1st Quarter Results
WPP Group PLC
22 April 2005
For Immediate Release 22 April 2005
WPP
QUARTERLY TRADING UPDATE
REPORTED REVENUES UP OVER 16%
CONSTANT CURRENCY REVENUES UP OVER 16%
LIKE-FOR-LIKE REVENUES UP ALMOST 6%
FIRST QUARTER OPERATING MARGIN ABOVE BUDGET
FULL YEAR OPERATING MARGIN FORECAST TO INCREASE IN
LINE WITH TARGET
Current Trading
Reported revenues rose by over 16%. In constant currencies, first quarter
revenues were up over 16%, primarily reflecting strong organic growth and a
first-time contribution from Grey Global Group ("Grey") from 7 March. The
impact of currency in the first quarter of 2005 was minimal. On a like-for-like
basis, excluding acquisitions and currency fluctuations, revenues were up almost
6%. This maintains the improvement in the organic growth rate of the last two
quarters of 2004 and reflects the growing focus by clients on improving
profitability through innovation and branding and top line growth, rather than
by relying solely on cost cutting.
As shown in the appendix, on a constant currency basis, all regions showed
double digit revenue growth. In North America, revenues were up over 16%. In
Europe, the UK was up 12% and Continental Europe up over 15%. Asia Pacific,
Latin America, Africa and the Middle East was up 22%.
By communications services sector, advertising & media investment management was
up over 17%, information, insight & consultancy up 19%, public relations &
public affairs up over 12%, and branding & identity, healthcare and specialist
communications up almost 15%.
Net new business billings of £875 million ($1.62 billion) were won during the
first quarter. The Group continues to benefit from consolidation trends in the
industry, winning several large assignments from existing and new clients.
In the first quarter both profitability and operating margin were ahead of
budget. Full year margin forecasts are in line with the Group's revised
combined margin target for 2005, including Grey, of 14.3%.
The Group's operating companies continued to improve productivity. On a
pro-forma basis, the number of people in the Group (excluding associates) was up
3.8% at 31 March 2005 to 71,097, as compared to the previous year. In the first
quarter of 2005, average headcount on a like-for-like basis was up 5.2% to
64,368, compared with the first quarter of 2004.
Balance Sheet and Cash Flow
The Group continues to implement its strategy of using free cash flow to enhance
share owner value through a judicious combination of capital expenditure,
acquisitions and share cancellations, whilst ensuring that these expenditures
are covered by free cash flow.
Average net debt in the first quarter of 2005 was down £240 million to £586
million, compared to £826 million in 2004, at 2005 exchange rates. The current
net debt figure compares with a market capitalisation of approximately £7.5
billion. Net debt at 31 March 2005 was £938 million compared to £825 million
in 2004 (at constant exchange rates) an increase of £113 million, reflecting a
£384 million gross cash payment for Grey. In the twelve months to 31 March
2005, the Group's free cash flow was £572 million. Over the same period, the
Group's capital expenditure, acquisitions and share cancellations were £646
million (including a £384 million gross cash payment for Grey).
In the first quarter of 2005, in addition to the completion of the acquisition
of Grey, the Group made acquisitions or increased equity interests in
advertising and media investment management in the United Kingdom, Denmark and
Argentina; in information, insight and consultancy in Hong Kong; in public
relations and public affairs in Denmark; in healthcare in the United States,
Netherlands and Switzerland; and in direct, internet and interactive in the
United States.
In the first quarter of 2005, 3,367,000 ordinary shares were purchased, at an
average price of £6.17 per share and total cost of £20.8 million. 2,250,000 of
these shares were cancelled. The company's objective remains to repurchase up
to 2% annually of its share base in the open market at an approximate cost of
£150 million, when market conditions are appropriate.
International Financial Reporting Standards ("IFRS")
In addition to the quarterly trading update, attached as a separate appendix are
the changes to the full year 2004 financial statements as a result of adopting
IFRS.
As disclosed previously, the major impact on the Group results is a charge for
share based compensation, a reduction in equity income as a result of showing
equity income net of taxes, and an increase in the Group's reported tax rate.
In addition there is a reduction of £680 million in goodwill and corporate
brands, the majority of which arises as a result of translating historic
goodwill and brands (previously fixed in sterling), on the opening balance sheet
at 31 December 2003 exchange rates.
The impact of all this on reported earnings per share is a reduction of over 6%.
This reduction at the after tax earnings level is greater than at the
operating level, due to the disproportionate impact of certain items on the
Group's reported tax charge. None of these adjustments impact the cash earnings
per share, cash taxes paid, or the cash generating ability of the Group.
Future Objectives
The Group continues to focus on its key objectives of improving operating
profits by 10% to 15% per annum; improving operating margins by half to one
margin point per annum; improving staff cost to revenue ratios by 0.6 margin
points per annum; growing revenue faster than industry averages; improving our
creative reputation and stimulating co-operation among Group companies.
For further information:
Sir Martin Sorrell )
Paul Richardson ) (44) 20 7408 2204
Feona McEwan )
Fran Butera (1) 212 632 2235
This press release may contain forward-looking statements within the meaning of
the federal securities laws. These statements are subject to risks and
uncertainties that could cause actual results to differ materially including
adjustments arising from the annual audit by management and the company's
independent auditors. For further information on factors which could impact the
company and the statements contained herein, please refer to public filings by
the company with the Securities and Exchange Commission. The statements in this
press release should be considered in light of these risks and uncertainties.
Appendix: Revenue and revenue growth by region and communications services
sector
3 months ended March 31, 2005
Revenue Constant
Growth Currency
Region Reported Growth1
2005 % 2004 % 2005/2004 2005/2004
£m Total £m Total % %
North America 443.9 40 390.3 41 13.7 16.6
United Kingdom 184.4 17 164.7 17 12.0 12.0
Continental Europe 291.5 26 246.0 26 18.5 15.5
Asia Pacific, Latin
America, Africa
& Middle East 194.7 17 159.3 16 22.2 22.0
TOTAL GROUP 1,114.5 100 960.3 100 16.1 16.4
Revenue Constant
Communications Services Growth Currency
Sector Reported Growth1
2005 % 2004 % 2005/2004 2005/2004
£m Total £m Total % %
Advertising, Media
Investment
Management 515.9 46 439.5 46 17.4 17.3
Information, Insight &
Consultancy 188.7 17 158.3 16 19.2 19.0
Public Relations
& Public Affairs 117.1 11 105.3 11 11.2 12.4
Branding & Identity,
Healthcare and
Specialist Communications 292.8 26 257.2 27 13.8 14.8
TOTAL GROUP 1,114.5 100 960.3 100 16.1 16.4
1 Constant currency growth excludes the effects of currency movements.
Appendix II
WPP GROUP PLC
Impact of IFRS on Preliminary Results
For the year ended 31 December 2004
Introduction
WPP Group plc (WPP) currently prepares its primary financial statements under UK
Generally Accepted Accounting Practice (UK GAAP). For periods beginning on or
after 1 January 2005, all listed companies in the European Union, including WPP,
are required to prepare their consolidated financial statements in accordance
with International Financial Reporting Standards (IFRS) including International
Accounting Standards (IAS). WPP's first IFRS results will be its interim
results for the six months ending 30 June 2005 and the Group's first Annual
Report under IFRS will be for the year ending 31 December 2005. WPP's date of
transition to IFRS is 1 January 2004 (the transition date).
The financial information contained in this appendix has been prepared by
management using their best knowledge and judgement of the expected standards
and interpretations of the International Accounting Standards Board, facts and
circumstances, and accounting policies that will be applied when the company
prepares its first complete set of IFRS financial statements as at 31 December
2005. Therefore, until such time, the possibility cannot be excluded that the
comparative information included in that first complete set of IFRS financial
statements may not be consistent with the disclosures below. Moreover, attention
is drawn to the fact that, under IFRSs, only a complete set of financial
statements comprising a balance sheet, income statement, statement of changes in
equity, cash flow statement, together with comparative financial information and
explanatory notes, can provide a fair presentation of the company's financial
position, results of operations and cash flow.
The following analysis has been prepared substantially on the basis of all IAS
and IFRS, and related interpretations, published by the International Accounting
Standards Board (IASB), and currently in issue. Certain of these standards are
subject to ongoing amendment by the IASB, and subsequent approval by the
European Commission, and are therefore subject to possible change.
Consequently, the information contained within this Appendix may also require
amendment at a future date.
In preparing this financial information, the Group has assumed that the
Amendment to IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans
and Disclosures will, in due course, be endorsed by the European Commission.
The effect that the transition from UK GAAP to IFRS would have on the Group's
reported financial position, financial performance and cash flows for 2004 is
explained in the following schedules included in this Appendix:
• IFRS 1 exemptions
• Summary unaudited financial statements
• Key impact analysis
• Reconciliations of:
• Income statement for the year ended 31 December 2004
• Balance sheet as at 31 December 2004
• Cash flow statement for the year ended 31 December 2004
The financial information presented is unaudited.
IFRS 1 Exemptions
IFRS 1 (First-time adoption of International Financial Reporting Standards)
allows a number of exemptions from the full requirements of IFRS for those
companies adopting IFRS for the first time. WPP has taken advantage of certain
of these exemptions as follows:
Financial Instruments
The Group has taken advantage of the exemption available under IFRS 1 not to
apply IAS 39 (Financial Instruments: Recognition and Measurement) and IAS 32
(Financial Instruments: Disclosure and Presentation) in respect of the year
ended 31 December 2004. UK GAAP has continued to be applied in accounting for
financial instruments in this period. The Group will adopt IAS 39 and IAS 32
with effect from 1 January 2005 and consequently restate the balance sheet at
that date in accordance with the requirements of these standards, which will
generally mean a recognition of financial instruments at fair value.
Business Combinations
The Group has elected not to apply IFRS 3 (Business combinations)
retrospectively to business combinations that completed prior to 1 January 2004.
Share-based Payments
IFRS 2 applies to all share-based payments granted since 7 November 2002, but
the Group has elected for full retrospective restatement as this better
represents the ongoing charge to the income statement.
Presentation of Financial Information
The primary financial statements contained in this appendix have been presented
substantially in accordance with the requirements of IAS 1 (Presentation of
Financial Statements). This presentation may require further modification in
the event that further guidance is published or as practice develops.
Summary unaudited financial statements
Summary reported income statement:
2004 2004
UK GAAP IFRS
Revenue £4,300m £4,300m
PBIT £529m £507m
PBIT margin 12.3% 11.8%
PBT £457m £434m
Earnings £292m £273m
Diluted earnings per share 25.0p 23.4p
Headline PBIT, Headline PBT and Headline Earnings
As a result of the change in presentation in the income statement in respect of
income from associates, as well as other changes described below, the Group has
redefined certain of its key performance metrics or 'Headline' profits and
margins. An analysis of how the Group will calculate these under IFRS is
presented in Appendix IV.
2004 2004
UK GAAP IFRS
Revenue £4,300m £4,300m
Headline PBIT £608m £560m
Headline PBIT margin 14.1% 13.0%
Headline PBT £537m1 £490m
Headline earnings £373m1 £328m
Headline diluted earnings per share 31.6p1 27.9p
1Restated to include interest on defined benefit pension schemes of £10m as a
deduction from Headline profits
Summary Balance Sheet
2004 2004
UK GAAP IFRS
Non current assets £6,519m £5,959m
Net current liabilities £(421)m £(445)m
Net assets £3,966m £3,057m
Total capital employed £3,966m £3,057m
Appendix II
WPP GROUP PLC
Impact of IFRS on Preliminary Results
For the year ended 31 December 2004
Changes in Accounting Policies
Key Impact Analysis
The principal differences between UK GAAP and IFRS as they apply to WPP are set
out below.
Changes in Presentation of Financial Statements
The financial statements in this appendix have been prepared substantially in
accordance with IAS 1 (Presentation of Financial Statements). The most
significant presentational differences arising from this change in format are as
follows:
Income from Associates
In the current income statement format, in accordance with UK GAAP, the Group
separately presents its share of operating profit, interest, minority interests
and tax from associate undertakings. Under IAS 1, these results are aggregated
into a single line in the income statement. The effect is to reduce reported
profit before interest and taxes by £19m in 2004, although there is no impact on
earnings.
Working Capital Facility
In the balance sheet, the Group has historically presented its working capital
facility (the advance of cash financing against which certain trade debts have
been assigned) as a deduction from debtors, in accordance with the 'linked
presentation' required by FRS 5 (Reporting the substance of transactions).
Under IFRS this presentation is not permitted, and the cash advance is shown as
a bank borrowing within creditors: amounts falling due within one year. As a
result of this change, net debt is restated to include this facility as a
borrowing, whereas previously it was treated as a reduction in working capital.
The impact is to increase net debt at 31 December 2004 by £261m to £561m. The
cash flows of the Group in 2004 are unaffected by this change. There is also no
change to the income statement presentation of the charges on this facility
which are included in finance costs.
IFRS 2 Share-based Payment
Under UK GAAP, where the Group grants share options at a strike price equal to
or greater than the market price on the date of the grant, no compensation
expense is recognised. For share awards other than stock options, the charge
to the Group's income statement is based on the intrinsic value (market value on
grant date) of the award, spread over the relevant performance period, in
accordance with UITF 38 (Accounting for ESOP trusts). IFRS 2 requires that
share-based payments (including share options) are recognised in the income
statement as an expense, spread over the relevant vesting period using a fair
value model. The Group has used a Black-Scholes valuation model for this
purpose.
IFRS 2 permits prospective adoption for grants made after November 2002, but the
Group has chosen to adopt IFRS 2 on a full retrospective basis, for all option
and share award grants as the resulting charge better reflects the ongoing
impact on the Group. The impact on the income statement for the year ended 31
December 2004 is an after-tax charge of £27m.
Deferred tax is provided based upon the expected future tax deductions relating
to share-based payment transactions, and is recognised over the vesting period
of the relevant share award schemes. For the year ended 31 December 2004, this
results in an additional deferred tax credit to the income statement of £2m.
IFRS 3 Business Combinations
The Group has elected not to apply IFRS 3 retrospectively to business
combinations completed prior to 1 January 2004, an exemption permitted by IFRS
1.
IFRS 3 prohibits amortisation of goodwill and instead requires annual impairment
testing. Under UK GAAP, WPP amortises a number of acquisitions where the life
of the goodwill is determined to be finite. In the IFRS financial information
presented, this amortisation has been reversed from the date of transition and
the relevant goodwill tested for impairment at 31 December 2004.
The Group has also conducted an impairment review of goodwill at 1 January 2004,
in accordance with the requirements of IAS 36 (Impairment of Assets).
The impact on the income statement for the year ended 31 December 2004 is to
eliminate goodwill amortisation of £42.5m. No additional impairment of goodwill
arose at 1 January 2004, however there was additional impairment of £5m for the
year ended 31 December 2004.
When the Group makes acquisitions, deferred tax assets are established in
relation to tax losses and other tax attributes to the extent that it is
probable that they will be utilised in the future. If the performance and
profits of acquisitions are higher than originally anticipated then the Group
may recognise the additional tax benefit of unbooked tax attributes in the IFRS
income statement. IFRS 3 and IAS 12 (Income Taxes) require a write-down of
goodwill equal to the tax benefit of any tax attributes that are subsequently
recognised if a deferred tax asset has not been established at the time of
acquisition. The write-down of goodwill adjusts goodwill in the balance sheet
to the amount it would have been had a deferred tax asset been established on
all of the tax attributes utilised. Due to the better than expected performance
of certain acquisitions in the year ended 31 December 2004 there was an
additional goodwill adjustment of £13m charged to operating profit relating to
the utilisation of pre-acquisition tax attributes that previously couldn't be
recognised due to insufficient evidence that they were recoverable. The Group
expects the annual goodwill adjustment to be lower in the future.
IAS 21 requires goodwill and fair value adjustments on acquisitions to be
recorded in the functional currency of the acquiree rather than the functional
currency of the acquirer. As permitted by IFRS 1 we are applying IAS 21
retrospectively to goodwill and fair value adjustments arising in business
combinations that occurred before the date of transition to IFRS. We have
retranslated our goodwill and corporate brands on this basis which has resulted
in a decrease in the carrying value of these assets at 31 December 2004 of
£679m, and an equivalent reduction in equity.
IFRS 1 has a further impact in that goodwill previously written off to reserves
under UK GAAP is not recycled to the income statement in the event of the
disposal of the business concerned.
Appendix II
WPP GROUP PLC
Impact of IFRS on Preliminary Results
For the year ended 31 December 2004
Changes in Accounting Policies (continued)
IAS 38 Intangible Assets
The Group has also applied IAS 38 to acquisitions completed since the initial
adoption date which has resulted in the recognition of intangible assets of £7m
at 31 December 2004 which would not qualify for recognition under UK GAAP. These
largely comprise corporate brand names.
These intangibles are amortised over their useful economic lives, which vary
depending on the individual characteristics of the intangibles concerned, but
are no more than 10 years. The impact on the income statement for the year ended
31 December 2004 is not material.
Under UK GAAP, capitalised computer software is included within tangible fixed
assets on the balance sheet. Under IFRS, only computer software that is integral
to a related item of hardware should be included as property, plant and
equipment. All other capitalised computer software should be shown as an
intangible asset.
Accordingly, a reclassification of £24m has been made in the 31 December 2004
balance sheet from property plant and equipment to intangible assets.
IAS 28 Investments in Associates
IFRS requires equity accounting for associates' losses to cease at the point
that the carrying value of the net assets of the relevant associate are nil.
Further losses are only accrued if the investor has a legal or constructive
obligation for the losses. The Group has therefore ceased to recognise equity
losses where the net assets of the associate concerned are nil or negative,
where appropriate. This did not result in any impact on the 2004 income
statement.
IAS 10 Events After the Balance Sheet Date
IAS 10 does not permit dividends proposed after the balance sheet date to be
recognised as a liability at that date because they do not represent a present
obligation as defined by IAS 27 (Provisions, Contingent Liabilities and
Contingent Assets).
The impact of this change is to exclude the final dividend of £62m from the
income statement for the year ended 31 December 2004, but include the prior year
final dividend of £52m as an expense in 2004. This results in a net increase in
retained profit of £10m. The respective restated balance sheets at 31 December
2004 and 1 January 2004 exclude these dividends.
IAS 19 Employee Benefits
The group fully implemented the UK Accounting Standard FRS 17 (Retirement
Benefits) in 2001. This standard is consistent with IAS 19 and the Amendment to
IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans and
Disclosures adopted by the IASB in December 2004, which encourages early
adoption prior to its expected effective date of 1 January 2006. On the basis
that the Amendment will be endorsed by the European Commission in the future,
the Group has not made any changes to its accounting policies in respect of
accounting for pensions.
IAS 32 and IAS 39 Financial Instruments
The Group has taken advantage of the exemption available under IFRS 1 not to
apply IAS 32 and IAS 39 in respect of the year ended 31 December 2004. UK GAAP
has continued to be applied to financial instruments in this period.
The Group will therefore adopt IAS 32 and IAS 39 on 1 January 2005 and
consequently restate the opening balance sheet at that date to an IFRS basis in
compliance with these standards.
The most significant impact on the income statement of adopting IAS 32 and IAS
39 at 1 January 2005 will be as follows:
Convertible Bonds
Under UK GAAP, convertible bonds are reported as a liability unless conversion
actually occurs, and no gain or loss is recognised on conversion. Under IAS
32, classification of such compound instruments is undertaken based on the
substance of the contractual arrangements and, consequently, the Group's
compound instruments will be split into liability and equity elements, based on
the fair value of the debt component at the date of issue.
The income statement charge for the finance cost will continue to be spread
evenly over the term of the bonds so that at redemption the liability equals the
redemption value. However, under IFRS the initial recognition of the liability
is for a lower amount than under UK GAAP and consequently the finance cost over
the period is higher.
At 1 January 2005, the Group had in issue two convertible bonds: £450m bond
maturing in April 2007 and $287.5m bond maturing in January 2005. The impact on
the 1 January 2005 transition balance sheet from these bonds will be:
• £98m reclassification from debt to equity to separately account for the
equity element of the convertible bonds (£69m relating to the £450m bond and
£29m relating to the $287.5m bond).
• £66m adjustment to debt and retained earnings to reflect the cumulative extra
amount of financing costs that would have been expensed through the income
statement as at 31 December 2004 (£37m relating to the £450m bond and
£29m relating to the $287.5m bond).
• The impact on the income statement for the year ending 31 December 2005 is
expected to be an increase in interest payable and similar charges of
£14m, in relation to convertible bonds in issue at 1 January 2005 (£13.7m
relating to the £450m bond and £0.3m relating to the $287.5m bond).
• The expected total interest charges for these bonds under IFRS for the year
ending 31 December 2005 will be £30m on the £450m convertible and £0.5m
on the $287.5m convertible.
On 7 March 2005 WPP completed the acquisition of Grey Global Group Inc (Grey).
Grey had in issue $150m 5% Contingent Convertible Subordinated Debentures due in
2033. The principles described above will also apply to this bond.
Hedging Instruments
The Group has a number of hedging instruments which were accounted for as hedges
under UK GAAP during 2004. On adoption of IAS 39, the Group will recognise these
hedging instruments at fair value in the balance sheet at 1 January 2005. It is
expected that subsequent movements in the fair value of these instruments will
not have a significant impact on the income statement for the year ending 31
December 2005 as they also qualify for hedge accounting under IAS 39.
From time to time, the Group uses certain short-term derivative financial
instruments to mitigate interest rate and foreign exchange rate risks. These may
not be held in qualifying hedge relationships and so movements in fair value of
the relevant instrument will be taken to the income statement. However, owing to
their short-term nature, the Group does not expect this to have a significant
impact on the income statement.
IAS 12 Income Taxes
IAS 12 requires deferred tax to be provided on all taxable temporary differences
between the book value and the tax base of assets and liabilities of the Group
rather than timing differences under UK GAAP. As a result, the Group's IFRS
balance sheet at 31 December 2004 includes additional deferred tax assets of
£11m and deferred tax liabilities of £17m in respect of the differences between
the carrying
value and tax written down value of goodwill in the Group's balance sheet. In
accordance with IAS 12, a liability of £15m has been netted off against a
deferred tax asset as both items relate to the same consolidated tax group.
There was an additional charge to the IFRS income statement of £2m in the year
ended 31 December 2004 in relation to movements in these balances. IAS 1
requires deferred tax to be classified as a 'non current' asset and accordingly
£77m of deferred tax assets reported under UK GAAP have been reclassified from '
current assets'.
IAS 12 requires a deferred tax liability to be booked in respect of the tax cost
of remitting undistributed earnings of the Group's associated undertakings and
joint ventures. At 1 January 2004 this deferred tax liability was £8m. There
was an additional charge to the IFRS income statement of £2m in the year ended
31 December 2004 in relation to undistributed earnings arising in the year
whilst foreign exchange movements led to an increase in the liability of £1m. At
31 December 2004 the deferred tax liability was £10m.
IAS 12 also requires deferred tax to be provided in respect of the Group's
future deductions in respect of share-based payments. At 1 January 2004 an
asset of £3m was recognised in respect of anticipated future tax deductions of
share-based payments.
The 2004 IFRS income statement expense for stock options was £29m. Deferred tax
of only £2m is credited to the IFRS income statement in 2004; the majority of
the expense cannot be tax effected due to either the expense not being
deductible for tax purposes or the recognition of the asset being restricted by
existing tax losses. At 31 December 2004 a deferred tax asset of £3m was held in
the balance sheet as although the asset was increased by £2m relating to the
2004 charge there were other adjustments, primarily the exercise of options,
that reduced the asset by £2m.
In accordance with IAS 12, in the year ended 31 December 2004 an amount of £9m
which had previously been credited to tax expense in the UK GAAP profit and loss
account was credited directly to equity as it related to the tax benefits of
share-based payments that exceeded the cumulative income statement expense for
those payments.
The total IFRS income statement tax charge for the year ended 31 December 2004
is £135m. In accordance with IAS 28, income from associates and joint ventures
is now shown net of tax. A reconciliation from UK GAAP to IFRS tax charge is
shown below. Under IFRS there is a net reduction of £5m in the tax charge for
the year ended 31 December 2004 which is comprised as follows:
£m
UK GAAP Profit and loss account tax charge 140
Reclass of tax charge relating to associates and joint ventures (18)
Deferred tax charge on unremitted earnings of associates
and joint ventures 2
Deferred tax credit in relation to stock option expense (2)
Tax charge in relation to the tax effect of share-based payments
now credited to equity 9
Deferred tax charge relating to goodwill 2
Other changes 2
____
IFRS Income statement tax charge 135
The effect of the adjustments required under IFRS is to increase the Group's tax
rate on Headline PBT for the year ended 31 December 2004 to 27.6% as compared
with 26.1% under UK GAAP. The primary reason for the increase in tax rate is
the reduction in IFRS Headline PBT due to the additional income statement
expense for stock options as the majority of this expense cannot be tax
effected. The Group's estimate of tax rate on Headline PBT for 2005 and 2006
remains 28-30% (excluding the impact of Grey). The introduction of IFRS does
not impact the amount of cash tax paid by the Group.
IAS 12 requires deferred tax liabilities of £300m to be recognised at 31
December 2004 in respect of intangible assets such as corporate brands which
were recognised at the time of various acquisitions including Ogilvy & Mather,
J. Walter Thompson, Hill & Knowlton and Young & Rubicam. As the Group acquired
the shares in the respective holding companies there is no tax basis in the
brands themselves and therefore the resulting deferred tax liabilities are equal
to the carrying value of the corporate brands tax effected at the appropriate
tax rate. The Group considers the appropriate tax rate to be the Group's
combined US federal and state tax rate. Normally recognition of these deferred
tax liabilities would result in a corresponding increase of goodwill in respect
of these acquisitions, however under the exemptions provided by IFRS 1 relating
to business combinations, the Group has not adjusted goodwill in respect of
acquisitions before 1 January 2004.
At 31 December 2004 the tax related adjustments under IFRS, excluding the
adjustments for corporate brands, increase total assets by £3m and total
liabilities by £27m. As a result, a net amount of £24m was debited to IFRS
Capital and Reserves as at 31 December 2004 in relation to these adjustments. As
detailed above, additional deferred tax liabilities of £300m were recognised at
31 December 2004 in relation to corporate brands; a corresponding amount was
also debited to IFRS Capital and Reserves.
Earnings per share
Earnings per share have been calculated in accordance with IAS 33 (Earnings per
share). As noted above, in accordance with IFRS 2, the Group has charged the
fair value of stock options to the income statement for 2004. IFRS 2 does not
permit any reduction in the number of shares used in the diluted earnings per
share calculation in respect of the dilutive effect of stock options, in spite
of the fact that a charge to the income statement has been made.
Appendix III WPP GROUP PLC
Preliminary results for the year ended 31 December 2004
Unaudited preliminary consolidated income statement for the year ended
31 December 2004
IFRS Reconciliation
31 Dec 2004
Reported
under
UK GAAP IFRS 3 IFRS 2 IAS 28 IAS 10
Business Share Associates Dividends
Combinations Options
£m £m £m £m £m
Revenue 4,299.5
Operating profit before goodwill 559.6 (28.9)
amortisation
Goodwill amortisation and impairment - (75.0) 34.4
subsidiaries
Operating profit 484.6 34.4 (28.9) 0.0 0.0
Goodwill amortisation and impairment - (3.5) 3.5
associates
Income from associates and joint ventures 48.1
Tax, interest and minority interest on 0.0 (18.6)
associates
Net income from associates and joint 48.1 (18.6)
ventures
Profit on ordinary activities before
interest, taxation and amounts written
off fixed asset investments 529.2 37.9 (28.9) (18.6) 0.0
Profits on disposal of fixed assets 3.0
Amounts written off fixed asset (5.0)
investments
Investment income 0.0
Finance costs (shown net under UK GAAP) (70.7) 0.1
Profit on ordinary activities before 456.5 37.9 (28.9) (18.5) 0.0
taxation
Taxation on profit on ordinary activities (140.2) 2.0 17.9
Profit on ordinary activities after 316.3 37.9 (26.9) (0.6) 0.0
taxation
Minority interests (24.0) 0.6
Profit attributable to ordinary share 292.3 37.9 (26.9) 0.0 0.0
owners
Ordinary dividends (92.0) 10.3
Retained profit for the year 200.3 37.9 (26.9) 0.0 10.3
Headline PBIT 1 607.7 0.0 (28.9) (18.6) 0.0
Headline PBIT 1 margin 14.1%
Headline PBT 1 537.02 0.0 (28.9) (18.5) 0.0
1Headline PBIT: Profit on ordinary activities before interest, taxation, goodwill impairment and fixed asset
gains and write-downs.
Headline PBT: Profit on ordinary activities before taxation, goodwill impairment and fixed asset gains and
write-downs.
2Restated to include interest on defined benefit pension schemes of £9.5m as a deduction from Headline profits.
The Calculation of Headline PBIT and Headline PBT is set out in Appendix IV.
Appendix III WPP GROUP PLC
Preliminary results for the year ended 31 December 2004
Unaudited preliminary consolidated income statement for the year ended
31 December 2004
IFRS Reconciliation - CONTINUED
31 Dec 2004
Restated
IAS 12 Income Under
Taxes Total IFRS IFRS
adjustment
Other
£m £m £m £m
Revenue 4,299.5
Operating profit before goodwill (28.9) 530.7
amortisation
Goodwill amortisation and impairment - (12.6) 21.8 (53.2)
subsidiaries
Operating profit (12.6) 0.0 (7.1) 477.5
Goodwill amortisation and impairment - 3.5 0.0
associates
Income from associates and joint ventures 0.0 48.1
Tax, interest and minority interest on (18.6) (18.6)
associates
Net income from associates and joint (18.6) 29.5
ventures
Profit on ordinary activities before
interest, taxation and amounts written off
fixed asset investments (12.6) 0.0 (22.2) 507.0
Profits on disposal of fixed assets 3.0
Amounts written off fixed asset investments (5.0)
Investment income 56.4 56.4 56.4
Finance costs (shown net under UK GAAP) (56.4) (56.3) (127.0)
Profit on ordinary activities before (12.6) 0.0 (22.1) 434.4
taxation
Taxation on profit on ordinary activities (14.7) 5.2 (135.0)
Profit on ordinary activities after taxation (27.3) 0.0 (16.9) 299.4
Minority interests (3.0) (2.4) (26.4)
Profit attributable to ordinary share owners (27.3) (3.0) (19.3) 273.0
Ordinary dividends 10.3 (81.7)
Retained profit for the year (27.3) (3.0) (9.0) 191.3
Headline PBIT 1 0.0 0.0 (47.5) 560.2
Headline PBIT 1 margin 13.0%
Headline PBT 1 0.0 0.0 (47.4) 489.6
1Headline PBIT: Profit on ordinary activities before interest, taxation, goodwill impairment and fixed asset
gains and write-downs.
Headline PBT: Profit on ordinary activities before taxation, goodwill impairment and fixed asset gains and
write-downs.
2Restated to include interest on defined benefit pension schemes of £9.5m as a deduction from Headline
profits.
The Calculation of Headline PBIT and Headline PBT is set out in Appendix IV.
Appendix III
WPP GROUP PLC
Preliminary results for the year ended 31 December 2004 Unaudited consolidated
summary interim cash flow statement for the year ended 31 December 2004
IFRS Reconciliation
UK GAAP IFRS
(IFRS format) adjustments IFRS
£m £m £m
Net cash flows from operating activities 489.0 0.0 489.0
Investing activities
Acquisitions and disposals (218.2) (218.2)
Purchases of property, plant and equipment (95.6) (95.6)
Proceeds on disposal of property, plant and equipment 9.3 9.3
Proceeds on disposal of current asset investments 9.3 9.3
Interest received 48.9 48.9
Dividends from associates 18.5 18.5
Net cash outflow from investing activities (227.8) 0.0 (227.8)
Financing activities
Issue of shares 17.9 17.9
Share repurchases and buybacks (88.7) (88.7)
Repayments of borrowings 128.6 128.6
Financing and share issue costs (5.0) (5.0)
Equity dividends paid (81.7) (81.7)
Dividends paid to minority shareholders in subsidiary
undertakings (22.5) (22.5)
Net cash outflow from financing activities (51.4) 0.0 (51.4)
Net increase in cash and cash equivalents 209.8 0.0 209.8
Translation differences (44.6) (44.6)
Cash and cash equivalents at beginning of year 1,117.8 1,117.8
Cash and cash equivalents at end of year 1,283.0 0.0 1,283.0
Reconciliation of net cash flow to movement in net
debt:
Net increase in cash and cash equivalents 209.8 0.0 209.8
Cash inflow from (increase)/decrease in debt financing (124.2) (124.2)
Debt acquired (9.6) (9.6)
Other movements (8.2) (8.2)
Translation difference (6.7) 19.4 12.7
Movement in net debt in the year 61.1 19.4 80.5
Net debt at beginning of period (361.5) (280.4) (641.9)
Net debt at end of period (300.4) (261.0) (561.4)
Appendix III WPP GROUP PLC
Unaudited preliminary consolidated balance sheet as at 31 December 2004
IFRS Reconciliation
31 Dec 2004 IFRS 3
Reported Business IAS 28 IAS 10 IAS 12
under Combinations Associates Dividends Income Tax
UK GAAP
Non current assets £m £m £m £m £m
Intangible assets:
Corporate brands 950.0 (207.4)
Goodwill 4,845.7 (436.4) (12.6)
Other 0.0
Property plant and equipment 333.8
Deferred tax assets 0.0 91.8
Investments 389.3 3.2 1.1
6,518.8 (640.6) 1.1 0.0 79.2
Current assets
Inventories and work in progress 220.6
Debtors 2,677.6 (76.6)
Trade debtors within working capital
facility:
Gross debts 545.7
Non-returnable proceeds (261.0)
284.7
Current asset investments
(short-term bank deposits) 244.0
Cash and cash equivalents 1,372.0
4,798.9 0.0 0.0 0.0 (76.6)
Current liabilities
Creditors: amounts falling due (5,220.0) 62.6 0.0
within one year
Net current liabilities (421.1) 0.0 0.0 62.6 (76.6)
Total assets less current 6,097.7 (640.6) 1.1 62.6 2.6
liabilities
Non current liabilities
Creditors: amounts falling due after
more than one year (including
convertible bonds) (1,852.6)
Deferred tax liabilities 0.0 (312.3)
Provisions for liabilities and (91.2) 4.3
charges
Post employment benefits (187.8) (14.4)
Net assets 3,966.1 (636.3) 1.1 62.6 (324.1)
Capital and reserves
Called up share capital 118.5
Share premium account 1,002.2
Shares to be issued 49.9
Merger reserve 2,920.6
Other reserves (125.5) (174.7) 28.6
Own shares (277.7)
Retained earnings 226.5 (461.6) 1.1 62.6 (352.7)
Equity share owners' funds 3,914.5 (636.3) 1.1 62.6 (324.1)
Minority interests 51.6
Total capital employed 3,966.1 (636.3) 1.1 62.6 (324.1)
Appendix III WPP GROUP PLC
Unaudited preliminary consolidated balance sheet as at 31 December 2004
IFRS Reconciliation - CONTINUED
IAS 38 31 Dec 2004
Intangibles and
software Total IFRS Restated under
reclass Other adjustment IFRS
Non current assets £m £m £m £m
Intangible assets:
Corporate brands (207.4) 742.6
Goodwill (7.0) (456.0) 4,389.7
Other 31.0 31.0 31.0
Property plant and equipment (24.0) (24.0) 309.8
Deferred tax assets 91.8 91.8
Investments 4.3 393.6
0.0 0.0 (560.3) 5,958.5
Current assets
Inventories and work in progress 220.6
Debtors (76.6) 2,601.0
Trade debtors within working capital
facility:
Gross debts 545.7
Non-returnable proceeds 261.0 261.0 0.0
261.0 261.0 545.7
Current asset investments
(short-term bank deposits) (244.0) (244.0) 0.0
Cash and cash equivalents 244.0 244.0 1,616.0
0.0 261.0 184.4 4,983.3
Current liabilities
Creditors: amounts falling due (270.4) (207.8) (5,427.8)
within one year
Net current liabilities 0.0 (9.4) (23.4) (444.5)
Total assets less current 0.0 (9.4) (583.7) 5,514.0
liabilities
Non current liabilities
Creditors: amounts falling due after
more than one year (including
convertible bonds) (2.6) (2.6) (1,855.2)
Deferred tax liabilities (312.3) (312.3)
Provisions for liabilities and 4.3 (86.9)
charges
Post employment benefits (14.4) (202.2)
Net assets 0.0 (12.0) (908.7) 3,057.4
Capital and reserves
Called up share capital 118.5
Share premium account 1,002.2
Shares to be issued 49.9
Merger reserve 2,920.6
Other reserves 181.0 34.9 (90.6)
Own shares (277.7)
Retained earnings (196.0) (946.6) (720.1)
Equity share owners' funds 0.0 (15.0) (911.7) 3,002.8
Minority interests 3.0 3.0 54.6
Total capital employed 0.0 (12.0) (908.7) 3,057.4
Appendix IV
WPP GROUP PLC
Impact of IFRS on Preliminary Results
For the year ended 31 December 2004
Reconciliation to Non-GAAP measures of performance
Reconciliation of profit on ordinary activities before interest, taxation, fixed
asset gains and write-downs to Headline PBIT for the year ended 31 December 2004
UK GAAP IFRS
£m £m
Profit on ordinary activities before interest, taxation,
fixed asset gains and write-downs
529.2 507.0
Goodwill amortisation 42.5 -
Goodwill impairment 36.0 40.6
Goodwill write-down of historical deferred tax losses - 12.6
Headline PBIT 607.7 560.2
Reported margins
UK GAAP IFRS
£m £m
Revenue 4,299.5 4,299.5
Headline PBIT 607.7 560.2
Headline PBIT margin 14.1% 13.0%
Reconciliation of profit on ordinary activities before taxation to Headline PBT
and Headline earnings for the year ended 31 December 2004
UK GAAP IFRS
£m £m
Profit on ordinary activities before taxation 456.5 434.4
Goodwill amortisation 42.5 -
Goodwill impairment 36.0 40.6
Goodwill write-down of historical deferred tax losses
- 12.6
Profits on disposal of fixed assets (3.0) (3.0)
Amounts written off fixed asset investments 5.0 5.0
Headline PBT 537.01 489.6
Taxation on profit on ordinary activities (140.2) (135.0)
Minority interests (24.0) (26.4)
Headline earnings 372.81 328.2
Calculation of effective tax rate on Headline profit before tax
UK GAAP IFRS
£m £m
Taxation on profit on ordinary activities (140.2) (135.0)
Headline PBT 537.01 489.6
Effective tax rate on Headline profit before tax 26.1%1 27.6%
Earnings per ordinary share
UK GAAP IFRS
£m £m
Headline earnings 372.81 328.2
Earnings adjustment:
Dilutive effect of convertible bonds 12.2 12.2
Weighted average number of ordinary shares 1,219,588,084 1,219,588,084
Headline diluted earnings per ordinary share 31.6p1 27.9p
1Restated to include interest on defined benefit pension schemes of £9.5m as a
deduction from Headline profits.
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