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Edited Transcript of WPP.AX earnings conference call or presentation 22-Aug-19 11:00pm GMT

Half Year 2019 WPP Aunz Ltd Earnings Call

SYDNEY , NSW Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of WPP Aunz Ltd earnings conference call or presentation Thursday, August 22, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Rollinson

WPP AUNZ Limited - CFO

* John Steedman

WPP AUNZ Limited - Executive Chairman of Media Investment Mgmt, Interim CEO & Executive Director

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the WPP AUNZ Half Year Results 2019 Conference Call. (Operator Instructions)

I would now like to hand the conference over to John Steedman, Interim Chief Executive Officer. Please go ahead.

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John Steedman, WPP AUNZ Limited - Executive Chairman of Media Investment Mgmt, Interim CEO & Executive Director [2]

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Good morning and thank you for joining us for the 2019 half year results briefing. I'm John Steedman, WPP AUNZ's Interim Chief Executive Officer, and I'm joined by Chris Rollinson, our Chief Financial Officer. I will begin with a summary of the results and the operational highlights. I will then hand over to Chris to run through the financials before I provide an outlook for the second half of the year. We will then open it up for a line of questions.

As it's widely been reported, the major markets in which we operate and service continued to face headwinds in the first half. This, together with a mixed performance across the portfolio, was reflected in our financial performance through the half year. The company's net sales were $405.6 million, down 2.6% on the prior half. Headline earnings before interest and tax was $43.6 million, down 12.6%. And our headline earnings per share was $0.027, down 15.3% on the prior half. While the result is not what we would have liked to report to the market and our shareholders, we had anticipated these challenging market conditions and the results are in line with our internal forecasts.

On a positive note, our business continues to generate solid cash flow. Our cash flow conversion rate was 91% for the last 24 months, and we've declared an interim dividend of 2.3% -- $0.023 per share, which is on par with last year. Our leverage ratio was 2.5x at the end of June, outside of our targeted range of 1.5x to 2x, but our expectation is that it will return within our range by year's end. The sale of the Kantar business, announced last week, will also provide scope to reduce the leverage ratio in 2020. Our high cash flow and proceeds from the sale of Kantar provide us with the flexibility to maintain a high dividend level, pursue targeted investment or undertake capital management initiatives.

At an operational level, a weak media market, combined with global and local account losses, impacted our largest revenue-producing segment, Advertising and Media Investment Management, as forecast in our first half internal. Revenue in this segment was also impacted by the flow-on effect of client losses towards the back end of last year. However, these losses will be well and truly offset in the second half of the year as we benefit from the significant new business won in the first half, including Australia Post, Transport New South Wales and the Defence Force Recruiting. Positively, the diversity of our business means we are leveraged to bright spots in the market. And we saw good organic growth in the Data Investment Management, Public Relations and Specialist Communications segments. The global repositioning of VMLY&R and Wunderman Thompson's is in the early stages of integration, and we've been encouraged by the early momentum in that business. The Large Format Production segment, which has undergone restructuring to drive cost and operational efficiencies, is now midway through its restructure. We are aiming to have the business at a breakeven in financial '20, underpinning our view of a strong second half this financial year.

More broadly, we are making headway in simplifying the structure of our business. In the last 6 months, we have reduced our portfolio of companies by 20 through either closure, merging of brands or disinvestment. This includes the proposed sale of Kantar Australia and New Zealand, which was announced last week. The proposed sale of Kantar for $168 million or circa $150 million net of costs and liabilities will provide balance sheet flexibility going forward.

We're making it easier for our clients to navigate our portfolio, and we are also enhancing collaboration and efficiencies through our co-location strategy. In the last 6 months, we have launched 2 new campuses in Brisbane and Sydney, bringing together 1,100 people from 7 businesses.

In summary, whilst the group's financial performance is disappointing, we are doing all we can to right-shape the group so that we are fit for the future to capture growth in the markets we operate and to entrench our position as a leader in creative transformation across Australia and New Zealand. The overall Australian and New Zealand markets media spend in 2019 is expected to be flat, with varied performance in the individual market segments. We are -- while we are confident of long-term success of the business, our outlook for the remainder of the year is to deliver reduction in the financial '19 earnings per share of between 5% and 10%.

I will now hand over to Chris to talk you through the details of the financial results. Thanks, Chris.

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Chris Rollinson, WPP AUNZ Limited - CFO [3]

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Thanks, John. The first slide looks at the key headline financial results of the company. They're presented excluding the impact of significant nonrecurring and noncash items such as amortization of our inquired (sic) [acquired] intangible assets and impairment. And we've adjusted 30 June 2018 to reflect the impact of the new lease standards, which provides a like-for-like comparison of the results.

So overall, net sales for the 6 months to 30 June '19 was $405.6 million, delivering headline earnings before interest and tax of $43.6 million at a margin of 10.7%. The interim dividend has been maintained at $0.023 per share underpinned by strong operating cash flows. And at 30 June 2019, the net debt is $326 million, and the leverage ratio 2.5x. I'll address these key metrics throughout the presentation.

Turning to the portfolio of companies. As outlined by John, there was a mixture of performance. Advertising and Media is our largest individual segment and includes a combination of independent local and internationally aligned brands. As previously flagged to the market, the Advertising and Media segment faced headwinds in the first half of the year due to global and local account losses in 2018. This has been amplified by weak media market spend. Encouragingly, there was a steady stream of new business wins that provide support for second half earnings, along with a number of new business pitches currently [in play]. The strongest-performing creative agencies in this segment is where there is a true end-to-end offer to their clients. This is the model we continue to extend across the segment, as evidenced by the global repositioning of VMLY&R and Wunderman Thompson.

The performance of the Data Investment Management, Public Relations and Specialist Communications segments all delivered organic earnings growth. And the digital businesses contained within the specialist segment are growing and well positioned for further growth both locally and in Southeast Asia. Progress has been made in restructuring the Large Format Production segment. While not yet reflected in the earnings, the restructure actions will deliver cost and operational efficiencies in the second half of the year. The largest of these savings will be generated through property consolidation and an improvement in the overall supply chain. The benefit of these initiatives is an improvement in the quality of operations and enhanced customer experience that will drive client retention and growth.

On to the Kantar sale. Our clear objective is to simplify the company, making it easier to navigate and to manage. This has been achieved through targeted closure, merger and sale of brands, and we expect the measured rationalization of the portfolio to continue into the second half of the year.

The most significant transaction is the proposed sale of the Kantar businesses. The company announced it had entered into an agreement to sell 100% of its interests in the Kantar businesses in Australia and New Zealand. The transaction values Kantar at $168 million, equivalent to a multiple of 8.2x as Kantar's 2019 budgeted EBITDA. Proceeds of completion are expected to be circa $150 million, payable in cash. And completion is expected to be in quarter 1 2020 and is subject to shareholder approval. Assuming all proceeds are used to repay debt and no capital management initiatives are undertaken, the impact of the transaction would have represented a circa 9.2% decline on the 2018 pro forma earnings per share. The sale of Kantar does, though, create balance sheet flexibility to pursue growth and the capacity to return funds to shareholders through dividends or capital management initiatives. And we expect to retain a close working relationship with Kantar and work together with them as we do now to create better integrated solutions for our clients.

Turning to the headline profit and loss account. And the key takeaway, okay, is the staff costs-to-revenue ratio has increased during the period, and this has been the main driver of our margin decline. In more pleasing news, we have seen some positive financial benefits through the campus strategy and consolidation of our lease space. Our establishment costs are reducing in the period, and we expect this to continue into the back half of the year.

Looking at the interim dividend. The directors of WPP AUNZ have declared a fully franked interim dividend of $0.023 per share. This is in line with the prior year, and we're maintaining the dividend off the back of strong operating cash flows and expected proceeds from the proposed sale of the Kantar businesses. The interim dividend has a record date of 26 September 2019 and will be paid on the 3rd of October 2019. The current payout ratio is between 60% to 70% of underlying earnings, and this will be reviewed post the completion of the Kantar transaction.

Moving to the balance sheet. The key movements in the balance sheet at 30 June 2019 relates to the impairment of intangible assets. During the first half, the company has recorded an impairment charge relating to intangible assets of $295 million. The impairment charge relates to the acquired intangibles, including brand names, customer relationships and goodwill. The impairment charge for the Advertising and Media segment is $247 million and takes into account the recent trading performance as well as an assessment of future earnings outlooks. The impairment charge for the Data Investment Management segment is $44 million and takes into account the upcoming sale of the Kantar business.

The impairment charge represents a write-down of 25% of our intangible asset values contained in the balance sheet at [30 June '18]. It is noncash in nature; has no impact on the company's debt facilities, compliance with bank covenants, payment of dividends or ability to undertake capital management initiatives in the future.

So moving on to our debt facilities and leverage ratio. The company has access to debt facilities totaling $520 million. And the debt facilities' maturity profile has $370 million of debt expiring in June '21 and a $150 million overdraft facility expiring in June 2020. The company's net debt including earnouts totaled $326 million at 30 June '19 and the leverage ratio was 2.5x. While outside our targeted leverage ratio range of 1.5 to 2x, we expect to be back within the higher end of that range by 31 December 2019.

And finally, looking at our cash flow. We are a strong cash-generative business. I mean, over the last 24 months, we've delivered cash conversion of 91% of our operating cash flow. At June '19, we have maintained our positive working capital momentum. The acquisitions in the cash flow of $11 million relates to the buyout of minority shareholdings. It's consistent with our desire to simplify our corporate structure, and holding a 100% equity position has facilitated the operational mergers of AKQA New Zealand and Wunderman Thompson. So in summary, in the half, the company has progressed its strategy to simplify the group, to deliver integrated solutions to our clients and drive collaboration amongst our people.

I'll now hand you back to John Steedman.

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John Steedman, WPP AUNZ Limited - Executive Chairman of Media Investment Mgmt, Interim CEO & Executive Director [4]

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Thanks, Chris. Turning to the outlooks on Slide 15. Looking ahead, we expect the challenging market environment in the Advertising and Media businesses to continue for the remainder of the year, and this has impacted our outlook for 2019 where we expect a reduction in headline earnings per share of 5% to 10%. Many of the challenges we have talked about in recent years continue to persist. The retail market remains under pressure, along with a -- with the broader marketing spend moving away from additional -- traditional forms of advertising. We remain focused on turning around our Large Format Production business, which is exposed to retail clients. As I said earlier, we are midway through our transformation of that segment, and our aim is for that business to break even in 2020.

Positively, we see good momentum and growth opportunities in e-commerce, digital transformation and marketing infrastructure, which will support organic growth in some of our Specialty Communications, PR and media businesses. In this new market reality, a necessity is to be a more valuable partner for our clients with the right level of agility and responsiveness to help them navigate the complexities in a digitally disruptive world and to support their marketing and business growth requirements. Navigating WPP AUNZ for our clients must be straightforward, and this is why we're focused on simplifying the business. And we will continue to reshape the portfolio with a further consolidation planned in the second half of this year. We'll be looking at what more we need to do to foster high-growth-potential business in the portfolio. Our simpler structure, our investment and understanding of the latest technologies, our understanding of what makes Australians and New Zealanders buy brands they do and our commitment to excellence is our focus. This will position us well to move quickly to respond to our client needs as with -- the market continues to change.

Finally, I'd like to thank you all for your support during the period of change of leadership. As you are all aware, the Board has appointed Jens Monsees as Chief Executive Officer. Jens has a strong reputation internationally for building brands and leading change. And we're looking forward to him joining the team on October 1. Thank you for your time today.

And I'll now open up for a line of questions.

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Operator [5]

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(Operator Instructions) There are no further questions at this time. I will now hand back to Mr. John Steedman for any closing remarks.

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John Steedman, WPP AUNZ Limited - Executive Chairman of Media Investment Mgmt, Interim CEO & Executive Director [6]

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Thanks very much for joining us today, and we look forward to seeing you all during the course of later today and on Monday. Thanks very much for your time.

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Operator [7]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.