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WPP plc (NYSE:WPP)
Q1 2019 Earnings Call
Aug 09, 2019, 4:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Mark Read

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. opportunities to ask questions. So in terms of sort of a summary at the beginning of the call, we set out a three-year plan on December 11 last year to return WPP to growth in line with its peers.

We're eight months into that three-year plan and I think the first six months of the year, so, so good in a 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 first-half revenues 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 group and have performed extremely well. We continue to see strong growth from our technology clients that make up a substantial part of our portfolio. And in some of the faster-growing economies, there's been 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'd just remind everybody that we last saw growth in the U.S.

in the first quarter of 2016, so some three years ago. So the issues there are really long-standing, and we have started to take or have taken the initiatives that we believe we need in terms of bringing in new leadership, reorganizing or 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 but remains to be 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 seven or eight 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'Oreal business in the U.K.

with 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 clients and some 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. There's a transaction with Bain Capital where WPP will retain 40% interest in Kantar and will continue to accelerate its technological transformation.

You know, the benefit is that it further simplifies WPP's portfolio and has a significant impact on our leverage. And we will hit, once the transaction completes, our leverage target for 2020, one year ahead of the plan we set out in December. 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 it sort of leaves us for the full year with our guidance unchanged at minus one and a half 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 macro challenges that are well known, but I think really at this point, we have greater confidence in making our full-year targets.

We haven't seen any impact of those macro challenges on 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.

Questions & Answers:


Operator

[Operator instructions] The first question comes from the line of Dan Solomon from BMO Capital. Please ask your question.

Dan Solomon -- BMO Capital Markets -- Analyst

Good afternoon everyone overseas, and good morning to everyone on our side of the Atlantic. 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 among the most important advertising verticals, a level usually reserved for FMCGs and auto's mostly?

Mark Read

Well, I think we focused on it because I think we need to be in the business of growing WPP for the next five to 10 years, maybe even 20 years. If you look at consumer technology, Tom ws explaining to me the other day, it's a $4-trillion business. 10 years ago, it was a $400-billion business. In 20 year's time, it will be a $40-trillion business.

So I think we want to position ourselves among the sectors that will continue to grow for the long term in a secular way. So I think on Xaxis, I don't think we'll see that site accelerate further, but I do think that you know, part of our job is to position ourselves with the faster-growing clients and the faster-growing parts of the economy and therefore, our work with those companies is very important to us. And we may well see, when I think three, four, five 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 we already have 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.

Dan Solomon -- BMO Capital Markets -- Analyst

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

Mark Read

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, and it continues to get traction with clients, particularly outside the U.S. who are attracted frankly to its performance.

Dan Solomon -- BMO Capital Markets -- Analyst

OK. Great. Thank you.

Mark Read

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Nathanson from MoffettNathanson. Please ask your question.

Michael Nathanson -- MoffettNathanson -- Analyst

Thanks. Mark, I'm going to go to an opposite place to 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 your business model. So I wonder, what do you see in your conversations -- unit conversations from those CMOs? Is there more price power within the model? I saw P&G had good results. So are you getting any sense or maybe there was a horn in their business prospects, maybe reemphasizing marketing spend? And so anything on that will be helpful. And then to Paul, you've been CFO for a long time.

You guys changed the segment's teams or you're breaking on these segments. What was the rationale for that, and what is [Inaudible] differently based on looking at it maybe presenting the data differently. So those are my questions.

Paul Richardson -- Group Finance Director

You got that? I've got most of it.

Mark Read

I think we might ask you to 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, the way that we expect consumers In; the retail channel the way they still get at 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 the spend in a more critical fashion.

And they're 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 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 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 healthcare, 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 across 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. One client in particular that's looking to invest much more in creativity and put creativity much more at the heart of their model.

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

Paul Richardson -- Group Finance Director

So, Michael, let me -– I mean, a bit of history as I have been around sort of a while. I mean, we started off with these four categories of marketing 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 are two 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 one P&L for the combined business. And we are doing so now across the world for these two 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. And our approach has been to, I suppose, equip the businesses for grow. And this way, I think it's unfortunate that 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 three sectors in our portfolio, so they had a healthcare business, they had a direct business.

So that would be one which are the specialized businesses. They had a PR business in public relations, public affairs, and they had the advertising business in Ogilvy. Obviously now, under 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, our management here at the center are now looking at the businesses and managing the P&L. So really, it was just a function of this restructuring, the acceleration how these businesses came together made a practical necessity to make the change to the sectors.

Michael Nathanson -- MoffettNathanson -- Analyst

OK, thanks Paul. Thanks, Mark.

Operator

Thank you. Our next question comes from the line of Richard Eerie. Please ask your question.

Unknown speaker

Thanks, just to sort of follow up some just additional questions from answering this morning. Just a first one, Paul. Just on -- in terms of as we look at the cash flow for second half, second half of 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 year and seeing if there's any sort of puts and takes because it seems as though the net debt numbers were $4.2 billion, $4.3 billion for the first half.

There obviously could be a sizable the de-gearing effect in the second half. I'm just wondering if I'm missing anything on tool 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 three negatives out and suggest that organic growth would actually be close to flat if we adjusted for those three effects?

Paul Richardson -- Group Finance Director

You want to deal with this next one?

Mark Read

Well, 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 -- you can't go quite that far. And there's probably more of an impact in the U.S.

I don't think if you adjusted in the U.S. you'd get back to flat. So it's sort of a little bit academic in your analysis really.

Unknown speaker

No, it's just I'm just trying to sort of look at obviously what were the drag in the second quarter still. And as we extrapolate that going through, it seems that GTB comes out with 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 those things, we can start to see some basically positive segue to put--

Mark Read

Yes, I think -- 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, look, we always win business, we always lose business, but the drag from really what we ended up within September was about minus one and a half. And that's relatively consistent during the year. I'd say that that remains true. So you can sort 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 it.

Unknown speaker

OK, thanks.

Paul Richardson -- Group Finance Director

Just on --

Unknown speaker

And Paul on the second question?

Paul Richardson -- Group Finance Director

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 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's spent in the first half, some of it's 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 to a degree do fluctuate depending on performance.

The averages we give you -- I'd say, so standing back on net debt, I think there are two 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 in particular quarter four, which leads to a balance sheet debt on a point-to-point basis, which is lower. The average which we give obviously is over by the six, nine or 12-month period.

The year-to-date performance, which is after the six months being down 700 million, is going to sort of let's say slowdown 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 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 of some of the disposals that happened late last year.

So it's pretty much -- it is fairly modelable, but it's never instant failure. So we are looking for an improvement in our gearing ratio at the end of the year based on what we'd see today on the average net debt and the earnings.

Unknown speaker

That's helpful. Thanks, Paul.

Operator

There are no further questions.

Mark Read

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

Paul Richardson -- Group Finance Director

Hopefully --

Mark Read

All right, thank you.

Paul Richardson -- Group Finance Director

All right, thank you.

Duration: 22 minutes

Call participants:

Mark Read

Dan Solomon -- BMO Capital Markets -- Analyst

Michael Nathanson -- MoffettNathanson -- Analyst

Paul Richardson -- Group Finance Director

Unknown speaker

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