WPP unveils restructuring plan focused on creativity, tech

(Sharecast News) - WPP will spend £300m over the next three years as new boss Mark Read's restructuring plan aims to make the marketing and advertising giant a "leader in creativity and technology" while keeping profit margins above 15%.Having so far raised £704m from disposing of 16 non-core investments and associates to reduce debt, Read plans to cut 3,500 jobs around the globe and shut or merge almost 200 offices, with preparations also "well underway" to sell a majority stake of the Kantar research business by the second quarter of next year.Streamlining the business, while aiming to achieve annual savings of £275m by the end of 2021 as under-performing units are downsized and divested, is also designed to better position the company for growth and around the needs of clients.With 134,000 employees dotted across more than 3,000 offices in 112 countries, WPP has become "too unwieldy, with too much duplication... not always as focused or as fleet of foot as it needs to be to satisfy the needs of all our clients", said Read, who took over full-time in September after longtime boss Martin Sorrell left under a cloud in April.Central to the new strategy is a simpler structure, plus a shift of emphasis and investment towards creativity and technology, Read added: "What we hear from clients is very consistent: they want our creativity, and they want us to help them transform their business in a world reshaped by technology. This is at the heart of what we do."We are fundamentally repositioning WPP as a creative transformation company with a simpler offer that allows us to meet the present and future needs of clients. This more contemporary proposition has already helped us to win new business, including Volkswagen's creative account in North America."The restructuring of our business will enable increased investment in creativity, technology and talent, enhancing our capabilities in the categories with the greatest potential for future growth. As well as improving our offer and creating opportunities for clients, this investment will drive sustainable, profitable growth for our shareholders."As well as splicing four of its largest agencies into two, VMLY&R and Wunderman Thompson, there will also be further regional 'campus' co-locations, and the establishments of a "consistent shared service infrastructure" over the next five years that can be used by WPP's agencies across 30 countries.By the end of 2021, WPP expects to be generating like-for-like revenue less pass-through costs growth in line with peers at a headline operating profit margin of at least 15%. With free cash flow conversion of 80-90%, directors will prioritise the dividend over share buy-backs and, targeting a reduction in average net debt to EBITDA ratio to 1.50-1.75x, will balance divestments with "targeted M&A". This year a dividend of 60p will be paid and held flat in the coming years.As revealed in September, the first half of 2018, the group grew revenue by 1.6%, thanks to its first quarterly growth since the start of 2017, with underlying profits down 2.5% and a profit margin of 13.3%.In the short-term, Read anticipate reporting 2018 results in line with consensus expectations, with full-year like-for-like revenue less pass-through costs growth now expected to be closer to -0.5%.Read will lead a strategy update presentation at 12.30 GMT on Tuesday, that investors can view via a webcast.The update lifted WPP shares almost 6% to 858.8p in early trading on Tuesday, after they had fallen to a six-year low just below 837p a day earlier.Analysts said it was not quite the "radical evolution" of Read's rhetoric and while some reassurance was taken that the company was making steps in the right direction, there was still much caution.Steve Liechti at broker Numis said the new strategy for growth update was "pretty much as we expected and press speculation with nothing especially radical in our view", but the good news was that management "is trying to address the key issues WPP faces, though the outcome is not particularly revolutionary in our view at this stage".Liechti summarised the new strategy as "focusing on creativity and tech plus simplifying the offer", highlighting the increased client focus, cutting of duplication, underperformers and unsustainable businesses; more investment in creative leadership, though the £15m incremental increase is "not a huge amount in our view", with the more investment and focus on tech and infrastructure "as we would expect".Ian Whittaker at Liberum gave the strategic update "a cautious welcome" but said it is "unlikely to be much of a catalyst for the shares at least in the short-term". He said Read's approach was that the turnaround "will take a long time, recognise the share price will not see much of a recovery short term and accept that the company needs to deliver to re-rate".He said the target of 15% margins by the end of 2021 "looks quite low", but said this may include Kantar, as excluding-Kantar the group's margin had been above 16% for 2017. Organic growth at least in line with peers implies "growth will be below peers for the next few years" and "if peers are defined as the agencies and not the wider marketing services area, it raises some questions about the direction of travel".George Salmon at Hargreaves Lansdown said simplifying the business and focusing on helping clients work with new retail giants like Amazon and Alibaba "seems a sensible strategy to us" but "whether the new approach will be enough to counter the severe disruption facing the business is another question entirely".While dividend growth is taking a back seat, confirmation the payout is to be held rather than cut, he said, "will likely be taken as a positive, as will the implication that current trading isn't deteriorating at the rate previously feared".Overall Salmon said it felt like these were hollow victories: "Looking forward, investors will want to see signs the group can thrive, not just survive."