WPP plc — FY 2018 Form 20-F
Business context and reporting period. This is WPP’s audited annual report for the year ended 31 December 2018, not a standalone Q4 filing. WPP is a global communications, advertising, media, data, public relations and related services group, with 134,281 employees at year-end. Financial statements are prepared under IFRS as issued by the IASB and reported in pounds sterling. Q4 operating commentary is included.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | £15,602.4m | £15,804.2m |
| Operating profit | £1,431.4m | £1,908.2m |
| Profit before interest and tax, including associates | £1,474.9m | £2,021.7m |
| Profit before tax | £1,463.3m | £2,109.3m |
| Profit for the year | £1,139.4m | £1,912.3m |
| Profit attributable to parent shareholders | £1,062.9m | £1,816.6m |
| Diluted EPS | 84.3p | 142.4p |
| Headline PBIT (non-GAAP) | £2,047.3m | £2,267.1m |
| Headline EBITDA (non-GAAP) | £2,311.1m | £2,534.1m |
| Net cash inflow from operating activities | £1,693.8m | £1,408.1m |
| Free cash flow (company-defined) | £1,102.9m | £809.4m |
| Net debt at year-end | £4,016.7m | £4,483.1m |
Reported revenue declined 1.3%; it increased 1.5% at constant currency and 0.8% like-for-like. The gross margin was approximately 18.8% and operating margin approximately 9.2%, calculated from reported IFRS figures. Headline PBIT margin was 15.9% of revenue less pass-through costs; it declined 1.2 percentage points year over year. Net debt comprised £6,659.9m of debt financing less £2,643.2m of cash and short-term deposits. The Group had £2,074.7m of undrawn committed credit facilities at year-end and reported net current liabilities of £666.0m.
Ordinary dividends were 60.00p per share for 2018, unchanged from 2017. Cash dividends paid during the year were £747.4m. The final 2018 dividend of 37.30p was proposed for payment in July 2019.
Material changes versus the prior comparable period
- Revenue declined on a reported basis, while constant-currency and like-for-like growth remained positive. Currency translation, particularly sterling strength in the first half, contributed to the difference.
- Operating profit fell 25.0%; profit attributable to shareholders fell 41.5%; and diluted EPS fell 40.8%. Headline PBIT declined 9.7% and headline EBITDA 8.8%.
- Results included £302.3m of restructuring and transformation costs, £183.9m of goodwill impairment (including £148.0m at VMLY&R), and £280.0m of amortisation and impairment of acquired intangibles. These were partly offset by £235.5m of disposal gains, principally Globant.
- The effective tax rate rose to 22.1% from 9.3%; the prior-year rate benefited from a significant US tax-reform-related deferred-tax credit.
- Cash generated from operations and free cash flow increased, and year-end net debt declined by £466m. The £849m proceeds from disposals were a major contributor to the reduction in net debt.
- Segment performance was mixed: public relations and public affairs headline PBIT was broadly flat; headline PBIT fell in advertising and media, data investment management, and brand consulting, health and specialist communications. North America was particularly weak.
Outlook, management commentary, risks and unusual items
- Management’s three-year transformation plan aims to return the business to growth by the end of 2021. It anticipates £300m of cash restructuring costs and annual savings of £275m by end-2021, with about half of savings reinvested in the business.
- 2019 guidance, unchanged in the filing, was like-for-like revenue down 1.5% to 2.0%, with greater headwinds expected in the first half following client assignment losses in late 2018. Q1 2019 revenue was £3.588bn, down 1.3% like-for-like.
- Management reported progress on mergers, office consolidation and redundancies, and said the Kantar strategic review was intended to maximise shareholder value while retaining strategic links. WPP prioritised dividends over share buy-backs in its stated capital-allocation approach.
- Debt leverage remained above the revised target range: average net debt to headline EBITDA was 2.1x versus a 1.5–1.75x target range to be achieved by end-2021. Management stated liquidity was sufficient for the foreseeable future; the Group was in compliance with its stated borrowing covenants.
- Key risks include client losses or marketing-budget cuts, intense industry competition and structural change, cyber and data-protection exposures, IT transformation execution, talent retention, foreign exchange, interest rates, tax and regulatory matters, and delivery of the restructuring plan. The ten largest clients generated 14.4% of revenue; no single client exceeded 5%.
- The Group reported £4,875.2m of gross tax losses and other temporary differences for which no deferred tax asset was recognised. It also disclosed £414.7m of recorded earnout obligations and estimated total contractual obligations of £12,963.7m, including debt, interest, leases and earnouts.
- IFRS 16 adoption from 1 January 2019 was expected to add approximately £2.0–£2.5bn each to right-of-use assets and lease liabilities, raise operating margin by about 0.4–0.6 points, and reduce diluted EPS by about 1.3–1.6p. IFRS 15 restated prior-year revenue and costs of services upward by equal amounts, with no gross-profit or operating-profit impact.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting at year-end.
Important facts for investors to verify
- Whether the 2019 revenue guidance and longer-term recovery targets were achieved, and how much growth is organic rather than currency- or acquisition-driven.
- Whether planned savings, restructuring costs and office consolidation were delivered as scheduled, and whether reinvestment supports margin recovery.
- Underlying cash conversion and the extent to which net-debt reduction depended on disposals; monitor leverage against the end-2021 target.
- Progress in North America and in the businesses with declining headline PBIT and margins, including the VMLY&R goodwill impairment sensitivity.
- Client retention and concentration, bad-debt provisions, and exposure to client-funded media and production commitments.
- The effects of IFRS 16 on reported leverage, earnings and cash-flow presentation, and the recoverability of deferred tax assets and goodwill.