WPP Plc
(LON:), the global advertising and marketing services giant, reported a modest 0.5% increase in net sales for the third quarter of 2024, according to the company’s recent earnings call. CEO Mark Read highlighted the growth as a return to form, with GroupM, the company’s media investment management arm, leading the charge with a 4.8% growth rate.
Despite a challenging macroeconomic environment and a decline in integrated creative agencies due to difficulties in China and the impact of
Pfizer
(NYSE:), WPP secured significant new business wins and maintained its full-year guidance for like-for-like net sales and margin improvement.
Key Takeaways
- WPP reported a 0.5% increase in net sales in Q3 2024, with GroupM growing by 4.8%.
- Technology sector growth rebounded to 1.3% while integrated creative agencies saw a 3.1% decline.
- WPP won Amazon (NASDAQ:)’s media account outside the Americas and expanded its relationship with
Unilever
(LON:). - Full-year guidance remains unchanged, with like-for-like net sales expected to be between -1% and flat.
- Adjusted net debt is projected to be broadly flat due to reduced M&A activity.
- Over GBP 250 million is being invested in WPP Open to scale AI adoption, which has significantly increased user engagement.
- The company anticipates a lesser negative impact from net new business in 2025.
Company Outlook
- WPP maintains its full-year guidance for like-for-like net sales and margin improvement.
- The company is focused on simplifying operations and leveraging AI to enhance productivity.
- Leadership is optimistic about the impact of AI on future business operations.
Bearish Highlights
- Integrated creative agencies faced a 3.1% decline in net sales, primarily due to challenges in China and the impact of Pfizer.
- The macroeconomic environment is creating uncertainty, with a volatile Q4 expected.
- The tech sector’s performance was impacted by a 13% decline year-over-year in Q3 and a 5% decline in Q4.
Bullish Highlights
- GroupM’s strong performance and new business wins are expected to drive growth.
- Strategic initiatives, such as the disposal of FGS Global to KKR, are projected to generate significant value.
- The company expects stabilization in the Chinese market and has adapted WPP Open for local needs.
Misses
- Challenges in China and the loss of Pfizer’s business have led to a decline in integrated creative agencies.
- The company is experiencing longer sales cycles, which delays revenue realization.
Q&A Highlights
- CEO Brian Lesser is focusing on creating synergies within GroupM and simplifying operations.
- WPP is prioritizing organic growth over mergers and acquisitions in the near term.
- Client feedback on WPP Open’s AI capabilities has been positive, enhancing workflow efficiency and effectiveness.
In summary, WPP is navigating a complex market landscape with strategic investments in AI and a focus on operational efficiency. The company’s commitment to innovation and new business development, combined with cautious optimism for market stabilization in China and the tech sector, positions WPP for potential growth in the coming years. Despite some setbacks, WPP’s leadership remains confident in the company’s direction and competitive strengths.
InvestingPro Insights
WPP’s recent performance and future outlook can be further illuminated by data from InvestingPro. Despite the modest 0.5% increase in net sales reported for Q3 2024, WPP’s stock has shown resilience, trading near its 52-week high with a 24.62% price total return over the past year. This suggests investor confidence in the company’s strategic direction and ability to navigate challenging market conditions.
InvestingPro data reveals that WPP has a market capitalization of $11.33 billion and a P/E ratio of 43.15, indicating that investors are willing to pay a premium for the company’s earnings. This high valuation multiple aligns with an InvestingPro Tip that WPP is “Trading at a high earnings multiple.” However, this should be considered alongside the company’s growth prospects and market position.
Another relevant InvestingPro Tip notes that WPP “Has maintained dividend payments for 32 consecutive years,” which is particularly impressive given the company’s recent challenges. The current dividend yield stands at 3.8%, offering shareholders a steady income stream despite the volatile market conditions described in the earnings call.
It’s worth noting that WPP’s revenue for the last twelve months as of Q2 2024 was $18.77 billion, with a revenue growth of -0.29%. This slight decline in revenue is consistent with the company’s guidance of like-for-like net sales expected to be between -1% and flat for the full year.
For investors seeking a deeper understanding of WPP’s financial health and prospects, InvestingPro offers 11 additional tips, providing a comprehensive analysis to inform investment decisions.
Full transcript – WPP PLC ADR (NYSE:) Q3 2024:
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the WPP 2024 Third Quarter Trading Update Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Today’s conference is being recorded. I would now like to hand over to WPP CEO, Mr. Mark Read. Please go ahead, sir.
Mark Read: Thank you very much, and good morning, everyone, and welcome to WPP’s third quarter trading update. I’m Mark Read. I’m here with Joanne Wilson, our CFO. We will take you through our results for the quarter and then answer your questions. After the interim results presentation, I said we’ve been extremely busy in the first half, and that’s very much continued in this third quarter. We’re making good progress against our strategic objectives, but we’re starting to see concrete benefits with the return to form in reaching new business outcomes and encouraging growth in our top clients. Our offer based around fewer, stronger brands underpinned by AI and new technologies making us more competitive while making the company structurally more efficient to improve our profitability. There’s more work to do, but I am very pleased with our progress. So, before we start, please read the important cautionary statement on Page 2 and on Page 3, in terms of the agenda, I’ll just go through the financial and strategic highlights before handing over to Joanne to take you through the financial performance. We’ll then briefly cover our strategic progress in the third quarter before we get into questions. So, turning to Page 4 and our opening of the highlights for the quarter.
Our third quarter showed a return to growth, with a 0.5% increase in net sales driven primarily by GroupM. We experienced growth in four of our top five markets and saw improvements across most client sectors, including technology which had previously weighed us down. GroupM saw a significant growth of 4.8% in the quarter, following a 1.9% growth in the first half of the year. Our integrated creative agencies, however, declined by 3.1% due to various factors such as the impact of Pfizer and challenging business conditions in China. Despite this, we made strong strategic progress by driving adoption of WPP Open and leveraging our simpler structure, resulting in good growth with our top 10 clients.
In terms of new business, we had a much stronger quarter, securing important wins like Amazon’s media account outside the Americas and expanding our relationship with Unilever. These wins position us well for the future, although we recognize that macro pressures continue to impact our industry. As a result, our expectations for the full year remain unchanged, and we are reiterating our guidance for like-for-like net sales and margin improvement. Joanne will now take us through the financial performance in more detail. Moving on to trends in our key client sectors on Page 9, we observed an acceleration across most sectors. We saw strong growth in the consumer-packaged goods sector, our largest sector, which grew by 7.6% in Q3 due to continued brand investment by our largest CPG clients. The technology sector stabilized with a modest growth of 1.3% in the quarter. Automotive grew by 5.8% on strength in the U.S. and Germany, while Financial Services grew by 5.3% due to new client wins and growth in our largest clients. Telecom, Media, and Entertainment declined by 2.3% as we anniversary 2023 new business wins. Healthcare and Retail continued to decline, impacted by past client losses at slower rates than in the first half.
Moving on to Page 10, adjusted net debt was around GBP300 million lower than September last year, and we expect it to be broadly flat by year-end. This excludes the impact of expected proceeds from FGS. We are focusing on leveraging working capital management to achieve a flat working capital movement for the full year. The lower level of adjusted net debt at September versus last year also reflects a lower level of M&A spend in the last 12 months. For the full year, the benefit to net debt from lower M&A spend will be partially offset by accelerated earn out payments and higher cash restructuring costs, in line with guidance.
Regarding guidance for 2024 on Page 11, we are reiterating our guidance for like-for-like revenue less pass-through cost growth of minus 1% to flat for the full year. We also expect an improvement in headline operating margin of 20 to 40 basis points at constant currency. We anticipate a 3.2 percentage point headwind for reported net sales from FX over the full year, with an adverse impact of 20 basis points on full-year margin based on current FX rates. The impact of M&A on the full year is likely to be slightly negative, with sensitivity to the timing of the closure of the disposal of FGS Global.
Thank you, and now I will hand back to Mark to update on our strategic progress. It’s an extraordinary business. I want to express my gratitude and acknowledge the creative excellence and reputation of the company that was built in AKQA. The strategic process of WPP Open and the integration of AI throughout WPP are key components of our future success. We believe that AI will play a crucial role in WPP’s future, enhancing productivity, improving work quality, reducing costs, and delivering targeted campaigns that drive higher ROI for our clients. We are investing over GBP250 million in WPP Open to scale up the adoption of AI across our agencies. By deploying AI tools through WPP Open, we are able to showcase the power of AI in the creative process to clients and streamline collaboration across the company. This will not only increase efficiency and production but also improve the effectiveness of media plans and incorporate data into the creative process. As we continue to roll out WPP Open, we are seeing a significant increase in adoption across the organization. The sale of our stake in FGS Global to KKR has allowed us to strengthen our balance sheet and increase financial flexibility. Additionally, our acquisition of NCA in the U.K. will further enhance our creative offerings in this important market. Overall, we have made significant progress in achieving our strategic objectives and returning to growth in the quarter. Despite the challenges we have faced, we remain confident in the future of WPP, especially with the potential of AI driving our success. Thank you for your attention, and we are now ready to take your questions. Firstly, congratulations on your recent wins. Can you provide insights into how the net new business will impact 2025 growth and when it will affect your revenue? Additionally, regarding GenAI, do you anticipate changes in the pricing model of ad agencies as more GenAI products are utilized, or is it too early to determine? Thank you.
Mark Read: In terms of GenAI, we expect it to contribute to revenue in 2025, potentially leading to more output-based pricing. As for the impact of recent wins on revenue, we anticipate a positive contribution in the coming year. Joanne will address the guidance for 2025.
Joanne Wilson: Our guidance for 2025 suggests a range of growth, with factors like macroeconomics, the tech sector, and net new business influencing our performance. We expect a more neutral impact from net new business in 2025 compared to 2024. As for M&A and our margin improvement plan, we are continually evaluating opportunities and aiming for steady improvement beyond 2024. Our focus remains on talent, technology, data, and product development within GroupM.
Laura Metayer: Thank you for the insights.
Operator: Our next question is from Nicolas Langlet with BNP Paribas. Nicolas, please go ahead with your three questions regarding GroupM, M&A, and our margin improvement plan. Thank you. At the beginning of this year, we emphasized our focus on organic growth in the business through strategic initiatives such as our investment in WPP Open. We have made significant progress in these areas, so the lower level of M&A activity this year should not be cause for concern. We anticipate a return to more normal M&A levels next year, although there are currently no significant opportunities in the pipeline.
Our midterm margin outlook remains unchanged from what was outlined earlier this year. We are on track to achieve cost savings of GBP125 million by 2025, and are working on improving efficiencies across the front and back offices. Our margin improvement will also be driven by operating leverage as we aim for medium-term growth targets. The impact of FGS on our margin is expected to be around 20 basis points and will have a neutral effect on EPS.
In terms of client losses in 2024, we estimate that it was around 1.5% beyond our expectations. However, our top clients are still investing in marketing and brand building, with strong growth seen in Q3. While there may be pressures in certain sectors like automotive, overall, companies are maintaining their marketing investments.
Media Studio within WPP Open is being gradually deployed to improve media effectiveness, ROI, efficiency, and visibility for clients. As for smaller project-related networks like AKQA, we believe they are strong businesses that may face challenges at times but have demonstrated resilience, especially post-COVID. There are no current plans to consider selling or disposing of such businesses. I believe we view them as critical and differentiating elements of WPP, and we anticipate them to continue in that role.
Thomas Singlehurst: Just a quick follow-up for Joanne, if I may. It seems like there’s a gap opening up with organic revenue. Is that mainly due to GroupM’s growth, or are there other factors at play?
Joanne Wilson: Yes, that’s primarily due to the growth of GroupM in the quarter and increased production leading to higher pass-through costs.
Operator: Our next question is from Joseph Thomas with HSBC. Joe, please go ahead.
Joseph Thomas: Congratulations on the results. Clients seem to value our AI and WPP Open solutions for their workflow efficiency and security. In terms of China, we expect stabilization in 2025, despite the challenging macro environment.
Joseph Thomas: Have there been any incremental client losses in China?
Mark Read: No, we haven’t seen any significant client losses beyond the ordinary. We are focused on supporting our team in China and driving growth through collaboration.
Operator: The next question is from Steve Liechti with Deutsche Numis. Steve, please go ahead.
Steve Liechti: Can you remind us of the skew in project-based business in Q4? What are your thoughts on volatility there? Also, what does the departure of AKQA’s CEO mean for the business, and what are your plans for it? Lastly, can you confirm the net effect of new business in 2025?
Mark Read: Joanne will address the first and third questions. As for AKQA, we are working with the team on leadership and don’t anticipate significant changes. We aim to build on the company’s legacy. Joanne, would you like to address the question?
Joanne Wilson: Yes, I’ll start with the last question as it’s straightforward. Steve, the impact on 2025 so far has been neutral, but we aim to turn it into a positive by maintaining the momentum from Q3. Regarding project-based businesses, AKQA is more exposed to such work due to its tech nature, as are our brand agencies. Landor, Design Bridge, and Partners have all been affected by client caution on discretionary projects, impacting their performance in recent quarters. We expect this trend to continue into Q4, with similar spending patterns to Q3 and Q2.
Steve Liechti: Thank you.
Operator: Our next question is from Simon Baker with Bernstein. Simon, please go ahead.
Simon Baker: Thank you for the opportunity to ask questions. Firstly, regarding the net new business impact for 2025, you mentioned a strong pipeline with some associated risks. How does this year’s pipeline compare to last year’s at this time? Do you feel optimistic about exceeding the 25% target? Secondly, tech spend has shown improvement in Q3, but how do you foresee product cycle spend translating into increased marketing spend in the future?
Mark Read: The new business pipeline is robust, with opportunities closing over the next few months. While it was strong last year, some deals took time to materialize. Clients seem more decisive now, which bodes well for faster progress. In terms of tech spend, while positive, we remain cautious. We anticipate increased spend in 2025, supported by our strong partnerships with tech giants like Google. This, coupled with our expertise, positions us well for the future.
Simon Baker: Thank you.
Operator: There are no further questions at this time. [Operator Closing Remarks]. following sentence: “The cat sat lazily in the sun, enjoying the warm weather.”
The lazy cat basked in the sun, relishing the pleasant weather.