WPP plc (WPP) on Q2 2022 Results - Earnings Call Transcript
Operator: Welcome to the WPP 2022 Interim Results Conference Call and Webcast. Todayâs conference is being recorded. I will now hand over to your host, Mark Read, CEO of WPP, to begin. Mark, please go ahead.
Mark Read: Thank you very much and good morning, everybody. I think weâll take sort of this morningâs presentation as viewed. If you want to look at it, itâs available online. In the interest of efficiency, Iâll make a few opening remarks and then we go on to questions. So I think if I look at -- as we look at the first half, I think we had continued strong demand from our clients. We had good growth in the first half, 8.9%, actually 8.3% in the second quarter, so only slightly lower than first quarter despite somewhat tougher comparatives. And that reflected strong growth across all of our business, the GIAs. The integrated agency is up 8.2% with perhaps a slightly stronger performance in media, actually a very creditable performance in our creative agencies across the board around 6% in Q2. Public relations is up 7.3%. PR has been our standout-performing business through the pandemic, reflecting this importance to clients. And indeed, our Specialist Agency is actually up 10.9%, so better than the average overall. Geographically, good growth across all our major markets, notably the U.S., which in the first half, accelerated WPPâs growth. So I think weâre seeing outperformance relative to the rest of the business in the U.S. Again, a marked turnaround from where we were sort of pre-pandemic. It might be our last quarter of growth before the recent outperformance was Q1 2016 and growth in all markets, except for China, obviously, due to the impacts of lockdowns there. I think that our business is stronger creatively. We were most creative company of the year at Cannes in 2022 and Ogilvy weâre named Network of the Year. In our media business, we were ranked by COMvergence as the worldâs leadingâs media group, and thatâs reflected in a very strong new business performance of $1.6 billion (sic) in the second quarter. Good wins in the likes of Audible, Danone, Audi, Nationwide. Actually, a very solid group of wins across both our creative and our media business, probably a little bit more evenly split creative and media this year than compared to last. We continue to invest in the business, both organically, initiatives like Everymile and Choreograph, our data business, and through M&A. So Bower House Digital, a Salesforce Marketing Cloud company in Australia, and Corebiz is really a significant e-commerce company in Brazil and in simplifying the business to make it easier for our clients and to improve and integrate its service, so the creation of EssenceMediacom and Design Bridge and Partners. The transformation programâs on track, expect to deliver $300 million (sic) of savings this year. And given the position of the balance sheet, so strongest on the balance sheet, we were able to execute GBP 637 million of our GBP 800 million program for share buybacks for the year in the first half as well as raise our guidance. So net-net, that means weâre able to increase our guidance for 2022. Net sales from 5.5% to 6.5% to a revised guidance of 6% to 7%, really taking into account the outperformance in Q2, leaving perhaps our expectations for the balance of the year and change with the headline operating margin up around 50 basis points. So thatâs sort of net summary for the first half, Iâd say, a good start to the year, confident in delivering the balance of the year. At that point, why donât we turn to any questions that you have.
Operator: Our first question goes to Tim Nollen of Macquarie.
Tim Nollen: Iâll ask, I guess, the obvious question, which is your results seem fine. Your guidance seems fine, and yet everyone is worried about whatâs going to happen next year, understandably, I guess. But I guess one number that sticks out to me from your slides is the digital growth. I think if I got this right, was up 12% in the first half versus up 32% a year ago. So what Iâm wondering is -- and weâve heard some comments from a number of ad-related businesses in the U.S. here talking about slowdown, whether already beginning in Q2 or going to happen in H2. So I guess -- my question is, is this a quick cut to some spending in some digital categories that you may be seeing as well? However, your growth looks solid because you have these general budgets. You do a lot of brand advertising, big blue-chip advertisers that are continuing to spend. Is this kind of the breakdown, sort of quick digital cuts versus general marketing plans from global advertisers continuing? Iâm just trying to understand the difference between your comments and outlook versus several other companies.
Mark Read: So I think what we said about this year and what we said about next year is not dissimilar from what our peers have said, which is broadly speaking, a strong demand in the first half of the year, no significant cuts by clients, likely to be a somewhat slower second half than first half and an uncertain 2023. And I think I characterize that as pretty consistent across what our peers are saying. In the first half of the year, WPP delivered 8% net sales growth, Google delivered 16%, Meta delivered 3%. So within that context, I donât think that you can say -- I think youâd say that those companies that are facing a few more headwinds from a net sales perspective, to my mind, is more to do with either competitive dynamics, the nature of the clients that they have than it is a result of a broader macro slowdown. If you look at the comments from Google, I think they said things were pretty stable. Amazon, I think they characterize the market as strong. Comcast characterizes as choppy by which they meant some ups and some downs but no overall slowdown. I think those companies have tended to do worse, where perhaps for obvious reasons, those companies will most like to point to the broader macro slowdown. So I donât know that itâs a broad macro slowdown or results in the competitive dynamics of those companies, but I think itâs more likely to be the latter than the former. Now thatâs not to say that we are facing more uncertain times in 2023. And I think as I said, we and most of our peers are looking for a slowdown. We are looking for things to be somewhat slower in the second half of the year than they are in the first. But I donât think you can say that those companies that have seen cuts in their budgets is down to sort of digital being cut more quickly or not. Some of it may be -- so I think some of the froth has come out of the market, and maybe some of those companies are a little bit more reliant on venture capital or venture capital-backed, app downloads, that type of nature of business, the Google-rs or the -- those types of things, that might be it. But I think itâs more likely to be that than it is a macro slowdown so far.
John Rogers: I think, Tim, just to -- itâs John, just to build on Markâs comments as well that sort of 32% digital growth coming down to 12% digital growth, I think, to your point, also reflects SMEs and also reflects the Chinese market, both of which from a market perspective, we sort of under-index in relative to the size of the market. So that might suggest why our figures have been a little bit more robust than perhaps the broader market.
Operator: And the next question goes to Doug Arthur of Huber Research.
Doug Arthur: We did a call with Brian Wieser a month ago, and he was making that point, and I donât know if you said this, this morning, a little early for me on the earlier call, but that Chinaâs weakness in the first quarter could provide a tailwind in the second half as it reopens and trade picks up. So Iâm wondering if thatâs sort of something youâre expecting. Thatâs question one.
Mark Read: Yes. I donât think itâs something that weâre -- I mean, I think weâre baking a slightly better second half than first half in China, but I donât think our numbers depend on a massive -- itâs a relatively small part of our business. It doesnât depend on the massive change in the Chinese situation really, no.
John Rogers: I mean there was a very stark contrast in performance between Q1 and Q2. So the Mainland China Q1, we were up 11.9. And for Q2, we were down 6.1. So that just showed the marked impact of the lockdowns in the second quarter. I think itâs fair to say weâd expect to see some recovery of that, not probably to the level seen in Q1, but certainly some degree of bounce-back in the market in the second half given that contrasting performance, Q1 to Q2. Itâs about -- as Mark said, itâs about 5% of our overall business. So itâs not insignificant, but itâs not a large percentage.
Doug Arthur: Got it. Okay. And second question, which is probably more difficult to answer. But obviously, given all the work youâve done on first-party data, Choreograph, client demand for solving the cookie issue, now that Chrome is delaying the elimination of third-party cookies again, does that help you, hurt you? Or is it sort of a neutral -- you continue to work with your clients on new solutions regardless of -- on the assumption third-party cookies will be eliminated, itâs not when itâs just if?
Mark Read: No. I think it doesnât change things really for us one way or another. Itâs just another uncertainty, another change in the market that means clients need more help to navigate it. I think we remain of a view that protecting consumer privacy is going to be an increasing part of the political or the data protection landscape that I donât think weâre going to replace the cookie with another form of identity owned either by one ad tech company or something else. I think really, itâs pretty clear that the kind of Wild West of data collection isnât right and the data collection needs to be done with the permission of the consumer. So weâre not looking to replace the cookie with another sort of unified ID system. But that -- and the data-driven marketing requires the integration of all sorts of data, not just sort of PII or purchase behavior. So I think that a more complex data landscape, these clients need more advice. I think there are companies in the automotive, travel, financial services sector that -- where PII will be very important and retail, where Iâve included that -- where PII is very important, and we -- thatâs a lot of the work we do with WBA. And thereâll be other companies in packaged goods and pharma and health care where it will be less relevant. And we need to be able to serve both those sorts of clients. But I think that broadly speaking, the sort of extension of cookies on Chrome, I mean, hasnât really been the major issue. The major issue has really been data collection on the iPhone really. And what -- really, what will happen if Android and the iPhone both coalesced to kind of a much more strict -- because the interesting activity today is happening on web browsers, itâs happening on the mobile device. I think thatâs much, much more significant, and thatâs what people have pointed to as a change. So I would say itâs neither one thing or the other for us in the main.
John Rogers: I think just to add to that. I mean itâs -- the fact that the ecosystem is forever dynamic and changing and delays or no delays, I just think adds to the complexity. And weâve always said the complexity within that ecosystem, generally speaking, is good for us because we can help our clients navigate through that complexity. And the fact that the cookies are maybe around for another year longer gives us more time to help our clients prepare for the new world. And obviously, weâre doing a lot of engagement with the clients at the moment, looking at how they transition from the world of cookies to a different way in which we can target customers going forward.
Doug Arthur: Got it. Okay. And then if I could just squeeze one more in. John, in terms of margin performance, great revenue growth, first half margins down, which is kind of what you guided toward. 50 bps, still the guidance improvement for the year. So what are the key parts of the operating leverage in the second half?
John Rogers: Yes. So I mean, as you said, the guidance that we gave at Q1 and the prelims is very much around 50 bps being down year-on-year for the first half. I guess, in a way, the mix of that was probably a little bit different than what we expected. So a little bit tougher in relation to staff costs, a little bit better, the establishment costs, pretty much bang in line with where we expected on personnel costs and a little bit more recovery through the staff incentives. So the shape for the first half was maybe a little bit different, but when it all summed together, down 50 bps, in line with what we guided. To get to our sort of 40 to 50 bps for the full year requires the second half to be up roughly 120 bps, again, as we guided at the Q1 trading statement. And I think the shape of that, albeit thereâs margin for error, of course, in this, weâd expect on staff costs pre-incentives to see about a 75 sort of bp decline impact on margin in the second half with the establishment costs. Maybe weâll see some upside of about 10 bps in the second half. On IT, theyâre down about 10 bps or so in the second half; personnel cost, probably an impact of about 20 bps down in the second half. Thatâs clearly less than 70 bps in the first half because weâre starting to annualize some of the travel that took place in the second half of last year. Probably an upside of about 10 bps or so in other G&A and then a consistent 200 bps on the staff incentives. When you add all of that together, that gets to roughly 120 bps in the second half, which when you combine that with your 50 bps down in the first half, gives you an overall increase in margin of 40 to 50 bps for the full year. So thatâs sort of the shape of it. I mean the one thing Iâd caveat, of course, is thereâs always lots of moving parts and we adapt and weâre very agile in our response to the market as we navigate our way through. So the shape can change, but weâre pretty reasonably confident we can deliver that full year margin guidance that weâve given.
Operator: Our next question goes from Matthew Walker of Credit Suisse.
Matthew Walker: Iâve got 3 questions, if thatâs okay. First is on the price rises that you talked about to offset inflation. You mentioned in the presentation, I think roughly 1% to 2% price rises -- or 1% to 2% benefit from price rises, I should say. And I think in the past when weâve talked, youâve said youâve been able to get some increases through maybe 1/3 of the client base. Maybe you could update us there because I guess that suggests for the clients who are accepting a price rise, then thatâs roughly a sort of 3% to 6% increase for them. So maybe the percentage of clients whoâve accepted a rise has expanded. So maybe you could talk to that a little bit. The second question was on -- obviously, the market seems a little skeptical or maybe not reacting that well to the uncertainty around 2023. But John, I was just thinking that the percentage of business coming from transformation. Maybe you could update us on that because letâs say, you have a -- I donât know, Iâm making it up now, but maybe a sort of 10% double-digit increase in transformation for your business. That will provide a long way to the 3% growth, which would allow other areas to be flat for â23. So maybe you could sort of talk us through your transformation business and how well that might grow and what percentage that is at the moment. And then finally, on the buyback. Obviously, you look a little cautious in just maintaining at the moment. Can you give us an update on what you expect your average net debt to EBITDA to be for the full year? And any sort of big acquisitions? Well, not to tell us what the acquisitions are, but do you anticipate large acquisition spending in the second half?
John Rogers: Maybe Iâll...
Mark Read: When you tackle the price rise stuff, and we can talk about acquisitions together. I mean on acquisitions, I think weâll see what happens today. Thereâs much more to say than that. We didnât anticipate large ones any more than we anticipate doing them, 1 month doing them. But John, what impacts the price the transformation spending first, if you can?
John Rogers: Sure. So well, maybe if I think at the buyback point, price down and to transformation. Look, on buyback, as we very clearly said, we always plan to do 800 for the year. Weâve done 630 in the first half. We did 170 in the second half. Weâll likely do that 170 in the first -- in Q3, I would imagine. And then we keep our options open. Mark has alluded to the point around M&A. But again, weâll keep our options open at that point. We could do more buybacks. We could keep our powder dry and look for M&A opportunities. In terms of where weâll exit the year from a net debt to EBITDA, I mean, obviously thereâs a lot of moving parts here and not least of which what weâve already referred to with regards to acquisitions. But broadly speaking, if you apply our guidance in relation to CapEx, in relation to M&A, then we ought to get to a position at the year-end with a net debt of about GBP 2.2 billion, GBP 2.3 billion, something of that order; and a net debt-to-EBITDA of maybe 1.3, 1.4x, maybe the bottom end of our 1.5 to 1.75x range. But that would be where weâd expect to get to for the full year, if you apply the guidance that weâve given, accepting the fact, of course, that M&A by its nature can be lumpy. And so we obviously will be partly driven by that. On price rises, yes, weâve seen sort of price increases probably 1.5% to 2% flow-through. And to your point, I think your math is right. When we talk about roughly 1/3 of our clients, therefore, an average 3% to 6%. And I think that probably be about right. I think if you split it roughly 1/3-1/3-1/3. 1/3 weâve managed to negotiate through. 1/3 are sometimes contractual in nature, so we canât effectively push price increases through this space when thereâs probably maybe just under 1/3 to still go after. So we have a concerted effort to push price increases through in the second half, building on what weâve achieved in the first half. We canât see it on all clients because there are clients where itâs largely fixed contractually over a period of years. Until those contracts unwind, we wonât be able to push further price increases through. But there is a little bit more work to do, so we will expect to see some upside on price increases come through in the second half.
Mark Read: I mean on transformation, I was trying to figure out how to answer your question. If not -- yes, itâs not to be candid as sort of on its own sort of definition. We look at -- I think maybe the best way to think about it is, if you look at our experience, commerce and technology business, thatâs largely what people would call transformation. Youâre creating experiences, building e-commerce platforms, implementing technology solutions for our clients. And thatâs about -- we said 39% of our GIAs. Thatâs just over half of our -- theyâre over half of our 45% to 50% of the business. So sort of 40% of 45% to 50% is about 20% of our business. So if you were just to look at that as 20% of the business, I think you wouldnât be far wrong. Now is that recession-proof? I donât think anything in the world is recession-proof, to be blunt. So I think that, yes, it will grow. Yes -- and the reason we said the future is uncertain is because itâs uncertain. And I think that some clients will continue to invest in that area through what happens. And to the extent that these are multiyear programs, some of them are -- we have a multiyear program, some of our clients that will persist, thatâs right. In other cases, clients will put big projects on hold. So I wouldnât -- I think that itâs good that we have a significant business in that area, and I think that does put us in a good position. But I donât -- I wouldnât want to rely on that. I think what Iâd look at is -- I think what weâve said is not that different from our peers. And I think thatâs the way to think about it really.
John Rogers: I mean weâve seen an increase in the GIAs over the last half-on-half of just under 1%. They said 38% at sort of 39%. I mean thatâs encouraging. And obviously, itâs in these higher-growth areas, which protects -- all else being equal, it protects our top line growth. I guess we would probably make the case that potential volatility in the top line driven by the business cycle is likely to probably happen quicker, then weâre going to make the shift across into these higher-growth sectors. But -- so to Markâs point, we canât completely protect ourselves against the business cycle. But every move in that direction, every incremental piece of work weâre doing in these higher-growth areas helps.
Matthew Walker: Maybe just a follow-up one very briefly, which is Unilever has been an example of someone investing in the brand building to support price rises. If you look across your client base by -- in terms of revenue, what percentage of clients do you think are taking that attitude? And what percentage of your clients do you think are sort of more in wait-and-see mode?
Mark Read: Well, I think continuing to invest -- actually, if I look across our major clients and if I were to sort of list them, letâs say, Unilever, Coca-Cola, P&G, LâOréal, Mondelez, in the FMCG category; if I look at those in the technology category, Google, Microsoft; or in pharma, Pfizer, I think theyâre all strong companies with a desire to build their brand and continue to invest. And I think the commentary, if you read through the analysts through the earnings transcripts of the CPG companies, I think to a person, they talk to a desire to continue marketing investment and through. But I donât -- weâre not using that to pinch ourselves that weâre immune from the cycle either. I do think that clients have recognized the danger of coming in and out. And I think that theyâve also seen the benefit for those companies that invested consistently during the pandemic, came out in a much stronger position, so I think thatâs positive as well. And I think thatâs why we characterize 2013 (sic) as uncertain because we actually have to see the breadth and depth of what happens. And I think if itâs a relatively soft landing, going to spend, weâll, Iâd say, continue relatively well. And if itâs a much tougher situation, then perhaps it wonât. But I think we were -- we called it sort of uncertain for a reason because it is uncertain and itâs not to say helpful, but I think it is what other people have said. And weâll come back and tell you what we think will be at that time. But I think the important point is that compared to previous cycles, clients, I think, have a greater appreciation of the value of marketing. I mean I heard the CEO of a company that was well known for ZBB just this week, regretting, saying they had overfocused on cost reduction at the expense of building brands and marketing, and they wanted to correct that. So I think the clients do understand that in that one material difference. I think the second material difference is the point you made about digital transformation, the need to engage in multiyear products, projects, the need to invest in some of these areas like commerce, transformation. I think thatâs very different from where we were in the past. I think the importance of data and ROI. And the ability, letâs be honest, for clients to shift money from just building a brand into driving sales, I mean itâs much easier for clients using, letâs say, retail media to drive sales. And so when times are tough, you might see clients invest more in marketing to drive sales, not just cut it because itâs -- they canât see the ROI. So I think better ROI would need clients to invest more money. I think these are all reasons to believe that we might be more resilient in a future economic cycle than we have been in the previous economic cycle.
John Rogers: I mean if you think about -- first and foremost, just think about sort of short-term agility, I think we were able to demonstrate through COVID, for example, how we can respond very quickly to external market changes. Weâre very good at looking forward. Weâre very good and agile at adapting our cost base in terms of hirings, indexing into freelances, et cetera. So weâve got a good ability to manage the business from a cost perspective, whatever the business cycle may throw at us. And then to Markâs point, from a long-term perspective, I think weâre just very well positioned from where we were 4 or 5 years ago. Business is being restructured. Weâve brought together our digital and creative agencies. Weâve got a much stronger balance sheet. The business is simpler. Weâve got continued structural cost-saving opportunities going forward in terms of our back office. Weâre facing into more and more attractive sectors, and as we highlighted at the beginning, pivoting into the high-growth areas of commerce experience and technology. So I think we feel -- itâs always a certain -- thatâs only uncertain business environment facing into in the next 12 months, but I think weâre very well positioned to face into that.
Operator: And we have a follow-up question from Tim Nollen of Macquarie.
Tim Nollen: One more. Iâm afraid Iâve got a very boring, dry modeling question, if you wouldnât mind helping me with something, John. And I know this came up on the call in London this morning. Itâs about the share of associates result line. I think you were saying that number was on a headline basis, I think, down pretty sharply. I think you were saying this morning on the call that, that was related basically to higher interest expense at Kantar. Could you just maybe elaborate on that? And then what numbers should be used for the remainder of this year and next year for that line in our model?
John Rogers: Yes. Look, I think to answer the question in reverse order, I think for the full year, Iâd work on a number between 40 to 50, which is clearly down year-on-year. But it is, as I said, primarily down to -- as a consequence of the acquisition of numerator by Kantar, obviously bring on more debt, more interest costs. And so has that meant that the overall sort of associate line has come down, but itâs not reflective of an underlying performance of the business. That -- the Kantar business is doing incredibly well. But it does mean mechanically and from a numbers perspective that the associates line will be lower, as I said, somewhere between 40 and 50 for the year-end.
Tim Nollen: Okay. And for next year, weâre back to a more normal level. I think that number was 80 or so last year. Are we back to that number next year?
John Rogers: I mean Iâm very cautious about giving guidance into next year just simply because itâs effectively driven by events. I guess all else being equal, it might normalize around that level. But as weâve evidenced in this year, events changed that. So I think, to be honest, I just want to keep my powder dry there, Tim, and we can give more specific guidance at the right time.
Tim Nollen: All right. Yes. No, I didnât mean to hold you to a â23 guidance. Just to make sure 40 to 50 this year versus 86, I think it was last year. I just want to make sure Iâve got the numbers right.
John Rogers: Yes.
Operator: We currently have no further questions. So Iâll hand the call back over to Mark for any closing remarks.
Mark Read: Very good. So thank you, everybody. Thanks for your questions. Just one final comment to make. As we end the call, thank Peregrine for his contribution in the last 3 years and he bows out over the next 0.5 hour. And thank you all for listening. I think itâs been a good start to the year. And weâve got work to do in the second half as well. So thanks, everybody. Weâll see you on the next call or before.
