Review, progress & strategyBy Sir Martin Sorrell, CEO, WPP
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Strategic report
Another record performance in 2016; our strategic priorities; and the outlook for 2017 and beyond
Reports from our company leaders
The leaders of our major companies give summary accounts of their performance and progress in 2016
Directors’ reports
Letters from the chairmen of our Nomination and Governance, Compensation and Audit Committees
WPP’s collective intelligence
Sir Martin Sorrell on turning diverse skills into seamless solutions
For a quick, pre-digested, highly-compressed version of the 2016 Annual Report.
WPP is the world leader in communications services. It comprises leading companies in all these disciplines:
There are more than 160 companies within the Group – and each is a distinctive brand in its own right. Each has its own identity, commands its own loyalty, and is committed to its own specialist expertise. That is their individual strength. Clients seek their talent and their experience on a brand-by-brand basis. Between them, our companies work with 360 of the Fortune Global 500, all 30 of the Dow Jones 30 and 78 of the NASDAQ 100. It is also of greater value to clients that WPP companies and their people can work together, as increasingly they do: providing a tailor-made range of integrated communications services. Some 892 clients are now served in three distinct disciplines. 596 clients are served in four disciplines, and these clients account for over 53% of Group revenues. Group companies also work with 462 clients across six or more countries.
Collectively, over 205,000 people (including associates and investments) work for WPP companies, out of over 3,000 offices in 112 countries.
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To develop and manage talent; to apply that talent, throughout the world, for the benefit of clients; to do so in partnership; to do so with profit.
Within WPP, our clients have access to companies comprising the complete range of advertising and marketing communications services skills: companies with strong and distinctive cultures of their own. WPP, the parent company, complements these companies in several different ways.
Read why we exist
by Sir Martin Sorrell
Horizontality is best described as ‘connected know-how’: a way of working that unites people with diverse skills to deliver seamless solutions for clients. We have made it our strategic priority, because client demand for coordination between the different companies and disciplines within parent groups is growing stronger all the time. We need to continue to do it better than our competitors, several of whom have now woken up to its advantage.
WPP’s 205,000+ individual brains represent the planet’s greatest store of advertising and marketing services insight, expertise, creativity and experience. The more we work together, the more we can draw on that collective intelligence and the more effective we are on behalf of our clients as a result.
Read Sir Martin Sorrell’s article
How ‘personalisation’ can get altogether too personal for comfort
by Jeremy Bullmore
For years, you’ve been unable to do something. Then new technology comes along – and suddenly you can. So you do.
It’s an entirely human instinct – but not one to be thoughtlessly followed. It’s unwise to assume that just because you’re now free to do something from which you were previously debarred, it must be in your interest to grab it. It ain’t necessarily so.
Read Jeremy Bullmore’s essay
Our goal remains to be the world’s most admired, creative and respected communications services advisor to global, multinational, regional and local companies. To that end, we have four core strategic priorities:
Read our Strategic report
2016, our thirty-first year, was another record year, our sixth record year in a row, despite a generally low global growth, or tepid, environment.
Billings*
£55,245m
Reported +16.0% Constant +5.5%
Revenue
£14,389m
Reported +17.6% Constant +7.2%
Net sales*
£12,398m
Reported +17.8% Constant +7.4%
Headline EBITDA*
£2,420m
Reported +20.8% Constant +8.0%
Headline PBIT*
£2,160m
Reported +21.8% Constant +8.5%
Net sales margin*
17.4%
Reported +0.5%1 Constant +0.2%1
Headline PBT*
£1,986m
Reported +22.4% Constant +9.1%
Reported profit before tax
£1,891m
Reported +26.7% Constant +12.5%
Headline diluted EPS*
113.2p
Reported +20.9% Constant +7.7%
Reported diluted EPS*
108.0p
Reported +22.2% Constant +8.5%
Dividends per share
56.60p
Reported +26.7% Constant +26.7%
(% change from 2015 in reported and constant currency)
* Refer to financial summary for additional information.
1 Margin points.
Reported billings were £55.2 billion, up well over 5% in constant currencies, reflecting good overall performance in net new business. Revenue was up well over 17% to £14.4 billion and up over 7% in constant currencies. Net sales were up almost 18% and over 7% in constant currencies. Including 100% of associates and investments, revenue is estimated to total around £19 billion (over $26 billion). Headline PBIT was up almost 22% to £2.160 billion (over £2 billion for the first time) and up well over 8% in constant currencies. Net sales margins increased by 0.5 margin points to an industry-leading 17.4% and, on a like-for-like basis, were up 0.3 margin points, in line with target, adjusted for the merger with STW Communications Group Limited in Australia.
Reported profit before interest and tax rose almost 26% to £2.113 billion from £1.679 billion, up 12% in constant currencies. Headline EBITDA increased by almost 21% to £2.420 billion, up 8% in constant currencies. Headline profit before tax was up well over 22% to £1.986 billion and reported profit before tax was up almost 27% to £1.891 billion. Diluted headline earnings per share rose by almost 21% to 113.2p (an all-time high) and diluted reported earnings per share were up over 22% to 108.0p, both reflecting like-for-like revenue and net sales growth, margin improvement and the benefit of acquisitions, along with the effect of currency tailwinds.
The value of the Group’s non-controlled investments rose to £1.3 billion during the year, from £1.2 billion in 2015, chiefly reflecting the value of its content businesses, primarily VICE and Refinery29, and the Group’s investment in leading media measurement company comScore, which merged with Rentrak in the first half of 2016.
With an equity market capitalisation at the time of writing of approximately £22.2 billion, the total enterprise value of your Company is approximately £27.2 billion, a multiple of 11.3 times 2016 headline EBITDA.
Free cash flow amounted to almost £1.6 billion in 2016. This free cash flow was absorbed by £0.7 billion of net cash acquisition payments and investments, £0.4 billion of share buy-backs and £0.6 billion of dividends, a total outflow of £1.7 billion. This resulted in a net cash outflow of £0.1 billion, before any changes in working capital. Average net debt was therefore £4.3 billion in 2016, compared to £4.0 billion in 2015, at 2016 exchange rates, and net debt at 31 December 2016 was £4.1 billion, against £3.2 billion at 31 December 2015, primarily reflecting the weakness of sterling. This trend has continued in the first two months of 2017, with average net debt of £4.2 billion against £3.8 billion for the same period in 2016, at 2017 exchange rates. The average net debt to headline EBITDA ratio in 2016 remains under 1.8 times, which is almost in the middle of the Group’s target range of 1.5-2.0 times.
Our reported revenue growth for the year was 17.6%, and on a constant currency basis, which excludes the impact of currency movements, revenue was up 7.2%. This difference of 10.4% reflects the weakness of the pound sterling against most currencies, particularly in the second half, following the UK vote to exit the European Union.
On a like-for-like basis, which excludes the impact of currency and acquisitions, revenue was up 3.0%, with net sales up 3.1%. In the fourth quarter, like-for-like revenue was up 0.5%, the weakest quarter of the year, following like-for-like growth well over 6% in the final quarter of 2015, which was that year’s strongest quarter. North America and the UK slowed in the fourth quarter, again partly the result of stronger comparatives, with Western Continental Europe and Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe continuing to perform well. Like-for-like net sales growth was stronger than revenue growth, up over 2% in the fourth quarter, also against a strong comparative in 2015, with all regions, except the UK, showing growth.
North America constant currency revenue was down almost 1% in the final quarter and like-for-like down almost 3%, largely as a result of the particularly strong comparatives in the fourth quarter of 2015, when constant currency revenue grew over 11% and like-for-like revenue was up almost 10%.
Despite the slight slow-down in the rate of revenue growth in the UK, constant currency net sales were up almost 2% in the final quarter, with like-for-like down 0.6%. On a full-year basis, constant currency revenue was up strongly at 5%, with like-for-like up almost 2%, with the second half weaker, perhaps reflecting Brexit uncertainties. Full-year net sales were up well over 5% in constant currency, with like-for-like up over 2%.
For the year, Western Continental Europe revenue grew almost 5% on a like-for-like basis (over 4% in the second half), compared with almost 5% in 2015, with net sales growth of well over 3% like-for-like (almost 3% in the second half), compared to well over 2% in 2015.
In Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, on a constant currency basis, revenue growth in the fourth quarter remained strong at almost 12%, the same as the first nine months growth, with like-for-like up almost 4%, the strongest quarter of the year, and well ahead of the first nine months growth of over 3%.
1 The calculation of headline PBIT is set out in note 31 of the financial statements PDF (1.07MB).
On a like-for-like basis, Advertising and Media Investment Management was the strongest performing sector, with revenue up almost 5% for the year and up almost 1% in quarter four.
Data Investment Management revenue was down almost 2% on a like-for-like basis in the fourth quarter, but more importantly, net sales were up well over 1% on the same basis. On a full-year basis, constant currency revenue was up 0.4%, but down almost 1% like-for-like, with a weaker second half. Net sales, however, showed stronger growth with constant currency net sales up over 3%, up almost 1% like-for-like.
Despite the slower growth in the final quarter, like-for-like net sales in the Group’s specialist Public Relations & Public Affairs businesses were up almost 7% for the year.
At the Group’s Branding & Identity, Healthcare and Specialist Communications businesses (including direct, digital and interactive), constant currency revenue grew strongly at 8% in quarter four, the strongest performing sector, with like-for-like revenue up well over 1%.
For the sixth successive year, WPP was named Creative Holding Company of the Year at the Cannes International Festival of Creativity, in recognition of your Company’s collective creative excellence; for the fifth consecutive year, WPP was ranked Most Effective Holding Company in the Effie Global Effectiveness Index; and, for the third year in a row, WPP was named the World’s Top Holding Company by Warc.
How-were-doing
Roberto Quarta Chairman of the Nomination and Governance Committee Member of the Compensation Committee
Sir Martin Sorrell Chief executive
Paul Richardson Finance director Chairman of the Sustainability Committee
Jacques Aigrain Chairman of the Audit Committee Member of the Compensation Committee
Charlene Begley Member of the Audit Committee and Nomination and Governance Committee
Tarek Farahat Member of the Audit Committee
Sir John Hood Chairman of the Compensation Committee
Ruigang Li Member of the Nomination and Governance Committee
Daniela Riccardi Member of the Nomination and Governance Committee
Nicole Seligman Senior independent director
Hugo Shong Member of the Nomination and Governance Committee
Timothy Shriver Member of the Compensation Committee
Sally Susman Member of the Nomination and Governance Committee
Sol Trujillo Member of the Audit Committee
Jeremy Bullmore
John Jackson
Bud Morten
John Quelch
Richard Rivers
Cuneyd Zapsu
Marie Capes
Read Who runs WPP
The Board of Directors is committed to achieving compliance with the principles of corporate governance set out in the UK Corporate Governance Code and to comply with relevant laws, regulations, and guidelines such as the US Sarbanes-Oxley Act 2002, the NASDAQ rules and, where practicable, with the guidelines issued by institutional investors and their representative bodies.
WPP operates a system of internal control, which is maintained and reviewed in accordance with the UK Corporate Governance Code, COSO and the FRC guidance on risk management and internal control.
Read How we comply
Directors’ Compensation Policy is set by WPP’s Compensation Committee and is governed by three guiding principles:
Read Letter from the chairman of the Compensation Committee
Leading companies – our clients – are prioritising sustainability, looking to integrate improved social and environmental performance into their products, communications and operations. Our commitment to sustainability helps us to align with the interests of our clients and to respond to the growing number of client procurement processes that include sustainability criteria. It makes the Group a more attractive employer, enables us to improve efficiency, to be prepared for changes in regulation and to maintain positive relationships with our stakeholders.
Read Sustainability review
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