WPP plc Q1 FY2020 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the WPP First Quarter 2020 Trading Update Conference Call and Webcast. Today's conference is being recorded. Mark Read, please go ahead, sir.

Thank you very much, George, and good morning, everyone. Welcome to our first quarter trading update. I'm joined here by John Rogers, our CFO, and Peregrine Riviere, who leads our Investor Relations efforts. I appreciate everyone joining us, and I hope you and your loved ones are safe during this challenging time. Our thoughts are with all those affected, and we are grateful to healthcare and essential workers for their efforts to keep us safe and to navigate through these difficulties. I assume everyone has the slides in front of them, so let’s move to the second slide, which contains our safe harbor statement. It's essential that everyone reviews that before we proceed. Now, on Slide 3, I'll provide a brief introduction, followed by John discussing our financial performance. After that, John and I will address the business update and take your questions following the formal presentation. On Page 4, regarding our COVID-19 response, we've concentrated our efforts on four main areas over the past 8 to 10 weeks. First and foremost is the health and safety of our staff, which is our top priority. We sent everyone home on March 16, and 95% of our 107,000 employees have been working from home since then. It's understandably a stressful time for them, but they are excelling in providing uninterrupted service to our clients, who are our second priority. We stay extremely close to our clients with daily contact through video, helping them adapt their plans to the current environment and consider future scenarios. Our customer satisfaction scores during this period have actually increased, which reflects the dedication of our team and the continuity planning we’ve implemented. At the same time, we are committed to our purpose at WPP to harness creativity to assist our people, clients, and communities, sharing initiatives we've undertaken to help those affected by this situation. Lastly, maintaining our financial resilience to safeguard all stakeholders has been a crucial focus. Moving to the highlights on Page 5, we had a solid start to the year. Outside of Greater China, our business grew by 0.4%. We made progress towards our strategic goals, although the business was impacted by COVID-19 in March, with revenues or net sales declining by 7.9%. This impact will continue in the second quarter; however, we have diversification in our clients, geography, and services, which we can discuss further later. It's worth noting that we performed exceptionally well in securing new business. We acquired over $1 billion in new business during the first quarter without significant losses to date. I'm pleased to report our win of the global business for Intel, the media business for Hasbro, creative services for Novo Nordisk, and Discovery in the United States, among others. Our balance sheet is strong, aided by our disposal program, and we are entering this period with the lowest net debt levels since 2007. Unlike the past financial crisis, we are in a much more robust financial position, with GBP 4.4 billion in cash and undrawn facilities, which John will elaborate on. We've taken significant steps to manage the effects of COVID-19 on our profits and cash flow while striving to protect our business. Navigating both an economic and health crisis poses complexities, and we recognize that our people are our greatest asset, driving our desire to preserve as many jobs as possible during this time, as you will see from John's presentation. We are also prepared for a swift recovery, similar to what we've observed in China, although not at pre-pandemic levels. Thus, we are balancing necessary cost actions with maintaining our operations. Those are the key highlights from the first quarter. I’ll now hand it over to John to provide further details on our financial performance.

Thank you, Mark, and good morning, everyone. I'd like to walk you through the financial results for the first quarter of 2020. Starting with the revenue less pass-through costs by sector, we observed a 2.6% decline in like-for-like revenue for the global integrated agencies, primarily driven by a 6.6% decrease in March, which reflects the impact of COVID-19 on our business, consistent with our expectations. Our public relations business decreased by 1.4% on a like-for-like basis for the quarter and by 4.4% in March, showing relatively stronger performance due to client demand for specialist PR services during this challenging period. Our specialist agencies experienced a 7.4% decline like-for-like, with a notable 15.2% drop in March due to the project-oriented nature of this segment. Overall, revenue less pass-through costs fell by 3.3% on a like-for-like basis, indicating a 7.9% decline for March. Turning now to revenue less pass-through costs by region, North America emerged as our leading region with like-for-like sales down by 1.9% for the quarter and 3.6% in March, compared to a decline of 8.8% in Q1 2019, which is encouraging. The U.K. saw a 4.2% decline for the quarter and a significant 9.8% drop in March, influenced by the lockdown's impact in the latter part of the month. Western Europe recorded a 3.7% decline in the quarter and a 9.6% decline in March, reflecting substantial lockdowns in Italy, France, Spain, and Germany during various periods. Our net sales were most adversely affected in other regions, falling 4.6% in the quarter and 11.5% in March, influenced heavily by challenges in China, despite better performances in India and Brazil. Looking at performance by country among our top five markets, the U.S., which initiated lockdowns in mid-March, posted a 1.9% decline for the quarter and 3.7% in March, which is an improvement compared to last year. The U.K. faced a tough March with a 9.8% decrease alongside a quarterly decline of 4.2%. Germany, which began lockdown on March 22, saw a decline of 14.9% in March and 4.3% for the quarter. Greater China was notably impacted, down 21.3% for the quarter and facing a 29.9% decline in March. However, it is important to note that we previously experienced an 8% decline in Q4 of 2019, indicating the significant impact of COVID-19. We are beginning to observe some signs of economic recovery in China. In India, we started the year strongly with an 8% increase in January and 13% in February, though March saw a slight decline of 1.1%, leading to an overall 6.1% increase for the quarter despite tough comparisons year-on-year. In terms of other major markets, France experienced slight declines throughout the quarter, culminating in a 4% decrease overall. Italy was the hardest hit in Europe, reporting a 16.2% decline for the quarter, alongside an especially severe 23.7% drop in March due to its early lockdown. Conversely, Spain, which entered lockdown on March 14, remained flat in March and reported a total increase of 3.8% for the quarter, showcasing resilient performances from agencies like Wunderman Thompson, Ogilvy, and Wavemaker. Brazil experienced growth of 8% to 9% in January and February but saw a 16.7% decrease in March, resulting in a negative overall quarter of 1.3%, albeit against a challenging prior year. Moving onto new business, we had a strong quarter, securing over $1 billion in new contracts. WPP won the Intel creative business, an important pitch, alongside assignments for Wavemaker with Novo Nordisk and various wins across our agency network. Notably, we faced no material client losses during the quarter. Regarding net debt, we made significant improvements year-on-year, reducing it from GBP 4.6 billion to GBP 2.8 billion, largely due to the sale of Kantar. Furthermore, our net working capital outflow was less than in the previous year's first quarter, reflecting tighter management and a three-percentage-point improvement in overdue invoices. In terms of free cash flow, we had net disposals of GBP 139 million countered by GBP 285 million in share buybacks during the first quarter. Following previous announcements, share buyback programs are currently suspended. We maintain ample liquidity, totaling GBP 7.2 billion in facilities, with GBP 2.8 billion drawn down, giving us GBP 4.4 billion available. Lastly, we are actively implementing measures to safeguard our business and workforce from COVID-19's effects. These include cost-saving actions such as a hiring freeze, review of freelance contracts, pay raise delays, and limiting discretionary spending, resulting in anticipated savings of GBP 700 million to GBP 800 million. We have also reduced our capital expenditure budget and are closely monitoring working capital, with improvements noted year-on-year. Although we removed full-year guidance, we are ready to adapt to various economic scenarios and explore long-term efficiency opportunities. I am confident we can respond effectively to market challenges. I'll now hand it back to Mark for the business update. Thank you.

Thank you, John. I want to provide some insights on our people, clients, and communities as reflected in our recent performance. Starting with our people, we've seen an effective response to the lockdown, marked by collaboration and continuous service to our clients. Approximately 95% of our workforce is currently working remotely, and while some markets are contemplating a return to the office, we are proceeding cautiously. We've prioritized regular support and communication with our teams through video town halls, recognizing that remote interactions can be just as effective as in-person ones. Our company CEOs are actively engaging with their teams, and we've introduced WPP TV, a series showcasing our diverse talents and emphasizing mental well-being during these challenging times. We understand the difficulties people are facing, particularly those with less space or those who live alone, and we have made efforts to support them through technology. The adoption of Microsoft Teams has surged significantly, demonstrating our commitment to enabling remote collaboration. Additionally, we have been dedicated to protecting jobs, with over 3,000 employees voluntarily participating in salary sacrifices. We've improved our internal job market and encouraged collaboration among our teams. Although people are busy, we see this as an opportunity to invest in training and development. Shifting to our work with clients, we've been quick to adapt our communications strategies. The current crisis has prompted us to revisit our plans and reallocate resources for better returns, allowing us to execute campaigns faster than usual. Our clients are increasingly embracing innovative production methods, including CGI and stock imagery. We've encouraged them to focus on ROI and maintain consumer engagement, as effective advertising during this period can lead to growth when competitors are quieter. We have highlighted various client initiatives, such as Colgate’s SafeHands campaign and Pfizer’s Science Will Win initiative, showcasing how brands can positively impact the community. The response from businesses to the ongoing crisis has been proactive and timely, with companies leveraging digital platforms to reach consumers effectively. As we analyze spending patterns, we see a growing emphasis on digital media and e-commerce, with certain sectors benefiting from this shift. While traditional advertising channels face challenges, there remains resilience in national TV and certain e-commerce platforms. Our diverse client base has also proven beneficial, particularly with sectors like consumer packaged goods and healthcare showing resilience amidst the downturn. We're closely monitoring geographic markets, which reveal varied recovery rates. Although the second quarter presents a tough economic landscape, our financial planning reflects a cautious approach as restrictions continue to evolve. In China, for instance, we're experiencing a gradual return to office work and a significant increase in e-commerce activity. This trend indicates a long-term shift in consumer behavior. While the recovery is not uniform, we've observed positive indicators from key clients, like L'Oréal and LVMH, who continue to invest in marketing and adapt to the new landscape. Lastly, our commitment to supporting communities remains strong, as we leverage our expertise in communications to help mitigate the impact of the virus. We’re participating in various initiatives and campaigns aimed at raising awareness and providing assistance where it’s needed most. I'm optimistic about our prospects for the future, emphasizing our readiness to navigate the uncertain landscape ahead while prioritizing the health and safety of our people and clients.

And we will take our first question from Patrick Wellington from Morgan Stanley.

Yes. Couple of questions. Firstly, I think, John, you referred to material longer-term efficiency. Can you give us perhaps some idea of the scale of that? And to what extent a new pair of eyes and this very different situation makes you look at the WPP business model, which effectively is applying staff to projects? And then, secondly, whether this situation has led you to think that you could potentially further restructure your major networks. And then, Mark, I think your remarks about how efficiently and quickly your staff are working just kept reminding me of the phrase, faster, better, cheaper. Again, do you think there's a continuing working style change there in the future? And then, finally, just on working capital, reassuring in the first quarter. Can you tell us about the impact on customer payment terms, whether you see any further pressure and how you see working capital going for the year as a whole?

I'll discuss our work and the networks, while John will cover material long-term efficiency and working capital. There's work that would typically take two to three months which we're accomplishing in just a week, and we're discovering new methods of working that we've been adopting for some time. As we've mentioned before, we have a significant number of people working on-site with our clients, and that is likely to continue. I believe we will maintain not only remote work benefits but also faster working methods in the future, which is a positive development. Regarding the networks, our front office approach to market engagement is largely effective, although some minor adjustments might be needed. We need to focus on improving our production services, media, and technology in the middle office to achieve greater efficiency. Finally, John will address the back office and provide insights on both areas.

Thank you, Mark. Having been in the business for three months, I am starting to understand the opportunities we have. There is significant potential to simplify and increase efficiency in this business. As Mark mentioned, a lot of the work has been done in the front office, but there remains considerable opportunity in both the middle and back office. We have previously discussed operations in HR, finance, procurement, property, and IT, in addition to the middle office opportunities that Mark mentioned. We are currently assessing the scale of these opportunities. I cannot provide specifics today on what we anticipate that size will be, but we are working on it. Once we have completed that analysis, we will update you on where we see opportunities in the coming three years. Regarding working capital, we are beginning to see some requests for extended payment terms from clients, especially those in distressed sectors. We are, as expected, trying to support our clients as best as we can. However, as Mark pointed out, a large portion of our client base remains stable in sectors that have not been as heavily impacted by COVID-19. In fact, in this past quarter, we improved our working capital by reducing the percentage of outstanding debtors by three percentage points year-on-year. Although I don’t want to speculate on whether we will see a net inflow or outflow this year, I do not expect a significant change either way. I am confident that there is still a considerable opportunity for further savings in working capital, especially since about 20% of our current balances are overdue. In terms of best practices, that figure should ideally be in single digits, indicating there is more potential for improvement. However, given the current market uncertainties, it would be unwise to predict what that opportunity might ultimately look like.

And our next question comes from the line of William Packer from BNP Paribas.

It's Will. Firstly, the detail on the performance of the Chinese business has been very useful. Could you give us your view on how useful it is as a proxy for the rest of the business when we look into Q2? I'm thinking of factors like relative exposure to CPG, exposure to digital marketing versus traditional budgets and how that compares to your U.S. and European businesses. Secondly, thanks for the detail on the cost savings. Can you just confirm your thinking around furloughing now in your key markets? We're a number of weeks into the crisis. So can we conclude you will not use those schemes at scale and so there isn't much upside to the potential cost savings on that basis? And then, finally, any commentary on Chinese performance in April? Has it improved materially?

Okay. I'll address the first question regarding our business in China, and then John will handle the next two. I'm not sure how much I can contribute to the third. Our business in China is just one data point among others for what occurred in March. It's not the sole indicator. You can also examine other markets for insights. Our operations in China are primarily media-focused and heavily digital. However, the transition from analog to digital isn't as straightforward. This was evident in Google's recent results and their outlook. In many instances, digital can be more affected, as it's easier to adapt than traditional media. We do have a strong consumer packaged goods business, along with a robust automotive business. There are both similarities and differences in how the business operates in China compared to other markets. I suggest looking at both to form your conclusions. John, please add your thoughts and then discuss furloughing.

I understand your question about whether the situation in China might reflect trends in other economies. The key point to make is that many factors are involved, making it challenging to draw broad conclusions from any single country. In China, for instance, we experienced a 25% to 30% drop in March, but we have seen significant recovery in April. Looking at Western Europe, we've observed around a 10% to 15% decrease in net sales over two weeks in March, which appears similar to the decline in China. However, there are significant variations among European markets. For example, Spain has performed fairly well, indicating differences across regions. As for Italy, which was largely shut down in March, we noted a 24% decline, aligning with our broader observations about COVID-19's impact on markets lasting for two to three months. Therefore, you can form your own predictions for Q2 based on these insights. The uncertainty for me lies in what will unfold in Q3 and Q4. Some analysts suggest a possible rebound similar to China's, but the economic complexities make predictions challenging at this stage. We do have some evidence of recovery in China, so you can take that into account. Overall, I'm presenting the facts and data, and it's up to you to interpret and extrapolate for your modeling, keeping in mind the inherent uncertainties we face.

We have observed a significant recovery in the Chinese economy. While I won't delve into specific WPP net sales figures, Mark's slide demonstrates that the economy is clearly back to working efficiently. However, we must remain cautious since some countries are relaxing restrictions and experiencing a rise in COVID-19 cases. There has been discussion in the news about Germany potentially facing further lockdowns, so we need to tread carefully. That said, we have seen a swift return to economic activity in China over the past few weeks. I will not comment on specific WPP net sales or suggest monthly reporting, but there are positive signs from an economic standpoint. Regarding furlough schemes, we currently do not intend to utilize the U.K. scheme, but we are employing furloughs in other regions like Spain and Italy. Given that the U.K. is one of our key markets, we do not plan to apply for that scheme there. We have various cost-saving strategies available, including a 4-day working week, salary sacrifices, and certain permanent headcount reductions, which provide us with options to reduce costs quickly while still being able to scale up promptly as the market recovers. Our flexible cost structure positions us well to adapt to any economic conditions that may arise.

Our next question comes from the line of Lisa Yang from Goldman Sachs.

So I appreciate, there's a very lack of visibility, especially in the second half, but you did mention your model the numbers, economic scenarios and your detailed cost action. Just wondering, like, John, if you can share with us what the scenarios are, like maybe what's the worst case versus best case. And out of all the cost-saving measures you've just talked about, like where do you see the most flexibility for this year? The second question is on the U.S. I thought it was quite helpful you gave the impact of COVID in Europe in the last two weeks. Could you maybe share the same information for the U.S.? I was actually quite surprised to see U.S. was only down 4% in March. So I'm just wondering whether it is due to the timing of cancellations or the turnaround that has been happening for WPP just progressing better than expected. And the last question is, in this environment, we're seeing more emphasis on budgets shifting to digital media and e-commerce. I'm just wondering, like, how do you guys think this will do to in-housing? Like, have you seen more or less in-housing recently? And what do you think will happen going forward? And how the WPP is positioned to capture the opportunity from that shift?

Okay. So why don't I start with the in-housing question, then John can take the first two questions. Look, I think that one thing I'd say in our relationship with our clients is they're much closer, I'd say, than they were three months ago. And I think others have made the same observation. And I think we're talking to CMOs and CSOs and indeed CFOs of our clients in a much closer way in helping them plan what they're doing. I think clients realize the importance of the work that we do and the judgment that we have about the mood of people, the tone of the conversation and the way in which they communicate. And I also think they recognize the value, the stronger value of a creative idea than the not-so-creative idea, I mean, there's been some parodies made of some of the client responses to COVID, and I have to think that, yes, it's a careful balance between seeing to help people and doing the right thing. So I think there is a value, to my mind, in having an external agency advise clients on their marketing. At the same time, we are working faster and closer and more quickly. And I think that the fact that we're working remotely has made, quite frankly, a lot of that easier. We're jumping on video calls rather than going to meetings. We're having daily updates rather than waiting a week, and the situation is so fluid that it's forcing us to work more quickly. And I think a large amount of that work will continue. And my final observation would be that I think a number of clients, and we have had one or two discussions with clients that have in-house agencies with the fixed costs attached with them, can see the benefit of having an agency partner with variable costs. So I think that it's a spectrum. And I think in a number of cases, we actually had conversations about bringing in-house agencies back into WPP. So I don't think it's heading in one direction. And I think, if anything, clients, when they will work through this, will see the value in having an independent, an expert partner and working with them, the flexibility in terms of the arrangements and the costs that, that gives them, but also the access to expertise. I mean one of the things we've been spending most of our time with has been sharing examples and case studies of work we've seen in other parts of the world, in other regions, in other clients with our clients. And the ability to give clients an insight into what's going on all over the world in other sectors, I think, is something that an in-house agency is, by definition, incapable of doing. So I remain confident about the structure of our business. There's no doubt that we'll work faster and in a more agile way. We have made a lot of steps in that direction, but I remain positive. So John, please take Lisa's other questions.

Thanks, Mark. Regarding the economic scenarios we've considered, we've modeled a range from the most optimistic flat sales for the year, which seems unlikely, to a negative impact on net sales of about 35% to 40% for the remainder of this financial year. This illustrates a broad spectrum from very optimistic to very pessimistic. We've identified cost savings for each scenario and established triggers within the business for early warnings on when to implement these cost reductions. We're confident in our liquidity and our ability to meet banking covenants, having prepared for various uncertainties since we don't have a clear outlook for the next nine months. However, we know how to respond to each scenario. In terms of cost mixture, we've already initiated actions like salary freezes and discretionary spending cuts, resulting in savings of GBP 700 million to GBP 800 million. We're considering other measures like part-time working, salary sacrifices, and permanent headcount reductions, depending on the scenarios we've outlined. As Mark mentioned earlier, it's crucial for us to protect our colleagues while ensuring we maintain resources and capabilities for when the market rebounds. One major step we've identified is a salary sacrifice involving over 3,000 colleagues, though we can't extend much further in that area. Shifting some colleagues to part-time schedules would offer us maximum flexibility for quick cost reductions and reinstating those costs as the market recovers. We are also addressing potential permanent headcount reductions in parts of our business that may experience significant declines, making these decisions proactively. This gives you an insight into our operational strategy for cost management. Regarding our performance in the U.S., we were encouraged by the first quarter results, reflecting our efforts to integrate agencies and a sense of recovery in that market. Despite the challenges posed by COVID-19, VMLY&R, Grey, and GroupM all reported growth last quarter, which gives us optimism about the underlying performance in that region.