Wednesday, August 17, 2022

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    ‘Client spend is giving us comfort’: WPP’s optimism fails to shift share price

    WPP posted positive results for the first half of 2022, but a lack of formal guidance for the year ahead in the face of economic uncertainty left analysts scratching their heads and led to an 8% drop in its share price.

    “We face an uncertain macro environment but we're ready to respond as needed. We are competitively stronger than four years ago. We have transformed the business: we have better leadership, we're more integrated to deliver services clients need, our creative agencies stronger and growing, the US has turned around – it’s not a drag on growth but an accelerant,“ said chief executive Mark Read. 

    “Our client relationships are stronger, NPS scores are better and new business performance is better. Our balance sheet is in better shape.“ 


    2022 H1 highlights include:

    • Revenue up 10.2% to £6.75bn

    • Operating profit up 11.4% to £539m

    • Pre-tax profit up 6.1% to £419m

    • Its North American business performed better than expected, with revenue up 9.5%

    • UK revenue was up 7.1%

    • It raised its own prices by between 1% and 2% as it tried to “find a balance“ between costs and client willingness to absorb those increases

    • It said it was “confident” it could deliver organic growth of between 3% and 4% and an operating margin of between 15.5% and 16%, but would only provide formal guidance for 2023 in February

    • Its share price fell almost 8% as investor doubts over client spend amid economic turmoil weigh heavy



    Read reassured investors that clients were still spending despite the economic headwinds. The IPA predicted a fall in spend over the next four years as big brands try to balance the books, yet to date some of the world’s biggest advertisers have indicated they’ll continue to invest.

    FMCG companies like Coca-Cola, P&G and Unilever are taking a “different, constructive and more long-term approach” to their marketing spend, said Read, which WPP is benefitting from. It is also talking to these brands about managing inflation, innovating and “demonstrating they are on the side of the consumer”.

    “Our clients’ view of marketing and what we do has transformed. They recognize the value we create and you see that in our numbers. We’re well placed to navigate challenges.

    “As long as consumer spending is strong, clients will invest. There’s a disconnect between the corporate world and financial world, which looks more at the future. We’re dealing with the real time and are seeing strong continued demand for goods and services.

    “Clients have learned the value of continuing to invest in brands and innovation and the importance in marketing spend. It gives us comfort going into H2 and 2023, but the outlook is uncertain.” 

    Read highlighted major wins during the period, including Audi, Audible, Danone and Nationwide, and said it was seeing the gains from landing Coke’s creative and media business in 2021. 

    He assured investors that the new business pipeline was strong, with around £10bn in net sales coming from hard-won clients, giving it “strong momentum” as it heads into 2023. But those numbers are still 10% shy of where it was in the same period the year before.

    Staff costs and cutting freelancers

    Staff costs, excluding incentives, were up 16.7% year-on-year to £3.8bn, reflecting a 10% increase in headcount and the full-year impact of the salary reviews that took place in June 2021.

    It said it planned to cut its use of freelance talent, which was up significantly on the back of increased work coming through the business and came with a hefty price tag. Freelancers have increased their prices significantly as a result of inflation compared with the salary increases of permanent staff. 

    “As we go from H1 to H2, we’ll depend less on freelancers and focus more on permanent staff, which will help deliver better margins,“ it said. 

    The analyst view

    Despite the positive numbers and optimistic outlook from Read that client spend will continue, analysts were left concerned by its long-term prospects and the likelihood of advertising cuts at some point in the coming year. 

    AJ Bell, investment director at Russ Mould, said: “WPP’s first-half numbers actually look fairly solid, but investors are so concerned about the economic backdrop, and what it says about WPP’s prospects, they have reacted negatively.

    “Clearly there is a belief that WPP’s recent momentum, which helped it lift its annual sales outlook, can’t last in the long-term.

    “While chief executive Mark Read argues WPP is yet to see any evidence of a big retrenchment in spending by its clients, this feels likely to come at some point.”

    Thomas Singlehurst, an analyst at Citi, told the FT that “it feels like WPP is being held to account” by the market against the “high benchmarks” for the quarter set by other agency holding groups.

    Publicis hiked its full-year guidance after seeing outright organic growth in the second quarter up 21%, with net revenue growing 19.1% across the first half of the year, compared to the same period in 2021. Havas and Interpublic Group also posted strong resulted last month. 

    Singlehurst said investors may have been worried by WPP’s “lack of willingness” to firmly commit to achieving midterm targets in 2023. 

    Analysts at Goldman Sachs Group agreed that the unchanged margin guidance “could be seen by the market as a slight disappointment“.

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