17th Aug 2007 07:01
WPP Group PLC17 August 2007 FOR IMMEDIATE RELEASE 17 August 2007 WPP 2007 INTERIM RESULTS Billings up almost 5% at £15.085 billion Reported revenue up 2% to £2.921 billion and up almost 8% in constant currencies Like-for-like revenue up over 5% Headline operating profit up over 6% to £383 million and up over 12% in constant currencies Headline operating margin up 0.5 margin points to 13.1% Headline profit before tax up almost 7% to £338 million and up almost 14% in constant currencies Profit before tax up over 2% to £294 million and up almost 9% in constant currencies Diluted headline earnings per share up over 9% at 18.2p and up almost 19% in constant currencies Interim ordinary dividend up 20% to 4.32p per share • Billings up almost 5% at £15.085 billion. • Reported revenue up 2.0% to £2.921 billion and up almost 8% in constant currencies. • Like-for-like revenue up 5.3%, gross margin up 5.7%. • Headline operating profit up 6.1% to £383.1 million from £361.0 million and up over 12% in constant currencies. • Headline operating margin up 0.5 margin points to 13.1%. • Headline profit before tax up 6.9% to £338.0 million from £316.1 million and up almost 14% in constant currencies. • Profit before tax up 2.4% to £294.1 million from £287.1 million and up almost 9% in constant currencies. • Diluted headline earnings per share up 9.6% to 18.2p from 16.6p and up almost 19% in constant currencies. • Diluted earnings per share up 2.8% to 14.7p and up almost 12% in constant currencies. • Interim ordinary dividend up 20% to 4.32p per share. • Average net debt for the first half up £26 million to £1,196 million from £1,170 million, despite cash payments of £417 million for net cash acquisition payments and share repurchases in the first six months. • Estimated net new business billings of £1.565 billion ($3.051 billion). • Acquisition of new technology company 24/7 Real Media Inc. completed on 2 July 2007. 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 2007. These represent record levels of performance throughout thebusiness and the achievement, as last year, of the Group's financial model, withlike-for-like revenues growing over 5% and profits almost 10%, at the same timeas earnings per share, on a constant currency basis, grew considerably faster inhigh double digits through a mixture of acquisitions, share buy-backs and areduced tax charge. Billings were up almost 5% at £15.085 billion. Reportable revenue was up 2.0% at £2.921 billion. On a constant currency basis,revenue was up 7.7% compared with last year, with currency fluctuations, chieflythe strength of the £ sterling against the US dollar, in the first six monthsreducing the Group's revenue growth by almost 6 percentage points. Over thefirst half of the year, the US dollar declined 10% against sterling. As a numberof our competitors report in US dollars and inter-currency comparisons aredifficult to make, Appendix 2 shows WPP's interim results in reportable USdollars. This shows, for example, that US dollar reportable revenues were up by12.3% to $5.764 billion, headline profits up 16.5% to $757.6 million and dilutedheadline earnings per share up 20.4% to 36.0c. Further analysis is included inAppendix 2. On a like-for-like basis, which excludes the impact of acquisitions andcurrency, revenues were up 5.3% (gross margin up 5.7%) in the first half, thepace accelerating with 6.2% growth in the second quarter. Headline earnings before interest, depreciation and amortisation ("EBITDA") wasup 5.5% to £452.5 million and up over 11% in constant currencies. Headlineoperating profit was up 6.1% to £383.1 million from £361.0 million and up 12.1%in constant currencies. Headline operating margins rose yet again, in line with objectives, by 0.5margin points to 13.1% from 12.6%, also in line with the full year margin targetof 15.0%. Before short-term and long-term incentives (including the cost ofshare-based compensation), operating margins were flat with last year at 16.3%.Short and long-term incentives and the cost of share-based incentives amountedto £92.2 million or 20.2% of operating profits before bonus and taxes, downslightly on last year as a result of currency movements and the first halfimpact of additional space and staff costs. On a reported basis the Group's staff cost to revenue ratio, includingincentives, improved 0.5 margin points to 59.9% in the first half of 2007,compared with the same period last year, as productivity rose. On alike-for-like basis, the average number of people in the Group, excludingassociates, was 81,521 in the first half of the year, compared to 77,948 in2006, an increase of 4.6%. On the same basis, the total number of people in theGroup, excluding associates, at 30 June 2007 was 82,998 compared to 79,599 inJune 2006, an increase of 4.3%. Headline profit before tax was up 6.9% to £338.0 million from £316.1 million orup 13.7% in constant currencies. Net finance costs (excluding the revaluation of financial instruments) were flatwith last year at £45.1 million compared with £44.9 million in 2006, reflectinghigher interest rates, offset by improved cash management and higher investmentincome. Reported profit before tax rose by 2.4% to £294.1 million from £287.1 million.In constant currencies pre-tax profits rose by 8.9%. The tax rate on headline profit before tax was 26.9%, down 2.1 percentage pointson the first half 2006 rate of 29.0%. Profits attributable to share owners rose by 2.9% to £181.9 million from £176.7million, or up 11.7% in constant currencies. Diluted headline earnings per share rose by 9.6% to 18.2p from 16.6p. Inconstant currencies, earnings per share on the same basis rose by 18.8%. Dilutedreported earnings per share were up 2.8% to 14.7p and up 11.7% in constantcurrencies. The Board declares an increase of 20% in the interim ordinary dividend to 4.32pper share. The record date for this interim dividend is 12 October 2007, payableon 12 November 2007. Further details of WPP's financial performance are provided in Appendices I and2. 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 2007: Region Constant Reported Constant Like-for- Currency(*) Revenue Currency(*) like(**) Revenue as Growth Revenue Revenue a % of Total 07/06 Growth Growth Group % 07/06 07/06 % %North America 38.5 -2.1 8.3 5.1United Kingdom 14.8 3.7 3.7(***) 2.3(****)Continental 26.1 4.1 6.0 3.1EuropeAsia Pacific, 20.6 6.1 11.9 10.9Latin America,Africa & Middle East-------------------- ----- ----- ----- -----TOTAL GROUP 100.0 2.0 7.7 5.3(*****)-------------------- ----- ----- ----- ----- (*) Constant currency growth excludes the effects of currency movements (**) Like-for-like growth excludes the effects of currency movements and theimpact of acquisitions (***) Gross margin up 4.9% (****) Gross margin up 4.1% (******) Gross margin up 5.7% On a constant currency basis, the Group grew at almost 8% and all regions showedgood growth. Again, the world grew at three speeds. The faster growing marketsof Asia Pacific, Latin America, Africa and the Middle East and Central andEastern Europe were at one end of the spectrum and the United Kingdom andWestern Continental Europe at the other, with North America and Spain inbetween. Growth in all regions improved over those seen in the first quarter. The United States continues to grow, with the rate in the first half up over 8%,on a constant currency basis, compared with 6.5% growth in the first quarter. Asin the first quarter Asia Pacific, Latin America, Africa and the Middle East,continues to be the fastest growing region, with revenues up almost 12%. AsiaPacific remains strong, with revenues up almost 11%. Mainland China and Indiacontinued the rapid growth seen in 2006 and the first quarter of 2007, withfirst half like-for-like revenues up almost 29% and 22% respectively.Continental Europe was up 6.0%, an improvement over the 4.4% growth in the firstquarter, with Central and Eastern Europe particularly strong at almost 19%. TheUnited Kingdom remains the slowest growing region with revenues up 3.7%, withgross margin up 4.9% reflecting the relative scale of our market researchrevenues in the United Kingdom. As more market research is executed on the web,both revenue and direct costs are reduced. As a result, gross margin is probablythe better measure of performance. Estimated net new business billings of £1.565 billion ($3.051 billion) were wonin the first half of the year and the Group continues to benefit fromconsolidation trends in the industry, winning several assignments from existingand new clients. The faster growing geographical markets of Asia Pacific, Latin America, Africaand the Middle East and Central and Eastern Europe, accounted for 23% of theGroup's revenues in the first half of 2007. Revenue by Communications Services Sector and Brand The pattern of revenue growth also 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 of2007: Communications Constant Reported Constant Like-for- Services Currency(*) Revenue Currency(*) like(**)Revenue Sector Revenue as a Growth Revenue Growth 07/06% % of Total 07/06 % Growth % Group 07/06 % Advertising, Media 46.5 0.7 6.0 5.2 Investment Management Information, Insight & 14.8 -1.6 3.3(***) 1.3(****) Consultancy Public Relations & 10.8 7.8 14.8 7.7 Public Affairs Branding & Identity, 27.9 4.0 10.5 6.8 Healthcare and Specialist Communications---------------- ----- ---- ---- ---- TOTAL GROUP 100.0 2.0 7.7 5.3(*****)---------------- ----- ---- ---- ---- (*) Constant currency growth excludes the effects of currency movements (**) Like-for-like growth excludes the effects of currency movements and theimpact of acquisitions (***) Gross margin up 5.9% (****) Gross margin up 4.2% (******) Gross margin up 5.7% Media investment management continues to show the strongest growth of all ourcommunications services sectors, along with direct, internet and interactive.Direct and digitally-related activities now account for approximately 23% of theGroup's total revenues, which are running at the rate of approximately $12billion per annum. Brand advertising, particularly in the new faster growingmarkets, along with information, insight & consultancy, branding & identity andspecialist communications, show consistent growth. Public relations and public affairs also continues to show significantimprovement over last year, following a strong year in 2006, with constantcurrency revenues up almost 15%, reflecting the positive impact on the sector'sgrowth of social networking on the web, which demonstrates the increasedeffectiveness of editorial publicity over paid for publicity. Over 53% of the Group's revenues came from outside advertising and mediainvestment management, in the first half of 2007. Advertising and Media Investment Management On a constant currency basis, advertising and media investment managementrevenues grew by 6.0%, with like-for-like revenue growth of 5.2%. Operatingmargins improved by 0.6 margin points in the first half. These businesses generated estimated net new business billings of £1.276 billion($2.489 billion). Information, Insight and Consultancy The Group's information, insight and consultancy businesses growth improved inthe second quarter, with first half revenues, on a constant currency basis, up3.3% and gross margin up 5.9%. Operating margins improved 0.2 margin points inthe first half. Public Relations and Public Affairs In constant currencies, the Group's public relations and public affairs revenuesrose by 14.8%, with like-for-like growth of 7.7%. Operating margins improved 0.8margin points in the first half. Branding and Identity, Healthcare and Specialist Communications The Group's branding and identity, healthcare and specialist communicationsconstant currency revenues were up 10.5%, with operating margins up 0.2 marginpoints. Particularly good performances were registered by several companies inthis sector in the first half - including, in promotion and direct marketingOgilvy Activation, Wunderman, VML, G2, Bridge Worldwide, Mando, EWA, the ForwardGroup; in branding and identity Enterprise IG, Addison and The Partners; inhealthcare Ogilvy Healthworld; and in specialist communications Geppetto,Spafax, the Farm, MJM, the Food Group, BDG, Global Sportnet and Headcount. Cash Flow and Balance Sheet A summary of the Group's unaudited cash flow statement and balance sheet andnotes as at 30 June 2007 are provided in Appendix I. In the first half of 2007, operating profit was £320 million, depreciation,amortisation and impairment £117 million, non-cash based incentive charges £33million, net interest paid £67 million, tax paid £76 million, capitalexpenditure £72 million and other net cash inflows £24 million. Free cash flowavailable for working capital requirements, debt repayment, acquisitions andshare re-purchases was, therefore, £279 million. This free cash flow wasabsorbed by £208 million in net cash acquisition payments and investments (ofwhich £141 million was for initial acquisition payments net of disposalproceeds, £65 million was for earnout payments and the balance of £2 millionrelated to prior year loan note redemptions), and £209 million by sharere-purchases, a total outflow of £417 million. This resulted in a net cashoutflow of £138 million, before any changes in working capital. Average net debt in the first six months of 2007 rose by £85 million to £1,196million, compared to £1,111 million in 2006, at 2007 exchange rates. On 30 June2007 net debt was £1,264 million, against £1,219 million on 30 June 2006, anincrease of £45 million. Your Board continues to examine ways of deploying itsEBITDA of over £1 billion (over $2 billion) and substantial cash flow of over£700 million or over $1.4 billion per annum, to enhance share owner value, giventhat interest cover remains strong at 8.5 times in the first half of 2007, incomparison to 8.0 times on a comparable basis, in the first half of 2006. Asnecessary capital expenditure, mainly on information technology and property, isexpected to remain equal to or less than the depreciation charge in the longterm, the Company has continued to concentrate on examining possibleacquisitions or returning excess capital to share owners in the form ofdividends and/or share buy-backs. In the first half of 2007, 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 (including digital), the United Kingdom, Austria, France, Germany(including digital), the Netherlands (including digital), Russia, Spain, SouthAfrica, Brazil, Colombia, Australia, China and Japan; in information, insight &consultancy in the United States and the United Kingdom; in public relations &public affairs in the United States; in healthcare in the United Kingdom; inbranding and identity in Ireland and in direct, internet & interactive in theUnited States, Belgium, Germany, South Africa, the Middle East, Chile, Mexico,Korea and Singapore. The acquisition of 24/7 Real Media Inc., was completedafter the half-year end on 2 July 2007. This represents the company's first (andthe communications services industry's first) major investment in theapplication of modern media technology to advertising and marketing services. In addition to increasing the interim dividend by 20% to 4.32p 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 in 2006. As a result, the Group accelerated its share repurchaseprogramme and now aims to buy-back up to 4-5% of its share capital each year, ascompared to 1-3% historically. In the first half of the year, 27.906 millionordinary shares equivalent to 2.3% of the share capital, were purchased at anaverage price of £7.50 and total cost of £209 million. All of these shares werepurchased in the market and subsequently cancelled. Client Developments in the First Half of 2007 Including associates, the Group currently employs over 102,000 full-time peoplein over 2,000 offices in 106 countries. It services over 340 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 thefirst half of the year were generated through the joint development ofopportunities by two or more 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, Asia Pacific, Latin America,Africa and the Middle East and Central and Eastern Europe, reinforced by acontinued improvement in Western Europe, although the United Kingdom remainsrelatively weak, even against Western Continental Europe. In the last fewmonths, Spain has shown continued strength and France slower growth, with therest of Western Europe showing progress in Quarter 2 over Quarter 1.Like-for-like revenue was up over 5% in the first half of 2007. This trendcontinued into the second half, with July like-for-like revenues up stronglyover 7%. Experts forecast that the industry will grow at 4-5% this year, which,so far, the group has exceeded, growing market share. An operating margin of13.1% was achieved in the first half, in line with the Group's revised margintarget for 2007 of 15.0%. The first half of 2007 saw another significant improvement in activity, evenagainst the strong performance of 2006. Levels of activity in 2007 should match,or surpass, those seen in 2006 and there are significant new businessopportunities at both the network and parent company levels. As long as theUnited States economy holds up, 2008 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 see Hillary Clinton nominated and elected.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 anticipated strength of 2008 and as the new UnitedStates administration wrestles with the country's fiscal and trade imbalances. 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 16 years, significant, repeated, 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 house prices. Any slack inconsumer spending has not to date been taken up by significant increases incorporate capital spending, beyond replacement spending. Company boards remaincautious, perhaps cowed by regulatory measures and fear of failure. The averagelife of a Chief Executive Officer, remains around four years and apparentlyunder two years for a Chief Marketing Officer in 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 the traditional media and, moreimportantly, direct, internet and interactive (including mobile and video) aretaking a growing share of client spending, albeit from lower absolute andrelative levels. Similarly, but geographically, Asia Pacific (particularly butnot exclusively China and India and including the new tigers of Indonesia,Pakistan and Vietnam), Latin America, despite some political volatility and somegrowth of populism and protectionism, Africa, the Middle East and Central andEastern Europe are becoming more and more significant, again from lower absoluteand relative levels. We are finding that our industry is becoming more and more multi-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, Asia Pacific, LatinAmerica, Africa and the Middle East and Central and Eastern Europe. Growthpatterns even vary within regions - for example, slow growth in Western Europealongside rapid growth 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 Pacific, Latin America, Africaand the Middle East and Central and Eastern Europe and the internet an icon formobile, iPodsTM, video iPodsTM, iPhonesTM, PVRs, HDTV, IPTV, gaming and socialnetworks, amongst others. Geographical development remains relatively easy tomanage. Technological development remains relatively difficult to manage as itis taxing to forecast the impact of such changes, although increasing complexitymakes us more valuable to our clients. It is difficult to imagine what thosehalf a dozen PhDs might now be cooking up in Beijing or Bangalore, let aloneSilicon Valley. Since the birth of WPP in 1985, some 22 years ago, our industry has, so far,seen three distinct phases. The first, some 15-20 years ago, as David Ogilvywould, perhaps, have phrased it, the era of the Big Idea. This is just ascritical today, as big creative ideas need to differentiate clients products andservices, either tangibly or intangibly in an increasingly undifferentiatedworld. Secondly, around 10 years ago, we saw the beginning of the growth andconcentration of media planning and buying or what we call media investmentmanagement. According to industry research sources, approximately 1-in-4advertisements you may see anywhere in the world may have been planned or boughtby WPP's GroupM and its constituent operating brands MindShare, Mediaedge:cia,MediaCom or Maxus. GroupM increasingly provides one buying point in each countryto give clients increased cross-platform content opportunities, buying leverageand consumer and research insights. Inside WPP, there is, therefore, an almost$40 billion (the level of our gross media billings and turnover) media enginethat mirrors the importance of media in the Japanese or Dentsu model. As aresult, traditional media faces increased buying concentration, as well as thechallenges of new media and technology. Finally, we are witnessing, the third era - the application of technology, wherehigh science is being increasingly applied to advertising and marketing servicesindustries. This kicked off with a major land-grab by Google, with its proposed$3.1 billion purchase of DoubleClick, our own $650 million purchase of 24/7 RealMedia Inc. and Microsoft's $6.1 billion purchase of aQuantive. It does notinclude, as some have suggested, the purchase of digital agencies. DoubleClick,24/7 Real Media Inc. and aQuantive represent, for the first time, theapplication of modern technology to provide advertising and marketing solutionsfor clients. Whilst also about talent, these initiatives really concern thedeployment of detailed and precise technology in our industry for the firsttime. This land-grab has also set off a related wave of agency consolidations. The prospects for trading performance improvements at WPP remain good too. Sixmonths ago the Group increased its margin target for 2009 to 16.0% and for 2010to 16.5%. The Group is on track to achieve this accelerated timetable. Our longterm operating margin target remains 19%. 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. Increasingco-operation, although more difficult to achieve in a multi-branded company,which has grown by acquisition, than in an organically grown uni-branded one,remains a priority. The Group also continues to concentrate on its long-term targets and strategicobjectives of improving operating profits by 10-15%; improving operating marginsby half to one margin point per annum or more depending on revenue growth;improving staff cost to revenue or gross margin ratios by 0.6 margin points perannum or more depending on revenue growth; converting 25-33% of incrementalrevenue to profit; 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 ) +44 20 7408-2204Paul Richardson )Feona McEwan )Fran Butera +1 212 632 2235www.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 Exchange MORE TO FOLLOWRelated Shares:
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