WPP 2018 Preliminary Results

2018 at upper end of guidance; 2019 challenging as previously
indicated; good initial progress on strategy

NEW YORK & LONDON–(BUSINESS WIRE)–WPP (NYSE:WPP) today reported its 2018 Preliminary Results.

Mark Read, Chief Executive Officer, WPP:

“Since September, we have made good progress in implementing the new
strategy for WPP. We have set out our vision for a more client-centric
WPP, simplified our offer through the creation of two new integrated
networks, VMLY&R and Wunderman Thompson, realigned our US healthcare
agencies with major networks, formed the Company’s first executive
committee and begun the process of seeking a financial and strategic
partner for Kantar. Through 36 disposals since April 2018, we have
strengthened our balance sheet and streamlined our business, raising
£849 million of cash proceeds in 2018.

“We are showing early signs of success in attracting new business and
new talent to WPP. The newly formed VMLY&R, for example, has enjoyed a
strong start, with client wins totalling $25 million in its first 90
days. The quality of our creative work has been exceptional, with six
WPP spots featuring at this year’s Super Bowl and work such as Grey’s
‘The Best Men Can Be’ for Gillette demonstrating once again the global
impact of what we do.

“Our results for 2018 are at the upper end of the guidance we provided
in October, with like-for-like revenue less pass-through costs down 0.4%.

“As we have said previously, 2019 will be challenging – particularly in
the first half – due to headwinds from client losses in 2018. However,
we start the year with fewer clients under review than we did in 2018,
and investments in creativity and technology will further improve the
competitiveness of our offer.

“Our business is performing strongly in Western Continental Europe, Asia
Pacific, Latin America, Africa & the Middle East and Central & Eastern
Europe, and we are addressing our performance in the United States.
Important wins such as Volkswagen in North America reflect our creative
strengths, and we are making significant investments in talent in our
largest market.

“We are at the beginning of a three-year turnaround plan, but WPP’s new
positioning as a creative transformation company with stronger, more
integrated, more tech-enabled agencies is already proving effective,
having driven several of our recent new business successes. As we
implement our strategy in 2019 we will continue to put creativity,
technology and great work for clients at the heart of our own
transformation.”

In this press release not all of the figures and ratios used are
readily available from the unaudited preliminary results included in
Appendix 1. These non-GAAP measures, including constant currency and
like-for-like growth, revenue less pass-through costs
and
headline profit measures, management believes are both useful and
necessary to better understand the Group’s results. Where required,
details of how these have been arrived at are shown in the Appendix.

Key figures

                   
£ million     2018    

∆ reported1

   

∆ constant2

   

∆ LFL3

   

20174

Billings     55,798     0.4%     3.3%     3.2%     55,585
Revenue     15,602     -1.3%     1.5%     0.8%     15,804
Revenue less pass-through costs     12,827     -2.6%     0.2%    

-0.4%

    13,170

Headline EBITDA5

    2,311     -8.8%     -6.4%           2,534

Headline operating profit6

    1,962     -8.9%     -6.6%           2,154

Headline operating margin7

    15.3%     -1.1*     -1.1*     -1.1*     16.4%

Headline PBIT8

    2,047     -9.7%     -7.4%           2,267

Headline PBIT margin9

    16.0%     -1.2*     -1.3*     -1.2*     17.2%
Profit before tax     1,463     -30.6%     -28.1%           2,109
Profit after tax     1,139     -40.4%     -38.5%           1,912

Headline diluted EPS10

    108.0p     -10.3%     -8.1%           120.4p

Diluted EPS11

    84.3p     -40.8%     -38.9%           142.4p
Dividends per share 60.0p 60.0p
 

* Margin points

  • 2018 at upper end of guidance given in October, with like-for-like
    revenue less pass-through costs -0.4%
  • As previously stated, 2019 challenging, particularly in the first
    half, due to headwinds from client losses in 2018
  • Business performing strongly in Western Continental Europe, Asia
    Pacific, Latin America, Africa & the Middle East and Central & Eastern
    Europe, and addressing performance in the United States
  • Profit before tax reflects impact of restructuring and
    transformation costs and goodwill impairment
  • Dividends per share of 60.0p, flat with last year
  • Year end net debt position improved by £466 million on same date in
    2017 (an improvement of £605 million at 2018 exchange rates)
  • Good initial progress on implementing strategy

Review of results

Reported billings at £55.798 billion, up 0.4%, up 3.3% in constant
currency and up 3.2% like-for-like.

Reported revenue was down 1.3% at £15.602 billion. Revenue on a constant
currency basis was up 1.5% compared with last year, the difference to
the reportable number reflecting the strength of the pound sterling
against most currencies, particularly in the first half of the year. On
a like-for-like basis, which excludes the impact of currency and
acquisitions, revenue was up 0.8%.

Reported revenue less pass-through costs was down 2.6%, up 0.2% in
constant currency and down 0.4% like-for-like. In the fourth quarter,
like-for-like revenue was down 0.1%, a slight deterioration from the
third quarter of +0.2%, with all regions, except North America, showing
an improvement. On the same basis, revenue less pass-through costs in
the fourth quarter was down 0.7%, an improvement over the third quarter
of -1.5%, with North America and the United Kingdom slightly weaker,
more than offset by stronger growth in Western Continental Europe and
Asia Pacific, Latin America, Africa & the Middle East and Central &
Eastern Europe.

Operating profitability

Headline EBITDA was down 8.8% to £2.311 billion, from £2.534 billion the
previous year and down 6.4% in constant currency. The Group’s revenue is
more weighted to the second half of the year across all regions and
sectors, and, particularly, in the faster growing markets of Asia
Pacific and Latin America. As a result, profitability and margin
continue to be skewed to the second half of the year, with the Group
earning approximately 40% of its profits in the first half and 60% in
the second half. Headline profit before interest and tax for 2018 was
down 9.7% to £2.047 billion, from £2.267 billion and down 7.4% in
constant currencies.

Headline operating margin12 was down 1.1 margin points to
15.3%, and also down 1.1 margin points in both constant currency and
like-for-like, at the upper end of the full year revised operating
margin target. Headline PBIT margin13 was down 1.2 margin
points to 16.0%, down 1.3 margin points in constant currency and down
1.2 margin points like-for-like. The Group’s operating margin of 15.3%
is after charging £37 million ($54 million) of severance costs, compared
with £40 million ($52 million) in 2017 and £326 million ($435 million)
of incentive payments, which were 14.2% of operating profit before
incentives, a similar level to the £324 million ($421 million) or 13.1%
in 2017. Achievement of target, at an individual operating company
level, generally generates 15% of operating profit before bonus as an
incentive pool and 20% at maximum.

On a reported basis, the Group’s operating margin, before all incentives14
and income from associates, was 17.8%, down 1.0 margin point, compared
with 18.8% last year. The Group’s staff costs to revenue less
pass-through costs ratio, including severance and incentives, increased
by 0.5 margin points to 63.7% compared to 63.2% in 2017. In addition,
there was an increase in the Group’s general and administrative costs,
principally in relation to an increase in the provision for bad debts
and higher IT costs.

On a like-for-like basis, the average number of people in the Group,
excluding associates, in 2018 was 133,903 compared to 135,521 in 2017, a
decrease of 1.2%. On the same basis, the total number of people,
excluding associates, at 31 December 2018 was 134,281 compared to
135,187 at 31 December 2017, a decrease of 906 or 0.7%.

Exceptional gains and restructuring and transformation costs

As outlined in the Investor Day on 11 December 2018, we have undertaken
a strategic review of our operations. As part of that review,
restructuring actions have been taken to right-size underperforming
businesses, address high cost severance markets and simplify operational
structures. This has included a number of WPP’s operating companies
having been merged, closed or sold. It also includes transformation
costs with respect to strategic initiatives like co-locations in major
cities, IT transformation and shared services.

£234 million of restructuring and transformation costs were recorded in
the fourth quarter in relation to this plan. This included £63 million
of non-cash write-offs and £171 million of actions that have a cash
impact in 2018 and beyond. In 2018 the cash outflow was £50 million. The
£171 million forms part of the anticipated £300 million total cash cost
of the restructuring plan that we announced – with the balance to be
incurred in 2019, 2020 and 2021.

The total of restructuring and transformation costs in 2018 was £302
million. The remaining £68 million relates to severance restructuring
costs recorded in the first half, together with costs in relation to the
continuing global IT transformation program.

These exceptional costs of £302 million and £41 million of associate
company exceptional losses have been partly offset by exceptional gains
of £235 million, primarily relating to the gain on the sale of the
Group’s investment in Globant S.A.

This gives a net exceptional loss of £108 million and compares with a
net exceptional loss in 2017 of £24 million.

Interest and taxes

Net finance costs (excluding the revaluation of financial instruments)
were £184.5 million, compared with £174.6 million in 2017, an increase
of £9.9 million. This is due to higher dollar interest rates.

The headline tax rate was 22.5% (2017 22.0%) and on reported profit
before tax was 22.1% (2017 9.3%), the difference in the rates in 2017
was principally due to an exceptional tax credit, primarily relating to
the re-measurement of deferred tax liabilities. Given the Group’s
geographic mix of profits and the changing international tax
environment, the tax rate is expected to increase slightly over the next
few years.

Earnings and dividend

Headline profit before tax was down 11.0% to £1.863 billion from £2.093
billion, and down 8.5% in constant currencies.

Reported profit before tax fell by 30.6% to £1.463 billion from £2.109
billion, the difference between the headline and reported figures
reflecting principally the £302 million of restructuring and
transformation costs and £184 million of goodwill impairment charges. In
constant currencies, reported profit before tax fell by 28.1%.

Reported profit after tax fell by 40.4% to £1.139 billion from £1.912
billion. In constant currencies, profits after tax fell 38.5%.

Profits attributable to share owners fell 41.5% to £1.063 billion from
£1.817 billion, again reflecting principally the £302 million of
restructuring and transformation costs and £184 million of goodwill
impairment. In constant currencies, profits attributable to share owners
fell by 39.6%.

Headline diluted earnings per share fell by 10.3% to 108.0p from 120.4p.
In constant currencies, earnings per share on the same basis fell by
8.1%. Reported diluted earnings per share fell by 40.8% to 84.3p from
142.4p and decreased 38.9% in constant currencies.

As outlined in our Investor Day presentation, despite the reduction in
diluted earnings per share, your Board proposes to maintain the final
dividend of 37.3p per share, which, together with the interim dividend
of 22.7p per share, makes a total of 60.0p per share for 2018, the same
as the prior year. This represents a dividend pay-out ratio of 56%,
compared with 50% last year. The record date for the final dividend is
14 June 2019, payable on 8 July 2019.

Further details of WPP’s financial performance are provided in Appendix
1.

Regional review

The pattern of revenue and revenue less pass-through costs growth
differed regionally. The tables below give details of revenue and
revenue less pass-through costs, revenue and revenue less pass-through
costs growth by region for 2018, as well as the proportion of Group
revenue and revenue less pass-through costs and operating profit and
operating margin by region:

Revenue analysis

                           
£ million     2018     ∆ reported    

∆ constant15

   

∆ LFL16

    % group     2017     % group
N. America     5,371     -5.1%     -1.9%     -3.0%     34.4%     5,659     35.8%
United Kingdom     2,189     2.6%     2.6%     1.5%     14.0%     2,133     13.5%
W Cont. Europe     3,335     3.2%     3.5%     1.7%     21.4%     3,231     20.4%

AP, LA, AME, CEE17

   

4,707

   

-1.6%

   

3.8%

   

4.4%

   

30.2%

   

4,781

   

30.3%

Total Group     15,602     -1.3%     1.5%     0.8%     100.0%     15,804     100.0%
 

Revenue less pass-through costs analysis

                           
£ million     2018     ∆ reported     ∆ constant     ∆ LFL     % group     2017     % group
N. America     4,474     -6.7%     -3.5%     -4.2%     34.9%     4,794     36.4%
United Kingdom     1,691     0.2%     0.2%     -0.5%     13.2%     1,688     12.8%
W Cont. Europe     2,736     4.0%     4.1%     2.0%     21.3%     2,631     20.0%
AP, LA, AME, CEE    

3,926

   

-3.2%

   

2.0%

   

2.5%

   

30.6%

   

4,057

   

30.8%

Total Group     12,827     -2.6%     0.2%     -0.4%     100.0%     13,170     100.0%
 

Operating profit analysis (Headline PBIT)

               
£ million     2018     % margin*     2017     % margin*
N. America     804     18.0%     937     19.6%
United Kingdom     245     14.5%     280     16.6%
W Cont. Europe     372     13.6%     376     14.3%
AP, LA, AME, CEE     626     15.9%     674     16.6%
Total Group 2,047 16.0% 2,267 17.2%
 

* Headline PBIT as a percentage of revenue less pass-through costs

North America constant currency revenue less pass-through costs
was down 4.5% in the final quarter, the same as the third quarter, and
down 5.7% like-for-like, a slight deterioration on the third quarter of
-5.3%. This reflects continuing challenges in our advertising
businesses, with data investment management and healthcare also slower,
partly offset by a significant improvement in public relations and
public affairs. On a full year basis, constant currency revenue less
pass-through costs was down 3.5%, with like-for-like down 4.2%.

United Kingdom constant currency revenue less pass-through costs
was down 2.4% in the final quarter and down 2.7% like-for-like, slightly
weaker than the -2.0% shown in quarter three. Media investment
management and the specialist communications businesses were
particularly strong with data investment management improving. Our
public relations and public affairs and direct, interactive and
eCommerce businesses were slower. On a full year basis, constant
currency revenue less pass-through costs was up 0.2%, with like-for-like
down 0.5%.

Western Continental Europe constant currency revenue less
pass-through costs was up 4.1% in the final quarter, a significant
improvement on the growth in quarter three of 1.3%. On a like-for-like
basis revenue less pass-through costs was also up 4.1%, the strongest
quarter of the year, and compared to -0.4% in quarter three. Twelve of
the Group’s top 14 markets showed significant growth in quarter four,
particularly Austria, Belgium, Denmark, Finland, Germany, Italy,
Netherlands, Portugal, Sweden and Turkey. For the year, Western
Continental Europe constant currency revenue less pass-through costs
grew 4.1% with like-for-like up 2.0%, the second strongest performing
region.

In Asia Pacific, Latin America, Africa & the Middle East and Central
& Eastern Europe
, on a constant currency basis, revenue less
pass-through costs was up 0.4% in the fourth quarter and up 2.6%
like-for-like, slightly above the third quarter growth of 2.4%. In the
fourth quarter, Latin America, grew over 7%, stronger than the
third quarter, with Central & Eastern Europe showing double
digit growth in the fourth quarter compared with almost 5% in quarter
three. Asia Pacific and Africa & the Middle East were
slightly weaker. On a full year basis, constant currency revenue less
pass-through costs growth in the region was 2.0% with like-for-like
growth 2.5%, the strongest performing region.

Business sector review

The pattern of revenue and revenue less pass-through costs growth also
varied by sector and operating brand. The tables below give details of
revenue and revenue less pass-through costs, revenue and revenue less
pass-through costs growth by sector, as well as the proportion of Group
revenue and revenue less pass-through costs for 2018 and operating
profit and operating margin by sector:

Revenue analysis

                           
£ million     2018     ∆ reported    

∆ constant18

   

∆ LFL19

    % group     2017     % group

AMIM20

    7,132     -3.2%     -0.4%     1.0%     45.6%     7,369     46.6%
Data Inv. Mgt.     2,582     -4.5%     -1.8%     -2.0%     16.6%     2,703     17.1%

PR & PA21

    1,211     0.6%     3.4%     3.1%     7.8%     1,204     7.6%

BC, HW & SC22

    4,677     3.3%     6.3%     1.5%     30.0%     4,528     28.7%
Total Group     15,602     -1.3%     1.5%     0.8%     100.0%     15,804     100.0%
 

Revenue less pass-through costs analysis

                           
£ million     2018     ∆ reported     ∆ constant     ∆ LFL     % group     2017     % group
AMIM     5,530     -6.1%     -3.3%     -1.2%     43.1%     5,889     44.7%
Data Inv. Mgt.     1,966     -4.2%     -1.3%     -1.8%     15.3%     2,052     15.6%
PR & PA     1,136     -0.4%     2.5%     2.6%     8.9%     1,141     8.7%
BC, HW & SC     4,195     2.6%     5.6%     0.6%     32.7%     4,088     31.0%
Total Group     12,827     -2.6%     0.2%     -0.4%     100.0%     13,170     100.0%
 

Operating profit analysis (Headline PBIT)

               
£ million     2018     % margin*     2017     % margin*
AMIM     972     17.6%     1,109     18.8%
Data Inv. Mgt.     301     15.3%     350     17.1%
PR & PA     184     16.2%     183     16.1%
BC, HW & SC     590     14.1%     625     15.3%
Total Group 2,047 16.0% 2,267 17.2%
 

* Headline PBIT as a percentage of revenue less pass-through costs

Advertising and Media Investment Management

In constant currencies, advertising and media investment management
revenue less pass-through costs was down 1.6% in the fourth quarter, a
significant improvement on the -6.5% in the third quarter and the
strongest quarter of the year. On a like-for-like basis revenue less
pass-through costs was up 0.4% in the fourth quarter, the first quarter
of positive growth, with both our advertising and media investment
businesses showing considerable improvement over the third quarter.
However, despite this improvement, our advertising businesses remain
under pressure.

The strong revenue less pass-through costs growth across most of the
Group’s media investment management businesses, offset by slower growth
in our advertising businesses in most regions, resulted in the combined
reported operating margin of this sector being down 1.2 margin points at
17.6% and down 1.4 margin points in constant currency.

Data Investment Management

In constant currencies, data investment management revenue less
pass-through costs was down 2.8% in the fourth quarter, and down 2.8%
like-for-like. On a full year basis, constant currency revenue less
pass-through costs was down 1.3%, down 1.8% like-for-like.
Geographically, revenue less pass-through costs was up strongly in Asia
Pacific and Latin America, but North America was weaker. Kantar
Worldpanel and Kantar Media showed strong like-for-like revenue less
pass-through costs growth, with Kantar Insights, Kantar Health, Kantar
Public and Lightspeed less robust. Reported operating margins were down
1.8 margin points to 15.3% and down 1.8 margin points in constant
currency.

Public Relations and Public Affairs

In the fourth quarter, in constant currencies and like-for-like, our
public relations and public affairs businesses were the strongest
performing sector, as they were in the first half and third quarter,
with growth of 3.3% and 1.2% respectively. On a full year basis,
constant currency revenue less pass-through costs grew 2.5% with
like-for-like growth 2.6%. Geographically, all regions showed strong
growth, with the United Kingdom and Africa & the Middle East
particularly strong. Cohn & Wolfe, H+K Strategies and the specialist
public relations and public affairs businesses Finsbury, Hering
Schuppener and Buchanan, performed particularly well. Overall operating
margins improved 0.1 margin points to 16.2% and by 0.1 margin points in
constant currency.

Brand Consulting, Health & Wellness and Specialist Communications

Our brand consulting, health & wellness and specialist communications
businesses (including direct, interactive and eCommerce), performed less
well in the fourth quarter with constant currency revenue less
pass-through costs up 0.2%, compared with 6.5% in the third quarter,
with like-for-like down 1.6%, as our healthcare businesses in North
America and some direct, interactive and eCommerce businesses came under
pressure. On a full year basis, revenue less pass-through costs was up
5.6% in constant currency and up 0.6% like-for-like. In brand
consulting, Landor and FITCH performed strongly, and in the direct,
interactive and eCommerce businesses, Wunderman, Hogarth, AKQA, Blue
State Digital, F.biz and Deeplocal performed well. Operating margins,
for the sector as a whole, were down by 1.2 margin points to 14.1% and
down 1.3 margin points in constant currency, with operating margins
negatively affected as parts of our direct, interactive and eCommerce,
brand consulting and healthcare businesses in North America slowed.

Cash flow highlights

In 2018, operating profit was £1.431 billion, depreciation, amortisation
and goodwill impairment £728 million, non-cash share-based incentive
charges £85 million, working capital and provisions inflow £166 million,
net interest paid £162 million, tax paid £384 million, capital
expenditure £375 million, earnout payments £120 million and other net
cash outflows £266 million, principally £235 million gains on disposal
of investments and subsidiaries. Free cash flow available for debt
repayment, acquisitions (excluding earnouts), share buy-backs and
dividends was, therefore, £1.103 billion.

This free cash flow was enhanced by £849 million of proceeds from the
disposal of associates and investments, offset by £289 million in cash
acquisition costs (investments and new acquisition payments), £207
million in share buy-backs and £747 million in dividends, a net outflow
of £394 million. This resulted in a net cash inflow of £709 million.

Free cash flow conversion23 in 2018 was 81%.

A summary of the Group’s unaudited cash flow statement and notes as at
31 December 2018 are provided in Appendix 1.

Balance sheet highlights

Average net debt in 2018 was £4.966 billion, compared to £5.125 billion
in 2017, at 2018 exchange rates. On 31 December 2018 net debt was £4.017
billion, against £4.483 billion on 31 December 2017, a decrease of £466
million (a decrease of £605 million at 2018 exchange rates). The reduced
period end debt figure reflects the benefit of £849 million proceeds in
relation to disposal of our interests in certain associates and
investments, the principal of which were Globant S.A., Imagina, AppNexus
and Bruin. This trend has continued in the first seven weeks of 2019,
with average net debt of £3.954 billion, compared with £4.519 billion in
the same period in 2018, a decrease of £565 million (a decrease of £691
million at 2019 exchange rates).

The net debt figure of £4.017 billion at 31 December, compares with a
current market capitalisation of approximately £10.420 billion ($13.821
billion), giving an enterprise value of £14.437 billion ($19.

Contacts

Mark Read
Andrew Scott
Paul Richardson
Lisa Hau
Chris
Wade
+44 20 7282 4600

Kevin McCormack
Fran Butera
+1
212 632 2235

Juliana Yeh
+852 2280 3790

Richard
Oldworth,
Buchanan Communications
+44 20 7466 5000 +44 7710
130 634

wpp.com/investors

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