29th Feb 2008 07:01
WPP Group PLC29 February 2008 FOR IMMEDIATE RELEASE 29 February 2008 WPP 2007 PRELIMINARY RESULTS Billings up over 5% to £31.7 billion Revenue up almost 5% to £6.186billion Constant currency revenue up over 8% Like-for-like revenue up 5% Headline EBITDA rises over 7% to £1.072 billion Headline operating margin up 0.5 margin points to 15.0% Headline operating profit before interest and tax up 8% to £928 million Headline Profit before tax up almost 7% to £817 million Profit before tax up over 5% to £719 million Diluted headline earnings per share up over 9% at 46.0p Final dividend up 20% to 9.13p per share • Billings up over 5% to £31.7 billion. • Reported revenue up 4.7% to £6.186 billion, up 8.2% in constant currency. • Like-for-like revenue up 5.0%. • Headline EBITDA rises over 7% from £1.002 billion to £1.072 billion. • Headline operating profits before interest and tax up 8.0% to £928 million from £859 million. • Operating margin up 0.5 margin points to 15.0% from 14.5%. • Headline profits before tax up 6.7% to £817 million from £766 million. • Profit before tax up 5.5% to £719 million from £682 million. • Diluted headline earnings per share up 9.5% to 46.0p from 42.0p. • Reported diluted earnings per share up 8.0% to 38.0p from 35.2p. • Final dividend up 20% to 9.13p per share making a total for the year of 13.45p up 20% over 2006. • Average net debt up £305 million to £1,458 million from £1,153 million (at 2007 exchange rates). • Record estimated net new billings of over £5.0 billion ($9.8 billion). • Operating margin targets of 15.5% and 16.0% remain in place for 2008 and 2009. • Rolling share-buyback programme to continue at 4-5% of outstanding share capital in 2008. In this press release not all of the figures and ratios used are readilyavailable from the unaudited preliminary results included in Appendix I. Whererequired, details of how these have been arrived at are shown in the Appendix. Summary of results The Board of WPP Group plc ("WPP") announces the unaudited preliminary resultsfor the year ended 31 December 2007, the Group's twenty-second year. Theserecord results again reflect the continued steady strength of the world economy,despite the current credit and liquidity crisis, positively impacting almost alldisciplines and geographies and the strength of the Group's operating brands andfranchise. 2007 also saw an historically unprecedented run of new business winsacross the Group, building a strong base for 2008. Billings were up 5.1% at £31.7 billion, around $63.5 billion. Reportable revenue was up 4.7% to £6.186 billion. Revenue, including 100% ofassociates, is estimated to total over £7.3 billion. On a constant currencybasis, revenue was up 8.2%, chiefly due to the 8.6% decline in the US dollaragainst the pound sterling. Like-for-like revenues, excluding the impact ofacquisitions and on a constant currency basis, were up 5.0%. On the same basis,gross margin was up 5.1%. Like-for-like revenues were up 5.3% in the first halfof 2007 and up 4.8% in the second half, continuing the strong organic growth of5.4% in 2006. Fourth quarter revenues were up 4.9%. The relative weakness of the US dollar against the pound sterling hashighlighted currency differences between those companies that report in USdollars and those that report in pounds sterling. So that comparisons can moreeasily be drawn, we have summarised here the key income statement numbers, as ifthe Group had reported in US dollars in 2007. On this basis, revenues were up13.6% to $12.4 billion, headline profits were up 16.5% to $1.865 billion anddiluted headline earnings per share up 18.1% to 92.6c. Appendix 2 shows WPP'spreliminary results in reportable US dollars. Headline earnings before interest, depreciation and amortisation ("HeadlineEBITDA") rose 7.1% to £1.072 billion and 9.2% in constant currencies. Headlineoperating profit was up 8.0% to £928 million and up 10.1% in constantcurrencies. Reported operating costs together with direct costs (but excluding goodwillimpairment, amortisation of acquired intangibles and profits on disposal offixed asset investments), rose by 4.2% and by 7.9% in constant currency.Like-for-like total operating and direct costs rose 4.6%. Reported staff costs,excluding incentives (which includes the cost of share-based compensation), wereup 4.6%. Incentive payments (including the cost of share-based compensation)totalled £230.7 million (£246.9 million in 2006), down 6.6%, which represents20.6% (23.1% in 2006) of headline operating profit before bonuses and incomefrom associates. Before these incentive payments, operating margins remainstrong at 18.7%. On a reported basis, the Group's staff cost to revenue ratioimproved 0.5 margin points to 58.3% compared with 58.8% in 2006. Part of the Group's strategy is to continue to increase variable staff costs asa proportion of total staff costs and revenue, as this provides flexibility todeal with volatility in revenues and recessions or slow-downs. Through thecyclical upswing of the 1990s, variable staff costs as a proportion of totalstaff costs increased, reaching a peak of 12.1% in 2000. The impact of therecession in 2001 and 2002 was to reduce this ratio to 9.2% and variable staffcosts as a proportion of revenue to 5.3% (calculated under 2004 UK GAAP). In2004, following the significant improvement in pre-bonus operating profit andincentives, variable staff costs as a proportion of staff costs increased. Therewas a slight deterioration in 2005, with the ratio declining slightly by 0.4percentage points, to 12.8% (under IFRS - which includes 1.0 percentage pointsattributable to share-based compensation), but in 2006 the ratio strengthenedagain to 13.0%. In 2007 the proportion changed marginally by 0.3 percentagepoints to 12.7%. The number of people in the Group averaged 84,848 against 77,686 in 2006, anincrease of 9.2%. On a like-for-like basis, average headcount was up to 84,848from 81,086, an increase of 4.6%. At the end of 2007, staff numbers were 90,182compared with 86,254 at the end of 2006 on a like-for-like basis, an increase of4.6%. Headline operating profit or profit pre-goodwill impairment, amortisation ofacquired intangibles, interest, tax and investment gains and write-downs was up8.0% to £928 million from £859 million and up 10.1% in constant currencies.Reported profit before interest and tax was up 8.1% to £846 million from £783million and up 10.0% in constant currencies. Headline profit before tax orprofit pre-goodwill impairment, amortisation of acquired intangibles, investmentgains and write-downs, revaluation of financial instruments and tax was up 6.7%to £817 million from £766 million and up 8.8% in constant currencies. Reportedheadline operating margin (including income from associates) increased 0.5margin points to a record 15.0% from 14.5%, in line with the revised target setin February 2007. Net finance costs (excluding the revaluation of financial instruments) were£110.7 million up from £92.7 million last year, largely reflecting higherinterest rates, the impact of the cash cost of the acquisition of 24/7 RealMedia Inc. in July 2007, partly offset by improved liquidity as a result of areduction in average working capital. Reported profit before tax rose by 5.5% to £719 million, and by 7.4% in constantcurrencies. The Group's tax rate on headline profits was 25.0%, a reduction of onepercentage point over 2006. This reflects the continuing positive impact of theGroup's tax planning initiatives. Diluted headline earnings per share were up 9.5% at 46.0p. In constant currency,earnings per share on the same basis were up 13.6%. Diluted earnings per sharerose by 8.0% to 38.0p and by 12.0% in constant currencies. The Board recommends an increase of 20% in the final dividend to 9.13p pershare, making a total of 13.45p per share for 2007, a 20% increase over 2006.The record date for this dividend is 6 June 2008, payable on 7 July 2008. Thedividend paid in 2007 is over four times covered by headline earnings. Further details of WPP's financial performance are provided in Appendix I. Review of operations The financial world's sub-prime and insurance monoline credit crisis had littleor no impact on the Group's financial performance in 2007. Despite the lack of any maxi-quadrennial or mini-quadrennial events, the Group'sfinancial model continued to deliver, with like-for-like revenues growing ataround 5% and operating profits up around 10%, and with operating marginsgrowing in-line with the target of 0.5 margin points. Small- and medium-sizedacquisitions brought constant currency revenue growth into the 5-10% range andearnings per share growth into the 10-15% range, with share buy-backs furtherdriving earnings per share growth towards 15%. All geographical and functionalsegments showed growth. Three geographical growth speeds remain though - fastestgrowth in Asia Pacific, Latin America, Africa, the Middle East and Central andEastern Europe; a surprisingly steady speed in the United States; and a slowerspeed in Western Europe. 2007 also marked continued client focus on top-line growth, as corporateprofitability, margins and liquidity continued to improve significantly.Corporate profitability remains at historically high levels on both sides of theAtlantic. This resulted in continued high levels of new business activity. Network television price inflation and declining audiences, fragmentation oftraditional media and rapid development of new technologies continued to driveexperimentation by our clients in new media and non-traditional alternatives.1998 was really the first year when WPP's marketing services activitiesrepresented over 50% of Group revenue. By 2004, these activities representedalmost 54% of Group revenue. In 2005, they represented 52%, as media investmentmanagement was again the fastest growing part of our business, following majorsuccess in winning media planning and buying consolidations, and reflected thefirst time inclusion of Grey Worldwide and MediaCom. In 2006, the underlyingrelative strength of the inaptly named "below-the-line" services re-asserteditself, as marketing services grew to 52.5% of revenues. In 2007, they grewfurther to 53.8%. In addition, in 2007, our broadly-defined internet-relatedrevenue was almost $2.8 billion or 23% of our worldwide reported revenue and ournarrowly-defined internet-related revenue was almost $1.5 billion or 12% of ourworldwide reported revenue. These are both more than the 10% for on-line media'sshare of total advertising spend both in the United States and worldwide. Thenew 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 detailsof revenue and revenue growth (on a constant currency basis including the impactof acquisitions) by region for 2007 as well as proportions of operating profits: Region Revenue as a % Revenue growth Operating profit Like-for-Like of Total Group % +/(-) 07/06 as a % of Total Revenue growth Group % +/(-) 07/06 North America 37.6 7.6 43.5 3.8United Kingdom 14.4 4.0 11.6 2.1*Continental Europe 26.12 7.0 23.1 3.9Asia Pacific, 21.9** 13.7 21.8 10.9Latin America,Africa & theMiddle East _____ ____ _____ ____Total Group 100.0 8.2 100.0 5.0 _____ ____ _____ ____ * Gross margin up 3.4%** If Central and Eastern Europe is included with the faster growing markets ofAsia Pacific, Latin America, Africa and the Middle East, the proportion of Grouprevenues represented by these markets rises to 24.4% and Continental Europefalls to 23.6%. The United States continues to grow, with like-for-like growth of almost 4%,Latin America remained one of the fastest growing regions, as it has been overthe last three years, accelerating in the second half to almost 14%. AsiaPacific remained strong across the region, with Mainland China and India growingfastest, with like-for-like growth rates of over 31% and almost 23%respectively. Continental Europe, although relatively more difficult, improvedsignificantly in the second half, with like-for-like growth of almost 5%. In thefinal quarter, like-for-like growth was over 6%. The United Kingdom was broadlysimilar in the first half, with second half like-for-like growth of 2%. As seenin the first half, but even more pronounced in the second half, rates of growthin Europe continue to be two-paced, with Western Continental Europe softer andCentral and Eastern Europe, Russia and the other CIS countries, in particular,more buoyant. Of the big five Western European markets, Spain remains a strongergrowth market (though there are now real estate bubble worries), althoughGermany and Italy began to show some renewed signs of life. The faster growingmarkets of Asia Pacific, Latin America, Africa and the Middle East and Centraland Eastern Europe now account for over 24% of revenues, against the target ofone-third over the next 5-10 years. Estimated net new billings of £5.03 billion ($9.81 billion) were won last year,reflecting an historically unprecedented run of net new business wins in thefinal quarters of 2007. The Group was ranked first in the major new businesssurveys for 2007. Revenue and operating profit by communications services sector and brand The pattern of revenue growth also varied by communications services sector andbrand. The table below gives details of revenue and revenue growth bycommunications services sector for 2007 (on a constant currency basis includingthe impact of acquisitions) as well as proportions of operating profits: Communications Revenue as a Revenue Operating Like-for-Likeservices % of Total growth % +/ profit as a % Revenue growth Group (-) 07/06 of Total Group % +/(-) 07/06 Advertising, Media 46.2 5.1 49.9 4.5Investment ManagementInformation, Insight 14.6 4.5 11.2 2.7*& ConsultancyPublic Relations & 10.5 12.6 11.7 8.2Public AffairsBranding & Identity, 28.7 14.1 27.2 6.1Healthcare & SpecialistCommunicationsTotal Group ______ _____ _____ _____ 100.0 8.2 100.0 5.0 ______ _____ _____ _____ * Gross margin up 4.0% Media investment management continued to show the strongest growth of all ourcommunications services over 14%, along with direct, internet and interactive(part of specialist communications) and public affairs. This makes it four yearsin a row, when like-for-like revenue growth in media investment management was14% or over, almost three times the average for the Group, as a whole, of 5-6%over the same period. Direct and digitally-related activities now account forover 23% of the Group's revenues, which are running at the rate of over $12billion per annum. Brand advertising, particularly in the new faster growingmarkets, along with information, insight & consultancy and branding & identity,show consistent growth. Public relations and public affairs also continues toshow significant improvement over last year, following a strong year in 2006.The new technologies have demonstrated the power of editorial publicity throughfast-growing new applications of new technology such as MySpace, YouTube,Facebook, Flickr and Wikipedia, along with the difficulties of making money onsocial networking sites through advertising, as even Facebook found out withBeacon. Media investment management and information, insight & consultancycombined, grew their gross margins by well over 10% on a like-for-like basis,ahead of independent competitors. Advertising and Media Investment Management In constant currencies, advertising and media investment management revenue grewby over 5%. Like-for-like revenue growth was 4.5%. The combined operating marginof this sector is now 16.0%. In 2007, Ogilvy & Mather Worldwide, JWT, Y&R Advertising, Grey Worldwide andUnited Red Cell generated estimated net new billings of £723 million ($1.4billion). Also in 2007, GroupM, the Group's media investment management company, whichincludes MindShare, Mediaedge:cia, MediaCom and MAXUS generated estimated netnew billings of £3.686 billion ($7.188 billion). Information, Insight and Consultancy On a constant currency basis information, insight and consultancy revenues grewover 4%, with like-for-like revenues up almost 3%. Gross margin grew by 4.0% ona like-for-like basis. Overall margins improved by 0.3 margin points to 11.3%. Strong performances were recorded by Millward Brown (MaPS in the United States,Canada, Millward Brown and Dynamic Logic in the United Kingdom, Hungary, Italy,Centrum in the Netherlands, Poland, Spain, Turkey, Impact in South Africa,Australia ACSR in China, the Philippines, Singapore, Colombia, Brazil andMexico); BMRB International in the United Kingdom, Mediafax; ResearchInternational (in the United Kingdom, Italy, SIFO in Norway, South Africa,Mexico, New Zealand, Hong Kong, Malaysia, Singapore and Thailand); Ziment in theUnited States and All Global in the United Kingdom; IMRB in India; LightspeedResearch in the United Kingdom; Mattson Jack in the United States, Icon AddedValue in Germany, Spain, Japan; RMS in-store in the United Kingdom. Public Relations and Public Affairs Public relations and public affairs continued its strong growth with constantcurrency growth of over 12% and like-for-like growth of over 8%. Particularlystrong were Hill & Knowlton, Burson-Marsteller, Ogilvy Public RelationsWorldwide, Finsbury and Clarion in the UK and Public Strategies in the USA. Operating margins continued to improve and are now over 16.5%, an improvement of1.5 margin points over the previous year. Branding and Identity, Healthcare and Specialist Communications The Group's branding and identity, healthcare and specialist communicationsrevenues rose by over 14%. Like-for-like revenues rose by over 6%. Operatingmargins were down slightly by 0.2 margin points. The Group's direct, internetand interactive businesses showed particularly strong revenue growth. Several companies performed particularly well: • in branding and identity - Landor Associates in New York and Chicago in the United States, the United Kingdom, France, Germany, Italy, Dubai, Hong Kong and Australia; The Brand Union (formerly Enterprise IG) in the United States, France, Germany, Ireland, Spain, South Africa, China, Hong Kong, Japan, Singapore and Ray & Keshavan in India, Addison and the Partners in the United Kingdom; Fitch in the United Kingdom, Peclers in France, Norway and Dubai. • in healthcare - Sudler & Hennessey in the United Kingdom, France, Germany, Italy, Sydney in Australia, China and India; Grey Healthcare Group in Catalyst Online, Innovative Customer Solutions, BrandEdge and Insight Medical Communications in the United States, WG Consulting and Grey Healthcare London in the United Kingdom, Australia and Japan; in Ogilvy Healthworld in the United States, Canada, the United Kingdom, France, the Netherlands, Spain, Switzerland and Turkey. • in promotion and direct marketing - OgilvyOne (in Global Strategies, Eicoff, The Lacek Group, Leopard, San Francisco and Neo@Ogilvy in the United States, Neo@Ogilvy in Canada, Neo@Ogilvy and OgilvyOne London in the United Kingdom, Ireland, Denmark, France, Portugal, Italy, Sweden, the Czech Republic, Poland, Russia, Argentina, Brazil, Chile, China, Hong Kong, India, Indonesia, Malaysia and Singapore); 141 Worldwide; Wunderman (in San Francisco, Seattle, RTC, KBM, Fortelligent, Studiocom and ZAAZ in the United States, Canada, Burrows, Good Technology and iMpact in the United Kingdom, Belgium, Denmark, Germany, the Netherlands, Italy, Switzerland, the Czech Republic, Aqua On-Line in South Africa, Argentina, Brazil, Mexico, Singapore, Thailand); RMG Connect (in the United States, Canada, Mexico, Hong Kong, India, Japan and Singapore); G2 (in Direct & Digital and Interactive Marketing in the United States, Joshua in the United Kingdom, Germany, Russia, Colombia, Chile, China, Hong Kong, Japan, Korea and Taiwan). • in specialist marketing resources - Bridge, VML and The Geppetto Group in the United States, Metro Group, The Farm and Spafax and Headcount in the United Kingdom. Manufacturing Revenues and profits at the Group's manufacturing division were disappointinglydown in 2007. Balance sheet and cash flow The unaudited preliminary Group consolidated balance sheet as at 31 December2007 is attached in Appendix I. As at 31 December 2007, the Group's net debtincreased to £1.286 billion compared with £815 million at 31 December 2006,largely reflecting acquisition spend and share repurchases. Net debt averaged £1,458 million in 2007, up £305 million from £1,153 million in2006 (at 2007 exchange rates). These net debt figures compare with a currentequity market capitalisation of approximately £7.4 billion, giving a totalenterprise value of approximately £8.9 billion. Cash flow strengthened as a result of improved working capital management andcash flow from operations. In 2007, operating profit before goodwill impairment,amortisation of acquired intangible assets and charges for non-cash basedincentive plans was £950 million, capital expenditure £171 million, depreciation£144 million, tax paid £151 million, interest and similar charges paid £106million and other net cash inflows of £32 million. Free cash flow available fordebt repayment, acquisitions, share buybacks and dividends was therefore £698million. This free cash flow was absorbed by £675 million in net acquisitionpayments and investments, share repurchases and cancellations of £415 millionand dividends of £139 million. This resulted in a net outflow of £531 million.An unaudited consolidated cash flow statement is included in Appendix I. In the first seven weeks of 2008, up until 22 February, the last date for whichinformation is available prior to this announcement, net debt averaged £1,498million up £569 million versus £929 million for the same period last year at2008 exchange rates. Your Board continues to examine ways of deploying its EBITDA of almost £1.1billion (over $2 billion) and substantial cash flow of over £800 million oralmost $1.6 billion per annum to enhance share owner value. As necessary capitalexpenditure, spent mainly on information technology and property, is expected toremain approximately equal to the depreciation charge in the long-term, theCompany has concentrated on examining potential acquisitions and on returningexcess capital to share owners in the form of dividends and/or share buy-backs. In 2007, in addition to the acquisition of 24/7 Real Media Inc., the Groupcontinued to make small to medium-sized acquisitions and/or investments in highgrowth geographical or functional areas. The net initial cost of allacquisitions was £579 million in cash, in advertising and media investmentmanagement in the United States (including digital), the United Kingdom,Austria, France, Germany (including digital), Hungary, the Netherlands(including digital), Russia, Spain, South Africa, Brazil, Colombia, Australia,China and Japan; in information, insight & consultancy in the United States andthe United Kingdom; in public relations & public affairs in the United States;in branding and identity in Ireland and Dubai; in healthcare in the UnitedKingdom and in direct, internet & interactive in the United States, Canada,Belgium, Germany, South Africa, the Middle East, Brazil, Chile, Mexico, Koreaand Singapore. Consistent with the objective, announced in 2006, of increasing the sharebuy-back programme to 4-5% of the Group's share capital in 2007 and 2008, 59.19million ordinary shares, equivalent to 4.7% of the share capital, were purchasedat an average price of £7.03 per share and total cost of £415.4 million. Ofthese shares, 57.19 million were purchased in the market and subsequentlycancelled. Such annual rolling share repurchases are believed to have a moresignificant impact in improving share owner value than sporadic buy-backs. As noted above, your Board has also decided to increase the final dividend by20% to 9.13p per share, taking the full year dividend to 13.45p per share. Developments in 2007 and 2008 Including associates, the Group had over 110,000 full-time people in over 2,000offices in 106 countries at the year end. It services over 340 of the FortuneGlobal 500 companies, over one-half of the Nasdaq 100, over 30 of the Fortunee-50, and approximately 610 national or multi-national clients in three or moredisciplines. More than 370 clients are served in four disciplines and theseclients account for 58% of Group revenues. The Group also works with over 270clients in six or more countries. These statistics reflect the increasing opportunities for developing clientrelationships between activities nationally, internationally and by function.The Group estimates that over 35% of new assignments in the year were generatedthrough the joint development of opportunities by two or more Group companies.New integration mechanisms, sensitive to global and local opportunities,including WPP global client leaders and country managers, continue to bedeveloped. There is an increasing number of major client creative andintegration opportunities at a Group level. 2007 saw, for instance, thedevelopment of a new agency, in successful competition against all our majorcompetitors, specifically to address the objectives of one high technologyclient. Future prospects Despite the recent financial crisis, the world economy continued to grow in2007, after the recovery in both 2003 and 2004, driven by the United States,Asia Pacific, Latin America, the Middle East, Russia and the other CIScountries. As a result, your Company has performed again at record levels. Inaddition, Africa also showed significant signs of growth, no doubt stimulated byChinese interest and investment and is increasingly becoming a continent ofopportunity. The FIFA World Cup in South Africa in 2010 will have a significantimpact in focusing further attention on the African continent. Whilst like-for-like revenues have grown beyond market expectations,like-for-like average headcount has grown less. Following this productivityimprovement, the Group's operating margin at post-incentive levels has improved.In addition, given improved levels of operating profit and margin, incentivepools and variable staff costs are now at around the highest levels. This willimprove operational gearing and flexibility in 2008 and beyond. The task of improving property utilisation continues to be a priority with aportfolio of approximately 19 million square feet worldwide. In December 2002,establishment cost as a percentage of revenue was 8.4%, with a goal of reducingthis ratio to 7.0% in the medium term. At the end of 2004 the establishment costto revenue ratio reduced to 7.6% and by December 2005 this ratio improvedfurther to 7.2%, driven by better utilisation and higher revenues. In 2006 and2007, further improvements were made and this ratio reduced slightly to 6.9%. As usual, the budgets for 2008 have been prepared on a prudent basis, largelyexcluding new business, particularly in advertising and media investmentmanagement. They predict improvements in like-for-like revenues at even higherlevels than at this time in 2007 (which were around 4.0% to 4.5%), with balancedgrowth in the first and second half of the year. They also indicate marketingservices revenues growing faster than advertising and media investmentmanagement. We have only preliminary data for January in 2008 and this showslike-for-like revenues up 5%. On the basis of these data, 2008 should be abetter year than 2007, against the views of most economic forecasters, whopredict a gloomy 2008. Despite the severe financial crisis, the 'real' economy continues to grow andour clients continue to expand, particularly in the BRICs and the Next Elevenmarkets, addressing the twin opportunities of geographical expansion andtechnological change. However, it seems inevitable that the 'real' world will at some point in time beaffected by the private equity, sub-prime, insurance monoline, and housingmarket crises, that we have seen. In our view, this seems more likely to be in2009, when a slow-down (not a recession) in the United States will be hard toavoid, particularly as a new United States President tries to deal with heavygovernment spending and twin deficits, and 'kitchen-sinks' his or her budgets,in front of a possible eight year "reign", just as new CEOs tend to do withcompanies - and there are no mini- or maxi-quadrennial events to stimulateeconomic activity. The decoupling theories will also be challenged, as China maypause a little, after the stimulation of the Beijing Olympics, and the worldcontinues to catch cold when America sneezes - if not influenza, as it used tobe. 2010 may be a different story, however, with the FIFA World Cup in South Africa,the Winter Olympics in Vancouver and the mid-term Congressional elections in theUnited States, stimulating economic activity Concerns remain over the Middle East, oil and commodity prices and the twindeficits of the United States economy and inflation, in general. Despitesignificant increases in prices of raw material inputs, clients, particularlyFMCG or packaged goods companies, have been able to pass on cost increases sofar in the form of price increases, as inflation quickens. This year'sprospects, therefore, again look good, with worldwide advertising and marketingservices spending set to rise by at least 4% and with your company expected togrow in excess of this and therefore increasing share. Although growth in theworld economy continues to be led by Asia Pacific, Latin America, Africa and theMiddle East, Russia and the other CIS countries, even Western Continental Europemay continue the improvement seen in 2007, where growth in the second half wasup significantly. 2008 should also benefit from the build-up to the United States Presidentialelections and the Beijing Olympics, which, as a maxi-quadrennial year, should bea very strong one, buoyed by heavy United States political advertising as themultiple candidates slug it out and by the European Football Championships. In the short-term, growth in advertising and marketing services expenditure mayremain in low to medium single digit territory, given the historically lowinflationary environment and the fear of inflation growing, concentratingdistribution and consequent lack of pricing power. In this climate, procurementpressure continues (but less so in new media) and the significant proportion offee remuneration dampens revenue growth on cyclical upturns (and moderates ondownturns). However, there continues to be significant opportunities in the areaof outsourcing clients' marketing activities, consolidating clients' budgets andcapitalising on competitive weaknesses. In addition, spending amongst thepackaged goods, pharmaceutical, oil and energy, government (the governmentcontinues to be one of the largest advertisers in the UK market) and price-valueretail sectors, which remained relatively resilient in the recession of 2001 and2002, have been buttressed by increased activity in previouslyrecession-affected sectors like technology, financial services, media andentertainment and telecommunications. In the long-term, the outlook appears very favourable. Overcapacity ofproduction in most sectors and the shortage of human capital, the developmentsin new technologies and media, the growth in importance of internalcommunications, the continued strength of the United States economy, the need toinfluence distribution, and the new focus on corporate responsibility issuessuch as climate change, underpin the need for our clients to continue todifferentiate their products and services both tangibly and intangibly.Moreover, the continuing growth of the BRICs (Brazil, Russia, India and China),Next Eleven and other faster-growing geographical markets, will add significantopportunities in Asia Pacific, Latin America, Africa and the Middle East andCentral and Eastern Europe - along with the growth of "new-BRICs" such asVietnam, Pakistan, Indonesia and Bangladesh. Advertising and marketing servicesexpenditure as a proportion of gross national product should resume its growthand burst through the cyclical high established in 2000. Given these short-term and long-term trends, your Company has three strategicpriorities. In the short-term, having weathered the recession, to continue tocapitalise on the 2004 to 2007 up-turn and deal with any slow-downs; in themedium-term, to continue to successfully integrate acquired companies; andfinally, in the long-term, to continue to develop its businesses in thefaster-growing geographical areas of Asia Pacific, Latin America, Africa and theMiddle East, and Central and Eastern Europe and in the faster-growing functionalareas of marketing services, particularly direct, internet, interactive andmarket research. Incentive plans for 2008 will again focus more on operating profit growth thanhistorically, in order to stimulate top-line growth, particularly ininformation, insight and consultancy, although objectives will continue toinclude operating margin improvement, improvement in staff costs to revenueratios and qualitative Group objectives, including co-ordination, talentmanagement and succession planning. In these circumstances, there is no reason to believe that the Group cannotachieve the revised margin targets set with the announcement of last year'sresults, to achieve margins of 15.5% in 2008 and 16.0% in 2009. Budgets andincentive targets for 2008 include the operating margin target of 15.5%previously set for 2008. Neither is there any reason why operating margins couldnot be improved beyond these levels by continuing focus on revenue growth andcareful husbandry of costs. Our ultimate objective continues to be to achieve a19% margin over a period of time and to continue to improve the return oncapital employed. We believe we can continue to make the necessary investment intalent and the application of technology, whilst, at the same time, improvingoperating margins, at around current levels of like-for-like revenue growth. Increasingly, WPP is concentrating on its mission of the "management of theimagination", and ensuring it is a big company with the heart and mind of asmall one. To aid the achievement of this objective and to develop the benefitsof membership in the Group for both clients and our people, the parent companycontinues to develop its activities in the areas of human resources, property,procurement, information technology and practice development. Eleven practiceareas which span all our brands have been developed initially in mediainvestment management, healthcare, privatisation, new technologies, new fastergrowing markets, internal communications, retail, entertainment and media,financial services, hi-tech and telecommunications and corporate responsibility. Another reason for cautious optimism ... The world continues to be a restless place: nothing stays still for very long;there is a constant thirst for change. And restlessness continues to be good forthe marketing communications industry. Both companies and governments have learnt an important lesson over the lasttwenty years or so: it's an extremely dangerous and expensive exercise toattempt to impose change on citizens, employees or consumers without firsttaking them into your confidence. And that, of course, means consulting them,involving them, talking them through the reasons for change and presenting themclearly with its intended benefits. The real costs involved in suchcommunications programmes are minimal; if only because the costs of encounteringresistance can be so formidable. Planned communications act as a kind oflubricant - and so help make all organisations more efficient. From fundamental research right through to consumer advertising, WPP companiesare there to help their clients put change into effect as seamlessly aspossible. It involves the scrupulous mining of hard data as well as an intuitiveunderstanding of people's aims and apprehensions and how they respond topromise. And that, in turn, is why you'll find such an extraordinary diversity of talentin WPP companies: statisticians and art directors; product designers and webdesigners; futurologists and copywriters; experts in everything from fashion topharmaceuticals. There are getting on for 100,000 of them, putting their talents at the disposalof our clients. So when, as now, we reveal our gratifying figures for last year,we are very glad indeed to recognise those many thousands of men and womenaround the world who made those figures possible. We thank them all; and wishthem great satisfaction in their future work and all deserved success. Further information:Sir Martin Sorrell ) (+44) 20 7408 2204Paul Richardson )Feona McEwan ) Fran Butera (+1) 212 632 2235 www.wppinvestor.com This press release may contain forward-looking statements within the meaning ofthe federal securities laws. These statements are subject to risks anduncertainties that could cause actual results to differ materially includingadjustments arising from the annual audit by management and the company'sindependent auditors. For further information on factors which could impact thecompany and the statements contained herein, please refer to public filings bythe company with the Securities and Exchange Commission. The statements in thispress 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 ExchangeRelated Shares:
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