18th Aug 2006 07:00
WPP Group PLC18 August 2006 PRESS RELEASE 18 August 2006 WPP 2006 INTERIM RESULTS Billings up over 27% at £14.4 billion Reported revenue up over 16% to £2.86 billion Like-for-like revenue up 5% Headline operating profit up over 20% to £361 million Headline operating margin up 0.5 margin points to 12.6% Headline profit before tax up over 24% to £316 million Profit before tax up almost 30% to £287 million Diluted headline earnings per share up over 20% at 16.6p Interim ordinary dividend up 20% to 3.60p per share • Billings up over 27% at £14.4 billion • Reported revenue up over 16% to £2.86 billion and up almost 13% in constant currencies • Like-for-like revenue up 5% • Headline operating profit up over 20% to £361.0 million from £299.6 million and up almost 17% in constant currencies • Headline operating margin up 0.5 margin points to 12.6% • Headline profit before tax up over 24% to £316.1 million from £254.8 million and up almost 20% in constant currencies • Profit before tax up almost 30% to £287.1 million from £221.5 million and up almost 25% in constant currencies • Diluted headline earnings per share up over 20% to 16.6p from 13.8p and up over 15% in constant currencies • Diluted earnings per share up almost 29% to 14.3p and up almost 23% in constant currencies • Interim ordinary dividend up 20% to 3.60p per share • Average net debt up £150 million to £1,170 million from £1,020 million, despite cash payments of £287 million for net cash acquisition payments and share repurchases in the first six months • Estimated net new business billings of £2.204 billion ($4.078 billion). Rated No. 1 in almost all new business surveys for the first half of 2006 • Strategic opportunities remain new markets and new technologies In this press release not all the figures and ratios used are readily availablefrom the unaudited interim results included in Appendix I. Where required,details of how these have been arrived at are shown in note 17 of Appendix I. Summary of Results The Board of WPP announces its unaudited interim results for the six monthsended 30 June 2006. These represent record first half results, reflectingcontinued significant improvement over last year and further evidence of growthacross the whole business, both functionally and geographically. Billings were up over 27% at £14.407 billion. Reportable revenue was up 16.1% at £2.864 billion. On a constant currency basis,revenue was up 12.7% compared with last year, with currency fluctuations in thefirst six months accounting for over 3 percentage points of the Group's revenuegrowth, principally due to the strength of the US dollar against sterling. On alike-for-like basis, which excludes the impact of acquisitions and currency,revenues were up 5.0% in the first half, a slight increase on the encouragingorganic growth of 4.8% in the first quarter of 2006. Headline earnings before interest, depreciation and amortisation ("EBITDA") wasup 22.0% to £427.9 million and up over 18% in constant currencies. Headlineoperating profit was up 20.5% to £361.0 million from £299.6 million and up 16.8%in constant currencies. Headline operating margins rose by 0.5 margin points to 12.6% from 12.1%, inline with the full year margin target of 14.5%. Before short-term and long-termincentives (including the cost of share-based compensation), operating marginsrose by 0.5 margin points to 16.3% from 15.8%. Short and long-term incentivesand the cost of share-based incentives amounted to £105.1 million or 22.7% ofoperating profits before bonus and taxes, as improvements in operatingprofitability continued to swell incentive pools towards maximum levels. On a reported basis the Group's staff cost to revenue ratio, includingincentives, was down 0.3 margin points to 60.4% in the first half of 2006,compared with the same period last year. On a like-for-like basis, the averagenumber of people in the Group, excluding associates, was 76,436 in the firsthalf of the year, compared to 73,933 in 2005, an increase of 3.4%. On the samebasis, the total number of people in the Group at 30 June 2006 was 77,535compared to 75,004 in June 2005, also an increase of 3.4%. Headline profit before tax was up 24.1% to £316.1 million from £254.8 million orup 19.9% in constant currencies. Net finance costs (excluding the revaluation of financial instruments) were flatwith last year at £44.9 million compared with £44.8 million in 2005, reflectinghigher interest rates, offset by the impact of improved liquidity as a result ofa reduction in working capital. Reported profit before tax rose by 29.6% to £287.1 million from £221.5 million.In constant currencies pre-tax profits rose by 24.8%. The tax rate on headline profit before tax on ordinary activities was 29.0%,slightly up on the first half 2005 rate of 28.5%. Profits attributable to ordinary share owners rose by 30.5% to £176.7 millionfrom £135.4 million or up 24.4% in constant currencies. Diluted headline earnings per share rose by 20.3% to 16.6p from 13.8p. Inconstant currencies, earnings per share on the same basis rose by 15.6%. Dilutedreported earnings per share were up 28.8% to 14.3p and up 22.7% in constantcurrencies. The Board declares an increase of 20% in the interim ordinary dividend to 3.60pper share. The record date for this interim dividend is 13 October 2006, payableon 13 November 2006. Further details of WPP's financial performance are provided in Appendix I. Review of Operations Revenue by Region The pattern of revenue growth differed regionally. The table below gives detailsof the proportion of revenue and revenue growth by region for the first sixmonths of 2006: Region Constant Reported Constant Like-for- Currency* Revenue Currency* like** Revenue as Growth Revenue Revenue a % of Total 06/05 Growth Growth Group 06/05 06/05 % % % North 39.6 16.7 11.3 4.5AmericaUnited 14.6 6.7 6.7 1.2KingdomContinentalEurope 25.7 11.9 11.4 4.5 Asia 20.1 29.3 22.8 9.4Pacific,LatinAmerica,Africa &Middle East ---------- ---------- ----------- ----------- TOTAL GROUP 100.0 16.1 12.7 5.0 ---------- ---------- ----------- ----------- * Constant currency growth excludes the effects of currency movements. ** Like-for-like growth excludes the effects of currency movements and theimpact of acquisitions. On a constant currency basis, the Group grew at almost 13% and all regionsshowed double digit revenue growth, with the exception of the United Kingdom. The United States continues to grow, despite the twin deficits and threat ofinflation. Latin America remains one of the fastest growing regions, as it wasin 2004 and 2005. Asia Pacific shows strong growth across the region, withMainland China and India leading the way, with like-for-like growth rates of 22%and 23%. Western Europe, although relatively more difficult, has improved overlast year and the United Kingdom has stabilised, at low levels of growth. Ratesof growth in Europe continue, however, to be two-paced, with the United Kingdom,Germany, France, Spain, Italy, Netherlands, Sweden, Denmark and Portugal growingslower and Central and Eastern Europe, Russia and the CIS countries, inparticular, more buoyant. Africa and the Middle East is currently the fastestgrowing region, along with Central and Eastern Europe. There is no doubt thatSouth Africa, and Africa as a whole, will benefit from the World Cup in 2010.Perhaps not as significantly as China will from Beijing 2008, but certainly theevent will be of similar political, social and economic significance. Record estimated net new business billings of £2.204 billion ($4.078 billion)were won in the first half of the year (up 15% on the comparable period lastyear) and the Group was rated No. 1 in almost all new business surveys. Revenue by Communications Services Sector and Brand The pattern of revenue growth varied by communications services sector andcompany brand. The table below gives details of the proportion of revenue andrevenue growth by communications services sector for the first six months of2006: Communications Constant Reported Constant Like-for-Services Currency* Revenue Currency* like**Sector Revenue as Growth Revenue Revenue a % of Total 06/05 Growth Growth Group 06/05 06/05 % % % Advertising,Media 47.3 14.2 10.7 3.4InvestmentManagementInformation,Insight & 15.3 13.3 10.9 4.1ConsultancyPublicRelations & 10.1 15.3 11.6 5.5Public AffairsBranding &Identity, 27.3 21.6 18.0 8.0Healthcare andSpecialistCommunications ---------- ---------- ---------- ----------TOTAL GROUP 100.0 16.1 12.7 5.0 ---------- ---------- ---------- ---------- * Constant currency growth excludes the effects of currency movements. ** Like-for-like growth excludes the effects of currency movements and theimpact of acquisitions. Media investment management continues to show the strongest growth of all ourcommunications services businesses, along with direct, internet and interactiveand healthcare communications. Direct and digitally-related activities nowaccount for approximately 20% of the Group's revenues, which are running at therate of approximately $11 billion per annum. Brand advertising, particularly inthe new faster growing markets, along with information, insight & consultancyand branding & identity, healthcare and specialist communications, showconsistent growth. Public relations and public affairs also continues to show significantimprovement over last year, following a strong year in 2005. It seems that thepublic relations and public affairs businesses, in particular, are benefitingfrom the growth of new technologies, where editorial publicity is very effectiveand probably more effective than paid for publicity. Social networking, inparticular, is offering a new form of word-of-mouth "advertising", that is veryeffective. These new technologies are probably boosting the growth rates ofpublic relations and public affairs activities. Advertising and Media Investment Management On a constant currency basis, advertising and media investment managementrevenues grew by almost 11%, with like-for-like revenue growth well over 3%.Operating margins improved by 0.7 margin points. These businesses generated estimated net new business billings of £1.894 billion($3.504 billion). Information, Insight and Consultancy The Group's information, insight and consultancy businesses continued theirgrowth, with constant currency revenues increasing by almost 11% and operatingmargins improving. Public Relations and Public Affairs In constant currencies, the Group's public relations and public affairs revenuesrose by over 11%, with operating margins maintained at almost 14%. Branding and Identity, Healthcare and Specialist Communications The Group's branding and identity, healthcare and specialist communicationsconstant currency revenues were up 18%, with operating margins up 0.5 marginpoints, as our direct, internet and interactive businesses targeted sales growthand invested in talent. Particularly good performances were registered byseveral companies in this sector in the first half - including, in promotion anddirect marketing OgilvyOne, Wunderman, G2 and Bridge Worldwide; in branding andidentity Landor, Enterprise IG, VBAT, Addison, The Partners and Fitch; inhealthcare Sudler & Hennessey and Grey Healthcare Group; and in specialistcommunications Pace, Spafax and MJM. Cash Flow and Balance Sheet A summary of the Group's unaudited cash flow statement and balance sheet andnotes as at 30 June 2006 are provided in Appendix I. In the first half of 2006, operating profit was £308 million, depreciation,amortisation and impairment £103 million, non-cash based incentive charges of£38 million, net interest paid £37 million, tax paid £69 million, capitalexpenditure £74 million and other net cash inflows £50 million. Free cash flowavailable for working capital requirements, debt repayment, acquisitions andshare re-purchases was, therefore, £319 million. This free cash flow wasabsorbed by £125 million in net cash acquisition payments and investments (ofwhich £32 million was for initial acquisition payments net of disposal proceeds,£81 million was for earnout payments and the balance related to prior year loannote redemptions), and £162 million by share re-purchases, a total outflow of£287 million. This resulted in a net cash inflow of £32 million, in line withthe Group's free cash flow objectives. Average net debt in the first six months of 2006 rose by £150 million to £1,170million, compared to £1,020 million in 2005, at 2006 exchange rates. On 30 June2006 net debt was £1,219 million, against £1,242 million on 30 June 2005, aslight reduction. The Board continues to examine ways of deploying the Group'ssubstantial surplus cash flow, which now amounts to almost £600 million or over$1 billion per annum, to enhance share owner value, given that interest coverremains strong at 8.0 times in the first half of 2006, in comparison to 6.7times on a comparable basis, in the first half of 2005. As necessary capitalexpenditure, mainly on information technology and property, is expected toremain equal to or less than the depreciation charge in the long term, theCompany has continued to concentrate on examining possible acquisitions orreturning excess capital to share owners in the form of dividends and/or sharebuy-backs. In the first half of 2006, the Group continued to make small to medium-sizedacquisitions or investments in high growth geographical or functional areas. Inthe first six months of this year, acquisitions and increased equity stakes havebeen concentrated in advertising & media investment management in the UnitedStates, the United Kingdom, Germany, South Africa, Israel, China, Singapore andBrazil; in information, insight & consultancy in China; in public relations &public affairs in India; in healthcare in the United States, the Netherlands andSwitzerland and in direct, internet & interactive in the United States. In addition to increasing the interim dividend by 20% to 3.60p per share, theCompany continues to focus on examining the alternative between increasingdividends and accelerating share buy-backs, and completed a review of its sharebuy-back policy earlier this year. The Group will accelerate its sharerepurchase programme and will now aim to buy-back up to 2-3% of its sharecapital each year, as compared to 1-2% historically. In the first half of theyear 24.0 million ordinary shares were purchased, equivalent to 1.9% of theshare capital, including 5.6 million ordinary shares acquired by the WPP ESOP inconnection with restricted stock awards. These shares were acquired at anaverage price of £6.73 per share and total cost of £161.5 million. Of theseshares, 18.4 million were purchased in the market and subsequently cancelled. Client Developments in the First Half of 2006 Including associates, the Group currently employs almost 97,000 full-time peoplein over 2,000 offices in 106 countries. It services over 300 of the FortuneGlobal 500 companies, over one-half of the Nasdaq 100, over 30 of the Fortunee-50, and approximately 330 national or multi-national clients in three or moredisciplines. More than 230 clients are served in four disciplines and theseclients account for over 50% of Group revenues. This reflects the increasingopportunities for co-ordination between activities both nationally andinternationally. The Group also works with nearly 200 clients in 6 or morecountries. The Group estimates that more than 35% of new assignments in the first half ofthe year were generated through the joint development of opportunities by two ormore Group companies. Current Progress and Future Prospects The Group's performance in the first half of the year mirrored the continuinggood economic conditions in the United States, Central and Eastern Europe, AsiaPacific, Latin America, Africa and the Middle East, reinforced by a mildimprovement in Western Europe, although the United Kingdom remains relativelyweak, even against Continental Europe. In the last few months, Germany has shownstrength and Spain slower growth, with Brazil also softening. Like-for-likerevenue was up 5% in the first half of 2006, exceeding budgeted levels. Thistrend continued into the second half, with July like-for-like revenues up almost5% . Experts forecast that the industry will grow at 4% this year, which, sofar, the group has exceeded, growing market share. An operating margin of 12.6%was achieved, in line with the Group's revised margin target for 2006 of 14.5%. The first half of 2006 saw another significant improvement in activity, evenagainst the strong performance of 2005. Levels of activity in 2006 should match,or surpass, those seen in 2005 and there are significant new businessopportunities at both the network and parent company levels. As long as theUnited States economy holds up, 2007 should be a good year too, buoyed by thebuild up to Beijing 2008 and heavy United States political spending, in advanceof a Presidential election, which may pit Hillary Clinton against John McCain.2008 should be a bumper year, with the culmination of these two major events andthe European Football Championships in Austria and Switzerland. 2009 may seeslower growth, following the strength of 2008 and as the new United Statesadministration wrestles with the country's economic issues. Corporate profitability remains strong on both sides of the Atlantic, in fact,at the highest levels as a proportion of GNP for almost 50 years and, as aresult, advertising and marketing services spending does too, if anythingcontinuing to strengthen. However, in a low inflationary environment, whichremains a government and central bank priority and which has been with uscontinuously for almost 15 years, significant, continuous, like-for-like salesgains remain difficult to achieve. Overcapacity, disintermediation via the web,slowing population growth and concentrating distribution result in limitedpricing power. This pressure is at its most intense in the slower growth, butlarge, mature markets of the United States and Western Europe. Concerns remainof stagflation, as the United States and other nations wrestle with increasingoil prices, twin fiscal and trade deficits and the potential impact of changesin interest rate policy. The consumer remains under pressure on both sides of the Atlantic fromincreasing levels of debt, low savings ratios and potentially fragile houseprices. Any slack in consumer spending has not to date been taken up bysignificant increases in corporate capital spending, beyond replacementspending. Company boards remain cautious, perhaps cowed by regulatory measuresand fear of failure. The average life of a Chief Executive Officer, remainsaround four years and apparently under two years for a Chief Marketing Officerin the United States. In this environment, clients are seeking new ways of reaching the consumer andfinding new geographic growth opportunities. Satellite and cable television,outdoor and out-of-home advertising and radio in traditional media and moreimportantly direct, internet and interactive are taking a growing share ofclient spending, albeit from lower absolute and relative levels. Similarly, butgeographically, Asia (particularly but not exclusively China and India), LatinAmerica, despite political volatility and the growth of populism andprotectionism, Africa, the Middle East and Eastern Europe are becoming more andmore significant, again from lower absolute and relative levels. We are finding that our industry is becoming more and more two-paced. Slowgrowth in traditional media, such as network television, newspapers andmagazines, more rapid growth in new media, such as direct, internet andinteractive, driven by new technology. Slower growth in the mature markets ofthe United States and Western Europe, more rapid growth in Central and EasternEurope, Asia, Latin America, Africa and the Middle East. Growth patterns evenvary within regions - for example, slow growth in Western Europe alongside rapidgrowth in Central and Eastern Europe. In these market conditions, the prospects for our industry remain very good, asthe need for differentiation through innovation and branding and globalexpansion grow. The two critical strategic opportunities for our clients, mediaowners and ourselves, remain geographical expansion across the globe andassessing and dealing with the implications of new technological developments -which could be glibly described as "China and the internet". Clearly, it is morecomplex than this, with China an icon for Asia, Latin America, Africa and theMiddle East and Central and Eastern Europe and the internet an icon for mobile,iPodsTM, video iPodsTM, PVRs, HDTV, IPTV, gaming and social networks, amongstothers. Geographical development remains relatively easy to manage.Technological development remains relatively difficult to manage as it is taxingto forecast the impact of such changes, although increasing complexity makes usmore valuable to our clients. The prospects for trading performance improvements at WPP remain good too. Ayear ago the Group revised its margin target for 2005 to 13.7% and for 2006 to14.2%. These were raised again at the time of the Group's 2005 preliminaryannouncement to 14.5% for 2006 from 14.2% and to 15.0% for 2007 from 14.7%. TheGroup is on track to achieve this accelerated timetable. Our long term operatingmargin target remains 19%. Margin targets for 2008 and 2009 will be outlined inthe preliminary results announcement for 2006 in February 2007. Plans, budgets and forecasts will continue to be made on a conservative basisand considerable attention is still being focused on achieving margin and staffcost to revenue or gross margin targets. Margins continue to be strong inimportant parts of the business. In addition to influencing absolute levels ofcost, the initiatives taken by the parent company in the areas of humanresources, property, procurement, information technology and practicedevelopment continue to improve the flexibility of the Group's cost base. The Group continues to improve co-operation and co-ordination between companiesin order to add value to our clients' businesses and our people's careers, anobjective which has been specifically built into short-term incentive plans.Particular emphasis and success has been achieved in the areas of mediainvestment management, healthcare, privatisation, new technologies, new markets,retailing, internal communications, hi-tech, financial services and media andentertainment. The Group continues to lead the industry, in co-ordinatinginvestment geographically and functionally through parent company initiatives,which competitors initially 'pooh-poohed' but now attempt to imitate. The Group also continues to concentrate on its long-term targets and strategicobjectives of improving operating profits; improving operating margins by halfto one margin point per annum or more depending on revenue growth; improvingstaff cost to revenue or gross margin ratios by 0.6 margin points per annum ormore depending on revenue growth; converting 25-33% of incremental revenue toprofit; growing revenue faster than industry averages and encouragingco-operation among Group companies. As clients face an increasingly undifferentiated market place, particularly inmature markets, the Group is competitively well positioned to offer them thecreativity they desire, along with the ability to deliver the most effectiveco-ordinated communications in the most efficient manner. The rise of theprocurement function, the increasing concentration of distribution and thelegislative acceptance of media ownership concentration in several countries,will further stimulate consolidation amongst clients, media owners, wholesalersand retailers and last, but not least, advertising and marketing servicesagencies. The Group is very well positioned to capitalise on these developmentsand to focus on developing the best talents, the strongest management structuresand the most innovative incentive plans in the industry for our people. For further information: Sir Martin Sorrell )Paul Richardson ) +44 20 7408-2204Feona McEwan ) Fran Butera +1 212 632 2235 www.wppinvestor.com This announcement has been filed at the Company Announcements Office of theLondon Stock Exchange and is being distributed to all owners of Ordinary sharesand American Depository Receipts. Copies are available to the public at theCompany's registered office. The following cautionary statement is included for safe harbour purposes inconnection with the Private Securities Litigation Reform Act of 1995 introducedin the United States of America. This announcement may contain forward-lookingstatements within the meaning of the US federal securities laws. Thesestatements are subject to risks and uncertainties that could cause actualresults to differ materially including adjustments arising from the annual auditby management and the Company's independent auditors. For further information onfactors which could impact the Company and the statements contained herein,please refer to public filings by the Company with the Securities and ExchangeCommission. The statements in this announcement should be considered in light ofthese risks and uncertainties. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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