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Penny Machines

oil on canvas
22 x 20 in

Penny Machines
oil on canvas
23¾ x 29¾ in

Stack of Books
oil on canvas
30 x 24 in

Seven Suckers
oil on canvas
19 x 23 in

Twin Jackpots
oil on canvas
30 x 46 in

oil on canvas
20 x 26 in

Cake Slices
oil on canvas
20 x 16 in

Letter to share owners*

Dear share owner

2009, our twenty-fourth year, was a brutal year for both WPP and the communications services industry as a whole. After a difficult first six months, however, the Group adjusted its cost base to falling like-for-like revenues and achieved the same pro-forma operating margins in the second half of the year as in the second half of 2008.

Despite such a difficult year in the real world, total share owner return increased sharply, with your share price rising over 200p, or 50%, to 609.5p from 402.5p during the year, in part due to the recovery of the financial markets.

A year ago, the downturn in the media sector in general weighed heavily on your share price despite the outlook for the wider sector being increasingly less relevant to your Company’s prospects: the many ways in which our business is being transformed by new markets, new media and new capabilities provide major opportunities to enhance our future growth and profitability. Pleasingly, since the year end, your share price has increased a further 96.0p, or 16%, to 705.5p at the time of writing. Dividends were maintained at 15.47p, the same level as 2008.

Billings were up almost 3% to £37.9 billion. Revenues were up over 16% to £8.7 billion. Our revenues exceeded all our competitors for the second consecutive year, by an increasing amount. Headline PBIT margin was 11.7% in 2009 against 15.0% last year (or 14.3% including TNS on a pro-forma basis for the whole of 2008). The Group achieved a Headline PBIT margin of 15.4% in the second half of the year, equal to the margin achieved in the second half of 2008, including TNS, again on a pro-forma basis, and in line with the target set at the time of the Group’s 2009 half-year results announcement. Headline PBIT – that is, profit before goodwill write-downs, amortisation and impairment of acquired intangible assets, investment gains/losses and write-downs, share of exceptional gains/losses of associates, one-off costs of changes to our corporate structure in 2008, finance income/costs, revaluation of financial instruments and taxation (what a mouthful!) – fell 9% to £1,017 million, but was above £1 billion for the second consecutive year.

Headline EBITDA (or headline earnings before interest, taxation, depreciation and amortisation – another mouthful! – which is a key metric that private equity firms, for example, use for valuing companies) fell by less than 4% to £1.2 billion but remained above £1 billion for the fourth consecutive year.

Headline profit before tax was down over 16% to £812 million. Reported profit before tax was down over 11% to £663 million. Diluted headline earnings per share were down 20% to 44.4p and diluted reported earnings per share down over 6% to 35.3p.

Free cash flow remained strong at £618 million. Net debt averaged £3.4 billion in 2009, up exactly £1.0 billion at 2009 exchange rates, reflecting the net acquisition cost and debt acquired of TNS of £1.3 billion and other, smaller acquisitions and earnout payments. Equity analysts appear comfortable with the level of the Group’s average net debt, which was around 2.8 times headline EBITDA in 2009. Questions from institutions and analysts have shifted from concerns about debt levels at the beginning of the year, to questions at the end of the year about what we will do with our borrowing capacity, as net debt falls. Net debt at 31 December 2009 decreased to £2.6 billion compared with £3.1 billion last year, reflecting improved cash flows. Headline interest cover in 2009 was 5.0 times. So far, in the first three months of 2010, average net debt was down over £300 million at £2.9 billion against £3.2 billion for the same period in 2009, at 2010 exchange rates, again reflecting strong cash flows.

With a current equity market capitalisation of approximately £8.9 billion, the total enterprise value of your Company is approximately £12.1 billion, almost 10.0 times headline EBITDA.

This letter to share owners should be read in conjunction with and as part of the management report set out in the section headed Directors' report.

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