WPP plc Q2 FY2022 Earnings Call

Thank you very much and good morning, everyone. This morning's presentation is available online for your review. To be efficient, I will make a few initial comments before we move on to questions. Looking at the first half, we saw continued strong demand from our clients with good growth of 8.9% for the first half and 8.3% in the second quarter, which is only slightly lower than the first quarter despite tougher comparisons. This demonstrates strong growth across all of our businesses. The integrated agency grew by 8.2%, with media showing slightly stronger performance, while our creative agencies performed commendably at around 6% in Q2. Public relations increased by 7.3%, standing out as our best-performing business throughout the pandemic, highlighting its significance to clients. Additionally, our Specialist Agency grew by 10.9%, surpassing the average overall. Geographically, we experienced good growth in all major markets, particularly in the U.S., which accelerated WPP's growth in the first half. This represents a significant turnaround compared to pre-pandemic times; our last quarter of growth before this recent surge was Q1 2016. Growth was consistent across most markets, except for China, due to the impacts of lockdowns there. Our business has also strengthened creatively. We were recognized as the most creative company at Cannes in 2022, and Ogilvy was named Network of the Year. In the media sector, COMvergence ranked us as the world’s leading media group, which reflects our strong new business performance of $1.6 billion in the second quarter, including key wins with companies like Audible, Danone, Audi, and Nationwide. We are continuing to invest in the business, both organically with initiatives like Everymile and Choreograph, our data division, and through M&A, including Bower House Digital, a Salesforce Marketing Cloud entity in Australia, and Corebiz, a significant e-commerce player in Brazil. We are also simplifying our operations to enhance client service, as seen in the creation of EssenceMediacom and Design Bridge and Partners. Our transformation program is on track, with expectations to deliver $300 million in savings this year. Given our strong balance sheet position, we executed £637 million of our £800 million share buyback program within the first half and have raised our guidance. Consequently, we are increasing our 2022 guidance for net sales from 5.5% to 6.5% to a revised range of 6% to 7%, factoring in the outperformance in Q2, with our headline operating margin expected to rise by around 50 basis points. Overall, the first half has been a solid start to the year, and we are confident about the remainder of the year. With that, let's move on to any questions you may have.

I’ll ask the obvious question, which is that your results seem fine and your guidance looks good, yet there’s understandable concern about what will happen next year. One number that stands out to me from your slides is the digital growth. It increased 12% in the first half compared to 32% a year ago. What I'm curious about is whether you're experiencing a slowdown in some digital categories, as we've heard from various ad-related companies in the U.S. that may have seen a decrease starting in Q2 or expect it in H2. Is this a situation where some digital spending is being quickly cut, even though your overall growth remains strong due to ongoing spending from major brand advertisers? I'm trying to understand the differences between your comments and outlook and those from several other companies.

I believe our remarks about this year and the outlook for next year align with what our peers have mentioned, highlighting a strong demand in the first half of the year, minimal cuts from clients, a likely slower second half compared to the first, and an uncertain 2023. This perspective appears consistent with feedback from our peers. In the first half of the year, WPP saw an 8% growth in net sales, Google reported 16%, and Meta had 3%. Given this context, it seems that those companies facing more challenges in net sales are likely affected more by competitive dynamics and their client base rather than a widespread macroeconomic slowdown. For instance, Google has noted stability, Amazon described the market as strong, and Comcast referred to the situation as variable - indicating some fluctuations but no overall decline. While some companies may infer a broader economic slowdown, I believe the challenges are more related to their specific competitive conditions. That said, we are entering more uncertain times in 2023 and, like many peers, we anticipate a slowdown, particularly in the latter half of the year. However, I would argue that the budget cuts being observed may not stem solely from rapid reductions in digital spending, but rather some normalization after a period of brisk growth. Some companies might be more dependent on venture capital or app downloads, which could play a role. Overall, it seems more likely that this situation is influenced by company-specific factors rather than a significant macroeconomic downturn at this stage.

I think, Tim, just to build on Mark’s comments regarding the decline from 32% digital growth to 12% digital growth, it reflects both SMEs and the Chinese market, where we under-index compared to the overall market size. This could explain why our figures have remained somewhat stronger than the broader market trends.

We did a call with Brian Wieser a month ago, and he was making that point, and I don’t know if you said this, this morning, a little early for me on the earlier call, but that China’s weakness in the first quarter could provide a tailwind in the second half as it reopens and trade picks up. So I’m wondering if that’s sort of something you’re expecting. That’s question one.

Yes. I believe we are anticipating a slightly better second half compared to the first half in China, but our figures do not heavily rely on significant changes in the Chinese market, as it remains a relatively small part of our overall business.

There was a significant difference in performance between the first and second quarters. In Mainland China, we saw an increase of 11.9% in Q1, while Q2 experienced a decline of 6.1%. This clearly illustrates the substantial effect of the lockdowns in the second quarter. We can expect some recovery, although likely not to the same level as Q1. However, there's likely to be some level of improvement in the market during the second half, considering the contrasting performances between Q1 and Q2. It represents about 5% of our overall business, which is not trivial but also not a major portion.

Got it. Okay. For my second question, which may be a bit more challenging to answer: considering all the work you've done on first-party data, Choreograph, and the client demand for addressing the cookie issue, now that Chrome is once again postponing the removal of third-party cookies, does that impact you positively, negatively, or is it neutral? Do you continue to collaborate with your clients on new solutions under the assumption that third-party cookies will eventually be phased out, viewing it as more of a question of when rather than if?

No, I think it doesn’t really change anything for us. It simply adds another layer of uncertainty and a shift in the market that indicates clients will require more assistance to navigate these changes. We believe that protecting consumer privacy will become increasingly important in the political and data protection landscape, and I don’t think we will replace the cookie with another form of identity owned by a single ad tech company or anything else. It is evident that the unrestricted data collection practice is not acceptable, and data gathering must be done with consumer consent. Therefore, we are not looking to substitute the cookie with another unified ID system. Data-driven marketing needs the integration of various types of data, not just personally identifiable information or purchase behavior. A more complex data landscape means clients will require additional guidance. There are companies in sectors like automotive, travel, and financial services where personally identifiable information is crucial, as well as retail, which is a significant part of our work with WBA. Other sectors, like packaged goods, pharma, and healthcare, may find it less relevant. We need to cater to both types of clients. Generally, the extension of cookies on Chrome has not really been the main concern; the larger issue has been data collection on the iPhone. What remains to be seen is how both Android and the iPhone might move towards stricter measures, considering that most significant activities are occurring on web browsers and mobile devices. I would say that overall, it's a mixed situation for us.

To add to that, the ecosystem is constantly evolving, and whether there are delays or not adds to the complexity. We've always believed that this complexity is beneficial for us because we can assist our clients in navigating it. The extension of the cookies' availability by another year gives us additional time to prepare our clients for the new landscape. We are actively engaging with our clients to explore how they can transition from relying on cookies to different methods of targeting customers in the future.

Got it. Okay. And then if I could just squeeze one more in. John, in terms of margin performance, great revenue growth, first half margins down, which is kind of what you guided toward. 50 bps, still the guidance improvement for the year. So what are the key parts of the operating leverage in the second half?

Yes. So I mean, as you said, the guidance that we gave at Q1 and the prelims is very much around 50 bps being down year-on-year for the first half. I guess, in a way, the mix of that was probably a little bit different than what we expected. So a little bit tougher in relation to staff costs, a little bit better, the establishment costs, pretty much bang in line with where we expected on personnel costs and a little bit more recovery through the staff incentives. So the shape for the first half was maybe a little bit different, but when it all summed together, down 50 bps, in line with what we guided. To get to our sort of 40 to 50 bps for the full year requires the second half to be up roughly 120 bps, again, as we guided at the Q1 trading statement. And I think the shape of that, albeit there’s margin for error, of course, in this, we’d expect on staff costs pre-incentives to see about a 75 sort of bp decline impact on margin in the second half with the establishment costs. Maybe we’ll see some upside of about 10 bps in the second half. On IT, they’re down about 10 bps or so in the second half; personnel cost, probably an impact of about 20 bps down in the second half. That’s clearly less than 70 bps in the first half because we’re starting to annualize some of the travel that took place in the second half of last year. Probably an upside of about 10 bps or so in other G&A and then a consistent 200 bps on the staff incentives. When you add all of that together, that gets to roughly 120 bps in the second half, which when you combine that with your 50 bps down in the first half, gives you an overall increase in margin of 40 to 50 bps for the full year. So that’s sort of the shape of it. I mean the one thing I’d caveat, of course, is there’s always lots of moving parts and we adapt and we’re very agile in our response to the market as we navigate our way through. So the shape can change, but we’re pretty reasonably confident we can deliver that full year margin guidance that we’ve given.

I have three questions, if that’s alright. First, regarding the price increases you mentioned to combat inflation. You stated in the presentation that there would be approximately 1% to 2% benefits from these price raises. In previous discussions, you indicated that you have managed to implement some increases for about a third of your client base. Could you provide an update on that? This implies that for clients who are accepting the price increase, they might see an increase of roughly 3% to 6%. Has the proportion of clients accepting a rise grown? Please elaborate on that.

Sure. On the buyback front, we have consistently stated our intention to reach a buyback of 800 million for the year. So far, we have completed 630 million in the first half and 170 million in the second half. We anticipate doing that 170 million in the third quarter as well. We are keeping our options open regarding potential M&A opportunities. In terms of our net debt to EBITDA by year-end, although there are various factors at play, including acquisitions, if we follow our capital expenditure and M&A guidance, we expect to end the year with a net debt around 2.2 billion to 2.3 billion and a net debt-to-EBITDA ratio of approximately 1.3 to 1.4 times, possibly at the lower end of our 1.5 to 1.75 times range. This expectation assumes that any M&A activity, which can be unpredictable, is factored in.

When you tackle the price rise stuff, and we can talk about acquisitions together. I mean on acquisitions, I think we’ll see what happens today. There’s much more to say than that. We didn’t anticipate large ones any more than we anticipate doing them, 1 month doing them. But John, what impacts the price increase on transformation spending first, if you can?

Yes. On buybacks, yes, we’ve seen sort of price increases probably 1.5% to 2% flow-through. And to your point, I think your math is right. When we talk about roughly 1/3 of our clients, therefore, an average 3% to 6%. And I think that probably be about right. I think if you split it roughly 1/3-1/3-1/3. 1/3 we’ve managed to negotiate through. 1/3 are sometimes contractual in nature, so we can’t effectively push price increases through this space when there’s probably maybe just under 1/3 to still go after. So we have a concerted effort to push price increases through in the second half, building on what we’ve achieved in the first half. We can’t see it on all clients because there are clients where it’s largely fixed contractually over a period of years. Until those contracts unwind, we won’t be able to push further price increases through. But there is a little bit more work to do, so we will expect to see some upside on price increases come through in the second half.

I was trying to figure out how to answer your question about transformation. It's not just a straightforward definition. The best way to think about it is by looking at our experience in the commerce and technology business, which is largely what people describe as transformation. We are creating experiences, building e-commerce platforms, and implementing technology solutions for our clients. This accounts for about 39% of our GIAs, which represents a little over half of our overall business, estimated at 45% to 50%. So, if you consider that, it amounts to around 20% of our business. I don’t think anything is truly recession-proof, to be honest. However, I believe it will grow. The uncertainty we mentioned is because the future is unpredictable. Some clients will continue to invest in this area regardless of the circumstances, and to the extent that we have multiyear programs with some clients, those should continue. On the other hand, some clients may choose to pause larger projects. While it's beneficial to have a strong presence in this area, I wouldn’t want to depend solely on it. What we've stated isn't much different from what our competitors have expressed, and that’s the perspective to keep in mind.

We have observed an increase in the GIAs over the last half-on-half of just under 1%. They reported 38%, close to 39%. This is encouraging, especially in these higher-growth areas, which helps protect our top line growth. However, we believe that potential volatility in the top line driven by the business cycle could occur faster than our transition into these higher-growth sectors. To Mark’s point, we cannot fully shield ourselves from the impacts of the business cycle, but every step we take towards these higher-growth areas is beneficial.

Could you provide a brief follow-up? Unilever is a good example of a company that has invested in brand building to support price increases. Looking at your client base in terms of revenue, what percentage would you say is adopting that mindset, and what percentage seems to be taking a more cautious approach?

I believe it's crucial to keep investing. Looking at our major clients like Unilever, Coca-Cola, P&G, L’Oréal, and Mondelez in the FMCG sector, as well as tech giants like Google and Microsoft, and pharmaceutical leaders like Pfizer, all of them are strong companies keen on building their brands and maintaining their investments. Analysts’ comments during the earnings transcripts of CPG companies consistently highlight a commitment to ongoing marketing investment. However, we should not assume immunity from economic cycles. Clients have realized the risks of fluctuating investments and have observed the advantages that companies, which consistently invested during the pandemic, gained by emerging much stronger. This context leads us to describe 2023 as uncertain since we need to assess the overall situation. If the landing is soft, spending should remain steady; if it’s more challenging, then spending may decline. We acknowledge this uncertainty. Importantly, compared to past cycles, clients now seem to appreciate marketing's value more. Recently, I heard a CEO from a company historically focused on zero-based budgeting express regret over prioritizing cost reduction over brand building and marketing, indicating a shift in understanding. Another significant change is the emphasis on digital transformation, the necessity for multiyear projects, and investments in areas like commerce. The focus on data and return on investment has also evolved, making it easier for clients to reallocate funds from brand development to sales initiatives, particularly through retail media. Thus, during challenging times, clients might be incentivized to invest more in marketing aimed at driving sales rather than cutting back, where ROI is more transparent. I believe these factors suggest that we may demonstrate greater resilience in future economic cycles compared to previous ones.

If you consider our short-term agility, we demonstrated our capacity to respond quickly to external market changes during COVID, for instance. We excel at forecasting and adapting our cost structure regarding hiring and utilizing freelancers. This gives us a solid ability to manage our business costs, no matter what the business cycle presents. From a long-term perspective, we're in a much stronger position than we were about four or five years ago. The business is undergoing restructuring. We have integrated our digital and creative agencies, improved our balance sheet, and simplified our operations. We also have ongoing structural cost-saving opportunities in our back office. We are targeting increasingly attractive sectors and, as mentioned earlier, shifting towards high-growth areas in commerce, experience, and technology. While we acknowledge the uncertainties in the business environment over the next 12 months, we believe we are well-equipped to navigate those challenges.

One more. I’m afraid I’ve got a very boring, dry modeling question, if you wouldn’t mind helping me with something, John. And I know this came up on the call in London this morning. It’s about the share of associates result line. I think you were saying that number was on a headline basis, I think, down pretty sharply. I think you were saying this morning on the call that, that was related basically to higher interest expense at Kantar. Could you just maybe elaborate on that? And then what numbers should be used for the remainder of this year and next year for that line in our model?

Yes, to address the question in reverse order, I anticipate a figure between 40 and 50 for the full year, which is notably lower than the previous year. This reduction is mainly due to the acquisition of Numerator by Kantar, which brought more debt and increased interest costs. Consequently, the associates line has decreased, but this does not indicate a decline in the underlying performance of the business. The Kantar business is performing exceptionally well. However, it does mean that, from a numerical standpoint, the associates line will be lower, as I mentioned, somewhere between 40 and 50 at year-end.

Okay. And for next year, we’re back to a more normal level. I think that number was 80 or so last year. Are we back to that same number next year?

I mean I’m very cautious about giving guidance into next year just simply because it’s effectively driven by events. I guess all else being equal, it might normalize around that level. But as we’ve evidenced in this year, events changed that. So I think, to be honest, I just want to keep my powder dry there, Tim, and we can give more specific guidance at the right time.

Very good. So thank you, everybody. Thanks for your questions. Just one final comment to make. As we end the call, thank Peregrine for his contribution in the last three years and he bows out over the next half hour. And thank you all for listening. I think it’s been a good start to the year. And we’ve got work to do in the second half as well. So thanks, everybody. We’ll see you on the next call or before.