WPP sales pick up as Read eyes simplification

WPP returned to underlying growth in the second quarter of the year though this was not enough to prevent the marketing conglomerate's profits falling in the first half of the year as its North American business remained under major pressure.

Freshly appointed chief executive Mark Read said the board had begun to "focus" the portfolio of business through 15 disposals and divestments in the period, accelerated initiatives to simplify the organisation and had won new contracts with the likes of Adidas, Hilton, Mars and Shell by providing "more effectively integrated solutions" to clients.

He hailed the increase in like-for-like revenue of 1.6% for the first half, thanks to a 2.4% LFL gain in the second quarter that was the first quarterly progression since the start of 2017.

While North American sales fell in the quarter, amid pressure on advertising, digital & interactive and brand consulting businesses, other regions were all better, with a "marked improvement" noted in the faster growing markets of Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe. Germany performed particularly well and mainland China showed "significant improvement"..

But reported revenue fell 2.1% to £7.49bn in the first six months of the year due to a 5% currency headwind that masked 2.9% underlying growth. Headline profit before tax of £735m was down 7.4%, or down 2.5% if currency headwinds are ignored.

Headline profit before interest and tax of £821m was down 7% and PBIT margin of 13.3% was down 0.5 points, with the slight decline attributed to the mix of performance by geography and function and a decision to invest in the growing areas of our business. EBITDA of £948m was shy of the average analyst forecast of £973m.

A day after his appointment as CEO, Read said his focus will be on "invigorating our company and returning the business to stronger, sustainable growth", with a strategy review underway and due by the year end, "addressing our structure, our underperforming operations, particularly in the United States, and how we position the company for the future".

Already, disposals and divestments, including Globant and AppNexus, have generated cash proceeds of £676m this year, used to strengthen our balance sheet and improve the average net debt to EBITDA ratio, with reports that a sale of market research division Kantar also thought to be under consideration. Net debt averaged £4.98bn in the period, up from £4.71bn a year before.

Read's initiatives to simplify the sprawling mass of the group, which employs 130,000 people worldwide, are designed around "making it easier for us to manage and clients to access" and have so far included co-locations in New York, Kuala Lumpur, Prague and Toronto.

Headline diluted earnings per share fell 6.2% to 42.6p, down 1.3% in constant currency, despite £201m of share buy-backs. Including net exceptional gains in the first half, reported EPS rose 14.6% to 53.4p.

An interim dividend of 22.7p per share was declared, the same as last year.

For the full year, revenue guidance was slightly improved but margin guidance was down from flat at constant currency to -40bps on a like for like basis.

WPP shares fell 7% to 1,186.5p in early trading on Tuesday.

Broker Shore Capital noted that EBITDA was short of consensus forecasts but was "reassured by what appears to be a solid performance", with outlook comments that "look supportive" of a solid full year.

Although full year margin guidance was trimmed, analysts at Liberum did not expect much change in consensus numbers, especially given FX moves, with WPP receiving over a third of revenues from North America.

"Longer-term, WPP has moderated its guidance - revenue less pass through cost guidance is now at industry average vs above industry average before, annual margin improvements the same (0% to 0.3% improvement pa at constant currency) although the longer-term margin target of 20% has gone and headline eps growth of 5%-10-% growth is the same. We think this makes sense and is prudent, especially as WPP still has significant market research assets that its main competitors do not have and which drags down profits," Liberum wrote.

Richard Hunter at broker Interactive Investor felt it was a robust first-half performance but highlighted concerns for the group, with net debt that remains stubbornly high.

"In addition, there is something of struggle within parts of the brand consulting unit, and the United States in particular, which is slightly alarming given the strong current growth being seen in the world’s largest economy. The currency effect has been a mixed bag, whilst it remains to be seen whether the structural change within the industry is here to stay and, equally, whether WPP is up for the fight."