20-F 1 d714282d20f.htm FORM 20-F Form 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended 31 December 2018

 

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report                 

 

For the transition period from                  to                 

 

 

Commission file number 001-38303

 

WPP plc

(Exact Name of Registrant as specified in its charter)

 

Jersey

(Jurisdiction of incorporation or organization)

 

Sea Containers, 18 Upper Ground

London, United Kingdom, SE1 9GL

(Address of principal executive offices)

 

Andrea Harris

Group Chief Counsel

Sea Containers, 18 Upper Ground, London, United Kingdom, SE1 9GL

Telephone: +44(0) 20 7282 4600

E-mail: andrea.harris@wpp.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

  

Name of each exchange on which registered

Ordinary Shares of 10p each

American Depositary Shares, each

representing five Ordinary Shares (ADSs)

   New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

Not applicable

 

(Title of Class)

 

Not applicable

 

(Title of Class)


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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

 

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

At December 31, 2018, the number of outstanding ordinary shares was 1,332,678,227 which included at such date ordinary shares represented by 13,929,272 ADSs.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

YES  ☒    NO  ☐

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

YES  ☐    NO  ☒

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Emerging growth company

 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

    The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐

   International Financial Reporting Standards as issued by the
International Accounting Standards Board  ☒
   Other  ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17  ☐    Item 18  ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES  ☐    NO  ☒

 

 

 


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TABLE OF CONTENTS

 

     Page  

FORWARD – LOOKING STATEMENTS

     1  

Part I

     1  

  Item 1

  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     1  

  Item 2

  

OFFER STATISTICS AND EXPECTED TIMETABLE

     1  

  Item 3

  

KEY INFORMATION

     1  
   A   

Selected Financial Data

     1  
   B   

Capitalization and Indebtedness

     3  
   C   

Reasons for the Offer and Use of Proceeds

     3  
   D   

Risk Factors

     3  

  Item 4

  

INFORMATION ON THE COMPANY

     5  
   A   

History and Development of the Company

     5  
   B   

Business Overview

     7  
   C   

Organizational Structure

     12  
   D   

Property, Plant and Equipment

     13  

  Item 4A

  

UNRESOLVED STAFF COMMENTS

     14  

  Item 5

  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     14  
   A   

Operating Results

     14  
   B   

Liquidity and Capital Resources

     22  
   C   

Research and Development, Patents and Licenses, etc.

     23  
   D   

Trend Information

     24  
   E   

Off-Balance Sheet Arrangements

     24  
   F   

Tabular Disclosure of Contractual Obligations

     24  

  Item 6

  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     34  
   A   

Directors and Senior Management

     34  
   B   

Compensation

     36  
   C   

Board Practices

     40  
   D   

Employees

     48  
   E    Share Ownership      49  

  Item 7

  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     50  
   A   

Major Shareholders

     50  
   B   

Related Party Transactions

     51  
   C   

Interests of Experts and Counsel

     51  

  Item 8

  

FINANCIAL INFORMATION

     51  
   A   

Consolidated Statements and Other Financial Information

     51  
   B   

Significant Changes

     51  

  Item 9

  

THE OFFER AND LISTING

     52  
   A   

Offer and Listing Details

     52  
   B   

Plan of Distribution

     52  
   C   

Markets

     52  
   D   

Selling Shareholders

     52  
   E   

Dilution

     52  
   F   

Expenses of the Issue

     52  


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     Page  

  Item 10

  

ADDITIONAL INFORMATION

     53  
   A   

Share Capital

     53  
   B   

Memorandum and Articles of Association

     53  
   C   

Material Contracts

     61  
   D   

Exchange Controls

     65  
   E   

Taxation

     65  
   F   

Dividends and Paying Agents

     70  
   G   

Statements by Experts

     70  
   H   

Documents on Display

     70  
   I   

Subsidiary Information

     70  

  Item 11

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     71  

  Item 12

  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     71  
   A   

Debt Securities

     71  
   B   

Warrants and Rights

     71  
   C   

Other Securities

     71  
   D   

American Depositary Shares

     72  

Part II

     74  

  Item 13

  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     74  

  Item 14

  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     74  

  Item 15

  

CONTROLS AND PROCEDURES

     74  

  Item 16A

  

AUDIT COMMITTEE FINANCIAL EXPERT

     76  

  Item 16B

  

CODE OF ETHICS

     76  

  Item 16C

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     76  

  Item 16D

  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     77  

  Item 16E

  

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     77  

  Item 16F

  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     77  

  Item 16G

  

CORPORATE GOVERNANCE

     77  

  Item 16H

  

MINE SAFETY DISCLOSURE

     78  

Part III

     79  

  Item 17

  

FINANCIAL STATEMENTS

     79  

  Item 18

  

FINANCIAL STATEMENTS

     79  

  Item 19

  

EXHIBITS

     79  

 


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Forward-Looking Statements

 

In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the Reform Act), the Company (as defined below) 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, regulatory compliance costs or litigation, natural disasters or acts of terrorism, the Company’s exposure to changes in the values of major currencies other than the UK pound sterling (because a substantial portion of its revenues are derived and costs incurred outside of the United Kingdom) 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 in Item 3D, captioned “Risk Factors,” 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.

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

Overview

 

WPP plc and its subsidiaries (WPP) is a leading worldwide creative transformation organisation offering national and multinational clients a comprehensive range of communications, experience, commerce and technology services. At 31 December 2018, the Group, excluding associates, had 134,281 employees. For the year ended 31 December 2018, the Group had revenue of £15,602.4 million and operating profit of £1,431.4 million.

 

Unless the context otherwise requires, the terms “Company”, “Group” and “Registrant” as used herein shall also mean WPP.

 

A. Selected Financial Data

 

The selected financial data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements of the Company, including the notes thereto.

 

The selected income statement data for each of the years ended 31 December 2018, 2017 and 2016 and the selected balance sheet data as at 31 December 2018 and 2017 are derived from the consolidated financial statements of the Company that appear elsewhere in this Form 20-F. The selected financial data for prior periods

 

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is derived from the consolidated financial statements of the Company previously filed with the Securities and Exchange Commission (SEC) as part of the Company’s Annual Reports on Form 20-F. The consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

The reporting currency of the Group is the UK pound sterling and the selected financial data has been prepared on this basis.

 

Selected Consolidated Income Statement Data

 

      Year ended 31 December  
     

2018

£m

   

20171

£m

   

20161

£m

   

2015

£m

   

2014

£m

 

Revenue

     15,602.4       15,804.2       14,887.3       12,235.2       11,528.9  

Operating profit

     1,431.4       1,908.2       2,063.1       1,632.0       1,507.3  

Profit for the year

     1,139.4       1,912.3       1,501.6       1,245.1       1,151.5  

Profit attributable to equity holders of the parent

     1,062.9       1,816.6       1,400.1       1,160.2       1,077.2  

Earnings per ordinary share:

          

Basic

     85.2  p      144.0  p      109.6  p      90.0  p      82.4  p 

Diluted

     84.3  p      142.4  p      108.0  p      88.4  p      80.5  p 

Earnings per ADS2:

          

Basic

     426.0  p      720.0  p      548.0  p      450.0  p      412.0  p 

Diluted

     421.5  p      712.0  p      540.0  p      442.0  p      402.5  p 

Dividends per ordinary share

     60.00  p      59.75  p      48.33  p      42.49  p      35.27  p 

Dividends per ADS (US dollars)3

     391.87  ¢      397.23  ¢      352.41  ¢      340.57  ¢      280.73  ¢ 

1    Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements. No restatement has been made in 2015 or 2014.

2    Basic and diluted earnings per American Depositary Share (ADS) have been calculated using the same method as earnings per share, multiplied by a factor of five.

3    These figures have been translated for convenience purposes only, using the approximate average exchange rates of US$1.3351 to pound sterling for the year 2018 (2017: US$1.2887, 2016: US$1.3547, 2015: US$1.5288, 2014: US$1.6475). This conversion should not be construed as a representation that the pound sterling amounts actually represent, or could be converted into, US dollars at the rates indicated.

    

    

    

 

Selected Consolidated Balance Sheet Data

 

      At 31 December  
     

20181

£m

    

20172

£m

    

20162

£m

    

2015

£m

    

2014

£m

 

Total assets

     33,867.7        33,662.8        34,562.4        28,749.2        26,622.9  

Net assets

     9,806.6        9,956.1        9,761.7        8,015.8        7,826.8  

Called-up share capital

     133.3        133.3        133.2        132.9        132.6  

Number of shares (in millions)

     1,332.7        1,332.5        1,331.9        1,329.4        1,325.7  

1   IFRS 9 Financial Instruments has been adopted from 1 January 2018 as described in the accounting policies section of the consolidated financial statements. No restatement has been made for years prior to 2018.

2    Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements. No restatement has been made in 2015 or 2014.

    

    

 

Dividends

 

Dividends on the Company’s ordinary shares, when paid, are paid to share owners as of a record date, which is fixed by the Company. The following table sets forth the amounts of interim or first interim, final or second interim and total dividends paid on the Company’s ordinary shares in respect of each fiscal year indicated. In the United States, the Company’s ordinary shares are represented by ADSs, which are evidenced by American

 

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Depositary Receipts (ADRs) or held in book-entry form. The Group uses the terms ‘ADS’ and ‘ADR’ interchangeably. The dividends are also shown translated into US cents per ADS using the approximate average rates as shown on page 2, for each year presented.

 

             Pence per ordinary share               US cents per ADS  
In respect of the year ended 31 December:   

Interim

or First

Interim

    

Final or

Second

Interim

     Total     

Interim

or First

Interim

    

Final or

Second

Interim

     Total  

2014

     11.62        26.58        38.20        95.72        218.95        314.67  

2015

     15.91        28.78        44.69        121.62        219.99        341.61  

2016

     19.55        37.05        56.60        132.42        250.96        383.38  

2017

     22.70        37.30        60.00        146.27        240.34        386.61  

2018

     22.70        37.30        60.00        151.53        249.00        400.53  

 

The 2018 interim dividend was paid on 5 November 2018 to share owners on the register at 5 October 2018. The 2018 final dividend will be paid on 8 July 2019 to share owners on the register at 14 June 2019.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

The Company is subject to a variety of possible risks that could adversely impact its revenues, results of operations, reputation or financial condition. Some of these risks relate to the industries in which the Company operates while others are more specific to the Company. The table below sets out principal risks the Company has identified that could adversely affect it. See also the discussion of Forward-Looking Statements preceding Item 1.

 

   
Principal risk    Potential impact
Clients     
The Group competes for clients in a highly-competitive and evolving industry which is undergoing structural change. Client loss to competitors or as a consequence of client consolidation or a reduction in marketing budgets due to economic conditions or a shift in client spending may have a material adverse effect on our market share, business, revenues, results of operations, financial condition or prospects.   

The competitive landscape in our industry is constantly evolving and the role of traditional agencies is being challenged. Competitors include multinational advertising and marketing communication groups, regional and national marketing services companies, database marketing information and measurement, social media and professional services and consultants and consulting internet companies.

 

Client contracts can generally be terminated on 90 days’ notice or are on an assignment basis and clients put their business up for competitive review from time to time. The ability to attract new clients and to retain or increase the amount of work from existing clients may be impacted if we fail to react quickly enough to changes in the market and to evolve our structure and by loss of reputation and may be limited by clients’ policies on conflicts of interest.

 

The global economy continues to be volatile with uncertainties such as those caused by Brexit in the UK and Europe and technological disruption from disintermediators. In the past clients have responded to weak economic and financial conditions by reducing or shifting their marketing budgets which are easier to reduce in the short term than their other operating expenses.

 

 

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Principal risk    Potential impact

The Group receives a significant portion of our revenues from a limited number of large clients and the net loss of one or more of these clients could have a material adverse effect on our prospects, business, financial condition and results of operations.

 

  

A relatively small number of clients contribute a significant percentage of our consolidated revenues. Our 10 largest clients accounted for 14.4% of revenues in the year ended 31 December 2018. Clients can reduce their marketing spend, terminate contracts, or cancel projects on short notice. The loss of one or more of our largest clients, if not replaced by new accounts or an increase in business from existing clients, would adversely affect our financial condition.

 

Cyber and data security     

The Group is subject to strict data protection and privacy legislation in the jurisdictions in which we operate and relies extensively on information technology systems. We store, transmit and rely on critical and sensitive data such as strategic plans, personally identifiable information and trade secrets. Security of this type of data is exposed to escalating external threats that are increasing in sophistication, as well as internal data breaches.

 

Existing and new data protection laws, General Data Protection Regulation (GDPR) and e-privacy regulation in the EU concerning user privacy, use of personal information, consent and online tracking may restrict some of our activities and increase costs.

 

The Group is part way through an IT Transformation project and relies on third parties for the performance of a significant portion of our worldwide information technology and operations functions. A failure to provide these functions could have an adverse effect on our business. During the transformation, we are still reliant on legacy systems which could restrict our ability to change rapidly.

 

   The Group may be subject to investigative or enforcement action or legal claims or incur fines, damages, or costs and client loss if we fail to adequately protect data or observe privacy legislation in every instance. A system breakdown or intrusion could have a material adverse effect on our business, revenues, results of operations, financial condition or prospects.
Financial     
The Group is subject to credit risk through the default of a client or other counterparty.   

The Group is generally paid in arrears for its services. Invoices are typically payable within 30 to 60 days.

 

The Group commits to media and production purchases on behalf of some of our clients as principal or agent depending on the client and market circumstances. If a client is unable to pay sums due, media and production companies may look to us to pay those amounts.

 

Operational     

The Group’s performance could be adversely impacted if it failed to ensure adequate internal control procedures are in place in relation to media trading.

 

   Failure to ensure that trading activities are compliant with client obligations where relevant could adversely impact client relationships and business volumes.

The Group has commenced a three-year strategic plan to return the business to growth by the end of 2021 which includes the merger of some operations, disposals and the simplification of our structure.

 

   A failure or delay in implementing the transformation plan may have a material adverse effect on our market share and our business, revenues, results of operations, financial condition or prospects.
People and succession     

The Group’s performance could be adversely affected if it does not react quickly enough to changes in our market and fails to attract, develop and retain key creative, commercial and management talent.

 

  

The Group is highly dependent on the talent, creative abilities and technical skills of our personnel as well as their relationships with clients. We are vulnerable to the loss of personnel to competitors (traditional and emerging) and clients, leading to disruption to the business.

 

 

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Principal risk    Potential impact
Regulatory, sanctions, anti-trust and taxation     
The Group may be subject to regulations restricting its activities or effecting changes in taxation.   

Changes in local or international tax rules, for example prompted by the OECD’s Base Erosion and Profit Shifting project (a global initiative to improve the fairness and integrity of tax systems), changes arising from the application of existing rules, or new challenges by tax or competition authorities, for example, the European Commission’s State Aid investigation into the UK CFC rules, may expose us to significant additional tax liabilities or impact the carrying value of our deferred tax assets, which would affect the future tax charge.

 

The Group is subject to strict anti-corruption, anti-bribery and anti-trust legislation and enforcement in the countries in which it operates.

 

  

The Group operates in a number of markets where the corruption risk has been identified as high by groups such as Transparency International. Failure to comply or to create a culture opposed to corruption or failing to instil business practices that prevent corruption could expose us to civil and criminal sanctions.

 

The Group is subject to the laws of the US, the EU and other jurisdictions that impose sanctions and regulate the supply of services to certain countries.

 

  

Failure to comply with these laws could expose the Group to civil and criminal penalties including fines and the imposition of economic sanctions against the Group and reputational damage and withdrawal of banking facilities which could materially impact the Group’s results.

 

Civil liabilities or judgements against the Company or its directors or officers based on United States federal or state securities laws may not be enforceable in the United States or in England and Wales or in Jersey.

 

  

The Company is a public limited company incorporated under the laws of Jersey. Some of the Company’s directors and officers reside outside of the United States. In addition, a substantial portion of the directly owned assets of the Company are located outside of the United States. As a result, it may be difficult or impossible for investors to effect service of process within the United States against the Company or its directors and officers or to enforce against them any of the judgements, including those obtained in original actions or in actions to enforce judgements of the U.S. courts, predicated upon the civil liability provisions of the federal or state securities laws of the United States.

 

 

ITEM 4. INFORMATION ON THE COMPANY

 

WPP’s offer to clients encompasses communications, experience, commerce and technology. The Company provides these services through a number of established global, multinational and national operating companies that are organised into four business segments. Our largest segment is Advertising and Media Investment Management, which accounted for approximately 46% of the Company’s revenues in 2018. The remaining 54% of our revenues were derived from the business segments of Data Investment Management; Public Relations & Public Affairs; and Brand Consulting, Health & Wellness and Specialist Communications (including direct, interactive and ecommerce). Excluding associates, the Company currently employs over 130,000 full-time people in 112 countries.

 

The Company’s ordinary shares are admitted to the Official List of the UK Listing Authority and trade on the London Stock Exchange and American Depositary Shares (which are evidenced by ADRs or held in book-entry form) representing deposited ordinary shares are listed on the New York Stock Exchange (NYSE). At 23 April 2019 the Company had a market capitalisation of approximately £11.814 billion.

 

The Company’s executive office is located at Sea Containers, 18 Upper Ground, London, United Kingdom, SE1 9GL, Tel:+44 (0)20 7282 4600 and its registered office is located at Queensway House, Hilgrove Street, St Helier, Jersey JE1 IES.

 

A. History and Development of the Company

 

WPP plc was incorporated in Jersey on 25 October 2012 under the name WPP 2012 plc.

 

On 2 January 2013, under a scheme of arrangement between WPP 2012 Limited (formerly known as WPP plc), (Old WPP), the former holding company of the Group, and its share owners pursuant to Article 125 of the Companies (Jersey) Law 1991, and as sanctioned by the Royal Court of Jersey (the Jersey Court), a Jersey incorporated and United Kingdom tax resident company, WPP 2012 plc became the new parent company of the

 

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WPP Group and adopted the name WPP plc. Under the scheme of arrangement, all the issued shares in Old WPP were cancelled and the same number of new shares were issued to WPP plc in consideration for the allotment to share owners of one share in WPP plc for each share in Old WPP held on the record date, 31 December 2012. Citibank, N.A., depositary for the ADSs representing Old WPP shares, cancelled Old WPP ADSs held in book-entry uncertificated form in the direct registration system maintained by it and issued ADSs representing shares of WPP plc in book entry uncertificated form in the direct registration system maintained by it to the holders. Holders of certificated ADSs, or ADRs, of Old WPP were entitled to receive ADSs of WPP plc upon surrender of the Old WPP ADSs, or ADRs, to the Depositary. Each Old WPP ADS represented five shares of Old WPP and each WPP plc ADS represents five shares of WPP plc.

 

Pursuant to Rule 12g-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act), WPP plc succeeded to Old WPP’s registration and periodic reporting obligations under the Exchange Act.

 

Old WPP was incorporated in Jersey on 12 September 2008 and became the holding company of the WPP Group on 19 November 2008 when the company now known as WPP 2008 Limited, the prior holding company of the WPP Group which was incorporated in England and Wales, completed a reorganisation of its capital and corporate structure. WPP 2008 Limited had become the holding company of the Group on 25 October 2005 when the company now known as WPP 2005 Limited, the original holding company of the WPP Group, completed a reorganisation of its capital and corporate structure. WPP 2005 Limited was incorporated and registered in England and Wales in 1971 and is a private limited company under the Companies Act 1985, and until 1985 operated as a manufacturer and distributor of wire and plastic products. In 1985, new investors acquired a significant interest in WPP and changed the strategic direction of the Company from being a wire and plastic products manufacturer and distributor to being a multinational communications services organisation. Since then, the Company has grown both organically and by the acquisition of companies, most significantly the acquisitions of J. Walter Thompson Group, Inc. (now known as J. Walter Thompson Company LLC) in 1987, The Ogilvy Group, Inc. (now known as The Ogilvy Group LLC) in 1989, Young & Rubicam Inc. (now known as Young & Rubicam LLC) in 2000, Tempus Group plc (Tempus) in 2001, Cordiant Communications Group plc (Cordiant) in 2003, Grey Global Group, LLC (Grey) in 2005, 24/7 Real Media Inc (now known as Xaxis LLC) in 2007, Taylor Nelson Sofres plc (TNS) in 2008, AKQA Holdings, Inc. (AKQA) in 2012, IBOPE Participações Ltda (IBOPE) in 2015, Triad Digital Media, LLC and the merger of most of the Group’s Australian and New Zealand assets with STW Communications Group Limited in Australia (re-named WPP AUNZ) in 2016. During 2018, the Company focused on simplifying its organisation with the completion of the merger of VML and Y&R to create VMLY&R and the merger of Burson-Marsteller and Cohn & Wolfe to create Burson Cohn & Wolfe, and the beginning of the merger of Wunderman and J. Walter Thompson to create Wunderman Thompson.

 

The Company received £440.3 million and spent £228.8 million and £697.1 million related to acquisitions and investments in 2018, 2017 and 2016, respectively, including payments in respect of earnout payments resulting from acquisitions in prior years, net of cash and cash equivalents acquired (net) and proceeds on disposal of investments. For the same periods, cash spent on purchases of property, plant and equipment and other intangible assets was £375.2 million, £326.2 million and £285.1 million, respectively, and cash spent on share repurchases and buy-backs was £207.1 million, £504.2 million and £427.4 million, respectively.

 

The Company is subject to the informational requirements of the Exchange Act. In accordance with these requirements, the Company files reports and other information with the United States Securities and Exchange Commission. You may read and copy any materials filed with the SEC at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. The Company’s Form 20-F is also available on the Company’s website, www.wpp.com.

 

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B. Business Overview

 

Introduction

 

Certain Non-GAAP measures included in this business overview and in the operating and financial review and prospects have been derived from amounts calculated in accordance with IFRS but are not themselves IFRS measures. They should not be viewed in isolation as alternatives to the equivalent IFRS measure, rather they should be read in conjunction with the equivalent IFRS measure. These include constant currency, pro-forma (‘like-for-like’), headline PBIT (Profit Before Interest and Taxation), headline PBT (Profit Before Taxation), headline EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation), billings, estimated net new billings, free cash flow and net debt and average net debt, which we define, explain the use of and reconcile to the nearest IFRS measure on pages 25 to 28.

 

Management believes that these measures are both useful and necessary to present herein because they are used by management for internal performance analyses; the presentation of these measures facilitates comparability with other companies, although management’s measures may not be calculated in the same way as similarly titled measures reported by other companies; and these measures are useful in connection with discussions with the investment community.

 

The following tables show, for the last three fiscal years, reported revenue and revenue less pass-through costs attributable to each business segment in which the Company operates.

 

Revenue1    2018      20172      20162  
      £m     

% of

total

     £m     

% of

total

     £m     

% of

total

 

Advertising and Media Investment Management

     7,132.4        45.6        7,368.7        46.6        6,709.4        45.1  

Data Investment Management

     2,582.5        16.6        2,703.4        17.1        2,672.4        17.9  

Public Relations & Public Affairs

     1,210.7        7.8        1,204.0        7.6        1,130.6        7.6  

Brand Consulting, Health & Wellness and Specialist Communications

     4,676.8        30.0        4,528.1        28.7        4,374.9        29.4  

Total

     15,602.4        100.0        15,804.2        100.0        14,887.3        100.0  
1    

Intersegment sales have not been separately disclosed as they are not material.

2   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

Revenue less pass-through costs1    2018      20172      20162  
      £m     

% of

total

     £m     

% of

total

     £m     

% of

total

 

Advertising and Media Investment Management

       5,529.7          43.1          5,889.3          44.7          5,450.9          43.9  

Data Investment Management

     1,965.4        15.3        2,052.1        15.6        1,994.0        16.0  

Public Relations & Public Affairs

     1,136.3        8.9        1,140.6        8.7        1,078.5        8.7  

Brand Consulting, Health & Wellness and Specialist Communications

     4,195.2        32.7          4,087.6          31.0          3,905.2          31.4  
1    

Revenue less pass-through costs is revenue less media, data collection and other pass-through costs. Pass-through costs comprise fees paid to external suppliers where they are engaged to perform part or all of a specific project and are charged directly to clients, predominantly media and data collection costs. See note 3 to the consolidated financial statements for more details of the pass-through costs.

2   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

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The following tables show, for the last three fiscal years, reported revenue and revenue less pass-through costs attributable to each geographic area in which the Company operates and demonstrates the Company’s regional diversity.

 

Revenue1    2018      20173      20163  
      £m     

% of

total

     £m     

% of

total

     £m     

% of

total

 

North America2

     5,371.0        34.4        5,659.2        35.8        5,400.9        36.3  

United Kingdom

     2,189.4        14.0        2,133.4        13.5        1,970.7        13.2  

Western Continental Europe

     3,335.3        21.4        3,230.6        20.4        3,008.5        20.2  

Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe

     4,706.7        30.2        4,781.0        30.3        4,507.2        30.3  

Total

     15,602.4        100.0        15,804.2        100.0        14,887.3        100.0  
1    

Intersegment sales have not been separately disclosed as they are not material.

2   

North America includes the US with revenue of £5,074.1 million (2017: £5,336.3 million, 2016: £5,107.2 million).

3   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

Revenue less pass-through costs1    2018      20173      20163  
      £m     

% of

total

     £m     

% of

total

     £m     

% of

total

 

North America2

      4,474.2        34.9         4,793.9        36.4        4,598.4        37.0  

United Kingdom

     1,691.3        13.2        1,688.0        12.8        1,590.2        12.8  

Western Continental Europe

     2,735.4        21.3        2,630.6        20.0        2,438.3        19.6  

Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe

       3,925.7        30.6          4,057.1          30.8          3,801.7          30.6  
1    

Revenue less pass-through costs is revenue less media, data collection and other pass-through costs. Pass-through costs comprise fees paid to external suppliers where they are engaged to perform part or all of a specific project and are charged directly to clients, predominantly media and data collection costs. See note 3 to the consolidated financial statements for more details of the pass-through costs.

2   

North America includes the US with revenue less pass-through costs of £4,236.7 million (2017: £4,535.3 million, 2016: £4,359.7 million).

3   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

The Company’s principal disciplines and operating companies within each of its business segments are described below.

 

Advertising and Media Investment Management

 

Advertising – WPP’s creative advertising services are delivered through our integrated agency networks, which include Ogilvy, Wunderman Thompson, VMLY&R and Grey. Among the principal functions of these agencies are the planning and creation of marketing and branding campaigns and the design and production of advertisements across all media.

 

Media Investment Management – GroupM is the world’s leading media investment company responsible for more than $45 billion in annual media investment through agencies including Mindshare, MediaCom, Wavemaker, Essence and m/SIX, as well as the outcomes-driven programmatic audience company, Xaxis.

 

Data Investment Management

 

WPP’s data investment management services are delivered through Kantar, one of the world’s leading data, insights and consulting company.

 

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Public Relations & Public Affairs

 

WPP’s public relations and public affairs companies advise clients who are seeking to communicate with a range of stakeholders from consumers to governments and the business and financial communities. They include Burson Cohn & Wolfe and Hill+Knowlton Strategies.

 

Brand Consulting, Health & Wellness and Specialist Communications

 

Brand Consulting – Our consumer, corporate and employee brand consulting and design services, covering areas such as brand strategy, creative services, digital corporate communications, identity, motion graphics and packaging, are delivered through firms such as Landor and Superunion.

 

Health & Wellness – WPP provides integrated health marketing solutions through its main agency networks in the US and, internationally, specialist firms such as ghg, Sudler and Ogilvy Healthworld.

 

Specialist Communications (including direct, interactive and ecommerce) – WPP provides a full range of specialist communications services, including digital marketing, production, ecommerce, shopper, direct, field, retail, promotional, point-of-sale, sports marketing and events.

 

WPP Head Office

 

The central functions of WPP, with principal offices in London and New York, are to develop the strategy of the Company, coordinate the provision of services to cross-Company clients, perform a range of cross-Company functions in areas such as new business, talent recruitment and development, training, IT, finance, audit, legal affairs, mergers & acquisitions (M&A), property, sustainability, investor relations and communications, promote best practice in areas such as our agencies’ approach to diversity and inclusion, drive operating efficiencies and monitor the financial performance of WPP’s operating companies.

 

Our new strategy in 2018

 

We describe our new strategy as a radical evolution. It’s radical because we are making tough decisions and taking decisive action – having restructured a large proportion of our revenue base in 2018 – but an evolution because we are changing our business in a way that respects the people and things that make WPP such a great organisation. WPP has substantial assets, the most important of which is our people. As a talent business we need to transform at the right pace, and bring our people with us on the journey.

 

Our strategy focuses on growth. The restructuring of our business and associated cost savings will enable increased investment in creativity, technology and talent, so that we are well positioned for top-line growth in the future.

 

We aim to deliver this strategy over the next three years, incurring cash costs for restructuring of £300 million. The annual savings are anticipated to be £275 million by the end of 2021, approximately half of which will be reinvested in the business.

 

Our five elements to our new corporate strategy are:

 

   

Vision & Offer. A new vision developed with our people and clients and a refreshed, more contemporary offer to meet the needs of our clients in a rapidly changing market.

 

   

Creativity. A renewed commitment to creativity, WPP’s most important competitive advantage.

 

   

Data & Technology. Harnessing the strength of our marketing and advertising technology, and unique partnerships with technology firms, for the benefit of clients.

 

   

Simpler Structure. Reducing complexity and making sure our clients can access the best resources from across the Company.

 

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Culture. Investment in our people, our culture and a new set of values to ensure WPP is the natural home for the best and brightest talent.

 

Sustainability

 

Our clients look to us to provide the insight, expertise and creative solutions they need to navigate this changing landscape and communicate their purpose effectively and authentically. Our own sustainability strategy helps us to do this with credibility, meeting changing client expectations while reducing risks and creating a more resilient business for the long term.

 

Our sustainability strategy aligns with all five elements of our new corporate strategy, which we introduced in late 2018. We work with clients on sustainability across our disciplines. This work is growing in importance as more of our clients seek to develop brands with purpose and to integrate social and environmental values into their communication. Below sets out the most material ways in which sustainability supports our strategy.

 

   

Vision & Offer.

A stronger offer for our clients: A growing number of clients are grappling with sustainability challenges and looking to articulate the purpose of their brands. They look for partners who share their sustainability values and aspirations. Our commitment to responsible and sustainable business practices helps us to broaden and deepen these partnerships, and to meet the growing expectations and sustainability requirements in client procurement processes.

 

   

Creativity.

Social investment: Our pro bono work can make a significant difference to charities and non-governmental organisations (NGOs), enabling our partners to raise awareness and funds, recruit members, and achieve campaign objectives. Pro bono work benefits our business too, providing rewarding creative opportunities for our people that often result in award-winning campaigns that raise the profile of our companies

 

Diverse and inclusive teams: Creativity thrives on diversity of background and thought. This makes having a diverse and inclusive workplace essential to our long-term business success. We want all of our people to feel valued and able to fulfil their potential, regardless of gender, ethnicity, age, or disability.

 

   

Data & Technology.

Privacy and data ethics: Data – including consumer data – can play an essential role in our work for clients. Data security and privacy are increasingly high-profile topics for regulators, consumers and our clients. We have a responsibility to look after this data carefully; to collect data only when needed and with consent where required, and to store and transfer data securely.

 

   

Simpler Structure.

Greener office space: Our work to simplify our structure and consolidate our office space is driving a positive impact on our energy use and carbon footprint. We are reducing the overall number of offices we occupy, moving to locations that use green building standards and reduce our impact, help us to use space more efficiently and encourage collaboration between our companies.

 

   

Culture.

Shared values across our business and supply chain: Strong employment policies, investment in skills and inclusive working practices help us recruit, motivate and develop the talented people we need to serve our clients in all disciplines across our locations. Selecting suppliers and partners who adopt standards consistent with our own can reduce costs, improve efficiency, and protect our reputation.

 

Clients

 

   

£2.07 billion revenues generated through clients who engaged with us on sustainability, equivalent to approximately 13% of our total revenue.

 

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People

 

   

We spent £45.5 million on training in 2018.

 

   

At year-end 2018, women comprised 36% of the WPP Board and Executive leadership roles, 49% of Senior Managers, and 54% of total employees.

 

Environment

 

   

Our scope 1 and 2 market-based emissions per employee for 2018 were to 0.74 tonnes of CO2e, a 9% reduction from 2017.

 

Social investment

 

   

Our pro bono work was worth £11.3 million in 2018. We also made cash donations to charities of £6.2 million, resulting in a social investment worth £17.5 million. This is equivalent to 1.20% of profit before tax.

 

   

WPP media agencies negotiated free media space worth £23.8 million on behalf of pro bono clients, 1.63% of profit before tax.

 

Clients

 

The Group works with 369 of the Fortune Global 500, all 30 of the Dow Jones 30, and 71 of the NASDAQ 100.

 

The Company’s 10 largest clients accounted for 14.4% of the Company’s revenues in the year ended 31 December 2018. No client of the Company represented more than 5% of the Company’s aggregate revenues in 2018. The Group’s companies have maintained long-standing relationships with many of their clients, with an average length of relationship for the top 10 clients of approximately 50 years.

 

Government Regulation

 

From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations, and rulings that directly or indirectly affect the form, content, and scheduling of advertising, public relations and public affairs, and market research, or otherwise limit the scope of the activities of the Company and its clients. Some of the foregoing relate to privacy and data protection and general considerations such as truthfulness, substantiation and interpretation of claims made, comparative advertising, relative responsibilities of clients and advertising, public relations and public affairs firms, and registration of public relations and public affairs firms’ representation of foreign governments.

 

There has been a trend towards expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to advertising for certain products, such as over-the-counter drugs and pharmaceuticals, cigarettes, food and certain alcoholic beverages, and to certain groups, such as children. Though the Company does not expect any existing or proposed regulations to have a material adverse impact on the Company’s business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.

 

IT

 

We develop principles on privacy and data protection and compliance with local laws. We implemented extensive training ahead of GDPR implementation in 2018 and rolled out a GDPR toolkit to assist our people to prepare for implementation and will do the same as new legislation is adopted in other markets.

 

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A Chief Privacy Officer and Data Protection Officer have been appointed at the Company and Data Protection Officers are in place at a number of our operating companies. Our Group Chief Privacy Officer and Data Protection Officer are working with our internal audit team to review privacy risks and practices as part of our company-wide audit programme.

 

In 2018, we launched WPP’s Data Privacy and Security Charter to help us communicate our approach to data to our people and our clients. This brings together our Data Code of Conduct, which sets out core principles for responsible data management, with our IT security, privacy and social media policies, and our security standards (which are based on ISO 27001).

 

Our people must take Privacy & Data Security Awareness training and understand the WPP Data Code of Conduct and WPP policies on data privacy and security.

 

The Data Health Checker survey is performed annually to understand the scale and breadth of data we collect so the level of risk associated with this can be assessed. We use our Data Health Checker to review privacy risks and data security practices in our businesses. This provides us with insight into how data is used, stored and transferred and helps to identify any parts of the business that need further support on data practices. The results showed that the majority of our companies have mitigation measures that match or exceed their level of privacy risk, with the average risk score being 2.16 out of 5, where 5 is the maximum score possible indicating maximum risk. Of those companies surveyed, 80% have a dedicated privacy lead.

 

The IT Transformation project will enhance our data security. In addition, we have established a global internal IT company responsible for providing core IT shared services to our companies and manage external technology providers.

 

C. Organizational Structure

 

The Company’s business comprises the provision of creative transformation services on a national, multinational and global basis. It operates out of over 3,000 offices in 112 countries (including associates). For a list of the Company’s principal subsidiary undertakings and their country of incorporation see Exhibit 8.1 to this Form 20-F.

 

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D. Property, Plant and Equipment

 

The majority of the Company’s properties are leased, although certain properties which are used mainly for office space are owned. In the United States the sole owned property was the 214,000 square foot VMLY&R office condominium for their headquarters located at 3 Columbus Circle in New York, New York, which was sold and converted to a leased location in Q1 2019 in addition to 160,000 of square feet of space already leased. Other owned properties are in Latin America (principally in Argentina, Brazil, Chile, Mexico, Peru and Puerto Rico), Asia (India and China) and in Europe (Spain, France, UK and Italy). In Europe, owned properties include the 135,626 square foot TNS office located at 2 Rue Francis Pedron, Chambourcy, Paris, France and the 101,592 square foot TNS House at Westgate, Hangar Lane, London. Manufacturing facilities are owned in the United Kingdom. Principal leased properties, which are accounted for as operating leases, include office space at the following locations:

 

Location   Use     
Approximate
square footage

 

3 World Trade Center, New York, NY

  GroupM, Mindshare, Wavemaker, Mediacom, Kantar (Occupancy Q4 2018)      690,000  

636 Eleventh Avenue, New York, NY

  Ogilvy, Geometry, MJM      564,000  

399 Heng Feng Road, Zhabei, Shanghai

  Ogilvy, GroupM, Wavemaker, Mediacom, Mindshare, Geometry, Kantar, Hill+Knowlton Strategies, GTB, Sudler MDS, Burson Cohn & Wolfe, Peclars, Hogarth, Wunderman Thompson, Superunion, Kinetic.      464,200  

498 Seventh Avenue, New York, NY

  GroupM, Mindshare, Wavemaker, Mediacom (Lease expired Q4 2018, Employees transferred to 3 World Trade Center)      401,000  

Calle de Ríos Rosas, 26, Madrid, Spain

  GroupM, Grey, Kantar, WPP Health & Wellness, Ogilvy, Hill+Knowlton Strategies, Burson Cohn & Wolfe, Axicom, WPP, Lambie Nairn, Finance +, Superunion, SCPF VMLY&R, Wunderman Thompson (Fully occupied Q1 2019)      382,402  
The Orb Adjacent to JW Marriott Sahar, Chatrapati Shivaji International Airport, Andheri East, Mumbai   GroupM, Ogilvy, Kantar, Grey, Wunderman Thompson, H+K, Fitch, Landor, VMLY&R, Genesis BM & PPR.      375,000  

3 Columbus Circle, New York, NY

  VMLY&R, Wunderman Thompson, Midas Exchange, Berlin Cameron, CMI (See discussion above)      374,000  

200 Fifth Avenue and 23 West 23rd Street, New York, NY

  Grey, Burson Cohn & Wolfe, ghg, GCI Health      349,000  

230 Park Avenue South, New York, NY

  Burson Cohn & Wolfe, Landor, Sudler & Hennessey, Hogarth, Kinetic (Exiting H1 2019)      301,000  

Tower B, DLF Cyber Park, Gurgaon

  GroupM, Ogilvy, Wunderman Thompson, Hogarth, Grey, Kantar, AKQA, ADK (Q1 2020 Occupancy)      288,000  

500/550 Town Center Drive, Dearborn, MI

  Global Team Blue, PRISM, Burrows, Possible, VMLY&R      282,900  

222 Merchandise Mart / 350 N Orleans, Chicago IL

  Ogilvy, Wunderman Thompson, Geometry, Global Team Blue, Kantar, GroupM, Burson Cohn & Wolfe, Hill+Knowlton Strategies, The Futures Company, Kinetic      277,400  

333 North Green Street, Chicago, IL

  Ogilvy, Wunderman Thompson, Geometry, GTB, Kantar, GroupM, Burson Cohn & Wolfe, Hill+Knowlton Strategies, The Futures Company, Kinetic, VMLY&R (Estimated Q1 2020 Occupancy)      263,356  

125 Queens Quay, Toronto, Canada

  GroupM, Ogilvy, Kantar, Wunderman Thompson, VMLY&R, Grey, H&K (Estimated Q4 2021 Occupancy)      258,053  

Sea Containers House, Upper Ground, London SE1

  Ogilvy, Wavemaker, WPP, Kantar      226,000  

 

The Company considers its properties, owned or leased, to be in good condition and generally suitable and adequate for the purposes for which they are used. At 31 December 2018, the fixed asset value (cost less depreciation) representing land, freehold buildings and leasehold buildings as reflected in the Company’s consolidated financial statements was £780.6 million.

 

In 2018, 21% of our floorspace was certified to advanced sustainability standards like LEED and BREEAM. Our target is 25% of global floor space certified to advanced green building standards by 2020.

 

We will continue to develop Campus co-locations to house our agencies in major cities, which deliver world-class working environments and increased efficiencies. The focus for 2019 includes 80 closures at local office

 

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level by end of 2019 and opening of new WPP Campuses such as Madrid and Amsterdam. 70 of the 100 planned office mergers have been completed and 57 of the 80 offices have been closed.

 

See note 3 to the consolidated financial statements for a schedule by years of future minimum rental payments to be made and future sublease rental payments to be received, as at 31 December 2018, under non-cancelable operating leases of the Company.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

As introduced on page 7, certain Non-GAAP measures are included in the operating and financial review and prospects.

 

A. Operating Results

 

Overview

 

The Company is one of the world’s most comprehensive marketing communications groups. It operates through a large number of established national, multinational and global advertising and marketing services companies. The Company offers services in four reportable segments:

 

   

Advertising and Media Investment Management;

 

   

Data Investment Management;

 

   

Public Relations & Public Affairs; and

 

   

Brand Consulting, Health & Wellness and Specialist Communications

 

In 2018, approximately 46% of the Company’s consolidated revenues were derived from Advertising and Media Investment Management, with the remaining 54% of its revenues being derived from the remaining three segments.

 

The following discussion is based on the Company’s audited consolidated financial statements beginning on page F-1 of this report. The Group’s consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.

 

During 2018 we focused on a number of short-term strategic priorities, as well as on formulating a new long-term strategy, which was announced in December. The actions taken in 2018 are outlined below.

 

   

Focus on our clients. Emphasis on providing faster, more agile, more effectively integrated solutions for our clients.

 

   

Continue to simplify our organisation. Creation of VMLY&R, a new brand experience agency formed by the merger of VML and Y&R. Integration of our healthcare agencies with Ogilvy, VMLY&R and Wunderman. Began Wunderman and J. Walter Thompson merger to create Wunderman Thompson, a new creative, data and technology agency. VML, Y&R, Wunderman, J. Walter Thompson and WPP Health & Wellness collectively account for 23% of WPP revenue. Opened/announced further Campus co-locations including New York, Prague and Toronto. Completion of Burson Cohn & Wolfe merger.

 

   

Embed data and technology much more deeply into our offer. New data and technology team in place. First WPP Chief Technology Officer appointed.

 

   

Invest in talent that represents our changing world. Formation of new central team with key appointments including Chief Operating Officer, Chief Client Officer and Chief Technology Officer. WPP Executive Committee established for the first time, drawn from corporate and operating company leadership.

 

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Evaluate the shape of the portfolio to maximise shareholder value and release capital. 30 disposals in 2018, raising £849 million to reduce our debt. Initiated a strategic review of options in relation to Kantar to maximise shareholder value. The intention is to continue to develop Kantar while remaining a shareholder with strategic links to the business.

 

The share price decreased by 37% in 2018, closing at 846.6p at year end. Since then it has risen to 936.2p, up 11%, at 23 April 2019. Dividends remain flat at 60.00p in 2018, same as prior year.

 

Revenue was down 1.3% at £15.602 billion. Revenue on a constant currency basis was up 1.5% compared with last year, the difference to the reportable number reflecting the strength of the pound sterling against most currencies, particularly in the first half of the year. On a like-for-like basis, which excludes the impact of currency and acquisitions, revenue was up 0.8%. Billings were £55.798 billion, up 0.4%, up 3.3% in constant currency and up 3.2% like-for-like.

 

The Group’s revenue is more weighted to the second half of the year across all regions and sectors, and, particularly, in the faster growing markets of Asia Pacific and Latin America. As a result, headline PBIT continues to be skewed to the second half of the year, with the Group earning approximately 40% of its headline PBIT in the first half and 60% in the second half.

 

Profit before interest and tax was down 27.0% to £1.475 billion from £2.022 billion. Headline PBIT for 2018 was down 9.7% to £2.047 billion, from £2.267 billion and down 7.4% in constant currencies. Headline EBITDA was down by 8.8% to £2.311 billion, from £2.534 billion the previous year and down 6.4% in constant currencies.

 

Profit before tax fell by 30.6% to £1.463 billion from £2.109 billion reflecting principally the £302 million of restructuring and transformation costs and £184 million of goodwill impairment charges. Headline profit before tax was down 11.0% to £1.863 billion from £2.093 billion.

 

Profit after tax fell by 40.4% to £1.139 billion from £1.912 billion. In constant currencies, profit after tax fell 38.5%.

 

Profits attributable to shareholders fell 41.5% to £1.063 billion from £1.817 billion, again reflecting principally the £302 million of restructuring and transformation costs and £184 million of goodwill impairment. In constant currencies, profits attributable to shareholders fell by 39.6%.

 

Diluted earnings per share fell by 40.8% to 84.3p from 142.4p and decreased 38.9% in constant currencies.

 

Net cash inflow from operating activities increased to £1.694 billion in the year. In 2018, operating profit was £1.431 billion, depreciation, amortisation and goodwill impairment £728 million, non-cash share-based incentive charges £85 million, working capital and provisions inflow £166 million, net interest paid £162 million, tax paid £384 million, capital expenditure £375 million, earnout payments £120 million and other net cash outflows £266 million, principally £235 million gains on disposal of investments and subsidiaries. Free cash flow available for debt repayment, acquisitions (excluding earnouts), share buy-backs and dividends was, therefore, £1.103 billion. This free cash flow was enhanced by £849 million of proceeds from the disposal of associates and investments, offset by £289 million in cash acquisition costs (investments and new acquisition payments), £207 million in share buy-backs and £747 million in dividends, a net outflow of £394 million. This resulted in a net cash inflow of £709 million.

 

Debt financing was £6.660 billion at 31 December 2018, compared to £6.875 billion at 31 December 2017. Average net debt in 2018 was £4.966 billion, compared to £5.125 billion in 2017, at 2018 exchange rates. On 31 December 2018 net debt was £4.017 billion, against £4.483 billion on 31 December 2017, a decrease of £466 million (a decrease of £605 million at 2018 exchange rates). The reduced period end debt figure reflects the benefit of £849 million proceeds in relation to disposal of our interests in certain associates and investments, the principal of which were Globant S.A., Imagina, AppNexus and Bruin.

 

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Segment performance

 

Performance of the Group’s businesses is reviewed by management based on headline PBIT. A table showing these amounts by reportable segment and geographical area for each of the three years ended 31 December 2018, 2017 and 2016 is presented in note 2 to the consolidated financial statements. To supplement the reportable currency segment information presented in note 2 to the consolidated financial statements, the following tables give details of revenue growth and revenue less pass-through costs growth by geographical area and reportable segment on a reported, constant currency, and like-for-like basis. Headline PBIT and headline PBIT margin by reportable segment are also provided below.

 

Geographical area

 

Revenue Analysis                                             
     

Reported

revenue

growth %+/(-)

    

Constant

currency

revenue

growth %+/(-)

    

Like-for-like

revenue

growth %+/(-)

 
      2018     20171      2018     20171      2018     20171  

North America

     (5.1     4.8        (1.9     0.1        (3.0     (2.5

United Kingdom

     2.6       8.3        2.6       8.3        1.5       6.8  

Western Continental Europe

     3.2       7.4        3.5       1.6        1.7       (0.2

Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe

     (1.6     6.1        3.8       0.8        4.4       (0.3

Total Group

     (1.3     6.2        1.5       1.6        0.8       (0.2
  1   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

 

Revenue less pass-through costs analysis                                      
     

Reported

revenue

less pass-
through costs1
growth %+/(-)

    

Constant
currency

revenue

less pass-
through costs1
growth %+/(-)

   

Like-for-like
revenue

less pass-
through costs1
growth %+/(-)

 
      2018     20172      2018     20172     2018     20172  

North America

     (6.7     4.3        (3.5     (0.4     (4.2     (3.2

United Kingdom

     0.2       6.2        0.2       6.2       (0.5     4.9  

Western Continental Europe

     4.0       7.9        4.1       1.9       2.0       —    

Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe

     (3.2     6.7        2.0       1.4       2.5       (0.9
  1   

Revenue less pass-through costs is revenue less media, data collection and other pass-through costs. Pass-through costs comprise fees paid to external suppliers where they are engaged to perform part or all of a specific project and are charged directly to clients, predominantly media and data collection costs. See note 3 to the consolidated financial statements for more details of the pass-through costs.

 
  2   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

 

North America constant currency revenue less pass-through costs was down 4.5% in the final quarter, the same as the third quarter, and down 5.7% like-for-like, a slight deterioration on the third quarter (-5.3%). This reflects continuing challenges in our advertising businesses, with data investment management and healthcare also slower, partly offset by a significant improvement in public relations and public affairs. On a full year basis, constant currency revenue less pass-through costs was down 3.5%, with like-for-like down 4.2%. Addressing our underperforming operations in the US is a key element of WPP’s new strategy.

 

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United Kingdom constant currency revenue less pass-through costs was down 2.4% in the final quarter and down 2.7% like-for-like, slightly weaker than the -2.0% shown in quarter three. Media investment management and the specialist communications businesses were particularly strong with data investment management improving. Our public relations and public affairs and direct, interactive and ecommerce businesses were slower. On a full year basis, constant currency revenue less pass-through costs was up 0.2%, with like-for-like down 0.5%.

 

Western Continental Europe constant currency revenue less pass-through costs was up 4.1% in the final quarter, a significant improvement on the growth in quarter three of 1.3%. On a like-for-like basis revenue less pass-through costs was also up 4.1%, the strongest quarter of the year, and compared to -0.4% in quarter three. Twelve of the Group’s top 14 markets showed significant growth in quarter four, particularly Austria, Belgium, Denmark, Finland, Germany, Italy, the Netherlands, Portugal, Sweden and Turkey. For the year, Western Continental Europe constant currency revenue less pass-through costs grew 4.1% with like-for-like up 2.0%, the second strongest performing region.

 

In Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, on a constant currency basis, revenue less pass-through costs was up 0.4% in the fourth quarter and up 2.6% like-for-like, slightly above the third quarter growth of 2.4%. In the fourth quarter, Latin America grew over 7%, stronger than the third quarter, with Central & Eastern Europe showing double-digit growth in the fourth quarter compared with almost 5% in quarter three. Asia Pacific and Africa & the Middle East were slightly weaker. On a full-year basis, constant currency revenue less pass-through costs growth in the region was 2.0% with like-for-like growth 2.5%, the strongest performing region.

 

Reportable Segments

 

Revenue Analysis                                      
     

Reported

revenue

growth%+/(-)

    

Constant

currency

revenue

growth%+/(-)

   

Like-for-like

revenue

growth%+/(-)

 
      2018     20171      2018     20171     2018     20171  

Advertising and Media Investment Management

     (3.2     9.8        (0.4     5.2       1.0       0.1  

Data Investment Management

     (4.5     1.2        (1.8     (3.5     (2.0     (2.9

Public Relations & Public Affairs

     0.6       6.5        3.4       1.7       3.1       0.8  

Brand Consulting, Health & Wellness and Specialist Communications

     3.3       3.5        6.3       (0.9     1.5       0.6  

Total Group

     (1.3     6.2        1.5       1.6       0.8       (0.2
  1   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

 

Revenue less pass-through costs analysis                                      
     

Reported

revenue

less pass-

through  costs1
growth %+/(-)

    

Constant
currency

revenue

less pass-
through costs1
growth %+/(-)

   

Like-for-like
revenue

less pass-
through costs1

growth%+/(-)

 
      2018     20172      2018     20172     2018     20172  

Advertising and Media Investment Management

     (6.1     8.0        (3.3     3.5       (1.2     (2.3

Data Investment Management

     (4.2     2.9        (1.3     (1.9     (1.8     (1.3

Public Relations & Public Affairs

     (0.4     5.8        2.5       1.0       2.6       0.2  

Brand Consulting, Health & Wellness and Specialist Communications

     2.6       4.7        5.6       0.2       0.6       1.0  
  1    

Revenue less pass-through costs is revenue less media, data collection and other pass-through costs. Pass-through costs comprise fees paid to external suppliers where they are engaged to perform part or all of a specific project and are charged directly to clients, predominantly media and data collection costs. See note 3 to the consolidated financial statements for more details of the pass-through costs.

 
  2   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

 

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Table of Contents
Headline PBIT analysis   2018     2017     2016  
     £m    

Headline

PBIT

margin1

%

    £m    

Headline

PBIT

margin1, 2

%

    £m    

Headline

PBIT

margin1, 2

%

 

Advertising and Media Investment Management

    972.4       17.6       1,109.0       18.8       1,027.2       18.8  

Data Investment Management

    301.1       15.3       350.3       17.1       351.5       17.6  

Public Relations & Public Affairs

    183.7       16.2       183.2       16.1       179.8       16.7  

Brand Consulting, Health & Wellness and Specialist Communications

    590.1       14.1       624.6       15.3       601.8       15.4  

Total

    2,047.3               2,267.1               2,160.3          
  1    

Headline PBIT margin is calculated as headline PBIT as a percentage of revenue less pass-through costs. Previously referred to as revenue less pass-through costs margin.

 
  2   

Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

 

 

In constant currencies, advertising and media investment management revenue less pass-through costs was down 1.6% in the fourth quarter, a significant improvement on the -6.5% in the third quarter and the strongest quarter of the year. On a like-for-like basis revenue less pass-through costs was up 0.4% in the fourth quarter, the first quarter of positive growth, with both our advertising and media investment businesses showing considerable improvement over the third quarter. However, despite this improvement, our advertising businesses remain under pressure. On a full year basis, constant currency revenue less pass-through costs was down 3.3%, down 1.2% like-for-like.

 

The strong revenue less pass-through costs growth across most of the Group’s media investment management businesses, offset by slower growth in our advertising businesses in most regions, resulted in headline PBIT decreasing £137 million from £1,109 million in 2017 to £972 million in 2018 and the combined headline PBIT margin of this sector being down 1.2 margin points at 17.6% and down 1.4 margin points in constant currency.

 

In constant currencies, data investment management revenue less pass-through costs was down 2.8% in the fourth quarter, and down 2.8% like-for-like. On a full year basis, constant currency revenue less pass-through costs was down 1.3%, down 1.8% like-for-like. Geographically, revenue less pass-through costs was up strongly in Asia Pacific and Latin America, but North America was weaker. Kantar Worldpanel and Kantar Media showed strong like-for-like revenue less pass-through costs growth, with Kantar Insights, Kantar Health, Kantar Public and Lightspeed less robust. As a result, headline PBIT was down £49 million from £350 million in 2017 to £301 million in 2018. Headline PBIT margins were down 1.8 margin points to 15.3% and down 1.8 margin points in constant currency.

 

In the fourth quarter, in constant currencies and like-for-like, our public relations and public affairs businesses were the strongest performing sector, as they were in the first half and third quarter, with growth of 3.3% and 1.2% respectively. On a full year basis, constant currency revenue less pass-through costs grew 2.5% with like-for-like growth 2.6%. Geographically, all regions showed strong growth, with the United Kingdom and Africa & the Middle East particularly strong. Burson Cohn & Wolfe, Hill+Knowlton Strategies and the specialist public relations and public affairs businesses Finsbury, Hering Schuppener and Buchanan, performed particularly well. As a result, headline PBIT was up £1 million from £183 million in 2017 to £184 million in 2018. Overall headline PBIT margins improved 0.1 margin points to 16.2% and by 0.1 margin points in constant currency.

 

Brand consulting, health & wellness and specialist communications businesses (including direct, interactive and ecommerce), performed less well in the fourth quarter with constant currency revenue less pass-through costs up 0.2%, compared with 6.5% in the third quarter, with like-for-like down 1.6%, as our healthcare businesses in North America and some direct, interactive and ecommerce businesses came under pressure. On a full year basis, revenue less pass-through costs was up 5.6% in constant currency and up 0.6% like-for-like. In brand consulting, Landor and FITCH performed strongly, and in the direct, interactive and ecommerce businesses, Wunderman,

 

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Table of Contents

Hogarth, AKQA, Blue State Digital, F.biz and Deeplocal performed well. Headline PBIT margins, for the sector as a whole, were down by 1.2 margin points to 14.1% and down 1.3 margin points in constant currency, with headline PBIT margins negatively affected as parts of our direct, interactive and ecommerce, brand consulting and healthcare businesses in North America slowed. As a result headline PBIT was down £35 million from £625 million in 2017 to £590 million in 2018.

 

2019 Reportable Segments

 

The restructuring actions that we are implementing, including the mergers of VMLY&R and Wunderman Thompson, the One Ogilvy strategy and the reorganization of our specialist healthcare agencies, mean that certain units will be reclassified between sectors and going forward it is likely to be less meaningful to report these sectors as we have in the past. We will review the appropriateness of this sectoral breakdown during 2019.

 

2018 compared with 2017

 

Revenues

 

Reported revenue was down 1.3% at £15,602.4 million. Revenue on a constant currency basis was up 1.5% compared with last year, the difference to the reportable number reflecting the strength of the pound sterling against most currencies, particularly in the first half of the year. On a like-for-like basis, which excludes the impact of currency and acquisitions, revenue was up 0.8%.

 

Costs of services, general and administrative costs

 

Costs of services increased by 0.3% in 2018 to £12,663.5 million from £12,629.0 million in 2017.

 

General and administrative costs increased by 19.0% to £1,507.5 million from £1,267.0 million in 2017, principally in relation to an increase in the provision for bad debts and higher IT costs.

 

Staff costs decreased by 1.8%. Staff costs, excluding incentives, also decreased by 1.8%. Incentive payments of £326 million were 14.2% of headline PBIT, excluding share of results of associates (excluding exceptional gains/losses), before incentives compared with £324 million or 13.1% in 2017. Achievement of target, at an individual Company level, generally generates 15% of headline PBIT, excluding share of results of associates (excluding exceptional gains/losses), before bonus as an incentive pool and 20% at maximum.

 

On a like-for-like basis, the average number of people in the Group, excluding associates, in 2018 was 133,903 compared to 135,521 in 2017, a decrease of 1.2%. On the same basis, the total number of people, excluding associates, at 31 December 2018 was 134,281 compared to 135,187 at 31 December 2017, a decrease of 906 or 0.7%.

 

As outlined in the investor day on 11 December 2018, we have undertaken a strategic review of our operations. As part of that review, restructuring actions have been taken to right-size underperforming businesses, address high cost severance markets and simplify operational structures. This has included the merger of a number of WPP’s operating companies. It also includes transformation costs with respect to strategic initiatives like co-locations in major cities, IT transformation and shared services.

 

£234 million of restructuring and transformation costs were recorded in the fourth quarter in relation to this plan. This included £63 million of non-cash write-offs and £171 million of actions that have a cash impact in 2018 and beyond. In 2018 the cash outflow was £50 million. The £171 million forms part of the anticipated £300 million total cash cost of the restructuring plan that we announced – with the balance to be incurred in 2019, 2020 and 2021.

 

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Table of Contents

The total of restructuring and transformation costs in 2018 was £302 million. The remaining £68 million relates to severance restructuring costs recorded in the first half, together with costs in relation to the continuing global IT transformation program. These costs of £302 million and £41 million of associate company exceptional losses have been partly offset by exceptional gains of £235 million, primarily relating to the gain on the sale of the Group’s investment in Globant S.A.

 

This gives a net exceptional loss of £108 million and compares with a net exceptional loss in 2017 of £24 million.

 

Profit before interest and taxation

 

As a result of the above, profit before interest and tax was down 27.0% to £1.475 billion from £2.022 billion, down 24.4% in constant currencies. Headline PBIT was down 9.7% to £2.047 billion, from £2.267 billion and down 7.4% in constant currencies.

 

Finance income, finance costs and revaluation of financial instruments

 

Finance income increased to £104.8 million in 2018 from £95.2 million in 2017. Finance costs increased to £289.3 million in 2018 from £269.8 million in 2017. Therefore, net finance costs were £184.5 million, compared with £174.6 million in 2017, an increase of £9.9 million. This is due to the higher dollar interest rates. Revaluation of financial instruments resulted in a gain of £172.9 million in 2018 and a gain of £262.2 million in 2017.

 

Taxation

 

The Group’s tax rate on profit before tax was 22.1% in 2018 against 9.3% in 2017. The difference in the rates in 2017 was principally due to an exceptional tax credit in 2017, primarily relating to the re-measurement of deferred tax liabilities following US tax reform. Given the Group’s geographic mix of profits and the changing international tax environment, the tax rate is expected to increase slightly over the next few years.

 

Profit for the year

 

Profit after tax fell by 40.4% to £1,139.4 million from £1,912.3 million. In constant currencies, profit after tax fell 38.5%. Profits attributable to shareholders fell 41.5% to £1,062.9 million from £1,816.6 million, again reflecting principally the £302.3 million of restructuring and transformation costs and £183.9 million of goodwill impairment. In constant currencies, profits attributable to shareholders fell by 39.6%. Diluted earnings per share fell by 40.8% to 84.3p from 142.4p and decreased 38.9% in constant currencies.

 

2017 compared with 2016

 

Revenues

 

Our reported revenue growth for the year was 6.2%, and on a constant currency basis, which excludes the impact of currency movements, revenue was up 1.6%. This difference of 4.6% reflects the weakness of the pound sterling against most currencies, particularly in the first half of the year, with some strengthening in the second half.

 

On a like-for-like basis, which excludes the impact of currency and acquisitions, revenue was down 0.2%.

 

Costs of services, general and administrative costs

 

Costs of services increased by 6.6% in 2017 to £12,629.0 million from £11,846.5 million in 2016. The increase is in line with the increase in revenue, primarily driven by pass-through costs and staff costs.

 

General and administrative costs increased by 29.6% to £1,267.0 million from £977.7 million in 2016, primarily due to a net exceptional loss of £24 million in 2017 (compared to a net exceptional gain of £164 million in 2016). The remaining increase is driven by increases in various costs, such as staff costs, currency exchange (gains)/losses and impairment and amortisation of acquired intangibles.

 

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Table of Contents

Reported staff costs increased by 6.9%. Reported staff costs, excluding incentives, increased by 7.8%, up 2.8% in constant currency. Incentive payments of £324 million were 13.1% of headline PBIT, excluding share of results of associates (excluding exceptional gains/losses), before incentives compared with £367 million or 14.9% in 2016. Achievement of target, at an individual Company level, generally generates 15% of headline PBIT, excluding share of results of associates (excluding exceptional gains/losses), before bonus as an incentive pool, 20% at maximum and 25% at super maximum.

 

On a like-for-like basis, the average number of people in the Group, excluding associates, in 2017 was 134,428 compared to 136,409 in 2016, a decrease of 1.5%. On the same basis, the total number of people in the Group, excluding associates, at 31 December 2017 was 134,413 compared to 136,775 at 31 December 2016, a decrease of 2,362 or 1.7%.

 

The Group has embarked on a number of programs to improve operational effectiveness including process simplification, shared service centres, offshoring certain tasks to lower-cost markets and, where appropriate, outsourcing. We are consolidating IT infrastructure and services, and centralising systems development and applications to create efficiencies and focus investment.

 

In 2017 the Group generated exceptional gains of £129 million, largely representing the gain on the sale of the Group’s minority interests in Asatsu-DK to Bain Capital and Infoscout to Vista Equity Partners. These were partly offset by investment write-downs of £96 million, principally in relation to comScore Inc., resulting in a net gain of £33 million, which in accordance with prior practice, has been excluded from headline PBIT. The Group took a £57 million restructuring provision, primarily against severance provisions in mature markets and the Group’s IT Transformation costs, resulting in a net exceptional loss of £24 million.

 

Profit before interest and taxation

 

As a result of the above, reported profit before interest and tax was down over 4% to £2.022 billion from £2.113 billion, down over 7% in constant currencies. Headline PBIT for 2017 was up 4.9% to £2.267 billion, from £2.160 billion and up 1.5% in constant currencies.

 

Finance income, finance costs and revaluation of financial instruments

 

Finance income increased to £95.2 million in 2017 from £80.4 million in 2016. Finance costs increased to £269.8 million in 2017 from £254.5 million in 2016. Therefore, net finance costs were up marginally by 0.3% at £174.6 million, compared with £174.1 million in 2016, an increase of £0.5 million. This is due to the weakness in sterling resulting in higher translation costs on non-sterling debt and the cost of higher average net debt being offset by the beneficial impact of lower bond coupon costs resulting from refinancing maturing debt at cheaper rates and higher investment income. Revaluation of financial instruments resulted in a gain of £262.2 million in 2017 and a loss of £48.3 million in 2016.

 

Taxation

 

The Group’s tax rate on reported profit before tax was 9.3% in 2017 against 20.6% in 2016, principally due to the exceptional tax credit, primarily relating to the re-measurement of deferred tax liabilities. Given the Group’s geographic mix of profits and the changing international tax environment, the tax rate is expected to increase slightly over the next few years. The recent tax changes outlined in the United States Tax Cuts and Jobs Act do not impact the Group’s tax rate significantly, up or down, except for the tax credit mentioned above.

 

Profit for the year

 

Profit for the year increased by over 27% to £1,912.3 million from £1,501.6 million in 2016 on a reported basis and increased by almost 23% in constant currencies. In 2017, £1,816.6 million of profit for the year was attributable to equity holders of the parent and £95.7 million attributable to non-controlling interests. Diluted earnings per share was up almost 32% to 142.4p from 108.0p and increased 26.9% in constant currencies.

 

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B. Liquidity and Capital Resources

 

General—The primary sources of funds for the Group are cash generated from operations and funds available under its credit facilities. The primary uses of cash funds in recent years have been for debt service and repayment, capital expenditures, acquisitions, share repurchases and cancellations and dividends. For a breakdown of the Company’s sources and uses of cash and for the Company’s liquidity risk management see the “Consolidated Cash Flow Statement” and note 23, which are included as part of the Company’s consolidated financial statements in Item 18 of this Report.

 

Progress on growth strategy: In the last seven months we have made significant progress in simplifying our operations to make them more client-centric and improving WPP’s financial position. Milestones include the launch of a new vision, offer and brand identity for WPP, the creation of two new integrated networks (VMLY&R and Wunderman Thompson), the realignment of the US healthcare agencies with major networks, the formation of WPP’s first Executive Committee and the initiation of the process to find a financial and strategic partner for Kantar.

 

As part of the restructuring plan we outlined in the investor day presentation, 70 of the 100 planned office mergers have been completed, 57 of the 80 offices have been closed and approximately 2,650 of the 3,500 planned redundancies have been actioned. The anticipated gross savings remain in line with the £160 million estimate in December. As we outlined in the investor day a proportion of these gross savings will be reinvested in talent and technology development.

 

In addition, 30 disposals were completed in 2018 realising proceeds of £849 million, helping to strengthen the Group’s balance sheet and improve leverage. The disposal programme will continue in 2019 and a further 6 disposals have been completed year-to-date.

 

Return of funds to shareholders: Dividends paid in respect of 2018 will total approximately £753 million for the year. Funds returned to shareholders in 2018 totalled £955 million, including share buy-backs. In 2018, 16.6 million shares, or 1.3% of the issued share capital, were purchased at a cost of £207 million.

 

Uses of funds: As per the investor day in December, over the next three years we will prioritise the dividend over share buy-backs and will balance targeted M&A with divestments.

 

The Group’s liquidity is affected primarily by the working capital flows associated with its media buying activities on behalf of clients. The working capital movements relate primarily to the Group’s billings. Billings comprise the gross amounts billed to clients in respect of commission-based/fee-based income together with the total of other fees earned. In 2018, billings were £55.8 billion, or 3.6 times the revenue of the Group. The inflows and outflows associated with media buying activity therefore represent significant cash flow within each month of the year and are forecast and re-forecast on a regular basis throughout the year by the Group’s treasury staff so as to ensure that there is continuing coverage of peak requirements through committed borrowing facilities from the Group’s bankers and other sources.

 

Liquidity risk management— The Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in excess of peak net-borrowing levels and debt maturities are closely monitored. Targets for debt less cash position are set on an annual basis and, to assist in meeting this, working capital targets are set for all the Group’s major operations. See additional discussion on liquidity risk in note 23 to the consolidated financial statements.

 

Debt

 

The Company’s borrowings consist of bonds and revolving credit facilities, details on the Company’s borrowings are provided in note 10 to the consolidated financial statements.

 

The Group had a five-year Revolving Credit Facility of $2.5 billion due July 2021. Borrowings under the Revolving Credit Facility are governed by certain financial covenants based on the results and financial position of the Group, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 5.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at

 

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30 June and 31 December in each year shall not exceed 3.5 to 1, both covenants are defined in the relevant agreement. The Group is in compliance with both covenants. On 15 March 2019, the Group refinanced the facility and extended the term of the $2.5 billion five-year Revolving Credit Facility to March 2024.

 

The Group also has a one-year Revolving Credit Facility of A$150 million due June 2019 and a three-year Revolving Credit Facility of A$370 million due June 2021. Borrowings under these facilities are governed by certain financial covenants based on the results and financial position of WPP AUNZ, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 4.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at 30 June and 31 December in each year shall not exceed 3.0 to 1, both covenants are defined in the relevant agreement. The Group is in compliance with both covenants.

 

Hedging of financial instruments—The Group’s policy on interest rate and foreign exchange rate management sets out the instruments and methods available to hedge interest and currency risk exposures and the control procedures in place to ensure effectiveness. The Group uses derivative financial instruments to reduce exposure to foreign exchange risk and interest rate movements. The Group does not hold or issue derivative financial instruments for speculative purposes.

 

In 2018, operating profit was £1.431 billion, depreciation, amortisation and goodwill impairment £728 million, non-cash sharebased incentive charges £85 million, working capital and provisions inflow £166 million, net interest paid £162 million, tax paid £384 million, capital expenditure £375 million, earnout payments £120 million and other net cash outflows £266 million, principally £235 million gains on disposal of investments and subsidiaries. Free cash flow available for debt repayment, acquisitions (excluding earnouts), share buy-backs and dividends was, therefore, £1.103 billion. This free cash flow was enhanced by £849 million of proceeds from the disposal of associates and investments, offset by £289 million in cash acquisition costs (investments and new acquisition payments), £207 million in share buy-backs and £747 million in dividends, a net outflow of £394 million. This resulted in a net cash inflow of £709 million.

 

On 31 December 2018 net debt was £4.017 billion, against £4.483 billion on 31 December 2017, a decrease of £466 million (a decrease of £605 million at 2018 exchange rates). The reduced period end debt figure reflects the benefit of £849 million proceeds in relation to disposal of our interests in certain associates and investments, the principal of which were Globant S.A., Imagina, AppNexus and Bruin. Average net debt in 2018 was £4.966 billion, compared to £5.125 billion in 2017, at 2018 exchange rates. Interest (finance cost net of finance income, excluding revaluation of financial instruments) cover based on headline PBIT in 2018 was 11.1 times. The average net debt to headline EBITDA ratio at 2.1x, is above the revised target range of 1.5-1.75x to be achieved by the end of 2021.

 

Average net debt in the first quarter of 2019 was £4.163 billion, compared to £4.875 billion in 2018, at 2019 exchange rates, a decrease of £712 million. The net debt figure of £4.624 billion at 31 March 2019, compares with a current market capitalisation of approximately £11.814 billion at 23 April 2019, giving an enterprise value of £16.438 billion.

 

Given the strong cash generation of the business, its debt maturity profile and available facilities, the Directors believe the Group has sufficient liquidity to match its requirements for the foreseeable future.

 

Refer to Item 5F for details on the Company’s material commitments for capital expenditures at 31 December 2018.

 

C. Research and Development, Patents and Licenses, etc.

 

Not applicable.

 

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D. Trend Information

 

The discussion below and in the rest of this Item 5 includes forward-looking statements regarding plans, objectives, projections and anticipated future performance based on assumptions that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. See “Forward-Looking Statements” preceding Item 1 in this annual report.

 

Revenue in the first quarter of 2019 was £3.588 billion, up 0.9% compared with the same period last year on a reported basis and -0.6% on a constant currency basis. Like-for-like revenue was -1.3% compared with last year. Financial guidance for 2019 is unchanged with like-for-like revenue down 1.5% to 2.0%, with stronger headwinds in the first half, due to client assignment losses in the latter part of 2018.

 

E. Off-Balance Sheet Arrangements

 

None.

 

F. Tabular Disclosure of Contractual Obligations

 

The following summarises the Company’s estimated contractual obligations at 31 December 2018, and the effect such obligations are expected to have on its liquidity and cash flows in the future periods. Certain obligations presented below held by one subsidiary of the Company may be guaranteed by another subsidiary in the ordinary course of business.

 

              Payments due in  
(£m)    Total      2019      2020      2021      2022      2023     

Beyond

2023

 

Debt financing under the Revolving Credit Facility and in relation to unsecured loan notes1

 

Eurobonds

     3,324.4        539.1        224.6               224.6        673.9        1,662.2  

Sterling bonds

     600.0               200.0                             400.0  

US$ bonds

     2,184.5                      637.4        392.3               1,154.8  

Bank revolvers

     174.0        32.0               142.0                       

Subtotal

     6,282.9        571.1        424.6        779.4        616.9        673.9        3,217.0  

Interest payable

     1,728.4        177.3        172.2        157.7        125.6        112.9        982.7  

Total

     8,011.3        748.4        596.8        937.1        742.5        786.8        4,199.7  

Operating leases2

     4,231.1        600.9        468.6        410.4        358.1        320.3        2,072.8  

Capital commitments3

     28.4        28.4                                     

Investment commitments3

     31.4        31.4                                     

Financial derivatives

     4.8        11.4        10.0        8.2        7.0        5.0        (36.8

Estimated obligations under acquisition earnouts and put option agreements

     656.7        185.0        177.9        70.3        119.6        40.2        63.7  

Total contractual obligations

     12,963.7        1,605.5        1,253.3        1,426.0        1,227.2        1,152.3        6,299.4  

 

1    

In addition to debt financing under the Revolving Credit Facility and in relation to unsecured loan notes, the Company had short-term overdrafts at 31 December 2018 of £442.0 million. The Group’s net debt at 31 December 2018 was £4,016.7 million and is analysed in Item 5B.

2   

Operating leases include lease-related costs of £602.9 million and are net of sub-let rentals of £31.5 million. Lease-related costs include real estate taxes, insurance costs and operating costs embedded in the rental payments to the landlord.

3   

Capital and investment commitments include commitments contracted, but not provided for in respect of property, plant and equipment and in respect of interests in associates and other investments, respectively.

 

The Company expects to make annual contributions to its funded defined benefit plans, as determined in line with local conditions and practices. Contributions in respect of unfunded plans are paid as they fall due. The total contributions (for funded plans) and benefit payments (for unfunded plans) paid for 2018 amounted to £44.9 million (2017: £68.2 million, 2016: £43.7 million). Employer contributions and benefit payments in 2019 are expected to be approximately £50 million. Projections for years after 2019 are subject to a number of factors, including future asset performance and changes in assumptions which mean the Company is unable to make sufficiently reliable estimations of future contributions.

 

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Non-GAAP Information

 

As introduced on page 7, the following metrics are the Group’s Non-GAAP measures.

 

Constant currency

 

The Company’s reporting currency is the UK pound sterling. However, the Company’s significant international operations give rise to fluctuations in foreign exchange rates. To neutralize foreign exchange impact and illustrate the underlying change in revenue, profit and other relevant financial statement line items from one year to the next, the Company has adopted the practice of discussing results in both reportable currency (local currency results translated into pounds sterling at the prevailing foreign exchange rate) and constant currency.

 

The Group uses US dollar-based, constant currency models to measure performance. These are calculated by applying budgeted 2018 exchange rates to local currency reported results for the current and prior year. This gives a US dollar-denominated income statement which excludes any variances attributable to foreign exchange rate movements.

 

Pro-forma (‘like-for-like’)

 

Management believes that discussing like-for-like contributes to the understanding of the Company’s performance and trends because it allows for meaningful comparisons of current year to that of prior years.

 

Pro-forma comparisons are calculated as follows: current year, constant currency actual results (which include acquisitions from the relevant date of completion) are compared with prior year, constant currency actual results, adjusted to include the results of acquisitions for the commensurate period in the prior year. The Group uses the terms ‘pro-forma’ and ‘like-for-like’ interchangeably.

 

The following table reconciles reported revenue growth for 2018 and 2017 to like-for-like revenue for the same period.

 

      Revenue  
      £m         

2016 Reportable1

     14,887          

Impact of exchange rate changes

     682       4.6

Changes in scope of consolidation

     266       1.8

Like-for-like growth

     (31     (0.2 %) 

2017 Reportable1

     15,804       6.2

Impact of exchange rate changes

     (435     (2.8 %) 

Changes in scope of consolidation

     109       0.7

Like-for-like growth

     124       0.8

2018 Reportable

     15,602       (1.3 %) 

1  Prior year figures have been restated for the impact of the adoption of IFRS 15 Revenue from Contracts with Customers, as described in the accounting policies section of the consolidated financial statements.

   

 

Headline PBIT

 

Headline PBIT is one of the metrics that management uses to assess the performance of the business.

 

Headline PBIT is calculated as profit before finance income/costs and revaluation of financial instruments, taxation, gains/losses on disposal of investments and subsidiaries, investment write-downs, goodwill impairment

 

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and other goodwill write-downs, amortisation and impairment of acquired intangible assets, restructuring and transformation costs, share of exceptional gains/losses of associates and gains/losses on remeasurement of equity interests arising from a change in scope of ownership.

 

A tabular reconciliation of profit before interest and taxation to headline PBIT is provided in note 29 to the consolidated financial statements.

 

Headline PBT

 

Headline PBT is one of the metrics that management uses to assess the performance of the business.

 

Headline PBT is calculated as profit before taxation, gains/losses on disposal of investments and subsidiaries, investment write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangible assets, restructuring and transformation costs, share of exceptional gains/losses of associates, gains/losses arising from the revaluation of financial instruments, and gains/losses on remeasurement of equity interests arising from a change in scope of ownership.

 

A tabular reconciliation of profit before taxation to headline PBT is shown below.

 

      Year ended 31 December  
     

2018

£m

   

2017

£m

   

2016

£m

 

Profit before taxation

     1,463.3       2,109.3       1,890.5  

Amortisation and impairment of acquired intangible assets

     280.0       195.1       168.4  

Goodwill impairment

     183.9       27.1       27.0  

Gains on disposal of investments and subsidiaries

     (235.5     (129.0     (44.3

(Gains)/losses on remeasurement of equity interests arising from a change in scope of ownership

     (2.0     0.3       (232.4

Investment write-downs

     2.0       95.9       86.1  

Restructuring and transformation costs

     302.3       56.8       27.4  

Share of exceptional losses/(gains) of associates

     41.7       (0.8     15.2  

Revaluation of financial instruments

     (172.9     (262.2     48.3  

Headline PBT

     1,862.8       2,092.5       1,986.2  

 

Headline EBITDA

 

Headline EBITDA is a key metric that private equity firms, for example, use for valuing companies, and is one of the metrics that management uses to assess the performance of the business.

 

Headline EBITDA is calculated as profit before finance income/costs and revaluation of financial instruments, taxation, investment gains/losses and write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of intangible assets, share of exceptional losses/gains of associates, depreciation of property, plant and equipment, losses/gains on remeasurement of equity interests arising from a change in scope of ownership and restructuring and transformation costs.

 

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A tabular reconciliation of profit for the year to headline EBITDA is shown below.

 

      Year ended 31 December  
     

2018

£m

   

2017

£m

   

2016

£m

 

Profit for the year

     1,139.4       1,912.3       1,501.6  

Taxation

     323.9       197.0       388.9  

Finance income, finance cost and revaluation of financial instruments, net

     11.6       (87.6     222.4  

Amortisation and impairment of acquired intangible assets

     280.0       195.1       168.4  

Depreciation of property, plant and equipment

     225.1       230.7       220.8  

Amortisation of other intangible assets

     38.7       36.3       38.6  

Goodwill impairment

     183.9       27.1       27.0  

Gains on disposal of investments and subsidiaries

     (235.5     (129.0     (44.3

(Gains)/losses on remeasurement of equity interests arising from a change in scope of ownership

     (2.0     0.3       (232.4

Investment write-downs

     2.0       95.9       86.1  

Restructuring and transformation costs

     302.3       56.8       27.4  

Share of exceptional losses/(gains) of associates

     41.7       (0.8     15.2  

Headline EBITDA

     2,311.1       2,534.1       2,419.7  

 

Billings

 

Billings is one of the metrics that management uses to assess the performance of the business.

 

Billings comprise the gross amounts billed to clients in respect of commission-based/fee-based income together with the total of other fees earned.

 

Estimated net new billings

 

Estimated net new billings is one of the metrics that management uses to assess the performance of the business.

 

Estimated net new billings represent the estimated annualised impact on billings of new business gained from both existing and new clients, net of existing client business lost. The estimated impact is based upon initial assessments of the clients’ marketing budgets, which may not necessarily result in actual billings of the same amount.

 

Free cash flow

 

The Group bases its internal cash flow objectives on free cash flow. Management believes free cash flow is meaningful to investors because it is the measure of the Company’s funds available for acquisition related payments, dividends to shareholders, share repurchases and debt repayment. The purpose of presenting free cash flow is to indicate the ongoing cash generation within the control of the Group after taking account of the necessary cash expenditures of maintaining the capital and operating structure of the Group (in the form of payments of interest, corporate taxation and capital expenditure). This computation may not be comparable to that of similarly titled measures presented by other companies.

 

Free cash flow is calculated as net cash inflow from operating activities including proceeds from the issue of shares and proceeds from the disposal of property, plant and equipment, less earnout payments, purchases of property, plant and equipment, purchases of other intangible assets and dividends paid to non-controlling interests in subsidiary undertakings.

 

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A tabular reconciliation of net cash inflow from operating activities to free cash flow is shown below.

 

      Year ended 31 December  
     

2018

£m

   

20171

£m

   

20161

£m

 

Net cash inflow from operating activities

     1,693.8       1,408.1       1,773.8  

Share option proceeds

     1.2       6.4       27.2  

Proceeds on disposal of property, plant and equipment

     9.5       8.0       7.7  

Earnout payments

     (120.2     (199.1     (92.3

Purchases of property, plant and equipment

     (314.8     (288.9     (252.1

Purchases of other intangible assets (including capitalised computer software)

     (60.4     (37.3     (33.0

Dividends paid to non-controlling interests in subsidiary undertakings

     (106.2     (87.8     (89.6

Free cash flow

     1,102.9       809.4       1,341.7  

1  Prior year free cash flow has been re-presented to include movements in working capital and provisions and exclude earnout payments.

   

 

Net debt and average net debt

 

Management believes that net debt and average net debt are appropriate and meaningful measures of the debt levels within the Group. This is because of the seasonal swings in our working capital generally, and those resulting from our media buying activities on behalf of our clients in particular, together with the fact that we choose for commercial reasons to locate the debt of the Group in particular countries and leave cash resources in others—though our cash resources could be used to repay the debt concerned.

 

Net debt at a period end is calculated as the sum of the net borrowings of the Group, derived from the cash ledgers and accounts in the balance sheet. Average net debt is calculated as the average daily net borrowings of the Group.

 

The following table is an analysis of net debt:

 

     

2018

£m

   

2017

£m

   

2016

£m

 

Debt financing

     (6,659.9     (6,874.5     (6,567.4

Cash and short-term deposits

     2,643.2       2,391.4       2,436.9  

Net debt

     (4,016.7     (4,483.1     (4,130.5

 

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Use of Estimates

 

The preparation of consolidated financial statements requires management to make estimates, judgements and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Critical Accounting Policies

 

The Company’s consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB. A summary of the Group’s principal accounting policies is provided in the Accounting Policies section of the consolidated financial statements. The Company believes certain of these accounting policies are particularly critical to understanding the more significant judgements and estimates used in the preparation of its consolidated financial statements. Therefore, we have prepared the following supplemental discussion of critical accounting policies, which should be read together with our consolidated financial statements and notes thereto.

 

Goodwill and other intangibles

 

The Company has a significant amount of goodwill and other intangible assets. In accordance with the Group’s accounting policy, the carrying values of goodwill and intangible assets with indefinite useful lives are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

 

The impairment review is undertaken annually on 30 September. The review assessed whether the carrying value of goodwill and intangible assets with indefinite useful lives was supported by the net present value of future cash flows, using a pre-tax discount rate of 9.0% (2017: 8.5%) and management forecasts for a projection period of up to five years, followed by an assumed annual long-term growth rate of 3.0% (2017: 3.0%) and no assumed improvement in operating margin. Management have made the judgement that this long-term growth rate does not exceed the long-term average growth rate for the industry.

 

Under IFRS, an impairment charge is required for both goodwill and other indefinite-lived assets when the carrying amount exceeds the ‘recoverable amount’, defined as the higher of fair value less costs to sell and value in use.

 

Our approach in determining the recoverable amount utilises a discounted cash flow methodology, which necessarily involves making numerous estimates and assumptions regarding revenue growth, operating margins, appropriate discount rates and working capital requirements. The key assumptions used for estimating cash flow projections in the Group’s impairment testing are those relating to revenue growth and operating margin. The key assumptions take account of the businesses’ expectations for the projection period. These expectations consider the macroeconomic environment, industry and market conditions, the unit’s historical performance and any other circumstances particular to the unit, such as business strategy and client mix.

 

These estimates will likely differ from future actual results of operations and cash flows, and it is possible that these differences could be material. In addition, judgements are applied in determining the level of cash-generating unit identified for impairment testing and the criteria used to determine which assets should be aggregated. A difference in testing levels could affect whether an impairment is recorded and the extent of impairment loss. Changes in our business activities or structure may also result in changes to the level of testing in future periods. Further, future events could cause the Group to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Group’s financial condition and results of operations.

 

Historically our impairment losses have resulted from a specific event, condition or circumstance in one of our companies, such as the loss of a significant client. As a result, changes in the assumptions used in our impairment

 

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model have not had a significant effect on the impairment charges recognised and a reasonably possible change in assumptions would not lead to a significant impairment, except for VMLY&R as discussed in note 12 to the consolidated financial statements. The carrying value of goodwill and other intangible assets will continue to be reviewed at least annually for impairment and adjusted down to the recoverable amount if required.

 

Acquisition accounting

 

The Group accounts for acquisitions in accordance with IFRS 3 ‘Business Combinations’. IFRS 3 requires the acquiree’s identifiable assets, liabilities and contingent liabilities (other than non-current assets or disposal groups held for sale) to be recognised at fair value at acquisition date. In assessing fair value at acquisition date, management make their best estimate of the likely outcome where the fair value of an asset or liability may be contingent on a future event. In certain instances, the underlying transaction giving rise to an estimate may not be resolved until some years after the acquisition date. IFRS 3 requires the release to profit of any acquisition reserves which subsequently become excess in the same way as any excess costs over those provided at acquisition date are charged to profit. At each period end, management assess provisions and other balances established in respect of acquisitions for their continued probability of occurrence and amend the relevant value accordingly through the consolidated income statement or as an adjustment to goodwill as appropriate under IFRS 3. In 2018, operating profit includes credits totalling £29.9 million (2017: £44.8 million, 2016: £26.3 million) relating to the release of excess provisions and other balances established in respect of acquisitions completed prior to 2017.

 

Future anticipated payments to vendors in respect of contingent consideration (earnout agreements) are initially recorded at fair value which is the present value of the expected cash outflows of the obligations. The obligations are dependent on the future financial performance of the interests acquired (typically over a four- to five-year period following the year of acquisition) and assume the operating companies improve profits in line with Directors’ estimates. The Directors derive their estimates from internal business plans together with financial due diligence performed in connection with the acquisition. Subsequent adjustments to the fair value are recorded in the consolidated income statement within revaluation of financial instruments. A summary of earnout related obligations included in trade and other payables is shown in note 18 to the consolidated financial statements.

 

WPP has also entered into option agreements that allow the Group’s equity partners to require the Group to purchase the non-controlling interest. These agreements are treated as derivatives over equity instruments and are recorded in the consolidated balance sheet initially at the present value of the redemption amount in accordance with IAS 32 Financial Instruments: Presentation and subsequently measured at fair value in accordance with IFRS 9 Financial Instruments. The movement in the fair value is recognised as income or expense within revaluation of financial instruments in the consolidated income statement.

 

Actual performance may differ from the assumptions used resulting in amounts ultimately paid out with respect to these earnout and option agreements at more or less than the recorded liabilities. Estimates are required regarding growth rates in deriving future financial performance and discount rates to be applied when measuring the liabilities for earnout and option agreements. The assumptions and sensitivity to changes in these assumptions is shown in note 24 to the consolidated financial statements.

 

Revenue recognition

 

The Group is a leading worldwide creative transformation organisation offering national and multinational clients a comprehensive range of communications, experience, commerce and technology services. Contracts often involve multiple agencies offering different services in different countries. As such, the terms of local, regional, and global contracts can vary to meet client needs and regulatory requirements. Consistent with the industry, contracts are typically short-term in nature and tend to be cancellable by either party with 90 days notice. The Group is generally entitled to payment for work performed to date.

 

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The Group is generally paid in arrears for its services. Invoices are typically payable within 30 to 60 days. Revenue comprises commissions and fees earned in respect of amounts billed and is stated exclusive of VAT, sales taxes and trade discounts. Pass-through costs comprise fees paid to external suppliers when they are engaged to perform part or all of a specific project and are charged directly to clients, predominantly media and data collection costs. Costs to obtain a contract are typically expensed as incurred as the contracts are generally short-term in nature.

 

In most instances, promised services in a contract are not considered distinct or represent a series of services that are substantially the same with the same pattern of transfer to the customer and, as such, are accounted for as a single performance obligation. However, where there are contracts with services that are capable of being distinct, are distinct within the context of the contract, and are accounted for as separate performance obligations, revenue is allocated to each of the performance obligations based on relative standalone selling prices.

 

Revenue is recognised when a performance obligation is satisfied, in accordance with the terms of the contractual arrangement. Typically performance obligations are satisfied over-time as services are rendered. Revenue recognised over-time is based on the proportion of the level of service performed. Either an input method or an output method, depending on the particular arrangement, is used to measure progress for each performance obligation. For most fee arrangements, costs incurred are used as an objective input measure of performance. The primary input of substantially all work performed under these arrangements is labour. There is normally a direct relationship between costs incurred and the proportion of the contract performed to date. In other circumstances relevant output measures, such as the achievement of any project milestones stipulated in the contract, are used to assess proportional performance.

 

For our retainer arrangements, we have a stand ready obligation to perform services on an ongoing basis over the life of the contract. The scope of these arrangements are broad and generally are not reconcilable to another input or output criteria. In these instances, revenue is recognised using a time-based method resulting in straight-line revenue recognition.

 

The amount of revenue recognised depends on whether we act as an agent or as a principal. Certain arrangements with our clients are such that our responsibility is to arrange for a third party to provide a specified good or service to the client. In these cases we are acting as an agent as we do not control the relevant good or service before it is transferred to the client. When we act as an agent, the revenue recorded is the net amount retained. Costs incurred with external suppliers (such as production costs and media suppliers) are excluded from revenue and recorded as work in progress until billed.

 

The Group acts as principal when we control the specified good or service prior to transfer. When the Group acts as a principal (such as in-house production services, events, data investment management, and branding), the revenue recorded is the gross amount billed. Billings related to out-of-pocket costs such as travel are also recognised at the gross amount billed with a corresponding amount recorded as an expense. Further details on revenue recognition are detailed by sector below:

 

Advertising and media investment management

 

Revenue is typically derived from media placements and advertising services. Revenue may consist of various arrangements involving commissions, fees, incentive-based revenue or a combination of the three, as agreed upon with each client. Revenue for commissions on purchased media is typically recognised at the point in time the media is run. The Group receives volume rebates from certain suppliers for transactions entered into on behalf of clients that, based on the terms of the relevant contracts and local law, are either remitted to clients or retained by the Group. If amounts are passed on to clients they are recorded as liabilities until settled or, if retained by the Group, are recorded as revenue when earned. Variable incentive-based revenue typically comprises both quantitative and qualitative elements. Incentive compensation is estimated using the most likely amount and is included in revenue up to the amount that is highly probable not to result in a significant reversal of cumulative revenue recognised. The Group recognises incentive revenue as the related performance obligation is satisfied.

 

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Data investment management

 

Revenue for market research services is typically recognised over-time based on input measures. For certain performance obligations, output measures such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract are used to measure progress. While most of the studies provided in connection with the Group’s market research contracts are undertaken in response to an individual client’s or group of clients’ specifications, in certain instances a study may be developed as an off-the-shelf product offering sold to a broad client base. For these transactions, revenue is recognised when the product is delivered. When the terms of the transaction provide for licensing the right to access a product on a subscription basis, revenue is recognised over the subscription period typically on a straight-line basis.

 

Public relations & public affairs and brand consulting, health & wellness and specialist communications

 

Revenue for these services is typically derived from retainer fees and fees for services to be performed subject to specific agreement. Most revenue under these arrangements is earned over-time, in accordance with the terms of the contractual arrangement.

 

Pension costs

 

Pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various plans were carried out at various dates in the last three years. These valuations have been updated by the local actuaries to 31 December 2018.

 

The Group’s policy is to close existing defined benefit plans to new members. This has been implemented across a significant number of pension plans. As a result, these plans generally have an ageing membership population. In accordance with IAS 19, Defined Benefit Plans, the actuarial calculations have been carried out using the projected unit credit method. In these circumstances, use of this method implies that the contribution rate implicit in the current service cost will increase in future years.

 

The Group’s pension deficit was £183.4 million at 31 December 2018, compared to £205.4 million at 31 December 2017. The decrease in the deficit is primarily due to higher discount rates as a result of an increase in high-quality corporate bond yields.

 

There are a number of areas in the pension accounting that involve judgements made by management based on the advice of qualified advisors. These include establishing the discount rates, rate of increase in salaries and pensions in payment, inflation and mortality assumptions. A sensitivity analysis for each significant actuarial assumption is shown in note 22 to the consolidated financial statements.

 

Most of the Group’s pension plan assets are held by its plans in the UK and North America. Management considers the types of investment classes in which the pension plan assets are invested. The types of investment classes are determined by economic and market conditions and in consideration of specific asset class risk.

 

Management periodically commissions detailed asset and liability studies performed by third-party professional investment advisors and actuaries that generate probability-adjusted expected future returns on those assets. These studies also project the estimated future pension payments and evaluate the efficiency of the allocation of the pension plan assets into various investment categories.

 

Taxation

 

Corporate taxes are payable on taxable profits at current rates. The tax expense represents the sum of the tax currently payable and deferred tax.

 

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The Group is subject to corporate taxes in a number of different jurisdictions and judgement is required in determining the appropriate provision for transactions where the ultimate tax determination is uncertain. In such circumstances, the Group recognises liabilities for anticipated taxes based on the best information available and where the anticipated liability is both probable and estimable, liabilities are classified as current. Any interest and penalties accrued are included in corporate income taxes both in the consolidated income statement and balance sheet. Where the final outcome of such matters differs from the amount recorded, any differences may impact the income tax and deferred tax provisions in the period in which the final determination is made.

 

We record deferred tax assets and liabilities using tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on enacted, or substantively enacted legislation, for the effect of temporary differences between book and tax bases of assets and liabilities. Currently we have deferred tax assets resulting from operating loss carryforwards and deductible temporary differences, all of which could reduce taxable income in the future. The main factors that we consider include:

 

   

the future earnings potential determined through the use of internal forecasts;

 

   

the cumulative losses in recent years;

 

   

the various jurisdictions in which the potential deferred tax assets arise;

 

   

the history of losses carried forward and other tax assets expiring;

 

   

the timing of future reversal of taxable temporary differences;

 

   

the expiry period associated with the deferred tax assets; and

 

   

the nature of the income that can be used to realise the deferred tax asset.

 

If it is probable that some portion of these assets will not be realised, then no asset is recognised in relation to that portion. At 31 December 2018, no deferred tax asset has been recognised in respect of gross tax losses and other temporary differences of £4,875.2 million.

 

If market conditions improve and future results of operations exceed our current expectations, our existing recognised deferred tax assets may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate further or future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realisable. As a result, all or a portion of the deferred tax assets may need to be reversed.

 

New IFRS Accounting Pronouncements

 

See page F-2 of the consolidated financial statements for a description of new IFRS accounting pronouncements.

 

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ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

The Directors and Executive Officers of the Company are as follows:

 

Roberto Quarta, Age 69: Chairman. Roberto Quarta was appointed as a Director on 1 January 2015 and became Chairman on 9 June 2015. Roberto has extensive and diverse experience in corporate governance and global commerce. He is Partner and Chairman of Clayton, Dubilier & Rice Europe, a private equity firm, which allows him to bring valuable perspective to WPP, particularly when evaluating acquisitions and new business opportunities. Roberto has an in-depth understanding of differing global governance requirements having served on the boards of a number of UK and international companies, including as Chairman of BBA Group plc and Rexel SA and as Non-Executive Director of BAE Systems plc, Equant NV and Foster Wheeler AG.

 

Other current appointments: Chairman, Smith & Nephew plc.

 

Mark Read, Age 52: Chief Executive Officer. Mark Read was appointed as an Executive Director and Chief Executive Officer on 3 September 2018. Mark has held multiple leadership positions at WPP, having first joined the Company in 1989. He was responsible for WPP’s expansion into technology through the acquisition of 24/7 Real Media, the creation of the POSSIBLE network and the launch of Stream, WPP’s celebrated “unconference”. In 2015, he was appointed Global CEO of Wunderman, which he transformed into one of the world’s leading creative, data and technology agencies. Wired magazine ranked Mark as one of the Top 25 Digital Influencers in Europe in 2014 and he was named The Drum’s Digital Individual of the Year in 2015 and 2017. In September 2018 he was named as a Financial Times and HERoes Champion of Women in Business.

 

Paul Richardson, Age 61: Group Finance Director. Paul Richardson became Group Finance Director in 1996 after four years with the Company as Director of Treasury. Paul is responsible for the Company’s worldwide functions in finance, information technology, procurement, property, treasury, taxation, internal audit and sustainability. Paul is a chartered accountant and fellow of the Association of Corporate Treasurers. In October 2018 he informed the Board he would step down during the course of 2019.

 

Nicole Seligman, Age 62: Senior Independent Director, Non-Executive Director. Nicole Seligman was appointed as a Director on 1 January 2014. Nicole is a global business leader and an internationally recognised lawyer. She brings to the Board analytical skills, in-depth knowledge of public company corporate governance and a comprehensive understanding of media and business issues. Nicole was previously President of Sony Entertainment, Inc. and global General Counsel for Sony Corporation. Prior to that, as a partner at law firm Williams & Connolly, Nicole represented key public figures and major media and other companies in complex litigation.

 

Other current appointments: Non-Executive Director, Viacom Inc. Non-Executive Director, Far Point Acquisition Corporation. Chairman, The Doe Fund.

 

Jacques Aigrain, Age 64: Non-Executive Director. Jacques Aigrain was appointed as a Director on 13 May 2013. Jacques brings business, corporate finance and governance expertise to his role on the Board of WPP. Currently a Senior Advisor at Warburg Pincus LLP, from 2001 to 2009 he was a member of the Executive Committee of Swiss Re AG. Prior to Swiss Re, he spent 20 years with JPMorgan Chase. Jacques was previously Chairman of LCH Clearnet Group Ltd, a Director of the Qatar Financial Center Authorities and a Supervisory Board Member of Lufthansa AG and Swiss International Airlines AG.

 

Other current appointments: Chairman, LyondellBasell NV. Non-Executive Director, London Stock Exchange Group plc. Chairman, Self Trade Bank S.A.U.

 

Tarek Farahat, Age 54: Non-Executive Director. Tarek Farahat was appointed as a Director with effect from 11 October 2016. Tarek has extensive leadership and brand-building experience gained in different markets

 

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around the world. He worked for Procter & Gamble for over 26 years in Europe, the Middle East and Latin America, leading multi-billion dollar businesses for the company. His last position at Procter & Gamble was President of Procter & Gamble Latin America and member of the Global Leadership Council. Tarek was previously Chairman of the board of JBS S.A. and a board member of Pilgrims Pride Corporation and Alpargatas. He is currently a strategic advisor and partner for several companies.

 

Sir John Hood, Age 67: Non-Executive Director. Sir John Hood was appointed as a Director on 1 January 2014. Sir John brings deep knowledge and experience of international business to the Board, and provides analytical rigour arising from his leadership roles in higher education and research. He has held advisory roles for the New Zealand and British governments and has served as a Non-Executive Director of British and New Zealand-based enterprises. He was formerly Vice Chancellor of the University of Oxford and the University of Auckland.

 

Other current appointments: President and CEO, Robertson Foundation. Chairman, BMT Group. Non-Executive Director, Study Group Limited. Non-Executive Director, Aurora Energy Research. Non-Executive Director, Blackstone Group LP.

 

Ruigang Li, Age 49: Non-Executive Director. Ruigang Li was appointed as a Director on 12 October 2010. As Founding Chairman and CEO of CMC Capital Group, China’s leading equity investment group in the entertainment, technology and consumer sectors, and of CMC Inc., a media and entertainment conglomerate, Ruigang offers WPP insight into the Chinese media and technology sectors. Ruigang was Chairman and President of Shanghai Media Group for over 10 years and was previously Chief of Staff of Shanghai Municipal Government.

 

Other current appointments: Chairman and CEO, CMC Capital Group. Chairman and CEO, CMC Inc. Board Member, City Football Group. Director, Creative Artists Agency. Vice Chairman, TVB (Hong Kong). Chairman, Shaw Brothers (Hong Kong). Board Member, Special Olympics.

 

Daniela Riccardi, Age 59: Non-Executive Director. Daniela Riccardi was appointed as a Director on 12 September 2013. A senior FMCG, retail and fashion products executive, Daniela is a recognised leader in business development and branding. She is currently CEO of Baccarat, the international luxury goods company, and was previously CEO of Diesel Group. Daniela has substantial global business experience, having spent 25 years at Procter & Gamble in senior management roles around the world – including Vice President of Procter & Gamble Columbia, Mexico and Venezuela, Vice President and General Manager of Procter & Gamble Eastern Europe & Russia and President of Procter & Gamble Greater China.

 

Other current appointments: CEO, Baccarat. Non-Executive Director, Kering. Non-Executive Director, Comite Colbert.

 

Sally Susman, Age 57: Non-Executive Director. Sally Susman was appointed as a Director on 13 May 2013. Sally brings expertise in communications, public affairs, governance and strategy to the Board. She is Executive Vice President, Chief Corporate Affairs Officer for Pfizer, the world’s largest biopharmaceutical company. She also heads Pfizer’s corporate responsibility group and plays a key role in shaping policy initiatives. Before joining Pfizer in 2007, Sally was EVP of Global Communications at Estée Lauder, where she directed global corporate affairs strategy and served as a member of the Executive Committee. Sally previously held several senior corporate affairs posts at American Express, in both London and the US.

 

Other current appointments: Co-Chair, International Rescue Committee.

 

Solomon D. (Sol) Trujillo, Age 67: Non-Executive Director. Solomon D. (Sol) Trujillo was appointed as a Director on 12 October 2010. An international business executive with three decades of leading high-cap global companies in the US, Europe and Asia Pacific, Sol has wide board and corporate governance experience in the

 

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technology, media and digital sectors. Sol has managed operations in over 25 countries from Europe and North America to China, Australasia, Africa and the Middle East. He is a Senior Advisor to Bain & Company and Chairman of Trujillo Group LLC, which manages investments and examines emerging trends in the broader digital space.

 

Other current appointments: Director, Western Union. Chairman, Silk Road Telecommunications.

 

Cindy Rose, Age 53: Non-Executive Director. Cindy Rose was appointed as a Director on 1 April 2019. A high-profile leader in the technology and media sectors, Cindy has a deep understanding of the role of technology in business transformation. As Microsoft UK CEO since 2016, she is responsible for Microsoft’s product, service and support offerings across the UK. Prior to Microsoft, she was Managing Director of the UK Consumer division at Vodafone where she led the expansion of its retail store estate from 350 to over 500 stores. Before Vodafone, Cindy was Executive Director of Digital Entertainment at Virgin Media. She also spent 15 years at The Walt Disney Company, ultimately as SVP & Managing Director of Disney Interactive Media Group.

 

Other current appointments: Non-Executive Director, Informa plc.

 

The independence of each Non-Executive Director is assessed annually by the Board under the UK Corporate Governance Code which applies in respect of WPP’s primary listing on the London Stock Exchange. The Board has confirmed that all of the Non-Executive Directors standing for election and re-election at the 2019 Annual General Meeting (AGM) continue to demonstrate the characteristics of independence.

 

B. Compensation

 

Directors’ Compensation

 

For the fiscal year ended 31 December 2018 the aggregate compensation paid by WPP to all directors and officers of WPP as a group for services in all capacities was £9.5 million. Such compensation was paid by WPP and its subsidiaries primarily in the form of salaries, performance-related bonuses, other benefits and deferred share awards. The sum of £0.5 million was set aside and paid in the last fiscal year to provide pension benefits for directors and officers of WPP.

 

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Executive Directors’ total compensation received

 

Single total figure of remuneration

 

2018    Base salary5      Benefits6      Pension7      Short-term
incentive8
    

Long-term

incentive9

     Total annual
compensation
 
      £000      £000      £000      £000      £000      £000  

Mark Read1

     325        12        57        244        327        965  

Paul Richardson2,3

     808        64        243        320        690        2,125  

Sir Martin Sorrell4

     391        70        102        —          2,522        3,085  
1    

Mark Read was appointed as CEO on 3 September 2018 and his salary is prorated accordingly.

2   

Any US dollar amounts received in 2018 have been converted into pound sterling at an exchange rate of $1.3351 to £1.

3   

Paul Richardson’s base salary figure is denominated in US dollars other than his fee for Directorship of WPP plc of £100,000 which, per above, has been converted at an exchange rate of $1.3351 to £1.

4   

Sir Martin Sorrell resigned from the Company on 14 April 2018. The base salary includes accrued and unused holiday pay.

5   

Base salary levels are reviewed every two years or following a change in role and will normally increase by no more than the local rate of inflation. Company and personal performance are taken into account during review process.

6   

Benefits are fixed, non-itemised allowance enabling executives to procure their own benefits as required. While the Compensation Policy allows for a benefits allowance of up to £200,000 for the CEO, Mark Read was appointed with a benefits allowance of £35,000, which is prorated for his period as CEO. The benefits, and total annual compensation, set out in the table above exclude the disclosable value of expenses related directly to attendance at Board meetings that would be chargeable to UK income tax. The expenses were for Mark Read £1,666, Sir Martin Sorrell £2,253 and Paul Richardson £7,625. Sir Martin Sorrell’s benefits allowance was estimated up to his date of resignation.

7   

Pension is provided by way of contribution to a defined contribution retirement arrangement, or a cash allowance, determined as a percentage of base salary. Contributions/allowances are as follows (as % of base salary): CEO—30% and CFO—30%. While the Compensation Policy allows for new Executive Directors to receive an allowance of 25% of base salary, Mark Read was given an allowance of 20% less employer’s National Insurance contribution of 13.8% resulting in a net pension contribution of 17.6%. The 2018 amount is prorated for the period as CEO. Sir Martin Sorrell’s pension allowance was prorated up to his date of resignation.

8   

In respect of the 2018 short-term incentive awards, 40% will be delivered in the form of shares as an Executive Share Award (ESA) with a two-year deferral requirement. ESAs are subject to malus provisions. The cash bonuses are subject to clawback provisions. Whilst the Policy allows for the CEO to have awards under the short-term incentive plan of up to 400% of base salary, it was determined to appoint the new CEO on 250% of base salary with a target of 50% of maximum. Mark Read’s short-term incentive relates to performance post his appointment as CEO on 3 September 2018, prorated for his four months in office. In addition, he received a short-term incentive payment of £1,246,049 related to his performance as CEO of Wunderman and then joint-COO in the course of the first eight months of the year. The STIP will be delivered £747,629 as a cash award and £498,420 as an ESA award.

9   

This is the value of the 2014 and 2013 Executive Performance Share Plan (EPSP) awards which vested in 2019 and 2018, following the end of the five-year EPSP performance periods on 31 December 2018 and 31 December 2017 respectively. For Mark Read this figure includes the Leaders 2015 award which vested in November 2018. Sir Martin Sorrell’s EPSP award was time prorated in accordance with the plan rules as discussed on page 42.

 

Vesting of 2014 – 2018 EPSP awards

 

Vesting of the 2014 EPSP awards was dependent on performance against three measures, all assessed over a five-year period, which include relative Total Shareholder Returns (TSR), Earnings Per Share (EPS) growth and average annual Return On Equity (ROE).

 

     

Number of shares

awarded

     Additional
shares in
respect of
dividend
accrual
     Number of shares
vesting
     Share/ADR price
on vesting
    

Value of
vested

2014-2018
EPSP awards
000

 

Mark Read

     68,174        4,504        27,228      £ 8.5606      £ 233  

Paul Richardson1

     40,927        2,732        16,374      $ 56.2594      $ 921  

Sir Martin Sorrell2

     867,756        48,728        294,591      £ 8.5606      £ 2,522  
1    

Paul Richardson’s EPSP awards were granted in respect of ADRs.

2   

In addition to the application of the performance outcome, Sir Martin Sorrell’s award was time prorated in accordance with the plan rules as discussed on page 42.

 

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Table of Contents

Outstanding share-based awards

 

Executive Share Awards (ESAs) held by Executive Directors

 

All Executive Share Awards or Performance Share Awards (PSA) granted under the Restricted Stock Plan and its successor, the WPP Stock Plan, are made on the basis of satisfaction of previously determined performance conditions and are subject to continuous employment until the vesting date. Mark Read received ESAs and PSA awards prior to his appointment as Executive Director. Unless otherwise noted, awards are made in the form of WPP ordinary shares.

 

           

Grant

date

   

Share/ADR

price on

grant date

   

No. of

Shares/ADRs

granted2

   

Face

value

on grant

date

0003

   

Additional

shares

granted

in lieu of

dividends

   

Total

shares

vesting

   

Vesting

date

   

Shares/ADR

price on

vesting

   

Value

on vesting

000

 

Mark Read

    2016 PSA       06.06.17       £17.2050       25,573       £440       —         —         10.03.19       —         —    
      2017 PSA       12.06.18       £12.3800       38,317       £474       —         —         10.03.20       —         —    

Paul Richardson1

    2015 ESA       07.06.16       $116.2700       10,837       $1,260       792       11,629       06.03.18     $ 85.8183       $998  
      2016 ESA       06.06.17       $110.7600       9,280       $1,028       —         —         06.03.19       —         —    

Sir Martin Sorrell

    2015 ESA       07.06.16       £15.9850       133,817       £2,139       9,521       143,338       06.03.18     £ 12.4220       £1,781  
      2016 ESA       06.06.17       £17.2050       86,955       £1,496       —         —         06.03.19       —         —    
1    

Paul Richardson’s ESAs were granted in respect of ADRs.

2   

Dividend shares will be due on these awards.

3   

Face value has been calculated using the average closing share price for the trading day preceding the date of grant (as set out in the table).

 

Mark Read received awards prior to his appointment as CEO under the management incentive plans. In addition, on his appointment as joint-COO, and while the Board decided on the appointment of the next CEO, a special one-off award was made, recognising the importance and scale of the additional responsibilities that were being undertaken. Each award is subject to continuous employment and malus and clawback and were made under the Restricted Stock Plan or the WPP Stock Plan 2018.

 

         

Grant

date

   

Share/ADR

price on

grant date

   

No. of

Shares

/ADRs

granted2

   

Face

value

on grant

date

0003

   

Additional

shares

granted

in lieu of

dividends

   

Total

shares

vesting

   

Vesting

date

   

Shares/ADR

price on

vesting

   

Value

on vesting

000

 

Mark Read

  Leaders 2015     23.12.15       £15.4750       9,693       £150       1,281       10,974       15.11.18       £8.5405       £94  
  Leaders 2016     28.11.16       £17.0550       8,795       £150       —         —         15.11.19       —         —    
  Leaders 2017     04.12.17       £13.0850       11,463       £150       —         —         15.11.20       —         —    
    Special award1     12.06.18       £12.3800       121,161       £1,500       —         —        
01.05.19 to
01.05.21
 
 
    —         —    
1    

The special one-off award will vest in three equal parts from 1 May 2019 to 1 May 2021.

2   

Dividend shares will be due on these awards.

3   

Face value has been calculated using the average closing share price for the trading day preceding the date of grant (as set out in the table).

 

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Table of Contents

Long-term incentive plans – EPSP

 

The following table summarises all of the awards outstanding under the EPSP.

 

     Grant
date
   

Performance

period

   

Shares/
ADR

price on

grant date

   

Maximum

number of nil

cost options over

shares/ADRs

awarded3

    During 2018  
 

Options

vested/

(lapsed)

   

Additional

dividend

shares

   

Options

exercised

   

Maximum number

of nil cost options

over shares/ADRs

at 31 December 2018

 

Mark Read

    04.06.14       01.01.14-31.12.18     £ 12.9080       68,174       —         —         —         68,174  
      09.06.15       01.01.15-31.12.19     £ 15.1720       65,910       —         —         —         65,910  
      28.11.16       01.01.16-31.12.20     £ 17.0520       58,644       —         —         —         58,644  
      04.12.17       01.01.17-31.12.21     £ 12.9110       106,498       —         —         —         106,498  
      06.12.18       01.01.18-31.12.22     £ 8.6040       396,617       —         —         —         396,617  

Paul Richardson1

    04.06.14       01.01.14-31.12.18     $ 107.9960       40,927       —         —         —         40,927  
      09.06.15       01.01.15-31.12.19     $ 115.8800       37,970       —         —         —         37,970  
      28.11.16       01.01.16-31.12.20     $ 105.9309       41,536       —         —         —         41,536  
      04.12.17       01.01.17-31.12.21     $ 86.9138       36,933       —         —         —         36,933  
      06.12.18       01.01.18-31.12.22     $ 55.2631       58,628       —         —         —         58,628  

Sir Martin Sorrell2

    04.06.14       01.01.14-31.12.18     £ 12.9080       867,756       —         —         —         867,756  
      09.06.15       01.01.15-31.12.19     £ 15.1720       738,267       —         —         —         738,267  
      28.11.16       01.01.16-31.12.20     £ 17.0520       656,873       —         —         —         656,873  
      04.12.17       01.01.17-31.12.21     £ 12.9110       534,428       —         —         —         534,428  
1    

Paul Richardson’s EPSP awards were granted in respect of ADRs.

2   

Sir Martin Sorrell’s EPSP awards will be prorated to reflect retirement treatment as outlined on page 40.

3   

Dividend shares will be due on these awards.

 

Non-Executive Directors’ total compensation received

 

The single total figure of compensation table below details fee payments received by the Non-Executive Directors while they held a position on the Board.

 

     

Fees

£000

 
      2018  

Roberto Quarta

     475  

Jacques Aigrain

     138  

Tarek Farahat

     98  

Sir John Hood

     118  

Ruigang Li

     88  

Daniela Riccardi

     88  

Nicole Seligman

     130  

Hugo Shong1

     48  

Sally Susman

     88  

Sol Trujillo

     98  
1    

Hugo Shong retired from the Board 31 July 2018.

 

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Table of Contents

Past directors

 

Remuneration Arrangement for the former Chief Executive Officer

 

Sir Martin Sorrell left WPP on 14 April 2018. Under the terms of his employment agreements, he was treated as having retired. The treatment of his compensation elements is discussed on page 37. The long-term incentive awards were made under the EPSP and are subject to performance conditions.

 

Plan   

Number of

shares awarded

    

Vesting

date

    

Time

pro rating %

 

2014 EPSP

     867,756        March 2019        85  

2015 EPSP

     738,267        March 2020        65  

2016 EPSP

     656,873        March 2021        45  

2017 EPSP

     534,428        March 2022        25  

 

Payments to past directors

 

During 2018, payments were made to past Directors who continued to provide advisory services to the Company. A payment of £30,000 was made to John Jackson in respect of his advisory role to WPP, which enabled the Company to benefit from his considerable knowledge and experience in the communications and marketing services sector. This arrangement was terminated on 31 December 2018. Since his retirement from the Board, Timothy Shriver has been appointed as a consultant advising the Company on certain client relationships. He received a payment of £150,497 for his consultancy services.

 

No payments were made for loss of office to any Director during 2018.

 

The full Directors’ Compensation Policy can be found at www.wpp.com/about/corporate-governance. This Annual Report on Form 20-F does not incorporate by reference information on the Company’s website.

 

C. Board Practices

 

Board attendance table  
     

Board

(scheduled

meetings)

    

Board

(unscheduled

meetings) 1

    

Audit

Committee

    

Compensation

Committee

 

Roberto Quarta

       6/6        3/3                 8/8  

Mark Read2appointed on 3 September 2018

     5/5        3/3                    

Paul Richardson

     6/6        3/3                    

Jacques Aigrain

     6/6        2/3          10/10        8/8  

Tarek Farahat

     6/6        2/3        10/10           

Sir John Hood

     6/6        3/3                   8/8  

Ruigang Li

     5/6        1/3                    

Daniela Riccardi

     6/6        3/3                    

Nicole Seligman – appointed to Nomination and Governance Committee on 17 April 2018

     6/6        3/3                 8/8  

Sally Susman

     6/6        1/3                    

Solomon D. (Sol) Trujillo

     6/6        2/3        10/10           

Former Directors who served for part of the year

                                   

Sir Martin Sorrell – retired on 14 April 2018

     1/1                             

Hugo Shong – retired on 31 July 2018

     3/4                             
1   

Additional unscheduled meetings of the Board took place in relation to the resignation of Sir Martin Sorrell on 14 April 2018.

2  

Mark Read attended two scheduled meetings of the Board as CEO and three scheduled meetings of the Board as Joint COO.

  Chair

 

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The role of the Board

 

The Board is collectively responsible for promoting the long-term success of the Company by directing and supervising the Company’s policy and strategy and is responsible to shareholders for the Company’s financial and operational performance and risk management. Responsibility for the development and implementation of Company policy and strategy and for day-to-day management issues is delegated by the Board to the Group Chief Executive and Group Finance Director. The list of matters reserved to the Board can be downloaded from www.wpp.com/about/corporate-governance. This Annual Report on Form 20-F does not incorporate by reference information on the Company’s website.

 

Re-election

 

The Directors submit themselves for annual re-election at each AGM, if they wish to continue serving and are considered by the Board to be eligible. Directors may be appointed by shareholders by ordinary resolution or by the Board on the recommendation of the Nomination and Governance Committee and must then stand for re-election at the next AGM, where they may be re-elected by ordinary resolution of the shareholders. With only specific exceptions to ensure Board continuity, Non-Executive Directors shall not stand for re-election after they have served for the period of their independence, as determined by applicable UK and US standards, which is nine years. Refer to Item 6A for the appointment date of each Director.

 

Service contracts

 

The Company’s policy on Executive Directors’ service contracts is that they should be on a rolling basis without a specific end date. The effective dates and notice periods under the current Executive Directors’ service contracts are summarised below:

 

                      Effective from        Notice period  

Mark Read

                       3 September 2018          12 months  

Paul Richardson

                       19 November 2008          12 months  

 

The Executive Directors’ service contracts are available for inspection at the Company’s registered office and head office.

 

Loss of office provisions

 

Fixed compensation elements

 

As noted above, the service contracts of the Executive Directors provide for notice to be given on termination.

 

The fixed compensation elements of the service contracts will continue to be paid in respect of any notice period. There are no provisions relating to payment in lieu of notice in Paul Richardson’s service contract. The Company can elect in its sole and absolute discretion to make a payment in lieu of notice in the event of termination of Mark Read’s service contract. If an Executive Director is placed on garden leave, the Compensation Committee retains the discretion to settle benefits in the form of cash. The Executive Directors are entitled to compensation for any accrued and unused holiday although, to the extent it is possible and in shareholders interests, the Committee will encourage Executive Directors to use their leave entitlements, prior to the end of their notice period.

 

Except in respect of any remaining notice period, no aspect of any Executive Director’s fixed compensation is payable on termination of employment.

 

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Short- and long-term compensation elements

 

If the Executive Director is dismissed for cause, there is no entitlement to a STIP award, and any unvested share-based awards will lapse. Otherwise, the table below summarises the relevant provisions from the directors’ service contracts (cash bonus) and the plan rules (Restricted Stock Plan (RSP) and EPSP), which apply in other leaver scenarios. The Compensation Committee has the authority to ensure that any awards that vest or lapse are treated in accordance with the plan rules, which are more extensive than the summary set out in the table below.

 

   

Cash bonus

  

Paul Richardson is entitled to receive his bonus for any particular year provided he is employed on the last date of the performance period.

 

If Mark Read’s service contract is terminated prior to the date on which any bonus is paid (in respect of the cash element) or prior to the vesting date of the deferred stock award (in respect of the deferred stock element) he will lose all entitlements under the STIP.

ESA    Provided the Executive Director is a Good Leaver, unvested awards will be reduced on a time pro-rata basis and paid on the vesting date.
EPSP   

•   The award will lapse if the Executive Director leaves during the first year of a performance period.

  

•   Provided the Executive Director is a Good Leaver, awards will vest subject to performance at the end of the performance period and time pro-rating. Awards will be paid on the normal date.

  

•   In exceptional circumstances, the Compensation Committee may determine that an award will vest on a different basis.

  

•   Generally, in the event of death, the performance conditions are to be assessed as at the date of death. However, the Compensation Committee retains the discretion to deal with an award due to a deceased executive on any other basis that it considers appropriate.

    

•   Awards will vest immediately on a change of control subject to performance and time pro-rating unless it is agreed by the Compensation Committee and the relevant Executive Director that the outstanding awards are exchanged for equivalent new awards.

 

Other Compensation Committee discretions not set out above

 

   

Leaver status: the Compensation Committee has the discretion to determine an executive’s leaver classification in light of the guidance set out within the relevant plan rules.

 

   

Settlement agreements: the Compensation Committee is authorised to reach settlement agreements with departing executives, informed by the default position set out above.

 

Other chairman and non-executive director policies

 

Letters of appointment for the chairman and non-executive directors

 

Letters of appointment have a two-month notice period and there are no payments due on loss of office.

 

Appointments to the Board

 

The chairman and non-executive directors are not eligible to receive any variable pay. Fees for any new non-executive directors will be consistent with the operating policy at their time of appointment. In respect of the appointment of a new chairman, the Compensation Committee has the discretion to set fees taking into account a range of factors including the profile and prior experience of the candidate, cost and external market data.

 

Payments in exceptional circumstances

 

In truly unforeseen and exceptional circumstances, the Compensation Committee retains the discretion to make emergency payments which might not otherwise be covered by this policy. The Compensation Committee will

 

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not use this power to exceed the recruitment policy limit, nor will awards be made in excess of the limits set out in the Directors’ Compensation Policy table. An example of such an exceptional circumstance could be the untimely death of a director, requiring another director to take on an interim role until a permanent replacement is found.

 

Compensation Committee

 

During 2018, the Compensation Committee met eight times on a formal basis, with several additional informal meetings held as needed to deal with the matters related to the resignation of the former CEO and appointment of the new CEO. A table of Board and Committee attendance can be found on page 40.

 

The Committee members do not have any personal financial interest (other than as a shareholder as disclosed on page 50) in the matters to be decided by the Committee, potential conflicts of interest arising from cross-directorships or day-to-day involvement in running the Group’s businesses. The terms of reference for the Compensation Committee are available on the Company’s website, www.wpp.com/about/corporate-governance, and will be on display at the AGM, as set out in the Notice of AGM. This Annual Report on Form 20-F does not incorporate by reference information on the Company’s website.

 

The Committee’s principal responsibilities under its terms of reference include:

 

   

reviewing and approving the Company’s compensation strategy;

 

   

determining appropriate remuneration for executive directors;

 

   

approving the service agreements and severance arrangements for executive directors and other senior executives of the Company;

 

   

maintaining appropriate procedures for evaluation of executive performance;

 

   

overseeing succession planning and management development for senior executives in the Group who are not members of the Board;

 

   

reviewing, approving and administering the Company’s executive long-term incentive plans, employee share schemes and other equity-related incentive plans;

 

   

reviewing proposed special incentive awards to senior executives;

 

   

monitoring prohibitions on personal loans to directors and officers;

 

   

determining targets for performance-related pay schemes;

 

   

advising on any major changes in employee benefit structures;

 

   

overseeing the provisions for selecting, appointing and setting the terms of reference for any remuneration consultants to the Company;

 

   

overseeing the preparation of and recommending to the board the approval of the annual report of the Committee in compliance with the disclosure requirements of the Code of Best Practice and the Directors’ Remuneration Report Regulations 2002;

 

   

overseeing the adequacy of disclosures throughout the year regarding director compensation, stock transactions and benefits;

 

   

approving the policy for authorising claims for expenses from directors and senior executives; and

 

   

ensuring that procedures are in place concerning compliance with the employee welfare provisions of the Company’s Code of Business Conduct and Ethics and the Company’s Policy Manual.

 

Advisors to the Compensation Committee

 

The Compensation Committee regularly consults with Group executives. In particular, the Committee invites certain individuals to attend meetings, including the Chief Executive Officer (who is not present when matters

 

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relating to his own compensation or contracts are discussed and decided), the Company Secretary, the Chief Talent Officer and the Worldwide Compensation & Benefits Director. The latter two individuals provide a perspective on information reviewed by the Committee and are a conduit for requests for information and analysis from the Company’s external advisors.

 

External advisors

 

The Committee retains Willis Towers Watson (WTW) to act as independent advisors. They provide advice to the Compensation Committee and work with management on matters related to our compensation policy and practices. They are a member of the Remuneration Consultants Group and have signed the code of conduct relating to the provision of advice in the UK. Considering this, and the level and nature of the service received, the Committee remains satisfied that the advice is objective and independent. WTW provides limited other services at a Group level and some of our operating companies engage them as advisors at a local level. In 2018, WTW received fees of £130,000 in relation to the provision of advice to the Committee. The Committee receives external legal advice, where required, to assist it in carrying out its duties.

 

Audit Committee

 

The Committee held 10 meetings during the year, which were attended by Deloitte LLP (the Company’s external auditors, “Deloitte”), the Company’s Chairman, the Senior Independent Director, the Group Finance Director, the Chief Executive Officer, the Chief Operating Officer, the Director of Internal Audit, the Group Chief Counsel, the Group Chief Accountant and the Company Secretary. Individual attendance by the Committee members during 2018 is set out in the table on page 40.

 

The Committee also held separate private meetings with Deloitte, the Director of Internal Audit, and the Group Chief Counsel. The Committee Chairman held pre-meetings with Deloitte and regular meetings with the Company’s Directors of Internal Audit, Tax and Treasury and the Group Chief Counsel. The Committee Chairman has an ongoing dialogue with the Group Finance Director, the Group Chief Accountant, the Director of Internal Audit and the Director of Tax and reports to the Board, as a separate agenda item, on the activities of the Committee at the following Board meeting.

 

Committee responsibilities and how they were discharged in 2018

 

The discussion below addresses the main matters covered by the Committee’s terms of reference as well as key responsibilities of the Committee during 2018:

 

   

Monitoring the integrity of the Group’s financial statements and reviewing significant financial reporting judgements;

 

   

Reviewing and monitoring the Group’s internal control framework and the activities and effectiveness of the Group’s internal audit function;

 

   

Assisting the Board in meeting its responsibilities in carrying out a robust assessment of the principal risks facing the Group and reviewing and reporting on the systems and key elements of risk management as they affect the Group;

 

   

Regular consideration of the risk dashboard and risk map for presentation to the Board. Reviewing the Group’s risk management processes, including the establishment of Risk Committees at network level;

 

   

Reviewing the Group Treasury policy with a particular focus on debtors, working capital and cash management and the continued ability of the Group to adopt the going concern basis in preparing the financial statements;

 

   

Reviewing reports on any material litigation or regulatory reviews involving Group Companies;

 

   

Reviewing the Group’s mergers and acquisitions strategy, reviewing the analytical integrity for material M&A transactions and the earn-out payments profile of previous acquisitions. Reviewing integration processes;

 

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Reviewing the Group’s tax position and its UK tax strategy and reviewing the impact of any significant changes in tax laws;

 

   

Monitoring the accounting and legal reporting requirements applicable to the Company, including all relevant regulations of the UK Listing Authority, the SEC, the NYSE and the Jersey Financial Services Commission and the provisions of the UK Corporate Governance Code;

 

   

Reviewing the implementation of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, adopted from 1 January 2018 and the future implementation of IFRS 16 Leases from 1 January 2019;

 

   

Overseeing the Group’s continued compliance with Section 404 of the Sarbanes-Oxley Act (SOX), setting the SOX agenda, considering and approving audit plans and monitoring through regular status reports submitted by the Director of Internal Audit and Deloitte;

 

   

Reviewing the continued implementation of the Group’s IT transformation project and reviewing the Group’s co-location and shared services initiatives; and

 

   

Reviewing matters reported on the Group’s Right to Speak helpline, the investigations into such matters and the actions taken by the Group in response.

 

Fair, balanced and understandab