Investors in the world's largest advertising agency WPP saw the value of their holdings fall sharply this morning. This was in reaction to the group's announcement of its 2017 interim results. One analyst noted that it was the biggest drop in the share price for over a decade.
The headline figures themselves seem on the surface acceptable in the global economic context of the biggest and longest financial downturn in almost a century. Key metrics on revenue, profit, margins and dividend are up, some significantly so.
It is surely the gloomy comments buried in pages 15-16 of the results document that have caused the problem. It is surely safe to assume they come directly or indirectly from CEO Sir Martin Sorrell, who has known a setback or two in his lifetime in the industry.
Sir Martin Sorrell, courtesy of WPP
Much tougher going
After another record year in 2016, the group’s performance in the first seven months of the new financial year has been much tougher, says WPP. It notes that worldwide GDP growth, both nominal and real, seems to have slowed in the second half of last year and into 2017.
Growth has become even more difficult to find, we hear. Many clients are subject to activist investment and pressure to reduce cost or restructure. This reduces client spending. Some investment groups are practiced in the art of zero-based budgeting.
Competition is fierce, says WPP. There have been several examples of groups offering clients upfront discounts as an inducement to renew contracts, reduced creative and media fees, and extended payment terms (starting to show on agency balance sheets).
These practices cannot last
These practices cannot last, states WPP. They 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. 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 be under pressure,” says WPP. “For this year, growth is now forecast to be zero to 1.0% with weaker comparatives in the second half of 2016 aiding growth this year.”
The extent is the key
It is the extent of the undershoot of like-for-like sales that explains the impact on the share price, comments a source familiar with the company and the industry. Analysts were primed in March this year to expect growth of 2% rather than the customary 3%.
The fact that the figure is now zero to 1% is simply shocking to them, the source says. Especially as the like-for-like figures are in negative territory for the first seven months. “There is a lot to be done in the final few months of the year,” the source adds.
Generating some optimism is the indication given by fast-moving consumer goods giants Unilever and Procter & Gamble that they will increase advertising spend in the second half of the year, having cut it earlier. Both are major WPP clients.
P&G HQ, courtesy of P&G
WPP the bellwether
“WPP is very much seen as the bellwether of the advertising industry and as such is widely regarded as a global economic barometer and so it is unsurprising the shares have reacted in the way they have this morning,” said Graham Spooner, an analyst at The Share Centre.
“It is likely that the market will continue to concentrate on the group’s gloomy outlook for growth 2018, particularly as it expects little in the way of global GDP growth next year.”
M&A with everything
In the wake of the results, WPP's announcement of the acquisition of Design Bridge, an independent brand design agency, passed almost unnoticed. Founded in London in 1986 Design Bridge has as clients AkzoNobel, Diageo, Mondelēz and Unilever, among others.
WPP says the acquisition continues its strategy of investing in important sectors and markets and further strengthening its capabilities in branding and identity. The Group completed 23 transactions in the first six months.
Of these, nine acquisitions and investments were in new markets. Another 18 are in quantitative and digital (digital now accounts for 41% of group revenues, WPP notes separately). One was driven by individual client or agency needs.
Quantitative and digital
Five were in both new markets and quantitative and digital. A further eight acquisitions and investments were made in July and August, with one in advertising and media investment management in Germany, and one in branding & identity in Italy.
Six were in digital eCommerce and shopper marketing in the USA, France, United Arab Emirates, China and Brazil.
WPP 2017 interim result highlights
- Reported billings up 6.3% at £26.906bn, down 4.7% in constant currency
- Reported revenue up 13.3% at £7.404bn, down 0.4% at US$9.328bn, up 2.7% at €8.609bn and up 0.4% at ¥1.047trn
- Constant currency revenue up 1.9%, like-for-like revenue down 0.3%
- Constant currency net sales up 2.2%, like-for-like net sales down 0.5%
- Reported net sales margin of 13.9%, up 0.2 margin points versus last year, flat in constant currency and up 0.1 margin points like-for-like
- Headline reported profit before interest and tax £882m up 14.7%, and up 1.9% in constant currency
- Headline profit before tax £793m up 15.0%, up 1.8% in constant currency
- Profit before tax £779m up 83.3%, up 52.4% in constant currency
- primarily reflecting net exceptional costs in the first half of 2016 of £122 m and gains on the fair value of financial instruments in the first half of 2017
- Reported profit after tax £634m up 124.7%, up 80.6% in constant currency
- Headline diluted earnings per share 45.4p up 16.1%, up 2.4% in constant currency
- Reported diluted earnings per share 46.6p up 146.6%, up 95.1% in constant currency
- Dividends per share 22.7p up 16.1%, a pay-out ratio of 50%, in line with target
- Share buy-backs of £290 m in the first half, up from £197m last year, equivalent to 1.3% of the issued share capital against 1.0% last year
- Return on equity up strongly at 16.9% for the 12 months to 30 June 2017 from 15.5% for the previous 12 months period.
- Weighted average cost of capital at 30 June 2017 was 6.3% down slightly from 6.4% at 31 December 2016
- Reported EBITDA (earnings before interest, tax, depreciation and amortisation) £1.016bn, over £1bn for the first time in a half-year period, up 14.2%, up 1.7% in constant currency