Dear share owner
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, your Company was awarded a Cannes Lion for Creative Holding Company of the Year, in recognition of your 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, we have responded to the changing competitive landscape by accelerating the implementation of our strategic goals. Sector targets for faster-growth markets and new media have been raised to 40-45% of revenues over the next five years. We welcome the challenges and opportunities a post-POG (Publicis Omnicom Group) world will bring, if and when it happens.
Your share price rose sharply in 2013 – an increase of over 55% to 1380.0p at year end. Since then, however, the share price has fallen to 1,218.0p at the time of writing, reflecting the weakness in global stock markets over recent weeks. Dividends increased by 20% to 34.21p, a record level. This represents a dividend pay-out ratio of 42% on headline diluted earnings per share, in line with the objective set after the 2013 Annual General Meeting of increasing the dividend pay-out ratio to approximately 45% over the following two years. We are targeting a pay-out ratio of 45% in 2014.
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 margin, or net sales, increased by almost 6% and over 5% in constant currencies. Including 100% of associates, revenue is estimated to total £13.3 billion (almost $21 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 increased by 0.3 margin points to a new high of 15.1% and, on a constant currency basis, were up 0.5 margin points, in line with target.
We are seeing the increasing impact of digital inventory trading, where billings effectively become revenues in comparison to traditional media buying. Revenues are, therefore, likely to grow at a faster rate than gross margin or net sales. On gross margin, the headline PBIT margin was 16.5%, up 0.4 margin points on 2012 and up 0.5 margin points in constant currency. We will increasingly focus on this measure and growth in gross margin, or net sales, as they represent a more meaningful basis for competitive comparisons.
Reported profit before interest and tax rose almost 13% to £1.478 billion from £1.311 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 headline earnings per share were up over 10% to 80.8p (an all-time high) and diluted reported earnings per share rose by almost 11% to 69.6p.
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. 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.
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%. The bonds were well received by investors, with strong demand for both, and will reduce the Group’s funding costs, as well as increase the average maturity of the Group’s debt to almost eight years.
Headline interest cover in 2013 was 8.2 times. So far, in the first two months of 2014, average net debt was down approximately £0.6 billion at £2.3 billion against £2.9 billion for the same period in 2013, at 2014 exchange rates. Our long-term debt is currently rated Baa2 and BBB and our short-term debt P2 and A2, by Moody’s and Standard & Poor’s respectively.
With a current equity market capitalisation of approximately £16.4 billion, the total enterprise value of your Company is approximately £18.7 billion, a multiple of 9.9 times 2013 headline EBITDA.* This strategic report to share owners should be read in conjunction with and as part of the Directors' report and the section headed How we comply.
Chapter 6 of 13