PUBGY Publicis Groupe SA (QX)

By Lara O'Reilly 

Publicis Groupe SA said cutbacks in ad spending from consumer-goods companies in the U.S. weighed on its sales in the fourth quarter, but the French advertising giant is banking on a host of recent new business wins to buoy its performance in 2019.

The owner of agencies Saatchi & Saatchi, Leo Burnett, and Starcom Mediavest Group said sales in the three months ended Dec. 31 fell 0.3% from a year earlier on an organic basis -- a key industry measure of the company's performance that strips out currency effects and acquisitions -- to EUR2.49 billion ($2.85 billion). Analysts had expected a rise of 2.5%.

The sales figure includes the Publicis Health Services pharmaceutical contract sales support business the company sold to Altamont Capital Partners for around EUR100 million at the end of January this year. With that unit factored out, Publicis recorded 0.5% organic growth in the quarter.

The Paris-based company said a higher-than-expected pullback in traditional ad spending from clients, mainly from U.S.-based consumer-goods companies, had negatively weighed on its business to the tune of EUR150 million in 2018. Its operating margin rate improved to 16.7% from 15.5% in 2017, as the company kept a tight lid on costs and simplified its organization.

Consumer goods giants, which have typically driven revenue at the largest advertising companies, are struggling to boost sales amid pressure on a number of fronts, and some have been vocal recently about trimming their ad agency costs.

For example, Procter & Gamble Co., the biggest ad-spender in the U.S. and a Publicis client, said last month it had delivered almost $1 billion in savings from agency fees and ad-production costs over the last four years and it sees room for more potential cutbacks in these areas. Its annual spend on advertising in the U.S., excluding social media ad spending, rose 4.7% to $2.9 billion in 2018, according to estimates from ad-tracking firm Kantar Media.

Publicis Chief Executive Arthur Sadoun told reporters in Paris on Wednesday that consumer-goods clients account for around 25% of the company's revenue.

The loss in revenue from consumer-goods companies "doesn't mean we have a bad relationship with them," Mr. Sadoun said, adding that Publicis understands why these clients are cutting costs and that the ad group is "suffering with them."

Publicis's sales in North America dropped 2.6% in the quarter on an organic basis, or 1.1% excluding the disposed-of health group. North America was also a soft spot for rival ad group WPP PLC in the three months to Sept. 30, its most-recently reported quarter.

Aside from consumer-goods spending cutbacks, Madison Avenue is facing an array of challenges amid a fast-shifting marketing landscape. Those range from clients seizing more control of their advertising functions, to a swarm of new entrants looking to take a slice of marketers' budgets, including consulting firms. Meanwhile, digital ad spending in the U.S. eclipsed spend on TV ads for the first time in the U.S. in 2016, according to research firm eMarketer.

Agency businesses have responded to these new trends by trimming their ranks and by attempting to reorganize their businesses around the shifting needs of clients, particularly in the areas of technology and data. Publicis has set about an integration strategy to unite its operations, dubbed the "Power of One."

Publicis confirmed it is targeting 4% organic growth by 2020, but warned in its earnings release of a "bumpy ride" in the first quarter of 2019, owing to the prolonged impact of cutbacks from consumer goods clients.

The warning shot from Publicis reverberated around Madison Avenue. Shares in Interpublic Group of Cos. were down around 6% and shares of Omnicom Group Inc. fell almost 5% in midafternoon trading Wednesday.

Publicis is looking ahead to a host of recent new business wins -- including GlaxoSmithKline PLC's global media account and Fiat Chrysler Automobiles NV's North America media business -- to begin to have a positive impact as the year progresses. R3, a consulting firm that helps match marketers with agencies, said in a report released last month that Publicis outperformed its rival holding companies by generating $736.4 million in net new business revenue last year. That was followed by WPP, with $579.1 million, according to R3.

"We have demonstrated we have the right model," said Mr. Sadoun.

Publicis said Wednesday it had promoted Steve King, CEO of Publicis Media, to the role of chief operating officer for the wider holding company. Elsewhere, Nigel Vaz has been promoted to CEO of Publicis.Sapient, its digital agency network, from his current position of EMEA and APAC CEO. Publicis has also hired a marketer from outside the company -- Ros King, recently a top marketer at Lloyds Banking Group PLC -- who will join as executive vice president for global clients.

The company also announced a EUR400 million share buyback program, which includes the proceeds from the disposal of its health group.

--Nick Kostov contributed to this article.

Write to Lara O'Reilly at lara.oreilly@wsj.com

(END) Dow Jones Newswires

February 06, 2019 15:38 ET (20:38 GMT)

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