WPP plc (WPP) Q3 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the WPP Q3 2022 Trading Update Conference Call and Webcast. [Operator Instructions] Today's conference is being recorded. At this time, I would like to hand the conference over to WPP's CEO, Mr. Mark Read. Please go ahead, 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 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 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, top 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, the -- 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 4 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 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 9 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, 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, 4 -- as Mark said, 4 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 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 GBP 1 billion of share buybacks, 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, of course, 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 bps, 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 I've just mentioned; and around the 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.

So thank you very much, John. So turning to Slide 12, I thought I'd touch on a little bit about what we're hearing from clients. And let me start by saying how we're doing in new business. Well, I think it's a strong indicator of the vitality of our offer and perhaps a leading indicator of our performance. I think, in terms of wins, we've won or retained a number of important assignments against tough competition. And I called out the broad range of assignments and agencies that are attributing to this overall new business performance; so for example, in media, the Nestlé media win in Germany, foodpanda media in Asia, Discover media with Mindshare in the U.S. and Tesco media with EssenceMediacom in the U.K. We won the Samsung CRM business in Europe through Wunderman Thompson, driven really in close partnership with Adobe that use their technology operations; a very good creative win with H&R Block; Ogilvy. And I've called out that performance. And we're onboarding Costa into the OpenX structure for The Coca-Cola Company. And then an integrated win at SC Johnson, both created with Ogilvy and shopper marketing with VMLY&R. If you look at the 2 tables from COMvergence and then from R3, we're very well ranked #1 in media overall, with Mindshare coming out strongly after probably a tough couple of years, followed by Wavemaker who had a really creditable performance on the technology front. So I think, net-net, we remain very competitive in new business. A few words what I'm hearing from clients. Overall I'd say that they've decided to invest behind their brands and, in their transformation, remain strong. Maybe surprising to some, but I think it persists while consumer spending remains strong and while clients need to support their brands in a more inflationary environment as well as invest for the future and transform their business. And I don't think this is the point to give guidance for the next year, and it's because it's not formal guidance, but I would say that the net mood among clients does remain positive. In recent discussions with 2 major FMCG companies, they're looking to increase their spend in Q4 because the business is slightly stronger than perhaps they had anticipated earlier in the year. You saw comments from The Coca-Cola Company on their spending in Q4 and actually crediting [indiscernible] they credited our performance on Fanta. Also seen the comments from Nestlé and P&G and the first looking to slightly increase their spend; and the latter saying that, while it's looking to reduce overall spend, they really want to achieve the same impact through efficiencies and shifting money from linear non-targeted television and into programmatic and digital media, both of which, by the way, we have strong businesses to help their clients. So I'd say, broadly speaking, this is the pattern we see persistent across most clients. I don't think we yet see many who are yet looking to dramatically cut spend. I'd say most have a more positive attitude, and I think that gives us the confidence to raise our guidance, if you like, to the top end for the year. I think one point that's not on this chart is Ford. As you know, Ford is our largest client. We're delighted to hear recently that we'll be working with Wieden+Kennedy on their creative assignments, expanding our current creative remit to meet Ford's changing needs and to deliver more efficiency to them but also to leverage the creative strengths of 2 strong agency partners for Ford. I think it's particularly important to remember where we were 4 years ago with Ford. So I think we've seen good performance in our top 4 clients Ford, Google, Unilever and The Coca-Cola Company, having confidence to expand their work with us recently. So in summary, on Page 13. I'd say we go into 2023 with confidence despite the challenges that we know we will face. And our plan, as it is in other times, is to come through them stronger as we did with COVID. A number of reasons for this confidence: First, client demand remains strong. Our underlying growth has accelerated during the year. Secondly, we have a strong offer, excellent talent, significant investments in technology. And this is really what's driving our current performance, and I'd say that each element of our business is contributing to our overperformance. So creatively I'd call out AKQA growing double digits this year, a really strong performance at Ogilvy. Devika has recently joined -- or been promoted to CEO. We've seen really an excellent new business performance, most recently with H&R Block and SC Johnson. And they have a good pipeline of opportunities. Wunderman Thompson continues to perform well; and Hogarth, our production agency. Particularly important, I'd call out their relevance going into slightly tougher times. Their ability to deliver the breadth of production that clients need while saving money through efficiencies and offshoring is also critical. In media, we continue to lead the new business tables. In public relations and public affairs, we've talked about that business has been much more resilient both during COVID and continued strongly. And our integrated offer is proving particularly powerful. I think the third reason we approach 2023 with confidence is the strength of our performance this year. We've upgraded our growth. And we'll deliver 30 to 50 basis points of margin improvement despite the investments that we're making in our people and some headwinds in China. So I think, net-net, we delivered -- the performance this year demonstrates the resilience of our business and our ability to help clients navigate a more challenging macro environment in 2023. So thank you very much. I think it's been a good quarter. I thank our people for their hard work, and our clients for their support; and open the line to questions to me and to John.

[Operator Instructions] 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 3 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 phasing 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.

Okay. So why don't I start? And then John, add sort of particular comments on the margin and the guidance on Q4, but I think that our business has remained resilient this year, to sort of take your last question first, on Snap. We probably performed better than financial analysts expect and to some extent better than we expect. And mind you we gave our guidance, I think, 4% to 5% at the beginning of the year, actually on the day that Russia invaded Ukraine, but we're now at the point to upgrade it to the top end of -- in the 6.5% to 7% range. So I think it's -- you asked the question why we did perform better than the platform. So I think the first is we do have a broader business. We're not just dependent on advertising. Advertising is an important part of our business, but we'll not just depend on advertising. There's a much broader business. Secondly, I think we have a different client mix from the platforms. Our clients tend to be major advertisers and major marketers who understand the value of continuing to invest. They have strong balance sheets. They have strong consumer demand and take a long-term approach to their marketing. They're not venture capital-backed start-ups looking to acquire customers. And then lastly, I think we have more growth opportunities outside of advertising. I think the -- one shouldn't draw a conclusion from any individual platform like Snap. If you think about it: Snap first surprised the market back in Q1 of this year, and everyone called the advertising recession on the basis of the Snap results. I think they were wrong at that time. I wouldn't over-infer things into their Q3 results either. I think there's a lot of competitive dynamics around data privacy, around the growth of TikTok, around the growth of many advertising platforms that inform that. So I think that's what gives us the confidence. Now to answer your question directly on when will cut comes or will cut comes in: We'll give you our guidance for next year, next year as we see more visibility, but I don't think we're hearing that yet from clients. And I think clients recognize and understand the value of what we do. We're a very different business from where we were 5 years ago or 10 years ago. It doesn't mean we're not subject to the macro environment, but I think there's a lot to look at in this year's results to understand where we'll go next year. John, do you want to comment on the guidance for this year?

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 sort of 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 bps 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 bps. We're now saying it will be somewhere between 30 and 50 bps 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 making, 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 here from Citi. Sort of 2.5 questions, I think, actually. The first one: Agencies in general have begun to talk about pricing power; and you yourselves have alluded to this as well, I think. I was wondering whether you could quantify this impact this year and whether you think there's going to be sort of incremental "pricing power sort of based" support running into next year. That's the first question. Second question, in a similar vein, have you or can you quantify the contribution this year from new business performance? And then the follow-on question from that is, is it as simple as saying that you've won more business in 2022 than you did in 2021, so therefore this contribution should move up in 2023 versus 2022? So those are the 2 questions on growth. And then very briefly. I just missed it as you said it. I think you said there was a 20% drag on margin just from the -- I think it was the China effect alone, but I wanted to confirm that. But more broadly, the factors moving margin for this year from around 50 to 30 to 50, are these one-off in nature such that, regardless of what happens in the top line, we will see a bit of relief next year, all things being equal?

Yes. So look. When -- I'll start with new business. I'll make some comments on pricing more generally, and then maybe John can add to that and talk about margin. I think we've already answered the margin question one, so far. So on new business, I think -- as others have said, I think new business adds 1% to 2% to our growth in a good year and detracts 1% to 2% in a bad year. There's a lot of moving parts. And organic growth with existing clients is really what drives the performance, the macro environment, so I think a good new business year will support us going into next year, but I don't think -- necessarily see a significantly different approach next year from this year, but I think it's a sign of the health of the business, if you like. In terms of pricing power, look. Our job is to deliver results to our clients. And we do that in many ways, through media plans and saving money on media, through producing work more efficiently, by moving our business to parts of our business that we've done in lower-cost locations. There's many moving parts in what we charge our clients. And overall our goal is to deliver results at the same or reduced cost [ in -- the past ] then deliver them ROI. I think, at the same time, we are a people-based business. And at times where we're having to pay our people more money to support them, we're having to, to some extent, increase our prices, but there's many factors in that in what gets billed to clients. And I think overall our job is to deliver results at an efficient price to clients. And John can talk about that from a sort of quantification perspective, but I think we have to sort of look at it in the overall mix and range of what we're doing, not just, in case, a question of sort of putting up prices, which is not, I think, a constructive conversation to have with clients.

Yes. Maybe I can just build on what Mark said. I see our role, as managers of the business, to really help protect our clients from price increases. We want to ensure that we remain competitive in the market. Clearly a major part of our cost base is our people. In fact, a big section of our cost base is our people. And we've seen inflationary pressures in terms of our permanent colleagues. We wanted to make sure that they are properly rewarded, reflecting the hard work they do. We've seen inflationary pressures on freelancers as well. And we've had to dial into freelancers, as we said at the half, in order to make sure that we're supporting our clients. So we're certainly seeing inflation on our key cost base of our people at around sort of 6% to 7% or so, but equally, as Mark said, there's lots of things that we can do to help mitigate that. We've made savings in other parts of our cost base, particularly on things like rent and with things like travel and so forth. We also can redistribute where the work gets done in our businesses so that we can utilize much more offshoring, which is the cheaper cost base, and so in effect, we can protect our clients from some of that inflationary pressure that we're seeing in our business. I said in the first half or the interims that I thought we were probably on average putting price increases through 1.5% to 2%, but I said at the time that there's still more work to do in order to push price increases through for the full year. I suspect, when we look at things in the round at the end of the year, we'll see overall price increases of 2% to 2.5%. So as you can see evident from the fact that our core cost base is going up at 6% to 7% and our price increase is at about 2% to 2.5%, we've done a pretty good job of protecting our clients from those inflationary pressures at the same time as planning to deliver 30 to 50 bps of margin accretion for the full year. And in terms of -- again just I don't want to sort of come back to that margin question or clarification. What I said was -- and I think in some ways it's wrong to pull out individual components because, as I've already made clear, the margin is made up of a lot of different moving parts, but you did ask specifically about China. And just to ensure understanding, we said that actually China alone, as a consequence of the lockdowns that we've seen throughout this year, will be a drag on margins of about 20 bps in and of itself, but again I think it's wrong to probably shine a light on one particular factor. There's a multiplicity of factors that ultimately contribute to our overall margin and to our guidance of 30 to 50 bps, but China certainly is a headwind of 20 bps that we hadn't foreseen at the start of this 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 years 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 take those -- I mean I think, on the macro, I wouldn't read too much into the variances country by country. I think it depends more a little bit on new business and competitive performance in the market. And I think we're seeing in these quarterly results maybe continued resilience in the U.S., pricing resilience in the U.K., slightly tougher performance in Western Continental Europe. I think it really tells through what you see in the quarter really, to answer that question. John, do you want to tackle the cost savings and campus? And what was the last question? It was about...

Choreograph.

Choreograph, okay. You can talk about the financial impact of that as well.

So -- well, just maybe to share some numbers. I think you particularly asked a question on the U.S. market and the 3-year growth. Actually I think, on the U.S. market, we saw, just to be clear, 3-year growth in Q1 of 7.6%. In Q2, we saw 3-year growth of 10% -- sorry, 12.3%. I beg your pardon. So 7.6% in Q1, 12.3% in Q2, to give overall growth on a 3-year basis in the U.S., in the half, of 10%. Actually, in Q3, we saw that growth at 11%, so we saw an acceleration of our 3-year growth in the U.S., so we feel very confident about the performance of the U.S. As we said in the past, it's been perhaps a challenging market for us, but throughout this year, it's grown ahead of the rest of the business. And we seem to be recovering strongly. And in terms of Q4, again I'd expect to see a similar sort of 3-year wrap in Q4 as well, so the U.S. business continues to move ahead, I think, in a positive manner. I think, on cost savings, obviously cost savings come from a number of areas across our campus program; our procurement program; and some of the changes we're making through shared services and standardized systems, for example. We set out our guidance on our cost transformation program at the Capital Market Day in December of 2020, where we said that, by 2025, 2026, we'd saved GBP 600 million, of which 2/3 of which we'd reinvest back into our business and GBP 200 million of which we'll drop through to the bottom line. That's the overarching guidance on our transformation cost savings. As we've highlighted in the statement today, we're on track with that plan. So GBP 300 million of savings this financial year. And we did actually set out in December 2020, there was actually a graph in the presentation that shows a broad forecast of what we anticipate to deliver in each of the years following '23, '24 and '25 and '26. It's not an accurate forecast, but it's indicative in terms of the savings levels. And we remain on track with that trajectory, so we're comfortable with our savings plan. With regards to our campus program, we've made really good progress. I think we've now -- or certainly, by the end of this year, we'll have over half of our people located in about 38 campuses. And we remain on track to have about 75% of our people in campuses by about 2025, 2026. And that's obviously delivered cost savings as a consequence of moving into those campuses, but as importantly, I think it's created fantastic collaboration across our agencies. I was in our Jakarta campus recently in Indonesia. And it was great to see how, by bringing the teams together, they really work much more closely together. And actually they have an executive team that comprises of all the CEOs of the agencies, different agencies, in Indonesia, who sit and operate and collaborate and work together, which is a great positive of moving people into the same buildings. On Choreograph. I mean I wouldn't want to split out the investments specifically in -- that we're making to Choreograph, other than to say that they are substantive and rightly so. And we're very proud, so far, of the progress being made in terms of the investments that we're making there. And we'll update and give more detail when we come to our prelims in February.

We now have Lisa Yang of Goldman Sachs.

I have 3 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 bps 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 head count 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, like what are the assumptions you're making for China? What's baked in the sort of guidance?

Okay, look maybe just on margin, Lisa. Look. I don't think it's a great mystery. I think we've -- the business has continued to perform strongly. We continue to invest in people; and to support that growth Q4, the most important quarter of the year. And we tempered it very slightly from 50 to 30 to 50. I don't think it's a significant difference. And -- or you could attribute all of that to China if you wanted. I think, rather than have a sort of laundry list of reasons, net-net is really the result of the investments we've made in people and continuing to support our clients or continuing to support the growth going into next year. So that's really where we are. I mean, John, do you want to talk a little bit about cost inflation and sort of -- look. I think, on China itself -- our guidance for the year takes into account all the factors of which we're aware, including China. There isn't much more to say to it than that either.

Just on cost inflation. As we said, we sort of -- based across our sort of permanent head count, we'd say average for the salary increase is around sort of 5%, 5.5%. There's a little bit in there that's including promotions as well. As we've already said, on freelance, which is about 10% of our workforce, we're seeing inflation of around 15%. You sort of net all that together. That's a sort of circa 7% average increase, hence that's been part of our key cost base inflating. We've done -- as I said earlier on, we've done a great job of protecting our clients from those increases by changing the way that we support them in serving their business. In terms of your specific question or just in terms of numbers, we've actually -- as I said already, we've increased our permanent head count, broadly speaking, about 9% from the start of the year. We've actually -- successfully, as I said at the half and the interims, we've managed to reduce our dependency on freelancers, albeit, as I alluded to, perhaps not as much as we would have planned to because we wanted to continue to support our clients. And that's been a little bit of a drag on margins. So again, not to labor the point of margin because we probably answered that question already -- but I'd say, if -- there were 2 factors that I would call out at this point, I would say, 1 of which is China where there's a sort of 20 bps or so headwind as a consequence of the lockdowns that we've seen which weren't forecast at the beginning of the year. And I'd also say, whilst we've done a reasonable job of reducing our dependency on freelancers, there's a little bit more that we can do there. And I think those 2 factors combined that have resulted in a slight softening. I mean we were saying around 50 bps. We're now saying 30 to 50 bps. We can still deliver the 50. We'll see where we get to at the end of the year, but I think those 2 factors would explain that away. And I think that covers it. Thank you -- no. That's right. You had 1 more question, didn't you, I forgot, on the bonuses for the year. Last year, just again for clarification, we paid out total bonus pools of just over GBP 500 million. And as you said, we're comfortable with a sort of GBP 300 million to GBP 400 million range for 2022. Somewhere in the middle of that range probably will be where we'll end up for the year. Thank you.

We now have Julien Roch of Barclays.

3 questions, if I may. Mark, as you highlighted, creative as an area of turnaround, how much will creative be up organically this year, assuming, which quite likely, to do it, you make your 6.5%, 7% organic for the full year? It's probably easy for you to give us a number taking into account like AKQA and Wunderman Thompson, but I was wondering whether you could try to split the more digital business within AKQA and Wunderman Thompson and the more traditional creatives to have an idea of turnaround of traditional creative which was a drag in the 2017, 2019 year. That's my first question. The second one is on macro. Rather than trying to ask you to dust off your crystal ball for next year, a different question. Do you think clients have really learned their lessons from previous cycles and will cut brand advertising less in a downturn? Or same as usual, they will cut if macro is weak. The WFA survey of 55 of the world largest advertisers indicating that 74% of them said that their budget is linked to macro would indicate that nothing has changed, but I wanted to have your view on that -- I'll stick with 2 actually.

Yes. Look. I think, on the creative agency question, we can't split out -- there's no such thing as traditional creative or nontraditional creative any longer. There's just creative, so I can't really answer that question. Our creative agencies grew year-to-date 5.2% on growth last year. I think it's a pretty creditable performance. In terms of the cyclicality of the business, look. I think that we are a cyclical business. As I pointed out before, we have a much broader business than just advertising. And there are some reasons to think that, that may or may not be less cyclical, depending on what happens next year. I'd just be careful not to sort of catastrophize 2023. I think there are parts of our business that -- India growing at sort of 10%, Brazil growing at sort of 20%, Southeast Asia, that will be less affected. The consumer remains relatively strong. I think, clients' attitude, I would describe as constructive. So I'm not going to say we're not a cyclical business, but I think that you just need to keep things in perspective. In an environment of rising prices and clients seeming to put through price increases and innovate, they're going to continue to invest in supporting their brands.

And maybe just a little bit of color on what Mark said on the creatives just to -- we don't obviously break out the individual agencies, but just to give you a little bit of color: I mean, as Mark says, growth year-to-date 5.2%. Ogilvy, a really strong performance, so ahead of that. Or let's say they're ahead of the pack. And we've seen some really good new business wins in Ogilvy. And it really feels that Ogilvy has started to turn the corner in building that new business momentum, so that's really a positive sign. Wunderman Thompson, a little bit behind the 5.2% but not far off. VMLY&R, I think, has had quite a relatively tough year, but let's not forget that in 2021 and 2020 they were the standout performer amongst our agencies; had a really, really strong performance in those 2 years, so on a 3-year basis, they're very strong, but a little bit more challenged in 2022. And AKQA Group, again, ahead of the pack. As Mark says, AKQA itself, double-digit growth, so a really positive performance. And then Hogarth, again, going great guns, double-digit growth for the year-to-date. So I think that gives you a little bit of a flavor across that creative spectrum but some -- I would say, some very solid and good-performing businesses.

We now have Omar Sheikh of Morgan Stanley.

I've got a couple of questions, if I could. Maybe to start with China, could you maybe just remind us what -- how much China is as a proportion of the total? I think it's about 10% or 11% of revenues. And what kind of business is that? Does it reflect -- does the business mix reflect the rest of WPP, or is it more media related? Some sort of color on that would be helpful. And then just on the outlook for '23, Mark, I don't know whether you could sort of give us some comments about how you are thinking about the growth of the China business next year just in the context of all the kind of growth concerns about China more broadly that are currently out there. That's the first couple of questions. And then just secondly, maybe for John, on hiring plans. I think you said year-to-date FTE head count was up 9% for the year. I just want to clarify that. And are you still seeing the same level of attrition as you normally do? So is that -- does that give you a little bit of flexibility as you go into next year? Perhaps to kind of lay the ground for perhaps slightly more challenging market conditions and sort of commentary on your hiring plans would be helpful.

So China is about 5% of our business, mainland China. It's probably -- it is different from the rest of WPP, a little bit different. It's probably a little bit more media focused. We have a strong multinational client base but actually a strong domestic Chinese client base, probably 60% multinational and 40% domestic Chinese. It's more digital. And the other question too, it's 90% of ad spend today, more e-commerce driven, more social. And media is probably a bigger percentage of the mix overall, which makes the market, I think, a little bit more volatile than it is with WPP overall. And that's why you do see a little bit more volatility in our performance in China. And on the basis of what goes down must come up, as things open up next year, probably we'll see a little bit of volatility going the other way. John, do you want to talk a little bit about hiring?

Yes. So just to confirm, Omar, the increase in head count year-on-year, from the start of this year to now is -- so as I said, 9%, so you're right in that respect. On attrition, we've seen attrition come off a little bit over the last month or so. So we were running at about 30%. We're now starting to come back to around 25%, 26%, which is the normal level that we would see in this industry. So again, to give you a bit of a history, of course, we saw attrition come off through COVID. When we came out of COVID, we then saw attrition rise to the 30%. And then more recently, we started to see that come off again, but it's still at around the industry norm of 25%. And in terms of your comments around going into next year, I mean, just to be clear: As is true of every year, when we move from Q4, 1 of our biggest quarters, to Q1, our lightest quarter, we always go through an exercise of planning and forecasting and thinking about how we manage our cost base. And I would say often the success of the year is often dependent on how successfully we managed that Q4-into-Q1 transition. And that is no less important this year, for obvious reasons, and so we will -- as we said, we're doing a lot of planning going into next year. There's a full range of potential outcomes, but the fact that we can in the verticals rely on a 25% churn rate naturally in our business, as well as flexing our 10% freelance mix, again gives us great confidence going into '23 that we can manage our cost base accordingly whatever the economic headwinds may throw at us.

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. So look. I think on sustainability of spend, we don't have a major client base in crypto. And I think there's no doubt that some of the digital spend has been driven by, let's call, venture capital-backed customer acquisition, sort of longer-term funded -- or short-term funded businesses that have pulled back as the economy has changed. And I think our client mix is different. Now there were times 5 or 10 years ago where perhaps that made life tougher for us in comparison, and there may be times like now where it makes -- it's slightly better for us. So I think in the main our clients are -- continue to spend and probably do view this as a long-term investment rather than something that's sort of funded by short-term capital. And you -- on your question. So I think there is a big opportunity from this shift from linear to addressable television. I think, firstly, clients were beginning to wonder about the availability of advertising inventory and the growth of advertising on Netflix, the growth of Peacock, the number of platforms. And it gives them more opportunities to invest in content, and I think that's positive. I think we have a strong business in connected television through Finecast. Finecast grew; has been growing 10%, 20%, 30% over the past few quarters; grown very strongly. And there is ability for us to connect and work in different ways with these platforms, just as we have with Xaxis, and help clients into connected television. And I think that net-net will be another positive to us. So I'd say there are reasons why the growth of the holding companies, if that's what they're called, in the first half was better than the growth of the digital platforms in the first half. And I think it talks to the broader business that we have, the different client mix we have, the newer growth opportunities in other areas that actually we have beyond advertising and the changing nature of our business.

We now have Richard Eary of UBS.

Mark, John, 3 questions from myself. And the first one just comes back to looking at sort of the inflation impacts on the business, both on revenues and costs. You talked obviously about upgrading guidance this year, from the start of the year, from 4% to 5%, now to 6.5% to 7%, but you also talked on the call about cost increases of 2% to 2.5%. Is that the large reason for the upgrade is that, as inflation has come through, you've been able to pass that on? And therefore, that's had a positive impact on the organic growth. Or is that a mix issue where you've seen better demand for other services? So just trying to get clarity on that because, as we go into next year, if there's still inflation in the system, does that protect against any sort of weaker volume growth? Or does that not help in a weaker market environment? So that's the first question. The second question, just on Q4. I mean I think, relative to your peers, your guidance is obviously for a stronger Q4 relative to the peers, which are around 4%. I mean you're probably 5% to 6%, and I'm just trying to understand. Is that due to your view on account win momentum, where you've obviously got that 80%, 85% guidance? Yes. Or is it more about conservatism from your peer group? So I mean just me trying to understand is that -- is the [ outpost ] in Q4 just around count win momentum, or is there something else in there? And then just lastly, going back to, let's say, auto is a large component which has probably been, let's say, out of the ad market or less prevalent in the ad market in the last couple of years because of supply chain issues. It'd be interesting to get your thoughts, now that you're getting greater involvement with Ford as your largest customer, to see what their plans are for 2023; and whether auto comes back in a little bit better shape and that helps provide some protection as well for, let's say, the advertising mix.

Yes. Look. Why don't I tackle that? Look. I think, on Q4, I mean, I can't comment on what we are thinking compared to the competitors, so -- our peers. I don't know what they're thinking. I think our guidance takes into account everything we know about the year and we're confident that we'll deliver it. I think -- on the inflation mix, again I think it's hard to disentangle price versus volume. What I'd say is that I think clients, if they're seeing -- if clients are seeing strong top line growth, they tend to invest more in marketing. And I think that's what we're benefiting from, not really a price impact on our business. I think it's just overall aggregate client spend, but within that mix we're trying to earn a fair price for our services. On the auto question. There's no doubt that the auto market has been challenged in the last couple of years. I can't comment specifically on Ford's plans, but I think like everyone are looking to drive brand, looking to drive sales. We hope that the chip shortage will alleviate. They have a -- Ford have an attractive range of new models coming through. You have to see what their plans are, but I think all clients are looking to drive greater efficiency and greater return on their marketing spend. And that's what we'll see. And we'll have to see how that translates into '23 because there's many moving parts. There's the chip shortage. There's the build-out of cars. There is the macro environment, so look. I think it's just sort of hard to read more broadly. What I would say is that the auto market is becoming more competitive, has a lot of EVs being launched and a lot of new models being launched. And typically in a more competitive market, clients tend to spend more. We'll have to see what Tesla does. If Elon ends up owning Twitter, maybe he'll push more -- push some more through that. We'll 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 5 years ago. I think what's -- or even 10 years ago. I think what's most important is the extent to which clients take a long-term view, which I think more clients are doing. I think the breadth of our service beyond advertising or media spend, which is no doubt the most cyclical part of our business. And I think that, that is now broader. And I think importantly to understand is the geographic breadth of our business that goes beyond the U.S. and indeed the U.K. where we tend often to focus. So I don't think you can read too much into the pricing point.

We now have Matti Littunen of AllianceBernstein.

Just a quick follow-up on that pricing discussion. So thank you, John, for that 2% to 2.5% effect from price increases -- or rather 2.5% price increases that you mentioned. Now I just want to connect to the earlier question about is that just for the business where you bill on a scope-of-work basis. Or in that effect, do you calculate anything from, for example, the impact of higher media prices on the absolute level of commissions you get in GroupM, for example? And the other question I had was on Xaxis. So could you give us an update on how that business has performed this year, so far, and what the main growth drivers have been?

Do you want to take that, John?

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 one is on visibility. Obviously you've got the commerce and technology business. You've got the media and you've got the creative production. How much visibility do you have in terms of like number of months, number of quarters for the different types of business? Is it significantly longer in commerce and technology versus the other buckets? That's the first question. The second question is on -- back to pricing. I think John commented before that price increases were kind of like going through on 1/3 of the client base and that 1/3 was in discussion and then 1/3 was grandfathered. Can you give us a bit of an update there? Like this -- is this 2% to 2.5% coming from just 1/3 of the client base, or has it moved to be broader than that now? And then the last question is on what is the cash spend for all the deals that you [indiscernible] year-to-date, please.

Okay, I'll talk about -- look. I think the visibility question is we start the year -- we're starting to have conversations with clients about budgets for next year. I'd say, without giving guidance, those conversations fall into the category of what I described before, but things change, don't they? So I think it's -- our visibility is no more or less than it is, I think, at any other time. I don't think this visibility has changed. I think sort of market -- analyst paranoia has increased more than market visibility has reduced. You have to just look at the breadth of our business, breadth of our offer, type of service we offer to the clients and -- but where you're cognizant of that plans change. I mean I'd advise you just to read -- if you look at what was said on the Coca-Cola call yesterday. I think it's a good example of how clients think about it. They want to continue to invest, but they're willing to adjust in short term if they need to. So I think that's what's more important than visibility. I'll let John go into the degree of detail he's willing to on pricing.

Just to also talk about -- you asked the question very specifically about commerce, experience and technology. I just want to remind you what we said at the half, all right? It isn't, as Mark has often said in the past, the way that we look at our business because we very much think about ourselves as having an integrated offer across our agencies, into our clients. We've -- we do look at it on a 6 monthly basis today, so at the half and the prelims, we try and break out component parts of our work that are related to commerce and experience and technology. And if you remember, what we said at the first half was that we've seen in our Global Integrated Agencies, excluding GroupM, an increase in the percentage of work that those agencies did to about 39% being commerce and experience and technology related. And what that really meant in practice, so about 39% of those GIAs excluding GroupM, was that we've seen commerce, experience and technology grow by about 10%, double digit. On average, the Global Integrated Agencies excluding GroupM grew by just over 5%, so you can work out the math that therefore the rest of the business grew at about 3% or so. So that's what we said at the half. It gives you an indication of the split of work in those areas across our global integrated agencies and the nature of the growth that we're seeing in those parts. So hopefully that's helpful. On pricing, I don't want to get sort of drawn into too much detail here, but we said at the half, again, exactly what you just replayed back. And we said that would translate into, at the time, price increases of roughly 1.5% to 2%. We've clearly extended our work, as you described, into those areas that we haven't seen price increases and hence why I said on the call today we'd expect price increases for the full year to end up at around 2% to 2.5%. So hopefully, that's clear. And the cash spend on the 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 3 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 5 and certainly 10 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.