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Good morning, ladies and gentlemen, and thank you for standing by. Thank you for standing by. Welcome to the WPP 2020 Third Quarter Trading Statement 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 CEO, Mr. Mark Read. Please go ahead.
Thank you very much, operator, and good morning, everybody, and welcome to our third quarter results call. I think I'd like to start by asking you to read the statement on Page 2 of the presentation. And then if we turn to Page 3. So briefly, I'm going to cover the highlights of the third quarter, and then John Rogers, our CFO, will take you through the financial presentation, the financial performance. And then John and I will come back at the end to answer any questions that you have. So on Page 4, I think I would describe our performance in the third quarter as a resilient performance in a challenging environment. As we expected, the second quarter was the toughest quarter of the year so far. And the third quarter came in, I think, slightly better than analyst expectations and probably slightly better than we had expected at the end of the second quarter. Remind you, the progression from minus 3.3% in Q1 to minus 15.1% in Q2 to minus 7.6% in Q3. We saw a good recovery in our integrated agencies, particularly at GroupM driven by media spend. The public relations sector was the strongest performing sector in our business, and we had a good performance from both BCW and Hill+Knowlton. But our specialist agencies did remain challenged, which reflects the nature of those companies in events or working with airlines or in the branding identity business, which by nature, is a little bit project based. What we're most pleased about is the continued new business momentum at WPP, which continued into the third quarter. Our new wins were Zespri, Whirlpool, Alibaba and Uber and, last night, we were able to announce that Walgreens Boots Alliance had renewed and extended our relationship with them. And that's a new relationship we'll be focused on accelerating their digital transformation and extending our work from communications into public relations with deep emphasis on data and on technology. We continue to put a major focus on cost. And as John will talk about, we still expect to come in at the upper end of our GBP 700 million to GBP 800 million savings range in 2020, and the progress that we've made on the balance sheet stays in place. The balance sheet remains strong. Average net debt down 2.5 -- average -- sorry, GBP 2.5 billion is down GBP 2 billion year-on-year with good working capital. For the full year, we do expect to be in line with analyst expectations. Remind you that those expectations have improved somewhat since the last quarter. I think that reflects a better momentum or continued momentum in the business overall and our new business performance. Turning to Page 5. I think as we said before, in the long run, I think one thing we can take as a positive in the results is the relationship and value that we have with our clients. We have seen our customer satisfaction scores improve over the course of our pandemic, and I think our results demonstrate that we are a critical partner to our clients. If you look at the net sales from our top 100 clients, they improved from minus 8.1 in Q2 to minus 2.4 in Q3, and we saw a balanced improvement, really, across all -- most sectors of our clients. In those parts of our business, the 21% that we classify as significantly impacted, we saw some improvements in automotive, luxury and premium, although the travel and leisure sector continues to be impacted. So you saw that improvement minus 17.9% in Q2 to minus 9.7% in Q3. This company somewhat in the middle also improved. But I think most importantly, the clients we would describe as resilient consumer packaged goods, technology, health care and pharma actually grew in the third quarter. We did see growth in the third quarter from 18 of our top 30 clients. And that was most pronounced, I'd say, in the health care, pharmaceutical sector and consumer packaged goods. And as I said on Page 6, we have seen continued new business momentum across the company. I think our new business pipeline, as we speak today, is probably somewhat stronger than it was 3 months ago. And we do expect to see a heightened level of new business activity in Q4 and in Q1 of next year. I think we do find ourselves more competitive in new business pitches than perhaps we were a year or 2 years ago. Most importantly, as I mentioned, last night, we're able to announce the Walgreens Boots win. I think if you look at the wins we've had across the company, several things that I'd point out. One, a number of them with technology companies like Uber or where the focus is really on data and technology and transformation like Walgreens Boots Alliance. A number of them are integrated across creative and media, so clients looking for a sort of simplified integrated approach at the current time. But we've also had a number of wins that I would say creatively focused. The clients are looking for really strong creative solutions, most notably perhaps the McDonald's win. In Germany, it's Scholz & Friends or the win at Carlsberg by Grey, the global win as part of the Carlsberg business by Grey. So we are seeing continued strength in our new business approach across the company. On Page 7, we are, at this point, confirming the date of our Capital Markets Day, which would be the 17th of December. I think as we said on the last call, we do expect to update you on our strategic progress with 2 years into a 3-year plan. There's no doubt that COVID has accelerated many of the trends in our industry, and that's required us to accelerate our approach. We'd like to update you on how we see that as well as go into some detail on the longer-term efficiency savings and how we can reinvest them for growth, our longer-term capital allocation and our medium-term financial targets. So we'll come back to you in December. So I'll turn over to John Rogers to take you through the financial performance of WPP.
Thank you, Mark. Good morning, everyone. So Mark's already taken you through the trends on a quarterly basis. But just to reinforce messaging, obviously, Q1 down minus 3.3%, which was really reflecting the early onset of COVID-19 and, in particular, the impact on China at that time and Italy. And then obviously, moving into Q2 where we saw like-for-like net sales down to 15.1% and clearly reflecting a lockdown across most of the Western markets within which we operate. But as the market started to recover, we saw a steady improvement in performance in Q3, so minus 7.6% for the quarter. And if you remember at the half, we reported a number for July at minus 9.2%, so you can see that we've had some momentum building through the third quarter itself. So I think we have some confidence about the momentum of the business going forward, but we remain sensibly cautious, of course, about Q4, given the uncertainty in the market. Coming on now to Slide 10 and looking at breakdown by segment. Again, you'll see here the breakdown of performance of the global integrated agencies. Again, the big impact in Q2 at minus 15.7%. But we're pleased with the recovery coming through into Q3 at minus 6.7%. And in fact, all our agencies showed sequential improvement Q2 into Q3. VMLY&R remains the strongest performing agency, only slightly down year-on-year and up in the U.S. albeit the strongest recovery between Q2 and Q3 was actually seen at GroupM, reflecting the closer correlation to the uptick in client media spend that we saw come through in Q3. But as I said, all the integrated agencies are recovering steadily. Coming on now to Slide 11 and public relations. This is our best-performing segment. It was the most resilient through Q2 and only down minus 7.5%, of course, reflecting the need for many of our clients to manage their messaging in these challenging times. And we saw our performance bounce back in Q3 to minus 2.9%, so some real positive momentum. We actually saw our specialist PR companies return to growth in the third quarter and BCW and H+K, as Mark alluded to earlier on, both performing, both recovering well through Q3. Coming on now to Slide 12 and the specialist agencies, there's slow recovery here. It's fair to say that this has been a more challenging sector. So we've seen the impact in Q1 itself of minus 7.4%, minus 16.3% in Q2 and a slightly disappointing minus 13.9% in Q3. So it's a much more challenged sector. Although pleasing to see that GTB did improve for the second consecutive quarter as we start to annualize the impact of the major assignment ending. Brand consulting itself was a challenging market, remains under pressure given the client budget cuts and the sector exposure. So some recovery in Q3 but perhaps not quite as strong as we would have liked. Coming on now to the geographic performance on Slide 13 and just looking at our top 5 markets here. The U.S.A., the least volatile actually, of all of our markets through the COVID-19 pandemic, so obviously down in the first quarter by 1.9%, down 9.6% in the second quarter. But Q3, we saw some good recovery at minus 5.5%. The U.K., more impacted in Q2. You've seen that down minus 23.3%, reflecting, I think, quite the hard lockdown that we saw in Q2. But very pleasingly actually -- and slightly better than we expected performance in Q3 at minus 6.5%. So a strong relative bounce back in the U.K. market. Germany was more robust, so didn't go down as much in Q2, only down 11.6%. And again, we've seen a strong bounce back in Q3 to minus 1.8%. So an encouraging performance in Germany. Greater China, a little bit more disappointing. So we saw the full impact come through in Q1 when we saw lockdown in China at minus 21.3%. We saw better performance in Q2 at minus 3.1%, albeit that is significantly flattered by one-off contractual client payment. And then we saw performance in Q3 at minus 16.7%. It is worth noting, though, that we reported at the half that China in July was down just over 18%. So we are seeing a relatively small slight improvement as we traded through Q3, and we would expect to see that trend continue into Q4. I think the main reason why we've been seeing slightly disappointing performance in China is, given by -- driven by our sectoral exposure, particularly in areas like obviously, automotive and luxury goods. We haven't seen those areas recover quite as strongly as we would have liked, and therefore, performance has been lagging somewhat. If we look at India, again, we saw the Indian economy impacted quite severely in Q2, and our own performance down minus 25.1%. And again, we've seen some recovery coming through in Q3, but not as much as we've seen in the -- in Western Europe and again, principally driven by the continued lockdown environment that we are seeing in India even today. So moving on now to some of our other major markets on to Slide 14 and looking at France, Italy in Spain, our European markets. Again, we've seen the trends of Q2 being quite severely impacted as a consequence of lockdown and seeing the recovery come through in Q3. That recovery has been more evident in Italy, which perhaps, obviously, is slightly earlier on in the recovery cycle than perhaps Spain or France. But nonetheless, we are seeing slow recovery come through into Q3. Brazil, in some ways, not dissimilar to India, not so quietly partially impacted in Q2. We are seeing small recovery coming through in Q3. But again, given the challenging environment in Brazil, that recovery is not perhaps as strong as we're seeing in some of the Western European markets. So coming on now to Slide 15, just looking at our improvement in net debt year-on-year. So we started out this time last year with net debt of GBP 4.47 billion. We've seen improvements in trade working capital, obviously, allowing then for CapEx and share buybacks and dividends and the benefits, of course, of the Kantar disposal reaching a net position of GBP 2.3 billion net debt at this time, September this year. So strong overall balance sheet. We've got liquidity of circa GBP 5 billion. And so a very strong position year-on-year in terms of our balance sheet and liquidity position. So just coming now to the last slide, Slide 16, just to iterate our guidance for the full year. 2020 financial performance is expected to be within the range of current market expectations. And of course, that has improved since the half 1 in terms of the market expectations. And that, of course, assumes no widespread lockdown in -- across our major markets. So that implies like-for-like revenue less pass-through costs between minus 8.5% to minus 10.7% and headline operating margin between 11.4% and 12.5%. We expect a small working capital outflow for the full year, maybe a little bit better, but I think taking a conservative view of small outflow for the year on trade working capital and CapEx at circa GBP 300 million. Average net debt over EBITDA in the range of 1.5 to 1.75 by the end of 2021. And I'd expect it to be at an average just above that range for this year-end, so probably about 1.8x for this year-end, albeit at the balance sheet date itself as opposed to an average, I'd expect net debt to EBITDA to be 1.5 at this year-end, so an encouraging performance overall. So that concludes our presentation today, and I'll hand back now to the operator so that Mark and I can take Q&A.
[Operator Instructions] We will now take our first question from Lisa Yang at Goldman Sachs.
Congratulations on the results. I appreciate obviously the high level of uncertainty going ahead, especially with COVID. I'm just wondering if you can say anything on what you've seen in October so far. I mean it looks like some of the other media owners have mentioned October is still resilient. So just wondering if you can give a bit of update for WPP and what -- how has the tone of conversation with advertisers evolved more lately. The second question is on the cost savings. So I think in the press release, you mentioned that all the revenue decline was offset by the cost saving in Q3. So I think it implies around 600 million in the 9 months. Could you confirm that? And maybe could you give a bit more color in terms of what are the main areas of cost savings left for Q4? And what sort of underlying cost inflation you're expecting for this year, so we can basically work out the growth in net cost savings for this year? And the third question is on the new business activity, which clearly has been very good so far this year. You mentioned on the call that you expect more activity in Q4 and Q1. So I'm just wondering like what sort of pitches are you sort of expecting? Is it more like WPP defending accounts? Or is it more like new opportunities? And maybe you can give a bit more color in terms of what sort of pitches that we're talking about media or digital data, et cetera?
Okay. I'll start, and then John can talk about the cost savings and I'll come back on new business. So I think that we did say that we expect Q4 to be in line with the range of analyst expectations. I think it's fair to say that we haven't seen anything -- we don't have our October results. I can't comment on our October results. But I think it's fair to say that we haven't seen anything from our clients in terms of a knee-jerk reaction like we saw in March, April, May in terms of reducing their spend. And I would say that we do see governments steering a fine line between limiting the spread of the virus and protecting economic activity. We did say that we expect the second quarter to be the toughest quarter of the year. And I think it's fair to say that we do still expect that to be the case. Okay. John, the savings?
Yes, sure. So just in relation to cost savings, we did have a good quarter for cost savings as you highlight. Obviously, I'm just going to reiterate the guidance that we've given for the full year, which is we expect our total savings for the full year to be at the upper end of our GBP 700 million to GBP 8 million range. So we remain confident in our ability to deliver those cost savings for the full year. You asked a question specifically about cost savings year-to-date. I'm not going to get sort of drawn on giving sort of cost savings by month. But obviously, if you extrapolate the GBP 800 million, you roughly get to the figure that you referenced. So give or take, that would be around about right. In terms of cost savings coming through in Q4, there remain a similar mix to those that we've seen so far during the year. So a combination of property savings, obviously, travel and subsistence continues to come through. We don't see people doing much travel in the next 3 months or so, and we continue to make savings with regards to our total headcount and salary costs, again, as a result of the actions that we took early on given the impact of COVID-19. So no change in mix of those cost savings, but they will come through in Q4, in line with we expect. And then you asked also around inflation. It was quite difficult to break out the impact of inflation by cost line and by geography. But as a broad guide, I think I would use a number between 1.5% and 2% coming through. Obviously, we've been able to hold back salary increases this year, which would be a major source of inflation. We would expect to see that come through next year as we see global economies start to recover. We would see some of that salary inflation come back in. But I'd say 1.5% to 2% for the purpose of your model.
And then on new business activity. We said, as we came into the year, we had a relatively strong new business pipeline. We had limited new business at risk. Actually, the key piece of business we had at risk was our work with Walgreens Boots Alliance. As you know, as we announced last night that we both retained and extended our scope with Walgreens Boots Alliance. I think we are seeing a number of new pitch activity. It's primarily integrated pitches, so both media and creative. And by far, the bulk of that is net new business WPP. We haven't seen anything specifically at risk in the last few weeks.
And your next question comes from the line of Julien Roch of Barclays.
Three questions, if I may. On GroupM, you said good recovery per industry spread is wide. IPG's media positive in Q3 for them. Ogilvy comes better, but only marginally better than the minus 11.7%. So what about you? Better than minus 7.6%, I assume, better than minus 5%, close to 0? Coming back on Q3, as John highlighted, minus 9.2% in July, you finished at minus 6.7%. So can we have an idea of the quarterly progression in Q3? Was it something like minus 9%, minus 6% minus 3%? Then coming back on Lisa's question on October. Mark, you said you didn't have October yet. But I guess now that you have restructured, simplified the offer, do you get some weekly indication of revenue? I mean publicly, it's clear that they do have weekly revenue now. But for your major agencies, did you get weekly revenue? And if yes, how much of revenue does that represent? And then maybe a quick last one, John having given lots of indication on net debt and working capital on Page 16. Where do you think free cash flow is going to be roughly for the year if you meet midpoint of analyst consensus?
Thank you. So I think I'll just take the October question. So I think on October, we don't see weekly revenue by -- we don't see weekly revenue by agency. What I would say is that none of the conversations we've had with the leaders of our agencies or with clients have yet implied a massive pull back in spend in October. And so yes, John, do you want to talk -- take the other questions on GroupM?
Yes. So in terms of GroupM performance, we did see a strong recovery come through between Q2 and Q3. So I'll give you a little bit of an indication. We were down circa 17%, 18% or so in Q2 for GroupM and down about circa 4% in Q3. So we saw a good bounce back in GroupM. But equally, we saw a strong bounce back in other areas, too, across our global integrated agencies. So that gives you a little bit of feel for the weighting of performance. You then asked a question about, second, in terms of July and progressing through Q3. I'm not going to get drawn on giving you specifics for August and September. Obviously, given July was minus 9.2% and the quarter is minus 7.6% and, clearly, we did see an improvement coming through the quarter. I wouldn't say it's quite as positive, as you suggested trajectory of minus 9%, minus 6% and minus 3%, I think it's certainly a little bit flatter than that. But clearly, the numbers do suggest an improvement through the quarter. And in terms of weekly revenues, we do get some line of sight from the business in terms of forecasting revenues on a weekly basis, but we don't capture that information. We generally get the monthly numbers coming through when we confirm the actuals, but we get some forecasting coming through. So we have a little bit of line of sight on the weekly numbers, and that's obviously helpful for understanding the true trajectory of the business. And in relation to your question on free cash flow, I think it's a broad approximate, I would say, for the full year, excluding Kantar. We'd expect to see a couple of hundred million outflow in relation to operations. That reflects, obviously, a negative outflow in the first half as we reported at the half 1, followed by a positive inflow in the second half. But overall, net-net, a slight negative outflow of cash flow from operations for the full year. And then when you take account of acquisitions and disposals, would be broadly flat in terms of our cash flow before shareholder distributions for the full year to give you some guidance.
Your next question comes from the line of Tom Singlehurst, Citi.
Tom here from Citi. So yes, first question, just a sort of philosophical one, I suppose, about the fourth quarter. The guidance implies a wide range. I appreciate that's based on our forecast, not yours. But I just -- the question is around sort of how 4Q is expected to work relative to history. I suppose you would say there's lots of project work. There's always a risk for budget flush. In the old days, the company might use marketing as an adjustment fact to make margins. I'm just wondering, with a lot of your advertising clients possibly sitting on big T&E savings, whether there's any chance of the reverse coming through and seeing a budget flush. Obviously, a positive spin, but I'd be interested on your view on that. And then the second question, just specifically on the U.K., which had a very strong performance, I'm just wondering whether that's -- whether the U.K. operations are sort of sucking in work from elsewhere in the globe and that explains why it's so strong in relative terms, both in terms of pickup and the absolute level of growth in the third quarter.
Yes. Look, I think on Q4, I don't think we've ever really looked at Q4 on the basis of budget flushes or indeed it going the other way. I think it's just really a question of how clients are thinking about the full year, what the impact of the lockdowns will be. I mean I point out, at its worst, it was minus 15%, which is above the upper end of your expectations. And I don't think that currently, we expect the lockdowns to be as severe as they were in March, April, May. But I don't think we focus on sort of project work or budget flushes in that way, really.
I mean I think just to build on what Mark just said, as you rightly highlight, Tom, there is a wide range of implied consensus for Q4. In fact, that range, as I understand it, goes between minus 6.8% to minus 12.5%. And I think the reason why there's such a wide range in that consensus forecast is because there's such a wide range in potential outcomes. As we sit here today, we're not seeing any particular changes in client behavior. We've got positive momentum coming through in the business. But of course, there's uncertainty out there. And if there are significant lockdowns across market economies, then we will see that impact our performance. If there aren't, those lockdowns and governments do a good job of balancing the needs of the economy and the need of restraining the outspread of the virus, then obviously, performance will be stronger. But there still remains uncertainty out there as we work our way through the winter. And I think that justifies the very broad range of consensus outcomes. And it's a little bit of a guessing game as to where you think we may end up in those scenarios, but it does depend on those particular outcomes. I mean the middle of the consensus range is about minus 9.4%, and that's probably not an unreasonable average to assume.
Fair enough. One quick follow up on that particular point. Arthur of Publicis has detected, I think the phrase he used was a fighting spirit from the CEOs of some of the clients that he's been talking to. Do you see something similar in your discussion?
Yes, I certainly think that clients are looking for growth. I think that those clients look -- look at the pattern that we gave you between the resilience the balance of our -- in our business. There are clients who are seeing really strong growth in the packaged goods area, Reckitt, Unilever, a number of them have had strong -- P&G, none of them had stronger growth in Q3. If you look at retail spend in the United States in September, you saw certain sectors, apparel and fast food and restaurants down, I think, close to 20%, but you did see growth in other areas. There's no doubt that the pandemic is -- while it's having a negative impact on economic growth overall, it's causing some sectors to decline. It's also causing spend to be increased and displaced into other sectors, retail and supermarkets, technology, health care, consumer packaged goods. And so I think it is a balanced picture. I think that clients are looking at growth. I said before, every conversation I had with a client starts and ends with the word e-commerce and how they can shift their business online and how they can shift more budget into digital media and more sales-driven digital media, and those are all areas where we can help clients. And I think even in those parts of the economy that are most badly affected, people are looking for light at the end of the tunnel. I mean if you read the newspapers today, you'll see 3 front pages that talk about lockdown, and you will see 2 front pages that talk about vaccines. And I think it is a careful balance between navigating our way through a period of lockdown, but I think they will do -- governments will do their best to mitigate the economic impact and working our way through to -- I wouldn't use the word sunny uplands, but working our way through to the other side of this. And I think to some extent, clients are holding their nerve to get through to that.
Very clear. And does that e-commerce point feed through to the U.K. as a sort of export market for…
It's not about an export market. I mean the U.K. is one of the world leaders in e-commerce. We have, probably after China and South Korea, the most advanced e-commerce market anywhere in the world. So I think it is positive for parts of the U.K. It's positive for our e-commerce capability.We did say -- we talked -- last time we met about us helping 8 of our top 10 clients with e-commerce. We're seeing that feed through into our media business where we're shifting biddings very rapidly. Amazon is one of our fastest-growing media platforms. And I think you're seeing clients increase their sales targets on e-commerce. Some clients that were at 10% or 12% of sales through e-commerce are hitting close to 20%. I think in the U.K., outside of grocery, e-commerce is now 40% of retail sales. Many clients are increasing their targets to 50% plus. So I think there's a lot for clients to invest in. And many of those clients find that a partner like WPP and our agencies are going to help them navigate their way through that many of the questions they need to do in how do they build the right e-commerce experience, how do they deal with Amazon, what do they want to build directly, whether they want to partner? We've been helping supermarkets to expand their capacity to get them more capacity to sell online. We've been helping -- we helped a chain of liquor stores in the U.S., build a curbside delivery platform in 2 weeks. So there's a tremendous amount of activity going on in these newer areas. And I think, to some extent, our results reflect both the more resilient pattern of many of our clients and the new activities that they're undertaking.
Our next question comes from the line of Adrien de Saint Hilaire at Bank of America.
So first question is on China. So year-to-date, it's one of the worst markets alongside France and Italy. John, you've given some explanations in your prepared remarks. But if you look at these 2 sectors, they seem to be performing quite well in Q3 in terms of their actual sales. So can you be a bit more specific on the drivers of China and the maybe local or multinational clients? Secondly, on net new business, thanks for giving that KPI. Does it already have an impact on your 2020 P&L? Or do you think most of these wins will be felt in 2021 in terms of actual revenues? And also, how does the $5.6 billion compare to 9 months 2019? And then thirdly, I think in your guidance, you indicate that this guidance holds there are no lockdowns in markets among the top 4. But is there a risk that if some of these markets introduce lockdowns or some of the government introduce lockdowns, that Q4 could actually be worse than Q2? Or does your comment mark that Q2 is the worst would still hold?
John, why don't you take those 2, and I'll just go back and…
Yes. So just coming on to China. Look, I think it's fair to say that we are a little bit disappointed with performance in China. We haven't seen it recover quite as much as we have in the other markets. But it is recovering, and we would expect to continue to see that recovery come through in Q4. You're right to say that if you look at the automotive market, you look at the luxury market, they have recovered in Q3. However, the spend that we're seeing in those markets from an advertising and marketing perspective, we haven't seen recoveries as much. And in fact, if you looked at our performance in China versus that of our competition, you'll see that it's pretty comparable. And actually, China, I think, from a marketing perspective, has been a relatively tough market Q2 through Q3 compared to some of our other markets. So our performance isn't really out of line with the market. In relation to lockdown and sort of what we'll see in Q4, I think, obviously, if we see -- so there's a bit of background noise on the line. If, perhaps, people can go on mute, that would be helpful. If we see lots of lockdown -- lots of the markets lock down over Q4, then I think it is possible that we will see a slowing down of spend. I personally don't think we will get to the types of declines that we saw in Q2, even if we did see significant lockdowns across our global economies. I think -- to Mark's observations, I think Q2 will be seen to be our worst quarter. I actually think, in practice, most governments are trying to very sensibly and rather delicately balance the needs of the economy and the need to hold back the spread of the virus. So I think the sorts of lockdowns that were like -- most likely to see through Q4 will tend to be a little bit more temporary in nature, the likes of 2, 3 weeks or so, 4 weeks maybe. But I think we'll see a more measured response over Q4. And I think that measured response is certainly within the parameters of the breadth of consensus guidance that's out there. So hopefully, that helps you a little bit.
On the new business target, Adrien, so our net new business was at $5.6 billion. We're 43% up on last -- on the same period last year where there were $3.9 billion. So we had a much stronger performance in new business. I mean it is hard, given the background of the pandemic, to differentiate between just to see the impact in the business. And I would expect much of the impact to flow through into next year. What I would say, you can see is if you look at our U.S. numbers, year-to-date in the U.S., we were down 5.5%. But on a full year basis, last year, we were down 6%. So despite the pandemic, our business in the United States has -- is relatively better than it was last year. And I think that reflects both greater stability in our client base and the net new business wins. So I think you can start to see the positive impacts flowing through into the business, and it does give us continued confidence in the competitiveness of our offer and our ability to recover next year.
Your next question comes from the line of Tim Nollen of Macquarie.
I think that's me, Tim Nollen from Macquarie. Question for you, Mark. I saw -- I believe, if I remember correctly, not too long ago, I saw a headline in some publication, I forget which, talking about you, WPP looking at acquisitions again. Could you just confirm if I read that correctly? And I'm just curious if so, is this a matter of your debt ratio having come down quite a lot? Is it a matter of target pricing having come down quite a lot in this environment? And/or is it a matter of needs to build out into more areas of data-driven marketing, a lot of privacy issues, a lot of changes coming with Chrome cookies and Apple ID phase and so on and so forth? Just any comments you could give on that front would be great.
Yes. So I think it reflects, first, the progress that we've made in the last 2 years in terms of streamlining the company, simplifying our structure, integrating the business and reducing our leverage. Remind you that we've raised GBP 3.5 billion through the sale of Kantar. We both refocused our offer but also put our balance sheet in a much stronger position, and that has enabled us to navigate the last 7 to 8 months with much greater confidence than if we hadn't done it. The observation I made in the article you're referring to is that you have to build a house on firm foundations, and I think our foundations are much more secure. And as we come through COVID and start to focus on growth, we need to focus on both organic growth and growth by acquisitions, which I describe as selective acquisitions. I think what's much more valuable for WPP is to grow on top line and to invest to grow the business organically, and I think that has to be our priority. But there is room within that strategy of making acquisitions to complement our offer in areas that are important to our clients around technology, around data, around e-commerce. And so I think that's really going to be our focus. It will be a balanced approach, but with a real emphasis on driving top line, investing to drive the top line, but making acquisitions where they think that makes sense and in, what I'll describe, a selective way.
Your next question comes from the line of Dan Salmon at BMO.
So Mark, I think I've asked you about these sort of things a couple of times, but it seems timely to return to them in light of what you've mentioned a few times here. I think that's the shift to e-commerce being the sort of profound move right now underneath what's being driven by COVID. So one, I just wanted to ask about the parts of your business doing e-commerce services, business transformation work where you often see the consultants. What are you hearing from those agencies in terms of demand? And then second is we continue to see these retailers ad businesses take off. Walmart reported for $1 billion of ad sales now the other day and the shift there moving as well. And like I said, I think I've asked you this -- about this before, is are you seeing an opportunity to tap into trade promotion budgets with these retailers more? Would love to hear more on those 2 parts of the business.
Yes. I mean, I think if I just remind you of the capabilities we have in e-commerce and how far they go back. I think we bought, as was then, Salmon, which was an e-commerce company. I think 8 or 9 years ago, at the time, it was sort of 300 or 400 people. It's grown now to more than 1,000 people and beyond that in terms of after acquisition. So we have very strong e-commerce build capability in Wunderman Thompson Commerce. We're able to actually build sainsburys.co.uk platform alongside our client. We just replatformed up YOOX Net-Ã -Porter, 60 different websites there. And we have really strong skills in all the major e-commerce platform, including Hybris, Magento that Adobe bought. Within VMLY&R, we have a really strong commerce business. We bought a business called Rockfish in Arkansas, again, about 10 years ago that had a strong relationship with Walmart. And through another company, ArcTouch, we do actually build much of the Walmart mobile application. Then business like AKQA have strong commerce capabilities helping companies like Hermes build e-commerce capability. Then in Geometry, we have strong capabilities in digital shopper marketing, helping clients navigate their way through Amazon. And obviously, in GroupM, we're helping a large number of our clients manage their digital media budgets, particularly a lot of growth we're seeing in the e-commerce media budgets. And as you say, that also relates to the work that they do managing trade budgets. I do think it's interesting. If you think about sort of -- if you take a step back, what's happening in the world is technology is causing the worlds of communication, what we've passively done, content and commerce to collide. The best example might be Net-Ã -Porter. If you look at Net-Ã -Porter, it's both an e-commerce site has a lot of content on its site, some of which about its product, and mainly about things that people come back to look at, but also the lot of communications reaching out to customers about what they can buy on the site. So I think as you see those 3 worlds collide. I think you're seeing our clients trying to navigate their response between the marketing department, often the Chief Digital Officer, often the sales department figuring out how to allocate their budgets and optimize their presence on those platforms. I think what we are able to help clients do is really navigate through those strategies that cover, not only how they should manage with retailers or how they should sell their product through Walmart or Sainsbury's and how they should allocate the advertising spend, your point about the Walmart spend, but also what the right strategy should be for Amazon. Should they put their product in Amazon or not put their products in Amazon and the same with the other marketplaces. But then I think increasingly, we're helping them build their own direct-to-consumer platform. So working with one of our top 5 clients on a global rollout of a DTC platform based on Magento. And in that instance and in a number of others, we do go head-to-head with Accenture and Deloitte Digital and other systems integrators on building those platforms. And in a number of cases, we have been successful. So I think we have highly competitive systems integration capability in e-commerce, able to help clients both define their strategy, to find a technical architecture and build those platforms as well as what these platforms have built, help to understand how to merchandise and how to drive traffic to those platforms and how to program them with the right content. I do think this is a major area of opportunity and growth for WPP. And what we tried to do 2 years ago is to lay out a strategy that we focused our offer or broadened offer into the faster-growing areas, and we'll talk to you a little bit more about that in December.
And maybe just one quick follow up. And John, if you could add your thoughts on how you might be thinking -- your latest thoughts on real estate footprint. But Mark, what are you hearing from employees right now about views on hybrid work and how maybe keeping certain parts of what pandemic life has been like versus getting back to normal? Seems to be a very popular topic these days. Would be interested to hear about…
Yes. But -- I think by the time it's -- going back to normal, we'll have forgotten what normal is. When we talk to our people, and I think we would accept this, we're not going to go back to working 5 days a week in the office in the way that we used to, though, we did have always had an element of flexible working. And I think we're much more likely to be in the office 3 to 4 days a week, and we need to work on that with our people to make sure that we're not -- it's not -- we're in the office Monday to Thursday, and everyone's out of the office on Friday, clearly, there won't be any savings from that. I think the changes are more fundamental that we've seen in the last 6 months and whether we're working from home or whether we're working in an office. Actually, we're working in many different ways. And actually, that, I think, is most exciting. It's how do we continue to work in more agile, more flexible and more collaborative ways across WPP and with our clients. And no doubt there will be a knock-on impact on our buildings, in our campus program, which was designed to consolidate our footprint and consolidate our growth, which anyway we'll continue. And John, why don't you talk about how we're thinking about the financial impact of that?
Sure. Yes. Look, I mean, I'd just reinforce what Mark has just said. It's absolutely clear that the way that we use our space going forward is going to change. It's going to be much more of a collaborative space as opposed to people sitting at desks answering their e-mails, which clearly people can appreciate they can do as easily from home as they can from the office. So the way that we use our space is going to change. And also, as Mark said, it won't -- we don't -- we won't expect them to be in the office for 5 days a week. But equally, it won't be 0 either. So -- but it will be somewhere in between. So when you add those 2 together, all of that means that we'll need less space, not more. Now the question is to how much less space, I think, is a debatable point. We're doing some work at the moment, have done some detailed work looking across our portfolio, as to the impact of changing working practices on our space requirements. And I think you could say as a loose rule of thumb, we'll probably need somewhere between 10% to 20% less space going forward than we have today. What's really pleasing, from a WPP perspective, is that our campus strategy actually lends itself to being able to accelerate a consolidation of our space, because we -- as we were already planning to move many of our operating companies into a 1 or 2 tenancies within the cities that we operate within. This actually allows us to do that quicker and actually come out of the space that we've been in historically. So we can accelerate those savings. And what we will do at Capital Markets Day in December is outlined to you, what quantity those savings are anticipated to be and the phasing of those savings over the next 3 to 5 years.
Your next question comes from Matthew Walker, Crédit Suisse.
Just one quick question, actually, really, which is I also noticed your interview in the paper about resuming acquisitions. And I also noticed that you and John had rated your piggy banks and put quite a lot of money into WPP stock. So it was really a question about when and how the Kantar buyback is going to be resumed. I'm just wondering on your thoughts on the timing of that, because it would seem like you're not -- given your comments on trading in Q4 so far, you're not unconfident about Q4 even if there are some uncertainties. So maybe you could explain how and when you're going to restart the buyback?
Yes. I mean, let me just comment on the article and then John can answer the rest of the question. And as you raised, specifically, my observation would be that the headline and the text need to be read carefully in coordination with each other.
Okay. And just answering your specific question on the Kantar buyback. Obviously, I think, we take it from a tone of voice, we are confident in our current momentum within the business. But there's no question. I mean I don't need to tell you this, that Q4 remains uncertain. You only need to pick a paper up every morning to see that uncertainty manifest itself. So Q4 remains uncertain. We very clearly stated at the half that we would not resume the Kantar share buyback growth until we had a degree of line of sight over the future. And that remains the case. And we also said that we would cover, clearly, our capital allocation strategy and also the share buybacks within that in more detail at our Capital Markets Day in December.
Do you think that's when you might have a line of sight? Is that the Capital Markets Day?
I wouldn't -- it's possible. I mean, it largely depends on, obviously, what happens over the coming months. There is a possibility that we will have better line of sight in December. But we'll just have to wait and see what happens over the next couple of months, so I can't commit to saying -- providing definitive dates at our Capital Markets Day in December. But there's a possibility, depending on how we travel over the next couple of months, we may be able to be more definitive then.
Your next question comes from the line of Richard Eary at UBS.
A few questions. Just first of all, in terms of the cost savings, obviously, you've achieved in the business. Are you now getting questions or inquiries from clients about whether you need to pass some of those savings onto them? And whether, as we step into the cost-saving exercise in December, where some of those will actually be passed through to end clients? So that's just the first question. The second question relates to actually, John, you talked about free cash flow numbers being operating negative and a net debt number of 1.5x EBITDA. Can you just go through some of the puts and takes within that number and maybe a guide for actually the actual net debt number in pounds at the end of the year, so we can get a feeling in terms of the flow-through effect? That would be great.
Okay. So just maybe if I comment on both of those, in terms of the cost savings and the pass-on. I mean I guess I would just draw your attention to the current situation in the market where some of our competitors are able to earn a margin, which is a premium to our own. So I do believe, and I have said this before that there's an opportunity within WPP to simplify what we do, to homogenize and bring together, particularly our finance and HR, procurement, property, facilities management operations across our business. And I do think there are significant savings that arise as a result of that. Now the debate as to whether those ultimately get passed on to clients or not is obviously a relevant one, but I would argue that the market is very, very competitive. We compete very aggressively in the market for business. But there are examples where some of our competitors are able to sustain higher margins than we can sustain at the moment and hence, why I believe there's an opportunity to flow through that won't necessarily get passed on to clients. But clearly, I think anything that we want to do, we will -- and we'll talk a little bit more about this at the Capital Markets Day where we'll outline what we think the savings are from these opportunities. But equally, we'll also outline the quantum of those savings that we believe need to be invested back into the business in order to grow in the areas that Mark talked about on this call like e-commerce, transformation and technology and so forth. But we remain excited by the opportunity. It's clearly there for us. In relation to sort of free cash flow and net debt, I'm always a little bit reluctant to spell it out for you, but I'm feeling generous today, so I'll give you a little bit of a flavor. I mean these things are always subject to movement, of course. But as I said, I expect sort of cash flow from operations before net working capital adjustments and restructuring to be a positive of, give or take, around GBP 600 million. The -- making adjustments then for restructuring and earn-out and movements in both trade and nontrade working capital, I'd expect that to result in a circa GBP 200 million outflow. And a lot of that's driven by nontrade working capital as a result of the differences in bonus accruals between year-end. And then as a consequence of the net of acquisitions and disposals, I'd expect it to be roughly as I said roughly flat cash flow before shareholder distributions. And of course, you're aware of the dividends and the share buybacks that we've already performed to date. So that's sort of a fairly detailed outline I think I've given you there as guidance. And I would expect all that to result in year-end net debt of around 2.2 billion, something like that. And I'm not going to give you that level of detail again.
Your next question comes from the line of Wellington at Morgan Stanley.
It's Patrick Wellington at Morgan Stanley. Just focusing on the Capital Markets Day. You talked about line of sight there with Matthew for capital allocation. I'm wondering what line of sight you'll have for your medium-term targets for growth and margin. At the moment, we're on a, I think a 15% pre-associates margin, and we're on a growth in line with peers. I mean, surely, the latter is going to be very difficult to define in this COVID-19 environment when we get to December. And I'm not sure you can talk about a higher margin than 15% at that midterm stage. So what's your thinking going to be around sort of setting those medium-term targets when you get to December?
Patrick, it's John. Clearly, we will set our medium-term targets, and we'll do so on a sort of roughly a 2- to 3-year basis. So it will be quite clear as to what we expect those targets to be on a 2-year basis for both net sales and for operating margins. So we'll be absolutely clear on those expectations. But as we said, we will do that at the Capital Markets Day in December. So obviously, I'm not going to get drawn on giving you any indications or clues at this stage, but we will set it out very clearly for you in 8 weeks or so's time on that basis. So you have that clearly laid out for you.
Mathematically, our growth was in line with our peers in Q2 and Q3 of this year.
That is indeed the case. The 15%, I mean, given your starting point, would it be fair to say it's hard to imagine that you would have a higher margin on a, what did John say, a 2- to 3-year basis, and you might very well target a lower margin.
I think just, Patrick, I know you're trying, and I understand what's behind your question, but we will set it out for you very, very clearly in -- at the Capital Markets Day. There's all sorts of -- if you think there's different components, there's opportunities, of course, for us to save money, and we talked about some of those on the call. There's equally opportunities for us to reinvest back in the business for growth in areas like e-commerce and technology. We'll be very clear when we come to our Capital Markets Day in a few weeks' time, exactly what we expect to deliver through cost savings and over what time frame and exactly where we think we're going to invest and what quantums between organic and selective acquisitions, as Mark's already alluded to. So we will set it out for you very clearly. But obviously, it's pointless getting drawn on that detail today.
Your next question comes from Matti Littunen at Bernstein.
Just a couple of questions on the business mix. So you mentioned the strength of health care clients. Could you just give us a bit more color on the performance of the health care practice in the U.S. relative to that market's overall improvement? Then the other one is within GroupM, behind the GroupM improvement, could you give us a bit more color on the role of Essence and Xaxis, please?
Yes. So in health care, as you know, we restructured our health care businesses about 2 years ago back into the agencies they've been put in a sort of separate box, if you like. And I think that, that's proven to be the right decision, and we've seen a much better improved performance in our health care businesses. So I think our improvement in performance in health care affects both the underlying health and spending of the health companies generally. And clearly, they're playing a critical role in the pandemic, and this is a time for them to talk about what they do, so working with clients like Pfizer on a major purpose campaign called Science Will Win. We've also won a number of major assignments in the health care business. It tends to be the industry where because of new drugs, new indications is a relatively high level of pitching. And so I think our business has become more competitive. I'll let John talk about the results from the businesses within GroupM.
Yes. Just on Xaxis, actually, we did see a very strong turnaround between Q2 and Q3. So Q2 was actually down about 30% year-on-year, and Q3 was up 12% year-on-year. So quite well, pretty remarkable turnaround, frankly, between Q2 and Q3. And of course, a lot of that is driven by the fact that programmatic campaigns are easier, quicker to turn on as the economies have started to recover. We saw good demand in CPG and strong performances across all of our regions. Actually, it was a fairly steady recovery in Xaxis across all of our different geographies. We've seen particularly strong growth in the channels of volume, omnichannel video and influences. So very strong performance in Xaxis.
Okay. Very helpful. Just a quick follow up on health. So should we take that to mean that health care grew in the U.S. like-for-like?
Yes. I mean I think you can say that. Well, if we look at our top 200 clients, health care within our top 200 clients grew globally and in the U.S., yes.
Your next question comes from the line of Sarah Simon at Berenberg.
I've got a couple of questions. First one, very simple, just because I'm not very good at modeling FX. John, can you give us an idea of if rates stay where they are, what you think the FX effect will be for full year? The second one was on bonuses. You alluded earlier on to salary inflation being kind of limited this year. How are you thinking about bonuses? And what have you been accruing so far if we think about it kind of year-on-year? And then the third one, I'm just interested if you have any thoughts on this sort of new independent ID identity graph plan, let's say, that's forming with some of the ad tech guys, if that's something that you would participate in? Or are you going to leave people to kind of do that lobbying themselves, given obviously, you have a relationship with people who control identity already and who would kind of lose it under that plan.
Yes. Let me just take the identity question first as it's top of mind. I think that the important thing is not that there's going to be sort of one single source of truth for identity, but how we can help our clients connect up identity from first-party data that they own into their marketing activities. And actually, that was at the heart of the work that we won at Walgreens Boots Associates -- Walgreens Boots Alliance. So I think that we will -- I expect to see a number of different identity graphs assist in the market. And what's important is how we can link them up really rather than being for or against any particular form of identity. John, can you talk to the other one?
Yes. And just to come on to bonuses. Obviously, it's been a challenging year, and we recognize that. But we do want to try and obviously reward our colleagues for their significant contributions this year, not least of which in terms of managing our cost base and driving performance in a very, very difficult market. So we do want to pay some form of bonus this year. Clearly, that bonus will be lower than it's been in historical years for the obvious reasons, but it won't be 0 either. So -- but obviously, at this stage, we can't really comment much more than that other than to say that we'll come back at the year-end and provide you with more detail on that.
But I think just to say that, that's more for the company overall than it would be for executives, right?
Absolutely, yes. I mean, I think Mark and I both accept the fact that it's challenging for the 2 of us, but we want to, nonetheless, reflect the performance of many of our more junior colleagues, given the sacrifices and the contributions that they've made towards the business. In relation to your first question on FX, it's actually clear. It is laid out for you in the slide pack in one of the supplementary slides. The overall FX impact for the full year is expected to be a headwind of minus 1 -- 1%. And that's largely -- I mean by quarter, it's minus 0.3% in the first quarter, an improvement of plus 0.4% in the second quarter, minus 3.9% in the third quarter. So we've had quite a headwind come through in this quarter and is expected to be minus 0.2% in the fourth quarter to roughly flat. All of that nets out for the full year being a headwind of minus 1% for the full year compared to the tailwind of plus 1.2% for last year.
There are no further questions at this time. I will now hand the call over to Mr. Mark Read for further closing remarks.
Very good. Well, thank you, everyone, for your questions. I think as we said, it's been a challenging year, but I think we're pleased with the progress that we made in the third quarter, and we can see the momentum in the business while we're cautious around the fourth quarter. We do see good momentum more broadly across WPP, particularly in terms of our new business record, recent wins, new business activity that's coming up in general. So thank you all for your time, and we'll see you in a few months.
That does conclude the conference for today. Thank you for participating. You may all disconnect.
Thank you.