WPP plc Q2 FY2020 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the WPP 2020 Interim Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. 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, sir.

Thank you very much, operator, and good morning to everyone. Welcome to WPP’s interim results call for 2020. I’m here in Sea Containers with John Rogers, our CFO; and Peregrine Riviere, who heads up our Investor Relations committee. We’ll take you through the numbers. On Page 2, we should all just take the time to read our Safe Harbor statement and then move on to Page 3, our agenda today. So I’ll briefly take you through the highlights of our results in the first half, and then John will take you through the financial performance of the company before we come back to an update on the business and how we see it and then some time for people to ask questions. On Page 4. Look, I think, if we had to describe the first half, I think we would say that we had a resilient performance in what has no doubt been a challenging environment. It’s clear that COVID-19 had a significant impact on WPP as it has had on business and on society as a whole. And we shouldn’t forget the impact on people’s lives and the people who have lost their lives as a result. But turning to our business in the first half, we saw like-for-like revenue less pass-through costs down 9.5% in the first half. I’d say that May was the toughest month, and we really started the year positively with growth outside of Greater China of 0.4%, but overall results were minus 0.6%. In March, we started to see the impact of COVID-19 in a really kind of a half a month impact, minus 7.9%, and then a decline of 15.1% in the second quarter. And we’ll come on to that. But I think I’d say it’s significantly better than perhaps we had anticipated. And then a gradual recovery of minus 9.2% in July. So you can really see the pattern to our results. We’ll come on to the full-year expectations later. That reflects, I’d say, a resilient performance, particularly from our top clients, our top 200 clients. And if we go into that in some detail, you can see, in just over half of our business, 56% of our business in consumer packaged goods, technology, and pharma actually, the decline was only 0.7% in the first half and only 4.4% in the second quarter relative to 15.1% of the business overall. But the automotive luxury travel sector was much more impacted, minus 11.7% for the first half and 18.7% in the second quarter. So I think that demonstrates the resilience and breadth of our business, and we see that as well in the services that we offer. We have had, I’d say, a very different working relationship with our clients over the last six months. And we’ve seen parts of our business in marketing, technology, and e-commerce in greater demand, public relations much less impacted. I’m particularly pleased with the new business performance of the company overall, market-leading new business performance, with wins from Intel, HSBC, and Unilever, where we won the media business in China. I think the way that our people have responded has been fantastic. And that goes beyond building and strengthening relationships with clients, looking after their team working from home. I think collectively, people have really come together over the last six months. Financially, and John will go into some more detail, we’ve had good progress on cost savings. I think we’ve got the right balance between temporary and permanent cost savings that we set out at the beginning of the pandemic to really mitigate as much as we could the permanent headcount reductions that we need to take or that regrettably there have been some. With the strong liquidity position, our net debt is down significantly year-on-year and from our peak of close to £5.7 billion around three years ago. We’re pleased that the Board was able to recommend that we could reinstate our dividend, and we have had a goodwill impairment that we’ll talk about at £2.5 billion. Lastly, and perhaps most importantly, COVID-19 has accelerated trends that were existing in our industry before but have really been accelerated and that calls for and we are accelerating our strategy. In the last six months, we talked to you about the actions we’ve taken in terms of investing in brand, investing in talent, and investing in training. Many companies and people probably prefer not to have been in the situation that we’ve been in for the last six months. But I’d say that we’ve performed resiliently and done well. I’ll turn it over to John, who will take you through our financial performance.

So thank you, Mark. Good morning to everyone. I’m going to take you through the first-half results for 2020. Turning to Slide 6 and starting with the headline income statement, revenue less pass-through costs down 10.2% on a reported basis, down 9.5% on a like-for-like basis, reflecting the impact of COVID-19, particularly in the second quarter. Disposals account for 0.8% reduction in revenue, less pass-through costs, and with currency being 0.1% favorable, all of which has delivered an operating profit of £382 million, down 38.1% year-on-year, with associate income down £15 million as the benefit of the Kantar investment is offset by COVID-19-related downsides. This delivered a PBIT for the year of £382 million, down 39.6%, with net finance costs down year-on-year to £106 million, reflecting an improvement in our net debt position. That’s delivered a profit before tax of £276 million, and with tax at 23.1%, broadly in line with the same figure last year, delivering a profit after-tax of £212 million. Deducting non-controlling interest delivers profit attributable to shareholders of £191 million and our diluted earnings per share figure of 15.4p. Worth highlighting that our operating margin for the first half was 8.2%, down 0.3 percentage points year-on-year but better than the market was expecting. Moving on now to the reconciliation of our headline operating profit to our reported operating profit, you see here the headline operating profit of £382 million I’ve just made reference to, taking into account the goodwill impairment charge of £2.5 billion, amortization, impairment of intangibles and the investment write-down of associates, which is largely Imagina at £210 million, £220 million in total, reflecting restructuring and transformation costs, which relate to the ongoing costs we talked about in our restructuring plan first outlined in December 2018 of £18 million this year compared to £34 million last year. Also, specifically, COVID-19 restructuring costs relating to severance actions taken in the second quarter as a response to the pandemic. Reflecting a gain on disposals, largely in relation to our sports agency, Two Circles, all of which just delivered a reported operating loss of just over £2.4 billion. The impairments of £2.74 billion include the goodwill impairment and also the impairment related to our associates. You’ll see the breakdown here by company. Most of the impairments relate to an acquisition of the Y&R Group made back in 2000, which was acquired in a stock-for-stock transaction on the basis of a 23 times PBIT multiple at the peak of the dotcom bubble. The impairments are driven by higher discount rates used to value the cash flows, a lower profit base, and recovery from 2020 through 2021, and lower industry terminal growth rates. As an indication of the sensitivities to these assumption changes, around £2 billion to £2.1 billion of the £2.5 billion goodwill impairment relates to changes in the discount rate assumptions. About £300 million or so relates to a change in the terminal growth rate for the industry and about £100 million or so relates to a lower profit base in 2020 and recovery through 2021. Moving on to a breakdown of our performance by sector, first, the global integrated agencies reported revenue less pass-through costs down 10.3%, down 9.5% on a like-for-like basis, delivering an operating profit margin of 7.4%. VMLY&R was by far the best performer, really encouraging performance, close to flat like-for-like in the first half, reflecting improving business momentum since the merger of those businesses. Our second best-performing global integrated agency was Wunderman Thompson, again benefiting from the creation of an integrated agency in the last couple of years. Hogarth production also saw strong demand. GroupM, as a whole, underperformed the overall GIAs due to the fact that its performance is more closely correlated to client media spend, which has clearly been significantly impacted as a result of COVID-19. Looking at the graph, you’ll see the significant step down in Q2 to minus 15.7%. Performance in July has bounced back to minus 9.2%. There are positive momentum and some recovery as we go into the second half. Coming on now to our public relations businesses, these have been our strongest performing sector. Reported revenue less pass-through costs down 3.6%, and on a like-for-like basis, down 4.5%, delivering a very strong operating profit margin of 16.9%, which is actually up 1.5 percentage points year-on-year. We’ve seen good demand from clients particularly looking at how they want to engage with their strategic stakeholders. We’ve seen very encouraging performance from our specialist PR companies, where we’ve seen like-for-like growth half-on-half. H&K has been the strongest performing of our major agencies. We’ve also seen in the first half the formation of Finsbury Glover Hering to create a global leader in strategic communications and significantly simplified our overall portfolio. If you look at the trends on the graph, you’ll see the dip down in Q2 of minus 7.5%. Again, in July, recovery back to minus 2.7%. Encouraging momentum again as we go into the second half. Finally, our specialist agency has seen a bit more of a mixed performance overall, revenue less pass-through costs down 13.3% on a reported basis, down 11.8% like-for-like and overall operating margin at 7%. AKQA and Geometry have been the relative outperformance, given their focus on experience and commerce. Our GTB is broadly in line despite the ongoing drag from the assignment losses that we’ve communicated historically. It’s really been our Brand Consulting businesses that have suffered from short-term budget cuts through this period. Our events businesses and specialist airline agencies have been heavily impacted in the second quarter resulting in a decline in overall net sales by 16.3%. Again, we’ve seen some relative improvement in July where we saw net sales down 12.5%. So now moving on to our overall geographic performance, starting off with our top five markets. In the USA, North America, we’ve seen a relatively robust performance. The first quarter being down minus 1.9%, the second quarter down minus 9.6%, with some recovery coming through in July at minus 6.1%. It’s been a shallower dip in the U.S. compared to many other global markets. In the UK, we saw a decline in Q1 of minus 4.2%, a big step down in Q2 of minus 23.3%, reflecting the impacts of the lockdown in the UK economy. But we’re starting to see recovery as conditions start to ease, and we saw minus 10.5% in July. Germany, which was the strongest performer of our European countries, again, relatively robust against the impact of COVID-19, minus 4.3% in the first quarter, minus 11.6% in the second quarter, with some recovery into July at minus 7.2%. Coming on now to Greater China, the figures here are slightly unusual. China itself was impacted by COVID-19 earlier than other global markets, with the Q1 numbers down minus 21.3%. We saw some recovery come through in Q2, which saw net sales down minus 3.1%. However, they’re somewhat flattered by one-off revenue adjustments in Q2, along with a very tough comparator in July, where we saw net sales decline by 18.6%. But the underlying trend in China is more positive than these headline numbers suggest. Lastly, looking at India, we see a pattern much more characteristic of what we’ve seen across many of our other markets, with some recovery coming through in July. Looking at major other markets, like France, Italy, Spain, and Brazil, we’ve seen typical patterns across these respective geographies. Interestingly, Italy was one of the first European countries impacted by COVID-19, with a significant step down in Q2, minus 29.9%. We are now seeing positive growth in Italy in July, which is an encouraging sign, even if it’s only one month. In comparison, Spain experienced an impact in Q2 of minus 17.2%, but the recovery in July wasn’t as strong, at minus 14.3%, possibly due to local lockdowns. We need to be sensibly cautious about our outlook for the second half. There are encouraging signs of momentum, but the impact of local lockdowns may also affect us. We reported net sales down by £531 million, or down 10.2% on a reported basis. As Mark has highlighted, we’ve taken significant cost actions, particularly in the second quarter, to mitigate that downside on the net sales. Staff costs are down just under 5%, with most actions coming through in the second quarter. Establishment costs down just over 5%, although we’ve had some investment in our IT, reflecting ongoing investments in our IT platforms going forward, which will deliver longer-term savings. The biggest saving we’ve seen has been in our personal costs, which reflects reduced travel and hotel expenses, alongside other operating expenses down 12.2%. On average, for the first half, our operating expenses are down 6.5%, delivering a total saving of £296 million, which is actually about 56% of our net sales decline that we’ve been able to offset by operating cost savings. Looking at our operating cost savings run rate, most of our cost actions were only taken in the second quarter, and we only got up to our full run rate in May and June. If you extrapolate towards the end of the full year, we are confident that we’re on track to deliver towards the upper end of the £700 million to £800 million target savings we've communicated previously. About one quarter of these savings will be permanently retained when we return back to 2019 net sales levels, which indicates an estimate of about £200 million of these savings will be permanently retained in our business going forward. Moving on to free cash flow conversion, we start with the statutory reported operating loss of £2.4 billion, adding back depreciation, impairments, all non-cash items. We've seen an improvement in working capital year-on-year, reflecting accrued interest payments, tax, and capital expenditure, which is in line with our guidance that we gave. We expect capital expenditure to be about £300 million for the year and earn-out payments, all of which resulted in a cash outflow of about £825 million compared to £513 million for the same period last year. Looking at the uses of cash flow, disposals of £207 million decreased compared to £304 million last year, slightly lower, and also acquisitions of £46 million, a bit higher than last year but not significantly. Alongside this, a distribution to shareholders of £286 million reflects the share buyback program that we initiated in the first quarter has seen an overall net cash outflow of £950 million compared to £235 million for the same period last year. Despite the challenging period, we’ve seen a significant improvement in our net debt position from £4.2 billion to £2.7 billion as of June 2020, reflecting the operating cash flows delivered during that time. We have the benefit of disposals coming through, along with improvements in our trade net working capital of just over £400 million. Overall leverage metrics have seen our available liquidity increase to £4.7 billion compared to £3.5 billion during the same period last year. Our interest cover has delivered 6.8 times, which is broadly similar to last year. We expect that we will get our average net debt to headline EBITDA down to a level between 1.5 and 1.75 times by the end of financial year 2021.

Thanks very much, John. I would say that our financial results reflect a tremendous amount of hard work by our people, particularly our finance members around the world who have been disciplined in managing the business. I’ll try to provide everyone with a bit more color on what we’ve seen in the first half and the implications for our strategic opportunities for WPP. Firstly, I must emphasize that we have not stood still during the lockdown; we’ve continued to make solid progress on our strategy, and our turnaround remains on track. Our vision and offers for WPP has been validated by the trends we’ve seen in the market. Our strong performance in digital media, commerce, and marketing technology reflects that, as does our new business performance and retention of existing clients. We’ve attracted excellent creative talent across agencies, particularly in North America, demonstrating our commitment to creative excellence. Our performance at the Global Effies for the ninth consecutive year reflects our success in establishing fresh, innovative talent within the company. In the area of data and technology, Forrester recognized the quality of our work with Adobe and Salesforce, acknowledging us as a leader in implementation services. Over the last six months, we’ve equipped our team with the skills they need for the future. We’ve continued to simplify the structure of WPP, ensuring our traditional and digital capabilities are integrated. We’ve created a global powerhouse in strategic communications with Finsbury Glover Hering, enabling collaboration across our business units. Our investment in talent was evident in our latest appointments of key figures such as Andy Main from Deloitte Digital and Todd McDonald from Xandr. Our commitment to comprehensive inclusion and diversity strategy will be vital in the coming months. In terms of our client performance, our top 200 clients grew by 1.4% in the first quarter and were only down by 8.4% in the second quarter compared to overall WPP’s decline of 15.1%. This resilience illustrates the strength of our client base, particularly in sectors less affected by COVID-19, such as consumer packaged goods and technology. Our new business track record has been impressive during lockdown, and our pipeline is strong. We’ve seen a positive recovery in various sectors alongside a significant uptick in e-commerce, as our clients pivot towards enhancing online operations. We’ve noted the acceleration of digital trends and purpose-driven strategies. We are actively advising our clients on various issues, ensuring we remain relevant in their communications. Moving forward, we anticipate growth in experience, commerce, and technology sectors. As such, we will continue to invest in these areas to provide the best services to our clients and stay ahead in a rapidly changing landscape. The last months have highlighted our resilience and capacity to respond effectively to the evolving demands of our industry. Our focus is on embedding the lessons learned during lockdown and ensuring we work more flexibly and agilely in the future. As we move towards our Capital Markets Day at the end of this financial year, we will share more about our strategy progress and the opportunities we foresee for WPP. Thank you for your time, and now we will turn to questions.

Thank you, sir. We will now take our first question from the line of Tom Singlehurst from Citi. Please go ahead.

Hi, good morning. Thank you very much for taking the question, and thanks for doing the call. I wanted to go back on that theme of the current environment accelerating changes, because early in the presentation, you mentioned that within global integrated agencies, we’ve seen GroupM underperform the broader group. What line of sight do we have that will revert to being a sort of outperformer within GIA? And how comfortable are you that there isn’t a sort of negative acceleration happening there with longer-term impacts? Secondly, great that you’re at the upper end of the £700 million figure for cost savings, and even better to retain some of that. But I’d like to raise a concern that this might constrain your ability to rebound next year when recovery becomes broader base? As for the final question on the reinstatement of the dividend, which is very helpful, why didn’t you just initiate the buyback instead? Shareholders would potentially get more out of that as it’s more flexible. Thank you.

I’ll take the first question, and John can tackle the last two. I’m comfortable with the strategic performance of our media business. Rather than saying GroupM is underperforming, we might consider it more impacted. It’s significantly linked to advertising expenditure. Clearly, in the second quarter, ad spend was down drastically in many markets. But advertising spend is expected to rebound much quicker, and I believe we will see the recovery in GroupM go the opposite way. I don’t have strategic concerns here, just the impacts we expected. John?

Regarding your question about cost savings possibly constraining recovery, we’re actually confident that we have the right blend of temporary and permanent cost savings that will allow us to respond to market recovery. We’ll retain the structure to reintroduce resources as needed. We believe that these cost savings won’t adversely affect our ability to rebound—rather, some of them will be permanent, reflecting shifts in the way we operate and work. As for the dividend versus buyback decision, we wanted to signal to the market a confident return to cash flow sustainability, and shareholders value the dividend. Having solid visibility is key before resuming share buybacks. We will analyze the performance going forward, and share buybacks will be considered when uncertainty subsides.

That’s very clear. Thank you.

Yes, good morning. Thank you for taking my question. The first one is on cost savings. The upper end of £200 million will be permanent. This equates to 184 basis points of 2019 margin. Your margin target was around 15%. Should we add that whole 1.8% to that? Or are those gross savings, then you will reinvest somewhere else? If you can give us a rough idea of how much we should keep? My second question is coming back on Page 29, you’re highlighting e-commerce as one of your strengths. Would it be possible to have an idea of how much that represents as a percentage of net sales approximately, in either 2019 or an estimate for 2020? Lastly, the £2.5 billion goodwill impairment—does it create any tax loss carryforward? If yes, how much? Thank you.

I think the first thing to say is it’s difficult to identify specific e-commerce projects, and we’re not organized around those four areas. However, we believe it’s around 8% of our net sales generated from the e-commerce area.

In terms of cost savings, your math is correct. If other factors remain equal, we will see that benefit flow through. However, we must consider that costs will fluctuate in relation to sales, not only based on fixed or variable categorizations. We will provide more detail at our Capital Markets Day regarding our cost structure and also confirm if there are any exceptional costs for achieving structural savings.

Thank you.

Good morning. Within your online media business during COVID-19, do you see any shift between open exchange programmatic and the more closed walled garden platforms like Facebook? Additionally, how do you see the impact of their IDFA changes on your online media business? Thank you.

We’ve seen continued growth in spend on Facebook and Google, with more resilience there than on the exchanges. For Facebook, if they’re limited from using data, that will naturally impact spend through those platforms. I’d expect to see a reduction in absolute spend around the value of impressions.

Good morning. Sorry to go back on numbers, but can you elaborate on the July numbers for China and Russia? It appears to buck the trend. Also, can you provide more color on the margins of your top 200 clients? What do they represent in the total revenues? Lastly, regarding cost savings, could you provide an update on what you’ve pushed for in front-office, middle-office, and back-office savings as you had shared before?

Regarding our top 200 clients, which account for 64% of our revenue, they are more resilient as they tend to be in healthcare, technology, and consumer packaged goods. As such, they've seen continued spending despite the broader impacts. In terms of identifying trends specific to the returns, I’ll get back on that.

You are correct; China and Russia have not followed the same positive recovery trend we’ve seen in other markets. It’s important to note that these figures are one month and should not be overanalyzed. We’re seeing improvements in July, as previously experienced in the second quarter. If I analyze China more closely, I have seen tougher comparatives historically which could reflect in numbers. Thus, since July figures only represent one month, we need to be cautious but on track with overall positive momentum.

Hi, guys. Can you hear me okay? Congratulations on the result. I have two questions. The first one is about revenue improvement. Given you’ve set out your cost-saving targets, how would you characterize what drop would happen if revenue improves from what you’re expecting? For every £100 of improvement in revenue, how much would drop through to the operating profit line? Second question relates to structural cost savings: do you think there will be costs associated with achieving those savings? Will you put those into operating profit, or will these be accounted for as exceptional items?

In terms of revenue recovery, we aim for 50% to 60% of any net sales decline to be offset by cost savings. When the future revenue improves, we believe the remaining costs will drop through into profitability significantly. On structural cost savings, while some may incur one-off costs, we expect to convey specific costs associated with these initiatives, along with how we retain flexibility moving forward.

Yes, good morning. Firstly, the £200 million-savings permanently retained—does this imply that if net sales do not return to previous levels, you might retain more than £200 million? Moreover, your dividend policy appears to be reviewed. Do you foresee a greater focus on M&A to grow now that the balance sheet is in good shape?

Our £200 million minimum for permanent savings stands irrespective of sales recovery. Should we continue to hold onto them, they enhance our operational efficiency. We plan to evaluate capital allocation. At this time, we focus on maintaining robust profitability and cash flow while keeping M&A options open in the future.

I just have one question about capital allocation; you indicated that your dividend policy will be reviewed. Do you feel that you need to shift focus more towards M&A now that you have a strong balance sheet, or can organic growth be sufficient?

I believe we’ll have more clarity on that during our Capital Markets Day. For now, we are focused on delivering excellent service to our clients and maximizing organic growth.

There are no further questions at this time. I would now hand the call back over to Mark Read for further closing comments.

Thank you very much, operator. To summarize, it has been a challenging six months for the company, but we haven’t stood still. We’ve made significant progress against our strategic objectives, and demonstrated the resilience of our business model and the strength of our client relationships. I’d like to thank all our people for their hard work in these challenging circumstances to deliver for our clients and look out for each other. Thank you for listening, and we’ll see you for the quarterly results later on.