Annual Reports

  • 20-F (Apr 28, 2017)
  • 20-F (Apr 29, 2016)
  • 20-F (Apr 30, 2015)
  • 20-F (Apr 30, 2014)
  • 20-F (Apr 30, 2013)
  • 20-F (Apr 30, 2012)

 
Other

WPP plc 20-F 2014
Form 20-F
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended 31 December 2013

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

OR

 

¨   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report                     

 

Commission file number 0-16350

 

WPP plc

(Exact Name of Registrant as specified in its charter)

 

Jersey

(Jurisdiction of incorporation or organization)

 

27 Farm Street

London, United Kingdom, W1J 5RJ

(Address of principal executive offices)

 

Andrea Harris, Esq.

Group Chief Counsel

27 Farm Street, London, United Kingdom, W1J 5RJ

Telephone: +44(0) 20 7408 2204

Facsimile: +44(0) 20 7493 6819

(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.

 

Title of each class

 

Name of each exchange on which registered

Not applicable   Not applicable

 

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)


Table of Contents

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

 

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

At December 31, 2013, the number of outstanding ordinary shares was 1,348,733,317 which included at such date ordinary shares represented by 10,970,861 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:

 

U.S. GAAP  ¨

   International Financial Reporting Standards issued by the International Accounting Standards Board  x    Other  ¨

 

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

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

FORWARD – LOOKING STATEMENTS

     1   

Part I

     1   

  Item 1

  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     1   

  Item 2

  

OFFER STATISTICS AND EXPECTED TIMETABLE

     1   

  Item 3

  

KEY INFORMATION

     1   
   A   

Selected Financial Data

     1   
   B   

Capitalization and Indebtedness

     4   
   C   

Reasons for the Offer and Use of Proceeds

     4   
   D   

Risk Factors

     5   

  Item 4

  

INFORMATION ON THE COMPANY

     7   
   A   

History and Development of the Company

     7   
   B   

Business Overview

     8   
   C   

Organizational Structure

     12   
   D   

Property, Plants and Equipment

     14   

  Item 4A

  

UNRESOLVED STAFF COMMENTS

     14   

  Item 5

  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     15   
   A   

Operating Results

     15   
   B   

Liquidity and Capital Resources

     22   
   C   

Research and Development, Patents and Licenses, etc.

     24   
   D   

Trend Information

     24   
   E   

Off-Balance Sheet Arrangements

     25   
   F   

Tabular Disclosure of Contractual Obligations

     26   

  Item 6

  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     36   
   A   

Directors and Senior Management

     36   
   B   

Compensation

     39   
   C   

Board Practices

     64   
   D   

Employees

     75   
   E   

Share Ownership

     76   

  Item 7

  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     78   
   A   

Major Shareholders

     78   
   B   

Related Party Transactions

     78   
   C   

Interests of Experts and Counsel

     78   

  Item 8

  

FINANCIAL INFORMATION

     79   
   A   

Consolidated Statements and Other Financial Information

     79   
   B   

Significant Changes

     79   

  Item 9

  

THE OFFER AND LISTING

     80   
   A   

Offer and Listing Details

     80   
   B   

Plan of Distribution

     81   
   C   

Markets

     81   
   D   

Selling Shareholders

     81   
   E   

Dilution

     81   
   F   

Expenses of the Issue

     81   


Table of Contents
     Page  

  Item 10

  

ADDITIONAL INFORMATION

     82   
   A   

Share Capital

     82   
   B   

Memorandum and Articles of Association

     82   
   C   

Material Contracts

     90   
   D   

Exchange Controls

     94   
   E   

Taxation

     94   
   F   

Dividends and Paying Agents

     99   
   G   

Statements by Experts

     99   
   H   

Documents on Display

     99   
   I   

Subsidiary Information

     99   

  Item 11

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     100   

  Item 12

  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     100   
   A   

Debt Securities

     100   
   B   

Warrants and Rights

     100   
   C   

Other Securities

     100   
   D   

American Depositary Shares

     101   

Part II

     103   

  Item 13

  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     103   

  Item 14

  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     103   

  Item 15

  

CONTROLS AND PROCEDURES

     103   

  Item 16A

  

AUDIT COMMITTEE FINANCIAL EXPERT

     105   

  Item 16B

  

CODE OF ETHICS

     105   

  Item 16C

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     106   

  Item 16D

  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     106   

  Item 16E

  

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     106   

  Item 16F

  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     107   

  Item 16G

  

CORPORATE GOVERNANCE

     107   

  Item 16H

  

MINE SAFETY DISCLOSURE

     108   

Part III

     109   

  Item 17

  

FINANCIAL STATEMENTS

     109   

  Item 18

  

FINANCIAL STATEMENTS

     109   

  Item 19

  

EXHIBITS

     109   


Table of Contents

Forward-Looking Statements

 

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 Company’s 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 Company’s major markets (which varies depending on, among other things, regional, national and international political and economic conditions and government regulations in the world’s 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 Company’s 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.

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

Overview

 

WPP plc and its subsidiaries (WPP) comprise one of the largest communications services businesses in the world. At 31 December 2013, the Group had 119,116 employees. Including all employees of associated companies, this figure was approximately 175,000. For the year ended 31 December 2013, the Group had revenue of £11,019 million and operating profit of £1,410 million.

 

Unless the context otherwise requires, the terms “Company”, “Group” and “Registrant” as used herein shall also mean WPP plc 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 each of the three years ended 31 December 2013, 2012 and 2011 and the selected balance sheet data as at 31 December 2013 and 2012 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

 

1


Table of Contents

is derived from the Consolidated Financial Statements of the Company previously filed with the Securities and Exchange Commission (SEC) as part of the Company’s 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).

 

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

 

      Year ended 31 December  
     2013     2012     2011     2010     2009  
      £m     £m     £m     £m     £m  

Revenue

     11,019.4        10,373.1        10,021.8        9,331.0        8,684.3   

Operating profit

     1,410.3        1,241.1        1,192.2        973.0        761.7   

Profit for the year

     1,012.1        894.7        916.5        661.0        506.9   

Profit attributable to equity holders of the parent

     936.5        822.7        840.1        586.0        437.7   

Earnings per ordinary share:

          

Basic

     72.4  p      66.2  p      67.6  p      47.5  p      35.9  p 

Diluted

     69.6  p      62.8  p      64.5  p      45.9  p      35.3  p 

Earnings per ADS1:

          

Basic

     362.0  p      331.0  p      338.0  p      237.5  p      179.5  p 

Diluted

     348.0  p      314.0  p      322.5  p      229.5  p      176.5  p 

Dividends per ordinary share

     30.27  p      25.94  p      19.28  p      16.25  p      15.47  p 

Dividends per ADS (US dollars)2

     238.8  ¢      207.1  ¢      151.2  ¢      126.7  ¢      135.9  ¢ 

1    Basic and diluted earnings per American Depositary Share (ADS) have been calculated using the same method as earnings per share, multiplied by a factor of five.

2    These figures have been translated for convenience purposes only, using the approximate average rates shown in the exchange rate table on page 3. This conversion should not be construed as a representation that the pound sterling amounts actually represent, or could be converted into, US dollars at the rates indicated.

        

         

 

Selected Consolidated Balance Sheet Data

 

      At 31 December  
     2013      2012      2011      2010      2009  
      £m      £m      £m      £m      £m  

Total assets

     25,005.4         24,877.6         24,694.9         24,345.1         22,351.5   

Net assets

     7,846.5         7,060.6         6,894.3         6,647.9         6,075.7   

Called-up share capital

     134.9         126.5         126.6         126.4         125.6   

Number of shares (in millions)

     1,348.7         1,265.4         1,266.4         1,264.4         1,256.5   

 

Dividends

 

Dividends on the Company’s ordinary shares, when paid, are paid to share owners as of a record date, which is fixed by the Company.

 

2


Table of Contents

The table below sets forth the amounts of interim or first interim, final or second interim and total dividends paid on the Company’s ordinary shares in respect of each fiscal year indicated. In the United States, the Company’s ordinary shares are represented by ADSs, which are evidenced by American Depositary Receipts (ADRs) or held in book-entry form. The Group uses the terms ‘ADS’ and ‘ADR’ interchangeably. The dividends are also shown translated into US cents per ADS using the approximate average rates as shown in the exchange rate table below, for each year presented.

 

             Pence per ordinary share               US cents per ADS  
In respect of the year ended 31 December:    Interim
or First
Interim
     Final or
Second
Interim
     Total      Interim
or First
Interim
     Final or
Second
Interim
     Total  

2009

     5.19         10.28         15.47         40.66         80.53         121.19   

2010

     5.97         11.82         17.79         46.15         91.37         137.52   

2011

     7.46         17.14         24.60         59.80         137.39         197.19   

2012

     8.80         19.71         28.51         69.75         156.22         225.97   

2013

     10.56         23.65         34.21         82.61         185.01         267.62   

 

The 2013 interim dividend was paid on 11 November 2013 to share owners on the register at 11 October 2013. The 2013 final dividend will be paid on 7 July 2014 to share owners on the register at 6 June 2014.

 

Exchange rates

 

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 Company’s 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 exchange rates between the pound sterling and the US dollar. As at 24 April 2014, the closing exchange rate was 1.6793.

 

Month ended    High      Low  

31 October 2013

     1.6240         1.5922   

30 November 2013

     1.6362         1.5915   

31 December 2013

     1.6566         1.6261   

31 January 2014

     1.6616         1.6344   

28 February 2014

     1.6733         1.6311   

31 March 2014

     1.6762         1.6496   

 

The annual average exchange rates between the pound sterling and the US dollar for each of the five years ended 31 December were:

 

Year ended 31 December    Average  

2009

     1.5667   

2010

     1.5461   

2011

     1.6032   

2012

     1.5852   

2013

     1.5646   

 

3


Table of Contents

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

4


Table of Contents

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.

 

Risk    Potential impact
Clients     
The Group competes for clients in a highly-competitive industry and client loss may have a material adverse effect on the Group’s market share and its business, revenues, results of operations, financial condition or prospects.   

Competitors include large multinational advertising and marketing communication companies and regional and national marketing services companies, database marketing and modelling companies, telemarketers, social media and consulting internet companies.

 

Service agreements with clients are generally terminable by the client on 90 days’ notice and many clients put their advertising and communications business up for competitive review from time to time. The ability to attract new clients and to retain or increase the amount of work from existing clients may also in some cases be limited by clients’ policies on conflicts of interest.

The Group receives a significant portion of its revenues from a limited number of large clients and the net loss of some of these clients could have a material adverse effect on the Group’s prospects, business, financial condition and results of operations.    A relatively small number of clients contribute a significant percentage of the Group’s consolidated revenues. The Group’s 10 largest clients accounted for 17.8% of revenues in the year ended 31 December 2013. Clients generally are able to reduce advertising and marketing spend or cancel projects on short notice. The loss of one or more of the Group’s largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Group’s financial condition.
Data Security     
The Group is subject to strict data protection and privacy legislation in the jurisdictions in which it operates and relies extensively on information technology systems. The Group operates on a largely decentralised basis with a large number of different agencies and operating entities and the resulting size and diversity of the operational systems increases the vulnerability of such systems to breakdown or malicious intrusion.    The Group may be subject to investigative or enforcement action or legal claims or incur fines, damages, or costs if the Group fails to adequately protect data or observe privacy legislation in every instance. A system breakdown or intrusion could have a material adverse effect on the Group’s business, revenues, results of operations, financial condition or prospects.
Economic     
The Group’s businesses are subject to economic cycles. Many of the economies in which the Group operates currently have significant economic challenges.    Reduction in client spending or postponing spending on the services offered by the Group or switching of client expenditure to non-traditional media and renegotiation of contract terms can lead to reduced profitability and cash flow.
Financial     
Currency exchange rate fluctuations could adversely impact the Group’s consolidated results.    The Company’s reporting currency is pounds sterling. Given the Group’s significant international operations, fluctuations in currency exchange rates can affect the Group’s consolidated results.
The interest rates and fees payable by the Group in respect of certain of its borrowings are, in part, influenced by the credit ratings issued by the international debt rating agencies.    If the Company’s financial performance and outlook materially deteriorate, a ratings downgrade could occur and the interest rates and fees payable on certain of the Company’s revolving credit facilities and certain of the Group’s bonds could be increased.
The Group is subject to credit risk through the default of a client or other counterparty.   

The Group is generally paid in arrears for its services. Invoices are typically payable within 30 to 60 days.

 

The Group commits to media and production purchases on behalf of some of its clients as principal or agent depending on the client and market circumstances. If a client is unable to pay sums due, media and production companies may look to the Group to pay such amounts to which it committed as an agent on behalf of those clients.

 

5


Table of Contents
Risk    Potential impact
Mergers & Acquisitions     
The Group may be unsuccessful in evaluating material risks involved in completed and future acquisitions and may be unsuccessful in integrating any acquired operations with its existing businesses.    The Group regularly reviews potential acquisitions of businesses that are complementary to its operations and clients’ needs. If material risks are not identified prior to acquisition or the Group experiences difficulties in integrating an acquired business, it may not realise the expected benefits from such an acquisition and the Group’s financial condition could be adversely affected.
Goodwill and other intangible assets recorded on the Group’s balance sheet with respect to acquired companies may become impaired.    The Group has a significant amount of goodwill and other intangible assets recorded on its balance sheet with respect to acquired companies. The Group annually tests the carrying value of goodwill and other intangibles for impairment. The estimates and assumptions about results of operations and cash flows made in connection with impairment testing could differ from future results of operations and cash flows. Future events could cause the Group to conclude that the asset values associated with a given operation have become impaired which could have a material impact on the Group’s financial condition.
Operational     
The Group operates in 110 countries and is exposed to the risks of doing business internationally.    The Group’s international operations are subject to the following risk factors: (i) restrictions and/or changes in taxation on repatriation of earnings; (ii) economic, social or political instability within different countries, regions and markets; (iii) changes in foreign laws and regulatory requirements, such as those on foreign ownership of assets or data usage or business models; and (iv) uncertainty or potential ineffectiveness or lack of enforcement in relation to the Group’s client service agreements or other contractual rights.
People     
The Group’s performance could be adversely affected if it were unable to attract and retain key talent or had inadequate talent management and succession planning for key management roles.    The Group is highly dependent on the talent, creative abilities and technical skills of our personnel as well as their relationships with clients. The Group is vulnerable to the loss of personnel to competitors and clients leading to disruption to the business.
Regulatory/Legal     
The Group may be subject to regulations restricting its activities or effecting changes in taxation.    Governments, government agencies and industry self-regulatory bodies from time to time adopt statutes and regulations that 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 Group and its clients which could have a material adverse impact on our financial position. Changes in tax laws and international tax treaties or their application may also adversely affect the Group’s reported results.
The Group may be exposed to liabilities from allegations that certain of its clients’ advertising claims may be false or misleading or that its clients’ products may be defective or harmful.    The Group works for a large number of clients across a broad spectrum of industries and end markets, some of which may become subject to litigation. As a consequence of providing services to such clients, the Group may itself become involved as a defendant in litigation brought against its clients by third parties, including its clients, competitors or consumers or governmental or regulatory authorities.
The Group is subject to strict anti-corruption and anti-bribery legislation and enforcement in the countries in which it operates.    The Group may be exposed to liabilities in the event of breaches of anti-corruption and anti-bribery legislation in all of the 110 countries in which it operates.
Civil liabilities or judgements against the Company or its directors or officers based on United States federal or state securities laws may not be enforceable in the United States or in England and Wales or in Jersey.    The Company is a public limited company incorporated under the laws of Jersey. Some of the Company’s directors and officers reside outside of the United States. In addition, a substantial portion of the directly owned assets of the Company are located outside of the United States. As a result, it may be difficult or impossible for investors to effect service of process within the United States against the Company or its directors and officers or to enforce against them any of the judgements, including those obtained in original actions or in actions to enforce judgements of the U.S. courts, predicated upon the civil liability provisions of the federal or state securities laws of the United States.

 

6


Table of Contents

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 Advertising, JWT, Y&R, Grey, Bates CHI&Partners and the United Network, as well as Media Investment Management companies such as MediaCom, MEC, Mindshare, Maxus and tenthavenue. Our other segments are Data Investment Management (previously “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 Strategies and Ogilvy Public Relations; 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, Geometry Global, Xaxis, POSSIBLE, AKQA and other companies.

 

The Company’s 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 24 April 2014 the Company had a market capitalisation of approximately £17.0 billion.

 

The Company’s executive office is located at 27 Farm Street, London, United Kingdom, W1J 5RJ, Tel:+44 (0)20 7408 2204 and its registered office is located at Queensway House, Hilgrove Street, St Helier, Jersey JE1 IES.

 

A. History and Development of the Company

 

WPP plc was incorporated in Jersey on 25 October 2012 under the name WPP 2012 plc.

 

On 2 January 2013, under a scheme of arrangement between WPP 2012 Limited (formerly known as WPP plc), (Old WPP), the former holding company of the Group, and its share owners pursuant to Article 125 of the Companies (Jersey) Law 1991, and as sanctioned by the Royal Court of Jersey (the Jersey Court), a Jersey incorporated and United Kingdom tax resident company, WPP 2012 plc became the new parent company of the WPP Group and adopted the name WPP plc. Under the scheme of arrangement, all the issued shares in Old WPP were cancelled and the same number of new shares were issued to WPP plc in consideration for the allotment to share owners of one share in WPP plc for each share in Old WPP held on the record date, 31 December 2012. Citibank, N.A., depositary for the ADSs representing Old WPP shares, cancelled Old WPP ADSs held in book-entry uncertificated form in the direct registration system maintained by it and issued ADSs representing shares of WPP plc 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 ADSs of WPP plc upon surrender of the Old WPP ADSs, or ADRs, to the Depositary. Each Old WPP ADS represented five shares of Old WPP and each WPP plc ADS represents five shares of WPP plc.

 

Pursuant to Rule 12g-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act), WPP plc succeeded to Old WPP’s registration and periodic reporting obligations under the Exchange Act.

 

Old WPP was incorporated in Jersey on 12 September 2008 and became the holding company of the WPP Group on 19 November 2008 when the company now known as WPP 2008 Limited, the prior holding company of the WPP Group which was incorporated in England and Wales, completed a reorganisation of its capital and corporate structure. WPP 2008 Limited had become the holding company of the Group on 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 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

 

7


Table of Contents

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. (now known as The Ogilvy Group, LLC) 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, LLC (Grey) in 2005, 24/7 Real Media Inc (now known as Xaxis, Inc) in 2007, Taylor Nelson Sofres plc (TNS) in 2008 and AKQA Holdings, Inc. (AKQA) in 2012.

 

The Company spent £221.0 million, £586.6 million and £532.4 million for acquisitions and investments in 2013, 2012 and 2011, respectively, including payments in respect of loan note redemptions and earnout payments resulting from acquisitions in prior years, net of cash and cash equivalents acquired (net) and proceeds on disposal of investments. For the same periods, cash spent on purchases of property, plant and equipment and other intangible assets was £284.5 million, £330.1 million and £253.2 million, respectively, and cash spent on share repurchases and buy-backs was £197.0 million, £134.5 million and £182.2 million, respectively.

 

B. Business Overview

 

The Company’s business comprises the provision of communications services on a national, multinational and global basis. It operates from over 3,000 offices in 110 countries including associates. The Company organises its businesses in the following areas: Advertising and Media Investment Management; Data Investment Management; Public Relations & Public Affairs; and Branding & Identity, Healthcare and Specialist Communications (including direct, digital, promotion and relationship marketing).

 

Approximately 42% of the Company’s reported revenues in 2013 were from Advertising and Media Investment Management, with the remaining 58% of its revenues being derived from the business segments of Data Investment Management; 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.

 

Revenue1    2013      2012      2011  
      £m     

% of

total

     £m     

% of

total

     £m     

% of

total

 

Advertising and Media Investment Management

     4,578.8         41.5         4,273.2         41.2         4,157.2         41.5   

Data Investment Management2

     2,549.7         23.1         2,460.2         23.7         2,458.0         24.5   

Public Relations & Public Affairs

     920.7         8.4         917.1         8.8         885.4         8.8   

Branding & Identity, Healthcare and Specialist Communications

     2,970.2         27.0         2,722.6         26.3         2,521.2         25.2   

Total

     11,019.4         100.0         10,373.1         100.0         10,021.8         100.0   
1   

Intersegment sales have not been separately disclosed as they are not material.

2   

Data Investment Management was previously reported as Consumer Insight.

 

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 Company’s regional diversity.

 

Revenue1    2013      2012      2011  
      £m     

% of

total

     £m     

% of

total

     £m     

% of

total

 

North America2

     3,744.7         34.0         3,546.5         34.2         3,388.2         33.8   

United Kingdom

     1,414.0         12.8         1,275.2         12.3         1,183.5         11.8   

Western Continental Europe

     2,592.6         23.5         2,439.2         23.5         2,505.1         25.0   

Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe

     3,268.1         29.7         3,112.2         30.0         2,945.0         29.4   

Total

     11,019.4         100.0         10,373.1         100.0         10,021.8         100.0   
1   

Intersegment sales have not been separately disclosed as they are not material.

2   

North America includes the US with revenues of £3,498.1 million (2012: £3,309.4 million, 2011: £3,149.9 million).

 

8


Table of Contents

The Company’s principal disciplines within each of its business segments are described below. Item 4C sets forth the Group brands operating within each discipline.

 

Advertising and Media Investment Management

 

Advertising – 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.

 

Media Investment Management – GroupM is WPP’s leading global media investment management operation. 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 WPP’s 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 GroupM’s core and talent resources. Our offering in this discipline also includes the network tenthavenue, which integrates some of the Group’s key specialist media offerings in online, mobile, experiential and out of home (OOH).

 

Data Investment Management (previously Consumer Insight)

To help optimise its worldwide research offering to clients, the Company’s separate global research and strategic marketing consultancy businesses are managed on a centralised basis under the umbrella of the Kantar Group. The Kantar Group offering includes: custom research in a wide range of business sectors and areas of marketplace information including strategic market studies; brand positioning; equity research; customer satisfaction surveys; product development; international research; advanced modeling; advertising research; pre-testing, tracking and sales modeling; and trends and futures research and consultancy.

 

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.

 

Branding & Identity, Healthcare and Specialist Communications

 

Branding & Identity – consumer, corporate and employee branding and design services, covering identity, packaging, literature, events, training and architecture.

 

Healthcare Communications – provide integrated healthcare marketing solutions from advertising to medical education and online marketing.

 

Direct, Digital, Promotion & Relationship Marketing – the full range of general and specialist customer, channel, direct, field, retail, promotional and point-of-sale services.

 

Specialist Communications – a comprehensive range of specialist services, from custom media and multicultural marketing to event, sports, youth and entertainment marketing; corporate and business-to-business; and media, technology and production services.

 

WPP Digital – Through WPP Digital, WPP makes acquisitions and strategic investments in companies that bolster the Group’s presence in digital marketing & media and provide access for WPP companies and their clients to a portfolio of digital experts. Services provided by WPP Digital full-service interactive agencies include: digital marketing solutions for advertisers and publishers; integrated digital marketing strategy services; mobile solutions for handset manufacturers and wireless operators; creating measurable interactive marketing; and proprietary platforms which enable advertisers to engage with global audiences across the universe of digital media.

 

9


Table of Contents

WPP Head Office

 

WPP, the parent company, with its offices in London, New York, Tokyo, Hong Kong, Singapore, Shanghai and São Paulo develops the professional and financial strategy of the Group, promotes operating efficiencies, coordinates cross referrals of clients among the Group companies and monitors the financial performance of its operating companies. The principal activity of the Group continues to be the provision of communications services worldwide. WPP acts only as a parent company and does not trade. The parent company complements the operating companies in three distinct ways.

 

   

First, the parent company relieves them of much administrative work. Financial matters (such as planning, budgeting, reporting, control, treasury, tax, mergers, acquisitions, investor relations, legal affairs and internal audit) are co-ordinated centrally.

 

   

Second, the parent company encourages and enables operating companies of different disciplines to work together for the benefit of clients. The parent company also plays an across-the-Group role in the management of talent, property, procurement, information technology (IT), knowledge sharing, practice development, and sustainability.

 

   

And, finally, the parent company itself can function as the 21st-century equivalent of the full-service agency. For some clients, predominantly those with a vast geographical spread and a need for a wide range of marketing services, WPP can act as a portal to provide a single point of contact and accountability.

 

The parent company operates with a limited group of approximately 400 people.

 

WPP Strategy

 

Our reason for being, the justification for WPP’s existence, continues to be to add value to our clients’ businesses and our people’s careers. Our goal remains to be the world’s most successful communications services advisor to multinational, regional and local companies.

 

The Group has four core strategic priorities.

 

   

Increase the combined geographic share of revenues from the faster-growing markets of Asia Pacific, Latin America, Africa and the Middle East, and Central and Eastern Europe to 40-45%.

 

   

Increase the share of revenues of new media to 40-45%.

 

   

Maintain the share of more measurable marketing services - such as Data Investment Management and direct, digital and interactive - at 50% of revenues, with a focus on the application of new technology, big data and digital.

 

   

Achieve ‘horizontality’ by ensuring our people work together for the benefit of clients, primarily through two horizontal integrators: Global Client Leaders and Country Managers.

 

If we implement this strategy effectively then our business will be geographically and functionally well positioned to compete successfully and to deliver on our long-term financial targets:

 

   

Revenue and gross profit growth greater than the industry average supplemented by acquisitions.

 

   

Annual improvement in headline PBIT margin on revenue and gross profit of 0.3 margin points or more, excluding the impact of currency, depending on revenue and gross profit growth, and staff cost to revenue ratio improvement of 0.2 margin points or more.

 

10


Table of Contents

Sustainability

 

Our commitment to sustainability has a direct impact on our financial performance and our ability to achieve our business strategy. It is integral to our relationships with our clients, employees, investors and other stakeholders.

 

We focus on the following areas that are significant to WPP’s business strategy and reflect our stakeholders’ priorities:

 

   

The impact of our work for clients. Our companies help clients integrate sustainability into their business strategy and communications. Client business supported by our sustainability credentials was worth at least £1.26 billion out of total revenues of £11.02 billion to the Group in 2013.

 

   

Marketing standards. We strive for high ethical standards in our conduct and work for clients and we protect consumer data used for marketing purposes.

 

   

Employment practices. Our talent strategy includes competitive remuneration, high-quality training and a focus on diversity and inclusion.

 

   

Environmental performance. We have reduced our carbon footprint per person by 31% since 2006. Our target is a 47% reduction by 2020.

 

   

Supply chain. We monitor key supplier performance.

 

   

Social investment, including pro bono work. Our total social contribution (including the value of free media space) was worth £39.4 million in 2013.

 

Clients

 

The Group services 351 of the Fortune Global 500 companies, all 30 of the Dow Jones 30, 69 of the NASDAQ 100, 31 of the Fortune e-50, and some 770 national or multinational clients in three or more disciplines. Almost 490 clients are served in four disciplines and these clients account for 57.5% of Group revenues. The Group also works with nearly 400 clients in six or more countries.

 

The Company’s 10 largest clients accounted for 17.8% of the Company’s revenues in the year ended 31 December 2013. No client of the Company represented more than 5% of the Company’s aggregate revenues in 2013. The Group’s companies have maintained long-standing relationships with many of their clients, with an average length of relationship for the top 10 clients of approximately 50 years.

 

Government Regulation

 

From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations, and rulings that directly or indirectly affect the form, content, and scheduling of advertising, public relations and public affairs, and market research, or otherwise 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 have a material adverse impact on the Company’s 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.

 

11


Table of Contents

C. Organizational Structure

 

The Company’s business comprises the provision of communications services on a national, multinational and global basis. It operates out of over 3,000 offices in 110 countries including associates. For a list of the Company’s principal subsidiary undertakings and their country of incorporation see note 29 to the Consolidated Financial Statements.

 

The Company organises its businesses in the following segments: Advertising and Media Investment Management; Data Investment Management; Public Relations & Public Affairs; and Branding & Identity, Healthcare & Specialist Communications. These business segments are comprised of the following principal disciplines: Advertising; Media Investment Management; Data Investment Management; Public Relations & Public Affairs; Branding & Identity; Healthcare Communications; Direct, Digital, Promotion & Relationship Marketing; Specialist Communications; WPP Digital; WPP Digital partner companies; and WPP knowledge community. A listing of the Group brands operating within these disciplines as at April 2014 is set forth below.

 

Advertising

ADK1

Bates CHI&Partners

Berlin Cameron United

CHI&Partners1

Grey

HS Ad1

JWT

Ogilvy & Mather Advertising

Santo

Scangroup

Scholz & Friends

Señora Rushmore

Soho Square

TAXI4

Team Detroit

The Jupiter Drawing Room1

United Network

Y&R4

 

Media Investment Management

GroupM:

KR Media

Maxus

MediaCom

MEC

Mindshare

Ohal

Catalyst

Xaxis

Quisma

Other media agencies

M/Six2

tenthavenue:

Forward

Joule

Kinetic Worldwide

Spafax

TMARC

 

Data Investment Management

Kantar:

Added Value

Benenson Strategy Group

Center Partners

IMRB International

Kantar Health

Kantar Japan

Kantar Media

Kantar Retail

Kantar Worldpanel

Lightspeed Research

Millward Brown

  

Data Investment Management (continued)

The Futures Company

TNS

 

Public Relations & Public Affairs

Blanc & Otus7

Buchanan Communications

Burson-Marsteller4

Clarion Communications

Cohn & Wolfe4

Dewey Square Group

Glover Park Group

Hering Schuppener

Hill+Knowlton Strategies

Ogilvy Government Relations

Ogilvy Public Relations

Penn Schoen Berland4

Prime Policy Group

QGA

RLM Finsbury

Wexler & Walker Public Policy Associates7

 

Branding & Identity

Addison Group6

BDG architecture + design

CBA

Coley Porter Bell

Dovetail

FITCH6

Lambie-Nairn6

Landor Associates4, 6

PeclersParis6

Brand Union6

The Partners6

VBAT6

 

Healthcare Communications

Feinstein Kean Healthcare8

GCI Health

ghg

Ogilvy CommonHealth Worldwide

Sudler & Hennessey4

Wunderman World Health5

 

12


Table of Contents

Direct, Digital, Promotion & Relationship Marketing

AdPeople Worldwide5

A. Eicoff & Co

AKQA

Barrows1

Blast Radius5

Brierley+Partners1

Cerebra

Deep Blue9

Dialogue

Digit

EWA

FullSIX3

Grass Roots1

Geometry Global

High Co1

iconmobile4

KBM Group5

Mando

Maxx Marketing

OgilvyOne Worldwide

RTC4

SJR

Smollan Group1

Smollan/Headcount

VML4

Wunderman4

 

Specialist Communications

Corporate/B2B

Ogilvy Primary Contact

Demographic marketing

Bravo4

UniWorld1

Wing

Employer branding/recruitment

JWT Inside

Event/face-to-face marketing

MJM

Metro

Richard Attias & Associates1

Foodservice marketing

The Food Group

Sports marketing

9ine Sports & Entertainment

Chime Communications PLC1

GroupM ESP

PRISM Group

Entertainment marketing

Alliance

Real estate marketing

Pace

Media & production services

The Farm Group

Imagina3

United Visions9

  

WPP Digital

Acceleration

Blue State Digital

Cognifide

The Data Alliance

Fabric Worldwide1

F.biz

Hogarth Worldwide

Interlude1

Johannes Leonardo1

Mutual Mobile1

POSSIBLE

Rockfish

Salmon

Syzygy1

Visible1

 

WPP Digital partner companies

Ace Metrix3

eCommera3

Fullscreen3

Globant1

HDT Holdings Technology3

In Game Ad Interactive3

Invidi3

mySupermarket3

Moment Systems3

Percolate3

Proclivity Systems3

Say Media3

SFX Entertainment3

Vice Media3

The Weinstein Company3

WildTangent3

 

WPP knowledge communities

Government & Public Sector Practice

The Store

 

 

Notes

1     Associate

2    Joint venture

3     Investment

4    A Young & Rubicam Group company

5    Part of the Wunderman network

6    A member of BtoD Group

7    A Hill+Knowlton Strategies company

8    An Ogilvy company

9    A Commarco company

 

13


Table of Contents

D. Property, Plants and Equipment

 

The majority of the Company’s properties are leased, although certain properties which are used mainly for office space are owned. In the United States owned properties include the 214,000 square foot Young & Rubicam office condominium for their new headquarters located at 3 Columbus Circle in New York, New York and the 152,000 square foot TNS property located near Toledo, Ohio. The Company also leases an additional 160,700 square feet of space for Young & Rubicam at the 3 Columbus Circle location. 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:

 

Location   Use     
 
Approximate
square footage
  
  

636 Eleventh Avenue, New York, NY

  Ogilvy & Mather      554,800   

498 Seventh Avenue, New York, NY

  GroupM, Mindshare, Maxus, Mediacom      358,000   

200 Fifth Avenue, New York, NY

  Grey Global Group, Cohn & Wolfe      343,000   

230 Park Avenue South, New York, NY

  Burson-Marsteller, Landor, Sudler & Hennessey, Hogarth      305,000   

222 Merchandise Mart / 350 N Orleans, Chicago IL

 

Ogilvy & Mather, JWT, Geometry, Millward Brown, GroupM,

Burson Marsteller, TNS, H+K, The Futures Company, Kinetic,

Kantar Media, Team Detroit

     287,700   

500/550 Town Center Drive, Dearborn, MI

  Team Detroit, JWT, Ogilvy & Mather, Y&R Advertising, PRISM, Burrows, Possible      282,900   

466 Lexington Avenue, New York, NY

  JWT      270,300   

Sea Containers House, Upper Ground, London SE1

  Ogilvy & Mather, MEC      226,000   

 

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. At 31 December 2013, the fixed asset value (cost less depreciation) representing land, freehold buildings and leasehold buildings as reflected in the Company’s consolidated financial statements was £491.5 million.

 

In 2013 the Company again reduced its core property portfolio, with absolute square footage falling by 0.6%, while revenues attributable to acquisitions added 2.2% and in total, revenues in constant currencies rose by 5.7%.

 

The average cost per square foot rose by 3.8% in 2013, largely due to the expiry of a number of below-market leases in the year, although this was still less than the increase in constant currency revenues. The combination of all these factors resulted in a reduction of the establishment cost-to-revenue ratio to 6.6% from 6.7% last year.

 

In 2014 the Company will continue to focus on consolidating the number of properties in the Group, further reducing square foot per head as the Company takes on new leases, and introducing more ‘agile working’ (enabling companies to run at less than one workspace per person) to further reduce the establishment cost-to-revenue ratio.

 

As part of this effort, WPP has signed a lease for 3 World Trade Center in New York, New York commencing in 2017. The lease is contingent upon the developer obtaining financing to construct the building. Assuming the relevant financing is obtained, offices in several existing properties will be consolidated into this new location.

 

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 at 31 December 2013, under non-cancelable operating leases of the Company.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

14


Table of Contents

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Introduction

 

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 constant currency, pro-forma (‘like-for-like’), headline PBIT (Profit Before Interest and Taxation), headline PBIT margin, headline PBIT margin on gross profit, headline PBT (Profit Before Taxation), headline EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation), billings, estimated net new billings, free cash flow and net and average net debt, which we define, explain the use of and reconcile to the nearest IFRS measure on pages 27 to 30.

 

A. Operating Results

 

Overview

 

The Company is one of the world’s 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 reportable segments:

 

   

Advertising and Media Investment Management;

 

   

Data Investment Management (previously Consumer Insight);

 

   

Public Relations & Public Affairs; and

 

   

Branding & Identity, Healthcare and Specialist Communications.

 

In 2013, approximately 42% of the Company’s consolidated revenues were derived from Advertising and Media Investment Management, with the remaining 58% of its revenues being derived from the remaining three segments.

 

The following objectives represent the Group’s key performance indicators.

 

1.   First, to continue to improve operating margins. In 2013, we achieved a headline PBIT margin of 15.1%, a new high, and a headline PBIT margin on gross profit of 16.5%, the highest-reported level in the industry. We continue to believe a headline PBIT margin of around 18% or more, and a headline PBIT margin on gross profit of well over 19%, is a tough, but realistic, objective given that our best-performing companies in each services sector have already demonstrated they can perform at a combined Group headline PBIT margin of 17%. In the future, we will focus more on headline PBIT as a percentage of gross profit, given it is a more meaningful competitive comparison.

 

2.   Second, to increase flexibility in the cost structure. In 2013, flexible staff costs (including incentives, freelance and consultants) returned to historical highs of around 7.5% of revenues and continue to position the Group extremely well should current market conditions deteriorate.

 

3.   Third, to enhance share owner value and maximise the return on investment on the Company’s substantial free cash flow. As capital expenditure remains relatively stable, there are broadly three alternative uses of funds: acquisitions, share buy-backs and dividends. We have increasingly come to the view, based on co-operative research with leading investment institutions that, currently, the markets favour consistent increases in dividends and higher sustainable pay-out ratios, along with anti-dilutive progressive buy-backs and, of course, sensibly-priced strategic acquisitions.

 

4.  

Fourth, we will continue to develop the value added by the parent company and build unique integrated marketing approaches for clients. WPP is not just a holding company focused on planning, budgeting, reporting and financial issues, but a parent company that can add value to our clients and our people in the

 

15


Table of Contents
 

areas of human resources, property, procurement, IT and practice development, including sustainability. This does not mean that we seek to diminish the strength of our operating brands, but rather to learn from one another. Our objective is to maximise the added value for our clients in their businesses and our people in their careers.

 

5.   Fifth, to emphasise revenue and gross profit growth more as margins improve through our practice development activities, aimed at helping us position our portfolio in the faster-growing functional and geographic areas.

 

6.   Sixth, to build on, still further, the impressive creative reputation WPP now enjoys globally. Training and development programs remain a key focus, as of course does the judicious use of our M&A skills to identify the best and most like-minded creative businesses to join us.

 

The following discussion is based on the Company’s audited Consolidated Financial Statements beginning on page F-1 of this report. The Group’s consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.

 

2013, our twenty-eighth year, was another record one, with revenue, profitability, headline margins and earnings per share all reaching new highs. For the third successive year, the Company was awarded a Cannes Lion for Creative Holding Company of the Year, in recognition of the Company’s collective creative excellence; and for the second consecutive year, WPP was ranked Most Effective Holding Company in the Effie Global Effectiveness Index. At the same time, the Company has responded to the changing competitive landscape by accelerating the implementation of its strategic goals. Sector targets for faster-growth markets and new media have been raised to 40-45% of revenues over the next five years.

 

The share price rose sharply in 2013 – an increase of over 55% to 1,380.0p at year end. Since then, however, the share price has fallen to 1,274.0p at 24 April 2014, reflecting the weakness in global stock markets over recent weeks. Dividends were increased by 20% to 34.21p, a record level.

 

Reported billings increased by over 4% to £46.2 billion and were up well over 3% in constant currencies, driven by a strong leadership position in all net new business league tables. Revenues were up over 6% to £11.0 billion and up well over 5% in constant currencies. Gross profit increased by almost 6% and over 5% in constant currencies.

 

Group revenues are more weighted to the second half of the year across all regions and functions, especially in the faster-growing markets of Asia Pacific and Latin America. The Group’s profitability and margins continue to be skewed to the second half and, in particular, the final quarter. The strengthening of sterling in the final quarter, particularly against the currencies of the faster-growing markets, therefore resulted in a reduction in the Group’s headline PBIT margins. This currency effect is exacerbated by the fact that disproportionate amounts of central overheads and incentive costs are paid in sterling and US dollars.

 

Reported profit before interest and taxation rose almost 13% to £1.478 billion from £1.311 billion. Headline PBIT was up well over 8% to £1.662 billion against £1.531 billion in 2012 and up 9% in constant currencies. Headline PBIT margins were up 0.3 margin points to a new historical high of 15.1%, compared to 14.8% in 2012. The impact of exchange rates reduced headline PBIT margins by 0.2 margin points, but on a constant currency basis margins increased by 0.5 margin points, and on a like-for-like basis by 0.6 margin points, more than in line with the Group’s margin target. The headline PBIT margin on gross profit was 16.5%, up 0.4 margin points on 2012 and up 0.5 margin points in constant currency.

 

Profit for the year increased by 13% to £1.012 billion. Headline EBITDA increased by 8% to £1.896 billion. Headline profit before tax was up well over 10% to £1.458 billion and reported profit before tax was up well over 18% to £1.296 billion. Diluted reported earnings per share rose by almost 11% to 69.6p.

 

16


Table of Contents

Net cash inflow from operating activities strengthened to £1.374 billion in the year. Free cash flow strengthened to £1.220 billion in the year, over £1 billion for the third consecutive year. Net debt averaged £3.0 billion in 2013, a decrease of £0.2 billion at 2013 exchange rates, and net debt at 31 December 2013 was £2.2 billion, £0.6 billion less than 2012, reflecting improvements in working capital and the redemption of the £450 million Convertible Bond, reinforced by lower acquisition spending in 2013.

 

Estimated net new business billings of £6.1 billion (almost $10 billion) were won in 2013, up over 57% on 2012.

 

Segment performance

 

Performance of the Group’s businesses is reviewed by management based on headline PBIT. A table showing these amounts by operating sector and geographical area for each of the three years ended 31 December 2013, 2012 and 2011 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 following tables give details of revenue growth by geographical area and operating sector on a reported, constant currency, and like-for-like basis.

 

Geographical area

 

      Reported
revenue
growth %+/(-)
    Constant
currency
revenue
growth  %+/(-)
     Like-for-like
revenue
growth %+/(-)
 
      2013      2012     2013      2012      2013      2012  

North America

     5.6         4.7        4.4         3.7         2.9         (0.1

United Kingdom

     10.9         7.7        10.9         7.7         4.8         4.0   

Western Continental Europe

     6.3         (2.6     2.1         3.7         0.5         0.1   

Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe

     5.0         5.7        7.9         9.3         6.1         8.3   

Total Group

     6.2         3.5        5.7         5.8         3.5         2.9   

 

Like-for-like revenue growth in North America improved as the year progressed, from -1% in the first quarter to up over 5% in quarter four, with particularly strong growth in Advertising and Media Investment Management, Healthcare Communications and parts of the Group’s digital operations, especially AKQA. Data Investment Management also performed well, with like-for-like growth of 5% in the final quarter. In constant currencies, full year revenue growth in this region was over 4%, while like-for-like revenues were up almost 3%.

 

In the UK, full year revenue growth was almost 11% in constant currencies and almost 5% like-for-like. The rate of growth slowed in the final quarter to over 5% in constant currencies, and over 2% like-for-like, partly due to strong comparative rates of growth in the final quarter of 2012.

 

The Group’s Advertising and Media Investment Management, Public Relations & Public Affairs, direct, digital and interactive and Healthcare Communications operations all performed strongly, partly offset by lower revenue growth in Data Investment Management. However, overall gross profit in the final quarter increased by well over 5% on a like-for-like basis, with stronger gross profit growth in the custom research business. Full year gross profit in the UK increased by almost 7% on a like-for-like basis.

 

Western Continental Europe, like the UK, slowed slightly in the final quarter, with both constant currency and like-for-like growth of over 1%. For the year, Western Continental Europe revenues grew 0.5% like-for-like (almost 2% in the second half) compared with 0.1% in 2012. Italy, Turkey, the Netherlands and Germany all showed good growth in the final quarter, but Spain, Portugal, Belgium, Switzerland and Austria were tougher.

 

17


Table of Contents

Our strongest regions in 2013 were again Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, with constant currency growth of almost 8% and like-for-like growth of over 6%. Growth in the fourth quarter was similar to the full year and driven principally by Latin America, Australia and New Zealand, Central and Eastern Europe and Africa. After a difficult first half, Central and Eastern Europe improved significantly, with like-for-like growth of over 10% in the second half (and over 12% in the fourth quarter), with strong growth in the Czech Republic, Russia and Poland. The Middle East slowed in the fourth quarter, while Africa grew by over 9% like-for-like. Latin America showed consistently strong growth for most of 2013, with like-for-like revenues up well over 8% in the final quarter and up 9% for the year.

 

Full year revenues for the BRICs1, which account for almost $3 billion of revenues including associates, were up almost 7% on a like-for-like basis. In 2013, almost 30% of the Group’s reported revenues came from Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe – slightly down compared with the previous year, as a result of the strength of sterling against the currencies of many of the markets in these regions. On a constant currency basis, 30.5% of the Group’s revenues came from these regions, up 0.7 percentage points compared with 2012 and against the Group’s strategic objective of 40-45% in the next five years. Markets outside North America now account for 66% of our revenues.

 

Operating Sector

 

      Reported
revenue
growth %+/(-)
    

Constant
currency
revenue

growth %+/(-)

     Like-for-like
revenue
growth %+/(-)
 
      2013      2012      2013     2012      2013     2012  

Advertising and Media Investment Management

     7.2         2.8         6.9        5.2         5.5        5.1   

Data Investment Management*

     3.6         0.1         3.0        2.8         1.6        0.8   

Public Relations & Public Affairs

     0.4         3.6         (0.7     4.2         (1.7     (1.0

Branding & Identity, Healthcare and Specialist Communications

     9.1         8.0         8.4        10.2         3.9        2.6   

Total Group

     6.2         3.5         5.7        5.8         3.5        2.9   

 

*  Data Investment Management was previously reported as Consumer Insight.

    

 

Advertising and Media Investment Management revenues were up almost 7% for the year in constant currencies and well over 5% like-for-like, the strongest-performing sector on this basis. In the final quarter, constant currency revenues were up almost 8% and like-for-like revenues were up well over 6%, very similar to like-for-like growth in the third quarter.

 

Of the Group’s advertising networks, Ogilvy & Mather, JWT and Grey performed especially well in North America in the fourth quarter, with Y&R performing strongly in the UK. However, the Group’s advertising businesses in Western Continental Europe generally remained challenged, with like-for-like revenues under pressure. Growth in the Group’s Media Investment Management businesses has been very consistent throughout the year, with constant currency revenues up almost 11% for the year and like-for-like growth of almost 10%. tenthavenue, the ‘engagement’ network focused on out-of-home media, also performed strongly in the fourth quarter, with like-for-like revenue growth up over 16%. The strong revenue growth across most of the Group’s businesses, together with good cost control, resulted in the combined headline PBIT margin of this sector improving by 0.3 margin points to 18.0%.

 

In 2013, Ogilvy & Mather, JWT, Y&R, Grey and United generated estimated net new business billings of £2.3 billion ($3.7 billion). GroupM (the Group’s Media Investment Management arm, which includes Mindshare, MEC, MediaCom, Maxus, GroupM Search and Xaxis), together with tenthavenue, generated estimated net new business billings of £3.2 billion ($5.1 billion).

 

1    Brazil, Russia, India and China

 

18


Table of Contents

Data Investment Management (formerly Consumer Insight) revenues grew 3% on a constant currency basis, with like-for-like revenues up well over 1%, and the second half much stronger than the first half. More significantly, gross profit was up over 2% like-for-like, a turnaround of the trend seen in 2012. In the fourth quarter, revenues grew by almost 4% on a constant currency basis, with gross profit up 4%. On a like-for-like basis, revenues were up over 1% and gross profit up almost 2%. North America, Asia Pacific, Latin America, Africa and the Middle East performed well above the average in the fourth quarter, as they did for the year as a whole. The UK and Western Continental Europe were more difficult. There seems to be a growing recognition of the value of ‘real’ data businesses, rather than those that depend on third-party data. Headline PBIT margins improved 0.3 margin points to 10.3%, while headline PBIT margins on gross profit also improved 0.3 margin points to 14.3%.

 

Although there has been marked improvement during 2013, the weakest sub-sector continues to be the custom businesses in mature markets (with North America maybe now an exception) where discretionary spending remains under review by clients. Custom businesses in faster-growth markets and syndicated and semi-syndicated businesses in all markets remain robust, with strong like-for-like revenue and gross profit growth.

 

The Group’s Public Relations & Public Affairs businesses had a difficult year, particularly in North America, Continental Europe, Latin America and the Middle East. However, although revenues for the year fell by almost 1% on a constant currency basis and by almost 2% like-for-like, top-line growth returned in the fourth quarter with constant currency revenues up over 2% and like-for-like growth of over 1%. Despite careful cost management, headline PBIT margins fell by 0.4 margin points to 14.5%.

 

At the Group’s Branding & Identity, Healthcare and Specialist Communications businesses (including direct, digital and interactive), constant currency revenues grew strongly at over 8% with like-for-like growth of almost 4%. Like-for-like revenue growth slipped slightly in quarter four, due primarily to slower growth in parts of the Group’s Branding & Identity and Specialist Communications businesses, but overall the second half was much stronger than the first half on a like-for-like basis. AKQA, the leading digital agency acquired in July 2012, performed particularly well with full year like-for-like revenues up over 20%, with the fourth quarter even stronger. For the sector as a whole, headline PBIT margins improved by 0.4 margin points to 14.8%.

 

Almost 35% of the Group’s 2013 revenues came from direct, digital and interactive, up over two percentage points from the previous year and growing well over 7% like-for-like. Marketing services comprised almost 60% of our revenues in 2013, a similar proportion to 2012.

 

2013 compared with 2012

 

Revenues

 

Reported revenue growth for the year was 6.2%, and on a constant currency basis, which excludes the impact of currency movements, revenues were up 5.7%. Changes in exchange rates increased revenue growth by 0.5%, chiefly reflecting the weakness of the pound sterling against the US dollar and euro in the first nine months, largely offset by the strength of the pound sterling, particularly against the US dollar, Japanese yen, Australian dollar and Indian rupee in the final quarter.

 

On a like-for-like basis, which excludes the impact of currency and acquisitions, revenues were up 3.5%, with gross profit up 3.4%. In the fourth quarter, like-for-like revenues were up over 4%, following like-for-like growth in the third quarter of 5%, reflecting stronger growth in North America and Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, offset by lower growth in the UK. Like-for-like growth in the second half was therefore well over 4% compared with over 2% in the first.

 

Operating costs

 

Operating costs increased by 4.7% in 2013 to £8,665.8 million from £8,273.7 million in 2012 on a reported basis and by 4.2% on a constant currency basis. During 2013, the Group continued to manage operating costs effectively,

 

19


Table of Contents

with improvements across most cost categories, particularly staff, property, commercial and office costs. On a like-for-like basis, total operating and direct costs rose by 2.9%, a slower rate of growth than for revenue.

 

On a like-for-like basis, the average number of people in the Group decreased by 0.1% in 2013. On the same basis, the number of people in the Group at 31 December 2013 increased by 0.7% compared with the end of 2012. These average and point-to-point figures reflect the continuing sound management of headcount and staff costs in 2013 to balance revenues and costs. Also on a like-for like basis, revenues increased by 3.5% and gross profit was up 3.4%.

 

Reported staff costs, excluding incentives, rose by well over 5% and by over 5% in constant currency. Staff costs included £27 million ($43 million) of severance costs compared with £51 million ($82 million) in 2012. Incentive costs amounted to £328 million ($521 million) which was over 17% of headline operating profit before incentives and income from associates, compared with £291 million ($462 million) or well over 16% in 2012.

 

Performance in parts of the Group’s Data Investment Management custom businesses, Public Relations & Public Affairs, Healthcare Communications and direct, digital and interactive businesses fell short of the target performance objectives agreed for 2013, as the like-for-like revenue growth rate was slower in the first nine months of the year, although most improved in the final quarter. Headline PBIT margins, before all incentives and income from associates, were 17.3%, up 0.4 margin points, compared with 16.9% last year. The Group’s staff cost to revenue ratio, including incentives, decreased by 0.1 margin point to 58.8% compared with 58.9% in 2012, indicating an improvement in productivity.

 

In 2013, the ratio of variable staff costs (incentives, freelance and consultants costs) to total staff costs was 12.7%, compared with 11.4% in 2012. As a proportion of revenue, variable staff costs were 7.5% in 2013 compared with 6.7% in 2012.

 

In 2013, the Group incurred restructuring costs of £5.0 million as a result of the continuing rationalisation of its IT infrastructure, a project initiated in 2012. Restructuring costs in 2012 of £93.4 million include £62.9 million of severance costs arising from a structural reassessment of certain of the Group’s operations, primarily in Western Continental Europe; and £30.5 million of other costs, primarily accelerated depreciation of IT assets in the US and Europe, arising from an overhaul of its centralised IT infrastructure.

 

Profit before interest and taxation

 

As a result of the above, reported PBIT rose almost 13% to £1.478 billion from £1.311 billion, up well over 13% in constant currencies, in part due to gains of £36 million arising on the disposal of minority investments and the re-measurement of certain of our equity interests where we have acquired a majority stake. Headline PBIT rose by well over 8% to £1.662 billion from £1.531 billion, up 9% in constant currencies.

 

Finance income, finance costs and revaluation of financial instruments

 

Finance income increased to £64.3 million in 2013 from £55.9 million in 2012. Finance costs decreased to £267.9 million in 2013 from £269.8 million in 2012. Therefore, net finance costs were £203.6 million, down from £213.9 million last year, reflecting the beneficial impact of lower net debt funding costs and higher income from investments, partially offset by the cost of higher average gross debt, due to pre-funding of 2014 debt maturities. Revaluation of financial instruments resulted in a gain of £21.0 million in 2013 and a charge of £4.7 million in 2012.

 

Taxation

 

The Company’s effective tax rate on reported profit before tax in 2013 was 21.9%, compared to 18.1% in 2012. The difference in the reported tax rate is primarily due to significant deferred tax credits arising in the prior year in relation to acquired intangibles that were non-recurring items.

 

20


Table of Contents

Profit for the year

 

Profit for the year increased by 13.1% to £1,012.1 million in 2013 from £894.7 million in 2012 on a reported basis and increased by 13.0% in constant currency. In 2013, £936.5 million of profit for the year was attributable to equity holders of the parent and £75.6 million attributable to non-controlling interests. Diluted earnings per share increased by almost 11% (well over 10% in constant currencies) to 69.6p.

 

2012 compared with 2011

 

Revenues

 

Reported revenue growth for the year of 3.5% was impacted by the strength of sterling, primarily against the Euro. On a constant currency basis, which excludes the impact of currency movements, revenues were up almost 6%. On a like-for-like basis, which excludes the impact of currency and acquisitions, revenues were up 2.9%, with like- for-like gross profit up 2.4%, reflecting pressure on gross profit in the Group’s Consumer Insight custom businesses in the mature markets of North America, the UK and Western Continental Europe. In the fourth quarter, like-for-like revenues were up 2.5%, an improvement on the third quarter of 1.9%, due to stronger growth in all regions except North America. This reflects a reversal of the declining quarterly like-for-like revenue growth trend which went from 4% in quarter one, to 3% in quarter two and to 2% in quarter three.

 

Operating costs

 

Operating costs increased by 2.8% in 2012 to £8,273.7 million from £8,046.3 million in 2011 on a reported basis and by 4.7% on a constant currency basis. During 2012, the Group continued to reap the benefits of containing operating costs, with improvements across most cost categories, particularly property, commercial and office costs.

 

On a like-for-like basis the average number of people in the Group increased by 1.6% in 2012. On the same basis, the number of people in the Group at 31 December 2012 was 0.4% lower than at the end of 2011. This point-to-point decrease reflects the adjustments in staff costs made in the second half of 2012, following the slowdown in revenue growth after the first quarter of the year. Also on a like-for-like basis, revenues increased by 2.9% and gross profit 2.4%.

 

Reported staff costs, excluding incentives, rose by over 5% and by over 7% in constant currency. Incentive payments amounted to £291 million (or over $465 million) which was well over 16% of headline PBIT before incentives and income from associates compared with £338 million or almost 20% in 2011. Performance in parts of the Group’s custom research, public relations and public affairs, healthcare and direct, digital and interactive businesses fell short of the maximum performance objectives agreed for 2012, as the like-for-like revenue growth rate slowed in quarters two and three in 2012. This followed the record profit and margin performance in 2011, when most of the Group’s operating companies achieved maximum incentive levels. Headline PBIT margins, before all incentives and income from associates, were 16.9%, down 0.1 margin points, compared with 17.0% last year. The Group’s staff cost to revenue ratio, including incentives, increased by 0.3 margin points to 58.9% compared with 58.6% in 2011. Following intentional reductions in 2009 and 2010 after the Lehman crisis, the Group increased its investment in people, particularly in the latter part of 2011 and in early 2012, mainly in the faster-growing geographic and functional markets (such as media investment management and digital) as like-for-like revenues and gross profit increased.

 

In 2012, the ratio of variable staff costs (incentives, freelance and consultants costs) to total staff costs was 11.4%, compared with 12.2% in 2011. As a proportion of revenue, variable staff costs were 6.7% in 2012 compared with 7.2% in 2011.

 

In the second half of 2012, the Group received the proceeds from the sale of the stake in Buddy Media and also completed the sale of the freehold of 285 Madison Avenue, the New York headquarters of Young & Rubicam Inc. These two transactions combined resulted in a gain of £102 million. Offsetting this gain, are restructuring

 

21


Table of Contents

costs of £93.4 million which include £62.9 million of severance cost arising from a structural reassessment of certain of the Group’s operations, primarily in Western Continental Europe; and £30.5 million of other costs, primarily accelerated depreciation of IT assets in the US and Europe, arising from an overhaul of its centralised IT infrastructure.

 

Profit before interest and taxation

 

As a result of the above, reported PBIT rose over 4% to £1.311 billion from £1.258 billion, up over 8% in constant currencies. Headline PBIT rose over 7% to £1.531 billion from £1.429 billion, up over 11% in constant currencies.

 

Finance income, finance costs and revaluation of financial instruments

 

Finance income decreased to £55.9 million in 2012 from £64.7 million in 2011. Finance costs increased to £269.8 million in 2012 from £264.6 million in 2011. Therefore, net finance costs were £213.9 million, up from £199.9 million last year, reflecting higher average net debt, offset by lower funding costs. Revaluation of financial instruments resulted in a charge of £4.7 million in 2012 and a charge of £50.0 million in 2011.

 

Taxation

 

The Company’s effective tax rate on reported profit before tax in 2012 was 18.1%, compared to 9.1% in 2011. The difference in the reported tax rate is primarily due to the release in 2011 of prior year corporate tax provisions following the resolution of a number of open tax matters.

 

Profit for the year

 

Profit for the year decreased by 2.4% to £894.7 million in 2012 from £916.5 million in 2011 on a reported basis and increased by 2.4% in constant currency, reflecting a higher effective tax rate, which is only partially offset by the higher revenue and lower charges for revaluation of financial instruments. In 2012, £822.7 million of profit for the year was attributable to equity holders of the parent and £72.0 million attributable to non-controlling interests. Diluted earnings per share decreased by over 2% (increased by almost 2% in constant currencies) to 62.8p, again reflecting the release of prior year tax provisions in 2011.

 

Inflation

 

As in 2012, in management’s opinion inflation did not have a material impact on the Company’s results for the year or financial position at 31 December 2013.

 

Foreign currency fluctuations

 

See Item 11 for a discussion of the impact of currency exchange rate fluctuations on the Group’s consolidated results.

 

B. Liquidity and Capital Resources

 

General—The 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 Company’s sources and uses of cash and for the Company’s liquidity risk management see the “Consolidated Cash Flow Statement” and note 24, which are included as part of the Company’s Consolidated Financial Statements in Item 18 of this Report.

 

As capital expenditure remains relatively stable, there are broadly three alternative uses of funds:

 

   

Mergers and acquisitions. There is a very significant pipeline of reasonably priced small- and medium-sized potential acquisitions, with the exception of Brazil and India and digital in the US, where prices

 

22


Table of Contents
 

seem to have got ahead of themselves because of pressure on our competitors to catch up. This is clearly reflected in some of the operational and governance issues that are starting to surface elsewhere in the industry, particularly in faster-growing markets like Brazil, India and China.

 

Our acquisition focus in 2013 was again on the triple play of faster-growing geographic markets, new media and Data Investment Management, including the application of new technology and big data, totally consistent with our strategic priorities in the areas of geography, new communication services and measurability. In 2013, the Group spent almost £200 million on initial acquisition payments, net of cash acquired and disposal proceeds. Net acquisition spend is currently targeted at around £300-£400 million per annum and we will continue to seize opportunities in line with our strategy, as in the first quarter of 2014.

 

   

Dividends. Following the strong first-half results in 2013, the Board raised the interim dividend by 20%. The final dividend has also been increased by 20%, bringing the total dividend for the year to 34.21p per share, up 20%. Dividends paid in respect of 2013 will total almost £460 million for the year.

 

   

Share buy-backs will continue to be targeted to absorb any share dilution from issues of options or restricted stock. However, given the reduced operating and headline PBIT margins on gross profit targets of 0.3 margin points improvement, the targeted level of share buy-backs will be increased from around 1% of the outstanding share capital to 2-3% in order to enhance earnings per share. In addition, the Company does also have considerable free cash flow to take advantage of any anomalies in market values, particularly as the average 2013 net debt to EBITDA ratio is 1.6 times, at the low end of our market guidance of 1.5-2.0 times, and should come down further in 2014. Share buy-backs in 2013 cost £197 million, representing 1.4% of issued share capital.

 

The Group’s 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 Group’s 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 2013, billings were £46.2 billion, or 4.2 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 Group’s treasury staff so as to ensure that there is continuing coverage of peak requirements through committed borrowing facilities from the Group’s bankers and other sources.

 

Liquidity risk management—The 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 Group’s major operations. See additional discussion on liquidity risk in note 24 to the consolidated financial statements.

 

Debt

 

The Company’s borrowings consist of bonds and revolving credit facilities, details on the Company’s borrowings are provided in note 10 to the consolidated financial statements.

 

The Group has a five-year Revolving Credit Facility of $1.2 billion and £475 million due November 2016. Borrowings under the Revolving Credit Facility are governed by certain financial covenants based on the results and financial position of the Group, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 5.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at 30 June and 31 December in each year shall not exceed 3.5 to 1, both covenants as defined in the relevant agreement. The Group is in compliance with both covenants.

 

Hedging of financial instruments—The Group’s 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

 

23


Table of Contents

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.

 

In 2013, net cash inflow from operating activities was £1,374.2 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was £1,219.6 million. This free cash flow was partially absorbed by £221.0 million in net acquisitions and disposals, by £197.0 million in share repurchases and buy-backs and by £397.3 million in dividends, leaving £404.3 million.

 

In November 2013, the Group issued $500 million of 30-year bonds at a coupon of 5.625%, together with 750 million of 10-year bonds at 3.0%.

 

At 31 December 2013, the Group’s net debt was £2.2 billion, £0.6 billion less than 2012, reflecting improvements in working capital and the redemption of the £450 million Convertible Bond, reinforced by lower acquisition spending in 2013. Net debt averaged £3.0 billion in 2013, a decrease of £0.2 billion at 2013 exchange rates. The Group’s average net debt was around 1.6 times headline EBITDA in 2013 compared with 1.8 times in 2012, and well within the Group’s current target range of 1.5-2.0 times.

 

Interest (finance cost net of finance income, excluding revaluation of financial instruments) cover based on headline PBIT in 2013 was 8.2 times. Average net debt in the first quarter of 2014 was £2.454 billion, compared to £3.056 billion in 2013, at 2014 exchange rates.

 

With an equity market capitalisation of approximately £17.0 billion at 24 April 2014, the total enterprise value of the Company is approximately £19.5 billion, a multiple of 10.3 times 2013 headline EBITDA.

 

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 Company’s material commitments for capital expenditures at 31 December 2013.

 

C. Research and Development, Patents and Licenses, etc.

 

Not applicable.

 

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 2014, reported revenues were up 1.5%, with like-for-like growth of 7.0%, 2.6% growth from acquisitions and -8.1% from currency, reflecting the continuing strength of sterling against many currencies, particularly in the faster growth markets, as in the final quarter of 2013. Revenues in constant currency were up 9.6%. Reported gross profit was down 1.8%, but up 6.1% in constant currency and up 3.8% like-for-like. Due to the increasing scale of digital media purchases within the Group’s media investment management businesses and of data investment management, gross profit is the more meaningful and accurate reflection of top-line growth. As a result the commentary below relates primarily to gross profit data.

 

The pattern of gross profit growth in 2014 has started similarly to the final quarter of 2013, with both constant currency and like-for-like growth showing continuing improvement across all geographies and sectors. On a like-for-like basis, Advertising and Media Investment Management and Branding & Identity, Healthcare and

 

24


Table of Contents

Specialist Communications (including direct, digital and interactive), were the strongest sectors, with Data Investment Management slower than the final quarter of 2013 and Public Relations & Public Affairs up even more strongly than the final quarter of 2013, which was the strongest quarter last year for this sector. Our budgets for 2014 indicated like-for-like revenue growth well over 3% and gross profit growth of over 3% against last year. For the first three months actual performance was well ahead of those projections, due to the stronger than budgeted digital media purchases in Media Investment Management, with gross profit growth also up strongly. A preliminary look at our quarter one revised forecasts for the full year also indicates revenue growth up strongly and gross profit growth up over 3%. On a constant currency basis headline PBIT is above budget and well ahead of last year and the increase in the headline PBIT margin on gross profit is in line with the Group’s full year target of a 0.3 margin point improvement.

 

The Group gained a total of £797 million ($1.275 billion) in net new business wins (including all losses) in the first quarter, compared to £940 million ($1.504 billion) in the same period last year. April has proven to be a particularly strong month with net new business billings of over £0.9 billion ($1.5 billion) as at 24 April 2014.

 

Concerns remain globally over the fragility of the Eurozone, although probably less so than last year, the prospects for the Middle East, although probably again, better now than a year ago, a Chinese or BRICs hard or soft landing, with most, if not all suffering a slowdown in 2013, and which continued into 2014 and, probably still most importantly, dealing with the US deficit and a record $16 trillion of debt in the most effective way. In addition, the political decisions in the United Kingdom on Scottish devolution and Britain’s membership of the European Union, add further uncertainty to the United Kingdom economy. All in all, whilst clients may be more confident than they were in September 2008, they broadly remain unwilling to take further risks. They remain focused on a strategy of adding capacity and brand building in both fast growth geographic and functional markets, like digital and containing or reducing capacity, perhaps with brand building to maintain or increase market share, in the mature, slow growth markets. They also remain focused, in a sub-trend pre-Lehman growth environment, on achieving their profitability objectives by cutting costs, rather than by growing the top-line.

 

The pattern for 2014 looks very similar to 2013, perhaps with slightly increased client confidence, enhanced by slightly stronger global GDP growth forecasts and the mini-quadrennial events of the Winter Olympics at Sochi, the FIFA World Cup in Brazil and the mid-term Congressional Elections in the United States. Forecasts of worldwide real GDP growth still hover around 3.6%, with inflation of 2.1% giving nominal GDP growth of around 5.7% for 2014, a half a percent or so increase on 2013, although they have been reduced recently and may be reduced further in due course. Advertising as a proportion of GDP should at least remain constant overall, although it is still at relatively depressed historical levels, particularly in mature markets, post-Lehman and advertising should grow at least at a similar rate as GDP. Although both consumers and corporates seem to be increasingly cautious and risk averse, they should continue to purchase or invest in brands in both fast and slow growth markets to stimulate top line sales growth. Merger and acquisition activity may be regarded as an alternative way of doing this but clients may regard this as a more risky way than investing in marketing and brand and hence growing market share.

 

E. Off-Balance Sheet Arrangements

 

None.

 

25


Table of Contents

F. Tabular Disclosure of Contractual Obligations

 

The following summarises the Company’s estimated contractual obligations at 31 December 2013, 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.

 

              Payments due in  
(£m)    Total      2014      2015      2016      2017      2018      Beyond
2018
 

Debt financing under the Revolving Credit Facility and in relation to unsecured loan notes1

  

Eurobonds

     1,664.8         —           416.2        624.3         —           —           624.3  

Sterling bonds

     600.0         —           —           —           400.0        —           200.0   

US$ bonds

     1,859.8         584.7        —           —           —           —           1,275.1  

Other

     15.1         15.1        —           —           —           —           —     

Subtotal

     4,139.7         599.8         416.2         624.3         400.0         —           2,099.4   

Interest payable

     1,561.2         208.0         159.1         133.2         100.0         92.0         868.9   

Total

     5,700.9         807.8         575.3         757.5         500.0         92.0         2,968.3   

Operating leases2

     2,523.7         372.0         305.8         254.2         207.5         197.2         1,187.0   

Capital commitments3

     31.6         31.6         —           —           —           —           —     

Investment commitments3

     27.3         27.3         —           —           —           —           —     

Estimated obligations under acquisition earnouts and put option agreements

     332.6         103.2         74.4         47.3         80.6         19.0         8.1   

Total contractual obligations

     8,616.1         1,341.9         955.5         1,059.0         788.1         308.2         4,163.4   

 

1   

In addition to debt financing under the Revolving Credit Facility and in relation to unsecured loan notes, the Company had short-term overdrafts at 31 December 2013 of £338.4 million. The Group’s net debt at 31 December 2013 was £2,240.4 million and is analysed in Item 5B.

2   

Operating leases are net of sub-let rentals of £17.5 million.

3   

Capital and investment commitments include commitments contracted, but not provided for in respect of property, plant and equipment and in respect of interests in associates and other investments, respectively.

 

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 2013 amounted to £47.8 million (2012: £56.5 million, 2011: £66.8 million). Employer contributions and benefit payments in 2014 are expected to be approximately £80 million. Projections for years after 2014 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.

 

26


Table of Contents

Non-GAAP Information

 

Constant currency

 

The Company’s reporting currency is the UK pound sterling. However, the Company’s 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.

 

The Group uses US dollar-based, constant currency models to measure performance. These are calculated by applying budgeted 2013 exchange rates to local currency reported results for the current and prior year. This gives a US-dollar denominated income statement and balance sheet which exclude any variances attributable to foreign exchange rate movements.

 

Pro-forma (‘like-for-like’)

 

Management believes that discussing like-for-like provides a better understanding of the Company’s performance and trends because it allows for more meaningful comparisons of current period to that of prior periods.

 

Pro-forma comparisons are calculated as follows: current year, constant currency actual results (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 year in the prior year. The Group uses the terms ‘pro-forma’ and ‘like-for-like’ interchangeably.

 

The following table reconciles reported revenue and gross profit growth for 2013 and 2012 to like-for-like revenue and gross profit growth for the same period.

 

      Revenue      Gross profit  
      £m             £m          

2011 Reportable

     10,022                 9,239            

Impact of exchange rate changes

     (231     (2.3%)         (203)         (2.2%)   

Changes in scope of consolidation

     291        2.9%         258         2.8%   

Like-for-like growth

     291        2.9%         221         2.4%   

2012 Reportable

     10,373        3.5%         9,515         3.0%   

Impact of exchange rate changes

     53        0.5%          48          0.5%    

Changes in scope of consolidation

     229        2.2%         190          2.0%   

Like-for-like growth

     364        3.5%         323         3.4%   

2013 Reportable

     11,019        6.2%         10,076         5.9%   

 

Headline PBIT

 

Headline PBIT is one of the metrics that management uses to assess the performance of the business. Management believes that it is both useful and necessary to report headline PBIT because this measure is used by management for internal performance analysis; the presentation of this measure facilitates comparability with other companies who may use similar titled measures, although management’s measure may not be calculated in the same way as similarly titled profit measures reported by other companies; and it is useful in connection with discussion with the investment community.

 

Headline PBIT is calculated as profit before finance income/costs and revaluation of financial instruments, taxation, investment gains/losses and write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangible assets, share of exceptional gains/losses of associates and

 

27


Table of Contents

gains/losses on remeasurement of equity interest on acquisition of controlling interest and Group restructuring costs; and, in 2012, the gain on sale of freehold property in New York, and costs incurred in changing the corporate structure of the Company.

 

A tabular reconciliation of profit before interest and taxation to headline PBIT is provided in note 31 to the consolidated financial statements.

 

Headline PBIT margin

 

Calculated as headline PBIT (defined above) as a percentage of revenue.

 

Headline PBIT margin on gross profit

 

Given the significance of Data Investment Management revenues to the Group, with none of the direct competitors present in that sector, gross profit and headline PBIT margin on gross profit are a more meaningful measure of comparative, competitive revenue growth and margin performance. This is because Data Investment Management revenues include pass-through costs, principally for data collection, on which no margin is charged.

 

Calculated as headline PBIT (defined above) as a percentage of gross profit.

 

Headline PBT

 

Headline PBT is one of the metrics that management uses to assess the performance of the business. Management believes that it is both useful and necessary to report headline PBT because this measure is used by management for internal performance analysis; the presentation of this measure facilitates comparability with other companies who may use similar titled measures, although management’s measure may not be calculated in the same way as similarly titled profit measures reported by other companies; and it is useful in connection with discussion with the investment community.

 

Headline PBT is calculated as profit before taxation, investment gains/losses and write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangible assets, share of exceptional losses/gains of associates, gains/losses arising from the revaluation of financial instruments, and gains/losses on remeasurement of equity interest on acquisition of controlling interest and Group restructuring costs; and, in 2012, the gain on sale of freehold property in New York, and costs incurred in changing the corporate structure of the Company.

 

A tabular reconciliation of profit before taxation to headline PBT is shown below.

 

      Year ended 31 December  
     

2013

£m

   

2012

£m

   

2011

£m

 

Profit before taxation

     1,295.8        1,091.9        1,008.4   

Amortisation and impairment of acquired intangible assets

     179.8        171.9        172.0   

Goodwill impairment

     23.3        32.0        —     

Gains on disposal of investments

     (6.0     (26.8     (0.4

Gains on re-measurement of equity on acquisition of controlling interest

     (30.0     (5.3     (31.6

Investment write-downs

     0.4        19.6        32.8   

Cost of changes to corporate structure

     —          4.1        —     

Gain on sale of freehold property in New York

     —          (71.4     —     

Restructuring costs

     5.0        93.4        —     

Share of exceptional losses/(gains) of associates

     10.7        3.0        (2.1

Revaluation of financial instruments

     (21.0     4.7        50.0   

Headline PBT

     1,458.0        1,317.1        1,229.1   

 

28


Table of Contents

Headline EBITDA

 

Headline EBITDA is a key metric that private equity firms, for example, use for valuing companies.

 

Headline EBITDA is calculated as profit before finance income/costs and revaluation of financial instruments, taxation, investment gains/losses and write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of intangible assets, share of exceptional losses/gains of associates, depreciation of property, plant and equipment and gains/losses on remeasurement of equity interest on acquisition of controlling interest and Group restructuring costs; and, in 2012, the gain on sale of freehold property in New York, and costs incurred in changing the corporate structure of the Group.

 

A tabular reconciliation of profit for the year to headline EBITDA is shown below.

 

      Year ended 31 December  
     

2013

£m

   

2012

£m

   

2011

£m

 

Profit for the year

     1,012.1        894.7        916.5   

Taxation

     283.7        197.2        91.9   

Finance income, finance cost and revaluation of financial instruments, net

     182.6        218.6        249.9   

Amortisation and impairment of acquired intangible assets

     179.8        171.9        172.0   

Depreciation of property, plant and equipment

     202.0        191.0        185.8   

Amortisation of other intangible assets

     32.7        33.7        25.7   

Goodwill impairment

     23.3        32.0        —     

Gains on disposal of investments

     (6.0     (26.8     (0.4

Gains on re-measurement of equity on acquisition of controlling interest

     (30.0     (5.3     (31.6

Investment write-downs

     0.4        19.6        32.8   

Cost of changes to corporate structure

     —          4.1        —     

Gain on sale of freehold property in New York

     —          (71.4     —     

Restructuring costs

     5.0        93.4        —     

Share of exceptional losses/(gains) of associates

     10.7        3.0        (2.1

Headline EBITDA

     1,896.3        1,755.7        1,640.5   

 

Billings

 

Billings is one of the metrics that management uses to assess the performance of the business.

 

Billings comprise the gross amounts billed to clients in respect of commission-based/fee-based income together with the total of other fees earned.

 

Estimated net new billings

 

Estimated net new billings is one of the metrics that management uses to assess the performance of the business.

 

Estimated net new billings represent the estimated annualised impact on billings of new business gained from both existing and new clients, net of existing client business lost. The estimated impact is based upon initial assessments of the clients’ marketing budgets, which may not necessarily result in actual billings of the same amount.

 

29


Table of Contents

Free cash flow

 

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 the Company’s 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 net cash inflow from operating activities to free cash flow is shown below.

 

      Year ended 31 December  
     

2013

£m

   

2012

£m

   

2011

£m

 

Net cash inflow from operating activities

     1,374.2        908.3        665.2   

Share option proceeds

     42.4        56.0        28.8   

Proceeds on disposal of property, plant and equipment

     7.3        123.5        13.2   

Movement in working capital and provisions

     133.4        388.2        620.9   

Purchases of property, plant and equipment

     (240.7     (290.3     (216.1

Purchase of other intangible assets (including capitalised computer software)

     (43.8     (39.8     (37.1

Dividends paid to non-controlling interests in subsidiary undertakings

     (53.2     (51.9     (62.2

Free cash flow

     1,219.6        1,094.0        1,012.7   

 

Net debt and average net debt

 

Management believes that net debt and average net debt are appropriate and meaningful measures 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 others—though our cash resources could be used to repay the debt concerned.

 

Average net debt is calculated as the average daily net bank borrowings of the Group, derived from the Group’s automated banking system. Net debt at a period end is calculated as the sum of the net bank borrowings of the Group, derived from the cash ledgers and accounts in the balance sheet.

 

The following table is an analysis of net debt:

 

     

2013

£m

   

2012

£m

   

2011

£m

 

Debt financing

     (4,462.0     (4,766.5     (4,411.4

Cash and short-term deposits

     2,221.6        1,945.3        1,946.6   

Net debt

     (2,240.4     (2,821.2     (2,464.8

 

30


Table of Contents

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 Company’s financial statements have been prepared in accordance with IFRS as issued by the IASB. A summary of the Group’s principal accounting policies is provided 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. In accordance with the Group’s accounting policy, the carrying values of goodwill and intangible assets with indefinite useful lives are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

 

The carrying values of brands with an indefinite useful life are assessed for impairment purposes by using the royalty and loyalty methods of valuation, both of which utilise the net present value of future cash flows associated with the brands.

 

The goodwill impairment review is undertaken annually on 30 September. 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 identified for impairment testing and the criteria used to determine which assets should be aggregated. A difference in testing levels could affect whether an impairment is recorded and the extent of impairment loss. Changes in our business activities or structure may also result in changes to the level of testing in future periods. Further, future events could cause the Company to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s 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:

 

   

Future cash flows derived from each cash-generating unit are based on a projection period of up to five years. These projections utilise the latest budget information available for each cash-generating unit covering one or more twelve month periods from the balance sheet date. These budgets have been prepared by management;

 

31


Table of Contents
   

After the projection period, there is an assumed annual long-term growth rate of 3.0% (2012: 3.0%), with no improvements in operating margins. Management have made the judgement that this long-term growth rate does not exceed the long-term growth rate for the industry; and

 

   

The net present value of the future cash flows was calculated using a pre-tax discount rate of 9.5% (2012: 9.5%).

 

Acquisition accounting

 

The Group accounts for acquisitions in accordance with IFRS 3 ‘Business Combinations’. IFRS 3 requires the acquiree’s identifiable assets, liabilities and contingent liabilities (other than non-current assets or disposal groups held for sale) to be recognised at fair value at acquisition date. In assessing fair value at acquisition date, management make their best estimate of the likely outcome where the fair value of an asset or liability may be contingent on a future event. In certain instances, the underlying transaction giving rise to an estimate may not be resolved until some years after the acquisition date. IFRS 3 requires the release to profit of any acquisition reserves which subsequently become excess in the same way as any excess costs over those provided at acquisition date are charged to profit. At each period end management assess provisions and other balances established in respect of 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. In 2013, operating profit includes credits totaling £19.9 million (2012: £19.8 million, 2011: £14.0 million) relating to the release of excess provisions and other balances established in respect of acquisitions completed prior to 2012.

 

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 Group’s 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.

 

Revenue recognition

 

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.

 

32


Table of Contents

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. This 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 take 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

 

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 been updated by the local actuaries to 31 December 2013.

 

The Group’s policy is to close existing 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 (amended), 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 Group’s pension deficit was £246.6 million at 31 December 2013, compared to £334.3 million at 31 December 2012. The decrease in the deficit is primarily due to higher discount rates as a result of an increase in high-quality corporate bond yields and actions taken by WPP to curtail and settle plans.

 

There are a number of areas in the pension accounting that involve judgements made by management. These include establishing the discount rates, rate of increase in salaries and pensions in payment, inflation and mortality assumptions.

 

Most of the Group’s pension plan assets are held by its plans in the UK and North America. Management considers the types of investment classes in which the pension plan assets are invested. The types of investment classes are determined by economic and market conditions and in consideration of specific asset class risk.

 

33


Table of Contents

Management periodically commission detailed asset and liability studies performed by third-party professional investment advisors and actuaries that 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 2013, the life expectancies underlying the value of the accrued liabilities for the main defined benefit pension plans operated by the Group were as follows:

 

Years life expectancy after age 65    All
Plans
     North
America
     UK     

Western
Continental

Europe

     Other1  

Current pensioners (at age 65) – male

     21.9         20.5         24.1         20.6         19.3   

Current pensioners (at age 65) – female

     23.9         22.7         25.4         23.6         24.7   

Future pensioners (current age 45) – male

     24.1         22.6         26.2         23.0         19.3   

Future pensioners (current age 45) – female

     25.9         24.6         27.6         25.5         24.7   

1    Includes Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe.

       

 

In the determination of mortality assumptions, management uses 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 2013, the effect on the year-end 2013 plan liabilities would be a decrease or increase of approximately £28 million and £30 million, respectively. A sensitivity analysis for each significant actuarial assumption is shown in note 23 on page F-30.

 

Taxation

 

Corporate taxes are payable on taxable profits at current rates. The tax expense represents the sum of the tax currently payable and deferred tax.

 

The Group is subject to corporate taxes in a number of different jurisdictions and judgement is required in determining the appropriate provision for transactions where the ultimate tax determination is uncertain. In such circumstances, the Group recognises liabilities for anticipated taxes based on the best information available and where the anticipated liability is both probable and estimable. Such liabilities are classified as current when the Group expects to settle the liability within 12 months and the remainder as non-current. Any interest and penalties accrued are included in income taxes both in the consolidated income statement and balance sheet. Where the final outcome of such matters differs from the amount recorded, any differences may impact the income tax and deferred tax provisions in the period in which the final determination is made.

 

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:

 

   

future earnings potential determined through the use of internal forecasts;

 

   

cumulative losses in recent years;

 

   

the various jurisdictions in which the potential deferred tax assets arise;

 

   

history of loss carryforwards and other tax assets expiring;

 

34


Table of Contents
   

the timing of future reversal of taxable temporary differences;

 

   

the expiry period associated with the deferred tax assets; and

 

   

the nature of the income that can be used to realise the deferred tax asset.

 

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 2013 no deferred tax asset has been recognised in respect of gross tax losses and other temporary differences of £4,680.2 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 page F-7 of the consolidated financial statements for a description of new IFRS accounting pronouncements.

 

35


Table of Contents

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 68: Non-executive chairman. Philip Lader was appointed chairman of WPP in 2001. The US Ambassador to the Court of St James’s from 1997 to 2001, he previously served as a member of the US President’s Cabinet, White House Deputy Chief of Staff and Deputy Director of the Office of Management & Budget. Before entering government service, he was executive vice president of the late Sir James Goldsmith’s 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, Rusal and AES Corporations, a trustee of RAND Corporation, the Smithsonian Museum of American History and the Atlantic Council, and a member of the Council on Foreign Relations.

 

Sir Martin Sorrell, Age 69: 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 and Alcoa Inc.

 

Paul Richardson, Age 56: 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 Group’s worldwide functions in finance, information technology, procurement, property, treasury, taxation, internal audit and sustainability.

He is a chartered accountant and fellow of the Association of Corporate Treasurers. He is a non-executive director of STW Communications Group Limited in Australia, which is a company associated with the Group.

 

Mark Read, Age 47: Chief executive, WPP Digital. Mark Read was appointed a director in March 2005. He is chief executive of WPP Digital and was WPP’s director of strategy from 2002 to 2011. He is 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. He is a trustee of the Natural History Museum Development Trust.

 

Roger Agnelli, Age 54: Non-executive director. Roger Agnelli was appointed a non-executive director of WPP on 13 May 2013. He is the founding partner and CEO of AGN Holding, a Brazilian company focused on mining, logistics and bioenergy in Brazil, Latin America and Africa. He is also the chairman of B&A, a joint venture between BTG Pactual and AGN, focused on the exploration and development of fertilizer, iron ore and copper assets. He was CEO and president of VALE from July 2001 to May 2011. He was vice president of ANBID (Brazil’s National Association of Investment Banks) and member of the International Advisory Committee of the New York Stock Exchange (NYSE). He has served on the board of directors of CPFL, Rio Grande Energia, Serra da Mesa Energia and VCB Energia in Brazil and Duke Energy in the US; in oil and gas, Petrobras and Suzano Petroquímica in Brazil and Spectra Energy in the US; in steel, CSN and LATASA; in automotive and auto parts, Mahle Metal Leve; in home appliances, Brasmotor and in cable TV, UGB Participações. In September 2010, he joined the International Business Leaders Advisory Council (IBLAC) to the Mayor of Shanghai. He has served on the International Advisory Council of South Africa to the President Thabo Mbeki. He has been a member of the board of directors of ABB Ltd since 2002 and of the International Advisory Council to the President of Mozambique, Dr Armando Guebuza. In addition, he is a member of Anadarko’s Global Advisory Board and McKinsey International Advisory Council. He is a member of the International Expert Advisory Board of the Sultanate of Oman. In Brazil, he is a member of the Strategic Advisory Council of FIESP (Federation of Industries of the State of São Paulo) and honorary director of ACRJ (Commercial Association of Rio de Janeiro).

 

Jacques Aigrain, Age 59: Non-executive director. Dr. Jacques Aigrain was appointed a non-executive director of WPP on 13 May 2013. He is currently chairman of LCH.Clearnet Group Limited. He was CEO of Swiss Re from 2006 to 2009, and prior to that, he spent 20 years with JP Morgan Chase in New York, London and Paris. In

 

36


Table of Contents

addition, he is a non-executive director of London Stock Exchange Group Plc and a Supervisory Board Member of Lyondell Bassell NV, Deutsche Lufthansa AG and its subsidiary, Swiss International Airlines AG. He is also an advisory director of the Qatar Financial Centre Authority and a Senior Advisor to Warburg Pincus. He is a dual French and Swiss citizen. He holds a PhD in Economics from Sorbonne University, and a MA degree in Economics from Paris Dauphine University.

 

Charlene Begley, Age 47: Non-executive director. Charlene T Begley was appointed a non-executive director of WPP on 1 December 2013. Most recently, Ms Begley served as a Senior Vice President of General Electric Company and the Chief Executive Officer and President of GE Home & Business Solutions at General Electric Company. In this role, she had responsibility for $9 billion of revenue with the GE Appliances, Lighting and Intelligent Platforms businesses, as well as served as the company’s Chief Information Officer and led the Sourcing Council and Corporate Leadership Staff. As CIO, she managed a budget of $3.7 billion and led 10,000 IT professionals with a strong focus on business process excellence, simplification, collaboration and security and compliance. Over her career at GE, she served as President and Chief Executive Officer of GE Enterprise Solutions, GE Plastics, and GE Transportation. In addition, she led GE’s Corporate Audit Staff and served as the Chief Financial Officer for GE Transportation and GE Plastics Europe and India. Ms Begley currently serves as a non-executive director of NASDAQ OMX. Ms Begley was a director of Morpho Detection, Inc. and GE Fanuc JV. She also served on the board of the National Association of Manufacturers and the Business Advisory Council at the University of Vermont. She was recognized as a Young Global leader on the World Economic Forum and Fortune’s “Most Powerful Women in Business.” Ms Begley graduated Magna Cum Laude from the University of Vermont in 1988 with a B.S. Degree in Business Administration.

 

Colin Day, Age 59: Non-executive director. Colin Day was appointed a non-executive director of WPP in July 2005. He is the Chief Executive of Essentra plc and a non-executive director of Amec and FM Global. He was the group finance director of Reckitt Benckiser plc until April 2011, having been appointed to its board in September 2000. Previously he has been group finance director of Aegis Group plc and held a number of senior finance positions with the 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 September 2005 and Cadbury plc until 2010.

 

Esther Dyson, Age 62: Non-executive director. Esther Dyson was appointed a director of WPP in 1999. She is the founder of HICCup (Health Initiative Coordinating Council, hiccup.co), a non-profit dedicated to the production of health as opposed to care for the unhealthy. In 2004, she sold her business, 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 EDventure. She has been highly influential for the past 30 years on the basis of her insights into online/information technology markets and their commercial/social impact worldwide, including the emerging markets of Central & Eastern Europe, Asia and Africa. An active investor as well as an analyst/observer, she participated in the sale of Flickr to Yahoo!, of Medstory and Powerset to Microsoft, and of Vizu to Nielsen, among others. She sits on the boards of Russia’s leading search company Yandex (YNDX) and outsourcing company Luxoft (LXFT), and also of non-listed start-ups including 23andMe, Eventful.com, Meetup, NewspaperDirect (Canada), PA Consulting (UK), Voxiva (US) and XCOR Aerospace (US). Her current investments include Evernote, Gridpoint, LinkedIn, Nomanini, Omada Health, Space Adventures and Square. She is also active in public affairs and was founding chairman of ICANN, the domain name policy agency, from 1998 to 2000. She currently sits on the board of the Sunlight Foundation, which advocates transparency in government, and writes a monthly column for Project Syndicate (http://www.project-syndicate.org/contributor/esther-dyson) which is distributed worldwide.

 

Orit Gadiesh, Age 63: 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, was a Baker Scholar and was also presented the Brown Award. Ms Gadiesh is a member of the Foundation Board for the World Economic Forum as well as a member of the International Business Council of the World Economic Forum. She is on the Board of Directors of The Peres Institute for Peace, sits on the International

 

37


Table of Contents

Advisory Board of The Atlantic Council of the United States, and the Advisory Board for the British-American Business Council. She is the Chairman of the International Business Leaders’ Advisory Council for the Mayor of Shanghai (IBLAC) and sits on the International Advisory Board at HEC School of Management in France.

 

Dr John Hood, Age 62: Non-executive director. Dr John Hood was appointed a director on 1 January 2014. An international education and business leader, he was formerly Vice-Chancellor of the University of Oxford and of the University of Auckland. In his native New Zealand, he served as Chairman of Tonkin & Taylor Ltd and as non-executive director of Fonterra Co-operative Group, ASB Bank Ltd, and other companies. He currently serves as Chairman of URENCO Ltd and of Study Group Ltd, as a non-executive director of BG Group plc, as President of the Robertson Foundation and as Chairman of Rhodes Trust. Dr Hood earned his PhD in Civil Engineering from the University of Auckland and then won a Rhodes Scholarship to Oxford, where he was awarded an MPhil in Management Studies.

 

Ruigang Li, Age 44: Non-executive director. Ruigang Li was appointed a director of WPP in October 2010. He is Founding Chairman of CMC Capital Partners (CMC), China’s first and most prestigious Media and Entertainment dedicated private equity fund. Through Li’s chairmanship, CMC acquired the controlling stake of former News Corporation’s China assets – Star China, together with the management team. CMC has also invested in Oriental DreamWorks – a joint venture with DreamWorks Animation; TVBC – a joint venture with leading Chinese language TV content provider and broadcaster TVB, and China’s largest TV shopping company OCJ, all of which are of profound significance in China and beyond. CMC also leads China’s highly eye-catching urban leisure and entertainment destination – the Dream Center in Shanghai through a multi-party international partnership. Li is also the Chairman of Shanghai Media Group (SMG), which he led as the CEO for 10 years and grew it into China’s second largest media conglomerate with the most diversified media assets of national reach.

 

Daniela Riccardi, Age 54: Non-executive director. Daniela Riccardi was appointed a director on 12 September 2013. A prominent FMCG, retail-and-fashion products executive, she is Chief Executive Officer of Baccarat, the international luxury goods company, and was Chief Executive Officer of Diesel Group, the innovative fashion business. She was an executive at Procter & Gamble for 25 years, including service as President of Procter & Gamble Greater China, with 7,000 employees, and Vice President-General Manager for Eastern Europe & Russia. Ms Riccardi is a Magna Cum Laude graduate in Political Science and International Studies at Sapienza University of Rome and completed a Fellowship in Marketing at Yale University.

 

Jeffrey A. Rosen, Age 66: Non-executive director. Jeffrey Rosen was appointed a director of WPP in December 2004. He is a deputy chairman and managing director of Lazard with over 40 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.

 

Nicole Seligman, Age 58: Non-executive director. Nicole Seligman was appointed a director on 1 January 2014. A senior Sony executive since 2001, she is Executive Vice President and General Counsel of Sony Corporation and President of Sony Corporation of America. Previously, as a partner in the Washington law firm of Williams & Connolly, she counselled a wide range of clients, including major media companies, on complex litigation and commercial matters. She was a law clerk for US Supreme Court Justice Thurgood Marshall and was associate editorial page editor for the Asian Wall Street Journal. She was a Magna Cum Laude graduate of both Harvard College and Harvard Law School.

 

Hugo Shong, Age 58: Non-executive director. Hugo Shong was appointed a director on 13 May 2013. He is the executive vice president of International Data Group (IDG), a private technology media, research and events company, and president of IDG Asia/China. He joined IDG in 1991 as an associate to IDG’s founder and chairman, Patrick J. McGovern, for Asian business development after working for three years as a reporter and editor at Electronic Business and Electronic Business Asia magazine, where he launched over 40 magazines and newspapers in Asian countries, such as PC World Vietnam, the Chinese editions of NetworkWorld, Electronic Products, Cosmopolitan, Harper’s Bazaar, National Geographic, FHM and Men’s Health. In 1993, he helped IDG to set up the first technology

 

38


Table of Contents

venture fund in China, IDG Capital Partners, which now has $3.8 billion under management and an investment portfolio including Baidu, Tencent (QQ), Sohu, Ctrip and Soufun. He currently serves on the boards of China Jiuhao Health Industry Corp, which focuses on health maintenance and retirement community projects in China, and Mei Ah Entertainment Group, an entertainment company with interests in television, film and theatre listed on the Hong Kong Stock Exchange. Hugo has been a member of the board of trustees of Boston University since 2005. After completing his undergraduate studies at Hunan University, he attended the Chinese Academy of Social Sciences and earned a Master of Science from Boston University in 1987. He conducted graduate studies at the Fletcher School of Law and Diplomacy and has also completed the Advanced Management Program at Harvard Business School.

 

Timothy A. Shriver, Age 54: Non-executive director. Tim Shriver was appointed a director of WPP in August 2007. He is a social leader, educator, activist, film producer and business entrepreneur. As Chairman and CEO of Special Olympics, he serves nearly four million Special Olympic athletes in 180 countries all working to promote health, education, and unity through the joy of sports. Before joining Special Olympics in 1995, he was (and remains) a leading educator focusing on the social and emotional factors in learning. He co-founded and currently chairs the Collaborative for Academic, Social and Emotional Learning (CASEL), the leading research organisation in the field of social and emotional learning. He is a member of the Council on Foreign Relations. He chairs the board of Lovin’ Scoopful a cause-related consumer products brand specialising in ice cream that ‘loves you as much as you love it’.

 

Sally Susman, Age 52: Non-executive director. Sally Susman was appointed a director on 13 May 2013. She is currently executive vice president, Corporate Affairs for Pfizer, the world’s largest biopharmaceutical company. Sally also heads the firm’s corporate responsibility group and plays a key role in shaping policy initiatives. Before joining Pfizer in 2007, she was EVP of Global Communications at Estée Lauder, where she directed global corporate affairs strategy and served as a member of the Executive Committee. She also held several senior corporate affairs posts at American Express, working in both London and the US. She started her career in government service focused on international trade issues and her positions included Deputy Assistant Secretary for Legislative and Intergovernmental Affairs in the US Department of Commerce. She serves on the board of the International Rescue Committee and the US Department of State’s International Council on Women’s Business Leadership. Sally holds a BA in Government from Connecticut College in the US and has studied at the London School of Economics.

 

Sol Trujillo, Age 62: Non-executive director. Sol Trujillo was appointed a director of WPP in October 2010. He is an international business executive with three decades’ experience as CEO of large market cap global companies in the US, the EU and Asia Pacific, including US West (now CenturyLink), Orange (now France Telecom) and Telstra, the Australian communications company. A digital pioneer operating in the telecommunications, technology, and media space, he has been a long-time champion of high-speed broadband and a pioneer and innovator of smartphone and the mobile internet to stimulate productivity and innovation across all sectors of the economy. He has managed operations in more than 25 countries – including developed and emerging markets from the EU and North America to China, South Asia, Africa and the Middle East. He currently sits on corporate boards in the US, EU and China – including Western Union and ProAmerica Bank in the US and in Asia, Silk Road Technologies in China, where he is Board chairman. In the public sector, Mr Trujillo served as 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).

 

B. Compensation

 

Review of Compensation

 

This year’s Compensation Committee Report has been drafted with the new UK remuneration reporting regulations in mind. The Report therefore comprises three parts: this summary of the key events that occurred in 2013, the Executive Remuneration Policy, and an Implementation Report. The latter two will be put to share owners at the forthcoming Annual General Meeting (AGM) for approval.

 

39


Table of Contents

Summary of key events in 2013

 

Key changes in 2013

 

Following an extensive consultation program with share owners during 2012 and 2013, the Compensation Committee implemented a revised remuneration package for the Group chief executive, partly in 2012 and fully in 2013. At the beginning of 2013, the base salary and pension allowance of the Group chief executive were reduced in line with the amended policy, as was advised to share owners in the last Annual Report. A new long-term incentive plan, the Executive Performance Share Plan (EPSP), was approved by share owners at the 2013 AGM. The first awards under that plan were made in June 2013. These awards have a five-year performance period, with performance being assessed using stretching targets over Total Share Owner Return (TSR), Earnings Per Share (EPS) and Return On Equity (ROE) measures. These substantial revisions to WPP’s remuneration policy resulted in a materially increased level of support from our share owners and the advisory bodies, as demonstrated by the share owner vote in favour of the Compensation Committee report at the 2013 AGM.

 

In July 2013, the Compensation Committee undertook the review of the pay packages of the Group financial director and the Chief executive of WPP Digital, whose pay packages were previously reviewed in January 2011. These 2013 reviews resulted in modest increases to base salary and fees of 1.8% and 3.5% respectively and in the case of the Chief executive of WPP Digital, a modest increase in his pension allowance to 15% of base salary and fees in order to align his position with that of other UK executives. Employees across the Group who were subject to a salary review received an average annual salary increase of approximately 3%.

 

In drafting the Executive Remuneration Policy, the Compensation Committee has maintained the structure of compensation as discussed extensively with share owners in 2012 and 2013 and implemented in 2013. An addition for 2014 is the inclusion of a recruitment policy, as set out in the new UK remuneration reporting regulations. This recruitment policy, found in Item 6C, has been drafted while taking into consideration input received from share owners last year. The policy represents a lower level of incentive opportunity than that provided to the incumbent Group chief executive, while seeking to retain the flexibility required to recruit talent of the level necessary to run such a complex global group.

 

Pay for performance in 2013

 

In 2013, the operational performance of the Group was strong, with like-for-like revenue growth of 3.5% and headline PBT growth of almost 11%. In addition, the last year has seen very strong share price growth and a considerable increase in TSR. The share price increased 55% from 888p at the end of 2012 to 1,380p at the end of 2013, versus a 14% gain in the FTSE 100 from 5,898 to 6,749, reflecting a high level of investor confidence in the Group’s future prospects.

 

The annual bonuses awarded to the executive directors for 2013, of which 70% is based on financial performance, take into account not only the impressive performance of the Group but also the stretching targets set by the committee. The executive directors’ bonus awards average 143% of target. Half of the annual bonus is paid in cash and half in deferred shares which vest in 2016, thereby reinforcing the alignment of the executive directors’ interests with those of share owners.

 

WPP was an early adopter of long-term incentives that measure performance over the longer five-year period. Each of the three Leadership Equity Acquisition Plan (LEAP) plans and the replacement plan, the EPSP, are based upon a five-year performance period. In addition, participation in the LEAP plans has required executives to commit shares that could be matched, up to five times, dependent upon the Group’s performance over the five-year period. The long-term incentive awards that were granted in 2009 under LEAP III vested in February 2014. The share price and relative TSR performance over the performance period of the 2009 LEAP award cycle has resulted in awards vesting at 87% of maximum. While the level of vesting will undoubtedly attract public attention, the close relationship between WPP’s pay and performance is again demonstrated by the considerable value that has been created for share owners during that period. Indeed, over the five years from 1 January 2009 to 31 December 2013, the share price increased by 243%, which translates to 28% per annum on a compound basis. WPP’s TSR of more than 241%, averaged over six months at the start and end of the investment and performance period in accordance with the plan rules, ranks the Company in the top decile of the FTSE 100 over the same period.

 

40


Table of Contents

Compensation and policy issues for 2014

 

There are no planned changes to the way in which the Executive Remuneration Policy will be implemented in 2014. For the executive directors, base salaries and fees will be unchanged as will annual bonus opportunity and EPSP award levels. The committee has undertaken its regular review of measures and has set new targets for the 2014 annual bonus. The impact of the proposed merger between Publicis and Omnicom on the LEAP and EPSP TSR peer groups will be considered on completion of the transaction (a date for which is yet to be confirmed); details of the impact on the LEAP and EPSP comparator group and TSR calculation approach will be confirmed in next year’s Compensation Committee Report. The nature of benefits provided in 2014 will also be unchanged, although the value may be higher or lower depending upon individual circumstances during the year. The fees for the current chairman and non-executive directors will also be unchanged.

 

How we have performed

 

LOGO

 

1   

The calculation of headline PBIT is set out in note 31 of the financial statements

2   

Growth in the value of a hypothetical £100 holding over 20 years. TSR calculated using a three-month rolling average in common currency. Source: DataStream

 

The above graphs compare WPP’s 20-year TSR performance relative to our primary peers and the major indices in both the US and Europe. Over this period, a £100 investment in January 1994 in WPP ADRs would be worth £1,940 in January 2014 and a £100 investment in January 1994 in WPP ordinary shares would be worth £1,898 in January 2014, with both investments out-performing our competitors and the local indices. An identical investment in either the S&P 500 or the FTSE 100 would be worth £518 or £413 respectively.

 

How much the executive directors earned in 2013

 

2013 executive directors total remuneration received

 

LOGO

 

41


Table of Contents

Executive Remuneration Policy

 

The Compensation Committee presents the Executive Remuneration Policy, which will be put to share owners for approval at the Annual General Meeting (Resolution 4). This policy is intended to comply with the UK Companies Act 2006 despite the fact WPP plc is a Jersey incorporated company and therefore not subject to that legislation (or the associated regulations). The policy will take effect immediately following the AGM and is consistent with the arrangements in place from the start of the 2014 financial year. It is the intention of the committee that this policy will be in effect for three years from the date of approval and subject to periodic review during its operation to ensure it continues to align with the Company’s mission statement and business objectives.

 

The report that follows is split into a number of sections, which in summary are as follows:

 

   

Details of the contextual information that the committee considers when setting, reviewing and implementing the directors’ pay policy Pages 42-43

 

   

An Executive Remuneration Policy table for the executive directors Pages 43-49

 

   

A summary of other executive director policies that relate to compensation; Pages 51-52, 67-70

 

   

An Executive Remuneration Policy table for the chairman and non-executive directors; Page 52

 

   

A summary of other non-executive director policies that relate to compensation Page 70

 

WPP’s compensation philosophy

 

Our mission statement and our six business objectives shape our compensation philosophy. Broadly, our Executive Remuneration Policy is determined by three guiding principles:

 

   

performance driven reward;

 

   

competitiveness; and

 

   

alignment with share owner interests.

 

Specifically, our six business objectives (as set out on pages 15-16) are reflected in the design of our compensation plans as set out below:

 

WPP’s six business objectives

   Alignment with compensation structure
1    Continue to improve operating margins on revenue and gross profit    Short-term incentive measure for the Group chief executive and Group finance director
2    Increase flexibility in the cost structure    Short-term incentive measure for the Group finance director
3    Use free cash flow to enhance share owner value and improve return on capital    TSR, EPS growth and average ROE are long-term incentive measures for the executive directors
4    Continue to develop the value added by the parent company    Short-term incentive measures (parent company-led efficiency projects) for the Group finance director
5    Emphasise revenue growth more as margins improve    Short-term incentive measures for the Group chief executive and Group finance director (Group) and Chief executive, WPP Digital (Digital)
6    Improve still further the creative capabilities and reputation of all our businesses    Short-term incentive measure for the Group chief executive

 

The Executive Remuneration Policy is designed to attract and retain the best-in-class talent. The policy looks to incentivise the directors to develop the skills of the Group’s employees in order to consistently exceed our clients’ expectations. The policy’s objective is to drive and reward sustainable and exceptional performance, thereby producing long-term value for share owners. In applying this policy, the committee takes into account the pay and conditions elsewhere in the Group, which in turn are informed by general market conditions and internal factors such as the performance of the Group or relevant business unit.

 

42


Table of Contents

Considerations taken into account when setting our Executive Remuneration Policy

 

Employment conditions at WPP

 

When reviewing changes to the compensation levels for the directors, the committee considers any changes in light of the increases awarded across the Group over a relevant period of time, in conjunction with the other factors set out in the policy table. The committee did not consult employees when drawing up this Executive Remuneration Policy.

 

Share owner views

 

WPP continues to engage openly with share owners and institutional investors to discuss matters relating to compensation. The feedback received during these conversations is valuable and is among the factors that inform the decisions made by the committee.

 

During 2013, the committee consulted with share owners on the design of the EPSP. The selection of performance measures took account of the feedback received (as detailed on page 40). More generally, formal and informal share owner feedback has been used by the committee when drafting this Executive Remuneration Policy.

 

Glossary

 

The following are acronyms used throughout the policy:

 

Acronym    Definition
DEPs    Dividend Equivalent Payments
DSUs    Deferred Stock Units
EPSP    Executive Performance Share Plan – long-term incentive plan introduced in 2013
ESA    Executive Share Award – the part of the STIP that is deferred into shares
ExSOP    Executive Stock Option Plan
Good Leaver    Broadly, when an individual is dismissed other than for cause (the particular meaning applicable to each share plan can be found in the relevant rules)
LEAP    Leadership Equity Acquisition Plan – long-term incentive plan used to grant awards until the end of 2012
RSP    Restricted Stock Plan
STIP    Short-term Incentive Plan – the annual incentive plan comprising a cash bonus and an ESA

 

Executive Remuneration Policy table — executive directors

 

The following table sets out details of the on-going compensation elements for WPP’s executive directors.

 

Component and Purpose    Operation    Performance    Maximum Annual Opportunity
Fixed elements of compensation

Base salary and fees

To maintain package competitiveness and reflect skills and experience.

  

Base salary and fee levels are reviewed every two years or following a significant change in the scope of a role.

 

Levels are determined by taking a number of relevant factors into account including individual and business performance, level of experience, scope of responsibility, compensation practices across the Group and the competitiveness of total compensation against both our competitors and companies of a similar size and complexity.

   Company and personal performance will be taken into account during the review process.   

Under normal circumstances base salary and fees will increase by no more than the local rate of inflation over the period since last review.

 

In the event of a promotion or a significant change in the scope of a role, or changes in sector competitive pay or the need to counter a competitive external offer, the committee may exceed this limit.

 

43


Table of Contents
Component and Purpose    Operation   Performance   Maximum Annual Opportunity
Short-term incentives (details of how performance measures and targets are set are included in the notes to this table on page 48)

Cash bonus, Executive Share Awards (‘ESA’)

To drive the achievement of business priorities for the financial year and to motivate, retain and reward executives over the medium term, while maximising alignment with share owner interests.

  

Overview

The committee may invite executives to participate in the STIP under which a bonus can be made subject to performance measured over the financial year. Bonus opportunity is determined as a percentage of salary and fees.

 

Performance measures and targets are reviewed and set annually to ensure continuing strategic alignment. Achievement levels are determined following year-end by the committee, based on performance against targets.

 

Executive directors’ bonuses are delivered in the form of a cash award and a deferred share award (ESA), the latter constituting at least 50% of the total bonus achieved. The ESA will vest after a minimum of two years subject to continued employment, together with additional shares in respect of accrued dividends.

 

Judgement

The committee will use its judgement to set the performance measures and targets annually.

 

Malus provisions (ESA)

The committee has the ability to reduce any unvested ESA in certain situations, including when fraud or a material misstatement has affected the level of any performance-related remuneration.

 

70% subject to financial performance, either at a Group and/or divisional level depending on the role.

 

30% subject to personal objectives linked to the strategy of WPP or the relevant business area.

 

The committee will use its judgement in assessing performance relative to targets and expectations communicated at the start of the year and will consider unforeseen factors that may have impacted performance during the period.

 

Vesting schedule

The following table sets out the level of bonus payable for threshold and target performance as a percentage of maximum. Vesting operates on a straight-line basis between these points.

 

 

Group chief executive: 435% of base salary and fees.

 

Other executive directors: 300% of base salary and fees.

 

The value of any accrued dividends will vary depending on the size of the ESA awarded, dividends declared and share price over the deferral period.

    

 

 
        Threshold  

    Target

 (as percentage

of maximum)

 
    

 

 
     Sir Martin Sorrell    0%   50%  
    

 

 
     Other executive directors    0%   67%  
    

 

 
            

 

44


Table of Contents
Component and Purpose    Operation    Performance    Maximum Annual Opportunity
Long-term incentives (details of how performance measures and targets are set are included in the notes to this table on page 48)

Executive Performance Share Plan (‘EPSP’)

To incentivise long-term performance and to focus on long-term retention and strategic priorities, while maximising alignment with share owner interests.

  

Overview

Executives may receive an annual conditional award expressed as a percentage of base salary and fees. Executives may also receive an award in respect of the number of reinvested dividends proportionate to the amount of the award vesting, the dividends declared during the performance period and the share price at the time the dividend is declared. Awards will vest subject to performance, measured over a period of five consecutive financial years.

 

In respect of merger and acquisition activity within the peer group, the committee has an established and operated policy that TSR outcomes should not be impacted by the speculation or actuality of takeovers of peer group companies (including WPP). This policy includes a minimum listing requirement, an approach for the reinvestment of proceeds from shares of companies that delist during the performance period and parameters for companies subject to bid speculation. Details of how this policy is implemented will be disclosed each year in the relevant Annual Report.

 

Discretions

In accordance with the EPSP rules that were approved by share owners at the 2013 AGM, if the committee considers that there has been an exceptional event or that there have been exceptional circumstances during a performance period that have made it materially easier or harder for the Company to achieve a performance measure, the committee may adjust the extent to which an award vests to mitigate the effect of the exceptional event or circumstances.

 

Malus provisions

The committee has the ability to reduce any unvested EPSP award in certain situations, including when fraud or a material misstatement has affected the level of any performance-related remuneration.

  

One-third relative TSR

One-third headline EPS growth

One-third average ROE

 

All measures are assessed independently of each other.

 

TSR is measured on a market-capitalisation weighted basis against a peer group of business competitors that are selected according to size and relevance. This peer group is reviewed annually at the start of each cycle to ensure it remains robust, appropriate and relevant in light of WPP’s business mix. Half of the TSR element is measured on a local currency basis, half on a common currency basis.

 

EPS is defined as WPP’s headline, fully diluted, earnings per share. The EPS performance is calculated by taking the aggregate EPS over the performance period and calculating the compound annual growth from the financial year preceding the start of the period.

 

ROE is calculated as fully diluted EPS divided by the average balance sheet per share value of share owners’ equity during the year.

 

Vesting schedule

Awards will vest on a straight-line basis from 20% for threshold performance and 100% for maximum performance.

  

Conditional awards:

 

Plan maximum: 9.75 times base salary and fees.

 

Group chief executive: 9.75 times base salary and fees.

 

Other directors: four times base salary and fees.

 

The value of accrued dividends will vary depending on the level of vesting, dividends declared and share price over the performance period.

 

45


Table of Contents
Component and Purpose   Operation   Performance                   Maximum Annual Opportunity
Long-term incentives (legacy plans with unvested awards)                     

Leadership Equity

Acquisition Plan III

(‘LEAP III’)

To incentivise long-term performance and to focus on long-term retention and strategic priorities, while maximising alignment with share owner interests.

 

Overview

Executives were invited to participate in the plan annually by the committee. In order to participate, individuals must have committed to hold an investment level in WPP shares which is determined by the committee, subject to an overall maximum, and must be held for the full five-year performance period. Investment levels were determined by the committee, subject to an overall maximum. A final number of matching shares will be awarded, proportionate to the investment, dependent on the performance of WPP. Executives may also receive an award in respect of the number of reinvested dividends proportionate to the amount of the award vesting, the dividends declared during the performance period and the share price at the time the dividend is declared. The Plan was closed to the grant of new awards at 31 December 2012.

 

Discretions

Following the end of the performance period, the committee undertakes a ‘fairness review’ to determine whether any exceptional events have impacted the outcome and that the resulting match is in line with financial performance relative to the comparator group and the underlying financial performance of the Group. Merger and acquisition activity will be treated in accordance with the policy set out under the EPSP above.

 

Malus provisions

The committee has the ability to reduce any unvested LEAP III award in certain situations, including when fraud or a material misstatement has affected the level of any performance-related remuneration.

 

100% relative TSR measured on a market-capitalisation weighted, common currency basis.

 

Vesting schedule

The following table sets out the level of award that will vest for threshold and target performance as a percentage of maximum.

    

  

    

 

The following maximum levels applied at the time of grant. No further awards can be granted under LEAP III, and none have been made since 2012.

 

Investment: one times an executive director’s total target earnings (base salary and fees plus target bonus).

 

Award: Five times an executive director’s investment.

 

The value of accrued dividends will vary depending on the level of vesting, dividends declared and share price over the investment and performance period.

   

 

   
         Threshold             Maximum     
   

 

   
   

All executive

directors

  

 

 

30%

  

  

 

 

100%

  

 
   

 

   
   

 

To achieve threshold vesting WPP must outperform at least 50% of the market-cap weighted peer group; to achieve maximum vesting WPP must outperform at least 90% of the market-cap weighted peer group.

 

      

 

 

46


Table of Contents
Component and Purpose    Operation    Performance    Maximum Annual Opportunity
Other items in the nature of compensation      

Dividend Equivalent Payments (‘DEPs’) on the DSUs

To ensure that Sir Martin Sorrell receives an amount equal to the dividends that would be payable if he had taken receipt of and retained the shares underlying the DSUs.

   The Company has previously received share owner approval to allow Sir Martin Sorrell to defer receipt of the DSUs. The Company makes a cash payment to Sir Martin Sorrell of an amount equal to the dividends that would have been due on the shares comprising the DSUs.    No longer subject to a performance requirement as this was assessed at the point of vesting in 1999.    The value of any accrued dividends will vary depending on the dividends declared during the deferral period.