Current progress and future prospects
The Group's profit performance in the first half of the year was strong and ahead of most estimates, despite the general economic tightening in the US and Western Europe in the second quarter. The faster-growing geographical markets of Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, continue to show double-digit revenue growth, with the UK and Western Continental Europe improving in the second quarter, although they remain at mid single-digit rates. The US, despite the continuing uncertainties surrounding the financial markets continues to grow, with revenues on a constant currency basis up 5.8%.
Functionally, Media Investment Management (which is a stronger-growing part of what some call our advertising revenues), Public Relations & Public Affairs, direct, internet and interactive and Information, Insight and Consultancy, continue to grow strongly. Healthcare Communications, particularly in the US owing to FDA non-approvals of new drugs, some project-based specialist communications activities and traditional advertising in the mature markets of the US, UK, France, Germany, Italy and Spain, performed at or below the Group's revenue growth for the period.
Levels of activity in 2008 should match those seen in 2007 and there are significant new business opportunities at both the network and parent company levels. Spending behind the US Presidential Election and around the Beijing Olympic Games should continue to boost 2008 revenues, as well as some clients taking the view, that our research supports, that the cost of cutting brand spending at this stage of the cycle is too costly in the long term. However, the prospects for 2009 remain less certain, particularly if the US and Western European economies continue to be impacted by the financial crisis and commodity price increases.
In addition, the new US President will have to wrestle with twin fiscal and budget deficits in early 2009 and post the Olympics, Chinese growth may slow due to inflationary (particularly food price) concerns and the impact that a weakening US economy has on the rest of the world. In mid-2009 the financial markets may start to rebound and 2010, in the real world, continues to look better, with the prospect of the impact of ‘mini-quadrennial’ events such as the FIFA World Cup in South Africa, the Winter Olympics in Vancouver, the mid-term Congressional elections in the US, the World Expo in Shanghai and the Asian Games in Guangzhou.
Despite these shorter-term uncertainties, the prospects for trading performance improvements at WPP remain good. Eighteen months ago the Group increased its margin target for 2009 to 16.0% and for 2010 to 16.5%. Our long-term operating margin target remains 19%.
Plans, budgets and forecasts will continue to be made on a conservative basis and considerable attention is still being focused on achieving margin and staff cost to revenue or gross margin targets. Margins continue to be strong in important parts of the business. In addition to influencing absolute levels of cost, the initiatives taken by the parent company in the areas of human resources, property, procurement, information technology and practice development continue to improve the flexibility of the Group's cost base.
Flexible staff costs (incentives, freelancers and consultants), which remain at the historically highest levels of around 6–7% of revenues, will position the Group very well to weather any economic slowdown.
The Group continues to improve co-operation and co-ordination between companies in order to add value to our clients' businesses and our people's careers, an objective which has been specifically built into short-term incentive plans. Particular emphasis and success has been achieved in the areas of media investment management, healthcare, privatisation, new technologies, new markets, retailing, internal communications, hi-tech, financial services and media and entertainment. The Group continues to lead the industry, in co-ordinating investment geographically and functionally through parent company initiatives, which competitors initially pooh-poohed, but now attempt to imitate. Increasing co-operation, although more difficult to achieve in a multi-branded company, which has grown by acquisition, than in an organically grown uni-branded one, remains a priority.
The Group also continues to concentrate on its long-term targets and strategic objectives of improving operating profits by 10-15%; improving operating margins by half to one margin point per annum or more depending on revenue growth; improving staff cost-to-revenue or gross margin ratios by 0.6 margin points per annum or more depending on revenue growth; converting 25-33% of incremental revenue to profit; growing revenue faster than industry averages and encouraging co-operation among Group companies.
As clients face an increasingly undifferentiated marketplace, particularly in mature markets, the Group is competitively well positioned to offer them the creativity they desire, along with the ability to deliver the most effective co-ordinated communications in the most efficient manner.
The rise of the procurement function, the increasing concentration of distribution and the legislative acceptance of media ownership concentration in several countries, will further stimulate consolidation amongst clients, media owners, wholesalers and retailers and last, but not least, advertising and marketing services agencies.
The Group is very well positioned to capitalise on these developments and to focus on developing the best talents, the strongest management structures and the most innovative incentive plans in the industry for our people.