WPP Interim Results 2012
- Billings up over 1% at £21.7 billion
- Reportable revenues up 5.5% to almost £5.0 billion
- Constant currency revenue up almost 7%
- Like-for-like revenue up 3.6%
- Operating margin of 11.5% up 0.5 margin points and 0.7 margin points like-for-like
- Headline profit before interest and tax £570 million up over 10% and over 13% in constant currency
- Headline profit before tax £467 million up almost 12% and over 17% in constant currency
- Profit before tax £358 million up 7% reflecting higher re-measurement gains in previous year and up over 13% in constant currency
- Headline diluted earnings per share of 25.8p up over 13% and over 18% in constant currency
- Dividends per share of 8.80p up 18%
- Return to the UK subject to share owner approval in December
|£ million||H1 2012||reported1||constant2||% revenues||H1 2011||% revenues|
|EPS headline diluted5||25.8p||13.2%||18.6%||-||22.8p||-|
|Dividends per share||8.80p||18.0%||18.0%||-||7.46p||-|
First-half and Q2 highlights
- Billings increased by 1.2% to £21.651bn
- Revenue growth of 5.5%, with like-for-like growth of 3.6%, 3.2% growth from acquisitions and -1.3% from currency. Q2 slightly softer than Q1
- Growth in all regions and business segments with Q2 improvement in the UK and the faster growing markets offset by slower growth in the mature markets of the USA and Western Continental Europe. Continuing double-digit growth from South East Asia, Latin America and Africa
- Like-for-like gross margin growth lower than revenue growth by 0.3 percentage points at 3.3%, partly due to stronger comparatives and changes in technology and increased pricing pressure, particularly in consumer insight
- Headline EBITDA growth of 10% delivered by organic revenue growth and by 0.5 margin point improvement with operating costs (+4%) rising less than revenues
- Headline PBIT increase of 10% with PBIT margin also rising by 0.5 points
- Gross margin margins, probably a more accurate competitive comparator, up 0.6 margin points to 12.5%
- Headline diluted EPS up 13% resulting in 18% higher first interim ordinary dividend of 8.80p, in line with the Company’s objective of reaching a 40% pay-out ratio, in the medium term
- Average net debt increased by £307m (+12%) to £2.898bn compared to last year, but continuing to reflect an improvement of approximately £200 million in working capital since the beginning of the year
- Creative excellence recognised again in 2012 with the award of the Cannes Lion to WPP for the most creative Holding Company for the second consecutive year since its initiation and another to Ogilvy & Mather Worldwide for the most creative agency network
Current trading and outlook
- July 2012 | Revenues up over 3% like-for-like for month, with year-to-date similar to the first half
- FY 2012 quarter 2 revised forecast | Slight reduction in like-for-like revenue growth from the quarter 1 revised forecast, with first and second half more balanced and headline operating margin target, as previously, of 14.8% up 0.5 margin points
- Focus in 2012 | 1. Revenue growth from leading position in both faster growing geographic markets and digital, “horizontality”, premier parent company creative position, new business strength and strategically targeted acquisitions; 2. Continued emphasis on balancing revenue growth with headcount increases and improvement in staff costs/revenue ratio to enhance operating margins
- Long-term targets reaffirmed | Above industry revenue growth due to geographically superior position in new markets and functional strength in new media and consumer insight, including data analytics and application of new technology; improvement in staff cost/revenue ratio of 0.3 to 0.6 points p.a. depending on revenue and gross margin growth; operating margin expansion of 0.5 margin points or more; and PBIT growth of 10% to 15% p.a. from margin expansion and from strategically targeted small and medium-sized acquisitions
In this press release not all of the figures and ratios used are readily available from the unaudited interim results included in Appendix 1. Where required, details of how these have been arrived at are shown in the Appendices.
Review of group results
Billings were up 1.2% at £21.651 billion. Estimated net new business billings of £2.475 billion ($3.960 billion) were won in the first half of the year, more than double that in the first half of last year, placing the Group first in all leading 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 and media assignments, the full benefit of which will be seen in Group revenues later in 2012 and in 2013.
Reportable revenue was up 5.5% at £4.972 billion. Revenue on a constant currency basis was up 6.8% compared with last year, chiefly reflecting the strength of the pound sterling against the euro and against certain BRIC and Next 119 currencies, partly offset by the weakness of the pound sterling against the US dollar. As a number of our competitors report in US dollars and in euros, appendices 2 and 3 show WPP’s interim results in reportable US dollars and euros respectively. This shows that US dollar reportable revenues were up 2.9% to $7.844 billion, which compares with the $6.868 billion of our closest competitor and euro reportable revenues were up 11.5% to €6.049 billion, which compares with €3.084 billion of our nearest European-based competitor.
On a like-for-like basis, which excludes the impact of acquisitions and currency, revenues were up 3.6% in the first half, with gross margin up 3.3%. In the second quarter, like-for-like revenues were up 3.2%, less than the first quarter 4.0%, with gross margin up 2.6%, following 4.0% in the first quarter. Data continues to reflect increased advertising and promotional spending – with the former tending to grow faster than the latter, which from our point of view is more positive – across most of the Group’s major geographic and functional sectors. Quarter two saw a continuation of the strength of advertising spending in fast moving consumer goods, especially. Nonetheless, clients understandably continue to demand increased effectiveness and efficiency, i.e. better value for money. Although corporate balance sheets are much stronger than pre-Lehman and confidence is higher as a result, the Eurozone, Middle East, China hard or soft landing and US deficit uncertainties demand caution. The $2 trillion net cash lying virtually idle in those balance sheets, seems destined to remain so.
Headline EBITDA was up 10.0% to £682 million and up 13.0% in constant currencies. Headline operating profit was up 10.1% to £570 million from £518 million and up 13.5% in constant currencies, now well over half a billion pounds sterling. It should be noted that our profitability tends to be more skewed to the second half of the year compared with our competitors.
Headline operating margins were up 0.5 margin points to 11.5% compared to 11.0% in the first half of last year, in line with the Group’s full year margin target of a 0.5 margin point improvement. On a like-for-like basis, operating margins were up 0.7 margin points. Headline gross margin margins were up 0.6 margin points to 12.5%.
Given the significance of consumer insight revenues to the Group, gross margin margins are probably a more meaningful measure of competitive margin performance. All these margin comparisons can be regarded as “clean” margin increases that are not impacted by the “one-off” provisions, that seem to be increasingly common within our industry.
On a reported basis, operating margins, before all incentives , were 14.0%, up 0.1 margin points, compared with 13.9% last year. Like-for-like operating margins, before all incentives10, were up 0.3 margin points to 14.1%. The Group’s staff cost to revenue ratio, including incentives, increased by 0.4 margin points to 61.1% compared with 60.7% in the first half of 2011. This reflected the impact of increasing staff numbers in the second half of 2011 and increasing investment, mostly in existing talent, particularly in the faster growing geographic and functional markets, as like-for-like revenues and gross margin continued to increase significantly.
On the same basis, the Group’s staff cost to revenue ratio, excluding incentives, increased by 0.9 margin points to 58.6% from 57.7%.
During 2011, the Group continued to benefit from containing operating costs, with improvements across most categories, particularly direct, property, commercial and office costs.
In the first half of 2012, reported operating costs rose by 5.0% and by 6.0% in constant currency, compared with reported revenue growth of 5.5% and constant currency growth of 6.8%. Reported staff costs excluding all incentives rose by 7.0% and by 8.0% in constant currency. Incentive costs amounted to £127.4 million or 19.0% of headline operating profits before incentives and income from associates, compared to £139.3 million last year, or 22.0%, a decrease of £11.9 million or 8.5%. Target incentives are set at 15% of operating profit before bonus and taxes, maximum at 20% and super-maximum at 25% in some instances.
On a like-for-like basis, the average number of people in the Group, excluding associates, was 113,311 in the first half of the year, compared to 110,365 in the same period last year, an increase of 2.7%. On the same basis, the total number of people in the Group, excluding associates, at 30 June 2012 was 113,761 compared to 111,960 at 30 June 2011, an increase of 1,801 or 1.6%, reflecting careful control of headcount increases. On the same basis revenues increased 3.6% and gross margin 3.3%.
Interest and taxes
Net finance costs (excluding the revaluation of financial instruments) were up slightly at £103.2 million compared to £100.9 million in 2011, an increase of £2.3 million, reflecting higher long-term funding costs and higher levels of average net debt.
The tax rate on headline profit before tax was 22.0% (2011 22.0%). This excludes the impact of the net deferred tax credit in relation to the amortisation of acquired intangible assets and other goodwill items. The tax rate on reported profit before tax was 14.2% (2011 21.4%).
Earnings and dividend
Headline profit before tax was up 11.9% to £467 million from £417 million, or up 17.1% in constant currencies.
Reported profit before tax rose by 7.0% to £358 million from £334 million, principally reflecting lower re-measurement gains on step-ups in associates than in 2011. In 2011, reported profit before tax rose by 37%, to £334 million, partly driven by gains on re-measurement. In constant currencies, reported profit before tax, for the first half of 2012, rose by 13.4%.
Profits attributable to share owners rose by 20.4% to £278 million from £231 million.
Diluted headline earnings per share rose by 13.2% to 25.8p from 22.8p. In constant currencies, earnings per share on the same basis rose by 18.6%. Diluted reported earnings per share were up 19.3% to 21.6p and up 26.1% in constant currencies.
In line with the statement made in the Group’s 2010 Preliminary Results, announcing the objective to raise the dividend pay-out ratio from around a third to 40%, the Board declares an increase of 18% in the first interim dividend to 8.80p per share, 500 basis points greater than the growth in diluted earnings per share, in line with previous practice. The dividend pay-out ratio for the first half is, therefore, 34%, reflecting the stronger weighting of the second interim dividend. The record date for the first interim dividend is 12 October 2012, payable on 12 November 2012.
Following share owner approval at the Company’s General Meeting in 2011, the Board has put in place a Scrip Dividend Scheme, which enables share owners to elect to receive new fully paid ordinary shares in the Company instead of cash dividends. This scheme commenced with the second interim dividend for 2010.
The Company continues to operate the Dividend Access Plan, which allows share owners who have elected (or, by virtue of holding 100,000 or fewer shares, are deemed to have elected) to participate in the plan to receive cash dividends from a UK source without being subject to any Irish or UK withholding taxes.
The United Kingdom Coalition Government has now enacted legislation covering the taxation of foreign profits from 2013. This will mean that, at least for the life of this Government, there will be no tax cost to the Group by returning its Headquarters to the United Kingdom from Ireland. The decision to return to the United Kingdom has already been approved by the Board and will require share owners consent at an EGM planned for early December 2012. Unfortunately, one of the consequences of the change in domicile is the loss of the scrip dividend alternative, which will affect UK tax-paying individual share owners the most.
Further details of WPP’s financial performance are provided in Appendices 1, 2 and 3.
The pattern of revenue growth differed regionally. The tables below give details of revenue and revenue growth by region for the second quarter and first half of 2012, as well as the proportion of Group revenues and operating profit and operating margin by region;
|£ million||Q2 2012||reported||constant12||LFL13||% group||Q2 2011||% group|
|W. Europe||624||- 3.0%||5.3%||0.8%||24.2%||643||25.8%|
|AP, LA, AME, CEE14||765||6.2%||11.1%||9.8%||29.6%||720||28.9%|
|£ million||H1 2012||reported||constant12||LFL||% group||H1 2011||% group|
|AP, LA, AME, CEE14||1,446||8.5%||11.1%||9.7%||29.1%||1,333||28.3%|
Operating profit analysis (PBIT)
|£ million||H1 2012||% margin||H1 2011||% margin|
|AP, LA, AME, CEE||163||11.2%||141||10.6%|
North America revenue growth slowed in the second quarter, following reduced client spending in parts of the healthcare business, custom research, the Group’s call centre operation and public affairs businesses in Washington, in advance of the US General Election.
However, United Kingdom revenue growth improved over the first quarter and continued to show strong growth, with constant currency revenues up over 6% in the second quarter and up 3.5% like-for-like. The Group’s media investment management businesses, the Ogilvy Group and Hogarth showed particularly strong growth.
Western Continental Europe revenue growth, as with the USA, slowed in the second quarter, with constant currency revenues up 5.3% and up 0.8% like-for-like. Germany, Italy and Switzerland showed high single digit growth in the second quarter, but Spain, Portugal, France, Greece, Ireland, the Netherlands, Denmark and Finland remain slower.
Asia Pacific, Latin America, Africa & the Middle East and Central and Eastern Europe remained the strongest region, with constant currency revenues up 11.1% in the second quarter and up 9.8% like-for-like, slightly ahead of the first quarter like-for-like growth of 9.5%. This double digit growth was driven principally by Latin America and the BRICs15 and Next 1116 parts of Asia Pacific and the CIVETS17 and the MIST18. Africa showed a sharp improvement in the second quarter, with like-for-like revenues up over 17%, with particularly strong growth in South Africa, Kenya, Nigeria and Egypt.
As in the first quarter, Latin America showed the strongest growth of all our sub-regions in the second quarter, with like-for-like revenues up well over 13%. Growth in the BRICs was up almost 14% on a like-for-like basis in the second quarter, with Next 11 and CIVETS up well over 11% and up almost 13% respectively on the same basis. In Central and Eastern Europe, revenues were up over 4% like-for-like in the second quarter, slightly below the first quarter, with double digit growth in Russia, Romania, the Slovak Republic and Kazakhstan, but with Poland, Hungary, the Ukraine and Czech Republic slower.
In the first half of 2012, over 29% of the Group’s revenues came from Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, an increase of almost 1.0 percentage point compared with the first half of last year and against the Group’s strategic objective of 35-40% in the next three to four years.
Business sector review
The pattern of revenue growth also varied by communications services sector and operating brand. The tables below give details of revenue, revenue growth by communications services sector as well as the proportion of Group revenues for the second quarter and first half of 2012 and operating profit and operating margin by communications services sector;
|£ million||Q2 2012||reported||constant||LFL||% group||Q2 2011||% group|
|PR & PA20||234||5.6%||5.8%||0.3%||9.1%||221||8.9%|
|BI, HC & SC21||653||6.0%||8.3%||2.2%||25.3%||616||24.7%|
|£ million||H1 2012||reported||constant||LFL||% group||H1 2011||% group|
|PR & PA||459||6.8%||6.3%||1.0%||9.2%||430||9.1%|
|BI, HC & SC||1,278||8.3%||9.1%||3.0%||25.7%||1,179||25.0%|
Operating profit analysis (PBIT)
|£ million||H1 2012||% margin||H1 2011||% margin|
|PR & PA||62||13.5%||67||15.5%|
|BI, HC & SC||141||11.0%||126||10.7%|
Advertising and Media Investment Management
As in the first quarter, advertising and media investment management remains the strongest performing sector. Constant currency revenues grew by 7.0% in the second quarter, compared with 8.4% in the first quarter, with like-for-like growth of 5.9%, very similar to the first quarter like-for-like growth of 6.2%. Growth in the Group’s advertising businesses was slightly stronger than the first quarter, with media investment management slightly weaker, although even then like-for-like growth was up strongly at almost 12%. Of the Group’s advertising networks, as in the latter part of 2011 and the first quarter of 2012, Ogilvy & Mather Advertising continued the strong start to the year with double digit growth in North America and Latin America, following several major new business successes towards the end of 2011. Growth in the Group’s media investment management businesses was consistently strong throughout 2011 and this has continued into the first half of 2012, with constant currency revenues up over 14% for the first half and like-for-like growth up over 12%. This like-for-like growth rate is yet again stronger than pure play listed media planning and buying competitors, of which there are now none, all having been absorbed into full-service groups.
The Group gained a total of £2.475 billion ($3.960 billion) in net new business wins (including all losses and excluding retentions) in the first half, compared to £1.201 billion ($1.922 billion) in the same period last year. Of this, Ogilvy & Mather Worldwide, JWT, Y&R, Grey and United generated net new business billings of £593 million ($949 million). Also, out of the Group total, GroupM, the Group’s media investment management company, which includes Mindshare, MEC, MediaCom, Maxus, GroupM Search and Xaxis, together with tenthavenue, generated net new business billings of £1.502 billion ($2.403 billion). This new business performance ranks top of the class in all new business surveys in the first half.
Reported operating margins grew strongly, increasing by 1.6 margin points to 13.9% in the first half, as revenue and cost growth continued to be well balanced.
On a constant currency basis, consumer insight revenues grew 3.1% in the second quarter, very similar to the first quarter, with like-for-like revenues up 0.8% compared with 1.3% in the first quarter. Like-for-like revenues in the faster growing markets of Asia Pacific, Latin America, Africa and the Middle East were up strongly and ahead of the first quarter, but the USA, the UK and Western Continental Europe softened in the second quarter, but less so than indicated by competitors’ comparative data. In the US, the custom research business in TNS and Millward Brown, together with Added Value and the call centre operation were the most affected. Reported operating margins slipped 0.5 margin points to 7.0%, partly due to client pricing pressure and additional re-structuring severance in the USA, the UK and Western Continental Europe and significant technology investments.
Public Relations and Public Affairs
In constant currencies, public relations and public affairs revenues were up 5.8% in the second quarter, with like-for-like up 0.3%. These compare to 6.8% and 1.9% respectively in the first quarter. The USA, the UK and Asia Pacific grew less strongly in the second quarter, with the public affairs businesses in Washington and Penn Schoen Berland, the USA polling business in Burson-Marsteller, particularly affected. Cohn & Wolfe continued the strong growth seen in the first quarter, with Hering Schuppener, one of the Group’s specialist PR businesses in Germany, also improving. Reported operating margins fell 2.0 margin points to 13.5%, with most businesses, except Cohn & Wolfe, showing lower margins.
Branding and Identity, Healthcare and Specialist Communications
At the Group’s branding and identity, healthcare and specialist communications businesses (including direct, digital and interactive) constant currency revenues grew strongly at 8.3% in the second quarter, with like-for-like growth of 2.2%. This compares to like-for-like growth of 3.8% in the first quarter as the Group’s branding & identity businesses in the UK, healthcare and direct, digital and interactive in Western Continental Europe saw slower growth. The Group’s specialist communications businesses continued to perform strongly in the second quarter. Reported operating margins improved 0.3 margin points to 11.0% in the first half.
People, Clients, “Horizontality” and Countries
Including associates, the Group currently employs over 162,000 full-time people in over 3,000 offices in 110 countries. It services 340 of the Fortune Global 500 companies, 29 of the Dow Jones 30, 64 of the NASDAQ 100, 28 of the Fortune e-50 and 653 national or multi-national clients in three or more disciplines. 390 clients are served in four disciplines and these clients account for over 55% of Group revenues. This reflects the increasing opportunities for co-ordination between activities both nationally and internationally. The Group also works with 320 clients in 6 or more countries. The Group estimates that more than 35% of new assignments in the first half of the year were generated through the joint development of opportunities by two or more Group companies. “Horizontality” is clearly becoming an increasingly important part of client strategies, particularly as they continue to invest in brand in slower-growth markets and both capacity and brand in faster-growth markets.
Cash flow highlights
In the first half of 2012, operating profit was £455 million, depreciation, amortisation and impairment £194 million, non-cash share-based incentive charges £44 million, net interest paid £107 million, tax paid £143 million, capital expenditure £116 million and other net cash inflows £48 million. Free cash flow available for working capital requirements, debt repayment, acquisitions, share re-purchases and dividends was, therefore, £375 million.
This free cash flow was absorbed partly by £140 million in net cash acquisition payments and investments (of which £50 million was for earnout payments and loan note redemptions with the balance of £90 million for investments and new acquisition payments net of disposal proceeds) and £66 million in share repurchases, a total outflow of £206 million. This resulted in a net cash inflow of £169 million, before any changes in working capital.
A summary of the Group’s unaudited cash flow statement and notes as at 30 June 2012 is provided in Appendix 1.
In line with the Group’s strategic focus on new markets, new media and consumer insight, the Group completed 40 transactions in the first half; 20 acquisitions and investments were in new markets (of which 14 were in new media), 13 in consumer insight, including data analytics and