WPP, the world's biggest advertising agency, is on its way back,
having recovered to making worthwhile profits and paying a promised
dividend, but there is no call to get carried away with enthusiasm for
the group's recovery situation as it has a very long way to go to return
to full financial health.
It still has negative shareholders' funds of #160m (albeit down from
#253m a year ago) and its main markets remain weak, making disposals
difficult. Somehow it has to trade its way out of the trough and only
through painstakingly raising margins will it do this.
But the first-half figures certainly make encouraging reading, with
pre-tax profits for the first half of the year up from just #1.82m to
#24.1m and the interim dividend -- the first since 1990 -- of 0.35p, is
as forecast with the #88m rights issue in March. Excluding exceptionals,
trading profits were 21% ahead at #42.6m.
Turnover showed strong growth, up 16% at #700m, but much of this
reflected currency movements, with underlying growth put at 5%. The
pattern of trading varied considerably from region to region with
revenues rising by 9% in the US, helped by the recovery in the economy
there. But in the UK revenues were down 3%. The rest of the world was
10% ahead, led by emerging markets in advertising terms, Latin America
and Asia-Pacific.
At least with its global range WPP does have exposure to whatever
expanding economies there are. The group grew from humble beginnings
during the great 1980s' takeover spree with the rationale being that in
a shrinking world multinationals would want an agency able to operate in
all principal markets and able to offer various services. This seems to
have happened as WPP worked with 868 companies in two or more functions
in the first half.
But the recession put paid to the hopes for growth while the group was
loaded down with debt. Past acquisitions continue to haunt it because
the consideration included deferred payments which left the group
running to try to keep still. Payouts in the first half of #23.4m
outpaced operating cash flow of #19.8m. Commitments for #61m remain.
WPP has made a number of disposals to reduce debt and would like to
make more. But with markets poor it is just impossible to get worthwhile
prices for businesses. Negotiations have been going on for several
months to sell the New York subsidiary Scali McCabe Sloves, which
operates independently and therefore should be straightforward to sell,
particularly as its revenue grew by a quarter in the first half.
Other proposals such as the flotation of the successful
market-research activities and the operations in South-east Asia, which
are trading well, plus the sale of one or two smaller companies, are
under investigation but in most cases the net proceeds would not even
match the cash flow they generate.
Debt is coming down slowly. It averaged #372m in the first half,
against #476m, though much of this reduction stemmed from the #88m
rights issue.
Market research maintained a strong showing, increasing revenues by
12%, while audio-visual services, healthcare marketing, direct
marketing, and certain specialist communications performed ''reasonably
well''. Corporate design and identity did well in difficult conditions
while sales promotion performed reasonably in the UK and US but less
well in Europe.
However, these are peripheral activities. The most important operation
after advertising is public relations, led by Hill & Knowlton, and this
still suffers from dull economic conditions, particularly in the US.
Revenues fell by 12% overall.
Advertising revenue was up 7% but there are doubts over whether this
growth can be sustained. The debate is centred on the value of brands
following the well-publicised price cuts in famous brand consumer goods
such as Philip Morris's Marlboro cigarettes and Procter & Gamble
nappies. The success in value-for-money generic brands in creaming off
sales means that less money will be spent on advertising as
branded-goods manufacturers are forced to curtail spending to save
margins.
The recession has clearly made people acutely aware of value for money
and the question is really whether this is a permanent shift. Own-label
products have improved in quality and quickly respond to product
innovation as the supermarkets are keen to see this proportion of their
sales rise. The jury is still out on the question.
However, WPP's recovery does not depend on the volume of business.
Getting margins up is the important thing and here progress is being
made. Excluding severance costs, operating margins improved from 5.8% to
6.6%.
Chief executive Martin Sorrell says that even given a stable climate
they should be able to make considerable progress as margins remain well
below the best-performing competitors and their own historical
performance. The problem is that the climate from WPP's viewpoint is
barely even stable. Mr Sorrell says on the basis of client experience so
far it is possible the economic recovery will be delayed for some time.
This brings us back to where we began -- namely, WPP is clearly on the
mend but recovery is going to be a protracted affair. The shares gained
3p to 93p yesterday.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article