M&C Saatchi Regulatory News (SAA)

M&C SAATCHI PLC

INTERIM RESULTS

SIX MONTHS ENDED

30 JUNE 2019

24 September 2019

M&C SAATCHI PLC

Interim results for the six months

ended 30 June 2019

24 September 2019

See note on next page for definition of headline.

2018 Restated. See note 4 for details of the restatement, as well as comments below.

Highlights

·; Increase in Statutory profit due to £11.6m profit on disposal of remaining 24.9% share in Walker Media Ltd for £25m in February 2019

·; As previously communicated, year-on-year decline in Headline revenue and profits due to larger number of loss-making entities, particularly start-ups, and the impact of the timing of revenues in 2019 which are expected to fall into the second half

·; Independent accounting review by PwC ongoing, expected to conclude by November 2019. The Board expects this to lead to a restatement of 2018 results; H1 2018 results have been restated to reflect misstatements already identified. The specific items result in a net charge of £5.1m

·; Solid balance sheet with net cash of £9.5m (£2.2m net debt at 31st December 2018)

·; Interim dividend maintained at 2.45p

·; Full year operating profit and profit before tax forecast to be 5%-10% below expectations (before the impact of exceptional items including office refurbishment costs of £1.4m)

·; Full Year earnings and EPS are projected to show a relatively greater decline than operating profits as a result of the changing composition of profits, with a greater share of Group profits currently being made by those companies with a higher proportion of non-controlling interests and operating in higher tax rate jurisdictions

"Our results in the first half of 2019 have been impacted by the number of new businesses in the Group as well as the weighting of revenues shifting towards the second half of the year.

"Whilst this has had a short term impact on our results, we remain confident in and committed to our strategy of winning new business and investing in new, fast-growing businesses. Looking to the second half, our pipeline of new business is strong across the network, and our newest businesses are performing well and expected to start making a meaningful contribution to the Group."

For further information please call:

M&C Saatchi +44 (0)20-7543-4500

David Kershaw

Tulchan Communications +44 (0)20-7353-4200

Tom Murray

Numis Securities +44 (0)20-7260-1000

Nick Westlake, Hugo Rubinstein, NOMAD

Charles Farquhar, Corporate Broking

Notes to Editors

Headline results

The term headline is not a defined term in IFRS. The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill and acquired intangibles, but excluding software) acquired in business combinations; changes to deferred and contingent consideration and other acquisition related charges taken to the income statement; impairment of investment in associate; profit and loss on disposal of associates; revaluation of investment and their related costs and income statement impact of put option accounting (whether accounted under IFRS2 or IFRS 9). See Note 6 for reconciliation between the Group's statutory results and the headline results.

Like-for-like

The like-for-like revenue comparisons referred to in this report are stated after excluding the impact of foreign currency movements, corporate acquisitions and disposals and incorporate restated 2018 results (see note 4).

Operating margin

Operating margin refers to the percentage calculated through dividing operating profit by revenue.

Net Cash

Net Cash refers to cash and cash equivalents less external borrowings at the end of the period, exclusive of expected future cash outflows relating to lease agreements.

Periods compared

This report comments on the unaudited consolidated income statement of M&C Saatchi plc (the "Group") for the six months to 30 June 2019 compared with the restated unaudited consolidated income statement for the same period in 2018 (see note 4 for details of the restatement).

SUMMARY OF RESULTS

Factors impacting these results

As stated in the trading update announced on 16th August 2019, two key factors have impacted the Group's results in the first six months of 2019 when compared to the same period in 2018 and prior years.

First, M&C Saatchi has continued to invest in new, start-up businesses which we consider will deliver long term growth. That is reflected in the higher proportion of losses from such ventures in H1 19 compared to H1 18, amounting to a negative impact on profit of £2.6m in H1 19 vs H1 18. Ours is a network of best-in-class entrepreneurs motivated to succeed by holding meaningful minority equity holdings in their businesses. In 2019 the fastest growing businesses in the network and those making the greatest contribution to operating profits have larger minority shareholdings than in prior years and also operate in higher tax rate jurisdictions creating a disproportionate drag on earnings and earnings per share when compared to operating profit.

Second, the timing of a considerable proportion of revenues committed and expected to be delivered in 2019, including recent client wins and additional projects, is such that operating profit will be much more heavily weighted to the second half of the year. This also reflects a more prudent approach to revenue recognition.

Although there were regional changes to net revenues caused by exchange rate movements, at the Group level currency had negligible effect on net revenues.

The first six months of 2019 saw revenues increase by 0.7% compared to H1 2018 (restated). The increased cost of sales due to higher production costs recognised in the period has resulted in a £5 million or 4% reduction in net revenue compared to H1 2018 (restated), leading to a £4.6m or 49% decline in operating profit.

Expectations for the second half and full year

We have seen a shift in the timing of revenues in 2019 away from the first half of the year and expect an increased proportion of profits to be made in the second half of the year. Trading in the second half has been solid, with a strong pipeline of client revenues through to the end of the year expected to convert to improved revenues and profits. As a result, we expect like for like full year operating profit to be 5%-10% below full year 2019 expectations. This is before the impact of any exceptional items including office refurbishment costs of £1.4m. With a change in the composition of those companies in the Group contributing to profits, that is those companies with higher minority shareholdings, and which operate in higher tax rate jurisdictions generating a greater share of operating profit, earnings and EPS are expected to fall by a relatively greater margin than operating profit.

The largest contribution to Group profits in the remainder of the year is expected to come from the following divisions:

·; Performance - slow start to the year but has since picked up and has been operating on a monthly run rate consistent with its record of last year

·; Australia - heavily skewed towards retail clients with focus on advertising and promotions during the final quarter of the year.

·; SS+K - significant project with Commonwealth Bank in the second half of the year

·; World Services - significant media activities in the second half of the year

·; South Africa - win of Standard Bank with all of this year's revenue in the second half

·; China - move from associate to subsidiary in the second half

In addition, and as announced in the Company's 12th August statement, as part of the ongoing assessment of the Group's assets, we have decided to take an exceptional cost of £1.4m in the second half of 2019 in respect of property-related assets arising from the UK office refurbishment which is currently taking place.

UK

The UK posted an increase in net revenue of 3% (2019, £43.6million; 2018, £42.3million). Headline operating profit was up 108% (2019, £3.0million, 2018, £1.4million), with headline operating costs increasing 5% (all comparisons are against restated 2018 numbers).

Growth was driven by World Services and the Talent Group, which has benefited from the acquisition of Red Hare and Grey Whippet on 29 June 2018, have traded strongly. M&C Saatchi S&E continues to trade well, winning Heineken, Beko & Ovo Energy.

The UK Group businesses have strengthened compared to H1 2018 and continues to do so winning a New Home Office contract, LNER, Alpro, Vodafone, Revolution Beauty, OPPO, Durasein, Olympia London, McCormick, Trinity College, Cetaphil, Forex.com, Expedia, the Football Association, Foxtons, GambleAware, Heineken, Legal & General, Powerade and Twinings.

Our Talent agencies signed up John Amaechi (OBE), as well as having three contestants performing in Strictly 2019 (Alex Scott (MBE), James Cracknell (OBE) and Saffron Barker) along with other projects.

Performance media spending slowed in H1 during a period of contract renewals. They have however since resumed at 2018 levels.

We made significant investment in start-ups, including in excess of £1million in Send Me A Sample in the first half of the year.

Europe

Like for like net revenues in Europe declined by 16% (2019, £14.2million ; 2018, £17.1million). Headline operating profit was down 84% (2019, £0.4million; 2018, £2.6million), with headline operating costs reducing 5% (all comparisons are against restated 2018 numbers).

France had a poor first half with the loss of La Banque Postale and Mini contributing heavily to reduced performance in Europe. However, the office continued to win business which will translate to much improved second half trading, winning work with Compté, Picard, LVMH, Celio, Lansay, IZI by EF, GERLINEA, Focal, Le Bourget and Ipsos.

Spain and Sweden had a slow start to the year, but stronger H2 results are expected, particularly in Sweden which is becoming a regional hub winning Adidas Euro 2020 (Sweden), Reebok (Norway, Sweden and Denmark), KLM (Norway, Sweden, Denmark and Finland) and Zound Industries (Sweden).

Italy continues to trade strongly with wins including Delonghi and fashion retailers OVS.

Germany had a number of new clients including ING (Banking), Falke (Socks), Vattenfall (Energy) and Uniqfeel (Sports Apparel).

Middle East and Africa

Like for like net revenue in the Middle East and Africa was down 4% (2019, £7.5million; 2018, £7.8million). Headline operating profit was down 85% (2019, £0.1million; 2018, £0.5million), with headline operating costs reducing 2% (all comparisons are against restated 2018 numbers).

The South African business had client losses of Nedbank and SARB impacting H1 2019. This has been countered by winning Standard Bank in the first half, with the work starting in the second half and will be that office's largest ever client.

Asia and Australia

In Asia and Australia, like for like net revenues have increased by 1% (2019, £32.8million; 2018, £32.6million). Headline operating profit was down 48% (2019, £2.3million; 2018, £4.6million), with headline operating costs increasing 6% (all comparisons are against restated 2018 numbers).

Start up investments in Jakarta, Hong Kong and Singapore resulted in H1 losses of £0.8m. This is expected to turn around in H2.

Non-recurring income in Australia for H1 2018 has resulted in lower comparative profits in H1 2019. Spend in H2 2019 is expected to increase due to the strong retail-driven client base (Woolworths, Optus, Lexus, Cricket Australia and Tab).

Clients won in 2019 by the Australian group include AHC (Division of Unilever), SUMO Power, FlexiGroup, Uniting (NSW ACT), Sony Music, AVEO Group, Respiri, Racing Victoria, Plush, Yourtown, Ethos Urban, UNSW, Bill Care and SMEG.

Americas

Like for like net revenues have decreased by 14% (2019, £19.9million; 2018, £23.1million). Headline operating profit was down 50% (2019, £1.3million; 2018, £2.7million), with headline operating costs reducing 5% (all comparisons are against restated 2018 numbers).

The Los Angeles office had a poor first half. The office has experienced client reductions, including Epson and Fox Restaurant Concepts, materially impacting our results. Subsequently however the office has won projects for Amazon Music and Origin Hotel.

Performance media spending slowed in H1 during a period of contract renewals. They have however since resumed at 2018 levels.

Investment in start-ups in Mexico & NY (LIDA) has further impacted H1 2019 results.

SS+K continues to trade in line with 2018, with the Commonwealth Bank project generating revenue in H2 2019.

Notable client wins for the region in 2019 which will beneficially impact H2 include Locktons, VIZIO + Apple and Copperstate Farms.

Balance sheet and cash

Net cash at the half-year was £9.5m, which compares with £2.5m of net debt at 2018 year end and £4.5m net cash at the same stage last year. Working capital outflows during the first half year were £3.8 million which compares to a £11.8 million working capital outflow in the 12 months of 2018 (restated). The disposal of Walker Media Ltd generated £23.2m of cash in the first half and this has been absorbed in repaying bank loans and in investing activities.

Opening reserves have been reduced by £6.5m due to the adoption of IFRS16 Leases. This accounting charge will reverse over the life of the leases (see note 5). Initial findings from the ongoing independent accounting review lead us to conclude a restatement of prior year results is necessary, reducing opening reserves by £5.1m (see note 4)

Accounting review

The Group announced in August that we would be taking an exceptional charge of £6.4 million to the Group's 2019 results as result of an internal review of specific subsidiaries in the UK (this comprised of £4.9m of specifically identified items and a contingency of £1.5 million for further items that may subsequently be identified). We have since engaged PwC to conduct an independent accounting review of the whole Group which is expected to be completed by November 2019. Initial indications are that this review will result in the restatement of prior year results (rather than an exceptional charge in 2019). Further analysis has been undertaken and the specific issues identified relate to:

·; Overstated accrued income: £2.6m

·; Irrecoverable receivables: £1.7m

·; Prepayments: £0.9m

·; Other debtors: £0.5m

·; Impairment of intangible assets: £0.7m

·; The above items to be offset by corporation tax receivable: £1.2m

Further detail is included in Note 4 and we will make a further announcement to the market once the findings are confirmed.

Since these issues came to light, our recently appointed Group Finance Director, Mickey Kalifa, has appointed a new Finance Director for the UK division and is in the process of hiring additional senior finance staff.

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

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1. GENERAL INFORMATION

The Company is a public limited company incorporated and domiciled in the UK. The address of its registered office is 36 Golden Square, London W1F 9EE.

The Company has its primary listing on the AIM market of the London Stock Exchange.

This consolidated half-yearly financial information was approved for issue on 23 September 2019.

These results do not constitute the Group's statutory accounts. The information presented in relation to 31 December 2018 is extracted from the statutory financial statements for the year then ended, which have been delivered to the Registrar of Companies, except for the amendments detailed in Note 4. The auditor's report on the statutory financial statements for the year ended 31 December 2018 was unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

2. BASIS OF PREPARATION

This consolidated half-yearly financial information for the half-year ended 30 June 2019 has been prepared in accordance with the AIM Rules for companies. The half-yearly consolidated financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2018.

3. USE OF JUDGEMENTS AND ESTIMATES

In preparing these interim financial statements, management has made judgements and estimates that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those described in the last annual financial statements, except for new significant judgements and key sources of estimation uncertainty related to the application of IFRS 16, which are described in Note 5.

4. Restatement

As announced on 12 August 2019 the Group has conducted an internal accounting review of several of the UK subsidiaries. Subsequent to the commencement of the internal review, under the oversight of the Audit Committee, PwC were engaged to perform a separate targeted independent forensic review of the entire Group, including the UK subsidiaries that formed part of the internal accounting review. At the date of publication of these Interim financial statements the external review is ongoing.

As a result of these investigations the Board are currently of the belief that there are a number misstatements relating to 2018 which need to be addressed. This is subject to confirmation by the conclusion of all investigations which is expected in November 2019. As at the date of publication of the Interim statement it is impracticable to ascertain definitively whether the corrections, on an individual basis, relate to 2018 or potentially earlier. At this point in time, however the indications point to the corrections relating to 2018, and as such the identified misstatements have been incorporated within the 6 month financial period ending 30 June 2018 in accordance with the requirements of IAS 8.44.

The £6.4 million of adjustments comprise the following corrections: overstatement of revenue of £2.6million, understatement of costs of £3.1million and an inappropriate recognition of intangible assets valued at £0.7million. After the effect of tax, these resulted in an overstatement of equity of £5.1million. These adjustments are restricted to four UK trading entities and the UK shared services company. The precise basis as to how these errors arose is expected to be identified in PwC's review and we will update the market in due course.

Description of misstatements

(1) - Two of the affected entities under review were noted as having recognised £2.6million of accrued income which under the requirements of IFRS 15 should not have been recognised based on the profile of completion of the related performance obligations as at the end of 2018.

(2) - £1.7million of adjustments relate to a mis-estimation of project progress and estimated costs to completion.

(3) - £0.9million of prepayments held as at the end of 2018 that we now believe had expired during the second half of 2018 have been eliminated from the Balance sheet.

(4) - A balance of £0.5million of Other Debtors as at 31 December 2018 was identified as being unsupportable and requiring to be written out.

(5) - Impairment of intangible assets - £0.7million of intangible assets with no future economic benefits were identified and consequently impaired.

(6) - The impact of the above adjustments in reducing profit previously recognised for 2018 by £6.4million, has resulted in a reduction of corporation tax of £1.3million.

The impact of these misstatements are presented below in tabular format for the Consolidated income statement and Consolidated balance sheet for the financial period ending 31 December 2018 and 30 June 2018 respectively.

* Reflecting IFRS9 year end treatment.

5. ACCOUNTING POLICIES

The financial information in these interim results is that of the holding company and all of its subsidiaries (the Group). It has been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards as adopted for use in the EU (IFRSs). Except as described below, the accounting policies applied in these interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2018.

The changes in accounting policies are also expected to be reflected in the Group's consolidated financial statements as at and for the year ending 31 December 2019.

The Group has initially adopted IFRS 16 Leases from 1 January 2019. Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the interim condensed consolidated financial statements of the Group.

IFRS 16 Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model.

Adoption method

The Group has adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application being 1 January 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised within equity at the date of initial application. Accordingly there is no restatement of the comparative period financial information.

On adoption of IFRS 16 the Group has elected to grandfather the assessment of which arrangements are leases. Contracts not identified as leases under Legacy IFRS were not reassessed for whether there is a lease under IFRS 16. The Group also elected to use the recognition exemptions for lease contracts that, at the application date of IFRS 16, have a lease term of 12 months or less and do not contain a purchase option ('short-term leases'), and lease contracts for which the underlying asset is of low value ('low-value assets').

Approach to transition

As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group. Any prepaid rent and accrued rent were recognised under Prepayments and Trade and other payables, respectively.

Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for all leases (unless exempt from applying IFRS 16) on its balance sheet. The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases:

§ applied the exemption not to recognise right-of-use assets and liabilities for leases of low value or for which the lease term ends within 12 months of the date of initial application, on a lease-by-lease basis

§ relied on previous assessments on whether leases are onerous for impairment of right-of-use assets

§ excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application

§ used hindsight when determining the lease term if the contract contains options to extend or terminate the lease

§ applied the exemption not to separate non-lease components such as service charges from lease rental charges

§ used a single discount rate to a portfolio of leases with reasonably similar characteristics