WPP plc (NYSE:WPP) Q4 2023 Earnings Call Transcript
WPP plc (NYSE:WPP) Q4 2023 Earnings Call Transcript February 22, 2024
WPP plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Mark Read: Thank you very much and welcome everybody to WPP's Preliminary Results for 2023. I'm Mark Read. I'm joined here by Joanne Wilson, our CFO; and Tom Waldron, our Head of Investor Relations. So turning to the presentation, please take notice of our cautionary statements on Page 2. And for the meeting on Page 3, I'm just going to cover the highlights of our financial performance before Joanne takes through that in more detail. I'll then reiterate the strategy we laid out at the Capital Markets Day just over three weeks ago before taking questions. Turning to Page 5, the highlights. We had a resilient performance in 2023 with like-for-like growth of 0.9% and a headline operating margin of 14.8%, up 0.2% on a constant-currency basis showed excellent cost-control, and we are pleased to have continued margin progression this year.
We had strong growth outside the United States with our non-U.S. business growing 3.3%, the U.K., and India doing particularly well, and despite some challenges in China. However, the U.S. market declined 2.8%, as strong growth in the CPG sector was outweighed by lower revenues from our technology clients and in the retail sector. In terms of agency performance, GroupM grew 4.9% with a strong performance in Q4, up 5.7%. Our public relations businesses grew 1.4% against a strong comparison last year, but this was offset by a tougher year in our specialist & integrated creative agencies, with the exception of Ogilvy that grew very well and should remind us of the growth potential in our creative agencies. At our Capital Markets Day, we set our strategy to drive accelerated and more profitable growth with focus on AI and a commitment to invest GBP250 million a year in AI and proprietary technology.
And at the Capital Markets Day, we also started new financial targets for the medium-term. Growth target is 3% plus, 16% to 17% headline operating profit margins, and 85% plus operating cash-flow conversion. And lastly, we also shared our guidance for 2024 with like-for-like revenue less pass-through costs at 0% to 1%, continued progression in our headline operating profit margin, up 20 to 40 basis points. So with that highlights, I'll turn it to Joanne, to take you through the financial performance in more detail.
Joanne Wilson: Thank you, Mark, and good morning, everyone. And so let me take you through the 2023 financial results just starting on Slide 7. Revenue less pass-through costs was up 0.5% on a reported basis and 0.9% on a like-for-like basis. Reported growth includes a 1.3 percentage point headwind from FX and a 0.9 percentage point contribution from M&A. Like-for-like performance was towards the upper end of the guidance we shared at Q3; however, our full-year performance reflects softer growth than we had anticipated at the beginning of 2023. This was impacted primarily by a slowdown in spending by our technology clients in the U.S. underlays and technology-related projects as a result of more cautious client spending patterns.
Turning to the headline income statement on Slide 8. Overall, revenue less pass-through costs was GBP11.9 billion, an increase of 0.5% year-on-year with headline operating profit of GBP1.75 billion, also up 0.5% year-on-year. This resulted in an operating margin that was in line with our original target of 15% at constant currency, reflecting the disciplined cost-control measures that we took throughout the year. The reported headline operating profit margin of 14.8% you see here is flat from 2022, reflecting a headwind of 25 basis points from FX. Moving down the P&L income from associates excludes any contribution from Kantar in 2023 in accordance with IAS 28, due to no carrying value on our balance sheet. This compares to GBP38.1 million contribution in 2022.
Net finance cost increased year-on-year due to higher levels of debt and interest rates and lower investment income compared to 2022, which benefited from disposal. These items were partially offset by higher interest income. Reflecting an increased tax rate of 27% in the year and non-controlling interest of GBP87 million, the profit attributable to shareholders was GBP1.03 billion, resulting in a headline diluted EPS of 93.8 pence. Based on that performance, our cash generation and progressive dividend policy, the Board has recommended a flat final dividend of 24.4 pence, giving a total dividend of 39.4 pence to 2023 representing a cash return to shareholders of over GBP420 million. Moving now to Slide 9 and the reconciliation between our headline and reported profit.
Our headline operating profit of GBP1.75 billion is adjusted for a number of items, the majority of which are non-cash. We have taken a goodwill impairment totaling GBP63 million, which relates to two of our smaller businesses within Specialist Agencies. The creation of VML has triggered the impairment of the balance sheet's current values of intangibles related to legacy brands including Young & Rubicam and Wunderman, which is the majority of the GBP728 million of impairments excluded from headline operating profit. During 2023, we incurred restructuring and IT-related transformation costs of GBP196 million, including some initial costs of GBP60 million associated with the creation of VML and simplification of GroupM. In addition, the review of our property portfolio has shared interims resulted in a largely non-cash charge of GBP232 million.
This is slightly higher than the around GBP220 million we guided to in July. As a result of an additional non-cash charge reflecting the application of the recent IFRIC agenda decision on IFRS accounting for-sale and leasebacks. The above, together with some smaller items, results in an overall adjustment of GBP1.2 billion and the reported operating profit of GBP531 million. Moving on to Slide 10. Our Global Integrated Agencies grew 1.3% on a like-for-like basis. GroupM, our media planning and buying business grew 4.9% in the year with an improved quarter-on-quarter performance in Q4. This was offset by a weaker performance from our integrated creative agencies, which saw an overall decline of 1.6% in 2023. Ogilvy grew well, supported by recent new business wins including SC Johnson and Verizon.
Our other global Integrated Agencies; Wunderman Thompson, VMLY&R, and AKQA were adversely impacted by reduced spend across tech sector clients, predominantly in the U.S., client-led delays and technology-related projects, and the impact of expected client losses in the U.S. retail sector. In Q4, this included the early impact of the loss of Pfizer, which will continue to weigh on this segment in 2024. Hogarth grew well, benefiting from increased spending by CPG clients and growing demand for its technology and AI capabilities of clients producing more personalized and addressable contents. The global Integrated Agencies as a whole, headline operating profit was GBP1.5 billion, up 2.9%, delivered a margin of 15% up 30 basis points. And moving now on to Public Relations on Slide 11, where we still continued demand for strategic communications with like-for-like sales of 1.4% overall.
FGS Global, our leading strategic advisory and communications consultancy grew high-single-digits. Hill and Knowlton delivered modest growth lapping a strong 2022, partially offset by a weaker year for BCW. Headline operating profit of GBP191 million, was down 0.5% year-on-year with margin of 16.2%, down 30 basis points year-on-year. And now turning to Specialist Agencies on Page 12. Revenue less pass-through cost was down 3.4% on a like-for-like basis. While CMI, our U.S. specialist healthcare media agency delivered strong double-digit growth. Landor, Design Bridge and Partners, and the longer tail of smaller agencies in the segment were impacted by tougher comps and more cautious client spending patterns, which resulted in longer lead times and project delays.
Operating margin of 9.7%, a 3.3 percentage points lower year-on-year reflecting the weaker top-line and the run-off of COVID-19 related contract in Germany. Slide 13 highlights performance across our geographic segments. North America declined 2.7% in 2023 with quarter-four seeing similar client spending trends to those in the second and third-quarters most notably reduced spend from technology clients and client losses in the retail sector. Q4 also saw the beginning of the roll-off of the Pfizer creative business and partially offsetting this was good growth across our CPG and telecom clients. The U.K. grew 5.6% in the year, lapping 7.6% growth in 2022 with both GroupM and Ogilvy performing well. CPG and healthcare were the strongest client sectors.
In Western Continental Europe, Germany, our largest market had a challenging end to the year with a more uncertain macro-environment, weighing on client spend in the second half. France returned to growth in Q4 after several quarters of declines and new clients were onboarded. The Rest of the World saw good growth in 2023, driven by India, which was up 7.7% reflecting strong double-digit growth in the second half. This was partially offset by China, which declined 3.3% with a consistent level of decline across the first and second half and a weak macro-economy weighing on our creative agencies. Turning to Slide 14, you can see the 2023 client sector split and net sales dynamics. WPP has a diverse client base, but in 2023, three sectors have really dominated the outcome with very strong growth in CPG clients, offset by declines in technology and the retail sector.
In Q4, these trends continued across our five largest sectors with CPG strong, and technology and retail sectors weaker. In addition, automotive accelerated a little in Q4, and then healthcare growths were negative which has begun to be impacted by client loss. Going forward, we believe our exposure to the technology sector and within that - within that, our strong relationship with some of the world's most valuable companies will be a source of growth and competitive advantage over the medium term. And now moving to Slide 15 and changes in operating margin year-on-year. We had a reported headline operating margin flat in 2023 despite a weaker topline performance and a 25 basis points FX headwind. Staff costs excluding incentives were up 0.2% year-on-year at GBP7.8 billion, reflecting wage inflation.
This was offset by a small reduction in permanent headcount as we exit 2023 and a 19% reduction in average freelancers through the year, improving our overall mix. Together, these resulted in staff costs, reducing as a percentage of net sales by around 30 basis points. Incentive costs were lower year-on-year, contributing to further 30 basis-points improvement in margin. These movements were offset by higher personnel costs, driven by more impressive client meetings and some inflationary pressure on travel costs. Establishment costs fell as more of our people moved into campuses, contributing to 20 basis points of margin improvement. And finally, our investments in IT, both enterprise and client-facing was a headwind and margin of 70 basis points.
This investment included our IT and cloud infrastructure and cyber capability as well as our global capabilities including WPP Open and AI and was partly offset by offshoring savings. As we look to 2024 and beyond, I thought it would be helpful to recap on this slide from our Capital Markets Day. So turning now to Slide 16. In 2024, despite top-line pressures, we expect to deliver 20 to 40 basis points of margin accretion, benefiting from part realization of the cost savings from the creation of VML and Burson, and the simplification of GroupM. We expect 40% to 50% of the GBP125 million cost savings to be realized in 2024, partially offset by an expected increase in incentives as a percentage of net sales. Beyond 2024, we expect to realize further structural and efficiency savings and greater operating leverage as our top-line growth towards our medium-term target.
Some of these savings will support continued investment in our business, prioritizing our industry-leading capabilities, including AI, Choreograph, and WPP OPEN. Our plans include annual cash investment of around GBP250 million in 2024 and proprietary technology to support our AI and data strategy. Taking all of this together, we are confident we can deliver our medium-term margin target of 16% to 17% and invest in our business to accelerate growth. And moving now to Slide 17, which provides an overview of our net debt and cash generation and uses over the last 12 months. Our net debt at year-end of GBP2.5 billion is broadly flat year-on-year. Looking at the bridge and starting from 2023, EBITDA less income from associates of GBP2.2 billion, you can see the uses of cash.
Rent of GBP362 million. Non-headline cash costs, including cash restructuring of GBP280 million, which I'll come back to. CapEx of GBP217 million with investment primarily in our tech capability in campuses, and a working capital outflow of GBP260 million, which includes an adverse impact from year-end FX of GBP89 million. Excluding FX, the working capital outflow was GBP171 million. This included a better-than-expected performance from trade working capital, excluding FX, representing an inflow of GBP157 million. This is offset by a larger-than-expected outflow on non-trade working capital of GBP328 million, excluding FX, impacted by the year-on-year movement of bonus, a shift to prepayment terms for our large IT contract and other smaller items.
Combined, these moving parts translate to adjusted operating cash flow of GBP1.3 billion, which translates to 73% conversion of headline profit before interest and tax. Free cash flow after dividends to minorities, M&A earnouts, interest and tax was around GBP637 million, nearly GBP600 million higher than last year. Total cash returned to shareholders via the dividend was GBP423 million and acquisitions and disposals resulted in a net cash outlay of GBP158 million. As I indicated at our recent Capital Markets Day, the fundamentals of our business mean we are confident that we can deliver consistent and stronger cash generation that exceeds 85% conversion of headline operating profit into operating cash flow over the medium term. The levers to drive that improvement in cash generation include more profitable growth, our focused on working capital management, lower CapEx, and lower cash restructuring costs as we complete our transformation initiatives.
As we flagged our average adjusted net debt to headline EBITDA, slightly above our target range of 1.5 to 1.75 times at 1.3 times at year-end. We are focused on bringing that metric back within our target range. I'm moving on to more detail on our restructuring costs and other adjusting items on Slide 18. 2023 reported operating income includes non-cash charges for impairments to our property portfolio as a result of our 2023 property review and the impairment and accelerated amortization of goodwill associated with legacy brands, which had been impaired following the creation of VML. The bulk of our restructuring and transformation costs in 2023 consists of the costs associated with the transformation program and the initial cost of the strategic actions taken in the creation of VML and simplification of GroupM.
These totaled GBP196 million. Within that, restructuring costs for our ERP program have declined to GBP52 million in 2023 as we evolve our ERP roadmap to reflect some of the learnings from the past few years. As I shared at our CMD, we now expect the bulk of our ERP consolidation to be completed by 2026, with restructuring costs reducing accordingly. Other restructuring and transformation costs associated with enterprise IT under campus programs will also decline as initiatives begun in 2020 are completed. The total cash attributable to restructuring costs in 2023 of GBP207 million consists of about GBP196 million, plus an additional GBP11 million of cash cost from our property review. In 2024, we expect cash restructuring costs to be around GBP285 million.
That reflects the GBP125 million of costs associated with the VML and Burson mergers and the GroupM simplification. Other cash restructuring costs relating to our ERP and IT programs, as well as property-related costs are expected to reduce from GBP196 million you see here, to around GBP160 million in 2024. And finally, let me take you through the guidance for 2024 on Slide 19. Our headline guidance for like-for-like growth of 0% to 1% and margin improvement of 20 to 40 basis points at constant currency are consistent with the guidance shared at our Capital Markets Day on January 30th. At current FX rates, we would expect to run a 2% drag on 2024 reported revenue, less pass-through costs growth with a net neutral impact on margin. We expect M&A to contribute between 0.5% to 1% to our growth.
Our net finance costs will rise to around GBP295 million as a result of increase in rates including a full-year impact of last year's bond refinancing and the partial-year impact of refinancing the $750 million bond that matures in 2024. We expect a tax rate of around 28% in 2024, up from 27% in 2023 as we see upward pressure on our effective tax rates from increased rates in some countries together with minimum tax regimes. Caps on interest deductibility on withholding taxes. CapEx will be around GBP260 million in 2024 and will reduce from 2025 onwards with lower spend on our campus program. We will continue to focus on our working capital management and are targeting overall net total working capital to be flat in 2024. So thank you and I'll now hand you back to Mark to talk about our strategic progress.
Mark Read: Thank you, Joanne. So turning to our strategic progress on Page 21. We outlined the key elements of our strategy, Innovating to Lead, that we set out at the Capital Markets Day. There is really four key elements to our strategy. The first, leading through our investments in AI, data, and technology. The second, accelerating our growth with the power of creative transformation. Thirdly, building world-class market-leading brands. And finally, executing efficiently to drive financial returns through margin and cash. And we went through those in some detail at the Capital Markets Day, but I would like to emphasize some of the key points that we made on this call. Turning to Page 22 and our ambition to lead through AI, data, and technology.
Had lot of questions at the meeting and the subsequent discussions. We showed about the impact of AI on our business model and it's early days, but we do see opportunities for our investments in AI to lead improved growth and better financial performance. And these were the five areas we highlighted at the meeting and they show some of the opportunities that we see and how they can translate into revenue and margin. Starting the talk, we see the ability to earn technology license fees in areas such as commerce, production, and media from WPP Open. Secondly, we have the ability to help our clients embrace AI, offering them consulting projects to use AI, as well as technology projects with AI embedded with it and as many examples of those over the past few years with an acceleration into 2023.
We also see how AI can help to drive improvements in the effectiveness of our work. It can augment, not replace roles, to make people more productive and we will see the AI-augmented work is driving better ROI for our clients. You saw that in the Amazon PGP generates we shared at the Capital Markets Day. And this leads us to believe that we can improve our pricing to clients on the back of improved financial returns on their marketing investment. AI will also offer the ability to develop new business and financial models and to accelerate the shift away from hours-based compensation to remuneration more linked results, particularly get in areas such as commerce, media, and production where a meaningful percentage of our remuneration today is already non-hours-based.
And lastly, we see the ability of AI to make us more efficient to reduce our back-office costs and to improve profitability. And I'm sure we'll get into it in the Q&A, but these are all reasons why we see AI as an opportunity for us in the future. On Page 23, turning to the second element of our strategy, creative transformation. And at the Capital Markets Day, we just spent some time demonstrating to the link between creative, production, and media and how this discipline increasingly integrates to drive success for clients. The heart of our work is creativity and there is no bigger platform on the world stage for creative excellence than the Super Bowl. While for some it's a game, for us it's the Olympics of advertising and the time actually when viewers look forward to the ads, maybe one of the few times in the year.
If you look at the viewing, you can see why this year's Super Bowl was the most-watched event on U.S. TV since the moon landing at an average viewing of 123 million people across all platforms, not just on linear TV but on many of the streaming platforms. And WPP agency was this year, responsible for the creative work on 12 TV spots and bought media for 19 spots. Really significant involvement given there are only 57 spots in the Super Bowl. Forbes Magazine, in an assessment of a number of indicators, called out what they evaluated to be the top five ads at the Super Bowl. I'm pleased to say that four came from WPP agencies. So the work we do for Verizon from Ogilvy, the Hellmann's work, they searched Super Bowl ads from VML and Mindshare, work for Progressive Insurance from VML, and the survey work from WPPOnefluence team made-up of WPP agencies.
These are just some of the examples of the work that we're doing. Now, we're really pleased by the impact particularly the work we had for Verizon. If you remember, this is a client Ogilvy One during the course of 2024 and the work that they did with Beyoncé at Super Bowl, was talked about by many commentators to be the ad that one Super Bowl. So let's look at that piece if you could run that film. [Video Presentation] All right. So we endorsed you with a full 90-second version. Why is that important?? Well, I'll start with, it should remind us that in this digital age, there is still some events that bring people together and the Super Bowl is one of them and we also have the Olympics coming up this summer. These events aren't just linear TV events, although that's at the heart of the multimedia digital events.
There's many, many digital elements around our work. The Verizon amplified the idea. The sort of the heart of it was a creative idea from a talented team and the power of creativity and ability to amplify clients' investment. Superbowl at $7 million for 30 seconds isn't cheap, but clients are really looking for a meaningful financial return. And while we can't yet share details of the business impact from that work, I can say the clients saw a meaningful increase in the business following Super Bowl. On Page 24, the third element of our - Page 25, the third element of our strategy is building world-class brands, and six brands today account for approximately 90% of WPP's business. We share here some of the business, those brands that won over the course of the past year.
Just to highlight some examples here, VML won the Krispy Kreme business globally. The first, new business win is VML. It has been followed up by several wins since then. Ogilvy had a very strong business performance, let's say, but not least, Verizon also wins globally and in Europe, the business has done well. Hogarth's had an excellent year, supported by many new business wins and expansion of key client relationships. And GroupM may have had a more challenging times since the new business in the United States, has been successful globally, make us top for global new business shots and they won a number of important global reviews, not least the Nestle business in Europe. And lastly in the next page, we lay out at our Capital Markets Day our medium-term financial framework of 3% plus organic growth, 16% to 17% headline operating margin, 85% adjusted operating cash flow conversion, and 1.5x to 1.75x average net debt headline EBITDA.
All of that supported by a disciplined capital allocation. So on the last Page in 28 where we discussed at the Capital Markets Day. I'd just conclude by touching on the investment case for WPP that we've covered. Our unrivaled global reach and scale, our ability to help global and domestic champions reach their clients. We operate in attractive and growing addressable markets. We have deep client relationships with many of the world's leading businesses. We worked with three of the world's four biggest companies by market capitalization. They rely on WPP for growth. We have a strategy to lead through AI, data, and technology, supported by an investment of GBP250 million a year, a strong investment-grade balance sheet, and lastly and by no means least, world-leading talent, ambitious for the future.
All of this has aimed deliver accelerated growth, margin expansion, and improve cash generation to drive returns for our shareholders. So that's what we're absolutely focused on as a team. Thank you for listening, and now we'll take your questions.
Operator: [Operator Instructions] Our first question comes from Laura Metayer of Morgan Stanley. Laura, your line is open. Please go ahead.
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