Future outlook for WPP in 2003

LONDON: The board of WPP Group plc (WPP) has announced that the budget forecasts for 2003 have been prepared on a conservative basis, largely excluding new business particularly in advertising and media investment management.

They predict broadly flat like for like revenues in comparison to 2002 and a stronger second half of the year relative to the first. They also indicate advertising and media investment management revenues up by 1per cent, counterbalanced by flat marketing services revenues.The ultimate objective continues to be to achieve 20 per cent margins over a period of time and improving the return on capital employed.

An official WPP statment says that the actual data for January in 2003 shows revenue marginally above budget and like-for-like revenues down 1 per cent on last year.

Estimated net new business billings so far in 2003 were very strong with almost $750 million of net wins according to trade publications. Worldwide economic conditions are likely to remain difficult in 2003 particularly given the uncertainty created by the prospect of a war in Iraq.

A bath-shaped or saucer-shaped recovery, where the upturn is gradual still seems most likely, although the bath does seem to have deep corrugations. The economy still seems to be paying the price for the over-expansion of the late nineties.

Should conditions improve, the group states that it is well positioned to respond to any recovery, given its geographical and functional spread and strengths, its flexible cost structure and strong cash flow. In the short-term, therefore, growth in advertising and marketing services expenditure will likely remain fairly flat or low, particularly given procurement pressures and the dampening effect of the increasing proportion of fee remuneration on the impact of cyclical upturns (and downturns).

However, there are now significant opportunities in the area of outsourcing clients' marketing activities, consolidating client budgets and capitalising on competitive weaknesses. In addition, spending amongst the package goods, pharmaceutical, oil and energy, government (the government is the largest advertiser in the UK market) and price-value retail sectors has remained relatively resilient. These sectors represent approximately 27 per cent of the group's revenue.

In the long-term, however, the outlook is very favourable. Overcapacity of production in most sectors and the shortage of human capital, the developments in new technologies and media, the growth in importance of internal communications, the continued dominance of the United States economy and the need to influence distribution, underpin the need for our clients to continue to differentiate their products and services both tangibly and intangibly.

Advertising and marketing services expenditure as a proportion of gross national product should resume its growth and once more bust through the cyclical high established in 2000. Given these short-term and long-term trends, the group has three strategic priorities.

In the short-term, to weather the recession; in the medium-term to continue to integrate successfully the mergers with Y&R and Tempus; and finally, in the long-term, to continue to develop its businesses in the faster growing geographical areas of Asia Pacific, Latin America, Central and Eastern Europe, Africa and the Middle East and in the faster growing functional areas of marketing services, particularly direct, interactive and market research.

Incentive plans for 2003 will again focus more on operating profit growth than historically to stimulate top-line growth, although objectives will continue to include operating margin improvement, improvement in staff costs to revenue ratios and qualitative group objectives, including co-ordination, talent management and succession planning.

In these circumstances there is no reason to believe that the group cannot achieve the revised objective set in 2002 of improving margins by up to another one margin point in 2003 with the potential for a further half of one margin point improvement in 2004.

The WPP board does not believe that there is any functional, geographic, account concentration or structural reasons that should prevent the group achieving operating margins of up to 13.8 per cent by 2004. After all, the best listed performer in the industry is or has been at 15-16 per cent and that is where it would want to be, says the WPP statement.

Neither is there any reason why operating margins could not be improved beyond this level by continued focus on revenue growth and careful husbandry of costs. The ultimate objective continues to be to achieve 20 per cent margins over a period of time and improving the return on capital employed.

Increasingly, WPP is concentrating on its mission of the "management of the imagination", and ensuring it is a big company with the heart and mind of a small one. To aid the achievement of this objective and to develop the benefits of membership of the group for both clients and our people, the parent company continues to develop its activities in the areas of human resources, property, procurement, information technology and practice development.

Ten practice areas which span all the WPP brands have been developed initially in media investment management, healthcare, privatisation, new technologies, new faster growing markets, internal communications, retailing, entertainment and media, financial services and hi-tech and telecommunications.

2002 was a very difficult year. 2003 will also be difficult but hopefully a little easier. Early indications are that worldwide advertising and marketing services expenditure will be up slightly. 2004 may well be better.

The WPP statement says that its people have responded magnificently in 2002 to the difficult economic and political challenges that they have faced. They have delivered results which, even including all exceptional items, have out-performed most of their competition and grown market share.

The board believes that despite the challenges that it faces, 2003, WPP's eighteenth year, should be a good one.

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