Giant global advertising agency WPP plc (WPP 1.66%) has been through a lot over the last few years, and now it has to deal with the likely economic downturn from the world's reaction to the coronavirus pandemic. But the changes it made before the coronavirus hit have set it up well to muddle through this weak patch.
Here's what's been going on and a look at how much stronger WPP is today than it was just one year ago.
Changing from the top down
A few years ago, WPP was led by advertising legend Martin Sorrell. His strong personality and heavy-handed control of the company basically meant he was responsible for most major decisions. One of the key ways in which WPP grew to become one of the largest ad agencies in the world under Sorrell was by acquiring other agencies. And it acquired a lot of other agencies over a relatively short period of time, leaving company operations a bit disjointed and unwieldy and its balance sheet laden with debt. In a contentious move, Sorrell parted ways with the company in late 2018. At the end of that year, financial debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) stood at nearly 0.6 times.
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The board brought in insider Mark Read to replace him. Read's main goals were to streamline the company, mend the balance sheet, and create a more collegial corporate culture. To achieve points one and three, the company has been hiring new leaders and merging businesses to foster greater resource- and idea-sharing. And to achieve point two (and help with point one), WPP sold off non-core agencies and its controlling stake in a data analytics division known as Kantar.
One of the primary uses of the cash from its asset sales was debt reduction. Over the past two years, the British company generated roughly 3.2 billion pounds from asset sales. It trimmed its net debt from 4 billion pounds to 1.5 billion pounds. At the end of 2019, its financial debt-to-EBITDA ratio stood at roughly 0.33 times, largely thanks to the timing of the sizable Kantar sale, which took place in 2019. The rest of the business, meanwhile, had begun to show progress, with solid (though hardly spectacular) results in key markets. It was entering 2020 on a fairly strong note, with plans to buy back stock and continued progress on its broader business goals.
And then COVID-19 happened
To be fair, signs of COVID-19's potential for havoc started to show up in China in late 2019, but the full impact wasn't felt or recognized until 2020. Still, WPP's business held up reasonably well in the first two months of the year, with the company recently noting some key contract wins, decent retention of existing business, and revenue outside of China inching higher. However, COVID-19 didn't stay in China, and as it spread to the rest of the world, WPP chose to make some big changes.
The company's March performance weakened as countries around the world basically started shutting down in an effort to contain the spread of the virus. And with no end in sight for the shutdown, WPP chose to retract its full-year guidance. Advertising is a cyclical business, with customers often pulling back on ad spending when times get tough. Since the world's reaction to COVID-19 is likely to lead to a global recession, that was probably a good call. The last 10 months of the year are going to look a lot different from the first two (before the virus really started to spread).
WPP Financial Debt to Equity (Quarterly) data by YCharts
The debt reduction over the past couple of years, meanwhile, couldn't have been better timed. The decision had nothing to do with COVID-19, of course, but the benefit of coming into this period with less leverage shouldn't be overlooked. WPP, meanwhile, is taking even more dramatic steps to ensure it gets through what is likely to be a difficult period in one piece.
For starters, WPP has shelved its dividend. That's a major hit to income investors who bought the stock because of its high yield. However, that move, along with a plan to stop buying back stock (one of the intended uses of cash from the Kantar sale), will help to free up 1.1 billion pounds of cash. It doesn't have many near-term debt maturities to deal with, but its debt covenants are tied to EBITDA. That figure is going to fall as COVID-19's economic impact spreads, so shoring up liquidity will be important. WPP estimates that it has roughly 4.8 billion pounds of liquidity today, with 3 billion pounds in cash and 1.8 billion available on credit facilities. In addition, the company is working on ways to trim costs to limit its expenses as much as possible.
There's no way to tell what the future will hold until COVID-19's impact becomes more clear. However, WPP has made some swift and dramatic moves to prepare. The next financial update is planned for late April when investors will get a much better picture of the impact the virus is having on WPP. However, WPP is going into this difficult period in relatively strong financial shape.
Don't give up
The story behind WPP over the last couple of years has been one of transition and improvement. COVID-19 has clearly disrupted the progress the giant advertising company had been making, and the dividend cut stings for investors drawn by the stock's once-high yield. COVID-19, however, is a major exogenous shock and will impact companies across the spectrum. At this point, investors that own WPP should probably stick around. It is in much better shape to deal with the coronavirus hit than it would have been a short while ago, and it remains a leader in the ad space -- a fact that's unlikely to change because of COVID-19. When things eventually get back to normal, it should be in good shape to recover along with the rest of the ad industry. In fact, if smaller competitors end up closing their doors, it might even find itself in a better position than it was going into the downturn.