M&C SAATCHI PLC

 

 

 

 

 

INTERIM RESULTS

 

 

SIX MONTHS ENDED

30 JUNE 2023

 

 

 

 

 

14 September 2023

 

 

M&C SAATCHI PLC

(the "Company")

Interim results for the six months

ended 30 June 2023

 

Strong double-digit growth in the Issues and Passions specialisms.

Good margin momentum going into second half with acceleration of new operating model.

 

H1 Highlights

Financial

·	Net revenue of £120.4million (H1 2022: £129.4million).
·	Headline operating profit margin of 8.3% (H1 2022: 14.0%), with Q2 margin of 12%.
·	Headline profit before tax of £8.8million (H1 2022: £16.0million), with strong operating leverage mitigating the impact of lower revenue.
·	Headline EPS of 4.47p (H1 2022: 6.37p).
·	Net cash at 30 June 2023 of £15.4million (30 June 2022: £39.7million), reflecting lower trading and the settling of put options.

Operational

·	Strong double-digit net revenue growth in our Issues (+22% LFL) and Passions (+10% LFL) specialisms, which now account for c.£40million (33%) of the Group's net revenue, demonstrates the value of our ongoing diversification away from traditional advertising. New clients include Unilever, Channel 4 and JPMorgan, with new assignments from Diageo, Samsung and Pepsico.
·	Good progress being made on the strategy set out at the Capital Markets Day, with growth in our Fluency brand expanding our data capabilities, and put option settlement creating more opportunities for growth and investment returns.
·	Along with the wider market, we have seen a significant slowdown in technology client spend in our Media specialism and a slower pace of new business wins in the Advertising division. However, 85% of the Company's full year revenue forecast is now booked as at the end of August, marginally ahead of 84% for the same time last year. Recovery is expected in the second half of the year.
·	Enhanced, simplified leadership structure under a new Executive Chair implemented, with investment focused on our specialisms, and new leadership roles to drive creativity, execution, and efficiency.
·	Global efficiency programme refocussed to accelerate quick wins, while delivering the strategy for the longer term. As a result, we expect to deliver annualised savings of £3.8million in FY2023 with an in-year impact of £1.5million.  We are targeting annualised savings of £10million by the end of FY2024.

 

Current Trading and Outlook

·	Revenue pacing marginally ahead of this time last year, with 85% of full year expected revenue booked. Improving momentum in H2, with a small single digit net revenue decline expected.
·	Operating leverage in Advertising, combined with our global efficiency programme, means that we are expecting improvement in Headline operating margin in H2. Full year margin is expected to be in line with last year.
·	In light of the continued challenging macro environment, we are taking a cautious view overall on H2. In 2024, the Group should benefit from the global efficiency programme and review of loss-making entities.

 

Unaudited Headline¹  Results

 

Six Months To 30 June 2023
	2023 £M		2022 £M		Movement	LFL2
Net revenue1	120.4		129.4		(7%)	(7%)
Operating profit	10.0		18.1		(45%)	(48%)
Profit before taxation	8.8		16.0		(45%)	(48%)
Earnings3	5.5		7.8		(30%)	(12%)
Operating profit margin	8.3%		14.0%		-5.7pts
EBITDA4	14.5		22.8		(36%)
Net cash1	15.4		39.7		(61%)

 

 

Unaudited Statutory Results

 

Six Months To 30 June 2023
		2023 £M		2022 £M		Movement
Revenue		216.7		221.7		(2%)
Net revenue1		120.4		129.4		(7%)
Operating (loss)/profit		(3.6)		2.7		(231%)
(Loss)/profit before taxation		(5.1)		0.3		(1759%)
Losses3		(6.3)		(4.0)		(57%)
Operating (loss)/profit margin		(3.0%)		2.1%		-5.1pts

 

 

1 Refer to Notes for the definition of Headline net revenue and net cash.

² Like-for-like excluding the effect of the disposal of Clear Deutschland GMBH in H1 2023 and retranslating 2022 figures to 2023 FX rates.

³ Earnings and Losses are calculated after deducting tax and the share of profits attributable to non-controlling interests.

⁴ EBITDA is calculated excluding the income statement charges relating to IFRS 16.

 

Moray MacLennan, Chief Executive Officer, said:

The diversification of our offering, combined with swift action on our cost base, have ensured good momentum into the second half, despite a slower start to 2023. Strong double-digit growth in Issues and Passions, in particular, reflects our continued investment in our specialisms.

Zillah Byng-Thorne, Executive Chair, said:

The second half of the year is about growth, execution, and efficiency. Whilst some economic headwinds are likely to continue, we are focused on what we can control: continued connectivity of our business, elevating our highest-margin businesses in resilient segments, underpinned by tight cost management.

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.

M&C Saatchi Half Year 2023 Results - Analyst Presentation

M&C Saatchi plc will host an in-person analyst presentation today at 9:00am at 36 Golden Square, London, W1F 9EE. The presentation will be followed by a Q&A with Zillah Byng-Thorne, Executive Chair, Moray MacLennan, Chief Executive Officer, and Bruce Marson, Chief Financial Officer.

Please email MCS@Brunswickgroup.com to register to attend. Dial-in details are also available for those not able to attend in person.

For further information please call: M&C Saatchi plc	+44 (0)20-7543-4500
Zillah Byng-Thorne, Executive Chair Moray MacLennan, Chief Executive Officer Bruce Marson, Chief Financial Officer
Numis Securities Limited	+44 (0)20-7260-1000
Nick Westlake, Iqra Amin
Liberum Limited	+44 (0)20-3100-2000
Max Jones, Benjamin Cryer, Will King
Brunswick Group Limited	+44 (0)207-404-5959
Andrew Porter, Kate Pope

SUMMARY OF RESULTS

 

Net revenue for H1 was £120.4million, down 7.0% compared to last year. Our specialisms delivered £70.3million (+0.9% vs last year), compared to the Advertising division at £50.1m, (-16.1% vs last year), reflecting the delivery of our strategy set out at our Capital Markets Day earlier this year. The specialisms were fueled by double digit revenue growth in the Issues (+20.6%) and Passions (+11.0%) specialisms, underpinning their strong market position. Along with the wider market, we experienced challenging trading conditions in H1, particularly in those businesses with more exposure to a technology client base or where there is more discretion around client spend resulting in lead times for new projects widening. This had an impact on revenues in our Media specialism (-30.1%) and the Advertising division (-16.1%), although we saw a strong performance in our US advertising business (+4.1%).

Headline operating costs decreased by 1% to £110.4million compared to H1 2022 (£111.3million) and decreased by 11% versus H2 2022 (£124.4million). The nature of the business means that as some markets began to see revenue soften, we were able to flex the variable cost base, with most of these actions impacting Q2 onwards, while ensuring we continued to invest in our specialisms. As a consequence, the Headline operating profit margin was 12% in Q2, compared to 8.3% for H1 overall. This improvement in margins was also a consequence of some of the early wins from the global efficiency programme announced at our Capital Markets Day, with £0.5million of savings delivered within the H1 results.

Overall Headline operating profit was £10.0million, a decline of £8.1million versus last year. The global efficiency programme has been refocused into quick wins and more structural savings. The quick wins have secured annualised savings of £3.8million already, which is expected to have an impact of £1.5million in FY2023. We are targeting further annualised savings of around £6million by the end of FY2024, as a result of the centralisation of certain back and middle office functions.

In H2, we expect continued strong momentum in the Issues and Passions specialisms, and some recovery in the Media specialism and Advertising division, supported by the typical seasonality of client campaigns.

On a statutory basis, the Company delivered a loss before tax of £5.1million (2022: £0.3million profit), due to the decline in net revenue of £9.0million that has been partially mitigated by statutory cost savings of £3.6million.

Net cash as at 30 June 2023 was £15.4million (£30.0million at 31 December 2022). During H1, we cash-settled £3.3milliion of put options and experienced a negative working capital swing of £6.8million driven by lower trading volumes and one-off adverse working capital timing at the end of June, much of which we expect to reverse in H2.  During H2 we expect to cash settle a further £15.5million of put options, leaving us with a residual liability of c.£12million at a 152p share price.

Market Dynamics

Market growth in the first half of 2023 slowed significantly, with clients slower to commit budgets and generally spending less. While there are some indications of the wider market beginning to recover in H2 2023 and beyond, we are taking a cautious outlook for H2 until we see more data points. Beyond the economic trends we see several key themes emerging:

·	Generative AI - especially the diversity, scale, and rate of acceleration of the application layer.
·	Digital transformation - continuing at pace, and responsible for a large proportion of the sector's growth.
·	Complex marketing mix - channel and customer engagement platform fragmentation resulting in client demand for simplification and consolidation.
·	Automation at speed - increased speed, personalisation and customisation of messaging across more channels as a result of tech (including Generative AI).
·	Creativity as a competitive advantage - enabling differentiation, cut through and improved ROI.
·	Sustainability - albeit eclipsed in coverage by the economic headwinds and cost of living crisis.

 

We have reflected these themes in our proposition and believe we are well positioned to succeed due to our: broad diversified client base, geographic breadth, and specialist capabilities in resilient, counter-cyclical segments: public sector, issues-based marketing, passions and talent.

Strategy Update

During our Capital Markets Day, we outlined our strategy centred around accelerating high-margin, digital-led growth, with three clear pillars:

 

·	Building capabilities with a focus on data, tech and digital transformation.
·	Developing new opportunities through M&A and partnerships; moving away from start-ups.
·	A new operating model that delivers significant cost savings and enhanced productivity.

 

Delivery of this strategy is core to our ongoing success.  In H1 we have made good progress, with Fluency growing at scale and underpinning our data capabilities. The settlement of the put options also means that only 10% of earnings will be attributable to minorities by the end of 2023 (2022: 25%), further simplifying our opportunities for growth and freeing up capital for M&A moving forward. The initial benefit of our operating model work is beginning to be seen in our business, and we expect to have completed our new organisation design by the end of the year.

 

At the heart of our strategy is creativity and award-winning work. The recent additions to our trophy cabinet are an endorsement of this, winning awards in Data (Campaign's Start up Agency of the Year - M&C Saatchi Fluency) and Consultancy (Consultant of the Year - Consulting Magazine). While winning, Agency of The Year, Sports Industry Awards (M&C Saatchi Sport & Entertainment) and Performance Marketing Agency of Year - Marketing Interactive, highlight the peer recognition of our specialisms.

 

Our ongoing ability to deliver on this strategy is underpinned by a focus on growth, execution and efficiency, and the key developments in each of these areas is outlined below. 

 

Growth Plans

 

Core to our strategy are our growth plans. As technology advances, creativity is even more integral to our future growth than it has been in our past. Our ability to stand out from the crowd, with award winning creative, is the easiest way to win new clients, and while we have many fantastic creative resources across the businesses, we had no one person representing our creative agenda at the leadership table. As a result, we have embarked on a search for a new Chief Creative Officer who will set the benchmark for our work internally, while also playing a hands-on leadership role across our UK Group.

 

We are focussing our investment and energy on growing our strategically important businesses, whilst also undertaking a review of loss-making and non-core entities. Where businesses do not have a clear route to profitability within the next 18 months we will look to divest or close them, unless there is a clear strategic imperative not to.

 

Replicating success is an easy way to accelerate growth and, as we have examined our track record, it is evident that where we provide clients with integrated solutions across regional advertising centres, we excel. As a consequence, we have decided to organise around a regional first strategy. The benefits of this include simplifying collaboration and ensuring more of our revenue can become connected, harnessing the benefits of the wider group at scale.

 

Justin Graham will lead this for us across the APAC region, while Marcus Peffers will take on an extended remit to include Chief Executive Officer of the UK Group. The increased focus on regional integration supports the drive towards connected revenue, which now accounts for c.60% of net revenue, driven by technology platforms, new capabilities and collaboration processes.

 

Execution

 

The effective execution of our strategy is critical to our success. To enable this, we have made a number of changes to how we are organised and drive performance. To improve alignment, clear accountabilities and ownership, we have simplified our leadership structure from over 20 (the old ExCo) to a new Executive Leadership Team of 13. This new team includes two newly created roles including the Chief Creative Officer as referenced above and a Chief Operating Officer who will support the execution and delivery of the global efficiency programme. A new way of working, focussed on meeting cadences, pipeline management and lead sharing has been introduced. This is in addition to work that is underway for a new LTIP and incentive plan for the Executive Leadership Team and senior leaders, to drive collaboration and entrepreneurialism.

 

Efficiency

 

We have broadened and deepened the scope of our global efficiency programme and refocussed it into two streams; quick wins and structural changes. Having identified savings of just under £4million already, we are now targeting an additional £6.2million of savings from the creation of shared service centres and centralised procurement. This will bring the total annualised savings to £10million by the end of 2024, and we expect the costs of change to be in the range of 0.5-1x of the saving.

 

During the year we intend to merge our small advertising head office in Asia with Australia, to increase resource and capability available to the APAC region. While we have also reviewed the central group structure reducing the absolute size of the team, with increased accountability for growth and strategy being devolved to the regions and specialisms, in order for the Group to focus on delivery of global efficiencies and effective capital allocation.

 

Headline Segmental Information (Like-for-Like)[1]

Specialisms

	Net Revenue	Net Revenue						Operating Profit		Operating Profit						Operating Profit Margin		Operating Profit Margin
	H1 2023	H1 2022			Movement			H1 2023		H1 2022			Movement			H1 2023		H1 2022		Movement
	£000	£000						£000		£000
Specialisms	70,158	70,250			0%			13,866		19,979			(31%)			19.8%		28.4%		(8.6)pts
Advertising	50,091	59,465			(16%)			461		4,113			(89%)			0.9%		6.9%		(6.0)pts
Group Central Costs	-	-			-			(4,353)		(4,922)			12%			-			-	-
Total	120,249	129,715			(7%)			9,974		19,170			(48%)			8.3%			14.8%	(6.5)pts

Specialisms now represent 58% of the Group's net revenue (from 49% two years ago). These specialisms contributed £70.3million of the Group's net revenue (H1 2022: £70.3million, 54%), and £13.9million (139%) of the Group's Headline operating profit (H1 2022: £20.0million, 104%). Net revenue decreased by £0.1million (0%) compared to H1 2022, the revenue decline in Media offsetting the strong growth in Issues and Passions.

Headline operating profit margins decreased to 19.8% from 28.4% in H1 2022, due to the impact of the revenue decline in Media (which is high margin), although this was partially mitigated in the Media specialism by headcount reductions in the US and UK. In addition, the Issues, Passions and Consulting specialisms have invested in staff to retain the best talent and added headcount to drive future growth.

Advertising contributed £50.1million (42%) of the Group's net revenue (H1 2022: £59.5million, 46%) and £0.5 million (5%) of the Group's Headline operating profit (H1 2022: £4.1million, 21%). Net revenue decreased by £9.4million (16%) compared to H1 2022. Operating profit margins decreased to 0.9% from 6.9% in H1 2022, as cost saving measures lagged the decrease in revenue.

·      Specialisms

 

 

·	Issues - driving critical global and social change, protecting the planet, transforming lives for the better A net revenue increase of £4.1million to £23.4million (+21.5%), driven by ongoing growth of the security and defense business, continuing the momentum from the prior year. New client assignments include WHO, Ofcom, and UNICEF.
·	Passions - connecting brands direct to consumers through passions and personalities A net revenue increase of £1.6million to £17.1million (+10.3%), driven mainly by the Sport and Entertainment business in the UK, which supported clients such as Barclays to maximise their sponsorship of Wimbledon, and the Sport and Entertainment business in Germany, which won new clients such as Porsche.
·	Consulting - transforming businesses by unlocking existing and new growth opportunities A net revenue decrease of £0.2million to £17.5million (-0.7%), with our CX business in the US winning additional new projects and our small startup consultancies starting to win more new business including McDonalds, Channel 4 and Nike. This was offset by a decline in our brand design business as clients pause or defer new projects.
·	Media - connecting brands with today's connected customers A net revenue decrease of £5.6million to £12.1million (-31.9%), due to the well-publicised downturn in the technology sector in the US and UK. A restructuring programme has been undertaken to mitigate the full-year profit impact of the lower revenues during H1 2023. However, we did pick up some notable wins with Amazon, Sega and TickPick.

·      Advertising - Blending marketing science with creativity through earned, owned and paid-for content

A net revenue decrease of £9.4million to £50.1million (-15.8%). The Advertising division includes a large number of businesses. We saw good revenue growth in the US, driven primarily by increased activity with Meta; Italy, driven by growth in its partnership with EY; Brazil, driven by increased spend from clients (including BASF and Uber); and UAE, where we won more work with new and existing clients. While our businesses in the UK, Australia, Germany and China, suffered revenue declines year-on-year as a consequence of the challenging market conditions.

Group Central Costs

Further to the global efficiency programme, central costs have reduced by £0.5million to £4.4million (12%). This is driven primarily by a reduction in external audit fees and executive bonuses.  

Income Statement

·	Statutory Profit Before Tax Statutory loss before tax was £5.1m (2022: £0.3m profit). This loss was primarily driven by non-trading items, such as the revaluations of put options and equity investments. A full listing of these items is set out in Note 4.
·	Taxation The effective tax rate for H1 2023 has decreased to 23.7% (H1 2022: 29.1%). This is mainly due to the takeover transaction costs in H1 2022, which were treated as non-deductible for corporation tax provision purposes.
·	Earnings   The Headline earnings decline was partially mitigated, as minority interests were further reduced in H1 to 18% (from 32% in H1 2022).

 

Balance sheet and cashflow

·	Cash and Borrowings Operating cash inflow before movements in working capital was £4.2million, which was lower than last year (£7.7million in H1 2022), but in line with the lower profitability. We invested £1.6million, similar to last year, buying replacement IT equipment, fit-outs for new offices in Dubai and Berlin, and procuring new software. We paid out £3.3million to settle put options and reduce our minority interests (with more to come in H2). We also paid what was due on our property leases (£4.4million), down from £4.9million last year. Cash net of bank borrowings at 30 June 2023 is £15.4million, compared to £30.0million of net cash at 31 December 2022 and £39.7million net cash at 30 June 2022.
·	Working Capital Movement Trade and other receivables decreased by £15.7million (11%) between 30 June 2022 and 30 June 2023, driven by the reduction in activity. Trade and other payables decreased by £33.1million (19%) between 30 June 2022 and 30 June 2023, driven by the reduction in activity and lower levels of cost accruals. Net working capital decreased by £6.8million since the beginning of the year. This has been driven by lower trading volumes (which has reduced our ongoing positive working capital position) and one-off timings on when suppliers have been paid and clients have been billed in June (versus December). We expect much of this to reverse in H2.
·	Put Options Based on the put option holders that have exercised in 2023, around 50% of the remaining liability will be settled in H2 2023. This is expected to reduce minority interests to 10% of Headline earnings in 2023, down from nearly 40% in 2019. We expect the remaining liability at the end of the year to be around £15m, and this will be settled over the next five years.
·	Other Balance Sheet Movements The other movements include the revaluation of unlisted equity investments held in early-stage companies, reported as financial assets at fair value through profit and loss. The revaluation of £1.9million of these companies is excluded from Headline results.

 

Notes to Editors

 

Company

M&C Saatchi plc, a company incorporated and domiciled in England and Wales with company number 05114893, listed on the AIM Market of the London Stock Exchange plc.

 

Group

The Company and its subsidiaries.

 

Headline results

A self-defined alternative measure of profit that provides a different perspective to the Statutory results. The Directors believe it provides a better view of the underlying performance of the Company, because it excludes a number of items that are not part of routine business income and expenses. These Headline figures are a better way to measure and manage the business and are used for internal performance management and reward. "Headline results" is not a defined term in IFRS.

 

Headline results represent the underlying trading profitability of the Group and excludes:

·	Separately disclosed items that are one-off in nature and are not part of running the business.
·	Acquisition-related costs.
·	Gains or losses generated by disposals of subsidiaries and associates.
·	Fair value adjustments to unlisted equity investments, acquisition related contingent consideration and put options.
·	Dividends paid to IFRS 2 put option holders.

A reconciliation of Statutory to Headline results is presented in Note 4.

 

Operating profit margin

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

 

Net cash

Net cash refers to cash and cash equivalents, less borrowings of the Group, derived from the accounts in the balance sheet, excluding lease liabilities.  

 

Net revenue

Net revenue is equal to revenue less project cost / direct cost. It is not an IFRS defined term. It is, however, used as a key performance indicator by the Group.

 

Revenue

Revenue comprises the total of all gross amounts billed, or billable to clients in respect of commission-based, fee-based and any other income where we act as principal and our share of income where we act as an agent. The difference between Billings and Revenue is represented by costs incurred on behalf of clients with whom we operate as an agent, and timing differences where invoicing occurs in advance or in arrears of the related revenue being recognised.

 

EBITDA

EBITDA is earnings before depreciation, amortisation, finance expense and taxation, and excludes any charges relating to IFRS 16. It is not an IFRS defined term. It is, however, used as a key performance indicator by the Group.

 

Billings

Billings comprise all gross amounts billed, or billable to clients in respect of commission-based and fee-based income, whether acting as agent or principal, together with the total of other fees earned, in addition to those instances where the Group has made payments on behalf of customers to third parties. It is stated exclusive of VAT and sales taxes.

 

Minority interests and non-controlling interests

Within the Group, there are a number of subsidiary companies and partnerships in which employees hold a direct interest in the equity of those companies. These employees are referred to as minority shareholders. Of these subsidiary companies and partnerships, most account for the shareholding of their minority shareholders as a management incentive (through the award of conditional shares) and are 100% consolidated in the Group's financial statements. The remaining four subsidiary companies (including one without a put option) account for their minority shareholders as non-controlling interests, a defined IFRS term, with their share of the Group's profits being shown separately on the Income Statement.

Unaudited Consolidated Income Statement

 

				Six months ended 30 June 2023			Six months ended 30 June 2022			Year ended 31 December 2022
	Note				£000			£000			£000
Billings					250,448			262,208			597,520
Revenue					216,672			221,699			462,533
Project cost / direct cost					(96,281)			(92,305)			(191,393)
Net revenue					120,391			129,394			271,140
Staff costs					(99,030)			(94,401)			(198,765)
Depreciation					(4,458)			(4,543)			(9,326)
Amortisation					(397)			(454)			(1,060)
Impairment charges					(426)			-			(564)
Other operating charges					(17,731)			(27,712)			(49,474)
Other (losses)/gains					(1,922)			452			(1,403)
Operating (loss)/profit					(3,573)			2,736			10,548
Share of results of associates and joint ventures					(14)			-			(10)
Gain on disposal of subsidiaries					304			-			-
Finance income					874			70			391
Finance costs					(2,650)			(2,501)			(5,506)
(Loss)/profit before taxation					(5,059)			305			5,423
Taxation					(1,223)			(4,294)			(5,178)
(Loss)/profit for the period					(6,282)			(3,989)			245
Attributable to:
Equity shareholders of the Group					(6,376)			(4,137)			90
Non-controlling interests					94			148			155
(Loss)/profit for the period					(6,282)			(3,989)			245
(Loss)/Earnings per share
Basic (pence)		4			(5.22)p			(3.38p)			0.07p
Diluted (pence)		4			(5.22)p			(3.38p)			0.07p
Headline results
Net revenue					120,391			129,394			271,140
Operating profit		4			9,980			18,079			35,388
Profit before tax		4			8,848			16,041			31,833
Profit after tax attributable to equity shareholders of the Group		4			5,462			7,790			18,105
EBITDA					14,524			22,774			45,168