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LONDON (Alliance News) - WPP PLC Monday reported 2014 profit growth that met market expectations, as the media buying giant reported further strong growth in emerging markets, but also a strong performance in the US and UK and a performance in continental Europe that belied the economic downturn in the region.
It also predicted similar sales growth in 2015, despite the lack of major events to spur advertising, after getting off to a strong start in January, and sweetened the results for investors by hitting its new dividend payout target a year ahead of schedule and saying it would soon consider another increase to the target.
WPP posted a closely-watched headline profit before interest and tax of GBP1.68 billion for 2014, up from GBP1.66 billion in 2013, and earnings per share of 82.4 pence, up 14% from 72.4 pence a year before. WPP's headline profit before interest and tax figure excludes amortisation, impairment, gains on disposals or re-measurement of equity interests, write-downs, restructuring costs of shares of exceptional losses of associates.
According to consensus forecasts provided by the company, analysts expected WPP to post a headline profit before tax and interest of GBP1.67 billion, and earnings per share of 82.2 pence.
It reported pretax profit of GBP1.45 billion, up from GBP1.30 billion a year before, on revenue of GBP11.53 billion, up 4.6% from GBP11.02 billion. That revenue growth came from like-for-like growth as well as from the 65 acquisitions it made in the year. It said its net sales margin also improved.
Revenue was hit by the strength of the pound against the dollar and euro in its first three quarters, which was partly offset by weakness in sterling against the dollar, yen, Australian dollar and Indian rupee in the final quarter. It said that, overall in 2014, currency fluctuations knocked 6.7% off its revenue compared with the previous year and on a constant currency basis, revenue would have been up 11.3%.
The company said revenue growth sped up at constant currency in the fourth quarter in North America and the UK, up 10.5% in North America compared to the 9.8% growth it saw in its first nine months, and up 15.0% in the UK compared to 14.9% growth in the third quarter.
Western Continental Europe performed better than expected, "contrary to the macro-economic picture", it said, seeing improvement in the fourth quarter partly due to acquisitions. Within this region Germany, Italy, the Netherlands and Turkey all showed good growth, although Austria, Belgium, France, Spain and Switzerland were tougher.
The fastest growth in the fourth quarter came from the Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe regions, up 16.0% at constant currency, although only up 4.6% at actual exchange rates.
Latin America softened somewhat in the second half as parts of WPP's businesses in Brazil and Chile slowed, WPP said, and the Middle East and Africa both grew strongly in the fourth quarter. In Central and Easter Europe like-for-like revenue, meaning at constant exchange rates and excluding acquisitions and disposals, was up 5% in the fourth quarter, slowed slightly from the 5.3% growth it saw in the third quarter.
The company proposed a final dividend of 26.58 pence, taking its total dividend to 38.20 pence, up 12% from 34.21 pence in 2013. WPP said it had reached its targeted dividend pay-out ratio of 45% a year ahead of schedule. As a result, it will shortly be considering whether this pay-out ratio target should be raised further.
WPP is essentially a holding company for a vast number of agencies, and it is continuing to expand by snapping up small agencies at a very fast rate. Its focus now is switching to digital markets, as it tries to offset a trend of shifting media buying towards online and away from traditional outlets like TV and print. It was facing a challenge when two of its biggest competitors, Omnicom Group Inc of the US and France's Publicis SA, flirted with a potential merger, but that deal fell apart because they couldn't agree the terms of a deal.
WPP made 65 acquisitions and investments during the year, of which 36 were in new markets, and 53 were in the quantitative and digital markets.
The company said it still has a "very significant pipeline" of small and medium sized potential acquisition, except in Brazil, India and in the the digital market in the US, where " prices seem to have got ahead of themselves because of pressure on competitors to catch up."
Going forward the company plans to focus on new markets, new media, and data investment management, including new technology and big data. It's net acquisition spend is currently targeted at around GBP300 million to GBP400 million per year.
WPP said its revenue in January was up 6.7%, with net sales up 3.9%, as it saw a strong start to the year. It said all of its regions except Latin America were up, with Asia Pacific, Africa and the Middle East seeing above average net sales growth.
It said its budgets for 2015 have been prepared on a cautious basis, and, as it had guided for 2014 it is forecasting like-for-like revenue and net sales growth of over 3%, and a target net sales margin improvement of 0.3 point excluding the impact of currency.
In the longer term the company is targeting above-industry revenue growth, improvement in its staff costs to net sales margin ratio, expansion of its operating margin by 0.3 margin points or more on a constant currency basis, and headlined diluted earnings per share growth of 10-15% per year.
WPP cited a few 'known unknowns', or so-called 'grey swans' lingering over 2014, citing continuing fragility in the Eurozone, a "litany of woes" in the Middle East, a slowdown in emerging markets, the US's deficit and debt and the impact of Federal Reserve easing and tapering, and uncertainty surrounding the outcome of the UK's upcoming general election.
Grey swans are unlikely events, as opposed to black swans, which are wholly unpredictable events, and are a reference to the book by Nassim Nicholas Taleb.
Although WPP is likely to get a boost from the recent strengthening of the US dollar in 2015, it said that the "pattern" for the year looks similar to 2014, although without any events such as the World Cup to boost marketing investments.
"All in all, 2015 looks to be another demanding year, although a weaker UK pound against a stronger US dollar would provide a modest currency tailwind and positive impact on profits, unlike the fierce currency headwind in 2014," the company said in a statement.
Liberum reiterated its Hold rating on the stock, saying that whilst it sees WPP as "best positioned" amongst the agency groups it remains cautious on the sector in general as advertising technology puts the traditionally high margins of the media space at risk.
"While we do not think the agencies will be disintermediated, we do think the competitive environment will be less favourable than in the past," Liberum said.
WPP's results came in ahead of Numis' estimates, and Numis reiterated its Add rating, viewing WPP as a "core holding in the sector". Numis raised its target price to 1,725 pence from 1,485.00 pence.
Investec reiterated its Buy rating on the stock, although it has put its price target and forecasts under review, saying WPP's figures "look fine overall."
Although Investec liked WPP's long term digital and emerging growth drivers and international momentum, it believes its relative valuation is high compared to global agency peers.
Shares in WPP are trading up 1.3% at 1,561.00 pence Monday morning.
By Hana Stewart-Smith; hanassmith@alliancenews.com; @HanaSSAllNews
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