Oct 23, 2014
Executives
Maurice Lévy – CEO Jean-Michel Etienne – CFO
Analysts
Brian Wieser – Pivotal Research Conor O’Shea – Kepler Cheuvreux Bruno Hareng – Oddo Securities Julien Roch – Barclays Will Smith – Goldman Sachs Charles Bedouelle – Exane BNP Paribas Ian Whittaker – Liberum Capital Ruchi Malaiya – Bank of America Merrill Lynch Dan Salmon – BMO Capital Markets
Operator
Good day, and welcome to the 2014 Quarter Revenue of Publicis Groupe Presentation. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Maurice Lévy, CEO of Publicis Groupe. Please go ahead.
Maurice Lévy
Thank you. Bonjour everyone.
Thank you all for joining us for our third quarter revenue call. I am with Jean-Michel Etienne and our Investor Relations directors.
And I hope that everyone had a chance to review our release. Both, the press release and the presentation are posted to the Publicis Groupe website, so you can consult them whenever you want.
And if you want to follow the conversation, you can now be connected to our website and follow the presentation. Today’s call is about the third quarter numbers.
As you know, we have planned to present the strategic update on the 2018 plan, and this will take place on November 7. Details will be given later.
I’d like to begin the call with some small comments. Following my remarks, we will then review our numbers for the third quarter and year-to-date, and then Jean-Michel and I will be happy to take your questions.
At this point, you have already seen our release and all our numbers as published. I want to tell you bluntly that, even this very modest 1% organic growth is a slight improvement from Q2, which was however read, it is not the level of growth you or we expected.
There are many reasons for that, but to put it simply, this is the end of a bad cycle, during which, most of the management attention was not focused on growth or short-term performance. We have been focused on other plans, that you all know too well, and have not taken corrective actions in due time, and thus had delayed management changes or other decision when needed.
As I said, this is the end of a bad cycle. This is now behind us.
We are aggressively back on new business and are making sure, that all our teams are energized with a clear roadmap to growth. As I said management changes and decision have been already made on many fronts at top management of the group.
Anne-Gabrielle Heilbronner is joining the Directoire. We have created the Directoire+ with the addition of key leaders for our future.
Laura Desmond, CEO of Starcom MediaVest; Steve King, CEO of ZenithOptimedia; Rishad Tobaccowala, the Chief Strategist of Publicis Groupe; and Arthur Sadoun, CEO of Publicis Worldwide. Kevin Roberts will help me shape the future management of the Group in his new role as Head Coach.
Saatchi & Saatchi will, as of January 2015, be led by a superb team. Robert Senior, CEO; Chris Foster, CEO and their marching order are very simple, it is all about growth.
Razorfish, which is part of our problem. Razorfish suffered greatly in 2014, due to what we can call a perfect storm.
The Motorola move from Google to Lenovo, the Blackberry move from consumer communication to professional communication, and the end of some important one-off contract, and the poor performance of Razorfish compared to forecast had an impact on the Group growth of about 200 basis points. Razorfish is being reorganized.
We are building whole new offering, which would be called Razorfish Global, including key assets from Nurun and our Rosetta operations, under the leadership of Tom Adamski, who has been till now the CEO of Rosetta with very good results. I don’t want that you think that there is something broken with our digital operation, because when you look at our combined digital operation, and despite the service impact of the negative performance of Razorfish, we are delivering more than 9% growth.
And if Razorfish had delivered, we would had been somewhere in the region of 12% to 13%. We have stellar operations delivering great growth with Starcom MediaVest Group, ZenithOptimedia and Publicis Healthcare Communications, which is recovering strongly from the titan cliff.
Our creative agencies are doing well, winning awards and new accounts, but suffering from the heavy loads of the shrinking analog business. Leo Burnett has planned to enhance growth, and the new management of, both, Publicis Worldwide and Saatchi & Saatchi, plus new ways of working with integrated operation that are breaking down the silos, should generate more growth in 2015.
We are quite confident on this, and this is also true for our PR operations. One of the issue that we had been facing in the past months is the growth in BRIC and MISSAT, and more generally in emerging markets, where performance was uneven.
We have eyed Axel Duroux to focus on those markets across all brands. The pressure of the speed of digital and technological innovations has not yet been fully taken into account by the advertisers and the impact on their business transformation positively, when it comes to omni-channel is not yet fully faded.
This will have huge consequences on Agency’s businesses and services. The good news is that Publicis is ready, and Publicis is probably the most ready of any of the holding company.
We are undoubtedly the most prepared, not only to back-to-back serve our clients in branding and communication, but also in omni-channel, programmatic, e-commerce, consulting and everything to help them moving from the analog world to the digital transformation. They need to build up business for the future.
One promising example is the Samsung Pitch. All holding companies had been invited, plus some independent to pitch four streams; Media, Digital, Creativity and Networks.
Publicis Groupe won in all the four pitches. Media with Starcom; Digital with Rosetta and Digitas; Creativity with BBH; and Network with Leo Burnett.
To conclude, Q3 performance is an unfortunate hiccup. We should not look at this as anything as that, but in our growth and we are right on where we should and back on the front lines.
I shall now go through the Publicis Groupe third quarter numbers in greater detail, but you have already most of the information. So you have read the disclaimer because I have made my speech on that disclaimer.
And it was a reason to give you all the necessary time to really it fully and to please our legal department. We move now to Slide #3, which is about our revenue.
Revenue is at the level of EUR 1.748 billion, which is an increase of 4.4% for Q3. If we exclude Forex impact, it’s 4.6% up, and organic growth, very poor 1%.
I am not pleased with that number, but this is the reality and we have to face it. Year-to-date revenue is at EUR 5.106 billion.
The increase compared to last year published number is 1.6%. If we exclude the Forex impact, it’s 4.8%.
And organic growth is at 1.5%. On the following Slide #4, you have the revenue by geography.
You will see that we have been firstly hit by Europe, which is at negative growth, 0.5%. North America is not at the level and this is mainly due to Razorfish impact.
And BRIC and MISSAT are just above the surface of the water, plus 0.6%. The rest of the world is at 3.1%, which give us 1% in total.
I am not going to insist on the increase by market or by region, because you have all the numbers that you can read. On year-to-date revenue by geographies of the first nine months which is Slide #5.
Europe is still negative; North America is up by 2.3%; BRIC and MISSAT not very different, up by 0.5%; Rest of the world, up by 4.7%. If we had to publish our numbers in US dollar, organic growth will not change.
And we will have Europe up by 7.5% compared to last year, and North America 4.9%; BRIC and MISSAT, flat; Rest of the world, slightly down. And the variation would have been 4.5%.
One slide which I believe is interesting is the growth by countries. We are not giving a lot of details, but we have picked some significant countries by category.
Above 5% and some of them are with double-digit growth. We see Argentina, Australia, India, which is a good news because India has been negative the two former quarters.
Malaysia, Poland with very good growth. Russia, Saudi Arabia, Singapore.
That’s few of the countries that we consider that these are the most significant. From zero to 5%, we have by alphabetical order, the Arab Emirates, Canada, France positive, Germany positive.
Japan, the Philippines, Sweden, USA. There are a few countries here also, but not much to put as telling a lot regarding the numbers.
Below the level of the sea at negative numbers, we have most of the other European countries. When I say most, it’s almost all, plus Brazil, which is still a little bit in trouble, Greater China, Israel, Korea, Mexico, South Africa and Turkey.
We will move now to better news, because even if the picture is not great, relatively bleak, there are some very good news and we should not discount them. The first one is on Slide 8, where you see that on digital, we are reaching year-to-date share of digital revenue of the whole Group, 41.6% and we are good for our 50%.
This compared with the 37.6% of last year. We have an amount of EUR 2.126 billion for the first nine months in absolutely euros, and the organic growth is 9.1%.
If we look at the following slide, it is about the so-called, fast-growing markets, which are not growing that fast any more, not only for us but in general. And we see that the share has declined a little bit, but this is due to the fact that we have made some acquisition in western countries and the total is now 23% compared to 24.1%.
In does represent EUR 1.176 billion and the growth is not great, 2.1%, however, much better than the total growth of the Group, double of it. If we look at the Slide #10, we see that a table with organic growth by region, Europe, North America, BRIC and MISSAT, rest of the world and activity, digital and analog.
Digital is up in total for the first nine months, up by 9.6%. And as I said, it could have been a fortune to say, if we had not the hiccup of Razorfish, we would have been at probably 12%, 13%.
Europe is posting 10.3%. North America, due to Razorfish, 4.5%.
BRIC and MISSAT 35.6%. Rest of the world, 50% plus.
Analog is where we are suffering most. And we see that in Europe, we are down by 6%.
In North America by 1.8%; BRIC and MISSAT, 6.2% down; rest of the world, 7.6% down. Total 4.6%.
Clearly, this is where we are suffering most and this is the area we are correcting now. Year-to-date, I’m not going to insist.
The numbers are almost the same and we see no big differences. If we summarize at this point in time, what the issues had been for the third quarter and year-to-date, it’s a sharp decline in analog.
It is a one-offs end of contract plus the Motorola and Blackberry impact, which are affecting Razorfish, which have been faced with a perfect storm and a slow recovery on BRIC and MISSAT and Europe contrasted. To be honest, I think that as I should take the responsibility for that, we have been too much focused on our project and we are paying the price for that, but as I said, this is now the best.
Q3 and year-to-date opportunities on Slide 13. We have solid digital growth despite Razorfish decline.
Healthcare, strong growth recovery. SMG & ZO, strong performance.
We had made the necessary management changes, is what I have described at the beginning of my comment, and we have reorganized Razorfish with a new global offering, which we believe will be extremely attractive. We will move now to the financial section, as there is only three slides coming that will continue to make the comment under the supervision of Jean-Michel.
Page 15, you see that on average net debt, we are cash positive as of December 30. And our net debt at December 30, we are slightly negative with EUR 93 million net debt.
So as we can see, this is almost not a debt. When we move to what is our gross debt at December 30, 2014 on Slide 16.
We see that we have EUR 868 million of gross debt. More than half of it, EUR 556 million is due between October 2014 and September 2015.
And as you know, there is no covenants. Moving to Slide 17, that I will not comment in detail is we are showing our liquidity as of the end of September.
It is at the level of EUR 2.7 billion available and we feel good with this. Now a section that you are waiting for, which is the outlook.
It is as always difficult to speak about the fourth quarter, because we have always uncertainties with the fourth quarter, which is used very often as a variable adjustment by some companies. So on Slide 19, you will see that we have two challenges on revenues.
One is the uncertainties in emerging markets, the challenging environment in Europe, on top of the normal regular uncertainty of November and December. The opportunities: sustained growth in digital expected in Q4; strong recovery in Healthcare, which is confirmed.
If we move to the following slide, it is about margin. Our biggest challenge on margin is the fact that we are now delivering a growth, which is in line with our budget and our expectations, and therefore, we have been forced to take a few actions in order to protect our margin.
So the modest revenue growth is one – it’s our biggest issue. Talent scarcity, which is leading to a higher cost is the second issue.
There are some opportunities. The scale effect in digital, the specific cost initiatives that we have been taking and the fact that we are working for building a better strong base for 2015 in term of cost.
So all in all, what I would like to say regarding the outlook is that I don’t believe that 2014 will be a landmark in our history as one of our greatest year, to put in wisely. And we should put it behind us pretty quickly and move fast into a better 2015, delivering higher growth, stronger and the best industry margin and a very strong cash flow.
We have the resource to build this and we have the resource, thanks to our very strong balance sheet to take the necessary actions. So we feel extremely confident.
The only problem is to come pretty quickly to the end of the year. We will have on November 7, and that is our next slide, a webcast organized to talk to you in greater detail on the strategic plan revisited, and the way we will be working in order to deliver at least 100 basis points above market average in terms of growth.
The margin improvement of at least 200 basis points, and a few other aspects regarding our investors and shareholders, the early redemption of the Orane bonds, higher return to shareholders through various means, it can be either dividend or other means that we will be presenting to you. And what I would like now is that, if you don’t mind, we concentrate all the questions regarding Q3 year-to-date, the outlook for the full-year, and that you keep your question on the strategic issues and the year-to-date for November 7.
As you will see on the slide, there is a TBC, simply because I am struggling to be back from a trip on November 7, and there might be a small delay but we are shooting for that date and I’m pretty confident that we will be able to speak to you on that date. So Marian, the floor is yours now to manage the Q&A session.
And we will be, Jean-Michel and myself, at your disposal to answer all your questions. Thank you, Marian.
Operator
Thank you. (Operator Instructions) We’ll now take our first question from Brian Wieser from Pivotal Research.
Please go ahead.
Brian Wieser – Pivotal Research
All right. Thanks for taking the question.
It seems that a number of your significant media clients among the higher profile packaged goods marketers that have made [indiscernible] bringing programmatic trading in-house, the P&G model and Kellogg’s for example. So the first question is, do you feel that there is – perhaps because you have been pushing digital very hard for so many years, to some degree has that had any consequences in terms of your clients, will it be well educated think they can do this and to some degree perhaps restrain some growth in the short-term?
Separately and maybe unrelatedly, you posted some really solid growth in France and Germany. Do you see some of the turnaround there, or do you think the results are more due to Agency’s specific results?
Maurice Lévy
Thank you, Brian. I would answer immediately the second question.
It is on both case specific to us, and to the share of digital business that we have. So that’s simple for France and Germany.
It’s not yet the sign of a pick-up of the market. Regarding programmatic, it is probably one of the most complex issue and it will be probably one of the most controversial issue for the next 18 months, because there are lot of aspect in programmatic.
The first one is that there is lots of tools which exist in the market. They are not all perfectly clean, and they are not all working in total transparency.
And this is creating a little bit of a shadow on the market. The second aspect is that, there are some people we have created, some engines to open messages, to open ads, to click automatically, robots.
And in some cases, you have to pay for clicks, which are seen by nobody. That’s the second aspect.
The third aspect is that, there is a huge complexity in the algorithm, and we see a lot of progress in that field. I’d like to remember – to remind everyone that the first platform has been created by [indiscernible].
It’s Publicis Groupe who created the first platform with AOD. And we have enhanced our tools and we have something which is called VivaKi Verified.
And this is something which is demonstrating that we are controlling the audience. It is the delivery, it is in line with the promises and everything is verified.
To-date, and to my knowledge, we are the only one to do that. And we are enhancing this in other areas, and we have a transparency approach to the business.
So I guess that if we continue on that route, the people who will be winning in the eyes of the client are the people who will have the best tools, who will have the best platform, who will have the edgings to verify the audience and to make fair that the audience that is involved is real and checked seriously. So I’m pretty confident.
I don’t believe that the experience of some clients, and we respect that experience that we have seen in the past that in many areas there has been some direct operation, is something which will last forever, because of the fact that they would need to be always updated, that the investment which are behind are very heavy. And that at the end of the day, what will count is the result and making sure that the return on their investment is right.
That’s the reason why we feel confident about our approach. As we follow the idea that we should not put all our eggs in the same basket, despite the fact that we like to break some to do an omelet, we have invested in Matomy.
Matomy is an Israeli company, which is leader in its field of pure performance. So you should not care about what the audience sees, you should not care where the information are coming etcetera, they invoice on pure performance.
It’s not about click. It’s not about page views or whatever, it is about criteria which can be even case.
So they have an approach which is absolutely pure performance, they invoice only on pure performance, on agreed term and on performance which is checked. So as you can see, it is quite complicated.
And by having these two different operations, on Matomy, our objective is to remain for the foreseeable future a minority holder. We don’t want to be in this operation.
We don’t want to control it. We don’t believe it is in our interest to do it, but we want to see how this is working in the future and we want to be seeking in a company, which is today at the best in its category, and we are extremely pleased that with the first contact which we have had with the management, the teams and we feel that this is an area where we would see some very interesting development.
I have been a little bit long, Brian, but I think it was for the benefit of all the people because I know that programmatic is top of mind of everyone. Thank you, Brian.
And we move to the next question.
Operator
The next question comes from Conor O’Shea from Kepler Cheuvreux.
Conor O’Shea – Kepler Cheuvreux
Yes, thank you. Hello everybody.
Two questions from my side. First question on your comments on being overly focused on long-term projects, obviously in particular the merger, but it seems not referred exclusively to that.
Could you give a little bit more detail about that? We would assume that some of this is related to digital and maybe the e-commerce activity side, but at the same time you’re reporting very strong growth again in digital of 9%.
How do you reconcile those two statements? And also on the digital growth side.
If my numbers are correct on Razorfish, if it cost 200 basis points of growth at an organic level, it suggests Razorfish’s revenues were down by about 30%, yet digital growth was 9%. So may be if you could just reconcile that, that would be very helpful.
And second question, maybe for Jean-Michel, on the M&A consolidation effect going into the fourth quarter and what you expect for the first nine months in 2015, with respect to deals that have already been announced. If you could give us a number, that would be very helpful.
And then a final question. I know you’ve expressed to the analysts not to ask questions about November 7, but it seems in the interview that you gave in the press this morning that you may be stepping back a little bit from share buybacks.
Is that fair, or are we reading a little bit too much into that?
Maurice Lévy
I would answer the third and the first, and Jean-Michel the second. You’re reading too much.
And let’s be clear, this is something which is – I don’t know where it’s coming from. We have been just cautious and we don’t want to reveal what we will be saying at that time.
So I think it’s something which should be disregarded. Okay?
Conor O’Shea – Kepler Cheuvreux
Okay.
Maurice Lévy
It’s rhetoric. All the plans is pure rhetoric, simply because I was fed up in mentioning merger and I decided that I would not mention any more the merger.
So it’s pure rhetoric. The only thing which has been keeping us focused with the merger, far too much, and I recognize and they have said it already bluntly at our last call.
I was personally and my team too much focused on this. And this is what happened.
Regarding Razorfish, in fact, I have may be not been expressing myself very well. The 200 basis point is because of the cost of what they are not delivering, compared to what it should have been delivering.
So it’s much more in the region of 20% than 30% down. Okay?
Conor O’Shea – Kepler Cheuvreux
Okay.
Maurice Lévy
On digital, not only we are all working hard and we are all focusing on this, but this is a good spot and this is a good strategy and this is where the market is going, and being focused on this is extremely positive, because it is generating growth, it is generating better results, etcetera. So this is externally positive.
Now what has been the distraction? It’s the merger and it’s my fault.
Now Jean-Michel would speak about the M&A impact.
Jean-Michel Etienne
Conor, it’s very simple. On a nine months basis – for the first nine months of the year, the effect of acquisition on revenues is EUR 160 million.
And on the full-year basis, it is easy to make a figure [ph] based on what we know today is EUR 220 million of additional revenues.
Conor O’Shea – Kepler Cheuvreux
And for the first nine months of next year for – in respect of deals already announced full-year effect and so on, what’s the tailwind?
Jean-Michel Etienne
Do we get this number later on, because I don’t have this with me, but this is – you can expect something on the same region I guess, EUR 160 million for the first nine months, EUR 220 million for the full-year. This is an estimation for the full-year of course, because we’ll have probably a few small acquisitions.
Conor O’Shea – Kepler Cheuvreux
Okay, great. Thank you.
Jean-Michel Etienne
Thank you.
Maurice Lévy
Thank you, Conor. And we move to the next question.
Operator
Next question comes from Bruno Hareng from Oddo Securities.
Bruno Hareng – Oddo Securities
Yes, hi. Thanks for taking the question.
Maurice, you mentioned some measures taken on cost. Could you be a bit more specific on this?
And the underlying question is, I’m wondering whether there is a risk that margin might slip below 16% in 2014 versus the 16.5% of last year? Second question, growth was not really impressive to me in the UK.
Could you explain a bit more, I mean what happened, and if you expect an upturn in the next few quarters? Thank you very much.
Maurice Lévy
Bonjour Bruno. Yes, on the UK, the issue is very simple.
Publicis Worldwide is left with no management at the Group since the beginning of the year roughly, and we have hired there someone at that time and that person is on garden leave. And so that person is gardening.
Thanks to his boss. And we are waiting quietly the end of his notice period and see him joining us when he will be able to join us.
He is a great, great guy. He was the number two [indiscernible] on a worldwide basis, so he is one of topnotch and which is another demonstration of our ability to attract the best people.
And we are extremely pleased to have him, and he will be there at the beginning of next year, and we feel confident that this will help us recovering quickly. Regarding cost, I don’t believe that our margin will slip below 16%.
I think that we are all working extremely hard. So these are the usual measures that we are taking, which is okay.
When we can delay a recruitment, we delay a recruitment. When we can freeze, we freeze.
When we can cut expenses, meetings. When we can cut travels and have the meeting by phone, as we do have now or by video conferencing, we do it.
So it is a whole collection of small measures which can look to everyone like pretty nitty-gritty things, but based with all the operation we have, it is at the end of the day delivering some good savings. So this is what we are doing, and we are doing this for the time being with some interesting results.
And we want to accelerate this. We need to.
Bruno Hareng – Oddo Securities
Thank you. And I’ve got a third question for Jean-Michel, if I may.
Long time that we didn’t hear a lot about the ERP. Can you update us on where you are and how much cost you will incur this year and potentially next year, and what the effect you expect from this SAP roll-out?
Thank you very much.
Jean-Michel Etienne
The ERP has started really, because the roll-out has started as planned last year. We have started in July.
The roll-out for France first, as you know, the priority was France, because we had very, very old system – working well, but very old, and implying a lot of manual tasks. So we have rolled out to France.
France One is the name of the first wave. And France Two is on the point to start also.
So the plan is to have the US during the beginning of next year, and the plan is to roll-out the entire US in 2015, which is a hell of a job as you can imagine. UK will not be a big problem as they have already a very efficient system and all the processes of the ERP are mostly the one-off, we have already the UK.
So we are not expecting a big problem. So this is decent start [ph].
The cost in this year is not – I don’t have in mind that precisely, but the cost is not very significant for this year and we will not use the ERP to explain the margin. I guess for the margin right for 2014, so you should not expect us seeing very significant in the 2014.
So big project, benefits we can in due time of course, because we have people last two years and about the system first and this is being changed. It is the ways the management new approach regarding a lot of tasks, which are amortized on a worldwide basis, which is extremely good.
And from this amortization and the automatization that the system is implying, of course we will have results in term of cost that we are expecting to be cautious at the end of the project, which should be 2017, 2018. If we want to be fair, it would be part of our 2018 strategic plan.
Maurice Lévy
Okay, thank you Bruno. We move to the next question.
Marian?
Operator
The next question comes from Julien Roch from Barclays.
Julien Roch – Barclays
Yes, good morning. The first question is on, how many quarters do you feel it’s going to take to go back to a normal run rate of Agency, i.e., around 4%, because I guess the market, when you reported your disappointing Q2 numbers was expecting, maybe 2% to 3% in Q3, 3% to 4% in Q4, so kind of two quarters to get back to the normalized growth rate which is not the case.
So that’s my first question is, how many quarters do you feel you’re going to need to get back there. And I’ll ask the following ones once you’ve answered.
Maurice Lévy
Okay, Julien. We do that this way.
It’s a very good question and it’s a question we are struggling with. I don’t want to be too optimistic.
What I can tell you with a good comfort of confidence is that the vast majority of our issues are behind us, that the measures that we have been taking since a few months are starting to be felt. And I would say that we will show a continuous improvement, and we will probably see in Q3 next year the full speed of the growth.
Julien Roch – Barclays
Okay. The second question is related, but I’m a bit confused because you just told us that the vast majority of issues are behind you.
In interview on the website, you said that you’ve done everything and it was now back to growth, but you’re also saying that the full-year is going to be similar to the nine months, i.e., implying 1.5% in Q4. So the comps are much easier going from 3.5% to 0.7%, so almost three points easier.
So by saying that Q4 is going to be similar, you’re actually telling us that things are deteriorating on an underlying basis. So I’m confused between the two messages where, it’s all behind us but it’s getting worse.
Maurice Lévy
No, let’s be clear. I have not mentioned anything regarding Q4, and you will hardly find a comment regarding Q4, but I have said is for the full-year.
So even if Q4 is good, we are not going to deliver a 3% growth for the full-year. So we will certainly improve our performance for the full-year.
This is what we currently have in light, but the idea that we can have a Q4, which is such that we will go back for the full-year at the level of 3%, is something which is probably stretched. So that’s the reason why I am saying, don’t expect a much better 12 months than the first nine months.
We will obviously do our best to come up with better numbers, and we will really do our best. We are winning in many areas.
We have all our teams who are energized, but it takes time because you need to have the pipeline when it comes to some operation of digital, you need to have the calls, if it is on a project basis, it takes time before it is starting and it takes even more time before it is invoicing – invoiced, sorry. So there is a line of time that we have to take into account even if the problems are solved.
And this something which is fairly reasonable. So if we have, as we anticipate, a relatively good Q4, it will not change dramatically the color of the full-year.
That is what I was trying to imply.
Julien Roch – Barclays
Okay, very clear. And then the last one, I’m going to be noting slightly disregard your advice at the beginning.
On the potential shareholder returns, if you were to go to, say WP [ph] level of 1.5%, that would be quite significant return, but the feedback from investors is – or sorry, the anticipation from investors is that you’re not going to do much. I was wondering whether you could give us some color on between nothing and very aggressive?
Maurice Lévy
It’s a very good question and you will get the answer on November 7.
Julien Roch – Barclays
Okay. No harm in asking.
Maurice Lévy
But you know the front expression, [indiscernible] percentage cut, so you can be noted by putting the question, and I would be noted by not answering. I think it is fair that we finish the work, that we consult one last time our key directives, because this is something that we are discussing on an ongoing basis with our Board.
And it is already – the good news, if I may, is that it is a chapter in our presentation, which is by itself an indication.
Julien Roch – Barclays
Okay, merci beaucoup.
Maurice Lévy
[Foreign Language – French]. We can move to next question.
Operator
Next question comes from Will Smith from Goldman Sachs. Please go ahead.
Will Smith – Goldman Sachs
Yes, hi. Two questions from me.
Firstly on the merger. You talked a lot about the distraction and the impact that it had on the business, but if we look at Omnicom, they seem to be performing quite well, winning business and beat expectations earlier this week.
So can you just point to why your performance is so different, and how much longer you expect that to last? And then secondly on the margins.
I know that when you spoke at Q2, you mentioned that you were working hard to keep them flat for the full-year. Is that still realistic with the lower full-year organic growth guidance that we’ve got now?
Maurice Lévy
Okay. Or is there question?
Will Smith – Goldman Sachs
No, that’s all.
Maurice Lévy
I thought that you [indiscernible] fairly understandable. The distraction between – the difference of distraction between Omnicom and Publicis.
You have two different organizations which are working differently. We are much more involving our teams and it is something which has been extremely important for us.
We believed in the merger. We felt that the merger will happen.
We worked very hard, and then we’ll not comment on Omnicom. So clearly there has been less distracted.
So probably that they didn’t believe very much in the merger and may be they were believing much more than takeover. And that has been really the difference.
And regarding now the margin, this is still our objective and we are working very hard. We are making everything we can in order to make it happen.
I’m not sure that we would have wiped [ph] to that level, but we are working hard. Jean-Michel is losing some hair as I’m getting mine more white than the window examination can demonstration.
Will Smith – Goldman Sachs
And just as a follow-up to that on the merger, you’ve mentioned a couple of management changes in Publicis Worldwide and in Razorfish. I mean, did you guys lost more management than say Omnicom has, and that’s potentially one of the reasons that accounts for the difference?
Maurice Lévy
Honestly no. We made the management change of Publicis Worldwide in October last year and we moved from Jean-Yves Naouri who had many things on his plates to Arthur Sadoun, who is 200% focused on Publicis Worldwide, and he has already starting to get some very good results.
It’s very impressive the way he is operating. We had delayed some management changes simply because we were expecting the merger, and we knew that with the merger for example, we could have made the decisions on Razorfish as soon at the beginning of this year, because we were seeing that there were some issues, but as we were in the middle of the merger, we felt that as after the merger, we will have probably to do something with all our digital assets to take maximum advantage, we decided to not do it immediately and we made the change only recently.
That’s clearly a fact. When you look at the top 100 people in our organization or top 200, we have now close to handful of people.
This is something which you can look, who is in charge of the key agencies, who is in charge of the operations, etcetera. You will hardly see some very important dramatic changes because we have not lost a lot of people.
Now on Razorfish, the change has been prior the merger and it was a change from Bob Lord to Pete Stein. And Pete is an excellent guy, but probably the casting was not appropriate for those days.
Will Smith – Goldman Sachs
Great. Thanks.
Maurice Lévy
Thank you.
Operator
The next question comes from Charles Bedouelle from Exane BNP Paribas.
Charles Bedouelle – Exane BNP Paribas
Good morning everyone. Thanks for taking the question.
I have actually two questions, one on the top line and one on the margin. If I may start with just with the top line, we had a quite nasty surprise at Razorfish.
Can you just walk us through what you think will be the key negative steps we will have from today let’s say to sometime next year before we recover a more normal growth. So could we couple of bad quarter?
There is fishy, but anything else you can point to so that we are really fully prepared for to understand the gap in growth in the coming quarters? That’s my first question.
And then second question relates to the margins and there is two questions in that. The first one is, we had a negative surprise with the principal part of the business in terms of change in H1.
Do you think, or do you have the view on how it would be for the full-year? And the broader question on margin I guess is, when I do some calculation, having maybe 2% growth for example for H2, I think you guys can probably have a flat margin if you’re working hard on cost in H2.
Do you think having your flat margin H2 year-on-year, and I’m excluding the Omnicom cost, is something which is really sick given the picture you described, or is it not really sick yet? Thank you.
Maurice Lévy
Jean-Michel is jumping on his chair. He want absolutely to answer the second question.
So I will give him the floor right after I have answered the first one. We are reorganizing the Razorfish, Nurun and Rosetta operations.
And we are creating a second network, which will be like the DigitasLBi. So if you look at what will be the offering, and if you look at the kind of organization that we will put up in place and the management that will be in charge, you can be pretty sure that we will have – like we have with DigitasLBi, a very, very strong offering in the market.
And this will bring some very good result. The key issue will be time to take off.
And there are some reorganization issues and they think it will take one or two quarter before we see the result, not much more than that. We’ll have to find a plan within two to three weeks, which would be finalized into all the details.
And then we will move aggressively to implement it, and it will be up and running by January 1, it may take one or two quarters, so you can be sure that in the full-year, Razorfish Global, the new name, will deliver good growth. And now I am giving the microphone to Jean-Michel.
Jean-Michel Etienne
Thank you. Charles, you mentioned what we disclosed in the sort of change on the first half where we mentioned a 30 basis point effect of gross versus net accounting for revenues on the few contracts and activities that we disclosed specifically in that presentation.
In Q3, we did not notice such events or such contracts whose activity justifying the different accounting treatment, I mean moving from net revenue to gross. So we don’t have that in Q3.
And for the rest of the year, we are not expecting such an effect. It’s been that what you have seen in H1 will be a very small impact on the full-year basis.
It will be not material. So I don’t expect to be in a position to disclose or having to disclose such effect on the full-year basis.
This is something that I told you at the time of the presentation, that for the rest of the year, we are not envisaging to have to disclose this kind of effect. Regarding now on the margin.
In the margin, what we indicate, we are not expecting to go below 16% and we will do everything we can on a full-year basis to remain on the same levels on last year. This is something that’s certainly clear.
So in terms of H2 margin, you can make the calculation very easily. So we are doing – I can give you that we are doing everything we can on this front in order to protect the margin.
Instruction have been given to everybody in the organization with a very clear indication of what is expected, and we will see, but I have the impression that the work is in progress and we should be able to deliver.
Charles Bedouelle – Exane BNP Paribas
Okay, it’s very clear. If I can just follow-up on that very quickly, and I understand it’s really a more estimated than any guidance at this stage, but if I look back at the bridge in H1 ‘14, which explains I would say the 80 bps drop year-on-year, you have the FX impact, which would be much lower on the full-year basis normally given the US dollar.
Then you have the 30 bps, which will be much lower. Then you have additional cost measures.
So in fact – and I’m not asking for a guidance, but there is a case in which we can have flat margin even with a relatively modest H2 organic growth, if I just want to make sure I understand the different moves and what you said correct? Thank you.
Jean-Michel Etienne
There is something that you are just forgetting in your analysis is that we are preparing, as we said in the presentation, the 2015 cost basis. It’s been that there are some costs that we are also incurring, which we will prepare 2015, and this will be part of the Q4 exercise that we are currently handling.
Charles Bedouelle – Exane BNP Paribas
Okay, that’s very clear. I was thinking in my peer-to-peer kind of analysis where everybody highlights, I guess the restructuring charges, but that’s very clear.
Thank you very much.
Jean-Michel Etienne
Thank you.
Maurice Lévy
Thank you, Charles. Marian, do you have some other questions?
Operator
Yes. We’ll now take our next question from Ian Whittaker from Liberum.
Please go ahead.
Ian Whittaker – Liberum Capital
Thank you very much. I just had two questions please.
The first one is more of a general one in the – if you look at the sort of your guidance on calls over the past couple of quarters, it does appear as though the guidance perhaps hasn’t been met in subsequent results, so there has been perhaps some of the other agency groups, which would suggest that you had less visibility on some of your operations. Could you just explain why perhaps that is, because we go back to the third topic of the conference call, there seem to be lot of confidence that Q3 would be a lot better and obviously it hasn’t come in as expected, and I know you’ve mentioned about the breakdown of the merger with Omnicom, but again it doesn’t seem to be an issue with other agency groups.
And the second question just around the emerging markets performance. Again if you look at, sort of, your performance over the past number of quarters and again not just recent ones, it does seem to be a jumble in the performance against other agency groups.
Is there anything that’s particularly happening there?
Maurice Lévy
Okay. I will take the second question.
Jean-Michel will answer the first one. Regarding emerging markets, we have situation which varies from one country to another.
On India, the key issue we have had is the fact – and we still have is the fact that we have a base which is not strong enough. That’s clear.
In India, we are not one of the top two players. In China, 90% of our problem in China has been in two very simple and unfortunate events.
One was, what could happen with luxury goods and the fact that the government was fighting against corruption and they were considering that all the gifts coming from luxury companies could be seen as a way to bribe people. So there has been – in last year a terrible, terrible cut on all investment in this field.
And as we are more exposed than anyone else in this sector because we almost have all the accounts, we have been severely finished. The second aspect has to do with field operations.
Two field operations that we have, Betterway and Yong Yang. And on both, we have put extremely stringent process by which we have refused that the operations can manage cash.
People were paid in petty cash for the demonstration that they were doing in hypermarkets, supermarkets, in remote cities, all the demonstrators, the people we are [indiscernible] etcetera. All this, we have decided that we cannot accept that the people continued to be paid in cash.
And they had to be paid normally, and this has led to a difficult situation because the market is organized around cash and we are not organized to pay that. We don’t want –ensure that we are also organized.
We don’t want that the people can manipulate cash, because in countries such as China, you never know how you can move from something which is 100% clean to something which is only 90% clean. And we want our operation to be 100% clean, so we have been hit with the two operations we have.
And one this is recovering, the other one will probably not recover.
Ian Whittaker – Liberum Capital
So is it fair to say on point one with luxury is impacted by a crackdown. I mean it doesn’t look as though that crackdown is anytime soon.
So that softness would like to continue?
Maurice Lévy
Luxury is behind us. And they are starting to peak up again.
So they have taken the heat last year. We have taken the heat with them and it’s starting to come back on a normal trend.
The issue of field marketing is more complicated. And this is something for which we have taken some very, very strong actions, which puts us almost out of business in these two sectors.
And this is something which is, as I said, now for one operation behind us, but another operation we will be probably continue to shut [ph] for at least one or two more quarters. Let me try and discuss about Brazil.
With Brazil, our performance is mostly in line with the market. Mexico, we have been till now ahead of market markedly.
Russia, we are ahead of market. So when you look at the operation, it is mainly in two countries and we have to fix this.
Regarding then all the things that we want to do in those emerging markets, we have to be alert and to move fast with probably a new strategy and that is one of the task of Axel Duroux. He has to design a new strategy and he has just started.
He is still in the immersion process and we will expect him to be up and running by the beginning of next year. And now I handle the cost issue to Jean-Michel.
Jean-Michel Etienne
In terms of reforecast and the planning for reforecast what we have. As you know, we have the budget process, we have a voting forecast process, which is just re-forecasting the year, and we have also the short-term forecast for the next three months.
So it is extremely useful to plan the activity of course, and plan the cost basis of course that we need to deliver the margin. Until the end of May, we had earning forecast which was planning very strong H2.
And as you know, and you know extremely well that’s due to this Q3 growth rate that we are posting, this will not materialize. We took of course the measures in order to launch all the cost initiatives that we need in order to rebalance the P&L due to legal activities.
We know that – we have seen that with the short-term forecast tool, which is extremely useful tool, that we saw extremely quickly that Q3 will be lower than expected and we saw that in end of July, early August. And that the expectation will be the one we had before will not be there.
So this is the tool we used to manage the cost. And according to that tool, this is what is allowing us to tell you about the margin for this year, for the full-year.
Ian Whittaker – Liberum Capital
I guess, the concern is, is that if you – if we go back to the Q2 results, which I think was July 22 around the reassurance, a lot of people were reassured by the fact or the comment that Q3 would be stronger than second quarter. And that didn’t happen.
And yes, I think it was weaker. And I guess the concern would be so that how much confidence we should have in the statement that Q4 will actually be – will be okay both in terms of revenues and margins, because if there wasn’t enough visibility for Q3, the obvious question would be, why would be that visibility for Q4, particularly when Q4 as you said is very much of a make-up quarter when people decide whether to spend that full-year purchase and obviously it has a disproportionate impact our margin performance because it just found to be a great proportion of profits.
Maurice Lévy
It’s a very good question. And I think I understand that you are putting it.
I can – if the numbers were not that sad, I could have made a joke by saying that we doubled the growth of Q2 from 0.5% to 1%. So it is stronger, much stronger, but this would be a bad joke and it’s not a good time for making jokes.
But clearly when we look at the details, because there is something that we have and you don’t have. And maybe in the future life, analysts will have access to all the information of the company and they will have the same level of information as the one we had, but we know the spending of our plans, we know exactly what’s going on.
And we feel quite confident that Q4 will be in line, but forget about that comment and look at the full-year, which I believe is probably the good way of looking at the things. We will have probably a better Q4 than Q3.
That is something, which is based on what we have. It is probably what will happen, but we will assume that it is exactly at the same level, and we will assume that we will have only 1.5% growth for the full-year, which would be quite painful to live with for me, but it is – let’s assume it is the case.
The only thing I can tell you is, we are working extremely, extremely hard on the cost in order to deliver the margin. That is the thing, and it is certainly underlined in our presentation, because when you look at the page on outlook, you see that we are mentioning the fact that we are missing growth.
So we are taking into account the fact that the growth will be very poor and then it’s a question of the confidence we have, we have not, and trust we may have or we don’t have with our management, and our ability to make the decision and to follow the instructions which have been given. So clearly the instructions are extremely clear.
They are in the very plain English, a broken English in order to make it even plainer, and this is something which is underway and I think that the work is being done on the margin side.
Ian Whittaker – Liberum Capital
Okay, that’s great. Thank you very much.
Maurice Lévy
Thank you. Marian?
Operator
The next question comes from Ruchi Malaiya from Bank of America Merrill Lynch.
Ruchi Malaiya – Bank of America Merrill Lynch
Hi, good morning. It was a question on headcount costs.
Now if I remember correctly, your average headcount wasn’t up significantly at the first half. However total staff costs were, and that’s presumably because you’ve raised salaries.
So I just want to understand, what actions you’re taking on the staff costs? Are you cutting the level of staff or you’re cutting the salaries.
And if it’s the later, then what risk is that, that you could lease talent? Thanks.
Maurice Lévy
We are not cutting the salaries. We are not in a situation which is so desperate that we have to ask for salary cuts.
So this is not what happened in 2018, where we asked – and I have been the first to volunteer to cut our bonuses or our salaries or whatever. We are in a situation which is not great but not that bad.
We are extremely solid and we need to attract talent. And attracting talent today is something, which is very tough because there is new competitors for talents.
We were speaking about how the market has changed several times and the market has changed in many areas including when it comes to talent. Talent today are hunted by the platforms, by the start-ups, by the advertisers and also the advertisers are losing their CMOs to the platform.
So we see that there is a lot of blurring on who is trying to hire the right talent. And on top of that, there are some people who are desperate to get talent and they are making some very tough decision on this and destabilizing the market, but it’s something which we know and we are dealing with the issues and we are making sure that we keep our talent, we retain our talent and we attract new talent.
So what are we doing? We are mainly doing a kind of slowdown in recruitment and slowdown in replacement, in order to make sure that we are with a stable number of headcount that we can bring our cost base slightly down, progressively done, and we don’t need to take enormous measures.
We don’t need to have a hatchet. We just need to do some nice reasonable decision in areas where it is needed.
So it’s something which we are managing carefully. It’s like [indiscernible].
It’s something which has to be done with a lot of delicacy.
Ruchi Malaiya – Bank of America Merrill Lynch
Thank you.
Maurice Lévy
And we move to the next question which is maybe the last one.
Operator
Yes, we’ll now take our last question from Dan Salmon from BMO Capital Markets.
Dan Salmon – BMO Capital Markets
Hi good morning everyone. Jean-Michel, say about my questions for uses of free cash flow for November 7, but maybe if you could talk a little bit about where the optimal capital structure of the company is in your opinion, especially since you have a debt instruments coming due soon.
Is there any reason to think, sort of the 1x to 2x net leverage that we see commonly across the industry is not appropriate? And then just Maurice a quick one on Razorfish.
Is there a date, a quarter where you could maybe tell us where they cycle-through some of the headwinds from the client losses?
Maurice Lévy
Okay. Something that they should have mentioned on Razorfish is that they have won 31 accounts in the last nine months.
It’s not a broken company and they don’t want that anyone is getting out of this goal considering that Razorfish has huge a problem. They have as I said to face a perfect storm, and I think that they will be showing growth in the new organization probably as soon as Q2, latest Q3.
Regarding your question, it is a question for which we will give you all the details at our November 7 meeting to be confirmed. As I hope, it would be confirmed.
And the only thing I would like to maybe insist on that we have to take into account when we look at our comp structure and our plan, what we need to do in term of investment, what we want to invest in term of CapEx some time to lower our OpEx, which is also sometimes an interesting solution. You spend money on real estate and you reduce quite dramatically your OpEx, and this is something where we can think about in some areas.
There are some other areas where we can think about, as well as obviously, the future plan for acquisition because we have some key objectives, and particularly the fact that we believe in – we believe very, very strongly in the digital transformation. I think that people have not even seen the tip of the iceberg.
And what is boiling down in this field is huge. It is about omni-channel as I mentioned.
It is a fact that all advertisers will need to deal with their distribution system as well as creating their own distribution system. We will see ourselves some restructuring in term of the way they work, internal communication, a lot of other aspect in which we have a role to play.
And with all investments that we have made and the one that we are thinking about and there are a few options, I think that the transformation of Publicis Groupe will be finally visible for all of you, and to a much higher degree that what you can imagine today. So all this will be disclosed on November 7, and I look forward to speaking to you on that day.
I would like to thank the organizers of the call, to thank Marian for managing this, to thank all of you for being present. And I look forward to speaking to you pretty soon, and I hope with much better news.
And if there is one thing I can assure you is that, we are working extremely hard on those various fronts and we will be delivering. Thank you.
Operator
Thank you. That would conclude today’s conference call.
Thank you for your participation. Ladies and gentlemen, you may now disconnect.