Business context and reporting period
WPP plc’s Form 20-F is an audited annual report for the year ended 31 December 2017, prepared under IFRS as issued by the IASB and reported in pounds sterling. It is not a standalone fourth-quarter filing. WPP is a global communications services group with four segments; Advertising and Media Investment Management represented 47% of 2017 revenue. The Group had 134,413 employees, excluding associates, across 112 countries.
Financial performance and position
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Revenue | £15,265.4m | £14,388.9m | +6.1% reported; +1.6% constant currency; −0.3% like-for-like |
| Operating profit | £1,908.2m | £2,063.1m | −7.5% reported |
| Profit before interest and taxation | £2,021.7m | £2,112.9m | Includes share of associates’ results |
| Headline PBIT | £2,267.1m | £2,160.3m | +4.9% reported; +1.5% constant currency |
| Profit for the year | £1,912.3m | £1,501.6m | +27.3% reported |
| Profit attributable to parent shareholders | £1,816.6m | £1,400.1m | Basic EPS 144.0p; diluted EPS 142.4p |
| Net cash from operating activities | £1,408.1m | £1,773.8m | Down from 2016 |
| Free cash flow | £1,540.3m | £1,585.3m | Management-defined, excludes specified working-capital movements |
| Net debt at year-end | £4,483.1m | £4,130.5m | Average net debt £5.1bn versus £4.6bn |
| Total assets / net assets | £33,668.7m / £9,962.0m | £34,568.3m / £9,767.6m | Current liabilities exceeded current assets by £351.8m |
Reported revenue benefited materially from sterling weakness: constant-currency revenue growth was 1.6%, while reported growth was 6.1%. Billings were £55.6bn, up 0.6% reported but down almost 4% in constant currencies. Headline EBITDA was £2,534.1m, up almost 5% reported. Headline PBIT margin on revenue less pass-through costs was 17.2% (approximately), compared with about 17.3% in 2016.
Segment performance
- Advertising and Media Investment Management: revenue £7,180.3m; headline PBIT £1,109.0m; revenue less pass-through costs margin 19.0%. Like-for-like revenue was down 0.1%.
- Data Investment Management: revenue £2,690.9m; headline PBIT £350.3m; margin 17.1%. Like-for-like revenue fell 2.9%; margin declined 0.5 percentage points.
- Public Relations and Public Affairs: revenue £1,171.9m; headline PBIT £183.2m; margin 16.1%. Like-for-like revenue grew 0.7%; margin fell 0.6 percentage points.
- Brand Consulting, Health and Wellness and Specialist Communications: revenue £4,222.3m; headline PBIT £624.6m; margin 15.3%. Like-for-like revenue grew 0.8%.
Material changes versus the prior comparable period
- Revenue grew in reported currency but was slightly down like-for-like, versus 3.0% like-for-like growth in 2016. Fourth-quarter like-for-like revenue growth was 1.2%, the strongest quarter of 2017.
- Reported operating profit declined despite higher revenue; headline PBIT increased modestly in constant currency. General and administrative costs rose 29.6%, partly reflecting the swing from a £164m net exceptional gain in 2016 to a £24m net exceptional loss in 2017.
- Operating cash inflow fell by £365.7m. Free cash flow remained above £1.5bn, but average and year-end net debt increased.
- Segment trends diverged: Media Investment Management was comparatively resilient, while Data Investment Management was weak. UK performance was strong; North American and several continental European businesses faced pressure.
- WPP retrospectively changed the income statement presentation from “nature of expense” to “function of expense”; the filing says this did not change revenue, operating profit or profit for the periods shown.
Outlook, management commentary, risks and unusual items
- Outlook: For first-quarter 2018, reported revenue was down 4.0%, but constant-currency revenue rose 2.0% and like-for-like revenue rose 0.8%. Management said preliminary revised forecasts were in line with budget, with flat like-for-like revenue for the year and a slightly stronger second half. The Group reported $1.737bn of first-quarter net new business wins.
- Strategy and leadership: After describing 2017 as disappointing, management outlined an accelerated strategy focused on closer global-client and regional coordination, integrated digital and production capabilities, shared functions and systems, and executive incentives more closely linked to Group results. Following Sir Martin Sorrell’s departure in April 2018, Roberto Quarta became Executive Chairman and Mark Read and Andrew Scott joint Chief Operating Officers while a new Group CEO was sought.
- Capital returns and leverage: The Board proposed a 37.3p final dividend, taking the 2017 total to 60.0p per share, a 6% increase and a stated 50% payout ratio. Buy-backs cost £504.2m. Average net debt/headline EBITDA was 2.0x, at the top of WPP’s 1.5–2.0x target range; interest cover based on headline PBIT was 13.0x. WPP reported compliance with its revolving-credit covenants and £1.164bn of undrawn committed facilities.
- Earnings quality and unusual items: The 9.3% effective tax rate (20.6% in 2016) included a £234.1m non-cash deferred-tax credit from the US tax-rate reduction and a £28.1m transition-tax charge. A £262.2m gain from revaluation of financial instruments also boosted reported profit; the filing identifies substantial earnout and put-option revaluations. Exceptional items included £129.0m disposal gains, partly offset by £95.9m investment write-downs and £56.8m restructuring costs. The filing identifies £53.1m of 2017 write-downs relating to comScore.
- Cybersecurity: WPP suffered the destructive NotPetya cyberattack in June 2017. It described recovery and strengthened IT controls as priorities, alongside its IT transformation and GDPR preparations.
- Principal risks: Client losses or reduced marketing budgets, competitive and technological disruption, cyber and privacy failures, reliance on third-party IT providers and legacy systems, talent retention, media-trading controls, credit exposure from media commitments, foreign-exchange movements, and changing tax, competition and regulatory requirements. The ten largest clients generated 14.9% of revenue; no single client exceeded 5%.
- Contingencies and audit: Management said pending legal claims were not expected to have a material adverse effect. The auditors gave unqualified opinions on the IFRS financial statements and internal control over financial reporting. The company reported effective disclosure controls and internal financial controls.
Important facts an investor should verify
- How sustainable underlying growth and margins are, given −0.3% full-year like-for-like revenue and pressure in Data Investment Management and parts of North America.
- How much of the reported profit and EPS increase reflects recurring operations versus the US tax remeasurement, financial-instrument revaluation and disposal gains.
- Whether operating cash flow, working capital and debt trends support continued dividends and buy-backs while net debt is at the top of the stated leverage target.
- Progress against 2018 revenue expectations and the execution of the strategic and leadership changes, including client retention and new-business conversion.
- The financial and operational consequences of NotPetya, GDPR compliance, outstanding earnout and put-option obligations, and the future balance-sheet effect of IFRS 16 lease accounting.