WPP plc Q4 FY2020 Earnings Call

Good morning ladies and gentlemen and thank you for standing by. Welcome to the WPP 2020 Preliminary Results conference call and webcast. At this time, all participants are in a listen-only mode. After the initial opening remarks, there will be a question and answer session, at which time if you wish to ask a question, please press star and one on your telephone keypad. 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, and good morning to everybody listening to us from the United States, and welcome to our 2020 results presentation. I’m here in London with John Rogers, our CFO, and Peregrine Riviere, who heads up our Investor Relations department. As is customary, we’re going to have a few brief opening remarks and then open up the floor to questions. You should look at the presentation we made this morning, including the cautionary statement that was included within that presentation. I think to start, it’s now been exactly one year to the day since we asked everyone at WPP, some 100,000 people to work from home, if they weren’t working from home already, and it’s been quite the year but I think overall, a very productive year. We enter 2021 in a good place. It’s clearly been an amazing effort from our people who have looked after each other very well. We’ve had a great degree of support from our clients and I’m very pleased with our client satisfaction scores and the new business that we’ve won, and actually as a company we’ve done a lot to help our communities manage their way through COVID. Overall, I think the performance can be described as resilient and we’ve made significant progress on our strategic goals. I’d like to highlight some of the key themes that perhaps we can touch on in the Q&A. The first is the sequential recovery in our business that we’ve seen since the initial lockdown. In the second quarter, we were down 15.1%; down 7.6% in the third quarter and 6.5% in the fourth quarter, so we have seen improvement throughout the year in our relative net sales performance compared to last year. We have major parts of our business that were growing well for the year overall, indeed in Q4 - tech, CPG, and pharma, about 57% of WPP’s business, and they turned to us for help and advice during this period. We’re seeing growing demand for commerce services; we work with 76 of our top 100 clients in that area, and that extends both to the work we do helping them build websites and the work they do in digital media, where group revenues in commerce media grew by 43%. Our new business performance has been excellent. We’ve led all the new business tables and I think it’s going to be a busy year in 2021 for new business with both opportunities and challenges for all of us in our industry. I talked about our people; we have really had a fantastic effort from them. We focused a lot as a company on their wellbeing, more as you might expect as the year has gone on, and I think everyone’s keen to get back into our offices, if not five days a week, for at least a fair part of the week. We have had great success in attracting top talent into WPP over the last 12 months. To name a few: Rob Reilly, who joined us as Chief Creative Officer; Andy Main, the CEO of Ogilvy; Kirk McDonald, running GroupM in North America; Devika Bulchandani, who’s running Ogilvy in New York and heading up their advertising business; and also the work we’re doing with Barry Waxman on their new digital transformation consulting. Talent is at the heart of our business and we’re really pleased to attract top talent into WPP, but also to invest in talented people who already work for us. The work we’ve done on the client-facing parts of this business is supported by the work that John and our finance teams have done. We’ve shown very strong financial discipline throughout the year, so despite our net sales being down 3.2%, we saw a 1.4% decline in our operating margin, and very pleasingly, our net debt ended the year at £700 million, the lowest since 2004, so we made a lot of progress during the year. We laid out our plans to accelerate our growth and invest in the company while building an efficient platform, and we can touch on some of those topics during the Q&A. I’d like to end these opening remarks by thanking all of our people and clients for the work that they’ve done, and now I’ll give you the chance to ask any questions that you may have.

Your first question today comes from Dan Salmon from BMO Capital Markets.

Hi Dan.

Great, hi Mark, good morning. Good morning, good afternoon to you guys over there. Mark, I wanted to just start by tapping in a little bit more on the continued focus on growing commerce services. One of the things that you’ve talked a little bit more about lately is building more commerce services at the creative agencies. I just wanted to hear a little bit more of an update on that and the traction that may be happening there in the short term, and more about how you think about that over the long term - you know, should commerce be a certain mix of business at the creative agencies? I don’t know if that’s the right way to put it. Then just a follow-on to that, how you think or how your recruitment of young talent, maybe out of college and university, is changing as commerce services, do they require different talent sets? Love to hear more about that as well.

Okay. I think broadly speaking at a group level, we have set targets to increase our commerce business. It’s something that we’re looking increasingly to attract, track and measure our investments to make sure that our investments are delivering revenue. I think our view is that commerce services should be an integrated part of an agency’s offer. What we’re seeing in the market today is a confluence of communications, content, and commerce on a device, largely the mobile device, and I think clients need integrated solutions to do that. I’d say the two agencies that are probably most advanced would be Wunderman Thompson Commerce, particularly on the web build side, and VMLY&R Commerce, where we brought geometry to bear with VMLY&R to create VMLY&R Commerce. We do have strong commerce offerings inside AKQA and Ogilvy as well. As I say, I think it should be integrated. The services that we offer from a commerce creative perspective, and it’s a very broad definition of creative, is everything from helping companies build their own websites, so we built with the client, for instance, net-a-porter.com; we’re helping one of our top 10 clients with the rollout globally of a direct-to-consumer platform; we’re helping clients merchandise their products on retailer websites, selling through Wal-Mart, Target, or other retailers; and then we’re helping to think through how they take advantage of the marketplaces - Amazon, Alibaba, Mercado Libre, where we’ve invested in a number of companies in that area. Additionally, commerce is part of what we do within GroupM, so our media business, which has seen a 40% increase in commerce billings, increasingly clients are looking at their media budgets where brand promotion or sales have mixed together, presenting us with the opportunity to expand our trade media advice to clients. Then, I think we have to work together and collaborate at a group level to bring clients an integrated solution. From a talent perspective, I don’t think the commerce part of the business necessarily needs different types of talent. What I would say on the talent front is that we’re very focused on bringing in different types of people into WPP. Over the summer, we ran this Next Gen Leaders program to bring in a new set of interns. We had 750 interns that joined, and got to expand it this year, with 57% coming from diverse backgrounds, so we’re tapping into different types of people for the business, and I think naturally commerce will attract somewhat different types of people but I wouldn’t say it’s substantially different from those WPP has traditionally had.

Then if I can maybe sneak in one follow-up, just the latest news on Apple and Google’s platform changes and maybe how you’re helping clients prepare, especially for Apple’s ATT changes, which are expected to come into play shortly.

Yes, I think from our perspective, I don’t think it changes the overall attractiveness of digital media, which still provides greater targeting, greater measurability, and greater variation of creative assets than traditional media. I think by protecting consumers’ privacy, we do help sustain the long run viability of media. In that context, we would broadly welcome the changes, but they clearly have different impacts on different players in the value chain. They tend to benefit companies like Google, Facebook, and Apple that have first-party relationships. A cynic might say that’s why they’re doing it; I don’t think they’re doing it because it’s the right thing to do, but they’re less advantageous to smaller publishers and intermediaries that don’t have direct relationships with consumers. I don’t think that really applies to WPP. Our job is to help our clients activate their data in those channels, and to the extent that this becomes a harder proposition, they probably need our advice a little bit more than they did in the past, so I think it’s probably at worst neutral, at best slightly positive for us to help our clients navigate what they’re working through.

That’s very helpful. Thanks, Mark.

Thank you.

The next question comes from the line of Tim Nollen.

Hi. I’ve got a couple of questions just on the numbers, following on the broader stuff that Dan was asking on. Just to be clear, your guidance today is really no different from what you presented in December. Just want to make sure if there are any differences in there, first off. I don’t think there are.

John?

No, no differences. I suppose the only new news is the year-end net debt position of £0.7 billion, which was better than we expected as a result of the strong working capital management. As we’ve said on the call later on today, we would expect some of that upside to reverse out this year, about $200 million to $300 million or so, but we’ll keep the vast majority of it, so it’s a positive outcome, but we’d expect a small reversal in 2021. Aside from that, everything is consistent with what we said at the capital markets day in December.

And could you remind us, is there any more restructuring to be done in 2021, or has that all been taken care of in 2020?

There’s a little bit more to come through in 2021, probably £70 million to £100 million or so, half of which will be the remainder of the restructuring program we announced as part of the 2018 strategy review. The other half will be COVID-19 related, so there’s a little bit to come this year. Then going forward 2022 to 2025, we anticipate up to another £100 million to £200 million or so, spread over those years to reflect the transformation program that we’re undertaking that we announced at the capital markets day in December, but a significant drop-off from what we’ve seen over the last couple of years. It would seem, if you like, the worst of the restructuring charges have come through. We’ll see a little bit in the future but a lot lower than it’s been historically.

Okay, thanks. Then one more on cash and use of cash. You mentioned, I think in your press release which is new news, reinstating the buyback. Could you just run through one more time for us your priorities on use of cash? You do mention M&A, I think you say half a point to a point of acquisition growth per year. Just in general, what are the targets you might be looking for in M&A? What type of activity do you think there might be, and how much might you spend?

Yes, so we said at capital markets day we intend to spend between £200 million and £400 million a year on M&A. The likely targets, of course, are going to be in the areas of commerce and experience in technology, those areas where we anticipate high growth occurring. In fact, the two relatively small acquisitions that we’ve done this year to date absolutely fit in those areas, a small acquisition in Scotland of an ecommerce consultancy business, and then a digital consultancy business in Brazil, both of which align with these high growth areas. But in terms of our capital allocation, we will do £200 million to £400 million in acquisitions, and any capital above and beyond that will be returned to shareholders. If you apply the guidance we gave at the capital markets day in December, then it’s easy to see in future years, if we achieve those levels of growth and the cost savings we’ve anticipated, there will be further opportunities for share buybacks in 2022 and beyond.

Okay, good. Thanks very much.

Thank you. Once again ladies and gentlemen, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad. That’s star and one if you wish to ask a question. Your next question comes from the line of Doug Arthur.

Yes, thank you. John, I think you had reiterated at the analyst day that you expected to reach the upper end of £700 million to £800 million in cost savings for 2020. Just specifically, do you have an updated figure on your total employment level right now?

Yes, so in terms of number of employees, is that the question?

Yes.

Yes, it’s just under 100,000. And we delivered savings in 2020 of £810 million, so slightly higher than the £700 million to £800 million that we guided to.

Okay, and I would assume going into 2021. I mean, you’ve talked about the second round of process rationalization, so there’s more to go?

Well in fact, in headcount terms we anticipate increasing headcount slowly over time because obviously we anticipate growth over the next year and the years ahead, so we actually see our headcount going up slightly. However, an offset against that will be further efficiency savings that we think we can deliver over the next three to four years, so we identified £600 million of savings to deliver over the next few years, that will mean overall, there will be headcount reductions. But when you balance against the growth that we’re going to deliver and heads that we anticipate recruiting to ensure that growth, then the net position will be an increase in headcount over time.

Okay, and then just off the beaten path per se, but it’s still pretty important to you guys, any comments on how Kantar is doing?

I think there was information in the public domain a week or so ago. They had a slightly tougher year than WPP did in net sales terms, which was about 10% or 11% down for the year in net sales, but did a good job, as you’d expect, managing their cost base, so their margin was down but not by much. They’ve had a reasonably good year and obviously they’ve got plans to consolidate costs going forward.

Okay, and then finally, Mark, any thoughts on the outlook for China in 2021?

Yes, I think just to add to what John said on Kantar, we’re very pleased we did the transaction. I think navigating 2020 with both Kantar and the lack of reduction of debt that would have resulted would have made a pretty different outcome. I think that Andrew and the team did a fantastic job getting that done just at the right time. On China, our business has been a little disappointing for us in the last 18 months, and I’d say our peers have probably been a bit more impacted by the pandemic than we would have liked. We expect to see recovery in 2021, but there are probably some business-specific and client-specific issues that we’re going to work to address and invest in the business. We’ve got a fantastic business in China and a number of very strong clients, both domestic and multinational. We’re probably a little over-indexed to the multinational client than we would like, and a little over-indexed to traditional media than we would like. While we’ve got a good commerce business there, we could invest a bit more in that, and we are looking at investing behind a stronger China-based technology strategy because the technology footprint there has diverged from the rest of the world. I think it merits its own approach. Given our scale in the market, we should be in a good position to take advantage of that.

Okay, great. Thank you very much.

Thank you. We have no further questions at this time, sir.

Well, thank you very much everybody, and thank you for your questions. We’ll see you on the next call in a couple of months.

Thank you. That will conclude today’s conference call. Thank you all for your participation, ladies and gentlemen, and you may now disconnect.