WPP plc (WPP) Q3 2019 Earnings Call Transcript

WPP plc (WPP -0.28%)
Q3 2019 Earnings Call
Feb 27, 2020, 4:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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

Mark Read -- Chief Executive Officer

Thank you very much, and good morning to everyone in New York. It's Mark Read here. I'm here with Paul Richardson and John Rogers. And as in previous calls, we'll just make a few introductory remarks, we won't go back with the presentation, and then take people's questions.

I think just to point out that we should take the safe harbor statement from the presentation this morning as part of this call as well. I think in terms of introduction, I think just to reflect on where we are at the end of 2019, looking forward into 2020 in the context of what we've been trying to do -- or looking to do on a three-year plan. And we explained -- we felt that we've made solid foundations. We've built solid foundations, and we're on track to deliver our 2021 targets, both strategically and financially, and if you look at what we've done strategically, we've made significant progress simplifying WPP.

We've got fewer, stronger agency brands. We've gone from effectively nine creative networks to five creative networks. And the mergers, in particular VML and Y&R and Wunderman and JWT, I think, have been successful with VMLY&R returning to growth in the second half of 2019 and Wunderman comes in having a stronger second half, albeit negative than they did in the first half. Secondly, we have been focused on investing and building the team.

And with John joining us as CFO; Jacqui Canney joining us as chief people officer from Walmart and previously Accenture; and then Laurent Ezekiel as chief growth officer; and Stephan Pretorius as our CTO; and Lindsay Pattison our chief client officer, we've got a really solid team at the center to set the direction for WPP overall and work with the leaders of our companies and our country managers and our client leaders to deliver to our clients. We've had much better client retention and a really solid win of new business during 2019. And if you look at where we are going into 2020, the level of reviews was around $4 billion in media billings, not renews at the beginning of 2018. It was around $1 billion of media billings at the beginning of 2019, roughly around half of that as we enter 2020.

We've had a solid set of wins, both creatively with Instagram and Mondelez and through media with AXA, eBay or Hasbro. Importantly, we've simplified WPP and successfully completed the Kantar transaction. We've done that really by meeting our leverage targets one year ahead of the target that we set ourselves. I think we've got a very good price for the 60% of the company.

And we have a very strong strategic partner in Bain Capital. We've got, I think, the right balance between returning money to shareholders and keeping strategic investments in the company with our 40% shareholding to give shareholders upside of what we hope will be a successful turnaround, and we use that reach to reduce our debt to a strong position. And then lastly, strategically, and I think in many ways is less tangible but still important, we set up the new purpose for WPP. And we focus on strengthening the culture through the creation for the first time of the executive committee to run the company, building campuses and investing in people, so I think solid strategic foundations.

And if you look at the business financially, we did deliver on the organic revenue growth and margin guidance we set ourselves in December 2018. As you remember, we set ourselves a target of minus 1.5% to 2%. Including Kantar, we delivered minus 1.2% organic growth and met our margin guidance. So I think on the basis that -- the targets we set at the beginning of the year, we did a good job.

And on the basis of continuing operations -- and Kantar did perform slightly better in 2019. Continuing operations were down 1.6%, but we had a strong sequential improvement from minus 2.5% in H1 to minus 0.7% in H2. And while Q4 was tougher for us, we did highlight that in the third-quarter statement, where we did say that Q4 would be -- likely to be negative, and we've maintained our guidance for the year. So I think the year has fallen much as we expected, and we've set our guidance for 2020 in line with that.

We had a good working capital performance, GBP 300 million of working capital inflow and reduced our net debt at year-end to GBP 1.5 billion from GBP 4 billion at the beginning of the year. So I think we go into 2020 in a much stronger position as a company. We went in 2019 with new leadership, with the bulk of the strategic changes we need to make, with a simpler WPP, with a balance sheet in a much better position and a set of client relationships also in the best position. So I think we are pleased with the progress that we've made, but we're not in any way complacent and we know that we've got work to do.

We're particularly pleased to have John on the call today. He started, I think, a month ago. And I thought maybe it'd be worth for him briefly introducing himself and then -- for those of you who don't know him. He, Paul and I can take your questions.

So John?

John Rogers -- Chief Financial Officer

Thank you, Mark, and good morning, everyone. I just wanted to say I'm very pleased to be joining WPP at this important time in its transformation. Just by way of background, before joining WPP, as Mark said, about four weeks ago, I was actually the CEO of a business called Argos, which is one of the largest digital retailers in the U.K. with sales of around $10 billion.

So I certainly have a background in digital retailing and digital marketing. At the same time, we also integrated the Argos business into a big food retailing business called Sainsbury's, where we delivered about GBP 260 million of synergies just over a two-year basis, 10 months ahead of our plan. So again, got a good background and understanding how to transform businesses and make them more efficient, I think, which will also carry me in good stead as we start to talk about the transformation plan for WPP. So that's a little bit of my background.

Prior to that, I was the CFO of the Sainsbury's business with a broad remit across property, food online, procurement, etc. I think this is actually a very exciting time to be joining WPP. As Mark highlighted, we are one year into a three-year plan. I think there's been great progress in 2019 in terms of simplifying the business, instilling a much more collaborative culture, strengthening the balance sheet, to name a few items, but still there's a lot more to go, another two years to go.

And certainly, Mark and Andrew in the past have highlighted the opportunity to make this business more efficient. In the last four weeks, I've been able to get my way around the business and start to understand where the opportunity exists, particularly across finance function, across HR, across procurement and in the installing of new ERP and IT systems across the businesses to where that opportunity lies. And I certainly see upside potential for the future over the next two to three years. So hopefully, that gives you a little bit of flavor of my background and the role that I can play in taking this business forward.

Mark Read -- Chief Executive Officer

Great. Thanks very much, John. So I think we should turn it over to questions now. So operator, we would like to answer the first question.

Questions & Answers:

Operator

Thank you very much. [Operator instructions] We'll take our first question from Tim Nollen from Macquarie. Please go ahead.

Tim Nollen -- Macquarie Research -- Analyst

Thanks very much. First, Paul, bon voyage. It's been great working with you for many, many years. And John, I look forward to working with you from now on.

My questions are about the growth in Q4 and then the -- I guess, as well as the outlook for 2020. You mentioned the CPG sector in the slides was up 3%, and I guess that's been the biggest sector that's been weighing on your revenues for the last year or two. So I'm just curious if you could inform us on what sectors now are winning on that if CPG is doing better and yet you're looking for a similar or maybe slightly better growth in 2020. And then kind of a similar question.

GroupM, I guess, the media business, I think has been quite strong until recently. Has it sort of seen a downturn in Q4? And is it more challenged from here in 2020? Those are my questions.

Mark Read -- Chief Executive Officer

OK. So I think if we take your first question and start backwards, I think we did have a good performance in consumer packaged goods in 2019, which we highlighted given the interest in that in the past. I don't think that our challenges at WPP have been specifically limited to that sector. I mean, if you look at the sector, the challenge has a little bit been consumer packaged goods, has also been automotive, and actually, in many ways, healthcare has been one of the toughest sort of vertical sectors for us.

If you look at the split between the U.S. and the rest of the world, I mean, there's two ways we could argue. I think one is sort of the U.S. versus rest of the world, and then one is sort of global integrated agencies versus everything else.

If you look at the U.S. versus the rest of the world, the rest of the world was 0.5% in the first half, 1.3% in the second half, so growth and slightly improving in the second half. The U.S. was, I think minus 7.7% going down to minus 4.5% in the second half.

So our growth issues are predominantly in North America. Or the other way of looking at it, if you look at our global integrated agencies, their performance improved from the first half to the second half as well. So I think that there's a number of factors for why we are where we are. Now turning to your question about the fourth quarter.

I think when we released our third-quarter trading update, we did maintain our guidance for the year, and I think we did specifically say we expected Q4 to be negative. And actually, Q4 has come in, to some extent, as we expected, even if we might have hoped that it would come in a little bit stronger. It's sort of come in as we expected, and perhaps we should have been more forceful in sort of reiterating that at the time in retrospect. I think that part of it is the comparatives, which were a bit tougher in Q4 than Q3, and part of it is just the way the business fell throughout the year.

And GroupM did have a very strong end to the year in 2018, slightly somewhat less strong year to the end of 2019, which was what they were expecting, hence, your comment about GroupM. I don't think that as we look at GroupM's business, that it actually had a fantastic year, taking the year overall. And our business is volatile, as we have said to people on a quarter-by-quarter basis, and it's I think quite difficult to extrapolate from one quarter to another exactly the linear direction of travel, which, to some extent, is what we're dealing with. So they haven't seen a slowdown in GroupM.

And I think if you roll forward from Q4 into 2020, we did go through our budgets with all of our companies at the end of 2019. And again, we went through them at the beginning of this year. And our guidance is based on what we saw talking to the people in the companies, albeit before the broader impact of coronavirus, particularly in the last few days. And I think, hopefully, that sort of contextualizes a little bit how we see what happened last year and how we think about it in the future.

Tim Nollen -- Macquarie Research -- Analyst

OK, fair enough. And just to be clear, you are looking toward, I think, what you said, flattish like-for-like growth in 2020, which would be an improvement on '19. Is that right?

Mark Read -- Chief Executive Officer

Yes. I mean, '19 was a minus 1.6%. I mean, we didn't say flattish. I think we said flat, full stop.

Not flattish.

Tim Nollen -- Macquarie Research -- Analyst

All right. Didn't mean to put words in your mouth.

Mark Read -- Chief Executive Officer

Make sure we're all clear. Much better.

Tim Nollen -- Macquarie Research -- Analyst

All good. Thank you.

Mark Read -- Chief Executive Officer

Thank you.

Operator

Our next question for today is from Dan Salmon from BMO Capital. Please go ahead.

Dan Salmon -- BMO Capital Markets -- Analyst

God morning, good afternoon, everyone. Thanks for taking the questions. Mark, at the London meeting, you highlighted how much of the group's business under review has come down over the past 24 months and that very little is under review right now. Also just interested to hear a little bit about review opportunities, too.

Do you see -- what's the sort of level of review activity you see going on right now? Are there any particular verticals you see opportunity to add more clients? And then you also highlighted several changes in management, and I'll add my welcome to John and farewell to Paul in the CFO role, specifically. But just high level, Mark, how do you think about the upper reaches of your org chart? Are they largely in place? And when we think about Jacqui Canney's top priorities, is it more at the management level, or is she increasingly focused on the broader employee base and making sure you have the right people to help your clients with their faster-growing areas of their marketing needs?

Mark Read -- Chief Executive Officer

Yes. Look, I think -- I'd say our pipeline is as strong, if not stronger, than I've seen it in the last 18 months, and there's a significant amount of new business out there at the moment. I think we're, at this point, in a fortunate stage that not as much as in the past is from WPP. There's a substantial amount of new business, both media and creative, but particularly in the media area out there.

I don't think there's any generalization by sector, but there's a large number of sort of media breeds, to some extent, in consumer packaged goods and related areas that are there. From a sectoral perspective, I think we need to do more to invest in our healthcare business. It's something that Jacqui is working on. And I think that, to some extent, we are underweight in financial services as we look at where we are compared to where we should be, so hopefully, there should be some growth opportunities there.

Turning to the question around our org chart and Jacqui's focus. I think Jacqui's focus is really to build a people function across WPP that attracts, retains, develops, manages the best people in our industry. And if we can make WPP the destination or the place where the best talent wants to work, that will enable us to deliver to our clients. Part of that is around the senior leadership.

But I think -- I feel like the senior leadership team is now substantially in place. And I think our focus is around the areas of culture, helping people build careers in WPP. We have a group with amazing geographic reach and variety of opportunity. And I think we can do more to help people work across the company, standardizing a lot of our programs and increasingly looking at sort of shared services, not just in the finance area as we start to put in HRIS systems increasingly in the HR system so that WPP can provide, if you like, an efficient backbone to agencies.

And increasingly, those things go hand-in-hand together with some of the new cloud-based programs. Actually, it's quite an interesting time to be going through that experience. So I think that her experience at Walmart and previously at Accenture, I think, will be invaluable to us in really building a people function that will enable WPP to be a much more modern company and a destination for talent.

Dan Salmon -- BMO Capital Markets -- Analyst

That's good. Thanks very much for the color.

Mark Read -- Chief Executive Officer

Thank you.

Operator

We will now take our next question from Doug Arthur from Huber. Please go ahead.

Doug Arthur -- Huber Research Partners -- Analyst

Yeah. Thanks. This is kind of a circular question. You sort of answered it.

But I guess, Mark, if you go back two or three quarters ago, when you suggested business would be better in the second half versus the first half, which was certainly true, did -- and you're framing everything within a three-year type of turnaround. It's flat in 2020. Is that kind of in line with what you would have thought at the time? Or is that based on how the year ended a little bit of a -- a little softer than you might have anticipated six months ago?

Mark Read -- Chief Executive Officer

No, look, I think we said minus 1.5% to 2% in 2019. And I think someone said, "Would minus 3% and minus 1% equal that," to which I said yes. So I think minus 2.5% and minus 0.7% is a little bit better in both quarters. We didn't give specific guidance at the time for 2020.

So if we're going to get to peer-level organic growth in 2021, at some point, logically during 2020, the line needs to cross the x-axis, and I think that's what we're saying it will do. And I think that's broadly where we said we would be in the year. So I feel that, and as we said, things are on track to get to where we need to get to.

Doug Arthur -- Huber Research Partners -- Analyst

OK, great. And I know you're going to sort of put off questions on the COVID-19 impact to the first-quarter trading update. But certainly, your predecessor talked a lot about your large exposures, relatively speaking, in China. I'm wondering if you can just sort of frame your exposure there in terms of revenues.

Just update us on that.

Mark Read -- Chief Executive Officer

Yes. So I think we're not going to give specific guidance until we're in a position to tell you exactly what we know. What I think we do know is that our business in China itself is around $700 million. The first quarter of the year is, by some distance, the smallest quarter of the year, and if you divide $700 million by 12, roughly $50 million a year is a little bit less than that in the first quarter.

And we didn't see any impact. It started, I'd point out, after the end of January, so we wouldn't see any impact in January. And while we haven't closed our books on February yet, we can't give you specific guidance. February is Chinese New Year, where a lot of people in our business do take time off.

And the people just start coming back to work, albeit from home, quite early after the Chinese New Year. So I think I have, as I said, this morning, been very impressed by both the resilience of our people and their ability to get on with the work. But there's no doubt that it will have an impact on our business, like it would on every global company. And our kind of reluctance to sort of give guidance is less to do with China and more to do with uncertainties, particularly at the moment, on the global impact and what that may mean at the moment.

Doug Arthur -- Huber Research Partners -- Analyst

Great. Very helpful. Thank you.

Operator

[Operator instructions] Sir, there are no further questions that have come through.

Mark Read -- Chief Executive Officer

All right. So thank you for listening. Before I finish, I'd just like to say, firstly, thank you to Paul. He's been a long-standing CFO, has contributed a lot to the company over many years, taking it from its infancy to where it is today, so all of us owe a debt of gratitude to him and thank him for his work.

Welcome, John. And I think just to really reiterate how we feel about 2020, we think we're coming into the year in a much better position than we came into 2019 with a management team in place; with key mergers and structural changes out of the way; with the Kantar transaction completed, which was a significant effort for Andrew and his team in terms of getting that transaction done; with the bulk of the restructuring out of the way; with a few of our clients under review. So I think we feel in a good position as we start the year to deliver on the guidance that we expect for the year, which, I'll remind you, is flat for the year in terms of net sales and margin and which, I think, sets us up to meet our target in 2021. So we're not focused on any individual quarterly performance but really what we need to do to deliver on that target, and that's what we'll do.

So thank you, everyone, for listening and for your questions, and we're here if you need to reach us.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Mark Read -- Chief Executive Officer

John Rogers -- Chief Financial Officer

Tim Nollen -- Macquarie Research -- Analyst

Dan Salmon -- BMO Capital Markets -- Analyst

Doug Arthur -- Huber Research Partners -- Analyst

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