Publicis Groupe: First Half 2018 Results

• H1 results on track with our objective to improve organic growth and expand margin in 2018
• Slowdown from a good Q1 to a negative Q2 partly due to health sector
• 27% growth on our strategic game changers and unprecedented new business track-record ramping up in H2 2018
• Strong operating margin rate expansion of 60 basis points in H1 2018 allowing both investment in our transformation to build future growth and 13% headline EPS growth at constant currency
• All numbers in value impacted by lower US dollar and other currencies versus the euro

Arthur Sadoun, Chairman and CEO of Publicis Groupe:

“First half of 2018 was a busy but very productive period for Publicis Groupe. We have focused on 3 main objectives directly in line with our 3-year transformation plan, Sprint To The Future.  

First, we have set the financial conditions to deliver our full year 2018 targets of organic growth and margin expansion. First half organic growth was slightly negative as in 2017, but with an improvement in North America which turned positive. This is an encouraging sign as this is where our new model is the most advanced. We saw a slowdown from our good first quarter of +1.6% to a second quarter at -2.1%, mostly due to two conjunctural challenges – tougher basis of comparison and uncertainty relating to GDPR implementation impacting our net revenue in Europe – but also to one specific operational bump with our volatile health sales representatives business in the US. This bump represents the biggest share of our negative growth as the overall impact of our Publicis Health business was around 30 million euro.

Despite the environment, we showed a 60 basis point margin improvement and 40 basis points on a comparable basis at constant restructuring charges. This 40 basis point expansion actually includes +70 basis points thanks to cost savings and investment in our game changers representing 30 basis points. These reflect two important points: first, we are making progress in delivering on our efficiency plan, demonstrating our ability to reduce costs while providing more high value products and services to our clients. Second, we are investing in our key strategic capabilities to build the growth of the future.

Overall, our first half financial results, combined with our impressive new business wins that will start ramping up in the second half, make us confident to deliver our full year objective of improving growth and margin versus 2017.

Our second objective was to accelerate our transformation by scaling up our new model connecting data, creativity and technology to accelerate our organic growth.

During this semester, we continued to develop our global practices and simplify our structure in the countries where we operate and the way we work with our clients. We are on track and sometimes ahead on all the KPIs we communicated during the Investor Day in March 2018.

We are actually experiencing very high growth, above 25%, in what will be the core of our offer in the future: our strategic game changers, namely data, dynamic creativity and digital business transformation.

Being at the core of our client transformation has made us win like never before with our existing clients and in new business, be it globally with Daimler, Campbell's and M‎arriott, or locally with McDonald’s, Macy’s and Nestlé. The momentum is continuing in Q3, and only last week, we announced the wins of Lenovo media globally, P&G Shopper in the UK and Nestlé in the US.

I reiterate, if necessary, that our market has been facing major challenges and transformation has become a necessity for all. Initiatives we launched very early and acquisitions we made are bearing fruits: we are able to overcome unavoidable budget cuts and changes in marketing plans thanks to our assets and our organization that position us in the most competitive way possible. 

Our third objective was to increase shareholder value to make sure we reward our shareholders for the trust they put in our transformation journey. During this semester, we were able to deliver strong financial results, beyond organic growth. We improved margin significantly, headline EPS went up 13% at constant currency, and our financial situation is stronger with a net debt reduction of almost 1 billion euros over the last 12 months.

No doubt, during H1, we have set the foundations to deliver our full year objectives and even more importantly our 3 years transformation plan. It will not be an easy journey as we must transform ourselves while facing some strong market headwinds. There could be some unexpected bumps in the road like the one we just experienced in the health sector. But we have an outstanding team, unmatched capabilities in data, creativity and technology and a proven winning model that make us very confident for the future.”

Publicis Groupe’s Supervisory Board met on July 18, 2018, under the chairmanship of Maurice Lévy, to examine the accounts for the first half of 2018 presented by Arthur Sadoun, CEO and Chairman of the Management Board.

Publicis Groupe has applied IFRS 15, the accounting standard on revenue recognition, since it became effective on January 1, 2018.  The 2017 financial statements have therefore been restated for the purposes of comparison with revenue since the standard came into force.  This accounting standard increases IFRS revenue insofar as certain costs re-billed directly to clients are excluded from revenue. These costs mainly concern production activities as well as various expenses incumbent on clients.

In this context, as the items that can be re-billed to clients do not come within the scope of assessment of operations, Publicis Groupe has decided to use a different indicator, i.e. net revenue , which is a more relevant indicator to measure the operational performance of the Groupe’s activities. 

The table below provides a detailed account of revenue reported for 2017 before the impact of IFRS 15, as well as the 2017 figures restated after applying IFRS 15, i.e. net revenue and revenue.

Publicis has decided to early adopt IFRS 16 accounting standard as of January 1, 2018.

This accounting standard considers all lease contracts under a single model by which a lease contract is accounted for as a liability (discounted future payments), and a right of use is accounting for as an asset. The right of use will be amortized over the period of the lease contract (taking into account option periods during which the exercise is reasonably certain).

Contracts committed by Publicis for which this accounting standard applies, are:

• Mainly, real-estate leases: Publicis is a tenant of the offices in most cities where the Groupe operates,
• And to a lesser extent, outdoor activities: the Groupe has committed to advertising contract concessions in its advertising sales activity where minimum guarantees apply, as well as vehicles and IT hardware leases.

Publicis has retained the “prospective method” allowed by the accounting standard by which the cumulative effect of the standard will be accounted for as an adjustment to the opening equity, considering the “right of use” asset equals the amount of the lease commitment, adjusted for rents paid in advance.  The opening balance sheet at January 1, 2018, after application of IFRS 16, is presented in the press release dated July 6, 2018 (available on our website: www.publicisgroupe.com).  Furthermore, the 2017 consolidated income statement will not be restated.  The Groupe will communicate 2018 half-year and full-year results including IFRS 16 and will provide those financial items excluding IFRS 16.

Publicis Groupe’s net revenue in Q2 2018 was 2,198 million euro, i.e. an 8.3% decline from 2,397 million euro in 2017.  At constant exchange rates, growth was -2.4% after a 145 million euro negative impact of currency (-6.0% impact).  Net acquisitions contributed a negative 5 million euro to net revenue in Q2 2018 following the deconsolidation of Genedigi from January 1, 2018.  

Organic growth was -2.1% in Q2 2018.  This is a slowdown by comparison with the +1.6% recorded in Q1 2018 due to the strong comparable period in 2017, especially in North America.  The Groupe has yet to register the benefits of the accounts won in the first quarter, which will only contribute to organic growth from Q3 2018 onwards.  Furthermore, organic growth was affected by implementation of GDPR (General Data Protection Regulation) in Europe which caused several campaigns to be temporarily suspended at the initiative of clients but also at the initiative of Publicis due to uncertainties surrounding the obtaining of consumer consent via the websites on which these campaigns are rolled out.  Mention should also be made of the difficulties encountered in the healthcare sector, notably concerning the activities of Contract Sales Organizations (see paragraph below). 

Publicis Groupe’s net revenue in H1 2018 was 4,280 million euro, down 8.2% from 4,664 million euro in H1 2017.  At constant exchange rates, growth was -0.5%, after exchange rates adversely affected net revenue by 362 million euro (-7.8% impact).  Net acquisitions contributed a negative 6 million euro to net revenue in H1 2018 following the deconsolidation of Genedigi from January 1, 2018.  Organic growth was -0.4% in H1 2018 

In US dollars, Publicis Groupe net revenue was up 2.6%. 

Unless otherwise stated, figures are presented before impact of IFRS 16.

Income statement

The operating margin before depreciation & amortization was 683 million euro in H1 2018, down 5.0% from 719 million euro in 2017, i.e. a percentage margin of 16.0% of net revenue (vs. 15.4% in 2017):

• Personnel costs totaled 2,834 million euro at June 30, 2018, down 8.4% from 3,095 million euro in 2017.  Fixed personnel costs amounted to 2,507 million euro, i.e. 58.6% of net revenue versus 58.7% in 2017. Freelance costs were down to 187 million euro in 2018, after 199 million in 2017.  Restructuring costs totaled 36 million euro in 2018 (down from 52 million euro in 2017) as the Groupe reorganizes around The Power of One which increasingly integrates structures and activities.  Numerous investments (organization by country, development of production platforms, on-going regionalization of the Shared Services Centers, as well as various technological developments) will all help improve operational efficiency.
• Other operating costs (excluding Depreciation & Amortization) amounted to 1,208 million euro, compared to 1,307 million euro in 2017.  When pass-through costs are factored out, these costs stand at 17.8% of net revenue (versus 18.2% in 2017).

Depreciation & Amortization for the period amounted to 72 million euro in 2018, down 11.1% by comparison with H1 2017.

The Operating margin was 611 million euro, i.e. a 4.2% decrease from 638 million euro in 2017.  At constant exchange rates, the Operating margin rose by 5.6%.  Operating margin rate was 14.3%, up 60 basis points over 2017.  On a like-for-like basis (constant exchange rates and constant scope of consolidation), it was 70 basis points higher than in 2017.  This improvement was due to the downswing in restructuring costs (for 30 basis points), and to the impact of the cost savings program over the last 18 months (for 70 basis points), despite the investments made to accompany growth of game changers (for -30 basis points) .

By region, the operating margin was 12.2% in Europe, 17.3% in North America, 9.7% in Asia Pacific, 8.2% in Latin America and 1.6% in the Middle East & Africa.

Amortization of intangibles arising on acquisitions totaled 34 million euro in H1 2018, versus 35 million euro in 2017.  Impairment - Real estate consolidation totaled 107 million euro that was mainly due to real estate restructuring costs incurred by our real estate program “All in One” commenced in early 2018.  In addition, non-current income and expense was a charge of 18 million euro (compared with 1 million euro in H1 2017) which corresponds to 17 million euro of capital loss for Genedigi before the sale of this entity was completed at the start of April 2018.

Operating income totaled 452 million euro in H1 2018, after 604 million euro in H1 2017.

Financial income (expense), comprised of the cost of net debt and Other financial income and expenses, amounted to an expense of 13 million euro in H1 2018, down from an expense of 38 million euro for the corresponding period in 2017.  The cost of net debt was 15 million euro in H1 2018, after 32 million euro in 2017.  Other financial income and expenses netted out at income of 2 million euro after an expense of 6 million euro in H1 2017.

The revaluation of earn-out payments amounted to an expense of 11 million euro in H1 2018, down from an expense of 22 million in 2017.

Income tax for the period was 114 million euro, stemming from the application of a forecast effective tax rate of 25.9% for 2018, after 151 million euro in H1 2017, corresponding to a forecast effective tax rate of 26.7%.

The Associates share of profit was 1 million euro, compared with a loss of 2 million in H1 2017.  Minority interests totaled 2 million euro in H1 2018 after 4 million in 2017.

Overall, net income attributable to the Groupe amounted to 313 million euro at June 30, 2018, versus 387 million at June 30, 2017.

When IFRS 16 is applied, the Operating margin stands at 617 million euro, and the percentage operating margin for the period is 14.4%.   By region, the Operating margin then becomes 12.4% in Europe, 17.4% in North America, 9.9% in Asia Pacific, 8.2% in Latin America and 1.6% in the Middle East & Africa.

The Operating income was 458 million euro in H1 2018.

After IFRS 16, Financial income (expense) was an expense of 36 million euro in H1 2018 after inclusion of lease obligations totaling 29 million euro.

Income tax was 109 million euro when the 2018 forecast effective tax rate of 25.9% was applied.

Overall, net income attributable to the Groupe amounted to 301 million euro (after IFRS 16) at June 30, 2018.

Free Cash Flow

The Groupe’s free cash flow, before application of IFRS 16 and excluding variations in working capital requirements, decreased by 16% compared with the previous period to stand at 499 million euro. At constant exchange rates, it fell 8%.  This decline was due to higher capex and the higher level of tax paid.  Investments rose to 86 million euro versus 37 million euro in the first half of 2017.  The increase in H1 2018 includes investments made under the All in One real estate program.  Income tax paid rose from 115 million euro in H1 2017 to 149 million euro in H1 2018.  Also, while the Groupe received a tax refund in H1 2017, the first half of 2018 marked the first payment of the toll charge (payment spread over an eight-year period) for 18 million euro.  After application of IFRS 16, free cash flow amounted to 500 million euro.

Net debt

At June 30, 2018, net debt totaled 1,136 million euro, up from 727 million euro at December 31, 2017.  The substantial debt reduction (close to 1 billion euro) over the last 12 months can be attributed to strong cash flow generation combined with very strict control of variations in working capital requirements.  In fact, the increase in working capital requirements was limited to 889 million euro in H1 2018, after an increase of 1,013 million euro in H1 2017.  In H1 2018, the Groupe’s average net debt stood at 1 405 million euro, after 1,993 million euro in the first half of 2017.

Sprint To The Future

Since 2014 and the acquisition of Sapient, Publicis Groupe has been undergoing a deep transformation and is now uniquely positioned thanks to three key differentiation points:

• The vision: the technology provided by Publicis.Sapient gives the Groupe the expertise to combine marketing and digital business transformation, connected with data.  Thanks to these unparalleled assets, Publicis Groupe is able to engage with both Chief Marketing Officers (CMOs) and Chief Information Officers (CIOs).
• The model: The Power of One gathers all the Groupe’s capabilities under one roof, putting clients at the core of its organization.  It has led to the deployment of Global Client Leaders (GCLs) and the implementation of our country model under one leader and a unified executive team drawing from all the expertise of the Groupe to break down silos and improve efficiency.
• The governance: the Groupe has successfully completed its management succession and has reinforced its decision-making committees, with a strong focus on the execution of strategy.

Sprint To The Future is Publicis Groupe’s strategy and execution plan for 2018-2020 and is based on three pillars:

1.  To provide each client with the keys to its future success: one-to-one consumer engagement at scale, and three strategic game changers, namely data, dynamic creativity and digital business transformation expertise.

2.  A sprint to accelerate the Groupe’s transformation, notably through the deployment of Global Client Leaders, the roll-out of a country-by-country organization, and an “invest in growth” plan funded by a major cost-cutting program.

3.  Greater value to shareholders during the transformation, by accelerating organic growth and the percentage operating margin.

For further details, see the Groupe’s press release dated March 20, 2018:

http://www.publicisgroupe.com/en/news/press-releases/publicis-2020-sprint-to-the-future-en-1

First results are very encouraging.  net revenue of Strategic Game Changers is up 27% in the course of the first 6 months of 2018, validating the strategic decisions of the Groupe. Net revenue generated with the first 100 clients of the Groupe amounted to 450 million, representing 18% of net revenue of the top 100 clients.

Publicis Groupe appointed 46 Global Client Leaders as of June 30, compared with 35 end 2017 and an objective of 100 by 2020. The objective to achieve 100% of net revenue under country model was reached at the end the first half of 2018, with the implementation around 8 key markets: France, United Kingdom, DACH (Germany, Austria, Switzerland), Central & Northern Europe, Southern Europe, North America, Latin America, Asia Pacific & Middle East / Africa. This organization will aim at accelerating Groupe’s growth and delivering efficiency gains.

Headcount in global delivery platform was 9,100 at end June, versus 8,700 end 2017.

All the energy of the Groupe is mobilized to execute its strategy and to deliver greater value to its clients, its people and its shareholders. A dedicated incentive plan, fully aligned with the objectives presented during the investor day, will be implemented for the group of executives in charge of the execution of the plan.

Disposal

Publicis Groupe finalized the disposal of Genedigi during the second quarter of 2018.

Publicis Groupe remains focused on three priorities: to deliver the results announced year after year, to accelerate its transformation by rolling out its model at scale, and to create shareholder value throughout the period.  The first half-year 2018 yielded a marked improvement of its percentage margin, double-digit growth (at constant exchange rates) of headline EPS, and a strengthening of its financial position.  Business gains in the first quarter should lead to higher organic growth than in 2017.  Concerning the margin, cost saving efforts will be continued, and part of the savings achieved will be reinvested to establish the basis for sustained future growth.  Overall, the margin can be expected to increase by 30 to 50 basis points in 2018.

In the longer term, Publicis Groupe intends to deliver greater value to shareholders by accelerating the growth of its headline diluted EPS over 2018-2020, using three levers:

• accelerated organic growth,
• improved margins,
• bolt-on acquisitions.

The objective is to accelerate organic growth over 2018-2020 with the ambition of achieving +4% by 2020.

Publicis Groupe is also aiming to increase its percentage operating margin by 30 to 50 basis points per annum between now and 2020.  This objective includes a 450-million euro cost savings plan fully aligned with the Groupe’s strategy.  This cost savings plan will serve to fund a 300-million euro operational investment program spanning 2018-2020, a plan that is primarily dedicated to the Groupe’s talent through hiring, training, development and re-skilling.

Publicis Groupe is targeting 5% to 10% annual growth of its headline diluted EPS, ramping up over the next three years, at constant exchange rates, through continuous enhancement of its organic growth, improved margins and the contribution of acquisitions to earnings.

Free cash flow generation is expected to remain strong and the Groupe’s balance sheet will remain solid. With a payout ratio in the region of 45%, dividend growth can be expected to accelerate over the next three years.

This enhanced financial performance will place Publicis Groupe at the forefront of the market in marketing and business transformation.

Certain information contained in this document, other than historical information, may constitute forward-looking statements or unaudited financial forecasts.  These forward-looking statements and forecasts are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements and forecasts are presented as at the date of this document and, other than as required by applicable law, Publicis Groupe does not assume any obligation to update them to reflect new information or events or for any other reason.  Publicis Groupe urges you carefully to consider the risk factors that may affect its business, as set out in the Registration Documents filed with the French Autorité des Marchés Financiers (AMF) and which is available on the website of Publicis Groupe (www.publicisgroupe.com), including an unfavorable economic climate, an extremely competitive market sector, the possibility that our clients could seek to terminate their contracts with us at short notice, the fact that a substantial part of the Group’s revenue is derived from certain key clients, conflicts of interest between advertisers active in the same sector, the Group’s dependence on its directors and employees, laws and regulations which apply to the Group’s business, legal action brought against the Group based on allegations that certain of the Group’s commercials are deceptive or misleading or that the products of certain clients are defective, the strategy of growing through acquisitions, the depreciation of goodwill and assets listed on the Group’s balance sheet, the Group’s presence in emerging markets, exposure to liquidity risk, a drop in the Group’s credit rating and exposure to the risks of financial markets.

Publicis Groupe has applied IFRS 15 “Revenue” accounting standard since January 1, 2018. Details of 2017 quarterly and full year revenue before and after IFRS 15 impact, 2017 net revenue by quarter and by geography, and the main items of 2017 half year and full year results before and after IFRS 15 impact, have been disclosed in a press release dated July 6, 2018.

Publicis Groupe has applied IFRS 16 “Leases” accounting standard in advance, as of January 1, 2018. Publicis has retained the “prospective method” allowed by the accounting standard by which the cumulative effect of the standard will be accounted for as an adjustment to the opening equity, considering the “right of use” asset equals the amount of the lease commitment, adjusted for rents paid in advance. The opening balance sheet with the application of IFRS 16 as of January 1, 2018 have been disclosed in a press release dated July 6, 2018. Besides, the 2017 consolidated income statement will not be restated. The Groupe will communicate 2018 half-year and full-year results including IFRS 16 and will provide those financial items excluding IFRS 16.

05-01-2018     Publicis Groupe half-year financial statement liquidity contract
22-01-2018     Nick Law Joins Publicis as Chief Creative Officer of Publicis Groupe and President of Publicis Communications
23-01-2018     Carrefour group signs strategic partnership with Publicis.Sapient to accelerate its digital transformation
23-01-2018     Press release “Anonymous Letter”
29-01-2018     Publicis Groupe and Microsoft Announce Partnership for Marcel AI Platform
01-02-2018     Publicis Groupe Announces Global Leadership Promotions Across its Solutions & Regions
01-02-2018     Loris Nold appointed to the newly created role of CEO of Publicis Groupe APAC
01-02-2018     Alexandra von Plato Appointed Chief Executive Officer of Publicis Health
08-02-2018     Publicis Groupe : 2017 Annual Results
14-02-2018     Viva Tech 2018
14-02-2018     Leo Burnett Chicago Names Kieran Ots EVP, Executive Creative Director
26-02-2018     Robett Hollis and FrontSide join Saatchi & Saatchi New Zealand
28-02-2018     Saatchi & Saatchi New Zealand wins global Tourism Fiji account
05-03-2018     Brill and Crovitz announce launch of NewsGuard to fight fake news
20-03-2018     Publicis 2020: Sprint To The Future
27-03-2018     Publicis Groupe Named 2018 Adobe Experience Cloud Partner of the Year
29-03-2018     Publicis Media launches Global Commerce capability to manage the intersection of media and marketplaces
10-04-2018     Leo Burnett wins international Betfair account
19-04-2018     Publicis Groupe: Q1 2018 revenue
23-04-2018     2017 Registration Document available
25-04-2018     Publicis Groupe appoints leadership team to lead Indian market
30-04-2018     Publicis Media aligns EMEA & APAC markets under unified leadership
24-05-2018     Publicis Groupe unveils Marcel
28-05-2018     Combined General Shareholders’ Meeting
13-06-2018     Tom Kao appointed as Publicis Groupe Hong Kong CEO
22-06-2018     Publicis Groupe clients champion creativity in Cannes
26-06-2018     Publicis Groupe appoints Raja Trad to the newly created role of Chairman Middle East

Net revenue or Revenue less pass-through costs: Pass-through costs mainly concern production and media activities, as well as various expenses incumbent on clients. These items that can be re-billed to clients do not come within the scope of assessment of operations, net revenue is a more relevant indicator to measure the operational performance of the Groupe’s activities.

Organic growth: Change in net revenue excluding the impact of acquisitions, disposals and currencies.

EBITDA: Operating margin before depreciation.

Operating margin: Revenue after personnel costs, other operating expenses (excl. non-current income and expense) and depreciation (excl. amortization of intangibles arising on acquisitions).

Operating margin rate: Operating margin as a percentage of revenue.

Headline Group Net Income: Group net income after elimination of impairment charges, amortization of intangibles arising from acquisitions, main capital gains (or losses) on disposals, effect of US tax reform and revaluation of earn-out payments

EPS (Earnings per share): Group net income divided by average number of shares, not diluted.

EPS, diluted (Earnings per share, diluted): Group net income divided by average number of shares, diluted.

Headline EPS, diluted (Headline Earnings per share, diluted): Group net income after elimination of impairment charges, amortization of intangibles arising from acquisitions, main capital gains (or losses) on disposals, effect of US tax reform and revaluation of earn-out payments, divided by average number of shares, diluted.

Capex : Net acquisitions of tangible and intangible assets, excluding financial investments and other financial assets.

Free Cash Flow before changes in working capital requirements: Net cash flow from operating activities less interests paid & received, repayment of lease liabilities & related interests and changes in WCR linked to operating activities

Net Debt (or financial net debt): Sum of long and short financial debt and associated derivatives, net of treasury and cash equivalents.

Average net debt: Average of monthly net debt at end of month.

Dividend pay-out: Dividend per share / Headline diluted EPS.