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Rating Action:

Moody's affirms WPP's Baa2 ratings; outlook remains negative

14 Mar 2019

London, 14 March 2019 -- Moody's Investors Service, ("Moody's") has today affirmed the Baa2 senior unsecured ratings and the (P)Baa2 MTN programme ratings of WPP Plc's guaranteed subsidiaries where applicable (WPP Finance 2013, WPP Finance 2016, WPP Finance 2017, WPP Finance 2010, WPP Finance S.A. and WPP Finance Deutschland GmbH). Concurrently, Moody's has affirmed the Prime-2 (P-2) short term ratings of WPP Plc's guaranteed subsidiaries (WPP CP Finance Plc and WPP CP LLC). The outlook remains negative.

"While WPP is making good progress in executing its restructuring plan and strategic priorities focused towards reviving organic revenue growth by 2020/21 and has plans to reduce leverage through the sale of Kantar and other non-core associates/ investments, the negative outlook on the ratings reflects the weak credit metrics for the rating category, the execution risks associated with the successful delivery of the plan, and the structural pressures facing the industry," says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for WPP.

The affirmation of the Baa2 rating takes in to consideration (1) the company's progress with the disposals of 36 non-core businesses in 2018 raising GBP849 million in proceeds; (2) potential sale of majority stake in low growth Kantar, WPP's Data Investment Management division, in 2019 that could help alleviate further pressure from credit metrics, although execution risks remain; and (3) the company's conservatized medium term financial policy of reducing reported Average Net Debt/ EBITDA to between 1.50x-1.75x by 2021.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

WPP achieved an organic net sales (revenue less pass through costs) growth of -0.4% in 2018, somewhat better than its guidance range of -0.5% to -1.5% for the year. The revenue performance was nevertheless weaker than industry peers with Omnicom Group, Inc. (Baa1, stable) growing by 2.6% in 2018, Interpublic Group of Companies, Inc. (Baa2, stable; 5.5%) and Publicis Groupe S.A. (Baa2, stable; 0.1%) and performance was particularly weak in North America (35% of total revenues suffering -4.2% organic growth). Headline operating profit margin (excluding associates) weakened in 2018 to 15.3% compared to 16.4% in 2017.

For 2019, WPP has guided for an organic decline in net sales of -1.5% to -2.0% and a roughly 100 bps decline in operating profit margin (including Kantar) at around 14.3%. H1 2019 will be particularly tough in North America with the impact of the loss of Ford and GSK contracts.

Since 2018, WPP is focused on implementing its new three-year strategic plan focused on restoring revenue growth in the business. The restructuring program (whose total cash cost is expected to be around GBP300 million) will simplify the structure of the company and improve profitability. However, it appears relatively small in scope compared to the cost structure of the company (roughly 1.5% of the cost base) and it might not be sufficient to turnaround WPP, in case operating performance weakens materially more than currently anticipated for 2019.

The plan is expected to deliver annualized savings of GBP275 million by 2021, of which half will be reinvested in technology, creative services and incentives to retain talent and resources at WPP. The plan includes measures such as closure and disposals of under-performing businesses, integration among existing agencies (such as the recently formed integrated networks VMLY&R and Wunderman Thompson) and cost savings in shared services and real estate.

Moody's recognizes WPP's good progress with the restructuring plan since its launch. The company has conducted 70 of the 100 planned office mergers, closed 57 of the 80 offices planned for closure, and has made 2650 of the 3500 planned redundancies. The company has also realigned its US healthcare agencies with major networks and formed a new managerial executive committee.

Moody's takes into consideration the various execution risks in the implementation of the plan and some uncertainty around the timely and successful disposal of a majority stake in Kantar (15.3% of overall net sales, and 14.7% of headline operating profit -- including associates) in 2019. WPP's management has indicated that half of the net proceeds from the Kantar disposal will be used to reduce debt, while the remainder will be used for share buy-backs. The disposal of Kantar could be announced in Q2 2019.

As part of the new plan, WPP has set out the following financial targets to be achieved by the end of 2021: (1) organic growth in line with the advertising agencies peers; (2) headline operating profit margin of at least 15%; and (3) reported free cash flow conversion of 80%-90%. Moody's believes that these financial targets could be achievable, but only assuming a successful implementation of the restructuring and strategic plan.

Moody's positively views WPP's conservatized net leverage target of 1.50x-1.75x (net leverage stood at 2.1x at 2018 year-end), the plan for disposals of non-core associates (further GBP 200 million expected in 2019, besides Kantar) and investments.

Despite the weak operating results and the management changes, WPP's adjusted debt/EBITDA (as adjusted by Moody's) stayed largely flat at 3.7x at the end of 2018 supported by debt reduction via asset disposals. Moody's adjusted average net debt/ EBITDAR for the company was also high at around 3.4x. The leverage is materially higher than Moody's revised tolerance for WPP's Baa2 rating but over the next 6-12 months, the agency expects the company's leverage to improve materially helped mainly by debt reduction achieved through the disposal of Kantar. Failure to execute planned asset disposals and/ or material underperformance to operating plan could lead to downward ratings pressure.

Moody's takes into account the longer-term challenges that WPP and the overall advertising agencies sector is facing, including reduced budgets from some of the largest advertisers, increased competition from consulting firms and smaller ad agencies and data-driven marketing companies as well as the long-term risk of further disintermediation from large tech companies.

Nonetheless, WPP's Baa2 ratings continue to reflect WPP's worldwide leadership in advertising communications and marketing services as well as its strong position in digital advertising. The Baa2 rating also reflects the good liquidity position of WPP supported by GBP2.6 billion of cash on hand and GBP2.0 billion of availability under its RCF at the end of 2018 as well as a long dated maturity profile.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the company's weak recent operating performance, execution risks with its turnaround strategy and the ongoing industry-wide challenges it faces.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's has revised and tightened the leverage tolerance for WPP at the Baa2 rating level considering the structural and cyclical operational challenges that the company is facing and that, at this point, are affecting WPP to a greater extent than some of its peers.

Downwards ratings pressure could arise if (1) WPP's turnaround strategy fails to bring in the timely targeted results in terms of revenue growth restoration and operating margin improvement; (2) the company is unable to achieve debt reduction by executing timely asset disposals (especially a majority stake in Kantar) and/ or (3) its Moody's adjusted Gross Debt to EBITDA remains materially above 3.25x beyond 2019, Moody's Adjusted Average Net Debt/ EBITDAR ratio is above 3.0x and its Moody's adjusted retained cash flow (RCF) / Net Debt does not remain on track to improve towards 20%.

Upwards pressure on the rating is unlikely in the near term. It would nonetheless require the company to show a sustained improvement in operating performance, as measured by revenue and margin development as well as Debt/EBITDA (Moody's-adjusted) falling below 2.75x or company's adjusted Average Net Debt/EBITDAR trending below 2.5x on a sustained basis. In addition, a steady improvement in Moody's adjusted RCF/ Net Debt ratio towards 30% would add to upward ratings pressure.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: WPP CP Finance Plc

....BACKED Commercial Paper, Affirmed P-2

..Issuer: WPP CP LLC

....BACKED Commercial Paper, Affirmed P-2

..Issuer: WPP Finance 2010

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: WPP Finance 2013

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: WPP Finance 2016

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: WPP Finance 2017

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

..Issuer: WPP Finance Deutschland GmbH

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: WPP Finance S.A.

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

..Issuer: WPP Finance 2010

....Outlook, Remains Negative

..Issuer: WPP Finance 2013

....Outlook, Remains Negative

..Issuer: WPP Finance 2016

....Outlook, Remains Negative

..Issuer: WPP Finance 2017

....Outlook, Remains Negative

..Issuer: WPP Finance Deutschland GmbH

....Outlook, Remains Negative

..Issuer: WPP Finance S.A.

....Outlook, Remains Negative

..Issuer: WPP CP Finance Plc

....No Outlook

..Issuer: WPP CP LLC

....No Outlook

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

WPP is a large, globally operating advertising, communications and marketing group. In 2018, it recorded consolidated revenue of GBP15.6 billion (including commissions fees earned), sales less pass through costs of GBP12.8 billion and EBITDA of GBP2.3 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gunjan Dixit
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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