ANNUAL REPORT 2018 2 WPP AUNZ WE ARE A CREATIVE TRANSFORMATION COMPANY ANNUAL REPORT 2018 1 CONTENTS 2 WELCOME TO WPP AUNZ 4 CHAIRMAN’S LETTER 6 OUR COMPANIES 8 COMMUNICATIONS 11 EXPERIENCE 14 COMMERCE 17 TECHNOLOGY 20 CREATING A CULTURE OF EXCELLENCE 22 WORK FROM OUR COMPANIES 26 THE BOARD OF DIRECTORS 29 DIRECTORS' REPORT 32 OPERATING AND FINANCIAL REVIEW 36 AUDITOR'S INDEPENDENCE DECLARATION 37 OUR REMUNERATION CHAIR'S LETTER 38 REMUNERATION REPORT 56 FINANCIAL STATEMENTS 120 DIRECTORS’ DECLARATION 121 INDEPENDENT AUDITOR'S REPORT 126 ASX ADDITIONAL INFORMATION 128 CORPORATE DIRECTORY 2 WPP AUNZ WELCOME TO WPP AUNZ WPP AUNZ is made up of Australia and New Zealand’s leading companies in communications, experience, commerce and technology. Four key areas that our clients are invested in. Four key areas that will determine our clients' growth and their success. Our operating companies are focused on delivering Fortunately, we have access to more data and insights excellence in these four critical areas. Whether it’s creating about Australians and New Zealanders than any other brand stories through inspired communication, or company in this part of the world. We know their dreams delivering memorable customer experiences, every single and aspirations, their frustrations and their worries. day we build that important bridge between our clients’ Business can only grow if it can connect with the brands and their target audiences. customers who buy their products and services. Understanding human behaviour is the key ingredient in More and more, our work is built on the strength of building new business models and new revenue streams. technology. Whether it be the latest data management The success of companies like Uber and Airbnb comes not platforms to create meaningful and timely communication only from their transformative technology platforms but in a 24/7 world, or eCommerce sites that allow consumers from their deep understanding of human behaviour. to transact anywhere, anytime, on any digital device of their choosing. In this new world, innovation and incubation have never been more critical. For all the focus and discussion on This annual report comes at a time of great change. technology, data, eCommerce and new platforms, creativity still remains as the X factor. Like many industries, we too are facing structural change. The way that people interact in this world, and the way Without a memorable, lateral, entertaining or thought- that they select and buy their goods and services, has provoking idea to burst through the avalanche of marketing changed forever. Every channel is a potential transaction messages consumers receive hourly, the job of connecting opportunity. Every communication effort is a chance to with people is almost impossible. build a memorable brand story. Seamless technology, driven by the engine room of Many of our clients are facing their greatest marketing meaningful data, is of course crucial. But getting challenges in their company’s history. The traditional rules of consumers, customers, audiences, target markets, human marketing no longer exist. New rules are being written daily. beings – ultimately people – to see the message and take action, often comes down to imagination and creativity. Our clients look to us to help them navigate this changing landscape. This complexity. They look to us to provide wise We are committed to helping our clients navigate this counsel and to make it far easier. merging of technology and marketing. To use these transformative platforms offering real-time commerce This is why our new vision is to offer a simpler structure, and data to their advantage, by adding that magic with technology and data driving marketing decisions ingredient of creativity. based on how consumers behave. This is why we call ourselves a creative transformation company. ANNUAL REPORT 2018 3 COMMUNICATIONS Our world-leading capabilities in advertising, content, media investment, public relations and public affairs give us unmatched breadth and depth in the world of communications. EXPERIENCE Expertise in branding and design, service design, platforms and applications allows us to create vivid, compelling and hyper-relevant brand experiences for clients. COMMERCE With deep omni-channel retail experience, including creating direct-to-consumer platforms and helping clients navigate marketplaces such as Amazon and Alibaba, we provide cutting-edge commerce solutions – both online and offine. TECHNOLOGY Our data management, marketing technology consulting and systems integration services, alongside our unique partnerships with the world’s leading technology companies, deliver value and growth for our clients. 4 WPP AUNZ CHAIRMAN’S LETTER DEAR SHAREHOLDERS Strategic and operational achievements for 2018 included: At the beginning of 2018, WPP AUNZ had made good • Solid organic revenue and earnings growth in the Media, progress in capitalising on its position as the leading Digital and Public Relations segments. marketing communications company in Australia and New Zealand. In last year’s Annual Report, I told shareholders that • Digital businesses delivered growth through their strong while the Company had not yet taken full advantage of its service offerings in e-commerce, marketing automation and unique position or firepower, we had a clear opportunity to digital transformation. capture more of our clients' marketing and communications expenditure, and to deliver growth. • Global repositioning of creative agencies – VMLY&R and Wunderman Thompson. However, while the start to 2018 was encouraging, there were operational missteps that led to the Company not achieving • Invested in a new Melbourne campus, bringing together its financial goals, and posting a very disappointing full year 15 agencies and 360 people, providing an opportunity for financial performance. The two primary drivers for this were: greater customer experience synergies. • The significant underperformance of a small number of our • Discussions with WPP plc to evaluate strategic options for businesses which materially detracted from the overall the Kantar business. performance of the Group and the strong results achieved by the majority of our companies. An area of significant strategic value to our business is the continued reshaping of the portfolio of companies under • Slower than anticipated progress on the operational and the WPP AUNZ Group. During 2018, we acquired additional strategic initiatives aimed at fully capitalising on the WPP related entities and increased shareholdings in growth and scale opportunity created through the 2016 existing businesses where we had a minority stake. The merger with WPP in this region. total cost of these investments was $20.8 million and this While the Group financial performance was disappointing, will allow us to execute on strategic initiatives with greater many of our operating companies delivered strong results in speed and control. 2018. We also continued to progress initiatives to support As we have consistently foreshadowed, the marketing future revenue growth and deliver operational efficiencies. To and communications industry in which we operate has recap on our headline results in 2018: been characterised by rapid digital transformation, • Net sales of $857.3 million, down 1.4% economic headwinds, market contraction and high turnover of client side marketing leaders. We don’t shy • Earnings before interest and tax of $121.0 million, away from this reality nor do we use the state of the down 12.8% industry as an excuse for our performance. • Net profit before tax decreased 13.7% to $107.9 million Within WPP AUNZ we have the people, the expertise, the technology and the creativity that should, and I believe • Earnings per share of 8.4 cents, down 14.5% will, allow us to grow market share by continuing to deliver • A final dividend of 4.0 cents per share, bringing total on the promise to our marketing and advertising clients dividends for the year to 6.3 cents per share, reflecting that we are the “go to” Company for creative and effective a payout ratio of 75% of headline earnings. solutions in a rapidly changing market environment. • Entered into new debt facilities totaling $520 million To fulfil this ambition, we have acknowledged the need with a syndicate of 5 banking partners. The structure of the to accelerate the pace of “radical evolution” of the new debt facilities is better aligned to business cashflow company. Against that backdrop, the company made the and offers improved terms. following decisions: ANNUAL REPORT 2018 5 • In late October, we accepted the resignation of our long John Steedman has been admirable in stepping in to take the standing CEO, Mike Connaghan, who after 12 years leading leadership reigns whilst the CEO search is underway. We are our business recognised the need for fresh leadership. A very fortunate to have someone of Steady’s experience, global search for Mike’s replacement is in progress. acumen and standing as interim CEO and he has not only provided stability but is actively championing the ongoing • In December, Sunita Gloster was appointed as our first change program. Thank you Steady. Chief Customer Officer to drive our engagement and thought leadership with the major advertisers and At the Board level, we announced the resignation of Jon Steel brand owners. as a director, consistent with his resignation from executive life after a distinguished senior executive career with WPP plc • Following the strategic merger of WPP’s two leading