Annual Financial Report

RNS Number : 3830R

WPP PLC

29 April 2009

 



For Immediate Release

29 April 2009

Annual Financial Report

WPP plc ('WPP')

Annual Report and Accounts 2008 and associated documents

In accordance with Listing Rule 9.6.1 R, WPP plc has today submitted two copies of the Annual Report and Accounts for the year ended 31 December 2008, Notice of Annual General Meeting 2009 and Form of Proxy to the UK Listing Authority and these documents will shortly be available at its Document Viewing Facility which is situated at:

Financial Services Authority

25 The North Colonnade
Canary Wharf
London
E14 5HS
Telephone: [phone]

Copies of the Annual Report and Accounts for the year ended 31 December 2008 and the Notice of Annual General Meeting 2009 will also shortly be available to view on WPP's website: www.wpp.com.

In accordance with Disclosure and Transparency Rule 6.3.5(2)(b), certain additional information extracted in unedited full text from the Annual Report and Accounts is set out in the appendices to this announcement.

Appendices

Appendix 1: Management report information

The letter to share owners, which is set out on pages 18 to 28 of the Annual Report, and Accounts includes the following indication of important events that have occurred during the financial year and their impact on the financial statements:

Letter to share owners*

Dear share owner

WPP's twenty-third year was in many ways another record year despite the financial catastrophes of 2008. Our performance conformed in many respects to the financial model we have developed, with both revenues and headline profits rising in the 5-10% range on a constant currency basis. 

Despite these record results, disappointingly, total share owner return declined, with your share price falling over one-third from 647.0p to 402.5p during the year, principally due to the chaos in the financial markets. Dividends, however, rose 15% to 15.47p. Since the year end, your share price has increased to 419.0p at the time of writing. Given the considerable management share ownership in your Company, management has shared that pain, which has not been reduced by issuing options to senior management at bargain-basement prices or re-pricing old ones.

In October 2008, the Company successfully completed the acquisition of Taylor Nelson Sofres plc (TNS), a major information, insight and consultancy group, operating in over 80 countries with almost 17,000 people worldwide.  Our results include the contribution of TNS for the last two months of the year. 

Billings were up over 16% to £36.9 billion. Revenues were up almost 21% to £7.5 billion. Headline PBIT margin was flat at 15.0% against a target of 15.3%, including TNS. Headline PBIT - that is, profit before goodwill write-downs, investment gains and write-downs, amortisation and impairment of acquired intangible assets, share of exceptional gains/losses of associates, one-off costs of changes to our corporate structure, finance income/costs and taxation (what a mouthful!) - was up over 20% to £1,118 million, crossing £1 billion for the first time. 

Headline EBITDA (or headline earnings before interest, taxation, depreciation and amortisation, which is a key metric that private equity firms, for example, use for valuing companies) rose over 20% to £1.3 billion. 

Headline profit before tax was up over 18% to £968 million. Reported profit before tax was up almost 4% to £747 million, reflecting goodwill and investment write-downs. Diluted headline earnings per share were up over 21% to 55.5p and diluted reported earnings per share down 1% to 37.6p, again reflecting goodwill and investment write-downs. 

Free cash flow remained strong at £777 million. Net debt averaged £2.2 billion in 2008, up just over £600 million at 2008 exchange rates, principally reflecting the net acquisition cost of TNS and other, smaller acquisitions. Net debt at 31 December 2008 was £3.1 billion compared with £1.3 billion last year. Headline interest cover in 2008 was 7.5 times. In the first two months of 2009, average net debt was £3.2 billion, the seasonal cash outflow at this time of year remaining the same as last year. With a current equity market capitalisation of approximately £5.3 billion, the total enterprise value of your Company is approximately £8.5 billion. 

Following our 2008 results, our listed debt has maintained investment grade status with the rating agencies (Moody's and S&P). Equity analysts also appear comfortable with average net debt levels of around 2.5 times headline EBITDA. This would equate to approximately £3.5 billion based on a pro forma 2008 EBITDA, including TNS for a full year. 

A tale of two halves

Our reported revenue growth of almost 21% reflected the strength of the euro and US dollar against sterling, as well as the impact of TNS. On a constant currency basis, which excludes the impact of currency movements, revenues were up 9.0%. On a like-for-like basis, excluding the impact of acquisitions and currency, revenues were up 2.7%. Revenue, including 100% of associates, is estimated to total over £8.9 billion.

2008 was largely a year of two contrasting halves. A strong first half (although second-quarter growth wobbled a little), with like-for-like growth of 4.3%, which compares with overall growth of 5.0% for 2007, and a weaker second half with slowing organic growth of 1.4%, as the impact of the sub-prime and insurance monoline crises, that started towards the end of 2007, was intensified by the collapse, emergency acquisition and restructuring of financial institutions in many parts of the world. 

Revenue growth slowed as the year progressed: on a like-for-like basis, growth of 4.8% in the first quarter slowed to 3.8% in the second, 3.0% in the third and then flattened to 0.1% in the final quarter of the year. However, we suffered less in the final quarter than some of our major competitors, who experienced negative overall growth. This trend will continue in the immediate short term: our own budgets prepared late last year indicate a like-for-like revenue decline of 2% for 2009, whilst more recent forecasts for the advertising industry as a whole indicate a decline of 4% or more, so we expect to continue to increase market share in spite of the downturn. Our total revenue in 2008 surpassed that of all our competitors, regaining the No.1 position for the third time.

Like-for-like revenue growth was positive across all regions other than North America, which was almost flat, although revenues in the fourth quarter were stronger than forecast. There were conflicting trends in North America as, on the one hand, smaller businesses may be more rapidly affected by the recession and, on the other hand, FMCG companies may be maintaining their brand investment spending, even in more difficult times.

*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 on pages 107 to 137. 

Asia Pacific, Latin America, Africa and the Middle East continued to be the fastest-growing of our geographic regions, with Africa and the Middle East being the fastest-growing sub-region. Asia Pacific remained strong across the region, with mainland China up almost 9% and India up 21%, although Japan and Australia were weaker. Continental Europe and the UK, although suffering from the deterioration in economic conditions, both grew over 2% like-for-like. In 2008, Continental Europe remained two-paced, with Western Continental Europe softer and Central and Eastern Europe, Russia and the other CIS countries, in particular, more buoyant. Of the big five Western European markets, Spain and Italy were weakest, France and Germany were stable and the UK was stronger. 

Markets outside North America now account for over 65% of our revenues, up from 62% in 2007 and 58% five years ago. The influence of the faster-growing markets outside North America and Western Europe is increasing rapidly.

Strongest growth in public relations and media

Growth was encouraging across all communications services sectors - Advertising, Media Investment Management, Information, Insight & Consultancy, Public Relations & Public Affairs, Branding & Identity, Healthcare and Specialist Communications - although this last sector lagged the others, particularly in the second half of the year.

Public Relations & Public Affairs was the fastest- growing communications services sector with constant currency revenue up 6.9% and like-for-like growth of 4.9%. Particularly strong were Hill & Knowlton, Burson-Marsteller, Ogilvy Public Relations Worldwide and Clarion in the UK. Overall operating margins for this sector remained flat at 16.6%.

New technologies and new media have, once again, demonstrated the power of editorial publicity through fast-growing new services such as MySpace, YouTube, Facebook, Flickr and Wikipedia, along with the risks and difficulties of making money on social networking sites through advertising, as even experts like Facebook have found on two occasions. In addition, Public Relations & Public Affairs have benefited from the impact of polling techniques, which have provided a more scientific basis for the industry. What you know is becoming more important than who you know. 

Advertising and Media Investment Management revenue grew by over 4% in constant currencies and by 3.6% on a like-for-like basis. Operating margins rose by over 1 margin point to 17.5%.

In 2008, Ogilvy & Mather Worldwide, JWT, Y&R Advertising, Grey and United generated estimated net new billings of £865 million ($1.6 billion). GroupM, the Group's media investment management company, which includes Mindshare, Mediaedge:cia, MediaCom and Maxus, generated estimated net new billings of £1.3 billion ($2.4 billion).

Information, Insight & Consultancy continued to show resilience in difficult economic conditions. On a constant currency basis, revenues grew 27.8%, largely as a result of the acquisition of TNS, with like-for-like revenues up 3.0%. Gross margin grew by 2.9% on a like-for-like basis. Overall operating margins fell by 0.2 margin points to 11.3%. This part of the industry certainly seems to have a lower 'beta', growing less rapidly in the upturn and more steadily in the downturn. 

Branding & Identity, Healthcare and Specialist Communications was the slowest-growing segment of our business as the significant growth in direct, digital and interactive services was overpowered by slower growth in Healthcare and Specialist Communications. Revenues rose by 7.6% in constant currency and were marginally higher on a like-for-like basis. The Specialist Communications segment of our business includes a number of smaller companies, largely in the US and Western Europe, which have particularly felt the impact of the recent slow-down and recession. As a consequence, operating margins were down by 1.6 margin points to 12.6%. 

Marketing services rose to almost 56% of our revenues in 2008, up from 54% in 2007, due to strong growth in Public Relations & Public Affairs and the impact of TNS on Information, Insight & Consultancy. This proportion should increase to around 62% in 2009, reflecting a full year's contribution from TNS. It is no longer accurate to call us an advertising agency.

Profits up; margins firm

Headline PBIT margins remained at 15.0%, slightly down from the target margin of 15.3% for 2008, on the same basis, including TNS for two months, 0.2 margin points up on 2007 on the same basis. 

The Group's like-for-like headcount continued to grow faster than like-for-like revenue growth in the first half and third quarter, although this did not have a significant negative impact on achieving the Group's operating margin target of 15.5% (excluding TNS) and 15.3% (including TNS), until the 'Beijing bounce', anticipated in the Group's budget and reforecasts for the third quarter of 2008, failed to materialise. In the fourth quarter, better than anticipated revenue growth (also better than some competitors'), combined with decisive action to reduce like-for-like headcount growth, improved relative performance. The average like-for-like headcount growth for the year of 3.9%, contrasted sharply with the year end like-for-like headcount growth of 1.3%, as headcount fell through a mixture of non-replacement, the attrition rate and increased severance.

Incentive payments (including the cost of share-based compensation) fell by over 7% to £214 million from £231 million. Excluding these incentive payments, headline PBIT margins remained strong at 17.8%. Incentives represented almost 17% of headline operating profit before bonuses and income from associates, against almost 21% in 2007. Our objective remains to pay out approximately 20% at maximum and 15% at target, so our performance against our objectives is clear. 

Part of the Group's strategy is to continue to ensure that variable staff costs (freelancers, consultants and incentive payments) are a significant proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slow-downs. In 2007, the ratio of variable staff costs to total staff costs fell marginally by 0.3 percentage points to 12.7% and in 2008 to 11.4%. As a proportion of revenue, variable staff costs were 7.4% in 2007 and 6.6% in 2008. These variable staff costs provide a 'shock absorber' to operating margins as revenues come under increasing pressure. We estimate that at least half of these variable staff costs can be reduced in the course of a recession. There is, therefore, a potential buffer of around 3 margin points.

On a reported basis, the Group's staff cost-to-revenue ratio improved slightly to 58.2%.

As a result of all this, headline PBIT rose to £1,118 million (almost $2 billion), up over 6% in constant currencies. Although 2008 was a successful year overall, some of our first-generation businesses continued to suffer, resulting in a combined goodwill and investment write-down of £115 million compared to £44 million in 2007. Reported PBIT, therefore, fell by 6% in constant currency to £922 million.

Net finance costs (excluding the revaluation of financial instruments) were £150 million, up from £111 million last year, reflecting higher interest rates and increased average net debt due to cash spent on acquisitions, including TNS. Reported pre-tax profits, therefore, declined by over 13% in constant currency to £747 million, although still above $1 billion for the fourth consecutive year. 

The Group's tax rate on headline profit before tax was 25.3%, the same as 2007. Diluted headline earnings per share were up 5.5% in constant currency to 55.5p and diluted reported earnings per share were down over 18% on the same basis to 37.6p. Share owners approved the proposed change in tax domicile to Ireland in November 2008 with an unprecedented vote. Over 64% of our share owners voted and of those 99.5% voted in favour, a turnout and positive vote which has not been achieved by your Company before in similar situations.

TNS joins the Group, at last

TNS is a company whose people, brands and work we have long admired competitively and it will add significant value to the Group. TNS is a market leader in Continental Europe with strong positions in the UK, Asia and the Middle East and is a major supplier of consumer panel, media intelligence and TV and radio audience measurement data. It is competitively strong in key industries, including automotive, technology, healthcare and retail and packaged goods.

The combination of TNS and the other companies within Kantar - the Group's Information, Insight & Consultancy business - has created the second-largest global insight, information and consultancy group and the fourth-largest information services company in the world, after Thomson Reuters, Nielsen and Bloomberg. This combination now provides leading positions in shopper research and marketing, Media (outside of the US), Healthcare, Communications and Innovation. In a recently announced reorganisation, TNS Custom Research has now been merged with Research International and four specialist research units have been formed - Kantar Media, Kantar Healthcare, Kantar Retail and Kantar Worldpanel. 

TNS performed well in line with its revenue and profit forecast at the time of its acquisition. Our estimates of synergy benefits are being met and in fact being exceeded. The cost benefits identified will also be realised sooner than originally anticipated and the cost ratios will be in line with our original projections. Integration has gone well so far and the new organisational structure for the combined Kantar and TNS has been implemented. The cost of the acquisition of TNS including debt was £1.6 billion and was funded principally by debt. Our goal remains that the return on capital from TNS will exceed the cost of capital within three years from the date of acquisition.

Industry prospects in 2009 and 2010

Although the US Presidential Election, the Beijing Olympics and the UEFA football championship had the usual positive maxi-quadrennial effect on client spending in 2008, worldwide advertising and marketing expenditures only rose about 2-3% in the year.

Despite the overall slow-down in the industry growth rate, three engines of relative growth remained. Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, iconically represented by the BRICs and those of the Next 11 markets where we are present (Bangladesh, Egypt, Indonesia, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam), continued to grow faster and now represent almost 27% of the Group's approximately $15 billion pro-forma (including TNS) revenue. As did new media and the application of technology in the form of internet, PC, mobile, video content and social networks, which now account for almost 25% of Group revenues. And finally, as did consumer insight and Information, Insight & Consultancy, which now account for almost 27% of Group revenues, on a proforma basis.

As the first year of the quadrennial cycle, there are no mini- or maxi-quadrennial events in 2009 to boost client spending. It is true that 2009 was always likely to be a weaker year, but the unprecedented current financial crisis has triggered a vicious recession across the globe. Our budgets for 2009 initially indicated flat like-for-like revenue growth, but revenue out-performance in the fourth quarter of 2008 versus forecast and the prudent addition of further budgeted revenue contingencies, resulted in final budget revenues for 2009 being down 2% like-for-like, with relative decreases in costs. GroupM forecasts that global advertising spending (equivalent to approximately 40% of the Group's revenues) will fall by over 4% in 2009 versus 2% growth in 2008.

The first half is budgeted to be weaker than the annual average, with a relative improvement in the second half, partly due to weaker comparatives in the second half of 2008. 

Geographically, there are relatively brighter spots budgeted in Asia Pacific, Latin America and the Middle East, reflecting the continued relative strength of the BRIC (or more accurately BIC) and Next 11 markets. Central and Eastern Europe, as a whole, remains relatively softer, as Russia is under extreme pressure, exacerbated by the falls in the oil price and the rouble, although we expect Russia to recover quickly, when the oil price does. Discipline is already being restored. The US and Western Europe remain relatively weaker, with recession biting hardest there and in Southern Europe. 

There are similar differences functionally. Media Investment Management, Information, Insight & Consultancy, Public Relations & Public Affairs, Healthcare Communications and direct, digital and interactive show relative strength, whilst Advertising, Branding & Identity and Specialist Communications remain under the greatest pressure.

Incentive plans for 2009 will place increased emphasis on operating margins in conjunction with operating profit growth, although objectives will continue to include improvements in staff costs-to-revenue ratios and qualitative Group objectives, including Group co-ordination and co-operation, talent management and succession planning. 

At the time of writing, we have revenue and profit data for the first two months of 2009 and this does show a difference in the trend of revenues against last year, although operating profits were better than budgeted. The first two months of 2008 were, in any event, relatively strong months for like-for-like revenue growth, at almost 6%.

Revised margin objectives

Operating margins for 2009 are targeted to be flat at 14.3%, including a full year of TNS, equivalent to the 15.0% achieved in 2008. Operating margin targets have, therefore, been reset at 14.8% for 2010, equivalent to 15.5%, pre-TNS. In the longer term, we continue to believe we can improve our operating margin to over 18% including TNS, equivalent to the previous target of 19%, excluding TNS. This is challenging, of course, but not so outrageous as some believe, given that our best-performing companies in each services sector already perform at a combined Group margin of 17%.

A recovery of sorts in 2010?

Although the economic gloom has heightened recently, with further earnings disappointments, surprise dividend cuts, continued financial restructurings and rights issues, we still believe there will be a recovery of sorts in 2010, partly driven by weak comparatives, as the effects of massive Keynesian fiscal injections, quantitative easings and interest rate reductions take hold. These already approximate to $13 trillion or approximately 20% of worldwide GDP of $64 trillion.

2010, a so-called mini-quadrennial year, should also benefit from the impact on client spending on the Winter Olympics in Vancouver, the FIFA World Cup in South Africa and the mid-term Congressional elections in the US. China, especially, also may see stronger growth due to the impact of the Shanghai Expo and the Asian Games in Guangzhou.

The more interesting question, probably, is how the West in particular will emerge from the current crisis and reduce the colossal government deficit needed to fund the early stage of the recovery. There seem to be two possible routes. First, the more prudent and painful - reduce government spending, increase taxes and unemployment and learn to save again. Secondly, inflate our way out of the problem and continue to spend and lend, with significant resultant increases in inflation and long-term interest rates.

Given the politically unpleasant implications of the first route and imminent general elections in the UK and Germany and mid-term Congressional elections in the US, the second course is more likely. As a result, those countries that are capital rich and have saved - like Brazil, China, India, Japan and eventually, when the oil price rises again, Russia - will benefit even more. And the Group's strategic focus on the BRICs and Next 11, on the new media and on consumer insight, will benefit even more.

There is also evidence in recent years of a growing focus on top-line growth. Given a low-inflationary environment, limited pricing power and more concentrated retail distribution, clients are increasingly coming to the view that there is only one long-term way to compete - through innovation and branding. Promote on price and you create commodities. Innovate and differentiate, you create brands and the right to demand a premium from the consumer.

There is a growing realisation that cutting costs alone will not deliver growth targets promised to Wall Street and the City of London. There is a limit to cost reduction, but no ceiling on top-line growth - at least until you reach 100% market share. Reinforcing this trend, strategic advisors, such as management consultants like McKinsey and Bain, counsel a switch in focus from costs to revenues. Corporate strategic plans are increasingly concentrating on managing for growth, as well as managing for value.

Beyond the financial crisis

In the long term, the outlook for the advertising and marketing services industry appears favourable. Increasing globalisation, overcapacity of production in most sectors and the shortage of human capital, the developments in new technologies and media, the growth in importance of internal communications, the need to influence distribution, the new focus on corporate responsibility issues such as climate change and the focus on global and country organisational structures, underpin the need for our clients to continue to differentiate their products and services, both tangibly and intangibly. 

Moreover, the continuing growth of the BRICs, Next 11 and other faster-growing geographical markets, will add significant opportunities in Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe - along with the growth of 'new BRICs' such as Vietnam, Pakistan, Indonesia and Bangladesh. Advertising and marketing services expenditure as a proportion of gross national product should eventually resume its growth. In these difficult times, meanwhile, we are committed to working with our clients to improve the effectiveness (quality) and efficiency (cost) of their spending.

Given these short- and long-term trends, your Company believes it has the right strategic priorities - new markets, new media and consumer insights. 

Including associates, the Group had over 135,000 full-time people in 2,400 offices in 107 countries at the year end. It services 345 of the Fortune Global 500 companies, 29 of the Dow Jones 30, half of the NASDAQ 100, 33 of the Fortune e-50, and over 700 national or multinational clients in three or more disciplines. More than 440 clients are served in four disciplines and these clients account for over 58% of Group revenues. The Group also works with over 310 clients in six or more countries.

These statistics reflect the increasing opportunities for developing client relationships between activities nationally, internationally and by function. We estimate that over 35% of new assignments in the year were generated through the joint development of opportunities by two or more Group companies. New integration mechanisms, sensitive to global and local opportunities, including WPP Global Client Leaders and Country Managers, continue to be developed. There is an increasing number of major client creative and integration opportunities at a Group level. 

The Group continues to be extremely successful in most, if not all, of the integrated marketing competitions that clients are increasingly initiating. It is very rare for us not to reach the final round, at least. These opportunities range from the creation of teams across the Group to the integration of various operating units and to the creation of individually tailored agencies to meet clients' needs. The Group's integration record leads its competitors by a considerable distance.

Our key priorities

Our reason for being, the justification for WPP's existence, continues to be to add value to our clients' businesses and our people's careers. Our goal remains to be the world's most successful provider of communications services to multinational and local companies, not just the largest. To that end, we have three key strategic priorities.

1 First, our immediate priority is to weather the current financial crisis successfully. Compared with the last downturn, our people are stronger: they are better resourced, motivated and incentivised than when we exited the last recessions in the early 1990s and 2000s. The Company is also more profitable, more liquid and better structured. In the most recent economic cycle, margins peaked at 14.5% and bottomed at 12.3%, as opposed to 10.5% and 5.6% the previous time. 

2 Second, in the medium term, to build upon the successful base we have established with the acquisitions, for example, of TNS, Young & Rubicam Brands and Grey. At Grey, the new management structure is now in place and the planned integration is now completed. Grey Advertising still needs to raise its game in terms of revenue growth and ghg needs to overcome the impact of FDA non-approvals on products that clients have assigned to them. At Young & Rubicam Brands, our plans are also largely implemented, the one remaining task being to continue to strengthen the Y&R advertising agency, although the business is showing increased strength following the change in leadership two years ago.

3 Our third priority, in the long term, or over the next five to 10 years, is to:

• increase the combined geographic share of revenues from the faster growing markets of Asia Pacific, Latin America, Africa and the Middle East, and Central and Eastern Europe, from around 27% to one-third.

• aim to increase the share of revenues of marketing services from around 62% now (including TNS on a full year basis) to two-thirds.

• increase the share of more measurable marketing services - such as Information, Insight & Consultancy (or consumer insight), and direct, interactive and internet - from around 40% of our revenues to 50%.

Our six specific objectives

1 Continue to raise operating margins to the levels of the best-performing competition.

2 Continue to increase flexibility in the cost structure.

3 Improve total share owner return.

4 Continue to enhance the contribution of the parent company.

5 Place greater emphasis on revenue growth.

6 Further improve the quality of our creative output.

Our six objectives are summarised below, together with an assessment of how we performed against them in 2008. These objectives represent our key performance indicators (KPIs).

1 First, to continue to raise operating margins to the levels of the best-performing competition. 15% has been achieved for two consecutive years. 19%, or over 18% post-TNS, is much tougher, but not out of the question. BBDO, Dentsu and McCann have done so historically, although the pressure became too great in some instances.

2 Second, to continue to increase flexibility in the cost structure. Great strides have been made in recent years. Peak flexibility historically was in 2000, when variable staff costs made up 6.6% of revenues. At 7.4% in 2007, 7.7% in 2006, 7.6% in 2005 and 7.8% in 2004, we have seen new peaks; and once again we have a sufficient 'shock absorber' in our cost structure for when revenue growth weakens, as it will do as a result of the current financial crisis. The decrease to 6.6% in 2008 illustrates the value of this flexibility as revenue growth started to tail off in the year, yet we were able to maintain an operating margin in line with the prior year. 

3 Third, to improve total share owner return by maximising the return on investment on the Company's almost £800 million (or $1.2 billion) free cash flow. There are broadly three alternative uses of funds: 

• Capital expenditure, which usually approximates the depreciation cost. Pressure here has eased as technology pricing has fallen, although we are investing more in real estate following lease renewals, particularly in New York, to secure greater efficiencies. 

• Mergers and acquisitions, which have historically taken the lion's share of free cash flow. Here we have raised the hurdle rate on capital employed so that our return on capital may be increased. Even so, there are still interesting opportunities, particularly outside the US, where pricing remains lower, despite the recent financial crisis, and where there is a closer fit with the Company's strategic objectives. Private transactions remain more attractively priced at single-digit price-earnings multiples. 

Our acquisition focus in 2008 was again on the twin opportunities of faster-growing geographic markets and new technologies, totally consistent with our strategic objectives in the areas of geography, new communication services and measurability. 

• Dividends or share buy-backs. We were the only FTSE 100 company to consistently increase its dividend by 20% per annum for the 10 years up to 2007. In 2008 we increased the dividend by 15%. Given dividend cover of four times headline earnings and a dividend yield of over 1% in recent years (although current yields are in excess of 4%), we believe we can continue to increase the dividend. A rolling share buy-back program appears to offer a more significant benefit to total share owner returns. In 2007 we boosted the target level of the share buy-back program from 2-3% of the outstanding share capital to 4-5%, spending over £400 million in that year on buy-backs. In the first half of 2008, we bought back almost 19 million shares, equivalent to 1.6% of share capital, at a cost of £112 million, but then withdrew from the market during the TNS bid process. 

For the two years following the acquisition of TNS, we will limit our share buy-back program to a target of 1% of share capital per annum and dividend growth at 15% per annum, subject to review by the Board. We expect these actions, together with a reduced level of acquisition spend (targeted at £100 million per annum), to generate surplus cash and a reduction in borrowing levels.

4 Fourth, we will continue to enhance the contribution of the parent company and build unique integrated marketing approaches for clients. WPP is not just a holding company focused on planning, budgeting, reporting and financial issues, but a parent company that can add value to our clients and our people in the areas of human resources, property, procurement, information technology and practice development. We will continue to do this through a limited group of 300 or so people at the centre in Dublin, London, New York, Hong Kong and Shanghai. This does not mean that we seek to diminish the strength of our operating brands. Our objective is to maximise the added value for our clients with their businesses and our people with their careers. 

Many of our initiatives are possible because of the scale on which we now operate. In the optimum use of property, in information technology and in procurement generally, we are able to achieve efficiencies that would be beyond the reach of any individual operating company. 

But it is also clear that there is an increasing requirement for the centre to complement the operating companies in professional development and client co-ordination. It is a relatively recent development for certain multinational marketing companies, when looking to satisfy their global communications needs, to make their initial approach not to operating companies but directly to parent companies. 

Such assignments present major, and increasingly frequent, opportunities for the few groups of our size. It is absolutely essential that we have the professional resources and the practice development capability to serve such clients comprehensively, actively and creatively. The recent high-profile, high technology pitch (that we won against all our competitors), to build a totally new agency for that client's needs, is the most extreme and exciting (and difficult) example of this. Similar initiatives involving some of the world's largest marketers continue to gain momentum. 

All our clients, whether global, multinational or local, continue to focus on the quality of our thinking, co-ordination of communications, and price. In response, we focus on talent, structure and incentives. 

Training and development

Talent and its management therefore remain the lynchpin of our reason for existence: that is what our clients pay us for. Development of our people and the way we manage that talent is a critical determinant of performance; and on that critical dimension, we continue to make significant progress.

In the creation of extremely attractive working environments, with highly competitive incentives, we increasingly differentiate ourselves from our competitors and improve the attraction of WPP companies as destinations for talent. Our quarterly reviews with the operating companies have been restructured, consequently, to give more time and attention to talent and to clients. Our recruiting efforts throughout 2008 were especially fruitful, as we successfully targeted and attracted top talent within and beyond our industry, often competing with investment banking, management consulting and private equity offers. The war for talent is fierce and there is more to be done.

The blueprint for our executive development curriculum has been completed and our new client leadership training program, Maestro, has been successfully introduced. The parent company and each of our operating companies installed its own approach to performance assessment and succession planning, aimed at developing the careers of their people, improving the quality of feedback, coaching and mentoring and providing for orderly succession. We continued to scrutinise and modify our compensation practices, both to offer competitive and appropriately-based rewards to our people and to attract outstanding talent from elsewhere.

Communications

A communications services company must be a model of excellent external and internal communications. To that end, we accelerate the understanding of the Group's vast resources with a raft of regular communications through our websites and in print: our online FactFiles profiling Group resources/companies/products; our monthly public online news bulletin, e.wire; our award-winning global newspaper, The WIRE, voted best internal newspaper globally at the recent LACP Inspire awards; our annual Atticus Journal of original marketing thinking; The WPP Reading Room, an extensive online library of thinkpieces (both public and original) from WPP professionals worldwide; our annual Corporate Responsibility Report; and this consistently-award winning Annual Report.

Property management

In property management we continue to optimise our real estate portfolio through the award-winning WPP Space Program, with investment in property databases and systems, innovative design and a continuous review of our key locations. This has enabled us to hold the increase in square footage in our portfolio to 5% p.a. over the last three years, while for the same period, revenue (excluding the impact of currency) increased by 6% p.a. As a result, average square foot per head is down 8% from 236 sq ft in 2006 to 218 sq ft in 2008. 

We have achieved the medium-term objective of a 7% establishment cost-to-revenue ratio set in 2002, when the same ratio was 8.4% and our future priority in managing the property portfolio of approximately 19 million sq ft worldwide is to ensure growth in additional square footage is far less than the growth in revenues and headcount.

In the short term our objectives will be to manage our lease expiries so that we can reduce our portfolio in line with any short-term reductions in headcount and revenue.

Procurement

In procurement, we continue to set ourselves the goal of being the undisputed leader of procurement practice in the global advertising and marketing services industry. 

We aim to benchmark ourselves regularly against our competitors and our clients. Through intensified investment in procurement people, processes and technology, our goal is to maintain the ratio of bought-in costs-to-revenue at around 15%, by leveraging Group scale across all of our major markets, and focusing on those spend categories most favourable for global, regional and local supply contracts, such as in IT, telecoms, travel, professional services, facilities and production.

IT

In IT we continue to consolidate our core technology infrastructure with the objectives of reducing cost and improving quality. This enables our operating companies to concentrate their efforts on client-related developments and other internal business-focused applications. 

The convergence of mobile, voice and data communications has allowed us to take advantage of new offerings in the telecommunications sector to drive efficiencies and to provide enhanced support to our increasingly mobile workforce.

Practice development

Finally, in practice development we continue to develop horizontal initiatives in a focused set of high-potential areas across our vertical operating brands: in media, healthcare, new technologies, new faster-growing markets, internal communications, retail, entertainment and media, financial services, hi-tech and telecommunications and corporate responsibility. Specifically, we continue to invest in sharing insights and developing initiatives through The Channel (in media and research) and The Store (in distribution and retail). 

In key geographic markets we are increasingly co-ordinating our activities through WPP Country Managers. We continue to believe that increasing co-ordination is required between our brands at the country and global levels, as the arguments for investment in regional management become weaker. As experience in Italy has demonstrated, however, the activities of Country Managers must be closely aligned and monitored. In addition, we are appointing an increasing number of WPP Global Client Leaders to co-ordinate our efforts on behalf of clients and to ensure they get maximum benefit from their relationships with WPP operating brands. We are focused currently on our top 30 global clients, which last year grew revenues at 3.6% on a like-for-like basis.

Furthermore, we continue to encourage internal strategic alliances and promote co-operation. Practice development initiatives have therefore been reinforced in such areas as healthcare, retail, internal communications and media and entertainment. This has been especially important to manage our portfolio of direct investments in new media, including 24/7 Real Media, under WPP Digital, and where our investments are working with our agencies and people to bring new technology capabilities and understanding to our clients. All these initiatives are designed to ensure that we, the parent company, really do (as well as being perceived to) inspire, motivate, coach, encourage, support and incentivise our operating companies to achieve their strategic and operational goals.

Growing our revenues

5 Fifth, to continue to place greater emphasis on revenue growth. One legitimate criticism of our performance against the best-performing competition is our comparative level of organic revenue growth. 2000 was a bumper year but unsustainable. In 2001, we disappointingly moved back into the middle of the pack. But there was a significant revival in 2002 and 2003, when we were one of only two of the major companies that showed revenue growth. 2004 was punctuated with a number of high-profile wins, resulting in the second strongest organic growth performance in the industry, and 2005 and 2006 saw strong growth again among the leaders in the industry. New business wins in 2007 were unprecedented in the history of WPP, and revenue growth again impressed against the competition, particularly the Big Four. 

In 2008, revenue growth trailed a little behind our major competitors, although the fourth quarter held up better than the competition. Estimated net new billings of £2.9 billion in 2008 reflected a consistently high level of wins throughout the year. The Group was ranked first in two of the three major industry new business surveys in 2008 and was, therefore, the leading group overall in new business acquisition, excluding re-appointments, as is the industry convention.

Our practice development activities are also aimed at helping us position our portfolio in the faster-growing functional and geographic areas. So far in 2009, the Group has made acquisitions or increased equity interests in Advertising and Media Investment Management in Italy and South Africa; in Information, Insight & Consultancy in the UK and US; in direct, internet and interactive in France, South Africa, the US and Vietnam.

These acquisitions continue to move us forward to our previously described strategic priorities; expanding the market shares of our businesses in Asia Pacific, Latin America, Africa and the Middle East to one-third; in marketing services to two-thirds; and in Information, Insight & Consultancy, direct and interactive, to one-half.

We intend to expand our strong networks - Ogilvy & Mather, JWT, Y&R, Grey, United Network, Bates 141, Mindshare, Mediaedge:cia, MediaCom, TNS (the newly combined TNS Custom Research and Research International), Millward Brown, Kantar Media, Kantar Healthcare, Kantar Retail, Kantar Worldpanel, Hill & Knowlton, Ogilvy Public Relations Worldwide, Burson-Marsteller, Cohn & Wolfe, OgilvyOne, Wunderman, OgilvyAction, G2, 24/7 Real Media, CommonHealth, Sudler & Hennessey, Ogilvy Healthworld, ghg, The Brand Union, Landor and Fitch - in high-growth markets or where their market share is insufficient.

In 2008, in addition to the acquisition of TNS, we strengthened our position in Advertising and Media Investment Management in the US, the UK, Denmark, France, Italy, the Netherlands, Switzerland, Ukraine, the Middle East, Kenya, Argentina, Brazil, Chile, Guatemala, Australia, New Zealand, China, Singapore and Vietnam; in Information, Insight & Consultancy in the US, the UK, Spain, Brazil and India; in Public Relations & Public Affairs in the UK, China, Korea and India; in direct, internet and interactive in the US, the Czech Republic, Denmark, France, Russia, China, India, Japan and Malaysia; and in Branding & Identity in the Netherlands. 

We will also enhance our leadership position in Information, Insight & Consultancy by further development of our key brands with particular emphasis on North America, Asia Pacific, Latin America and Continental and Eastern Europe. We will continue our growth of research panels and have established a Kantar-wide operational capability, which will be consolidated with the same function at TNS. We will reinforce our growing position in media research through Kantar Media, which includes our investments in television audience research through the former TNS Media Intelligence and TNS Media Research, and IBOPE and Marktest, which, combined, are among the market leaders outside North America.

In addition, we intend to reinforce our worldwide strength in direct and interactive marketing and research through our traditional channels such as OgilvyOne, Wunderman, G2, RMG Connect, Blanc & Otus and Lightspeed. Although the early 2000-2001 compressions in financial valuations initially offered significant opportunities, we will now also invest directly in the new channels through start-ups, particularly as US and French valuations in search, for example, are still prohibitive, despite the financial crisis. Other opportunities will be sought to enhance our online capabilities.

Lastly, we will continue to develop our specialist expertise in areas such as healthcare, retail and interactive and to identify new high-growth areas.

Creativity remains paramount

6 Our sixth objective is to improve still further the quality of our creative output. Despite the growing importance of co-ordinated communications and price effectiveness, the quality of the work remains and will remain paramount. If you drew a graph plotting creative awards (as a proxy for creativity) against margins for any group of agencies, there would be a very strong correlation. The more awards, the stronger the margins. The client's procurement department fades into the background when the work is strong. Of the three things we do - strategic thinking, creative execution and co-ordination - creative execution is undoubtedly the most important, and that means creativity in its broadest sense.

Clients look for creative thinking and output not just from advertising agencies, public relations and design companies, but also from our media companies and our research companies. Millward Brown remains arguably one of our most creative brands. Witness the BrandZ™ Top 100 Most Powerful Brands Study published annually each April with the Financial Times. 

We intend to achieve this objective by stepping up our training and development programs; by recruiting the finest external talent; by celebrating and rewarding outstanding creative success tangibly and intangibly; by acquiring strong creative companies; and by encouraging, monitoring and promoting our companies' achievements in winning creative awards. Our thanks go to Robyn Putter, who left the Group in November, for his work in championing the WPP creative product and community; and we welcome the appointment of John O'Keeffe to the position of worldwide creative director of WPP. 2008 saw the second annual WPPED Cream awards, our internal award scheme for outstanding work across the Group. Your Company also amassed the second largest points tally at the 2008 advertising and marketing services festival in Cannes (please refer to our website, www.wpp.com, for further details).

At the same time we are committed to achieving all these objectives as a significantly responsible corporate citizen of the world at large and the communities in which we operate. 

As a parent company, we continue to develop practical principles and policies for our companies' charitable giving and services to the environment, education, the arts and healthcare based on best practice guidelines. We conservatively calculate that the WPP organisation contributed an estimated £14.6 million worth of time, skills, materials and money to social and community causes in 2008. A summary of the Group's approach to corporate responsibility can be found on pages 118 to 125.

Please also see our annual and unique (in our industry) Corporate Responsibility Report on the work our clients and our people do in these increasingly important areas. 

The future

A colossal amount remains to be done - challenging our clients, and therefore us. It seems certain that once these objectives are achieved, they will be replaced by new ones. As companies grow in size, most chairmen and CEOs become concerned that their organisations may become flabby, slow to respond, bureaucratic and sclerotic. Any sensible business leader aggressively resists this phenomenon; we all seek the benefits of size and scale without sacrificing the suppleness and energy of a smaller firm. And, for the first time, new technologies now make this possible on a global platform. WPP wants the scale and resources of the largest firm together with the heart and mind of a small one. 

And finally… 

For well over a year now, long before the word recession was officially permitted to re-enter the global economic vocabulary, WPP companies, both singly and in collaboration, have been priming themselves to apply their skills and experience to their clients' new needs. 

There are well over 150 papers published by WPP people and others on the impact of recessions on marketing. Both the parent company itself and its operating companies have filleted these papers - and indeed have added to them. There are no magic solutions and no great surprises. In essence, the way for marketing companies to survive recessions, and even to emerge stronger from them, is to do what the best of marketing has always done: be obsessed by the ultimate individual user. Not markets, not consumers, not target groups, not plural anything: the individual. 

If there is a characteristic that straddles all our companies, it is a fascination with the human mind and how it responds to different stimuli. We have stressed before in this letter the crucial importance of insight: some new understanding that in turn reveals an opportunity. 

It will be the driving purpose of our own talented individuals, in all our operating companies of every discipline, to help our clients identify those opportunities - the opportunities that all recessions, when looked at in retrospect, invariably open up - and seize upon them: individual by individual, one by one. 

These are the people whose talents were sought and valued by our clients in 2008 and to whom our success is due. We thank them for their skills and their resourcefulness. They will be even more valued, by both their clients and by the Board of WPP, in the months to come.

Philip Lader

Chairman

Sir Martin Sorrell

Group chief executive

Paul Richardson

Group finance director

*    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 on pages 107 to 137. 

Forward-looking statements

In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the 'Reform Act'), the Company may include forward-looking statements (as defined in the Reform Act) in oral or written public statements issued by or on behalf of the Company. These forward-looking statements may include, among other things, plans, objectives, projections and anticipated future economic performance based on assumptions and the like that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. Important factors which may cause actual results to differ include but are not limited to: the unanticipated loss of a material client or key personnel, delays or reductions in client advertising budgets, shifts in industry rates of compensation, government compliance costs or litigation, natural disasters or acts of terrorism, the Company's exposure to changes in the values of other major currencies (because a substantial portion of its revenues are derived and costs incurred outside of the UK) and the overall level of economic activity in the Company's major markets (which varies depending on, among other things, regional, national and international political and economic conditions and government regulations in the world's advertising markets). In addition, you should consider the risks described under the caption 'Principal risks and uncertainties' on page 114, which could also cause actual results to differ from forward-looking information. In light of these and other uncertainties, the forward-looking statements included in this document should not be regarded as a representation by the Company that the Company's plans and objectives will be achieved. The Company undertakes no obligation to update or revise any such forward-looking statements, whether as a result of new information, future events or otherwise.

Appendix 2: Financial Statements

The financial statements attached are extracted from pages 139 to 175 of the Annual Report and Accounts and include a responsibility statement on page 145:

Click on, or paste the following link into your web browser, to view the associated PDF document.

http://www.rns-pdf.londonstockexchange.com/rns/3830R_-2009-4-29.pdf

Appendix 3: Principal risks and uncertainties

The WPP board has considered the principal risks and uncertainties affecting the Group as at 31 December 2008 and the summary of these below is extracted from page 114 of the Annual Report and Accounts:

Principal risks and uncertainties

The Board has considered the principal risks and uncertainties affecting the Group as at 31 December 2008 and these are summarised below. As set out above, the Group has specific policies in place to ensure that risks are properly evaluated and managed at the appropriate level within the Group.

Global economic risk

• The Group is subject to recessionary economic cycles. The current global credit crisis could adversely impact our business, results of operations, ability to raise appropriate finance and financial condition.

Client risks

• The Group competes for clients in a highly competitive industry, and client loss may reduce market share and decrease profits.

• The Group receives a significant portion of its revenues from a limited number of large clients, and the loss of these clients could adversely impact the Group's prospects, business, financial condition and results of operations.

• The Group may be unable to collect balances due from any client that files for bankruptcy or becomes insolvent.

• A reduction on client spending and a slowdown in client payments could adversely affect the Group's working capital.

Employee risks

• The Group is dependent on its people and, like all service providers, is vulnerable to adverse consequences from the loss of key people.

International business risks

• The Group is exposed to the risks of doing business internationally.

• Currency exchange rate fluctuations could adversely affect the Group's consolidated results of operations.

The Group may have difficulty repatriating the earnings of certain of its subsidiaries.

Mergers & acquisitions

• The Group may be unsuccessful in evaluating material risks involved in completed and future acquisitions.

• The Group may be unsuccessful in integrating any acquired operations with its existing businesses.

• Goodwill and other acquired intangible assets recorded on the Group's balance sheet with respect to acquired companies may become impaired.

Regulatory and legal risks

• The Group may be subject to certain regulations that could restrict the Group's activities.

• Changes in tax laws or their application may adversely affect the Group's reported results.

• The Group may be exposed to liabilities from allegations that certain of its clients' advertising claims may be false or misleading or that its clients' products may be defective.

• Civil liabilities or judgments against the Group or its directors or officers based on US federal or state securities laws may not be enforceable in the US or in England and Wales or in Jersey.

 

END

 

 

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