- Reported billings up 9.2% at £13.017
billion
- Reported revenue up 16.9% at £3.597
billion, up 1.2% at $4.457 billion, up 4.9% at €4.183 billion and
down 0.2% to ¥506 billion
- Constant currency revenue up 3.6%,
like-for-like revenue up 0.2%
- Constant currency net sales up 4.8%,
like-for-like net sales up 0.8%
- First quarter revenue, net sales and
operating profit well above budget and ahead of last year
- Share buy-backs of £180 million,
representing 10.0 million shares or 0.8% of the issued share
capital purchased in first quarter
- Constant currency net debt at 31
March 2017 up £474 million on same date in 2016, with average net
debt in first quarter of 2017 up by £453 million over same period
in 2016, reflecting strong acquisition activity, including debt
acquired on the merger with STW of approximately £150 million and
share buy-backs
- Resumption of net new business
momentum, with first or second position in all net new business
tables year to date
WPP (NASDAQ:WPPGY) today reported its 2017 First Quarter Trading
Update.
Quarter 1 highlights
- Revenue growth of 16.9%, with
constant currency growth of 3.6%, like-for-like growth of 0.2%,
3.4% growth from acquisitions and 13.3% from currency, primarily
reflecting the weakness of sterling against the US dollar, the euro
and other major currencies
- Net sales growth of 18.5% in
sterling (up 2.6% in dollars, up 6.3% in euros and down 1.1% in
yen), with constant currency growth of 4.8%, like-for-like growth
of 0.8%, 4.0% growth from acquisitions and 13.7% from currency
- Like-for-like revenue growth in all
regions and business sectors, except North America and data
investment management, characterised by particularly strong growth
geographically in the United Kingdom, Western Continental Europe,
Latin America and Central & Eastern Europe and functionally in
public relations and public affairs and sub-sector digital,
eCommerce & shopper marketing – the renamed direct, digital and
interactive sub-sector
- Like-for-like net sales growth
of 0.8%, with all regions and sectors, except North
America and data investment management, showing growth. The delta
compared to revenue growth reversing, as it did in the second half
of 2016, as the Group’s investment in technology enhanced the
growth of advertising and media investment management net sales and
as data investment management direct costs have been reduced
- Constant currency average net debt
in the first quarter increased by £453 million to £4.544
billion compared to the same period in 2016. This continued to
reflect significant net acquisition spend and dividends of £1.320
billion in the twelve months to 31 March 2017, and the impact of
the debt acquired on the merger with STW in Australia of
approximately £150 million, more than offsetting the improvements
in working capital seen in the second half of last year and first
quarter of this year
- Net new business of $2.103 billion
in the first quarter, compared to $1.779 billion in the first
quarter last year, with the Group first or second in net new
business league tables year to date
Current trading and outlook
- FY 2017 quarter 1 preliminary
revised forecasts | Similar to budget, with like-for-like
revenue and net sales growth of around 2%, with the second half
stronger reflecting weaker comparatives and a headline net sales
margin target of 0.3 margin points improvement on a constant
currency basis
- Dual focus in 2017 | 1. Revenue
and net sales growth from leading position in horizontality, faster
growing geographic markets and digital, premier parent company
creative and effectiveness position, new business and strategically
targeted acquisitions; 2. Continued emphasis on balancing revenue
growth with headcount increases and improvement in staff costs/net
sales ratio to enhance operating margins
- Long-term targets | Above
industry revenue growth, due to effective implementation of
horizontality, geographically superior position in new markets and
functional strength in new media, data investment management,
including data analytics and the application of new technology,
creativity and effectiveness; improvement in staff costs/net sales
ratio of 0.2 or more depending on net sales growth; net sales
operating margin expansion of 0.3 margin points or more on a
constant currency basis, with an ultimate goal of almost 20%; and
headline diluted EPS growth of 10% to 15% p.a. from revenue and net
sales growth, margin expansion, strategically targeted small- and
medium-sized acquisitions and share buy-backs
Review of quarter one
Revenue and net sales
In the first quarter of 2017, reported revenue was up 16.9% at
£3.597 billion. Revenue in constant currency was up 3.6%, the
difference to the reportable number primarily reflecting the
continuing weakness of the pound sterling against most currencies,
particularly over the last nine months, following the United
Kingdom vote to exit the European Union. On a like-for-like basis,
excluding the impact of acquisitions and currency fluctuations,
revenue was up 0.2%. Reported net sales were up 18.5%, up 4.8% in
constant currency and up 0.8% like-for-like. As outlined in
Preliminary Announcements for the last few years, due to the
increasing scale of digital media purchases within the Group’s
media investment management businesses and of direct costs in data
investment management, net sales are the more meaningful and
accurate reflection of top line growth, although currently only one
of our competitors report net sales. The differences are shown
below in a table that compares the Group’s like-for-like revenue
and net sales against our direct competitors’ like-for-like revenue
only performance over the last two years or so.
Q1
WPPRevenue
WPPNet Sales
OMCRevenue
PubRevenue
IPGRevenue
HavasRevenue
Revenue (local ‘m) £3,597 £3,100
$3,587 €2,328 $1,754
€519 Revenue ($'m) $4,423 $3,812
$3,587 $2.481 $1,754
$553 Growth Rates (%)* 0.2
0.8 4.4 -1.2 2.7
0.1 Quarterly like-for-like growth %*
Q1/15 5.2 2.5 5.1
0.9 5.7 7.1 Q2/15
4.5 2.1 5.3 1.4
6.7 5.5 Q3/15 4.6
3.3 6.1 0.7 7.1
5.5 Q4/15 6.7 4.9
4.8 2.8 5.2 3.1
Q1/16 5.1 3.2 3.8
2.9 6.7 3.4 Q2/16
3.5 4.3 3.4 2.7
3.7 2.7 Q3/16 3.2
2.8 3.2 0.2 4.3
2.0 Q4/16 0.5 2.1
3.6 -2.5 5.3 4.2 Q1/17
0.2 0.8 4.4
-1.2 2.7 0.1 2 Years cumulative
like-for-like growth %
Q1/15 12.2 6.3
9.4 4.2 12.3
10.1 Q2/15 14.7 6.5
11.1 1.9 11.4 13.4
Q3/15 12.2 6.3 12.6
1.7 13.4 11.5 Q4/15
14.5 7.0 10.7
6.0 10.0 6.6 Q1/16
10.3 5.7 8.9 3.8
12.4 10.5 Q2/16 8.0
6.4 8.7 4.1 10.4
8.2 Q3/16 7.8 6.1
9.3 0.9 11.4 7.5
Q4/16 7.2 7.0 8.4
0.3 10.5 7.3 Q1/17
5.3 4.0 8.2 1.7
9.4 3.5
* The above like-for-like/organic revenue figures are extracted
from the published quarterly trading statements issued by Omnicom
Group (“OMC”), Publicis Groupe (“Pub”), Interpublic Group (“IPG”)
and HAVAS (“Havas”)
The pattern of net sales growth in the first quarter of 2017, is
similar in part, to the final quarter of 2016, except North America
and data investment management were under more pressure. On a
like-for-like basis, the United Kingdom and Western Continental
Europe grew strongly, with Asia Pacific, Latin America, Africa
& the Middle East and Central & Eastern Europe more or less
flat and North America down. On the same basis, public relations
and public affairs and branding & identity, healthcare and
specialist communications (including digital, eCommerce &
shopper marketing) were the strongest sectors, with advertising and
media investment slightly down, following weaker comparative new
business trends towards the end of 2016 and a strong comparative
last year. Given the tepid economic growth prospects and the softer
net new business trend late last year, our budgets for 2017
indicated like-for-like revenue and net sales growth at around 2%.
For the first three months, actual performance was ahead of budget,
due to the stronger than budgeted performance across all sectors,
except data investment management. A preliminary look at our
quarter one revised forecasts for the full year, again indicates
revenue and net sales growth similar to budget at around 2%, with a
stronger second half primarily due to weaker comparatives,
approximately 2% in the second half of last year and 4% in the
first half.
Regional review
The pattern of revenue and net sales growth differed regionally.
The tables below give details of revenue and net sales, revenue and
net sales growth by region for the first quarter of 2017, as well
as the proportion of Group revenue and net sales by region;
Revenue analysis
£ million
2017 ∆ reported
∆ constant1
∆ LFL2
% group
2016 %
group N. America 1,376 15.5%
-0.2% -3.0% 38.2%
1,191 38.7% United Kingdom 473
4.8% 4.8% 3.2%
13.2% 451 14.7% W. Cont. Europe
727 18.0% 6.8%
5.3% 20.2% 616 20.0%
AP, LA, AME, CEE3
1,021 24.9% 6.1%
-0.1% 28.4% 818
26.6%
Total Group 3,597 16.9% 3.6%
0.2% 100.0% 3,076 100.0%
Net sales analysis
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group N. America 1,204
18.1% 2.1% -1.1% 38.8%
1,019 39.0% United Kingdom
396 5.6% 5.6% 3.7%
12.8% 375 14.3% W. Cont.
Europe 597 17.5% 6.1%
4.3% 19.3% 508
19.4% AP, LA, AME, CEE 903 26.6%
7.5% -0.1% 29.1%
714 27.3%
Total Group 3,100
18.5% 4.8% 0.8% 100.0% 2,616
100.0%
North America, with like-for-like revenue and net sales
growth down 3.0% and 1.1% respectively, was the weakest performing
region, with both advertising and media investment management and
data investment management weaker, partly offset by strong growth
in the Group’s public relations and public affairs, branding &
identity and digital, eCommerce and shopper marketing
businesses.
The United Kingdom, with like-for-like revenue and net
sales growth of 3.2% and 3.7% respectively, was stronger than the
first quarter of 2016, and net sales were slightly stronger than
the final quarter of last year. There was particularly strong
growth in the Group’s media investment management, data investment
management, public relations and public affairs and specialist
communications businesses.
Western Continental Europe was the strongest performing
region, with like-for-like revenue and net sales up 5.3% and 4.3%
respectively, well above the first quarter of last year, with above
average growth in Belgium, Germany, Greece and Italy, with Austria,
Ireland, the Netherlands, Spain and Turkey more challenging. By
sector, the Group’s advertising and media investment management,
public relations and public affairs, branding & identity,
healthcare and digital, eCommerce & shopper marketing
businesses performed strongly, with data investment management
flat.
Asia Pacific, Latin America, Africa & the Middle East and
Central & Eastern Europe constant currency revenue and net
sales were up 6.1% and 7.5% respectively, with like-for-like
revenue and net sales both marginally down 0.1%. In Asia Pacific,
all markets, except Greater China, Singapore and Malaysia grew
strongly. In mainland China, the Group’s advertising, public
relations and public affairs, branding & identity, healthcare
and specialist communications businesses were up strongly, with
parts of the Group’s media investment management, data investment
management and digital, eCommerce & shopper marketing sectors
under pressure. In India, the Group’s second largest market in the
region, net sales were up over 9%, despite demonetisation and even
against a particularly strong comparative last year, when
like-for-like net sales were up over 11%. In the
BRICs4, like-for-like net sales grew strongly in
Brazil, Russia and India but China slowed.
Latin America was similar to the first quarter of 2016,
with like-for-like net sales growth of just under 4%, with Brazil
recovering and with strong growth in Argentina and Colombia. Growth
in the Next 115 and CIVETS6 was over
10% for both, on the same basis, indicating the relative
strengthening of the smaller faster growth markets.
In the first quarter of 2017, the seasonally smallest quarter
for faster growth markets, 29.1% of the Group’s reported net sales
came from Asia Pacific, Latin America, Africa & the Middle East
and Central & Eastern Europe. This compares with 27.3% in the
first quarter of 2016. The increase is primarily due to the merger
of STW Communications Group Limited (STW) in April 2016, whereby
STW became a subsidiary of the Group, the largest advertising and
marketing services business in Australia and New Zealand and WPP’s
fifth largest market, with revenue of over $800 million. This was
partly offset by the lower rate of growth seen in the major faster
growth markets than that seen in the mature Western markets in the
first quarter, and the weakness of most faster growth market
currencies. This performance in the first quarter compares with the
Group’s strategic objective of 40-45% in the next three to four
years.
Business sector review
The pattern of revenue and net sales growth also varied by
communications services sector and operating brand. The tables
below give details of revenue and net sales, revenue and net sales
growth by communications services sector for the first quarter of
2017, as well as the proportion of Group revenue and net sales by
those sectors;
Revenue analysis
£ million
2017 ∆ reported
∆ constant7
∆ LFL8
% group
2016 %
group
AMIM9
1,672 20.6% 7.1%
0.2% 46.5% 1,387
45.1% Data Inv. Mgt. 639 7.9%
-4.3% -3.4% 17.8%
592 19.2%
PR & PA10
291 21.7% 6.8%
4.4% 8.1% 239
7.8%
BI, HC & SC11
995 15.9% 2.4%
1.4% 27.6% 858
27.9%
Total Group 3,597 16.9%
3.6% 0.2% 100.0% 3,076 100.0%
Net sales analysis
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group AMIM 1,364 21.6%
7.7% -0.3% 44.0%
1,122 42.9% Data Inv. Mgt. 484
11.7% -1.3% -0.8%
15.6% 433 16.5% PR & PA
282 20.7% 6.0%
3.9% 9.1% 234 9.0%
BI, HC & SC 970 17.3%
3.7% 2.2% 31.3% 827
31.6%
Total Group 3,100 18.5%
4.8% 0.8% 100.0% 2,616 100.0%
In the first quarter of 2017, over 39% of the Group’s revenue
came from digital, up almost 1.0 percentage point from the previous
year, with net sales crossing 40% of the Group for the first time,
in the range of the Group’s strategic objective of 40-45% in the
next three to four years. Digital revenue across the Group was up
almost 6% in constant currency and over 4% like-for-like.
Advertising and Media Investment Management
In constant currencies, advertising and media investment
management revenue grew by 7.1% with like-for-like growth of 0.2%,
partly reflecting weaker trading conditions in the Group’s media
investment management businesses in North America and the Middle
East and the particularly strong comparative in the first quarter
of last year of almost 8% like-for-like growth. On the same basis,
net sales grew 7.7% and -0.3% respectively. The Group’s media
investment management businesses grew strongly in all other regions
and sub-regions, particularly in the United Kingdom, Western
Continental Europe, Latin America and Africa. However, the Group’s
advertising businesses has remained challenged in the mature
markets in recent years, particularly Western Continental Europe,
where some of the restructuring costs incurred in recent years have
been directed.
The Group gained a total of $2.103 billion in net new business
wins (including all losses) in the first quarter, compared to
$1.779 billion in the same period last year. Of this, J. Walter
Thompson Company, Ogilvy & Mather, Y&R and Grey generated
net new business billings of $519 million. Also, of the Group
total, GroupM, the Group’s media investment management company,
which includes Mindshare, MEC, MediaCom, Maxus, GroupM Search,
Xaxis and Essence, together with tenthavenue, generated net new
business billings of $1.259 billion, compared to $854 million in
the same period last year.
Data Investment Management
On a constant currency basis, data investment management revenue
fell 4.3%, with like-for-like revenue down 3.4%. The decline in net
sales was less prominent, with constant currency net sales -1.3%
and like-for-like -0.8%. In the United Kingdom, Latin America and
Africa, like-for-like net sales were up strongly, with North
America and Asia Pacific more difficult.
Public Relations and Public Affairs
In constant currencies, public relations and public affairs
revenue and net sales were up 6.8% and up 6.0% respectively, with
like-for-like revenue and net sales up 4.4% and 3.9% respectively,
the strongest performing sector. All regions and sub-regions were
up, with particularly strong growth in the United States, United
Kingdom, Western Continental Europe and the Middle East. Cohn &
Wolfe performed strongly, especially in the United States, driven
by consumer and healthcare spending, together with H+K Strategies
in Europe, Africa & the Middle East, Ogilvy Public Relations in
North America, Europe, Africa & the Middle East and the
specialist public relations and public affairs businesses, Glover
Park, Hering Schuppener, Ogilvy Government Relations and
Buchanan.
Branding and Identity, Healthcare and Specialist
Communications
In constant currencies, at the Group’s branding and identity,
healthcare and specialist communications businesses (including
digital, eCommerce & shopper marketing), net sales growth was
3.7%, with like-for-like growth of 2.2%, the second strongest
performing sector. All of the Group’s businesses in this sector,
except parts of the Group’s specialist communications businesses,
grew in the first quarter, with particularly strong growth in the
Group’s branding & identity and digital, eCommerce &
shopper marketing businesses.
Operating profitability
In the first quarter, on a constant currency basis, revenue, net
sales and operating profits were well ahead of budget and ahead of
last year. Severance costs were at a very similar level with
increased incentive accruals, when compared with the first quarter
of last year.
We are in the process of reviewing our quarter one preliminary
revised forecasts, but early indications are that full year
like-for-like revenue and net sales will be up around 2%, with a
stronger second half reflecting the comparatively weaker second
half of 2016.
The number of people in the Group, on a proforma basis excluding
associates, was down slightly at 31 March 2017 to 134,340, as
compared to 135,303 on 31 March 2016, against an increase in
revenue on the same basis of 0.2% and net sales of 0.8%. Similarly,
the average number of people in the Group in the first quarter of
this year was down slightly to 134,807 compared to 135,351 for the
same period last year. Since 1 January 2017, on a like-for-like
basis, the number of people in the Group has fallen to 134,340 at
31 March 2017 from 135,038 at the start of this year, reflecting
continued caution by the Group’s operating companies in hiring and
the usual seasonality of a relatively smaller first quarter in
comparison to all other quarters. As noted above, the preliminary
quarter one revised forecast indicates an approximately 2%
improvement in revenue and net sales, whilst forecast headcount at
the end of the year remains well balanced.
Balance sheet highlights
The Group continues to implement its strategy of using free cash
flow to enhance share owner value through a balanced combination of
capital expenditure, acquisitions, share repurchases and dividends.
In the twelve months to 31 March 2017, the Group’s free cash flow
was over £1.6 billion (over $2.0 billion). Over the same period,
acquisitions, share repurchases and dividends was over £1.8 billion
(over $2.3 billion).
During the quarter, 10.0 million shares, or 0.8% of the issued
share capital, were purchased at a cost of £180 million and an
average price of £17.91, 2.0 million shares being held as Treasury
stock and 8.0 million shares held by the ESOP Trusts.
Average net debt in the first quarter of 2017 was £4.544
billion, compared to £4.091 billion in 2016, at 2017 exchange
rates, an increase of £453 million. Net debt at 31 March 2017 was
£5.008 billion, compared to £4.534 billion in 2016 (at 2017
exchange rates), an increase of £474 million. The increased average
and period end debt figures, reflect both the significant net
acquisition spend of £704 million and dividends of £616 million in
the twelve months to 31 March 2017, and the impact of the debt
acquired on the merger with STW in Australia of approximately £150
million, more than offsetting the improvements in working capital.
The net debt figure of £5.008 billion at 31 March, compares with a
market capitalisation of approximately £22.022 billion, giving an
enterprise value of £27.030 billion.
As outlined in the 2015 Preliminary Announcement, the
achievement of the previous targeted pay-out ratio of 45% one year
ahead of schedule, raised the question of whether the pay-out ratio
target should be increased further. Following that review, your
Board decided to up the dividend pay-out ratio to a target of 50%,
to be achieved by 2017, and as a result, dividends increased by an
overall 17.0% in relation to 2015, and a dividend pay-out ratio of
47.7%. In 2016, dividends increased overall by a further 26.7%
(including the proposed final dividend of 37.05p), reaching the
recently targeted pay-out ratio of 50% one year ahead of schedule.
Your Board will continue to review the question of whether the
dividend pay-out ratio should be further increased, although any
increase has to be balanced against the continuing attractive
opportunities to reinvest retained earnings in the business.
Acquisitions
In line with the Group’s strategic focus on new markets, new
media and data, the Group completed 14 transactions in the first
quarter; 7 acquisitions and investments were in new markets and 10
in quantitative and digital and 1 were driven by individual client
or agency needs. Out of these transactions, 4 were in new markets
and quantitative and digital.
Specifically, in the first quarter of 2017, acquisitions and
increased equity stakes have been completed in advertising and
media investment management in the United States, Croatia,
China and India; data investment management in the United
Kingdom and Ireland; in digital, eCommerce & shopper
marketing in the United States, the United Kingdom, Ireland and
China.
A further acquisition has been completed since 31 March in
digital, eCommerce & shopper marketing in the United
States.
Outlook
Macroeconomic and industry context
2016, the Group’s thirty first year, was another record year,
following successive post-Lehman record years in 2011, 2012, 2013,
2014 and 2015, six record years in a row, despite a generally low
global growth or tepid environment. Top line growth remained
strong, with operating profits and margins meeting and exceeding
targets and all regions and sectors showing growth on almost all
metrics. 2017 has started more slowly, with like-for-like net sales
growth of just under 1%, but with renewed and encouraging net new
business wins, confidential assignments globally, in the United
States and the Middle East, and further wins to be announced and
opportunities to be explored over the coming months.
Generally, the world seems trapped currently in a nominal GDP
growth range of 3.0-4.0%. Historically, the BRICs or Next 11,
located in Asia Pacific, Latin America, Africa & the Middle
East and Central & Eastern Europe offered higher growth rates.
After all, that is where the next billion middle-class consumers
will come from. However, in the last few years Brazil, Russia and
China have all faced various challenges and slowed, although India
remains the one BRIC star currently continuing to shine. Whilst
that diminishing growth gap has been countered somewhat by better
prospects in the Next 11, CIVETS and MIST markets like Mexico,
Colombia, Vietnam, Indonesia, the Philippines, South Africa, Turkey
and Egypt, the growth rates of the mature markets of the United
States, the United Kingdom and Western Continental Europe have also
improved, albeit from relatively low levels of growth. That
continues to be the case with the short to medium-term prospects in
the United States, at least, strengthening under the Trump
administration, which is much more strongly pro-business, much more
business-connected than the Obama administration, outlining planned
pro-growth tax, infrastructure investment, spending and regulatory
reform, although implementation seems to have been delayed. The
prospects in the United Kingdom are more mixed as the post-Brexit
vote scenarios will play out over the next two years and
uncertainties about the possible outcomes increase, although a
successful outcome for the incumbent Government in the forthcoming
General Election should provide more wiggle room to negotiate a
deal around a transition agreement and/or free movement and keep
Tory hard-line Brexiteers in check. The four leading Western
Continental European economies, Germany, France, Italy and Spain,
also all face political uncertainty, although Germany and Spain are
strengthening economically.
In these circumstances, clients face challenging top line growth
opportunities and uncertainties. And although inflation may pick up
in the United States because of stimulative economic policy and in
the United Kingdom because of the weakness of sterling, generally
inflation remains at low levels, resulting in limited pricing
power. As a result, there remains considerable focus on the
short-term and cost and the finance and procurement functions are
dominant, certainly equal or more powerful than marketing, rightly
or wrongly, and the siren calls of consultants suggest cost based
solutions.
In addition, if you are running an established business, you are
faced with three simultaneous discombobulating forces -
technological disruption from disintermediators, those like Uber or
Airbnb or Amazon in the transportation, hospitality and retail
industries; the zero-based budgeting techniques of companies like
3G Capital, Reckitt Benckiser and Coty in consumer package goods
and Valeant and Endo in the pharmaceutical industries (although
their models have become somewhat discredited); and, finally, the
attentions of activist investors such as Nelson Peltz, Bill Ackman
or Dan Loeb. These pressures have intensified recently, in the last
three to six months with a perfect storm being created by this
trifecta of forces, reflected, for example, in the significant
psychological impacts of the aborted Kraft Heinz bid for Unilever
and the Trian investment in Procter & Gamble. And these winds
are unlikely to shift or abate until interest rates return to more
normal historical levels. They are causing the distortions that
investors like Warren Buffett identified many years ago. The slow
but solid growth prospects of baked beans or tomato ketchup are
attractive, when you can borrow long-term at virtually zero
interest rates.
Not helping either in focusing on the long-term, is the average
term life of S&P 500 and FTSE 100 CEOs at 6-7 years, CFOs at
4-5 years and CMOs at 2-3 years. As a result, it is not surprising
that since Lehman at the end of 2008, the combined level of
dividend payments and share buybacks as a proportion of retained
earnings at the S&P 500 has steadily risen from around 60 per
cent of retained earnings to over 100%. In effect, managements are
abrogating responsibility for reinvesting retained profits to their
institutional investors. In fact, in seven of the last eight
quarters the ratio has exceeded or almost reached 100%, tapering
off in the last two quarters as stock market indices and share
prices reached new highs and the relative attraction of buy-backs
lessened.
This emphasis on the short-term and consequent disinclination to
invest for the long-term may be misplaced. Our over ten-year
experience of measuring brand valuation clearly shows that the
strongest innovators and strongest brands generate the strongest
top line growth and total shareholder returns. If you had invested
equally over the last decade in the top ten brands identified by
our annual Financial Times/Millward Brown BrandZ Top 100 Most
Valuable Global Brands survey, you would have outperformed the
S&P 500 index by over 50% and the MSCI by over three and a half
times, more than most, if not all, active or passive money managers
can claim. Investing in innovation and strong brands yields
enhanced returns. Perhaps surprisingly, corporate structures that
seem to offend customary good corporate governance may deliver
better long-term results. Controlled companies like the Murdochs’
Newscorp and Fox or the Roberts’ Comcast or Zuckerberg’s Facebook
or Brin & Page’s Google or Bezos’ Amazon or, now, Spiegel’s
Snap may provide the confidence and stability needed to take the
appropriate level of risk.
Given this macro-economic background, it is not surprising that
clients are generally grinding it out in a highly competitive
ground game, rarely resorting to a passing game or Hail Marys. Both
volume and price-based growth are hard to find. Recently reported
calendar 2016 and first quarter 2017 results generally reflect
this, for example, in the auto, retail, consumer package goods and
pharmaceutical industries. Although top line growth may be hard to
find and sales guidance missed or just met, bottom lines are met or
exceeded. As top line growth opportunities become more and more
pressurised, acquisitions and mergers become even more attractive
as a growth opportunity, particularly if they present opportunities
for significant cost synergies and relatively unleveraged balance
sheets can be supplemented by still historically low cost long-term
debt. One, no doubt self-interested, investment banker raised the
possibility of the first $100 billion cash/debt financed
acquisition to surpass the previous world record $60 billion
Bayer/Monsanto deal.
Our industry is no different. Competition is fierce and as image
in trade magazines, in particular, is crucial to many, account wins
at any cost are paramount. There have been several examples
recently of major groups being prepared to offer clients up-front
discounts as an inducement to renew contracts, heavily reduced
creative and media fees, extended payment terms, unlimited indirect
liability for intellectual property liability and cash or pricing
guarantees for media purchasing commitments, even though the latter
are difficult for procurement departments to measure and monitor.
As some say, you are only as strong as your weakest competitor.
These practices cannot last and will only result eventually in poor
financial performance and further consolidation, the premium being
on long-term profitable growth. Our industry may be in danger of
losing the plot. Once you accept benchmarking as a means of
evaluation you become a cost and are viewed as a source of funding
or insurance, rather than an investment or value added and recent
industry results have reflected this increased pressure and
inconsistencies. Some are storing up problems for the next
generation of management.
Not surprising then that your Company's top line revenue and net
sales organic growth continues to hover around the 3% level and on
a cumulative basis for the last two years around 6%, as it has done
in previous sets of consecutive years. In the first half of 2016
growth was around 4%, due to weaker comparatives and in the second
half at around 2% due to stronger comparatives.
2017 is unlikely to be much different. There seems little reason
for an upside breakout in growth in terms of worldwide GDP growth,
or indeed a downside breakout, despite the possibility of an
increase in interest rates in the short-term. Interest rates are
likely to continue to remain at historically low relative levels,
longer than some think. Whilst Trumponomics may well result in an
increase in the United States GDP growth rate and the United States
is the biggest ($18 trillion) GDP engine out of a total of $74
trillion worldwide, political uncertainties in Europe, West and
East, the Middle East, the PyeongChang Peninsula, Chinese focus on
qualitative growth and the longer-term recovery of Latin America,
probably mean that stronger growth will be harder to find outside
the United States. America First, if the new Administration’s plans
are implemented, will almost definitely mean a stronger American
economy, at least in the short- to medium-term.
2017 is neither a maxi- or mini-quadrennial year, although it
will be somewhat influenced by the build-up for the Russian World
Cup and the mid-term Congressional elections, both in 2018 and,
perhaps, the PyeongChang Winter Olympics. Nominal GDP growth should
continue to grow in the 3.0-4.0% range, with advertising as a
proportion remaining constant overall, with mature markets
continuing at lower than pre-Lehman levels, counter-balanced by
under-branded faster growth markets growing at faster rates. In our
own case, budgets indicate top line revenue and net sales growth of
around 2%, reflecting the impact of a lower net new business record
in the latter part of 2016, although new business activity and
conversion rates have recently started to improve.
Financial guidance
The budgets for 2017 have been prepared on a cautious basis as
usual (hopefully), but continue to reflect the faster growing
geographical markets of Asia Pacific, Latin America, Africa &
the Middle East and Central & Eastern Europe and faster growing
functional sub-sector of digital, eCommerce & shopper
marketing, with a stronger second half of the year, reflecting the
2016 comparative. Our quarter one preliminary revised forecasts are
in line with budget at the net sales level and show the
following;
- Like-for-like revenue and net sales
growth of around 2%
- Target operating margin to net sales
improvement of 0.3 margin points excluding the impact of
currency
In 2017, our prime focus will remain on growing revenue and net
sales faster than the industry average, driven by our leading
position in horizontality, faster growing geographic markets and
digital, premier parent company creative and effectiveness
position, new business and strategically targeted acquisitions. At
the same time, we will concentrate on meeting our operating margin
objectives by managing absolute levels of costs and increasing our
flexibility in order to adapt our cost structure to significant
market changes and by ensuring that the benefits of the
restructuring investments taken in 2015 and 2016 continue to be
realised. The initiatives taken by the parent company in the areas
of human resources, property, procurement, information technology
and practice development continue to improve the flexibility of the
Group’s cost base. Flexible staff costs (including incentives,
freelance and consultants) remain close to historical highs of
above 8% of net sales and continue to position the Group extremely
well should current market conditions deteriorate.
The Group continues to improve co-operation and co-ordination
among its operating companies in order to add value to our clients’
businesses and our people’s careers, an objective which has been
specifically built into short-term incentive plans. We have decided
that up to half of operating company incentive pools are funded and
allocated on the basis of Group-wide performance in 2016 and
beyond. Horizontality has been accelerated through the appointment
of 48 global client leaders for our major clients, accounting for
over one third of total revenue of almost $20 billion and 19
regional and country managers in a growing number of test markets
and sub-regions, covering about half of the 112 countries in which
we operate.
Focus has been laid on the areas of media investment management,
healthcare, sustainability, government, new technologies, new
markets, retailing, shopper marketing, internal communications,
financial services and media and entertainment. The Group continues
to lead the industry, in co-ordinating communications services
geographically and functionally through parent company initiatives
and winning Group pitches. Whilst talent and creativity (in the
broadest sense) remain key potential differentiators between us and
our competitors, increasingly differentiation can also be achieved
in three additional ways – through application of technology, for
example, Xaxis, AppNexus and Triad; through integration of data
investment management, for example, Kantar and comScore (now merged
with Rentrak); and through investment in content companies, for
example, Imagina, Imagine, Vice, Media Rights Capital, Fullscreen,
Indigenous Media, China Media Capital, Bruin and Refinery29.
In addition, strong and considered points of view on the
adequacy of online and, indeed, offline measurement, on
viewability, on internet fraud and transparency, on online media
placement and brand safety and, finally, on fake news are all
examples where further differentiation is important and can be
secured through considered initiatives. With its leadership
position, as the world's largest media investment management
operation, GroupM has developed a strong united point of view with
its leading clients and associates, like AppNexus, in all these
areas and has aligned with Kantar's data investment management
capabilities, for example, through comScore, to provide better
capabilities. These philosophical differences and operational
capabilities are extremely effective in responding to the trade
association and regulatory issues that have been raised
recently.
Our business remains geographically and functionally well
positioned to compete successfully and to deliver on our long-term
targets:
- Revenue and net sales growth greater
than the industry average
- Improvement in net sales margin of 0.3
margin points or more, excluding the impact of currency, depending
on net sales growth and staff costs to net sales ratio improvement
of 0.2 margin points or more
- Annual headline diluted EPS growth of
10% to 15% p.a. delivered through revenue growth, margin expansion,
acquisitions and share buy-backs
This announcement has been filed at the Company Announcements
Office of the London Stock Exchange and is being distributed to all
owners of Ordinary shares and American Depository Receipts. Copies
are available to the public at the Company’s registered office.
The following cautionary statement is included for safe harbour
purposes in connection with the Private Securities Litigation
Reform Act of 1995 introduced in the United States of America. This
announcement may contain forward-looking statements within the
meaning of the US federal securities laws. These statements are
subject to risks and uncertainties that could cause actual results
to differ materially including adjustments arising from the annual
audit by management and the Company’s independent auditors. For
further information on factors which could impact the Company and
the statements contained herein, please refer to public filings by
the Company with the Securities and Exchange Commission. The
statements in this announcement should be considered in light of
these risks and uncertainties.
1Percentage change at constant currency exchange
rates2Like-for-like growth at constant currency exchange rates and
excluding the effects of acquisitions and disposals3Asia Pacific,
Latin America, Africa & Middle East and Central & Eastern
Europe4 Brazil, Russia, India and China, which accounted for over
$560 million revenue, including associates, in the first quarter5
Bangladesh, Egypt, Indonesia, South Korea, Mexico, Nigeria,
Pakistan, Philippines, Vietnam and Turkey (the Group has no
operations in Iran), which accounted for almost $200 million
revenue, including associates, in the first quarter6 Colombia,
Indonesia, Vietnam, Egypt, Turkey and South Africa, which accounted
for over $200 million revenue, including associates, in the first
quarter7Percentage change at constant currency exchange
rates8Like-for-like growth at constant currency exchange rates and
excluding the effects of acquisitions and disposals9Advertising,
Media Investment Management10Public Relations & Public
Affairs11Branding and Identity, Healthcare and Specialist
Communications
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170427005695/en/
For WPPSir Martin Sorrell, Paul Richardson, Lisa Hau, Feona
McEwan, Chris Wade+44 20 7408 2204orKevin McCormack, Fran Butera+1
212 632 2235orJuliana Yeh+852 2280 3790www.wppinvestor.com
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