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WPP sets out ambitious plans as it emerges in one piece from bad old 2020

WPP is updating investors and analysts today but the menu gives a pretty clear idea of CEO Mark Read’s plans and expectations.

Under Strategic Goals we have:

*Return core Communications business to sustainable growth.

*Expand further into high-growth areas of Commerce, Experience and Technology – from 25% of our business today to 40% by 2025.

*Fund growth and improve profitability through gross annual cost savings of £600 million by 2025, with approximately two-thirds reinvested in talent, incentives and technology to drive growth.

*Supplement growth through targeted, scalable M&A (acquisitions) of £200-400 million annually.

*Invest capital expenditure of £450-500 million per annum in 2021 and 2022 and £300-350 million per annum thereafter, in our campus programme, ERP systems and shared services to deliver gross cost savings and improved business insight and talent management.

Medium-term targets

*Recovery to 2019 revenue less pass-through costs levels by 2022

*3-4% annual growth in revenue less pass-through costs from 2023, including M&A benefit of 0.5-1.0% annually.

*15.5-16.0% headline operating margin in 2023 *Double-digit headline EPS growth over next three years

*New dividend policy: intention to grow annually with a pay-out ratio around 40% of headline EPS
Average net debt/EBITDA maintained in the range 1.5-1.75x

2020 and 2021 guidance

*Like-for-like revenue less pass-through costs growth of -6.7% in the two months to November.

*2020 LFL revenue less pass-through costs growth expected to be in line with year to date performance of -8.4%.

*2020 headline operating margin expected to be 12.5-13.0%.

*2020 year-end net debt expected to be around £1.6 billion.

*2020 dividend in line with new policy

*2021 LFL revenue less pass-through costs growth of mid-single-digits %, with headline operating margin of 13.5-14.0%

*Kantar share buyback programme to resume in 2021.

WPP has also announced that the board of WPPAUNZ (its majority-owned business down under) has accepted a slightly sweetened offer to buy the minority.

Read (above) says: “It has been two years since we set out our strategy to return WPP to growth. Since then, we have made significant progress, with stronger agency brands, new leadership, a simpler structure and a strong balance sheet. We can see the results in our industry-leading new business performance, with $5.6 billion won in the first nine months including Alibaba, HSBC, Intel, Uber and Unilever.

“The events of 2020 have only accelerated the structural changes in our industry, from the expansion of digital channels to growing demand for ecommerce solutions. The actions that we have taken have positioned us well, and we are already working with 76 of our top 100 clients on ecommerce. There are significant new growth opportunities for WPP as clients demand simple, integrated solutions that combine creativity with technology and data expertise. Clients need trusted partners more than ever to help them transform and succeed.

“In partnership with our agency brands we are deepening and accelerating the change already happening within WPP. We aim to return our communications business to sustainable growth and invest further in the high-growth areas of commerce, experience and technology.

“We are converting our size into scale, making us more effective and efficient as we share expertise across a simpler company of stronger agency brands. £400 million of the targeted £600 million savings will be used to fund investment in the capabilities and technology that will drive future growth for our people, our clients, our business and our shareholders.”

So it’s going to be pretty rough end to bad old 2020 but these are quite ambitious targets for the short and medium-term future.

£450-500m in capital expenditure in the next two years, much of it on WPP’s “campuses” is heavy too. Read obviously expects most people to return to the office most of the time fairly soon.

What sort of WPP will we end with if Read navigates these choppy waters? A modernised, simplified version of the business he inherited from founder Sir Martin Sorrell or a tech and data-based consultancy with added creative bits?

It won’t be smaller – if all goes to plan – despite some naysayers saying WPP should be broken up. Creative remains the big challenge. It may be a smaller part of the total business but it’s what catches the eye and differentiates the likes of WPP from the big consultancies (Accenture has addressed this with a string of acquisitions, most notably Droga5.)

WPP needs at least one of its big merged agencies (Wunderman Thompson, VMLY&R, AKQA/Grey or Ogilvy under Andy Main to lead on the that front. Some of the £200-400m it’s stashed away for acquisitions may be used to bolster creative performance. We may see a deal sooner rather than later.

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