Publicis Groupe : 2016 annual results

2016 Annual Results

February 9, 2017

2016 Results

(1)  After elimination of impairment charges, amortization of intangibles arising from acquisitions, main capital gains (or losses) on disposals and revalued earn-out payments
(2)  Dividend to be proposed to the Shareholders' AGM on May 31, 2017

Q4 2016

Maurice Lévy, Chairman and CEO of Publicis Groupe:

"Publicis Groupe's 2016 results are confirmation - if needed - of the exceptional strength of our business model.  As previously announced, all our indictors have increased: revenue, operating margin (amount and percentage of revenue), headline diluted EPS and dividend payout. On top of these positive elements, it worth mentioning the very high level of free cash flow generation and debt reduction.

These results have been achieved against the backdrop of a modest organic growth rate, mainly due to lower US revenue as a result of media accounts lost in 2015 and the first half of 2016, but also to serious issues at Razorfish.  This led us to merge Razorfish and SapientNitro in order to create the world's first entity dedicated to consumer experience, and to book an impairment charge in our 2016 accounts. After this impairment, the balance sheet now shows very solid indicators with a debt / equity ratio of 0.21 and liquidity of close to five billion euro, considerably enhancing our agility.

2016 was devoted to the implementation of Publicis Groupe's new organization and transformation from an "advertising holding company" to a "connecting company" with the creation of a completely new approach called "The Power of One".  The results of this have been excellent since they were first felt in the summer of 2016, with remarkable client successes such as Asda in the UK, Wal-Mart in the USA, account wins including Merck, KFC and, more recently, HSBC, but also the return of Special K and the retention of Mars with a budget extension and the recent retention of GMC after a lengthy review.  This new approach is still in the very early stages but, given the results already achieved, strikes me as very promising.

2017 clearly marks the beginning of a new era, as much for the market as for our Groupe. Society is evolving spectacularly as the exponential development of digital and other technologies obliges companies to undergo very deep transformation.  Outcomes of referendums in the UK and Italy and elections in the US have rung in geopolitical upheavals bringing with them new uncertainties for Europe whereas America's traditional positions seem to produce economic consequences that are difficult to gauge.

Our Groupe is ready for this new world thanks to its high-potential digital assets and capacities to help our clients embrace this new order, including help with their own transformation.  And we have a new generation at the helm. 

After 30 years devoted to developing the superb brand that is Publicis and making the Groupe a global player, I will be passing over the chairmanship of the Management Board to Arthur Sadoun on June 1.  Arthur has demonstrated the very broad range of his abilities over the last ten years, he is a great professional driven by his passionate approach to clients and his desire to make them winners.  He understands the world of tomorrow, knows how to attract talent and bring people together to work in multidisciplinary teams, which is the only way to get the best out of The Power of One which has already proved such a success. As for myself, subject to approval from the shareholders, I will succeed Elisabeth Badinter as Chair of the Supervisory Board and will have the immense pleasure of having her continued vigilant presence on the Board.  At this point, I would like to express heartfelt thanks to the people who, through their input over the last three decades, have made Publicis what it is, namely the world's third-ranked global communications group, first in digital, with operations in over 100 countries. Over the last 30 years, Publicis has multiplied its revenue by 50, its staff by 25 and its market cap by 100.

We are and will continue to be ambitious.  I know that our successors are ready to step in, and they are energetic, curious, committed, creative and very determined.  This new team will build Publicis Groupe's future by achieving the ultimate goal of our transformation with The Power of One.  To defy the challenges of the future, Arthur Sadoun can count on the top-flight expertise of Management Board members Jean-Michel Etienne and Anne-Gabrielle Heilbronner, enriched by the arrival of Steve King whose stellar career to date commands admiration.

To achieve our future objectives we must improve our organic growth.  The first half of 2017 will still bear the marks of previous difficulties, but as of the second half year, the Groupe should be back to levels of growth which are more comparable to its peers.  And beyond, growth should be sustainably back on track with performances that are more consistent with our profile and history.

Our recent commercial successes, which we should leverage to improve our margins and continue to generate substantial cash flow, give me confidence about our future.  This is why we are planning to propose to the Shareholders' AGM to approve a 16% increase of our dividend to 1.85 euro, and we are confirming our objectives for 2018."

Publicis Groupe's Supervisory Board met on February 8, 2017, under the chairmanship of Elisabeth Badinter, to examine the annual accounts for 2016 presented by Maurice Lévy, Chairman of the Management Board and Chief Executive Officer.

1 - KEY FIGURES

(1)  After elimination of impairment charges, amortization of intangibles arising from acquisitions, main capital gains (losses) on disposals and revaluation of earn-out payments

2 - BUSINESS ACTIVITY IN 2016

Publicis Groupe's business environment was one of global growth comparable to that of 2015, but characterized nonetheless by recovery in the emerging markets and continued sluggish performance in the American and European economies.  Inflation remained low.  Organic growth was weak, as expected, at +0.7% due to accounts lost in 2015 and early 2016 and to issues at Razorfish.  Given this context, the Groupe has taken the required decisions to re-launch growth, fully benefit from Razorfish's assets, and keep costs under strict control.  Therefore, operating margin rate improved slightly and Free Cash Flow rose by 14.9% to 1.261 billion euro.

2.1 - Q4 2016 revenue

Publicis Groupe's consolidated revenue for the fourth quarter was 2,665 million euro, down 2.5% from 2,734 million in Q4 2015.  Exchange rates impacted revenue negatively by 27 million euro, i.e. 1.0% of revenue in Q4 2015.  Net acquisitions contributed 25 million euro to revenue in Q4 2016, i.e. the equivalent of 0.9% of Q4 2015 revenue.  Growth at constant exchange rates was -1.6%.

Organic growth was -2.5% in the fourth quarter.  It was negative due to media accounts lost in 2015 and early 2016, the fact that certain digital projects reached completion at Razorfish before others had fully ramped up, and a very unfavorable basis on comparison in North America in Q4 2015 (+6.3%) where the market was not as strong as anticipated.

Breakdown of Q4 2016 revenue by region 

2.2 - 2016 Revenue

In 2016, Publicis Groupe's consolidated revenue rose to 9,733 million euro, an increase of 1.4% from 9,601 million in 2015.  Exchange rates adversely affected revenue by 177 million euro, i.e. 1.8% of 2015 revenue.  Net acquisitions contributed 247 million euro to revenue in 2016, i.e. the equivalent of 2.6% of 2015 revenue.  Growth at constant exchange rates was +3.3%.  Organic growth was 0.7% in 2016.

Breakdown of 2016 revenue by region 

Europe posted 3.6% revenue growth.  When the impact of acquisitions and exchange rates is factored out, organic growth was +5.9%.  France performed well (+6.5%), and Germany and Italy both posted strong momentum (+8.0% and 6.3% respectively), all shored up by the improving macroeconomic situation.  The situation was volatile in Russia where growth for the full year was +11.8%.  The UK showed a marked improvement at +5.9% (including organic growth in excess of 8% in the second half of the year, following on close to 4% in the first half).  Overall, digital progressed sharply in Europe, achieving growth of 11.1%.

North America reported growth of 1.0% but organic growth of -2.2% due notably to a decline in the fourth quarter (-6.9% on an organic basis).  This downturn is attributed to the loss of accounts, particularly during the Mediapalooza, but also to the completion of certain digital projects at a time when more recent projects have yet to ramp up to cruising speed.  In addition, organic growth was high in Q4 2015 (+6.3%) which served as the basis of comparison for Q4 2016, where the market was not as strong as anticipated.

Asia Pacific achieved reported growth of 1.8% and organic growth of 1.5%.  China decreased in the second half year (-6.0%) as a result of difficulties encountered by Genedigi, after achieving +4.4% in the first half year.  India and Singapore posted full year growth of 0.5% and 8.1% respectively.

Latin America was down 11.4% on a reported basis, mainly because of exchange rates, whilst organic growth was +2.9% for the period.  Brazil saw its revenue fall by 1.9% in 2016 despite Rio hosting the Olympic Games. This represents an outperformance in a declining market overall.  Mexico continued to post strong growth (+7.7% in 2016).

The Middle East & Africa region achieved reported growth of 4.4% and organic growth of 1.1%.

2016 organic growth by region: digital and analog

The Groupe's growth continued to be driven by its digital activities (organic growth of +3.2%). North America saw its digital growth decline by 0.4% due to the impact of media accounts lost and the completion of certain digital projects at Razorfish at a time when new projects are only slowly gathering speed.  Razorfish posted negative growth in double digits. It should also be mentioned that analog activities continued to decline.

3 - ANALYSIS OF THE KEY FIGURES

3.1 - Income statement

Operating margin before depreciation and amortization reached 1,682 million euro in 2016, up 1.3% from 1,661 million in 2015, i.e. a percentage margin of 17.3% of revenue (stable versus 2015):

-    Personnel costs totaled 6,059 million euro at December 31, 2016, up 1.2% from 5,988 million in 2015.  Fixed personnel costs amounted to 5,268 million, i.e. 54.1% of total revenue (unchanged versus 2015).  Freelance costs reached 444 million euro in 2016, after 414 million in 2015.  Restructuring costs stood at 73 million euro in 2016 as the Groupe implements its reorganization and adjusts to an environment that is increasingly digital-oriented, while continuing to generate synergies from the Sapient acquisition.  Operational efficiency will be enhanced by the various projects in which the Groupe continues to invest (ERP roll-out, the development of production platforms, on-going regionalization of the Shared Services Centers, as well as a number of technological developments).

-    Other operating costs (excluding Depreciation & Amortization) totaled 1,992 million euro after 1,952 million in 2015.  These costs represented 20.5% of consolidated revenue (versus 20.3% in 2015).

Depreciation for the period was 166 million euro, i.e. a 4.6% decrease on 2015.

Operating margin rose to 1,516 million euro, i.e. a 2% increase over 1,487 million in 2015. As a percentage of revenue, the margin stood at 15.6%, compared with 15.5% in 2015. As a percentage of revenue, operating margin was impacted by 20 basis points as a result of acquisitions and currencies impact versus the euro.  At constant perimeter and currencies, operating margin as a percentage of revenue improved by 30 basis points due to the positive impact in 2016 of cost reduction measures implemented since end 2015 including Sapient cost synergies, lower restructuring charges, partly offset by higher costs related to the ERP deployment and other IT initiatives.

The operating margin by region was 15.5% in Europe, 15.5% in North America, 15.9% in Asia Pacific, 14.0% in Latin America and 17.4% for the Middle East & Africa region.

Amortization of intangibles arising from acquisitions totaled 79 million euro in 2016, down from 89 million in 2015. The Publicis.Sapient's assets, which goodwill and intangible assets amount to 4.9 billion euro, have been analyzed thoroughly given the underperformance of some of its entities.  The solution hub has been confronted to delays in the integration of acquisitions, in particular Razorfish.  A new management team has been put in place and required investments in consulting teams have been revalued.  New forecasts now factor in a faster-than-expected growth in the business transformation activity but a slower-than-anticipated growth for the remaining digital activities, which in total, will impact estimated growth of the coming years. In order to take those new market conditions into account, which impact both the value of some of Publicis.Sapient's assets and future cash flows of the solution hub, the Groupe booked a non-cash depreciation charge of 1,440 million euro (including 1,392 million for Publicis.Sapient), after an impairment of 28 million in 2015.
Other non-recurring income (expenses) amounted to income of 12 million euro, corresponding mainly to the capital gain on the disposal of Mediavision, after income of 8 million euro in 2015.

Operating income totaled 9 million euro in 2016, versus 1,378 million in 2015.

Financial income (expense), excluding earn-out revaluation, amounted to a net expense of 74 million euro in 2016, after an expense of 77 million euro in 2015. The cost of net financial debt is stable - 74 million euro in 2016 as in 2015 - and the other components of the financial income (expense), mainly foreign exchange gains and losses as well as expenses relating to the discounting of long-term provisions, are slightly improving, from 3 million euro expense in 2015 to 0 in 2016.
Revaluation of earn-out costs totaled 108 million euro in 2016, up from 12 million in 2015.  This includes revaluations concerning Genedigi (end of earn-out), Heartbeat, Turner Duckworth, 3 Share as well as a certain number of more recently acquired subsidiaries whose expected performance has been revised upwards.

Income tax for the period was 342 million euro, i.e. an effective tax rate of 29.0%, by comparison with 386 million in 2015, when the effective tax rate was 29.9%.

The Associates' share of profit was a negative 5 million euro in 2016, after a positive 8 million in 2015.  Minority interests totaled 7 million euro in 2016, versus 10 million in 2015.

Overall, Net income attributable to the Groupe was a loss of 527 million euro in 2016, after a profit of 901 million in 2015.

After elimination of impairment charges, amortization of intangibles arising on acquisitions, the main capital gains (or losses) on disposals and the reappraisal of earn-out costs, headline net income group share was 1,015 million euro up 2.3%.

Headline diluted EPS was 4.46 euros up 1.6%.

3.2 - Free Cash Flow

Before changes in working capital requirements, Free Cash Flow was 1,261 million euros in 2016, compared to 1,097 million in 2015.

3.3 - Net debt

Net debt amounted to 1,244 million euro at December 31, 2016 (i.e. a debt / equity ratio of 0.21) down from 1,872 million at December 31, 2015.  The Groupe's average net debt was 2,385 million euro in 2016, down from 2,429 million in 2015, bearing in mind that the Sapient acquisition was completed on February 6, 2015.

4 - HIGHLIGHTS FROM 2016

4.1 - Reorganization

During the first half of 2016, Publicis Groupe reorganized its operations by placing its clients at the very core of the Groupe, thus providing them with access to all the Groupe's capabilities ("The Power of One") for their commercial, marketing or transformation requirements.

This reorganization entailed Publicis.Sapient, one of the Groupe's hubs, merging SapientNitro and Razorfish to create SapientRazorfish, thus combining the consumer experience and technological know-how of the two entities to meet clients' needs even better than before.  The merging of these two entities led to the creation of an undisputed leader positioned as a new type of partner, capable of rethinking the future based on a client-centric model, while leveraging extensive experience in change management.

4.2 - Groupe commitment to start-ups

-    Viva Technology Paris. In conjunction with Groupe les Echos, Publicis Groupe staged a global event in Paris bringing together start-ups and the main stakeholders in the digital environment.  This rendezvous, from June 30 to July 2, 2016, attracted 5,000 start-ups, dozens of major industrial groups and investors, and included over 300 conferences with the top names in the global hi-tech sector. With over 45,000 visitors in three days, Viva Technology proved a tremendous success and underscored the pre-eminent place of Publicis Groupe in the global digital economy.  The annual event will be back for the second edition from June 15, 2017, just before the Cannes Lions Festival.

-    Publicis90. For its 90th anniversary, Publicis Groupe launched a project named Publicis90.  The idea was to provide 90 projects or start-ups with financial aid and the support of the Groupe's digital experts.  After an initial phase of stringent selection over a period of several months, the winners were picked from among the 3,500 contestants representing 130 countries, and received their awards at a ceremony held during Viva Technology.

4.3 - Global partnership with Tencent

Publicis Groupe has announced a strategic partnership with Tencent, the internet giant that operates the most popular social and media platforms in China.  This partnership is a first-of-its-kind collaboration between a global communications group and China's biggest internet company.  It spans the Groupe's three hubs (Publicis Media, Publicis Communications and Publicis.Sapient) as well as Tencent's eleven product lines.  This agreement will cement the groups' relationship at global level while providing clients with access to all Tencent's innovations via a unique, borderless approach built on three pillars, i.e. tremendous innovation capacity, an exceptional source of data, and innovative web content.

4.4 - Acquisitions

-    MercerBell, a leading Australian agency in the field of customer experience.  MercerBell is specialized in CRM and digital strategy, creativity, content and technology, and will be integrated into Saatchi & Saatchi.  This agency, which was founded in 1999, has a team of 65 professionals and a customer base that includes Toyota, Foxtel, Quantas, BT, Allianz and ASX

-    Vertiba, the Salesforce partner, is specialized in marketing solutions.  Founded in 2010, Vertiba is headquartered in Boulder, Colorado.  Vertiba's skills will be integrated into the Publicis.Sapient platform

-    Seven Seconds, the London (UK) based e-commerce and digital specialist, was founded in 2013 and will be integrated into BBH.  Its main clients are British Airways, Barclays, Boots, Tesco Retail and Tesco Bank

-    Venus Communications, is a leading public relations agency in Vietnam.  Venus has been integrated into the MSL brand, which in turn is part of Publicis One in Vietnam.  Over the last ten years, Venus and MSL have worked together successfully on numerous assignments. The agency, which was founded in 1998, has 40 employees and a prestigious client portfolio that includes MasterCard, FedEx, Rolls Royce, BAT, Mead Johnson and Sanofi

-    Troyka Group : Publicis Groupe has taken a stake in West Africa's first fully-integrated communications services group.  The Troyka group is comprised of six agencies, i.e. Insight Communications, The Thinkshop, All Seasons Media, Media Perspectives, The Quadrant Company, and Hotsauce.
Starting out with Insight Communications in 1980, the Troyka group now has 300 employees over six agencies across the entire region.  The Troyka agencies work with prestigious international brands such as Heineken, Shell, Samsung, Unilever, Google, P&G, Microsoft, Ford and Axa, as well as with national brands that include Oando, Nestoil, Africa Investor, Jagal, and Olam.
Publicis Groupe has been investing regularly in Africa in recent years, in view of the high growth potential of this market.  By way of this equity investment, Publicis Groupe will use Troyka to launch its network in Nigeria, thereby creating a powerful communications agency that will have a competitive edge in all skills sets in West Africa.

4.5 - Finance

On October 28, 2016, Publicis Groupe - rated Baa2 by Moody's and BBB+ by Standard and Poor's (both with a stable outlook) - announced that it had successfully priced its EUR 500 million bond issue maturing November 3, 2023, with an annual coupon of 0.5%. The net proceeds will be used to partially repay the USD 1.6 billion bank loan subscribed in January 2015 to fund the acquisition of Sapient Corporation Inc., and to fund the Groupe's general corporate purposes.

5 - GOVERNANCE

Publicis Groupe's Supervisory Board appointed Arthur Sadoun to succeed Maurice Lévy as Chairman of the Groupe's Management Board.

From June 1, 2017, Arthur Sadoun will become Chairman of the Management Board which will be joined on the same date by Steve King, the current CEO of Publicis Media, who will team up with Jean-Michel Etienne, Executive Vice-President and CFO, and Anne-Gabrielle Heilbronner, Secretary General.

To develop the Groupe, the Management Board can count on top-flight leaders and the Groupe's transformation team: Alan Wexler and Chip Register at Publicis.Sapient, Nick Colucci at Publicis Health, Jarek Ziebinski at Publicis One, as well as Rishad Tobaccowala in the field of strategy and the client-centric approach.

The Supervisory Board has proposed that, upon completion of his term of office, Maurice Lévy join its ranks and take over as Chairman.  This motion will be put to a vote before the shareholders at their AGM on May 31, 2017.

6 - OUTLOOK

The implementation of "One company" and the transformation from a "holding" to a "connecting company" are taking place according to the announced plan, with an excellent feedback from clients to the "Power of One" proposal. Recent successes in client retention (GMC, Mars, Special K) as well as client and budget wins (HPE, USAA, HSBC) are promising signs that Publicis Groupe's growth will resume.

The first half of 2017 will be impacted by some account losses and the difficulties at Razorfish, but they will progressively be offset by the ramp up of account wins.  The 2018 plan should be delivered as expected.

The economic and business environment for our clients on one hand, and the "One company" and transformation concepts on the other hand, should be favorable to Publicis Groupe.

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Disclaimer

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 unfavourable 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. This press release contains inside information as per the definition of article 7 of Regulation n°596/2014.

About Publicis Groupe - The Power of One
Publicis Groupe [Euronext Paris FR0000130577, CAC 40] is a global leader in marketing, communication, and digital transformation, driven through the alchemy of creativity and technology. Publicis Groupe offers its clients seamless access to its tools and expertise through modular offering. Publicis Groupe is organized across four Solutions hubs: Publicis Communications (Publicis Worldwide, Saatchi & Saatchi, Leo Burnett, BBH, Marcel, Fallon, MSL, Prodigious), Publicis Media (Starcom, Zenith, Mediavest | Spark, Blue 449, Performics), Publicis.Sapient (SapientNitro, Razorfish, DigitasLBi, Sapient Consulting) and Publicis Health.These 4 Solution hubs operate across principal markets, and are carried across all others by Publicis One, a fully integrated service offering bringing together the Groupe's expertise under one roof. Present in over 100 countries, Publicis Groupe employs nearly 80,000 professionals. 
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