WPP’s Sorrell: 2017 was “not pretty” as growth dries up

WPP flat-lined at best in 2017 according to its preliminary results released today. In CEO Sir Martin Sorrell’s words 2017 “was not a pretty year.”

Currency movements and some stern financial management allowed WPP to increase its top line post-tax profits by 27.4 per cent to £1.9bn but like-for-like billings fell 5.4 per cent to £55.56bn, like-for-like revenue was down 0.3 per cent to £15.26bn and, a new one this, constant currency revenue less pass-through costs – previously known as net sales – down 0.9 per cent like-for-like. Pass-through costs are costs paid to other companies to fulfil a contract. Some analysts had been hoping for two per cent growth here. WPP is now expecting little or no growth in 2018.

Sorrell (below) says: “2017 for us was not a pretty year, with flat like-for-like, top-line growth, and operating margins and operating profits also flat, or up marginally.

“The major factors influencing this performance were probably the long-term impact of technological disruption and more the short-term focus of zero-based budgeters, activist investors and private equity than, we believe, the suggested disintermediation of agencies by Google and Facebook or digital competition from consultants.

“In this environment, the most successful agency groups will be those who offer simplicity and flexibility of structure to deliver efficient, effective solutions – and therefore growth – for their clients. With this in mind, we are now accelerating the implementation of our strategy for the Group…as our industry continues to undergo fundamental change, we are upping the pace of WPP’s development from a group of individual companies to a cohesive global team dedicated to the core purpose of driving growth for clients.

“As we build an increasingly unified WPP, we are focusing on a number of areas that will allow us to deploy our deep expertise with greater flexibility, efficiency and speed. These include: further simplification of our structure; stronger client co-ordination across the whole of WPP, including greater responsibility and authority for global client teams and country managers; the development of key cross-Group capabilities in digital marketing, digital production, eCommerce and shopper marketing; further sharing of functions, systems and platforms across the Group; and the development and implementation of senior executive incentives to align them even more closely to Group performance.”

In other words Sorrell’s much-trumpeted theme of “horizontality.”

Will 2018 be any better for the marcoms giant that owns Grey, JWT, Ogilvy, Y&R, a gaggle of media agencies under GroupM, the Kantar research business and numerous other smaller businesses besides? WPP may be bringing it all together but it’s still the busiest acquirer of companies in the marcoms sector by number of deals done.

WPP says: “(In) January 2018 like-for-like revenue (was) flat with last year for the month, slightly ahead of budget, with like-for-like revenue less pass-through costs1, down 1.2 per cent also ahead of budget and against more difficult comparatives in the first quarter of last year.”

So it doesn’t look like all systems go yet.

As ever with such a diversified company there were highlights and lowlights with the UK and Western Europe performing well, North America, the biggest marcoms market, markedly less so. Advertising and “media investment management” were the strongest performers (as usual) with research, via Kantar, bringing up the rear – also as usual.

Net debt, which becomes more of a worry as WPP’s market capitalisation falls from over £20bn a year or so ago to nearer £17bn, increased by £352m in the year to hit £4.48bn which, WPP says, has increased the average net debt to EBITDA (profits earnings before interest, tax, depreciation and amortisation) to two times, the top of its target range. This is uncomfortable especially as WPP continues to increase its dividend, necessary to support the share price.

Sorrell says: “We start this new phase of our journey from a position of market leadership, and with total confidence in the enduring value of what we offer our clients. We will report at every opportunity on our progress.”

So we can expect further news about changes to the group. Last year and this WPP has merged Maxus into MEC to create Wavemaker, formed Kantar Consulting to bring its research businesses together, grouped several medium-sized design businesses into Superunion and, this week, announced the merger of PR firms Burson Marsteller and Cohn & Wolfe into Burson Cohn & Wolfe. Among other things, all these moves will reduce headcount and there’ll certainly be more.

More dramatic would be a merger with another marcoms group or one of the big consultancies. WPP is now classed by many as a business services company as are the consultancies. Accenture is four times as big as WPP by most measures.

Almost equally dramatic would the sale of some of its interests, the Kantar research operation being the most obvious. But WPP, like its marcoms rivals, has always believed that it needs to be able to do everything for its clients although the others don’t have such a research operation. None of them (Omnicom, Interpublic, Publcis and Dentsu Aegis) have, so far, sold a substantial business.

That may need to change if their independence is to be guaranteed. In the meantime we wait to see what effect Sorrell’s gloomy analysis has on the share price*. WPP will also be examining its share register to see if the dreaded short sellers – outfits that bet on a share price falling – make an unwelcome appearance.

*WPP shares fell sharply in early London trading.

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