M&C Saatchi Regulatory News (SAA)

M&C SAATCHI PLC

(the "Company", "M&C Saatchi" or the "Group")

Unaudited preliminary results for the year ended 31 December 2023 ("FY 23")

Material profit improvement in H2 and encouraging Q1 like-for-like momentum

Significant progress on transformation programme

Strengthened foundations for future growth

Zillah Byng-Thorne, Executive Chair, said:

"2023 was a year of strategic progress. We have begun to transform into a leaner and more agile business laying the groundwork for sustained growth and improved profitability ahead. There is much more to do on simplifying how we interact with our clients and evolving our go-to-market strategy. With strengthened cash generation, we expect to re-invest in value accretive opportunities to enhance shareholder returns.

"I am delighted that Zaid Al-Qassab joins as CEO in May to lead M&C Saatchi on its next phase of growth, building on a simplified operating model and supported by our exceptional leaders.

"We are encouraged by our performance in the start to the year, and while macro-economic uncertainty across our markets remains, our continuing transformation, which is already delivering, underpins our confidence that we will meet expectations."

Financial headlines

Note throughout: Headline results reflect the underlying profitability of the business units, by excluding a number of items that are not part of routine expenses. Note 1 of the financial statements reconciles Statutory results to Headline results.

A like-for-like basis (LFL) applies constant foreign exchange rates and removes entities discontinued during 2023. 

· Net revenue £252.8m (FY22: £271.1m) down 2% excluding the impact of the non-core businesses exited in H2 (LFL)

· Headline operating profit £32.4m (FY22: £35.4m) with H2 growing 30% on the prior H2 as a result of actions including:

o  £3.9m of annualised cost savings as we accelerated the global efficiency programme

o  Exited non-core businesses representing c.£9m of revenue and c.£3m of operating losses in FY23

· Operating margin 12.8% (FY22: 13.1%) with significant improvement in the H2 margin to 16.9% compared with 8.3% in H1

· Headline profit before tax £28.7m (FY22 £31.8m), down 1% LFL

· Headline EPS 15.2p (FY22 14.8p) up 3% reflecting the reduction in put option liabilities

· Net cash £8.3m (FY22: £30.0m), with liquidity headroom of £55m, largely reflecting the settlement of put option cash liabilities with minority interests now 13% of Headline profits (FY22: 25%)

· Proposed increased final dividend of 1.6p (FY22 1.5p) reflecting our earnings performance

Operational performance

· Challenging market dynamics for Advertising, Consultancy and Media, however, our actions on costs and progress in rationalising the portfolio helped the H2 performance 

· Strong performances from Issues and Passions contributed to an increase in their proportion of the portfolio to 34% of net revenue (FY22 27%), demonstrating continuing diversification

· 119 awards and 216 new business wins including World Health Organization, Porsche, adidas, Nike, Revlon, and McDonalds

Transformation programme

· Significant progress made in delivering our efficiency and transformation plans including annualised cost efficiencies of £3.9m achieved in FY23

· New operating model and go-to-market strategy, bringing us closer to clients and better aligning our global capabilities with their needs

· Strengthened and simplified leadership structures led by Zillah Byng-Thorne whose appointment as Executive Chair was effective from 1 September 2023

· Appointment of Zaid Al-Qassab as CEO, effective 13 May 2024; he brings an extensive track record of advertising and market leadership, managing global teams and brand-building expertise

· New roles of Chief People and Operations Officer to deliver the transformation programme and Global Chief Creative Officer to be appointed to deliver the new operating model

Current trading and outlook

· Our confidence in meeting FY24 expectations is underpinned by encouraging Q1 momentum, despite continuing macroeconomic uncertainty

· Improved free cash generation in 2024 with the expected settlement of the majority of the remaining put option liabilities

· We are confident that the structural changes we are making to our cost base alongside our new operating model are increasing our operational leverage potential which will help support future margin expansion

PRELIMINARY ANNOUNCEMENT

This preliminary announcement was approved by the Board on 9 April 2024. It is not the Group's statutory accounts. Copies of the Group's audited statutory accounts for the year ended 31 December 2023 will be available on the Company's website in the coming days, and a printed version will be dispatched to shareholders thereafter. 

2023 RESULTS PRESENTATION

An in-person presentation will be held today at 9:00am at 36 Golden Square, London, W1F 9EE, hosted by Zillah Byng-Thorne, Executive Chair, and Bruce Marson, Chief Financial Officer. 

Please email mcsaatchi@headlandconsultancy.com to register to attend.

A webcast is available for those not able to attend in person: https://events.teams.microsoft.com/event/cdbcb755-3135-400f-a7bb-e8f4ee9eec2e@bd5a0452-9909-41d4-9092-cf358a7950c5

A replay will be also available on the Company's website following the event https://mcsaatchiplc.com/

FURTHER INFORMATION

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014.

EXECUTIVE CHAIR STATEMENT

2023 was a year of significant progress for M&C Saatchi. Our financial results not only reflect the challenging market environment our businesses operate in, but also the considerable progress that has been made in shaping the Group to best deliver sustainable growth in the future.

We delivered a materially better financial performance in the second half of the year, following the more challenging start to the year. This was partly led by impressive contributions from Issues and Passions. The biggest drivers of improvement were our own proactive actions on costs, accelerating our structural transformation, and closing or divesting a number of loss-making businesses which drove operating margin up from 8.3% in the first half to 16.9% in the second half.

Although much has already been achieved in transforming our Group, there is more to do and 2024 will deliver further progress. The market environment remains challenging, but 2024 will also benefit from the full-year impact of the actions we have already undertaken and the planned actions we are yet to deliver. This report will cover what we have been doing to improve our Group and lay the foundations for what we all believe will be an exciting future for the Company and all of its stakeholders.

PERFORMANCE

Market backdrop

2023 was a challenging year across our industry, particularly in the first half. However, as we indicated at the interims, we had already accelerated our global efficiency programme and were taking action on the loss-making, non-core businesses within our portfolio. As a result, we were able to arrest the decline and significantly improve profitability in the second half.

The early signs we noted at the half year, that pressure was easing on client marketing budgets pointing to an improving market backdrop, are being realised. Nevertheless, looking at the year overall, the more cyclically exposed parts of our businesses felt pressure throughout the year. As a result of this, Advertising, Media and Consulting were the most heavily affected (particularly where they were exposed to large technology clients), while Issues and Passions, which are less exposed to the broader marketing spend cycle, continued to deliver strong growth and healthy margins, underpinning the benefit of our diversified business model.

Operational performance

The resilience that our diversified portfolio lends the Group is evident in this year's performance.

Advertising

· Represented 42% of the Group net revenue, down from 46% in 2022. 

· 2023 was a challenging year encompassing a broad range of outcomes across our geographical breadth, with the US and the UAE outperforming Asia and Europe.

· Advertising was most affected by business exits and excluding these, like-for-like (LFL) net revenue declined 8% (a 12% decline in the first half and a 5% decline in the second half). Net revenue overall declined 15% in the full-year, ahead of the 16% decline at the half year.

· Market sentiment has shown signs of improvement, but we remain cautious on the outlook. Our self-help measures, including strengthened leadership and internal improvements from operating as integrated, simpler agencies, will be the key drivers of performance in 2024.

Issues

· Represented 20% of Group net revenue, up from 15% in 2022.

· Characterised by a global client base of both commercial and non-commercial entities and multi-year engagements, which is less cyclical and has been a strong contributor to the Group over the last two years.

· Delivered 21% net revenue growth; 22% on a LFL basis.

· The outlook for 2024 remains positive. 

Passions

· Represented 14% of Group net revenue, up from 12% in 2022. In FY23, PR's results are included in Advertising, but will be included in Passions & PR from FY24 reflecting the consolidation taking place. 

· This specialism encompasses our award-winning Sport & Entertainment and Talent businesses. It is also characterised by multi-year client engagements and benefits from the growing desire of brands to partner and engage through consumer events and non-traditional channels.

· Passions delivered 8% net revenue growth; 10% on a LFL basis.

· The outlook for 2024 remains positive, and we expect to invest further in this business to drive growth.

Consultancy

· Represented 14% of Group net revenue, in line with 2022.

· Broader market challenges in the consultancy sector were evident and net revenue declined by 9%; 6% on a LFL basis.

· We acted on costs within this specialism, and re-aligned our business structures and leadership. In addition, we have simplified our proposition, launching M&C Saatchi Consulting, in order to make it simpler for our clients to access our services.

· 2024 has started on a firmer footing than 2023, but we remain cautious about market conditions.

Media

· Represented 10% of Group net revenue, down from 13% in 2022.  

· This was the most challenged specialism in 2023 with a 23% decline in net revenue; 21% decline on a LFL basis, notwithstanding a number of good client wins. The decline was 30% in the first half and 12% in the second).

· Most impacted by the macro factors at the start of 2023 including the reduction in spend from technology clients in the first half, coupled with changes relating to privacy regulations.

· We have addressed costs in this business during the year and have strengthened leadership to enable a focus on strategic growth.

· While we remain cautious about the structural headwinds the paid media market faces in the short term, the outlook for 2024 is more promising. We have seen a stronger start to the year compared to 2023.

PROGRESS ON SENIOR MANAGEMENT AND THE BOARD

Executive management

2023 was a year of significant change from a senior management and Board perspective.

I would like to thank Moray MacLennan, who stepped down as a director at the end of September 2023 following his intention to retire as Chief Executive Officer, for his longstanding contribution and commitment to our Group. Moray was instrumental in seeing the business return to a sound footing after a particularly challenging period and laying the groundwork for its subsequent growth.

We were delighted to announce the appointment of Zaid Al-Qassab as our new Chief Executive Officer, joining in May 2024. I will then step back from my interim role as Executive Chair to fulfil the role of Non-Executive Chair. Not only does Zaid bring significant marketing industry experience with him, he also brings a client perspective that will be critical to our customer-led growth journey.

Over the course of the year, a key priority has been to streamline and rebalance our Executive Leadership Team, resulting in a number of internal promotions and external appointments. The new role of Chief Operations Officer, with responsibility for the delivery of our global transformation project, has been taken by Mark Dickinson-Keen in addition to his Chief People role. We expect to announce the appointment of a Global Chief Creative Officer shortly. This role will be critical as we roll out our new operating model, providing a central focal point for the Group's creative ambition and activities. 

The Board

During the year Gareth Davis, my predecessor as Chair, and Lisa Gordon, Senior Independent Director, stood down. I would like to thank both Gareth and Lisa for the support and contribution to the Company over their tenure.

In January 2024, we welcomed Dame Heather Rabbatts to the Board as our new Senior Independent Director. Dame Heather brings her experience across a range of industries, including local government, infrastructure, media and sport. Dame Heather has held a number of executive and non-executive roles.

We also welcomed Chris Sweetland to the Board as a non-independent Non-Executive Director. Chris is the nominated representative of AdvancedAdvT Limited and Vinodka Murria, who hold in aggregate 22.2% of the Company's issued share capital. Chris brings substantial relevant experience as previous Deputy Group Finance Director of WPP Group and is an excellent addition to our Board. 

PROGRESS ON TRANSFORMATION

The transformation of our business is multi-phased with significant progress made in 2023.

1. The initial phase has focused on securing short-term efficiency and cost savings and reviewing the loss-making businesses within our Group. This is now well underway and we have made very tangible progress.

2. In the next stage, we will focus on shaping our business for the future and what that means for the structure of our Group. 

1. Cost savings and portfolio rationalisation

The purpose of initial phase was three-fold:

· To deliver a structural and long-term improvement to our Group operating margin.

· To simplify our Group structure and ensure that all the businesses within Group are wholly aligned with our new operating model and go-to-market strategy.

· To free up the capital required to support these businesses and allow this capital to be re-invested where longer-term growth opportunities are more attractive.

At our interim results we announced that we would be accelerating and refocusing our global efficiency programme. We have made good progress, exceeding our 2023 target with £3.9m of fully annualised cost savings delivered by the year-end. We remain on course to deliver an additional £6.1m of annualised savings by the end of 2024 totalling c £10m.

In 2023 we incurred £3.3m of exceptional costs relating to our global efficiency programme, of which £1.1m was cash and £2.2m represented property impairment charges. For 2024, we expect a higher level of costs to be incurred but we still expect the total cost of this programme, both cash and accounting costs, to be in line with our previous guidance of 0.5x to 1.0x the level of annualised cost savings delivered.

Where we focused our efforts in 2023:

· People. Focus primarily on our Group head office and functions where roles are no longer necessary or likely to be duplicated.

· Property. Rationalising and optimising our UK, Australian and US property portfolios.

· Procurement. Seeking greater efficiency around our use of service suppliers and internal cost centres such as travel.

Looking forward to 2024, we see further material gains to be made from:

· Optimising and rationalising our group support functions including Finance, IT and HR to create shared service centres to support the Group on a global basis.

· Further gains from our property portfolio with more efficient use of our UK property.

· Rationalising our IT service provision through group-wide deployments.

· Focus on creation of centres of excellence for our middle office functions and common capabilities, specifically production, data and analytics and social media. 

Business portfolio rationalisation:

Above and beyond the operational cost savings we are making, we have also been actively reviewing our portfolio, in particular a number of non-core or loss-making businesses. Significant progress has been made and we have exited from businesses that, in aggregate, represented a consolidated c.£9m of revenue and c.£3m of operating losses in 2023, including:

· Sweden. We reduced our interest from 70% to 30%, with the management team acquiring our interest.

· Asia. We have closed, wound down, or exited through local management buy-outs, a number of our smaller offices across this region, including in China, Hong Kong, Indonesia and Singapore. We have also consolidated our regional structure into a unified regional headquarters for APAC.

· UK. We have exited several of our smaller, non-core businesses and have merged our agencies into an integrated new UK Agency.

For a number of the businesses that have been disposed of, we have entered into future relationship agreements that enable these businesses to continue to use the M&C Saatchi brand. In return for the use of our brand rights, and to remain connected to our global network, these businesses will pay an ongoing licence fee to the Group. This allows us to continue to share in their success as independent businesses, albeit not solely at the equity level, and transforms them into a profit centre for the Group rather than a cost centre.

In the first quarter of 2024, the Group divested of its shareholdings in its three French associate investments, for €1m. More recently on 9 April 2024, the Group announced the divestment of its shares in the M&C Saatchi South Africa Group for £5.6m. Once completed, these transactions mean that we will have materially completed the simplification of our business portfolio.

2. Shaping of the business for the future

Building on our creative heritage

Creativity is a word that has often been associated with M&C Saatchi, and with good reason. Our position in the market has been hard won over the years through a dedication to creativity to empower our clients by cutting through a crowded and competitive brand landscape. M&C Saatchi has always been a business that has dared to be different. 

However, creativity must have a purpose and be accompanied, supported, and enhanced by other skills and specialisms that fit the broader and evolving needs of our clients. M&C Saatchi exemplifies exactly that exciting breadth of skills and passions. 

The challenge is not whether we have the capability, it is how best to align these capabilities with our customers. This is about removing the internal barriers to growth that our historic approach had put in place to reflect the changing needs of our clients.

Regional first

We solve the problem of client complexity and proximity by going towards, and becoming closer to, our clients and presenting a clear and integrated solution to them. Our existing regional presence already places us close to our clients but rather than presenting a narrow, regional set of solutions to them, we will open up the full range of capabilities that exist within our global specialisms.

We also need to recognise the client opportunities that this model is ideally suited for. These are the regional champions that need the full suite of our capabilities but have yet to go fully global themselves. These are the businesses that we can grow with over the long term and deliver a meaningful impact to. We recognise that we have a core competency in helping the businesses that are ambitious, that are at an inflection point facing competitive or market challenges that we can deliver solutions to.

Global specialism delivery

A regional first focus does not imply no global client mandates. Our specialisms already work with a wide array of global clients on a global basis, and we do not see this changing. Instead, a regional first focus means that our global specialist teams will be exposed to a broader array of clients. We want our global specialisms to be busier. We see this as the fastest route to bring our unique suite of skills closer to more of our clients.

Supported by global shared services and an integrated agency model

Critical to the success of this regional first, global specialism delivery model is a group and agency structure that will enable delivery on this basis and remove internal barriers.

· Global shared services. This is about efficiency and the speeding up of client delivery. By creating global service centres that deliver Group-wide support and back-office functions, we can streamline and increase the agility of our client-facing regional hubs. Not only will this enhance our margins by removing duplicated functions and reducing procurement costs, it will also decrease complexity, and increase our flexibility and speed of response. 

· Integrated agency model. We reduce the complexity of our client offer by reducing the number of distinct, and often disconnected, faces we present to them. Our clients need to see us as a partner that can deploy the requisite skills at the right time to solve the issues they face.

Our Australian businesses are an integrated agencies into a single, go-to-market proposition. We have created a new integrated agency in the UK and we will see further integration as the year progresses. This is about recognising that the template for success already exists within the Group and ensuring that we make this our uniform approach.

The simplification of our structure, coupled with the simplification of our balance sheet will liberate the capital, both fixed and working, that will be needed to deliver this new operating model across the Group.

CAPITAL ALLOCATION

M&C Saatchi is capable, over the medium-term, of converting at least 80% of its operating profits into cash, although each future year will undoubtedly see some degree of variability through the cycle. Putting aside the one-off impacts on cash generation in 2023, our streamlined portfolio of businesses, our new operating model and go-to-market strategy give us a high degree of confidence in the potential for sustainable and growing free cash generation.

Our strategy to evolve and grow M&C Saatchi will require investment. Aligned to our regional first, global delivery-led approach, we will seek to re-invest to drive long-term growth and to add capability, capacity and scale in the parts of the Group that will generate the greatest return. We will remain open to opportunities to accelerate that through selective M&A. We expect that the majority of acquisitions would be bolt-on in nature and address gaps in our client-facing capabilities and regional coverage.

Our confidence in the Group's ability to generate sustainable and growing free cash underpins our view on capital allocation. We are comfortable operating with a net debt to EBITDA ratio not exceeding 1.5 times, although we would allow for a temporary spike in the case of a material acquisition. 

By simplifying our Group, good execution, re-investing in growth, and selective bolt-on acquisitions, we believe we can deliver a compelling proposition of returns to shareholders including capital growth, a progressive dividend, and a robust, optimal balance sheet.

OUTLOOK

Over the last 12 months, there have been many changes at M&C Saatchi against a background of significant market volatility. The Board has materially changed, including the appointment of a new Chair and Chief Executive Officer designate while our markets have been challenging, particularly in the technology sector. As such, we have taken the decision to no longer provide long-term targets and will, instead, provide nearer-term guidance.

2024 has started with renewed energy and focus and encouraging first quarter momentum. While our end markets continue to be affected by macro-economic uncertainty, we expect Headline profit before tax for 2024 to be in line with expectations. We are confident that the structural changes we are making to our cost base alongside our new operating model are increasing our operational leverage potential which will help support future margin expansion. 

We have evolved the senior leadership team increasing capabilities and alignment. Zaid Al-Qassab's arrival as our new Chief Executive Officer is at the core of this process and sets the scene for our delivery over the coming years.

We are well progressed on building a simplified operating model which places our regional focus and global specialist expertise at the heart of everything we do. This will ensure we can continue to be unashamedly bold, creative, entrepreneurial and fearless in the work we do with our clients.

Our focus is on growing returns for our shareholders by investing in capabilities and driving the Group forward with renewed purpose. We have a marked advantage in being able to operate at scale with the agility of a start-up, allowing us to move at pace.

FINANCIAL REVIEW

The Group generated £252.8m of net revenue in 2023, 7% lower than last year, but with strong growth in our Issues business (+21%) and in our Passions business (+8%). The downturn in the technology sector and client hesitancy to commit to new projects affected Media (-23%), Advertising (-15%) and Consultancy (-9%).

Headline operating profit for the Group in 2023 was £32.4m, £3.0m lower than last year, with the full impact of our cost actions benefitting the second half of the year (H2 operating profit of £22.4m, £5.1m (30%) higher than last year). Headline operating profit margin for the full year was 12.8% (0.3 pts lower than last year), with H2 margin of 16.9% (4.7 pts higher than last year).

Headline profit before tax in 2023 for the Group was £28.7m (2022: £31.8m). Excluding Advertising, the other specialisms contributed £29.8m of profit before tax (2022: £31.6m), driven by ongoing growth and margin improvement in Issues, offset by lower revenue and margin declines in Media and Consulting, with Passions delivering similar profit to last year. Advertising contributed £6.2m of profit before tax (2022: £9.9m), with profit growth in the UK, South Africa and the UAE offset by declines in Australia, Asia, Europe and the US. The Group's central costs reduced by £2.3m to £7.4m, due to lower bonuses and audit fees.

Exceptional costs relating to our global efficiency programme amounted to £3.3m of which £1.1m was cash and £2.2m represented property impairment charges. For 2024, we expect a higher level of exceptional costs to be incurred but we still expect the total cost of this programme, both cash and accounting items, to remain in line with our previous guidance of 0.5x to 1.0x the level of annualised cost savings delivered.

On a statutory basis, the Group delivered operating profit of £7.3m (2022: £10.5m) and a profit before tax of £0.7m (2022: £5.4m profit).

Due to the exercise of put options in the year, minority interests have diminished to 13% of Headline profits (2022: 25%), which results in Headline earnings of £18.5m, 2% higher than last year. Headline earnings per share has grown 3% to 15.2p (2022: 14.8p). Statutory earnings per share were (0.6p) (2022: 0.1p).

The Group remains in a net cash position of £8.3m (2022: £30.0m), after £15.4m of put option payments and a £14.5m of working capital absorption (driven by £8m reduction in bonus accruals, a £3m reduction in minority interest profit share liabilities and £3m relating to changing revenue mix). Our net cash position at the end of the first quarter showed an improvement compared with December. 

Segmental review 

Advertising remains the largest specialism, comprising 42% of total net revenue (2022: 46%). The other four specialisms have increased their share of total net revenue to 58% (2022: 54%). This shift away from Advertising continues to improve our overall operating margin mix, as these other specialisms have an average operating profit margin of 22%, compared to Advertising with an operating profit margin of 8%.

There has been a marked shift in revenue between the different specialisms over recent years as shown by the table below, with Issues, Passions and Consulting all increasing their contribution to the Group since 2020. 

The Group's net revenue decreased 7% in 2023. However, the reduction was 2% on a LFL basis, if we exclude those entities the Group disposed of, closed or wound down through the course of 2023, and the impact of foreign exchange movements. During the year, the Group disposed of Clear Deutschland, and more recently M&C Saatchi Spencer Hong Kong Limited, and reduced its interest in M&C Saatchi Sweden AB. The Group also announced in 2023 that it was in negotiations to divest of M&C Saatchi Holdings Asia Pte. Limited, which is now complete. During 2023 the decision was made to wind down a number of smaller, non-core businesses in Advertising and Consulting. No businesses were acquired in 2023.

Note: A like-for-like basis applies constant foreign exchange rates and removes entities discontinued during 2023. 

Due to the tougher trading conditions in Advertising, cost actions were taken which reduced operating costs by 13% in 2023. This helped maintain operating Advertising profit margins at 8% (2022: 9%).

Operating costs outside of Advertising grew 3% in 2023, driven by the growth of Issues and Passions, partially offset by cost reduction actions in Media and Consulting in reaction to their lower client spend. The net result was a slight reduction in our non-Advertising specialisms operating margin to 22% (2022: 24%).

The impact of our global efficiency programme reduced our Group central operating costs by £3.7m (33%). This helped the Group maintain its overall operating margin of 13%. 

Regional review 

On a geographic basis, the UK remains our biggest region, supported by the significant growth of Issues, which offsets the contraction of UK Advertising. Following the decision to discontinue many of the Asia businesses, we have merged Asia and Australia into a new APAC region, managed from Australia. Also, given the growth and prospects in the Middle East and our new executive leadership structure, we have split out Middle East and Africa. However, we retain a good geographic mix of businesses. The recent shifts in share of revenue by region can be seen in the table below: 

Note: A like-for-like basis applies constant foreign exchange rates and removes entities discontinued during 2023. 

Discontinued businesses 

At the end of 2023, it was decided to dispose, wind-down or close a number of non-core businesses in Advertising (Hong Kong, Singapore, Indonesia, China, Sweden, Majority and Accelerator) and in Consulting (Thread Innovation and M&C Saatchi Life). In 2023, these businesses contributed £8.7m in net revenue and a loss before tax of £3.1m. The Group's 2023 net revenue excluding these discontinued operations would have been £244.1m (2% lower than last year) and the Group's 2023 profit before tax would have been £31.8m (1% lower than last year), with an operating profit margin of 14.2% (0.2 pts higher than last year). 

Key movements between Statutory to Headline results  

The Headline results are alternative performance measures that the Board considers the most appropriate basis to assess the underlying performance of the business, monitor its results on a month-to-month basis, enable comparison with industry peers and measure like-for-like, year-on-year performance.

Financial income and expense  

The Group's financial income and expense includes bank interest, lease interest and fair value adjustments to minority shareholder put option liabilities (IFRS 9).

Bank interest payable for the year was £2.3m (2022: £1.2m) due to higher interest rates on the Company's revolving multicurrency credit facility agreement and increased drawdown on the facility during the year.

The interest on leases decreased to £2.9m (2022: £3.0m) due to leases ending in 2022.

The fair value adjustment of put option liabilities created a charge of £2.1m (2022: charge of £1.1m). This increase is due to increased profitability in the agencies where there are outstanding IFRS 9 put option arrangements.

Tax

Headline tax 

Our Headline tax rate has increased from 24.5% to 25.6%. The increase is primarily due to the increase in the effective UK corporation tax rate from 19.0% to 23.5%.

Statutory tax

The Statutory tax rate changed from 96% in 2022 to 492% in 2023. We expect large variations in Statutory tax rates, because items such as share-based payments (option charges) and put options arising from investments in subsidiaries are non-deductible against corporation tax due to their being capital in nature.

Non-controlling interests (minority interests) 

On a Headline basis, the non-controlling interest share of the Group's profit represents the minority shareholders' share of each of the Group's subsidiaries' profit or loss for the year. In 2023, the share of profits attributable to non-controlling interests reduced to £2.8m (2022: £5.9m) representing a reduction in minority interests to 13% of profit after tax (2022: 25%). This reflects a reduction during the year in the minority interest shareholdings in several Group entities, as a result of the settlement of put options, to the value of £15.4m.

On a Statutory basis, non-controlling interests excludes any minority interests which relate to IFRS 2 put option holders (holders of put options that are contingent on being employed by the relevant company). Their share of the entity's Statutory profit is paid as dividends each year, which are reported as staff costs in the Statutory results.

Dividends 

The Company paid a 2022 dividend of £1.8m (1.5p per share) to its shareholders in 2023 (2022: £nil). We understand the importance of returning capital to shareholders, and, given the earnings performance during the year, the Board is recommending the payment of an increased final dividend of 1.6 pence per share.

Subject to shareholder approval at the Annual General Meeting, to be held on 16 May 2024, the dividend will be paid on 24 June 2024 to shareholders on the register at 10 May 2024. The shares will go ex-dividend on 9 May 2024.

Cash flow

Total gross cash (excluding bank overdrafts) at 31 December 2023 was £24.3m (2022: £41.5m). Cash net of bank borrowings (net cash) was £8.3m, compared to £30.0m in 2022.

In 2023, the Group generated operating cash from trading (before working capital) of £31.5m (2022: £40.3m) before dividends to IFRS 2 put option holders (£2.5m) and £15.4m of payments to acquire non-controlling interests (2022: £12.1m). There was a £14.5m net outflow from working capital (2022: £4.8m inflow), driven by £8m reduction in bonus accruals, £3m reduction in minority interest profit share liabilities, and £3m relating to changing revenue mix. The Company made £9.1m of lease payments (2022: £10.3m). In addition, £1.8m of tangible and intangible fixed assets and investments were purchased in 2023 (compared to £5.6m in 2022, which was primarily due to the one-off investment in the new office in Sydney, Australia).

Net operating cash flow (operating cash generated from operating (excluding put option payments and non-Headline cash costs) net of purchases of intangible / tangible fixed assets and the principal payment on leases) for the year was £17.3m which represents a cash conversion from Headline operating profit of 53% (2022: 106%).

The following table sets out the key movements in net cash during 2023:

Banking arrangements 

On 7 March 2024, the Company entered into a new revolving multicurrency facility agreement with National Westminster Bank Plc, HSBC UK Bank plc and Barclays Bank PLC for up to £50m (the "New Facility"), with a further £50m extension if required for strategic acquisitions.

The New Facility is provided on a three-year term with two one-year extensions. This New Facility is to refinance the existing £47m facility with National Westminster Bank Plc and Barclays Bank PLC (the "Old Facility") which would have matured on 31 May 2024. At 31 December 2023, the Group had up to £47.0m (2022: £47.0m) of funds available under the Old Facility.

The primary purpose of the New Facility is to provide the Group with additional liquidity headroom to support any variations in working capital and provide funding for bolt-on acquisitions. At 31 December 2023, £16.0m was drawn on the Old Facility compared to £7.0m at 31 December 2022.

Capital expenditure 

Total capital expenditure in 2023 (including software acquired) decreased to £1.8m (2022: £5.6m). This included £0.7m on furniture, fittings and other equipment (2022: £1.7m), £0.6m on computer equipment (2022: £1.6m), £0.5m on leasehold improvements (2022: £1.1m), and £0.0m on software and film rights (2022: £1.0m).

SUMMARY

Our performance in 2023 was mixed in several ways. A challenging first half was followed by a more encouraging second half and we saw strong revenue growth in Issues and Passions, while fighting difficult market conditions in Advertising, Media and Consulting. As we look ahead, the Group has started 2024 with renewed energy and focus. While our end markets continue to be affected by macro-economic uncertainty, we expect Headline profit before tax for 2024 to be in line with expectations. We are confident that the structural changes we are making to our cost base alongside our new operating model are increasing our operational leverage potential which will help support future margin expansion. 

UNAUDITED CONSOLIDATED INCOME STATEMENT

The notes form part of these financial statements.

UNAUDITED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

*All items in the consolidated statement of comprehensive income may be reclassified to the income statement.

The notes form part of these financial statements.

UNAUDITED CONSOLIDATED BALANCE SHEET

Reserves are defined in Note 36 of the financial statements.

These financial statements were approved and authorised for issue by the Board of Directors on 9 April 2024 and signed on its behalf by:

Bruce Marson

Chief Financial Officer

M&C Saatchi plc

Company number 05114893

The notes form part of these financial statements.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The notes form part of these financial statements.

UNAUDITED CONSOLIDATED CASH FLOW STATEMENT

* The cashflow statement for 2022 has been restated (Note 28 of the financial statements).

**Bank loans and borrowings are defined in Note 24 of the financial statements; they exclude the lease liability of £53,735k (2022: £55,570k) (Note 18 of the financial statements).

*** These overdrafts can be legally offset with other cash balances. They have not been netted off in accordance with IAS32.42 in 2022 as there was no intention to settle on a net basis. However, they have been netted off in 2023 as the cash balance and the overdraft balance is with the same bank and there is intention to settle this on a net basis.

The notes form part of these financial statements.

PREPARATION

Preliminary announcement

This preliminary announcement was approved by the board of directors on 9 April 2024. It is not the Group's statutory accounts. Copies of the Group's audited statutory accounts for the year ended 31 December 2023 will be available at the company's website in the coming days, and a printed version will be dispatched to shareholders thereafter.

Basis of preparation

The financial statements have been prepared in accordance with UK adopted international accounting standards, in conformity with the requirements of the Companies Act 2006.

The financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest thousand. They have been prepared under the historical cost convention, except for the revaluation of certain financial instruments.

Going concern

These financial statements have been prepared on the going concern basis, as discussed in the Directors' Report and the Report of the Audit & Risk Committee.

The Board has concluded that under the most likely going concern scenarios, the Group will have sufficient liquidity and headroom on bank covenants to continue to operate for a period of not less than a year from approving the financial statements.

The Board has formed its opinion after evaluating four different severe but plausible forecast scenarios and a reverse stress test, extending to 31 December 2025. The four scenarios comprise:

1. A significant reduction in new business wins.

2. A significant increase in wage inflation.

3. A significant number of top clients are lost.

4. A significant economic downturn.

These severe but plausible scenarios are assumed to materialise from Q1 2024 onwards. The estimated decline in EBITDA ranges from £11m to £24m compared to the base case plan for the cumulative period ending 31 December 2025, including a £5m to £14m decline in EBITDA in 2024.

The reverse stress test case evaluates how extreme conditions would need to be for the Group to break its covenants within the going concern review period. The conditions go significantly further than the severe but plausible scenarios and reflect a scenario that the Directors consider to be highly unlikely.

The Directors have also considered the impact of climate change on going concern, taking into account the Company's support for Ad Net Zero (the industry initiative to tackle climate change led by the Advertising Association and its members), and do not believe that there is a significant financial impact.

The Board is satisfied that the Group's forecasts, which take into account reasonably possible changes in trading performance, show that there are no material uncertainties over going concern, and that, even under the severe but plausible scenarios, the Group will continue to have sufficient liquidity and headroom to operate within the terms of its banking covenants. The Board, therefore, has concluded that the going concern basis of preparation continues to be appropriate.

Consolidation

Where a consolidated company is less than 100% owned by the Group, the treatment of the non-controlling interest share of the results and net assets is dependent on how the non-controlling interests' equity award is accounted for. Where the equity is accounted for as a share-based payment award under IFRS 2, all dividend outflow is taken to staff costs, and there is no non-controlling interest. In all other cases, the non-controlling interest share of the results and net assets is recognised at each reporting date in equity, separately from the equity attributable to the shareholders of the Company.

Material accounting policies

Certain of the Group's accounting policies are considered by the Directors to be material due to the level of complexity, judgement, or estimation involved in their application and their potential impact on the financial statements. The critical accounting policies are listed below and explained in more detail in the relevant notes to the financial statements.

The Group's revenue is earned from the provision of advertising and marketing services, together with commission-based income in relation to media spend and commission-based income in relation to talent performance. Revenue from contracts with customers is recognised as, or when, the performance obligations present within the contractual agreements are satisfied. Depending on the arrangement with the client, the Group may act as principal or as agent in the provision of these services.

See Note 4 of the financial statements for a full listing of the Group's revenue accounting policies.

It is common for equity partners in the Group's subsidiaries to hold put options over their equity, such that they can require the Group to purchase their non-controlling interest for either a variable number of the Company shares or cash. Dependent on the terms and substance of the underlying agreement, these options are either recognised as a put option liability under IFRS 9 (Note 27 of the financial statements) or as a put option under IFRS 2 (Note 28 of the financial statements) - see significant judgements below.

An IFRS 9 scheme should be considered as reward for future business performance and is not conditional on the holder being an employee of the business. These instruments are recognised in full at the amortised cost of the underlying award on the date of inception, with both a liability on the balance sheet and a corresponding amount within the minority interest put option reserve being recognised. At each period end, the amortised cost of the put option liability is calculated in accordance with the put option agreement, to determine a best estimate of the future value of the expected award. Resultant movements in the amortised cost of these instruments are charged to the income statement within finance income/expense. The put option liability will vary with both the Group's share price and the subsidiary's financial performance. Upon exercise of an award by a holder, the liability is extinguished and the associated minority interest put option reserve is transferred to the non-controlling interest acquired reserve.

An IFRS 2 scheme should be considered as reward for future business performance and is conditional on the holder being an employee of the business. These schemes are recognised as staff costs over the vesting period (if equity-settled) or until the option is exercised (if cash-settled). In September 2021, the Board made the decision to move to cash settlement of these put options going forward. This required a fair value assessment on the day of the modification and a movement between reserves and liabilities.

See Note 28 of the financial statements for a full description of the Group's accounting policy for IFRS 2 put options.

As stated in the Financial Review, the Directors believe that the Headline results and Headline earnings per share (see Note 1 of the financial statements) provide additional useful information on the underlying performance of the business. The Headline results reflect the underlying profitability of the business units, by excluding a number of items that are not part of routine business income and expenses.

In addition, the Headline results are used for internal performance management and reward, and they are also used to calculate minority shareholder put option liabilities. The term 'Headline' is not a defined term in IFRS. Note 1 reconciles Statutory results to Headline results and the segmental reporting (Note 3 of the financial statements) reflects Headline results, in accordance with IFRS 8.

The items that are excluded from Headline results are:

· Exceptional separately disclosed items that are one-off in nature and are not part of running the business.

· Acquisition-related costs.

· Revaluation of associates on transition to assets held for sale.

· Impairment of right-of-use assets, leasehold improvements, acquired intangibles and goodwill.

· Gains or losses generated by disposals of subsidiaries.

· Fair value adjustments to unlisted equity investments, acquisition-related contingent consideration and put options.

· Dividends paid to IFRS 2 put option holders. However, in non-controlling interest, we deduct profit share attributable to IFRS 2 put option holders.

The Group holds certain unlisted equity investments which are classified as financial assets at FVTPL (see Note 20 of the financial statements). These investments are initially recognised at their fair value. At the end of each reporting period, the fair value is reassessed, with gains or losses being recognised in the income statement.

Significant accounting judgements and key sources of estimation uncertainty

In the course of preparing financial statements, management necessarily makes judgements and estimates that can have a significant impact on the financial statements. The estimates and judgements that are made are continually evaluated, based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and judgements that have a significant risk of causing a material adjustment to the financial statements within the next financial year are outlined below:

Significant accounting judgements

Management has made the following judgements, which have the most significant effect in terms of the amounts recognised, and their presentation, in the financial statements.

Impairment reviews are undertaken annually, or more frequently if events or changes in circumstances indicate a potential impairment. Assets with finite lives are reviewed for indicators of impairment (an impairment "trigger") and judgement is applied in determining whether such a trigger has occurred. External and internal factors are monitored by management, including a) adverse changes in the economic or political situation of the geographic locale in which the underlying entity operates; b) heightened risk of client loss or chance of client gain; and c) internal reporting suggesting that an entity's future economic performance is better or worse than previously expected. Where management has concluded that such an indication of impairment exists, then the recoverable amount of the asset is assessed.

The Group assesses whether an impairment is required by comparing the carrying value of the CGU assets (including the right-of-use assets under IFRS 16) to their value in use. Discounted cash flow models, based on the Group's latest budget and three year financial plan, and a long-term growth rate, are used to determine the recoverable amount for the CGUs. The appropriate estimates and assumptions used require judgement and there is significant estimation uncertainty. The results of impairment reviews conducted at the end of the year are reported in Note 15 (Intangible Assets) of the financial statements, Note 16 (Investments in associates and joint ventures) of the financial statements, and Note 18 (Leases) of the financial statements.

The Group has recognised a total impairment charge of £6,798k in the year (2022: £564k), of which £4,794k relates to Intangibles (2022: £728k) and £1,884k relates to the impairment of right-of-use assets (2022: reversal of £164k). There was a £132k impairment in the year of plant and equipment (2022: £nil). There was no impairment in the year of associate investments (2022: nil).

The key judgement is whether the awards are given beneficially as a result of employment, which can be determined where there is an explicit service condition, where the award is given to an existing employee, where the employee is being paid below market value or where there are other indicators that the award is a reward for employment. In such cases, the awards are accounted for as a share-based payment in exchange for employment services under IFRS 2.

Otherwise, where the holder held shares prior to the Group acquiring the subsidiary, or gained the equity to start a subsidiary using their unique skills, and there are no indicators it should be accounted for under IFRS 2, then the award is accounted for under IFRS 9.

Significant estimates and assumptions

Some areas of the Group's financial statements are subject to key assumptions and other significant sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The Group has based its assumptions and estimates on parameters available when the financial statements were prepared.

The Group assesses the future availability of carried forward losses and other tax attributes, by reference to jurisdiction-specific rules around carry forward and utilisation, and it assesses whether it is probable that future taxable profits will be available against which the attribute can be utilised. Changes in such estimates would allow unrecognised deferred tax to be recognised and vice versa. Analysis of deferred tax can be seen in Note 9 of the financial statements.

The Group holds certain financial instruments, which are recorded on the balance sheet at fair value at the point of recognition and remeasured at the end of each reporting period. At the year-end these relate to:

i. Equity investments at FVTPL in non-listed limited companies (Note 20 of the financial statements).

ii. Certain contingent consideration (Note 14 of the financial statements).

No formal market exists to trade these financial instruments and, therefore, their fair value is measured by the most appropriate valuation techniques available, which vary based on the nature of the instruments. The inputs to the valuation models are taken from observable markets where possible, but, where this is not feasible, judgement is required to establish fair values.

The basis of calculation of the estimated fair value of these financial instruments (in addition to sensitivity analyses on the estimates' salient inputs) is detailed in Note 30 of the financial statements.

Share-based incentives are valued at the date of the grant, using stochastic Monte Carlo pricing models with non-market vesting conditions. Typically, the value of these awards is directly related to the performance of a particular entity of the Group in which the employee holds a minority interest. The key inputs to the pricing model are risk-free interest rates, share price volatility and expected future performance of the entity to which the award relates. Management applies judgement to these inputs, using various sources of information, including the Group's share price, experience of past performance and published data on risk-free interest rates (government gilts).

Details of awards made in the year are shown in Note 28 of the financial statements.

Anticipated length of lease term - IFRS 16 defines the lease term as the non-cancellable period of a lease, together with the options to extend or terminate a lease, if the lessee is reasonably certain to exercise that option. Where a lease includes the option for the Group to extend the lease term, the Group takes a view, at inception, as to whether it is reasonably certain that the option will be exercised. This will take into account the length of time remaining before the option is exercisable, current trading, future trading forecasts and the level and type of any planned capital investment. The assessment of whether the option will be exercised is reassessed in each reporting period. A reassessment of the remaining life of the lease could result in a recalculation of the lease liability and a material adjustment to the associated balances.

NOTES TO THE FINANCIAL STATEMENTS

1. Headline results, earnings per share and EBITDA