LONDON: The board of WPP Group plc (WPP) has announced reportable revenue was down to ?3.908 billion (almost three per cent) in the unaudited results for the calendar year 2002. In 2002 the group's marketing activities represented over 53 per cent of group revenue, a little less than 2001, even as advertising and media investment management revenues were more robust than anticipated.
Also in 2002, MindShare and Mediaedge generated estimated net new billings of ?1,007 million ($1,512 million). Plans continue to be developed to form a worldwide "WPP Media" parent company, probably to be named GMEC and will be implemented shortly.
The following are some excerpts from the statement offered by the board reviewing the operations.
Review of operations
As a result of the worldwide recession, which started in the United States in the fourth quarter of 2000 and the impact of the tragedy of 11 September, the worldwide advertising industry shrank by approximately 5 per cent in 2001, with marketing services also down a similar amount. This sharp downturn affected the United States most significantly, but also impacted Europe, Asia Pacific and Latin America.
The recession continued into 2002, when advertising and marketing services expenditure was probably down again in the low single digits and the downturn has now continued for over two years. The tragic events of 11 September 2001 had a material negative impact on the second half of 2001 and many people (ourselves included) felt that the second half of 2002 might see a relative improvement, particularly given easier comparative figures.
However, further stock market nervousness in the third quarter of 2002 raised additional concerns about corporate profitability, consumer confidence and a possible economic "double-dip", producing a "dead-cat" bounce.
While, as mentioned above, the group has seen a reduction in the rate of decline in each quarter of 2002, with the United States exhibiting revenue growth in the fourth quarter of 2002 for the first time in almost two years, the possibility of an Iraqi conflict has increased levels of uncertainty.
As a result, 2003 will likely be another difficult year, with hopes for a more significant recovery being pinned on 2004 and the positive impact of quadrennial factors such as the United States Presidential Election, political advertising in the United States pushing up media rates, the Athens Olympics and the European Football Championships.
Network television price inflation and declining audiences, fragmentation of traditional media and rapid development of new technologies continued to drive experimentation by our clients in new media and non-traditional alternatives.
1998 was really the first year when WPP's marketing services activities represented over 50 per cent of Group revenue. In 2002 these activities represented over 53 per cent of group revenue, a little less than 2001, as advertising and media investment management revenues were more robust than anticipated.
In addition, in 2002, the group's narrowly defined internet-related revenue was over $300 million or over 2 per cent of its worldwide reported revenue. This compares with approximately 5 per cent for on-line media's share of total advertising spend in the United States and approximately 3 per cent share worldwide. The new media continue to build their share of client spending.
As can be seen, North America and the United Kingdom have been most affected by the recession, with Continental Europe and Asia Pacific, Latin America, Africa and the Middle East least affected.
Estimated net new billings of ?2.4 billion ($3.6 billion) were won last year. The group was ranked first in the absolute net new business billings survey by Credit Suisse First Boston for 2002 and second as a proportion of advertising and media investment management revenues. Revenue and operating profit by communications services sector and brand. The pattern of revenue growth also varied by communications services sector and brand.
As can be seen, public relations and public affairs continued to be most affected by the recession. Branding & identity, healthcare and specialist communications was somewhat affected, with healthcare and direct, a part of specialist communications, being more resilient.
Advertising and media investment management has been less affected than anticipated and information and consultancy has continued to see some limited growth, although it has been increasingly affected by the recession.
Advertising and Media Investment Management
In constant currencies, this sector's revenue grew by 2.5 per cent last year. The combined operating margin (including income from associates) of this group of companies (Ogilvy & Mather Worldwide, J Walter Thompson Company, Y&R Advertising, Red Cell, MindShare and Mediaedge:cia) was over 15 per cent.
In 2002, Ogilvy & Mather Worldwide generated estimated net new billings of ?147 million ($221 million), J Walter Thompson Company ?534 million ($802 million), Y&R Advertising ?212 million ($319 million). Red Cell, which has been strengthened significantly by the addition of new talent, the acquisition of Berlin Cameron and Partners in the United States and the increase in the shareholding in the Batey Group in Asia Pacific, generated estimated net wins of ?52 million ($78 million) excluding the recent assignment of Coca-Cola Classic in the United States.
Also in 2002, MindShare and Mediaedge:cia generated estimated net new billings of ?1,007 million ($1,512 million). Plans continue to be developed to form a worldwide "WPP Media" parent company, probably to be named GMEC and will be implemented shortly.
Information and Consultancy
Although the recession has increasingly impacted the Group's information and consultancy businesses, on a constant currency basis revenues grew 4 per cent in 2002, partly driven by acquisition. Like-for-like revenues were still down less than 1per cent. Despite this overall top line performance, revenues, operating profit and operating margins came under pressure, particularly at Center Partners and Research International.
However, strong performances were recorded by Millward Brown at Greenfield Consulting in the United States, the United Kingdom, IMS in Ireland, MFR and Millward Brown in France, Spain, China and Brazil; and by Research International in Australia, Japan, Singapore, Taiwan, Thailand and South Africa.
Public Relations and Public Affairs
In constant currencies, the group's public relations and public affairs revenue continued to be most affected by the recession, particularly in technology, media and telecommunications, declining by 8 per cent.
Burson-Marsteller, Ogilvy Public Relations Worldwide, Robinson Lerer & Montgomery in the United States, and Finsbury and Buchanan in the United Kingdom performed well.
Following the decline in revenues in 2001, and 2002, the public relations and public affairs businesses reduced their costs significantly and as a result operating margins before associates improved by over one margin point in 2002.
Branding and Identity, Healthcare and Specialist Communications
Again in constant currencies the group's branding and identity, healthcare and specialist communications revenues were flat compared with 2001.
Several of the group companies in this sector performed particularly well:
* In promotion and direct marketing - Wunderman in New York, Chicago and San Francisco in the United States, in Canada, in the United Kingdom, France, Germany, Italy, the Netherlands, Spain and Chile: OgilvyOne in Belgium, France, Germany, Spain, India, Japan, Singapore, Thailand and Mexico.
* In branding and identity - Landor Associates in New York and Cincinnati in the United States; Walker Group and MJM Creative Services in the United States: Lambie-Nairn in the United Kingdom and icon brand navigation in Germany.
* In healthcare - CommonHealth in the United States, Sudler & Hennessey in the United States, MarketForce Communications in Canada, Italy and Melbourne, Australia
* Other specialist marketing resources - The Geppetto Group, Management Ventures, Savatar and VML in the United States and The Forward Group, Glendinning and EWA in the United Kingdom.
Manufacturing
Gross profit was down significantly with operating profit and margins similarly impacted at the group's manufacturing division.
Balance sheet and cash flow
As at 31 December 2002, the group's net debt fell to ?727 million compared with ?885 million at 31 December 2001 (2001 - ?893 million on the basis of 2002 year end exchange rates), following net cash expenditure of ?280 million on acquisitions (including ?94 million of loan note redemptions) and ?76 million on share repurchases.
Net debt averaged ?1,343 million in 2002, up ?509 million against ?834 million in 2001 (up ?521 million at 2002 exchange rates), primarily reflecting the full year impact of acquisitions made in 2001.
These net debt figures compare with a current equity market capitalisation of approximately ?4.4 billion, giving a total enterprise value of approximately ?5.7 billion.
Cash flow strengthened as a result of improved working capital management and cash flow from operations. In 2002, operating profit before goodwill amortisation and impairment was ?450 million, capital expenditure ?101 million, depreciation ?117 million, tax paid ?85 million, interest and similar charges paid ?78 million and other net cash inflows of ?46 million.
Free cash flow available for debt repayment, acquisitions, share buybacks and dividends was therefore ?349 million. This free cash flow was absorbed by acquisition payments and investments of ?281 million, share repurchases and cancellations of ?76 million and dividends of ?56 million.
The company almost fulfilled its recently set objective of covering acquisition payments and share repurchases and cancellations from free cash flow.
In the first six weeks of 2003 up until 12 February, the last date for which information is available prior to this announcement, net debt averaged ?1,095 million versus net debt of ?1,075 million for the same period last year at 2003 exchange rates.
The statement says that the board continues to examine ways of deploying its substantial cash flow of over ?400 million per annum to enhance share owner value. As necessary capital expenditure is expected to remain equal to or less than the depreciation charge, the company has concentrated on examining acquisitions or returning excess capital to share owners in the form of dividends or share buy-backs.
In 2002 the group increased its equity interests, at a combined initial cost of ?105 million in cash, in advertising and media investment management in the United Kingdom, France, Germany, Spain, the Netherlands, Switzerland, Sweden, Finland, the Czech Republic, Slovakia, Australia, New Zealand, China, India, Taiwan, Brazil and the Middle East; in information and consultancy in the United States, Ireland, France, Poland and Thailand; in public relations and public affairs
in the United States, Norway, China, Australia, Japan and Taiwan; in direct and promotion in the United States; and in sports marketing in Germany.
As noted above, your Board has decided to increase the final dividend by 20 per cent to 3.67p per share, taking the full year dividend to 5.40p per share which is four and a half times covered, at the headline earnings level.
In addition, as current opportunities for cash acquisitions may be limited particularly in the United States, the Company will continue to commit to repurchasing up to 2 per cent of its share base in the open market, when market conditions are appropriate. Such annual rolling share repurchases are perceive to have a more significant impact in improving share owner value than sporadic buy-backs.
In light of recent stock market declines and consequent poor equity investment returns, the company has reduced its forecasted weighted average return on United States pension assets from 9.1 per cent to 7.2 per cent and on United Kingdom pension assets from 5.8 per cent to 5.4 per cent.
Further average cash contributions of approximately ?12 to ?13 million per annum would be necessary to fully fund all funded pension schemes over their remaining lives, unless stock markets recover.
Developments in 2002
Including associates, the Group had over 62,000 full-time people in over 1,400 offices in 103 countries at the year end. It services over 300 of the Fortune Global 500 companies, over one-half of Nasdaq 100, over 30 of the Fortune e- 50, and approximately 333 national or multi-national clients in three or more disciplines. More than 130 clients are served in four disciplines and these clients account for over 50 per cent of group revenues. The group also works with over 100 clients in six or more countries.
These statistics reflect the increasing opportunities for developing client relationships between activities nationally, internationally and by function. The group estimates that at least 20 per cent of new assignments in the year were generated through the joint development of opportunities by two or more group companies. New integration mechanisms, including WPP client co-ordinators and country managers, are being developed.
Given the current state of the world economy, WPP group has performed reasonably well, says an official statement. In essence, operating costs, including severance and restructuring costs, have been reduced following the significant fall in like-for-like revenues.
As the group forecasted the general decline in economic conditions relatively early, the consequent focus on matching staff costs to revenues has resulted in a fall in average headcount by over 8 per cent and point-to-point headcount by over 6 per cent. This has been achieved, in part, by a slowdown in recruitment and the impact of the normal attrition rate.
With the recession, the task of eliminating under-utilised property costs continue to be a priority. At the beginning of 2002 the Group occupied approximately 14 million square feet worldwide. By the end of the year, occupancy had fallen to 13.5 million square feet or a 4 per cent reduction. In addition, as a result of actions already taken, a further 1.1 million square feet or an additional 8 per cent will be jettisoned by the end of 2003.
