WPP plc

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the WPP 2020 Interim Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session, at which time if you wish to ask a question, please press star 1 on your telephone keypad. Today's conference is being recorded. At this time, I would like to hand the conference over to WPP CEO, Mr. Mark Reid. Please go ahead, sir.

Thank you very much, operator. And good morning to everyone and welcome to WPP's interim results call for 2020. I'm here in sea containers with John Rogers, our CFO and Paragon Revere heads up our investor relations committee, which takes you through the numbers. On page two, I think we should all just take the time to read our safe harbor statement and then move on to page three to our agenda today. So I'll briefly take you through the highlights of our results in the first half and then John will take you through the financial performance of the company before we come back to an update on the business and how we see it and then some time for people to ask questions. On page four, I think if we had to describe the first half, I think we would say that we had a resilient performance in what's no doubt been a challenging environment. It's clear that COVID-19 has had a significant impact on WPP as it has had on business and on society as a whole. And we shouldn't forget the impact on people's lives and people who've lost their life as a result. But turning to our business, in the first half, we saw like-for-like revenue this past week cost down 9.5% in the first half. I'd say that May was the toughest month, and we really started the year positively with growth outside of greater China of 0.4% for overall results and minus 0.6%. In March, we started to see the impact of COVID-19, really kind of half a month impact, minus 7.9%. And then a decline of 15.1% in the second quarter. And we'll come on to that, but I think I'd say it's significantly better than perhaps we had anticipated. And then a gradual recovery of minus 9.2% in July. So you can really see the pattern to our results. We'll come on to the full year expectations later. That reflects, I'd say, a resilient performance, particularly from our top clients. top 200 clients. And if we go into that in some detail, you can see in just over half our business, 56% of our business in consumer packaged goods, technology, and pharma, actually the decline was only 0.7% in the first half and only 4.4% in the second quarter relative to 15.1% for the business overall. But the automotive luxury travel sector much more impacted, minus 11.7%. for the first half and 18.7% in the second quarter. So I think that demonstrates the resilience and breadth of our business. And we see that as well in the services that we offer. We have had, I'd say, a very different working relationship with our clients over the last six months. And we've seen parts of our business in marketing technology and e-commerce in greater demand, public relations much less impacted. And I'm particularly pleased with the new business performance of the company overall, market-leading new business performance with wins from Intel, HSBC, and Unilever, where we won the media business in China. I think the way that our people have responded has been fantastic. And that goes beyond building a strengthening relationship with the clients, looking after their team, working from home. I think collectively, people have really come together over the last six months. Financially, and John will go into this in more detail, we've had good progress on cost savings, and I think we've got the right balance between temporary and permanent cost savings that we set out at the beginning of the pandemic to really mitigate as much as we could the permanent headcount reductions that we need to take, although regrettably there have been some. With a strong liquidity position, our net debt is down significantly year on year, and from our peak, of close to £5.7 billion around three years ago. We're pleased that the board was able to recommend that we could reinstate our dividend, and we have had a goodwill impairment that we'll talk about of £2.5 billion. I think lastly, and perhaps most importantly, COVID-19 has accelerated trends, I think, that were existing in our industry before, but have really been accelerated, and that calls for, and we are accelerating our strategy. We certainly haven't, so still over the last six months, we'll talk to you about the actions we've taken, in terms of investing in brand, investing in talent, and investing in training over the last six months. So I think, you know, like many companies and people, we probably prefer not to have been in the situation that we've been in for the last six months, but I'd say that we've performed resiliently and done well. So I turn it over to John, who will take you through the financial performance.

So thank you, Mark. Good morning to everyone. I'm going to take you through the first half results for 2020. So turning to slide six and starting with the headline income statement. So revenue let's pass through costs down 10.2% on a reported basis, down 9.5% on a light for light basis, obviously reflecting the impact of COVID-19, particularly in the second quarter. Disposals account for 0.8% reduction in revenue, less pass-through costs, and with currency being 0.1% favourable, all of which has delivered an operating profit of £382 million, down 38.1% year-on-year, with associate income down £15 million as the benefit of the Kantar investment is offset by COVID-19-related downsides. That delivered a PBIT for the year, of £382 million, down 39.6%. With net finance costs down year-on-year to £106 million, obviously reflecting an improvement in our net debt position that Mark's just referred to, that's delivered a profit before tax of £276 million, and with tax at 23.1%, broadly in line with the same figure last year, delivering a profit after tax of £212 million. Deducting non-controlling intests delivers profit to shareholders of 191 million and a diluted earnings per share figure of 15.4p. Worth highlighting that our operating margin for the first half was 8.2%, down 0.3 percentage points year on year, but better than the market was expecting. So moving on now to the reconciliation of our headline results. operating profit to our reported operating profit. So you see here the headline operating profit of $382 million I've just made reference to, obviously taking account of the goodwill impairment charge of $2.5 billion that I'll come on to in a second in more detail, amortization impairment of intangibles, and also the investment write-down of associates, which is largely imaginary at $210 million, $220 million in total. And then reflecting restructuring and transformation costs, which relate to the ongoing costs that we talked about in our restructuring plan first outlined in December 2018 of 18 million this year compared to 34 million last year. And then also, very specifically, COVID-19 restructuring costs relating to severance actions that Mark just referred to, taken in the second quarter as a response to the pandemic. And then reflecting again on disposals, largely in relation to our sports agency two circles, all of which is delivered when added together, a reported operating loss just over 2.4 billion. So now coming on to the impairment charge in a little bit more detail. So impairments of 2.74 billion, which includes the Goodwill impairment and also the impairment in relation to our associates. You'll see the breakdown here. by company. And you'll notice that most of the impairments largely relate to an acquisition of the Y&R Group that was made back in 2000, so 20 years ago, when the business was acquired in a stock-for-stock transaction on the basis of 23 times PBIT multiple at the peak of the dot-com bubble, so when valuations were very high. The impairments themselves are actually driven by a combination of higher discount rates used to value the cash flows, a lower profit base and recovery from 2020 through to 2021, and then lower industry terminal growth rates. Just as an indication of the sensitivities to these assumption changes, around 2 to 2.1 billion of the 2.5 billion goodwill impairment relates to changes in the discount rate assumptions. About 300 million or so relates to a change in the terminal growth rate for the industry, and about 100 million or so relates to a lower profit base in 2020 and then recovery through 2021. So by far, the bulk of the impairment is related to a change in the discount rate. So just moving on now to a breakdown of our performance by sector. First, the global integrated agencies. A reported revenue-less pass-throughs cost down 10.3%, down 9.5% on a light-for-light basis, so exactly in line with the overall group, delivering an operating profit margin of 7.4%. VML Y&R was by far the best performer, really encouraging performance, close to flat light-for-light in the first half, reflecting improving business momentum since the merger of those businesses. And our second best-performing A global integrated agency was Wunderman Thompson, again benefited from the creation of an integrated agency in the last couple of years. And Hogarth Production, also in strong demand. Group M, as a whole, underperformed the overall GIAs due to the fact that its performance is more closely correlated to client media stem, which has clearly been significantly impacted as a result of COVID-19. If you look at the graph, you'll see the trajectory by quarter, the significant step down in Q2 to minus 15.7%. But encouragingly, performance in July has bounced back and we've delivered an improvement to minus 9.2%. So we've got some positive momentum, some recovery as we go into the second half. Coming on now to our public relations businesses. These have been our strongest performing sector. So reported revenue-less pass-through costs down 3.6% and on a like-for-like basis down 4.5%, delivering a very strong operating profit margin of 16.9%, which is actually up 1.5 percentage points year-on-year. So very encouraging performance from our public relations businesses. We've seen a lot of good demand from clients. who are particularly looking at how they want to engage with their strategic stakeholders, how they communicate to those stakeholders. We've seen very encouraging performance from our specialist PR companies, where we've actually seen light-for-light growth, half-on-half, and H&K has been the strongest performing of our major agencies. We've also seen in the first half the formation of Finsbury Glover Herring to create a global leader in strategic communications and significantly simplified our overall portfolios. And again, if you look at the trends on the graph, you've seen the dip down in Q2 of minus 7.5%, but again, in July, recovery back to minus 2.7%, so encouraging momentum, again, as we go into the second half. Coming on now, finally, to our specialist agency, where it's fair to say we've seen a bit more of a mixed performance. Overall revenue last past week cost down 13.3% on a reported basis. are down 11.8% like for like, and overall operating margin at 7%. AKQA and geometry have been the relative outperformers, given their focus on experience and commerce, where we've seen good growth. GTB is broadly in line, despite the ongoing drag from the assignment losses that we've communicated historically. And it's really been our brand consulting businesses that have suffered from short-term budget cuts through this period. And, of course, our events businesses and our specialist airline agencies have been heavily impacted in the second quarter, resulting in a decline in overall net sales by 16.3% that you see on the chart. But, again, we have seen some relative improvement coming into July where we saw net sales down 12.5%. So now moving on to our overall geographic performance. Starting off with our top five markets, looking at the USA and North America, we've seen actually a relatively robust performance in the USA. So the first quarter being down minus 1.9%, the second quarter down minus 9.6%, but some recovery coming through in July at minus 6.1%. And it's been a much shallower dip that we've seen in the US compared to many other of our global markets. Coming on to the UK, which is perhaps more characteristic of what we've seen through most of our geographies through COVID-19, we saw a decline in Q1 of minus 4.2, a big step down in Q2 of minus 23.3, reflecting the impact of lockdown in the UK economy. But then we're starting to see recovery as things start to ease, conditions start to ease, and we saw minus 10.5% in July. Germany, which was perhaps the strongest performer of our European countries, again, relatively robust against the impact of COVID-19, minus 4.3 in the first quarter, minus 11.6 in the second quarter, and then some recovery into July at minus 7.2. Coming on now to greater China, slightly unusual figures here. So obviously China itself was impacted by the impact of COVID-19 earlier than than any of our other global markets, and you see that reflected in the Q1 numbers that were down minus 21.3. We did see some recovery come through in Q2, which saw net sales down minus 3.1%, but they're somewhat flattered, to be fair, by one-off revenue adjustments in Q2, and then also coming up against a very tough comparator in July. where we saw net sales decline by 18.6%, but largely as a result of quite a strong comparison for the same time last year. When you actually look at the underlying trend in China, it's much more positive than is necessarily portrayed by these headline numbers. And then lastly, coming on to India, where the pattern in India is much more characteristic of what we've seen across many of our other markets, with some recovery coming through in July. Coming on now to our Major other markets, France, Italy, Spain, and Brazil. And again, we've seen quite typical patterns across these respective geographies. Interestingly, actually looking at Italy, which, as you know, was one of the first European countries impacted by COVID-19. We saw the impact come through quite heavily in Q2, minus 29.9. We are actually now seeing positive growth in Italy in July, which is a very encouraging sign. It's clearly one month, and it's We can't be too complacent, but it's good to see positive growth coming through. And at the same time, lest we forget, if you look at Spain, again, we've seen the impact coming through in Q2, minus 17.2%. but actually not so strong a recovery coming through in July, minus 14.3, and perhaps as a consequence of local lockdowns in Spain. So we need to be sensibly cautious about our outlook for the second half. Clearly there's some encouraging signs with some momentum coming through, but equally the impact of local lockdowns clearly could have further effects as we travel through the second half, and hence we need to be sensible, sensibly cautious about the outlook for the second half. So coming on now to our overall costs and our change in our headline operating margin. So as you know, we reported net sales down by $531 million or down 10.2% on a reported basis. But as Mark's already highlighted, we've taken significant cost actions, particularly in the second quarter, in order to mitigate that downside on the net sales. So staff costs are down just under 5% with most of the actions reported. coming through in the second quarter. Establishment costs down just over 5%, albeit we've had some investment in RIT reflecting an ongoing investment, actually, in RIT platforms going forward, which will deliver longer-term savings. The biggest saving we've seen, though, has been in our personal cost, which obviously reflects reduced travel and hotel expenses, and other operating expenses down 12.2%. So on average, for the first half, our operating expenses are down 6.5% delivering a total saving of 296 million which is actually 56% of our net sales decline we've been able to offset by operating cost savings to deliver the operating profit as reported here and the margin of 8.2% as we've already discussed. And moving on to the next slide, it's important to look at the run rate here on our operating cost savings because, of course, most of our cost actions were only taken in the second quarter, and we only got up to our full run rate coming through in May and June. So you'll see here that actually the first quarter, relatively minimal cost savings with COVID-19 not hitting net sales until March onwards. And then we've seen significant cost reductions take place from April through May and June, with immediate reductions taking place in relation to obviously personal expenses and staff costs and salary cuts and so forth. And then slightly more permanent cost savings coming through towards the end of June in terms of permanent staff reductions taking place. So if you look at the ongoing run rate in May to June and you extrapolate that towards the end of the full year, We are confident that we are on track to deliver towards the upper end of 700 to 800 million target savings that we've communicated to you previously. And we also believe that when you look at these savings, approximately one quarter of these savings will be permanently retained when we return back to 2019 net sales levels. So particularly in areas where we've had savings on travel and hotel costs, Some of our establishment cost savings and some of our staff cost savings will be permanent in nature, which leads us to believe that about 200 million of these savings will be permanently retained in our business going forward. Coming on now to the free cash flow and the free cash flow. Conversion, you'll see we start off with the headline, sorry, with the statutory reported operating loss of 2.4 billion, adding, of course, back to that depreciation, adding back the impairments, all of which, of course, are non-cash items, reflecting lease payments, an outflow of working capital, which is very typical for the first half. We've actually seen an improvement in working capital if you look at the year-on-year position, but we all see an outflow of working capital in the first half. reflecting obviously interest payments, tax, capital expenditure, which again is in line with the guidance that we gave. So we've cut back our capital expenditure. We expect to outturn about 300 for the year and earn out payments, all of which has resulted in a cash outflow of 825 million compared to 513 million for the same period last year. And then when we look at the uses of that cash flow, again, on the next slide, you'll see that obviously with disposals of 207 million compared to 304 million last year, slightly lower, and also acquisitions of 46 million, a little bit higher than last year, but not by much. And taking account, of course, of distribution to shareholders, the 286 million there reflecting the share buyback program that we made in the first quarter of this financial year. has seen an overall net cash outflow of $950 million compared to $235 million for the same period last year. So coming on now to our net debt waterfall chart on slide 18, you'll see that we've seen a significant improvement in our net debt position from $4.2 billion to 2.7 billion as of June 2020, obviously reflecting the operating cash flows that we delivered during that time offset by lease payments, capex and tax paid. We then have the benefit of the, obviously the disposal in relation to Cantar coming through. And as I mentioned earlier, we've seen an improvement June upon June in our trade networking capital of just over $400 million, offset by the share buybacks and dividends that we paid last year and some other FX adjustments to deliver a significant improvement in our net debt position to $2.7 billion. And then coming over now to look at our overall leverage metrics. Again, you'll see the net debt number four lines down on that page, the 2.7 I've just made reference to. Important to highlight in the line below, our available liquidity at the 30th of June is 4.7 billion. And if you remember back to at the same time last year, it was 3.5 billion. And in fact, if you remember back to our discussions at March at the outset of COVID-19, we had available a liquidity of 4.4 billion. So we've actually improved our liquidity over what's been clearly a tough trading period. Taking account of headline finance costs, in other words, stripping out the impact of IFRS 16 on that charge, has delivered an interest cover of 6.8 times, which is broadly similar to the same point last year. And again, looking at the rolling average net debt to headline EBITDA, we've come down from 2.5 times to 2.1 times, and so an improvement year on year. And we would expect by this financial year end to come down to a level between 1.8 and 1.85 times at the end of this year. So again, further improvement. And ultimately, we expect to get down to our target level of between 1.5 and 1.75 times by the end of 2021. So coming on now to dividend and buyback, as we said, we've cancelled the 2019 final dividend in order to maintain our desired leverage ratio, offsetting, of course, the impact on profitability and cash flow that we've seen in the first half of this year. That said, we're pleased to be able to announce the reinstatement of an interim dividend of 10p being declared reflecting our greater visibility in the second half of the year on our earnings, future performance, and clearly our strong liquidity position, and the fact that we are forecasting a positive cash flow in the second half of the year. The share buyback remains under review, although it will be our intention to restart that when the environment stabilizes further. And, of course, as Mark's already talked about, we've got a capital market day planned towards the end of this financial year where we will update the market on our future capital allocation plan. And so last but by no means least, coming on to our 2020 guidance for the full year. So guidance, we expect financial performance to be within the range of the current market expectations. So like-to-like revenue, less pass-through costs between minus 10 and minus 11.5% down. Headline operating margin between 10.4% and 12.5%. We expect a small working capital outflow for the full year, reflecting the fact that there was a real stretch of the line this time last year. But overall, I think I've been very pleased with our working capital performance here, clearly at what is quite a tough time for the industry, for industry more broadly, to maintain, broadly speaking, maintain or expect to maintain our working capital position for the full year, I think is a very good result. CapEx. 300 million, slightly lower than our usual number, again, reflecting savings that we've made. And as I've already talked about, our average net debt to EBITDA in the range of 1.5 to 1.75 by the end of 2021, and 1.8 to 1.85 at the end of this financial year. And with that, I'll hand back to Mark to give you a business update. Thank you.