WPP PLC (WPP) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the WPP 2020 Interim Results and Conference Call and Webcast. (Operator Instructions) Today's conference call is being recorded.

At this time, I would like to hand the conference over to WPP's CEO, Mr. Mark Read. Please go ahead, sir.

Thank you very much, and good morning, everyone, and welcome to our U.S. interim results call. As in previous calls, we're assuming that you've had a chance to watch the presentation online. So I'm going to focus this call really on your questions. I'm here in London, in our office, actually, with John Rogers and Peregrine Riviere. So I think, hopefully, you've all had a chance, and you will see online, to read our safe harbor statement at the beginning of the presentation.

And I'll just make a few introductory remarks before I turn it over to questions.

I think if we had to describe our first half, I think we'd say that we had a resilient performance in a challenging environment. Our second quarter, I think, was sort of slightly better, maybe a bit more than slightly better than we had expected. And certainly, I think, significantly better than some of the worst-case scenarios that we had looked at back in March.

So we ended the first half with like-for-like revenue less pass-through costs down 9.5% or 15.1% in the second quarter. And you can really see the impact and spread of COVID-19 and the lockdowns on our business as we go through the months of January and February, down 0.6%. We actually grew outside of China by 0.4%, down 7.9% in March, in some ways, half a month of impact, and then the full impact in the second quarter of 15.1%.

And within the quarter, May was the -- we're not going to give the revenues by month. But May was the toughest month followed by June. And we saw a slight improvement in July to minus 9.2%.

I think the other pattern that we can see in our revenues is the impact of the sectors that we're working. If we take our top 200 clients, it represents around 64% of our business, about half, just over half of them come from consumer package goods, technology pharmaceuticals, they were down only 0.7% in the first half versus 9.5% for the group overall; whereas automotive, luxury and travel, which are much more impacted by the pandemic, were down 11.7%.

So I think you see a natural impact on our business of the lockdown and the decline in economic activity. And I think you can see in those sectors that were more resilient continued -- level of continued work what we do for those clients. And I think that bodes well for the recovery that will no doubt follow. We are confident in the recovery but cautious in the pace of which that will take us over the balance of this year.

I think the second point is that we've worked in a very different way with our clients over the last 6 months, both in terms of increased focus on the types of services they want from technology to e-commerce. Our public relations businesses performed significantly better than the rest of the group, down only 4.5%. And actually, their profitability was higher in the second quarter of this year than the second quarter of last year on a margin basis.

We've had a very, very strong new business track record, won roughly $4 billion in new business billings. It's a market-leading performance, includes wins from Intel, HSBC, Unilever's media business in China and a number of other major companies.

Our people, I think, have performed fantastically in a very challenging environment. We had a lot of commentary on the numbers we gave, the people that are working from home today. Around 3% of our staff are working in the office in the U.K., around 1% of our people in the United States and 0% in India. So while we're largely back to sort of business as normal in China, I think our people have demonstrated an ability to go above and beyond, both working collaboratively with their clients and looking after each other.

From a financial perspective, we made really solid progress on cost savings. We're ahead of the targets. Well, on a full year basis, we expect to be at the upper end of the target that we set. We had very strong liquidity at GBP 4.7 billion at year-end. And our net debt is down significantly year-on-year and from its peak of GBP 5.7 billion in September 2017.

We're able to reinstate the interim dividend, which I think reflects the degree of confidence we have in the business moving forward. And we did take a goodwill impairment of about GBP 2.5 billion, largely related to Y&R Group, a company we acquired in a stock transaction in 2000.

I think the final point to make is that over the last 6 months, we've seen an acceleration of the changes in our industry and in society, more broadly, brought on by COVID. I don't think we see those changes as new things. In the main, they're really an acceleration of trends that were already happening in our business.

And just as WPP set out a new strategy in 2018, we continue to believe that, that is the right strategy, but the change is core for us to accelerate. And indeed, we have started to accelerate. We haven't stood still. Over the last 6 months, we've continued to invest in the business, in people, in creativity, in technology and in continuing to simplify our offer. So we had a productive 6 months in a challenging environment, and we look forward to the future with confidence.

I think that's what I'd like to say by way of opening remarks. I think we'll give you a chance now to ask us questions. So operator, would you like to take the first question?

First question comes from the line of Tim Nollen from Macquarie.

Mark, John, I've been through your slides and the transcript from the 4:00 a.m. our time in New York call this morning.

Yes. I'm sorry about that.

No, no, that's how it is, and I'm glad there are transcripts I can read. So I'll focus on some other things beyond those questions that you took there. One is the Y&R impairment, which after 20 years, is kind of surprising, you're taking such a big hit on it now. Just curious why now? And then you also mentioned VMLY&R was your best performer. I know it was not up, but just kind of to reconcile the big impairment charge there with the performance of VMLY&R now. And then -- yes, so maybe go ahead with that first then I'll follow-up the next.

Yes. Look, I think -- I mean, John should explain the impairment charge. I'd just remind you that Y&R Group, when we acquired it, consisted of Y&R Advertising, Wunderman, Burson-Marsteller, Cohn & Wolfe, Sudler & Hennessey and Landor. So a number of the businesses that were impacted. And the impairment is not really to do with the current -- it's not connected solely to the current performance of VMLY&R. It's more primarily related to the Y&R Group.

John, why don't you talk?

Yes. I mean, the first observation I would make is that the Y&R Group was acquired back in 2000 in a stock-for-stock transaction, as I think Mark highlighted, and it was done so at the peak of the market. The WPP stock was high and so was the stock of Y&R, it's a stock-stock transaction. But obviously, it then comes on to our books of what could be said is a relatively high valuation.

And then your question that is in there, well, why now? Why is it -- obviously owned that for 20 years. And the reality is we wouldn't normally do, of course an impairment test at the half, it's normally done at the year-end. But because of COVID-19 and the clear impact that, that's had on the market, not just for our sector, but for all industrial sectors, frankly, that triggers the impairment test at the half.

And the movement in the goodwill impairment, the GBP 2.5 billion, it's really comprised of 3 components. One of which is a change in the discount rate, which, frankly, accounts for the vast majority of that GBP 2.5 billion; say, GBP 2 billion to GBP 2.1 billion of that GBP 2.5 billion is accounted for as a consequence of a change in the discount rate. About GBP 300 million is down to a lowering in the longer-term terminal growth rate from 3% to 2%; and about GBP 100 million is down to the fact that we expect slightly lower profits in 2020. And obviously, sometimes recover from COVID-19.

The vast majority of it is down to the technical issue of the discount rate. And the reason discount rate has risen so much is just because all the factors in the capital asset pricing model has increased. So cost of equity has gone up because EBITDA for the sector has gone up and because the market seems more volatile. The risk-free rate has gone up because markets overall have seen it riskier. The cost of our debt has gone up because, again, market is riskier. So actually, most of it is down to the increase in discount factor. That explains away the vast majority of that impairment charge.

And so we very much see it as being -- it's a technical -- you would know, a technical noncash accounting adjustment. And in a way, I don't think it even necessarily reflects on our future cash earning potential because those had relatively nominal impact on that GBP 2.5 billion. It's mainly the adjustment to the discount factor that's causing that impairment charge to be made. And as I said, it's triggered by the events of COVID-19, which is why we're taking that impairment now. And we obviously haven't taken it previously because there hasn't been the need.

Fine. Fair enough. Could I get 1 or 2 more in then?

Sure, yes.

You've spoken many, many times on previous earnings calls about your programmatic work in Xaxis. It's possible I missed it, but I didn't see a mention of Xaxis. Anything to speak on there? Any numbers to provide? And any commentary on the sort of ongoing fear that a lot of people have had about in-housing at advertisers by using programmatic services directly, which seems to counter what companies like The Trade Desk have been talking about, where they very much rely on you and relying with the agencies to bring them business. So any commentary on the programmatic business?

I'll talk about in-housing and programmatic, and maybe John can give you the numbers for Xaxis.

Look, I think more broadly on in-housing, it's going both ways. I think you see clients that are in-housing. You see clients that are moving the other way. I think it's hard to perceive a real trend, but there's no doubt that I think there was a desire for clients to work flexible and more agile ways with their agency partners, and there are areas where we can grow.

I make one observation at a time when no one is working in the office, the notion of having to have things in-house, I'd say, is slightly ironic. So I think that we will continue to see more flexible arrangements between agencies and clients until we have many people that work inside our clients.

I think specifically on programmatic media, I don't see a lot of in-housing of programmatic media in large clients. I think there are 2 or 3 examples that are trotted out. But I don't think that many large clients are in-housing their programmatic media, notwithstanding that there have been some, but I don't think there's enough to call it a trend. I think if anything, clients want an integrated approach to their media across all channels, including programmatic. And I think that mitigates against them just taking programmatic media in-house.

John, do you want to give the Xaxis numbers?

Yes. Just on Xaxis trading for the first half, we saw overall sort of sales level down about 21% or so in the half, which is, as it happens, pretty much exactly in line with the reduction we've seen in our overall trading income and actually broadly in line with the reduction that we've seen in media spend.

So my observation would be, we haven't seen any sort of structural change in that business. It's nearly down year-on-year, in line with the overall reductions that we've seen in media spend. So it's much more driven by the broader trend in the market than any structural change in relation to how people use Xaxis' services, for example.

Okay. If I could just squeeze one last one in then, please.

Yes.

You mentioned on the call this morning earlier about e-commerce, and you talked about that. And I think you mentioned, Mark, about 8% of your total sales is coming from e-commerce. I just wonder if that or any of the other activities you're doing that you talked about at your Investor Day back in January about IT integration work and so forth. Is this -- are compensation methods changing? Are you being, perhaps with e-commerce, more tied to actual product sales? Or is there any other sort of performance compensation that's changing versus how things have always been?

I think there are some examples where we have incentive structures linked to sales. I think that we are exploring with a number of clients whether we can move to more directly sales-related compensation trends. And I think we will be very open and interested in doing that, indeed, keen to do that. But we tend to work on a fee basis in these parts of our business, particularly in the e-commerce business.

Our e-commerce business is very broad. It encompasses building websites. We recently replatformed all of [NUK's] Mezzoforte. We actually built the sainsburys.co.uk site, where John has come from many years ago, it's a piece a business we actually took over from Accenture at the time. We build websites for the traditional retailers and e-commerce websites. We build direct-to-consumer propositions for clients. And we do a lot of work supporting clients in marketplaces like Amazon or Alibaba or Lazada, and then we do all the media that drives consumers to those sites.

So I think in the main, our work is commission based. Now clearly, as volumes increase, so does the amount of work that we need to do. But we're not yet moving to sort of more direct compensation basis. So I think it is interesting for us to do it in Xaxis, and I think we are exploring ways in which we can do that for clients.

Yes. I mean, it's one of the things I've been in my first 6 months or so in the business, started to explore with the commercial team because we have a strong faith in our ability to add value for our clients. And therefore, we should be, all else being equal, very willing to adopt commercial models that are based on the value that we add, so a contingency-based model.

I think Mark is obviously absolutely right. It's fair to say today that still, the vast majority of our income comes from fixed fee-type models. But going forward, we could absolutely see an increase in much more value-based billing. And I think that's a positive sign for our business, given that we know we're comfortable and confident in the value that we can deliver to our clients.

Next question comes from the line of Dan Salmon from BMO.

Mark, could you talk a little bit about the level of review activity at the moment? It certainly seems to be picking up. Do you think it's more a reversion to the mean after a little bit of a lull? Do you think COVID is driving it or maybe a little bit of both? And then any color you can add to your risk or your opportunity in currently public reviews? That would be great.

And then perhaps for both Mark and John, could you walk us through both the Board and your own views on reinstating the dividend a little bit more initially at this lower level? And what investors should expect the path for that payment over the mid to long term?

Okay. Well, I'll let John take the dividend question, I think. Let me address the question on reviews. I think if we started the year with, let's say, reviews running at about 100, I'd say by April, May, our pipeline was about 80. And I think gradually, it's crept up to sort of 105. So I think it didn't dip by as much as we expected. And it's going to come back to where it was, if not a little bit higher, at the beginning of the year.

We now track our pipeline and all opportunities more than $1 million really pretty accurately now, centrally. We have good visibility on what we've got. We have got, I'd say, little revenue at risk. We always have, in the nature of our business, the good part of our business, the value chain part of the business, we always have some revenue at risk. The key piece of business we're defending at the moment is WBA, which is up for a 3-year statutory review, and we're putting everything that we have into that.

I saw reported in the press that Sanofi will be reviewing their media arrangements. So we have part of that business, but not all of it. So that's both an opportunity and a risk to us. And really, those are the only major public reviews or, indeed, any major reviews that we're aware of at the moment. But as you know, the great things about our business is, these things do happen.

I think that we have really done a very good job in the first half of the year from a new business perspective. We included in the presentation the best independent review. We have of that from our 3. And I think if you go back 2 years to 2018, with all of the turmoil at the time, we were in a very different situation. I think we lost 7 or 8 pieces of business over a 6-month period, which was a challenge for us going into 2019.

So I think that we're very pleased both with the competitiveness of our offer, with our ability to convert business and with the work that we're doing to retain our clients. And indeed, our customer satisfaction scores have increased significantly over the last 6 months despite all of the disruption in our business caused by the pandemic, which illustrates the good work that our people are doing.

So John, on the dividend?

Dan, let me take you through the Board's thinking on the reinstatement of the dividend, so based on a number of factors. First, a stronger-than-expected performance in the first half of the year. I think we've demonstrated that, particularly through Q2. Number two, better visibility on our future. We're not saying it's perfect visibility, but the visibility of our performance over the next 6 months is clearer now than it certainly was 3 or 4 months ago at the start of the pandemic. I think the third factor is, obviously, the strength of the balance sheet and the overall liquidity.

Liquidity has actually improved since the start of the outbreak. So GBP 4.7 billion today compared to GBP 4.4 billion in March. So we've got plenty of liquidity. And therefore, I think the Board felt, obviously, the key to the dividend is affordable. But we also wanted to signal to the market a confidence in our future going forward.

All of that said, I wouldn't draw any conclusions about what the payment of an interim dividend means for any final dividend for the year. Clearly, we stated that our dividend policy is under review, and it's something that we'll come back to at the end of the financial year when we update the market at our Capital Markets Day. So I wouldn't draw any inferences one way or other in terms of our longer-term distribution strategy. But clearly, it reflects a confidence in our ability to manage the business and the cash flows going forward.

Next question comes from the line of Doug Arthur from Huber Research.

A couple of questions. Is there anything to call out in Greater China in July? I mean, I think you mentioned in the release that you actually had some growth in China, I think, in the second quarter. So I'm just trying to understand the -- is that just sort of a one-off comparison in the month? Or is there anything else going on there?

John?

Yes, I'll pick this one up. I mean, I think it is -- when you look at the numbers, you're right to highlight, it does look slightly unusual. So the second quarter, I think we outturned -- we were down about 3%, just over 3%. And in July, we were down about 18%.

So it looks like the business is going backwards. But there's a couple of qualifiers that are important to note here. First and foremost, there were some one-off adjustments in our revenue line in the second quarter that rather flatter the second quarter outturn at minus 3%. And when you strip out those one-off adjustments, would be more like minus 15% in China.

And then the second point to note is that the minus 18% in July, first and foremost, it's a month, and it's always dangerous to look at things just on a monthly basis because obviously, things can be quite volatile on a monthly basis. But secondly, if you look at how we performed this time last year, we were up against very tough comps. So that -- I think we were about plus 9% in July for China last year. So actually, when you strip out those 2 effects on an underlying basis, we're probably really shifting from minus 15% to about minus 10% in July. And in fact, I would expect, whilst it's difficult forecast, but expect our performance in the second half in China to deliver somewhere between minus 5%, minus 10% in that type of order.

So I feel reasonably okay with our performance across the board. It's just the headline numbers look a little bit off because of those adjustments I've just talked you through.

No, it makes total sense. And obviously, North America is trending a lot better. And I'm wondering, I'm looking at the Slide 24, and Mark, you made reference to this in your remarks about the mix of your business. And it's a really interesting slide in terms of your exposures and what's worse and -- or more centrally impacted right now and not. And I'm wondering, how much of the improvement in North America is a function of mix as opposed to a function of the changes you've made and the integration you've done in your agencies? Or is this sort of a combination of two?

I think on a 2-year basis, it's largely a result of the changes that we have made to the leadership in terms of -- in North America as a leadership, investments in creative talent, integration of the companies. If I look particularly at the performance of VMLY&R, the performance of Geometry, indeed, the performance of GroupM, now those businesses have no doubt been impacted by pandemic since March. But I think in the first 2 months of the year, our performance in North America was close to flat, having been down 9% in the first quarter of last year.

So I think that it is much more a factor of improvements to the business than it is anything to do with specific sectoral trends. Indeed, we have a number of clients in the automotive sector in the U.S. just as we have in packaged goods. So I don't think there's any real difference in terms of client mix that's driven the performance.

And just to build on that, if you looked at the performance of the -- some of the global integrated agencies in North America in the second quarter, VMLY&R was actually positive in the second quarter, which I think is an outstanding performance, frankly, in the context of the market backdrop, but also a reflection, as Mark has said, of I think the success in bringing these businesses together and operating -- offering a much more integrated offer to our clients. I'd say a very, very positive performance there.

Next question comes from the line of Michael Nathanson from MoffettNathanson.

Following on what Doug said, I think he asked a really good question. And the flip side of that is, if you look at the European markets, which have been pretty resilient for you guys over the years, they're definitely weaker than North America. Then you go to your slides about e-commerce accelerating and media mix changing, and I kind of wonder where you guys sit. Is Europe -- from someone who observes the markets like you guys do, is Europe behind the U.S. in the shift to e-commerce and the shift to digital? Is that possibly explaining why they've maybe been hit harder? And what do you see maybe changing on the context of having to maybe accelerate those trends that could benefit you guys?

Yes. Look, I think from an e-commerce perspective, I hate to say this is only in America, but the U.K. is ahead of America in terms of e-commerce. In terms of sophistication, it's sort of South Korea, China, the U.K. and then I'd say the U.S., Germany, France are pretty much at the same level.

I think the trends you see in Europe are much more to do with the severity of the lockdowns. And actually, if you look at the worst quarter or the toughest quarter for our countries, it's really pretty closely related to the severity of a lockdown. In India and Spain, close to 30%; the U.K., slightly less severe, 23%; Germany, less than the U.K.; and the U.S., the U.S., less than that. So I think that, really, impact on a quarterly basis is pretty closely correlates to the severity of lockdown.

Now the other correlation of that is the longevity of the lockdown. And you can -- we can have a debate about the economics of is it better to have a severe lockdown followed a faster recovery or a more extended lockdown, not as severe, but lasts longer.

And just to maybe just to sort of reinforce that point with some data. I mean, if you look at the U.S. market, it's predicted in 2020, about 53% of total media spend will be digital. Let's assume that's a surrogate for the penetration of e-commerce. And the equivalent number in the U.K. is actually 66%. So the U.K. has significantly higher penetration of digital spend in its media. And yet, as Mark just highlighted, its performance was clearly down a lot more than the U.S. And equally, if you look at the German market, the German market is projected to be a 46.7% digital spend. And yet, that was the best-performing market in Europe by far.

And so there is no correlation between digital penetration and market performance. The correlations that Mark has just outlined, which is very much more driven by the effectiveness through which these different economies have coped with lockdown. And so if you look at the European data, it's very clear that Germany was much more effective at dealing with lockdown, for example, than the U.K. because of its more efficient track-and-trace system. And therefore, its performance over the period has been much less marked than the U.K. performance. So it's much more down to the way we've dealt with lockdown than any other factor.

(Operator Instructions) There are no further questions at this time. I would now like to hand the call over to Mark Read for your further closing remarks.

Thanks very much, operator, and thanks very much for everyone for listening. I think it's been a challenging few months for us as indeed it has been for everybody. I hope you see in our numbers the resilience of our business model, our commitment to taking action both to address any issues we face but as well as the opportunities in our business and to ensure that the company is financially resilient. We remain of the view that those companies that are the most financially resilient will come out of the current situation in the strongest position, and that's where we want WPP very much to be.

So thank you, all, for listening, and we hope to see you soon.

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.