Publicis Groupe S.A. (EPA:PUB)

Earnings Call: H2 2018

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Feb 7, 2019

Ladies and gentlemen, good day and welcome to the full year 2018 results presentation for Publicis Groupe. For your information, this conference is being recorded. At this time, I'd like to turn the call over to Mr. Arthur Sadoun, Chairman and CEO of Publicis Groupe. Julia, bonjour, and welcome to Publicis Groupe's full year 2018 earnings call. I am Arthur Sadoun, and I am in Paris with our CFO, Jean-Michel Etienne. The two other members of the Directoire are also in the room, our Secretary General, Anne-Gabrielle Heilbronner, and Steve King, CEO of Publicis Media. As usual, we will take your question together after the presentation. Jean-Michel Bonamy is also here and will be ready to take your question offline after this session. in 2018, we set ourselves two very ambitious goals. Develop a winning model and reinforce our strong financial foundation at a time where our industry is being challenged. It was not always easy, but we clearly delivered on those two objectives. We made the demonstration that we have the right model for our clients and for ourselves by winning a disproportionate share of the biggest pitches and ranking number one in new business on every front. Our new business performance speaks volume about our attractiveness and our future. What is more, we transform our organization to be more efficient and deliver the highest EPS ever, giving us the means to invest in our future. This record year, commercially and financially, would have been a complete success for us if we did not experience a higher than expected attrition coming from traditional advertising on some FMCG clients, mainly in the U.S., which had an impact on our organic growth and particularly in Q4. I will comment this in full detail later on. Despite Q4 weakness, we are actually extremely confident for the future. We have the model, the structure, and the teams to continue to win, grow our clients, and accelerate on organic growth. During this call, I will first go through the full year highlights, demonstrating how we plan to increase shareholder value, thanks to our model. Then Jean-Michel will take you through the detail of our financial, where we are making progress on every financial indicator and over-delivering on the main one. Finally, I will share with you the four key actions we are taking to overcome attrition and accelerate on profitable organic growth. We will then, of course, take your question. Now, if I may, let's dive into the presentation. I will take a second for you to look at the disclaimer on page 2 as it is an important legal matter. Okay. Let's begin with the four key highlights of 2018. New business, financial performance, organic growth, and transformation. Despite anticipated modest organic growth due to client attrition, our model allows us to outperform the market in new business and deliver a record year financially. First, the shift we are operating from being a communication partner to a marketing and business transformation partner is making a massive difference commercially. We have proven that our model works beautifully and fits the current, and more importantly, the future needs of our clients. Thanks to our ability to connect data, dynamic creativity, and technology, we won the majority of the biggest pitch in 2018, such as Daimler, Campbell, Marriott, Carrefour, Cathay Pacific, Smucker, GSK, and Pfizer, and actually many local and regional accounts. These last two wins, GSK and Pfizer, each represent more than $1 billion in billing per year. We have actually outperformed the market in new business on every front. At group level, we rank first globally, as highlighted in several reports, including JP Morgan and Goldman Sachs. Publicis Media is definitely leading the pack in the media industry, as stated in the R3 ranking. Finally, on the creative field, our two biggest networks, Publicis Worldwide and Leo Burnett, ranked first and second, respectively, in R3's new business report. I don't need to insist on the fact that today new business is tomorrow growth. Second, we committed to deliver financially while transforming. 2018 was definitely a record year when it comes to our financial results. We improved our margin rate by 60 basis points above our objective of 30 to 50 basis points increase. Operating margin rate was actually at 16.7%. I would like to make two important comments on this margin. First, we did not deliver this performance at the expense of tomorrow growth. We achieved around EUR 200 million of savings, thanks to all our work on structure simplification and the right sizing of some operation. Out of this amount, about EUR 110 million were reinvested in talent and in our game changer. Second, we delivered on margin while increasing our incentive pool. We want to make sure that we can reward the outstanding work that was done by our team. To be clear, here we are really talking about efficiencies. As a result, operating income stood at EUR 1,501,000,000, up 5% in constant currency. Thanks to this margin improvement, headline EPS reached EUR 4.72. It is growing at 10.3% on constant currency, above the objective that we have fixed during the Investor Day, going from 5% to 10%. It is the highest EPS ever posted by the group. Finally, free cash flow remained very strong at EUR 1,311,000,000, up 2.4% in constant currency, fueled by a positive change in working capital for the second year in a row. This allowed us to reduce our net debt by EUR 923 million and turn net cash positive at EUR 196 million at the end of 2018, only four years after the EUR 3 billion acquisition of Sapient. This is a big strength in this time of economic uncertainty. Therefore, we will propose a EUR 2.12 dividend per share, growing by 6% and representing 45% of payout as we committed. In addition, we did not spend the full amount dedicated to acquisition in 2018, and we will implement, as we committed again during the Investor Day, a share buyback program for EUR 400 million. It's worth mentioning that this amount includes the proceeds from the divestment of PHS for roughly EUR 100 million. We have the right model, which is outperforming the market commercially. We have a record year in terms of financial results, and now I would like to move to organic growth. Excluding PHS, as the expected divestment took place effectively, full year 2018 organic growth was at 0.8%, which is close to the objective we set early 2018 with PHS. H2 is at +1.3%, and Q4 is at +0.5%. Regarding Q4, we were on track to achieve our objective, and we had very good reason to be confident. New business revenue was ramping up nicely and actually contributed 150 basis points to this quarter. We were continuing to experience strong growth with our game changer, as you will see, but as we repeatedly said for years, Q4 is an adjustment quarter for our clients who cut expenses to deliver earnings or over invest when the numbers are good. Q4 is volatile and uncertain. In 2017, actually, it helped us with unexpected growth. It was the opposite in 2018. On top, the phenomena the industry is experiencing with the impact of attrition on traditional advertising in the U.S. from FMCG clients that represent for us 25% of our revenue globally, has been stronger than expected. Needless to say, without those two items, mainly coming from a handful of U.S. clients, we would have actually met our growth objective. To give you a bit of perspective, on a full year basis, the strategic game changer represent EUR 240 million of incremental revenue above our expectations. Attrition roughly reached EUR 150 million above the EUR 100 million that we expected at the beginning of the year. Moving to geography, you can see that despite this attrition on traditional advertising coming mainly from FMCG clients in the U.S., North America posted a positive growth with 0.5% for the full year. Europe performed quite well, with full year growth at 1.4%, fueled by a strong Q4 at +4.3%. In particular, France and the U.K. are posting both 3.9% growth on a yearly basis. It is where our country model is the most advanced and producing its first result. The fourth big thing you should take out of 2018, is that we are creating the conditions for growth to effectively accelerate. We are on track, and actually ahead of schedule, on all the strategic and organizational KPIs set in our plan into the future. The best proof of that is the performance we are seeing with our game changer. Data, dynamic creativity, and business transformation grew by 28%, now reaching 12% of the group revenue. From an operational standpoint, we are also ahead of our plan. 61 clients are benefiting from the client-centric organization with one global client leader, one P&L, and seamless access to all the group capabilities. We have already defined eight markets covering the entire group. Each of them benefit now from the single leadership overseeing all the operation with a single P&L. Our delivery platform in India has allowed us to upgrade our capabilities and contribute to several of our new business win, showing once again the uniqueness and the attractiveness of our model. It has also had a direct impact on our achievement in terms of efficiencies. As planned, we continue to invest in our future. We dedicated around EUR 110 million to invest in our talent to activate our game changer, while strengthening further our leadership team. On M&A, we were focused on rigorous and selecting the few companies that will help us scale our model and accelerate our transformation. We spent slightly less than EUR 200 million, below the amount of EUR 300 million to EUR 500 million a year we allocated for acquisition. This is why, as we committed at the Investor Day, we will implement a share buyback program for EUR 400 million. Here it is for the headlines. As you have seen, 2018 has been a very productive year. Let's be clear, we won't be satisfied until we bring back strong and profitable organic growth in a market that is experiencing attrition on its traditional business. What is making me confident is that in this industry that is facing challenges of transformation, we have a clear plan, as you will see, for 2019 and beyond. As you will see later in the presentation, we will make sure that we apply this plan with the same rigor as the one that we have put in 2018. Nevertheless, in this challenging context, we are demonstrating that we have built a model that is highly attractive and competitive while increasing shareholder value. This was the Directoire commitment for 2018, and it was what we are delivering today. I will now leave the floor to Jean-Michel, who will provide you the detail of our number. I will then come back with the four priorities for 2019, and finally, we will take your question. Thank you, Arthur. Good morning, everybody, and as usual, I will go now through a few slides detailing our 2018 results. We start with revenue, page 12. We start with the net revenue on page 12. Regarding Q4 first, net revenue was EUR 2,492,000,000, up 0.4% versus last year. Currencies have a 0.2% positive impact. As a result, at constant currency, growth is at +0.2%. Acquisitions have a 0.4% positive impact. All in all, organic growth for our net revenue was -0.3% in Q4. Excluding the Publicis Health Services disposal at the end of January 2019, organic growth is +0.5%. For the whole of 2018, net revenue is EUR 8,969,000,000, down 3.9% versus last year as reported. Currencies have 4% negative impact, mostly in H1. At constant currency, growth is +0.1%. Acquisition impact is almost neutral because of the contribution of acquisitions being offset by disposals, mostly the deconsolidation of Genedigi subsidiary in China at the beginning of 2018. Therefore, organic growth for net revenue in 2018 is +0.1%. Excluding PHS, which is more relevant, we are at +0.8%. On page 13, regarding Q4 net revenue by geography, I will focus on the performance excluding Publicis Health Services. Europe is up 4.3% in Q4. As expected, we benefited from the contribution of accounts won earlier this year, namely Daimler and Carrefour, as it was already the case in Q3 2018. North America is down 1.1% in the quarter. We have the ramping up impact of accounts wins, notably Campbell's and Marriott, while experiencing attrition in our creative operation, mainly coming from FMCG clients, as Arthur already explained. Asia Pacific is down 2.8% in the quarter. We have the impact of several accounts losses in China, which is down 5.4% in Q4. Latin America is down 1.9% due to a couple of campaign cancellations in Brazil. Middle East and Africa are up 6.8%, mainly due to the good performance of our operation in the United Arab Emirates. Overall, Q4 organic growth for the whole group is at +0.5%, excluding Publicis Health Services. On page 14, regarding 2018 net revenue by geography, I will only go through the numbers excluding PHS, Publicis Health Services. Europe is up 1.3%. North America, up 0.5%. Asia Pacific, down 1.8%. Latin America, up 4.5%. Middle East Africa, up 4.6%, and we have +0.8% for the entire group. On page 15, we highlight organic growth rates for the main countries for the full year 2018. I will only mention a few of them. Above 10%, we have mostly Turkey at +11% and Vietnam at +19%. Between +5% and +10%, Mexico is at +5.5% and United Arab Emirates at +7.5%. Between 0% and +5%, Brazil is at +1.1%, France at +3.9%, Singapore at +3.9%, the U.K. at +4%, U.S. at +0.4% excluding PHS. Several countries reported negative organic growth for the year, among which Germany at -1.1%, China -1.3%, and Spain at -1.3%. Let's continue now with the detailed analysis of the P&L on page 17, starting with the P&L before impact of IFRS 16 that we have implemented this year, 2018. 2018 revenue is EUR 9,951 million. Net revenue that we are using for the calculation of organic growth is at EUR 8,969 million. EBITDA is at EUR 1,006,052 million, slightly down at 0.8% year-on-year, but up 4.2% at constant currency. Operating margin is at EUR 1,005,01 million, almost flat and up 5.0% at constant currency. Operating margin rate is at 16.7%, 60 basis points higher than 2017. We come back to this with the next slide, of course. I will cover also separately interest expense and income tax. Headline net income is at EUR 1,001,007 million, up 6.8% versus last year. The amortization of intangibles is at EUR 55 million net of tax. We have an impairment charge and a real estate consolidation charge due to vacant locations for EUR 103 million net of tax. We have a capital loss and a change in fair value of financial assets for EUR 10 million. The impact of the U.S. tax reform is a profit of EUR 18 million, and the revaluation of earn-out represents -EUR 30 million. All in all, the group net income is at EUR 944 million before IFRS 16. We also present the P&L with the impact of IFRS 16. EBITDA is at EUR 2,049 million. Operating margin is at EUR 1,000,523 million with a 17% margin rate. Headline group net income is at EUR 1,082 million, and the group net income after the impact of IFRS 16 is at EUR 919 million. All these figures, with the impact of IFRS 16, will be used as a basis for the comparison in the future. On page 18, we show 2018 versus 2017 at constant currency to illustrate how material the adverse currency movements were when reporting in euros. Before IFRS 16, at constant currency, net revenue is up 0.1%. Operating margin is up 5.0%, we said that already. Headline group net income is up 12.2%, and headline EPS is up 10.3% on a diluted basis. Let me come back to the operating margin details now. We have two slides on this. First of all, personnel costs represent 62.9%, down 10 basis points. This includes the investment in our talents to grow our game changers and the impact of higher incentives, showing that our margin has not been delivered at the expense of growth. I think it is important to say that. You will see the detail on the next slide. Restructuring costs are at EUR 104 million versus EUR 120 million last year. This is in line with our expectations presented at our Investor Day in March last year. For 2019, we expect the same level as 2018, which is approximately EUR 100 million. Before IFRS 16, other operating expenses represent 17.5% of net revenue versus 18.1% last year. This is mostly the result of our real estate consolidation plan, as well as the savings on G&A, as described during our Investor Day last year. Overall, the operating margin rate is at 16.7%, improving by 60 basis points versus last year. The improvement we are seeing here with the modest growth rate is confirming that our transformation program delivers also on the cost side. Our restructuring activity continues, and we are on track to deliver our multi-year cost reduction program. More importantly, as expected, it allows us to invest in our game changers. With IFRS 16, operating margin rate is at 17.0%. You noticed that already. If we move now to page 20, we are presenting the change in operating margin as a percentage of revenue. Foreign exchange and M&A altogether had a 30 basis points positive impact on operating margin rate. Lower restructuring charge had a 10 basis point positive impact on margin. Excluding these two items, operating margin rate increased 20 basis points, including 180 basis point savings for personnel expenses, 20 basis points for occupancy costs, and 10 basis points for other G&A, partly offset by the investment in our game changers, representing 120 basis points and higher incentives for our talent for 70 basis points. All in all, we generate cost savings representing 210 basis points, and we have reinvested 120 basis points to build our future growth. This has led us to deliver an operating margin rate reaching 16.7%. IFRS 16 has a 30 basis point impact on operating margin, which is at 17% under this accounting standard. Regarding now the net financial expense on Page 21. You can see that we have a reduction of interest on financial debt of EUR 29 million, resulting from our cash generation over the last 12 months. Net interest on financial debt is at EUR 22 million versus a EUR 51 million charge in 2017. When including the impact of net exchange gains, the total net financial expense are at EUR 60 million versus EUR 61 million charged last year. With IFRS 16, we include an interest charge on leases of EUR 58 million, and the financial expense is at EUR 71 million. Regarding taxation on Page 22. The 2018 tax rate is at 24.0%, resulting in more than 300 basis points reduction versus 2017. This improvement is mostly due to the decrease of the U.S. income tax rate. To be fair with you, as of 2019, we will have the impact of the BEAT tax, which is a U.S. tax on imported high added-value services. It will cost the group roughly EUR 30 million per year. This should lead to an effective tax rate roughly at 26.5% on a regular basis. For illustration purposes, excluding this U.S. BEAT tax, the effective tax rate will still be at 24% in 2019. On Page 23, the headline earnings per share is fully diluted, is growing year-on-year by 4.9% and reached EUR 4.72 in 2018. At constant currency, the increase is 10.3% above the top end of the objective set at our last Investor Day. After implementation of IFRS 16, 2018 headline diluted EPS is EUR 4.61. Obviously, this figure is not comparable with 2017, which is pre-IFRS 16, as you know. Regarding dividends on Page 24, we will propose a dividend of EUR 2.12 per share in 2018 to be paid in 2019. This represents a 6% increase and a dividend payout of 44.9% as committed at the Investor Day. As usual, we will give our shareholders the option to choose for the dividend to be paid in cash or in shares. The dividend will be submitted to the AGM of May 29th. Additionally, you will consider this as a bold move, we are planning a share buyback for EUR 400 million. Importantly, if you add the dividend and the buyback, this is around EUR 900 million, which should be returned to the shareholders. This should represent more than 7% of the current market cap. On Page 25, free cash flow before change in working capital is EUR 1.182 billion, down EUR 105 million year-on-year. This is due to a higher level of CapEx and a higher tax paid. As you remember, CapEx was particularly low in 2017, and as announced, we have deployed more CapEx in 2018 due to our real estate reorganization plan. We also have a higher tax paid in 2018, as we had significant tax reimbursements last year. In addition, this year, we also have the first payment for the toll charge in the U.S. for EUR 18 million. We delivered an improvement in change in working capital for the second year in a row, and as it has been the case during many years, this result directly from a strong cash management in our operations. Free cash flow is at EUR 1.311 billion, up 2.4% at constant currency. IFRS 16 has little impact on free cash flow as it is presented here. It leads to higher EBITDA, as we removed the lease payment charge. The actual lease payment is classified as repayment of lease liabilities and related interest. On Page 26, acquisitions net of disposal was EUR 128 million in 2018. This figure is made of acquisitions for EUR 154 million and disposal for EUR 26 million. This has led to a significant net debt reduction of EUR 923 million. Let's move now on Page 27 to the balance sheet. Not much to say here. Working capital is improved by EUR 419 million over the last 12 months. As explained during our H1 2018 results, the biggest impact is actually due to IFRS 16, as we see an increase of total balance sheet of EUR 1,892 million, with the accounting of right of use for EUR 1,732,000,000 on the asset side, and the lease liability for EUR 2,041,000 on the liability side. Seeing two add those, I guess, on the balance sheet. On Page 28, 2018 average net debt is EUR 1,430,000,000, down almost 30% year on year. Net cash position at the end of 2018 is at EUR 196 million, down more than EUR 900 million versus end of last year. On Page 29, we are showing our financial ratios before the impact of IFRS 16. In line with net debt reduction, we see a good improvement in these ratios versus 2017. On page 30, as a result of the implementation of IFRS 16, we are adjusting our financial ratios to take into account the leases accounting. Our target is to keep our average net debt, including leases to EBITDA ratio below 2.2 times, our net gearing below 0.8 time, and interest coverage above 7 times. In fact, what we are doing here is simply aligning this methodology with rating agencies. To finish my presentation, long presentation, I am sorry for that, on page 31. Our liquidity stands at EUR 5.9 billion. Now Arthur, we continue with the strategic update and as always, I will be available for question at the end of the presentation. Thank you. Thank you, Jean-Michel, for your long presentation. As I said in my introduction, in 2018, we accelerated our transformation while delivering a record year financially and commercially. We engaged in a very disciplined approach to simplify our structure, resulting into a good cost management. In the same period, thanks to our model connecting data, dynamic creativity, and technology, we outperformed the market in new business, demonstrating the attractiveness of our model for both our clients, but also our talents. Last but not least, we are on track and actually ahead on our transformation plan, delivering on every KPI. Today, we have the financial robustness, the model to win in the future, and a clear roadmap for the next step of our journey. We now need to deliver strong and profitable organic growth. There are two things to take out of our 2018 organic growth. Our three game changers in data, dynamic creativity, and technology grew by 28%, representing EUR 240 million in additional revenue. On the other side, this performance has been partly offset by the client attrition in FMCG, representing roughly EUR 150 million above the expectation we were having at the beginning of the year of EUR 100 million. Let me pause for a second and tell you more about client attrition. It is an industry issue, and it does impact our traditional advertising operations, mostly in the U.S. It is coming mainly from the FMCG sector that represents for us a quarter of our revenue. The paradox is that it does not come from clients that are unhappy with us, nor that we have lost, by the way. We barely had such a good year in term of retention. Nor does it come from the performance of our creative brand. As you have seen earlier, they are doing very well in new business. No, this attrition comes from clients with whom we have a great relationship, but which are shifting or cutting their traditional advertising investment. What is extremely interesting, and by the way, very encouraging for the future, is that although we are actually experiencing the same kind of attrition on traditional advertising for our financial services clients, the category for us is actually growing. Why? Because we are able to overcompensate the loss of revenue on one side by the growth of our game changer on the other. As you will know, these sectors have started this transformation much earlier than others, so our model is applying at full speed. To sum up, the good news is that we are ahead of our plan in our strategic game changer that are delivering a strong growth at 28%, representing 12% of our business. But the flip side is that attrition has been higher than expected on traditional advertising, which is representing roughly 35% of our business today, and with a volatility in Q4 that has been even higher and generally speaking, offsetting a part of the progress we are making. This is why it is taking some time for the potential of our model to materialize on overall organic growth number for the full year. This is why we need to accelerate our transformation in 2019 with four key priorities to deliver strong and profitable organic growth. Our first priority, and sorry, I'm going to get a bit technical, is to scale up our game changer even faster. To achieve this, we need to strengthen our practices in data, production, dynamic creativity optimization, commerce, and investment to bring to every of our clients marketing transformation. We also need to strengthen our industry verticals in business transformation with auto, consumer product, energy and commodities, retail, financial services, health, media and telecom, and travel and hospitality. Implementing those global practices in marketing transformation in every country in a very consistent way will be the top priority of Steve King, CEO of Publicis Media, member of the Directoire, who is promoted to the role of Chief Operating Officer of the group. Steve has already successfully, actually very successfully, achieved this at Publicis Media. Nigel Vaz is promoted to CEO of Publicis Sapient. He will implement the business transformation industry verticals at global level as he did extremely successfully at Publicis Sapient International. Alan Wexler will take on the role of Chairman and work directly with me on some key client transformation, as you will see later. Our second priority for 2019 is definitely to accelerate the transformation of our relationship with our top clients. They all need to benefit from our unique ability to bring them marketing and business transformation in a connected way through data to reinvent their business. I will take direct responsibility for this and work closely with our group client leader, with Carla Serrano, Nick Law, and Ros King, who is joining Publicis Groupe as EVP Global Client. Ros was previously Director of Marketing Innovation and Communication at Lloyds after leading top accounts and agencies in our industries. For all of our top clients, this team will actually focus on three areas, putting data at the core of our client relationship thanks to our platform, PeopleCloud, that some of you have seen at the Investor Day, shifting from linear to dynamic creativity, and bringing our business transformation and digital capabilities to reinvent their business model thanks to technologies. This is a huge source of value for them and of course, of growth for us. The third priority is to put in place our country model in all of our markets. We have already defined eight markets covering the entire group. Each of them benefits now from a single group leadership overseeing all operation with one single P&L. They will now appoint their management team with one single organization per market for finance, talent, clients, new business, and communication. Shifting to a country organization is critical to accelerate cross-fertilization. And by the way, it is already producing results. For example, France is posting positive growth at 3.8% despite flattish markets, thanks to the effect of cross-fertilization between Publicis Sapient and the rest of the group. I should mention that implementation of our country model is also critical to reduce cost and adapt our organization to the current market environment. Client attrition oblige us to be more drastic in the way we manage our cost base, to simplify our structure, and reduce the number of layers. This is what we have started to do, and it's already having some effect, as you have seen. We have been able to increase our margin in our main geography, and particularly in North America, despite attrition. We will continue to accelerate in this dimension, too. Last but not least, our fourth priority is to heavily invest in our model. It is a no-brainer that we need to invest in the capabilities of the future if we want to strengthen our growth while increasing margin. In 2018, we invested around EUR 110 million in our talent to activate our model. We will continue to do so in 2019. We are taking various initiatives to put our people at the core of our organization. Let me give you two complete example. First, as you may have seen, we have launched a very ambitious learning and development program last week with the game changer at the core of the experience. Second, we are accelerating on the development of our AI platform, Marcel. We have completed the beta test, and we will announce a major next step in the coming weeks. The good news is that thanks to the effort on cost and our discipline, there is no need to choose between investments and margin improvement. This is an additional proof that we are not sacrificing the long term to boost our short-term performance. On M&A, we have been very focused and disciplined in selecting the company that will help us scale our model and accelerate our transformation. As you know, we spent slightly less than EUR 200 million in 2018. We will redouble our effort in 2019, but with exactly the same rigor, focusing on data, dynamic creativity, and technology. To sum up, we are confident that by scaling up our game changer Bringing our model to our key clients, putting our country organization in place, and continuing to invest in our future, we will deliver our 2020 objective. Before talking about the outlook, let me come back on four indicators for 2018. Growth for strategic game-changer were higher than expected. Attrition was also higher than expected. Operation margin rate improvement was higher than expected, and EPS growth at constant currency was also higher than expected. Based on those outcomes, how do we see the future? We confirm our 2020 objectives to deliver 4% organic growth. We also expect our operating margin rate to improve by 30 to 50 basis points and headline EPS to grow by 5%-10% in constant currency in 2019 and in 2020. We are committed to increase shareholder value during our transformation. We have started 2019 with optimism and confidence. We expect a better 2019 than 2018. As attrition of Q4 continued to weight on the first months of the year, we expect a tough Q1. But the significant account win that we had in Q4 should allow us a steep acceleration in Q2. This should lead to an accelerated H2 versus H1 and to the 4% objective in 2020. Voilà. As we have seen, 2018 was a very busy and productive year despite these challenges. We put a huge amount of effort, and we are pleased to see that this is paying off with a record year financially and commercially. I would like to sincerely thank the teams for their incredible work and our clients for their trust. Of course, we are still facing some headwinds, which are having an impact on our organic growth, but we are confident in the future. We have the right model to win in new business and with our clients, where our game changer are growing by almost 30%. We are putting in place the right organization to scale up our model, accelerate organic growth, and reduce our cost base. We have strengthened the very robust financial foundation of the group to continue to invest in our future. So we are committed to transform Publicis, to deliver strong results and increase shareholder value. Thank you very much for your attention, and we are now available with all the Directoire to take your questions. Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question today. We'll now take our first question from Mr. William Packer from Exane BNP Paribas. Please go ahead. Your line is open. Hi there, Will here. Thanks a lot for taking my questions. Three, please. Firstly, Q4 organic growth was weak, and the Q1 outlook sounds bumpy with, as you kind of explained on the call, weakness in FMCG. Could you just talk us through in a bit more detail the factors that make you confident in a H2 rebound? Many of these issues feel structural, and isn't there a risk that attrition is worse again than you expected? Secondly, there's been a healthy boost to the bonus pool in 2018. Should we expect a further growth in that bonus pool in 2019, or do you think it's suitably replenished? Then finally, could you discuss the weakness in China a little bit? How are you dealing with the disruptive impact of the Chinese internet giants on the ad market, and are you hopeful of a return to growth in 2019? Thank you. Thank you, Mr. William Packer. I guess we're going to take the question in that order. I'm actually going to start with Q4 and Q1. Let's be clear. Q4 organic growth has been a disappointment for us. Without this true organic growth, as I said in Q4, we would have had a total success in 2018. To give you a bit of sequence, because I guess we all knew that, October and November were slightly below our expectation, but exactly as it was in 2017. The big difference, as I said, is that in 2017, we have been helped by an adjustment quarter that was favorable, where it was the opposite in 2018. To be clear, the two main reasons for this shortfall, as I said, is that it was first that a quarter that is a quarter of adjustment, which is something that we repeatedly said. Second, because we have seen this attrition from traditional advertising to actually be stronger than what we expected, mainly, as you can see in our number, coming from the U.S. and FMCG. Now, there is one point that I want to mention, is that despite this number, we have been managing our cost base in a way that we are also over-delivering on margin. What you should take out of that beyond the number is how we are simplifying our model to make sure that we win and that we develop our game changer. Honestly, what is very tough for me in Q4 is we have this disappointed organic growth, and on the other side, we want the two biggest pitches of the year, GSK and Pfizer, that are both more than a billion of billing, that actually are not up for it, by the way, will have a big impact for us next year. Of course, it was very mixed. I think the question you're raising about Q1, what we should expect is what we see at the moment for Q1 is pretty simple. First of all, we see a continuation of attrition, the one that we have seen in Q4. Hopefully, we start to decrease after, and we have a very clear plan for that, but we continue to see some attrition in Q1. Second, we have tough comparable, honestly. Last, but not least, and this is a technical point, but it is an important one. Let us be clear. When I am talking about attrition, I am not talking about client loss. I am talking about clients that are very happy with us, with whom we are doing a good job, and with whom, by the way, we are suffering today, and hopefully, when they will start to succeed, which is the case of some today, we will see some growth again. So we feel confident about that. But it is important to note that Q1 is typically a month where you take a hit on what you have lost in Q3, and the ramping up of what you have won in Q4 is not that high for the moment. When you take attrition on one side, the comparable, and this kind of phase between what you have won and what you have lost in the prior year, you find the reason why we believe that Q1 is going to be tough. I am not going to go in detail about the bonus, but Jean-Michel can. I just would like to give you our philosophy on that. We truly believe that we have the model for the future. By the way, hopefully, you will judge that as the number of pitches we have been winning. The reason why we are insisting so much on new business is because it is a proof of the attractiveness of the model. By the way, the success of the model of today is the growth of tomorrow, for sure. When you look at the objective we set for the group, which is on one side, put the model, start to win, start to find a strong and profitable organic growth for the future, and more importantly, make sure that you bring a value to the market that is creating value for our shareholder on the long term. I think that this objective has been fulfilled, again, with this hit on organic growth. The second thing we said very clearly, let us be clear, in a market that is being challenged on the value it could deliver, we need to demonstrate to everyone, not only to you, but also to our people, that we are having a model that is healthy, that we can simplify, and that can continue to create value for everyone. In the everyone, of course, there is our collaborators. Our ability to increase the valuable part is very important. Would we do the same in 2019? Of course. It will depend on our results. But this is clearly defined, and we are very confident, as I said, that reaching our target, we will be able to do the same thing. When it comes to China, I think I am going to pass to my friend Steve, and maybe I will add a word later. Okay. Thank you, William. Thank you, Arthur. Just coming to China, I think as you know that we have been active in the market. We were one of the first groups into the market and have been working there over 25 years. And we've obviously been a beneficiary of the huge growth that's occurring in that market. We're actually predicting, as you probably know, that China next year will contribute the second largest level of growth outside of the U.S. I'll come back to our performance and expectations. You're right in suggesting that is there some moderation in the rate of growth because of the macro and microeconomic environment in China. But we are still predicting that next year we will see something, sorry, 2019 and 2020 through to 2021, we will see a growth of an average of about 6.2%. Even though it is subdued compared to what we've seen over the last decade, it's still, let's say, double the level of growth that we're predicting for the U.S. at about 3%. In terms of our own performance, you saw that we, like a number of other markets, had some account losses, which accounted for our weak performance in 2018, particularly in Q4. Those are losses, it should be noted, that were in 2017. We actually had a successful year in 2018, and we have some further quite significant new business successes which we have not yet announced. I think we can be confident that we are on a growth trajectory for China. There's a couple of other scenarios in China which will give us further confidence. You mentioned about the digital players, which of course, are very different to those we see in the rest of the world. The market is not dominated by Facebook or Google or Amazon. And as you know, when we previously communicated, we have very strong and unique market leading partnerships with some of those digital players. Secondly, is that we have a very strong and growing position in e-commerce. China currently, in terms of the ad market, 18% of the total market is accounted through e-commerce, which is an indicator of what might happen in the rest of the world. China definitely leads the world in terms of e-commerce and e-retailing. I think our position in terms of account wins, our situation and relationship with the key market players, and our strong position in terms of the growth category in e-commerce, mean we feel confident of returning to strong growth in China in 2019 and beyond. Thank you, Steve. I will make two comments on China. The first is we are actually doing a great job for our global clients. It is not an easy market for most of them, and this is where the Power of One is playing at full speed. It is extremely difficult to scale talent. Because we are putting under one roof all our capabilities and reinventing the model of tomorrow, we are having good attraction with talent, and we can provide to our global clients the kind of great resources. To give you an example, I sent a film yesterday night to our 80,000 employees explaining what we are discussing today. Maybe I will encourage you to look at it. It is pretty simple and self-explanatory on how we see our vision for our people and for the Groupe in the future. Maybe because of time zone, but you cannot imagine the answer I had from China and from our people there that actually felt that what we are doing with our game changer could have an impact on their future. The second thing I will say, and by the way, we still cross finger because, I am a bit superstitious on that, is, as Steve said, we had some loss in 2017 that had an impact on 2018. Actually, we are starting the year pretty well when it comes to new business. It is a market that is pretty challenging because you are mainly pitching your business very often, and we have a series of defensive pitch that we won recently, an offensive one that could really make a difference. So now it is up to us to deliver. The good news is that at the opposite of the U.S., which most of them are sleeping, I know that our leaders in China are listening, so the message is for you guys. I think we are going to move to the next question with Omar. Oh, no. Omar? No. Yeah, I see Omar. Yes. As a reminder, ladies and gentlemen, to ask a question today, it is star, followed by the digit one on your telephone keypad. We are now going to our next question from Omar Sheikh from Morgan Stanley. Please go ahead. Your line is open. Morning, everyone. Just a couple from me. Athol, the first question's on the U.S. business. You've been very clear in identifying that that was the reason for the disappointment in organic growth in the fourth quarter of last year. I just wondered, for 2019, do you expect the, or is your planning assumption, for the level of attrition that you were seeing in the last quarter of last year, do you think that's going to improve during 2019 or, perhaps stay the same? Do you think the U.S. business in 2019 can grow versus 2018? That's the first question. Second, longer term target for 4%, which you highlighted at the Investor Day last year. Right at the beginning of this call, I think I heard you say that that target was very ambitious. Looking back at what you said this time last year at the Investor Day, I don't think you referred to it in that way. I'm just wondering, has that target got tougher to achieve now, given everything that's happened, the level of attrition you're seeing in the U.S. business and perhaps the macro headwinds getting a little bit worse. Some commentary on that would be helpful. Thank you very much. Thank you very much, Omar. No, I didn't say that 4% was very ambitious. What I said in my introduction is that the goal we set for 2018 were very ambitious. Again, and remember the Investor Day, I say it make sense. We presented to you our model that was very new at the time. We won already Daimler, but there were still a lot of things to say, and we said clearly during that day that we had the winning model. It was pretty ambitious, actually, to say that that day. Hopefully, you will agree on one thing, which is we have made the demonstration that this is a winning model, that now we need to scale. The second thing that was ambitious is to say we're going to grow our margin by 30 basis points, 30 to 50. We actually delivered 60. Will it be easy? No. It was not easy. We had to do a lot of things. We had to simplify structure. We have to change culture. We have to make sure that people work better together. But we did it, and those two things were definitely ambitious. The reason why we are confident on the 4% is actually fourfold. The first is, we have some game changer, that are growing by almost 30% this year. By definition, the weight, just organically, will be bigger, not even considering the acquisition we are doing at the moment. Just to take the French example, in the last two months, we bought a consulting company for Sapient that is going to give us a big strength in the U.S. in business transformation. And we are about to finish. We actually did finish the completion of the acquisition of a data company that will put us first on data. So those two acquisition will bring us very strong growth in France. I am taking those example because I think it is important to understand the model we are trying to build. We know that we have some difficulties that we need to fix. We are fighting against attrition, and I will come back to that later. But the first thing that make us confident for 2020 is we have seen the power of our model. More importantly, in the positive impact it is having on our client business, because this is what matters the most. Our model helping them to sell more while reducing their costs. And we have seen, consequently, the actually impact of those game changer in our growth. So the first reason why we are confident about 2020 is that in the first year, when we met in March, we have been able since to win such big new business and increase that we did, there should be a ramp-up effect in the future. The second thing, and by the way, I can mix that with your first question, is that we believe that attrition will slow down now. For a very simple reason is that there is, I think, more pressure on our FMCG client to find back growth. I do not want to go into any American client. I will let you read the press and talk to the competition. But honestly, you are starting to see that in this category, where, by the way, we should not put every client in the same basket. You have FMCG clients that are doing brilliantly. But as I said, others that are suffering, and we are incredibly confident, honestly, that the effort we are making today to adjust our structure to their need, to actually suffer with them and be there with them when they will accelerate growth, it will have a benefit and impact for us. So again, coming back to your question about the 4%, acceleration on our game changer, attrition that should slow down, and I will add two more points. The first, and this is going to help a lot, our country model is accelerating cross-fertilization in a way that is pretty outstanding. It is too early to be happy because, again, we still need to do a lot on organic growth. But delivering 3.6% of growth in France, in a market that is, as you know, a bit difficult and that has been difficult in Q4, at a moment where we are able to put this model in place, and it does not play at full speed yet, is extremely encouraging. And last but not least, you see me, we are going to continue to pitch because, again, we have the model, and we want to make sure that we use the time we have got. And by the way, the advance that Maurice Lévy gave us a couple of years ago when he created the Power of One and bought Sapient, to actually go again on the market and continue very aggressively and commitment to win new business. So is that an ambitious target? I think it is a target that we can confidently achieve. It will add a lot of work. It will mean that we are growing our game changer and still we have a big role to play on that because the problem we are having at the moment, honestly, is not to sell, is to deliver. Is to make sure that we can treat more clients. This is something if we find the right acquisition, if we are able to staff the people as we do, investing the right money on this, you will see some growth there and strong growth. We are confident that attrition at one point will stop. We are certain, by the way, that the country model will deliver because it is already delivering, and we are going to continue to pitch, hopefully with the same kind of luck we had this year. Some will tell you that the more we work, the more we get lucky, but we are going to continue to work very hard on that. Just one comment on the U.S. and attrition as a whole. Believe me. Okay. Is the U.S. business going to grow in 2019 after all? Sorry, that was just the follow-up. Just on this, we will see, yeah. We are going to see some growth definitely in the U.S. We are extremely optimistic about the model we are putting in place. We are actually having a management committee on Monday in New York to accelerate on what is 50% of our business, and it is going to be an effort coming from everywhere. The example I took, which is a good one, is what we are doing with Nigel Vaz, the CEO of Publicis Sapient. Those industry verticals are some things that are delivering huge growth internationally and should have an immediate impact in the U.S. Just this make us confident. So yeah, we will see growth in the U.S. Again, I want to stay reasonable for a very simple reason, which is we are for the moment planning for attrition in 2019, and we don't want to overstate anything once we are not sure about how our clients will react to the general context, and more importantly, how fast they will transform. Perfect. Thank you very much. Thank you. We will now take our next question from Adrien de Saint Hilaire from Bank of America Merrill Lynch. Go ahead. Yes. Good morning, everyone, and I hope you can hear me well. I've got a few questions, please, on your top-line outlook. Just a simple one to begin with. Is the starting point for organic sales growth including or excluding PHS, that is, are you expecting to grow faster than 0.1% or faster than 0.8%? That would be the first question. Secondly, I think in your press release you called for some volatility in your strategic game changer activities. Can you give us some outlook, perhaps, for your activity which grew, as you said, 28% in 2018? Then on your point about attrition from FMCG clients, do you feel that's coming from cuts in their marketing spending, or is it perhaps some market share losses to other agencies, or could it be also that they've increasingly insourced some of their marketing duties? Thank you very much. Thank you, Adrien. The first question is going to be very simple. Our top-line objective is obviously starting at 0.8%, so better than 0.8. Volatility on our game changer, I won't talk about volatility on our game changer. In the sense that we have experienced 30% growth from this year. We are confident that organically we can deliver that again. The question is how can we go faster? The question is how can we make sure that we accelerate that also through acquisition? As you have seen, we have been extremely rigorous in the acquisition we made because we said very clearly in March that it would be only about data, dynamic creativity and technology. Believe me, we have seen great agencies or companies that could have boosted our growth in a few areas, but that were not core of what our model should be. We have passed because we want to build the model of the future. I won't talk about volatility. I will say that we are pretty confident to deliver the same kind of number. More importantly, we hope we can boost it more, knowing that if we do that through acquisition, it won't have a direct impact on our organic growth in the first term. On attrition, maybe I will let Steve tell you a word first, and then I will conclude. It's a big topic because the question you raised is very well raised, by the way. There is a mixed bag of different things that we are putting in attrition, and we can talk to you a bit about insourcing and explaining how it works. Of course, there is some projects that are cut. It's definitely not going to other agencies because what is going to other agencies is considered for us like lost. Not like attrition. I want to be clear on that. This is why, by the way, we are seeing for the moment a very soft Q1, is that at the end of the day, what is lost is lost and will never come back. In the case of attrition, we are very confident that we can continue to grow. Maybe, Steve, you can tell us where on that. Yeah. I think maybe where we start in terms of the attrition, as Arthur just said, and just to confirm, this is not us losing market share to competitors. You mentioned in your question, Adrien, about was this because of in-housing. I would also suggest it is not because of in-housing. Just to tackle that particular question, there is certainly a trend for clients, particularly in the U.S., to consider in-housing. That does not necessarily lead to a loss of revenue, because many of those clients still need strategic support. We also have seen a number of clients set up in-housing in areas like programmatic. Of course, although there are technology systems out there, access to talent and scale and have the right degree of verification is very difficult to set up. We, of course, have, let's say, a 10-year experience and have scaled practices, and we work with over 400 clients in the U.S. So we've actually seen a reversal of some major clients, both in the U.S. and global, reversing the in-housing trend. Just to give you some reassurance, the attrition that we saw in the U.S. was more of a reaction to the economic environment, particularly in one particular category in FMCG. It is not a factor due to in-housing, either in 2018. I do not believe that will have any material impact on our numbers in 2019 either. Maybe- Okay, great. To stay on- Sorry. To stay on this topic one second more. Talking about attrition, it's important to look at it category by category. We talked about FMCG. I'm not going to come back to that. But we talked also about the financial services. The reason why I want to touch this point is really to try to explain why the model we are building today will actually deliver growth in the future. The attrition we are seeing on traditional advertising from our financial services clients is actually at least at the level of what we are experiencing with FMCG. The difference is CMOs today not only have the power on advertising, they also have the power to put in place the digital transformation that the bank needs to put in place, mainly because of retail, by the way, and because of the new entrants. It's not that CMOs in the financial services are spending less overall. They are spending less with traditional agencies. It's incredible to see that with the same kind of level of attrition that you can see in FMCG, we are actually growing our business in financial services in a very big way because we are the only one that have, again, on one side, the credibility, the trust, and the knowledge of the brand and the consumer of any of those banks, and the capabilities with Sapient to help them transform their business model from within. What is true there is that FMCG, as you know, is weighting more in our revenue, around 25%, than financial services. But the reason why we are so optimistic for the future is that you won't find any category that won't go through a digital transformation. We will be there because all along the way, we are building the right relationship. Thanks for that, Arthur, and sorry I interrupted your narrative. Just perhaps one last easy one, hopefully. Can you tell us what was the impact of net new business on organic sales growth in 2018, and what is the incremental impact that you expect for 2019? Now, Michel has been quiet for too long, so I guess this one is maybe for you. The impact of net new business on 2020 came mostly during the H2, if you remember. This has represent 150 basis points. 50 basis points, and regarding 2019 now, the impact will be 150 basis points on H1 mostly. Will come on H1 mostly. Maybe I can add a point on that, is the good news about winning accounts that are above EUR 1 billion in billing is that they will be structural for us. As you know, we want two in Q4. The bad news is that we are talking about hundreds of people that are working for one holding company and will move to another in more than 50 countries. When you are talking about the GSK in the U.S., when you talk to Frank Kaiser, it's big moves that take a bit of time. So I think that we can actually plan exactly as we did in Q3 and Q4 on 150 basis points on one side. But hopefully, and surely by the way, in H2, you will see a ramp-up that will be bigger. Many thanks. Next question, please. Yes, sir. Next question comes from Conor O'Shea from Crédit Agricole CIB. Please go ahead. Your line is open. Yes, good morning. Thanks for taking my calls. Just a couple of questions on FMCG. If you look at the split in group revenues, I think it fell from 28% to 26%. For the full year, which could imply a high single-digit decline. I think previously we've been looking at a mid-single-digit decline. Do you confirm that that decline has accelerated to high single digits for the full year and obviously potentially more in Q4? That's the first question. Second question, just on the U.S. in terms of competitiveness. This is an issue where it seems that the European agencies over the last couple of years have struggled a lot more than historically in the U.S. business, and WPP and I think Havas have alluded to it. Just wondering, obviously, that's the market where the industry problems are the strongest, but is there also a dimension in terms of your own hiring and key hires for key posts that you have developed more the rollout of the European markets and the country model and so on, and that the U.S. is more sort of work in progress for you, and that it may take a little bit more time? Specifically with that in mind, the latest management change at Sapient, I think that's three or four CEOs in the last five years. Is there an issue there? Could you maybe talk a little bit around that? Then, just very specifically on the first quarter, just to give us an idea, halfway through, do you expect the organic decline to be more than what we saw in the fourth quarter? Obviously like for like, excluding or including PHS. Thank you. Connor, I'm sorry, I didn't get the third question. I'm going to make a quick answer on the first one concerning FMCG attrition. Again, we have seen an acceleration of attrition in Q4. It could continue in Q1, but we should not extrapolate at all the number that we have seen in Q4, because again, we are seeing positive sign on the other side. More importantly, as I said, it is not client that we have lost. It's client that are either shifting their revenue to promotion, for example, they are putting their marketing money into the price or cutting some project. We don't see a trend. We stay cautious, but we don't see a trend. The second question was on the On the U.S. business, yeah. U.S., first of all, the U.S. for us is a country that is very strong in terms of capabilities. We have very strong creative brands. Two of them have been ranked first in new business. We are leading the market in media, with Publicis Media. We have Publicis Sapient, which is again something unique when you look at our business. It's big, it's 50% of our business. By definition, integration is, I won't say more complex, but take a bit more of time because where you have a CEO per country, France, which is our third market, so it's a big one, yet. The decision to put Agathe Bousquet at the helm of everything was not an easy decision that we took with Maurice. But at the end of the day, we have seen an immediate impact on the way we transform, in the product we deliver, in the value we create for our clients, and in the growth. We have to do the same in the U.S. I am pretty optimistic, by the way, for several reason. The first is we see that when we play together, we win. You would have been in the room in several of the pitches that has happened last year that were mainly U.S.-based. I guess you would have understand why the model of tomorrow will deliver the growth. The model of today will deliver the growth of tomorrow, no doubt. So people are experiencing what it means to work better together, and our key manager are. And we have a first line of people that get along well together. We're going to continue, Steve and myself, by the way, being very involved in how we manage the management committee there. And I'm actually very optimistic, and I'll be happy to come back to your question. I'm going to note it, at the end of Q1 to tell you what we are putting in place. And I think you will agree that it's tangible proof that we can actually put the country model in the U.S. Now I'm sorry, I couldn't hear the third question. Yes. Sorry. And the third question, just very simply, as things stand today, do you think that the first quarter of 2019 could be materially worse than the fourth quarter of 2018 in terms of organic declines, like for like? And if you could also just say a quick word about Sapient, the latest change in the promotion of Nigel Vaz. You always reference Sapient as having really delivered since the acquisition, but this is I think the third or fourth change of CEO at Sapient since you've acquired it. And could you just maybe explain why that has happened, why there's another change being made there? I'm going to start by this one, if you don't mind, and then I come back in on Q1. No doubt, when the decision has been taken by Maurice Lévy to acquire Sapient, it was the right thing to do. It was the right vision because at least here and in some of the other companies, more on the consultant side at least, we are absolutely convinced that there will be a convergence between marketing transformation and business transformation, and that the player of tomorrow will be the one that can reinvent the consumer journey thanks to data and creativity, but also can build the platform and the business model, thanks to technology to make it work. To do that, you need creative and media agencies, but you need tech experts, consultants that can work on how to define technological term, the experience that you are proposing to your clients. That was the right thing to do. Now, the good news and the bad news is that there is a price to entry, which has nothing to do with money, apart from the fact that if you look at what is available in the market by buying Sapient, we have bought the only tech company at scale that could actually strengthen a group like ours. But there is another barrier that is a cultural barrier. You are asking creative people, media people, to work with engineers, to work with consultants to make the model of tomorrow work and actually work today to deliver the growth of tomorrow. This is what we are doing extremely well in pitch, because it's a handful of people getting together, making it work, and then you can flow and create best cases. It has been, in the last 3 years, of course, a challenge to integrate. Where I say there is a good news and the bad news is that the bad news is it has been a challenge. The good news is good luck to whoever else wants to try. It will take a lot of time. I'm obviously thinking about the system integrator. There is a reason why you are not finding any of the system integrator today saying that they're going to go for a big acquisition. It is extremely difficult to do. We did it, and I want to be very clear. You are right. We have made change of CEOs, but before making change of CEOs, and I'll come back on every CEO in a second, what we did is actually changing the perimeter and the purpose of Publicis. There is a jewel in Publicis, which is business transformation. This ability to go and see any of our clients and explain to them how, thanks to technology, working with a creative or a media team, we can accelerate their growth while reducing their cost. You won't find one of our clients that is not interested about the next step. There's no one. What we have done, honestly, as you have seen, is we took Publicis, but we took Sapient. We called it, well, I say we. Maurice called it Publicis Sapient. We add Razorfish into that to bring the level of experience, and you know that we had some difficulties on that, but we fixed it and integrated. We took another decision, which is Digitas that was part of Publicis, actually move into Publicis Media for a simple reason, is this was more about personalization at scale and what fitting better with the marketing side of our business. So what has changed is not the CEO. What has changed is the perimeter. I don't want to go into detail into that, but we have operated a shift focusing on what is really delivering the value on Publicis today, which is business transformation. When you look at the CEOs that have been running Publicis, they are all extremely talented. By the way, let's be clear, someone that Alan Wexler is today one of the best account guys that I know, and this is definitely what I need to help me transform our clients. But we were, and by the way, with Alan, thinking that the right thing to do, as you say, we need to be extremely clear and extremely committed to deliver to every of our clients business transformation through our verticals. Because you will know that in the consulting business, at the opposite of the creative business, to client is not a conflict, it is an expertise. So we are building those expertise globally, led by Nigel Vaz that has done an incredible job. Alan will help me to make the bridge, because we are calling that a bridge, between the client driving of the business transformation side or the one that we are in marketing because honestly, they are not talking the same language. So I need to make sure that I can have some translator that helps me anytime we go into a creative meeting with someone from Sapient, that people understand the value of what we bring, and this is what we will do together. Now, on Q1, as we said very clearly, we don't exclude Q1 to be negative. This for three reasons. First, as I said, you will see the continuation of attrition, which we have seen in Q4. Second, I'm not going to come back to that. Tough comparable. But the big difference also, as I mentioned, is that at the end of the day, what we have won in Q4 will start to ramp up end of Q1, beginning of Q2, while we will have the impact of what we have lost in Q3 for Q1. So again, we are extremely confident in the fact that we will improve sharply in Q2 for the reason I just mentioned, but we are expecting a tough Q1. Great. Many thanks. Thank you. We will now take our next question from Tim Nollen from Macquarie. Please go ahead. Your line is open. Oh, thanks very much. Question for you about the account wins, and I wonder if you could help us understand about the rate of revenues that you are taking on these. We have seen across much of the agency groups slower organic growth, of course, last couple of years. We see a lot of account moves. I am just wondering if there is pressure on the rate that you are taking on the account wins. If there is anything you could enlighten us on that, please. Secondly, just a quick modeling question. Your interest expense line has moved around quite a lot, come down quite a lot, obviously to pay down some debt. I just wonder what level of interest expense we should be using for 2019, and also how should we model the other financial income line for 2019, given I think that has a lot to do with the IFRS 16. Thank you. Thank you. I will, again, go start with question two. Jean-Michel, you take it? Tim, okay. We are moving to IFRS 16, and the comparison in 2019 will be done with the IFRS 16 number, and we are at EUR 71 million, but entering Entering in the 2019 with this low position in debt, we should be able to improve that amount. Definitively. So the impact- Sorry, is that- As we said, it has been roughly 150 basis points in Q4 and Q3 coming from the wind that we had at the beginning of the year, which by the way, were already pretty significant. We are expecting, again, to do better next year, but something ramping up in Q2 as, of course, it takes more time to integrate this kind of very big winds. Now, coming back to the transformation rate, I guess you were also asking the question on this. It's very difficult to tell you. What I can tell you is that we are choosing very carefully our battles. We are making sure that we are going into the right pitch, the one that have client that understand our model and are advanced enough to believe that this is a solution, and so we can lead the race and win. And by the way, the one that we know we won't have to buy it at the end with price. We did this mistake once this year. I won't repeat it. So we went through a long process, and at the end of the day, we had to give up for the wrong reason because as we said very clearly, we are not here to buy market share at any cost. We want to make sure that we have valued business. But what is important there, and this is why, by the way, we were very happy to see what all the reports have been saying about our track record is that it's easy to announce a win. We all have local wins with big names that we can make believe the market that's a big thing. What you should look at, of course, is what are the global one that are really having an impact, of course, on our organic growth and on our model, but more importantly on our ability to demonstrate that we have a model that is attractive and competitive for our clients on a big scale. And this is what we have done. And the two last example, which are again, GSK and Pfizer for us, are the best example of that, which made, by the way, again, Q4 a bit sour because we had on the one side, this Q4 organic growth that is not at the level we expected. On the other, those win that are neither at the level we are expecting or actually overdoing the probability. As you know, just to mention that because we should be celebrating and we're not, of course. GSK said very clearly that they won't go with one holding company. They decided that they will go at least with two, and at the end of the day, they decided one, they decided us for several reason. One of those was definitely our transformation, the other were capabilities of our talent. And they said, by the way, very clearly in the price year that we were not the lower in term of price. So again, very difficult the transformation rate. We are choosing our battle. We are making sure that we sell our model. We are making sure that we are not sacrificing our value, and we will continue in the same way in 2019. Question, please, because time is flying. Thank you. We will now take our next question from Richard Eary from UBS. Please go ahead. Your line is open. Thank you. Just a few questions from my side. Just the first one, just so we can get some further color as we go into 2019 in terms of the impact of attrition and game changers. Just from listening to you speak, with the account wins, are you expecting the growth from game changes in 2019 of EUR 240 million or to be in excess of the EUR 240 million in 2018? Looking at the attrition numbers, are we expecting a bigger attrition number in your guidance for 2019 as well? Just so I can understand that. That's the first question. The second question is just looking at the margin expansion in 2018 and trying to understand that obviously there was a lack of project work that came in December. Was that a lower margin project work and therefore that didn't have a bigger drag as we may have expected on margin? So we just understand what happened between the loss of attrition and margin, that would be helpful. Then just the last question on cash flow. Clearly a good performance on cash flow, EUR 1.3 billion. You've already allocated EUR 900 million to capital management, a further EUR 400 million to M&A, plus EUR 100 million windfall from the sale of PHS. That still means that the net cash position will grow in 2019. How do we think about what you're going to use that cash flow? Are we going to see an acceleration in M&A, or are we likely to see further basically buybacks as we go through later in the year? I guess the three questions are for Jean-Michel. Okay. Yes, Richard. The first one is the impact of the attrition, in 2019. So, we're expecting, in 2019, an attrition, of course, in the range of EUR 150 million, like it has been in 2018. So this is for sure conservative, as we already is seeing clients asking themselves about their own transformation and new ways to engage differently with consumers. But we want to remain cautious on attrition based on the experience of 2018, of course, and to continue our transformation on the strong pace. We are much more optimistic for 2020, to be fair. The outcome is expected to be a lower attrition and a higher contribution from our strategic game changers, leading to the 4% organic growth in 2020, which is our main objective to be clear. In term of game changers- In 2019, difficult to be too specific on that. On the one hand, as revenue from our game changers now represent more than EUR 1 billion versus EUR 880 million a year ago, you remember that, it would be ambitious to assume that we could retain the same 28% growth rate as we deliver in 2018. On the other hand, the account wins of 2018 and the way we are now engaging with the clients make us very confident to deliver another very strong year for our game changers. What is certain is that we are confident to achieve our target for 2020, EUR 1.5 billion revenue, knowing that we are already in advance at the end of 2019 compared to our plan. Second question, in term of cash, we are returning EUR 900 million based on the cash generation, and decision on dividend, and the share buyback on 2018 results. We have this ambition to spend the M&A envelope at EUR 350 million to EUR 500 million. Something that we want, this is a priority. Priority is to boost our game changers through M&A. Something that we need to understand, if we want to get the growth we want, we need to boost our game changer as fast as possible, and of course, we will have organic growth, which is very high as you saw. But of course, the M&A will help a lot, and as we are extremely disciplined, this is something that we will focus on boosting game changers through M&A in 2019, sorry. Merci, Jean-Michel. Next question. Can I just, Arthur? Yes, we hear you. Yeah. Just to follow up on that. Jean-Michel, just to go back to the game changer, you said you are confident going from EUR 1 billion in 2018 to EUR 1.5 billion in FY 2020. I am presuming that if we are just doing a normal step change, you are confident of delivering at least the EUR 240 million in 2019. Is that a correct statement or not? Correct. Okay. Thank you. It was a short answer. I guess we can move to the next question, if it is fine for you. Thank you. We will now take our next question from Chris Collett from Deutsche Bank. Please go ahead. Yes, good morning. Thanks for taking the question. Just had, really couple left. One was just if you could give us a word on competition with consultancy firms, either on the more sort of traditional marketing work, but also, some of the digital consulting and transformational work. Could you just let us know what you have seen in terms of your win-loss rate? Then secondly, good to see the buyback that you've announced for this year, but just wondering, with the scrip dividend program that you continue to run, you continue to issue sort of a couple of percent of shares each year, via the scrip dividend. So just wondering whether you would put in place a more permanent function that could then at least offset the dilution from the scrip dividend. Thank you. I'm going to take the first question, and I will leave the second to Jean-Michel. When it comes to the consultancy, again, I need to come back to the model we are building. What we are clearly saying is that we want to take the leadership in marketing and business transformation connected by data. On the marketing transformation side of our business, where our traditional competitors are the Omnicom and WPP of this world, we actually don't see those consultants. We can cross them sometime in some pitch, but rarely at the second round, and honestly, we haven't seen anything significant that has been won so far. It could come because they're going to continue to aggressively make some acquisition with very high multiples. So you will find some creative agencies belonging to a consulting group, that could win some marketing transformation business. But it will be traditional agency bought by those guy, put onto a pitch. For the moment, honestly, on this side of the business, we are not seeing them. Where we do see them as Publicis, and only as Publicis, is on the business transformation part of it, i.e., what we have with Publicis Sapient. And I won't go into the wins we had this year in detail, but of course, every win we are making on this area either come from cross-fertilization, i.e., we come with a solution that is stronger because it's integrated with our marketing clients. And by the way, normally we exit a consultant to take his job, or we pitch frontally. Sometimes we win, sometimes we lose, but I don't want to overpromise what we are having today in term of transformation rate, but it's pretty high. Again, on the marketing side, for the moment, we don't see anything strong enough to compete with the so-called holding companies. On the other side, of course, with Sapient, we're going very hard against those guys and will be indirectly, i.e., using the fact that we have built a relationship with our clients on the marketing side that makes sense to get relevant at converge or frontally in a pitch. Jean, second question is for you. The second question on the scrip dividend. Of course, this is clear. The buyback to be a short answer again, that is clear. The buyback will offset the dilution. That is clear. No other answer on that point for sure. I guess we still have a few questions on the line. Three? We have three questions on the line still, I guess. Yes. We will now take our next one from Tom Singlehurst from Citi. Please go ahead. Your line is open. Yes, thank you. It is Tom here from Citi. Conscious of time, so thank you for taking the question. I suppose just the main one I had was about growth. Obviously, I am someone that is slightly more sanguine about the structural position of the agencies in general, and Publicis, in particular, but the big question I always get is, how can we be comfortable in 2020 growth if we cannot get comfort on growth in the coming quarter? So I just wonder whether you could just give maybe a little bit more color on the mechanics of a miss like the one we have just seen in the fourth quarter. I think you alluded to it, but just to be specific, is this money that is going out of advertising into promotional spend? Is it specific projects that were tagged as PBC that are specifically being cut, and you have had to take them out? Just so we can sort of really understand what the mechanics are when we see a sort of short-term miss like this, and why it wouldn't be representative of a sort of bigger miss for the, let's say, for the whole of 2019. Then very briefly, second point. I understand that the buyback is obviously helpful in terms of keeping earnings ticking over, but why aren't you more aggressive on the M&A? That would be a quicker way of getting growth back up. I know it's not necessarily high quality in the sense you're buying growth, but is there a lack of big deals to do? Are you consciously keeping the M&A deals smaller in nature? Thank you so much. No, thank you very much. If you don't mind, I'm going to start with the share buyback. Because you said something very important at the beginning of your question, which is the trust you should have in the industry or not. When we came to the Investor Day, which lasted, by the way, for 7 hours. Where we showed you our model, where we showed you our target. We set ambitious goal in a lot of areas. One year later, we came back delivering or over-delivering on every financial ratio and on share buyback. What is important there is that the reason why we are doing the share buyback is extremely simple. Believe me, if we could have found the EUR 300 or EUR 500 million of acquisition, we won't have hesitate 1 second. We know that when we do the right acquisition, it is immediate growth and profit. By the way, you will see it in the small acquisition we have done so far. The question is, we decided that first we will be extremely rigorous in our acquisitions, and we will only go for what is strategic. Because again, and it comes back to what you were saying about confidence, we committed to that. Then because we realized that we won't find any more targets that can really strengthen our model, again, maybe targets that will boost organic growth on the short term. But the question is not there. The question is how do we reinvent our model to continue to grow while increasing our margin? We decided that we had to do a share buyback because it was our commitment. Hopefully next year, we will be able to find more acquisition. Believe me, we have a good pipe at the moment. We will try to do everything we can to strengthen our organic growth through the acceleration of our game changer, through acquisition. The only thing that matter, and it has been a big topic, is we want as much as we can in every circumstances, try to deliver what we commit. We said clearly that we won't do any acquisition that was not on those game changer. If we don't find anything that can accelerate our growth and our profit since those acquisition, we will do the share buyback. So we are doing the share buyback. The second point you are touching is 2020. Let's be clear. There is 4 reason why, honestly, we are confident for 2020. Again, the game changer. Maybe we should stop to call them the game changer in a way, because what you need to understand there is that we are talking about the three ingredients that are delivering growth and reducing costs for our clients. When you put them together under our model, that is unique for us because we are the only one who have, at the same time, the marketing and the business transformation skills. We know that we win. So of course, you will see an acceleration in 2019. Believe me, you will see again an acceleration in 2020. The second thing is, hopefully, may be too early to say, but we are pretty confident we are going to see attrition that is going to slow down. We are staying very cautious for 2019, but we do believe that this is going to shift for the reasons that I just mentioned. I want to make a point that is very important there. We are not blaming one second our client for our problems. Our clients are doing the right thing. We are suffering because of that, they will be winning tomorrow, and we will be winning with them. So we are pretty confident again, that in 2020, you will see a turnaround on that. Third, for those who are in the Investor Day you will see the progress that we have made so far. The country model will pay, and we are seeing how much is paying in France today and in the U.K. tomorrow. The question someone raised about the U.S. is the right one. Still 50% of our business. How can we accelerate the country model there? This is why we are having this priority. As promised, we will come back on that in Q1 because this will have a big impact on our business. Last, we are not going to stop to pitch. We are going to continue to put our model in front of our clients. We are going to use the advance that we are having at the moment to continue to pitch. For all of this reason, by the way, not only we are confident on the 4%, we are confident in delivering the margin improvement. Again, we could have come back to you with 30 basis point improvement. We came back with 60, which means that we still have to find at least 60 in the next two years. We know how to simplify our structure, accelerate on valued products that are having the right margin, and actually deliver on both growth and profit, because we do believe that these are, for us at least, the two things that matter, is making the demonstration that we have the right model and bringing additional value. Thank you. Next question, please. Thank you. Thank you. We will now take our next question from Julien Roch from Barclays. Please go ahead. Yes, good morning. Two number questions. The first one, can you confirm that the account win benefit in 2018, from Q1 to Q4, were 70 basis points, 70 basis points, 100 basis points, and 150 basis points? Then could you give us the split of the 150 basis point benefit by quarter in 2019? That is the first question. The second question is, how much restructuring can we expect in 2019 versus the 104? Merci. Julien, we do not have these details, to be clear. In the way you formulate it, we do not have, for 2019, this detail. This is something that we are still looking at, of course. We do not have it. I am sorry for that. Arthur, a couple of times said things would improve from Q2, so at least you have an idea of phasing. Maybe the starting point in Q1, and then we'll take an improvement from there? This is 150 basis point above. We have a Q1, which has been described by Arthur, and Q2, we will have the effect of the wins, which will ramping up clearly during the Q2 and progressively in the rest of the year. This is the only what we will comment at this stage. But you will see an average rate that will increase by definition. We are talking about 2 accounts that are billing more than EUR 1 billion. I wish it was EUR 100 billion. EUR 1 billion. So, we are pretty confident on that. Again, because it's big business, it will really start to ramp up in Q2. I think we have a last question. Okay, and there was just a question on restructuring. Question on restructuring. Yeah, as I said in my presentation, restructuring in 2019 will be at the same level, roughly, than 2018. This is part of what has been announced during the strategy plan at the Investor Day. We are consistent with what we said before. We try to select the project which are bringing the most benefit, in term of profit, obviously, knowing that in our industry, as you know, we have a churn rate which is very high, which is also helping us to limit the restructuring cost. Okay. Merci beaucoup. Thank you. We'll now take our next question from Sarah Simon from Berenberg. Please go ahead. Your line is open. Hi. Just one question. I'm sorry to be a bit boring, come back on the attrition question, but it was really two things. Just following Tom's question, was this specific project, and are we talking here basically decisions to just not create new campaigns, but spend money using old creative? Secondly, is this across the board FMCG, or is it just a couple of clients or large clients who made this decision? Thanks. Well, thank you for asking the question, because we have to be very clear on that. Yes. It is about specific project, and just look at how things are being done marketing wise. When you are, for example, managing a large portfolio of brands, you are going to decide the one you're going to invest it and the one you're going to divest, and by the way, sometimes sell. You can lose, on one day, a brand that you have been managing forever, but that is going to be stopped in term of investment or either sell or. We are more talking about this kind of project that are being cut. Now, the second question is extremely important. The problem is that you put so many things into FMCG, that it is unfair for most of them to be associated to the problem of the few of them. By the way, the one that are having challenge today could be the one that are successful tomorrow. You are actually seeing example of that. The problem I am having, and this is, again, I am coming back to what I said, I think that we have to fix our own problem, we have to continue to scale our model, and we have to bring back organic growth, and we shouldn't blame anyone else for that. The truth is, we have a few clients that actually count a lot for us, that we are continuing to invest on, by the way, that at the moment have been cutting and hurting us on organic growth. Those clients will come back. We are with them on that. But I don't want anyone to think that we're talking category-wise. It is within this category for a very simple reason, is we are talking about clients that for the moment are not accelerating in their transformation. As we can see in other category, I talk about financial services, but retail is a great example. If you look at what we are doing with Carrefour, that we won at the beginning of the year, it is a brilliant example of a client that has been spending maybe a bit less on On advertising, but more on transformation, with whom we are doing great things. I don't think we should resume as a category problem, not even as a trend. We are talking about particular clients that are pretty big for us, where we need to do the work. Look, normally we do an hour and a half. Okay, very clear. This time we did almost 2 hours. I will thank you for your time. I will finish very fast with, hopefully, what are the three points you will retain of this call. First, we strongly believe that thanks to our transformation, and despite low organic growth, we have delivered a record year commercially with our new business, and financially, I won't go into every ratio again, highest ever EPS. We have done everything we could to make sure that we can raise our attractiveness on one side for our client and for our talent, and on the other side, in a market that is under pressure, increase the value we are delivering. We are extremely clear that we need to accelerate on organic growth. Again, we are not looking for any excuses. We are trying to be overly transparent. We have a model that is growing by 30% on 12% of our business. That is, if I've got to make the parallel with the music industry, the equivalent of streaming, that is proving to be working and will expand in time. On the other side, we have experienced some attrition on some key clients that have upset part of all the effort. Again, this would not have happened. We would have had a great year in every dimension. We are extremely confident on our ability to deliver our targets for 2020, not only on growth, but also on profit, for one reason, which is at the end of the day, we are intimately convinced that the model we have built today will deliver the growth of tomorrow. This is the work we're going to do in the coming months, and hopefully come back to you with good news. Thank you very much. Have a good day. Thank you. Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Data Source: Quartr Last updated: Feb 7, 2019

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