WPP plc 20-F 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended 31 December 2007
For the transition period from to
Date of event requiring this shell company report
Commission file number 0-16350
WPP Group plc
(Exact Name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
27 Farm Street, London W1J 5RJ England
(Address of principal executive offices)
Andrea Harris, Esq. Group Chief Counsel
27 Farm Street, London W1J 5RJ England
(Name, Telephone, Facsimile number and Address of
Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares of 10p each
(Title of Class)
American Depositary Shares, each representing five Ordinary Shares (ADSs)
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
At December 31, 2007, the number of outstanding ordinary shares was 1,191,491,263 which includes at such date ordinary shares represented by 19,568,295 ADSs.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES x NO ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
YES ¨ NO x
Note Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨
International Financial Reporting Standards as issued by the International Accounting Standards
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the Reform Act), the Company as defined below may include forward-looking statements (as defined in the Reform Act) in oral or written public statements issued by or on behalf of the Company. These forward-looking statements may include, among other things, plans, objectives, projections and anticipated future economic performance based on assumptions that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. Important factors which may cause actual results to differ include but are not limited to: the unanticipated loss of a material client or key personnel, delays or reductions in client advertising budgets, shifts in industry rates of compensation, regulatory compliance costs or litigation, natural disasters or acts of terrorism, the Companys exposure to changes in the values of other major currencies other than the UK pound sterling (because a substantial portion of its revenues are derived and costs incurred outside of the United Kingdom) and the overall level of economic activity in the Companys major markets (which varies depending on, among other things, regional, national and international political and economic conditions and government regulations in the worlds advertising markets). In addition, you should consider the risks described in Item 3.D., captioned Risk Factors, below, which could also cause actual results to differ from forward-looking information. In light of these and other uncertainties, the forward-looking statements included in this document should not be regarded as a representation by the Company that the Companys plans and objectives will be achieved.
The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
WPP Group plc (WPP) and its subsidiaries and affiliates comprise one of the largest communication services businesses in the world. As of 31 December 2007, the Group had approximately 90,000 employees. For the year ended 31 December 2007, the Group had revenue of approximately £6.2 billion and operating profit of approximately £805 million.
Unless the context otherwise requires, the terms Company, Group and Registrant as used herein shall mean WPP and its subsidiaries.
A. Selected Financial Data
The selected financial data should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company, including the notes thereto.
WPP prepared its primary financial statements under UK Generally Accepted Accounting Practice (UK GAAP) extant in respect of 2004 (2004 UK GAAP) for the years up to and including the year ended 31 December 2004. For periods beginning on or after 1 January 2005, all listed companies in
the European Union, including WPP, were required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards including International Accounting Standards (IFRS). WPPs date of transition to IFRS was 1 January 2004. The selected financial data under IFRS is presented for four years.
The selected income statement data for the three years ended 31 December 2007 and the selected balance sheet data as of December 2007 and 2006 are derived from the Consolidated Financial Statements of the Company, which appear elsewhere in this Form 20-F. The selected financial data for prior periods is derived from the Consolidated Financial Statements of the Company previously filed with the Securities and Exchange Commission as part of the Companys Annual Reports on Form 20-F.
The reporting currency of the Group is the pound sterling and the selected financial data has been prepared on this basis.
Selected Consolidated Income Statement Data under IFRS1
Selected Consolidated Profit and Loss Account Data under 2004 UK GAAP1
Selected Consolidated Income Statement Data under US GAAP
Selected Consolidated Balance Sheet Data under IFRS1
Selected Consolidated Balance Sheet Data under 2004 UK GAAP1
Selected Consolidated Balance Sheet Data under US GAAP
Dividends on the Companys ordinary shares, when paid, are paid to share owners as of a record date, which is fixed by the Company.
The table below sets forth the amounts of interim, final and total dividends paid on the Companys ordinary shares in respect of each fiscal year indicated. In the United States, the Companys ordinary shares are represented by American Depositary Shares (ADSs), which are evidenced by American Depositary Receipts (ADRs) or held in book-entry form. The dividends are also shown translated into US cents per ADS using the average Bloomberg Closing Mid Point rate for pounds sterling, as shown below, for each year presented.
The 2007 interim dividend was paid on 12 November 2007 to share owners on the register at 12 October 2007. The 2007 final dividend is expected to be paid on 7 July 2008 to share owners on the register at 6 June 2008. The Annual General Meeting to approve the final dividend will be on 24 June 2008 and therefore the final dividend has not been included as a liability in the Consolidated Financial Statements.
Fluctuations in the exchange rate between the pound sterling and the US dollar will affect the dollar equivalent of the pound sterling prices of the Companys ordinary shares on The London Stock Exchange Limited (The London Stock Exchange) and, as a result, are likely to affect the market price of the ADSs in the United States. US dollar amounts paid to holders of ADSs also depend on the sterling/US dollar exchange rate at the time of payment. The annual average of the daily Bloomberg Closing Mid Point rate for pounds sterling expressed in US dollars for each of the five years ended 31 December 2007 was:
The following table sets forth for each of the most recent six months, the high and low Bloomberg Closing Mid Point rates. As of 30 April 2008, the Bloomberg Closing Mid Point rate was 1.9832.
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
The Company is subject to a variety of possible risks that could adversely impact its revenues, results of operations or financial condition. Some of these risks relate to the industries in which the Company operates while others are more specific to the Company. The following factors set out potential risks the Company has identified that could adversely affect it. See also the discussion of Forward-Looking Statements preceding Item 1.
The Company competes for clients in a highly competitive industry, which may reduce market shares and decrease profits.
The communications services industry is highly competitive and fragmented. The Companys principal competitors are other large multinational communications services companies, as well as regional and national advertising and/or marketing services firms and new media companies. In the communications services industry, service agreements with clients are generally terminable by the client upon 90 days notice. As such, clients may move their accounts to another agency on relatively short notice. In many cases, a WPP agency represents a client for only a portion of its advertising or marketing services needs or only in particular geographic areas, thus enabling the client continually to compare the effectiveness of the WPP agency against other agencies work. Many clients do not permit an agency working for them to represent competing accounts or product lines in the same market. A lesser number of companies will not permit any of the agencies owned by a communications service company to work on competing accounts or product lines in any market. These client conflict policies can and sometimes do prevent WPPs agencies from seeking and winning new clients and assignments. If WPPs agencies are unable to compete effectively in the markets in which they operate, WPPs market share and profits may decrease.
The Company receives a significant portion of its revenues from a limited number of large clients, and the loss of these clients could adversely impact the Companys prospects, business, financial condition and results of operations.
A relatively small number of clients contribute a significant percentage of the Companys consolidated revenues. The Companys ten largest clients accounted for approximately 19% of revenues in the year ended 31 December 2007. The Companys clients generally are able to reduce advertising and marketing spending or cancel projects at any time for any reason. There can be no assurance that any of the Companys clients will continue to utilise the Companys services to the same extent, or at all, in the future. A significant reduction in advertising and marketing spending by, or the loss of one or more of, the Companys largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Companys prospects, business, financial condition and results of operations.
The Company may be unable to collect balances due from any client that files for bankruptcy or becomes insolvent.
The Company generally provides advertising and communications services to its clients in advance of its receipt of payment. The invoices for these services are typically payable within 30 to 60 days. In addition, the Company commits to media and production purchases on behalf of some of its clients. If one or more of its clients files for bankruptcy, or becomes insolvent or otherwise is unable to
pay for the services the Company provides, the Company may be unable to collect balances due to it on a timely basis or at all. In addition, in that event, media and production companies may look to the Company to pay for media purchases and production work to which it committed as an agent on behalf of these clients. The damages, costs, expenses or attorneys fees arising from the lack of payment could have an adverse effect on the Companys prospects, business, results of operations and financial condition. The reputation of the Companys agencies may also be negatively affected.
The Company is dependent on its employees.
The advertising and marketing services industries are highly dependent on the talent, creative abilities and technical skills of the personnel of the service providers and the relationships their personnel have with clients. The Company believes that its operating companies have established reputations in the industry that attract talented personnel. However, the Company, like all service providers, is vulnerable to adverse consequences from the loss of key employees due to competition among providers of advertising and marketing services for talented personnel.
The Company is exposed to the risks of doing business internationally.
The Company operates in 106 countries throughout the world. The Companys international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to risks regarding:
The occurrence of any of these events or conditions could adversely affect the Companys ability to increase or maintain its operations in various countries.
Currency exchange rate fluctuations could adversely affect the Companys consolidated results of operations.
The Companys reporting currency is pounds sterling. However, the Companys significant international operations give rise to an exposure to changes in foreign exchange rates, since most of its revenues from countries other than the UK are denominated in currencies other than pounds sterling, including US dollars and Euros. Changes in exchange rates cause fluctuations in the Companys revenues when measured in pounds sterling.
The Company may have difficulty repatriating the earnings of its subsidiaries.
Any payment of dividends, distributions, loans or advances to the Company by its subsidiaries could be subject to restrictions on, or taxation of, dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which the Companys subsidiaries operate. If the Company is unable to repatriate the earnings of its subsidiaries it could have an adverse impact on the Companys ability to redeploy earnings in other jurisdictions where they could be used more profitably.
The Company is subject to recessionary economic cycles.
The Companys business is affected by recessionary economic cycles. Recessionary economic cycles may adversely affect the businesses of the Companys clients, which can have the effect of
reducing the amount of services they purchase from the Companys agencies and thus can materially adversely affect the Companys consolidated results of operations.
The Company may be unsuccessful in evaluating material risks involved in completed and future acquisitions.
The Company regularly reviews potential acquisitions of businesses that are complementary to its businesses. As part of the review the Company conducts business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite the Companys efforts, it may be unsuccessful in ascertaining or evaluating all such risks. As a result, it might not realise the intended advantages of any given acquisition. If the Company fails to realise the expected benefits from one or more acquisitions, the Companys business, results of operations and financial condition could be adversely affected.
The Company may be unsuccessful in integrating any acquired operations with its existing businesses.
The Company may experience difficulties in integrating operations acquired from other companies. These difficulties include the diversion of managements attention from other business concerns and the potential loss of key employees of the acquired operations. Acquisitions also frequently involve significant costs related to integrating information technology, accounting and management services, rationalising personnel levels and implementing internal controls. If the Company experiences difficulties in integrating one or more acquisitions, the Companys business, results of operations and financial condition could be adversely affected.
Goodwill and other acquired intangible assets recorded on the Companys balance sheet with respect to acquired companies may become impaired.
The Company has a significant amount of goodwill and other acquired intangible assets recorded on its balance sheet with respect to acquired companies. The Company annually tests the carrying value of goodwill for impairment. The estimates and assumptions about results of operations and cash flows made in connection with impairment testing could differ from future actual results of operations and cash flows. In addition, future events could cause the Company to conclude that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Companys financial condition and results of operations.
The Company may use ordinary shares, incur indebtedness, expend cash or use any combination of ordinary shares, indebtedness and cash for all or part of the consideration to be paid in future acquisitions that would result in additional goodwill being recorded on the Companys balance sheet.
The Company may be subject to certain regulations that could restrict the Companys activities.
From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations and rulings that directly or indirectly affect the form, content and scheduling of advertising, public relations and public affairs, and market research, or otherwise affect the activities of the Company and its clients. For further discussion of such regulations, see the discussion in the Government Regulation section under Item 4B. Although the Company does not expect any existing or proposed regulations to materially adversely impact the Companys business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.
The Company may be exposed to liabilities from allegations that certain of its clients advertising claims may be false or misleading or that its clients products may be defective.
The Company may be, or may be joined as, a defendant in litigation brought against its clients by third parties, its clients competitors, governmental or regulatory authorities or consumers. These actions could involve claims alleging, among other things, that:
The damages, costs, expenses or attorneys fees arising from any of these claims could have an adverse effect on the Companys prospects, business, results of operations and financial condition to the extent that we are not adequately insured against such risks or indemnified by the Companys clients. In any case, the reputation of the Companys agencies may be negatively affected by such allegations.
Civil liabilities or judgments against the Company or its directors or officers based on U.S. federal or state securities laws may not be enforceable in the U.S. or in England.
The Company is a public limited company incorporated under the laws of England and Wales. Some of the Companys directors and officers reside outside of the United States. In addition, a substantial portion of the directly owned assets of the Company are located outside of the United States. As a result, it may be difficult or impossible for investors to effect service of process within the United States against the Company or its directors and officers or to enforce against them any of the judgments, including those obtained in original actions or in actions to enforce judgments of the U.S. courts, predicated upon the civil liability provisions of the federal or state securities laws of the United States.
ITEM 4. INFORMATION ON THE COMPANY
The Company operates through a number of established global, multinational and national advertising and marketing services companies that are organised into four business segments. Our largest segment is Advertising and Media Investment Management where we operate the well-known advertising networks Ogilvy & Mather Worldwide, JWT, Y&R, Grey Worldwide, Bates 141 and the Voluntarily United Group of Creative Agencies (United Group), as well as Media Investment Management companies such as MediaCom, Mediaedge:cia and MindShare. Our other segments are Information, Insight and Consultancy (where our operations are conducted through the Kantar Group), Public Relations and Public Affairs (where we operate through well-known companies such as Burson-Marsteller, Cohn & Wolfe, Hill & Knowlton, Ogilvy Public Relations Worldwide and GCI Group) and Branding & Identity, Healthcare and Specialist Communications, (where our operations are conducted by B to D Group, Fitch, CommonHealth, Wunderman, Sudler & Hennessey, OgilvyOne Worldwide, Ogilvy Healthworld, 141 Worldwide, G2, OgilvyAction, 24/7 Real Media Inc and other companies).
The Companys ordinary shares are admitted to the Official List of the UK Listing Authority and trade on The London Stock Exchange and American Depositary Shares (which are evidenced by ADRs or held in book-entry form) representing deposited ordinary shares are quoted on the NASDAQ Global Select Market (NASDAQ). At 30 April 2008 the Company had a market capitalisation of £7.3 billion.
The Companys executive office is located at 27 Farm Street, London W1J 5RJ, England, Tel: (44) 20-7408-2204 and its registered office is located at Pennypot Industrial Estate, Hythe, Kent CT21 6PE, England.
A. History and Development of the Company
On or about 25 October 2005, the company originally named WPP Group plc and now known as WPP 2005 Limited (Old WPP), completed a reorganisation of its capital and corporate structure through a scheme of arrangement pursuant to Section 425 of the UK Companies Act of 1985 (the Companies Act 1985), resulting in the formation of the Company as the new parent company of Old WPP. On 26 October 2005, the Company effected a reduction of capital, reducing the nominal value of each of its ordinary shares by 465p from 475p to 10p. This reduction of capital created distributable reserves of £5,843,422,695. Pursuant to Rule 12g-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act), the Company succeeded to Old WPPs registration and periodic reporting obligations under the Exchange Act. On completion of the reorganisation, each shareholder of Old WPP received an ordinary share of the Company in place of every Old WPP ordinary share held prior to the reorganisation. Citibank, N.A., depositary for the ADSs representing Old WPP ordinary shares, canceled Old WPP ADSs held in book-entry form and issued ADSs representing ordinary shares of the Company to the holders. Holders of certificated ADSs, or ADRs, of Old WPP were entitled to receive Company ADSs upon surrender of the Old WPP ADRs to the Depositary. Each Old WPP ADS represented five ordinary shares of Old WPP and each Company ADS represents five ordinary shares of the Company.
Old WPP was incorporated and registered in England and Wales in 1971 and is a private limited company under the Companies Act 1985, and until 1985 operated as a manufacturer and distributor of wire and plastic products. In 1985, new investors acquired a significant interest in WPP and changed the strategic direction of the Company from being a wire and plastics manufacturer and distributor to being a multinational communications services organisation. Since then, the Company has grown both organically and by the acquisition of companies, most significantly the acquisitions of JWT Group, Inc. in 1987, The Ogilvy Group, Inc. in 1989, Young & Rubicam Inc. (Young & Rubicam or Young & Rubicam Brands, as the group is now known) in 2000, Tempus Group plc (Tempus) in 2001, Cordiant Communications Group plc (Cordiant) in 2003, Grey Global Group, Inc. (Grey) in 2005 and 24/7 Real Media Inc (TFSM) in 2007.
In July 2007, the Company completed the acquisition of TFSM. WPP paid £316.5 million in an all cash tender offer for TFSM. TFSM is a leading company in the global digital marketing industry. TFSMs digital media business, technology licensing and search marketing services strengthen WPPs position in digital marketing services.
The Company spent £744.4 million, £252.5 million and £719.9 million for acquisitions and investments in 2007, 2006 and 2005, respectively, including payments in respect of loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases of property, plant and equipment and other intangible assets was £170.8 million, £184.5 million and £171.3 million, respectively, and cash spent on share repurchases and cancellations was £415.4 million, £257.7 million and £152.3 million respectively.
B. Business Overview
In 2007, revenues increased by 4.7% to £6.2 billion as compared to 2006. On a like-for-like basis, under which current year actual results on a constant currency basis (which include acquisitions from the relevant date of completion) are compared with prior year results, adjusted to include the results of acquisitions for the commensurate period in the prior year, revenues were up by 5.0%. See Item 5 Operating and Financial Review and Prospects for the Groups view on reviewing its businesses on a like-for-like and constant currency basis. Reported profit before interest and tax increased in 2007 by 8.1% to £846.1 million, including the effects of £44.1 million and £35.5 million of goodwill impairment charges taken on subsidiaries in 2007 and 2006, respectively, and £1.7 million and £8.8 million, respectively, of goodwill write-downs relating to utilisation of pre-acquisition tax losses. Profit before tax in 2007 was up 5.5% to £719.4 million as compared to 2006 and diluted earnings per share increased by 8.0% to 38.0p.
The Companys business comprises the provision of communications services on a national, multinational and global basis. It operates from over 2,000 offices in 106 countries. The Company organises its businesses in the following areas: Advertising and Media Investment Management; Information, Insight and Consultancy; Public Relations and Public Affairs; and Branding and Identity, Healthcare and Specialist Communications (including direct, digital, promotion and relationship marketing).
Approximately 46% of the Companys reported revenues in 2007 were from Advertising and Media Investment Management, with the remaining 54% of its revenues being derived from the business segments of Information, Insight and Consultancy; Public Relations and Public Affairs; and Branding and Identity, Healthcare and Specialist Communications.
The following table shows, for the last three fiscal years, reported revenue attributable to each business segment in which the Company operates.
The pattern of revenue growth also differed regionally. The following table shows, for the last three fiscal years, reported revenue attributable to each geographic area in which the Company operates and demonstrates the Companys regional diversity.
The Companys principal activities within each of its business segments are described below.
Advertising and Media Investment Management
The principal functions of an advertising agency are the planning and creation of marketing and branding campaigns and the design and production of advertisements for all types of media such as television, cable, the internet, radio, magazines, newspapers and outdoor locations such as billboards.
The Companys principal advertising agencies include Ogilvy & Mather Worldwide, JWT, Y&R, Grey Worldwide, the Voluntarily United Group of Creative Agencies and Bates 141. The Company also owns interests in ADK (22.9%); GIIR, Inc (29.0%); Singleton, Ogilvy & Mather in Australia (33.3%) and DYR Tokyo (49%).
Ogilvy & Mather Worldwide. Ogilvy & Mather is a full-service multinational advertising agency. Ogilvy & Mather was formed in 1948 and is headquartered in New York. Its strategy includes an integrated service offering known as 360 Degree Brand Stewardship®, a business platform that enables Ogilvy & Mather to integrate its growing range of disciplines which now include OgilvyAction, Ogilvys brand activation company, Ogilvy Public Relations Worldwide and Ogilvy Healthword. Ogilvy also brought digital and direct media back into their operations in 2005 as Neo@Ogilvy.
JWT. JWT, one of the worlds first advertising agencies, was founded in 1864 and is a full service multinational advertising agency headquartered in New York. JWTs relationships with a number of its major clients have been in existence for many years, exhibiting, management believes, an ability to adapt to meet the clients and markets new demands.
Y&R. Y&R, a full-service multinational advertising agency network headquartered in New York, was formed in 1923 and is now part of a collaborative, multidisciplinary model under Young & Rubicam Brands. Y&Rs clients also benefit from Y&Rs continued investments in its proprietary brand management tool, BrandAsset® Valuator.
Grey Worldwide. Grey commenced operations in 1917 and was incorporated in 1925 as Grey Advertising Inc. Grey has offices in approximately 90 countries and was acquired by WPP in March 2005.
The Voluntarily United Group of Creative Agencies. In late 2005, WPPs Red Cell network was split in two parts, with nine of the former Red Cell offices forming the Voluntarily United Group of Creative Agencies. The group now includes Senora Rushmore United, Madrid; Berlin Cameron United, New York; Cole & Weber United, Seattle; WM United, Buenos Aires; United London; 1861 United, Milan; LDV United, Antwerp; BTS United, Oslo; and Les Ouvriers du Paradis United, Paris.
Bates 141 is an Asia-dedicated advertising and brand activation network. In 2007 several acquisitions were made to broaden the companys geographic coverage in key disciplines.
Media Investment Management
GroupM is WPPs global media investment management operation, serving as the parent company to agencies including MediaCom, Mediaedge:cia and MindShare. With its agencies, GroupM has capabilities in business science, consumer insight, communications and media planning implementation, interactions, content development, and sports and entertainment marketing. The primary purpose of GroupM is to maximise the performance of WPPs media agencies, operating not
only as a parent company but as a collaborator on performance-enhancing activities, such as trading, content creation, sports, digital, finance, tool development and other business-critical capabilities, in order to leverage the combination of GroupMs care and talent resources.
MediaCom. MediaCom became part of GroupM following the Grey acquisition in March 2005 and, as a part of the WPP family, was able to work together with sister media agencies, beginning to develop synergies in a number of relevant professional areas.
Mediaedge:cia. Mediaedge:cia was formed following the Groups acquisition of Tempus in 2001 with the merger of its core brand CIA with The MediaEdge. In addition to its media planning and implementation capability, Mediaedge:cia has established and is growing its operations in interaction (digital, direct & search), entertainment marketing, sports, sponsorship and event marketing, cause-related marketing, content development, return on investment (ROI) and consumer insights, and is now developing a retail marketing practice.
MindShare. MindShare was originally formed from the merger of the media departments of JWT and Ogilvy & Mather. MindShare has recently made significant investments in developing strategic resources, especially in the areas of communications planning, content, insights, digital and ROI, with its ambition moving from being marketing partners for their clients to being their business partners.
Information, Insight and Consultancy
To help optimise its worldwide research offering to clients, the Companys separate global research and strategic marketing consultancy businesses, which are described below, are managed on a centralised basis under the umbrella of the Kantar Group. The principal interests comprising the Kantar Group are:
Research International. RI, a large custom research company, specialises in a wide range of business sectors and areas of marketplace information including strategic market studies, brand positioning and equity research, customer satisfaction surveys, product development, international research and advanced modeling.
Millward Brown. MB is one of the worlds leading companies in advertising research, including pre-testing, tracking and sales modeling, and offers a full range of services to help clients market their brands more effectively.
IMRB International. IMRB is a leading market research business in India.
Kantar Media Research. In 2008, KMR brought together Kantars media audience research measurement assets to respond to client requirements in a new media environment. Products and services in the KMR portfolio include TGI, KMR Software, IntelliQuest CIMS, MARS Pharma and MARS Medical, as well as TV ratings businesses and media solutions through its equity interests in the following principal subsidiaries and investments:
AGBNielsen Media Research. AGBNielsen, a joint venture formed with Nielsen Media Research International, is a leading provider of television audience measurement systems worldwide.
BMRB International. BMRB is one of Europes largest and fastest growing full-service market research agencies. BMRB offers innovative research solutions through its network and partnerships with agencies worldwide.
IBOPE Media Information (the Company holds 31% of the total share capital). IBOPE is one of Latin Americas leading media research businesses, which services national and multinational clients throughout the region in measurement and analysis of television ratings and advertising expenditures.
Lightspeed Research. Lightspeed provides online consumer panel access for tracking and ad hoc studies. Lightspeed also offers online proprietary panel products and solutions for such specialty consumer panels as healthcare, financial services, expectant and new mothers, automotive and family.
Public Relations and Public Affairs
Public Relations and Public Affairs companies advise clients who are seeking to communicate with consumers, governments and/or the business and financial communities. Public Relations and Public Affairs activities include national and international corporate, financial and marketing communications, crisis management, reputation management, public affairs and government lobbying. The Companys global networks in this area included Burson-Marsteller, Hill & Knowlton, Ogilvy Public Relations Worldwide, Cohn & Wolfe and GCI Group.
Burson-Marsteller. B-M, founded in 1953 and part of Young & Rubicam Brands, specialises in corporate and marketing communications, business-to-business services, crisis management, employee relations and government relations. The B-M network includes the businesses of Marsteller, a full service multimedia agency, and public affairs companies BKSH and Penn, Schoen & Berland.
Hill & Knowlton. H&K, founded in 1927, is a worldwide public relations and public affairs firm headquartered in New York. H&K provides national and multinational clients with a wide range of communications services including corporate and financial public relations, marketing communications, internal communication, change management, crisis communications and public affairs counseling. The Hill & Knowlton network also includes the businesses of Blanc & Otus, H&Ks stand-alone technology company, and Wexler & Walker Public Policy Associates.
Ogilvy Public Relations Worldwide. Part of the Ogilvy & Mather worldwide network, OPR is a leading public relations and public affairs firm based in New York with practice areas in marketing, health and medical, corporate public affairs and technology and social marketing. The firm has offices in key financial, governmental and media centres as well as relationships with affiliates worldwide.
Cohn & Wolfe. C&W, a Young & Rubicam Brands company, is an international public relations agency established in 1970. It offers marketing-related public relations for its clients and provides its clients with business results and marketing communications solutions.
GCI Group. GCI Group, Greys global public relations firm and part of Grey Group has expertise in five practices: Consumer marketing, corporate, digital media, healthcare and technology.
Branding and Identity, Healthcare and Specialist Communications
The Companys activities in this business area include branding and identity; healthcare communications; direct digital, promotional and interactive marketing; and other specialist communications services including custom media, demographic and sector marketing, sports marketing, and media and film production services.
Branding and Identity
B to D Group. This branding and design entity, formed in 2005, consists of Landor Associates (a Young & Rubicam Brands company), The Brand Union (formerly Enterprise IG), VBAT, Addison Corporate Marketing, Lambie-Nairn and The Partners (a Young & Rubicam Brands company). The mission of the B to D Group is to maximise and leverage the strengths of each individual company in order to offer clients and prospects the most complete and compelling branding and design solutions. As part of the Group, the companies have access to new clients and untapped markets, as well as resources such as advanced knowledge sharing systems and financial tools. Employee exchange further enables the companies to share top-level strategic thinking, creativity and cultural knowledge.
Fitch. Fitch is a leading brand and design consultancy, operating across the three main geographical areas (Europe, the United States and Asia Pacific) for multinational clients and for those regional clients standing to benefit from a globally informed interdisciplinary approach.
BDG McColl. BDG McColl, Edinburghbased architects and interior designers, specialise in the design of commercial buildings and interiors.
BDGworkfutures. BDG workfutures is an international design consultancy focusing on strategy and design for working environments, working with corporate clients and within the Government sector.
The Company has extensive expertise in healthcare communications, including the global networks of CommonHealth, Sudler & Hennessey (a Young & Rubicam Brands company), Ogilvy Healthworld (part of the Ogilvy & Mather Worldwide network) and GHG (part of Grey Group).
Direct, Digital, Promotion and Relationship Marketing
The Company has a number of operating businesses in this category, including:
Real estate marketing
Media & production services
The original business of the Group remains as the manufacturing division, which operates through subsidiaries of Wire and Plastic Products Limited. The division produces a wide range of products for commercial, industrial and retail applications.
WPP Group plc
WPP, the parent company, develops the professional and financial strategy of the Group, promotes operating efficiencies, coordinates cross referrals of clients among the Group companies and monitors the financial performance of its operating companies. The principal activity of the Group is the provision of communications services worldwide. WPP acts only as the parent company and does not trade. The parent company complements the operating companies in three distinct ways:
The parent company operates with a limited group of approximately 300 people at the centres in London, New York and Hong Kong.
The Group has three strategic priorities:
The significance of corporate responsibility (CR) to the Companys business is continuing to increase. We focus our efforts on the issues we have identified as being most material (relevant and significant) to WPP. We consider five corporate responsibility issues to be of significance to WPP:
The Group services over 340 of the Fortune Global 500 companies, over one-half of the NASDAQ 100 and over 30 of the Fortune e-50. Over 600 clients are served in three distinct disciplines. More than 370 clients are served in four disciplines and these clients account for 58% of Group revenues. The Group also works with over 270 clients in six or more countries. The Companys ten largest clients in 2007, measured by revenues, were BAT, Ford, GlaxoSmithKline, IBM, Johnson & Johnson, Kraft Food, Microsoft, Nestlé, Proctor & Gamble and Unilever. Together, these clients accounted for approximately 19% of the Companys revenues in 2007. No client of the Company represented more than 6% of the Companys aggregate revenues in 2007. The Groups companies have maintained long-standing relationships with many of its clients, with an average length of relationship for the top 10 clients of approximately 50 years.
Total initial cash consideration spent on acquisitions and investments, less cash and cash equivalents acquired, was £587.9 million in 2007. WPP or its operating companies acquired, made an investment in or increased their existing equity stake in a number of companies in 2007, identified below:
In the first quarter of 2008, the Group has made acquisitions, investments or increased equity interests in Advertising and Media Investment Management in China, the UK, the Netherlands, Guatemala and the Middle East; in Information, Insight & Consultancy in China and the US; in Specialist Communications in India and Germany, and in Public Relations and Public Affairs in China.
From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations, and rulings which directly or indirectly affect the form, content, and scheduling of advertising, public relations and public affairs, and market research, or otherwise affect the activities of the Company and its clients. Some of the foregoing relate to privacy and data protection and general considerations such as truthfulness, substantiation and interpretation of claims made, comparative advertising, relative responsibilities of clients and advertising, public relations and public affairs firms, and registration of public relations and public affairs firms representation of foreign governments.
In addition, there is an increasing tendency towards expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to advertising for certain products, such as over-the-counter drugs and pharmaceuticals, cigarettes, food and certain alcoholic beverages, and to certain groups, such as children.
Proposals have been made for the adoption of additional laws and regulations that could further restrict the activities of advertising, public relations and public affairs, and market research firms and their clients. Though the Company does not expect any existing or proposed regulations to materially adversely impact the Companys business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.
C. Organizational Structure
The Companys business comprises the provision of communications services on a national, multinational and global basis. It operates from over 2,000 offices in 106 countries. The Company organises its businesses in the following areas: Advertising and Media Investment Management; Information, Insight and Consultancy; Public Relations and Public Affairs; and Branding and Identity, Healthcare, and Specialist Communications (including direct, digital promotion and relationship marketing). A listing of the Group brands operating within these business segments as at April 2008 is set forth below.
As at April 2008
D. Property, Plant and Equipment
The majority of the Companys properties are leased, although certain properties which are used mainly for office space are owned in the United States (including the 370,000 net square foot Young & Rubicam headquarters office building located at 285 Madison Avenue in New York), Latin America (principally in Argentina, Brazil, Chile, Mexico and Peru), Europe (Spain) and in Asia (India) and manufacturing facilities are owned in the United Kingdom. Principal leased properties, which are accounted for as operating leases, include office space at the following locations:
The Company considers its properties, owned or leased, to be in good condition and generally suitable and adequate for the purposes for which they are used. See also Item 5Operating and Financial Review and Prospects. As of 31 December 2007, the fixed asset value (cost less depreciation) representing properties, both owned and leased, as reflected in the Companys consolidated financial statements was approximately £244.3 million.
The task of improving property utilisation continues to be a priority for the Group, with a portfolio of approximately 19 million square feet worldwide. In December 2002, establishment cost as a percentage of revenue was 8.4%, with a goal of reducing this ratio to 7.0% in the medium term. At the end of 2004 the establishment cost to revenue ratio reduced to 7.6% and by December 2005 this ratio improved further to 7.2%, driven by better utilisation and higher revenues. In 2006 and 2007 further improvements were made and this ratio reduced slightly to 6.9%.
See note 3 to the Consolidated Financial Statements for a schedule by years of future minimum rental payments to be made and future sublease rental payments to be received, as of 31 December 2007, under non-cancelable operating leases of the Company.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The Companys reporting currency is the UK pound sterling. However, the Companys significant international operations give rise to an exposure to changes in foreign exchange rates. The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or functional) currencies of its main operating units. The majority of the Groups debt is therefore denominated in US dollars and euros, as these are the predominant currencies of revenues.
To neutralise foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Company has adopted the practice of discussing results in both reportable currency (local currency results translated into pounds sterling at the prevailing foreign exchange rate) and constant currency (current and prior year local currency results translated into US dollars at a budget, or constant, foreign exchange rate).
See Item 11 of this report for Quantitative and Qualitative Disclosures about Market Risk.
A. Operating Results
The Company is one of the worlds most comprehensive marketing communications groups. It operates through a large number of established national, multinational and global advertising and marketing services companies. The Company offers services in four reporting segments:
In 2007, 46% of the Companys consolidated revenues were derived from Advertising and Media Investment Management, with the remaining 54% of its revenues being derived from the marketing services segments.
The Group has established the following financial and strategic objectives:
The following discussion is based on the Companys audited Consolidated Financial Statements beginning on page F-1 of this report. The Groups consolidated financial statements have been prepared under IFRS (International Financial Reporting Standards, incorporating International Accounting Standards).
The financial worlds sub-prime and insurance monoline credit crisis had little or no impact on the Groups financial performance in 2007. Despite the lack of any maxi-quadrennial or mini-quadrennial events, the Groups business model continued to deliver. All geographical and functional segments showed growth. Three geographical growth speeds remain though fastest growth in Asia Pacific, Latin America, Africa, the Middle East and Central and Eastern Europe; a surprisingly steady speed in the United States; and a slower speed in Western Europe excluding Spain.
2007 also marked continued client focus on top-line growth, as corporate profitability, margins and liquidity continued to improve significantly. Corporate profitability remains at historically high levels on both sides of the Atlantic. This resulted in continued high levels of new business activity.
Network television price inflation and declining audiences, fragmentation of traditional media and rapid development of new technologies continued to drive experimentation by our clients in new media and non-traditional alternatives. 1998 was really the first year when WPPs marketing services activities represented over 50% of Group revenue. By 2004, these activities represented almost 54% of Group revenue. In 2005, they represented 52%, as Media Investment Management was again the fastest growing part of our business, following major success in winning media planning and buying consolidations, and reflected the first time inclusion of Grey Worldwide and MediaCom.
In 2006, the underlying relative strength of below-the-line services re-asserted itself, as marketing services grew to 52.5% of revenues. In 2007, they grew further to 53.8%. In addition, in 2007, our broadly-defined internet-related revenue was almost $2.8 billion or 23% of our worldwide reported revenue and our narrowly-defined internet-related revenue was almost $1.5 billion or 12% of our worldwide reported revenue. These are both more than the 10% for on-line medias share of total advertising spend both in the United States and worldwide. The new media continue to build their share of client spending.
As discussed earlier, management reviews the Groups businesses in constant currency to better illustrate the underlying trends from one year to the next. Further, management reviews the Groups businesses on a like-for-like basis, in which current year actual results on a constant currency basis
(which include acquisitions from the relevant date of completion) are compared with prior year, constant currency actual results adjusted to include the results of acquisitions for the commensurate period in the prior year. Management believes that discussing like-for-like revenues provides a better understanding of the Companys revenue performance and trends because it allows for more meaningful comparisons of current period revenue to that of prior periods. The following table reconciles reported revenue growth for 2007 and 2006 to like-for-like revenue growth for the same periods.
To supplement the reportable currency segment information presented in note 2 to the Consolidated Financial Statements, the table below gives details of revenue growth by region and business segment on a reported, constant currency, and like-for-like basis.
The US continued to grow, with like-for-like revenue growth of almost 4%, Latin America remained one of the fastest growing regions, as it has been over the last three years, accelerating in the second half to almost 14%.
Asia Pacific remained strong across the region, with Mainland China and India growing fastest, with like-for-like revenue growth rates of over 31% and almost 23% respectively.
Continental Europe, although relatively more difficult, improved significantly in the second half, with like-for-like growth of almost 5%. In the final quarter, like-for-like growth was over 6%. In the UK, 2% like-for-like growth in the second half was broadly similar to the first half. As seen in the first half, but even more pronounced in the second half, rates of growth in Europe continued to be two-paced, with Western Continental Europe softer and Central and Eastern Europe, Russia and the other CIS countries, in particular, more buoyant.
Of the big five Western European markets, Spain remained a stronger growth market (though there are now real estate bubble worries), although Germany and Italy began to show some renewed signs of life.
The faster-growing markets of Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe accounted for over 24% of revenues in 2007, against the target of one-third over the next 5-10 years.
Performance of the Groups businesses is reviewed by management based on profit before interest and taxation, gains on disposal of investments, goodwill impairment and goodwill write-downs relating to utilisation of pre-acquisition tax losses, amortisation and impairment of acquired intangible assets, and share of exceptional gains of associates. A table showing these amounts by segment for each of the three years ended 31 December 2007 is presented in note 2 to the Consolidated Financial Statements. Related performance margins by region and business segment are shown below.
2007 compared with 2006
RevenuesReported revenues were up 4.7% in 2007 to £6,185.9 million from £5,907.8 million in 2006. On a constant currency basis, revenue was up 8.2% and gross margin up 7.8%, with all regions showing revenue growth, as detailed in the table above. In 2007, acquisitions contributed £132.2 million to revenue. Acquisitions completed in 2006 did not make a material contribution to revenue. On a like-for-like basis revenues were up 5.0% and gross margin was up 5.1%. Like-for-like revenues were up 5.3% in the first half of 2007 and 4.8% in the second half, continuing the strong growth of 5.4% in 2006, with the fourth quarter of 2007 up 4.9%.
Operating costsReported operating costs increased by 3.6%. Reported operating costs including direct costs (but excluding goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangibles and investment gains and write-downs) rose in 2007 by 4.2% and by 7.9% in constant currency (over 4.6 % on a like-for-like basis) from the previous year.
Staff costs excluding incentives (which include the costs of share based payments) in 2007 were up 4.6%. Charges for incentive payments (including the cost of share-based compensation) totaled £230.7 million in 2007 (£246.9 million in 2006), down 6.6%, which represents 20.6% (compared with 23.1%, in 2006) of operating profit before bonuses, income from associates, investment gains and write-downs, goodwill impairment and other goodwill write-downs, and amortisation and impairment of acquired intangible assets. Before these incentive payments, operating margins remained strong at 18.7%. The reported staff cost to revenue ratio improved 0.5 margin points to 58.3% compared with 58.8% in 2006.
Part of the Groups strategy is to continue to increase variable staff costs (freelance, consultants and charges for incentive payments, including share option charges) as a proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slow downs. Variable staff costs as a proportion of total staff costs was 12.7% in 2007, a marginal change of 0.3 percentage points from 13.0% in 2006.
Establishment costs as a proportion of revenues continued to improve slightly from 7.1% in 2006 to 6.9% in 2007, driven by better property utilisation and higher revenues.
Goodwill impairment charges of £44.1 million and £35.5 million were recorded in the years ended 31 December 2007 and 2006, respectively. The impairment charges relate to certain under performing businesses in the Group. In certain markets, the impact of current local economic conditions and trading circumstances on these businesses was sufficiently severe to indicate impairment to the carrying value of goodwill. Goodwill write-downs in relation to the utilisation of pre-acquisition tax losses of £1.7 million and £8.8 million were taken in 2007 and 2006, respectively. These write-downs were due to the better than expected performance of certain acquisitions in the year, which enabled the utilisation of pre-acquisition tax attributes that previously could not be recognised at the time of acquisition due to insufficient evidence that they were recoverable. Additionally, in 2007 and 2006, an impairment charge on acquired intangible assets was recorded for £1.5 million, resulting from certain client relationships which were lost during the years concerned.
Operating profitReported operating profit was up 8.5% to £804.7 million in 2007 from £741.6 million in 2006. Reported operating margins increased from 12.6% to 13.0%. Reported operating income, including income from associates, was £846.1 million in 2007, up 8.1% from £782.7 million in 2006. Reported operating margins, including income from associates, were 13.7% and 13.2% in 2007 and 2006, respectively. While margins improved overall they were negatively impacted by 1.4% in 2007 and 1.5% in 2006 due to goodwill impairment and other goodwill write-downs, and amortisation and impairment of acquired intangibles taken on subsidiaries in each year. The impact of profits on disposal of equity investments was immaterial in both 2007 and 2006. Operating margins, including income from associates, increased to 15.0% in 2007 from 14.5% in 2006 before investment gains, goodwill impairment and other goodwill write-downs, and amortisation and impairment of acquired intangible assets and share of exceptional gains of associates. For 2007, the post-acquisition contribution of all acquisitions to the Groups operating profit was £14.7 million. For 2006, the post-acquisition contribution of acquisitions to the Groups operating profit was not material.
The Group has released £16.8 million in 2007 to operating profit relating to excess provisions and other balances established in respect of acquisitions completed prior to 2006 and £10.6 million in 2006 related to acquisitions completed prior to 2005. Further details of the Groups approach to acquisition accounting is given in Note 28 to the Consolidated Financial Statements.
Finance income/costsFinance income increased to £139.4 million in 2007 from £111.0 million in 2006 mainly due to higher interest rates on higher cash balances. Finance costs increased to £266.1 million in 2007 from £211.7 million in 2006, reflecting higher interest rates on variable interest rate debt. Therefore, net finance costs increased by £26 million, largely reflecting the higher interest rates, the impact of the cash cost of the acquisition of 24/7 Real Media Inc in July 2007, partly offset by the impact of improved liquidity as a result of a reduction in average working capital.
TaxesThe Companys tax rate on reported profits in 2007 was 28.4% compared to 29.2% in 2006. This decrease reflects the continuing positive impact of the Groups tax planning initiatives.
Profit for the yearProfit for the year attributable to equity holders of the parent was £465.9 million in 2007 against £435.8 million in 2006. The increase was driven by improved results of operations during the year, partially offset by increased net finance costs.
2006 compared with 2005
RevenuesReported revenues were up 9.9% in 2006 to £5,907.8 million from £5,373.7 million in 2005. On a constant currency basis, revenue was up 10.9% and gross margin up 10.3%, with all regions showing revenue growth, as detailed in the table above. Acquisitions completed in 2006 did not make a material contribution to revenue. In 2005, acquisitions contributed £757.4 million to revenue including £695.0 million from the acquisition of Grey. On a like-for-like basis revenues were up 5.4% and gross margin was up 5.7%. Like-for-like revenues were up 5.0% in the first half of 2006 and 5.7% in the second half, continuing the strong growth of 5.5% in 2005, with the fourth quarter of 2006 accelerating to 7.2%. The fourth quarter was the Companys first $3 billion revenue quarter.
Operating costsReported operating costs increased by 8.7%. Reported operating costs including direct costs (but excluding goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangibles and investment gains and write-downs) rose in 2006 by 9.3%, and by 10.1% in constant currency (over 4.3% on a like-for-like basis) from the previous year.
Staff costs excluding incentives (which include the costs of share based payments) in 2006 were up 9.1%. Charges for incentive payments (including the cost of share-based compensation) totaled £246.9 million in 2006 (£227.6 million in 2005), an increase of 8.4%, which represents 23.1% (compared with 24.0% in 2005) of operating profit before bonuses, investment gains and write-downs, goodwill impairment and other goodwill write-downs, and amortisation and impairment of acquired intangible assets. Before these incentive payments, operating margins increased 0.4 margin points in 2006 to 18.7% from 18.3% in 2005. The reported staff cost to revenue ratio improved 0.5 margin points to 58.8% compared with 59.3% in 2005.
Part of the Groups strategy is to continue to increase variable staff costs (freelance, consultants and charges for incentive payments, including share option charges) as a proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues. There was a slight deterioration in variable staff costs as a proportion of total staff costs in 2005. This ratio decreased to 12.8% in 2005 (including 1.0 percentage point attributable to share-based compensation), but in 2006 the ratio strengthened again to 13.0%.
Establishment costs as a proportion of revenues continued to improve slightly from 7.2% in 2005 to 7.1% in 2006, driven by better property utilisation and higher revenues.
Goodwill impairment charges of £35.5 million and £46.0 million were recorded in the years ended 31 December 2006 and 2005, respectively. The impairment charges relate to certain under-performing businesses in the Group. In certain markets, the impact of current local economic conditions and trading circumstances on these businesses was sufficiently severe to indicate impairment to the
carrying value of goodwill. Goodwill write-downs in relation to the utilisation of pre-acquisition tax losses of £8.8 million and £1.1 million were taken in 2006 and 2005, respectively. These write-downs were due to the better than expected performance of certain acquisitions in the year, which enabled the utilisation of pre-acquisition tax attributes that previously could not be recognised at the time of acquisition due to insufficient evidence that they were recoverable. Additionally, in 2006, an impairment charge on acquired intangible assets was recorded for £1.5 million resulting from certain client relationships which were lost during the year. In 2005 no such impairment arose.
Operating profitReported operating profit was up over 13.6% to £741.6 million in 2006 from £652.8 million in 2005. Reported operating margins increased from 12.1% to 12.6%. Reported operating income, including income from associates, was £782.7 million in 2006, up 14.0% from £686.7 million in 2005. Reported operating margins, including income from associates, were 13.2% and 12.8% in 2006 and 2005, respectively. While margins improved overall they were negatively impacted by 1.5% in 2006 and 1.3% in 2005 due to goodwill impairment and other goodwill write-downs, and amortisation and impairment of acquired intangibles taken on subsidiaries in each year. Margins were positively impacted by 0.1% in 2006 and 2005 by profits on disposal of equity investments. Additionally, in 2006, margins were positively impacted by 0.1% due to share of exceptional gains of associates. Therefore, operating margins, including income from associates, increased to 14.5% in 2006 from 14.0% in 2005 before investment gains, goodwill impairment and other goodwill write-downs, and amortisation and impairment of acquired intangible assets and share of exceptional gains of associates. For 2006, the post-acquisition contribution of acquisitions to the Groups operating profit was not material. For 2005, the post-acquisition contribution of Grey to the Groups 2005 operating profit was £68.6 million, and the contribution of other acquisitions completed during the year was £6.0 million in the aggregate.
The Group has released £10.6 million in 2006 to operating profit relating to excess provisions and other balances established in respect of acquisitions completed prior to 2005 and £10.1 million in 2005 related to acquisitions completed prior to 2004. Further details of the Groups approach to acquisition accounting is given in Note 28 to the Consolidated Financial Statements.
Finance income/costsFinance income increased to £111.0 million in 2006 from £87.6 million in 2005 mainly due to higher interest rates on higher cash balances. Finance costs increased to £211.7 million in 2006 from £182.3 million in 2005, reflecting higher interest rates on variable interest rate debt. Therefore, net finance costs increased by £6.0 million, largely reflecting the higher interest rates, offset by the impact of improved liquidity as a result of a reduction in average working capital.
TaxesThe Companys tax rate on reported profits in 2006 was 29.2% compared to 32.8% in 2005. This decrease reflects the continuing positive impact of the Groups tax planning initiatives, particularly in relation to Grey, which had a tax rate on acquisition in excess of 45%.
Profit for the yearProfit for the year attributable to equity holders of the parent was £435.8 million in 2006 against £363.9 million in 2005. The increase was driven by improved results of operations completed during the year, partially offset by increased non-cash depreciation and amortisation charges.
B. Liquidity and Capital Resources
GeneralThe primary sources of funds for the Group are cash generated from operations and funds available under its credit facility and US commercial paper program. The primary uses of cash funds in recent years have been for debt service and repayment, capital expenditures, acquisitions, share repurchases and cancellations and dividends. For a breakdown of the Companys sources and uses of cash see the Consolidated Cash Flow Statements included as part of the Companys Consolidated Financial Statements in Item 18 of this Report.
The Company spent £744.4 million and £252.5 million for acquisitions and investments in 2007 and 2006, respectively, including payments on loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases of property, plant and equipment and other intangible assets was £170.8 million and £184.5 million, respectively, and cash spent on share repurchases and buy-backs was £415.4 million and £257.7 million, respectively.
As we expect that necessary capital expenditure, spent mainly on information technology and property, will remain approximately equal to the depreciation charge in the long-term, the Company has concentrated on examining potential acquisitions and on returning excess capital to share owners in the form of dividends and/or share buy-backs. Consistent with the objective, announced in 2006, of increasing the share buy-back programme to 4-5% of the Groups share capital in 2007 and 2008, in 2007, 59.19 million ordinary shares (of which 57.19 million were cancelled), or 4.7% of our share capital, were repurchased at a total cost of £415.4 million and average price of £7.03 per share.
The Board has decided to increase the final dividend by 20% to 9.13p per share, taking the full-year dividend to 13.45p per share for 2007.
The Groups liquidity is affected primarily by the working capital flows associated with its media buying activities on behalf of clients. The working capital movements relate primarily to the Groups billings. Billings comprise the gross amounts billed to clients in respect of commission-based/fee-based income together with the total of other fees earned. In 2007, billings were £31.666 billion, or 5.1 times the revenue of the Group. The inflows and outflows associated with media buying activity therefore represent significant cash flow within each month of the year and are forecast and re-forecast on a regular basis throughout the year by the Groups treasury staff so as to ensure that there is continuing coverage of peak requirements through committed borrowing facilities from the Groups bankers and other sources.
Liquidity risk managementThe Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in excess of peak net borrowing levels and debt maturities are closely monitored. Targets for average net debt are set on an annual basis and, to assist in meeting this, working capital targets are set for all the Groups major operations. See the discussions below for the Groups view on the use of net debt to measure net debt levels.
US commercial paper programThe Group has a $1.4 billion US Commercial Paper Program using the Revolving Credit Facility as a backstop. The Groups borrowings under this program are notes issued in US dollars and swapped into other currencies as required. The average commercial paper outstanding since the launch of the program was $476 million at an average interest rate of 5.4%. There was no US Commercial Paper outstanding at 31 December 2007.
USA bondsAt December 31, 2007, the Group had in issue $100 million of 6.875% bonds due July 2008 and $650 million of 5.875% bonds due June 2014.
EurobondsIn November of 2007, the Group issued 500 million of 5.25% bonds due January 2015. At December 31, 2007 the Group also had in issue 600m of 4.375% bonds due December 2013 and 650 million of 6.0% bonds due June 2008. In May 2008, the Group issued 750 million of 6.625% bonds due in 2016.
Sterling bondIn April 2007, the Group issued £400 million of 6% bonds due April 2017. In November 2007 the Group issued £200 million of 6.375% bonds due November 2020.
Revolving credit facilitiesThe Group has a $1.6 billion seven-year Revolving Credit Facility due August 2012. The Groups borrowings under this facility, which are drawn down predominantly in US dollars, Canadian dollars and pounds sterling, averaged $377 million in 2007 at an average interest rate of 5.95% inclusive of margin. The Group had available undrawn committed facilities of £759 million at 31 December 2007 (£817 million at 31 December 2006).
Borrowings under the Revolving Credit Facility are governed by certain financial covenants based on the results and financial position of the Group, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 5.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at 30 June and 31 December in each year shall not exceed 3.5 to 1, both covenants as defined in the relevant agreement. The Group is in compliance with both covenants.
Convertible bondsDuring 2007, the Group redeemed £450 million of 2% convertible bonds on their due date of April 2007.
In March 2005, with the purchase of Grey Global Group Inc, the Group acquired $150 million of 5% convertible debentures due 2033. Each debenture holder has the right to require Grey and WPP (as co-obligor) to repurchase as of each of 28 October 2008, 2010 and 2013 all or a portion of the holders then outstanding debentures at par ($1,000 per debenture) plus the amount of accrued and unpaid interest. WPP has the unrestricted right to call the bond at par from 2013. Each $1,000 of principal amount is initially convertible into 11.820362 WPP ADSs and $499.31 of cash and is convertible at the option of the holder at any time. The effective interest rate on the liability component is 4.5%.
Hedging of financial instrumentsThe Groups policy on interest rate and foreign exchange rate management sets out the instruments and methods available to hedge interest and currency risk exposures and the control procedures in place to ensure effectiveness. The Group uses derivative financial instruments to reduce exposure to foreign exchange risk and interest rate movements. The Group does not hold or issue derivative financial instruments for speculative purposes.
As at 31 December 2007, the Groups net debt was £1,286 million, up £471 million from £815 million in 2006. Net debt averaged £1,458 million in 2007, against £1,153 million in 2006 (up £305 million at 2007 exchange rates).
Cash flow strengthened as a result of improved working capital management and cash flow from operations. In 2007, operating profit before investment gains and write-downs, goodwill impairment and other goodwill write-downs, amortization and impairment of acquired intangible assets and non-cash based incentive compensation was £950 million, capital expenditure £171 million, depreciation £144 million, tax paid £151 million, interest and similar charges paid £106 million and other net cash inflows of £32 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was therefore £698 million. This free cash flow was partially absorbed by £675 million in net acquisition payments and investments, share repurchases and cancellations of £415 million and dividends of £139 million. This resulted in a net outflow of £531 million.
The Group bases its internal cash flow objectives on free cash flow. Free cash flow is a non-GAAP financial measure. Management believes free cash flow is meaningful to investors because it is the measure of our funds available for acquisition-related payments, dividends to shareowners, share repurchases and debt repayment. The purpose of presenting free cash flow is to indicate the ongoing cash generation within the control of the Group after taking account of the necessary cash expenditures of maintaining the capital and operating structure of the Group (in the form of payments of interest, corporate taxation and capital expenditure). Net working capital movements are excluded
from this measure since these are principally associated with our media buying activities on behalf of clients and are not necessarily within the control of the Group. This computation may not be comparable to that of similarly titled measures presented by other companies.
A tabular reconciliation of free cash flow is shown below.
Because of the seasonal swings in our working capital generally, and those resulting from our media buying activities on behalf of our clients in particular, together with the fact that we choose for commercial reasons to locate the debt of the Group in particular countries and leave cash resources in others, though our cash resources could be used to repay the debt concerned, management believes that net debt, also a non-GAAP financial measure, is an appropriate and meaningful measure of the debt levels within the Group. We similarly believe average net debt to be a more accurate reflection of the amount of debt the Group has supporting its activities through the year.
The following table is an analysis of net debt.
As at 31 December 2007, the Companys credit rating was BBB+ (S&P) and Baa2 (Moodys). These ratings have been at this level since 2003.
We believe that cash provided by operations and funds available under our credit facility and US commercial paper programme will be sufficient to meet the Groups anticipated cash requirements based upon our current forecast funding requirement and our ability to access capital and bank markets to refinance maturing debt.
Following approval by share owners at an Extraordinary General Meeting on 26 September 2005, and after obtaining Court approval, the Groups corporate structure was changed in October 2005. This primarily involved the introduction of a new parent undertaking in the UK. This reorganisation resulted in the creation of more than £5 billion of additional distributable reserves, which the Board considered necessary to cater for likely requirements for dividends and share repurchases in the medium to long term.
C. Research and Development, Patents and Licenses
D. Trend Information
The discussion below includes forward-looking statements regarding plans, objectives, projections and anticipated future performance based on assumptions that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. See Forward-Looking Statements elsewhere in this annual report.
Despite the recent financial crisis, the world economy continued to grow in 2007, after the recovery in both 2003 and 2004, driven by the United States, Asia Pacific, Latin America, the Middle East, Russia and the other CIS countries. As a result, the Company performed at record levels in 2007. In addition, Africa showed significant signs of growth, no doubt stimulated by Chinese interest and investment and is increasingly becoming a continent of opportunity. The FIFA World Cup in South Africa in 2010 will have a significant impact 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 productivity improvement, the Groups margins at the post-incentive level have improved. In addition, given improved levels of operating profit and margin, incentive pools and variable staff costs are now at around the highest levels. This should improve operational gearing and flexibility in 2008.
The budgets for 2008 have been prepared on a prudent basis, largely excluding new business, particularly in Advertising and Media Investment Management. They indicate improvements in like-for-like revenues at higher levels than at this time in 2007 (which were around 4.0% to 4.5%), with balanced growth in the first and second half of the year. They also indicate marketing services revenues growing faster than Advertising and Media Investment Management. In the first quarter of 2008 like for like revenues were up 4.8%.
In the first quarter of 2008, reported revenues rose by 14.1% to £1.558 billion from the first quarter of 2007. Revenues in constant currency were up 9.0%, reflecting the strength of the Euro overcoming the weakness of the US dollar against the pound sterling. On a like-for-like basis, excluding the impact of acquisitions and currency fluctuations, revenue growth was 4.8%, continuing the growth rates seen throughout 2007 and before. Net debt at 31 March 2008 was £2,152 million, compared to £1,410 million at 31 March 2007 (at constant exchange rates). Average net debt in the first quarter of 2008 was £1,669 million compared to £1,083 million in the corresponding period in 2007, at 2008 exchange rates. In the 12 months to 31 March 2008, the Groups free cash flow was £874 million. See Item 5BOperating and Financial Review and ProspectsLiquidity and Capital Resources above for the Groups view on basing its internal cash flow objectives on free cash flow. Over the same period, the Groups expenditure on capital, acquisitions, share repurchases and dividends was £1,423 million.
E. Off-Balance Sheet Arrangements
F. Tabular Disclosure of Contractual Obligations
The following summarises the Companys estimated contractual obligations at 31 December 2007, and the effect such obligations are expected to have on its liquidity and cash flows in the future periods. Certain obligations presented below held by one subsidiary of the Company may be guaranteed by another subsidiary in the ordinary course of business.
The Company expects to make annual contributions to its funded defined benefit schemes, as determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. In 2006 the Group implemented a funding strategy under which we expect to fully eliminate the deficit for funded schemes by 31 December 2010. Employer contributions in 2007 were £47.0 million (2006: £48.6 million) and are expected to be £39.4 million in 2008. Projections for years after 2008 are subject to a number of factors, including future asset performance and changes in assumptions which mean the Company is unable to make sufficiently reliable estimations of future contributions.
At 31 December 2007, the Companys capital base was comprised of 1,191,491,263 ordinary shares of 10 pence each.
The task of improving property utilisation continues to be a priority for the Group with a portfolio of approximately 19 million square feet worldwide.
As in 2006, in managements opinion the effect of inflation has not had a material impact on the Companys results for the year or financial position as at 31 December 2007.
Use of Estimates
The preparation of financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Critical Accounting Policies
The Companys financial statements have been prepared in accordance with IFRS. A summary of the Groups principal accounting policies are described in the first section of notes to the Consolidated Financial Statements, entitled Accounting Policies. The Company believes certain of these accounting policies are particularly critical to understanding the more significant judgments and estimates used in the preparation of its consolidated financial statements. Therefore, we have prepared the following supplemental discussion of critical accounting policies, which should be read together with our consolidated financial statements and notes thereto.
Goodwill and other intangibles
The Company has a significant amount of goodwill and other intangible assets. In accordance with the guidance provided by IAS 36 Impairment of Assets, the Company initially tests the carrying value of goodwill and other indefinite lived intangible assets for impairment annually as at 30 June of each year, and then updates the review as at 31 December or whenever there is an indication of impairment.
Under IFRS, an impairment charge is required for both goodwill and other indefinite lived assets when the carrying amount exceeds the recoverable amount, defined as the higher of fair value less costs to sell and value in use. Our approach in determining the recoverable amount utilises a discounted cash flow methodology, which necessarily involves making numerous estimates and assumptions regarding revenue growth, operating margins, tax rates, appropriate discount rates and working capital requirements. These estimates will likely differ from future actual results of operations and cash flows, and it is possible that these differences could be material. In addition, judgments are applied in determining the level of cash-generating unit we identify for impairment testing and the criteria we use to determine which assets should be aggregated. A difference in testing levels could affect whether an impairment is recorded and the extent of impairment loss. Changes in our business activities or structure may also result in changes to the level of testing in future periods. Further, future events could cause the Company to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Companys financial condition and results of operations.
In 2007, the Group acquired 24/7 Real Media, Inc. for consideration of approximately £330 million. 24/7 significantly enhances the Groups digital capability and will make a major contribution to winning new business for the Group, primarily our Advertising and Media Investment Management businesses. For this reason, goodwill relating to 24/7 was reviewed for impairment against the net present value of future cash flows of this segment as the appropriate cash-generating unit.
Historically our impairment losses have resulted from a specific event, condition or circumstance in one of our companies, such as the loss of a significant client. As a result, changes in the assumptions
used in our impairment model have not had a significant effect on the impairment charges recognised. The carrying value of goodwill and other intangible assets will continue to be reviewed at least annually for impairment and adjusted to the recoverable amount if required.
The most significant assumptions employed by the Company in determining recoverable amounts are as follows:
Future anticipated payments to vendors in respect of contingent consideration (earnouts) are based on the directors best estimates of future obligations, which are dependent on the future performance of the interests acquired and assume the operating companies improve profits in line with directors estimates. A summary of earnout related obligations included in creditors is shown in note 19 to the Consolidated Financial Statements. WPP has also entered into option agreements that allow the Groups equity partners to require the Group to purchase the minority interest. These agreements are treated as derivatives over equity instruments and are recorded in the balance sheet at fair value and the valuation is remeasured at year end. Under IFRS, fair value is based on the present value of expected cash outflows. Actual performance may differ from the assumptions used resulting in amounts ultimately paid out with respect to these earnout and option agreements at more or less than the recorded liabilities.
The Group accounts for acquisitions in accordance with IFRS 3 Business Combinations. IFRS 3 requires the acquirees identifiable assets, liabilities and contingent liabilities (other than non-current assets or disposal groups held for sale) to be recognised at fair value at acquisition date. In assessing fair value at acquisition date, management make their best estimate of the likely outcome where the fair value of an asset or liability may be contingent on a future event. In certain instances, the underlying transaction giving rise to an estimate may not be resolved until some years after the acquisition date. IFRS 3 requires the release to profit of any acquisition reserves which subsequently become excess in the same way as any excess costs over those provided at acquisition date are charged to profit. At each period end management assess provisions and other balances established in respect of acquistions for their continued probability of occurrence and amend the relevant value accordingly through the income statement or as an adjustment to goodwill as appropriate under IFRS 3. In 2007, operating profit includes credits totaling £16.8 million (2006: £10.6 million, 2005: £10.1 million) relating to the release of excess provisions and other balances established in respect of acquisitions completed prior to 2006.
Advertising and media investment management arrangements may include incentive-based revenue. Incentive-based revenue typically comprises both quantitative and qualitative elements; on the element related to quantitative targets, revenue is recognised when the quantitative targets have been achieved; on the element related to qualitative targets, revenue is recognised when the incentive is received/receivable.
In applying the proportional performance method of revenue recognition for both market research and other long-term contracts, management is required to make significant judgments, estimates and assumptions. In assessing contract performance, both input and output criteria are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct relationship between costs incurred and the proportion of the contract performed to date. Costs incurred as a proportion of expected total costs is used as an initial proportional performance measure. The indicative proportional performance measure is subsequently validated against other more subjective criteria (i.e. relevant output measures) such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract. In the event of divergence between the objective and more subjective measures, the more subjective measure takes precedence since these are output measures.
Since project costs can vary from initial estimates, the reliance on total project cost estimate represents an uncertainty inherent in the revenue recognition process. Individual project budgets are reviewed regularly with project leaders to ensure that cost estimates are based upon up to date and as accurate information as possible, and take into account any relevant historic performance experience. Also, the majority of contracted services subject to proportional performance method revenue recognition are in relation to short term projects, averaging approximately 3 months. Due to this close and frequent monitoring of budgeted costs and the preponderance of short term projects, the impact of variances between actual and budgeted project costs has historically been minimal. The Companys combined bad debt and work in process write-offs in the business segments where the proportional performance method of revenue recognition is applied was less than 1% of revenues in each of the three years ended December 31, 2007. The Company does not believe that the effect of these uncertainties, taken as a whole, will significantly impact their results of operations in the future.
Pension costs are accounted for in accordance with IAS 19, Employee Benefits under IFRS. Pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various schemes were carried out as at various dates in the last three years. These valuations have generally been updated by the local independent qualified actuaries to 31 December 2007.
The Group has a policy of closing defined benefit schemes to new members which has been effected in respect of a significant number of the schemes. As a result, these schemes generally have an ageing membership population. In accordance with IAS 19, the actuarial calculations have been carried out using the projected unit method. In these circumstances, use of this method implies that the contribution rate implicit in the current service cost will increase in future years.
The Groups pension deficit was £133.6 million as at 31 December 2007, compared to £186.6 million as at 31 December 2006. The pension deficit decrease is primarily due to increases in discount rates in the US, UK and Europe.
Establishing the expected long-term rates of investment returns on pension assets is a judgmental matter. Management considers the types of investment classes in which our pension plan assets are invested and the expected compound return we can reasonably expect the portfolio to earn over time, which reflects forward-looking economic assumptions.
Most of the Groups pension scheme assets are held by its schemes in the UK and North America. In the UK, the forecasted weighted average return on assets increased from 5.6% as at 31 December
2006 to 5.8% as at 31 December 2007, and in North America, the forecasted weighted average return decreased from 6.8% to 6.7%, broadly in line with the yields available in both markets.
Management reviews the expected long-term rates of return on an annual basis and revises them as appropriate.
Also, we periodically commission detailed asset and liability studies performed by third-party professional investment advisors and actuaries, which generate probability-adjusted expected future returns on those assets. These studies also project our estimated future pension payments and evaluate the efficiency of the allocation of our pension plan assets into various investment categories.
At 31 December 2007, the life expectancies underlying the value of the accrued liabilities for the main defined benefit pension plans operated by the Group were as follows:
For a 0.25% increase or decrease in the discount rate at 31 December 2007, the 2008 pension expense would be broadly unchanged as the change in service cost and interest cost are similar. The effect on the year-end 2007 pension deficit would be a decrease or increase, respectively, of approximately £20.0 million.
Contributions to funded schemes are determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. In 2006 the Group implemented a funding strategy under which our objective is to fully eliminate the deficit for funded schemes by 31 December 2010.
We record deferred tax assets and liabilities using tax rates enacted, or substantively enacted, at the balance sheet date for the effect of temporary differences between book and tax bases of assets and liabilities. Currently we have deferred tax assets resulting from operating loss carryforwards and deductible temporary differences, all of which could reduce taxable income in the future. Based on available evidence, both positive and negative, we determine whether it is probable that all or a portion of the deferred tax assets will be realised. The main factors that we consider include:
If it is our belief that it is probable that some portion of these assets will not be realised, then no asset is recognised in relation to the portion not considered to be realisable. Gross unrecognised assets under IFRS were £2,851.0 million in 2007.
If market conditions improve and future results of operations exceed our current expectations, our existing recognised deferred tax assets may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate further or future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realisable. As a result, we may need to reverse all or a portion of the deferred tax assets, which may have a significant effect on our results of operations and financial condition.
New IFRS Accounting Pronouncements
The following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:
IFRIC 11 IFRS 2: Group and Treasury Share Transactions;
IFRIC 12 Service Concession Arrangements;
IFRIC 13 Customer Loyalty;
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction;
IFRS 8 Operating Segments;
IAS 1 (revised) Presentation of Financial Statements; and
IAS 23 (revised) Borrowing Costs.
The Group does not consider that these Standards and Interpretations will have a significant impact on the financial statements of the Group except for additional disclosures when the relevant standards come into effect for periods commencing on or after 1 January 2008.
In addition, IFRS 3 (revised) Business Combinations and IAS 27 (revised) Consolidated and Separate Financial Statements become effective for the Group in the year ended 31 December 2010. The revisions to these standards will apply to business combinations completed after 1 January 2010. The main changes under the revised standards are: all acquisition-related costs must be recognised as an expense in the period; contingent consideration payable is to be measured at fair value at the acquisition date. Any subsequent movements in the fair value of such consideration as a result of post-acquisition events (such as changes in estimates of earnout consideration) must be recognised as a gain or loss in the income statement; equity interests held prior to control being obtained must be re-measured to fair value at the acquisition date, with any gain or loss recognised in the income statement; increases in ownership interest in a subsidiary that do not result in a change of control are treated as transactions among equity holders and are reported within equity. No gain or loss is recognised on such transactions and goodwill is not re-measured.
The revisions to the standards apply prospectively to business combinations for which the acquisition date is on or after the first annual financial reporting period beginning on or after 1 January 2009. Consequently, the impact that these revised standards will have on the financial statements of the Group will depend on the circumstances of business combinations occurring on or after 1 January 2010.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The directors and executive officers of the Company as of 15 May 2008 are as follows:
Philip Lader, age 62: Non-executive chairman. Philip Lader was appointed chairman in 2001. The US Ambassador to the Court of St Jamess from 1997 to 2001, he previously served in several senior executive roles in the US Government, including as a Member of the Presidents Cabinet and as White House Deputy Chief of Staff. Before entering government service, he was executive vice president of the company managing the late Sir James Goldsmiths US holdings and president of both a prominent American real estate company and universities in the US and Australia. A lawyer, he is also a Senior Advisor to Morgan Stanley, a member of the council of Lloyds (insurance market) a director of RAND, Marathon Oil, Rusal, AES Corporation and Songbird Estates plc (Canary Wharf), a trustee of the Smithsonian Museum of American History and a member of the Council on Foreign Relations.
Sir Martin Sorrell, age 63: Chief executive. Sir Martin Sorrell joined WPP in 1986 as a director, becoming Group chief executive in the same year. He is a non-executive director of Formula One.
Paul Richardson, age 50: Finance director. Paul Richardson became Group finance director of WPP in 1996 after four years with the Company as director of treasury. He is responsible for the Groups worldwide functions in finance, information technology, procurement, property, treasury, taxation, internal audit and corporate responsibility. He is also the Country Manager for Italy. Previously he spent six years with the central financial team of Hanson PLC. He is a chartered accountant and fellow of the Association of Corporate Treasurers. He is a non-executive director of Chime Communications PLC and STW Communications Group Limited in Australia, both of which are companies associated with the Group.
Mark Read, age 41: Strategy director. Mark Read was appointed a director in March 2005. He has been WPPs director of strategy since 2002 and is also CEO of WPP Digital. He is a member of the Supervisory Board of HighCo and a director of CHI & Partners. He worked at WPP between 1989 and 1995 in both parent company and operating company roles. Prior to rejoining WPP in 2002, he was a principal at the consultancy firm of Booz-Allen & Hamilton and founded and developed the company WebRewards in the UK.
Colin Day, age 53: Non-executive director. Colin Day was appointed a director in July 2005. He is group finance director of Reckitt Benckiser plc, having been appointed to its board in September 2000. Prior to joining Reckitt Benckiser he was group finance director of Aegis Group plc and previously held a number of senior finance positions with ABB Group plc and De La Rue Group plc. He was a non-executive director of Imperial Tobacco plc until February 2007 and of easyJet plc until September 2005.
Esther Dyson, age 56: Non-executive director. Esther Dyson was appointed a director in 1999. In 2004 she sold her company, EDventure Holdings, to CNET Networks, the US-based interactive media company. She left CNET at the end of 2006 and now operates as an independent investor and entrepreneur, again under the name of EDventure. She has been highly influential for the past 25 years on the basis of her insights into online/information technology markets and social impact worldwide, including the emerging markets of Central and Eastern Europe and Asia. An active investor as well as an analyst/observer, she recently participated in the sale of Flickr to Yahoo! and of Medstory to Microsoft. She sits on the boards of non-listed start-ups including 23andMe (US), Boxbe (US), Eventful.com (US), Meetup Inc. (US), NewspaperDirect (Canada), CVO Group (Hungary) and Yandex (Russia). She is also an active investor in new-space and aviation start-ups including Space Adventures, XCOR Aerospace, Icon Aircraft and Airship Ventures (all based in the US) and co-hosts the annual Flight School workshop for air and space entrepreneurs. She sat on the consumer advisory
board of Orbitz until its sale to Cendant. She is also active in public affairs and was founding chairman of ICANN, the domain name policy agency, from 1998 to 2000. She currently sits on the board of the Sunlight Foundation, which advocates transparency in government and (among other things) is pushing US legislators to publish their daily diaries.
Orit Gadiesh, age 57: Non-executive director. Orit Gadiesh was appointed a director in April 2004. She is chairman of Bain & Company, Inc. and a world-renowned expert on management and corporate strategy. She holds an MBA from Harvard Business School and was a Baker Scholar. She is a member of the International Advisory Board at Haute Ecole Commerciale in France. She is a member of the Foundation Board for the World Economic Forum, and on the Board of Directors of The Peres Institute for Peace. She is a member of the Council on Foreign Relations, a trustee for Eisenhower Fellowships and a member of the Business Committee of the Metropolitan Museum of Art, New York.
David H. Komansky, age 68: Non-executive director. David Komansky was appointed a director in January 2003. He was chairman of the Board of Merrill Lynch & Co., Inc., serving until his retirement on 28 April 2003. He served as chief executive officer from 1996 to 2002, having begun his career at Merrill Lynch in 1968. Among many professional affiliations, he serves as a director of Black Rock, Inc. and as a member of the International Advisory Board of the British American Business Council. Active in many civic and charitable organisations, he serves on the Board of the New York Presbyterian Hospital.
Christopher Mackenzie, age 53: Non-executive director. Christopher Mackenzie was appointed a director in 2000. He is chairman and chief executive of the Equilibrium Group, a London-based investor group and chairman of Borets, the Russian Oil services group. He is also a board member of the Abdul Latif Jameel Group and KazMunaiGas Exploration & Production JSC. He served as the chief executive of Brunswick Capital in Russia, the president and chief executive officer of Trizec Properties and as the president of GE Capital Europe.
Stanley (Bud) Morten, age 64: Non-executive director. Bud Morten was appointed a director in 1991. He is a consultant and private investor. He is currently the Independent Consultant to Citigroup/Smith Barney with responsibility for its independent research requirements. Previously he was the chief operating officer of Punk, Ziegel & Co, a New York investment banking firm with a focus on the healthcare and technology industries. Before that he was the managing director of the equity division of Wertheim Schroder & Co, Inc. in New York. He is a former non-executive director of Register.com, which was sold to a private equity firm in November 2005 and is no longer a public company. He is also a non-executive director of The Motley Fool, Inc., which is a private company.
Koichiro Naganuma, age 63: Non-executive director. Koichiro Naganuma was appointed a director in February 2004. He is president and group chief executive officer of Asatsu-DK, also known as ADK. Joining the agency in 1981, he began his career with the account service of global clients in the agency. His mandate thereafter expanded to the total operation of the group. He replaced ADK Chairman Masao Inagaki on the Board who retired upon the appointment of Mr Naganuma. ADK is Japans third largest advertising and communications company, and ninth largest in the world.
Lubna Olayan, age 52: Non-executive director. Lubna Olayan was appointed a director in March 2005. Ms Olayan is the deputy chairman and chief executive officer of the Olayan Financing Company, a subsidiary and the holding entity for the Olayan Groups operations in the Kingdom of Saudi Arabia and the Middle East. Ms Olayan is a Board Member of Saudi Hollandi Bank, a publicly listed company in Saudi Arabia. She is on the International Advisory Board of the Council on Foreign Relations, a member of the Board of Directors of INSEAD and a member of the Board of Trustees of Cornell University. Ms Olayan joined the International Advisory Boards of Rolls-Royce in October 2006 and of Citi in 2007.
John Quelch, age 56: Non-executive director. John Quelch was appointed a director in 1988. He is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School. Between 1998 and 2001 he was Dean of the London Business School. He also serves as chairman of the Massachusetts Port Authority. Professor Quelchs writings focus on global business practice in emerging as well as developed markets, international marketing and the role of the multinational corporation and the nation state. He is a non-executive director of Gentiva Health Services Inc., Inverness Medical Innovations, Inc. and Pepsi Bottling Group Inc. He served previously on the boards of Blue Circle Industries plc, easyJet plc, Pentland Group plc and Reebok International Limited.
Jeffrey A. Rosen, age 60: Non-executive director. Jeffrey Rosen was appointed a director in December 2004. He is a deputy chairman and managing director of Lazard. He has over 30 years experience in international investment banking and corporate finance. He is a member of the Council on Foreign Relations and is President of the Board of Trustees of the International Center of Photography in New York.
Timothy (Tim) Shriver, Age 48: Non-executive director. Tim Shriver was appointed a director in August 2007. He is Chairman of Special Olympics serving over 2 million Special Olympic athletes and their families in 170 countries. In recent years, he has produced films for Disney, Dream Works and Fox Searchlight and more recently, has begun writing a column for The Washington Post/Newsweek.com. He co-founded the Collaborative for Academic, Social and Emotional Learning (CASEL) and currently chairs the CASEL Board. He is a member of the Council on Foreign Relations and is also a non-executive director of the National Center for Learning & Citizenship, Malaria No More and Neogenix. He serves on the advisory committee of Main Street Advisors and Leeds Equity.
Paul Spencer, age 58: Non-executive director. Paul Spencer was appointed a director in April 2004. He is a financier with 20 years experience in the financial management of a number of blue chip companies, including British Leyland PLC, Rolls-Royce PLC, Hanson PLC and Royal & Sun Alliance PLC. He served as UK chief executive of Royal & Sun Alliance PLC between 1999 and 2002. He is the chairman of State Street Managed Pension Funds Ltd. He is also chairman of the Association of Corporate Treasurers Advisory Board, NS&I (National Savings), the UK government-owned retail savings institution, and Sovereign Reversions Group plc. He is also a non-executive director of Resolution Life Group plc and Nipponkoa.
The board of directors has determined that all of the non-executive directors are independent under NASDAQ Marketplace Rule 4200.
Terms of Directors and Executive Officers
As a matter of policy the Company requires all directors to submit themselves for re-election by an ordinary resolution of share owners at least every three years or every year in the case of those directors who held office for more than nine years.
Review of compensation
The committees work during 2007 included:
Key elements of short-and long-term remuneration
The principal elements of WPP executive remuneration currently comprise the following:
Pension contributions, life assurance, health and disability, and other benefits are also provided.
The Compensation Committee believes that base salary is only one element of compensation and therefore should only be reviewed in the context of the total compensation being provided to an executive.
Sir Martin Sorrells base salary was increased from £840,000 to £1,000,000 on 1 January 2007. This is the first increase to Sir Martins base salary since September 1999.
With effect from 1 July 2007, Paul Richardsons base salary was increased from £450,000 to £500,000. Paul Richardsons base salary was last increased in May 2003.
Annual cash incentives
The annual cash bonus is paid under plans established for each operating company as well as the parent company. Challenging performance goals are established and these must be achieved before any bonus becomes payable. Each executives annual incentive opportunity is defined at a target level for the full achievement of objectives. Awards in excess of the target level may be paid up to a prescribed maximum for superior performance.
In the case of the Group chief executive and other parent company directors, the annual cash bonus is based on Group and individual performance:
Where appropriate, performance objectives relating to environmental, social and governance issues are measured in the second and third sections above.
The table below shows how the objectives for the Group chief executive are aligned with the overall objectives of WPP, as outlined on pages 25 and 26.
As a percentage of base salary, the target, maximum and actual bonuses for 2007 paid to executive directors were as follows:
In some countries an opportunity exists to defer part of the annual bonus for four years in the form of WPP shares. At the end of the deferral period a 25% match is applied to the original shares, subject to continuous employment.
Following the policy review in 2005, the committee continues to believe that share plans approved by share owners later that year remain appropriate in terms of grant levels, performance criteria and vesting schedules. None of WPPs share awards are pensionable and, other than the stock option awards, all will be satisfied out of one of the Companys ESOPs or WPP shares held in treasury.
Renewed Leadership Equity Acquisition Plan (Renewed LEAP)
2007 was the fourth year of operation for Renewed LEAP and awards were once again granted to the Groups key executives.
Under Renewed LEAP, which was approved by share owners in 2004, participants have to commit to acquire and retain WPP shares (investment shares) in order to have the opportunity to earn additional WPP shares (matching shares) The number of matching shares that a participant can receive at the end of the investment and performance period depends on the Companys TSR performance measured over five years (four years in the case of awards made in 2004).
Because relative TSR may not always reflect the true performance of the Company, the Compensation Committee is required to perform a fairness review on the basis of which it may, in exceptional circumstances, decide to vary the number of matching shares that will vest. Factors the committee considers in its fairness review of any awards include, amongst others, various measures of the Groups financial performance (such as growth in revenues and in earnings per share) and any evidence of distortions in the share price of either WPP or the peer group (such as bid price premia).
For awards made in respect of LEAP programs commencing in 2005, 2006 and 2007 the vesting schedule is as follows:
The comparator companies for the awards made in 2007 were: Aegis, Arbitron, Dentsu, Gfk, Havas, Interpublic, Ipsos, Omnicom, Publicis and Taylor Nelson Sofres.
Vesting of the 2004-2007 LEAP Award
For awards made in respect of the LEAP program commencing in 2004 the vesting schedule was as follows:
TSR results indicated a vesting level of 3.27 matching shares reflecting a ranking between third and fourth place against the peer group of 13 companies. The committee then undertook its fairness review, the purpose of which was to ensure that the TSR ranking accurately reflected the true underlying performance of the Company and took into account any exceptional circumstances deemed relevant by the committee.
The committee compared WPPs financial performance to that of the peer group. It was noted that over the investment and performance period, WPP ranked first on margin improvement, and between third and fifth on other key measures such as growth in EBITDA, EBITA, EPS and Revenue. The committee was therefore comfortable that the TSR ranking was consistent with WPPs relative competitive performance over the period.
However, the committee noted two exceptional circumstances that materially affected the TSR performance of WPP relative to that of its peers.
First, based on the advice of WPPs broker, the committee concluded that the ending share prices of two of WPPs comparator companies (Aegis and Ipsos) contained an element of bid premium. The committee concluded that including these premia did not reflect the underlying performance of these companies and therefore adjusted the TSR data accordingly. Removing the bid premia had no effect on WPPs ranking, but increased the vesting percentage by moving its TSR closer to that of the company ranked above it.
Second, it was also noted that there had been relatively large currency swings over the performance period that dampened the TSR performance of comparator stocks denominated in US dollars or Japanese yen. The committee determined that this currency factor, which was outside management control, had materially affected WPPs relative TSR ranking and vesting percentage.
The fairness review took both of these factors into account, each of which had a different impact on the results. The committees judgement was to make an overall net reduction of 0.67 in the number of matching shares vesting from 3.27 to 2.60. This implies a ranking between fourth and fifth place
against the peer group of 13 companies; the committee felt this was a fair reflection of WPPs true relative underlying performance over the period in question. As a result the number of ordinary matching shares that actually vested (including additional shares from reinvested dividends) along with the number at median and maximum, are shown in the following table.
Performance Share Awards (PSA) / Executive Share Awards (ESA)
Approximately 1,000 executives in the operating companies are eligible to receive PSAs. The size of each award depends on the extent to which annual performance targets are met. These awards are granted under the WPP Restricted Stock Plan but funded from the incentive pools at each operating company ensuring a significant proportion of these pools are delivered in shares. The ESA is the equivalent award at the parent company.
As a percentage of base salary, the target, maximum and actual awards for 2007 to executive directors were as follows:
Leaders and Partners programs
To further align the interests of our key executives in the operating companies with the interests of share owners annual awards of restricted stock are granted under either the WPP Leaders or the WPP Partners programs. In both cases grants of restricted stock are made to participants which vest three years after grant provided the participant is still employed within the WPP Group. Some executives at parent company participate in these programs but no awards are made to executive directors.
Other share awards
In order to attract or retain key talent it is sometimes necessary to make special grants of shares, usually from the Restricted Stock Plan or occasionally from the Executive Stock Option Plan. No such awards were made to executive directors in 2007.
All pension benefits for the Companys executive directors are currently on a defined contribution basis and only base salary is pensionable under any Company retirement plan. Details of pension contributions for the period under review in respect of executive directors are set under Directors Remuneration below.
The form and level of Company-sponsored retirement programs vary depending on historical practices and local market considerations. The level of retirement benefits is regularly considered when reviewing total executive remuneration levels.
Directors remuneration and interests
The following information on directors remuneration and interests is presented in accordance with UK reporting requirements.
The shareholdings of non-executive directors are set out in Item 6E. Non-executive directors do not participate in the Companys pension plans, share option or other incentive plans, but may receive a part of their fees in ordinary shares of the Company and may participate in the Companys deferred compensation program. The Board considers that the non-executive directors remuneration conforms with the requirements of the Combined Code.
The fees payable to non-executive directors represent compensation in connection with Board and Board committee meetings, and where appropriate for devoting additional time and expertise for the benefit of the Group in a wider capacity.
For the fiscal year ended 31 December 2007 the aggregate compensation paid by WPP and its subsidiaries to all directors and officers of WPP as a group for services in all capacities was £7,798,341. Such compensation was primarily paid by WPP and its subsidiaries in the form of salaries, performance-related bonuses and a deferred share award. The sum of £588,000 was set aside and paid in the last fiscal year to provide pension benefits for directors and officers of WPP.
The compensation of all executive directors is determined by the Compensation Committee which is comprised wholly of non-executive directors whom the Company considers to be independent. The Compensation Committee is advised by independent remuneration consultants as well as by Group executives as described under Remit of Compensation Committee below. The compensation of the chairman and non-executive directors is determined by the Board which is similarly advised.
Remuneration of the directors who were directors during the year ended 31 December 2007 is set out in the table below. All amounts shown constitute the total amounts which the respective director received during 2007 and for the annual bonus and awards of ESAs in respect of 2007 but received in 2008. No compensation payments for loss of office have been made during 2007 to any individuals who have been directors of the Company.
Other long-term incentive plan awards
Long-term incentive plan awards granted to directors comprise the PSP and Renewed LEAP. The operation of the PSP and Renewed LEAP are described elsewhere in Item 6.
Performance Share Plan awards to directors up to and including 31 December 20071,2,3
Renewed Leadership Equity Acquisition Plan1
C. Board Practices
Information regarding the expiration of the current term of each director and the period during which such director has served is set forth in Item 6A.
During 2007, the Compensation Committee comprised the following members, who took decisions in respect of the year: Jeffrey Rosen (chairman of the committee), P Lader, Esther Dyson, and C Mackenzie (retired on 26 June 2007).
During 2007 the Compensation Committee held eight formal meetings and had many informal discussions. Committee meetings are frequently attended, in whole or in part, by the Group chief executive, the chief talent officer, the director of compensation and benefits and the Company Secretary.
Remit of Compensation Committee
Under its terms of reference (which are reviewed regularly) the committee is responsible for:
No current member of the committee has any personal financial interest (other than as a share owner) in the matters to be decided by the committee, potential conflicts of interest arising from cross-directorships or day-to-day involvement in running the Groups businesses. The terms of reference for the Compensation Committee are available on the Companys website (www.wppinvestor.com) and will be on display as set out in the Notice of Annual General Meeting. These terms of reference are regularly reviewed.
The Compensation Committee regularly consults with Group executives, particularly the Group chief executive (who was not present when matters relating to his own compensation contracts were discussed and decided), the chief talent officer, and the director of compensation and benefits. During the year, the committee received material assistance from Towers Perrin. Advice was also received from Hammonds solicitors on a number of legal, tax and governance issues relating to compensation and benefits. Hammonds provide legal advice on a range of matters to the Group. See further discussion in the Directors remuneration section of Item 6.
The committee receives advice on the following:
Principles of remuneration
All executive compensation at WPP is governed by three guiding principles:
Compensation packages for Group executives are reviewed on a regular basis (on average every 24 months). When reviewing an executives package the committee usually consults with the Group chief executive and the Group chief talent officer.
In making its assessments, the committee considers individual and business unit performance, level of experience and scope of responsibility. It also takes into account the overall package, including both fixed and variable elements, and considers both the on-target and maximum levels of remuneration. The competitiveness of this total package is then reviewed in relation to the most appropriate benchmarks.
For example, for the Group chief executive three separate benchmarks for remuneration opportunities are used:
A similar approach is taken for the other senior executives, including executive directors. The Compensation Committee considers data from the latest industry surveys covering the senior positions in WPPs operating companies. WPP participates in the leading global surveys of executive remuneration in the advertising, market research, healthcare, interactive, direct marketing, public relations and public affairs sectors. In addition, for heads of operating companies the committee considers public disclosures for similar positions in listed companies of comparable size and complexity in the relevant sector.
All remuneration packages for senior executives, including executive directors, have a significant element which is variable and dependent on performance.
Alignment to share owner interests
WPP is committed to aligning executive performance and reward with share owner interests. This is achieved by providing significant opportunities for executives to acquire WPP shares, by using
performance measures that are linked to the creation of share owner value and by operating share ownership goals for the most senior executives. Many of our incentive plans pay out wholly or partially in WPP shares. At least half of the compensation package of the executive directors was delivered in shares during 2007.
Total Shareholder Return (TSR) relative to a group of key comparators is the measure for determining long-term performance-based rewards for Group executive directors.
WPP has encouraged share ownership for its most senior executives, including executive directors, for many years. For executive directors this is achieved through participation in Renewed LEAP. Other WPP Leaders (approximately 200 people) are incentivised to own 40,000 WPP ordinary shares each.
The committee also considers the extent of any dilution of share owner value through the issue of new shares to satisfy incentive awards. The dilution, as at 24 April 2008, was well below the 10% level acceptable to the ABI (Association of British Insurers). It is intended that Renewed LEAP awards, the Performance Share Awards, the Executive Share Awards and Restricted Stock Plan awards will all be satisfied with purchased shares held in the employee share ownership plans (ESOPs) or in Treasury.
Policy on directors service contracts, notice periods and termination payments
The Companys policy on the duration of directors service contracts is that no executive directors have fixed term contracts and the notice period for each is shown below. None of the contracts of parent company executive directors contain liquidated damages provisions. There were no payments in 2007 in respect of termination of employment of any executive director.
As of 31 December 2007, the Audit committee comprised Paul Spencer, Bud Morten, Jeffrey Rosen and Colin Day.
Meetings of the Audit committee, of which there were 9 during 2007, were also attended (by invitation for all or part of any meeting) by the external auditors, the Companys chairman, the Group finance director, the director of internal audit, the Group chief counsel and the Company Secretary.
During 2007, the committee and its members were formally assessed by the chairman of the Company for their technical suitability to be members of the committee and also for the committees overall effectiveness.
The committee has once again continued to oversee compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) for 2007, through regular status reports submitted by the internal and external auditors.
The committee received and reviewed regular reports on both our Right to Speak helpline, which is made available to employees to enable them to communicate confidentially on matters of concern, and the actions taken in response to those calls.
Other work carried out by the committee in 2007 under its terms of reference included:
The committees terms of reference, which are reviewed with the Board annually, are available for inspection on the Companys website at www.wpp.com and are on display prior to and at all general meetings of the Company. Following this years review there have been a number of changes made to the remit. Many of these for regulatory, legal and best practice updates. The Board has extended the remit of the committee to review on its behalf acquisition and investment matters and debt financing.
In 2002, the Group appointed Deloitte & Touche LLP as auditors to the Company following a thorough review of services offered by a number of the leading international accountancy firms.
NASDAQ Marketplace Rules and Home Country Practices
In general, under NASDAQ Marketplace Rule 4350, foreign private issuers such as WPP are permitted to follow home country corporate governance practices instead of certain provisions of Rule 4350 without having to seek individual exemptions from NASDAQ. A foreign private issuer that elects to follow a home country practice instead of any such provisions of Rule 4350 must submit in advance to NASDAQ a written statement from an independent counsel in such issuers home country certifying that the issuers practices are not prohibited by the home countrys laws. The Companys independent United Kingdom counsel has certified to NASDAQ that the Companys corporate governance practices are not prohibited by the laws of England and Wales.
The requirements of Rule 4350 and the corporate governance practices that the Company follows in lieu thereof are described below:
The assets of communications services businesses are primarily its employees, and the Company is highly dependent on the talent, creative abilities and technical skills of its personnel and the relationships its personnel have with clients. The Company believes that its operating companies have established reputations in the industry that attract talented personnel. However, the Company, like all communications services businesses, is vulnerable to adverse consequences from the loss of key employees due to the competition among these businesses for talented personnel. On 31 December 2007 the Group had 90,182 employees located in approximately 2,000 offices in 106 countries compared with 79,352 and 74,631 as of December 31, 2006 and 2005, respectively. Including all employees of associated undertakings, this figure is approximately 111,000 (2006: 98,000, 2005: 92,000). As at March 31 2008, the Group had approximately 93,000 employees and approximately 114,000 employees including associate undertakings. The average number of employees in 2007 was 84,848 compared with 77,686 and 70,936 in 2006 and 2005, respectively, including acquisitions. Their geographical distribution was as follows:
E. Share Ownership
Directors interests in the Companys share capital, all of which were beneficial, were as follows 1:
Option Awards held by executive directors in the year ended 31 December 2007
ESA and Restricted Stock Awards held by executive directors in the year ended 31 December 20071,2