M&C Saatchi plc (SAA) Earnings Call Transcript & Summary

If you weren't awake before, hopefully, you are now all awake. I certainly am. Listen, it's great to see you all here today, and welcome to M&C Saatchi in Golden Square. Last time I saw a number of you was in April when I've been 3 weeks into the role as Chief Exec. I'm now 5 months into this role. You can see I'm still counting in weeks and months. And my goodness me, it's been an exciting and interesting 5 months, and we'll talk about our half year results, obviously, shortly. I just wanted to make a few overarching comments though to begin with. We're living in a world, and I know this sounds trite, of just unprecedented change. I mean we -- and aligned with huge geopolitical uncertainty. We have 2 wars, none of which show any signs of concluding peacefully in the near future sadly. Oil prices today stand at $100 still a barrel. We have inflationary pressures, likely interest rate rises and a cost of living crisis that shows no signs of abating. And alongside all of those challenges is the world of AI and technology, and none of us can keep pace with what AI is managing to achieve. But what we all know is that it's fundamentally changing business models, and it is also fundamentally changing routes to profitability. This is the stage which this group is standing on alongside all other industries and sectors. And these are the headwinds that we are constantly trying to meet and respond to. So let me -- Simon will talk through the detail of this, but I just wanted to give a couple of headline points. I've been meeting colleagues from some of my past in the audience today when I've done work in film and television. And I've also done work in football. And I'm going to use a football analogy, if I may, just for a moment, which is this first half is a story of 2 quarters. The first quarter continuing challenges as we really look to reset ourselves as we move forward. And in the second quarter, what we've started to see is an improvement in like-for-like growth, continuing strong margin growth in our performance and issues business. I'm also pleased to say we're seeing growth in advertising across U.K., Europe and the U.S. and really notable wins across geographies and disciplines. And there's a little reference in this corner here, Great British Railways. We're going to talk about some of these others. And obviously, Simon will talk further about the detail. But Great British Railways is probably the largest infrastructure change this country has seen in decades. It is bringing all of the railway companies together in one entity, and M&C Saatchi is delighted that it is the agency of choice to work with GBR as it forges this new and exciting future. So let me say a few things that I've been trying to do during these early months of my journey as the Chief Executive here. The first and one of our real -- my sort of constant refrain is about growth and simplification. So we've dealt with a subscale business in Malaysia. It's now on a franchise model. The Australian advertising business, as we all know, has been a real challenge over many, many years. We're now migrating those clients. And also what I'm pleased to say is that our Australian Issues business that works with governments is continuing to grow. But fundamentally, the work that we've all been involved with is how we've empowered the leadership, the executive leadership in this business, not only to run their businesses, to share in the collective endeavor of how we shape strategy in this very challenged marketplace, but also how we win, how we win pitches, how we increase the scope of work with our existing clients and how we hunt down new opportunities. Everyone at the leadership table is involved in that. That is their prime motivation, how do we grow. And I count myself in that, that I'm also involved in how do we grow and how do we win pitches and how do we win new clients. Aligned with that mission is really our DNA, which is this is a massively creative company. It is -- there are so many talented people. And one of the things we've been working on is how do we unlock their creative voices to ensure they bring the best of their creative selves to those pitches and help secure wins. And you'll see some examples of that work later on in this agenda. And of course, as I mentioned at the beginning, no presentation is complete without us mentioning AI, data and tech. And we've recently brought together a new transformation team with deep expertise in this area to accelerate our growth in this space. But I would like to give you one example of work we've already done with how we are deploying AI-enabled tools to really power our work with clients. This is an award we won for the media specialism recently who've built a really fantastic suite of tools, enabling our clients to redeploy their investment and also really helping in terms of execution. What is, I think, sometimes gets lost in the conversation around AI, data and tech. It is the relationship between human creativity and intelligence and how AI enables us to deploy those plans much more effectively. You need both working together. So it's how do we upweight our creative, our human intelligence at our leadership level. And when I say leadership, I mean across leadership across many layers in this business and how does our AI support that execution. That relationship is constantly shifting and changing. It's how do we continue to learn, but it's fundamental to a creative agency such as ourselves. So this is a great example of work that's already in play, and we will talk further. And finally, I just want to mention myself. As I said, I'm 5 months in. There's more work that we need to do together. So I will be continuing to do that work over the forthcoming future. And let me hand over to Simon, who will now give you the full detail.

Thanks very much, Heather. Good morning, everyone. Good to see you today. Thanks very much. We're very grateful that you've come along to listen to our update on the business. Heather has already described that the market context continues to be characterized by uncertainty. And that's not just for us, that's also for our clients. But despite those volatile conditions, our strategic and operational focus remains consistent. And that's about driving momentum through our growth businesses. That's about simplifying our model in order to improve efficiency and effectiveness, and that's about unlocking intrinsic value for our shareholders. And so to demonstrate that, we'd like to step through our half year results and our outlook. Well, as expected, given the year-on-year shape and the annualization effect of the global tariff disruptions, Q1 was a predictably slower start to the year. But as Heather has already referred to, we've marked improvement in Q2 when we returned to low single-digit like-for-like growth as a group. This meant net revenue overall for the half was down 1.4%, which was a significant improvement on 2025's full year negative of 7.3%. I'll cover in more detail the subcomponents of that performance in the next few slides, both by region and by specialism, but the overall shape of our performance very much fits with the market context. The Middle East was our weakest region. More project-based businesses like consulting and Sports and Entertainment were more challenged. However, we saw strong structural growth in both issues and media. Operating profit was down year-on-year by GBP 2.9 million to GBP 6.2 million on a like-for-like basis. But notably, this reduction was almost all in Q1 with Q2 in aggregate close to flat. And subsequently, we've moved into year-on-year growth as revenue has strengthened and cost programs more than offset any modest targeted investment. Net cash was down GBP 6.2 million versus a year ago with GBP 2.2 million of share buybacks as at the 30th of June, a further GBP 1 million as at today. And we also saw a temporary working capital outflow of approaching GBP 6 million, with half 2 always seasonally stronger with Performance Media and Production. So full year, we target to be back into net cash of double-digit millions. Almost half of our business now is made up by issues, which covers our government and public sector clients and our Performance Media business, almost half of our business now. And both of these drove strong growth with issues at 9.3% like-for-like and media at 9.9% like-for-like and with Q2, a strengthened trajectory. Passions and PR, which is our Sports and Entertainment business, was strongest in Europe and strongest in the sports component. However, there was a weaker overall delivery in the U.S. and the U.K. and reductions in the entertainment component, particularly in the alcohol segment, which drove the negative result. After a tougher few years, and you might remember, we've talked about this, our Talk PR business in the U.K. has had some really encouraging recent wins, including the Frasers Group. Consulting, which has a higher mix of projects alongside rather less retained work, continues to see some volatility. But even that within its subelement has some really encouraging performance. You might remember that within Consulting, we have data, strategy, brand and creative. And the data and strategy side, we are seeing good progress. Finally, we saw encouraging signs, and Heather has already referred to this in advertising, and that's across our largest markets, the U.K. and the U.S. We often remind stakeholders of this, but advertising in 2026 is principally digital. And within this line, there's a wide array of services that we provide, all the way through from being JPMorgan Chase's global social agency in the U.S. and now further into the U.K., also including our continued work with Screwfix and the Olympian Mo Farah that you may have seen on your TVs in the U.K. So it's a wide array of services, and we're encouraged by moving that into growth. And so excluding the Middle East, which is our UAE business, advertising was in mid-single-digit growth for the half and at GBP 23.5 million of net revenue, it's still our second largest specialism. This next picture is our regional matrix of revenue. So it's the same revenue just cut into regions. And what it demonstrates is that our largest region, which is the U.K. and which offers our full array of services and is our most mature market was in growth. It's up 5.9% to GBP 52.6 million. Importantly, and you can check this out if you look back at previous presentations, importantly, that business is now bigger than it was in 2024 before all of the tariff and other global market disruption. Outside of the U.K., the U.S.' growth in media and advertising was not sufficient to offset those declines in consulting and S&E, which I've mentioned. EMEA's decline was principally down to the Middle East, again, which I've already talked about. But Europe is showing improved momentum. And we've got some fantastic clients across the business, but also in Europe, we work with, for example, Lidl, which is a growing and sizable client for us in Germany. We work with Ferrari in Italy. We've got some brilliant brands and clients, and we're seeing growth with them. And then in APAC, which now excludes Australia, we saw a flat performance. As already noted, the GBP 2.9 million reduction in like-for-like operating profit was around 90% driven by Q1's negative like-for-like and cost annualization. And as the half has progressed and as we've moved now into half 2, we've seen a momentum shift in profit delivery as media and issues growth has accelerated and other half 1 and prior year cost actions have flowed through. As signaled in the RNS, on a full year basis, we expect like-for-like profit to increase in line with market expectations. Let me move on to talk about cash. Compared to our year-end position, net cash reduced by GBP 11 million or GBP 6.2 million versus the same time last year. As those familiar with the business will recall, half 1 is the seasonally weaker cash generator, and the effect of this was part exacerbated by one-off costs relating to Australia and leadership restructuring, the latter of which will drive savings in half 2 and beyond. Operating working capital was an outflow of GBP 5.7 million, which is expected to reverse in H2, part helped by media and production seasonality. Cash focus in the business is strong, and we continue to navigate an uncertain market. Finally, we saw the cash impacts of our share buyback, which was about GBP 2 million, with a further GBP 1 million in half 2 as the program reaches completion. The possibility of a further program remains under Board review. For completeness, we do provide a reminder of our capital allocation priorities. They are unchanged to what we've shared previously. And I'll just remind everyone, therefore, that most important is about driving organic growth. It's the top of our list of priorities across our focused specialisms and our regions. And that is underpinned by a number of structural enablers, for example, our capital-light model as laid out on the right-hand side of the slide. And so in conclusion, my last slide, outlook. We expect to experience the continued negative impact of the Middle East conflict and reduced project spend in consulting and S&E, but we are very encouraged by the Q2 exit and early H2 performance. And given this, we anticipate a strengthening revenue, operating profit and cash flow to drive a full year improvement on a like-for-like basis as is reflected in the market numbers. So now I'd like to pass back to Heather to detail our unique market position and the opportunities to leverage this in half 2 and beyond. Thank you very much for listening.

Thank you, Simon. He gets the hard part. I wish I could find another word for unique. I'll work on it. I'm sure if I ask Claude, he'll give me or she will give me a clue, but I don't like asking Claude. We do have a really special market position. It is a market position actually that's been earned over decades of being a really independent business. We have worked at government, a public policy and in the commercial world for decades. We have years of data insights about what really prompts behavioral change. And what we're really trying to do now is to use that history, use that insight as we superpower our offer to clients going forward. So if we were to -- so we are constantly now looking at how data, our infrastructure and how we connect to creativity drive all of this expertise, but particularly working in a really collaborative way. And that's a culture that we're really fostering. And I begin to see real green shoots, and I'll give a couple of examples. One, there was earlier mention of [ Dawsons ]. [ Dawsons ] is a very large U.S. real estate player. Our Middle East colleagues have real deep experience of real estate. They came together to work on an integrated pitch, which we won. We're also being able to take some of our understanding our data with long-standing clients and increasing the scope such as JPMorgan and Ferrari. And I'll come back and give you -- talk a bit more about JPMorgan. This is a slide we've shared before. It is about what really holds these 2 worlds together. It is the world of culture. If you were to go to any conversation with our colleagues and our peers in this sector, everybody is talking about how do brands live in culture? How do they take advantage of culture? How do they still feel relevant and sustainable in culture, in cultures that are hugely disrupted. That is the work that we have been doing in Saatchi. We've talked about some of the work we've been doing on Return on Cultural Power. But that -- and that harnessed with our decades of insight, we believe, gives us a really special offering in the current marketplace. So if we were to just move forward. So here's a real example. JPMorgan, long-standing client, we engaged in a conversation about that whole way in which you leverage your position in culture. We won this piece of work, which was reigniting the American dream, leveraging a cultural moment to create cultural power. This is a classic example of the work that springs out of that understanding I've just mentioned. On the other side, this point about culture, everybody talks about it. And you go into -- we've doubled our U.K. government wins in 2026 as we've talked about creativity and integration. We've just opened a new office in Berlin as we start to work with more European member states. This is how we constantly connect these 2 worlds. But what is also connecting them apart from the data, the insight, the quality of the work is the creativity and what we can now bring to bear. So let me show you an example of that in action. We did for teachers, a major recruitment campaign across all platforms, whether it be social, television, posters, a real moment, the ads were run during the World Cup. So let's just play the ad now. [Presentation]

Whilst the main teacher is a professional dancer, many of the other people are all teachers. All the people on the posters are real-world teachers. It's been a great campaign, being really successful in pulling more and more people into a really important and valuable profession. If teachers is a great example of what we do at government level, HUGO BOSS is a fantastic example of what we do in the commercial world. It was a joint win and again, another group, really good collaboration between sport and entertainment, between U.K., U.S. and Europe to become the agency of record for BOSS unifying the communication strategy, working across fashion, sport, art culture, digital customer engagement and again, crucially important, how we leverage our data stack and data-driven consumer insights to win this gig. Again, a real great example of the work that we're being able to do as we work in a much more integrated way, constantly connecting our offer across the geographies and across specialisms. So finally, as we said, we are working on a dual engine approach. Engine 1 is very much how do we put in AI at an agentic level that really helps drive the process. And this is a good example. These are planning frameworks that really help our clients, Grab, which our Performance Media team work on. Much more exciting is Engine 2, how do we really now upscale our IP development and our productization based on all of those years of insight that we have across both the public and citizen realm. And here, we have used deployed AI, but actually the human-directed creativity to really drive the production on these media outlets here. So what we're always looking to do now is improve the processes and then adapt AI to enable us to really drive IP and productization, which we believe will gain future value for the business. And then finally, I think we're seeing some early signs of improved business momentum as both Simon and I have talked about. There are really strong underlying fundamentals of this business, great business with huge heritage. We've simplified the structure. It is absolutely about empowering the voice of creativity, harnessed by AI, but not replaced by AI. And with all of these working together, we continue to focus on how we unlock value. Thank you very much, ladies and gentlemen, and we will now take questions. Do you want to. Right. Okay. You first and then you -- do you want to just say who you are and where you are from?

Will Larwood from Berenberg. In the statement, you sort of talked about sort of investing in the growth areas within your business. Just if you could help us quantify that, particularly into '27 as well and how we should expect the margins to evolve going forward? Secondly, obviously, you talked about simplifying the group in terms of Australia being sort of deconsolidated now and you've sold Malaysia and doing it through a license. What sort of other sort of restructuring can we expect? Or is this sort of now that you're focused on the core markets? And then thirdly, just in terms of the Middle East, obviously, a bit of a drag in some of your specialisms. So -- how much confidence do you have that we've then reached the bottom in that market and there's not going to be any further drag in there?

I'm a prophet, didn't you know? Let me take that last question first, and Simon will ask your first question. I'll take your last and your second. I mean, look, the Middle East, it's obviously going through an incredibly challenging period, and none of us know. We all hope the conflict would have ended. When we were last here in April, we were hopeful that there would have been a settlement and here we are today, and there isn't one. However, as we speak today, the Abu Dhabi Grand Prix is still going to go ahead. Dubai Airport has reported it's not fully back, but almost back to the volumes it saw before. We are seeing ongoing investment into the real estate in the region, people still buying off plan. And indeed, we're seeing other opportunities. So it's not straightforward. We still don't know what's going to happen. Do I think it's reached the bottom? I really don't know, nor does anybody. I would hazard a guess, but maybe you'll find somebody who's much more expert in those global politics than myself. But ultimately, this -- we have confidence in this region, and we can see why we have confidence by the examples I've just given. In terms of restructuring, I believe that for the -- we've completed the restructuring in terms of the subscale entities and Australia. As I said, Issues is very strong in the Australian market, and we will obviously continue to support that work there. But fundamentally, we're focused in, obviously, U.K., Europe and the U.S., and we will continue on that trajectory. In terms of the leadership, I think we've now simplified the leadership in a way that I think accords with our mission around growth and how we're driving our data and AI agenda. Question one.

Yes. I mean just the other small item on the simplification of the group is we have talked about there may be a few more small geographies that are more appropriate for license. I mean we've already publicly disclosed that previously. So we've got a very small business in Pakistan, for example, small business in India. So those will remain under review as to what is the best go-to-market. Because sometimes applying the same operating model in the U.S. and in Pakistan may not be appropriate. So we just look at what is the best model. So in terms of the first question around investing in growth areas, I mean for both our growing Issues and Media businesses, that tends to be growth that then requires investment because we effectively put in the resource behind the revenue growth. So we don't tend to have to move ahead of the revenue. So it doesn't tend to have a sort of negative impact on the margin. The exception to that is where we've built capability. So for example, we have, over the last few years, been really investing in our issues securitization and data stack capabilities, some of their tools, their technology tools. And that has really put us in a position where we believe that, that unit has some really unique capabilities worldwide, let alone in the geographies we currently operate worldwide. We think that's unique. And the same within the Media business. We've been investing, for example, in some of those AI tools where, as Heather mentioned, we've got the combination of human intelligence to work out how do we reduce someone's cost per acquisition or how do we think about a campaign that enables them to have a higher level of app downloads like with Grab, it's an app-based business or Gopuff in the U.S., it's an app-based business. So we think about how do we optimize the business. But then technology helps us to fight that campaign and do that really accurately and make sure it's on time and has low error rates. So that's another example of that sort of human and machine. But I mean, those investments have been effectively within the P&L. There's not sort of big one-off requirements for those. We've been able to manage those on a sort of day-to-day basis. So yes, we think the strong margin characteristics of both our performance and Issues businesses will be retained.

Steve Liechti from Deutsche Bank Numis. Yes, can I have 3. One is just on the first quarter and second quarter like-for-like and the kind of momentum into the third quarter. Can I push you to give us some harder numbers to help bring that alive between those? And also just remind us, we hit a really easy comp in the fourth quarter, kind of give us some sensitivity on that one -- sorry, fourth quarter for the like-for-like. Second question is, given we've just done 6, let's say, a profit in the first half, I don't know where consensus has landed, but let's say, you need to do between 15 and 20 to get to sort of consensus now in the second half. Just give us some building blocks to help us get conviction that you can do that overall. And then the third question is more general. Just one of the things the big agency holding companies are kind of trying to deal with us, analysts about is the shift in the model. So AI is giving you, in theory, a lower cost per content unit and a better ROI for customers, which implies customers may pay you less for the same work. What are you seeing? And how are you adjusting your business model to kind of reflect this new -- well, if it's reality or not?

Should I just make a comment on the last piece. I mean this is -- as you say, this is a fundamental conversation that all of us are involved in. And it speaks to whether the model needs to shift. I think what's crucially important, and I tried to allude to this in the course of my presentation, there are 2 challenges, a rush to the bottom because you don't need 10 people anymore, you need 1 and a group of agents or a rush to the middle where AI actually gives forth a whole range of ideas, but they're often in the -- you're in the middle of the pack. And I think what we are trying to do here is what I've just been talking about is actually to say that the human intelligence and the creativity that we are bringing to bear still commands a premium in the market. And yes, we can execute differently with the use of AI and data insights. But actually, you still need that really powerful creative and human intelligence. That's the work that we're constantly talking with our clients around. Ultimately, I'm sure there are going to be more fundamental structural changes. We know some of our colleagues in the big holding companies, for example, will roll in for free some of their services. That is not a place that we are at nor would we want to be at. We really want our people, our creativity and our strategic insights to be valued by our clients. And so far in the work we're winning, we're continuing to see that.

One point there, sorry, because you mentioned the kind of effectively bundling, which...

That you see elsewhere.

Yes, elsewhere, which some people might say is the same as integration and an integrated offering. So I'm trying to distinguish in my head what you are saying.