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Fitch Affirms WPP at 'BBB+'; Outlook Stable
May 23, 2017 / 3:27 PM / 6 months ago

Fitch Affirms WPP at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 23 (Fitch) Fitch Ratings has affirmed UK-based WPP Plc's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Outlook is Stable. A full list of ratings actions is below. The ratings reflect the leading market position of WPP within the marketing communications services sector and its effective scale and diversification across geographies, products and customer market sectors. The ratings are supported by significant discretion in managing the company's capital structure that results from a strong cash-generative business model and by retained flexibility in the company's financial policies. These are elements that are equally key to maintaining competitive capability, investing for growth and addressing changes in the industry environment. Fitch expects that leverage will increase marginally in 2017 but remain consistent with a 'BBB+' rating, albeit with limited headroom. KEY RATING DRIVERS Diversified and Holistic Portfolio: WPP has a strong portfolio of advertising, measurement, market research, PR and brand management businesses. The portfolio covers most elements of the marketing communications services sector and enables the company to provide holistic solutions to its clients. WPP's revenues are equally well diversified from a geographic and end-customer segment perspective. Fitch views the diversification as credit- supportive as it enables data and technology expertise to be leveraged from one market to another, the targeting of global clients and reduces risks related to the company's cyclical exposure. Potentially Slower Growth Trends: WPP's net sales growth of 3% over the past three years on an organic basis could slow. This reflects a combination of increasing competition and pricing pressure in the sector, potentially reducing spend at FMCG clients and greater cost pressures at some of WPP's large established customers who are facing a macro environment of low growth and low inflation. Recent loss of contracts at AT&T and VW exemplify some of the pressures. We expect WPP to take a balanced approach on the trade-offs between profitability and revenue. In the medium-term the competitive sector backdrop could lead to further industry consolidation. Sustaining its Competitive Position: We believe WPP's focus on portfolio integration, scale, ability to provide holistic products and services and investment capacity for data, technology and content are key to sustaining the company's competitive position. These elements take time to yield a sustainable positive effect on financial performance. They enable WPP to offer greater value to customers, reduce costs and absorb pricing pressure. WPP aims to improve its net sales profit margin by 2 pp to 19.7% in the long run. This includes 1% margin improvement as a result of operational efficiency programmes. Capital Structure Discretion: We expect WPP to manage leverage at a level corresponding to funds from operations (FFO) adjusted net leverage (based on average net debt) of around 3.6x. This leaves limited headroom in its 'BBB+' rating. The company however, retains significant financial flexibility as a result of its strong cash generation and financial policy. Fitch estimates that WPP is likely to be able to generate GBP1.4 billion-1.5 billion of pre-dividend free cash flow (FCF) annually over the next three years, assuming no significant macro-economic downturns. Combined with a dividend pay-out ratio of 50%, WPP retains capacity for investments and managing its credit profile. Exposure to Macro-Cyclicality: WPP's revenues are driven by the marketing spend of corporates, which can fluctuate depending on business and economic cycles. This exposure constrains ratings in the sector. WPP's geographic, product and end customer diversification helps to reduce these risks. In addition, 8% of costs in relation to net sales are variable staff costs, which can be reduced if needed. In periods of sustained economic downturns, WPP may also be able to gradually downsize some of its operating leases, which are primarily linked to property rental. FX Exposure: We expect WPP's results to be positively impacted by FX in 2017 but to a lower extent compared with 2016. WPP's emerging markets operations earn a higher margin than operations in more developed countries. WPP funds itself with USD, GBP and euro-denominated debt. While dollar, euro and sterling debt are largely matched by revenue generation in the US, Europe and the UK, the company is exposed to a modest currency mismatch in emerging markets. Around 30% of 2016 revenue was generated in APAC, LATAM, CEE and MEA regions. These regions are funded by euro-denominated debt. Sector Opportunities and Threats: Sector trends and rapid evolution will continue to create uncertainties. These include the growing dominance and disintermediation from the likes of Facebook, Google and Amazon, the entry of consultancies and technology companies, the increasing importance of data analysis and expansion of new digital and media. We believe these trends present both opportunities and threats for WPP. Its business model is not affected by the type of media advertising. In our opinion, WPP's success will be driven by the company's ability to add value to its clients, with scale and FCF generation being key to this. DERIVATION SUMMARY WPP's rating is driven by the company's scale and leading market position in the global marketing communications sector, strong cash generative capability and retained financial flexibility to manage cyclical downturns, operational pressure and invest in growth opportunities. Compared with other sub-segments of the media sector, revenue from market communications are less exposed to a shift in digital distribution and advertising. These are factors that are also reflected in the rating of sub-segment peer The Interpublic Group of Companies, Inc. (BBB/Positive). Among Fitch-rated European TMT companies, WPP has one of the best net debt to cash flow from operations minus capex ratios in the sector around 3.5x (based on average net debt). This is comparable to other media sector peers with leading market positions such as RELX (3.6x to 3.7x, BBB+/Stable) and Bertelsmann (2.5x-3.0x, BBB+/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 7% in 2017, partially driven by FX, reducing to 3% in FY18 and 2.5% per annum thereafter - Operating margins to expand by 20-30bp per year over the next three years. - Capex of around 2.5% per year. - Share buybacks of 2%-3% of share capital per year. - A net income dividend pay-out ratio of 50%. - Leverage managed within the company's target of 1.5x to 2x average net debt-to-EBITDA. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Notwithstanding a strong industry position, diversification and a flexible cost base, the company's financial policy of balancing the need to invest in acquisitions, a progressive distribution policy and a measured leverage profile - are likely to constrain the ratings; Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Events leading to average net debt/EBITDA trending consistently and materially above 2x. - FFO adjusted net leverage (calculated using average net debt) remaining sustainably above 3.7x and pre-dividend FCF margin remaining consistently below 7%. - A weakened operating profile or a change in financial policy, more so than M&A or cyclically driven trends. LIQUIDITY WPP has a strong liquidity profile. The company is expected to generate positive FCF over the next 12 months; while an undrawn USD2,500 million revolving credit facility due 2021 provides further liquidity. FULL LIST OF RATING ACTIONS WPP Plc -- Long-term IDR: affirmed at 'BBB+', Outlook Stable -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance S.A -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance 2010 -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance 2013 -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance Deutschland GmbH -- Senior unsecured rating: affirmed at 'BBB+' Contact: Principal Analyst James Hollamby Associate Director +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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