WPP plc (WPP) Earnings Call Transcript

Good morning. I'm Lisa Yang, and I cover the EU media and Internet space for Goldman. Welcome to our 29th Annual Communacopia Conference. It's a great pleasure to be joined today by Mark Read, the CEO of WPP. Mark, thank you very much for being here. I know it's an incredibly busy time. But before we start, I need to read the following disclaimer. Goldman Sachs agrees to host conference on the basis that no third-party speaker would provide confidential or material nonpublic information. In addition, by attending this conference, you provide Goldman Sachs the right to record and redistribute the conference information. The views of third-party speakers not necessarily reflect of Goldman Sachs. We are required to make certain disclosures in public appearances about Goldman Sachs' relationship with companies that we discuss. Disclosures relate to investment banking relationships, compensation received or 1% or more ownership. We're prepared to read aloud disclosures for any issuer upon request. However, the disclosures are available in our most recent reports available to you as client on our firm portals. Disclosures and updates to those disclosures are also available by ticker on the firm's public website. Also the views stated by non-Goldman Sachs personnel do not necessarily reflect those of Goldman Sachs. And finally, disclosures applicable to research with respect to issuers, if any, mentioned herein are available through your Goldman Sachs representative or on our website. With that, let's kick off.

So Mark, it's just been over 2 years since you took over as CEO of WPP. You implemented a major turnaround plan to simplify the business and ability for great growth. As we are now in the second year of your 3-year plan, could you maybe talk about the progress on the execution, the main achievement, challenges? How COVID-19 might be affecting this? And what is going to be your main focus over the next 6 to 12 months?

Okay. So thanks very much, Lisa. Thanks for having me. And thanks, everybody, for listening. So we set out sort of the new strategy, if you like, on, I think, December 11, 2 years ago. And I think what I'm particularly pleased about is really the speed at which we've moved. If you look -- for WPP is a relatively complex company, over 100,000 people, operating in 112 countries around the world with really a pretty complicated structure. If you look at what we've done, I'd say things fall into sort of 3 broad categories: one around leadership; second around simplifying our structure, which is sort of related to leadership; and then the third about taking care of the balance sheet. From a leadership perspective, we brought in a new Chief Financial Officer, John Rogers, who started at the beginning of this year; a new Chief People Officer; and we've either replaced or promoted, I mean, many of the leaders across our business most recently. Andy Main joined us from leading Deloitte Digital globally to run Ogilvy, but we have new leadership at GroupM in Christian Juhl; new leadership at Hill+Knowlton with AnnaMaria DeSalva back; new leadership at Geometry; and then Jon Cook and Mel Edwards both stood up to run VMLY&R and Wunderman Thompson, respectively. So we have pooled in a lot of new leadership and new creative talent. Secondly, we've really made a lot of progress in terms of simplifying the structure of WPP. We wanted to eliminate the sort of artificial silo between so-called traditional or analog businesses and digital businesses to put new technology at the heart of WPP, so the creation of VMLY&R and Wunderman Thompson address part of that; but also other tidying up, bringing Finsbury, Glover Park and Hering Schuppener together to create Finsbury Glover Hering that we announced about 2, 2.5 months ago; or declaration of BCW as a global network in -- or stronger global network in public relations and public affairs. We've gone from -- when I asked how many brands we had in WPP when I started, no one actually knew the answer. And what we can count we've gone from 480 brands to 280 brands. So I'd say we've made a lot of progress, though we would say there's probably still a little bit more to do. And then on the third area of the balance sheet, we've really through our disposal program raised GBP 3.5 billion. GBP 2.5 billion through the sale of a majority interest in Kantar to Bain Capital, in which we still retain 40%. Another roughly GBP 1 billion through a number of other businesses. Roughly, we made about 50 disposals of various sized companies we owned, 100% of through to associates and investments, with very little impact actually on the P&L, because most of them were really investments or associates. And I think that we worked at some pace through that. Much of that happened in the first 18 months sort of running into COVID. If you look at the results, to the second part of your question, I think that we've seen a relative improvement to our peers in organic growth. In the first 2 months of this year, the U.S. business sort of pre-COVID was down 0.9% versus down 9% in the first quarter of 2019. I mean we really had, I think, quite a difficult 2018 in terms of client retention. And that obviously impacted the net sales sort of from Q4 2018 into 2019. And a key focus has been improving our organic revenue performance in the U.S. And I think to get just shy of flat in the first 2 months of this year indicates the progress we've made in continuing with really quite long-standing structural issues and leadership issues in our business in the United States. The last time we grew in the U.S. I'll remind you is the first quarter of 2016. This is not a sudden thing that happened in mid-May 2018. These are deep-seated structural and leadership issues in our U.S. business that we addressed. I think the second area we can see in our results is in new business. We've led over new business tables this year. And I think that shows where the group is competitive and shows that if a offer is winning in a market and gives us confidence for the future. And then the other half of the new business coin is retention. We've had a really strong track record of retaining clients. A recent publication yesterday, COMvergence, to the media business, GroupM, they estimated to won about $3.5 billion of media billings. That's 5x the new business wins of our nearest competitor. And so I think that we've seen as well much more resilience and performance from our largest clients. Two years ago, our largest clients were actually performing worse than the rest of the group. And today, they're performing somewhat better than the rest of the group. And I think that's what's given us relative stability this year. So net-net, I think that's how we see things. Now turning to -- I mean maybe we'll take the question sort of longer-term about COVID. But I think it's really sort of building on that -- on those sort of foundational steps the last 2 years.

Great. Clearly, the U.S. has been a standard region for you, but also for the broader agency holding companies during and even before COVID-19. So I'm just wondering given the U.S. has been such a challenge for many of the agencies for a long time, and now it's getting -- turning into the best performing region, what does it tell us in terms of, I guess, either changes you see in terms of the structural challenges facing the agencies and maybe the resilience of your business model? And what sort of confidence does that give you that the agencies are well positioned to rebound next year?

I think the biggest driver of performance between the U.S. and the rest of the world, to be honest, is COVID, really. I mean at the end of the day, if you look at our numbers, you can see in markets that suffer a full lockdown, you see a 20% to 25%, maybe even 30% decline in revenues in a particular month. When the lockdown is relatively relaxed, it's more like 10%. So I think that the U.S. versus rest of the world performance is more driven by the fact that the rest of the world underwent, particularly in Western Europe, more severe lockdowns for a shorter period of time. Having said that, I do think that the U.S. economy is resilient, and our largest clients have been more resilient than our smallest clients. Our top 200 clients in the first half of the year were down, I think, around 4.5% compared to closer to 9.5 -- compared to 9.5% for the rest of the group. And so that relative resilience we see, I think, in our U.S. business. So I don't think we can declare victory yet in the U.S. And as you know, performance in the U.S. has been a little bit tailored to cities. The 2 American companies have performed relatively better. And the 2 sort of European companies have had a tougher time. And to some extent, I think, in Q2, you've seen some of that pattern not be so clear to materialize. So I think certainly from talking from a WPP perspective, I think that the emphasis we put on our business in the U.S. has certainly helped.

Great. I'm just thinking in terms of the overall environment, the current trading environment. You indicated at the first half results that July was down 9%, which is a good improvement versus the minus 15% you put in for Q2. And we've also been hearing better trends from some of the broadcasters on August, September and some of the FMCG companies also talking about reinvesting in the second half. So I appreciate a lot of moving parts. The visibility is still limited, but how does that make you feel about Q3, H2? Maybe can you share some color you may have on the -- how Q3 is trending any -- by regions or by practice?

Yes. I can't really share any color beyond sort of what we disclosed around July, which you pointed out, I think, we were down 9.2%. And I think within that, you can see some markets that were relatively better and some markets that were relatively worse, which I think indicates sort of the volatility in performance market-by-market. My second observation would be that really the point of comparison is not really the first half, but really Q2 at minus 15.1%. And therefore, I think we're comfortable saying that the full year outturn is going to be within the range of analysts' expectations. And there is still considerable uncertainty over what's going to happen between now and the end of the year. I mean, we're certainly not in any way out of the woods from a COVID perspective. I think when we sort of -- when we shared our -- when we present our interim sort of 3 weeks ago, I think, we'd be a little bit more confident, certainly, in the U.K. than we are 3 weeks later. So I think that we're comfortable with what we've said. We are giving guidance, which is one of the few agencies, I think, that are giving guidance. We are giving guidance. And I don't think you can read more into it than that. I mean we remain rightly, I'd say, cautious about the outlook in the second half and the speed of recovery and the risks which remain.

So I think the European agencies have been impacted. And the reason why they also underperformed the U.S. counterparts was due to their high exposure to FMCG. So I'm just wondering with the recent comments by, for instance, Kraft Heinz that they're going to be increasing their marketing spend by 30% over the last 5 years. Do you think we sort of -- we have sort of reached the bottom in terms of ad intensity amongst the FMCG category? And when this company talk about reinvesting, how do you think WPP is positioned to capture this increasing spending?

Yes. I think if you look at our top 200 clients, in the analysis we gave, 56% were in packaged goods, telco, health care. They were only down 0.7% in the first half of the year compared to 9.5% for the rest of the group. Now I think that reflected the nature of their business as much as sort of their approach to marketing. So I don't think you can look at that and say the pressures on cost have gone away. I think that you get -- you sort of get what you'd expect. You get the group of companies that are more resilient. Then you get the group in the middle, telco, financial services, media that are somewhat impacted down 2.7%. I think you get the businesses that are luxury, travel and tourism, down 11.7%. And I think I take some confidence from that in a sense that our top 200 clients performed better than average. I think the pandemic has affected smaller companies more than bigger companies. And I think that as we come out of it, the travel, tourism should bounce back relatively quickly, though I think it will take some time for them to get back to previous levels. And so I think that you can look at that and say the value -- it demonstrates the value of what we do to those companies and our ability to help them manage their way through the recovery. When we say to clients, the -- sort of where you've encouraged clients to look at this is to react, recover and renew. React is, as you come into the pandemic, make sure that your communications are appropriate. You're talking to customers in the right way. We done work with clients like Pfizer or Unilever, P&G around that. Then let's recover, where are the pockets of recovery. And in automotive, it's very interesting. We've been doing work literally in sort of state-by-state level, looking at how mapping lockdowns to demand. It's going to forecast out 2 to 3 months when the demand will pick up and how we need to go into the market. But recovery isn't really enough. What actually it's really about is renewal, fundamentally, clients looking at their business in a post-COVID world, looking at what's changed, the shift online, the growth in e-commerce, the relative weakness of the high street, shifting patterns within cities versus rural and how do they renew their business to take advantage of those opportunities or to avoid the pitfalls, if they don't renew.

And I guess, just following on your point about the sort of structural shifts we are seeing coming out of this crisis, shift to online, to e-commerce, how do you think about WPP's existing skill set and capabilities? Do you feel in order to be able to better, I would say, capture those new revenue streams you need to make any significant effort in terms of maybe reskilling your existing talent pool? And I guess, you have obviously the opportunity from the growth areas. And on the other hand, you have, I guess, attrition in some of the more sort of creative areas or maybe even the traditional media buying. So net-net, do you think the structural changes we're seeing out of COVID-19, is that a net-net positive or negative for WPP?

Well, look, I think that we'll pick up on the point about attrition in the media business, I disagree with that, but let's not forget to address that. Look, I think the -- what people would say is that COVID-19 has accelerated all of the trends that were preexisting in society, all of them, but pretty -- has been an accelerant to existing trends. I'm not the first person who have made the observation, but I think that is the right one. The shift online, the growth in e-commerce, tensions between the U.S. and China, the -- all of those things are things that were happening. And so I feel, in that sense, I feel like we have the right strategy to simplify, integrate technology into the heart of WPP, to invest in e-commerce, to make the groups to manage, to strengthen the balance sheet, to provide us with resilience through the economic cycle to look at how we can offshore work, to do it in more cost competitive locations, the investment we made in our technology platforms that allowed us to work in this remote way pretty seamlessly over the last 6 months. So I think that the strategy is right. My conclusion would be that we need to accelerate what we're doing and invest more aggressively in that. We are working, as we said, with 8 of our top 10 clients on various e-commerce initiatives. I'd like that to be 10 of our top 10 clients. But I think the investments that we've made put us in a good place but I think that we need to continue to invest and to double down on that. Now turning to your point about sort of traditional creative and media planning and buying, I don't agree with that. Actually, if anything, if you look at our client satisfaction scores, which have improved during COVID. So our client satisfaction scores have gone to sort of 7.3, 7.4 to 7.8. And specifically, when we ask about COVID, 8.1. I think that reflects the fact that clients value what we're doing. You have to communicate in sensitively and in the right way with consumers in this environment. So I think sort of old-fashioned creative schools actually are just as important, but they need to be expressed over new technologies. Similarly in our media planning and buying business, clearly, a business that's much more directly linked to media advertising, has been more impacted during this time. This advertising spend has declined in some typical markets -- I think globally, 22%, but some markets 25%, 30% and 45%, 50%. So clearly, that business has been more impacted. But I think that's a cyclical impact that will come back as the market comes back. And from -- analysts would be obsessed by the fact that we had sort of detached from advertising growth. But actually, on the downturn, it's proven beneficial. I think GroupM estimated ad spend in the first half down 22%. Our revenues are down 9.5%. So we've been relatively -- we've done relatively better than the advertising market. Now that would also mean that we bounced back less quickly, which may come to some of your questions you have about our net sales forecast for the rest of the year and comparing that to broadcasters and meaning that the confidence -- the caution that we have is the right one. But I think that net-net is to back where we started. I think it's really a question of accelerating the changes that we're making. The fact that VMLY&R -- they grew in the United States. The fact that our integrated business have done well, it should be better, should give us the confidence that we're sort of -- we're heading in the right -- we have the right strategy, and we're heading in the right direction. And that we need to move faster. And what we don't want to do is to get the lessons of COVID. We're making -- we made a television ad for a telco client in 16 days from start to on-air. It would have taken us perhaps 16 weeks before this. The fact that senior clients are more involved in client conversations is also important. So we're working faster. We're using technology in different ways, not just about working from home and working from the office. Really the way that we collaborate with each other and with clients, and I think our relationships with clients have improved as well. And we don't want to lose a lot of that efficiency when we come out of this either.

A question on your new business performance, which has been quite strong over the last 12 months. Could you maybe share a bit of details about who you've been winning with? What type of work you've been winning? And broadly speaking, like how do you see the competitive environment for pitching evolving going forward?

Look, I mean, the great thing about our business is it's always competitive. And so that's good. I think that we've done a good job both in sort of winning new, new business like the global Intel creative business to consolidating business with existing clients like our creative work with HSBC. But our wins really have come across the board, both from our creative agencies. VMLY&R, Wunderman Thompson, have done particularly well, but so has Grey and Ogilvy. I think we've got 3 of the top 10 creative networks in the league tables from WPP. But our media business has also performed very strongly in new business. I mentioned the COMvergence report, where we've won $3.5 billion of billings to 5x our nearest competitor. And I think that reflects the strength of GroupM's franchise and its sort of data and technology and digital offer. I think it's also part of being better organized as a company. We've invested in a central new business team that I think have really coordinated our efforts. The group has become -- worked more collaboratively. I think we've really doubled down during COVID to make sure that we pitch in the right way and show up well. And if I look at our new business pipeline, it did dip by about 20% in sort of March -- sorry, sort of January, February through March, April to May, but actually we're back really where we were at the beginning of the year. And we always have business under review. The biggest thing under review at the moment is WBA, Walgreens Boots. And we'll have to see how we do on that. We're not in any way complacent on this thing. But I think that net-net, there's probably more opportunity for us than there is not. And that does contrast with 2 years ago, where the 2 or 3-week periods where we lost sort of 8 pieces of business in a row in various new business pitches and things. But I think that just reflected deep-seated issues with our relationships with some of our largest clients. If you remember, May 2018, Ford, who is our large client, put us under review, and we had our evaluation with them. That was extremely positive a month or 2 ago. So I think we've done a lot of work to fix the basics of our relationship with clients and address a lot of the client satisfaction issues or quality work issues.

That's great. I think there's a lot of concern from investor community around the potential impact of the cookie change announced by Google Chrome, but also Apple's limiting tracking on iOS. How do you think the real impact could be on the ad agencies and/or WPP more specifically? And how does that -- how are you thinking about your data strategy, especially after you have sold a stake in Kantar?

So look, I think that, clearly, there will be a big impact by these changes on the media industry, more broadly. But I think most of the impact will be faced by publishers and probably, unfortunately, smaller publishers that rely on the simplicity of cookies to optimize the sale of their inventory and maximize the value. What inevitably will happen will be those companies that have first-party data relationships or logged in users will gain a larger share of the media dollars. So that would tend to be Facebook or Google or Amazon, and those publishers that don't will suffer. From a -- and I say companies like The Financial Times or Dow Jones or The Wall Street Journal that do have logged in users or people that look to apps would also be fine. I think the issue for agencies is less clear because I think, ultimately, I don't think it will reduce the amount of money spent on advertising. It will sort of reduce the effectiveness of the signal but the money that we would have spent on channels driven by cookies will just go to different channels. So I don't think net-net it's a particular issue for us. If anything, by making the environment somewhat more complicated, it may increase the value that we have. And I think it will lead us to different conversations with clients about how we activate their first-party data across the Internet, which I think is beneficial to us. Now if I turn to Kantar, Kantar isn't really a data business, in a classic sense truly a market search business. And so I don't think that really -- it's impacted in those areas where it is a data business or owns its own data, Kantar Worldpanel or Kantar Media, they're not cookie-driven businesses. They have their equivalent of logged-in users. So I don't think it has an impact on Kantar or our decision one way or another as to what to do with it. But I think it has clearly impacted businesses that have been very cookie-dependent, retargeting businesses, some immediate businesses. And I think they are going to have a tougher time without sort of the ease of the use, ability to hoover up data that cookies did provide. I think, net-net, from a consumer perspective, that is beneficial. At the end of the day, we want consumers to feel safe on the Internet or safe on digital media. And that their data is not being misused or used in the wrong way. So I think that while there will be some sort of loss of fidelity or signal, I think in the long run, when you're protecting and leading on the side of consumer privacy is the right way to go.

That's very helpful, Mark. Maybe switching gears to your margins. Obviously, the first half, you and many of your peers have a surprise possibly on the margins. And you also sort of raised sort of your cost savings target for the full year. I guess, beyond, I would say, the sort of more like near-term cost savings associated -- we had obviously a decline in travel, et cetera. Like how are you thinking about the more structural cost savings opportunity that is going to result from COVID in terms of working from home, the ability to significantly reduce your office space? Could you maybe share some lights on the work you've been doing there? And what's potential benefit which we could see in the coming years?

Yes. So I think that, as you say, we've done a good job so far, I think, of managing the cost base through this. I think coming back to sort of the first question you asked me about how we've done it in implementing the strategy. I'd say there's one area where we haven't made as much progress as we would like, it will be sort of addressing the structural elements of our cost base and building shared services, particularly in areas such as finance and HR. And part of that has been because there's a more -- they are more complicated areas. We are a complex organization. Secondly, John Rogers, our CFO, you said didn't really start until the beginning of January next year, and I think it needed a new CEO -- sorry, CFO, to take a fresh start at tackling it. So I think that's what we're going after. And so what we'll see is both a mix of those sort of longer-term structural savings from addressing costs in our finance and HR functions as well as COVID-related costs. We believe that about 1/4 of the cost savings we make will be permanent in those areas around sort of people and internal structure, there are areas there around travel and around property and around procurement. I mean we're saving a tremendous amount at the moment in travel and entertainment. And I don't think we're going to go back to sort of pre-COVID levels. We actually just ran our leadership meeting the last 2 days remotely. We would typically have flown 130 people, 140 people from across the company to Brooklyn to meet at 3 days. We did it all remotely. It cost us, we think, probably 20th of the amount. We've got fantastic feedback from the participants in terms of sort of getting alignment around the strategy and understanding the key messages, and we're able to have 400 people joined, not 114. And those are the lessons that we need to learn. Now on property. I think clearly, we will need less space, more people moving working from home in the future. But I don't think that it's going to be a sort of binary thing where we sell off whole host of offices. I think we're going to have to give people a reason to be in the office and think about what our offices are for, and we have a lot of ideas for that. And I think that, actually, the campus strategy that we've already embarked on, we can really accelerate that. And by bringing people together in single buildings use those buildings more efficiently, provide a space to people who want to come to, space really around collaboration and creativity. And so there will be savings on our property space. [ If you sort of push me, ] it's more -- people who work 1 day in 5, not 3 days in 5, but we'll see -- a part of -- this is what really will be coming back to people at the Capital Markets Day to give you some more quantification really about what these savings would be.