Market Overview

WPP AGM Trading Update

Share:





WPP (NASDAQ:WPPGY) today reported its 2017 Annual General Meeting
Trading Update.

The following Chairman's statement was referred to at the Company's 45th
Annual General Meeting held in London at noon today and is available on
the Company's website:

"First, a few comments on current trading.

In the first four months of 2017, reported revenue was up 15.9% at
£4.846 billion. Revenue in constant currency was up 3.4%, continuing to
reflect the weakness of sterling against the US dollar, the euro and
other major currencies. On a like-for-like basis, excluding the impact
of acquisitions and currency fluctuations, revenue was up 0.7%, compared
with the same period last year, an improvement over the first quarter
growth of 0.2%. Reported net sales were up 16.7% at £4.168 billion, up
4.0% in constant currency and up 0.7% like-for-like, almost the same as
first quarter growth of 0.8%. The gap between revenue growth and net
sales growth in April reversed the trend seen in the first quarter,
continuing to reflect the scale of digital media purchases in media
investment management and data investment management direct costs.

The pattern of revenue and net sales growth in the first four months of
2017 is generally the same as the first quarter of the year, with the
one month of April showing stronger revenue growth, particularly in the
United Kingdom and Asia Pacific, Latin America, Africa & the Middle East
and Central & Eastern Europe, with Western Continental Europe weaker and
marginally softer net sales growth. For the first four months, there was
like-for-like revenue and net sales growth in all regions and business
sectors, except North America and data investment management, with the
United Kingdom improving markedly in the month. On a like-for-like
basis, public relations and public affairs continued to be the strongest
sector, as in the first quarter of 2017, with advertising and media
investment management showing an improving trend.

Regional review

North America, with year-to-date, like-for-like revenue and net
sales growth of -2.7% and -1.6% respectively, continued to be the
weakest performing region, with advertising and media investment
management, data investment management and parts of the Group's
healthcare businesses weaker, partly offset by stronger growth in the
Group's public relations and public affairs, branding & identity and
digital, eCommerce and shopper marketing businesses.

The United Kingdom, with year-to-date, like-for-like revenue and
net sales growth of 5.6% and 5.1% respectively, improved markedly over
the first quarter, with the Group's advertising and media investment
management, public relations and public affairs and branding & identity
businesses, showing stronger growth than the first quarter.

Western Continental Europe, with year-to-date, like-for-like
revenue and net sales growth of 4.2% and 3.0% respectively, somewhat
softer than the first quarter, with all markets, except Austria,
Ireland, the Netherlands, Spain and Turkey performing well in the first
four months.

Asia Pacific, Latin America, Africa & the Middle East and Central and
Eastern Europe
, strengthened in April, with year-to-date,
like-for-like revenue and net sales growth of 0.8% and 0.5%
respectively, compared with -0.1% for both revenue and net sales in the
first quarter. All sub-regions showed improvement, particularly in Asia
Pacific, Latin America and Central & Eastern Europe. In Asia, all
markets except Greater China, Malaysia and Singapore grew strongly. In
mainland China, the Group's media investment management, public
relations and public affairs and healthcare businesses improved strongly
in April, with parts of the Group's data investment management and
digital, eCommerce and shopper marketing sectors continuing to slow.

Business sector review

Advertising and Media Investment Management

In constant currencies, advertising and media investment management
revenue grew by 8.0%, with like-for-like growth of 1.6% in the first
four months, a significant improvement over the first quarter growth of
7.1% and 0.2% respectively. However, these figures continue to reflect
the weaker trading conditions in the Group's media investment management
businesses in North America and the Middle East and the strong
comparative in the first four months of last year of almost 7%
like-for-like growth. Net sales grew 7.6% in constant currency, with
like-for-like growth of 0.2%, also showing a strong improvement in
like-for-like net sales growth compared with the first quarter -0.3%.
The Group's media investment management businesses grew strongly in all
other regions and sub-regions, particularly the United Kingdom, Latin
America and Africa. The Group's advertising businesses continue to be
challenged in the mature markets, especially North America and Western
Continental Europe, where some of the restructuring costs incurred in
recent years have been directed.

Data Investment Management

On a constant currency basis, data investment management revenue fell
5.0%, with like-for-like revenue down 3.9% in the first four months. The
decline in net sales, as in the first quarter, was less significant,
with constant currency net sales -2.9% and like-for-like -1.6%. In the
United Kingdom, Latin America and Africa, like-for-like net sales grew
strongly, as in the first quarter, with North America, Western
Continental Europe and Asia Pacific remaining difficult.

Public Relations and Public Affairs

In constant currencies, public relations and public affairs revenue and
net sales were up 5.8% and 4.9% respectively, slightly slower than the
first quarter, with like-for-like revenue and net sales up 3.8% and 3.2%
respectively, still the strongest performing sector, as it was in the
first quarter. In April, the United Kingdom showed very strong growth
with Western Continental Europe and Asia Pacific slightly weaker,
compared with the first quarter.

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
and shopper marketing), net sales growth was 2.3%, with like-for-like
net sales growth 2.0%, fractionally weaker than the first quarter, but
still the second strongest performing sector. All businesses in this
sector, except parts of the Group's specialist communications and
healthcare communications businesses, performed well in the first four
months.

Operating profitability

In the first four months, on a constant currency basis, revenue, net
sales and profits were ahead of the quarter one revised forecast, budget
and last year.

As indicated in the first quarter trading update, our quarter one
revised forecasts are similar to budget, with like-for-like revenue and
net sales growth up around 2%.

For the remainder of 2017, the focus remains on improving revenue and
net sales growth, 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 cost flexibility, in order to adapt our cost
structure to significant market changes and by ensuring that the
benefits of the restructuring investments taken in recent years continue
to be realised.

Balance sheet highlights

Average net debt in the first four months of this year was £4.654
billion, compared to £4.239 billion in 2016, at 2017 exchange rates.
This represents an increase of £415 million, an improvement over the
first quarter. Net debt at 30 April 2017 was £5.156 billion, compared to
£4.812 billion in 2016 (at 2017 exchange rates), an increase of £344
million, a significant improvement compared with the £474 million higher
net debt at the end of the first quarter of 2017. The increased average
and period end net debt figures, reflect the significant net acquisition
spend, share buy-backs and dividends in the twelve months to 30 April
2017, and the impact of the net debt acquired on the merger with STW in
Australia, more than offsetting the improvements in working capital.

In May 2017, the Group issued €250 million of 3 year floating rate bonds
with a coupon of 3 month EURIBOR plus 0.32%. The first coupon covering
the period from May to August was set at 0%. The bonds provide medium
term liquidity taking advantage of current low interest rates.

Acquisitions

In line with the Group's strategic focus on new markets, new media and
data investment management, the Group completed 17 transactions in the
first four months; 8 acquisitions and investments were in new markets
and 12 in quantitative and digital and 1 was driven by individual client
or agency needs. Out of these transactions, 4 were in both new markets
and quantitative and digital.

Specifically, in the first four months 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 3 acquisitions have been completed since 30 April in digital,
eCommerce & shopper marketing
in the United States and Spain.

Return of funds to share owners

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 increase
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 in the pay-out ratio has to be balanced
against the continuing attractive opportunities to reinvest retained
earnings in the business.

During the first four months of 2017, share buy-backs remained at the
same level as the first quarter, with 10.0 million shares, or 0.8% of
the issued share capital, purchased at a cost of £180 million and an
average price of £17.91 per share, with 2.0 million shares being
purchased as Treasury stock and 8.0 million shares purchased by the ESOP
Trusts. Further share buy-backs continued in May and June and the
Group's objective remains to repurchase 2-3% of the issued share capital.

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 revenue and net sales growth of just under
1%, but with renewed and encouraging net new business wins, further
confidential assignments won 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 (so far, despite demonetisation and GST issues). 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 clearly much more strongly
pro-business, and much more business-connected than the Obama
administration, outlining planned pro-growth tax, infrastructure
investment, spending and regulatory reform, although implementation has
been delayed. The prospects in the United Kingdom are more mixed as the
possible post-Brexit vote scenarios will play out over the next two
years and uncertainties about the 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 still 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% 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 100 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 two thirds and the MSCI by over
three and a half times, more than most, if not all, active 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 and payments
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 in the future, as the
relevant variables ebb and flow. 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 continued 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, 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 the very 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 be 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, and a
faster rate of growth in the second half, primarily reflecting easier
comparatives.

The human element

And finally, let me dig a little deeper into the results that we
announce today; not just the numbers, pleasing though they are, but
rather into the nature of those numbers and how they have been achieved.
And I am prompted to do so by the continued and impressive advances of
Artificial Intelligence and the publicity and the speculation that such
advances increasingly attract.

Most of the Group's companies already make profitable use of artificial
intelligence. Wherever modern technology can perform complex tasks with
speed and accuracy, WPP companies are quick to embrace it. That process
will undoubtedly continue. But much of the most valuable work that WPP
undertakes on behalf of our clients is work that is beyond the
capability of even the most sophisticated algorithm – and will be for
many, many years to come.

In the design of brands, in the positioning of brands, in the building
of brands, in the maintenance of brands - yes, hard, research-based
facts are of course essential. But at least as important for continued
commercial success is an intuitive understanding of human nature and how
best to engage it. And for that you need human beings of exceptional
talent.

So, let me take this opportunity, on behalf of the board of WPP, our
management and our share owners, to recognise publicly the true parents
of our financial performance: those tens of thousands of inventive,
creative individuals in our operating companies who between them craft
the elegant solutions to our clients' briefs. Our debt to them is
immense - and I would like it to be formally recorded."

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.

View Comments and Join the Discussion!
 

Partner Center