Final Results - Part One
WPP Group PLC
20 February 2002
FOR IMMEDIATE RELEASE 20 FEBRUARY 2002
WPP
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2001 - PART ONE
Revenue up almost 35% to £4.0 billion
Profit before tax, goodwill, investment gains and write-downs up almost 29% to
£490 million
Diluted earnings per share on the same basis up almost 2% at 30.6p
Final dividend up 20% to 3.06p
• Revenue up almost 35% to £4.0 billion
• Profit before goodwill, interest, tax, investment gains and write-downs
up almost 30% to £561.1 million
• Operating margins of 14.0%
• Profit before tax, goodwill, investment gains and write-downs up almost
29% at £489.8 million
• Diluted earnings per share pre-goodwill, investment gains and
write-downs up almost 2% to 30.6p from 30.1p
• Final dividend up 20% to 3.06p per share making a total for the year of
4.50p up 20% over 2000
• Net new billings of over £1.6 billion ($2.5 billion)
• Objective to achieve revised fifth margin plan of 15% operating margin
by 2002 and 15.5% by 2003
Summary of results
The Board of WPP Group plc ("WPP") announces the unaudited preliminary results
for the year ended 31 December 2001. Despite very difficult trading conditions,
particularly in the United States, these results represent record profits in the
Company's sixteenth year.
Turnover was up almost 50% to £20.9 billion, reflecting in part the full
consolidation of media investment management.
Reportable revenue was up almost 35% to £4.022 billion and gross profit up over
38% to £3.790 billion. On a constant currency basis, revenue was up 33% and
gross profit up over 36%. Pro-forma for the merger with Young & Rubicam Inc. ("
Y&R") constant currency revenue was up over 1%. On a like-for-like basis,
excluding all acquisitions, revenue was down by 3.0% and gross profit was down
4.0% on 2000.
Profit before goodwill, interest, tax, investment gains and write-downs was up
almost 30% to £561.1 million from £431.1 million and up almost 32% in constant
currencies. Pre-goodwill, operating margins (including income from associates)
were 14.0% on a reportable and constant currency basis. The margin gap between
the very best performing competition and ourselves continues to narrow. Post
goodwill, profits before interest, tax, investment gains and write-downs was up
almost 31% to £546.3 million from £417.4 million.
Operating margins before short-term and long-term incentive payments (totalling
£81 million or over 12% of operating profit before bonus and taxes) fell to
16.0% from 17.9%, reflecting the impact of more difficult trading conditions and
of the group's pay-for-performance compensation strategy. Reported operating
costs including direct costs rose by over 39% and by over 37% in constant
currency. However, in constant currency, like-for-like total operating and
direct costs were down 3.5% on the previous year. Staff costs excluding
incentives were flat, as were total salaries.
On a reported basis the Group's staff cost to gross margin ratio, excluding
severance and incentives, rose to 56.5% from 54.1%. Variable staff costs as a
proportion of total staff costs have increased over recent years, although the
impact of the recession in 2001 has reduced this ratio to 8.2% and variable
staff costs as a proportion of revenue to 4.6%. This highlights the benefits of
the increased flexibility in the cost structure. Our actual staff numbers
averaged 50,487 against 36,157 in 2000, up over 39%. On a like-for-like basis,
average headcount was down to 50,487 from 51,398, a decrease of almost 2%. At
the end of 2001 staff numbers were 51,009 compared with 55,811 at the end of
2000 on a pro-forma basis, a reduction of almost 9%.
Net interest payable and similar charges (including a notional charge for the
early adoption of FRS17) increased to £71.3 million from £51.7 million
(restated), reflecting increased profitability more than offset by debt
acquired, the increased level of acquisition activity and share repurchases.
Interest cover remains at the relatively conservative level of 7.9 times and at
8.3 times, excluding the FRS17 adjustment.
Profit before tax, investment gains and write-downs rose by almost 30% to £475.0
million from £365.7 million. On a constant currency basis, pre-tax profits were
up over 29% reflecting the weakening of sterling against the dollar,
counterbalanced to some extent by strength against the euro. If sterling had
stayed at the same average levels as 2000, profits on this basis would have been
£478.0 million.
The Group's tax rate on profits was 28%, down from 30% on the previous year,
reflecting the impact of further improvements in tax planning.
Diluted earnings per share before goodwill, investment gains and write-downs
were up almost 2% at 30.6p. In constant currency, earnings per share on the
same basis were up slightly.
All severance and restructuring costs have been included in operating profits.
However, in light of the collapse in technology equity valuations, it has been
considered prudent to write down the net balance sheet value of the Group's
investments in this area by £70.8 million. This results in diluted earnings of
23.7p per share after these non-cash write-downs. At the end of 2001, the
unrealised surplus on the Group's other quoted fixed asset investments was over
£80 million.
The Board recommends an increase of 20% in the final dividend to 3.06p per
share, making a total of 4.50p per share for 2001, a 20% increase over 2000.
The record date for this dividend is 5 June 2002, payable on 7 July 2002. The
dividend for 2001 is almost seven times covered by earnings.
Further details of WPP's financial performance are provided in Appendix I (in
sterling) and Appendix II (in euros).
Review of operations
As a result of the worldwide recession which started in the United States in the
fourth quarter of 2000 and the impact of the tragedy of 11 September, the
worldwide advertising industry shrank by approximately 5% in 2001, with
marketing services also down a similar amount. This sharp downturn affected the
United States most significantly, but also impacted Europe, Asia Pacific and
Latin America. Despite the gloomy trading conditions, the Group believes it
increased its worldwide market share.
Network television price inflation and declining audiences, fragmentation of
traditional media and the rapid development of new technologies continued to
drive experimentation by our clients in new media and non-traditional
alternatives. 1998 was really the first year when WPP's marketing services
activities represented over 50% of Group revenue. In 2001 these activities
represented over 54% of Group revenue. In addition, in 2001, our narrowly
defined internet-related revenue was over $300 million or over 5% of our
worldwide reported revenue. This compares with approximately 3% for on-line
media's share of total advertising spend in the United States and approximately
2% share worldwide. The new media continue to build their share of client
spending.
Revenue and operating profit by region
The pattern of revenue growth differed regionally. The table below gives
details of revenue and revenue growth (on a constant currency basis) by region
for 2001 as well as proportions of operating profits:
Region Revenue as a Revenue growth Operating profit as a
% of Total Group % +/(-) 01/00 % of Total Group
North America 44.3 32.8 47.5
United Kingdom 16.2 17.7 13.2
Continental Europe 22.2 46.7 21.3
Asia Pacific, Latin
America, Africa & the
Middle East 17.3 33.9 18.0
Total Group 100 33.0 100
Including Y&R, on a pro-forma combined basis, the proportion of revenue and
revenue growth by region was as follows:
Region Revenue as a Revenue growth
% of Total Group % +/(-) 01/00
North America 44.3 (3.7)
United Kingdom 16.2 2.5
Continental Europe 22.2 8.2
Asia Pacific, Latin
America, Africa & the
Middle East 17.3 5.8
Total Group 100 1.3
As can be seen, on a pro-forma combined basis, North America bore the brunt of
the recession with the United Kingdom, Continental Europe, Asia Pacific, Latin
America, Africa and the Middle East less affected.
Net new billings of £1.6 billion ($2.5 billion) were won last year. The Group
was ranked second in the net new business billings survey by Credit Suisse First
Boston for 2001.
Revenue and operating profit by communications services sector and brand
The pattern of revenue growth also varied by communications services sector and
brand. The table below gives details of revenue and revenue growth by
communications services sector for 2001 (on a constant currency basis) as well
as proportions of operating profits.
Communications services Revenue as a Revenue growth Operating profit as a
% of Total % +/(-) 01/00 % of Total Group
Group
Advertising, Media
Investment Management 45.8 30.8 56.9
Information & Consultancy 14.9 14.4 10.3
Public Relations & Public Affairs* 12.3 49.3 8.6
Branding & Identity, Healthcare
& Specialist Communications 27.0 43.1 24.2
Total Group 100 33.0 100
* The revenue figures submitted to the O'Dwyer Report reflect some public
relations income which is included here in advertising and media investment
management and branding and identity, healthcare and specialist communications.
Total public relations and public affairs revenue grew over 42% to $802 million.
Including Y&R, on a pro-forma combined basis, the proportion of revenue and
revenue growth by communications services sector was as follows:
Communications services Revenue as a Revenue growth
% of Total Group % +/(-) 01/00
Advertising, Media
Investment Management 45.8 0.3
Information & Consultancy 14.9 14.4
Public Relations & Public Affairs 12.3 (6.7)
Branding & Identity, Healthcare
& Specialist Communications 27.0 0.6
Total Group 100 1.3
As can be seen, on a pro-forma combined basis, public relations and public
affairs has been most affected by the recession. Branding & identity,
healthcare and specialist communications was somewhat affected, with healthcare
and direct, a part of specialist communications, being more resilient.
Advertising and media investment management has been less affected than
anticipated and information and consultancy continues to grow relatively
strongly.
Advertising and Media Investment Management
This sector's revenue grew 31% last year, primarily driven by acquisitions. On
a pro-forma combined basis, revenue at Ogilvy & Mather Worldwide (which was
again named the United States Agency of the Year by Advertising Age and which
includes Cole & Weber and OgilvyOne), J. Walter Thompson Company (named Eastern
Agency of the Year by Adweek), Y&R Advertising, Red Cell, MindShare (named
European media Agency of the Year by Media & Marketing Europe) and Mediaedge:
CIA, (the new brand name for the merged operations of The Media Edge and CIA)
were flat. The combined operating margin of this group of companies was over
17%.
In 2001, Ogilvy & Mather Worldwide generated net new billings of £237 million
($367 million), J. Walter Thompson Company £243 million ($377 million) and Y&R
Advertising £96 million ($149 million). Red Cell has been strengthened
significantly by the addition of new talent and the acquisition of Berlin
Cameron and Partners in the United States.
Also in 2001, MindShare and Mediaedge:CIA generated net new billings of £563
million ($873 million). Plans continue to be developed to form a worldwide "WPP
Media" parent company, probably to be named GME, but these have been revised
following the merger with Tempus Group PLC ("Tempus") and the subsequent
formation of Mediaedge:CIA, resulting in the development of a second strong
global media investment management brand.
Our digital operations suffered as clients reduced their spending on digital
media campaigns with consequent adjustments in revenue and people. The quality
of our operations in Europe will be enhanced with the integration of Outrider,
Tempus' digital operation.
Information and Consultancy
Despite the recession, the Group's information and consultancy businesses
continued their strong revenue growth with gross profit rising by over 14% and
operating margins up over the previous year, although 11 September did have a
discernible impact. Particularly strong performances were recorded by Millward
Brown in Canada, Spain, France, China, Singapore, Brazil and Mexico; by Research
International at Winona in the United States, in the United Kingdom, Italy,
Australia, New Zealand, South-East Asia and Mexico; by Center Partners; and by
Goldfarb Consultants in Mexico.
Technology and interactive research revenue declined during the first nine
months of the year but stabilised in the last quarter. This was evidenced by
the stabilisation at MB IntelliQuest and a pick-up in activity at Lightspeed,
our interactive panel.
Public Relations and Public Affairs
In constant currencies, the Group's public relations and public affairs revenue
showed continued growth, due to acquisitions, rising by over 49%.
However, this sector was most affected by the worldwide recession, particularly
in technology, media and telecommunications. On a pro-forma combined basis,
although Hill and Knowlton's revenue rose in 2001, Burson-Marsteller, Ogilvy
Public Relations Worldwide and Cohn & Wolfe suffered significant revenue
declines. Robinson Lerer & Montgomery, however, continued to make a strong
contribution to the Group.
As a result operating margins at our public relations and public affairs
businesses as a whole declined to over 9% against over 13% in the previous year.
Branding and Identity, Healthcare and Specialist Communications
The Group's branding and identity, healthcare and specialist communications
revenue grew by 43% last year, again primarily due to acquisitions. Including Y
&R, on a pro-forma combined basis, revenue and gross profit rose by almost 1%
and operating costs by over 6%, resulting in overall operating margins declining
by almost 1.0 margin points, chiefly due to margin erosion at some of our
branding and identity and specialist communications units.
Several of our companies in this sector performed particularly well:
• in promotion and direct marketing - Wunderman at the Irvine office in
the United States, in the United Kingdom, Germany, China and Brazil; OgilvyOne
in the United Kingdom, France, Spain, the Czech Republic, Singapore, Hong Kong,
Korea and Argentina
• in branding and identity - BPRI, Banner McBride, Warwicks, Landor
Associates in the United Kingdom, Germany, Japan, Hong Kong and Mexico
• in healthcare - CommonHealth in the United States; Sudler & Hennessey
in Germany and Australia; MarketForce Communications in Canada; Transart
Marketing in the United Kingdom
• other specialist marketing resources - Glendinning in the United
Kingdom, the Geppetto Group and Pace Communications
Despite difficult market conditions, all of our networks - OgilvyOne, Wunderman,
Y&R2.1 and digital@jwt - grew their digital revenue and developed their
capabilities, all in the context of increasingly integrated offers.
Manufacturing
Gross profit was flat with operating profit and margins up slightly at the
Group's manufacturing division.
Balance sheet and cash flow
An unaudited summary of the Group's consolidated balance sheet as at 31 December
2001 is attached in Appendix I (in sterling) and in Appendix II (in euros). As
at 31 December 2001, the Group had net debt of £885 million compared with net
debt of £25 million at 31 December 2000 (2000 - £36 million on the basis of 2001
year end exchange rates), following net cash expenditure of £736 million on
acquisitions and £103 million on share repurchases.
Net debt averaged £834 million in 2001, up £411 million against £423 million in
2000 (up £385 million at 2001 exchange rates). The average debt figures for
2000 include the impact of the Y&R long-term convertible bond of £195 million
for the final quarter. These net debt figures compare with a current equity
market capitalisation of approximately £8.0 billion giving a total enterprise
value of approximately £9.0 billion.
Cash flow remained strong as a result of improved profitability and management
of working capital. In 2001, operating profit was £506 million, capital
expenditure £118 million, depreciation and amortisation of £125 million, tax
paid £78 million, interest and similar charges paid £56 million and other net
cash inflows of £73 million. Free cash flow available for debt repayment,
acquisitions, share buybacks and dividends was therefore £452 million. This
free cash flow was more than absorbed by acquisition payments and investments of
£736 million, share repurchases and cancellations of £103 million and
dividends of £44 million. A summarised unaudited consolidated cash flow
statement is included in Appendix I.
In the first five weeks of 2002 up until 6 February, the last date for which
information is available prior to this announcement, net debt averaged £1,058
million versus net debt of £250 million for the same period last year at 2002
exchange rates.
Your Board continues to examine ways of deploying its substantial cash flow of
over £500 million per annum to enhance share owner value. As necessary capital
expenditure normally approximates to 1-1.25 times the depreciation charge, the
Company has concentrated on examining possible acquisitions or returning excess
capital to share owners in the form of dividends or share buy-backs. In 2001
the Group increased its equity interests, at a combined initial cost of £736
million in cash, in advertising and media investment management in the United
States, the United Kingdom, Australia, Brazil, France, Portugal, South Africa,
South Korea, Taiwan and Turkey; in information and consultancy in the United
States, Germany and South Africa; in public relations and public affairs in the
United States, Argentina and Switzerland; and in branding and identity in the
United States, the United Kingdom and Japan; in direct in the United Kingdom,
France and Hong Kong; and in interactive in the United States, the United
Kingdom, France and South Korea.
As noted above, your Board has decided to increase the final dividend by 20% to
3.06p per share, taking the full year dividend to 4.50p per share which is
almost seven times covered. In addition, as current opportunities for cash
acquisitions may be limited particularly in the United States, the Company will
continue to commit £150-200 million for share buy-backs in the open market, when
market conditions are appropriate. Such annual rolling share repurchases would
represent approximately 2.0-2.5% of the Company's share capital which is
perceived to have a more significant impact in improving share owner value than
dividends.
Developments in 2001
Including associates, the Group had over 65,000 full-time people in over 1,400
offices in 103 countries at the year end. It services over 300 of the Fortune
Global 500 companies, over one-half of the Nasdaq 100, over 30 of the Fortune
e-50, and approximately 330 national or multi-national clients in three or more
disciplines. More than 150 clients are served in four disciplines. The Group
also works with over 100 clients in six or more countries.
These statistics reflect the increasing opportunities for developing client
relationships between activities nationally, internationally and by function.
The Group estimates that 25% of new assignments in the year were generated
through the joint development of opportunities by two or more Group companies.
Future prospects
Given the current state of the world economy, your Group has performed well.
In essence, despite a fall in like-for-like revenue, operating margins and
absolute levels of operating profitability have been broadly maintained. As
the Group forecasted the general decline in economic conditions relatively
early, the consequent focus on the staff cost to revenue ratio has resulted in a
fall in average headcount by almost 2% and point-to-point headcount by 9%.
This has been achieved, in part, by a slowdown in recruitment and the impact of
the normal attrition rate.
Continued progress has been made over the last nine years during which pre-tax
profits have increased almost nine times from £54 million in 1993 to £85 million
in 1994, £114 million in 1995, £153 million in 1996, £177 million in 1997, £213
million in 1998, £255 million in 1999, £366 million in 2000 and £475 million
(pre investment gains and write-downs) in 2001. Over the same period operating
margins (including income from associates) have doubled from 7.0% to 14.0%, and
interest cover has increased from 3.0 times in 1993 to 7.9 times in 2001 giving
credit ratings of A- and Baa1.
However, there is still a significant profit opportunity in matching the
operating margins of the best-performing competition. The best-performing
competitive listed holding companies, such as Omnicom, achieve 15-16% operating
margins, whilst the best-performing individual agencies such as McCann-Erickson
Worldwide and BBDO Worldwide are estimated to achieve operating margins of as
much as 20%. This compares to a WPP parent company margin of 14.0% and reported
combined margins of the Ogilvy & Mather Worldwide, J. Walter Thompson Company
and Y&R Advertising brands of over 17%.
Historically, listed public relations companies showed operating margins of over
10%, which have been more than matched by our own operations. Despite the
difficult trading conditions in 2001, operating management has indicated that
margin performance can be improved above those competitive levels again.
The results of our research into comparative benchmarking data on our
information and consultancy and branding and identity, healthcare and specialist
communications operations confirm that our businesses in these areas are
competitive, although there are still opportunities to improve performance to
the level of the best-performing competitors.
With the recession, the task of eliminating under-utilised property costs has
again become a priority. The Group occupied approximately 14 million square
feet worldwide, at a total establishment cost of $466 million in 2001. Around
one million square feet at an annual cost of $39 million is under-utilised
currently, mainly in the United States. Despite the usual inflexibility of
property costs, approximately one million square feet of the Group's property
portfolio is up for renewal in the United States in the next two years.
Achievement of "best practice" competitive operating margins and our targets in
just our advertising and media investment management and public relations and
public affairs businesses at current pro-forma revenue levels, would generate
approximately £20-30 million of additional annual operating profits.
As usual and given conditions in 2001, our budgets for 2002 have been prepared
on a conservative basis largely excluding new business particularly in
advertising and media investment management. They predict flat like-for-like
revenue in comparison to 2001 numbers and a stronger second half of the year
relative to the first, driven by comparables. They also indicate advertising and
media investment management revenue down 3% counterbalanced by marketing
services revenue growth of 3%, primarily driven by comparative strength in
information and consultancy, healthcare and direct. This compares with budgeted
growth of 6% in 1998 against like-for-like outcome of almost 8%, growth of over
4% and almost 8% in 1999, growth of 10% and 15% in 2000 and growth of 7% and a
decline of 3% in 2001. We only have data for January in 2002, and this shows
revenue approximately in line with budget. Net new business billings so far in
2002 were very strong with over $600 million of wins and the Group was ranked
first in the new business survey by Credit Suisse First Boston in January.
Worldwide economic conditions are likely to remain difficult in 2002. A
V-shaped recovery seems unlikely, despite the level of stock market valuations.
W- shaped and L-shaped recoveries seem unlikely too, given government and
central bank monetary and fiscal policies. What seems most likely is a bath-
shaped or saucer-shaped recovery where the upturn is gradual. Should conditions
improve, the Group is well positioned to respond to any recovery, given its
geographical and functional spread and strengths, its flexible cost structure
and strong cash flow.
In the short-term, therefore, advertising and marketing services expenditure
will likely remain flat, although spending amongst the package goods,
pharmaceutical, oil and energy, government (the government is the largest
advertiser in the UK market) and price-value retail sectors has remained
relatively resilient. These sectors represent approximately 20% of the Group's
revenue.
In the long-term the outlook is very favourable. Overcapacity and the shortage
of human capital, the developments in new technologies and media, the growth in
importance of internal communications and the continued dominance of the US
economy underpin the need for our clients to continue to differentiate their
products and services both tangibly and intangibly. Advertising and marketing
services expenditure as a proportion of gross national product should continue
to grow.
Given these short-term and long-term trends, your Company has three strategic
priorities. In the short-term, to weather the recession; in the medium-term to
continue to successfully integrate the mergers with Y&R and Tempus; and finally,
in the long-term, to continue to develop its businesses in the faster growing
geographical areas of Asia Pacific, Latin America, Central and Eastern Europe,
Africa and the Middle East and in the faster growing functional areas of
marketing services, particularly direct, interactive and market research.
Incentive plans for 2002 will focus more on operating profit growth than
historically to stimulate top-line growth, although objectives will continue to
include operating margin improvement, improvement in staff costs to revenue
ratios and group co-operation.
In these circumstances there is no reason to believe that the Group cannot
achieve the revised objective set in 2001 of further improving margins by up to
another one margin point to 15.0% in 2002 with the potential for a further 0.5
of a margin point improvement in 2003. Your Board does not believe that there
is any functional, geographic, account concentration or structural reasons that
should prevent the Group achieving operating margins of 15.5% by 2003. After
all the two best listed performers in the industry are or have been at 15-16%
and that is where we would want to be. Neither is there any reason why operating
margins could not be improved beyond this level by continued focus on revenue
growth and careful husbandry of costs. As a result of this confidence, your
Board had already set a new operating margin plan, its sixth since 1991, to
achieve further growth in operating margins beyond 2003. The objective is to
achieve 20% margins over a period of time.
Increasingly, WPP is concentrating on its mission of the "management of the
imagination", and ensuring it is a big company with the heart and mind of a
small one. To aid the achievement of this objective and to develop the benefits
of membership of the Group for both clients and our people, the parent company
continues to develop its activities in the areas of human resources, property,
procurement, information technology and practice development. Ten practice
areas which span all our brands have been developed initially in media
investment management, healthcare, privatisation, new technologies, new faster
growing markets, internal communications, retailing, entertainment and media,
financial services and hi-tech and telecommunications.
2001 has been a brutal year. 2002 will be difficult but hopefully not as
traumatic. Early indications are that the worldwide growth of advertising and
marketing services expenditure will be flat. 2003 may be slightly better.
Our people have responded magnificently in 2001 to the difficult economic,
political, financial, personal, emotional and psychological challenges that they
have faced. They have delivered results which, even including all exceptional
items, have out-performed their competition and grown market share.
We believe that despite the challenges that we face, 2002, WPP's seventeenth
year, should be another good one.
Further information:
Sir Martin Sorrell )
Paul Richardson ) (44) 020 7408 2204
Feona McEwan )
Share owner web-site - www.wppinvestor.com
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.
This information is provided by RNS
The company news service from the London Stock Exchange
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