Final Results - Year Ended 31 Dec 1999, Part 2
WPP Group PLC
17 February 2000
PART 2
Balance sheet
An unaudited summary of the Group's consolidated balance
sheet as at 31 December 1999 is attached in Appendix I.
Appendix II presents, for illustrative purposes only, the
preliminary consolidated profit and loss account and the
preliminary consolidated balance sheet in euros. As at
31 December 1999, the Group was cash positive with net
cash of £92 million compared with £134 million at 31
December 1998 (1998 - £124 million on the basis of 1999
year end exchange rates), despite cash expenditure of
£262 million on acquisitions and £18 million on share
repurchases. As usual, this was primarily due to the
seasonally strong fourth quarter and management efforts
to improve working capital.
Net debt averaged £206 million in 1999, up £63 million
against £143 million in 1998 (up £51 million against £155
million in 1998 at 1999 exchange rates). These net debt
figures compare with a current equity market
capitalisation of approximately £9.0 billion giving a
total enterprise value of approximately £9.2 billion.
Cash flow continued to improve as a result of improved
profitability and management of working capital. In
1999, operating profit was £264 million, capital
expenditure £65 million, depreciation £42 million, tax
paid £58 million, interest and similar charges paid £33
million and other net cash inflows of £21 million. Free
cash flow available for debt repayment, acquisitions,
share buybacks and dividends was therefore £171 million.
A summarised unaudited consolidated cash flow statement
is included in Appendix I. This free cash flow was more
than absorbed by acquisition payments and investments of
£262 million (offset by £52 million of cash acquired),
share repurchases and cancellations of £18 million and
dividends of £21 million.
In the first five weeks of 2000 up until 4th February,
the last date for which information is available prior to
this announcement, net debt averaged £118 million versus
net debt of £22 million for the same period last year at
2000 exchange rates.
Your Board continues to examine ways of deploying its
substantial cash flow of over £220 million per annum to
enhance share owner value. As necessary capital
expenditure normally approximates to 1-1.5 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 1999 the Group increased its equity
interests, at a combined initial cost of £262 million in
cash, in advertising and media investment management
agencies in Australia, Austria, Brazil, France, Italy,
The Netherlands, Portugal, Spain, Sweden, the United
Kingdom and the United States; in information and
consultancy in Argentina, France, Germany, Mexico,
Poland, the United Kingdom and the United States; in
public relations and public affairs in Chile, Germany,
the United Kingdom and the United States; and in branding
and identity, healthcare and specialist communications in
Brazil, the Czech Republic, France, Germany, the United
Kingdom and the United States. Particularly interesting
functional acquisitions and investments have been made in
the world's leading loyalty marketing company (Brierley
Partners), hi-tech public relations and public affairs
(Blanc & Otus, Hiller W-st), sports sponsorship,
marketing and public relations (PRISM), corporate
reputation research, branding and identity (BPRI, Brand
Union, Brindfors, Windi Winderlich), multi-ethnic
marketing (Market Segment Group), call center marketing
(Center Partners), digital and new media (NoHo,
Mediaquest, High Co), on-line technology advertising
(Dazai), airline marketing research (Jochems Ladendorf),
television audience measurement (ILASA), outdoor
advertising contracting (Portland), healthcare marketing
(Shire Hall, Matthew Poppy), promotion and direct
(Perspectives), specialist public relations (BWR,
Feinstein Kean), financial services marketing consultancy
(P7Four, International Presentations), and technology and
media research (Intelliquest, SPC, SMG, DRI).
As noted above, your Board has decided to increase the
final dividend by 22% to 2.1p per share, taking the full
year dividend to 3.1p per share which is over seven times
covered. In addition, as current opportunities for cash
acquisitions at sensible prices are limited particularly
in the United States, the Company will be increasing the
target amount available for share buy-backs in the open
market to £50-100 million, when market conditions are
appropriate. Such annual rolling share repurchases would
represent approximately 1% of the Company's share capital
which seems to have a more significant impact in
improving share owner value. If sufficient small to
medium sized cash acquisition opportunities are available
and there are attractive opportunities for share
repurchases, your Board is prepared to increase net debt
further to the range of £200-250 million in comparison
with the historical target range of £150-200 million.
This level of debt would still represent only 2-3% of the
Company's market value.
Developments in 1999
Including associates, the Group had over 39,000 full-time
people in over 950 offices in 92 countries at the year
end. It services over 300 of the Fortune Global 500
companies, over one-third of the Nasdaq 100, and
approximately 330 national or multi-national clients in
three or more disciplines. More than 60 clients are
serviced 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.
Management Stock Ownership
Under the Group's 100 Club, 300 Club and High Potential
300 Club executive stock option programs, options have
been granted each year since 1995 to those people with
major responsibility for the success of our business. In
2000, these programs will be further expanded as a result
of the significant growth of the Group over the past five
years. In addition, 50% of all awards to the 500
participants in operating company long-term incentive
plans are paid in WPP restricted stock.
In 1997, WPP launched the Worldwide Ownership Plan to
give all our people an opportunity to share in its
success through stock ownership. Options have been
granted annually under this program to approximately
9,000 people worldwide.
Including outstanding options, interests in WPP
restricted stock, stock already owned and holdings of the
Employee Stock Ownership Plan, people working in the
Group currently own, or have interests in, in excess of
63 million ordinary WPP shares representing over 8% of
the Company.
The Leadership Equity Acquisition Plan (LEAP) was
approved by share owners on 2 September 1999. Fifteen
executives of the Group have been invited to participate
in the plan. These participants will purchase or have
purchased 2,549,059 WPP ordinary shares and have made a
commitment to retain them until September 2004. Under
the terms of LEAP, the participants may earn matching
shares over a five-year performance period, based on the
Group's relative total share owner return as compared
with 14 other major listed companies in our industry.
Future prospects
Considerable progress was again made in 1999, helped by a
strong economic environment in North America and Europe
and recovery in Asia Pacific. Continued progress has
been made over the last seven years during which pre-tax
profits have increased almost five 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 and £255 million in 1999. Over the same period
operating margins (including income from associates) have
almost doubled from 7.0% to 13.4%, and average net debt
has almost halved from £361 million in 1993 to £268
million in 1994, £214 million in 1995, £145 million in
1996, £115 million in 1997, rising to £143 million in
1998 and £206 million in 1999.
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, The Interpublic Group of Companies
Inc. ('IPG') and Omnicom Group Inc. ('Omnicom') achieve
15%-16% operating margins, whilst their 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 13.4% and combined margins at the Ogilvy &
Mather Worldwide and J. Walter Thompson Company brands
of 16.4%. Historically, listed public relations
companies showed operating margins of over 10% which have
now been more than matched by our own operations. As
mentioned before operating management has indicated that
margin performance can be improved further.
The results of our research into comparative benchmarking
data on our information and consultancy and identity and
branding, 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.
The task of eliminating surplus property costs has been
achieved over the last eight years. Over 650,000 sq ft
with a cash cost of approximately £14 million ($22
million) per annum has been sublet or absorbed. Whilst
WPP's rental costs to revenue ratio is competitive to its
best performing competition your Board believes the Group
is still capable of achieving a further =% improvement
equivalent to approximately £11 million of operating
profit, which would, of course, form part of any general
operating profit improvement.
Achievement of 'best practice' competitive operating
margins and our targets in just our advertising and
public relations and public affairs businesses at current
revenue levels, would generate approximately £20-30
million of annual operating profits.
As usual, our budgets for 2000 have been prepared on a
conservative basis. They predict like-for-like revenue
increases of over 7% in comparison to 1999. This
compares with budgeted growth of 6% in 1998 against an
actual outcome of almost 8% and budgeted growth of over
4% and actual growth of almost 8% in 1999. We only have
data for one month so far in 2000, for January, and this
shows a like-for-like increase well in excess of budget.
Economic conditions in North America and Europe remain
sound as long as interest rate increases remain moderate
and financial markets stable. The economic difficulties
in Asia Pacific have moderated and reasonable growth is
being experienced in China, Taiwan, Singapore, Thailand,
Malaysia, India and Australia. Japan and Indonesia
remain problematic. Even Latin America is improving
partly as year-to-year comparisons become easier and, in
our case, as significant new business wins kick in. Our
budgets for 2000 indicate a like-for-like growth rate of
over 10% for Asia Pacific and Latin America.
In the slower growth, lower inflation 1990s there are still
economic uncertainties in the United States, United
Kingdom and Continental Europe, as a result of continued
relatively high levels of unemployment in some countries
and the consequent lack of confidence and fear of further
unemployment amongst both consumers and managers. In the
medium-term, therefore, like-for-like revenue gains are
likely to be in the mid-single to high-single digit range
and in these circumstances the Company will continue to
concentrate on improving the balance of its resources and
the flexibility of its costs particularly in staff and
property areas. To achieve this, short-term and long-
term incentive plan objectives have been based on
improving absolute levels of profit, operating margins,
staff cost to revenue ratios, incremental revenue
conversion, revenue growth and Group co-operation. These
incentive plans now include 'side-car' cyber funds,
minority interest IPO's and equity for fee funds which
offer attractive additional inducements to our key new
media and technology people. The structure of the equity
for fee funds is aimed to ensure cash fees for the Group,
offer effective retention incentives to our people and
minimise divisiveness between the 'old' and 'new' media
parts of our business. As our margins improve and come
even closer to matching the very best performing
competition, increasing emphasis is being placed on
revenue generation through the incentive objectives.
Consequently, the Group has increasingly focused on
improving its competitive position in the faster growing
segments of the communications services industry. Despite
the recent recession, your Board continues to believe
that Asia Pacific, Latin America, Africa and the Middle
East and Central and Eastern Europe will offer superior
opportunities for growth in the medium to long-term.
These markets now account for over 17% of the Group's
revenue as opposed to 13% in 1992 despite the recent
slowdown in growth. These markets are still forecast to
continue to grow at significantly faster rates than those
of North America and Western Europe in the long-term.
WPP, according to the Advertising Age Agency Report,
ranks in the top three in all of the ten fastest growing
markets of the world.
In these circumstances there is no reason to believe that
the Group cannot achieve the objective set in 1998 of
further improving margins by another 0.6% in 2000. Your
Board does not believe that there is any functional,
geographic, account concentration or structural reason
that should prevent the Group achieving operating margins
of 14% by 2000. After all the two best listed performers
in the industry are 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 is
setting a new operating margin plan, its fourth since
1991, to achieve a 15% operating margin by 2002. The
objective will be to achieve 14.5% in 2001 and 15% in
2002.
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.
1999 saw the continued development of MindShare, the combined
media investment management unit of our two major
agencies - Ogilvy & Mather Worldwide and J. Walter
Thompson Company - in North America, Europe, Asia Pacific
and Latin America. Other new ventures initiated, for
example, in the healthcare area include a joint company
in Europe between Ogilvy & Mather Worldwide and
CommonHealth; The Quantum Group, a New Jersey-based
direct-to-consumer pharmaceutical company; MD&A/Salud, a
Hispanic healthcare agency; EinsonHealth, a joint venture
between Einson Freeman and CommonHealth; and Enterprise
IG Health, a healthcare identity group which is a joint
venture between CommonHealth and Enterprise IG.
Innovative graduate recruitment schemes, awards and
training programmes have all continued to be implemented
and developed in 1999. In 1999 the parent company
continued a worldwide share ownership programme for all
our people with over two years service, a partnership
programme rewarding outstanding examples of collaboration
across operating companies with the objective of adding
value to our clients' businesses and training programmes
on the new media and enhancing and stimulating
creativity.
2000, WPP's fifteenth year, should be another good year
given the quadrennial boost of the United States
Presidential Election, the Sydney Olympics and the
Millennium celebrations themselves. Early indications are
that the worldwide growth rate of advertising will be
stronger than 1999 at approximately 6-7% with marketing
services growing at 8-9%. As long as financial markets
remain stable and governments do not overdo deflationary
correction, the worldwide economic environment should be
good for growth in communications services expenditure as
a whole. Although 2001 is further afield, it should see
continued growth, perhaps a percentage point or so lower
reflecting a possible Millennium hangover but the overall
environment is favourable.
Further information
Sir Martin Sorrell
Paul Richardson (44) 020 7408 2204
Feona McEwan
Andrew Hall (1) 212 632 2314
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.
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