WPP plc 6-K/A, filed Feb 12, 2021
WPP plc (WPP)
About this 6-K/A
WPP plc filed this 6-K/A on February 12, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K/A
(Amendment No.1)
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the Month of September 2020
Commission File Number: 001-38303
WPP PLC
(Translation of registrant’s name into English)
Sea Containers, 18 Upper Ground, London, United Kingdom, SE1 9GL
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
Explanatory Note
This Amendment on Form 6-K/A is being furnished by WPP plc (“the Company”) as Amendment No. 1 (this “Amendment”) to its interim report on Form 6-K for the period ended 30 June 2020 (the “Original Furnishing”) originally furnished with the Securities and Exchange Commission (the “SEC”) on 3 September 2020 (the “Original Filing Date”). As indicated on our Form 6-K furnished to the SEC on 14 December 2020, it was determined that the Company’s previously issued financial statements for the period ended 30 June 2020, 2019 and year ended 31 December 2019 contained errors with respect to certain aspects of the application of IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement, resulting in the incorrect presentation of the Company’s notional cash pooling arrangements on the balance sheet and the inappropriate deferral of foreign exchange movements in the Company’s translation reserve due to the inappropriate application of hedge accounting in respect of non-derivative financial instruments, respectively. We have also determined that the discount rate used in the calculation of the present value of the expected cash outflows in respect of put option agreements and payments due to vendors (earnout agreements) did not fully reflect the risk in the associated cash flows.
To correct these errors, in this Amendment we are restating our condensed consolidated interim balance sheets as at 30 June 2020 and 2019, and 31 December 2019, and our condensed consolidated interim statements of income, comprehensive income, and changes in equity for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019. The condensed consolidated interim financial statements as at and for the six months ended 30 June 2020 and 2019 and year ended 31 December 2019 are collectively referred to as the “Restated Financial Statements”. The adjustments to correct the notional cash pooling matters were limited to balance sheet adjustments in both cash and short-term deposits and bank overdrafts, bonds and bank loans that result in an aggregate increase in both of £7.795 billion, £9.334 billion and £8.337 billion in the Company’s condensed consolidated interim balance sheets as at 30 June 2020, 2019 and 31 December 2019, respectively. The adjustments to correct the net investment hedging matters have resulted in reclassifying exchange adjustments on foreign currency net investments within the Company’s condensed consolidated interim statement of comprehensive income to be reported together with revaluation of financial instruments on the face of the Company’s condensed consolidated interim income statement as revaluation and retranslation of financial instruments and separately disclosed in the notes to the condensed consolidated interim financial statements, amounting to a £301.1 million loss, £8.9 million gain and £245.7 million gain for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019, respectively. Corresponding adjustments to other reserves and retained earnings on the Company’s condensed consolidated interim balance sheets and statements of changes in equity were made. This change also reduced the opening retained earnings balance as at 1 January 2019 by £517.4 million with a corresponding increase in other reserves. The adjustments to correct the put option and payments due to vendors (earnout) discount rate have resulted in adjustments to the Company’s condensed consolidated balance sheet, decreasing trade and other payables (current and non-current liabilites) by £35.4 million, £58.7 million and £32.4 million as at 30 June 2020, 2019 and 31 December 2019, respectively; increasing other reserves by £60.2 million, £51.9 million and £59.6 million as at 30 June 2020, 2019 and 31 December 2019, respectively; and decreasing intangible assets: goodwill by £23.9 million, £70.4 million and £60.1 million as at 30 June 2020, 2019 and 31 December 2019, respectively. The Company’s condensed interim consolidated interim income statement has also been adjusted to reflect credits to revaluation and retranslation of financial instruments of £2.5 million and £10.2 million for the six months ended 30 June 2020 and 2019, respectively, and a charge of £13.5 million for the year ended 31 December 2019 along with a credit to goodwill impairment of £36.1 million in the six months ended 30 June 2020. Corresponding adjustments to retained earnings on the Company’s consolidated balance sheets and statements of changes in equity were made. These changes also reduced the opening retained earnings balance as at 1 January 2019 by £73.8 million. These adjustments are described more fully in the accounting policies discussion and notes 6 and 22 of the accompanying Restated Financial Statements.
We have made no other changes to our Original Furnishing, and the other disclosures included in this Amendment are included for the convenience of the reader only and have not been updated to reflect events occurring after the Original Filing Date. Accordingly, except as expressly modified to reflect the impact of the corrections made in the Restated Financial Statements, this Amendment continues to speak only as of the Original Filing Date.
Since this Amendment restates the financial information for the six months ended 30 June 2020 and 2019, we do not intend to amend our previously furnished interim report on Form 6-K for the six months ended prior to 30 June 2019. As a result, you should rely upon the Restated Financial Statements contained in this Amendment with respect to such prior period. In addition, on 12 February 2021, we filed a Form 20-F/A to similarly restate our consolidated balance sheets as at 31 December 2019, 2018 and 2017, and our consolidated statements of income, comprehensive income, and changes in equity for the years ended 31 December 2019, 2018 and 2017. Please refer to that report for further detail and review the Original Furnishing and this Amendment together with that report.
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The Company and certain of its subsidiaries, including WPP Finance 2010, WPP 2005 Limited and WPP Jubilee Limited, may from time to time file registration statements for the registration of securities that may from time to time be offered by WPP Finance 2010 or other subsidiaries of the Company with guarantees of WPP plc, WPP 2005 Limited and WPP Jubilee Limited and, to the extent so indicated in an applicable prospectus supplement or otherwise established following the offer and sale of a series of debt securities, guarantees of other entities. The Company is furnishing this amended report on Form 6-K/A for the purpose of presenting its results for the six months ended 30 June 2020 in a format that can be incorporated by reference into any such registration statement.
Forward-Looking Statements
In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), the Company may include forward-looking statements (as defined in the Reform Act) in oral or written public statements issued by or on behalf of the Company. These forward-looking statements may include, among other things, plans, objectives, projections and anticipated future economic performance based on assumptions and the like that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. Important factors that 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”, in the Company’s Form 20-F/A for the year ended 31 December 2019, 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 the oral or written public statements 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.
EXHIBIT INDEX
| Exhibit No. |
Description | |||
| 1 | Operating and Financial Review for the period ended 30 June 2020 | |||
| 2 | Unaudited Condensed Consolidated Interim Financial Statements of WPP plc for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019 | |||
| (i) |
Unaudited condensed consolidated interim income statement for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019 | |||
| (ii) |
Unaudited condensed consolidated interim statement of comprehensive income for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019 | |||
| (iii) |
Unaudited condensed consolidated interim cash flow statement for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019 | |||
| (iv) |
Unaudited condensed consolidated interim balance sheet as at 30 June 2020 and 2019 and 31 December 2019 | |||
| (v) |
Unaudited condensed consolidated interim statement of changes in equity for the six months ended 30 June 2020, 31 December 2019 and 30 June 2019 | |||
| (vi) |
Notes to the unaudited condensed consolidated interim financial statements | |||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WPP PLC | ||||||
| (Registrant) | ||||||
| Date: 12 February 2021 | By: | /s/ Balbir Kelly-Bisla | ||||
| Balbir Kelly-Bisla | ||||||
| Company Secretary | ||||||
Exhibit 1
Operating and Financial Review for the period ended 30 June 2020
Six months ended June 2020 compared with six months ended June 2019
Introduction
Certain Non-GAAP measures included in this operating and financial review 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 operating profit, headline PBIT (Profit Before Interest and Taxation), headline PBT (Profit Before Taxation), 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 14 to 17.
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.
First half overview
Introduction
After two months in which our strategic progress could be measured by growth outside Greater China, the second quarter saw an inevitable downturn, albeit better than our expectations. Assuming there is no second wave nor major lockdowns, the second quarter is expected to be the toughest period of the year, although we remain cautious on the speed of recovery.
Our strategic transformation remains on track but as COVID-19 accelerates the change in our sector, we are accelerating our plans. We continue to attract new talent, invest in technology and ecommerce, and train our people in the skills they need for the future, with more than 20,000 receiving accreditations from Adobe, Amazon, Facebook, Google and Salesforce this year.
We are working with our clients to help them get back to business, adapt their marketing strategies at speed and reshape their operations for a new world. Brands are seeing increases in online sales of 100% and more, and we are supporting eight of our top ten clients on ecommerce strategies. Our new business record is industry-leading, at $4 billion in the first half, including wins from Intel, HSBC and Unilever, and our pipeline remains strong.
As at 30 June 2020 we had cash and cash equivalents of £2.5 billion and total liquidity, including undrawn credit facilities, of £4.7 billion. With £4.7 billion of liquidity thanks to the Kantar transaction, and as we deliver against our cost savings targets, our financial position remains strong. As a result, we are able to return to paying our dividend, with an interim dividend of 10p for 2020.
Performance and progress
Revenue in the first half was £5.6 billion, down from £6.4 billion in the first half of 2019. We started the year strongly, building on the progress made over the course of 2019, returning to like-for-like growth in revenue outside Greater China in January and February, and landing a number of valuable new business wins. Since March, the environment has inevitably been more challenging, but we have responded positively as an organisation, supporting our people, staying closer than ever to clients and working with a number of partners to protect our communities. Our financial performance has been less geared to client media expenditure than in previous cycles, reflecting the broader spread of marketing services we now provide, as well as an ongoing shift to resource-driven revenue models and away from commission on media investment.
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The nature and delivery of our client work has evolved significantly. Most of our major clients required rapid support in developing relevant communications, with new campaigns being developed in days rather than months. Our investment in production through Hogarth, combining leading-edge technology with a wide geographical footprint, has been a strong differentiator in this regard. We have also been working with clients to re-plan their communications spend, redirecting resources to alternative channels and maximising their media return on investment. Work on ecommerce and omnichannel services has also ramped up significantly, with ongoing ecommerce engagements with 8 of our top 10 clients.
Our PR businesses have held up relatively well (revenue less pass-through costs -3.6% and like-for-like revenue less pass-through costs -4.5% in the first half), as clients have sought advice on how to engage with their own stakeholders. We expect future demand for our experience, commerce and technology services to be very strong, with clients looking to adapt rapidly to permanent changes in consumer behaviour. On the other hand, we have seen pressure on some project-based work in branding and identity as clients look to cut costs.
Our new business performance has continued to be very strong, In the first half we won almost $4 billion of new business, with very few assignment losses, and this is testament to the success of our new strategy: WPP now has fewer, stronger agency brands working better together. We are seeing very strong levels of collaboration across WPP, with most pitches involving multi-agency teams with strong co-ordination and support from the client, new business and technology expertise we are building in the centre. Key wins included Intel (global creative), HSBC (global creative), Unilever (China media) and WW (global integrated creative and media).
Our sector exposure has also delivered a more resilient performance. Within our top 200 clients, 56% of revenue comes from companies in the consumer packaged goods, technology and healthcare & pharma sectors, which were the least impacted by COVID-19. Their combined revenue growth in the first half was -0.6%. Within retail, financial services, telecom, media & entertainment and other clients, representing 22%, revenue growth was -4.9%. The sectors which suffered the most – automotive, luxury & premium and travel & leisure, which together comprise 22% of top 200 client income – saw a revenue decline of 12.9%.
Our commitment to creativity also continues to be reflected in the industry recognition our campaigns attract. In June, WPP was ranked the most effective marketing communications company in the world in the 2020 Effie Index. It is the ninth successive year that WPP has received this award. The Index, the world’s most comprehensive global ranking of marketing effectiveness, lists companies that create the most effective marketing and communications ideas in terms of measurable business results for clients. In the same month, the Cannes Lions International Festival of Creativity named WPP as holding company of the decade, in global rankings to recognise those companies which have demonstrated the greatest sustained creative excellence, based on winning and shortlisted work over the last 10 years.
We also continued to be recognised in independent research evaluation. In its March 2020 report, Gartner included four WPP agencies (AKQA, Ogilvy, VMLY&R and Wunderman Thompson) in its Magic Quadrant for Global Marketing Agencies, rating AKQA highest globally for both vision and execution.
Update to COVID-19 response
The significant majority of our people have been working remotely since March, with some recent re-opening of offices at reduced capacity in certain countries, involving very strict hygiene and social distancing protocols. As outlined above, we have ensured strong continuity of service to clients at a time when the need for our services and expertise has been greater than ever.
The latest level of office-based working in our main markets is as follows: US 1%, UK 3%, Germany 17%, China 77% and India 0%.
We have continued to work with clients, governments, national health organisations and NGOs to help limit the impact of COVID-19 on society, including our multi-agency support for the World Health Organization on a pro
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bono basis, delivering global and regional public awareness campaigns to encourage people to stay at home and adopt safe behaviours.
We have also successfully maintained the financial resilience of the business from both a liquidity and cost perspective. We raised over £900 million in the bond markets in May, and at 30 June 2020 had total liquidity of £4.7 billion. Our working capital position has improved year-on-year as a result of increased focus and discipline.
We have generally not applied for government support in response to COVID-19, although in some markets funding has been applied automatically. We did not use the UK Government funded Job Retention Scheme. In total we have received £29 million of funding, none of which related to the UK or US, and have also benefited from the deferral of certain taxes under local initiatives available to all companies in the countries concerned. These benefits are described in more detail in Exhibit 2.
Impairments of £2.7 billion (including £2.5 billion of goodwill impairments and £0.2 billion of investment and other write-downs) were recognised in the first half. The goodwill impairments relate to historical acquisitions whose carrying values have been reassessed in light of the impact of COVID-19. The impairments are driven by a combination of higher discount rates used to value future cash flows, a lower profit base in 2020 and lower industry growth rates.
On 31 March 2020, we announced the suspension of the 2019 final dividend of 37.3p per share and the share buyback funded by proceeds from the Kantar transaction. At the time, given the high level of uncertainty, the Board’s view was that preserving liquidity and maintaining lower leverage were the key financial priorities, and these two actions together provided WPP with additional liquidity of £1.1 billion.
Since then, the Board has continued to review the impact of COVID-19 on operational performance and liquidity, as well as the medium-term outlook for the broader economy. While impacted by the economy, our performance in the second quarter was much better than initially anticipated.
Review of Group results from continuing operations
Revenue
Revenue from continuing operations was down 12.3% at £5.6 billion. Revenue on a constant currency basis was down 12.4% compared with last year. Net changes from acquisitions and disposals had a negative impact of 0.9% on growth, leading to a like-for-like performance, which excludes the impact of currency and acquisitions, of -11.5%. Billings were £20.9 billion, down 17.5%, and down 16.8% like-for-like. In the second quarter, revenue was down 19.0% and like-for-like revenue was down 18.4%, reflecting the impact of COVID-19 on economic activity.
Costs of services, general and administrative costs
Costs of services decreased by 9.8% in the first half of 2020 to £4,805 million from £5,329 million in the first half of 2019. General and administrative costs increased by 621.2% in the first half of 2020 to £3.2 billion from £443 million in the first half of 2019.
The main areas of cost reduction were in travel and discretionary expenditure (down 47%), property costs (down 5%) and staff costs (down 5%). Impairments of £2.7 billion (including £2.5 billion of goodwill impairments and £0.2 billion of investment and other-write downs) were recognized in the first half of 2020. The goodwill impairments relate to historical acquisitions whose carrying values have been reassessed in light of the impact of
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COVID-19. The impairments are driven by a combination of higher discount rates used to value future cash flows, a lower profit base in 2020 and lower industry growth rates. The majority of the impairments relate to businesses acquired as part of the Y&R acquisition in 2000. A full analysis of the impairments is provided in note 14 of Exhibit 2.
In the first half of 2020, the Group generated £16 million of gains on disposals of investments and subsidiaries, offset by losses including the Group’s share of associate company exceptional losses (£51 million) and restructuring and transformation costs (£57 million). The majority of the latter comprise severance costs arising from the continuing structural review of parts of the Group’s operations and our response to the COVID-19 situation. This compares with gains of £65 million, primarily relating to the gains on disposal of investments and subsidiaries and the gain on sale of freehold property in New York, offset by restructuring and transformation costs (£34 million) and share of associate company exceptional losses (£14 million) in the first half of 2019.
Operating profitability
Operating loss was £2.4 billion, compared to an operating profit of £596 million. Headline operating profit was down 38.1% to £382 million, and down 37.8% like-for-like. The sharp decline in profitability year-on-year reflects the sudden and significant impact of COVID-19 on revenue. The difference between the headline operating profit and operating loss reflecting principally the £2.7 billion of impairment charges and £57 million of restructuring and transformation costs.
The Group’s headline operating profit is after charging £19 million of severance costs, compared with £16 million in the first half of 2019 and £48 million of incentive payments, compared to £95 million in the first half of 2019.
On a like-for-like basis, the average number of people in the Group, in the first half was 105,000 compared to 106,000 in the first half of 2019. On the same basis, the total number of people, at 30 June 2020 was 101,000 compared to 106,000 at 30 June 2019. The decrease reflects a combination of voluntary leavers whose roles were not replaced as part of the hiring freeze, and redundancies. Wherever possible, the preservation of our workforce continues to be a priority.
Interest and taxes
Net finance costs, finance and investment income less finance costs (excluding the revaluation and retranslation of financial instruments), were £157.3 million, a decrease of £22.8 million year-on year primarily as a result of lower average net debt. Revaluation and retranslation of financial instruments resulted in a loss of £268.6 million, an increase of £237.2 million year-on-year primarily as a result of £301 million of retranslation losses for the period.
The tax rate on loss before tax was -0.8% (2019: 25.5%). The difference in the rate in 2020 is principally due to impairments and retranslation of financial instruments.
Earnings and dividend
Loss before tax was £2.8 billion, compared to a profit of £428 million in the prior period, reflecting principally the £2.7 billion of impairment charges and £57 million of restructuring and transformation costs. Headline profit before tax was down 44.2% at £276 million, and down 45.8% like-for-like.
Loss after tax was £2.9 billion compared to a profit last year of £319 million. Losses attributable to share owners were £2.9 billion, again reflecting principally the £2.7 billion of impairments and £92 million of exceptional losses noted above.
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Diluted loss per share from continuing operations was 235.9p, compared to earnings per share of 22.9p in the prior period.
In March 2020, we announced the Board’s decision to suspend the 2019 final dividend of 37.3p per share to protect liquidity in light of the threat to liquidity and cash flow from the COVID-19 impact. The Board has now decided to cancel this dividend to contribute towards lower leverage.
For 2020, the Board is declaring an interim dividend of 10p. The record date for the interim dividend is 9 October 2020, and the dividend will be payable on 6 November 2020.
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Regional review
The following tables give details of revenue and revenue less pass-through costs by region, as well as revenue and revenue less pass-through costs growth by region for the second quarter and first half of 2020. Headline operating profit by region is provided in note 7 of Exhibit 2.
Revenue analysis
| Three months 30 June 2020 |
Reported change three months ended 30 June 2020 |
Like-for-like change three months ended 30 June 2020 |
Six months ended 30 June 2020 |
Reported months |
Like-for-like change six months ended 30 June 2020 |
|||||||||||||||||||
| Continuing operations | £m | £m | ||||||||||||||||||||||
| N. America |
1,076 | -11.5 | % | -12.7 | % | 2,177 | -6.7 | % | -7.6 | % | ||||||||||||||
| United Kingdom |
347 | -27.3 | % | -24.9 | % | 758 | -16.5 | % | -14.0 | % | ||||||||||||||
| W. Cont. Europe |
531 | -20.8 | % | -21.6 | % | 1,093 | -13.5 | % | -13.5 | % | ||||||||||||||
| AP, LA, AME, CEE1 |
782 | -22.8 | % | -20.1 | % | 1,555 | -16.5 | % | -13.8 | % | ||||||||||||||
| Total Group |
2,736 | -19.0 | % | -18.4 | % | 5,583 | -12.3 | % | -11.5 | % | ||||||||||||||
Note
| 1 | Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe |
Revenue less pass-through costs1 analysis
| Three months 30 June 2020 |
Reported change three months ended 30 June 2020 |
Like-for-like change three months ended 30 June 2020 |
Six months ended 30 June 2020 |
Reported months |
Like-for-like change six months ended 30 June 2020 |
|||||||||||||||||||
| Continuing operations | £m | £m | ||||||||||||||||||||||
| N. America |
918 | -8.7 | % | -10.2 | % | 1,856 | -4.9 | % | -6.1 | % | ||||||||||||||
| United Kingdom |
272 | -24.5 | % | -23.3 | % | 586 | -15.4 | % | -14.2 | % | ||||||||||||||
| W. Cont. Europe |
453 | -18.0 | % | -18.8 | % | 920 | -11.7 | % | -11.7 | % | ||||||||||||||
| AP, LA, AME, CEE2 |
659 | -18.6 | % | -14.8 | % | 1,306 | -13.7 | % | -10.1 | % | ||||||||||||||
Notes
| 1 | Revenue less pass-through costs is revenue less media 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 costs. See note 4 to the consolidated financial statements for more details of the pass-through costs |
| 2 | Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe |
North America like-for-like revenue less pass-through costs was down 6.1% in the first half and down 10.2% in the second quarter. This reflects a good start to the year, before the impact of COVID-19 began to be felt from March. Our improved new business performance in 2019, and good momentum at VMLY&R which grew in the US in both the first half and the second quarter, led to the strongest regional performance across the Group. Specialist Agencies underperformed the overall North America performance, reflecting weakness in the automotive and travel sectors, as well as weaker performances across a number of smaller agencies. Our PR businesses outperformed, and were only slightly down year-on-year.
United Kingdom like-for-like revenue less pass-through costs was down 14.2% in the first half and down 23.3% in the second quarter. Performance overall reflected the extent of the lockdown in the second quarter, as well as a strong performance in the comparable period. VMLY&R was a relative outperformer, but all of our Global Integrated Agencies declined over the period. PR held up better than the other business segments, but was still down significantly year-on-year.
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Western Continental Europe like-for-like revenue less pass-through costs was down 11.7% in the first half and down 18.8% in the second quarter. Of the larger markets, France, Italy and the Netherlands were particularly hard-hit in the second quarter, Germany was relatively resilient and Spain traded in line with the region as a whole. Denmark, where we have a commerce and technology centre of excellence, grew in the first half and second quarter.
In Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, like-for-like revenue less pass-through costs was down 10.1% in the first half and down 14.8% in the second quarter. Eastern Europe performed relatively better than the other regions in the second quarter. China bounced back to growth in the second quarter, which partly reflected the economic recovery but was also the result of a weak comparative period. The China performance was offset within Asia Pacific by weaker trends in Australia, India and Singapore.
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Reportable segments review
The following tables give details of revenue and revenue less pass-through costs by business sector, as well as revenue and revenue less pass-through costs growth by business sector for the second quarter and first half of 2020. Headline operating profit and headline operating profit margin by business sector for the first half of 2020 are also provided below.
Revenue analysis
| Three months 30 June 2020 |
Reported change three months ended 30 June 2020 |
Like-for-like change three months ended 30 June 2020 |
Six months ended 30 June 2020 |
Reported months |
Like-for-like change six months ended 30 June 2020 |
|||||||||||||||||||
| Continuing operations | £m | £m | ||||||||||||||||||||||
| Global Integrated Agencies |
2,095 | -20.3 | % | -19.1 | % | 4,249 | -12.8 | % | -11.4 | % | ||||||||||||||
| Public Relations |
224 | -8.1 | % | -9.6 | % | 447 | -5.2 | % | -6.3 | % | ||||||||||||||
| Specialist Agencies |
417 | -17.3 | % | -19.6 | % | 887 | -13.3 | % | -14.4 | % | ||||||||||||||
| Total Group |
2,736 | -19.0 | % | -18.4 | % | 5,583 | -12.3 | % | -11.5 | % | ||||||||||||||
Revenue less pass-through costs1 analysis
| Three months 30 June 2020 |
Reported change three months ended 30 June 2020 |
Like-for-like change three months ended 30 June 2020 |
Six months ended 30 June 2020 |
Reported months |
Like-for-like change six months ended 30 June 2020 |
|||||||||||||||||||
| Continuing operations | £m | £m | ||||||||||||||||||||||
| Global Integrated Agencies |
1,717 | -16.3 | % | -15.7 | % | 3,462 | -10.3 | % | -9.5 | % | ||||||||||||||
| Public Relations |
214 | -6.0 | % | -7.5 | % | 426 | -3.6 | % | -4.5 | % | ||||||||||||||
| Specialist Agencies |
371 | -17.5 | % | -16.3 | % | 780 | -13.3 | % | -11.8 | % | ||||||||||||||
Note
| 1 | Revenue less pass-through costs is revenue less media 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 costs. See note 4 to the consolidated financial statements for more details of the pass-through costs. |
Headline operating profit analysis
| Headline operating six months |
Headline operating profit six months |
Headline operating profit six months ended |
Headline operating profit margin1 |
|||||||||||||
| Continuing operations | £m | % | £m | % | ||||||||||||
| Global Integrated Agencies |
256 | 7.4 | 463 | 12.0 | ||||||||||||
| Public Relations |
72 | 16.9 | 68 | 15.4 | ||||||||||||
| Specialist Agencies |
54 | 7.0 | 86 | 9.6 | ||||||||||||
| Total Group |
382 | 617 | ||||||||||||||
Notes
| 1 | Headline operating profit margin is calculated as headline operating profit as a percentage of revenue less pass-through costs. |
| 2 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13 of Exhibit 2. |
Global Integrated Agencies like-for-like revenue less pass-through costs was down 9.5% in the first half and down 15.7% in the second quarter. VMLY&R was the best performing integrated agency, reflecting its
8
improving business momentum since the merger. Wunderman Thompson also performed better than the segment as a whole, again benefiting from the creation of an integrated agency. Hogarth, our specialist production business, experienced strong demand for its services. GroupM underperformed the segment, due to the closer correlation of its revenue to client media expenditure. As a result, headline operating profit was down £207 million from £463 million for the six months ended 30 June 2019 to £256 million for the six months ended 30 June 2020.
Public Relations like-for-like revenue less pass-through costs was down 4.5% in the first half and down 7.5% in the second quarter. Headline operating profit was up year-on-year as a result of improved margins. Demand for PR services held up well relative to other parts of the Group, as clients sought advice on their communication with all stakeholders in light of the pandemic. Hill + Knowlton was the best performing of our major agencies. In July, we announced the merger of Finsbury, Glover Park and Hering Schuppener to form Finsbury Glover Hering, which will be a leading global strategic communications and public affairs business. As a result, headline operating profit was up £4 million from £68 million for the six months ended 30 June 2019 to £72 million for the six months ended 30 June 2020.
Specialist Agencies like-for-like revenue less pass-through costs was down 11.8% in the first half and down 16.3% in the second quarter. Of the larger agencies, AKQA and Geometry performed better than the overall segment, with GTB broadly in line. Brand Consulting, which is more project-based in nature, experienced short-term budget cuts. Smaller agencies focused on challenged sectors such as airlines, or in events production, suffered from a collapse in demand in the second quarter. As a result, headline operating profit was down £32 million from £86 million for the six months ended 30 June 2019 to £54 million for the six months ended 30 June 2020.
9
Cash Flow and Balance Sheet
The Group’s unaudited condensed consolidated interim cash flow statement, balance sheet and notes as at 30 June 2020 are provided in Exhibit 2.
Net cash outflow from operating activities increased to £402 million in the period from £126 million in 2019.
In the first half of 2020, operating loss from continuing operations was £2,417 million, operating profit from discontinued operations was £10 million, depreciation and amortisation £306 million, impairments and investment and other write downs £2,705 million, non-cash share-based incentive charges £31 million, earnout payments £88 million, working capital and provisions outflow £751 million, net interest paid £32 million, tax paid £201 million, lease liabilities (including interest) paid £203 million, capital expenditure £141 million and other net cash outflows £44 million. Free cash flow was, therefore, an outflow of £825 million.
This free cash flow outflow was enhanced by £207 million disposal proceeds (of which £204 million was disposals of investments and subsidiaries net of cash disposed and £3 million was disposal of property, plant and equipment) and reduced by £46 million in net initial acquisition payments and £286 million of share buybacks.
As at 30 June 2020 we had cash and cash equivalents of £2.5 billion and total liquidity, including undrawn credit facilities, of £4.7 billion. Debt financing at 30 June 2020 was £13.3 billion, compared to £15.8 billion on 30 June 2019, a decrease of £2.5 billion. Net debt at 30 June 2020 was £2.7 billion, against £4.3 billion on 30 June 2019, a reduction of £1.7 billion at 2020 exchange rates. The reduced net debt figure year-on-year reflects the benefit of the proceeds from the Kantar transaction as well as an improved working capital performance. Average net debt in the first half was £2.5 billion, compared to £4.5 billion in the prior period, at 2020 exchange rates.
In May, we issued bonds of €750 million and £250 million. Our bond portfolio at 30 June 2020 had an average maturity of 8.1 years, with no maturities until 2022.
Summarised financial information about Guarantors and Issuers of Guaranteed Securities
WPP Finance 2010 has in issue $500 million of 3.625% bonds due September 2022 and $93 million ($28 million was repaid in 2018 and $179 million was repaid in 2019 from the $300 million initially issued) of 5.125% bonds due September 2042 with WPP plc as parent guarantor and WPP Air 1, WPP 2008 Limited, WPP 2005 Limited, WPP 2012 Limited and WPP Jubilee Limited as subsidiary guarantors. WPP Finance 2010 repaid in full $812 million of 4.75% bonds due November 2021 on December 27, 2019.
In the event that WPP Finance 2010 fails to pay the holders of the securities, thereby requiring WPP plc, WPP Air 1, WPP 2008 Limited, WPP 2005 Limited, WPP 2012 Limited or WPP Jubilee Limited to make payment pursuant to the terms of their full and unconditional, and joint and several guarantee of those securities, there is no impediment to WPP plc, WPP Air 1, WPP 2008 Limited, WPP 2005 Limited, WPP 2012 Limited or WPP Jubilee Limited obtaining reimbursement for any such payments from WPP Finance 2010.
10
Summarised income statement information for WPP Finance 2010 (issuer), WPP plc and Subsidiary Guarantors
| For the ended 30 June 2020 |
For the ended 31 December 2019 |
|||||||
| Continuing operations | £m | £m | ||||||
| Revenue |
— | — | ||||||
| Costs of services |
— | — | ||||||
| Gross profit |
— | — | ||||||
| Finance and investment income from non-guarantors |
10.0 | 27.5 | ||||||
| Finance costs to non-guarantors |
(137.8 | ) | (252.3 | ) | ||||
| Loss for the period from continuing operations |
(535.3 | ) | (200.8 | ) | ||||
| Loss for the period |
(535.3 | ) | (200.8 | ) | ||||
Summarised balance sheet information for WPP Finance 2010 (issuer), WPP plc and Subsidiary Guarantors
| At 30 June 2020 |
At 31 December 2019 |
|||||||
| Due from Non-Guarantors-long term |
1,502.6 | 198.2 | ||||||
| Non-current assets |
1,631.6 | 320.1 | ||||||
| Due from Non-Guarantors-short term |
85.6 | 137.6 | ||||||
| Current assets |
963.6 | 1,215.7 | ||||||
| Due to Non-Guarantors-short term |
(18,301.9 | ) | (11,310.2 | ) | ||||
| Current Liabilities |
(21,256.6 | ) | (14,377.5 | ) | ||||
| Due to Non-Guarantors-long term |
(3,229.1 | ) | (7,182.3 | ) | ||||
| Non-current liabilities |
(4,618.1 | ) | (8,490.5 | ) | ||||
WPP Finance 2010 has in issue $750 million of 3.750% bonds due September 2024 and $220 million ($50 million was repaid in 2018 and $230 million was repaid in 2019 from the $500 million initially issued) of 5.625% bonds due November 2043, with WPP plc as parent guarantor and WPP Jubilee Limited and WPP 2005 Limited as subsidiary guarantors.
In the event that WPP Finance 2010 fails to pay the holders of the securities, thereby requiring WPP plc, WPP Jubilee Limited or WPP 2005 Limited to make payment pursuant to the terms of their full and unconditional, and joint and several guarantee of those securities, there is no impediment to WPP plc, WPP Jubilee Limited or WPP 2005 Limited obtaining reimbursement for any such payments from WPP Finance 2010.
11
Summarised income statement information for WPP Finance 2010 (issuer), WPP plc and Subsidiary Guarantors
| For the 30 June 2020 |
For the ended 31 December 2019 |
|||||||
| Continuing operations | £m | £m | ||||||
| Revenue |
— | — | ||||||
| Costs of services |
— | — | ||||||
| Gross profit |
— | — | ||||||
| Finance and investment income from non-guarantors |
10.0 | 27.5 | ||||||
| Finance costs to non-guarantors |
(137.8 | ) | (252.3 | ) | ||||
| Loss for the period from continuing operations |
(535.3 | ) | (200.8 | ) | ||||
| Loss for the period |
(535.3 | ) | (200.8 | ) | ||||
Summarised balance sheet information for WPP Finance 2010 (issuer), WPP plc and Subsidiary Guarantors
| At 30 June 2020 |
At 31 December 2019 |
|||||||
| Due from Non-Guarantors-long term |
1,502.6 | 198.2 | ||||||
| Non-current assets |
1,631.6 | 320.1 | ||||||
| Due from Non-Guarantors-short term |
258.6 | 310.7 | ||||||
| Current assets |
1,132.7 | 1,384.9 | ||||||
| Due to Non-Guarantors-short term |
(18,302.5 | ) | (11,310.9 | ) | ||||
| Current Liabilities |
(21,257.1 | ) | (14,378.1 | ) | ||||
| Due to Non-Guarantors-long term |
(3,229.1 | ) | (7,182.3 | ) | ||||
| Non-current liabilities |
(4,618.1 | ) | (8,490.5 | ) | ||||
The issuer and guarantors of the bonds (issuer and subsidiary guarantors are 100% owned by WPP plc) are consolidated subsidiaries of WPP plc and are each subject to the reporting requirements under section 15(d) of the Securities Exchange Act of 1934. The summarized financial information for WPP Finance 2010 and the guarantors is presented on a combined basis and prepared in accordance with IFRS as issued by the IASB and is intended to provide investors with meaningful financial information, and is provided pursuant to the early adoption of Rule 13-01 of Regulation S-X which allows for alternative financial disclosures or narrative disclosures in lieu of the separate financial statements of WPP Finance 2010 and the guarantors. The financial information presented is that of the issuers and guarantors of the guaranteed security, and the financial information of non-issuer and non-guarantor subsidiaries has been excluded.
12
Trend information
The discussion below 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 Exhibit 1 in this Form 6-K.
Despite the significant challenges faced by our people, our clients and our communities over the first six months of the year, we have wherever possible continued to conduct business as usual. Our strong financial position, the renewed strength of our global networks, the range of our services and the depth of our client relationships have all underpinned our resilience. We have further consolidated this through our swift action on cost and liquidity.
In July, the Group recorded revenue of -12.9% and like-for-like revenue of -9.3% compared to the previous year, showing a steady improvement over the second quarter, although performance across markets remains volatile.
13
NON-GAAP INFORMATION
As introduced on page 1, the following are the Group’s Non-GAAP performance measures.
Constant currency
The consolidated financial statements are presented in pounds sterling. However, the Group’s significant international operations give rise to fluctuations in foreign exchange rates. To neutralise 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 Group 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 2020 exchange rates to local currency reported results for the current and prior year which excludes any variances attributable to foreign exchange rate movements.
Pro-forma (‘like-for-like’)
Management believes that discussing pro-forma or like-for-like contributes to the understanding of the Group’s performance and trends because it allows for meaningful comparisons of the current period to that of prior periods.
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 and disposals 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 the three month and six month periods ended 30 June 2020 and 2019, to like-for-like revenue growth for the same periods.
| Three months ended 30 June |
Six months ended 30 June |
|||||||||||||||
| Revenue | Revenue | |||||||||||||||
| Continuing operations | £m | % | £m | % | ||||||||||||
| 2019 Reported |
3,375 | 6,368 | ||||||||||||||
| Impact of exchange rate changes |
10 | 0.3 | 6 | 0.1 | ||||||||||||
| Changes in scope of consolidation |
(30 | ) | (0.9 | ) | (57 | ) | (0.9 | ) | ||||||||
| Like-for-like growth |
(619 | ) | (18.4 | ) | (734 | ) | (11.5 | ) | ||||||||
| 2020 Reported |
2,736 | (19.0 | ) | 5,583 | (12.3 | ) | ||||||||||
Headline operating profit
Headline operating profit is one of the measures that management uses to assess the performance of the business.
Headline operating profit is calculated as operating profit before gains/losses on disposal of investments and subsidiaries, investment and other write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangible assets, restructuring and transformation costs, restructuring costs in relation to COVID-19, litigation settlement, gain on sale of freehold property in New York and gains/losses on remeasurement of equity interests arising from a change in scope of ownership.
A tabular reconciliation of operating profit to headline operating profit is provided in note 23 of the unaudited condensed consolidated interim financial statements of the Company, which appears in Exhibit 2.
14
Headline PBIT
Headline PBIT is one of the measures that management uses to assess the performance of the business.
Headline PBIT is calculated as profit before finance income/costs and revaluation and retranslation of financial instruments, taxation, gains/losses on disposal of investments and subsidiaries, investment and other write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangible assets, restructuring and transformation costs, restructuring costs in relation to COVID-19, litigation settlement, gain on sale of freehold property in New York, 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 shown below.
| Six months 30 June 20201 |
Six months ended 30 June 20192 |
Year ended 31 December 2019 |
||||||||||
| Continuing operations | £m | £m | £m | |||||||||
| (Loss)/profit before interest and taxation |
(2,469.2 | ) | 597.8 | 1,310.6 | ||||||||
| Amortisation and impairment of acquired intangible assets |
53.1 | 52.8 | 121.5 | |||||||||
| Goodwill impairment |
2,484.7 | — | 47.7 | |||||||||
| Gains on disposal of investments and subsidiaries |
(16.0 | ) | (40.6 | ) | (40.4 | ) | ||||||
| Gains on remeasurement of equity interests arising from a change in scope of ownership |
— | (0.4 | ) | (0.4 | ) | |||||||
| Investment and other write-downs |
220.6 | — | 7.5 | |||||||||
| Litigation settlement |
— | (16.8 | ) | (16.8 | ) | |||||||
| Gain on sale of freehold property in New York |
— | (7.9 | ) | (7.9 | ) | |||||||
| Restructuring and transformation costs |
17.9 | 33.9 | 153.5 | |||||||||
| Restructuring costs in relation to COVID-19 |
39.3 | — | — | |||||||||
| Share of exceptional losses of associates |
51.4 | 13.6 | 47.8 | |||||||||
| Headline PBIT |
381.8 | 632.4 | 1,623.1 | |||||||||
Notes
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies of the consolidated financial statements. |
| 2 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13 of Exhibit 2 |
Headline PBT
Headline PBT is one of the measures 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 and other write-downs, goodwill impairment and other goodwill write-downs, amortisation and impairment of acquired intangible assets, restructuring and transformation costs, restructuring costs in relation to COVID-19, litigation settlement, gain on sale of freehold property in New York, share of exceptional gains/losses of associates, gains/losses arising from the revaluation and retranslation of financial instruments, and gains/losses on remeasurement of equity interests arising from a change in scope of ownership.
15
A tabular reconciliation of profit before taxation to headline PBT is shown below.
| Six months ended 30 June 20201 |
Six months ended 30 June 20191,2 |
Year ended |
||||||||||
| Continuing operations | £m | £m | £m | |||||||||
| (Loss)/profit before taxation |
(2,843.9 | ) | 428.1 | 1,214.3 | ||||||||
| Amortisation and impairment of acquired intangible assets |
53.1 | 52.8 | 121.5 | |||||||||
| Goodwill impairment |
2,484.7 | — | 47.7 | |||||||||
| Gains on disposal of investments and subsidiaries |
(16.0 | ) | (40.6 | ) | (40.4 | ) | ||||||
| Gains on remeasurement of equity interests arising from a change in scope of ownership |
— | (0.4 | ) | (0.4 | ) | |||||||
| Investment and other write-downs |
220.6 | — | 7.5 | |||||||||
| Restructuring and transformation costs |
17.9 | 33.9 | 153.5 | |||||||||
| Restructuring costs in relation to COVID-19 |
39.3 | — | — | |||||||||
| Share of exceptional losses of associates |
51.4 | 13.6 | 47.8 | |||||||||
| Litigation settlement |
— | (16.8 | ) | (16.8 | ) | |||||||
| Gain on sale of freehold property in New York |
— | (7.9 | ) | (7.9 | ) | |||||||
| Revaluation and retranslation of financial instruments |
268.6 | 31.4 | (163.8 | ) | ||||||||
| Headline PBT |
275.7 | 494.1 | 1,363.0 | |||||||||
Note
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies of the consolidated financial statements. |
| 2 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13 of Exhibit 2. |
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.
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 Group’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 flow from operating activities plus proceeds from the issue of shares and payments on early settlement of bonds, less earnout payments, purchases of property, plant and equipment, purchases of other intangible assets, repayment of lease liabilities and dividends paid to non-controlling interests in subsidiary undertakings.
16
A tabular reconciliation of net cash flow from operating activities to free cash flow is shown below:
| Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended |
||||||||||
| £m | £m | £m | ||||||||||
| Net cash (outflow)/inflow from operating activities |
(401.9 | ) | (126.4 | ) | 1,850.5 | |||||||
| Payment on early settlement of bonds |
— | — | 63.4 | |||||||||
| Share option proceeds |
— | 0.2 | 0.6 | |||||||||
| Earnout payments |
(88.5 | ) | (57.9 | ) | (130.2 | ) | ||||||
| Purchase of property, plant and equipment |
(121.3 | ) | (145.9 | ) | (339.3 | ) | ||||||
| Purchase of other intangible assets (including capitalised computer software) |
(19.2 | ) | (21.1 | ) | (54.8 | ) | ||||||
| Repayment of lease liabilities |
(154.5 | ) | (103.8 | ) | (249.8 | ) | ||||||
| Dividends paid to non-controlling interests in subsidiary undertakings |
(40.1 | ) | (58.5 | ) | (96.2 | ) | ||||||
| Free cash flow |
(825.5 | ) | (513.4 | ) | 1,044.2 | |||||||
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.
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. Net debt excludes lease liabilities.
The following table is an analysis of net debt:
| 30 June 20201 |
30 June 20191 |
31 December 20191 |
||||||||||||||
| £m | £m | £m | ||||||||||||||
| Cash and short-term deposits | 10,558.0 | 11,507.5 | 11,305.7 | |||||||||||||
| Bank overdrafts, bonds and bank loans due within one year | (8,147.7 | ) | (10,469.1 | ) | (8,798.0 | ) | ||||||||||
| Bonds and bank loans due after one year | (5,135.8 | ) | (5,309.4 | ) | (4,047.3 | ) | ||||||||||
| Net debt | (2,725.5 | ) | (4,271.0 | ) | (1,539.6 | ) | ||||||||||
| 1 | Figures have been restated to be in accordance with IAS 32 Financial Instruments: Presentation, as described in the accounting policies section of the consolidated financial statements. |
17
Exhibit 2
Unaudited Condensed Consolidated Interim Financial Statements of WPP plc
for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019
WPP plc
Unaudited condensed consolidated interim income statement
for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019
| Continuing operations | Notes | Six months £m |
Six months £m |
Year ended £m |
||||||||||||
| Revenue |
7 | 5,582.7 | 6,368.2 | 13,234.1 | ||||||||||||
| Costs of services |
4 | (4,804.7 | ) | (5,328.8 | ) | (10,825.1 | ) | |||||||||
| Gross profit |
778.0 | 1,039.4 | 2,409.0 | |||||||||||||
| General and administrative costs |
4 | (3,195.3 | ) | (443.1 | ) | (1,113.1 | ) | |||||||||
| Operating (loss)/profit |
(2,417.3 | ) | 596.3 | 1,295.9 | ||||||||||||
| Share of results of associates |
5 | (51.9 | ) | 1.5 | 14.7 | |||||||||||
| (Loss)/profit before interest and taxation |
(2,469.2 | ) | 597.8 | 1,310.6 | ||||||||||||
| Finance and investment income |
6 | 51.2 | 41.8 | 99.0 | ||||||||||||
| Finance costs |
6 | (157.3 | ) | (180.1 | ) | (359.1 | ) | |||||||||
| Revaluation and retranslation of financial instruments |
6 | (268.6 | ) | (31.4 | ) | 163.8 | ||||||||||
| (Loss)/profit before taxation |
(2,843.9 | ) | 428.1 | 1,214.3 | ||||||||||||
| Taxation |
8 | (24.0 | ) | (109.3 | ) | (275.0 | ) | |||||||||
| (Loss)/profit for the period from continuing operations |
(2,867.9 | ) | 318.8 | 939.3 | ||||||||||||
| Discontinued operations |
||||||||||||||||
| Profit for the period from discontinued operations |
13 | 3.1 | 49.7 | 10.8 | ||||||||||||
| (Loss)/profit for the period |
(2,864.8 | ) | 368.5 | 950.1 | ||||||||||||
| Attributable to: |
||||||||||||||||
| Equity holders of the parent |
||||||||||||||||
| Continuing operations |
(2,889.0 | ) | 288.3 | 860.1 | ||||||||||||
| Discontinued operations |
(6.8 | ) | 43.2 | (3.8 | ) | |||||||||||
| (2,895.8 | ) | 331.5 | 856.3 | |||||||||||||
| Non-controlling interests |
||||||||||||||||
| Continuing operations |
21.1 | 30.5 | 79.2 | |||||||||||||
| Discontinued operations |
9.9 | 6.5 | 14.6 | |||||||||||||
| 31.0 | 37.0 | 93.8 | ||||||||||||||
| (2,864.8 | ) | 368.5 | 950.1 | |||||||||||||
| Earnings per share from continuing and discontinued operations |
||||||||||||||||
| Basic earnings per ordinary share |
10 | (236.4p | ) | 26.5p | 68.5p | |||||||||||
| Diluted earnings per ordinary share |
10 | (236.4p | ) | 26.3p | 67.9p | |||||||||||
| Earnings per share from continuing operations |
||||||||||||||||
| Basic earnings per ordinary share |
10 | (235.9p | ) | 23.0p | 68.8p | |||||||||||
| Diluted earnings per ordinary share |
10 | (235.9p | ) | 22.9p | 68.2p | |||||||||||
Notes
The accompanying notes form an integral part of this unaudited condensed consolidated interim income statement.
| 1 | Figures have been restated as described in the accounting policies. |
| 2 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
1
WPP plc
Unaudited condensed consolidated interim statement of comprehensive income
for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019
| Six months £m |
Six months £m |
Year ended £m |
||||||||||
| (Loss)/profit for the period |
(2,864.8 | ) | 368.5 | 950.1 | ||||||||
| Items that may be reclassified subsequently to profit or loss: |
||||||||||||
| Exchange adjustments on foreign currency net investments |
412.3 | 78.2 | (625.1 | ) | ||||||||
| Exchange adjustments recycled to the income statement on disposal of discontinued operations |
(15.4 | ) | — | (284.0 | ) | |||||||
| 396.9 | 78.2 | (909.1 | ) | |||||||||
| Items that will not be reclassified subsequently to profit or loss: |
||||||||||||
| Actuarial loss on defined benefit pension plans |
— | — | (36.6 | ) | ||||||||
| Deferred tax on defined benefit pension plans |
— | — | 6.4 | |||||||||
| Movements on equity investments held at fair value through other comprehensive income |
(102.4 | ) | (75.7 | ) | (141.4 | ) | ||||||
| (102.4 | ) | (75.7 | ) | (171.6 | ) | |||||||
| Other comprehensive income/(loss) for the period |
294.5 | 2.5 | (1,080.7 | ) | ||||||||
| Total comprehensive (loss)/income for the period |
(2,570.3 | ) | 371.0 | (130.6 | ) | |||||||
| Attributable to: |
||||||||||||
| Equity holders of the parent |
||||||||||||
| Continuing operations |
(2,598.3 | ) | 280.5 | 180.0 | ||||||||
| Discontinued operations |
(21.1 | ) | 50.4 | (386.4 | ) | |||||||
| (2,619.4 | ) | 330.9 | (206.4 | ) | ||||||||
| Non-controlling interests |
||||||||||||
| Continuing operations |
39.0 | 34.6 | 61.9 | |||||||||
| Discontinued operations |
10.1 | 5.5 | 13.9 | |||||||||
| 49.1 | 40.1 | 75.8 | ||||||||||
| (2,570.3 | ) | 371.0 | (130.6 | ) | ||||||||
Notes
The accompanying notes form an integral part of this unaudited condensed consolidated interim statement of comprehensive income.
| 1 | Figures have been restated as described in the accounting policies. |
2
WPP plc
Unaudited condensed consolidated interim cash flow statement
for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019
| Notes |
Six months £m |
Six months £m |
Year ended £m |
|||||||||||||
| Net cash (outflow)/inflow from operating activities |
11 | (401.9 | ) | (126.4 | ) | 1,850.5 | ||||||||||
| Investing activities |
||||||||||||||||
| Acquisitions |
11 | (96.8 | ) | (72.9 | ) | (161.3 | ) | |||||||||
| Disposal of investments and subsidiaries |
11 | 203.9 | 133.7 | 2,141.0 | ||||||||||||
| Purchase of property, plant and equipment |
(121.3 | ) | (145.9 | ) | (339.3 | ) | ||||||||||
| Purchase of other intangible assets (including capitalised computer software) |
(19.2 | ) | (21.1 | ) | (54.8 | ) | ||||||||||
| Proceeds on disposal of property, plant and equipment |
3.1 | 167.2 | 174.0 | |||||||||||||
| Net cash (outflow)/inflow from investing activities |
(30.3 | ) | 61.0 | 1,759.6 | ||||||||||||
| Financing activities |
||||||||||||||||
| Repayment of lease liabilities |
(154.5 | ) | (103.8 | ) | (249.8 | ) | ||||||||||
| Share option proceeds |
— | 0.2 | 0.6 | |||||||||||||
| Cash consideration for non-controlling interests |
11 | (37.8 | ) | (9.1 | ) | (62.7 | ) | |||||||||
| Share repurchases and buybacks |
11 | (285.5 | ) | — | (43.8 | ) | ||||||||||
| Net increase/(decrease) in borrowings |
11 | 699.8 | (134.6 | ) | (1,713.2 | ) | ||||||||||
| Financing and share issue costs |
(6.8 | ) | (4.4 | ) | (6.4 | ) | ||||||||||
| Equity dividends paid |
— | — | (750.5 | ) | ||||||||||||
| Dividends paid to non-controlling interests in subsidiary undertakings |
(40.1 | ) | (58.5 | ) | (96.2 | ) | ||||||||||
| Net cash inflow/(outflow) from financing activities |
175.1 | (310.2 | ) | (2,922.0 | ) | |||||||||||
| Net (decrease)/increase in cash and cash equivalents |
(257.1 | ) | (375.6 | ) | 688.1 | |||||||||||
| Translation of cash and cash equivalents |
7.1 | 11.7 | (89.7 | ) | ||||||||||||
| Cash and cash equivalents at beginning of period |
2,799.6 | 2,201.2 | 2,201.2 | |||||||||||||
| Cash and cash equivalents including cash held in disposal group at end of period |
2,549.6 | 1,837.3 | 2,799.6 | |||||||||||||
| Cash and cash equivalents held in disposal group presented as held for sale |
(13.5 | ) | — | (66.3 | ) | |||||||||||
| Cash and cash equivalents at end of period |
11 | 2,536.1 | 1,837.3 | 2,733.3 | ||||||||||||
Note
The accompanying notes form an integral part of this unaudited condensed consolidated interim cash flow statement.
3
WPP plc
Unaudited condensed consolidated interim balance sheet
as at 30 June 2020 and 2019 and 31 December 2019
| Notes | 30 June £m |
30 June £m |
31 December £m |
|||||||||||||
| Non-current assets |
||||||||||||||||
| Intangible assets: |
||||||||||||||||
| Goodwill |
14 | 8,096.3 | 13,181.7 | 10,110.6 | ||||||||||||
| Other |
15 | 1,488.9 | 1,786.2 | 1,468.8 | ||||||||||||
| Property, plant and equipment |
914.0 | 984.4 | 876.0 | |||||||||||||
| Right-of-use assets |
1,773.9 | 1,825.2 | 1,734.5 | |||||||||||||
| Interests in associates and joint ventures |
515.7 | 739.6 | 813.0 | |||||||||||||
| Other investments |
398.0 | 574.7 | 498.3 | |||||||||||||
| Deferred tax assets |
205.2 | 155.4 | 187.9 | |||||||||||||
| Trade and other receivables |
16 | 144.0 | 182.7 | 137.6 | ||||||||||||
| 13,536.0 | 19,429.9 | 15,826.7 | ||||||||||||||
| Current assets |
||||||||||||||||
| Corporate income tax recoverable |
180.8 | 248.1 | 165.4 | |||||||||||||
| Trade and other receivables |
16 | 9,403.3 | 13,170.2 | 11,822.3 | ||||||||||||
| Cash and short-term deposits |
10,558.0 | 11,507.5 | 11,305.7 | |||||||||||||
| 20,142.1 | 24,925.8 | 22,293.4 | ||||||||||||||
| Assets classified as held for sale |
49.8 | — | 485.3 | |||||||||||||
| 20,191.9 | 24,925.8 | 23,778.7 | ||||||||||||||
| Current liabilities |
||||||||||||||||
| Trade and other payables |
17 | (10,768.0 | ) | (14,345.9 | ) | (14,188.1 | ) | |||||||||
| Corporate income tax payable |
(371.3 | ) | (493.9 | ) | (499.9 | ) | ||||||||||
| Short-term lease liabilities |
(310.2 | ) | (388.4 | ) | (302.2 | ) | ||||||||||
| Bank overdrafts, bonds and bank loans |
(8,147.7 | ) | (10,469.1 | ) | (8,798.0 | ) | ||||||||||
| (19,597.2 | ) | (25,697.3 | ) | (23,788.2 | ) | |||||||||||
| Liabilities associated with assets classified as held for sale |
(20.9 | ) | — | (170.4 | ) | |||||||||||
| (19,618.1 | ) | (25,697.3 | ) | (23,958.6 | ) | |||||||||||
| Net current assets/(liabilities) |
573.8 | (771.5 | ) | (179.9 | ) | |||||||||||
| Total assets less current liabilities |
14,109.8 | 18,658.4 | 15,646.8 | |||||||||||||
| Non-current liabilities |
||||||||||||||||
| Bonds and bank loans |
(5,135.8 | ) | (5,309.4 | ) | (4,047.3 | ) | ||||||||||
| Trade and other payables |
18 | (355.2 | ) | (528.8 | ) | (449.6 | ) | |||||||||
| Deferred tax liabilities |
(398.9 | ) | (397.7 | ) | (379.8 | ) | ||||||||||
| Provisions for post-employment benefits |
(169.5 | ) | (184.9 | ) | (159.0 | ) | ||||||||||
| Provisions for liabilities and charges |
(235.1 | ) | (255.8 | ) | (247.8 | ) | ||||||||||
| Long-term lease liabilities |
(2,035.6 | ) | (1,957.3 | ) | (1,947.5 | ) | ||||||||||
| (8,330.1 | ) | (8,633.9 | ) | (7,231.0 | ) | |||||||||||
| Net assets |
5,779.7 | 10,024.5 | 8,415.8 | |||||||||||||
| Equity |
||||||||||||||||
| Called-up share capital |
19 | 129.6 | 133.3 | 132.8 | ||||||||||||
| Share premium account |
570.3 | 569.9 | 570.3 | |||||||||||||
| Other reserves |
532.3 | 1,043.9 | (169.9 | ) | ||||||||||||
| Own shares |
(1,124.3 | ) | (1,207.4 | ) | (1,178.7 | ) | ||||||||||
| Retained earnings |
5,303.4 | 9,080.3 | 8,689.9 | |||||||||||||
| Equity shareholders’ funds |
5,411.3 | 9,620.0 | 8,044.4 | |||||||||||||
| Non-controlling interests |
368.4 | 404.5 | 371.4 | |||||||||||||
| Total equity |
5,779.7 | 10,024.5 | 8,415.8 | |||||||||||||
Notes
The accompanying notes form an integral part of this unaudited condensed consolidated interim balance sheet.
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies. |
| 2 | Figures have been restated to be in accordance with IAS 32 Financial Instruments: Presentation, as described in the accounting policies. |
4
WPP plc
Unaudited condensed consolidated interim statement of changes in equity
for the six months ended 30 June 2020 and 2019 and 31 December 2019
|
Called-up £m |
Share £m |
Other £m |
Own £m |
Retained £m |
Total equity £m |
Non- £m |
Total1 £m |
|||||||||||||||||||||||||
| Restated Balance at 1 January 2019 |
133.3 | 569.7 | 962.4 | (1,255.7 | ) | 8,849.1 | 9,258.8 | 424.4 | 9,683.2 | |||||||||||||||||||||||
| Ordinary shares issued |
— | 0.2 | — | — | — | 0.2 | — | 0.2 | ||||||||||||||||||||||||
| Treasury share allocations |
— | — | — | 0.8 | (0.8 | ) | — | — | — | |||||||||||||||||||||||
|
Profit for the period |
— | — | — | — | 331.5 | 331.5 | 37.0 | 368.5 | ||||||||||||||||||||||||
|
Exchange adjustments on foreign currency net investments |
— | — | 75.1 | — | — | 75.1 | 3.1 | 78.2 | ||||||||||||||||||||||||
| Movements on equity investments held at fair value through other comprehensive income |
— | — | — | — | (75.7 | ) | (75.7 | ) | — | (75.7 | ) | |||||||||||||||||||||
|
Other comprehensive income/(loss) |
— | — | 75.1 | — | (75.7 | ) | (0.6 | ) | 3.1 | 2.5 | ||||||||||||||||||||||
|
Total comprehensive income |
— | — | 75.1 | — | 255.8 | 330.9 | 40.1 | 371.0 | ||||||||||||||||||||||||
| Dividends paid |
— | — | — | — | — | — | (58.5 | ) | (58.5 | ) | ||||||||||||||||||||||
| Non-cash share-based incentive plans (including share options) |
— | — | — | — | 32.5 | 32.5 | — | 32.5 | ||||||||||||||||||||||||
| Tax adjustments on share-based payments |
— | — | — | — | 1.0 | 1.0 | — | 1.0 | ||||||||||||||||||||||||
| Net movement in own shares held by ESOP Trusts |
— | — | — | 47.5 | (47.5 | ) | — | — | — | |||||||||||||||||||||||
| Recognition/remeasurement of financial instruments |
— | — | 6.4 | — | (3.7 | ) | 2.7 | — | 2.7 | |||||||||||||||||||||||
| Acquisition of subsidiaries2 |
— | — | — | — | (6.1 | ) | (6.1 | ) | (1.5 | ) | (7.6 | ) | ||||||||||||||||||||
| Balance at 30 June 2019 |
133.3 | 569.9 | 1,043.9 | (1,207.4 | ) | 9,080.3 | 9,620.0 | 404.5 | 10,024.5 | |||||||||||||||||||||||
| Ordinary shares issued |
— | 0.4 | — | — | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||
| Share cancellations |
(0.5 | ) | — | 0.5 | — | (47.7 | ) | (47.7 | ) | — | (47.7 | ) | ||||||||||||||||||||
| Treasury share allocations |
— | — | — | 0.2 | (0.2 | ) | — | — | — | |||||||||||||||||||||||
|
Profit for the period |
— | — | — | — | 524.8 | 524.8 | 56.8 | 581.6 | ||||||||||||||||||||||||
|
Exchange adjustments on foreign currency net investments |
— | — | (682.2 | ) | — | — | (682.2 | ) | (21.1 | ) | (703.3 | ) | ||||||||||||||||||||
| Exchange adjustments recycled to the income statement on disposal of discontinued operations |
— | — | (284.0 | ) | — | — | (284.0 | ) | — | (284.0 | ) | |||||||||||||||||||||
| Movements on equity investments held at fair value through other comprehensive income |
— | — | — | — | (65.7 | ) | (65.7 | ) | — | (65.7 | ) | |||||||||||||||||||||
| Actuarial loss on defined benefit pension plans |
— | — | — | — | (36.6 | ) | (36.6 | ) | — | (36.6 | ) | |||||||||||||||||||||
| Deferred tax on defined benefit pension plans |
— | — | — | — | 6.4 | 6.4 | — | 6.4 | ||||||||||||||||||||||||
|
Other comprehensive loss |
— | — | (966.2 | ) | — | (95.9 | ) | (1,062.1 | ) | (21.1 | ) | (1,083.2 | ) | |||||||||||||||||||
|
Total comprehensive (loss)/income |
— | — | (966.2 | ) | — | 428.9 | (537.3 | ) | 35.7 | (501.6 | ) | |||||||||||||||||||||
| Dividends paid |
— | — | — | — | (750.5 | ) | (750.5 | ) | (37.7 | ) | (788.2 | ) | ||||||||||||||||||||
| Non-cash share-based incentive plans (including share options) |
— | — | — | — | 38.9 | 38.9 | — | 38.9 | ||||||||||||||||||||||||
| Tax adjustments on share-based payments |
— | — | — | — | 2.1 | 2.1 | — | 2.1 | ||||||||||||||||||||||||
| Net movement in own shares held by ESOP Trusts |
— | — | — | 28.5 | (28.5 | ) | — | — | — | |||||||||||||||||||||||
| Recognition/remeasurement of financial instruments |
— | — | 4.2 | — | 16.8 | 21.0 | — | 21.0 | ||||||||||||||||||||||||
| Share purchases-close period commitments3 |
— | — | (252.3 | ) | — | — | (252.3 | ) | — | (252.3 | ) | |||||||||||||||||||||
| Acquisition of subsidiaries2 |
— | — | — | — | (50.2 | ) | (50.2 | ) | (31.1 | ) | (81.3 | ) | ||||||||||||||||||||
| Balance at 31 December 2019 |
132.8 | 570.3 | (169.9 | ) | (1,178.7 | ) | 8,689.9 | 8,044.4 | 371.4 | 8,415.8 | ||||||||||||||||||||||
| Share cancellations |
(3.2 | ) | — | 3.2 | — | (281.2 | ) | (281.2 | ) | — | (281.2 | ) | ||||||||||||||||||||
| Treasury share allocations |
— | — | — | 0.5 | (0.5 | ) | — | — | — | |||||||||||||||||||||||
|
(Loss)/profit for the period |
— | — | — | — | (2,895.8 | ) | (2,895.8 | ) | 31.0 | (2,864.8 | ) | |||||||||||||||||||||
|
Exchange adjustments on foreign currency net investments |
— | — | 394.2 | — | — | 394.2 | 18.1 | 412.3 | ||||||||||||||||||||||||
| Exchange adjustments recycled to the income statement on disposal of discontinued operations |
— | — | (15.4 | ) | — | — | (15.4 | ) | — | (15.4 | ) | |||||||||||||||||||||
| Movements on equity investments held at fair value through other comprehensive income |
— | — | — | — | (102.4 | ) | (102.4 | ) | — | (102.4 | ) | |||||||||||||||||||||
|
Other comprehensive income/(loss) |
— | — | 378.8 | — | (102.4 | ) | 276.4 | 18.1 | 294.5 | |||||||||||||||||||||||
|
Total comprehensive income/(loss) |
— | — | 378.8 | — | (2,998.2 | ) | (2,619.4 | ) | 49.1 | (2,570.3 | ) | |||||||||||||||||||||
| Dividends paid |
— | — | — | — | — | — | (40.1 | ) | (40.1 | ) | ||||||||||||||||||||||
| Non-cash share-based incentive plans (including share options) |
— | — | — | — | 30.6 | 30.6 | — | 30.6 | ||||||||||||||||||||||||
| Tax adjustments on share-based payments |
— | — | — | — | 2.6 | 2.6 | — | 2.6 | ||||||||||||||||||||||||
| Net movement in own shares held by ESOP Trusts |
— | — | — | 53.9 | (54.3 | ) | (0.4 | ) | — | (0.4 | ) | |||||||||||||||||||||
| Recognition/remeasurement of financial instruments |
— | — | 67.9 | — | (32.8 | ) | 35.1 | — | 35.1 | |||||||||||||||||||||||
| Share purchases – close period commitments4 |
— | — | 252.3 | — | — | 252.3 | — | 252.3 | ||||||||||||||||||||||||
| Acquisition of subsidiaries2 |
— | — | — | — | (52.7 | ) | (52.7 | ) | (12.0 | ) | (64.7 | ) | ||||||||||||||||||||
| Balance at 30 June 2020 |
129.6 | 570.3 | 532.3 | (1,124.3 | ) | 5,303.4 | 5,411.3 | 368.4 | 5,779.7 | |||||||||||||||||||||||
Notes
The accompanying notes form an integral part of this unaudited condensed consolidated interim statement of changes in equity.
| 1 | Figures have been restated as described in the accounting policies. |
| 2 | Acquisition of subsidiaries represent movements in retained earnings and non-controlling interests arising from changes in ownership of existing subsidiaries and recognition of non-controlling interests of new acquisitions. |
| 3 | During 2019, the Company entered into an arrangement with a third party to conduct share buybacks on its behalf in the close period commencing on 2 January 2020 and ending on 27 February 2020, in accordance with UK listing rules. The commitment resulting from this agreement constitutes a liability at 31 December 2019, which is included in Trade and other payables: amounts falling due within one year and has been recognised as a movement in equity. |
| 4 | During 2019, the Company entered into an arrangement with a third party to conduct share buybacks on its behalf in the close period commencing on 2 January 2020 and ending on 27 February 2020, in accordance with UK listing rules. The commitment resulting from this agreement constituted a liability at 31 December 2019 and was recognized as a movement in other reserves in the year ended 31 December 2019. As the close period ended on 27 February 2020 the movement in other reserves has been reversed in the period ended 30 June 2020. |
5
Notes to the unaudited condensed consolidated interim financial statements
| 1. | Basis of accounting |
The unaudited condensed consolidated interim financial statements are prepared under the historical cost convention, except for the revaluation of certain financial instruments and held for sale assets as disclosed in our accounting policies.
| 2. | Accounting policies |
The unaudited condensed consolidated interim financial statements comply with the recognition and measurement criteria of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), IAS 34: Interim Financial Reporting and with the accounting policies of the Group which were set out on pages F-7 to F-15 of the 2019 Annual Report on Form 20-F. With the exception of the impact of Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7), which is discussed below, no changes have been made to the Group’s accounting policies in the period ended 30 June 2020.
Restatement
After the unaudited condensed consolidated interim financial statements for the period ended 30 June 2020 were issued, it was determined that they did not comply with certain aspects of the application of IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and measurement, resulting in the incorrect presentation of the Company’s notional cash pooling arrangements on the balance sheet and the inappropriate deferral of foreign exchange movements in the Company’s translation reserve due to the inappropriate application of hedge accounting in respect of non-derivative financial instruments and the inappropriate discount rate being applied in the calculation of the fair value of liabilities in respect of put option agreements and payments due to vendors (earnout agreements).
The presentation of cash and overdrafts within notional cash pooling arrangements did not meet the requirements for offsetting in accordance with IAS 32 Financial Instruments: Presentation. This resulted in the incorrect presentation of the notional cash pooling arrangements on the balance sheet. Therefore, there has been a restatement of the periods ending 30 June 2020, 31 December 2019 and 30 June 2019. The impact of this change is to increase cash and short-term deposits and bank overdrafts, bonds and bank loans by £7,795.4 million for the period ended 30 June 2020 (30 June 2019: £9,334.3 million, 31 December 2019: £8,336.7 million), while having no impact on the Company’s net debt. This adjustment does not impact the consolidated income statement or consolidated cash flow statement.
Net investment hedging was inappropriately applied against certain foreign exchange exposures, where the relationship was either an ineligible hedging relationship under IFRS or insufficiently documented, such that the criteria to apply hedge accounting under IAS 39 Financial Instruments: Recognition and Measurement were not met. Therefore, there has been a restatement of the periods ended 30 June 2020, 30 June 2019 and 31 December 2019, resulting in the reclassification of exchange adjustments on foreign currency net investments within the consolidated statement of comprehensive income to be reported in the consolidated income statement as revaluation and retranslation of financial instruments (note 6). The impact of this change is a £301.1 million loss for the period ended 30 June 2020 (30 June 2019: £8.9 million gain, 31 December 2019: £245.7 million gain) being recognised in revaluation and retranslation of financial instruments. This change also reduces the opening retained earnings balance as at 1 January 2019 by £517.4 million with a corresponding increase in the foreign currency translation reserve.
The fair value of liabilities in respect of put option agreements and payments due to vendors (earnout agreements) are recorded at the present value of the expected cash outflows of the obligation. The discount rate historically used in this calculation represented the Company’s cost of debt. To fully reflect the risk in the cash flows, the Company has changed the discount rate used in this calculation, and restated the periods ending 30 June 2020, 31 December 2019, and 30 June 2019 to reflect the change, which resulted in the following adjustments:
| • | Liabilities in respect of put options (note 22) have decreased by £22.1 million at 30 June 2020 (30 June 2019: £39.2 million; |
6
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 2. | Accounting policies (continued) |
| 31 December 2019: £22.3 million) and a charge of £0.6 million in the period ended 30 June 2020 (period ended 30 June 2019: credit of £4.9 million; year ended 31 December 2019: charge of £10.8 million) recognised in the consolidated income statement within the revaluation and retranslation of financial instruments (note 6). Other reserves on the consolidated balance sheet increased by £60.2 million at 30 June 2020 (30 June 2019: £51.9 million; 31 December 2019; £59.6 million); |
| • | Payments due to vendors (earnout agreements) (note 18) have decreased by £13.3 million at 30 June 2020 (30 June 2019: £19.5 million; 31 December 2019: £10.1 million) and a credit of £3.1 million in the period ended 30 June 2020 (period ended 30 June 2019: credit of £5.3 million; year ended 31 December 2019: charge of £2.7 million) recognised in the consolidated income statement within the revaluation and retranslation of financial instruments (note 6). Goodwill on the consolidated balance sheet decreased by £23.9 million at 30 June 2020 (30 June 2019: £70.4 million; 31 December 2019; £60.1 million) |
| • | The goodwill impairment charge (note 4) decreased by £36.1 million in the period ended 30 June 2020 (period ended 30 June 2019: £nil; year ended 31 December 2019; £nil), as a result of the above adjustments that decreased goodwill and payments due to vendors (earnout agreements) on the consolidated balance sheet. |
| • | These changes also reduces the opening retained earnings balance as at 1 January 2019 by £73.8 million. |
The restatements described in this note resulted in a decrease in the basic and diluted earnings per share from continuing and discontinued operations of 21.4p and 21.4p, respectively, for the period ended 30 June 2020 (period ended 30 June 2019: increase of 1.5p and 1.5p, respectively; 31 December 2019: increase of 18.6p and 18.4p, respectively).
7
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 2. | Accounting policies (continued) |
Impact of Interest Rate Benchmark Reform
The amendments issued by the IASB, Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7), are mandatory and are effective from 1 January 2020. They provide relief on specific aspects of pre-replacement issues that impact hedge accounting, whereby entities applying hedge accounting requirements will be able to assume that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based are not altered as a result of Interest Rate Benchmark Reform. The Group does not consider that these amendments have a significant impact on the financial statements as they provide relief for the possible effects of the uncertainty arising from interest rate benchmark reform.
Impact of COVID-19 on critical judgements and estimation uncertainty
The critical judgements and estimation uncertainty in applying accounting policies set out on page F-15 of the 2019 Annual Report on Form 20-F remain applicable. However, the level of judgement and estimation uncertainty has increased since 31 December 2019 due to the impact of the COVID-19 pandemic. COVID-19 has had the most significant impact on the following areas of estimation uncertainty:
Impairment of goodwill:
Given the COVID-19 pandemic, impairment indicators such as a decline in revenue less pass-through costs forecasts, and downturns in the global economy and the advertising industry were identified in the first half of 2020. As such, the Group performed an impairment test over goodwill and intangible assets with indefinite useful lives as at 30 June 2020. In performing the impairment test, estimates are required in regard to the discount rates, long-term growth rates and the level of cash flows during the five-year projection period, which involves judgement on the duration and shape of the recovery from COVID-19 in this period. Further details of the goodwill impairment charge and sensitivity to these estimates are outlined in note 14.
Expected credit losses:
Under IFRS 9, the expected credit losses are measured as the difference between the asset’s gross carrying amount and the present value of discounted estimated future cash flows. As a result of the COVID-19 pandemic on the Group’s clients, estimates of future cash flows from clients involve significant judgement. The Group performed a detailed review of trade receivables, work in progress and accrued income at 30 June 2020, focusing on significant individual clients along with the industry and country in which the clients operate where there is increased risk due to the pandemic. The Group’s approach to expected credit losses is outlined in note 16.
Payments due to vendors (earnout agreements) and liabilities in respect of put options:
When measuring the liabilities for earnouts and put options, estimates are required regarding discount rates and growth rates in determining future financial performance, which involves judgement on the duration and shape of the recovery from COVID-19 in this period. Further details on growth rates, discount rates and the sensitivity to these estimates are set out in note 22.
Government Support
In reaction to the COVID-19 pandemic, certain governments have introduced measures to assist companies. A reduction to operating costs is recorded in relation to government subsidies/schemes (such as furlough measures)
8
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 2. | Accounting policies (continued) |
where these amounts will never have to be repaid. Further details of such amounts are included in note 4. In other cases, this involves the deferral of certain tax payments in order to stimulate the economy. The deferral of payments does not impact the income statement and these are charged as normal in the period they are incurred.
The unaudited condensed consolidated interim financial statements were approved by the board of directors and authorized for issue on 3 September 2020.
| 3. | Currency conversion |
The presentation currency of the Group is pounds sterling and the unaudited condensed consolidated interim financial statements have been prepared on this basis. The 2020 unaudited condensed consolidated interim income statement is prepared using, among other currencies, average exchange rates of US$1.2604 to the pound (period ended 30 June 2019: US$1.2938; year ended 31 December 2019: US$1.2765) and €1.1439 to the pound (period ended 30 June 2019: €1.1453; year ended 31 December 2019: €1.1403). The unaudited condensed consolidated interim balance sheet as at 30 June 2020 has been prepared using the exchange rates on that day of US$1.2379 to the pound (30 June 2019: US$1.2695; 31 December 2019: US$1.3263) and €1.1010 to the pound (30 June 2019: €1.1175; 31 December 2019: €1.1813).
| 4. | Costs of services and general and administrative costs |
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Costs of services |
4,804.7 | 5,328.8 | 10,825.1 | |||||||||
| General and administrative costs3 |
3,195.3 | 443.1 | 1,113.1 | |||||||||
| 8,000.0 | 5,771.9 | 11,938.2 | ||||||||||
Note
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
Costs of services and general and administrative costs include:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Staff costs |
3,330.0 | 3,501.7 | 7,090.6 | |||||||||
| Establishment costs |
314.4 | 331.7 | 672.9 | |||||||||
| Media pass-through costs |
613.7 | 818.8 | 1,656.2 | |||||||||
| Other costs of services and general and administrative costs2,3 |
3,741.9 | 1,119.7 | 2,518.5 | |||||||||
| 8,000.0 | 5,771.9 | 11,938.2 | ||||||||||
Notes
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
| 2 | Other costs of services and general and administrative costs include £301.3 million (period ended 30 June 2019: £350.0 million; year ended 31 December 2019: £731.4 million) of other pass through costs. |
| 3 | Figures have been restated as described in the accounting policies. |
9
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 4. | Costs of services and general and administrative costs (continued) |
Staff costs include:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Wages and salaries |
2,417.5 | 2,442.5 | 4,946.2 | |||||||||
| Cash-based incentive plans |
17.2 | 64.8 | 227.6 | |||||||||
| Share-based incentive plans |
30.6 | 30.0 | 66.0 | |||||||||
| Social security costs |
304.6 | 304.9 | 591.7 | |||||||||
| Pension costs |
86.4 | 83.5 | 169.7 | |||||||||
| Severance |
18.8 | 16.1 | 42.6 | |||||||||
| Other staff costs |
454.9 | 559.9 | 1,046.8 | |||||||||
| 3,330.0 | 3,501.7 | 7,090.6 | ||||||||||
Note
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
Other costs of services and general and administrative costs include:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Amortisation and impairment of acquired intangible assets |
53.1 | 52.8 | 121.5 | |||||||||
| Goodwill impairment2 |
2,484.7 | — | 47.7 | |||||||||
| Gains on disposal of investments and subsidiaries |
(16.0 | ) | (40.6 | ) | (40.4 | ) | ||||||
| Gains on remeasurement of equity interests arising from a change in scope of ownership |
— | (0.4 | ) | (0.4 | ) | |||||||
| Investment and other write-downs |
220.6 | — | 7.5 | |||||||||
| Restructuring and transformation costs |
17.9 | 33.9 | 153.5 | |||||||||
| Restructuring costs in relation to COVID-19 |
39.3 | — | — | |||||||||
| Litigation settlement |
— | (16.8 | ) | (16.8 | ) | |||||||
| Gain on sale of freehold property in New York |
— | (7.9 | ) | (7.9 | ) | |||||||
| Depreciation of property, plant and equipment |
88.2 | 88.5 | 185.5 | |||||||||
| Amortisation of other intangible assets |
9.6 | 9.9 | 21.2 | |||||||||
| Depreciation of right-of-use assets |
155.4 | 152.1 | 301.6 | |||||||||
| Short-term lease expense |
19.7 | 49.9 | 83.8 | |||||||||
| Low-value lease expense |
1.1 | 1.2 | 2.9 | |||||||||
Notes
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
| 2 | Figures for the period ended 30 June 2020 have been restated, as described in the accounting policies. |
Amortisation and impairment of acquired intangibles in the period ended 30 June 2020 includes an impairment charge in the period of £17.1 million (period ended 30 June 2019: £4.7 million, year ended 31 December 2019: £26.5 million) in regard to certain brand names and customer relationships for entities which have closed.
Further details of the goodwill impairment charge of £2,484.7 million are provided in note 14. The goodwill impairment charge of £47.7 million in 2019 relates to a number of under-performing businesses in the Group where the impact of current, local economic conditions and trading circumstances on these businesses is sufficiently severe to indicate impairment to the carrying value of goodwill.
10
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 4. | Costs of services and general and administrative costs (continued) |
Investment and other write-downs of £220.6 million primarily relate to the impairment of certain investments in associates, including £209.8 million in relation to Imagina in Spain. Further details of the Group’s impairment review are provided in note 14.
Gains on disposal of investments and subsidiaries in the period ended 30 June 2020 of £16.0 million include a gain of £14.7 million on the disposal of the sports agency Two Circles. Gains on disposal of investments and subsidiaries in 2019 include a gain of £28.6 million on the disposal of the Group’s interest in Chime.
Restructuring costs in relation to COVID-19 of £39.3 million primarily relates to severance actions taken in the second quarter in response to the pandemic.
Restructuring and transformation costs of £17.9 million (period ended 30 June 2019: £23.6 million, year ended 31 December 2019: £121.1 million) are in relation to the continuing restructuring plan, first outlined on the Investor Day in December 2018. As part of that plan, restructuring actions have been taken to right-size under-performing businesses, address high cost severance markets and simplify operational structures. Further restructuring and transformation costs will be incurred in the second half of 2020 and 2021. In the period ended 30 June 2019, the remaining £10.3 million (year ended 31 December 2019: £32.4 million) primarily comprises transformation costs in relation to the global IT transformation programme.
In 2019, the Group received £16.8 million in settlement of a class action lawsuit against Comscore Inc. for providing materially false and misleading information regarding their company and its financial performance.
In March 2019, the Group entered into a sale and leaseback agreement for its office space at 3 Columbus Circle in New York. The Group sold the freehold for proceeds of £159.0 million and simultaneously entered into a 15-year lease. The net gain recognised from the sale and leaseback is £7.9 million.
In the period ended 30 June 2020, the Group received £28.6 million of aid from governments around the world in relation to the COVID-19 pandemic, predominantly in Western Continental Europe and Asia Pacific, which is included as a credit in other staff costs.
Management continues to assess the impact of COVID-19 on long-term working practices and the Group’s real estate portfolio, which could result in impairments of right-of-use assets in the future. At the current time, given the level of uncertainty, such impact has not been quantified and any resulting impairments could have an impact on the Group’s financial results.
| 5. | Share of results of associates |
Share of results of associates include:
| Continuing operations | Six months ended |
Six months ended |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Share of profit before interest and taxation |
46.2 | 26.2 | 99.2 | |||||||||
| Share of exceptional losses |
(51.4 | ) | (13.6 | ) | (47.8 | ) | ||||||
| Share of interest and non-controlling interests |
(40.4 | ) | (8.0 | ) | (19.4 | ) | ||||||
| Share of taxation |
(6.3 | ) | (3.1 | ) | (17.3 | ) | ||||||
| (51.9 | ) | 1.5 | 14.7 | |||||||||
Note
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
11
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 5. | Share of results of associates (continued) |
Share of exceptional losses of £51.4 million (period ended 30 June 2019: £13.6 million, year ended 31 December 2019: £47.8 million) primarily comprise £27.3 million (period ended 30 June 2019: £nil, year ended 31 December 2019: £5.3 million) of amortisation and impairment of acquired intangible assets as well as restructuring and one-off transaction costs of £23.1 million (period ended 30 June 2019: £nil, year ended 31 December 2019: £20.3 million) within Kantar.
| 6. | Finance and investment income, finance costs and revaluation and retranslation of financial instruments |
Finance and investment income includes:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Income from equity investments |
6.8 | 9.3 | 18.3 | |||||||||
| Interest income |
44.4 | 32.5 | 80.7 | |||||||||
| 51.2 | 41.8 | 99.0 | ||||||||||
Finance costs include:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Net interest expense on pension plans |
1.4 | 1.8 | 3.5 | |||||||||
| Interest on other long-term employee benefits |
1.4 | 1.8 | 3.9 | |||||||||
| Interest payable and similar charges |
104.3 | 127.8 | 252.0 | |||||||||
| Interest expense related to lease liabilities |
50.2 | 48.7 | 99.7 | |||||||||
| 157.3 | 180.1 | 359.1 | ||||||||||
Revaluation and retranslation of financial instruments include:
| Continuing operations | Six months ended 30 June 20202 |
Six months ended 30 June 20191,2 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Movements in fair value of treasury instruments |
(2.0 | ) | 7.3 | 0.4 | ||||||||
| Premium on the early repayment of bonds |
— | (32.2 | ) | (63.4 | ) | |||||||
| Revaluation of investments held at fair value through profit or loss |
1.7 | 1.6 | 9.1 | |||||||||
| Revaluation of put options over non-controlling interests |
25.4 | (14.6 | ) | (24.3 | ) | |||||||
| Revaluation of payments due to vendors (earnout agreements) |
7.4 | (2.4 | ) | (3.7 | ) | |||||||
| Retranslation of financial instruments |
(301.1 | ) | 8.9 | 245.7 | ||||||||
| (268.6 | ) | (31.4 | ) | 163.8 | ||||||||
Notes
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
| 2 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies. |
The retranslation of financial instruments includes foreign exchange gains/losses on bonds, cross currency swaps, intercompany loans and bank balances that form part of the Group’s central financing structures. Any foreign exchange gains/losses on operations are recognised in general and administrative costs as set out in note 3.
12
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 7. | Segmental analysis |
Reported contributions by reportable segments were as follows:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Revenue |
||||||||||||
| Global Integrated Agencies |
4,249.2 | 4,873.6 | 10,205.2 | |||||||||
| Public Relations |
446.8 | 471.5 | 956.5 | |||||||||
| Specialist Agencies |
886.7 | 1,023.1 | 2,072.4 | |||||||||
| 5,582.7 | 6,368.2 | 13,234.1 | ||||||||||
| Revenue less pass-through costs2 |
||||||||||||
| Global Integrated Agencies |
3,461.5 | 3,858.1 | 8,108.1 | |||||||||
| Public Relations |
426.3 | 442.2 | 898.0 | |||||||||
| Specialist Agencies |
779.9 | 899.1 | 1,840.4 | |||||||||
| Headline operating profit3 |
||||||||||||
| Global Integrated Agencies |
256.0 | 463.5 | 1,219.5 | |||||||||
| Public Relations |
71.9 | 67.9 | 140.6 | |||||||||
| Specialist Agencies |
54.4 | 85.9 | 200.5 | |||||||||
| 382.3 | 617.3 | 1,560.6 | ||||||||||
Notes
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. As a result, Data Investment Management is now excluded from the segment analysis. |
| 2 | Revenue less pass-through costs is revenue less media, 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 costs. See note 4 for more details of the pass-through costs. |
| 3 | A reconciliation from operating (loss)/profit to headline operating profit is provided in note 23. |
13
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 7. | Segmental analysis (continued) |
Reported contributions by geographical area were as follows:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| £m | £m | £m | ||||||||||
| Revenue |
||||||||||||
| North America2 |
2,177.1 | 2,334.3 | 4,854.7 | |||||||||
| United Kingdom |
757.6 | 907.7 | 1,797.1 | |||||||||
| Western Continental Europe |
1,092.9 | 1,263.6 | 2,628.8 | |||||||||
| Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe |
1,555.1 | 1,862.6 | 3,953.5 | |||||||||
| 5,582.7 | 6,368.2 | 13,234.1 | ||||||||||
| Revenue less pass-through costs3 |
||||||||||||
| North America2 |
1,856.1 | 1,951.3 | 4,034.3 | |||||||||
| United Kingdom |
585.6 | 692.6 | 1,390.1 | |||||||||
| Western Continental Europe |
919.5 | 1,041.7 | 2,176.4 | |||||||||
| Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe |
1,306.5 | 1,513.8 | 3,245.7 | |||||||||
| Headline operating profit4 |
||||||||||||
| North America2 |
215.4 | 278.3 | 662.0 | |||||||||
| United Kingdom |
35.4 | 86.7 | 188.5 | |||||||||
| Western Continental Europe |
43.8 | 96.5 | 261.5 | |||||||||
| Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe |
87.7 | 155.8 | 448.6 | |||||||||
| 382.3 | 617.3 | 1,560.6 | ||||||||||
Notes
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
| 2 | North America includes the US with revenue of £2,065.2 million (period ended 30 June 2019: £2,203.8 million; year ended 31 December 2019: £4,576.5 million), revenue less pass-through costs of £1,757.5 million (period ended 30 June 2019: £1,843.0 million; year ended 31 December 2019: £3,806.3 million) and headline operating profit of £207.1 million (period ended 30 June 2019: £262.8 million; year ended 31 December 2019: £620.6 million). |
| 3 | Revenue less pass-through costs is revenue less media 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 costs. See note 4 for more details of the pass-through costs. |
| 4 | A reconciliation from operating (loss)/profit to headline operating profit is provided in note 23. |
14
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 8. | Taxation |
The tax rate on reported (loss)/profit before tax was -0.8% (30 June 2019: 25.5%; 31 December 2019: 22.6%).
The tax charge comprises:
| Continuing operations | Six months ended 30 June 2020 |
Six months ended 30 June 20191 |
Year ended 2019 |
|||||||||
| £m | £m | £m | ||||||||||
| Corporation tax |
||||||||||||
| Current year |
35.7 | 187.4 | 423.0 | |||||||||
| Prior years |
(1.7 | ) | (19.7 | ) | (63.4 | ) | ||||||
| 34.0 | 167.7 | 359.6 | ||||||||||
| Deferred tax |
||||||||||||
| Current year |
(6.7 | ) | (46.7 | ) | (78.3 | ) | ||||||
| Prior years |
(3.3 | ) | (11.7 | ) | (6.3 | ) | ||||||
| (10.0 | ) | (58.4 | ) | (84.6 | ) | |||||||
| Tax charge |
24.0 | 109.3 | 275.0 | |||||||||
Note
| 1 | Figures for the period ended 30 June 2019 figures have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
The tax charge may be affected by the impact of acquisitions, disposals and other corporate restructurings, the resolution of open tax issues, and the ability to use brought forward tax losses. Changes in local or international tax rules, or challenges by tax or competition authorities, for example, the European Commission’s state aid decision into Group Financing Exemption in the UK CFC rules, may expose the Group to additional tax liabilities or impact the carrying value of deferred tax assets, which could affect the future tax charge.
The Group does not currently expect any material additional charges, or credits, to arise in respect of these matters, beyond the amounts already provided. Liabilities relating to these open and judgemental matters are based upon estimates of whether additional taxes will be due after taking into account external advice where appropriate. Where the final tax outcome of these matters is different from the amounts which were initially recorded then such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.
| 9. | Ordinary dividends |
The Board has recommended an interim dividend of 10.0p (2019: 22.7p) per ordinary share. This is expected to be paid on 6 November 2020 to shareholders on the register at 9 October 2020. In March 2020, we announced the Board’s decision to suspend the 2019 final dividend of 37.3p per share to protect liquidity in light of the threat to liquidity and cash flow from the COVID-19 impact. The Board has now decided to cancel this dividend to contribute towards lower leverage.
15
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 10. | Earnings per share |
Basic EPS
The calculation of basic EPS is as follows:
| Continuing operations | Six months ended 30 June 20201 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
|
Earnings2 (£ million) |
(2,889.0 | ) | 288.3 | 860.1 | ||||||||
| Weighted average shares used in basic EPS calculation (million) |
1,224.7 | 1,249.1 | 1,250.0 | |||||||||
| EPS |
(235.9p | ) | 23.0p | 68.8p | ||||||||
| Discontinued operations | Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended |
|||||||||
|
Earnings2 (£ million) |
(6.8 | ) | 43.2 | (3.8 | ) | |||||||
| Weighted average shares used in basic EPS calculation (million) |
1,224.7 | 1,249.1 | 1,250.0 | |||||||||
| EPS |
(0.5p | ) | 3.5p | (0.3p | ) | |||||||
| Continued and discontinued operations | Six months ended 30 June 20201 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
|
Earnings2 (£ million) |
(2,895.8 | ) | 331.5 | 856.3 | ||||||||
| Weighted average shares used in basic EPS calculation (million) |
1,224.7 | 1,249.1 | 1,250.0 | |||||||||
| EPS |
(236.4p | ) | 26.5p | 68.5p | ||||||||
Notes
| 1 | Earnings figures have been restated as described in the accounting policies. |
| 2 | Earnings is equivalent to (loss)/profit for the period attributable to equity holders of the parent. |
16
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 10. | Earnings per share (continued) |
Diluted EPS
The calculation of diluted EPS is as follows:
| Continuing operations | Six months ended 30 June 20201 |
Six months ended 30 June 20191 |
Year ended |
|||||||||
| Diluted earnings (£ million) |
(2,889.0 | ) | 288.3 | 860.1 | ||||||||
| Weighted average shares used in diluted EPS calculation2 (million) |
1,224.7 | 1,257.3 | 1,260.6 | |||||||||
| Diluted EPS |
(235.9p | ) | 22.9p | 68.2p | ||||||||
| Discontinued operations | Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended |
|||||||||
| Diluted earnings (£ million) |
(6.8 | ) | 43.2 | (3.8 | ) | |||||||
| Weighted average shares used in diluted EPS calculation2 (million) |
1,224.7 | 1,257.3 | 1,260.6 | |||||||||
| Diluted EPS |
(0.5p | ) | 3.4p | (0.3p | ) | |||||||
| Continuing and discontinued operations | Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended |
|||||||||
| Diluted earnings (£ million) |
(2,895.8 | ) | 331.5 | 856.3 | ||||||||
| Weighted average shares used in diluted EPS calculation2 (million) |
1,224.7 | 1,257.3 | 1,260.6 | |||||||||
| Diluted EPS |
(236.4p | ) | 26.3p | 67.9p | ||||||||
Notes
| 1 | Earnings figures have been restated as described in the accounting policies. |
| 2 | The weighted average shares used in the basic EPS calculation has also been used for diluted EPS due to the anti-dilutive effect of the weighted average shares calculated for the diluted EPS calculation. |
A reconciliation between the shares used in calculating basic and diluted EPS is as follows:
| Six months ended 30 June 20201 |
Six months ended 30 June 20191 |
Year ended |
||||||||||
| m | m | m | ||||||||||
| Weighted average shares used in basic EPS calculation |
1,224.7 | 1,249.1 | 1,250.0 | |||||||||
| Dilutive share options outstanding |
— | 0.1 | 0.3 | |||||||||
| Other potentially issuable shares |
12.3 | 8.1 | 10.3 | |||||||||
| Weighted average shares used in diluted EPS calculation |
1,237.0 | 1,257.3 | 1,260.6 | |||||||||
At 30 June 2020 there were 1,296,079,242 (30 June 2019: 1,332,703,852, 31 December 2019: 1,328,167,813) ordinary shares in issue, including treasury shares of 70,750,170 (30 June 2019: 70,799,200, 31 December 2019: 70,787,730).
17
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 11. | Analysis of cash flows |
The following tables analyse the items included within the main cash flow headings on page 3:
Net cash flow from operating activities:
| Six months ended 30 June 20201 |
Six months ended 30 June 20191 |
Year ended |
||||||||||
| £m | £m | £m | ||||||||||
| (Loss)/profit for the period |
(2,864.8 | ) | 368.5 | 950.1 | ||||||||
| Taxation |
26.1 | 128.8 | 353.8 | |||||||||
| Revaluation and retranslation of financial instruments |
268.6 | 38.1 | (154.4 | ) | ||||||||
| Finance costs |
157.6 | 189.2 | 376.4 | |||||||||
| Finance and investment income |
(51.4 | ) | (43.6 | ) | (102.6 | ) | ||||||
| Share of results of associates |
51.9 | (8.0 | ) | (21.2 | ) | |||||||
| Goodwill impairment on classification as held for sale |
— | — | 94.5 | |||||||||
| Loss/(gain) on sale of discontinued operations |
3.3 | — | (73.8 | ) | ||||||||
| Attributable tax expense on sale of discontinued operations |
1.9 | — | 157.4 | |||||||||
| Non-cash share-based incentive plans (including share options) |
30.6 | 32.5 | 71.4 | |||||||||
| Depreciation of property, plant and equipment |
88.2 | 106.2 | 203.2 | |||||||||
| Depreciation of right-of-use assets |
155.4 | 168.4 | 317.9 | |||||||||
| Goodwill impairment |
2,484.7 | — | 47.7 | |||||||||
| Amortisation and impairment of acquired intangible assets |
53.1 | 66.9 | 135.6 | |||||||||
| Amortisation of other intangible assets |
9.6 | 18.3 | 29.6 | |||||||||
| Investment and other write-downs |
220.6 | — | 7.5 | |||||||||
| Gains on disposal of investments and subsidiaries |
(16.0 | ) | (40.6 | ) | (45.1 | ) | ||||||
| Gains on remeasurement of equity interests arising from a change in scope of ownership |
— | (0.4 | ) | (0.4 | ) | |||||||
| Gain on sale of freehold property in New York |
— | (7.9 | ) | (7.9 | ) | |||||||
| (Gains)/losses on sale of property, plant and equipment |
(0.1 | ) | (0.6 | ) | 3.2 | |||||||
| Movements in trade working capital2, 3 |
(456.1 | ) | (296.7 | ) | 563.4 | |||||||
| Movements in other receivables, payables and provisions2 |
(294.6 | ) | (482.5 | ) | (213.1 | ) | ||||||
| Corporation and overseas tax paid |
(201.2 | ) | (261.0 | ) | (536.0 | ) | ||||||
| Payment on early settlement of bonds |
— | — | (63.4 | ) | ||||||||
| Interest and similar charges paid |
(77.4 | ) | (110.8 | ) | (270.6 | ) | ||||||
| Interest paid on lease liabilities |
(48.6 | ) | (51.7 | ) | (105.1 | ) | ||||||
| Interest received |
45.2 | 35.8 | 80.8 | |||||||||
| Investment income |
6.8 | 9.3 | 18.3 | |||||||||
| Dividends received from associates |
4.7 | 15.4 | 33.3 | |||||||||
| Net cash (outflow)/inflow from operating activities |
(401.9 | ) | (126.4 | ) | 1,850.5 | |||||||
Notes
| 1 | Figures have been restated as described in the accounting policies. |
| 2 | The Group typically experiences an outflow of working capital in the first half of the financial year and an inflow in the second half. This is primarily due to the seasonal nature of working capital flows associated with its media buying activities on behalf of clients. |
| 3 | Trade working capital represents trade receivables, work in progress, accrued income, trade payables, and deferred income. |
18
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 11. | Analysis of cash flows (continued) |
Acquisitions and disposals:
| Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended 31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Initial cash consideration |
(5.9 | ) | (6.4 | ) | (3.9 | ) | ||||||
| Earnout payments |
(88.5 | ) | (57.9 | ) | (130.2 | ) | ||||||
| Purchase of other investments (including associates) |
(2.4 | ) | (8.6 | ) | (27.2 | ) | ||||||
| Acquisitions |
(96.8 | ) | (72.9 | ) | (161.3 | ) | ||||||
| Proceeds on disposal of investments and subsidiaries |
228.4 | 136.7 | 2,468.5 | |||||||||
| Cash and cash equivalents disposed |
(24.5 | ) | (3.0 | ) | (327.5 | ) | ||||||
| Disposals of investments and subsidiaries |
203.9 | 133.7 | 2,141.0 | |||||||||
| Cash consideration for non-controlling interests |
(37.8 | ) | (9.1 | ) | (62.7 | ) | ||||||
| Net acquisition payments and disposal proceeds |
69.3 | 51.7 | 1,917.0 | |||||||||
Share repurchases and buybacks:
| Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended 31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Purchase of own shares by ESOP Trusts |
(0.4 | ) | — | — | ||||||||
| Shares purchased into treasury |
(285.1 | ) | — | (43.8 | ) | |||||||
| (285.5 | ) | — | (43.8 | ) | ||||||||
Net increase/(decrease) in borrowings:
| Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended 31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Net increase/(decrease) in drawings on bank loans |
7.4 | 376.5 | (70.6 | ) | ||||||||
| Repayment of €250 million bonds |
(223.1 | ) | — | — | ||||||||
| Repayment of £200 million bonds |
— | (199.5 | ) | (199.5 | ) | |||||||
| Partial repayment of $450 million bonds |
— | (176.2 | ) | (176.2 | ) | |||||||
| Partial repayment of $272 million bonds |
— | (135.4 | ) | (135.4 | ) | |||||||
| Repayment of €600 million bonds |
— | — | (512.7 | ) | ||||||||
| Repayment of $812 million bonds |
— | — | (618.8 | ) | ||||||||
| Proceeds from issue of €750 million bonds |
665.5 | — | — | |||||||||
| Proceeds from issue of £250 million bonds |
250.0 | — | — | |||||||||
| 699.8 | (134.6 | ) | (1,713.2 | ) | ||||||||
19
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 11. | Analysis of cash flows (continued) |
Cash and cash equivalents:
| 30 June 20201 |
30 June 20191 |
31 December 20191 |
||||||||||
| £m | £m | £m | ||||||||||
| Cash at bank and in hand |
9,442.3 | 11,149.0 | 10,442.1 | |||||||||
| Short-term bank deposits |
1,115.7 | 358.5 | 863.6 | |||||||||
|
Overdrafts2 |
(8,021.9 | ) | (9,670.2 | ) | (8,572.4 | ) | ||||||
| 2,536.1 | 1,837.3 | 2,733.3 | ||||||||||
Notes
| 1 | Figures have been restated to be in accordance with IAS 32 Financial Instruments: Presentation, as described in the accounting policies. |
| 2 | Bank overdrafts are included in cash and cash equivalents because they form an integral part of the Group’s cash management. |
| 12. | Debt financing |
The Group estimates that the fair value of corporate bonds is £5,348.5 million at 30 June 2020 (30 June 2019: £5,783.4 million; 31 December 2019: £4,439.8 million). The carrying value of corporate bonds is £5,136.4 million at 30 June 2020 (30 June 2019: £5,535.2 million; 31 December 2019: £4,162.9 million). The Group considers that the carrying amount of bank loans at 30 June 2020 of £125.8 million (30 June 2019: £580.1 million; 31 December 2019: £110.4 million) approximates their fair value.
The following table is an analysis of future anticipated cash flows in relation to the Group’s debt, on an undiscounted basis which, therefore, differs from the carrying value:
| 30 June 20201 |
30 June 20191 |
31 December 20191 |
||||||||||
| £m | £m | £m | ||||||||||
| Within one year |
(249.8 | ) | (936.6 | ) | (324.8 | ) | ||||||
| Between one and two years |
(366.9 | ) | (327.7 | ) | (204.0 | ) | ||||||
| Between two and three years |
(532.0 | ) | (990.0 | ) | (692.1 | ) | ||||||
| Between three and four years |
(793.7 | ) | (496.1 | ) | (726.3 | ) | ||||||
| Between four and five years |
(1,145.4 | ) | (1,114.7 | ) | (634.2 | ) | ||||||
| Over five years |
(3,461.7 | ) | (3,500.3 | ) | (2,761.9 | ) | ||||||
| Debt financing (including interest) under the Revolving Credit Facility and in relation to unsecured loan notes |
(6,549.5 | ) | (7,365.4 | ) | (5,343.3 | ) | ||||||
| Short-term overdrafts – within one year |
(8,021.9 | ) | (9,670.2 | ) | (8,572.4 | ) | ||||||
| Future anticipated cash flows |
(14,571.4 | ) | (17,035.6 | ) | (13,915.7 | ) | ||||||
| Effect of discounting/financing rates |
1,287.9 | 1,257.1 | 1,070.4 | |||||||||
| Debt financing |
(13,283.5 | ) | (15,778.5 | ) | (12,845.3 | ) | ||||||
Note
| 1 | Figures have been restated to be in accordance with IAS 32 Financial Instruments: Presentation, as described in the accounting policies. |
| 13. | Assets held for sale and discontinued operations |
On 12 July 2019, the Group announced the proposed sale of its Kantar business to Bain Capital. The sale involved the Group disposing of the Kantar business and holding a 40% equity stake post-transaction which is treated as an associate. On 5 December 2019 the first stage of the transaction completed with consideration of £2,140.2 million after tax and disposal costs. This generated a pre-tax gain of £73.8 million, tax charge of £157.4 million and goodwill impairment of £94.5 million for the Group. In the period ended 30 June 2020 the second, third and fourth stages of the transaction completed with total consideration of £200.1 million after tax and disposal costs. This generated a pre-tax loss of £3.3 million, and a tax charge of £1.9 million. The final
20
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 13. | Assets held for sale and discontinued operations (continued) |
stages of the transaction are expected to complete in the second half of the year with further consideration expected to be approximately £50.0 million after tax and disposal costs.
Under IFRS 5: Non-current Assets Held for Sale and Discontinued Operations where certain conditions are met, an asset or disposal group that has been put up for sale should be recognised as ‘held for sale’. The criterion was met on 9 July 2019, following Board approval of the disposal of Kantar to Bain Capital, representing the date at which the appropriate level of management was committed to a plan to sell the disposal group. The Kantar disposal group therefore became held for sale on this date.
The Kantar group is classified as a discontinued operation in 2019 and 2020 under IFRS 5, as it forms a separate major line of business and there was a single co-ordinated plan to dispose of it.
As at 30 June 2020 the Kantar group is therefore presented as a discontinued operation with the remaining portion of the company not yet sold by 30 June 2020 disclosed as held for sale. Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5.
Results of the discontinued operations, which have been included in profit for the year, were as follows:
| Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended 31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Revenue |
101.9 | 1,247.8 | 2,387.5 | |||||||||
| Costs of services |
(87.4 | ) | (1,061.4 | ) | (1,951.5 | ) | ||||||
| Gross profit |
14.5 | 186.4 | 436.0 | |||||||||
| General and administrative costs |
(4.0 | ) | (109.7 | ) | (151.7 | ) | ||||||
| Operating profit |
10.5 | 76.7 | 284.3 | |||||||||
| Share of results of associates |
— | 6.5 | 6.5 | |||||||||
| Profit before interest and taxation |
10.5 | 83.2 | 290.8 | |||||||||
| Finance income |
0.2 | 1.8 | 3.6 | |||||||||
| Finance costs |
(0.3 | ) | (9.1 | ) | (17.3 | ) | ||||||
| Revaluation and retranslation of financial instruments |
— | (6.7 | ) | (9.4 | ) | |||||||
| Profit before taxation |
10.4 | 69.2 | 267.7 | |||||||||
| Attributable tax expense |
(2.1 | ) | (19.5 | ) | (78.8 | ) | ||||||
| Profit after taxation |
8.3 | 49.7 | 188.9 | |||||||||
| Goodwill impairment on classification as held for sale1 |
— | — | (94.5 | ) | ||||||||
| (Loss)/gain on sale of discontinued operations |
(3.3 | ) | — | 73.8 | ||||||||
| Attributable tax expense on sale of discontinued operations |
(1.9 | ) | — | (157.4 | ) | |||||||
| Net gain attributable to discontinued operations |
3.1 | 49.7 | 10.8 | |||||||||
| Attributable to: |
||||||||||||
| Equity holders of the parent |
(6.8 | ) | 43.2 | (3.8 | ) | |||||||
| Non-controlling interests2 |
9.9 | 6.5 | 14.6 | |||||||||
| 3.1 | 49.7 | 10.8 | ||||||||||
Notes
| 1 | Goodwill impairment of £94.5 million arose from the assessment of fair value less costs to sell under IFRS 5 in the year ended 31 December 2019. |
| 2 | In 2020, non-controlling interests includes £9.3 million recognised on the disposal of Kantar within WPP Scangroup, a 56.25% owned subsidiary of the Group. |
For the period ended 30 June 2020, the Kantar group contributed £26.8 million (period ended 30 June 2019: £135.2 million, year ended 31 December 2019: £322.9 million) to the Group’s net operating cash flows, paid
21
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 13. | Assets held for sale and discontinued operations (continued) |
£1.1 million (period ended 30 June 2019: £26.5 million, year ended 31 December 2019: £53.2 million) in respect of investing activities and paid £0.9 million (period ended 30 June 2019: £18.8 million, year ended 31 December 2019: £27.2 million) in respect of financing activities.
The gain on sale of discontinued operations is calculated as follows:
| 30 June 2020 |
31 December 2019 |
|||||||
| £m | £m | |||||||
| Intangible assets (including goodwill) |
150.9 | 2,410.0 | ||||||
| Property, plant and equipment |
13.7 | 115.7 | ||||||
| Right-of-use assets |
24.2 | 103.5 | ||||||
| Interests in associates and joint ventures |
2.0 | 92.3 | ||||||
| Other investments |
— | 11.5 | ||||||
| Deferred tax assets |
5.5 | 44.1 | ||||||
| Corporate income tax recoverable |
15.0 | 49.8 | ||||||
| Trade and other receivables |
157.6 | 748.8 | ||||||
| Cash and cash equivalents |
19.8 | 324.9 | ||||||
| Trade and other payables |
(129.0 | ) | (839.8 | ) | ||||
| Corporate income tax payable |
(4.0 | ) | (48.2 | ) | ||||
| Lease liabilities |
(20.5 | ) | (106.3 | ) | ||||
| Deferred tax liabilities |
(1.3 | ) | (98.6 | ) | ||||
| Provisions for post-employment benefits |
(6.7 | ) | (26.7 | ) | ||||
| Provisions for liabilities and charges |
(0.6 | ) | (22.4 | ) | ||||
| Net assets |
226.6 | 2,758.6 | ||||||
| Non-controlling interests |
(5.9 | ) | (19.1 | ) | ||||
| Net assets excluding non-controlling interests |
220.7 | 2,739.5 | ||||||
| Consideration received in cash and cash equivalents |
191.3 | 2,352.1 | ||||||
| Re-investment in equity stake1 |
— | 231.7 | ||||||
| Transaction costs |
(3.8 | ) | (56.1 | ) | ||||
| Deferred consideration2 |
14.5 | 1.6 | ||||||
| Total consideration received |
202.0 | 2,529.3 | ||||||
| Loss on sale before exchange adjustments |
(18.7 | ) | (210.2 | ) | ||||
| Exchange adjustments recycled to the income statement |
15.4 | 284.0 | ||||||
| (Loss)/gain on sale of discontinued operations |
(3.3 | ) | 73.8 | |||||
Notes
| 1 | Re-investment in equity stake represents the value of the Group’s 40% stake in the new Kantar group as part of the disposal. |
| 2 | Deferred consideration in the year ended 31 December 2019 is made up of £79.6 million expected to be received in future periods on the satisfaction of certain conditions and the deferral of £78.0 million consideration against services the Group will supply to Kantar on favourable terms in the future. |
22
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 14. | Goodwill and acquisitions |
Cash-generating units (CGUs) with significant goodwill and brands with an indefinite useful life as at 30 June are:
| Goodwill | Brands with an indefinite useful life |
|||||||||||||||
| 30 June 20201 |
31 December 20191 |
30 June 2020 |
31 December 2019 |
|||||||||||||
| CGU | £m | £m | £m | £m | ||||||||||||
| GroupM |
3,057.9 | 2,921.7 | — | — | ||||||||||||
| Wunderman Thompson |
1,167.2 | 2,121.9 | 433.3 | 409.7 | ||||||||||||
| VMLY&R |
460.6 | 901.0 | 203.6 | 199.1 | ||||||||||||
| Ogilvy |
823.8 | 758.6 | 218.5 | 211.1 | ||||||||||||
| Burson Cohn & Wolfe |
651.3 | 739.3 | 138.0 | 130.2 | ||||||||||||
| Other |
1,935.5 | 2,668.1 | 136.4 | 128.1 | ||||||||||||
| 8,096.3 | 10,110.6 | 1,129.8 | 1,078.2 | |||||||||||||
Note
| 1 | Figures have been restated as described in the accounting policies. |
Other goodwill represents goodwill on a large number of CGUs, none of which is individually significant in comparison to the total carrying value of goodwill. Separately identifiable brands with an indefinite life are carried at historical cost in accordance with the Group’s accounting policy for intangible assets. The carrying values of the other brands with an indefinite useful life are not individually significant in comparison with the total carrying value of brands with an indefinite useful life.
Goodwill in relation to subsidiary undertakings decreased by £2,014.3 million (30 June 2019: increased by £49.0 million) in the period. This movement primarily relates to impairment charges of £2,484.7 million, partially offset by the effect of currency translation of £473.3 million, as well as both goodwill arising on acquisitions completed in the year and adjustments to goodwill relating to acquisitions completed in prior years.
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. Given the COVID-19 pandemic, impairment indicators such as a decline in revenue less pass-through costs forecasts, and downturns in the global economy and the advertising industry were identified in the first half of 2020. As such, the Group performed an impairment test over goodwill and intangible assets with indefinite useful lives as at 30 June 2020.
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. The review assessed whether the carrying value of goodwill and intangible assets with indefinite useful lives was supported by the value in use determined as the net present value of future cash flows.
Due to a significant number of CGUs, the impairment test was performed in two steps. In the first step, the recoverable amount was calculated for each CGU using the latest available forecasts for 2020, nil growth rate thereafter (2019: 3.0%) and a conservative pre-tax discount rate of 13.5% (2019: 8.5%). The pre-tax discount rate of 13.5% was above the rate calculated for the global networks of 12.5%. For smaller CGUs that operate primarily in a particular region subject to higher risk, the higher of 13.5% or 100 basis points above the regional discount rate was used in the first step.
The recoverable amount was then compared to the carrying amount. CGUs where the recoverable amount exceeded the carrying amount were not considered to be impaired. Those CGUs where the recoverable amount did not exceed the carrying amount were then further reviewed in the second step.
23
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 14. | Goodwill and acquisitions (continued) |
In the second step, the CGUs were retested for impairment using more refined assumptions. This included using a CGU specific pre-tax discount rate and management forecasts for a projection period of up to five-years, followed by an assumed long-term growth rate of 2.0% (2019: 3.0%). If the recoverable amount using the more specific assumptions did not exceed the carrying value of a CGU, an impairment charge was recorded.
In developing the cash flows, we considered the impact of the COVID-19 pandemic to our businesses and adjusted projected revenue less pass-through costs and operating margins in 2020 accordingly. For the remaining years in the projection period, we assessed when the cash flows would recover to 2019 levels as representative of pre-COVID-19 revenue less pass-through costs and operating margins. For many of our CGUs, recovery to 2019 levels by 2023 was estimated with some CGUs using alternative recovery profiles as considered appropriate.
The long-term growth rate is derived from management’s best estimate of the likely long-term trading performance with reference to external industry reports and other relevant market trends. As at 30 June 2020, we have assessed long-term industry trends based on recent historical data including the long-term impact of COVID-19 and assumed a long-term growth rate of 2.0% (2019: 3.0%). Management have made the judgement that the long-term growth rate does not exceed the long-term average growth rate for the industry.
The discount rate uses the capital asset pricing model “CAPM” to derive the cost of equity along with an estimated cost of debt that is weighted by an appropriate capital structure to derive an indication of a weighted average cost of capital. The cost of equity is calculated based on long-term government bond yield, an estimate of the required premium for investment in equity relative to government securities and further considers the volatility associated with peer public companies relative to the market. The cost of debt reflects an estimated market yield for long-term debt financing after taking into account the credit profile of public peer companies in the industry. The capital structure used to weight the cost of equity and cost of debt has been derived from the observed capital structure of public peer companies.
Given current market factors, there has been an increase in the estimated cost of equity. This has been driven by increased levels of market uncertainty and volatility which is reflected in the market valuations for global advertising agencies. This has led to upward adjustments to the estimates for the equity risk premium as well as the applicable beta (i.e. volatility of public peer companies relative to the market). Additionally, given the magnitude of the declines in our market capitalisation, the cost of equity reflects an increase in the size premium applicable to the Group, and a company specific risk premium to reflect implied market discount rates. This increase in the cost of equity, combined with an increase in the cost of debt as a result of increased corporate bond yields, resulted in the discount rates applied to our CGUs increasing relative to the prior year.
The pre-tax discount rate applied to the cash flow projections for the CGUs that operate globally was 12.5% (2019: 6.3% to 7.4%). We developed a global discount rate that takes into account the diverse nature of the operations as these CGUs operate with a diverse range of clients in a range of industries throughout the world, hence are subject to similar levels of market risks. The pre-tax discount rates applied to the CGUs that have more regional specific operations ranged from 10.8% to 19.3% (2019: 4.1% to 13.6%).
Our approach in determining the recoverable amount utilises a discounted cash flow methodology, which necessarily involves making numerous estimates and assumptions regarding revenue less pass-through costs 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 less pass-through costs growth and operating margins. The key assumptions take account of the businesses’ expectations for the projection period. These expectations consider the macroeconomic environment, industry and market conditions, the CGU’s historical performance and any other circumstances particular to the unit, such as business strategy and client mix.
24
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 14. | Goodwill and acquisitions (continued) |
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 CGU 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.
As part of the overall effort to simplify operations and become more client-centric, certain operations have been realigned between the various networks. These realignments have been reflected in the CGUs being tested. The most significant of these include the treatment of Landor and FITCH as a single CGU given the collaboration of the two brands from both a management and client perspective; the shift of certain European operations into VMLY&R, and the transfer of certain Asian operations from VMLY&R to Ogilvy in order to improve the operational synergies and offer in the respective regions. The transfers of carrying value between CGUs were determined on a relative value basis. The impact of these realignments has not had a significant impact on the impairment figures recognised.
The goodwill impairment charge of £2,484.7 million largely reflects the adverse impacts of COVID-19 to a number of businesses in the Group. The impact of these global economic conditions and trading circumstances was sufficiently severe to indicate impairment to the carrying value of goodwill. By operating sector, £1,606.9 million of the impairment charge relates to Global Integrated Agencies, £142.7 million relates to Public Relations and £735.1 million relates to Specialist Agencies.
The CGUs with significant impairments of goodwill as at 30 June 2020 are set out in the below table.
| Operating Sector | Recoverable amount |
Goodwill impairment charge1 |
||||||||
| CGU | £m | £m | ||||||||
| Wunderman Thompson |
Global Integrated Agencies | 1,932.2 | 1,054.4 | |||||||
| VMLY&R |
Global Integrated Agencies | 918.3 | 472.0 | |||||||
| Burson Cohn & Wolfe |
Public Relations | 859.8 | 127.0 | |||||||
| Geometry Global |
Specialist Agencies | 205.9 | 232.5 | |||||||
| Landor & FITCH |
Specialist Agencies | 197.5 | 158.1 | |||||||
| Other |
Other | 1,349.3 | 440.7 | |||||||
Note
| 1 | Figures have been restated as described in the accounting policies. |
25
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 14. | Goodwill and acquisitions (continued) |
Sensitivity of CGUs with an impairment charge
The impairment review is sensitive to changes in the assumptions used, most notably to changes in the revenue less pass-through costs growth and operating margins used to derive cash flows during the 5-year projection period, the terminal cash flow growth rate, and discount rate. The revenue less pass-through costs growth rates used in the 5-year projection period for impaired CGUs that operate globally resulted in compound annual growth rates of 2.5% to 5.0%. The operating margins used in the 5-year projection period for impaired CGUs that operate globally resulted in average operating margins of 6.6% to 19.0%. Long-term cash flow growth rates and discount rates used in the test are discussed above. A summary of the movements in the impairment charge from a reasonably possible change in these assumptions is as follows:
| Impact of changes to assumptions in 5-year projection period |
Impact of change to terminal value assumptions |
Impact of change to pre-tax discount rate |
||||||||||||||||||
| CGU |
Revenue less +/- 0.5% |
Operating margin % +/- 0.5% |
Long-term cash flow +/- 0.5% |
+1.5% | -1.5% | |||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
| Wunderman Thompson |
19.2 | 70.8 | 54.6 | (210.2 | ) | 279.4 | ||||||||||||||
| VMLY&R |
8.3 | 37.7 | 22.9 | (100.1 | ) | 132.0 | ||||||||||||||
| Burson Cohn & Wolfe |
9.6 | 21.8 | 26.9 | (98.7 | ) | 127.0 | ||||||||||||||
| Geometry Global |
1.2 | 13.5 | 3.6 | (22.3 | ) | 29.7 | ||||||||||||||
| Landor & FITCH |
2.1 | 6.5 | 6.0 | (23.5 | ) | 31.3 | ||||||||||||||
| Other |
11.9 | 47.8 | 33.9 | (136.4 | ) | 162.6 | ||||||||||||||
| 52.3 | 198.1 | 147.9 | (591.2 | ) | 762.0 | |||||||||||||||
Sensitivity of CGUs not impaired
For the CGUs not impaired in the period, a reasonably possible change in assumptions would not lead to a significant impairment.
Acquisitions
The contribution to revenue and operating profit of acquisitions completed in the period was not material. There were no material acquisitions completed during the period or between 30 June 2020 and the date the interim financial statements were approved.
| 15. | Other intangible assets |
The following are included in other intangibles:
| 30 June 2020 |
30 June 2019 |
31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Brands with an indefinite useful life |
1,129.8 | 1,141.2 | 1,078.2 | |||||||||
| Acquired intangibles |
284.4 | 530.4 | 323.6 | |||||||||
| Other (including capitalised computer software) |
74.7 | 114.6 | 67.0 | |||||||||
| 1,488.9 | 1,786.2 | 1,468.8 | ||||||||||
26
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 16. | Trade and other receivables |
Amounts falling due within one year:
| 30 June 2020 |
30 June 2019 |
31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Trade receivables |
5,175.7 | 7,713.8 | 7,007.6 | |||||||||
| Work in progress |
312.4 | 419.5 | 349.5 | |||||||||
| VAT and sales taxes recoverable |
272.5 | 270.6 | 212.7 | |||||||||
| Prepayments |
311.6 | 391.0 | 287.1 | |||||||||
| Accrued income |
2,703.2 | 3,731.1 | 3,292.7 | |||||||||
| Fair value of derivatives |
0.6 | 10.0 | 1.4 | |||||||||
| Other debtors |
627.3 | 634.2 | 671.3 | |||||||||
| 9,403.3 | 13,170.2 | 11,822.3 | ||||||||||
Amounts falling due after more than one year:
| 30 June 2020 |
30 June 2019 |
31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Prepayments |
1.7 | 2.8 | 2.2 | |||||||||
| Accrued income |
— | 22.8 | — | |||||||||
| Fair value of derivatives |
— | 6.3 | — | |||||||||
| Other debtors |
142.3 | 150.8 | 135.4 | |||||||||
| 144.0 | 182.7 | 137.6 | ||||||||||
The Group has applied the practical expedient permitted by IFRS 15 to not disclose the transaction price allocated to performance obligations unsatisfied (or partially unsatisfied) as of the end of the reporting period as contracts typically have an original expected duration of a year or less.
The Group considers that the carrying amount of trade and other receivables approximates their fair value.
Expected credit losses
The Group has applied the simplified approach to measuring expected credit losses, as permitted by IFRS 9: Financial Instruments. Therefore the Group does not track changes in credit risk over the life of a financial asset, but recognises a loss allowance based on the financial asset’s lifetime expected credit loss. Under IFRS 9, the expected credit losses are measured as the difference between the asset’s gross carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. Given the short-term nature of the Group’s trade receivables, work in progress and accrued income, which are mainly due from large national or multinational companies, the Group assessment of expected credit losses includes provisions for specific clients and receivables where the contractual cash flow is deemed at risk. Additional provisions are made based on the assessment of recoverability of aged receivables, where the following criteria are met:
–– 100% of the asset aged over one year;
–– 50% of the asset aged between 180 days and one year; and
–– sufficient evidence of recoverability is not evident.
27
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 16. | Trade and other receivables (continued) |
These criteria form the basis of expected future losses based on historical loss rates. As a result of the COVID-19 pandemic, the Group also performed a detailed review of trade receivables, work-in-progress and accrued income aged less than 180 days, taking into account the level of credit insurance the Group has along with internal and external data including historical and forward looking information. This review focused on significant individual clients along with the industry and country in which the clients operate where there is increased risk due to the pandemic.
This resulted in a bad debt expense of £29.2 million (period ended 30 June 2019: £12.3 million; year ended 31 December 2019: £25.8 million) on the Group’s trade receivables in the period. The allowance for bad and doubtful debts is equivalent to 2.5% (30 June 2019: 1.6%; 31 December 2019: 1.6%) of gross trade receivables.
| 17. | Trade and other payables: amounts falling due within one year |
| 30 June 2020 |
30 June 2019 |
31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Trade payables |
7,279.2 | 9,945.7 | 10,112.1 | |||||||||
| Deferred income |
968.7 | 1,377.3 | 1,024.6 | |||||||||
| Payments due to vendors (earnout agreements)1 |
65.2 | 167.8 | 143.4 | |||||||||
| Liabilities in respect of put option agreements with vendors1 |
42.9 | 21.4 | 75.7 | |||||||||
| Fair value of derivatives |
2.7 | 4.0 | 1.5 | |||||||||
| Share repurchases - close period commitments2 |
— | — | 252.3 | |||||||||
| Other creditors and accruals |
2,409.3 | 2,829.7 | 2,578.5 | |||||||||
| 10,768.0 | 14,345.9 | 14,188.1 | ||||||||||
Notes
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies. |
| 2 | During 2019, the Company entered into an arrangement with a third party to conduct share buybacks on its behalf in the close period commencing on 2 January 2020 and ending on 27 February 2020, in accordance with UK listing rules. The commitment resulting from this agreement constitutes a liability at 31 December 2019, which is included in Trade and other payables: amounts falling due within one year and has been recognised as a movement in equity. |
The Group considers that the carrying amount of trade and other payables approximates their fair value.
| 18. | Trade and other payables: amounts falling due after more than one year |
| 30 June 2020 |
30 June 2019 |
31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Payments due to vendors (earnout agreements)1 |
88.1 | 184.2 | 100.3 | |||||||||
| Liabilities in respect of put option agreements with vendors1 |
102.5 | 203.8 | 128.8 | |||||||||
| Fair value of derivatives |
0.6 | — | 21.2 | |||||||||
| Other creditors and accruals |
164.0 | 140.8 | 199.3 | |||||||||
| 355.2 | 528.8 | 449.6 | ||||||||||
Note
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies. |
The Group considers that the carrying amount of trade and other payables approximates their fair value.
28
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 18. | Trade and other payables: amounts falling due after more than one year (continued) |
The following table sets out payments due to vendors, comprising contingent consideration and the Directors’ best estimates of future earnout-related obligations:
| 30 June 20201 |
30 June 20191 |
31 December 20191 |
||||||||||
| £m | £m | £m | ||||||||||
| Within one year |
65.2 | 167.8 | 143.4 | |||||||||
| Between 1 and 2 years |
26.0 | 87.6 | 36.3 | |||||||||
| Between 2 and 3 years |
14.1 | 40.5 | 34.6 | |||||||||
| Between 3 and 4 years |
23.4 | 30.5 | 12.3 | |||||||||
| Between 4 and 5 years |
21.8 | 17.7 | 7.7 | |||||||||
| Over 5 years |
2.8 | 7.9 | 9.4 | |||||||||
| 153.3 | 352.0 | 243.7 | ||||||||||
Note
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies |
The Group’s approach to payments due to vendors is outlined in note 22.
The following table sets out the movements of deferred and earnout related obligations during the period:
| Six months ended 30 June 20201 |
Six months ended 30 June 20191 |
Year ended 31 December 20191 |
||||||||||
| £m | £m | £m | ||||||||||
| At the beginning of the period |
243.7 | 400.8 | 400.8 | |||||||||
| Earnouts paid |
(88.5 | ) | (57.9 | ) | (130.0 | ) | ||||||
| New acquisitions |
2.9 | 3.6 | 9.6 | |||||||||
| Revision of estimates taken to goodwill |
(3.0 | ) | 1.1 | (14.1 | ) | |||||||
| Revaluation of payments due to vendors (note 6) |
(7.4 | ) | 3.1 | 3.8 | ||||||||
| Transfer to disposal group classified as held for sale |
— | — | (11.5 | ) | ||||||||
| Exchange adjustments |
5.6 | 1.3 | (14.9 | ) | ||||||||
| At the end of the period |
153.3 | 352.0 | 243.7 | |||||||||
Note
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies |
The Group does not consider there to be any material contingent liabilities at 30 June 2020.
| 19. | Issued share capital |
| Six months ended 30 June 2020 |
Six months ended 30 June 2019 |
Year ended 31 December 2019 |
||||||||||
| Number of equity ordinary shares | m | m | m | |||||||||
| At the beginning of the period |
1,328.2 | 1,332.7 | 1,332.7 | |||||||||
| Share cancellations |
(32.1 | ) | — | (4.5 | ) | |||||||
| At the end of the period |
1,296.1 | 1,332.7 | 1,328.2 | |||||||||
29
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 20. | Related party transactions |
The Group enters into transactions with its associate undertakings.
The Group has continuing transactions with Kantar, including sales, purchases, the provision of IT services, subleases and property related items. None of these were material in the period after 5 December 2019 when Kantar became an associate, to 31 December 2019, or in the period ended 30 June 2020.
In the period ended 30 June 2020, revenue of £49.7 million was reported in relation to Compas, an associate in the USA. All other transactions in the periods presented were immaterial.
The following amounts were outstanding at 30 June 2020:
| 30 June 2020 |
30 June 2019 |
31 December 2019 |
||||||||||
| £m | £m | £m | ||||||||||
| Amounts owed by related parties |
||||||||||||
| Kantar |
79.2 | — | 87.5 | |||||||||
| Other |
27.8 | 82.7 | 87.5 | |||||||||
| 107.0 | 82.7 | 175.0 | ||||||||||
| Amounts owed to related parties |
||||||||||||
| Kantar |
(14.6 | ) | — | (36.5 | ) | |||||||
| Other |
(61.9 | ) | (56.0 | ) | (49.6 | ) | ||||||
| (76.5 | ) | (56.0 | ) | (86.1 | ) | |||||||
| 21. | Going concern and risk management policies |
In considering going concern and liquidity risk, the Directors have reviewed the Group’s future cash requirements and earnings projections. The Directors believe these forecasts have been prepared on a prudent basis and have also considered the impact of a range of potential changes to trading performance. The Company’s forecasts and projections, taking account of (i) reasonably possible declines in revenue less pass-through costs; (ii) remote declines in revenue less pass-through costs for stress-testing purposes as a consequence of the COVID-19 pandemic compared to 2019; and considering the Group’s bank covenant and liquidity headroom taking into account the suspension of share buybacks and the cancellation of the final dividend in 2019 and cost mitigation actions which are and which could be implemented, show that the Company and the Group would be able to operate with appropriate liquidity and within its banking covenants and be able to meet its liabilities as they fall due. The Company modelled a range of revenue less pass-through costs declines from 15% to over 35%. The Directors have concluded that the Group will be able to operate within its current facilities and comply with its banking covenants for the foreseeable future and therefore believe it is appropriate to prepare the financial statements of the Group on a going concern basis and that there are no material uncertainties which gives rise to a significant going concern risk. The potential impact of Brexit has been considered and is not deemed to have a significant effect on this assessment.
30
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 21. | Going concern and risk management policies (continued) |
At 30 June 2020, the Group has access to £7.4 billion of committed facilities with maturity dates spread over the years 2021 to 2046 as illustrated below:
| Maturity by year | ||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025+ | ||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
| £ bonds £400m (2.875% ’46) |
400.0 | 400.0 | ||||||||||||||||||||||
| US bond $220m (5.625% ’43) |
177.6 | 177.6 | ||||||||||||||||||||||
| US bond $93m (5.125% ’42) |
75.0 | 75.0 | ||||||||||||||||||||||
| £ bonds £250m (3.75% ’32) |
250.0 | 250.0 | ||||||||||||||||||||||
| Eurobonds €600m (1.625% ’30) |
545.0 | 545.0 | ||||||||||||||||||||||
| Eurobonds €750m (2.375% ’27) |
681.2 | 681.2 | ||||||||||||||||||||||
| Eurobonds €750m (2.25% ’26) |
681.2 | 681.2 | ||||||||||||||||||||||
| Eurobonds €500m (1.375% ’25) |
454.1 | 454.1 | ||||||||||||||||||||||
| US bond $750m (3.75% ’24) |
605.9 | 605.9 | ||||||||||||||||||||||
| Bank revolver ($2,500m ‘24) |
2,019.5 | 2,019.5 | ||||||||||||||||||||||
| Eurobonds €750m (3.0% ’23) |
681.2 | 681.2 | ||||||||||||||||||||||
| US bond $500m (3.625% ’22) |
403.9 | 403.9 | ||||||||||||||||||||||
| Eurobonds €250m (3m EURIBOR + 0.45% ’22) |
227.1 | 227.1 | ||||||||||||||||||||||
| Bank revolver (A$420m ‘21) |
233.8 | 233.8 | ||||||||||||||||||||||
| Total committed facilities available |
7,435.5 | 233.8 | 631.0 | 681.2 | 2,625.4 | 3,264.1 | ||||||||||||||||||
| Drawn down facilities at 30 June 2020 |
5,291.9 | 109.7 | 631.0 | 681.2 | 605.9 | 3,264.1 | ||||||||||||||||||
| Undrawn committed credit facilities |
2,143.6 | |||||||||||||||||||||||
Given its debt maturity profile and available facilities, the Directors believe the Group has sufficient liquidity to match its requirements for the foreseeable future.
Treasury management
The Group’s treasury activities are principally concerned with monitoring of working capital, managing external and internal funding requirements and monitoring and managing financial market risks, in particular risks from movements in interest and foreign exchange rates.
The Group’s risk management policies relating to foreign currency risk, interest rate risk, liquidity risk, capital risk and credit risk are presented in the notes to the consolidated financial statements of the 2019 Annual Report on Form 20-F and in the opinion of the Board remain relevant for the remaining six months of the year.
| 22. | Financial instruments |
The fair values of financial assets and liabilities are based on quoted market prices where available. Where the market value is not available, the Group has estimated relevant fair values on the basis of publicly available information from outside sources or on the basis of discounted cash flow models where appropriate.
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable, or based on observable inputs:
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
31
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 22. | Financial instruments (continued) |
Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
| Level 1 | Level 21 | Level 31 | ||||||||||
| £m | £m | £m | ||||||||||
| 30 June 2020 |
||||||||||||
| Held at fair value through profit or loss |
||||||||||||
| Other investments |
— | — | 258.7 | |||||||||
| Derivative assets |
— | 0.6 | — | |||||||||
| Derivative liabilities |
— | (3.3 | ) | — | ||||||||
| Payments due to vendors (earnout agreements) (note 18) |
— | — | (153.3 | ) | ||||||||
| Liabilities in respect of put options |
— | — | (145.4 | ) | ||||||||
| Held at fair value through other comprehensive income |
||||||||||||
| Other investments |
28.4 | — | 110.9 | |||||||||
Note
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies. |
Reconciliation of level 3 fair value measurements:
| Liabilities in respect of put options1 |
Other investments |
|||||||
| £m | £m | |||||||
| 1 January 2020 |
(204.5 | ) | 456.1 | |||||
| Gains recognised in the income statement |
25.4 | 1.7 | ||||||
| Losses recognised in other comprehensive income |
— | (88.7 | ) | |||||
| Exchange adjustments |
(1.1 | ) | — | |||||
| Additions |
(1.3 | ) | 3.0 | |||||
| Disposals |
— | (2.5 | ) | |||||
| Cancellations |
28.9 | — | ||||||
| Settlements |
7.2 | — | ||||||
| 30 June 2020 |
(145.4 | ) | 369.6 | |||||
Note
| 1 | Figures have been restated to be in accordance with IAS 39 Financial Instruments: Recognition and Measurement, as described in the accounting policies |
Payments due to vendors and liabilities in respect of put options
Future anticipated payments due to vendors in respect of contingent consideration (earnout agreements) are recorded at fair value, which is the present value of the expected cash outflows of the obligations. Liabilities in respect of put option agreements are initially recorded at the present value of the redemption amount in accordance with IAS 32 and subsequently measured at fair value in accordance with IFRS 9. Both types of obligations are dependent on the future financial performance of the entity and it is assumed that future profits are 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. At 30 June 2020, the weighted average growth rate in estimating future financial performance was 16.6%, which reflects the prevalence of recent acquisitions in the faster growing markets and new media sectors. The weighted average risk adjusted discount rate applied to these obligations at 30 June 2020 was 4.0%.
32
Notes to the unaudited condensed consolidated interim financial statements (continued)
| 22. | Financial instruments (continued) |
A one percentage point increase or decrease in the growth rate in estimated future financial performance would increase or decrease the combined liabilities due to earnout agreements and put options by approximately £3.1 million and £3.0 million, respectively. A 0.5 percentage point increase or decrease in the risk adjusted discount rate would decrease or increase the combined liabilities by approximately £3.4 million and £3.5 million, respectively. An increase in the liability would result in a loss in the revaluation and retranslation of financial instruments (note 6), while a decrease would result in a gain.
Other investments
The fair value of other investments included in level 1 are based on quoted market prices. Other investments included in level 3 are unlisted securities, where market value is not readily available. The Group has estimated relevant fair values on the basis of publicly available information from outside sources. Certain investments are valued using revenue multiples. An increase or decrease in this multiple of 0.5 times revenue would result in an increase or decrease in the value of investments of £26.9 million, which would result in a credit or charge to the income statement of £1.5 million and equity of £25.4 million. The sensitivity to changes in unobservable inputs for certain other investments is specific to each individual investment.
| 23. | Reconciliation of operating (loss)/profit to headline operating profit |
| Continuing operations | Six months ended 30 June 20202 |
Six months ended 30 June 20191 |
Year ended 31 December 2019 |
|||||||||
| £m | £m | £m | ||||||||||
| Operating (loss)/profit |
(2,417.3 | ) | 596.3 | 1,295.9 | ||||||||
| Amortisation and impairment of acquired intangible assets |
53.1 | 52.8 | 121.5 | |||||||||
| Goodwill impairment |
2,484.7 | — | 47.7 | |||||||||
| Gains on disposal of investments and subsidiaries |
(16.0 | ) | (40.6 | ) | (40.4 | ) | ||||||
| Gains on remeasurement of equity interests arising from a change in scope of ownership |
— | (0.4 | ) | (0.4 | ) | |||||||
| Investment and other write-downs |
220.6 | — | 7.5 | |||||||||
| Litigation settlement |
— | (16.8 | ) | (16.8 | ) | |||||||
| Gain on sale of freehold property in New York |
— | (7.9 | ) | (7.9 | ) | |||||||
| Restructuring and transformation costs |
17.9 | 33.9 | 153.5 | |||||||||
| Restructuring costs in relation to COVID-19 |
39.3 | — | — | |||||||||
| Headline operating profit |
382.3 | 617.3 | 1,560.6 | |||||||||
Notes
| 1 | Figures for the period ended 30 June 2019 have been re-presented in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations, as described in note 13. |
| 2 | Figures have been restated as described in the accounting policies. |
Headline operating profit is one of the metrics that management uses to assess the performance of the business.
33