Good morning ladies and gentlemen and thank you for standing by. Welcome to the WPP 2022 interim results conference call and webcast. At this time, all participants are in a listen- only mode. After the speaker's opening remarks, there'll be a question- and- answer session, at which time, if you would like to ask a question, please press star followed by one on your telephone keypad. Today's conference is being recorded. I will now hand over to your host, Mark Read, CEO of WPP to begin. Mark please go ahead.
Thank you very much and good morning, everybody. I think we'll take sort of this morning's presentation as viewed. If you want to look at it's available online. In the interests of efficiency, I'll make a few opening remarks and return to questions. W e look at the first half. I think we had continued strong demand from our clients. You know, we had good growth in the first half, 8.9%. Actually, 8.3% in the second quarter, so only slightly lower than the first quarter despite you know, somewhat tougher comparatives. That reflected strong growth across all of our business.
The GIAs, the integrated agencies up 8.2% with perhaps a slightly stronger performance in media, but actually a very credible performance in our creative agencies across the board, around 6% in Q2. Public relations up 7.3%. PR has been our standout performing business through the pandemic reflecting its importance to clients. Led our specialist agencies actually up 10.9%, better than the average overall. Geographically good growth across all our major markets, notably the U.S., which in the first half, you know, accelerated WPP's growth. I think we're seeing an outperformance relative to the rest of the business in the U.S. Again, you know, Mark, a turnaround from where we were sort of pre-pandemic.
You know, remind you our last quarter of growth before the recent outperformance was Q1 2016 and growth in all markets, except for China, obviously due to the impacts of lockdowns there. I think that our business is stronger creatively. We were Most Creative Company of the Year at Cannes Lions in 2022, and Ogilvy were named Network of the Year. In our media business, we rank by COMvergence as the world's leading media group, and that's reflected in a very strong new business performance of $1.6 billion in the second quarter. Good wins from the likes of Audible, Danone, Audi, Nationwide. Actually a very solid group of wins across both our creative and our media business. Probably a little bit more evenly split, creative and media this year, than compared to last.
We continue to invest in the business, both organically, initiatives like Everymile and Choreograph, our data business, and through M&A. Bower House Digital, a Salesforce Marketing Cloud company in Australia, and Corebiz, really a significant e-commerce company in Brazil, and in simplifying the business to make it easier for our clients, and to improve sort of integrated service with the creation of EssenceMediacom and Design Bridge and Partners. The transformation program's on track expect to deliver $300 million of savings this year. Given the strong position of the balance sheet, we're able to execute GBP 657 million of our GBP 800 million program for share buybacks for the year in the first half, as well as raise our guidance.
Net-net, that means we're able to increase our guidance for 2022, our net sales from 5.5%-6.5% to revised guidance of 6%-7%, really taking into account the outperformance in Q2, leaving perhaps our expectations for the balance of the year unchanged with the headline operating margin up around 50 basis points. That's a net summary for the first half. I'd say good start to the year confident in delivering the balance of the year. At that point why don't we turn to any questions that you have?
Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypads. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question goes to Tim Nollen of Macquarie. Tim, please go ahead. Your line is open.
Great, thanks. Hi, Mark. Thanks for the comments. I'll ask I guess the obvious question, which is, you know, your results seem fine, your guidance seems fine, and yet everyone's worried about what's gonna happen next year, understandably, I guess. I guess one number that sticks out to me from your slides is the digital growth. I think if I got this right, it was up 12% in the first half versus up 32% a year ago. What I'm wondering is, and, you know, we've heard some comments from a number of, you know, ad-related businesses in the U.S. here talking about slowdown, whether already beginning in Q2 or going to happen in H2.
I guess my question is this a quick cut to some spending in some digital categories that you may be seeing as well? However, your growth looks solid because you have these general budgets. You do a lot of brand advertising, big blue-chip advertisers that are continuing to spend. Is this kind of the breakdown, sort of quick digital cuts versus general marketing plans from global advertisers continuing? I'm just trying to understand the difference between your comments and outlook versus several other companies. Thanks.
I think what we said about this year and what we said about next year is not dissimilar from what our peers have said, which is broadly speaking, no strong demand in the first half of the year, no significant cuts by clients, likely to be a somewhat slower second half than the first half. An uncertain 2023, and I think I characterize that as pretty consistent across what our peers are saying. In the first half of the year, WPP delivered 8% net sales growth, Google delivered 16%, Meta delivered 3%. Within that context, I don't think that you can say.
I think you'd say that those companies that are facing a few more headwinds from a net sales perspective, to my mind is more to do with either competitive dynamics, the nature of the clients that they have, than it is a result of a broader macro slowdown. If you look at the comments from Google, you know, I think they said things were pretty stable. Amazon I think they characterize the market as strong. Comcast characterizes as choppy, by which they meant some ups and some downs but no overall slowdown. I think those companies that tended to do worse were, perhaps for obvious reasons, those companies were most likely to point to the broader macro slowdown.
I don't know that it's a broader macro slowdown or results in the competitive dynamics of those companies, but I think it's more likely to be the latter than the former. Now that's not to say that we are facing more uncertain times, you know, in 2023. I think, as I said, we and most of our peers are looking for a slowdown. We're looking for things to be somewhat slower in the second half of the year than they are in the first. I don't think you can say that those companies that have seen cuts in their budgets is down to sort of digital being cut more quickly or not. That may. Some of it may be to.
I think some of the frost has come out of the market and maybe some of those companies are a little bit more reliant on venture capital or, you know, venture capital backed app downloads, that type of nature of business. You know, the Gorillas or the Farfetch, you know, those types of things. That might be it, but I think it's more likely to be that than it is a macro slowdown so far.
I think, Tim, John, just to build on Mark's comments as well. That sort of 32% digital growth coming down to 12% digital growth, I think to your point, also reflects SMEs and also reflects the Chinese market. You know, both of which from a market perspective, we sort of under-index in relative to the size of the market. That might suggest why our figures have been a little bit more robust than perhaps the broader market.
Okay. I get it.
Make sense?
Okay. Yep. Thank you both.
Thank you. The next question goes to Doug Arthur of Huber Research. Doug, please go ahead. Your line is open.
Yeah. Thanks. Good morning. You know, we did a call with Brian Wieser a month ago, and he was making the point, and I don't know if you said this this morning, a little early for me, on the earlier call, but that China's weakness in the first quarter could provide a tailwind in the second half as you know it reopens and trade picks up. I'm wondering if that's sort of something you're expecting. That's question one.
Yeah, I don't think it's something that we're. I mean, I think we're baking a slightly better second half than first half in China, but I don't think our numbers depend on, you know, a massive change. It's a relatively small part of our business. Doesn't depend on a massive change in the Chinese situation really, no.
I mean, you know, there was a very stark contrast in performance between, you know, Q1 and Q2. For mainland China Q1, we were up 11.9%, and for Q2, we were down 6.1%. You know, that just showed the marked impact of the lockdowns in the second quarter. I think it's fair to say, you know, we'd expect to see some recovery of that, not probably to the level seen in Q1, but certainly some degree of bounce back in the market in the second half, given that contrasting performance Q1 to Q2.
Okay.
As Mark said, it's about 5% of our overall business, so it's not insignificant, but it's not a large percentage.
Got it. Okay. The second question, which is probably more difficult to answer, but obviously, given all the work you've done on first-party data, Choreograph, client, you know, demand for solving the cookie issue. Now that Chrome is delaying the elimination of third-party cookies again, does that help you, hurt you, or is it sort of a neutral. You continue to work with your clients on new solutions regardless of under the assumption third-party cookies will be eliminated. It's not when, it's just if.
No, I think it doesn't change things really for us one way or another. It's just another uncertainty, another change in the market that means clients need more help to navigate it. I think we remain of the view that you know, protecting consumer privacy is gonna be an increasing part of the you know, the political or the data protection landscape that I don't think we're gonna replace the cookie with another form of identity owned either by one ad tech company or something else. I think really it's pretty clear that the kind of Wild West of data collection isn't right and that data collection needs to be done with the permission of the consumer. We're not looking to replace the cookie with another sort of unified ID system, but that.
The data-driven marketing requires, you know, the integration of all sorts of data, not just sort of PII or purchase behavior. I think that a more complex data landscape means clients need more advice. I think there are companies, you know, in the automotive, travel, financial services sector that where PII will be very important and retail, where I'd included that where PII is very important and we. That's a lot of the work we do with WPP, and there'll be other companies in packaged goods and pharma and healthcare where it will be less relevant, and we need to be able to serve both those sorts of clients. I think that broadly speaking, the sort of extension of cookies on Chrome hasn't really been the major issue.
The major issue has really been data collection on the iPhone really, and you know, what would happen if Android and the iPhone both coalesce to kind of a much more strict. Because you know, the interesting activity today is happening on web browsers, happening on the mobile device. I think that's much, much more significant, and that's what people have pointed to as a change. I would say, it's neither one thing nor the other for us in the main.
I think just to add to that, I mean, it's, you know, the fact that the ecosystem is forever dynamic and changing and, delays or no delays, you know, I just think adds to the complexity. We've always said that complexity within that ecosystem, generally speaking, is good for us because we can help our clients navigate through that complexity. The fact that the cookies are maybe around for another year longer gives us more time to help our clients prepare for the new world. Obviously we're doing a lot of engagements with the clients at the moment, looking at how they transition from the world of cookies to a different way in which we can target customers going forward.
Got it. Okay. If I could just squeak one more in.
Yeah.
John, in terms of margin performance, you know, great revenue growth, first half margins down, which is kind of what you guided toward, 50 basis point, still the guidance improvement for the year. What are the key parts of the operating leverage in the second half?
Yeah. I mean, as you said, you know, the guidance that we gave at Q1 and the prelims is very much around 50 basis points, being down year-on-year for the first half. I guess in a way the mix of that was probably a little bit different than what we expected, so a little bit tougher in relation to staff costs, a little bit better with the establishment costs, pretty much bang in line with what we expected on personnel costs and a little bit more recovery through the staff incentives. The shape for the first half was maybe a little bit different, but when it all summed together down 50 basis points in line with what we guided.
To get to our sort of 40 basis points to 50 basis point for the full year requires the second half to be up roughly 120 basis points again, as we guided at the Q1 trading statement. I think the shape of that, albeit, you know, there's margin for error of course in this, would expect on staff costs, pre-incentives to see about a 75 basis point, sort of bps decline impact on margin in the second half. We'd see establishment costs. Maybe we'll see some upside of about 10 basis points in the second half. On IT, maybe down about 10 basis points or so in the second half. Personnel cost, probably an impact of about 20 basis points down in the second half.
You know, that's clearly less than 70 basis points in the first half because we're starting to annualize some of the travel that took place in the second half of last year. Probably an upside of about 10 basis points or so on other G&A, and then a consistent 200 basis points on the staff incentives. When you add all of that together, that gets you roughly your 120 basis points in the second half, which when you combine that with your 50 basis points down in the first half, gives you an overall increase in margin of 40 basis points to 50 basis points for the full year. That's sort of the shape of it.
I mean, the one thing I'd caveat, of course, is there's always lots of moving parts and, you know, we adapt and we're very agile in our response to the market as we navigate our way through. The shape can change, but we're pretty reasonably confident we can deliver that full year margin guidance that we've given.
Excellent. Really helpful. Thank you.
Thank you. Our next question goes to Matthew Walker of Credit Suisse. Matthew, please go ahead. Your line is open.
Thanks a lot. I've got three questions, if that's okay. Hi, Mark. Hi, John.
Hi, Matt.
Hey, guys. The first is on the price rises that you talked about to offset inflation. You mentioned in the presentation, I think roughly 1%-2% price rises, or 1%-2% benefit from price rises, I should say. I think in the past when we've talked, you said you've been able to get some increases through maybe one-third of the client base. Maybe you could update us there, because I guess that suggests for the clients who are accepting a price rise, that's roughly a sort of 3%-6% increase for them. Maybe the percentage of clients who've accepted a rise has expanded, maybe you could talk to that a little bit. The second question was on, obviously, the market seems a little skeptical or, you know, maybe not reacting that well to the uncertainty around 2023. I was just thinking that, you know, the percentage of business coming from transformation
Maybe you could update us on that because let's say you have, you know, I don't know, I'm making it up now, but maybe a sort of 10% double-digit increase in transformation for your business. That would provide, you know, a long way to the 3% growth, which would allow other areas to be flat for 2023. Maybe you could sort of talk us through your transformation business and how well that might grow and what percentage-
Yeah
It is at the moment. Finally on the buyback, obviously you look a little cautious in just maintaining it at the moment. Can you give us an update on what you expect your average net debt to EBITDA to be for the full year, and any sort of big acquisitions? Well, not to tell us what the acquisitions are, but d o you anticipate large acquisition spending in the second half?
Maybe. Why don't you tackle the price rise stuff?
Yeah.
We can talk about acquisitions together. I mean, on acquisitions, I think, you know, we'll see what happens. I don't think there's much more to say than that. We don't anticipate large ones any more than we anticipate doing them or not doing them. John, why don't you talk about transformation spending first. We can.
Sure. Well, maybe if I pick up the buyback point price.
Yeah.
Achieve the transformation. Look, on buyback, as we very clearly said, we always plan to do GBP 800 for the year. We've done GBP 630 in the first half. We'll do GBP 170 in the second half. We'll likely do that GBP 170 in the first, in Q3, I would imagine. We keep our options open. Mark alluded to the point around M&A, but again, you know, we'll keep our options open at that point. We could do more buybacks, we could keep our powder dry and look for M&A opportunities. In terms of where we'll exit the year from a net debt to EBITDA, I mean, obviously, you know, there's lots of moving parts here, and not least of which what we've already referred to with regards to acquisitions.
Broadly speaking, if you apply our guidance in relation to CapEx, in relation to M&A, then we ought to get to a position at the year-end with a net debt of about GBP 2.2 billion-GBP 2.3 billion, something of that order, and a net debt to EBITDA of maybe 1.3x-1.4 x, maybe you know the bottom end of our 1.5x-1.75x range, but that would be where we'd expect to get to for the full year if you apply the guidance that we've given. Excepting the fact, of course, that M&A by its nature can be lumpy, and so we know obviously will be partly driven by that.
On price rises, yeah, we think the price increase is probably 1.5%-2% flow through. To your point, I think your math is right, when we talk about, you know, for roughly a third of our clients, therefore an average 3%-6%. I think that would probably be about right. I think if you split it roughly a third, a third, a third, you know, a third we've managed to negotiate through, a third are sometimes contractual in nature, so we know we can't effectively push price increases through straight away. There's probably just under a third to still go after. You know, we have a concerted effort to push price increases through in the second half, building on what we've achieved in the first half.
We can't do it on all clients because there are clients where it's largely fixed contractually over a period of years, and it will, you know, until those contracts unwind, we won't be able to push further price increases through. There is a little bit more work to do, so we will expect to see some upside on price increases come through in the second half.
I mean, on transformation, like I was trying to figure out how to answer your question. If not to be candid, as sort of on its own sort of definition, we look at. I think maybe the best way to think about it is if you look at our experiential, commerce and technology business, that's largely what people would call transformation. You're creating experiences, building e-commerce platforms, implementing technology solutions for our clients. And that's about. We said 39% of our GIAs. That's just over half of our. You know, they're over half of our. You know, 45%-50% of the business. So sort of 40% of 45%-50% is about 20% of our business.
If you wanted to look at that as 20% of the business, I think you wouldn't be far wrong. Now, is that recession-proof? I don't think anything in the world is recession-proof, to be blunt. I think that, yes, it will grow. Yes, the reason we said the future is uncertain is because it's uncertain. I think that, some clients will continue to invest in that area through what happens. To the extent that these are multi-year programs, some of them are. We have multi-year programs with some of our clients that will persist, that's right. In other cases, clients will put big projects on hold. I wouldn't.
You know, I think that it's good that we have significant business in that area, and I think that does put us in a good position. I wouldn't want to rely on that. I think what I'd look at is, I think what we've said is not that different from our peers, and I think that's the way to think about it really.
I mean, we, you know, we've seen an increase in the GIAs, you know, over the last half on half of just under 1%. So 38% to sort of 39%. I mean, that's encouraging, and obviously it's in these higher growth areas, which protects, all else being equal, you know, protects our top line growth. I guess we would probably make the case that potential volatility in the top line driven by the business cycle is likely to probably happen you know, quicker than we're gonna make the shift across into these higher growth sectors. To Mark's point, you know, we can't completely protect ourselves against the business cycle, but every move in that direction, every, you know, incremental piece of work we're doing in these higher growth areas helps.
If I could just follow up, Mark, one very briefly, which is, you know, Unilever has been an example of someone investing in the brand building to support price rises. If you look across your client base by, in terms of revenue, what percentage of clients do you think are taking that attitude? And what percentage of clients do you think are sort of more in wait and see mode?
Well, I think continuing to invest. Actually, if I look across our major clients, if I were to sort of list them, let's say, you know, Unilever, Coca-Cola, P&G, L'Oréal, Mondelez in the FMCG category. If I look at those in the technology category, Google, Microsoft, you know, or in pharma, Pfizer. I think they're all strong companies with a desire to build their brand and continue to invest. I think the commentary, if you read through the earnings transcripts of the CPG companies, I think to a person, they talk to a desire to continue marketing investment. And true. You know, but I don't. We're not using that to convince ourselves that we're immune from the cycle either.
I do think that clients have recognized the danger of coming in and out, and I think that they've also seen the benefit for those companies that invested consistently during the pandemic, came out in a much stronger position. Think that's positive as well. I think that's why we characterize 2013 as uncertain, because we have to see the breadth and depth of what happens. I think if it's a relatively soft landing, then our spend will, I'd say, continue relatively well. If it's a much tougher situation, then perhaps it won't. I think we, you know, You know, we called it sort of uncertain for a reason because it is uncertain.
I know it's gonna sound helpful, but I think it is what other people have said, and we'll come back and tell you what we think it will be at that time. I think the important point is that, you know, compared to previous cycles, you know, clients I think have a greater appreciation of the value of marketing. I mean, I heard the CEO of a company that was well known for ZBB just this week regretting saying they'd over-focused on cost reduction at the expense of building brands and marketing, and they wanted to correct that. I think the clients do understand that, and that's one material difference.
I think the second material difference is the point you made about digital transformation, the need to engage in multi-year products, projects, the need to invest in some of these areas like commerce transformation. I think that's very different from where we were in the past. I think the importance of data and ROI and the ability, let's be honest, for clients to shift money from, you know, just building a brand into driving sales. I mean, it's much easier for clients using, let's say, retail media to drive sales.
When times are tough, you might see clients invest more in marketing to drive sales, not just cut it because they can't see the ROI. Better ROI would lead clients to invest more money. Think these are all reasons to believe that we might be more resilient in a future economic cycle than we have been in a previous economic cycle.
I mean, if you think about, you know, first and foremost, just thinking about sort of short-term agility, I think we were able to demonstrate through COVID, for example, how we can respond very quickly to external market changes. You know, we're very good at looking forward. We're very good and agile at adapting our cost base in terms of hirings, indexing into freelancers, et cetera. We've got a, you know, good ability to manage the business from a cost perspective, whatever the business cycle may throw at us. Then to Mark's point from a long-term perspective, I think we're just very well positioned from where we were four or five years ago. You know, the business was being restructured. We've brought together our different creative agencies. We've got a much stronger balance sheet. The business is simpler.
We've got continued structural cost saving opportunities going forward in terms of our back office. We're facing into more and more attractive sectors, and as we highlighted at the beginning, pivoting into the high growth areas of commerce, experience and technology. Yeah, I think we feel, you know, it's always a certain, you know, certainly an uncertain business environment facing into the next 12 months, but I think we're very well positioned to face into that.
Okay. That's very clear. Thank you, guys.
Yeah. Thank you.
Thank you. As a reminder, if you would like to ask a question today, please press star followed by one on your telephone keypads now. We have a follow-up question from Tim Nollen of Macquarie. Tim, please go ahead. Your line is open.
Thanks for letting me ask one more. I'm afraid I've got a very boring, dry modeling question, if you wouldn't mind helping me with something, John.
Oh, no.
I know this came up.
Don't know.
Oh, have you done?
This one's for Mark then.
It's a real warm-up to a question describing it as very broad. That's why it's a follow-up here. And I know this came up on the call in London this morning. It's about the share of associates result line. I think you were saying, you know, that number was on a headline basis, I think down pretty sharply. I think you were saying-
Yeah.
This morning on the call that was related basically to higher interest expense at Kantar. Could you just maybe elaborate on that? What numbers should we use for the remainder of this year and next year for that line in our model? Thanks.
Yeah. Look, I think well, just to answer the question in reverse order. I think for the full year, I'd work on a number between 40%-50%, which is, you know, clearly down year-over-year. It is, as I said, primarily down to the consequence of the acquisition of Numerator by Kantar. Obviously bring on more debt, more interest costs, and so that's meant that the overall, sort of associate line has come down. It's not reflective of an underlying form for the business. In fact, the Kantar business is doing incredibly well. It does mean mechanically and from a numbers perspective, that the associates line will be lower, as I said, somewhere between 40%-50% for the year end.
Okay. For next year, are we back to a more normal level? I think that number was 80 or so last year. Are we back to that type of a number next year?
Yeah. I mean, I'm very cautious about giving guidance into next year, just simply because, you know, it's effectively driven by events. I guess all else being equal, it might normalize around that level. You know, as we've evidenced in this year, you know, events change that. I think, to be honest, I wanna keep my powder dry there, Tim, and, you know, we can give more specific guidance at the right time.
All right.
Similarly.
Yeah. No, I didn't mean to hold you to a 23 guide. Just to make sure 40%-50% this year versus 86%, I think it was last year. Just wanna make sure I've got the numbers right.
That's correct.
Okay. Thanks.
That's correct.
Great. Thanks.
Thank you. We currently have no further questions, so I'll hand the call back over to Mark for any closing remarks.
Very good. Thank you, everybody. Thanks for your questions. Just one final comment to make, as we end the call. Thank Peregrine for his contribution over the last three years and as he bows out over the next half hour. Thank you all for listening. I think it's been a good start to the year and, you know, we've got work to do in the second half as well. Thanks, everybody. We'll see you on the next call or before.