WPP plc 20-F 2011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended 31 December 2010
For the transition period from to
Date of event requiring this shell company report
Commission file number 0-16350
(Exact Name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
6 Ely Place
Dublin 2, Ireland
(Address of principal executive offices)
Andrea Harris, Esq.
Group Chief Counsel
6 Ely Place Dublin 2, Ireland
(Name, Telephone, E-mail and/or 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, 2010, the number of outstanding ordinary shares was 1,264,391,221 which includes at such date ordinary shares represented by 10,766,211 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES ¨ 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:
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 and the like 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 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 3D., captioned Risk Factors, 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 such forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. KEY INFORMATION
WPP plc (WPP) and its subsidiaries and affiliates comprise one of the largest communications services businesses in the world. At 31 December 2010, the Group had approximately 104,000 employees. Including all employees of associated companies, this figure was approximately 146,000. For the year ended 31 December 2010, the Group had revenue of approximately £9,331 million and operating profit of approximately £973 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.
The selected income statement data for the three years ended 31 December 2010 and the selected balance sheet data at 31 December 2010 and 2009 are derived from the Consolidated Financial Statements of the Company that 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 Consolidated Financial Statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), for all periods.
The reporting currency of the Group is the UK pound sterling and the selected financial data has been prepared on this basis.
Selected Consolidated Income Statement Data
Selected Consolidated Balance Sheet Data
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, second interim 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 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 on page 4, for each year presented.
The 2010 first interim dividend was paid on 8 November 2010 to share owners on the register at 8 October 2010. The 2010 second interim dividend is expected to be paid on 4 July 2011 to share owners on the register at 3 June 2011.
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 following table sets forth for each of the most recent six months, the high and low Bloomberg Closing Mid Point rates. As of 18 April 2011, the Bloomberg Closing Mid Point rate was 1.6247.
The annual average of the Bloomberg Closing Mid Point rate for pounds sterling expressed in US dollars for each of the five years ended 31 December was:
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 table below sets out principal risks the Company has identified that could adversely affect it. See also the discussion of Forward-Looking Statements preceding Item 1.
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, JWT, Y&R, Grey, Bates 141 and the United Network, as well as Media Investment Management companies such as MediaCom, MEC, Mindshare and Maxus. Our other segments are Consumer Insight, where our operations are conducted through Kantar; Public Relations & Public Affairs, where we operate through well-known companies such as Burson-Marsteller, Cohn & Wolfe, Hill & Knowlton and Ogilvy Public Relations Worldwide; and Branding & Identity, Healthcare and Specialist Communications, where our operations are conducted by B to D Group, ghg, Wunderman, Sudler & Hennessey, OgilvyOne Worldwide, Ogilvy CommonHealth 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 14 April 2011 the Company had a market capitalisation of £9,159 million.
The Companys executive office is located at 6 Ely Place, Dublin 2, Ireland, Tel: 011-353-1-669-0333 and its registered office is located at 22 Grenville Street, St Helier, Jersey, JE4 8PX.
A. History and Development of the Company
WPP plc was incorporated in Jersey on 12 September 2008.
On 19 November 2008, under a scheme of arrangement between WPP 2008 Limited (formerly WPP Group plc), (Old WPP), the former holding company of the Group, and its share owners under Part 26 of the Companies Act 2006, and as sanctioned by the High Court, all the issued shares in that company were cancelled and the same number of new shares were issued to WPP plc in consideration for the allotment to share owners of one ordinary share in WPP plc for each ordinary share in WPP 2008 Limited held on the record date, 18 November 2008. Citibank, N.A., depositary for the ADSs representing Old WPP ordinary shares, cancelled Old WPP ADSs held in book-entry uncertificated form in the direct registration system maintained by it and issued ADSs representing ordinary shares of the Company in book entry uncertificated form in the direct registration system maintained by it 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.
As part of the scheme of arrangement noted above, 1,252,652,646 ordinary shares were issued at a price of 340.75 pence each. On 24 November 2008 the entire balance standing to the credit of the share premium account was transferred to retained earnings as sanctioned by The Royal Court of Jersey. As a result £4,143.1 million was added to retained earnings for both WPP plc and the Group. For the Company this amount is distributable.
Pursuant to Rule 12g-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act), WPP plc succeeded to Old WPPs registration and periodic reporting obligations under the Exchange Act.
Old WPP became the holding company of the WPP Group on or about 25 October 2005 when the company now known as WPP 2005 Limited, the original holding company of the WPP Group, completed a reorganisation of its capital and corporate structure. WPP 2005 Limited (formerly WPP Group plc) 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, 24/7 Real Media Inc (TFSM) in 2007 and Taylor Nelson Sofres plc (TNS) in 2008.
The Company spent £295.9 million (excluding cash and cash equivalents acquired), £196.6 million and £1,054.0 million for acquisitions and investments in 2010, 2009 and 2008, 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 £217.5 million, £253.3 million and £220.6 million, respectively, and cash spent on share repurchases and cancellations was £46.4 million, £9.5 million and £112.2 million, respectively.
B. Business Overview
The Companys business comprises the provision of communications services on a national, multinational and global basis. It operates from almost 2,400 offices in 107 countries including associates. The Company organises its businesses in the following areas: Advertising and Media Investment Management; Consumer Insight; Public Relations & Public Affairs; and Branding & Identity, Healthcare and Specialist Communications (including direct, digital, promotion and relationship marketing).
Approximately 40% of the Companys reported revenues in 2010 were from Advertising and Media Investment Management, with the remaining 60% of its revenues being derived from the business segments of Consumer Insight; Public Relations & Public Affairs; and Branding & 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 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, JWT, Y&R, Grey, United Network and Bates 141. The Company also owns interests in Asatsu-DK (24.3%); CHI & Partners Limited (49.9%); GIIR, Inc (22.7%) and The Jupiter Drawing Room & Partners (49.0%).
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 includes OgilvyAction, Ogilvys brand activation company, Ogilvy Public Relations Worldwide (OPR), Ogilvy CommonHealth Worldwide and Neo@Ogilvy.
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, 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 investment in its proprietary brand management tool, BrandAsset® Valuator.
Grey commenced operations in 1917 and was incorporated in 1925 as Grey Advertising Inc. Grey has offices in approximately 96 countries.
United Network. In 2005, WPPs Red Cell network was split in two parts, with several of the former Red Cell offices forming the United Network. United Network now includes Senora Rushmore United, Madrid; Berlin Cameron United, New York; Cole & Weber United, Seattle; 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.
Media Investment Management
GroupM is WPPs global media investment management operation, serving as the parent company to agencies including MediaCom, MEC, Mindshare and Maxus. 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 core and talent resources.
MediaCom became part of GroupM following the Grey acquisition in March 2005 and, as part of WPP, is able to work together with sister media agencies, developing synergies in a number of relevant professional areas.
MEC 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, MEC 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 was originally formed from the merger of the media departments of JWT and Ogilvy & Mather. Mindshare has 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.
Maxus is a global communications consultancy, spanning across 60 offices in 50 countries, which helps marketers build interactive relationships between consumers and their brands.
tenthavenue, launched in March 2011, integrates some of the Groups key specialist media offerings in online, mobile, experiential and out of home (OOH) communications in a single company. tenthavenues focus is on delivering tailored audiences and outcomes across multi-channels and devices, reaching specific audiences as they go about their daily lives. It incorporates lifestyle and environments agency Kinetic Worldwide; custom communication and in-flight publisher Spafax; performance marketing specialist Quisma; and mobile marketing agency Joule.
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. In 2009 the Kantar Group announced a major re-organisation to strengthen its position as the worlds leading consumer insight business and streamline its offer for clients. The re-organisation simplified the Groups overall offering through a series of structural changes, building on the acquisition of TNS in October 2008. The principal interests comprising the Kantar Group are:
The TNS Custom business and Research International were merged in 2009. The new global company is known as TNS. This 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.
In addition, following the acquisition of TNS four dedicated vertical sector operating units were established using the Kantar name:
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.
The Futures Company is a global trends and futures research and consultancy business.
Public Relations & Public Affairs
Public Relations & Public Affairs companies advise clients who are seeking to communicate with consumers, governments and/or the business and financial communities. Public Relations & 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 and Cohn & Wolfe.
Burson-Marsteller (B-M), founded in 1953 and now 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, Quinn Gillespie, Dewey Square Group 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. In 2011, H&K merged with another of WPPs public affairs companies, Public Strategies Inc. The combined entity trades under the H&K name.
Ogilvy Public Relations Worldwide is 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. In 2008 C&W merged with Grey Groups public relations network, GCI.
Branding & Identity, Healthcare and Specialist Communications
The Companys activities in this business area include branding and identity; healthcare communications; direct, digital, promotion & relationship marketing; and specialist communications including custom media, demographic and sector marketing, sports marketing, and media and film production services.
Branding & 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, VBAT, Addison Corporate Marketing, Lambie-Nairn, The Partners, FITCH and PeclersParis. 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.
BDGMcColl. BDGMcColl, Edinburgh-based architects and interior designers, specialise in the design of commercial buildings and interiors.
BDGworkfutures. BDGworkfutures 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 GCI Health, Sudler & Hennessey (a Young & Rubicam Brands company), Ogilvy CommonHealth Worldwide (part of the Ogilvy & Mather network) and ghg (part of Grey Group).
Direct, Digital, Promotion & Relationship Marketing
The Company has a number of operating businesses in this category, including:
Real estate marketing
Media & production services
WPP Digital provides access for WPP companies and their clients to a portfolio of digital talent and expertise, platforms and partnerships. WPP Digital comprises full-service interactive agencies, including Possible Worldwide (through the merger of Schematic, BLUE, Bridge Worldwide and Quasar in February 2011), Blue State Digital, production services company Deliver; and technology-led digital marketing company 24/7 Real Media Inc. In addition, WPP Digital holds minority investments in businesses providing creative services, analytics, mobile marketing, in-game advertising, video and social networking 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 Head Office
WPP and its offices in Dublin, London, New York, Tokyo, Hong Kong, Shanghai and Sao Paulo develop the professional and financial strategy of the Group, promote operating efficiencies, coordinate cross referrals of clients among the Group companies and monitor the financial performance of its operating companies. The principal activity of the Group continues to be the provision of communications and marketing 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 350 people.
Our reason for being, the justification for WPPs existence, continues to be to add value to our clients businesses and our peoples careers. Our goal remains to be the worlds most successful provider of communications services to multinational and local companies, not just the largest.
The Group has three strategic priorities.
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 336 of the Fortune Global 500, 29 of the Dow Jones 30, 61 of the NASDAQ 100, 35 of the Fortune e-50 and 708 national or multinational clients are served in three or more disciplines. More than 460 clients are served in four disciplines and these clients account for over 57% of Group revenues. The Group also works with over 340 clients across six or more countries. The Companys 10 largest clients in 2010, measured by revenues, were, British American Tobacco p.l.c., Dell Inc., Ford Motor Company, GlaxoSmithkline plc, Johnson & Johnson, Kraft Foods, Inc., Microsoft
Corporation, Nestlé S.A., The Procter & Gamble Company and Unilever PLC. Together, these clients accounted for approximately 18% of the Companys revenues in 2010. No client of the Company represented more than 5% of the Companys aggregate revenues in 2010. 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.
Acquisitions & Investments
During 2010, acquisitions and increased equity stakes were focused on Advertising and Media Investment Management in Canada, the UK, France, Germany, Poland, Israel, Brazil, Colombia, Hong Kong, India and South Korea; on Consumer Insight in Poland, Hungary, Cyprus, Chile and Guatemala; on Public Relations & Public Affairs in the UK, Germany, Poland and Turkey; on direct, digital and interactive in the US, the UK, Germany, Brazil, China and Singapore; and on Healthcare Communications in the US, the UK and the Czech Republic. Total initial cash consideration spent on these acquisitions and investments, less cash and cash equivalents acquired, was £120.5 million in 2010.
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 limit the scope of 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 trend 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 out of almost 2,400 offices in 107 countries including associates. For a list of the Companys principal subsidiary undertakings and their jurisdictions of incorporation see note 29 to the Consolidated Financial Statements.
The Company organises its businesses in the following areas: Advertising and Media Investment Management; Consumer Insight; Public Relations & Public Affairs; and Branding & Identity, Healthcare & Specialist Communications (including direct, digital, promotion and relationship marketing). A listing of the Group brands operating within these business segments as at April 2011 is set forth below.
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 owned properties include the 370,000 net square foot Young & Rubicam headquarters office building located at 285 Madison Avenue in New York, New York and the 152,000 square foot TNS property located near Toledo, Ohio. Other owned properties are in Latin America (principally in Argentina, Brazil, Chile, Mexico, Peru and Puerto Rico), Asia (India and China) and in Europe (Spain, France, UK and Italy). In Europe owned properties include the 135,626 square foot TNS office located at 2 Rue Francis Pedron, Chambourcy, Paris, France and the 101,592 square foot TNS House at Westgate, Hangar Lane, London. 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. As of 31 December 2010, the fixed asset value (cost less depreciation) representing land, freehold buildings and lease-hold buildings as reflected in the Companys consolidated financial statements was approximately £418.8 million.
In 2010 we were able to reduce our property portfolio by almost 4% to 22.8 million sq ft as a result of shedding excess space created by the integration of the custom business of TNS with Research International and, sadly, as a result of the severance program that saw our staff numbers decline by over 12% in 2009.
The combination of revenue growth and reduction in portfolio enabled us to reduce the establishment cost-to-revenue ratio from 8.0% in 2009 to 7.0% in 2010, equal to our medium term goal. Average square foot per head fell slightly to 229 sq ft from 230 sq ft in 2009, although our target is to achieve 220 sq ft in 2011.
Our key property task is to maintain the 7% establishment cost-to-revenue ratio as we continue to grow the business, by focusing on the key metrics of space per head and cost per square foot on all our lease renewals.
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 2010, 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 fluctuations in foreign exchange rates. 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).
Certain Non GAAP measures included in this operating and financial review and prospects have been derived from amounts calculated in accordance with IFRS but are not themselves IFRS measures. They should not be viewed in isolation as alternatives to the equivalent IFRS measure, rather they should be read in conjunction with the equivalent IFRS measure. These include headline profit before interest and taxation (PBIT), headline PBIT margin (headline PBIT as a percent of revenues), constant currency, billings, free cash flow, and net and average net debt, which we define, explain the use of and reconcile to the nearest IFRS measure in the operating results overview below and on pages 21 and 28 to 30. In reviewing year on year revenue growth management also uses the measure of like-for-like revenue as discussed on page 21.
See Item 11 of this report for Quantitative and Qualitative Disclosures about Market Risk.
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 2010, 40% of the Companys consolidated revenues were derived from Advertising and Media Investment Management, with the remaining 60% of its revenues being derived from the remaining three segments.
The following objectives represent the Groups key performance indicators.
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 in accordance with IFRS as issued by the IASB.
Management reviews the Groups businesses in constant currency to better illustrate the underlying trends from one year to the next and also 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 revenue growth for 2010 and 2009 to like-for-like revenue growth for the same periods.
Our reported revenue growth for the year of 7.4% reflected the comparative weakness of sterling against most currencies, other than the euro. On a constant currency basis, which excludes the impact of currency movements, revenues were up 5.6%.
On a like-for-like basis, excluding the impact of acquisitions and currency, revenues were up 5.3%, reflecting sequential quarterly improvement throughout the year. Revenue grew by 8.5% in the final quarter, the fastest rate of like-for-like quarterly growth since the fourth quarter of 2000. The month of December saw the first monthly double-digit growth rate since January 2001.
Throughout 2010 we have seen continued sequential improvement in our like-for-like quarterly revenue growth, with the final two quarters of the year at 7.5% and 8.5% respectively. This followed zero like-for-like growth in the first quarter and 4.7% in quarter two. This significant turnaround was directionally in line with our earlier forecasts (we anticipated like-for-like growth in the second quarter of 2010 as early as the third quarter trading update of 2009), but was considerably more violent than anticipated. In 2009, our budgets were optimistic anticipating like-for-like growth of -2%. In fact we came in at -8%. In 2010, on the other hand, we proved too pessimistic, budgeting like-for-like growth of zero and coming in at over 5%.
Performance of the Groups businesses is reviewed by management based on headline PBIT. A table showing these amounts by segment and geographical area for each of the three years ended 31 December 2010 is presented in note 2 to the Consolidated Financial Statements. To supplement the reportable currency segment information presented in note 2 to the Consolidated Financial Statements, the tables below gives details of revenue growth by region and business segment on a reported, constant currency, and like-for-like basis.
Geographically, revenue growth continued to strengthen in the final quarter, particularly in the UK, Central and Eastern Europe, the Middle East, Latin America, Africa and Australia, with the US and Asia (excluding Australia and New Zealand) maintaining the strong growth seen in the third quarter. Western Continental Europe remained difficult, with growth in the final quarter of just over 3%, with France, Spain, Greece, Ireland and Belgium still under pressure. The US continued the strong growth seen in the third quarter, up 9.8%. The UK showed its strongest growth of the year at 9.7%. Latin America was up 6.5% in the fourth quarter in constant currency, but on a like-for-like basis was up almost 15%, reflecting the disposal of a call centre business in Argentina in September. Asia, excluding Australia and New Zealand, grew at 13.6%, which was the same as the third quarter. Mainland China and India continued their strong growth with revenue up over 18% and almost 15% respectively in the final quarter. Other major markets in Asia also showed strong growth, including South Korea, Singapore, Indonesia and more surprisingly Japan, driven by Ogilvy, GroupM and Kantar. Markets
outside North America now account for 65% of our revenues, up from 61% five years ago. The influence of the faster-growing markets outside North America is increasing rapidly.
The Groups Advertising and Media Investment Management businesses continued their strong growth, with constant currency revenues up 11.6% in the fourth quarter, the strongest quarterly growth in the year, with Media Investment Management up over 17% and Advertising up well over 7%.
The Groups Public Relations & Public Affairs businesses also had their strongest quarter, with revenues up 5.6%, compared with 5.1% in the third quarter and 3.2% in the first half. Consumer Insight also had a good quarter, with revenues up 5.3%, compared with 6.9% in the third quarter and 2.7% in the first half. The Groups Branding & Identity, Healthcare and Specialist Communications businesses (including direct, digital and interactive) grew by 7.3% on a constant currency basis, down slightly on the strong growth of 8.1% in the third quarter, but well ahead of the first half growth of 2.1%. However, on a like-for-like basis, revenues were up 7.2% in the fourth quarter compared with 7.1% in the third quarter, adjusting for the disposal of the call centre business mentioned earlier.
This continuing improvement was driven largely by our uniquely global direct, digital and interactive businesses, amongst others comprising OgilvyOne, with global revenues of over $800 million, VML, with revenues over $100 million and Wunderman, with global revenues over $900 million. OgilvyInteractive, VML and Wunderman are three of the seven worldwide digital leaders, according to the leading independent digital research firm, Forrester Research. No other competitive group has more than one digital leader.
The Group has also recently announced the launch of Possible Worldwide, a global interactive marketing agency, formed through the combination of award-winning WPP digital agencies Schematic, Bridge Worldwide, BLUE and Quasar, with revenue of over $100 million, with 18 offices and 1,000 staff worldwide, and with operations in the US, Europe, Asia, the Middle East and Africa.
In constant currencies, Advertising and Media Investment Management revenues grew by 7.0%, with like-for-like revenues up similarly at 7.1%. All of the Groups four largest advertising networks finished the year strongly, with growth in our Media Investment Management business over 13% in the year. Advertising showed sequential quarterly like-for-like growth in the last three quarters of 2010, following six quarters of decline. This strong revenue growth in 2010, together with the cost actions taken in 2009, resulted in the combined headline PBIT margin of this sector improving by approximately 1.5 margin points to 15.3%.
Consumer Insight revenues grew by 4.4% in constant currencies, with like-for-like revenues up similarly at 3.9%. Headline PBIT margins improved by 1.1 margin points to 9.7% as benefits resulting from the integration of TNS custom research and Research International and the other operations of both TNS and Kantar, in media, healthcare, retail and their related panel activities, were realised. Headline PBIT gross margins (headline PBIT as a proportion of gross profit rather than revenue) improved 1.5 margin points to 13.2%.
The Groups Public Relations & Public Affairs businesses had a strong end to the year, with constant currency revenue growth of 5.6% in quarter four, the highest quarter of the year. Headline PBIT margins rose by 0.5 margin points to 15.8%. Particularly strong performances were recorded by Burson-Marsteller and the Groups specialist public relations businesses.
The Groups Branding & Identity, Healthcare and Specialist Communications (including direct, digital and interactive) constant currency revenues grew by 5.0% in the year and 7.3% in the final quarter. The Groups global direct, digital and interactive agencies grew strongly, as did Branding & Identity with revenue up almost 11% in the final quarter. This service sector showed a strong recovery in headline PBIT margins, up 2.0 margin points to 12.4%.
Marketing services comprised 60% of our revenues in 2010, a similar proportion to 2009. It is no longer accurate to call us an advertising agency, we are really a communications services company.
2010 compared with 2009
Reported revenues were up 7.4% in 2010 to £9,331.0 million from £8,684.3 million in 2009. On a constant currency basis revenues were up 5.6% and on a like-for-like basis revenues were up 5.3%, see discussion on pages 22 to 24. In 2010 and 2009, acquisitions completed during the year had an immaterial impact on revenue.
Reported operating costs increased by 5.1%. Reported staff costs, excluding incentives, were up 3.2%. Incentive payments (including the cost of share-based compensation) increased 92.1% to £342 million from £178 million. On a reported basis, despite the almost doubling of incentive payments, the Groups staff cost-to-revenue ratio fell to 58.3% compared with 58.9% in 2009.
Together with the improved top-line growth, the Group has benefited from the cost actions taken, particularly towards the end of 2009, to adjust headcount and staff costs. On a like-for-like basis, average headcount has fallen by over 4%, compared with 2009, although given the substantial increase in like-for-like revenues of 8.0% in the second half of the year, our operating companies have begun to invest in more talent.
Revenue conversion post-incentives, that is incremental profit as a proportion of incremental revenue, was very strong at 33%, as our operating companies benefited from the actions to reduce both staff costs and other operating costs in 2009 and during 2010.
Part of the Groups strategy is to continue to ensure that variable staff costs (incentives, freelance and consultants costs) are a significant proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slow-downs. In 2010, the ratio of variable staff costs to total staff costs increased significantly to 13.4%, compared with 9.7% in 2009. As a proportion of revenue, variable staff costs were 7.8% in 2010 compared with 5.7% in 2009. These represent the highest ratios in the last 10 years. The business is, therefore, even better protected against economic downturns.
Reported PBIT rose over 25% to £1.028 billion in 2010 from £819 million in 2009 as a result of the above and reflecting a lower charge for goodwill impairment and amortisation of intangibles, partly offset by higher investment write-downs.
Finance income, finance costs and revaluation of financial instruments
Finance income decreased to £81.7 million in 2010 from £150.4 million in 2009. Finance costs decreased to £276.8 million in 2010 from £355.4 million in 2009. Therefore, net finance costs were £195.1 million, down from £205.0 million last year, reflecting lower debt, partly offset by higher funding costs. Revaluation of financial instruments resulted in £18.2 million of income in 2010 and £48.9 million in 2009. The 2010 income is attributable to gains from movements in the fair value of treasury instruments.
The Companys effective tax rate on reported profit before tax in 2010 was 22.4%, a reduction of 1.1 percentage points from 2009, as a result of utilisation and recognition of losses and other temporary differences not previously recognised.
Profit for the year
Profit for the year increased by 30.4% to £661.0 million in 2010 from £506.9 million in 2009 on a reported basis and increased by 23.7% in constant currency, reflecting higher profit margins and lower effective tax rate. In 2010, £586.0 million of profit for the year was attributable to equity holders of the parent and £75.0 million attributable to non-controlling interests.
2009 compared with 2008
Reported revenues were up 16.1% in 2009 to £8,684.3 million from £7,476.9 million in 2008 reflecting the strength of the euro and US dollar against sterling, as well as the impact of the first full-year inclusion of TNS in our results. On a constant currency basis revenues were up 4.9% and on a like-for-like basis revenues were down 8.1%, as detailed in the table on page 21. In 2009, acquisitions completed during the year had an immaterial impact on revenue. In 2008, acquisitions completed during the year contributed £376.3 million to revenue (£269.6 million was related to TNS).
Reported operating costs increased by 17.7%. Reported staff costs, excluding incentives, were up 19.4%. Incentive payments (including the cost of share-based compensation) fell by almost 17% to £177.8 million from £213.7 million. The Groups staff cost to revenue ratio increased to 58.9% compared with 58.2% in 2008. Part of the Groups strategy is to continue to ensure that variable staff costs (freelancers, consultants and incentive payments) are a significant proportion of total staff costs, as this provides flexibility to deal with volatility in revenues and recessions or slow-downs. In 2009, the ratio of variable staff costs to total staff costs fell to 9.7% compared with 11.4% in 2008. As a proportion of revenue, variable staff costs were 5.7% in 2009 compared with 6.6% in 2008.
Establishment costs as a proportion of revenues were 8.0% in 2009 compared to 7.0% in 2008. 2009 was a difficult year with our property portfolio. We were able to reduce it by 4% to 23.7 million sq. feet however it was not possible to adjust the property portfolio in line with the recession.
Goodwill impairment charges of £44.3 million and £84.1 million were recorded in the years ended 31 December 2009 and 2008, 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. There were no impairment charges on acquired intangible assets in 2009. In 2008, an impairment charge was recorded for £1.5 million. Investment write-downs of £11.1 million and
£30.5 million were taken in the years ended 31 December 2009 and 2008, respectively. Intangible amortisation in 2009 increased by £94.2 million compared to 2008 due to a full year of amortisation related to intangibles established in connection with the acquisition of TNS.
The Group released £19.4 million in 2009 to operating profit relating to excess provisions and other balances established in respect of acquisitions completed prior to 2008 and £23.7 million in 2008 related to acquisitions completed prior to 2007.
Reported operating profit was down 13.0% to £761.7 million in 2009 from £876.0 million in 2008. Reported operating margins decreased to 8.8% from 11.7%. Reported profit before interest and taxation (PBIT) was £818.7 million in 2009, down 11.2% from £922.0 million in 2008. Reported PBIT margins were 9.4% and 12.3% in 2009 and 2008, respectively. PBIT margins were negatively impacted by 2.6% in both years due to goodwill impairment, other goodwill and investment write-downs, and amortisation and impairment of acquired intangibles in each year. While the goodwill impairment charge in 2009 was lower by £39.8 million compared with 2008 and investment write-downs were lower by £19.4 million compared with 2008, intangibles amortisation in 2009 was higher by £94.2 million due to a full year of amortisation related to intangibles established in connection with the TNS acquisition. The impact of profits on disposal of investments was £31.1 million in 2009 and £3.4 million in 2008. Headline PBIT margin was 11.7% in 2009 against 15.0% last year. For 2009, the post-acquisition contribution of all acquisitions to the Groups operating profit was immaterial. For 2008 it was £30.3 million.
Finance income, finance costs and revaluation of financial instruments
Finance income decreased to £150.4 million in 2009 from £169.6 million in 2008. Finance costs increased to £355.4 million in 2009 from £319.4 million in 2008. Therefore, net finance costs increased by £55.2 million, reflecting lower interest rates and higher average net debt as a result of the full year impact of the acquisition of TNS. Revaluation of financial instruments resulted in £48.9 million of income in 2009 and a charge of £25.4 million in 2008. The 2009 income is predominantly attributable to gains on termination of hedge accounting on repayment of TNS debt.
The Companys effective tax rate on reported profit before tax in 2009 was 23.5% compared to 31.2% in 2008. In 2008 there were significant expenses that were not deductible for tax purposes. In 2009 these expenses, such as goodwill impairment, were lower and were offset by other income that was not taxable such as the gain on disposal of investment and income attributable to the revaluation of financial instruments.
Profit for the year
Profit for the year decreased by 1.3% to £506.9 million in 2009 from £513.9 million in 2008 on a reported basis and decreased by 14.2% in constant currency, reflecting lower profit margins partially offset by lower tax expense. In 2009, £437.7 million of profit for the year was attributable to equity holders of the parent and £69.2 million attributable to non-controlling interests.
As in 2009, in managements opinion inflation did not have a material impact on the Companys results for the year or financial position at 31 December 2010.
Foreign currency fluctuations
See Item 11 for a discussion of the impact of currency exchange rate fluctuations on the Groups consolidated results.
B. Liquidity and Capital Resources
GeneralThe primary sources of funds for the Group are cash generated from operations and funds available under its credit facilities. 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 Statement included as part of the Companys Consolidated Financial Statements in Item 18 of this Report.
The Company spent £295.9 million (excluding cash and cash equivalents acquired) and £196.6 million for acquisitions and investments in 2010 and 2009, 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 £217.5 million and £253.3 million, respectively, cash spent on share repurchases and buy-backs was £46.4 million and £9.5 million, respectively, and dividends paid were £200.4 million and £189.8 million, respectively.
There are broadly three alternative uses of funds.
Capital expenditure, which usually approximates the depreciation cost. Pressure here has eased as technology pricing has fallen, although we are increasing investment in our digital and technology-based service offering, in line with our strategic goals. In 2009, we also invested significantly more in real estate following lease renewals, particularly in New York, to secure greater efficiencies.
Mergers and acquisitions, which have historically taken the lions share of free cash flow. Here we have raised the hurdle rate on capital employed so that our return on capital may be increased. Valuations remain reasonable, particularly outside the US, although some speculative froth does seem to have developed, especially in digital and interactive in the US and in some faster-growing markets, like Brazil. Our acquisition focus in 2010 was again on the triplet opportunities of faster-growing geographic markets, new technologies and consumer insights, totally consistent with our strategic priorities in the areas of geography, new communication services and measurability. The cost of the acquisition of TNS in 2008 was funded principally by debt. At the time of the transaction, we announced that, for the following two years, acquisitions would be limited to no more than £100 million per annum, the Groups share buy-back program would be targeted up to 1% per annum and dividend growth at up to 15% per annum, with the objective of using surplus cash generated to reduce debt. In 2010, the Group spent £97 million on initial acquisition payments, net of cash acquired and disposal proceeds, so within the target set. It is likely we will continue to focus on small and medium-sized acquisitions in 2011.
Dividends or share buy-backs. We continue to focus on examining the relative merits of dividends and share buy-backs. Following the strong first half results in 2010, we re-instituted an increase in dividend with a 15% increase in the first interim dividend, the upper limit committed to at the time of the TNS acquisition. Following the continued improvement in profitability during the second half of 2010, the Board has also recommended an increase in the second interim dividend of 15%. This makes a total for the year of 17.79p per share, an all-time high for your Company. Dividends paid in 2010 were more than 3 times covered by profit for the year. The Board has also undertaken a review of its dividend pay-out policy and consulted institutional share owners and analysts. It seems clear from this analysis that in current stock market conditions, many share owners favour consistent dividend growth
and better dividend yields over share re-purchases. Given these views, the Board plans to increase the dividend payout ratio as a proportion of post-tax profits from the current level of approximately 30% to approximately 40% over the medium term. Share buy-backs in 2010 cost £46 million, representing 0.5% of share capital, again well within the target set at the time of the TNS acquisition. It is likely that we will continue to ensure that share buy-backs at least equal the dilutive effect of option and restricted stock issuance.
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 2010, billings were £42.7 billion, or 4.6 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 debt and cash position 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 on pages 29 and 30 for the Groups view on the use of net debt and average net debt to measure debt levels.
US$ bondsThe Group has in issue $600 million of 8% bonds due September 2014 and $650 million of 5.875% bonds due June 2014.
EurobondsThe Group has in issue 600 million of 4.375% bonds due December 2013, 500 million of 5.25% bonds due January 2015 and 750 million of 6.625% bonds due May 2016.
Sterling bondsThe Group has in issue £400 million of 6% bonds due April 2017 and £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 and a £200 million amortising Revolving Credit Facility maturing in July 2011. The Groups borrowing under these facilities, which are drawn down predominantly in US dollars, euros, Canadian dollars and pounds sterling, averaged the equivalent of $818 million in 2010. The Group had available undrawn committed credit facilities of £1,145 million at 31 December 2010 (2009: £1,335 million).
Borrowings under the Revolving Credit Facilities 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.
US Commercial Paper ProgramThe Group has a $1.4 billion US Commercial Paper Program using the $1.6 billion Revolving Credit Facility as a backstop. There was no US Commercial Paper outstanding at 31 December 2010.
Convertible bondsThe Group has in issue £450 million of 5.75% convertible bonds due May 2014. At the option of the holder, the bonds are convertible into 76,530,612 WPP ordinary shares at an initial share price of £5.88 per share.
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.
The Group bases its internal cash flow objectives on free cash flow. 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.
In 2010, net cash inflow from operating activities was £1,361.2 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was £901.8 million. This free cash flow was partially absorbed by £215.2 million in net acquisitions and disposals, by £46.4 million in share repurchases and buy-backs and of £200.4 million in dividends, leaving £439.8 million, of free cash flow.
Management believes that net debt and average net debt is an appropriate and meaningful measure of the debt levels within the Group. This is 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 othersthough our cash resources could be used to repay the debt concerned. Average net debt is calculated as the average daily net borrowings of the
Group and is a more accurate reflection of the amount of debt the Group has supporting its activities through the year. Net debt at a period end is calculated as the sum of the net borrowings of the Group, derived from the cash ledgers and accounts in the balance sheet.
The following table is an analysis of net debt.
At 31 December 2010, the Groups net debt was £1,888 million, down £752 million from £2,640 million in 2009. Net debt averaged £3,056 million in 2010, against £3,448 million in 2009, down £0.4 billion at 2010 exchange rates, reflecting significant improvement in profitability and improved cash flows, despite a continued client emphasis on improved liquidity, as well as effectiveness and efficiency.
The Companys borrowings are evenly distributed between fixed and floating rate debt. Given the strong cash generation of the business, its debt maturity profile and available facilities, the directors believe the Company has sufficient liquidity to match its requirements for the foreseeable future.
Refer to Item 5F for details on the Companys material commitments for capital expenditures at 31 December 2010.
D. Trend Information
The discussion below and in the rest of this Item 5 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 preceding Item 1 in this annual report.
In the first quarter of 2011, reported revenues were up 7.0% at £2.223 billion. Revenues in constant currency were up 8.4%, reflecting the strength of the pound sterling against the US dollar and Euro. On a like-for-like basis, excluding the impact of acquisitions and currency fluctuations, revenues were up 6.7% and gross profit 7.4% compared with the same period last year. Revenues have continued to recover following the stabilisation in quarter one of last year and the sequential improvement in like-for-like growth in quarters two, three and four of 2010.
The pattern of revenue growth in 2011 has started similarly to the second half of 2010, with improvements across all sectors and geographies. Our budgets for 2011 indicated like-for-like growth of 5% over last year and for the first three months we were in line with those projections. A first look at our flash quarter one revised forecasts, indicates further improvement for the year to over 6%, with a more balanced pattern over the two halves, despite tougher comparatives in the second half. In 2010 we were surprised at the speed of the recovery in the more mature markets of the United States and
Germany and more traditional media, like free-to-air television. This pattern has continued into the first
quarter of 2011, although as indicated in the budgets for this year, the faster growing markets of Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe are growing even faster. They were last into the recession and last out.
On a constant currency basis, the Groups revenue grew by 8.4%, in line with the Groups budget, but with gross profit, probably a better indicator of top-line growth and cost comparator, growing faster at 9.1%. In 2010, the United States behaved more like a faster growing market, with constant currency growth of 8.0%. In the first quarter of 2011 this has continued, with revenue on the same basis up 9.1% and only slightly below the third quarter of 2010, which saw the highest quarterly growth since the second quarter of 2007, at 9.9%. However, the world continues to move at very different speeds, with the BRICs (Brazil, Russia, India and China), Next 11 (Bangladesh, Egypt, Indonesia, Iran (?), Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, Vietnam) or CIVETS (Columbia, Indonesia, Vietnam, Egypt (still included), Turkey, South Africa) generally growing strongest, followed by the United States and Germany, then the United Kingdom, France, Italy and Spain with Japan, weakest, suffering from years of stagnation and now triple hit by the dreadful earthquake, tsunami and nuclear disasters. In the first quarter, revenue growth in the United Kingdom, on a constant currency basis, was up 7.7% with Western Continental Europe up 2.2% and Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe growing strongly at 12.6%. Western Continental Europe remains the most challenging, with revenues in France and Spain the most affected, when compared with the same period last year. The Middle East has been affected by the current political turmoil in the first quarter, growing only 1.5%. Central and Eastern Europe grew at 9.1%, driven primarily by Russia and Poland, with the combined revenues in these two markets up over 13%. Latin America grew 10.4% on a constant currency basis, but 16.7%, like-for-like, following the disposal of a call centre business in Argentina in September 2010. Asia Pacific was up 12.5% on a constant currency basis and excluding Japan (which was flat) was up 13.8%, with all the Groups major markets, except Malaysia, showing strong growth. Two of the Groups biggest markets in Asia, Mainland China and India showed combined growth of 18.4%, versus 12.5% in 2010.
By communications services sector, Advertising and Media Investment Management continued to bite-back with revenues on a constant currency basis up 12.9%, followed by Branding & Identity, Healthcare and Specialist Communications (including direct, digital and interactive) up 7.9%. The Groups direct and interactive networks of Wunderman and OgilvyOne, together with specialist digital agencies VML and JWT Inside showed strong growth. Public Relations & Public affairs continued the solid performance in 2010, with growth of 5.6%, which was slightly ahead of quarter four in 2010, the highest quarterly growth in 2010. Consumer Insight revenues were up 3.4% with gross profit up more at 3.6% (3.8% like-for-like), and with North America, the United Kingdom and Western Continental Europe weaker, but stronger growth in Asia Pacific, Latin America, Africa and the Middle East, despite the current political and human challenges in North Africa, the Middle East and Japan.
The Company is in the process of reviewing its quarter one revised forecasts, but early indications are that revenues in the balance of the year will grow faster than budgeted, with full year like-for-like revenue growth of over 6%. The higher levels of incentive compensation paid out this year has focused attention on variable, rather than fixed, compensation and has helped to ease, to some extent, potential pressure on salaries. As our operating companies continue to be more positive about 2011, the increase in selective hiring and talent investment, particularly in the faster growing markets, originally seen in the second half of 2010, has continued into 2011.
During 2009 the Group took action to bring into balance the fall in revenues with staff costs, with a significant reduction in the number of people employed in the Group. As revenues stabilised towards the end of 2009 and growth returned in 2010, our operating companies began hiring again, although as mentioned above, mainly in the faster growing markets. Although hiring has begun again, the discipline of balancing revenues with headcount has continued. The number of people in the Group, on a like-for-
like basis excluding associates, was up 4.2% or 4,350 at 31 March 2011 to 106,825, as compared to 31 March 2010, against an increase in revenues on the same basis of 6.7%. The average number of people in the Group in the first quarter of this year was up similarly by 4.2% to 106,076 compared to 101,763 for the same period last year. In 2009, the point-to-point headcount fell by 12%, in 2010 it rose 4.5% and in 2011, by 31 March, it had risen another 1%. Overall, therefore, the number of people in the business has fallen by over 6%, whilst revenues are now back to pre-Lehman levels on a like-for-like basis, a significant increase in productivity.
For the rest of 2011, the focus will continue to be on ensuring that our operating companies balance revenue and headcount growth, while at the same time capitalising on the various client and market opportunities that continue to arise and continuing to invest in both existing and new talent, where necessary.
Despite the recent developments and effect of the difficult political and human situations in the Middle East, North Africa and Japan (as a point of reference, the Middle East accounts for about 1.7% or $300 million of our approximately $16 billion of revenues forecast by analysts and Japan about 1.5% or $200 million), the continued doubts about sovereign debt in some Western European economies and the growing concerns in the United States about the failure to reduce the fiscal deficit, where the recent US Treasury purchase strike by PIMCO and US debt change in outlook by S&P have not helped, we are cautiously optimistic about the prospects for 2011 and, indeed for 2012.
The second quarter, according to our budgets and quarter one revised forecasts, shows stronger growth in Asia Pacific and Latin America, counter-balanced by lower growth in the United States, with these trends, as anticipated earlier this year, continuing into the final two quarters of 2011. 2012 will see the maxi-quadrennial impacts of the London 2012 Olympic and Paralympic Games, the Eastern European-based UEFA EURO 2012 Football Championships and United States Presidential elections (where media spending may reach $4 billion), all of which may add 1-2% to worldwide levels of advertising and marketing spending, whatever they are. It may be that to some extent we benefit from uncertainty, particularly in the mature economies, where risk averse managements prefer to invest in brand equity, rather than expand capacity. In addition, there are some indications that FMCG clients, lacking pricing power and facing commodity price increases, are decreasing promotional price discounts and increasing investment in advertising. The difficult year may well be 2013, when newly elected or re-elected governments have to wrestle with the impact of fiscal and monetary stimuli and the failure to deal quickly enough with fiscal deficits.
F. Tabular Disclosure of Contractual Obligations
The following summarises the Companys estimated contractual obligations at 31 December 2010, 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 plans, as determined in line with local conditions and practices. Contributions in respect of unfunded plans are paid as they fall due. The total contributions (for funded plans) and benefit payments (for unfunded plans) paid for 2010 amounted to £53.3 million (2009: £47.7 million, 2008: £44.2 million). Employer contributions and benefit payments in 2011 are expected to be in the range of £40 million to £60 million depending on the performance of the assets. Projections for years after 2011 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.
Use of Estimates
The preparation of financial statements requires management to make estimates, judgements 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 Accounting Policies section of the Financial Statements. The Company believes certain of these accounting policies are particularly critical to understanding the more significant judgements 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 financial statements and notes thereto.
Goodwill and other intangibles
The Company has a significant amount of goodwill and other intangible assets. The Company initially tests the carrying value of goodwill and other indefinite lived intangible assets for impairment annually at 30 June of each year, and then updates the review 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, 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, judgements 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 an 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.
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:
The Group accounts for acquisitions in accordance with IFRS 3 (revised) Business Combinations. IFRS 3 (revised) 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 (revised) 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 acquisitions for their continued probability of occurrence and amend the relevant value accordingly through the consolidated income statement or as an adjustment to goodwill as appropriate under IFRS 3 (revised). In 2010, operating profit includes credits totaling £16.5 million (2009: £19.4 million, 2008: £23.7 million) relating to the release of excess provisions and other balances established in respect of acquisitions completed prior to 2009.
Future anticipated payments to vendors in respect of contingent consideration (earnout agreements) are initially recorded at fair value which is the present value of the expected cash outflows of the obligations. The obligations are dependent on the future financial performance of the interests acquired (typically over a four to five year period following the year of acquisition) and assume the operating companies improve profits in line with directors estimates. The directors derive their estimates from internal business plans together with financial due diligence performed in connection with the acquisition. Subsequent adjustments to the fair value are recorded in the consolidated income statement within revaluation of financial instruments. For acquisitions completed prior to 1 January 2010, such adjustments are recorded in the consolidated balance sheet within goodwill. 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 non-controlling interest. These agreements are treated as derivatives over equity instruments and are recorded in the consolidated balance sheet at fair value and the valuation is remeasured at each period end. Fair value is based on the present value of expected cash outflows and the movement in the fair value is recognised as income or expense within revaluation of financial instruments in the consolidated income statement.
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.
Advertising and Media Investment Management revenue is typically derived from commissions on media placements and fees for advertising services. Revenue may consist of various arrangements involving commissions, fees, incentive-based revenue or a combination of the three, as agreed upon with each client.
Revenue is recognised when the service is performed, in accordance with the terms of the contractual arrangement. 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 or receivable.
The Group receives volume rebates from certain suppliers for transactions entered into on behalf of clients that, based on the terms of the relevant contracts and local law, are either remitted to clients or retained by the Group. If amounts are passed on to clients they are recorded as liabilities until settled or, if retained by the Group, are recorded as revenue when earned.
In applying the proportional performance method of revenue recognition for both market research and other long-term contracts, management is required to make significant judgements, 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 labour. As a result of the relationship between labour 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 measures 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 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 assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various plans were carried out at various dates in the last three years. These valuations have generally been updated by the local independent qualified actuaries to 31 December 2010.
The Group has a policy of closing defined benefit plans to new members. This has been implemented across a significant number of pension plans. As a result, these plans generally have an ageing membership population. In accordance with IAS 19, the actuarial calculations have been carried out using the projected unit credit 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 £239.9 million at 31 December 2010, compared to £248.0 million at 31 December 2009. The decrease in the deficit relates to positive investment performance and actions taken by WPP to curtail and settle plans. These factors are partially offset by a drop in discount rates and by the weakening of the sterling.
There are a number of areas in the pension accounting that involve judgements made by management. These include establishing the long-term expected rates of investment return on pension assets, mortality assumptions, discount rates, inflation, rate of increase in pensions in payment and salary increases.
Most of the Groups pension plan assets are held by its plans in the UK and North America. In the UK, the forecasted weighted average return on assets decreased to 5.4% at 31 December 2010 from 5.6% at 31 December 2009, and in North America, the forecasted weighted average return decreased to 6.4% from 6.5%, 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, management 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 the estimated future pension payments and evaluate the efficiency of the allocation of the pension plan assets into various investment categories.
At 31 December 2010, the life expectancies underlying the value of the accrued liabilities for the main defined benefit pension plans operated by the Group were as follows:
In the determination of mortality assumptions, management use the most up-to-date mortality tables available in each country.
For a 0.25% increase or decrease in the discount rate at 31 December 2010, the effect on the year-end 2010 pension deficit would be a decrease or increase, respectively, of approximately £26 million.
We record deferred tax assets and liabilities using tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on enacted, or substantively enacted legislation, 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. At 31 December 2010 no deferred tax asset has been recognised in respect of gross tax losses and other temporary differences of £4,834.9 million.
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
See pages F-7 and F-8 to the Consolidated Financial Statements for a description of new IFRS accounting pronouncements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The directors and executive officers of the Company are as follows:
Philip Lader, age 65: 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 director of Marathon Oil, AES and Rusal Corporations, a trustee of the Smithsonian Museum of American History and the Atlantic Council and a member of the Council on Foreign Relations.
Sir Martin Sorrell, age 66: 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 53: 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 a chartered accountant and fellow of the Association of Corporate Treasurers. He is a non-executive director of CEVA Group plc, Chime Communications PLC and STW Communications Group Limited in Australia, the last two being companies associated with the Group.
Mark Read, age 44: Strategy director and CEO, WPP Digital. Mark Read was appointed a director in March 2005. He has been WPPs director of strategy since 2002 and is also chief executive 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 56: Non-executive director. Colin Day was appointed a director in July 2005. He is the chief executive of Filtrona plc and a non-executive director of Amec. He was the group finance director of Reckitt Benckiser plc, until April 2011, 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 Vero Group plc until 1998, Bell Group plc until 2004, Imperial Tobacco plc until February 2007, easyJet plc until 30 September 2005 and Cadbury plc until 2010.
Esther Dyson, age 59: 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 now owned by CBS. She left CNET at the end of 2006 and now operates as an independent investor and writer, again under the name of EDventure. She has been highly influential for the past 20 years on the basis of her insights into online/information technology markets and their social impact worldwide, including the emerging markets of Central and Eastern Europe and Asia. An active investor as well as an analyst/observer, she participated in the sale of Flickr to Yahoo! and of Medstory and Powerset to Microsoft. She sits on the boards of non-listed start-ups including Evernote (US), 23andMe (US), Airship Ventures (US), Eventful.com (US), Meetup Inc. (US), NewspaperDirect (Canada), Voxiva (US) and Yandex (Russia). 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.
Orit Gadiesh, age 60: 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, as well as a member of the Foundation Board for the World Economic Forum and the Board of Directors of The Peres Institute for Peace. She is a member of the Council on Foreign Relations, and a trustee for Eisenhower Fellowships.
Ruigang Li, age 41: Non-executive director. Ruigang Li was appointed a director in October 2010. He is President of Shanghai Media Group (SMG) a multimedia conglomerate based in Shanghai. Since 2002, under Ruigangs leadership, SMG has maintained the most complete portfolio of media and related businesses, including television, radio, print media, digital media, home shopping, content distribution, performing arts, training, and has become the largest content and service provider and distributor of Chinese language programs in the Chinese Mainland. Ruigang is also the Chairman of China Media Capital (CMC), Chinas first and only sovereign private equity fund dedicated to the media sector both within China and abroad. CMC recently announced a partnership with News Corporations Star China to develop their joint interests in developing growth opportunities in the operational and investment platforms in China and overseas markets. Prior to his current role, Ruigang was a visiting scholar at Columbia University in New York.
Stanley (Bud) Morten, age 67: Non-executive director. Bud Morten was appointed a director in 1991. He is a consultant, private investor and one of the five public members of the Investment Advisory Council of the State of Connecticut. From 2003 to 2009 he was 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. He is also a non-executive director of The Motley Fool, Inc., and of Darien Rowayton Bank, both of which are private companies.
Koichiro Naganuma, age 66: Non-executive director. Koichiro Naganuma was appointed a director in February 2004. He is chairman of the Board of Asatsu-DK Inc., also known as ADK. He is also vice chairman of Japan Advertising Association. Joining the agency in 1981, he was president and Group CEO from 1991-2010. ADK is Japans third largest advertising and communications company, and 10th largest in the world.
Lubna Olayan, age 55: Non-executive director. Lubna Olayan was appointed a director in March 2005. Ms Olayan is the deputy chairperson 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 two publicly listed companies, the Saudi Hollandi Bank and Schlumberger, and on the International Advisory Board of Akbank, Rolls-Royce and the National Bank of Kuwait. She is on the Board of Trustees of Cornell University, INSEAD and KAUST (King Abdullah University of Science and Technology) and on the Board of DSCA (Down Syndrome Charitable Association) and Al Fanar, the first Arab venture philanthropy organisation in the Arab region.
John Quelch, age 59: Non-executive director. John Quelch was appointed a director in 1988. He is the Dean, Vice President and Distinguished Professor of International Management at the China Europe International Business School. Between 2001 and 2011 he was the Lincoln Filene Professor of Business Administration and Senior Associate Dean at Harvard Business School. Between 1998 and 2001 he was Dean of the London Business School. Between 2002 and 2011 he served as chairman of
the Massachusetts Port Authority, honorary counsel general of the Kingdom of Morocco in New England and as honorary chairman of the British American Business Council of New England. 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 Alere, Inc and a member of the Council on Foreign Relations. He served previously on the boards of Blue Circle Industries plc, easyJet plc, Pentland Group plc, Pepsi Bottling Group and Reebok International Limited.
Jeffrey A. Rosen, age 63: 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 51: Non-executive director. Tim Shriver was appointed a director in August 2007. He is Chairman and CEO of Special Olympics, serving over three million Special Olympic athletes and their families in 180 countries. In recent years, he has produced films for Disney, Dream Works and Fox Searchlight and Hallmark Hall of Fame. 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 Malaria No More, Neogenix Oncology, and he is the founder and President of the Center for Interface Action on Global Poverty.
Paul Spencer, age 61: 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 has held a number of non-executive directorships including until 2009 chairman of NS and I (National Savings). He is currently chairman of State Street Managed Pension Funds and Chairs audit at TR Property Investment Trust PLC. He is the independent Trustee of the BAT, BT, BA and Rolls-Royce Pension Funds. In the 2010 Honours he was awarded a CBE for services to the financial services industry. Paul is a governor of the charity Motability.
Sol Trujillo, age 59: Non-executive director. Sol Trujillo was appointed a director in October 2010. He is a highly experienced international business executive, who brings 30 years of international business experience to the Board, having served as CEO on three continents in media communications organisations; US West (now Qwest), Orange (now France Telecom) and Telstra, the Australian communications company. Recognised as a broadband and wireless pioneer, he has a reputation as an innovator in the digital space, described by President Reagans science advisor as the nations first digital telecom CEO. He has managed operations and remains active in business affairs in both developed and fast-growing markets from China and South Asia to Europe, North America, Africa and the Middle East... more than 20 countries around the world. He is a member of corporate boards in the US, EU and China including in the US, Target and Promerica Bank; in Europe, Weather Investments S.p.A in Italy; and in Asia, Silk Road Technologies in China, where he is board chairman. In the public sector, Mr Trujillo served as a trade policy advisor to the Clinton and Bush administrations and remains active on public policy issues related to immigration, trade, productivity and fiscal affairs.
The board of directors has determined that all of the non-executive directors are independent under NASDAQ Rule 5605(a)(2).
Review of compensation
Following a very challenging 2009, the performance of the Group improved considerably in 2010. The design of compensation policy at WPP ensures that there is a clear and direct link between the performance of the Group and executive compensation throughout the Group. In 2010, the strong performance of the Group therefore resulted in both increased incentive levels for management and strong returns for share owners. The use of performance-driven compensation ensures the continued alignment of share owner and executive interests and is essential to enable the Company to attract, retain and motivate the most gifted talent in the industry.
The committees work during 2010 included:
WPP competes on the basis of its intellectual capital. This intellectual capital is created entirely by its people, and the committee endeavours to strike the right balance of fairness between employees and share owners. For this reason, the design of all executive compensation at WPP is governed by three guiding principles: competitiveness, performance-driven reward and alignment with share owner interests.
These three principles are themselves derived from both our mission statement: to develop and manage talent; to apply that talent, throughout the world, for the benefit of clients; to do so in partnership; to do so with profit and our six business objectives (see pages 20 to 21).
The Compensation Committee regularly reviews fixed and variable compensation against appropriate benchmarks both internal and external. When making decisions on executive compensation, the committee is briefed on the remuneration levels within the Group. This includes, for example, the consideration of actual and budgeted salary increases across the organisation when determining executive salary increases. In addition, the committee approves the design of incentive plans and reviews all the awards made under those incentive plans. In 2010 the proportion of total compensation that was variable (due to linkage to performance) for Sir Martin Sorrell, Paul Richardson and Mark Read was 87.4%, 80.1% and 75.2%, respectively.
WPP is committed to aligning executive performance and reward with share owner interests. From a compensation perspective, this is encouraged in a number of ways:
The role of the Compensation Committee in improving risk management
The Compensation Committee is always sensitive to the requirement that the decisions that it makes and the compensation programs the Group has in place serve to improve the management of risk in the Group. In particular:
Key elements of short- and long-term remuneration
The principal elements of WPP executive remuneration currently comprise the following:
Pension contributions, life assurance, healthcare and other benefits are also provided.
Compensation packages for the most senior people at WPP are normally reviewed every 24 months. These reviews are undertaken within the context of:
In determining suitable benchmarks, the Compensation Committee looks at the compensation of executives holding similar roles in competitor organisations and, if appropriate, general industry data for organisations of comparable size and complexity.
Base salary and fees
As reported in previous years, fees of £100,000 are paid to each of the executive directors in respect of their directorships of WPP plc and are included in the numbers above.
Sir Martin Sorrells base salary was last increased on 1 January 2007. It was due to be reviewed in November 2008 with any change to be implemented from January 2009; however, Sir Martin informed the Compensation Committee that an increase would not be appropriate in light of business conditions. His salary and directors fees therefore remained unchanged throughout 2008, 2009 and 2010. As part of the extensive review of the executive directors compensation at the end of 2010, the committee considers that an increase in base salary and adjustments to incentive opportunities are appropriate. Consideration of these issues has continued during 2011 and the committee intends to consult share owners before the proposals are finalised. The final changes agreed will be disclosed in the 2011 Compensation Committee report.
As a result of the review, and being mindful of the time that has elapsed since the last salary increases, the committee decided to increase the base salary of the other two executive directors. Paul Richardsons base salary was increased from $830,000 plus £100,000 fees to $925,000 plus £100,000 fees. The committee believed that Mark Reads package of base salary and fees at £325,000 was uncompetitive and, given the increased importance of digital strategy to the Group and Mr Reads continuing personal development, an increase to his remuneration was in order. As a result, Mark Reads package of base salary and fees was increased to £425,000. These increases were the first increases since July 2008 and January 2009 respectively, and both increases were implemented with effect from 1 January 2011.
All pension benefits for the Companys executive directors are currently on a defined contribution basis. Only the aggregate of base salary and director fees is pensionable. Details of pension contributions for executive directors for the period under review are set on page 50.
Each year WPP sets stretching performance targets for each operating company. Performance against these targets determines the size, if any, of the incentive pool for that unit. In aggregate, incentive payments in 2010 were higher than in 2009 due to improved performance. This trend was also reflected in the bonuses paid to executive directors.
Individual targets (both financial and strategic) for the operating company CEOs are set by WPP and in turn, these CEOs set similar targets for employees who report directly to them. Payment is in the form of both cash bonuses and deferred shares, being Performance Share Awards (PSAs), which vest a further two years after grant. The grant of PSAs typically occurs three months after the end of the financial year.
In a similar way, the Compensation Committee sets objectives for Sir Martin Sorrell and the other executive directors. The extent to which these objectives are met will determine the size of both annual cash bonuses (under the Short Term Incentive Plan, or STIP) and Executive Share Awards (ESAs, the portion of the annual bonus paid in shares which normally vest a further two years after grant).
No changes were made in 2010 to the levels of short-term incentive payouts that would be payable for achieving either target or maximum performance. The target and maximum cash bonus and ESA awards for each of the three executive directors in 2010 were as follows (shown as a percentage of salary):
Consistent with previous years, for 2010 the performance of each executive director was measured in the three areas shown below.
Each of these three elements is equally weighted for bonus purposes (i.e. one third of the bonus is payable for the achievement of each objective). Except for the Group financial objectives, the exact measures differ for each individual executive director.
After considering each of these areas and the respective measures for each executive director, the committee assessed the following levels of performance:
These achievement levels resulted in the following bonus payments:
The executive directors are eligible, but decided not, to participate in a cash bonus deferral plan whereby they can defer receipt of part of their bonus for four years, and receive a 25% match in the form of WPP shares (subject to continuous employment).
In conjunction with the committees review of total compensation for the executive directors, the committee decided to adjust the levels of short-term incentive awards available for executive directors. The target and maximum levels for both Paul Richardson and Mark Read have been adjusted for 2011 in order to better balance the cash and share incentive elements of their remuneration, and to reflect market practice, and are shown below (as a percentage of salary):
As mentioned in the Base salary and fees section, a decision regarding adjustments to Sir Martin Sorrells incentive opportunities is pending the outcome of share owner consultation.
During the latter part of 2010, the Compensation Committee reviewed the long-term incentive plans to assess whether they continued to meet the strategic objectives of the Company particularly given the increased competitive pressures that have been fuelled by the general economic recovery and competitors behaviour. The committee reviewed grant levels, performance criteria and vesting schedules. The conclusion of the review was that the grant levels and vesting schedules remained appropriate and well suited to the nature of the business. While the committee believes that the relative TSR measure that has been used for a number of years continues to be the most appropriate performance measure, the committee periodically reviews whether the plans would be strengthened by the addition of one or two further non-market measures in order to balance TSR.
Other than stock options, all awards will be satisfied out of WPP shares held in treasury or one of the Companys employee share ownership plans (ESOPs). The proceeds from any of the cash or share-based equity plans are not pensionable.
Leadership Equity Acquisition Plan III
In 2010, awards under LEAP III were made to 18 of the Groups key executives. Details of the awards made to the executive directors can be found on page 52.
Participants have to commit and retain investments in WPP in order to receive awards under LEAP III. Such investments are in the form of WPP shares (investment shares) and, at the invitation of the Compensation Committee, also in the form of options over WPP shares purchased from an independent third party (investment options). LEAP III awards provide participants with the opportunity to earn additional WPP shares to match their investments (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 and compared with a peer group weighted by market capitalisation.
Following the end of a performance period, 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. This is because relative TSR may not always reflect the true performance of the Company. Factors the committee considers in its fairness review of any award
include, amongst others, multiple measures of the Groups financial performance (such as growth in revenue 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 premiums).
Vesting of the 2005 and 2006 LEAP awards
As previously reported in the 2009 Compensation Committee report, the 2005 award vested in March 2010 with a match of 2.50.
As described above, the Compensation Committee is required to perform a fairness review before any awards can vest. When performing this fairness review in the context of determining the level of vesting of the 2006 award, the committee reviewed a broad range of factors in its consideration of whether the relative TSR achievement was a fair reflection of the performance of the Group over the five-year performance period or whether there were factors that required the result to be adjusted. For the vesting of the 2006 award, the committee considered the following factors: the constituents of the peer group and whether there were any events that had an undue impact on their TSR performance in either a positive or negative way; the impact of changes in exchange rates on the TSR calculation; and the financial performance of the Company, relative to its peers, covering a wide range of measures including EPS, PBIT, margin, revenue and several other factors.
Following the fairness review, the committee concluded that the relative TSR result fairly reflected the performance of the Company over the five-year investment period, and that no adjustment was deemed necessary. The relative TSR performance of the Company resulted in a match of 4.14 for each investment share committed to the program despite the fact that on a local currency basis the match was 4.80.
Restricted Stock Plan
Other than to satisfy awards under the short-term incentive plans (ESAs and PSAs), the principal use of the Restricted Stock Plan is for awards under the WPP Leaders and Partners program. This program is used to reward, retain and align the interests of about 1,250 of our key executives with the interests of share owners.
In the program, awards are made to participants that vest three years after grant, provided the participant is still employed within the Group. Executive directors are ineligible to participate in this plan.
Executive Stock Option Plan
In order to attract or retain key talent it is sometimes necessary to make special grants of options. No awards were granted in 2010 to any employee or executive director (1 award was granted to an employee in 2009). However, the Compensation Committee is conscious that stock options remain a powerful motivator and, in certain circumstances, it might be necessary to make awards to a broader population under the Executive Stock Option Plan.
Worldwide Ownership Plan
The Worldwide Ownership Plan is an all-employee plan that makes annual grants of stock options to employees with two years of service who work in wholly owned subsidiaries. During 2010, awards were made to over 45,000 employees. By 31 December 2010, options under this plan had been granted to approximately 97,700 employees over 43.4 million shares since March 1997. Executives who participate in one of the other share plans described above are ineligible to participate in this plan.
Share incentive dilution for 2000 to 2010
The share incentive dilution level, measured on a 10-year rolling basis, has declined to 4.4% at 31 December 2010 (2009: 4.6%). It is intended that awards under all plans, with the exception of the Worldwide Ownership Plan, will all be satisfied with purchased shares held either in the ESOPs or in treasury.
Key elements of short- and long-term remuneration
For the fiscal year ended 31 December 2010 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 £9.9 million. Such compensation was paid by WPP and its subsidiaries primarily in the form of salaries, performance-related bonuses, other benefits and a deferred share award. The sum of £0.7 million was set aside and paid in the last fiscal year to provide pension benefits for directors and officers of WPP.
Executive directors emoluments
The value of salary and fees, benefits, pension contributions and annual incentives paid both in cash (under the STIP) and shares (ESAs) for the year ending 31 December 2010 are set out in the table below. The table also shows comparative numbers for 2009. In the case of the STIP and ESAs, the figures shown are the value of the awards in respect of the year in question (although they were received in the following year). Benefits include such items as healthcare, life assurance, spouse travel and allowances for cars and housing. Both Sir Martin Sorrell and Paul Richardson currently receive part of their remuneration in pounds sterling and part in US dollars. Any US dollar amounts received in 2010 have been converted into sterling at an exchange rate of $1.5461 to £1 ($1.5667 for 2009).
ESAs and Restricted Stock Awards held by executive directors
All awards made under the Restricted Stock Plan are made on the basis of satisfaction of previous performance conditions and are subject to continuous employment until the v