UPDATE 2-WPP vows better margins to offset weaker growth

Fri Oct 28, 2011 5:20am EDT

* Cuts organic growth forecast for full-year

* Says expects operating margins to show continued improvement

By Kate Holton

LONDON, Oct 28 (Reuters) - WPP Plc , the world's largest advertising company, sought to reassure the market with a pledge of improving margins on Friday, after it cut as expected its 2011 outlook due to slowing growth in the U.S. and the euro zone debt crisis.

Martin Sorrell's WPP said preliminary forecasts for the full-year indicated like-for-like revenue growth of 5 percent, compared with a previous forecast of 5.9 percent, lowering its expectations for the fourth quarter much like its French rival Publicis .

But the group, whose ad agencies include JWT and Ogilvy & Mather, said it expected operating margins to improve more than forecast due to its still solid revenue growth and strong cost control, sending its shares up 1 percent.

WPP has been boosted this year by strong growth in the United States, an improving picture in Britain, and continued solid performances in Latin America, Africa, the Middle East and central and eastern Europe.

However with ad agency performance largely linked to the economic cycle, ad groups such as WPP, Omnicom and Publicis have been under increasing pressure in recent months due to uncertainty over Europe's sovereign debt crisis and sluggish growth elsewhere.

Analysts said they had already factored in a slowdown for the fourth quarter and noted that the third-quarter growth was a shade below expectations, but they welcomed the improved guidance on margins.

"Although we believe uncertainty remains over organic revenue growth in full-year 2012, we view profits as relatively well-underpinned given the group's ability to deploy cash balances on earnings enhancing acquisitions," Numis said in a note to clients.

"Our target price remains broadly unchanged."

NOT DIRE

WPP said the margin improvement "augurs well for enhanced profitability, despite more difficult economic headwinds and industry comparatives.

"Although it is too early to compile or estimate budgets for next year, despite current uncertainties, the prospects do not look dire, particularly given the record high levels of variable costs in the company's structure."

Sorrell told Reuters that 2012 would be underpinned by events such as the London Olympics and the U.S. Presidential election, but that he had concerns for 2013 as the U.S. government looks to reduce its deficit.

WPP had already reduced its forecast in August, saying that its 2011 organic revenue growth may drift down slightly after it upgraded the outlook in April.

Third-quarter organic revenue growth was up 4.7 percent, a slow-down from the previous quarter and a shade lower than a forecast of 4.9 percent according to a Reuters poll.

"The cut from 5.9 percent to 5 was mostly expected," Paul Gooden at RBS said. "The street was expecting 5.1 percent anyway. And on the margins, that's comforting.

"So realistically is there going to be any change on full year numbers? I don't think so."

At the half year, headline operating margins improved 0.7 margin points to 11.0 percent, and they improved again in the third quarter, despite tougher comparatives.

"As a result, our full-year operating margin should improve beyond the 70 basis points or 0.7 margin points achieved in the first half and in comparison to the budgeted operating profit margin improvement of 0.5 margin points," it said.

Publicis posted 6.4 percent third quarter organic sales growth earlier this month but also said it expected this to slow in the fourth quarter.

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