WPP plc Q3 FY2022 Earnings Call

Good morning, everyone, and thank you for being here. Welcome to the WPP Q3 2022 Trading Update Conference Call and Webcast. Today's conference is being recorded. I would now like to pass the call over to WPP's CEO, Mr. Mark Read. Please proceed, sir.

Thank you very much. And good morning, everybody, and welcome to WPP's third quarter results for 2022. I'm here in Sea Containers in London. I'm joined by John Rogers, our CFO; and our investor relations team. So on Page 2, I'll just draw your attention to our cautionary statement as we start our meeting; and on Page 3, the agenda. So I'll talk through the highlights before handing over to John to talk about the financial performance. We'll come back to a quick overview and summary, and then we'll take your questions. So on Page 4, our highlights. I think our performance for the quarter has been strong. We delivered growth of 3.8% for the quarter on the back of really a very strong performance in the third quarter last year up close to 16%. I think more importantly our 3-year stack accelerated from Q1 to Q2, to Q3 this year, so from 9.2% to 9.7%, to 10.9%, and that reflects important progression in the business. Acceleration against really a more challenging macro environment reflects the strengths of our clients, of each of the sectors of our business, increasingly all of which are contributing to the company's growth and the broad geographic mix of WPP's business. And while we achieved 4.5% growth in the U.S. or 4.2% in the U.K., we're up 19.7% in Brazil and 10.7% in India. Our offer, which is increasingly integrated, topped the new business league tables. We'll come back to this in some detail, but we won $1.7 billion of new business in Q3. And I'd call out our wins of Nestlé media in Germany; Samsung CRM in Europe; and SC Johnson, consolidating the creative and the shopper marketing business into Ogilvy and VMLY&R, particularly important wins in the quarter. Of course, we continue to need to invest in our offer. We're doing so organically in fast-growth and strategically important areas like commerce, data, and media; and also through acquisitions, where we've remained disciplined but strengthened our business with four acquisitions in the quarter. So net-net, I'd say our performance in the third quarter and confidence in our offer and our work with clients gives us the ability to raise our guidance for the full year to the top end of the range of 6.5% to 7%. And at the same time, we're slightly tempering our margin guidance to 30 to 50 basis points to reflect the continued investments that we're making in the business. So look. In my view, it's a creditable performance. Particularly, we gave our original guidance at the start of the year on the day that Russia invaded Ukraine. And the fact that, some nine months later, to raise our revenue guidance again and still deliver solid margin improvement reflects the importance of the work we do for clients, our ability to drive their results. So with that as introduction, John is going to take us through the financial performance.

Thank you, Mark. And good morning, everyone. Coming on now to revenue less pass-through costs by quarter. As a reminder: We delivered like-for-like growth of 9.5% in Q1, 8.3% in Q2. And like-for-like growth in Q3 was 3.8%, delivering a year-to-date growth of 7.1%. The 3.8% growth was impacted by ongoing China lockdowns and obviously a COVID-related contract benefit in Q3 of 2021; and if you reverse out that benefit, it would result in a 4.8% growth for the quarter. On a 3-year basis, i.e., versus 2019, as Mark has already alluded to, growth has continued to improve through the year with 9.2% in Q1, 9.7% in Q2, and 10.9% in Q3. And as Mark has already said, as a result of this momentum, we've upgraded our guidance to like-for-like growth for the full year of 6.5% to 7%. Coming on now to growth across our business lines. The Global Integrated Agencies delivered 4.3% like-for-like growth in the quarter, made up of 4.7% for GroupM and 4% for the creative agencies, so both ahead of our overall growth for the business. PR delivered like-for-like growth of 5.8% with strong growth across all of our major businesses there, BCW, Hill+Knowlton, and FGS Global. And our Specialist Agencies declined by 3.9%, again reflecting the COVID-related contract I made mention of earlier on. And actually, excluding that impact, growth would have been 8.6% for our Specialist Agencies. And on a 3-year basis, we continue to see good growth in GroupM at 20%, PR at 19%, and 17% in our Specialist Agencies. Coming on now to our continued investments in our growth, whether that's organically through Choreograph, our data business; or in GroupM Nexus, our media planning and performance business; and most importantly, our people, investing in new talent and events like Making Space initiative, giving our people a company-wide break and a series of events across our offices to inspire and allow them to reconnect. We also continue to invest in acquisitions, four acquisitions in the quarter: Corebiz, a Latin American e-commerce agency; the JeffreyGroup, a leading corporate communications and public affairs business in Lat Am; Newcraft, a European e-commerce consultancy based in Amsterdam; and most recently, Passport Brand Design, a leading brand design agency based in the U.S. We also continue to invest in our transformation, our campus program, our procurement initiatives, our new systems rollout and shared services; and pleased to say we're on target to achieve annual savings of GBP 300 million for the year against 2019 baseline. Coming on now to our major markets, where we've seen varied performance, growth in the U.K. and U.S. ahead of the overall business. And on a 3-year basis, we've seen an acceleration in performance in our U.K. business to 13.9%. Germany has been down 8.7%, again given the impact of the COVID-related contract. Excluding that, Germany would have been up 3.3%. China, down 9% on the back of down 6% in the second quarter due to the continued impact of lockdowns. We did expect that to recover a little bit in the third quarter and the second half. We haven't yet seen that come through, and that is weighing on both our revenue and our margins as a consequence. India is still strong, 10.7%, albeit down on Q2, reflecting the IPL benefits we saw in the second quarter. Australia is still recovering but yet to get back to 2019 levels. And Canadian growth remains strong. France is still a little disappointing given client losses in 2021. And Brazil is still delivering very strong growth, double-digit growth in the quarter. And Spain is lapping some tough comparatives. So a varied performance across our major markets. Coming on now to our net debt. There's been a year-on-year increase from GBP 1.6 billion to GBP 3.5 billion driven mainly through over GBP 1 billion in share buybacks for the last 12 months, as well as CapEx and acquisition spend to fuel our future growth and drive efficiencies in our business. We expect our year-end adjusted net debt to be around GBP 2.3 billion, reflecting the usual improvement we would see in working capital in Q4, allowing for flat trade working capital year-on-year as we've previously guided. And also, of course, there's been an outflow in our non-trade working capital of GBP 300 million to GBP 400 million, reflecting the high 2021 bonus that gets paid out in 2022. And finally, coming on now to our 2022 guidance. As I've already said, we've upgraded our revenue less pass-through cost guidance to 6.5% to 7%, to deliver an operating margin up 30 to 50 basis points, reflecting our continued investment in our people, our data, and technology to support this growth; with net debt expected to end the year at GBP 2.3 billion, with an average adjusted net debt-to-EBITDA ratio slightly below the 1.5x to 1.75x guidance range that we've given in the past; M&A contribution of 0.3%, consistent with what we said at our interims. We're upgrading the FX benefit now to 7% as a result of recent exchange rate movements. As we've previously guided, we've got restructuring costs of GBP 220 million, including GBP 100 million of Workday costs anticipated in this year, 2022; and a headline tax rate of 25.5%; CapEx of GBP 350 million to GBP 400 million, again in line with our previous guidance; trade working capital flat; and GBP 300 million to GBP 400 million of outflow on non-trade, as I've just mentioned; and around GBP 800 million of share buybacks which we committed to at the beginning of the year. When you add all those together, that should get you to your net debt number that we've guided to. And with that, I'll hand you back to Mark.

Thank you very much, John. Turning to Slide 12, I want to share some insights about what we're hearing from clients. First, regarding our new business performance, I believe it's a strong indicator of the robustness of our offerings and may also serve as a leading indicator of our overall performance. We've secured or retained several significant contracts against fierce competition. Notably, in media, we've achieved wins like the Nestlé media account in Germany, foodpanda media in Asia, Discover media with Mindshare in the U.S., and Tesco media with EssenceMediacom in the U.K. Additionally, we captured the Samsung CRM business in Europe through Wunderman Thompson, thanks to our close collaboration with Adobe on technology operations. There's also a notable creative win with H&R Block and Ogilvy, and we are onboarding Costa into the OpenX structure for The Coca-Cola Company. Moreover, we achieved an integrated win at SC Johnson, collaborating with Ogilvy and VMLY&R for shopper marketing. The tables from COMvergence and R3 show that we rank #1 overall in media, with Mindshare performing strongly after having a challenging couple of years, followed by Wavemaker, which excelled on the technology front. Overall, we remain very competitive in new business. On the client front, I would note that clients have opted to invest in their brands and maintain a strong focus on transformation. This might come as a surprise to some, but it persists amid strong consumer spending and the necessity for clients to support their brands in an inflationary environment while also investing in future growth and transformation. Though I don't think it's the right time to provide guidance for the upcoming year, I can say that the general sentiment among clients is positive. In recent conversations with two major FMCG companies, they've expressed plans to increase their spending in Q4, fortuitously due to stronger-than-expected business conditions earlier in the year. Comments from The Coca-Cola Company about their Q4 spending highlight our effective performance with Fanta. We've also heard from Nestlé, which aims to slightly boost their spending, and P&G, which plans to cut overall spending but seeks to maintain impact through efficiency by reallocating funds from linear non-targeted television to programmatic and digital media, areas in which we excel. Overall, this trend appears to be consistent across most clients, with few looking to drastically reduce spending. Many exhibit a more positive outlook, which gives us the confidence to raise our guidance for the year. One significant point to mention is our work with Ford, our largest client. We're thrilled to announce that we will be collaborating with Wieden+Kennedy on creative assignments, expanding our existing remit to meet Ford's evolving needs while increasing efficiency and capitalizing on the creative strengths of two accomplished agency partners. It's important to reflect on our journey with Ford over the past four years, as we've seen strong performance from our top clients: Ford, Google, Unilever, and The Coca-Cola Company, all expanding their collaboration with us recently. To summarize on Page 13, we enter 2023 with confidence, despite the challenges we know lie ahead. Our strategy, as it has been in other situations, is to emerge from these challenges even stronger, as we did during COVID. Several factors contribute to this confidence: Firstly, demand from clients remains robust, and our underlying growth has accelerated throughout the year. Secondly, we boast a strong service offering, exceptional talent, and considerable investments in technology, all of which are driving our current success. Each area of our business contributes to our exceptional performance, notably AKQA, which is growing at double digits this year, and Ogilvy, with strong new business performance, particularly with H&R Block and SC Johnson, along with a solid pipeline of opportunities. Wunderman Thompson also continues to excel, as does Hogarth, our production agency, whose capacity to deliver the comprehensive production clients need while achieving cost savings through efficiencies and offshoring is crucial in today's landscape. In media, we remain the leaders in new business. In public relations and public affairs, this sector has proven resilient during and after COVID. Our integrated approach is demonstrating significant strength. Lastly, we face 2023 with assurance thanks to our strong performance this year. We’ve upgraded our growth expectations and anticipate a margin improvement of 30 to 50 basis points, despite the investments we're making in our workforce and some challenges in China. Overall, our performance this year reflects the resilience of our business and our ability to support clients in navigating a more challenging macro environment in 2023. I appreciate your attention and I would like to thank our team for their dedication and our clients for their continued support. I now open the floor to questions for me and for John.

We will now take our first question from Lina Ghayor of BNP Paribas Exane.

Mark, John, I hope you can hear me well. I have three questions, please, and the first one is on the margin guidance. Could you elaborate a bit around the moving parts of the new guidance; and how you think of the margin for next year in the context of the current consensus which is, I believe, minus 0.6%? And the second one is on the organic guidance for this year. The top end of your guidance implies a rather stable 3-year stack between Q3 and Q4, so my question is what visibility do you currently have on the quarter. Is it 50% of the revenue, 70% of the revenue? So that will be helpful. And lastly, obviously on 2023. It's clear that the business is holding up pretty well, which is a sharp contrast with what we hear from Snap specifically, and you mentioned some confidence for 2023. So my question is how long, in your opinion, can it last. And if agencies suffer from cuts, when would you expect some cuts to come? And would you rather think, from the conversation you have with clients, that the cuts would be sharp or rather phased slowly as macro deteriorates? I believe some of your peers referred to contingency planning with clients, so it will be great to hear your feedback.

Sure, I'll begin. John can provide specific insights on margin and Q4 guidance afterward. Overall, our business has shown resilience this year. To address your earlier question about Snap, we performed better than many financial analysts anticipated, and even better than our own expectations. At the start of the year, we projected growth of 4% to 5% on the day Russia invaded Ukraine, but we are now updating that estimate to the upper end of 6.5% to 7%. Regarding our outperformance compared to the platform, there are a few factors. Firstly, we have a more diversified business model that isn't solely reliant on advertising, which, although significant, is just one part of our overall operations. Secondly, our client mix differs from those of these platforms. Our clients are mainly established advertisers and marketers who recognize the importance of continued investment. They have solid financial standing and robust consumer demand, taking a long-term view towards marketing rather than being startups focused on customer acquisition. Lastly, we see more growth possibilities beyond advertising. It’s important not to draw conclusions based solely on individual platforms like Snap. For instance, Snap surprised the market in Q1, leading many to incorrectly declare an advertising recession. I wouldn’t rush to conclusions based on their Q3 results either, given various competitive dynamics surrounding data privacy and the rise of platforms like TikTok. Now, on your inquiry regarding potential cuts, we will provide our guidance for next year when we have more clarity, but currently, we aren't sensing that from our clients. They seem to acknowledge the value we provide. Our business is markedly different now compared to five or ten years ago. While we are still influenced by the macro environment, this year’s results offer much insight into our direction for next year. John, would you like to share your thoughts on this year’s guidance?

Sure, yes. Look. As Mark has already said, we've got really good momentum going into Q4 on new business and our net sales growth. We want to continue to invest in that growth. As you said, there's a lot of moving parts in our margin. We want to continue to invest in our people, make sure we're being competitive on our salary increases, investing in events like Making Space. We've actually got roughly 9% more people in the business today than we had at the start of the year. We have been dialing back a little bit on the use of freelancers, as we guided at the interims, albeit we've actually probably needed slightly more freelancers than we planned to support the right growth of our business. It's really important that we ensure we've got the right resources, the right capabilities to serve our clients to make sure we can continue the growth on that top line. We've had the planned investments, of course, in Choreograph, in our data business; continued savings from transformation; and of course, the extended impact of lockdowns in China, which weren't in our forecasts. And we expected that to slightly improve in the second half, and that's not been the case, and that's added to margin pressure. And actually if you looked at that particular dynamic alone, that would have given us headwinds of about 20 basis points of margin pressure for the full year. So those are all the moving parts. And that's why we've slightly tempered our guidance. We previously said we'd outturn at around 50 basis points. We're now saying it will be somewhere between 30 and 50 basis points for the full year. Just on your second question, with regards to the 3-year stack and visibility. I mean you're right to highlight that the implied 3-year growth in Q4 should be similar to Q3. And actually, I think that we're forecasting a little bit less, around 9% to 10% or so, but similar to Q3. I think we've got pretty good visibility on that. I would say 80% to 85% visibility on that net sales coming in. Of course, clients can still cut spend. That's always the case, but as Mark has already alluded to, we've had a number of very, very positive conversations with clients about the fourth quarter in and of itself. And with regards to 2023, as Mark says, we won't give specific guidance for the year, but as you would expect, like all companies, we're doing various scenario planning to look at whatever the economic scenarios could throw at us next year. We've got a good track record of flexing our cost base through natural efficiency of our people and dialing into or out of freelance resource in order to flex our cost base whatever the economic climate might throw the business.

We have the next question from Tom Singlehurst of Citi.

Tom from Citi here. I have two and a half questions. First, agencies have started discussing pricing power, which you've mentioned as well. Can you quantify this impact for the current year and do you expect some incremental pricing power as we head into next year? My second question relates to new business performance. Could you quantify its contribution this year? Is it fair to say that since you've secured more business in 2022 compared to 2021, this contribution should increase in 2023 relative to 2022? Those are my two questions about growth. Additionally, I think I missed it when you mentioned it, but did you say there was a 20% drag on margin due to the effect from China? I wanted to confirm that. More generally, are the factors affecting margins this year, which have moved from around 50 to 30 to 50, one-off occurrences? Should we expect some relief next year, all else being equal?

Yes. I'll begin with new business and share some thoughts on pricing, and then John can contribute on margin. Regarding new business, I believe it can contribute 1% to 2% to our growth in a strong year and reduce growth by 1% to 2% in a weaker year. There are many factors at play, but organic growth from existing clients truly drives performance. A strong year for new business could provide support as we move into next year. However, I don't expect a significant change in our approach compared to this year. It's an indicator of our business's health. Concerning pricing power, our primary goal is to achieve results for our clients. We accomplish this in various ways, such as optimizing media plans, finding savings, and producing work more efficiently, often through lower-cost locations. There are several elements that influence what we charge clients, and our aim is to provide results at the same or reduced costs while ensuring ROI. We are also a people-based business, and as we increase compensation to support our staff, we might need to raise prices to some extent. However, many factors affect client billing. Ultimately, our responsibility is to offer efficient pricing while achieving results, and John can elaborate on this from a quantitative viewpoint. It's essential to consider the overall context rather than just focusing on price increases, which isn't a constructive discussion to have with clients.

Yes. Building on what Mark mentioned, our responsibility as business managers is to protect our clients from price increases and maintain competitiveness in the market. A significant portion of our costs is attributed to our employees, and we have been facing inflationary pressures regarding our permanent staff. It's essential that we reward them fairly for their hard work. Freelancers have also experienced inflation, prompting us to adjust our approach to support our clients effectively. We're observing that our key personnel costs are rising by about 6% to 7%. However, as Mark pointed out, there are various strategies we can implement to alleviate this issue. We have achieved savings in other areas of our cost structure, such as rent and travel. Additionally, we can optimize our operations by increasing offshoring, which tends to have a lower cost. This allows us to shield our clients from some of the inflationary impacts we encounter. In the first half of the year, I indicated that we might implement price increases of 1.5% to 2%, but acknowledged that more work was required for the full year. I anticipate that by year-end, the overall price increases will be between 2% and 2.5%. Therefore, although our core costs are rising by 6% to 7%, we have managed to keep our price increases relatively lower, demonstrating our commitment to protect our clients and aiming for a margin improvement of 30 to 50 basis points for the year. Regarding the margin question, while I understand the desire for specifics, it’s important to note that margins consist of many factors. Specifically for China, we expect the lockdowns this year will negatively impact margins by around 20 basis points, though I caution against focusing too heavily on any single element since many variables influence our overall margins and the guidance of 30 to 50 basis points. Nonetheless, the situation in China represents an unforeseen challenge of 20 basis points that we did not anticipate at the beginning of the year.

We now have Silvia Cuneo of Deutsche Bank.

The first one is on macro, just wondering if there are any markets where perhaps you've seen macro having more of an impact already and if you could comment on that. For example, in the U.S. or Spain, we noticed you reported slightly lower momentum on a 3-year basis for like-for-like growth, so just wondering if there is anything more than comp effect. Second question is around the cost savings. You confirm today that you are on target to achieve the annual savings of GBP 300 million. And I’ve seen that during the quarter you reported the opening of another WPP campus, in Canada, for example, so just wanted to ask if there are potential areas for more savings looking out next year and how you’re tracking with the WPP campus program. And then third question, just on Choreograph: Can you please share an update about the investments, and can you quantify that? And what's been the adoption, so far, on the new business negotiations?

Okay, John, do you want to address those? I believe that on a macro level, the differences from country to country shouldn't be overanalyzed. The changes are more influenced by new business and competitive dynamics in the market. We are observing some resilience in the U.S. during this quarter, stable pricing in the U.K., and slightly more challenging conditions in Western Continental Europe. The quarterly results provide insight into this. John, could you also discuss the cost savings and the campus initiative? What was the last question regarding Choreograph?

Let me share some numbers regarding the U.S. market and its 3-year growth. In Q1, we experienced a 3-year growth of 7.6%, followed by 12.3% in Q2. This results in an overall growth of 10% on a 3-year basis for the U.S. business in the first half. In Q3, the growth continued at 11%, indicating an acceleration in our 3-year growth in the U.S. We feel confident about this performance. Although the U.S. market has been challenging for us in the past, it has outpaced the rest of the business this year and is showing strong recovery. For Q4, I expect a similar 3-year growth trend to continue, so the U.S. business remains on a positive path. Regarding cost savings, these come from various initiatives including our campus program, procurement efforts, and changes to shared services and standardized systems. During our Capital Market Day in December 2020, we set guidance for our cost transformation program, aiming to save GBP 600 million by 2025-2026, with two-thirds reinvested in the business and GBP 200 million affecting the bottom line. We are on track with this plan, achieving GBP 300 million in savings this financial year. We provided a forecast in December 2020, which indicates our anticipated savings each year through 2026. We remain aligned with this trajectory and are confident about our savings plan. As for our campus program, we've made significant progress. By the end of this year, we will have over half of our workforce located in about 38 campuses, with a target of around 75% by 2025-2026. This shift has yielded cost savings and fostered collaboration among our teams. I recently visited our Jakarta campus in Indonesia and observed how bringing teams together enhances their collaboration and teamwork. The executive team there includes all the CEOs from different agencies in Indonesia, facilitating effective cooperation. Regarding Choreograph, I will not specify the exact investments being made, but they are substantial and we are proud of the progress achieved thus far. We will provide more detailed updates during our preliminary report in February.

We now have Lisa Yang of Goldman Sachs.

I have three questions as well. The first question is coming back to the margin. I'm still trying to understand what has happened here because obviously, you upgraded your organic growth guidance by 2 points. So you should see some operating leverage from this faster growth. I understand the 20 basis points drag from China. And I guess that's explained like-for-like the downgrade from the 50 to 30 to 50, but yes, I'm just wondering why we’re not seeing more operating leverage. Is the high growth coming with low margin? That's the first question. Secondly, I think you gave a useful update on the cost inflation you're seeing on your staff. Is that for permanent, or is that permanent and freelancers? And what's your plan in terms of headcount growth for permanent and freelancers for the year, and on incentives? Or are you still happy with going back to the sort of more normalized GBP 300 million to GBP 400 million for the year? And thirdly, just wondering. Obviously China was very weak and there's a lot of uncertainty there still, so in your guidance of 4% to 6% for Q4 for the group, what are the assumptions you're making for China? What's baked in the sort of guidance?

On margins, I believe it’s straightforward. The business has continued to perform well, and we are investing in our workforce to support growth in the fourth quarter, which is the most crucial period of the year. We adjusted our expectations slightly from 50 to 30 to 50, but I don’t see that as a significant change. You could possibly link that to China, but the key takeaway is that our results reflect the investments we've made in our team and our ongoing support for clients as we head into next year. John, would you like to discuss cost inflation? Regarding China, our guidance for the year reflects all factors we are aware of, including the situation there. There's not much more to elaborate on that.

Regarding cost inflation, based on our permanent headcount, the average salary increase is approximately 5% to 5.5%, which includes some promotions. For our freelance workforce, making up about 10% of our total, we're experiencing an inflation rate of around 15%. When we combine these factors, we arrive at an average increase of about 7%, contributing to an increase in our cost base. However, we have effectively mitigated these increases for our clients by adapting our support strategies. Specifically, our permanent headcount has risen by about 9% since the beginning of the year. While we have successfully decreased our reliance on freelancers, it hasn't reduced as much as we initially intended, in order to continue providing support to our clients, which has slightly impacted margins. Regarding margins, there are two main factors to note: one is the approximately 20 basis points headwind from the unforeseen lockdowns in China, and the other is the continued opportunity to further lower our freelancer dependency. These elements have led to a slight softening in our projections; we previously indicated around a 50 basis point impact, but now we estimate it at 30 to 50 basis points. We're still aiming for the 50 basis points, and we will finalize our position by the end of the year. Additionally, for clarification on bonuses, last year we distributed total bonuses exceeding GBP 500 million. For 2022, we are comfortable with a range of GBP 300 million to GBP 400 million, likely settling somewhere in the middle of that range. Thank you.

We now have Julien Roch of Barclays.

I have three questions, if I may. Mark, as you mentioned, creative is an area of turnaround. How much do you expect organic growth in creative this year, assuming you make your 6.5% to 7% organic growth for the full year? It might be straightforward for you to provide a number considering AKQA and Wunderman Thompson, but could you also separate the more digital business within AKQA and Wunderman Thompson from the traditional creatives? This would help us understand the turnaround in traditional creative, which was a challenge from 2017 to 2019. My second question is about the macro environment. Instead of asking you to predict next year, I’d like to know if you believe clients have truly learned from past cycles and will cut brand advertising less during a downturn. Or, as usual, will they cut spending if the macro environment weakens? The WFA survey of 55 of the world's largest advertisers indicates that 74% have budgets tied to the macro environment, suggesting that not much has changed. However, I would like to hear your perspective on this. I'll just stick to two questions for now.

Yes, I believe that when it comes to the creative agency question, we cannot easily distinguish between traditional and nontraditional creative anymore; it's all just creative. Our creative agencies experienced a year-to-date growth of 5.2% compared to last year, which I consider a commendable performance. Regarding the cyclicality of the business, I acknowledge that we operate in a cyclical environment. However, as I've mentioned previously, our business extends beyond just advertising. Depending on developments in the coming year, there may be reasons to believe that certain aspects could be less cyclical. It's important not to overreact about 2023. Certain regions like India, with a growth rate of around 10%, Brazil at approximately 20%, and Southeast Asia, should be less impacted. The consumer remains relatively strong, and I would describe our clients' attitudes as constructive. While I acknowledge that we are indeed a cyclical business, it's essential to maintain perspective. In an environment of rising prices, clients are adjusting their price strategies and innovating, which will lead them to continue investing in their brand support.

I’d like to provide some insight into Mark’s comments regarding the creatives. While we don't disclose the performance of individual agencies, I can share that year-to-date growth stands at 5.2%. Ogilvy has performed particularly well, surpassing this growth and demonstrating strong new business wins, indicating they are gaining positive momentum. Wunderman Thompson is slightly trailing the 5.2% but remains close. VMLY&R has faced a relatively challenging year; however, it’s important to note that they were the top performer among our agencies in 2020 and 2021, maintaining solid performance over three years, despite facing more challenges in 2022. The AKQA Group is also performing well, with double-digit growth, indicating strong results. Hogarth is similarly thriving, also showing double-digit growth year-to-date. Overall, this gives a good overview of our creative agencies, with several performing exceptionally well.

We now have Omar Sheikh of Morgan Stanley.

I have a few questions. To begin with China, could you remind us what percentage China contributes to the total revenues? I believe it's around 10% or 11%. What type of business is that? Does the business mix mirror the overall structure of WPP, or is it more focused on media? Any insights you could provide would be useful. Regarding the outlook for 2023, Mark, could you share your thoughts on the expected growth of the China business next year, considering the broader concerns about growth in China at the moment? That's my first set of questions. Now, for John, about hiring plans. I think you mentioned that the year-to-date full-time employee count has increased by 9% this year. I want to confirm that. Are you experiencing the same level of attrition as usual? Does that give you some flexibility as you approach next year, particularly to prepare for potentially more challenging market conditions? Any comments on your hiring strategies would be appreciated.

China constitutes about 5% of our business, specifically mainland China. It is somewhat distinct from the rest of WPP, with a greater emphasis on media. Our client base is robust, with approximately 60% being multinational and 40% domestic Chinese. The market is more digitally oriented, with 90% of ad spend today being driven by e-commerce and social media. Additionally, media makes up a larger portion of the overall mix, which can lead to more volatility compared to WPP overall. This is why we are experiencing some fluctuations in our performance in China. However, as conditions improve next year, we might witness some counter-volatility. John, would you like to discuss our hiring plans?

Yes. To confirm, the increase in headcount from the beginning of this year to now is 9%, which is accurate. Regarding attrition, we have noticed a slight decrease over the past month. Initially, we were at about 30%, but we are now returning to around 25% or 26%, which aligns with the typical levels seen in this industry. Historically, attrition declined during COVID, then rose to 30% as we emerged from it. Recently, we've seen it reduce again, but it remains at the industry norm of about 25%. Concerning your comments about next year, I want to clarify that every year we go through a planning and forecasting process as we transition from Q4, one of our busiest quarters, to Q1, the lightest quarter. The success of the year often hinges on how well we manage this Q4 to Q1 transition, which is particularly important this year. We are engaging in extensive planning for the upcoming year. There are various potential outcomes, but we have strong confidence heading into 2023 that we can effectively manage our cost structure, especially considering our ability to rely on a 25% churn rate in our business and the flexibility of our 10% freelance mix, regardless of any economic challenges we may face.

Your next question comes from Richard Kramer of Arete Research.

Mark, on Google's call last night, they cited some pullback in some advertisers in areas like financial services and crypto and so forth. And there's been a bit of a debate among investors whether agencies have simply not seen these sort of pullbacks because you deal with larger clients, but I guess my question is do you see a gap opening up between some of the larger brands you’ve mentioned with some of the SME or D2C brands that have emerged from those challenges in the past few years that seem to be struggling with sustaining brand spend? And my second question is you mentioned the shift from linear to addressable TV, and you cited P&G as an example. And we see some big new pools of inventory opening up maybe in private marketplaces or programmatic guaranteed deals. Is there an opportunity for WPP to capture a greater share of that TV ad spend by direct media buying onto those platforms instead of going through some of the CTV DSPs?

Yes. I believe that our sustainability of spending is impacted because we don’t have a large client base in crypto. It’s clear that some digital spending has come from client acquisition efforts backed by venture capital, which have decreased as the economy has shifted. Our client mix is unique, and while in the past this may have posed challenges for us, currently it may actually be beneficial. Overall, our clients continue to invest, viewing their spending as a long-term commitment instead of relying on short-term funding. Regarding your question, there is significant potential in the transition from linear to addressable television. Clients are starting to question the availability of advertising inventory due to the rise of platforms like Netflix and Peacock, which expands their opportunities for content investment—a positive development. We have a robust business in connected television through Finecast, which has seen strong growth of 10%, 20%, or even 30% over the last few quarters. We are also able to collaborate with these platforms, similar to our work with Xaxis, to assist clients in navigating connected television. This, in turn, will benefit us as well. Consequently, I believe the greater growth of holding companies in the first half can be attributed to our diverse client mix, various growth opportunities in areas beyond advertising, and the evolving nature of our business.

We now have Richard Eary of UBS.

Mark, John, I have three questions. The first is about the impact of inflation on the business, particularly concerning revenues and costs. You mentioned raising guidance this year from 4% to 5% and now to 6.5% to 7%. However, you also indicated cost increases of 2% to 2.5%. Is the main reason for the upgrade because you’ve managed to pass on inflation costs, positively affecting organic growth? Or is it related to improved demand for other services? I’d like clarity on this because as we move into next year, if inflation persists, will that shield against potential weaker volume growth? The second question is about Q4. Your guidance indicates a stronger performance compared to your peers, who are around 4%. You’re looking at 5% to 6%. Can you clarify if this is due to your expectations of account win momentum, especially since you've set guidance at 80% to 85%? Or is it more about your peers being conservative? I'm trying to determine if the optimism for Q4 stems solely from account wins or if other factors are at play. Lastly, considering that the automotive sector has been somewhat absent from the ad market recently due to supply chain issues, I’d like your perspective on Ford, your largest customer, and their plans for 2023. Will the auto sector recover in a more favorable manner, potentially enhancing the advertising mix?

Yes, let me address that. Regarding Q4, I can't comment on our competitors' thoughts, so I can't speak for them. Our guidance reflects everything we know about the upcoming year, and we are confident in our ability to meet it. When it comes to inflation, it’s challenging to separate price from volume. What I can say is that if clients are experiencing strong top-line growth, they typically invest more in marketing. That’s what we are benefiting from, rather than a price impact on our business. It's really about the overall spending of clients while we aim to secure a fair price for our services. As for the auto sector, it has indeed faced challenges over the past couple of years. While I can’t provide specifics on Ford's plans, like everyone else, they are looking to enhance their brand and sales. We anticipate that the chip shortage will ease, and they have an appealing array of new models coming out. We need to see their plans, but all clients are aiming for greater efficiency and returns on their marketing investments. It will be interesting to see how this plays out in 2023, considering various factors like the chip shortage, vehicle production, and the broader economic conditions. The auto market is becoming increasingly competitive with many electric vehicles and new models being introduced. Typically, in a competitive environment, clients tend to increase their spending. We’ll also need to see what Tesla's strategy will be, especially if Elon Musk's involvement with Twitter influences things. We’ll have to wait and see.

Can I just ask a follow-up question? And I don’t know whether you can sort of answer this. It’s that, as the business mix has shifted, could you give us an indication? It’s that how much of the business is now sort of priced out on a sort of cost-plus basis relative to where it was in previous cycles. I mean you mentioned obviously the business is very different from where it was 5 years ago, but it would be trying getting a better understanding in terms of how we’ll think about it from a sort of cost-plus perspective...

I don’t think that’s significantly different from five years ago or even ten years ago. What’s most important is the extent to which clients are taking a long-term view, which I think more clients are doing. The breadth of our service now goes beyond just advertising or media spend, which is undoubtedly the most cyclical part of our business. Additionally, it's essential to understand the geographic reach of our business that extends beyond the U.S. and the U.K., which are often our primary focus. Therefore, I don’t think you can place too much emphasis on the pricing aspect.

We now have Matti Littunen of AllianceBernstein.

I have a quick follow-up regarding the pricing discussion. Thank you, John, for mentioning the 2% to 2.5% impact from the price increases. I want to connect this to the earlier question about whether this is applicable only to the business where you bill based on scope-of-work. Additionally, do you consider the effects of higher media prices on the overall commissions for GroupM? Also, could you provide an update on the performance of Xaxis this year and the main factors driving its growth?

Yes. So on the question on pricing, I think the 2% to 2.5% is a blended rate across the business, so it includes all the component parts that you’ve described. And we wouldn’t want to sort of break it out in any more details than that, but the 2% to 2.5% is across the board. In relation to Xaxis, it’s, yes, a little bit more of a challenging time in Q3, I would say, than historically but on the back of very, very strong comps in Q3 of last year. In the last year, we were up 23% or so in Q3. This year, we’re down a little bit, but over a 2-year basis, we continued to progress and go forward.

We now have Matthew Walker from Crédit Suisse.

The first question is about visibility. You have commerce, technology, media, and creative production. How much visibility do you have in terms of months or quarters for each business segment? Is it significantly longer for commerce and technology compared to the others? The second question relates to pricing. John previously mentioned that price increases were affecting one-third of the client base, with one-third still under discussion and another third grandfathered in. Can you provide an update on this? Is the 2% to 2.5% increase coming from just that one-third, or has it expanded to a wider client base? Finally, what is the cash spend for all the deals you've completed this year to date?

I'll address the visibility question. We’re engaging with clients about next year’s budgets. Without providing specific guidance, these discussions align with what I previously described, but variables can shift. Our visibility remains consistent with what it has been in the past. I don’t believe this visibility has changed; rather, concerns among analysts have heightened more than any actual decline in market visibility. We need to take into account the diversity of our business, the range of services provided, and be aware that plans can change. A good reference point is the Coca-Cola call from yesterday, which illustrates how clients approach their investments—they aim to continue investing but are prepared to make short-term adjustments if necessary. I believe the focus should be less on visibility and more on that adaptability. I’ll now turn it over to John for more details on pricing.

Just to address your question about commerce, experience, and technology. I want to remind you what we shared at the halfway point. We don’t view our business in isolation, as Mark often mentions; we see ourselves as having an integrated offering across our agencies. We evaluate it on a semi-annual basis, so at the midway point and in our preliminaries, we break down components of our work related to commerce, experience, and technology. As we mentioned in the first half, our Global Integrated Agencies, excluding GroupM, indicated that approximately 39% of their work was related to commerce, experience, and technology. This represents a growth of around 10% in those areas. The Global Integrated Agencies, excluding GroupM, grew by just over 5%, meaning the rest of the business grew by about 3%. This gives you insight into the distribution of work in those categories across our global integrated agencies and the growth we're experiencing. On pricing, we don't want to delve into too much detail, but we confirmed at the halfway point what you've repeated. We projected price increases of around 1.5% to 2% at that time. We've expanded our work into those areas where we haven't observed price increases, leading us to expect price increases for the full year to be about 2% to 2.5%. I hope that's clear. The cash spend on deals to date is just under GBP 150 million.

There are no further questions at this time. I would now like to hand the call over to Mr. Mark Read for further closing remarks.

Very good. Well, thanks, everyone. Thanks for listening and thanks for your questions. In conclusion, I would say we had a strong quarter, with an accelerating 3-year growth during the year. And as we look at next year, I’ll just make these three observations. First, what we do is critical to our clients, and that’s demonstrated by the strength of our growth this year. Secondly, we have a very strong offer; very strong people, agencies, technology; and good new business momentum and a good pipeline going into next year. And third and last, we’re a very different business from where we were five and certainly ten years ago. We’re an important advertising business, but we’re not just dependent on advertising. We have broad growth opportunities and fantastic business in markets like Brazil and India and Southeast Asia that give us resilience. So that said, we are aware of the macro issues, to give you, say, a caveat. And we’re able to react to protect our profitability as needed, but the key thing has to be to come out of 2023 in a stronger position than we entered it. That’s what we intend to do. And thanks to our people and the strength of our relationships with our clients, I’m confident that we will be able to do that. So thanks, everybody, for listening. And we’ll keep in touch. Thank you.