WPP plc Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Q3 Highlights: Net sales down 0.6%, technology clients' spend reduced (from -9% in Q2 to -13% in Q3), slower growth in GroupM primarily in U.S. and U.K. New business wins in Estée Lauder, Nestlé, Unilever, Verizon.
• Strategic Initiatives: Creation of VML to be the world's largest creative agency and simplification of GroupM to deliver GBP 100 million in-year savings by 2025, with stronger revenue growth. Ongoing investments in AI. GroupM simplification to refocus business, improve client service, and ensure competitiveness.
• New Business: Notable wins include Nestlé Europe and PayPal media business in U.S. Ogilvy recognized as Adweek's Global Agency of the Year, VMLY&R Network of the Year at New York Festivals.
• China Situation: Authorities in China asked not to comment on specifics, but immediate actions taken including dismissing involved executive, stopping dealings with third parties, and independent investigation by senior leaders.

Segment Performance

• Global Integrated Agencies: Broadly flat year-on-year in the quarter with growth of 0.1%. GroupM, the media planning and buying business, grew 1.6% but had slower growth in U.S. and U.K. Integrated creative agencies saw a like-for-like decline of 1.1%.
• Public Relations: Revenue less pass-through costs declined 0.9% in the quarter. FGS Global continued strong growth, but BCW and Hill+Knowlton declined due to cautious client spending.
• Specialist Agencies: Declined 6.8% with CMI's strong growth offset by smaller agencies' declines.
• Geographic Segments: North America declined 4.1%, U.K. grew 1.1% but with a broad-based slowdown, Western Continental Europe had mixed results with strong performance in some markets offsetting declines in others, Rest of World grew led by India, China declined 4.2% due to uncertain economic environment.
• Client Sectors: Consumer packaged goods (CPG) grew 14.5% driven by Coca-Cola and others. Telecom, media/entertainment, and automotive improved, while health care slowed and retail was a drag. Technology and digital services fell 12.7% due to tech client spend cuts.

Guidance

• Lowered net sales guidance to 0.5%-1% for full year 2023, headline operating margin 14.8%-15%.
• Expect net debt to be broadly flat year-on-year, average leverage above target range of 1.5 to 1.75x.
• VML and GroupM initiatives expected to deliver GBP 100 million in-year savings by 2025, with half landing in 2024. Details to be shared at Capital Markets Day in January 2024.

Risks

• Continued cautious client spending, particularly from technology clients.
• Macro environment impacts, including tech client spending declines.
• Potential revenue dis-synergy from client conflicts in VML and GroupM reorgs.
• Uncertainty in China market due to regulatory actions and economic environment.

Question and Answer

Q: Tom Singlehurst of Citi asked about the impact on revenue from VML and GroupM reorgs, including phasing of revenue benefits.

A: Mark Read stated scale matters in marketing, previous combinations had minimal client losses, revenue benefits from improved offer and cost savings, with savings expected to be GBP 100 million by 2025.

Q: Julien Roch of Barclays asked about account wins/losses impact on organic growth in 2023 and GroupM simplification's effect on U.S. media scale.

A: Mark Read said new business had a slight headwind but strong pipeline, GroupM simplification aimed at improving execution and competitiveness.

Q: Lisa Yang of Goldman Sachs asked about timing of return to growth in U.S., client feedback since guide cut, and midterm targets.

A: Mark Read said midterm targets stand, client conversations show cautious spending, tech client spend cuts impacted, with Q2 2024 expected to lap tech drag; midterm targets to be updated at Capital Markets Day.

Q: Adrien de St. Hilaire of Bank of America asked about 2024 guidance, leverage, capital allocation, and like-for-like growth impact on margin.

A: Joanne Wilson explained leverage expected to return to range in 2024, focus on cash conversion and M&A in high-growth businesses, with VML and GroupM initiatives to drive growth and efficiencies, full guidance on 2024 in early 2024.

Q: Richard Kramer of Arete Research asked about programmatic/CTV supply chain value and tech client spending impact on retail media.

A: Mark Read said common technology platform in GroupM will help in programmatic/CTV, tech client spending not majorly impacting retail media as it's a reclassification of spend similar to past trends.