Growth, integration, evolution S4Capital plc Annual Report and Accounts 2019 Our mission To create a new era, new media solution embracing data, content and technology in an always- on environment for global, multinational, regional and local clients and for millennial-driven brands. www.s4capital.com/annualreport19 Contents Strategic Report 1 2 Financial highlights 12 Growing responsibly 4 Letter to shareowners 12 Our business model 4 Covid-19: our response 13 Our four core principles 6 The state of our nation 14 Sustainability and 8 Expansion and integration corporate responsibility 9 Outstanding growth 15 Our people 10 Geographic performance 16 Section 172(i) statement 11 Practice performance 21 Principal risks and uncertainties Industry outlook 2 28 Swallows and albatrosses: Why clients need agility in today’s 24/7 world by Sir Martin Sorrell Life in the new marketing age 3 36 The 4Cs in the S4C business: 36 Clients 36 Consumers 37 Creativity 37 Culture Governance and financial statements 4 38 Governance Report 54 Report of the Nomination and 38 Leadership Remuneration Committee 46 Executive Chairman’s 58 Remuneration Report governance statement 72 Directors’ report 48 The role of the Board 76 Financial statements 52 Report of the Audit and 123 Shareowner information Risk Committee S4Capital Annual Report and Accounts 2019 1 Strategic Report Financial highlights Billings1 Pro-forma2 billings £455.8m £513.2m +671% +47% Like-for-like +46% Revenue Pro-forma revenue £ 215.1m £271.0m +292% +37% Like-for-like +41% Gross profit Pro-forma gross profit £171.3m £224.2m +361% +39% Like-for-like +44% Operational EBITDA4 Pro-forma operational EBITDA £33.4m £45.0m +612% +47% Like-for-like +51% Operational EBITDA margin5 Pro-forma operational EBITDA margin 19.5% 20.1% +6.9 margin points +1.1 margin point Like-for-like +0.9 margin points Operating loss Pro-forma operating profit -£3.8m £2.5m 2018 -£8.5m 2018 – £11.0m Adjusted operating profit6 Pro-forma adjusted operating profit £31.1m £42.5m +671% +47% Like-for-like +51% 2 S4Capital Annual Report and Accounts 2019 1 Loss before income tax Pro-forma loss before income tax -£9.2m -£2.8m 2018 – £9.1m 2018 – £16.4m Adjusted result before income tax7 Pro-forma adjusted result before income tax £25.8m £ 37.1m +660% +58% Like-for-like +69% Basic loss per share Pro-forma basic loss per share -2.7p -1.3p 2018 -3.3p 2018 -3.3p Adjusted basic earnings per share Pro-forma adjusted basic earnings per share 5.2p 6.0p +420% +54% Like-for-like +63% Market capitalisation at 1 May 2020 Share price at 1 May 2020 £884.9m 183.5p For full reconciliation from statutory to non-GAAP measures, please refer to Note 25 and the unaudited preliminary results published on 18 March 2020. Notes: 1. Billings is gross billings to clients including pass-through costs. 2. Pro-forma numbers relate to unaudited full year non-statutory and non-GAAP consolidated results in constant currency as if the Group had existed in full for the year and have been prepared under comparable GAAP with no consolidation eliminations. 3. Like-for-like is a non-GAAP measure relates to 2018 being restated to show the unaudited numbers for the previous year of the existing and acquired businesses consolidated for the same months as in 2019 applying currency rates as used in 2019. 4. Operational EBITDA is EBITDA adjusted for non-recurring items and recurring share-based payments and is a non-GAAP measure management uses to assess the underlying business performance. 5. Operational EBITDA margin is operational EBITDA divided by gross profit. 6. Adjusted operating profit is operating loss adjusted for non-recurring items and recurring share-based payments. 7. Adjusted result before income tax is loss before income tax adjusted for non-recurring items and recurring share-based payments. S4Capital Annual Report and Accounts 2019 3 Strategic Report Letter to shareowners Covid-19: our response Clearly the global impact of the tragic covid-19 pandemic has overtaken our stellar results for 2019 and any commentary in this annual report, writes Sir Martin Sorrell. I would like to take this opportunity to comment on the current crisis before we describe our performance in 2019 and the longer-term prospects. Managing the crisis Client resilience At the time of going to press, our Coronavirus On clients, we are seeing limited impact Crisis Group (‘CCG’) is meeting online every on revenue and gross profit. Our Content day to assess impact and actions on our Practice (70% of our business) is resilient people, clients and finances. It consists of and relatively untouched, so far, maybe the seven Executive Directors of S4Capital from 5%-10% down. Our Data, Analytics & plc and Michel de Rijk, CEO of Asia Pacific. Programmatic Practice (the other 30%) is This is supplemented by periodic calls with more affected, around 10%-15% down from the leaders of the nine additions to the budget. However, in-housing programmes are Group since the foundational mergers with being elongated, as lockdowns mean clients MediaMonks and MightyHive, along with are unable to implement on-boarding due to regional and office heads. The agenda is difficulties in hiring and training, so we continue the same – people, clients and finances. to provide hands on keyboards and staff. In addition, being added to the agency rosters People first of a number of major fast-moving consumer Firstly, and most importantly, our 2,500 goods companies (fmcg) or consumer package people and their families in 30 countries are goods companies (cpg) and a pharma predominantly healthy and safe. As I write, company has helped maintain momentum. we have two reported infections and no Our clients break down currently into two serious consequences. We are keeping a buckets. The tech clients (who represent close eye on the implications of working from about half our gross profit) are continuing to home, with a particular focus on any mental spend their budgets, switching to ‘purpose’ health and childcare issues. Our people, campaigns in all senses of the word. They’ve who are digital natives and used to 24/7 become the big spenders. Amazon may now agility and flexibility, are practiced in this be the biggest in the world, outdistancing way of working and didn’t need to adapt even Procter & Gamble. However, there are like others. We’re very proud that our people some signs currently of a desire to postpone have acclimatised so seamlessly. In line with spending until the second half of 2020, as long others, our office in Shanghai has been up as CFOs agree not to snaffle the money later and running for several weeks, having been on in the year. closed since Chinese New Year at the end of January. The other bucket is the fmcg or cpg, pharma and retail companies. Here, it’s patchier. Budgets are being cut, but money is being moved to digital, which looks like a permanent change. While travel and hospitality and some retail clearly have been decimated, being locked up at home means that consumers have accelerated their use of new media to communicate, shop and buy and educate themselves and their children. Both online and linear TV audiences have blossomed 4 S4Capital Annual Report and Accounts 2019 1 with mandatory lockdowns, but online offers Accelerated digital transformation is a more measurable, cheaper and more inevitable, given the impact of coronavirus. effective solution. Consumers have become more used to online behaviour. Media owners, some of Financial viability whom have stopped their paper versions Finally, in the troika of focus for the CCG, our in the crisis, and which will not return, will finances remain strong. Despite having drawn accelerate the analogue to digital process. down our bank revolvers out of caution and Finally, enterprise managers, who declined having made business combination cash to move forward rapidly on disruptive digital payments for Circus, we remain cash positive transformation in relatively good times, now with little or no debt. All non-essential costs that they are facing a ravaging Q2 will be more have been reduced and the CCG has agreed prepared to take the digital leap forward and to reduce its salaries from 1 April 2020, as kitchen sink any associated costs, cash or summarised in the Remuneration Report, book. So, while Q4 and 2021 may not be the with no cash bonuses for 2019 converted sunny uplands, they will be full of opportunity from cash to share bonuses. I wonder how – along with consolidation opportunities and many companies are paying cash bonuses for good people and clients who have been 2019, when they have cancelled or postponed abandoned by bankruptcies or the advertising dividends for 2019. That’s not shared pain holding companies. with key stakeholders. Some are even paying Our results for Q1 of 2020 have shown little bonuses for going backwards. impact, with gross profit up 19% like-for-like, We are watching our receivables like hawks, and understandably reflecting the impact of particularly as some clients, even large ones, covid-19 on Asia Pacific and the beginnings seek to extend payment terms. We have of its impact on Western Europe and the run cash-flow scenarios gaming substantial Americas. You will be able to assess the falls in revenue, with cost corrections, all of situation in more detail when we announce which indicate viability. So, financially, so far our first quarter revenues and gross profit in so good. early May. The unvarnished outlook To give you an idea of what we think our We believe in telling our various stakeholders current position is, on the following page we how it is and not glossing over or varnishing reproduce extracts from a series of emails I the truth.