WPP plc (WPP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to WPP 2024 Third Quarter Trading Update Conference Call and Webcast. [Operator Instructions] Today's conference is being recorded. Now I would like to hand it over to WPP CEO, Mr. Mark Read. Please go ahead, sir.

Thank you very much and good morning, everybody, and welcome to WPP's Third Quarter Trading Update. I'm Mark Read, and I'm here with Joanne Wilson, our CFO. We're going to take you through our results for the quarter and then answer your questions. Back at the interim results presentation in August, I think we've been extremely busy in the first half and that's very much continued in this third quarter. We're making good progress against our strategic objectives, but we're starting to see concrete benefits with the return to form in recent new business outcomes and encouraging growth in our top clients. Our offer, based around fewer stronger brands, is underpinned by AI and new technologies, making us more competitive while making the company structurally more efficient to improve our profitability. There's more work to do, but I am very pleased with our progress. So before we start, please read the important cautionary statement on Page 2. And on Page 3, in terms of the agenda, I'll just go through the financial and strategic highlights before handing over to Joanne to take you through the financial performance. We'll then briefly cover our strategic progress in the third quarter before we get into questions. So turning to Page 4 and our [ business ] highlights for the quarter. I think our third quarter delivered a return to growth, which is important, with 0.5% growth in net sales led very much by GroupM. We saw growth across 4 of our top 5 markets and a broad-based improvement across most client sectors, including the technology sector, which has weighed on us by 9% in Q1 and 1% in Q2, returned to growth at 1.3% in the quarter. For the quarter, GroupM grew 4.8%, after 1.9% growth in the first half. It is a slightly easier comparative last year and a slightly tougher comparative in Q4, but the performance in the third quarter was encouraging. Our integrated creative agencies declined 3.1%, driven really by 3 factors, the impact of Pfizer, the macro and business conditions in China and declines in project-based work against a more challenging macro backdrop. We can say a strong strategic progress against the objectives we laid out for you at the beginning of this year, driving adoption of WPP Open, our intelligent marketing operating system and leveraging our simpler structure. That progress drove tangible benefits in the third quarter with good growth in our top 10 clients. Our top clients grew 7% in the quarter despite the drag from the loss of a health care client. And you can see really a very good performance with our key clients. In terms of new business, we had a much stronger quarter. We said last quarter, we wanted to be more competitive in new business. We are seeing that coming through. We won Amazon's media account outside the Americas with a pitch built around WPP Open and led by a team drawn from across GroupM and WPP, leveraging our unmatched global footprint. It's the world's largest advertiser, which is a very important win for us. At Unilever, we've consolidated the creative work with additional key beauty brands and expanded our media relationship in the U.S., in particular, with retail media and activation. We remain Unilever's most significant media partner by some way. And Q4 also started well with our creative win at Starbucks at a pivotal moment for that business, and the retention of Honor's global media account winning additional work, including within China. So we're encouraged by our performance within the quarter, but with recent new business wins primarily impacting 2025 and continued macro pressures, our expectations for the full year remain unchanged. I'm sure we'll get into that in the Q&A. We are reiterating the guidance we've given back in August. The like-for-like net sales of minus 1.0 to flat, with 20 to 40 basis points of margin improvement, driven very much by our structural initiatives and cost discipline. So Joanne, if you can take us through the financial performance.

Thank you, Mark, and good morning, everyone. So let me take you through some more detail on our financial results for the third quarter, and I'll start on Page 6. Revenue less pass-through costs fell 2.6% on a reported basis and was up 0.5% on a like-for-like basis. Reported growth includes a 2.9 percentage point headwind from FX due to sterling strengthening against a number of currencies. The contribution from M&A in Q3 was a small negative, reflecting some small disposals and the discontinuation of our profitable business in smaller markets, which more than offset a small contribution from acquisitions. Like-for-like growth of 0.5% reflected a sequential improvement versus Q2, with Q3 lapping the softest like-for-like comparative. Now moving on to Page 7 on our performance by business. Global Integrated Agencies grew 0.5% in the quarter. Within this, GroupM, our media planning and buying business, grew 4.8% with broad-based growth in all major markets, partially offset by continued weakness in China. GroupM saw good growth from both existing and new clients, with some benefits from the softer comp of 1.6% growth in Q3 '23. Across our integrated creative agencies, we saw a like-for-like decline of 3.1%. This is broadly consistent with our first half. Hogarth continues to grow well, benefiting from new business wins and growing demand for its technology and AI-driven capabilities. Ogilvy grew well in the U.S., benefiting from recent client assignment wins, but this was offset by weakness in China. VML continued to be impacted by the loss of a health care creative assignment, partially offset by growth in spending by auto and tech clients. As in recent quarters, AKQA's performance was impacted by macro pressures weighing on project-related spend. Moving our PR, revenue less pass-through costs grew 0.2% in the quarter. And within this, Burson declined mid-single digits as the business continued to be impacted by the loss of Pfizer assignments and the impact of macro uncertainty on some areas to client spending. This is offset by continued growth at FGS Global. And finally, our Specialist Agencies grew 0.8%. Within that, CMI Media, our specialist health care media planning and buying agency, continued to grow well. Landor and Design Bridge's performance declined at a similar level to the first half, also impacted by pressure on project-based spending. This was partially offset by stabilization in some smaller agencies against easing comps. Page 8 highlights performance across our geographic segments. North America grew 1.7%, reflecting good growth in GroupM and across the auto and financial services sectors, offsetting a weaker performance in health care. U.K. net sales were stable year-on-year in Q3 with strong year-on-year growth at GroupM, benefiting from an easier comparative, offset by weakness in project-based spend at smaller agencies. By client sector, CPG delivered good growth, offset by weaker spending from health care, retail and automotive clients. Western Continental Europe improved sequentially with 2.2% growth in Q3, reflecting growth in Germany, France and Spain. CPG and automotive were the strongest performing client sectors. The Rest of the World declined by 2.2% in the quarter, with growth in most markets offset by a decline of 21.3% in China on client assignment losses and persistent macroeconomic pressures impacting both our media and creative businesses. Central and Eastern Europe and the Middle East and Africa grew mid-single digit in the quarter, with LatAm growing low single digits. And now moving to trends across our key client sectors on Page 9, where we saw an acceleration across most sectors. We continue to deliver strong growth in consumer packaged goods, our largest sector, which grew 7.6% in Q3, reflecting continued brand investment by our largest CPG clients. The technology sector saw further stabilization with growth of 1.3% in the quarter, which although modest and against the soft comp, is encouraging. Automotive grew 5.8% on strength in the U.S. and Germany, and financial services grew 5.3%, helped by new client wins and growth in our largest clients. Telecom, media entertainment declined by 2.3% as we anniversary 2023 new business wins. Health care and retail continued to decline, impacted by past client losses, however, still a [ raise ] than in the first half. Turning now to Page 10 and the movement in adjusted net debt. As of the end of September, adjusted net debt was around GBP 300 million lower than September last year. We continue to expect adjusted net debt at year-end to be broadly flat, and this excludes the impact of expected proceeds from FGS. As part of that, we continue our focus on disciplined working capital management as we work towards our target for a flat working capital movement for the full year. The lower level of adjusted net debt at September versus last year also reflects a lower level of M&A spend in the last 12 months. For the full year, the benefit to net debt from lower M&A spend will be partially offset by some accelerated earn-out payments and higher year-on-year cash restructuring costs, which we expect to be in line with guidance. Moving on to guidance for 2024 on Page 11. We are reiterating our guidance for like-for-like revenue less pass-through cost growth of minus 1% to flat for the full year. The midpoint of this range implies Q4 like-for-like of minus 0.5%. Q4 is always the largest quarter and there remains uncertainty with regards to client spending plans in the balance of the year, reflecting a continued uncertain macro and political environment. This environment, together with the tougher comparative in Q3, will likely weigh on Q4 relative like-for-like. And of course, our recent business wins will not impact until 2025. We are also reiterating our guidance for improvement in headline operating margin of 20 to 40 basis points at constant currency despite the short-term cost of staffing up for new business wins and continued investment across our business. This margin improvement reflects the strong execution of our 3 strategic initiatives, which as well is setting us up for accelerated growth, are also reducing structural costs in our business. We expect a 3.2 percentage point headwind to reported net sales from FX over the full year and expect to have an adverse impact of 20 basis points on the full year margin based on current FX rates. This is based on an FX rate of GBP 1.3 to U.S. dollars as of mid-October 2024. The impact of M&A on the full year is likely to be slightly negative with some sensitivity to the timing of the closure of the disposal of FGS Global. This also reflects the small disposals and portfolio optimization actions mentioned earlier. So thank you, and I will now hand you back to Mark to update on our strategic progress.

Thanks very much, Joanne. So turning to our strategic progress on Page 12. And I think I would describe it as a time we've been very busy. We continue to make very good progress on building a simpler, more efficient company through the simplification of GroupM, the creation of VML and Burson. For GroupM, you can see the results of the simplification, greater sharing resources and the impact of WPP Open in terms of new business performance. And there were 2 important strategic wins for GroupM and WPP that I highlighted at the beginning of the call. The first was Amazon, where the team had an integrated global approach and were awarded the media business outside the United States. I'd say that the factor that contributed to this win were a very strong team with top talent sourced from across GroupM, a demonstration of WPP Open and how it helped Amazon improve its media effectiveness and its operations, a very close collaboration with VML throughout the pitch, demonstrating both how we can bring creative ideas to life through media. And also, the VML shopper capability in the United States and in Luxembourg. reflects the acquisition of the Amazon Marketing Cloud -- Amazon Marketing expert marketing Ignition in 2017 in Seattle and 2 sales in Luxembourg in 2018. And finally, it demonstrate the depth and breadth and strength of GroupM's media business globally. I think we saw the same factors come to play at Unilever, where we're the incumbent or much of the business. And after a very competitive review, we came out, broadly speaking, ahead of where we started. Most importantly, we consolidated the retail media and retail activation business in the United States that we lost 3 years ago. We demonstrated a very strong integrated approach for both media and commerce in how we can help Unilever to win in retail, which is really where it matters. Secondly, for VML, the merger is now behind them. They have been impacted by the loss of a health care client in 2023. So they have had very good wins. They're part of the key WPP win of the U.S. Starbucks creative work along with a number of our other agencies. And Burson has been working through the merger this year. Corey and the team have done a very good job of bringing the 2 organizations together. I think I'd say it probably had more of an impact than we anticipated on the top line, but they have been able to attract some very, very strong talent into the company who's excellent and will further strengthen the business for next year. And while we're discussing the performance of our individual brands, I would like to recognize Ajaz Ahmed and AKQA. Ajaz founded the company 30 years ago. It's an amazing business. I'd like to thank him and recognize the creative excellence and reputation of the company that he built in AKQA. The second area of strategic progress to highlight is WPP Open and the adoption of AI across WPP. As you know, we do believe AI will be fundamental to WPP's future. We can see its potential to make our people more productive, to produce more work at higher quality and lower cost, and to make their work more effective by delivering campaigns that are more targeted and relevant to consumers and drive higher ROI to our clients. We're investing more than GBP 250 million in WPP Open, some of that incremental, but more of that investment is really focused on the scaled adoption of AI across WPP's agencies. We're using WPP Open to deploy AI tools into the workflow. For example, I now have WTP Open on my iPhone, allowing to demonstrate the power of AI in the creative process to clients. The other benefit of WPP Open is to allow us to streamline how we work together across the company and to bring creative, media and production activities together more seamlessly. It's being architected in a way that allows work to flow across the company and also, importantly, data. This is going to be critical to delivering both efficiencies in production as well as more effective media plans and driving data into the creative process. As we roll out WPP Open across the organization, we are seeing continued steady growth in adoption across the enterprise. Monthly active users are up 107% since the start of this year, and LLM usage up 300%. So not only are more people using it, but they're using it more often. And I would make one more comment on AI. While it's fundamental, I still think that 2024 is a year of, let's say, proof of concept where we see what AI can do and its potential. Next year, we're very start to see its impact more fundamentally on the business. That said, where we are seeing the impact is in new business, where clients are starting to look much more at technology usage and adoption. I said at the start of this year, client RFPs barely mentioned AI. That's starting to change and clients are looking for partners who have strong capabilities and platforms powered by AI. The third area of strategic progress to highlight is the sale of our stake at FGS Global to KKR. It's a strong company, and we're very pleased with our partnership with management that allow us to create more than $500 million in value for WPP shareholders over the last 5 years. The sale was a very strong valuation and allows both to strengthen our balance sheet and give us more financial flexibility over the medium term. As Joanne said, we expect the transaction to close before the end of the year, and we'll be using the proceeds to reduce debt and leverage. We also acquired NCA in the U.K., a very strong creative and experienced agency led by James Murphy and David Golding, being brought together with Ogilvy in the U.K. and will further strengthen Ogilvy's offer here in this important market. So in conclusion on Page 14, I'd say it's been a very productive quarter. We've made continued progress on our strategic objectives, returned to growth in the quarter, which, while it was expected, is a positive step. We won significant new assignments. But we are restating our guidance given the impact of those assignments will start in 2025. So perhaps I can close on why I am and our leadership team is positive for the future for WPP. I think to start with, it hasn't been an easy 12 months, with pressures from technology clients, a very tough market in China, a softer macro environment weighing on some of our more project-related businesses, as well as the painful loss of our health care clients. We also has to be more both internally focused on the further restructuring that's been needed to prepare the company for the future and externally focused in major clients to defend and to pitch. I'd say the leadership time we've had -- the leadership team had a busy time, but that's the reality. We're not making excuses. I do think in that context, the last quarter is important when we go into 2025 with more confidence, more external focus on being more competitive. It's early days, but I do believe we can see how we can be more externally focused now with much of the restructuring behind us. We're winning more new business, critical pitches with 2 of the world's top 10 advertisers. We have a strong new business pipeline. There's some at risk, but no more than that at any time. We went with everything as we have strong competitors, but I do believe we're in a much better position than we were this time last year. We have a very well-balanced business in media, production, and creatively and geographically in the United States and internationally, with real strength for major global clients. And most importantly, I believe that AI is a once in a generational shift, just like the Internet was 30 years ago. Sadly, I'm old enough to remember its impact, but it's very reminiscent today at that time. And where we are now is very similar. The early adopters, and I believe we are an early adopter, can see the potential. It's not quite ready, but it will be. And the critical task ahead of us is to focus on delivering that and staying the course. That's certainly what we're going to do. So thank you very much for listening, and now we'll take your questions.

[Operator Instructions] We will now take our first question from Laura Metayer with Morgan Stanley.

Three questions from me, please. The first one is what would need to happen in Q4 for you to reach the top end of your full year 2024 guide? Second question is on the recent wins. So first of all, congratulations on your recent wins. Could you give us an idea of the impact of the net new business on 2025 growth? And when do you expect your recent wins to impact your revenue? And last question on GenAI. So you mentioned you expect GenAI to be a revenue contributor in 2025. Do you affect the pricing model of ad agencies to evolve with more GenAI products being levered? Or is that too soon to know yet?

Okay. Why don't I take the GenAI question and then Joanne can take the 2 questions on the guidance in 2025. But I think that we are seeing the impact of our investments in our -- in new business and in assignments with clients. I think it's too early to say how it will impact the pricing model. I think we talked before that we do have significant parts of our business that are on fees, relatively smaller parts on commission and a number of parts of our business we do within GroupM and Hogarth have output-based pricing. I think broadly speaking, we can expect GenAI to lead to more output-based pricing. I think we have to see what happens over time. There's also the opportunity set before for us to earn technology license fees and other technology fees that are linked to those investments. But I think broadly speaking, I think we will start to see more of an impact of GenAI on our revenues in the next year. I think there's nothing to suggest so far that, that will be negative. And certainly, at the moment, it's contributing positively to our revenues. Joanne, do you want to talk about guidance for next year?

Yes. So thanks, Laura, for the question. Look, our full year guidance of minus 1% to flat would imply a range of minus 2.3% at the bottom and 1.4% growth at the top end for Q4, and the midpoint of that is minus 0.5%. And where I'd probably start with is the differential in the comp is about 90 basis points between Q3 and Q4. So that is going to be a factor within that. And then other factors to consider. I think perhaps most important is the macro. Q4 is our biggest quarter, and therefore, it does tend to be a little bit more volatile. And we're not seeing any easing in that macro. There remains a lot of uncertainty across the economic and geopolitical landscape. So that will be a factor. We would need to see an improvement in China. At this point, the central cases, we'll see continued trends as we've seen in the last couple of quarters in that market. And then, of course, is tech. So we're encouraged by the stabilization of -- the further stabilization of tech in the third quarter. It is a tougher comp in Q4. So we were down almost 13% in Q3 last year for tech. And in Q4, it was down 5%. So those are some of the factors to think about. And all of those would need to move in the right direction to hit the top end of that range. And then to your second question on the impact of net new business on 2025. Look, we've said before that in any year, net new business tends to have a plus or minus 1.5 percentage points on like-for-like. And now for 2025, we're certainly not expecting to have the same drag on the top line for net new business as we have in '24. Most notably, that health care loss will largely fall away in 2025. And we are encouraged by the wins that we've seen in Q3. At this point, we're probably neutral on the impact of net new business. And so to move that into positive territory, we'll need to continue to build on the recent new business success that we've seen in Q3.

Our next question is from Nicolas Langlet with BNP Paribas.

I've got 3 questions, please. The first one on GroupM, so we are now a couple of months after the nomination of Brian Lesser as new CEO. Curious if there have been any new key initiatives that has been discussed for GroupM? And when do you expect the benefit of those actions? Secondly, on M&A, this year will likely be a light year. Anything in the pipeline that could impact 2025? And are there any specific areas you are looking at, at the moment? Finally, on the midterm margin. At the Capital Market Day, you mentioned steady improvement beyond 2024. Considering the current market condition, the disposal of FGS Global and the current level of reinvestment, do you still expect this steady improvement? Or it's more back-ended in your midterm plan?

Okay. So I'll cover GroupM and Joanne will take 2 questions. Look, I think Brian has been with the business, I think, 5 or 6 weeks. I think it's too early to -- to be specific, what I would say is that I think he would say and we would feel that the synergy project, the simplification of GroupM that we started last year is very much a step in the right direction. So it's very much about continuation of that process. I think he's focused on talent, technology, data and the product. I think the product is important. Brian came from Xaxis and 24/7 Real Media that we acquired in 2007. And he was the founding CEO of Xaxis, I worked very closely with him at that time. And I think we led the way at that time in new media models and new media products for clients. And I think that's something that very much he plans to continue. So I think we'll update you as that progress goes. But there's nothing more to say at this point. Joanne?

Yes. Nicolas, just starting with your question on M&A. Look, at the start of this year, we said that the focus this year would really be on organic parts of the business. That's the 3 strategic initiatives on our investment in WPP Open. And as Mark has shared, we had really good progress on those. So I wouldn't read too much into M&A being a light year. I would expect that from next year, we'll get back to more normalized levels. And of course, there has been some M&A activity in the market, and we have looked at those opportunities as we do. There's nothing significant that we have in the pipeline currently. In terms of your question on midterm margin, nothing really has changed since setting that financial framework in January this year at the Capital Markets Day. We remain confident that it's the right financial framework for us, and we will deliver against that. The 3 big drivers of that margin improvement, first of all, is the structural cost-out, and we're absolutely on track to deliver that net saving of GBP 125 million, which we'll fully realize in 2025. We then talked about efficiencies across the front office and the back office, which we are getting on with. And also operating leverage as we move towards that medium-term growth target of 3% plus. So those all still stand. We talked about the 16% to 17% range being really reflective of the investment that we already make in our business and we'll continue to make, with the priority being around Open and AI, as you've seen and heard. With regard to FGS, we -- the impact on margin will probably be about 20 basis points. It will be broadly neutral on EPS because we fully consolidated that business. So it's not material enough to have a significant impact on that medium-term guidance of 16% to 17%.

Our next question is from Adrien de Saint Hilaire with Bank of America.

Yes. First of all, can you just remind us like what was the headwind from account losses in '24? I think you called out the health care loss being a 1 point drag, but was there anything else for '24? And then Mark, recently, there's been a number of profit warnings in the automotive sector. Some consumer good companies have also been talking about lower growth. I'm just curious, across these 2 groups, like what's been the tone of conversation with these 2 companies? Are they still keen on investing more on marketing? Or are you seeing the usual, I would say, knee-jerk reaction that when sales go down they tend to reduce marketing spending?

Yes, I think on the question on headwinds I think, as Joanne said, it's plus or minus 1.5%. And if -- we always win business and we always lose business. But I'd say if you said this year was minus 1.5% beyond what we would expect, given it was not a good year, I think that's not an estimate, it'd be a million miles away. I think on the second point, Look, I think we're seeing companies continue to invest in what I would call ongoing marketing, brand building, sales, things that drive consumer demand and build brands. I think where we're seeing pressure is on the more discretionary elements of the marketing mix. And that means within CPG and auto. And look, if you look at our top 10 clients and their growth, it's very strong at 7% in Q3 despite the impact of Pfizer. So I think you can see that in the numbers. Where I think we're seeing more pressure is sort of more smaller clients, more discretionary business. I think automotive, it's definitely competitive. I don't see companies certainly not slashing spending or pulling back. I think it's really about getting the right balance between price and volume and innovation. But I think the general tone we've seen from clients is, particularly in CPG, a return to, since COVID, consistent investments in marketing. And I think you see that across the sector.

Our next question is from Tom Singlehurst with Citi.

Tom here from Citi. You specifically called out the impact of Media Studio within WPP Open in winning new business. Can you talk a bit more about the broader impact of Media Studio on the existing clients? How broadly deployed it is and what the benefits are for advertisers? That's the first question. And then the second question, if it's okay. Other big holding groups have sort of talked again about the role of smaller and more project-related networks play and have even considered sort of sales or disposition of the route to go down. With respect to WPP, is there any chance this might be something you'd consider for AKQA given its challenges?