinise and modify our compensation practices, both to offer competitive and appropriately based rewards to our people and to attract outstanding talent from elsewhere. This is a key strategic priority for us. Our competition is, sometimes, not so rigorous in evaluating and rewarding performance – for example, taking advantage of sharp falls in share prices to re-price or issue options or giving limited disclosure to investors of compensation plan details. A failure of external, as well as internal, audiences to understand the importance of globally competitive incentive-based compensation will undermine the Company’s leadership position. After all, we invest over $10 billion a year in human capital, as opposed to only $500 million in fixed assets – 20 times more.
Of all businesses, a communications services company must be a model of excellent external and internal communications. To that end, we accelerate understanding of the Group’s vast resources with a raft of regular communications online through our websites, social media channels and in print: our monthly public news bulletin, e.wire ; our multi-awarded global newspaper and eBook, The WIRE ; our annual Atticus Journal of original marketing thinking; our online Fact Files profiling Group resources/companies/products; regular communication on Group initiatives such as the WPP Worldwide Partnership Program and the WPP Fellowship Program; our annual Sustainability Report and this Annual Report, both consistently awarded, in print and online.
As part of the increased focus on ‘horizontality’, WPP’s public website is being substantially refreshed to highlight the scope and scale of the Group as well as enhancing the overall user experience. The Group intranet is being redeveloped to facilitate further internal strategic alliances and cross-company co-operation.
In 2013 we again reduced our core property portfolio, with absolute square footage falling by 0.6%, while revenues attributable to acquisitions added 2.2% and in total revenues in constant currencies rose by 5.7%.
The average cost per square foot rose by 3.8% in 2013, largely due to the expiry of a number of below-market leases in the year, although this was still less than the increase in constant currency revenues. The combination of all these factors resulted in a reduction of the establishment cost-to-revenue ratio to 6.6% from 6.7% last year.
In 2014 we will continue to focus on consolidating the number of properties in the Group, further reducing square foot per head as we take on new leases, and introducing more ‘agile working’ (enabling companies to run at less than one workspace per person) to further reduce the establishment cost-to-revenue ratio.
Our operating companies’ workplaces are often cited for their creativity and innovation. Recent accolades include first place at the 2013 International Property Awards - America for GroupM’s Bogotá offices and Best of the Best for Interior Design at the 2013 Sydney Design Awards for Lightspeed. The offices of JWT Atlanta, Wunderman California and Ogilvy & Mather Jakarta all featured in a recent edition of Interior Design ’s ‘Best of Office’ book.
In procurement, our goal is to make savings, add value and minimise risk across all of WPP’s external spend, with particular emphasis on opportunities to leverage our scale to the benefits of our clients and our companies.
In 2013, we continued to implement and develop a spend analytics system, which now provides supplier-level visibility of over $5 billion of external spend, across nine of our largest markets – the US, UK, Germany, France, Spain, Italy, China, India and Brazil. Access to data of this detail is now driving procurement opportunity assessment and project activities across the Group. The procurement team have been re-organised to reflect the major opportunity areas.
As a consequence of better data, 2013 saw the completion of a risk assessment pilot in our supply chain for advertising production, during which over 400 suppliers in the UK and China completed a self-assessment questionnaire which enabled us to assess environmental, social and governance risks. Future plans include an extension of the advertising production risk assessment to the US, and a focus on other areas of our supply chains which we perceive may carry more inherent risk.
For 2014, we will continue our focus on the key drivers of supplier cost. For indirect procurement, our goal remains to have a minimum of 50% supplier spend in each major country covered by WPP preferred suppliers and contracts, and for these preferred suppliers to work with us to deliver year-on-year value improvement. Also in 2014, we are launching The Bridge Advanced Production Buying, a new initiative in advertising production procurement and the first of its kind in our industry.
In 2012, following the impact of Hurricane Sandy on some of the Group’s IT infrastructure, we accelerated a major review of the Group’s IT operations to make them better coordinated, more responsive to changing needs (both internal and external) and more cost-effective. Core to this strategy will be greater centralisation, standardisation and transformation of the Group’s IT infrastructure and services, with the objective of delivering savings of at least 10% (or £50 million) on current delivery cost. We have recruited a highly-regarded CIO for the Group, Robin Dargue, whose first priority is to push this program of work forward. We estimate that implementation will take two to three years.
In practice development we continue to develop horizontal initiatives in a focused set of high-potential areas across our vertical operating brands: in media investment management, healthcare, sustainability, government, new technologies, new markets, retailing, shopper marketing, internal communications, financial services and media and entertainment. Specifically, we continue to invest in sharing insights and developing initiatives through WPP Digital (in digital marketing and media), The Store (in distribution and retail) and our new Government & Public Sector Practice.
We have increased the number of WPP Global Client Leaders to coordinate our efforts on behalf of clients
In key geographic markets we are increasingly coordinating our activities through WPP Country Managers. We continue to believe that increasing coordination is required between our brands at the global and country levels, as the arguments for investment in regional management become weaker, largely because of improved technology. In addition, we have increased the number of WPP Global Client Leaders to coordinate our efforts on behalf of clients and to ensure they receive maximum benefit from their relationships with WPP operating brands.
Furthermore, we continue to encourage internal strategic alliances and promote co-operation. Practice development initiatives have therefore been reinforced in such areas as healthcare, retail, internal communications, corporate sustainability and media and entertainment. This has been especially important in developing our portfolio of direct investments in new media under WPP Digital and where our investments are working with our agencies and people to bring new technology capabilities and understanding to our clients.
All these initiatives are designed to ensure that we, the parent company, really do (as well as being perceived to) inspire, motivate, coach, encourage, support and incentivise our operating companies to achieve their strategic and operational goals.
5 Fifth, to emphasise revenue and gross margin or net sales growth more as margins improve. One legitimate criticism of our performance against the best-performing competition is our comparative level of organic revenue growth, although the methods used to calculate rates of organic growth ‘vary’ to say the least and we may have put too much emphasis on margin improvement. In 2013, our like-for-like revenue growth of 3.5% led the industry. Our margin performance is consistently at the top end of the pack. We continue to believe that profitable growth is preferable to sacrificing margins.
Estimated net new business billings of £6.1 billion (almost $10 billion) were won in 2013, up over 57% on 2012, placing the Group first in all independently-sourced net new business tables. The Group continues to benefit from consolidation trends in the industry, winning assignments from existing and new clients, including several very large industry-leading advertising, digital, media, pharmaceutical and shopper marketing assignments. These wins partly benefitted the second half of 2013, but the full benefit will be seen in 2014.
Our practice development activities are also aimed at helping us position our portfolio in the faster-growing functional and geographic areas. The Group completed 62 acquisitions in 2013: 38 acquisitions and investments were classified in new markets (of which 32 were in new media); 22 in Data Investment Management, including data analytics and the application of technology; with the remaining two driven by individual client or agency needs.
Specifically, in 2013, acquisitions and increased equity stakes were completed in Advertising and Media Investment Management in Canada, Kenya, Colombia, China, Hong Kong, Indonesia, Myanmar, the Philippines and Thailand; in Data Investment Management in the US, Brazil and Myanmar; in Public Relations & Public Affairs in the US, the UK, China and Hong Kong; in direct, digital and interactive in the US, the UK, Belgium, France, Germany, the Netherlands, Poland, South Africa, Turkey, Argentina, Brazil, Colombia, Uruguay, India, Singapore and Australia.
So far in 2014, the Group has made acquisitions or increased equity interests in Advertising and Media Investment Management in Russia, the Middle East and the Philippines; and in direct, digital and interactive in the US, the Netherlands, Poland, Russia, South Africa, China and Vietnam.
These acquisitions continue to target our previously-described strategic priorities; expanding the share of revenues of our businesses in Asia Pacific, Latin America, Africa and the Middle East, and Central and Eastern Europe to 40-45%; in new media to 40-45%; and in Data Investment Management, direct, digital and interactive, to one-half.
We intend to expand our strong networks – JWT, Ogilvy & Mather, Y&R, Grey, United, Bates CHI&Partners, Scangroup, Mindshare, MEC, MediaCom, Maxus, tenthavenue, TNS, Millward Brown, Kantar Media, Kantar Health, Kantar Retail, Kantar Worldpanel, Hill+Knowlton Strategies, Ogilvy Public Relations, Burson-Marsteller, Cohn & Wolfe, Brand Union, Landor, FITCH, Ogilvy CommonHealth Worldwide, Sudler & Hennessey, ghg, OgilvyOne Worldwide, Wunderman, Geometry, POSSIBLE and AKQA – in high-growth markets or where their market share is insufficient. In 2013, we announced the merger of OgilvyAction and G2 to form Geometry, the largest and most geographically-complete activation agency in the world, uniquely placed to exploit the intersection of the world’s brands and distribution systems.
We will also enhance our leadership position in Data Investment Management by further development of our key brands with particular emphasis on North America, Asia Pacific, Latin America and Continental and Eastern Europe. We will continue our growth of research panels and have established a Kantar-wide operational capability. We will reinforce our growing position in media research through Kantar Media, which includes our investments in television and internet audience research and IBOPE, Marktest and CSM/CTR, which, combined, is the market leader outside North America. We currently measure television and/or internet audiences in 60 markets around the world.
In addition, we intend to reinforce our worldwide strength in direct and interactive marketing and research through our traditional channels such as Wunderman, OgilvyOne, Geometry, Blanc & Otus and Lightspeed. We will also invest directly in new channels through start-ups, particularly as US and French valuations in search, for example, are still prohibitive. Other opportunities will be sought to enhance our online capabilities.
Lastly, we will continue to develop our specialist expertise in areas such as healthcare, retail and interactive and to identify new high-growth areas.
Creativity remains paramount
6 Sixth, to build on, still further, the impressive creatively reputation WPP now enjoys globally.
The creative capability of the Group is led by John O'Keeffe, WPP's worldwide creative director. John reminded us last year, as indeed he does constantly, that whilst many issues facing WPP are very important – margin growth, acquisitions, geographical spread and the like – the creative quality of the work will always be priority No.1. We live or die by the ideas we deliver to our thousands of clients: design ideas, media and digital ideas, consumer insights and, of course in proprietorial terms, Millward Brown’s influential BrandZ studies.
Training and development programs remain a key focus, as of course does the judicious use of our M&A skills to identify the best and most like-minded creative businesses to join us.
In 2013, we celebrated our seventh annual internal WPPED Cream awards, showcasing what we consider our very best work. wppedcream.com is now a key online destination website for anyone searching for the very best in marketing creative excellence.
But beyond our own views, lest we appear inwardly focused, there is of course the Cannes Lions International Festival of Creativity. WPP’s achievement in securing back-to-back Creative Holding Company of the Year Awards in 2011 and 2012, which many thought the pinnacle, became a hat-trick in 2013. Cannes is acknowledged as the only truly global award, across all media, so to win there is to be the best. To do it three times in a row is a wonderful tribute to all of our people the world over and we congratulate every one of them.
Our main competitors, as we have seen, have now joined forces in response.
So the challenge for WPP is clear. And we are up for it.
Chapter 6 of 13