WPP plc

Welcome to the WPP 2022 interim results conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's opening remarks, there will be a question and answer session, at which time, if you would like to ask a question, please press star followed by one on your telephone keypad. Today's conference is being recorded. I will now hand over to your host, Mark Reid, CEO of WPP, to begin. Mark, please go ahead.

Thank you very much, and good morning, everybody. I think we'll take... sort of this morning's presentation as viewed. If you want to look at it, it's available online. In the interest of efficiency, I'll make a few opening remarks and then return to questions. So I think if I look at, you know, we look at the first half, I think we had continued, you know, strong demand from our clients. You know, we had good growth in the first half, 8.9%, actually 8.3% in the second quarter. So only slightly lower than the first quarter, despite, you know, somewhat tougher growth. And that reflected strong growth across all of our business. The GIAs, the integrated agencies, up 8.2%, with perhaps a slightly stronger performance in media, but actually a very credible performance in our creative agencies across the board, around 6% in Q2. Public relations up 7.3%. PR has been our standout, performing business through the pandemic, reflecting its importance to clients. and need our specialist agencies 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, you know, accelerated WPP's growth. So I think we're seeing outperformance relative to the rest of us in the U.S. Again, you know, marked turnaround from where we were sort of pre-pandemic, you know, mind you, our last quarter of growth, before the recent outperformances, 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, Peter, they were named Network of the Year. In our media business, we're ranked by Convergence as the world's leading media group. And that's reflected in a very strong new business performance, $1.6 billion in the second quarter. Good wins from 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 Every Mile and Choreograph, our data business, and through M&A, so Barrowhouse Digital, a Salesforce marketing cloud company in Australia, and Corbiz, really a significant e-commerce company in Brazil, and in simplifying the business to make it easier for our clients and to improve integrated service, so the creation of Essence Mediacom and Design Bridge and Partners. The transformation program's on track, expect to deliver $300 million of savings this year, And given the position of the balance sheet, the strong position of the balance sheet, we're able to execute £637 million of our eight living calendar programme for share buybacks of the year in the first half, as well as raise our guidance. So net-net, that means we're able to increase our guidance for 2022, our net sales from five and a half to six and a half to revise guidance of six to seven, 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 that's a net summary for the first half. I'd say good start to the year, confident in delivering the balance of the year. At that point, why don't we turn to any questions that you have?

Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. And our first question goes to Tim Nolan of Macquarie. Tim, please go ahead. Your line is open.

Great. Thanks. Hi, Mark. Thanks for the comments. I'll ask, I guess, the obvious question, which is, you know, your results seem fine. Your guidance seems fine. And yet everyone's worried about what's 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, it was up 12% in the first half versus up 32% a year ago. So what I'm wondering is, and, you know, we've heard some comments from a number of, you know, ad-related businesses in the U.S. here talking about slowdowns, 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? I'm just trying to understand the difference between your comments and Outlook versus several other companies. Thanks.

So I think, I think what we said about this year, and what we said about next year, is not dissimilar from what our peers said, which is broadly speaking, no 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 characterise 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 three. So within that context, I don't think that you can say, I think you'd 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, when 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 characterized 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. were perhaps for obvious reasons, those companies were most likely to point to the broader macro slowdown. So I don't know that it's a broader macro slowdown or results in the competitive dynamics of those companies, but I think it's more likely to be the latter than the former. Now, that's not to say that we are facing more uncertain times you know, in 2023. And I think, as I said, we and most of our peers are looking for a slowdown, looking for things to be somewhat slower in the second half of the year than they are in the first. But I don't 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, I think some of the frost has come out of the market, and maybe some of those companies are a little bit more reliant on venture capital or, you know, venture capital backed app downloads, that type of nature of business, you know, the gorillas or the, you know, those types of things, that might be it. But I think it's more likely to be that than it is a macro slowdown so far.

I think Tim, just as John, just to build on Mark's 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. Okay. I get it. Make sense?

Okay. Yep. Thank you both.

Thank you. And the next question goes to Doug Arthur of Huber Research. Doug, please go ahead. Your line is open.

Yeah, thanks. Good morning. You know, we did a call with Brian Weiser a month ago, and he was making the point, and I don't know if you said this this morning, a little early for me on the earlier call, but that China's weakness in the first quarter could provide a tailwind in the second half as, you know, it reopens and, trade picks up. So I'm wondering if that's sort of something you're expecting, that's question one.

Yeah, I don't think it's something that we're, I mean, I think we're baking slightly better second half than first half in China, but I don't think our numbers depend on, you know, a massive change, a relatively small part of our business doesn't depend on a massive change in the Chinese situation really, no.

I mean, you know, there was a very start contrast in performance between Q1 and Q2. So for 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 it's fair to say we'd 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 contrast in performance Q1 to Q2.

Okay.

It's about, as Mark said, it's about 5% of our overall business, so it's not insignificant, but it's not a large percentage.

Got it. Okay. And the second question, which is probably more difficult to answer, but obviously given all the work you've done on first-party data, choreograph, client, you know, demand for you know, 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, it's not when, it's just if?

No, I think it doesn't change things really for us one way or another. It's just another uncertainty and other change in the market that means clients need more help to navigate it. I think we remain of a view that, you know, protecting consumer privacy is going to be an increasing part of the, you know, the political or the data protection landscape that I don't think we're going to replace the cookie with another form of identity owned either by one ad tech company or something else. I think really it's pretty clear that the kind of wild west of data collection isn't right and that data collection needs to be done with the permission of the consumer. So we're not looking for a paste of cookie with another sort of unified ID system. But that, and the data-driven marketing requires, you know, the integration of all sorts of data, not just sort of PII or purchase behavior. So I think that a more complex, data landscape means clients need more advice. I think there are companies, you know, in the automotive, travel, financial services sector where PII will be very important and retail, I think through that where PII is very important and that's a lot of the work we do with WBA and there'll be other companies in packaged goods and pharma and healthcare 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 hasn't really been the major issue. The major issue has really been data collection on the iPhone, really. And, you know, really what would happen if Android and the iPhone both coalesced to kind of a much more strict, Because the interesting activity today that's happening on web browsers is happening on the mobile device. I think that's much, much more significant, and that's what people are pointing to as a change. So I would say it's neither one thing nor the other for us in the main.

I think just to add to that, the fact that the ecosystem is forever dynamic and changing and delays or no delays, I just think adds to the complexity and we've 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 we're doing a lot of engagements 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.

Got it. Okay. And if I could just squeak one more in. John, in terms of margin performance, you know, great revenue growth the first half, margins down, which is kind of what you guided toward. 50 BIPs, still the guidance improvement for the year. So what are the key parts of the operating leverage in the second half?

Yeah, so, I mean, as you said, the guidance that we gave at Q1 and the prelims was very much around 50 bits 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 with the establishment costs, pretty much bang in line with what we expected on personal costs. and a little bit more recovery through the staff incentives. But the shape for the first half was maybe a little bit different, but when it all summed together down 50 bits in line with what we guided. To get to our 40 to 50 bits for the full year requires the second half to be up roughly 120 bits, again, as we guided at the Q1 training statement. And I think the shape of that, albeit there's margin for error, of course, in this. We'd expect on staff costs, pre-incentives to see about a 75 sort of BIP decline impact on margin in the second half. We'd see establishment costs, maybe we'll see some upside of about 10 BIPs in the second half. On IT, maybe down about 10 BIPs or so in the second half. Personnel costs, uh probably an impact of about 20 bits down in the second half you know that's clearly less than 70 bits in the first half because we're starting to annualize some of the travel that took place in the second half of of last year probably an upside of about 10 bits or so another gna and then a consistent 200 bits on the staff incentives when you add all of that together that gets the roughly 120 bits in the second half which when you combine that with your 50 bits down in the first half gives you an overall increasing margin of 40 to 50 bits for the full year. So that's sort of the shape of it. I mean, the one thing I'd caveat, of course, is there's always lots of moving parts. And, you know, we adapt and we're very agile in our response to the market as we navigate our way through. So the shape can change, but we're pretty reasonably confident we can deliver that full year margin guidance that we've given.

Excellent. Really helpful. Thank you.

Thank you. Our next question goes to Matthew Walker of Credit Suisse. Matthew, please go ahead. Your line is open.

Thanks a lot. I've got three questions, if that's okay. Hi, Mark. Hi, John. Hi, Mark. Hey, guys. 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 we've talked, you've said you've been able to get some increases through maybe one third of the client base. Maybe you could update us there because I guess that suggests for the clients who are accepting the price rise, then that's roughly a sort of three to six percent increase for them. So maybe the percentage of clients who've 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. I was just thinking that the percentage of business coming from transformation, maybe you could update us on that because let's say you have a, I don't know, I'm making it up now, but maybe a sort of 10% double-digit increase in transformation. for your business, that would provide a long way to the 3% growth, which would allow other areas to be flat for 23. So maybe you could sort of talk us through your transformation business and how well that might grow and what percentage it is at the moment. And then finally, on the buyback, obviously you look a little cautious in just maintaining it 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?

Maybe I'll...

When you tackle the price rise stuff, and we can talk about acquisitions together. I mean, on acquisitions, I think, you know, we'll see what happens. There's much more to say than that. We don't anticipate large ones any more than we anticipate doing them or not doing them. John, when you talk about prices and how to wrap the transformation spending, first we can.

Sure. So, well, maybe if I pick up the buyback point, price and NFT for transformation. Look, on buyback, as you very clearly said, we always plan to do 800 for the year. We've done 630 in the first half. We'll do 170 in the second half. We'll likely do that 170 in the first Q3, I would imagine. And then we keep our options open. Mark just alluded to the point around M&A. But again, we'll 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 we'll exit the year from a net debt to EBITDA. I mean, obviously, there's lots of moving parts here, and not least of which what was already referred to with regards to acquisitions. But broadly speaking, if you apply our guidance in relation to CapEx and in relation to M&A, then we ought to get to a position at the year end with a net debt of about 2.2, 2.3 billion, something of that order, and a net debt to EBITDA of maybe 1.3, 1.4 times maybe to the bottom end of our 1.5 to 1.75 times range, but that would be where we'd expect to get to for the full year if you apply the guidance that we've given, excepting the fact, of course, that M&A by stage can be lumpy, and so we obviously will be partly driven by that. On price rises, yeah, we've seen sort of price increases, probably 1.5% to 2% flow through, and your point, I think your math is right when we talk about roughly a third of our clients, therefore an average 3% to 6%, and I think that's probably about right. I think if you split it roughly a third, a third, a third, a third we've managed to negotiate through, a third are sometimes contractual in nature, so we can't effectively push price increases through straight away, and there's probably maybe just under a third to still go after. So we have a concerted effort to push price increases through in the second half, building on what we've achieved in the first half. We can't do it on all clients because there are clients where it's largely fixed contractually over a period of years, and until those contracts unwind, we won't 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.

I mean, on transformation, I was trying to figure out how to answer your answer your question. It's not. Yeah, it's not to be counted 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 if you look at our experience, commerce and technology business, that's largely what people would call transformation of creating experiences, building ecommerce platforms, implementing technology solutions for our clients. That's about we said 39% of our GIs that's just over half of our, you know, they're over half of our, you know, 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 wouldn't be far wrong. Now, is that recession-proof? You know, I don't think anything in the world is recession-proof, to be blunt. So I think that, yes, it will grow. Yes, you know, and it's, you know, we recently said the future is uncertain. It's because it's uncertain. And I think that, you know, some clients will continue to invest in that area through what happens. And to the extent that these are multi-year programs, some of them are, you know, we have multi-year programs for some of our clients that will persist. That's right. In other cases, clients will put big projects on hold. So I wouldn't, you know, I think that it's good that we have significant businesses in that area, and I think that does put us in a good position, but I wouldn't want to rely on that. I think what I'd look at is, I think what we've said is not that different from our peers, and I think that's the way to think about it, really.

I mean, you know, we've seen an increase in the GIAs, you know, over the last half on half of just under 1%, so 38% to sort of 39%. I mean, that's encouraging, and obviously it's in these higher growth areas, which protects all else being equal, 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 than we're going to make the shift across into these higher growth sectors. So to Mark's point, we can't completely protect ourselves against the business cycle. But every move in that direction, every incremental piece of work we're doing in these higher growth areas helps.

I can just follow up 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 in terms of revenues, What percentage of clients do you think are taking that attitude? And what percentage of clients do you think are sort of more in wait-and-see mode?

Well, I think continuing to invest... Actually, if I look across our major clients, and if I were to sort of list them, let's say, you know, Unilever, Coca-Cola, P&G, L'Oreal, Mondelez in the FMCG category. If I'd look at those in the technology category, Google, Microsoft, you know, or in pharma, Pfizer, I think they're all strong companies with a desire to build their brand and continue to invest. And I think the commentary, if you read 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 we're not using that to convince ourselves that we're immune from the cycle either. I do think that clients have recognized the danger of coming in and out and I think that they've also seen the benefit for those companies that invested consistently during the pandemic came out in a much stronger position. I think that's positive as well. And I think that's why we characterise 2013 as uncertain, because we actually have to see the breadth and depth of what happened. And I think if it's a relatively soft landing, then a spend will I'd say continue relatively well. And if it's a much tougher situation, then perhaps it won't. But I think, you know, we were, you know, we called it sort of uncertain for a reason, because it is uncertain. I don't want to say helpful, but I think it is what other people have said. And we'll come back and tell you what we think will be at that time. But I think that the important point is that, you know, compared to previous, compared to previous, cycles, you know, 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'd over focused 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, and that's one material difference. I think the second material difference is the point you made about digital transformation, the need to engage in multi-year products, projects, the need to invest in some of these areas like commerce, transformation. I think that's very different from where we were in the past. I think the importance of data and ROI and the ability, let's be honest, for clients to shift money from, you know, just building a brand into driving sales. I mean, it's much easier for clients using, let's 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 they can't see the ROI. So I think better ROI would lead 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 a previous economic cycle.

I mean, if you think about, first and foremost, just thinking 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. You know, we're very good at looking forward. We're very good and agile at adapting our cost base in terms of hiring, indexing into freelancers, et cetera. So we've got a good ability to manage the business from a cost perspective, whatever the business cycle may throw at us. And then to Mark's point from a long-term perspective, I think we're just very well positioned from where we were four or five years ago. The business has been restructured. We've brought together our digital and creative agencies. We've got a much stronger balance sheet. The business is simpler. We've got continued structural cost-saving opportunities going forward in terms of our back office. We're 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, you know, I think we feel, you know, it's always a certain, certainly an uncertain business environment facing into in the next 12 months. But I think we're very well positioned to faith into that.

Okay, that's very clear. Thank you, guys. Yeah. Thank you.

Thank you. And as a reminder, if you would like to ask a question today, please press star followed by one on your telephone keypads now. And we have a follow-up question from Tim Nolan of Macquarie. Tim, please go ahead. Your line is open.

Thanks for letting me ask one more. I'm afraid I've got a very boring, dry modeling question, if you wouldn't mind helping me with something, John. It's a real warm-up to a question.

That's why I think it is very boring.

That's why it's a follow-up here. And I know this came up on the call in London this morning. It's about the share of associates result line. I think you were saying, you know, 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 Cantar. Could you just maybe elaborate on that? And then what numbers should we use for the remainder of this year and next year for that line in our model? Thanks.

Yeah, I think, well, just to answer the question in reverse order, I think for the full year I work on a number between 40 to 50, which is clearly down year on year. But it is, as I said, primarily down to the consequence of the acquisition of Numerator by Kantar, obviously bringing on more debt, more interest costs, and so that's meant that the overall sort of associate line has come down. But it's not reflective of an underlying performance of business, in fact, the Gantt Art 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.

Okay. And for next year, are we back to a more normal level? I think that number was 80 or so last year. Are we back to that type of a number next year?

I mean, I'm very cautious about giving guidance into next year just simply because, you know, it's effectively driven by events. I guess all else being equal, it might normalise around that level. But, you know, as we've evidenced in this year, you know, events change that. So I think, to be honest, I want to keep my palate dry there, Tim, and, you know, we can give more specific guidance at the right time in relation.

Yeah, no, I didn't mean to hold you to a 23, guys. Just to make sure, 40 to 50 this year versus 86, I think it was, last year. Just want to make sure I've got the numbers right. That's correct. Thanks. Great. Great. Thanks.

Thank you. We currently have no further questions, so I'll hand the call back over to Mark for any closing remarks.

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 three years and as he bows out over the next half hour. And thank you all for listening. I think it's been a good start to the year. And we've got work to do in the second half as well. So thanks, everybody. We'll see you on the next call or before.