WPP PLC (WPP) 2019 Q2 法說會逐字稿

Good day and welcome to the WPP 2019 Interim Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to the WPP CEO, Mark Read. Please go ahead, sir.

Thank you very much and good morning, everyone. I'm here in Sea Containers House in London with Paul Richardson and Andrew Scott and our IR team. I think I'll just start by really just outlining some key points from today's presentation. As you know, we don't go through the whole presentation today, that's available on the webcast. This is really to give people in the U.S. opportunity to ask questions.

So in terms of sort of a summary, at the beginning of the call, we set out a 3-year plan on December 11 last year to return WPP to growth in line with its peers. We're 8 months into that 3-year plan and I think the first 6 months of the year. So good strategic progress against the plan. It remains the case that our business this year was heavily impacted by client losses that took place really from the beginning of last year through until September. And we said when we gave you our guidance for the full year of minus 1.5% to minus 2%, that they'd impact the first half more than the second half, and we continue to see -- believe that's the case. So we saw a first half revenue less pass-through costs of minus 2% in the first half, which is made up of minus 2.8% in the first quarter, minus 1.4% in the second quarter. So a slightly better result in the second quarter than the first and slightly better than we were expecting at the beginning of the year.

We do have encouraging areas of growth in our media businesses. GroupM have performed extremely well. We continue to see strong growth from our technology clients that make up a substantial part of our portfolio. And some of the faster-growing economies witnessed some choppiness in China, but Brazil and India where we have large businesses have done well.

The U.S. is our key area of focus. It's the part of the business most impacted by the client losses we had last year. And I just remind everybody that we last saw growth in the U.S. in the first quarter of 2016, so some 3 years ago. So the issues there are really longstanding, and we have started to take or have taken the initiatives that we believe we need in terms of bringing in new leadership, reorganizing and repositioning the company through the creation of VMLY&R, Wunderman Thompson, BCW. And we're starting to see a positive impact of those mergers. And the business in the U.S. declined by minus 8.8% in the first quarter, minus 5.4% in the second quarter. It remains really a major focus for us.

I think more reassuringly, we've seen much stronger client retention. We haven't really had a significant client loss since around October of last year, so for some sort of 7 or 8 months. I think the new business environment generally has been a little bit subdued, but we have had a steady stream of new business wins and retentions. We retained the L'Oréal business in the U.K. with an expanded scope. We won the eBay business. We have some business in Europe. We won the eBay business globally. And the Ogilvy were awarded the Instagram creative business. So I think we have good progress in terms of client retention, new business wins.

One of the key elements of our strategy has been really to find a financial and strategic partner for Kantar. And Andrew really led that process, which will complete by the end of the year with a transaction with Bain Capital where WPP will retain a 40% interest in Kantar, and we'll continue to accelerate its technological transformation. The benefit is it further simplifies WPP's portfolio and has significant impacts on our leverage. And we will hit, once the transaction completes, our leverage target for 2020 1 year ahead of the plan we set out in December.

The talent acquisition remains a key priority, bringing new people into the group, promoting people from within and developing them. And I think we've made more progress there, and there will continue to be more progress.

So that leaves us for the full year with our guidance unchanged at minus 1.5% to minus 2%. I think that we had some questions about changing that. I think we feel that we should leave it where it is for now. There are sort of macro challenges that are well known. But I think that really at this point, we have greater confidence in making our full year targets. We haven't seen any impact of those macro challenges in our numbers to date, but I'd say we remain rightly cautious.

So a sort of summary of where we are. And I think from there, perhaps we could take questions. Operator?

(Operator Instructions) The first question comes from the line of Dan Salmon from BMO Capital.

Mark, on your comments this morning, you spent a lot of time on the importance of technology and in particular, being a beneficiary of the major platforms' growth. And as an ad spending vertical, I think you noted that it was up 16%. My question is do you think that, that can accelerate further? There's been a lot of focus on the big players in the space, and they're arguably still facing some of their biggest challenges to their consumer brand perceptions, they're launching a lot of new products. And you highlighted some of your biggest players in your top 20 clients. How does that trend look down through the top 200? Are you seeing competitive reactions from mid- to smaller consumer technology companies as well? And is that strength sort of broad-based? And then really what I'm kind of getting to is over the mid- to long term, do you think consumer technology is at a point where it should be considered amongst the most important advertising verticals at a level usually reserved for FMCGs and autos mostly?

Well, I think we focused on it because I think we need to be in the business of growing WPP for the next 5 to 10 years, maybe even 20 years. And if you look at consumer technology, someone was explaining to me the other day, it's a $4 trillion business. 10 years ago, it was a $400 billion business. In 20 years' time, it will be a $40 trillion business. So I think we want to position ourselves amongst the sectors that will continue to grow for the long term in a secular way. So I think on that, I don't think we'll see that necessarily accelerate further, but I do think that part of our job is to position ourselves with the faster-growing clients in the faster-growing parts of the economy. And therefore, work with those companies is very important to us. And we may well see -- when, I think, 3 or 4 or 5 of the world's largest companies are technology companies, it wouldn't surprise you that they may also be the world's largest advertisers. Google is WPP's third largest client today. So it really has surpassed a number of the FMCG clients. So I think that we are seeing a shift in economic power and shift in spending, and we want to be on the right side of that trend.

Great. Maybe just one quick follow-up. I also saw in your remarks, you mentioned Zaxus was up 16%. Can you just elaborate a little bit on the strength there?

So I think that broadly speaking, it's strength really outside of the U.S. more than inside the U.S. But I think even in the U.S., the business has done well. But we continue to deploy it around the world. It continues to get traction with clients, particularly outside the U.S. who are attracted, frankly, to its performance.

Our next question comes from the line of Michael Nathanson from MoffettNathanson.

Mark, I'm going to go to the opposite place of where Dan went. I want to ask you about FMCGs. And if you think about it, that was probably the beginning of a major change for you. There's a lot of pressure on their business model. So I wonder, what are you seeing in your conversations -- from your conversations from those CMOs? Is there more price power between the model? I saw P&G had good results. So are you getting any sense of maybe there's a [scrying] in their business prospects maybe reemphasizing marketing spending? So anything on that would be helpful.

And then to Paul, you've been CFO for a long time. You guys changed the segmenting or the breakdown of the segments. What was the rationale for that? And what is that -- and your margins come even differently based on looking at it, maybe presenting the data differently. So those are my questions.

I've got most of it.

I think we might have to have you repeat Paul's question. But let me tackle the FMCG point first. I think that as you say, there has been -- FMCG companies do face disruption in the media channels in the way they reach their consumers, in the retail channel the way they still get their consumers and through sort of newer kind of upstart brands. So I think as a sector, quite frankly, like most of the economy, they have been disrupted. And obviously, they've reacted, I think, in part by examining their spend in a more critical fashion and in part by shifting their spend into digital channels quite aggressively. What we have to do is move our business to serve them in those new channels. And we've had, I'd say, some success in that, and we expect to have more success in the future.

I think we see probably a more mixed pattern across the FMCG companies. And I think that there's more of them coming out -- let's say, coming out of the other side of some of those shifts. But I think that those shifts sort of have persisted. And we've seen a fair amount in actually consumer health care as well as FMCG. So if we look at -- we made a comment in the statement about a small number of our larger clients have had an impact on the revenue. I'd say that's, of course, both FMCG and consumer health and to some extent, pharma clients where they're really restructuring their spend more aggressively than others. Now there are some clients coming out the other side, and one client in particular looking to invest much more in creativity and put creativity that much heart -- much more at the heart of their model.

So I think there's some moves to in-house some services. I think in the long run, the trend in business is not to in-house but to out-house. And we have to respond more effectively to that and help understand what it is that clients need and provide those services at WPP, which I believe that we can do. So I think it's -- the headline would be a mixed performance but maybe some more coming out the other side of the shift they want to do. Paul?

So Michael, let me -- I mean I've got a bit of history as I have been around sort of a while. I mean we started off with these 4 categories of marketing spend expenditure, and they held pretty well really until, I suppose, 2000 when we started to see digital emerge as its own independent category, albeit fairly modestly. And what's really happened that's made us change this approach, it's 2 things. One, there have been some genuine business combinations of what one would call traditional advertising agencies and traditional digital businesses such as VMLY&R and such as Wunderman Thompson. And we have operationally merged the business. We have co-located the offices. We've merged the management teams. And actually, we are reporting, say, in London just 1 P&L for the combined business. And we are doing so now across the world for these 2 businesses.

So what was becoming clear is if we were to stick with the old sectors, there's going to be too much approximation of the performance of one in the other sector. So -- and our approach has been to, I suppose, equip the businesses to grow. And this way I think is -- it's unfortunately we've ended up with one quite significant sector, the global integrated agencies, but it is how the businesses have evolved. So Ogilvy that traditionally was spread across 3 sectors in our portfolio, so they had a health care business, they had a direct business at OgilvyOne, which is the specialized businesses. They have a PR business in public relations, public affairs. And they have the advertising business in Ogilvy. Obviously now on the one Ogilvy approach, it is impossible actually for us to estimate the individual performances of those disciplines within the Ogilvy portfolio. So it's only right and proper that we put it into one of the sectors. And really, with the acceleration of these changes such as the VMLY&R and Wunderman Thompson, it really was time to make that change plus it's how management here at the center are now looking at the businesses and managing the P&L. So it really was just a function of this restructuring, the acceleration as these businesses came together made a practical necessity to make the change to the sectors.

Our next question comes from the line of Richard Eary.

Just to sort of follow-up some just additional questions from answering this morning. Just the first one, Paul, just in terms of as we look at the cash flow for second half. Second half last year was obviously impacted by the restructuring costs that came through. I'm just trying to think about where we're looking at cash flow and, therefore, net debt numbers for the full year and seeing if there's any sort of puts and takes because it seems as though the net debt numbers were GBP 4.2 billion, GBP 4.3 billion for the first half. There obviously could be a sizable de-gearing effect in the second half. I'm just wondering if I'm missing anything untoward on that. That's the sort of first question.

And then just the second question, just to pick apart sort of some of the negatives that were in the first, second quarter results such as China, GTB and also maybe the drag from P&G. Would I be right if I was to take those 3 negatives out and suggest that organic growth would actually be close to flat if we adjusted for those 3 effects?

You want to deal with the second one?

I don't really want to go into kind of individual client amounts. I don't really think it's the right thing to do. So -- but I'd say directionally, you could be comped as quite that far. And there's probably more of an impact in the U.S. I don't think if we adjusted that in the U.S., we'd get back to flat. So it's sort of a little bit academic in your analysis for me.

No. It's just I'm just trying to sort of look at obviously what were the drags in the second quarter still. And as we extrapolate that going through, it seemed that GTB comes out in the numbers. As we go into next year, the drag from P&G may get less worse. And your comments about China hopefully getting an improvement in the second half with July up, as we start to cycle out the space, we can start to see some basically positive segue to...

No. I think -- well, I mean one way to look about it is I think we said back in December, the drag from client losses would be about minus 1.5% that we saw as being kind of -- I mean we always win business, we always lose business. But the drag from really what we ended up with in September was about minus 1.5%, and that's relatively consistent during the year. I'd say that, that remains true. So you can sort of do with that -- you can sort of do the math with that. We'll have to see where we end up next year in terms of underlying spend, but I think that's probably one way of thinking about that.

Okay. Just on the second question?

Yes. Just on cash, I mean you're right. I mean there is some cash to be spent in 2019 from the restructuring. We mentioned on the day -- or Andrew mentioned on the day that the total commitment is around GBP 300 million of spend, and I think we identified last year that we had actually only spent GBP 50 million last year. We have budgeted a certain amount in our cash flow projections of around a further GBP 125 million this year, some of it spent in the first half, some of it spent in the second half. That really does make no material impact to the average net debt number. It's in our forecast. It's one of many variables along with the CapEx and other commitments we have, which at a certain degree do fluctuate depending on performance.

The averages we give you -- as I said, standing back on net debt, I think it's 2 trends. One, we are a seasonal business, and our strongest quarter is the fourth quarter. And we do have strong cash generation in the second half and particularly quarter 4, which leads to a balance sheet debt on a 0.1 basis, which is lower. The average which we give you obviously is over by the 6-, 9- or 12-month period. The year-to-date performance, which is after the 6 months being down GBP 700 million is going to sort of, let's say, slow down because the vast bulk of the disposals have happened in the last 12 months. So the average is going to continue to decline but not at the same rate as it has declined in the first half of this year. So I do have a number in front of me that sort of shows an average net debt for the full year. It is lower than it is at the half year point, which is a combination of both the seasonal factors and the full year impact just from the disposals that happened late last year. So it's pretty much -- it is fairly modelable, but it's never instantaneous. So we are looking for improvements in our gearing ratio at the end of the year based on what we see today on the average net debt and the earnings.

There are no further questions.

Okay. Well, thank you very much, everybody, for listening, and we'll speak to you all again in a couple of months, not before. All right. Thank you.

Thank you.

This will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect. Have a nice day.