REG - WPP PLC - Third Quarter Trading Update

WPPAnnouncement

26/10/2023 07:00

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RNS Number : 3272R  WPP PLC  26 October 2023

 

                                                                                                                     26 October 2023

 Third Quarter Trading Update

 Third quarter performance impacted by the continuation of second quarter
 trends. Launching the world's largest creative agency, VML, to enhance our
 offer to clients and simplify WPP. Now expect 2023 LFL growth of around
 0.5-1.0% with margin of 14.8-15.0% at 2022 rates.

 

 

                                          % reported 1   % LFL 2 

                                  £m
 Third Quarter
 Revenue                          3,508   (1.8)          2.3
 Revenue less pass-through costs  2,837   (5.0)          (0.6)

 Year to date
 Revenue                          10,729  3.9            3.1
 Revenue less pass-through costs  8,649   1.8            1.2

 

 

n Trading highlights: Q3 revenue -1.8%; LFL revenue +2.3%

n Q3 LFL revenue less pass-through costs -0.6% with growth in UK, Western
Continental Europe and Rest of World, offset by declines in North America,
with continued weakness from technology clients and in China

n Global Integrated Agencies grew revenue less pass-through costs +0.1% in Q3
(YTD +1.5%) with integrated creative agencies declining -1.1% (YTD -0.9%).
GroupM grew +1.6% in Q3 (YTD +4.6%) with low-single digit growth in the US and
UK

n $1.4bn net new business won in Q3, including from Estée Lauder, Hyatt,
Lenovo, Nestlé, Unilever and Verizon. $3.4bn net new business won
year-to-date

n Strengthened offer: Two significant moves to further strengthen our
competitive offer, simplify our business and benefit from scaled technology
platforms:

o Launch of VML, the world's largest creative agency with world-class
creativity and deep expertise in commerce, data and technology

o Further integration of GroupM with common products and single technology
platform, streamlining of operations and back-office functions supporting
client-facing agencies

o Together these moves are expected to drive stronger revenue growth and net
annualised cost savings of at least £100m in FY25 with a part-year benefit in
FY24

n Outlook: 2023 guidance updated: LFL revenue less pass-through costs growth
now expected to be around 0.5-1.0% (previously 1.5-3.0%); with headline
operating margin of 14.8-15.0% (excluding the impact of FX) (previously around
15.0%)

n WPP intends to hold a Capital Markets Day in January 2024 to update
investors and analysts on its strategic roadmap to drive growth, further
efficiencies and margin expansion over the next three to five years

Mark Read, Chief Executive Officer of WPP, said:

 

"In a world being rapidly reshaped, we need to continue to evolve our offer to
clients and simplify our business. I am excited by the creation of the world's
largest creative agency, VML, and the continued evolution of GroupM. Both
these developments will strengthen our offer to clients, simplify the
integration of our services and maximise the returns on our ongoing
investments in AI and technology.

 

"Our top-line performance in Q3 was below our expectations and continued to be
impacted by the cautious spending trends we saw in Q2, particularly across
technology clients with more impact from this felt in GroupM over the summer
than the first half.

 

"We continue to win both creative and media assignments from leading global
companies including significant wins in the third quarter with Estée Lauder
(media), Hyatt (creative), Lenovo (creative), Nestlé (media) and Verizon
(creative). Our net new business performance of $1.4bn in the quarter showed
sequential improvement after a tougher first half.

 

"We will provide more detail on today's announcements, our strategic roadmap
and actions to drive growth, further efficiencies and margin expansion at our
Capital Markets Day in January."

 

This announcement contains information that qualifies or may qualify as inside
information. The person responsible for arranging the release of this
announcement on behalf of WPP plc is Balbir Kelly-Bisla, Company Secretary.

 

For further information:

 

Investors and analysts

Tom
Waldron
+44 7788 695864

Anthony Hamilton                           +44 7464
532903

 

irteam@wpp.com

 

Media

press@wpp.com                              +44 20
7282 4600

 

Richard Oldworth                             +44
7710 130 634

Buchanan Communications         +44 20 7466 5000

wpp.com/investors (http://www.wpp.com/investors)

 

 

 

Looking ahead

 

We have made great progress over the last five years, investing in creativity
and technology and behind fewer, stronger agency brands strengthening our
offer to clients. We have attracted new talent, particularly in the United
States, and invested in data and technology capabilities with a common
approach that supports collaboration and delivers results to clients. Our
early investments in AI can be seen in the many examples of work that we are
doing for clients. We also moved quickly, through the sale of Kantar, to
address our leverage and ensure our balance sheet is in a much stronger
position, while returning surplus capital to shareholders and paying a
long-term sustainable dividend.

 

Much has been achieved, but the world is changing fast, and there is now more
to do, particularly as we look out at the environment over the next five
years, to ensure that WPP remains relevant and competitive to major global and
local clients.

 

Today we have outlined two strategic initiatives that will strengthen our
client proposition, further simplify WPP and better equip us to navigate a
future more shaped by technology.

 

1. VML: Creation of the world's largest integrated creative agency.

 

VML will bring together the people, creativity, commerce, data and technology
offering of two of our most successful agencies: VMLY&R and Wunderman
Thompson. The combined agency will benefit from the complementary nature of
their geographic strengths as well as bringing world-class capabilities in
CRM, data, experience design, influencer marketing, marketing technology and
ecommerce to the clients of both agencies.

 

VML will be operational on 1 January 2024 with more than 30,000 people and
will provide clients with the highest level of creativity, commerce, data and
technology expertise in 64 markets globally. It will be led by Jon Cook as
CEO, who has successfully led VMLY&R and, prior to that, VML since 2011,
and Mel Edwards as Global President who previously led Wunderman Thompson for
five years.

 

2. Simplification of GroupM's operating model.

 

GroupM embarked on a simplification plan in 2020 under new leadership which
will now accelerate and move to a second phase. The new structure will retain
its strong agency brands, EssenceMediacom, Mindshare, Wavemaker and
mSix&Partners, but support them with common media products and a single
technology platform, with shared services in finance, IT and HR.

 

One element of this is GroupM Nexus, GroupM's performance media organisation,
which provides the agencies with a unified digital media offering and in the
third quarter retired certain individual brands including Xaxis, Finecast and
Sightline.

 

The creation of VML and the simplification of GroupM will strengthen these
companies' competitive positions, allow further investment in client-facing
expertise and help them to accelerate their growth. In addition, the reduction
in operational complexity and duplication that accompanies these changes is
expected to result in net annualised cost savings of at least £100m in FY25,
with a part-year benefit in FY24. Associated expected restructuring costs are
anticipated to be predominantly in FY24. The carrying value of brands impacted
or retired by these actions will be assessed as part of our regular impairment
review process and this may result in additional non-cash charges in the
fourth quarter.

 

These net savings are in addition to the expected benefit from the
transformation plan which we set out in December 2020, designed to achieve
£600m in gross annual cost efficiencies by 2025 (with £200m net savings). We
are on target to achieve an annual run-rate of £450m in efficiencies this
year, against a 2019 baseline.

 

We will provide more details on these actions and our strategic roadmap to
drive growth and margin expansion over the next five years at a Capital
Markets Day in January.

 

 

Q3 overview

 

Revenue in the third quarter was £3.5bn, down 1.8% from £3.6bn in Q3 2022,
and up 2.3% like-for-like. Revenue less pass-through costs was £2.8bn, down
5.0% from £3.0bn in Q3 2022, and down 0.6% like-for-like.

                                  Q3 2023  %          %         %      %

                                  £m       reported   M&A       FX     LFL
 Revenue                          3,508    (1.8)      1.6       (5.7)  2.3
 Revenue less pass-through costs  2,837    (5.0)      1.1       (5.5)  (0.6)

 

                                  YTD 2023  %          %         %      %

                                  £m        reported   M&A       FX     LFL
 Revenue                          10,729    3.9        1.2       (0.4)  3.1
 Revenue less pass-through costs  8,649     1.8        0.9       (0.3)  1.2

 

 

 

Business segment review

 

Revenue less pass-through costs

 

 £ million                   Q3 2023  Q3 2022  +/(-) % reported  +/(-) % LFL  +/(-) % LFL (YTD)
 Global Integrated Agencies  2,347    2,460    (4.6)             0.1          1.5
 Public Relations            283      297      (4.9)             (0.9)        1.1
 Specialist Agencies         207      229      (9.6)             (6.8)        (2.2)
 Total Group                 2,837    2,986    (5.0)             (0.6)        1.2

 

Global Integrated Agencies: GroupM, our media planning and buying business,
saw LFL growth in revenue less pass-through costs of +1.6% in Q3 (YTD +4.6%),
on lower spend from technology clients and the impact of client losses in the
United States resulting in low-single-digit growth in the US and UK and a
slight decline in Germany. This offset good growth in APAC markets.

 

Our digital billings mix within GroupM increased to 51%, compared to 48% in FY
2022.

 

In our integrated creative agencies, a LFL decline of 1.1% in Q3 (YTD -0.9%)
represented an improvement on Q2's LFL of -2.3%.

 

Ogilvy grew well, supported by recent new business wins including SC Johnson
and Verizon B2B.

 

Other integrated creative agencies, Wunderman Thompson, VMLY&R, AKQA Group
and Hogarth all felt a continued impact from reduced spend across the
technology sector and delays in technology-related projects.

 

Public Relations: FGS Global continued to grow well in Q3 while H+K and BCW
both saw LFL declines, with all three agencies impacted by client caution in
the face of macroeconomic uncertainty, primarily in the USA.

 

Specialist Agencies: continued strong growth in our specialist healthcare
media planning and buying agency, CMI Media Group, was offset by reduced
client spending in a number of our smaller stand-alone specialist agencies.

 

 

Regional review

 

Revenue less pass-through costs

 

 £ million       Q3 2023  Q3 2022  +/(-) % reported  +/(-) % LFL  +/(-) % LFL (YTD)
 N. America      1,105    1,222    (9.6)             (4.1)        (2.2)
 United Kingdom  388      381      2.0               1.1          5.8
 W. Cont Europe  554      547      1.3               1.1          2.8
 Rest of World   790      836      (5.5)             2.8          3.0
 Total Group     2,837    2,986    (5.0)             (0.6)        1.2

 

 

North America declined by 4.1% in the third quarter, primarily reflecting
lower year-on-year revenues from technology clients and the expected impact of
2022 client losses in the retail sector. This was partially offset by growth
across CPG, healthcare and financial services clients, with GroupM and Ogilvy
both growing in the quarter.

 

The United Kingdom grew with CPG and healthcare continuing to grow, but at a
slower rate than in H1, offset by declines in technology client spend. Western
Continental Europe saw declines in Germany on lower spend by automotive,
technology and government clients and in France due to client losses; offset
by growth in Spain and other markets.

 

The Rest of World saw continued growth in the quarter but was held back by
China where a slower than expected macro recovery impacted our integrated
creative agencies. India LFL growth accelerated to 7.3% in the quarter with a
strong performance in media driven by new business wins.

 

Top five markets - revenue less pass-through costs

 

 % LFL +/(-)  USA     UK    Germany  China   India
 Q3 2023      (4.2%)  1.1%  (3.8%)   (4.2%)  7.3%
 YTD 2023     (2.2%)  5.8%  2.2%     (4.1%)  2.8%

 

 

 

 

 

 

Client sector review

 

Client sector - revenue less pass-through costs

 

                                             % share  Q3 % growth +/(-)  YTD % growth +/(-)
 CPG                                         26.7     14.5               14.9
 Tech & Digital Services                     17.4     (12.7)             (7.6)
 Healthcare & Pharma                         12.1     1.5                3.3
 Automotive                                  10.3     2.1                0.6
 Retail                                      9.2      (8.4)              (8.0)
 Telecom, Media & Entertainment              6.5      8.4                1.7
 Financial Services                          6.2      3.9                7.9
 Other                                       5.7      (0.8)              (0.5)
 Travel & Leisure                            3.4      4.1                7.3
 Government, Public Sector & Non-profit      2.6      0.0                2.4

 

 

Strategic progress

 

There have never been more opportunities for advertisers to reach consumers,
reflected in the plethora of marketing channels available. Our clients
continue to invest in their brands and seek our support as they navigate this
complexity. In this increasingly complex world, WPP continues to invest in our
offer to make it more relevant than ever.

 

In our creative production activities, we are moving to leverage scale and our
investments in AI and production technology. We are concentrating our
investments here in Hogarth which will take on all creative production
activity not already aligned there and expand its operations into all our key
markets. This will provide clients with a single world-class production
operation with high standards of craft backed by the latest technology.

 

We believe that AI will be fundamental to WPP's business and are excited by
its transformational potential and will cover the opportunity for WPP in more
detail at our Capital Markets Day. Our expertise in the application of AI to
marketing is based on investments that we have been making over many years,
including the appointment of a Head of Creative AI in 2019 and the acquisition
of Satalia in 2021.

 

AI is used extensively across our business today, particularly in GroupM and
in Hogarth. Our application of AI includes automation of workflows, speeding
up the process of ideation and concepting, and producing innovative creative
work for clients.

Clients: We have won $3.4bn of net new business billings in the first nine
months of 2023 (YTD 2022: $5.1bn) including the potential loss of certain
Pfizer assignments currently held by WPP integrated creative agencies. Key
assignment wins in Q3 included Estée Lauder, Hyatt, Lenovo, Nestlé, Unilever
and Verizon B2C. Our performance in the third quarter picked up after a
somewhat disappointing first half.

 

Creativity and awards: Creativity is at the heart of our offer, and we
continue to be recognised for our creative excellence. WPP was named holding
company of the year and VMLY&R network of the year at the New York
Festivals Advertising Awards. Ogilvy was the most awarded agency at the Global
Influencer Marketing Awards for the fifth year running and was recently named
AdWeek's 2023 Global Agency of the Year. WPP global marketing effectiveness
consultancy Gain Theory was recognised by Forrester as a Wave Leader in
marketing measurement and optimisation.

 

Purpose and ESG

 

WPP's purpose is to use the power of creativity to build better futures for
our people, planet, clients and communities. Read more on the ways WPP is
working to realise a more sustainable, equitable future in our 2022
Sustainability Report
(https://www.wpp.com/en/sustainability/sustainability-report-2022) .

 

Balance sheet highlights

 

Average adjusted net debt for the twelve months to 30 September 2023 was
£3.5bn, compared to £2.5bn for the twelve months to 30 September 2022, an
increase of £1.0bn. The increase was primarily due to the 2022 share buyback
programme.

 

Net debt at 30 September 2023 was £3.9bn, compared to £3.5bn reported on 30
September 2022, an increase of £0.4bn.

 

Outlook

 

We are updating our guidance for 2023 as follows:

 

 Like-for-like revenue less pass-through costs growth of around 0.5-1.0%
 (previously 1.5-3.0%); Headline operating margin of 14.8-15.0% (excluding the
 impact of FX) (previously around 15.0%)

 

Other 2023 financial guidance:

•     Mergers and acquisitions will add 0.5-1.0% to revenue less
pass-through costs growth

•     FX impact: current rates (at 20 October 2023) imply a c.1.0%
headwind on revenues less pass-through costs and a c.0.25pt headwind on
headline operating margin

•     Headline income from associates is expected to be around £40m 3 

•     Effective tax rate (measured as headline tax as a % of headline
profit before tax) of around 27%

•     Capex of around £250m

•     Restructuring and property impairment charges of around £400m 4 

•     Trade working capital expected to be broadly flat year-on-year,
with operational improvement offsetting increased client focus on cash
management

•     Non-trade working capital expected to be an outflow of £150m

•     Year-end adjusted net debt flat year-on-year

•     Average adjusted net debt/headline EBITDA slightly above the top
end of our range of 1.5x-1.75x (previously within the range)

 

 

 

 

 

 

 

Cautionary statement regarding forward-looking statements

This document contains statements that are, or may be deemed to be,
"forward-looking statements". Forward-looking statements give the Company's
current expectations or forecasts of future events. An investor can identify
these statements by the fact that they do not relate strictly to historical or
current facts.

These forward-looking statements may include, among other things, plans,
objectives, beliefs, intentions, strategies, projections and anticipated
future economic performance based on assumptions and the like that are subject
to risks and uncertainties. These statements can be identified by the fact
that they do not relate strictly to historical or current facts. They use
words such as 'aim', 'anticipate', 'believe', 'estimate', 'expect',
'forecast', 'guidance', 'intend', 'may', 'will', 'should', 'potential',
'possible', 'predict', 'project', 'plan', 'target', and other words and
similar references to future periods but are not the exclusive means of
identifying such statements. As such, all forward-looking statements involve
risk and uncertainty because they relate to future events and circumstances
that are beyond the control of the Company. Actual results or outcomes may
differ materially from those discussed or implied in the forward-looking
statements. Therefore, you should not rely on such forward-looking statements,
which speak only as of the date they are made, as a prediction of actual
results or otherwise. Important factors which may cause actual results to
differ include but are not limited to: the impact of, epidemics or pandemics
including restrictions on businesses, social activities and travel; the
unanticipated loss of a material client or key personnel; delays or reductions
in client advertising budgets; shifts in industry rates of compensation;
regulatory compliance costs or litigation; changes in competitive factors in
the industries in which we operate and demand for our products and services;
changes in client advertising, marketing and corporate communications
requirements; our inability to realise the future anticipated benefits of
acquisitions; failure to realise our assumptions regarding goodwill and
indefinite lived intangible assets; natural disasters or acts of terrorism;
the Company's ability to attract new clients; the economic and geopolitical
impact of the Russian invasion of Ukraine and conflicts arising in other
international markets; the risk of global economic downturn, slower growth,
increasing interest rates and high and sustained inflation; supply chain
issues affecting the distribution of our clients' products; technological
changes and risks to the security of IT and operational infrastructure,
systems, data and information resulting from increased threat of cyber and
other attacks; the Company's exposure to changes in the values of other major
currencies (because a substantial portion of its revenues are derived and
costs incurred outside of the UK); and the overall level of economic activity
in the Company's major markets (which varies depending on, among other things,
regional, national and international political and economic conditions and
government regulations in the world's advertising markets). In addition, you
should consider the risks described in Item 3D, captioned "Risk Factors" in
the Group's Annual Report on Form-20F for 2022, which could also cause actual
results to differ from forward-looking information.

Neither the Company, nor any of its directors, officers or employees, provides
any representation, assurance or guarantee that the occurrence of any events
anticipated, expressed or implied in any forward-looking statements will
actually occur. Accordingly, no assurance can be given that any particular
expectation will be met and investors are cautioned not to place undue
reliance on the forward-looking statements.

Other than in accordance with its legal or regulatory obligations (including
under the Market Abuse Regulation, the UK Listing Rules and the Disclosure and
Transparency Rules of the Financial Conduct Authority), The Company undertakes
no obligation to update or revise any such forward-looking statements, whether
as a result of new information, future events or otherwise.

Any forward-looking statements made by or on behalf of the Group speak only as
of the date they are made and are based upon the knowledge and information
available to the Directors at the time.

 

 1  Percentage change in reported sterling vs prior year.

 2  Like-for-like. LFL comparisons are calculated as follows: current year,
constant currency actual results (which include acquisitions from the relevant
date of completion) are compared with prior year, constant currency actual
results, adjusted to include the results of acquisitions and disposals for the
commensurate period in the prior year. Both periods exclude results from
Russia.

 3  In accordance with IAS 28: Investments in Associates and Joint Ventures
once an investment in an associate reaches zero carrying value, the Group does
not recognise any further losses, nor income, until the cumulative share of
income returns the carrying value to above zero. WPP's cumulative reported
share of losses in Kantar reduced the carrying value of the investment to zero
at the end of December 2022.

 4  Excluding any additional non-cash charges in the fourth quarter that may
result from the impairment of the carrying value of brands impacted by the
creation of VML and simplification of GroupM.

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