WPP plc Q3 FY2023 Earnings Call

Thank you very much, and good morning, everybody, and welcome to our third quarter results. I'm joined here in London by Joanne Wilson, our CFO; and Tom Waldron, from our Investor Relations team. And we'll just take you through the presentation before answering questions. On Slide 2 is our cautionary statement. I'd just like to draw your attention to this and ask you to read it. So on Slide 3, in terms of the agenda. So I'm going to touch briefly at the beginning on the highlights of our third quarter results before Joanne covers the financial performance in some detail. We'll take some time to go through the strategic update and then Q&A. So highlights on Slide 4. I'd say that our third quarter was somewhat below our expectations with net sales down 0.6%, taking us to around 1.2% growth on a year-to-date basis. We had expected performance in Q3 to improve somewhat on Q2, in part due to the easier comparatives. But we did see a continued continuation of the pattern of spending that we saw in the second quarter, in particular, a reduction in spend by our technology clients. In fact, they were slightly worse from minus 9% in Q2 to minus 13% in Q3. We also saw somewhat slower growth in GroupM, primarily in the U.S. and the U.K., a little bit in Germany, due to a mix of factors. Some technology impact, some around the new business performance in the U.S. and some client softness in the U.K. As a result, although the U.S. performance in Q3 is broadly the same as Q2 around minus 4.2%, minus 4.5%, it had a slower growth internationally from 5% in Q2 to 1.8%, really taking down the overall performance. That's really the key drivers of our top line for the year. In terms of new business, in a somewhat better Q3 after probably a tougher start to the year than we would have liked with wins in Estée Lauder, in media, Nestlé, media in Europe, Unilever and Verizon. Importantly, we're making two important moves to strengthen our offer, the creation of VML and the simplification of GroupM. I'll comment on them. They intend to deliver around GBP 100 million of in-year savings by fiscal year '25, together with stronger revenue growth. We are making ongoing investments in AI to enhance our offer. In terms of our guidance, given the results in Q3 and desire to be cautious for the year overall, we're lowering our net sales guidance to 0.5% to 1% for the full year with a headline operating margin excluding FX of 14.8% to 15%, i.e., an underlying improvement of 0 to 20 basis points on a like-for-like basis from last year. Lastly, we do think it's the right time to come back to you with a more comprehensive picture of our plans and actions. The world is changing fast. There's a lot of development, and we're at a point where there are many opportunities ahead of us, particularly with the application of AI to marketing, that will drive revenue growth. And we want to share those with you in a comprehensive way. So we'll do that with the Capital Markets Day in January 2024 and, at the same time, address the actions we're taking to deliver further efficiencies, including and on top of the steps we've announced today and in the last few weeks as well as margin improvement, which are equally important. So that's what I'll say, by introduction.

Thank you, Mark, and good morning, everyone. I'll talk a little bit more about the expected financial benefits from VML and the further integration of GroupM later. But first, let me take you through the financial results for the third quarter. So starting on Slide 7. Revenue less pass-through costs fell 5% on a reported basis and was down 0.6% on a like-for-like basis. Reported growth includes a 5.5 percentage point headwind from FX due to sterling strengthening year-on-year and a 1.1 percentage point contribution from acquisitions. As Mark shared, the quarter was impacted by a continuation of the cautious client spending patterns we saw in Q2, particularly at technology clients and also weaker quarter-on-quarter performance in media. Moving on to Slide 8. Global Integrated Agencies were broadly flat year-on-year in the quarter with growth of 0.1%. Within this, GroupM, our media planning and buying business, grew 1.6%, a slowdown versus H1 as a result of lower spend from technology clients and the impact of client losses in retail and CPG in the U.S. Together, these contributed to low single-digit growth in the U.S. and the U.K. in the quarter. GroupM grew well in Asia, and we saw continued strong growth in digital, programmatic and connected TV advertising, driving the share of digital to 51% of billings in Q3, up from 48% a year ago. Across our integrated creative agencies, we saw a like-for-like decline of 1.1%, a slightly better performance quarter-on-quarter. Ogilvy benefited from new business wins and delivered continued strong growth, offset by declines at our other creative agencies. As in Q2, those agencies continue to be adversely impacted by reduced spend primarily across tech sector clients and longer lead times for new business and project-related work. Moving to Public Relations, which is around 10% of WPP. Revenue less pass-through costs declined 0.9% in the quarter. Within this, FGS Global, our leading strategic advisory and communications consultancy, continued to deliver strong growth. However, this is more than offset by a decline in BCW and Hill+Knowlton, which saw broad-based cautious spending patterns in clients. And finally, our Specialist Agencies, around 8% of WPP, declined 6.8% with CMI's continued strong growth offset by declines in smaller agencies. Slide 9 highlights performance across our geographic segments. North America declined 4.1%, consistent with Q2 performance and with similar client spending drivers, reduced spend from technology clients and client losses in the retail sector. This is despite good growth in some other sectors such as CPG, health care and financial services. The U.K. slowed in Q3, growing at 1.1% with a broad-based slowdown across our media and creative agencies. CPG and health care led growth, offset by weakness in tech and retail compared to Q2. In Western Continental Europe, strong performance in Spain and some smaller markets offset declines in Germany, as a result of the macro weighing on client spending, and France due to client losses. The Rest of World saw continued growth in the quarter led by India, where like-for-like growth accelerated to 7.3%, with a strong performance in media and new business wins and in Ogilvy. We also saw continued growth in Latin America, Central and Eastern Europe, and the Middle East and Africa. China like-for-like net sales fell 4.2%, a weaker-than-expected result due to the uncertain economic environment, which primarily impacted our integrated creative agencies. Now moving to trends across our key client sectors on Slide 10. We again delivered strong growth in consumer packaged goods, our largest sector, which grew 14.5% in Q3, driven by both our work with Coca-Cola Company and other CPG clients. Across other sectors, telecom, media and entertainment and automotive improved in Q3, delivering year-on-year growth. Health care slowed a little, and retail remained a drag reflecting client losses. Technology and digital services continue to dominate the overall picture, falling 12.7% versus 8.7% year-on-year in Q2 as we saw a small number of U.S. tech clients also cut spend in media. Moving on to guidance for 2023 on Slide 11. We are now expecting like-for-like revenue less pass-through costs to grow by 0.5% to 1% for the full year. This compares to previous guidance of 1.5% to 3% and reflects the continued challenging macro environment and more cautious client spending patterns, which have impacted our Q3 performance more than we anticipated. We expect these trends to persist in Q4. We remain focused on delivering margin progression with full year margins now expected to be between 14.8% to 15% on a constant currency basis. Previous guidance was around 15%. We expect a 1 percentage point headwind to reported net sales from FX over the full year. On profit or mix means we still expect to have an adverse impact of 25 basis points on full year margin based on current FX rates. We continue to expect around GBP 400 million in restructuring and property impairment cost in FY '23. This assumes a small amount of cost associated with the creation of VML, which we expect to be sub GBP 10 million.

Net debt at the end of Q3 was GBP 3.9 billion compared to GBP 3.5 billion at Q3 2022. Consistent with the seasonal nature of our business, we expect net debt to fall to around GBP 2.6 billion by the end of the year, which would leave it broadly flat year-on-year. Within that, we expect trade working capital to be flat and non-trade working capital to be GBP 150 million outflow at the end of the year. We expect our average leverage ratio to land slightly above our target range of 1.5 to 1.75x as a result of lower profit and time and cash flows throughout the year. Guidance in associates tax and CapEx is unchanged. Moving on now to Slide 12 on our VML and GroupM strategic initiatives. Mark will talk more about the strategic rationale for these initiatives and how they build on the simplification and the transformation work our teams have done over the last 5 years. VML be the world's largest creative agency, and the actions of GroupM will make its business simpler for our clients with a stronger go-to-market proposition and a more efficient operating model. Together, these 2 businesses will account for over 60% of WPP's net sales and head count. These initiatives will enable us to unlock scale benefits and optimize our back office across both our creative and media businesses. Scale benefits will come from 3 main areas: a simplified and scaled organization structure as a result of consolidation of units in each market and across regions; optimization of how we utilize resources across our front and middle offices; and finally, from enhanced offshoring operations. We will also optimize our back office and support functions by centralizing and consolidating some of our finance, HR and IT support, further simplification across our smaller markets, including reducing our legal entities, and better leveraging our back-office shared services. We expect to deliver net annualized cost savings of at least GBP 100 million in 2025 as a result of these actions, with around half of this landing in 2024. We will share further details on those savings at our Capital Markets Day in January. So thank you, and I will now hand you back to Mark to update you on our strategic progress. Thank you very much, Joanne. Now, let's discuss our strategic growth. On Slide 14, we address the changing needs of our clients. We are continually enhancing our offerings, including the establishment of VML, the simplification of GroupM, our recent acquisitions in marketing influence, and our ongoing investment in production through Hogarth. All of this is designed to respond to the evolving expectations of our clients. Next, regarding creativity, we are committed to investing in our creative products. I'd like to highlight the achievements of Ogilvy under Devika's leadership, particularly its recent acquisition of the Verizon business in both B2B and B2C segments, and its accolade as Adweek's Global Agency of the Year. Ogilvy has seen robust growth of 3% to 4% year-to-date, largely due to its creative revitalization under their guidance and the many talented individuals they have brought on board alongside existing team members. Moving on to technology and AI, these elements are becoming increasingly vital to our operations and to our clients. Throughout the year, we have shared numerous examples of our work in this area, and we will continue to do so. We plan to return in January with a more detailed overview of our approach and investment strategy regarding AI, demonstrating how we can fundamentally enhance our client collaborations using these innovative tools. Additionally, we are dedicated to simplifying WPP's structure to capitalize on economies of scale. Today's announcements indicate that our five largest companies—GroupM, VML, Ogilvy, AKQA, and Hogarth—now account for roughly 82% of the company. This marks significant progress towards streamlining our operations, allowing us to reap the benefits of scale and support our transformation initiative across these businesses. Lastly, on the people front, we continue to attract top talent, particularly at BCW, where we are bringing in new professionals to strengthen our public relations and public affairs division. I expect to see the impact of these changes on our business in the coming months.

Yes. It's Tom here from Citi. I was going to start with the VML and GroupM sort of reorgs because obviously, in the short term, we're obviously very focused on the savings impact. But I'd love to get your sense of how we should think about the impact on revenue and how that's phased. Firstly, in the short term, is there a likely revenue dis-synergy from any potential client conflicts? Or is that less of an issue that might have been in the past? And then secondly, on the basis that this drives a better operating model strength go-to-market, will that revenue benefit be dependent on client account wins? So it's going to be pushed out until 2025? Is that how we should think about the phasing of revenue?

I believe that the world is evolving quickly, and scale has become increasingly important in marketing compared to one year ago or even five. I feel that further action was necessary. In our previous mergers, despite the differences, we hardly saw any client losses. In fact, there were virtually no client losses at VMLY&R or Wunderman and J. Walter Thompson. Instead, these moves helped to stabilize both businesses and allowed us to manage clients more effectively. The situation with VML is unique since it involves bringing two complementary companies together. The feedback from clients has been intriguing, as they are eager to explore new capabilities that arise from the strengths of these businesses. This presents an opportunity for clients to reassess their work. In a climate where clients aim to simplify their relationships, I believe this positions us more favorably. While I won't discuss the specifics of revenue timelines, our intent is to drive revenue growth. Reflecting on our experiences in 2020 and 2021, after consolidating some of our smaller offices and combining businesses in distant locations, we observed those new entities growing quicker with better margins post-merger. I am confident that we will establish a stronger business with VML. From GroupM's standpoint, the focus will gradually shift resources from redundant back-office activities across three agencies to enhancing competitive media products and technology platforms. Though it may take time to realize these changes, I anticipate an improvement in new business performance moving forward. I want to emphasize that we are pursuing this to enhance our competitiveness, which we believe will also bolster revenue growth. Additionally, we are targeting cost savings of at least GBP 100 million, and we will provide further details at the Capital Markets Day. I want to highlight that these are net savings, not gross.

My first question is about account wins and losses. You experienced a few significant losses but also several smaller wins. Considering this, what do you anticipate the impact will be on organic growth next year from the 2023 wins and losses? My second question is related to your comments on the losses at GroupM in the U.S., where you mentioned needing to improve. Could you provide more details on what steps you plan to take to meet investment-class criteria? Lastly, during the Investor Day, will there be midterm financial targets shared, or will the focus be more on a qualitative overview of the business?

I think regarding the current accounts and wins and losses, it seems to be a slight challenge at the moment. However, there is a robust pipeline with a lot of opportunities, and we have achieved success. We are leading the new business rankings in media in Asia and are well-positioned in Europe as well. It's important to note that these new business rankings mostly pertain to media, which constitutes only about 37% of our overall business. From GroupM's standpoint, the changes we are publicly announcing today are already in progress and will begin to address those challenges in North America. During the Investor Day, we will provide a comprehensive presentation covering everything you need to know.

Yes, I appreciate you're going to talk about the plans of actions at the CMD in more detail, but just wondering at this point what you can share with us in terms of your part of the timing of return to growth in the U.S. It feels like based on what you're doing so far, the issue is more about the simplification execution rather than the capabilities. So could you confirm that? And can you confirm you don't need to go out and maybe reinvest more or buy something to improve your capabilities? So that's the first question. The second one is I just wonder, what has sort of really changed in terms of your client conversations since you cut the guide already early August? And what sort of feedback you're getting from clients for the rest of the year? How do they think about 2024? Are you seeing any signals of bottoming out, for instance, in China or in tech? And the third thing is, I noticed you haven't reiterated your midterm target. So maybe to go back to Julien's question, just wondering like do they still hold? Or we should basically just wait for the CMD and look for an update?

Okay. Can you just clarify the last question, Lisa? An update on what?

I noticed that you haven't restated your midterm targets of 3% to 4% net sales growth and a margin of 15.5% to 16% in today's press release. I'm curious if those targets still stand, or should we just wait for the update at the upcoming CMD?

Yes. I think that they stand as they are today, and we'll update the midterm targets at the CMD. In terms of new business, I think that our capabilities are strong. I think it's really a question of execution, and we need to improve our execution on the day. In terms of client conversations, I'd say that it's pretty clear that spending by tech companies has been significantly impacted. I'm sure you saw Meta's results last night. They announced a 24% reduction in their marketing spend. And we've seen that across a number of technology clients. So that has undoubtedly impacted us. And we saw the impact of technology spend, down 9% in Q3, down 13% in Q2, and some of that spread from the U.S. more internationally. So that has been probably the major impact that has weighed on us. I don't think that the macro environment has improved. I would describe client conversations as, in the main, cautious. At the same time, as we discussed in the past, there are a number of clients, particularly in the consumer packaged goods area, that continue to invest. Our CPG spend was up 15%. Seven of our 10 client categories increased their spending in the year. Telco is up 8%, in part on the back of the Verizon win. Travel was up 5%. And I think that's sort of how we see it. And maybe, trying to sort of bring you around and just to answer your questions and everyone else's on the guidance more precisely, so you can do that.

Yes. Lisa, just in terms of the guidance, so we've reduced, as we said, to 0.5% to 1% for the full year. And now what does that mean for Q4? So at the bottom end, minus 1% like-for-like and at the top end, plus 0.5%. So as Mark said, we've been cautious on the bottom end. So our performance in Q3 was below where we were expecting too. We've reflected some of that into the guidance, so a continuation of trends that we've seen in Q3 tied into Q4. And we've got tougher comps in Q4, so that reflects that. And at the top end, it's really an improved performance, and that's also back off an acceleration in GroupM, which we expect to see quarter-on-quarter. And we continue to see, within that top end, some of the trends persist in Q4. So that's really how we're thinking about the balance of the year. And then you asked about 2024. Of course, we'll give further guidance on that early in the new year. But in terms of how we're thinking about it at the moment, we have seen a tougher second half than we've seen in the first half. And therefore, the macro and tech coming back will be important considerations. Obviously, in Q2 next year, we'll start to lap that sharp fall-off in tech that we've seen this year. And Mark talked about some of the net client wins and losses. And we were encouraged by new business in Q3. So as I said, we'll give a further update in 2024 early in the new year.

I mean, I'd add to that, Lisa. Tech is definitely the worry of us this year, from worrying us increasing as we go through the year. I would expect it to reverse next year. And the question is going to be at what point in the year it reverses. But I do think that these are significant companies that are making major investments. They have a lot of new product launches ahead of them, and they are major advertisers. They need to communicate to customers, both business and personal and indeed to regulators and issue makers around the world. So I think that they will come back to investing in marketing. What's happening today is really a combination of sort of an efficiency pause, it's an efficiency play by some of them, and then a pause around new product launch and new product development by others.

So I've got a few questions, please. So first of all, I know this is a Q3 call, and it's probably premature to talk about '24. But do you think that Q3 and the Q4 guidance that you gave, is that a good way to think about the start of 2024 as well? Secondly, could you comment on how much like-for-like growth you need in '24 in order to grow your margins? And then so leverage is ticking up, and it's now guided to be at the upper end or above the range. Does that change your capital allocation strategy and how you think about spending on M&A, dividends, et cetera?

Let me clarify the leverage situation. As you know, our average leverage across the year is expected to be slightly above the upper end of our target range. This is primarily due to the timing of cash flows and lower profits than we initially expected. In terms of net debt, we anticipate that it will remain largely stable, possibly increasing slightly compared to last year. Looking ahead, I expect leverage to fall back within the target range in 2024. Regarding our capital allocation, I prefer to see our leverage closer to the lower end of the range, and we are prioritizing our cash conversion to support this. We are maintaining our dividend policy with a 40% payout, without any changes. Additionally, we have adopted a disciplined approach to M&A, planning to invest between GBP 300 million and GBP 400 million annually in high-growth businesses that enhance our capabilities, creating revenue synergies as we integrate them into our agencies. A good example of this is the influencer marketing businesses we have acquired recently. We will continue to target smaller opportunities in the coming year. As for your question on margin growth in 2024, that's not how I approach it. We'll provide more detailed guidance for 2024 early next year. However, we see VML and GroupM as opportunities to accelerate growth, and we'll elaborate on this at the Capital Markets Day, along with details on achieving operational efficiencies across our business. These efficiencies will come from optimizing our regional structures and improving back-office functions in finance, HR, and IT. We expect to see benefits from these improvements in 2024. We are also exploring other initiatives to enhance our margins, aiming for top-line acceleration while increasing bottom-line growth. As Mark mentioned, we'll provide further insights during the upcoming CMD.

So thanks very much. Thanks, everybody, for listening. So we look forward to seeing you again in January. We'll come back to you with a comprehensive picture of the opportunities ahead of us, particularly the impact of AI in our industry, what that means for WPP, and how we can help our clients. We'll also address the need for further efficiencies and margin improvement and demonstrate how, in an integrated fashion, we can deliver stronger returns to our shareholders. Thanks, everybody, for listening. And you can follow up with us directly if you've got any questions.