Lackluster Sales Growth Puts Publicis on Defensive

PARIS—Publicis Groupe SA Chief Executive Maurice Levy was on the defensive Thursday after the company—battling the loss of key U.S. clients last year—reported sales growth that failed to meet analysts' expectations, sending shares falling more than 6% in early trading in Paris.

"Even if I'm cautious about the clouds on the horizons, notably with three big countries holding elections, I'm very optimistic about the way Publicis is evolving," Mr. Levy told reporters.

"Yes, yes, yes," he said, when asked whether 2017 would see stronger sales growth than this year.

Publicis has struggled to keep corporate clients who reviewed their media-buying contracts last year in an industrywide push for greater transparency and cost-cutting. That pressure was compounded by Publicis' struggle to line up new business following its failure to complete a merger with U.S.-based rival Omnicom Inc. in 2014.

On Thursday, Publicis laid bare the damage caused by contracts that have not been renewed in wake of the review. The company said its organic sales—a closely watched figure in the ad industry that strips out acquisitions, disposals and currency swings—dropped 4% in North America during the period as account losses from 2015 that included Procter & Gamble, Coca-Cola and General Mills started to hit the top line.

Publicis also attributed the weaker U.S. performance to timing issues associated with the digital projects. Mr. Levy, who has championed the company's march into the digital age, said new projects had been lined up for the fourth quarter and would translate into the top line in 2017.

Overall, organic sales grew 0.2%, below analysts' expectations of 0.8% and way shy of the company's historic growth levels. The drop in the U.S. was partially compensated for by strong performances in Europe, where organic sales rose 7.6%, and in some emerging markets.

The drop "comes despite a very strong U.S. ad market in the year-to-date which carried into the third quarter thanks to a very strong showing in the Rio Olympics on NBC," Kepler Analyst Conor O'Shea wrote in a note.

Results in the U.S. "will hurt, and [are] a reminder that Publicis is still not firing on all cylinders," he added.

Mr. Levy, who has led the French firm since 1987, faces a lengthy to-do list as he prepares to step down from his role next year. He has called 2016 a "year of transition" as he focuses on an integrating Sapient Corp, the digital agency Publicis bought last year, and an internal reorganization to encourage its myriad agencies to work more closely together.

The problems are a measure of how Publicis has struggled to recover from a failed merger that would have created the world's largest advertising holding company. Publicis said the fourth quarter was often volatile and would again be hit by client losses in the U.S.

In response to the problems, Mr. Levy has overhauled the company's structure and shuffled its leadership in a bid to better coordinate its myriad agencies so it can tap more business from its clients

Mr. Levy told reporters that the reorganization—which he has described as the biggest challenge of his rein—was now largely complete and would lead to a stronger financial performance in 2017. He said that it had already led to some new business with clients such as GlaxoSmithKline and Coty.

The French group's performance contrasts with that of its rivals. Omnicom Group Inc. on Tuesday reported 3.2% growth in organic revenue in the same quarter, while WPP PLC's growth has consistently topped that of Publicis in recent quarters.

On Thursday, Publicis also said that it would increase its dividend payout ratio to 42% by 2016, up from a payout ratio of 39.5% in 2015, bringing forward a plan to do so by two years.

Mr. Levy, who hasn't ruled out taking another role with the company when he steps down, said there was a "90% to 95%" chance that his successor would be an internal promotion.

Write to Nick Kostov at Nick.Kostov@wsj.com

(END) Dow Jones Newswires

October 20, 2016 06:05 ET (10:05 GMT)

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