Oct 25, 2012
Martin Sorrell
We're past the appointed hour so welcome, if welcome is the right word, to the third quarter review. And we've got a presentation for you, which is very focused on the results.
Not much, if anything, on strategy. So I think the results are probably even more -- the more important thing to focus on.
Martin Sorrell
So Paul, do you want to kick off? And then I'll just come back at the end so that Paul's not on his own out there in front.
I'll come back just to summarize where I think we are.
Paul Richardson
Okay. Thanks, Martin.
So this is the third quarter trading update for 2012. And so we had reported revenues are up 1.6% at GBP 2.496 billion with constant currency revenues up 4.8%.
And on a like-for-like basis, revenues are up 1.9% in the quarter.
Paul Richardson
Operating profits and operating margins in the first 9 months are in line with budget and ahead of last year. And the average net debt of 3 -- just over GBP 3.1 billion was up GBP 329 million compared to the same 9-month period last year at constant exchange rates.
We continue to reflect the improvement on the 2011 year-end position, where principally, our working capital had deteriorated by over GBP 500 million.
Paul Richardson
There's a slowdown in North America and Continental Europe, particularly in September; and functionally, in advertising, media investment management and public relations and public affairs. Net new business billings of GBP 3.359 billion in the first 9 months ranked first in all net new business tables and actually was up 28% on the same period last year.
Paul Richardson
So turning to the revenues. On the third quarter, the like-for-like basis revenues are up 1.9%.
Acquisitions added 2.9% to the revenue growth. So on a constant currency basis, revenues were up 4.8%.
Foreign exchange was negative by 3.2% in the quarter, which led to reportable sterling growth of 1.6%.
Paul Richardson
Currencies are having a significant impact. So if we were a dollar-reporting company, our revenues reported would have been flat.
If we were a euro-reporting company, our revenue growth reported would have been 12.5%.
Paul Richardson
Flowing that through for 9 months, our like-to-like growth in 9 months is 3%. Acquisitions have added 1/3 of the 3.1%, giving constant currency rate growth of 6.1%, while foreign exchange for the 9 months is minus 1.9%.
And if we project forward to the end of the year at current exchange rates, we think foreign exchange would be in the order of minus 2.4% impact for the full year, so just under 2.5%. That has given reportable sterling growth of 4.2%.
In sterling, if we were dollars, that would have been 1.9%; and if we were a euro-reporting company, that would have been up 12%.
Paul Richardson
So turning now to the revenues. Across all our businesses and all our geographies, they were growing on a constant currency basis, which includes the impact of acquisitions.
But I will be speaking mainly about the like-for-like growth in the quarters.
Paul Richardson
So our advertising, media investment management business, which is 40% of the group, had like-for-like revenue growth in the quarter of 2.9%. That followed growth on the same basis in quarter 1 of 6.2% and in quarter 2 of 5.9%.
So the key changes in that discipline were in the media investment management business in Europe and in the U.S.A.
Paul Richardson
The consumer insight business, which represents 24% of the group, had like-for-like growth of 0.8% in quarter 3, following growth of 1.3% in quarter 1 and likewise 0.8% in quarter 2. The public relations and public affairs business, which is 9% of the group, had negative growth this quarter on a like-for-like basis of 1.7%.
The difficulties were principally in the U.S.A. across all our networks in public relations and public affairs.
And that followed growth in quarter 1 in its discipline of 1.9% in quarter 1 and 0.3% in quarter 2.
Paul Richardson
The branding & identity, healthcare and specialist businesses, which represent 27% of the group, grew at 2.7% in this quarter, which followed like-for-like growth of 3.8% in quarter 1 and actually accelerated compared to the quarter 2 growth of 2.2%. So overall, the group grew at 1.9% in quarter 3, following growth of 4% in the first quarter and 3.2% in the second quarter.
Paul Richardson
So in terms of the year-to-date performance on the same basis by discipline, you have like-for-like growth after 9 months in the advertising, media investment management business of 5%; whereas at the half year, this was growing at 6.1%. Likewise, in consumer insight, the year-to-date growth after 9 months on a like-for-like basis is 0.9%; at the half year, it was 1%.
In public relations and public affairs, we have 9 months growth now just above flat at 0.1%, having been grown at 1% after the 6 months. And on the branding & identity, healthcare and specialist communications businesses, we have growth for the 9 months of 2.9%, having been grown at 3% after 6 months.
So overall, on a constant currency basis, the business is growing at 6%, 6.1% to be precise, after 9 months on a like-for-like basis, having grown at 3% after 9 months. At the half year stage, on a like-for-like basis, we were growing at 3.6%.
Paul Richardson
So some comments now about the revenues by discipline. In advertising, media investment management discipline is the strongest performing sector in 2011 and the first half of 2012.
Advertising improved in the third quarter, with media investment management slower than quarter 2 albeit at higher absolute rates of growth than in advertising.
Paul Richardson
The advertising was stronger in North America, the Middle East and Latin America, partly offset by lower growth in the United Kingdom, Continental Europe and Asia Pacific. On media investment management, the growth is lower in North America and Continental Europe, but with double-digit growth in all other regions.
Paul Richardson
On consumer insight, the like-for-like growth in the third quarter was the same at quarter 2 at just under 1%, with modest relative improvement in North America and strong growth in the United Kingdom.
Paul Richardson
For the overall Kantar business, there was double-digit growth in Latin America, Africa and the Middle East. On the custom business or the custom research, which is just over half of the business, continues to be under pressure in mature markets, but again, strong growth in the faster-growing markets maintained.
Particularly, strong growth was seen at Millward Brown, Kantar Media, Kantar Worldpanel, Lightspeed and Kantar Indian Market Research Bureau.
Paul Richardson
In the public relations and public affairs discipline, it's a difficult third quarter, particularly in September, with like-for-like revenues in the quarter down 1.7%, and North America down across all group brands. Geographically, there was strong growth in the United Kingdom, with double-digit like-for-like growth in Latin America and Africa.
Paul Richardson
In terms of branding & identity, healthcare and specialist communications, like-for-like growth of 2.7% in the third quarter was stronger than the second quarter growth of 1.7%, driven by direct digital interactive, partly offset by softness in branding & identity and healthcare communications.
Paul Richardson
Geographically, a strong like-for-like growth in direct, digital and interactive in the United Kingdom, Continental Europe, Asia Pacific and in Latin America region. In healthcare communications, United Kingdom was slower, but Continental Europe improved compared to quarter 2.
Paul Richardson
Now finally, by discipline. Direct, digital and interactive, in the first 9 months, this represented almost 32% of the group or just under GBP 2.4 billion of revenues, came from this discipline of direct, digital and interactive, up over 2% compared to the previous year.
Digital, direct and interactive revenues were well up well over 7% in the first 9 months of this year.
Paul Richardson
The acquisition of AKQA, the leading digital agency, completed in the third quarter, which meant that the group now has 4 of Forrester's 7 digital leaders in Wunderman, OgilvyOne, VML and AKQA; no other group has more than one digital leader.
Paul Richardson
In terms of revenues by geography. So North America, which represents 35% of our business, on a like-for-like basis was down 0.4% in the quarter, following like-for-like basis growth of 1.4% in quarter 1 and down 0.5% in quarter 2.
Paul Richardson
Europe as a whole represents 34% of the group, with the U.K. representing 12.5%, and this has had a strong performance year-to-date, with like-for-like growth in quarter 3 up 4.7%, following good growth in quarter 1 of 2.5% and quarter 2 of 3.5%.
Paul Richardson
Western Continental Europe, which represents 21.5% of the group, was down overall in the quarter 2.1%. This followed growth in quarter 1 of 2.5% and in quarter 2 of 0.8%.
The main markets where softness occurred was across most of the European markets. We still have positive growth but modestly in Germany and France, but Spain and Italy have turned negative; and a number of other European markets are soft in the Scandinavia, Portugal, Australia, Switzerland; so Austria-Switzerland region.
Paul Richardson
In terms of the final discipline or final region, Asia Pacific, Latin America, African and the Middle East and Central and Eastern Europe, this represents just under 31% of the group and was growing at 6.8% in quarter 3, following growth of 9.5% in quarter 1 and 9.8% in quarter 2. I think we made reference in the press release to the difficulties we've seen in Central and Eastern Europe, which was down 6% in the quarter and some general softness in some of the Asian markets such as Japan, Australia, Malaysia and South Korea where considerably softer than the run rates we've seen in the first 6 months.
Paul Richardson
So turning now to the year-to-date performance by geography. So North America, after 9 months, on a like-for-like basis, is growing at 0.1%; at a 6-month basis, it's growing at 0.4%.
So a similar pattern.
Paul Richardson
The U.K. has accelerated its growth.
It's now growing at 3.6% year-to-date after 9 months, having grown at 3% after the 6-month period.
Paul Richardson
Western Continental Europe remains mildly positive and up 0.4% after 9 months, having been grown at 1.6% on average for the first 6 months.
Paul Richardson
And Asia Pacific, Latin America, Africa and Middle East is growing 8.7% after 9 months, having been growing at 9.7% after 6 months. So overall, the group growing organically at 3% after 9 months, having been grown at 3.6% after 6 months.
Paul Richardson
So in terms of some comments on the growth by region. The faster-growing markets of Asia Pacific, Latin America, Africa and Middle East continued good growth seen in the first half and in the third quarter growth of 6.8%.
The U.K. also grew strongly in quarter 3, as I mentioned, with like-for-like growth of 4.7%.
Paul Richardson
Latin America remains our strongest sub region as it was in the first half, with a like-for-like growth of over 14%. Central and Eastern Europe, as I mentioned, was down 6% in the third quarter, with growth coming through in Russia and Romania, but more than offset by weakness in Poland, the Czech Republic, Slovakia and the Ukraine.
Paul Richardson
On a like-for-like basis, the BRICs, which represent now 13% of the group, were up 11% overall. And just breaking that out in terms of year-to-date, like-for-like performance of the BRIC markets, we have Brazil, year-to-date after 9 months, up 15%; Russia, up over 10%; India, up over 8%; and Greater China, up just over 12%.
Paul Richardson
So in terms of some trends in the quarter by geography, you can see here there continues to be strong growth in Latin America as seen by the position of Argentina and Brazil and Mexico. South Africa, we had a very strong quarter coming through.
And I also would add in the Brazil-Mexico category, Turkey was very strong in the European region.
Paul Richardson
You then see Greater China, India, Mainland China and Singapore in the next bracket, but there was a little bit of weakness in the Russian markets in terms of the BRIC markets in quarter 3. Other markets of note apart from the European market, you see down there, Australia, Japan and South Korea and then really the number of European markets that were growing at 5% or less.
Paul Richardson
In terms of categories, some of these categories are relatively small in the total picture. So the government, we have mentioned, is a relatively small category overall.
We've had some successes there in Europe. We've had some good business wins that are affecting, say, the retail.
Wins of Best Buy and CBS and Levis and RadioShack in the last 12 months; and likewise, in the drinks category, MillerCoors and some Coke business all affect the category. Automotive has remained relatively strong despite some difficulties in Europe.
But the vast majority of our categories are in the 5% or less growth, including our biggest category, which is personal care and drugs.
Paul Richardson
In terms of currency, you saw it was quite sharp movement in quarter 3, accounted for a 3.2% decrease in revenue, reflecting the strength of sterling against the euro, which was stronger by 11% than other faster-growing market countries like the Brazilian real, Indian rupees, South African rand, for example. As I mentioned, at full year impact, we're expecting currency to have a minus 2.4% impact on the full year results.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
one for Mindshare; in France, SFR; 2 for MEC in Europe; and a number that have also occurred during the rest of the year.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
Likewise, on Slide 2 of the wins, I'd pick out a couple of the creative wins, significant one for Grey; one for the Rostow agencies; on the combined government department, so the FDA, the Food and Drug Administration and the CDC, Center for Disease Control; and likewise an overview of the significant win of the NASCAR business. Other wins included media in the first -- in the third quarter as highlighted here.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
In terms of losses in the quarter, just one loss to report. A Mindshare loss in the U.S.A.
for the Farmer's business. And overall, on our measures of billings, collected internally, our net new business billings are at $5.375 billion compared to the June figure of just under $4 billion, so an incremental $1.4 billion in the quarter; and then compared to last year, so the same 9-month period, of $4.2 billion.
We're basically ahead by about 28% in the new business tables.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
In terms of business won and lost since the end of the quarter, a very significant win of agency of record by VML for Wendy's. Again, a global piece of business won by Grey, for the insurance business; and likewise, another MEC win coming out of success in the U.S.A.
One loss to record, MEC business in the U.S.A. of Macy's.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
So in terms of cash flow, average net debt in the first 9 months was up 325 -- GBP 329 million to GBP 3.1 billion compared to GBP 2.776 billion in 2011 at constant exchange rates. Acquisitions or new acquisitions, which represent GBP 487 million; but when added to earn-outs and share buybacks, totaled GBP 558 million in the 9 months.
And the net debt at the point-to-point basis was up GBP 533 million to GBP 3.5 billion compared to just over GBP 3 billion at last year September. This reflects the increased spending, principally on the acquisition of AKQA, and there was a property deal also concluded for a new building as a result of the sale of the old building of Y&R.
And again, that went through in the third quarter.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
Free cash flow in the 12 months to ending September '12 was over GBP 1.3 billion, and the average net debt to headline EBITDA, again, for the 12-month rolling until the end of September, was around 1.8x.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
In terms of acquisitions, it's hard to read. But if you focus on the blue color, there are a number that we conclude -- by far the biggest of significance was AKQA deal, but a number of other digital deals have been included.
I won't list them all, but some in the U.S.A., Korea, Chile, Brazil, France, et cetera. A significant digital business in the U.K.
called Fortune Cookie added to the very significant deals we've covered off in both the faster-growing markets and digital year-to-date. And outside their disciplines, a couple in the public relations business added strength in particular markets in Denmark, Canada and France completed in the quarter.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
In terms of where we are on uses of cash flows, we laid out our various targets where our objective is to achieve at the beginning of each year. So on new acquisition spend, our goal is to spend around GBP 300 million.
Obviously, with the AKQA purchase of around GBP 250 million by itself, we exceeded that limit. This year, the year-to-date spend is GBP 487 million.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
On share buybacks, our minimum requirement to avoid dilution is 0 point -- is 1%; year-to-date, as of the end of September, we have purchased 0.7%. Last year, we came up to about 2.1% on share buybacks.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
And on dividends, as you know, we are trying to improve the payout ratio, and our goal is to increase dividends at least by 5% above the EPS growth. And at the first interim where EPS grows to 13%, our dividend increases 18%.
In terms of wins and losses, we listed out the wins here year-to-date. The shaded ones are of note because they have occurred in the third quarter. We've seen 3 fairly significant media wins in Europe coming through
And then we now turn to the summary, which Martin will give us a few words.
Martin Sorrell
Okay. So I just want to summarize where we are after the third quarter.
So obviously, just to summarize what Paul said.
Martin Sorrell
July and August sort of came in roughly where we thought it was going to come in. September was an extremely disappointing month.
When you think about what's happened, I mean, all the soundings or conversations, I think virtually without many exceptions, maybe more exceptions in the FMCG area, but even in the FMCG area, I think you're seeing some pressure.
Martin Sorrell
But this morning, as we announced, Credit Suisse in the financial services sector, Daimler in the automotive sector, all missed or announced revised figures. So I think whatever it was -- and we can have a discussion as to what happened in September.
I mean it's strange, I was with one of our largest clients yesterday in Europe, and it was the first time the people inside the company said the CFO referred in their earnings call specifically to September as being a change. So quite why there was a change in September, I think we honestly don't know other than it's a change, which surprised our clients, surprised us and indeed surprised the authorities.
Martin Sorrell
I somewhat naïvely believed that the QE adjustments that we saw 4 or 5 weeks ago, whenever it was, by the ECB, by the Fed, by the Japanese and to some percent, the Chinese was a reflection of their concern because they've seen the stuff that we were seeing or we saw in October when we saw the September results. But I think they have been surprised as anybody.
You look at the comments by Warren Buffett yesterday in Washington where he said the world is slowing down. There are signs of some stabilization in America in the housing market, but the world is slowing down.
Martin Sorrell
And when you look at the first 9 months of this year and the first 3 quarters, I mean, it's very simple. We've gone in like-for-like growth 4, 3, 2, and so there's been a sequential quarter-by-quarter reduction.
Martin Sorrell
So given that, that marked slowdown in September, it reduced the like-for-like growth in the quarter to just under 2%. And geographically, the negatives were North America and Continental Europe.
And for the first time, it was Continental Europe as a whole. It wasn't -- you couldn't just sort of discriminate or half the Europe into West and to East, Central and Eastern Europe, not Russia, but other parts of Central and Eastern Europe came under pressure.
And I think Europe is more homogeneous now than it was before. It was differentiated.
It was certainly in Q3, it's become that way, although I still remain very bullish about what's happening in Russia and the possibilities of Russia over the short to medium term at least.
Martin Sorrell
So those were the -- that was the toughest stuff. The better stuff, relatively, was Asia and Latin America, Africa and the Middle East and of course, the U.K.
Here in the U.K., we are celebrating or we will be celebrating supposedly a third quarter which is up 0.6%. And of course, we are doing 3%, 4% growth, 5% growth here in the U.K.
and last year did 8%. So -- but the U.K.
is still strong and Asia and the other regions, all sub regions. Although they have slowed, and Paul gave you the numbers for the BRICs, but they're still talking about very high single digit.
In the case of India, in double digit. In the case of the other BRIC countries, we are still seeing strong growth, and it is very differentiated still from a geographic point of view.
Martin Sorrell
From a functional point of view, advertising and media investment management, particularly media investment management continues to do well. And within branding & identity, healthcare and specialist communications, it is really the specialist communications side of the business that's driving it, and namely digital.
Martin Sorrell
Branding & identity, project-driven; healthcare, project-driven or less project-driven than branding & identity and more pressure. Although we have seen some very significant consolidations in the healthcare business, 2 in particular last week, where the group's benefit has been one of I think ourselves and just one other holding company.
There are 2 companies that have benefited from both major consolidations. And as I said, direct and digital continues to drive the overall growth.
I'm just going back to why -- what happened in September. We tried to suggest some reasons in the release, call them gray swans, because there are things that we know about; things that are black swans, we obviously don't know about. But they are really the 4
The Eurozone; the hard-soft landing, and we would be in the soft landing camp for China; the Middle East, which probably has deteriorated since we last met in terms of Syria and Lebanon and also whether the Israelis will do anything in Iran or vice versa. And then probably most importantly is U.S.
U.S. is still the guerrilla.
It's a $16 trillion guerrilla out of $65 trillion. And obviously, what happens post the election is critically important, and whoever wins we're likely to have a deadlock Congress.
So some form of Simpson-Bowles agreement modified or what was on the table before when the President asked Simpson-Bowles to report, I think, is to look for. The business community clearly favor a Romney victory rightly or wrongly, but I think it would be better for business.
I'm not so sure that it will be one way or the other, but we'll have to see how that pans out.
I'm just going back to why -- what happened in September. We tried to suggest some reasons in the release, call them gray swans, because there are things that we know about; things that are black swans, we obviously don't know about. But they are really the 4
But in any event, people are worried about the fiscal cliff. They're worried about the expiration of Bush tax cuts.
They're worried about the deficit, and they're worried about the overall level of debt, which has now reached $16 trillion. So that's the background to it.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
The sale of Buddy Media and the conditional sale with an escrow for the Young & Rubicam freehold at Madison Avenue, both will yield well in excess of $100 million of book and cash profit. So that will further enhance the cash flow.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
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Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
And we're committed, of course, to moving the dividend payout ratio up to 40%. And as we've discussed before when we get to 40% on the basis of some of the things we've been advised to do, we may look at that as a board in terms of increasing that still further.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
So the first 9 month operating process, I think this is important, operating margin in line with the budget and ahead of prior year. When people go on BBC and they say you are slashing your forecast.
Actually, what's more important for us, if you do the numbers as I'm sure you do, is us holding the margin and keeping the margin target of 14.8 than really the top line. And so if you look at the difference between 2.5% and 3%, which is the range that we've said our forecasts are which they are for the year given the 4-quarter forecast in the Q3 RF, if you'd look at that and look at the difference we're talking about 1p or 2p of consensus forecast pre the Q3 trading update of about 74p.
So people will -- if you just take that logically through and looking, it's their analysis not ours, is about 72p to 73p.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
So that's the background. Acquisitions has contributed about half our growth for the first 9 months.
And as I mentioned, the exceptional gains on Buddy Media and the conditional sale of the freehold property, were it to go through, will generate the profits that I just mentioned.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
The faster-growing markets, as I mentioned, continue to be strong. And the U.K.
remains strong in line with Q3, even in Q4. I think Q3 in the U.K.
was affected by the Olympics. It was positive for the U.K., maybe not so much for markets outside.
I think it was pretty much in line with expectations, maybe a little bit less than people expected overall. But the uncertainty as I have also mentioned are more about North America and Continental Europe, and we remain concerned about that.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
And as I've said before, the full year outlook for the group as a whole, taking into account the Q3 revised forecast is in the 2.5% to 3% range. Some people asked me before we started, what did I think about the forecast?
I think there is a danger when I look at October and November and December for Q4. December is very pessimistic.
Historically, people are very pessimistic about Decembers, and they turn out in most years, if not all years, I can think with the 1 year in the last years where December has proven to be accurate in terms of forecast, people are naturally conservative in their forecast as we said to you before. And I think part of the problem now is that everybody -- may well be now that people are so shellshocked in terms of what happened in September that they go too far the other way.
We'll see how it plays out. But the pattern of October, November and December is some growth in October and November.
As I look at the Q4 in the Q3 revised forecast, but December, quite pessimistic, I mean, so pessimistic that one questions whether it's realistic.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
Now, I would just say one thing that this, just to be quite clear, softness in September, however it happened, it doesn't matter how it happened, it happened. And I'm talking about clients now, couldn't come at a worse time, if you think about the planning process, I mean, for our clients.
So most of our clients are on a calendar financial year. So they will be doing their planning for next year, they are budgeting for next year, knowing that what they know about September and what's been happening in the final quarter of the year.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
So I think they are inevitably, and we've got to plan our business on the basis of caution. And that's -- the good thing about what's happened is that our headcount, if you look at the headcount from January 1 of this year until certainly September 30, the headcount is up about 0.6%, a few hundred people.
And so we managed to control the headcount. As I was saying to some of you before we came into the room, if you looked at what's happened to our margin improvement over the years, certainly for the first half of this year, it was an SG&A improvement, and it was actually a staff cost to revenue deterioration.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
In 2010, if you go back 2009, we caught up in the back end of 2009, the last half of 2009, by being aggressive on the headcount when we got caught post-Lehman in the first half of 2009, so we adjusted the headcount. 2010, we saw the impact of that with a reduction of staff cost to revenue ratios.
In 2011, there wasn't that much of an improvement in staff cost of revenue ratios as we started to hire towards the back end, second half of 2011. And in 2012, we've kept the staff costs, kept the headcount flat.
And so we should see an improvement over the margin improvement we get should see an improvement in the staff cost to revenue ratio.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
Operating profits and margins, again, in the first 9 months, were in line with budget and ahead of prior year. And we've got this increased focus on cost control in Q4 and looking at not just salaries, not just hiring but at the headcount run rate as well.
And what we want is to make sure that we meet our margin improvement targets of half a margin point, 50 basis points. And more importantly, actually to enter 2013 with a controlled salary run rate, which if you jump back to the beginning of 2012 and late 2011, I don't think we were in that same position.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
To reinforce that, we still have variable cost running at 6% to 7% of revenues. Variable cost again is incentives, freelance and consultants.
And as I've mentioned before, the headcount has been held pretty much at the level it was at December 2011. And we've got very good new business momentum on top of all the polls.
And a strong cash flow and improved debt maturity profile. One thing we didn't mention in the release is we went into the 30-year bond market at just over 5%, and good balance sheet ratios and strong liquidity.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
Now as far as next year is concerned, it is a bit of a puzzle. I mean, it's true that the IMF and the World Bank have taken down their GDP projections for 2013, and indeed I think for the latter part of 2012.
But the 2 are still pretty much the same, and again as we were saying before, I think it's highly likely that those forecasts are going to come down. But they still seem to be stuck at around 3% to 3.5% real.
And if you add in inflation of 2%, still the people are talking about 5% to 5.5%, which seems to me to be on a high side, and one could only assume that they're going to come down.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
And there is a disconnect between analysts forecasts for the next year in terms of earnings growth and what's happening in the world economy. And maybe after Q3, we'll see some adjustment as we go into Q4 next year from analyst as to what they expect corporate earnings are going to be.
I think, so far in the Q3 earnings season in America, something like 2/3 of companies are missing analyst projections or guidance. And that reflects the difficulties that we are seeing across the world.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
Now having said all that, we do still believe that there are good opportunities. Let's say that the real forecasts come down to 1% to 2%.
That would still mean in nominal terms, they are 3% to 4%, which I think gives us the necessarily top line flexibility that we need and gives us the opportunity to continue to improve our operating margin by 50 basis points. And of course, in addition to that, use our cash flow, which is running at about $2 billion and about 1/3 of that, GBP 300 million to GBP 400 million, say $500 million applied to small to medium-sized acquisitions like the one that we did, for example, this week in China, for acquisitions to share buybacks, which are running at around 1% to 2% of share capital, and, of course, debt reduction and increasing the dividend payout ratio.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
So I think that's a sort of summary of where we are. So disappointing Q3 and September.
As we go into Q4, we're extremely cautious. I should say that even before we got the September results and when we had our strategy session in Silicon Valley, mainly at Google and Facebook, with our top 100 or so people in September, the parting words were, 'be cautious.'
And I think that's proven to be prophetic, because I think we all are concerned about the overall trading environment globally. And I think the financial markets are a little bit out of kilter with the real world, but maybe the real world with catch up with the financial markets at some point in time.
Having said all that, we do have our strong spots, geographically and functionally, which I've mentioned. We also have a strong cash flow. EBITDA has historically been running at about $2.7 billion; free cash flow at about 2 billion, GBP 1.3 billion pounds; and obviously, we're balancing the uses of cash in the right way. Depreciation, really, and capital expenditures is now roughly in balance. We have -- Paul mentioned the purchase of -- the sale -- the purchase of a building in New York, but the sale of a building in New York as well. And we have 2 exceptional cash gains
Okay, questions? Yes, we'll start at the front and then we'll move backwards.
Just say who you are and where you're from.
Filippo Lo Franco
Filippo Lo Franco, JPMorgan. I have 2 questions.
The first is on the U.S. performance.
Trying to understand there what's going on. I have the feeling that, I mean, most of this slowdown is also coming from PR and public affairs, which also relates...
Martin Sorrell
Some, not most. I mean, some.
That's 10% of the business, globally. I can't remember what it is America, 14%, 15% in America.
So it's some.
Filippo Lo Franco
It's some, which is related to the U.S. presidential election, yes or no?
Martin Sorrell
Yes. Yes, I mean, listen, I mean, at the end of the day we can -- it's like trying to analyze what the hell happened in September.
I mean, we cling on to possible reasons. I think that's some of the reasons.
Filippo Lo Franco
So, I mean, once the U.S. presidential election is over, we should expect a bit of recovery there, I mean, for this part.
Martin Sorrell
Yes, I mean, issue management is going to be very important. There are going to be certain sectors that will want to, whether if it's a new administration or even if it's a rerun of the old administration, will want to exercise their-- or put their cases, and I think there will be more opportunities.
So I think it is, to some extent, cyclical, but it's more than it has been because more than we would have expected 6 or 9 months ago, but I think that will recover, yes.
Filippo Lo Franco
The second question is on consumer insight. I'm trying to make an effort to see the glass half-full there.
Martin Sorrell
Yes.
Filippo Lo Franco
Because you still do another 0.8% growth that in itself is not...
Martin Sorrell
Yes, it's the same. It's the same as Q2 actually.
Filippo Lo Franco
But yesterday, Ipsos, again, in Q3 was -- I mean, they didn't say precisely but we extracted a kind of feeling that is still negative.
Martin Sorrell
Yes, yes.
Filippo Lo Franco
So, should we see some improvement there compared to the -- in terms of market share or just too early.
Martin Sorrell
Well, it's very difficult. I mean, the Ipsos thing was after -- it was surprising after hours and no organic the growth rate for the second time.
So...
Filippo Lo Franco
We try to have a feel.
Martin Sorrell
You know we will be in trouble if we didn't give you the organic growth rate. So the flip side of that is that we should benefit from it, and I think, to some extent, we are seeing that.
And I think I've said to you before wherever I go because they put -- Ipsos puts Synovate together with Ipsos, you've got one spare person sort of thing. And that has resulted in some disaggregation but that's -- or confusion, to put it mildly for them.
Having said that, that's going to cycle out at some point in time. So I don't think we should rely on that.
But in the short term, I think we get a benefit. Again, I come back to the thing and I -- maybe what we should do, at some point in time, is show you, in the custom business, and if you look at the companies that we highlighted in the presentation whether it's Kantar Worldpanel, Kantar Media, Millward Brown, they are all the syndicated businesses or the semi-syndicated businesses and they do well.
The other thing that does well is Turkey and China and Indonesia or the markets, the growing markets, the South American markets and the Asian markets that are doing well. So if you go to China and you look at consumer insight, whether it's a panel business or whether it's a custom business, it's doing well.
So we have this-- I think in those businesses, there's a tremendous dichotomy. I mean, just go back to the Chicago Business Council meeting.
So the first thing you see is confidence down. The second slide you see in the presentation is what's the action?
And the second question in the survey is what's the action that you take as the head of the business? And 74% say cut discretionary expenditure.
And I shout, we are not discretionary, okay? And we don't think we are, but the realities are as research comes -- custom research is a discretionary spend, and in a market that's being squeezed, that is going to be attacked.
And I think it comes back to your point about public relations and public affairs, right, as well. So I think project-based businesses or subjects that clients believe to be projects and timing, I mean, somebody said to me yesterday, again at the IBM conference in Paris, that they saw a lot of postponement.
This is another one of our clients, not IBM. They saw a postponement of a number projects over the September year end.
So people shoving things into the fourth quarter. So I think delay as well is a sort of feature in what we've seen in September.
[indiscernible] Yes. Go back, Patrick.
Patrick Kirby
Patrick Kirby from Deutsche Bank. Firstly, at China, how much of a slowdown did that see in September, because I think for July and August, you have previously said no real sign of...
Martin Sorrell
No real sign. It did see a slowdown.
You saw we what bracketed in the 5% to 10% range for Greater China. I think Mainland China for Q3 and I think Paul gave the figure, what was it 12% or 13%?
Paul Richardson
Year-to-date.
Martin Sorrell
For Greater China was it?
Paul Richardson
Yes.
Martin Sorrell
Year-to-date. So some slowdown but, Patrick, I really don't think that we're representative of the slowdown in China.
I mean, I look at the Unilever results this morning driven by emerging markets growth and because they have about half of their business in emerging markets and fast growth markets. And the mass consumer goods sectors, I don't think have been affected as much.
It's not just China. It's India.
You can't explain our Indian growth of 8%. The GDP is down south of 5.
You can't explain that other than we're concentrated in those of mass consumer areas, the areas that the middle class and lower middle class are spending. And so we haven't seen yet that slowdown.
So it was probably more likely to hit luxury first or capital and investment first than it is us.
Patrick Kirby
And just secondly, on Europe, given the deterioration. Is there a need for further restructuring in the second half and how does that impact your ability to get 50 bps of margin growth.
Martin Sorrell
Yes, well, we had our board meeting at Touffou, David's famous Château, which we don't own, but his wife owns. And we had our board meeting there a couple of weeks ago and we looked at our European businesses.
And I think to be blunt, every one of the people who runs our European businesses, who all made presentations, would love to have a pot of money to be able to do further restructuring. But that will be easy for anybody to do.
I mean, anybody can come in and say give me x, let me restructure y and we'll be off to the races next year. We think it's our sort of obligation and the priority to manage the business in the most effective way, because you could take exceptional provisions all the time, every year.
Then they wouldn't be exceptional, they'd become regular. So we're trying to do everything in the context of normal activity.
But the answer is, to your question, is everybody would love a little bit more flexibility who runs our European businesses pretty much irrespective of what sector they're in, right, to be able to do something. The other thing about Europe, which I think is different in Q3, is it has become more homogenous.
In other words, there seemed to be a difference. People would say, I didn't see it that pronounced in our own business between North and South, and that seems to have come together.
I certainly thought there was a difference between East and West, but that seems to have disappeared a bit. The good news, to the heart of your point, is that a couple of our clients have said, despite the fact that the Spanish business, their Spanish business, and indeed ours is being very challenged.
Given the Rajoy reforms, the severance reforms, they have much more flexibility to do things. So the wherewithal that you need in order to do the restructuring is probably less in the Spanish example than it used to be.
Italy has not been -- Mario Monti has not achieved as much as Rajoy, really, in terms of structural -- I mean, easing structural reforms. But there's some improvement there too, but it's going to take a long time.
I mean, the other part of that comment was loss decade, and we're halfway through it. And even the conservative chancellor at the conference said, U.K.'
s going to see austerity to 2018. So I think we have to plan on the basis, that irrespective of whether we do anything further structurally and how we account for it or what we do in terms of restructuring, that Western Europe, at least, and I'm still bullish about the eastern piece, Western Europe at least, excluding maybe the U.K.
because the U.K. does seem to be a little bit different either for us or generally, that we're going to have to -- we face a long time.
France under the Hollande government, the Hollande government has some taxation policies and business policies that businesses find it difficult to manage. And people are finding it quite difficult in that environment, the same thing how you think, in principle, goes for Italy and Spain.
Germany is different. Germany, you can see from our numbers, is a little bit better, export driven, and there is a greater degree of confidence in Germany, I think, than elsewhere in Western Europe.
And then you've got the eastern and Russian influence on Germany too. But we would like to do more, but I think it's easy to just go too far and say, let's take the easy way out.
Next, yes.
Ian Whittaker
It's Ian Whittaker from Liberum. Just 3 questions.
First of all, just on your there's a line in your statement that says the operating profit margins are in line with your budgets. I mean, if your revenue is weaker and your profits are in line, it implies the margins are actually ahead.
So just a little bit of clarification whether that's on your original budget, your revised...
Martin Sorrell
It's on the original budget.
Ian Whittaker
On the original.
Martin Sorrell
There is no such thing as revised budget. It's just the original.
Ian Whittaker
Okay. So, it would imply -- I mean, the implication of that would be your margins are actually probably ahead of...
Martin Sorrell
Well, you can imply whatever you want for that, I wouldn't comment.
Ian Whittaker
It's better. Okay.
Second question, just, again, on the margin side, so looking back to 2011, there was quite a significant margin beat on your guidance. But as you just said, your staff cost you did actually ramp up your staff hiring in the second half.
Martin Sorrell
Towards the end of '11.
Ian Whittaker
Towards the end of '11. So can you remind us what exactly was the beat, was it mainly due to staff was it mainly due to...
Martin Sorrell
I think beat was actually more due to non-staff actually to be fair. Wasn't it?
Again, our margin improvement has been more SG&A influenced in '11 and the beats, as you put it, in '12, in the first half, was totally due to SG&A. In fact, if anything it was more than due, because staff cost to revenue went the wrong way.
I think in '11 the staff cost to revenue ratio stayed pretty much the same, either including incentives or excluding incentives but I may be wrong on that. But actually it was an SG&A, yes.
So I think it's about time, I think having improved the staff cost to revenue ratio in the back end of '09 and in '10, it's about time we do something on the staff cost to revenue ratio. And in theory, sorry, if you just look at the -- in theory, if you look at the headcount numbers that should come through.
Ian Whittaker
Just final question as well, I mean, the Bank of America contracts is quite a big win. Does that catapult -- so would Bank of America become one of your top 10 clients with that...
Martin Sorrell
We'll see. Yes, we just -- we keep going backwards as we're going backwards in Q3, we'll go back.
Let's go over there, row by row.
Matthew Walker
It's Matthew Walker from Nomura. Just one question, which is on next year, if you think about the components of growth for next year, if you have a negative result in Europe, not necessarily out of the question, maybe 6% or 7% growth in Rest of World.
Do you think it's conceivable to have sort of 0 growth for next year? And under that scenario given what you just said about staff cost to revenue, what sort of margins do you think you'd do under that scenario and we do actually start taking out heads.
Martin Sorrell
Well, yes, churn is still quite high. So turnover is still 15%, 20% probably in the north end of that range.
So there is a natural -- now, but sadly, you tend to lose your good people rather than your bad people but, so when you say 15% to 20% turnover, there's a replacement. So it's not 15% to 20%.
But it shouldn't be beyond the wit of men and women to manage the headcount. If our revenues are up 3, which they are for the first 9 months on a like-for-like basis and the headcount is flat, not year-to-year, but in the course of the 9 months, that's moving in the right direction.
I mean, I just think intuitively that moves in the right direction. As to whether it's realistic to believe, in our famous last words, but 0 growth for next year would be really a tough forecast for next year.
Now we're looking at GDP. I mean, you've got institutions who have historically been wrong, but you've got other institutions that have historically been right forecasting still 3, okay, for the world: 3 real, 5 nominal.
I think that's too high. So do I think and on the basis that advertising is a proportion of GNP, overall, stays the same.
Forget about whether emerging markets -- it's growing and going down in mature markets. It seems to me that, that's too gloomy a view.
Now, having said that, it's been a bit of a chastening experience since September, and I should emphasize that we haven't gone through the Q3 RF. We start on Monday for a couple of weeks in New York going through the Q3 RFs.
And then because we are following that with about a week's break, I think we then go into the budget. So we get to the budgets in sort of the middle end of November.
And then we'll finalize them probably in the middle of December. I would find it -- forget about what our budgets say for a minute, because people are going to be conservative.
I would find it very difficult to believe that you will see 0 growth next year. So I think your question is a bit of an academic one.
If it was, it would put us under pressure to achieve the margin target that we're talking about, 50 basis points. I wouldn't say it's impossible, however.
But it would put us under extreme pressure to get it done. Yes?
Alexander De Groote
Alex DeGroote, Panmure Gordon. Two quick questions please, just in terms of leverage ratios, are you pretty comfortable at around the 1.8x now?
And then secondly, just on the exceptionals, whilst, of course, they're exceptional. Does this also hint to the fact that there might be some other assets within the mix, may be held as investments or properties on the balance sheet, that you may be looking to extract some value from going forward?
Martin Sorrell
Do you want to say about the leverage?
Paul Richardson
Yes, leverage, I think, as we indicated, I mean, last year we ended at 1.7x net debt to EBITDA. With the acquisition of AKQA, we were going to increase the leverage ratio by 0.1%.
We obviously haven't got the full year pro forma effect on the net debt, but 1.8x, 1.7x, I'm absolutely comfortable. It's well sort of slap bang in the middle of that range that we're aiming to achieve, the sort of 1.5x to 2x.
So in that sense, I think, we're doing everything we expected to and accommodating both the dividend growth, the share buybacks and sensible acquisition. So we're very comfortable.
Martin Sorrell
Buddy Media was forced on us. We've sold the salesforce.com stock that we had as we came out of the holding period.
So I think we've realized the whole of that, which I think yielded, what was it, 50? 50.
The property, I mean, we had that tragic accident at the building, which we all feel terrible about. The plan was in place to sell the building, as Paul mentioned, that we've gone into a new building at Columbus or go into new building at Columbus Circle.
And we have a conditional contract with quite a significant escrow. So I think it certainly would be penal on the buyers if they didn't complete.
And we'll see whether it gets completed but that will give us, as we've said, a significant book and cash gain actually well over $100 million. But it doesn't signify anything.
I mean Omniture and Buddy Media were forced on us really. We didn't choose Adobe or indeed salesforce.com to buy the companies.
Martin Sorrell
*
Martin Sorrell
In fact, to be honest with you, we'd prefer to have stuck with it because the web analytics business and the Facebook platform business, which Buddy Media was in, were 2 businesses where we -- which we were using really to train large numbers of people inside the company about Web analytics and the potency of Facebook. So no, it doesn't signal anything of that nature at all.
I mean, we are a strategic VC for things like Omniture and Buddy Media and Joule and other things, and some of them are successful and some of them are not so successful. And we learn a lot, and part of it is it's not a venture capital exercise or a financial exercise.
It really is trying to get our people to understand more about the potency of Facebook and other things. Yes, yes.
We go to Tamsin out here.
Tamsin Garrity
Tamsin Garrity from UBS. I was wondering whether you could talk about the quadrennial impact that we always wait for and never seems to occur.
And just break out maybe some of the impact you've had this year.
Martin Sorrell
Well, Tamsin, if it wasn't a [indiscernible], I disagree with that. I mean ,it could have been worse, so.
Tamsin Garrity
But also, looking at the U.K., we have maintained very resilient numbers here, so just under 5% in the third quarter. I was wondering whether you could give some detail around that and whether you think some of that impact has been Olympics or why you think we are being so resilient.
Martin Sorrell
Well, I think some of it must have been the Olympics. I think it might be that we've got good people.
It's not beyond the wit of a man to -- or woman to believe that. We have a strong market position in the U.K.
I mean, I do think there is something a bit Lunar [ph] about how small companies -- and then she thrust a booklet in my hand, which says, "50 technology companies which are all growing not only their topline, Jesus [ph], but bottom line.
Tamsin Garrity
But you want it? Indeed, the small companies index, 1,961 companies, hit an all-time peak on the 29th of March, I believe gaining the most.
Martin Sorrell
Yes, that's probably a better signal.
Tamsin Garrity
[Indiscernible]
Martin Sorrell
That's probably a -- well, we also track it to the market and just see where is it basing.
Tamsin Garrity
There's more money in that area than anywhere else.
Martin Sorrell
Okay, this is an ad for Numis and their smaller company’s indicator.
Paul Richardson
[Indiscernible] over there.
Tamsin Garrity
[Indiscernible] over there.
Paul Richardson
[Indiscernible].
Martin Sorrell
It's good to see. We weren't allowed to put the WPP logo on Sky this morning.
So it's a bit like now you're thrusting the Numis logo down our throats in our presentations. Anyway, I -- where I disagree, I mean, for example, the ECB bankruptcies in France are up by 30%.
We've seen 2 bankruptcies in our own sector where we've -- which we've capitalized on. But there was an initiative in Downing Street this week about supply chain financing for small companies.
The banks are not lending to the SMEs, irrespective of the perspicacious Numis investment strategy. I think we see smaller companies under pressure, and we certainly see that at the client level, the media owner level and the agency level.
And I think it is tougher for the smaller business, I mean, irrespective -- acknowledging what Lunar [ph] says, the technology might drive differences certainly on the topline. So I think the U.K., I think we've done well.
We have -- previously, we did even better. It was 8%, I think, up in terms of revenues.
We've added a couple of thousand people. It's gone from 12,000 -- I think the precise figure is 12,400 to 14,000 the last couple of years.
So we've added an account reflecting that growth. So all credits to our business.
As to where it come from, pretty much across-the-board. I mean, if you look at the results, we -- actually, consumer insight in a mature market has done quite well.
So -- and public relations and public affairs have done quite well, too. So I think it's pretty much across-the-board, and I think it's to do with the fact that we've probably integrated our media offer very effectively.
Our advertising agencies are in good shape. Our digital businesses are good.
They could probably be even bigger in the U.K., but they're good. So just, I think, good, well-run businesses with good people.
So -- and I think in the current environment, it's sort of helping the bigger rather than helping the smaller. So we saw Brilliant Media, we saw Rapier all go down -- both go down.
And I think there are some stresses and strains in the system. Interestingly, that supply chain initiative, I mean, is probably a good initiative as long as it doesn't result in supply chain financing resulting in extension of credit terms rather than reducing credit terms.
Tamsin Garrity
And then finally, just on looking into 2013, would you really have to be seeing something more in the region of 3% organic to be doing the 50 basis points of margin improvement?
Martin Sorrell
I think 3% -- famous last words. I'd say I would be comfortable with 3%.
I don't think it has to be 3%. Now once it gets to 0, which was the previous suggestion, it would get quite tough.
I'm not saying we couldn't do it, but I said it would get -- obviously gets quite tough.
Claudio Aspesi
Aspesi, Sanford Bernstein. Two questions, please.
Is there a risk, if the economy deteriorates further, that some of your performance bonuses against campaigns could be at risk? Is there a revenue risk associated in any significant way with the final demand for the goods and services of your clients?
Martin Sorrell
Well, I mean, if the economy deteriorates, there are 2 risks on incentives. One is what you just pointed out, which is not big in the course of things.
Claudio Aspesi
We'll see [ph] next year?
Martin Sorrell
Yes. But it's not big in the context of things whenever it falls, okay?
There's great thing about performance incentives. I mean, whilst they are there, they're not a crucial part of our compensation.
Some of those incentives we can control. Some of them we can't.
So even in normal times, it may not be -- we don't get them because we -- it's not our control, okay? The other type of incentives is our incentives, meaning bonuses internally.
And those -- that's part of that 6 to 7 of variable costs. So I don't think -- in our thinking actually, I don't think in any of the reviews that we do like the group that's here.
Or we don't really look at -- maybe we should. And it's an area of risk that we should look at, but it doesn't come up on the radar screen, the risk radar screen.
But if incentives -- sales-related -- prototype NOS [ph] sales-related incentives were to fall, what impact that would have? And so it doesn't really figure into our thinking.
I mean, we'll take a look at it, but I don't think that we've really factored that in as a specific risk. I think the answer is no.
Claudio Aspesi
Okay. And a second question.
This was a quarter of mobile for some tech companies, particularly Facebook.
Martin Sorrell
Yes.
Claudio Aspesi
Do your economics change in any way based on the shift to mobile advertising for some of your digital agencies?
Martin Sorrell
Now you see, this conversation reminds me of the sort of conversation with a trade magazine who say, "Well, there's -- look, a team pitch win or a team pitch review, does this mean the beginning of teams or the end of teams? I mean, the fact that Facebook does have a successful quarter on mobile, and then the week before, Google had an unsuccessful week, I mean, I don't think it was because of CPCs being reduced.
I think Google had to wrestle with Motorola Mobility. And if you look at the earnings miss, it's pretty much equivalent to the loss at Motorola in the first quarter that it was consolidated.
I think it's too early to come to a view on mobile. Somebody asked me this morning, and I think it was Thomson Reuters who said, "What's the most important thing over the next 10 years?"
God alone knows, but I said, "Mobile," which is as good an answer as I could summon up within 5 seconds as anything else, or within 1 second. It sounded like a good answer.
And it is going to be very important, but I think it's too early to judge. And just the Mary -- the famous Mary Meeker slide, which I don't think we can put up here, but I don't know whether we popped it in but 0.5% of their budgets is being spent on mobile at the moment.
And we know that consumers are spending 1/3 of their time between mobile and Internet. And then the other -- the Internet piece of their budgets is 19% or something like that.
So it's 20% in total, and we know that people are spending 1/3 of their time. So the answer to your question, is going to become more important whether Facebook's results or Google's results, are right.
It's -- monetizing it is not easy. We still have a problem internally.
We do pretty well on the agency side, but it hasn't become a big money spinner for us yet. It'll come, but it's still early days.
So I don't think you'd run up the flag and say we're getting there yet. It's going to take time.
You -- do you have a different view by any chance?
Claudio Aspesi
I don't have a view. I was wondering if you could help me how the economics work.
Martin Sorrell
Oh, well, the -- listen, the economics from our point of view in terms of application work, in terms of advertising -- this thing about it's a small screen and therefore it's less flexible, I don't buy. I think the screen will adapt over time.
I think going back to the Thomson Reuters question, just what would a smartphone or the equivalent thereof look like in 10 years' time? God alone knows.
But it's -- we'll be more facile with it as consumers. And the device that we use, whether it's a small tablet and even smaller tablet than the new iPad, whatever, I don't know.
A smart or smarter phone, I don't know. Maybe some other device that we just can't even contemplate.
Now whether it's Sergey Brin and Larry Page are running around with those -- and Nikesh Arora running around with those glasses, which we can download things, and so I will -- theoretically, in a year's time, I'll be standing here with a pair of spectacles where I will -- my presentation in front of my eyes and I don't have to look at the screen, I don't know. I mean, God alone knows.
So there's a driverless car as well. So maybe I'll be doing the presentation from a driverless car.
So -- but I think it will become more and more important. Clearly, that's going to be a major source of revenue for us, and we've got to get ourselves ready for it, I think, and there's a big opportunity.
Yes?
Claudio Aspesi
Just coming back to what we saw in Q3, so these interesting discussions. Clearly, Europe is weak, and emerging...
Martin Sorrell
They might be interesting, but a little bit dispiriting.
Claudio Aspesi
Yes, Europe is weak, EMEA is stronger. When you look at the swing factor, in fact, from Q2 to Q3, both EMs [ph] and digital seems to have slowed down probably even more quickly than the Europe, which is already in negative territory.
So what do you think of that? And in particular, like a secondary question on the U.S., in your Slide 9, you've talked about direct and digital revenues, and you didn't mention the U.S.
has been one of the strong areas. So I infer from that, that it wasn't a strong area.
So can you explain what you see here on the -- both fronts?
Martin Sorrell
Yes, I think direct and digital did better outside the U.S. than inside the U.S.
I mean, Chris is nodding yes. And so I think we saw better growth in direct and digital, or digital interactive and Internet, outside the U.S.
than we did inside the U.S. in Q3.
So I think that was the answer there. Well, the hope's that's not going to be the situation going forward.
But certainly, in the case of Q3, obviously that would be a reflection of what we saw in September. A journalist asked me the same question in relation to the slowdowns, and kind of there's a -- and I said just be careful what you wish for.
I mean, the fact is, if you look at the BRICs and the MIST and the CIVETS, how do you define it? If you look at the digital business outside and if we gave you a break on the digital business outside the U.S., it would be better than the 7% that you see overall.
Whatever it is, it's better, all right? And as we scramble for growth at 4, 3, 2 and whatever it's going to be, whether it's 0 next year or 3 next year, to my mind, it's still a no-brainer that those markets will grow.
I mean, the one worrying thing that I -- if I was soul searching about this, was Central and Eastern Europe. Not Russia, but Poland.
It's out -- that sort of concerns me because that -- they're not insulated, obviously, from Eurozone and stuff. But that sort of does concern me.
The rest of it had to happen because everybody -- first of all, the Chinese have been saying for 2 years they're going to lower the rate of growth, so it's not a surprise. But they're still growing at 7% or 8%.
In the last couple of weeks, a number of people are have started to write that the new Politburo, whoever that is -- and we have to wait for ratification, remember, until March. So there's almost the sort of a U.S.
election-type gap in China, too, between November, whenever it's going to be, in November 7 or whatever it is, and the ratification of the Congress over the appointments in March. Nothing will happen.
And in fact, the latest analysis that I heard on the weekend from a quote-unquote China expert -- but a really good expert -- is don't expect major policy change for at least the first 2 years because these people who've been put in place by the previous administration, they won't sort of insult the previous administration, put it like that, by major radical change. But the general view is the change that's taking place and where these people came from in terms of the cultural revolution and which sides they were on, et cetera, is good in the longer term.
Some of the things that the administration are doing, the current administration is doing during the course of the handover, I think, is generally regarded as being either neutral to positive. So my view is if China grows at 7%, 7.5%, which is the 12th Five-Year Plan, fine.
Advertising is short -- is low as a proportion of GNP and will grow faster. I mean, we're growing at 12%, and the economy is growing at 7.5%.
It's not quite the twice the GNP rate it was, but it's close to it. And the same thing applies to India, the same thing applies to Brazil at the moment.
So the slowdown is concerning. But again, I'd rather be at 14% going to 12% than I am at 3% going to 1%.
And that's -- so -- and we're going to still push that way. I mean, it doesn't knock our strategy.
Again, I look at Unilever's results. What does that tell you?
They've got 50% of their business in the fast-growing markets. That's kind of one of their -- one -- they've got a lot of core strengths, but that's one of their big core strengths.
And that tells me we've only got 1/3 of our business or 30% of our business in those markets. I want to have more.
And if you said to me, what do you regret -- instead of what's going to happen in the next 10 years, what do you regret about the last 10 years? That we don't have 50% of our business in those markets.
Then I would not be having these embarrassing discussions or less embarrassing discussions. Yes?
Richard Jones
Richard Jones at Goldman. First, I just wanted to ask if anything particular going on at PR.
So they seem to have been particularly weak. I don't remember seeing that the U.S.
election had a particularly negative effect. I had previously...
Martin Sorrell
Yes. No, I think that's a fair comment.
I think if you notice, we did say that across all our brands in the U.S., we were down. So in Q2, I think 3 of them were, and one of them wasn't.
Now I think we're finding it tough, but I don't think there's anything sort of intrinsically wrong. But I think it's been tougher sledding for H&K and for Burson.
And for Ogilvy PR. Cohn & Wolfe, I think, has found it tougher in the U.S.
If you look outside the U.S., I think it's a little bit better. But it has been tougher, whether it's for the U.S.
-- we -- we're always trying to find reasons for these things. It doesn't really matter at the end of the day what the reasons are.
It is what it is. So you have to deal with it.
And whether it's increasing the investment in good people, whether it's Western Europe restructuring, whatever happens to be, you have to deal with it. So I think there is -- I share your concern in a sense a little bit about that.
You can't explain it totally by the election. But, I mean, that's one of the contributory factors.
Richard Jones
And then secondly, so September's flat. The budget for the fourth quarter implies between plus 1 and plus 3.
Martin Sorrell
Depending on which you take, yes.
Richard Jones
I just -- I wasn't entirely clear on your level -- why you had a confidence of why that would be better growth in September.
Martin Sorrell
Well, again, it is what it is. I mean, we're giving you -- I mean, it's not our forecast for the numbers, right?
So it's our rollout of what we see. So if you just think about the process for a minute, each operating company, knowing what they saw in September, have prepared their October to December forecast.
We haven't gone through that yet. We will go through that in the next 2 weeks.
And if we find any holes in it, either positive or negative, we will do that. I don't think that you can -- September is a big month.
And if I look at it in terms of months as opposed to quarters, it's one of the biggest months. October is a big month.
November is a big month, and December tends to be a big month anyway. I did indicate to you that the pattern seems to be that October and November will be positive.
I won't say any more about December other than it looks to me to be -- I don't feel -- I don't -- think confident from a positive sense, I mean, not from a negative sense. I will find it very difficult to believe that December, as forecast, will turn out to be what it is.
But we'll see. We'll see.
And if you do -- again, the math show that I think, depending on whether you think it's 2.5% for the year or 3%, your figure is right. It'll come out between 1% and 3% for the quarter.
If you think about it, if 4%, 3%, 2% is continued, it'll be 1%.
Daniel Kerven
It's Daniel Kerven from Merrill Lynch. If nominal GDP is growing at around 5% for this year, and you've had some quadrennial benefits, then why are you only saying 2.5% to 3%...
Martin Sorrell
I don't know. I ask the others, too, because they're in the same boat.
It's -- the -- it's -- that is difficult to -- so maybe the figures for this year are wrong. I mean, you would think with GDP forecast at 3% or 3.5% and 5% and 5.5%, that it would be better.
But that hasn't proven to be the case. Particularly, going back to the quadrennial question, that, that would give you a boost.
But it hasn't worked out that way. Maybe it's to do with the disposition of the -- where the growth is coming from.
Maybe -- our U.S. business, again to the heart of your question, U.S.
business, I would have liked to -- putting it mildly -- liked to have seen better. So going back to Rich's question about PR, I'd like to see PR stronger in the U.S., so I'd like to see our advertising and media businesses stronger in the U.S., I'd like to see our consumer insight business in the project in the customer side of the business better, branding and identity and health care better.
So I think we've had pressure across most of the segments or 1 or 2 segments where we have -- the flip side is also true. It's interesting, in relation to the digital question, we've done better outside the U.S.
than that. But it's not -- I mean, I agree with that.
I mean, it is -- you would -- if you're doing a sort of macro top-down, you would expect it to be that. But it's come under pressure.
It might be to do with the mix of our clients, it might be to do with the mix of the countries. I can't explain it.
Maybe that the forecasts are wrong, the GDP forecast, just like us. Yes?
Just in the front again.
Unknown Analyst
I apologize for asking another question. I also apologize for interrupting the gloomy mood for next year.
But I have a quick question about really when I look at the net new businesses. I mean, you have increased this year by 28%.
I mean, I know that this is in relation between..
Martin Sorrell
Not in Q3, but in the first 9 months.
Unknown Analyst
Yes, yes, exactly. I know that the relation is no longer what it used to be in the past.
But for sure, this must have some positive impact into next year. So it's possible to quantify what could add in terms of growth next year, et cetera, is variable for other essential [ph] ..
Martin Sorrell
It is, but I wouldn't. And then you can compare the 5 figure to 72, which is the topline billings.
So it gives you a -- I mean, the way those figures are compiled, they take -- the figures that we quote -- come from the trade magazines, which are notoriously accurate. So you have to be a little careful.
But let's say there's errors both ways. The 5 billion, which is the figure that we put together.
If you compare that to this, the 72 it's fair. Having said that, in an environment that's coming under pressure, what people promise or say is the figure often doesn't turn out that way.
So it's not big, and sometimes it even gets delayed. But broadly, I don't think the delay is the issue.
There's also stuff that falls out the bottom of the pond as well. And then you've also got the base business, which is -- which people are taking a closer look at.
So I come back to that slide of the business council last week, which was, "What's the first thing you do? You cut discretionary spending."
So then, it's a question about what you define as discretionary spending. And I come back to also to the point not wanting to be overly gloomy because gloomy, I don't want to be but this happens at a time when people are thinking about their budgets.
And I think that if you just look at the -- forget about WPP for a minute. If you look at the welter [ph] of news that has come through in the last 2, 3 weeks, IBM, Intel, GE.
And then on the day of the business council, on the Friday, GE announces its numbers, and it misses on the topline. So I think people look at that and they say it's kind of -- it just becomes a self-fulfilling prophecy.
So you look at things more cautiously. So I think we have to look at -- I mean, we'd be very silly for us to look at things more optimistically and come [indiscernible].
I'd rather look at look at it pessimistically and be able to manage it a little bit more effectively.
Unknown Analyst
But I can do this, so.
Martin Sorrell
You can do whatever you like. Yes?
One more.
Unknown Analyst
Just one on sort of the potential for debt refinancing for next year and how we should look at interest costs. Sort of are there any opportunities for you to bring down your interest rates?
Paul Richardson
Yes, but limited. It's not a huge requirement.
The convertible is actually an 0 14 [ph] item from memory. But that is still expected to convert.
There is one bond out there from memory, so I'm going to owe it to my head, which is an 8% bond, which we only partially rolled, so that, obviously, will be significantly cheaper. The other bond, just from memory, is around sort of 6%.
It's a bit -- it is very marginal, the net effect. I mean, our weighted average cost of debt when you add up the whole portfolio has kind of shifted to the benefit of 3/8% to 1/2% in the last 12 months as we rolled over new debt at longer maturities and at good prices.
So it's not that significant hurdle [ph] or cost. What is significant, however, much more significant, is if interest rates increase, which has a number of impacts, so what does to it, it does mean they generate significantly better returns on our net cash, which, at the moment, are earning very little money.
So...
Martin Sorrell
Yes. If you want to -- this may sound perverse, but a bull signal to me would be if interest rates rose.
So, I mean, funny, the reason the financial markets, I think, got ahead of the game after the QE from Europe and U.S. and the Japanese was because they saw maybe the potential of printing money as the way out of the problem with a bit of inflation.
And if you look, for example, at some of the trading announcements, they complain about commodity price inflation. So they have very little pricing power.
Retail is also getting more and more agitated. You have Amazon changing the structure of the retail industry and the competitive problems.
That puts pressure on the manufacturers. The manufacturers can't increase prices because there aren't -- is inflation.
They're getting commodity price inflation. And that's pushing their margins, so they're looking at their supply chains, and not just finance but looking at cost, which -- so I actually think, I mean, irrespective of what impact that might have on our own interest borrowing cost and cash receipts, interest received, I do think that, that would, to my mind, although others might regard as being a negative signal, I think it's a positive signal.
Not a lot but starting to move up.
Unknown Analyst
Okay. Just a quick follow-on.
You wouldn't expect for interest costs to be much different from 2012 from where we're looking at the moment?
Paul Richardson
No, we said we do have more debt on the balance sheet because of AKQA principally. So I just actually found a table of our debt maturity profiles handily.
The '13 bond is actually at good prices, 4.375 at EUR 600 million. So that will make us [indiscernible].
It's '14 where we have the next rung [ph]. And as I mentioned, we have an 8% and a 5.875 and a convertible.
So it's really, as I mentioned -- so the immediate impact is the additional debt we took on for AKQA. The longer-term impact, if interest rates rise, because our, well, the cost of earnings are principally fixed, we will get some closure.
Because of the interest rate, earnings will be higher.
Martin Sorrell
But, I mean, modified a little bit by the gains, hopefully, on the property certainly on Buddy Media. Okay, anybody else or not?
All right, thank you. We're all here if you want any more.
Thank you very much. Thank you.