WPP (LON:WPP) has updated investors on its third-quarter trading this morning.
Highlights from the company statement:
Third quarter reported revenue up 23.4% at £3.611 billion, up 4.6% at $4.741 billion, up 4.2% at €4.248 billion and down 12.3% at ¥485.4 billion
Third quarter constant currency revenue up 7.6%, like-for-like revenue up 3.2%
Third quarter constant currency net sales up 7.8%, like-for-like net sales up 2.8%
Nine months reported revenue up 15.8% at £10.147 billion, up 5.0% at $14.108 billion, up 4.7% at €12.632 billion and down 6.0% at ¥1.528 trillion
Nine months constant currency revenue up 8.5%, like-for-like revenue up 3.9%
Nine months constant currency net sales up 8.0%, like-for-like net sales up 3.4%
Nine months operating margin up 0.3 margin points in constant currency, 0.4 margin points in reported and targeted to be up 0.3 margin points in constant currency for full year in line with objective
Preliminary quarter 3 revised forecast indicates like-for-like revenue and net sales growth over 3%
Average constant currency net debt up by £434 million for the first nine months of 2016 to £4.206 billion, reflecting continued significant acquisition activity and share buy-backs, with point-to-point net debt only up £74 million, on the same basis, improving significantly through working capital reduction
Net new business of £3.467 billion ($5.374 billion) in first nine months compared to £3.212 billion ($4.979 billion) in the same period last year
Share buy-backs of £342 million in the first nine months, down from £588 million in the same period last year, representing 1.6% of the issued share capital, against a full year target of 2.0-3.0%.
Low growth, low inflation, focus on costs likely to continue
With the exception of a V-shaped post-Lehman recovery in 2010, the Group has posted record results each year, in a low growth, low inflation world economy, with clients focussing, as a result, on costs. The first nine months of 2016 reflect a similar economic picture and performance record. Worldwide nominal GDP growth remains in the 3.0-3.5% range for 2016 and Group like-for-like revenue grew by 3.9% and net sales by 3.4%, against 4.8% and 2.6% for the same period last year. Current forecasts for 2017 global nominal GDP growth are slightly higher in the 3.5-4.0% range, although it is early days in the forecasting cycle and initial forecasts tend to be optimistic. In any event, worldwide growth looks likely to remain tepid for the rest of 2016 and for 2017. There seems little likelihood of either an upside breakout or, indeed, a downside one, that is a recession. Advertising also remains a constant proportion of GDP overall, with the mature markets growing less post-Lehman, but fast-growth markets filling the void and growing their advertising to GDP ratio, faster, giving a constant ratio overall.
Clients remain challenged, by mainly digital disruption, by zero-based budget business models and by activist investors. With S&P 500 and FTSE 100 CEOs lasting on average 6-7 years and their CFOs and CMOs lasting even shorter periods, there is a natural focus on the short-term, reinforced by institutional investor and analyst focus and incentivisation on short-term results.
As a result, the S&P 500 is effectively shrinking. From the beginning of 2009 to today, dividends and share buy-backs have steadily grown from around 70% of retained earnings to well over 100%. In fact, in five of the last six quarters, for which data is available, this ratio has exceeded 100% and in the remaining one it was 98%. The FTSE 100 shows a similar tendency, with the dividend payout ratio rising from just over one-third post-Lehman to two-thirds currently. In both cases, decisions on where to reinvest retained earnings are being abrogated primarily to investors, rather than being taken by management.
Neither do high levels of economic and political uncertainty help. Grey swans such as BRIC volatility in Brazil, Russia and China, despite India's relative strength and the Next 11's continued strength in countries like Indonesia, Vietnam, the Philippines, Mexico, Colombia and Peru, encourage conservatism. As does political uncertainty and right-wing and left-wing populism around both the Presidential election in the United States and various upcoming elections and referenda in Western Continental Europe, not forgetting the diplomatic warfare and long-term negotiation around Brexit or political issues in Eastern Europe and the Middle East. Let alone what black swans might be flapping around.
However, we do know that if we had invested equally over the past ten years in the top ten most highly valued brands in our annual top 100 global brands survey published by the Financial Times, we would have outperformed the S&P 500 by over 70% and the MSCI by approximately four times. Investing in innovation and branding clearly pays off in the short and long-term. Ironically, it also seems that companies that have controlling share structures and may therefore offend good corporate governance often ensure that a longer term strategic point of view is taken.
Despite this context, 2016's first nine months like-for-like top line growth and operating performance has been well above last year. Like-for-like revenue growth was 3.9%, with all geographies and sectors showing growth. Net sales growth, on the same basis, was up 3.4%, not as strong as the final quarter of 2015, but stronger than the first nine months at 2.6% and full year growth of 3.3%. Our operating companies are still hiring cautiously and responding to any geographic, functional and client changes in revenue - positive or negative. On a constant currency basis, operating profit is well above budget and ahead of last year.
We see little reason, if any, for this pattern of behaviour to change in 2017, with continued caution being the watchword. There is certainly no evidence to suggest any such change in behaviour, although one or two institutional investors, including, most notably, Blackrock, Legal & General and the United Kingdom Government, are saying that they are tiring with some companies' total focus on short-term cost cutting and would favour strategies based more on the long-term and top line growth and the end to quarterly reporting. Your Company, together with McKinsey & Co., Blackrock and Dow Chemical Co., amongst others, has joined an alliance to stimulate focus on long-term strategic thinking.
The pattern for 2016 looks very similar to 2015, but with the bonus of the maxi-quadrennial events of what has proven to be a visually-stunning Rio Olympics, a successful UEFA Euro Football Championships and, of course, the still ratings-stimulating United States Presidential Election to boost marketing investments, as usual by up to 1% or so. Forecasts of worldwide real GDP growth for 2016 still hover around 3.0% to 3.5%, with recently reduced inflation estimates of 0.5% giving nominal GDP growth, in dollars (because of its strength), of even less than 3%. Advertising as a proportion of GDP should at least remain constant overall. Although it is still at relatively depressed historical levels, particularly in mature markets, post-Lehman, it should be buoyed by incremental branding investments in the under-branded faster growing markets.
Although consumers and corporates both seem to be increasingly cautious and risk averse, the latter should continue to purchase or invest in brands in both fast and slow growth markets to stimulate top line sales growth. Merger and acquisition activity may be regarded as an alternative way of doing this, particularly funded by cheap long-term debt, but we believe clients may regard this as a more risky way than investing in marketing and brand and hence growing market share, particularly as equity valuations continue to be strong. The recent, almost record spike in merger and acquisition activity, may be driven more by companies running out of cost-reduction opportunities in the existing businesses, rather than trying to find revenue growth opportunities or synergies. Although, in our own industry, the Bolloré Model, which unites ownership and control of telecommunications, media, content and agency services, is probably a unique approach, which challenges conventional wisdom.
Looking ahead to 2017, worldwide GDP forecasts by the so called experts indicate a slight strengthening, if anything, to 3.5-4.0%, real and nominal. If advertising as a percentage of GDP remains constant, which we believe it will, this should result in a similar growth rate for the industry. Although we are in the early stages of our rolling Three Year planning process and are starting the 2017 budgeting process, we see no reason why revenue and net sales cannot continue to grow at over 3% in 2017, a very similar pattern to 2015 and 2016. Our new business record remains strong, despite recent bumps.
For 2016, reflecting the first nine months net sales growth and quarter 3 revised forecast:
Like-for-like revenue and net sales growth of over 3% with the gap between revenue and net sales growth narrowing further.
Target operating margin to net sales improvement of 0.3 margin points on a constant currency basis in line with full year margin target.