- Third quarter reported revenue up
1.1% at £3.649 billion, up 0.8% at $4.780 billion, down 4.2% at
€4.067 billion and up 9.3% at ¥531 billion
- Third quarter constant currency
revenue down 0.4%, like-for-like revenue down 2.0%
- Third quarter constant currency net
sales up 0.9%, like-for-like net sales down 1.1%
- Nine months reported revenue up 8.9%
at £11.053 billion, flat at $14.107 billion, up 0.4% at €12.676
billion and up 3.3% at ¥1.578 trillion
- Nine months constant currency
revenue up 1.1%, like-for-like revenue down 0.9%
- Nine months constant currency net
sales up 1.7%, like-for-like net sales down 0.7%
- Nine months reported operating
margin up 0.1 margin points, flat in constant currency, up 0.1
margin points like-for-like
- Preliminary quarter 3 revised
forecast indicates like-for-like revenue growth, net sales growth
and constant currency operating margin broadly flat for the
year
- Average constant currency net debt
up by £519 million for the first nine months of 2017 to £5.036
billion, primarily reflecting continued significant acquisition
activity and share buy-backs
- Net new business of $6.363 billion
in first nine months compared to $5.374 billion in the same period
last year, with the Group leading net new business league
tables
- Share buy-backs of £396 million in
the first nine months, up from £342 million in the same period last
year, representing 1.9% of the issued share capital, against a full
year target of 2.0-3.0%
WPP (NASDAQ:WPPGY) today reported its 2017 Third Quarter Trading
Update.
Revenue analysis
£ million
2017
∆ reported
∆ constant1
∆ LFL2
Acquisitions
2016
First quarter
3,597
16.9% 3.6% 0.2%
3.4% 3,076
Second quarter
3,807 10.0% 0.3% -0.8%
1.1% 3,460
First half
7,404 13.3% 1.9%
-0.3% 2.2% 6,536
Third quarter
3,649 1.1% -0.4%
-2.0% 1.6% 3,611
First nine
months 11,053 8.9% 1.1% -0.9%
2.0% 10,147
Net sales analysis
£ million
2017 ∆ reported ∆ constant
∆ LFL Acquisitions
2016 First quarter 3,100
18.5% 4.8% 0.8%
4.0% 2,616
Second quarter
3,262 9.5% -0.2%
-1.7% 1.5% 2,978
First
half 6,362 13.7% 2.2%
-0.5% 2.7%
5,594
Third quarter 3,190 2.4%
0.9% -1.1% 2.0%
3,114
First nine months 9,552
9.7% 1.7% -0.7% 2.4% 8,708
Quarter 3 and first nine months highlights
- Reported quarter 3 revenue growth of
1.1% in sterling, with constant currency down 0.4%, 1.6% growth
from acquisitions and 1.5% from currency. The latter reflects the
comparative strengthening of the pound sterling against most
currencies, compared with the first half, as we are now lapping the
impact of the weakness in the pound sterling, following the United
Kingdom vote to exit the European Union in June 2016
- Reported quarter 3 net sales growth
of 2.4% in sterling, with constant currency growth of 0.9%,
2.0% growth from acquisitions and 1.5% from currency
- Constant currency revenue growth in
quarter 3 in the United Kingdom and Western Continental Europe and
advertising and media investment management, with particularly
strong growth geographically in the United Kingdom and sub-regions
Canada, Latin America, the Middle East and Central & Eastern
Europe. Functionally, advertising and media investment management,
branding & identity and parts of the Group’s specialist
communications businesses were also stronger
- Like-for-like net sales in quarter 3
were down 1.1%, an improvement on the second quarter and
compared with -0.5% in the first half, with the gap compared to
revenue growth in the third quarter widening compared to the first
half, but narrower than last year, as the Group’s investment in
technology continued to enhance the growth of advertising and media
investment management net sales and as data investment management
direct costs have been reduced
- Reported operating profits in the
first nine months up strongly on last year with operating
margins up 0.1 margin points. On a constant currency basis
operating profits were up slightly, with flat comparative operating
margins and like-for-like operating margins up the same as
reported
- Average net debt for the first nine
months increased by £519 million to £5.036 billion compared to
last year, at 2017 constant rates, continuing to reflect
significant net acquisition spend and share repurchases of £1.218
billion in the twelve months to 30 September 2017, compared with
£846 million in the previous twelve months, which, together with
increased dividends of £144 million over the same period, more than
offset improvements in working capital
- Continued net new business momentum,
with wins of $2.117 billion in the third quarter and $6.363
billion in the first nine months, up significantly on the first
nine months of last year
- Continued implementation of growth
strategy with revenue ratios for fast growth markets and new
media raised to 40-45% over the next three to four years, and
currently at 30% and 40% respectively. Quantitative revenue target
of 50% already achieved
Current trading and outlook
- FY 2017 quarter 3 revised
forecast will be formally reviewed in the first two weeks in
November, but indicates broadly flat like-for-like revenue and net
sales growth, with the gap between revenue and net sales growth
narrowing further. Headline net sales operating margin improvement
now targeted flat in constant currency
- Dual focus continues despite
short-term pressures | 1. Stronger than competitor revenue and
net sales growth due to leading position in both faster growing
geographic markets and digital, premier parent company creative
position, new business, horizontality and strategically targeted
acquisitions; 2. Continued emphasis on balancing revenue and net
sales growth with headcount increases and improvement in staff
costs to net sales ratio to enhance operating margins
- Long-term targets remain | Above
industry revenue and net sales growth due to geographically
superior position in new markets and functional strength in new
media, in data investment management, including data analytics and
the application of new technology, creativity, effectiveness and
horizontality; improvement in staff cost to net sales ratio
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 three and first nine months
Revenue
As shown in the table below, in the third quarter of 2017,
reported revenue was up 1.1% at £3.649 billion. Revenue in constant
currency was down 0.4% compared with last year, the difference to
the reportable number reflecting the comparative strengthening of
the pound sterling against most currencies, compared with the first
half, as we are now lapping the impact of weakness in the pound
sterling, following the United Kingdom vote to exit the European
Union in June 2016. On a like-for-like basis, excluding the impact
of acquisitions and currency fluctuations, revenue was down 2.0%,
compared with -0.8% in quarter two. Geographically, like-for-like
revenue growth in the third quarter was stronger in the United
Kingdom, with all other regions, particularly North America,
slipping back. Latin America and Central & Eastern Europe grew
strongly with Africa & the Middle East also up, but Asia
Pacific was more difficult. Functionally, all sectors, except data
investment management, performed less well compared with the second
quarter, with data investment management, branding and identity and
parts of the Group’s specialist communications businesses showing
improvement over the second quarter.
In the first nine months, reported revenue was up 8.9% at
£11.053 billion. Revenue in constant currency was up 1.1%, the
difference to the reportable number continuing to reflect the
relative weakness of the pound sterling against most currencies,
particularly in the first half, but less so in the third
quarter.
On a like-for-like basis, excluding the impact of acquisitions
and currency fluctuations, revenue was down 0.9% compared with the
same period last year, with net sales down 0.7%, with the
difference compared to revenue growth widening in the third
quarter, contrary to the trend seen in the first half.
First nine months
WPPRevenue
WPP NetSales
OMCRevenue
PubRevenue
IPGRevenue
HavasRevenue
DentsuRevenue
Revenue (local ‘m) £11,053 £9,552
$11,097 €7,107 $5,541
n/a ¥* Revenue ($'m)
$14,107 $12,192 $11,097
$7,896 $5,541 n/a $*
Growth Rates (%)* -0.9 -0.7
3.5 0.3 1.1 n/a
n/a Quarterly like-for-like growth%*
Q1/15 5.2
2.5 5.1 0.9 5.7
7.1 6.2 Q2/15 4.5
2.1 5.3 1.4 6.7
5.5 6.5 Q3/15 4.6
3.3 6.1 0.7 7.1
5.5 4.2 Q4/15 6.7
4.9 4.8 2.8 5.2
3.1 10.6 Q1/16 5.1
3.2 3.8 2.9 6.7
3.4 5.1 Q2/16 3.5
4.3 3.4 2.7 3.7
2.7 9.5 Q3/16 3.2
2.8 3.2 0.2 4.3
2.0 2.7 Q4/16 0.5
2.1 3.6 -2.5 5.3
4.2 3.9 Q1/17 0.2
0.8 4.4 -1.2 2.7
0.1 3.9 Q2/17 -0.8
-1.7 3.5 0.8 0.4
-0.9 -4.8 Q3/17 -2.0
-1.1 2.8 1.2
0.5 n/a n/a 2 Years cumulative
like-for-like growth %
Q1/15 12.2 6.3 9.4
4.2 12.3 10.1 n/a
Q2/15 14.7 6.5 11.1
1.9 11.4 13.4
n/a Q3/15 12.2 6.3
12.6 1.7 13.4 11.5
n/a Q4/15 14.5 7.0
10.7 6.0 10.0 6.6
n/a Q1/16 10.3 5.7
8.9 3.8 12.4 10.5
11.3 Q2/16 8.0 6.4
8.7 4.1 10.4 8.2
16.0 Q3/16 7.8 6.1
9.3 0.9 11.4 7.5
6.9 Q4/16 7.2 7.0
8.4 0.3 10.5 7.3
14.5 Q1/17 5.3 4.0
8.2 1.7 9.4 3.5
9.0 Q2/17 2.7 2.6
6.9 3.5 4.1 1.8
4.7 Q3/17 1.2 1.7
6.0 1.4 4.8 n/a
n/a * The above like-for-like/organic revenue figures
are extracted from the published quarterly trading statements
issued by Omnicom Group (“OMC”), Publicis Groupe (“Pub”) and
Interpublic Group (“IPG”). HAVAS (“Havas”) was acquired by Vivendi
and no longer provides separate financial information. Dentsu
(“Dentsu”) is due to report Q3 figures in November 2017.
Regional review
The pattern of revenue growth differed regionally. The tables
below give details of revenue and net sales and revenue and net
sales growth by region for the third quarter and first nine months
of 2017, as well as the proportion of Group revenue and net sales
by region;
Revenue analysis – Third Quarter
£ million
2017 ∆ reported
∆ constant3
∆ LFL4
% group
2016 %
group N. America 1,317 -1.9%
-2.4% -5.1% 36.1%
1,342 37.2% United Kingdom 475
3.1% 3.1% 1.8%
13.0% 461 12.8% W. Cont Europe
742 5.7% 1.2%
-0.9% 20.3% 702 19.4%
AP, LA, AME, CEE5
1,115 0.8% -0.3%
-0.4% 30.6% 1,106
30.6%
Total Group 3,649 1.1% -0.4%
-2.0% 100.0% 3,611 100.0%
Revenue analysis – First Nine Months
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group N. America 4,084
8.0% -1.1% -3.7% 36.9%
3,783 37.3% United Kingdom
1,454 4.8% 4.8%
3.6% 13.2% 1,388 13.7% W.
Cont Europe 2,235 9.4%
1.6% 0.2% 20.2% 2,043
20.1% AP, LA, AME, CEE 3,280
11.8% 2.0% 0.1%
29.7% 2,933 28.9%
Total Group
11,053 8.9% 1.1% -0.9% 100.0%
10,147 100.0%
Net sales analysis – Third Quarter
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group N. America 1,157
-1.4% -1.9% -4.9% 36.3%
1,173 37.6% United Kingdom
405 2.8% 2.8% 2.0%
12.7% 394 12.7% W. Cont
Europe 629 8.5% 3.8%
1.6% 19.7% 580
18.6% AP, LA, AME, CEE 999 3.2%
2.1% 0.9% 31.3%
967 31.1%
Total Group 3,190
2.4% 0.9% -1.1% 100.0% 3,114
100.0%
Net sales analysis – First Nine Months
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group N. America 3,566
8.9% -0.2% -3.1% 37.3%
3,276 37.6% United Kingdom
1,219 4.2% 4.2%
3.2% 12.7% 1,169 13.4% W.
Cont Europe 1,859 9.9%
1.9% 0.3% 19.5% 1,692
19.4% AP, LA, AME, CEE 2,908
13.1% 3.1% 0.1%
30.5% 2,571 29.6%
Total Group
9,552 9.7% 1.7% -0.7% 100.0%
8,708 100.0%
North America, with constant currency revenue down 2.4%
and like-for-like down 5.1% in the third quarter, was worse than
the -3.0% like-for-like growth in both quarter two and the first
half, with further softness across almost all of the Group’s
businesses, although data investment management and parts of the
Group’s specialist communications businesses showed an improving
trend compared with the second quarter. Net sales were down 1.9% in
constant currency and down 4.9% like-for-like, showing a similar
trend to revenue. North America remains our biggest geographical
area of concern and focus.
The United Kingdom, with constant currency revenue
growth of 3.1% and like-for-like growth of 1.8% in the third
quarter, was the strongest performing region, but slowed compared
with quarter two like-for-like growth of 5.8% and first half
like-for-like growth of 4.5%. The Group’s media investment
management, branding & identity, healthcare and specialist
communications businesses (including digital, eCommerce and shopper
marketing) grew strongly, with public relations and public affairs
softer. Net sales showed a similar pattern, up 2.0% like-for-like,
compared with 4.0% in the second quarter and 3.8% for the first
half.
Western Continental Europe showed marked improvement over
the second quarter, with constant currency revenue growth of 1.2%
and like-for-like down 0.9%, compared with -2.5% and -3.2%
respectively in quarter two. Denmark, Italy, the Netherlands,
Norway, Portugal and Spain showed an improving trend compared with
the second quarter, but the region continues to reflect differing
political and macro-economic conditions. Net sales growth was
stronger with constant currency up 3.8% and up 1.6% like-for-like
in the third quarter, compared with 1.0% and -0.3% respectively for
the first half.
Asia Pacific, Latin America, Africa & the Middle East and
Central & Eastern Europe showed some weakening in the third
quarter, with constant currency revenue down 0.3% and like-for-like
down 0.4%, compared with 3.2% and 0.3% respectively in the first
half. Latin America, Africa & the Middle East and Central &
Eastern Europe improved significantly in the third quarter, with
Asia Pacific more difficult as China and India came under pressure.
Net sales were stronger than revenue, up 2.1% in constant currency
and up 0.9% like-for-like, compared with 0.6% and -0.4% in quarter
two.
In the first nine months of 2017, 29.7% of the Group’s revenue
came from Asia Pacific, Latin America, Africa & the Middle East
and Central & Eastern Europe. This was 0.5 percentage points
higher than the first half and up 0.8 percentage points over the
same period last year and on track with the Group’s revised and
strengthened strategic objective of 40%-45% over the next three to
four years. With the continuing weakness of the majority of the
fast growth market currencies, the proportion for the first nine
months remained around 30% in constant currencies. Based on the
preliminary quarter three revised forecast, the fast growth markets
are expected to outperform the slower growth mature markets in the
final quarter of the year, particularly in Asia Pacific and Latin
America. On a net sales basis, fast growth markets represented a
higher 30.5% of the total Group, compared with 29.6% for the same
period last year.
Business sector review
The pattern of revenue 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 third quarter and first nine
months of 2017, as well as the proportion of Group revenue and net
sales for the third quarter and first nine months by those
sectors;
Revenue analysis – Third Quarter
£ million
2017 ∆ reported
∆ constant6
∆ LFL7
% group
2016 %
group
AMIM8
1,686 4.1% 2.6%
-2.6% 46.2% 1,619
44.8% Data Inv. Mgt. 646 -1.3%
-3.1% -2.9% 17.7%
655 18.1%
PR & PA9
288 0.5% -0.9%
-1.0% 7.9% 287
8.0%
BI, HC & SC10
1,029 -2.0% -3.4%
-0.7% 28.2% 1,050
29.1%
Total Group 3,649 1.1% -0.4%
-2.0% 100.0% 3,611 100.0%
Revenue analysis – First Nine Months
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group AMIM 5,175 12.9%
4.9% -0.9% 46.8%
4,582 45.2% Data Inv. Mgt. 1,954
2.9% -4.6% -3.7%
17.7% 1,898 18.7% PR & PA
872 10.9% 2.6%
1.3% 7.9% 786 7.7%
BI, HC & SC 3,052 6.0%
-1.7% 0.3% 27.6%
2,881 28.4%
Total Group 11,053
8.9% 1.1% -0.9% 100.0% 10,147
100.0%
Net sales analysis – Third Quarter
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group AMIM 1,412 5.7%
4.2% -1.7% 44.2%
1,336 42.9% Data Inv. Mgt. 496
0.2% -1.7% -1.4%
15.6% 495 15.9% PR & PA
282 0.1% -1.3%
-1.4% 8.8% 281
9.0% BI, HC & SC 1,000 -0.2%
-1.6% 0.0% 31.4%
1,002 32.2%
Total Group 3,190
2.4% 0.9% -1.1% 100.0% 3,114
100.0%
Net sales analysis – First Nine Months
£ million
2017 ∆ reported ∆ constant
∆ LFL % group
2016
% group AMIM 4,242 12.9%
4.8% -1.7% 44.4%
3,758 43.1% Data Inv. Mgt. 1,493
5.3% -2.5% -1.7%
15.6% 1,417 16.3% PR & PA
850 10.1% 1.8%
0.7% 8.9% 772 8.9%
BI, HC & SC 2,967 7.5%
-0.3% 0.7% 31.1%
2,761 31.7%
Total Group 9,552
9.7% 1.7% -0.7% 100.0% 8,708
100.0%
In the first nine months of 2017, 41.3% of the Group’s revenue
came from digital, eCommerce and shopper marketing, up 2.8
percentage points from the previous year. Digital revenue across
the Group was up relatively strongly, well over 2.0% like-for-like
with net sales up almost 3.0% on the same basis. There continues to
be client concern on digital viewability, verification and value,
along with brand safety issues. We remain committed to the highest
standards of clarity and transparency on media planning and buying
and leading the industry in developing more accurate measurement
standards in both on-line and off-line media, aligned with our
clients’ objectives.
Advertising and Media Investment Management
In constant currencies, advertising and media investment
management revenue grew by 2.6% in the third quarter, with
like-for-like down 2.6%, weaker than quarter two, as the Group’s
advertising and media investment management businesses, came under
pressure. Net sales were stronger, with constant currency growth of
4.2% and like-for-like down 1.7%. This compares with 2.8% and -2.9%
respectively in quarter two. Media investment management was up
strongly in Latin America, Africa & the Middle East, with the
United Kingdom also up, but Asia Pacific was weaker.
The Group gained a total of $2.117 billion in net new business
billings (including all losses) in the third quarter. Of this, J.
Walter Thompson Company, Ogilvy, Y&R and Grey generated net new
business billings of $316 million. GroupM, the Group’s media
investment management company, (which includes Mindshare, MediaCom,
Wavemaker (the new identity for the merger of MEC and Maxus),
GroupM Search, Xaxis and Essence) together with tenthavenue,
generated net new business billings of $1.625 billion out of the
Group’s total. Net new business billings won in the first nine
months were $6.363 billion, with continued strong net new business
gains, particularly recently.
Data Investment Management
On a constant currency basis, data investment management revenue
fell 3.1%, with like-for-like revenue down 2.9% in quarter three.
On the same basis, constant currency net sales were down 1.7%, with
like-for-like down 1.4%, with an improving trend in both revenue
and net sales compared with quarter two and the first half. The
United Kingdom and Latin America grew, with all other regions
except Africa & the Middle East improving over the second
quarter.
Public Relations and Public Affairs
In constant currencies, public relations and public affairs
revenue and net sales weakened in quarter three, with like-for-like
revenue down 1.0% and net sales down 1.4% on the same basis.
Western Continental Europe, Asia Pacific and the Middle East were
up strongly compared with quarter two, with North America, the
United Kingdom and Latin America weaker. In the first nine months,
there was particularly strong growth globally at Cohn & Wolfe,
in social media content development in the United States at SJR,
Glover Park and Ogilvy Public Relations in the United States,
Buchanan in the United Kingdom and Hering Schuppener in
Germany.
Branding and Identity, Healthcare and Specialist
Communications
At the Group’s branding & identity, healthcare and
specialist communications businesses (including digital, eCommerce
and shopper marketing), constant currency revenue was down 3.4%,
with like-for-like down 0.7%, in quarter three. On the same basis
net sales were down 1.6% and flat respectively, a slight
improvement over the second quarter. The Group’s branding &
identity, digital, eCommerce and shopper marketing and specialist
communications businesses grew, with healthcare more difficult.
Operating profitability
In the first nine months, reported operating profits were well
ahead of last year and operating margin up 0.1 margin points. On a
constant currency basis, operating profits were up slightly and
operating margin flat, with like-for-like operating margins up the
same as reported.
We are in the process of reviewing our quarter three revised
forecasts. Early indications are that like-for-like revenue and net
sales growth will be broadly flat for the year.
The average number of people in the Group in the first nine
months of this year was down 1.3% to 134,286, compared to 136,066
for the same period last year, against a decrease in revenue on the
same basis of 0.9% and net sales decrease of 0.7%. This reflected,
in part, continued caution by the Group’s operating companies in
hiring in a low growth environment and the impact of back office
consolidation actions. At 30 September, the total number of people
in the Group, on a proforma basis excluding associates, was 134,585
compared with 136,263 on 1 January 2017. On the same basis, the
total number of people in the Group including associates, was
199,694 compared with 203,246 on 1 January 2017.
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, dividends and share buy-backs.
In the twelve months to 30 September 2017, the Group’s free cash
flow was £1.972 billion. Over the same period, the Group’s capital
expenditure, acquisitions, share repurchases and dividends were
£2.214 billion.
In the first nine months of 2017, 24.1 million shares, or 1.9%
of the issued share capital, were purchased at a cost of £396
million and an average price of £16.45 per share, compared with a
full year target of 2.0-3.0% of the issued share capital.
Average net debt in the first nine months of 2017 was £5.036
billion, compared to £4.517 billion in 2016, at 2017 exchange
rates. This represents an increase of £519 million. Net debt at 30
September 2017 was £5.697 billion, compared to £4.700 billion in
2016 (at 2017 exchange rates), an increase of £997 million,
reflecting the temporary impact of delayed billing following both
the cyber attack on 27th June 2017 and the implementation of the
Goods and Services Tax in India. It is expected that this negative
impact will reverse in the fourth quarter. The increased average
and period end net debt figures reflect significant net acquisition
spend and share repurchases of £1.218 billion in the twelve months
to 30 September 2017, more than offsetting improvements in working
capital over the same period.
Acquisitions
In line with the Group’s strategic focus on new markets, new
media and data investment management, the Group completed 36
transactions in the first nine months; 13 acquisitions and
investments were in new markets, 27 in quantitative and digital and
4 were driven by individual client or agency needs. Out of all
these transactions, 8 were in both new markets and quantitative and
digital.
Specifically, in the first nine months of 2017, advertising
and media investment management in the United States, Germany,
the Middle East and North Africa, Croatia, Russia, China and India;
data investment management in the United Kingdom and
Ireland; branding & identity in the United Kingdom and
Italy; digital, eCommerce & shopper marketing in the
United States, the United Kingdom, France, Ireland, Spain, the
United Arab Emirates, Kenya, China and Brazil.
A further 3 acquisitions and investments were made in October,
with 1 in healthcare in the United States; and 2 in
digital, eCommerce & shopper marketing in the United
States.
Outlook
A changing industry?
For certain, the advertising and marketing industry has had a
good run for the last seven years since the Lehman crisis of
September 2008, and a very weak year in 2009, with your Company
experiencing a V-shaped recovery in 2010 and sequentially record
years from 2011 onwards until 2016. 2017 has, however, been a
different kettle of fish, with top line growth slowing across the
industry. What may have brought about this significant shift, which
seems to have started almost in the first quarter of this year?
The general macro-economic environment seems to be very
consistent. Generally, low GDP growth at about 3-4% per annum
nominal, perhaps a little weaker recently, but consistently
sub-trend i.e. in comparison to the pre-Lehman period. At the same
time, low inflation and, therefore, very little pricing power and a
consequential focus on cost to maintain and improve profitability.
So, if general economic conditions have not changed dramatically,
what are the other possible variables?
There have generally been three possible explanations.
First, that the rise of digital search and social platforms,
notably Google and Facebook, which now account for about 75% of
digital advertising, which in turn account for 30% of total
advertising, have disintermediated or disrupted our industry.
However, if you examine, for example, the distribution of our
billings, which are currently running at about $70 billion, the
largest investment we now make is in Google at around $5 billion
and a further approximately $2 billion in Facebook, which ranked
third largest last year and will probably rank second this year.
Both too continue to grow at reasonably strong rates. Most of the
traditional media owners each absorb anywhere between $750 million
to $2 billion of media investment each year in comparison, with
limited growth. True, our share of Google or Facebook total
advertising revenues, is lower with Google grossing around $100
billion and Facebook around $40 billion this year, but that is
explained to a large degree by the fact that both platforms have
stimulated the primary demand for search and social advertising
amongst the “long tail” or small and medium sized advertisers,
which are generally not the hunting ground for agencies or
traditional media owners. Google and Facebook have, in fact,
increasingly become friendlier frienemies or more flexible friends,
particularly as viewability, measurability and consumer and
political brand safety issues have been increasingly raised. In
addition, the rise and rise of Amazon poses significant challenges
in search and advertising for Google especially and its control of
data and private label creates similar challenges for big brands.
So, this does not seem to be an adequate explanation, although the
rise of Alibaba and Tencent, in particular, in China may have been
more of a factor in dampening agency demand there.
Secondly, it has been suggested that the intrusion of
management consultancies, particularly in the digital space, may
have also started to have an impact on the advertising industry,
particularly as companies such as Accenture and Deloitte Digital
aggressively target acquisitions of small agencies and talent and
absorb them. However, there are only currently two or three listed
consultants or similar, whilst the bulk of the industry consists of
private partnerships that drain their p&ls and balance sheets
each year of retained earnings and, consequently, have limited
financial firepower. In fact, most agencies report, including
ourselves, that even when they do compete directly with the
consultancies on digital projects, the win/loss records are
consistently strong, particularly given the continuing importance
of the creative dimension for success. Can consultancies really buy
a creative culture? Furthermore, even the advertising industry’s
trade press has carried wildly inaccurate estimates of the
consultancies’ digital marketing revenue in comparison with the
industry’s agencies or holding companies. Where the consultancies
may have made some inroads is their focus not so much on the
digital area, but more importantly on client concerns about cost.
Very few CEOs will resist the suggestion that they may be
overspending and the promise of an audit or review that will only
cost a proportion of any cost savings generated or a contingency
fee. So, it may well be, that consultant activity is having some
impact, not so much in the digital area, but more because of an
emphasis on cost containment.
Thirdly, and finally, there is a view that post-Lehman
central bank easy or loose monetary policy has resulted in
consistently low interest rates which, in turn, has caused some
distortion in capital allocation. Clients in any event have had to
deal with the impact of digital disruption from say Airbnb in the
hospitality industry, or Uber in transportation or Amazon or
Alibaba in distribution. But, in addition, they have now been
forced to focus even more on cost reduction in response to activist
investors (for example, Nelson Peltz at Procter & Gamble or Dan
Loeb at Nestlé, who claim to be proponents of increased marketing
spend), or the consolidation threat of zero-based budgeters such as
3G or Reckitt Benckiser or Coty, or previously Valeant or Endo in
the pharmaceutical industry. Kraft Heinz’s transitory bid for
Unilever, was a seminal moment as it suggested no one was safe,
irrespective of size.
There is little or no doubt that this third factor has had a
significant, almost Pavlovian impact on variable cost reduction and
encouraging a short-term focus, particularly in the fast moving
consumer goods sector, which accounts for about 30% of our revenue,
but it has also had a further impact on other sectors, such as
autos and pharmaceuticals. Neither has this been helped by the fact
that the average S&P 500 or FTSE 100 CEO has a life expectancy
of 6-7 years, the average CFO 4-5 years and the average CMO 2-3
years. As a result, the S&P 500 is now consistently paying back
around 100% of its earnings to share owners in the form of
dividends and buybacks, as opposed to about 60% in 2009,
post-Lehman. Effectively management is abrogating responsibility
for reinvesting retained earnings back to share owners.
In summary, it does seem that in the new normal of a low
growth, low inflation, limited pricing power world, there is an
increasing focus on cost reduction, exacerbated by a management
consultant emphasis on cost reduction and the close to zero cost of
capital funding of activist investors and zero-based budgeters.
Although interest rates seem set to rise, they are unlikely to
reach pre-Lehman levels, so these conditions will probably
continue, maybe at less stressful and lower levels after one-time
reductions this year, which are increasingly difficult to repeat.
You cannot cost-cut your way to success.
Furthermore, when you examine the revenue growth of companies
post such cost reduction, there is very little evidence of increase
in volumes, if anything to the contrary, with some pricing gains in
areas with more inflation like Asia Pacific and Latin America, but
with little or no volume growth. Most experienced package goods
executives say, that the alarm bells ring when volumes stagnate or
start to tail off and there are fewer users. After reductions in
marketing spending in the first half of this year, many companies
have talked about increasing spend again as volume growth has been
reduced.
Lastly, our brand valuation data clearly shows that companies
that invest in innovation and branding consistently deliver
stronger total share owner return through top line like-for-like
sales growth. Over the last twelve years, for example, an equal
investment in the top 100 global brands that we have identified,
which consistently make those innovation and marketing investments,
would yield an investment return more than 50% greater than the
S&P 500 and over 3 times greater than the MSCI.
In these changing circumstances, we have an increased focus and
urgency in implementing our four-pronged strategy of
horizontality, fast-growth markets, digital and data.
Clients increasingly demand a fully integrated and seamless
offer across advertising, media and data investment management,
public relations and public affairs, branding & identity,
healthcare and digital. Clients want the best people working on
their business, irrespective of where they come from, or which
vertical they inhabit. Whilst traditionally we were vertically
organised by brand, we have now introduced two horizontal
integrators: the first, client leaders, working across our top 50
or so clients, representing almost one-third of our revenue and
35,000 of our people; the second, regional and country managers,
covering almost half of the 113 countries in which we operate, and
ensuring we have the best people, local clients and acquisitions in
each country we operate in. In addition, we have formed integrated
units around media and data investment management through GroupM
and Kantar, around branding & identity through BtoD group,
around health and wellness through WPP Health & Wellness and
around specialist digital through WPP Digital. Although the Group’s
creative agencies remain separate, primarily for conflict reasons,
all are focused on simplifying and unifying their client offers,
e.g. Ogilvy with One Ogilvy and in data investment management with
Kantar First.
The next billion consumers are not going to come from North
America or Western Europe, whether the United Kingdom is in the
European Community or not. They will come from Asia Pacific, or
Latin America, or Africa & the Middle East, or from Central and
Eastern Europe. In addition, the real competition for Western-based
multi-national companies is increasingly coming from local
“piranha” companies in these markets as they develop stronger
marketing and technology skills. Currently these markets are around
30% of our business. They have to be almost one-half in 3-4
years.
Digital already accounts for over 40% of our business against a
current industry weighting of around 30%. We are, therefore, over
indexed, but probably not sufficiently. Digital activities
certainly have to be also half of our business, again within 3-4
years and certainly as digital penetrates all that we do.
Last, but not least, data already accounts for 25% of our
revenue and quantitative disciplines about 50% of our revenue,
which is where they should be. However, we have to ensure that our
data clearly demonstrates the added value we bring in terms of
return on marketing investment and is fully integrated into our
offer to clients, for example, most clearly in the functional area
of media investment management.
Financial guidance
For 2017, reflecting the first nine months net sales growth and
quarter 3 revised forecast:
- Like-for-like revenue and net sales
growth broadly flat
- Forecast operating margin to net sales
broadly flat on a constant currency basis
Our prime focus remains on improving revenue and net sales
growth, capitalising on 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 maintaining our operating margin, by managing
absolute levels of costs and increasing our flexibility in order to
adapt our cost structure to significant market changes. 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
around 7-8% of net sales and should position the Group well if
current market conditions deteriorate further.
The Group continues to improve co-operation and coordination
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 2017 and
beyond.
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 coordinating 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, Imagine, Vice, Media Rights Capital, Bruin Sports Capital,
Fullscreen, Indigenous Media, China Media Capital 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.
Whilst it is too early to comment on prospects for 2018 as three
year plans and budgets are in the course of preparation, any
further marketing investment reduction may well be countered by the
mini-quadrennial events of 2018 – the Winter Olympics in South
Korea; the FIFA World Cup in Russia; and the mid-term Congressional
elections in the United States. 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 improvement in the staff costs to net sales
ratio
- 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 disposals3Percentage
change at constant currency exchange rates4Like-for-like growth at
constant currency exchange rates and excluding the effects of
acquisitions and disposals5Asia Pacific, Latin America, Africa
& Middle East and Central & Eastern Europe6Percentage
change at constant currency exchange rates7Like-for-like growth at
constant currency exchange rates and excluding the effects of
acquisitions and disposals8Advertising, Media Investment
Management9Public Relations & Public Affairs10Branding and
Identity, Healthcare and Specialist Communications (including
direct, digital and interactive)
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171031005675/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.wpp.com/investor
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